Skechers USA reported net earnings plunged 77.4 percent to $6.7 million, or 4 cents a share, although sales came in ahead of guidance.

Quarterly And Fiscal Year Highlights

  • Record fourth-quarter net sales of $764.3 million, an increase of 5.8 percent, and record annual net sales of $3.56 billion, an increase of 13.2 percent
  • Earnings from operations of $28.3 million for the fourth quarter and $370.5 million for the year
  • Net earnings of $6.7 million for the fourth quarter and $243.5 million for the year
  • Diluted earnings per share of 4 cents a share for the fourth quarter and $1.57 for the year

“Skechers achieved new fourth quarter and full-year net sales records, exceeding our fourth quarter guidance range of $710 million to $735 million,” began David Weinberg, chief operating officer and chief financial officer. “The strong quarterly growth was primarily the result of a 17.1 percent increase in our international wholesale business, led by China with an increase of 48.5 percent. In addition, our global company-owned retail business grew 13.9 percent on a store base of 571 at year-end. Combined with our third-party owned stores, we had 2,012 Skechers stores worldwide at year-end, creating a global network that includes more than 500 locations in China, more than 60 in each of India, Mexico and Saudi Arabia, and over 50 in each of Australia, Malaysia, South Korea and Taiwan.”

Fourth-Quarter Financial Results
Quarterly net sales increased 5.8 percent to $764.3 million compared to fourth quarter 2015. The growth was the result of a 17.1 percent increase in the company’s international wholesale business and a 13.9 percent increase in its company-owned global retail business, which included comparable same-store sales increases of 3.6 percent. Additionally, the negative currency translation impact on its gross margins in its international wholesale and international company-owned retail businesses for the fourth quarter was $18.4 million. The net sales increases were offset by a decrease of 11.8 percent in the company’s domestic wholesale business, which included a 4.6 percent decrease due to the launch of the Star Wars footwear collection in the fourth quarter of 2015.

Gross profit for the fourth quarter was $356.2 million, or 46.6 percent of net sales, compared to $329.9 million, or 45.6 percent of net sales, for the fourth quarter of last year. Historically, gross margins for its retail segment are the highest, followed by gross margins for international subsidiary sales and then domestic wholesale sales, with gross margins for its international distributor sales being the lowest. The slightly higher gross margin during the quarter was due to a combination of increased international subsidiary revenues and margins, reduced domestic wholesale and international distributor sales and margins, which were offset by lower retail margins.

Fourth-quarter selling expenses increased $1.6 million to $59.5 million, or 7.8 percent of sales, compared to $57.9 million, or 8 percent of sales, in the fourth quarter of the prior year. The increase was primarily due to increased international advertising expenses.

General and administrative expenses for the fourth quarter increased $52.3 million to $273.4 million, or 35.8 percent of sales, compared to $221.1 million, or 30.6 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 $15.3 million associated with the company’s 53 additional domestic and international retail stores, and $27 million to support its international growth, of which $19 million was due to increased costs in China, $2.8 million for the transition of its South Korean distributor to a joint venture, $2.3 million in support of its new Latin America subsidiary and $3.2 million in Japan. Domestic wholesale general and administrative expenses increased $10 million during the fourth quarter, primarily due to increased headcount in the United States to support its brand worldwide.

“We are in our 25th year of business, have a well-established brand and prominent position in the United States, and have grown our international business to 46.1 percent of our 2016 sales,” added Weinberg. “As we plan for our international business to grow to 50 percent of our total sales in the near future, we transitioned several of our international distributors to joint ventures or subsidiaries in key regions in 2016 and the few years prior, and have been investing in the infrastructure and marketing to support the current and planned growth. In the fourth quarter, these investments were primarily in China, Korea Japan and Latin America, which are regions that we believe will represent great growth opportunities.”

Earnings from operations were $28.3 million, a decrease of 48.3 percent over the fourth quarter of 2015.

Net earnings decreased 77.4 percent to $6.7 million, while diluted net earnings per share for the fourth quarter were 4 cents, compared with 19 cents for the fourth quarter in the prior year. The company’s annual effective tax rate for 2016 increased to 20.6 percent from 19.9 percent as of September 30, 2016, which increased its fourth quarter 2016 effective tax rate to 31.5 percent and reduced its earnings per share by 2 cents. In addition, the company’s gross margins were negatively impacted by approximately $18.4 million due to negative foreign currency translations and an additional $4.6 million in pre-tax expenses related to foreign currency transaction losses during the fourth quarter of 2016. Further, the company’s business in the United Kingdom was significantly impacted by currency headwinds as its wholesale sales were flat during the fourth quarter in local currency but down 17.9 percent in U.S. dollars.

2016 Financial Results
Net sales were $3.56 billion, gross profit was $1.63 billion, or 45.9 percent of net sales, and earnings from operations were $370.5 million, or 10.4 percent of net sales. Net earnings were $243.5 million and diluted net earnings per share were $1.57 per share.

Robert Greenberg, Skechers chief executive officer, commented: “With record annual sales of over $3.56 billion, 2016 was another significant growth year for Skechers. We remained the number two sport footwear brand in the United States, and the number one walking brand, work brand, and dress/comfort casual brand*, and received the 2016 Plus Award for Children’s Design from Footwear Plus. We believe we are continuing to increase market share around the globe as we experience the strongest growth coming from our international businesses. Our continued growth and strong market position is due to aggressively revamping our product lines to include more youthful, relevant and innovative styles, while still creating comfort footwear that our broad consumer base finds appealing. We expect that 2017, Skechers’ 25th year of business, will be an even more remarkable in terms of product and sales. Our speed to market and ability to react and deliver as trends arise gives us the flexibility to pivot as necessary. When it comes to design, we are focused on the domestic market as well as our international markets as we provide a product offering that resonates around the world. We are looking forward to delivering our new collections across all our divisions for men, women and kids—included lighted footwear, a new line from our Skechers Performance Division, and a new product line perfect for the Millennials and Post-Millennials—and believe that we will remain a leading global footwear company.”

Balance Sheet
At year end, cash and cash equivalents were $718.5 million, an increase of $210.5 million, or 41.4 percent over last year.

Total inventory, including inventory in transit, was $700.5 million, an $80.3 million increase, or 12.9 percent, over December 31, 2015, in line with the company’s incoming order rate, backlogs and growing retail and wholesale business.

Working capital was $1.2 billion versus $971.2 million at December 31, 2015.

Weinberg continued: “We ended 2016 with positive domestic and international backlogs, and the highest incoming order rate for our domestic wholesale, subsidiary and distributor businesses in our history for both the fourth quarter and full year. Already in 2017, we’ve achieved mid-single-digit comps in January and high single-digit comps for the first week of February in our company-owned retail stores on a worldwide basis. Based on these key indicators, combined with the many new products delivering later this year—including the domestic launch of You by Skechers in the second quarter—we believe the remainder of the year is on a favorable growth track, and we are well positioned for another record year.”

Outlook
Despite an all-time net sales record in the first quarter of 2016 and Easter falling into the second quarter in 2017, the company believes it will achieve flat to slightly positive sales in its domestic wholesale business, and increases in its international business and company-owned retail stores. The company expects net sales in the range of $1.05 billion to $1.075 billion and earnings per share of 50 cents to 55 cents for the first quarter of 2017.

The company expects its ongoing capital expenditures for 2017 to be approximately $50 million to $55 million, which includes corporate office upgrades and an additional 70 to 90 company-owned retail store openings and several store remodels, and an additional $25 million for infrastructure primarily in its China joint venture.

Photo courtesy Skechers