Q2 2021 Skechers USA Inc Earnings Call
[music].
Greetings and welcome.
And to the Skechers second quarter 2021 earnings conference call. At this time, all participants are in a listen only mode of <unk>.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn of conference over to Skechers. Please go ahead.
Thank you everyone for joining us on Skechers conference call today, I will now read the safe Harbor statement certain statements contained herein, including without limitation statements addressing the beliefs plans objectives estimates or expectations of the company or future results or events may constitute forward looking statements that involve risks and uncertainties specific.
The COVID-19 pandemic has had and is currently having a significant impact on the company's business financial conditions and cash flow and results of operations such forward looking statements with respect to the COVID-19 pandemic include without limitation, the Companys plans and response to the pandemic at this time there of significant uncertainty.
At the duration and extent of the impact of the COVID-19, pandemic and dynamic nature of these circumstances 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 and national and local economic business and market conditions in general and specifically as they apply to the retail industry and the company. There can be no assurance of the actual future results performance or achievements expressed or implied by any of our forward looking statements will occur users of 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 of their 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 condition.
<unk> cash flows and results of operations with that I would like to turn the call over to Skechers, Chief Operating Officer, David Weinberg, and Chief Financial Officer, John to end Tomorrow.
David.
Thank you for joining us today for our second quarter Conference call.
I Hope you your colleagues and loved ones are healthy as the Covid pandemic continues to be a global challenge.
We appreciate the resiliency of the Skechers organization over the past 18 months and hope that those facing the ongoing COVID-19 related challenges are staying safe.
<unk> second quarter financial results exceeded expectations as we achieved record quarterly sales of $1.66 billion, a 127% increase over 2020, and a 32% increase over 2019.
This marks the first time on quarterly sales have exceeded $1.6 billion and.
And together with our first quarter yields of new 6 month record of over $3 billion.
We also achieved a record gross margin of 51, 2% record quarterly diluted earnings per share of 88 cents and exceptionally strong operating margins of 12, 1%.
Our record revenues were the result of increases of 147% and our domestic business and 114% and our international business and both businesses increased over 30% compared to 2019.
International sales comprised 56% of our total sales in the quarter.
This growth a result of increases across all reportable segments is reflective of higher average selling prices on significantly more units sold less promotional activity during the period and consumers embracing our comfort technology and our seasonal athletic and casual footwear lines and addition to our apparel.
Offering.
It is important to note that these exceptional second quarter results came despite the ongoing global pandemic Covid continue to clearly impacts from countries in the second quarter, most notably India, but also remains a challenge for many of the markets with lockdown restrictions temporary closures and reduced store operating hours.
The pandemic and other factors also continued to challenge our global supply chain.
We appreciate the dedication and focus of the Skechers teams around the world without them, we would not have achieved the results we had.
Our international wholesale business grew 95% from the second quarter last year and 37% from 2019.
On a quarterly sales growth was primarily driven by China with an increase of 51% over the same period and 2020 and a 68% increase from 2019.
And as well as Europe, which had an increase of 150% over 2020 and 85% over 2019.
Our joint venture businesses increased 56% for the quarter compared to 2020, and 46% as compared to 2019, and addition to China, Mexico and Israel also improved over both periods.
Subsidiary sales increased 163% from 2020, and 48% from 2019, despite temporary closures and reduced operating hours and many regions, including India, Canada, Japan and parts of Europe, and South America.
The U K, Germany, Canada, France, Spain, and Italy, all achieved notable growth over about 2020 and 2019 comparable period.
Our distributor business improved 122% over last year, though it was down 7% from 2019.
Several markets achieved growth not only compared to 2020, but also of 2019. These include Australia, Russia, Taiwan, Algeria, South Africa, Scandinavia, and Ukraine among others.
Our largest distributor the UAE, where channel as much of our business across the middle East and parts of Africa, and Eastern Europe saw significant improvements over 2020, and we believe it is continuing to improve.
Skechers direct to consumer business increased from 138% over 2020, and 26% over 2019, despite temporary store closures, primarily in India, Canada, Japan, and Chile, and reduced hours and many of our international company owned stores due to local health guidelines.
Worldwide comp store sales were up 109% compared to 2020, including 96% domestically and 165% internationally.
As compared to 2019 worldwide comp store sales increased 13%, including an increase of 22% domestically and a 9% decrease internationally, reflecting the ongoing store closures.
Our direct to consumer average selling price per unit rose, 17% compared to 2020 indicative of our less promotional stance and the success of our comfort technology products.
And given the unpredictability of the Corona virus and its continued impact on very many markets. We remain cautious about a return to normal traffic and sales and many international stores, but believe that we will see improvements where we are fully opened and restrictions will ease.
Our domestic direct to consumer sales increased 101% compared to the second quarter of 2020, and nearly 30% compared to 2019.
Driving this growth was a 232% increase and our retail store sales or 11% over 2019.
And the domestic retail store improvement was partially offset by a decrease and our domestic ecommerce channel of 25%, which faced difficult comparisons to the prior year. However, it is important to note that domestic E. Commerce sales were up 337% over 2019.
