Q4 2019 Earnings Call
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Okay Lisa.
Thank you.
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A brief question and answer session will follow the formal presentation.
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Turn the call over to Skechers. Thank you you may begin.
Thank you everyone for joining us on Skechers conference call today.
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With that I'd like to turn the call over to Skechers, Chief Operating Officer, David Weinberg, and Chief Financial Officer, John Vandermosten David.
Good afternoon, and thank you for joining us today.
2019, with a milestone year for Skechers as we surpassed 5 billion in sales and.
Records in each quarter of the year.
We achieved sales of 5.22 billion a year over year increase of 12.5% or 578 million.
Typically the fourth quarter was our smallest quarter of the year yet it was the second highest in our history with net sales of 1.33.
Billion, a 23.1% increase.
The growth in the quarter was the result of a 13% increase in our domestic business and a 31.2% increase in our international businesses.
Every region contributed double digit growth. This included as anticipated a return to double.
Growth in our domestic wholesale business as well double digit growth in our direct to consumer segment.
Importantly, strong increases in our international business resulted in the 59.3% of our total sales in the quarter and 57.9% for the year.
We believe that our.
International businesses will continue to be our leading growth driver.
Our direct to consumer business achieved strong sales growth with a quarterly increase of 19.4%, which included 9.9% comparable same store sales worldwide.
At the year end, we had 3500 foot.
47, skechers stores around the world, including 800 company owned stores.
Our efforts in 2019, not only resulted in sales improvements, but also more than 25 awards for product innovation and design.
Most notably for performance shoes, featuring our hyperbaric.
Acknowledging and company of the year and Kids design Excellence Awards from footwear plus magazine.
Highlights in the fourth quarter include. The addition of art fit to our product offering which also includes relaxed wide classic and stretch fits.
The signing of Dodger pitching as Clayton Kershaw out of the new.
Lumens ambassador.
Opening a sketches flagship store on Rome's via Delek Corso and it did in the town and Shanghai, Our first location on the Disney property.
Of course record when by Skechers elite golfer Colin Montgomerie at the Invesco Championship in California.
Being named number one.
There aren't a powerful brand on you Gcgs top bugs brand for 2019.
And the reduction of plastic in our packaging to 7% all of which is 100% recyclable.
At the core of our global success is our ability to develop a vast range of footwear for active lifestyles that delivers on.
Innovation and most importantly comfort.
We believe our unique and competitive product offering along with our pervasive marketing sets us apart from other global brands.
Our continued momentum in success throughout 2019, our confirmation of the strength and demand for our products around the world.
With our strong backlog and growing direct to consumer business, we are extremely optimistic about 2020 and beyond.
While we are deeply concerned by that health crisis in China, and the wellbeing of those affected including our employees partners and vendors we remain.
Domestic about the strength of Skechers in China and committed to our long term growth strategy in the country.
John will address how we have incorporated our current understanding of situation into our guidance.
Now turning to our domestic business in detail.
In the fourth quarter, our domestic sales increased 13%.
Percent driven by a 16.3% increase in our direct to consumer business with comparable same store sales, increasing 10.3% for the quarter.
Our domestic wholesale growth of 10.4% was the result of a 12.9% increase in pairs shipped for the quarter along with a modest increase in.
On average price per pair of about 1%.
With a broad distribution strategy and fast product offering we are a valuable resource for both our domestic account base and consumers who are seeking comfort style innovation and quality in their footwear.
At quarter end, we had 497.
Any owned Skechers retail stores in the United States.
In the fourth quarter, we opened nine stores across seven states. We also remodeled one store and expanded two locations to date in the first quarter seven company owned stores have opened in the United States. So we have closed we are currently planning for another 75 to 80.
85, new stores predominantly in our warehouse format to opened before the end of year.
Our mens womens and kids domestic business improved in the fourth quarter, specifically the biggest increases came from our sport and worked lines for men and women are Bob's from Skechers collection.
Women's go walk and our men's casual and performance lines as well as our kids business returning to growth in the quarter.
To keep Skechers top of mind over the holidays and into 2020, we supported our domestic business to several marketing campaigns from print outdoor digital and.
This included television commercials for our kids footwear as well as spots for our new Max cushioning and arch that collections.
Based on our domestic direct to consumer January sales comping up low double digits and strong backlogs within our domestic wholesale channel. We believe our domestic business will continue to show positive growth.
In the first quarter.
Now looking in detail, our international business, which represented 59.3% of our total sales in the quarter.
Sales increased 31.2% or 32.3% on a constant currency basis and reflected growth in our subsidiary joint.
Sure and distributor businesses and across each region.
For the fourth quarter. The biggest drivers in terms of dollar increases were China, India, the United Kingdom, UAE, and Mexico, which transition to a joint venture in 2019.
The only subsidiary or joint.
Venture markets that didn't grow, we're Chile, and Hong Kong, both of which faced unusual political unrest during the quarter.
Specifically the sales growth was the result of a 32.8% increase in our wholesale business and a 24.7% in our direct to consumer business with an eight point.
8% increase in comparable store sales.
At quarter end, there with 3050 international retail stores, a net increase of 231 in the fourth quarter.
Of those stores 2747, our owned and operated by International distribution partners joint.
Bruce at a network of franchisees.
In the quarter 12 company owned international stores opened three in the UK two each in Poland, Spain, and Chile, and one each in Peru, India, and Italy, which opened on the highly trafficked via della Corso enrollment.
Also with stores remodeled.
And then other relocated we plan to open another 40 to 50 wholly owned company stores in international markets, including 15 in India.
In the fourth quarter 259 joint venture a third party owned stores opened across 35 countries New store openings included 143 in China.
25 in India, eight in Indonesia, seven in Malaysia, and five in both Mexico, and Romania, 40 stores close in the quarter.
