Impacted as expected by a promotional climate and the hangover of numerous store closures in the U.S., Skechers USA reported net earnings plunged 77.4 percent in the fourth quarter.
Earnings reached $6.7 million, or 4 cents a share, falling short of Wall Street’s average target of 10 cents a share.
On the positive side, sales reached $764.3 million, an increase of 5.8 percent and ahead of the company’s guidance calling for revenues in the range of $710 million and $735 million. Comparable-store sales also rose 3.6 percent, while analysts had forecast flat results.
On a conference call with analysts, Skechers’ COO and CFO David Weinberg said the sales growth was primarily the result of a 17.1 percent quarterly increase in its international wholesale business. Its global retail business also increased 13.9 percent for the quarter due to a higher store count and the comp gain.
Those gains were offset by a decrease in its domestic wholesale business of 11.8 percent, which included a 4.6 percent decrease due to the launch of the Star Wars footwear collection in the fourth quarter of 2015.
“The second half of 2016 presented some challenges in the United States with several retailers shuttering doors and an influx of off price footwear that is normally full priced,” noted Weinberg. Besides the closure of Sports Authority, Skechers has also been hurt by closures in the department store channel.
Encouragingly, Skechers ended the year with positive domestic and international backlogs and the highest incoming order rate for fourth quarter and full year in the company history.
“We achieved mid-single-digit comps in January and high-single-digit comps in the first week in February in our global company-owned stores,” said Weinberg. “We remain optimistic about our domestic wholesale business and we believe our international business will continue to grow.”
Discussing the domestic business, Weinberg noted that Skechers remained the number two footwear brand, the number one walking brand, the number one work brand, and the number one dress comfort casual brand in the U.S. Excluding the Star Wars sales in the fourth quarter of 2015, the brand’s kids business was ahead 20.5 percent in the quarter. Growth was also seen in its women’s sport, women’s casual and sandals, and its work businesses.
The company continued to support its franchises with campaigns in the quarter starring Demi Lovato, Brooke Burke-Charvet, Sugar Ray Leonard, Howie Long, Kelly Brook and Meghan Trainor.
Going forward, key launches for 2017 include a new performance lifestyle offering called You by Skechers and a youthful sneaker line called Skecher Street. Said Weinberg, “Based on customer feedback and incoming orders to these new lines and our new walkers and our athletic casual lines for men and women, we believe we have hit on several key trends and our product is on target.”
He added, “As we deliver these new styles, our focus is on maintaining our position on the floor while managing our inventory flow into key wholesale accounts. We remain poised to move quickly as consumers begin to shop for what they want as well as need.”
The 17.1 percent international sales gain was a result of a 34.3 percent jump in its subsidiary and joint venture businesses. The highest gains among subsidiaries came from France, Brazil and Chile. Its joint ventures grew 61.9 percent, led by a 48.5 percent gain in China and high-double-digit gains in Hong Kong, India and Malaysia.
This was offset by 13.6 percent quarterly decrease in its distributor business due in part to the transitioning of its Latin America and Central Eastern European distributors to subsidiaries in 2015 and its Israel and South Korea distributors to joint ventures in the second half of 2016. Strong gains among international distributors were seen in Australia, Indonesia, the Philippines, Taiwan and South Africa.
Skechers international wholesale business comprised 37.9 percent of its total business for the quarter and 39 percent for the year. Adding in its international retail stores, international represented 46.8 percent and 46.1 percent, respectively. International is expected to be 50 percent of its total sales this year and “continues to represent the most significant growth opportunity for the company,” said Weinberg.
The 13.9 percent global gain in retail reflected an increase in domestic retail sales of 8.1 percent and international retail sales of 32.5 percent. This included positive comp store sales of 1.7 percent domestically and 10.3 percent internationally.
Gross margins in the quarter increased to 46.6 percent compared with 45.6 percent. The improvement was due to a combination of increased international subsidiary revenues and margins, reduced domestic wholesale and international distributor sales, which were offset by lower retail margins.
The bottom line was impacted by the slowing sales rate and a decline in operating expenses as a percent of sales to 43.6 from 46.2 percent. Skechers continued to invest in expanding its retail network and investing in its headcount and overall infrastructure to support international growth. Earnings from operations for the quarter decreased 48.3 percent to $28.3 million.
The bottom line in the quarter was also pulled down by $18.4 million in negative currency translations. Skechers business in the U.K. was significantly impacted by currency headwinds as wholesale sales were flat for the fourth quarter in local currencies but down 17.9 percent in U.S. dollars.
For 2016, sales increased 13.2 percent to $3.56 million. Net earnings were up 5 percent to $231.9 million, or $1.57 a share.
For the first quarter, Skechers said it expects earnings in the range of 50 to 55 cents a share. That compares to earnings of 63 cents a share in the same period a year ago and was below Wall Street’s consensus target of 63 cents
Despite an all-time net sales record in the first quarter of 2016, and Easter falling into the second quarter in 2017, Skechers expects achieve flat to slightly positive sales in its domestic wholesale business and increases in its international business and company-owned retail stores during the first quarter of 2017.
“While we were impacted by the sluggish retail environment in the United States, we focused on developing fresh new product for 2017, maintaining strong gross margins and keeping our inventory in line,” said Weinberg. “Our speed-to-market and diverse product offering as well as our vast distribution network has been the cornerstone of our success.”
Photo courtesy Skechers
