Skechers U.S.A. - Q3 2022
October 25, 2022
Transcript
Speaker 0
Welcome to Skechers Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to Skechers.
Thank you. You may begin.
Speaker 1
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 that involve risks and uncertainties. Specifically, the COVID-nineteen pandemic has had and is currently having and are experiencing a significant impact on the company's business, financial conditions, cash flow and results of operations. Such forward looking statements with respect to the COVID-nineteen pandemic include, without limitation, the company's plans in response to this pandemic.
At this time, there is significant uncertainty about the duration and extent of the impact of the COVID-nineteen pandemic. The dynamic nature of these circumstances means that what is said on this call could change at any time and as a result, actual results could differ materially from those contemplated by such forward looking statements. Additional forward looking statements involve known and unknown risks, including, but not limited to, global, Russia's war with Ukraine and supply chain delays and disruption, 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 any of our forward looking statements will occur. Users of forward looking statements are encouraged to review the filings with the U.
S. Securities and Exchange Commission, including the most recent annual report on Form 10 ks, quarterly reports on Form 10 Q, Current reports on Form 8 ks and all other reports filed with the SEC, as required by federal securities laws, for a description of all other significant risk factors that may affect the company's business, financial conditions, cash flows and results of operations. With that, I would like to turn the call over to SKECHERS' Chief Operating Officer, David Weinberg and Chief Financial Officer, John Vandemore. David?
Speaker 2
Thank you for joining us today on our Q3 2022 conference call. Before we discuss our business in detail, I would like to thank footwear news for naming Skechers as company of the year for the 3rd time in our 30 year history. This honor wouldn't have been possible without the collective energy, dedication and creativity of the entire SKECHERS organization, both here in Southern California as well as in every SKECHERS showroom, office, logistics center and retail store around the world. The SKECHERS team worked extremely hard this year alongside our loyal partners globally, be it our accounts, Distributors, factories and vendors, from the bottom of our hearts, thank you for your enthusiasm and collaboration as we work to the challenges of the last couple of years. We are optimistic that the COVID related restrictions are easing with only a few markets around the world still temporary closures and restrictions and that freight costs are beginning to decline.
However, macroeconomic headwinds including foreign currency exchange rates and congestion within our distribution centers due to the strong demand for our product and supply chain disruptions over the past year impacted our reported results in the Q3 and we expect will remain a factor into the New Year. While we focused on working through these challenges, we remained a go to source for consumers and our partners around the world, resulting in a new quarterly sales record of $1,880,000,000 for the 3rd quarter. We are proud of this achievement, which was driven by As we see improvements from supply chain, logistic costs, distribution center congestion, particularly in North America, Foreign currency exchange rates and closures in China, we believe we will achieve continued revenue growth. Our ongoing success of record annual sales in 2021 and this year's 3 consecutive quarterly sales records is rooted in our talented team. Our core design principles comfort, innovation, style and quality at a reasonable price by which every payer is measured, our focused marketing efforts, our deep distribution network and our determination to deliver our product as quickly as possible to our consumers.
Years ago, we recognized the need for comfortable footwear. And as the 3rd largest athletic footwear company in the world, we are widely known for our comfort technology products. As consumers have truly come to view casual as the new normal, we are in a unique position with our extensive offering. Always looking for new ways to meet our customers' needs, we extended our SKECHERS Archfit technology into a wider offering of styles, introduced SKECHERS hands free slip ins, the ultimate in ready to go footwear for men, women and children, and expanded our fashion collection within our Skechers Street offering and collaborations. Innovation is the core of our performance division and it's never looked stronger, including the gripping outsole and comfort upper of our VIPER Pickleball collection and the awards given to the Max Road 5 by both Men's Health and Self magazines.
Also this month, the Razor 4, An update to the technical running shoe that Meb wore in his Boston Marathon win was released with Hyperburst Pro, The latest evolution of our signature ultra lightweight resilient cushioning foam. We are always focused on meeting the demands of our wholesale partners globally and our consumers who shop at our approximately 4,450 SKECHERS retail stores worldwide and through our expanding e commerce footprint. All to ensure SKECHERS, the Comfort Technology Company, is the leading choice and is available when and where consumers want. Total sales growth of 21% or 27% on a constant currency basis Was the result of increases in our international and domestic businesses of 25% and 15%, respectively. By region, EMEA saw improvements of 48% and the Americas grew 16%.
We are also particularly pleased with our APAC sales growth of 9% or 17% on a constant currency basis, which includes China decreasing by 19% or a not so strong double digit 13% in constant currency. Despite China's 0 COVID policy, we remain confident in the long term success for Skechers in this country. In the quarter, our wholesale business increased 26% due to double digit growth both in domestic and international. The international growth was led by a 59% increase in EMEA, an 18% increase in the Americas and an 8% increase in APAC. Overall, wholesale sales were driven by increases in unit volume of 25% and an average selling price per unit of 1%.
The Americas wholesale sales growth was Due primarily to a 15% increase within our U. S. Wholesale business, where we saw improvements across genders and multiple categories, most notably our sport, casual and work lines as well as the unit price. Canada and Mexico are Also saw sales improvements except Chile, which is experiencing significant economic volatility. Growth in EMEA Wholesale was primarily driven by double digit improvements across all European countries as well as growth within our distributors, primarily driven by the Middle East, Turkey and Scandinavia, partially offset by the continued cessation of shipments to Russia.
APAC wholesale sales increased primarily due to strength within our distributors as well as India and Singapore and the addition of the Philippines, which transitioned from a distributor in 2021. The increases were partially offset by decreases in China and Japan due to COVID related lockdown measures. Turning to our direct to consumer business, which is a key focus area for the company as we look to create more opportunities to showcase the broad range of SKECHERS products and connect directly with consumers. Sales increased 12% in the quarter due to growth of 14% in the Americas, 10% in APAC and 6% in EMEA. Domestic direct to consumer sales increased 15%, primarily due to strong double digit growth in our digital commerce International direct to consumer sales grew in nearly every country, partially offset by declines in China, which was impacted by the temporary closures of just over 10% of our company owned stores and Chile due to economic volatility.
