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

So good afternoon, everyone, and thank you for joining us. My name is Gaby Carbone. I cover the U.S. apparel sector here at Deutsche Bank. I'm very pleased to be hosting Skechers. Skechers designs, develops, distribute lifestyle performance footwear along with apparel with its products available in over 180 countries and territories. I'm very excited to be joined by Chief Financial Officer, John Vandemore. Thanks, John, and welcome for being here.

Yes. Thank you.

So John, maybe just to kick off, how do you view Skechers position kind of within the global footwear market? And what are the key competitive advantages that make Skechers so unique in the marketplace?

Well, first of all, I apologize for anybody who's had to hear this spiel before. So most people don't realize, first and foremost, that Skechers is currently the third largest footwear provider in the world. And I say that it usually surprises people. Now one of the reasons that surprises people is because we predominantly focus on footwear, where some of our other major branded competitors provide a little more apparel than we do. But if you look at it on just a footwear prospective basis, we're the third largest. Why that's important is because it affords us a scale similar to others. You also noted that we're in over 180 countries across the globe. I don't know what the exact count is, but there's not many more countries to go. But what that means is we derive a lot more of our relative revenue from outside of the United States than many of our competitors. And what it means then is our footprint is really more global than most people recognize in any one market. Our positioning, as a result, reflects that. [indiscernible] the broad swath of the world we cover. But it also reflects our focus on a core market where consumers appreciate what we always say as stable price. And it's really those four characteristics that distinguish our footwear from others. But it also -- if I were to say some other brands, you'd say, "Oh, they're largely known for their basketball," or "They're largely known for their football or soccer." But if we talk about Skechers, what we're largely known for is those four qualities. But in that we get the flexibility to address a broader swath of the marketplace. I would also point out, we have a general brand awareness globally. But we also are a more premium brand as we go more into direct-to-consumer as we go more into international markets because that affords us the opportunity to illustrate more of what our brand can do. As it stands today, what we will continue to focus on and what -- I'm sure I will endlessly refer to in this session is those four qualities: style, comfort and quality at a reasonable price. But what really stands out and something that we've put a point of focus on lately is comfort, is being the most comfortable footwear you can try on. And so we think that's an area where we win competitively. We think that's an area that despite the propensity for females everywhere to have to put on high heels, we win across genders because everybody wants to be comfortable in their footwear. And so that's how we go about tackling the market. I would also just add, though, we're not shy about trying things that are new. Some brands are somewhat beholden to the categories that they play in. But at Skechers, we are perfectly willing to try new and try and develop new. It's how we develop the walking category, which didn't exist before Skechers. But it's also led us to areas like work footwear and, quite honestly, golf and a lot of other categories. So that's how we go to market, that's how we show the market, but that's also why we think we win in the market.

Yes, absolutely. And then one of the key things I find really unique about Skechers is your vast global infrastructure and your distribution model, which as -- you really have become profitable across all channels and geographies. Where do you think that can kind of develop over time as you enter new markets and build the current markets you already have?

Well, I should first say we're actually a very big believer in controlling as much of our destiny as we can. I think we would all love to control more of our destiny, but in a fashion-driven business, you're susceptible to changes in trends, changes in consumer tastes and preferences. So our going in presumption is that we're better off controlling as much of our destiny as we can. And that has led us to always invest alongside the growth of our business in infrastructure. Most pointedly for us, that is in distribution infrastructure. It's absolutely essential in order to be operable in a profitable way in as many markets as we are. But it also affords us the opportunity to make choices regarding investments in technology, automation and quite frankly, geographies. Today, as I sit here, we probably have five or six distribution center-related projects underway to either add or enhance the distribution capacity we have. But what that then affords us is the opportunity to attack a market with flexibility and, quite frankly, pricing that resonates in that marketplace. I would tell you, I think for us, we will have to continue to invest alongside growth. But by doing so, again, we take more of our destiny into our own hands. One of the most exciting markets for us today is India. And we're on the verge of putting up our first owned or only operated distribution center. And we're starting with 600,000 square feet, but we've already contracted for over 1 million. And so in addition to them putting ourselves in a position where we can control our own destiny, it also is a strong testimonial to the marketplace. So the add-on benefit, quite frankly, of that for us is it demonstrates to the market, both franchise players, multi-brand players, our own team, that we're committed to growing that market and being behind that market. So there's this added benefit when you're willing to invest alongside your growth, that you're also testifying to your belief in that market. And while we're not perfect every step along the way, it's been a way we can enhance our approach in market but also kind of accelerate brand acceptance in the marketplace. And that's worked for us incredibly well.