Our international direct to consumer business increased 259% over the second quarter of 2020, and 20% over 2019 the growth as compared to 2019 was the result of of larger International company owned retail store base and increases and our ecommerce business a number of markets.
<unk> achieved growth over both 2020, and 2019, including the U K, Spain, Germany, and Mexico and others are.
Our E Commerce channel remains a meaningful growth opportunity and continues to grow this business. We recently launched our new loyalty program and the United States, which we will be capitalizing on and in the coming weeks. We're also looking forward to the planned expansion of our worldwide E Commerce presence this year and into 2022.
And the second quarter, we opened 13 company owned Skechers stores, including key locations and Antwerp, Barcelona, Berlin, and Lima, we closed 8 locations and the second quarter as leases expired.
We have opened 3 stores to date and the third quarter and have another 3 plants through the end of the month with another 20 to 25 expected to open by year's end.
And additional net 63 third party Skechers stores opened and the second quarter across 26 countries, including our first and the Dominican Republic and.
In total at quarter end, there were 4057 skechers stores around the world. Another 145 million to 155 third party stores are expected to open by year end.
Sales and our domestic wholesale business improved significantly, 206% and the second quarter compared to the same period, and 2020 and 31% compared to the same period and 2019 nearly every product category achieved growth in the quarter with the highest gains coming from sport kids.
Casual and our seasonal fast sandal footwear. Additionally, the average selling price prepare increased reflecting the appeal of our new comfort product and technologies.
Innovations and developing footwear technology has been a significant part of our DNA from much of our history.
Going back to a made to last occupational footwear to the lightweight cushioning and performance material for a first generation Skechers go run and go walk lines to features that deliver comfort and every pair our core product philosophy of comfort style innovation and quality at the right price is resonating.
With consumers, especially during these difficult times as we believe people are embracing a more relaxed lifestyle and want to incorporate comfort into their work and weekend wear.
Throughout the quarter, we were strategic and our approach to marketing and communicating the comfort and innovations of Skechers vast collection of products for men women and kids and the second quarter on multi platform approach include of television outdoor print and online and many global markets. This created awareness helped drive sales.
And resulted in a record revenues.
To further support our business and the coming year, we are enhancing our infrastructure with new distribution centers and Peru, the UK and Japan and are looking for a location and India.
We have completed our new 1.5 million square foot, China distribution center, which as of this month is fully operational we are continuing to work on the expansion of our LEED Gold certified North American distribution center, which will bring our facility in southern California to 2.6 million square feet and 2022.
Given our global growth, we are confident that skechers innovative collection of comfort footwear and apparel resonated with consumers as they began returning to work dining out shopping and traveling.
And where markets were open and restrictions eased sales exceeded our expectations and in the markets that were largely closed through to local health guidelines, we still performed well given the circumstances. We believe are exceptional results and the second quarter, our size of the power of the brand globally and now I'd like to turn the call over to John.
For more detail.
Thank you David and good afternoon, everyone Skechers second quarter results were remarkable and even exceeded our internal targets for the period. They clearly illustrates the strength of our comfort technology product portfolio resident brand and the focused execution of our global growth strategy and we delivered these results.
Despite lingering obstacles posed by the pandemic, including supply chain challenges continued store closures and operating restrictions, primarily and some international markets.
Now, let's turn to our second quarter results, where we will provide comparisons to both prior year and 2019 since.
Since the prior year was heavily influenced by the impact of the pandemic and numerous lockdowns and will largely focus my commentary on the comparisons to 2019, because we believe and has a more meaningful period against which to assess our performance.
Sales and the quarter achieved a new record totaling 166 billion and increase of $928.3 million or 127% from the prior year and a 32% increase over the second quarter of 2019 with both our domestic and international businesses growing.
Of our 30% of.
On a constant currency basis sales increased $857 million or 118% from the prior year.
International wholesale sales increased 95% year over year and grew 37% compared to the second quarter of 2019.
Our joint ventures grew 56% year over year led by China, which grew 51% on the strength of robust e-commerce demand, partially offset by weakness in several of adjacent markets, which are still being impacted by the pandemic.
As compared to the second quarter of 2019, China grew by 68%.
Subsidiary sales increased an impressive 163% year over year and as compared to the second quarter of 2019 grew 48%.
<unk> versus 2019 was primarily the result of volume increases, particularly in Europe.
Our distributor business grew 122% year over year of declined by 7% as compared with the second quarter of 2019, we are pleased by the year over year growth and this business, which as expected continues to recover and more slowly from the pandemic. However, we remain optimistic that this business retains its attractive long term.
And growth characteristics.
Direct to consumer sales increased 138% year over year supported by growth in both domestic and in international markets, albeit at a lower rate due to store closures and the period.
And as compared with the second quarter of 2019 direct to consumer sales increased 26%. The result of a 30% increase domestically and a nearly 20% increase internationally.
Domestic wholesale sales grew 206% year over year and as compared to the second quarter of 2019 increased 31%.
