Skechers had another strong top-line quarter in the face of global headwinds as sales leapt 20.5 percent to $1.88 billion in its third period. Net earnings for the footwear seller totaled $85.9 million, falling short of initial guidance as incremental logistics costs and capacity constraints weighed on margins.
The report didn’t satisfy the Street, with stock falling more than 12 percent in after-hours trading due to the company’s declining net earnings and margins, and light fourth-quarter guidance.
In a Nutshell: For the fourth quarter, Skechers anticipates sales growing 4.5 percent to 7.6 percent sales from last year’s $1.65 billion to a range of $1.725 billion to $1.775 billion. Diluted earnings per share is projected between 30 cents and 40 cents, down from last year’s diluted earnings per share of $2.56.
The macroeconomic challenges faced in the third quarter including foreign currency exchange rates, distribution center congestion and overall supply chain disruption are expected to remain challenges into 2023, according to Skechers chief operating officer (COO) David Weinberg.
Improvements in transit times and port throughput since mid-2022 has resulted in capacity challenges and processing constraints at Skechers’ distribution centers, adding $50 million in incremental logistics costs globally, said chief financial officer John Vandemore in the company earnings call.
“[The costs] will linger as long as those issues linger, though we do expect they will begin to become less prominent, as we move through Q4 in the early part of 2023,” Vandemore said. “The only caution I give is, this is clearly a ramification from Covid’s effect on the supply chain, which has been both extreme and extremely volatile. Some of this is going to be subject to where the supply chain normalizes out and when that happens.”
Weinberg talked about improvements to the business’s overall distribution infrastructure, noting that the expansion of the company’s 2.6 million-square-foot North American distribution center in Rancho Belago, Calif., is in the final process of integration with Skechers’ existing operating system, “which is expected to improve processing volumes and efficiencies over the course of 2023,” he said.
Additionally, the COO said previously announced Vancouver and India distribution centers will begin shipping in the first half of 2023. Phase 2 of the China distribution center’s expansion, which began in the quarter, is expected to be completed in 2024.
Third-quarter inventory increased 44.6 percent to $1.78 billion from last year’s $1.23 billion, with inventory levels primarily reflecting growth in the Americas, and a lesser degree in Europe.
“It’s all arrived within the last couple of months. It is good inventory that we fully expect to be able to sell through at regular prices. We don’t have any real concerns about that,” Vandemore said. “We have seen a material shift out of in-transit into on-hand, but that’s part of the issue we’re talking about here. You saw throughput improve dramatically and you saw transit times improved dramatically, and that just brought a lot of product on shore at a rate that’s far more significant than we’ve historically observed.”
Gross margin was 47.1 percent, a decrease of 280 basis points (2.8 percentage points) from the 49.9 percent gross margin in the 2021 third quarter. The margin hit was primarily the result of increased freight and logistics costs, and a higher proportion of distributor sales, partially offset by average selling price increases. Vandemore said that Skechers expects gross margin to increase sequentially in the fourth quarter.
In the third quarter, the retailer opened 76 company-owned stores, including 46 in China, eight in the U.S., a flagship store in Madrid and its first location in Rotterdam, The Netherlands. Thirty-four stores were closed in the quarter, including 21 in China and two concept stores in the U.S. Skechers also opened 166 third-party distributor, licensee and franchise stores in the quarter, including 129 in China, 12 in India and five in South Korea.
To date, Skechers has opened 14 company-owned stores in the fourth quarter, including one in the U.S. and five in China. For the remainder of the year, it plans to open 35 to 45 more company-owned locations.
Skechers operates for 4,458 stores worldwide.
Cash, cash equivalents and investments totaled $681.5 million, a decrease of $358.9 million, or 34.5 percent from Dec. 31, 2021, primarily as a result of ongoing investments in working capital, particularly inventory, and completing $74.2 million of share repurchases year-to-date.
Capital expenditures for the quarter were $100.1 million, of which $42.1 million were related to the distribution center expansion, $30.8 million related to investments in its retail stores and DTC technologies, and $17.7 million related to the company’s product design center.
Net Sales: Third-quarter sales at Skechers increased 20.5 percent to $1.88 billion, up from $1.56 billion in the year-prior. On a constant-currency basis, sales increased 27.3 percent.
Total domestic sales jumped 14.9 percent to $745.8 million from $649.2 million in the year-ago quarter, while international sales improved 24.6 percent to $1.13 billion from 2021’s $909.3 million.
Wholesale sales growth of 26.2 percent to $1.19 billion was led by increases in EMEA of 58.8 percent and the Americas at 18.1 percent. Wholesale volume increased 25.1 percent and average selling price increased 1.4 percent.
Direct-to-consumer sales growth was 11.9 percent to $686.8 million, with the Americas leading the way at 13.8 percent growth while APAC saw 10 percent. Direct-to-consumer volume increased 11.1 percent and average selling price increased 0.6 percent.
Distributor sales soared 85.7 percent to $171.1 million.
EMEA saw the biggest total jump in sales at 47.6 percent to $469.8 million, while the Americas region increased sales 16.2 percent to $948 million. APAC sales improved 8.6 percent to $460.6 million.
China was the one market that saw sales declines, as expected, tumbling 18.5 percent to $226.7 million from $278.1 million in the year-ago period. At one point during the quarter, more than 10 percent of stores in China were closed due to pandemic-related measures.
Net Earnings: Net income was $85.9 million and diluted earnings per share were 55 cents, a decrease of 16.7 percent over the prior year. Diluted earnings per share include an unfavorable impact of 9 cents due to declines in foreign exchange rates, primarily in EMEA.
Adjusted earnings were $99.4 million, down from $107.2 million last year. Adjusted diluted earnings per share totaled 64 cents, down from last year’s adjusted diluted 68 cents.
Earnings from operations came in at $130 million, down from $146.2 million in the 2021 third quarter.
CEO’s Take: “As we celebrate our 30th year in business with three consecutive quarters of record sales, we are honored to be named ‘Company of the Year’ by Footwear News for the third time,” said Skechers CEO Robert Greenberg, in a statement. “These notable achievements illustrate the ability and dedication of our entire organization to design, deliver and market the most comfortable and innovative footwear available. As we continue to grow towards our goal of $10 billion in annual sales by 2026, we remain as focused and as dedicated as we were from the year we started Skechers.”