Great. So maybe sticking with growth. You reached almost $7.5 billion in sales last year. You've set a target to reach $10 billion by 2026. Would you discuss the key building blocks that gets you there?

I will. But if you don't mind a moment, I would tell you, so we're a founder-led organization. We've had some leaders in place for over 30 years. Today, we're able to say that we're actually a new entrant into the Fortune 500, which, for a footwear company, it's kind of hard to accomplish. There's not that many there. So getting to the scale we're at, I think, is reflected in that, but also then reflects the ambitions that we have. In terms of growing from where we are today to $10 billion, which I should note is just a way point, it's not the end destination. We'll continue to do the same things we've been doing for the past really 7 to 10 years. And that's primarily focusing on growing our business internationally and growing our direct-to-consumer presence across both retail stores and online and e-commerce. Collectively, we think both of those give us an opportunity to grow in the high single, low double-digit teens even, in some instances, as high as the 20% last quarter, We grew our direct-to-consumer 25%, both domestically and internationally. And that's really the foundation of our opportunity. That comes from bringing new categories to market. It comes from bringing new doors to market. It comes from growing on nascent businesses for us, like apparel. And so that's really going to be the propellent behind our growth. But it's also important to recognize that we have a very stable position in the domestic wholesale marketplace, the U.S. marketplace. It's certainly one of the more turbulent markets at the moment. But if you actually look back the last couple of years, it's also been a propellent for growth. So what I would say is as we build towards $10 billion and beyond, it will be more international, it will be more direct to consumer, but it will ultimately be across a very stable and profitable domestic marketplace that we think is going to continue to offer both that springboard for growth but also a solid foundation of profitability for the company to rely upon.

Great. So maybe just sticking with U.S. wholesale for a moment, given how topical that's become. How do you kind of see the near-term headwinds in that channel playing out for the remainder of the year? And maybe what's kind of baked into your guidance?

Yes. I mean, the domestic wholesale marketplace has certainly been through some turbulent moments over the last 2 years. And stepping back, I think we should all be cognizant that COVID, while generally perceived as a singular event over time, really caused a lot more ripples in the waters than we ever would have anticipated, not least of which was supply chain disturbances that we're still feeling the effects of today. As I sit here today, the domestic wholesale marketplace is probably our single most challenged marketplace. Although it has grown handsomely since 2019, the year before COVID from a financial perspective, for us, it's still experiencing the ramifications, particularly of some of the acute inventory arrivals last summer. And for those of you who aren't familiar, last summer, we saw inventory builds at a rate that we have never before seen in our industry, not just Skechers. It was kind of across the industry. And as that inventory rippled down into the retail environments of our wholesale partners, it started to back up and cause some congestion. We chose to approach that rather aggressively. As you know, we spent a lot last year to absorb that inventory, to deal with that inventory and to get it moving through the system in a productive way. And I think some of that is still an effect being felt in the domestic wholesale marketplace. It isn't one level of performance across the board. You're definitely seeing some wholesale players performing better and some performing worse. So it does seem to be a little idiosyncratic across the state. Our expectation right now is that some form of those challenges and headwinds will continue for at least the balance of the year. We're eager to see that get resolved. We think there is good demand. And in our own stores, we're seeing excellent demand for our product. But it's a situation we have to overcome collectively as a market before we can start seeing a return to more normalized ordering patterns. I do think the one positive in that is -- and we said this at the beginning of the year, our tell for performance of the year overall was going to be how the consumer in the U.S. performed. And I'm going to guess you'll ask about that at some point. But thus far, at least from our perspective, looking at our product and the performance of our stores, we're actually highly encouraged by what we continue to see in the consumer. In our stores, we continue to see good traffic. We continue to see good conversion. We continue to see good responsiveness to the promotions that are in the marketplace. And so that's all been very encouraging. And I think against that backdrop, we feel confident the domestic wholesale marketplace will eventually clean up. Now obviously, we'd like that to happen sooner. I'm sure you would and everybody else here would as well. But as long as the consumer stays healthy and the demand stays consistent, I think we stand a pretty good chance of that. Absent that or absent some sort of stability because COVID reemerges or something happens, then we might have to rethink things. But at the moment, while we think it will take longer to clean up than we want, we are confident it will ultimately get there.

