Skechers U.S.A., Inc. (SKX) Earnings Call Transcript & Summary

All right. Good morning, everybody. Thank you so much for joining us today here at the UBS Global consumer conference. I am Jay Sole, UBS' North America softlines analyst. I'm really pleased to be joined by John Vandemore, the CFO of SKECHERS. And what we're going to do today, we're going to do a little Q&A, and then there's an opportunity for you to ask questions. If you type in your question, it will come up here to me on the iPad, and then we'll stop about 10 minutes before time on that time over there. And we'll -- I'll ask John your questions here from the iPad. So without further ado -- no, we're going to get to the coronavirus stuff.

Thank God.

So -- because I know everybody wants to talk about that. But it's a good opportunity to sort of take a step back a little bit and talk about what a terrific fundamental story. 23% top line growth in 4Q. Your guidance for the first quarter call for more double-digit top line growth. Just want to dig into some of the drivers. And one of the maybe most important ones to me, and tell me if you disagree, is e-commerce. Because 2019 was a big year for all the work that you've done to improve the website, the app, the loyalty programs and sort of connect it all together, come up with turnkey solution to take to the U.S. that you're going to take internationally. But just maybe just give us a little bit of a summary of what you've done, what the consumer has seen that's different and sort of what the financial impact has been?

Well, first, let me thank you for not starting off with either tariffs or the coronavirus. That pretty much sums the last year of questions from you all. And quite frankly, I can't explain our e-comm strategy any better than you just did, which is we're very much in the early innings of e-commerce at SKECHERS, particularly in the United States. We have put a lot of work and a lot of investment into effectively rebuilding the technology platform on which we are going to market in e-commerce. And that is both in the United States and then ultimately, it will be across the globe. Last year, we went through a fundamental replatforming of our marketing efforts. We adopted several best-in-breed solutions for digital marketing. Simultaneously, we definitely increased our spend in the digital arena. We also made changes to the product search functionality, the delivery, many different aspects of what was our e-commerce offering at that point in time. But to be honest with you, last year, this year have been dedicated to planning for what will now be a pretty significant rollout of change in functionality in our e-commerce offering. Later this year, we will unveil a completely new website, again, going to best-in-breed functionality. We will also pilot a new loyalty program. We've had a loyalty program. We've been happy with it, but we realized that having not updated it in a while, there were several features that we needed to add, including increased mobile functionality, redemption patterns and the like. And that will couple with a significant investment we're making in our physical stores at point of sale. Because one of the things we have become totally convinced of is the need to have as seamless a relationship between your online and off-line offering as possible. So what consumers want nowadays is the ability to flex between an online solution, a physical solution, particularly in footwear, where trying and trial before you buy remains a very important facet of consumer-buying behavior. So when you take all of those investments, all those actions together, I would characterize our status as very early stage in e-commerce. It has grown magnificently. But to be blunt, that's off a smaller base than we like, and we're aiming for. So at the end of this year, which is where I point most to, I would consider SKECHERS to be in the very early innings of what we can accomplish online. Couple that, quite frankly, with the strength we've had in the product, and we think that provides us a significant runway for the business online, continues to support our off-line world and more importantly, continues to deepen our relationship directly with consumers, which is one of the end goals to be able to get into that one-on-one communication with consumers, understand their buying preferences, their taste preferences and use that as a positive feedback loop in how we design, develop and then market product.

Right. So it's very interesting that -- maybe let's just talk about -- a little bit about more the rollouts because -- and this is my speculation, so this is not an official number. But, like, SKECHERS' e-commerce business as a percent of total retail is probably at the low to mid-single-digit range, something that may be mid-single digit-ish, but most of that's probably in the U.S. And can you talk about the rollout? So like the U.S. has this -- the turnkey solution is going to improve. But how many countries outside the U.S. have it? And so by the end of the year, how many will have? And then into 2021, how many international countries will kind of get it turned on?

