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

Hello, everyone. Thank you for joining us at our U.S. CEO conference. I'm Brian McNamara, U.S. mid retail analyst here at Berenberg Capital Markets. We're delighted to host Skechers today. Skechers is a $7 billion market cap branded footwear company. With nearly 4,200 stores in more than 170 countries across the world with 3,000 styles, over 3,000 styles and 31 brands, serving all genders, ages and category Skechers ranks as the #1 branch for walk work, casual, and casual lifestyle shoes across the U.S. The company is expected to surpass $6 billion in sales in 2021. Today, at our conference, we welcome Chief Financial Officer, John Vandemore, who joined the company in 2017. He's had over 2 decades of experience in corporate finance, serving most recently as EVP and division CFO of Mattel; as well as the CFO and Treasurer of IGT. Prior to that, he spent 12 years in operations at a major financial roles, the Walt Disney company, including 5 years as VP and CFO of Walt Disney Imagineering. John, welcome, and thanks very much for your time today.

Brian, thank you for having us. We're excited to be here.

So I guess to kick off the conversation here, I'm sure it's a question you get asked a lot, but I think it's an important 1 in terms of the current competitive landscape. So you guys have carved out a nice niche offering consumers comfortable shoes at a great value. I'm curious who your primary competitors are in the U.S., specifically? And then as you a kind of branch out into your more important international markets?

Yes, it's a good question, Brian. And I do think that Skechers is unique among footwear players out there. We do focus on delivering, we always say, 4 key characteristics: style, quality, and comfort, at a reasonable price. We also have a lot of breadth to our product, which I think is another unique feature of what we deliver. As a result, it actually makes answering your question directly a bit difficult because it really depends on what category we're talking about when we think about competitors. I mean, obviously, on the worldwide stage, we compete with brands like Nike, Adidas, Puma, others. But really, when you get down to a market-by-market look, and even a category by category look, it can be incredibly different competitors at any given point in time. And what we try to do is maintain the same relative positioning no matter which category we're in, so that we're competing on the same core characteristics. And I'll give you a great example, and this is just 1 we compete in the golf footwear business. It's something that is purely athletic. It's very sport driven. And in that, we compete with Nike with Audi, obviously, with others that are more specific in the footwear space. But in that market, we still maintain our same relative position, which is we're more affordable. We focus on those core characteristics, but most than anything else comfort. And that's how we drive our niche in that marketplace. And I could use that example across work footwear, casual athletic black and brown. And the same general characteristics would hold. We're looking to compete based on our brand and our brand characteristics relative to a lot of different players. And then we expand that globally. The 1 thing you'd have to add in is local players. There are certain markets that have very strong, very capable local players. Against whom we compete. Some tend to fall into our same price range, but don't have as much feature or functionality in their footwear and certainly don't have the focus on comfort that we do. And as a result, for Skechers, what's really important is that we remain focused on competing at the local level with our teams distribute across those 170 countries you've mentioned. Because they have to compete every day against a variety of local players, and then they have to compete based on the categories they offer. But what we see time and time again is that we compete very effectively in that range. And in fact, I don't think there's really any other brand with the scope and breadth that Skechers has, and the global footprint who does that as well as we do.

Great. Is there anything particular you're doing in China? I mean, Audi reported results this morning that were still pretty negative, Nike at a plus 1% in their most recent quarter. You guys are doing a plus 10% on a tough comp. I get asked by investors a lot kind of -- is there any difference in what you guys are doing in China relative to your competitor set? Or is it simply you're operating in that niche and that niche is quite strong?