In 2020, we anticipate between 550 and 650 sketches third party stores to open.
To support our global.
Business expansion, we utilized television outdoor digital and print campaigns to drive consumers to stores were Skechers are available. This included underground campaigns in the UK in France perimeter boards and sporting events in Canada, and central Eastern Europe kiosks across Turkey massive billboards in.
And Chile fashion weeks in the UAE and Greece.
Vents that engaged consumers in India, and Mexico and Windows in key avenues in malls across Europe and Asia.
Our international business remains the primary growth driver for the sketches brands. This was reflected in the exceptional performance of.
Distribution centers in Europe, Japan, India, and Latin America, each of which if efficiently handle double digit increase in pairs shipped in 2019, while simultaneously preparing for the future growth for our business through our infrastructure projects.
Our backlogs are up across our international segment and we.
We are seeing the benefits from the conversion of India to a subsidiary and Mexico to a joint venture.
Now I'll turn the call over to John to review, our financials and discuss our outlook.
Thank you David.
First I would like to add my sentiments about the crisis in China right now we are most concerned with the.
Fair of our employees partners and vendors.
These are people we work with closely day in day out and we want them to know the Skechers will be therefore them. During this critical time as David said, the Skechers brand is strong in China, and we firmly believe this situation, although challenging will prove.
Transitory.
Our record fourth quarter sales totaled 1.33 billion, an increase of total of 249.9 million or 23.1%.
And reflects the strength of our brand product portfolio and worldwide execution capabilities.
On a constant currency basis sales increased 257 million or 23.8%.
As David mentioned earlier, we grew in all segments in every region and in nearly every country. The growth continued despite enduring headwinds from foreign exchange rates and the impact.
Of incremental domestic tariffs.
International wholesale sales increased 32.8%, including a 36% increase from our wholly owned subsidiaries a 31.4% increase in our joint ventures, and a 32.4% increase in our distributor business.
Direct to consumer sales increased 19.4% the result of a 16.3% increased domestically and a 24.7% increase internationally.
Domestic direct to consumer sales growth was driven by a 10.3% increase in comparable store sales.
Sales and the net addition of 27 new stores.
International direct to consumer sales growth was driven by an 8.8% increase in comparable store sales and the net addition of 20 new stores.
Domestic wholesale sales grew 10.4% or 28 million.
With a double digit increase in our men's division and mid single digit increases in both womens and kids.
We continue to see encouraging signals for the Skechers business, among our domestic wholesale customers into the first half of 2020.
Gross profit was 600.
There are 37.7 million up 122.1 million compared to the prior year.
Gross margin increased by 20 basis points to 47.9%, primarily due to the strength in our direct to consumer businesses joint ventures, and distributors, partially offset by lower.
So our subsidiary and domestic wholesale gross margins the latter due to increased domestic duties.
Total operating expenses increased by 111.5 million or 25.5% to $548.3 million in the quarter.
As a percentage of sales.
Operating expenses increased by 80 basis points to 41.2% compared to 40.4% in the prior year, largely driven by increased advertising and marketing spending where we chose to strategically invest in the momentum of our global business in order to support both current and future.
Our growth.
Selling expenses increased by 26.8 million to 88.7 million due to higher advertising expenses in both of the domestic and international markets. The increase supported both our growth in the quarter as well as opportunities to build on brand and product awareness worldwide.
As reflected in our backlogs and strong comparable store performance.
General and administrative expenses increased 84.7 million to $459.7 million, but remained essentially flat as a percentage of sales.
The dollar increases reflect both higher than expected sales volumes, which increased.
Variable costs like distribution and warehousing and additional expenses to handle the accelerated arrival of list for be products, which were exposed at the time to incremental tariffs.
The increase also included $28.2 million to support the growth of our joint venture businesses, primarily in China in Mexico.
And 32.7 million associated with our direct to consumer business and a net increase of 47, New company owned stores, including 21 that opened in the quarter.
We also incurred startup costs related to the new automation in our distribution center in Belgium, and operational planning for our new distribution.
Our in China.
Earnings from operations increased 12.4% to 94 million versus the prior year and our operating margin was 7.1% compared with 7.7% from the prior year.
Net income increased 25.7% to 59.5 million.
Or 39 cents per diluted share on 154.6 million diluted shares outstanding compared to net income of 47.4 million or 31 cents per diluted share on 155 million diluted shares outstanding in the prior year period.
Our effective income tax rate for the quarter decreased.
Crease to 14% from 15.5% in the prior year.
We expect our effective tax rate for 2020 to be between 16 and 18%.
And now turning to our balance sheet at December 31, 2019, we had over 1 billion in cash cash equivalents and.
Investments, which was a decrease of 30 434.5 million or 3.2% from December 30, Onest 2018.
Recall that earlier this year, we invested over 180 million to purchase the minority interest of our former joint venture in India and to form a new joint venture in.
Mexico.
Our cash and investments represented approximately $6 in 72 cents per diluted share outstanding at December 30, Onest 2019.
Trade accounts receivable at quarter end were 699.2 million an increase of 141.6 million from December 30 Onest.
2018, driven by higher sales, particularly in our international wholesale business.
Total inventory was approximately 1.1 billion, an increase of 23.9% or 206.6 million from December 31, 2018, the increase was primarily in our international.
No markets, where we believe our inventory levels leave us well positioned to support our growth expectations.
Total debt, including both current and long term portions was 121.2 million compared to 97 million at December 30, Onest 2018, the increased primarily reflects borrowings.
Associated with the construction of our first distribution center in China.
During the quarter. We also replaced our existing 250 million dollar asset backed credit facility that was due to expire in June of 2020, with a new $500 million senior unsecured credit facility to.
Provide additional liquidity support to the continued growth of our business.
