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

I think we're going to get started. Welcome, everybody. Good morning. Really great to see everybody. Welcome to UBS's Global Consumer and Retail Conference. We are very pleased and honored to be joined by Skechers today. John Vandemore, CFO, has been kind enough to join us. And we're going to go through a Q&A for about 45 minutes, and then maybe at the end will take some questions. But to start off, I do want to read our disclosure statement real quick. As research analysts, 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 call 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.

Now I always like to start big picture because Skechers has really -- had an amazing, amazing journey over the last 2, 3 decades. And it's now the third largest footwear company in the world. Like I can repeat that wherever I go, when I talk about Skechers [indiscernible] realize how successfully Skechers has become. Really, so I guess, John, I want to talk about what has been the key for exceptional top line growth and double-digit top line CAGR over the last 2 decades. What is -- if you could still adopt [indiscernible].

Yes. Well, first of all, let me say thank you for having us. Thank you for the -- at least for UBS conference standards, nice weather. It's always a challenge. [indiscernible] I do think that catches most people by surprise. They don't realize that we're the third largest footwear provider. Part of the mystery there, we don't do nearly as much apparel of our near field competitors. But if you look at it on a footwear basis, definitely the third largest. I think what's led to the success quite honestly, is our relatively unique focus on an area of the market that many others don't focus on. We're -- we always say we're intent on delivering style and quality with innovation. And it's that unique combination of characteristics that I think helps drive our business really across the globe. We're over -- nearly 60% of sales come from outside of the United States. So we're really an incredibly global brand. And so -- when you think about that approach to building product with those characteristics and then you consider taking it across the globe, what you find is there's certainly a lot of very good players at the premium end of the footwear space, but there's not a lot of branded players in the middle. And what we strive for is consistently delivering against those kind of a customer value propositions in a way where we become readily known in every market. And what you find is our consumers like we do in every market, those 4 characteristics really stand out. But what really, really gets people is the combination of comfort and value we offer. And that's resonant everywhere. And I think that, along with some unique marketing approaches and the flexibility in a market to market that allows us to adapt to where we are versus tells us or dictate how to do business has allowed us to grow pretty significantly globally, but in particular, in markets outside the United States.

Well, I think one of the interesting things about [ investing especially globally ] is the distribution model. I think the other thing that really surprises people, and I feel like I don't talk about it enough, is unlike -- Skechers has a distribution model that can really is differentiated from what the other brands have because you have full price stores and big [indiscernible], you have sort of like intermediate sort of what you call warehouse stores, which would kind of remind me of biggest footwear and the outlet stores, but you also have great e-commerce, which you've worked on really hard over the last couple of years and then a great wholesale distribution all over. John, what is it about the company and the brand that allows you to be profitable in all these different channels. And how does it help you build brand equity?

The first thing I'd note is part of that is the flexibility. At Skechers, we fundamentally believe that we're here to deliver a great product to consumers. Robert has the old saying, unseen, untold, unsold. So it's make great product, it's market that product. From there, in all honesty, we're very adaptable to the market we're in because what we've found is we do business in about 180 countries across the globe. And there are some similarities country to country, but no market is completely similar to the next. And I think a lot of brands make is -- they've had success in 1 market, and they assume that's the model for success elsewhere, whereas what we try to do is find a way to succeed across a variety of different distribution channels. Today, as you mentioned, we go direct-to-consumer. We've been doing that for 20, 25 years. So we know it's a fashionable strategy of late, but it's been something that's been built into our DNA for a long time. It's an approach that we have learned to work in concert with our wholesale partners. But even beyond that, there's markets where we operate our own stores and [ same place ] stores. There's markets where we operate in those stores, but we work just with franchisees and wholesale partners. There's markets where we work in channels that literally don't exist in any other market, the government channels that exist in a handful of markets. And so I think it's really that adaptability. And then quite frankly, as you point out, figuring out a way to make money in each of those situations. What we know at the end of the day is if we can get consumers into the shoe and importantly, if we can get you to buy more than one pair of shoes then your value to us as customers skyrocket. And that allows for a very positive flywheel-like effect. It doesn't matter what market we're in. But the key is just get to the consumer and to be flexible in how you get there and make sure you're disciplined about how you price and promote in that context. But for us, the primary point of our operations is to get the product to the consumer. And that's why, again, I know some have pulled out of wholesale relationship. We have not because we want to get the product to wherever the consumer is going to be. And we're not vain enough to believe that everybody is going to shop at a Skechers store every time. We'd certainly welcome that. But we want to provide for the flexibility that the consumer demands from meeting that consumer where they are is incredibly important to us. And so I think that attitude, that flexibility and then that really honed focus on product and marketing has led to the success that we've been able to experience.