So maybe kind of just sticking with that topic. You made some changes to your promotional strategies given the environment, which seems to be working in driving sales. But how should we also be thinking about the AUR pressure from that for the rest of the year and maybe longer term?

It's like you're sitting in on our retail meeting. Now listen, I will admit readily, no CFO likes to sacrifice price. It's like a genetic thing. And I'm absolutely in that camp. I would say following on the heels of the last couple of years where consumers continuously felt pressure in price and in many instances, as I'm sure we all experienced, you went to the store to buy something and you couldn't buy it. It wasn't there, it just wasn't available. There was no promotionality in the marketplace for almost 2 years. So I think in some sense, that translated at the consumer level into a little bit of feeling taken advantage of. As we started last holiday season, we began experimenting with a wide variety of promotions but quickly narrowed down to really one modality that worked really well for us. And when I say worked really well, although we were sacrificing in AUR, we were actually gaining in terms of total dollars. So it's what we've stuck with. Honestly, as much as I'd love to make a strong argument against it, it's been really productive for us. And as I said earlier, we're seeing traffic. We're seeing conversion. We're seeing units per transaction. We're seeing average transaction values all respond as you want them to be. So in a way, it's kind of -- although it's a little bit heartbreaking to me to see the AURs drop a bit, it is for the purpose of driving more business. And so while we may sacrifice a little bit on the gross margin side of things, we're definitely making up for it on the gross profit, gross profit dollars. And as one of my colleagues says, you can't take a margin to the bank. You can only take dollars to the bank. We'll take the dollars. Now I do think that's been against the background of a stable promotional environment. We haven't seen any extreme discounting going on. It seems like most businesses have kind of triangulated on what's working for them. Everybody is higher than the previous 2 years because there was nothing in the market. So, so far, it seems to be stable and responsible promotionality, which I'm even supportive of. But we're going to continue to watch it because I think in concert with where the consumer goes and where inventory positions sit, that's something we have to be alert to at all points in time. And at the end of the day, as much as I'd love to tell you, I determine price, I'm not the one who does, the consumer does. And so we'll have to continue to be alert to and responsive to what the consumer is telling us relative to price.

Great. So maybe before digging in more on margins, I want to go back to China, obviously, another important topic, which is obviously a big growth vehicle for you. And you've been a pretty consistent performer versus peers in the market despite the disruption.

Yes.

So maybe just if you could talk about -- since the region and the house has now reopened, how is that performing versus your expectation. And then just bigger picture, what about Skechers has resonated so well with the Chinese consumer and within the APAC market just in general?

