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

All right. Good morning, everybody. I'm Alex Straton, Morgan Stanley's North America Softlines Retail and Brands Analyst. Super excited to welcome Skechers to the stage with us, which is a $10 billion market cap wholesale and direct-to-consumer lifestyle footwear brand. I'm joined by John Vandemore, Skechers' CFO. Thanks so much, John, for joining us today.

Thanks for having us. Happy holidays, everybody.

Yes, right after the holidays. So look, on format, fireside chat, most of you guys are familiar with how this works. We'll explore some of the key investor questions we're hearing on our end. We've also left some time to open it up to you all at the end for a couple of questions if you have any. My favorite part of all of these is the disclosures. So please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. And that keeps me covered. So John, we're sitting here in December, just got there, I can't believe it. We're looking at 2025 in the face. Maybe starting high level, what are the most topical industry kind of dynamics that you're focused on right now?

You could have asked that a month ago, it was a lot easier. First of all, happy holidays. I would emphasize that we are currently in the midst of the holidays/weekend, obviously, and I think probably the most important thing on most brands minds right now is the kickoff to the heavy holiday spending season. That seems to have gone very nicely. We're thrilled by what we've seen. It's a long selling window, though, and we're obviously going to be about a week short this year. So it will be interesting to watch how sales unfold. But I'd say probably the biggest question we continue to get is about the health of the consumer from our view and at least our consumer, we still seem to be holding up pretty well. I think the key in our space, which I'm sure you're not surprised to hear me say is that newness, innovation continue to resonate with consumers, and that seems to be what pulls them in and propels transaction volume. The next most topical thing, I don't think is going to come to anybody's surprise. And if you could all use this as my singular and only response to the question on tariffs today, I'd be very appreciative. But it's contemplating what the future holds, which to be fair, we don't really know at this point, a lot of conjecture, a lot of thinking through what options may be but I would stress, until we actually see something formal, it's going to be a little bit tough to give a precise response, but that's clearly a topical issue that people are wrestling with. After that, to be honest with you, from our perspective, it's really about how do we fuel the growth that we're attempting to achieve in our brand that is both domestic but also nationally focused. So those are probably the 3 things that we focus on most day in and day out.

Perfect. And I promise everyone in the audience, we will circle back on holiday on consumer on tariffs. So I will not let you off the hook yet. But maybe before we go there, it seems like Skechers' competitive positioning in the last few years has evolved, at least from when I first started covering it a number of years before that. So can you talk about where the brand fits into the mosaic of the industry now compared to maybe even just 3, 5 years ago?

I think it's a really good question because in part, it speaks to the evolution of our brand, which is certainly something we're constantly focusing on I would say one of the things that we're most known for is the breadth of what we offer the consumer. Purposely, we're attempting to meet consumer needs across a very broad spectrum of events. Everything from workwear to performance footwear to casual lifestyle, seasonal needs. And what that allows us to do is to continue to fill in the niches of people's use cases. We've obviously done very well in the Lifestyle segment. That's one of the most well known for. I would say on top of that, clearly, we've made forays into other areas, most recently into high athletic performance. We launched football/soccer, basketball, along with pickleball. We're on the verge of actually reintroducing running with the really interesting lineup that I think anybody who has a chance to see in the next couple of days would really be impressed by and there's other sports on the horizon. But it speaks to that natural evolution of the brand into more and more categories, more and more use cases for the consumer. And what we emphasize in that is in all of those categories, you're going to get style, comfort, quality and innovation, but at a reasonable price. And I think that's really our unique niche we are focused on delivering a significant amount of value for the money. Certainly, there's areas where we compete at a premium end, at least from our perspective, but it's definitely below the premium level that you'd see from other brands. And we're completely open to the fact that we're going to have to share that closet with somebody who wants a premium solution, but we offer a tremendous assortment below that, that actually, again, continues to focus on those 4 consumer value characteristic, the style, comfort and quality at a reasonable price, infused with innovation across the portfolio. That's really, I think, where we're ultimately unique. And I would just make sure that people appreciate that, that lens extends globally. One of the things I think sometimes we fall prey to in the U.S. is thinking about the domestic market as the footwear market globally, and that's really not the case. It's a bit broader than that. And so our ability to meet needs across the globe is incredibly important for how do we develop product.

