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

Hi, my name is Kimberly Greenberger, and I'm the branded apparel and footwear and softlines analyst here at Morgan Stanley. Thank you so much for joining us today. We're so pleased to host Skechers at our inaugural global sporting goods event as we view the business as one of the most attractive players in the global sportswear and footwear ecosystem. In fact, we upgraded the stock to overweight earlier this year and our thesis is predicated on Skechers' attractive category exposure, diversified portfolio and value positioning. We also appreciate the business's improved profit flow-through and clarity on its expenses, 2 items that we'll get into more during the session today. So let's start with who Skechers is? Skechers is an $8 billion market cap branded footwear company with over 4,000 stores worldwide across 170 countries. Skechers product offering spans over 3,000 styles and 30-plus brands serving all genders, ages and categories. It ranks as the #1 brand for walk, work, casual and casual lifestyle shoes in the U.S. and Skechers generated over $5 billion in sales in 2019, nearly 50% of which were international and is on track to deliver $6 billion in sales here in 2021. Today, we're joined by Skechers' Chief Financial Officer, John Vandemore. John joined the company in 2017 and directs Skechers' overall financial policies and functions. He has over 2 decades of business finance experience, including senior finance roles at Mattel, International Game Technology, and The Walt Disney Company. John, thank you so much for joining us today, and welcome.

Thank you, Kimberly. We appreciate being here.

Fantastic. We will spend the majority of today's session in a question-and-answer style fireside chat, where we will explore Skechers' business model and long-term strategies as well as some of the investor questions I've heard most often in recent months. We've also reserved time to answer your questions. For those of you joining us via the webcast, please click the Ask a Question button on the webcast to submit your questions. For those of you watching the recording after the fact, please do feel free to send your questions directly to me via my Morgan Stanley e-mail. Lastly, before we begin, I need to remind everyone that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And Skechers comments today are subject to the safe harbor language that can be done in their SEC filings.

So with that out of the way, let's kick off the fireside chat. So John, I wanted to start on just a couple of big picture questions, if we could. How do you think about Skechers peer set and who the business primarily competes with both in the U.S. and globally?

Well, thank you, Kimberly. That's actually an interesting question for us because it's one we get regularly and I'm sure when most people think about competitors and peers, they think about the big athletic brands, obviously, the Nikes and the adi's of the world, but in reality, when Skechers competes across the globe, in over 170 countries as you mentioned, we actually find ourselves competing against a wide variety of different companies everywhere. Now to be sure, we certainly see some of the big global players in many, if not all of the markets in which we compete, but often times we're also competing with local players, local brands that are very resolute and they're positioned in the markets in which they play and are very well known. Further, when you take into account our breadth of product, it's not just the athletic footwear players we're competing against. We have a very strong work business, for example and that drives competitors of a completely different nature. So I guess the best way to answer that question is we actually see ourselves competing with many different players in many different markets. What holds true though is Skechers is always standing by kind of its 4 main consumer value propositions. We always say we're focused on style, comfort, and quality at a reasonable price and in each market, that will take on a different set of competitors depending upon the nature of the market. What we find is if we stick to those core characteristics, if we really focus on particular value and comfort we find a resonant customer base everywhere. And so that means in China, we'll compete as much against the Nikes of the world as we will, the Antas and the [ Wattle ]. In other markets across the globe, we're competing with local players quite effectively, I might add.

Great. So the secret sauce, value and comfort, love it, okay. What type of metrics does management concentrate on when benchmarking Skechers against its peers? And how have the team's views on the appropriate peer set in sort of relevant metrics evolved over time?

Well, again, a very interesting reflection of our business, which I think stands in contrast to others. Now to be sure, we look at all the same metrics, everybody else does, particularly when you start to get down to either a category level or a style level. I mean we're looking at the turns, we're looking at the profitability of a style, but it also requires that we look in each market at what we're trying to achieve. One of the things we actually look at most is how recognized our brand is for those same consumer attributes, in particular, comfort. I mean, comfort is the one thing that Skechers is most well known for across the globe and so one of the things we look at quite intently is how are we competing on the basis of comfort and our comfort technologies in each of the markets in which we participate. And then there, we take it down, obviously, looking at share and relative size of wallets for consumers as well as how do we rank just in brand recognition, but we try to focus on those things that make us unique and that are going to allow us to continue to outdistance our rivals in addition to, again, all the other standard metrics you're looking at from a profitability standpoint, from an engagement standpoint in each and every market in which we operate.

