Q2 2019 Earnings Call
Greetings and welcome to Skechers second quarter 2019 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like to turn the floor over to Skechers to begin thank you.
Thank you everyone for joining us on Skechers conference call today.
I will now read the safe Harbor statement.
Certain statements contained herein, including without limitation statements addressing the beliefs plans objectives estimates or expectations of the company or future results or events may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 as amended.
Such forward looking statements involve known and unknown risks, including but not limited to global national and local economic business and market conditions in general and specifically as they apply to the retail industry and the company.
There can be no assurance that the actual future results performance or achievements expressed or implied by such forward looking statements will occur.
Users of forward looking statements are encouraged to review the Companys filings with the U.S. Securities 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 FCC as required by Federal Securities laws for a description of all other significant risk factors that may affect the company's business results of operations and financial conditions.
With that I'd like to turn the call over to Skechers, Chief Operating Officer, David Weinberg, and Chief Financial Officer, John Benda more David.
Good afternoon, and thank you for joining us today.
Skechers continued growth, including record sales for the second quarter is a testament to the strength and demand for our diverse product offerings around the world.
From golf to running from kids to men's and women's sport and casual and our brand recognition due to our global marketing efforts.
Based on sales and shipping trends in the second quarter and already in the third quarter as well as reactions from key accounts in numerous markets, we see our momentum continuing in the back half of 2019.
We delivered record results for the second quarter with sales up 1.26 billion, an increase of 10.9% or 13.7% on a constant currency basis.
We also delivered a 69% increase in our earnings per share to 49 cents.
This was the result of solid sales increases across all regions. The biggest dollar gains came from our distributor in the Middle East, India and the conversion of Mexico to what joint venture business in April .
As well as our company owned direct to consumer business, which had mid single digit comps worldwide.
With a net increase of 112 stores in the second quarter, we have 3172 skechers stores around the world, which are comprised of 768 company owned stores and 2404 third party stores.
Our skechers stores and e-commerce platforms give us the opportunity to tell the entire product story as they featured key initiatives of course, each division and allow consumers to shop, the breadth of our mens womens and kids offerings.
As the world becomes smaller the acceptance of new trends has increased we continue to evolve our business to be more globally minded and sure enough speed to market around the world.
With simultaneous product introductions, we can replicate success globally.
This went on from sales drivers in each of our categories, especially within men's and women's Street sport and worked lines, including Skechers delights sketchy, there and the resurgence of our goal what category.
In 2018, and 19, we introduced several collaborations including the popular animated series one piece for a limited edition collection available in Asia, Europe , and North America.
We are continuing with collaborations and limited edition collections, including three commemorative skechers energy styles, marking the twentyth anniversary of the signature chunky style in the second quarter, and we just announced the collaboration with welding online friends in the United States.
Other collections will be announced later this quarter.
Our product focus continues to be on comfort innovation style and quality as we design and develop our diverse offerings. Our efforts in the Skechers performance Division resulted in several awards in the second quarter for Skechers go run seven hyper.
And Skechers go run Max Road for hyper from Runner's World outside magazine and shake.
These awards followed another from Runner's World in March for Skechers go run razor three hyper.
Further in April Skechers elite athlete, and which has a wreck who is the winning it and see a runner when the Carlsbad 5000, tying the record in what is known as the world's fastest five K.
Additionally in April brick Anderson wasn't palazzi championship in Hawaii.
And then in June she wanted to Meyer LPG a championship in Michigan.
With this latest win at just 21 years old.
Took soul ownership of the most when ever by a professional Canadian golfer.
Earlier. This month was also named best female golfer at the SP Award.
We couldn't be prouder, it's broken cheese victory after victory and Skechers go golf.
Former NFL quarterback and sketches Ambassador Tony Romo has also achieved several victories at golf tournament, including his latest at the American century Celebrity Championship last week and Lake Tahoe.
Tony his retirement from football has been followed with a noted career as a play by play broadcaster and an accomplished golfer all while wearing skechers, both on and off the course.
No.
Turning to our domestic business in detail.
Our domestic sales increased by 1.5%. The result of an 8.6% increase in our direct to consumer business, which was comprised of a 7.3% increase in our brick and mortar stores and a 36.1% increase in our E Commerce business.
Comparable direct to consumer sales increased 4.2% for the quarter.
We also saw a month over month acceleration in our direct to consumer business with June achieving a high single digit comps for the month and an average price per pair increase of 3%.
Our domestic wholesale business performed better than expected with a decrease of 3.8%. We continue to believe it will be flat to slightly positive for 2019.
At quarter end, we had 477 company owned Skechers retail stores in the United States.
In the second quarter, we opened four warehouse stores and closed one store and Union square in New York.
We also remodeled one store relocated two stores and expanded three locations.
In our domestic direct to consumer business, we saw the best increases in women's and men's sport and work.
Men Street, where Bob and go walk in our domestic wholesale business. The biggest increases also came from our men's sport Street wear and work lives.
Our chunky shoes from the Skechers to like collections continue to resonate with consumers in the United States.
To support our domestic business, we ran numerous marketing campaigns, including adds in fashion magazines for our chunky shoes radio and digital campaign, including those featuring our women's Heritage Footwear Street, Cleat and Skechers energy.
