Skechers USA Inc. reported earnings sunk 23.9 percent in the second quarter ended June 30, to $45.3 million, or 29 cents a share. Sales rose 10.6 percent to $1.13 billion.

EPS arrived well below, while sales were at the lower end of guidance. On April 19, when it reported first-quarter results, Skechers said it expected earnings to range between 38 to 43 cents a share. Sales were expected in the range of $1.120 billion to $1.145 billion. Skechers had warned that quarterly sales would include an expected shift in shipments from the second quarter to the back half of the year for several key international distributors and domestic accounts.

Second Quarter Highlights

  • Record sales of $1.134 billion, an increase of 10.6 percent
  • Record quarter gross margins of 49.4 percent
  • International wholesale sales increased 24.9 percent; total international wholesale and retail sales combined represented 51.6 percent of total sales
  • Company-owned global retail sales increased 12.8 percent, with a comparable same-store sales increase of 4.5 percent worldwide

“The financial accomplishments in the second quarter are the result of our product and marketing, as well as our ongoing efforts to seek out global opportunities,” began Robert Greenberg, Skechers’ chief executive officer. “With the resurgence of retro looks and Skechers D’Lites, we are the originator of one of the hottest trends in footwear. At the core of this chunky look is comfort, which runs through every one of our divisions—from Relaxed Fit to Skechers Sport to our sandal collections. The excitement over Skechers D’Lites has allowed us to broaden our distribution and marketing to reach savvy millennial consumers. With chart-topping Camila Cabello in Skechers D’lites, we have a global ambassador who resonates with this audience. Add to that the campaigns for our wide demographic appeal and vast footwear offering—including those with ambassadors Tony Romo, Howie Long and David Ortiz—enable us to meet the footwear needs of men, women and children in the United States and around the world. With the right product and marketing, we believe there is significant opportunity to further grow our brand and continue to take market share. We are investing in our international business—both in newer and established markets as we continue to experience strong growth overseas. We’re looking forward to the back-to-school season and the remainder of the year as we deliver more new styles backed by impactful marketing.”

“We achieved another record sales quarter and continued to see significant growth in our subsidiary and joint venture businesses, which resulted in record sales of $2.38 billion over the first six months of the year,” stated David Weinberg, chief operating officer of Skechers. “Our largest international markets—Canada, China, South Korea, Germany, India and the United Kingdom, achieved double-digit sales growth in the second quarter, a testament to our global strategy. Additionally, China shipped approximately 5.6 million pairs in the period, a new quarterly record. As expected, our domestic wholesale had single-digit decreases in the quarter, though much of our business within our core accounts remained solid. Our international distributor business also had single-digit decreases but performed better than originally anticipated. Looking forward, we believe both of our domestic wholesale and international distributor businesses will be positive in the second half of the year. Our focus for the balance of 2018 is to continue to grow our international business while maintaining our strength in the United States.”

Second Quarter 2018 Financial Results

Sales in the quarter grew 10.6 percent as a result of a 24.9 percent increase in the company’s international wholesale business and 12.8 percent increase in its company-owned global retail business. Second quarter comparable same store sales in company-owned stores worldwide increased 4.5 percent, including a 2.2 percent in the United States and an 11.3 percent internationally. The growth in the second quarter was partially offset by a 7.0 percent decrease in the company’s domestic wholesale business and a 6.1 percent decrease in the company’s international distributor business.

Gross margins increased due to strength in the company’s international wholesale and company-owned international retail businesses.

SG&A expenses increased 19.7 percent in the quarter, including an increase in selling expenses of $14.1 million due to higher international advertising. General and administrative expenses increased by $65.6 million as the company continued to build its international brand presence and direct-to-consumer channels. General and administrative expenses in China grew $29.4 million to support continued expansion, including support for the upcoming Single’s Day, and $11.7 million associated with operating 54 additional company-owned Skechers stores worldwide, of which 12 opened in the second quarter. The G&A expenses also included $19.8 million related to corporate and domestic expenses, of which $7.0 million was for increased domestic warehouse and distribution costs and $6.2 million was for legal costs.

Earnings from operations decreased $4.9 million, or 5.7 percent.

Net earnings were $45.3 million and diluted earnings per share were $0.29. In the second quarter; the company’s income tax rate was 18.8 percent reflecting its continued assessment of the impact of the recently enacted tax reform legislation. The company’s net earnings for the second quarter were negatively impacted by adverse foreign exchange impacts of $7.0 million and legal costs of $6.2 million.

Six month 2018 Financial Results

Sales grew 13.6 percent as a result of a 22.9 percent increase in the company’s international wholesale business and a 15.5 percent increase in its company-owned global retail business. For the six-month period, the company’s domestic wholesale business increased 1.0 percent compared to the same prior year period.

Gross margins increased due to strength in the company’s international wholesale and company-owned international retail businesses.

SG&A expenses increased 21.4 percent. This increase was due to an additional $138.5 million in general and administrative expenses. Selling expenses increased by $24.7 million.

Earnings from operations increased $19.4 million, or 9.2 percent.

Net earnings were $162.9 million and diluted earnings per share were $1.04.

Balance Sheet

At quarter-end, cash, cash equivalents and short-term investments totaled $887.7 million, an increase of $151.3 million, or 20.5 percent from December 31, 2017 and an increase of $136.2 million, or 18.1 percent, over June 30, 2017.

Total inventory, including inventory in transit, was $822.4 million, a $50.6 million decrease from December 31, 2017, and a $152.7 million increase over June 30, 2017. The majority of the year-over-year inventory increase was attributable to international wholesale and retail, particularly in China.

Working capital was $1.6 billion at June 30, 2018, a $134.7 million increase over December 31, 2017 and a $282.9 million increase over June 30, 2017.

“In the second quarter, we continued to invest in building the Skechers brand worldwide,” said John Vandemore, chief financial officer of Skechers. “This included an expanded direct-to-consumer presence in retail and online. We also diligently managed our balance sheet, driving cash conversion and matching inventory growth with anticipated sales volumes. At the same time, we continued to allocate capital in line with our stated philosophy, returning cash to shareholders directly through approximately $15.0 million of open market share repurchases.”

Share Repurchase

During the three months ended June 30, 2018, the company repurchased approximately 510,000 shares of its Class A common stock at a cost of $15.0 million under its existing share repurchase program. At June 30, 2018, approximately $132.0 million remained available under the company’s share repurchase program.

Outlook

For the third quarter of 2018, the company believes it will achieve sales in the range of $1.200 billion to $1.225 billion and diluted earnings per share of 50 to 55 cents. In the year-ago quarter, sales were $1.095 Billion and EPS was 59 cents a share.

Skechers said the guidance is based on continued strong performance within the company’s international subsidiaries and joint venture businesses, and the company-owned Skechers retail stores, as well as growth in the company’s international distributor and domestic wholesale businesses in the back half of the year. The company expects that its effective tax rate for the year will be at the top of or slightly higher than the previously announced guidance of 12 to 17 percent.

Photo courtesy Skechers