Yes. I mean I think I'd tell you the penetration is lower than we'd like. We have 6 markets today where we have an owned and operated sites, so that's fully under Skechers' control. I would point out that in China, actually, there's a much more significant penetration in online. Obviously, that equates with the buying patterns that are predominant in that market. But setting that aside, although we do leverage that know-how, it's about 6 markets today. What we'll do is we'll start in the United States, and then we have been consciously developing solutions that can be turnkey in select markets. Our goal is to successively hit each of the other owned and operated markets over the course of the ensuing year and years and then actually use that as a launching point to open up new markets. The end goal, obviously, is to get to a point where there's seamless integration between any market we're in, from a physical standpoint with online, and then quite frankly, even extend beyond that and use it as a tool as an early entry point into new markets where that's appropriate.

So you've made an interesting comment in the past about that you don't believe that e-commerce business is cannibalistic to your store's business or to your wholesale business. Why do you believe that to be the case?

Well, one thing, we just haven't seen it in the numbers yet, that's the biggest indicator. When we've looked at it from a geography standpoint in terms of behavior and the corresponding behavior we're seeing online, we also haven't seen a lot of evidence of any sort of cannibalism whatsoever. Quite frankly, if anything, what we've seen is the ability to drive behavior in-store from an online relationship. Now they were relatively agnostic. We have a consumer, we have the ability to communicate with that consumer. We can either push them offers or incentives and then allow them to utilize that in either the physical world or in the offline world. Again, the one thing I'd point out in footwear that I think is distinctive still is that people still have a preference to trying on before they buy a product. If you think of the size range in footwear, that makes sense, as compared to a standard apparel offering, which has a very limited size run. So we're mindful of that existence right now and that fact, and we want to make sure we're answering consumer wants and desires. That being said, I think what's most important in that is having established that one-to-one communication with consumers and then the ability to leverage that throughout the business.

So you mentioned stores as part of, like, a complete experience -- offering a complete experience to the consumer. I don't want to overlook the stores' story because the company has about 800 owned stores. Now there's a lot more than that globally run by franchise partners right now. But about 500 in the U.S., 300 outside the U.S. And you talked about opening another 115 to 125 stores this year, which is a big number. Now first, just to explain, SKECHERS has a little bit of a unique model with stores because you have 3 different types of stores. Can you just briefly walk us through what you mean with those 3 types of stores?

Yes. So for us, there's 3 formats that we talk about frequently. And I have to apologize, some of them have great titles, some of them probably need to be retitled a little bit. Our concept store, you should think of as our highest offering of in-line products, generally, the higher price points as well, traditionally located in either a high street or a mall-based solution. And those tend to be kind of our premium product, our newer product. It's where we like to start with product introduction, high personal touch from the staff, extensive POP and in-store marketing. The second category is outlet, which, again, probably is the most self-definitive. It's an outlet shopping experience. These are a little bit bigger. So if the concept stores probably are under 3,000 square feet at their max, the outlet stores can be 3,000 to 5,000, depending on the situation, depending on the location. And that's a little bit less in line, a little less staffing, a little more self-service, kind of a midpoint price point on average between the concept. And then our growth area right now is what we have called traditionally warehouse. I like the term big box better because what you should think of in the warehouse category is a freestanding pad or an adjoined anchor pad to an open air mall. It can have anywhere from 3,000 at the very, very low end to 30,000, quite frankly, at the high end of square foot. It's very self-service. It tends to be much less in-line product. And that's really where we've seen a lot of success lately, both in terms of the attractiveness, the opportunities we're seeing to develop those stores, especially with retail vacancies being what they are. We're seeing a lot of very attractive opportunities on the rent side. It's also where we have the opportunity to bring the full weight of SKECHERS product line to bear for the consumer, everything from kids, to adults, to work, to golf, to apparel, more extensive accessories offering. So it tends to be the all-encompassing solution for us and the one where we've seen the greatest velocity. And as you look at the numbers that we're looking to open this year, you should expect the high, high concentration of those, especially in the United States, are going to be in the warehouse format.

Got it. So of that -- if you talk about the 115, 125, how many will be U.S., how many will be kind of international? And maybe where do you see the store count going? Because go back 15 years ago when SKECHERS had like 50 stores, and the question was, well, how many can open? Can you get to 50 -- or can you get 100? And I don't know, that was sort of like the goal and then the company stopped answering the question because it's like, "Well, we just keep opening more and they keep working. So we're just keep doing it." But do you have a vision now because there's obviously like now probably 10,000 stores that you need?