In total, direct to consumer unit volume increased 11% and average selling price was essentially flat. In the Q3, we opened 76 company owned SKECHERS stores, including 46 in China, 8 big box stores in the United States, a flagship store in Madrid and our first store in Rotterdam. We also expanded and relocated 2 stores in key Lima Malls, Jockey Plaza and Plaza Norte. We closed 34 locations in the quarter, including 21 in China and 2 concept stores in the United States. We ended the quarter with 4,458 Skechers stores worldwide, of which 3,054 were 3rd party stores, including 177 that opened in the 3rd quarter, 129 of which were in China, 12 in India and 5 in South Korea.
In the Q4 to date, we've opened 14 company owned stores, including 1 big box store in the United States and 5 stores in China. For the remainder of the year, we plan to open an additional 35 to 45 company owned locations. In the Q3, we launched new e commerce sites in Poland and Switzerland, and this month we launched our site in Japan. We also plan to launch several more e commerce sites in the coming year. We are pleased with our record sales achievement in the 3rd quarter, driven by the continued strong demand for our Comfort Technology products.
With double digit growth across our wholesale and direct to consumer businesses, Sales increased in nearly every market except those that faced either COVID related lockdown measures or significant economic volatility. This is a testament to our product and marketing, resonating globally as well as our determination to both deliver our footwear to consumers as quickly as possible and the efforts we've made to improve our infrastructure, including our network of distribution centers, some of which are being impacted by the supply chain challenges. The expansion of our LEED certified gold 2,600,000 Square Foot North American Distribution Center is in the final process of integration with our existing system. This is expected to improve processing volumes and efficiencies over the course of 2023. With international representing 60% of our total sales, we remain focused on our infrastructure abroad.
We plan to begin shipments out of 2 new distribution centers in the first half of twenty twenty three. This includes a new 427,000 Square Foot distribution center in Vancouver, which will result in improved shipping times in Canada as well as some reduced pressure on our Rancho Belago facility. As we celebrate our 10th year of business in India, we begin the first phase of our 1,100,000 Square Foot IGBC Platinum pre certified distribution center outside Mumbai, which is planned to be operational by mid-twenty 23. This quarter, we also began Phase 2 of our China distribution center, which is expected to be complete in 2024. Last month, we held our 1st in person global product conference since COVID at the newly finished initial phase of our corporate headquarters in Southern California.
And this month, our key retail partners joined us for 2023 Buy Meetings. The expanded building on Pacific Coast Highway is now home to our many showrooms serving to highlight our extensive comfort technology footwear. To support and drive awareness to our diverse product offering, we have an equally diverse team of ambassadors appearing in our marketing campaigns From pop superstar Ava Max to lifestyle guru Martha Stewart, retired athletes Sugar Ray Leonard and Tony Romo To Elite Major Championship Golfers, Brooke Henderson and Matt Fitzpatrick and local celebrities who launched in the Q3, including Mylene Klass in the UK and Vanessa Mai and Michael Balek in Germany. Getcher's marketing campaigns appeared on billboards in Panama and Chile, Buses in Greece across buildings on high streets in Spain and Portugal, elevator kiosks in China and malls in Canada, Hungary and Colombia as well as SKECHERS shoes on the seat of influencers and key opinion leaders on a catwalk in Berlin and on covers and within the pages of fashion magazines worldwide. Where consumers shop, be it on their phones or in malls or where they visit, be it in stadiums or tourist centers or where they commute, buses, trams and subways, Skechers is everywhere driving demand.
There's no doubt that macroeconomic issues remain, but we believe our unique position as a brand that delivers on Comfort, style, innovation and quality at a reasonable price will continue to resonate with consumers in the U. S. And around the world. And now, I would like to turn the call over to John for more details on our financial results.
Speaker 3
Thank you, David, and good afternoon, everyone. Skechers again achieved a new quarterly sales record of $1,880,000,000 growing 21% on an as reported basis and 27% on a constant currency basis. We saw double digit growth in both our wholesale and direct to consumer segments. In fact, we saw double digit growth in nearly every country demonstrating the broad based consumer demand for our Comfort Technology products and the strength of the SKECHERS brand around the world. We remain focused on executing our long term growth strategy and delivering a diverse assortment of innovative, comfortable products for consumers across the globe, even as we navigate historic headwinds from supply chain disruptions, Ongoing COVID related restrictions, inflationary pressures and growing uncertainty around the macroeconomic environment and its impact I want to first provide an update on COVID related supply chain dynamics and their impact on our results in the quarter.
1 year ago, we began experiencing container shortages, factory closures and severe port congestion. Those conditions led to elongated order time line and tremendous concern about product availability, which prompted more substantial backlog volume. Then about mid year, we experienced significant improvement in transit times and port throughput. This resulted in capacity challenges in distribution networks across the industry due to a meaningfully increased arrival rate for goods. Consequently, we experienced and continue to experience Processing constraints at our distribution centers, leading to cost inefficiencies as we work to mitigate the impact of these disruptions on our customers.
In the Q3, this gave rise to approximately $50,000,000 of incremental logistics costs globally, which weighed heavily on our results. In addition, more significant than expected COVID related challenges in the Asia Pacific region, particularly in China and adverse foreign currency fluctuations further weighed on expected results, which were below our earnings guidance. While we are disappointed with the lack of earnings flow through from our better than expected sales in the quarter, we are confident that supporting our customers was The right decision for our brand. Further, we believe the corrective actions we have taken and are taking to accelerate additional capacity and adjust future orders will ultimately resolve the situation and restore efficiency. Now let's review our Q3 financial results.
