Mirroring the reaction to Nike’s weak North American sales, investor concerns regarding Skechers’ poor domestic performance sent its stocks falling during early trading Thursday morning—despite the footwear retailer posting record sales in the first quarter.
In a Nutshell: In its Q1 financial report, Skechers celebrated a quarterly sales record and a period of international expansion. However, investors saw its domestic performance as wanting, due to a 10.9 percent decrease in the brand’s wholesale revenue and an overall revenue decline of 6.3 percent on its home turf.
Additionally, Skechers reported a major decrease in inventory for the quarter, with its quarterly total being $740.9 million, a decrease of $122.4 million (14.2 percent) over the last count made in December 2018.
General and Administrative expenses decreased as a percentage of sales despite Skechers spending $7.8 million toward its new distribution center in China and $8 million to operate 40 new stores, 12 of which opened during Q1.
Sales: Skechers reported sales of $1.28 billion during the first quarter of FY19, a 2.1 percent increase over last year’s total, but lower than the $1.3 billion that analysts predicted for the brand. Skechers didn’t provide exact totals for domestic versus international sales but revenue was down 6.3 percent domestically compared to an increase of 9.3 percent (15 percent on a constant currency basis) in international sales. International wholesale revenue was also up 8.7 percent compared to the 10.9 percent loss in domestic wholesale.
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Comparable store sales presented the same story. Internationally, Skechers improved same-store sales by 2.3 percent compared to 0.2 percent in North America. Skechers also said its gross margins were slightly smaller for the quarter, down 40 basis points, due to “lower international margins from higher discounts” and foreign exchange impacts.
The brand expects its sales to be in the range of $1.2 billion to $1.225 billion in the second quarter.
Earnings: Diluted EPS for Skechers in Q1 landed at 71 cents, just below analyst expectations of 72 cents. The brand’s net earnings of $108.8 million was down $8.9 million, year-over-year, a decrease of 7.6 percent. However, Skechers noted that earnings from operations improved 11.5 percent at $165.8 million.
The brand issued guidance that its EPS for the second quarter would between 30 cents and 35 cents as a product of “existing foreign currency headwinds” and the beginning of the Skechers’ joint venture in Mexico. Additionally, after working with an effective tax rate of 9.6 percent in the first quarter due to the positive impact of a “discrete item associated with the Tax Cuts and Jobs Act” and a “performance-based government rebate in China” worth $15 million, Skechers anticipates its tax burden will rise to between 17 and 20 percent in Q2.
CEO’s Take: Naturally, Skechers CEO Robert Greenberg focused on the positive—a record quarter of sales for the brand and a future of continued Skechers momentum after a breakout 2018.
“The momentum we experienced in 2018 is continuing as we again achieved a new quarterly sales record in the first quarter of 2019,” Greenberg began. “Our focus has been on designing and delivering relevant product across all genders and categories and supporting it with targeted marketing for our diverse consumer base…we are already seeing a positive impact in sales with the launch of our television campaigns for Spring, and we believe our momentum will continue into the second quarter. Further, we’re looking forward to meeting with our domestic and international accounts and partners over the next two months, presenting our new styles and marketing.”
John Vandemore, the CFO of Skechers, acknowledged that trading conditions were somewhat challenging in the first quarter, but said he believed in the brand’s current strategy.
“Given the fairly challenging conditions of the quarter, we are quite pleased to have successfully executed against our strategy by continuing to grow sales and to profitably invest in our operations,” Vandemore said. “We believe the underlying momentum in our business is strong, as evidenced by our backlog and current booking trends, as well as continued growth in our direct-to-consumer channels. We continue to invest in our infrastructure and operational capabilities across the globe, including development of our new China distribution center, breaking ground on the expansion of our corporate offices, and development of direct-to-consumer offerings both in our company-owned e-commerce channels and in our retail stores.”