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

All right. Thank you. Good morning, everyone, and thanks for joining us bright and early here at the Raymond James Institutional Investors Conference. I'm Rick Patel, research analyst covering Softlines Retail Digital Commerce and Global Brands. I'm thrilled to be hosting Skechers. Skechers is the third biggest footwear company globally with distribution across stores, e-commerce and wholesale. The company is widely known for its comfort technologies. And we're happy to have Chief Financial Officer, John Vandemore. So John, thanks so much for being here.

Thank you, Rick. Although I would note the ungodly hour for the West Coast. So if I say anything silly, that's going to be my excuse.

You get extra points for putting in the hard work. So...

I feel like I should get something. It's 4:30 a.m. for us. Come on.

So for investors that are new to the Skechers story, can you just provide a high-level overview of the business and touch on the financial progress you've made over the last year?

Yes. I think the snippet you started with is probably the most important. Many don't realize that Skechers is the third largest footwear brand in the world. We've got an incredibly distributed global footprint. And I think that's what sometimes leads people to under-appreciate the depth and breadth of the brand. Over 60% of our sales derived from outside of the United States. And when you really think about what we do relative to some others in the space, it's a unique offering, beginning with the product. We have a very broad and deep product assortment. We deliver everything from -- on the technical side, running, basketball, pickleball -- looks like a lot of pickleballers in the room, all the way through to on the other side, leisure and casual products. So it's a unique position in the market. It's a unique footprint in the market. But I would also add, we're aiming strategically at a slightly different consumer. We always say that the most important thing for the Skechers brand is style, quality, comfort and innovation at a reasonable price. And when you package all of those value propositions together, I think you understand then why we're unique. We're not aiming at the ultra-premium end of the market. We're certainly not aiming at the lowest end of the market. We're in that middle of demand. But I also think it's one of the most lucrative opportunities in the market, and it poises us well to attack many different markets with many different solutions across that extremely broad product array.

And could we start by talking about Europe. It's an area that doesn't get a whole lot of airtime on the calls, but I feel like it's very interesting. We've seen strong growth out there, and it seems that the company has some dry powder. How should we think about the growth potential there?

Yes. Europe has been exceptionally strong for us, really over the last 5 or 6 years, emanating from COVID. I would have told you at the time that I thought Europe was not going to be one of our fastest-growing regions. It looked like the market had kind of sorted itself out from a brand perspective. And we thought there was opportunity, but I would have to say, we didn't know there was this much opportunity. What we've really seen in Europe over the last 5 or 6 years, is: one, consumer is embracing the brand; two, our ability to go direct to consumer, both in our stores and in e-commerce has been much more attractive and lucrative than we had originally anticipated, but probably more than anything else, what we find in Europe is a significant appreciation for the type of product we bring. Europeans very much love function in their footwear. One of the things that we're most well-known for is our comfort technologies. You probably heard us -- well, if anybody here has watched any financial channel in the last year, you have to have seen at least 3 Skechers Hands Free Slip-ins commercials. If anybody hasn't, raise your hand, we'll get you one in a second. But it's a reflection of what they appreciate in their product. And so when we deliver comfort technologies that perform at the consumer level, we found that it's extremely resonant in Europe, in particular. And so that's led to some significant growth over the last -- pretty much last 5 years, but even the last couple of years directly. I would say one of the things that is -- all good things have their non-silver linings. It is sometimes a challenge to keep up with that capacity, something we've been facing on and off. It's really the good problem of growing almost too fast in certain instances. But it's been an incredibly lucrative market for us, one we know we'll continue to grow well. And we'll continue to move forward over the long term, but certainly a fantastic region for us and one that's exceeded even our own expectations.

And can you also talk about China? Obviously, a very important market, but also a lot of headwinds going on across the industry. So how do we think about the near-term versus long-term potential?

