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

Okay. Thank you, everyone, so much for joining us. My name is Abbie Zvejnieks, I'm a senior research analyst here at Piper Sandler covering footwear and athletic names. So I'd like to welcome John Vandemore, CFO of Skechers. I'm sure you all know that Skechers is primarily a footwear business. They generated $7.8 billion in revenue in the last 12 months. And product is available in over 180 countries, and they have over 4,700 stores.

So -- to kick it off, we'll talk about John's favorite topic right now, the state of the U.S. wholesale channel. So obviously, it's been challenging to excess inventory clogging the channel. How are you managing through this period? And when do you think we will reach a more normalized state?

Well, to the back half of that question, I wish I had a better answer for you. I really don't honestly know. I would have thought by now, we were further along clearing some of that channel than we are. That being said, I think it's something everybody's dealing with. It's something we know ultimately will result, but it's probably not going as fast as we'd like. From our perspective, I think what we try to keep in mind is, thankfully, against the backdrop of a very strong consumer -- a strong consumer relative to our brand, in particular, but also our focus on what we always say, style, comfort and quality at a reasonable price. And those characteristics right now, we see, be it in our own stores or in the wholesale partners who are cleaner is continuing to resonate with consumers. I mean our sincere hope is that, quite frankly, all the channels get healthy as quick as possible. We haven't really changed our strategy like some over the last couple of years. We're still focused on making sure consumers have the opportunity to get to our brand wherever they want to shop, however they want to shop. And so we're interested in fully supporting both the wholesale and the direct-to-consumer channel. These issues, although painful in the near term, we think are temporary. And ultimately, our hope is by the end of the year, we're in a healthier position overall so that we can press both the DTC business that has been doing exceptionally well for us, but also reinvigorate some of the wholesale accounts that have struggled over the last 6 to 12 months, recognizing, I think, like we all should, mentioning as some folks earlier, this has been anything but normal, the past 3 years. It's starting to feel like maybe we're getting back to a position of normalcy, but it's really been 3 years since we've been able to have a stable operating environment. And that's taken its toll on a lot of partners, a lot of brands, and we're eager to get to a more normal environment. Plus, I can't calculate Brandon's 3-year stacks on the slide, so it's just tough.

So we heard from Walmart yesterday that the consumer is resilient and maybe a little bit more savvy or selective in where they're choosing to spend. What have you, I guess, seen in terms of your consumer, maybe any commentary on back-to-school? And are they spending when there is a reason to spend?

Well, we think our consumers are exceptionally savvy to begin with because they're choosing Skechers product. And I would say from our perspective, again, with a very data-driven focus, we remain largely encouraged by what we've seen out of the consumer. I mean our DTC business is up pretty significantly over the first half of the year. That's a reflection in part on the health of that consumer. The consumer's coming into our DTC environment and engaging with the brand. I think it's also obviously a testament to what we've been delivering in terms of features and functionality within our footwear that has resonated with those consumers. Ultimately, I'm a big fan of the saying, you never get to determine price, the consumer determines price. But when you're delivering against your core value propositions, when you're delivering features and style and quality, it marries well with price. And what we've seen is we've been able to deliver more for the consumers and the consumers as a result, have been willing to pay more. And so that would argue in our minds that we have both a savvy consumer because they're willing to make and able to make that trade-off, but also a healthy consumer because they're out there actively engaging with our brand. I think there's certainly this ever present, it seems specter of potential recession in the U.S., but so far, we haven't seen that manifest in our consumer base at all.

Got it. And touching on that D2C growth that you've seen, I guess can you talk about what's driving that and maybe the difference between your own stores and e-commerce?

