Focus Picks: Sketchers USA (SKX) and Federal-Mogul Corp (FDML)

Sketchers USA (SKX)
 
In the 3-month period ending February, SKX has posted gains in 9 of the past 10 years, generating a 14.49% average return and a 9.64% median return. SKX's standard deviation is 31.66% in the period and its correlation to the SPY is 0.43.

 

The spread of new products from domestic to overseas markets may support growth given international wholesale sales, which were up 5.8%, significantly lagged domestic growth last quarter.  During the Q3 call, Sketchers suggested that Italy and Spain may have bottomed and reported that sales in France grew double digits.  Total sales increased across all four of the company's divisions during the third quarter.  The largest division is domestic wholesale, which accounts for 44% of sales, up from 40.5% a year ago.   Domestic strength was tied to growth of its Women's Go, Men's and Women's Sport, and BOB's divisions, which more than offset lower sales to foreign distributors.  The average selling price per pair within the domestic wholesale segment increased to $22.51 per pair for the three month period from $21.65 per pair last year thanks to newer products that carry higher average prices. Domestic wholesale segment net sales growth benefited from a 25.2% lift in unit sales volume to 10.1 million pairs, up from 8.0 million in Q3, 2012.  International wholesale, retail, and e-commerce represent 25%, 29%, and 1.4% respectively.  International wholesale margin improved thanks to a shift in sales mix from foreign distributors to higher-margin direct sales.  Retail segment sales at the company's 307 domestic and 63 international stores grew 19.8% YoY to $152.1 million thanks to same store sales growth, which grew 17.3% in the U.S.  Sketchers added 24 net new stores over the past year and gross margin at the company's retail stores reached 59.7%, up from 58% a year ago.  Sketchers entered the quarter with plans to add 17 additional stores by year end.  E-commerce sales improved 30.3% to $7 million.  Total sales across all four divisions climbed 20.1% to $515.8 million in the quarter -- the second highest in the company's history.  Gross margin improved to 44.7% from 43.7% last year, while operating expenses dropped to 36.5% from 39.4%, lifting EPS to $0.53 in the quarter, up from $0.22 the year before.  Heading into Q4, Sketchers reported Q3 was one of the best for incoming orders and that order strength continued into October -- suggesting solid holiday numbers.  The company's five biggest customers account for 17.9% of sales, up from 16.7% last year, however no customer accounts for more than 10% of sales.   There are 6 days to cover held short and the company has beat expectations in 3 of the past 4 quarters.  Sketcher's has $6.58 per share in cash. 

 

 

Q3 Earnings Transcript

 

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Federal-Mogul Corp (FDML)
 
In the 3-month period ending February, FDML has posted gains in 4 of the past 5 years, generating a 15.3% average return and a 16.68% median return. FDML's standard deviation is 29.75% in the period and its correlation to the SPY is -0.81.

 

A recovery in European vehicle demand offers upside opportunity for FDML given 42% of the company's revenue comes from the region, including 49% of FDML's powertrain sales.  Overall, 45% of its sales come from No. America and 13% are generated in the rest-of-the-world.  FDML produces products both for OEMs and aftermarket.  Its powertrain customers include makers of light, medium, and heavy duty vehicles that typically co-develop products with FDML and ink longer term deals.  The company's vehicle components segment produces over 500k SKUs, which are distributed through multiple wholesale and retail accounts to both repairers and consumers.  Revenue through the first 9 months grew 4% to $5.09 billion, including 5% growth in powertrain.  EBITDA grew 0.3% to 8.8% year-to-date through September.   EMEA powertrain sales fell 1% in the quarter, more than offset by 8% growth in No. America, suggesting significant upside opportunity for the segment as vehicle sales rebound off austerity lows.   61% of FDML's vehicle components sales, which includes brake related products (Wagner), wheel parts, gaskets, wipers (ANCO), spark plugs (Champion), etc, come from No. America, while 32% comes from EMEA and 7% from ROW.  Segment sales were up 2% in the first nine months led by 15% growth in EMEA.  Long term opportunity exists thanks to more global drivers supporting total vehicles in operation, which is expected to grow a compounded 4% through 2020.   Additional opportunity comes from the increase in average vehicle age and upcoming brake regulation, including reducing copper content and braking distances -- both of which offer pricing support.   Across both segments, sales improved 9% (+6% organic) to $1.7 billion in the third quarter.  Net income came in at $38 million in the period, versus a loss of $11 million the prior year.  EBITDA improved by 2.1% year-over-year for the quarter.   Profit upside opportunity exists thanks to an ongoing restructuring/right-sizing, including the closure of 15 locations.  That restructuring should provide margin opportunity as lower costs are leveraged against an expected 6% CAGR and 7% CAGR in global light and commercial vehicle construction through 2018, respectively.  That growth offers additional opportunity since global emissions restrictions are tightening, which is likely to boost content per vehicle and provide price mix advantages.  Additional opportunity may come from future debt refinancing and debt reduction.
 

 

Corporate Presentation
Company's Q3 EPS transcript