Q3 2022 Skechers USA Inc Earnings Call
[music].
Greetings welcome to Skechers third 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 this conference.
Two skechers. Thank you you may begin.
Thank you everyone for joining us on Skechers conference call today.
I'll 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.
Such forward looking statements with respect to the COVID-19 pandemic include without limitation the company's plans in response to this 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 to 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 the impact of inflation, Russia's worried with Ukraine, and supply chain delays and disruption 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.
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 other reports filed with the SEC as required by Federal Securities Law.
For a description of all other significant risk factors that may affect the company's business financial conditions cash flows and results of operation.
With that I would like to turn the call over to Skechers, Chief Operating Officer, David Weinberg, and Chief Financial Officer, John Santa Mara David.
Thank you for joining us today on our third quarter of 2022 conference call.
Before we discuss our business in detail I would like to thank footwear news for naming Skechers is a company of the year for the third time in our 30 year history.
This honor wouldn't have been possible without the collective energy dedication and creativity of the entire Skechers organization. Both here in southern California, as well as in every Skechers showroom office Logistics center and retail store around the world.
The Skechers team worked extremely hard this year alongside our loyal partners globally.
Our accounts distributors factories and vendors.
From the bottom of our Hearts.
For your enthusiasm and collaboration as we work through the challenges of the last couple of years.
We are optimistic that the COVID-19 related restrictions are easing with only a few markets around the world so facing temporary closures and restrictions and that freight costs are beginning to decline, however, macroeconomic headwinds, including foreign currency exchange rates and congestion within our distribution centers due to the strong demand for our <unk>.
And supply chain disruptions over the past year impacted our reported results in the third quarter and we expect will remain a factor into the new year.
While we focused on working through these challenges we remain the go to source for consumers and our partners around the world, resulting in a new quarterly sales record of $1 88 billion for the third quarter.
We are proud of this achievement, which was driven by double digit increases in EMEA and the Americas and high single digit growth in APAC, bringing our international business to 60% of our total sales.
As we see improvements from supply chain logistic cost distribution center congestion, particularly in North America foreign currency exchange rates and closures in China. We believe we will achieve continued revenue growth.
Our ongoing success of record annual sales in 2021, and this year is three consecutive quarterly sales records is rooted in our talented team.
Our core design principles comfort innovation style and quality at a reasonable price by which every pair is measured.
Our focused marketing efforts, our deep distribution network and our determination to deliver our product as quickly as possible to our consumers.
Years ago, we recognize the need for comfortable footwear.
And it's the third largest athletic footwear company in the World. We are widely known for our comfort technology products.
As consumers have truly come to view casual is the new normal we are in a unique position with our extensive offering.
Always looking for new ways to meet our customers' needs, we extended our skechers arch fit technology enjoy wider offering of styles introduced skechers hands free slipping the ultimate and ready to go footwear for men women and children and expanded our fashion collection within our Skechers Street offering.
And collaborations.
Innovation is the core of our performance division and it's never looked stronger, including the gripping outsole and comfort upper of our Viper Pickle ball collection.
And the awards given to the Max Road five by both men's health and self magazines.
Also this month the raise of four an update to the technical running shoes that web war and as Boston Marathon win was released with hyper burst froze the latest evolution of our signature ultra lightweight resilient cushioning phone.
We are always focused on meeting the demands of our wholesale partners globally, and our consumers who shop at our approximately 4450 skechers retail stores worldwide.
Through our expanding e-commerce footprint.
All to ensure Skechers comfort technology company is the leading choice and is available when and where consumers want.
Total sales growth of 21% or 27% on a constant currency basis was the result of increases in our international and domestic businesses of 25% and 15% respectively.
By region EMEA saw improvements of 48% and the Americas grew 16%.
We are also particularly pleased with our APAC sales growth of 9% or 17% on a constant currency basis, which includes China decreasing by 19% or not so strong double digits, 13% in constant currency.
Despite China's zero Covid policy, we remain confident in our long term success for Skechers in this country.
In the quarter, our wholesale business increased 26% due to double digit growth both in domestic and international the.
International growth was led by a 59% increase in EMEA and 18% increase in the Americas, and an 8% increase in APAC.
Overall wholesale sales were driven by increases in unit volume of 25% and an average selling price per unit of 1%.
The Americas wholesale sales growth was due primarily to a 15% increase within our U S wholesale business, where we saw improvements across genders and multiple categories, most notably our sports casual and work lines as well as the unit price.
Canada and Mexico.
American markets outside the United States also achieved double digit growth.
And every Latin American countries also saw sales improvement except Chile.
Which is experiencing significant economic volatility.
Growth in EMEA wholesale was primarily driven by double digit improvements across all European countries as well as growth within our distributors, primarily driven by the middle East, Turkey and Scandinavia.
Partially offset by the continued cessation of shipments to Russia.
APAC wholesale sales increased primarily due to strength within our distributors as well as India, and Singapore and the addition of the Philippines, which transitioned from a distributor in 2021.
The increases were partially offset by decreases in China, and Japan due to Covid related lockdown measures.
Turning to our direct to consumer business, which is a key focus area for the company as we look to create more opportunities to showcase the broad range of skechers product and connect directly with consumers.
Sales increased 12% in the quarter due to growth of 14% in the Americas, 10% in APAC and 6% in EMEA.
Domestic direct to consumer sales increased 15%, primarily due to strong double digit growth in our digital commerce channels.
International direct to consumer sales grew in nearly every country, partially offset by declines in China, which was impacted by the temporary closures of just over 10% of our company owned stores and Chile due to the economic volatility in total direct to consumer unit volume increased 11%.
And average selling price was essentially flat.
In the third quarter, we opened 76 company owned Skechers stores, including 46 in China, eight big box stores in the United States, a flagship store in Madrid, and our first store in Rotterdam.
We also expanded and relocated two stores and key Lima malls jockey Plaza and Plaza Nortek.
