Skechers' earnings declined by 7.1 percent to $74.1 million in the second quarter ended June 30, missing Wall Street expectations. After the market close on Thursday July 21, the company's share price plunged by 15.3 percent.
Revenues showed a lower-than-expected gain of 9.7 percent over the same quarter last year, rising to $877.8 million, with strong growth of 25.5 percent overseas offsetting a drop in U.S. revenues caused by a shift in the timing of shipments, along with the effects of a highly promotional environment as a result of high inventories in the market, compounded by the bankruptcies of the Sports Authority and Sports Chalet chains in the country. Average selling prices stopped growing for the brand. They were off by a few cents, and this was attributed to changes in the product line.
Skechers' international subsidiaries and joint ventures recorded an impressive increase of 34.6 percent in revenues, driving a 26 percent increase in international wholesale revenues. Sales were particularly buoyant in China, the U.K., Brazil, Canada and France.
Sales to foreign distributors were up by 3.2 percent only, due primarily to the takeover of the distribution in several countries in Central Europe and Latin America. On the other hand, sales to distributors registered strong growth in Russia and Scandinavia as well as Indonesia, Israel, the Philippines, Taiwan, Turkey, South Africa and the United Arab Emirates.
Total sales in Asia grew by 65.5 percent, with a high double-digit gain in China and a triple-digit jump in India. Sales at company-owned Skechers retail stores outside the U.S. jumped by 40.5 percent, with same-store sales up by 9 percent. Together, the international wholesale and retail business accounted for 41.9 percent of total sales in the second quarter and 45.0 percent for the first six months of 2016.
International expansion remains a key focus for the brand as it is seeking to deliver more products through more channels of distribution. The company opened its first single-brand stores in Belgium, Norway and Finland during the quarter. It also added 42 more stores in China, bringing the total door count in that country up to 233 units.
All in all, ten new directly-operated stores were inaugurated during the quarter. In cooperation with its foreign partners, the group also opened 133 locations in the second quarter, bringing the total number of Skechers retail stores to 1,548, of which 1,144 are now outside the U.S. The management said it expects to have more than 1,600 Skechers stores in place by year-end, including the first retail stores in Uruguay, Paraguay, Botswana and Sri Lanka.
Contrasting with the international business, the company's U.S. wholesale business registered a drop in revenues, as uncertainty surrounding the presidential elections and the health of the national economy may have made consumers less likely to spend.
Skechers' sales results in the U.S. were also hit by a shift in the timing of deliveries from the second into the first quarter, which caused a percent drop in shipments in April. In addition, the company's management pointed out that the second quarter of 2015 had been particularly strong, as some shipments had been shifted from the first into the second quarter, while the opposite occurred this year. This resulted in a sales decrease of 5.4 percent in the U.S. for the quarter.
The gross margin gained 0.6 percentage points in the second quarter to 47.4 percent, due primarily to higher sales at foreign subsidiaries and joint ventures as well as at company-owned retail stores.
However, the operating margin dropped by 2.6 percentage points to 11.4 percent, negatively impacted by several factors including foreign currency translations and exchange losses of $8.3 million. In addition, the company had higher operating expenses in Brazil from additional VAT taxes of $2.7 million. A fire in its Malaysian warehouse resulted in a pre-tax loss of approximately $0.9 million. Higher investments in new stores and advertising expenditures outside the U.S. weighed on the operating results, too.
For the six months ended June 30, 2016, net sales were $1.86 billion as compared to net sales of $1.57 billion in the same period last year. The gross margin gained 0.6 percentage points over the first six months of 2015 to 45.7 percent, while the operating margin inched up by 0.1 percent to 12.9 percent.
Based on its June shipments as well as a strong start to July, Skechers believes the positive momentum will continue into the third quarter, with net sales estimated at between $950 million and $975 million for the period. Sales are expected to grow by a low to mid-single digit in the U.S. and by 30 to 40 percent in the rest of the world, but operating results should be consistent with those of the first and second quarters.
The past month of June was the biggest shipping month in history from its North American and European distribution centers. A few days ago, Skechers formally inaugurated the latest extension of its European distribution center near Liège in Belgium, following an investment of €25 million in the site. As previously reported, it has stretched the warehousing surface by 26,500 square meters to a total of around 98,500 sqm., making it the largest company-operated distribution center in southern Belgium and complementing the company's 170,000-sqm. DC in California.
Skechers has introduced new automation features in its European hub that should become fully operational by the end of this year. Improved efficiency already permitted Skechers to reach a monthly throughput of 3 million pairs in February, contributing to total shipments of 8.1 million pairs in the first quarter of this year. The company plans to ship a total of about 21 million pairs from the 14-year-old European DC in 2016.