Spots featuring football legend, Tony Romo, and Howie long and an array of commercials for our kids footwear.
As noted we experienced an upward trend in our domestic direct to consumer business in the second quarter, which has continued in July .
Based on our account meetings in June as well as this month. The same is also occurring with our domestic customers.
Now looking in detail at our international business.
Sales increased 19.8% for the quarter, representing 55.7% of our total sales.
The biggest drivers came from the UAE, who handles the majority of our business in the Middle East, Australia, New Zealand, and Indonesia, all of whom are distributors.
India, Alpine, Germany, Spain, and the United Kingdom within our subsidiaries.
And within our joint Ventures, China, Singapore, South Korea, and Mexico, which transition to a joint venture in the second quarter.
In China, we grew mid single digits, but on a constant currency basis, we saw a 12% improvement.
Similar to the U.S. key sales drivers included men's and women's sport and men's and women's Street.
To support and build Skechers business International markets are creating skechers delight and sport windows and many leading accounts.
Billboard and mall campaigns, and our TV campaigns are being broadcast and multiple languages.
The sales growth was the result of an 18.2% increase in our wholesale business and the 25.8% increase in our direct to consumer business with a 6.7% increase in comparable sales.
As in the United States, we saw our comp store sales growth at an accelerated rate month over month through the quarter.
In our international wholesale business, our joint venture sales were up 13.4% our wholly owned subsidiary sales grew by 18.5% and our distributors grew by 30.7%.
Turning to international retail stores at quarter end, there were 2695, an increase of 109 in the second quarter.
Of these stores.
2400 for our owned and operated by International distribution Partners Joint Ventures, and a network of franchisees.
In the second quarter eight company owned international stores opened in the UK, Japan, Germany, and Colombia, and one company owned store closed in the quarter.
To date in the third quarter, one company owned store has opens in the UK.
In the second quarter 153 joint venture or third party owned stores opened across 37 countries, including our first locations in Afghanistan, Kurdistan and Lithuania.
New store openings include 69 in China, 13 in India, and six each in Indonesia and Vietnam.
51 stores closed in the second quarter, including 20 in China.
For third party owned Skechers stores have opened so far in the third quarter, including our first and then Dora.
For the remainder of 2019, we expect another 250 to 300 company owned and third party Skechers branded stores to open.
We believe international remains the primary growth driver to our total business. We are seeing continued strength across all regions, especially Asia Pacific and Europe , which had a record shipments out of our distribution center in Belgium.
Plus we believe both India, which converted to a subsidiary in the first quarter, and Mexico, which converted to a joint venture in the second quarter, which will result in significant additional growth over the coming years.
With the momentum we are seeing in our business worldwide. We believe it will continue to grow double digits. This year.
Now I will turn the call over to John to review, our financials and discuss our outlook.
Thank you David.
Our second quarter results reflect the success of our ongoing strategy to aggressively grow our international and direct to consumer businesses, while responsibly investing for the future.
Our second quarter sales totaled $1.26 billion, an increase of 10.9%.
On a constant currency basis sales increased $155.6 million or 13.7%.
These results exceeded our own expectations on the strength of our international business, which represented 55.7% of total sales and on increased consumer demand as is evident in our direct to consumer business.
International wholesale sales increased 18.2%, including a 30.7% increase in our distributor business.
A 13.4% increase in our joint ventures, and an 18.5% increase from our wholly owned subsidiaries.
Direct to consumer sales increased 14.4%.
The result of an 8.6% increase domestically and a 25.8% increase internationally.
Comparable store sales increased 4.9%, including e-commerce sales growth of 34.3%.
We added 39, new company owned stores compared to the same period last year.
These results include for the first time, our joint venture operations in Mexico.
Excluding Mexico, our international wholesale business would have grown 15.9%.
And our international direct to consumer sales would have grown 15.1%.
Our domestic wholesale business performed slightly better than expected registering a mild decline of 3.8% in the quarter.
We continue to believe the domestic wholesale business will be flat to slightly positive on a full year basis.
Gross profit was $609.8 million up $48.8 million compared to the prior year.
Gross margin decreased by 100 basis points to 48.5% and were pressured by promotional efforts to clear seasonal merchandise in select international markets.
This was partially offset by improved pricing and a decrease in promotional activity within our consumer direct business domestically, where the average price per pair was up 3%.
Total operating expenses increased by $20.2 million or 4.2% to $505.1 million in the quarter.
As a percentage of sales. This represents a 260 basis point improvement from 42.7% in the prior year to 40.1% this year.
Selling expenses decreased slightly on the quarter and totaled $113.5 million or 9% of sales.
This was a 100 basis point improvement from 10% of sales in the prior year and was primarily related to lower domestic advertising expenses.
General and administrative expenses increased by $20.7 million or 5.6% to $391.6 million, but decreased as a percentage of sales by 160 basis points from 32.7% in the prior year to 31.1% this quarter.
The dollar increase primarily reflects additional spending of $18.5 million in our direct to consumer business from 39, new stores, including 12 that opened in the quarter.
Earnings from operations increased 36.5% to $111.1 million versus the prior year.