Right. Well, I'm not sure what our vision would have been a decade ago, but I don't think it would have been 800. So we're hesitant to give a final number on it. What I would tell you that is important to us is stores got to be profitable. Aside from a handful of marketing locations, stores have to be profitable. So we govern that fairly assiduously. They have to add to and not be cannibalistic to a geography, right? We don't want to just open up in a store after store in adjacent cities or counties, if they're going to be cannibalistic. You don't see that typically, but there's still a lot of foot on ground out there for us to go out and open new stores in new markets. We don't like to get overly strict on exactly how many stores. We give you guys a range because if not you'll ask about it endlessly. But the reality is, what we want to be conscious of is that we're picking good locations, with good rent structures, with good demand patterns that will be additive to the overall profile of the business. And I don't want to get into a position where we're forcing either our store team or a retail team to open a store just to meet a commitment externally. So more important than the number to us is we're opening in good locations that are additive. In terms of overall store count, to be honest with you, I can't give you a number because it would probably be a silly large number that you might discount today and it might look even sillier because it's too small later. Other than to say, we believe that there is significant continuing runway, both domestically and internationally, to continue to open SKECHERS stores. And what that does for us is 2 main things. One is, obviously, it gets the product closer to the consumer. And I think you've heard us say before, we're fairly agnostic as to where you buy SKECHERS' product, we just want you to be able to buy it. So it's either a third-party retailer, it's our own store, it's a franchised store, whatever the case, we just -- we need to get the product to the consumer. Because once we marry you with our shoes, quite frankly, you don't leave, and you become infinitely more valuable to us as a consumer. So we need to continue to grow that, but it also gets the brand out there, right? There are several markets where the SKECHERS brand is still at its early stages of consumer awareness. And what we find is when we add that retail base, that foundation to a market, it aids the entire brand in the market. And you've seen some really interesting growth patterns come out of very mature markets for us. And some people ask, how can you be growing in a developed market like Western Europe that's having retail struggles? And the answer we often give is that you're starting to see the brand drive to a new level of awareness. We even get that in some markets in the United States. I can't tell you how many times people tell me they didn't realize we do technical running shoes or my favorite is the golf shoes. When you're wearing golf shoes on the course, people say, "I didn't know Skechers did golf shoes." But they put on a pair, they realize that the comfort features, the quality, the style is there and they're ours for life. So it's both of those strategies that we want to continue to leverage to drive the brand growth globally. And as a result, we think there's a tremendous runway for additional retail outlets, either our owned or through partners, to come.

Right. Well, I think being able to raise the brand awareness is great. I assume nobody asked you if you work for SKECHERS anymore, right? I hope that doesn't happen, but...

Other than if they're just trying to goad me, yes.

Yes, perhaps. The question a lot of people have on Wall Street, they said, okay, obviously, there's a lot of pressure out there on the mall, mall traffic. A lot of companies are going to be having to close stores, Macy's closed -- talked about closing over 100 stores the other day. You're opening stores. Are you concerned about you kind of opening stores, as it seems like the landscape, the retail footprint continues to shrink. What's your view on that?

Well, look, I think some of the retail attrition we've seen, quite frankly, has been absolutely warranted. I think they're in some categories that have clearly been overstored. I can't tell you today that I think that's true with family footwear, and certainly, for our brand. But it's -- I think it's wrong to assume that, that number always is going to stay static. I mean I think that's why the discipline, quite frankly, around the profitability of the stores is very, very important, and it's something that we adhere to religiously. That being said, we'll continue to open stores as long as the demand is there for the store. And we're seeing fantastic demand signals from the marketplace, both through our third-party retailers, through our own stores, through e-commerce. So it's something we watch. I don't have any concern about that at the moment, but it's something we're always vigilant about because we don't want to get into a situation where we have stores that aren't contributing. But we do think, again, it's got runway. And you've seen some pretty massive attrition in some categories, especially in the family category in shoes. And I think the reality is there's still people who need to shop for footwear that used to have a Payless near them or Sports Authority that don't any longer. And so when we're coming into a market, bringing a full family offering that is, again, style, comfort, quality at the right price that resonates with consumers, and we're seeing that continue to be the case in both our same-store sales comp numbers, but also the growth rates we're seeing with our key retail partners.

