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

Hi. Good afternoon, and welcome to UBS' Global Consumer and Retail Conference. Really great to see everybody in person here. We're back live. And super excited to welcome John Vandemore, CFO of Skechers to our fireside chat. So just to remind everybody, I'm Jay Sole, UBS' retailing department stores and specialty software analyst. And before going further, I do want to read the disclosure statement. I'll read this quickly. As a research analyst, I'm required to provide certain disclosures related to the nature of my own relationship with that of UBS with any company on which I express a view at this event today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the event. All right. Now with that out of the way, like I said, I'm super excited John is here today to talk to us about Skechers and what's new and what's happening with the third largest footwear company in the world. So to start off, John, I want to maybe go over to some hot topics that everybody is curious about, obviously, the world is always changing. But obviously, we were just talking about the situation in Russia. What percentage of the company sales are happening in Russia, Ukraine and Eastern Europe?

Well, first, thank you, Jay, for having us. We always appreciate being at this conference. This one holds a special place in our heart from our first visit here years ago. And secondly, I would say our heart goes out to all those affected by the current conflict on every side but obviously most significantly in Ukraine, the people, the displacement of refugees. Actually, ironically, we just put out an announcement not more than an hour ago that we have suspended all shipments to Russia as a reflection of the current circumstances. We have partners in both countries. They've been good partners to us. But under the circumstances, we felt like we had no other choice really than to illustrate our support for the Ukrainian people. In terms of both those markets, for us, they're both distributor markets. In the context of our business overall, I would tell you they're less than 1%. There are Skechers stores in both markets. I would tell you they're about 50 in total, relatively evenly split between both.

Got it. Okay. So I want to talk about another hot topic, which is inflation, but also trade down. How does inflation impact consumer demand for Skechers? In other words, if Skechers is a brand that consumers will trade down to -- or is it something consumers will buy less of as they try to prioritize spending?

Yes. I mean it's a great question, and I think we're all wrestling with the impacts of the inflation we've seen. For one, it's certainly something we focus on. We're concerned about both from the consumer discretionary spend perspective. But just in general, the inflation rates we've seen lately are unsupportable long term, and we're eager to see measures introduced that start to address that. I think in terms of our business, we haven't yet seen an impact from inflation. It's not to say that it won't happen. But at this point, we haven't seen any knock-on effect to consumer discretionary spend. And historically, when we've had periods where either inflation or other economic effects are weighing on the consumer. We haven't actually noticed a downtick in our ability to grow the business. I do think the most rational explanation and the one that we believe is applicable is that there is a trade down opportunity for many consumers into our price range, into our category. But also many consumers when they're looking for solutions in footwear, especially those that are more functionally driven than maybe, say, style at the high end. We offer a very good and compelling opportunity for that. And I think the best example I give that to you is our work brand. Our work brand is focused on individuals who need compliant footwear for their employment. Well, that doesn't change in an inflationary environment. It may be a little bit more painful to have to make that purchase price acquisition, but in that type of environment, you're not going to be able to refrain from buying the footwear you need for your job. And so in many categories like that, but just in general, we do see there's a benefit to Skechers in, what I'll call those, macro strained environments.

Yes. Okay. That makes sense. The other hot topic people are talking about is the cost side of inflation. Now oil prices are up. How should we think about the price of oil impacting the company's cost of goods sold? What percentage of the cost of goods sold are oil-based raw materials?

I don't want to get too far into the details on the costing side other than to say, again, it's something we're watching. It is not a cost pressure. We have seen significant evidence of yet. And keep in mind, over the last year, we made some meaningful price adjustments for a variety of reasons, some of which had input costs as their origin early last year. As it stands at the moment, we don't see anything on the horizon that would cause an extraordinary pressure on the cost side of things. Our #1 cost concern at the moment continues to be logistics and everything from freight to port logistics and intermodal transportation. I mean that continues to be the single biggest factor driving our cost profile. And it's one we're actively working to mitigate but also find ourselves somewhat beholden to the infrastructure that exists today, particularly in the domestic markets and the challenges that we've seen with throughput there. So that's what we're mostly focused on. But we are vigilant about other costs, input costs, in particular. And are monitoring the landscape to make sure we're aware of those. And if necessary, we're positioned to make pricing adjustments to respond accordingly.

Okay. So you mentioned the cost of transportation, John, can you tell us how the current flow of product into the United States compares to 1 month ago and 3 months ago and maybe versus normal?

