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

I'm Kimberly Greenberger, and I'm the branded apparel and footwear and softlines analyst here at Morgan Stanley. We're very pleased to host at our conference Skechers today. Skechers is a nearly $8 billion market cap branded footwear company with over 4,000 stores worldwide across over 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 this year. Today, we're joined by Skechers' CFO, John Vandemore. John joined the company in 2017 and direct 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.

Thank you for having us. We appreciate it.

We'll spend the majority of today's session in a question-and-answer style fireside chat, where we'll explore some -- where we will explore Skechers business model and long-term strategies as well as some of the investor questions that we've heard most recently. We also have reserved time to answer your questions. [Operator Instructions] 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. With that, let's kick off the fireside chat.

John, I wanted to know if you could start just on Skechers position in the global footwear market. What differentiates Skechers from competitors? And does the brand position differ from the U.S. brand position in other global markets?

Well, thank you again, Kimberly, for having us. It's actually a very astute question because what we find is that often with the domestic-only lens, people don't really appreciate the power of the Skechers brand globally. As you noted and has been consistent in recent past, we generate the majority of our sales actually outside of the United States. And we're extremely excited about the long-term opportunity for the brand internationally. When you step back and you look at the brand, there is absolutely a perception differential outside of the United States. In part, that's because of the fact that we grew up in the United States from a young upstart shoe company focused on a handful of products to this global portfolio we have today. Whereas in many other countries, we arrived in market with a complete repertoire of categories. Everything from technical running to specific sports like golf and walking, all the way through to casual and even, as some people don't know, black and brown. What's consistent in all of that, though, and what we find resonates with our consumers most is kind of our 4 core product tenants. We're looking to deliver a product that is stylish, that's high quality, that's on trend, and that's reasonably priced. So style, comfort and quality at a reasonable price is what we always say. And the one that's actually interesting in that, that really stands out from a consumer perspective, and you've seen us focus on it more and more as a company is comfort. Whenever we talk to people, no matter where they are in the globe, they will always say, Skechers shoes are the most comfortable they own, even when we do head-to-head comparisons. And so as you've seen us continue to evolve as a company, what we focus on is delivering those core tenets, but also with a very strong emphasis on comfort. I think the other very compelling factor that we see from consumers though is that we offer a price range that is very reasonable within the context of the footwear and apparel industry. And it's that kind of combination of things that we find resonate. No matter whether or not you're talking about technical running, which can be a very high technology and leading-edge product category all the way down, the pricing being reasonable and valuable in comparison to others is an extremely compelling factor. So absolutely, we look differently outside of the United States than we do inside the United States, but those core elements, those core capabilities are consistent.

Great. Okay. Fantastic. And you talked a little bit about what customers appreciate about the brand. Is there any sort of difference in your typical customer here in the U.S. as compared to international markets? And can you just describe briefly your customer acquisition strategy? How does Skechers approach winning customers over?

Yes. I think every market is different. Every -- quite frankly, every consumer base in every market is different. I think one of the strengths of Skechers is our ability to leverage our broad product portfolio with a range of price points and adapt that to myriad markets across the globe. The reality today is that there are common elements among consumer behavior across the globe, but there are also very distinct elements in each country. Further to that, in Skechers, what we find is we have the ability to expand our range of target audience outside the United States by leveraging that product portfolio. So that if I was talking in Shanghai to our team, we would talk about a brand that certainly has its core roots in the same ends of the spectrum of the consumer that we do in the U.S., but also has a very strong middle, a very strong fashion play. A very -- a younger demographic in that range than we would experience anywhere else. But if we were to take that and move that to South America, you'd find a different mix. But I think that ability to be flexible, that alacrity is actually what helps us succeed in many markets. And I would extend that to our go-to-market strategy. There isn't one format for Skechers that we insist upon in each market. We go to market differently in each market depending upon the capabilities we have in that market, the strength of the brand in that market. And to your -- the end point of your question, how many consumers we have and how we've acquired them? To be completely honest with you, and I don't mean this to sound glib, our #1 consumer acquisition strategy is to get you in a pair of comfortable Skechers shoes. And it does underpin actually our distribution. We're fond of using the phrase that I know many have heard, which is we want our product to be available to consumers wherever they want it, whenever they want it, however they want it. And I think that is guided in part by that customer acquisition strategy, which is we know if we get you in a pair and you feel the comfort, you understand the price value equation, you have a tremendously higher propensity to buy again. And then if we get you in 2, we've pretty much got you as a customer for life. Now that's not to the exclusion of other brands. We're not misled by the fact that we think people only buy one brand. We know they buy multiple brands for multiple uses. But we know if we can get you into 1 or 2 pairs of Skechers, the LTV to the company goes up dramatically from there. In terms of actually how we tactically acquire customers, it's, again, market-dependent. We obviously use merchandising in stores and retail expression heavily. We're in many markets, advertising across the spectrum of opportunities. But again, it's really all designed just to get you into a pair of Skechers because that comfort ultimately speaks for itself.

