Q1 2023 Skechers USA Inc Earnings Call
Waiting in all countries Skechers first quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
As a reminder, this conference is being recorded.
Now I would like to turn this conference over to Scott. Thank you you may begin.
Hello, everyone.
My name is Ashley Keith from the S. P N 18. Thank.
Thank you for joining us on Skechers conference call today.
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Asian.
With that I would like to turn the call over to Skechers, Chief Operating Officer, David Weinberg, and Chief Financial Officer, John Daniel Moore, David.
Thank you for joining us today on our first quarter 2023 conference call.
For the first time in our history, we achieved quarterly sales of $2 billion and a first quarter record earnings of one dollar on <unk>. These results were attributable to the strength of our brand and the demand for our comfort technology products supported by impactful marketing and distribution capabilities.
With a product first approach to our business. We are focused on staying true to our design principles style comfort innovation and quality all at a reasonable price to ensure consumers worldwide has the footwear they need to enjoy their lives comfortably.
Were there any office, Jim school or home, whether walking running golfing, we're playing pickle ball, we have something for everyone.
We ensure a skechers remains top of mind through memorable advertising. This quarter, we launched marketing campaigns that included a Super Bowl AD with Snoop Dog, Martha Stewart, Tony Romo and how we launch Nash.
National TV commercials for Skechers slippage with Amanda Kluge, and Brooke Burke, among others and targeted digital and out of home advertising for Skechers Uno with actually park.
We also further improved operations at our distribution facilities, ensuring a more efficient and continuous flow of inventory through our direct to consumer channels as well as timely shipments to our wholesale partners.
Our success combines the talents of many individuals across our business, including those in our corporate offices sales teams and distribution centers retail associates interfacing with consumers around the world and so many others. This quarter's record sales wouldn't have been possible without the non stop support determination and <unk>.
<unk> ability of the global Skechers organization and our partners at every step along the way.
For the first quarter Skechers achieved sales of $2 billion, a 10% increase year over year or 13% on a constant currency basis. This incredible achievement was led by an increase of 24.5% and direct to consumer as well as three 5% growth in wholesale.
International sales increased 21%, representing 63% of our total sales for the quarter domestic.
Domestic sales decreased 5% due to declines in our domestic wholesale business up 18% related to inventory congestion issues impacting many of our partners. However, we also faced a very difficult comparison to a particularly strong quarter last year due to the alleviation of the west coast Port congestion.
This is evident when compared to the first quarter of 2021 against which this quarter's domestic wholesale sales increase was an impressive 17%.
By region, EMEA and APAC each grew 21% the latter of which included 3% growth in China as consumers started shopping eating out and traveling again after a long period of Covid restrictions sales in the Americas were flat as domestic wholesale declines masked robust growth and most of that.
Other markets.
Wholesale remains a critical element of our growth strategy, representing 65% of our total sales for the quarter.
The three 5% year over year sales increase was driven by 20% growth in our international wholesale business, where nearly every market achieved double digit growth.
Overall wholesale average selling price per unit increased 5% and unit volume decreased 2%.
EMEA wholesale grew 20% driven by double digit increases in most markets, including Spain, Italy, and Germany, and APAC wholesale increased 24% led by strong double digit growth in India and single digit growth in China.
Sales to our distributors also improved in the region driven by growth in Australia, New Zealand, Indonesia and Taiwan.
The Americas wholesale business decreased 13%, however, excluding the United States sales grew 10%.
Our marketing efforts and increased traffic and conversion along with our improved ability to replenish inventory in our company owned stores resulted in a 24, 5% sales increase in our direct to consumer segment the.
The increase was the result of 29% growth in the Americas, 18% in APAC and 30% in EMEA.
In total direct to consumer unit volume increased 27% and average selling price decreased 2%.
Domestic direct to consumer sales increased 25% due to double digit growth in both our brick and mortar and e-commerce channels.
International direct to consumer sales grew 24% due to double digit increases in nearly every market and even triple digit and some in China direct to consumer grew due to the return of consumers to a brick and mortar shopping experience.
Higher gains came from Hong Kong, South Korea, Chile, Thailand, and Canada.
In the first quarter, we opened 56 company owned Skechers stores and closed 25 star.
Store openings included 18 in China 13 in the United States six each in Thailand, and Vietnam, and three each in Germany and Israel.
We ended the quarter with 4549, Skechers stores worldwide of which 3074 third party stores, including 108 opened in the first quarter 71 of which were in China 15 in India, and our first store in Tajikistan.
In the second quarter to date, we have opened one company owned store in the United States. We expect to open between 125 to 140 stores worldwide over the balance of the year.
We remain focused on growing our direct to consumer segment to efficiently drive sales and connect with our loyal consumers. During the first quarter, we launched our sketch plus loyalty program in Canada, the United Kingdom, Germany, and Spain, and expect to roll out. This program to more countries. We're also in the process of updating our existing e-commerce platform.
In Chile, which is already one of our most productive international sites with plans to launch additional e-commerce sites internationally.
During the first quarter, we launched our limited edition collaborations which included the popular James Gold Crown collection, and our first with Diane von Furstenberg.
We also introduced our first collaboration with Martha Stewart, which launched on International Women's day in the United States and Canada.
These limited releases position the brand to a more upscale audience drive traffic to our E Commerce channel and create buzz in the media.
These collaborations are also part of our brands' demand creation efforts by ensuring skechers stays top of mind with important influencers and designers.