Well, that's a good measurement window to suggest because what we're seeing is that things change pretty dynamically. At the end of our third quarter, it was most challenged. That's when we saw a significant amount of containers backlog offshore. The throughput metrics we were seeing at the ports, particularly the domestic port were not encouraging. We did see improvement over that in the back end of the fourth quarter in particular and carrying into the first quarter. So we've seen some alleviation of that backlog, which is an incredibly good sign. Of late, the last couple of weeks, it's kind of back a bit. So there's been maybe 2 steps forward, 1 step back type situation. But I expect it to continue to be a relatively volatile measure, something we're watching carefully. And it's not just the ports to be clear. There's a lot of issues in and through the supply chain that are popping up and then fading back and then popping back up. It's the nature of the flow of goods. But so far, we're encouraged by the progress we've seen. We just like to see it sustained and to see a little bit more.

Okay. If we talk about the consumer for a second. Obviously, you talked about Russia, Ukraine, specifically. But what have you seen from the consumer over the last couple of weeks since earnings, not just in the U.S., but also really in Western Europe where people are wondering if there's sort of a CNN effect, so to speak, from people watching TV and watching what's going on. And if you can touch on China as well, what have you seen?

Yes. I mean what we're watching it carefully. I think we're all concerned about the health of the consumer. I would say at this point, quite frankly, we haven't seen anything that's discouraging relative to where we have been on the consumer discretionary spend front, which has been incredibly robust. We're watching it carefully. We are concerned about the effects of inflation. But as it stands at the moment, quite frankly, the most significant impacts we've had over the last couple of months have been the traditional impacts, things like weather that cause a store to be closed or inhibit consumer activity. But generally speaking, the demand characteristics that we continue to see in the marketplace remain robust. And that's in the U.S., that's in Europe and other markets as well. So it seems to be, at the moment, steady as it goes, which is good. I think we are concerned about the knock-on effect of both, as you pointed out, the effect of the news on the conflict as well as the -- what appears to be likely current inflationary pressures in the European market. But at this moment, we haven't seen any evidence of it. And so we're encouraged by that because it continues to suggest us that there are very healthy consumers out there with discretionary spend, they want to put into at least the Skechers product line.

Okay. I want to talk about COVID and it's sort of funny now because we just said how many questions here before we even got to COVID.

I know it's relaxing.

Right? I mean, hopefully, it's like that. Maybe I shouldn't ask since we stop talking about it, but like -- how much of a factor is COVID on sales right now? I mean is it -- do you have stores anywhere in the world that are closed? I mean what's the...

Yes, we do. We do. I mean the most pernicious effects at the moment tend to be localized in Asia. That's where we're continuing to see in part, the 0 tolerance standard that governments have been employing, working against our operating hours and availability. I think that's to be expected in a market that experienced a different initial wave of COVID. And so what we see is a spike in activity in detection tends to lead to restrictions on operating hours and other effects that negatively impact our physical retail environments. So that's happening sporadically. I wouldn't say it's a significant number of stores. But at any given point in time, particularly, again, in Asia, we've seen stores impacted negatively by the virus. But I would even tell you, just in January, the Omicron variant, while it didn't result in overt closures in markets like the U.S., there was certainly a downtick in traffic we saw. That actually rebounded quite nicely after the major thrust of the variant expired. But we still see little effects from COVID across the landscape. And I should add that extends into the supply chain as well in some markets as few as 1 or 2 detected factory workers can lead to the closure of a factory for a period of time while secondary testing can occur until the factory is sanitized and cleared. So I think for the next year, we expect to see intermittent effects from COVID popping up everywhere, but not at a size or a scale that reflects where we were in either 2020 or 2021.

Okay. All right. I maybe want to just take a step back and talk about some of the other -- some of more company specific themes. And the first one is Foot Locker made big news a couple of Fridays ago when they said that Nike is going to really significantly pull back on the allocation of product they're giving to Foot Locker. And this seems to be happening to many of Nike's retail partners and a lot of other brands they want to play compete head-to-head, I think against Nike are kind of doing the same thing. What kind of opportunity does this create for Skechers in the domestic wholesale business?

Yes. I mean we think at the end of the day, it will be a fantastic opportunity for our brand. I mean many of the accounts that are being left behind by some of those other brands are accounts we do business with every day. That gives us, I think, a preferred stake in having a conversation about how we expand what we're offering those brands, but also increasing shelf space as a result. We're also, quite frankly, for many of those that tried and true supplier already. So it's not as if we have to renegotiate a relationship. We're already in most of them. And so I think long term, we expect that to be a fantastic opportunity for our brand. In the short term, to be clear, it is inhibited by the limited availability of certain products, product categories. I think in effect, although I don't think it was news they were excited to share, the Foot Locker news was exacerbated by some of the supply constraints in the marketplace. But those same supply constraints are going to, in the short term, impact our ability to step into that space. In the long term though, it's absolutely the subject of some pretty robust dialogue with many of those retail brands, and we're excited to be able to step in and continue to provide them great Skechers product. But of an expanded variety so that we can fill in some of that gap for them. I mean I don't expect we'll be able to fill in all of it, but we will definitely make a strong contribution to helping them out.

