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

All right. Well, good morning, everybody. Welcome to UBS' 2025 Global Consumer Conference. It's great to see everybody here. I'm Jay Sole, UBS' retailing department stores and specialty softlines analyst, and I'm super excited to be joined by John Vandemore, CFO of Skechers. Skechers is one of the great stories in Softlines over the past 20 years, double-digit growth on an annualized basis. I'll let John tell the story. But I do want to read the disclosure statement real quick. I think you got to get us out of the way once for the conference. As a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any companies on which I express a view at this conference today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the event. Now what we're going to do is, John, I'm going to do a Q&A session. We're going to go for about 42 minutes and 38 seconds. We've got a little clock up here. And then that will be it.

So first, John, I want to start big picture and then dive into some of the details later. But Skechers is the third largest footwear company in the world. And I think I know you said that all the time. I said that all the time. And like I just mentioned, the company has grown its top line at a double-digit rate for over 2 decades, which I think is a remarkable accomplishment. And I know these facts surprise people. I guess, what's been the key to this exceptional top line growth?

Well, first, thanks for having us. We appreciate it. Thanks also for mentioning we're the third largest footwear provider in the world because that saves me from having to say it 3 more times later. I think really when you think about footwear, it's a very competitive business. What distinguishes Skechers from some of the players, particularly some of the bigger players, in fact, is our breadth and our depth. Breadth in the sense that we offer a lot of different categories of footwear. What you generally find in footwear is a brand will stake out ground in a particular category. Some will be focused on basketball, some on running, some on cleated, some on collabs, clogs, what have you. What I think distinguishes Skechers is we play in almost every single one of those categories to a degree. Our focus is less on a category than delivering what we always cite as kind of our 4 main value propositions to the consumer: style, quality, and comfort at a reasonable price. And so I think that focus on delivering really, at the end of the day, characteristics of footwear, not just a category, is very unique. And then the depth is our distribution. Most people don't realize how large Skechers is, particularly domestically because 62% of our revenue derives from outside of the United States. One of my most treasured moments, pretty much every single week, is when some of you or others, I know, travel and they'll be in Portugal and they'll snapshot a Skechers store. They'll say beautiful store in Portugal, who knew. And I said, well, we get 5,600 stores, I knew. And it's really that footprint, that global footprint, which is incredibly unique for a company at our kind of stage of development. And what it allows us to do is to take that breadth of product assortment, which includes price points as well as categories and put it in almost every corner of the globe. Today, we operate in roughly 180 countries across the globe, which in case you don't know how many countries there are, it's a pretty high percentage. And so that combination, I think, of both where we position ourselves as well as where we are able to reach the consumers is what makes us so unique.

Well, John, I want to follow up on that point talking about the distribution model because there's some brands, if I want to buy some from their brand in New York City, they may have a flagship store here in Manhattan. And then they might have an outlet store, and now we're north of here at Woodbury Common, but they have no other physical distribution, and it could be a very big brand. Skechers is amazing because Skechers can be anywhere the consumer is, whether it's DTC, whether it's outlet stores, neighborhood stores, flagship stores, stores in A malls, B malls, C malls, whatever outlets, plus all the wholesale distribution. Can you just talk about how that's developed and how that makes that distribution model really unique versus all the competition that's out there?

Yes, this is where I would normally try to convince you all. It was a very strategic move early in our lifetime to be a balanced DTC and wholesale player. But in all honesty, that's not the truth. When we started as a brand, what we knew is we had very good product that met consumer needs. What we also knew though is we weren't going to get carriage from a wholesale perspective to really do justice to what we were developing. And so we started very early with a strong DTC component. I don't have a picture, but if you ever saw our first DTC representation, you all get a pretty good chuckle out of it. But what it allowed us to do then is develop the business kind of side by side with a very healthy wholesale base which gives you incredible economies of scale, incredible turns from a working capital perspective, but also then to nurture DTC business alongside that. Today, we're almost perfectly balanced between the 2. But what it gives us is the ability to attack any market from either side. And ultimately, usually both. So we can have a thriving wholesale business alongside a DTC business that spans both stores and online. And it's largely underpinned by our philosophy that we're not in any position to determine where consumers should buy our product. We just want to be in their path to purchase in some way, shape or form. We want to put the product where the consumer wants to buy it, not necessarily where we want them to buy it. And we want to make that as bountiful and plentiful as possible across the globe. So what we normally do is attack a market from one angle or the other to begin with, but then ultimately spread to both because what we are very talented at doing ultimately is operating primarily in almost every market.