Well, I mean, we certainly focus on our niche in that market as well. But I also think our team on the ground does a very good job of focusing on what we do best. And growing in the channels available. I think we have a ton more room in China. There certainly have been some issues of late, relative to commentary made by other brands, yes, quite frankly, touches on an area that we don't often feel it's our prerogative to be commenting on. So I think in many respects, we attempt to focus on what we can do, and what we should be doing for our consumers and customers. And if we focus on that, we find that we can actually drive very healthy results. That being said, it's certainly no piece of new news that China in Q3, the quarter ended September was challenged by more COVID related issues than it had seen in the previous probably 4 to 6 quarters other than the first outbreak of the pandemic. And that did cause some challenges on, I think, everybody's account to grow as would normally be the case in China. That all being said, I mean, I hate to make it sound right. But our goal in that market, and in every market, is to continue to focus on bringing great product to market. Marketing it effectively, and staying in that range of delivering style and comfort and quality at a reasonable price. And when we do that, we find that we're actually pretty successful.

Got it. And can you remind us of Skechers' international's strategy? I find it unique. What are the characteristics of subsidiary JV and distributor markets, as you -- particularly as you look to enter new markets?

Yes. And before I touch on that, though, I do think you've mentioned something that is incredibly unique and very powerful for Skechers, which is we actually don't have an international model. We have several international models, but we've built into how we operate the business is a core focus around that, which we believe we need to control from a brand perspective, which is generally product, marketing, imaging. And then we let the international markets to determine what's best for that market. In some instances, that means we'll operate as a wholly owned subsidiary. And then we'll penetrate in the wholesale channel, we'll open up the retail channel, we'll operate our own stores. And it will become basically a microcosm of what we've done in the United States. In other markets, that's not as effective. And even in that subsidiary model, we can often employ other tactics to grow the brand either more quickly or more efficiently, including enlisting franchisees to build stores for us, et cetera. In other markets still, wholly owning that subsidiary is not probably the best operating model, either because there's local expertise required that we don't possess, or we feel like partnering with somebody locally can help accelerate our development into the market. And I think that's probably the 2 endpoints of how we choose to operate. China is a joint venture market for us. We have a great and very effective partner there. They help us navigate the nuances of that market, and make sure that what we're delivering makes sense at a local level. And that's a partnership we hugely benefit from having. India is another very good example that we started as a joint venture because we felt we needed help to build the organization that would springboard that country force forward, and we utilized a joint venture partner for a period of time to build that organization. However, when we felt like we had reached a level of both operational excellence as well as size and scale. We chose to purchase that minority stake, and now we operate that market as a wholly owned subsidiary. And then the last category that we use is distributors. There are some markets where we, quite frankly, don't believe we deliver any additional incremental value by operating the business directly. There can be a wide variety of reasons for that, either because we don't have experience, the market may have some characteristics that don't allow us to really leverage what we do best in an effective way. And in those situations, we'll often use a distributor, a third-party to help drive the brand, grow the brand. And we constantly look at those as well as to whether or not a market has come to a point of transition where we should change that model. And as we mentioned on our most recent earnings call, the Philippines is a very good example of that. That was a market that we were using a third party distributor. That distributor was a fantastic partner for a period of time, but now we've chosen to take that as a wholly owned subsidiary. So this quarter, we begin operating that as a wholly owned subsidiary, and we have very optimistic projections for what we think we can do in the Philippine market under that model. But I think at the end of the day, what I'd emphasize is that it's that flexibility and operating model, that we think really drives additional value. Because we try to focus on what we know we do best, but also trust others on a local basis to deliver what they know best, which is how that local market functions, and how to function best within that local market.

Got it. So there was a recent media report that suggested strategic alternatives for your Asia business, particularly China. I mean when does China reach that transition point as you a kind of alluded to in your previous comments in terms of you guys a kind of feel confident enough to go it alone? Or is that a kind of -- Is that a unique market where you think the JV model you have right now is a kind of the go-forward path?

Well, let me first comment on the media report because what it touched upon was that we actually very regularly look at a wide array of strategic alternatives to help drive value for our shareholders. We fundamentally believe our business is undervalued. We fundamentally believe as a component of that, our business in China and Asia is fundamentally undervalued. But to be honest with you, that's an exercise we go through across the globe, looking at ways that we could conceive of potentially unlocking value. But that's a far cry from having a plan of action or a desire to take action. So really what the report touched on is simply part of our normal progression to look at how do we unlock value for shareholders. Insofar as the Asian region is concerned and our partner there, what I can say is today, it's a very effective partnership. It's 1 that we enjoy having the benefit of. We'll continue to evaluate really alongside, quite frankly, our partner in that market to ensure that it's continuing on that posture going forward. But right now, we fully benefit from having them involved. They've been really good partners. They are the cornerstone at 1 of our fastest and largest growing markets. And so for the time being, our intent is to continue to profit from that partnership jointly and continue to drive that business.