Well, I think that's the right way to think about it, in all honesty, Rick. Near term, I think everybody here has a fairly decent appreciation for the headwinds that we've seen and other brands have seen in China. It's certainly not typical of what we've seen over the last decade. I would say, for us, China remains a bit of a work in progress. We had anticipated that this year would probably demonstrate some earlier challenges and then hopefully some stability. I would say that's still where we're at. We do have to keep in mind for our business last year in China in the first quarter, we grew pretty nicely, I think, about 13%. So we are also kind of facing a difficult comparison in the quarter. But more importantly to us, what we're looking for is signs of consumer stability, consumer discretionary spin stability in particular. You have seen of late some actions from the government to get the macro environment a little bit more stable. I wouldn't say the problem is solved. We're not yet ready to declare that the market is fully stabilized, but it does seem to be inching in that direction. We're monitoring the results relative to our, I would say, very modest expectations for the first quarter through a couple of months. It seems to be in line with that. That's not to say it's been fantastic or terrible. It's just been in line with our expectations. I think what's exceptionally important, though, with China is to look to the long term. It's a market for us where the brand is extremely strong at the consumer level. We know there is a substantial opportunity to continue to grow the brand. And I would even add, for us, we believe there's still incremental opportunity with some of our comfort technology, some of our product. It really hasn't had an opportunity to settle into the market as it has had in other markets. And what we know is when we bring those comfort technologies to a market, eventually, it reaches a level of penetration, pretty similar across the globe. And China for us still represents that opportunity. So I think part of the recovery in the consumer will be matched with our own ability to get the right product in from a comfort technology perspective, and that when the market heals will poise us well for continued growth. Because what I'd want to make abundantly clear is that despite all the hullabaloo, shall we say, between the U.S. and China right now, we still think it's a fantastic market, an end-user market for us.

And can we shift gears and talk about the opportunity by channel. So in the past, you've talked about the importance of the D2C channel, how that should be an outperforming channel over the long term. Should we think that way about the outperformance in 2025 as well and what drives that?

Yes, no. The problem with giving you guys long-term guidance is no sooner do we do that, then we have a year that's slightly off-kilter from that. I would actually say this year, our expectation at the moment is that we're probably going to see more balanced growth. That algorithm for the long term certainly holds true. We believe international and direct-to-consumer hold for us the biggest opportunities. And that's certainly where we're putting our investment dollars, both in terms of infrastructure, but also new paths to the consumer. I would say in the short term, partly because of the -- some of the headwinds we see in China, we're probably going to see a bit more of a balanced growth this year, which is still good growth. We still expect it will probably sort out to be a kind of a high single-digit number when you take into account foreign exchange headwinds. And that just means that this year it will be a bit more balanced than we would expect long term. But like I said, long term, that algorithm remains intact. DTC, both e-com stores and then the international wholesale side of things, those are our most lucrative opportunities. I would set aside just because in case you don't ask, it doesn't mean that we don't think there's opportunity in the domestic marketplace. We absolutely do. It's just not as fast growing, not as robust, not as verdant as I would say, we see in international markets.

And can you double-click on the -- within D2C, how should we think about the potential between stores versus digital?

Yes. That's -- I would say that's a constant weighing we do. I think that if anybody were to tell you they know the endpoint evolution of digital commerce relative to brick-and-mortar commerce today, they'd be being a little bit dishonest, in the sense that the consumer continues to evolve. I'll use the first part of this year as an example. We saw weather become a factor again. It's been a while since we've all talked about weather. But on the retail brick-and-mortar front, the weather was an impact, but we saw a lot of that get made up through e-commerce. So the consumer today is very quick to pivot to whichever offering solves their need most immediately or most efficiently. And so I would say we still believe there's tremendous opportunity domestically to grow our store estate, largely freestanding big-box style stores, probably not a lot of mall-based stores. And as everybody here knows, the outlet segment is not growing that quickly. There's a lot of outlet malls out there. They're very productive, but they're not growing as quickly as what you'd see in a freestanding retail solution. And so I think we'll continue to move the store state forward, but it will be in conjunction with -- in combination with what we're doing from an e-commerce perspective. Because again, I think at the end of the day, the consumers often don't care. They don't wake up in the morning and think I really want to go shopping for a pair of shoes in a store. They just think they need to go get a pair of shoes. And so our challenge is to make sure we're continuing to offer them solutions, both digitally and physically that solve whatever needs they have.

