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

Super excited that Skechers is joining us today. Representing the company is John Vandemore, the CFO of the company. And what we're going to do is we're going to have a little chat just about the business, talk for about 45 minutes. I'll turn it over to John to make some brief opening remarks just to get the conversation going, and then we'll do -- dive into Q&A. [Operator Instructions] But with that, John, thank you so much for being here. Really appreciate it. Maybe I'm just going to pass it to you, see if you want to sort of start off with a few words, and then we'll sort of dive into the Q&A.

Yes. Great. Thanks, Jay. Thanks for having us. As usual, as I say, this conference always has a special place in my heart, usually due to the travel challenges of getting up to Boston in the winter. But this year, I actually wish I could be experiencing those travel challenges because more than anything else, we would love to all be together personally. But as this pandemic unfolds, hopefully, that will become more and more likely. The first thing I'd say is at Skechers, we are today cautiously optimistic that we are, as a globe, turning the corner on the pandemic. And we're excited for what that means both for our brand, but also for the economies of the world. Today, there are obviously still more restrictions in place from the pandemic. But as those begin to ease, as the vaccine becomes more widespread in its application, we firmly believe consumers are going to come back, and we know they'll come back to the Skechers brand. We know what it means to them: style, comfort and quality at a reasonable price, and know that, that comfort feature in particular promotes health and well-being and is something consumers continue to gravitate towards. So again, with cautious optimism, we look forward to the next couple of quarters. We'd like to see things get back to normal as soon as we can, safely, of course. And when it does, we're supremely confident that the Skechers brand will continue to grow and continue to mean to consumers that 4-point element of what we bring as a brand: style, comfort and quality at a reasonable price. So with that, I'll be happy to answer any questions you have, Jay.

Super. Well, John, thank you. And I think that I want to start off with just talking about top line growth. Obviously, the pandemic affected fiscal '20 the way nobody anticipated. But if you look back in the 20 previous years of Skechers, the company has grown the top line, at an average, 11% rate, which is pretty remarkable. I mean, it's pretty hard to find a story within all of global soft lines that has had that kind of growth. And I'd like to say is -- I know you like to say this too, that Skechers is the third largest footwear company in the world, which I don't know if people really realize. What do you feel the top line growth rate can be coming out of the pandemic? So obviously, '21 is going to be a rebound year. But let's just assume '22 hopefully is a normal year. What -- do you think the company can deliver -- can continue to deliver really above-average top line growth?

Well, the short answer is absolutely. And the thing we always point back to is we were exiting 2019 really as the very early stages of the pandemic began. We couldn't have felt better about our brand and our trajectory. And in fact, coming out of 2019, in that fourth quarter, if memory serves, we grew in almost every market. And in fact, we even joked that the only thing that could hold back the brand was civil unrest. And that had occurred in a couple of markets and challenged our growth there. But almost everywhere else, we saw very robust top line growth. And for us, that's really a translation at the consumer level of an interest in our brand and growing -- our brand is obviously our primary goal. We are the third largest footwear provider in the world, I think many people do miss that, but we also have one of the most impressive growth trajectories in the business. And I think, quite honestly, there's many years of that ahead of us. Obviously, the pandemic was a setback, but we've been very pleased at our pace of recovery, particularly on the top line. And we're very enthusiastic about the growth rate we'll see this year, not just relative, by the way, to 2020 which was obviously depressed, but even relative to 2019. And then what we expect to see going forward is really -- and I don't mean to make this sound trite, more of the same. More impressive top line growth, in particular, outside of the United States, but also with a focus on our direct-to-consumer channel, but even in the United States, where, obviously, it will be a bit more muted as a mature market. But we think much of the retail attrition having taken place lays the foundation for a nice mid-single-digit growth rate long term. And so we're incredibly encouraged by our opportunity as soon as we get past the pandemic. And as I said just a moment ago, we're cautiously optimistic. We're beginning to see that corner. And then we can turn that and get back to the type of growth Skechers is used to putting up.

Understood. So -- and maybe let's unpack that a little bit because you talked about international versus U.S. International has been such a huge part of the story, and it's more than 50% of the business now. You've had amazing success in China. Can you talk about just the potential to continue to grow in China? And it's already at a retail level probably over $1 billion in sales. Do you think there's more growth in China? Because you've had 20% type of growth in the normalized environment. And then what would be maybe a couple of the other countries where you feel like there's really an exceptional opportunity?

