American University of Sharjah

School of Business Administration

Department of Finance

FIN 310 – Analysis of Financial Statements

Fall 2021

Skechers Report

By:

Abdulla Alqubaisi – b00077690

Ahmed Rizwan Memon – b00083848

Gouthami Pillai - g00085113

Tabish Zahid – b00085322

Under the supervision of:

Dr. Kimberley Gleason

2021
 Table of Contents
Executive Summary...........................................................................................................3

Introduction.......................................................................................................................4

Financial Statement Analysis............................................................................................5

Liquidity and Efficiency..............................................................................................................5
Solvency.......................................................................................................................................6
Leverage......................................................................................................................................8
Tangibility...................................................................................................................................9
Profitability................................................................................................................................10
DuPont Analysis........................................................................................................................11
Valuation...................................................................................................................................12

Analyst Recommendations...............................................................................................13

Suggestions......................................................................................................................13

Conclusion......................................................................................................................14

Appendix.........................................................................................................................16
 Executive Summary

We analyzed Skechers, Inc. as equity analysts. Below are the reasons for our

recommendation, based on our analysis of the financial statements. The recommendation

issued in this paper is to HOLD the stock of Skechers Inc. The approach taken to conduct the

financial analysis has been done through calculating and analyzing a series of financial ratios.

The category of the financial analysis includes profitability, liquidity and efficiency, leverage,

solvency, and valuation. To gain a proper understanding of Skechers and the industry it

operates in, the analysis has been conducted on a time-series and cross-sectional approach.

The time-series approach allows for the ratio comparison over the last four fiscal years, while

the cross-sectional analysis allows for the use of comparable performance among similar

companies called benchmarks. In this case, the report has taken three benchmark companies

which will provide an estimate of how the overall industry is performing, and to evaluate if

Skechers has been performing well relative to the industry. The benchmarks that have been

selected are Crocs Inc., Steve Madden Ltd, and Wolverine World Wide Inc. On the overall,

Skechers has performed well, along with its benchmark companies, in terms of having strong

and stable profitability measures, stable liquidity and solvency position with a strong position

in being able to pay off short-term debts and fixed payments. The primary issue comes in the

year of 2020, with the COVID-19 lockdown, causing sharp changes in the ratio measures.

Profitability decreased significantly in 2020 for all the companies, while liquidity increased

due to taking on more debt, as seen in the leverage ratios. In terms of efficiency, the turnover

ratios, similar to the other ratios, remained stable, but slowed down in 2020 due to the

decrease in sales, increasing the overall cash conversion cycle.

 Introduction

This paper has conducted a thorough financial analysis on the company, Skechers Inc.

Skechers, Inc. designs and markets branded contemporary casual, active, rugged, and lifestyle

footwear for men, women, and children. The company is based in the United States, and it

sells its products to department stores and specialty retailers, and it also sells its products

internationally through distributors and directly to consumers through its own retail stores.

Skechers’ ISS Governance QualityScore, as of September 26, 2021, is 10 and this measures

the corporate governance within the company based on the four pillars: audit, board,

shareholder rights, and compensation. A score of 10 represents highest governance risk and

indicates that Skechers’ corporate governance is not the best. Moreover, the earnings quality

of Skechers was measured by the Beneish M score that is a mathematical model that

identifies whether a company is manipulating its earnings, and it turned out to be -2.698,

which means that Skechers is not a manipulator. The stock price for Skechers, Inc. as of

December 6, 2021, at 8 PM GST is $44.43. We analyzed the financial performance of

Skechers over the past four years through financial statement analysis and make

recommendations on whether an investor should strong buy, buy, hold, or sell the stock. In

addition, after having analyzed the company, we provided our suggestions on how Skechers

can improve its financial performance.

 Financial Statement Analysis

Liquidity and Efficiency

Liquidity is the ability for a company to transform its assets into cash without a

substantial decrease in the monetary value of the asset. The liquidity of Skechers, Inc. is

measured using the following ratios: current ratio, quick ratio, cash to total assets, and

cashflow to total liabilities.