Working capital decreased 45.5 million to approximately 1.58 billion versus 1.62 billion at December 31 2018.
Partially attributable to the inclusion of current operating.
The lease liabilities totaling 191.1 million arising from the adoption of the new lease accounting standard for fiscal year 2019.
Capital expenditures for the fourth quarter were 66 million of which $11.8 million was related to the construction of our distribution center in China.
Canteen point 1 million related to direct to consumer stores and E Commerce investments worldwide, and 9.8 million related to our distribution capabilities around the globe as well as general corporate investments for the full year 2019, our total capital expenditures were 240.7 million.
We expect our capital expenditures for 2020 to be in the range of $325 million to $350 million, which includes completing the construction of our China distribution center the expansion of our US distribution facility opening 115 to 125 New company.
Our own Skechers stores, and 20 to 30 store Remodels expansions and relocations.
The expansion of our corporate headquarters and technology investments, primarily in our direct to consumer business.
Now turning to guidance.
First let me reiterate that there is much we do not know about the current.
Situation in China.
As a result, assessing the impact to our business is difficult.
What we know is that a meaningful number of skechers stores in China. Both company owned and franchised have been temporarily closed and those that remain open are seeing significantly below average.
Traffic and comparable store sales patterns.
Incorporated into the following guidance is our best estimate of the influence of these factors on the first quarter of 2020.
But if the severity of the situation in China, worsens and impacts our businesses outside of China and or our global.
Hi chain this guidance may change.
We currently expect first quarter 2020 sales to be in the range of 1.4 billion to 1.4 to 5 billion and net earnings per diluted share to be in the range of 70 to 75 cents.
This guidance incorporates the view based.
Based upon current trends backlogs and other indicators that all three of our segments will continue to grow in the first quarter and the impact from the crisis in China aligns with our expectations.
And now I'll turn the call over to David for closing remarks.
Thank you John has mentioned, we believe our business product.
Distribution marketing and infrastructure is extremely strong.
In 2019, we surpassed the milestone of 5 billion an annual sales grew our international business to 57.9% of our total sales at year end and achieved double digit growth in our domestic and international businesses in the fourth quarter.
We now have.
More than 3500, skechers stores around the world and the strong ecommerce business that we believe will improved greatly with upgrades. We are completing in the first half of 2020.
We believe this momentum will continue in 2020, given our strong backlogs and the strength of our direct to consumer channel, which had low double digit.
Comps for January.
We will continue to assess the potential impact of the health prices on our business in Asia as well as elsewhere provide support to our teams in China and with that I'd like to now turn the call over to the operators to begin the question and answer portion of the conference call.
Thank you.
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For pressing the star keen interest so Tom if you could please limit yourself to one question and one follow up question and re queue for additional questions. Our first question comes from the line of Jay sole with UBI US. Please proceed with your question.
Great. Thanks, so much.
The 9.9% Cob.
Was one of the.
Strongest numbers and what was a very strong top line in the quarter can you talk about E commerce growth within the retail business and maybe just mentioned some upgrade your meeting can you give us idea of where you think that business can go from here.
Oh, I don't think there's a limit to where that business can grow at some still relatively.
Although growing very very significantly you know, we don't even measure that anymore in single digits or double digit swell into the double and.
And for some months, even triple digits. However, it's still only now maintain it is about low double digits of our complete direct to consumer sales. So there's plenty of room to to go we have invested a lot of money that we've over the past couple of years, and our replatforming and getting things ready for a new.
Major launch, including our lead program.
On top of that we're going to use that as.
A prototype to take around the world, We don't have direct to consumer online E. Commerce and every subsidiary in the world, but we plan on that in the next year to be online and direct to consumer in every country in the world. So when you put it all together it can be very very significant but we shouldn't take away.
The fact that even in this difficult time or brick and mortar as camping up significantly as well, which shows what we'd have to offer as a destination and a direct to our consumer and when we put them all together in the coming years and our version of the Omni channel. We think it's going to be with a great product we have the even that much better.
Got it and then if I can just ask about the guidance you, obviously, China's such a big topic in the corner virus for for every company can you may be sort of spread out what impact that you're incorporating from that you know situation and.
Yeah Scott.
This afternoon.
Well, we don't want to get overly precise because you know what we're waiting is the probability of a lot of different outcomes, but what I would reiterate from the guidance as we still expect every segments to grow we are planning China down for this quarter, we've taken a fairly severe looked at you know February.
And parts of March how that unfolds really is to be determined.
But it's really the strength of all of our other business segments that aren't being directly impacted by the situation right now, which is which is powering that guidance. So.
You know I tell you I think we've taken in appropriately conservative view of how China will impact our first quarter results I think we'll learn more as the situation unfolds, but you know every other segment every other piece of the business. Our expectation is that will continue to contribute at roughly similar levels to what we've seen which.
Is very strong performances David highlighted.
Okay, and then maybe one more from it if I could you know you mentioned that India was one of the strongest growers in terms of dollars within the international business.
It seems like the interest is still probably a pretty small piece. The overall business idea what percentage type of growth rate, you're seeing in India and with the prospects are for the rest of your in that market [noise].
Well I'll start with the prospects because you know we think the prospects for Sketchers in India are extraordinarily bright, especially over the long term, it's incredible market, where you've seen incredible traction for the brand. It continuously ranks in the market is one of the most recognized in love brands by consumers I would.
Tell you a this quarter the the rate was fantastic. It was over 50 per cent growth for the full year. The the raid was you know also near that level, it's starting to become a very meaningful contributor to the overall economics of our international subsidiary business. So it's a it's a significant driver and we have very high.
High expectations for the continued growth of the market even in what are you know somewhat you know difficult times right now from a consumer discretionary spending environment and we you know we've seen the brand thus far powers through that which is extraordinarily encouraging.
Okay got it takes so much.