So a third thing that I think really surprises people, and I think this 1 gets talked about even less than, obviously, the sales of the distribution model. But it's how stable the company's gross margin has been over time, especially if you look at say, really the last, say, 7, 8, 9 years. And then if you go back, it was around 43.5%, and it's been a steady climb up. I think this year or last year you finished 47% and I think that's interesting in the face of what's been so much volatility. Obviously, margin last year was down a little bit because of freight and things that everybody would have encouraged, but tell us a little bit about what has been the key to manage the gross margin in a way with FX volatility and COVID, everything that happens, like how have you been able to sort of be able to keep that gross margin [ unnecessarily ] climb higher?

Yes. Although I'm waiting for you to say the last thing people don't talk about enough is the skilled management. That's got to be #4, right? You're getting me at a weak moment on gross margin, though, because I don't think anybody is really happy with where we were last year. I mean, last year was an incredible event [indiscernible] folks really appreciate what we saw happened in particular, in supply chain and transportation. I mean you saw 40-foot high cube container rates go from an average of about $3,000 to $25,000. So for an average pair of shoes and it took the land embedded freight cost [Technical Difficulty] margin side. We attempted to accelerate pricing into that to account for as much of that as we could. But in the last year, quite frankly, wasn't my proudest year from a gross margin perspective. But I do believe a lot of those exogenous factors are beginning to abate, which should lead to improvement later on. In terms of crafting a stable and growing gross margin, it's really been quite frankly, a product of our strategy, which we've said is to grow internationally and grow our direct-to-consumer business. Those are both highly gross margin accretive businesses for us. I think that plus the discipline around what we design and develop and making sure, quite frankly, that we maintain pricing integrity behind this. People always ask, you're value-oriented. So are you the cheapest? Well, our goal isn't to be the cheapest shoe. Our goal is to be the best value for the money, best pound-for pound price for price shoe. And I think that discipline has helped us sustain the margins behind the product and then look for channels where it can be accretive and so that -- I think that pushed that strategy as well as that discipline has helped maintain the gross margins. And are geared to increasing it over time, part of our longer-term growth strategy going forward is we'll continue to grow international, which is gross margin accretive. We'll continue to grow direct-to-consumer, which is gross margin accretive. The only caveat I'll give to that though is we don't chase gross margin falsely in the sense that one of our most profitable operating margin categories is actually our least generous gross margin, our distributors. So there are markets out there where we don't operate directly. We still work through distributors. And while those do carry lower gross margins, we don't bear any operating expense to support them. And so even in that instance, that's a lower gross margin business but a very high operating margin contribution. So we also want to make sure we're being thoughtful about how we target gross margins so that we don't inadvertently cut our nose off to supply it at our face.

Maybe just a follow up on that a little bit. I mean when you obviously talk to people, do people understand -- because you mentioned that price discipline in there in the middle of that answer, which I think is interesting. Like when commodity costs go up or when FX changes and that discipline around price. I think people feel like Skechers value brand should be promotional 50-off everywhere all the time. It's not that way. And you've been able to raise prices when necessary and you've reacted to it quickly when it happens, do you think people really get the Skechers is a brand that can really just price for things that happen in the market that are just sort of macro related?

