Skechers 2017 Q3 Conference Call Notes

What a quarter! I just went through the call and here’s my notes:

Overall Business: Gross profit was $520 million (+21% YOY) with gross margins of 47.5%; a strong balance sheet with $802.9 million in cash and cash equivalents which comes out to about $5.12/share.

Quarterly net sales record of $1.095 billion, 16.2% increase year over year

Quarterly sales growth was result of: 1) +25.7% int’l wholesale; 2) +1.4% domestic wholesale; 3) +18.6% in worldwide Skechers retail stores (+4.4% same store sale comps).

Increase in Skechers retail same store sales comps despite temporary store closings (55 combined total) in FL and TX for hurricanes, and continued store closings (9 total) in Puerto Rico.

Breaking down those sales into a bit more detail:

International Wholesale: +25.7% this quarter, comprised 43.4% of our total net sales for the quarter. Sales increase due to “double-digit gains in most of our subsidiary and joint venture countries” including Canada, Brazil, “most of” Europe and Asia.

Int’l Retail: +43.8% increase in international retail stores with +8.4% same store sale comps.

Total Int’l: International wholesale and retail combined represented 53% of total quarterly sales. CFO David Weinberg: “Our international business remains the biggest growth opportunity, and we believe it will continue to represent approximately 50% or more of our total business.” Almost one-third of company-owned stores operate outside U.S. (187 out of 623).

In the Q&A session, Weinberg sounded really upbeat about int’l growth:

“So I think the biggest up for me personally in my expectations for the quarter in international came from Europe and parts of South America … [T]his year, I had anticipated that we would have a stronger third quarter because the more seasonal product and more acceptance of the brand in Europe. And I think we hit on all cylinders. Our European business was up, I think, we said 17% or 18%. Canada continued to grow well, a double-digit grower. They usually are tougher in the third quarter. And South America, while – and Japan and Panama, while still not where we’d like them, showed more growth than we would have thought, and their retail store business is growing very well as well. To China, China was up on a stand-alone basis, almost 50% in the quarter.”

Domestic Wholesale: +1.4% this quarter, increase of 2.7% in pairs shipped, average price/pair decreased 1.3%. Price decrease mainly due to popularity of kids’ line which has lower price point.

Domestic Retail: +9.5% sales this quarter, same store sale comps +3.1%.

Total company-owned and third-party stores: 2,438. In 3Q, 140 combined company-owned and third-party stores opened, including 78 in China, 18 in India, 6 in Indonesia. In 4Q, expect 120-140 stores to open.

Expenses keep increasing. Selling expenses increased $89.6M, a 32% YOY increase. It was down sequentially however from $100M. The increase was primarily due to increased advertising expenses.

General and administrative expenses also keep going up. This quarter it was $316.9M, a 21% YOY increase. About those increased expenses, CFO Weinberg explained stated:

“The $55 million year-over-year increase was primarily due to SKECHERS’ long-term global growth initiatives. This is evident in both the expansion of our international business, which had the highest net sales dollar and percentage gain, followed by our company-owned global retail business … Given the increases in our international business, we believe international provides the greatest opportunity for continued growth. We remain committed to investing in the brand, product and infrastructure for all areas that present further growth opportunities.”

After today, hard to argue with that logic. It’s just nice to see that now the company can show meaningful earnings growth and re-invest revenue back in business. In the Q&A session, Weinberg did say SG&A expense growth should start to slow down in 4Q due to lapping of Korea joint venture process, which was big contributor to increased expenses, and then, in 1Q18, expense growth should slow down even more so.

Skechers Kids line earned a shout-out from Weinberg as well, which was personally gratifying because, with four kids, I feel like I’ve personally done more than my fair share of heavy lifting in this category ?. Weinberg stated:

“Our SKECHERS Kids business did particularly well in the third quarter, led by the strength of our lighted footwear and our lightweight sports styles and is indicative of a strong back-to-school period. For the back-to-school selling season, which typically ships during our second and third quarters, domestic wholesale net sales increased 4% in the second and third quarters combined when compared to the same period in the prior year. To support our back-to-school business, we ran several campaigns targeted to kids, including Energy Lights, along with our first Camila Cabello campaign targeted to young women and featuring our youthful SKECHERS Street collection.”

Favorable tax rate: No doubt about it, earnings did get a boost from favorable tax rate. Effective tax rate was 9.5% this quarter, 24.2% in 3Q2016. Going forward, if tax laws remain same around globe, company expects tax rate of 13% for this year and between 12-15% next year due to mix of int’l and domestic sales.

That’s about all I got. Any questions/thoughts/concerns?

Long SKX
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at