All right. That is a great point, right. And double-digit comp last quarter in the U.S. in 4Q. So evidence of that playing out.

Yes.

All right. So let's talk about -- so of the 3 big sales drivers, we talked about e-commerce, talked about stores, let's talk about product and really the innovation pipeline because maybe the high level, what's been working? I think we had a conversation, you said it's kind of rare that everything in the company in terms of product categories, they're all moving up into the right. Is that still the case? And talk about why that is?

Yes. I mean I hate to be glib, so please don't take this the wrong way. I mean, right now, most things are working. And that's not just because we're lucky. I think it reflects some very diligent application at the product level for the team, some exciting innovation that we've brought to the fore at the same time. We've definitely seen a rejuvenation in our women's business, that's been very strong over the course of the last year. Our men's business continues to do exceedingly well. We have new divisions like our work product that has done extraordinary, both in our own stores, but at third-party retail partners. Our GOwalk franchise is back in a very big way. We've also won a ton of awards for a new outsole we have in the technical running area, the Hyper Burst, extraordinarily light, high-rebound outsole that has a unique manufacturing process that has yet, quite frankly, even though worked its way down fully through our line. And when it does, I think that's when we're going to see even more benefits from that innovation. Also our focus on comfort, right, which is, we think, relatively unique, ensuring that everything we build has an element of comfort into it, all the way up through some very unique fit perspectives, like Arch Fit, some of the Max Cushioning we've been putting out, an emphasis on wide when most people, quite frankly, neglect that poor wide foot out there. I mean, the reality is, what you're seeing right now is this tremendous confluence between both the innovation side, the design side and then to focus on the core things that we have done very well over time and that we're well-known for. And we're excited about that cycle. If it weren't for a handful of exogenous events nowadays, we couldn't be even more excited about the product lineup. And quite frankly, what we have to come. Because like I said, even Hyper Burst as an example, it's just beginning to filter through the product line. And if you remember, Memory Foam started out at the top. And now it's in a lot of our different products, and it makes a huge difference from a comfort standpoint to consumers. So to the extent we can leverage technologies through the line over time is a fantastic advantage of having that innovation.

So let me just ask one more on that because I don't know if the company quite gets credit for the innovation in the product because it's a value price point. You don't think of innovation and value at the same time. But the company announced a new partnership with Goodyear. Maybe just give us a little taste of what that is. And just to kind of round out the point about how much innovation the company is putting into the product all the time.

Well, I couldn't agree with you more. I think people think of innovation only at the highest level, launching rockets, making outsoles that are potentially illegal in certain competitions. But innovation can be in a lot of different areas, right? It can be in small things, in big things. So one of the most game-changing innovations in all the world was the Ziploc bag. And you wouldn't think of that as innovation, but the reality is there's a lot of innovation to be had. So Goodyear is a great collaboration for us. It's going to work very well, particularly in situations where we want heavy rubber on the outsole and on the sole. It's a great name as well. What's interesting about that for us is we're actually using the rubber material they use. This isn't just a branding exercise. We're actually using the rubber, high durability, high strength, good recovery. So it's great for a lot of our product. But even more than that, to your point, I don't think people realize. Again, I'll point to Memory Foam. Putting some -- a style of foam in a sole didn't seem like a radical innovation, but how many shoes out there have some form of Memory Foam in them that aren't branded SKECHERS today? It's pretty widespread because it's a fantastic comfort feature. I'll bet my shoes are way more comfortable than yours today and mine have Memory Foam in them. So it can be small things in innovation that have a big difference as well as the big things. And I think that's what we try to focus on as not giving overly wed to just being the best in a certain category of technology, but bringing that innovation across the landscape of the product. Everywhere from kind of the design and development of the product to actually the style, the look, the comfort, whatever it is.

So I want to talk about gross margin. I think it's a nice way to connect the innovation piece because I think one thing that maybe goes a little bit overlooked has been the consistency in the company's gross margin despite the deflationary pressure that exists in the U.S. Intense promotions from competitor brands, they don't need to be named, and then also FX. So can you talk about what has been the key that has allowed to come in to maintain that stable, especially that stable merchandise margin within the gross margin?

