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Skechers Sidesteps Worst of Vietnam Shutdowns, China Boycott

Unlike its largest competitors, it would appear Skechers has managed to both sidestep a major backlash in China and escape the worst of the Covid outbreak in Vietnam.

In late March, days after the U.S. and its allies sanctioned Chinese officials for what they called a “genocide” against Uyghurs in Xinjiang, companies from H&M and Uniqlo to Nike and Adidas found themselves at the center of a consumer boycott in the world’s second largest economy.

Though some signs appeared to show that the boycott was easing up with time, Nike saw year-over-year sales growth in the country slip to 1 percent in its most recent quarter. Earlier this week, Puma posted its second-straight quarter of declining year-over-year sales in China. Adidas, which has yet to release its third-quarter results, saw its Greater China revenue slip 16 percent in the second quarter. At Skechers, meanwhile, sales in the country rose 10 percent year-over-year in the third quarter, on top of 24 percent growth a year ago.

“Clearly there were some incremental headwinds in China owing to the pandemic,” chief financial officer John Vandemore said Thursday on a call with investors. “There were closures, there were restrictions on activity, restrictions on movement, and that had an impact. But, we’re actually thrilled by the 10 percent growth we put out because, against the backdrop of the struggles you’ve seen other brands have, our brand, we think, continued to outperform and we’re very optimistic about the continued growth of the brand.”

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Skechers’ positive results in China likely derive from the different tack it has taken on Xinjiang. Whereas the recent boycott has focused on brands that have expressed concern over reports of forced labor, Skechers differentiated itself from other companies by defending one of the named factories. Though it said it was concerned about the treatment of Uyghurs, it also noted how it had audited the specific Xinjiang factory multiple times and found no indications of forced labor. In April, China Market Research’s Kerstin Brolsma identified Skechers’ response as one of the few that Chinese consumers seem to appreciate.

Having skirted one of the major headwinds facing Western brands in China today, Skechers is continuing to expand its presence in the East Asian nation. In the third quarter, it opened a new distribution center and 67 third-party stores in China.

Further south, Skechers managed to largely sidestep another major issue that has plagued footwear companies recently—temporary factory closures in Vietnam.

Battling its worst coronavirus outbreak of the pandemic, the Vietnamese government imposed restrictions in July that, though they left open the possibility of continued manufacturing, ultimately forced widespread factory closures. As cases and deaths soared, officials doubled down on the policies.

In late September, Nike reported that it had already lost 10 weeks of production. Earlier this week, Puma CEO Bjørn Gulden told the press that the company’s factories in Vietnam had closed for 10 to 11 weeks due to Covid outbreaks. Last week, Crocs CEO Andrew Rees said the clog maker’s Vietnamese factories were again operational after “several weeks” of closures. When the year began, Crocs planned to source 70 percent of its products from the Southeast Asian nation.

With the majority of Skechers’ production located outside southern Vietnam—the outbreak’s epicenter—chief financial officer John Vandemore said the summer’s restrictions impacted its production “to a more limited degree than others.” Instead, he pointed to the widespread container shortages, port congestion and last-mile transportation delays as the “more disruptive issues.”

As of Sept. 30, Skechers’ total inventory was up 17 percent, or $177 million, from a year earlier to $1.23 billion. According to Vandemore, that total included a $218 million increase in in-transit inventory. “Under normal conditions we believe a meaningful portion of that inventory would have been delivered to customers in the third quarter,” he said. Chief operating officer David Weinberg said the company expects supply chain issues to continue to impact Skechers’ business into the first half of next year.

“Things are starting to get somewhat better and we are picking up the pace, especially outside the United States,” Weinberg said. “The U.S. is getting somewhat better, but our facilities in Europe and in parts of South America are going, leading to a stronger October than we had originally anticipated a few weeks ago.”

Even with the supply chain delays, Skechers saw sales climb 19.2 percent year-over-year to $1.55 billion. Direct-to-consumer sales led the way, growing 44.1 percent, while wholesale sales grew 10.5 percent.

Skechers’ gross margin inched up 150 basis points to 49.6 percent, “primarily” due to higher average selling prices and fewer promotions in its direct-to-consumer business and partially offset by increased freight costs, Weinberg said. Operating expenses increased 17.6 percent, while selling expenses grew 39.4 percent. General and administrative expenses rose 13.5 percent as a result of higher labor costs, increased rent and warehouse and distribution expenses, Skechers said.

Net earnings totaled $339.1 million, or $2.17 per diluted share, up from $45.3 million, or 29 cents per diluted share, a year ago.

Skechers adjusted its full-year revenue guidance down slightly from between $6.15 billion and $6.25 billion to between $6.15 billion and $6.2 billion. It downgraded its earnings forecast further, down from between $2.55 and $2.65 per share to between $2.45 and $2.50 per share.