Skechers U.S.A., Inc.
Q2 2013 Earnings Call Transcript

Published: 24 Jul 2013

[Operator:]

Greetings, and welcome to the SKECHERS USA, Inc. Second 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' second quarter 2013 results. Net sales for the second quarter were $428.2 million, earnings from operation were $17.2 million. The strong sales improvement of 11.5% was the result of double-digit growth in our international wholesale and company-owned retail businesses, as well as single-digit gains in domestic wholesale. We are particularly pleased with the growth, given that Easter fell in the first quarter this year and the gains achieved despite unseasonably cooler spring temperatures in the U.S. and in many other regions around the world. We believe the strong sales in all our revenue channels indicates the broad-based demand for our products. And the 16.5% increase in domestic and international comp store sale indicates the strong acceptance of our fresh new product worldwide. Our gross margins also improved to 45.5% as a result of the improvements in our retail stores and international subsidiary and joint venture businesses, combined with the expected decrease in our international distributor sales which carries a lower gross margin. Second quarter sales and product highlights include

[Operator:]

[Operator Instructions] Our first question is coming from the line of Mr. Scott Krasik with BB&T Capital Markets.

[Scott D. Krasik:]

So obviously, a lot of moving parts, and I know you were a little short on inventory. But can you dig into exactly why the growth rate in domestic wholesale was sort of below that low double-digit, maybe we had talked about last quarter, and also, what your expectations are for the real growth rates of domestic wholesale over the next few quarters?

[David Weinberg:]

Well, as we've said before, with Easter moving into the first quarter, everybody loaded up in the first quarter. And we had an outrageously high growth rate. Something north of 25% in the first quarter, which was twofold. It was December moving into January, because nobody realized how hot we would be. And obviously, Easter falling in March, so deliveries coming earlier, which obviously took from the fourth quarter. By the time everybody realized how exactly hot we were moving orders, our order rate increased. And we had exceptionally good booking periods through May and June, but obviously, too late to catch the second quarter. While we did try to move some in, it was just too far behind in April or early May to catch any. And so, I think 6.6% is about what we had talked about. We'd said we would be relatively flat up a little bit depending on deliveries. Now some of that also had to do with the June and July. While we shipped very well the last 2 weeks of June, we also shipped very well in the first 2 weeks of July. So some of it has moved in. So needless to say, we think our growth rates for Q3 on a domestic wholesale basis, even though it's a more difficult comp, will be at a significantly higher percentage than it was in Q2.

[Scott D. Krasik:]

And without giving guidance, do you feel comfort? I mean, the consensus estimates, they're up sort of 20% for total sales, $0.60, $0.61, I mean, is that crazy?

[David Weinberg:]

I don't know that it's crazy. It's not crazy. It would be at the upper end of what I think is possible here. But of course we surprised in a number of places. So it depends on what comp store sales are and how well we do in Southeast Asia. I think the number's aggressive, but I certainly wouldn't say it's out of the question.

[Scott D. Krasik:]

Okay. And then we're going to see it, I guess, in the queue, but can you just help us understand the moving parts of gross margin? How much the mix from lower distributor sales, how much gross margin, and the retail mix, how much that helps gross margin versus 1 year ago?

[David Weinberg:]

Yes. Well, I think it's more than that as well. I think what you see here is because the growth in retail was so high and retail is our highest piece. We increased some of retail, and retail had a significant increase in margin as well. So that was the first piece. Second piece, obviously, is distributors, which is our lowest margin business, decreased the most. So that came out of the mix, or the average. We had the biggest growth in Southeast Asia, where our joint venture has better margins than some of the other subsidies we have around the world in Europe. And for the last piece, we had increased margins, slightly increased margins, on our domestic wholesale business simply from the new product and limited closeouts than we had last year. So I think you throw it all together, you get what we talked about at the end of the first quarter, is that we have a mix that moves towards slightly higher margins and we get to the top end of where we could possibly be.

[Operator:]

Our next question is coming from the line of Mr. Jeff Van Sinderen with B. Riley & Co.