Operating margin improved 170 basis points to 8.8% versus 7.2% in the prior year.
Net income for the second quarter was $75.2 million or 49 cents per diluted share on 153.9 million shares outstanding compared to net income of $45.3 million or 29 cents per diluted share on 157.1 million shares outstanding in the prior year period.
Our effective income tax rate for the quarter decreased from 18.8% in the prior year to 18.4%.
We continue to expect that our effective tax rate for the full year will be between 17 and 20%.
During the second quarter, we acquired approximately 500000 shares of common stock at a cost of $15 million, representing an average price of $29.39 per share.
Since announcing our share repurchase program in 2018, we have acquired almost 4.6 million shares at a cost of 130 million, representing an average price of $28.11 per share.
At June Thirtyth, 2019, 20 million remained available under our existing repurchase authorization.
And now turning to our balance sheet.
At June Thirtyth 2019, we had 973 million in cash cash equivalents and investments.
Which was a decrease of $93 million or 8.7% from December 31 2018.
And an increase of $61.3 million or 6.7% from June Thirtyth 2018.
During the quarter, we made our initial investment into our new joint venture in Mexico.
Our cash and investments represented approximately $6.35 per diluted share outstanding at June Thirtyth 2019.
Trade accounts receivable at quarter end were $641.4 million, an increase of 93.9 million from June Thirtyth 2018.
Total inventory was $855.6 million.
The decrease of 0.9% or $7.6 million from December 31, 2018, and an increase of 4% or $33.2 million from June Thirtyth 2018.
We believe these inventory levels are in line with and sufficient to support our growth expectations.
Long term debt was $100 million compared to 70 million at June Thirtyth 2018.
The increase primarily reflects borrowings associated with the construction of our new distribution center in China.
Working capital decreased 78.8 million to approximately $1.59 billion versus 1.67 billion at June Thirtyth 2018, primarily reflecting the recognition of operating lease liabilities from the new lease accounting standard, partially offset by higher cash and investment balances.
Capital expenditures for the second quarter were approximately $86.2 million of which $42.2 million was used for general corporate purposes, including real estate and transportation.
$14 million related to the construction of our distribution center in China.
$12.4 million related to 12, New company owned domestic and international store openings and several store remodels and $8.4 million related to our international wholesale operations.
For the remainder of 2019, we expect our total capital expenditures to be approximately $150 million to $175 million.
This includes an additional 30 to 40 company owned direct to consumer stores, and 15 to 20 store remodels expansions or relocations.
This also includes the construction of our new distribution center in China enhancements to our existing distribution center in Europe , and the expansion of our corporate headquarters in California, and other corporate expenditures.
Now turning to guidance.
We currently expect third quarter sales to be in the range of $1.325 billion to $1.35 billion.
And net earnings per diluted share will be in the range of 65 to 70 cents.
This guidance incorporates the view that our international and direct to consumer businesses will continue to grow at a mid teen and high single digit rate respectively over the balance of the year.
It also reflects our confidence that the domestic wholesale business will likely be flat to up slightly on a full year basis.
And now I'll turn the call over to David for closing remarks. Thank you. John we are pleased with our financial performance in the second quarter, including our record sales strong increases in our earnings from operations net income and earnings per share and our positive retail comps in both our domestic and international channels.
We believe the consumer reaction and demand for our products and the perception of our brand within our global account base of both very strong.
Further we believe the momentum we experienced in the second quarter, we will continue this quarter and our business will flourish, both domestically and internationally.
As our strong product continues to resonate worldwide, we are committed to investing in our global infrastructure and operational capabilities to meet consumer demand and future sales growth.
And with that I would now like to turn the call over to the operator to begin the question and answer portion of the conference call.
Thank you at this time, we will conduct a question and answer session. So that we may address as many participants as possible. We ask that you limit yourself to one question and one follow up if you have additional questions. You may re queue time permitting those questions will be addressed if you would like to ask a question. Please press star one on your telephone keypad a confirmation. So indicate your line is in the question queue. You May press starts if you will like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key our first question comes from the line of Jason will you. Please proceed with your question.
Great. Thanks, so much so I would ask about the guidance gross margin in third quarter.
The the inventories looks really well controlled FX is probably a smaller factor.
But at the same time.
So theres a lot of things happen can you give us an idea of what the gross margin year over year change might look like is there more discounting your product in international markets you might have to do.
If you could start with that that's great.
Hi, Jay Thanks.
For the third quarter, our expectation is that we're likely to see something relatively close to flat year over year. The discounting that we mentioned we believe was was more temporal than anything else and again related to the international markets. The only thing I'd note as an aside is that if you recall last year. The third quarter is when we began to enact the pricing and the lower discounting activity in our domestic retail markets. So last year you saw an increase that we don't expect we'll lap this year simply because that pricing has remained durable in the marketplace. So you won't see as much of a jump there, but our expectation at the moment is for a relatively flat year over year perspective on gross margin.
Got it Okay, and then maybe if I can ask on question.
I think you talked about how the dollar growth is kind of flat X the stores DNA.
Is that something where maybe you know soon.
Some investment has shifted out of the quarter into other quarters or so.
Pressed for reasons or is that sort of like the run rate based on the fact alive.
