Skechers USA reported sales and earnings topped guidance in the fourth quarter despite supply chain disruption that restricted inventory flow and softness in China.
Sales in the quarter ended December 31 reached $1.88 billion in the quarter, a year-over-year increase of 13.5 percent. Skechers had projected sales would be in the range of $1.725 billion and $1.775 billion. Wall Street’s consensus estimate had been $1.77 billion.
Net earnings were $75.5 million, or 48 cents a share, against $402.4 million, or $2.56, a year ago, with the year-ago period benefiting from a tax benefit and legal settlements. Adjusted EPS of 48 cents was up 16 percent from 43 cents a year ago. Skechers had guided EPS in the range of 30 to 40 cents a share and Wall Street’s consensus estimate was 38 cents.
“Our fourth quarter growth across all segments of our business and the increases in nearly every market demonstrate the robust demand for our comfort technology products,” said David Weinberg, COO, Skechers, on a conference call with analysts. “The relevance of our footwear collections, the effectiveness of our marketing efforts and our commitment and ability to execute in the face of headwinds.”
He further noted that many of the shipping challenges faced within its own distribution centers have eased.
John Vandemore, CFO, added that it’s not just Skechers facing network congestion. He said, “We’re seeing that those challenges exist downstream as well. And then, unfortunately, that causes a backup into our own distribution centers that we have to deal with.”
Domestic sales in the quarter jumped 22 percent in the quarter while international sales gained 9 percent. International represented 62 percent of revenues for the quarter and 59 percent for the full year.
Americas and EMEA Pace Regional Growth
By region, sales in the Americas for the quarter climbed 22 percent year over year to $925.6 million, driven by double-digit growth across all channels, reflecting healthy consumer demand and improved inventory availability.
EMEA’S sales climbed 29 percent year over year to $413.7 million, driven by double-digit growth across all channels and in most countries, led by Germany and sales to distributors. Vandemore said, “We continue to experience strong brand momentum and consumer demand in EMEA throughout the quarter.”
In APAC, sales slid 7 percent year over year to $539.5 million but grew 31 percent excluding China, driven by double-digit growth in all channels. Particular strength was seen in India, one of Skechers’ fastest-growing markets and in sales to distributors. China’s sales declined 23 percent due to continued COVID-related disruptions, including the closure of over 35 percent of Skechers’ stores at one point.
Wholesale Sales Expands 16 Percent
Wholesale sales increased 16 percent year over year to $1.05 billion, representing 16 percent growth in both its domestic and international markets. The gains reflect broad-based demand for products as evidenced by increases in unit volume of 9 percent and average selling price per unit of 6 percent.
Vandemore said, “During the quarter, our supply chain team continued to work diligently to alleviate the congestion stemming from the unprecedented supply chain disruptions last year. While we continue to experience some processing constraints at our distribution centers from record input volumes, we are pleased with the progress we have made to improve efficiencies, expand capacity and reduce on-hand inventory while also maintaining the pace of shipments to our wholesale customers.”
Americas’ wholesale revenues grew 19 percent attributable to double-digit growth in nearly every market, including a 16 percent increase within its domestic wholesale channel, which saw double-digit growth in men’s and kids’ lines and single-digit growth in women’s. A highlight was the 41 percent growth in men’s domestic wholesale business with increases in most product categories. Weinberg said, “Recently, we have seen strong sales drivers across several men’s key categories, and we believe that performance across the board speaks to the relevance and broad acceptance of our men’s styles.”
EMEA wholesale growth of 31 percent was primarily driven by double-digit improvements in Germany, Spain and Central Eastern Europe, as well as to distributors, including Turkey, the Middle East, Scandinavia and Greece. This was partially offset by the termination of shipments to Russia.
APAC wholesale sales decreased 6 percent, primarily due to the challenges in China. Excluding China, APAC wholesale sales grew 32 percent with growth across most other markets, led by high double-digit growth in India and Indonesia as well as triple-digit growth in Taiwan.
