Skechers U.S.A., Inc.
Q1 2013 Earnings Call Transcript

Published: 16 May 2013

[Operator:]

Greetings, and welcome to the SKECHERS USA, Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. 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 their 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' Chief Operating Officer and Chief Financial Officer, David Weinberg. David?

[David Weinberg:]

Thank you for joining us today to review SKECHERS first quarter 2013 results. Net sales for the first quarter were $451.6 million, and earnings from operations were $15.3 million. Our first quarter 2013 sales increased by 28.6% over the same period last year. This was the result of double-digit growth in all our revenue channels

[Operator:]

[Operator Instructions] Our first question is coming from the line of Mr. Jeff Van Sinderen with B. Riley.

[Jeffrey Wallin Van Sinderen:]

David, maybe you can just talk a little bit more about the shift or about your feeling that orders may fall more in Q3 than Q2. Is that a function at all of retailers telling you that they think back-to-school is going to be later this year? Or are they shifting delivery dates for that? Or maybe you can just give us a little more color on that.

[David Weinberg:]

Well, it's twofold. It has to deal with both our distributors and domestic wholesale, obviously. We did move some business into Q1, both domestic, I believe, because of Easter and our distributor base. And if you remember back, we had significant increases in inventory, which people speculated about at December 31 because everybody wanted to take them in earlier. And we had brought in significant inventories, saying we're getting ready for the season, which was going to start earlier this year than in prior years, which turned out to be true. So that's part of the movement from Q2 into Q1. Now for the back half, our distributors primarily are not as strong in Q2 and have been taking so much inventory into Q1 and distributing it through their base, especially with places like Korea and Venezuela and Colombia having more difficulty. And then some in Eastern Europe, we think that digests through and continue to grow for a new season in third quarter, which is primarily their strongest season. I think what happened domestically is while we fully expect to continue to grow, it won't be at the same level for domestic wholesale as it was at the end of last year and the first quarter. I think what happened was that spring started off slow, and now people are chasing it, and we can't get deliveries as early enough as June as they'd like. So what we're gearing up to is we're not sure how that June, July shift will work. We think most -- a lot of our customers came late and will get more product in July. Most of them seemed fully willing to accept it in June if it becomes available, which becomes a production issue, so there is a possibility for certainly picking it up. But more likely, given our inventory controls and as hot as we are over a significant amount of our product to catch up completely before July may be difficult. So the conservative tack would be to plan on moving it into July, which should be fine, and show that -- if you count June, July together, we will still show significant growth. Unfortunately, for us, it does flip over a quarter-end, so sometimes we have to take June as it is. So between those two, we'll still show some growth in Q2, but we've had significant growth in Q4 and Q1 and anticipate significant growth in Q3. So that's just the timing of the calendar and the way our international business came in this year.

[Jeffrey Wallin Van Sinderen:]

Okay. But if we're talking about domestic, it sounds like you still have pretty strong order trends in your domestic business, but some of it is just sort of a push-out and a little bit of a production fitting delivery schedule issue.

[David Weinberg:]

Yes, it's very true. I think because of the macro situation, a lot of customers didn't believe how hot we really were and our ordering patterns came in later as well, which is why that moved into June. While we had up orders for the first quarter, we had significant growth in April. And May will turn out to be, I'm sure, the largest May we've had outside of 2010 in the history of the company because people are just running that late overall, not realizing how hot we were in what may otherwise be a very not-so-hot marketplace at retail, so -- for footwear, anyway. So I think it's just the timing perception. And big customers of ours, domestically, have been trying to build supplies early for Easter and then push them back closer to need and not realizing how short we're going to be as the stuff came into the marketplace.

[Jeffrey Wallin Van Sinderen:]

Okay. And then you also mentioned that -- I think the sandal business has been tough for just about everybody due to the weather. And I'm just wondering if there are other pressure points in gross margin. I know there was -- there were some shifts going on, and obviously, you had a 50 basis point hit from the toning product. But is there anything else to read into there, either associated with sandals or puts and takes in terms of product margin in the quarter?

[David Weinberg:]

No, I don't think so. I think if you put the 50 basis points back, we're pretty much where we had planned to be. We would have been at 43.25, give or take, and for -- as bigger distributor pieces we had this time, and we're holding up well. The stores continue to increase their margins a little bit at a time while they continue to comp up, so we get a double benefit from them. The stores are really the best indicator. And they seem to be -- we mentioned they accelerated in April from first quarter, which was double digits. And it looks like now, they're even increasing on a comp store basis, on a percentage basis in May going into Memorial Day. So if Memorial Day has the same increases, percentage-wise, as we've seen the growth from April and May, then product may be even shorter as we get into Q3.

