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

My name is Albert Lin. I am the Consumer Sector Specialist here at Morgan Stanley. I work in the Institutional Equities division. I am super pleased to host Skechers today at our Second Annual Global Sporting Goods Day. So let's just start a little bit with about who Skechers is. Skechers is a $6 billion market cap branded footwear company with over 4,000 stores worldwide across 180 countries. Its products offering span over 3,000 styles and over 30-plus brands serving all genders, ages and categories. And it ranks as the #1 brand for walk, work, casual and casual lifestyle shoes in the U.S. Skechers generated over $6 billion in sales in 2021, nearly 60% of which were international and is on track to deliver more than $7 billion in sales in 2022. Today, we're joined by Skechers' Chief Financial Officer, John Vandemore. John joined the company in 2017 and has great experience, over 2 decades of business finance experience, including senior finance roles at Mattel, International Game Technology and Disney. John, thanks so much for joining us today, and welcome.

Albert, thanks for having us. We're happy to be here.

Great. So turning to today's event. We'll spend the majority of today's session in a question-and-answer style fireside chat, where we'll explore Skechers' business model and long-term strategies, as well as answer some of investors' questions I've heard most often in recent months. We've also reserved some time to answer your questions. For those of you joining us via the webcast, please click the Ask a button -- ask the button question on the webcast to submit your questions. And lastly, before we begin, I need to remind everyone that for important disclosures, please see Morgan Stanley's research disclosure website. And so with that, we'll kick off the fireside chat.

So John, maybe we can level set first on how Skechers differs from other global footwear brands that it's often compared to like Nike and Adidas. Can you just help us understand your revenue breakdown by category and geography and how Skechers' proposition varies from those different players?

Yes, happy to, Albert. The first thing I'd mention, though because I think it often escapes noticed by many investors, is that the way you just described the marketplace has actually, what we see in terms of global footwear rankings, #1 is obviously Nike, #2 is Adidas. What most people don't realize, though, is that Skechers is the third largest footwear provider in the world. Now obviously, we go to market a bit differently than others and our offering is different. But I think just that size and scale is often something most investors don't appreciate. I think if you then look at Skechers, what we always say is we focus on 4 key characteristics for our consumers. We want to produce and deliver products that are stylish, that are good quality, that are reasonably priced and then are insanely comfortable. So style, comfort and quality at a reasonable price. And I think that focus is in and of itself a bit unique because what we're looking to deliver is a solution for consumers, really that is a complement to some of the other footwear needs they have. We don't expect in every instance to solve everybody's footwear problems or needs or wants. But the ones that we can solve, we think we offer the best value for the money out there in the market today. I would also say traditionally, we've grown up with a much broader array of product than most, especially in the footwear category. What I often get asked is, who do you compete against? And the answer is simply not 1 brand. So even though Nike and Adidas are the most well-known names in the space, they aren't who we compete against in every category because we will produce products ranging from traditional athletic sport and performance wear, all the way down through your standard clogs, sandal and other casual footwear, so yes! And as a result, we end up competing against a lot of different brands, both in the U.S., but also globally. In terms of the breakdown of our business, unique aspects I would call attention to. First and foremost, we are predominantly footwear. So as I mentioned, we're the third largest footwear provider in the world. We don't yet have, I think, a full expression of our brand on apparel. It's something we're working on and we think is a fantastic additional leg of growth. But if I were to state it today, I'd have to describe apparel as being substantially less than 10% of our overall business. The other unique aspect, though, that I think is most important is that nearly 60% of our sales derived from outside of the United States. We're much more from a proportion standpoint, a much more international brand than most people recognize. And that allows us to scale both our offering, but also adjust and adapt to different markets with a flexible strategy that I think is not easy to replicate. It's also why we have such a broad array of product because it allows us multiple tools to attack opportunities on the international front. If you were just looking at it from a revenue perspective, nearly 50% of our business comes from inside some portion of North America or the Americas, and then about 30% comes from Asia and about 20% from Europe, although that can ebb and flow in any given quarter owing to events like Double 11 in China or the holiday seasons in kind of the Westernized markets.

That's great. That's a super helpful background. So one of Skechers' clear points of differentiation is its value. And to me, it seems like Skechers could be a potential beneficiary of this economic slowdown that we're seeing right now. As consumers gravitate towards value, you're starting to see that in other pockets of the consumer, right? Have you seen any benefit during the great -- did you see any benefit during the great financial crisis? And are you seeing any signs of consumer trade down right now?

