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

Good afternoon, everyone. Thanks for joining us for Skechers fireside chat. We're very pleased to be joined this morning by CFO, John Vandemore. Skechers is the third largest global footwear company with a focus on style, comfort and quality at a reasonable price across all south. They have delivered consistent top line growth and outstanding 16% revenue CAGR over the last 10 years. Just a quick note before we begin. If anyone has questions they'd like to ask, you should see a chat box at the bottom of your screen. Feel free to pop a question in there, and we'll get to some of the questions at the end here.

So thanks, John, for joining. Let's start with a broader topic here. Can you share with us any insights on the current demand environment? In the last quarter, domestic wholesale saw a recovery with significant improvement in flow of orders. Has that trend continued over the past months? What has surprised you or what has disappointed over the last month?

Well, first of all, Jesalyn, thank you for having us. We appreciate being part of your conference. I would say, in general, we've been very pleased by the strength of the consumer, particularly as it relates to demand for the Skechers brand. Certainly have seen a noticeable change to the positive in the domestic wholesale environment brought about, I think, in large part because of that consumer demand, but also strength broadly across the globe in Europe, where we saw outsized growth in Q1 and a continuation of some very positive trends in Asia, including in China, where I know the demand environment has been a bit rocky for others. So overall, we've been incredibly pleased by what we've seen. I think in large part, that's driven by the fact that we continue to bring a very new and innovative product to market. And that's resonating with consumers, particularly in our focus around value and comfort.

Right. On the topic of value, given the macro challenges, have we seen any indications of trade-down consumption and whether that has benefited us in terms of the demand of our products there?

Well, that's a little bit difficult for us to detect only because we are very focused on delivering value to the consumer. And by value, we mean a very fair trade of features, quality, style for the money. So we don't operate across the spectrum of pricing, particularly at that extraordinarily premium end of the marketplace. So it would be tough for us to detect if somebody is consciously choosing to leave that marketplace and come to us. What I would tell you is within our own portfolio, where we do have a range of price points available for consumers, we have actually seen consumers choose to trade up. And that trade up is largely focused on acquiring product that has more of our comfort features embedded in it. And so what we've seen in our own stores and our own ecosystem is actually a trade up when it's been concurrent with receiving more value in the product. Look, I think it's probably reasonable to expect that as consumers face pressures from inflation and others, they're looking for a very well-balanced offering. And I think that's something we continue to provide. But in terms of detecting trade down within the market from the premium into schedule, that's pretty difficult for us to ascertain with any degree of certainty.

Got it. And in terms of market share, obviously, Skechers have been gaining in most of the markets. which markets do you see the most opportunity to gain more market share or are the most underpenetrated in terms of your international geographies?

Well, I think in general, I would just argue that international is a huge opportunity in the aggregate. There, we see several dynamics at play that really are good things for our brand. Most notably is the transition of consumers from unbranded and private label offerings in their local market into an international brand world where we participate quite handsomely. I think there's a lot of opportunity for that, particularly in markets where you're seeing a growing consumer discretionary class and more economic improvement in that consumer discretionary envelope. I would also just argue that there's a lot of opportunity for us to continue to expand our product offering in many international markets. If I was to bifurcate that at all, it would probably be with a bias towards more opportunity in developing markets than developed markets. But I wouldn't set aside either opportunity because both offers the Skechers brand an opportunity to penetrate more deeply. I would also add that what we find internationally is very similar to what we find in the more developed markets of the West, which is an appreciation for what Skechers is delivering. Again, style, comfort and quality at a reasonable price. All of those characteristics are equally compelling to consumers in developed and developing markets. And as a result, the Skechers brand and what it conveys to consumers is a very compelling offering. If I was to look at individual markets, obviously, China, India, the balance of Southeast Asia, South America with large Eastern Europe, those are all much faster growing markets with an increasing consumer consumptive economy. And so those obviously stand out. But again, I would just note just in aggregate, the international market offers us a lot of compelling opportunities.

Got it. And John, given you touched on India, China, maybe just digging deeper into India. Can we get an update on how the regulatory environment has been on India. What's the progress there in terms of the manufacturing ability?

