Q1 2021 Skechers USA Inc Earnings Call
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Thank you for standing by at this is the conference operator, welcome to the Skechers first quarter 'twenty 'twenty, One earnings conference call.
As a reminder, all participants are in a listen only mode at the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
She joined the question queue, you May press Star one on your telephone keypad sketch.
Skechers request that analysts limit themselves to one question and one follow up question only to allow all analysts to have the opportunity to ask a question.
Should you need <expletive>istance during the conference call you may signal, an operator by pressing star zero.
I would now like to turn the conference over to Skechers. Please go ahead.
Thank you everyone for joining us from Skechers.
Please call today I will now have an interesting type of statement certain statements contained herein, including without limitation statements addressing the beliefs plans objectives estimates of our expectations of the company or future results or events may constitute forward looking statements that involve risks and uncertainties.
Specifically the COVID-19 pandemic has had and is currently having a significant impact on the company's business.
Conditions cash flow at myself of operations such forward looking statements with respect to the COVID-19 pandemic include without limitation. The Companys plans in response to the pandemic at this time there of significant uncertainty about the duration and extent of the impact of the COVID-19, pandemic, Hey, Dana Mcnee share of these circumstances.
It means that what is said on this call could change at any time and as a result of actual results could differ materially from those contemplated by such forward looking statements. Additional forward looking statements involve known and unknown risks, including but not limited to global national and local economic business and market conditions in general and specifically as they apply to the <unk>.
Each of our industry and the company there can be no <expletive>urance of the actual future results performance or achievements expressed or implied by any of our forward looking statements will occur.
The forward looking statements are encouraged to review the company's filings with the U S Securities and Exchange Commission, including the most recent annual report on form 10-K quarterly reports on form 10-Q current reports on form 8-K, and all other reports filed with the SEC as required by Federal Securities Law for a description of all other significant.
Risk factors that may affect the company's business financial conditions cash flows and results of operations.
With that I would like to turn the call over to Scott <unk>, Chief Operating Officer, David Weinberg, and Chief Financial Officer, John to end of March.
David.
Yeah.
Thank you for joining us today for our first quarter conference call I Hope you your colleagues and loved ones are staying safe and healthy.
As the COVID-19 pandemic continues to be of global challenge, we remain dedicated to the safety of everyone in the entire Skechers organization and appreciate their ongoing efforts and resiliency during this difficult period.
While many countries restrictions are easing our thoughts are with those regions facing another corona virus wave.
As is the case with most businesses at the pandemic continue to impact skechers, but at the high demand for our comfort technology product resulted in a strong beginning to 2021.
And it feels reminiscent of 2019.
In the first quarter, we achieved revenue growth of 15% over the same period last year, which resulted in our first quarterly sales of more than one 4 billion.
This was done while parts of the world remain closed due to the pandemic.
The 143 billion first quarter sales were also at 11, 9% increase over first quarter 2019, which was then a record for the period.
Driving the record sales with a 22% increase at our international business and an eight 5% increase in our domestic business.
This double digit growth drove international sales to 57, 8% of total sales in the first quarter.
Throughout the quarter, we focused on delivering our footwear and apparel to meet the needs of both of our consumers and customers our sell throughs across customer types of categories exceeded expectations in many markets and we were able to deliver double digit growth.
Skechers mission of delivering comfort style and quality and innovation at a value resonated with consumers prior to the onset of the COVID-19 pandemic and the same is true now consumer.
Consumers are returning to a new normalcy, one that involves more work and more comfort all of the job at of casual lifestyle mindset. We are a natural choice for any demographic worldwide with comfort technology at our core.
The record sales are a testament to the fact that consumers appreciate our product offerings, which was seen by the success across many divisions.
Our international wholesale business grew 23, 8% for the first quarter last year and 13% from 2019.
The quarterly sales growth was driven by an increase of 174% in China, which was severely impacted by the pandemic in the prior year. However.
However, even as compared to 2019, China grew 45, 5%.
The international wholesale growth was partially offset by decreases in our subsidiary and distributor of businesses subsidiary sales decreased four 8% from 2020, but improved four 2% from 2019. The first quarter of 2021 decrease was due to temporary closures and reduced operating hours and.
Spain, and Italy, and especially in the United Kingdom, where businesses were closed for the entire quarter.
When markets were open sales were strong, including in Germany, India and Canada.
Our distributor business was down six 5% from last year, yes, several markets experienced growth in the quarter, specifically, Russia, Taiwan, Turkey and Ukraine.
We believe we will continue to see improvements at our distributor business in the second quarter and the remainder of the year.
Sales in our domestic wholesale business decreased less than 1% in the first quarter compared to the same period in 2020, but improved eight 1% compared to the first quarter of 2019.
