Skechers U.S.A., Inc. (NYSE:SKX) Q3 2023 Earnings Call Transcript

Skechers U.S.A., Inc. (NYSE:SKX) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Greetings, and welcome to the Skechers Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to Skechers. Thank you. You may begin.

David Roche: Hello, everyone. My name is David Roche from the FP&A team. Thank you for joining us on Skechers’ conference call today. I will now read the safe harbor statement. Certain statements contained herein, including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events may constitute forward-looking statements that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, including, but not limited to, global, national and local economic, business and market conditions, including the impact of inflation; foreign currency fluctuation; challenging consumer retail markets in the United States; wars, acts of war and other conflicts around the world; and supply chain delays and disruption in general and specifically as they apply to the retail industry and the company.

A group of young millennials in casual attire wearing the company’s footwear.

There can be no assurance that the actual future results, performance or achievements expressed or implied by any of our forward-looking statements will occur. Users of forward-looking statements are encouraged to review the company’s filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC, as required by federal securities laws, for a description of all other significant risk factors that may affect the company’s business, financial condition, cash flows and results of operations. With that, I would like to turn the call over to Skechers’ Chief Operating Officer, David Weinberg; and Chief Financial Officer, John Vandemore.

David?

David Weinberg: Good afternoon, and thank you for joining us today for our third quarter 2023 conference call. Before we discuss our record quarterly results, I would like to express our concern for those impacted by the devastating crisis in the Middle East and the ongoing war in Ukraine. This is a very difficult and uncertain time for many of our colleagues, partners and customers with whom we remain in close contact, offering whatever comfort and assistance we can. Once again, our financial results exceeded expectations with a new quarterly sales record of $2.025 billion, a strong gross margin of 52.9% and earnings per share of $0.93. Along with our continued momentum in the quarter, we extended our product portfolio, which we believe will further strengthen our position in the global footwear market.

We released three capsules from our new Snoop Dogg collaboration across North America, Europe and several other key markets, creating media attention and expanding our reach with fans of the legendary entertainer. Our collection with Snoop Dogg, along with our collaborations with Martha Stewart and the Rolling Stones, heightened awareness and consumer engagement for the Skechers brand. We also launched an exciting expansion to our Skechers Performance division, Skechers Football, or soccer, as it’s known in the United States, with boots built for speed and control. In support of this initiative, we signed Harry Kane, the leading striker for Bayern Munich and captain of the England national football team. Harry, along with a roster of athletes from the Premier League and Women’s Super League, have been instrumental in testing and launching of this product.

Harry’s move to Bayern Munich created additional excitement and generated headlines as he made his inaugural Bundesliga appearance in Skechers boots with a goal and an assist. The SKX_01 and Skechers Razor are currently available in key football specialty retailers, select Skechers stores and online in Europe. Just this week, we announced the further expansion of our technical performance footwear with the addition of Skechers Basketball and the unveiling of the SKX Resagrip and the SKX Float. Similar to our approach with football, we have partnered with two-time All-Star Julius Randle from the New York Knicks and local star Terance Mann from the Los Angeles Clippers, both of whom have been training and playing in Skechers Basketball footwear leading up to the 2023 NBA season.

Skechers Basketball will be available shortly in North America, China and the Philippines, the world’s largest basketball markets. With the launch of Skechers Football and Basketball, we expanded our Skechers Performance division with two of the biggest sports in the world, building on our assortment of award-winning Running, Golf and Pickleball footwear. Taken together, the expansion of Skechers Performance footwear and our collaborations with Snoop Dogg, Martha Stewart, the Rolling Stones as well as others, illustrates our commitment to innovation and our determination to deliver comfort, style and quality in every pair. We continue to develop fresh takes on our successful and in-demand Skechers Hands-Free Slip-ins, Arch Fit, Max Cushioning, GOwalk and street collections, as well as many other styles.