We believe leveraging our roster of notable and relatable talent, both globally and in regional markets is impactful and effective way.
We have a diverse team that includes Emily and Paris Star Ashley Park legendary Snoop Dog and the recently announced movie and ATM Act are Mr. T, which launched last week and exemplifies the breadth of our product offering.
We also connect on the field, thanks to a doctor picture Quake Herschel and on the course with elite golfers and Skechers Ambassadors Brooke Henderson and Matt Fitzpatrick, who won the RBC heritage earlier this month, while wearing Skechers go golf.
With Pickle ball approach Tyson Mcguffin, and Katherine parents, how when a roster of playing in our sketches Viper core pickle ball shoes, and as the official footwear sponsor of their professional Pickle Ball Association tour in U S. Open we are connecting to the fastest growing sports in America. The enthusiasm for this sport is spreading to other markets, including Canada.
The U K and Singapore among others.
Our aim is to have consumers see here and think about skechers. When they are shopping in stores browsing websites from the comfort of their home watching their favorite TV shows listening to their favorite music station or traveling the world.
Youll find Ashley park wearing uno on Billboards on the streets of Paris.
Skechers slipping on a roadshow traveling the country, Spain.
<unk> commercials are translated into dozens of languages influencers are posting about our products, reaching millions of their followers globally. We continue to pursue opportunities to connect with consumers build brand awareness and drive consumer demand for our innovative products.
We have worked diligently to improve shipping within our own logistics facilities, particularly at our LEED certified gold North American distribution center, where inventory and shipping costs have both declined over the previous two quarters.
By the end of 2023, we expect to begin shipping out of our new distribution centers in Canada, India, Chile, and Panama and we also expect to open another phase of our planned LEED certified gold corporate offices.
Just last week, we released our first impact report our stewardship is focused on minimizing our environmental footprint and the communities, where we operate as an organization Skechers is thinking about our product our people and our planet because we believe it is a critical element of acting responsibly to serve all our stakeholders.
<unk>, including the families who loves Skechers.
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 delivered another quarter of record financial performance exceeding both our top and bottom line expectations. As we continued to successfully execute our long term growth strategy.
Sales surpassed 2 billion growing 10% year over year and quarterly earnings per share exceeded $1 for the first time for this period.
These results were driven by continued broad based strength globally, particularly in our direct to consumer segment as well as a return to growth in China.
We also made significant progress in moderating our inventory levels, which decreased 17% versus last quarter. These.
These results demonstrate that even amid a dynamic retail landscape and market challenges consumers around the globe are seeking out the skechers brand and compelling assortment of stylish comfortable high quality and exceptionally priced product.
Before turning to our first quarter results I would like to highlight the announcement. We made this morning regarding the planned acquisition of our Scandinavian distributor.
<unk> formally welcomed the sports connection team to Skechers.
We're looking forward to working closer together and excited about the prospects of further growing the skechers brand in the Nordic region.
This transaction is expected to close within the coming quarters and to be slightly accretive to earnings.
Now, let's review, our first quarter financial results.
Wholesale sales increased 3% year over year to $1 $2 9 billion led by 20% growth internationally.
Our fourth quarter momentum of last year carried on through the first quarter with double digit growth in nearly every market as well as an encouraging return to growth in China.
Domestic wholesale sales were as expected the headwind in the quarter declining by 18%.
We continue to see good sell through of the Skechers brand at our wholesale partners. However, the ongoing challenges of broader inventory congestion is meaningfully impacting orders.
That being said, it's important to keep in mind that last year's comparable quarter delivered a robust 43% growth year over year as port congestion alleviated in the pace of shipments to our customers recover.
As compared to the first quarter of 2021 this quarter as domestic wholesale sales actually grew by a more than respectable 17%.
Direct to consumer sales increased 24% year over year to $707 4 million, driven by 25% growth domestically and 24% growth internationally.
Growth was both broad and robust as nearly every market posted double digit gains, which we believe are indicative of the strong underlying consumer demand for our comfort technology products improved inventory availability and compelling marketing activation.
Deepening our direct relationship with our consumers remains a focal point of our strategy and we continue to hone our capabilities to raise brand awareness more effectively and to enable a frictionless omnichannel experience for our consumers.
Now turning to our regional sales in the Americas sales for the first quarter were essentially flat year over year at $945 9 million, where the headwinds in the domestic wholesale market masked continued strong consumer trends and double digit growth across most markets, particularly in Chile and Mexico.
Excluding domestic wholesale the Americas grew 23% year over year.
In EMEA the.
Our momentum from last quarter continued through this quarter as sales increased 21% year over year to $534 5 million driven by double digit growth across both segments in most countries led by Spain, Italy and Germany.
And APAC sales increased 21% year over year to $521 5 million also driven by double digit growth in both segments in most countries led by India, and Korea, and triple digit growth in several markets, including Thailand, and the Philippines.
Notably, we also experienced significantly better than expected results in China, where sales grew by 3% driven by strength in our physical retail stores as consumers enjoyed a return to in person shopping.
While the Chinese market has been volatile over the last few years, we are cautiously optimistic about the near term recovery that appears to be materializing and remain confident in our long term growth opportunity in the market.
First quarter gross margins were 48, 9% a significant improvement of 360 basis points compared to the prior year as pricing adjustments made last year in our wholesale segment annualized and we experienced a favorable channel mix of higher direct to consumer unit volume.