Yes. We couldn't be more excited about China on a continuing basis, and that's on top of several very strong years of growth. For us, China represents probably the single largest opportunity to grow in the near term, both in a dollar capacity, but also in a percentage capacity. It's going to be because of the same drivers we've seen to date, which is online growth. E-commerce growth in China is astounding, really has been, and it's been accentuated in the pandemic. But also the opportunity to grow distribution through more doors, more formats, experimenting with formats that are somewhat new to China but have worked in many other markets across the globe that we think have promise. And so we continue to be very optimistic about the opportunity with China. The only challenge with China is -- and this owes entirely to the law of large numbers, the percentage rate may not be the same. But the dollar growth rate, we are encouraged, can be very similar to what we've seen over the last couple of years. And we fully expect China to be $1 billion market or more for us. When it comes to other markets to get excited about, whenever we're asked this question, we suffer from too much optimism. But really, that's born out of a confidence that our brand is doing well everywhere. If I were to kind of rank order our opportunities, we certainly think the balance of Southeast Asia outside of China holds extraordinary opportunity. That's everywhere from Korea, Japan, Thailand, Vietnam, Indonesia, Malaysia, the Philippines, all the way to India, which is one of the markets we're most excited about. But it doesn't stop there. I mean, when we look at South America, it's a market in several areas we do extraordinarily well, and others that are completely untapped. And as our brand continues to grow, we see consumer appreciation for what we deliver and how we deliver it. And it's growing in an exciting level there. But even when you then look at Europe which has several mature markets, we've seen some of those be among our top percentage gainers over the last couple of years in quarters. So we're also excited about the opportunity there. In mature markets, it's more about increasing our product breadth, getting more distribution, but also beginning to penetrate in channels like e-commerce that are still very nascent in some of those markets. And in Eastern Europe, it's more about establishing the brand, opening stores, franchise or our own, and really growing brand awareness for Skechers in those markets. And we think those markets have a tremendous long-term potential as they continue to mature into their own, and really embrace Western brands and Western products in a way that is reminiscent of what we saw early in Europe when those markets opened.

Understood. You mentioned franchise versus company-owned stores. Company has a lot of different business models across the world outside of the United States to extend the brand and grow the company, whether it's JVs or distributors or company-owned stores or online. Going forward, which -- what type of distribution do you think is going to be the one that really drives the international business?

Well, just from a size perspective, our owned and subsidiary businesses are probably going to be the most significant growth drivers, although we've had tremendous success in many of our joint ventures. I think the one thing that is unique to Skechers is our willingness to be flexible in the operating model. We don't have a one-size-fits-all approach either to how we run a market in terms of ownership, but how we approach it from a strategic perspective. We're very adaptable and we're flexible and we try to play to the strengths of those markets as a means to penetrate the brand. What we tend to see, though, is a very common experience after that, is once the brand is established, once it gets known, once consumers understand the value of what we deliver, there's a quick growth into all channels of distribution. And then eventually, in many of those markets, it makes sense for us as a brand to own that market as well. But that's not a rule we follow religiously because we are cognizant that in different areas of the world, there's different approaches that are more successful. I'm very fond of the quip that I heard long ago when many U.S. companies would describe the U.S. and international that, that there was no country called international. International is actually a composite of many different countries with many different dynamics at play. And so being flexible in how you enter and operate in those markets, I think that's been an extraordinary advantage to Skechers. And our willingness to pivot if the first choice isn't working and move to a second is also a strength. Because we'd much rather be successful than be right, and so we're willing to change our mind when it's important or necessary and then to adapt to what works in the marketplace.

Very interesting. What about e-commerce? The company has really put a lot of time, and John, I know you've put a lot of time into working on creating a turnkey one solution e-commerce model for all of those different countries. And I know presumably, the pandemic sort of disrupted that. Can you tell us where that stands now and just sort of your ability to do more direct e-commerce on skechers.com or through your apps in international markets?