We closed 34 locations in the quarter, including 21 in China, and two concept stores in the United States.
We ended the quarter with 4458, Skechers stores worldwide of which 3054 with third party stores, including 177 that opened in the third quarter 129 of which were in China 12 in India and five in South Korea.
In the fourth quarter to date, we have opened 14 company owned stores, including one big box store in the United States and five stores in China.
For the remainder of the year, we plan to open an additional 35 to 45 company owned locations.
In the third quarter, we launched new e-commerce sites in Poland, and Switzerland, and this month, we launched our site in Japan.
We also plan to launch several more e-commerce sites in the coming year.
We are pleased with our record sales achievements in the third quarter driven by the continued strong demand for our comfort technology products.
With double digit growth across our wholesale and direct to consumer businesses sales increased in nearly every market, except those that faced either COVID-19 related lockdown measures or significant economic volatility.
This is a testament to our product and marketing resonating globally as well as our determination to both deliver a footwear to consumers as quickly as possible and the efforts we've made to improve our infrastructure, including our network of distribution centers, some of which are being impacted by the supply chain challenges.
The expansion of our LEED certified gold $2 6 million square foot North American distribution Center is in the final process of integration with our existing system.
This is expected to improve processing volumes and efficiencies over the course of 2023.
With international representing 60% of our total sales we remain focused on our infrastructure abroad. We plan to begin shipments out of two new distribution centers in the first half of 2023.
This includes a new 427000 square foot distribution center in Vancouver, which will result in improved shipping times in Canada as well as some reduced pressure on our Rancho <unk> facility.
As we celebrate our 10th year of business in India. We began the first phase of our $1 1 million square foot.
<unk> platinum pre certified distribution center outside Mumbai, which is planned to be operational by mid 2023.
This quarter. We also began phase II of our China distribution center, which is expected to be complete in 2024.
Yeah.
Last month, we held our first in person global product conference since Covid at the newly finished the initial phase of our corporate headquarters in Southern California, and this month, our key retail partners joined us for 2023 by meeting the.
The expanded building on Pacific Coast Highway is now home to our many showrooms serving to highlight our extensive comfort technology footwear.
To support and drive awareness to our diverse product offering we have an equally diverse team of ambassadors, appearing in our marketing campaigns from pop superstar ever Max two lifestyle Guru Martha Stewart retired athletes sugar Ray Leonard Tony Romo to elite Major championship golfers Brooke Henderson.
And Matt Fitzpatrick and local celebrities who launched in the third quarter, including my lean class in the U K and Vanessa <unk> and Michael Ballack in Germany.
Skechers marketing campaigns appeared on Billboards in Panama in Chile.
This increase across buildings on high streets in Spain, and Portugal.
Elevator kiosks in China.
And malls in Canada, Hungary and Columbia.
As well as Skechers shoes on the feet of Influencers and key opinion leaders on a catwalk in Berlin and on covers and within the pages of fashion magazines worldwide.
Where consumers shop be it on their phones or in malls or were they visit speed in stadiums or tourist centers or were they commute buses trams and subways skechers is everywhere driving demand theres.
There's no doubt that macroeconomic issues remain but we believe our unique position as a brand that delivers on comfort style innovation and quality at a reasonable price. We will continue to resonate with consumers in the U S and around the world and.
And now I would like to turn the call over to John for more details on our financial results.
Thank you David and good afternoon, everyone Skechers.
Skechers again achieved a new quarterly sales record of $1 88 billion growing 21% on an as reported basis and 27% on a constant currency basis.
We saw double digit growth in both our wholesale and direct to consumer segment.
We saw double digit growth in nearly every country demonstrating the broad based consumer demand for our comfort technology products and the strength of the Skechers brand around the world. We remain focused on executing our long term growth strategy and delivering a diverse assortment of innovative comfortable products for <unk>.
Tumors across the globe.
Even as we navigate historic headwinds from supply chain disruptions ongoing COVID-19 related restrictions inflationary pressures and growing uncertainty around the macroeconomic environment and its impact on consumers.
I want to first provide an update on COVID-19 related supply chain dynamics and their impact on our results in the quarter.
One year ago, we began experiencing container shortages factory closures and severe port congestion.
These conditions led to elongated order timelines and tremendous concern about product availability, which prompted more substantial backlog volume.
Then about mid year, we experienced significant improvement in transit times and worked throughput. This resulted in capacity challenges in distribution networks across the industry due to a meaningfully increased arrival rate for goods.
Consequently, we experienced and continue to experience processing constraints at our distribution centers, leading to cost inefficiencies as we work to mitigate the impact of these disruptions on our customers.
In the third quarter. This gave rise to approximately $50 million of incremental logistics costs globally.
Each weighed heavily on our results.
In addition, more significant than expected COVID-19 related challenges in the Asia Pacific region, particularly in China, and adverse foreign currency fluctuations further weighed unexpected results, which were below our earnings guidance.
While we are disappointed with the lack of earnings flow through from our better than expected sales in the quarter. We are confident that supporting our customers was the right decision for our brand.
Further we believe the corrective actions, we have taken and are taking to accelerate additional capacity and adjust future orders will ultimately resolve the situation and restore efficiencies.
Now, let's review, our third quarter financial results.
Wholesale sales increased 26% year over year to $1 $1 9 billion led by 33% growth internationally and 15% growth domestically.
Broad strength extended across regions with notable growth in EMEA and the Americas as well as in APAC, excluding China.
Collectively we saw a double digit increase in units sold and higher average selling prices per unit, reflecting strong demand for our distinctive product portfolio at compelling price points.
Direct to consumer sales increased 12% year over year to $686 8 million with 15% growth domestically and 9% growth internationally driven by double digit increases in units sold and strength in both our retail stores and digital platforms.