Operating expenses increased 210 basis points as a percentage of sales year over year from 35, 6% to 37, 7%.
Selling expenses increased 50 basis points as a percentage of sales year over year to six 4%, primarily due to higher brand marketing globally and demand creation expenses and digital.
General and administrative expenses increased 160 basis points as a percentage of sales year over year to 31, 3% due to volume related impacts of higher sales and the expansion of our retail footprint.
Continuing congestion related inefficiencies totaled approximately $20 million of incremental costs globally.
We have made tremendous progress on improving efficiency at our domestic distribution center since the second half of last year, and we continue to expect incremental logistics costs to decline in magnitude.
Earnings from operations were $223 6 million, a 27, 1% increase compared to the prior year and our operating margin for the quarter was 11, 2% compared to nine 7% in the prior year.
Earnings per share were $1 <unk> per diluted share on $156 8 million diluted shares outstanding a 32, 5% increase.
This included a positive <unk> <unk> impact from foreign currency fluctuations year over year.
Our effective tax rate for the first quarter was 18, 5% compared to 20% in the prior year.
And now turning to our balance sheet, we ended the quarter with $933 million in cash cash equivalents and investments an increase of $110 4 million from March 31 2022.
This increase was largely attributable to operating cash flow as working capital needs moderated.
Inventory was $1 5 billion, an increase of only 4% or $52 7 million compared to the prior year and a decrease of 17% versus the prior quarter, notably domestic inventory declined nearly 24% from the fourth quarter.
Accounts receivable at quarter end were 1.05 billion, an increase of $42 1 million, reflecting higher wholesale sales globally.
Capital expenditures for the quarter were $71 2 million of which 31 million was related to the expansion of our distribution infrastructure globally, $19 9 million related to investments in our retail stores and direct to consumer technologies and $9 million primarily related to the construction of our new corporate offices.
Our capital investments are focused on supporting our strategic priorities growing our direct to consumer business and expanding our brand presence globally.
During the first quarter, we also repurchased approximately 676000 shares of our class a common stock at a cost of approximately $30 million, we continue to deploy our capital consistent with our stated philosophy.
Now turning to guidance.
This was an exceptional first quarter, one that exceeded our expectations and demonstrated that the strong brand momentum and robust consumer demand trends for our comfort technology products is continuing.
The core assumptions originally embedded in our annual guidance for 2023 remain applicable and we are still faced with numerous uncertainties about this year, particularly around macroeconomic factors a dynamic wholesale landscape and the shape of the market recovery in China.
For the fiscal year, we now expect sales to be in the range of $7 9 billion to $8 1 billion and net earnings per diluted share in the range of $3 to $3 20.
For the second quarter, we expect sales in the range of $1 85 billion to $1 9 billion.
And net earnings per diluted share in the range of 40 to 50.
Our effective tax rate for the year is expected to be between 19% and 20%.
We expect total capital expenditures to be between $300 million to $350 million as we continue to invest in our strategic priorities, including additional stores expanded omnichannel capabilities and incremental distribution capacity in key markets like India, China and Chile.
Moving ahead, we remain focused on executing our strategy and delivering innovative stylish high quality and comfortable products at a reasonable price we.
Thank you for your time today, and we look forward to updating you on our second quarter financial results, which we expect to release on Thursday July 27th with that I will now turn the call over to David for closing remarks.
Thank you John as we begin our fourth decade in business with plans to reach $10 billion in annual sales by 2026, we couldnt be more positive about our position in the market. Thanks to the strength of our brand the relevance of our footwear collections the robust demand for our comfort technology products, the effectiveness of our marketing efforts and our.
Commitment and ability to execute our strategy as efficiently and effectively achieve.
Achieving quarterly sales of $2 billion with growth of 10% against the strong comparison to last year. Despite challenges in one of our core businesses domestic wholesale is a significant achievement and won the entire organization should be proud of attaining.
As always we never stop innovating, creating and seeking new opportunities, including the acquisition of our longstanding Scandinavian distributor engaging with those your cat, who time magazine just named one of the most influential music artists for our marketing and collaboration campaign and building efficiencies to better meet the needs of consumers.
We thank our talented employees and incredible partners for their ongoing commitment and look forward to more successes together in the future now I would like to turn the call over to the operator for questions.
Thank you.
I will be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question.
Press Star two if you would like.
And we will be a question from the queue.
All participants using speaker gentlemen, it may be necessary to pick up your handset before pressing the star keys Glenn.
One moment please.
Yes.
Our first question comes from Jay Li.
With UBS. Please go ahead.
Great. Thank you so much.
So obviously big big quarter for Q1.
Well ahead of consensus I want to ask about the second quarter guidance, maybe if you could talk about sales. If you maybe can breakdown what youre expecting in the wholesale channel versus the DTC channel. If we can start doing that would be helpful. Thank you.
Well, thanks, Jay It was.
It was really an exceptional quarter on a lot of fronts.
Our second quarter guidance really.
Incorporates all the challenges we have been talking about namely on the domestic wholesale side.
There was a little bit of Q2 that ended up shipping a little bit earlier, which impacted Q1, its not a extraordinary amount, but it is an amount that came out of Q2 into Q1 still held the order which is most important.
Absent that we're actually incredibly encouraged by what we're seeing in the shape of Q2.
But the domestic wholesale is the headwind we're facing.