Okay. Great. That's very helpful, very intuitive as well as you describe it. Can you talk about how Skechers approaches product development and innovation and product extensions? Maybe you can even address your recent expansion into apparel?

Yes. And I say this with all due love in my heart. I mean our product development is as dynamic and sometimes crazy as everywhere. And I see that with affection because the reality is we're not in the business as a company of telling consumers what they want. We think we're in the business of responding to what they need and responding to the trends in the marketplace. So I think what you often see from Skechers is a strong tendency to try to read the market and adapt and deliver them what we think the consumer wants. I'd say the one big exception to that is back to that point on comfort. What we do know now, and we're thoroughly convinced of as a company is, we excel at comfort, and consumers want comfort. In fact, in some respects, I think comfort is becoming a core tenet of overall personal health and wellness. And so the one area we focus on actively seeking out and developing technologies and product and product categories is in the area of comfort. And a very good example of this is our Arch Fit product. So every foot bed is a little bit different, but there's many who need more arch support in their footwear. And it's just not offered generally as a global feature. And so as we brought Arch Fit to the market, what we wanted to do is make sure we were bringing a strong feature benefit to consumers. But also that we could use it in a lot of different places. I think the one tactic oftentimes in R&D that doesn't work well is being very narrow on what you're delivering. And so for us, you'll find Arch Fit in our golf shoes. You'll find Arch Fit in our work shoes. You'll find Arch Fit in our walking shoes, and you'll find the same categories without Arch Fit. But by adding that feature, we've brought incremental comfort to the consumer and then we've been able to really explode that across the breadth of our product portfolio. And I think that's, for us, the most effective means to combine a responsive posture on design and development from a style and market standpoint with a strong technical focus on delivering features that really add value at the consumer level and then extrapolate that as far and wide within our product portfolio as you can. You touched on apparel. I mean that's obviously a pretty different category for us. But even in apparel, what we want to focus on is delivering product that is true to the Skechers tenants of style, comfort and quality at a reasonable price. And so even in our product discussions around -- and I'm not joking here, on socks. We focus on how can we make socks more comfortable. Or how do we use socks as an accessory to augment the comfort features in our shoes. Again, it is a well-honed focus for us, but it is I think, also extraordinarily consistent with what the brand means to consumers. And traditionally, that's worked very well for us.

Great. Okay. Wonderful. John, when we host you at our Global Sporting Goods Day back in September, you talked about the $10 billion revenue target for Skechers and suggested it could be achievable by the end of 2025. Can you just review for our audience today, what are the strategies and the sort of levers that you see at Skechers' disposal in order to drive revenue from the current $6 billion to that $10 billion number over time?