As one of our key long term growth strategies. The investments we are making in our direct to consumer segment are yielding strong results as we continue to expand our international online presence and enhance our omnichannel capabilities.
This further enables us to build direct relationships with our loyal consumers showcase the breadth and depth of our product portfolio attract new consumers and above all else deliver a great product.
We are excited about the growth opportunities ahead and meeting the needs of our consumers whenever and however, they choose.
Now turning to our regional sales.
In the Americas sales for the third quarter increased 16% year over year to 948 million supported by growth across all channels.
As we work to alleviate the congestion in our domestic distribution network, we expect sustained consumer demand for our products and brand residents will continue to drive growth across the region in the fourth quarter.
In EMEA sales increased 48% year over year to $469 8 million, primarily driven by strength in our wholesale segment, which benefited from improvements in product availability compared to last year's European Port congestion.
And APAC sales increased 9% year over year to $466 million driven by strength in distributor markets as well as India, Singapore, and Malaysia, partially offset by a decline in China.
Excluding China sales grew 60%.
In China sales declined 19%.
Over 10% of our stores were temporarily closed at one point.
We expect ongoing COVID-19 related lockdowns and restrictions to continue to impact our operations into 2023.
This however does not diminish our view of the Chinese market long term, where the Skechers brand is uniquely positioned with our distinctive products and attractive value proposition.
Third quarter gross margins decreased 280 basis.
47, 1% predominantly due to elevated freight costs as well as an unfavorable mix impact from higher distributor sales, partially offset by improved pricing.
Operating expenses increased $123 3 million or 20%, but decreased approximately 30 basis points as a percentage of sales year over year.
Selling expenses increased $23 million or 18%, but improved 20 basis points as a percentage of sales.
The dollar increase was primarily due to higher demand creation expenses and digital and brand marketing globally.
General and administrative expenses increased $100 2 million or 20%, but decreased 20 basis points as a percentage of sales year over year.
We incurred approximately $50 million of incremental logistics costs globally to minimize disruptions and delivering product to our customers and also saw increased volume driven distribution expenses.
Earnings from operations decreased 11% compared to 2021, and our operating margin for the quarter was six 9% as compared with nine 4% in the prior year.
Earnings per share were <unk> 55 per diluted share on $156 2 million diluted shares outstanding a 17% decrease year over year.
This includes a negative <unk> <unk> impact from foreign currency fluctuations year over year.
Our effective tax rate for the third quarter was 17, 9% compared to 15, 6% in the prior year.
And now turning to our balance sheet, we ended the quarter with 681 5 million in cash cash equivalents and investments.
This is a decrease of $500 2 million or 42% from September 32021, as we continued to invest in working capital to drive sales and ensure we have product available in the right place and at the right time to meet consumer demand.
Inventory was $1 78 billion, an increase of 45% or $549 million compared to the prior year period, reflecting the supply chain conditions I previously mentioned we.
We are optimistic that inventories will gradually returned to normalized levels at supply chain volatility diminishes.
Accounts receivable at quarter end were $933 9 million, an increase of $175 2 million from September 32021, resulting from higher wholesale sales.
Capital expenditures for the quarter were $100 1 million of which $42 1 million related to the expansion of our distribution infrastructure globally.
$38 million related to investments in our retail stores and direct to consumer technologies and $17 7 million related primarily to our new product design Center.
During the third quarter, we also repurchased 639000 shares of our class a common stock at a cost of $25 million.
We will continue to deploy our capital consistent with our 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 turning to guidance for.
For the fourth quarter, we expect sales in the range of $1 75 billion to $1 775 billion and net earnings per diluted share in the range of 30 to 40.
We anticipate sequential gross margin improvements in the fourth quarter and that our effective tax rate for the year will be between 19% and 20%.
This guidance also includes the continuing impact of inefficiency in our distribution network associated with supply chain congestion as well as ongoing COVID-19 related operating limitations, particularly in the Asia Pacific region.
For the fiscal year 2022, we expect total capital expenditures to be between 300 $325 million as we continue to invest in our strategic priorities.
In the face of a numerable challenges, we are encouraged by the strong consumer demand for our comfort technology products, which delivered double digit growth in nearly every country and across all distribution channels.
This is a testament to our brands our people and our products.
Our long term growth strategy remains intact, and we believe will demonstrate the resilience of our business model through these challenging times we.
We are steadfast in our focus on delivering innovative stylish comfortable products at attractive price points to consumers around the world.
With that I will now turn the call over to David for closing remarks.
Thank you John .
Three quarters of record growth during a period of continued macroeconomic challenges is a clear indication of the ongoing relevance of skechers the desire for quality and comfort by consumers and the determination of our entire organization to meet the needs and demands of our customers.
While we look ahead to our goal of $10 billion in annual sales by 2026, we remained focused on the here and now delivering fresh product as quickly as possible create.
Creating awareness of the innovations and features in each collection and increasingly opportunities to shop, our brands be it at our expanded network of direct to consumer locations, including our retail base of approximately 4450 locations or through visible spaces within third party stores.
We are honored to receive a third company of the year Award from footwear news and our 30 <unk> year of business. The excitement of our first year has grown over three decades and resonates throughout our talented and dedicated team. We're looking forward to continuing our growth momentum and some more experienced organization and a brand known around.
The world for its unique portfolio of comfort collections.
We recognize the volatility and dynamic situation, we are presently in but we believe in the strength of our brands and our long term position of Skechers now I'd like to turn the call over to the operator for questions.
Thank you.
He would like to ask a question. Please press star one on your telephone keypad.
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Please ask one question and one follow up question only to allow all analysts to have an opportunity to ask a question.
Our first question comes from Jay sole with UBS. Please proceed.
Great. Thank you. So much my question is about gross margin John you called out some of the drivers I think you mentioned freight and logistics foreign exchange mix Asps.
