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Initially, the stock was impacted by the filing of two frivolous legal claims by several individuals, questioning the health benefits of Shape ups, which the company has effectively countered with scientific aOlernKienOP
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More importantly, information started to emerge (highlighted by Susquehanna, who downgraded SKX to neutral) that, based on SportScan POS data and conversations with retailers, Shape up sales were lagging and increased discounting was evident, especially during the Labor aOlernKienOP
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This data point was extrapolated to question the viability of the whole concept and therefore SKX profitability.
The Inventory Problem:
Certain family footwear companies doubled their Shape up inventories going into back to school (BTS), treating Shape ups as aOlernKienOP
Buy Online Authentic Orion 7s an athletic category (which is a huge BTS category) and this was a big mistake. Shape ups are not relevant to BTS and are purchased by regular folks who are finding that the technology helps their feet, legs, back or posture, like nurses, retail workers, factory workers, folks who spend a lot of time on their feet etc. Mums don purchase for themselves during BTS, hence the sales slowdown versus the doubled inventory. Note, Shape ups have so far been essentially a ladies category (85% of sales).
During the past 3 weeks Shape up sales have again aOlernKienOP
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But, this will likely slow the delivery of the Fall collection which has a much aOlernKienOP
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Inventory levels at SKX have been growing more slowly than sales and receivables, aOlernKienOP
Discount Price Reflective Silver 13s so SKX, internally, does not have an inventory problem. Inventory was y/y up 14% at the end of the 2nd quarter while sales increased 68%. But, the excess Shape up inventory is at the retailer, thanks to certain of them doubling inventory prior to BTS, so the flattering balance sheet metrics at the end of the 2nd QTR are a bit misleading. Analysts expect inventories to be up about 50% y/y at the end of the 3rd QTR, more in line with sales growth and reflecting push back from retailers on deliveries of new model Shape ups until excess retail inventories are worked off. $20 is the typical discount, especially on the more extreme colors and the $79.99 discounted price point is still holding up well on the original bottom models.
It not clear to what extent SKX is assisting some key retailers with the current discounted promotions, but SKX management are very disciplined about this process and any assistance is unlikely to cost more than a percent or two in company gross margin during the balance of the year.
With an ex factory cost of around $15 the XF Shape up carries a much higher gross margin than the company 47% average. So, this discounting to facilitate inventory balancing is not very painful financially.
Additionally, SKX has its own store network, outlet stores and the international operation to move excess inventories without unnecessary discounting (and international is just beginning the ramp in Shape up sales and can sell the original XF model aOlernKienOP
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Store managers expect Shape ups to be a big Xmas gift item. January is also anticipated to be a strong month for all aOlernKienOP
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There is still strong demand for the original rocker sole Shape up range, the XF. It has become a classic walking shoe which aOlernKienOP
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Customers are still returning to repurchase the same model as they have experienced worthwhile health benefits. As long as shoes are priced under $100 repeat sales are continuing. It unfortunate that retailers doubled inventory levels triggering the desire to accelerate sales with discounting on what is now a item. SKX management is correct to resist aOlernKienOP
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Shape ups are also becoming the defacto work wear shoe for many professions such as nursing, where people are on their feet all day.
The real (excess) inventory risk in the footwear industry is always aOlernKienOP
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