And let's talk about margins. Start with gross margins. I'd love to understand the puts and takes as you think about how this year is shaping up. And obviously, you can't talk about margins this year without talking about the very fluid impact of tariffs. I'd just love to get your thoughts on that?

Yes. I joked with Rick before. Between when I left my hotel room and I came down, I had to check and make sure there were no new tariffs before I answered any questions. So let me caveat all of this. This is based on what I know at this single moment, which isn't often a long enduring knowledge base. And I do have to say what we said when we announced our year-end results and our fourth quarter results was that if the tariff structures that we were aware of at the time, which was an incremental 10% on China and a potential 25% on Canada and Mexico, that we could absorb that, that we had a pretty solid path to absorbing that. Unfortunately, they didn't stay stable for long. And I would tell you right now, we're in the process of assessing what these incremental tariffs mean. So anything I say is going to have to be caveated with the fact that we have yet to fully assess what that means. I would even point out that some of the rules relative to that increment are still up in the air. That all being said, if I were to strip that effect out, what I would tell you is that over the last 5 years, we have done a very good job of growing our gross margins through a combination of really focusing on the value we're delivering to the consumer, emphasizing our comfort technologies, and in many instances, rationalizing what were kind of the inherent costs built into the system prior to that point in time. This year, our expectation is generally for kind of a flat mix-adjusted gross margin structure prior to this latest announced round of tariffs and anything that comes in the future because that's the big unknown. And in reality, with all due respect, that's all we can plan for at the moment. Things are changing so quickly that, that lack of stability really makes giving any forward perspective difficult because there's so much uncertainty. What I can tell you is at a product level, we believe we're delivering an attractive value proposition for the consumer that's yielding significantly improved gross margins, and we'll continue to do that. We'll continue to focus on that. I anticipate that your next question would be, "Okay, what are you going to potentially do if there are more tariffs or with these tariffs?" And the answer is simply going to be the same things that we've done in the past. Whenever we're faced with challenges like this, we work very closely with our vendors. We look to them to absorb some of the impact. Obviously, we have to look at where we're sourcing goods. That's not something that can be moved immediately and it's not cost free, but that's a solution. But the honest answer at the end of the day is after you take those 2 options into consider and you have to look at price. We, as a company, we believe our shareholders require, and we will be taking hard that we need to defend the margin that we have achieved. And so I think it's going to be -- all those arrows are in the quiver, so to speak, but definitely, we'll have to look at all of them.

And help us understand investment spending as well. I think Skechers has a track record of investing ahead of growth, and you have a lot of growth ahead of you. So how do we think about the investments you have planned, both this year and what you need over the long term?

Yes. I only chuckle because David would say he's never made an investment on time. He's either too early or too late. And the too late usually means you're outgrowing your original projections. We do invest heavily on our infrastructure. That's everything from distribution to stores, to technology to enable stores and digital commerce. That's something we pride ourselves on. Look, I think the good problem to have when you're outgrowing your infrastructure is that you are constantly chasing on the investment side. I mentioned Europe. Europe right now, we're a little bit processing constrained. We're having to add faster than we had anticipated because that market is growing faster. We do have projects slated to resolve that long term. But in the near term, that's going to be a bit of a headwind. So there are situations like that, that materialize from time to time, and that's the one we're facing in Europe right now. I would say, outside of that, we're looking to invest in our core distribution capabilities for the long term. What we know is when we make those investments, we get more efficient on a distribution cost per pair basis. It does take some time to materialize, but we do make those investments with the eye towards creating greater efficiency. Today, we're on the verge of making really 3 major investments, one of which is pretty sizable in the year from a CapEx perspective. Those 3 evolve around our distribution infrastructure in China, which is a distribution center capacity enhancement that's been underway for a year or 2 and will continue. We're planning in the next 2 to 3 years to begin a pretty significant expansion and consolidation of our distribution capacity in Europe. But what's most notable this year is we're adding storage capacity to our U.S. distribution center, pretty sizable. It's a big chunk of CapEx in a given year, but the benefit of that investment over the next 20 years is undeniable. And so we are taking the time at the moment to put some infrastructure into the ground that we know will enable the continued growth of the business for the next 10 to 20 years, even though in the year, it looks like an exaggerated CapEx amount.

