Skechers U.S.A., Inc. (NYSE:SKX) Q2 2023 Earnings Call Transcript

Skechers U.S.A., Inc. (NYSE:SKX) Q2 2023 Earnings Call Transcript July 27, 2023

Skechers U.S.A., Inc. beats earnings expectations. Reported EPS is $0.58, expectations were $0.53.

Operator: Greetings, and welcome to Skechers Second 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 the conference over to Skechers. Thank you. You may begin.

Shannon Butler: Hello, everyone. My name is Shannon Butler 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 fluctuations, Russia’s war with Ukraine 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: Thank you for joining us today on our second quarter 2023 conference call. Our results exceeded expectations with a new sales record of 2.13 billion and gross margin of 52.7%. These results are due to a 29% gain in our direct-to-consumer segment, double digit growth internationally, and our focus on innovation throughout the business. As the third largest athletic footwear brand in the world, we continue to be the go-to source for footwear for the entire family. By creating fresh takes on proven sellers, expanding our comfort technologies, and offering new looks and collaborations, we continue to serve our engaged and loyal consumer base while expanding our reach to new demographics. Through every collection, we consistently deliver on our design tenants of comfort, style, innovation and quality at a reasonable price.

I would like to take a moment to congratulate our global team and acknowledge their dedication and expertise, which enables Skechers to join the Fortune 500, an honor that belongs not only to every employee but every partner and consumer. In addition to our successful and in demand Skechers Hands Free slip-ins, Skechers Arch Fit and Skechers UNO collections, and further building on our walking and performance offerings, we successfully launched several collaborations during the quarter, most notably with the legendary rock band The Rolling Stones. The men’s and women’s collection featuring their iconic logo first hit stores in North America, and at the band’s official store on Carnaby Street in London before rolling out across Europe and other markets.

Just last week, we also launched a limited edition collaboration with Skechers ambassador Ashley Park for a capsule of fashion-forward footwear. This came on the heels of the release of our hit summer movie Joy Ride. We have plans to launch more exciting collaborations over the remainder of 2023. We have a diverse team of notable and relatable talent appearing in Skechers marketing campaigns, including Martha Stewart with our namesake collection, singer Doja Cat and entertainer Snoop Dogg, among others. We have also signed regional ambassadors that resonate locally, including European footballers Frank Leboeuf and Jamie Redknapp, and Bollywood actress Kriti Sanon for India. We also have an elite team of golfers, runners, and pickleball pros training and competing in Skechers performance footwear.

Our marketing efforts connect with consumers wherever they are to build brand awareness to educate shoppers on our features and technologies and most importantly, to drive demand for our innovative products. Throughout the company, we view our accomplishments and activations as an opportunity to elevate the Skechers brand to offer more people the comfort technology products they want and need and to make their Skechers shopping experience seamless. As always, the goal is to grow and operate an even more efficient, sustainable, and impactful manner. Before I discuss the business segments, I would like to note that in the quarter, we completed the acquisition of our long-term Scandinavia distributor. They helped Skechers successfully build our brand in the Nordic region with stores and e-commerce platforms and a network of wholesale customers across Finland, Sweden, Denmark, and Norway.

We welcome the Sports Connection team and look forward to further broadening our reach and growing this important market. Looking at our second quarter results. Skechers achieved record sales of 2.13 billion, an increase of nearly 8% year-over-year and 9% on a constant currency basis. These results were driven by a 29% increase in our global direct-to-consumer segment, which represented 47% of our total sales in the quarter. Regionally, we grew 20% in APAC and 16% in EMEA, including 19% in China, 29% in Germany, 13% in the UK, 35% in Spain, and 27% in India. Sales in the Americas were slightly down. As expected, challenges in domestic wholesale were nearly offset by continued direct-to-consumer strength and wholesale improvements outside the United States.