Got it. All right. I want to talk about gross margin, too, because I think one of the undertalked about stories of Skechers is how consistent and steady the gross margin has expanded over the last 10 years. If you go back roughly 10 years ago, it was about 44%. And if you look at last year, I think it was 53%, and that was up 125 basis points year-over-year. And what's important to note is this has been an environment where a lot of your competition has been very promotional. There's been a lot of dislocations, COVID, everything, all these things, FX is kind of move against companies, U.S. companies, I should say. Yes, Skechers just -- the gross margin has been so steady and so steadily growing. What's been the key?

Well, actually, it's never one thing, right? I think there's been a concentrated effort we've applied to drive gross margin. But really, gross margin is just a sign of driving value for the consumer. One of the things we've done is like others gone through and try to clean up where we can in the sort of discounts or pernicious programs in place that weren't contributing to the gross margin in one way or another. But really, the primary focus has been on products, developing product that delivers more value to the consumer. We always say we're not looking to be an inexpensive shoe, a cheap shoe. That's not what we're doing. What we want is to carefully balance the value we're contributing to the consumer with what we charge. And I think we've done a lot on the product side, particularly from the innovation side to drive that. And that has improved our gross margin. I'm going to assume everybody here has seen, judging by the group of about 10 Skechers Hands Free Slip-in commercials on CNBC or some other channel. But it's a really good example of where we've implemented technology in line with one of our core focuses, which is comfort and driven more value at the consumer level. And what that's allowed us to do over time is to give more to the consumer, but also get more in return. And what we've really seen over the last, I'd say 10 years, is that consumers are incredibly savvy. In footwear, they want something that contributes positively to them. They want innovation, they want newness. And when you deliver that, they will deliver back in appropriate pricing. And so we've been able to capture that and accrete the gross margin. It also doesn't hurt that as we build kind of both sides of the business, we get the accretive effect of a DTC business that's growing a bit faster than the wholesale business. But the primary driver has been delivering more value to the consumer and being able to extract more value from a price perspective and return.

Makes sense. Maybe as part of that, we can talk about inventory management for a second because -- for people in the room that have been watching Skechers for 20, 25 years. I mean there was points in the past where inventory gets a little bit out of control, but the last 10 years have been very steady. And I think it's another one of those elements that maybe doesn't get talked about enough because it's like you only notice it when it's a problem. But can you just talk about what is Skechers do that has made the company so good at supply chain, made it so good at controlling inventory and sort of keeping the inventory not just on trend, but in the right amounts in the right places?

Well, Jay, I think anybody who hasn't been in retail doesn't probably fully appreciate what inventory can do, both from a positive and a negative standpoint. David, our Chief Operating Officer, has a saying that if you're not watching inventory every day, you really shouldn't be in retail. And I think that really emphasizes the importance we put on inventory management. And it's a tricky thing. I think it's getting trickier by the moment here in the most recent month or 2, but even over the time span of COVID and the effects thereafter. Core focus for us is really making sure the inventory remains healthy, not as much for financial reasons, although that is important, but really to make sure that we are able to continue deliver newness and new innovation to the consumer. If you have stale product that starts to clog the channel, what you're prevented from doing is getting your best, newest, most value-additive product to the consumer. And to us, that's the main objective is you got to keep the inventory clean so that you can continue to deliver innovation and newness to the consumer. Now there's a lot that goes into that. You have to watch channel inventories carefully. You have to watch your own inventories carefully. The other thing that we don't do that some other brands do is we don't take a lot of inventory risk. We don't like to take inventory risk. So generally speaking, when we're dealing with inventory, it's either a booked order or it's intended for our retail distribution. And then I think we're advantaged on the retail side, in particular, for having a store estate of format that we can move product through if we ever need to. I mean ideally, you never have to do that, but I think managing the totality of what you have in the inventory in order to make way for a new product is our primary focus.

Okay. One more sort of big picture question that I want to kind of dive into some of the 2025 topics, but company has always kept a fortress balance sheet. I mean I think even today, almost $1 billion net cash position. Can you just talk about how -- why the company has taken this approach to always have a fortress balance sheet and how it's really served the company well over time and why you want to continue?

