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Monday, September 13, 2010

Flat Footed?

Steve was kind enough to point out two opportunities in the footwear sector that opened up last week while I was in the midst of a particularly brutal week of 10 and 11 hour days. I've had the chance to take a look at them this weekend and today, and I wanted to chime in.

These are specifically Crocs (CROX) and Skechers (SKX). While Crocs has taken a more recent and dramatic hit, Skechers interests me because it is down so much over a protracted period of time and because of its PE ratio of... 7. Before continuing, here are the charts:

Under most circumstances I am usually leery of charts like Skechers'. What seems to have happened in this case is that there is a wicked case of multiple compression. Apparently, the sales forecasts for a particular shoe (I know nothing of fashion so I won't even try) the market had built into the price were a little too much and the growth rate has come into something more reasonable. To be perfectly honest, you don't need very much of a growth rate at all to justify a 7 PE.

In a market that is valuing a great many stocks at criminally cheap PEs, single digit PEs shouldn't draw so much attention, but for a clearly growing company this gives me pause. There have been fashion related stocks in the past that seem to be getting very cheap, but then they are doing so for a reason. Chicos FAS (CHS) dropped about 50% in 2006 from $40 to $20 and saw a multiple compression from 40x earnings to about 17x earnings, which was a little cheap compared to the market at the time and its growth rate still seemed alright. It's at $9 now and trading at 13.7x earnings. That being said, Skechers seems particularly attractive and could actually see earnings drop as much as 30% without becoming unattractive. It's not often you can say that about a company.

As for Crocs, I have to be honest that I never understood the trendiness of their products to begin with so when they nearly went under a year and a half ago I wasn't shocked. They've come back in nearly Ford-ian fashion, perhaps better, and I have to be honest that I don't fully understand whether or not they are back in style. Earnings have recovered notably and their forecast reduction really wasn't that bad. The stock price hit I think reflected that traders had been continuously hiking estimates and when Crocs simply brought them back down to a reasonable level the stock had to come in.

Between the two of them, a small position in Skechers makes the most sense to me, but I will confess ignorance of fashion trends and that can be more than enough to doom you in this sector.


  1. I have only my powers of observation to guide me here, but here we go anyway. There is a Sketchers store in Mall of America that's large, over-employed and (as far as I can tell on the Saturdays I bother to go and walk by) under-customered. You know what I mean. Also, I'd almost never spot a Sketcher shoe on a person just walking by.

    The stupid Crocs, however, I see everywhere. Even my parents have at least a pair a piece. And they typically operate off of kiosks. That can't be a very high operating cost. And all anyone says about them is how comfortable they are. Blah blah.

    The point here is kind of mute, I guess, since I'll never buy products from either retailer (and if I owned McDonald's stock wouldn't I eat there every day?)

  2. I don't ever go to malls or look at people's feet (honestly I can't tell you what any of my co-workers wear and I work with them 10 hours a day). I was looking at it purely on a valuation basis, but of course valuation is contingent on the sales outlook.