Q4 2022 Skechers USA Inc Earnings Call
Greetings and welcome to the Skechers fourth quarter 2022 earnings conference call at.
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 over to Skechers. Thank you you may begin.
Hello, everyone. My name is Amanda started yet from the F. P. N 18, Thank you for joining us almost 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 operation.
Such forward looking statements with respect to the COVID-19 pandemic include without limitation the company's plant 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 that 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 the impact of inflation, Russia's war with Ukraine, and supply chain delays and disruption in general and specifically as they apply to the retail industry.
The company.
There can be no assurance that the actual future results performance or achievements expressed or implied by any other 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 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.
That I would like to turn the call over to Skechers, Chief Operating Officer, David Weinberg, and Chief Financial Officer, John Van Tomorrow, David.
Okay.
Thank you for joining us today, our fourth quarter and full year 2022 conference call.
2022 or.
30th year in business was a significant milestone for the company. We achieved record sales of $7 4 billion, an increase of one 1 billion or 18% year over year.
On a constant currency basis sales would have exceeded seven 7 billion an increase of over $1 4 billion.
All four quarterly sales records in 2022 are the result of our focused marketing efforts extensive distribution network and core design principles style comfort innovation and quality at a reasonable price.
From a product perspective, we further cemented skechers has the comfort technology companies with the introduction of Skechers hands free slipped bins and continue to innovate our performance solutions with the launch of Skechers go golf shoes.
Among many other stand out moments, where news named Skechers company of the year for the third time, and our elite golf athletes match Fitzpatrick and Brooke Henderson when majors wearing skechers go golf.
It was also a year that presented challenges, including temporary COVID-19 related store closures in China, and rising freight and logistic costs, which have started to moderate we also experienced supply chain disruptions that created inventory congestion throughout the distribution channel as we move through the year.
We overcame those challenges and achieved record annual sales due to the flexibility creativity and dedication of the global Skechers organization.
Thank you to all the team members at our corporate headquarters in our offices and distribution centers, our sales teams in the field and our retail associates throughout our global network of Skechers stores, each and every one of our team members is an important contributor to our ongoing success.
We remain focused on meeting the demands of consumers continuing to replenish stocks and all our skechers retail stores worldwide and partnering with our global accounts to ensure shoppers have access to the leader and comfort footwear.
For the fourth quarter Skechers achieved sales of $1 88 billion, a 13.5% increase marking a new fourth quarter record and slightly above our previous quarterly record. This notable achievement was led by increases of 16% in wholesale and 11% and direct to consumer.
Domestic sales increased 22% and international sales increased 9% with international representing 62% of our revenues for the quarter and 59% for the full year.
By region, EMEA grew 29% and the Americas grew 22%.
APAC sales decreased 7%, which included a China sales decrease of 23%.
Excluding China.
<unk> sales increased 31%.
And approximately 62% of our global sales for the year wholesale remains a key element of our growth strategy.
As a consumer driven company, we focus on what shoppers want.
And deliberate as efficiently as possible to our global wholesale partners.
This allows us to reach our loyal base, where and when they want to shop be it department stores family channels, where their favorite specialty store.
In the quarter wholesale increased by 16% in both the U S and international.
International growth was driven by double digit increases across many markets globally overall.
Overall wholesale sales were driven by increases in unit volume up 9% and average selling price per unit of 6%.
The Americas wholesale business grew 19% attributable to double digit growth in nearly every market, including a 16% increase within our domestic wholesale channel, which saw a double digit growth in our mens and kids lines and single digit growth in womens of note for the quarter man.
<unk> rose to 41% of our domestic wholesale business as we saw increases in most product categories. Recently, we have seen strong sales drivers across several mens key categories and we believe the performance across the board speaks to the relevance and broad acceptance of our men's styles.
Wholesale growth of 31% was primarily driven by double digit improvements in Germany, Spain, and central Eastern Europe , as well or to our distributors, including Turkey, the middle East Scandinavia and Greece.
This was partially offset by the termination of shipments to Russia.
APAC wholesale decreased 6%, primarily due to the challenges in China.
Excluding China APAC wholesale sales grew 32% as we experienced growth across most other markets, most notably in India, and Indonesia with high double digit growth and Taiwan with triple digit growth.
A key focus area for the company is direct to consumer where we are working to create a more seamless omnichannel experience. The 11% sales increase in the quarter was the result of 27% growth in the Americas and 19% in EMEA.
Partially offset by a decrease of 7% in APAC again, primarily due to China direct to consumer comparable same store sales worldwide increased seven 5%.
Domestic direct to consumer sales increased 30% due to strong triple digit growth in our E Commerce channel as well as a double digit increase in our brick and mortar stores.
International direct to consumer sales were flat due to declines in China were up one point over 35% of our stores were temporarily closed outside of China, and Chile, which was impacted by economic volatility every other market experienced growth within our company owned Skechers stores portfolio.
And nearly every market grew and our direct e-commerce business.