I mean it partly links to, quite frankly, your prior question. In an industry where inventory can be a tremendous, immediate drain or source of working capital needs and then cash. You really need to be positioned to withstand that without, quite frankly, relying on other parties. I think COVID is a great example of this. Our balance sheet during COVID was a tremendous asset. We didn't have to go to banks. We didn't have to go to anybody to navigate through the short term and then the longer term duress of both too much and too little working capital requirements. At one point in 2023, if you recall, we probably had to put about $0.5 billion into inventory. It's all good inventory, order backed inventory, but we had to put that in because of the supply chain disruptions that we had seen post COVID. That's not something you can do unless you have the balance sheet to absorb that. And so I think the experience that our executive team has in particular in retail, particularly in footwear, gives us some insight into the necessity of maintaining a very strong balance sheet to withstand those moments because those are the moments quite frankly, where companies either live or die. And obviously, we want to live. And so maintaining that fortress like balance sheet for us is a preeminent focus. I would say from there, when we feel like we have the strength we need to withstand kind of the [vicissitudes] of the market, we do look at other ways to deploy capital, including returning cash to shareholders, but that rock-solid balance sheet is really important. And I would highlight in the current environment even more so. This is the type of environment we're in at the moment where having that balance sheet is going to be incredibly important. And so we want to make sure that we maintain that posture of strength.

Okay. Great. Let's talk about 2025. You just alluded to it. It's been a wild start to the year. Maybe let's just talk about what you're seeing there from the consumer first in the different regions. And first, what are you seeing from the consumer in the U.S.?

Yes. I mean my big update is going to be no major update at this point in time, which I think hopefully is news to a degree. I would say we have seen interesting patterns emerge in the retail environment in the U.S. that are not quite what we had expected going into the year. We've seen more volatility week-to-week owing to factors like weather, the timing of tax refunds, buyers, a lot of exogenous events, quite frankly, that we believe have been impacting the consumer and consumer traffic. On the plus side, for us, what we've seen is a lot of consumers then pivot out of store activity into online activity, and that's been incredibly healthy. The net effect of all of that, quite frankly, is at the moment, what we see is a consumer who continues to be interested in spending on the right things, still a careful consumer, making good value judgments. And a consumer for whom our brand continues to resonate, particularly our focus on comfort and comfort technologies. That all being said, I think it'd be silly not to acknowledge that there's been a lot of noise lately for the last 6 to 8 weeks, particularly we're watching kind of the state of the consumer carefully. But at the moment, at least in our business and for our brand, we haven't seen a material change of note that I would call out, but it is something we're watching carefully.

Okay. maybe sticking with the U.S. for a second. I mean what have you heard from your wholesale partners in terms of their view of just all the noise that's out there and their willingness to place orders and sort of continue to do business as normal?

Yes. I would first acknowledge when we're talking about wholesale partners, they're always a little bit skittish, right? It's a tough business. It's been a tough business for a couple of years. I think we've coming up a pretty decent holiday. I would say, generally, kind of the uncertainty that is prevailing in the market as a whole is having an effect on at least the psychological positioning we see thus far. We haven't gotten deep into conversations about order books for later in the year and early next year. So it's a little tough to tell with any degree of certainty how that's going to impact their order flow as of yet. I would certainly say there's a more cautious tone than there has been maybe the last 2 years. But I would also point out, over the last 2 years, we've seen incredible swings, right? '23 for us was a very challenged year on the domestic wholesale side. '24 was a fantastic year. So some of that, I believe, is simply inherent in kind of the state of affairs in retail broadly. I think what we'll tell for us the most is when we actually get those partners in front of product, and we can actually give them the product presentations. We can show them what we're working on because that's really when you get the best feedback. And I would note, sometimes what we hear is different than what other brands hear. So I think that will need to kind of fair it out over time. But at the moment, I would say there's definitely more cautiousness borne of the uncertainty that's prevailing large in the economy. I think that's probably the best way to characterize it at the moment.

Okay. I'm sure there's a lot of talk out there about a potential U.S. recession. How do you think about the company and the brand in that potential scenario? I mean would you expect trade down? Would you think that people would -- that Skechers maybe, as a value brand, could maybe outperform other brands a little bit if that's the case?

Well, let me be clear. I certainly don't wish for any reason, a recession. I don't think that's a rising tide that lifts any boat fondly. That being said, in an environment where consumers are feeling more pressure, and because we believe footwear, at some level, is less of a discretionary purchase than a necessity, we certainly would prefer to be a value-oriented brand, again, delivering good value for the money at a more reasonable price range than other brands. That's not to say the brands won't do well, but I like our positioning in that type of environment because we do believe we deliver to the consumer a unique assortment or selection with very reasonable prices to choose from. And again, like I said, there's a piece of footwear that is not discretionary. You can't send your children to school without shoes, at least I don't think so. And so one of the things that we rely on is there's a steady state demand built into the footwear industry that is just by necessity fulfilling needs for work, school and the like. And so for that reason, we believe there's a little bit more durability to some of that demand than maybe in other categories. But I want to be clear. I mean, we're not wishing for that. We certainly don't hope that. We much prefer an environment where the economy is thriving. That certainly is the most positive propellant for consumer behavior.

