Q2 2022 Skechers USA Inc Earnings Call
Greetings and welcome to the Skechers second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Skechers Investor Relations. Thank you you may begin.
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.
Specifically the COVID-19 pandemic has had and is currently having a significant impact on the company's business financial condition cash flow and results of operations and.
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 is significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic.
The dynamic nature of these circumstances means that what is said on this call could change at any time and as a result 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, including supply chain delays and disruptions in general and specifically as they apply to the retail industry and the company.
There can be no assurance that the actual future results performance or achievements expressed or implied by any of our forward looking statements will occur.
This is our 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 laws for a description of all other significant.
Risk factors that may affect the company's business financial condition 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 Benda more David.
Thank you for joining us today on our second quarter 2022 conference call.
This year marks sketches 30th anniversary.
Accomplishments this quarter and year to date are a testament to the strength of the Skechers brand creative talents of our design team who continues to evolve our leading comfort technologies with strong execution by our management to build efficiencies to better serve our customers and the commitment of all of our global workforce to drive.
In the face of ongoing COVID-19 related economic and political challenges.
We would like to recognize the ongoing efforts of our global teams from retail associates on the front lines, who are supply chain personnel working diligently to move our product around the world.
We would also like to acknowledge our team in China, who continue to whether COVID-19 related restrictions as they safely work through Lockdowns and return to business as it is opened.
Skechers is a widely recognized and trusted brand as well as the third largest athletic footwear company in the world with 4255 Skechers stores in our network of leading retail partners.
While we are a brand with a broad range of products for every agent.
We also know that not everyone has slipped on skechers comfort innovation style and quality.
We also recognize that we are relatively new in many markets and have tremendous expansion and growth opportunities.
In the second quarter, we focused on meeting the demands of our wholesale partners globally, and expanding our direct to consumer business, including growing our digital commerce footprint.
All to ensure our loyal consumers worldwide are able to where skechers comfort technology products, we delivered hands free slipping comfort footwear to men women and children and continue to develop new styles with skechers arched it.
We launched getting Viper court, our performance footwear designed specifically for a pickle ball.
This growing sports in America.
Awareness for the Skechers performance Division with also meaningfully elevated with major championship wins from two of our elite golfers Brooke Henderson secured her second major career win at the Monday every all the championship in France. This past weekend, while not Fitzpatrick earned its first major championship last month.
At the U S open at Brookline.
Skechers the comfort technology company remains the leading choice for our customers and consumers worldwide.
Our brand strength and the efforts to meet the broad based demand for our innovative comfort product, resulting in a new quarterly sales record of $1 87 billion, and especially remarkable achievement given the macroeconomic headwinds supply chain issues and COVID-19 related restrictions primarily in China.
Total sales growth of 12% or 16% on a constant currency basis was the result of increases in our domestic and international businesses of 15% and 10% respectively.
By region. The growth was driven by increase was up 21% in the Americas, and 8% in EMEA, which improved 17% on a constant currency basis.
APAC sales were flat year over year, primarily due to lockdown measures in China, which began easy in June and were offset by strong growth in most other Asia Pacific markets on a constant currency basis APAC sales improved 5%.
In the quarter, our wholesale business increased 18% led by 35% growth in the Americas and 6% growth in EMEA.
Actually offset by a 3% decrease in APAC overall.
Overall wholesale sales were driven by an increase in unit volume and average selling price per unit.
Our U S wholesale business increased 30% due to double digit improvements across genders and categories, including apparel and accessory lines.
This reflected strong consumer demand along with improved availability of product. In addition to the growth in the United States. Nearly every other market in the Americas achieved double digit growth, including Mexico, and Canada grew.
Growth in EMEA wholesale was primarily driven by strong distributor sales, particularly in the middle East and Africa as well as Scandinavia in Turkey.
The improvements were partially offset by currency headwinds due to the weakening euro as well as the continued deflation of shipments to Russia.
APAC wholesale sales declined primarily due to the lockdown measures through much of the quarter in China.
India, which faced temporary store closures and lockdown measures during the second quarter of 2021 returned to solid growth. This year, driven by pent up demand and the availability of product.
South Korea, Malaysia, and our distributor in Australia, and New Zealand also a strong improvements.
While China continues to navigate through the effects of Covid, we are confident in our long term prospects what skechers in this region.
Turning to our direct to consumer business sales increased 4% in the quarter due to growth of 14% in EMEA and 4% in the Americas and 3% in APAC.
Domestic DTC sales decreased slightly primarily due to a difficult retail store comparison to last year, partially offset by growth and digital commerce, China, which experienced locked down measures, but much of the quarter saw declines in both stores and online.
During the quarter, we saw sequential improvements today, the majority of our China stores have reopened so traffic is not back to pre closure levels nearly all other countries showed improvement.
In the second quarter, we opened 46 company owned Skechers stores, including 15 Big box stores in the United States.
Kevin stores in India, and nine in China, We closed 34 locations in the quarter, including five concept stores in the United States and 24 in China.
We ended the quarter with 4355, Skechers stores worldwide of which 2993 with third party stores, including 123 that opened in the second quarter.
In the third quarter to date, we've opened four company owned stores, including two international stores and an additional 115 to 135 company owned locations are planned by year end.
The rollout of our new ecommerce platform continued in the second quarter with the launch of new sites in Belgium, The Czech Republic, Hungary, Italy, Netherlands, and Portugal.
We expect to launch two additional sites in Europe , two in South America, and one in Japan.
Further we plan to rollout a robust domestic sketches plus loyalty program to international markets, beginning with Canada, The UK, Germany and Spain.