We believe sales of our domestic wholesale business were negatively impacted by logistical challenges, which caused slower replenishment and product shipments to some accounts.
Key sales drivers came from multiple categories with the largest gains in our women's sport kids work and men's performance. Additionally, the average selling price per pair of increased two 7%, reflecting the strength and appeal of new comfort products and technologies.
Skechers direct to consumer business increased 18, 1% over 2020, and 13, 1% over 2019. Despite the fact that domestic operating hours were reduced by approximately 15% during January and February and 7% in March and our international.
Company owned stores, we lost 37% of the days available to sell during the quarter.
Our domestic direct to consumer sales increased 28, 4% compared to the first quarter of 2020, and 18% compared to 2019. This improvement came from our domestic ecommerce channel, which grew by 143% and our brick and mortar stores, which grew by 13, 6%.
Our domestic direct to consumer average selling price per unit rose 10, 9%, which speaks to the strength of our current product offering.
While we expect that our ecommerce business to continue to perform exceptionally well we were pleased with the increased traffic and sales in our domestic retail stores, especially in March which we believe improve as more people became comfortable shopping and we ramped up our marketing efforts.
We have now completed the update of our point of sales system, which further optimizes, our domestic direct to consumer channels and we will continue to improve our omnichannel capabilities. We are now focused on rolling out this same platform worldwide.
Our ecommerce channel remains a meaningful growth opportunity as sales increased significantly across the globe.
We plan to expand our e-commerce reach across Europe, beginning with a new site in Ireland and the revamp of our UK site. This summer are.
Our international direct to consumer business increased one 9% over the first quarter of 2020 and four 4% over 2019. The growth was largely attributable to our company owned E Commerce sites and the strength of our sales in Korea, India, and Thailand, partially offset by ongoing temporary store.
Of our closures due to stay at home guidelines across many markets, most notably in the United Kingdom.
While we are seeing some markets reopening this month, including England last week.
Other countries have extended or reinstated their lockdowns.
Given the unpredictability of of Corona virus and its impact on many markets, we remain cautious of better return to normal traffic and sales in many international stores.
In the first quarter, we opened 12 company owned Skechers stores six of which are in international locations, including our largest store in India. We have opened seven stores to date in the second quarter, including our first in Antwerp, We closed 20 locations in the first quarter as we opted not to renew expiring leases and we expect to close one of <unk>.
Additional store at the end of this month.
An additional net 106 third party Skechers stores opened in the first quarter, bringing our total store count at quarter end to 3989.
The stores that opened were across 16 countries with most located in China and India.
To support the open regions during the first quarter, we ramped up our marketing efforts to drive home. Our comfort message. This included former professional quarterback and lead NFL commentator Tony Romo and of Max Cushioning commercial during the Super Bowl and NFL coach Jon Gruden at sports Analyst Howie long and new commercials for Skechers.
Arch fit as well as Brooke Burke featured an arch fit at Skechers apparel commercials during the quarter.
Our new campaign ran on TV as well as digital platforms to support key initiatives for men women and kids.
In the first quarter, we were awarded company of the year by a leading industry publication footwear plus for the ninth time in 15 years.
This was due to our efforts during this challenging 2020 year and our ability to deliver to consumers. The comfort. They wanted we are pleased with our performance in the first quarter at think this was a solid beginning, especially given the ongoing pandemic related difficulties, most recently impacting our international business, which now represents 58%.
Of our total sales.
While many markets continue to face challenges, we are seeing strong signs of recovery.
Recovery at remained focused on delivering our comfort technology and managing the flow of our inventory to fulfill demand, where we are open and drive sales where possible now.
Now I'd like to turn the call over to John.
Thank you David and good afternoon, everyone.
The Skechers brand performed exceptionally well this quarter, despite ongoing challenges posed by the pandemic, including continuing store closures and operating restrictions in many markets across the world.
The quarter began as expected with the pandemic continuing to influence tepid consumer trends worldwide, especially as many markets re instituted lockdowns. However, mid quarter, we began seeing signs of consumer engagement and optimism domestically that we have not seen in over a year.
That led to the results in March that even exceeded our own internal expectations, reflecting high demand for the Skechers brand.
Although we remain cautious given the nature of government responses to COVID-19 globally. We are optimistic that our first quarter results are indicative of the power of our brand as the world begins to recover from the pandemic.
Now, let's turn to our first quarter results, where you will note that due to the unusual nature of last year, we will occasionally compared to both 2020 and 2019, where we feel the added measure is beneficial to evaluating the performance of our business.
Sales in the quarter achieved a new record totaling 143 billion, an increase of $186 1 million or 15% from the prior year and an impressive 11, 9% increase over the first quarter of 2019 on a constant currency basis.
Sales increased $145 9 million or 11, 7%.