Excellent. Okay. Great. One of the things that really struck me as I did my work initially on Skechers is just what a nice sort of top line grower the business has been. When I look at your historical revenue growth, it looks like 17% compounded annual growth in the 5 years pre-pandemic, double-digit annual growth. Obviously, it stands out, frankly, relative to most of the companies that we cover. And I understand, obviously, the disruption of COVID and this year is, I would say, far from normal, let's say as well, but looking ahead, how realistic do you think it is for Skechers to return back to that double-digit revenue growth in the coming years? Or is there sort of a different benchmark that you all are shooting for?

Well, no, I think the short answer is there's no inhibition we see in the marketplace with consumers for our brands to continue growing the way it has. Our formula for growth is going to be largely consistent with what it's been and I hate to say that because I think sometimes that sounds very glib or easy but the reality is coming off of high teen double-digit compound annual growth over the last 5 to really, if you stretch it back 7, 8 years, it's a formula been working very well for us. That formula includes focusing primarily on international growth and direct-to-consumer growth. Now I say that, but I also should note that we actually had to have had phenomenal success in our domestic wholesale business, growing, taking share, especially as others exit and so we also have really robust expectations certainly in the near term for continued growth on the domestic side. If you add all that together, we believe that certainly continues to offer the opportunity for significant top line growth, both domestically and internationally. And there's no reason in our mind we can't take that to a $10 billion business by '25, '26. And I'd say, certainly, the COVID situation has been a near-term disruption, but what has not been disrupted, which leaves us all feeling incredibly optimistic is consumer appreciation for the brand, for the value it delivers, for the comfort it delivers and quite frankly, demand for the product. It's an interesting environment we're in currently and I'm sure we'll get into the supply-side constraints, but what we find most notably right now is that there is robust consumer demand for the brand and so that leaves us in a position understanding that both the global profile for growth in the brand is significant, but also the domestic side is quite healthy.

Okay. Fantastic. Just peeling back the onion on the international side for a second. Can you talk about your international strategy? How do you decide between different models of distribution? And because in some markets, you have a distributor model, others, you have a wholesale model. In some markets, you have more of a direct-to-consumer end. So how do you think about tackling each and every market? And how does that sort of blend up to kind of an overall international strategy if that's how you look at it.

Well, no, it's actually -- I think one of the things that makes Skechers so confident as a global player, what we don't demand is that some markets do business our way. We've always been very flexible. We've grown up as a scrappy underdog in this space and so we're flexible and adaptable in many markets to what we think will work best. Now what we're not flexible about though is the style development, the brand development of our product and our marketing. That is something we take a very firm lead on everywhere, but after that, we actually employ several different models in different geographies depending on what we think will work best. And quite frankly, we're not quite or shy about changing that at a later date if we need to and I think that degree of flexibility is sometimes missing in particular, as U.S. companies or international companies go into smaller markets. Too often, they formulate a plan. This is how they're going to attack a market and that's what they stick to no matter what. I think for Skechers, what we try to do is sense what the best model is for that location and then employ that and I think you see that across the wide array of different types of relationships we have. We have some markets in which we are the wholly owned subsidiary operating full-fledged retail direct-to-consumer, online wholesale. In others, we work on a more remote distributor basis and then anything in between and what we found is, in certain markets, it is absolutely beneficial to have local leadership, local influence, a local partnership and that has worked remarkably well. In others, we feel quite frankly, that we're the most capable operator with the best balance sheet to grow our brands. So I think it's mixing and matching those business models while maintaining that core control and focus on brand and product that has enabled us to succeed so wildly across the globe. And why, quite frankly, I think, unique among most, if not all, footwear players, we have over -- almost 60% of our revenue deriving from outside in the United States today and as you mentioned, over 170 countries in which we operate. And I think that global footprint is a fantastic advantage for our brand. As we look forward to our strategy, I think the other thing I'd note is a lot of those countries are still significantly underpenetrated for our brand. We feel like we're in very early stages in many of them with a ton of opportunity to continue to grow. And I think that's what gives us the confidence when we talk about our growth strategy to feel so good about the future because we know we're still relatively nascent in many of those markets with tremendous runway and opportunity to continue to grow the brand.