Our next question comes on the line of Chris Sub zero with what Bush Securities. Please proceed with your question.
Okay afternoon, guys to extract my <unk>. Congratulations I guess first just went clarification on China.
U.N. <unk> are you anticipating it gets worse stays the same and any thoughts about supply chain I know what the inventories look like currently but just where you stand right now as you think about first half product deliveries.
So January for China was very good right up until about the the 23rd when we saw the travel restrictions or go into place. So performance through the early part of January was was actually very encouraging a while we are seeing depress traffic and calm store trends at the moment, you know or physical <unk>.
Doors in in our franchise doors E. Commerce continues to do well what we've assumed as a result for this quarter that February a is very difficult partly because of the travel restrictions, partly because of the unknowns of how consumer discretionary spending patterns are going to revitalize and when we've taken a you know is similar.
View of March, though not as a sphere, assuming at the moment that you know this situation begins to dissipate, but you know we've also attempted to incorporate enough leeway that will give us latitude in the guidance we have.
As far as the supply chain is concerned it's obviously an issue, but it's not a short term issue for us in fulfilling what we have available outside of China.
We took a lot of stuff thoroughly around the world for various reasons.
We have capacity and raw materials in those factories that are working and I've already gone to work outside of China.
Obviously have somewhat of a decrease demand for the.
Parts of our supply chain I'd have to supply China since sales will be down so why we're watching it closely in there certainly is significant potential somewhere down the road. We don't think there can be a <unk> via impact for Q1. So we have time to monitor and see what happens as we go through the year.
Okay. Thank you on switching gear and she wants wholesale for a moment just 10 per cent growth queue for Q1, you got a much what do you mean you out here.
Oh gosh your workout you hit the <unk> congratulations by the way anyway, just to one just you have an easier compare seems like there's some momentum here how do we think about two one U.S. wholesale one if any color you want to give to some of the other segments D.T.C. cop or anything along those lines.
Pertains to the revenue guidance.
[noise], well I'm gonna I'm in I'm going to hold back from saying I told you so on domestic or wholesale although I will know that we we are actually very happy with the resurgence we've seen in domestic wholesale and you know it's gotten stronger every quarter. The product is clearly resonating I would tell you at the moment, we view you know.
Next quarter as likely to be around where we were this quarter, we see great backlog traffic, we see a good order flow good shipping trend. So we're very optimistic that we will see a similar performance or potentially even better relative to Q1 again, the only Astra got put on that is you know assessing to.
The global impact of of what's happening in China to the extent that has a knock on effect elsewhere in the world, but you know right now we're seeing you were saying very good trends in first and even indications in the second quarter, although we're not as fully booked there yet and I would tell you that that general guide outside of international wholesale which.
So he's going to be impacted by China is somewhat of the group. We're using this quarter because we're seeing you know similar Chen's David mentioned that January comparable store sales are or upload double digits, which which is fantastic. So you know we're looking for you know somewhat similar patterns of growth, you know plus or minus a bit.
In in each of the segments.
And outside of China, The international wholesale business continues to do resoundingly well the the backlogs there are phenomenal. So again, the the what you're gonna see in the corridor ahead, we believe his strength across the portfolio off setting the the challenge that exist in China, which again you know, we're we're planning down for the core at the moment.
But it's really the strength of the brand everywhere else, that's gonna carriers through this quarter, which again I think it's just just a testament to the residents of the product right now.
Okay sounds. Good then one final thing something near and Dear Tschirhart, John but just on X.G.N.A. I know, we took an opportunity here to invest on the on the selling line in Q. for it's it's still the general thought that S.G.N.A. or however, we want to look at at U.N.A. grows in line with revenues as we move forward or is it still opportunity.
<unk>.
Based on investments Wanna make or how should we look at that.
Well I'm. So glad you ask her. Thank you. So generally speaking you know that remains our target let me take a moment to to point out a few things. This year that are going to be different as we mentioned with the onset of the opening of our distribution center in China, there will be costs throughout the year that we incur startup costs.
This will most likely be concentrated over the first recorders for the full year, we expect them to approximate about $15 million to $20 million U.S.. So that'll have a natural d. leveraging effect because they are one time, you know type costs.
I will just also point out we are finalizing the purchase accounting our investment in Mexico.
Is likely to be you know quite frankly, a full <unk> a few cents on the full year related to the the purchase accounting, it's really just accounting adjustments, but when we have that finalize which should be at the end of the first quarter. We'll give you some guidance there. So I would want to point those two out because they are anomalies outside of that though I would.
10, you to point toward revenue growth as our upper bound.
You know probably again, the global caveat, they're being China. We've again, we've incorporated some latitude throughout our piano, you and maybe that we need to spend some money in China to reignite operations. It wouldn't surprise me, if if there's a quarter to where we need to d. leverage in China specifically.
But quite frankly until we get better informed about how that is going to unfold it would be difficult to really project with specificity when or how much that's going to be so carving out those unique items that that's still the guidance I would points you too is you know S.G.N.A. growing in line. It's at the high end with revenue obviously with us.
Are getting do better I would also emphasized the that this quarter would definitely an opportunistic quarter. We've got great. You know strengthen the brand or we saw an opportunity to put that into sales and marketing related expenses. You know G.N.A. itself was actually in line. So I would think of those largely as a invest.
<unk> for you know the in the future of the brand.
<unk> I would add in there as well.
That as we mentioned fourth quarter is usually our smallest of the year. This year was in and it showed a re acceleration in many places around the world that includes Europe, and usually when we have an acceleration in a fourth quarter from a small quarter like that it shows in significant growth in the following year. So when we.
Talk about opportunist, we've got to see what that growth pattern is because it can be significant and I would tell you along with having such a strong fourth quarter or booking trends <unk>. All the subsidiaries in the first quarter were extremely good and significantly higher than last year, which leads us to an acceleration <unk>.