All of our key initiatives, whether they are related to performance or lifestyle, have targeted and unique marketing campaigns to drive awareness and purchase intent. This includes athletes and brand ambassadors who are admired in their respective countries, like newly signed former footballer, Fabio Cannavaro, in Italy; and actress and TV personality, [ LilLi Co ], in Japan. As we review our accomplishments in the third quarter, we want to note that our goals and objectives remain unchanged. We are committed to delivering the ultimate comfort technology products to the world, enhancing the Skechers shopping experience and operating in an increasingly efficient, sustainable and impactful manner. Looking at our third quarter results. We achieved record sales of $2.025 billion, an increase of 8% year-over-year.

International sales increased 9%, representing approximately 61% of our total sales, and domestic sales increased 7%. Gains were driven by a 24% increase in our Direct-to-Consumer segment. Our Wholesale sales decreased 1%, due primarily to lower distributor sales in the quarter, which led to international Wholesale being down 2%. Excluding distributor sales, international Wholesale was up 5%. Domestic wholesale was significantly better than expected at flat to prior year, driven by accelerated deliveries in the third quarter. We are encouraged by the positive signals we continue to see in the domestic Wholesale marketplace, including requests for early deliveries, solid sell-throughs, healthier inventory levels and, most importantly, booking trends for the first part of 2024.

After a difficult year, we are optimistic about the prospects of a return to growth in Domestic Wholesale in 2024 on the back of our incredible product lineup. Turning to Direct-to-Consumer, where our 24% growth was the result of a 33% increase internationally, with strong performance in both online and brick-and-mortar locations and a 14% increase domestically, driven by our stores. This includes growth of 17% in the Americas, 24% in APAC and 61% in EMEA. At 42% of our total sales, our Direct-to-consumer segment is a key driver of our long-term growth strategy. As such, we are focused on improving efficiencies and creating a more seamless experience for consumers, driving demand and ensuring we have a fresh flow of inventory. In the third quarter, we opened 72 company-owned Skechers stores and closed 23.

Store openings included 43 in China, five big box stores in the United States, five in Vietnam, four in South Korea, three in both Chile and India, two each in France, Israel and Hong Kong and one each in Canada, Colombia and Peru. In the period, 324 third-party stores opened, including 282 in China and 11 in India, bringing our third-party store count to 3,399 and our total worldwide count to 4,992 Skechers stores. In the fourth quarter to date, we’ve opened three company-owned stores in the United States and one each in the U.K., Colombia and Chile. We expect to open 45 to 55 company-owned stores worldwide over the remainder of the year. Reflecting our diligent efforts to manage our inventory, levels declined 24% from year-end 2022 while simultaneously increasing our gross margins and maintaining growth.

We have also begun shipping out of our new distribution centers in Canada and Chile, and we expect to be operational at our facilities in India and Panama before the end of the year. And now I would like to turn the call over to John for more details on our financial results.

John Vandemore: Thank you, David, and good afternoon, everyone. Skechers delivered another quarter of record sales, surpassing $2 billion and growing 8%, led by the continued strength of our Direct-to-Consumer segment, which grew double digits in all regions. This sustained momentum highlights the strength of the Skechers brand globally and the successful execution of our long-term growth strategy. Now let’s review our third quarter financial results. Direct-to-Consumer sales grew 24% year-over-year to $850.4 million, driven by increases of 33% internationally and 14% domestically. We saw continued strong performance in our retail stores globally and meaningful outperformance on our international e-commerce platforms. Consistent with what we are seeing across the industry, we experienced a slowdown in our domestic e-commerce channel as consumers shifted to our stores, which are once again at target inventory levels.

The growth in Direct-to-Consumer reflects the continued demand for our innovative products as we deliver on our strategy to enhance our omnichannel capabilities. Wholesale sales decreased 1% year-over-year to $1.17 billion. Domestically, sales were flat versus the prior year, which was a significantly better result than we expected due to the accelerated timing of orders. International wholesale sales declined 2%, predominantly due to a decline in sales to our distributor markets, which can be influenced heavily by the timing of orders, and which we’re facing a particularly difficult comparison to the prior year. Excluding distributor sales, international wholesale sales were up 5%. Overall, we were encouraged by the performance of the Wholesale segment in the quarter, as well as the positive booking trends we have observed for the first half of 2024.

