Slammed by heavy promotions to clear excess toning models, Skechers USA's earnings tumbled 88.5% in the fourth quarter, to $3.2 million, or 7 cents a share. 

Revenues grew 17.0% to $454.6 million in the period.
On a conference call with analysts, company COO and CFO David Weinberg said demand for Skechers product remains high, including toning, but earnings and margins were negatively impacted by the clearing of toning inventory, sales of lower margin in-line products through all channels of distribution, and lower retail margins relating to promotions. Gross margins were 40.5% of sales in the period, down from 48.7% in the prior-year period.


He added that inventories – at $398.6 million as of Dec. 31 versus $224.1 million a year ago – were above plan given sales volume. Backlog and overall margins are expected to come in below historical norms over the next six months as SKX clears old styles. Of the $174.5 million inventory increase, $65 million supports the growth in the international and retail business with $110 million related to domestic wholesale.
“It is important to note that the majority of our business, which is non-toning, is selling well and at full margin across all product categories and geographies throughout the world,” said Weinberg.

The sales gain in the quarter was the result of high double-digit sales growth in the international wholesale business as well as double-digit growth at owned-retail stores. Domestic wholesale sales increased 4% due to improvements across men's, women's and kids brands, including its women's active, men's and women's sports and USA lines, and kids. Positive growth also came from the fitness division and boots. Domestic and international wholesale backlogs were up 29%. Of that, domestic backlogs were ahead low double-digits.

Domestic pairs sold increased 13.3% in Q4 but average selling prices slid 8.2% as a result of market saturation of lower-priced toning product and Skechers’ own efforts to sell through excess inventory. Also negatively impacting ASPs was Ecko footwear, which showed sales improvement for the quarter largely due to the clearance of older styles.

In the U.S., Weinberg said Skechers’ focus in the quarter was on further building on its strength in the toning, kids and casual markets through marketing investments, including running a Super Bowl ad featuring reality star Kim Kardashian. A Wayne Gretzky toning campaign also launched during Super Bowl weekend. At the same time, Skechers worked through excess toning inventory due in large part to cancellations by several customers of toning product.

“We remain committed to both our retail partners and the toning market, and we are confident when the inventory situation resolves in the next six months we will remain the dominant differentiated brand in the space with the best product at assorted prices and generate strong sales and margins,” said Weinberg.

Skechers’ international wholesale business grew 64% for the quarter, driven by strength in toning and kids. Its international subsidiary and joint venture segments were up 52% while the international distributors business was up 87%. Russia, Spain, Chile, Italy and China saw particularly robust growth.

Worldwide sales for company-owned stores were up 16% for the quarter with domestic improving 12% and international ahead 52%. Combined comps increased 3.5% for the quarter. SKX ended the year with 287 company-owned Skechers stores, and plans to add 30 to 35 more in 2011.