Skechers Investor Sues Board in Del. Faulting Disclosure of Costs
A derivative suit filed Tuesday in Delaware federal court accused the directors of Skechers USA Inc. of hiding skyrocketing operational costs from investors at a time when the company was experiencing rapid growth in international sales.
November 28, 2018 at 04:25 PM
3 minute read
A derivative suit filed Tuesday in Delaware federal court accused the directors of Skechers USA Inc. of hiding skyrocketing operational costs from investors at a time when the company was experiencing rapid growth in international sales.
Stockholder Kathleen Houseman said in a 48-page complaint that the shoemaker's board told investors in late 2017 that the company had slowed a yearlong trend where selling, general and administrative expenses regularly outpaced its net sales growth. At the time, Skechers, which is based in Manhattan Beach, California, was seeing a significant uptick in sales abroad, particularly in China, and directors repeatedly assured analysts and investors that the company was returning to “leverage” on the expenses, which include all operating costs not directly tied to the cost of goods sold.
According to the complaint, the board failed to disclose that the growth in China was unsustainable and that the company lacked the “operational infrastructure” to meet increased demand overseas. As a result, Houseman said, the company was relying on expensive outside solutions that would continue to drive SG&A expenses higher than sales growth for the foreseeable future.
Meanwhile, the complaint alleged, the directors continued to sell shares of their personal holdings in Skechers at inflated prices, reaping net proceeds of more than $37 million.
Houseman said that the truth didn't begin to emerge until April 2018, when Skechers said in a regulatory filing that its SG&A expenses had increased more than 23 percent on a year-to-year basis, compared to just a 16.5 percent increase in sales and a 19.6 percent increase in earnings from operations. Skechers' stock fell 27 percent on unusually heavy trading volume, leading to a $1.5 billion loss in market capitalization.
During a second quarter earnings call in July, Skechers reported a nearly 20 percent spike in SGA expenses, compared to just 10.6 percent growth in sales and a 5 percent drop in earnings from operations, leading to a 20 percent dip in the company's stock price and another $947 million loss in market cap.
“As a result of the individual defendants' wrongful conduct alleged herein, Skechers disseminated false and misleading statements and omitted material information that would have rendered the statements neither false nor misleading. The improper statements have devastated the Company's credibility,” Houseman's Bragar Eagel & Squire and Rigrodsky & Long attorneys said in Tuesday's filing. “Skechers has been, and will continue to be, severely damaged by the Individual Defendants' misconduct.”
The company did not immediately return a call Wednesday seeking comment on the lawsuit.
Investors have also filed two securities class actions in New York federal court over the company's allegedly false and misleading statements regarding its expenses.
The derivative suit in Delaware names each of Skechers' nine directors, as well as John Vandemore, the company's chief financial officer. Houseman said she did not make a demand that the board consider filing its own litigation, because each of the directors face a substantial likelihood of liability for their alleged misconduct.
Houseman is represented by Marion C. Passmore and Melissa A. Fortunato of Brager Eagel in New York and Brian D. Long and Gina M. Serra of Rigrodsky & Long in Wilmington.
An online docket-tracking service did not list counsel for the Vandemore or the Skechers' directors.
The case, filed in U.S. District Court for the District of Delaware, is captioned Houseman v. Greenberg.
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