Well, I mean, credit there really goes to the product teams and how they develop and design shoes, and their focus on maintaining merchandise margins at the appropriate level, kind of by division, we have very structured goals. They would probably not describe it as lovingly as I do because it's a rigorous evaluation for them and they get held to that standard. And I know that's a challenge sometimes when you're designing, but they do a very good job of ensuring that we're bringing product to market that has the right margin structure for us. It has been stable. But in concert with that, I'd also point out that we are cognizant of the need to be a very good partner to our third-party retail -- wholesale customers. We fundamentally believe that we all have to make money for the kind of the virtuous cycle of our relationship to work. So where also a very attractive margin for them to play with in their outlets. And that's why I think you see velocity in our product that's both increasing, but also very strong in the current climate is because they can make money off our product, we can make money. We aim for stability or better in gross margins. To be fair, we haven't seen any significant input cost pressures, which helped. It's a nice stable environment to work with. The tariffs were a little bit of a hazard in there, and FX is the one you can't control for. But I'd say, absent that, what we're hoping to construct long term is that stability at the merchandise level, maybe a little bit of accretion and then an overall blend in our business that emphasizes the direct-to-consumer relationship in the international markets, both of which generate accretive gross margins. And couple all that together, hopefully, neutralizing for things like FX and tariffs that come out of the blue, that constructs a pattern for long-term margin growth.

Right. So I mean I think that discipline is -- desire to have the retail partners make money along with you and have the -- give them the structure they can feel confident and I think it's been a key for a long time. Let's talk about just supply chain and how that could impact gross margin for just a second. Because a lot of companies are talking about how they're able to shorten lead times. They're talking about improving fill rates, talking about being able to get back in stock on hot-selling items, better track inventory now with RFID and things like that, do more replenishment systems. That's a lot to talk about. But just maybe briefly, like, what's the company's view on that? Is -- are you making inroads on that? Are you making -- spending time working on creating strategy to sort of improve in those areas?

Yes. Well, I mean that's really where you put the elbow grease in, in a business like ours, to be honest with you. We're very proud of our fill rates, our completion rates, our on-time delivery, statistics with our customers. It's always been a hallmark of how we do business. It's definitely not easy, less so in an environment like the current environment where things are changing as fluidly. If you think -- think about our core supply chain team over the last 6 months, they've had to endure tariffs from out of the blue and now some situations in China that I'm sure we'll talk about. But the reality is being very close to the manufacturing partners, being very close to the supply chain, watching it carefully, managing the flow as adeptly as we can. The one advantage, I think we have that people don't appreciate is we have a high degree of consistency by market in the SKUs, and that allows us some fungibility on where deliveries can go so that if we have it coming off a line and it's destined for a market that for some reason doesn't have a need, we can move it elsewhere in the globe pretty seamlessly. And that's a very effective tool for us in managing overall inventory. Obviously, we also have at our disposal an opportunity to cleanse out if we need to through our own retail environments. But to be honest with you, that's just day in and day out work. We're always aiming to make strides in improving the efficiency with which we deliver those very high fill rates, those on-time deliveries, but it's not easy work, and the credit really goes to our supply chain team. In addition to that, I would also mention because it's become a topic, more often asked again and again is managing that alongside also keeping in mind things like our supplier code of conduct, that our suppliers are acting and behaving in the right way and that we're monitoring that. And that's things we do day in and day out that we don't, quite frankly, often talk about. But just like everybody else in the space, we have a very active QA program, a very active audit program. It's in-market with over the 300 employees in China and the surrounding area, actively monitoring that base on a regular basis to ensure, both that we're seeing the right type of productivity, the right type of delivery schedules, we're flowing the inventory properly, but also that it's being done in the way that accords with our standards, which are very consistent with global standards. So it's a lot of work. I think it's the type of work when it goes well people don't appreciate enough. And then it's the work when dynamic environments like this that people go the extra mile to get us over the hump and to where we need to be for a delivery standard that we think is exceedingly high.