I think probably not in all honesty. But I would ask people to step back and name me another value-oriented brand in the footwear space. And the reality is that there aren't any, at least in our steam. And that's because we are unique. We're unique in that we're focusing on that middle of the population of consumers in footwear. Look, we don't we don't have the misperception that somebody is only ever going to buy Skechers. Again, it would be nice, but not really realistic, but what we wanted is play a role in the closet. And I think when we continue to deliver against those consumer value propositions that I spoke about, style, comfort, quality innovation at a reasonable price, the composite of that is compelling to those consumers in at least 1 or more of their footwear purchases. And what we really win is when you try a pair, you're comfortable and you have another need. And usually, what we hear is anecdotally would be, "Oh, I don't know Skechers made a work shoe or a gulf shoe or sandal or a boot." And then they try that, and they realize, "Oh, it's still comfortable. It's still reasonably priced." And that's what -- that's what really engages them with the brand. But being a brand and supporting the brand and supporting the brand with the marketing that we do, does give us the latitude to price appropriately. We don't aim to be a price taker. We're not trying to nickel and dime our consumer or quite frankly, our wholesale customer. We're looking for a fair exchange. And I think when we deliver against that, people understand, okay, there's times when foreign exchange or commodity costs or most recently, freight costs are going to have to pass through in pricing. But on the other end, we don't try to augment price every year just as a matter of policy because we don't think that delivers against our proposition, which is a value -- give value. What we do like to do is add features, add functionality to the shoe. And then when we do that, we think there's a fair exchange for value going on. And so I think if we stick to that formula, we find that we have the ability to -- where we need to augment price, certainly in response to exogenous factors, but also when we're delivering more value, but frankly, consumers are happy to pay the price. It's also still a very good value option relative to what prevails in the market at the premium end. So I think that calculation still works in our favor.

Got it. Maybe one other element about the stability of gross margin I want to explore is just about inventory management. Obviously, a very topical theme right now. But really thinking about Skechers over the last 20 years, the inventory management, you need to see the -- just the ability to sort of keep turns in a really tight range. And I think that's under estimated as well. So just talk about what's been sort of the journey the company has been on, to go to the point now where it seems the inventory has been pretty well controlled. And John, to your point, a very tough supply chain environment last year, a lot of difficulties with the wholesale partners downstream. What is it about -- how the company manages inventory that's may have been able to not become sort of the source spot that has been for, frankly, other companies in the industry?

I think there are a couple of things, but I'm always reminded when people ask about inventory. There's -- I have a colleague who said if you're not worried about inventory every day, you should not be in retail. And do you think that's true. And it is something we focused on every day. Obviously, the last couple of years has been a heightened focus to everybody because of the unpredictability that was introduced into the supply chain. And I think in terms of maintaining inventory focus, part of it is our model. We don't buy a lot of speculative inventory. Our process is to engage with consumers -- our customers early to help them help us to design and develop in a way that allows us to book orders and book production against that. And in that, ideally, you're taking very little risk because I have an order for you. I'm going to make the order, I'm going to deliver the order. The risk you take on the inventory is very minimal. And we do focus on that risk without something we talk about often internally and making sure we have an understanding of what that quantification is. And what that leads to ultimately is a very fast-turning wholesale business. Now I will say, as we continue to grow the direct-to-consumer side of things, you don't get nearly the turns you do on the wholesale side because you are by the very nature of the business, taking a bit more speculative risk. What I think benefits us on that end is we have extremely high fidelity to the product line globally. So if I make a pair of GOwalk 7s, and I intend to put them in the United States. And for some reason, I don't need it there or it's not selling there. I can move it anywhere because it's generally speaking, the same style. There may be some color variations. But generally, we have strong adherence to the global design line. And that allows us a lot of flexibility. And then even within our own system, if you think about it in a given market, as you pointed out earlier, we have concept stores which carry a significant percentage of in-line product. We have our big-box stores or what we used to call warehouse stores, which have kind of a middle of the road percentage of in-line and non in-line product. And then you have our outlet stores, which carry a lower percentage of in-line, but a lot of other product. And what that allows us to do is flexibly and as needed to deploy product for the highest possible value realization within our own system. And that has a lot of capability to an organization that from time to time has to deal with having inventory of a little bit too much or a little bit too little in any given spot. And we do really -- I wouldn't say we manage it centrally, but we balance it centrally so that we know at any given point in time, if there's a condition brewing in a market, COVID is a great example. When we had issues where we knew lockdowns were being approached in certain markets, we would stop the flow of goods there, redirect that inventory to another market that has the same need and cut the production. And that flexibility allowed us to main some semblance of a reasonable balance against inventory. Now having said, I'd have to bet again, last year was tough. We saw delivery rates rise. We ourselves start quite having too much inventory coming in too fast, and we had to respond to that. Our response to that was we felt it was better to have that inventory, again within our system and within our control. So we were willing to take that and spend to, warehouse it and manage it, which hurt last year, but it was the right thing to do for consumers, right thing to do for customers, right thing to do for Skechers so that we could help contain and quite frankly, manage that inventory back down to a more reasonable level. And that's what we're seeing happen. So subsequent to kind of the Q3, Q4 high point on on-hand inventory, we've been able to manage that down. We've to continue to do so to help ameliorate some of the challenges that I think were fairly widespread, at least comment upon widespread in the retail industry in Q4.

