Shares of Skechers USA rose $3.60, or 13.8 percent, to $29.72 Friday after the company reported earnings topped guidance in the third quarter, thanks to tigher cost controls. A healthy bounce-back was also predicted for the fourth quarter, led by a return to growth in the company’s domestic-wholesale segment with the help of robust demand for the brand’s D’Lites chunky style.
“The resurgence of the chunky shoe trend around the world is resulting in new interest from fashion-minded consumers and pacemakers as Skechers D’Lites gain broad acceptance as the originator of the trend,” said David Weinberg, COO, on a conference call with analysts. “This has allowed us to partner with accounts that cater to this market as well as appear in the editorial sections of fashion and sneaker publication and on the catwalk at seven designer shows during New York Fashion Week last month.”
Weinberg added that Skechers had expanded the company’s collaboration with the best-selling anime series One Piece and Skechers D’Lites to North America as well as in Europe to support the trend.
In a statement, Robert Greenberg, Skechers’ CEO, likewise added that Skechers D’Lites has seen “great success” over the last two years in Asia, is now an in-demand style across North America and Europe and poised for growth in South America, India and the Middle East. Added Greenberg, “Through Skechers D’Lites, we are reaching a younger, more fashion-savvy audience and getting press—from Marie Claire and Elle to HypeBae and Highsnobiety—and social media influencers are embracing this signature look. Further, we are seeing renewed acceptance of this chunky style by men.”
Greenberg also noted that Skechers’ core footwear categories for men, women, work and golf “are also performing well,” and the company expects to see growth across both domestic and international channels in the fourth quarter.
For the fourth quarter, Skechers said the company expects earnings in the range of 20 cents to 25 cents a share. That compares to Wall Street’s average target of 18 cents and year-ago earnings of 21 cents.
Sales for the fourth quarter are expected to range between $1.1 billion to $1.13 billion, up about 13 percent from $970.6 million a year ago. Wall Street’s consensus target had been $1.08 billion.
In the quarter ended September 30, net earnings eased 1.7 percent to $90.7 million, or 58 cents a share, but came above guidance calling for earnings in the range of 50 to 55 cents. Wall Street had expected 51 cents.
Skechers’ shares had fallen 21 percent after the company reported second-quarter earnings in July that came in well short of guidance and provided a soft outlook for the third quarter
Revenues in the third quarter reached $1.176 billion, an increase of 7.5 percent, or 8.5 percent on a constant currency basis. That’s below company guidance of in the range of $1.2 billion to $1.23 billion.
The gains in the quarter reflected double-digit growth in both the company’s international wholesale and worldwide company-owned retail businesses.
Domestic Wholesale Sales Decline 3 Percent In Q3
By segment, domestic wholesale business in the third quarter decreased 3 percent and is now running flat for the first nine months. In the quarter, a 1.5 percent increase in pairs shipped was offset by a decline in average price per pair of 4.4 percent, or $1.03, partially due to the strength of several lower priced collections. However, domestic wholesale margins increased 110 basis points in the quarter.
“Our business within our core accounts remained solid during the quarter as we maintained our position as a leading brand for men and women in numerous categories,” said Weinberg on the call. ”Our product strength in the United States came across multiple divisions, including walk, sandals and BOBS for women as well as casuals, work and golf for men and women.”
Marketing campaigns were executed domestically for women for D’Lites with Camila Cabello as well as others supporting D’Lites Fashion and GOwalk Joy. For men, campaigns included sports and casual slip-on spots starring Tony Romo, Relaxed Fit with David Ortiz and Wide Fit footwear featuring Howie Long. Campaigns for lighted and lightweight sports footwear as well as Twinkle Toes supported kids.
“Our golf business continues to grow,” added Weinberg. Brand ambassador Brooke Henderson won her 7th LPGA Championship in her home country of Canada, and Scottish golfer Russell Knox won the Irish Open. Both wore GOgolf.