Wholesale sales increased 26% year over year to $1,190,000,000 led by 33% growth internationally and 15% growth domestically. Broad strength extended across regions with notable growth in EMEA and the Americas as well as in APAC excluding China. Collectively, we saw a double digit increase in units sold and higher average selling prices per unit, reflecting strong demand for our distinctive product portfolio at compelling price points. Direct to consumer sales increased 12% year over year to $686,800,000 with 15% growth domestically and 9% growth internationally, driven by double digit increases in units sold and strength in both our retail stores and digital platforms. As one of our key long term growth strategies, The investments we are making in our direct to consumer segment are yielding strong results as we continue to expand our international online presence and enhance our omni channel capabilities.
This further enables us to build direct relationships with our loyal consumers, showcase the breadth and depth of our product portfolio, attract new consumers and above all else deliver great product. We are excited about the growth opportunities ahead and meeting the needs of our consumers whenever and however they choose. Now turning to our regional sales. In the Americas, sales for the 3rd quarter increased 16% year over year to 948,000,000 supported by growth across all channels. As we work to alleviate the congestion in our domestic distribution network, We expect sustained consumer demand for our products and brand resonance will continue to drive growth across the region in the 4th quarter.
In EMEA, sales increased 48% year over year to $469,800,000 primarily driven by strength in our wholesale segment, which benefited from improvements in product availability compared to last year's European port congestion. In APAC, sales increased 9% year over year to $460,600,000 driven by strength in distributor markets as well as India, Singapore and Malaysia, partially offset by a decline in China. Excluding China, sales grew 60%. In China, sales declined 19% as over 10% of our stores were temporarily closed at one point. We expect ongoing COVID related lockdowns and restrictions to continue to impact our operations into 2023.
This however does not diminish our view of the Chinese market long term, where the SKECHERS brand is uniquely positioned with our distinctive products and attractive value proposition. 3rd quarter gross margins decreased 280 basis points year over year, 47.1%, predominantly due to elevated freight costs as well as an unfavorable mix impact from higher distributor sales, partially offset by improved pricing. Operating expenses increased $123,300,000 or 20%, but decreased approximately 30 basis points as a percentage of sales year over year. Selling expenses increased $23,000,000 or 18 percent, but improved 20 basis points as a percentage of sales. The dollar increase was primarily due to higher demand creation expenses in digital and brand marketing globally.
General and administrative expenses increased $100,200,000 or 20 percent, but decreased 20 basis point as a percentage of sales year over year. We incurred approximately $50,000,000 of incremental logistics costs globally to minimize disruptions in delivering product to our customers and also saw increased volume driven distribution expenses. Earnings from operations decreased 11% compared to 2021 and our operating margin for the quarter was 6.9% as compared with 9.4% in the prior year. Earnings per share were $0.55 per diluted share on 156,200,000 diluted shares outstanding, a 17% decrease year over year. This includes a negative $0.09 impact from foreign currency fluctuations year over year.
Our effective tax rate for the 3rd quarter was 17.9% compared to And now turning to our balance sheet. We ended the quarter with $681,500,000 in cash, cash equivalents and investments. This is a decrease of $500,200,000 or 42 percent from September 30, 2021, as we continue to invest in working capital to drive sales and ensure we have product available in the right place and at the right time to meet consumer demand. Inventory was $1,780,000,000 an increase of 45% or $549,000,000 compared to the prior year period, reflecting the supply chain conditions I previously mentioned. We are optimistic that inventories will gradually return to normalized levels as supply chain volatility Accounts receivable at quarter end were $933,900,000 an increase of $175,200,000 of which $42,100,000 related to the expansion of our distribution infrastructure globally, dollars 30,800,000 related to investments in our retail stores and direct to consumer technologies and $17,700,000 related primarily to our new product design center.
During the Q3, we also repurchased 639,000 shares of our Class A common stock at a cost of 25,000,000 We will continue to deploy our capital consistent with our philosophy for maintaining a strong balance sheet and making investments in our business, while opportunistically providing direct returns to shareholders in the form of share repurchases. Now turning to guidance. For the Q4, we expect sales in the range of $1,725,000,000 to 1,775,000,000 and net earnings per diluted share in the range of $0.30 to $0.40 We anticipate sequential gross margin improvements in the 4th quarter and that our effective tax rate for the year will be between 19% 20%. This guidance also includes the continuing impact of inefficiency in our particularly in the Asia Pacific region. For the fiscal year 2022, we expect total capital expenditures to be between In the face of innumerable challenges, we are encouraged by the strong consumer demand for our Comfort Technology products, which double digit growth in nearly every country and across all distribution channels.
This is a testament to our brand, our people and our products. Our long term growth strategy remains intact and we believe will demonstrate the resilience of our business model through these challenging times. We are steadfast in our focus on delivering innovative, stylish, comfortable products at attractive price points to consumers around the world. With that, I will now turn the call over to David for closing remarks.
Speaker 2
Thank you, John. 3 quarters of record growth during a period of continued macroeconomic challenges Our organization to meet the needs and demands of our customers. While we look ahead to our goal of $10,000,000,000 in annual sales by 2026, We remain focused on the here and now, delivering fresh product as quickly as possible, creating awareness of the innovations and features in each collection and increasing the opportunities to shop our brand, be it at our expanded network of direct to consumer locations, including a retail base for approximately 4,450 locations or through visible spaces within 3rd party stores. We are honored to receive our 3rd Company of the Year Award for Footwear News in our 30th year of business. The excitement of our 1st year has grown over 3 decades and resonates throughout our talented and dedicated team.
We're looking forward to continuing our growth momentum As a more experienced organization and a brand known around the world for its unique portfolio of comfort collections. We recognize the volatility and dynamic situation we are presently in, but we believe in the strength of our brands and the long term position of SKECHERS. Now, I'd like to turn the call over to the operator for questions.
Speaker 0
Thank Our first question comes from Jay Sole with UBS. Please proceed.