Okay. So we talked about the U.S. in terms of consumer behavior, what are you seeing in China?

China is performing basically in line with our expectations, which I think, from a positive perspective, would lead you to believe there's some stability emerging in the market, which is good. Still a market that we think has vastly more potential than what we're seeing in consumer behavior right now. I would add, it still looks to us very much like a macroeconomic-driven issue. When we look at what other brands are talking about in China, what they're experiencing, what kind of our partners downstream are experiencing, the general tail is that it's a consumer discretionary pressure that's applying on the market broadly. There are a couple of brands out there who have noted that they have slightly better performance. But when you really look at those, they tend to be smaller, very nascent brands in the market. I'm optimistic that China will begin to improve upon where it's been sitting for the last 2 to 3 quarters. Our hope is that with stability can start to reemerge some consumer discretionary demand patterns that we've been missing. Also I would hope that the government starts to apply a bit more stimulus than they have to date. That's something that we've heard about. We haven't seen yet and we'd like to see, particularly in the consumer discretionary space. I would say most importantly, though, there's nothing in our view that has diminished the growth opportunity in China on the long term. We continue to invest in that market, particularly at the moment with distribution capacity. But the brand is very strong. It resonates with consumers. We've got good distribution. And more importantly, we've got very good prospects for continued growth when we get past this point in time. So we're excited about what China offers us. I think just in the near term, there's probably going to continue to be a bit more headwinds. As we noted, as you probably recall in the last earnings call, the first quarter is going to be the most challenged for us because last year, it was probably the last robust quarter of growth. So we do expect the first half of the year to be a bit more challenged. But again, seeing stability with the potential to some churn. And then we're going to be taking efforts in that market to be a bit more stimulative with our consumer, particularly around our comfort technologies that we think will yield some fruit.

Okay. And then maybe just lastly, if we think about rest of world, Europe, obviously, a lot of stuff going on in Europe as well. I mean, what are you seeing broadly outside of the U.S. and China?

Yes. I mean, sticking with Asia Pac for a bit. I mean really outside of the challenges that we've seen in China over the last couple of quarters, the balance of Asia Pacific has been doing phenomenal, a lot of really good long-term prospects for us there, India, which we didn't talk about yet, but hopefully, we will, a thriving market, one where we believe we're getting past some of the regulatory hurdles that have been a bit of a supply obstacle in that market. But even just thinking about Malaysia, Indonesia, the Philippines, Thailand, Vietnam, all very [emergent] markets for us. So we're excited about that. South America continues to be a very good spot for our brand, very good brand recognition, really good success in certain markets and some really good opportunities that we're exploring and others. And then Europe, which, to be honest with you, I have under accounted for a couple of years now, and we'll do so no more, continues to be a very strong market for us, both on the developed side, but also on the developing side. Despite innumerable challenges in that market, we've continued to see very strong growth and really good resonance with the brand. The European consumer very much appreciates functionality in footwear. It's one of the key differentiators between the consumer there and in the U.S. And so delivering things like comfort technologies, but also technologies like waterproof, water resistance, those have resonated really strongly in that market. So it's one we continue to be very excited about and seen really, really good results.

Well, just on that point about comfort technology. I mean, are you seeing any trends in the market? So independent of macro. I mean are you seeing any fashion trends or opportunities that have emerged this year?

Well, I mean, we firmly believe in the message around comfort. I haven't yet met a consumer who would say, I prefer an uncomfortable shoe, which is unfortunate because I have a lot of suggestions there. What we then see as kind of big trends, you're still seeing stack heights in certain categories, you are seeing low profile emerge in others. What we see with our consumer is actually continued gravitation to our premium technologies, which are very focused on comfort, Skechers Hands Free Slip-ins, it's Arch Fit, it's max cushioning, it's our Hyper Burst technology. I mean, honestly, Wide Fit continues to be a very in-demand product. We hear more and more needs for. So our focus on comfort really is what we're delivering to the consumer and what we're seeing the consumer come to our brand for, but it's not without those influences of fashion. So in addition to innovating around comfort, we're innovating around style and look. We have a couple of products that are coming out, some of which I don't want to talk about here, but innings you can see some of the examples later, some newer products that are coming up that are resonating really, really well. And that's even before we market against them. So I think what you can continue to expect from Skechers is that we'll be bringing innovation at the consumer fast and furiously, but with an eye towards, again, staying on trend with style, comfort and quality at a reasonable price.