So what I refer to as your other international markets, and that's basically excluding China, India, and Canada, those are markets we can reasonably estimate where they're at. I guess what international market in that other international category are you most excited about?

So I feel like this is always a trick question because then I'm basically going to list every market. And I know that sounds like a promotional attitude. But really, what we've seen across the last couple of years, especially right before COVID, is that the brand had tremendous momentum almost everywhere. And in fact, I think -- I think Q4 of '19, we were very close to being able to comment that every single market grew and grew close to double digits. At that time, if you remember, there were some challenges in a couple of markets that we're preventing that mostly geopolitical in nature. And really, that is still true. What we see is when the brand is able to be available to consumers, when we're able to move the brand forward as we have in the past. We see tremendous opportunity in many markets. Some that, quite frankly, are completely shocking to me. highly developed markets we've been in for years, a market like Germany, has been a double-digit grower for us for the last couple of years when you strip out the effects of COVID. So I think the reality is we believe we have a lot of opportunity in many of those markets, if not all of those markets. Some will grow a little bit faster and some are a little bit more sizable, but the opportunity is there. In the developed category, you're probably talking about adding categories like work that isn't a big driver of business today in many markets, but we think can be, as well as categories like apparel and accessories in a bigger way in some of the newer markets, that includes Eastern Europe, that includes parts of South America. The opportunity is to continue to drive penetration with the brand, both in our Wholesale and our Direct-to-Consumer business, and then use that wedge to expand categories to expand the offering in those markets as it fits those markets. And so quite frankly, we're extremely excited about what we see in South America. We're excited about what we see in Europe, both Eastern and Western, although for different reasons. And then there's a lot of other countries in that Asia makeup that probably aren't precisely China and India, that we think offer a lot of long-term opportunity, Thailand, Vietnam, Indonesia, Malaysia, the Philippines, as I mentioned. But then there's others still that we think the brand still has a long way to go, markets like Japan and Korea, that are very healthy footwear markets, but the Skechers brand is still just beginning its journey to the consumer.

Got it. So Skechers has predominantly been a volume story over time, but it appears pricing is playing a bigger role than it has historically, particularly as your comfort technology appears to be commanding higher prices. How should we think about pricing as a contributor to annual revenue growth moving forward?

Yes. I'd say the way we think about price is more in terms of value we're delivering. We don't want to be the brand that just increases prices on everybody, every year for no reason. What we want to deliver is more value. And I think what you've seen, a component of what you've seen, certainly in the ASP growth that we've been delivering is that is bringing comfort technology, bringing unique solutions to the comfort of your foot in the marketplace. And as a result, being able to extract slightly more value for that, which is evident in that ASP growth. And so I think that's a huge contributor in our mind to how we move forward because the 1 thing we know about the Skechers brand is that people value the comfort that we deliver. And if we can continue to offer comfort technologies like we think we can, we believe there is more runway to infuse that into everyone's footwear solution. On top of that, to be clear, I mean, obviously, the current environment with very lean inventories, restricted supplies, and a very favorable promotional environment at retail is certainly helping. I mean that's a contributing factor. We probably don't expect that to continue forever. But certainly in the near term, those conditions look like they will be persistent. At some point in time, a more normalized level of promotional cadence will probably reenter the market, and we'll want to be competitive in that. And then the last thing I'd say is just the continued advancement of our product delivery to offer different categories that have favorable pricing will be a driver. But mostly, what we're looking to deliver is more value at the consumer level, more value to comfort is a key focus. And in that, we see opportunities to drive ASPs.