Yes. Here is just what I would note. First and foremost, we're not trying to be the least expensive solution in the marketplace. That's not really what we do. But what we try to do is very capably balance what we're charging with what we're delivering. So it's really about the overall value picture. What I think that then lends us the opportunity for is greater durability of demand in economic recessionary environments. What we've seen traditionally is that even in past instances where consumer discretionary spend has been under duress, Skechers has continued to grow. Is that trade down? Is that simply preserve capacity at the consumer level? I think it's probably a little bit of both. But what we know is that what we offer is appreciated at the consumer level, and their ability to continue to afford that is maintained even in economically challenging environments. I think it's also important to note that a lot of what we offer sometimes really isn't a discretionary purpose or purchase. One of the categories I love most about Skechers is our work business. It's a business focused on qualified workwear that then also contains the features of style, comfort and quality and a reasonable price that we talk about. And if you think about, what workwear is used by -- for most consumers, it's a service sector job, it's a construction job, where there are special requirements on the footwear that need to be attained and need to be certified. And so if you think about that, that's not really a discretionary purchase. If I'm working on a construction site, and I just need a steel toe boot, and I want it to be both good quality and comfortable and at a reasonable price, I'm going to look to SKECHERS as a solution. And be it in a recessionary environment or not, if I'm working, I need that solution. And there's a lot of other examples like that, I think, out there that really helps support our business even in those economically challenged times. But again, at the end of the day, what -- we're looking to make sure we've gotten proper balances, the features we're delivering, with the price we're offering. And I do think that puts us in a unique opportunity set for consumers, even though the purchase environment may be a little bit challenged.

Great color. So we can move on to like some more recent trends. In some of our recent sportswear channel tracks, it sounded like North America and some of these European retailers indicated back-to-school had a little bit of a slower start. At a recent investor event, I think you guys indicated back-to-school was off to a strong start. So is there any color you can provide on the trend that you've seen over the past couple of months, any notable changes, variations and income cohort or call outs on geography?

Yes. I mean the first thing I'd say is, it was nice to have a back-to-school season period, right? I mean, we need to recognize where we've been the last couple of years, which was anything less than normalized environment. And so I think one of the things that we actually greatly appreciate about this last season is that it existed in a manner that was roughly similar to what we had seen before. I would generally characterize the back-to-school season as good. I think if the environment weren't what it is today with concerns about inflation and other factors, I think we'd all be very happy about what we just saw in back-to-school and we'd be very encouraged by what that means for holiday and for 2023. Obviously, the conditions are a bit unique and that is, I think, weighing on the expectation of purchase behavior. But so far, what we've seen at the consumer level remains encouraging. That's absolutely true in the United States. I'd say Europe was probably a little bit of a step back from where it had been earlier in the year, but earlier in the year, things were fantastic. So if you're not fantastic and you're good, that's still a great position to be in. I'd say maybe the 1 exception would be in Asia, particularly in China. I'm sure we'll talk about that. But that was probably 1 area that really not for reasons of demand or consumer appetite, rather mostly COVID, where we saw probably less encouraging results than we had hoped for. But again, overall, if I step back and I look at the demand side of things, the consumer behavior side of things, I'm continuingly encouraged by what we're seeing.

Great. And yes, you did mention China briefly. I was hoping to actually drill into that a little bit. And you kind of just mentioned some of those recent remarks just now. But at a recent conference as well, you mentioned that China has been a little bit more challenging than expected. You reiterated that just now. I guess, can you elaborate on that a little bit more? And with the domestic brands taking footwear market share there in the last year, how is your thinking and all -- has your thinking at all changed in terms of Skechers' long-term strategy there?