Right. Okay. So let's talk about SG&A because, typically, it's been the top of conversation. There's been quarters in the past where SG&A maybe grew a little faster than people expected. I want to ask 2 SG&A questions. The first is just basic. Can you just give us level set as we sit here today, March 4, 2020, what's your plan for SG&A as a percent of sales as we go forward?

I'm trying to figure out if this is a better question or the coronavirus is the better question for me. You saved the 2 ones for the end. Listen, I think if you look at our trajectory on SG&A spend, although I know it's an incredibly focused topic on, and you look at where we've invested, it's been incredibly consistent with our growth strategy, right? It's in new stores, it's in China, it's in other international markets. The balance that has been spent would be supporting each of those in a centralized capacity. So we develop a new line, you obviously have to have design talent to do that. But the vast majority of the spend over, really, the last 3 to 5 years has been in those categories. So the first thing I'd point out is incredibly consistent alignment with where we're spending and where we're plotting to go from a strategy. In the short term, I would tell you to expect more of the same because we fundamentally believe the best way to create value for you all, for our shareholders, our stakeholders is to continue to grow the brand. The bigger the brand gets, the more brand recognition we get, the stronger the brand. When we get people, as I said, into the SKECHERS product, they stay in the SKECHERS product. And that's the way to build value long term, recognizing that does come with some investment. You have to invest in new stores. You have to invest in new capabilities in new markets. If you step back and you kind of strip that out, you say, "Well, what would you do otherwise?" Then it's a much more managed top line growth rate or below strategy. There are times when we'll deviate from that, either because of opportunism or a change in circumstances short term. But generally speaking, that's what we're looking to align. What we don't want to do though, and this is where we always get a little bit crossways with some on the SG&A topic is, we don't want to diminish our ability to grow the brand. That is most important to us. Absent that, I would tell you, we spend G&A just like everybody else. We spend it where we need to. We're as parsimonious as anyone else when it comes to things that we don't feel like we need to grow the brand. So it's not a dramatically different G&A management policy than most other than our willingness to spend to grow the brand because the reality is we think we can continue to lead the category on top line growth and growing the brand, and we're willing to spend to do it.

Got it. Okay. So let's talk about the coronavirus. We got it delayed as long as we could. Obviously, the company is doing, from what we've -- everything it can to make sure the employees are safe, and that's priority number one, safety obviously. But give us an idea of -- so far, how has the coronavirus impacted sales? And you talked about on the call in China. Have you seen an impact in other countries at this point?

All right. Well, this is a prepared response I have to give you. So the first thing I would say is we operate extensively in China with our own employees, joint venture employees. We also operate, across the globe, a fairly extensive network of retail outlets, and we are exceedingly concerned about making sure everybody stays safe. So that absolutely is kind of our first 3 priorities. So everything we've done from an operational standpoint is geared towards that. Obviously, like most, we restricted travel to the region. In many instances, we've tried to restrict travel to only that which is exceedingly essential for the business. And we're watching things very carefully across the board, monitoring both the health of our employees, but quite frankly, in many instances, their families, in some instances, their villages. So we're watching that carefully. When we announced earnings on, I think it was the 6th of February, if I'm not mistaken, we said that we were incorporating an impact from the virus but if things got worse, we might be open to changing that. I can tell you, things definitely have deteriorated to a degree. I think in, certainly, the global nature now of this issue, not being just a China market is certainly evidence of that. I'll tell you today, we're not in the position to change our guidance. At this point, we're sticking with it. What I would highlight to you is kind of 3 major thrusts of the viral impact right now. The first is on the Chinese consumer. Obviously, with a significant number of store closures and diminished activity just in general in China, we definitely have seen a tick down in consumer demand over the course of February. I think the open question now is how fast does that recover? We know it will recover. We know the brand is strong in China. Our partners remain strong. So it will come back. It's just a question of at what pace, and so that's what we're watching from the consumer standpoint. And I would just tell you that's China in kind of the near markets that actually share a lot of activity -- economic activity with China. So it's kind of a -- almost a super-regional thing at the moment. On the supply chain side, we're seeing pretty much what everybody else is seeing. Things started off a little slow coming out of CNY, but we have actually seen tremendous progress being made. It's in cooperation with the government and the requirements to ensure worker safety. You're definitely seeing kind of -- in some areas, it's a little bit more robust. In other areas, it's still a little more restrained, Central China being that region. For us, a significant portion of our manufacturing, our finished goods manufacturing is either outside of China or in the southern rim so that it's not as severely impacted right now by the restrictions. So we're actually very encouraged by what we're seeing on the production side. There will be an impact. No doubt, there will be an impact. The question is, how big of an impact? Right now, we think it's very manageable in the context of both our inventory position and then the reduced demand patterns in market. So we're monitoring that almost every other day on a call with our China production team. But the reality is, we're actually very encouraged by what we've seen in that marketplace. Kind of the third rung is, quite frankly, the biggest unknown at this juncture. Until a few weeks ago, I would have been hard-pressed to cite any evidence of any impact from the virus outside of kind of that region, kind of the China, Japan, Korea area. And now you're starting to see a little bit of that kick up in Europe. I read from CNBC this morning that Italy has chosen to close schools and university campuses. That type of an impact will undoubtedly have some sort of reflection in demand patterns. To what extent, it's hard-pressed for me to know. What's interesting is it's not correlated as it was in China with actions by the government or actual reactions to the viral outbreak, it's really more of an action in advance and action, quite frankly, out of fear. So it's a little hard to gauge exactly how extensive or deep that will be. We're watching it carefully, but that's probably the one unknown out there is how the virus and concern about the virus start to impact markets outside of China, almost irrespective, in some instances, of the rate of infection or any other identifiable statistic.

