Skechers U.S.A., Inc. (NYSE:SKX) Q4 2023 Earnings Call Transcript

Skechers U.S.A., Inc. (NYSE:SKX) Q4 2023 Earnings Call Transcript February 1, 2024

Skechers U.S.A., Inc. beats earnings expectations. Reported EPS is $0.56, expectations were $0.52. Skechers U.S.A., Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Skechers Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to Skechers. Thank you. You may begin.

Unidentified Company Representative: Hello, everyone. My name is [indiscernible] 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 insight of inflation, foreign currency fluctuations, challenging consumer retail markets in the United States, Wars, Acts of War, and other conflicts around the world and supply chain delays and disruptions in general and specifically as they apply to the retail industry and the company.

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 conditions, 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 fourth quarter and full year 2023 conference call. We ended the year with a new annual sales record of $8 billion, an increase of $556 million compared to last year. This milestone was the result of four quarterly sales records, including $1.96 billion for the fourth quarter. We also achieved a new annual gross margin record of 51.9%. These impressive results were driven by the worldwide demand for our products, our innovative marketing efforts, growing base of loyal consumers, strong relationships cultivated throughout our partner network and the hard work of our dedicated team worldwide. As always, we remain focused on our core design principles; style, comfort, innovation and quality, while at a reasonable price.

In 2023, we pushed our technologies to new heights with the introduction of two new categories Football and Basketball. These new categories expand the breadth of our award-winning Performance division, which also includes Running, Walking, Golf, and Pickleball. We partnered with Harry Kane, last year’s top goal scorer in Europe to launch Skechers football. Harry, along with a roster of athletes including recently announced Arsenal Defender, Oleksandr Zinchenko are generating excitement and elevating awareness of Skechers boots at key football specialty retailers, select Skechers stores and online in Europe. Today, I’m pleased to announce that Skechers Football is now available in the United States and will be coming to markets around the world.

We also signed New York Nicks Allstar, Julius Randle and L.A. Clippers, Terance Mann for Skechers Basketball. The collection has been launched in the world’s largest basketball markets; North America, China, and the Philippines and will expand to new markets in 2024. Athletes are a growing force in our marketing plans but we remain committed to growing our successful lines like Skechers hands-free Slips-ins, GOwalk and Uno and continue to focus on expanding our proven business. This past year, we introduced more standout collections to further extend our reach, including capsules with partners, Martha Stewart and Snoop Dog. For 2024, we are working on more initiatives and collaborations including a global agreement with John Deere that will unite two trusted brands for a new technical footwear offering.

These key initiatives are supported by targeted and unique marketing campaigns to drive awareness and purchase intent. This includes athletes and brand ambassadors recognized globally as well as locally such as Cha Eun-Woo, a K-pop star actor who we will be using extensively across the Asia-Pacific region. Our accomplishments in the year were numerous, including becoming a Fortune 500 company and surpassing 5,000 Skechers retail stores. Together with our team and partners, we are designing and efficiently delivering our comfort products to the world, meeting our consumers’ footwear needs and enhancing the Skechers shopping experience in an impactful manner as we further grow our direct-to-consumer and wholesale businesses. Looking at our fourth quarter results.

Sales increased 4.4% to $1.96 billion. International sales increased 7%, representing approximately 64% of our total sales in the fourth quarter and domestic sales were flat. We continue to see strength in our direct-to-consumer segment, which increased 20% and for the first time exceeded 50% of our total sales. Our wholesale sales decreased 8%, primarily due to some retailers conservatively managing inventory levels and taking goods closer to season. Domestic wholesale decreased 10%, though retail sell-throughs at our major accounts were actually up single digits. International wholesale declined 7%, primarily due to EMEA, which faced inventory congestion at a handful of retailers. The decrease was partially offset by improvements in APAC, including double-digit improvements in China which had a healthy return to growth over the key fourth quarter holidays.