Fantastic. Okay. So definitely not a one-size-fits-all, a very customized model with a lot of opportunity, very, very broadly spread. Okay. Fantastic. One of the other sort of things that we've been scratching our heads at for a number of years pre-pandemic was really there seemed to be a sort of disconnect between the attractiveness of the annual revenue growth as compared to what I viewed as kind of a depressed trading multiple, PE trading multiple or valuation level. When I sort of dug down below the surface to look at what -- to try to diagnose what this disconnect was, it seemed like perhaps it was this volatility that would happen sometimes on a quarter-to-quarter basis in the SG&A line and it struck us that maybe this was because there were often investments that were made that we as a sell-side community didn't know really how to model or anticipate very clearly. So one of the things that really surprised us earlier this year is after a longstanding sort of position on not providing guidance. Skechers made the decision to start offering annual guidance. And it was really, I think, a watershed moment for us because it gave us just a glimpse inside of how you're planning the business financially, more than just on the top line. And it seems like it's been -- it's led to -- we're only 6 months or 7 months in, but it certainly led to some, I think, much deserved multiple expansion with -- based on our analysis, more to go. So I'm wondering if you can just talk about the change in your guidance philosophy, the thought process behind it and what -- is there something in particular that that you're hoping to help investors with through this process?

Yes. That's a good question, but let me first admit, I don't know of a CFO out there who feels like their shares are completely fully valued at any point in time. So I realize some of this may sound like crying over spilled milk here. I would first say, we absolutely and fundamentally believe that our shares -- our company really is undervalued. I think if you look at the top line growth, it's almost unrivaled and certainly for the consistency with which we've delivered that. Now certainly understand that there have been some concerns around the volatility of the shares and some of the predictability of the earnings flow through historically. I think if you stretch that and you look at a broader frame of reference and not just a given quarter, it actually gets to be a much less significant concern. That all being said, what I would first remind folks of is that very few companies are growing at our pace and I think Skechers continues to grow at a pace enviable by everybody else in the market, it's natural to have investments going relatively quickly, maybe not always coming with the precise timing that might be more readily predictable at a company that wasn't growing as quickly. So I think in some respects, we are being held to an odd standard of grow predictably well so growing really fast and that's just tough to do. So we've known for a while that we needed to make some improvements in how we internally put together our projections, our guidance to build out really infrastructure across the company. And again, I would attribute that to nothing more than the fact that we've been growing so quickly, it's almost impossible to keep pace on the infrastructure and back-of-house side of things. We've made a pronounced effort to improve that over the last couple of years. We've put in place technology, people, processes, all the attributes that we needed to, while still keeping ourselves lean and flexible because I mentioned, I think that's actually a great strength of our company. As we began to improve those components of our infrastructure though, we found ourselves in a position where we had what we felt was the right amount of information to be able to constructively guide both Wall Street as well as investors and we wanted to provide that because we felt it gave further insight into just the capacity for our business. Now that being said, it's always a work in development. You always try to get smarter. Certainly, the current conditions lend themselves to more unpredictability than would be normally the case. And certainly, we'd like to see a lot less volatility in the business world because of COVID than we're seeing. But I think the components of what we put in place as a company will allow us in the future just to provide more clarity, more observability about what's going on in the business. And if there are changes, we'll certainly do everything we can to explain why. I think the composite of that approach combined with the stellar growth of the brand, the continued resident consumer response to our comfort technologies, that should get a full evaluation in the marketplace, if not immediately, which would be my hope, certainly over time because I think it's going to be more commensurate with what you see in terms of meeting both analysts and investor expectations while also providing us the alacrity to continue to move quickly in the marketplace because the one thing we don't want to do is to that. We think that, like I said, that's a bit of a special sauce that makes us effective. And so we don't ever want to get ourselves bogged down in trying to meet expectations when that is not the right business thing. What we do want to do is try and do both to make sure we're abundantly clear when that works and why and when it doesn't and why. And I think over time, that will allow for expansion both in the multiple and I think a fuller appreciation of what Skechers as the third largest footwear brand in the world is capable of.