All right. So that's interesting. Let me just follow-up on the supply chain point because -- so it sounds like there's been a lot of progress made, which is really a positive thing. Do you expect -- a, how much inventory do you have in the country at this point with your retail partners before there could be a potential issue? So I mean what it sounds like is like you have inventory through June. What we'll see into July and back-to-school, that's when you're sort of relying on production to sort of deliver products. Are you worried about any delays in deliveries at this point for back to school? Or how are you thinking about that?

We're not worried about any of that yet. We're watching it carefully. I mean the reality is we have to reflow a lot of inventory now based on the changes and some of the dislocations and getting back up and running for some of the factories. In other instances, though, we're -- we got back to full production capacity. Certainly outside of China are near-full production capacity pretty quickly. So it depends. Right now, we don't see anything that is concerning to us. But we're going to watch it carefully. We want to make sure our customers get the orders they place to the extent feasible, and we're managing our own inventories. I mean I think, thankfully, we were in a pretty good inventory position going in. You had some preproduction before CNY that has helped offset any short-term issues. We're watching it carefully. But at the moment, I wouldn't tell you that we're concerned. We're just vigilant and active.

So I guess along that point, people have talked about port congestion. Some of the ports have been closed, maybe airfreight rates have gone up because everybody is trying to -- instead of having to go to the port, maybe fly it in, but that's been tougher. Have you seen any issues around that?

We haven't seen any material issues on the transportation side yet. No.

Okay. And then obviously, consumers in China haven't been shopping for a period of weeks. There's a little bit of concern about the inventory build in China. What's your view on that?

Yes, again, it will be hard -- we're hard-pressed to answer that until we see how quickly the consumer comes back. No doubt there will probably be some seasonal miss in there. Then again, we feel very good about our ability to deal with that as a company. One of our core strengths, as I mentioned, is the ability to move product across the globe and deal with it in an effective manner across the globe, leveraging kind of that global footprint. That being said, we'll have to wait and see. We'll have to wait and see how quickly the consumer comes back. I think of all those poor unshoed feet right now that need covering. So we're definitely focused on it. We're watching it. I think we probably need another 30, 60 days before we have a good sign of exactly what kind of recovery we're looking at. Is it more V-shaped? Is it more U-shaped? Is it flat? We don't quite know. But we're watching it carefully. And I think that's probably the big question on everybody's mind at this point.

Okay. So now, if anybody has a question? Definitely, I haven't got any questions yet on the iPad here. But send them in. Otherwise, I'm just going to keep asking John questions. Maybe just following up on that. You're making -- building a giant DC in China. It's going to be a fantastic project -- fantastic when it's finished. Has this coronavirus situation impacted the plans to get that up and running by the end of the year?