Got it. So I think one thing that's interesting about Nike and everybody talks about Nike and their direct consumer strategy and how excited people are -- investors are about it. But if there's any one footwear brand in the world that has a really robust complete omnichannel strategy, it's probably Skechers because you have the full price stores. You have your warehouse stores, you have your outlet stores. And now you have these very robust digital capabilities that comes through very hard for the last couple of years to really bring up to where you want to be. Tell us where the digital strategy stands now because you have apps and you have this turnkey solution, you've been rolling it out. Maybe just kind of tell us where it stands today.

Yes. Let me -- I'm going to confess 2 things upfront. One is I'm incredibly proud of what the company has accomplished in a very short period of time. But I can't honestly stand here and say we're where we want to be, because we want to be much further forward. So...

And that's really the question, right? I know that you want to be there, right?

Yes. So I mean the team has done a fantastic [ thing ] on the priority at the time which was, effectively, a complete re-tech stack of the entire digital business, everything from our marketing platform to our commerce platform to our loyalty platform and everything that goes with that. And had we not done that years ago, we would never have been able to capture as much of the opportunity that came about as a result of COVID as we were. So that was absolutely critical. I think from where we go forward, 1 priority and probably the 1 we're most furiously working at the moment is to bring digital everywhere we are. There's many markets, a couple of handfuls at least, where we're not yet present in a direct-to-consumer relationship and we want to be, and that means digitally. So we're in the process of rolling out a turnkey solution. We started within the U.S. to each market in which we have a wholly owned subsidiary. And by the end of, I'd say, '23 at the latest, we will have a direct presence in all those markets. From there, we're working to combine that digital presence with our physical retail presence because what we firmly believe is at the end of the day, that is what's going to win. And that's what consumers are going to want. And a frictionless environment in which they can decide to shop digitally, shop in a store, shop digitally and receive in a store, shop in a store, receive in shipments. And so we're working against what that model of omnichannel will be for us. And I think what I'm most excited about in that, it's a win for the consumer, but it's also a win for Skechers as we then figure out the ability of how do we use this mass store estate that we have that's well positioned across the country to serve our economic interest best. How do we use it as a distribution point? How do we use it to prioritize where we're selling what goods based on margin realization? I mean, all the factors that we can employ once we have that infrastructure fully installed. And so that's what we're continuing to work towards. I would also say you're kind of -- I know a lot of other brands are switching to DTC. But as you point out, we started with DTC. So we've been in this business for a while. We welcome them to the strategy. But I would also say, for us, this is how we've been operating for a very long time. And so we're excited about taking it to that next level, which really addresses what our consumers want from Skechers and continuing to deliver that frictionless experience that allows them to interface with the brand any way they want. And quite frankly, they didn't get the product in their hands, which is what we care about most.

Right. I mean I think the company's ability to segment the market with different -- whether it's different mall types, different locations, different real estate types. So if the wholesale environment change, Skechers has a solution for that, [ MSA ], that you walk right in and just still have that presence that you want to have and keep the consumer engaged with your brand.

Absolutely. Absolutely.

So maybe I just want to dig into digital a little bit because apps are a big theme, membership is a big theme, loyalty is a big theme. Skechers has been working on the app. Can you tell us about the app? Tell us what your vision is for how that fits into the overall digital strategy.

Yes. I mean it really leverages what I just spoke about. I mean my vision is that we have an opportunity, again, to really address consumer demand wherever it sits. I think in general, we all know that the ability for consumers to research product, to evaluate product, to locate product, digital is absolutely a must have. That's still available on the desktop. And for those of you I have to explain what a desktop was to my kids, but also across all platforms and making it seamless. And that's what we're working to continue to achieve. But again, I think that next layer of improvement is really marrying that capability with a physical capability. I mean there's a reason why many of the digital-first brands that were in our industry have gone to opening retail outlets. They know that, that touch point with the consumer is essential. And I do think Skechers actually does a very good job. If you're in one of our stores, you're going to get a good experience. It's generally going to be clean. The design is going to be solid. The customer service is going to be great. We're augmenting what we can do from a point-of-sale perspective. But once we can tie all that together with a digital solution and get to the point where you can check out digitally if you want to or if you want to just run in and grab your shoes that you ordered an hour ago, you can do that or we can facilitate the use of that store estate via a digital order to, in some way, affect last mile delivery of under an hour or 2. I mean that's where we need to go over time. And I think that's going to be, for us, the top of where we want to get to from an omnichannel perspective. So that it's really, quite frankly, very consumer-led consumer-facing and satisfying consumer needs.