Okay. So let me first just start with in terms of the long-term view on China, I would say nothing has, in any way, disrupted our long-term view, which is China is a market that still represents ample opportunity to continue growing and growing above trend. I think most brands would agree with that. It's been a tough couple of years to be sure for that marketplace. But in terms of long-term potential, China still is one of the most attractive markets for a global brand like ours. I do think we sustained our business in the face of repeated challenges from COVID and other ramifications pretty well. And we're fairly proud of that. I would certainly want to offer kudos to our team in China, which did a remarkable job of dealing with what was rolling lockdowns, which, in some instances, would stop shipments midstream and see them return to a DC only to get rerouted. So it was a tough environment. I think as we began to see the disposition in the marketplace change towards lockdowns and open up, there was a near-term pressure that had to be felt. And that was really Q4 and early Q1. And that was an even tougher environment in China, in all honesty. Coming out of that, our expectations for this year were fairly modest. What we had anticipated was a building recovery. Not one of the fantastic revenge spending driven recoveries of the Western markets, but really a building recovery over time. I would tell you, from our perspective, what we have seen thus far is actually more encouraging than what we anticipated. So from my perspective, I'm relatively pleased. In the first quarter, we grew 3% in China. I would not normally be ecstatic about 3%. But in this instance, I was ecstatic about 3% because it augured for an improvement continuing over the course of the year in that marketplace. And I think that's what we're going to see. I've heard, which I'm sure is something you've all here heard, some people have expressed disappointment in the pace of recovery. I don't share that. We're pretty happy with what we see because it's a market that has to build back in retail, dining, entertainment, all those activities that surround kind of normal shopping and consumption patterns. And we're starting to see that, which is really encouraging. Long term, as we get beyond this year, as we get through some of the prime selling seasons of 6/18 and 11/11, 12/12, I think we'll have a better sense of where things will go next year. But our supposition is that this will put us in good stead for 2024 and beyond and a return to market level growth, which will be led by great product in more doors and with a stronger push online. I think also it's just as in a sign, it's important to note, the online market in China has shifted in a way that we consider to be favorable. There's more diversity of players online than there has been. There's less of a stranglehold of kind of a single marketplace online. And that's all really good because that's just like we see in most markets. That's enabling a little bit of competition which is always good. So we feel good about how things set up. There's probably going to be a few more barriers to normal operating procedures in China over the course of the year, but we think they're overcomeable, and we're fairly happy with how we're positioned there. In terms of our product in China, in all honesty, I hate to be trite about it, but it's the same four things that matter everywhere else: style, comfort and quality at a reasonable price. When that works in a marketplace, it works. It's what people know about the brand. China for us is a market where we have a strong foothold but we also think there's a ton of opportunity. Awareness is not where it will ultimately be. But again, when people try the shoes, when they see how comfortable they are, when they recognize the affordability and when we're in distribution that allows them easy access, we see that the brand resonates. And I would probably extend that to the balance of Southeast Asia. In all honesty, the only difference would be that array of countries are all in kind of different levels of penetration and development. We're exceedingly excited about what some of our developed markets like Japan and South Korea offer us as opportunity. Really excited about the opportunities in markets like the Philippines and Indonesia and Malaysia and Thailand and Vietnam, et cetera. I mean, it's a pretty significant base of population that we've seen the brand work well in kind of early entrants. And that usually portends good things later on. And so we're definitely looking at opportunities to kind of further accelerate the growth of the brand in Southeast Asia.

Great. And then so turning to Europe, which is more of a developed market for you. How do you still view the opportunity of growth? And how can you still take market share in the region? And then like how does maybe the European market differ from the U.S. right now in terms of what you're seeing around consumer demand? Or are you not really seeing anything?