So Skechers provided annual guidance this year. I think for the first time in a long time, 2002 as I think it was the last year. I mean that's a pretty momentous decision for you guys. I'm curious what went into that decision when we thought making process behind it?

Yes. Well, we've been working -- I mean, look, the reality is Skechers in 2010 scratched just over $2 billion. It took us 7 years to get to $4 billion. It took us 3 or 4 years to get to $6 billion, right? So the pace of growth has been pretty torrid in there. And there are certain functionalities that we just needed to augment before we felt comfortable taking some steps. And I think in the area of offering guidance, that's1 is being able to have the foundational infrastructure, and how we plan, how we forecast, what we know about the business, how we test that. We needed more substance behind that, and we've put that into place. But to be honest with you, that's just a characteristic of a company growing so quickly. Almost no business would be able to naturally keep up. We really had to focus on, on building the components to be able to do some things that I think would be welcome in the street and the guidance was 1. That being said, we're going to continue to evolve that capability so that we're offering a good perspective on, on the brand's capability. At the end of the day, our objective is to ensure that investors have as much visibility as we can offer into the strength of the brand because going back to a comment I made earlier, what we don't believe is that the pace of growth we've been able to achieve and the profitability that comes along with that is underappreciated. And so what we're looking to make sure is that people adequately appreciate the real growth and profitability story behind this business because we just feel like that's not often being captured, and offering guidance as well as doing a few other things was just 1 step along that road.

Got it. So on the same note, it appeared the company is pretty well positioned for a beat and raise year before kind of industry-wide supply chain issues interfered. Is there any way to size up how much supply chain issues has impacted the company relative to your revised full year guidance?

Yes. It's tough to be precise. And unfortunately, for us, as a reporting company, we have to be precise. What we can do is set some light on what we've observed as a kind of unique features of the environment. In our last quarter, we mentioned that we had an incremental $218 million of inventory in transit in Q3. And without being terribly precise, a meaningful portion of that should have been delivered in Q3 to customers or to our retail store for sell-through. The reality is, if you take that, you add that to what we reported, you see we would have had a much more meaningful growth quarter than we were able to report. I think the reality is what the challenge is right now for everybody, I imagine, but certainly for us is predicting how that supply chain situation is going to resolve, and then how quickly that result. What we feel great about though on the back side is that we're seeing continued demand for the brand, very high demand for our comfort technologies. And we think those are enduring qualities for the brand that will drive value for many years to come. Unfortunately, the supply chain challenges being what they are, it's just tough to predict when those will resolve.

Got it. So will 2021 supply chain headwinds impact how you guys a kind of run the business moving forward? Are there any learnings or is this something that was a kind of crappy for everybody?

I sort of think your second comment is probably accurate. I think everybody has been challenged by it. I mean, I have never been in as many supply chain meetings as I have in the last year. So it's already changed, fundamentally what we're focused on. And I've said before, we're much more focused on ensuring that we're managing that supply chain as actively as we can across the business because -- well, we don't want to be. We don't want a position of disappointing customers. And when you have supply chain challenges that lead to delivery delays, that's an unsatisfactory experience, and we don't want that, and we don't want there to be supply challenges at our stores at the consumer level either. So we're actively managing that challenge, I think, as best as we can, and I think better, quite frankly, than most in the industry. But it's a major frustration because we know if we had that product that we'd be able to sell it through, because there is that level of demand for the brand globally. And so we're doing everything we can to try to resolve the current congestion. Our expectation at the moment is that it probably takes a couple of more quarters at least to resolve. But as we do that, we'll be throttling our expectations on deliveries, and supply to make sure that we can meet that customer demand, more thoroughly than we're able to today.

So you recently stated that there's no reason -- no impediment to you guys building a potentially a $10 billion revenue business by 2025 or 2026. Your guidance this year, what you -- if you achieve that, it implies a CAGR of roughly 10% to 13% on the top line. Now that's basically what you've done historically, but it's off a much higher base at this point. So can you remind us what will -- what are the drivers of that potential growth as you see over the next a kind of 4 to 5 years?