So let's zoom out and talk about customer acquisition opportunities. Maybe starting off with who your core customer is, and we get that question often from investors. So who is your core customer? And where do you see the opportunity to capture more?

So if Robert Greenberg were here, I think you would tell you that our core customer is anybody with feet, and he's not too far off. I would say I do believe there's a general misperception that we occupy kind of the ends of the consumer spectrum, children, clearly, but also more established, more dependable kind of consumers at the other end. But the reality is if you actually look at our demographic spread, it's more even than that. Certainly, we play very, very well with what we would consult kind of children up until their teen years. And then we tend to pick consumers up very well when -- in all honesty, when people have to pay for their own goods. Before you pay for your own product, you're not as concerned about all those other qualities we mentioned: style, comfort, quality, innovation. The reasonable price for anybody here who has a teenager, you know that doesn't enter anybody's calculus until they start paying for their own stuff, right? So that's where we tend to pick consumers back up. But even in between, we have a pretty decent base of business. I would also go as far to say, just from an income spread, I think there's also a misperception that we are anchored in lower or mid-income tiers, but that's actually not the case at all. What we tend to find is our brand resonates with individuals who seek value, and that is not limited by your income or your average household income or any household income measure. It's really more of an attitudinal element around, "Do I feel like I'm getting good value for the money?" We have consumers who have incredible household incomes, and we have consumers who have more modest. And the brand works very well for those who want value across all those income demographics.

And can you tell us where you are with Slip-ins? So a really successful franchise for you. We've seen the commercials. They are great. So like -- it's couple of years in now, like where is it in the maturity curve and where are you seeing incremental gains?

Yes. Well, first I'd say, I would be remiss if I didn't encourage everybody here to try a pair of Skechers Hands Free Slip-ins Shoes. If you're lazy at all, if you don't feel like bending over to put on your shoes, this is the shoe for you. I would also add, it's actually incredibly comfortable. Some of the technology that adheres to the notion of having the Hands Free Slip-ins technology actually makes the shoes extraordinarily comfortable, even by our standards. So I would encourage you to try it. I would tell you, the honest answer is I don't know. I don't know because we're still seeding the market with awareness. We're still moving the product design and development along in a way that changes almost the way the look and feel of the technology appears at the consumer level. And so what I would say is we know it has a long way to go. I don't know if that means ultimately that it will be an X, Y or Z level of penetration. I would also caution that sometimes I believe people mistake our technologies, particularly our comfort technologies with an outsole look. So there are certain brands that do very, very well because they have a unique look, something you can see on the shoe, you can appreciate. Skechers Hands Free Slip-ins is not that. There certainly are elements to that, particularly in our early-stage designs, but you should think about it as a component of that in a shoe. And so what it does when it's a component like that is it can be actually insert into a lot of different categories. I would tell you today, Skechers Hands Free Slip-ins as a shoe, as a traditional sneaker works very, very well. But we also have an incredibly successful -- don't chuckle because it's actually legitimate, Skechers Hands Free Slip-ins sandal. It's a sandal. And what it does is it uses the same technology, allows people to get into the sandal more comfortably and actually positions the straps of the sandal in a way that actually holds your foot better. And so we're still deploying the technology in a lot of different areas, and that's where I think some people don't realize and even we don't know where the ultimate resting place is from a penetration standpoint.

Can you also talk about your initiatives around performance footwear. As we think about athletic shoes, there's a lot of competition out there. So where do you see opportunity to add differentiation to the market?