Well, first, I would say we remain incredibly excited about the opportunity in the Indian market. It's been a very successful market for us and we think offers long-term opportunity that's almost unrivaled in the world today. Clearly, dealing with regulatory regimes in every market is something we have to do as a brand that generates more than 60% of its revenue from outside the United States. So we're accustomed to being responsive to regulatory changes and requirements. And India is no different. We're certainly in the process of adapting to the BIS regulations that were put into effect at the early part of this year. And whenever you see new regimes begin, there's a learning period for all in vault, both on the government side and quite frankly, on the corporate side as well. And I'd say that's where we're at today. We've seen some very good developments over the last couple of months that would facilitate what we think is a very expected but necessary continued importation regime, but also incredible improvements locally with manufacturing in India for India and ultimately, at least as part of our strategy for exportation. I think what you'll find is as kind of the market seasons out this regulatory regime, things will become more reliable, both in terms of a path for importation, but also a path for developing both local production and exportation. And that's ultimately what we'd like to see because we think the Indian market is one of the most exciting out there. It's a very diverse marketplace in terms of routes to market, routes to the consumer. It's a consumer and a growing consumer class that appreciates the characteristics that we bring to market that appreciates brand value. And so we see that the growth opportunity in India, both unto itself, makes it attractive, but also given our current position of size and scale in the market offer Skechers the opportunity to continue to help distance many of our rivals. And I think, in all honesty, India is one of the last fairest fight markets out there for brands to compete for consumer attention and loyalty, and we feel very well positioned to do that with an excellent team leading the way.

When you think about manufacturing in India, how do you think about the economics of that versus the other regions?

Well, it's growing. I mean I think you have to expect that as a market begins to develop manufacturing capabilities, it takes some time. Not just economics, by the way, certainly, supply chain reliability, cost, quality, those are all factors you have to continue to develop. What we found so far is early success with many of our partners. We would like to continue that, both in terms of partnering with manufacturers locally but also bringing to them what we have learned manufacturing across the globe, particularly around quality and quality control. Quality is a very important element of both what I think the Indian government is seeking to foster vis-a-vis the BIS regulations, but also incredibly important to Skechers. It's one of those 4 factors that we think consumers look to our brand for. So I think there's a lot of opportunity for us to both bring to the market some capabilities, but also then benefit from the market growing those capabilities across the industrial landscape. Because, again, what we would love to see happen is a very thriving production base developing in India for local consumption, but also then ultimately for exportation.

And then shifting gears maybe a little bit to China. China is roughly $1.2 billion business right now, but it has been growing pretty well in the last quarter as well as previous couple of quarters but we have heard macro concerns trends have been pretty sluggish there. Any concerns on the growth there and just the outlook overall in China?

We've been incredibly pleased with the results in China, quickly over the last 4 or 5 quarters as that country has emerged from kind of their post COVID situation. I think our team there has done an incredible job navigating the difficulties of both the macro environment, which are certainly well known. But also the peculiarities of having to adopt to COVID standards and then emerge through those. Our excitement about China continues to be extremely high. We think the brand has a long runway to grow in China, and we have a sound strategy to get there. In addition, I would argue, I think our product lineup in China is probably one of the strongest globally because COVID inhibited the launch of several of our Comfort technologies in that market at a concurrent moment to where we launched elsewhere. And so we have with us a pipeline of very compelling comfort-focused technology that we can bring to bear in China in collaboration with and based off of the experience that we've had elsewhere. So again, I think the team has done a terrific job, navigated in that environment. I think there are probably some wrinkles to unfold as the Chinese market deals with some of the macroeconomic challenges that it faces that are very comparable to what other countries have had to face. And we're excited about our ability to see our way through those, but also then to continue what we see as a very long runway of growth potential in that market balanced by what we see growing digitally and in new channels like social media selling and live streaming but also with a greater penetration of a physical footprint that has reemerged in China over the last year as a strong source of growth and opportunity to reach the consumer.

Maybe moving on to the long-term algo here, the $10 billion top line target, longer-term EBIT margin at one point, it was low teens between 11%, 13% versus now at 10% there. Can you help us to understand the put and takes to get to the high end of the guide? If we were to think about that 13% operating target, what needs to happen to achieve that goal? And maybe from growth is to SG&A leverage, how do we think about that?