Yes. I mean what we absolutely believe $10 billion is in sight. We believe the components, much like you said, are basically the components we've been using to drive the business in the last 10 years, which is continue to emphasize growth opportunities internationally, and continue to move that direct-to-consumer business forward. I mean, anchoring some of our expectations internationally. You have big markets that are growing at above trend like China. You have a very strong developing opportunity in a market like India. But as I also said, we see growth in momentum in almost everywhere. So South America is a huge untapped opportunity in mass for us. There's parts of Eastern Europe that are still very underdeveloped, but we're also seeing strength in the more developed European markets, and other international markets. So the cornerstone of that is we need most of those to contribute. We don't need actually every single 1 of those to grow above trend to get to $10 billion, but if you mix those together and they continue to deliver a mid- to high teens growth rate, that gets you to certainly the international component. The direct-to-consumer side I mean that's going to be continuing to do what we've been doing, which is opening doors, driving e-commerce, and really driving towards a true omnichannel solution, which -- which we think, when coupled with a modest level of a kind of organic comparable store sales growth gets you to a level of DTC growth that is high single digits, low teens that gets you there? And then quite frankly, we have had, I think, a very realistic perspective on what the most domestic wholesale market ought to grow at. Once we got through retail Armageddon and a lot of the other challenges, we saw a very strong underlying demand for our brand. And for us, that always translated into a long-term view on domestic wholesale, that should be a kind of a mid-single digit growth. And that's before we really take into account any sort of tailwinds from other brands pulling back from the domestic wholesale marketplace and our ability to capture increasing opportunities in new categories, the most notable, which would be apparel. So if you a kind of bring that all together and you look at those growth rates that we've been able to establish historically, as well as the opportunities for some very nascent markets to begin contributing in a very meaningful way. I think you can get comfortable that $10 billion is absolutely within shot. Now is it '25 or '26? I can't tell you precisely at the moment, will eclipse that. But -- but I think you can see that the algorithm to get there is pretty consistent with what we've been able to do. And then we'll look at incremental opportunities on top of that. There may be some distributors that we choose to take in-house. There may be some new markets, some new categories on the product side. And so we feel very good about that lineup, especially having come out of 1 of the most challenging environments in the modern era.

Can you talk briefly on e-commerce? I know it was a kind of a hot topic last year. It's been talked about a little less this year just as it relates to Skechers. But you guys exited Q4 of last year had a pretty strong run rate. I'm curious a kind of where that settled this year and a kind of how the e-com algorithm a kind of impacts your decisions to now open and potentially close stores on the brick-and-mortar front, particularly in the U.S.

Well, the first thing I'd say is we don't view e-com as a threat to retail. We actually think they work together quite nicely. I think it's a reason you see a lot of digitally native brands, now going into physical retail, what we think we can deliver with our retail store estate and a very capable e-commerce offering is the right solution for consumers at the end of the day. And that entails everything from being able to frictionlessly go between an online offering or a search into a store, but also ultimately to be able to use those stores from a logistics perspective, to conquer that last mile at the consumer level. And so that's what we're building towards. What that means for us is we'll continue to open doors. The big box a kind of neighborhood store is our preferred format. And then we're going to continue to augment what we can do from an e-commerce perspective, and that's both domestically where we've done things recently like launch a new loyalty program, and augmented our technology stack, but also what we're doing internationally, which is taking that same technology and deploying it globally as well as deploying it to new markets, that don't currently have a direct-to-consumer offering. At the end of the day, what we hope to then deliver is a very strong consumer-led retail offering, that has stores that has digital-only transactions, and then has a very tight fusion between those 2, for the benefit both for the consumer. And as I mentioned, for Skechers to be able to use both our inventory more flexibly, our distribution more flexibly, and really deliver at the consumer level. Because if you step back, you look at our retail store footprint today, it's not anywhere near full penetration, if you look at other retail comparables, and we believe those neighborhood stores, those big box stores can definitely be leveraged for the greater good of Skechers as a whole.