Got it. I mean I want to -- maybe on that, I want to ask about the content side of digital. Because when the Skechers hallmark expressions since the very beginning has been unseen untold that's all, a fantastic marketing organization. And really just brilliant in a lot of the ways it's connected with consumers over time. Nowadays a lot of [indiscernible] brands doing user-generated content and do live streaming. They use their app as sort of interface with some of their key influencers and maybe tell us about how you think about some of those new trends, gamification to sort of keep that conversation with consumer going and keep that audience engaged just on your brand, so when that journey starts on their shopping trip, they start with you? And...

Well, I mean, look, I think the reality is we're getting to a point where you have to be able to reach consumers across a wide variety of medium. I mean they may be watching a game on a traditional television, then I'll explain to that to my kids later, but also on a tablet or a phone, right? You need to be activating them in traditional media, we still do radio. And radio is actually for our retail stores locally, sometimes a very compelling medium to transmit traffic to the store. But by the same token, you have to be active on social. What we're finding is that our capabilities are growing certainly on the digital side and then adding in layers, especially through our loyalty program, that include gamification and other ways we can get involved in our consumers' lives without, quite frankly, being too intrusive. I mean the one thing we know is there is an upward bound to how many e-mails you can send somebody before they get really annoyed to you. And so we want to be conscious of that. I mean I think the other thing that you probably agree with is over time, Skechers, we're not -- we don't take ourselves too seriously. If you saw the -- you saw the Super Bowl's ad with Willie Nelson. It's a good example, I think, of the ethos of our marketing. We don't take ourselves too seriously. We don't think footwear is the most serious topic in the world today. But if you can get a good chuckle out of it, if you get a good appreciation for the message we're trying to send. We think that's a good compelling message opportunity. And so we try to do that. Again, traditional media, digital, online through our loyalty I would say in digital, I mean, one of the big leverage points for any digital solution is having a consumer base you can target, you can address without having to pay the exorbitant acquisition costs afforded to you by the likes of the big web players. And so the big strategy over time for everybody, including Skechers is transition more and more people into our information ecosystem. So we can use that to communicate with them as opposed to indirectly routing through acquisition channels that are getting increasingly volatile and costly in some instances, actually becoming much less effective owing to privacy statutes and the like. And so what we want is that one-on-one opportunity to communicate with you. Not annoy you, but communicate with you and then engage with you to tell you what we're doing, what's available to you and send you when it's proper and quite honestly leave you alone when it's not.

So I don't know -- I'm going to try to ask this question. I'm not sure if I'm going to articulate it properly, but like there's a lot of companies, especially these digital native companies that are approaching the challenge of being digital and having that conversation with consumer purely from a technology standpoint, it's all about cost per customer acquisition cost in LTV and all these stats. And there's something that -- I think there's something missing, because it's like there's -- these companies, they don't have any brands. They don't have a creative -- they don't have anything creative force behind them that like a Skechers has to sort of, I think, bridge the gap to bring down that customer acquisition cost to really be able to create that digital ecosystem. Can you sort of explain to us how you leverage the power of the Skechers name and all the people who have been wearing Skechers for years and the millions of people who bought the shoes, millions of pairs you sell this year. As an advantage over like any sort of new guy who's going to pop up there and just try to sort of mathematically try to sort of figure out how to wear their product. Well, just to 1 pair or hundreds of millions of pairs.

Listen, I actually think you're speaking to something that's not quite well understood in the space today. And that's really the advantage of scale. There's certainly some folks in [ Oregon ] I know who understand this. But what we find is, again, it's about all the touch points. You can't just talk about digital. More than half of our loyalty sign-ups come in our store. And so think about that if you didn't have that capability, you're battling with at least 1 arm tied behind your back. And so what we really think is compelling about the Skechers offering and other scale participants is if you have the product array that we have, if we have the ability to communicate to you directly as a consumer that we're building, if you have the ability to physically interface with a consumer, and that's another great communication medium and you treat that, quite frankly, just as valuable as you do a digital medium, you really have a multifaceted way to approach and satisfy your consumers. And I think that's what you're looking to build. I think anybody only has one of those is going to be at a disadvantage long term. And I think, again, for us, the added benefit of having such a broad array of interface points and offerings to consumers almost doubles that. And a great example I'd give you is when we sign up an operating partner to provide work footwear, we're looking to do that to make a work footwear sales. So Jay, you look like you probably were a Barista at some point. So I'm going to say, we are with your Barista operator, who shall remain nameless, but we're going to offer you a pair of no-slip, slip-resistant Skechers work footwear at a discount for you to buy. You can even deduct it from your paycheck, if you want. But the objective is not just to sell you that pair and the next pair, although that is a really good objective. Our objective is to then turn you into somebody who appreciates the comfort you get out of those shoes. And then flip you into a direct-to-consumer relationship that we can communicate to you about more than just footwear. And then quite frankly, our hope is we get to you, we get to your family. If you're a working mother, we get to your kids as a result of that. And so you expand that touch point. And that's just 1 example. But you can think about it as coming at consumers from a variety of different directions in order to simply cultivate that relationship that you can then use to create value for them and us, and we know once we get you to buy a second pair of Skechers, your LTV to us goes through the roof. It's phenomenal. And so we want to make sure we're getting to as many consumers as we can, giving them the opportunity to get into the shoes and then doing what we can to foster that second sale. And that for us then becomes the tipping point of convincing folks that this is a footwear solution, while it's probably not going to be your only footwear solution, although we're not opposed to that, it's certainly a complement to what you have in your closet.

