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

Good morning, everyone. This is Omar Saad from Evercore ISI. Thank you very much for joining us in our Annual Consumer & Retail Summit. Sorry, we're not in person with the store tours and the presentations and meetings, but we really appreciate everyone participating virtually, the many clients and institutional investors on the lines, and of course, our management teams. Today here at the 11:00 hour, we're very excited to have John Vandemore, the Chief Financial Officer of Skechers. It's been an exciting stock and a really fun company to watch evolve over the last several years into a real kind of global branded powerhouse in what we know has been a very strong athletic, athleisure, casual, lifestyle segment of the market -- the broader market. So thanks, John, for being here. Good morning.

Good morning. And good morning to everybody listening. Thank you for having us.

Great. So let's dive right in. I'd love to hear your latest thoughts on the kind of the pandemic, the recovery curve coming out of the pandemic. You guys are such a global organization across so many different channels and touch points. I think you have great visibility into the consumer, recovery trends in North America versus Europe and Asia, digital versus stores. I know you guys have had really strong e-commerce growth, but you're also opening a lot of your stores and wholesale channels again, wholesale versus retail. We'd love your broader thoughts on some of these ongoing dynamics. Thanks, John.

Well, look, and I'll comment where I can, but I think we all recognize that this is an evolving story that we're in. Things change, sometimes week-to-week, even day-to-day in different markets across the globe. The #1 thought I would choose to impart today is one we've echoed a couple of times speaking publicly, and that's a cautious optimism based on what we're seeing in the markets we participate in globally. What we've seen over the course of this pandemic, obviously beginning most intensely in Asia and specifically in China, is now becoming a relatively consistent pattern where you see a rather sizable immediate drop-off in business that then begins to recover at a roughly similar pace market-to-market with some notable variations, but encouragingly, a positive trend as things begin to reopen and as consumers begin to get back into that mode of shopping. We spoke about this a little bit in China. China to us today is a largely reopened, very close to normal shopping behavior on a year-over-year basis at the moment. Obviously, it's something we're watching carefully. But you've seen a steady progression in improvement in that business since the nadir of their lockdown efforts. Today in the United States, albeit through a different lens because the lockdown periods in the United States were a little bit longer, they were actually a little bit slower to come online. You're seeing the market begin to make that same recovery. Now it's not a perfect match in terms of pacing, but I would say the general direction is relatively consistent. Today, as I sit here, we have the vast majority of our domestic locations open in some way, shape or form. I would say most have some semblance of moderated operating hours. And obviously, traffic isn't yet fully back to those pre-pandemic levels. But what you're seeing is that almost each and every store reopens to somewhat subdued traffic patterns and customer behavior and then begins to build positively from that on a march toward flat to, in some instances, even better year-over-year comparable same-store sales. Along that same path and probably the one outlying and yet very positive trend we've seen is that our e-commerce business has remained extraordinarily robust and has actually even outdistanced the incredible growth rates it was obtaining prior to the pandemic. For us, what's most encouraging in that is that it clearly illustrates the desire of consumers to get to our products, to get the product they need. It also illustrates for us very clearly that the product remains both on trend and priced and featured right for the consumers out there who know and appreciate our brand. The additional benefit of that, though, is that we're getting an opportunity to make more contact with newer consumers. Now they're not obviously all new consumers, but in that process of increased demand online, we are capturing new consumers. We're able to bring them into our loyalty program. And as a result, we believe we're going to continue to grow that relationship because we know once we get somebody into our loyalty program, they become a much more valuable, much more long-term customer. And the LTV benefit is substantial. Outside of the United States, just quickly, we are seeing varying rates of reopening activity in non-U.S., non-China markets. Some are moving a little bit faster. Some are moving a little bit slower. What's interesting, though, is even in that variable pace of reopening, once stores in a market are reopened, we're seeing that positive trend upward of behavior as, again, consumers get used to the idea of going out and shopping again, they get into the stores and they start buying again. So even though there is some variability in when stores reopen, we are seeing that generally positive trend line replicate itself market-to-market. And the sum total of all that is, again, we remain cautiously optimistic that we're well on our way back as an economy and, as a result, as a brand to repositioning ourselves in that same point of strength we were exiting 2019.