As indicated on last quarter's earnings call. We continue to see very positive underlying trends with the majority of our domestic wholesale partners, including healthy sell through rates and strong average selling prices.
Gross profit was $849.5 million up 130% or $480.9 million compared to the prior year.
Gross margin for the quarter was 51, 2% and increase of over 70 basis points versus the prior year and 270 basis points as compared to 2019.
In both instances gross margins improved as a result of higher average selling prices across all segments compared to 2020. The increase in gross margin was partially offset by channel mix, including a lower proportion of e-commerce sales and a higher proportion of domestic wholesale sales.
Total operating expenses increased by $223 million or 51% to $652.4 million and the quarter versus the prior year period.
Selling expenses and the quarter increased year over year by $72.2 million or 120% to $132.4 million. However, as a percentage of sales. This represented a year over year decrease of 30 basis points and as compared to 2019, a 100 basis point reduction.
The dollar increase year over year was primarily due to higher demand creation spending as markets reopen to globally.
General and administrative expenses and the quarter increased year over year by $148 million or 40% to $519.9 million, but decreased as a percentage of sales by almost 20 percentage points.
The dollar increase year over year was primarily reflective of increased labor and incentive costs as well as volume driven expenses and warehouse and distribution for all our businesses globally.
Earnings from operations of our $201.2 million versus a prior year loss of $61 million and increase of $262.2 million.
Compared to the second quarter of 2019 earnings from operations increased 81%.
Operating margin was 12, 1% as compared with 8.8% and the second quarter of 2019 and increase of 330 basis points.
Net earnings were $137.4 million at 88 per diluted share on $156.7 million diluted shares outstanding.
This compares to prior year net loss of $68.1 million or <unk> 44 per diluted share on $154.1 million diluted shares outstanding at.
As compared to the second quarter of 2019 net earnings improved 83% from $75.2 million of <unk> 49 per diluted share.
Our effective income tax rate for the quarter was 24% versus and income tax benefit of $4.3 million and the prior year and an 18, 4% effective tax rate in the second quarter of 2019.
And now turning to our balance sheet, our cash and liquidity position remain extremely healthy during the second quarter, we fully repaid our revolving credit facility of which $452.5 million with outstanding and still ended the quarter with 1.32 billion and cash cash equivalents and investments.
This reflects a decrease of $234.5 million or 15, 1% from June 32020.
Trade accounts receivable at quarter end were $778.2 million and increase of $300.2 million from June 32020, predominantly a result of higher wholesale sales.
Total inventory was 1.06 billion and increase of 2.9% or $29.5 million from June 32020.
The increase is primarily attributable to higher inventories to support growth in Asia.
Total debt, including both current and long term portions was $312 million at June 32021, compared to $763.3 million at June 32020, reflecting the repayment of our revolving credit facility during the quarter.
Capital expenditures for the second quarter were $62 million of which $23.1 million related to the expansion of our joint venture 1 domestic distribution center and the United States.
$14.7 million related to investments and our direct to consumer technologies and retail stores 8 million related to our new now fully operational distribution center, and China, and $7.8 million related to investments and our new corporate offices and southern California.
Our capital investments remain focused on supporting our strategic growth priorities growing our direct to consumer business as well as expanding the presence of our brand internationally.
For the remainder of 2021, we expect total capital expenditures to be between $150 million and $200 million.
Now I will turn to guidance.
Given our outstanding performance this quarter as well as cautious optimism that the recently resurgent virus impacts will be limited, we expect third quarter and full year results above our previous guidance range in both sales and earnings per share.
We expect third quarter of 2021 sales to be in the range of $1.
6 billion and $1.65 billion and net earnings per diluted share to be in the range of 70 and 75.
For fiscal 2021, we now expect sales to be in the range of $6, 1.5 billion and $6.25 billion and net earnings per diluted share to be in the range of $2.55.
And $2.65.
We anticipate that gross margins over the back half of the year will be up as compared to the back half of 2019 and that our effective tax rate for the year will be approximately 20% as compared to a rate of 5.5% and 2020 and 17, 2% and 2019.
And now I'll turn the call over to David and for closing remarks. Thank.
And thank you John.
Our second quarter performance exceeded expectations with 3 new records quarterly revenues of more than $1.6 billion gross margins of 51, 2% and diluted earnings per share of <unk> 88.
Our innovative comfort product resonated with consumers around the world conversions and foot traffic improved and many of our retail stores opened during the period and our E Commerce business continued to perform well.
Although we remain on a fluid situation with various government responses to COVID-19 globally, given our performance and the first half of the year the strength of our brand and our product. We believe our momentum will continue and the back half of the year and into next year, we will remain focused on driving sales by managing our inventory flow developing.
And delivering fresh new innovative product and communicating our message to consumers.
And that Skechers is the comfort technology company and now I'd like to turn the call over to the operator for questions.
Thank you at this time, we'll be conducting a question of Bachman looking at like to ask a question. Please press star 1 on your telephone keypad, a call from Asia and the Kate Your line is from my question. Hugh you might start to if you like to remove your question from the queue from.
