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Skechers Sees Shipping Times Improve But Expects Problems to Persist

Though supply chain challenges persisted into the fourth quarter, Skechers signaled Thursday that things have begun to improve.

The footwear company began seeing improvements in December, chief operating officer David Weinberg said, with more goods moving through its distribution centers than in the previous months. These improvements continued into January and February as port congestion eased and more containers reached distribution centers.

“We believe these challenges will remain through the first half of 2022, but we are optimistic they will ebb in the latter half of the year,” Weinberg said on a call with investors.

In a Nutshell: The effect of the fourth quarter’s supply chain challenges was “most evident” in Skechers’ inventory balances, chief financial officer John Vandemore said. This included an incremental $325 million in in-transit inventory, a year-over-year increase of more than 130 percent. “This inventory supports orders to our wholesale accounts and our own direct-to-consumer business, which could not be sold in the quarter,” Vandemore said.

As of Dec. 31, Skechers’ inventory totaled $1.47 billion, an increase of $454.2 million, or 44.7 percent, from a year earlier.

Although supply chain restrictions and Covid-related store closures dampened sales in China—including around the important 11/11 holiday—Skechers still managed to pull out a high single-digit revenue increase. Though well below the company’s 51 percent sales bump in the second quarter, Skechers’ continued growth contrasts with Nike, which saw sales fall 24 percent in China in the quarter ended Nov. 30. Nike, which was much more exposed to the Vietnam factory closures, has seen consistently lower sales growth in the country than Skechers since last March, when it was at the center of a consumer boycott of companies that had released statements on Xinjiang.

“We continue to be very optimistic about the long-term prospects for the brand in China,” Vandemore said. “We will continue to invest behind that looking forward next year to beginning investments in our second distribution center. So, we remain fully behind China. We’re very optimistic about what it will yield. We do expect some Covid impacts over the course of ’22, like every other market across the globe. But overall, we remain incredibly optimistic about what we see there for the brand.”

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Skechers expects to achieve sales between $1.675 billion and $1.725 billion and diluted earnings per share between 70 cents and 75 cents in the first quarter. Looking to the full fiscal year, it forecast sales of between $7 billion and $7.2 billion and diluted earnings per share between $2.70 and $2.90.

Net Sales: Skechers’ net sales rose 24 percent year over year in the fourth quarter to $1.65 billion. Domestic and international sales grew 10 percent and 34 percent, respectively, amid increases in both wholesale and direct-to-consumer (DTC).

The largest improvement was attributable to international wholesale, where revenue increased 30 percent year over year and 33 percent on a two-year stack. Sales from Skechers’ distributor business climbed 124 percent compared to 2020. Though it remained “slightly below pre-pandemic levels,” Vandemore said, the channel continued to make “good strides toward recovery,” particularly in the Middle East and Russia.

Subsidiary sales rose 47 percent as “nearly every country” recorded double-digit growth, Weinberg said. The United Kingdom and India saw the strongest gains, he added.

“We believe this impressive sales growth is due to both strong demand for our product and our ability to deliver goods as some of the port pressure eased,” Weinberg said.

The company’s joint ventures business grew 10 percent year over year, led by a 9 percent bump in China. “The growth in China was driven by strong e-commerce demand, somewhat tempered by slower traffic patterns in retail stores as well as temporary pandemic-related store closures,” Vandemore said. “Continuing weakness” in adjacent markets also weighed on joint venture growth in Asia, Vandemore added.

Domestic wholesale, meanwhile, grew 4.6 percent as Skechers continued to see “very positive underlying trends among [its] domestic wholesale partners, including strong sell-through rates and higher average selling prices,” Vandemore said. Growth primarily came from the company’s women’s and kids’ categories, Weinberg said, though men’s running and walking also performed well.

The company’s DTC sales grew 30 percent year over year amid increases of 17 percent and 52 percent domestically and internationally, respectively. Both markets saw “meaningful improvements” in gross margins and strong average selling price growth, Vandemore said. Compared to the fourth quarter of 2019, DTC sales increased 22 percent overall, 8 percent domestically and 45 percent internationally.

Full-year sales increased 37 percent as Skechers’ domestic and international businesses saw growth of 33 percent and 39 percent, respectively. On a constant-currency basis, Skechers’ total sales grew 34 percent. Domestic wholesale revenue climbed 28 percent amid higher unit sales volume. International wholesale sales climbed 34 percent, including 35 percent in China and 24 percent in Europe. DTC sales soared 50 percent as Skechers sold more units and averaged higher selling prices.

Net Earnings: Skechers’ fourth-quarter gross margin fell 30 basis points to 48.6 percent, “due to higher freight expense and the mix impact of higher sales in our distributor business, which is an inherently lower gross margin business with very attractive operating margins,” Vandemore said. These factors were partially offset by higher average selling prices.

Though total operating expenses rose 20 percent, as a percentage of sales they fell 160 basis points from 45 percent to 43.4 percent. General and administrative expenses also grew on an absolute basis, 19 percent, but shrank as a percentage of sales by 160 basis points. Vandemore attributed the dollar increase to “a combination of factors, including higher retail store labor, incentive compensation, settlements of multiple legal matters and distribution-related costs.”

Net earnings in the fourth quarter totaled $402.4 million, or $2.56 per diluted share. This included a tax benefit of $346.8 million resulting from an intra-entity transfer of intellectual property rights, which was partially offset by $15 million related to the settlement of multiple legal matters. Excluding these factors, adjusted diluted earnings per share totaled 43 cents, a 79 percent increase from the prior year’s 24 cents.

Skechers’ full-year net earnings were $741.5 million, or $4.73 per diluted share. Adjusted diluted earnings per share were $2.59, up dramatically from 2020’s 65 cents.