In all, 2023 was a challenging year for wholesale, particularly in the United States. But our key indicators give us optimism that our wholesale business will return to growth in the first half of 2024. Turning to our direct-to-consumer segment, where sales grew 20%, International was up 27% due to strong performance across both physical and digital stores and domestic increased 12%, driven by strong sales during the key holiday selling period. In the fourth quarter, we reached a new milestone with our 5,000th Skechers store opening in Bogota, Colombia. At year-end 2023, we had 5,168 Skechers-branded stores worldwide. We opened 67 company-owned Skechers stores in the quarter and closed 12, bringing us to 1,648 locations. We continue to expand our global reach with the addition of 27 stores in China, nine stores in the United States, four locations in Colombia, three each in Italy, Mexico, Thailand, and the United Kingdom, two each in Chile, Malaysia and Peru and one in France, Spain and Vietnam.

Also in the period, 217 third-party stores opened, including 160 in China, and 11 each in Australia and Indonesia, bringing our third-party store count to 3,520. In the first quarter to date, we’ve opened four company-owned stores in the United States and China, two each in Colombia, Thailand and South Korea, and one each in Chile, Costa Rica, India, Malaysia and Panama. We expect to open 140 to 160 company-owned stores worldwide in 2024. Following last year’s supply chain congestion, we remain focused on carefully managing our inventory levels, which resulted in a 16% year-over-year reduction. We also continue to invest in our logistics capabilities. We began shipping from our new 600,000 square foot facility in Mumbai, as well as our newly opened distribution center in British Columbia, which we expect to become a primary source of shipments for Canada for this year, reducing delivery times and cost.

Further, we expect our new distribution center in Panama to be operational this quarter, which will meaningfully increase our South American capacity. As always, we are committed to delivering the ultimate in comfort technology, enhancing the Skechers shopping experience and operating in an increasingly efficient manner. 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. 2023 presented several challenges. There were significant macroeconomic headwinds, including inflation and rising interest rates as well as wholesale challenges, particularly in the United States, largely stemming from inventory congestion. Against this backdrop, Skechers delivered strong performance for the full year, achieving sales of $8 billion, gross margins of 51.9% and earnings per share of $3.49, each of which are records for our brand. We also made meaningful progress toward our goal of double-digit operating margins reaching 9.8%. Collectively, these accomplishments demonstrate the strength of the Skechers brand around the world and our ability to deliver profitable growth.

Our talented global team remain focused on expanding our brand presence, developing exceptional product for our consumers and executing against our growth strategy. Turning to the quarter. Skechers delivered another fourth quarter sales record of $1.96 billion, growing 4.4%. Robust consumer demand for our distinctive comfort technology products and compelling value proposition drove continued strength in our global direct-to-consumer business, which grew 20% year-over-year to $998.3 million. For the first time in our history, this segment represented over 50% of total sales. This remarkable performance was driven by an increase of 27% internationally and 12% domestically with both our physical and digital stores achieving double-digit growth.

The momentum in our direct-to-consumer segment is indicative of strong consumer demand driven by the combination of our fresh and innovative product paired with effective brand marketing. We are excited about our omni-channel growth opportunities as we continue to deliver on our strategy to expand our direct-to-consumer presence worldwide. Wholesale sales decreased 8.3% year-over-year to $962.6 million. As expected, domestic wholesale sales declined 10% versus the prior year as customers continued managing inventory levels conservatively. International wholesale sales declined 7.1%, primarily due to lower shipments in Europe, reflecting both the difficult comparison to last year as well as inventory congestion in certain markets. However, we continue to be encouraged by positive shipping and order trends we see in the first half of 2024, both domestically and internationally.

Now, turning to our regional sales. In the Americas, sales for the fourth quarter increased 3.2% year-over-year to $955.4 million, driven by continued strength of our direct-to-consumer business, particularly in our retail stores, which grew double digits across most markets. This was partially offset by the aforementioned domestic wholesale market dynamics. In EMEA, sales decreased 7.3% year-over-year to $383.6 million, due in part to lapping robust growth of 29% in the prior year. Direct-to-consumer channels grew double digits year-over-year in nearly every country. Unfortunately, this was not enough to offset lower wholesale sales, which were impacted by difficult comparisons as well as inventory congestion at certain customers. In Asia Pacific, sales increased 15% year-over-year to $622 million, led by double-digit growth in most markets.