Total direct to consumer and unit volume increased 15% and average selling price was down three 5%.
In the fourth quarter, we opened 62 company owned Skechers stores and closed 22 of which 17 were in China included in the openings were 29 in China, seven big box or outlet stores in the United States for in India, and our first company owned store in Ireland, a flagship location on <unk>.
<unk> Street in Dublin.
We ended the quarter with 4537 Skechers stores worldwide.
<unk> 3093, with third party stores, which include a 157 that opened in the fourth quarter 94 of which were in China 16 in India nine in the Philippines and seven in Australia.
In the first quarter 2023, we've opened seven company owned stores six big box locations in the U S and one concept store in Germany.
Year to date, we have closed one location in the United States, We expect to open a total of 35 to 40 company owned stores worldwide in the first quarter and between 100 to 120 stores over the course of the year.
In the fourth quarter, we launched our first Skechers E Commerce site in Japan, and we're pleased with the initial reaction from consumers. We remain focused on growing our direct to consumer business to efficiently drive sales and connect with our loyal consumers to this end we have planned additional e-commerce sites, including Peru, Colombia.
And an update to our existing platform in Chile, which is already one of our most productive international E Commerce sites.
Last month, we also launched our sketch plus loyalty program in Canada and plan to roll out this program to more countries throughout the year.
Our fourth quarter growth across all segments of our business and the increases in nearly every market demonstrate the robust demand for our comfort technology products. The relevance of our footwear collections the effectiveness of our marketing efforts and our commitment and ability to execute in the face of headwinds.
Many of the shipping challenges, we face within our own distribution centers have eased and we are seeing improved operations in our recently expanded two 6 million square foot North American distribution Center.
At the end of the first half of 2023, we expect to be shipping out of a new 427000 square foot center in Vancouver that will improve delivery times for Canada and relocated our new Chilean distribution center, doubling our space to 430000 square feet. Additionally.
Additionally.
In India, the 660000 square foot phase one of our new $1 1 million square foot distribution center outside Mumbai is expected to be completed by year's end.
As always we believe demand creation is critical to our brand success.
To support and drive awareness of our diverse product offering we leverage a roster of notable talent both globally and in regional markets. The challenge is as diverse as lifestyle Guru Martha Stewart retired athletes sugar Ray Leonard and Tony Romo and elite Major championship golfers Brooke Henderson and that Fitzpatrick we.
Also signed Pickle ball pros Tyson mcguffin, and Katherine parent out in early 2022 to correspond with the launch of Skechers Viper Court Pickle ball shoes.
We are now the official footwear sponsor of the professional Pickle Ball Association tour, creating an undeniable connections between the fastest growing sports in America and Skechers.
[noise] Skechers employs a 360 degree marketing approach.
Digital and social media TV out of home print radio and PR and translate to our campaigns into dozens of languages wherever consumers are be it the most watched soccer matches in the world a subway in Asia Billboards in South America, where fashion magazines in Europe , we are there.
And wherever consumers shop.
Phones high streets are malls, we are they're all these marketing techniques build brand awareness and drive consumer demand.
While we fully expect to face continuing challenges throughout the year. The recent elimination of the zero Covid policy is a positive for our business in China, and we believe both consumer confidence and more normal shopping behavior will build throughout the year in.
In addition, despite the recent inventory challenges impacting our domestic distribution network, we remain confident in the strength of our brand and the demand for our products. Further we are beginning to see freight and logistic costs normalize foreign currency rates moving in our favor.
In our retail stores full of fresh inventory.
We had a strong December and January direct to consumer sales tracked ahead of last year, giving us confidence that we'll see continued growth in 2023.
And now I would like to turn the call over to John for more details on our financial results.
You, David and good afternoon, everyone.
2022 was our 30 <unk> year end business and as I reflect on the past four quarters I'm incredibly proud of our talented team around the globe for navigating one of the most turbulent macroeconomic environments in our 30 year history, while remaining steadfastly focused on executing against our long term growth.
Strategy.
In this complex year Skechers achieved record quarterly and full year results, surpassing seven 4 billion in annual sales and impressive year over year increase of over $1 1 billion driven by global growth across our channels.
These results demonstrate the strength of our brand as the comfort technology leader and the robust consumer appetite for our innovative product portfolio.
We remain excited about the growth opportunities ahead and are committed to stylish comfortable high quality and reasonably priced footwear for skechers consumers around the globe.
Now, let's review, our fourth quarter financial results.
Wholesale sales increased 16% year over year to 1.05 billion.
Representing 16% growth in both our domestic and international markets.
We continue to see broad based demand for our products evident in the increased number of units sold and higher average selling prices achieved.
During the quarter, our supply chain team continued to work diligently to alleviate the congestion stemming from the unprecedented supply chain disruptions last year.
While we continue to experience some processing constraints at our distribution centers from record input volumes. We are pleased with the progress we have made to improve efficiencies.
Spanned capacity and reduce on hand inventory, while also maintaining the pace of shipments to our wholesale customers.
