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

All right. Good morning, everyone. Thanks for joining us at Raymond James Institutional Investors Conference. I am Rick Patel, Research Analyst covering global brands and digital commerce here at Raymond James. I am very pleased to be hosting Skechers for our fireside chat. Skechers is really a brand, doesn't need any introduction. It's one of the biggest footwear brands globally, widely known for its comfort, value and very cool ambassadors. We're thrilled to be joined by CFO, John Vandemore. John, thanks so much for being here.

Thanks for having us.

Well, for those that know the brand, but that are still ramping-up on the Company, can you give us a quick overview of the business? What's the right way for investors to think about the big picture across geographies, channels, products?

Well, I know looking from this crowd that everybody is probably wearing a pair of Skechers right now, if you're not, let me tell you, there is no better way to enjoy an investor conference then actually being comfortable in your footwear. And yes, in case any of you're looking, these are in fact Skechers, I'm wearing. I think what surprises most people is what you just mentioned, which is worldwide, we're the third largest footwear provider in the world and that's a pretty bold statement to make because I think a lot of people don't recognize the breadth of our operations. What's interesting about that for most though is that we are nearly 60% outside of the United States. So whatever perception anyone from the United States in this room has, you need to double, at least. I also think it's important to reinforce what you mentioned because where I also think we stand out as a footwear provider is that we are focused, we say always on 5 things, it's style, comfort, quality, innovation at a reasonable price and it's really the blend of those attributes that makes us unique. If you think about almost any other footwear provider in the world, you're not going to be able to check all those off. And so, what makes us fiercely competitive as a global footwear brand is our ability to satisfy those 5 criteria, no matter where we are in the world. Now I should also note though there's really 2 factors in that 5 that standout most and it's probably where you all or anybody you know and love who wear Skechers, who as a result I also love. And that's the notion that we are an extraordinarily comfortable, reasonably priced solution. If you ask consumers anywhere, that's what really stands out to them about our brand and that's what we're myopically focused on delivering in every single pair of shoes we offer. And that's everything from work wear, which is work qualified footwear for the job you do every day, to golf, to performance running all the way down to what we're most known for, our casual footwear.

And how are you able to grow in such a competitive market, you have established players like Nike, you have up and coming players like on running and HOKA, what is your competitive edge?

I really think it's those characteristics in all honesty, any one of those competitors you mentioned, stands out in kind of one of those parameters or quite frankly in a completely different one and they're also seeking to be a premium player. And make no mistake, we're not trying to be the least expensive footwear provider, we want to be as we would say the biggest bang for the buck. And I really find it hard to think of a brand that is aiming to deliver that at the consumer level. The other thing I would note is that we do have a breadth of assortment that none of those other brands have. And the question we always get that I always struggle to answer in less than 10 seconds is, who is your major competitor? Because it really depends on what category we're talking about. Clearly, if we were talking about performance running, where we have a very competitive product set. We're going to be going up against at least a couple of the brands you mentioned, which I will not rename. But if you're talking about work footwear, none of those brands really play at all. None of them have steel toed solutions for working in your local distribution center or slip resistant footwear for working in your local hospital. And so it really is that we have a breadth of product assortment that is unrivaled, but in that we always adhere to those 5 core characteristics and I think that makes us stand out because then the Skechers brand to the consumer means more than just strength or preeminence in one category that those other brands are doing fine, several of them are, but I think that's what makes us so unique to the consumer. And then to the consumer worldwide, because we offer so many more solutions than some of those other brands can.

And you have a long-term goal to get to $10 billion in revenue. What gives you confidence on getting there in such a choppy macro environment?

