Skechers Financial Statement Analysis

Joseph Smith
James Walters
Alexander Appugliese
Joseph Hilliard
Trent Shelton
Josh Fernino

2
Table of Contents
Executive Summary 4
Business and Industry Analysis 11
Rivalry Among Existing Firms 13
Threat of New Entrants 20
Threat of Substitutes 25
Bargaining Power of Customers 27
Bargaining Power of Suppliers 29
Value Chain Analysis 32
Firm Competitive Advantage 36
Accounting Analysis
Key Accounting Policies 40
Potential Accounting Flexibility 46
Actual Accounting Strategy 47
Qualitative Analysis of Disclosure 49
Quantitative Analysis
Core Sales Manipulation 51
Core Expense Manipulation 57
Potential Red Flags 61
Undoing Accounting Distortions 62
Financial Analysis
Liquidity Analysis 64
Profitability Analysis 74
Capital Structure Analysis 81
Cost of Capital Estimation 89
Forecasting 92
Income Statement 93
Balance Sheet 95
Cash Flow Statement 100
Valuations
Method of Comparables 102
Free Cash Flow Model 107
Residual Income Model 108
Long Run Residual Income Model 109
Abnormal Earnings Growth Model 110
Analyst Recommendation 111
Appendix
Liquidity Ratios 112
Profitability Ratios 114

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Capital Structure Ratios 115
Core Sales Manipulation Diagnostics 117
Core Expense Diagnostic Ratios 118
Cost of Equity Regression Analysis 119
Restated Balance Sheet Forecasted 134
Forecasted Income Statement 135
Forecasted Statement of Cash Flows 136
Common Size Balance Sheet 137
Common Size Income Statement 138
Supplemental Disclosure of CF 139
Free Cash Flow Model 140
Residual Income Model 141
Long Run Residual Income 142
AEG Model 143
Operating Lease Capitalization Table
Cost of Debt Table
144
144
References and Citations 145

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Executive Summary
Overvalued, Sell (4/1/08)
SKX- NYSE (04/01/08) $21.17 A ltman's Z-score 2003 2004 2005 2006 2007
52-Week Range $16.81-$36.62 Initial 4.654 5.435 6.216 6.574
Rev enue 1.43 Billion A fter Restatement 2.864 2.705 3.973 4.176 3.510
Market C apitalization 1.12 Billion
Shares O utstanding 45.88 Million
Percentage Institutional O wnership 88.90% Market Price 4/1/08 $21.17
Comparable Ratio Pricing Analysis
Book V alue Per Share 13.669 Trailing P/E $ 34.78
RO E 9.517% Forward P/E $ 19.95
RO A 7.36% P/B $ 21.05
PEG $ 21.22
Cost of Capital EV /EBITDA before $ 20.83
Estimated R-Square Beta Ke EV /EBITDA restated $ 13.21
3-Month 0.236 2.5436 0.2131 P/EBITDA $ 29.01
6-Month 0.237 2.5483 0.2134 P/FC F $ 7.80
2-Year 0.2366 2.5458 0.2132
5-Year 0.2357 2.5319 0.2122 Intrinsic Valuations
10-Year 0.2347 2.5182 0.2113 Discounted Div idends NA
FC F $ 43.64
Published Beta 2.57 Residual Income $ 13.75
C ost of Debt 7.26 LRRI $ 24.05
WA C C (BT) 8.783 A EG $ 13.45

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Industry Analysis:
Skechers began its operations in 1992 out of Manhattan Beach, California, with
the purpose of providing fashionable footwear that appeal to men and women between
the ages of five and forty. They have grown year after year and has managed to carve
out a substantial market share in the industry of footwear apparel. Although it is not
one of the powerhouses of the industry, such as Nike, it continues to be a profitable
business entity and has established a well-known brand image. Skechers sells its
products through retailers, factory outlets, and concept stores across the United States
and internationally. Some of Skechers’ main competitors are Nike, Adidas, Steve
Madden, Deckers, Puma, Timberland, and K-Swiss. As a whole the industry has been
growing its revenue over the past five years, which says that consumers are continually
spending more and more money on shoes every year.
In the context of the Five Forces Analysis, the footwear apparel industry is one
of mixed competition. When the industry is broken down to its core components, we
conclude that it does in fact lean toward high competition. There is a high rivalry among
the firms in this industry, and there is low concentration of firms. They are continually
fighting for market share by establishing a brand image and trying to differentiate their
products. The larger firms gain an advantage by utilizing their economies of scale and
making mass purchases of raw materials. The threat of new entrants is somewhat high
in this industry because it is not hard for a new company to begin production due to the
high level of outsourcing. However, new entrants often find it difficult to establish a
brand image when so many of their competitors have already done so. In a sense,
shoes are almost a commodity because everyone needs them but they all serve the
same basic function. This leads to a high threat of substitute products. The firms do
have a small bit of leverage because they can differentiate the quality and design of
their products. All signs of the Five Forces Model point toward the footwear apparel
industry being one of relatively high competition.

6
In order to compete in this industry, Skechers focuses on a few important
strategies for its survival. Efficient production is important and Skechers knows this
because they outsource almost all of their manufacturing in Asian countries where the
cost of production is considerably lower. Brand image is another important component
to their success and is achieve through large advertising campaigns and hiring
celebrities to endorse their products. Lastly, Skechers concentrates on product
differentiation through superior quality and by offering a large variety of product lines
for their customers to choose from.
Accounting Analysis:
GAAP, (Generally Accepted Accounting Principles), requires for all firms to
disclose a certain amount of information on their financial statements for the public.
Some companies choose to disclose information liberally, while other companies choose
to disclose conservatively. Certain guidelines by the GAAP can create leeway for firms to
manipulate their financial statements and makes their business look more attractive to
investors and the public. The job of an analyst is to find these manipulations and create
a level playing ground so that any distortions in the financials are fixed, and the true
value of the firm is shown.
In the retail industry, operating leases are purposely held off the balance sheet.
If operating leases were added to the balance sheet, Skechers, among other shoe
companies, would look extremely undesirable to investors and creditors because there
would be a large amount of liabilities on the balance sheet. The operating leases were
found in the Skechers’ 10-k, along with the present value, (PV), of the operating leases.
Open purchase agreements are another liability purposely held off of the balance sheet.
This too is a commonly accepted practice in the retail industry and keeps liabilities on
the balance sheet at a respectable amount. If both of these “off the balance sheet”
accounts were put on the balance sheet, total liabilities would double in size and the
attractiveness of Skechers would be reduced considerably.

7
Skechers has a reasonable amount of disclosure of their financial statements.
There were times of potential accounting flexibility, but further research led us to
believe that no such flexibility occurred. In 2003, Skechers was hit with a huge loss in
sales, which affected both the sales diagnostics and expense diagnostics. Even though
this drop in sales happened, Skechers followed the industry average and any faults
were fixed the following year. In conclusion, Skechers discloses information both by
GAAP standards and with a fair amount of transparency so that investors and analysts
can have a reasonable amount of information for valuation needs.
Financial Analysis:
An analysis was performed on Skechers to determine how it stood in comparison
to the footwear industry. Using 11 different analysis ratios, we were able to determine
that on average Skechers is par with the footwear industry. There are a few anomalies
that can be explained by a 60% increase in inventory between 2005 and 2006. We
expect future growth of inventory to maintain the previous growth rate at about 11%.
Skechers has grown at an average sales growth of 13.7%, however with the
current uncertain market conditions we have chosen to conservatively estimate the
growth at 10% to allow for a likely recessive market. The industry growth is between
5% and 12% therefore 10% puts Skechers at the top of the industry but still within
reasonable growth rates. Forecasted values were determined primarily from smoothing
of the last five years of data requiring either a three year trend or a general growth or
decline in each forecasted value. Current assets were derived at a value of 60% of
total assets (after restatement), while total assets were grown at an 8% smoothed
growth rate. Net income was flown through retained earnings to arrive at any given
year’s accurately forecasted book value of equity. Error was built into liabilities, because
this is an equity valuation is liability is not our primary concern.

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A capital structure analysis was performed and we have found the Debt to Equity
ratio to be particularly high for Skechers in the past five years. The ratio has dropped
almost 50% in the last five years and is likely to continue to the industry average of
about .53. The sustainable growth rate, (SGR), appears to be leveling off at the 20%
mark after recent year’s growth. This means Skechers is well within their means to
maintain a 10-15% growth into the near future. In regards to threat of bankruptcy,
Skechers Altman Z-score of 3.5 after restatement puts them comfortably outside of the
threat of going bankrupt, however they are below the industry high of around 18. This
means they are more likely to get loans from banks but not as easily as other
companies. The restated Cost of Equity was found to be 9.72% by using the “Back
door method”, and the Before Tax Weighted Average Cost of Capital, (WACC), was
found to be 8.783%. This information all served a purpose in helping us determine
whether or not Skechers is fairly valued, overvalued, or undervalued.
Valuations:
Using the before tax WACC and earnings per share for Skechers we can estimate
stock prices. When compared to the actual price taken from the close of April 1st, 2008,
we can see if the stock is likely overpriced or underpriced at that time.
The first method used to find Skechers stock price was to compare Skechers
EBITDA and earnings per share to an industry average, excluding any ratio outliers and
Skechers itself. Both the P/E and the P/EBITDA ratios indicated that Skechers is
underpriced. The restated Enterprise value to EBITDA and price to free cash flows
stated Skechers is overpriced. All of the other ratios gave a price that was fairly
accurate; forward P/E, P/B, PEG, and EV/EBITDA before restatement. Seeing as how we
found two overpriced, 2 underpriced, and four fairly priced, the conclusion of this
pricing method is that Skechers is fairly priced. These models compare Skechers to an
industry average with its only link as earnings and do not include adjustments for the
time value of money. These clearly are not the best methods to price a company.

