Skechers Or Crocs: Which Footwear Company Is A Better Bet?

Skechers’ stock (NYSE: SKX) has remained flat since early February after the WHO declared the Coronavirus a global health emergency, while Crocs’ stock (NASDAQ: CROX) hasn’t done too bad either with a decline in value of just around 5%. The lockdown in various parts of the world has hurt the apparel industry worldwide, with more weakness to come over the coming months. Moreover, fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in store remaining closed continue to take their toll on the apparel industry. However, we believe Skechers has the edge over Crocs and is likely to fare better over the coming months because of its stronger brand presence (geographical diversification), robust digital network, and a diversified business model as compared to Crocs.

Our conclusion is based on our detailed dashboard analysis, ‘Is Skechers U.S.A. Expensive Or Cheap vs. Crocs? ’ wherein we compare trends in key metrics for the two apparel companies over the years to determine their relative valuations under the current circumstances.

• Skechers derives roughly 40% of its revenues from North America, while Crocs makes more than 50% of its sales from the region.
• Moreover, Skechers has a stronger balance sheet, with the company having a comfortable $1.2 billion in cash reserves as per the latest report, while Crocs’ cash reserves stood at a mere $100 million.
• Additionally, Skechers has a wider product portfolio, which ranges from footwear and apparel to eyewear and accessories. On the other hand, Crocs primarily offers footwear products and accessories.
• Finally, Skechers has a larger retail footprint with the company operating more than 1,150 stores as of 2019 while Crocs’ store count stood at less than 370. A larger retail footprint will help Skechers achieve faster growth once the things return to normal as the outbreak of virus subsides.

There Is Little To Separate The Stock Performance Of Both Companies Over Recent Weeks

Skechers’ P/E based on 2019 earnings has declined from 19x in 2019 to 16x currently, while Crocs’ multiple has contracted from 25x to about 21x. There is little to separate the two, as both companies have witnessed a similar contraction of the multiple. However, we believe Skechers’ multiple is appropriate at its current level. On the flip-side, Crocs’ multiple appears high, keeping in mind the fact that the company’s revenues and margins are at a higher risk compared to Skechers’. Notably, Skechers’ P/E is towards the lower end of the spectrum seen over the last six years, while Crocs’ multiple seems to be elevated. This leads us to believe that Crocs stock could be vulnerable. Overall, it’s likely that Skechers stock will outperform Crocs, if not near-term, at least in the medium- to long-run.

 But How Long Will Crocs Stock Remain Under Pressure?

• The expected timeline for recovery in global economic conditions, and in Crocs’ stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
• Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Skechers’ multinational peers, including Nike NKE and Lululemon. The complete set of coronavirus impact and timing analyses is available here.
• We believe there will be a recovery in demand for most sectors by late June/early July, with the gradual lifting of lockdowns and a gradual rise in the number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers.
• Although most companies will report poor Q2 results starting mid-July, market expectations will be buoyed by a visible improvement in the situation on the ground.

While things are bad for companies across the apparel industry, the ongoing crisis has raised questions about the very survival of some companies due to their precarious financial position. We find out whether Gap Can Survive The COVID-19 Recession in a separate analysis.

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