Well, let me first be clear, Robert has a very short-term goal of getting to $10 billion. There are certainly dynamics we have to keep in mind on getting there. And I'm sorry, this is going to sound a bit trite. I mean, we're just going to keep doing the same thing we've been doing really for the last 10 years, which is continuing to grow our international presence, that 60% of our business, we think continue to grow at a significantly above trend rate. We think anywhere between the mid and high-teens on an annualized basis. And we're going to continue to grow our presence in the direct-to-consumer world. Now I know that's been a very fashionable strategic shift off late, but I think it's important to remember that we've been doing that for 20 years. And we started out doing it, not because we were extraordinarily ahead of our times or clever, but rather when we started, that's where we needed to go in order to get our shoes distributed. But as a result, we've been in the direct-to-consumer business for quite a while and still feel like there is significant room to run both in terms of physical stores, which we still expect to add to, but also obviously with the increasing importance of omnichannel solutions to consumers. And then the last bit of that is, although, we never really expect for the domestic wholesale marketplace to be growing at significantly above-trend. It's still a very healthy market, one that offers us incredible profitability, but also a very strong foundation against which to keep the brand running domestically in a very lucrative way. So that also we expect to grow it at a more modest amount, but still grow. You take that together, I think it paints a picture for you that helps understand why we think $10 billion is the next way stop on the growth of our brand. I would be remiss if I didn't mention that we're not -- we're not looking to get to $10 billion and stop, that's not in our -- that's not in our DNA by any stretch of the imagination. So, we certainly believe the brand can grow well beyond that, but $10 billion is the next kind of way stop up on our journey.

And help us think about the long-term pathway for margins, where do you see the low-hanging fruit as we think about opportunities across gross margins and which we think about for SG&A?

Well, Rick as you know and I'm sure everybody in this room knows, the last couple of years have been very trying from a margin perspective, you had inventory availability issues, we've had most recently freight and logistics related issues. You've had FX issues, I mean, you name an issue, we've got it. I would say that our view coming forward is that many of those will recede in terms of the prominence they play in pressuring margins, both for us and quite frankly for the entire industry. Most notably is going to be the freight and logistics aberration that really has been the last 6 quarters. Just to put it into context, we saw the cost per pair of shipping increased by a factor of 5 to 7x in some instances. So take a component that was not a serious element in your landed cost and make it both the fastest-growing and a significant element all at once and you can -- I think understand the pressures that built. Thankfully, we started to see shipping and container rates come back to more normalized rate, that's very encouraging. Now, we have to work through all the inventory we acquired at the higher rates before that all manifest in our margins, but that's certainly going to be the most significant tailwind. I would say though, in general, what we could probably benefit from most is just a degree of stability, what's really been trying about the last couple of years is the volatility inherent in the operating environment. Container rates jumping radically, higher inventory arriving at a pace that was way above trend leading to congestion in other downstream issues and those all been margin exacerbators. But we feel really good about how this year is shaping up, once we get past the first half, we think a lot of those pressures abate, that will immediately offer an opportunity to contribute to operating margin. And then for us as a company, long-term, we continue to grow the businesses that are margin-accretive and those should add operating margin overtime to the range that we've long talked about being in that kind of low-teens level, because that's the leverage that you get out of the scale operations in our business. Unfortunately COVID has played up a bit of a game with us over the last couple of years as that starts to recede, we feel good about where we're headed.

And can we talk about China, it's a big focal point for investors, how does the recovery there compared to what you experienced in the US and what's the right way to think about growth there?

Well, the last bit there, honesty, I'm open to ideas because -- so one thing that's been unique within the uniqueness of COVID has been the Chinese market. If you recollect back to 2020, it was the first and really only market to completely close holistically. And then, it seem to actually have overcome the challenges of COVID only to see the zero COVID policy and resurgence of virus come back in a big way last year. So it's been very idiosyncratic, as a result, a little bit tough to judge. I would say, you know, although about 5 or 6 months ago we thought COVID zero was a permanent state, it's been pulled back, which is good. The immediate effect of that, though was, you actually saw a pretty significant dynamic pullback of the consumer in the market. And if you talk to folks in China, at least once a week, the issue was that if the virus hadn't been running rampant through the population and so people couldn't go out to shop, they couldn't do anything. That's kind of the characteristics we saw emerging from the fourth quarter. What we've seen since then though, I would say is encouraging. While it doesn't in any way suggest to us that things are back to normal, we do believe they're on an encouraging trajectory. We've seen several sign, several if you will, kind of the overused green shoots, that the market is reemerging back to a more normalized level, far from normal, but more in that direction. And so that gives us some optimism. For the year, we have thought that China would probably be a bit of a challenge in the first half and then a bit of a pleasant tailwind in the second half. I would say at this juncture, it's hard to radically change that view, just given the dynamics of the Chinese market, but I would say the recent data points for us have been very encouraging. And in a positive direction, faster than we thought. And so we're optimistic. I would say long-term though, there has been nothing. We've seen over the last couple of years that would change our view on China long-term. We absolutely are excited about what the brand can continue to deliver in that marketplace. We're excited about the dynamics of the consumer in that marketplace, so much so that we're actually in the midst of investing in a second owned distribution center in China, that shouldn't be completed over the next 2 years and that's a pretty big testimonial to our faith in that market long-term.