Got it. That's really helpful, John. As we think about some things as a result of this pandemic will go back to normal, some things may never go back to normal, one of the things we keep landing on and having conversations about with investors is whether or not there's this casualization and athleisure, athletic trend accelerates and then becomes more permanent if people are working within home or working out more, wanting to be comfortable and stylish and not have to wear as many dressy outfits and dress shoe categories. Do you think that's an area that could see permanent change? Or does that kind of recent inflection would maybe normalize back to the long-term strong trend in athletic?

Well, here's what I can tell you, and let me first note that the last person, I believe, in footwear you might want to be taking advice from how to style up a category is myself. So let me admit that. But I can tell you what we're seeing a bit of at the moment and one of the reasons why we think we're well positioned within the context of that. We're definitely seeing an increased demand toward casual styles, casual athletic. Now I would say it's not extraordinary. It's a notable increase, but it's not extraordinary. Obviously, that benefits us as primarily a casual and athletic provider. But I would also note that one of the benefits of Skechers overall is the breadth of the product line we deliver to the market because it doesn't pigeonhole us into just one category at any given time. What we have in our range is tremendous flexibility to adapt and reflect what the market is looking for at a given point in time. Further to that, I would tell you, just at our core, we are an organization that seeks to respond to where consumers are going and what they want, not necessarily the other way around, dictating to consumers what they should be, desires of from a product standpoint. So when you take all that together, what I think it gives us is a very broad product line to play with. It makes us very adaptable to what consumers are looking for at any given point in time. It gives us an opportunity to, quite frankly, address a global audience at one -- because we're not pigeonholed into one style that may be germane for one market but not another. So that flexibility stays throughout. And then again, in this environment where you are seeing absolutely increased demand for casual and athletic, and people aren't likely buying as much dress as they would historically, obviously, we're very well positioned for that. And then I think you match that with what we always say are the core tenets of what we're trying to bring to consumers, which is well-styled, high-quality, on-trend product at a reasonable price. And if you bring those to consumers, what we see time and again is that they come back to the product, and they're very loyal customers.

Great. Let's stay on the conversation around e-commerce. It's still a very low percentage. I know it's growing really strongly right now and has been even before the pandemic accelerating. How do you look at that channel? How big it could be for you? We have a very wide range. Some brands are single digits and some are 30-plus percent in terms of the digital penetration. Has the culture changed at the company around e-commerce? Is the company really accelerating its investment and embrace of e-commerce and digital? I know it's something that's obviously working on the revenue side right now.

Well, look, I would just -- recently, certainly, over the last 6 to 8 weeks, it's been a very high proportion of our overall sales, but that's cheating a little bit. It's solitaire in that instance. And what I would tell you is for a while now, we have been very dedicated to the notion of building our e-commerce capabilities and revenue. That's been a focal point of investment for us, really, certainly before I arrived but continuing over the last 3 years. It's something we know works for consumers. We know it's important to have for consumers. We do believe, though, that it's a combination of our online capabilities and our physical capabilities that really match with consumers' long-term shopping desires. Footwear is a category people still like to try on before they buy. So what we're aimed at bringing to consumers is a combination of what they can -- what they want online in terms of capabilities to shop, to browse, to research, to transact, if that's what they want, combined with an opportunity at physical retail locations to still try on, touch, feel product, if that's the case. Obviously, the in-between space is the ability to shop and select online and reserve it for an in-store try on or pick up, which is something we're working diligently to bring to consumers. So all of that has been a focal point of investment for us for a number of years. I would say the growth that we're seeing at the moment, which obviously began in earnest as the pandemic took its hold on the U.S., is even before we've been able to make some substantial technology changes that we've planned for the last couple of years. That includes a new website. It includes a new mobile application. It includes a new loyalty program. It includes a new point-of-sale system at retail that works cohesively with those solutions. So we're very excited about what that means for the future of our brand. Quite frankly, the only thing that I think stands in the way of it becoming a significant portion of our overall revenue is the fact that against the backdrop of that, which certainly characterizes the last 2 years of e-commerce growth, we've also been growing on the physical retail side. So as a relative measure, I think the one thing that could stand in its way is that we continue to grow our physical retail dollars. But again, at the end of the day, what we hope for is a moment where it's somewhat agnostic to us, whether or not you start online and you end in-store or you start in-store and you end online or either the 2 options in between because what we care about is delivering Skechers product to consumers in a manner in which they want it at a given point in time, and that spans a lot of different potential shopping patterns, which is what we want to be capable of delivering. At the end of the day, I don't see any reason why the e-commerce portion of our revenue can't be north of 1/4 to higher of what we deliver. But again, I wouldn't suggest that, that means then that we would slow down off-line because to date, we've been actually -- been able to grow both fairly robustly, and we think that's certainly what the near-term offers as an opportunity for Skechers and our brand.