Well, I would first say that no, nothing has diminished our expectations for the Chinese market long term. The brand positioning is exceptionally strong. We feel like we have a very good opportunity set going forward. I mean I do think we have to recognize that the market in China has been more challenged than expected, especially as they continue to battle COVID and the resurgence of COVID in markets. When you mesh that with the zero-tolerance approach, what that manifests itself in is more difficulty, quite frankly, in getting to the consumer and for consumers getting to stores. Plus, it's obviously having, I think, an impact on consumer discretionary spend patterns. That being said, I mean, I think, you can recognize this is still a COVID intensive environment, both globally, but in China. And so our early expectations have probably been for a more robust back-end recovery once the COVID lockdowns and restrictions began. What we're seeing materialize really over the course of the summer is a much more sedate and longer-tailed return to normal activity, and that's disappointing. I think it's disappointing as much for the Chinese market itself as it is for our brand and others that are participating. But it doesn't, in any way, diminish our appetite for continued both investment in and optimism about the long-term opportunity in that market. You asked about several of the local players, many of them, quite frankly, we've been doing battle within China since we arrived. I do think you're seeing a step-up in capability from many of them, and I think they continue to be more and more successful. But I don't think that diminishes the opportunity set in the market. Because if you look back at that market, today and even 5 years ago, I mean, the single largest purveyor of footwear is independent and contract footwear solutions, right? So unbranded solutions out there. And so there's still an enormous amount of opportunity in our space even with very skilled local competitors. I would also say, much like we see elsewhere across the globe, when we see competition, it tends to be in categories for us. It doesn't -- nobody really replicates the solution that Skechers offers, which is again everything from kind of performance athletic, all the way down to sandals and clogs and everything in between. And so even in those markets, we don't see a lot of relentless head-to-head competition. We see kind of areas where they compete, but that leaves a lot of white space for us to continue to explore where the Skechers brand can be successful. The last thing I'll say is in China, much like every other market, what continues to pull consumers to our brand, is the same 4 characteristics that we're focused on. And one thing we've seen is, our focus on being casual is a huge advantage, but also on focusing on comfort, a lot of the same comfort products we offer elsewhere resonate really, really well in China. So there's a high degree of fidelity to the demand characteristics no matter what market what market we're in. That all being said, look, our #1 hope in the near term is that COVID begins to recede from the Chinese market. That it begins to have a less significant impact, both to the people of China, to our business partners and operators in that market. We'd love to see things get back to normal. And when we get back to normal, we fully expect that growth will reemerge at a rate that we've come to expect. In the short term, we're probably going to continue to have to battle the market environment just like everybody else.

That's helpful color. Maybe we can shift to inventory and supply chain a little bit here. Some of our checks continue to show some challenges there, seemingly more so than general apparel. Footwear, I think we -- some of our checks show that inventory is arriving a little bit late. Some of the -- it's kind of resulting in some assortment imbalances. Can you talk a little bit about your inventory flow that you're seeing, the types of challenges that have been impacting Skechers specifically?

Yes. Also, I would just comment, in general, I've never talked so much about supply chain as the last couple of years, and I could do for a pretty long break on that front. But I mean, in all honesty, that's probably been the most significant ramification of COVID across the totality of our business. I mean the last couple of years for our supply chain, supply chain management team, transportation and logistics teams, I mean, it's been almost relentless. I'd say we're still experiencing the results of that. Everything from last year to factory closures and container shortages to elevated freight rates, the port congestion in the U.S., to intermodal challenges. I mean you name it, we've experienced it. I think we're still as an industry absorbing a lot of that. Keep in mind that supply chain, just the duration of this traditional supply chain extended pretty significantly last year. And now it seems to be coming back in. But what that does is put a lot of inventory on hand at once. From Skechers' perspective, we're definitely feeling the effects of congestion in, particularly in our domestic distribution network right now. We're seeing that actually throughout the system, both as product arrives from the port all the way down through to when it gets delivered to customers. And that's just creating innumerable challenges. For us, we're definitely seeing some inefficiency on the operating expense side of things. As we deal with that congestion, we're seeing issues with both customers taking deliveries on a timely basis and then their ability to process and then get into their own stores. So our expectation is, this will continue for another couple of quarters at least. In the interim, we're going to continue to see elevated inventory levels. We're working mightily to try and resolve that as quickly as we can. I think the encouraging thing about the environment, though, that we got to keep in mind is this is not a demand-driven situation. It's not because of an absence of demand we're seeing the inventory build. What we're seeing is kind of the ramifications of all the volatility on the supply chain side coming at some point in time into the distribution network. So it's unfortunate. I actually really feel for the teams globally, for every everybody out there who are dealing with supply chain, because it's been a tremendously challenging environment. I'm extremely happy with what our team has done because it has been a tireless effort over the last couple of years. And more than anything else, we're looking for a more normalized environment. Hopefully, starting sometime in the back half '23. The 1 other thing I'd say about that, which I think is important because it has been a topic of what we've discussed relative to gross margins, lately is. We are actually starting to see some positive indications that freight rates, that logistic costs in total for product movement is actually starting to recede a bit. It will take time before that manifests in the cost structure, but at least that's a good encouraging sign that some of the pressures may be abating, which is -- which I think will be welcome news for everyone.

Yes, that's very encouraging. So I think the next natural question is to ask after some discussion on inventories, to ask a little bit on discounts and promotions. We've heard the sportswear discounting and promotional environment has ticked up slightly this quarter. Nothing alarming, but we have also heard consumers don't seem to be responding that much to discounts and are instead kind of opting for newness and full-price items. How would you characterize the promotional and discounting environment at the moment as well as consumers' kind of price sensitivity?

