Skechers USA Inc. reported third-quarter earnings that were down slightly and missed Wall Street’s targets, despite record sales. The company also issued weak guidance for the fourth quarter.
“Skechers achieved a new third-quarter sales record for the period, and the second highest sales quarter in our 24-year history,” said David Weinberg, COO and CFO. “This also resulted in a new nine-month sales record of $2.8 billion.” Quarterly net sales rose 10.1 percent to $942.4 million compared to third quarter 2015. Total comp store sales increased 3.2 percent.
Weinberg said the increase was due to 18.3-percent growth in its international wholesale business, which now comprises 40.1 percent of Skechers’ total sales, or 47.9 percent including international retail. However, the negative currency translation impact on the international wholesale and retail sales for the quarter was $15.9 million.
“We believe that our international business represents the greatest growth opportunity with many countries continuing to show strong growth in the quarter, including China at just over 50 percent in net sales,” Weinburg said. “To further grow our business internationally, we have transitioned certain international distributors to our subsidiary or joint venture model, including Israel most recently to a joint venture, and we are in the final stages of South Korea moving to a joint venture as well. We are also pleased with the 16-percent sales growth in our global retail business with 556 company-owned Skechers retail stores, including 150 international locations, at quarter end. Including third-party-owned stores, there are now 1,716 Skechers stores worldwide.”
The company’s domestic wholesale business decreased 3.4 percent, though the number of pairs shipped increased by 0.6 percent compared to third quarter 2015. The decline in net sales dollars was due to a 97 cents or 4-percent decrease in average selling price per pair. Impacting the company’s domestic wholesale business was the sluggish retail environment in the United States, which resulted in several retailers either closing doors or ceasing operations, wide-spread discounting on other normally full-priced brands, as well as a shorter back-to-school period, officials said.
Gross profit for the third quarter was $430 million, or 45.6 percent of net sales, compared to $387 million, or 45.2 percent of net sales, for the third quarter of last year. The slightly higher gross margin during the quarter was primarily due to slightly higher domestic wholesale margins offset by slightly lower global retail margins, as well as the product sales mix.
Third-quarter selling expenses increased $4.1 million to $67.8 million, or 7.2 percent of sales, compared to $63.7 million, or 7.4 percent of sales, in the prior year quarter. The increase was primarily due to increased advertising expenses.
General and administrative expenses were $261.8 million, or 27.8 percent of sales, compared to $230 million, or 26.9 percent of sales, in the prior year. The $31.8 million year-over-year increase was primarily due to Skechers’ focus on long-term global growth, including $16.3 million associated with the company’s 61 additional domestic and international retail stores and $20.2 million to support its international growth, of which $9.8 million was due to increased costs in China, $2.6 million in Latin America, and $1.1 million in Japan with new offices and distribution center. The increased G&A expenses were offset by reduced domestic wholesale expenses of $4.7 million.
Earnings from operations were $103.4 million, an increase of 8.1 percent over the third quarter of 2015.
Net earnings decreased 2.2 percent to $65.1 million, while diluted net earnings per share for the third quarter were 42 cents, compared with 43 cents in the prior year. The company’s diluted earnings per share for the third quarter of 2016 were negatively impacted by foreign currency translation and exchange losses of approximately $8.1 million, or 4 cents per diluted share. Wall Street’s consensus estimate was 48 cents a share.
The company’s effective tax rate increased to 24.2 percent in the quarter, and 19.9 percent for the first nine months. This was compared to a 17.7 percent third quarter effective tax rate and 21.3 percent nine-month effective tax rate in 2015. The company’s quarterly effective tax rate was higher than its previous projected range of 17 to 22 percent, primarily due to differences between the actual and the projected mix of domestic and foreign earnings and (loss) before income taxes.
At quarter end, cash and cash equivalents was $665.3 million, an increase of $154.6 million, or 30.3 percent over the same period last year.
Total inventory, including inventory in transit, was $523.3 million, a $23.1 million increase, or 4.6 percent over September 30, 2015, and a decrease of $96.9 million or 15.6 percent when compared to December 31, 2015.
Working capital was $1.23 billion versus $995 million on September 30, 2015.
Weinberg added: “We believe the domestic market remains challenging and is continuing to adjust to the changing retail landscape with retailers managing inventory with more caution and ordering much closer to season. We believe the decrease in our wholesale business in the United States will continue in the fourth quarter, but are cautiously optimistic about the first quarter. In regard to our international business, the fourth quarter is typically the strongest for our distributors which increased 91.6 percent in 2015 over 2014, while the first quarter is stronger for our international joint ventures and subsidiaries which increased 58 percent in 2016 over 2015. Given the transition of several distributors to either a joint venture or subsidiary model, and the major shifts in the structure and timing in revenues for our international businesses, as well as the significant distributor and international growth across the fourth and first quarters of 2015 and 2016, respectively, it’s best to look at these growth drivers over a two to three year period.”
For the fourth quarter of 2016, the company expects net sales in the range of $710 million and $735 million. This outlook assumes single-digit increases and comps in its international wholesale business and total retail business, respectively, as well as a single-digit decrease in its domestic wholesale business. Wall Street had been forecasting $800 million for the quarter.
The company expects its ongoing capital expenditures for the remainder of 2016 to be approximately $5 million to $10 million, which includes an additional 15 to 20 retail store openings and the completion of its European Distribution Center automation system.