To achieve our goal of $10 billion in annual sales by 2026, we will continue to strategically opened skechers stores expand our digital commerce reach enhance our DTC omnichannel capabilities through investments in our global point of sale system.
And grow and upgrade our logistics centers to more efficiently distribute our best footwear assortment are.
Our belief in the long term position of the Skechers brand and growth opportunities has never been stronger.
As mentioned moving our goods throughout our network of distribution centers has been a primary focus of our logistics team.
Lead certified gold expansion of our $2 6 million square foot North American distribution center is almost complete and we have begun testing a new operating system.
We have seen an increased flow of goods from the port which has put a strain on our processing and that of our accounts during the quarter Covey.
Covid related operating restrictions in China also led to inventory delays, particularly in Europe .
Our ongoing efforts with our factories and logistics teams to expedite and process our shipments will allow us to work through COVID-19 related challenges in order to meet the broad based demand for our products.
Phase two of our China distribution center expansion is planned to begin this year with a goal of completion in 2024.
We have also begun development on a 111 million square foot.
BC platinum pre certified distribution center in India.
The first phase of the facility outside Mumbai will be 660000 square feet and is planned to be fully operational by mid 2023.
We have also secured a location outside Vancouver, Canada for a new 427000 square foot distribution center slated to open in early 2023, and we are currently moving into a new facility in Panama. We also expanded our current distribution facility in Colombia. This year with plans to develop a new.
Facility to be completed in 2024 that will grow our capacity from 85000 square feet to approximately 500000 square feet.
Hand in hand with product development is marketing is designed to drive awareness and create strong global demand.
In the quarter, we saw our elite athletes winning on the golf course, Pickle ball courts baseball fields and road races on book as well as some sports cars granted with Skechers. Our team of athletes from all Star Clayton Kershaw two major winners Brooke Henderson, a mattress Patrick sports Legends Sugar Ray Leonard to Tony Romo.
Television personalities, including Amanda clues Brooke Burke, and Martha Stewart and music artist from Willie Nelson to Jessica appeared in multimedia marketing campaigns designed to promote our renovations showcase our fashionable products and appeal to an ever widening consumer base.
Celebrities were joined by local talent from Jamie Redknapp in the U K to <unk> in India could talk say June and southeast Asia as well as influencers relevant to the many countries in which we sell our footwear to also drive awareness in key markets.
We believe we are in a unique position as a brand that delivers on comfort style innovation and quality at a reasonable price all especially desirable given our current macro environment and now I'd like to turn the call over to John for more detail on our financial results.
Thank you David and good afternoon, everyone Skechers achieved a new quarterly sales record of $1 87 billion growing 12% on an as reported basis and over 16% on a constant currency basis.
Growth was geographically distributed and evident in both our wholesale and our direct to consumer segments. Despite significant COVID-19 headwinds in several markets most notably in China.
In fact, excluding China, where operational activities were limited sales grew 20%.
These results reflect strong consumer demand for our distinctive value proposition and comfort technology products.
Before delving further into our financial results I want to first provide an update on supply chain dynamics in.
In the second quarter, we continued to experience challenges from shipment delays, particularly in Asia. As a result of COVID-19 related countermeasures to domestic processing congestion in our distribution centers and those of our customers.
Our supply chain and logistics teams are working diligently to ensure our products are delivered to our customers in stores and ultimately reach our consumers as quickly and efficiently as possible.
We do expect supply chain disruptions to continue to constrain our ability to fully meet consumer demand and to drive distribution inefficiencies throughout the balance of the year, yet we remain confident that our expanding operational capacity and disciplined execution will gradually moderate the <unk>.
Pact of these dynamics.
Now, let's turn to the details of our second quarter financial results and operating segment performance.
Wholesale sales increased 18% year over year to 114 billion led by 30% growth domestically and 10% growth internationally. Despite ongoing COVID-19 related restrictions in China momentum in the Americas continued throughout the second quarter with double digit growth in Nir.
Really every country.
Direct to consumer sales increased 4% year over year to $727 5 million driven by a 10% growth internationally, partially offset by a 2% decline domestically, where we faced difficult comparisons to last year when markets reopened and federal stimulus payments drove.
Outsized consumer demand.
We remain enthusiastic about the growth opportunities in our direct to consumer business as we saw strength in nearly every country during the quarter.
We also continued to invest in our online presence and omnichannel capabilities to drive deeper connections with our consumers.
Now turning to our regional sales in the Americas sales for the second quarter increased 21% year over year to $1 billion, an impressive achievement amidst persistent supply chain challenges.
Our results are indicative of our brand strength and the compelling value proposition of our distinctive product portfolio.
In Europe , Middle East and Africa, or EMEA sales increased seven 6% to $374 5 million, we experienced some inventory shipment delays during the quarter, which weighed on wholesale results, but we also saw robust consumer demand as shoppers return from last year's Lockdowns.
In Asia Pacific or APAC sales were flat, but outside of China in nearly every market saw growth with notable strength in India, South Korea and Malaysia.
Excluding China sales rose 44%.
In China sales declined, 20%, which was better than we had originally anticipated.
As restrictions ease we saw sequential improvement, especially in June .
While we remain optimistic about the long term health of our brand in the APAC region. We continue to take a cautious view relative to expected financial performance over the balance of the year, especially as the pandemic continues to impact operations.
Second quarter gross margins decreased 330 basis points year over year to 48, 1% as a result of increased freight costs and an unfavorable mix impact from higher wholesale sales, partially offset by improved pricing.
Operating expenses increased 50 basis points as a percentage of sales year over year from 39, 3% to 39, 8%.