For participants using speaker equipment, and Nathan of clients to pick up your handset before pressing at the start.
Our first question comes from Jay sole with UBS. Please proceed with your question.
Great. Thank you so much of what I ask about the domestic wholesale business just because you know up 31% versus 2019. Obviously you had an exceptional result can you just give us maybe elaborate a little bit more on what you saw by channel, whether it's family channel off price clubs and the online pure plays and maybe just give us a sense of maybe what you saw on some of the different <unk>.
That business and then secondly, if you could talk about if the growth was really market share gains is it sort of restocking based on really good sell through last year and line inventory levels or are you just seeing.
Really strong comps and.
And those stores across the channel that would be helpful. Thank you.
I think it's.
All of the above we're actually performing better and all the channels that we're in.
Family Channel the clubs.
We have product that resonates that's higher priced so we were able to move people to a higher price point keep the lower price points. They werent on sale of this often we had a lot of replenishment and we've done relatively well, although it is very difficult and replenishing them too.
And to a higher degree of then they probably had planned when we went into the quarter. So if you take the higher price points.
And the availability of product our performance against competitive brands that are out there and.
And then not being on sale and getting more margin for at they've replaced.
All the time.
So.
We've got and on all cylinders, so product resonates and we have higher price points, we've kept our traditional price points and we've delivered.
Relatively on time.
Thank you. Our next question comes from Kimberly Greenberger with Morgan Stanley. Please proceed with your question.
Okay.
Hi, This is Alex straighten on for Kimberly Greenberger I have a quick question on the ISP and granted you are seeing I think you said that the direct to consumer Asp's grew 17% year over year in the prepared remarks, but could.
And you just talk about your pricing strategy or how you think through strategic price increases at on a market by market basis or could you see even more increases throughout the year of just more on the strategy there would be helpful. Thank you.
Yes, I think.
Alex.
And our approach is to deliver great product and then.
And receive fair value for that and I think what youre seeing is that our product as David mentioned is performing exceedingly well, it's infused with comfort technology and that's resonating with consumers.
And as a result, we believe and we've seen that we're able to charge more for that product. In addition, and part of that ASP is clearly a more favorable promotional environment across the board. We certainly benefited from that as did our wholesale partners and we see that and our sell through and Asps, we see that and there.
Sell through at Asps, and I think Youll continue to see us where appropriate and take advantage of the value. Our technology is delivering at the consumer level on top of that obviously, we watch input costs and that's something we adjust for occasionally.
But I would say the predominant driver right now is getting value for the tremendous product, we're delivering and the marketplace. Yes, I think it's important to note that it wasn't like and of course the board just price increase that we're taking more price what we've done is inc.
Increased.
Performance and the features and our footwear to make at a higher price and seen is of higher priced product and the marketplace not only.
Raising prices of existing I mean, we know.
<unk> received as.
Technical company with great comfort and it's worth more and the marketplace.
Great. Thanks, so much.
Thank you. Our next question comes from Gabby Carbone with Deutsche Bank. Please proceed with your question.
Hi, congratulations on a great quarter, so kind of wanted to follow up on Jay's question on domestic wholesale really nice results there and just wondering if you could dig into your thoughts around the opportunity to take you know at yourself on shelf space at.
Of your competitor.
Pull out of certain retailers and maybe I'll, let you think that channel could grow you know on and more normalized base debt from here.
Yes, I mean I think.
To add on to David's comment earlier in response to Jay I mean, we're seeing really good sell through of the product, it's driving higher prices for our wholesale partners.
There absolutely is an opportunity to gain shelf space as shelf space becomes available, but I would say independent of that on our product is tremendously effective for our partners and again, we see this on our own data as well.
I'd like to tell you that I think forever, we can grow domestic wholesale at at.
200% of 30% clip, but I think it's probably an opportunity short term to grow above trend and then as we've said before we believe long term. There's no reason why domestic wholesale can.
For us at least of grow above market, because we believe we are exceedingly well positioned with key retailers and and categories and with technologies that consumers value, but certainly growing above the market in the domestic wholesale marketplace of long term and is absolutely achievable as well.
Got it and just a quick follow up on your gross margin performance was really impressive and our retail segment.
And about 800 basis points from 19.
What are the biggest drivers there and like what kind of performance because it be expect in the back half of like what what sort of kind of hold here and maybe at some kind of pressure I would you should think about.
1 of the drivers as we mentioned at was it was it was pricing.
That was the that was the most significant driver and our intention is to have that pricing modality and continue in the back half of the year now as I said also a contributing factor was the promotional environment. We're certainly eager to see this environment remained steady and I think most indications are that what youll see but certainly it's also a competitor.
Of landscape, so we need to be cognizant of what others are going to do I don't want to get into segment specific margin guidance other than to say the guide we gave relative to the back half of the year is certainly heavily influenced by what we've seen at and direct to consumer channel that's been a very big wind at all.
And our backs and we expect that to continue.
