Skechers U.S.A., Inc.
Q2 2012 Earnings Call Transcript

Published: 26 Jul 2012

[Operator:]

Good day, ladies and gentlemen, thank you for standing by. Welcome to the SKECHERS USA, Inc. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, July 25, 2012. And at this point, I would like to turn the conference over to SKECHERS. Please go ahead.

[Unknown Executive:]

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 company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of other significant risk factors that may affect the company's business, results of operations and financial conditions. With that, I would like to turn the call over to SKECHERS's Chief Operating Officer and Chief Financial Officer, David Weinberg. David?

[David Weinberg:]

Thank you for joining us today to review SKECHERS's Second Quarter 2012 results. As always, we will open the call to questions following our prepared comments. Net sales for the second quarter were $384 million and loss from operations was $1.5 million. Net loss for the second quarter was $1.8 million, and diluted loss per share was $0.04 on approximately 49.3 million average shares outstanding. Our second quarter 2012 sales decreased by 11.6% over the same period last year. This was due to lower sales across our domestic and international wholesale channels, which was primarily the result of the clearing of excess toning inventory and the winding down of our fashion brands last year. This was offset by increased sales in our retail stores due to an additional 39 stores, as well as growth in some of our heritage lines in our domestic wholesale business, and the addition of our performance lines. Our international sales were negatively impacted by a combination of factors

[Operator:]

[Operator Instructions] And our first question comes from the line of Jeff Van Sinderen with B. Riley.

[Jeffrey Wallin Van Sinderen:]

David, I wonder if you can talk a little bit more about which specific product is selling best in your own retail stores, what's driving the comp in your concept stores. Is it transactions or UPT or, largely, AUR? And then also, when do expect your regular domestic and international stores to turn positive comp? I know you -- I think you said in your prepared comments that you expect retail to be better in the second half. And then maybe you can also talk a little bit more about wholesale and which products your retail partners are responding to best and where you feel you have the most opportunity as you look at second half.

[David Weinberg:]

Well, the opportunities are about everywhere. And it's actually combining the first part -- the last part of your question is that our retail partners and our store are experiencing significantly better sales almost across-the-board. It goes from Active, which has become a very big part -- our women's Sport, men's Sport. Our Men's U.S.A. is picking up some and, certainly, our Performance, as well as Kids, both girls and boys. So we're getting a very good sell-through across-the-board. It's not a -- one particular item, although the Fitness product is still going very strong for us and doing well, but it's -- it's added to by everything else. Almost every part of our brand is showing increases and very solid sell-through and growth year-over-year. And you're correct. We anticipate that retail stores in totality will turn positive in the fourth -- in the third quarter, certainly, for easier comps, and we're off to a good start. So we feel pretty confident that we'll get to positive comps this quarter.

[Jeffrey Wallin Van Sinderen:]

Okay, great. And just wondering if there's anything else in the GO line. I know you said GOrun is still doing well and GOwalk. Anything else new developing there in terms of some newer-generation GO products that you're seeing?

[David Weinberg:]

Well, we continue to develop. And if you come up and see our room where you see them at the shelves when we present, the GO line can be move out to significant categories. But to date, the only other thing we've delivered to our stores so far is GObionic. And that's very recent, and it is off to a good start as well.

[Jeffrey Wallin Van Sinderen:]

Okay, great. And then maybe you can just touch a little bit more on what you're seeing in Western Europe and some of your other international segments that are worth pointing out.

[David Weinberg:]