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The next method used to price Skechers is the Free Cash Flow model. This uses
the assumption that “balance sheets balance”, and that the market value of liabilities
equals the book value. This model also uses the principle that prices are the present
value of all future cash flows. We used the free cash flows from Skechers to find the
market value of assets and subtracted the liabilities to find the market value of equity.
Assuming there are no stock issuances or repurchases, we divide the market value of
equity by shares outstanding to find a price per share. This formula is very sensitive to
the terminal value perpetuity growth rate, making it very hard to get precise prices. To
compensate, we ran sensitivity analysis of before tax WACC and growth rate. The vast
majority of prices found using this model indicates Skechers as underpriced.
Most valuations use the Dividend Growth Model as well when pricing a firm;
however Skechers doesn’t pay any dividends. This makes the model unusable in this
situation.
Next we valued our company using the Residual Income model. The residual
income finds the market value of equity by adding the economic value to book value of
equity. The economic value added is the difference in the actual growth in book value
to what it should have been, given a cost of equity. This model is good in that it is
grounded in theory and gives low influence to the terminal value perpetuity. Using
sensitivity analysis for Ke and growth, we found Skechers overvalued.
Another residual income model, called the long run residual income model, uses
return on equity, the cost of equity, and a growth rate related to earnings growth to
give a market value to our book value of equity. However we had many problems with
this model given our estimated ROE, Ke, and g were all very close to the same number.
This gave a few unrealistic prices. Most of the believable prices indicated Skechers was
overpriced.
The last model used was the abnormal earnings growth model. This assumes the
market value of equity is the present value of all future cash flows to equity. The
numerator of this perpetuity is adjusted for abnormal earnings taken from forecasted

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income minus how much income should have grown given a return on equity. The
sensitivity analysis shows a majority of prices indicating Skechers is overpriced.
Analyst Recommendation
After reviewing the industry, degrees of accounting flexibility, financials of
Skechers, and pricing the company according to our findings, we find Skechers
currently overpriced in the stock market. We believe that comparing Skechers to an
industry average cannot accurately price the stock. Companies differ even in the same
industry and cannot be relied on to price each other. Free cash flow model prices
Skechers based on assets even though stock price is equity based. We believe the
Residual Income model, the Long Run Residual model, and the AEG model prices
Skechers’ equity with a higher degree of believability than the others. We conclude
Skechers is overpriced.

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Business and Industry Analysis
Overview of the firm:
Skechers U.S.A., Inc. was founded in 1992 by Robert Greenberg in Manhattan
Beach, California. The mission for the company is to provide fashionable footwear that
would appeal to men and women from ages five to forty. They operate their business
through 60 concept stores, 63 factory outlets, and 33 warehouse outlets, including 12
which are run internationally. As of February 4, 2008, Skechers U.S.A., Inc. maintains a
market capitalization of 947.11 million dollars (http://finance.yahoo.com). We have
identified the company’s main competitors as Nike, Adidas, Puma, Timberland Shoe Co.,
Decker, and K-Swiss. Skechers’ competition has historically increased their sales over
time.
According to www.skechers.com, their objective is to “profitably grow our
operations worldwide while leveraging our recognizable Skechers brand through our
strong product lines, innovative advertising and diversified distribution channels.”
Skechers plans to grow the business globally by marketing its products under several
different lines that target specific customers and their needs. They advertise creatively
and using music artists, TV stars, and professional athletes on the rise, to advertise and
market new products to an ever changing market. Skechers not only sells their products
through retailers but they also have their own Skechers brand stores, factory outlets,
and website.
Each line has its own unique characteristics that target a specific niche such as
kids, sports performance, business dress, work savvy, and lifestyle. Skechers offers
practical features such as safety toe, durable materials, and slip resistant soles for their
workers line of shoes. To come up with the latest fashion trends they travel to domestic
and international fashion markets, analyze trend setting media such as music and
television, and compile information from internal and external research services and
transform this into their cutting edge products (Skechers 10-k).

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Over the past five years the footwear apparel industry has increased total sales.
More specifically, Skechers has increased revenues by 31% over five years since 2002.
Among the other seven identified competitors, Skechers ranks fifth in terms of total
revenue for 2006. Nike is currently the industry leader boasting 8.5 billion dollars in
sales revenue. The industry has shown an outstanding growth of 63% since 2002. This
rapid growth is attributed mainly to Adidas increase in revenue, 59% from 2005 to
2006.

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Rivalry Among Existing Firms
Industry growth:
This industry is growing. According to stock prices of the industry over the last 5
years we can define a definite upward trend. Another good growth indicator can be
taken from the amount of raw materials purchased every period. In the article
“Urethanes Technology” we see the amount purchased for rubber used in the sole of a
shoe rose by 46% since 1995. Even now, in an economic slump, we can still see an
increase in yearly revenues.
Company 2003 2004 2005 2006
Growth Growth Growth Growth
Timberland Co. 13% 12% 4% 0%
Skechers USA Inc. -12% 10% 9% 20%
K-Swiss Inc. 48% 13% 5% -1%
Steven Madden Ltd. -1% 4% 11% 26%
Deckers Outdoor Corp 22% 77% 23% 15%
Nike 11% 10% 9% 7%
Adidas 18% -5% 14% 59%
Puma 40% 18% 16% 21%
Industry Totals 14% 7% 11% 22%

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$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
2002 2003 2004 2005 2006
Industry Revenue
Revenue
(inthousands)
$-
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
2002 2003 2004 2005 2006
Year
Revenu in Thousands
Revenue
Timberland
Co.
Skechers
USA Inc.
K-Swiss Inc.
Steven
Madden Ltd.
Deckers
Outdoor Corp
Nike
Adidas
Puma

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Concentration:
The footwear industry is a low concentration industry. There are numerous firms
in a highly competitive market. Nike and Adidas are powerhouses which have more
market share than the other competitors but we do not believe it’s such an over
powering amount to shift the industry to a high concentration type. The other
companies still maintain growth and profit even with those two larger companies.
Degree of differentiation and Switching Costs:
In the shoe wear industry, differentiation plays a vital role in providing the
consumer with a choice to choose between different products from different companies.
Many of these companies look at popular design trends and current lifestyle trends in
the new design process for their product. The new design process is a huge contributor
for differentiating an organization’s product. Companies look at the fashion industry,
both domestically and internationally, when designing a new product. These companies
become ever increasingly competitive to try to catch the most current fashion trends
while incorporating these trends into their products. Quality is an important measure for
differentiation because quality shows the consumer how far a company is willing to go
to meet the needs of its segmented population. Quality control is also important as it
relates to how well a company’s product is made and to what high standards a product
must be to pass inspections. The companies rely on their brand name and sometimes
aggressive advertising campaigns to try to position their product to consumers and to
have the consumer think of their product as unique. Since the competition between
firms in this industry is highly competitive, price reductions do occur and switching costs
for consumers stay low.

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Scale economies:
This industry sells high volumes of its merchandise. To support these sales the
firms buys tons of raw materials to satisfy customer demands. When these materials
are purchased in bulk it creates an economy of scale. The more a company buys the
lower price they pay for it. This gives one obvious advantage to larger companies
namely Nike and Adidas. It allows them higher profit margin and lower costs. The
nature of the footwear industry lends itself to outsourcing physical production. Most
companies will warehouse their inventory and this will account for most of their assets.
Since Skechers buys in bulk they build a scale economy for themselves which allows
them higher profit margins over smaller companies. In turn this money is typically
reinvested into the company for global expansion.
Assets (in thousands)
Company 2002 2003 2004 2005 2006
Nike 3,815,700$ 4,298,400$ 4,672,000$ 5,257,500$ 5,573,900$
Adidas 2,277,809$ 2,742,436$ 2,940,354$ 3,827,545$ 5,833,573$
Puma 356,275$ 528,250$ 701,858$ 965,612$ 1,312,532$
Timberland Co. 407,235$ 492,196$ 582,525$ 604,109$ 606,192$
Skechers USA Inc. 483,156$ 466,533$ 518,653$ 581,957$ 737,053$
K-Swiss Inc. 183,891$ 234,653$ 294,957$ 336,236$ 404,560$
Steven Madden Ltd. 150,500$ 177,870$ 186,430$ 211,728$ 251,392$
Deckers Outdoor Corp 120,857$ 119,579$ 173,995$ 208,391$ 249,973$
Industry Totals 7,795,423$ 9,059,917$ 10,070,772$ 11,993,078$ 14,969,175$

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Variable & Fixed costs:
Variable costs are huge in this industry. According to several financial statements
the variable costs are roughly twice the fixed costs. This comes mostly from the fact
that the firms do not own any production facilities; all production is outsourced.
Outsourcing increases the variable costs of goods in extra shipping costs and adds a
profit margin for the production company. Since outsourcing is easy to maintain it
decreases fixed costs for the domestic firm. Although the company has lowered costs,
they have also assumed more risk since they are not the company directly handling the
goods themselves. Cutting costs for a firm on such a large scale that they have created
with scale economies leads to higher profit margins. It is simply another way for a
company to realize profits without raising selling price.
Excess Capacity:
Excess capacity is “a situation in which actual production is less than what is
achievable or optimal for a firm” (investopedia.com). In the footwear industry, capacity
has a small effect due to most firms being capable of manufacturing and outsourcing
the demanded amount of athletic shoes. This reduces the market price because most
firms overproduce, which in turn drives down the selling price. If there were high exit
barriers, this overproduction would be more of a problem; however, because of low
switching costs, low exit barriers exist in the industry as well. These low exit barriers
are due to a wide variety of diversification among shoe manufacturers and the quickly
changing trends in shoe styles. A shoe manufacturer must be able to easily switch from
one style of shoe to another without incurring too much cost, more specifically,
switching the factories they outsource from. Since the industry typically has low
switching costs, if a shoe manufacturer is not profitable in dress shoes, it is easier for
them to switch over to athletic or lifestyle footwear at a minimized cost. One example
of this is Finish Line, a major retailer, which is being adversely affected by “consumers
shifting away from high-end athletic shoes” (WSJ).