Selling expenses increased 40 basis points as a percentage of sales primarily due to higher demand creation spending globally.
General and administrative expenses increased 10 basis points as a percentage of sales largely due to volume driven increases and labor expenses and higher rents as we continue to grow our retail footprint and increased our distribution capacity.
Earnings from operations decreased 23% compared to 2021, and our operating margin for the quarter was eight 3% as compared with 12, 1% in the prior year, primarily due to the gross margin pressures previously mentioned.
Earnings per share were <unk> 58 per diluted share on $156 7 million diluted shares outstanding of 34% decrease year over year.
This includes a negative 11% impact from foreign currency absent, which diluted earnings per share would have totaled <unk> 69.
Our effective tax rate for the second quarter was 21, 3% compared to 24% in the prior year.
Now turning to our balance sheet, we ended the quarter with $946 4 million in cash cash equivalents and investments.
This is a decrease of $375 1 million or 28% from June 32021, as we continue to invest in working capital to drive sales and ensure we have products to meet the needs of our customers.
Inventory was 156 billion, an increase of 48% or $506 6 million compared to the prior year, but compared to December 31 inventories were up only slightly at six 3%.
This includes nearly $475 million of in transit inventory.
The year over year increase of 69%.
Reflecting longer lead times required to ensure we have product available to meet customer needs.
Accounts receivable at quarter end were $916 8 million, an increase of $138 6 million from June 32021, resulting from higher wholesale sales.
Capital expenditures for the second quarter were $74 1 million of which $24 4 million related to investments in our retail stores and direct to consumer technologies.
$22 7 million related to the expansion of our distribution infrastructure globally, and $17 1 million in investments primarily related to our new product design Center.
For the fiscal year 2022, we expect total capital expenditures to be between $250 million and $300 million.
During the second quarter, we repurchased approximately 636000 shares of our class a common stock at a cost of $24 2 million.
We will continue to deploy our capital consistent with our stated philosophy towards maintaining a strong balance sheet and making investments in our business, while opportunistically, providing direct returns to shareholders in the form of share repurchases.
Now I will turn to guidance.
Much has changed since we announced our first quarter, earning results.
Well I don't think we need to be labor the myriad economic challenges that we face and have already been documented by others. We would like to emphasize that the environment has become much more uncertain.
As a result, while we remain focused on our long term growth strategy and are confident in the strength of our brand.
Increasingly cautious about the balance of the year.
For fiscal 2022, we expect sales to be in the range of $7 2 billion to $7 4 billion and net earnings per diluted share to be in the range of $2 60 to $2 70.
For the third quarter, we expect sales to be in the range of $1 8 billion to 185 billion and net earnings per diluted share in the range of 70 to 75.
It is important to note that this guidance includes the impact of adverse foreign currency movements. Both of those we have already experienced and those we expect over the balance of the year as well as continued headwinds from COVID-19, particularly in the APAC region.
We anticipate that gross margins will continue to close the gap to prior year over the third and fourth quarter and that our effective tax rate for the year will be between 19 and 20%.
As we continue to navigate through ongoing pandemic related disruptions in our global supply chain.
Wins in China, and the macroeconomic volatility we are committed to executing on our strategy to drive long term growth and create value by investing in our direct to consumer capabilities enhancing our global distribution infrastructure deepening direct relationships with our consumers and above all else.
Delivering great product and.
And now I will turn the call over to David for closing remarks.
30 years in business and we're showing no signs of slowing down in fact, we are celebrating with a new quarterly sales record new product innovations that we successfully rolled out in the United States and with early deliveries in other markets. They appear to be equally embraced by consumers. Our team of brand ambassadors are is unique and different.
As our product offering and combined with a dedicated and loyal global employee base working hard to spread the sketches message of comfort style innovation and quality. We look forward to continued success and growth.
While we are still faced with Covid related challenges and now the impact of the war in Ukraine, which is being felt in many global markets. We believe in the mission message and offering a skechers and are seeing signs of this strengthening within our partners and consumers to reach $10 billion in annual sales by 2020.
We will work more efficiently to deliver the comfort and quality consumers expect from Skechers and should make it easier for them to shop through the expansion of our digital platforms retail stores as well as our reach through global accounts.
We know this isn't the beginning but we approach each day with the idea of the best is yet to come and through the strength of our brand and this determination we will drive sales growth in the back half of the year and the years to come.
Now I would like to turn the call back to the operator for questions.
And at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star one.
Please while we poll for questions.
And our first question comes from the line of Alex <unk> with Morgan Stanley . Please proceed with your question.
Great. Thanks for taking my question, it's Alex straightened at Morgan Stanley Great quarter guys.
Wanted to just quickly ask on on how you guys think about a potential slowing down the economy a lot of us have been thinking about Scott in terms of a potential trade down beneficiary given its value positioning.
Could you talk about any benefit you saw in prior recessions or how you think about that potential advantage as you kind of build in this revenue deceleration into the back half.
And also maybe just remind us what that what the average household income is Scott those customer or maybe kind of the distribution across your customer base. Thank you.
Thanks, Alex I'll take a crack at that first and then turn it over David for some historical context, I would say as we look forward to the balance of year as we noted in really every other company has noted.
We are facing a much more uncertain future. We believe we've taken that into account.
And what we've given you as guidance, but the fact of the matter is things are changing relatively dynamically.
So far we still see good trends in most of our retail locations, particularly globally.
But we're cognizant that the environment is going to make it slightly more difficult for the average consumer I would say one of the things. We always mentioned is that we believe we're providing very good value in our product along with comfort style and quality that we're known for and we think that is a favorable <unk>.