[Jeffrey Wallin Van Sinderen:]

I know that going into the quarter, you sort of just covered, I think, some of the metrics around which product get shipped and which product couldn't get shipped. I know it was somewhat of a challenge to sort of have retailer's chasing. Just wondering how much you actually were able to ship out the door at the end of the quarter and how much maybe pulled forward from Q3 into Q2? Or if maybe you could just kind of paint a picture for us, I guess, in terms of where you stood with the backlog that maybe you would have wanted, you always want to get more out by the end of the quarter. But any more color you can give us on that?

[David Weinberg:]

Actually, I don't think there's anything outrageous. We tried to pull as much forward on some of the key products as we could, but as -- I think I had the conversation the last quarter with somebody on the phone. Once we're committed, our customers realize that when we're committed, we hold inventory for them. So I don't know if there's a rush on the customer end to ship the end of June or early July so long as they say know they'll get it in the key period and they manage their own inventories real well. I would tell you that this time, there were no major shifts between second and third quarter, I think we had fairly even distribution. We had a very strong last 2 weeks and we had a very strong opening 2 weeks. So I don't think there's any significant moves one way or another. It's just it's been very strong all along. I will tell you, June was, by far, the strongest month of the quarter for us. So it was the new product going out that really made the quarter. While our retail stores and comp stores held out throughout the quarter, April will -- obviously, after Easter was slightly below what we had originally anticipated going into the quarter. So it really didn't make it up with new product as we moved along.

[Jeffrey Wallin Van Sinderen:]

Okay. So your comps, you ended the quarter with strong comps, it wasn't a fade, it sounds like your comps ramped.

[David Weinberg:]

The comps, yes. We had 16-plus percent, I don't think you can do much better than that. We're going to try, but I don't know that you can.

[Jeffrey Wallin Van Sinderen:]

Right. Okay. And along the lines of those comps, is there any more color you can kind of give us on what the waiting was in terms of what drove the comp? Was it more heavily weighted toward more transactions or AUR or UPT?

[David Weinberg:]

It was obviously UPTs. AURs were slightly higher. It comes from more unit sales. It's predominantly about the product categories. And UPTs and the hot product is there because when people come into the store, they come out with multiple products most of the time. So -- and we had a lot of add-on type of sales. It was -- I think it's pretty much across the board. I -- people don't like to hear that, they want to know something specific. But we were hot in our men's and our men's sports, men's USA. Our women's active and sport active, as well as the Performance division. BOBS has performed very, very well in the store, and that gives us extra UPTs because of its price point, that it hangs on rack. So it really is a cross section of multiple product categories in the store.

[Jeffrey Wallin Van Sinderen:]

Okay, good. And then I know you touched on Europe earlier. Now we've got, we're starting to see talk about Europe, the European macros stabilizing later this year and whether that happens or not remains to be seen, obviously. But just wondering if there's anything you can point to in your booking trends, any of the softer countries in Europe that might suggest a stabilization or something of that nature?

[David Weinberg:]

Yes. We had said, and I think it continues from into the second quarter and going into the third quarter, that we have seen stabilization, and certainly no significant deterioration. The only issues we have is we brought out -- well Italy, really, and Spain, which are the worst. But in other countries, our bigger countries, like the U.K., Germany, Switzerland in Europe and Austria, they all are holding well. And our big countries, U.K. and Germany obviously being, by far, our largest, are showing some increases as we go into the back half of the year. So we think there's certainly no more deterioration that we could see in the near term and should have some, if nothing else, modest growth with the big countries within Europe, in general, for a subsidiary base as we get to the back half of the year.

[Operator:]

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

[Sam Poser:]

Gross -- well, I mean, I'm going to bug you on your -- sort of how you're thinking about the balance of the year. Gross margin, you said prior, was 42% to 44% range, given -- and given that the distributor business is going to remain softer, that's the bank [ph] in your favor. How should we think about that?

[David Weinberg:]

I still continue to think we'll be at the top higher end of that range as we go through. Obviously, it will depend on comp store sales, the stores can have a big third quarter for Back-to-School, but we have a big wholesale business, so if the percentage changes significantly, it would change. And obviously, depending on which subsidiaries and the strength of the dollar, because the countries that are left, both the joint ventures and the subsidiaries, do have some currency risk. But everything being relatively equal, I still think -- I would anticipate we'd be at the top end of that range, if not, even somewhat better.