The domestic wholesale decrease was due to inventory-related issues impacting many of our partners. In addition, it is worth noting that we faced a difficult comparison to a particularly strong quarter last year where we grew 30%. We saw strength in our international wholesale business, increasing 10% as we grew in almost every market. Regionally, APAC grew 14% and EMEA grew 7%, including robust growth in China, Germany, India, and Spain. The Americas wholesale business decreased 19%, primarily due to the previously noted domestic challenges, but grew 10%, excluding the United States. Overall, wholesale average selling price per unit increased 8% from the pricing adjustments made last year and unit volume decreased 13%. Turning to direct-to-consumer.

The strong demand for our comfort technology footwear, improved in-store product availability and effective demand creation led to 29% growth, evenly balanced between domestic and international markets. This includes growth of 28% in the Americas, 25% in APAC, and 47% in EMEA. In total, direct-to-consumer unit volume increased 24% and average selling price increased 4%. In the second quarter, we opened 50 company-owned Skechers stores and closed 39. Store openings included 28 in China, eight of which transferred from franchise to company-owned; eight big box stores in the United States and three each in Chile and Vietnam. Additionally, we added 56 Skechers stores in four Nordic countries and two stores in Germany from the acquisition of our Scandinavian distributor.

We ended the quarter with 4,705 Skechers stores worldwide, of which 3,161 were third party stores, which included the 228 we opened in the second quarter, of which 157 were in China, nine in India, and eight in the Philippines. In the third quarter to-date, we have opened two company-owned stores in the United States and one each in Colombia and Chile. We expect to open between 90 and 100 company-owned stores worldwide over the balance of the year. We continue to increase awareness and emphasize the many features of our comfort technology products, driving purchase intent and ensuring Skechers remains top of mind through targeted marketing initiatives, be it with our engaged ambassadors and athletes in memorable campaigns on networks and streaming platforms, in publications, on social media, and through personalized digital content.

Efficiently meeting consumer demand is essential to our growth. We have made significant investments in our distribution centers, are flowing fresh inventory through our retail stores, and are improving our delivery times and inventory levels, particularly at our North American distribution center. We have already begun shipping out of our new distribution center in Canada and expect to begin shipping out of our new facilities in India and Chile 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 strong financial and operating performance, reflecting the execution of our long-term growth strategy. We saw continued broad-based strength across geographies and sustained momentum in our direct-to-consumer segment, driving record quarterly sales over 2 billion. This represents an 8% increase year-over-year, which, despite anticipated headwinds in our domestic wholesale business, exceeded both our top and bottom line expectations. We believe that these results highlight the strength of our brand and the appeal of our diverse assortment of stylish, comfortable, high quality, and reasonably priced product that continues to resonate with our consumers globally.

Before turning to our second quarter results, let me touch on the previously announced acquisition of our Scandinavia distributor. This transaction closed at the end of May but had no material impact on the quarter, given the timing of the close, our comparable sales to the distributor in the prior year, and the impacts of purchase price accounting. We do expect the transaction to be slightly accretive to earnings this year, and we look forward to working more closely with the Scandinavia team to continue growing the Skechers brand in the Nordic region. Now let’s review our second quarter financial results. Wholesale sales decreased 6% year-over-year to 1.07 billion, due to a 25% decline domestically, partially offset by a 10% increase internationally.

As indicated in our guidance last quarter, we expected the inventory congestion at our domestic wholesale partners to impact us most significantly in the second quarter. That expectation materialized, though domestic wholesale sales were actually better than expected due in part to a shift in the timing of orders benefiting the second quarter. International wholesale sales growth was driven by continued strength across APAC and EMEA with double digit growth in many markets. Direct-to-consumer sales grew 29% year-over-year to 939.5 million, representing nearly 47% of total sales for the quarter. Our performance was driven by an increase of 29% domestically, 30% internationally, and double digit growth across channels in nearly every market. These results further demonstrate the robust demand for our comfort technology products, complemented by the improved inventory availability in our stores and resident marketing campaigns that stimulated consumer demand.

Now turning to our regional sales. In the Americas, sales for the second quarter decreased 1% year-over-year to 1.03 billion, which we believe is a remarkable achievement given the challenges we faced in the domestic wholesale marketplace. Excluding U.S. wholesale, Americas grew 24% year-over-year, primarily driven by the strength in our direct-to-consumer business. In EMEA, we continue to see robust demand for our product with particular strength in our direct-to-consumer business. Sales in the region grew 16% year-over-year to 433.4 million, driven by double digit growth in most countries. In APAC, sales increased 20% year-over-year to 552.2 million, led by double digit growth in most countries across both our wholesale and direct-to-consumer segments.

In China, we continue to see evidence of recovery and sales there increased 19%, driven by double digit growth across channels, with particular strength in our retail stores, both owned and franchised. We are encouraged by the improved trends we are seeing in China and are cautiously optimistic about the near-term recovery. Longer term, we remain excited about the growth opportunities for our brand in the market. Second quarter gross margins reached a record 52.7%, up 460 basis points compared to the prior year. The improvement was driven by a favorable mix of higher direct-to-consumer volume as well as the annualization of pricing adjustments made last year in our wholesale segment. Operating expenses increased 210 basis points as a percentage of sales year-over-year from 39.8% to 41.9% as we leaned into demand creation investments and absorbed volume-related costs across the globe.

Selling expenses increased 40 basis points as a percentage of sales year-over-year to 9.3%, primarily due to higher marketing expenditures, a significant portion of which were focused on driving consumer awareness for our new Skechers Hands Free slip-ins technology. General and administrative expenses increased 170 basis points as a percentage of sales year-over-year to 32.6%. The increased expenses were primarily due to higher labor, rent and distribution costs to support our volume-driven growth within our direct-to-consumer segment and international markets. Earnings from operations were 217.7 million, a 41.2% increase compared to the prior year, and our operating margin for the quarter was 10.8% compared to 8.3% in the prior year. Our effective tax rate for the second quarter was 17.7% compared to 21.3% in the prior year, reflecting the beneficial recognition of several discrete items in the quarter.

Earnings per share were $0.98 per diluted share on 156.6 million diluted shares outstanding, a 69% increase. And now turning to our balance sheet. We ended the quarter with 1.07 billion in cash, cash equivalents, and investments, an increase of 127.3 million or 13.5% from June 30, 2022. Inventory was 1.49 billion, a decrease of 5% or 77.9 million compared to the prior year. However, inventories declined over $300 million or 18% versus December 31, 2022, and are healthy and well positioned both to meet consumer demand and continue the introduction of innovative products in the critical back-to-school and holiday selling periods. Accounts receivable at quarter end were 940.2 million, an increase of 23.4 million compared to the prior year, reflecting higher wholesale sales in the back half of the quarter.

Capital expenditures for the quarter were 76.2 million, of which 29 million was related to the expansion of our distribution infrastructure globally, 20.6 million related to investments in our retail stores and direct-to-consumer technologies, and 11.4 million related to the construction of our new corporate offices. Our capital investments are focused on supporting our strategic priorities, growing our direct-to-consumer business, and expanding our brand presence globally. During the second quarter, we also repurchased approximately 579,000 shares of our Class A common stock at a cost of approximately $30 million. We continue to deploy our capital consistent with our stated philosophy. And now turning to guidance. While we continue to see robust consumer demand and strong brand momentum globally, several uncertainties remain, including ongoing headwinds with some wholesale partners in several markets, ambiguity around the pace and shape of the recovery in China, and disconcerting macroeconomic trends.

Accordingly, our outlook attempts to balance these factors, and we remain cautious about our expectations for the remainder of the year. For the fiscal year, we expect sales to be in the range of 7.95 billion to 8.1 billion and net earnings per diluted share to be in the range of $3.25 to $3.40. For the third quarter, we expect sales in the range of 1.95 billion to 2 billion and net earnings per diluted share in the range of $0.70 to $0.75. Our effective tax rate for the year is still expected to be between 19% and 20%. We expect total capital expenditures for the year to be between 300 million and 350 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 like India, China, and Chile.

We remain confident in growing our sales to 10 billion by 2026 as we continue to execute on our long-term strategy of growing our direct-to-consumer business, both in-store and online, and expanding our brand presence globally, all of which is made possible by our differentiated product portfolio and attractive value proposition that continues to delight consumers around the globe. We thank all of you for your time today, and we look forward to updating you on our third quarter financial results, which we expect to release on Thursday, October 26. With that, I will now turn the call over to David for closing remarks.

David Weinberg: Thank you, John. We are proud to join the Fortune 500, motivated by our record results and excited to build our global momentum. The quarter was exceptional, most especially within our direct-to-consumer business, our strong 52.7% gross margin, the robust demand for our comfort technology products, and the buzz surrounding the brand from Skechers Hands Free slip-ins footwear to our recent Rolling Stones collaboration to the marketing launches with Ashley Park and Skechers UNO. Skechers defines comfort no matter the footwear need. We are the go-to source for all casual lifestyle activities, for elite athletes on the pickleball court or golf course, for those that work in an office or in the occupational footwear industry and for the record number of people once again flying this summer, Skechers is truly for all walks of life.

As always, we are focused on improving efficiencies, scaling our efforts, growing our business with new opportunities and delivering comfort, style, innovation and quality across our entire product line. We are thankful to the entire Skechers organization for another successful quarter, and we’re looking forward to working together toward our planned goal of 10 billion in annual sales by 2026. 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 comes from Jay Sole with UBS. Please go ahead.

Jay Sole: Great. Thank you so much. So I want to ask about direct-to-consumer sales in the quarter, which were up 29%. Maybe tell us a little bit about how much e-commerce grew and maybe the stores? And maybe just help us understand like the differential between the Americas, where it was up 28% and obviously, wholesale were slower. How can the trends be so different? How do you explain that?

John Vandemore: Well, thanks, Jay. That is a key question we have as well. What I can tell you about the direct-to-consumer performance is that it was significantly anchored both internationally and domestically in the stores. We saw better traffic, better conversion, better units. It really is I think a product-driven demand we’re seeing. Consumers are coming into the store. They’re looking for our comfort technology products. E-comm grew in both markets. Just to realize e-commerce is at a different stage of development in each of those markets domestically. Obviously, it’s grown significantly. It was up double digits, but stores were really the anchor there. Internationally, it was up more, but again that’s starting from a slightly smaller base.

Ultimately, I think the benefit the stores have is that as we said in our comments, they have the right inventory. They have the product that is the most new that features our comfort technology product attributes. And that’s what’s driving consumers into the store, particularly when activated with a lot of the demand creation spend we mentioned. And I don’t think that’s the case everywhere else. And I think that’s probably the advantage. Net-net for us, we’re thrilled that consumers are able to find the product they want and need. We’re thrilled to be able to give it to them in whatever channel distribution they prefer. But clearly, we’re seeing robust consumer take for the new product portfolio.

David Weinberg: Jay, I’d like to just point out, if I can, the timing differential of how these things happen. When we point to things like we had a very tough comp to last year as far as domestic wholesale is concerned, we had the same issue last year. We had received a lot of goods from our factories. We had shipped a lot of goods, although it took a longer while to get it into the stores. So what you’re seeing basically, if you were to look at our factories, they would show that their volume to us was down over the last quarter as compared to last year because of all the backup after the pandemic and getting multiple months at a time, and we deinventoried since the end of the year. I think the same is true for some of our customers.

That’s true in Europe and the U.S. and for our distributors. They’ve taken a lot of inventory. They were tougher comps for those that we booked when we sold it to them, not when they sold out. And now that our stores are full, and you see a lot of our customers deinventory while they’re showing increased sales. So if you take a differential in timing, those that took the stuff early, we ended up with a big bang last year because we shipped it out and didn’t have to worry about getting it to store or getting it to consumer. Ourselves now, we are, like John said, the most efficient. We turn it over every week, we deliver to our stores throughout the week, some 2x, 3x, 4x. They are fresh. They are new. And we’re getting it in. I think some of our customers, distributors are also in the same boat.

And as they clean out their inventories, they’ll start to pick up the receipts, which is what we’ll get to a more normal by the end of the year I hope or in the first quarter of next year.

Jay Sole: Got it, okay. Thank you so much.