Skechers U.S.A., Inc. raised its outlook for the year as broad strength internationally and strength in the U.S. direct-to-consumer (DTC) channel offset a 25 percent decline in wholesale sales in the U.S. due to overall elevated inventories in the marketplace.
In the second quarter ended June 30, Skechers sales expanded 7.7 percent to $2.01 billion, exceeding guidance between $1.85 billion and $1.90 billion. Sales gained 9 percent on a currency basis. Net earnings surged 69.0 percent to $152.8 million, or 98 cents a share, well above guidance in the range of 40 cents to 50 cents.
On a conference call with analysts, David Weinberg, COO, said the outperformance was due to a 29.1 percent gain in the DTC segment, double-digit growth internationally, and successful innovation.
“As the third largest athletic footwear brand in the world, we continue to be the go-to source for footwear for the entire family,” said Weinberg. “By creating fresh techs on proven sellers, expanding our comfort technologies, and offering new looks and collaborations, we continue to serve our engaged and loyal consumer base, expanding our reach to new demographics. Through every collection, we consistently deliver on our design tenets of comfort, style, innovation, and quality at a reasonable price.”
Weinberg added that the gains were boosted by strong demand for Skechers Hands-Free Slip-Ins, Skechers ARC FIT, and Skechers UNO collections as well as the further build-out of walking footwear offerings. Also beneficial were several collaborations, including one with the Rolling Stones featuring their tongue and lips logo, another aligned with the movie, “Joy Ride,” and one launched last week with actress Ashley Park, known for her role as Mindy Chen on the Netflix comedy series, “Emily in Paris.” Weinberg said, “We have plans to launch more exciting collaborations over the remainder of 2023.”
Skechers also believes the brand continues to benefit from its marketing investments with recent campaigns featuring Martha Stewart, singer Doja Cat and rapper Snoop Dog.
Internationally, the signing of regional ambassadors has helped the brand better resonate locally, including European footballers Frank Leboeuf and Jamie Redknapp, and Bollywood actress Kriti Sanon for India. In sports, he cited the benefits of partnerships with a range of elite golfers, runners and pickleball pros. Weinberg said, “Our marketing efforts connect with consumers wherever they are to build brand awareness to educate shoppers on our features and technologies and most importantly, to drive demand for our innovative products.”
However, sales in the Americas were still slightly down in the quarter as the inventory challenges in domestic wholesale were nearly offset by continued DTC strength wholesale improvements outside the U.S. Said Weinberg. “The domestic wholesale decrease was due to inventory-related issues impacting many of our partners. In addition, it is worth noting that we faced a difficult comparison to a particularly strong quarter last year, where we grew 30 percent.”
John Vandemore, CFO of Skechers, added, “As indicated in our guidance last quarter, we expected the inventory congestion at our domestic wholesale partners to impact us most significantly in the second quarter. That expectation materialized, though domestic wholesale sales were actually better than expected due in part to a shift in the timing of orders benefiting the second quarter.”
Overall sales in the Americas for the second quarter decreased 1 percent year over year to $1.03 billion. Excluding U.S. wholesale, Americas grew 24 percent year-over-year, primarily driven by the strength in its DTC business.
In EMEA, sales grew 16 percent year over year to $433.4 million, driven by double-digit growth in most countries with robust demand particularly being seen in its DTC business. Among key countries, sales grew 29 percent in Germany, 13 percent in the U.K., and 35 percent in Spain.
In APAC, sales increased 20 percent year over year to $552.2 million led by double-digit growth in most countries across both wholesale and DTC segments. Stand-out performances were seen in China, up 19 percent; and India, gaining 27 percent.
Vandemore said China continues to recover, driven by double-digit growth across channels, with particular strength in retail stores, both owned and franchised. The CFO said, “We are encouraged by the improved trends we are seeing in China and are cautiously optimistic about the near-term recovery. Longer term, we remain excited about the growth opportunities for our brand in the market.”
Skechers’ international wholesale business increased by 10 percent with growth in almost every market. Regionally on a wholesale basis, APAC grew 14 percent and EMEA grew 7 percent, including robust growth in China, Germany, India, and Spain.
The Americas’ wholesale business decreased 19 percent due to the 25 percent decline in the U.S. Excluding the U.S., America’s wholesale sales grew 10 percent. Overall, the wholesale average selling price per unit increased 8 percent from the pricing adjustments made last year and unit volume decreased 13 percent.
The 29 percent gain in DTC sales was split evenly between domestic and international markets. This includes growth of 28 percent in the Americas, 25 percent in APAC, and 47 percent in EMEA. U.S. DTC sales were up 29 percent. In total, DTC unit volume increased 24 percent and the average selling price increased 4 percent. Vandemore said of the outsized DTC gains, “These results further demonstrate the robust demand for our comfort technology products, complemented by the improved inventory availability in our stores and resident marketing campaigns that stimulated consumer demand.”
Gross margins reached a record 52.7 percent, up 460 basis points compared to the prior year. The improvement was driven by a favorable mix of higher DTC volume, as well as the annualization of pricing adjustments made last year in its wholesale segment.
Operating expenses increased 210 basis points as a percent of sales year over year from 39.8 percent to 41.9 percent due to increased marketing investments, partly to support Skechers’ new Hands-Free Slip-Ins technology. The increased expenses also reflect higher labor, rent and distribution costs to support volume-driven growth within its DTC segment and international markets.
Operating earnings were $217.7 million, a 41.2 percent hike compared to the prior year with operating margins improving to 10.8 percent compared to 8.3 percent in the prior year.
Skechers’ inventory at the close of the quarter was $1.49 billion, a decrease of 18.3 percent from December 31, 2022. Vandemore said inventories “are healthy and well-positioned, both to meet consumer demand and continue the introduction of innovative products in the critical back-to-school and holiday selling periods.”
In the Q&A session, Vandemore said Skechers’ inventories at its top 10 or 20 wholesale accounts in domestic markets are “pretty good.” and “probably a little bit leaner than we want them to be. And so, we think that tees up well for strong sell-through driven reorders.” However, inventories across brands are the problem. He said, “They’re dealing with inventory issues that extended beyond the Skechers brand, and, that, we believe, has been one of the bigger challenges. Although I would just note, it’s not every customer. We have wholesale customers out there who are doing fantastic. And that’s what led to some of the improvement in results relative to our second quarter. So, look, I don’t know how long it will take them to deal with the totality of whatever congestion they’re experiencing. What we do know is that our product is in demand and selling well. There certainly doesn’t appear to be any significant backup to our inventories in those key accounts…And the pricing is good. The factors tee up well for an acceleration of reorders once they’re clear of whatever challenges they’re experiencing.”
For the third quarter of 2023, the guidance calls for sales between $1.95 billion and $2.0 billion and diluted earnings per share between $0.70 and $0.75. That compares with sales of $1.88 billion and EPS of 55 cents a year ago.
For the full year, sales are now projected between $7.95 billion and $8.1 billion and EPS between $3.25 and $3.40. Previously, guidance called for sales between $7.9 billion and $8.1 billion and EPS between $3.00 and $3.20.