Back drop.
Environment, where the economy is under some form of duress that being said I mean again it is a unique.
<unk> out there.
<unk> it carefully we're definitely optimistic about the demand for the brand long term.
The next couple of quarters are probably going to give us some perspective that we don't yet have the benefit of.
Yes, I'd just like to say historically.
Movements in the economy happen for me, it's more about product.
It's just the price point people don't tend to shop price, if it's not something that one I think what we offer and what we offer today with our new entrees into slipped in comfort and making them more comfortable across a broad range of categories certainly gives us.
Plenty of opportunity even in a downturn.
Looking for a product.
Simply because they are priced site, although not on the lower end and bring all of that quality and comfort with them and their fashion right. So I do think we do have the opportunity as in the past to take advantage of an exit.
Adverse situation.
<unk> bye.
By offering the right product at the right price its a combination partner.
Great. Thanks, so much.
Our next question comes from the line of Jay sole with UBS. Please proceed with your question.
Great. Thank you so much I just wanted to follow up on China, I think I heard you mentioned that China was strong in June but traffic isn't quite back to pre pandemic levels, maybe could you elaborate a little bit more on what youre seeing in China quarter to date and sort of what youre expecting for China from a growth rate perspective in Q3 and Q4. Thank you.
Yeah. Thanks Jay.
First of all I would echo the sentiment we provided in the prepared remarks, which is our deepest thanks to the team in China, who is doing a wonderful job navigating a very difficult environment. What we saw in the quarter was a fairly high degree of correlation between our results and.
And the openness of each of the markets in which we participate the more often they are the more successful.
Our results reveal.
And that got increasingly better to the point where June was actually.
Better than we had anticipated and showed very good results, particularly coming out of the out of the 618 and holiday selling season, I would say as you've seen.
Restrictions reemerge that has had an impact on business.
For a while now though we've also mentioned that.
The real driver of growth in that economy, certainly subsequent to the first occurrences of Covid has been the digital side and that was clearly the strongest among our three main channels in China and that continues to be the case, which I think one would expect given.
The Covid lockdown environment, they're facing.
I would say we have tempered our expectations for the pace of recovery in China now that we have seen that.
There are more restrictions and limitations re emerging certainly this month, we've seen that and we havent anticipation for some level of that over the remainder of the year. So we baked a little bit of that into our expectations, whereas I think we have previously explained we were.
Hopeful for a relatively V shaped recovery it looks like the recovery is going to take a little bit longer.
Although again at the end of the day the longer term view from our perspective remains incredibly encouraging about the market. Its response to our product, especially the newer product as well as the strides we're making digitally and then the last comment I'd make is as David mentioned, a testimony to how we feel about that.
Market is that we are beginning our second distribution center on the heels of just recently completing our first we wouldn't make that type of investment if we didn't have abundant confidence in the brand's trajectory in that market.
Okay got it if I can ask one more.
Domestic wholesale growth was obviously very strong can you talk about how sell in versus sell through is trending and have you seen any change in orders for the second half of the year.
Yeah.
Yes, I would say sell through remains strong there was a period in kind of the early summer, which you would expect from a seasonality perspective, where things dipped off a bit.
That did also I would note tend to coincide with some of the more strident commentary about the recession and other environmental factors, we've seen things improved since then and going into the back to school season, we have thus far although although admittedly it is early.
<unk> seen some encouraging signs that things are going to pick up pace.
That is more similar to what we had seen earlier in the year. Overall, we don't we don't have a sense at all that there is a dramatic change under foot.
Consumption and demand remained good price points remains stable.
Margins remain good both in our own retail environment, but also and that of our wholesale partners.
And then orders remained strong.
The best thing that I can give you his orders remained strong although again, it's important to recognize that we're looking at longer booking windows than we've ever had because of the challenges on the supply chain side of things. So we're also looking at windows of delivery further out then than we would have traditionally used because.
Because of the supply chain challenges we're having.
Yes.
All of that.
To be a differential in flows the way we see borders.
Instead, we're taking a little longer period of time.
Get back to a normal timeframe.
Customers are reevaluating their flows and because of the pick up in the supply chain, we have more time to react to that.
John says our position remains strong with strong within the current timeframe I think it'll change simply because we're going to look at a lower.
Date than we have in the recent past so youll see changes that will have to explain to everybody as to what it means over a quarter by quarter, rather than looking out three and four quarters, because we don't anticipate looking at as far as we did last year over a significant amount of time.
Got it that's helpful. Thank you so much.
Our next question comes from the line of Laura Franklin.
<unk> with BNP Paribas. Please proceed with your question.
Good afternoon, and thank you very much for taking my questions John David.
I wanted to follow up on a couple.
Couple of things here I think John I think you mentioned there.
Hygiene disruptions there might've been some slippage of revenues into from <unk> to <unk> I was just curious to know.
If it was a certain number that we should consider as we think about the quarterly cadence and then remind me.
John but I think if I take the midpoint of EPS.
Revised guidance, it's about 20 cents lower maybe can you just frame for us how much of it is FX how much of it maybe incremental.
Cost.
Or other ancillary items that could have impacted the EPS guidance.
Happy to help.
The timing differentials.
The World is ranked with with timing issues, they're all over the place and Theres no amount I would quantify.
Other than to say, obviously with a supply chain as volatile as that which we've observed over the last really four or five quarters now theres always things that slipped to and from.
It could be anything from shipment outbound shipment delays to port congestion to congestion in our DC to congestion in our customers' Dcs all of those can have any impact.