Been made in the past couple of years, and that's just sort of a normalized number that were seeing right now.
Well I think outside of the direct to consumer investments that we made that we mentioned with the new stores you saw some puts and takes in the other side of the business. If you recall last year. There were a lot. There's a lot of noise in the DNA in the quarter. So I think you're seeing the elimination of some of that but you're also seeing the early signs of leverage opportunities in the DNA in particular internationally as the investments that we've made come to fruition.
I would gen generally point at that for the year, we're looking for slight favorability in the overall gionee spend but.
Not much more specific direction to provide than that at the moment.
Okay. Maybe then and then one last one you mentioned that the comp rate.
David you.
As we get into the back half of your you mentioned, you're not going to be lapping a price increase in the retail business and obviously a lot of the investments that you're making.
Commerce, probably.
To be more likely to affect the numbers how do you how do you think about the comp.
Back of the year can you maintain the current rate.
Higher lower how do you think about it.
Well, that's a pretty long a range.
Issue, but we are coming into July we maintained on the same as June maybe slightly higher.
The fact is that comps are slightly easier comparisons from last year. If you remember was it a much tougher year all around so we do anticipate we will be equivalent to Q2 or better.
As we move through this back to school season, barring any big changes in the macro pictures any place in the world.
Jay the encouraging side. In addition to the fact that comp store sales got stronger over the period month by month as David mentioned is that it was a combination factors. It wasnt just price. It wasn't just conversion. It wasnt just traffic. So there are a lot of factors in play, which give us the faith that David mentioned that the the increases will be durable, but at the end of the day, it's all about product really and what we're seeing is a very good response to the product both coming online and has been online in Q2.
Okay got it great. Thanks, so much.
Thanks Jay.
Our next question comes from the line of Laurent Vasilescu with Macquarie Group. Please proceed with your question.
Good afternoon. Thanks for taking my question Congrats on really solid results I wanted to follow up on on the US wholesale business you guys guided for declined mid singles came in a little bit better any any directional thoughts on how we should think about the us wholesale business for the third quarter to get to the annual guide.
Yes, I would suggest that its going up we think it's getting stronger and stronger. If you will Q1 was exhibited some softness from the cars that we discussed after that call Q2 has gotten a little bit better Q3, a little bit better than that and then Q4 showing up strong on the bookings at the moment.
No a lot of it will depend on slow as well we have said before we thought we could be relatively flat. If you take the two quarters together as well as for the room for them for the whole year.
We still think that's true.
We do find a lot more demand and a lot more request to move up deliveries.
In this quarter, so again barring any big macro changes, we do anticipate that we will start to show positive in the third quarter and then continue to increase as we go through the balance of the year and into the first quarter of last year given the meetings we've had.
In the U.S. and by the way same holds true worldwide. We've had great meetings. Our bookings for July are at an increased rate to last year around the world.
For our subsidiary base and.
For our distributor base so.
We do believe we're on the beginning of a role that there was a greater demand for our product that our existing customer base is growing and that obviously in the us it always depends on what the macro picture is how many store closings there will be how many sales there's going to be how many outlets are going away.
We believe that our direct to consumer business will continue to grow so the us business in and of itself will continue to grow.
At we believe an increasing pace as we go through the back half of the year.
Thats great to hear and then switching gears to China I think it was noted that China grew 12% on the Cc basis.
John maybe can you tell us how many free standing stores point of sales number units shipped for the quarter and how should we think about the growth rate for the third quarter, specifically for China.
Well I mean, let me first address the growth rate I mean, one thing to recognize is that China faced a very difficult comp to last year. If you recall last year Q2, China was up north of 40%. So if you look at this on a two year stack basis, it's a pretty incredible trajectory in that market.
I would also just note that obviously the foreign exchange impact in China. It was significant it more than half the growth rate.
In the market. So we're still very pleased with what China delivered we have I think it's fairly consistent expectations with where China is going to grow in the back half of the year and for the full year. So.
For us it's still is one of the most exciting markets.
Ill get you the Pos detail on China later, but we want to get into much more specifics beyond that in each market.
Okay, and then just a follow up question just housekeeping.
Question here.
The gross margin I think it was mostly flat from the second quarter can you, maybe just parse out FX mix.
And then.
On the other income line, how should we think about that line items for the third quarter.
Yes, so from a gross margin standpoint, as we mentioned the real issue was the need to move out some product in a few international markets.
Quite frankly, FX was a small maybe 10 basis points.
Root cause for the decline, we think thats a temporary issue it impacted the quarter, we had a little bit of that in Q1 as well as we mentioned in some markets, where we're trading that we're in the process of turning the profitability picture that we had some of that and it just contributed a little bit into Q2.
I think that the noteworthy element of the gross margin story as the domestic.
Contributions were very positive and strong.
So we think as it stands the margins absent the discounting activity you see and would have been roughly equivalent year over year in terms of other income in Q3 and I'll note for Q2. This is the first quarter in a while where we haven't seen something significant come through on FX translation last year. If you recall same quarter. We lost three to four pennies on that we did not see anything like that in Q2 and I would tell you. Our expectation is that there isn't anything significant that will creep up in Q3, although I would just warn that's that's an item that's tough to predict because you have to have the four set of knowing where foreign exchange rates are going to be to to be 100% accurate, but much more muted impact. This year in Q2 and were anticipating something similar in Q3.