Right. Agreed. Do you have a view on where the -- kind of the third channel, the wholesale multi-brand channel where you're making large wholesale shipments instead of selling, whether DTC or in your own stores to consumers, one pair at a time? Where that kind of traditional wholesale channel? It's a bigger market in the U.S. than Europe and Asia, especially Asia. But how does that channel fit in do you think long-term for a brand like Skechers?

We're very supportive of the wholesale channel, which obviously ends at some point in retail to a consumer because, again, what's important to us is that a consumer has the opportunity to find the Skechers product. That's what resonates with them. That's what makes them loyal to the brand, irrespective of the channel in which they purchase it. Now what we don't control is the relative health of that segment. And obviously, over the last 5 years, we have seen some tremendous struggles for the wholesale channel, the end point retailers. And so that's why we think it's very important to offer a complementary approach to the end customer of our own stores, of our online opportunity, of our wholesale partners, of our wholesale partners' online opportunity so that the consumer can get the product where they want it, in the channel they want it. Now to the extent the wholesale channel continues to struggle, we will definitely work with our partners to help them in that vein. But at the same time, we want to make sure that consumers can still find our brand. So at the end of the day, we want a healthy wholesale channel. We want a healthy direct-to-consumer physical channel and a very healthy direct-to-consumer online channel. We think all that can work together for the benefit of the customer. And what we know is there's certainly more than enough customers out there to support all those channels once they try the Skechers brand, once they have an opportunity to experience the features that we bring to consumers, at the value we deliver. I think pound for pound, we deliver the best shoe at our price ranges that are out there today, and consumers generally agree when they have a chance to experience the shoe. So that encourages us to keep all those channels very active and thriving to the extent we can affect that.

Yes. It's great update. Not to jump around a little bit, but your last point, I think, is very interesting because I agree the value proposition of Skechers, the quality of the fashion, the trend -- on trend, the comfort for the price is one of the best values out there. How do you think about the brand's pricing power from that context? Or how is the brand used and/or plans to use pricing given that kind of very strong value equation?

Well, I think we've illustrated that we have pricing power. Now the first evidence of that is in pricing durability because I think what you see generally is in different marketplaces, different solutions work better. But what we've seen kind of across the globe is that we are able to maintain our relative value proposition irrespective of the geography. And that to me is a testament obviously to the strength of the product. Look, we will always say, and we certainly mean it every time we say it, we're a product-driven company. And that product resonates in geography -- per geography, and I think that substantiates the pricing power. That being said, look, we're not looking to drive price as a primary means to growth. That's not what we think is in the best interest of the brand long term. What's in the best interest of the brand is getting our combination of style, comfort, quality in consumers' hands at a reasonable price point. And then from there, they build a very strong affinity for the brand. They love the features. You always hear about people appreciating the comfort along with the style that we bring. And then we've been able to expand that across more and more categories almost every year, right? So if you do that, quite frankly, pricing tends to take care of itself. But more importantly, what you have is a consumer who loves your brand, and that leads to the highest value creation overall. So while I certainly am very confident in our ability to price, what I would tell you is we're not a price-first company. That's not what we're looking to do. And we're certainly not looking to do that at the expense of our partners in the channels. That's not how we have tended to operate. But at the end of the day, what we want to build is a loyal Skechers customer because that's what will lead to the most value creation for our brand and for our shareholders, for everybody involved.

