Skechers U.S.A., Inc.
Q4 2013 Earnings Call Transcript

Published: 13 Feb 2014

[Operator:]

Greetings and welcome to the SKECHERS USA Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this point, I'd like to turn the conference over to SKECHERS. Please go ahead.

[Andrew Greenebaum:]

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 the 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:]

Good afternoon, and thank you for joining us today to review SKECHERS' fourth quarter, and year end 2013 results. 2013 was a year driven by product innovation across multiple categories, which resulted in net sales of $450.7 million for the fourth quarter, and $1,846,000,000 for the first year, 13.9% and 18.3% improvements respectively. The sales momentum we experienced in the fourth quarter was quite an achievement when considering the soft U.S. retail environment in December and the strong growth of 39.7% in the fourth quarter of 2012. The sales improvements came across all of our distribution channels, including double-digit growth in our domestic wholesale and company-owned retail stores and single-digit growth in our international and e-commerce businesses. We are especially pleased with the growth in our domestic business in the fourth quarter. This growth came in spite of severe weather that impacted retail in the Midwest and Northeast, as well as parts of the South. We believe we achieved this success despite the unseasonably cold weather because of our diverse product offering, including boots and lined footwear for the colder areas and our Sport product, which performed in the unusually warm weather in the West, as well as in other regions. The product successes that we've been experiencing in the U.S. are now translating internationally, as we saw strong increases in key markets in the fourth quarter, including some that were previously impacted by struggling economies. We'd like to note that our effective tax rate for the year ended December 31, 2013 was 26%, which was down from the forecasted rate of 31.9% at the close of the third quarter. This reduction caused our effective tax rate for the fourth quarter to be 2.3%. The overall decrease in our tax rate from the third quarter was the result of slightly increased international and slightly lower domestic profitability compared to the third quarter forecast. We expect the improved international sales to continue to have positive impact on our 2014 tax rate, which we currently anticipate to be between 25% and 30%. Fourth quarter sales and financial highlights include

[Operator:]

[Operator Instructions] Our first question is from Jeff Van Sinderen of B. Riley.

[Jeffrey Wallin Van Sinderen:]

That's a really impressive performance for Q4, especially in light of the challenging retail environment. David, maybe you can just talk a little bit more about the feedback that you're getting from some of your retail partners on sell-throughs, maybe touch on what product lines they're most enthusiastic about, maybe what they saw in Q4 and then what they're enthusiastic about going into 2014. And then maybe give us a little more color on what's driving the order book for the first half of this year.

[David Weinberg:]

I think they relate to each other. I think if you look at our order book, and we're up about 30% in backlog, if it shows that we performed well -- we performed well in a tough environment in Q4 for them, they're booking in advance, even though Easter has moved out a little bit this year, basically, because our products are in demand and we're filling up our pipeline. So I think it's across-the-board. As I said in the prepared comments, our women's sport, our men's sport, our Performance group, our Kids are all picking up. They're all positive. It's not accentuated in 1 place. It really is across the board and continues, just as it did last year. So I think it's all driving the order book and that's the feedback we've gotten through the meetings that we're having -- we've had pre-lines again at the end of January, and it's still positive. No one's pulling back and everybody continues moving forward. So it gives us a great bit of confidence in the quarter that's coming up.

[Jeffrey Wallin Van Sinderen:]

Yes, that's great to hear. And then as we think about gross margin for Q1, just wondering, your gross margin was actually better than we expected in Q4. And I'm just wondering if we should be modeling that up versus last year or maybe, which components you see driving that up or -- hopefully it's not going to be down in Q1, anything to add there?

[David Weinberg:]

I think what drove the margins this quarter, or month is just, obviously, how hot we are and how hot the product is. But our big increase in Southeast Asia, which is predominantly retail, raised it up because they have -- particularly retail margins and we were up so strong with them, both top and bottom line. And Europe kicked back some and because of our margins in Europe, our wholesale was slightly higher than domestic wholesale margins, that was a positive. As well as retail kept their margins up even though we had a slight flattening. I mean, we comped up very strongly for October and November and comped up mid-single digits for December when everybody else was having issues. So that kept it up. And barring any issues for weather or changes that I haven't seen yet, I would think margins would be slightly up from last year, although maybe not quite as high as they were in Q4.