Yes, absolutely. Although just to be abundantly clear, we think $10 billion is a '25, '26 number. So we're giving ourselves a little wiggle room. I think what's important, though, as you notice is the continued acceleration in the brand we expect that underpins that objective. And I hate to say this because it sounds trite and I promise we're not being overly acute. But what we're going to do over the next 4 or 5 years is the same thing we've been doing over the past 4 or 5 years. It's focusing on growing the brand internationally, a strength we have that we've already spoken about. And then also growing the brand in our direct-to-consumer channel. If you kind of take our historic growth rate on the international wholesale side, you realize there's a lot of markets where we're still well underpenetrated. You can very quickly get to the realization that, that should be kind of a mid-teens growth trajectory for us. You couple that with kind of a low teens to mid-teens growth trajectory on direct-to-consumer, which again considers the international markets, it considers adding new stores and more stores. It considers a real push in e-commerce that we have yet to fully capitalize on as well as the ability to see some ASP growth through added feature development, added pricing at the consumer level. And so you have those 2 core anchors. And then what I would say is the domestic market for us, the domestic wholesale market, we think, still offers abundant realistic growth opportunities in kind of that mid- to high single-digit range. Now we realize that's one of our most mature markets, too. So we don't have what we think are extraordinary expectations for the rate of growth. But it's also a very profitable market for us, one we know well. And we think that comes from both our continued velocity increase that we see at the consumer level. It comes from relationships we have with e-tailers who are doing very, very well in the market and supporting others. And it probably encapsulates in some sense, but doesn't require taking some of that position that's being left by other brands. Brands that are choosing to abandon wholesale customers, which, quite frankly, is not something we're interested in pursuing at this time. Because, as I said, when we first started, we want to make sure you can get into a pair of Skechers. And we know we're not everywhere yet. So we want to make sure you can get that product if you want to shop for it at your favorite retailer locally or on a Skechers' website or in a Skechers' store, what's most important is getting you into that product. And so we will continue to support the domestic wholesale business and continue to drive that as long as, obviously, there's mutual support for the brand, which is something we've often seen a lot of collaboration from -- with our retail partners.

Maybe we can just double-click on a few of those topics. Starting with wholesale. Your wholesale business here in North America has taken some nice share here over the most recent quarters. What are the contributing factors to that? And you expressed confidence in growing wholesale -- U.S. wholesale at sort of a mid-single digit rate plus, which seems promising. But the share gains really recently have been quite notable. What do you attribute that to?

Well, the first answer for us is always going to be product. And I do think that's absolutely true of the recent past. We've seen product resonate at the consumer level in a very strong way. I think that's probably in part both our product coming to market, but also the general transition we continue to see to more athletic and casual styles in the marketplace. It's hard to ignore that the pandemic clearly created a market for slip-on shoes. I know that most of my friends and colleagues have embraced, but also just a broader trend for casualization we think will continue. I think the breadth of our product is a strength there. When others sometimes are wed to a specific category and that category goes out of style or face headwinds, we have the ability to adapt and maneuver across our product portfolio. I mean I'm often asked who do you compete with? The reality is we compete with a lot of different brands in a lot of different categories. Not many of the big brands really play actively in work, and work is a very strong contributor for us. So that flexibility, that product breadth allows us to maneuver around market conditions and keep growth happening even in challenged situations. And then I would also say, I mean, clearly, we value our relationship with wholesale partners. We want to be there for them. We think we're pretty good partners. In the current environment where you're seeing tremendous supply chain challenges. You're seeing some accounts being left behind by other brands. We're there to support them. We're there to help them make money. And I think that helps us take share when there's uncertainty, when there's opportunity because those customers to us know what they can expect, know they can expect fair treatment. Now it's not as if they're always asking for discounts or the like, but they know what they're going to get from Skechers. They're going to get a good product that turns well. They get on-time deliveries. We help them manage their inventory levels. We don't want them being over-inventoried in a category. And so I think that cooperative and collaborative spirit we offer our wholesale partners is also a strong contributor to why they were -- they are willing to turn to Skechers more and more as we offer more and more features and products that appeal to their consumers.

Okay. Great. As you think about the international piece of revenue growth that you talked about, how do you decide when you're going to an international market? Whether you're going to go direct-to-consumer? Wholesale? Distributor? What are the factors that sort of drive your distribution decisions in each geography?