Speaker 4
Great. Thank you so much. My question is about gross margin. John, you called out some of the drivers. I think you mentioned freight and logistics, foreign exchange, mix, ASPs.
But can you give us an idea of sort of like the magnitude of each of those? And really what I'm trying to get at is, how much of those was really one time in nature that you expect to get back in a year or 2? And also within SG and A, you mentioned logistics costs were also in SG and A. I think you called out $50,000,000 Do you consider that like a sort of a one time expense as well? And how should we think about that going forward?
Thank you.
Speaker 3
Hi, Jay. On gross margin, I mean, really far and away, the cost driver has been Really for the full year, freight and logistics, it's by far the most significant driver. We were able to offset some of that with pricing. As we've mentioned before, we're still catching up a bit on price increases in our wholesale segment, And that was a very strong segment for us this quarter. So that catch up is still underway.
We do expect it Fully materialize over the course of Q4 and Q1, but we still didn't have enough pricing to offset the freight and logistics in the Q4. And then there was some mix. Our distributor business was very, very strong in the quarter, which is a great thing to see from those markets. But as you know, the distributor business has a dilutive gross margin, a very good operating margin, but a dilutive gross margin. So we did suffer a bit from mix effects there.
In regards to the incremental $50,000,000 we quantified, I think most of that long term It's going to go away as efficiency works its way back into the system. But as we mentioned and we have mentioned for a while now, we're Experiencing severe congestion from supply chain issues and that's giving rise to the need to spend in order to make sure we're preserving as best we So we do expect they will begin to become less prominent as we move through Q4 in the early part of 2023. The only caution I give is, this is clearly a ramification from COVID's effect on the supply chain, which as we noted in our prepared comments, has been both extreme and extremely volatile. And so Some of this is going to be subject to where the supply chain normalizes out and when that happens. One note I would give you though on the plus side, and I think David mentioned it in his remarks, we are starting to see some Favorable trends on freight rates, container rates that will work its way into the P and L over time because we're still We still have the inventory that we imported under the higher rate structures.
But in terms of green shoots in the supply chain, That's one of the more encouraging ones we've seen.
Speaker 2
Yes, Ajay. In addition, part of that issue with the distribution centers As we were expanding them at a time where it was difficult to get parts and we would have been complete a lot earlier and not have to run the duplicate costs, both in the U. S. And places like Panama. If we would have got equipment earlier and had them brought it up to speed earlier, we We continue to work on both of them and as we move into one structure and get the learning curve under our belt and back into the facilities complete, We should level out significantly, given the existing volume.
Obviously, if the volume continues As they can with us to grow at an outsized volume, we may have to play more catch up in the future in some markets.
Speaker 4
Got it. Okay. And then if I can just follow-up with one more, just on the inventory. Can you give us a little bit of an idea of maybe where it's Located, is it in China? Is it in the U.
S? Is it in transit? And are you comfortable with the level in the sense that you think
Speaker 3
Yes. In terms of the growth we experienced this quarter, two notable observations. Almost none of it was in the Asia Pacific region, which is obviously, as we mentioned, remains under some COVID duress. So It was predominantly in the U. S.
And to a lesser degree in Europe. We do feel very good about the inventory. As we noted, it's all arrived within the last couple of months. And so it is good inventory that we fully to be able to sell through at regular prices. We don't have any real concerns about that.
We have seen a material shift out of in transit into on hand, but that's part of the issue we're talking about here is You saw throughput improve dramatically and you saw transit times improve dramatically And that just brought a lot of product onshore at a rate that's far more significant than we've historically observed. So that also was a contributing factor The congestion we mentioned.
Speaker 2
Yes, Jay, you should notice, I think, just want to point out from my own perspective that what happened during The pandemic and the close down is that we moved out our buying process by a few months from what would normally be Somewhere in the neighborhood of 4, 4.5 months to like 6, 6.5 even out to 7 months trying to get everything in on time with the congestion at the ports and the issues we were having With our factories, that all came in at one time. So it's not under normal circumstances, we would have been at a more normal Inventory rate and rate of growth. But as John said, they are relatively new. They all just got here. They're all Predominantly spoken for given the flows we've seen, as we slow down buying on the tail end until we catch up to the process.
So we've now Taken our supply chain and moved it back a few months and we've absorbed all the inventory, so we'll be shipping out of hand. And now that we've Expanded our facility and have taken it in, it should be easier for us to process. And I will tell you, the one caveat with that obviously is how good does demand
Speaker 4
Okay. Thank you so much.
Speaker 0
Our next question is from Laurent Vasilescu with BNP
Speaker 5
Good afternoon. Thank you very much for taking my question, John, David. I'd love to ask about FY 'twenty two EPS guidance. If I look at the midpoint today versus the midpoint 90 days ago, it looks like you lowered it by about $0.25 John, I'd love for you to kind of give us the bridge on that, like how much of it is incremental from FX, from Congestion charges and maybe even China, so we can understand the magnitude of the cut.
Speaker 3
Thanks, Laurent. I will shy away from giving you a penny by penny walk
Speaker 5
through, but
Speaker 3
let me give you the big factors In order of size and scale, first is going to be the freight and logistics. We plan for, we believe, an adequate amount of that. So that's working its way into the guide. Secondarily, China has not recovered at the pace we had originally expected. Fortunately, that market continues to be challenged by COVID.
We're looking for some early signs that things are starting to recover. But I believe as long as lockdowns and other restrictions on operations are in place, it's going to inhibit China from fully recovering and then FX. FX is another headwind, but Those are the 3 most significant factors we're dealing with.