And while we're on Asia, can we talk about India. So India is a place where I feel a number of global brands have tried to expand and with mixed results, but you're doing pretty well there. So what's the key to success? And how do we think about that outlook?

Yes, I would say, first of all, we've done phenomenal in India and I know that sounds like we're trumpeting our own success and we are. But I also think it owes to a couple of dynamics that are unique to our position. At the end of the day in all honesty, though it comes down to people and flexibility. The Indian market is not the easiest to deal with, it's very dynamic, it has it's bureaucratic elements and being flexible and adaptable to those is incredibly important. At the ground level to root level, we see enormous opportunity in that market. I mean, some people will off handedly refer to it as a potential second China market, I don't think that's crazy to think of in terms of the scale, the populous and the trends towards both consumerism and middle-class expansion. Most importantly for us, though, in all honesty, is that in that market, our product resonates. It's very similar to what we see elsewhere across the globe, but the most encouraging you think you need as a consumer brand is people have to -- they want the product and we see a lot of demand for the product. We're still building infrastructure in that marketplace. We're actually going to light up our first owned distribution center in that market this year. We're making plans to expand. We continue to grow stores, but are owned, as well as franchise stores, multi-brand retail in that market is showing really good sign. So there's a lot we really like about the Indian market. I think again though the success we've had comes down to being flexible and adaptable in that marketplace and then quite honestly having, very talented local employees who do a fantastic job of helping guide the brand through. The only thing I would also though add is, when we talk about Asia-Pac outside of China, it's not just India where we're incredibly excited about opportunities in many of those markets, Thailand, Vietnam, Indonesia, Malaysia, the Philippines, all of which we think we've just scratched the surface on penetrating in a way that really reflects the brand strength. Because what we know in all those countries and all the rest that we penetrated, if you bring the product forward with those characteristics with the breadth of offering, the breadth of price points, the brand does really, really well. And so we're excited about really the entirety of the Asia-Pac region, not just China and India, all those 2, those 2 to stand out.

And so as we think about all the progress that's being made, if we zoom out, what does your market share look like and how has that changed overtime?

Yes, I don't know, I mean, I -- in all honestly I have no idea, in-part because it's so difficult to judge footwear outside of a very developed market like the US. I would tell you, I think from all the estimates we've seen, it's far too small for our tastes. It's probably in that mid-single-digit range. That being said, the biggest provider of footwear in the world, some gain in private-label. And the good news from our perspective is, we think that's where we've taken share historically, continuing to transition consumers quite frankly, out of a private-label solution into their first brand in some instances, a brand known for compelling rationale that warms them and is attractive to them. And so we think there is continuing opportunity across the globe to take share from that guy. What we tend to see is our growth has been relatively stable, which I think probably speaks mostly to our age of development than anything else. But even through challenging economic circumstances, you've continued to see the Skechers brand grow and I think that speaks in-part to some of the resilience within our 5 core operating characteristics, the consumer level and what means during periods of economic duress. Now we're not eager to embrace that there and we actually don't believe there will be a meaningful recession, but if there is one, we feel good about our brand's ability to sustain itself, even through trying economic circumstances.

And I'd like to double-click on the channel comment you made earlier. So what's the right way to think about the growth drivers across wholesale and D2C? And is there potential for cannibalization of wholesale from the D2C channel?