Only coming into this year.
And had China seen any significant growth, we would have even seen some outside groping in Q1 that we still think is available throughout the year. So we'll be getting ready for that kind of growth as well.
About it <unk>. Thank you on all the best appreciate it.
Mm.
Our next washing comes from the line of John Kernen with counting company.
<unk>.
Hey, good afternoon, David John Thanks for taking my question Congrats on a very strong fourth quarter and good start to this year.
<unk>.
Chuck you and David we're both pretty enthusiastic about Europe, when we met with you at Fannie clearly the fourth quarter numbers internationals. There are extremely robust I'm just wondering what your thoughts are on Europe for 2020, what regions, you're most excited about and maybe if some of the strength you're seeing in Europe can help.
Offset some of the.
The one time type challenges in China this year.
Yeah, John that I mean that pretty much describes it to be honest with you. We were excited about what we saw in Europe, both in developing and developed markets Europe as a region ruse significantly. It you actually go through above the average for international wholesale in in the corridor. So we've seen you know really good contain.
Queuing trends in that market as David mentioned, the backlogs are fantastic right now for both the first quarter and we're seeing you know very encouraging early indications on on second quarter I think the product is resonating in in its its across our stores it's across our wholesale accounts. It's a it's an R.E. commerce channels, where we have them in.
The international markets and it's it's going to be those markets and others again that poll the business through the headwind that that's going to be our results in China Q1 at least as we anticipate them at the moment. So that that market continues to be very robust for us from a growth standpoint, and we couldn't be you know quite frankly more optimistic about them.
Long term potential the brand there and you know quite frankly in South America in the other parts of Asia that are currently facing the challenge.
We we mentioned that it with every region every segment in in nearly every country and that's that's that's right on in fact in in many instances are the only instances I can think of that where we had a subsidiary or joint venture partner that didn't grow in the country. It was largely because of some sort of extraordinary political strife. So.
The business in the in the product is resonating you know in a lot of different markets. All at once which again I think is a is a testament to the design in the marketing behind it.
I got it want it to shift gears, maybe just to.
The company on cost, obviously impressive both in domestic and international.
Can you just talk to the drivers of this as it is there hey, S.P. story to this is it just traffic.
Hurting more with some of the Ami Chan on the ship you put in place and.
You know obviously the strength is continued into January I think you said counts dropped running up blow doubles as.
I Wonder if you could give us a little bit more color on the overall drivers of this of this cop.
Yeah, well, what we said was low double digits domestically, it's it's <unk> as well around the world.
The drivers for US we're always about product.
And and what we develop and and the brand acceptance as we go around certainly in a competitive environment. So I think with you, but you see as you go through is it's a little bit of everything.
We have many categories many of them resonate, we advertise them well, we get traffic through the stores. It's not so much traffic because I don't know that traffic per se is different for us than anybody else in especially in those places we share, but we do have better conversion we have customers that.
Come in knowing what they're looking for a week, which leads to a better conversion and they're always there to purchase so it's a little bit of everything a little bit of pricing an A.S.P., but nothing significant it is all about acceptance in conversion and the product we have to offer.
<unk> Okay. Thank you.
Oh next question coming from the line of Gabby Carbone, what torture Bank. Please proceed with your question.
Hi, good afternoon. Thanks for taking our question I want to ask about category performance. I was wondering if you can take a little bit deeper and discussed by categories and styles are driving such strong growth and that was wondering you could speak to kind of the kids business I mean, what's kind of 80 in that category to return back to gross things that much.
[noise], Yeah again, it does sound like a broken record we saw a lot of very broad strength across the divisions as we refer to them I think most encouraging this quarter is as we mentioned all genders grew women's group men's group Fantastically kids returned to growth it's been battling some difficult comparisons from are lighted product.
As well as I would describe can have a general malaise and kids across all brands and seeing that come back to life. This quarter was fantastic you know I think it's probably the the broad appeal of the general casual looking.
Look and feel at the moment that as eating a lot of different divisions, but you know obviously, bringing go back in a big way has helped US our street product has done very well you know or work product, which you know is definitely a completely different category than most has grown exceedingly well Oh David mentioned the.
Awards, we have one in our performance category you know that's helping to come performance category as well so to be honest you. It's it's a lot of different divisions, performing very well I think it's again the the casual atmosphere, but also you know the fact that we have come for features that than many don't we prize comfort unlike anyone else.
And you know bringing products to market like arch fit in combination with our other products like like relaxed and schedule I mean, it's it's the whole thing that customers are looking for right now I think this year actually.
This performance anyway follows what we've been saying all along we no longer are in search well or in search of but no longer need a hero shoe or L. hero division or a hero territory to carry it when you look at the <unk> the amount of growth in the double digits.
All the categories. So that's a lot of product and all those geography, it really is spread out and it has to do with a broad offering and brand identity and brand awareness and brand acceptance.
You have yet I left out the the Bob's group to and then they would be offended if I didn't they've they've done phenomenally well this year too so I want to make sure I call. It the Bob's team.
Got it things and then just a follow up on gross margin you, obviously did a nice job mentioning that this quarter I believe in the past you've said there could be some tear of pressure still in the first quarter <unk> update on had that situation is going.
Yeah, we definitely saw the impacts or the beginning impacts of the terrorist this quarter and let me just point out in our release. This quarter. We have actually included the segment level gross margin breakdowns for you. All so that you can have them before the 10 q. in that you'll see the domestic wholesale margin certainly took a bit of a hit.
Because of the terrorists what we have said all along though is is is while we have mitigation strategies to address the tariff increases we didn't feel the need to recoup that all in the domestic wholesale segment.