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All of this is important because it shows that the footwear industry can easily and
abruptly adjust to deter excess capacity. This is because most firms in the footwear
industry outsource to independent manufacturers and can place orders for however
much merchandise that they want. These firms are minimally affected by excess
capacity because they do not produce the goods that they sell.
Exit Barriers:
Nearly all footwear companies outsource most of their designs to independent
manufacturers. This greatly reduces specialized assets because companies do not own
their manufacturing plants and in turn points to low exit barriers. By reducing these
fixed costs and maintaining short term contracts with manufacturers, firms are not
locked into situations where it is less expensive to stay in the industry at a greatly
reduced profit.
This is important because it shows that in the footwear industry it is relatively
easy to exit. When there are few exit barriers in an industry it is also more likely that
there is a lower degree of price competition and a higher degree of differentiation.
Conclusion:
Overall there is no doubt that the footwear industry is a highly competitive
market. In order to be competitive you do not necessarily have to have the lowest
price but you do have to be competitive in price. This will lead firms to treat the
industry as a mixed competition industry. With prices held the same, companies must
compete on differentiation. This is achieved by positioning a brand in the market and
creating a desire in the customer to buy the product. Switching costs for customers are
nonexistent in the footwear industry; customers only have to pick up another shoe and
they have switched brands. So companies will pull once again from their design and
R&D components to gain that attention from their competitors on the next shelf. In

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recent years we have seen an influx in the amount of footwear each individual
customer purchases. This means that shoe companies are no longer limited by the
number of people on the planet only by their desire to purchase more products.
Although the footwear industry is without a doubt a high competition market, it must be
treated as a mixed, high and low competition market.

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Threat of New Entrants
Firms in any industry recognize that there is a limited market for their product.
An established firm can lose its market share one of two ways, either to another
established company, which was discussed in the previous section, or to a new firm
(new entrant) to the industry. The threat of new entrants in the footwear industry is
based on two sides of the same card. On one side, larger companies have advantages
of brand recognition and ability to purchase materials in bulk making new entrants
struggle to get their foot in the door. While on the other side, new shoe designers may
develop very different ideas and thrive in a saturated industry. The factors determining
what new entrants have to face are scale economies, first mover advantage,
relationships with customers and suppliers, and legal barriers regarding design
trademarks. The big boxes of Nike and Adidas have a large footprint and customer
base with a well established image, whereas new entrants will have to differentiate
themselves with innovative product design and a fashion based market, like Crocks or
UGGs.
Scale Economies:
In highly competitive industries there are many different factors that determine
“how the game is played.” Scale economies by itself may dictate whether or not a firm
will attempt to find a place in an industry. The footwear industry as a whole is
growing; however in the industry market share appears to be relatively stable.

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Assets (in thousands)
Company 2002 2003 2004 2005 2006
Nike 3,815,700$ 4,298,400$ 4,672,000$ 5,257,500$ 5,573,900$
Adidas 2,277,809$ 2,742,436$ 2,940,354$ 3,827,545$ 5,833,573$
Puma 356,275$ 528,250$ 701,858$ 965,612$ 1,312,532$
Timberland Co. 407,235$ 492,196$ 582,525$ 604,109$ 606,192$
Skechers USA Inc. 483,156$ 466,533$ 518,653$ 581,957$ 737,053$
K-Swiss Inc. 183,891$ 234,653$ 294,957$ 336,236$ 404,560$
Steven Madden Ltd. 150,500$ 177,870$ 186,430$ 211,728$ 251,392$
Deckers Outdoor Corp 120,857$ 119,579$ 173,995$ 208,391$ 249,973$
Industry Totals 7,795,423$ 9,059,917$ 10,070,772$ 11,993,078$ 14,969,175$
This tells us that as time goes on if companies want to enter the market they will
have to put up more capital to become competitive. Larger companies are constantly
competing on market share although little has changed, as far as market share
distribution, in the past 5 years. These larger and more established US domicile firms
benefit from operating globally with the “diversity helping them in an uncertain
environment” (WSJ). We feel that there is a risk of new entrants in the design aspect of
the industry. However the high initial outlay to become a competitive force in the
market is low risk in both the short and long run.
First Mover Advantage:
One of the business practices in the industry is to differentiate one brand from
another, a way of gaining market share. The footwear industry does this by developing
new ideas into products that will catch the consumer’s attention. The industry produces
product lines that appeal to different market segments while sharing common segments
between each other. Footwear companies tend to create new brands within themselves
or to buy smaller companies in order to gain rights to their trademark designs. This is
where the first mover advantage truly presents itself. When a company comes out with
a revolutionary design they trademark it, the footwear industry immediately attempts to

22
copy or modify the design. If this does not succeed, larger companies will in many
cases buy the smaller company so they can have the rights to the design, established
brand image, and the name. There is no denying that the footwear industry is made up
largely by fashion standards and if a company does not react to this fact its market
share will be affected.
Relationship with Suppliers:
In many industries relationships with suppliers can make or break a company
because they may have to pay higher prices for the same products if a relationship
becomes taxed. Relationships with suppliers have a relatively low factor in the footwear
industry. From the financial reports of each company, we find that the industry
standard is to outsource manufacturing on short term agreements and contracts so that
if quality falls or production time increases suppliers can be changed. This does
however become more of an issue as companies develop good working relationships
with the better manufacturers. This also creates more issues for new entrants in the
market to get quality work, because working relationships will often be established with
older companies. While the footwear industry accounts for only a part of Chinese
exports, however Chinese exports rose 18.5% last year (WSJ). This speaks to the
global requirement for Chinese contributions in a market where most of the production
happens in China.
Relationship with Customers:
In the footwear industry, as with most other industries, companies rely on
customers desire to purchase their product in order to be successful. To create this
desire, it is essential to build a certain brand image in order to get a defined space in
the market and develop a market share. This often takes years to achieve. From time to
time the players in the industry will attempt to reposition themselves in the industry, to
more sports related or to give their image a more trendy identity. This is usually done

23
by hiring well recognized spokespeople, which come at a high cost, and considerable
investments into advertising. For instance, Nike’s new move away from “down market
footwear” because its revenue was sub-par, speaks for the low switching costs of
competing firms and new trends (WSJ). Developing this brand image is one of the
most critical issues that new entrants will have to deal with initially to be competitive.
Legal Barriers:
In relation to the first mover advantage and the legal barriers associated with
developing a new product or design goes hand in hand. In the footwear industry it is
essential to have different designs in order to segment a company from another and to
entice more customers to buy your product. Companies will often trademark their
designs in order to keep others from using them. Trademark infringement is an issue
that most companies in the industry are in litigation or have been in one or more
lawsuit over. One example of these costly suits is ASICS Corporation. They filed a suit
against a number of companies (Skechers, Zappos.com, Brown Shoe Company to name
a few) in January 2007 for $100 million in punitive damages regarding copyright
infringement of the “ASICS stripe”. This example along with others pose problems with
new shoe designs that smaller companies must avoid in order to stay profitable in the
early years. In order for a new company to enter the industry they have to step around
these extensive trademarks in order to not be involved with costly litigation.
Conclusion:
As a whole there is a high threat of new entrants but a low threat of competitive
entrants. With new designers appearing all the time new ideas are constantly being
introduced into the market, however these ideas come from companies and designers
that will not be realistically competitive for quite some time. With Companies that are
trying to be competitive they will have to put out a considerable amount of startup

24
capital and even then they may not be spending it in the right place. They will also
have to define their product niche/image in some way, namely advertising, which is in
today’s market an expensive undertaking. With the market being as it is, the threat of
competitive new entrants is low.

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Threat of Substitutes
Relative Pricing:
In the footwear industry there is a large threat of substitute products. Prices of
shoes in the men’s casual lines range from $300 dollars, for Nike’s Air Rhyolite, to $22,
a markdown tennis shoe. However when comparing shoes of the same quality, the
prices across the board even out. Casual men’s shoes from K-Swiss, Deckers, Sketchers,
and Reebok all can be compared to the $60 range. Switching costs for customers is
relatively low. When shopping at major retailers, shoes from all companies are put up
for sale. Switching from Deckers to Nike is as easy as picking up a different shoe. Each
company is striving to differentiate themselves from their competitors by coming out
with the more fashionable shoe. According to the 2006 10-K from Sketchers (and
others) whoever can anticipate customer taste better than its competitors will have
more sales.
Willingness to Switch:
Switching costs for customers is relatively low. When shopping at major retailers,
shoes from all companies are put up for sale. Switching from Deckers to Nike is as easy
as picking up a different shoe. Each company is striving to differentiate themselves
from their competitors by coming out with the more fashionable shoe. “Finish line has
been wrestling with a big consumer shift away from high-end athletic shoes. The
company is racing to adapt, bringing more casual, fashion-oriented shoes into its
stores” (WSJ). According to the 2006 10-K from Skechers (and others) whoever can
anticipate customer taste better than its competitors will have more sales. The only
costs that could be attributed here would be brand loyalty.

26
Conclusion:
We find a relative pricing between competing products and almost zero switching
costs. Taking these into account we see a high threat of substitutes.