In China, sales grew 22% and driven by double-digit growth across channels, including improved sales during the critical holiday period. We continue to be encouraged by the progress we see in China. Similar to last quarter, India saw challenges due to higher inflation as well as shipment delays associated with our transition to the new Skechers distribution center outside of Mumbai. However, we expect the market to return to normal growth trends over the course of 2024. Fourth quarter gross margins were 53.1%, up 470 basis points compared to the prior year. The improvement was driven by higher average selling prices from our product and channel mix in addition to improved freight costs. Operating expenses increased 270 basis points as a percentage of sales year-over-year to 46.5%.

Selling expenses increased 90 basis points as a percentage of sales versus last year to 9.3%, primarily due to increased marketing globally, including investments focused on brand building and driving consumer awareness for our comfort technology products and newly launched categories. General and administrative expenses increased 170 basis points as a percentage of sales to 37.1% and primarily due to deleverage in our wholesale operations from lower sales, particularly in the United States. Overall, spending rose as a result of higher rent, depreciation and labor to support growth in our direct-to-consumer segment. Earnings from operations were $130.3 million, a 50% increase compared to the prior year, and our operating margin for the quarter was 6.6%, compared to 4.6% last year.

Our effective tax rate for the fourth quarter was 20.3%, compared to 9.6% in the prior year when we were able to utilize foreign tax credits and benefited from certain discrete items. Earnings per share were $0.56 per diluted share, a 17% increase on 155.6 million diluted shares outstanding. And now turning to our balance sheet. We ended the quarter with $1.39 billion in cash, cash equivalents and investments an increase of $598.1 million versus the prior year, primarily from improved working capital management and operating efficiency. Inventory was $1.53 billion, a decrease of 16% or $292.6 million compared to the prior year when we faced capacity challenges and processing constraints at our distribution centers. Notably, we lowered inventory levels domestically by one-third compared to the prior year, and we believe our current inventory levels are healthy and well positioned to support demand in early 2024.

Accounts receivable at quarter end were $860.3 million, essentially flat compared to the prior year. Capital expenditures for the quarter were $85 million, of which $32.9 million related to investments in new store openings and direct-to-consumer technologies, $25.1 million related to the expansion of our distribution infrastructure and $10.8 million related to the construction of our new corporate offices. Our capital investments are focused on supporting our strategic priorities, which include growing our direct-to-consumer segment and expanding our brand presence globally. During the fourth quarter, we repurchased approximately 1.1 million shares of our Class A common stock at a cost of approximately $60 million. We continue to deploy our capital consistent with our stated philosophy while maintaining a durable balance sheet and abundant liquidity.

Now turning to guidance. As we enter 2024, we have the unique ability to serve consumers around the globe with our collection of comfort technology products, coupled with our compelling value proposition. Taken together, we are confident in the strength of our brand. However, we are also keenly aware of the uncertainties that remain in such a dynamic operating environment, most notably geopolitical and macroeconomic risks and have factored these into our initial guidance for 2024. For the full year 2024, we expect sales in the range of $8.6 billion to $8.8 billion and net earnings per share in the range of $3.65 to $3.85. For the first quarter, we expect sales in the range of $2.175 billion to $2.225 billion and net earnings per share in the range of $1.05 to $1.10.

Our effective tax rate for the year is expected to be between 20% and 21%, and we expect total capital expenditures to be between $350 million and $400 million as we continue to invest in our strategic priorities, including opening additional stores, expanding our omni-channel capabilities and adding incremental distribution capacity in key markets, including constructing our second distribution center in China, a 2 million square foot facility, which will likely elevate our capital expenditures this year and next. We remain confident in our long-term growth strategy and are well positioned to drive profitable growth. We thank you all for your time today and look forward to updating you on our first quarter financial results, which we expect to release on Thursday, April 25.

With that, I will now turn the call over to David for closing remarks.

David Weinberg: Thank you, John. In 2023, Skechers delivered record quarterly and annual sales became a Fortune 500 company and surpassed 5,000 Skechers stores worldwide. We partnered with top-tier talents for collaborations and marketing campaigns that resonated with consumers. Importantly, we are committed to delivering comfort that performs with our footwear expansion to two of the largest sports worldwide, football and basketball and extended our offering of Skechers hands-free slip-ins to a broader audience by integrating this technology into both new and proven styles, all were notable milestones and achievements. We thank our entire supply chain and the Skechers team for delivering another successful quarter. As we enter 2024, we remain confident in the strength of our brand worldwide and the ongoing consumer demand for our exceptional product.

We expect some domestic and international partners will continue to conservatively replenish inventory and that macroeconomic concerns will remain. We are focused on working with our global partners to return to growth within wholesale, enhance our direct-to-consumer business and further grow our international sales. It is our belief that with our many product initiatives and our diverse roster of athletes and ambassadors, we have numerous opportunities to tell the Skechers story and grow our business worldwide. Now I would like to turn the call over to the operator for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Laurent Vasilescu with BNP Paribas. Please proceed with your question.

Laurent Vasilescu : Good afternoon. Thank you very much for taking my question. I would like to ask about the U.S. wholesale business. It was a little bit of a surprise to see down 14%. John, can you maybe talk a little bit more about the growth that you’re seeing for the first half of the year. And I think you’ve also commented a little bit about overseas growth? That would be very helpful.

John Vandemore : Yes. I mean, just to be specific, domestic wholesale is down 10%, not 14%. Listen, the domestic wholesale marketplace has been rocky all year. As David made mention in his prepared remarks, we’re seeing a lot of conservatism still within that customer base. Now what I think is interesting is, as David also mentioned, wholesale retail sales of sell-through at our top tier wholesale accounts was actually up slightly for the year. So what I think you can see in that is exactly what we’ve been talking about. This has been a year of destocking from a period of congestion last year driven by that post-pandemic surge. As we look forward to 2024, we’re actually really optimistic about what we’re seeing, both in terms of shipments thus far now through the first month of the quarter and bookings for the first half, which is about as far out as we’re booked at this point.

So we’re actually pretty optimistic about what we’re seeing. I think it reflects cleansing of that inventory situation that clearly predominated for this year. And I think that, along with what is clearly extraordinary consumer demand for the product as evidenced in our direct-to-consumer numbers will continue to power us through to 2024. And what we very reasonably expect at this point will be a return to growth in the domestic wholesale channel.

Laurent Vasilescu : Very helpful, John. And if I could follow-up, as a second question here, two-parts. China was up very nice, I think 22%, clearly outpacing some other international brands in the marketplace. What are you seeing in that marketplace right now for January? And how do you think about that for 2024? And here’s my second part of my question, John, sorry, but how are you thinking about selling expenses? Is the new resting heart rate like 9% going forward with these new contracts? Thank you very much.

John Vandemore: Yeah. On China, I mean, we were incredibly pleased with what we saw. We talked about in the quarter with double 11, 12.12 with that holiday selling period you really need to allow the whole period to mature, before you have a good sense of what happened. And we’re incredibly pleased with how that market performed overall. Now, I would say, it’s still not back to where we think it will reset eventually. It’s still a market in recovery, but in terms of Q4 performance, which you are right, was up 22%. And by the way, China was up 15% for the full year, which is really good, given where they started. We’re optimistic about what we see. I don’t want to talk a ton about what we’ve seen by market or channel to-date.

But I would say so far, we continue to be encouraged by what we’ve seen in China in the early January reads, definitely outpacing our early expectations, which is good. There’s obviously CNY coming up in a period of time, we need to see unfold. But so far, I would say, China continues to do better than we originally expected and continues to show every marker of recovery that we could hope for. In terms of selling, no, I don’t think we’re setting a new level here. As we mentioned, over the course of this year, we very consciously been over-investing in particular in brand building, especially around our New Technologies everything from Skechers Hands Free Slip-ins technology to Arch Fit technology. And then we did layer on some incremental work in support of these newer categories.

But you got to keep in mind we’re investing ahead of the curve there as you would want to do when you’re opening a new category. So I don’t think that represents a new resting point as much as it represents an investment we’re making to make sure consumers understand and appreciate our comfort technologies and are aware of our new entrants into very, we think, lucrative performance categories like basketball and football. So where we reset ultimately is determined [indiscernible], but in — so far as this year is concerned, I think we’ve pretty consistently told you we were over-investing intentionally. And that’s what you’re seeing in the amount.

David Weinberg: Hello, Laurent, I just wanted to point out as well, as far as domestic wholesale. There’s just some nuances from quarter into the new year. While the whole quarter, we reported — October was the weakest part of the quarter. And I think it led people to believe that they try to take the goods as late as possible and worrying about the season. As we got through November, December, it grew for us and I believe for everybody, it turned out to be a very good holiday season, and December started to pickup shipments for us as well. And if you look at the shipments we’ve had in January, that more than makes up at the difference. If you take the shift, we’ve had a significantly stronger January than we would have originally anticipated across the board by all means as well as domestic wholesale, even though weather was kind of difficult.

So I think people are coming back and picking up and getting ready to move into the new season. So I think if you put the fourth quarter and January together, we really haven’t missed that much and are really getting set for the spring season.

Laurent Vasilescu: Very good, John. Super helpful color. Thank you very much and best of luck.

John Vandemore: Thanks, Laurent

Operator: Thank you. Our next question is from Jay Sole with UBS. Please proceed with your question.

Jay Sole: Great. Thank you so much. My question is just on the guidance, what’s implied in the guidance for this year for EBIT margins? Can you just talk about how the guide for Q1 and then for fiscal 2024 splits between gross margin and SG&A?

John Vandemore: Well, hello, Jay, pretty specific. Look, I think what I would say is we still foresee some favorability in gross margin in Q1. Now that’s going to be incredibly mix dependent, right? If you think about the mix we had last year that heavily tilted toward DTC and in this quarter in particular, where we went above 50% for the first time ever from a direct-to-consumer perspective. We got to be mixed conscious here because we do expect the wholesale business to return to growth. We still think there’s some accretion left in the gross margin. You’ll see that in Q1. That should flow pretty nicely down through. We’re going to continue to invest in marketing. And just from a marketing perspective, Q1 does tend to have some events in it, most notably the Super Bowl that over-indexed a little bit relative to sales.

I would say, look, we continue to aim for that double-digit operating margin. I mean I think we actually, at the end of the day, came in much better than we thought we would this year, much closer. We’re 200 bps away, we’ll continue to chip away at that. As you know, we don’t guide to that level, but it’s certainly a guidepost for us and we’ll continue to work towards getting there. And we certainly continue to – to believe it’s entirely reasonable objective for us to hold.

Jay Sole: Okay. That sounds great. And if I could just try one more. I know this is probably another specific one, but just any color you can give us on revenue growth by segment within the guidance for this year?

John Vandemore: Yes, I would expect — and again, some of this is going to boil down to timing because as David mentioned, we are really seeing a lot of close-in order activity and pull activity. So this could flip. I would say at the moment, our current expectation is you’re probably going to see a slight uptick on the domestic wholesale side. Wholesale overall should be a good healthy amount, probably a high single digits number. Direct-to-consumer, we also continue to expect to do well. Maybe not as well as it’s done this year because it’s a pretty heady rate at 24% on the full year, but we still expect double-digit opportunities to reveal themselves, certainly to the first bit of the year. So we continue to see good trajectory, good recovery. I think if anything where we sit today, we think there’s probably a lot more opportunity than risk in that, but it’s also early. So we’re going to watch things unfold.