Through BOBS, Skechers has donated more than 15 million pairs of shoes to children in need since the give-back brand’s launch in 2011, including 15,000 pairs to Puerto Rico in the third quarter for continued Hurricane Maria aid. BOBS for Dogs has further helped 583,000 shelter pets through donations of more than $3 million over three years.
“We believe our product and marketing are both on point,” said Weinberg of the domestic wholesale segment. “As we begin account meetings this week, we are looking forward to presenting our 2019 collection and are pleased with the initial reaction. Further, we believe our wholesale business remains strong, and we will achieve high single to low double-digit growth for the fourth quarter.”
China Boosts International Growth
Skechers international wholesale business increased 11.8 percent in the third quarter led by double-digit growth in distributor and joint venture businesses with China contributing significantly with gains of 21.9 percent. Approximately 5.6 million pairs shipped in China in the quarter, reaching a retail base of 793 Skechers freestanding stores and 2,340 other points of sale.
The wholly-owned international subsidiary business grew 1.4 percent while facing a tough comparisons against increases of 31.4 percent in the third quarter of 2017. Joint venture sales grew 22.9 percent with growth across each region. For the quarter, the highest dollar gains came from Italy, Spain and Colombia within subsidiaries and China and India within joint ventures.
The international distributor business returned to double-digit growth in the quarter after experiencing some challenges in key markets. The growth primarily came from Russia, Indonesia and the Middle East as well as Australia, New Zealand and the Philippines.
International wholesale continues to expand as Skechers’ largest distribution channel, making up 45.2 percent of sales in the third quarter. Combining wholesale and retail, international represented 55.5 percent of sales for the quarter. At quarter end, there were 2,121 Skechers branded stores owned and operated by international distribution partners, joint ventures and a network of franchisees.
In the company’s retail segment, worldwide comps increased 1.9 percent in the quarter as a 3 percent domestic increase offset a decrease of 0.8 percent in international stores. However, on a comp basis domestic pairs increased 1.7 percent and international pairs increased 1.8 percent. Domestic e-commerce sales grew 15 percent for the quarter. At the quarter’s end, Skechers had 681 company-owned Skechers retail stores, of which 216 were outside the U.S.
Gross margins in the quarter increased 40 basis points to 47.9 percent as higher domestic margins from improved retail pricing and product mix were partially offset by the impact of negative foreign currency exchange rates.
SG&A expenses increased 9.5 percent in the quarter to support expanding the company’s international presence and direct-to-consumer channels. Selling expenses increased 0.7 percent but were reduced 50 basis points as a percentage of sales to 7.7 percent for the quarter.
G&A expenses as a percent of sales increased 120 basis points to 30.1 percent. G&A expenses in China grew $7.5 million to support continued expansion including preparation for next month’s Single’s Day and $13.3 million associated with operating 58 additional company-owned Skechers stores worldwide, of which 13 opened in the third quarter. G&A expenses also included $11.1 million related to corporate and domestic operations, of which $4.8 million was for increased domestic warehouse and distribution costs.
Order Timing Expected to Drive Q4 Domestic Growth
In the Q&A session, Weinberg said SG&A came in lower-than-expected to help bolster earnings because sales came in a “little lower” than expected. The lighter sales, he said, “gave us the chance to catch up on some of our infrastructure and automation and to benefit in the G&A line.”
Weinberg also the improving trend in domestic wholesale partly reflects shift the timing of orders at a “very good customer” that he did not name. He mentioned that Skechers had always been predicting growth for the back half of the year in part due to the timing impact. He added, “We got big orders from them, big promotions in the first part of the year, last year that will move to the back half this year. So that’s the differential, and we knew we would be up significantly when we take all the timing changes into effect.”
Weinberg also Skechers has seen some increases in order requests from the off-price channel but it overall “has been the drag.” Skechers during the company’s last conference call had said an abnormal number of closeouts in the marketplace was hurting the company’s non-core business that features lower-priced styles. Weinberg said Friday said Skechers is increasing the company’s online growth through the company’s own website and third-party sites and the overall “core business is healthy and continues to grow.”
Photo courtesy Skechers