Direct to consumer sales increased 11% year over year to $829 6 million driven by 30% growth domestically from a triple digit increase in e-commerce, and a double digit increase in our retail stores.
Both channel benefited from healthier inventory levels compared to last year's supply constrained environment inter.
International direct to consumer sales were flat year over year due to a decline in China. However, excluding China sales increased 22% driven by double digit growth in both our stores and online.
The expansion of our digital presence internationally and continued penetration of our retail stores contributed to strong growth as we further develop direct relationships with both our long standing and new consumers.
We're excited about the growth opportunities in our global direct to consumer business, both physically and digitally and remain focused on weaving, our omnichannel capabilities into a seamless consumer centric experience and showcasing the breadth of our full product assortment.
Now turning to our regional sales in the Americas sales for the fourth quarter increased 22% year over year to $925 6 million.
Driven by double digit growth across all channels, reflecting healthy consumer demand for our compelling product portfolio and improved inventory availability.
EMEA sales increased 29% year over year to $413 $7 million driven.
Driven by double digit growth across all channels and in most countries led by Germany and sales to our distributors. We continued to experience strong brand momentum and consumer demand in EMEA throughout the quarter.
And APAC sales decreased 7% year over year to $539 5 million.
However, excluding China sales grew 31% driven by double digit growth in all channels.
We saw particular strength in India, one of our fastest growing markets in the region and in sales to our distributors.
In China sales declined 23% due to continued COVID-19 related disruptions, including the closure of over 35% of our stores at one point.
Our China team has done an excellent job managing through these challenging conditions and persistent disruptions and we thank them for their tremendous poise they have shown throughout.
Fourth quarter gross margins were 48, 4% a decrease of 40 basis points year over year, but an increase of 140 basis points quarter over quarter. The.
The year over year decrease was the result of higher product costs and planned strategic promotions and our direct to consumer business.
Operating expenses increased 60 basis points as a percentage of sales year over year.
43, 2% to 43, 8% self.
Selling expenses increased $19 1 million or 14%, but were flat as a percentage of sales compared to the prior year.
The dollar increase was primarily due to higher demand creation expenses and digital and brand marketing globally.
General and administrative expenses increased $88 9 million or 15% and 60 basis points as a percentage of sales year over year.
We incurred approximately $25 million of incremental logistics costs globally to minimize disruption and delivering products to our customers. In addition to increased volume driven distribution expenses.
We are making considerable progress on restoring efficiency and accelerating the capacity expansion in our domestic distribution center were notably inventory was down 12% from the prior quarter. However, we continue to expect to incur some incremental logistics costs over the next several quarters, albeit at a moderated.
<unk> amount.
Earnings from operations were $86 6 million, a 7% decrease compared to the prior year and our operating margin for the quarter was four 6% compared to five 6% in the prior year, earning.
Earnings per share were 48 per diluted share on $156 3 million diluted shares outstanding compared to adjusted diluted earnings per share of 43 in the prior year, a 12% increase.
Our effective tax rate was nine 6% for the fourth quarter and 17, 8% for the full year.
The lower than expected tax rate was attributable to the utilization of foreign tax credits and benefits from certain discrete items.
And now turning to our balance sheet, we ended the quarter with $788 4 million in cash cash equivalents and investments.
A decrease of $252 1 million from December 31, 2021, but an increase of $106 9 million from the prior quarter. We continue 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 eight 2 billion, an increase of 24% or $347 million compared to the prior year, but up only 2% versus last quarter.
We continued to experience supply chain disruptions, but we are pleased with the progress we are making to reduce elevated inventory levels.
Accounts receivable at quarter end were $848 3 million, an increase of $115 5 million, reflecting higher wholesale sales.
Capital expenditures for the quarter were $95 4 million of which $40 2 million was related to the expansion of our distribution infrastructure globally.
$23 $8 million related to investments in our retail stores and direct to consumer technologies and $21 7 million primarily related to the construction of our new product design Center.
Our capital investments are focused on supporting our strategic priorities growing our direct to consumer business and expanding our brand presence globally.
Now turning to guidance as we begin 2023, it will come as no surprise that there is a meaningful degree of uncertainty ahead for.
For example, while we continue to see robust consumer demand for our product evidenced in strong comparable store sales trends and sell through there are also many recessionary signals in the marketplace.
Our results will be significantly influenced by what prevails.
But embedded in our initial guidance for 2023 is the following.
Continued sales momentum in most of our international markets throughout the year.
The China market recovery characterized by continued near term challenges, but improving steadily over the course of the year.
The domestic wholesale marketplace gradually overcoming elevated inventory levels and supply chain constraints.
Building and declines in the first half of the year before returning to growth in the back half.
Steady improvement to our distribution operating efficiency as expanded capacity and other remediation efforts bear fruit.
Finally, the gross margin benefits of lower logistics costs.
Particularly in freight maturing into our results over the course of the year as we deplete the inventory we acquired last year.
For fiscal 2023, we expect sales to be in the range of 775 billion to $8 billion.