Great to hear and best of luck.
Thank you.
Our next question comes from the line of Omar Saad with Evercore ISI.
Please proceed with your question.
Hi, guys. This is wescott on for Omar.
Good quarter so.
You seem to kind of change the tone or lead with the global coordination is that.
Should we think about the ability to market more directly globally as a change in how you are managing the business designing the business, making it more efficient as you kind of integrate these markets how should we think about the benefits of.
Why you're emphasizing that change in your go to market strategy.
I don't think its a change is probably more in the forefront.
Simply for the growth internationally, we've been talking about building, our infrastructure and advertising internationally for many years.
Through some hard times as well so it's not a change in focus and maybe an acceleration because the business is growing and we have the capacity now too.
Fill that pipeline at a much faster pace, we had said over the last few years that we are absorbing some new additions to our international portfolio and now that they are all in and all the infrastructure as we started and certainly most will need upgrades as they continue to grow at we're filling that pipeline and continuing to advertise.
At a faster pace continuing to push the growth internationally. So it's been a focus it remains a focus we do believe it will continue as we said double digit growth at a significantly faster pace.
Than the core business in the United States, and even direct to consumer so.
It's just a focal point for everybody an additional one and we just continue to push it.
Okay, that's great.
And then just one question on.
Again with China.
It seems like you guys are opening stores again after kind of pausing. How are you thinking about new store versus your online kind of strategy in China and any change in kind of consumer trends there given all the macro.
Noise that's out there in the marketplace.
We've always wanted to continue on both levels just as we do everywhere else in the world any which way we can get to the consumer we want the consumer to have the availability of our products.
I think it's just the advent of such a big capacity that comes on all at one time and our growth on the online business so to slow down the capacity add and the manpower we had available to open a significant number of our own stores. Although we have been opening a significant number of franchise stores. So there hasn't really been a change.
In the philosophy, nor the thought process and we will continue to open our own stores and continue to push online and continue to look for more franchisees to continue to grow our business I think our franchisees have seen that they can grow the business quite profitably with us and I'll re accelerating we've opened a couple of stores that are in excess of 30000 square feet now in the Chinese market with some franchise and they realized that the capacity for us and deliver.
Footwear, that's in demand and carry a store of that size for the consumer demand for our product is going to continue to push our direct to consumer significantly in China, and we anticipate significant growth.
I think what you soil and John mentioned that we had to clean up some inventory when you change from a franchise model thats growing significantly to an online model in whole Joel inventory for significant amounts of time the patterns change and every once in a while you have to clean out make sure you have all the algorithms correct and are moving forward. So we do feel today that we are clean that all new inventory is coming into the Chinese market and that.
We will continue to grow at an accelerated pace as we go through the back half of the year.
Okay, great. Thanks, a lot and best of luck guys.
Thanks, Thank you.
Our next question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.
Good afternoon gentlemen.
I don't have much just can you give us an update on the timing of the of the China distribution centers and how much you know given that there was a lot of official.
Q2.
How much efficiency.
Will that provide.
So we're still under construction, we anticipate commencing operations, probably the middle of next year the pace of that will depend upon the development process and if just the startup we're not yet stamina in a position to be precise on efficiency and I would just point out. This is a very similar exercise to what we've done in all of our other markets.
The first year isn't isn't the optimal year, you continue to get more and more efficient each subsequent year. So as we get closer to the end of the year will provide some perspective on that but your expectation should be begins operation and continues to become more and more efficient over time as we as we gain experience operating in market and we're going to continue to offer an optimized.
How do we expect to continue to grow at such a pace that will have to build the second one we won't pick up the whole efficiency factor here, we'll just pick up capacity.
And somewhat more efficiency and be able to grow.
Into this next distribution center that will help even more.
Well, that's it that's where I was going with the follow up I mean, given where you are today and given the international growth.
Lunch I mean once you get this.
That's going to be a whole lot better.
Middle of next year than it is today and you're already managing to make.
That growth more efficient now.
So how.
So I mean, even though it might not be where it could be long run.
I mean.
You can grow the I mean, if you grow the old if you grow China.
Hi single low double I mean.
When you put this in the running it should provide.
Better returns.
Is that a fair statement.
Thats certainly a fair statement, but I think we have.
Our idea show bigger opportunities I will tell you and I've been here, so long way since the beginning of all this automation and all the distribution centers.
We can because of our capacity to grow and these marketplace to outgrow these facilities a lot faster than as originally planned and people think we can so I think it's fair to say if you only take.
High single digit growth in China will certainly sell more efficiency, we do believe that our growth will accelerate past that point. So we'll pick up even more as we go along just may take some more time.
And you said that you were going to be breaking ground.
Breaking ground in the second DC before the first one was completed is that so.
Okay.
We're still working on the plan we were working on acquiring the land that's it's a timing issue.
We're working on it now so it's only a matter of timing whether it happens.
The first day with finished or a couple of months before a couple of months after its all timing and acquisition and design work.