So John, that's a great overview of kind of where you guys sit, what's top of mind. Now let's maybe zoom in a good segue into revenue. You have this $10 billion target out there. Can you just refresh us on what those building blocks are to get you there from here?

I can. And not only will I do that, I will refer you to some materials that I think we dropped this morning. Nothing really different than what we've talked about in terms of our growth algorithm, but puts down on paper for those who are not as familiar with the name. So when you have a free moment if you're in some other speaking engagement, you can look at our website and see that. But what I would tell you is that our strategy for growth is pretty consistent with what we've been doing for the last 1.5 decades, which is leaning heavily on the opportunity to continue to grow our brand internationally, leaning equally heavy on the opportunity to get closer to consumers in our direct-to-consumer business and leveraging a very reliable albeit slightly less fast growing segment in our domestic wholesale business, all of which for us, offers a tremendous opportunity to get both to that $10 billion target, which I would admit because somebody is going to raise it at some point in time. It was a more audacious goal when we started. Today, it seems a little bit easier to achieve, but that's after many years of a pretty significant growth. But obviously, our aim is to go beyond that. And we'll continue to grow past $10 billion. We just -- we want to get to that target first.

So you mentioned international, DTC, a little bit of domestic wholesale, it sounded like in terms of the big picture of getting there. Or how does that look in 2025? Are any more important than others? Or what are the dynamics there?

We're a little early to give specific guidance to '25. What I would say is generally, over kind of the medium to long term, what we view as the likely range of outcomes is that you're looking at probably a low to mid-teens international growth opportunity. You're looking at a low to mid-teens DTC opportunity when you think about DTC globally. Domestic wholesale, that is, again, admittedly going to be a little bit of a slower growth market simply because the U.S. market is so mature and so competitive, although I've point out recently in Q3, we significantly outdistanced what we believe to be kind of the long-term growth rate. But that's -- that we think offers a mid-single-digit growth opportunity. So if you kind of you pull that together, it gets you into kind of that low double digit to mid-double digits top line growth rate. I would tell you today without giving specific guidance on '25 yet because we certainly want to see how the holiday performs, we think next year offers the opportunity to continue along the trajectory of what we've done recently, which should certainly be growth in that kind of range.

Perfect. Maybe breaking that down a little bit, something that's unique about Skechers as you have such international exposure compared to some others I cover. So maybe we can do a quick lightning round on U.S., China, Europe, high-level views, kind of what's top of mind near term into next year.

That's very topical for me because from here, we'll be heading to Europe and then India and then Asia, all so that we can get home in the next week or 2. So the -- it's a heavy pace. But it's important because checking in on each of those markets on the progress of those markets is very critical to our growth trajectory. I'd say in the U.S. right now, we continue to be very optimistic that we're seeing a combination of, again, very steady consumer demand with some recovery from last year. Remember, last year's domestic wholesale results were definitely less robust than what we expect long term or what we had seen. As that market continues to reset, it still looks to us to be a very attractive growth opportunity. Europe, you got to be honest with you. I have been watching Europe with amazement for the last 2 years. If you think about a market that has more headwinds in it than Europe, I'd love to know what it is because you have strife certainly from a political perspective, you have economic headwinds coming from inflation, energy inflation being key among those. And you've got all sorts of other turmoil on a more localized basis, but that market for us has continued to do very well. I think that's a combination of, again, bringing innovative new market opportunities forward, matching that with product, continuing to expand our DTC presence. And I think when you're supporting newness with marketing in Europe, and you have the ability to kind of break through the noise we've seen tremendous success. So that market continues to do exceedingly well for us, and we're excited by it. Asia is probably the biggest mixed bag at the moment. You have a market like China, which admittedly has seen some struggles. I think we're hopefully seeing a bit of the bottoming out of that and a slight turn to the positive on the consumer side, although it's likely going to take a bit longer than we would like to recover fully but it's a market we're focused on. And we would like to see get some stability in the market and then a return to some semblance of growth. I'd say long term, nothing has diminished our appetite to continue to both invest in and grow in China. We see that as a continuing opportunity for the brand because the residence for the brand is still very solid and very favorable in that market. Then you have India, which is probably the most unique case in the world. And from our perspective, one of the most lucrative sizable markets out there struggling with kind of the adoption of some of the BIS standards that were implemented this year. Really, you have kind of a tale of 2 periods in India this year for us. One is in an inventory constrained environment where we saw a pretty significant decline in that market. The other was a more balanced inventory solution where you saw the complete offset fantastic growth. And I think what that speaks to is when that market can be fulfilled in a way that the product is available, the offering is available to the consumer, what we see is tremendous consumer response to that. And so it offers us, I think, a significant opportunity long term to grow. It's one of the reasons we're going there. We're going to go continue meeting with the government again to really help collaborate on a solution that gets through what the government feels is important from a local development perspective, but also what we believe is important to meet consumer needs. And then you have the balance of the rest of Asia, which is still performing incredibly well, markets like South Korea, Japan, doing very well, developing markets like Indonesia, Malaysia, Philippines, Thailand, Vietnam, all of these are terrific opportunities for the brand long term.