And net earnings per diluted share in the range of $2 80 to $3.
For the first quarter, we expect sales in the range of $1 8 billion to 185 billion.
And net earnings per diluted share in the range of 55 to 60.
Our effective tax rate for the year is expected to be between 19% and 20% and we expect total capital expenditures to be between 303 hundred $50 million as we continued to invest in our strategic priorities, including additional stores added omnichannel capabilities and incremental distribution.
<unk> in key markets, like India, China, Chile and more.
We also expect to continue our discretionary share repurchase program of which approximately $425 $8 million remained available at December 31 2022.
As we move forward into 2023, we remain confident that our long term growth strategy will continue to provide a strong foundation and ensure skechers is positioned to drive long term profitable growth.
Underpinning by our unwavering commitment to deliver value through our innovative comfort technology product portfolio at compelling prices for consumers globally.
With that I will now turn the call over to David for closing remarks.
Thank you John .
Past 30 years have been marked by unforgettable moments from our first store opening first television commercial and first $1 billion in sales to now operating over 4500 stores collaborating with Martha Stewart, many others for a comfort footwear being named company of the year by leading trade publication.
<unk> footwear news and achieving well over $7 billion in sales this year.
And every point along the way.
At the many milestones for the challenges we have faced over the years one thing has been consistent.
Our incredible employees sales personnel and customer service teams on the front lines, a talented and creative group of designers and marketers are logistics and operations forced that makes it all check.
Managers and executives who drive the vision there.
There is truly nothing like the global Skechers team and we thank the entire organization for making 2022, an incredible year.
2023, we will continue to present challenges, but we believe that with our loyal partners and dedicated team Skechers will continue to reach new heights, including $10 billion of annual sales by 2026, now I would like to turn the call over to the operator for questions.
Thank you.
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Please while we poll for questions.
Thank you and our first question comes from Jay sole with UBS. Please proceed with your question.
Great. Thank you. So much my question is just about China, and what's embedded embedded into the guidance. John you mentioned, you expect an improvement throughout the year, but can you tell us sort of right now in fourth quarter.
China sales are trending year to date, sorry quarter to date, and then sort of what you expect for Q1, and then maybe if you can sort of quantify a little bit how you expect the year to point out that would be super helpful. Thank you.
Well, yes, we're not going to give you.
Year to date trend for 23 other than to note that what we referenced in the guidance certainly includes that perspective I.
I think there are a lot of unknowns in China currently having departed from the Covid Zero policy you are still seeing COVID-19 effects as there are infections and other other protocols in place in response to that that is one of the reasons why the fourth quarter saw the declines that it did.
Currently we expect the challenges to continue for at least the.
First quarter and potentially reaching into the second.
But more significant rebound opportunity in the back half of the year.
Admittedly, though we're going to have to see how the situation unfolds.
We have seen some positive indications lately with regards to foot traffic and in store performance that we haven't seen for quite a while so thats very encouraging.
The inventory position is well suited for that market to rebound, but ultimately that's one of the bigger unknowns in our our view for 2023.
We are optimistic, though I'd say, what we see right now is encouraging but as.
It's been a long road in China over the last couple of years that they've dealt with Covid and so we want to make sure that we're cautiously.
Cautiously optimistic before we get overly optimistic.
Okay.
If I could maybe ask one more just on G&A. This quarter I think John you called out the $25 million incremental.
From some of the processing constraints I think that's related to.
Can you just talk about if there was other sort of onetime items in SG&A this quarter and then.
Think about Q1, it sounds like there is some still some.
Some constraints that might continue to impact SG&A can you. If you could just talk about those that would be helpful. As well. Thank you.
Yes, I mean, the most significant item Jay as you identified was the challenges that we've continued to have to battle from us.
At work congestion perspective, and I think it's important to know that that's not just skechers distribution centers that are having challenges, we're seeing that those challenges exist downstream as well and then unfortunately that causes a backup into our own distribution centers that we have to deal with so the most significant driver singles.
River was.
Continuing what I'd call congestion related costs similar to what we discussed in Q3, we did see a noticeable step down this quarter, which is a testimony to the comments, both David and I made about seeing improved efficiencies in our network.
The next most significant driver quite frankly in the G&A was volume related.
Obviously efforts such as attach themselves to our business operations when when we see sales increases of the scale that we saw this quarter.
We did put a little bit more into some some media.
That stayed flat as a percentage of sales, but it was a conscious effort to make sure we're bringing forward the comfort technology products that we're emphasizing right now and I'm sure. Many of you seen commercials out therefore for our new slippage, which are doing tremendous so absent that no nothing really to note in the period that I would consider to be kind of.
Outside the ordinary course.
Okay. Thank you so much.
Yes.
Thank you and our next question is from Lauren.
Scott with <unk> partners. Please proceed with your good afternoon <unk>.
Good afternoon, John David.
Great to hear.
The target for $10 billion.
It's still intact.
Remember as I recall I think John you were guiding for U S wholesale to grow at a mid single digit CAGR.