Okay, great. Thank you so much.
Thanks, Kevin.
Thank you. Our next question comes from Jim Duffy with Stifel. Please proceed with your question.
Thanks, John and David Hope you guys are doing.
I wanted to ask Greg.
Yes.
Yes, Indeed, I wanted to get an update on China business trends can you just talk about what youre seeing and retail stores, there relative productivity vis vis 2019, and what you saw during the 618 holiday period, and maybe just comment on.
Throughput through the new distribution center and how that's working for you and things to watch for with respect to that.
Well I think at first thing to start off with is China performed exceedingly well and again kind of the norm we've come to expect out of China, but it's anything but normal it was propelled and large part by the E Commerce channel, which has been a characteristic of that market for a few years now we did see better trends than we had been seeing.
Certainly over the last part of 2020 and.
And the physical stores I wouldn't say, it's fully recovered, but I think it's getting better which is a good sign that all being said I mean E. Commerce is going to continue to be the propellant behind growth in that and that marketplace. Overall again very healthy for us we didn't see any negative.
<unk> from some of the other challenges brands saw and the period.
We think we did and exceptionally good job at continuing to grow the brand and the marketplace and then adding the capabilities at the distribution Center, which is our first company owned distribution footprint in the market.
Has gone really well given the challenges we face getting it up and running with Covid and the travel restrictions and market and we're very pleased with at.
At the point at that at the moment, but there's also plenty of opportunity to continue to improve and.
And we are eager to see that obviously, we remain incredibly optimistic about China's long term trends for our brand.
Great and John you referenced some of the backlash for other brands has there been any detectable change and the promotional environment that you've seen and the China marketplace.
Now for our brand.
Around some of the holiday selling period of 6 to 18, and 11.11, you do see a little bit more intense promotion ality.
I wouldn't say and was extraordinary or noteworthy of above and beyond what we would normally come to expect in those periods and.
And most importantly for our brand and we felt very good about the environment, both through 618 and around the balance of the quarter.
Thank you very much guys.
Thanks, Jim.
Thank you. Our next question comes from Omar Saad with Evercore ISI. Please proceed with your question.
Thanks for taking my question great quarter.
I wanted to ask about the E com versus stores dynamic I mean, clearly of stores are coming racing back even relative to 19 levels. I think domestically you said stores were up 22, but E comm was down and the 'twenty. So you're kind of seeing that traffic really decline on the ecommerce side of stores come back is that something I mean, it's clear support for.
The importance of stores.
And the equation, but is that something you've seen and other markets in China as well when the stores reopen and the traffic comes back to the E com suffers and when do you think E com and will start to grow again.
Uh huh.
Yes, I mean, I think this quarter's and anomaly on marketing completely blunt I mean last year at this time E. Commerce was the only business in town and that's all we had and I think you need look no further than the growth rate on and kind of a 2 year stack basis at 337% I mean, that's that's not too bad of a number.
Our expectation is that this quarter is at a bit of an anomaly and the grand landscape of continuing to see e-commerce grow as a business.
It was just a very difficult comparison, given the in particular, the domestic dynamics on the international side, even before we've completed the rollout of the new platform globally and several other technology solutions that will be going into place over the next year or 2 we saw a very decent growth in international E Commerce.
Where we operate and directly and then and then obviously, we talked about China being from fell by by E Commerce. So.
And just take it in context of 300% 2 year stacked growth rate is none of them at.
Disappointed and we continue to be very optimistic about the long term opportunity for e-commerce to add to our solution at the consumer level.
Got it and Thats really helpful of complex job and then a quick follow up on the comfort trends you guys are talking about a lot of talking about comfort technology. What gives you confidence that it's sticky and.
That we don't necessarily go back to dress shoes, or other and maybe less comfortable shoes. When life returns people go back to work and any at any sneak peeks at key comfort products and technologies and the pipeline to please thanks.
Well, we always have a significant amount of the pipeline and we are.
Certainly try not to go and let everybody know and advance of bringing them in the first time, especially with what's going on.
Around the world, but.
This is growing around the world and it seems at.
They are on those service, but I think it's common.
And what process that comfort is here to stay more people are working from home people more comfortable when they go to work.
They love the technology that we present and they can wear at and multiple styles. So it's not that we're only selling of technology and a item we sell our technology through all of the items that fit everybody's lifestyle. So we hit it on both.
Fronts, and we think that's absolutely going to continue on and we will continue to develop for it.
I would just add Omar I think it's also when you think about comfort I would also bring into Europe perspective health.
Being comfortable as part of being healthy and you certainly can't argue against the general trend of focusing on health and wellbeing and.
And it's not there's nothing good about standing on a pair of shoes that are skechers and being uncomfortable at having your feet hurt so.
Comfort to us as also tantamount with with a health benefit to the consumer and I would I would definitely echo Davids comment and I have a pair of dress shoes from Skechers and our Mark Mason line and they are the most comfortable dress shoes Io and so it's not limited just you are our core casual and athletic we infuse that technology across the product portfolio.