Sure. I would first note that our primary goal is to continue to grow the brand as the third largest footwear player in the world, we want to continue to augment that position and firmly root Skechers as the third largest footwear provider in the world. And that's why we're aiming very squarely by 2026 to achieve $10 billion in sales or higher. That's going to continue to come from an [ emphas ] on growing our international business and growing our direct-to-consumer business. Those are very strong growth vectors for the company and ones we feel uniquely capable of achieving based on our history and on the runway we see ahead of us. Concurrent with that, we've certainly spoken about kind of the natural margin of the business being in that kind of low teens range. We've continued to progress toward that range over the course of time. There were some disruptions on that march to the low teens vis-a-vis COVID. I think we've largely recaptured and exceeded past that. And we will continue to grow that margin. The only caution that we often provide is that with our primary focus on growing the brand, it's important for us to retain the ability to invest ahead of that curve to make sure we're investing for that growth. And sometimes, that does cause a decision of taking a near-term hit to operating margin for the benefit of long-term growth. Ultimately, though, the way we achieve that operating margin is continuing to grow the top line as we have and balancing those investments for the future with some opportunities to leverage the core fixed costs of the business and do that in a way that becomes operating margin accretive. Also, as we grow the international market and the DTC market, those both carry attractive gross margin enhancement opportunities. So that should also simultaneously allow us to accrete our gross margin, albeit not in the size and the scale of what we've seen with the disruptions in COVID and the recovery there from, but at a modest pace that allows us to accrete through the gross margin down into the operating margin. But again, I would mention all this is against the backdrop of a desire to both get to $10 billion and then move beyond as the third largest footwear brand in the world. Because we think -- and we know that, that's the most significant way we can continue to contribute to stakeholder value and ensure our position in the marketplace as an enduring brand.

I'm going to double click into that growing the D2C business. We've known that Skechers have always leaned into the D2C to be closer to the end market to understand the demand trends. We act more nimbly there but some other brands have also leaned back into the wholesale. How does Skechers think about allocating resources between a D2C and wholesale strategy? How do we balance that choice? And is there any difference across the different geographies when we're thinking about the China strategy?

Well, I'd say our first philosophy of note is that we're relatively agnostic in most markets between a multibrand, wholesale channel opportunity in DTC. We've seen them grow together quite nicely. In many instances, can be very reinforcing to one another. I mean there's certainly markets where those opportunities don't exist on equal footing, and we adapt, I think one of the greatest strengths of Skechers has been our ability to adapt our business throughout the course of our history. And in fact, if you go back and look at our original forays into the direct-to-consumer side of the business, that was born out an adaptation to get more of our product into the market. When you look at what a wholesale customer traditionally orders and what we can express in our own stores, there's actually a very small overlap, which means the DTC side of the business is the most robust form of expression of the brand and the breadth of our product. And that's incredibly productive at the consumer level. But wholesale partners also play a significant role in putting our product into the path of the consumer. We don't believe we're in a position to dictate to consumers where they should buy our product. Rather, our obligation is to put our product in as many opportunities for the consumer to choose to engage with the brand as possible. I would say as we sit and look at different markets, different channels have fundamentally different growth opportunities in the domestic market. The wholesale channel is fairly well developed. We think there's more opportunity on the DTC side as you introduce more stores, you express the brand more fully, you can enhance that with digital and omnichannel capabilities. In other markets, there's still abundant opportunities in growth. So we definitely have to tailor the strategy to each market. What I think really advantages us as a brand is that we have both capabilities, we have experienced in both. And as a result, the know-how to deploy the brand either in DTC or in wholesale or in concert is relatively unique. But again, our objective is to support both robustly because we believe they both offer the brand and ultimately, the consumer tremendous way to engage and ultimately to affect a purchase.

And maybe just a little bit more on the DTC. That was the guidance of 155 to 170 owned stores for the remaining of the year to be open. Maybe a bit on sense where the stores will be mostly opened at? And any difference in the economics of this new store versus the older stores?

So a lot of those stores will be opening internationally and some of our highest growth markets will be overly represented in that. So a market like China, to the extent that we feel it would be prudent for the balance of the year to continue open doors in India as our ability to satisfy the inventory requirements in a market like that. But also more globally, in developing markets in Eastern Europe and in South America. There's also a sizable portion that will emanate from the United States as we find opportunities to increase our stake here. The one thing I would note, though is, the number of stores is not as important to us as opening the right stores, opening right locations that can offer a valuable contribution, both in terms of top line growth, but ultimately, earnings because we don't want to be chasing the false objective of simply opening doors if they're not going to be contributing in profitable doors. And so we always want to make sure that the type of doors we're opening and the doors that can contribute to both top and bottom line growth. And we'll flex the number of stores in response to that rather than the other way of around so we don't get caught in a situation where we're trying to treat a unit metric at the sacrifice of either top or bottom line growth. I would say, just stepping back, I mean, we continue to see abundant opportunities for growth in doors. And again, in many markets, particularly in international markets, that's brand accretive at the consumer level because reaching consumers is substantially benefited by having a store presence, particularly a store presence where they can experience the full breadth of our offering and quite frankly, experience the brand in a way that is very tightly controlled to convey our value proposition to the consumer.