But I think unfortunately, it's also difficult to anticipate what the next quarter's impacts are going to be so there's there's no guide we'd give you because we think the quarter is a fair reflection of what we were able to achieve given those constructs.
Those contracts are not going away anytime soon so.
Absolutely some slippage the amount I think on a net basis it depends on what happens next quarter what won't change is.
That we will we will still continue to experience supply chain challenges.
Certainly unavoidable in the current environment again kudos to our team here, that's doing a tremendous job dealing with those and as you can see in the numbers. We just posted an excellent job of getting that through to our customers and our consumers.
On the EPS guide.
One way I would think about it and we made note of this for a reason is there was an extraordinary impact from FX this quarter.
Not something we had anticipated I would generally chalk up the change on the on the guide to about two thirds FX both of that which we've already experienced as well at that.
We expect to continue given some stability in rates at these levels.
And then probably a third owing to a combination of supply chain challenges and COVID-19 related challenges in markets, where COVID-19 is having a pretty significant impact one way or another.
Very helpful, John and as a follow up question.
You said.
In your prepared remarks, the gross margin. So <unk> you should close the gap.
Love would love to have some guardrails around that Jon and then <unk> implies Rev. DSL to Alex's question are you anticipating that U S wholesale grew.
Grows in the fourth quarter or is there a level of conservatism that youre just taking on here.
Yeah.
So on the on the gross margin guidance, what we've said all along and I was hoping to improve upon.
Our our indicator last.
Last quarter was it.
<unk> expect the gap to prior year to continue to close at a rather ratable pace now how that ultimately sorts out its going to be influenced by a wide variety of factors, including including mix and prevailing.
Input costs et cetera.
But we expect the differential between this year's gross margin than prior year's gross margin to.
To close and it probably close in ratable steps between Q3 and Q4.
That's what we've been aiming for all year as we wait for some of our pricing adjustments to catch up to some of the cost issues that we've previously.
We previously noted.
In terms of revenue guidance, we don't obviously provide specifics by segment or country and the reason for that is we just don't know enough to tell you today exactly where challenges are going to materialize.
And the great exacerbate or to that.
Is the supply chain challenges, we have been experiencing a pop up in a market at a given time on their own and that's very hard to anticipate it. So what we've done is we've attempted to handicap overall results based on a wide variety of factors.
And then later that on top of our existing.
Forecasts and that gets us to a combined number we did like I said make an adjustment for China and we've made some adjustments to reflect the environment as best we can.
Ascertain it's going to materialize.
And all with the goal of trying to get at the point, where work, we're providing you better than not.
Guidance.
Ultimately in this type of environment, we're going to have to wait and see how that unfolds, especially on a on a channel or segment basis.
Very helpful. Thank you very much.
Yeah.
Our next question comes from the line of Gaby Carbone with Deutsche Bank. Please proceed with your question.
Hi, good afternoon, and congrats on a nice quarter.
I just wanted to dig into price increases a little bit more I was wondering if you could talk about how consumers are responding to the price increases and then when you expect those to be fully baked in the wholesale channel and maybe can you maybe just touch on any changes you've seen in the overall commercial environment.
Acted at all how youre thinking about price increases.
I would say that consumer response to price increases thus far has been stable.
And prior to this point certainly on the retail side of things.
<unk>.
It had been very constructive from our perspective, obviously.
Obviously, we're sensitive to any price increases so we tried to be very thoughtful about when we introduce those and under what circumstances.
Retail the retail environment continued to remain relatively stable on a price perspective, which is which is good we have for a while though been communicating our expectation that some level of promotion ality was likely to reemerge in the back half of the year.
Don't consider it to be significant or drastic, but some level of promotion already I think it's to be expected given the kind of ideal circumstances, we've been under for the previous five or six quarters.
And I would say that anticipation remains true today.
On the wholesale price increases the next two quarters will reflect the most material adjustments again on a mix neutral basis.
Such that we expect by the end of the year most of those will be baked in customer response to those I think as evidenced in the bookings that we've seen which again we've mentioned remain remained very strong.
Obviously, we'll continue to watch the.
Our realized sell through Asps.
Assess the durability of those but at this juncture everything remains relatively positive from a from a customer and consumer response perspective.
Got it. Thanks, I just had a quick follow up on gross margin.
For the <unk> I was wondering if you can help us quantify maybe the pressure from freight mix and pricing.
Yes, I think.
So mix was a small impact.
Biggest driver by by far almost by Us.
By a six to one ratio is is the cost side of things as we've mentioned before.
The pricing we had implemented previously or was in the process of being implemented just hasnt, yet caught up fully to the cost side. There was a slight detriment to mix, which I think if you recall after Q1, we had mentioned mostly because last years.
Q2 was very heavy on direct to consumer almost 300 basis points above a normal level on direct to consumer. So just just having a more robust wholesale result, this quarter, which I think is evident in the growth rates there.
Mix down the gross margin a bit.
We're writing cause on the gross margin pressures has been cost though.
Got it. Thank you so much for the color.
Okay.
Our next question comes from the line of Tom <unk>.
Securities. Please proceed with your question.
Hey, good afternoon, guys. Thanks for taking my question.
When you look at the.
The domestic business the Theres, a really big spread between the.
The wholesale channel and channel.
So on a one year basis, and when you look at it.
Okay.
I mean, how should we kind of think about that dynamic.
Why kind of seating.
A lagging performance in DTC.
Simultaneously.
So strong performance at wholesale thanks, guys.
Yes, I mean, I think from us from a financial perspective, I think you've got to keep in mind. There has been a lot of moving pieces within that question for a while I mean.