Got it. Okay. A lot of talk out there, maybe not for Skechers, but other brands and maybe, oh, it's consumer is a little choppy. There's noise, fires and all these things and tax refunds have impacted the consumer in the first half -- first part of the year. What do you see in terms of the promotional environment? Some of that stuff led to maybe inventory build in other places where now you're starting to see brands get more promotional. That's both U.S. and globally, but what's your take?

I don't know that we've seen a lot of change in kind of promotional depth or cadence. I would say there is a lot of uncertainty, I think at the moment, that's more headline driven than actually business-driven. I mean, look, when promotions work well, they stimulate either traffic or conversion or when they work really well both. And we're still seeing those as effective solutions to offer consumers. And so where we're seeing promotions, they're generally having the desired effect, which is to get people in the store, get people to convert. I would say our promotional cadence has been fairly consistent. Kind of year-on-year, we haven't really changed anything markedly. And I don't know that you've seen anything in the market that has changed materially, but I would expect that if uncertainty continues to prevail, that's something we're going to have to watch, particularly from other brands, just to make sure that we're cognizant of what's happening in the market. I think on the flip side of that, and I suspect at some point in time, you're going to -- utter the T word, there's also the effects of what we're seeing from a landed cost basis. And if that's going to get pressured, then I think that companies across the board are going to have to look at things like pricing. So there might be kind of polar opposite effects taking place at the consumer level.

Okay. Well, I want to get to that T word in a second, but just, I guess, the promotional environment, that makes sense. In terms of just the inventory, when you look across from your brand, obviously, and other brands, I mean, how do you feel about the inventory situation that you see out there globally?

I think it's good. I think it's good. I mean, we're coming from a period in '22 and '23, where there's some pretty tremendous challenges. From an inventory perspective, when we look at channel inventories, we look at our inventories, we feel really good both about the quantum, but also the composition and how much of it represents some of the newer products from us, and haven't really heard a lot about inventory congestion being a near-term focus for some of the brands. Now that's always a concern that's just not too far away against any sort of subpar performance, should that emerge. But at the moment, I would say generally pretty good, pretty healthy.

Okay. And maybe let's talk about tariffs for a second. Obviously, it's changing constantly. But for what we know today, I mean, how are you thinking about the impact of tariffs on the business this year?

Well, let me first applaud. We went 22 minutes before we really got into that. That's a record. Well, first, I would say, we're not a fan of incremental tariffs certainly in our industry. For those who aren't aware, they're pretty sizable tariffs to begin with. So it's not like we're starting from 0 and we're applying tariffs on top of that the 301 tariffs from '17, '18, still in place. And so it's a pretty heavily tariffed industry to begin with. Without being political in any way, shape or form, we're certainly not believing that's going to be incredibly good for the business. We're going to have to manage through it. I would say today, much like we've said, for the last 5 years, right? If there are landed cost issues, concerns, we have 3 primary tools that we can use. When it comes to tariffs, those are honed pretty specifically. One is working with vendors on price and price concessions. Even in some respects, maybe value engineering to affect kind of the FOB price. The second is looking about -- looking where we produce for which market. That is a very difficult calculus because what it involves for us is not just transit from a market like China or Vietnam to the U.S., but rather all the transits we do globally. So from Europe to Vietnam and China to Southeast -- I mean there's a lot of different routes we have to consider. And what we're optimizing for is kind of the global tariff cost, not just what happens in the United States. But we can look at reshoring in different instances. And then obviously, looking at price. And it's going to be a measure of those 3 solutions. I think what will be variable is how much of each we pull, how much intensity we apply to each. What I think is most [meddlesome] at the moment, though, is simply the unknown element, the rapidity with which each incremental wave of tariff has been announced. The scope of potential other issues or tactics that are going to be applied to other markets. I mean all that is creating a significant amount of unknown. And that's just very difficult to plan against. And just for example, if there was a cost motivation to move from market A to B, that cost motivation comes into question if you start thinking about tariffs on both A and B. If it was just, A, then it's easy, move it to B, be done. But when B might be threatened or other markets might be threatened or you might see a global coordination to be tariffing against the same country, I mean, all that creates a level of uncertainty that just makes planning very, very difficult. We always say, if you give us a problem, we know how to solve the problem. If the problem keeps moving daily, hourly in some instance, it makes it much more challenging. It puts us in a position to do is we're going to have to make an interim decision to adjust in some way, shape or form, one of those 3 levers. And if it's insufficient, we'll have to go back and do it again. And so that's what's probably giving us most pause at the moment.