Can we take on India a little bit more. I feel like you're one of a few that's kind of highlighted this opportunity and been very front-footed. So why is it so compelling to you all? Is the competitive landscape different there?

That's a key point. The competitive landscape in India is very different. And I don't really have a great explanation as to why that's the case. But what I can tell you is if you were to rank the top footwear providers in India today, you're generally depending on who cuts the numbers because I'm sure we cut it slightly different than our friends at PUMA, but it's Skechers or PUMA in the lead. And what's remarkable about that is you have a marketplace with over $1.5 billion individuals and Nike and Adi are not the 800-pound gorilla in the market. If Robert were here, he would tell you it's probably the fairest fight in football -- in footwear that's still available. And so we love that competitive balance. Also, I think we've done a very good job of investing ahead of the curve in India. And we have a great team there. We have great resources. We have a distribution footprint now. And so you really feel like, from our perspective, it's a great opportunity of size and scale. I would also note, India for us started off as a joint venture. We had some local partners who really helped us build that foundation. But what we learned quickly was that India was growing as fast or faster than many other markets and doing so profitably. And that's an opportunity you don't lose sight of easily. And so we really wanted to continue to invest and drive India. We think there's a lot of opportunity. The brand is very well known. And so for us, it really does represent that unique opportunity of balanced competitive environment, size and scale. And I would say today, existing brand strength that's pretty significant.

Perfect. So we've covered kind of how you think about the world and revenue right now from a geographic perspective. You also highlighted DTC as a key lever going forward. Can you break that down for us, how you're thinking about the strategy there domestically versus internationally? Is it different? How could the growth be different?

It's not really significantly different kind of from a high-level perspective, which is that we continue to see opportunity to put more doors into action, both domestically and particularly internationally. Obviously, today, that needs to be matched with a healthy offering in the digital realm, that's mobile, online and really ultimately bringing those 2 together in a seamless way for the consumers. But we see significant opportunity to continue to grow both our footprint and our digital exposure across the globe. And honestly, just like the example I gave earlier in Europe, I mean, when we put the brand in the opportunity path of a consumer, we see tremendous success. And then when you add top of that, what we think is industry-leading innovation and our stores, in particular, offer tremendous opportunity to show that innovation and its full complement. That's where we see the most success. So I think the DTC strategy really dovetails well with what we're doing from a product perspective and allows the brand to build awareness and build familiarity at the consumer level, which is great.

Perfect. Maybe now turning to the other side of the channel distribution. We've got wholesale. You highlighted domestic wholesale, which has been a strong point for all of you -- or for you going forward and recently. Can we just talk about the wholesale opportunity? How are you thinking about it now? I know you've had a lot of success, how much bigger can it get? What's on your mind there?

Yes. I mean it's -- I mean, I think the last 3 years tells us it's a challenging environment to deal with. Pre-COVID, I think it was a bit more stable post-COVID, we've been dealing with inventory fluctuations that have been pretty sizable logistics issues. Last year, I think we saw a lot of retailers downstream become clogged with inventory. So from our perspective, it doesn't look to us yet we have a perfectly rebalanced portfolio out there. What we see is when we're allowed to collaborate deeply with a partner and they embrace our technology, they really embrace what we're offering consumers. They do well and we do well. Our aim is to be a terrific wholesale partner to a retailer. Because ultimately, we don't think philosophically, we have the ability to tell the end consumer where they should buy Skechers. We want to make our product available wherever, whenever they want to shop. And so that means working well with wholesale partners. When that doesn't align with their interest in ours, that's when we don't have as much success. We continue to love wholesale. We think there are many partners out there that are great for the brand, they do great with the brand, and we love working with them to drive the brand. I think that's where, in particular, this year, we're seeing growth. But it's after many years of struggle. And I think from our perspective, what we hope to see is over the next year, some stabilization in the retail environment, that allows the retailers to rebalance both their inventory profile, but also their exposure to the offering at the consumer level, which should include a healthy dose of Skechers and really embrace innovation and newness. That to us seems like the formula. What it's given rise to you, though, ultimately, is you kind of had an up year, a down year, an up year. We think, again, it should ultimately be a fairly steady and dependable channel for us, but we have to go through still some of that correction owing to last year, which is, I think, what we're seeing this year, which has led to some very heavy growth, which is fantastic. But what we'd like to see ultimately is kind of a more stable profile going forward. It helps us plan, helps them plan. It also somewhat insulates you from the vagaries of the market demands that are out there.

