{ "docId": "019dd923-622c-750b-8b99-4037ee85af93", "docSlug": "4c8f29888304", "documentTitle": "Skechers U.S.A., Inc. (SKX)", "authorId": "54_Spruce_Point_Capital", "authorName": "Spruce Point Capital Management", "documentKindSlug": "activist-deck", "documentKindLabel": "Activist deck", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2022-07-19 00:00:00", "orientation": "landscape", "aspectRatio": 1.3333334, "pageNumber": 6, "pageCount": 34, "prevPage": 5, "nextPage": 7, "slideType": "executive_summary", "function": "summarize", "density": "overcrowded", "nDataPoints": 12, "notes": "This is a classic activist short thesis summary slide.", "elementsJson": [ "headline_text", "paragraph" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b99-4037ee85af93/6", "deckHref": "/decks/019dd923-622c-750b-8b99-4037ee85af93", "deckJsonHref": "/decks/019dd923-622c-750b-8b99-4037ee85af93.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b99-4037ee85af93#slide-6", "components": [ { "bbox": null, "kind": "callout", "text": "We believe Skechers deserves to trade a substantial discount to comparable apparel companies, particularly in light of its deteriorating financial performance and governance issues. We see 30% to 50% downside risk to Skechers’ share price.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-0395-748f-9561-e8213f6d1026", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "share price downside: 30% - 50%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd953-0395-748f-9561-ee031c1f7144", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.18, "w": 0.9, "x": 0.05, "y": 0.44 }, "kind": "paragraph", "text": "We find several indications that Skechers’ business is deteriorating and that financial pressures are mounting. Our proprietary, on-the-ground channel checks in China indicate that revenue trends are materially worse than implied by Street consensus, and that China sales are pacing at YTD growth down -20% to -30% YoY, while discounting activity remains high. As a result, we believe Skechers will disappoint investors in the coming quarters. Longer term, we see local Chinese brands and a resurgent Nike gaining ground in China, while those familiar with Skechers that we spoke with expressed an array of frustrations about the product offering, distribution strategy, and operations.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0e47d303-d745-448c-a9c0-11e7bfc478de", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.9, "x": 0.05, "y": 0.94 }, "kind": "paragraph", "text": "We believe Skechers deserves to trade a substantial discount to comparable apparel companies, particularly in light of its deteriorating financial performance and governance issues. We see 30% to 50% downside risk to Skechers’ share price.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "13d46f7c-23bf-4ae8-9a26-6fe0efc0efe2", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.9, "x": 0.05, "y": 0.79 }, "kind": "paragraph", "text": "Despite Skechers’ remarkable revenue growth, it has posted a highly troubling decline in cash flow related margins since their 2018 peak. In fact, we believe Skechers’ operating cash flow is materially worse than most analysts and investors realize. Adjusting for onerous capital distributions to partners and cash payments to settle employee compensation programs, we estimate LTM operating cash flow to be -62% lower than the headline result. Deteriorating margins have been accompanied by what we observe to be an effort by Skechers management to reduce financial transparency, and Skechers’ use of joint venture structures makes their financials opaque to begin with.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "7e1df4d4-feb5-4e7d-a959-a84967db4ad2", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.9, "x": 0.05, "y": 0.63 }, "kind": "paragraph", "text": "We also see signs that Skechers will likely suffer another inventory episode, which in the recent past has twice crushed the stock between 30% - 50%. Even before the 1H downturn in China and a weakening consumer, inventory days were at a 10-year high of 169 at year end 2021, 24% above pre-COVID averages, and we see signs of a potential inventory aging problem. To make matters worse, Skechers’ year end 2021 purchase commitments with foreign manufacturers rose a massive 82% to $2 billion, representing relative levels 40% - 50% above pre-COVID averages. Our fears around inventory at Skechers are exacerbated by the people involved.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "88338145-e659-4659-b86a-2143ada7f69a", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.25, "w": 0.9, "x": 0.05, "y": 0.18 }, "kind": "paragraph", "text": "After conducting a forensic financial evaluation of Skechers U.S.A., Inc (NYSE: SKX), Spruce Point is short shares of the Company. Founded and long run by Robert Greenberg and his children, while being advised by an SEC-charged executive from the LA Gear inventory accounting scandal, Skechers is a “fast follower” known for offering comfortable shoes at a reasonable price. Massive growth in China has been a key part of the Skechers growth story since 2015. We believe Skechers has long embodied many of the stereotypical attributes of a family-run company: nepotism, self-enrichment, rampant related party transactions, and remarkably poor corporate governance. We imagine few are surprised by that observation. However, we believe the rot at Skechers extends much deeper than investors realize. Our thorough examination of management, advisors, and partners has uncovered undisclosed lawsuits, related party transactions and numerous highly concerning red flags related to inventory.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d20b51e6-0ed6-4843-ab6c-8c94985f75fe", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.9, "x": 0.05, "y": 0.05 }, "kind": "title", "text": "Spruce Point Sees 30% - 50% Downside Risk To Skechers (SKX) Share Price ($18.60 - $26.00)", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "46b7c765-7824-4f32-9051-47bc33161cc9", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [ { "name": "Executive summary", "slug": "executive-summary", "agent": null, "layer": "slide", "matchId": "6b1a7fa1-a81e-4741-b403-f78e92db6812", "evidence": "Executive Summary", "confidence": 0.9 }, { "name": "Thesis archetype", "slug": "thesis-archetype", "agent": null, "layer": "slide", "matchId": "41379eaf-cd26-4c5e-add3-b8a90debfcea", "evidence": "Spruce Point is short shares of the Company.", "confidence": 0.8 } ], "frameworks": [], "arcBeats": [], "loops": [], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }