Shares of Skechers USA Inc. rallied on Friday after the footwear giant reported earnings that easily topped Wall Street’s targets due to tight expense and inventory controls as well as targeted pricing actions. Gangbuster international growth continued while domestic wholesale growth recovered.

On an adjusted basis, net earnings jumped 42.3 percent to $47.4 million, or 31 cents a share, beating Wall Street’s consensus target of 23 cents.

Adjusted earnings in the year-ago period excludes a net tax expense of $99.9 million related to U.S. tax reform. The expense led to a reported loss of $66.7 million, or 43 cents, a year ago.

Revenues advanced 11.4 percent to $1.08 billion. Sales increased 17.9 percent internationally and 4.1 percent domestically. On a constant currency basis, sales growth for the quarter was 13.7 percent.

Gross margins increased 90 basis points to 47.7 percent as higher domestic margins from improved retail pricing and product mix offset foreign currency headwinds.

SG&A expenses increased 7.9 percent in the quarter but was reduced as a percent of sales to 40.4 percent from 41.7 percent. Selling expenses decreased 3.2 percent and was reduced as a percent of sales by 90 basis points to 5.7 percent. G&A expenses increased $34.2 million, but was lowered by 40 basis points as a percent of sales to 34.7 percent. The increase in G&A expense was due to investments to support China expansion and an additional 47 stores year over year.

For the year, sales were $4.64 billion, up 11.5 percent. Adjusted earnings improved 7.9 percent to $301.0 million, or $1.92 a share.

Among its three channels, domestic wholesale business resumed growth in the quarter with an increase of 4.8 percent in the quarter, driving a gain of 0.8 percent for the full year.

Domestic wholesale growth in the quarter fell short of guidance of high-single or low-double digits due as the off-price channel didn’t recover as much as expected, weaker than anticipated Kids’ business against difficult comparisons, and traffic challenges by its key wholesale partners.

Domestic wholesale gross margins increased 140 basis points and were flat for the full year.

“For the year, we maintained our position in the United States as the number one walking, work, casual lifestyle and casual dress brand and moved up to one position to be the third-largest footwear brand in the United States according to SportsOneSource,” David Weinberg, COO, said o a conference call with analysts.

“We saw our strength across several categories such as men’s USA and women’s performance, BOBS and work, and in numerous styles such as SKECHERS D’Lites and men’s slip-on.”

Marketing campaigns run over the holiday season included executions for a SKECHERS D’Lites, SKECHERS Sport and Skechers GOwalk Joy for women;  sport and casual slip-on spots, starring Tony Romo, and sport and casual wide-width footwear featuring Howie Long, for men; and

Said Weinberg, “We have begun shipping spring 2019 product and are looking forward to sell-through for spring as well as account relations – or reactions to our new autumn/winter 2019 collection.”

International wholesale business increased 18.4 percent for the quarter as a result of double-digit growth across its subsidiary, joint venture and distributor businesses. China “contributed significantly “ to the growth, gaining 21.5 percent or 27.2 percent on a constant currency basis.

Including both wholesale and retail, international sales increased 17.9 percent for the quarter, and 19.2 percent for the year. International represented over 55 percent of sales in the fourth quarter.

Wholly owned international subsidiary sales grew 14.4 percent and joint venture wholesale business increased 19.5 percent. For the quarter, significant dollar gains came from Germany, Spain, Japan and Peru within subsidiaries, and China, India, Malaysia and Singapore within our joint ventures.

China remains the largest country within Skechers’ international portfolio with an annual sales increase of 29.1 percent and approximately 22.8 million pairs shipped in the full year. At the close of the year, China had 876 SKECHERS freestanding stores and 2,390 points of sale. Online sales jumped 53 percent increase last year. To support China’s growth, Skechers is planning to open a 1.6 million-square-foot distribution center and logistics facility that is expected to become operational in the second quarter of 2020.

International distributor revenues increased 19.7 percent in the quarter, primarily due to strong gains from Indonesia, Russia, Turkey and the Middle East. International distributor sales inched up 0.8 percent, overcoming significant headwinds in the first half of the year.

Weinberg said Skechers continues to view international as “the biggest growth opportunity for the company,” and that’s why India has been transferred from a joint venture to a wholly owned subsidiary. With approximately 220 Skechers stores, of which just over 60 are wholly owned, and a new e-commerce platform, India was one of the brand’s fastest-growing markets in 2018. Said Weinberg, “. We have another 80 to 100 stores planned for 2019, we see great potential to grow our business in this country of 1.3 billion people and believe this will be accretive to our diluted earnings per share in 2019.”

Mexico is seen as “another attractive growth opportunity” with 70 stores currently. Said Weinberg, “We believe this market can support significant additional growth over the coming years. When complete, we believe that this transaction will also be accretive to earnings.”

In Skechers owned global retail business, sales increased 7.5 percent in the quarter due to sales increases of 3.3 percent domestically and 15.9 percent internationally. N a currency-neutral basis, sales jumped 20.4 percent. Worldwide comps inched up 1.1 percent in the quarter with a 3 percent increase internationally and 0.4 percent domestically.

For the full year, sales increased 12 percent due to an increase of 7.7 percent domestically 21.2 percent internationally. Domestically, gross margins climbed 450 basis points in the quarter and 160 basis points for the full year, due to improved pricing and a decrease in promotional activity.

Domestic e-commerce business grew 8.9 percent for the quarter and 11.6 percent for the year. Improved functionality, accessibility and user interfaces will be launched this year and company-owned sites will reach more countries.

Inventory was down 1.1 at the close of the quarter, its first year-over-year decline since 2012. Said John Vandemore, CFO, on the call, “This reflects our diligent management of inventory levels globally, while fulfilling requirements for our growth expectations and expanded retail store base.”

Regarding its outlook, Skechers said it expects first quarter sales will be in the range of $1.275 billion to $1.3 billion and EPS in the range of 70 to 75 cents. The guidance reflects some foreign-exchange headwinds, a shift in some sales from the first to the second quarter, due to the timing of Easter this year, and newer investments in India. The year-ago period also included an unusual benefit of 7 cents a share from the tax reform.

In the Q&A session, Weinberg said Skechers’ moves to add more fashion-forward product to the line is helping attract a younger consumer. He elaborated, “I think on a worldwide basis, we continue to push the brand and deliver styles in the newer looks and continue to trend significantly younger. And it’s now beginning to happen in the U.S. as well. So, we are all positive about our brand offerings, our product offerings and anticipate we will solidify a significantly larger demographic, but we are getting more brand acceptance everywhere in the world.”

Weinberg also said that while the company is only now receiving initial orders getting for the back half of the year, the company is seeing “very good feedback”

Said Weinberg, “We had a very good January, on top of what was a significantly high growth incoming order rate last January, so that makes it look even more solid. So, we are getting good reception and we’re getting good sell-throughs from the current line that’s out there, so I think we all here feel very positive about the transition into Fall, holiday and potentially even increased acceleration as we get there.”

Image courtesy Skechers