Thank you.
Thank you. Our next question comes from Laurent <unk> with Exane BNP Paribas. Please proceed with your question.
Good afternoon, Hi, David Hi, John.
Hi, Ross.
I've got a question for you John with regards to and the guidance your second quarter top line growth was up 32% onto your stack.
The third quarter guidance.
And slide 22% growth and then the fourth quarter low double digits on a 2 year stack is this due to conservatism or are there. Other factors that we should consider I think and universe from ship from U S. Little sense of <unk> from <unk> any other factors, we should consider with regards to the overall top line.
Well I think you hit on the 2 I mean, what is there certainly is a tremendous amount of uncertainty and the marketplace remaining I mean, even as we sit here today I don't think we would of forecast as.
And as much of an impact from the pandemic continuing at this point and time, what I think is remarkable about the quarter. We just delivered as we deliver day in spite of several of those challenges. So there's still some unknowns, we're baking into the probability weighted outcome and we look at relative to the balance of the year. There are also a few unique call.
<unk> coming into play in the near term as we get China and that distribution center up and running at.
As we bring online distribution footprint and the U K and we've been talking about more fully and as we bring back more and more labor into the picture as stores improve I'd also note, we're taking steps like like many retailers to ensure that we're attracting and retaining the best and brightest so we're making some.
<unk> to our part time labor rates and labor rates at our retail business where.
Today, as we look at it and we're paying.
And we're paying about on average over 40% of prevailing minimum wage and each of the markets and which we sell today and that and that has an impact which 1 we absolutely can absorb and we think is beneficial for the long term.
I would also just note as you look at the stores it wasn't as if all of the stores. We're working at full capacity, we saw tremendous strength and our big box neighborhood stores.
The outlet stores did much better than before but I wouldn't characterize it as fully recovered and then we have some of our concept stores and particularly those and high tourism locations and.
Mall based properties that are still suffering from from restrictions or limited traffic flow of that arent, yet fully back to peak efficiency and when those come back that we believe delivers another leg.
Assistance from a from a leverage perspective, so all of that being said, it's a variety of factors, we baked into the into the back half guidance, but we will also want to look at that again next quarter and see if there is further clarity we can lend.
That's very helpful. John and then second question on on the supply chain, obviously, a lot of dynamics at play this year West coast, but obviously, we are and the headlines of Vietnam.
And that's called for shutdowns looked like shutdowns.
And remind me, but I think and you're right in your 10-K says the majority of your manufacturing.
And manufactured in China and Vietnam.
And just remind us and all.
How big of your Vietnam sourcing is at 40% of all work on revenues.
And if there is a 2 week shutdown could we manage that or when does it become problematic is that like a 4 to 6 week shut down any color on that would be very helpful.
That's 1 piece of of member any pieces of Youre talking about <unk> and.
I think we should just point out here that the numbers you threw out was Vietnam as a whole and the issued today for the closure of seems to be south Vietnam, which is a smaller piece of our overall Vietnam business to begin with and 2 weeks.
We could certainly handle.
Uh huh.
I don't know at what point of it becomes catastrophic it has to become part of the overall of what happening every place else and of supply chain and general.
Right now we seem to be doing as well as anyone we are bringing them.
And we're meeting our shipping, but it certainly could be faster so south Vietnam is not as important to us as and Vietnam as a whole and it will depend on the overall supply chain and availability of containers and shipments and and.
And getting it delivered at the Port.
Very helpful. If I could squeeze 1 more on Europe subsidiary of wholesale was up 85% on to your stock.
John and David could you guys give us any context of just how big this business here and.
And where do you think of it goes and 2 weeks 21.
They're on.
Look at it.
1 of our it's 1 of our.
Bigger regions and I'd say at.
It's a meaningful contributor and I think what's noteworthy about the growth is at it was really in every market almost every single market in Europe for us on a 2 year stacked basis grew by double digits, some by by Triple digits. So.
And I, probably don't want to put a specific side on it other than to say, it's obviously 1 of our significant contributors in the subsidiary line.
Okay. Thank you very much and best of luck.
Thank you.
Thank you. Our next question comes from Brian Mcnamara with Banbury and capital markets. Please proceed with your question.
Hey, congratulations on the strong results and guidance.
So your full year guidance supplies of flow through of your better Q2 of better Q3s and expected and then some so I'm curious what has been the biggest surprise over the last 90 days is at or is it simply a function of conservatism given it was your first of all your guide and a while or has the strength surprised you relative to your prior expectations.
I think we were positively surprised by the durability of some of the trends we saw in late Q1 in the direct to consumer channel in particular.
We're optimistic that some of the markets that have been closed over the last quarter and come back online and we've worked some of that into the situation and then.
And the pricing held and the promotions health and I think that is something we were again cautiously optimistic would be durable throughout the balance of the year and network. We're increasingly comfortable that that's more likely than not again still keeping some little bit of dry powder and case, we experienced unexpected consequences from COVID-19 or.