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Bargaining Power of Customers
Customers’ bargaining power is the customers’ ability to put pressure on firms.
This ability differs between different industries. In the footwear industry we see a high
volume of customers buying relatively small quantities. This is a characteristic of low
bargaining power of customers. In the same industry we find a good amount of
different firms for the customer to choose from. This is generally a characteristic of high
customer bargaining power. The tie breaker for this industry is the switching costs of
consumers. Customers can easily buy from any competitor. If any company increased
its price it would lose sales. The opposite is true as well. From the 2006 10-K from
Deckers they explained when other companies cut price to empty excess inventory it
would hurt their sales. The reduced sales is due customers switching from Deckers due
to a lower cost.
Retail:
Retailers, such as Famous Footwear, buy shoes from a variety of companies in
the industry. In this case we see a low volume of buyers buying in large quantities.
These revenues make up large percentage of sales for these firms. These quantities,
however, could easily be from any firm. “While reporting December sales, a slew of
retailers cut their estimates for the fiscal fourth quarter” (WSJ). As most footwear firms
use multiple retailers, they will all be affected by these reductions in sales. With the
limited shelf space available the retailers have a high bargaining power when
determining which companies they will display.
Even though switching would be easy, it would come at a cost. The costs
associated with switching brands in stores are losing the brand name recognition,
damaged relationships with suppliers, and the remaining length of contracts. Losing a
major brand could be a big hit to the retailer. The big brand names are big customer
attractions and can be easily marketed. Damaged relationships would potentially be

28
costly if they reject one of those big brands. Bad relations with the big brand could
remove any option of regaining that supplier, which hurts when that brand’s popularity
goes up. The contract costs are the lowest since they operate under short term
contracts. Even though it might costs some when switching brands, all the suppliers are
still competing with one another. If one big brand name was given smaller contracts, it
would only be to increase its big named competitors.
Factory Outlets:
In Factory Outlets we see a high volume of customers buying relatively small
quantities. Which is opposite of selling to other retail stores. Consumers’ generally only
buy shoes once or twice a year, which limits their overall bargaining power
effectiveness. Customers can easily buy from any competitor. If any company increased
its price it would lose sales. The opposite is true as well. From the 2006 10-K from
Deckers they explained when other companies cut price to empty excess inventory it
would hurt their sales. The reduced sales is due customers switching from Deckers due
to a lower cost. When looking directly at just the factory outlet stores the switching
costs aren’t as important since consumers are limited to stores in their area.
Conclusion:
When looking at two very different consumers it isn’t surprising we get two
different answers. Retailers have a high bargaining power due to the amount they buy
and the limited number of them. They can demand what they want, or go somewhere
else. The customers and the factory outlets have a lower relative bargaining power,
since they are limited to the location of stores and have a high buyer to firm
concentration ratio.

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Bargaining Power of Suppliers
The entire footwear industry relies heavily on independent contract
manufacturers, which are mostly in Asia (85% in China). Suppliers in the footwear
industry are subject to manufacturing disruptions which could adversely affect the
short-term revenues of the shoe companies. This states that the large suppliers could
potentially create a loss of sales for the shoe companies in the event that this was to
happen. Because this would only be short-term, shoe companies can always find
smaller independent suppliers to manufacture their products.
Switching Costs:
Most companies in the footwear industry have contacts with independent
suppliers. The larger supplier’s product is sold all around the world, whereas the smaller
independent supplier’s product is sold primarily in the country where the supplier is
located. Companies in this industry rely on import-export financing companies to
receive product from their suppliers and to sell their products internationally, but losing
one of these would only be a short-term issue due to the fact that there are readily
available alternative financing companies that are competitively priced. The companies
in this industry, if their current suppliers quit doing business with them, state that they
may be unable to establish relationships with other suppliers which are as favorable as
they were. Examples of this include: new manufacturers could have higher prices,
less favorable payment terms, lower capacity, lower quality standards, and higher lead
times for delivery.

30
Differentiation:
Independent manufacturers are by no means a scarcity in this industry.
Currently the major problem with these independent manufacturers is that China could
be facing a labor shortage in this industry due to migrants seeking better working
conditions and better wages. A continuation of this trend could pose potential problems
with outsourcing in China, but there are still other countries such as Taiwan and
Vietnam, which could be substitutes that have similarly low labor costs. This leads to
the conclusion that the bargaining power of suppliers is low.
Although the footwear industry would agree that finding different manufacturers
from the ones they are currently using would cost time and money, it would be very
feasible to switch manufacturers. In fact, the entire relationship with these
manufacturers is based upon the fact that when a company sources its manufacturing
to independents in foreign countries, the company can only retain short-term contracts
in order to consistently achieve the lowest manufacturing costs available and to be
prepared for any fluctuations in the foreign economy. If something happened in China
where these footwear companies could no longer outsource there; switching costs
would be incurred and labor costs would probably rise. However, due to the vast
number of possible suppliers in multiple countries (for example Vietnam, Taiwan, Brazil,
Italy, Korea) these problems would most likely only be short-term.

31
Overall Conclusion of the industry
The footwear industry has characteristics of both a highly competitive markets
and highly differentiated markets. People are buying more shoes today than they were
five years ago, and as such the entire market is getting larger. Market share has
remained relatively unchanged with the exception of Adidas with massive expansion in
recent years; they cannibalized Nike’s market share almost exclusively. Focusing on
design in some ways makes the footwear industry act like a low differentiated market.
Firms rely heavily on differentiating themselves with new designs and comfort. And
while cost is an important factor, firms tend to be competitive on price but do not seem
to use it as a primary means of attracting customers. This fact will cause companies to
put more resources into research and development/design. The scale of operation that
the top five footwear companies operate on makes it difficult on many different levels
for new entrants to become competitive in the well established market. This industry
has many different facets and must be characterized as mixed competition on the
whole, even though it is a highly competitive industry.

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Value Chain Analysis
Competitive Strategies:
The footwear industry is a highly differentiated market with high competition that
creates variety. Rivalry among existing firms in the industry, threat of substitute
products, customer bargaining power, and the bargaining power of suppliers make
competitive advantage necessary to increase profitability. The industry is competing
over efficient production, input costs, research and development, product quality, and
brand image to increase market share and maintain profit margins.
Efficient Production and Lowering Input Costs:
Cost leadership strategy is one way to achieve a competitive advantage over
competitors, and having efficient production and lower input costs are two ways to
achieve that. The footwear industry is highly competitive and Skechers has realized that
it is necessary to keep production costs low while maintaining efficient production. The
way they plan to achieve this is by outsourcing to places like China, India, and Brazil.
Lowering the cost of materials from suppliers, firms can maintain their profit margins
and have greater flexibility on price, which in turn gives them more power over their
competitors. Efficient production can help cut waste and also contribute to maintaining
profit margin. Although the industry is pretty much established there is still room for
improvements in these areas to give a firm a competitive advantage over another
company.

33
Brand Image:
To differentiate between competitors firms in the footwear industry relies heavily
on brand image. They create an image for the customer to identify with and appeal to.
The image created is a reputation the company has for delivering quality product
reliably, upholding high levels of customer service, and creating new products. The
brand image is one major factor that can either detour or attract customers. Brand
image is created through broadcasted advertisements, celebrity promotions, product
quality, and word of mouth reputation. Other things can affect brand image such as
how the firm conducts business in general, where and how the manufacture their
goods, and other companies they have supporting them. In this industry having a
positive brand image creates a huge competitive advantage because footwear is
something customers like to be proud of. Each firm invests heavily in brand image so
they can create a positive way for their customers to relate to their products. After
reviewing the industries financial statements of the companies we identified, spending
on advertising is approximately 11% of total asset for the company over the last three
years. Brand Imaging is very specific in whom it targets, in the sense of different
commercials or channels to target different audiences, and while the companies we
have identified offer products to a wide range of customers, age two to sixty, they
mainly advertise only to ages fourteen to twenty-eight.
Differentiation: Product Quality, Variety, and Customer Service:
Product quality, variety, and customer service are an intricate part of
differentiation among firms in the shoe industry. They rely, on high quality standards of
their products that meet or exceed strict industry standards. Each footwear firm tries to
draw lines between current fashion trends and new designs so they can better
represent the needs of the consumers. It is not uncommon for companies in the
industry to attend fashion shows in America as well as Europe. Customer service is a

34
huge component of this industry because it allows the firms to have and maintain loyal
customers so they will continue to purchase products throughout the course of their
lives. Since the industry is based entirely around satisfying the customer by providing
new and appealing products, continually creating quality products, or by
accommodating their every need while they shop through a store differentiation from
other companies and their products is a must.
Research and Development:
New product design is dependent on current fashion trends, both domestically
and internationally. The design process usually starts six to nine months before each
fashion season. Each firm has a dedicated design team that target current fashion
trends in popular television shows, movies, clothing, and sports. The firms in this
industry create prototypes that are usually introduced to customers to view, and
sometimes offered for sale in pilot stores across the U.S.. The customers provide
important feedback about the design of the product; any design flaws are quickly dealt
with and commercialization of the prototype product usually occurs after the design
process is complete.
Hedging and Foreign Currency Exchange Adjustments:
International companies can gain or lose money due to currency exchanges that
take place when they operate in foreign countries. Some choose to hedge these
expected fluctuations in case of a serious loss. For instance, K-Swiss enters into forward
foreign exchange contracts in order to minimize these fluctuations. In this industry the
actual fluctuation is considered negligible to most companies. Foreign currency
adjustments only result in .5-5% of the industries total equity. Shoes in these countries
seem to cost relatively the same limiting currency adjustment policies. If currency rates

35
start to fluctuate with increased frequency and magnitude, we could see more
companies look into hedging activities.
Gains/Losses on investments; Recognized not realized:
When companies see a gain or a loss on their investments they can recognized
that gain even though they do not have the cash yet. When they do this it is put under
stockholders’ equity as comprehensive income adjustments. In this particular industry
we do not see too many long term investments for us to recognize any gain
beforehand. Since the majority of liabilities are short-term, companies need much of
their assets to be liquid enough to meet these obligations.

36
Firm Competitive Advantage
Efficient Production and Lowering Input Costs:
Skechers outsources all of its products and does not own or operate any
manufacturing facilities. This allows for greater flexibility and capacity in production as
well as lowering their capital costs for production. They also diversify their
manufactures so that should one company not deliver they are not completely out of a
large majority of their merchandise. The company has recorded that 4 manufacturing
facilities accounted for only 59% of their total purchases in 2006 (Skechers 10-k).
Skechers is smart and does not enter into long term contracts with any of their
manufacturers which allows them to build good relationships. The fact that they do not
enter into long term contracts alleviates them from unnecessary liability of a long term
contract. It allows them to switch manufactures if a problem arises or if costs rise. They
report not having any trouble maintaining any of their relationships with any of their
previous or current manufacturers and have never had trouble locating a new
manufacturer (Skechers 10-k). Since their manufacturers are located mainly in Asia,
Skechers has an in house production department overseeing their foreign productions
to maintain a high level of quality control and to ensure that if a problem arises they
can fix it before they ever get shipped out.
Skechers demonstrates smart decisions when dealing with overseas production
and has what appears to be a very solid operation with little risk. Even if a problem
should arise they have developed outstanding long relationships with their current
manufactures, while maintaining short-term contracts, which should not make it hard to
find others if necessary.

37
Brand Image:
Skechers is in a highly competitive industry; however they still devote large
amounts of resources to their brand image so they can differentiate their product from
that of their competitors. A firm’s image is their reputation and having a negative
reputation can set sales back and detour customers from valuing the product. To make
sure that this does not happen to Skechers they have what they refer to as “trend
influenced marketing”.
Skechers places their shoes in television shows and specific movies, mainly on
persons between the ages of 12-24, to create positive brand images. Successful
celebrities such as Ashlee Simpson, Carrie Underwood, Paris Hilton, and Jamie Foxx
have all promoted Skechers brand. The image that they aim for is youthful and trend
setting. To stay on top of trends they devote many resources to attending fashion
shows and advertising in several magazines that appeal to their target market such as
Seventeen and Maxim.
Skechers has spent $99 million in 2007 and $86 million in 2006 on advertising
costs. Since advertising is an intangible asset it is hard to place value on those number,
but when compared with the industry they do not spend a significant amount more or
less than other companies of their size.
Hedging and foreign Currency Exchange Adjustments:
Skechers sits right in with the industry when it comes to foreign currency
adjustments. With a total comprehensive income of 11.2 million theirs is only a 2.5%
adjustment of the total equity. They do not enter into any hedging practices even
thought they own and operate half of their concept stores and warehouses in Asia,
Australia, Europe, the Middle East, and South Africa. Not only that but these numbers
also include adjustments for the production contracts in Asia.

38
Gains/Losses on Investments; Recognized not Realized:
86% of Skechers assets are current assets and 63% of their liabilities are
current. They keep much of their assets liquid to meet the demands of their current
liabilities. They do have a high working capital compared to other industries but are at
par with their own. Current assets make up 63% of Deckers total assets, 75.5% of
Nike’s, and a whopping 92% of K-Swiss’ total assets. Again they do not lead or follow
but are right in the middle of the industry. Most liabilities in this industry are current so
they need a high current asset total to meet those demands. The leftover capital is
needed for flexibility and quick action. They need to be flexible in order to meet
consumer demand and react quickly to their changes in preferences and taste. How
much is needed is debatable but Skechers is taking a moderate approach and has met
with moderate success.
Differentiation: Product quality, variety, and customer service:
To better differentiate their footwear, Skechers focuses on product quality,
variety, and exceptional customer service. In an ever increasingly competitive
environment, shoe wear companies have to compete with one another by
differentiating their products via quality. Skechers maintains strict quality control in their
manufacturing facilities which are located in China and Taiwan. They ensure that all
finished goods comply with the design specifications, and that goods are tested
throughout the entire process of production.
Skechers looks at current trends that appeal to consumers between the ages of
12 to 24 years of age. They offer a variety of product lines that target fashion-conscious
people, as well as lines for kids. They attend fashion shows to keep current on fashion
trends and they appeal to all ages but using actors, singers, and athletes to promote
their product lines.

39
Customer service is an essential component of the Skechers’ business strategy.
Skechers offers their wholesaler accounts but chooses carefully where to sell their
products so that they will have locations where customer service is a priority to the
retailer. They also have their own stores including factory outlets which they are
responsible for getting the product to the customer in the best way possible.
Research and Development and Design:
Design is the most important characteristic of a shoe in the modern market.
Skechers invests heavily in research and development because they’re prone to failure if
they do not keep up with current fashions and trends. Research and development for a
new shoe usually begins nine months prior to the beginning of a season and usually
involves rigorous testing to ensure an absolute product. A designated design team first
looks at lifestyle trends that are based on popular movies, television, sports, music, and
apparel. They then try to incorporate the trends into the products through varying
colors and the design framework. Once the team has reached an agreement, a
blueprint is sent to the manufacturer who then creates a prototype. Next, the prototype
is shown to wholesaler customers who provide valuable feedback on the advantages
and disadvantages of the design. Information is gathered and flaws are quickly fixed.
Once all of these steps are finished, the product can begin the process of large-scale
manufacturing.

40
Accounting Analysis
Firms are given a considerable amount of leeway in how they prepare their
financial statements. This is possible because the Generally Accepted Accounting
Principles, or GAAP (rules that financial statements essentially must follow), are
designed to apply to many different industries. They must be specific enough to give
shareholders a certain level of transparency to firms while being versatile enough to
apply to the many diverse needs of very different companies. GAAP requires that firms
make certain decisions as to how their company is reported and in effect allows them to
manipulate the numbers to achieve desired results. The Accounting Analysis takes
ratios from different areas of the financial statements and compares them to previous
years and also benchmarks a firm’s ratios against its competitors to determine if
anomalies can be explained by industry fluctuations or if an event occurred to cause a
firm specific “Red Flag.” These may be intentional or unintentional, and in the
Accounting Analysis we will determine if there are any outliers or anomalies that cannot
be explained by a defined source. With this information, we can get indications of
whether Skechers may be purposely manipulating their financials to make the company
look more attractive to investors.
Key Accounting Policies
In determining our firm’s key accounting policies, one must look at its key
success factors and decide how the firm disclosed in its financials and what it’s hiding.
As determined in the firm’s “Competitive Advantage” section, Skechers’ key success
factors are brand image; differentiation; efficient production and lowering input costs;
hedging and foreign currency exchange adjustments; and research and development.
The company has a moderate level of disclosure compared to the industry; however, it
does not seem to be hiding any major liabilities or embellishing numbers to an
unhealthy extreme.

41
Brand Image:
Skechers relies heavily on brand image and advertising to maintain sales by
matching its image with fashion’s current trends. It hires actors and music stars such as
Ashlee Simpson, Christina Aguilera, Brittany Spears, Carrie Underwood, Matt Dillon, and
Robert Downey Jr. to promote their products and create a desirable image for the
company. The increase in spending in most recent years has been attributed to the
launch and promotion of their Cali Gear line and an increase in television and print
advertising.
Figure 1
As one can see in Skechers’ 2007 10-k they have reported, advertising costs of
9.1% of net sales in the years 2006 and 2007. This may seem like a large portion of
their sales is being spent on advertising, but it is a very necessary expense for
Sketchers to incur. Skechers has clearly found a balance between advertising and
maintaining brand image to keep sales increasing and allow the company to grow.
Purchase Commitments:
When a company records information on their balance sheet it is important for
that information to provide accurate representations of what the company is actually
doing. Unfortunately there is something that Skechers conveniently leaves off of its
books. Skechers uses independent contract manufacturers to produce the bulk of their
products and is tied up internationally because of it. They have four major contractors
that make more than 56 percent of their products. They state in their 10-k that
replacement manufacturers would be easy to find and at little or no additional cost
(Numbers in Millions) 2002 2003 2004 2005 2006 2007
Recorded
on
Financials
Advertising expense 76.8 62.9 56 58.2 83 99.2
Selling
Expense

42
should there be a hiccup with one of its current manufacturers. While Skechers enters
into no long term contracts they do make purchase commitments.
Figure 2
As shown in the table the company typically makes over $100 million purchase
commitments that they do not record on financials as liabilities or expenses, but what
they do is report the amount outstanding on their purchase commitments under
accounts payable. Their most recent year has shown that they might be trying to
reduce accounts payable due to the rising interest expense they expect to incur.
Differentiation:
Another factor that Skechers considers key to its success is differentiation
through superior customer service and product quality. These two areas help to
distinguish Skechers from its competitors and help it keep its market share in an
industry that is very competitive and full of larger companies who have the advantage
in other areas. For example, Nike may be much larger and have more resources than
Skechers, but the latter has the ability to concentrate on serving its distributors more
efficiently and effectively since they are a smaller company. Better customer service
(Numbers in Millions
Except for Percentages) 2002 2003 2004 2005 2006 2007
Recorded
on
Financials
Interest Expense 2.3 1.9 3.1 2.3 2.9 3.3
Interest
Expense
Amount Outstanding
on Purchase
Commitments 51.4 43.3 45 57.8 85 81.3
Accounts
Payable
Open Purchase
Commitments 201.3 153.5 81.6 87.9 115.3 148.7
Not
Recorded
Percent Outstanding
of Open Purchase
Commitments 25.53% 28.21% 55.15% 65.76% 73.72% 54.67% N/A

43
and product quality will inevitably translate into more expenses for Skechers, but it has
been able to manage these costs and translate them into more revenue. Skechers
achieved the highest revenue it has ever had in 2006; meanwhile, they were able to
reduce their General and Administrative expenses as a percentage of net wholesale
sales from 2005 to 2006.
Customer Service
Skechers strives to excel above the industry standard by maintaining good status
with its channels of distribution. Since the company sells most of its products through
wholesalers, department stores, and retailers, they consider these businesses to be
their “customers.” The goal is to provide its distributors with products that meet the
right fashion, function, and price criteria that the consumers require when they visit
that particular store. They implement this plan into their strategy by dividing their sales
force into segments according to each product line. Each line has a vice president who
is in charge of the division, with executives under him or her that maintain contact with
the distributors and tailor to him or her individual needs. The salaries and commissions
which these positions require are booked under “General and Administrative” expenses
on the statement of earnings. Skechers believes its customer service strategy will allow
it to establish and continue its accounts with wholesalers in good standing, which will in
turn allow it to access other channels of distribution based on good reputation.
Product Quality
Skechers monitors the quality of products from the initial prototype all the way
through the final manufactured product both domestically and internationally. In the
U.S., each production facility has its own in-house staff in charge of quality
management. In Asia, where a significant amount of the production takes place,
Skechers has employed a 250-person staff that overseas the quality of the products in