And I think this is probably more of a statement than a question, but I think you mentioned scale and just how much Skechers has to offer to the consumer because a lot of brands, if all brands is running footwear, and there's nothing wrong with that, it's great category. It's big category, and a lot of great brands, selling running footwear. But it's hard to fill up a 5,000 square foot store with just running footwear. And you mentioned work but also casual, athletic, boots, sandals, kids, basically, everything other than women's dress in some of this Skechers has done for a long time. So you really can really address the entire family in a store in a meaningful way, not just filling up the store with stuff, which is not something that other brands can do. So I mean, I think the point is to say, anybody who doesn't have one or the other whether stores or digital are at disadvantage. Some brands by nature, don't have the foundational characteristics to be able to do what Skechers does.

Yes. I mean I don't want to flex, but you're absolutely right. I think in addition to that, though, keep in mind that across that POP product spectrum, we're still laser-focused on delivering those 4 key characters, style, comfort and quality at a reasonable price because what I think people find is -- usually what happens is somebody gets in Skechers pair of shoes, and they say, "I didn't realize they were so comfortable, right? And so maybe you bought them for walking. And then you got to go by your work pair. Well, Skechers is comfortable here. I bet you they're comfortable there. And so maintaining the integrity of those kind of 4 consumer value propositions across the array of products we offer, I mean that's, I think, the clue that binds it all together because you know you're going to get the same fit, same comfort, no matter what category you're buying through. And I think that's an excellent strength we have that not everybody can replicate.

All right. So I want to ask you 1 more on digital and then move on to some other topics. But just on connecting the digital to the stores to the inventory and really to the supply chain from end to end. What -- where are you in price? What kind of investments do you kind of need to make? I mean and I'm not asking a silly question. I know that's 2 things I'm asking. I'm not. I'm just sort of asking what -- is it RFID? Is it -- that kind of stuff that is really going to make that give you that total inventory visibility across the supply chain to better predict demand, got to allocate to the right place at the right time and obviously maximize margin.

Well, I'll tell you, it's something we have today, but probably not at the level of efficiency and seamlessness that we want to achieve. The good news is we absolutely have line of sight to this. And I can tell you, there's a bunch of folks on our IT team right now cringing that you ask that because they know I'm going to come back and ask them on the status of that. That being said, I mean, one thing that I think it's important to do in the situation is we've got to prioritize. So we're first focused on rolling out those websites globally. And then we will get to a necessary integration that needs to happen domestically to really bind that seamless inventory visibility to both our store and in-store operations and our digital customers. Once we have that, we avail ourselves of a lot of capabilities in omnichannel that -- we're just quite frankly, chomping at the bit to deliver, but we do need some more infrastructure work to be done. Again, it's something we have line of sight to. It's just -- it's standing in the queue on the prioritization side of things. And then when we do that, I think we'll see that we can unlock a lot more value from an omnichannel perspective.

Okay. And I guess 1 point because I get to ask this question a lot. Obviously, company owns hundreds of stores, obviously, mostly in the U.S., lots in Western Europe. But [indiscernible] has thousands and thousands of stores all over the world operated by partners. Will the omnichannel capabilities be as accessible to your franchise partners and your JV partners and your other partners in the world as they will be to Skechers own stores?

Eventually, yes. But we're going to start with the owned store envelope. We'll probably next go into kind of the near field JV-owned store envelope. And then at some point, will absolutely work in the franchises. And by the way, it's not just omnichannel in the sense of how do we merchandise, how do we market, how do we sell product, it's also loyalty. Our vision certainly holds someday that you can be a loyalty customer anywhere and use your points anywhere, which means you have to have some seamlessness behind the scenes on your loyalty programs, but that's the end state for us.