So your prepandemic operating margin was right around 10%, a little south of there. I think the goal for you, at least earlier in the year was a kind of get back to that level first before talking about expanding further. And I think you are well on track to be comfortably north of their a kind of before the supply chain stuff. I appreciate and we'll continue to invest in the business where appropriate. How should investors think about potential margin expansion as you build towards that $10 billion business?

I mean, you described it really well. I couldn't have done it better myself. Our first waypoint in recovery from COVID was to get back to the '19 operating margin levels, which I think was hundredth of a point off of a 10%. So that's always been a kind of our near-term objective is get back to '19. We actually, when we began the year, we thought it would be -- it would take us a little bit longer to get back to that '19 level. As it stands at the moment, as you've seen and noted, it's definitely within shot and we'll be very close. So much closer than we had anticipated, which is tremendously exciting given how we started the year. The operating margin journey to that a kind of low teen range that we've always mentioned as a company is just that. It's a journey. We'll continue to take steps forward. The first step, though, was getting back to '19. Once we do that, we're going to continue to put in place the parameters that we think help guide us to getting into those low-teen numbers. And that's just managing our operations as efficiently as we can while not in any way diminishing our opportunity to invest for growth, and that's new infrastructure capabilities, this new technology capabilities. And even in some instances, I think as we spoke about, it's investing in our retail business, but people and technologies to make sure that, that consumer-driven experience is, is the primary focus and will lead us to, I think, that right offering at the consumer level. So we'll continue to march north. That's our objective. Once we get back to '19 and we're hoping to get back to '19 as quickly as we can.

So I mean Skechers stock has historically been pretty volatile around earnings with a double-digit move in the share price reacting, in reaction to earnings, not all that unusual at least from a historical standpoint. But that volatility has diminished significantly with an average absolute move on your last 8 earnings reports of around 5%. What would you attribute that reduced volatility to?

Well, I hope it's because we're doing a better job both giving a forward perspective to investors and analysts like yourself, so that you understand what we're seeing in the business. I think that's a huge benefit and certainly 1 we've consciously attempted to address. Obviously, augmenting our guidance is another element of that. I think then also on the back end, making sure we're communicating clearly why something may have happened. I mean, I think, quite frankly, of all the quarters I've been involved in probably the 1 I'm actually most astounded by but also I'm most proud of is this most recent 1, where we had a very big issue impact our business. It had a material impact on our quarter. But I think the visibility we provided into it as it occurred, what was of concern to us and why. And then hopefully, the explanation and the explanatory power we put behind delivering the earnings was helpful for people to understand, if it is an issue in the most recent quarter, but it's also 1 that's navigable long term, and we'll be able to work through. And hopefully, that continues to depress that post earnings volatility because what we know is nobody likes extreme volatility. Unfortunately, it doesn't matter if it's up or down, if it's extreme, nobody really likes. And what we're trying to deliver is a vision of where we're going, and then success along the way because that's actually how the business has evolved. Sometimes though, I think the third-party perspective of that has been a bit disconnected leading to the volatility that you've seen. And so as we diminish some of that perspective differential. And we give people a good vision of where we're going, and then we continue to do what we do best, which is execute against that. That should give people confidence that we will -- we're going to get to $10 billion with that is going to come augmented profitability, and that means good things for the brand globally.

We haven't touched much on your a kind of domestic wholesale business. Nike has made the big announcements over the last few years of exiting certain wholesale partners, the family channel and the like. Presumably, that presents a pretty big opportunity for the likes of yourselves. Can you a kind of size up that opportunity for us a kind of where you are perhaps what inning you are a kind of seizing that opportunity, and a kind of how that impacts your relationships with your current wholesale partners?