[Sam Poser:]

And Q4 should, theoretically, all things being equal, be better than that because that's where you move into doing a lot of retail again.

[David Weinberg:]

Well, we do a lot of retail and certainly we've done a lot of distributor ships in the past. So I think for the balance of this year, buying any big comeback or shifts in the strength of the dollar, we should be at the upper end of that range. I don't think Q4 gets over that range unnecessarily because it's December. October is not a great retail month anyway. I don't think the percentages go that way. And we're -- we have very big shipments to distributors and some of our subsidiaries in December to get ready for spring, so it takes it down some. So I think there'll be a natural reduction in gross margins, but this year will be at the higher end of where they've been.

[Sam Poser:]

Great. And then you did a great job of controlling the spending.

[David Weinberg:]

We try.

[Sam Poser:]

Well, you did this time. And the only -- your spending in absolute dollars only went out -- in selling and distribution, it went up by about $3 million. Are we looking at the same thing for next quarter or for this quarter on a year-over-year basis for -- I mean...

[David Weinberg:]

Not necessarily. I mean, I think a big piece of that was the shift in the opening of retail stores that we couldn't get. We only opened 5 or 6 stores in the quarter, and we closed some concept stores and opened -- and replaced them with outlets and boxes which sort of changed the overhead both from a rent and people kind of perspective. As we've said, we're going to open 35 stores for the balance of the year. We have 22 planned for Q3 and 15 planned for Q4. So there's going to be some expenses that will arise from that. So I wouldn't anticipate quite the same. But we're going to try to keep it in check. Like we said, the big spends are already done. The warehouse should continue to -- we continue to leverage our warehouse domestically here quite significantly. Depending on where the rest of the business comes overseas, we don't have any big expenditures planned. It would really be dependent on our retail business. The opening of so many stores in 1 quarter, we obviously took all of that expense and moved it from Q2 to Q3 and 4. Not necessarily planned, but the luck of the draw that way as to when these spaces are available. So we'll have somewhat upward pressure on expense structures just from the store opening and the new rents and people that we pick up for training purposes.

[Sam Poser:]

Okay. I mean -- I'm sorry, I'm going to press this. Because you said to Scott's question, the low 60s would be at the high end. With -- I mean, the only thing I have left -- at the high end of...

[David Weinberg:]

$0.60. I got it. Yes.

[Sam Poser:]

I mean -- and from a revenue perspective, I mean, how should we -- I mean, you had said on the Q1 call that the U.S. business should -- or the domestic wholesale business should be up a lot closer to the Q1 number, but not that high. I mean, how should we be thinking about this? I mean, what kind of revenue number, what kind of total increase are you thinking about here within...

[David Weinberg:]

Well, I'm trying not to think as big as you guys think most of the time.

[Sam Poser:]

No, I know. That's why I'm trying to...

[David Weinberg:]

But just -- I will tell you, if you look at the numbers on the Street, I took a quick look this morning before I got here and the consensus numbers on the Street are about $520 million and 50-some-odd cents. And if you take $520-some-odd million, whatever that number is, at a 44% margin and you use the same expense structure that you used in Q2, now we know we usually have somewhat less advertising, but we have more for store builds, add a perfect storm that way without an extra penny in spending, you only get into the low 60s. So like I said, while it's possible, I would insist that for us to get 60s, we need a slightly higher revenue number where they could be some expenses that would make it slightly high on that end. But like I said, nothing is not possible, we are watching expenses. But that is almost a perfect storm at that volume level. So obviously, there's always some one-time charges, things that can happen when you're moving this quickly in trying to move that product, whether it's freight. And some things that come from the outside, whether they're freight cost, or customs, or duties or changes in structures or strikes some place. So things can change some, and it's perfect. But like I said, I don't take it out on the realm of possibility, I just think it's at the upper end of where I would be. My most probable number's probably somewhere just south of there.