But can you give us an idea of sort of like the magnitude of each of those and really what I'm trying to get at is how much of that was really one time in nature that you expect to get back in a year or two and then also with US within SG&A. You mentioned logistics costs were also in SG&A I think you called out $50 million do you consider that like a sort of a onetime expenses how should we think about that going forward. Thank you.
Hi, Jay.
On gross margin I mean, really far and away the cost driver has been really for the for the full year frame.
Freight and logistics.
By far the most significant driver we were able to offset some of that with pricing and as we've mentioned before we're still catching up a bit on price increases in our wholesale segment.
That was a very strong segment for us this quarter so.
That catch up is still underway, we do expect it to fully.
Fully materialize over the course of Q4 and Q1, but we still didn't have enough pricing to offset the freight and logistics in the fourth quarter and then there was some mix or.
Our distributor business was very very strong in the quarter, which is a great thing to see from those markets, but as you know the distributor business has.
A dilutive gross margin a very good operating margin, but a dilutive gross margin.
So we did suffer a bit from mix effects there in.
In regards to the incremental $50 million we quantified.
Most of that long term is.
Going to go away as efficiency works its way back into the system, but but as we mentioned and we have mentioned for a while now we are experiencing severe congestion from supply chain issues and thats, giving rise to the need to spend in order to make sure. We're preserving as best we can our customer delivery window.
And working our way through that inventory. So it will linger as long as those issues linger, though we do expect they will begin to become less prominent as we move through Q4.
In the early part of 2023.
The only caution I would give is this is clearly a ramification from COVID-19s effect on the supply chain, which as we noted in our prepared comments has been both extreme and extremely volatile and so some of this is going to be subject to where the supply chain normalizes out.
And when that happens.
One note I would give you, though on the plus side and I think David mentioned in his remarks, we are starting to see some favorable trends on freight rates container rates and that will work and work its way into the P&L over time, because we're still we still have the inventory that we imported under the higher rate structures.
<unk>.
In terms of green shoots in the supply chain.
That's one of the more encouraging ones we've seen.
In addition, part of the issue with the distribution centers is we were expanding them at a time, where it's difficult to get parts and we would've been complete a lot earlier and not have to run the tube look at cost both in the U S. In places like Panama, If we were to get equipment earlier and had them brought account up to speed earlier.
We continue to work on both of them and as we move into one structure and get the learning curve under our belt and paint back into the facilities complete we should level out significantly.
Given the existing volume obviously, if the volume continues as they can with us to grow it at that.
Outsized volume, we may have to play more catch up in the future in some markets.
Got it Okay, and then if I if I can just follow up with one more just on the inventory can you give us a little bit of an idea of maybe where it's located is it in China is that in the U S is that a transit.
And are you are you comfortable with the level in the sense that you think you'll be able to sell most of it at full price and maybe when do you think the inventory growth rate will get back in line with the sales growth rate.
Yes in terms of the growth we experienced this quarter.
Two notable notable observations.
Almost none of it within the Asia Pacific region, which is obviously <unk>.
As we mentioned remains under some COVID-19 duress. So it was probably predominantly in the U S and to a lesser degree in Europe.
We do feel very good about the inventory and as we noted it's all arrived within the last couple of months and so it is good inventory that we fully expect to be able to sell through.
Bringing our prices, we don't have any real concerns about that we have seen a material shift out of in transit into on hand.
But that's part of the issue we're talking about here is <unk>.
You saw throughput improved dramatically and you shop, you saw transit times improve dramatically and that just brought a lot of product onshore at a rate that is far more significant than we have historically observed. So that also was a contributing factor to the congestion we mentioned.
So you should notice I think.
Just want to point out from my own perspective that what happened during the pandemic and the closed down is that we moved out our buying process by a few months from what would normally be somewhere in the neighborhood of four four and a half months till like 665, even out to seven months trying to get everything in on time with the congestion at the ports and the.
We were having with our factories.
That all came in at one time, so its not under normal circumstances, we would have been at a more normal.
Inventory rate and rate of growth.
As John said they are relatively new they all just got here. They are all predominantly spoken for given the flows we've seen as.
As we slowed down buying on the tail end until we catch up to the process. So we have now.
Taken our supply chain and moved it back a few months and we've absorbed all the inventory. So we will be shipping out of hand, and now that we've expanded our facility and I've taken in in it should be easier for us to process and I will tell you. The one caveat with that obviously is how good this demand stay over the next few months and the way we started in October .
It gives me personally a lot of confidence in the fact that we will move it out on a very regular basis.
Okay. Thank you so much.
Our next question is from <unk> <unk> with BNP Paribas. Please proceed.
Good afternoon, and thank you very much for taking my question John David.
I'd love to ask about FY 'twenty EPS guidance, if I look at the mid points today versus the midpoint 90 days ago. It looks like you lowered it by about 25 cents.
John I'd Love for you to kind of give us the bridge on that like how much of it is incremental from FX from.
Congestion charges that maybe even China.
So we can understand the magnitude of the cut.
Thanks, Thanks, Brian I will not I will shy away from giving you a penny by Penny Walkthrough, but let me give you the big factors in order of size and scale.
First is going to be the freight and logistics.
We planned for we believe an adequate amount of that so thats working its way into the guide secondarily.
<unk> has not recovered at the pace, we had originally expected and unfortunately that market continues to be challenged by Covid.
We're looking for some early signs that things are starting to recover but I believe as long as.
Lockdowns and other restrictions on operations are in place that's going to inhibit China from from fully recovering.
And then FX FX is another headwind, but those are the three most significant factors were dealing with.
Okay understood. Thank you for that John and then I know youre not prepared to talk about 2023, but.
Andrew if you can give us some color on just the wholesale order book for spring 2023, like how do we think about domestic versus international and then wondering I would surprise me.
The ESP, both on wholesale and DTC were up around 1%.