Yes, absolutely. The first thing, though, I would be remiss if I didn't offer a note of thanks to our digital and e-commerce and retail teams this year. In the midst of a global pandemic, we opted to continue forward with many investments we had made in the company and deploy those actively in the face of this operating environment. That included everything from a complete revamp to our point-of-sale systems in our retail stores as well as a whole new e-commerce platform and native mobile application suite. And those all, quite frankly, got introduced over the course of 2020 more or less without a hitch. Now I know the technical teams would cringe when I say that. But certainly, they did a phenomenal job of introducing those capabilities domestically, which now poise us to be able to take those internationally. And that's what we're looking to do in 2021 and beyond. It will start in the retail stores, where we will begin the rollout of the same point-of-sale system, so we have leverage across the company, but then also extend into introducing direct-to-consumer e-commerce capabilities in nearly every market in which we operate directly. Some of those markets have an e-commerce offering today, but it's less than ideal from a technical standpoint. And others, it's going to be completely new. So what we've done is invest in a technology stack that allows us to deploy a solution globally, then -- and as a result, gain efficiencies as a company from managing centrally many aspects of that mechanism, everything from merchandising to -- for the advertising on-site to image management and creation. And so we're in the process now of planning a rollout of north of 15 websites over the next, I'd call it, 12 to 18 months. And then ultimately, to the balance of our subsidiary portfolio, that will give us a direct-to-consumer access online. I should mention, though, that, that doesn't mean that's the only method through which we believe we can penetrate online sales in many of those markets. We'll continue to work with wholesale partners to support them in their digital offerings. Because, again, our primary focal point as a company is to enable the acquisition of Skechers product by consumers where they want it, when they want it, how they want it. We want to make it easier for them to do that. We want to make it frictionless for them to do that between online, mobile application, at our stores. And we'll continue to invest time, energy, and certainly, capital to make that happen because we believe that's what consumers want at the end of the day.

Right. Understood. And I think it's worth mentioning, though, Skechers has done an amazing job on Amazon over the past 20-plus years. Great partnerships in a lot of those different big e-commerce online-only platforms. But John, maybe just to contextualize the opportunity with Skechers own e-commerce in international markets as you roll out those websites over the next 12 to 18 months. The perception is that online -- Skechers own dot.com, as a percentage of retail sales -- not even the total company sales, retail sales, is maybe 10-ish percent. Obviously, it's sort of hard to normalize that because of the pandemic. But like even within that piece, international is a very small piece. Since you turned on the new systems in the U.S. market, there's been huge growth online even before the pandemic. So can you just give us a sense, without giving guidance or any kind of numbers you're obviously not comfortable with, what's the size of the opportunity to be able to go from a really, really small direct international e-commerce business today to where you think it can be once everything is sort of built out?

Yes. Well, let me first speak to the U.S. and then I'll address the international opportunity. I mean, we've said before, we're a little bit later to the game on e-commerce. I think, by the way, we've exhibited tremendous make-up speed. So I very much like where we sit today and certainly applaud the investments the company has made over the last 2 to 3 years, I think, quite frankly, had we not made many of those in '17 and '18 and '19, we would not have been able to capture the fantastical growth we saw in 2020. So we made the investments. We caught up. I mean, we really left ahead of our business plan for e-commerce by a couple of years in a matter of almost 6 short months. Where that goes from here is really an open question. And I think, to be honest with you, it's going to be less important whether it's an e-commerce sale or an in-store sale because we really want to combine is the capability to do both. I think what you're seeing mature into the marketplace today is a maturation of that catchphrase omni-channel, in that, most retailers are now beginning to see what works well in that frame of reference. In some instances, it's buy online, pickup in-store; in others, it's reserve online; in others, it's the ability to return online merchandise in-store. And so what I think you'll continue to see us focus on is as we grow our direct-to-consumer business, it will be with more agnosticism between whether it's a digital-only or digital-first transaction or in-store first digitally enabled transaction. And really, what we care about is the transaction. That all being said, we absolutely believe there's room to continue growing the penetration of digitally enabled transaction in our direct-to-consumer business. It has been below, I think, others in the last couple of years. But this year, it's more of a mid-teens level overall, and we'll continue to grow that. As you pull back then globally -- and I think it's important also to recognize, many markets aren't yet at kind of China or U.S. level penetrations of online. But you're seeing it catch up fast. And so many of the installations we're looking at over the next 12 to 18 months are geared toward a future that anticipates a further penetration of online behavior in many of those markets because many of them, it's still relatively new. But even still, as we look at 2020, the growth rates we achieved in our domestic e-commerce business were very much reflected in many other markets. And so although the numbers were small, the growth rates were north of 100% in aggregate. And that tells us that, that shopping behavior pattern is coming to those markets. So in many instances, I feel like if you can contend that perhaps we were a little bit later domestically in deploying a best-in-class e-commerce solution, we're trying to get on the front end of that curve internationally. And I feel like we're doing pretty good in that score. And that will only enable our further growth in the direct-to-consumer channel, which we've said before, is definitely something we think we can continue to grow at that low to mid-teens level globally.

