Analysis of Skechers USA - Essay Example

1. Introduction Skechers U.S.A is a publicly listed organization catering to the lifestyle footwear industry. The company was founded in 1992 by Robert Greenberg and has since grown to surpass the billion dollar mark in sales beginning 2005. Products made focus on trendy and casual styles for men, women and children. The current portfolio of shoe styles exceeds 2,000 and is sold in the United States through company-owned 84 concept stores, 83 factory outlet stores and 37 warehouse outlet stores. It has also expanded internationally to include 16 concept stores and 3 factory outlets. Online buying of products have been made possible with the establishment of the company's website. Starting in 2003, the company expanded its product portfolio to include branded apparel such as sportswear, underwear, sleepwear, socks and swimwear. Annual revenues in 2007 amounted to $1,394,181 which slightly increased to $1,440,743 in the fiscal year of 2008. The expectation for 2009 is slightly lower and is seen to amount only to $1.3 Billion Dollars but is still seen as quite remarkable considering the global crisis and the cut-throat competition in the retail industry. 2. Current situation The most recent available annual 10k filings of Skechers provide the following information regarding the financial health of the company: All of the data were derived from the quarterly and annual financial reports of Skechers Inc (SKX) and Google Finance. Williams et al (2008) and Groppelli et al (2000) define the ratios as below: a. Return on equity (ROE) ratio relates earnings to shareholder equity. It gives people a measure on whether the company is an asset creator a cash consumer. Simply put, ROE refers to the amount gained for a unit of amount invested. If the ratio is 0.5 then that means that for every dollar invested, 50 cents is additionally created. We can see from the table that the ROE is diminishing signifying a decrease in profitability which may be a result of the global slump. b. Current ratio provides a measure that indicates the ability of an entity to settle its near-term obligations. It is given by dividing Current Assets with Current Liabilities. A high result indicates a greater probability that the company can pay on time. From the values above, we can see that for the quarter ending June 2009, current assets were 3.55 times larger than current liabilities. c. Inventory turnover is the ratio of net sales over total assets which measure the ability of an entity to use its assets. A high figure indicates that there is efficient management of assets to produce a good sales number. We can see that that net sales is 3.79 times larger than total assets which is indeed remarkable. d. Accounts Receivables Turnover and Days of Collection - Accounts Receivable is the ratio between net sales and average accounts receivable. This ratio is a measure of how much sales are quickly turned into cash. Days of Collection is defined as 365/accounts receivables turnover and average number of days the company's receivables are outstanding which is defined between the credit sale and collection of cash. e. Debt Ratio - this ratio is defined as debt/total assets. This indicates how much of the capital of the company is provided by borrowing. 3. Analysis The principal goal of Skechers U.S.A in the design of its products is "to generate new and exciting footwear in all of our product lines with contemporary and progressive styles and comfort-enhancing performance features". The focus is on "new styles to be fashionable and marketable to the 12 to 24year-old consumer" while expanding operations to also include lines that "appeal to the broader range of 5 to 40year-old consumers, with an exclusive selection for infants and toddlers". Skechers, while producing shoes with some performance features, "generally do not position our shoes in the marketplace as technical performance shoes". Designers determine lifestyle trend information by "the review and analysis of modern music, television, cinema, clothing, alternative sports and other trend setting media". (Securities and Exchange Commission, 2009) According to the 10k filing of Skechers, it takes about nine months of preparation and a sizeable internal design team and outsourced designers to come up with new product lines. It becomes a big problem, therefore, if these designs are copied, mass produced and marketed. Investments made by infringing entities is very small compared to the one made by the company. A deeper research indicates that the company have already experienced major legal battles involving product infringements. One of these was with Candie's Laser Jet, Override and Download dress styles which had large similarities with its Blasters and Discolines dress styles. In one case, Skechers was the one sued by Crocs, Inc. for alleged patent and trade dress infringement. The company was accused of marketing products with marks that are similar to Croc's animated crocodile design mark. This case is significant because it is indicative of fierce competition as many other entities enter into the niche that was previously shared by Nike and Skechers alone. As more competitors enter into the scene, there is a greater tendency for product similarity. The company also faces serious product infringement abroad as fake products, especially from China, flood the Oriental Asian, African, European and the United States markets. Fake products not only result to lower sales but also tarnish the quality of the brand. It is also becoming increasingly difficult to distinguish between fake and original products. Skechers also invests heavily in marketing their products and any negative image can negate this effort. Many companies now are under fire for not requiring their contractors to comply with labor laws. Although it has established a quality control system, any unforeseen event can result to a recall. Several companies, most of which have used Chinese manufacturers, have been already forced to recall its products. Extraneous factors also significantly impact the financial health of the company. As the majority of production was outsourced to Chinese contractors, there is always the threat of delayed productions due to political instability, occurrence of natural disasters, electrical shortages and changes in labor and monetary practices by the Yuan government. China is currently reeling from its overblown economy and the impacts of the US induced global recession which can lead to political and social unrest. The company tried to reduce its exposure to these risks by getting manufactures in Italy, Brazil and Vietnam. There is also the increasing concern not only for workplace safety but also in the safety of consumer products as evidenced by the passing of the Consumer Product Safety Improvement Act and the move to ensure that there is no lead in products for children. (Securities and Exchange Commission, 2009) The global slump affected many companies and a negative growth forecast have already been made by Skechers officials. In the 10k filings, it has already been mentioned that the global slump can result to cancellation of orders by retailers due to decreased demand as people line up for unemployment. Failure of financial institutions to live up to their security of credit line commitments also stifled further thoughts of investments. Knowing all of these, the strategy that should be adopted by Skechers is one which will diversify its manufacturing system. Chinese contractors are cheap but there are emerging economies which can offer the same price at the same quality. The company must look into this. Product infringement is a very hard problem to tackle especially in the international scene but there are efforts by public agencies to address this problem. Skechers can compete with quality but it must also take a proactive role in the fight against product infringements. Skechers products are already marketed in over 100 countries but the company must take measures that take into considerations differences in tastes and styles due to differing beliefs and value systems. Many other companies have tried to force their business models in international markets and have failed miserably. Reference: Google Finance (2009) Skechers Financials. Retrieved August 5, 2009 from http://www.google.com/financefstype=ii&q=NYSE:SKX Groppelli, A. and Ehsan Nikbakht (2000). Finance, 4th ed. Barron's Educational Series, Inc. Securities and Exchange Commission (2009). SKX Form 10-K. Retrieved August 5,2009 from http://www.secinfo.com/dsvR3.u1gb.htm. Williams, Jan R.; Susan F. Haka, Mark S. Bettner, Joseph V. Carcello (2008). Financial & Managerial Accounting. McGraw-Hill Irwin. Read More