Well said. Okay. Fantastic, John. And that's a perfect segue into sourcing, supply chain and everything that's going on in the world because it's fantastic and wonderful to have a plan in place. And as you know, reality is a little messier. And so we're having some of the messiness right now with what's happening in Vietnam and upstream in the supply chain. So maybe if you could just talk about your exposure to Vietnam for those listeners who aren't following the day-to-day machinations in the geography, Vietnam, in particular, Southern Vietnam shut down factories in mid-July. They were shut through September 15. The government began a phased reopening of the factories starting on September 16 and Phase 1 of that factory reopening continues through the end of October. And so it's still sort of a slow-going process there as they attempted to get the country vaccinated. And so -- but if you can just talk about what you're seeing in terms -- what's your exposure to Vietnam. We know Vietnam is a center hub for many of the athletic footwear brands, in particular, for sourcing goods and what are you hearing from your factory partners in terms of their ability to get reramped? Maybe let's just start with that and then we can sort of peel the onion back.

Yes. Let me first admit though. I've never been involved in so many supply chain conversations as the last 9 months. So I feel like I'm getting my educational credentials in supply chain management for sure. The first thing I'd note is that this is an industry-wide -- in fact, it even extends beyond the footwear apparel industry. This is a situation that in one way or another is impacting every company, certainly, every company that we speak to, but it certainly sounds like every company out there. So this is a global phenomenon. And as much as we'd like to say that we're past COVID or the worst parts of COVID, I mean this is an aftereffect of COVID for us. And I think that's taught us right now to be on your toes at all moments because you could have a seemingly clear sailing for a while and then rough waters ahead because of events like this. So to speak to Vietnam specifically, I'll come back to why -- I want to make sure that people appreciate that it's more than just a production capacity issue. Our production is generally fairly balanced between Vietnam and China with a small amount occurring outside of both of those markets, so independently sourced away from those 2. Our concentration in South Vietnam is probably significantly less than most others, definitely would put it below 10%. So that particular issue, while it certainly has had an impact to us and has left us without capacity in a couple of core styles and categories hasn't been as pronounced as some others. So thankfully, we do see the light beginning to emerge at the end of the tunnel as many factory partners begin to receive authorization to proceed back to production. We do anticipate it will be a slow ramp-up. We understand that right now, the government direction is for a measured upgrade back to full capacity, which may or may not take through Q4 to achieve. That will be welcome capacity to come back online for us. I would say the one other thing to keep in mind, though, is that -- and I think you've heard some of this in other commentary is that it's not just a production issue, unfortunately. What we're facing right now are myriad issues throughout the supply chain. Production is certainly one element of it. Vietnam has been most significantly impacted. Prior to that, it was China. As the pandemic began, there are some smaller issues emerging in other markets and back in China as well, but absent that, there's still an issue on the transport side of things. Container availability is a known restriction on getting goods from Asia to other markets. The transit rates you're seeing on cargo shipment. They are, in some instances, in kind of the spot market, quadruple what they would be on a normalized basis and then you have the issues really with the last mile, unloading in many domestic U.S. ports as well as international ports where vessels are being staged for sometimes up to a week or more before offloading. So what we're seeing emerge in the marketplace and what's having the most significant impact on our business and others is totality of all those issues arriving at once and it's creating tremendous ebb and flow in terms of product availability, but also and probably most perniciously in this situation, a real opacity as to what's going to happen next. Planning in this type of environment and planning is core to supply chain management and logistics is almost impossible because of that unpredictability. Like many other brands, we're watching it daily. We are watching it carefully, monitoring all facets of what's occurring from production to transport, container availability to rates. And unfortunately, expect that it's probably going to continue for quite a while, at least through the balance of this year and the first half of next and potentially beyond that, if conditions don't normalize soon. So it's something we're watching incredibly carefully. Unfortunately, it's had an impact. It's going to continue to have an impact on our business. I think the one thing we take away from this though is what's not changed is consumer demand for the product. That remains high, interest remains high, engagement remains high. And I think that means in the long term, this probably won't be more than a blip in history, but unfortunately, right now, as we're living through it, it's quite a challenge.

Absolutely, yes, so I was talking to someone else who works in the supply chain a couple of weeks ago, and she said to me, no one's ever cared about supply chain and this year, we are the stars.

I know it's an unusual world where my daughter asks me out of the blue, what a supply chain is. So to get an interest from a teenage girl in supply chain, that tells you something's up.