Skechers’ current and quick ratios were stable and greater than one throughout the

years 2017 to 2020, which is consistent with the benchmarks except for Crocs, Inc. whose

quick ratios were less than one in 2019 and 2020. A quick ratio less than one means that the

current liabilities of Crocs must be higher than their current assets minus inventory and any

assets less liquid than inventory, and this shows that Crocs cannot cover its current liabilities

with just its most liquid assets such as cash.

During 2020, the current and quick ratios of all four companies increased and this

could have been because of the pressure caused by the COVID-19 pandemic in order to have

enough cash on hand to cover the unexpected expenses as their cash to total assets also

increased during 2020. Crocs’ cash to total assets decreased, however, throughout the years

2017 to 2020. Skechers had the highest cash to total assets among the benchmarks in 2020.

The cashflow to total liabilities decreased for Skechers in 2020 and it was found to be the

same case for Steve Madden, however, it increased for Crocs and Wolverine World Wide.

This was to be predicted as many businesses were affected by the pandemic, and their cash

flows were affected and decreased. Overall, Skechers has good liquidity compared to the

benchmarks as it has the highest cash to total assets and current and quick ratios of greater

than one and comparable to the benchmarks.

 Efficiency measures the ability of a firm to transform its assets into revenue. The

ratios that measure it include the inventory turnover, asset turnover, and accounts receivables

turnover. Skechers’ inventory turnover was stable throughout 2017 to 2019, however, it

decreased during 2020. Similar results were noticed in the benchmark companies. The

inventory turnover decreased due to the COVID-19 pandemic as businesses were not able to

sell as much inventory as previous years due to the lockdowns in many countries throughout

the world.

Asset turnover was also stable throughout the years 2017 to 2019 for Skechers and its

benchmarks but decreased during the year 2020 because of the effect of the pandemic on

business operations. Accounts receivables turnover was decreasing throughout the years 2017

to 2020 for Skechers and the same trend can be seen in the benchmark companies except for

Steve Madden whose A/R turnover increased. A decreasing accounts receivables turnover

indicates that a business is having trouble collecting money from its customers and this

affects the efficiency of a firm negatively. Having said that, the efficiency of Skechers was

comparable to its benchmarks as most of them had similar trends and were still able to turn

inventory into sales even during the pandemic.

Solvency

Solvency is the measurement of the ability of a firm to pay its long-term debts and

financial obligations. The solvency ratios used to analyze Skechers, and the benchmark

companies are Cash Conversion Cycle, Defensive Interval Ratio, Altman’s Z Score,

EBIT/Interest, and the Fixed Charge Coverage Ratio.

The Cash Conversion Cycle measures the number of days it takes for the company to

convert inventory into cash flows from sales. From the data collected from Bloomberg, we

notice that Skechers has a high, inefficient estimated current cycle of about 81 days, with
Crocs at 67 days, Wolverine World Wide at 94 days, and Steve Madden at an extremely

efficient cycle of only 26 days. Thus, the cash conversion cycle of Skechers can be improved

as seen with the competitors in the market. When analyzing data from past years, we notice

that the cycle of Skechers has been stable at the range of 79 - 83 days but had a sharp rise in

2020 to about 92 days. This could be owed to the COVID-19 pandemic which would delay

the conversion of inventory into sales.

The second measure of solvency is the Defense Interval Ratio (DIR), which measures

how many days the company can survive without using capital assets and only relying on

current assets. Skechers currently has an estimate of 142 days in 2021 but had a measure of

177 days in 2020. The DIR had increased in 2018 as well, dipped in 2019, and once again

increased in 2020. This shows that Skechers has a consistently unstable DIR, even before the

pandemic hit. As compared to the benchmarks, Skechers has had a consistently higher DIR

every year, which thus implies lower solvency compared to the benchmarks in the market.

A third measure of solvency is the Altman Z Score. This is a model used to predict

whether a company is likely to go bankrupt in the near future; a score above 3 implies that a

company is financially stable and a score below 3 indicates otherwise. With the data

collected, Skechers currently has an estimated score of 3.98 in 2021, which means it is

unlikely to go bankrupt soon but is still in the grey zone. To add to the concern, the score was

initially high in 2017 with a whopping score of 7.93, but declined over the years, and fell

below 3 in 2020 with a score of 2.95. It is more concerning when comparing to the

benchmarks, who all have higher scores, with Steve Madden scoring the highest with a score

of 9.11 in 2020.