We're also watching the macroeconomic environment and what that means from a direct to consumer side of things, but obviously since youre seeing these quarterly results the direct to consumer side, the consumer demand for the product remains incredibly robust and that to US is the most encouraging signal because it means consumers are out there.
They want the brand they want the products that we're offering.
And so long term, we know thats going to be the key to success, but in the second quarter, particularly the headwind is going to be what it was in the first quarter shaping up to be a little bit more austere, partly because of that timing shift and partly just because of how the bookings came together.
And so while we're while we're hopeful that we'll start to see a turn in that soon the route is what we can what we can bank on at the moment.
Foreshadows that headwind continuing and remember.
When we had talked about the year.
We very much typify. This is a first half.
Half story, if you look at this in aggregate over the first half of it is really shaping up to be very similar to what you know.
We said for the most part on the domestic wholesale side of things and then better than we expected on the direct to consumer.
And particular in China, and so if you aggregate the first half quarters together I think you'd see it's a very encouraging sign overall, but that.
That's the headwind will continue to face in Q2.
Got it I understood, maybe if I can ask one more and then I'll pass it on but just wanted to follow up on what you just said, obviously, there's macro uncertainty out there shaping.
But the China recovery, you mentioned is uncertain wholesale channel dynamics are what they are.
Are you seeing that impact the business now it sounds like you saw really positive about what youre seeing in the DTC channel. So it's more like you are baking in conservatism, but not necessarily seeing at the moment and I guess just to follow up on that as well China.
How did the quarter trend in terms of obviously you are lapping some store closures as we went through March.
How are you seeing China play out in Q2 right now.
So on the direct to consumer I mean, it's hard not to be encouraged by 25% growth overall.
Almost precisely well balanced between our international estate in our domestic state $25 24.
Percent growth, so I mean, theres really nothing to take out of the direct to consumer side of things other than fantastic encouragement again really around around the brand and around the product.
Our arch fit product continues to do really well are slipping products continue to do well.
All of our comfort technology features are doing really well.
I mean, I think it's hard not to conclude that our marketing is resonating in a way that is what is driving traffic I mean, the metrics and direct to consumer we're we're great across the board so.
Really hard not to be incredibly encouraged by that now obviously, we're always going to take a little bit of a cautious view as we look forward because we don't know what the future holds but I would say thus far.
In April that trend is that positive trend is still continuing which is good.
China has shaped up I think a lot like <unk> heard elsewhere. I mean, there was a little bit of a headwind mentality in the early part I think as they still dealt with the ongoing effects of Covid things got stronger probably what's most encouraging to US is the fact that both you saw a return to consumers in stores and <unk>.
Shopping, which is an intentional effort to get out and to shop.
As we noted our retail stores in China did incredibly well, but also some total even with a little bit of a headwind in the first half of the quarter, China group and that's that's fantastic. So again, we're optimistic cautiously optimistic as you'd expect us to be but optimistic about what we're seeing it looks like some.
Of our conservatism early on May not have been fully warranted because this quarter certainly was better than we expected, but but we want to watch things a little bit further.
Net net though it really isn't anything that we see in that market that isn't encouraging at this point.
Okay got it thank you so much.
Yeah.
Next question comes from Gabby Carbone Dutch Bank. Please go ahead.
Hi, good afternoon, congrats on the nice quarter was wondering if you can help us think about the trajectory of gross margin for the remainder of the year considering the strong expansion experience.
Q what does it mean, the biggest tailwind you're facing if you could remind us.
Well I mean, we had said earlier and I would stick to this is the best guidance to give you is we expect gross margins to continue to do better every quarter.
We have long expected this quarter to be the biggest pickup because a year ago. It's when we really began to suffer from <unk>.
Increased logistics costs in particular, the freight rates, but others as well.
We expect to continue to see improvements maybe not at this magnitude maybe a more modest magnitude because a big part of that is the pricing. We implemented last year took place and we're not annualized wing as much of that but we are continuing to expect better each quarter at gross margins throughout the year.
Some of that is mix.
That is the benefit of pricing in the back half of the year, we expect a little bit more of that to be the pickup from some of those lower logistics costs, but just again to caution we have to burn out the inventory that that landed at higher rates.
But we are seeing current rates and we expect contract rates to be certainly beneficial as compared to last year in that and that should begin to materialize in the back half of the year.
Got it and then just one quick last question on the incremental logistics costs did you quantify what the impact that was Q1and then of the 90 million you experienced last year, how should we be thinking about like recouping that.
In the back half of SCR.
Yes.
A number this quarter was about $20 million it was actually.
Meaningfully less on the domestic side, but as we had mentioned last quarter. We had started to see some issues creep up in in Europe , they're not as significant the total.
In the quarter was about $20 million now you actually bring up a really good point and something I think is is.
It's worth noting we spent a lot last year to deal with what can only be described as an abnormal amount of incoming orders, but I think what youre seeing now is the benefit of that our stores. They have the product they need they're well stocked.
And that's why they were generating we believe.
That 25% uptick on volume. So it was it was in retrospect, although painful money very well spent to clean up our our position and to take the inventory into our own supply chain. So that we could deal with it versus.
Relying on others are seeing things back up I would also just point out in that we saw a significant downtick in inventory levels. So our inventory we believe is probably.
At the right level now, maybe a little bit more room to gain efficiency, but much improved from where we were.
<unk> at the end of the year.
Quite frankly compared to last year, especially with.