Great. That's super helpful, John. A couple financial line items that you maybe need to think about differently after the pandemic. First, on kind of protocols in your stores. Do they affect the store operations and the expense structure of those stores? Are there higher operating costs or different ways you have to run those stores, at least in the intermediate -- near and intermediate term? And then also -- let's start with the protocol, the store protocols question.

Well, yes, those are absolutely different, which, quite frankly, I would suggest is pretty common across the retail marketplace today. The one thing that we looked at, at every store before we decided to reopen it or not was can we operate that store both in line with whatever regulations exist in the market, although in some markets, that's been painfully wanting, but also what makes sense for the safety of our employees and our customers. And today, that simply requires a different operating environment than what we've had traditional. So we've implemented several measures at our stores that I think are becoming more common in retail but again reflect the highest value placed on the safety of employees and customers. It's -- obviously every employee is masked. We have hygiene stations throughout. We have numerous -- almost points of sale displays on the requirement for social distancing. I mean we've taken it all the way to how do we deal with returned product and things like that. So there's definitely a different operating environment. I can't compliment our retail team and, more importantly, our retail associates more than tell them that it's become almost flawless in the way they execute that because it is additional level of responsibility and requirement for them. And they're handling it in, I think, the most customer-friendly manner possible. But those are additional protocols than what we've dealt with traditionally. Now I'd tell you, I don't really yet have a great handle on exactly what that means in terms of incremental cost. We've seen some studies that would suggest it could be high as 200 basis points on a traditional operating environment. I'm not yet convinced we know that fully because the reality is we're not really back up to scale across the board. And I think once we've had an opportunity to deal with this as a part of how we operate, we'll get better and better. I mean that's just how the business operates. So I think it's a little too early to look at that from a cost standpoint and draw any long-term conclusions. But again, it is important for both employees and customers to know that we have established more operating protocols to keep the store extremely sanitized but also, quite frankly, the same welcoming environment they're used to in a Skechers store, be it a concept store all the way down through our big box warehouse-style stores. So it's in place. It's running. I suspect we'll continue to get better at it, as will the industry as a whole. And I think consumers' expectations will kind of normalize at some semblance of that level until something changes significantly in how the pandemic is affecting individuals in any -- in every given market. The other thing I'd note just for the record is that's pretty consistent across the globe. Obviously, some markets have more specific requirements, and we meet those certainly from a legal standpoint. But I would tell you those protocols are becoming fairly normative across the globe, not just in the U.S.

Got it. Got it. And then on the other side of the financial equation and the category of things that may have changed because of the pandemic, your inventory levels, the promotional environment. Are you bracing for a bad kind of 2H and potentially some bleed into next year? Or do you think you and other retailers have been able to use e-commerce and some of the kind of resurgence of demand now that things have reopened and being able to manage your supply chains to get inventory at a level where it's manageable? Do you have a sense or a view on this?

Well, look, first, I would compliment our own supply chain teams. I mean they did a marvelous job working extraordinarily fast with both our retail teams, our retail planning environment and our wholesale partners to do everything we could to rightsize our inventory position overall in light of the pandemic. That meant reflowing orders for customers. That meant reflowing production orders from factories, all the while maintaining a very strong commitment to support our factory partners. That meant maintaining a view on how much inventory was wise for us to take against a very unknown backdrop of consumer demand. I suspect based on what we've heard anecdotally that a lot of branded players were doing the same thing. I think we've all taken a view that we'd rather be more conservative than aggressive on inventory. And we'd much rather be in a position at the end of the day where we're chasing product versus having too much and having to liquidate it through the channel. The ultimate test of that all will, though, be consumer demand and how quickly that comes back. I would tell you, personally, at this point, I'm certainly optimistic about what I've seen early on in the consumer demand perspective that would lead me to a very comfortable feeling relative to our own inventory positions. I can't really speak to others. But if we all took the same actions going in, and the recovery has been, I think, a little bit better than people would have worst feared, that should lead you to a positive destination. That being said, certainly, inventory was higher for us at the end of Q1 than we would have anticipated because we chopped off a couple of weeks of shipping on the wholesale side and a couple of weeks of selling on the retail side. So I think it'll be dynamic for a while. The other thing I would note is certainly in China, we saw this. We've seen it a little bit thus far in the United States. As consumers come back into the marketplace, everybody is doing everything they can to reinvigorate that demand. And so there is a bit more promotion going on in the market than what we've seen at a normalized state this time of year. What we've seen in China is that has abated over time. So it's become less pronounced over time as the consumer has kind of gotten back into a normal pattern of behavior. And certainly, my expectation would be all things being equal, that will be a pattern of behavior that replicates in the United States and in the Western economies as well. But again, it's going to be largely dependent upon the consumer side of the equation. And that's something we're watching carefully, both for the original demand characteristics, which I just spoke about, but also the potential for something like a second shutdown or lockdown or anticipated restrictions later in the year on people's ability to shop. That's something we'll continue to watch with a high degree of vigilance.