Yes. And again, I think this is one of the strengths of Skechers. I mean there is no Skechers' way. We don't stop into China or India or Vietnam and say, this is how we're going to do things. What we look at is what's the predominant format or approach that's worked well in the market before? What expertise do we have? How do we build the brand? I would say as an architecture, though, what we're looking to do is, first, find measures and means to build the brand. Sometimes that means going into franchising in a way. Sometimes there's a multi-brand retail establishment in wholesale, you can work through. What I think we have developed is, again, the faculty to be able to do any one of those or all of those, right? And so we approach each market differently. What we do in the end though, that I think is extraordinarily valuable is we ultimately look to penetrate the market as fully as the brand is capable of in that market. And so there are some markets interestingly where we started with wholesale, and our business actually has been significantly wholesale based, that we're now kind of, if you will, backward integrating into a retail business as well. Others where we started in the market, and we just didn't have the expertise to operate retail locally, we started with franchisees. And in some of those, we look at opportunities to bring some of that retail back in-house. But again, I think the core tenet of how we approach international markets is by finding either good leaders or good partners, trusting their instincts about how to penetrate the market best. Use a tip of the spear with our strongest product for that market, and then grow and expand the brand once we've been here. And that's been a tried and true formula for us in kind of rough outline for recognizing that we're very flexible in how we accomplish those near-term goals.

Okay. Great. That brings us to some recent headlines. I think there were about -- headlines that Skechers might be considering strategic options for the Asia business. I'm wondering if you can just give us some perspectives in particular, on that geography. And especially China, which I think represents a great growth opportunity, and you've had some pretty good performance over time in that geography.

Yes. I mean, to be clear, the report seemed to suggest that there was an action imminent rather than what the truth is, which is we look at a lot of options for, quite frankly, many markets. All designed to focus on how do we actually drive shareholder value, right? What we firmly believe, and this is true in our quote on that story, is that the market doesn't adequately appreciate our $1 billion-plus business in China. And the growth opportunity it represents, the profitability it provides today. And so looking at it from that lens, obviously, we've considered a wide array of opportunities. But what I should emphasize is that we have a fantastic partner in that market. We want to continue to work with them to grow that business. And we won't do anything that we think in any way, shape or form jeopardizes our brand or our ability to grow our brand. That being said, we do look at a lot of opportunities. And we are, as a company, generally of the belief that the market doesn't adequately appreciate the growth that we deliver and have delivered historically. And it's part and parcel also with why we set this ambitious $10 billion goal because we want people to understand what we're aiming for. And that's already against the backdrop of being the third largest footwear manufacturer in the world. So again, we look at a lot of different options. If it was more, if you will, of an assessment on our part not intended to actually lead to any near-term action. But the core premise that we feel like components of our business, the high-growth components aren't properly valued in the marketplace are absolutely true. And we'll continue to look at ways to drive shareholder value by establishing the greater appreciation for those elements of our business.

Okay. Great. Very thoughtful. Thank you so much for that. A conversation on footwear would not be complete without a discussion of supply chain. So I'm wondering if we can turn to supply chain, and just talk about the disruptions that we're seeing globally. And in particular, if I just sort of reflect on your most recent report, I think you had over $200 million in inventory in transit as of the end of the most recent quarter. You talked about some of the late deliveries hurting third quarter revenue growth. What's the sort of short-term outlook on supply chain? Obviously, we're hoping this will get through to the end at some point next year. And how is supply chain impacting your business?

