After Skechers Issues Weak Guidance, Wells Fargo Predicts First Annual EPS Decline Since 2011

After Skechers USA Inc (NYSE: SKX) disappointed investors with its second-quarter earnings report and third-quarter guidance Thursday, Wells Fargo said it's lost confidence the footwear maker's earnings trajectory.

The Analyst

Wells Fargo's Tom Nikic downgraded Skechers from Outperform to Market Perform.

The Thesis

Exiting Skechers' earnings report, there are seven reasons why investors should no longer have confidence in the footwear company, Nikic said in a Thursday downgrade note. (See the analyst's track record here.) 

• Skechers only hit the midpoint of its sales guidance in Q2 after beating its guidance in each of the prior six quarters.
• The company said three months ago it was expecting a "very strong" third quarter, but its guidance now suggests no sequential acceleration in total revenue growth.
• Gross margin was strong in the second quarter, but the outlook is "far less enticing."
• There is no reason to suggest SG&A expense growth will moderate in the near-term, as expenses moved higher by at least 20 percent for the sixth consecutive quarter. Multiple projects ahead, including distribution centers in China, Europe, and the U.S., imply expenses will remain elevated.
• Despite prior guidance for an EBIT margin of 12-13 percent by 2019, Skechers is undergoing EBIT margin erosion.
• The company saw outsized growth from join ventures, but at the same time a larger portion of net income is being eliminated due to non-controlling interests.
• All told, Skechers should end the fiscal year with its first annual EPS decline since 2011, according to Wells Fargo. 

Price Action

Skechers shares were trading lower by 23 percent at the time of publication Friday at $25.61. 

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