Oh dear, I am really sorry about that. One of the comments that we heard from Nike on Thursday evening is that if you were to look pre-pandemic at just the whole supply chain, the process of getting inventory from the factory in Asia through the process on the water and through the port, let's say, to their U.S. or European distribution centers, that process end-to-end factory to MDC pre-pandemic was around 40 days. And then they talked about it sitting at kind of roughly 80 days right now. Do you have a similar metric for Skechers that you have handy and I know I'm springing this on you last minute, but I wasn't sure if you have a similar sense or if that sort of 2x time frame resonates with you as well.

Yes, I probably don't want to comment on specific to today's number, but I would tell you, it's absolutely a 2x impact we're seeing now and sometimes even beyond that. I mean, the one thing that we often see is even getting the product to the distribution center doesn't end the challenges. We're seeing a lot of issues with intermodal pickup locally, which is not our responsibility. Many of our customers have their transportation designees, but we're seeing delays in pickup even at that end. So I would absolutely echo those sentiments generally without you comment on the specific date ranges they offer because sometimes we're a little bit quicker than that, sometimes a little bit longer, but it's absolutely at the moment being, I think, quoted reliably in kind of that 2x frame. The other thing I'd comment on, which I think is probably even more notable from our perspective is If you look at order to delivery, that window has gotten extraordinarily longer because there's so much unpredictability in the marketplace, so much unreliable information. What you're finding is that factories and factory partners are having a difficult time quoting delivery dates reliably and so what entering into the equation now is some cushioning and other planning based on that unpredictability. And so when we look at it, one of the most significant components we focus on is order to delivery, and that's absolutely gotten longer as well.

Okay. Very interesting and it makes sense just given the environment that we're all dealing with. The silver lining around the cloud is Skechers had a pretty solid inventory balance here coming out of the second quarter. And I realize that that's not going to last you forever or for a very long time given your sales trends have been so robust. But just looking at the numbers here, you exited the second quarter with inventory that was up about 24% versus 2019 levels and you're sort of like eliminating the variations during COVID. So that may give you some slight cushion in terms of just dealing with some of these current delays and perhaps there may have been initiatives in place to improve safety stock levels, even in advance of these Vietnam shutdowns. So I just wanted to know if you could sort of take a look at your inventory balance. How are you feeling about it? Do you feel like you've got the right inventory to do the business you planned for here in the third and fourth quarter? And what would you be thinking about in terms of -- from all of the additional delays we're hearing about, could there be some impact towards the end of this year? Or do you think the impacts are likely to be more felt as we get into 2022?

Yes, I think the thing to keep in mind when we talk about inventories is that all inventories are not created equal and so one of the things that -- and I think you even heard about this last week from some others is merchandise in transit, which is a category of inventory that generally gets lumped into the number that we don't often focus on has elevated significantly. This is inventory that -- it's been commissioned, it's been produced, in many instances been paid for, but it's still in transit. And obviously, given the transit times, that is ballooning. I'd also say inventory to a degree is localized, right? Inventory in retail is not going to turn as quickly as inventory in wholesale. I think we felt as good as we could feel knowing what we knew exiting Q2 relative to our inventory balances. I think they've certainly allowed us to stay being a significant portion of our business but I wouldn't go so far as to say it's given everything we needed because what we're seeing is inventory on hand, which is the most critical inventory, the inventory you can sell is what has been most significantly impacted by supply chain challenges. Again, just to reiterate what we've said a couple of times recently, it's already had an impact. The areas of impact are in the types of businesses for us that have the most significant turnover of inventory. So its effects have already been felt in the business. I think going forward, no, I think we'd absolutely much prefer to have more on hand than we do. I think if we did, we could fulfill significantly higher demand maybe than even than we had thought, but because of the restrictions, we're seeing it, it's certainly having an impact and we'll continue to focus on that. I think the goal right now, though, is more really almost operational than financial. It's getting inventory into the right spot where it can be shipped out and unfortunately, the right spot is not on a vessel of sitting outside of the port of Long Beach in Los Angeles. So that's where really the rubber meets the road on the classifications of inventory and as we approach the end of this quarter, I think what we'll try to do is provide some color context for that as a means for helping people understand the difference between kind of the financial inventory balance and the balance of goods you can actually ship out in a given point of time.