Well, as we said, I believe Western Europe is obviously down significantly, and we anticipate it'll remain down, certainly, through the third quarter. Although we see some positive signs, some product selling, it's just -- it's seems across-the-board. It's in the places you'd imagine. Germany also shows down. The only one we have that's holding its own and possibly could break even for the back half of the year is the U.K. And since it's our largest, that's certainly something. But Germany, Italy, Spain, very difficult, and it's anticipated it'll stay that way. The balance, as you go around the world, South America, both Chile and our distributor that handles the biggest part of South America, being Venezuela, Columbia and all the way up to Mexico, along with Mexico, seem to be doing very well. Brazil, as I said, as we retrenched, we were very overly committed to non-SKECHERS brands and Shape-ups last year. So it was quite a significant cleansing process. And if you know anything about business in Brazil, it's very difficult, and there -- you have to cleanse it in Brazil. It's just -- you get no duty back. The duty rates are horrific, and you have to cleanse it out in Brazil. So that sets us back a bit. But we're now showing new product, delivering some new product and getting some good results, and it's just a matter of time before we continue -- we start growing and become significantly positive there. Southeast Asia has held up well for us. Korea continues to do well. Australia and New Zealand continues to do well. Our joint ventures outside of China, Hong Kong, Singapore, Malaysia, do very, very well and continue up. China's starting to get closer to positive. We still anticipate they'll be positive profit-wise by the end of the year. And they do continue to grow, and we continue to open new stores. So -- and Eastern Europe, where in Ukraine and Russia, we have significant businesses, are going to show increases in the back half. So right now, we're seeing the most difficulty in Western Europe. We've had problems with the currency, obviously, the euro there, as well as the existing business, and it is a big piece of our business. But that's going to take a little while before it comes back.

[Jeffrey Wallin Van Sinderen:]

Okay. One more question, and I'll jump back in the queue. Is it possible or feasible for you guys to be profitable, given the improvement trends you're running in Q4?

[David Weinberg:]

Well, I think we've said before, it's certainly possible. It's way too early to tell. As we get acceleration from this type of products, certainly, around the world, anything is possible. It would take some increases from here, but I -- we still remain very, very positive. It seems -- our goal has always been to build up and to be very positive to go into first quarter of '13. And that means if we perform well for back to school and these products are as good as we think they are and as good as our customers are telling them they are, some of it could move back to December and push the whole quarter up significantly. So yes, it's possible, still.

[Operator:]

Our next question comes from the line of Scott Krasik with BB&T Capital Markets.

[Scott D. Krasik:]

I missed it. What exactly was U.S. wholesale down in Q2?

[David Weinberg:]

It was down $39 million, I think, 11% -- 18%, something like that.

[Scott D. Krasik:]

18%. Okay. And then is U.S. wholesale based on your best guess right now? Is that going to be positive in Q3?

[David Weinberg:]

Yes, I -- we anticipate it's going to turn positive in Q3. If -- we try to bring out in the prepared remarks, although it might have been difficult to pick up. Our non-toning, non-fashion brands, the eco stuff that we're sort of discontinuing now came pretty close last year to being flat, although, obviously, with slower margins and no performance in it. So yes, it's anticipated that our domestic wholesale business turns positive this quarter.

[Scott D. Krasik:]

Okay. And I mean, you mentioned Kids. Is Kids going to be positive? And are you all the way around on Twinkle Toes again?

[David Weinberg:]

Twinkle Toes, we still have some new offerings, and Twinkle Toes remains a very active part. It's probable that Kids will break about even in Q3.

[Scott D. Krasik:]

Okay. And then you're sort of at the sweet spot still with the inventory super clean. So I mean, you don't have a lot of sales into the off price from what we hear. So are gross margins still going to be way above 44%?

[David Weinberg:]

Right now, we have no reason for it to change other than the flip in international. While we anticipate international to be relatively flat for the quarter, it's going to be a bigger increase in distributors and, certainly, less from Western Europe. And that's obviously a big swing in margins. So we may have some margin impact from the switches in international. So other than that, yes, everything remains status quo. We think will actually pick up some margin at our retail stores in the third quarter. Of course, they are clean as well, and they're starting to sell, really, the -- a lot of the new product, which as it moves through the outlets, we'll pick up the margins there. And we should maintain pretty healthy margins in domestic wholesale. So we're still feeling pretty good about that.

[Scott D. Krasik:]

Okay. And then I think it's on everybody's mind, as we get towards spring '13, you made some comment, I think, that backlog is up double digits. So at least, it's up double digits from the negative number that you had before, so maybe you can clarify that. But as we look to spring 2013, what sort of visibility do you have on sales from the new GO product? I mean, walk certainly seems to be accelerating.

[David Weinberg:]

I don't know that it's changed significantly. We were up double digits, but remember, that up double digits also includes a decline for our Western European subsidiary. So if that had remained relatively flat, margins would be up significantly more. The only thing I could tell you about first quarter '13 is the feedback I get from the larger customers we've had buy meetings with the last few weeks, and it's still all very positive about the product and about the shelf space we can acquire for first quarter. So while it's not in the bag yet, certainly, everybody is still looking around, all the comments we received and what we could tell and sell-through that we're monitoring as we go into back to school seem to indicate that everybody feels we'll have significant upside. And that includes the Fitness and the lifestyle product for first quarter of '13.