First on the on the direct to consumer side of things you have to recognize last year was an extraordinary year from it from a DTC perspective.
And so comping to that certainly on the at the store level was was significantly difficult not to.
To cause a slight a slight pullback I would note, though within that our continued growth on the e-commerce side of things was.
Was tremendous and then outside the United States you didn't see that same dynamics you didn't have that same fact pattern.
From the prior year.
On the flip side I think on the wholesale side, we're just seeing tremendous response to the product we're seeing opportunities for the brands continued to grow share.
Depending upon.
Base year on a on a two or three year basis. There was certainly some opportunity to kind of grow presence at some of the wholesale partners, we work with as well as some restocking that probably needed to occur coming out of 2020.
Overall again I think we're seeing.
Fantastic response to the product, though more than anything else and that's that's what's going to continue to carry the day I would note as an aside I think on the direct to consumer side of things. We did have some issues getting product into stores as quickly as we wanted to some of the newer product in particular that had.
Been prioritized and that no doubt created a small headwind on the DTC side that could have been.
Probably evidenced by a slightly more favorable comp store sales performance in the retail side of the business, but again overall, we're pleased with the direct to consumer performance certainly if you'd give you pull back and you look at it on a on a worldwide basis.
Especially then if you takeaway, China, which obviously had its challenge if you take the international.
The international direct to consumer side of things and you strip out China, which was which was a headwind you had growth of almost 35% and that's that's a pretty fantastic right. So we.
We continue to remain very optimistic about the GP side of the business and I'm pleased with the performance there.
Thanks, Sean if I could quickly follow up on <unk> question from earlier.
Said.
The EPS.
Revision about two thirds was FX and one was COVID-19 I think related to that.
We've heard from both Nike and already in the last couple of weeks that.
They are seeing a very hyper promotional environment in China.
Following the.
The spring Lockdowns.
What youre seeing as well and is that contributing to the.
The revision because it seems like the EPS revision is more margin related rather than sales related given that the sales.
Thanks.
Yes.
Probably would suggest that we didn't actually see.
Any sort of significant margin impact in in market.
In the quarter.
It doesn't mean that we don't anticipate some challenges from a from an overall margin perspective.
I guess I wouldn't I wouldn't echo that.
That being said I mean, you've got to keep in mind in particular in Q2 and in June where we saw the most significant recovery youre in the middle of the 618 holiday selling window that that is in of itself a promotional environment. So.
I don't think we noted anything that was extraordinary.
That window as compared to prior.
Prior year than what we would consider to be a more normative environment.
So.
Don't think we've seen that yet, but obviously to the extent that the <unk>.
Get factor Thats going to be influenced by what others do so we'll definitely be keeping an eye on that but I guess I guess my short answer is no we haven't seen that.
Got it thanks, John Best of luck the rest of the year.
Yeah.
Our next question comes from the line of Susan Anderson with B. Riley. Please proceed with your question.
Hi, good evening and thanks for taking my question.
I wanted to ask maybe about Asps firsthand CNS I think you said that both trials wholesale. So I was curious it was pretty equal between the two of them and then also HTC similar trends in your DTC channel.
And then also maybe if you could just talk about SG&A expectations for the back half and if anything's changed there versus your original thoughts. Thanks.
Thanks, Susan.
On wholesale we actually saw more units than price.
Which I think is reflective of what we had mentioned previously that some of the some of the.
<unk> adjusts.
Adjustments, we would make haven't yet fully caught up but we did see increases in both I would say, though it was it was more units than price there on the direct to consumer side of things again reflective of the pricing actions we.
We'd already taken.
Essentially saw units close to flat and Asps up.
So it was more of an ASP driven adjustment there now there is a lot of mixing and moving parts there in particular.
China, but.
Thats the net net of it on the G&A side, no nothing new to report.
I think the only.
The only experience of note is that again, we continue to experience some supply chain challenges that does manifest itself in some inefficiencies.
Do you have expectations I think reasonable ones that that will continue.
As we work to resolve.
Those inefficiencies that present themselves from the volatility on the supply side of things. So we're continuing to work through those otherwise there are no I would say no real change in our longer term objective of.
Attempting to hold G&A and more broadly opex in line with top line performance.
Great. Thanks, so much good luck Garcia.
Thank you.
Our next question comes from the line of Omar Saad with Evercore. Please proceed with your question.
Thanks for taking my questions a couple quick ones here at the end towards the end.
Skechers comfort positioning was.
Huge asset during Covid is consumers became super focused on comfort comfort footwear.
Comfortable feet, we have been hearing lately that.
Some of the Dressier footwear, and maybe less comfortable fashion footwear, making a comeback or are you seeing any shift away from the comfort.
Consumers consumer shifting away from comfort and that's kind of a rebound in fashion footwear number one that it also.
I'd love to hear any update on freight I know you discussed it a little bit but could freight flipped from a.
Headwind to a tailwind in the fourth quarter as you begin to lap some of that big Ocean Air utilization.
Well I certainly hope so.
Pretty good.
Rates are starting to come down, but theres less demand it will depend on what happens to demand and everything that goes through at the end.
We.
We've taken a lot more that's only one piece of freight that's going to be afraid around the country as well and there's still a potential strike at the port here. So we hope so it's certainly starting to trend, but way too early to.
To find out.
That that is going to be possible and that we're going to absorb that in the fourth quarter remember all the inventory that tier in transit.
Until freight rates come down for clarity I'll field right.
And as far as.
Shifting away from comfort, we don't see that at all I mean, we've been building comfort for years, it's not only a pandemic item I think people want comfort.
