By Thomas J. Ryan

Strong double-digit growth from its international business and company-owned retail channel couldn’t offset a myriad of financial and logistical challenges in the second quarter for Skechers USA.

Shares of the sport footwear brand (NYSE:SKX) fell more than 20 percent on June 22, after the company reported earnings that declined and came in short of Wall Street’s targets. Earnings in the period slid 7.1 percent to $74.1 million, or 48 cents a share, missing the consensus estimate of 53 cents.

Revenues rose 9.7 percent to $877.8 million, but also came in below Wall Street’s consensus target of $890.6 million.

On a conference call with analysts, David Weinberg, COO and CFO, said earnings were negatively impacted by several factors including foreign currency translation and exchange losses of $8.3 million, or 5 cents per share. The company also had G&A expenses for additional VAT taxes in Brazil of $2.7 million and a fire in its Malaysia warehouse, which resulted in a pre-tax loss of approximately $0.9 million. These factors reduced EPS by 2 cents. In addition, the company’s annual effective tax rate for the second quarter was 12.7 percent. Skechers’ annual effective tax rate is significantly lower than its previous guidance, primarily due to reduced projected domestic earnings combined with increased projected earnings from its China operations, which has a lower tax rate than its U.S. effective tax rate.

Weinberg also noted that the company faced an ”extremely strong” year-ago quarter comparison.

The top-line growth in the quarter was primarily attributable to a 34.6 percent increase in its international subsidiary and joint venture businesses and a 40.5 percent increase in its international company-owned Skechers retail stores. Company-owned Skechers retail sales increased 15.4 percent for the quarter. As expected, in its domestic wholesale business, shipments were pulled forward from April into March, resulting in significantly reduced shipments in April and a sales decrease of 5.4 percent in the quarter. Domestic sales are also being impacted by a promotional environment.

“Though we remain cautious about the domestic market with political uncertainty and a surplus of promotionally priced footwear, we are confident we will remain top-of-mind and a go-to brand,” Weinberg said.

Gross margins in the quarter improved to 47.4 percent from 46.8 percent primarily as a result of higher sales increases in its international subsidiary and joint venture businesses as well as its company-owned retail stores.

Selling, general and administrative expenses, however, expanded to 36.4 percent of sales from 33.2 percent. The increase was due to greater international advertising expenses to support growth as well as higher store count, rent, labor and increased depreciation expenses and increased warehouse and distribution costs related to higher sales volume.

Elaborating on its segments, Weinberg said the 5.4 percent drop domestically on a wholesale basis reflected a 25 percent drop in the month of April due to orders shifting with sales rising 6.5 percent in June. He noted that the decline also reflected “the challenging and promotional retail environment, which included the closing of some account doors and a surplus of product in the marketplace.”

Categories seeing increases domestically included its Kids division, Women’s Active and Sandals, Men’s Sport, Men’s and Women’s On The GO and Work.

A number of campaigns with Demi Lovato, Brooke Burke-Charvet, Sugar Ray Leonard, Kelly Brook and Meghan Trainor supported its lifestyle offerings. Kids included a spot focused on lightweight sport footwear geared toward tweens. In its performance division, GOgolf, GOrun and its “successful GOWalk division” ran commercials.

At the Olympics in Rio, Meb Keflezighi will compete in the marathon and Matt Kuchar in golf. Overall, more than a dozen Skechers Performance brand ambassadors will participate in the Rio games and the entire Belgian team will wear Skechers in the country’s colors off the field.

For fall, multiple new boys and girls Skechers Kids commercials are running domestically, including spots for the new S-Lights and Skech-Air for Boys. Men’s and women’s commercials will start airing in the coming weeks, including ones starring football legend and sports analyst, Howie Long.

“With a new record shipment month in our North American distribution center in June, which is largely comprised of shipments to the United States, some positive and anecdotal trends and sell-throughs, including that of our leading online account, we believe we are maintaining our position in the domestic marketplace, which is being impacted by both the political environment and an excess of sale price product,” Weinberg said.

Total international sales increased 25.5 percent. The 34.6 percent hike in its wholly-owned subsidiaries business was driven by Brazil, Canada and France. Skechers joint ventures in Asia jumped 65.5 percent for the quarter led by high double-digit gains in China and triple-digit gains in India. Its international distributor net sales increased 3.2 percent in the quarter with strong growth coming in Indonesia, Israel, Philippines, Russia, Scandinavia, Taiwan, Turkey, South Africa and the UAE. The small gain reflects the transition in the first half of 2015 of its Latin America and Central Eastern Europe regions from a distributor model to subsidiaries.

International represented 34.6 percent of wholesale sales in the quarter and 41 percent overall, including retail.

Said Weinberg, “We believe there was a tremendous opportunity to continue to grow the Skechers brand around the world as we build our presence through marketing, retail expansion and gaining shelf space within our wholesale accounts.”

The 15.4 percent jump in revenues from company-owned stores was due to a domestic retail sales increase of 8.8 percent and international gain of 40.5 percent. This included flat comp-store sales domestically and positive comp-store sales of 9 percent in its international stores for a total comp-store sales increase of 1.5 percent worldwide. In the quarter, 143 Skechers stores opened bringing its total store count to 1,548, of which 1,144 are located outside the United States. Skechers expects to have more than 1,600 by year-end 2016.

Weinberg said that with its biggest shipping month on record in June 2016 for its North American distribution center, which primarily serves the United States and Canada and a “strong start” to July, the third quarter is expected to reach “a new record” for the period.

Revenues, however, were projected in the range of $950 million to $975 million for the quarter, which was below Wall Street’s consensus target of $1 billion. Backlogs were also down low-single digits with domestic down in the low to mid-single range. International was also down due to currency issues.

Weinberg said the company “shipped so well in June and people are not ordering out.” Much will depend on the success of the back-to-school season. Last year, Skechers had strong backlogs, but September orders came in short as delivery shifted to October and November. Said Weinberg, “Our backlogs are quite nice for July and August and September, of course, which is an easier comparison for us. But that will depend on how back-to-school goes. So, we still feel that we will be in the low to mid-single-digits growth for domestic wholesale as we get through the back half of the year.”

Lead photo courtesy Skechers