I don't know if there was it was due to increased increased markdowns, but how do we think about asp's in the order book versus versus cost going forward for at least maybe spring 2023, and again I know youre not giving guidance for 2023, but just some color there would be super helpful. Thank you.
Yes, I would say relative to 2023, so far I'm encouraged by what we see there is certainly some nervousness in the marketplace, which.
We've spoken about I think it's also important to keep in mind domestically Q1 of this year, which will be our comp and Q1 domestically next year is a really high bar.
I would say many of our conversations with our partners are very encouraging as David noted demand from our direct to consumer business remains very encouraging so.
As I sit here today I am actually optimistic that 'twenty three we'll certainly at the very least be less bad than everybody is talking about.
And we see some very encouraging signs across the landscape. There are also some big unknowns, though I think again, the Asia Pacific region is going to be a big unknown for us given how co.
Covid has continued to have an effect on that.
That marketplace, but overall.
Sure.
I would consider argued to be cautiously optimistic and getting more optimistic as we continue to see demand at the consumer level.
<unk> robust for Skechers on Asps.
We need to be very careful there because we do have a significant number of foreign exchange.
Mixes in there.
I don't have the number right in front of me, but.
<unk> of basis points better would have been the ASP increase were it not for FX. So as you know with some of our key markets were also those most significantly impacted by.
Negative foreign currency movements, and with nearly 60% of our sales from outside the United States that FX impact is going to be felt throughout our key metrics and asps were certainly one area otherwise on a constant currency basis, we actually felt.
Pretty good about.
About ASP performance, although again, we're still we're still playing a little bit of catch up on the wholesale side.
We expect to get behind after the after the fourth quarter.
Very clear thank you very much John .
Our next question is from Alex <unk> with Morgan Stanley . Please proceed.
Great. Thanks, so much for taking my question I wanted to focus on the on the top line first so can you guys just talk to us about the.
Sales deceleration you haven't done it in the fourth quarter guidance.
If we're calculating it right it looks like it's going down to like a 9% three year CAGR underlying growth rate and that compares to the first quarter through the third at like a low teens number.
We're just having trouble reconciling that against what sounds like Super strong demand. So is that just all up all our facts are or how should we think about that.
The most significant factor is certainly FX I think year on year, we're losing nearly $100 million in top line revenue on FX. Some of that we had previously anticipated some of that we have not.
We are cautiously evaluating where every market stands relative to kind of the macroeconomic climate.
Probably the few big swing factors in there for us are where does FX go from here, how does China evolve over the course of the quarter and how much.
How much volatility is in that market because of Covid.
One of the other markets that obviously for US has historically been very key but had some of its own challenges.
This past quarter was Chile.
Very good market, a very robust market for us normally.
Undergoing some political and macroeconomic headwinds so that was that was a challenge and then.
In all honesty, we're cautious about how the supply chain performance and so we probably baked in a little bit more than average conservatism. There that being said I would say is if you look back at this quarter.
To replicate the growth that we put up in the face of all the.
All of the exigencies, we faced this quarter.
And in all honesty, it could've been even better than that and were it not for some of the challenges we felt on supply chain. So we feel really really good about where demand is and that's why we've said as long as demand stays where it at that we feel incredibly optimistic about our 2026 objective of $10 billion Mark Yeah, I would also point.
That that the quarter will likely change in this dynamic somewhat we can always have a very big back half of Q4, which is anticipation of spring, which is a lot of spring product is developed deliver some in the U S.
Significantly more overseas as they transition given the extent that a lot of wholesale customers are backed up now when their own deceased I do feel that they will take some more in the first quarter than the fourth quarter, because they won't be able to transition into there.
New season quite as quickly as in the past just given their own inventory.
Holdings.
Should that dynamic change that could also change some of the dynamics in the fourth quarter.
Yeah.
Great. Thank you.
Our next question is from Gabby Carbone with Deutsche Bank. Please proceed.
Hi, good afternoon. Thanks for taking our question just curious if you could maybe just dig in on the health of the U S consumer a little more what youre seeing now maybe versus a few months ago. I mean, you are obviously experiencing very good demand and any changes in consumer spending behavior.
The only thing I'd note honestly Gabby is what we've mentioned for really the last couple of months, which is that the data does not reveal to us at least a significant slowdown in.
And consumers' willingness to spend on the Skechers brand.
We felt like this quarter was potentially prone to some risks on the consumer side and none of that materialized in fact.
I would characterize our outperformance on domestic.
Direct to consumer side in particular.
Is really really strong, particularly in e-commerce, but really across the board and then as David mentioned early signals from Q4 also very positive so.
I would say, we're continuing to see.
Strength across at least our brand and within the gender profiles of our brand and really haven't detected any meaningful change, which is to say things continue to remain very encouraging.
Thank you for that and then just a quick follow up it sounds like you really aren't seeing any pressure from the increasing promotional environment is that a fair statement.
Yes.
Well.
David.
Absolute has never really worked well in business because it's never absolutely the case, one way or the other we're certainly seeing more promotions in the environment and we're not going to sit idly by while others promote and be off price significantly, but I wouldn't characterize it as a significant level of promotion ality. So.
Our offering promotions in a targeted way.
We'll deploy them when we feel it's appropriate but what we have seen is that it has also been accompanying very strong demand at the consumer level. So.
It has been effective and it is in by any extent from our perspective at least at this stage.
Stream or.
Beyond what I would consider to be average.
Okay, Alright, thank you very much.
Our next question is from Jim Duffy with Stifel. Please proceed.
Thank you Hi, David Hi, John .
Hi.
You mentioned, you're working to alleviate supply chain congestion in North America. Despite those challenges your wholesale revenue very strong what's the state of channel inventories are they lower than you'd like them to be just given those challenges.
Yeah.
As you work through the throughput issues is there some more channel fill opportunity, whereas the congestion simply just adding logistics costs and channel inventories are in a good place.
And youre, hoping to relieve some of those.
Additional costs.