[Jeffrey Wallin Van Sinderen:]

Okay. And then, I know you don't provide guidance but all else being equal, would you expect to be able to leverage SG&A a little bit in the first half of this year? And then maybe when you think about operating margin for the first half, I think you said you were comfortable with the consensus out there, so I'm assuming you'd be comfortable with something along a 5% or 6% operating margin, first half?

[David Weinberg:]

Yes, I think that's true. I think we will continue -- if you look at the expense growth this year, it was only because the store count grew so dramatically, certainly, in Q4. And at the end of Q3, which we just opened up. So basically, we opened 36 stores, predominantly, through Q3 and Q4, which was part of the increase. As well as China doubling their sales, which obviously led to increases. So I don't know, domestically, we haven't had any big increases at all. So I think we do leverage, we continue to leverage in China and probably at retail. I don't know that we're going to open 20 stores in the first quarter. So we should leverage that expense item as well. So yes, I think we do continue to leverage. I think we're still on the same path we were on when we spoke at the last conference call. But as we get closer to 2.2 and 2.3, we'll continue to leverage higher and higher, hopefully, approaching that double-digit operating margins as we get to the 2.2, 2.3 range.

[Operator:]

The next question is from Sam Poser of Sterne Agee.

[Sam Poser:]

Can you tell me what you expect domestic wholesale to be? You talked about the international growth. What are you looking at domestic wholesale to be for the year? Probably an increase...

[David Weinberg:]

We would think it will still be up double-digits. I think we're going to be up in the low-double digits in the first quarter, and unless weather is really a bigger factor -- I don't know what's going on today with -- as we go forward, I would expect that we would continue that through back-to-school and into the end of the year. I still do expect double-digit growth from our domestic wholesale business this year.

[Sam Poser:]

And then let me ask -- I mean, the thing is, you're opening -- you're going to have a nice double -- you're going to have 20% -- I mean, you're going to have, like, 20% store growth on the owned retail, give or take. I mean, it looks like you're comfortable with the numbers on the street but -- I mean, I'm on the high-end, but it sounds like there might be a little wiggle room there if those are the kind of revenue numbers you're looking for.

[David Weinberg:]

We are comfortable with the numbers on the street and we are very confident. But given the weather situation, as it begins now, especially as it concerns the first quarter, there is always the possibility that the fill-in rate won't be as high as we expect because people have booked pretty well and if stores are closed in an inordinate period of time, there's going to be a transition period. Also, first quarter is a tougher comp because Easter's moved out into April. So we're pretty confident and I guess, if the weather was to pick up and retail is supposed to pick up in the U.S., I would tell you that there might be some room, but it's kind of too early to tell. And given that today, I'm not even sure how many stores we have closed in the East Coast today, but I already saw on TV this morning for the snowstorms. That always is a caveat out there. And it's already middle of February, so half the first quarter is already gone. There's only so much time you can make that up at retail.

[Sam Poser:]

Okay. And then when you look at the -- I mean, the selling expenses seem like they are going to continue to grow modestly, but given the new stores -- I mean, the G&A looks like the investments there are going to keep that clicking along. So you're going to lever more on your selling, I would think, than you are on your G&A. If I'm thinking about that correctly, sort of on a broad -- sort of, broad way?

[David Weinberg:]

That is probably true for Q1 but I think as we get to the back end of the year, big places like Brazil and China and our joint venture in Southeast Asia, they will start to leverage theirs as well. So I think as we go through the year, we'll leverage both the selling and the G&A piece. This is really a backup for Q4 based on retail and some Southeast Asia. So I don't know that, that increase will continue through the whole year and I -- we would've shown even more leverage had the weather not really taken back the sales in December. We were tracking quite a bit ahead through October, November, going into what we had anticipated to be a very strong and shortened Christmas season, that got suddenly destroyed by the weather. So we'll see what happens in that piece but right now, we're feeling very comfortable on all pieces and feel very good about retail and our international expansion.

[Operator:]

The next question is from Chris Svezia of Susquehanna Financial Group.