Our intention is to grow so net net.
Arguably a tough dollar to spend but the right dollar to spend to get us to the point, where we are now and as a result see the benefits of the uptick, particularly on the direct to consumer side of things because we think that was a meaningful contributor to the growth we saw this quarter.
Great. Thank you for all the details.
Okay.
Next question comes from Lauren merchandise.
N D. Paribas. Please go ahead.
Good afternoon, David Good afternoon, Jon Thanks for taking my question.
I wanted to piggyback off of Jades question with regards to domestic wholesale you mentioned this is a tale of two halves.
How do we think about the second quarter I think you noted John that.
<unk> over <unk> 21 was up 17 should we assume that <unk> is still positive on a two year stack basis, and how do we think about it for the full year.
Lauren I should've known you were going to ask a two three or five year second question there.
Yeah.
So first thing I'd say is I mean.
I want to be clear our domestic wholesale product lineup, what we're seeing in reaction from customers is incredibly encouraging.
What we're seeing is that continuing congestion of inventory downstream impacting orders because we like you said, we continue to see good sell through we know the product is resonant. It drove that same product drove a 25% increase in our direct to consumer so.
We don't think Theres any health issues with regard to the inventory. We have I think there is just continuing to be a downstream congestion impact.
Also as I noted, we saw a little bit of shift us of orders out of Q2 into Q1.
And then the natural build of the book had been for the for the year that Q2 is always going to be the most challenging so I don't in all honesty, you think anything material has changed if it has in the second quarter, it's probably a little bit more challenging than we had expected, but again, we picked some of that up in Q1 and.
We think that as we get past that congestion.
The opportunity for the product that's resonating so strongly in our direct to consumers is going to.
Ultimately benefit the.
The wholesale customer base as well in terms of your two year stack question I don't want to get into specifics on growth by.
Channel, but we do expect it probably Q2 is going to be the worst of it and then we'll move beyond that and we're starting to see some good indicators on three and four Q3 and four on that side that are or at least green shoots that we're seeing things come back in a little bit.
Okay very helpful and then.
<unk> reported a little bit surprised by the guidance of 40 to 50 cents per <unk> can you just maybe I know you don't usually talk about the minority interest line.
But it did double year over year should we assume that doubled for the full year or is there any anomalies.
Anomalies that we should think about for <unk> and then I've got a follow up question on Scandinavia, If I may.
Yes.
The minority interest line is as we've long talked about is a fairly direct reflection of activities on our joint venture businesses, particularly in most significantly in the Asia Asia region, including China.
That line will go in concert with that business I'm not going to give specific guidance on it I will say that you have to recognize though that that that is all the way down past the operating margin line. So occasionally there can be tax ramifications or other issues that influence it, but but I would consider that a proxy for our.
Businesses in Asia in particular, and then and then also in Mexico, which is a fast growing significant contributor to us as well so it will perform in line with those countries.
You'll have a view I'm sure on where theyre going and that's why I would educate youre thinking about the minority that minority interest line.
Okay very helpful. Just lastly.
When you took over Mexico in 2019, I think you put out the $102 19 call.
The magnitude of the brands.
Conversion in the EPS accretion.
I think you've alluded to skin move is EPS accretive, but can you just maybe kind of give us some guardrails to just the revenue.
Shifts as we model distributor revenues and how much EPS accretion comes from Scandinavia.
I'll ask you to put a pin in that for now only because we just announced the deal and we do need to look at how it gets accounted for from a purchase accounting perspective, once we get through some of that hopefully on the next call, we'll provide a little bit more guidance, but I would say overall.
It is important right, it's a great business.
The brand shows very well in that market. We've got a good footprint that we think we can expand where we're acquiring a great team in the sports connection team there and we're incredibly excited about what that means for us both in the Nordic region as well as beyond in Europe , because we think we can we can find ways to continue.
To work together, but we will give more specifics on accretion and it kind of the revenue.
Tribune at a later date, although you did you did make a note that I think is important to consider this is a customer of ours on the distributor side of things. So not all of the revenue is going to be additive because we have to take out what we were earning from a distributor perspective and put in kind of the growth that we all learn in running the business so that revenue.
It's not all not all additive and will give more color on that as we get closer to our path to closing.
Very helpful. Thank you very much for taking my questions.
Of course.
Next question.
Jones from Jones, Chairman, Ladies Cowen and company. Please go ahead.
Excellent and congrats on the outside yet.
Thanks, John maybe just if we can just talk about the first quarter for a second.
Pretty big upside significant upside to your outlook I'm just curious.
What are the top line surprised you the most and then what on the margin profile of the business the prices in the us in Q1.
Okay.
Well I mean.
I don't know that it surprised because we saw the indicators that the business is performing well and I think we spoke to that throughout the quarter I mean in all honesty I think the magnitude of the strength that we saw particularly on the direct to consumer side.
<unk> was exceptional theres really no other way to describe it and that's.
That's a good response, we see to both our execution and the retail side of things, which our team deserves a ton of credit for it but also just the product the residents of the product.
The margin had long been planned to accrete.
That's because of the pricing adjustments that we had put in place.
And then we got an extra kicker on that to be honest with you because of the mix the mix on direct to consumer was was higher because that business outperformed and.
And then on the encouraging side of things, although although the numbers weren't what we're accustomed to from a growth perspective.
In China, just seeing that market begin to change and turn in the right direction was incredibly encouraging.