[Jeffrey Wallin Van Sinderen:]

Okay, good. So let me ask you this. I know there's been, at least in my channel checks, it seems like your wedge sneaker product has been pretty hot. Is there anything to talk about there in terms of, maybe, how much of your business that is or what we should be thinking about in terms of concentration of that business for back-to-school for fall, just as a hot category?

[David Weinberg:]

Actually, it's not a concentration business. And obviously, it will do better as the weather gets better. But it's a nice addition, but it's not overwhelming. It's not like our Performance product of GOwalk, on that order of magnitude yet around the world, although it continues to grow. So it's too early to worry about that particular product as a concentration point.

[Operator:]

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

[Scott D. Krasik:]

So just to drill down on the sales shift a little further. So what does your domestic backlog -- what's it running at right now? What's your international backlog running at right now?

[David Weinberg:]

Our international backlog is relatively flat. Our domestic backlog is obviously up some. It was slightly less than double digits going into this quarter from March, but it significantly increased since then. We've had a good April, and we'll have an even bigger May. I don't think it's a question of backlog to where they stand. The backlogs are significant. I think it's a timing issue between first, second and third quarter.

[Scott D. Krasik:]

I guess, I'm just trying to get to figure out -- I mean, you've given us some parameters around Q2. So I'm just trying to figure out how meaningful the sales growth in the wholesale channel could be in Q3.

[David Weinberg:]

It'll be certainly less than it was in -- oh, in Q3? Could have swore you were going to say Q2. So I'll do it my way. Q2 will certainly be less than Q3 -- Q4 and Q1. Q3, I think, could be as strong as Q4 and Q1 depending on how well Memorial Day goes. We've had a number of retailers call us and tell us how short they were going into Mother's Day, and if it continues to come out of Mother's Day stronger and gets stronger through Memorial Day, then a lot of good things can happen for us between now and the end of back-to-school, certainly for the balance of 2013.

[Scott D. Krasik:]

Okay, so you're looking for mega growth here in Q3 again?

[David Weinberg:]

Could be. Aren't I always?

[Scott D. Krasik:]

And then just on the gross margin, if you add back the $2.5 million credit to wholesale -- to domestic wholesale, I think your gross margin would've been about 36%.

[David Weinberg:]

Right.

[Scott D. Krasik:]

Traditionally, Q3 is actually a little bit higher than Q1 in domestic wholesale gross margin. Is there any reason why it shouldn't be this?

[David Weinberg:]

It usually is because winter product is more substantial shoes, and they comes with slightly higher margins. I think that would depend on the breakdown between Performance and Kids shoes, et cetera around the world. But yes, I would anticipate some upticks for Q3.

[Scott D. Krasik:]

And then, anything -- I mean, from last year, I'm sure you're off-price sales or close-out sales would be higher because you were so clean last year for the back half. But I mean, is it going to be abnormally high? Are the inventories still clean -- lean enough that you're chasing [ph]?

[David Weinberg:]

The inventory is still really clean. I mean, if you think about it, I mean, our stores, like anybody else, I mean, we've been short of product. We're only up $39 million year-over-year, and we were up $100 million in the top line and are building for some big increases for Q3. So unless there's a shift in some product or we have some Rompa [ph], we don't anticipate significant leftover inventory. I mean, it's always some, but it shouldn't be anything major, not yet anyway.

[Scott D. Krasik:]

Okay. And then just last, I mean, it looks like you had a higher distribution cost related to the sales, so that was variable. Did you have $5 million of other higher distribution costs that weren't sales related? I'm just trying to read through the Q.

[David Weinberg:]

We had -- I don't think it was $5 million. We probably had about...

[Scott D. Krasik:]

Or $4 million maybe?

[David Weinberg:]

$2 million, $2.5 million in -- outside the United States increases because Japan didn't exist last year, and now we have a third-party in Japan. It's a fairly expensive place to run in for most of the first quarter. The end was very strong, so it sort of complicated that calculation. And also in Brazil, where we were growing. I think you might add that we -- our bonus plan kicked back in this year, and there's probably another $1 million change or close to -- somewhere between $1 million, $1.5 million in bonuses that were issued this year that didn't exist, obviously, last year. So the 2 of those together are probably in that $3.5 million, $4 million you're looking for.

[Operator:]

Our next question is coming from the line of Mr. Sam Poser with Sterne Agee.

[Sam Poser:]

I have a question. How -- with the early Easter, did you pull forward some of the selling expenses into Q1, and how should we think about that going forward?