[Christopher Svezia:]

I guess, first question, dare I ask this, but inventory, just surprised, up 6%. Great job, but just any thoughts -- I mean, do you have enough inventory to meet demand or just kind of how we should think about that as we go through Q1?

[David Weinberg:]

I think our inventories are in great shape. First of all, when we report a backlog like 30%, we don't accept orders that are not already in our pipeline. So some of it is that we've used up some of this production capacity and do have it all, and we still have some for an at-once piece. So yes, I would think we're situated very well on the inventory side for the business we've booked and for some potential upside should the product remain as hot and the weather stay good.

[Christopher Svezia:]

Okay. Order book. I'm just curious, your comment about continuing to see growth into January, just how big is January from a pre-book basis and did it accelerate from that 30% or did it hold that 30% rate?

[David Weinberg:]

It held the 30% rate as far as backlog is concerned, maybe up slightly year-over-year. We usually have some deterioration in January because it's not a big booking month and it's a pretty big shipping month. Our big booking parts are February and March, but I think it's fair to say that this is the second largest January we've ever had of incoming orders on a worldwide basis.

[Christopher Svezia:]

I'm curious, on the gross margin, how much does -- you've mentioned the Kids business was down, I think, 11% or 12% like that in the fourth quarter. How much of that being down helped the gross margin if it's a low gross margin basis in the fourth quarter? And does that really revert itself as you go into this year?

[David Weinberg:]

I don't think that was the major contributing piece. While it's sure that they have slightly lower margins and it was slightly down, I think the biggest help based on our Southeast Asia and European business growing so dramatically, that 16% really did go through to the gross margin line.

[Christopher Svezia:]

Okay. And how -- I mean, I know you've touched slightly on Q1 on the gross margin but sustainability -- I think Q1 gross margin last year was down, call it around 100 basis points. I don't remember the exact reason but it seems like you have some favorability in Q1 with international really kicking in. I mean, could that be up 50 basis, 50 to 100 -- you're up to 190 in Q4, so thereabouts. So I'm just curious.

[Robert Greenberg:]

Yes, it could be. And Europe has gotten off to a very good start shipping and a very good start at the stores and so has Southeast Asia, just coming back from Chinese New Year. So if they hold, we certainly do have potential to increase the gross margin.

[Christopher Svezia:]

Okay. And then last question I have

[David Weinberg:]

I think it's a little abnormal from the store count opening and also, it's only $11 million over first quarter last year. I don't know that the $11 million goes to $20 million for first quarter given the additional growth and the stores remaining constant. So it might, if the store count continues to open at a very rapid pace, or that China really outpaces their projections as well.

[Christopher Svezia:]

Okay. And very last thing here, just on the tax rate. As it pertains to your thoughts about looking at consensus and feeling comfortable with what's out there for the year, previously, we didn't have that assumption about the tax rate and that, on an annualized basis, adds $0.10, $0.15 to EPS just alone. How do you think about that? Because that's a pretty big adjustment when we think about our numbers.

[David Weinberg:]

Yes, and it's still a moving target, as taxes usually are. But I would start to model 30%, certainly, and coming down if international could start to accelerate or continue to accelerate.

[Operator:]

The next question is from Scott Krasik of BB&T Capital Markets.

[Scott D. Krasik:]

Just a few questions on sales. It was a little weird last year, right, because you didn't have a big backlog and then people chased and you ended up with a lot of sales in Q1, but it was done on an at-once basis. So I mean, is the backlog bigger because of the timing shift, and how do you expect the at-once business to look this year?

[David Weinberg:]

I think it's -- a lot of how the at-once business looks, like I said before, will depend on how weather holds, because I think people still aren't booked sufficiently. People did book earlier because they wanted to secure goods earlier even though Easter had moved out. I don't need as big an at-once business to be comfortable with the first quarter numbers. So it's not even required. If the at-once business became anywhere near what it was last year, then indeed all these numbers would be conservative. But I really don't anticipate that, given the weather and the sell-throughs that most people are reporting even if through at the middle of February. So I think it's fair to say people have booked earlier but at a great -- at a rate that would still show increases with much smaller at-once components in the first quarter.