Fantastic. I have some additional questions here, but I'm going to take a few here from the audience, if you don't mind. First one, have you seen pressures in raw materials to the extent that you have, how do you see pricing evolve in the coming months?

Definitely have started to see some input cost pressures. Quite frankly, that was probably a little bit more visible earlier than some of the transportation and logistics-related challenges. At the beginning of the year, we commented on starting to see some input cost pressures, particularly those where we were dealing with currency because the currency situation between the U.S. and in particular, China had had seen the ones strengthened. And so we saw some of those earlier and had implemented some targeted pricing adjustments to account for that. As we go forward, right now, obviously, the most significant new input cost issue is in transportation and logistics and we have made some targeted adjustments there. We will continue to evaluate opportunities for making price adjustments. However, I'd also note, we do take very seriously that notion that we are here to provide our customers style, comfort and quality at a reasonable price. And that last component is important. It's important to consumers, it's important to us. And so we want to make sure we're maintaining our relative pricing posture at a level that consumers appreciate because we know that, that's one of the things they look to the Skechers brand to deliver. But we'll absolutely be looking at both raw material costs, logistics, transportation costs and where necessary making adjustments to the product level, which I think right now in this marketplace is a pretty consistent response you're seeing, both in our industry, but quite frankly, even more broadly across industries as many companies are dealing with the same issues.

Yes. Exactly. Okay. Fantastic. The next question is actually about the multiple on your stock. At half the multiple of peers and twice the top line growth, why would you not aggressively be buying stock back here?

I almost can guess who entered that question and it's what we get a lot. Listen, I think we look at all forms of returning cash to shareholders, including repurchasing stock and others. So we look at them routinely. I think the one unique aspect of the situation we're in and probably a bit of our conservative bias is, it certainly has not been the most predictable environment. And the one thing we want to make sure is that Skechers always maintains a top-tier balance sheet. And so as we've been navigating through the COVID situation, we've wanted to maintain that rock-solid balance sheet, keeping in mind that at the same time, we're investing for the future of this brand. We talked about the continued growth prospects of this brand, kind of that high teens growth rate, which we want to maintain. And so what we've chosen to do is take both the strength of our balance sheet and the desire to continue to invest in growth opportunities while still maintaining some semblance of a defensive posture in light of COVID as kind of our primary direction. As the early part of the year turned and we thought we were getting beyond probably the most severe deficits of what COVID had to offer, we repaid our revolving credit facility and we started to assume a slightly more aggressive posture. Obviously, the last couple of months with many of the issues associated with the supply chain coming home, we started to probably take a more defensive posture, but all that being said, it doesn't mean we don't look at other ways to return cash to shareholders and we will continue to evaluate those, but we also want to make sure that we have the right composite of capital available for us to continue to grow into the future as well as endure whatever the most significant impacts of COVID are, some of which may get to be coming forward because certainly, the supply chain issues were not something that we foresaw coming out of the early the second quarter.

Right, okay, yes. So surprise a minute these days.

It is...

Okay. John, the next question here, do you have a view on the age distribution in consumers? I assume the question is asking about the appeal of your products and your customer demographic. Popular, is it popular for Gen Z? Or is it skewed towards elder people?

Well, I don't know anybody who wants to be called an elder person. So let me just talk about what we see as the consumer demographic behind our brand. And first, warrant that when you talk about our brand, it's very important to remember those 170 countries in which we operate because we're not a one-size-fits-all brand. What I think a lot of U.S. investors focused on probably somewhat disproportionately is the U.S. perception of our brand. And that does skew a little bit older. Although what we always say is we like the children's footwear business, it's very strong for us. We fit very well. We make products for kids. -- and nothing beats our lighted footwear product at the children's level. And then we probably pick people up right after their teenage years when they start paying for their own shoes because I think that's where you really focus on style, comfort and quality as well as that reasonable price component. Look, I think the reality is nobody is ever going to buy just one brand of footwear and we think we play in everybody's closet at some level. Obviously, our strengths have been a little bit more on the book ends historically, although we've made great progress in kind of that core team Gen Z demographic with some of our street footwear, some of our Bob's footwear, very resonant at that age range. So I think we are actually getting to become a more full scope age range, demographic focus. I'd say outside of the United States, you actually look at our brand and it runs the full gamut from kids all the way through adults. And it really depends each market is a little bit different. But I think in those markets where we didn't grow up with some of the historical perspective that attaches itself to the brand in the U.S. So we actually skew a little bit younger, a bit more youthful demographic. We certainly look at markets like China. We definitely have a more useful demographic and brand recognition profile. So I think it's just -- you can be careful, you can't just say it's a one-size-fits-all assumption on demographics because we really hit different markets in different ways. It tends to deal with how we've penetrated and approached the market. And I think we're also getting a bit more wholesome in terms of our age penetration.

