Sneaking Up on the Competition

[Article published by The Motley Fool; April 30, 2014]

When it comes to running shoes, up until last Monday’s Boston Marathon, Skechers (NYSE: SKX  ) was considered more a shoe for recreational walkers than world-class runners. But Meb Keflezighi’s win on Patriot’s Day, one year after tragedy visited the city, had runners looking anew at the brand.

Not everyone’s an elite marathoner, but even amateur athletes logging fewer miles each week than Keflezighi ran in Boston in just over two hours, took notice of the runner’s historic performance—the first win in Boston for an American male since 1983, and doing it a few weeks from his 39th birthday, his age making it even more improbable. More important for Skechers, suddenly everyone was paying paying attention to what Keflezighi was wearing on his feet. As a result, Skechers’ stock price shot up nearly 10 percent by mid-week, closing above $40 per share for the first time in four years.

Actually, what Skechers might have been best-known for prior to Keflezighi elevating the athletic shoe’s profile was that Kim Kardashian had touted their rocker-bottomed shoes for a, well, shapely bottom. That was a costly decision, one that set the company back $40 million in refunds to consumers who purchased its Shape-ups, or other toning styles, resulting from a class action suit for false advertising claims.

Looking to change how people viewed their sneakers, in 2013 Skechers produced 10 of the top 250 top-selling models of all shoes, but the company still lacked the credibility of better-known running brands like Nike, (NYSE: NKE  ) , Adidas, and Brooks, a Berkshire Hathaway subsidiary, in the highly competitive $7 billion performance running shoe market.

Charles Krupa photo-Associated Press

When it comes to sneakers, Nike is supreme. The company continues to lead the way as the world’s leading innovator in sportswear, footwear, and sporting goods. Fast Company called Nike the most innovative company of 2013. Interbrand, the world’s biggest brand consultancy, listed Nike as the 24th most valuable brand in the world, the only sporting brand in the top 50.

Nike reported third quarter total revenue of $6.97 billion, beating analyst expectations for $6.69 billion, according to Thomson Reuters. Concerns exist, as orders in China for the third quarter fell 1%; the company also warned that weaker currencies in key emerging markets will weigh on next year’s reported revenue, gross margin and profit growth.

Nike’s loss is Skechers’ gain
Nike actually had Keflezighi on its endorsement roster three years ago. However, according to the Boston Marathon winner, he didn’t renew the deal because he thought Nike wasn’t offering enough. Nike so far has declined to comment on this.

Regardless of the reasons, Keflezighi signed with Skechers in late 2011. The deal at the time was unique in that it allowed him to wear other corporate logos, and his contract didn’t include financial penalties for poor performance. The pact, worth a purported annual mid-six figure sum, has been a win-win situation for the runner and the company.

Marathon win icing on the cake
Keflezighi’s win finds Skechers on the upswing. Sales rose 18% in 2013 to $1.8 billion, more than offsetting payments made in settling the false advertisement claims with the Federal Trade Commission.

First quarter 2014 net sales were $546.5 million compared to $451.6 million in the first quarter of 2013.The company’s firstquartergross profit for 2014 was $240.4 million, or 44% of net sales, compared to $192.7 million, or 42.7% of net sales during last year’s first quarter. First quarter earnings of $48.2 million topped 2013’s $15.3 million, a substantial gain for the company.

“The demand for Skechers footwear from both our customers and consumers has been above and beyond our expectations. The result was net sales of over $546 million, a 21% increase over last year’s first quarter and a first quarter record as well as the second highest quarterly revenues in the company’s 22-year history,” indicated David Weinberg, chief operating officer and chief financial officer.

Skechers decision in 2011 to make Keflezighi its first — and only — spokesman for its running shoes was a smart one; the runner was a familiar figure to serious runners.

However, after last Monday’s win many others who don’t follow running closely know who Meb Keflezighi is and have been hearing the Skechers brand associated with his victory and Boston’s feel-good story.

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