A fourth measure is the EBIT/Interest ratio which measures the ability of the

company to pay its interest obligations with the earnings before interest and tax. Skechers has
unstable estimated solvency for the current year with an EBIT/Interest of 58.88, which has

increased from the 2020 value of 8.19 but decreased from the 2019 value of 69.04. The value

is still greater than 1, which is a positive sign, and consistently higher than Crocs, except in

the year 2020. This implies that Skechers took the larger than expected hit on solvency during

the COVID-19 pandemic.

The Fixed Charge Coverage Ratio (FCCR) measures the company’s ability to recover

the fixed costs, such as debt, interest, and lease expenses, from the company’s earnings. A

value of 2 or higher implies that the company is financially stable, which a value less than 1

implies that the company is struggling to meet its fixed expenses. Skechers has an estimated

value of 58.88 in the current year, which is a large jump from the value in 2020 of 1.41. The

solvency was increasing prior to the pandemic but dipped during the outbreak. There is

insufficient data to compare with the benchmarks in the current years.

Leverage

Leverage measures the level of debt/borrowing that has been taken on in the

company. From 2016 to 2018, Skechers was maintaining a very low debt capital ratio, and

funding primary of its operations through equity. Starting 2019 there was a change in the

capital structure with debt increasing significantly and going from almost 3% to 26.13% of

total assets in 2019. Debt further increased to 34.49% of total assets in 2020. The years 2019

and 2020 saw a large increment in short-term debt and long-term debt indicating that

Skechers was looking to change its capital structure assessing the optimal level of debt to

gain the potential tax benefits, while minimizing the incremental burden of debt. The year

2020 saw additional borrowing in long-term debt, as the company looked to protect itself in

order to provide a cash inflow during periods where there were very limited operations.
 Skechers’ capital structure consists of debt and equity. Its equity consists of Class A

common stock and Class B common stock. The holders of Class A Common Stock and Class

B Common Stock have identical rights except that holders of Class A common stock are

entitled to one vote per share while holders of Class B common stock are entitled to ten votes

per share on all matters submitted to a vote of their stockholders. In terms of the benchmark

firms, all the companies saw a drastic shift in the capital structure, either in 2019 or primarily

in 2020. Skechers increased their borrowing in 2020 and the total debt increased, and the

capital structure became 34.49% debt and 65.51% equity. Crocs’ capital structure went from

53.29% debt in 2019 to 33.38% debt in 2020, and this made Crocs rely on shareholders’

equity more than debt in 2020. Steve Madden had its first borrowing in 2019 and since then

the amount of debt has decreased and its capital structure stand at 11.68% debt to 88.32%

equity. Wolverine World Wide’s reliance on debt also increased in 2020 as their capital

structure was 41.49% debt and 58.51% equity, compared to 39.50% debt in 2019.

Tangibility

Skechers’ long-term asset‘s performance is evaluated by tangibility measures. Firstly,

let’s talk about any impairment of goodwill, assets and intangible assets which results from

the fair value of the assets dropping to a price lower than the carrying/book value, and this

can happen during market distress. While Skechers did not have any impairments on either its

goodwill nor any of its assets, its benchmarks including Crocs and Steve Madden had asset

write offs of $21.1 million and $36.9 million, respectively. Skechers had total capital

expenditures of approximately $309.9 million in 2020, which consisted of expenditures to

support worldwide distribution capabilities, acquisition of a corporate office building, and

new retail stores worldwide. Lastly, Skechers uses the straight-line method to depreciate its

long-term assets. Its depreciation and amortization to sales was 3.11 times more than its net

sales in the year end 2020 being the highest among its benchmarks.
Profitability

Profitability measures provide an understanding of what is driving or pulling back the

earnings of the company. Skechers has seen a relatively stable gross margin over the last

three years, dropping slightly from 47.9% to 47.63%. While the core product profitability has

been maintained, the Operating Margin fell drastically in 2020 due to the impact of the

COVID-19 lockdowns, which was also illustrated in the Profit Margin. As for the Return on

Assets, the profitability was on a falling trend, with gradual decrease in 2019, and then a

sharp decrease in 2020, driven because of the fall in the profit margin. As for the return on

equity, unlike the return on assets, the ROE was very stable during the 2018 to 2019 period,

but due to the sharp decrease in profit margins, the ROE decreased as well. The ROE will be

further evaluated using the DuPont analysis in the next section.