A common question we get about your wholesale business is how you think about some of these bigger, I won't name names, competitors kind of publicly announcing they're reentering or going after it. So how does that factor in to your thinking about that channel?

It's a factor. But what I would stress is, in many instances, those brands are not our most direct competitor in every category. A lot of categories, some of those brands who were in wholesale and then weren't in wholesale and are back in wholesale. We're not even competing with day in and day out. So I think, again, what I would stress prior to their exit of wholesale, which is prior to the reentry of wholesale, they were there, we competed, we grew share. It's not really, I think, the thing that makes us stay awake at night and worry. We're more worried about meeting consumer needs. But it is a dynamic we're going to continue to watch. I think what we want to stress certainly, in our relationship with wholesale partners is that a steady relationship that invests equally in messaging and the product that benefits the end consumer, that's the path to success. And I think we offer them a unique opportunity even with those other players returning to the market that they should embrace.

So one thing you mentioned about competing effectively in wholesale is newness and innovation, and I won't let you off the stage until you talk about Slip-ins as everyone wants to hear about. So maybe where are you at in terms of that product life cycle and what's next? Like what should we be on the lookout for from an innovation perspective out of Skechers for what you can disclose?

Well, so first, let me say anybody who hasn't tried Skechers Hands Free Slip-ins, you really should. It's a marvelous innovation in the footwear space. And it seems like such a small thing, but when you try it, I think you'll instantaneously understand why it's so compelling at the consumer level. And we've seen a lot of very healthy consumer response to it. I would say we're still very early stages, both in terms of where we're incorporating it into our product, building consumer awareness of the technology and what it does as well as just innovating on the design iterations into our footwear. Ultimately, because the question we always get is what percentage of your product portfolio is it and where can it go? And I answer honestly, we don't know because you got to think about this in the context of ordinary footwear innovation tends to be around a style, a look, an outsole, an upper material, something that is on the facade of the shoe. It's not a feature of the shoe. And what we've done here, I think, and this is very unique is we've incorporated a feature into and on top of all the other innovations. So you get a multiplier effect on the innovation. We will continue to innovate on the look, the style, the material, the colors. But on top of that, we're adding features that deliver comfort and convenience to the consumer. And that's what Skechers Hands Free Slip-ins has done. I think it still has a long run rate to go, both in terms of the domestic marketplace where it's probably most advanced into other markets internationally that are also still incorporating an awareness of the brand. I think the issue that we find is most prevalent. We have to educate consumers as to what the technology does. It's not immediately apparent when you communicate Skechers Hands Free Slip-ins, what it really does it's kind of one of those products you have to try or see before you fully appreciate. But when you do, that's when it makes the most sense.

So a couple of other new areas you've entered, soccer, basketball, can you talk to me about what was the rationale behind entering them? How you see the go-forward opportunity? Are there any other sorts we should be looking out for your entry into?