[Scott D. Krasik:]

Okay. And then obviously, positive comps in January for anybody is pretty good. Was there anything -- with the acceleration last year in March, especially because Easter was big, what type of comp are you expecting for Q1 and what's realistic with the visibility you have?

[David Weinberg:]

We're still modeling mid-single digits, but I think it can accelerate for now. When we look back at comps for last year, they were in the mid-single digits in January and February and then they were up significant obviously in March because of Easter. But even with that, because the product is so well-received and we're a Spring House, our March -- our comp store sales were up in April and that's against a non-easter April. So we think that if the weather clears out and this product has as much demand as it had, that we could see acceleration, certainly, by the end of the month and going into March, even with Easter in it. But obviously that still remains to be seen.

[Scott D. Krasik:]

Okay. And then in terms of bookings that you have for back-to-school already for those June deliveries, maybe talk about how those compare year-over-year.

[David Weinberg:]

We're up everywhere and we're certainly ahead of the game, that far out. But we haven't had the biggest piece of June book, that will come in February. So it's kind of early to tell. We have all positive reception on our lines, from all our pre-lines and our big customers. I'm sure if you do your channel check, you'll see that we continue to perform well and anticipation is still very good for the back-to-school. So -- and I don't disagree with that.

[Scott D. Krasik:]

Okay. And then just to clarify Chris's question. So if we were using -- I forgot, I think it's $1.75, on a 33% or so tax rate, should we raise the EPS as we lower the tax rate or should we lower the EPS for -- in...?

[David Weinberg:]

That depends. I have to look at your model, but at 3% it's too early to tell although, maybe up and down 3%. I think it's a good number just to use 30%, do whatever you like, you can use 3% as a cushion or if it's a -- if a couple of pennies means that much to you during the year, you could use that as well. But we can just use that as a small cushion as we go through. We're expecting pretty significant growth, so I don't know what kind of will be the determining factor for this year anyway.

[Scott D. Krasik:]

Last one, sorry. You had talked about buying the partner's interest in your DC. When do you expect that to happen and how is that accretive to you?

[David Weinberg:]

I don't think we have a time or date yet because we're just beginning so it's kind of too early to discuss. What we will be doing, if nothing else, is that we have a balloon payment that we don't plan on rolling over for the equipment, which is probably a $50 million or $60 million decrease to our debt some time through 2014. So that will be one of the uses and then we'll be talking to them about what to do with the distribution center. So we'll let you know as that unfolds.

[Operator:]

[Operator Instructions] The next question is from Corinna Freedman of Wedbush Securities.

[Corinna L. Freedman:]

Just a quick question on your CapEx. What kind of level are you planning to for 2014, given the significant increase in stores?

[David Weinberg:]

Yes, I think right now, we're in the $35 million to $40 million range.

[Corinna L. Freedman:]

Okay. And then if you could talk a little bit about the Internet flowing from 30% growth last quarter to 9% this quarter. To what do you attribute that to, and what are you planning for that business going forward?

[David Weinberg:]

As we said before, our Internet business, we don't compete on price, so it's very difficult for us since we don't make necessarily specific products. We just compete on colors, assortment and inventory. I think it's only up 9% because it had a big increase last year, which was the beginning of our growth in the company worldwide. So we anticipate it will continue to grow. It will continue to prosper as the stores do because there's a lot of in-demand product but it is never -- we don't foresee it being an outrageously significant contributor because we do a lot of Internet business with a lot of major customers of ours. So our big Internet presence comes through our retail partners.

[Corinna L. Freedman:]

And I think you just endorsed a mid-single-digit comp for the first quarter and comps do get a little bit tougher for the second quarter, and third quarter. What kind of level are you baking in for the balance of the year?

[David Weinberg:]

Well, I think they get somewhat easier in the second quarter because we'll have an Easter April against a non-Easter April last year. So for us, that will be an increase. And I think that will increase in back-to-school. So we'd like to believe that we're still in the mid-singles to maybe low double-digit comp store sales as we go into the back half of the year.

[Operator:]

Ladies and gentlemen, this does conclude the question-and-answer session. I'd now like to turn the conference back over to SKECHERS for closing remarks.

[Andrew Greenebaum:]

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.