Okay. Maybe a fifth big differentiator I want to talk about. So do you want to talk about high level a little bit and some of the current trends, but -- and this I think is a little bit more well understood, but Skechers has always maintained a fortress balance sheet. And even today, I think you have a $500 million net cash in the balance sheet. Can you just talk about why the company has always kind of maintain that point of view, that's the kind of balance sheet we wanted to maintain. And how is it serving the company, especially today? .

Yes. I mean, I think it gets back to kind of the somewhat joking comment, I made earlier about if you're not worried about inventory every day, you shouldn't be in retail. If you're not worried about your balance sheet every day, you shouldn't be in retail because retail is known for having cyclical behaviors that none of us have yet been able to predict with a tremendous degree of accuracy. And so in our world, we feel like that's best protection against events to have a fortress balance sheet. I think that proved us quite frankly, and good stead during COVID, while a lot of other retailers were spending a lot of time fixing balance sheet issues or raising capital or addressing whatever needs they had, what we were focused on was how do we operationally get our business back into health. So we kind of view it in a sense like insurance. It's the best insurance we have against the business cycles that we know are inevitable. And quite frankly, the risks you take when you're in a fashion-driven industry. I think for us, it's been the primary capital deployment goal. But thankfully, I think we've been able to accomplish that add additional liquidity capacity and even then return cash to shareholders and deploy cash pretty aggressively for the growth of our business. But we don't take that for granted. I think it's something that you have to actively manage for. I think on the flip side, people will say, well, you can lever up and maybe you're in a slightly higher return or your invested capital base can be a little bit lower? I mean we could, but we'd much rather be in this for the long haul. Our goal is to continue to grow this brand so that it stays #3 and quite frankly, starts to make inroads maybe on 2 someday. So for us, it's kind of a primary strategic objective, but it's as much about making sure we're prepared to deal with the big reason of what retail consistently offers, which is an infill moment that people don't predict.

Well, maybe 1 other question on the balance sheet. Obviously, this comes up more in the last couple of years since the [ FASB rule ] changes. But just on lease portfolio, obviously, having a big direct consumer business and having been in for a long, Skechers has a lot of stores. And there's always talking about other companies that maybe are thinking about opening up their stores so they want the balance sheet risk, how they manage that. Tell us about how you manage and how you make sure that those leases will become sort of that off-balance sheet or I guess it's on balance sheet now, that risk that could become a problem.

Yes, I'll have to stay away from my more colorful commentary on lease accounting. Although I would say, I mean, I think at the end of the day, if you step back and you were dealing with capital question and you were a retailer like us, honestly, you've always been cognitive on the lease liabilities out there in most -- in those credit agreements for anybody with a sizable retail fleet. Creditors are always 1 step ahead, they would always consider your total lease liabilities and lease accounting, and I think you can argue with us, it's extraordinarily valuable, but it is where it is. I do think it's an important recognition to have with regards to how you operate and run a business when you use physical stores. It is, I think, an uncommon liability in the context of most businesses because most businesses don't have to have a retail footprint. That being said, I would tell you, it's been deeply ingrained in how we run to the business, how we think about capital and how we've constantly negotiated credit agreements. I think what's more important, in all honesty, is you really need to pick your location well. And what we do when we enter into new leases is we want to see a handful of criteria before we're willing to make that commitment. And there's flexible ways around that if it's a more speculative location looking for a 2- or 3-year exit clause looking for ways to be flexible, rate resets, et cetera. That's really important, but it really gets down to the nitty-gritty of how you launch stores and to secure space. I do think there is a scale advantage for us in being quite skilled at that. We have over 550 stores in the United States. I think, over 1,800 company stores. So that's a lot of built-in institutional knowledge and expertise. We use that across the globe to take advantage of both our scale but also our commitment and then to protect the back end because as much as the lease liability is a gauge of that, what really more important is operationally, what flexibility do you allow yourself to be successful. We don't. People always ask, are all your stores profitable? Well, no. But no retailer can say that. But we do certainly focus on making sure our stores are as profitable as they could be and the ones that aren't, will be fixed. But that's the trial and error of opening stores. So I think, again, it's really more about how you operate the business than anything else. But it is a liability, we've always been aware.

