Skechers raised its guidance for earnings and revenues for the full year after reporting better-than-expected results in the first quarter, when its top line rose by a reported 10.0 percent compared to the year earlier to reach a new record for the period of $2,001.9 million, coming in above an analyst consensus by about $130 million. On a constant-currency basis, revenues in the first three months of 2023 increased by 13.3 percent.
Despite the strong showing and improved expectations for the full year, the company warned that the second quarter would be the year’s most difficult, as its domestic wholesale business continues to face congestion due to high industry-wide inventory levels. “It looks like the second quarter will probably face the most serious headwinds, and then it will alleviate after that,” explained John Vandermore, the chief financial officer, in a conference call with analysts.
For the full year, Skechers now anticipates sales of $7,900-8,100 million, up from previous guidance of $7,750 to $8,000 million. It also expects diluted EPS of $3.00-3.20, up from $2.80-3.00 previously.
In the second quarter of 2023, Skechers forecasts sales of $1,850-$1,900 million and diluted EPS of $0.40-0.50. This is below the market consensus for the second quarter for sales of $1,980 million and EPS of $0.74.
Sales in the first quarter were boosted by a robust performance in the company’s international division, which includes the direct-to-consumer (DTC) and wholesale businesses, whose revenues rose by 21.1 percent to $1,261.0 million. The company’s performance in China was also better than expected at the onset of the year, inching up by 3.3 percent to $282.0 million as the economy showed the first signs of recovery with the easing of Covid-19 restrictions.
“While the Chinese market has been volatile over the last few years, we are cautiously optimistic about the near-term recovery that appears to be materializing and remain confident in our long-term growth opportunity in the market,” said Vandermore.
Domestic sales instead fell by 4.8 percent to $740.9 million, dragged down by a 17.9 percent drop in wholesale sales that more than offset a 24.9 percent rise in DTC. Aside from inventory woes, the company also noted that the first quarter of 2022 had been “particularly strong” in the U.S. due to the easing of port congestion on the West Coast.
Overall, the company’s DTC sales were up by 24.5 percent to $707.3 million, underpinned by a 28.6 percent gain in the Americas region, a 29.5 percent rise in EMEA and a 17.9 percent improvement in the Asia Pacific region. While DTC volumes increased by 27.2 percent, the average selling price decreased by 2.2 percent.
Global wholesale sales inched up by 3.5 percent to $1,294.6 million. Wholesale sales in EMEA were up by 20.1 percent, reflecting double-digit increases in most markets, including Spain, Italy and Germany. Sales in the Asia Pacific region grew by 24.1 percent. On the other hand, revenues in the Americas declined by 13.2 percent due to the softer U.S. market. Wholesale average selling prices increased 5.3 percent, although volumes were down by 1.9 percent.
Widening gross margins
The gross margin in the first quarter expanded by 3.60 percentage points to 48.9 percent, helped by a greater share of DTC sales and higher prices in wholesale. The gross margin for the company’s wholesale business improved by 3.2 percentage points to 39.6 percent, while that for DTC widened by 1.00 percentage points to 66.0 percent. Net income in the first quarter increased by 32.4 percent to $160.4 million, as diluted earnings per share climbed to $1.02 from $0.77, well above an analyst consensus of $0.61.
Skechers said it had made progress in moderating its inventory, which declined by 17.4 percent, or $315.8 million, during the first quarter compared to the end of 2022. “These results demonstrate that even amid a dynamic retail landscape and market challenges, consumers around the globe are seeking out the Skechers brand and compelling assortment of stylish, comfortable, high-quality, and exceptionally priced product,” said Vandermore.
In the first quarter, Skechers opened 56 company-owned stores and closed 25. Store openings included 18 in China, 13 in the U.S., six each in Thailand and Vietnam and three each in Germany and Israel. The company ended the quarter with 4,549 Skechers stores worldwide, of which 3,074 were third-party stores, including 108 opened in the first quarter, 71 of which were in China, 15 in India, and the first store in Tajikistan.
The first quarter was also marked by the launch in Canada, the U.K., Germany and Spain of the Skechers Loyalty program, which the company plans to roll out to more countries. Skechers is also in the process of updating its existing e-commerce platform in Chile, which it says is already one of its most productive internationally, and intends to launch additional e-commerce sites internationally.
Vandermore noted that Skechers is excited about prospects for growing the brand in the Nordics region following just-announced plans to acquire its Scandinavian distributor. That transaction is expected to be slightly accretive to earnings, he said.
Skechers calculates that continuing congestion-related inefficiencies added up to approximately $20 million of incremental costs globally in the first quarter but pointed to “tremendous progress” in improving efficiency at its domestic distribution center since the second half of last year and continues to expect incremental logistics costs to decline in magnitude. By the end of 2023, Skechers expects to begin shipping out of new distribution centers in Canada, India, Chile and Panama.