[Operator:]

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

[Christopher Svezia:]

So I'm curious, on the order book, I think as you went through June, you had one of the strongest booking periods x toning. I was just wondering maybe we can talk about how July looked, I guess, particularly domestically in terms of how you started booking there? Any color about that? Has it accelerated? Has it held the pace or what?

[David Weinberg:]

Well, July is historically not one of our biggest booking months. We've -- our biggest booking months of the year, certainly the back half of the year, August and September. So we're tracking to certainly be significantly ahead of last year, July, but it's not as significant to the quarter as some of the other months. In the second quarter, especially in May and June, we did have our biggest booking. We had our biggest booking quarter ever other than 2010 in the heart of the Shape-ups deal. So certainly our backlogs are growing, and we're booking quite well. And if our meetings here are any indication, we certainly anticipate having a very strong August, September.

[Christopher Svezia:]

Okay. Okay. And then just on the international side. Just curious, what -- how should we think about distributorship versus subsidiary in the third quarter? I mean, distributor continue to be down at that rate, does it then become less negative and can subsidiary hold at that level of growth or no? How should we think about that?

[David Weinberg:]

I think the distributors won't be down quite as a statistically as large, but it's very difficult, some of them have timing issues. I think the subsidiaries will continue to grow. I mean, I think Canada, Chile, certainly are growing significantly for us. I think Europe is fairly stable, it should show some slight increases. The key will be whether this breakout from our joint venture in Southeast Asia and the beginning of sales in Japan can hold. I mean, the big growth, to have a double-digit growth came predominantly from the big growth we've seen in China. China more than doubled second quarter from second quarter before. Now, from smaller beginnings certainly, but it did double and July seems to have started as well, so it could be a breakout with product and the infrastructure that we've built there. So if it continues at that level, I would anticipate that the overall would go at current levels and we'd still be 10% to 15% ahead for the back half of the year as far as the overall international business, even given a precipitative fall in distributor business, which may start to come back. I think while we have some issues, the 2 big issues, as we said at the end of the first quarter, with pretty much South America, some big countries down there and Korea, and some in the Middle East. The Middle East seems to have been a timing issue, they are very strong, they continue to open stores, so they'll come back. South America seems to be opening up. Some of the political issues and currency issues are clearing up. So they could be on line. And Korea, we're still waiting to see. So we could actually start closing that gap and you can get bigger growth for our international business as we go closer to the end of the year.

[Christopher Svezia:]

Okay. Helpful. On DTC, any color on -- retail comps being up 16.5, I mean, any color as you stepped into the third quarter that was sustained as you came through or any changes? I think as you come to August, I think comparisons become a little tougher, so I'm just sort of curious.

[David Weinberg:]

August is a very big month, and obviously the biggest month of the year. I would tell you that July started off very strong. I think there was a week that got very mild, it slowed back a little bit, although we're still comping very well. I would tell you, the first 3 weeks of July are probably still tracking along the same rates we had in Q2. But like I said, that's a smaller piece of the business and we need it to really happen in August for it to show that kind of result for Q3.

[Christopher Svezia:]

Okay. And lastly, I just want to understand something on the expense structure. Again, nice job there. But I'm just curious, as you go into the third quarter, when you open up more stores, last year did roughly $135 million and if we assume potentially you do somewhere in the $510 million to $520 million in revenues for the third quarter, I mean, is that something like a $10 million increase year-over-year in G&A? Or is it more like a $5 million increase in G&A?

[David Weinberg:]

That answer depends on when the stores open and how much money have to put into them and how much -- how many units we have to ship and where the business is. If the business is predominantly in the U.S., if it really is domestic wholesale growth and comp store sales and sales in the U.S., then it's more -- it's a shorter number than if it starts to happen in Europe and China and in South America, in our subsidiaries, where we have more infrastructure to build. But I would put it between $5 million and $10 million depending on where it is and depending on currency translation, not a bad place to be.

[Operator:]

Ladies and gentlemen, we have reached the end of our allotted time for our question-and-answer session. Thank you very much for your participation.

[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' filings with the SEC. Again, thank you, and have a great day.