Yes. It's interesting. I would have said before that we have yet to see a material impact from that. However, I think the supply chain challenges we're seeing are accelerating that move by a few other brands, not just the 1 you mentioned. And we're starting to absolutely see that develop in orders and demand for product from some of the affected wholesale partners. Unfortunately, for us, it's colliding with a moment where product availability is probably our single biggest issue. It's tough to put a quantum on that to be overly precise at this point other than to say what we see is robust appetite for additional categories or additional products, and categories by many of those partners as they try to maintain the complement of product that they've been offering their consumers against this pullback from other brands. What we want to do is we want to be poised to offer them solutions that help fill out that shelf space. We think in many instances, we're a tried and true capable partner to do that. To be fair, though, there's other categories that they sell in that we don't participate in. So we can't be the only solution, but we can be a very motivated, and a very compelling solution, given that for many of these partners. We already have a very strong history because there's always been a tremendous overlap between the wholesale partners we sell to, and some of those other brands. And so our objective is to continue to fill that in as best we can. The biggest challenge near term to that is product availability.

Can you envision a scenario next year, where the supply chain issues ease, and then all of a sudden, you just have a load of product, whether it be sneakers or whatever you want to characterize it, as coming in the market at perhaps an inopportune time. It feels like consumer companies in general are printing robust sales numbers. How does the industry react to something like that, where the supply shortage is perhaps turning to supply surpluses? There's been issues in the past with Nike, and the retail apocalypse in 2017. A kind of how does Skechers a kind of navigate a potential scenario like that?

Yes. I mean I think that's a risk. I think that's a known risk for the industry. It's certainly 1 we're mindful of. We've been attempting to address that on our own account for a while as we've looked at the production challenges, as we looked at the transportation and transit challenges, we've been actively calling where we can, inventory orders that we felt may have been either specific to a seasonality or other efforts. So that we're maintaining a level flow. I think the reality is, though, it's a big market. There's a lot of different players. And if everybody doesn't exercise that same caution and a forethought, we could be caught at a later date in a period of inventory glut. We don't foresee that at the moment, and it's certainly not the #1 concern we have, but it is something that we're conscious of, and we're actively addressing our order flow to address at least for Skechers. I think the cautionary side of me would say that it's going to depend in large part, how everybody else reacts to that situation as well, should it evolve.

So you've heard other competitors across footwear and apparel, talking about using more airfreight and things like that, perhaps sourcing in different places. It doesn't seem like you guys have a kind of leveraged that opportunity, but I don't want to put words in your mouth, a kind of what's the reasoning behind that? And how do you see things normalizing next year as it relates to kind of freight, and some of the supply chain stuff?

Yes. I mean we use air freight. We just haven't used it as much of a solution in the current environment because quite frankly, air freight rates have gone the same direction of container rates there. Last report I saw from a third-party bank was that they were up [ 450% ] versus 500% for container rates. So I don't know that there's a major cost favorability in there. I would also say footwear doesn't generally lend itself well to air freight except for in either strategic or special circumstances. And that tends to be how we use it. We use it if we're looking to get a first-run product into stores to test it or there's maybe a collaboration that is time sensitive. Absent that, it really doesn't work well because of the density you would need to achieve. If you're making a plastic clog, it's only got 3 pieces, you can probably jam a lot of those into an air freight container. But in terms of traditional footwear that's boxed, it's actually not a very efficient solution.

Got it. What international market I guess, is an up and coming 1 that nobody is paying attention to in the marketplace for you guys?

Well, I mean, there's enough for you guys out there that somebody is paying attention to every market. I mean the 1 that's really exciting from my perspective because of both our relative position there today, but also I think in the long-term opportunity is India. We have a very strong business in India. We're a very capable team that's done very, very well. It's actually got a very diverse operating model, everything from franchise stores, to multi-brand wholesale, to company-owned stores, and then they have some additional channels that are unique in that, there's a government channel, and a school channel. And so has a lot of different paths to market. We also find that our footwear there does very well. Our brand does very well. And it's actually a market that several other brands have struggled with. So you don't actually have the same existing Tilton dynamics where there's a couple of BMS, and everybody else, you actually have a much more level playing field. And then obviously, there's a lot of potential consumers there, including a growing middle class. That's 1 where we are tremendously excited both about what we've been able to accomplish in that market, but what the long-term opportunity for our brand is. And that's why even I think David mentioned on the call, we're eager to look at putting our first distribution center into the ground in India, and we're looking at other ways to invest because we are definitely excited about the long-term opportunity for India.