And on your wholesale partnerships, are we happy with the current wholesale footprint there? Are there any regions where you would like to add on new partners or reduce any wholesale partnership there?

We're always attempting to cultivate strong wholesale partnership where it makes sense. And where it makes sense is we have a compelling product offering that matches with the desire of that partner to support the brand. I think there's always opportunities to continue to expand in categories with existing partners. So both opportunities to grow our presence within an existing partner but also open up new partnerships. Now obviously, that again is a very market-by-market situation, but one that we feel continues to offer compelling opportunities for growth. I would note that we made a point of mentioning that we've entered some performance categories, particularly team sports, with football/soccer basketball, cricket coming soon to select markets in addition to running, golf, pickle ball that we already offer. And one of the strengths we think that we'll bring to the market is a more fulsome portfolio of performance footwear that we would like to use to potentially add more sporting good oriented footwear providers to our stable of customers because we think having a more fulsome selection of sports will allow us to be a more effective partner to some of those potential candidates. So I think there's abundant opportunity across the landscape. It really depends on what market we're looking to achieve. But I think the strength of our product array is what positions us well to expand relationships and create new ones with wholesale retailers.

Then moving on to the margins, John. On the gross margins, we've heard some companies started to call out the rate situation as a slight freight headwind, especially in the second half of the year. Just wanted to double click on that, whether the situation has impacted us? And are we seeing risk of it being a headwind going forward, especially in the first quarter, we had a very nice bit of gross margins on that front.

Yes. First, it's an unfortunate situation. And our hope is that it is resolved quickly to the benefit of all involved. It is certainly emerging as a bigger issue than it had been previously in the year. You're seeing it impact both spot container rates and other costs associated with moving product, including any elongation of transit times. And then those effects are felt throughout the supply chain because it's a very interconnected and interdependent global supply chain. So issues in one tend to start to have ramifications in others. Right now, where it's been most impactful is in the spot rates and some delivery time frames. That is something we're watching carefully. It is particularly impacting the Asia to European routes, but it could have some knock-on effects elsewhere. So I would say, part and parcel with the last couple of years, we both become more accustomed to focusing on supply chain issues and attempting to address them as quickly as we possibly can, but also being attuned to their potential effect to the business. If there is an impact, we will certainly communicate that. And it's something we're watching carefully. But at the moment, we have anything more pronounced to say on that other than, again, our expression of hope that it can be a situation that resolves itself sooner rather than later to the benefit of both just the supply chain it large, but also ultimately, the consumer. So that it doesn't begin to disproportionately impact pricing and as a result, become a contributing factor to increased inflation, which is certainly something nobody wants to see at this point in the macroeconomic cycle.

Got it. And any sense to quantify that Asia to Europe route, what percentage of sales is that for our business?

Yes. No, that's not information we currently disclose. Obviously, Europe is an important market to us. But in contrast to what we saw post COVID, where the supply chain was largely impacted everywhere. This does appear to be, at the moment, at least a more localized effect, which means that its impact ultimately on the business would be much smaller than what we saw post-COVID. But again, I would emphasize that it's an evolving situation. So it's one we have to continue to watch carefully, and we'll be assessing the impact of that on our business as events unfold. I would also point out, it's not always just a cost issue, it is a timing issue because the timing of arrivals can impact the timing of actual shipment to the end customer. So there could be some effects from a timing perspective that it's important to be sensitive to even though at the moment, we don't see anything that's extraordinarily pronounced in the near term.

Got it. And earlier, you mentioned about pricing and we have taken pricing nicely over the last couple of years given inflation. How should we think about the ability to increase pricing going forward? And in that $10 billion target, how should we think about ASPs further volumes growth?