Over that time period is that still the right framework as we think about long term and then I think you made some comments about first half second half how do we think about you.
U S wholesale for the year and can we see first half like down mid to high single digits any framework on that would be very helpful. Thank you.
Okay.
Absolutely, but I think we first have to acknowledge that the operator pronounced your name right, which is amazing.
The first in my experience.
Yes, I would first say as well, though that the $10 billion goal for US is still imminently achievable and we feel very good about where we sit as a brand the strength of our product portfolio of what we're seeing across the broad swath of where we operate in the world today I mean, I think it's noteworthy that we saw growth.
Pretty much across the board certainly in all channels, but for those that continue to be impacted by Covid.
Relative to the domestic wholesale. This this is going to be really I think a.
A year of kind of two different periods as the first half in the back half of the first half is looking like at the moment that it's going to continue to suffer from the challenges of elevated inventory downstream I think it is important to note about that is we're still seeing very strong results for the Skechers brand throughout our network and our own stores and in our partner stores. So.
It really is not a question in our view about Skechers product building up its really quite frankly, the impact of the broader inventory congestion that's being felt downstream that is as we've noted in a couple quarters ago that has been impacting order behavior for the first half of the year really.
Once we get clear of that.
The door quite openly opens for us to return to growth on the domestic wholesale side and we're optimistic about that in part because of the the great product lineup, we have coming.
I think that also then adds to our faith in that long term guide that we've always provided which is kind of a mid single digit domestic wholesale now we've been beating that pretty handsomely over the last couple of years. So I would take that into consideration youre going to have your ups and downs because nothing goes up in a straight line, but we're still very key.
And that contribution to the $10 billion objective, which again Ive just got will emphasize here. We still are very very confident in our ability to achieve.
Very helpful and then thinking about dialysis.
Questions on margins.
John can you maybe kind of quantify how much freight ocean freight.
Contracts with all of it is how much of a price reporting was for the full year on slide 22, what is it can we assume a 300 basis points of gross margin pressure and then if that's the case how much do we should.
Should we expect to recapture.
And then on the SG&A line I appreciate that you gave us the $25 million incremental distribution cost there. So yeah I agree there was $75 million for the second half.
I understand youre going to have a little bit more in the first half of this year, but net net should we assume it's like about $60 million lapping as we think about FY2023 SG&A.
Yeah.
That's about a three part question there Laurent.
The freight side, what I would probably give you as the best indicators when you when you take everything together and it's not just ocean freight although the obviously, it's the biggest piece the year over year decline in gross margin is nearly entirely.
The result of that and more because we did put in pricing I mean I'd note. This quarter, we improved the gross margin I think by about 140 basis points, which is very.
Strong result.
And that reflects some of the pricing that we've been talking to.
We didn't get all the way to match prior year that was a bit of a mixed shift quite frankly in some delayed shipments that.
That occurred because of the congestion we've spoken about but we grew gross margin quarter over quarter, and I think thats a good testimony to the actions we have taken that we had spoken about but when you think about freight and logistics last year.
And what that the toll that took out our business you need look no further than kind of the gross margin differential and understanding that we did mitigate a lot of that over the course of that time period. So obviously gross margins would've been down further had it not been for the actions we took.
On the.
On the congestion costs.
To give a precise quantification because a lot of that is going to depend on factors outside of our control.
We mentioned that a lot of the a lot of the congestion. We're seeing now is actually downstream is not in our own distribution centers with our ability to ship on because others are having a similar congestion related issue. So it's somewhat contingent upon that we.
We do think year over sorry quarter over quarter. It continues to be a lesser number how far below this quarter is $25 million.
It's something we'll have to watch carefully, but we see it declining over the course of Q1 and Q2 hopefully gone by by Q3.
Last note I'll just give you though is although you've arrived in quantifying the second half amount, we would estimate that the full year charges, we incurred because of congestion is actually closer to $90 million. All in so we had mentioned previously there were some costs in Q2, we just we just hadn't.
Considered calling those out then but but when you look back on the full year. There is close to $90 million of cost that we would attribute to this congestion that had been working their way in the P&L for awhile.
That's super helpful. John and maybe if I can squeeze one in your question for you David talked about Mumbai.
<unk> up and running can you just maybe give us some guardrails of just how big is that like a $200 billion business.
We can get to become a $1 billion opportunity within that $10 billion framework or is it beyond that.
I think it can get beyond that.
We are only scratching the surface of the brand is very well recognized and being accepted there.
And.
It's only a matter of getting everything up and running and we're looking to do production also in India, India is a very protective marketplace. So we have to move more things in there than we've had before when we went to China was obviously, a big marketplace. We already had production in China to a significant degree we're starting to move some production into China as well.
Apparel and footwear.
Building our infrastructure.
Without giving away too much information your numbers are pretty close for where it is now.
We'll hire and $1 billion is certainly depending on what your timeframe is within our sites. So we do well they are both from a wholesale basis, we have third party partners to add that our terrific that we use and I will continue to grow and we use a franchise model and our own wholesale and now we're putting in.