Now turning to our regional sales. In the Americas, sales for the third quarter increased 7% year-over-year to $1.02 billion, driven by growth across markets. We continue to see the strength of our Direct-to-Consumer business drive growth in the region, particularly within our retail stores. In EMEA, sales grew 2% year-over-year to $480.4 million, driven by strong Direct-to-Consumer growth, nearly offset by lower sales to our distributors. Excluding distributor sales from the equation, EMEA grew double digits year-over-year, particularly reflecting the strong demand for our brand and innovative product assortment in our Direct-to-Consumer channels. In Asia Pacific, sales increased 14% year-over-year, $527.1 million, on the back of robust growth across segments in most markets.

In China, sales grew 18%, driven by double-digit growth in all channels. As this market continues to recover, we are encouraged by the sustained growth rates and positive retail trends we have seen, which have exceeded our expectations. Third quarter gross margins were 52.9%, up 590 basis points compared to the prior year. The improvement was driven by favorable pricing and channel mix as well as lower unit costs. Operating expenses increased 230 basis points as a percentage of sales year-over-year to 42.4%, reflecting increased investments in demand creation, retail store growth and expanded distribution capabilities. Selling expenses increased 80 basis points as a percentage of sales year-over-year to 8.8%, mainly due to higher brand marketing expenses globally, including investments focused on brand building and driving consumer awareness for our collection of comfort technologies and newly launched categories.

General and administrative expenses increased 150 basis points as a percentage of sales year-over-year to 33.6%. The increased expenses were primarily due to higher rent, depreciation and labor to support volume-driven growth within our Direct-to-Consumer segment and the expansion of our distribution infrastructure to advance our capabilities worldwide. Earnings from operations were $213.2 million, a 64% increase compared to the prior year, and our operating margin for the quarter was 10.5% compared to 6.9% in the prior year. Our effective tax rate for the third quarter was 19.5% compared to 17.9% in the prior year. Earnings per share were $0.93 per diluted share on 156.2 million diluted shares outstanding, a 69% increase. This brings our year-to-date earnings per share to $2.93, which, when excluding unusual items, exceeds all prior full year results, a remarkable accomplishment.

And now turning to our balance sheet, we ended the quarter with $1.27 billion in cash, cash equivalents and investments, an increase of $591.5 million versus the prior year from improved working capital management and operating efficiency. Inventory was $1.38 billion, a decrease of 22% or $397.3 million compared to the prior year, when we experienced acute capacity challenges and processing constraints at our distribution centers. Notably, we lowered inventory levels in both the Americas and EMEA by 33% or over $400 million compared to the prior year. We believe that our current inventory levels are healthy and well positioned to support demand during the key holiday selling period and early 2024, accounts receivable at quarter end were $929.4 million, essentially flat compared to the prior year and in line with our Wholesale business.

Capital expenditures for the quarter were $91.3 million, of which $32.9 million was related to general corporate purposes, including construction of our new corporate offices in transportation, $25.6 million related to investments in our retail stores and Direct-to-Consumer technologies and $19.2 million related to the expansion of our distribution infrastructure globally. Our capital investments are focused on supporting our strategic priorities, which include growing our Direct-to-Consumer business and expanding our brand presence globally. During the third quarter, we repurchased approximately 805,000 shares of our Class A common stock at a cost of approximately $40 million. We continue to deploy our capital consistent with our stated philosophy while maintaining an enviable balance sheet to fund this liquidity.

Now turning to guidance, we are confident in the strength of our brand globally and underlying consumer demand for our differentiated product portfolio and compelling value proposition. However, for the balance of the year, our outlook remains cautious due to continued uncertainty around the macroeconomic environment in general and the consumer spending environment in particular. For the full year, we expect sales in the range of $7.95 billion to $8.05 billion, and net earnings per share in the range of $3.33 to $3.43. This implies fourth quarter sales will be in the range of $1.91 billion to $2.01 billion, and net earnings per diluted share in the range of $0.40 to $0.50. Our effective tax rate for the year is still expected to be between 19% and 20%, and we expect total capital expenditures to be between $300 million and $325 million as we continue to invest in our strategic priorities, including opening additional stores, expanding our omnichannel capabilities and adding incremental distribution capacity in key markets like India, China and Chile.