Thanks, John. As a follow-up to the protocols, the store protocols, the operations and kind of you're seeing that on a global basis be pretty consistent, does that environment feed you guys with a greater urgency around kind of omnichannel and BOPIS and pick up in store, or like you said, order and discover online but actually have several different pairs there ready to be tried on and before the purchase? Does that kind of feed greater urgency to build those capabilities? And where are you on that time line?

Well, I think -- yes, absolutely. I mean the reality is we were -- as I mentioned before, we've been investing heavily in our e-commerce capabilities. And a piece of that to us, a very important piece, was upgrading our POS capabilities in stores. I'd say if we were running before, we're kind of sprinting to the destination of having a full complement of omnichannel solutions available, but we also want to make sure we do it right. We think kind of a bad solution isn't good for anybody, including consumers. So what we've done in the interim is we've certainly, if you will, bootstrap some solutions that we think are both the right experience for consumers as well as deliver the right capabilities, but we're also working diligently and quickly to bring those capabilities to life in kind of the full scope of what we envision. It will occur concurrent with the rollout of our new POS, which is something we did have to take off-line for a couple of months as we watched how the pandemic effects rolled across the retail environment. But I would tell you our expectation is in the very near term that we'll be able to roll out a very decent complement of what we expect in the future will be our full omnichannel capabilities. And we do believe that's going to be an important part of how consumers shop, not just because of the pandemic, but certainly, there will be a lingering effect for some time to that, and this will help ameliorate that at the consumer level. But ultimately, again, the goal is we want to be able to provide the capabilities that the consumer deems important because that's what leads to both greater brand affinity and, ultimately, higher sales.

John, do you have a view on -- kind of a steady state view on the profitability levels of these different types of transactions that the consumer is going to have these options for, whether it's an omnichannel transaction or they order it online and pick it up in store or have it shipped to home or -- versus the wholesale where you're obviously doing mass quantity shipments to retailers who then mark up and resell? How do you think about the profitability to Skechers, kind of overall financial statements, of those different ways consumers can consume your brand?

Well, yes. I mean we certainly have a view on the profitability in the direct-to-consumer channel that's informed by our retail stores today. What I think we're going to continue to learn about is when you fully bring capabilities like BOPIS online and curbside pickup both in a [ long bow pack ] online is how that impacts things. It will also -- those capabilities will also enable us to, should we so choose, a ship from store solution. Look, I think at the end of the day, what we know is the direct-to-consumer offering, at least as it exists today, is accretive to overall profitability levels. That being said, we love the efficiency of our wholesale channel as well, and it's why we say continuously, we don't really -- we don't want to put a primary focus on where consumers get our product, just that they get it, that they become Skechers branded consumers. But we love the efficiency of our wholesale operations. We think ultimately there's room for growth. And growth in both will lead to growth in our overall operating profitability and will continue to help us drive toward what we think would be ultimately that steady-state level of operating profitability, keeping in mind the fact that, look, we still think there's a lot of runway for this brand to continue to grow. And we're still excited about the opportunities to continue to invest in those because that's what we think will lead to the most value overall.

Got it. And along the lines of digital and data and technology, you talked about the loyalty program and how your loyal customers become really high-value customers over time. Can you talk more about data and analytical capabilities, if you're using AI to either -- whether it's on the consumer behavioral side and your loyalty customers or product direction? How do you -- how are you guys using data to make better decisions in the business?