[Scott D. Krasik:]

I mean, could we look at first quarter '11 as a guide, or is that still even too much because that was inflated from Shape-ups?

[David Weinberg:]

That was still kind of inflated from Shape-ups, but I wouldn't take it off the table if Western Europe and international and Japan picks up as much as we think they might.

[Operator:]

Our next question comes from the line of Sam Poser with Sterne Agee.

[Sam Poser:]

Can you give -- just some housekeeping. Can you give us the actual dollars for domestic wholesale, international wholesale, retail, e-commerce and then the U.S., Canada, other international? Can you just give us the actual sales numbers?

[David Weinberg:]

I'll tell you what, I'll give you an offshoot from what we're going to print in the Q. For the quarter, domestic wholesale was a little over 46% of the whole. International was just over 23%. That includes distributors and subsidiaries -- sorry, 23%, I think I said that. Retail, both domestic and international, was 29.25%, and 1% to 1.5% was in our direct marketing. So that's what you can expect to see in the Q.

[Sam Poser:]

So that was the e-commerce?

[David Weinberg:]

The e-commerce is a balancing number. It's about 1.25%, 1.5%.

[Sam Poser:]

Okay. And then can you tell us -- and then you talked about -- all right. So we have it, and then the U.S., we'll deal with that later. Just a -- when you're thinking about the kind of sales, I mean, you said you're going to be up for the balance of the year. What kind of sales increases are you foreseeing at the moment for the balance of the year?

[David Weinberg:]

Well, it's kind of early, and I said we don't give guidance. We show domestic wholesale will be up. And when we get hot like we are now and everybody's chasing some product, it tends to grow pretty significantly, but it's kind of early. We're still geared towards first quarter '13, where we think a lot of positive things and a lot of things that we can do with our production facilities happen, so.

[Sam Poser:]

But do you think you can be up -- is it like -- I mean, are you looking -- I mean, because you do generate fast and you're up -- coming up against some horrific decreases last year. So I mean, are we -- could we see a 10% increase in domestic wholesale in the third quarter?

[David Weinberg:]

In domestic wholesale in the third quarter, that's certainly possible.

[Sam Poser:]

And then when we look at Q4, that should be accelerating from there theoretically?

[David Weinberg:]

Correct.

[Sam Poser:]

Okay. And what -- are you finding -- as far as the GO series and women's athletic, women's lifestyle, women's Active product, did that -- you're back hitting the sweet spot in that $50 to $60 price point hard, and that's where you're -- is that where you're getting a lot of the positive responses from?

[David Weinberg:]

Well, in Fitness, that's sort of the GOwalk or the SKECHERS GOwalk kind of different price point, which is certainly hot. But the balance is higher, and they perform very, very well. And Active and Sport, I would tell you in women's and that's probably correct.

[Sam Poser:]

And then -- and so could you give us some idea within the GO product sort of what percent right now is GOwalk versus the higher-ticket product?

[David Weinberg:]

I hate to give that number on the street. We can talk about that directionally later. But GOwalk is certainly a big piece, but it's not half. I mean, if you go all around, our men's product is performing quite well, both run and ride. And the women's product in run and rides continue to perform well. It's just -- GOwalk is concentrated when it's very colorful, and there is a lot of SKUs in it. And it just an eye-opening experience for our customers as well, because it fits right in there, and they got delivery of that earlier.

[Operator:]

Our next question comes from the line of Chris Svezia with Susquehanna Financial.

[Christopher Svezia:]

So I just wanted to be clear about something. So if Q3, potentially, U.S. wholesale could be up 10%, so just, say, maybe it's up 5% to 10%, you made some comments, total international. Is that flat? How you breakout subsidiary versus distributor? How do we think about that for the third quarter?

[David Weinberg:]

Well, I think it's relatively flat. I think we'll show significant increases in distributors and slightly down. I mean, we're going to be down significantly in Western Europe, but part of that will be made up by Japan and part of that will be make up from -- which will be a subsidiary, so the subsidiaries will get that much closer, and the rest from distributors, which will grow significantly. So we tend to be somewhere around flat, maybe slightly, slightly positive, but it may have a little bit of margin impact.