Well, I would say -- I would definitely agree that promotionality is back. I think in part it depends upon what you compare it against. If you take where we were last year, again, where inventories were extremely constrained and there was almost no promotions anywhere, that's a pretty unique environment. And as much as I would love to hope that, that was the future for a long time, I think that would be an unrealistic expectation. So some level of promotionality is back. We've introduced a little bit in the course of our addressing back-to-school. I would say we actually have seen consumers respond, not in an uncharacteristic way, but certainly respond to some of the limited promotions that we've introduced. I would also just note, I think that's been our expectation, is that at some point in time, promotions will have to work their way back into the system. That's a part of normal retail. I think what we're alert to and have yet to see any evidence of, and you mentioned this, is anything that I would consider to be extreme or noteworthy for its either size or depth or breadth. And so we haven't seen that. So our hope is that this allows us to kind of naturally get back into a more normalized cadence and level on promotions that they can be used to effect when needed but left aside when not. And so far, I'd say that, that's probably the best description of the marketplace. And then we'll continue to watch things. I think it's probably reasonable to expect that trend to continue. I think the objective for the industry as a whole and in retail as a whole is to continue to make that a more normal environment and not a reflection of what we saw in -- post TSA in '17 or '18.

Fair. Just really quickly, I want to remind investors, if you do have a question, you can click on the Ask a Question button on the webcast. Moving on to the next question. We've learned a number of footwear brands are offering support to the retail and wholesale partners to help clear through some of this inventory that you kind of talked about earlier. Have you seen that in the market? And what type of support does Skechers offer some of its partners?

Well, I think it all depends on what you mean by support. I mean we feel like we offer tremendous support to our wholesale partners. But often, and in most instances, that's in the form of really ensuring that the message about Skechers and what Skechers product offering provides the consumer is out there in abundance. So it's really marketing support, making sure that the message around Skechers, around our features, around our new product is front and center. And that tends from our perspective, to be the most effective way to support retail. I would note, if you look across the landscape of our wholesale partners right now, and we benchmark against inventory levels in 2019, we actually don't see any exaggerated inventory presence out there. And I think that's important because if you're comparing just the last year where everybody was exceptionally constrained on inventory and quite frankly, we're asking for anything that could be delivered certainly, inventories look higher. But if you take a more normalized environment relative to, say, 2019, which is what we've been looking at, the levels are not exaggerate. In fact, they look quite healthy. So from our perspective, at least relative to the Skechers product we see in channel and the sell-through that we continue to experience, we feel very good about where inventory levels sit, the sell-through rates we're seeing. And then we are supporting that, but in our traditional manner with a more marketing focus backing. We don't like to do a lot of price support or discount support. That doesn't tend to benefit anybody because at the end of the day, we're also in that marketplace selling the product. So the best thing we can do is to ensure the product remains in demand, is selling through and that tends to be the most effective way to ameliorate everybody's concerns.

Helpful. So maybe turning a little bit to macro and kind of your wholesale business. Macro uncertainty, recession risk has certainly, I think, arguably increased since kind of like mid-summer this year. And I think some of the retailers have indicated they're approaching 2023 more cautiously, as well as looking to cut back on their second half orders this year, if they can. Can you talk a little bit about the health of your U.S. wholesale business? And what are you seeing in your order book?

Yes. It's kind of an interesting perspective to ask about, though, because it does draw to the fore that same, almost contradiction that I spoke about earlier. Which is, if you look at the consumer today, what you generally are seeing is healthy spending patterns. You're seeing a good back-to-school. You're seeing good sell-through. And so what we see at the consumer level and what we see in actual behavior today, is then juxtaposed with what everybody is worried about in '23. We definitely see conservatism relative to '23. We definitely see some nervousness materializing in orders. That all being said, it's also important to recognize that it really depends on what you're comparing against, because last year at this time, as the supply chain elongated, you were looking for booking windows that were much further out than had been traditionally the case. And so it's really important to try to get an apples-to-apples view. We think that when you do look at it at kind of a comparable-to-comparable view on timing and expected deliveries, there's still more conservatism than the current environment would suggest is necessary. I think we'll have to see how the holidays go and how consumer demand goes. But if things remain steady, I would actually anticipated some of that conservatism, some of that nervousness will actually have been misplaced. But that's absolutely the case. I think everybody is concerned about the environment, concerned about where the consumer goes, concerned about recession. And that's definitely leading to some more restrained buying activity or booking activity at this point in time.

Yes, it certainly feels like the consumer is holding up a lot better than the current sentiment out there, but...

Which makes you ask, who's giving the sentiment, if it's not the consumer?