So when I'm on vacation in [ Ergo ] next year, I'll be able to take my Skechers points and go to that beach store and get some nice new sandals and...

But you could also pay full price, if you want. I mean just an offer.

Yes. All right. Well, all right, let's talk about China for a minute because John, you've talked in the past that China is a tremendous growth opportunity. Lot's changed in the world over the last couple of years with COVID. Do you still see this like kind of mid-teens type of 20s kind of growth market over the long term? And sort of what are the ways the company is going to look to capitalize on the opportunity in China?

Yes. Well, there's nothing that's happened in the last year or 2 that's diminished our excitement about the opportunity in China. In our position in the marketplace, we feel incredibly good about both what we've done over the last year in China in particular, but also for the last 5 years, where we've really substantively grown that business across multiple channels, not the least of which is e-com. So we're continuously excited about what China offers us. It's not an easy market to deal with and it's becoming an increasingly competitive market, to be sure. But we like our position in the market, which still holds true to what we do domestically, which is we want to be a brand that offers those 4 characteristics, but also plays a little bit below the high premium players offers the same array of products that we can elsewhere across the globe. We still have rooms to grow in in-stores. We have a significant amount of room to grow in e-comm. The one thing I'll just say about China over the last year, I mean, I think it's probably not been as apparent as it is in other markets. The COVID is still having an impact in that market. That's where we see intermittent closures sometimes. And the retail environment there still is not in any way, fully recovered. On the flip side, what you've seen is the e-commerce channels have continued to grow. And I think somewhat encouragingly, you've seen other platforms start to grow up around what had been a fairly Tmall dominant structure in the marketplace before. So we're excited about that. I think that's a great opportunity for us to continue to develop capabilities in e-commerce, which has been, quite frankly, over the last 3 years, really the primary driver of growth in the Chinese marketplace. So absolutely enthusiastic about what we continue to have there as an opportunity. We have very good partners who help us navigate some of the idiosyncrasies of doing business in China. I think they've been very helpful in getting us past some of the traps that may have caught some other brands. But ultimately, what we want to continue to do there is what we do everywhere else, which is bring great product to market, market it well and then get it delivered through whatever channel the consumers there want to use.

Got it. So maybe one other question on China is it how modelers are, right? We like to think about in terms of like geographies and stores. I mean I think Skechers has traditionally been really big in Southern China. I mean, is there -- how much geographic opportunities like in terms of like penetration, maybe can you add stores? I mean some of that capture opportunity is going to come from more stores in Northern China is going to come from categories that maybe you're not selling now like more apparel, whatever.

I mean, honestly, it's really all 3. It's going to be category expansion, store expansion, geographic expansion. I mean we're not even fully penetrated in many of the Tier 1 and 2 cities we're in today. We know that. I think the 1 thing that you got to count as against that, though, is as e-comm continues to develop, and let's be completely clear, China is the e-commerce leader of the world. There's no doubt about it. How it operates, how it goes and more, how it executes is fantastic. We need to weigh that and make sure we understand where e-commerce can play, where there's a complementary retail footprint to offer and how you marry those together. And so that's the only thing we keep in mind is trying to make sure we assess whereas the e-comm penetration going to be relative to the store? How do you continue to marry those 2 things together. And so that's probably the primary thought we'd like to consider. But in terms of growth, it's everything, it's product, both footwear and apparel. Its stores and its e-commerce channels and across all geographies really.

Okay. Maybe let's talk about India for a minute because somebody has talk about how it's used $1 billion opportunity. And it's probably less than this, as my guess, I would say, less than $20 million today as a market, but growing really fast. Obviously, pandemics been very disruptive, but still, I mean, it's been recovering. What are the key ways the company is going to look to capitalize on the opportunity in India. Yes. So a similar question to China, but just different markets.

Yes. Well, first, let me over-express my enthusiasm for India as well. And I see that for 2 reasons. One is, it is a great market as we like to say, lots of feed. But also, it's one of the few markets where you're not starting off in what I'll call a traditional market position. And that's because, like it or not, there is no 800-pound gorilla in the Indian market. It's been a struggle for many brands. And so we find ourselves in, I think, a very attractive position that we have a great team. We've invested resources in that market for many years to develop that team, develop that capability. We have a format that we love going to market. We have multiple points of distribution beyond that, which is unique to India in a way and there's no 800-pound gorilla standing in our way. Last year, just a point of example, I would call kind of Q2 in India pretty much flat to almost 0 quarter. I mean it was shut almost entirely. And yet with that 1 quarter taken away from them, they still comped above the prior year. So in 3 quarters, they did as much as they did in 4 quarters in prior year. So it gives you a sense for how much robustness there is. Now obviously, COVID continues to be intermittently impacting that market. But for us, it remains one of the most lucrative longer-term opportunities. It's going to be the same multifaceted strategy we're using everywhere else. We're going to open our own stores. We're facilitating franchisee store growth, and there's a lot of other channels. There's channels for wholesale, which is just traditional multi-brand sales all the way through to school and government is a unique channel there that's very robust. And so we -- this year, we made a purchase of some permanent space in India as a demonstration of our dedicated to the market and making sure that we have the space we need to grow. We will be putting a distribution center in India as well, and we're even beginning to manufacture some product locally. And so again, India, for us, is a fantastic example, I think, of what we can create together working with our local team in the country, and we couldn't be more excited about what it offers in terms of long-term both value opportunity, but just executional capabilities.