Speaker 5
Okay, understood. Thank you for that, John. And then I know you're not prepared to talk about 2023, but I don't know if you can give us some color on just the wholesale order book for spring 2023, like how do we think about it domestic versus international? And then one thing that surprised me, was the ASPs both on wholesale and VTC were up around 1 I don't know if there was it was due to increased markdowns, but how do we think about ASPs in the order
Speaker 3
Yes, I would say relative to 2023 so far, I'm encouraged by what we see. There's certainly some nervousness in the marketplace, which we've spoken about. I think it's also important to keep in mind Domestically, Q1 of this year, which will be our comp in Q1 domestically next year is a really high bar. I would say many of our conversations with our partners are very encouraging. As David noted, Demand from our direct to consumer business remains very encouraging.
So as I sit here today, I'm Optimistic that 23 will certainly at the very least be less than bad than everybody is talking about. And we see some very encouraging signs across the landscape. There are also some big unknowns though. I think again, the Asia Pacific region is going to be a big unknown for us given how COVID has continued to have an effect on that marketplace. But overall, I would consider our view to be cautiously optimistic and getting more optimistic as we You need to be very careful there because we do have a significant number of foreign exchange mixes in there.
I have the number right in front of me, but hundreds of basis points better would have been the ASP increase were it not for FX. As you know, some of our key markets were also those most significantly impacted by negative foreign currency movements With nearly 60% of our sales from outside the United States, that FX impact is going to be felt throughout our key metrics and ASPs were Certainly, one area. Otherwise, on a constant currency basis, we actually felt pretty good About ASP performance, although again, we're still playing a little bit of catch up on the wholesale side, which we expect to get behind after the Q4.
Speaker 5
Very clear. Thank you very much, John.
Speaker 0
Our next question is from Alex Stratton with Morgan Stanley. Please proceed.
Speaker 6
Great. Thanks so much for taking my question. I wanted to focus on the line first. So can you guys just talk to us about the sales deceleration you have embedded in the 4th quarter guidance? If we're calculating it right, it looks like it's going down to like a 9% 3 year CAGR underlying growth rate and that compares to the Q1 through the 3rd at like a low number.
We're just having trouble reconciling that against what sounds like super strong demand. So is that just all FX or how should we think about that?
Speaker 3
The most significant factor is certainly FX. I think year on year, we're losing nearly $100,000,000 of top line revenue on Some of that we had previously anticipated, some of that we have not. We are Cautiously evaluating where every market stands relative to kind of the macroeconomic climate. Probably the Few big swing factors in there for us are where does FX go from here, how does China evolve over the course of the quarter And how much volatility is in that market because of COVID. One of the other markets Obviously, for us, it's historically been very key, but had some of its own challenges.
This past quarter was Chile, a Very good market, a very robust market for us normally undergoing some political and macroeconomic headwinds. So that was a challenge. And then In all honesty, we're cautious about how the supply chain performs. And so we've probably baked in a little bit More than average conservatism there. That being said, I'd say, if you look back at this quarter, it's also hard to replicate The growth that we put up in the face of all the contingencies we faced this quarter.
And in all honesty, it could have been even better than that were it not for some of the challenges we felt on supply chain. We feel really, really good about where demand is and that's why we've said as long as demand stays where it's at, we feel incredibly optimistic About our 2026 objective of $10,000,000,000 and more.
Speaker 2
Yes. I would also point out that the quarter will likely change In this dynamic somewhat, we always have a very big back half of Q4, which is anticipation of spring, which is a lot of spring product that Deliver some in the U. S. And significantly more overseas as they transition. Given the extent that a lot of wholesale customers Are backed up now in their own DCs.
I do feel that they will take some more in the Q1 than the Q4 because they won't be able to transition into their New season quite as quickly as in the past, just given their own inventory holdings. So Should that dynamic change, it could also change some of the dynamics in the Q4.
Speaker 6
Great. Thank you.
Speaker 0
Our next question is from Gabby Carbone with Deutsche Bank. Please proceed.
Speaker 7
Hi, good afternoon. Thanks for taking our question. Just curious if you can maybe just dig in on the health of the U. S. Consumer a little more, what you're seeing now maybe versus a few months ago.
I mean, you're obviously experiencing very good demand. And any changes to note in consumer spending behavior?
Speaker 3
The only thing I'd note, honestly, Gabby, is what we've mentioned for really the last couple of months, which is that the data Does not reveal to us at least a significant slowdown in consumers' willingness to spend on the SKECHERS brand. We felt like this quarter was potentially prone to some risks on the consumer side and none of that materialized. In fact, I would characterize our outperformance on the domestic direct to consumer side in particular As really, really strong, particularly in e commerce, but really across the board. And then as David mentioned, early signals from Q4 also very positive. So I would say we're continuing to see strength across at least our brand, and within the gender Profiles of our brand and really haven't detected any meaningful change, which is to say things continue to remain very encouraging.
Speaker 7
Thank you for that. And just a quick follow-up. It sounds like you really aren't seeing any pressure from the increasing promotional environment. Is that a fair statement?
Speaker 3
Well, it's David. Absolute never really worked well in business because it's never absolutely the case one way or the other.
Speaker 8
We're certainly seeing more promotions
Speaker 3
in the environment and we're not going to sit idly by while others promote and be off price significantly. But I wouldn't characterize it as a significant level of promotionality. So we are offering promotions in a targeted way. We'll deploy them when we feel it's appropriate. But what we have seen is that it's also been accompanying very strong demand at Consumer level.
So it's been effective and it isn't by any extent from our perspective at least at this stage Extreme or beyond what I would consider to be average.
Speaker 7
All right. Thank you very much.
Speaker 0
Our next question is from Jim Duffy with Stifel. Please proceed.
Speaker 9
Thank you. Hi, David. Hi, John. Hi. You mentioned you're working to alleviate supply Congestion in North America, despite those challenges, your wholesale revenue very strong.
What's the state of channel inventories? Are they Lower than you'd like them to be just given those challenges. As you work through Throughput issues, is there some more channel fill opportunity? Or is the congestion simply just adding logistics costs and channel inventories are in a good place And you're hoping to relieve some of those additional costs?