Yes. I would say, generally, for the first half of the year, there wasn't a lot of discrepancy between e-commerce and retail. We have seen some deviation lately. E-commerce has been a little bit weaker over the latter half of the summer. In part, that is, I think, a reflection of where we were last year because if you remember last year, and this is certainly the case for Skechers, but I think broadly in the industry, last year in the summer is when we started to receive, quite frankly, just an ungodly amount of product from the manufacturing base. And so many of us got so over inventoried so quickly and not over inventoried in the sense that we had product that wasn't selling. It was just the physical logistics of dealing with the arrival of goods at a rate that we hadn't anticipated. For us, what that did is it actually put our inventory levels in our distribution infrastructure at an all-time high while simultaneously depressing what we had in the store. At one point, we were over 100% capacity in the DCs and nearly a 50% capacity in retail. And so what that did for us last year is it artificially depressed our retail sales in store. What we made up for was a significant online push. And this year, that's resetting a bit. At the end of the day, though, what I would share is that we still see really good traffic from the consumer in stores, online. It's matched with really good product. And that's really the best that we can hope for, and we think sets up for a constructive back half of the year. That all being said, I have to warrant, I think first half of the year, we grew close to 25% on a DTC basis. That's a little bit above normal. I wouldn't want to lay out that expectation for too long into the future. So we do expect some of that will come back to a more normalized high growth rate. But even then, we feel really good about the backdrop of how that sets up for the brand over the back half of the year. And then outside of the United States, in all honestly, it continues to be an incredibly encouraging set up both from a DTC and a wholesale perspective.

Got it. Yes. I'll get to international in a second. Maybe just focusing on the U.S. a bit. I mean we've heard I think that newness is really driving demand. And so right now, I think you have better newness in your DTC channel. Once the wholesale channel recovers in the U.S., do you think you face tougher compares in the DTC channel?

I don't because I think what consumers appreciate is what we're delivering from, again, a feature from a product perspective. And to be clear, we don't generally bifurcate what's available in wholesale and what's available in our DTC. So a traditional wholesale customer of ours will have access to our latest and greatest product. I mean, again, if you take our philosophy that we want our product to be available for consumers wherever they want to shop, it's incumbent upon us to make sure we're putting that new product everywhere we can. What's been a lag of late has been the ability for wholesale to really catch up to that newness, given the structures they're under. But our ideal state is they have new, we have new, we continue to market to new and the consumers have opportunity to buy new. I do think when we get into next year, and hopefully, we're seeing a healthier wholesale environment domestically, that should even out the scales a bit, but we still expect evening out to be a pretty decent growth opportunity given the product we're bringing forward, how unique it is. It's interesting. I actually don't know that there's been as much innovation in the footwear space as we're used to seeing across the landscape. I do think what we've delivered in terms of comfort features, Arch Fit, Max Cushioning, our Slip-ins technology that you haven't seen a commercial yet, I think you're the only one in the room. But all of that is really translating into value at the consumer level, and that's what we think will continue to activate consumers in both channels in the next year and beyond.

Yes. Let's talk about Slip-ins. I mean that's been a really exciting new innovation. I often get the question how big is the Slip-ins business, and how much is that driving growth? So how should we think about that?

Well, it's certainly an accelerator. The one thing I would just keep in mind, unlike, I think, some other innovation in the space, it's not an outsource. It's not limited in its construct to where it can deliver value because it's really more of a feature than anything else, which means for us, it's leverageable against a broad subset of our category. So you can have Slip-ins and golf. You can have Slip-ins and walk. You can have Slip-ins and work. You can have Slip-ins and casual. And what that allows us to do is mix and match the features because it's not just Slip-ins. Honestly, our Arch Fit product continues to do really, really well. And what we've seen is those features because they translate at the consumer level are features we can mix and match. And you can have Arch Fit with Slip-ins. You can have Arch Fit with Max Cushioning. I'd say today, the business in terms of scaling Arch Fit and Slip-ins, it's a meaningful portion, but not the vast majority of what we deliver. And I would say, we want to make sure we keep that balanced partly by delivering more innovation in the future, but also making sure that we're meeting the market where it is because what we want to do is make sure you have an opportunity to get into the brand even if you're not going to engage with one of those features. I would say in terms of Slip-ins specifically, we feel like it's very early innings. It's just really getting to a point where it's ever present in all of our stores and in online and wholesale accounts that's going to continue to build, but we also have tremendous opportunity outside of the United States, and that's super exciting for us.