Yes, I guess I'd better say nice things here. I would say -- I'm going to start with the second part first, which is from a consumer perspective, and I would say this somewhat surprised, we're actually not seeing a significant deviation between what we're experiencing in the U.S. and here, which is to say, last quarter both markets grew about the same, 25%, and with really strong common characteristics. So thus far, I mean, talk about enduring a lot of challenges, but Europe certainly has seen its fair share. We continue to see robust consumer demand, at least in our stores and for our product. And that's tremendously encouraging, again especially given the climate of Europe but also, in all honesty, the distribution. I mean, last quarter, I think every single market grew in Europe for us, which was fantastic. I would even go further to say I would have expected a separation behind developed Europe and developing Europe. And for us, that's -- it's kind of the Western countries, and then it's like Central and Eastern Europe. But actually, both portrayed very common characteristics of growth, which was encouraging. We're going to continue to watch Europe as a whole because we do know that there's inflationary pressure similar to the U.S. We've seen some disturbance in kind of supply chain similar to the U.S. but on a much, much smaller level. So we're watching that carefully. But we have very aggressive hopes for longer term because in many instances, the brand's still building. There's still categories available to us. There's still opportunity in terms of partners available to us. There's a lot of green space in terms of opening our own stores. I would tell you, one of the things that we did last year is we completely revamped our tech stack for online across Europe. In some markets, that meant rebuilding an old site, in others it was a completely new site. The performance of those sites and the team driving those results have been fantastic for us. In some instances, sometimes you get up in the morning, you look at the daily results and you're like, "Oh, there's clearly an error. That number is way too high." Only to find out that they're not an error, that's actually the performance. And so that has been a tremendous bright spot for us because we think there's a lot of opportunity to continue to ramp up both online and really omnichannel opportunities in Europe. I would say stepping back as a whole, I mean, Europe, for us, we think is a growth vehicle. It's a growth market on the whole. We recently repurchased markets that were in a distributor for us in the Scandinavian markets. That brings kind of almost all of Europe now under our own and operated umbrella, And we think it it's worth continuing investment, which we're happy to make, but we also think it will continue to yield above trend growth for us.

So you've touched on this already, but what are your big strategic abilites building out your direct-to-consumer channel? So in the post-COVID world, kind of how are you maybe rethinking your brick-and-mortar strategy versus e-commerce? As shoppers now returning to the stores, which you've mentioned.

Yes, that's tough to answer when you just posted a 25% in a quarter. I would say this. We're always rethinking retail in the sense that it's a marketplace you always have to be adaptable to, right? You have a store that works really well and then it doesn't. You have to respond. You can't sit idly by. I would say what we've seen in resurgent demand tells us that people still want to shop in stores. In footwear, I think that's a little bit distinctive because there's a large desire to try before you buy. I also think, for us, in all honesty, that works really, really well. Because, again, if you're playing on comfort, the only way you can tell comfort is by putting your foot in the shoe. It's hard to detect comfort over the Internet. That being said, I wouldn't in any way want to suggest that we aren't equally enthusiastic about online. And really, ultimately, the combination of online and physical retail together, I mean, if you step back and you look at who's been really successful in driving retail experience and performance, it's been those that have continued to reduce friction at the consumer level. So how do I make it as easy as possible for a consumer to get to me in some way, shape or form and then get into my product. And a piece of that is having a vibrant real estate portfolio where you have stores near people, right? You can't capture that impulse demand in an outlet mall unless you have a store, right? So we think both will be integral to our continuing growth. And what we want to continue to focus on is how do you make them better together? How do you make it better and easier for consumers? Now I want to at least mention that it's not our goal to dispossess wholesale partners of an opportunity to sell our brand as well. We're not in the business of shutting retail partners at this point in time. So we also view that as an approach we can take in concert. We've been doing it for a long time. Direct-to-consumer is not a new strategy for us. It's been in our DNA for a long time. So we think those can grow in concert. But having a vibrant store estate, having capable e-commerce and digital capabilities and marrying those together is absolutely critical to our ongoing growth.

Yes. And then I also want to touch on your supply chain capabilities real fast. You experienced congestion issues in the back half of last year and in 1Q. You've touched on that. But as we sit here today, how has inventory flow improved to both your DC channels and wholesale?