Well, Jim I'll give you my perspective, and I'm sure David will share his.
I think if you look at the.
Wholesale channel inventories right now and this is <unk>.
The same for every single partner, but they generally look pretty stable.
Look back relative to 2019.
They are very close to those levels. So theres no extreme buildup or drawdown that we're seeing we are seeing.
Supply chain challenges all the way through the system. So it is not.
Not simply in our own distribution. We're also seeing in downstream and so we know that many of our partners are similarly dealing with some congestion issues.
Wed like them to have more and in fact.
You step back and look at Q3 Q3.
Congestion, we would have certainly been able to deliver an even more significant domestic wholesale growth, but we also want them to be healthy and we don't want inventory to start backing up and to date. That's certainly not what we've seen we continue to see good sell throughs, we're doing everything we can to make sure we're shipping on top.
And in full and that's what gave rise to some of the costs that we talked about but we also need to be cognizant of the fact that our partners need to be able to adjust that inventory.
Yes, I think that is true.
We don't talk in terms of anybody with having too little inventory.
Certainly in our industry I think to our benefit and what we feel good about is that when space. It makes is made available whether it's by a promotional cadence or sales in general as things open up we are one of the first calls to deliver the next inventory because our stuff does so well.
Wholesale and for their own retail.
I think we're checking well, which gives us an opening to any openings for inventory and open to buys and.
<unk> opened to ship, which is just as important nowadays so I think keeping in high demand is a key for us. So we have the inventory we have taken in early two so we will be available to all our customers and as they sell down we're certainly moving it very quickly to them. So we could actually pick up the pace.
Should sales continue to be strong through the through the fourth quarter.
Got it.
John the incremental $50 million of expense you identified for the third quarter.
If I understand you correctly. That's in addition to the higher transocean rates on a year to year basis.
Yeah. Unfortunately, yes, that's that's.
Purely dealing with on hand inventories once product is landed.
Got it okay and any thoughts on.
What that figure might be for the fourth quarter I'm trying to put my arms around what is the potential recapture opportunity is.
Yeah.
Hopefully someday soon we get back to a more normalized environment.
Well I'll tell you we are certainly making that our priority, but it's also important to make sure that we're delivering to customers and we're honoring our commitments to get them the product that they need to sell through to to survive. So we're trying to balance those two.
I don't want to give specifics, but I would say, we certainly expect a lesser impact in Q4 than we had in Q3, because so far we view Q3 as kind of the epitome of the congestion issues, but it's still going to be a material impact and as I noted in response to Lauren's comment.
It's certainly one of the factors that is causing our change in guidance because we want to make sure we adequately incorporated that into our expected results, but but I assure you we're going to do everything we can to minimize that while honoring our commitments to customers to get them the goods they need predictive, particularly in this holiday.
Even.
Great. Thank you very much.
Yeah.
As a reminder, we ask that you ask one question and one follow up question.
Our next question is from Omar Saad with Evercore ISI. Please proceed.
Good afternoon. Thanks for taking my question most of them have been answered I was hoping you could dive in on the strong DTC trends maybe separate out.
E comm versus stores, what youre seeing there that kind of uniform to across markets and then I have one follow up.
Yes, I would say.
Not uniform across markets.
We definitely saw outsized growth on the digital side of things, but again as you've heard US say before we think those are very tightly integrated at the consumer level.
It's also not a fair comparison, because as David noted this year, we are in the process of lighting up markets with an online direct to consumer offering that we've never had before so in many markets.
It's an unfair comparison, what I would say is it's apparent to us that the Skechers brand remains in demand at the consumer level, we're seeing that in stores, we're seeing that really across store formats, which is something we haven't seen in a while which is very encouraging and we're seeing it in nearly every mark.
Again, the one the one <unk>.
<unk> back on the direct to consumer side of things would have been in China.
Which is just just facing some difficult conditions as we noted at one point, we had nearly 10% of our stores shuttered because of Covid.
So that market is simply struggling to cope with the dynamics of Covid, but but overall, we definitely were pleased with what we saw in store online in the communion between those two and it. It continues in the early part of this this period to show similar trends which were.
We're excited to see.
Got it could you actually elaborate on that comment you just made about putting.
Putting on some product that you've never had before.
Maybe a little bit more what you're talking about there.
Well I'm, sorry, it's not product.
Lighting up sites that we Havent had before so if you got it look to last year in the same quarter got it.
Did not have sites in Belgium, France, Italy, the Netherlands, Poland, Spain, mainly had one but.
Whitsel land so.
Again, we've been on this road map of launching our direct to consumer online offering and so we're getting.
Getting to a direct to consumer online relationship with many consumers in these markets that we've never had the ability to to.
To performance before and Thats very encouraging.
And then quickly John any product trends or category shift to call out as the kind of returns.
Out of Covid and the lockdown.
Lifestyle or you're seeing any shifts in your business certain parts of the category, but we're outperforming or underperforming.
No shifts really but I say that with an incredibly encouraging backdrop in that we've seen comfort and casual continue to resonate strongly we think consumers are very much appreciating our focus on those two domains in particular.
Evidences itself in the uptake they have for our new technologies, when we put them into the marketplace where.
They received.
Very strong demand I'd say the only notable change versus the last couple of years in the third quarter was really saw kids come back in a more meaningful way and we had seen in the previous couple of years, because COVID-19, obviously played with.
School in school attendance.
We saw a much more traditional curvature of demand on the kids side that is associated with back to school and that was refreshing that was good to see because it clearly is an indication to us that there is some normalcy returning to the retail cadence of things, which is in our view good.
Thanks for the color good luck for holiday.
Thank you.
Yeah.
Our next question is from Tom.
Nick <unk> with Wedbush Securities. Please proceed.
Okay.
Hey, guys.
My question.
I was hoping can you give us a little bit more color around Q4 like gross margin versus SG&A.
