Skechers ($SKX) is currently getting hammered in a freefall after reporting Q2 results and missing EPS (earnings per share) by $0.12 a share, (analysts thought it would be $0.41), and in-line revenue growth of a 9.7% year / year.
SKX seems to be an unlikely victim of the tariff trade war as well, as industry peers are all down mid-single digits as well, such as Lululemon ($LULU), Michael Kors ($KORS), Gildan Activewear ($GIL), Columbia Sportswear ($COLM), Fossil ($FOSL), Steven Madden ($SHOO), and Vera Bradley ($VRA).
Trade anxiety, as well as down guidance of $1.2 billion to $1.255 billion for the stock have pushed the stock dangerously close to its 52-week low of $23.90 (after-hours trading on 7/20/18 has the stock trading ~24% down, at $24.70 a share).
What SKX Q2 looked like
SKX did however have some bright spots when we look at the Q2 highlights from the earnings call, including:
- Record sales of $1.134 billion (+10.6%)
- Record quarter gross margin (49.4%)
- International wholesale sales increased (+24.9%)
- Company owned global sales increased (+12.8%)
- Q3 EPS expected to be $0.50 to $0.55
How you make money
Love it or hate it, a 24% drop in share price is an opportunity on either side. If you like the stock, this is a buying opportunity, both to hold the shares, and to buy long call options. Looking at 5 YR DCF (discounted cash flow) analysis, we calculate an 8.5% discount rate, a 12.8x EBITDA multiple, and a fair market value of $53.88, a 184% upside.
Looking at the long call option, if you buy 18 JAN 2019 $55 CALL options, at $24.70 share price, and you buy 10 contracts (to control 1,000 shares), and the stock hits $51 a share by 1 DEC 2018, you spend $230 to buy these contracts ($0.23 a share), and at exit you make $2,890 after subtracting $230 entry (does not take into account your own brokerage fees). Trading these long call options nets you a whopping 1,257% return on your money.
SKX does not offer or pay a dividend, so any gain from this stock will have to be from appreciation in stock price for long holds, short proceeds from opening a short position, or opening an option position (call or put).