We thank all of you for your time today, and we look forward to updating you on our fourth quarter and full year financial results, which we expect to release on Thursday, February 1. With that, I will now turn the call over to David for closing remarks.

David Weinberg: Thank you, John. Skechers delivered record quarterly sales and expanded our footwear offering to two of the largest sports worldwide. We believe this positions us for continued growth, reflects our commitment to offering top quality comfort and performance technologies to our consumers and enhances the Skechers brand. We recognize that the macroeconomic and political challenge in the United States and around the world were a factor in the third quarter, and we expect that these headwinds will continue to impact our business for the remainder of the year. We are well positioned to reach our goal of $10 billion by 2026, and we believe our diverse distribution and ability to deliver our product more efficiently will allow us to continue our positive momentum as our tenets of comfort, style, innovation and quality at an affordable price resonates with consumers.

Skechers is truly for all walks of life. We are the go-to brand for comfort, lifestyle and occupational footwear, and we deliver comfort that performs, be it on the golf course, trail, soccer pitch, pickleball court and now, basketball court. We are grateful to the entire Skechers team for delivering another successful quarter. We’re excited to end the year with what we believe will be a new annual sales record, more notable achievements and driving growth in an efficient and profitable manner in the years to come. Now I would like to turn the call over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jay Sole with UBS. Please proceed with your question. Great. Thank you so much.

Jay Sole: Great. Thank you so much. David, John, I want to ask about the guidance for the fourth quarter. You mentioned, obviously, there’s concern about macro in the consumer spending environment. But if I look at the first three quarters of the year, earnings are up 55%, which is obviously tremendous. And the midpoint of the guidance for 4Q for earnings says that earnings will be down 7%. So just help us understand like what magnitude are you seeing right now in the fourth quarter that tells you that you’re seeing a slowdown? And give us maybe a little bit of help on margins, like what you expect for margins in 4Q, what that would be, if you don’t mind?

John Vandemore: Sure, Jay. For this entire year, I think we’ve all had concerns about the consumer spending environment. What we’ve continuously seen is that as we get intra-quarter, things shape up better than we have expected. But we haven’t adjusted our full view of the year much because the general parameters, against which we plan, remain relatively consistent. This quarter, another good example of really high flow-through pull-forward and better-than-expected Direct-to-Consumer performance, particularly internationally, flow through, which is why we outperformed so significantly our expected range in Q3 EPS. Some of that is coming from Q4, so we’re pulling a bit of that in. I would say the other wildcard in Q4 is going to be how some of the international markets perform, particularly China.

And as you all know, China is incredibly sensitive to the events and performance surrounding Singles Day. That’s been a very difficult-to-read market for us on the quarters. As you saw this last quarter, though, it continued to outperform our initial expectations. So what we’re doing in the guidance is attempting to ensure the stuff that we know came from Q4 into Q3 that rewarded us with EPS this quarter is carried forward. We are sensitive to how China will perform in Q4 as well as kind of the consumer spending environment globally. There are certainly indicators kind of going in both directions. But we felt it was probably more important to be prudent about our expectations around consumer spending, particularly in some of those international markets.

I would also note, again, similarly to last quarter, when we recognized there were definitely some green shoots we were seeing in the domestic wholesale marketplace. We saw those again this quarter. It’s why we were able to actually get our domestic wholesale business flat to prior year, which was substantially better than what we thought. What we haven’t yet seen is the trickle-down effect of people pulling orders forward, good sell-through, good margin, good pricing. And that’s a condition that’s carrying on into the fourth quarter. It’s entirely possible that ends up leading to some pull forward in Q4. It might even be necessary from our point of view relative to some inventory levels and sell-through rates. But we haven’t yet seen that happen.

