Skechers On Path To Recovery, Led By China

By Thomas J. Ryan

<span style="color: #a1a1a1;">Skechers Inc. reported a significant loss in the second quarter as store closures due to COVID-19 fed a sharp sales decline. However, both the loss and sales levels were better than analysts expected. Skechers officials also noted that China has returned to growth, and domestic comps were only down single digits in June.

In the quarter ended June 30, the loss came to $68.1 million, or 44 cents per share, against earnings of $75.2 million, or 49 cents, a year ago.

Excluding a one-time, non-cash purchase price adjustment related to the acquisition of the company’s interest in the Mexico joint venture, the loss would have been 48 cents a share. Wall Street’s consensus estimate had been 67 cents.

Revenues were down 42.0 percent to $729.5 million, comfortably above Wall Street’s consensus target of $653 million.

Gross margins increased 210 basis points to 50.5 percent due to a favorable mix of online and international sales.

SG&A expenses decreased 14.5 percent, although they still expanded as a percent of sales to 59.2 percent from 40.1 percent a year ago due to sales deleverage.

Selling expenses were reduced $53.3 million, or 46.9 percent, primarily due to lower advertising and marketing expenses globally. General and administrative expenses decreased $19.7 million, or 5.0 percent, despite the inclusion of an incremental $10.2 million in bad debt expense due predominately to the impact of COVID-19 on wholesale customers across the globe. The decrease primarily reflects reduced compensation-related expenses from the temporary store closures and the furlough of select corporate staff.

The operating loss came to $61.0 million against earnings of $111.1 million.

China Returns To Growth
Skechers’ COO David Weinberg said on a conference call with analysts, “With the closure of most markets, it should be clear that the pandemic significantly impacted our business during the second quarter. However, China led the path to recovery, by stabilizing and then moving to growth by the end of the quarter.”

The overall 42.0 percent sales drop reflects a 37.8 percent decrease in its international businesses and a 47.3 percent slump in its domestic businesses. Weinberg added, “Despite the decreases, we believe the sales we achieved during the quarter are due to the strength of our product and the determination of our teams to drive sales where possible.”

The primary drivers in the quarter were Asia, led by China with an 11.5 percent growth and company-owned e-commerce climbing more than 400 percent. Nearly all stores were open in China during the quarter. Weinberg also said Skechers experienced pent-up demand for product and saw its brand resonate with a broader and younger audience in its e-commerce channels in North America, Chile and Europe.

The overall international wholesale business decreased 29.9 percent, with some other countries showing signs of recovery.

“China offered a model of recovery, stabilization and then growth in the quarter,” said Weinberg. “Every country’s progress has been at a different pace. But we began to see similar recoveries and stabilization trends in other markets. These include Australia, France, Germany, Indonesia, Spain, South Korea, Taiwan. Each market has reopened at different times and under distinctive guidelines, but we see positive signs within each of these regions.”

More than 90 percent of the third-party Skechers  stores around the world have reopened, and feedback from global partners has been that Skechers “remains a go-to footwear brand in the markets as consumers seek casual, comfort and value during this challenging time.”

Domestic wholesale sales fell 57.2 percent reflecting the majority of retail store closures during much of the quarter. Many wholesale partner stores have reopened and “demand remains high, and we are shipping at an active rate. We believe, based on early indicators from our partners and consumer sentiment, that Skechers will remain a key resource for these leading accounts.”

Domestic Comps Down Single-Digits In June
Skechers’ direct-to-consumer (DTC) business decreased 47.1 percent as stores being closed for most the quarter wasn’t offset by a 428.2 percent increase in e-commerce business. Same-store sales in its DTC business decreased 45.6 percent, including a decrease of 35.9 percent in the U.S. and 66.9 percent internationally. DTC comps improved month-over-month with total comp store sales down low double digits and domestic comps down single digits in June.

As of Thursday, more than 90 percent of its global company-owned stores have reopened. Said Weinberg, “Traffic and sales have been strongest within our big box and outlet locations as well as our non-tourist stores. Our company-owned stores that remain closed are primarily in South America.”

E-commerce grew by triple digits in each of its platforms in North America, South America and Europe. An upgraded online shopping platform launched in the U.S. this week with a plan to roll out to multiple countries later this year. At retail, a new POS system is being rolled out in addition to BOPIS and BOPAC capabilities.

Weinberg believes Skechers is benefiting as consumers are gravitating toward comfortable and casual footwear amid the pandemic. He added, “Our natural product development cycles helped us navigate these unique times as we are more flexible, can easily pivot design and production and offer a flow of fresh product to meet the needs of the buy now, wear now consumer.”

Total inventory was $1.03 billion, a decrease of 3.9 percent from December 31, but an increase of 20.1 percent year-over-year. The year-over-year increase is attributable to Asia where sales have largely recovered from the most serious effects of the pandemic.

Total debt, including both current and long-term, was $763.3 million compared to $121.2 million at December 31. The increase primarily reflects the drawdown of its senior unsecured credit facility in the first quarter.

John Vandemore, CFO, said that as the business continues to recover, investments will restart, including the rollout of a new global POS system and significant additional capacity at its U.S. distribution center. However, Skechers plans to “continue tightly regulating our new store opening plans given the uncertainty in the marketplace”. Skechers also continued to not provide guidance due to the uncertainty.

Weinberg cited several integral factors that are proving beneficial to Skechers managing in this climate, including its comfortable casual product at a reasonable price, the diversity of distribution channels and broad customer demographics, relationships with factories and wholesale partners, and strong balance sheet.

“We believe the pandemic will not only continue to be a concern, but it’s also changing the retail and competitive landscape,” said Weinberg. “We believe that Skechers is well-positioned to accelerate out of the global health crisis when it stabilizes and that we will remain a global footwear leader.”

Photo courtesy Skechers