Skechers booked a 48 percent decline in wholesale sales in the U.S. in the third quarter ended on Sept. 30, pushing its global turnover down to $412.2 million from $554.6 million a year earlier. The company, which is overhauling its product range, expects to continue facing challenges in the fourth quarter and was unwilling to give any guidance for next year.
The company was expected to book a decline in revenues because in the third quarter of 2010 it benefited from strong demand for toning shoes and higher average sales prices. But the quarterly figure was alarming because it was below the $465 million figure forecast by financial analysts due to lower-than-expected sales across many of the footwear lines with key wholesale accounts.
In a conference call, Skechers' chief operating and financial officer, David Weinberg, indicated that the drop is attributable both to the business environment and to the company's product management.
International wholesale revenues were 7 percent higher year-on-year rising to $133.8 million in the quarter, thanks to a 10 percent rise in sales to distributors and a 6 percent increase in sales by subsidiaries and joint ventures. The group's Italian subsidiary bolstered sales by a triple-digit rate. Four other subsidiaries, including Brazil, increased sales in the quarter, but six did not see an improvement in turnover.
Company-owned stores booked a 2 percent decline in sales in the U.S. and a 12 percent increase abroad. Comparable store sales were down by 10.6 percent at home and rose by 3.0 percent internationally. At the end of September, Skechers had 319 directly operated stores. Another 186 stores are managed by the group's distributors or joint ventures.
The company's gross margin fell to 42.5 percent in the third quarter from 45.6 percent a year earlier, but was up from the 33.0 percent posted in the second quarter. The group stressed that the gross margin is back to its historical range of 42-43 percent and expects it to remain at that level. Net profit attributable to Skechers dropped to $8.3 million from $36.4 million.
The company continued to reduce its inventory, which stood at $238.4 million at the end of September, down by $160.2 million from the end of 2010. The company still had $30-35 million worth of toning shoes in stock. Weinberg said that the company continues to sell the shoes at “nice margins” but they have become a slower-moving item.
In the second quarter, the group halved its inventory of lingering toning shoes by selling 2 million pairs of original Shape-up models at a loss of $21 million loss. The shoes were predominantly sold to one big account.
Weinberg warned that fourth-quarter revenues will be hit by a significant decline in international sales, reaching a high-single- to low-double-digit percentage, because last year sales were bloated by a shift of deliveries to the last quarter of 2010 from the first of 2011. When pressed by analysts to give guidance, he indicated that the quarterly revenue could be in a $350-360 million range.
Looking forward, Weinberg gave some contradicting signals. He said that the group has had more cancellations than orders in the fourth quarter for the spring collection. The company will not have a clear picture of the backlog until the end of the year-end holiday season. He was nevertheless upbeat about the initial launch of new products.
Sales of the group's first “true performance” footwear were strong in Skechers stores. The collection is being shipped this quarter to key accounts, where the company expects solid sell-throughs.
New fitness products are being tested in the group's stores and have been “as good a start” as any of the products Skechers previously brought on the market.
The group's sales performance is expected to rebound in the first quarter of 2012 and the company continues to plan store openings this year and in 2012, albeit at a slower rate. Skechers has opened 44 directly operated stores this year, including 14 during the third quarter, and expects to reach 50 by end-December. Next year, it could open between 30 and 40 locations. The group reviews its store openings on a quarterly basis.
As part of its brand extension policy, the group will be launching watches during the year-end holiday season and luggage in the spring, thanks to license agreements. Next year, fitness apparel and accessories produced under license by Li & Fung will also come on the market.