Got it. All right. So that's interesting. So I want to connect that to the U.S. business, speaking of being channel-agnostic and kind of that DTC growth. People traditionally, if you look back many years, have focused on the domestic wholesale business. Now I think people have understood Skechers is global, multichannel, omni-channel business, and it's really not about one specific country and one specific channel. But I think part of what the company has done over the last 5, 7 years is really continue to deliver growth in the U.S. above and take market share, even as that domestic wholesale business has had slow growth because the company's opened stores -- like increased square foot is 10% every year as comp is in mid- to single-digit rate. Do you see, going forward, that we're going to see a stabilization in the domestic wholesale business in terms of -- or I think we want understand, what kind of exposure do you have to department stores and maybe some of the channels where the traffic is most challenged? And how much can you continue to sort of replace that distribution, if necessary, with your own stores, and obviously, website, if necessary?

Right, right. Well, look, I think the first thing we need to recognize is we're still in the middle of a pandemic. So drawing too many conclusions long-term out of what we're seeing at the moment is something we want to be thoughtful about. Because it may be that as the world pivots back to pre-pandemic mobility, that the world looks a lot more like 2019 than it did 2020. It's also, I think, equally probable that some of the behavior that was established in 2020 remains. So the first thing we want to admit is we don't really know what the future holds, although we certainly want to be prepared for both eventualities. The other thing I'd note is in our wholesale business, and particularly in the domestic market, it hasn't been a rising tide lifts all boat scenario. There's definitely been some retailers performing stronger than others. What we've said is it seems to be that there's geographic concentrations that are working better than not. So in particular, if a partner is geographically concentrated in California or on the East Coast, it's been a little tougher sledding because of the restrictions in place, which is completely understandable. The other dynamic we've noted is that if a retailer has another source of traffic than just footwear and apparel, it's seeing much different traffic patterns than footwear and apparel players. And so for example, if you're in the sporting goods and footwear or apparel is an element of what you offer but not the totality, you're probably seeing better traffic patterns. If you step back then, what that means is even though we've seen very strong recovery in our domestic wholesale business, it's not because everybody is doing better. We think the opportunity exists for many of those retailers who have been experiencing more struggles to get healthier as well. And that would give you, I think, some tailwind in the domestic wholesale business. That all being said, I mean, our general belief is that the domestic wholesale business ought to be kind of a single-digit growth number on a regular basis, some of that being a little bit of price, some of that being a little bit of expansion. But it's certainly not going to replicate the size of growth that you see out of a market like China because we're just at a different point in the consumer discretionary maturity curve. But we do believe it offers an opportunity to growth. And then on top of that, what I would say is, look, the reality is in this business, the product speaks. And so if we continue to deliver product that works for the consumer, that offers that combination of style, comfort, quality at a reasonable price that they expect from Skechers, then we'll see growth because of the product. And we are a product-driven organization, no doubt about it, and we want to be because that's what we do best. And I think continuing to deliver a product that works for consumers like Arch Fit, like Max Cushioning, like many of the fit features like Hyper Burst that we've brought forward, those are all very attractive to consumers, in particular, in an environment where casualization remains the norm, I think, into the future. So all that being said, we're actually optimistic about the domestic wholesale market, probably more optimistic than we would have expected to be at the beginning of the pandemic. But we think that augurs for good things for the Skechers brand, and honestly, a recovery for some of those retailers who have been challenged throughout the pandemic.

Got it. Interesting. Maybe let me ask you about the product because -- and this is really maybe to help explain to people maybe what '21 might look like. The company, obviously, is known for selling a lot of athletic footwear, the GOrun, the GOwalk. Tremendous franchises, super successful. But athletic footwear is not 100% of the product mix. There's a lot of -- there's men's dress, men's work, women's work, there's boots, there's sandals, there's kids. There's lots of stuff in there. Some of those categories were not helped by the pandemic, to put it mildly, right, like work, like dress. Can you just talk about how the business was sort of impacted in those categories which were not comfy, casual, cosy, which is what people bought last year, and how maybe those businesses might rebound as we look into a post-pandemic world?