One another fun thing you've done is utilized collaborations to drive key brand awareness, some of the fund lenders, Snoop Dogg and Ashley Park, The Rolling Stones, and so with these collaborations, are you reaching a new consumer base? And is there any change in your average demo as you try to tap into this newer market?

Yes. I would say collaborations generally kind of fall into 1 or 2 categories. One of those categories is I think what's most typical in the market, which is really about brand heat, developing awareness, attracting eyeballs in a way that you wouldn't otherwise. Those are usually not scaled offerings. The other is where you're really working in partnership with talent to both activate brand heat but also potentially deliver something new to the marketplace. So I think there's a lot that we do that's just in that brand heat category, and they're great collaborations, but they're probably not going to drive business in and of themselves. And then there's others that we have hopes will really lead to something big. I'd say Snoop Dogg falls into the latter category. You'll see we've done a drop of his first co-lab collection. We'll do more over the balance of the year. Doja Cat, same thing. Those of you who aren't aware, we recently launched a cleated product with Harry Kane, who's captain of the English football team. And so those are what we think are long live partnerships to build out product that resonate with consumers and have an opportunity, and they do attract absolutely new consumers. They do tend to age a little bit younger and get consumers into the brand a little bit earlier, but it's not to the exclusion of others. And then I would just also note, what we avail those collaborations of is all the technology that we can bring to bear so that really what we're trying to do is mix and match our strengths and use those at the consumer focal point to drive the business.

Got it. Let's turn to international because that's also a very big piece of the business. I think the big question mark here is kind of China. It decreased as a percentage of revenue, and it's very volatile because of COVID lockdowns. What are we seeing in terms of a recovery there? And how are you thinking about the go-forward growth?

Well, I'll first tell you, we just -- I was just in China about 1.5 weeks ago. First time I had been able to put my feet on the ground there in 3 years. I was actually fairly encouraged by what I saw. I would kind of say that is reflected also in the results. Last quarter, we grew nearly 19%. Our view on China has long been that it's going to take a little bit longer to recover than what we've seen in other post-COVID markets. Now part of that is absolutely just the nature of how COVID impacted that market, but also the absence of the stimulus that you saw in other western markets. So we've, I think, long held that it would take a little bit longer for things to recover. And against that view, in all honesty, things are actually going better than we had originally anticipated. It's not that there aren't headwinds and that there aren't hiccups, but some of those are to be anticipated given the state of that market and how it's grown. I would say right now, quite honestly, the biggest concern I have is the Forex has been a pretty decisively negative move since the beginning of the year. But in terms of underlying demand operations and what you see in the market, I was actually pretty encouraged, and I think our numbers so far this year reflects some of that encouraging news. But I also would tell you, I don't think it's going to be a straight line from here back to the growth trajectory of where they were 3 years ago. It's going to take a little bit of time. None of that, in any way, diminishes our enthusiasm about the market long term. Our brand held up really well, even with the headwinds in the last couple of years. We're investing more in the marketplace in distribution infrastructure because we're confident that the brand has an opportunity. And like I said, when I was there, I was I was really encouraged by what I saw.

Got it. One of the market we've heard brought up recently is India. Can you just talk about your opportunity there? And what product and price points do you think you can succeed in that market?

Well, if you heard about India, it was probably because we were incessantly talking about it. It's actually probably in terms of a single market to get excited about, in our view, it's probably the most exciting, although I could rattle off many others as well. But one of the reasons it's so exciting from our perspective is that it's not a market that's yet dominated by any of the existing global brands. So if Robert were here, he would tell you it's the fairest fight out there because it's not a market where you have an existing 800-pound gorilla. It's a pretty fair playing field, and we like that. We think that's absolutely the right type of environment for us to succeed. It's also got a significant middle class with consumer discretionary power rising. The government there has done a lot to really invigorate the opportunity for private capital to succeed in the marketplace. So we're tremendously excited about that. And the other thing I should mention about India is they've got multiple avenues to market. They've got multi brand. They've got franchisee. We have our own stores. E-com is growing. There's a government channel. There's a school channel. So it's got a lot of paths to market. What we find there from a product perspective is really we can use our whole portfolio to attack different segments of the markets. Clearly, there's an opportunity at opening price points to penetrate and build brand awareness. But just as much as any other market in the premium category, we find success. It's not the easiest market in which to operate. There's a lot of regulatory hangover that you have to deal with. But what we found is when you can navigate through those, the opportunity in the market is incredibly compelling. And I would add to that, not just from a sales and a brand building, but also we think ultimately from a manufacturing and potentially manufacturing even for export in the future. It sits up really, really well.