Speaker 3
Jim, I'll give you my perspective and I'm sure David will share his. I think if you look at wholesale channel inventories right now and this is It's never the same for every single partner, but they generally look pretty stable. If you look back relative to 2019, No, they're very close to those levels. So there's no extreme buildup or drawdown that we're seeing. We are seeing supply chain challenges all the way through the system.
So it's not simply in our own distribution. We're also seeing it downstream. And so we know that many of our partners are Similarly dealing with some congestion issues, we'd like them to have more. And in fact, if you step back and look at Q3, Q3 Without congestion, we would have certainly been able to deliver an even more significant domestic wholesale growth. But we also want them to be healthy, and we don't want inventory to start backing up.
And to date, that's certainly not what we've seen. We continue to see good sell throughs. We're doing everything we can to make sure we're shipping on time and in full and that's what gave rise to some of the costs that we talked about. But We also need to be cognizant of the fact that our partners need to be able to ingest that inventory.
Speaker 2
Yes, I think that's true. We don't talk in terms of anybody with having too little inventory, certainly in our industry. I think to our benefit and what we feel Good about is that when space is made available, whether it's by a promotional cadence or sales in general, as things open up, We are one of the first calls to deliver the next inventory because our stuff does so well at wholesale and for their own retail. So I think we're checking well, which gives us an opening to any openings for inventory and open to buys and Open to ship, which is just as important nowadays. So I think keeping in high demand is a key for us.
So we have the inventory. We've taken it in early just so it will be available to all our customers. And as they sell down, We're certainly moving it very quickly to them. So we could actually pick up the pace should sales continue to be strong through the Q4.
Speaker 9
Got it. Then John, the incremental $50,000,000 of expense you identified for the Q3, If I understand you correctly, that's in addition to the higher Transocean rates on a year to year basis?
Speaker 3
Yes. Unfortunately, yes, that's purely dealing with on hand inventories once product has landed.
Speaker 9
Got it. Okay. And any thoughts on what that figure might be for the Q4? I'm trying to put my arms around what is a potential recapture opportunity is Hopefully, someday soon we get back to a more normalized environment.
Speaker 3
Well, I'll tell you, we are certainly making that our priority, but It's also important to make sure that we're delivering to customers and we're honoring our commitments to get them the product that they need to sell through To survive, so we're trying to balance those 2. I don't want to give specifics, but I would say we certainly expect A lesser impact in Q4 than we had in Q3 because so far we view Q3 as kind of the epitome of the congestion issues, But it's still going to be a material impact. And as I noted in response to Laurent's comment, it's certainly one of the factors that's Causing our change in guidance because we want to make sure we've adequately incorporated that into our expected results. But I assure you, we're going to do everything we can to minimize that while honoring our commitments to customers to get them the goods They need particularly in this holiday season.
Speaker 9
Great. Thank you very much.
Speaker 0
As a reminder, we ask that you ask one question and one follow-up question. Our next question is from Omar Saad with Evercore ISI. Please proceed.
Speaker 10
Good afternoon. Thanks for taking my question. Most of them have been answered. I was hoping though you could dive in on the strong DTC Trends maybe separate out e com versus stores what you're seeing there. Is that kind of uniform too across markets?
And then I have one follow-up. Thanks.
Speaker 3
Yes. I would say, not uniform across markets. We definitely saw outsized growth on the digital side of things. But again, as you've heard us say before, We think those are very tightly integrated at the consumer level. It's also not a fair comparison because as David noted, This year, we are in the process of lighting up markets with an online direct to consumer offering that we've never had before.
So in many markets, that's It's an unfair comparison. What I would say is, it's apparent to us that the SKECHERS brand remains in demand at the consumer level. We're seeing that in stores. We're seeing that really across store formats, which is something we haven't seen in a while, which is very encouraging. And we're seeing it in nearly every market.
Again, the one drawback on the direct to consumer side of things would have been in China, We're just facing some difficult conditions as we noted. At one point, we had nearly 10% of our stores Shuttered because of COVID. So that market is simply struggling to cope with the dynamics of COVID. But overall, we definitely were pleased with what we saw in store, online and the communion between those two. And it continues in the early part of this period Do show similar trends, which we're excited to see.
Speaker 10
Got it. Could you actually elaborate on that comment you just made about putting in some product that you've never had before into the DTC channel and maybe a little bit more what you're talking about there? Well,
Speaker 3
it's not I'm sorry, it's not product. It's actually lighting up sites that we haven't had before. So just if you look to last year in Same quarter. Got it. We did not have sites in Belgium, France, Italy, the Netherlands, Poland, Spain.
Maybe we had one, but Switzerland. So again, we've been on this road map of launching our direct to consumer online offering. And so We're getting to a direct to consumer online relationship with many consumers in these markets that we've never had the ability To perform in 4, that's very encouraging.
Speaker 10
And then quickly, John, any product trends or category shifts Call out as we kind of return to come out of COVID and the lockdown kind of lifestyle, are you seeing any shifts in your business, certain parts of the certain categories that were
Speaker 3
No shifts really, but I say that with an incredibly encouraging backdrop in that we've on those two domains. In particular, it evidences itself in the uptake they have for our new Technologies when we put them into the marketplace where they've received very strong demand. I'd say the only notable change versus The last couple of years in the Q3 was really saw kids come back in a more meaningful way than we had seen in the previous couple of years because COVID obviously played with school and school attendance. We saw a much more traditional curvature of demand on the kids side that is associated with back to school, and that was refreshing. That was good to see because it Clearly, it's an indication to us that there's some normalcy returning to the retail cadence of things, which is in our view good.
Speaker 10
Thanks for the color. Good luck for holiday.
Speaker 3
Thank you.
Speaker 0
Our next question is from Tom Nikic with Wedbush Securities. Please proceed.