Okay. All right. We want to start looking forward a little bit and talk about some of the company's key strategic priorities. And I guess the first one I want to talk about is just this idea between brick-and-mortar and e-commerce and where the consumer is going, because 2022 is sort of the year that consumers came back to stores. And so people are spectating, hey maybe everybody wants to reinvest in brick-and-mortar and maybe not so much in e-commerce. What's your view on that?

Yes. I think -- look, I think none of us really know what the future holds. We have a good sense that what people want is the continued opportunity to go into a store, in particular in footwear, people still -- some surveys would tell you, close to 1/3 of people won't buy a pair of shoes until they try them on. So we want to preserve that as we believe that's important. It's important to show the brand. It's important for people to try on the brand. There's also a consumer engagement that happens in a store that when done well is incredibly valuable. But people also want the convenience of being able to shop in an online capacity, either on mobile or iPad or desktop, whatever the situation is. And so I think really it's about creating a frictionless relationship between the 2. We see them as somewhat reinforcing. And I think, in all honesty, if you look at a lot of the digitally native brands, particularly in footwear an apparel that came out every single 1 of them opened stores, right? So having that kind of hand-in-glove relationship between an online world and a physical world, we think, is incredibly important. And quite frankly, a lot of that course of inspiration, we draw how every one of us wants to stop, right? Sometimes you want to go into a store, sometimes you want to see what you're going to buy before you buy it, sometimes you want to try it on. Sometimes you don't care because you bought 15 of those things before. And so you want the most frictionless transaction possible. Sometimes delivery speed is more important. So really, for us, the focal point is continuing to grow our physical footprint where there are opportunities geographically. But adding to that, omnichannel capabilities. But by omnichannel, I really mean the omnichannel capabilities that matter. I think a couple of years ago, we all got carried away with the 15 different things you can do with a mobile device in a store. And really, at the end of the day, not a lot of those matter. There's a couple of features that we see mattering. One is buy online, pick up in store. One is potentially using store for remote [indiscernible]. But quite frankly, what people really like is the ability to return in store. And so whatever combination of criteria consumers are going to use, that's what we're going to build for. Today, I would say we'll continue to build stores we're going to continue to augment our digital capabilities, that's both in the U.S. and globally because what we think that offers them -- the consumer is kind of an effortless seamless, low friction way to engage with the brand. It also continues to get us closer to the brand. I'm always mindful of many, many years ago, I worked at 1 Disney company. And we [ owed and ] spend billions on rides and ships and hotels. But the thing that mattered most is the people, the thing that mattered most to everybody was how they were treated by the employee. So you could have built the best rides. And in our case, you could build the best product. But where you really engage consumers is when you get them in some sort of relationship or communication and you do it well. And so we think omnichannel, our stores, how we deal with people online have one of the best opportunities to really engage the consumer for the benefit of the brand that we can find anywhere.

So that's pretty clear about omnichannel being a strategic priority. One other kind of connection with that is loyalty. I know it's something you've been working on, talk to us about where that fits in sort of the company's strategic priorities and what were you trying to accomplish there?

You're talking consumer loyalty, not your loyalty?

No. We're done mine, yes.

No, I think again, it's part of that same relationship building, right, which is engaging with consumers. I mean part of loyalty is to give consumers a reason to come back to engage with the brand. I mean, in all honesty, from a financial perspective, the main driver of loyalty is it's the lowest customer acquisition costs you can find, right? And in a world where the market for customer acquisition is getting as robust as is particularly digitally, it's a very efficient way to treat people. But again, I think it's really about engaging with the brand. From our perspective, it's that plus, quite frankly, the amount we learn from our consumers. We have a unique twist to our business, but I think many others don't have, which is we oftentimes have a key household member buying for multiple genders in the house. And I've done this, sometimes I sign up for our loyalty programs independent or under another name. And if I go and buy a pair shoes from my wife, all of a sudden, I'm getting hit with female-focused ads. And so one thing the loyalty program allows us to do is kind of get a layer underneath that. So we know, "oh, here's Jay, but we know Jay has bough women's shoes and kid's shoes in the past. So unless his foot size is changing, he's probably buying for his behalf." And now we know to mark you across a wide array of products and genders and not just kind of that automatic algorithm that a lot of loyalty programs offer. So getting to know the consumer a little bit better through a loyalty program is actually hugely valuable. And in that, you can add incentives like give us your birthday and we'll give you something special on your birthday, but we've also looked at, give us the birthday of your kids and we'll give them something special. What that does for us that would now tells you we can give you kid marketing material. And so it allows us to get a layer underneath, that knowledge and awareness of the consumer that's really important. And then quite frankly, tying loyalty deeply into the in-store experience and the online experience is incredibly important because if you're a member of that loyalty program, you've invested in it, you said I'm going to be -- I'm going to be a member of this community. If you don't then or you seamlessly recognize that person everywhere you interact with them, you actually run the risk of frustrating him more than anything else. So for us, focusing on how we make sure that the loyalty program is appreciated both in the physical context as much as it is on the digital is incredibly important.