Okay. All right. That's interesting. You just talk about some of the company's key strategic priorities for 2025. You touched on some of the call. Obviously, you mentioned investments in China and distribution centers. But just broadly speaking, what are your key strategic priorities?

Well, it would be largely similar to what we focused on for the last 1.5 decades, to be honest with you. One is continuing to grow our international business. We think there's tremendous continuing opportunity in a lot of the markets in which we operate and making sure we're plotting a course both for near-term growth, but ultimately long-term opportunities. Coincident with that, there are investments we need to make to grow the business. Some of those are in distribution. Some of those are in things like stores and technology. So making those investments that really are facilitating not this year's growth, but quite frankly, the next 2 to 5 years worth of growth. I'd be remiss if I didn't mention product. Continuing to innovate on product is incredibly important. I'm always impressed by the pace at which our design teams innovate. It's clearly a point of focus, has always been a point of focus. But every season, when I go into the showrooms, I see something new, and it's truly incredible. Some of it is reflective of what we're seeing in the market. Some of it is wholly new. I think it's that balance, quite frankly, being responsive to trends but also trying to bring new innovation to the market that serves us so well. And then just obviously, running the business as efficiently as we can, given all the balls that tend to be in the air. And that proves more challenging environments of heightened uncertainty than in others. And then I think, quite frankly, really laying the groundwork beyond even the next 2 to 5 years worth of growth for 5 to 10 years forward. What we know is the Skechers brand is not fully penetrated. It's not at its maximum potential. There's a lot more to do, investing behind categories like performance and other, Street, et cetera. Those continue to be really big opportunities. So continuing to invest in those for the long term so they can contribute 5, 10, 15 years out, incredibly important.

Okay. Maybe just a follow-up on that. I mean how should we think about Skechers long-term growth opportunity? You mentioned India before. You talked about some new categories, performance. When you think about long-term revenue growth, I mean, how should we think about it? And sort of what are the key drivers of that plan?

Yes. I mean we've said our growth algorithm is pretty well defined at this point. As much as we'd love to tell you that the domestic footwear market is going to grow at 20% a year for the next 10 years, that's probably not very realistic. We expect that this domestic market we're in will be healthy, profitable, but it's probably not going to be the fastest growing market. There may be years where we excel or others do. But by and large, we expect that to be kind of a mid-single-digit growth market, which is great. Quite frankly, very profitable for us. The anchor upon which we moor our ship for the rest of the world and where we design and develop from. I would say the 2 big thrusts of growth for us have always been international development going into some of the markets we talked about across the globe, but also continuing to grow that DTC business. What we see in the DTC business opportunity is better and best representation of our brand. The best opportunity to represent the entire assortment we have available for consumers. And quite frankly, the ability to get to know consumers directly. I think that is both stores and e-com. We're seeing e-com development markets that heretofore have not been heavily penetrated from a digital point of view. And so those continuing to grow together represent for us probably one of the most significant growth drivers, particularly outside the United States, although I would say even in the United States, we still see more opportunity.

Got it. I guess -- you mentioned some of the performance categories, basketball, soccer are 2 categories the company got into last year. Can you give us an update on how it's going? And it seems like company's made nice progress, I would love to hear a little bit more.