Well, you'll notice I didn't completely answer the what's next question, which some of you would know. If I were to, my life would be in jeopardy because mentioning what's next at Skechers is not something we're prone to doing. You need to be -- you have to wait for the surprise. On the Performance footwear side, I think the key opportunity we saw was to continue to expand that brand envelope to introduce performance footwear in a more comprehensive way than we've done traditionally. We've been running in golf for a while. But what we felt was we are substandard in terms of our offering. We weren't able to complete the offering, mostly to sporting goods retailers. So we wanted to attempt to build out that offering. What was first and foremost on our mind though is we had to have good product. And so we set out to make some product, demonstrate to ourselves and to consumers that it was the type of product that would suffice in the performance world. So we've built that product. We introduced it. We introduced it alongside athletes. And what we saw is it's a tremendous product. It's equal, I would argue to any other product out there. And so that gave us the confidence to continue to move forward with expanding our performance assortment. You'll see we have football now, pickleball. We have basketball. For those of you who care, we're in cricket globally. We're also doing some baseball shoes, although not marketing those for commercial purposes at this point in time, it's really more brand awareness. But I think what it testifies to is the notion that the product quality is unquestionable. If it works for Joel Embiid, I think it probably works for King on the weekend playing some hoops, right? And so having demonstrated that now we feel like we have an opportunity to commercialize that product portfolio in a more ambitious way, but really globally as well as domestically. And that, I think, will then allow us to look at opportunities both in our own stores, but also with potentially new partners who are more focused on high-performance footwear, more opportunities to reach consumers. There will be more sports, but I'm not going to unveil those, other than to say part of this, I think, has given us the confidence to relaunch running. So we do have some new product that's coming out. If you were at the running event, you would have seen some of that, but that's coming forward as well. And it's again, really with the idea of building out a performance offering that we can take globally and use to kind of attack that category in a more ambitious way while still adhering to the notions of delivering style, comfort and quality at a reasonable price.

Perfect. We'd beat a dead horse on revenue in that area.

I could never beat a dead horse on revenue, especially if it allows you to avoid a question on SG&A.

Well, don't worry, we're going to go there. First, bigger picture on EBIT margin sitting at 10% now, you've put this kind of low teens sort of out there.

You cannot curse a quarter before it's done. That's not done.

So tell me, how do we get to that low teens type of place from here? What are the key levers for [indiscernible] getting there?

I'd say it's funny kind of going into '19, we are incredibly thrilled with the progress we had made on the operating margin line. We were within a hair's breadth of being at $10 billion and then the COVID pandemic hit and all the associated ramifications of that through the supply chain, and that set us back a bit. I'm incredibly pleased that more likely than not this year, we'll be back into the double-digit range on operating margin. So that should be certainly 10% or slightly above that. And I think that's the culmination of a lot of work that, quite frankly, sometimes we feel it goes underappreciated into ensuring that as we grow, that we're also focusing on delivering profitability. To be fair, it's not our main point of focus. Our main point of focus is growing the top line, growing the brand as big as it possibly can globally because we believe that's ultimately what will deliver the most value for stakeholders, but certainly growing earnings alongside that. And it's going to come through that same mix of approach that we've talked about historically, seeing opportunities to augment the gross margin through mostly the mix of business, but also where we can, opportunities to price for value when we're delivering new technologies like Skechers Hands Free Slip-ins and others, but also diligently managing that, I would say, the middle of the P&L, right, for 2 things. One is making sure that we're continuing to operate our business in a fashion that serves the needs of our consumers and our customers, but also building for the future. And that's opening new distribution infrastructure ahead of its need, opening new stores, launching new technologies online that really supplement the retail offering, so you can get to a comprehensive omnichannel delivery at the consumer level. So all of those are factors we weigh. I would say there's no seminal change in our strategy in the near term, which is we want to continue to grow top line. So we want to invest forward in that but we want to do so and still continue to increment the operating margin over time via contributions both from gross margin and some slight leverage from time to time. But again, that's all in the service of growing the brand as big as it can be because that's what we think delivers the most value for stakeholders.

So from what you just said, it sounds like maybe gross margin is a bigger piece to hitting that or talk me through that.

Yes, I think in the longer term right now as we look forward because we will continue to need to invest in the business. You'll see some minor increments from gross margin that we think can drop to the operating margin line. That will be opposite to leverage OpEx. But what I would say at the very least, I want to make sure is that we maintain the existing leverage structure, so we don't delever over the long term. There will be opportunities again to augment that with some leverage, but that's not going to be our primary focus in the near term because we want to make sure we're continuing to invest appropriately for the growth of the business.

Perfect. So maybe just digging a little bit on gross margin, some more high level for Skechers right now, I think, almost peak from what you guys have ever done. What's enabled that step change? And then what is the next lag for how you continue to drive that forward?