Speaker 11
Hey, guys. Thanks for taking my question. I was hoping we Can you give us a little bit more color around Q4 like gross margin versus SG and A? I mean, it kind of seems like OpEx needs to slow pretty dramatically. I know you said, I think sequential improvement in gross margins, but like is there any more color you could give us there, like Gross margins up year over year, down year over year a little bit, like I guess any help there would be helpful.
Thanks.
Speaker 3
Sure. Although, I'll note, Tom, there's no reason we couldn't achieve both. But I would say in terms of the plan that we've given Our goal for the entirety of this year has been to catch up on the gross margin side. And our objective is certainly to do that this quarter. Now we may not make it 100%, we may get close, maybe a little bit better than that.
But I would guide toward a gross margin that's very close to or on top of prior year. That's been the objective of the pricing that we installed previous in the year and how we've gone about pricing in our direct to consumer channel as well. And so that's probably the one improvement that is key to understanding our guidance. We have, as we said, incorporated some excess costs from supply chain, similar to this quarter To incorporate what we know about how the supply chain is expected to behave, we'll have to see how things evolve to determine whether or not that's Too much or too little, but right now we think we've been appropriately conservative in incorporating those costs into our expectations for Q4.
Speaker 11
Got it. Okay. And if I could just ask one more question on China. Obviously, that's been a tough market and It sounds like 1 of or maybe 2 of your really big competitors are still I'm struggling there and you'll talk about really challenging market conditions. I mean, I guess, just kind of like how do you So to see the recovery in China progressing, like is it I mean, Do we think like your China business is up next year or like just any help around China would be great?
Speaker 3
Well, let me say first about this year. I mean, I still think Skechers is performing better than almost any Western brand in that market. The decline we spoke about in Q3, it's important to note that that has a very heavy influence from FX. You almost take 600 basis points out of that just on FX alone. So if you look at it on a constant currency basis, The market, I think they held up really well.
If you take a deeper slice of that, e comm was nearly flat and that's one of the most significant channels for us there. So that was great. Obviously, stores not being open inhibits their ability to sell and transact. Consumers not being able to be in malls and out Shopping severely inhibits our ability to convert there and that was the drag in the quarter. We're cautiously optimistic that Q4 will be better and Q1 will be better after that.
It's certainly a longer recovery path than we had originally expected, but I see no reason why next year can't put us right back into the track we've been on in China, which is a fairly sizable growth path now. That's all subject to what happens with COVID and political environments being what they are. So you have to take that with a Fairly heavy caveat, but in terms of the base business demand for the brand, the product resonance, we feel really good about all those things we can control. And I think our team is doing as good a job as anyone in navigating that. And that's why at least in terms of the Western brands, We feel like we continue to outperform.
We certainly haven't seen some of the more drastic impacts that others spoke about very recently and we're encouraged by that.
Speaker 11
Understood. Thanks, John, and good luck this holiday season.
Speaker 3
Thanks.
Speaker 0
Our next question is from Don Kiernan with Cowen and Company. Please proceed.
Speaker 8
Good afternoon. Thanks for taking my question. John, dollars 1,800,000,000 in inventory On the balance sheet at the end of Q3, it's up about $800,000,000 from where it was in 2019, I think sales are up about $100,000,000 from the same quarter. When do we think inventory dollar trends come down More in line with sales trends. Is it the first half of next year?
When does inventory peak on the balance sheet?
Speaker 3
Well, I mean, that's difficult to say. I think it's important to keep in mind that a portion of that inventory Build is purely cost based, right? You can't incur the type of freight escalation and logistics escalation We've had over the last year without it impacting your on hand balances because it just flows through that way. I would say, if we think about it from a unit Which is a more modest growth than what we saw on the dollar side of it. We do expect things to begin ticking down.
Now some Some of that's going to be contingent upon how the supply chain unfolds, because again this is not a situation where inventory backed up because of a lack of demand. That's definitely not the situation we're in. And so it really has to do with logistics and timing, all the We prefer it To be lower than it is, we would prefer to have put less in the working capital over the last year than we have. But by the In token, we want to make sure we have the product available to meet consumer needs. And I would expect it to get better or to be Yes.
Those two relationships come better into line over the course of this year. But in terms of the exact timing, that's too contingent upon how the supply chain Performs for me to give you an educated guess.
Speaker 8
Sure. Certainly the whole sector seems to be in a similar position. I guess You brought up the point that a lot of it, the increase is cost based. How does this affect gross margin as this comes off Balance sheet and on of the income statement into Q4 and the first half of next year.
Speaker 3
Well, I mean, it's already in the effects we've been seeing on the gross margin side of things. Again, the inventory turns over relatively quickly in the context of our overall sales performance. We think it's incorporated into both the costing that is underpinning our guidance, but also the pricing actions we've already taken To offset that, that we expect to materialize in the quarter. So again, I think we're going to be dealing with This inventory costed at this level for at least another quarter and a half, but our expectation is both in terms of what we're seeing on freight and logistics rates coming down as well as selling through the inventory that we have that it It'll remedy itself over time. The counterpoint I just mentioned against that because we've often said this is we're not looking for a windfall On gross margins, we're looking to make sure we protect our gross margin.
So while we'll try to capture as much of that as we can, if Promotionality comes back or there's changes on the pricing horizon, we'll have to be flexible about that going forward. It's important to keep in mind that we've got to be true to our goal of being a good price for the value we offer and That's going to
Speaker 10
be important.
Speaker 8
Very helpful.
Speaker 3
Thanks guys. Thanks, John.
Speaker 0
Our next question is from Sam Poser with Williams Trading. Please proceed.
Speaker 10
Good evening. Thanks for taking my questions. I want to just Go back to the G and A, please. And with $600,000,000 in G and A in the quarter, 603, Is that really I mean, is that sort of a top kind of number? I mean or is this a number that could go to It was up $100,000,000 from last year.
Is that a number that could be up $75,000,000 we could be looking at $650,000,000 in Q4 Or is this something where like that $600,000,000 maybe a little bit higher is sort of how to think about it, sort of more in absolute terms? Yes.