Absolutely. But let me first say, I think you've hit on what I think is a core component of what we offer that many don't, which is that product breadth. We offer product across a wide range of demographics and consumer needs. And I think you're actually seeing the strength of that this year. And this certainly isn't Skechers, but if we have been into heels and dress shoes this year, I think you would have seen a very different outcome. I think the diversity in our product worked very well for us. I would also say that despite the pandemic and probably the accentuation of the trend towards casualization that it brought forward, we still think that's a continuing trend in the marketplace, that people will still pivot more towards casual footwear and attire. That being said, we absolutely, as you mentioned -- and I'm wearing a pair of our Mark Nason leather boots today, we provide, black and brown solutions. We provide more formal solutions for work. And some of those have struggled, absolutely. Kids is another business. Without back-to-school, the kids business certainly hasn't been what we think it could have been in the year. And so as the market recovers, as, I'll say, the situation normalizes in many markets, we absolutely think there's a recovery available in many of those subcategories that will benefit our business. But we don't think it comes at the expense of the casualized categories either because those have done well. People are out. They're more active. I also think there's a general trend toward individuals focusing more on their health and well-being and appreciation that, honestly, comfortable footwear plays a key role in that. Anybody out there with a spouse who has to put on high heels when they go to work or go out knows that some of that stuff isn't comfortable. So I think a pivot towards focusing on health and well-being will enable continued focus on solutions that really emphasize consumer comfort. And that's certainly something we think is a sweet spot for the Skechers brand.

Got it. Right. And I think that piece, that diversity is one of the great things about the brand. And the fact that the brand is a brand that can sell across many different categories, it's not known as one thing. Its value, comfort, quality at the price, as you just like to say, that can be in anything. That really gives a much larger total addressable market, obviously.

And one of the other thing -- sorry to interrupt you, it also gives us tremendous flexibility as we enter foreign markets. Because within that breadth, we also have tremendous flexibility, everything from opening price points up through more established products. And using that as kind of many arrows in the quiver to attack each market uniquely has been a strength of the business. That product flexibility has really enabled us to find the right solutions for each markets, establish OPPs that work and then eventually guide and mature the market up to include the full suite of product available.

Right. Understood. I just think that some people might say, "Well, look at what Nike did this year. Look what Skechers did this year. It wasn't the same." I said, "Well, Nike, doesn't sell dress. They don't have the diversity of product." Sort of not to say it's not as great a company, but people might not really realize under the covers that like some of these pandemic factors may be impacted Skechers more than they realized.

Yes.

All right. So John, let me ask you about gross margin because fiscal '20 was kind of an amazing year in the sense that gross margin was up 47.8%, I think, if my memory serves, which pretty good accomplishment considering the ability to manage inventory. And to do all these things that had to be done to get to that point is a testament to the company's strengths. But going forward, that's what the market cares about, what do you see as a gross margin opportunity going forward? And sort of what are the drivers to get there?

Yes. The first thing I'd say is I think we have to acknowledge '20 was a unique year, if only because of mix being off-balance through much of the year. We were incredibly pleased with several aspects of our gross margin performance in '20, though. First among it was, as you noted, there was substantial support for price in the marketplace. We did that as a brand. Others, I think, saw value for what we are offering. And it didn't diminish the sell-through. And so products like Arch Fit, Max Cushioning, that we think can carry a bit of a premium, have performed exceedingly well and then price was maintained. And that obviously enabled sustenance in the gross margin line. Plus mix worked to our benefit with international being stronger, direct-to-consumer being more pronounced, and within that, e-commerce being more pronounced still. Those were all advantages. As we look to a normalized world next year, we actually think there's kind of offsetting pressures that will hopefully keep margins -- gross margins relatively stable. On the plus side, we will mix up, as retail comes back, with more beneficial gross margin contribution from our direct-to-consumer business. We expect more growth outside the U.S. than inside the U.S., which enables gross margin accretion coming from our international businesses. Those are all very good things. On the flip side, we are seeing some input cost pressures, some transit cost pressures, the expiration of a few favorable tariff mechanism. So those are adversely impacting some landed costs. We don't think that endures too long, but it's something we're watching carefully. The net effect of all of those at the moment for us, we believe, will point to a relatively stable gross margin, but then importantly, provide the foundation from 2021 onward to continue to accrete gross margin through positive mix shift, which has been -- as we said, our longer-term strategy for the business is to accrete gross margin through mix, not by taking dollars out of retail partners or pushing up price beyond consumer expectations. We don't think those are advantageous mechanisms for us to follow.