[David Weinberg:]

Well, I think what happened in Q1 was that our media expenses were only up about $3.5 million. The balance, the other $4 million, were production costs. And there was probably even another $1 million on top of that as far as agency costs outside. So I would think a lot of the production costs will have -- moderate through the second quarter, so if you think it pulled forward because we had a lot of new product and a lot of move-in, that's probably true. I don't have the final number on all the production costs and what new commercials we may or may not do, that's still in work. But as far as media concerns, we don't expect any more than about a $2 million, $2.5 million increase in media expense -- direct media year-over-year.

[Sam Poser:]

So I mean -- so how should we think about -- I mean, so in absolute dollars, your selling expenses should increase less in Q2 than they did in Q1, I would assume.

[David Weinberg:]

Yes. They'll increase certainly -- they should be less in real dollars and certainly less as a percentage since you're starting with a much higher base because of what selling expenses are in Q2 versus Q1.

[Sam Poser:]

Correct, okay. And then you talked about international business being flat -- international wholesale being flat in the second quarter. How should -- I mean, give us domestic while you're at it. I mean, relative, are we looking at going from a 44% increase to like a 20%? Is that ballpark? Or I mean...

[David Weinberg:]

To get to 20%, I think we'd have to have a much stronger June than I anticipate. I think it's more in the lower double digits, probably in the 10% range or north of there somewhat.

[Sam Poser:]

And then, does that put -- I mean, theoretically, the combination of the two, does that put Q3 sort of looking like Q1, theoretically?

[David Weinberg:]

It may not be quite that high in percentage, but certainly, in between the two. I would get into the -- hopefully into the mid-20s and higher, maybe in the 30s, depending on how hot we get through Memorial Day. We expect Q3 -- I personally expect Q3 to be a significant increase. The biggest Q3 we ever had was $550 million, when we were as hot as could be. I don't see any reason we can't get close to 5 -- north of $500 million this year, unless things start to slow down somewhere.

[Sam Poser:]

Okay, all right. And then we heard -- just back to -- I mean, for the overall selling expenses on a year-over-year basis, I mean, it was up -- how should we be thinking about that now? I mean, I know that Robert hasn't made all the decisions yet, but, I mean...

[David Weinberg:]

We were up $7 million in the first quarter. We expect to be up -- if you count production costs, they may be $3 million or $4 million in the second quarter. And I think that's a good range, maybe even slightly less in the fourth quarter, unless something changes from the thinking now. But like I said, that's still a work in process, so not to be put in stone.

[Sam Poser:]

And then in Q3, it looks more like Q1 as the increase, give or take?

[David Weinberg:]

I would hope so. I mean, it's certainly possible. [indiscernible]

[Sam Poser:]

So the increase in the selling expenses?

[David Weinberg:]

No, I don't think so.

[Sam Poser:]

So you think that won't be as great as -- that won't be up $7 million. You think of it of like $5-ish million? Is that...

[David Weinberg:]

I don't have an exact number. So I think my impression today in all the conversations we had and the plans that are going forward, there will be somewhat less than the $7 million increase that we saw in Q1.

[Operator:]

[Operator Instructions] Our next question is coming from the line of Mr. Chris Svezia with Susquehanna Financial Group.

[Christopher Svezia:]

Can I ask you international in Q2, can you parcel out the difference between your distributors and subsidiaries, or are they both pretty much flat? And can you just walk through maybe what's going on as you ship new products to markets like Germany, specifically, which had some challenges with toning in the past, what's going on there?

[David Weinberg:]

For Q2, our subsidiaries, joint ventures, et cetera, outside the distributors will be stronger certainly on a comparative basis than distributor. A big piece -- distributors will be down to bring international to a relatively flat quarter is what we see right now because the distributors stored their own inventory and it's not a constant flow. Once we sell it to them, how it moves through their customers, how they keep it, their reorder positions are significantly different. It's just based on when it leaves the Orient. So because of the big increase in Q1, for various reasons, and because their stronger seasons are invariably Q3 around the world, they will be weaker on a relative basis in Q2.

[Christopher Svezia:]

Okay, and Germany?

[David Weinberg:]

Germany seems to have, at least, found its bottom. We see some very positive signs that are converting a little bit at a time, so we don't anticipate any significant deterioration in Germany. And given the way sell-throughs are now, the weather's just starting to turn warm now, and we're getting some positive ideas, which leads us to believe we might be able to even show some slight increases in Germany for the back half of the year.

[Christopher Svezia:]

And as you think about Q3, which is more important on the international side than Q2, what gives you the sort of confidence that you could start to grow distributor and, I guess, obviously, the subsidiary business maybe in a -- at a faster pace? What gives you that confidence?