Right. Exactly. I wanted to talk a little bit about some of your peers kind of shift to direct-to-consumer. In our channel checks, a number of retailers called out Skechers as a potential shelf space winner as a result of some of the changes that we've seen over the past few years. Have you seen any uplift as peers like Nike, Adidas have reduced their wholesale footprints?

Yes, absolutely. And actually, it's interesting. It's really been a conversation topic for about 1 year, 1.5 years now. What we found ourselves in the position of last year though, was unable to take much advantage of that because of all the supply chain issues. Now we're having very healthy dialogues with many customers, customers whom we already service, about how we can continue to augment the offerings at Skechers. And I think you're going to continue to see us ply forward and take as much of that shelf space as we feel we're capable of successfully assuming. I don't think that means that we get every ounce of the shelf space, but I think in many -- for many customers, they're looking for a solution to round out their assortment. Skechers is a known quantity. As I've mentioned multiple times, even on this call, we have an exceptional breadth to our products. So our ability to tuck in and fill in on opportunities, as well as bring new categories to many of those customers, I think, is unparalleled. We're going to have to work our way to make sure we learn what works, what doesn't work and adjust that. But it's absolutely been a topic of conversation on kind of the ordering side of things. We've been shipping against that. I think we'll continue to see opportunities to do that. And look, our -- while we certainly appreciate and understand what the other brands are trying to do, our goal is to get Skechers to as many points of distribution as satisfies consumer needs. And so we're going to continue to support that wholesale channel as long as it's in a way that supports our brand. And I think in that, we see a lot of opportunity to continue to grow our footprint and in addition, our productivity.

Great. That's super helpful. I want to shift to some of the investor questions that I see coming in. The first one is in terms of inventory growth, would you slow down orders for OEMs for 4Q in 2023? Or any kind of estimate of growth?

Yes. Although it's not just about growth, if anything, it's really about supply chain, right? When you think about traditional supply chain timing would have been 6 months kind of order to delivery or order to sale, and that elongated over the last year, went onto to 9 months, sometimes in instances of extreme situations beyond that. As that comes back in, I have the inventory I need to sell through. I just don't need to place as many orders to deliver it. And so there's absolutely areas where we're pulling back. Now we have to balance that with our expectations for growth and growing in different markets. But we've absolutely taken a look at how we're ordering and from a timing standpoint, what type of latitude the supply chain coming back into a more normalized timing affords us.

Great. And I think 1 final one is on competition. Just in terms of like how you're defending your market share, it looks like specifically the question is around HEYDUDE making some inroads in the U.S. market. How are you guys kind of defending your share?

Yes. Look, I think there's a lot of brands out there that I think have recognized that where Skechers plays and plays with strength in the casual marketplace is a very desirable place to be. And what you've seen traditionally is that there's -- somebody has an offering in that space and then that's what they ply. And unfortunately, that does expose them somewhat to changes in taste and preference and other aspects of what can affect consumer demand. The strength of our breadth is our ability to pivot quite quickly and to have already available those offerings. I think what you're seeing with the HEYDUDE brand, is a conscious effort to kind of round out the assortment available from Crocs in the casualized marketplace. We have great respect for the brand, great shoes. It is a relatively limited silhouette selection at this point in time. And it's one that we would love to compete in. So I think that's an area we do really, really well. I think that's an area where you find consumers definitely appreciate the characteristics that we continue to focus on. But I think for us, what the benefit of our offering in that category is that it allows us to first get to a consumer and then expand our assortment with the consumer. The conversation we love to have the most with the consumers is, when they don't realize that we sell something else. So if they're in kind of a slip-on casual shoe, to show them that, look, we have golf. We have work. We have sandals. We have some black and brown offerings if you need them for work. We have performance athletic. And really being able to take a consumer who's in one silhouette and expand them across the horizon of what we offer, that's unparalleled. And so as much as other brands are going to attempt to continue to augment what they can offer in the casual space, they're going to continue to run up against, I think, the broad assortment array that we offer. And so again, I actually think it's probably a really good move for the Crocs brand and again, high compliments for the HEYDUDE solution. But when we compete against that, we're not just thinking about that silhouette. We're thinking about all the other opportunities we have to deliver Skechers' value and comfort and style and quality to those consumers.

Great. Well, John, thanks so much for the time. I think on behalf of Alex Straton, Kimberly Greenberger and myself, we really appreciate sitting down with you and you spending the time with us to answer some investor questions. And if there are any further questions on the investor side, please feel free to reach out. I think we can wrap it up there. John, again, thank you so much for your time.

Yes, thanks for having us. I appreciate it.