Yes. Well, first of all, I'd be curious how many people in here are aware that Skechers is developing performance product. That's a pretty decent penetration, but not anywhere near where we need to get it. So please tell everybody you know. So a couple of years ago, we launched our first cleated product. This is on the back of some pretty long-term development to bring cleat solutions to the marketplace. We partnered with a -- you might not have heard of him, a football player by the name of Harry Kane, who coincidentally scored a winning goal in yesterday's match, the UEFA match taking Bayern to the round of [ 8 ], and started to roll out what we believe is a very solid solution in kind of cleated -- focusing first on football, soccer for you Americans, and taking it then even to other cleated sports, like cricket. We also followed that afterward with basketball. And really, what we're trying to develop for the brand is a full suite solution in performance footwear. We've had for a long time as you know, Jay, golf and running. But we found that those were underoptimized because they were so isolated. We couldn't offer a full suite to sporting goods retailers across the globe. What we want to be able to deliver is a performance solution set that still focuses on style, quality and comfort at a reasonable price, but also has the characteristics required for performance footwear to serve the world's best athletes and then even folks like you and me. And so what we're developing is a portfolio performance product that we can put in our own stores, that we can offer to sporting goods, retailers that spans everything from cleated to basketball. We're going to be relaunching our running line this year. We have court shoes, pickle ball for those who play Padel for those internationally. And we'll look at others. And so the goal is to develop a suite of performance-related products that actually help both what we offer consumers and offer wholesale partners, but also, quite frankly, elevate the brand. Because performance is one of the primary testaments to the quality of goods. And what we know is that our quality, look, Harry can score a goal in a UEFA match. It's a good product. It works. And so being able to convey that to consumers, use that as an entry point for some but also to testify to the quality of the brand, that's going to be very valuable for us. And so what we are in the position of being able to do, which I think is pretty unique, is to nurture that over a period of time. We don't need to force it. It doesn't necessarily have to contribute outside to the next revenue goal we have of $10 billion and even the one beyond that. And that's a really unique position. If you think about most footwear brands in the performance space, they've started out there. And so by necessity, they have to succeed. What we have is the luxury to nurture that for a period of time to build it into the marketplace and then roll it out slowly across both our stores and wholesale partners. And what we think is that there's absolutely a need for yet another solution in the performance space, but one also that quite frankly, has a bit more of a reasonable price point. And so you'll see us have both the premium stuff that competes more directly with some of the premium players, but also a much more reasonably priced solutions set below that. And we think -- we think that's going to be a winning formula both for the brand from a branding perspective but also from a product perspective. And for anybody hasn't tried the product, if you try it, you'll see it's equal or better, certainly at the price point to anything out there on the market.

Got it. Okay. Great. And I think that we're talking about long-term sales opportunity. We talk about the long-term margin opportunity. How do you think about that long-term margin opportunity? Operating margins specifically.

Well, first, I'd point out that I think we've done a good job reconstructing kind of the pre-COVID margin over the last 3 years. Not been easy. But last year, we put the margin -- the operating margin into the double-digit range. Very close to that pre-COVID as you know, we've had to suffer through a lot of different challenges between that point and last year. But happy to see that operating margin get into that double-digit range. What we've always said is that structurally, the business has an operating margin that's in that kind of 11% to 13% range. It could be a little bit higher, but to be a little bit conservative, we want to keep it range bound. We still think that's absolutely the case structurally. The one thing I would always point out is we will continue to invest for the future. We could achieve that level of operating margin today if we weren't investing for the future. And the example we always give, it's also most instructive is, this year, we plan to open between 180 to 200 company-owned stores worldwide. Unfortunately, when a store opens, it's not contributing at the operating margin, you'd expect longer term. It just -- it takes stores a while to get up and running. And so each one of those stores in the short term is a bit of a drag from an operating margin perspective. But long term, they will over contribute and then also continue to grow the top line. And so those are decisions we're making on a pretty consistent basis that are consciously detrimenting the margin short term, but with the ability to add to the growth of the business long term. There will absolutely be a point in time when the quantum of kind of growth investments for us declines, and it will be much more modest, and that's when you should see the operating margin accrete, but in the near term, what we want to be conscious of and quite frankly, very, very clear about is our #1 goal is to continue to be the third largest footwear brand in the world and maybe some day challenge for #2 or #1, we'll see, but that requires us to continue to invest in the business.

Okay. We talked about tariffs, what about the Red Sea issues. I mean, that's been a volatile spot in the world and creating some pressure on costs. What are you expecting for this year and beyond?

Okay. I thought you're going to ask us to solve that one, the tough one. Yes, I mean, the Red Sea continues to be our preferred route of transit for goods, particularly from Asia to Europe. Unfortunately, that remains closed. Hoping that maybe we'll see some sort of alleviation of that issue in the short term, but our expectation right now is it's going to probably take a year before we get to see that loop back around. There's 2 consequences to that. One is it just increases travel time for goods. So goods going from Asia to Europe have to go down around the Cape of Good Hope. That's obviously significantly longer than going through the canal. That has added as a result, inventory. If you look at our third and our fourth quarter, you saw a meaningful step up from an inventory perspective, but most of that, if not all of it, was driven by merchandise in transit because of the elongated transit times in Europe. And so that's one issue, and obviously costs a little bit more to make that transit. There's more fuel. There's more time, et cetera. So what we'd really like to see is kind of a return to normal transit time. That would be very, very helpful. Unfortunately, that's a little bit out of our control. We're willing to help, but probably don't have the solution. And we'd like to see that get back to normal. We also think that would be good for the overall health of kind of the logistics side of our supply chain, but we're still in a wait-and-see mode on that.

Okay. So last topic I want to talk about shareholder returns. And specifically, I want to talk about ROIC. And first, John, how does the company think about ROIC?