Okay. All right. I want -- the last 10 minutes here, I want to transition a little bit to margins. Gross margin expanded 150 basis points last year, [ 49 ] and change, new peak, tremendous accomplishment. And look, the company's gross margin has been steadily climbing over the last 10 years is the shift in DTC is going down. That's just math. But I think that -- the question is, if we parse out some of the factors that caused the gross margin to hit [ 493 ] last year, how much -- I think investors want like how much was just an unusual level of full-price selling. It was a very unique time last year. Inventory was lean, demand was strong. But how much was -- I guess the question is how much of that gross margin gain last year was sustainable? And what was sort of onetime in nature, what you thought?

Yes. Well, I think you need to decompose that a little bit. I mean we think the pricing is sustainable by and large. I mean, there's probably at some point, a rebound effect on promotions coming. We don't think it will be anywhere near the size or scale of what the industry was experiencing kind of '17, '18 and early '19. But other than that, we feel really good about the durability of the pricing we put in place. Early in the year, we benefited from that pricing as well as some very lean inventories. I wouldn't even say though, but at the back end of the year, we were starting to face the freight challenges that we've talked about. And so unfortunately, as you look forward, the freight in the near term is going to continue to be a pretty severe headwind. I think that's a pretty universal perspective. But we believe the pricing is durable. And if there's a need, we think there's certainly room to enact some more modest price increases, if necessary, although we're not keen to do that right now. As freight abates and you start to see the logistics normalize a bit, we think some of that can result in value capture to the gross margin, although we're not yet banking on that. Really, in the near term, we're focused on the headwind of how do we get past some of these logistics challenges. But then with that elevated pricing and the ability to continue to deliver more features and functionality to the consumer that will give us more latitude to seek further price increases, probably not at the clip we announced in Q4, but with some benefit through to the gross margin line.

Okay. I want to ask about another gross margin question related to the investments that the company has made over the last few years in distribution centers because there's been a lot. I mean there's been expansion in California, China, D.C., Europe expansion. People want to go play in their models go back to 2013, when that Belgium DC was built. It was a headwind on margins for a while. I know when it opened up, it was a nice tailwind. What kind of benefit to gross margin do you expect to get from the investments that the company has made in distribution over the last couple of years?

Yes, I mean, because most of those investments have been on the distribution side, it probably comes out through the operating margin. And I would tell you, I think this year will probably be a bit of a net headwind for us. It's not enough, we think, to disrupt kind of the guidance we've provided or what we expect for the full year. But we're going to start up operations in the U.S. That's going to cause a bit of a drag. We have a new distribution center in the U.K. that was born out of our friends in the U.K.'s Brexit vote. And then we have some other expansions that we'll be facing -- and the reality is the first year of a distribution center is rarely it's most efficient year. So we fully expect those to get incrementally more efficient as time goes on. As we go forward in the year, if it becomes a material element, we'll definitely call out, here is the amount of kind of start-up related or new cost-related activities that are impacting us. But again, we're at a size and scale now where those things don't tend to matter as well as they did back in '13 when you mentioned that Belgium DC came online. What we do see is, over time, they continuously work their way into a more efficient processing of goods. And that's always the right thing to do. Plus from our perspective, it's important in many of these markets to control your own destiny as much as you can. I mean as we can see in the current environment, there's a lot we don't control. And so controlling as much of that distribution as we can is we think critically important to the company long term.

Okay. And then can I just -- want to ask you about the dollar. People wonder like how do you see, how do you think about the impact of the dollar on sales and gross margin if the dollar is going to continue to go up.

Yes. I think for next year, at least at the moment, our anticipation is we're probably going to lose 100, 150 basis points of growth on the top line from FX. That seems to be what's most likely at this point. That will probably be about a 200 to 250 basis point drag on growth on the EPS side of things. gross margin tends to offset most of the time because you're impacting the sales line as well as the costing line at the same time. But there'll likely be some minor impact in between there. But that's the flip side of having the benefit of the gross margin headwinds that we are -- I'm sorry, the FX headwinds we had last year or so.

