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Skechers CFO Has ‘Tempered Expectations’ for China Recovery

Headwinds in China didn’t stop Skechers from generating record sales of $1.87 billion, a 12.4 percent boost from last year’s second quarter on net income of $90.4 million.

In a Nutshell: The pickleball promoter is looking to brush off a hedge fund’s recent report describing Skecher’s lagging China business and potential “inventory aging” problem. Excluding China, Skechers sales grew approximately 20 percent, chief financial officer John Vandemore said in the second-quarter earnings call.

Although sales in China were better than anticipated in June, the continued lockdowns will cause lingering problems, he said.

“I would say we have tempered our expectations for the pace of recovery in China now that we have seen that there are more restrictions and limitations reemerging,” Vandemore said in the call. “Certainly this month, we’ve seen that, and we have an anticipation for some level of that over the remainder of the year. So we’ve baked a little bit of that into our expectations, whereas I think we had previously explained we were hopeful for a relatively V-shaped recovery. It looks like the recovery is going to take a little bit longer.”

Spruce Point Capital Management’s report earlier this month warned of Skechers stock dipping between 30 to 50 percent, indicating that the sneaker firm could be falling out of favor with Chinese consumers gravitating toward local brands and even back to Nike, which also has been struggling in the market.

For now, Skechers continues to show that one market’s performance isn’t hampering its growth. In the second quarter, it opened 46 company-owned stores worldwide, including 15 U.S. stores, seven in India and nine in China. It closed 34 locations, including five U.S. concept stores and 24 in China.

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In the third quarter to date, Skechers opened four company-owned stores, including two international stores, and is prepping 115 to 135 company-owned locations by year-end.

On the supply chain side, the LEED-certified Gold expansion of its 2.6 million square foot North American distribution center is almost complete, according to chief operating officer David Weinberg. Skechers has begun testing the new operating system. Phase 2 of the company’s China distribution center expansion is planned to begin this year with a goal of completion in 2024.

That’s not all when it comes to Skechers’ global distribution ambitions. The company also has begun development on the previously announced new 1.1 million square foot IGBC Platinum pre-certified distribution center in India. The first phase of the facility outside Mumbai, spanning 660,000 square feet, is planned to be fully operational by mid-2023.

Skechers also secured a new 427,000-square-foot distribution center location outside Vancouver, Canada slated to open in early 2023, and the company is currently moving into a new facility in Panama. It expanded its current distribution facility in Colombia this year with plans to develop a new facility to be completed in 2024 that will grow capacity from 85,000 square feet to approximately 500,000.

Inventory was $1.56 billion, up 47.9 percent from the $1.06 billion during the year-ago period and up 6.5 percent on a six-month basis. This includes nearly $475 million of in-transit inventory, which represents 30.4 percent of total inventory, and a year-over-year increase of 69 percent over last year.

“We have seen an increased flow of goods from the port, which has put a strain on our processing and that of our accounts during the quarter. Covid-related operating restrictions in China also led to inventory delays, particularly in Europe,” Weinberg said.

When asked about whether there were opportunities to bring inventories back toward what would have been pre-Covid norms, and whether he expects the supply chain to normalize in the holiday or 2023, Weinberg said some ground transportation issues remain because everything in China opened up so quickly, forcing the firm to move more product to distribution centers than it has had to in the past.

“That should normalize, I would hope for us anyway, within the next two quarters,” Weinberg said. “For us, the question internally is how quickly we can get our new distribution center portion opened in the U.S. that was supposed to open earlier but got caught up in its own supply chain issues, which will double our capacity to pick-and-pack and do singles. We would move through product a lot quicker if everything remained the same and the port remained open, and there were no lockdowns in Asia.”

Gross margin was 48.1 percent, a decrease of 330 basis points (3.3 percentage points) from last second quarter’s 51.4 percent margin, primarily driven by higher per unit freight costs partially offset by average selling price increases. Vandemore described consumer response to price increases as “stable” so far.

“For a while though, we have been communicating our expectation that some level of promotionality was likely to reemerge in the back half of the year,” chief financial officer John Vandemore said. “We don’t consider it to be significant or drastic but some level of promotionality I think is to be expected given the kind of ideal circumstances we’ve been under for the previous five or six quarters.

For the third quarter of 2022, Skechers projects sales between $1.80 billion and $1.85 billion—a 16.1 percent to 19.3 percent improvement—and diluted earnings per share between 70 cents and 75 cents.

For the full year, Skechers maintained its prior sales guidance, projecting it will achieve sales between $7.2 billion and $7.4 billion, but it lowered its diluted earnings per share of between $2.60 and $2.70. Skechers expects total capital expenditures to be between $250 million and $300 million in 2022.

Cash, cash equivalents and investments at Skechers totaled $946.4 million, a decrease of $94 million, or 9 percent from Dec. 31, 2021, primarily as a result of changes in working capital and completing $49.2 million of share buybacks year-to-date.

Net Sales: Second quarter sales increased 12.4 percent to $1.87 billion from $1.66 billion in the year-ago period. On a constant currency basis, sales increased 16.4 percent.

Domestic sales increased 15.4 percent to $840.5 million, while international sales jumped 10 percent to $1.03 billion, primarily driven by strength in wholesale.

The Americas region had the highest sales improvement, rising 20.9 percent to $1.03 billion from $855.2 million in the year-ago period. Europe, the Middle East and Africa (EMEA) experienced a 7.6 percent sales jump to $374.5 million from $348.1 million. Asia Pacific (APAC) sales ticked up 0.2 percent to $459.4 million, slightly ahead of last year’s $458.6 million total.

In APAC, Skechers withstood a 19.6 percent sales loss in China due to the lockdowns, dropping to $254.9 million from $316.9 million in the 2021 second quarter.

All segments experienced growth, with wholesale increasing 18.3 percent to $1.14 billion and direct-to-consumer increasing 4.3 percent to $727.5 million.

The wholesale growth was led by a 34.9 percent sales jump in the Americas. Wholesale volume increased 14.8 percent and average selling price increased 3.1 percent.

Direct-to-consumer sales growth was led largely by a 13.5 percent improvement in the EMEA region, with sales growing 3.7 percent in the Americas and 2.7 percent in APAC. Direct-to-consumer average selling price increased 5.3 percent and volume was essentially flat.

Net Earnings: Net income for Skechers was $90.4 million, while diluted earnings per share came in at 58 cents. Both figures are lower than their year-ago figures, which were $137.4 million in net income and diluted earnings per share of 88 cents.

This quarter’s diluted earnings per share include an unfavorable impact of 11 cents due to declines in foreign exchange rates, primarily in EMEA.

Earnings from operations decreased to $154.2 million in the quarter, down from $201.2 million in the 2021 period.

CEO’s Take: “2022 is shaping up to be another remarkable year for Skechers with two consecutive record sales quarters, the result of our talented team’s passion, determination and execution to evolve our product offering, inform the world of our exceptional comfort technologies, and effectively navigate the supply chain constraints,” said Robert Greenberg, CEO of Skechers, in a statement. This, our 30th year in business, is our strongest year yet from a sales, marketing and product perspective.”