Got it. All right. I want to talk about growth. Obviously, company has had -- we talked about tremendous growth. But looking forward, do you think that strong growth can continue? And sort of what are the key drivers?

Yes. We absolutely believe the growth can continue. When we -- usually what happens is, if you'll ask me, what country I'm most excited about when I rattle off 180 before everybody's eyes plays over. I would tell you, our strategy is going to remain pretty consistent, which is we see significant opportunity to grow the brand internationally. That's markets you all know and love like we develop Europe. But for us, South America is a huge growth opportunity. Outside of China, it's a huge opportunity. India is a huge opportunity. We have a stated objective of getting to $10 billion in sales by 2026. Kind of do the math just barely getting there would imply a deceleration. We think that's a very realizable target for us because we don't see any opportunities out there that don't have growth rates consistent with what we've seen recently. The one thing we did when we put that objective together though is we didn't assume every market would go smoothly every year. It seems like every year, there's something, right? 4 or 5 years ago, we were all talking about tariffs. Remember the tariff conversations, then we're talking about [indiscernible] and Hong Kong. And so we don't believe every market is always going to go forward at the same rate every year. So we've somewhat developed a plan that we think a lot of multiple paths is kind of a Monte Carlo style simulation on how you get in billions. But what it affords us is the opportunity to take the many markets we have where we see significant opportunity and push those forward. We'll also continue to grow the direct-to-consumer business. We'll do that domestically. We'll do that internationally. That's a business that continues to perform well for us. We still see a significant opportunity. And again, as I mentioned previously, it really gives us the best opportunity to engage directly with the consumer, which is something that we prioritize. And so we're building already the investments necessary to make that $10 billion reality. A lot of it is distribution. A lot of it is, quite frankly, backbone support. So you mentioned the loyalty. We launched the loyalty program. When we relaunched our loyalty program last year. That was after a couple of years of investment. So the one thing I'm sure even Jay would have to agree, we're not shy about investing for the future because we are confident in the growth opportunity in the future. And we'll continue to do that because even $10 billion for us, we think is just a pickup, if you will, on the way to even bigger things. And again, our goal is to continue to maintain, if not grow that position as the third largest brand in the world and continue to really get the brand in as many places as there are consumers because we believe it's a resident brand with a mining that the people enjoy.

Got it. Well you talked about investments, so I'm going to ask you the margin question. Obviously, company's EBIT margin is -- if you look over the long stretch of time is kind of going upward. Where do you see it going from here?

Upward. Upward and steep. Last year was a tough one because if we didn't have freight that had escalated as quickly and as significantly as it did and we didn't have kind of the supply chain challenges. We would have absolutely -- we think we outperformed our most recent high on the operating margin side of things. They happen, we'll get past them. I think good news from our perspective is most of those should abate this year. We've long said we're targeting kind of 11% to 13% operating margin for the long haul. But that's where I think kind of structurally our business is quite adept at operating. But we will make investments because, I mean, the worst thing to do would be to not take advantage of the opportunities we see before us. We don't think they'll last forever. I think there's urgency to continue to grow in markets like China and India and Malaysia and all the rest out there. But it's also, quite frankly, the way we will deliver the most value to all of our shareholders. But at the same time, there are clearly things we are doing and we'll continue to do to augment that operating margin. We do believe just the natural progression of growth should get us some flow-through that will also add to that, and that will be part of our longer-term growth algorithm. The only thing I would always caution anybody when looking at our story is one of the reasons we've been successful in growing as quickly as we have is because we have not been afraid to invest. Part of that is because we have a founder who has, I think, the wisdom to see beyond any given quarter to really -- more than anything else what they ask me is how big I think the brand can be. And I think that's the motivation we all follow because that's, again, that's how we'll drive the most value, but that's also how you make sure you continue growing. So we're not shy about making the investments necessary to get there. But I would say from an operating margin perspective, our goal is to continue to accrete over time. Kind of unfortunately a year or last year, but hopefully, most of those cost pressures are behind us.