Additionally, another important factor is the comparison of the ROIC against the

WACC. The WACC represents the cost of financing the company, while the ROIC is the

return that been provided to all the company’s financiers. As the trend shows, the ROIC has

been falling, while the WACC has remained relatively unmoved, dropping slightly. From

2018 to 2020, the ROIC fell from 17.41% to 2.97%, while the WACC went from 9.3% to

8.3%. This means that the company is not able to generate sufficient returns for the cost it is

paying to finance its assets, and Skechers is not generating wealth for all contributors of

capital.

Focusing specifically on the equity shareholders, the trend of the ROCE to the Cost of

Equity will be compared. A healthy/profitable business should have returns higher than costs,

but in this case, the Cost of equity has been rising, while the ROCE has fallen significantly.

From 2018 to 2019, the ROCE was above the cost of equity, but given the fall in profit
margins in 2020, the ROCE was below the Cost of equity, indicating that shareholders were

effectively losing.

Comparing the performance of Skechers to its benchmarks, a similar trend in all the

profitability ratios was found in the case of Wolverine and Steve Madden, where the gross

margins were sustained throughout the year, while the Operating profit, fell in 2020 due to

COIVD-19. This led a follow-on impact on net profit, profit margins, and then on the Return

on Assets and Return on Equity. The only company to have an opposite trend was Crocs.

Crocs’ gross margins improved significantly, while already having the highest margin in the

group. Additionally, Crocs seemed to have done well during COVID pandemic, which meant

that it was the preferred style of wear, boosting the sales, improving overall profitability

measures and have an overall positive picture despite going through the lockdown and the

pandemic.

Skechers’ basic EPS also decreased from 2.26 in 2019 to 0.64 in 2020 and this was

mainly due to the lowered sales and increased costs due to the pandemic. Skechers also has a

diluted EPS that is different in 2019 only and this was because 1,575,509 Class B stocks were

converted into Class A.

DuPont Analysis

Conducting the DuPont analysis allowed us to gain insight into what is the main

driving factor for the ROE. Examining the DuPont analysis on Skechers, from 2016 to 2019,

ROE had slightly decreased, excluding the sharp decline in 2020.While the company

maintained a relatively stable asset turnover ratio, the impact came from the drop in the

operating margin in 2020, while the asset turnover decreased and the company had taken on

more debt, magnifying the rise in the leverage ratio. Additionally, the interest burden on

Skechers decreased in 2020 as it paid more interest payments which followed from an
increase in debt in 2020, and this decrease in interest burden lowered its ROE in 2020. As for

the competitors, the main influencing factor was the operating margin, while there was also

increased leverage in 2020 either due to widely accessible cheap debt or for some paces that

the companies were seeking a cash inflow to float during the COVID-19 lockdown.

Valuation

For the valuation aspect of our analysis, we used the dividend growth model to value

our company. We found that Skechers and its benchmarks (except Wolverine World Wide

Inc) resulted in a negative value for the firm, however, that does not mean that the firm has

negative value. It means that the valuation model used (dividend growth) does not work as it

does not represent economic reality and requires further investigation to find the value of

firm. As for the fair price of the stock, only Skechers was able to be valued (at $80.62 per

share), however, currently it is priced at $44.43, a little more than half! Meaning that

currently the stock is undervalued. Skecher’s benchmarks (except Wolverine World Wide

Inc) resulted with negative values, however, that does not mean that the stock has negative

value. It means that the valuation model used (dividend growth) does not work as it does not

represent economic reality and requires further investigation to find the value of equity. The

case of Wolverine World Wide Inc is special as the retention ratio is not available meaning

that the company had a negative retention ratio (meaningless) so we cannot calculate the

value of firm and value of equity and requires further investigation.