You can imagine were quite busy with all our engineering facilities trying to get the three distribution centers were about to break ground before the end of the year in California, we're putting a significant amount of automation into Belgium, we're finishing this one so.
Design work and acquisition may be delayed a month or two but it won't be long. After it's done that we plan on starting with the second one.
Thanks very much.
Thanks, Dan.
Our next question comes from the line of Susan Anderson with B. Riley. Please proceed with your question.
Hi, Thanks, so much for taking my question nice job on the quarter.
Oh, Yes, maybe you could give a little bit of color how that.
Is performing and how it's resonating with the consumer and also if you could touch on it.
You mentioned there are some limited edition product coming out for the second half.
Ever felt about.
Category, though yes, then what customer that's going to be catering to thanks.
Yes, I would start at the beginning allergy blip just finished.
I just want to point out that.
That which customer and which product line I think we've moved way past that we want to make sure people understand the functionality here I think what we showed this year with that.
Dollar.
Growth in China, and the significant growth worldwide and our direct to consumer that we are no longer one product for a specific customer that brings us that advanced we anticipate that all our product categories that we called out in the prepared.
Comments.
About men's women's sport casual bobs.
The walk category Thats coming back very strong kids, all have potential and they all have potential multiple parts of the world, It's not a shoe.
In a.
Specific location or a specific geography. So we do feel that we will bring a myriad of products in all the categories around the world that we will continue this growth.
That we're seeing right now.
In Peru in particular relative to your question on the collaborations we're obviously not going to announce anything here, but I think what we've seen similar to what you've seen in the industry as that strategic collaborations have an opportunity to help drive both brand heat.
As well as revenue.
And we're going to continue to follow up on brand right opportunities to collaborate and so you'll see that continue both in the second quarter or in the third quarter and beyond and I apologize I actually couldn't hear clearly the first part of your questions. If you don't mind repeating that we can address that more specifically.
Yes sure yes, so I was just asking about the debt.
Line and how its performing resonating with the consumer.
[laughter] I'm, sorry, I couldn't hear that time, either and maybe it's maybe it's us.
Got it yes, no the Skechers three line items.
Whether a little closer to three color around.
Yes exactly.
Okay, sorry, I apologize.
Call that out on the comments that it's doing very well in multiple parts of the world. So that that does continue.
Yes, I think I think I'd add onto that you saw you see street continuing to grow.
Street growing in men's and women's category as well I mean, you're seeing and I think to David's point earlier, a lot of broad increases across the product line. So it's not just one category or one style thats growing its fairly broad and there are definitely some commonalities between what we see happening in the us and internationally, which is which is why we pointed out in the beginning of Davids comments. The ability. We now have we think to exercise opportunities to grow and introduce the style of brand across the globe simultaneously and Thats were seeing that as a really really big strength.
Great. That's very helpful. Thanks, So much good luck next quarter.
Thank you.
Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.
Thanks, Hi, guys Hope you do well.
Hi, Jim I wanted to I want to start on as you know the moderating growth in the US you may really stands out not too long guys.
You guys were growing in the 20% plus range year to date, you are up just 1% that implies some pretty impressive and efficiency outside of incremental spend from retail expansion, where are you guys finding that efficiency and.
Related to that how much more opportunity do you think there is for additional efficiencies.
Yes, it really is across the board so.
The first thing I would note that it's not any one area keeping in mind that we called out the investments we continue to make.
In the direct to consumer business.
And look we're not we're not trying to manage gionee to deliver a certain result, we're trying to manage the business to drive mobile growth in the brand and you'll continue to see that where we saw some efficiency. This year as I mentioned there were some abnormalities last year that evaporated that helped offset some of the more natural organic increases of just running the business, but I would point out also the international markets. As we've continued to make investments those investments are coming to fruition such that you are starting to see a little bit of the leverage come through.
So you are seeing kind of a natural evolution I think of many of those businesses to the point, where they are delivering some of the SGN a leverage that that is all the obvious in the results. This quarter, Yes, I think it's part of what we said in the past we don't have anything brand new even though we acquired the second piece of India. It's still flow through the same way intends to leverage as it continues to grow and Mexico is not a startup. So while there is a significant investment it doesn't start below zero as far as efficiency and operating margins are concerned. So as we said in the past we anticipate that that as John pointed out we're not looking to save money and not spend what we're looking to do is drive sales and leverage the operating lines as we grow in these countries and.
With nothing new unless there's a one off in the country. We do anticipate increased sales will bring with it increased operating efficiency.
Great and then changing gears to inventory and margin Youve seen some nice benefits to average selling prices and margin in the domestic business from tightening up inventory is there opportunity for that in international markets and if so how far along are you guys and then getting after that.
Yes, definitely some opportunities, although I'd say the inventory position is really a global position, you're seeing really healthy inventories in almost every market. So that's that's already incorporate into what you're seeing and again the only abnormality, we'd point out in the quarter was the discounting we did to get rid of some of the seasonal stuff absent that you would have seen pretty good strength.
There are potentially incremental opportunities keeping in mind that we have been battling forex negative headwinds from Forex for a while this year. So we're looking at what opportunities may exist. Now obviously most important is just making sure you are priced right for each market.