Our own e-commerce, while they've had it we're putting our own platforms and so we still have a lot of work to do but there is a lot of open road there.
Very helpful. Thank you very much and best of luck.
Great. Thanks, Ron.
Thank you and our next question is from John Kernan with Cowen and company. Please proceed with your question.
Good afternoon, everybody. Thanks for taking my question.
Hey, John .
Chad can you.
Give us detail just on the sequencing of gross margin.
This year between.
Expansion in the back half potential contraction in the front half is there any magnitude you can give us in terms of how.
Cost of goods sold and gross profit should flow.
Throughout the year.
Okay.
Well I mean in part is dependent upon how quickly we deplete the inventory we have what I would say is if you kind of take the halves of the year you would definitely expect the first half to be.
Materially lower.
On a gross margin perspective than the than the back half of the year. There is always mix in there and business mix as well as concentration within direct consumer that kind of gets it gets in the way of getting a pure look but what I would tell you is we definitely anticipate that the back half of the year is when we'll start to enjoy the benefits.
Provided our plan hold so I think you can you can expect.
From a if I take it back to kind of 2021 before we had as much of the.
The impact you should see some marked improvements from those certainly in the back half of the year that start to accentuate the value of what we lost in freight and other logistics related costs over the course of 2022.
And I guess just to harp on that is just for a second I mean this really this year, we're really become again a tale of two halves. The first half is where we're seeing the challenges. The second half is where we see a ton of opportunity I would tell you. Our guide attempts to sufficiently incorporate the challenges we foresee in the first half and probably leaves open opportunity on the back half because.
We haven't the visibility in the bookings and activity yet we don't know what COVID-19 is going to unfold, but that's how we've tried to position the year. So that once we get through the first couple of quarters, which we've already started on we'll get we'll get a much better insight into how the year is going to unfold, but we do see abundant opportunity there.
Got it maybe just a quick follow up on that.
Gross margin in the.
First half of the year could could it be down year over year, and then most of the recovery.
The increase in gross margin starts to pull in the back half there.
No I wouldn't I wouldn't expect it down versus 'twenty to 'twenty two.
Sorry for the color, but just a terrible gross margin here I mean, no fault of ours and.
I think everybody saw the impact of the highest freight rates, we've ever seen by a factor of five logistics cost backup and everything so.
We certainly have no expectation that year on year, we would see declines.
In any period, but it gets better as the year goes on.
Got it my follow up is just on Q1 top line guidance can you talk to channel and geography in terms of any expectations. You can give us obviously domestic wholesale has incredibly difficult comparison, but I'm wondering if there's any other detail you can give us to get to that sales guidance range. Thank you.
Yes, again not to harp on my theme, but obviously you can see we're speaking notes went too it's really China and domestic wholesale in the first half providing the headwind we think the balance of the markets. We're in will continue to perform very very well direct.
Direct to consumer is definitely started off strong I think as David noted in his prepared remarks.
We're very encouraged by what we see there.
And you rightly point out we've recollect back to 2022 Q1 was with a year. It was a quarter, where a lot of catch up shipped in the period.
From the inventory stagnation after off the port here so.
It's really domestic wholesale in China in the first quarter offset by good solid continuing performance elsewhere.
There is certainly opportunity to outperform those two challenging markets, but.
It's going to be.
Something that we're going to have to see as the period unfolds because of the known challenges there.
Got it thank you.
Thanks, John .
Thank you and our next question is from Gabby Carbone with Deutsche Bank. Please proceed with your question.
Hi, good afternoon. Thanks for taking my question, so kind of a bigger picture wondering if you can just talk about how you view <unk> ability to get back to 2019 operating margin over time kind of where do you still see the biggest opportunities within that business and maybe the biggest risk just considering the macro environment and the uncertainty there. Thank you so much.
Yeah, and I don't mean for this to sound trite Gabby, but it's really two things.
Our margins are going to have a gross margins are going to build back because of the absence of the extraordinary freight and logistics costs and we're going to get our distribution network back to what we would consider to be normalized.
Efficiency, if those two things happen.
Those are going to be the biggest contributors to success I think the potential risks to that are continuing COVID-19 challenges across the globe.
Because we've spoken about China already but.
What we've seen the nature of this <unk>.
Condition is that kind of travels across the globe. So if there is an impact out there to be had.
That could be a headwind and then obviously, we don't see any signs in what we monitor and certainly not in our own brand performance that we monitor all of our forthcoming macroeconomic recession, but that's obviously a possibility and I think if that occurs we still have a lot of.
Tools in our tool belt to to use.
Margins, but that would certainly be kind of the two biggest risks IC.
Got it and then just a quick follow up just wondering if you can provide a bit more color around the composition of inventory. It does seem like levels are much improved on a year over year basis versus the end of Q3, Q, but are there any areas in channels and regions, where you still feel a bit more inventory than you would like to be.