And so we took a little bit it hit there, but you saw our margins accrete elsewhere to offset that and that drove into the overall margin accretion for this quarter I should also in <unk> you know that the the pricing that we had talked about taking earlier was something that we we deferred until the first part 2020, so that wasn't even actually in the.
<unk> offset some of that cause the only the the pricing that we are able to see flow through with that our own retail and that was more on on on brand strength. So we expect there to be a continuing impact in the first quarter at least the way the tariff reductions were put into place everything that had arrived prior to designing of the first phase agreement.
[noise] still bore the higher tear across the wounds still need to work through some of that higher terrorist inventory over the first quarter, maybe a little bit into the second quarter. So we expect a little bit of that pressure coming into coming into Q1.
And in fact, I would just you know in concert with that.
So I know somebody will ask we do expect there to be some gross margin pressures in the first quarter because of that fact as well as you know what we anticipate in China is probably being an impact on some some S.P.'s for already delivered product.
Great. Thank you so much profit color.
<unk>.
Or next washing comes on line of Omar Saada with <unk>.
<unk>.
Thanks for taking my question Great quarter, guys. Thanks, probably information I wanted to ask my first question on pricing Ah you ours do you have any sense of you know what your trends art retail it feels like the brand has a lot of pricing prior power right now, whether it's kind of mixing the customer up from good better best or just like for like pricing. Maybe you can give us your thoughts on that and then at one follow up.
[noise], yeah pressing was whether growth rubber in the quarter for us at retail again, I would tribute that largely to the strength of the brand in pulling through in the pricing line, we didn't enact any price changes any major price changes in the wholesale segment. This quarter. If you recall when we're contemplating our action path for in response to the tariffs.
We mentioned pricing, but we also consciously differ that action until the early part of 2020, we didn't want to reset any pricing that was already for booked order. So you didn't see as much of that in the domestic wholesale you didn't see it kind of leveling off on on the pricing and it was you know about 1% so.
Actually in the in the domestic wholesale we got volume and a little bit of price as well, but again I I think you're inclination is correct. It is the just the sprinkler the brand and the quality of the product that we're bringing forward that is driving that that price relationship.
[noise] Gotcha, Okay, and then and then my one follow up you know kind of think about the E. Commerce, you know your commentary around E. commerce, and the digital initiatives and the investments are making you know if I think back a few years ago, you guys were still a little bit skeptical I'm not sure about how the profitability would work on that segment. You know maybe you could share with us how some of the your views on that that channel as a business model <unk>.
They've evolved and.
You know given how much you're you're you're kind of gearing your investment toward the channel now.
Well as David mentioned, it's certainly a source of pretty significant investment both in people and in technology. This year you will see you know the next evolution of that investment we will replatform our site in the U.S. and then we will take that out across the globe. We're also likely to be relaunching at least.
Beta phase are but we'll see program, which obviously has some significant technology investment behind it. We're also going to completely revamped R.P.O.S. system for existing store base. So that it will have a greater functionality and in or opera ability with our online accounts. So I I very much agree with David.
Your statement, it's it's very early stage for us in the E. Commerce business. The economics. You know are are still very attractive to us. They they they look very good to us relative to our overall retail performance something obviously, we watch carefully but we think the runaway for both E. commerce as a standalone element of our offer.
But also in concert with the stores, which is where they have mentioned the omni channel solution for sketches will come we think that has great upside opportunity.
Around the world.
Understood that I think good luck.
<unk>.
Products question coming from the line I'm, Sam Poser with subsequent Hannah Financial Group Places you with your question.
Oh good afternoon. Thanks for taking taking my questions could can you you know you've talked in the past about how big you're trying to sales were in the choir year, So how big where they're trying to sell this last year.
So and.
I don't know to get overly precise <unk> I would just ask you to keep in mind, China was also dealing with a pretty significant headwind from for X. last year. You know it was in you know we we saw a reasonable increase from the prior year, so within that kind of mid 800 million range.
And that's and that's I mean could we assume that two one is a products you're up against approximately 200 million, then give or take and and when you're when you're knocking it and when you're planning it down near you might be planning you know there might be $100 million or.
You know it's it can you give it some idea of what that dollar amount is that is with in there. So we you know because we're going to some of that back next year. It should spring. So we should know couldn't give it somebody there with the number is I mean other companies have been fairly specific about it.
Within your number I know it may change, but you know you've given us this revenue guidance and you know what the number was you took out to try to.
So it'd be great.
Remember you you're doing a whole water salmon your 200 million over 100 million or 150 million. They were actually up in January so the core it can't be as catastrophic unless it goes really down significantly. So we've taken a significant here quite by month.
But we still keep right <unk>. So right of course right of course, Okay. What percent of your production is now it you know in China, what presented an overall production is try that.
It hasn't changed significantly from the last time, it's about half maybe a little less than half.
If I remember a big <unk> is China for China, which doesn't have as much pressure.
Christmas sales or not there so they don't need the big stop and what percent of your.
<unk>, let's say first have product.
Is either on the water or.
Or or do you know sitting in warehouses right now.
As far as you couldn't see.
Well, there's a couple of things that are going on so we have taken a significant these I don't know that we'll talk about the first half because the first half also go through June and we still have capacity there and not obviously nothing from June is on the one or two day, although they may have raw materials and things like that as I said before we are set pretty much for first quarter.
With the production that's available what what we took early with what's on the water and even some things that we've pushed our some of our factories to make before Chinese new year that they didn't have a chance to ship that that will now be shipping since again for the quarter I don't think there's a significant.
Amount that's the at risk.
The first quarter April is not a big month for us So would waiting to see what happens we certainly wouldn't need more production. If you get all the way out to June, but it's kind of early to go through that whole scenario yet.
And then they talked about the put the factories you know at least last I heard they were opening <unk> you know maybe opening next Monday, but I mean, what are you hearing about when these Chinese factories, you know right. Now. So you know are are potentially going to reopen.
