Q3 2024 Earnings Summary
- Skechers exhibited strong domestic wholesale growth of 26% in the third quarter, reflecting continued consumer demand for its comfort technology products and increased capacity of wholesale customers to embrace the brand's offerings.
- Despite challenges in China, Skechers raised its full-year sales guidance, highlighting robust performance in other international markets and the strength of its diversified global portfolio.
- The company achieved double-digit operating margins and expects to sustain this profitability level, indicating efficient operational performance and financial health.
- Weakness in China is impacting sales and leading to higher inventory levels. The company noted that sales in China declined 5.7% year-over-year, which was below initial expectations due to macroeconomic pressures. This underperformance has led to higher inventory levels in China, and it's uncertain how long it will take to normalize inventory levels in the region.
- Gross margins have decreased due to increased promotional activity and are expected to remain under pressure. Gross margin for the quarter was 52.1%, down 80 basis points compared to the prior year, primarily due to a lower average selling price from slightly higher levels of promotional activity in certain markets. The company expects gross margins to be "flat to up a little, down a little for the fourth quarter as compared to last year," indicating continued margin pressure.
- Elevated SG&A expenses with limited expectation of leverage in the near term. Selling expenses as a percentage of sales increased 20 basis points versus last year to 9%, due to higher spending on brand-building investments. General and administrative expenses decreased only 40 basis points as a percentage of sales to 33.2%. The company stated, "I don't think there will be significant leverage or deleverage in the OpEx base as it stands at the moment," suggesting operating expenses will remain elevated.
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China Sales and Impact on Guidance
Q: How is China performing, and how does it affect guidance?
A: China remains the most significant unknown, but despite challenges there, we have raised our top-line guidance due to robust growth elsewhere. Excluding China, wholesale growth across regions was all double digits. Early signs from Singles Day are positive, but it's too early to make firm predictions. We've derisked China in our forward guidance and remain confident in our long-term opportunity there. -
Margin Outlook
Q: What are expectations for gross and operating margins?
A: Despite an 80 basis points decline in gross margin, we've established an attractive margin level relative to our history. For the fourth quarter, we expect gross margin to be around 53.1%, which is flat to slightly up or down compared to last year. We anticipate delivering double-digit operating margins for the year, achieving a significant objective for the company. -
Inventory Levels and Management
Q: How are inventory levels, especially in China and EMEA?
A: Inventory increases were primarily driven by higher levels in China and elevated in-transit inventory in EMEA. Remedying the China inventory depends on upcoming sales, particularly Singles Day. We have the capacity to move inventory globally to balance levels, and we're confident in resolving this situation. -
U.S. Wholesale Growth Prospects
Q: How is the U.S. wholesale outlook, including the spring order book?
A: While it's early to discuss 2025, early-stage bookings and customer conversations are positive and encouraging. We feel good about inventory levels heading into the holidays, with no significant imbalances noted. Feedback from wholesale partners has been very positive, and there's no sign of order pullbacks. -
EMEA Growth Drivers
Q: What drove the 30% growth in EMEA despite regional challenges?
A: Growth was driven by strong consumer demand, expansion of our own stores, and the success of our comfort technology products supported by active advertising. Economic conditions haven't diminished consumer interest in our offerings. -
India Market Growth and Local Sourcing
Q: Can you update us on India's growth and local sourcing strategy?
A: India is a strategic priority with exceptional growth over the last 8–10 years. We're diligently working on local sourcing by opening factories and increasing production capacity, though it's a moving target. While no significant margin changes are expected immediately, there should be benefits in the long term. -
SG&A and G&A Leverage
Q: How are SG&A expenses being managed, and what's the outlook?
A: We over-invested in marketing earlier to drive awareness of our comfort technologies. We expect to see some leverage in marketing spend. Our distribution team achieved G&A leverage through effective labor management and cost reductions in the supply chain. Overall, we don't anticipate significant leverage or deleverage in operating expenses in the near term. -
ASPs and Promotional Environment
Q: What are expectations for pricing and promotions in Q4?
A: Promotional levels are stable and effective. We expect growth to be largely volume-driven, with some opportunities for price increases. Any impact on average selling prices from China may improve if market conditions there recover. -
Expansion into New Categories and Wholesale Partners
Q: Is traction with comfort technology opening new wholesale channels?
A: It's early to see major changes, but we're testing new opportunities and receiving positive feedback globally. As we continue to build our presence, we expect demand in new channels we haven't been in before. -
Direct-to-Consumer Sales Performance
Q: How are same-store sales and e-commerce performing?
A: E-commerce continues to show strength worldwide. International same-store sales growth is solid, and although U.S. stores were flat, this follows a 14% increase last year. New stores take time to reach full productivity, but we're pleased with the overall performance.