Well, we're certainly doing everything we can to harness the maximum capabilities we can in data. Now that being said, I would point out because I think it is important certainly in a business like ours that is product-first, that's not going to be the decision. It really is only an aid to making decisions on a more informed basis, but it never becomes the decision-making of the business. That in our business, it's too complex, too nuanced, and quite frankly, has an element of fashion to it that you can never replace with just data. But our view is our ability to harness more data to bring more understanding of what's going on at the consumer level, at the product level will always advantage us long term. And so we continue to invest meaningful amounts of time and energy and money in bringing those capabilities more broadly to the organization. I hope it's actually, quite frankly, one of those areas of the business that we're never satisfied with that we always seize the opportunity to improve upon because as you get smarter, you can learn more, you can learn more faster, you can bring that to the benefit of consumers and product, to product development faster. I think we're still very early stages in what we can deliver in that vein. Again, as a complement to what decision-making already exists in the business among the business leaders and product leaders that we have because, again, that's what we think is the proper meshing of those 2 capabilities that really drives value for the business at the end of the day.

Great. Yes. Last question, pre-COVID, you guys -- if we rewind before the pandemic really hit and even China, you guys were running strong double-digit kind of plus 10% comps. I think it was very broad-based. You mentioned the breadth of your product line. Are there any kind of either strategic priorities or product categories, new products, categories that are resonating most before the crisis hit? And then I know you're the CFO and not the Chief Merchant, but any kind of really hot products you'd identify us to keep a lookout for or get a pair ourselves during and coming out of the pandemic?

Yes. I mean I think -- unfortunately, for us, we were extraordinarily strong coming out of 2019. And I say unfortunately because it certainly felt like as much as one could be, we were firing on all cylinders. Now the reality is, as I remind myself daily, that's a fantastic position to be in going into a situation like this because our general view is that nobody probably got significantly stronger during the pandemic. So to have that momentum, to have that strength in the brand and at the product level going in was very much a blessing. And what was unique about it, we thought, is that it was extraordinarily widespread. It was across genders. It was across almost every market. It was across multiple accounts. So it really spoke to the quality of what we were delivering for consumers. What was working? A ton of stuff was working and stuff that I think is also very appropriate for a lot of different categories. One thing that we've been focused on intently over the last couple of years, in particular, is being the company of fit and comfort, right, and continuing to double down on that strength in our brand, so products like Max Cushioning, Arch Fit, Stretch Fit, all those categories of feature on comfort that we're coming in to various subcategories of our portfolio were resonating. We were having great success in the technical running side. We brought our Hyper Burst cushioning to the market, and it's been fantastic. Both looks good but also feels good. It's very comfortable and lightweight. But I'd also just emphasize on the other end of the spectrum, categories for us like work, which is a category that many don't really think of but is a significant proportion of what people actually wear day in and day out, which is comfortable, value-oriented footwear for a workplace environment that has the qualifications necessary to satisfy whatever requirements exist in that environment like nonslip or puncture proof, whatever the case may be. So quite frankly, we don't think any of that product strength has dissipated in the face of this pandemic. It probably defers, quite frankly, consumers opportunity to appreciate it, but it doesn't, in any way, prevent it. And we're really excited about continuing that product strength going into a more normalized consumer environment because we do think it's absolutely critical both to the growth of our brand, but it also resonates so well. And I'd just lastly point out that again, in the e-commerce side of things, the strength we're seeing continues to illustrate that consumers want the product, want the casual, athletic, want the work product, the kids product, sandals, whatever the case may be, that continues to harness and deliver those 4 key value elements to our consumer of style, comfort, quality and a reasonable price. So I would strongly encourage everybody, find the Fit feature that works best for you but also try the others. There's a lot out there. And I'm sure what you'll say, which is what almost every consumer has ever said about Skechers product, is you can't believe how comfortable they are. For a stylish product, well made and the price point it delivers, you're going to be shocked by how comfortable it is.

John, thanks very much for the conversation. It was a great talk. Best wishes for the rest of the year.

Thank you. Thank you, everyone. We appreciate it.

Thanks.