It kind of seems like to get to get to your guidance given where the revenues are going to be it seems like either gross margin has to get a lot better or the year over year growth rate for opex needs to slow pretty dramatically.
I know you said.
I think sequential improvement in gross margin, but like is there any more.
Color you could give us there like.
Gross margins are up year over year down year over year, a little bit like I guess any any help there would be would be helpful. Thanks.
Sure. Although I'll note that there is no reason, we couldnt achieve both.
But I would say in terms of the plan that we've given you our goal for the entirety of this year has been to catch up on the gross margin side and our objective is certainly to do that this quarter now we may not make it 100% we may get close maybe a little bit better than that but I would guide towards our gross margin.
Close to or on top of product per year. That's been the objective of the pricing that we installed previous in the year and how we've gone about.
Pricing.
In our direct to consumer channel as well.
And so that's probably the one improvement debt.
Is key to understanding our guidance, we have as we said incorporated some excess costs from supply chain similar to this quarter to incorporate what we know about how the supply chain is expected to behave.
We'll have to see how things evolve to determine whether or not thats.
Too much or too little but right now we think we have been.
Appropriately conservative in incorporating those costs into our expectations for Q4.
Got it okay, and if I could just ask one more question on China, obviously, that's been a.
A tough market.
It sounds like.
One of them or maybe two of them really big competitors are still.
Struggling there and Youll talk about really challenging market conditions.
I mean, I guess, just kind of like how do you.
Sort of see the recovery in China.
<unk>.
I mean.
Do we think like China.
China business is up next year or like just any any help around China would be great.
Well.
But let me let me say first about about this year I mean, I still think Skechers is performing better.
And almost any other western brand in that market.
The decline we spoke about in Q3, it's important to note that that has a very heavy influence from FX.
Almost take 600 basis points out of that just on FX allowance. If you look at it on a constant currency basis.
The market I think they held up really well if you take a deeper slice of that E. Com was nearly flat and thats one of the most significant channels for US there. So that was great obviously stores not being open inhibits their ability to sell and transact.
Consumers not being able to be in malls and our shopping severely inhibits our ability to convert there and thats that was the drag in the quarter.
Cautiously optimistic that Q4 will be better in Q1 will be better after that it's certainly a longer recovery path than we had originally expected but.
I see no reason why next year can put us right back into the track we've been on in China, which is a fairly.
Sizeable growth path now that's all subject to what happens with Covid and political environments being what they are so you have to take that with a fairly heavy caveat, but in terms of the base business demand for the brand the product residents. We feel really good about all those things, we can control and I think our team.
<unk> is doing as good a job as anyone and navigating that and Thats why at least in terms of the western brands. We feel like we continue to outperform we certainly havent seen some of the more drastic impacts that others spoke about very recently.
And we're encouraged by that.
Understood. Thanks, John and good luck for holiday season.
Thanks.
Our next question is from John Kernan with Cowen <unk> Company. Please proceed.
Good afternoon, Thanks for taking my question.
China $1 $8 billion in inventory on the balance sheet at the end of Q3.
It's up about $800 billion from where it was in 2009 I think sale 2019, I think sales are up about $500 million from a similar same quarter.
When do we think inventory dollar trends come down.
More in line with sales strength is it the first half of next year when does inventory peak on the balance sheet.
Well I mean, it's difficult to say I think it's important to keep in mind that a portion of that inventory build is purely cost based rate you can you can.
<unk> incurred.
Type of freight escalation on logistics escalation we've had.
Had over the last one year without it impacting your on hand balances because it just flows through that way I would say if we think about it from a unit perspective, which is a more modest growth than what we saw on the dollar side of it we do expect things to begin ticking down now some of that is going to be contingent upon how the supply chain unfolds because.
Again, this is not a situation where inventory backed up because of a lack of demand thats definitely not in the situation. We're in and so it really has to do with logistics and timing all the things that we've had a very tough time predicting well over the last couple of years. So.
We prefer it.
To be lower than it is we would prefer to have put lesson in working capital over the last year than we have but by the same token we want to make sure we have the product available to meet consumer needs.
And I would expect it to get better or to be those two relationships better underlying over the course of this year.
But in terms of the exact timing that's two contingent upon how the supply chain performs for me to give you an educated guess.
Sure. That's certainly the whole sector seems to be in a similar position I guess you brought up the point that a lot of it the increases cost base. How does this affect gross margin as this comes off.
The balance sheet and onto the income statement.
In Q4 in the first half of next year.
Okay.
Well I mean, it's already in the effects, we have been seeing on the gross margin side of things.
Again, the inventory turns over relatively quickly in the context of our overall sales performance. So.
We think it is incorporated into both the costing that is underpinning our guidance, but also the pricing actions we've already taken.
To offset that that we expect to materialize in the quarter.
So again I think we're going to be dealing with this inventory cost and at this level for at least another quarter and a half but.
Our expectation is both in terms of what we're seeing on freight and logistics rates coming down.
As well as selling through the inventory that we have that.
And our remedy itself over time.
The counterpoint I just I just mentioned against that because we've often said this is we're not looking for a windfall on gross margins, we're looking to make sure we protect our gross margin so.
I'll try to capture as much of that as we can.
Promotional and it comes back or there is changes on the on the pricing horizon.
We will have to be flexible about that going forward because it's important to keep in mind that we've got to be true to our.
Our goal of being a good price for the value we offer and that's that's going to be important.
Very helpful. Thanks, guys.
Thanks, John .
Our next question is from Sam Poser with Williams trading. Please proceed.
Good evening, Thanks for taking my questions I wanted to go back to the to the G&A. Please.
And with $600 million in G&A in the quarter of 603.
Is that really I mean.
Is that sort of a top kind of number I mean.
Or is this a number that could go to.
It was up a $100 million from last year is that a number that could be up 70, we could be looking at $6 50 in Q4 or is this something where like that 600, maybe a little bit higher as well.
