Skechers USA (SKX), the Manhattan Beach, CA-based global casual footwear company that this year has overcome all but Nike in the race to be the largest athletic footwear brand in the U.S., announced third-quarter financial results on Friday. Although earnings beat analyst estimates, sales fell short of projections, sending overly skittish investors for the exits and the stock diving 32% to a closing price of $31.64.
Sales for the quarter ended September 30 increased 27% to $856 million from $674 million for the third quarter of 2014. Analysts had expected $868 million. About $10 million of the shortfall was due to currency volatility, while the rest was the result of the some wholesale orders shifted to the fourth quarter, according to the company.
Net sales increased 11.8% in the domestic wholesale business, 52 percent in the international wholesale business, and 20.9% in the Company-owned global retail business, which reflects an additional 64 net new stores compared to the prior-year period, and a 10.4% increase in comparable sales for the quarter.
The company noted that the gains in the business came despite the impact of negative foreign currency exchange rates in Brazil, Canada and Chile, and a rather sluggish domestic retail environment where the company achieved an increase in average price per pair of 6.8% in its wholesale business.
The company reported that the brand is very popular in China, where current annualized sales are now only 20 percent of the potential billion-dollar level.
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Gross margin remained flat in the quarter at 45.2% of net sales.
Earnings from operations for the third quarter of 2015 were $95.6 million as compared to earnings from operations of $74.1 million in the third quarter of 2014.
“With product and marketing initiatives that continue to resonate with our consumers worldwide, we achieved a new quarterly sales record in the third quarter of 2015. These results followed record first and second quarter revenues, resulting in a 34.1 percent net sales increase for the first nine months of 2015 as compared to the same period last year,” said COO and CFO David Weinberg, in a statement.
Net earnings for the third quarter increased by 30 percent to $66.6 million, or $.43 per diluted share, compared to $51.1 million, or $.33 per share, in the prior year period.
Earnings were negatively impacted by several factors including foreign currency translation and exchange losses of $13.5 million, increased deferred rent expenses of $3.5 million related to new stores in New York, increased legal expenses of $5.0 million related to the settlement of personal injury lawsuits from the Company’s toning footwear business, and $5.9 million in higher legal fees and associated costs primarily related to intellectual property litigation. The Company believes that most, if not all, of these legal matters will come to a conclusion by early next year. During the third quarter of 2015, these additional expenses reduced diluted earnings per share by $0.15.
CEO Robert Greenberg commented: “The continued quarterly sales records, including our highest quarterly sales in the Company’s 23-year history in the third quarter, is a testament to the strength of our brand and the innovative product we continue to develop and deliver. We are pleased that Skechers has grown to be the second largest athletic footwear brand in the United States, and that we are expanding into new doors and opening more Company-owned stores in key locations.”
At the close of the quarter, there were 1,210 Skechers stores worldwide, including just over 830 outside the United States. The Company continued its positive sales trend in the third quarter with double-digit gains in our international subsidiary, distributor and joint venture operations, including a triple-digit increase in China.
To build the brand, the company runs numerous commercials featuring celebrities, animated characters, and sports legends, including Demi Lovato, Meghan Trainor, Ringo Starr, Pete Rose and Sugar Ray Leonard.
Weinberg added: “Though we believe the sluggish macro domestic retail environment and declining currency in several key markets had an impact on our net sales, the third quarter was still a sales record. Given our double digit retail comps, increase in backlogs of approximately 28 percent and market share gains, we believe consumer demand remains strong for our footwear categories worldwide.”
Skechers footwear is available in the United States and over 120 countries and territories worldwide via department and specialty stores, more than 1,200 Skechers retail stores, and the Company’s e-commerce website. The Company manages its international business through a network of global distributors, joint venture partners in Asia, and 13 wholly-owned subsidiaries in Brazil, Canada, Chile, Japan, Latin America and throughout Europe.