[Christopher Svezia:]

Okay. And then the retail business, assuming you comp, say, positive low single and you have store growth, you're probably talking 10 percent-ish kind of growth rate for the retail piece.

[David Weinberg:]

Certainly, possible.

[Christopher Svezia:]

Okay. So looks like, potentially, a $450 million -- somewhere in that for $440 million, $450 million revenue number, potentially, through the third quarter, doesn't seem out of the realm of possibilities?

[David Weinberg:]

It's certainly a ballpark we would talk about.

[Christopher Svezia:]

So let me -- so if gross margin sort of hold this line, maybe it's a little bit of a margin impact. I mean, you did a nice job on marketing expense, I think, relative to what -- or selling expense relative to what you communicated, I think, to us beforehand, last time you had a call. I mean, does that incrementally go up in dollars on the selling expense line just because it's back to school and marketing initiatives step-up? I mean, how should we think about that? Is that flat year-over-year? Does it go up slightly year-over-year on the dollars on the selling line?

[David Weinberg:]

I think the selling line remains relatively flat to net last year. I don't know if there's any projects. I mean, from the media point of view, the biggest single one will be relatively flat. I think what you're looking at is that third quarter last year and second quarter this year are equivalent in dollars, and I still would -- that would be the place I'd start my analysis.

[Christopher Svezia:]

Okay. And the -- and just in and around the G&A line. I mean, this sort of $135 million number, is that sort of a fair proxy for third quarter? Does that go up slightly because you have more stores, or how do you think about that?

[David Weinberg:]

I think, actually, there are some room for improvement as we go through that. Obviously, I said there's only 5 to 7 stores in the whole back half of the year. So I think we can get some efficiencies in there. I think we'll make up some of it, obviously, with the legal fees and some -- we had a big 20th party. We're not going to upgrade the shelves. So I think there's a slight amount of positive leverage that we can get or a decrease in real dollar terms of the G&A line in the third quarter, certainly no increases from last year and maybe some slight decreases.

[Christopher Svezia:]

Okay. And then I'm curious where -- I mean, when you guys think about a quarter, whereby you can be breakeven. I mean, you did as much revenue as you did here, $380 million. I mean, we're sort of -- how do you think about breakeven on a quarterly basis? I mean, obviously, you'll be profitable in the third quarter. I know fourth quarter has yet to be determined. But you need to be close to a $375 million number to be profitable in the fourth quarter. I'm just trying to get an idea where that stands at this point.

[David Weinberg:]

I don't think so. If you look at last year's fourth quarter and this year's second quarter, there's a $16 million differential in the selling line, and I don't think last year's increase in G&A flows through this year. It'll be more like first and second quarter of this year. So you could take that number down somewhat, and there could be some more efficiencies that we find as well. So yes, you could take the number down somewhat from there.

[Christopher Svezia:]

Okay. So I mean, it could be more like a $350 million kind of top line revenue number, you could start to see breakeven?

[David Weinberg:]

Yes. If you think about $25 million is $10 million in gross margin and you have $16 million to play with, you can play back with the numbers, I mean, just if nothing happened and no efficiencies or gain.

[Christopher Svezia:]

Okay. And just on the balance sheet. The accounts payable continues to be pretty high relative to inventory. I'm just...

[David Weinberg:]

It still has the accrual for the FTC settlement.

[Christopher Svezia:]

That's what's in there. Okay, I see. So that will come down third quarter as you pay that out, correct?

[David Weinberg:]

Well, if I pay it out, it will come down, yes, can't argue that.

[Operator:]

[Operator Instructions] Our next question comes from the line of Matthew Berry With Lane Five Capital Management.

[Matthew Berry:]

David, a couple of questions just on the accounting. Firstly, the $438,000 you put in the noncontrolling interest line, how much of that is for your sort of the net rent effectively to the DC partner?

[David Weinberg:]

I think the biggest piece is the partnership we have in the distribution center, certainly, but it's also a piece -- a fairly significant piece, although certainly not the biggest piece from our joint ventures in China and the beginnings of our joint venture in India.

[Matthew Berry:]

So how much is to the DC partner?