It's sort of quite a think about it.
Sort of more in absolute terms.
Yes, I think the first thing I'd note is within that 600, you mentioned as these.
These supply chain cost that we've mentioned that $50 million, we quantified so.
We definitely don't view that as ordinary course.
G&A.
Second is we don't really think about it in dollar terms because that doesn't equate with how that G&A performs particularly the volume oriented what I would point out as well.
Believe it or not even with that $50 million of excess cost in there.
G&A as a percentage of sales actually lever year over year.
And that's how we tend to think about there is a piece of G&A that is stable.
And it reflects just the natural operations of the business the corporate environment design development et cetera, but then there's also a piece that is very volume influenced.
And then in this quarter as we mentioned there was that that $50 million that was in excess of what we would have normally expected. So.
If you kind of use those parameters you would understand that it should be in line with the sales performance, but also in this quarter.
That relative measure that sales in our G&A as a percentage of sales was aggravated by that by that $50 million.
Got you. Thank you and then I've got two more one.
What is your optimum forward weeks of supply back pre COVID-19 running around an average of 15 right now youre running around over to Monty.
So I'm not really thinking about on a year over year basis I'm more thinking about it is it's settling down and then that leads me into the last part of my question regarding timing of orders timing of your orders and expanding in.
December will you be taking orders.
We'll be back to that Florida quarter, four and a half months window there.
Or where are you taking it further out and then allowing some of that to flow through from what's already here and whats coming I guess based on when you took orders reasonably for spring.
Yes, I think those both run together, we're going to be more reactive as.
And as reactive as we conveyed to the market to what happens in the supply chain.
If we could get back to four months with the confidence that it will be here on time. So we can deliver on time, we will certainly push towards that direction as we get through the end of the year.
Right now there is some different issues as far as the supply chain is concerned even though container costs are coming down they are coming down because the demand for space has come down so dramatically that sailings have been canceled moved around and it does increase to what we feel a comfort factor would be.
For time in transit so to the extent, we get more back to normal we will be going more hand to mouth. So that we can calculate the time type of on hand inventory on the terms that you were talking about before if we can get a real solid handle on the transit times.
Okay, and then with your backup I mean with the congestion at the Dcs and getting the getting the.
Expansion to the USB C and the other DC up and going I mean is this something we really should we be thinking about that.
Incremental costs are going to continue through the first quarter of next year and Thats when they should.
We're going to ease up that's when we should think about the earliest theyre really going to start easing given the way everything is happening right now and the timing of getting.
You have the sort of internally up and running.
Well I'm more than optimistic hopeful person that John Keith a numbers Guy. So I will tell you my perspective is that they start to come down. The question is the rate they start to come down.
The way I think about it is when things started to open up as far as the Port was concerned we started to receive inventory from the port at a rate more than double of our peak.
At any time since those.
Places where open.
Going through all that and having received all that inventory and I hope inventory very close to a peak here, but even if it's not at a peak, which I believe it is it's the flow through so in other words, we won't be receiving given our buying patterns no matter, what unless a significant extreme change in the supply chain comes in it we will.
B receiving inventory at that rate. So that's one expense that goes away and looking for additional space and trying to move it out and just unload all those containers for somewhat efficiencies.
And we've already.
<unk> got those under our belt. So if anything we will not be looking for more space, we will not be expanding.
We'll get rid of the excess cost of the new part of the distribution center, which is not a storage facility for the most part, but it's an operational facility. So while we're training on it and getting up and going we have duplicate costs. So hopefully by the end of the year early part of next year, a significant piece of those costs go away. So if you think about not paying overtime.
Trying to work all of seven days, a week to receive all those shoes and ship. The maximum amount. We can I do believe we're coming into a more efficient use of the distribution center and that would include here do use and parts of South America, where we're expanding.
Assuming we can get all the equipment and then there's still some final touches both in South America and here in the U S that are waiting for our builders and our.
Installers to get final pieces to get it done so we can move this along.
Normal circumstances, we would have done in the U S last December or January a big piece of that was.
They were running late because of the supply chain their own supply chain and their own personnel issues to bring something to be installed and then we stalled back because we had all that stuff to receive and tried to get out the door.
And hire a significant amount of people people weren't as available. So right now we don't feel we need anymore and certainly not a significant amount of people, we will be reducing over time, we won't be receiving that much. So I think we're getting to a much more steady stream.
Our product and it should start to flow from the G&A as we move through this year and into next quarter.
Our final question is from Rick Patel with Raymond James. Please proceed.
Thank you and good afternoon, everyone can you talk about the underlying trends in Europe . It seems performance there was really strong in the third quarter on better product availability versus last year, but just given some of the macro headlines that we've been seeing across Europe into the U K in particular Im curious if youre seeing any change.
As in the way that wholesale accounts or consumers are behaving in Europe versus what you were seeing about three months ago.
[laughter].
Obviously, it's up.
I had a great quarter. So that's what we saw and nothing has changed in October and nothing has changed anecdotally with our meetings with some of our larger accounts as to what their needs are and what how we're selling through and how they feel about their order backlog. So.
While we as everybody else read the headlines and see what's going on and some of them for a particular case.
And the particular product offerings, we have there and stuff we're delivering we continue through current time in October .
As we did all through the last quarter.
Yes, I would just add to that Rick I mean keep in mind as well that the numbers, we spoke about in kind of our our EMEA and Europe region were also severely impacted by foreign currency. So they were.
They were significantly better even than as reported on a constant currency basis. So.
I think we continue to see good trends for our brand in Europe .
There is obviously a lot of concern in that market over the macroeconomic environment, but so far we have yet to see that and meaningfully materialize in our business either on the wholesale side or on the on.
On the direct to consumer side win when taken as a whole.
I appreciate it good luck this holiday.
Thanks.
And this does conclude our question and answer session and this concludes our conference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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