We're still taking a bit of a conservative posture relative to China, because I think theres more to be learned about how that business is market is going to recover.
It's been very encouraging.
So we think that there's certainly the opportunity to continue to outperform expectations.
If things continue to go in that direction.
And I think the intentionality of the consumer to get out and shop. There was probably the best part of it because it means people are out and they want to shop, they want to get engaged with brands and so.
That to us gives us the best indicator of how the market is feeling feeling.
Sealing generally.
Got it maybe on that theme of China.
Obviously, we returned to growth you faced a little bit of FX headwind as well.
Should we think about China as we go through the rest of the year.
The $1 two 5 billion or so are you generated in 'twenty, one what do you think the timeline.
So were getting back there is is it reasonable to assume you can get back there.
This year and how should we think about growth in the remaining nine months.
Well I'll tell you. So I mean again acknowledge we're going to continue to be a little bit conservative on this until we see more of the year unfold I would say getting into the year, we thought that.
Stepping back into a 'twenty one level is probably going to be a bit of a challenge because we saw a very much a first half second half dynamic now with the first half coming in a bit stronger I would say our interim goal is just that is try to get Mir 21.
Of course, we'd like to exceed it, but but just getting close would be a significant accomplishment given where we started off in Q4. So we're optimistic that we can we can push to that level, but I think we need a little bit more seasoning of the market recovery before we can fully commit to that but again I would echo.
The prior commentary commentary David made here, what we're seeing in China is very encouraging.
And we're excited by that because what it means for the brand and then also.
What it means for our ability to to move past this year and continue to grow the only other note I'd make is just keep in mind, China still have those core characteristics of some outsized selling windows.
You have the 618 event in June and then you have double 11 in the fourth quarter and so those two kind of somewhat awkwardly rate wait the results in that market typically and we do expect that to be the case.
This year as well.
All right last one for me just on direct to consumer obviously, you're seeing some green shoots there how do we think about that in terms of the mix on the margin profile for the business that's embedded in the guidance and.
It sounds like you.
The largest freight recovery to happen in Q1, how do we think about the recovery in freight rates as we get through the rest of the year on gross margin.
Yes again.
We're seeing the rates favorable now and again as we look forward, we expect our contract rates for the next year to embed that favorability. The problem is that it just takes a while for that to work its way into the system. So really we haven't seen a significant impact to gross margins from.
Those benefits yet that's still to come and that's something we're going to we'll benefit in the back half of the year in terms of the.
The gross margin pickup I would say it wasn't the most significant contributor to the gross margin improvement on the quarter, but it was a it was a meaningful pick up because of the mix of the business and again I would just echo it was outstanding performance on the direct to consumer side that that really ticked up its contribution relative to where we would have thought so.
I don't want to get down into the specifics of breaking apart.
The basis point differential, but that was definitely a meaningful contributor to the to the gross margin pop again, the biggest though being the benefit of the pricing that we had taken earlier materializing on an annualized basis on the wholesale side of the business.
Thank you.
Yeah.
Yes.
Next question comes from Jim Duffy with Stifel. Please go ahead.
Thank you good afternoon really terrific quarter I wanted to dig in some on the Americas market.
25 to minus 18 spread between DTC and wholesale performance is escaping typically two D to C is a good barometer of <unk>.
Sell through in wholesale because I understand compares and the <unk>.
First quarter with the timing of the release of the shipping logjam last year.
John I think you mentioned continued congestion of inventory downstream can you be more specific about what that means is that inventory issues from other brands and then what's the what are the sightlines to resolution of that when would you expect to see more life in that domestic wholesale channel.
Both of those questions relate to timing and time it can be very difficult I'll.
I'll take you back just a little bit.
When the pandemic first started and all the time, we started to change about when we'd recognize revenue and when it was delivered had to do with our distributors and holding inventory.
I think we're seeing now in the first part of your question that discrepancy between direct to consumer and wholesale is the fact that we recognize our direct to consumer sales as they get to the consumer and that shows that the product is resonating as John has said and the inventory is moving quite well and.
The margins indicate we're selling it across the board.
Good margins to hold everything.
Conversely.
To the wholesale channel.
We ship them a lot at the end of last year.
And it will throughout the year as.
Everything opened up in our distributions.
And.
Unfortunately for some reason, we do here around town, rather than discuss any of them individually none of them that we intimately.
No very well they have inventory issues and their inventory issues are probably across the board than the overall numbers and I don't know that Youll see.
And they are trying to clean them up which means taking in less inventory trying to sell through what you have.
<unk>.
Not necessarily re merchandising the group as it sits so what you see is those things that they can sell they are sold and they can't replace them no matter.
How well theyre doing until they get to an overall inventory scheme, which we understand we have been through it. So we've been through that piece. We know we have new merchandise, we know our merchandise newer stuff is selling well in the wholesale channel that just has to be room and timing. So when you're talking about when that's always a very interesting indicator because it depends how well.
They clean out the overall and it doesn't it only has to do with US we know.
Our direct to consumer.
I believe we will continue along its current path while that process is happening through the.
The wholesale channels. So you will see continue to see that discrepancy as we go through the second quarter. It's a matter of how quickly and the consumer has held up they can get to an open to buy and the time, where they can fill in what is selling for in fill in sizes fill in.
Those brands that are doing well that are doing well and channel and new product.