They enjoy comfort.
Kids like it.
File right and fashion forward.
I believe we're known for just being comfort without being stylish without being used for sport or wherever you are.
To choose from we carry a broad base and I think it's fashion forward and you can and you can buy it with comfort not just to go out and buy something thats comfortable that you can roam around the house that nobody wants to look at so that's always been a positive for US we think we're.
For lack of a better terminal block work hard as we've ever been now we have so many multiple styles that are in demand that's starting as we bring them out.
And the cadence is a lot quicker than we had anticipated releases. So we're feeling very comfortable in the fact that the marketplace continues.
To enjoy these use these for various reasons not only stay at home.
Just to be comfortable wherever they are whether they're wanting walking.
Sure.
Distressing and team going to work. So we think there's still plenty of room, we haven't seen any deterioration we haven't seen anybody moving away from it and we haven't seen it around.
Pretty much around the world.
Okay.
Got it thanks for the insights David then.
Great job on that Pickle ball opportunity.
I'm going to learn how to play it myself.
Okay.
And our next question comes from the line of Jim Duffy with Stifel. Please proceed with your questions.
Thanks, Hi, David Hi, John .
I'm, hoping it.
Hoping you can make some comments on the state of your inventories I appreciate more of the inventories in transit, but even adjusting for that inventories are still elevated versus pre COVID-19 norm. So I'm curious as production back to normalized levels.
If so are you.
If you're more confident in the availability of capacity or are there opportunities to bring inventories back towards what would have been pre COVID-19 norms.
Yes, if we can find what norms really our going forward I think what you see here is the confluence.
A number of items.
One is that we dealt with our factories and as shipments slowed down.
The high demand we brought it all in and we didn't want it slowed down production at the early stage of things simply because we werent sure as to how.
How long it would last and when the next block that would be and we use this inventory and it can move it around the world. So.
People say a place to stay open we can modify our inventory like I said, we're moving to a much closer purchasing option. So we will be able to reevaluate as we can go out on the far end. So as this moves forward given all what we see today and business holds up through the quarter, we'll certainly modify it and grow into it. The good news is that's all.
All new withdrawal in demand.
A little bit more of it would've been shipped patent that's been constrained in our own distribution centers in the United States, but its still in demand and we will move it anywhere in the world, we need it rather than making more on the floor and so usually.
The evaluation of inventory I would say and what the demand is.
At retail and at the consumer level. This is all relatively new and very much in demand and a lot of places in the world. So we're already beginning to move it around the world for where it's most needed whether it's been the biggest shortages. So we still feel very comfortable with what it is what it.
Can mean and how we can move it around the world over the next six months.
Thank you and then maybe a question just to try to benefit from your global perspective without question uncertainty in every region, but as you follow the end market demand progression. Since your last report for May and June and across July any reasons that really stand out as most resilient are strongest and on the other hand is there any.
Regions, where you see indications of end market demand might be fading faster than others.
Sure.
Well I don't know of any obvious.
[laughter].
Yes, I mean actually the note I would probably make on that Jim is kind of the opposite.
I was surprised by at least is just the breadth and depth of the strength everywhere I mean that goes into categories, which you've talked about in the prepared remarks, but if you look globally.
The vast majority of our markets grew and we're talking growth of.
No.
Multiple digits.
Double digits easily and so while there were a few markets that were challenged by COVID-19 or whatever prevailing situation impacted them. What we saw generally was very broad.
And very significant growth across a ton of market as we talked about the Americas being strong we talked about EMEA, which would have been even stronger but for FX, APAC, which quite honestly outside of the challenges China experienced crew.
North of 40% so.
We're seeing really good continued growth in the brand globally.
And then you couple that with the U S, which is obviously, notably doing doing very very well and I think you can get a very good picture of the demand profile for the brand and to David's comment earlier about how much in demand. It is how hard it is.
That's kind of that's the note I'd give around the global performance.
Great. Thank you for that guys.
Thanks, Joe.
Our next question comes from the line of Sam Poser with Williams trading. Please proceed with your question.
Good afternoon, guys I appreciate it.
Last question.
A few of the speed to market where are you by <unk>.
June like.
Versus let's say, where you were six months ago.
On transit times and stuff like that.
I'm not even sure what that means but.
It's like.
No I was going to say I don't we don't have a differential on the timing for any particular place in the world we send them all over it at basically the same time to.
The supply chain has certainly picked up transit time.
Not necessarily the issue right. This minute, we don't see the port is crowded nor getting containers and that certainly is getting better what changes is throughout the factory base there with some of our factories that are right up to the minute that do a great job of keeping it up there and there are some kinds of products that are specialties or smaller factories that are having more typical.
LTE so it rotates around but I think you could tell by our inventory position, even including our in transit and what we've done with sales that.
We're not having trouble getting goods right. This minute and we are certainly filling the pipeline and we're getting.
We're trying to get closer to a more normalized time to production. So that's still a work in process.
Got you I got a handful more and I'll just go through them and then you can answer all of them I hope wholesale in the back half.
The big picture of wholesale versus DTC, which do you expect to grow.
Faster.
Number two it's going to depend on factors that like China. So as I said, we're not we're not going to give channel or segment level guidance.
Because the way, we handicap or our prognostications as by probability waiting a variety of outcomes. So we layer on an adjustment at the aggregate level. Our expectation is that both will continue to grow so.
We remain optimistic about the prospects for Fargo with growth in both.
I do think I do think China is going to be a huge factor in that because it is a bit.
It disproportionately skewed toward direct to consumer relative to the rest of the business. So that that will have a big factor of play a big role one way or the other.