Yes. For those of you who aren't aware of our recent endeavors, we launched Skechers football/soccer for all you Americans. About 2 years ago, we launched basketball. About a year ago, we're going to relaunch our running program. This coming year, we've launched Skechers pickleball shoes, and we're looking at other categories, really focusing on the more technical side of the solution. The honest answer is, though, what we're attempting to deliver there, quite frankly, is the same thing that we attempt to deliver on every other: it's style, comfort and quality with innovation at a reasonable price. We believe there's an opportunity for a reasonable priced technical solution in a lot of those categories. But in addition to that, I want to make sure that when you think about that, you open your aperture beyond just the United States. I find -- a lot of times people think about the technical footwear market, and they very quickly gravitate to the U.S. model, which is heavily dominated by a couple of brands. But when you actually pull back outside of the U.S., you actually see a lot more white space opportunity, particularly when you have a solution that offers more value for the consumer. In addition to that, I would tell you also, those categories for us allow for an introduction of a consumer that we don't typically see. It's not in every instance, the same consumer that we're marketing our leisure shoes to our athletic nonperformance shoes too. And so it also avails us of a consumer touch point that we don't have today. And we found that, that even is opening up eyes. Because the most difficult sale for any brand, but even ours is that first sale. Once we get you into a pair of shoes and you realize how comfortable they are, how high quality they are relative to the price, that opens the door for consideration for other categories. And the strength of Skechers is if we put you into -- put you into a golf shoe, say, and you really enjoy. Obviously, it's comfortable, it's reasonably priced, but it's high quality, does the job. Then when you next go to the store and you see a pair of soft toe mocs or some other solution, you're willing to try it. And when you see that, that value proposition is reinforced in that second pair, then you become a very strong consumer for us because you realize that what we're delivering is consistent across categories. And we have so many different categories to solve so many of your footwear needs that it represents a very unique opportunity. And it's one of the reasons why we believe our stores, our retail footprint does so well is because that's where we can personify the assortment most significantly to the consumer and where they can trial other categories that they may not have been introduced to the brand through.

And can you help us understand the go-to-market strategy around performance footwear? I believe you spent a bit of time actually creating a product that's new and differentiated. So you have the product now. At what point are you in the seating process? And when do you pivot to hit the accelerator?

Yes. I think that's probably not going to be a question that's answerable by a definitive timeline because the reality is what we know about footwear is sometimes it takes time. Maybe a market takes time, maybe a retail solution takes time. You're very correct in saying that we are in a bit of a seating stage. We've opened up categories in many markets over the last year, particularly football and basketball. But they're still very early stage. We're also very early stage in messaging around the product. What we want to do is find a nice combination between awareness and availability in markets before we start pushing hard, but that will come. That will certainly come and that will be on the forefront in the next year or 2. I would say we're going to throttle it according to what we sense in the market, not some preordained timeline. In our view, that's generally where brands get into trouble when you determine that the consumer is going to be appropriately aware of my technology or my solution on this date, and that's when I'm going to launch it. I think that's more for us a bit of a qualitative factor that we need to sense in the marketplace, we need to see in consumer feedback. We've been showing the product for a couple of sessions now. And when we start to see kind of that momentum tip, that's when we'll prosecute the sales more aggressively. But right now, I'd still say we're in the seating phase.

And to wrap things up, can you touch on the balance sheet and your priorities for capital allocation?

Well, this year, a lot of capital is going to be spent on some of the projects. As I said, this is a bit of an outsized CapEx year. Traditionally, though, our mantra is to maintain a very, very strong balance sheet. We think that's important in our industry. I think even you've seen over the last 5 or 6 years, kind of the working capital demands in footwear and apparel can creep up pretty quickly, and they can be fairly volatile. I would say that apart from that, we look to deploy capital in the same way most other brands do. We look for highly accretive investments we can make internally. We do look at inorganic paths to growth, but that's not been our bailiwick really. And we want to be very judicious if we're ever going to consider something like that. And then our traditional path to returning cash to shareholders is through share repurchases. I would say that for us right now looks like a continued path that will be throttled by other factors depending upon price and where we are on our working capital spend for a given period of time. But that will be our primary means over the long term. And we have a share repurchase authorization that we put in place last year for $1 billion. That's what we'll continue to use for the time being. But I would say the most important priority for us is maintaining a really solid balance sheet, especially when you start to look at anything approaching turbulence in the marketplace because that's when we feel like it's most important to have that extra muscle. It helped us in '22 and '23 when we had to absorb incremental inventory investments, and we don't ever want to be at a loss for the ability to do that on our own. And so that is our far and away #1 priority.

Great. Well, that's all the time we have. So thank you so much, John, for joining us, and thank you all for your interest.

Yes. Thank you.