Yes. So our general sense is that while there's been a lot of pricing activity over the last couple of years, largely in response to exogenous factors that most consumers are relatively tired, if you will, of price increases. Now obviously, in a fashion-driven business, pricing changes quite dynamically because we're not producing a lot of commodity goods. And so there's always a dynamic of pricing that takes into account both new styles, new mixes from a product perspective. I would say, in general, we're not looking to make any like-for-like direct price increases, again, in keeping with the notion that consumers are tired of that and may begin reacting adversely to further increases. What we are focused on, though, is delivering more value for the money because that, in many consumers in most consumers' minds, is not a price increase, but rather delivering of more value at the end consumer level allows you to accrete ASPs. If anything, I think as we approach 2026, that's more of what we would expect, which is modest ASP increases born largely at a product or channel mix. And then within that, a very stable construct for gross margins at the product level that then have to be assessed for mix impact. So I think based on what we see right now, that's attainable, and that's the primary objective. I would always say, though, obviously, pricing is both a competitive dynamic and a dynamic reflective of the associated costs to produce goods in order to maintain margins. So it's something we do review quite regularly. But at this juncture, what we would be looking to facilitate is growth based on delivering channel mix improvement, product mix improvement and not like-for-like price increases.

And then moving to the SG&A cadence there, just broadly, how should we think about SG&A there? 2Q EPS is guided to be slightly down due to timing of demand creation. But 1 -- first quarter, the SG&A deleveraged by 150 basis points there. So how should we be thinking about it? Should SG&A deleverage in the second quarter then we see some form of SG&A leverage in the second half?

Well, so I'd say broadly speaking, what we're looking to achieve at a foundational level is to continue to grow the top line and then to not delever within the operating expense base. Now oftentimes, what that runs up against is decisions necessary to drive the growth of the business long term. The clearest example of that is opening stores, but also you mentioned advertising. We're clearly investing ahead of new categories, but also investing heavily to make sure consumers understand and appreciate the comfort technology that we're delivering, which we believe will certainly pay dividends over time. But as we discussed in the operating margin, the duality of our charge is to grow the brand and then to seek efficiency where we can while investing for that growth in the OpEx base. And so we're constantly evaluating opportunities to achieve both. And then the ramifications can be felt most often in SG&A. As it relates to Q2, you correctly pointed out that we are over-indexing from an advertising and marketing perspective in the quarter. That's not with the intent of driving results immediately, but rather delay the foundation for what we think is a very strong back-to-school holiday season ahead of us. And so again, that's investment we're making today to really inform consumers about what we're offering and what we're delivering in the Comfort technology space. Because a lot of the comfort technology that we've been delivering in many instances, requires consumer education to fully appreciate and understand. And so we believe it's been important to make sure consumers are aware of the technology, aware of what it does as a means to incent them to really try it for themselves. One of the most positive response signals we see today is that when consumers can actually try on a pair of hands free, Skechers' Slip-Ins or Skechers' Arch Fit that very much translates immediately to increased comfort. And that's what really gets consumers both into the brand and then excited about the brand long term. And as a result, that's our most valuable customer and the best way for us to drive stakeholder value long term.

John, you touched on Slip-Ins and new technologies there. Any sense on what are the new technologies percentage of sales mix right now? Where do you see that goal in terms of innovation, Skechers have done really well [indiscernible]. So any other major call in terms of new product innovation and anything new in the pipeline that you would like to call out?

Well, there's always a lot in the pipeline. Unfortunately, I'm not able to call that out in advance. What I would say is what we're going to continue to evolve is that focus on delivering comfort at the consumer level. I think what you're going to continue to see is our existing technologies evolve in ways that would not have been understood or appreciated from the beginning, incorporating Skechers hands-free Slip-In technology, incorporating Arch Fit, Max cushioning, Wide Width, Hyper Burst in a lot of different styles and categories across the business. But I would also just point out that's coupled with design innovation that is constantly occurring in the footwear space. So in a way, I think Skechers is actually advantaged by having almost 2 different veins of innovation. There's design innovation that just comes naturally in the business, new looks, new outsoles, new uppers, new colors, et cetera, as well as the comfort technologies that really act as enhancing features on top of that design innovation and which can be fed upon each other to deliver more value at the consumer and for which we're seeing consumers gravitate to within our own stores in our own portfolio.

Talking about consumers, maybe a last question on demographics. How is the difference in our demographics versus peers by income, by age group? Any difference in one market versus the other market?

Well, certainly, every market is different. What I'd say is we feel really good about where we're strong today. We feel really good about opportunities to increase penetration in areas where we have more opportunity. But again, that's very market specific. What we know, though, is that the ability to deliver style, comfort and quality at a reasonable price is appreciated by more and more consumers every day, particularly on comfort. And so we're going to continue to look to pair that offering with this design innovation to both penetrate existing demographic categories and more beyond that. And we think we have a lot of runway there as well.

Thank you, John. With that, we conclude this session. Thank you very much, John, for your time. Anyone has any questions, feel free to reach out. Thank you all.

Thank you.