Skechers USA reported domestic wholesale sales tumbled 18 percent in the first quarter due to elevated inventories across the U.S. marketplace and difficult year-ago comparisons. However, strong growth in U.S. direct-to-consumer (DTC) and across international regions helped overall results handily top guidance.

The improvement led Skechers to lift earnings and sales guidance for the year.

In the quarter ended March 31, sales grew 10.0 percent to $2.00 billion, topping company guidance between $1.80 billion and $1.85 billion and Wall Street’s consensus target of $1.86 billion. On a constant currency basis, sales climbed 13.3 percent.

Net earnings rose 32.3 percent to $160.4 million, or $1.02 a share. EPS easily exceeded company guidance in the range of 55 cents to 60 cents and Wall Street’s consensus estimate of 61 cents.

On an analyst call, Skechers’ COO David Weinberg said Skechers posted $2 billion in quarterly sales for the first time and record first-quarter earnings.

“These results were attributable to the strength of our brand and the demand for our comfort technology products, supported by impactful marketing and distribution capabilities,” said Weinberg. “With a product-first approach to our business, we are focused on staying true to our design principles; style, comfort, innovation, and quality, all at a reasonable price to ensure consumers worldwide have the footwear they need to enjoy their lives comfortably. Whether in the office, gym, school, or home, whether walking, running, golfing, or playing pickleball, we have something for everyone.”:

He also said Skechers benefited from advertising investments that included its Super Bowl ad with Snoop Dogg, Martha Stewart, Tony Romo and Howie Long; national television commercials for Skechers Slip-ins with Amanda Klootz and Brooke Burke, as well as targeted digital and out-of-home advertising for Skechers Uno with Ashley Park. Weinberg added, “We also further improved operations at our distribution facilities, ensuring a more efficient and continuous flow of inventory through our direct-to-consumer channels as well as timely shipments to our wholesale partners.”

The sales gains were led by an increase of 24.5 percent in direct-to-consumer (DTC) as well as 3.5 percent growth in wholesale.

International sales increased 21.1 percent, representing 63 percent of our total sales for the quarter.

Domestic sales were down 4.8 percent due to the decline in domestic wholesale business of 18 percent, related to inventory congestion issues impacting many wholesale retail partners.

Weinberg said Skechers’ wholesale business also faced “very difficult comparisons” against a particularly strong quarter last year due to the alleviation of the West Coast port congestion. When compared to the first quarter of 2021, domestic wholesale sales would have been up 17 percent.

Wholesale Sales Expand 3.5 Percent
Wholesale represented 65 percent of total sales for the quarter. The 3.5 percent year-over-year sales increase was driven by 20 percent growth in its international wholesale business where nearly every market achieved double-digit growth. Overall,  wholesale average selling price per unit increased 5 percent and unit volume decreased 2 percent.

EMEA wholesale grew 20 percent, driven by double-digit increases in most markets, including Spain, Italy and Germany. APAC wholesale increased 24 percent led by strong double-digit growth in India and single-digit growth in China. Sales to distributors also improved in the region, driven by growth in Australia, New Zealand, Indonesia, and Taiwan.

America’s wholesale business decreased 13 percent. Excluding the U.S., sales grew 10 percent.

DTC Sales Jump 24.5 Percent
The 24.5 percent DTC gain was attributed to marketing efforts, increased traffic and conversion, and an improved ability to replenish inventory in its company-owned stores. The increase was the result of 29 percent growth in the Americas, 18 percent in APAC and 30 percent in EMEA.

In total, DTC unit volume increased 27 percent and the average selling price decreased 2 percent. Domestic DTC sales increased 25 percent due to double-digit growth in both brick-and-mortar and e-commerce channels. International DTC sales grew 24 percent due to double-digit increases in nearly every market and even triple-digit in some. In China, DTC grew as COVID restrictions were lifted. The highest gains internationally came from Hong Kong, South Korea, Chile, Thailand, and Canada.

Skechers opened 56 company-owned Skechers stores and closed 25 in the first quarter and also added 108 third-party stores, ending with 4,549 stores worldwide. Between 125 to 140 stores worldwide are expected to open over the balance of the year.

Regional Performance Led By EMEA And APAC
By region, Americas’ sales for the quarter were essentially flat year-over-year at $945.9 million as the domestic wholesale decline was offset by double-digit growth across most markets, particularly in Chile and Mexico. Excluding domestic wholesale, the Americas grew 23 percent year-over-year.

In EMEA, the momentum from the fourth quarter continued, as sales increased 21 percent year-over-year to $534.5 million, driven by double-digit growth across both segments in most countries, led by Spain, Italy, and Germany.

In APAC, sales increased 21 percent year-over-year to $521.5 million, also driven by double-digit growth in both segments in most countries, led by India and Korea, and triple-digit growth in several markets, including Thailand and the Philippines. China returned to growth, increasing 3 percent and driven by strength in physical retail stores. John Vandemore, CFO, said on the call, “While the Chinese market has been volatile over the last few years, we are cautiously optimistic about the near-term recovery that appears to be materializing and remain confident in our long-term growth opportunity in the market.”

Gross Margins Improve 360 Basis Points
Gross margins increased 360 basis points to 48.9 percent as pricing adjustments made last year in its wholesale segment annualized. The gains also reflect a greater mix of DTC sales.

Operating expenses increased 16.5 percent due to higher marketing, labor, warehouse and distribution expenses, as well as increased facility costs, including rent and depreciation. As a percent of sales, operating expenses increased 210 basis points to 37.7 percent.

Continuing congestion-related inefficiencies totaled approximately $20 million of incremental costs globally. Vandemore said, “We have made tremendous progress on improving efficiency at our domestic distribution center since the second half of last year, and we continue to expect incremental logistics costs to decline in magnitude.”

Inventory was $1.5 billion, an increase of 4 percent compared to the prior year and a decrease of 17 percent versus the prior quarter. Domestic inventory declined nearly 24 percent from the fourth quarter.

Outlook
For the second quarter of 2023, the company believes it will achieve sales between $1.85 billion and $1.90 billion and EPS in the range of 40 cents to 50 cents. Further, the company believes that for the fiscal year 2023, it will achieve sales between $7.9 billion and $8.1 billion ($7.75 billion and $8.0 billion under previous guidance) and diluted earnings per share of between $3.00 and $3.20 (between $2.80 and $3.00 under previous guidance).

Asked in the Q&A session about second-quarter guidance, Vandemore said domestic wholesale headwinds will continue and be “a little bit more austere” versus the second quarter due to the timing of bookings, but improvement in domestic wholesale is still expected in the back half. Otherwise, he said demand for Skechers remains healthy.

“We’re actually incredibly encouraged by what we’re seeing in the shape of Q2. But the domestic wholesale is the headwind we’re facing. We’re also watching the macroeconomic environment, and what that means from a direct-to-consumer side of things. But obviously, since you’re seeing these quarterly results, the direct-to-consumer side, the consumer demand for the product remains incredibly robust.”

Photos courtesy Skechers