Over the past six months, Skechers’s stock price fell to $63.23. Shareholders have lost 16.7% of their capital, which is disappointing considering the S&P 500 has climbed by 4.3%. This may have investors wondering how to approach the situation.

Is now the time to buy Skechers, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Skechers Will Underperform?

Even though the stock has become cheaper, we're cautious about Skechers. Here are three reasons why you should be careful with SKX and a stock we'd rather own.

1. Weak Constant Currency Growth Points to Soft Demand

We can better understand Footwear companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of Skechers’s control and are not indicative of underlying demand.

Over the last two years, Skechers’s constant currency revenue averaged 9.7% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Skechers’s revenue to rise by 7.6%, a slight deceleration versus its 12% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Skechers has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.4%, lousy for a consumer discretionary business.

Final Judgment

Skechers falls short of our quality standards. Following the recent decline, the stock trades at 14.8× forward P/E (or $63.23 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.

Stocks We Would Buy Instead of Skechers

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