Just since you just mentioned that on the cost pressures last year, that obviously is quite unfortunate. Just can you frame for us sort of the recapture opportunity here in 2023, even in 2024 as hopefully, the world gets back normal from a supply chain standpoint and stays there.

Yes. I mean the 2 big ones are the freight because that will start to bleed off. Unfortunately, just the way the accounting works is if you acquired product at the higher freight rate you have to sell that product first before you can sell it for lower freight rates in the newer [indiscernible]. But that's definitely -- we see the freight rates down to a more normalized level. And then last year, we experienced about $90 million of excess what we would call kind of warehousing and distribution-related costs. That was largely associated with kind of this inordinate appearance of inventory at a very quick pace because the supply chain kind of did 2 things. It kind of reconciled back to its normal time frame, but also we have been ordering because of the longer time frame, more goods for customers. Both of those kind of collapsed upon themselves and we found ourselves with, a, at 1 point, we had almost 200% of our prior year on-hand inventory. And that just unfortunately stretched us beyond our logistic capacities. It wasn't anything about stuff wasn't selling. It wasn't a traditional retail inventory issue. It was simply the logistics talent of having too many goods at ones. And so again, as I mentioned earlier, our response to that was better to have that inventory in our hands, better to take control of our destiny and move forward then to try to push it back on factories or third-party partners. We didn't think that was right, that cost us. But I think it put us in a better position going forward. I think, quite frankly, we're capitalizing on that now. We're seeing the benefit of that. And we're encouraged that we'll get rightsized over the course of the year. So that $90 million of excess will be a much smaller this year based on what we're seeing. And so those will mostly capture back into the operating margin side of things, and that will certainly help us get back towards our goal. Our first marker when we were in 2019, we were at 9.93% of an operating margin. So I would take credit for the 10%, but Jay won't give it to me. But we'll get there, and then we'll move beyond.

Got it. All right. Well, you mentioned that the inventory serving you now. Obviously, everybody is interested in how the -- what you're seeing from the consumer very volatile market the last couple of weeks. What's your sense or maybe we'll start in the U.S., then we'll touch on Europe and China. But what your sense about where the consumer is at right now in the U.S?

Well, the first thing I'm going to be glad about is that the consumer isn't reading the financial press every day. I would tell you, really since kind of mid holiday, the consumer has been pretty robust. In some ways, way more robust than we expected. We continue to see a really strong consumer trends. To be sure, unlike last year when there was almost no inventory in the world to speak of, promotions are back. What we see the good side of promotions is they are actually having the effect desire, which is they're stimulating activity. We're seeing traffic gains. We're seeing conversion gains. We're seeing UPT gains. So from a perspective of what you would traditionally want the retail world to look like, we're seeing it, and we're really encouraged by the consumer activity. We see good sell-throughs downstream in our wholesale partners for our good at least. Generally speaking, good price maintenance. They're all pretty good, quite frankly, dynamics. Certainly, we're conscientious that there's factors out there that would suggest there could be a pullback. But as of yet, we quite frankly haven't seen it. We've been watching carefully.

Well, I guess, on those factors, I mean, when you talk to your wholesale partners in the U.S., I mean, how are they feeling? Is that -- are those factors affecting their orders? Are they getting more cautious? I mean what is your sense been of their attitude?

Yes, it's really a tapestry and honesty, there's some that are doing great and they're reaching out for at once. They want to move faster. There are some where I think the expectations that they are being matched with what they see. There's others, quite frankly, that are pretty skittish that still feel like the likelihood of a recession or recessionary environment is high or quite frankly, they're dealing with excess inventory issues of their own. So it's really a mixed bag, and we spoke to this at the beginning of the year. The first half of the year from a domestic wholesale standpoint looks soft for us. It doesn't necessarily jive though with what we think at the consumer level. So we're watching it carefully. I think our concern is really that if you have continued strong sell-through, and you're not reordering at the right pace, you could find yourself short. And I think there may be a misperception out there that brands like us are sitting on inventory to bring into the last unit, but we don't do that. That's not our model. And so our concern is that we might be in a good position, quite frankly, if consumer demand holds up where accounts are short on inventory again, kind of is that had been slow where it has been over the last couple of years. But I would say it really is kind of on a case-by-case basis is very distinct to the wholesale partner we have.