Speaker 3
I think the first thing I'd note is within that $600,000,000 you mentioned is These supply chain costs that we've mentioned that $50,000,000 we quantified. So we definitely don't view that as ordinary course G and A. The second is, we don't really think about it in dollar terms because that doesn't equate with how that G and A performs, particularly the volume oriented. What I would point out is, believe it or not, even with that $50,000,000 of excess costs in there, G and A as a percentage of sales actually levered year over year. And that's how we tend to think about.
There's a piece of G and A that is stable. It reflects just the natural operations of the business, the corporate environment, design, development, etcetera. But then there's also a piece that is very volume influenced. And then in this quarter, as we mentioned, there was that $50,000,000 that was in excess of what we would have normally expected. So I think if you kind of use those parameters, you'd understand that it should be in line with the sales performance, but also in this quarter That relative measure that sales G and A as a percentage of sales was aggravated by that 50,000,000
Speaker 10
Got you. Thank you. And then, I got 2 more. 1, what is your optimum Forward weeks of supply, back pre COVID running around, you know, average like 15, right now you're running around over 20. And so I'm not really thinking about it on a year over year basis.
I'm more thinking about it if it's settling down. And then that Leads me to the last part of my question regarding timing of orders timing of your orders. And at Fannie in December, will you be orders for like 8 way back to that 4 to 4.5 month window there? Or are you taking it farther out and then allowing some of it to flow through from what's already here and what's still coming, I guess, based on when you took orders Recently for spring.
Speaker 2
Sam, I think those both run together. We're going to be more reactive as we With the confidence that I'll be here on time, so we can deliver on time, we will certainly push towards that direction as we get through the end of the year. Right now, there's some different issues as far as the supply chain is concerned, even though container costs are coming down. They're coming down because The demand for space has come down so dramatically that sailings have been canceled, moved around And it does increase to what we feel a comfort factor would be for time and transit. So to the extent we get more back to normal, We'll be going more hand to mouth so that we can calculate the type of on hand inventory and the turns that you were talking about before if we can get a real solid handle on the transit times.
Speaker 10
Okay. And then with your backed up, I mean, with the congestion at the DCs and getting the expansion to the U. S. DC and the other DCs up and going, I mean, is this something we really should be thinking about that like these incremental costs are going to continue through the Q1 of next year And that's when they should if they're going to ease up, that's when we should think about the earliest they're really going to start easing, given the way Everything is happening right now and the timing of getting everything you have been sort of internally up and running.
Speaker 2
Well, I'm more an optimist and a hopeful person than John. He's more a numbers guy. So I will tell you my perspective is that they start to come down. The question is the rate they start to come down. The way I think about it is when things started to open up as far as the port was concerned, We started to receive inventory from the port at a rate more than double of our peak, at any time since those Going through all that and having received all that inventory and I hope inventory very close to a peak year, but even if it's not At a peak, which I believe it is, it's the flow through.
So in other words, we won't be receiving giving our buy in patterns no matter what unless a significant Extreme change in the supply chain comes in and we won't be receiving inventory at that rate. So that's one expense that goes away looking for additional space and trying to move it out and just unload all those containers for somewhat efficiencies. And we've already Got those under our belt. So if anything, we will not be looking for more space. We will not be expanding.
We will get rid of the excess cost of the new part of the distribution center, which is not a storage facility for the most part, but it's an operational facility. So while we're training on it and getting up and going, we have Duplicate costs. So hopefully by the end of the year, early part of next year, a significant piece of those costs go away. So if you think about Not paying overtime, not trying to work all of 7 days a week to receive all those shoes and shift the maximum amount we can. I do believe we're coming into a more efficient use of the distribution center and that would include here, the U.
S. And parts of South America where we're expanding, Assuming we can get all the equipment in, there's still some final touches both in South America and here in the U. S. That are waiting for our builders and our installers to get final pieces to get it done so we can move this along. Under normal circumstances, we would have done in the U.
S. Last December or January. A big piece of that was They were running late because of the supply chain, their own supply chain and their own personnel issues to bring stuff in to be installed. And then we stalled back because we had all that stuff to receive and try to get out the door and hire a significant amount of people, people who aren't as available. So right now, We don't feel we need any more.
Certainly not a significant amount of people. We will be reducing over time. We won't be receiving that much. So I think we're getting to a much more Steady stream of product and it should start to flow through the G and A as we move through this year and into next quarter.
Speaker 0
Our final question is from Rick Patel with Raymond James. Please proceed.
Speaker 2
Thank you and good afternoon everyone. Can you talk about the underlying trends in Europe? Headlines that we've been seeing across Europe and the U. K. In particular.
I'm curious if you're seeing any changes in the way that wholesale accounts or consumers Are behaving in Europe versus what you were seeing about 3 months ago? Obviously, it's up. We had a great quarter. So that's what we saw and nothing has changed in October and nothing has changed anecdotally with our meetings with some of larger accounts as to what their needs are and what how we're selling through and how they feel about their order backlog. So While we as everybody else read the headlines and see what's going on in some of them for our particular case, and the particular Product offerings we have there and the stuff we're delivering, we continue through current time in October as we did also the last quarter.
Speaker 3
Yes. I would just add to that Rick. I mean, keep in mind as well that the numbers we spoke about in Kind of our EMEA and Europe region were also severely impacted by foreign currency. So they were significantly better even As reported on a constant currency basis. So I think we continue to see good trends for our brand in Europe.
There's obviously a lot of concern in that market over the macroeconomic environment. But so far, we have yet to see That meaningfully materialize in our business either on the wholesale side or on the direct to consumer side when taken as a whole.
Speaker 2
I appreciate it. Good luck this holiday.
Speaker 3
Thanks. Thanks.
Speaker 0
And this does conclude our question and answer session, and this concludes our conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful