The $9 Billion Signal Investors Can’t Ignore

Joel Litman, chief investment officer, Altimetry

Editor’s note: Every Friday, we showcase a featured topic from our YouTube show, Altimetry Authority.

This week, we tackle themes from our latest episode, including an unexpected deal in the sneaker industry… and what it says about broader consumer trends.

One more note… The markets and our offices are closed on Monday, May 26 for Memorial Day. So we won’t publish our Altimetry Daily Authority e-letter.

Please look for your next edition on Tuesday, May 27.

It’s the biggest buyout in sneaker history… and the story isn’t over yet…

Earlier this month, private-equity (“PE”) giant 3G Capital made its boldest move in years. It announced a $9.4 billion all-cash deal to acquire footwear brand Skechers (SKX).

While this is a major deal for the footwear industry, 3G is paying just a modest premium of $63 per share. And investors were caught off guard by the deal…

Skechers has been flying under the radar these days. Trendier names like Nike (NKE) and On (ONON) seem to dominate the headlines.

But as you’ll see, the Skechers deal is part of a bigger trend in consumer discretionary stocks. The company was priced like it had no future at all.

It’s just the latest example of a beaten-down discretionary retailer becoming a bargain.

Consumer discretionary stocks have been under pressure for months…

And that’s exactly what makes them attractive.

Inflation still isn’t back down to the Federal Reserve’s target. Consumer debt levels are rising. That spells trouble for nonessential purchases like shoes, apparel, and home goods.

No wonder some discretionary stocks are cheap today, even though their core businesses remain intact.

Skechers is the perfect example…

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Before the buyout, the market was acting like this shoe retailer’s profitability was permanently impaired. We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price – or in this case, 3G’s $63-per-share acquisition price.

From there, we can calculate what the market expects from future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well Skechers has to perform in the future to be worth what 3G is paying for it.

Skechers’ Uniform return on assets (“ROA”) has hovered around 10% for most of the past decade… a solid figure for a mid-tier retailer. It even exceeded 12% in the past two years.

But at $63 per share, Uniform ROA would settle around 6% over the long term.

That’s far below its pre-pandemic average. It’s also low enough to make 3G’s $63-per-share buyout price look like a bargain…

3G saw its chance to profit… and swooped in.

Discretionary retail has been a minefield lately…

The consumer is getting weaker. A lot of companies are struggling to impress investors.

The flip side, of course, is that many retail stocks are becoming cheap.

If these companies survive the storm – or even show modest improvement – they could catch the market’s eye. That’s especially true for brands like Skechers, which still generate healthy returns despite short-term headwinds.

Private equity understands this. That’s why 3G went on a shopping spree. The trend won’t stop with shoes.

And it doesn’t have to end with PE, either…

Patient investors can follow the same playbook. Be on the lookout for quality discretionary names at depressed prices.

It may not be a smooth ride if you buy today. But most of these stocks will recover one way or another… whether they bounce back on their own or get scooped up in a deal.

Regards,

Joel Litman
May 23, 2025

P.S. We dove deeper into Skechers and the consumer discretionary landscape in the latest episode of Altimetry Authority. Check it out on our YouTube channel right here… and be sure to click the “Subscribe” button.