[David Weinberg:]

Well, everything is based on our pre-lines and our meetings. Even those places that are going to be -- or those distributors that are going to be somewhat down, and they would include our people in South America and Korea. They all -- "they think they have the best product ever." They just bought so much in Q1 because they were all over it and didn't want to miss anything for Easter that they're planning their buys for Q3 to be significantly higher, barring any increases, any political friction or whatever might exist. The guys in South America have had issues in Venezuela and Colombia with some duties and things like that; things seem to be straightening out. Korea obviously had a situation with the North that they say impacted their retail to some degree with all the inventory. But everybody thinks the product's well, it's checking well. It's starting to -- it's selling very well everywhere in the world, and that's not unique. I think that's truly a timing. If I don't get any impression from talking to them, then anybody's got inventory issues or has any issues with the line as they've purchased it or what they're submitting to their customer base. So same as with pre-lines here and our own domestic customers as we keep open and in-tune to their customers and what they're looking for and how they -- what they tell us about the product and what they need. And it seems we have what they need, and they're all happy with the products. That's always a great place to start.

[Christopher Svezia:]

So as we think about that mega third quarter, as Scott would call it...

[David Weinberg:]

I don't know it's a mega third quarter. It would be up third quarter. I mean, we could still move some of that stuff into June. So right now, we're pretty hot. I'm sure all your channel checks indicate that we're selling very, very well.

[Christopher Svezia:]

No, no, no. They do. I guess, I'm curious about is, is it -- does international return to mid-teens growth? Does it return back to 20% growth? I'm just trying to get a context of what kind of growth rate you can think about in that [indiscernible].

[David Weinberg:]

Well, it may start later. I would be very comfortable with mid-teens and think very easily if we get any success with the warm weather. It was cold very late, and our stuff this year is better in the warmer weather. All the initial reports I'm getting with the weather starting to turn, especially in Europe, give me indication that they all think it's going to be positive in those places where it can be. I mean, Spain is still an issue and Italy, somewhat of an issue, although Italy's showing some signs [indiscernible]. But aside from that, China has gotten well. Our stores are comp-ing up significantly going into Q3, or most of Southeast Asia. India is just beginning. Japan is starting to sell. Japan will have a much a bigger second quarter, just from fill-in business than they had in the first quarter and continue to go in Q3. So Brazil is picking up, and it's planning to have a bigger second half than first half as the product gets into the marketplace and some of the check-throughs. So all the data we have as to sell-throughs in products seems to be in line with significant growth in Q3. And we really won't know that until we get closer.

[Christopher Svezia:]

Okay. Shifting gears for a sec -- to the second quarter for a moment. When you think about G&A, at $141 million, call it, in Q1, is that sort of a fair proxy to use for the second quarter, so this $141-ish million number?

[David Weinberg:]

Depending with the volume -- I have to see the store openings, I would think so because, obviously, bonuses will be down some. And the rest shouldn't increase significantly, although there'll be -- there may be some increases in some countries that won't be saved in other countries like Japan will probably have to increase some, but nobody will decrease, even if their volumes are slightly down. I don't have significant distribution expense as far as the distributors are concerned. So since they're coming down, I don't get it back from anywhere, and some countries are up. So I would say that's not a bad place to start. There may be some minor increases here and there, but it should be somewhere in that ballpark.

[Christopher Svezia:]

And gross margin, you threw out 42%, 44%, which is a little bit higher than you'd typically give, 42%, 43%. Does that -- I mean, is Q2 -- just now that we've gotten out of that sort of little toning issue that you had, I mean, does that look more like a 43-ish, given how clean you are at retail? I mean, is that possible to be at that range?

[David Weinberg:]

Yes, I would think it's more in that range, simply because the biggest decrease will be distributors, which is the smallest gross profit, not necessarily the operating profit, and probably the biggest gainer because their comp store increases is retail, which is our higher-margin. So we do have a positive shift from 2 big pieces, and we'll see how the other piece is filled in.

[Christopher Svezia:]

Okay, can I ask you how Penny's is doing for you guys of late?

[David Weinberg:]

They're certainly not worse than last year. I'm trying to think of how to put it. We don't have any significant deterioration in Penny's, I mean, we haven't seen any major increases. But the deterioration we saw last year has held through. We're sort of flattish, maybe even slightly on the upside. What I can tell you anecdotally is that we think that they've changed some, and we're getting more requests for product. And if that request -- those requests for availability do convert to orders, we may even see some increases as we get to the back half of the year. So it's not that different than what I see in Europe. It's -- we've hit a bottom and we're moving along it, and we have some potential -- certainly more potential to the upside than the downside from here.

[Operator:]

Ladies and gentlemen due to time constraints, at this point, we will have to end our Q&A session. At this time, I would like to turn the conference back to SKECHERS for any closing comments that they may have.

[Unknown Executive:]

Thank you again for joining us on today's 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' filing with the SEC. Again, thank you, and have a great day.