Skechers USA Inc. reported sales slid 2.7 percent in the first quarter as COVID-19 began impacting its China business in February and spread to much of the rest of its markets in March. Earnings on an adjusted basis were down 45.1 percent due to lower international gross margins and purchase price adjustments related to the company’s acquisition in its Mexico joint venture.

First Quarter Results

  • Sales of $1.24 billion, a 2.7 percent decrease;
  • Constant-currency sales were $1.26 billion, a 1.2 percent decrease;
  • Domestic wholesale sales increased 9.0 percent;
  • International wholly-owned subsidiary sales increased 9.4 percent;
  • Diluted earnings per share were $0.32, a decrease of 54.9 percent;
  • Adjusted earnings per share were $0.39, a decrease of 45.1 percent; and
  • Cash, cash equivalents and investments were $1.37 billion at quarter-end.

“We are in unprecedented times, facing difficult decisions daily as we navigate this global pandemic that has negatively impacted every business throughout our industry and most others,” stated Robert Greenberg, chief executive officer of Skechers. “Our priority is the health and welfare of our global team, and we’re taking swift and decisive actions that will ensure Skechers remains a go-to brand as we also prepare for the reopening of markets around the world. We know from the triple-digit growth we are experiencing so far this month in our e-commerce business and the positive sales trajectory of our recovering business in China, that Skechers’ product continues to resonate with consumers. As our business begins to return to normal, we firmly believe that our retail partners and customers will look to a brand they trust that delivers comfort, innovation, style, and quality at a value.”

“We experienced strong momentum throughout 2019, which continued into the first two months of 2020,” began David Weinberg, chief operating officer of Skechers. “However, due to significantly reduced economic activity in China after January, and the spread of the COVID-19 pandemic around the rest of the world in March, sales decreased 2.7 percent in the first quarter. Until then, Skechers’ business was on track for a new first-quarter sales record. We achieved the highest shipments ever from our North American and European distribution centers in January and February, and our worldwide comparable same-store sales increased 9.8 percent in our company-owned direct-to-consumer business for the first two months of the quarter. We believe that our quarterly performance prior to the disruption is a testament to the strength of our product and brand, all of which leads us to believe that when markets reopen, people return to work and customers get back to shopping, Skechers will continue in its position as a leading footwear brand.”

First Quarter 2020 Financial Results
Sales decreased 2.7 percent as a result of a 6.8 percent decrease in its international business which was partially offset by a 2.9 percent increase in the company’s domestic business. On a constant currency basis, the company’s total sales decreased 1.2 percent. The company’s domestic wholesale business increased 9.0 percent, its company-owned direct-to-consumer business decreased 4.2 percent, and the company’s international wholesale business decreased 8.4 percent. The company’s international wholesale business was adversely impacted by results in China, which was down 47 percent in the quarter and impacted by a significant return reserve to keep franchisee inventory levels clean with seasonally appropriate merchandise. Comparable same-store sales in company-owned direct-to-consumer business decreased 8.1 percent, including a decrease of 4.7 percent in the United States and 16.6 percent internationally, reflecting the closure of the majority of its company-owned stores since mid-March.

Gross margins decreased by approximately 220 basis points as a result of lower international gross margins. There was also a negative impact on gross profit in the quarter related to the acquisition of the company’s interest in the Mexico joint venture in 2019. During the first quarter, the company recorded a one-time, non-cash purchase price adjustment of approximately $8.0 million.

SG&A expenses increased $78.3 million, or 18.2 percent in the quarter. Selling expenses increased by $3.8 million, or 5.5 percent, primarily due to higher digital advertising expenses domestically. General and administrative expenses increased by $74.4 million, or 20.7 percent. The increase included $28.1 million associated with its direct-to-consumer business, due to a net increase of 54 new company-owned Skechers stores, including 16 that opened in the first quarter; $16.2 million related to the inclusion of Mexico operations, including non-cash charges of approximately $7.8 million related to the acquisition of our interest in the joint venture; $7.3 million in China primarily related to the absence of a rebate comparable to the prior year; and $9.0 million related to higher compensation and outside services costs.

Earnings from operations decreased $121.1 million, or 73.0 percent, to $44.8 million.

Net earnings were $49.1 million and diluted earnings per share were $0.32. Adjusted net earnings and adjusted diluted earnings per share were $59.9 million and $0.39, respectively, and reflect the impact of negative foreign currency rates and certain purchase price adjustments related to the company’s acquisition in its Mexico joint venture.

In the first quarter, the company’s effective income tax rate was 15.3 percent.

Balance Sheet
At quarter-end, cash, cash equivalents and investments totaled $1.37 billion, an increase of $335.3 million, or 32.5 percent from December 31, 2019, and an increase of $487.0 million, or 55.4 percent, over March 31, 2019. The increase reflects the drawdown of the company’s senior unsecured facility in March.

Total inventory, including inventory in transit, was $985.7 million, a decrease of $84.2 million from December 31, 2019, but an increase of $244.8 million or 33.0 percent over March 31, 2019. The increase reflects the unexpected cessation of wholesale shipping and retail activity at the end of the quarter.

Working capital was $2.187 billion, a $606.1 million increase over December 31, 2019, and a $624.8 million increase over March 31, 2019. This was due to the company’s drawdown on its senior unsecured credit facility and increased inventory levels globally, partially offset by lower accounts payable balances.

“Despite an extremely strong end to 2019 and equally strong beginning to 2020, we did see a meaningful slowdown in markets impacted by the COVID-19 pandemic,” said John Vandemore, chief financial officer of Skechers. “We have taken decisive action to fortify our business for the duration of this crisis, including drawing down on our senior unsecured credit facility, actively managing operating expenses, inventory levels and production orders, and deferring non-critical capital expenditures. We are confident that the actions we have taken and will continue to take, combined with the global strength of our brand and balance sheet, will position Skechers to successfully navigate this situation, and poise us to return to growth in the future.”

The company is not providing any further financial guidance at this time given the ongoing business disruption and substantial uncertainty surrounding the impact of the COVID-19 pandemic on its business globally.

Photo courtesy Skechers