 Analyst Recommendations

After careful analysis we determine that the best course of action is to hold the stock

of Skechers. This is due to several reasons, the primary reason being that according to our

valuation, using the dividend growth model, the stock is currently highly undervalued

($44.43 vs $80.62). Secondly, Skechers’ performance throughout the pandemic, in terms of

liquidity, was positive as they still managed to turn inventory to sales. However, due to areas

of concern in solvency where they have a high 81-day cash conversion cycle, while

benchmarks Steve Madden have an extremely efficient cycle of only 26 days and

furthermore, their defensive interval ratio has been extremely inconsistent as it was

fluctuating even pre-Covid. Moreover, profitability is also concerning due to ROIC falling

over 10% while the WACC has only fallen by 1%. To conclude and reiterate, because of the

predicament the pros and cons our analysis highlights we recommend holding Skechers stock

and further observing the performance of Skechers as the effects of the pandemic wear off

and businesses continue their normal operations as we believe Skechers’ performance will

improve and their stock price will reflect their fair value of equity. Additionally, since the

stock price trend has been upwards for Skechers from the beginning of 2021 it is best to hold

the stock until it reaches its highest possible value and then sell it.

Suggestions

Based on the analysis of Skechers conducted above, we have the following

suggestions for the company to improve its financial performance. Firstly, the company

should aim to reduce its debt by retiring/paying off some of it, since it has a negative impact

on the ROE that is reported in the financial statements. Additionally, Skechers should also be

more careful in their capital budgeting decisions to generate wealth for their shareholders as

the ROE is currently lower than the cost of equity. The company should instead invest in
assets that yield a higher return than the current cost of equity. This would thereby generate

wealth for its shareholders. Skechers also has bad governance, which needs to be improved.

A suggestion for this would be to have one class of stock, as opposed to the current two

classes: Class A and Class B; where Class A common stockholders are entitled to one vote

per share while Class B common stockholders are entitled to ten votes per share. By having

just one class of stock, Skechers will improve the rights of all their shareholders as they will

have identical voting rights. Another point to note is that the EPS of Skechers decreased in

2020, which could be improved if the company could increase their sales and decrease their

costs. This could be done in multiple ways, such as coming up with new, creative ideas while

maintaining current trends, as well as becoming more efficient in their management of

resources to reduce their costs.

Conclusion

In conclusion, this paper analyzed the financial performance of Skechers Inc. from

2016 until 2020. The report also identified and included the performance of three benchmark

companies, namely Crocs, Steve Madden, and Wolverine World Wide. Based on the analysis,

recommendations were made, as well as suggestions for improving the future performance of

Skechers. Conducting the various financial tests on the four companies concluded that

Skechers had a relatively strong position compared to its benchmarks prior to 2020, and the

performance has declined and gives rise to concern currently.

When considering the liquidity and efficiency ratios, Skechers showed trends like its

benchmarks, wherein the company had mostly stable financial affairs until 2020, where the

COVID-19 pandemic struck. During this period is when the inventory and asset turnover of

the company fell, but still showed similar patterns compared to their benchmarks.
 Regarding their solvency, Skechers slightly underperforms compared to its

benchmarks. The most concerning measure would be Altman’s Z score which put Skechers in

the grey zone (just safe from bankruptcy) while the benchmarks are all safe. With the analysis

conducted, we could conclude that Skechers took a larger hit than expected during the

COVID-19 pandemic; before 2020 Skechers had a relatively stable ability to pay its long-

term obligations.

When looking into the financial leverage of Skechers, we can conclude that the

company has increased its debt, making it have more short-term and long-term debt

obligations. While the borrowings of the benchmarks increased over the years, especially

during 2019 and 2020, they have all maintained ratios with their equity being higher than

their debt. This is undoubtedly a cause for concern for Skechers as it is affecting its ROE

unless it pays off this increase in its debt.

Considering the profitability of the company, we can assess that Skechers had stable

revenue until the pandemic hit. The operating margin has significantly reduced over the

years, and the company has not been able to generate wealth for the shareholders. Conducting

the Dupont analysis allowed us to conclude that the ROE sharply declined in 2020. While this

trend was noticed amongst most of the benchmarks, Crocs did surprisingly well during the

pandemic. The final method of financial analysis was on the valuation of Skechers, which

concluded that all the companies had negative valuation, which lead us to believe that the

dividend growth model does not represent the economic reality of the companies. Based on

these conclusions, we were able to recommend that shareholders hold their stock of Skechers,

and suggested ways for the company to improve their financial position.
 Appendix
Ratios.xlsx