Yes, it's funny. Today, we talk about supply chain almost as much as we used to talk about tariffs. Historically, though, that would actually not be a remarkable component of our business. And I think that just speaks to the unusual circumstances we're in. As we noted on the third quarter, we did see significant supply chain issues across the globe in the third quarter. We've talked about on our earnings call that we were beginning to see conditions abate somewhat, particularly outside of the United States. I would share today that, that continues to be the case. We're very pleased with how markets other than the United States have dealt with the supply chain challenges. And we find today that most of those are getting resolved, probably not fully resolved yet, but definitely making a strong headway. In the U.S., it's a bit of a different story. We're actually still looking at significant delays at port. As a result, you're seeing a significant backup of inventory. We are seeing more and more in-transit inventory than we've ever had in the business before. That, quite frankly, is having a knock-on effect to sopping up some working capital that we would normally have at our disposal. We're optimistic things are going to start getting better. We have had in the last couple of weeks some positive indicators, but I would probably share most that it's a challenge. It's a continuing challenge, and we expect it to be throughout the fourth quarter, into the first quarter and second quarter. We hope it begins to get better from there, but we also need the ports in particular, Los Angeles and Long Beach to begin operating more efficiently and effectively. And to date, unfortunately, we just really haven't seen that. So it's somewhat frustrating from our perspective because we know there is immense demand for the brand and the product. And a lot of that inventory is sitting out there and currently has orders behind it. But until we can get it landed and then cleared into our DC, we're really hamstrung on our ability to leverage that demand. And that's probably the biggest frustration we have at the moment is understanding exactly where the brand could be, could have been in Q4, could be Q4, were it not for this exogenous event that unfortunately, we can't control any more so than any of the other brands out there that are suffering through.

Yes, a story that has been told and retold many times in the last several months. John, I'm wondering if you can talk about holiday demand. How is it shaping up so far? And any sort of category standouts or any variation in performance across geographies that you think are notable?

Yes, I would say, generally speaking, holiday demand has been good. In some markets, it's tremendously better than last year. But some of those markets were under fairly severe restrictions last year. I do think you're seeing a bit of an elongation of kind of what would be that concentrated window of buying in the domestic markets around Thanksgiving. I mean, more and more companies like ourselves are not open on Thanksgiving any longer. We're definitely moderating our discount level. And so you are seeing a bit of an elongation of that traditional Thanksgiving weekend buying pattern. Traffic levels in some locations still very challenged because of COVID. And I think that's probably the thing we ought to keep in mind as we think about this holiday selling season, even though there is very strong underlying consumer demand, impacts from COVID continue to pop up. Now not in mass and not at the level of scale of which we saw in early 2020, but it's still there. And it pops up from time to time, and it causes irritation in what otherwise are very, very strong demand drivers. As I step back, though, and I think about the holidays in Q3, I mean the notion I would want to leave people with is at current, we see no issue with the demand side of things, product is working, marketing is working, even the pricing is working. At the moment, the headwind is really is supply side. And that's uncomfortable for us to say because we usually pride ourselves on our supply chain and reliability, but I think that's a fairly common element of the marketplace right now. And so that's what we're focused on attempting to work through and navigate around.

Okay. Great. Obviously, we wish you a great deal of luck with that. And it looks like we've got time for one last quick question. One of the questions we're getting from investors most is what's happening in the pricing environment. I think you talked about a 23% increase in the average selling prices for Skechers' products here on your most recent call. Is this -- what's driving the increase? Is it higher prices on like-for-like items? Is it a mix shift between channels or geographies? Is it better full price selling, all of the above? Any color you could give.

Yes. I mean, right now, unfortunately, it's all those things. And it depends on the market, it depends on the quarter. What I would say is the 2 most prominent are that we continue to mix up the value equation of our product by adding features around comfort, things like Arch Fit, Max Cushioning, et cetera. And that is obviously having a fairly pronounced impact on the price value equation with consumers that they think there's tremendous value in there. And we've been able to capture some of that as well as pass some of that along to our retail partners. And then obviously, secondarily, the promotional environment, incredibly healthy environment, very lean inventories globally, very good discipline in the marketplace. And that is helping substantiate pricing at an ASP level that has been very lucrative for our retail partners, very lucrative for us. And without really denting sell-through rates because sell-through rates are holding up. Now that probably isn't a condition that persists perpetuity, but we do believe a lot of it is pricing that can be held long term. But we're going to continue to watch the market on that. I think at the end of the day, what we want to make sure is that we're still delivering on that reasonable value proposition with customers while also continuing to deliver style and comfort and quality with that comfort emphasis.

Great. Okay. Wonderful. That's a great point to wrap on today. Thanks for the really comprehensive discussion. We appreciate it. And I want to say thank you very much to the audience for joining us. On behalf of Morgan Stanley, we wish you all a great rest of the conference. And John, thanks once again.

Thank you.