It's a great question because there are several factors that have contributed to that. And I think, quite frankly, some of that's gone unnoticed because it's within the kind of the back and forth of COVID that it's happened. One is we focus fairly intently on product-level margins, making sure that we're delivering product level margins that both deliver value to the consumer, but also price appropriately for that. On top of that, we've done a lot of work kind of rationalizing discount structures with wholesale partners, really making sure that we're putting money that we're investing alongside wholesale partners where it matters most, where it's most important. On top of that, I think just a healthier retail environment of late has been good. I would characterize the promotions in the market is very reasonable, very effective at driving either traffic and conversion or both. And so we've really developed, I think, a very strong underlying gross margin fundamentals. And then on top of that, being able to price for the technology that we've delivered, that's all kind of combined to establish what we believe is a very durable gross margin structure that we can take forward and through the mix of business where, obviously, DTC and international are accretive in the gross margin line. That mix gives us increments over the course of time that we can then flow through down to the operating margin. And that should be kind of at least in the medium to longer term, the more reliable contributor with kind of the thing on the cake being the opportunity to find situations where our investments in OpEx aren't going to be as significant as our top line growth, and that gives us a little bit more leverage to benefit from.

Great. So you gave us a little bit of a taste on SG&A, your favorite topic. I want to do a little bit deeper now. It sounds like not expecting a ton of leverage near term. So maybe help us understand what's the message you want us to hear on your expectations for how you're managing SG&A maybe near term versus longer term?

Yes. I think it's really important to consider when we talk about SG&A, it's kind of one big ball of spend, I think, in people's minds, but it's really not that. I mean there's a meaningful portion of that, that for us is variable costs, it's distribution infrastructure it's labor to run stores. It's the stuff that fluctuates with sales. And so there's a portion of that that's going to track generally sales growth. The other 2 buckets are certainly an administrative load that every organization carries. And we focus on making that efficient, but not to the exclusion of all else. And then there's a third piece of it that is really the investment for the future. Again, the example we give, which is, I know, a little bit trite for you all is the store we opened last week, right? That store is not going to be contributing at the run rate operating margin in its first 6 to 12 months of operations. So we're knowingly taking a hit on the operating margin side in the near term so that we can benefit from the existence that once that store starts to become a comp store. Our objective is to have that actually contributing in an accretive way. And so those 3 elements are the elements we balance. The variable piece, it's actually been through some pretty challenging years with the effects of COVID and the knock-on effects of what happened in kind of labor usage and labor rates and all of that. Last quarter, we were at incredibly pleased. We made a meaningful dent in some of the labor management approaches that we have been employing for really a year and drove some appreciable optimization that we're happy with. I think that will continue this quarter, that's excellent. It's really that third bucket, quite frankly, how much are we willing to invest. And that's not governed by any sort of SG&A target as it is, what do we think the brand can grow to? What do we think is necessary to take the brand forward? The best example I can give you that as I'm sure everybody in this room who follows the name knows. We have deliberately overinvested in sales and marketing over the first half of this year, probably first 3 quarters. And it kind of -- that links back to my conversation with you all on Skechers Hands Free Slip-ins. One of the things that we realized is it's an innovation that you have to show people and so we deliberately overinvested on the marketing side. And I assume everybody here has watched CNBC at least once over the last year, which means you probably 7 or 8 [indiscernible] get your Hands Free Slip-ins commercials. But when you think about that technology, and the need to show consumers how it works. Hopefully, you understand why we felt it was necessary over index on the marketing side of that early in the technologies development because we have to show consumers how it works. I think that's proven to be a very successful strategy. You see it certainly in the sales momentum that we've been able to achieve. But it's conscious investments like that to drive the brand forward. That's where we focus most of our discussion because we're willing to take those. And I would say I think that's something that's relatively unique in footwear. There's a lot of brands out there that do a very good job managing for optimizing the operating margin, and I certainly applaud that. I think that's great. Our question is really, are we investing enough to grow the brand? Are we maximizing the opportunity for the brand globally and we're willing to take the operating margin hit in the short term if we believe that's an investment that will pay off in the long term.

And is that approach to marketing that you mentioned around the Slip-ins? Is that different than Skechers approach historically? And does that represent a change going forward as well that you'll invest more?