Not by the end of the year. I mean, it's put a little delay on that, and that is owing only to the availability of workers. When the travel restrictions went in place, there were certainly some limits on worker mobility for a few weeks. But absent that, no, that contains -- that continues to be in all systems go project for us. It's a very exciting one. It's our first distribution center in Mainland China, and we're excited about that. Unfortunately, demand patterns in that market are already above the need for that. So we'll actually have to look very quickly at building a second distribution center to fulfill the demand we have in the market already. So we're excited to get that up and running. And we think that long term definitely adds some opportunity to leverage to the business, but more importantly, really takes distribution for a significant chunk of our business into our own hands, which is something we like. Because we like to make sure we can monitor, we can ensure delivery, kind of your fill rate question earlier, your delivery time question, that is enhanced by our ability to own and operate our own distribution centers. I wouldn't say that it's large though, because I'll tell you right now we're in the process of also expanding our U.S. distribution center, which is a very large presence and is needed in the U.S. as well.

All right. So maybe we'll do one more CapEx question and a balance sheet question. Because in times like this, it must be nice to have about $900 million in net cash sitting on your balance sheet. The company's making big investments, obviously, in California, china, Belgium for distribution. What do you see as sort of a normalized CapEx rate going forward? And at the same time, maybe take us just a little bit up the cash flow statement. Talk about the normalized operating cash flow because it's been a little bit volatile over the last couple of years. So just give us an idea with all things, talk about sales, gross margin, SG&A, how much cash flow you think you're going to produce generally?

Yes. I mean, on the CapEx side, I'd tell you, we're in an elevated kind of CapEx curve right now. I'd say, last year, this year and next year will be kind of peak levels for us, and it's all about putting money back into the business to grow the business. Most of it is in distribution. We do have a campus centralization project going on in California. We continue to open stores. As I've mentioned, we've made some significant investments in e-commerce, information technology and the like. And that's going to be elevated over, again, last year, this year and next. The exact timing of that is somewhat dependent on things like I -- that I can't control, like the California Coastal Commission and approval on project plans, but we're making a concerted effort to put a lot to work in our distribution capacity that we think will certainly advantage us long term, so we'll continue to do that. In terms of cash flow generation, I mean we think even with that, we're free cash flow positive. Operating cash flow for us hasn't been something that has been terribly consistent, but it's also a reflection of the demand patterns we've seen and where you see a build in the business. I think generally speaking, we do a very good job over a more than 1-year horizon at managing cash flow and bringing cash into the business, which is why we're sitting on -- a small correction, over $1 billion in cash and investments on hand, and we do like that position. Right now, quite frankly, this is precisely the type of environment we're having our balance sheet, our cash position. And in fact, quite frankly, our ownership structure works really, really well for us. It gives us abundant faith that no matter what happens in the next couple of quarters, SKECHERS will be a brand that continues to thrive coming out of this situation. Could we do better? Absolutely. Everybody can do better in managing working capital and the like. But we feel like we do a fairly decent job, given the demand patterns we've had in managing that and generating free cash flow, which is ultimately the main goal.

Right. So I guess, the very last one, just with the balance sheet strength that you have, does it create opportunities in an environment where there's a lot of uncertainty? A lot of smaller brands are really kind of struggling. What kind of opportunity does that create for SKECHERS to continue to take share and extend the brand? And it's already the third largest footwear brand in the world, but how close can you get to those #2 and #1 guys?

Well, I don't know if either of those 2 is available for sale. That's probably not something we'd contemplate at this juncture. But we do keep our eyes open as to what's going on in the market. I think the question is, is there anything out there that inorganically would give us more acceleration in growth and gives us -- we have it organically. And I think right now, to be honest with you, we're very excited about the organic opportunities that we have. It doesn't mean that we wouldn't act in the right circumstances at an opportunity if it came out. We are vigilant, but right now, I'd tell you, we're very excited about the organic growth of the brand, and just making sure you're managing that is a full-time job and a half. So that's probably where our focus is. But it's not without being vigilant about what's out there and what's a potential opportunity long term.

Got it, all right. Well, why don't we stop there. John Vandemore, CFO of SKECHERS. thank you very much. Thanks, everybody, for listening.

Thank you. No questions?