And now floods in Europe, and other events that we've had to navigate through but overall I would say increasing confidence that the actions. We've taken the results. We've seen are a bit more durable than we had believed coming into the quarter.
And any update on India, and kind of are and obviously that's been of great.
Area of Covid concern any update there.
So far they are starting to open up we have more stores open although traffic still hasnt returned I think they still have of ways to go but they continue to make progress every month, especially and some of the <unk>.
Less densely populated if you can call anything and in India that areas around so we're making progress. They are open we are doing business. There past the closed down stage for the time being and continue to make progress.
Great. Thanks very much.
Thanks, Brian.
Thank you. Our next question comes from Susan Anderson with B Riley FBR. Please proceed with your question.
Hi, good evening nice job on the quarter.
And I'm curious just your comfort levels around your inventory did you feel like you had enough inventory in the quarter or you feel like Theres still kind of some stocking to do particularly within the wholesale channel.
Satisfy the demand there.
I think truth be known as we certainly could have sold more had we got net here.
It's a very it was a very difficult transition from slowing down through the pandemic and then having this explosive.
Consumer <unk>.
Purchasing program that's gone on so I think we managed it very well like I said we.
And we're somewhat surprised how well it held up and how well the promotional cadence held up.
And we were able to bring in more goods than we did in 2019, even with the supply chain issues and.
Fill that pipeline, we certainly could have done some more but.
And.
Demand Hasnt waned, so we will pick that up and Q3. So there's still a lot of work to be done and a lot of things to happen but.
We're still trying to get and as much inventory and as we can and and can pick up the pace. That's 1 of the conservative items is we're not sure how fast the supply chain picks up and if we get significantly further along than we are today.
And I am sure if we could get at here faster, we could sell at faster and move it out I think what it's taught us is debt.
We can be very reactive.
2 of inventory needs and we can bring at and when we do it continues to sell through and hold price. So those are the 2 big positive surprises for the quarter and I think they continue into this quarter.
Okay, great that sounds good and then just a follow up on the marketing for the second half should we expect increased marketing for the second half again sounds like at what we saw on this quarter.
I think you should expect it to be relatively steady kind of on a percentage of sales basis to what.
What we've traditionally done maybe a little bit more depending on.
And whether or not we have the inventory David mentioned to be able to see.
Satisfy the demand and what we've seen this year so far that the marketing we've put in place has been extremely.
Effective and driving top line.
Absent kind of timing differences that come at the end of the year normally and I think you can expect it to be of relatively consistent rate for what we what we traditionally observed but with some dexterity at our disposal of should we feel the opportunity to drive sales.
Okay, Great and then if I could just add 1 more im curious just on the work shoe business and if that's come back significantly as some of particularly the at leisure and hospitality workers get back to work and <unk> seen a big pick up and that type of business.
Yes, I don't think debt business ever went away and that's something that they came back very quickly it's a very.
Core business for us, it's done well and it has continued to grow so.
And we continue with it and we do expect and it will continue.
Great.
It's been and extremely strong division for us throughout.
Throughout time, but even during the pandemic yes.
Okay, great. Thanks, so much good luck the rest of year.
Thank you.
Thank you. Our next question comes from John Kernan with Cowen. Please proceed with your question.
Hey, good afternoon, and congrats on the great results guys.
Thanks, John and I.
I wanted to go on a gross margin you talked at out of being up and the back half I think there is a scenario of youll be north of 49% for the year.
Do you think gross margin can go over time, it feels like you're getting price.
Tale of the mix shift seems like it can be of benefit over time, just curious how we should think about the gross margin line as it relates to your long term operating margin overall.
Yes.
Yes, I mean listen a portion of that is going to be heavily influenced by mix.
And you got to keep mix in the picture that being said and our long term algorithm for gross margin performance has been pretty consistent which is we will continue to mix up toward direct to consumer and international businesses and.
And given normalized growth rates on the domestic side of things that will continue to accrete margins and the call at 25% to 50 bps range annually again, I think you've got to be cognizant, though that we outgrow kind of a normal rate and domestic wholesale and may not have.
Accretive margin impact, we want but it creates more gross profit dollars, which is absolutely something we will we'll take.
And we're encouraged by what we've seen and pricing we got to maintain vigilance on the on them on the marketplace and we are cognizant there still are input cost pressures out there that.
The whole industry is dealing with and shipping.
Few raw material side of things of tariffs that exclusions that of expired. So.
And part of it is also at.
Adjusting to that environment, but but again the long term profile for growth is continue to benefit our our mix towards international and direct to consumer and Thats certainly something we think has significant legs for the business.
Got it and I guess, 1 more just on.
And there were some earlier questions on the guidance for the back half of the year versus 2019.
And as indicated deceleration and you did indicate that there is still a lot of uncertainty I'm just curious for North America, particularly the U S.
And how youre viewing the opportunity for back to school and holiday does it looked like fourth quarter implied revenue guidance assumes another deceleration off of 2019, so any comments on how you see banks going out of shaping up to be great.
I think we're cautiously optimistic on on back to school and I think you have to keep in mind, whether or not at back to school happens is dependent upon how at schools and school districts behave.
