19 Jul Skechers Earnings Surge In Q2
Skechers USA Inc. reported second-quarter earnings jumped 66.0 percent, easily ahead of guidance, as revenues gained 13.7 percent on a currency-neutral basis.
Second Quarter Highlights
- Sales of $1.259 billion, an increase of 10.9 percent, or 13.7 percent on a constant currency basis
- International sales increased 19.8 percent, or 25.2 percent on a constant currency basis
- Comparable same store sales increased 4.9 percent, including increases of 4.2 percent domestically and 6.7 percent internationally
- International sales represented 55.7 percent of total sales
- Diluted earnings per share of 49 cents, an increase of 69.0 percent
Analysts on average were expected earnings of 33 cents a share on sales of $1.2 billion. Skechers had guided sales to come in the range of $1.2 billion to $1.225 billion and EPS in the range of $0.30 to $0.35.
“As the world continues to become closer and digital becomes a critical means of communicating and embracing trends to tell your brand’s story, it’s no longer what is happening in one market that matters; it’s what’s happening across all markets. We’re continuing to strategically view our business with a global lens as trends are traveling faster,” stated Robert Greenberg, chief executive officer of Skechers. “Specifically, many of our key product styles are introduced at virtually the same time around the world, with nuances in certain markets, giving us the ability to replicate our success around the globe. In the second quarter, we saw this with the broad acceptance of our women’s and men’s sport and streetwear lines, as well as with the resurgence of our GOwalk collection and our fresh new Skech-Air styles. Our focus continues to be on comfort, innovation, style and quality as we design our diverse collection. Our efforts in the Skechers Performance division resulted in three awards in the second quarter—Gear of the Year from Outside Magazine for Skechers GO Run 7 Hyper, and Best of Outdoor Retailer from Shape and Editors’ Choice Outdoor Retailer from Runner’s World for our Skechers GO Run Maxroad 4 Hyper. Our efforts also paid off with total sales increases of 10.9 percent, the result of a 19.8 percent increase in our international business and a 1.5 percent increase in our domestic business. Now in the third quarter, we are delivering our back-to-school and fall offerings, and believe we have fresh styles in our core accounts that will drive growth, while we also deliver some unique and limited-edition styles in select doors that will create additional excitement for the Skechers brand.”
“Skechers’ record second quarter sales are a testament to the demand and strength for our brand and products,” began David Weinberg, chief operating officer of Skechers. “We experienced growth in every region, with the biggest dollar increases coming from India, the Middle East and China, as well as in Mexico with the conversion of the business to a joint venture. In our direct-to-consumer channels, we saw monthly sales increases in the quarter, an upward trend that’s continuing in July. Based on feedback from recent account meetings, we are seeing a similar trend within our domestic wholesale business in June and July and continue to believe we’ll have a stronger back half of the year. To support this growth, we are investing in our global infrastructure—including our ecommerce platforms and distribution centers, and designing and developing new products for 2020. As we look forward to the back-to-school and holiday selling seasons, we believe our momentum will continue worldwide.”
Sales grew 10.9 percent as a result of a 19.8 percent increase in the company’s international business and 1.5 percent in its domestic business. On a constant currency basis, the company’s sales increased 13.7 percent. By segments, the company’s international wholesale business increased 18.2 percent, its company-owned global direct-to-consumer business increased 14.4 percent, and the company’s domestic wholesale business decreased 3.8 percent. Comparable same-store sales in company-owned stores and e-commerce increased 4.9 percent, including 4.2 percent in the United States and 6.7 percent internationally.
Gross margins decreased as a result of promotional efforts to clear seasonal merchandise in select international markets. This was partially offset by higher domestic margins from improved retail pricing and product mix in our direct-to-consumer and domestic wholesale businesses.
SG&A expenses increased 4.2 percent in the quarter. Selling expenses decreased by $0.5 million due to a lower advertising spend in the United States. General and administrative expenses increased by $20.7 million but decreased as a percentage of sales by 160 basis points. The dollar increase reflects additional spending of $18.5 million associated with the opening of 39 additional company-owned Skechers stores, including 12 that opened in the second quarter, and $4.6 million associated with higher distribution costs in our subsidiaries, a result of increased sales.
Earnings from operations increased $29.7 million, or 36.5 percent, to $111.1 million.
Net earnings were $75.2 million and diluted earnings per share were $0.49. In the second quarter, the company’s effective income tax rate was 18.4 percent.
For the six-month period, sales grew 6.3 percent, or 9.3 percent on a constant currency basis. By segments, the company’s international wholesale business increased 12.9 percent, its company-owned direct-to-consumer business increased 11.0 percent and its domestic wholesale business decreased 7.7 percent. The company’s international business grew 14.2 percent while its domestic business decreased by 2.5 percent.
Gross margins decreased as a result of promotional efforts to clear seasonal inventory in select international markets.
SG&A expenses increased 1.1 percent. This increase was due to an additional $24.9 million in general and administrative expenses mainly attributable to opening 39 company-owned stores, partially offset by a decrease in selling expenses of $14.8 million from lower domestic advertising.
Earnings from operations increased $46.7 million, or 20.3 percent, to $276.9 million.
Net earnings were $183.9 million and diluted earnings per share were $1.19.
Balance Sheet
At quarter-end, cash, cash equivalents and investments totaled $973.0 million, a decrease of $92.9 million, or 8.7 percent from December 31, 2018, and an increase of $61.3 million, or 6.7 percent, compared to June 30, 2018.
Total inventory, including inventory in transit, was $855.6 million, a $7.6 million decrease from December 31, 2018, and a $33.2 million increase over June 30, 2018. The majority of the year-over-year inventory increase is attributable to growth in our international wholesale business.
Working capital was $1.587 billion at June 30, 2019, a $128.2 million decrease over December 31, 2018, and a $78.8 million decrease from June 30, 2018, partially attributable to the inclusion of current liabilities totaling $170.9 million arising from the adoption of ASU 842 in the first quarter of 2019.
“In the second quarter, we continued to successfully execute against our strategy by growing both our international and direct to consumer businesses,” said John Vandemore, chief financial officer of Skechers. “Our product continues to resonate worldwide, and we are committed to investing in our global infrastructure and operational capabilities to meet consumer demand for the Skechers brand. This includes the construction of our first distribution center in China, the expansion of our North American distribution capabilities, the upgrade of our European logistics center and the further development of our direct-to-consumer offerings, both in e-commerce and in our retail stores. These strategic investments will benefit both our future sales growth and provide us an opportunity to execute against our long-term operating margin targets.”
Share Repurchase
During the three months ended June 30, 2019, the company repurchased approximately 511,000 shares of its Class A common stock at a cost of $15.0 million under its existing share repurchase program. At June 30, 2019, approximately $20.0 million remained available under the company’s share repurchase program.
Outlook
For the third quarter of 2019, the company believes it will achieve sales in the range of $1.325 billion to $1.350 billion, and diluted earnings per share of $0.65 to $0.70. The guidance is based on expected growth in each of the company’s three segments. The company expects its full-year effective tax rate to be between 17 and 20 percent.