44
Taiwan and China. All of these expenses can also be found under “General and
Administrative” on the statement of earnings.
Product Design and Development:
One of the most important success factors for Skechers is research and
development, which is call product design for its own purposes. Since this aspect is so
critical to its success, it employs a design team that gathers data from mediums such as
television, movies, sports, and other high profile or “trend setting” industries to
translate this information into some of the latest trends that we see in the footwear
apparel industry. Skechers also sends their design team overseas to many European
fashion shows because they are generally accepted as the worldwide leaders in the
fashion industry. All of this work is done in an effort to predict what will be in fashion
during the next season and incorporate this into its products.
Skechers spends a significant amount of money on what it calls product design
($8.3, $6.0, and $5.7 million in 2006, 2005, and 2004, respectively). These costs are
expensed as they are incurred on the statement of earnings under the label “General
and Administrative.” Skechers uses the supplementary data to its financial statements
to disclose specifically how much money they spend on product design and
development.
Hedging and Foreign Currency Exchange Adjustments:
When Skechers incurs sales or costs overseas, foreign currency adjustments are
necessary to accurately show the gain or loss of exchanging currency. One would think
the correct way to record this would be to include these adjustments to net sales since
it directly affects revenues and costs. Skechers records these adjustments as other
income which is separate from net income but still under equity. After looking at the

45
foreign currency adjustments, we saw there was no consistent pattern. Some years
would record a $300,000 loss and the next would be a $100,000 gain; overall there is a
positive balance in the account. This method allows for a more stable net income since
Skechers does not participate in hedging activities.
Conclusion:
After reviewing the firm’s key accounting policies we have come to the
conclusion that Skechers has a reasonable level of disclosure in its accounting practices.
Most anomalies we found in the past five years could be explained by an industry-wide
occurrence. Some events suggest that Skechers could have possibly tried to make
themselves look better to investors, but no evidence of this was found. We assume that
Skechers has a healthy level of disclosure on their financial statements relative to the
industry.

46
Potential Accounting Flexibility
Looking at the Key Success Factors of Sketchers, we find that many of these are
held to very rigid accounting standards. The GAAPrules are very strict when it comes to
recording research and development costs. These costs are important for the future of
a company yet can not be capitalized, only expensed. The same goes for brand image
which is greatly influenced by advertising. Lowering input cost is done entirely by
outsourcing which limits accounting policies since it all the costs are clearly defined
beforehand. Their foreign currency adjustments have the most flexibility from GAAP but
it’s a small amount to play with. Overall Skechers has very little flexibility in their
accounting policies.
Conclusion:
After reviewing the firm’s key accounting policies we have come to the
conclusion that has a reasonable level of disclosure in its accounting practices. Most
anomalies we found in the past five years could be explained by an industry wide
occurrence. Some events suggest that Skechers could have possible tried to make
themselves look better to investors, but no evidence of this was found. We assume that
Skechers has a healthy level of disclosure on their financial statements relative to the
industry.

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Actual Accounting Strategy:
Firms have two ways of disclosing financial information. They can either choose
to convey a higher income with lower expenses, or they can conservatively show lower
income and higher expenses. The latter is the key principle that both GAAP and FASB
would want to have firms show, but the first is what some firms do to manipulate
financial statements so they can show the company being profitable. Both ways are
acceptable, but the more conservative a firm is the lower the amount of net income is
going to be which means that taxes will be lower as well. The opposite is true with
aggressive accounting because the firm wants to overstate net income to look more
appealing to investors, but the drawback is a higher amount of taxes. The retail
industry does not include their lease agreements on their balance sheets. This is called
“off the balance sheet” accounting. In this respect, this would make an average person
assume that the retail industry is using an aggressive strategy for accounting, but the
fact of the matter is that this is an industry-wide practice. This accounting strategy has
led Skechers to report progressively higher net income from 2004-2006.
The retail industry has been known to show many of their leases “off the balance
sheet.” This means the companies treat their leases as rent, which is an expense listed
on the income statement. Consequently, these firms’ assets and liabilities are both
understated, because they have not been capitalized. Skechers is one of the biggest
users of this “loophole.” Among the competitors, Skechers has one of the highest
amounts of operating leases as a percentage of assets. Although this may look like an
aggressive act of accounting, it is no strange practice to the retail industry. These
companies argue that if they were forced to capitalize their operating leases, which
some experts think they should, they would look very undesirable to investors and
creditors. This sort of move could possibly cripple the entire industry, or at least those
retail companies who hold high amounts of operating leases.
Currently, Skechers holds operating leases that total about 37 percent of its
assets. If we were to capitalize these leases, the Present Value of Future Lease

48
Payments (PVFLP) would be $176.2 million. In comparison, Skechers has more
operating leases than most of its competitors. This behavior would lead some to believe
that Skechers is slightly aggressive in this aspect of accounting information, but one
needs to look no further than the footnotes to find all the information necessary to
capitalize the leases and restate the Balance Sheet. Here, the company shows operating
leases payments due in 1, 2, 3, 4, 5, and 6 or more years (all payments after 5 years
are lumped into one category). With this information we can find PVFLP, interest
expense, and depreciation which are all the things we need to make our computations.
In conclusion, although Skechers appears slightly aggressive at first glance, they are in
fact slightly conservative in this area because they disclose all the information we need
to get a true understanding of the Balance Sheet.

49
Qualitative Analysis of Disclosure
To perform a qualitative analysis of a firm’s disclosure, one must analyze the
transparency of the firm’s 10-K. Important factors to consider are the letter to the
shareholders, the management discussion and analysis, and quality of segment
disclosure.
When looking at Skechers’ letter to the shareholders it clearly lays out its
industry conditions, competitive positions, and plans for the future. Instances which
would adversely affect the industry, including Skechers, are clearly defined; such as a
labor shortage in China. Skechers’ competitive position is also clear. An example of
this would be that the Skechers 10-K states, “We face intense competition, including
competition from companies with significantly greater resources than ours.” Plans for
the future are also defined such as future celebrity endorsements and expansion plans.
The management discussion and analysis portions of the Skechers 10-K can be
evaluated on how well it explains its current performance. Skechers “achieved record
revenue and earnings during 2006” (10-K). The MD&A goes further into explaining
Skechers’ core strengths and initiatives which contributed to this and also explains that
this is why their selling expenses and general and administrative expenses went up.
Skechers’ accounting policies also seem to be consistent with the industry. One
negative is that Skechers never discusses any problems in this portion. It could be that
there are no problems, but it is more likely that Skechers is avoiding discussing them
and using its profitable year to shadow any problems that may exist.
The quality of segment disclosure is how well a company discusses its various
geographic and product segments. Skechers does a good job in segmenting
geographic locations’ operations into domestic, international, retail, and e-commerce;
and then into US, Canada, and Europe. Product segmentation is never differentiated
although the majority of Skechers’ business is footwear. From all of this information we
believe that Skechers is fairly transparent in its disclosure.

50
Quantitative Analysis
In this section we take different ratios from each component of sales and
compare them year by year to see if any part has been altered. This is one method a
firm can use to try and manipulate net income to their favor year by year. These ratios
should remain about the same from year to year. We show graphs to present the ratios
year by year and to competing firms’ ratios.

51
Core Sales Manipulation
The first method some use to manipulate net income is to manipulate sales
components. Cash collection, receivables, and inventory are all key components of
sales.
Net Sales/CashfromSales:
Net Sales divided by Cash from Sales is one important ratio that allows analysts
to reveal whether management of a particular firm is manipulating their sales. This is a
huge issue in business ethics today, because often times managers have a strong
incentive to overstate or understate their sales. For instance, if a firm is performing
relatively well during one year they may want to understate their sales for that year and
transport those unreported earnings to a future year where the firm might not perform
as well. This action is what most experts call the “big bath” theory, and it happens all
too often. This ratio should be near 1 all the time for any given firm, because net sales
is adjusted for the change in accounts receivable which leads us to expect cash from
sales to be the same value. Realistically, things can happen over the course of the fiscal
year that can cause slight variations in the ratio; anytime there are significant variations
they should be investigated more thoroughly to explain the root cause.

52
Figure 3
As indicated by the graph, this industry tends to remain very close to a ratio of 1.
Over the past five years, Skechers has remained almost right at the mark with no major
variations that would constitute a more thorough investigation. Adidas and Deckers
both have an odd year as shown by the graph, but for the purposes of this report we
need not go into further discussion on why they have these sharp variations.
-
0.200
0.400
0.600
0.800
1.000
1.200
1.400
Sales / Cash from Sales
Nike NKE $ Adidas N/A €
Puma N/A € Timberland Co. TBL $

53
Accounts Receivables Turnover:
Figure 4
The above graph shows accounts receivable turnover through a 5 year period.
We can tell by this graph if Skechers, or any other company, is manipulating sales
through accounts receivable. If any company is increasing its sales through fraudulent
accounts in receivables, the receivables turnover will be an outlier and much lower than
its competitors. Looking at this graph we can see Skechers has a very reasonable
turnover as it is in the center of the industry. Also Skechers is moving toward a
grouping of companies toward the end. Judging by this information, Skechers doesn’t
seem to have any sales manipulations through accounts receivable numbers.
-
2.000
4.000
6.000
8.000
10.000
12.000
14.000
Sales / Accounts Receivable
Skechers USA Inc. SKX $ K-Swiss Inc. KSWS $
Steven Madden Ltd. SHOO $ Deckers Outdoor Corp DECK $

54
Days Sales Outstanding:
Figure 5
Here is another look at receivables. Skechers can be seen in the middle of the
industry, with no sudden changes, and moving toward a grouping of other companies.
The ratios should be comparable to companies within the same industry since they sell
to the same consumers. Again Skechers accounts receivable and sales to cash numbers
show to be believable.
-
20.000
40.000
60.000
80.000
100.000
120.000
Days Sales Outstanding

55
Inventory Turnover:
Inventory turnover is how many times in a period a firm goes through its
inventory. The graph shown has a fairly large range for the ratio. Skechers itself is right
in the middle, showing steady movements with a slight increase from 2004-2005 then
with an equal decrease from 2005-2006. The balance sheet stated a decrease in ending
inventory in 2005. This jump could be the source of sales manipulation in that year
seeing as the industry didn’t share in an inventory turnover increase. If sales increased
without the inventory to support it, the result could be the bump we found.
Figure 6
0
2
4
6
8
10
12
2001 2002 2003 2004 2005 2006
Inventory Turnover
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers

56
Days in Inventory:
This is another graph related to Inventory. It shows supporting information that
Skechers does have a small bump in the graph. Otherwise it looks clean and
trustworthy in all other years.
Figure 7
Conclusion
After reviewing all of the sales manipulation diagnostics, we find Skechers has
very believable and supported numbers for its accounts receivable. The inventory ratios
look good for every year except for 2005, and it may be a potential red flag for sales
manipulation.
-
20.000
40.000
60.000
80.000
100.000
120.000
Days Supply in Inventory

57
Core Expense Manipulation Diagnostics
The other factor in determining net income is expenses. Expenses can be altered
by changing the firm’s assets and changes in operating income and net operating assets
not supported by cash flows. To find any red flags we look at assets, net operating
assets, and operating income.
Asset Turnover:
Figure 8
Whenever a company makes expenses a decrease in assets must occur to make
the balance sheet balance. Asset TO measures Sales over Total Assets. If a company
wanted to decrease to manipulate net income, we would see a decrease in asset
turnover since Assets would have to be bigger. The Asset TO graph shows a decrease
in 2003, but since many companies moved this way we do not believe it to be a red
flag. After looking at Skechers’ financials this decrease was cause by a loss of sales
rather than a change in expenses. Also shown is Skechers’ restated after adding in
0
0.5
1
1.5
2
2.5
3
2001 2002 2003 2004 2005 2006 2007
Asset TO
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers Restated
Skechers

58
capital leases and purchase agreements left out of the 10-Ks. These new assets lower
Skechers in the industry some, but it does decrease the amount of fluctuations between
the years.
Change in Cash Flows from Operations over Change in Operating Income
(Chg. in CFFO / Chg. in OI):
This chart shows the ratio of Change in CFFO/ Change in OI. This is a measure
to show how well a company is able to pay its short term debts with cash on hand.
Two reasons explain why Skechers is substantially lower than the rest of the industry
(besides Deckers). A problem could be that Skechers is using aggressive accounting
techniques when reporting high earnings and low cash flows from operations. What is
more likely is that Skechers is growing right now causing a short term negative ratio.
Figure 9
-60
-50
-40
-30
-20
-10
0
10
20
Change CFFO / Change in OI

59
Change in Cash Flow from Operations / Net Operating Assets:
Figure 10
This graph shows the change in cash flows from operations over the firm’s net
operating asset which consists of their property plant and equipment. This expense
diagnostic is focused on depreciation expense manipulation. If a company writes off
more or less than normal, a jump in its series would be shown here. While a few
companies do have jumps, Skechers is consistent in its ratios giving no reason to doubt
expense manipulation through these numbers.
(200.00)
(150.00)
(100.00)
(50.00)
-
50.00
100.00
150.00
200.00
2003 2004 2005 2006
CFFO / NOA

60
Conclusion
Even more so than the sales diagnostics, we get ratios consistent with the
industry and normal business activities. These numbers do not show any red flags
indicating false amounts recorded on their financial statements.

61
Potential Red Flags
Over the course of the analysis we find very few anomalies that could indicate
potential accounting foul play. In 2003 there was a low in the Asset Turnover ratios.
This was explained by an industry slow down and a low sales margin by Skechers. Since
the whole industry was affected, we do not believe any asset manipulation took place in
that year.
In Receivables Turnover we see a gradually increasing portion of net sales on
credit. This slows down collection which could indicate a red flag. When looking at the
industry at the end of the trend, we see Skechers is just heading toward the industry
norm where a large portion of firms are consolidated.
Our biggest concern was in the 2005 Inventory Turnover ratio. Unexpectedly
we saw an increase in Inventory Turnover and an increase Days Supply of Inventory.
This increase can be caused by an increase in sales and a decrease in inventory. After
reviewing the financial statements we found Skechers was having a boom in sales. In
2005 Skechers increased their inventory supply by $64 million in inventory purchases
seen on the statement of cash flows. Since Skechers were had record growth in 2006,
they used their excess cash to increase inventory to accommodate this higher demand.
This increase in sales brought the ratio back down to normal levels. This was explained
in the Management Discussion of the 2006 10-K. It’s a logical decision given their
current growth trend.
We find Skechers to be an honest company and that their Financial Statements
show accurate information. Any anomalies we found were explained by the industry
standards or a management decision based on economic information.

62
Undoing Accounting Distortions
The purpose of the Accounting Analysis is to determine the true nature of the
firm. The previous sections have examined many different ratios that look at a variety
of business segments. There were a few “Red Flags” that caught our attention;
however each were explained in the notes as either an industry trend, or preparation
for future sales. There are two distortions that are not covered by these diagnostic
ratios. These are using operating leases instead of capital leases, and using “open
purchase commitments” instead of contracts. Both are perfectly common and legal acts
that allow companies to distort investor’s views of the company and its liabilities.
By using “operating leases” a company can use assets as they would as if they
had purchased them, but account for no liabilities on their balance sheet. These leases
are essentially treated as rent and therefore an expense only. Skechers 2006 liabilities
are valued at $288 million on the balance sheet, but if we capitalize the present value
of future cash flow payments of operating leases we get a much different picture of
their liabilities at $464 million. Companies will use this technique to skew the perceived
values of their liabilities. We have restated the balance sheet to account for this
“corrected” liability.
Another off balance sheet liability Skechers uses is open purchase commitments.
As stated in the section “Purchase Commitments” Skechers uses purchase
commitments with foreign manufacturers to the tone of $115.3 million in 2006. This is
advantageous to the company on two levels. Firstly, they can announce that they use
“no long term contracts” with their manufacturers, while still treating these
commitments as contracts. Secondly these purchase commitments do not show up on
the balance sheet as a liability. If these were capitalized they would move the Total
Liabilities on the balance sheet to $579 million in 2006. We have restated the balance
sheet to account for this “corrected” liability as well.
These off balance sheet restatements show us that Skechers has almost double
the liabilities it shows on its financial statements. While these practices are not illegal

63
or uncommon they do give us a considerably different view of the company that has
moved well past the half-a-billion dollar mark for its liabilities.

64
Financial Analysis
Liquidity Analysis
Liquidity is very important regarding all businesses, whether large or small, and
is a valuable component of everyday business activities. The ratios used to measure
liquidity are: the current ratio, quick asset ratio, inventory turnover, days’ supply of
inventory, accounts receivable turnover, days’ sales outstanding, working capital
turnover, and cash-to-cash cycle. The current ratio is a great, broad indication on where
a firm is in terms of meeting their short-term obligations. The quick asset turnover is
similar to the current ratio but differs by using the most liquid assets. Inventory
turnover shows how efficiently a firm is getting its inventory out. Days’ supply of
inventory shows the actual amount of days it takes to get the inventory out. A firms’
accounts receivable turnover shows how well it manages its assets. The days’ sales
outstanding is similar to days’ supply of inventory, but the difference is that it’s used to
measure how long it takes to transform sales into cash. Working capital turnover is
basically how well a firm can convert working capital into sales. Lastly, cash-to-cash
cycle is how many days it takes to receive money from the initial investment in
production.

65
Current Ratio:
Figure 1
A company uses the current ratio to see where they are on meeting their short
term obligations. The current ratio is calculated by dividing current assets by current
liabilities. If the current ratio is above 1 then the company has enough short term
assets to pay off short term liabilities, but if the ratio is less than 1, this implies that the
company will most likely be unable to pay off their current debt. Lenders are often
meticulous about their credit terms, this basically means that the lender requires the
borrower to have more short term assets to meet short term liabilities (This is often
greater than 1). The lender’s risk goes down when the current ratio goes up for the
borrower. Skechers’ current ratio average, from 2002-2006, was 3.74 while its most
recent current ratio, from 2007, was 3.83. Skechers has had consecutive year-by-year
lower current ratios compared to the industries current ratio, excluding 2002. Its
average current ratio is actually the third highest in the industry which means Skechers
is less risky, in the eyes of lenders, then the other competitors below them.
0
1
2
3
4
5
6
7
8
2001 2002 2003 2004 2005 2006
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers
Current Ratio

66
Quick Asset Ratio:
Figure 2
The quick asset ratio is similar to the current ratio, except that the quick asset
ratio measures the most liquid current assets. The quick ratio is derived by dividing the
most liquid current assets, (cash, marketable securities, and accounts receivables), by
current liabilities. Skechers average quick asset ratio, from 2002-2006, is 2.93, which is
higher than the industry average of 2.83. The industry leader is K-Swiss at 4.39 while
the industry loser is Nike. So because Skechers has a higher quick asset ratio,
compared to the industry average, this means that Skechers is more liquid than most
other competitors in the retail industry.
0
1
2
3
4
5
6
7
2001 2002 2003 2004 2005 2006
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers
Quick Asset Ratio

67
Inventory Turnover:
Figure 3
The inventory turnover can be computed by dividing COGS by Inventory. A
company’s inventory turnover is one way of measuring its operating efficiency and a
higher inventory turnover means that the company is getting inventory out faster and
more efficiently. From 2002-2006, Skechers maintained an average inventory turnover
of 3.78 while the industry average was at 5.17. Skechers has never beaten the industry
average from a year-to-year basis. When comparing Skechers to the rest of the
completion, it comes in last place for inventory turnover, from 2002-2006. This doesn’t
automatically mean that Skechers is the complete loser in its industry, this just means
that Skechers either has diminishing sales or an excess amount of inventory. The
opposite is true for a higher inventory turnover.
0
2
4
6
8
10
12
2001 2002 2003 2004 2005 2006
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers
Inventory Turnover

68
Days’ Supply of Inventory:
Figure 4
Another important measure for inventory efficiency is the days’ supply of
inventory. Generally speaking, the days’ supply of inventory measures the days it takes
to sell a company’s inventory. To calculate the days’ supply of inventory, just take 365
and divide it by inventory turnover. A lower ratio implies greater efficiency with a
companies’ inventory while a higher ratio means the company isn’t converting inventory
into revenue in a timely manner. Skechers has an average days supply of inventory,
from 2002-2006, of 97.22 days whereas the industry average is at 77.69 days. The
industry leader is Steve Madden and the industry loser is K-Swiss. The days’ supply of
inventory is one component of the cash-to-cash cycle.
0
20
40
60
80
100
120
140
2001 2002 2003 2004 2005 2006
Days Supply of Inventory
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers

69
Accounts Receivables Turnover:
Figure 5
Accounts receivable turnover can be calculated by dividing Sales over accounts
receivables. A higher accounts receivable turnover means a firm is efficiently managing
its assets. The industry average, from 2002-2006, was 8.28, but Skechers was at 7.63.
Skechers can be viewed as a good example for accounts receivable turnover for the rest
of the competitors in its industry. Below Skechers was Deckers and Nike, while K-Swiss,
Timberland, and Steve Madden were higher than Skechers.
0
2
4
6
8
10
12
14
2001 2002 2003 2004 2005 2006
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers
Accounts Receivables Turnover

70
Days’ Sales Outstanding:
Figure 6
Days’ sales outstanding show how fast a company can convert sales into cash. It
is calculated by dividing 365 days by the accounts receivable turnover. Skechers days’
sales outstanding is just above the industry average of 48.03 days at 48.45 days (from
2002-2006). The sooner a company can convert sales into cash, the sooner they can
reinvest that cash back into the company. The industry leader is Steve Madden at 35.24
days and the industry loser is Nike at 63.84 days.
0
10
20
30
40
50
60
70
80
90
2001 2002 2003 2004 2005 2006
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers
Days' Sales Outstanding

71
Working Capital Turnover:
Figure 7
Working capital turnover is the measure of how well a firm can convert working
capital into sales. This ratio is derived by dividing sales by working capital, and working
capital equals current assets minus current liabilities. Companies want to always strive
for a higher working capital turnover because a higher working capital means that a
company is efficiently using its working capital. Skechers has an average working
capital turnover, from 2002-2006, of 2.94 whereas the industry average is at 3.29.
Working capital turnover, for Skechers, has been gradually declining over the years.
This is a result of higher sales and higher accounts receivables from 2002-2006.
0
1
2
3
4
5
6
7
8
2001 2002 2003 2004 2005 2006
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers
Working Capital Turnover

72
Cash-to-Cash Cycle:
Figure 8
The cash to cash cycle, also known as the money merry go round, is calculated
by adding days’ supply of inventory and days’ sales outstanding. The lower the number,
the faster cash is coming back. Skechers has an average cash to cash cycle of 146 days
whereas the industry average is 126 days (2002-2006). This means that Skechers isn’t
receiving cash flows as fast as the industry is. For example, the cash to cash cycle for
Steve Madden is only 80 days which is significantly lower than Skechers and is actually
the lowest out of all of the competitors in the industry.
0
50
100
150
200
250
2001 2002 2003 2004 2005 2006
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers
Cash-to-Cash Cycle

73
Conclusion:
The previous liquidity analysis shows us that Skechers is on or above average in
most of the five year industry studies. It is apparent however that Skechers
significantly increased its inventory in 2006. This will affect inventory turnover and of
course days supply of inventory, but can be attributed to recent management decisions
rather than poor performance. The cash to cash cycle for Skechers is on the higher end
of the average; however we believe this is being affected by the days supply
outstanding measure and therefore the recent spike can be explained once again by
inventory. Overall Skechers appears to be performing on average with the industry.

74
Profitability Analysis
Profitability analysis takes a look at the profitability of a company in different
levels. The levels are at pure product profitability; profitability after selling, general, and
administrative expenses; and profitability after all companywide operations are taken
into account. These are evaluated using Gross Profit Margin, Operating Profit Margin,
and Net Profit Margin, respectively. It also looks at the profitability of assets, return on
assets, and return on equity. These ratios show how well the company can generate
return using assets and equity.
Gross Margin:
Gross Margin shows how profitable a company is at the product level. Gross
Profit by itself is Sales minus the cost of the goods sold. The ratio then takes the Gross
Profit and divides it by Sales. This shows the percent of how much it makes in excess of
production expenses.

75
Figure 9
As shown in the graph above, the industry Gross Profit Margin is between .4 and
.5, or 40% and 50%, for 2007. Skechers’ Gross Profit Margin is usually less than its
competitors, showing it has more production costs. This doesn’t always mean Skechers
is a less profitable company overall. It is still within 5% of the competitors and, with
proper administrative expense management, it could become a more profitable
company.
Operating Profit Margin:
Operating Income is profit after all general expenses related to selling your
product are taken into account. A small difference from Gross Profit Margin shows how
well a company keeps these expenses low.
Figure 10
0
0.1
0.2
0.3
0.4
0.5
0.6
2001 2002 2003 2004 2005 2006
Gross Margin
K-Swiss Timberland Deckers Nike Steve Madden Skechers

76
As seen in the graph above, Skechers took a huge hit in 2003. In this year it incurred
large selling, general, and administrative expenses in proportion to net sales. Recently it
has been able to increase this Margin, but it still has the lowest in the industry.
Net Profit Margin:
Net Income is the residual amount a company has left over of sales after all
expenses, losses, and taxes. This number for Skechers will be added straight to its
retained earnings, because it does not pay any dividends. Net Profit Margin is the
percent of sales that reach net income. The relative flux of Net Profit Margin can cause
large changes in its stock market price since it is looked at heavily by prospective
investors.
Figure 11
-0.05
0
0.05
0.1
0.15
0.2
0.25
2001 2002 2003 2004 2005 2006
Operating Profit Margin

77
This graph shows the Net Profit Margin for Skechers and its competitors. Skechers is
still at the bottom but, due to the change seen in Operating Profit Margin, it is steadily
climbing.
Asset Turnover:
Asset Turnover is also a measure of profitability as well as an indicator of
expense manipulation. Sales divided by total assets shows how much money is made
for every one dollar spent on assets. Obviously when a company gets a high amount of
return on expenditures, profitability increases.
Figure 12
-0.1
-0.05
0
0.05
0.1
0.15
0.2
2001 2002 2003 2004 2005 2006
Net Profit Margin

78
This Asset Turnover graph shows Skechers with a turnover centered around 1.5.
Judging from this graph, it means Skechers makes $1.50 for every 1$ of assets. There
is a slight trend upwards since 2003, so Skechers is regaining its previous ratio high of
2002. It is still low in the industry but has recently passed Deckers.
Return on Assets:
This ratio looks at net income compared to total assets of the year before. We
use the prior year’s assets since it is those yearend totals which created this year’s
income. ROA shows the percentage return made off of assets. A high return is
preferable which indicates proper use of assets.
Figure 13
0
0.5
1
1.5
2
2.5
3
2001 2002 2003 2004 2005 2006 2007
Asset Turnover
K-Swiss
Timberland
Deckers
Nike
Steve Madden
Skechers Restated
Skechers

79
In this graph there are two Skechers lines. One is as stated on its financial statements
and the restated line has added purchase agreements and operating leases into total
assets. The restated line shows Skechers at the lower end of the industry but the other
line puts them much closer to the industry. Like before, the graph also indicates a
rebound as Skechers’ ROA begins to move up toward an industry norm. This shows
Skechers is beginning to properly use their assets again after their horrible 2003 year.
Return on Equity:
The Return on Equity measure looks at net income as a percent of total equity.
This ratio looks from a financing point of view showing how well a company can
generate net income from the previous year’s equity.
Figure 14
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
2001 2002 2003 2004 2005 2006 2007
Return on Assets
K-Swiss Timberland Deckers Nike
Steve Madden Skechers (restated) Skechers

80
Here is shown Skechers with a higher Return on Equity than some of its
competitors. It also sits at an industry norm for the industry. Another important factor,
which can explain some differences in this graph, is the companies have different debt
to equity ratios. These ratios are usually stable, yet different, for each.
Conclusion:
From these graphs, Skechers is shown as being one of the least profitable in the
industry. It is recovering from the drop in 2003, and if Skechers can continue its
upward trend, it will be able to pass up its competitors and become one of the more
profitable companies in the industry. The Company was on pair with the Industry on
the Gross Profit Margin. It’s the other areas where Skechers must concentrate on in the
future.
-20%
-10%
0%
10%
20%
30%
40%
50%
2001 2002 2003 2004 2005 2006 2007
Return on Equity

Skechers Financial Statement Analysis

Skechers Financial Statement Analysis

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