And you're dealing with a lot of different currency markets in the current environment that have up to this point in time bin bin drags from an FX standpoint. So we continue to believe that theres opportunity, but would also point out that we are making sure that were priced right in each market to enable growth of the brand.
Great and then last one for me can you speak to any cost relief, you're seeing as you negotiate with China sourcing partners.
Yes, I mean, we havent really seen any cost pressures and havent really executed any significant cost opportunities I mean, we're always diligent about evaluating where there are opportunities, but it's not a a one point in time event its really a continuous effort over time, obviously one of the bigger factors in there is FX and seeing how FX has changed so I would point out it's something we look at regularly and I don't I don't think we'd ever characterize ourselves as being done with that so it's more of an ongoing opportunity. We continue to pursue over the ordering ordinary course of our development process and not.
A point in time effort that we that we execute against.
Fair enough. Thank you.
Thanks, Jim.
Our next question comes from the line of Chris Svezia with Wedbush. Please proceed with your question.
Good afternoon, everyone. Thanks for taking my questions nice job.
I just want to go back to.
U.S. wholesale for a moment just maybe walk through your thought process in terms of this inflection how how meaningful that could be for Q3 and what that could mean for Q4 are we talking just kind of nailed down a little bit but more like mid single digit growth for Q3, and then accelerating to double digits in Q4, just curious the directory there.
Well first off but we didnt were not making them number up we're seeing really good trends in the backlog really good trends as David mentioned in his prepared comments in activity with accounts.
Both both an orders, but also just in the general dialogue, we're having so you're really seeing the product pull through.
Even to the point as David mentioned of some asking for a pull up yes.
In deliveries.
As we see the back of the year unfolding as we mentioned earlier.
Q3, Q2, together, we think would have been if you take those in aggregate about flat to up slightly and then obviously that would suggest some some pretty significant build into the back half.
Q4, that's what we see in backlogs, although I'll just point on something David touched on timing.
It's sometimes can bridge over a quarter. So how that exactly plays out remains to be sitting suffice. It to say we've said at once are now saying it twice, we expect for a full year that domestic wholesale to be flat to up slightly and we don't we don't make that that that forecast lately.
Is there anything maybe you could just touch on anything different but by when you look at certain accounts into the off price business was.
You know kind of set up from last year, how do I think about this year. This year in other words, what's the component of that wholesale growth. How does it look is that across all channels no child oldest types of retail customers or any color about that.
Yeah, it's pretty strong and broad the off price did get better this quarter. Although this is the quarter last year, where we saw the most significant decrease in then it continued out so little bit of an easier comp this quarter.
But I would say generally speaking, it's it's fairly broad.
It's in our traditional customers, it's in a little bit of the off price.
We're seeing it.
Fairly across the board.
Okay, and then just on switch gears just on the international side for a second just in Europe , just maybe add a little color I know I think UK was called out I think you mentioned, Germany, just any other color about what's what's you're seeing whether you want to talk currency neutral reported.
Just what you're seeing in those markets.
You could say it any which way you want that marketplace is growing significantly.
Continues to grow and as having an incoming order rate.
For this month Thats significantly higher than we would have anticipated a few months ago.
Going forward and the reset and this reception that we're seeing now is for first quarter. So we are looking for significant growth that backlogs are up significantly they are growing.
UK.
Is performing quite well and will grow but not as fast the pace as Germany, just calling out the two largest pieces there.
Primarily for the macro issues that exist in the UK and how their overall.
Retail business is going through a shakeout in.
Germany, we grow.
Significantly higher than our original forecast where at the beginning of the year as we move through both going to the end of this year.
And what we will now anticipate I guess for first quarter. If we continue on as mode. It is in all channels. We we had maybe one country in Europe that wasn't up on a dollar basis forget even a currency neutral basis in the last quarter and thats anticipated to be up.
Going through the end of the year. So Europe Europe is one of the great stories on fire and a relatively new piece for them the third and fourth quarter will continue to get stronger and stronger.
Okay.
Thank you very much and all the best appreciate it.
Thanks interest.
Our next question comes from the line of Nick with Wells Fargo. Please proceed with your question.
Hi, David and John Thanks for taking my question.
John first off just a clarification on the guidance.
Did you say balance of the year, so two H.
Direct to consumer up high singles and international up mid teens.
But did I hear that correctly.
I did I did.
Lot of selling to be done on the direct to consumer.
We thought we'd be kind of a mid teens in Q2, and we substantially outperformed that we're taking a conservative view as we look at Q3 and Q4.
As we pointed out the trends have continued to be positive. Thus far in July so that may end up being a conservative view, but that's what we've got factor and in a moment.
Got it okay.
And as far as the.
Improvement that you are that you are seeing in the backlogs for the U.S. wholesale business.
Is the thing that one of the drivers is that this this will be the first.
Back to school and holiday season, after Payless went away and some of your.
Wholesale partners, maybe trying to.
Capture that market share and use your brand as a as a way of picking up those displaced customers.
Well I think I think I'd bluntly, we're all going to try and capture that demand is not limited to payless I mean, all the store closures should increase the business strength of those that are that are left behind we certainly anticipate picking it up both in our third party wholesale business and our direct to consumer business.