Got it. All right. So maybe let's just talk about SG&A for a second because it is a topic that comes up quite a bit. And to your point, you probably made a lot of investments '17, '18, '19, and turned out being super beneficial in '20, continue to make investments in, like you mentioned, e-commerce. As you think about SG&A dollar growth going forward and sort of like where you want the EBIT margin for the company to land, what's your sense of your forecast for those metrics?

Yes. I mean, the number of questions we get on SG&A always shocks me. And I appreciate you're being modest today. Listen, I think SG&A is comprised of a couple of different important elements that we need to be cognizant of. The first is, and I mentioned -- and I know this is going to shock all the analysts out there. But believe it or not, we did cut SG&A in many categories this year. So we did aggressively pursue, particularly early in the year as the pandemic began, several efforts to meaningfully reduce G&A spend across the company. And some of those continue, particularly in our retail business. So we were actively managing SG&A. But as we became more confident that we were going to make it through the pandemic, that we can envision a world where the vaccines arrive, the world gets back to normal, we did put the accelerator back down on investments, many of those infrastructure-related, to build out the capability to supply this business to the growth levels we expect to achieve. We don't like to talk about it in dollar terms, though, because much of that SG&A base for us is actually variable costs associated with the business. We have our distribution costs in S&G -- or in G&A. There's some selling associated, in particular in the online community, that is much more variable in nature than kind of the brand, what we've traditionally done. So we don't think about it as much in dollar terms as we do as striving toward an EBIT margin. The EBIT margin we're holding out near term as our objective is a recovered margin. So in 2019, rounding did not work in our favor, and I think we clocked in at a 9.99% operating margin or something to that effect. It was very close. So we're, first, focused on regaining that operating margin. Truth be told, that's going to be very difficult to achieve right away. The top line recovery is going to arrive faster than that. The main culprit there, quite honestly, is we'll have a retail business that hasn't quite recaptured its level of run rate revenue from '19. And as a result, the fixed cost within that business, predominantly rent and depreciation, they're going to be a drag on operating profitability in the near term. Ultimately, we think that either gets back to a '19 level because the top line recovers and traffic recovers, or bluntly, we'll make adjustments to bring the operating margin back in line. But in the near term, what that means is our recovery to 2019 operating margins this year is going to be partial. We're only going to get part of the way there. We're optimistic about being able to reachieve those margins in '22 as long as we see at least a meaningful recovery in retail and we continue to grow the rest of the business as we think we're capable of doing. And that would establish a good recovery to get back to those 2019 operating margins. From there, we absolutely envision there's opportunity to accrete from those numbers to kind of that low-teen reference point we've used time and again. Part of that is always going to be contingent upon how much investment we're choosing to make because of how big we think the brand can be. But our overall goal in a normalized environment is to try to keep our operating expense growth rate roughly in line with our top line growth rate. And in many instances, we can do better than that and we can grow those lower -- at a lower rate. But there's obviously quarters where we have to grow it faster because we're doing a step-up investment in distribution or we're launching a new loyalty program or what have you. So those are the kind of broad parameters against which we think about how we manage operating expenses, but really more with an eye toward in Q2, an operating profit level that we've spoken about and achieved before and then we're aiming for on a longer-term basis.

Got it. So John, you mentioned distribution and investments in distribution. The company has made a big investment in the new distribution center in China. I think you talked about expanding your distribution center in Belgium. Obviously, some stuff in the work in Los Angeles. Can you talk about the benefit of those investments, sort of like how they might impact margins as they kind of roll off this year and those facilities scale up into '22?