We haven’t seen that trigger pulled. And until we do, it’s tough for us to predict exactly the timing of when those orders are going to go out to domestic accounts. So those are kind of the downward pressures on the guidance for Q4, specifically. Although, again, I would note, if you look at it on a full year basis, this has been a tremendous year and one we’re quite proud of, and we think that carries through to the balance of the year, certainly as it relates to the full year results. And then again, I’d just point out what we made a comment of in our opening remarks, we are seeing some very encouraging signs for the bidding in next year, and that’s an incredible positive as well.

Jay Sole: All right. Well, that’s very helpful. Maybe if I can just transition, I want to ask about basketball. David, obviously, basketball has been something the company’s had an ambition to grow into for a long time. And also, you’ve always been very careful to invest ahead of an opportunity once you really have confidence that, that opportunity is something you can take advantage of. What gives you confidence today that basketball is something that the company can really build a business in? What do you see that makes now the right time to really try to make a big push into basketball?

David Weinberg: I think it’s not only basketball. It’s the technologies that we have and the technologies around the world. And I’ll tell you what gives me the most confidence is the acceptance we’ve seen from the athletes we’re talking to, to wear them, to promote them, to enjoy them. And it’s not one of those things that we’re buying our way in the sense that we’re paying more than anybody else for an athlete for something that they’re not comfortable with that we’re going to push them to wear. These are very serious athletes that certainly make significantly more from what they play and how they get paid. And they’re very receptive to the brand. So it starts — we started with pickleball, we started with running. We have great running shoes, it’s a more difficult market.

There’s not many people that you can get to speak to them. But we win awards all over the world as far as our running shoes are concerned. When we went to soccer, football, it was great. We have a player like Harry Kane, who was very receptive, who loves the brand, who wears the brand. He’s familiar with it. He played with the shoes, the black shoes before he committed to come with us. He loves them. He — we certainly helped him out, was very receptive to him. I think people are finding out that the quality we make in our shoes is truly the quality that they can play in and enjoy. They have comments like they don’t worry about their feet as much anymore. It’s very comfortable to play with, even though they can play. And Harry has told us that this is the fastest start he’s had maybe in his career as far as golf.

He usually works his way up into it, and he’s feeling very, very comfortable. When we went to the basketball players as well, for players — Terance was very interested right away. He wears them. He was wearing them before there was a deal. He was on Instagram with them, talking about them, said he loved them. When we talked to Julius Randle, which is certainly on a higher level, he’s very receptive. I hope you saw him on TV the other day giving away a pair of shoes and telling how comfortable they are, and he’s made some very positive comments about the brand, about the people working for them, how comfortable he is and what he does with them, and we’re speaking to others. So I think it’s the reception they’ve given us and their willingness to do it and the fact, I believe — and I think you’ll see is they’re proud of the brand, gives us confidence that it is a product that sells well, that competes well, that will be part of the NBA and those that play on multiple levels and will perform as well as anything that’s out there.

So all of those players has given us complete confidence in the brand and backing the brand and taking the brand is certainly capable, and our people dealing with them are certainly capable of delivering something they could play with and promote and continue their careers with.

Operator: Our next question is coming from the line of Laurent Vasilescu with BNP Paribas. Please proceed with your question.

Laurent Vasilescu: Thank you so much for taking my questions. I would love to ask about the gross margin trajectory for fourth quarter. How do you think about the fourth quarter gross margin? And then I think you mentioned, John, that there will be — there was a pull forward into 3Q on U.S. Wholesale. How do you think about U.S. Wholesale for fourth quarter and then leading into next year?

John Vandemore: Yes. So for gross margin, let me talk a little bit about this quarter. I mean this quarter, we saw kind of a benefit from three different factors at once, which is a little bit unanticipated. We definitely had some mix benefit. That’s channel mix within the channels. There was some product mix as some of the newer technologies, David mentioned, materialized, particularly in the Direct-to-Consumer channel does carry a premium price. We also had some overt pricing that we had put in place internationally last year that benefited us. Some of that we’re going to be giving back because, as a result of that, we did leave, I think, some opening price points that we’d like to get back into. And you’ll see some of that not carry forward.