[noise], we don't we don't have anything more than what the official where you. We have most of them are are planning to go back to work Monday.
We're not sure what the retention pieces or how long it'll take them to get started there are some regions that will open the following week.
So it's a mix and match around the country. So we do anticipate that it'll take them time to get started like I said I don't know what that means right. This minute until we see the retention of workers and what's available as that as they come out.
Okay. Then lastly, just back to the gross margin given the strength of your D.T.C. business and you know both in store and <unk>. Despite the fact that it's froze Oh from a m- gross margin perspective, I mean that is added, especially with the number of store.
There's you're planning on opening this year I would think that you know that is you know.
The from from a mix of where you're getting your sales were bigger that gets the better that is for gross margin.
Well, that's true, but that's always has a percentage. So you know you we have so many moving pieces I mean, you concentrate on one you tend to get lost remember.
It's still has more impact depending on what it is and how this plays out in China, how the foreign exchange that around the world move against the dollar as much as a direct to consumer.
Europe has some we have some pricing so they're a number of pieces in a number of of things you have to throw into the pot and on an average basis you know China is.
A higher than the United States. So the fact that we're giving up something and the aggregate is there although depending on how expenses are and we.
Tried to be very careful with that and the guidance.
There could be impacts certainly of short term, but not necessarily that flow through the bottom line, depending on currencies et cetera.
Or thank you very much continued success.
The exam.
For next washing comes from the line of Kimberly Greenberger with Morgan Stanley pleased with your with your question.
Oh, great. Thank you so much I just wanted to clarify could starting with Sam's question did she say that on the gross margin line.
Facts can in some cases fully offset the benefits of D.C. on the gross margin. So affects has been a downward pressure point on Chris March N.D.T.C. has been a good news for an Chris March N., but but often times one can offset the other.
Yeah, I mean, what you saw this score is there were there were kind of two simultaneous positive impacts one was just general mix, which list lifted gross margin in that that comes from you know more D.T.C. and then there was also improvement within D.T.C. of the margin, but there was also an offsetting impact from F.X. we continue.
To experience F.X. headwinds in the corridor, so they almost offset not not totally and that's why you saw a little bit of accretion like to David's point, we certainly have seen situations in the past year, where that ethics effects impact has been even more severe and has washed away some of the benefits that you.
Get from improve mixed overall again, the long term strategy, though is to continue to advance in our direct to consumer and international businesses, both of which are a creative to our overall gross margin.
Great. Okay. That's that clarification is super helpful. And then just looking out to 2020 based on current exchange rate do you have a view of what you think the effects impact on gross margin will be if any and then I I just wanted to ask about China yeah.
I'm not sure what the mixed between E. commerce and brick and mortar revenue is in China.
If you have an estimate as to what portion of loft store sales you think could really be replaced.
By enhanced E. commerce sales I'd I'd certainly be interested in hearing that.
[noise] on the gross margin question relative to F.X. you know, we know what we know based on where we said today it looks like at the moment there maybe some modest pressure from gross on gross margin from effects in the first quarter.
We think it'll probably in this is already baked into the the the guidance yeah, probably dampens our growth by about 100 basis points in the corridor. So there'll be some flow through of that in the gross margin that being said.
The nature of foreign exchange rates as they are fairly dynamic so.
I have to wait till the end of the corridor to be certain on that.
You know relative to China, I, just it'd be very hard for us to guess at this point, how the situation unfolds. What I would tell you is you know about a third of the revenue overall is e. commerce, driven that changes by quarter, though there's obviously, some rather significant selling events in June.
And then in the fourth quarter with a single day and now 12 12. So you know what we're seeing right. Now is continued strength in E. commerce, but I I don't know if that will endure what what we've attempted to do is assume that we we have a fairly steady performance.
And E. Commerce, and then obviously the significant challenge comes through the the own retail stores and our franchise business, but.
This is a fast evolving situation. So it's it's difficult to be fairly precise on that at this point.
Understood. Thank you that was helpful.
Sure.
Products washing comes on the line of Susan Anderson with me Riley F.B.R. Please proceed with a question.
Hi could evening nice shop on the court, Eric [noise] I guess, a couple of follow up questions. When you look at the tariffs situation I think he said that the pricing doesn't necessarily flow through this quarter. So should we expect that grow smart Kim pressure to be a little bit last m. first quarter and then also as we kind of go into that.
Back half hour when those <unk> world back <unk>, well you continue to keep the pricing higher thanks.
Well I. So I think the the actual cost impact is going to be a little bit higher in the next quarter simply because we're going to continue to roll through that fully Tara product, we don't get the benefit yet rolling through and absorbing the product that was exempt or reduced at the reduced four be or for a.
Right. So we expect at the moment at least that will continue see pressure throughout the first quarter and you know the combination of reallocation of resources are vendor pricing strategies and then the pricing we put in place should begin to offset that but you know the timing of that is.
It is uncertain and we'll we'll have to play out over the first two quarters.
You know, it's really that plus the potential drag from effects and <unk> you know, how we plan to the situation in China at the moment that gives US you know some you know caution on the gross margin line and that's that's something we're gonna we're gonna watch carefully obviously in the corridor.
Got it okay, great and then I guess just to follow up on the kids business nice to see that returned <unk>.
I think he talked about maybe some that are marketing.
I guess also it's there I mean are their new products that I guess is driving nyquil terrorists at my cycling the easy compared there how should we think about that.
It's always new product. So we were never really stagnant with that I I think what you see as what we've talked about over the last few corridors. When John is mentioned that we were up against tougher confident with some product in there that not necessarily comes along with a light in features and now we're back to more normal setting and in.
The environment in the U.S. and now we're starting to grow again within what's our core business group group rather than looking for the outside one one time wonders.
