Led by gangbuster gains in international markets and a gritty performance in the challenging U.S. marketplace, Skechers USA reported earnings in the third quarter that handily topped estimates.
Net income jumped 41.8 percent to $92.3 million, or 59 cents a share. When it reported second-quarter earnings on July 20, management had guided earnings for the third quarter to arrive in the range of 42 to 47 cents a share.
Revenues climbed 16.2 percent to $1.1 billion. Sales slightly topped its guidance range of $1.05 billion to $1.08 billion as Europe and parts of South America came in better than expected. The overall gains were led by a 25.7 percent gain in international wholesale revenues and a 25.7 percent increase in company-owned global retail stores.
Domestic wholesale revenues grew only 1.4 percent, but beat Skechers’ internal plan calling for flat sales. David Weinberg, COO and CFO, also noted that for the BTS season, which typically ships during its second and third quarters, domestic wholesale sales increased 4 percent combined versus the same two periods in the prior year. Some shipments expected for the third quarter were pulled forward into the second due to healthy demand. Including its retail business, domestic sales grew 4 or 5 percent in the quarter.
Weinberg also predicted mid-single0digit growth in its domestic wholesale business for the fourth quarter, albeit against easy-year comparisons against a 12 percent decline last year. Low- to mid-single-digit comp growth is also expected in the U.S. for the current quarter.
The U.S. growth was seen bucking the trend given the highly promotional U.S. marketplace and store closings at several department stores and due to various bankruptcies. Nike, for instance, reported a decline of 3 percent in North America in its most recent quarter.
Asked by an analyst in the Q&A session about what’s enabling Skechers to outperform in the U.S. market, Weinberg noted that the company is seeing “broad” strength across its collections, including “great acceptance” of BOBS, its new youth-oriented Street collection and its Sport Active lines as well as good demand across Kids and a pickup across Men’s.
“It’s about the product offering and the breadth of the product and the newness and the demand by consumer and also our decision not to lower prices and margins trying to compete for market share,” said Weinberg. “We’re very happy keeping the market share we have, growing it by low to mid-single digits at the minimum until all that competition goes away for whatever reason, and then maximize our position. So I think we’re in a good place”
The 1.4 percent domestic wholesale gain in the quarter reflected a 2.7 percent increase in pairs shipped and a decrease of 1.3 percent in average price per pair, primarily due to the strength of its Kids business, which has a lower average selling price.
Skechers Kids “did particularly well,” led by the strength of its lighted footwear and lightweight sports styles and helped by a strong back-to-school period, according to Weinberg. Ads featuring Energy Lights and its first Camila Cabello campaign targeted to young women and featuring its youthful Skechers Street collection supported the Kids gains.
Men’s Sport and sport casual footwear “also performed very well” as did BOBS, Women’s Sport footwear and sandals, which benefited from warmer weather. Campaigns featuring Rob Lowe, Brooke Burke-Charvet, Kelly Brooks, Howie Long and Sugar Ray Leonard supported gains in those categories.
In the Performance segment, golf stood out, achieving triple-digit sales growth in the quarter. Among its golf athletes, Brooke Henderson won the New Zealand Women’s Open and Colin Montgomerie took his second title at the SAS Championship. Skechers’ star golf ambassador is Matt Kuchar.
On the run side, Edward Cheserek, a 17-time NCAA champion and the most decorated male runner in the history of the NCAA, signed on as an ambassador. Said Weinberg, “He is the ideal competitor to lead the Skechers athletes as Ed ends his competitive running career later this year.”
He also noted that its running ambassadors represented half of the medals at the Ironman World Championships in Kona last weekend.
Overall, Weinberg said Skechers continues to be the leading walking, work and casual footwear brand in the U.S. and the second largest women’s footwear brand.
“The domestic retail environment remains challenging, but we’re seeing improvements within some of our leading accounts, and we continue to be a trusted resource for their footwear needs,” said Weinberg. “We believe our product is unique and will continue to appeal to those seeking comfort, style and value. Our shipments remain strong, and we are both optimistic and eager to deliver our holiday assortments to our domestic partners.”
The 25.7 percent gain in international wholesale sales showed momentum building versus the 20.2 percent gain in the nine months. The gains were driven by double-digit increases in Canada, Brazil and most of Europe and Asia.
The wholly owned international subsidiary business grew 17 percent. The highest dollar gains came from Germany, Spain, the U.K. and Canada, “indicating the strength of our European business and the positive impact of price increases in the U.K.,” said Weinberg.
Joint venture sales grew 51.1 percent for the quarter, led by double-digit gains in China and India combined with the additional sales from South Korea, which is now Skechers’ second-largest joint venture.
China grew “almost 50 percent” overall in the quarter, and has the revenue opportunity to “ultimately be as large as the United States.” China shipped 4.3 million pairs in the quarter; opened 78 freestanding stores, primarily through franchisees; and had 736 Skechers stores open at the quarter’s end. At the quarter’s end, the company had 2,339 points of sale in China. E-commerce grew double digits in the country.
In India, 18 new third-party Skechers stores opened in the quarter, resulting in more than 100 stores in the country.
International distributor sales increased 5.4 percent, led primarily by Indonesia, Turkey, Scandinavia and Ukraine. Overall, international wholesale comprised 43.4 percent of its total net sales for the quarter and, combined with retail, represented 53 percent.
“Our international business remains the biggest growth opportunity, and we believe it will continue to represent approximately half or more of our total business,” said Weinberg. “With international backlogs approaching mid double digits, we expect double-digit net sales increases for our international wholesale business in the fourth quarter of 2017.”
Global retail sales climbed 18.6 percent as a result of a 9.5 percent increase in its domestic retail stores and a 43.8 percent increase internationally. Comps grew 3.1 percent domestically and 8.4 percent internationally for a combined comp of 4.4 percent in the quarter. The domestic gains came despite the temporary closure of 55 stores in the Texas and Florida regions and the continued closure of nine in Puerto Rico due to hurricanes. Domestic e-commerce sales advanced 8 percent.
Besides the sales gains, the profit upside benefited from an increase in gross margins to 47.5 percent of sales from 45.6 percent a year ago. The margin was better than expected due to sales strength internationally and at retail, which both carry higher margins, as well as some FX benefit.
The improved earnings also came despite investments in its international business. Selling expenses increased to 8.2 percent of sales from 7.2 percent a year ago, primarily due to increased advertising expenses of $17.2 million, including $3.6 million to support its international subsidiary business, and an additional $3.5 million in selling commissions from its joint venture in South Korea.
General and administrative expenses increased to 28.9 percent of sales, compared to 27.8 percent in the prior year’s third quarter, tied to store openings, new hires to support global growth and enhancements in its digital operations.
Inventories were up 33.3 percent at the quarter’s end but Weinberg said the company is “comfortable” with the levels due to increased revenues in its global business, increased store count worldwide, new product introductions and increased backlogs.
With low-double-digit increases in backlogs on a worldwide basis, Skechers expects fourth quarter net sales in the range of $860 million to $885 million and EPS between 9 and 14 cents. In the year-ago fourth quarter, earnings were 4 cents on sales of $754.3 million.
Weinberg also said Skechers expects to see domestic wholesale growth “accelerate” in coming quarter and see gains overall in 2018 despite the contraction in stores due to strong demand. He added, ”Even with some closing doors, somebody else will pick up the slack because this consumer is in search of it.”
Photo courtesy Skechers