Sorry to bring us back to the U.S., but you have one of the biggest athletic players going back into some wholesale channels. What does that mean for you?

Who? Yes. It's hard to keep track of people's strategies, they change so frequently nowadays. What I would say is there's not really a lot of brands out there that we are used to dealing with in one way or another. One of the strengths of Skechers, in addition to kind of the market position we aim to occupy kind of that style, comfort and quality at a reasonable price, that's pretty unique. In addition to that, our category exposure is so broad. There's a lot of categories we don't compete directly with any brands you would probably cite off the top of your head. And, ultimately, all those brands have existed while we've grown from just under $4 billion in 2017 to the run rate nearly $8 billion this year. So none of that really keeps us awake at night. We're certainly cognizant of it. We think it's -- it's a characteristic of the market, but not really the characteristic. But what we focus on more than anything else is delivering for our consumers, those 4 characteristics. And in all honesty, I would probably say right now I would put our innovation up against pretty much anybody else in the space. And I think it's resonating with consumers. I think you'll see people follow us into some of those areas. But we feel perfectly capable of competing against pretty much any brand out there. Not that we like it. If they want to all go away, that's perfectly fine. But if they're not, we'll be there too.

All right. Getting into the financials a little bit. Can you just walk us through the gross margin benefits this year? There is logistics costs, wholesale pricing coming through? And then how should we think about gross margin expansion as we go forward into '24 and beyond?

Yes. I mean, gross margin has been a pretty wicked friend in the last couple of years. I mean last year, we had some of the worst gross margin performance that we had seen largely attributable to the shipping cost and some 4x. We had to price into that. A lot of brands did. I would actually kind of describe this year as a settling out. We expect to no longer have a need to put on direct price adjustment at the consumer level, we know consumers are tired of paying more for the same thing. So we're more focused on delivering more value, not increasing prices per se. We're also seeing the benefit of lower and more reasonable freight rates coming to the realm for us as well, just as our business mix is more direct-to-consumer, there's a decided lift to that. We've kind of had all those factors in play. What I would probably point you towards is we feel like there's a significant opportunity to exit this year at one of the best gross margins we've ever achieved. That's by both dutifully managing through the last couple of years, but also continuing to provide product that consumers are willing to pay for that has both consumer value, but also margin benefits to us and then continuing to mix our DTC business because that is gross margin enhancing. The composite of those continue to leave us in a position for this year we'll be better in every quarter than we were last year on the gross margin. And we think that exit rate is ultimately sustainable against the backdrop of the marketplace we see. And then from there, our longer-term algorithm on gross margin has been pretty consistently focused on as we blend DCC, as we blend up international. Those are gross margin accretive businesses for us. And so we'll continue to accrete now not as big jumps that we've seen over this year. But over the longer term, we still think there's opportunity to continue to accrete that gross margin further.

Got it. On that topic, can you just talk about your own inventory levels, your comfort with them? And then anything that you're seeing in terms of promotion or how you're having to react on promotions?

