In the ultra-competitive sneaker game, it’s Skechers U.S.A., Inc. (NYSE: SKX) 1, Nike 0.

Shares of the mid-cap footwear challenger are crushing those of its large-cap peer by a wide margin in 2023. Entering this week on a momentum-packed nine-day winning streak, Skechers stock is up 41% year to date. Nike stock? Down 3%.

The stunning David over Goliath outperformance comes at a time when consumers are spending cautiously because of high prices and interest rates. Skechers is adjusting to the environment better than not just Nike but most industry rivals. Why?

Skechers’ tech-driven slip-ons and laced sneakers are comfortable for the feet and budget. The relative affordability of the brand has made it a viable alternative to the premium Nike swoosh for many cash-strapped households. Skechers has been able to raise prices to offset cost inflation without hurting sales.

At the same time, Skechers’ higher-margin direct-to-consumer (DTC) business is booming. Combined with shrinking inventory levels, this has produced superior profitability. In their most recently reported quarters, Skechers and Nike recorded gross margins of 53% and 44%, respectively.

Skechers’ expanding margin was just one of the highlights of a third-quarter report that propelled its stock to a 22% November gain. Revenue increased 8% year-over-year to a record $2.0 billion, led by a 24% jump in DTC sales. The result is solidified by the fact that all geographic regions experienced growth, including 18% growth in China — a market in which Nike has struggled to regain its footing. This helped Skechers blow past Wall Street’s Q3 adjusted earnings per share (EPS) estimate by 24% in delivering 53% growth above the prior year period.

Skechers is also gaining a competitive edge by forming collaborations with influencers who are popular with younger shoppers. While Nike sticks with its playbook of signing pro athletes to huge endorsement deals, Skechers is inking deals with artists like Spain’s Ricardo Cavolo and Grammy award winner Doja Cat. Far fewer social media followers than Cristiano Ronaldo and LeBron James, but equally effective marketing pawns.

In its boldest move yet, Skechers has also stepped foot into the basketball sneaker market. The company has teamed up with the NBA’s Julius Randle and Terance Mann to launch a pair of mid-top basketball styles to go toe-to-toe with the hardcourt footwear king. The offerings are unlikely to put much of a dent in Nike’s basketball market share, but an expanded presence in the sport could create a significant new revenue source for Skechers. 

This set the stage for what has become a heated battle between Nike and Skechers. 

Why is Nike suing Skechers?

Perhaps irked by Skechers’ late October push into the basketball arena, Nike filed a patent lawsuit against Skechers in a California federal court on November 6th. The suit alleges that Skechers violated the patents related to Nike’s Flyknit technology which weaves a lightweight yarn into a one-piece shoe upper. New Balance has also been sued for allegedly misusing the technology in its athletic shoes.

Legal challenges designed to protect its turf are nothing new for Nike. The sneaker king previously sued Adidas, Lululemon and Puma for infringing on Flyknit patents. It reached settlements with Adidas and Puma but the case against Lululemon is outstanding.

Naturally, Skechers has defended its name being thrown into the lion’s den. Last month, the company called the lawsuit “baseless” saying Skechers has been using various forms of knit uppers for almost 10 years. Management believes Nike is exerting its market and financial power to fight competition rather than letting things get settled on the playground — the sneaker marketplace.

Does Skechers stock have more upside?

Skechers is forecasting approximately $8 billion of revenue in 2023. EPS is expected to be between $3.33 and $3.43. At the midpoint, this gives the stock a 17.5x price-to-earnings (P/E) ratio. Over the last couple of years, SKX has traded between 7x and 21x. This suggests there is room for multiple expansions. All things equal, if the valuation can stretch to 21x, the stock price would go up by another 20%.

The valuation and Skechers’ opportunity to win with its value-priced sneakers have Wall Street remaining bullish. All five analysts who have weighed in on the company since the Q3 release have called it a buy. Their average price target is $66.00, which points to roughly $7.00 upside over the next 12 months. 

Skechers is resonating with budget-minded shoppers by offering comfy sneakers at a good price. Even at an all-time high, its stock is also priced attractively.