So it's different for everyone I'm sure you follow a lot of the retailers and some of them are significantly better shape than others. So it will depend on how it flows through the marketplace.
Usually the pendulum swings and.
Swing fairly quickly we do see indications that it will be in Q3, certainly as we get to the back half of the year as John indicated.
Which to me because the optimistic one in this group also means theres always a possibility that it moves into the back end of Q2, when you get through June .
And you see what happens on the on the wholesale and and.
What it means so our inventory channels are clean our warehouses are fairly clean as clean as they've been in a while so we continue to deliver on time, which sort of chain cuts the time to market for us from order to delivery. So we stand ready to do it and move up the timing, especially can but of course that's.
The market back phenomenon.
So we're looking forward to Q3 and onward with the potential of moving some of that forward if the channels clean up for us.
Thank you for that David helpful perspective.
One more if I may just on the $10 billion objective the midpoint of the guide this year $8 billion, you've got a $2 billion gap in directional terms, how would you see that incremental revenue splitting between.
In North America, and international markets, and if you can kind of call out any international markets, you expect disproportionate contributors that'd be helpful.
We said from oil to be disproportionate.
Then put them back in proportion to the.
Movement.
I mean, I mean not to be glib, Jim I mean that part of it I mean direct to consumer in North America, just grew 25% so I would say sometimes.
Sometimes even are well crafted plans come out exactly how we want them, but in this instance, it's all better than that I mean, we've long said.
The growth engine here is going to be international and direct to consumer.
How it actually mixes out I don't know I think there's a lot of markets that can contribute but not all have to contribute in order to get there thats kind of why we feel so confident about that goal and if I had to ballpark. It I'd say it probably it's probably a one third two third mix toward <unk>.
International being being the contributor but again.
When you have a direct consumer business performing as wells, we have domestically.
That may not be a good guess because it may continue to outperform our expectations net net though we feel really good about the number we continue to have our eyes on growing many markets at once.
In terms of the most notable it's the same it's the same ones. We would mentioned all the time, but but even from that I would step back and just note as we said on the call I mean, we saw a quarter where nearly every market we operate in.
But a few I mean, a few grew double digits and they did so growing both segments of their business wholesale and direct to consumer where presence so.
It's kind of a guess, but we like what we see and we like the position we're in relative to that goal given given that broad based strength.
Pretty good gap seems more and more manageable. Thank you guys.
Thanks, Jim.
Next question comes from Rick Patel with Raymond James. Please go ahead.
Good afternoon, and congrats on the strong performance.
I have a question on the updated revenue guidance. So as we think about the midpoint of guidance. It looks like the first quarter came in about $175 million better and for the year you raised by about $125 million does that delta reflect the wholesale shifts that you highlighted earlier or is there an element of caution that's.
Now factored into guidance.
Thanks, Rick.
It's a combination of those factors in all honesty some of its timing shifts some of it is a little bit weaker Q2.
On the wholesale side of things than we had anticipated and some of that is just us being a little bit conservative I will note, though as a group you all ran to the top side of our range. So as we adjust our range now now we're a little bit more in line, but.
I think thats, just us trying to make sure we wait the mechanics that we see unfolding in the marketplace and also try to make sure we understand where were.
Where we think foreign exchange is going to hit us and capture some of that as well.
And how are you planning inventory for the fall season, I'm curious if you see it tracking in line with revenue growth or if it becomes more leaner.
And how does that tie into the inventory that is earmarked for the wholesale channel versus D to C.
The question I'm getting at is like if restocking on the wholesale side happens quicker than expected how would you be able to manage that.
Okay. So let me so much management you can do with that like I said, we moved up our time to delivery.
Oh quicker, but.
As we plan our inventories I don't know that they changed significantly going forward.
Picking up the.
Direct to consumer piece here in the United States and we are building inventory for everyone around the world and as John said, our inventory decreased significantly more in the U S and it has elsewhere because it was higher here than it was elsewhere.
We have.
The capacity to move inventory everywhere around the world as we have things in production as delivery times move and change we have the capacity to move things quicker to use the same materials to make shoes for a different group.
So to say direct to consumer is one wholesales. The other we could do some things that have later deliveries that were making in our factories and use that material to fill our wholesale business here on a quicker basis if necessary within reason as we go down the road. So we're not building an inventory.
Of significant proportions in order to take this year and business is something that develops from the market back as we start to get the orders John was talking about as we see what develops as we deal with our customers certainly here in the United States and get their flows going we may take the.
The.
Time to move up those things to see that they get a faster turn and hold them for a little while longer so long as they are all spoken for as we go through.
Deviate that time, but theres only so much you could bring it back that's why you can only do so much into Q2 when you see the issues as they are they can change somewhat by moving Soma July maybe even a little the beginning of August back into June deliveries, but we have to know that shortly so some things will change they'll change at a slower pace.
But all of that stuff, we're making for Q3 now that that is coming into orders for us from our wholesale and around the world, We will mix and match to get the best Bang for the Buck around the world and deliver everything we can on time. So it could take the end of the second quarter into the third quarter start getting that and see the change.
Although two any into any customers out there listening we would strongly encourage you to book your orders now.
Really helpful. Thanks, very much and all the best.
Thanks, Rick on the line.
Sure.
Next question comes from Tom Mackinnon Suisse Wedbush Securities. Please go ahead.
Hey, guys. Thanks for taking my question.
I just want to make sure I kind of understand how we're thinking about U S wholesale.
