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Skechers Reports $1.8 Billion Quarter, Ramps Up Global Distribution

Skechers earned $1.82 billion in net sales to kick off 2022, a year-over-year increase of 26.8 percent from last year’s $1.43 billion. As net income came in at $121.2 million and consumers continue to spend even amid continued price increases, the footwear manufacturer and seller set the tone for a strong 2022.

In a Nutshell: David Weinberg, chief operating officer at Skechers, reiterated in an earnings call Wednesday that the successful first quarter will enable the footwear company to deliver record sales in 2022, and advance its goal of $10 billion in annual sales by 2026.

Skechers raised its guidance for fiscal year 2022, now forecasting sales at $7.2 billion and $7.4 billion on diluted earnings per share between $2.75 and $2.95. This is an increase over the $7 billion to $7.2 billion in sales initially expected, alongside diluted earnings per share of $2.70 to $2.90.

The projected sales increase for 2022 would range between 14.5 percent and 17.7 percent growth from the 2021 first quarter. Cowen has a wider projection for Skechers, marking a downside scenario of 3 percent full-year sales growth and an upside scenario of 18 percent growth. The equity research firm expects a broader earnings range as well, between $1.71 and $3.55 per share.

For the second quarter of 2022, Skechers now projects sales of $1.75 billion to $1.80 billion and diluted earnings per share between 50 cents and 55 cents.

Total inventory as of March 31 was $1.45 billion, an increase of 35.8 percent from the 2021 first quarter. This includes nearly $370 million of in-transit inventory, or approximately 26 percent of merchandise in total for a year-over-year increase of more than 50 percent.

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On a quarter-over-quarter basis, inventory slightly decreased 1.5 percent from $1.47 billion, reflecting lower merchandise in transit levels the supply chain started opening up.

Despite the strong quarter, Skechers’ gross margin took a hit. The 45.3 percent gross margin was a decrease of 250 basis points (2.5 percentage points) from last year’s 47.8 percent, driven by higher per-unit freight costs partially offset by average selling price increases.

But the DTC channel showed continued strength, with gross margin growing 60 basis points (0.6 percentage points) to 65 percent. Wholesale margins declined 280 basis points (2.8 percentage points) to 36.4 percent.

For 2022, Skechers anticipates that gross margins will be down compared to last year, both in the second quarter and for the full year, as freight costs will still weigh down improved pricing. However, the company expects gross margins to improve this year as its previously introduced wholesale pricing adjustments take effect.

While average wholesale selling prices increased 8.6 percent, average DTC selling prices increased 15.1 percent, resulting from lower promotions and the price hikes.

“Keep in mind when we were adjusting prices, with the order book, as it stands, you’re anticipating months in advance,” John Vandemore, chief financial officer at Skechers, told Wall Street analysts. “I don’t think anybody would have thought, middle of last summer, when you’re contemplating price adjustments, that freight would have stayed as high as it has. We’re just suffering the consequences of that freight staying higher much longer than anybody anticipated.”

Vandemore said the timing of the price hikes isn’t as challenging for the direct-to-consumer business’ ability to quickly adjust. He indicated the brand is already seeing benefits from the DTC adjustments.

“We don’t have the same challenge on timing in the direct-to-consumer side of the business there,” Vandemore said. “As we noted last year, we were able to adjust prices much more quickly. And so you’re not seeing as much of that impact effect, the direct-to-consumer side of things, because we’ve already taken the benefit of that pricing adjustments.

Cash, cash equivalents and investments totaled $819.9 million, a decrease of $220.6 million, or 21.2 percent, from Dec. 31, 2021, primarily reflecting increased accounts receivable from wholesale sales, particularly in the Americas region.

Capital expenditures for the first quarter were $89.4 million, of which $32.3 million were related to investments in new corporate offices domestically and in India. Another $27.2 million was related to the expansion of its global distribution infrastructure, while $24.7 million was allocated to investments in DTC technologies and retail stores.

In particular, Weinberg said Skechers improved the flow of goods through its North American distribution center and expects to be operational on its LEED-certified gold expansion in the third quarter of 2022.

For the remainder of 2022, Skechers expects total capital expenditures of $175 million to $225 million, reflecting continued investments in distribution infrastructure, both in the U.S. and internationally, as well as spending on omnichannel capabilities and corporate offices. The footwear company expects its new distribution center in India to open in 2023, and has recently secured locations for distribution centers in Canada and Chile. The company is also planning to open a new distribution center in Panama and expand its distribution facilities in Peru this year, Colombia in 2023 and China in 2024.

In the first quarter, Skechers opened 31 and closed 41 company-owned stores. In the second quarter, the retailer has opened 10 company-owned stores to date, and plans an additional 160 to 180 by the end of the year.

Net Sales: First quarter sales at Skechers increased 26.8 percent to $1.82 billion from $1.43 billion in the year-ago period, as a result of a 28.7 percent increase in domestic sales to $778 million and a 25.5 percent increase in international sales to $1.04 billion, primarily driven by strength in wholesale sales.

Weinberg said Skechers saw double-digit growth in its physical stores and e-commerce business.

Across all channels, the Americas region saw net sales jump 30.5 percent to $946.9 million in the quarter. Europe, the Middle East and Africa (EMEA) had the biggest growth jump at 49.3 percent to $441.2 million, while Asia Pacific (APAC) boosted sales 4.4 percent to $431.5 million.

Net sales in China improved 9 percent to $273 million, giving the company a leg up over other footwear giants like Adidas and Nike, which saw revenue in the market decline 24 percent and 9 percent respectively in their most recent quarters amid state-sanctioned consumer boycotts of several Western brands.

Earlier in April, the retailer changed its segment reporting to present segment results as wholesale and direct-to-consumer.

Wholesale sales grew 32.7 percent to $1.25 billion, led by a 41.6 percent sales jump in the Americas and a 42 percent boost in EMEA. Wholesale volume sold increased 22.7 percent.

The direct-to-consumer channel grew 15.7 percent to $568.3 million, powered largely by skyrocketing sales in EMEA of 157.3 percent, which lapped Covid-19 restrictions in the prior year. The Americas region saw 11.2 percent sales growth, while APAC generated DTC growth of 8.5 percent.

Net Earnings: Net earnings were $121.2 million, up 23 percent from the 2021 first quarter’s $98.6 million in income. Diluted earnings per share were 77 cents, an increase of 22.2 percent over the prior year’s 63 cents per share.

Earnings from operations increased to $175.9 million, up 11.6 percent from last year’s $157.7 million.

CFO’s Take:  “Our supply chain team did a fantastic job once in receipt of goods to process more than we’ve ever done in March and against some pretty challenging circumstances. The ability to get the goods in allowed us to process and sell-through to our wholesale partners in a way that we just hadn’t the capability in prior quarters because of the supply chain issues,” Vandemore said. “My perspective is, it doesn’t feel like restocking. Although clearly, there is some restocking going on because we continue to see very robust sell-through rates. Even if it is a restocking effort, you’re seeing it sell-through at the consumer level. And that’s something we also see in our own retail stores, really strong sell-throughs to whatever we can get onto the shelves.”