Yes. I mean, look, most distribution-related investments carry with it the burden of being kind of a one-stop investment and then a maturation period before they become as efficient as you want them to be, which then allows for some more accretion. But there's also just a base element of if you want to sell 200 million pairs of shoes, you need to be able to process 200 million pairs of shoes. So I would say we touched almost every distribution footprint this year or last -- or we'll be touching it significantly in '21. And that's been because of the growth, in particular, but also to enable certain functionalities that we think are going to be required more in the future than they are today. China was a little bit of an unfortunate occurrence. We were very close to being able to launch China last year, which would put it much further along that process of becoming efficient. But bluntly, the pandemic had a fairly negative effect on that, first, delaying the construction, and then ultimately, delaying the operationalization of the facility because much of the automation equipment, quite frankly, comes from outside of China. So getting that in country, getting installation done, getting test and adjusted on, it just took a lot longer. So we're probably about a year delayed on that one. When you think about the other markets, it's really about driving incremental opportunity. The only caveat to that I'll give you is the U.K. The U.K. is a distribution footprint we had to put in place because of Brexit, bluntly. We didn't need it from a capacity perspective. So that one's a little bit less fortunate in the sense that it was largely motivated by geopolitical events and not any need -- overt need from the business. That being said, all of these investments, what we tend to see is within the first 2 years, they become operationally efficient at a level that's commensurate with or better than what we were achieving before. And that is -- and it's certainly our expectation for each of these as we look to 2022 and 2023 because a lot of that stuff is going to come online this year or last year and be in its kind of maturing phase then.

Got it. So John, we're coming up on time here pretty quick. There are a couple of questions from the audience that came in. I was going to ask you about cash uses and balance sheet. But I think this is -- some of this stuff is, I think, getting even more direct to the point, which is that -- someone was mentioning that there's been a valuation disconnect for Skechers versus global category peers. The question is why do you think that exists? And what do you think that can happen -- within the things that the company can control, what do you think can happen to sort of eliminate that valuation disconnect?

Yes. Listen, I mean, it's a question we ask ourselves, if not daily, at least regularly enough to feel like daily. Look, I think the things that we can control, we're focused on, which is growing the business, driving the plan to get back to an operating margin that we've seen, and then ultimately, that longer-term margin. I think we've done an admirable job improving aspects of how we communicate with the market, and hopefully, you all have seen that. And we'll continue to focus on improving that as best we can. I think there's some of it that's hangover from the brands of volatility in the past. I mean, I think we've seen a significant decline in kind of post earnings ball, which hopefully enables more people to get comfortable to understand the trajectory of the business. At the end of the day, though, we can only control what we control, and that is going to be execution. And I do think the more we execute -- the more reliably we execute, along with making improvements in communication, guidance provisioning and the like, that will ultimately help. At the end of the day, though, the market is going to put a value on the company, and that's not something we can overtly control. Because if it was, believe me, we definitely think we're vastly undervalued.

Okay. So that was great. Let me ask you one more from the audience in our last few minutes here. And this is just a little bit about the EBIT margins that you were just talking about. And the question is, I think you've mentioned historically that e-commerce operating margins are nicely positive. But I think people want to understand, does that mean like low single digit, high single digit? Like, is it double-digit? Or is it sort of, I guess, just accretive-dilutive? I mean, as you the grow online, what would that mean for the company?

Yes. I mean, we obviously don't disclose either segment level operating margins, and this would be kind of a subsegment level. What I would say is, well, historically, it's always been an accretive operating margin, but it was a smaller business. We've grown the business and we've maintained that operating margin contribution. It is right now, and this is a little bit influenced by the pandemic, it's our most accretive retail business. But what I would say is its intention is to be accretive to the company average at most all points on a normalized environment. So just to take as a benchmark, the 2019 contribution EBIT margin for the company was about 10%. E-commerce and retail, quite frankly, both were accretive to that in their contribution towards the company. But we don't want to get into kind of nitpicking. I would also just add in that, by the way, we do truly mean it. We want to be agnostic between a digital sale and a physical sale. So much of that distinction, while important overall, really pales in comparison to the importance of direct-to-consumer being an accretive contribution margin. Because I don't want to -- at the end of the day, I don't want a retail associate caring whether or not they sell a shoe in the store or they enable a customer to sell it online. We need that to be agnostic to create the kind of seamless transaction that consumers expect and really wows them. And so I would argue that the real focal point has got to be on the direct-to-consumer operating margin contribution because that's ultimately what we're driving for. And that, too, is accretive for the company.

All right. Well, then why don't we stop there? We're at 2:45 Eastern. So John, thank you so much for doing this today. Super interesting. Really appreciate your insights. Want to thank everybody who logged in and people who submitted questions as well, thank you for doing that. And we will look forward to seeing you at the next session. So thanks so much. Have a great rest of the day.

Great. Thank you, Jay.

Thanks, John.