Okay. So maybe moving on, talk about China, obviously, China has been reopening. What's your sense?

Well, I have to admit, beginning of the year, we were coming off of the fourth quarter, which wasn't great in China, January early reads were not great. I would say since then, it has been pretty consistent and positive franchise. I'm not of a mind that I'm willing to fully take that up to the balance of the year, but definitely, China is performing better than we thought. Better than we thought, better than our local team thought. What's most encouraging in that in all honesty, is you're hearing about people getting out and shopping. And so throughout the COVID and even when things were not as bad economically in China, online was the [ bull work ]. And you continue to see franchise stores and company stores suffer from lack of traffic. That seems to be coming back. I wouldn't say it's back to where it was pre-COVID. So it's not yet good but it's definitely significantly better than we thought. And so that's really encouraging to us. Now you have seen a little bit of a pullback in online result. But in our sense that's probably well balanced. So if it continues, we certainly are optimistic about what China can return to this year. I would just say it's a bit of a cautionary note. China has been a little bit volatile over the last year or so. Five months ago, zero COVID was going to be the policy forever and then it's gone. And so it's changes like that to make it a little bit harder to predict. But I would say net-net, much more positive in China than we had anticipated, which is good.

Okay. And then maybe just to touch on Europe. Some companies seeing a slowdown in the last few weeks. I mean, kind of saying that, what's your sense of what you see?

Europe has been kind of a bright spot in a way that I think we had all very low expectations for Europe. I think everybody expected there to be some sort of significant recessionary pullback. We haven't seen that. I wouldn't say it's been as [ green ] as what we're seeing domestically. But it's been pretty good. It's been positive, which is strong. U.K. is a little bit weaker, but the U.K. is suffering a little bit more than most. But on balance, for the quarter, we still feel pretty good about what we're seeing in Europe. It's certainly out distancing our expectations. So I mean I hate to say it this way, but cautiously optimistic that whatever we thought was going to transpire in Europe is not going to happen, at least not going to happen on the timing that we originally suspected. So -- and again we continue to hear good things from our wholesale accounts in Europe as well. So I don't know, it's a little bit -- I think because it's inconsistent with what we all assumed it's surprising, but really, it's not a significant trend change from what we had seen over the course of kind of the last couple of quarters.

Got it. So in the last 2 minutes here, I just want to ask you about you mentioned promotions are back, right? Because last year, there were essentially very few. Talk about the impact of that on margins, sort of like what you're -- how you've been thinking about that and what you're seeing now?

Well, the first thing, I mean, it's definitely a DTC phenomenon. We're not seeing as much push yet in wholesale. Customers are asking, but for us, it's still the right equation from a margin perspective. Look, I mean, I'm the CFO, so I would just assume sit here and talk about full price sell-through every day of the year. A, it's not realistic, b, It's not always the right answer. And I think in this instance, what we're seeing is where we put promotions back into place, they are having the right effect. And so while we may sacrifice a bit of gross margin from a percentage perspective, we're getting more gross profit dollars and we're definitely getting people in the store and the traffic is improving and the conversion is improving, like it's a new [indiscernible] improving. And so at the end of the day, we're going to have to give back some of the pricing we've taken over the last couple of years. We had always expected some of that I think the positive end of it is though we're seeing in exchange those lifts on those measures that would suggest that whatever it is, for whatever reason that those promotions are resonant with consumers. We tried a lot of different things, quite frankly, in the holiday. And what we just kind of came back down to was a simple promotion around maybe at the buy 1 get 1 50% off. That's working really, really well. I think in part, there might be some pent-up consumer perspective that they feel like they've had to pay for inventory that was very scarce for the last couple of years. So maybe they're tired of all that and just the notion of getting something, getting some value, getting some promotion benefit is really resonating with them. For whatever it's worth, it is working. And in that context, I have to be incredibly supportive even though I know the greedy side would rather sell at full price every day.

Got it. All right. Well, I think that's a great place to stop. John, thank you so much for doing this. Super interesting as always. Really appreciate your time today. Thank you. .

Yes, appreciate. Great. Thank you.

Thank you.