Yes, I mean, I would I would first point out as we noted the U S quarter over quarter was down and Thats, where we previously had some of the bigger challenges, we did see a little bit of a shift of the issues in the U S kind of.
Like like a contained you kind of made their way overseas into into Europe , a little bit I think we're getting beyond that much faster than we did in the U S.
So I think thats incredibly important I would I would note.
In contrast to last year, we're seeing significantly less inventory in transit, which is good because that gives us the ability to deal with the inventory.
Obviously, we're still sitting on some inventory wed like to ship on to customers for which they have orders that.
The integrity of which we feel really good about but until they clear their own congestion in their own distribution networks, it's tough for us to have the opportunity to do that.
But again I think we're seeing encouraging signs, we think that flattish inventory quarter over quarter is a very good sign.
China reopening is a very good sign.
We just need to work through where we're at and that we believe again is probably a first half of the year activity.
Got it. Thank you so much and best of luck.
Thanks, Kevin.
Thank you and our next question is from Jim Duffy with Stifel. Please proceed with your question.
Thank you for taking my questions I wanted to start building on Jeremy's question on the inventory can you speak to how you see the glide path for inventory normalization and you mentioned <unk>.
Perhaps seeing some recessionary signals.
With respect to the inventory how are you planning receipts on a go forward basis.
Yes, I think it's fair to say.
Receipts will slow down I think it and taking the question dropped further.
To John's point, we were down in the U S. It's growing internationally a group primarily in EMEA, where we had a very strong January .
Of course, the demand we had a lot of movement from.
Fourth quarter into first quarter this year because of the backup that happened to some of our consumer base and I think it shows well for.
Some of our operating margins as well if you think about it we had a catch up on our stores. The fact that our stores are now full and we've utilized all of the cost and filling them up so shipping them significantly more pairs than they were selling starting probably in the middle of the second quarter through probably the middle of the fourth quarter. We're now current so we.
We'll have less cost to supply our own stores throughout the first half of the year and they're doing quite well than we had in the middle of last year.
We now have a significant amount of inventory basically what happened last year was a lot of what people thought was going to be delayed and get later and they wanted to increase their purchasing we now have we're helping on our customer base, both domestically and internationally, especially we can but we've already paid for all the receipts, we've already gone out of our way.
To increase the size of our distribution centers. So we can hold that and that cost is already behind us as we fill these orders it's only a shipping piece. So as wholesale continues to grow and we shipped less.
Per week to our retail stores will gain much more efficiency certainly from a financial perspective.
<unk>.
In the first quarter and going into the first half.
I'd also like to point out some of the inventory build is normal just from the movement and.
This change in our business by and large.
Our own retail sits on inventory significantly longer than our wholesale partners. They tend to turn wholesale much quicker. We're on a slow with them we'd run off flow through obviously because of the direct to consumer we carry more in our stores and the more stores and the bigger they become the more we carry so that there is a bigger carry piece in it. So we're looking.
Much better and we've gotten the inventory early and our receipts are slowing down so it builds for more efficiencies and more continued sales.
I think it's pretty normal that domestic wholesale had a tougher January than our own stores would indicate simply because they took a lot of product in the last quarter of last year coming into this year and we don't have no overlap.
Stuff that we ship.
In January as opposed to December .
The end of January and the first couple of days of February have shown significant increases also in our wholesale deliveries. So everything we see is moving in the right direction and the timing of what we're holding and how it gets to be billable or invoice as it moves out is looking more and more solid as we move into <unk>.
The back half of the first quarter and into the second quarter.
Thank you for that I wanted to dig in some on the comments on the domestic wholesale situation of course, the door difficult compares with Q1, a year ago, but I'm curious the backup which you speak to have inventory in the channel is that concentrated with any specific channels or key channel partners or is it widespread.
Crossed your U S wholesale base.
Some are obviously worse than others, and we want to talk about specifics, but by and large everybody took in a significant amount of inventory not necessarily skechers.
Our own inventory, we've cleaned up so some customers like us.
Ahead of the curve.
As we all wish is why I think our direct to consumer will show so strong in January but everybody is working through January .
While everybody is showing some increases we saw some increase is not the strongest month, it's a closeout months transition transition from product I think as we got through January which was the toughest comparison for us from year over year in the first quarter and why it is going to be pressure on the quarter simply because last year everything just opened up and it went.
To empty shelves. So it really did create quite a distortion.
But I think you won't see the same thing to the same order of magnitude for the balance of the quarter. We just won't catch the first month, but everything is cleaning out everything is starting and as we get the new seasonal goods, we find a lot of our customers are starting to get online now.
To even take more for January February and getting ready. So if weather doesn't change the sales pattern, we should see that for the most part of February going into March.
Thank you David Thank you John .
Thank you Jim.
Thank you and our next question is from Rick Patel with Raymond James. Please proceed with your question.
Thank you and good afternoon, everyone.
<unk> talked about the wholesale dynamic between the first and second half, but whats the right way to think about units versus price because I believe you are taking pricing in wholesale. So I'm. Just curious if you can contextualize, what the pricing tailwind might be.