So from a growth perspective, we think both represent ample opportunity. I think probably what's most important in that though is, knowing that we're not of a mind today that it makes sense to curtail one for the benefit of the other, that's not our operating strategy. I know others have put that strategy forward, but our priority is to get Skechers product into the hands of the consumer and that can be wherever you want to shop as a consumer. As long as a wholesale partner is willing to treat our brand in the proper way to collaborate on its growth, we're more than open for wholesale business. I think part of the answer quite honestly will depend upon the retail landscape, how that evolves. But in all, honestly, we believe the wholesale marketplace offers us a mid-teens to high teens growth rate, particularly when you include international marketplaces and the direct-to-consumer is probably a mid-teens, maybe up or down from that by a couple 100 basis points across the globe, because that's going to be a mix of DTC, as well as omnichannel. And the 2 could they be cannibalistic? Yes, but we've managed to grow both pretty successfully over our recent history. So more than anything else that would suggest to us that the consumer is there, it's just most important for us in the near-term to get to that consumer one-way or another and make sure quite frankly that we are offering as frictionless and opportunity for them to get to know the brand as possible. I'm sure every retail brand, every consumer goods brand would tell you though, the key is we got to get you -- we got to get you in your first pair shoes first and then we have to get you to buy a second, but once we get you into a second pair, we have a really valuable long-standing relationship to build. And so again our goal is, get feet into a first pair, get him into a second pair and where that actually hits at the consumer level always kind of interesting because usually it's a -- somebody doesn't know we make a type issue for an occasion they have. And then they get into shoe and then they are very, very comfortable. They're happy with the price, they're happy with the style and quality, but what really inks the deal is comfort. And then what happens next is that if you work for Skechers, the comment you here which both pains your heart to one degree, but also excites you to the other which is, oh I didn't know you made X or Y or Z, because what they then understand is we're selling them is not a shoe, we're selling them those features. And so if you put on a walking shoe to trips around Europe for the summer and then you go to buy a pair of work shoes for your job, you say, I didn't know Skechers made works shoes, but I know they're going to be comfortable, I know they're going to be reasonably priced, stylish and quality and innovative as well. And that's the transition at the consumer level. So the more, the more we can do irrespective of channel to begin that journey for people, the better of we are as a brand.

Can you talk about investment spending that might be needed to support these various growth drivers?

Yes, seemingly an endless pipeline of investment spending and that's because as a growing brand, we believe fundamentally that we need to make sure we control our destiny on distribution, I mean that's very important. We've seen in our own instances, but also others where that can be a hand stringing activity, is if you don't control your distribution, you're going to be at a disadvantage. So we do invest in order to facilitate distribution across the globe. We generally make decisions about how much automation to include in that investment, based on market dynamics, but it's critical for us, as I mentioned, India is a good example. We started out in that market as an early enterprise using a 3PL. When it gets to the point where you're commanding a significant portion of somebody's attention as a 3PL customer, you need to start thinking about owning your own distribution, so we're making that leap this year. In the India market, we'll probably go with a fairly modest degree of automation initially and we'll build into that as time goes on. In the US, it always makes sense to embrace automation significantly as the capabilities you're looking to provide allow for. And so we make those decisions on an ongoing basis. But it's important for us again to control our destiny. The biggest issue we have right now quite frankly is outgrowing our plans faster than we think. So very rarely do we pinpoint accurately how long it will take to get to a certain volume and as a result, how much time we have to build out the DC, so we're constantly catching-up. The other area is in quite frankly stores and capabilities that augment our direct-to-consumer relationships, used to be we were just talking about store openings, but today that's as much technology investments, to facilitate activities at a consumer level, again to bring that that frictionless interface down to the consumer level where it matters. And so, the second area of spending for us that really ends up being motivating from a returns perspective is in new stores, in technology and stores and digital and mobile technology, all that wrap around the consumer because as we say, a consumer doesn't sit around one day saying, oh I want to go shopping online for shoes, they just say, I want a pair of shoes. And then it's about getting to them in the quickest, most frictionless possible way. So we need to continue to wrap those capabilities around our direct-to-consumer offering and then there's hodgepodge of other activities, which as a growing brand we're always playing a little bit of catch-up on systems and other functionality that quite frankly you just -- it's just tough to keep pace that at the rate at which we're growing, but always have opportunities to add efficiency and effectiveness the way we do business. And then we do occasionally look at opportunities to deploy capital inorganically for us, mostly that's been about reacquiring our brand rights or taking over a country that we had previously delegated to a distributor relationship. Those tend to be less significant investments upfront, but better long-term returns for us because it's bit about a blend between build and buy. Sometimes we're buying rights back as we did in India, which is incredibly profitable for us. So we will look at other opportunities there, but those are more adhoc and circumstantial than anything else.

So you have a number of areas we have fairly strong growth expectations. Are there any areas of the business where you've paired back expectations for growth?