So we measure it pretty carefully. We watch it carefully. I wouldn't say it's the primary driver of our overall kind of financial guidance because what we find is it's ROIC. Particularly if you're not looking at it on a kind of a trended basis, can be a little bit misleading at any given point in time. But largely, our goal, obviously, is to accrete from both an operating margin perspective, as I mentioned, but also from an ROIC perspective. Now what's really important in that is the balance between what your near-term investments are required for the business, but also your opportunity to then generate returns on the back of that. And so I think sometimes that's a struggling measure for anybody who's growing because you're constantly growing your invested capital base ahead of the return base. The best example I can give you for that is any investment we've made in distribution. This year, we'll be making a sizable incremental investment in our U.S. distribution, something we know we need to do in the next 2 to 3 years. Now is the time we've chosen to do that. It's a once-in-a-decade investment for us, maybe even 1.5 decades. But it's something we have to do. Now we're going to have to make that investment today because, unfortunately, when it comes to distribution, you can't incrementally invest one shoe at a time, which is what we prefer, but it's not possible. And so what you're forced to do often is count the investment you have to make, but also against the return for the future. And so there's a balance to be played there. I do think we try to keep both sides of the ledger in mind. But more importantly, if it's a good business decision, if it's good business, long-term decision, we're going to make that, and we'll take the ROIC hit in the short term in order to facilitate that in the long term.

So maybe if we think about the long term, I mean, it sounds -- I mean, can ROIC move higher was going to the question. I think the answer is yes. Let me tell us a little bit how I mean both sides of ledger.

Well, I mean I think what we certainly aim for -- I'll just leverage this example again. We're going to make a DC investment this year in the U.S. That will set us up really for about the next 10 to 15 years of growth. That means every year subsequent to making -- while we'll have a fixed IC base relative to that specific investment, we will generate superior returns from a distribution perspective, will drive down our cost per pair versus what either -- what have otherwise been or where it is today. And so we get the increasing benefit of that over time. Now the obstacle would be if we have to make another incremental investment to facilitate growth. But again, with these sizable investments like that, you're making them once in a decade, so you get about 9 years to harvest after making that initial contribution. And that's really how we like to look at it. If you take that to a microcosm, it's really looking at the IRR of a lot of these individually. And generally speaking, those 2 should line up. Also, just from an ROIC perspective, obviously, maintaining your profitability is very important. Withstanding the vicissitudes of the market in a way that allows you to maintain margins and margin structure is always important. That's kind of table stakes. So that's obviously a piece of what we do, but it is something we focus on.

Okay. And then maybe just talk about CapEx this year. I think on the last call, I talked a little bit elevated this year because those big investments that are being made. But maybe I mean going forward, like where do you think CapEx as a percent of sales should be just on a normalized basis?

Yes. I tend to not think about it as a percentage of sales basis because I think that gets a little bit loose later on. Hopefully, you'll appreciate that discipline when the sales get to $20 billion. I would say we think about it very much on kind of a project basis. There's a certain amount of maintenance we need to apply. There's a certain amount we're going to invest in new stores. You are being generous. This year, we're spending a lot more on CapEx, but it is particularly 2 investments that we're making, one in the U.S. for this added storage capacity in the distribution center there. The other is we're continuing an amendment to our distribution footprint in China that aggrandize that to a point where we actually believe we can be fully self-sustaining. So those are pretty sizable this year. They are nearly doubling kind of our normal CapEx run rate. I would say, though, that with CapEx, I found large projects tend to move at their own pace and speed. So this is what we know now. We'll see as those projects materialize exactly the timing. But the net of it is we are over-indexing kind of our normalized CapEx rate this year in order to make those investments. But then, generally speaking, we believe those bleed off. The next big one we'll make will be about a year, 1.5 years from now with our European distribution center, another really good example where we're going to spend over a short term, a significant sum in order to consolidate and expand what today is a 9-building footprint into one, but the return that generates by being able to consolidate in, invest in automation, reduce labor exposure is very, very high IRR. And so we're happy to make those. And I think, quite frankly, one of the abilities that we have as a company with an anchor shareholder like we do, is to make those long-term decisions for the benefit of the business, even if in any 1 year, they don't actually resonate as well.

Right. Makes sense. And look, personally, I think it's fantastic and a lot of companies don't have the ideas and the opportunities to invest large sums of capital that can drive a strong IRR. They can maintain that strong ROIC going forward. So I think it's great that there's still so much opportunity out there.

Yes.

Right. I think it's a great place to stop. John, thank you so much for doing this today. This was awesome.

Thank you, Jay.

Thank you, everybody.