Those are all we have a broad spectrum.
Footwear and categories and price points to deliver we think we can access.
Pieces of all that as it goes forward.
It's interesting we still as we said before we saw increases in our direct to consumer and we believe in our customer saw this same sale through on the wholesale land in the United States.
Through the quarter is that it coincides with the liquidation of Payless I don't know that there is a direct cause and effect and be difficult to push such a thing, but as we clean out retail and we've been saying this for years as some of the weaker links move away those that are left with stronger will pick up.
The slack and we will continue to grow and I still believe that's true.
Got it that's helpful and just last one from me.
India I think you know you talked about how it was one of the biggest.
Growers from a dollar perspective this quarter can you contextualize.
The size of that business for you.
Oh, yes.
What it did in revenues last year any anything like that.
Yes, we're hesitant to get too specific on each country, but the rate. It's growing it's quick quickly coming up the ranks just to give you a reference point without being terribly specific.
India was very close to Germany.
In on a consolidated basis by country. So.
I should also note not only was it a big dollar gain or it was one of our highest percentage gaining markets and we couldn't be more thrilled with both the growth in that market and the execution, we're seeing from our team. There we think that market has tremendous.
Opportunity over the over the horizon.
All right got it thanks for the color.
Our next question comes from the line of Jim Chartier with him CH. Please proceed with your question.
Hi, Thanks for taking my question.
So on the expectation for third quarter.
When you say.
Second to third quarter, Bob be flat to slightly positive does that assume any possible pull forward of demand, but you hinted might occur.
No.
Okay.
And then.
On the running category, how do you guys build on kind of this editorial success that you've had.
Running product.
Have you been seeing more interest from new retailers or any more interest or growth in the running.
Categories.
And how big could that ultimately before thanks.
Well running is one of the major categories in the world. So it obviously helps us it obviously gives us superga umbrella impact we have more runners coming into the issues we have more.
Requests for the shoes and by the way that's on a worldwide basis. So we anticipate that these awards since we're only in the last two or three months, we will certainly continue to pick it up and we will certainly continue to push both the advertising.
And the online advertising to runners and.
If anybody out that assuming this hasn't tried a new should these issues are all they are geared up to be very comfortable.
Very light.
And there is something for everybody, both outdoors and long distance and even for walking. So we do anticipate those categories will continue to grow and give us a bait great.
Halo effect to the brand for all our major league walking category, which still remains the biggest.
Jim I, just just to add onto what David said that these issues are just hitting the street late Q2, and now but what's really important it's not it's as the show and it's the technology in this issue.
The hyper burst that we have in the shoe in that platform as David mentioned is one that we can extrapolate across segments. So it won't always be a running predominant platform for us. It's something we believe can improve and affect positively a lot of other categories, including walk and the like so we think you are just beginning to see the impact of this because it's just really coming into the into the online stuff in the running side and then it has a lot of opportunity to be carried forward from there.
As or are you already seeing kind of demand for more casual product with that.
That's true technology.
For which we just haven't even got it it's way too yes wait you know it just hasn't come up into that in those categories, yet, but thats. Obviously the plan over time is to bring it bring that that technology down into.
Array of other categories, not just casuals, but an array of other categories we have.
Great. Thanks best of luck.
Thanks, Jim.
And our final question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.
I just have a quick follow up on the selling on the selling part of the SGN a quick.
Was that a shift of some selling expenses that are going to move into the third quarter.
Most of yesterday in the third quarter going to come from that.
So in the second quarter is there wasn't anything noticeable that shifted one way or the other it was more of a conscious decision to pull back domestically, we still invested internationally, but it was more of a conscious decision to pull back a little bit domestically in terms of going forward.
We think generally speaking you're likely to see about the same level, maybe a little bit of leverage in the selling but thats going to come because of the scale increases we're seeing in.
Yes, I mean across the board.
So we think its a.
Think it continues to be an area, we'll invest in where it makes sense, but it's also an opportunity for the on a full year basis, well, we'll see leverage.
I mean on an absolute dollar basis in the quarter you were down in Q1, you were down slightly in Q2 do we expect the.
As the selling expenses to be.
Down again in Q3, and Q4 or flat or I mean, how should we think about that because it's the first time in a while we've seen two running quarters for the selling expenses down.
And so if I am wondering.
You know, how we should be at that at the moment, it's a dynamic items simply because we're we're sensing the demand characteristics in the market and we are adjusting as we go as it stands at the moment I would anticipate something more like on a constant percentage of sales to what we've seen in the in the last year last year over the over the back two quarters.
So so sort of you're going to see an increase but maybe you get a hair leverage on it.
I don't know, how you quantify a hair, but yes, I'd say, that's generally directionally accurate slight leverage.
However, you want to put it.
Thanks, guys all right. Thank you so much exam.
Ladies and gentlemen, we have reached the end of our question and answer session as well as today's conference I would like.
On the call back over to the company for closing remarks.
Thank you again for joining us on the call today.
We would just like to note that todays call may contain forward looking statements as a result of various risk factors actual results could differ materially from those projected in such statements.
These risk factors are detailed in skechers filings with the SEC.
Again, thank you and have a great day.
Okay.