Direct-to-Consumer Sales Advance 11 Percent
Direct-to-consumer sales increased 11 percent year over year to $829.6 million, driven by 30 percent growth domestically from a triple-digit increase in e-commerce and a double-digit increase in retail stores. Direct-to-consumer comparable same-store sales worldwide increased 7.5 percent. Both channels benefited from healthier inventory levels compared to last year’s supply-constrained environment.
By region on a DTC basis, Skechers saw 27 percent growth in the Americas and 19 percent in EMEA, partially offset by a decrease of 7 percent in APAC, dragged down by China. Overall international direct-to-consumer sales were flat year over year due to a decline in China. Excluding China, sales moved up 22 percent, driven by double-digit growth in both stores and online.
Fourth quarter gross margins were 48.4 percent, a decrease of 40 basis points year over year, but an increase of 140 basis points quarter over quarter. The year-over-year decrease was the result of higher product costs and planned strategic promotions in its direct-to-consumer business.
Operating expenses increased 60 basis points as a percent of sales year over year from 43.2 percent to 43.8 percent. Selling expenses were flat as a percentage of sales compared to the prior year as sales leverage offset higher marketing expenses. G&A expenses increased expanded 60 basis points as a percent of sales year-over-year as Skechers incurred approximately $25 million of incremental logistics costs globally to minimize disruption in delivering products to wholesale customers in addition to increased volume-driven distribution expenses.
Vandemore said, “We are making considerable progress on restoring efficiency and accelerating the capacity expansion in our domestic distribution center, where notably, inventory was down 12 percent from the prior quarter. However, we continue to expect to incur some incremental logistics costs over the next several quarters, albeit at a moderating amount.”
Earnings from operations decreased 6.9 percent, to $86.6 million.
For the year, sales jumped 18 percent to 7.44 billion. Net earnings were down 49.7 percent to $373 million, or $2.38 a share, from $741.5 million, or $4.73, a year ago. Adjusted EPS for the year declined 8.1 percent to $2.38 from $2.59 in 2021.
Inventories Ahead 24 Percent
Inventory at year end was $1.82 billion, an increase of 24 percent year over year, primarily reflecting elevatrd levels in the Americas and EMEA regions. Inventories were up only 2 percent versus last quarter. Vandemore said, “We continue to experience supply chain disruptions, but we are pleased with the progress we are making to reduce elevated inventory levels.”
Looking ahead, Skechers expects sales for the current year in the range of $7.75 billion and $8.0 billion and EPS between $2.80 and $3.00.
Vandemore said that while Skechers continues “to see robust consumer demand for our product evidenced in strong comparable store sales trends and sell-through, there are also many recessionary signals in the marketplace.”
The full-year guidance embeds:
- Continued sales momentum in most international markets throughout the year with China improving steadily over the course of the year;
- A domestic wholesale marketplace gradually overcoming elevated inventory levels and supply chain constraints, resulting in declines in the first half before returning to growth in the back half;
- A steady improvement to its distribution operating efficiency as expanded capacity and other remediation efforts bear fruit; and
- Gross margin benefits building throughout the year due to lower logistics costs, particularly in freight, as inventory acquired last year is worked down.
For the first quarter, sales are expected between $1.80 billion and $1.85 billion and EPS in the range of 55 cents to 60 cents. That compares to EPS of 77 cents on sales of $1.82 billion a year ago.
Weinberg said, “While we fully expect to face continuing challenges throughout the year, the recent elimination of zero COVID policy is a positive for a business in China and we believe both consumer confidence and more normal shopping behavior will build throughout the year. In addition, despite the recent inventory challenges impacting our domestic distribution network, we remain confident in the strength of our brand and the demand for our products. Further, we are beginning to see freight and logistic costs normalize, foreign currency rates moving in our favor and our retail stores full of fresh inventory. We had a strong December and January direct-to-consumer sales tracked ahead of last year giving us confidence that we’ll see continued growth in 2023.”
Photo courtesy Skechers