Yes. I feel like I should knock on wood because I don't want to curse myself. Let me first say, I have spent more time in supply chain discussions over the last 2 years that I think I ever envisioned I would have to in my entire life. So to say that the supply chain world was disruptive is not even close to accurate. And I would say, on our account, our teams that deal with supply chain every day, they did a masterful job. I mean, I can't imagine being thrown more hurdles, more obstacles on a recurring basis for a 2-year period than what I saw. And our team did a fantastic job. Perfect every time? No, but when you're being thrown new issues every single second from container availability to port congestion to container rates to arrival rates that were 3x what we've ever seen, I mean, it was amazing what got thrown out these folks. And I think they did about as good as possibly could have been done. As I sit here today, I somewhat cautiously breathe a sigh of relief, I would say, in more instances than not, things are back to a normal level. That's both transit times and container rates and container availability and production scheduling. They're all seemingly kind of reverting to the mean of where they were before COVID started. That being said, I would say some of the challenges that we've seen came out of left field. They were a little bit surprising. So we're cautious that this may not be the end of it. I do think, though, it's the best example I can give of where COVID started, the ripple effects of that lasted much, much longer than we ever would have anticipated. And so we're where we are today because of the skillful guidance of our team, We're hopeful that we've seen the end of some of the major disturbances, but we're also mindful that it's something we're going to have to maintain a high degree of vigilance into and continue to work on ways to improve both our ability to understand what's happening, what the ramifications could be. I would also say, I think it's a testament to our product teams, that they continue to develop in light of that. I mean, it wasn't easy trying to promise a customer when they'd get a style because production was going from 3 months to 6 months to 12 months back to 3 months. And so there's a lot of variability that causes downstream. And our product team did a great job developing into that. Had they not been, we wouldn't be nearly as well positioned with the product portfolio we have today as we are. So kudos to all those folks. But my hope is we're both back to a more normalized supply chain environment and I'm done with biweekly supply chain calls.

Let's I hope so.

Definitely the latter.

So then maybe circling back to margins. Would you help us think about the long-term pathway? It seems like you get back to 2019 levels this year. But beyond that, where do you see the low-hanging fruit as we think about the opportunities across both gross margin and SG&A?

Well, let me be clear. I don't think there's any low-hanging fruit. It's like I'm on a ladder every day. You rightly pointed out. So last year, our margin -- operating margin came in around 7%, 7.5%. It was definitely below where we wanted to be. The most significant drivers of that were inventory congestion and freight, by and large. Absent those two, in all honesty, we felt like we did a pretty good job managing through kind of the circumstances and the P&L effects, but those were certainly drags. This year, we expect both of those to unwind at least partially. And that should put us back on a course to getting to the -- our 2019 operating margin was 9.9%, I think it was 9.93%. So I couldn't even round up for God's sake. And that's for us a way point toward what we think is a natural operating margin resting place of between maybe 11% and 13%. So it's a goal we've held for a while. I think we were well on our way before COVID hit and we've had to kind of claw back to where we're at. But we feel pretty confident that we're on the path. Part of that is correcting the gross margin challenges of freight last year. Part of that is correcting and dealing with inventory like we did last year. But part of it is also kind of the natural accretion that comes from growing in our operating margin businesses like international and direct-to-consumer. And so as we grow in our strategy, we see that as naturally contributing not 400 basis points at a time but a modicum of basis point improvement every year through gross margin that we can take down into operating margin. Now not core to that strategy but also an opportunity that we explore and we look at is how do we leverage our fixed cost base as opportunities present. And so that also is an opportunity for us to kind of augment that operating margin. The only warning I always feel compelled to give is, like I said, we're not trying to get to $10 billion and stop. Our goal wasn't to get to the Fortune 500 and then stop. Our goal is to continue to grow and really to become the de facto #3 worldwide known footwear and apparel brand in the market. And so that means we have to continue to invest in our business. And the most illustrative example I can give you is we need new stores. We need more stores. That's just a nature of being global. And each store as you open it, is -- starts off as a decrement to operating margin and then builds into profitability. And so as we invest in that type of situation and others to grow the business, sometimes that can represent a near-term drag on operating margins. And as a result, my expectation is never that every quarter for the next 14 quarters we'll grow by 5 basis points or 10 basis point, whatever it is. It's going to be a little bit bumpy here or there. But net-net, we absolutely believe that the natural resting point for our margins in the near term kind of in the next 3 to 5 years is certainly that 11% to 13% range. And then we'll look and evaluate what opportunities exist from there. But we are encouraged by where we're going, what we see this year and how we see it sorting out. We're going to continue to drive to that 2019 way point and as soon as we can beyond that. And we think it takes us to that proper range.