And it seems like it's been -- well, an unusual year to say the least in India. Clearly, 2Q was a tough quarter, and then you got you guys came roaring back in Q3 with nearly 70% growth. Can you give us an idea how India looks year-to-date relative to a kind of where you were in 2019?

Recovering fast. I mean it's tough to recover entirely when you have a complete closure of the market like they experienced in the second quarter, but it's bounced back really, really well. I think that's in part both our management team there that's done an excellent job, but also the underlying consumer demand continues to remain robust. So without being terribly specific, it will definitely challenge to get back to '19 levels, but stands at a fairly good chance. But more exciting than that from our perspective is that means that we're back on that trajectory that we've seen because we've mentioned before, India is a very fast-growing market for us. It was faster to profitability than many of our other markets when we started. And so for those reasons, we're incredibly excited about getting that a kind of growth trajectory back on track, which we think we'll be able to do starting next year.

How do store openings in India a kind of look? I mean, clearly, you've been impacted by what's going on with the pandemic there. But how should we think about store growth in that country. I mean it's not your traditional -- I mean it's more of your traditional brick-and-mortar economy relative to Nike were a large e-commerce business.

We're seeing actually growth in both ends of that business, and that's why we have a direct-to-consumer online business in India. We also have the stores. The stores are a combination of company-owned and franchise, and we're seeing solid growth in both. We think there is extraordinary opportunity to continue to grow that footprint. And then what we're seeing there as well is actually a very early stage omnichannel solution coming forward as the preferred consumer choice, and that involves literally in our instance, we actually do some delivery from store to the consumer, some using third-party delivery mechanisms as well. And that just makes it such an exciting market. It's got huge opportunities for growth in just doors, but also a very strong burgeoning e-commerce, but it's also at the cutting edge of some of the omnichannel characteristics, we hope to actually duplicate across the globe.

Got it. And then finally, I mean, you had mentioned earlier in your remarks that every CFO, including yourself, believes their stock is undervalued. Clearly, there's a case to be made in your stock specifically, as our rating implies. But what are your priorities for capital allocation? And if you believe the stock is undervalued, do share buybacks, makes sense at some point again?

Yes. Look, our priorities are pretty consistent with what they've been historic. But the first thing is we want to maintain a top-tier balance sheet. We feel like that's incredibly important in the retail environment for 2 reasons. 1 is, it just ensures a stability of operational movement that I even COVID here absolutely proves is hugely valuable. We didn't really suffer from any liquidity issues throughout COVID, and that was in part because we had a very strong excellent balance sheet going into the situation. But we also feel like it provides you strategic leverage, should you want to take an action strategically, having a strong balance sheet as a precursor condition precedent to that. We want it to make sure we're always in that posture. From there, we always look to reinvest in the business on high-return opportunities where they exist. We've done no shortage of those, particularly in international and domestic infrastructure. As well as e-commerce, but we'll continue to look at those. And then we look at a host of inorganic opportunities, both within our own portfolio business like distributors as well as outside of our business that typically hasn't been a fruitful area for us, but we certainly look hard and then we kind of look at direct returns to shareholders. And I would tell you we're always looking -- does it make sense to look at directly returning cash to shareholders, either via repurchase or dividend on a regular basis. The only a kind of conditionality I'd put on that is over the last year, 1.5 years, we've obviously been through a pretty tumultuous time period. And so we want to make sure that, that first concern of having a rock-solid balance sheet remains our #1 priority. And that's probably kept us a little bit more defensive than we would have been otherwise. But it doesn't, in any way, diminish the amount of conversation we have around the topic of returning cash to shareholders. So I would say, it's always something we're looking at. It's always a part of how we look at capital allocation. But it's also important for us to maintain that top-tier balance sheet. And in the current environment, that certainly seems like an important priority to maintain.

John, thanks so much for your time. I think we are out of time, but really appreciate you visiting with us today and for all the insights on your company.

Yes. Thank you, Brian. Thank for having us.

Thanks very much, everyone.