Great. Okay, and then lafley the pressure in Hong Kong I guess, how should we think about that for this here are you starting to see that ease at all or should we expect continued pressure there until you get throughout this year.
Well I think years, along [laughter] Oh, we don't know that obviously continue pressure to go from tourism and some of those wells being close, but it's not a significantly large market for us and it's certainly not as impacted as China just yet so.
The effect on an overall basis while.
Probably significant for for for Hong Kong's not significant to the overall.
Got it okay, great that's how Paul Thanks, so much good luck next quarter.
Thanks.
For next question comes on line of Jim Duffy with people. Please proceed with your question.
Thanks, Good afternoon.
And I want to focus on green pasture opportunities in China, or just setting the krona virus. Aside if we can can you guys comment on the reception that you're seeing to the brand as you expand the two or three plus cities.
As you learn more are there any differences in these cities that makes growth here more challenging.
Well I mean again, we we mentioned you know both David and I that our long term view on trying to hasn't changed we we view this as a temporary situation and that is informed by both the success that we saw coming out of Q. for Q4 in China was a very.
Solid growth corridor, the the business did well and singles did did a single day did well on 12 12.
So we're still we're still seeing the brand resonate and grow with consumers you know part of our strategy over the next few years will certainly be incorporating more to your three four and five cities into the mix.
Reception, we've seen so far has been extremely strong.
You know I think this is probably at worst of temporary setback and and will continue to grow the brand that way it it's a little bit difficult to say today, how the timing of of some of those entries is going to play out I would also point out that obviously one of the one of the more significant drivers in the country has been E. commerce, which isn't has bounded by.
The location of the consumer that's obviously the big benefit of the of the solution that continues to be a a very resident platform for us with Chinese consumers, who are you know if not the world's leading most digitally savvy I I don't know who is because because they've really embraced both both mobile commerce and online commerce.
<unk>.
That's great. That's a good segue. My next question I wanted to ask where you guys feel you are in terms of leveraging <unk> as it relates to growth in China and stuff, we growth news new regions and I'm curious to the new distribution center simplify logistics to support he commerce growth.
So into team all the a fantastic partner for Sketchers has been for a very long time. If you look at our team all rankings by category, they're very strong, especially for an international brand you know we value those highly and we continue to work very closely with team all too advanced the brand. Both you know on the important selling days.
The year like like singles day, but also around those you know every other days Dave hundred of the year in terms of the distribution Center I think that's probably more a benefit from from a sketchers perspective for both operational efficiency and quite frankly, insuring that long term we have.
Have the availability and the reliance on systems that we know across the globe worked very very well for us it doesn't really change how we interface with key platforms because the the interface. The day is largely through third parties.
So I think you know Nat Nat, it's probably long term of benefit to Sketchers I think it if anything because of the reliability factor will enhance our ability to interface with T. mall and others, but but it's not it's not really going to be a major change in that relationship from from kind of the strategic standpoint.
Very good thank you.
<unk>.
We have time for one last question or last question comes from the line of Tom Nick with Wells Fargo. Please proceed with your question.
Hey, John Hey, David Thanks for a squeeze in the in here.
It seems like based on your guidance you're really.
Celebrating the pace of U.S. store openings. This here I think you said 70 585 stores in the U.S.I., which is.
Pretty significant increase from what you've done in recent years.
I realize you're copying pretty strongly domestically, but.
Are you I'm, just kind of wondering what.
Drove that decision to sorta step on the gap at all as far as you know physical store openings go and if there's anything you know I don't know from expend standpoint, or do you leverage standpoint, we should think about in terms of the I tolerate so thanks.
If they so I mean, I think the first and foremost.
We are we're cautious about how and where we opens doors you know we don't keep on profitable stores, you know by by and large so we're we're opening profitable stores. They the stores were opening right. Now are are big box format. So there are a family a solution that offers the whole range of the product we are seeing very.
Advantageous rates in in some very attractive locations, where you know we believe there's an opportunity to grow the business. We're obviously cautious about you know cannibalizing any presence in market, but you know even even with 800 stores as a company you know we feel there's a lot of opportunity across the globe.
To continue to grow out you know our store account.
We also think David mentioned earlier and I think is important it's a compliment to the online capability right, our ability to deliver and omni channel solution needs, a physical presence as well as an online presence in a mobile present. So it's really a complementary you know delivery system and presents for consumers.
I know, whether it's online predominantly in in in a supplement on the retail footprint or vice versa. So you know it's part of the strategy you know most importantly to get closer to consumers you know and again I I just probably would just stayed the obvious obvious we don't feel like we're we're fully penetrated in the United States, we feel like there's.
Significant room to run and again with the advent. He just rates were seeing or at least rates. You know these will be reasonably profitable locations. You know it's good to keep in mind also that we're we're not chasing what seems to be a deteriorating marketplace here in the United States will go into smaller cities were not conflicted with other own store some of them with the first ones in the.
City or the first ones in in that neighborhood and it will like John says go together with her online presence to be able to see them and the cost there are larger multistory stare outside of malls and.
<unk> weren't very well I don't not require that you don't require the same sort of turnover as you do in in some of the malls we've been in.
So when you put the economics together with the isolation. Some of these territories, it's worked very very well for us.
God that's helpful. Thanks, guys on the fourth.
<unk>.
I'd like to hand, the call back to management for closing remarks.
Ladies and gentlemen. This does include today's teleconference. Thank you for your participation you may just connecting lines at this time and have a wonderful day.
Thank you again for joining us on the call today.
Just like to know that today's column is contained forward looking statements as a result of various doctors x. results could differ materially from those projected in such statements. These risk factors are detailed and sketches filings with the S.P.C.
Good thank you and have a great day.
[laughter].
[laughter].