No, I mean, the one thing that's unique about Skechers though that I would mention is that we try a lot of stuff. What -- one thing I think is -- it really stands out from a cultural perspective is that and Robert's got a famous saying internally, that if something is not working, just do something. But what it really speaks to is not correcting wrongs, it's trying stuff and letting it fail if it's destined to fail and letting it succeed if it's destined to succeeding. Decades ago, nobody in the world had a walking shoe. If you think back, I won't age everybody in this room, but certainly myself, I never, as a child had a walking shoe, you had a tennis shoe, all right or a basketball shoe. And one of Robert's early observations was, it's crazy because if you look at what people do in tennis shoes, it's not play tennis, offence to the tennis players, but what people were doing is walking. They were walking in basketball shoes. And so we tried a walking shoe. Other brands came out and said there's no such thing as a walking shoe and we have a GOwalk franchise that does incredibly well, but it's that willingness to try new things. So there are areas where we've tried stuff, we've taken a look at it and it's just not -- it just didn't work, either that was us on execution or the market wasn't ready and a company designed to be responsive to the market, you have to listen to the market and we do. So that means, when we talk about these successes, there's clearly things in the background that aren't working. But recognizing that they aren't working and moving on quickly is part of our DNA. And I think it really does advantage us in an industry where people are so worried about getting things wrong. We have a massive amount of comfort with getting things wrong because we'll pivot quickly and we'll resolve them and move forward. And that experimentation is what has allowed us to become such a broad category, deliver for footwear is that we've tried a lot of different things. And one of the areas where we're destined to continue to improve is in apparel. As a footwear brand, what we do lack is a meaningful apparel contribution of the size that we think befits our business. We've tried some things there, some have worked, some are not. We're definitely continuing to sharpen our sort on that. In some markets, we actually have a really meaningful apparel penetration, but it's not where we want it to be. It's absolutely an opportunity for the future and it's one we'll continue to work against. But again, it's that spirit of trying and being willing to fail to also be willing to succeed, I think that stands apart.

And earlier, you touched on the puts and takes across gross margins. How much of a headwind have supply chain issues have been to gross margins over the last couple of years? And what gives you confidence in being able to recapture those margins?

Yes, I mean I would say, generally, if you -- I mean, it's kind of funny. When there's a little bit of noise, the smallest things stand out, right? Rubber costs, fabric costs, islet costs, which I know you all worry about endlessly. In an environment where shipping went from, again, kind of 1 to 7x, everything else kind of paled in comparison. So I mean, again, the biggest driver, the biggest anchor to gross margins has been freight and logistics. It was -- I mean we've never seen anything grow that quickly to that degree and its impact on gross margins was quite frankly terrible. I'm not overreacting when I say that. Now you say, well, you can price for that, yes, but pricing takes time to catch up. And so you're always chasing after it. We haven't really seen a significant amount of other input cost pressures. FX is probably the only other one that's really risen to the level of being a major concern for us, but that's one we can navigate. Absent that, I would tell you, most of kind of the manufactured cost pressures we've seen over the last 3 or 4 years have been fairly minimal. What's really been more disruptive quite frankly, is the activities of the supply chain, the duration elongation that we saw in '21, the port delays that we saw in '21 and '22, all those factors, the volatility within the supply chain because every ounce of volatility, although I don't think you measure volatility in ounces, leads to a cost elsewhere in the system. And so that's been the pressure that's been built. But at far and away, freight and logistics has been the most significant drag on margins. And the good news is, we have seen prevailing rates come back down to normal. It will just take time for that to work its way through the system beneficially.

And we're almost at the end of our time. So maybe one last question will be on the balance sheet and primary uses of cash going forward?

Well, our #1 priority always from a capital allocation perspective is to have a great balance sheet, stalwart balance sheet. Retail is well known for its cycles. We think, if anything, in the last couple of years has proven the wisdom of that, we were never really seriously stressed from a balance sheet perspective, despite having been literally shut down for an entire quarter at one point. So maintaining kind of a top shelf balance sheet is very important to us, ensuring we have the access to liquidity at all times that we need is very critical. Obviously, our first choice to spend money is to spend it on things that drive our business. That's not only my first choice, that's Robert's first choice by a long shot. And then looking at other ways to deploy capital with high returns. And then last, we've definitely been in the market from a repurchase standpoint, it's not intended for us to be a driving factor in EPS growth, but a contributing factor. And that's probably the portfolio we'll continue to look at. We do look at every option out there. But from our perspective, both strategically and operationally, as well as attempting to be a good steward for shareholders, those are the areas we focus on most.

That's great. Well, let's leave it there. Thank you, John, for the insights and thank you, everyone, for your interest.

Thank you.