Okay.
One piece of the pie that isn't well.
Yeah.
Performing well right now.
Anything else doing very very well.
Should we.
Assume an embedded in our models that.
The year over year decline in U S. Wholesale in Q2 is worse.
And the 18% decline that you reported.
For Q1.
Yes.
Don't give kind of segment or channel specific guidance, but I would say and reiterate what I mentioned earlier I mean, we think Q2 is the worst of it some of that is just by virtue of some of the orders.
Moving up into Q1, which I would note.
David I think noted that isn't in and of itself an optimistic signal right. If people are moving up orders when they.
<unk> been holding bag, that's a good sign but yes, I think the way the timing is shaking out right now.
It looks like the second quarter, we will probably face the most serious headwinds and then it will alleviate after that.
That's really kind of as we talked about just a timing thing if you look at it on a first half second half basis, it's actually not drastically different.
And what we had originally forecast, it's just a bit of when it shifts more than anything else, but to answer your question bluntly, Yes, we expect the second quarter to be the worst of it for the year.
Okay got it and I believe like three months ago, you said.
Yes.
We.
You should think that you can get back to growth in the second half in U S. Wholesale is that still the case.
That's still the objective.
We're pushing to get there some of that is going to be.
Pendant upon the timing that David mentioned that that's going to be important but our objective is to is to.
Get back to growth in the second half.
That's going to be something we're focused on intently I mean, obviously, we have some really strong product otherwise our direct to consumer side of things wouldn't be growing.
At the rate. It is we've been getting that into the hands of some of our wholesale partners would be both very productive for them as well as good for us, but again the part of it we can't control is when they have the capacity to take those.
Very good selling goods with really attractive.
Retail margins and so that's the unknown for us Bob.
We're definitely going to be endeavoring for that.
Okay.
Are you getting any sort of signals from the wholesale partners that like hey.
Got it.
We're starting to work through the inventory that we're it's things are getting better here.
Our inventory of Skechers is leaner than we would like are you getting any kind of signals from from your wholesale partners along those lines.
Well I would I would reiterate what we said.
In our prepared remarks, which is the sell through remains good the pricing attained remains good at it.
Really not about as far as we can tell.
Demand perspective at all and again pointing back to our direct to consumer.
Would be a very awkward situation, where demand was only impacting certain retail.
Retailers are not on our own business. So we know that's there now I think if you were to look at it across the wholesale spectrum you would really have to go case by case to get a good and accurate read.
What we continue to hear though as the near term congestion is the issue and every retailer out there is attempting to work through it as quickly as they can.
And they are excited for the product we have they just don't have the ability to ingest it at this point and so.
That's what we'll continue to work on I would also note, though we really haven't seen an uptick at all in any sort of cancellation requests or anything that would give you a sense that they want out of the orders. So we know they want the product. It's just a question of when when they can ingest it and when.
When it can ship.
Got it alright, thanks, very much guys best of luck the rest of the year.
Thanks, Tom.
Next question comes from Alex.
With Morgan Stanley . Please go ahead.
Great. Thanks.
Thanks, So much for taking my question and get a secret David and John quick one for you just zooming out on domestic wholesale I think historically that was consistently like just over $1 billion business and now it's significantly higher than that can you just walk us through kind of the drivers of that change and how you.
Think about the sustainability or even growing more off of it into the future.
The growth always comes from our building our products and our technologies and getting it out there and demand for our consumers and advertising to our consumers I just find out in the marketplace in general were in higher demand demographics are growing and.
We offer.
What we feel is a great service, we deliver on time, we deliver complete we deliver what we say, we're delivering we constantly developing new constantly developing new categories and that all shows.
Everywhere in our wholesale business I think.
That is true.
Also it also pertains, obviously to what's new in the marketplace and the macroeconomic picture for some of our competitors and for our customers. So I think we still have a good profile and I think we are in demand and a consumer is looking for us and.
We are in a very clean inventory position. So we're not looking to liquidate anything will create.
<unk> in the marketplace for our product offering.
Conversely, we are competing against a lot of liquidated product and in our own channels and in closeout channels that it puts a lot of inventory and a lot of pricing out on to try to liquidate inventories and thats, what a lot of our competitors are doing.
All the time, so we think we're creating a demand there will be a demand from our consumers theres not a closeout product there as we convert from this.
A handful of inventory that has got to clear out before they can start taking more stuff and we continue to sell and we continue to sell and good margins in our own stores. So we think we are keeping the brand in a very solid position that'll be warranted to be taken into our wholesale partners and we.
We will be well received by the customers when they create the space on the shelf space and in an environment, where you can sell full priced product in new new stuff rather than trying to promote everything to clean clean everything out.
That's helpful. Thanks, maybe one more quick one just any comments on like where the broader promotional environment sets.
What would be Super helpful. I think you guys had previously said it would remain competitive through the first half I'm just wondering if your thinking is still the same there.
It's been pretty stable from our perspective.
So we haven't really sizable changed up or down or promotions. They had been productive I think you can't discount its impact on the growth that we saw.
I think as we as we noted.
Asps were down reflecting the promotions, but volumes were up significantly so.
That's definitely a strategy that continues to resonate at the consumer level.
And it really there's nothing substantially different we did this quarter than we had been doing quite frankly at the end of the fourth quarter, but it continued to be very effective.
Yeah.
Thanks, so much good luck.
There are no further questions at this time. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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