Just to get a bit more granular on gross margin near term. How much of a headwind has supply chain issues been to that line over the last, call it, 2 years? And what gives you the confidence that you'll be able to recapture a lot of that in the back half of this year?

Yes. I mean, the single biggest challenge has been from freight. And just -- I'm sure you've all heard the tales, but because I lived it, you're going to hear it again. We went from a range of freight between $1,500 and $2,400 on a 40-foot high cube. And I remember, I mean, very distinctly and very painfully. I didn't sign anything because, you don't sign things up, but clicking and approval for an invoice at $27,000 for a 40-foot high cube. That's 10x what you would normally see. So the knock on effect to that on our per pair costing was enormous. We took a hit. This time last year was probably the most severe. I think first quarter last year was just abysmal margin. I think I went home and cried. But we've seen those freight rates come back into normal. In the experience of having that freight, we absolutely had to take some price. Our expectation is that freight rates will stay normal. They'll come back down. We will give back a little bit of that price and some of the promotions we talked about in consumer. But we also think there's an ability to recapture some of that because, ultimately, even with some of that price, we saw the business continue to grow. Ultimately, though, when we take price, we want it to be at a level where the consumer feels like and is getting something of value for it. I mean, we say price. But price we don't mean we want to be the least expensive shoe. We want to be the best value for the money. And so what we did simultaneous with that was add features to our footwear. And so you were getting a little bit more even though you were being asked to. So we'll continue to deliver that value. And we think that gives us some sustainability in the price that we used initially to offset freight, but which we can now use to kind of help augment the margins. And I think that's the right strategy for us to follow right now. We'll have to be responsive again, as I said, to the marketplace. But what we see right now is an appreciation -- a continuing appreciation from the consumer of that value, of what they're getting for that price. And so that gives us some confidence that we'll be able to sustain at least a portion of that and recapture the margins. The only caveat I have to give is -- just because I said freight rates are normal, it doesn't mean I get to bleed that into my P&L right away. I have to deplete the inventory that I acquired and adjust some of those higher rates. So as we've cautioned this year, it's not like that margin comes back to you all at once. It comes back over time because you have to work off the inventory you acquired at a higher price before you get the full benefit. But we do expect to start to see that as a tailwind over the back half of the year.

Great. So we have about two more minutes left. So kind of in closing and also one of my favorite questions I always ask you is, what do you think is the most likely misunderstood part of the Skechers story?

In 2 minutes.

In 2 minutes.

Most footwear brands when they enter are aiming to be premium. It is a fantastic strategy when you're smaller. And I think what's really unique about Skechers is we're not trying to be the premium player. As I said, value for the money, along with comfort, style and quality, like I said. And so that's a unique position. Again, if I said to you,"what's Nike about?" You'd say basketball."What's Adi about? You'd say soccer. You say, "What's sports is Skechers about?" And you'd say, "What shoe is the most popular?" And you would probably not answer it. But it's because we deliver so much across such a broad array, but if you think about the distribution of buying, that's the middle, the big middle of the market. And so we think it affords us a unique position to be a branded player in a relatively unoccupied space with the largest possible total addressable market, especially if you now include the whole world. And I think that unique position -- I mean, in all honestly, there's nobody like Skechers. You can't tell me another brand that is aiming to be valuable to the consumer in a way that also delivers comfort and quality. It's just not there. And so in that instance, we're very unique. I think also just our spirit of we're not going to try to define the market. We just don't think we can determine consumers' taste. But we want to follow it fast. And we want to be there with solutions that deliver on those four4 premise of ours. And so I think that's a unique way to go about it in the market. I don't think it's relatively comparable to anybody. And as you all know, when you do your valuations, without a comparable, it's very difficult to tell what you're worth. I think that's the biggest challenge for us in all honesty.

Yes. Great. Well, thank you so much for being with us.

Thank you for having us. I appreciate it.

Great. Yes. Thank you, everyone.