I feel great about our inventory. I mean it's almost, almost funny. Night and day it is from last year. Last year, I don't think there was a day that went by we didn't have a meeting about inventory in one way, shape or form. I'd say within the span of 9 months, we've cured most of that with a very dedicated focus to resolving inventory. We spent a lot of money, in all honesty, last year to put ourselves in that position, but we did so, I think, with great success. In some instances, we're probably a little bit shorter on inventory than we'd like to be. But as it stands right now, we feel really good about where we are. There are a couple of instances where we've purposely built inventory in the face of some either distribution infrastructure transitions we're making or other issues. But when I look at what we've done to decrement the inventory year-on-year in particular, I feel really good. And in part, that translates back to the cash we deployed last year. One of the things that we focus on is making sure we have a very strong balance sheet so that we're always in a position to do what's right for the business and not limited by our financing capacity. And last year, we were able to deploy close to $500 million extra into inventory in the short term that we're now in the process of recouping but to do so allowed us to get back in a healthy inventory position faster than I think most others and we feel really good about it. In terms of promotions, nothing really dramatic that we've seen change in the marketplace. I do think the one dynamic to be conscientious of is that we will be transitioning to a point shortly where we went from a position of having no promotions to -- new promotions, but not really elevated just kind of normal coming back into the marketplace. And now we're getting to the point where we're lapping that. So I haven't really -- we haven't really detected a significant change in that pace, but it is back to an environment where promotions are out there. And from our perspective, they're actually resonating with consumers. So promotions are doing what we want them to do, which is activating consumers to get into the stores, to convert. And so as that continues to work, and I think it's the right level for us.

Got it. So this is a consumer and tech conference. And we've talked about growing the D2C mix. A lot of that is e-comm. Can you just talk about the progress you've made on those omnichannel capabilities and how you intend to continue to evolve with the consumer?

Well, I think that last point is key is that we will have to continue to evolve. Everybody will. I don't know what the difference now between an e-comm player and a retail player are because it's become so inseparable with how we need to operate at the consumer level. We've done a lot over the last 3 to 4 years to catch up. I would admit we were a little bit behind on where we needed to be from an e-commerce and a digital perspective. I'd say, over the last 4 or 5 years, we've done as much as anybody to really catch up. There's still room to grow. But as it stands today, some of the brightest spots in our DTC business are markets that didn't traditionally have a significant e-comm footprint that are building off of the platform, we've given them to really drive outsized growth on the digital side of things. And I think you have to keep in mind, when we talk about digital, it's not like every market is at the same level of maturation. China, U.S., those are clearly leaders, but there's a lot of markets out there that still have yet to fully embrace digital in a way that we see across the globe. And we think those are huge opportunities at the end of the day. I would also, though, make a point that we don't believe that we're going to ever become a fully digital business. That's not the model for footwear that we see. Most consumers, I think 2/3 still prefer to try or touch footwear before they buy it. And so what we view the future is evolving toward is an even closer frictionless omnichannel solution that allows consumers to go into a store if they want to, to get something online if they want to and then to treat those transactions inseparably between the two. One of the benefits is if you could buy a pair online, and you need to exchange size or color or anything, you can go into one of our stores and it's there. And so we continue to see that that's going to mesh further and further. And you're going to have to be, as a retailer, equally adept at technology as if you were a technology platform provider of the past because that's how consumers want to be able to interact with your brand.

Yes. All right. One last thing to leave everybody with. Looking ahead at your path to $10 billion in revenue, what are the biggest areas of opportunity?

Well, that's a beautiful thing about $10 billion is it's not dependent upon one path. What we tried to construct when we developed that goal, look, quite frankly, for internal consumption and external is an understanding that there's multiple ways for us to get there. I think the easiest way is just continue to see a return to normalcy on the wholesale side domestically, and then we'll let international power our growth to $10 billion. That's markets like China, that's India, but that's also Eastern Europe, Western Europe, South America, all that have huge opportunity for us. But there's also a tremendous opportunity on the DTC side of things. So we actually feel like we have multiple paths to $10 billion. It's not contingent upon any one. I think one of the strengths of our business over the last couple of years you've seen is when a China has struggled, we've still managed to grow. When a U.S. has struggled, we still managed to grow. And so I think that's the confidence we have in getting to $10 billion. Personally, I'd love to see every market go, so we get to $10 billion faster than our goal. But even if that doesn't happen, we feel pretty confident in our ability to get to $10 billion, but then also ultimately lay the groundwork for getting beyond $10 billion. We're not aiming to get to $10 billion and then stop. Our goal is to continue to become the decider -- third largest footwear provider in the world. And that means we need to continue to plot past $10 billion, even though we feel like that's a pretty decent goal in the near term.

Very exciting. Thank you so much, John, for joining us.

Thank you.