Skechers USA Inc. reported earnings in the first quarter dipped 3.4 percent despite a 9.6 percent revenue gain. Double-digit increases internationally helped offset flat wholesale sales domestically.
First Quarter Highlights
- Record net sales of $1.073 billion, an increase of 9.6 percent
- Diluted earnings per share of 60 cents a share
“First quarter 2017 net sales represent a new quarterly record and the first time we exceeded $1 billion in quarterly sales. We are particularly proud of the growth in the quarter considering the tough comparison to 2016, which included the benefit of an additional day in February and Easter falling in March,” began David Weinberg, chief operating officer and chief financial officer. “The growth was the result of double-digit increases in both our international distributor and subsidiary/joint venture businesses, as well as in our global company-owned Skechers retail business. Further, in our domestic wholesale business, we shipped 4.5 percent more pairs than in the first quarter of 2016 but average price per pair decreased by 4.8 percent primarily due to stronger sales in our lower-priced lines including BOBS from Skechers and our sandal business.”
First Quarter Financial Results
Quarterly net sales increased 9.6 percent to $1.073 billion compared to first quarter 2016. The growth was the result of a 16.8 percent increase in the company’s international wholesale business and a 12.8 percent increase in its company-owned global retail business which included comparable same store sales increases of 2.9 percent. Additionally, the negative currency translation impact on its gross margins in its international wholesale and international company-owned retail businesses for the first quarter was $6.1 million. The company’s domestic wholesale net sales were relatively flat compared to the first quarter of last year.
Gross profit for the first quarter was $476.5 million, or 44.4 percent of net sales, compared to $432.2 million, or 44.2 percent of net sales, for the first quarter of last year.
First quarter selling expenses increased $19.9 million to $73.8 million, or 6.9 percent of sales, compared to $53.9 million, or 5.5 percent of sales, in the first quarter of the prior year. The increase was primarily due to increased international advertising and selling expenses.
General and administrative expenses for the first quarter increased $40.1 million to $282.5 million, or 26.3 percent of sales, compared to $242.3 million, or 24.8 percent of sales, in the prior year. The year-over-year quarterly increase was primarily due to Skechers’ focus on long-term global growth, including $13.2 million associated with the company’s 59 additional domestic and international retail stores, and $18.3 million to support its international growth, of which $9.3 million was due to increased costs in China, $3.4 million for the transition of its South Korean distributor to a joint venture, $1.7 million in support of its new Latin America subsidiary, and $3.4 million in Japan. Domestic wholesale general and administrative expenses in the first quarter increased $8.6 million year-over-year primarily due to increased headcount in the United States to support its brand worldwide.
“Skechers’ international business, including retail, grew to 51.3 percent of our total sales in the first quarter due to the strength of our brand in numerous markets,” added Weinberg. “While we see opportunities in the United States to increase our business, we believe international markets continue to present the strongest opportunity for growth. To meet this growth in our international business, we continue to invest in our infrastructure and marketing to support the current and planned global expansion.”
Earnings from operations were $124.4 million, a decrease of 10.2 percent over the first quarter of 2016.
Net earnings decreased 3.7 percent to $94.0 million, and diluted net earnings per share were $0.60. The company’s quarterly effective tax rate in the first quarter was 14.0 percent compared to 21.8 percent over the first quarter of 2016. The company expects its effective tax rate to be between 14 percent and 19 percent in 2017. In addition, the company’s gross margins were negatively impacted by approximately $6.1 million due to negative foreign currency translations and approximately $900,000 in pre-tax expenses related to foreign currency transaction losses during the first quarter of 2017. The company’s operations in the United Kingdom were significantly impacted by currency headwinds as its wholesale sales were up 6.1 percent for the first quarter in local currency but down 8.2 percent in U.S. dollars.
Robert Greenberg, Skechers chief executive officer, commented: “In 2005, we surpassed $1 billion in annual sales, and now less than 12 years later, we had our first $1 billion plus in quarterly sales. The key to our success then and now is the drive, dedication and talent of the many people behind this great brand. We look very good from a product standpoint—with innovative, comfortable and beautiful footwear and now apparel—and in our marketing as well—with lifestyle campaigns featuring Rob Lowe, Meghan Trainor, Joe Montana, Howie Long, Sugar Ray Leonard, Brooke Burke-Charvet and Kelly Brook. Our success in performance footwear can be seen in our title sponsorship of the Skechers Performance Los Angeles Marathon, in the Pan-European Ironman where we are the footwear sponsor, and in our many pro golfers, including American medalist Matt Kucher, Canadian Brooke Henderson, Scotland’s Russell Knox, Spaniard Belen Mozo, and American Wesley Bryan, who just earned his first PGA Tour victory.”
Greenberg continued: “Our global footprint continues to grow with our ongoing success in Canada, Chile and China as well as in India, Australia and Turkey, and many other markets. This success is in part due to the expansion of Skechers retail stores around the world. At quarter end, there were 2,055 Skechers retail stores, including 1,471 third-party-owned locations, of which 551 are in China alone. We’ve come a long way since our first billion dollar year, and our first retail store in Manhattan Beach, but we plan to accomplish much more in product design, marketing and distribution. In the United States, we are the No. 1 Casual, Work, and Walking brand and the No. 2 All Footwear for Women*, and we believe we can reach these coveted positions in numerous other countries around the world. As we’ve begun showing our Spring 2018 lines to accounts this week, I’m looking forward to delivering our back-to-school product in June and July, and continuing to profitably grow Skechers this year and in the coming years.”
At year end, cash and cash equivalents was $607.8 million, an increase of $164.0 million, or 37.0 percent over March 31, 2016.
Total inventory, including inventory in transit, was $585.8 million, an increase of $84.0 million or 16.7 percent over March 31, 2016, and a decrease of $114.7 million or 16.4 percent over December 31, 2016. The increase over last year is primarily due to international and is in line with the company’s backlogs, and growing retail and international wholesale business.
Working capital was $1.32 billion at March 31, 2017 versus $1.07 billion at March 31, 2016.
Weinberg continued: “We ended the first quarter with low double-digit increases in backlog on a worldwide basis, with all of our business units up a minimum of mid-single digits. Already in April, we’ve achieved high-single digit comps in our company-owned retail stores, which benefited from Easter falling in April, and successfully launched YOU by Skechers in our stores and on Skechers.com.”
Based on these key indicators, the company believes it will achieve net sales in the second quarter in the range of $950 million to $975 million, which would be a second quarter sales record, and earnings per share of $0.42 to $0.47. This projection includes flat to slightly positive sales increases in the company’s domestic wholesale business, and increases in its international business and company-owned retail stores.
The company expects its ongoing capital expenditures for 2017 to be approximately $40 million to $45 million, which includes corporate office upgrades and an additional 50 to 75 company-owned retail store openings and several store remodels, as well as an additional $25 million for infrastructure primarily in its China joint venture.
Photo courtesy Skechers