Okay.
One are your expansion in distribution in the United States are you seeing benefit from Nike vacating other folks and if so what degree what.
Two when it's Skechers plus how is that helping you.
And that's with two other ones have been scripted plus helping you.
It's set up right now and then.
What do you foresee going forward there.
Yes, Skechers pluses, the new loyalty program, we rolled out.
Beginning last year in the U S. It continues to do a wonderful job of building.
Direct to consumer relationship for its members members are definitely more productive they generate more LTV for us than non members.
<unk> method to communicate with consumers directly I think in general we're probably still in very early innings scratching the surface of that what it allows you to do obviously you had a much more cost effective method to drive digital and retail sales growth because youre not youre not paying the higher and higher cost.
Acquisition costs do you see in the marketplace today. The next leg for Skechers, plus though is to get it rolled out globally and that's something we're starting to work on now.
Our expectation is over the next year or so we will be able to provide that same program on a global footprint equivalent to where we have our direct to consumer websites and digital assets and.
And we think that just continues to add more fuel to allowing us to grow our direct to consumer business, both both online and in stores because thats.
The member is a productive contributor in both channels.
But that is going exceedingly well, it's still early but we're looking forward to rolling out across the globe and quite frankly, becoming more and more efficient and effective with the with the tools, it's given us.
It's been about Nike and Theyre just.
And your wholesale distribution in the U S where they pulled out.
Yeah.
I'm not sure we ever really know who is placed we take we're growing we're very accepted.
We think our product is better our price points are better fits our consumers better we anticipate our business is growing I think Nike is a contributing factor but.
I'm not sure given our own direct to consumer growth and where we've grown around the world.
Even where that's not us.
As large as the situation in the United States and continue to grow. So we do think its the product. We think we're taken some market share what particular piece of nike's decision to pull back.
I don't know I don't particularly feel it's that big I don't have anybody knocking on the door, saying 19, Cleveland what can you tell me.
Part of the whole process of taking what we offer and how it fits in at retail and continuing to grow within our own customer base.
Alright, thanks, very much continued success.
Thanks Sam.
And our next question comes from the line of John Kernan with Cowen. Please proceed with your question.
Awesome. Thanks for sneaking me in guys.
Quick question just on supply chain it sounds like there is still.
A fair amount of shipment delays you mentioned, particularly in Asia. There's also congestion you pointed to in North America.
Obviously, there are some of the supply chain costs were a factor in that 300 basis point decline in gross margin. So.
When do you think.
The supply chain starts to normalize obviously crystal balls have been pretty difficult for the last two years, but.
Is there anything you see that tells us.
Supply chain might normalize in 2012.
In holiday of 2023.
Well I think the beginning of <unk>. It started to move how fast it moves along the road into what point and how quickly you get to destination as it is.
Difficult and not all of it is on the China side.
Some issues with the ports here.
Not as much anymore, there's some issues with ground transportation here and truckers and moving things, Brian Theres, something because everything opened up so quickly.
Saturation coming in a lot of.
Distribution centers around and moving through more volumes than we've had to in the past.
As a group that all should normalize.
I would hope for us anyway, it would look within.
The next two quarters for US the question internally for support is how quickly we can get a new distribution center portion opened in the United States that was supposed to open earlier, if I got caught up in its own.
Quite China, Inc, which will double our capacity.
Pick and pack and do single.
Single that.
That we would move through a lot quicker.
If everything remained the same at a port remained open and there were no locked down in Asia.
That would get closer to it but like John says Everything's dynamic you have to take each piece in and.
About each piece on its own and see where it goes so we think around the world, It's certainly starting to get better.
It's a day to day thing, which is why we kept the inventory didn't move it overseas, but again just in case, but it's all good and relevant that we're gonna change the way, we order and we're going to keep up our system. So that we get ready as we move throughout the year.
To a more normalized situation.
Maybe even a bit earlier than most of the most anybody else.
Got it and maybe just a follow up to that David you mentioned inventory Q4 is when inventory dollars spike pretty much across the.
The sector and for Skechers.
You started to have big percentage increases year over year, I think inventory was up 45% in fourth quarter last year, it's up 48% now how do we think as we try to model the balance sheet and free cash flow, how do we think about inventory dollars at year end.
Thinking flat, but still be growth as we go into next year how.
How do we think about the working capital picture into the back half.
A lot of that will depend on supply chain and availability and getting back to normal I think it's fair to say, if we can get ourselves back to four or five months advance orders.
<unk> been better and turn it back quickly you would see a more efficient and lower inventory at the end of the year, but you got to take all the pieces and all the places in the world.
And to that so it's a moving target right now, but we're certainly planning on <unk>.
And in light on evaluating using it and not over producing given what's available to us.
In Asia.
On it we think.
The most hopeful path if not the most likely.
Pending on what happens on a macroeconomic basis until politically is that inventories will come in line and we will process and be more efficient every month as we go through this year.
John I would just I would just also add to that if you look at the growth relative to the end of the year. It was only 6% so the.
The year over year comparisons continued to be difficult up to this point I think in the Q4 as you noted that's when we saw the elevation last year or so.
With the supply chain being what it is.
Relative to the end of the year you can see that the increase wasn't that much more significant it was only 6%. So I just throw that out there is another data point as we mentioned because I think this is all about supply chain and not and not really about anything else.
Understood. Thanks, guys.
And we have reached the end of the question and answer session, which also concludes today's conference and you may disconnect. Your lines at this time.
Thank you for your participation.
Okay.
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Yeah.
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Okay.
Yeah.