Skechers Falls on Its Face After Tripping Over Its Q2 Guidance

In this segment of the Motley Fool Money podcast, host Chris Hill is joined by Million Dollar Portfolio's Jason Moser, Hidden Gems Canada's David Kretzmann, and Total Income's Ron Gross to reflect on last week's most interesting business and economic news stories.

In apparel, one tale of woe belonged to footwear maker Skechers (NYSE: SKX), which reported 17% higher revenue for Q1, and good numbers across the board. But a weak outlook that management tried to downplay startled investors, which then led to a sell-off. Was the 30% share price decline too steep? The Fools consider the investment thesis.

A full transcript follows the video.

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This video was recorded on April 20, 2018.

Chris Hill: Whatever Skechers shared in its first quarter report was overwhelmed by the company's guidance for what's coming in the second quarter. Shares of the sneaker company falling 30% on Friday. 30%, David? How bad was this guidance?

David Kretzmann: It hurts. For this latest quarter, revenue grew 17%. Operating income increased 20%. And their global same-store sales actually grew 9.5%. And believe it or not, Skechers now has over 2,600 stores worldwide, and they're opening another 450 or so this year, so the company is growing quickly. But, like you said, Chris, the guidance for this upcoming quarter was weak. They're just guiding for 4-6% revenue growth, earnings to be flat or up 13%. So, management is saying that their guidance for the year as a whole hasn't changed, they're saying it's just an issue of timing of distribution and orders moving from the second quarter to the third quarter. But, the company has gone through this in the past, so I think the market is a little skeptical.

Jason Moser: Do you feel like opening more stores is the answer? In all seriousness, I feel like more and more, you can buy your shoes online, obviously, have them shipped to you for free. I look at JPMorgan as another company where, I guess they're going to be opening more branches here locally. Which, to me, is the answer more banking centers? I don't think so.

Hill: I go back to something that Ron said earlier this morning when we were planning this week's show. Look, I get that guidance wasn't great, and I get that the stock is selling off. 30%? If a stock is selling off 30%, I want to see that the CEO has been arrested or something like that.

Ron Gross: Right. Unless a stock is irrationally exuberantly priced, no quarterly report, unless there's fraud involved, there's some major thing, should wipe away a third of a company's value. I haven't delved into this, but sometimes those types of sell-offs create opportunities for patient, longer-term investors.

Kretzmann: Yeah. I think longer-term, this could be an opportunity. Skechers has, in general, been a well-run company. You have Robert Greenberg at the helm. He's been head of this company for 25 years or so. He owns the majority of the company. The company is still producing strong free cash flow, has over $600 million in cash, no debt. So, the company is OK. They'll probably be buying back a lot of stock this quarter with the stock lower. But, it's going to be volatile, that's for sure.

Chris Hill has no position in any of the stocks mentioned. David Kretzmann owns shares of Skechers. Jason Moser has no position in any of the stocks mentioned. Ron Gross has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Skechers. The Motley Fool has a disclosure policy.