[David Weinberg:]

I have to go look. I don't have that off the top of my head. But if you call me later, I'll give it to you.

[Matthew Berry:]

Okay. And then one other thing on -- just disaggregating that a little bit. When I look at the direct subsidiary sales, which you include in your international wholesale, so the non-distributor bit, the direct bit, you include the JV, the retail JVs in there. That's right?

[David Weinberg:]

Correct.

[Matthew Berry:]

Okay. What is the split of the direct subsidiary sales between the JVs and sort of direct wholesale to the third parties?

[David Weinberg:]

The joint ventures probably represent about 5% of the total international sales, give or take.

[Matthew Berry:]

Okay, okay. And are they -- is that profitable at the moment, the JVs in total, including China?

[David Weinberg:]

Totally, if you include China, they are at about a breakeven.

[Matthew Berry:]

Okay. Okay, that's useful. And then one other thing, just on sort of the G&A side of things. We've talked over this a little bit. I was wondering if you could give me a little bit of a clue as to what your FT -- what your headcount was like at the end of the first half for full time and part time?

[David Weinberg:]

I don't know that we've ever given that out, and I have to add all the subsidiaries together. So I don't -- I look at them usually in pieces of operating pieces. So it's down significant from last year because of the distribution center. Other than that, it's remained fairly stable year-over-year.

[Matthew Berry:]

Okay, all right. Is it down from year end?

[David Weinberg:]

The distribution center or just in general?

[Matthew Berry:]

In general. Is headcount -- full-time headcount down from December?

[David Weinberg:]

I have to look at it. I think it might be down a little bit, but nothing significant.

[Operator:]

And we have time for one last question, and our last question comes from the line of Bill Dezellem with Tieton Capital Management.

[William J. Dezellem:]

A couple of questions. First of all, I believe that you expressed some enthusiasm for Western Europe in the first quarter of 2013, that you may see some positive items there. Would you please share with us what you think is going to overcome what appears to be kind of an ongoing malaise over there?

[David Weinberg:]

Well, it is ongoing. What we see is, in some places that the new product we've put in, while people have been -- certainly being more careful and watching their open to buys and inventories way down, but what we've delivered seems to be performing quite well. So for whatever reason, and you could call it just being positive about worldwide how our new products are being perceived, is that we believe we can pick up shelf space because of our price points and because of the demand for our product in parts of Western Europe.

[William J. Dezellem:]

Great. So this is -- so your positive inclination is based off of actual sales that you're seeing of a -- of the early product being there as opposed to just thinking or hoping that it might actually resonate?

[David Weinberg:]

Absolutely. I mean, we're always looking to see results, sales results before we make any kind of decisions.

[William J. Dezellem:]

Great. And then the next question is relative to inventories, they increased pretty substantially from the first quarter. Would you help us understand what are the underlying dynamics behind that?

[David Weinberg:]

Well, it's a twofold thing. We're growing now, and we finish cleaning out. And as pendulums tend to swing, we think we swung too far in our non-toning inventory. We're certainly as lean as it's ever been. And if somebody had asked me on the call, we obviously have nothing left for users that we use for closeout material, that we still make some positive margins and, certainly, some sales from. So we think we're a little light going in. And historically, we tend to grow inventory at the end of the second quarter, certainly, if we're going into a positive selling time, because we count everything that's in transit to us. And since our biggest shipping months of the year are June, July and early August, there's a lot more in transit to us if we played it all right to deliver all the stuff for back to school. So it's historically places we beef up, especially when there's a lot of new product in the offering.

[William J. Dezellem:]

So the component that's different from the normal preparing for the big selling season is just that you started out with inventories that you felt were a little too skinny?

[David Weinberg:]

They were skinny, and I -- we're not building any. So we would have thought the way we were purchasing, we would've start to build a little bit by now. But the product performing so well that we haven't been able to build as much inventory even as we'd like.

[William J. Dezellem:]

But basically, the inventory that we're seeing is almost solely for the higher -- or your larger selling season. That's pretty much it right now.

[David Weinberg:]

Correct.

[Operator:]

And at this time, I would like to turn the conference back to SKECHERS for any closing remarks.

[Unknown Executive:]

Thank you again for joining us today on the call. We would just like to note that today's call may have contained 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.