We plan for a reasonable recurrence of back to school of similar to what we saw at pre pandemic, but probably not a full throttle return at this juncture.
We're also dealing with the challenges, we've mentioned and the supply chain and making sure. We have the product at the right time is going to be going to be of criticality and we've got to be mindful of and in light of this environment and I'd also point out that as you look relative to 2020, you were starting to see early recovery in the and.
And the pandemic world in those quarters. So those are also very healthy quarters for us.
Overall that all being said again, we remain extremely optimistic about the balance of the year and into 'twenty 2.
And we're planning for some maneuverability should things change because we're certainly and Abbott now of seeing some pretty dynamic forces and the marketplace.
But we also think the guidance we've rolled through reflects that confidence and is a fairly healthy.
Improvement on what we previously discussed and that's good I would also just keep in mind when you're looking at EPS, you've got to keep in mind the tax rate differentials. If you look back the last couple of years at <unk>.
20%, we're at in some instances of 500 basis points higher on the tax rate and so if you adjust for that I think you look at the guide relative to Q3 in particular.
And that adds another 10 percentage points of growth into that number. So so please do keep that in mind.
Excellent. Thank you.
Thanks, Jonathan.
Thank you. Our final question comes from Sam Poser with Williams trading. Please proceed with your question.
Thank you guys for taking my questions I've got 3.
Yeah.
Did you are you seeing given that your inventory, while you could sold more of it looks like at some.
Pretty good shape relative to others.
Did you ship are there orders shifting forward because you have availability of have trucks and do you anticipate that continues.
To go on and that's complete.
And you can go on and while you could have more inventory if there is a problem with.
With Vietnam and other places.
And when do you think that might would of when would you see it at Texas.
Is that something that would be of spring of factor late Q4.
And just given the way you move product around.
I don't think Theres any shift and there I mean, what we're seeing is fantastic sell through and very strong asps at the wholesale partner level.
And it doesn't there's no evidence at our.
Our analysis of this is a shift and like David said, we could have sold more if we had more because of the demand is strong for the product yeah, and when you imply a shift do you think things are moving and and people are stocking more and it slows down.
I mean, they have opened.
But they have.
They have dollars available for your product you had orders before that everything is just moving and also to smooth it out because of all of that.
Ground transportation problems sort of in the U S and sort of legally.
Yeah, but I don't know that at our stock to sales.
Physicians and accrue.
Across the board as far as our wholesale business is concerned and then even of our own retail business.
It's still way down and so there's plenty of places to go and that doesn't preclude a shift that just means we haven't filled the whole demand yet I think that that would be opposite.
And then 2 other questions.
You said.
Can you identify sort of the.
The increase in your marketing spend and sort of what kind of return on investment you saw with debt and then lastly, you mentioned about having village.
A set of of diligence when the marketplace.
And maybe give us some more color as to what you mean by that.
On.
On the marketing spend I mean I would just.
I'm not going to give you anything at a detailed level other than to say.
The sales trajectory both in the quarter and what we've implied for the balance of the year clearly reflects that.
The power of that marketing many of markets of which are just restarting marketing coming out of the at.
1 of the kind of post pandemic lockdown period at the primary lockdown period, So youre seeing good trajectory, there and I think thats that is certainly driven by.
The efficiency and our marketing and I'd also point out and you look back in Q1 were a little bit lighter on marketing so.
Some of that is a little bit of.
Catch up I'm not entirely sure of what your second question relates to Samsung, maybe if you could clarify a bit that'd be helpful.
Well it was it was really about.
It was it was and in the context of.
And what you.
But that the marketplace was very clean with inventory and are holding these higher asps.
On a lot of promotions and I think.
Why don't you mentioned that you thought you would have villages.
On the marketplace to make I guess to make sure it goes on.
Go back to more promotional and I just wondered.
What that meant and how you how you go about doing that.
I don't think we control that I think.
People see how well its sales and I think most retailers understand that there's no requirement for that promotional cadence at sells well they get the higher asps and of higher margin. So I think everybody is just doing just common sense type of business going forward, we're not we haven't.
All of the guns to anybody's head and told them they can't promote assist and not worth it now but.
But we do monitor we monitor asps and we monitor sell through rates and inventory levels at all of our key wholesale partners. So so we're watching it carefully we watch that to help them.
Plan inventory levels.
And we watch it for us.
Just to see how the products performing and then we have also the benefit of our retail business, where we can we can see on a on and overall market environment.
Asps and sell through rates are performing and that we watch very carefully.
And 1 last thing do you have any could you give us any color on.
On on.
And today.
And update on July of direct to consumer same store sales quarter to date.
I would generally say the trends have been consistent.
With what we've seen when you kind of adjust for holidays and timing of the day and weekend and things like that but the general general pattern of what we've seen remains healthy and consistent.
Alright. Thank you very much continued success.
Thanks Al.
Thank you ladies and gentlemen, we have reached the end of our question and answer session. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful evening.
Okay.