We see in the first half that could help that helped to offset some of the pressure on the unit side and also as a follow up whether you expect to take additional pricing action as we think about the new year as a whole.
Yes, I mean, so we've long talked about the pricing increases that we had announced previously but we're waiting to materialize you saw that in the gross margin performance this quarter kind of quarter over quarter being up those benefits will continue to adhere to our P&L.
Particularly over the first couple of quarters. So so a lot of what youre seeing kind of to the commentary David just provided as a unit issue.
And that speaks to congestion.
No.
Theres nothing in we see the envelope of pricing action that is actually going to change the dynamic no matter what price we sell if they can't take the goods from our physical congestion perspective, they can't take the goods. So.
That should help and that is part of what will continue to help support our gross margins certainly in the first half of the year, but in the domestic wholesale marketplace in particular.
Mostly of units driven.
Headwind.
And as we think about the back half what do you see as driving the recovery in the wholesale channel does that I'm curious like is it.
Inventory, just being in better shape and your customers returning to a more normal cadence of taking in product or do you have innovation or demand creation in the pipeline that you think gets better traction in the back half.
While Rick you could you could not tees up any better than that I mean, the answer the answer ultimately is both.
There's definitely a lot of this is congestion congestion gets resolved and then product will flow in to Davids commentary, we're already seeing a little bit of that loosen up which is an encouraging sign but we also have obviously some continuing product introduction activity, that's going to I think really propel.
Where the market goes for Skechers in the back half of the year, most notably our slip in products, that's really when they begin to hit in full force in the market.
Early indications have been nothing but incredibly strong from a consumer perspective, so those will start to hit but I would also point out a lot of our other comfort features continue to perform really well arch fit.
It continues to be a very solid franchise for us so.
To answer your question cleanly, it's both we're going to see less congestion.
And thats going to help things, we're going to see the product really take hold and youre going to see US also get behind that from a marketing perspective, so that will also be a propellant.
And kind of the back half of the year.
Thank you all the best in the new year.
Thanks, Rick.
Thank you and then next question is from Alex Chang with Morgan Stanley . Please proceed with your question.
Great. Thanks, so much for taking my question guys.
I know in the last year.
Talk a lot about shelf space opportunities for Skechers <unk> peers have pulled back from wholesale and shifted into DTC.
Now that's a little bit bundle, just with so many being over inventoried and now kind of reverting back to wholesale.
Is there anything you can provide us or any observations as it relates to the competitive dynamic and how youre thinking about shelf space opportunities now.
I would tell you from our perspective.
We haven't seen.
A significant change again the major issue is we've already I think beaten to death on this it's a supply chain and logistics issue.
We haven't seen a dramatic turnaround in approach from any of the brands that had previously been out of a cat and account going into an account.
So there is really from our perspective, there is still abundant opportunity to take more shelf space to bring more product forward to bring some of our new innovation board or slip and technology are tried et cetera. So we still feel very good about those opportunities again, the biggest headwind that we continue to face is.
<unk>.
It's kind of on the on the logistics side pure physical logistics I would also just noted because we watch the sell through rates, we see at our account then we measure those against.
Last year, our normalized year of 2019, and the metrics there continue to be very positive for the brand.
Great.
Very helpful and maybe just one more quick one can you just help me understand I want to make sure I'm understanding your wholesale order book commentary and how it relates to the guide because it feels like you are building in this ramp in the back half. So does that mean, you've seen kind of the order book and proven the back half or is there still maybe some caution you're observing similar to the first half.
Just want to make sure I have that right.
I would say that relative to last year and probably the year before.
We've seen and actually quite frankly, we've solicited less long term bookings I think that's part of the reason quite frankly, we got into the situation as an industry. We did with the shipments all coming in the last couple of quarters.
With the normalization of kind of the production cycle and the transit cycle, we've been able to pull booking windows back to a more normalized so as we sit here today, we have really good visibility into the first couple of quarters, but just because of the order cycles haven't yet triggered we're not at a point, where we have a ton of bookings.
For Q3, or Q4, which is entirely normal. So there are obviously, we're giving our best guess I would say, we certainly didn't feel the need to be overly aggressive relative to those expectations. We think theyre measure, we think theyre appropriate, but I wouldn't tell you today that we're sitting on this back half hockey stick on the domestic coal.
Sales side, because we want to see some of that evidenced in the bookings and that's what will come over the next quarter quarter and a half. So we're still we're still waiting for a lot of that activity to come through the indications we have had particularly for the product that will populate those order windows.
Has been very strong and so that's one of the evidentiary points, we taken when we build that back half expectation, but ultimately we'll have to wait and see how the bookings unfold and as a result of that we don't think from our perspective, we've been overly aggressive in setting kind of those those early indications of where we think particularly the domestic.
Wholesale market is going to come.
Got it.
Thank you.
There are no further questions at this time. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
Okay.
[music].
Yeah.