I don't know that it's a sea change difference, but what was unique about this technology we found is that if you told some -- if I told you that I was going to give you a brand-new slip in shoe, you would immediately envisage something where you show your foot in, you crank down on the hill counter end up destroying it after, I mean that's what you think of because there has been nothing like what we were delivering to the market. And so what we found is if we could show it to you, the conversion, the tendency to purchase was significantly higher. And so that led us to conclude what we really needed to market it. Also, if you've been in the store, you're seeing a ton of visual merchandising that speaks to how you get into the shoe, why the shoe is unique. And so I think that's a little bit of a unique case but not a tremendous departure from the need to make sure that you're in front of consumers, you're communicating with consumers. For us, I think that's also incredibly important because unlike other brands that have kind of made a for way into direct-to-consumer that had been wholesale in the past or vice versa. We've always been pretty balanced between wholesale and DTC. And so when we advertise, we advertise for the benefit of everybody in our ecosystem. It's not -- you will rarely see a Skechers commercial that says, only available in Skechers stores. We don't do that. So when we're advertising, we think of that as a contribution both to our growth but to our retail partners because what we're attempting to do is activate the consumer, not just activate the Skechers DTC consumer. And I think that's one of the reasons we've been so successful operating both segments in parallel for most of our history.

Okay. I'll stop hammering you on things in the income statement. I do want to talk about inventory. Yes, inventory, we'll move there. It seems a little elevated across some of the war players, at least that sit in my coverage, looking at the latest results. So how do you feel about Skechers levels? How do you feel about inventory levels broadly in the industry right now?

I think they're good. I feel good about our inventory. We had a bit of a mismatch kind of from an overall perspective with where the business was and the actual inventory numbers. As we spoke about last quarter, due to some underperformance in China, what we saw is an above-average build there, while we actually saw kind of on-hand levels. The other issue that I think we're all dealing with right now is with elongated in transits from Asia to Europe because the Red Sea has been closed. You're just -- there's naturally more transit time, and that means you're holding on to more merchandise in transit than you normally would. You literally added a couple of weeks. And in that way, you have to fill it with inventory. But overall, we feel really good about our inventory position. We'll work on China. We know that needs attention. But quite frankly, by the time you see those results, the team is already working diligently to resolve that in one way or another. I would say, in general, our sense is that the industry, the retail side is pretty good, much better than last year. We're hearing more positive tonality behind it. To be fair, we're in the midst of holiday and nothing sends people off to the races one way or another, then their holiday results. So we'll want to see how retailers exit that tends to be a bit of an arbiter about where they're going to go in the early part of next year. But I would say, overall, right now, it still seems pretty healthy to us in the channel.

Perfect. Now speaking of holiday, you mentioned earlier, it sounded like a relatively positive early message. Can you elaborate a little bit more on that?

I can't only because I don't want to get too specific other than to say we've seen the results we've seen thus far, and those have been very encouraging. Online, really encouraging stores, good. I think to be fair though, I'd put an asterisk on that because we all know we're going to be dealing with one less week of holiday selling. So what we really need to see is how the entire period stacks up. But I would say so far, again, kind of also consistent with what we've seen year-to-date. It seems like a very steady consumer who's going to spend consciously on new products, new innovation, that's what they're going to be drawn to in the footwear space and that seems to be continuing. So more than anything else, I would note that we really haven't seen a sizable trend change, which is encouraging, but there's still more weeks to go, to be sure.

Perfect. I know we've got about a minute left. So I do want to open it up if there were any questions from the audience.

Short questions.

Yes, very short questions or if anyone has anything. Typically shy. So I'll ask you one final one. Don't worry, I still have many more. You talked a little bit about tariffs, how you're thinking about the implications there. Can you just refresh us on all the dynamics you're thinking about with the new administration, how it could potentially impact Skechers, what's most top of mind for you?

Yes. I mean the topic in general, is top of mind. What I would say is, again, needing something formal to respond to is preeminent. Our solution ultimately is likely going to look like what it did in 2019, multiple strategies from reallocating production to going back to vendors on pricing, potentially looking at pricing on our own to our customers and our consumers. Some semblance of those tactics are what we expect to employ. To be blunt, we would prefer not to see incremental tariffs put in place. We don't think that's necessarily a great thing for the consumer. But we'll deal with it. I would just also just emphasize supply chains are not institutions that change overnight. So it takes some time. We are preplanning where we can to be in a position to respond as rapidly as we can. But that some of the discussion topics out there right now would be some pretty tremendous trend changes in where supply chain and sourcing occurs today, and that would take some time to work through. But we're prepared to do that if necessary.

Great. Well, thank you so much for joining us today. We're right on time.

Great. Thank you.