Okay. Great, fantastic. For what it's worth, I cannot get my 16-year-old son out of Skechers...

Good.

He loves them. Okay. Next question. Can you please talk a little more about how you approach the potential for this degree of supply chain pressure when you set the latest guidance...

Yes. I'm sure that's referencing our quarter 2 guidance, which I completely understand the question. I mean, listen, I think whenever you put guidance together, you're attempting to assess how can you establish a more likely than not range of outcomes? I think the one challenge that pandemic has offered in many different instances now is bringing forward unpredictable challenges that you couldn't reasonably anticipate. So what I would say is as we were looking to guide and as we will always look to guide, we're trying to probability weight what we believe are the most likely range of outcomes and we certainly look at it in a range and take into account the known knowns. I think what challenges us, and certainly in this environment has become incrementally more challenging is the unknown items coming forward. And certainly, this degree of supply chain constraints, which we've never seen before, certainly not anywhere near this magnitude was outside the boundaries of what we would have normally anticipated. So we will continue to look at our opportunities to refine guidance, provide more color. And certainly, as this quarter evolves, we certainly provide as much perspective as we can on the performance relative to that. But I would just say COVID right now is giving us a lot of unpredictable outcomes and I don't think anybody from those who announced last week or those who are going to be announcing in the next month or so could have anticipated this degree of impact on the business.

Yes, absolutely, understandable. I wanted to just ask one more sort of big picture question, if we could. John, you talked about the sort of 2025, 2026 $10 billion revenue target and the path back -- the path to the double-digit EBIT margin. So as you think about the drivers, let's say, setting aside what we know is the volatile environment here in 2021. When you're looking out to '22, '23, '24, '25, what are the sort of key levers to get you to your higher operating margin target? And just remind us what are the sort of guideposts along the way? And where do you think ultimately can get?

Well, I think we're already on that path. First of all, I'd say people sometimes talk about it so far in the future doesn't seem realistic, but even as we talked earlier this year, we were actually well back on the path that we found ourselves in '19. And remember, in '19, we were just, I think, [ 100th of a ] percentage point away from getting into that double-digit side of EBIT margins. Look, I think the way to think about Skechers is, although we still make investments to grow, we have a material base of operation capabilities that will lead us into that future, lead us forward in the next 5, 6 years and that's all very leverageable business. Adding to that, we are going to continue to accrete our gross margin by growing internationally, growing in our direct-to-consumer businesses, both of which are gross margin accretive to us. Add to that, the opportunity to kind of grow outsized in markets where we have reached a degree of penetration, but not anywhere near full penetration, India, China, South America, Eastern Europe, even some parts of Western Europe. I mean those all give us tremendous leverageable capacity. I'd say the first waypoint is to try to get back to the margins we were at in '19. That's always been our interim goal as we left Q2. We feel really good about accelerating to that point faster than we had thought when we were coming out of the pandemic. Obviously, the current situation will remain -- would need to be incorporated into that before we opine on that fully, but I'd say that's going to be the first waypoint and then continuing to grow those businesses while leveraging the operating expense base that we already have because what we have is a full complement of product design and development capabilities, marketing capabilities that we can employ worldwide and in many of our countries, we have a very firm base of operating capabilities that we can use to leverage the brand more fully. There are some sizable investments to be made in infrastructure, distribution infrastructure, but we don't see many of those being a big drag on operating margin. And so as we think about becoming that $10 billion business, we absolutely can see it within the context of continuing to also accrete on the EBIT margin basis.

Okay. Fantastic. This has been a great session, John. Thank you for your time today and for everyone tuning into today's session. On behalf of Morgan Stanley, thank you very much for your kind attention. Again, if you have any follow-up questions, please do feel free to e-mail me. And John, once again, thanks so much for being here today.

Yes -- no, thank you, Kimberly. We appreciate it.

Have a great day, everybody.