Right. It goes up and down.

Yes.

All right. So then maybe -- all right, so I'm going to ask you as many questions. I guess the way I want to ask it is that if we think about the past, there were some quarters where SG&A grew seemingly faster than sales. And go back 6, 7 years ago, maybe even 8 years ago. But if I look at the last 3, 4 years, SG&A has been tracking pretty close to sales, and you've leveraged it on. What's different today? What has allowed the company to really manage that line item in contrast with the entire P&L to deliver that consistency that maybe people perceived wasn't there before.

Well, I mean, I think the first and foremost is we are scaled. We're getting -- ever scaled every day. I think when you think back to just where we were from a sales standpoint 6 years ago to where we are today, I mean, it's basically 2 different businesses. And so that's an advantage. I think we also have a better understanding each time we go into a market, each time we open a store out and do that more efficiently, and that's benefiting us. I do think we've made significant strides in how we plan, how we forecast, how we monitor those events, how we respond as a result when things don't work out. I guess the reality is you can plan all you want, but something is going to change, and you're going to need to respond. And I do believe we've developed a greater faculty at being able to adjust as we need to over the course of time as events warrant. All that being said, I don't want to make it sound like we were always [indiscernible] we weren't burning dollars in the backyard before. I mean there were investments we were making to further the business. I think really, you're seeing the fruition of those now. And sometimes those investments are hard to make in a timely fashion or really predict the timing of them. But the ultimate outcome is the growth that we've achieved since. So the reality is, although I know it's probably a little tougher to stomach back then, that investment led us to the point where we're eclipsing [ $6 billion ] sales this year. Next year, we will eclipse [ $7 billion ]. So I think it's part of what you need to invest in to grow the business. And I think the one thing Skechers does better than most is we keep an eye on the long term and we really want the brand to become and that allows us the latitude to make those investments. Sometimes even when it wasn't either ideal or palatable. But our aim, as we've said, is to try to do both; grow the top line, keep the SG&A growth within the context of that top line, maybe not perfectly every quarter, but on average in a year and then use that plus some gross margin accretion coming from the mix of our business to drive operating margin.

So just to clarify that point, it's very interesting because the way the business will be more flexible today as it scaled. The important part is that Skechers has always made the investments with an eye towards the long term and grow the market share, put more shoes on more feet. Is that changed? I mean within the construct of having more consistent SG&A. I mean, is there a pullback on investments? Or is the effort and the interest and the willingness to invest for the long term the same as it's always been.

Well, we're not going to get to $10 billion by not investing. It's the shortest answer I can give you. We still have the willingness, we still have the focus. I mean I think COVID's a great example. We definitely pulled back during COVID. We were uncertain of what the environment held, we were uncertain of how the landscape would evolve. We didn't know when we would be able to get back to kind of the trajectory we were on. So we pulled back. We pulled back in stores, we pulled back in other areas. Once we became convinced that we were going to be able to weather whatever COVID could throw at us. And it definitely tried a lot of things. That's when we started to really get back to investing in a meaningful way. And that I think will serve us in a good way in a couple of years as we light up our second China DC as we light up all the investments, the websites, et cetera. But we have the ability to pull back. We just want to make sure we keep our eye on the ball. And right now, that ball is pretty firmly $10 billion sales goal by '26 or earlier.

Got it. Okay. So then last question. Another thing you've always brought over time is why this is coming to keep $1 billion cash on the balance sheet. I think anybody has been asking that question really in the last couple of years. But what's your plan for the balance sheet going forward? I mean, do you feel like the environment has changed? Or is it still...

Yes. I mean, it's dynamic. I think the one thing to keep in mind is certainly with the supply chain issues that we've been having, there's been more of a working capital need than I think we've ever experienced and we talked about the year -- at the quarter end and year-end, the elevated merchandise and transit levels for inventory. So we are putting more money into working capital at the moment. That will actually normalize over time. And then obviously, we have our investments, plus we just announced a share repurchase authorization we'll be putting that to work to be able to repurchase shares to offset the dilution that comes from the natural programs we have to incentivize our employees. All that being said, it's something we review continuously. We review it with the Board. We review it with senior management. We look at a variety of options. And you can expect we'll do more of the same. But first, we always want to make sure we have the balance sheet and the capacity to move forward and move forward swiftly to grow the business because that's what's most important to us.

Got it. Okay. Why don't we stop there, John. This was great. Thank you for doing this. I really appreciate it.

No, thank you for having us. Thanks.

Okay. Well, thanks, everybody, for listening in. If you're on the webcast and for joining us live here in person, and enjoy the rest of the day, we'll see you at the next session.