International wholesale sales increased 23, 8% in the quarter compared with the first quarter of 2020, and 13, 4% compared with the first quarter of 2019 at.
Our joint ventures grew an impressive 120% in the quarter led by China, which grew 174% against prior year results, which contained the most severe impacts of the COVID-19 outbreak as.
As compared to the first quarter of 2019, China grew 45, 5% driven by strong E Commerce performance.
Subsidiary of sales declined slightly in the quarter by four 8% primarily as a result of continuing closures in Europe and Latin America. However.
However, as compared to 2019, our subsidiary sales grew an impressive four 2% despite the current year operational restrictions.
As expected our distributor business continued to face pandemic headwinds in the first quarter decreasing six 5% at saw a marked improvement as compared to the second half of 2020.
Although we continue to expect this portion of our business to recover more slowly than the overall international wholesale segment. We remain optimistic that we will ultimately see a full recovery of sales in this important channel.
Domestic wholesale sales decreased slightly in the quarter by less than 1%, primarily due to the unfavorable timing of shipments to customers, which we now expect to occur in the second quarter.
Compared to the first quarter of 2019 sales increased eight 1%, which we believe is more reflective of the positive underlying trends. We are seeing with the majority of our domestic wholesale partners, particularly based on sell through we observed in the back half of the quarter.
Direct to consumer sales returned to growth in the quarter, increasing 18, 1%. The result of of 28, 4% increase domestically and a one 9% increase internationally.
The results reflect a slight benefit from the pandemic store closures in the prior year, but more importantly also reflect a notable 143% increase in our domestic e-commerce business and a significant increase in store traffic and sales in March of trend that has continued.
Gross profit was $679 6 million up 24, 1% or $131 9 million compared to the prior year.
Gross margin was 47, 6% an increase of 350 basis points versus the prior year, primarily driven by increases in our average selling price across all segments as well as a favorable mix of online sales.
Total operating expenses increased by $19 9 million or three 9% to $528 million in the quarter.
Selling expenses increased by $11 2 million or 15, 2% to $85 3 million, which was flat as a percentage of sales versus last year.
The dollar increase was primarily due to higher domestic digital demand creation spending as well as the reopening of certain markets internationally.
General and administrative expenses increased slightly by $8 6 million or 2% to $442 7 million, which was primarily the result of volume driven expenses in warehouse and distribution for both our international and domestic e-commerce businesses.
This was partially offset by lower retail labor costs.
Earnings from operations was $157 $7 million versus prior year earnings of $44 8 million. This represents an increase of 252% or $112 9 million.
Operating margin was 11% compared with three 6% of year ago, and 13% in 2019, reflecting strong combination of top line performance and operating expense leverage despite ongoing pandemic related challenges.
Net earnings were $98 6 million or <unk> 63 per diluted share on $155 9 million diluted shares outstanding.
This compares to prior year net income of $49 1 million or <unk> 32 per diluted share on $154 7 million diluted shares outstanding.
Our effective income tax rate for the quarter was 22% versus 15, 3% in the same period last year. The increase was predominantly due to an unfavorable mix of earnings from higher tax jurisdictions.
And now turning to our balance sheet, we ended the quarter with $1 five 1 billion of cash cash equivalents and investments, which was an increase of $148 2 million or 10, 8% from March 31 2020.
Trade accounts receivable at quarter end were at $798 8 million, an increase of $2 6 million from March 31, two.
2020.
Total inventory was 1.07 billion, an increase of eight 3% or $81 8 million from March 31 2020.
The increase is largely attributable to higher inventories to support growth in China and government closures in Europe.
Total debt, including both current and long term portions was $779 7 million at March 31, 2021, compared to $699 8 million at March 31 2020.
Capital expenditures for the first quarter were $84 2 million of which $42 9 million related to the expansion of our joint venture one domestic distribution center.
$13 8 million related to investments in our new corporate offices in southern California.
$12 4 million related to investments in our direct to consumer technology in retail stores and $3 $6 million related to our new distribution center in China.
Our capital investments remain focused on supporting our strategic growth priorities growing our direct to consumer relationships and business as well as expanding the presence of our brand internationally.
For the remainder of 2021, we expect total capital expenditures to be between 202 hundred $50 million.
Now turning to guidance.
First let me preface by saying that we remain in a dynamic situation where conditions can change materially at any point in time.
As a result of <expletive>essing the ongoing impact of the pandemic to our business is difficult.
Incorporated into the following guidance is our best estimate of the influence of these factors on our expected results for 2021, however, if the situation deteriorates and closures continue longer than anticipated or expected results may differ materially from this guidance.
That being said, we are providing a perspective today for our second quarter and full year of 2021 results based upon current trends backlogs and other indicators.
We expect second quarter of 2000.