I wouldn’t normally share these here, but SKX was followed for a long time on this board and I believe they are a quarter or two away from a big turnaround as you’ll see in the notes below. Anyway, for those who still follow this company, here are my notes from its latest conference call.
Overall Business - Gross margins of 47.6%; a strong balance sheet with $751.6 million in cash and cash equivalents which comes out to about $4.81/share; 28% increase in our worldwide company-owned SKECHERS retail stores, same store sale comps +7.1%
Sales keep going up but earnings aren’t finding traction because expenses keep increasing. Selling expenses increased $24M to $100M or 9.7% of sales compared to $76M or 8.7% of sales in 2016 Q2. The increase was primarily due to increased advertising expenses. Domestic advertising was $5.2M, international advertising was $6.4M. General and administrative expenses also keep going up. This quarter it was $305.3M, which is up from $243.2M last year. That’s a 25% increase YOY and 30% of sales! CFO Weinberg explained the increase by saying it “was primarily due to the investments in our brand and business to achieve both our short and long-term global growth initiatives.”
International Wholesale - +18.6% this quarter, comprised 35.1% of our total net sales for the quarter
Domestic Wholesale - +6.4% this quarter, increase of 11.4% in pairs shipped, average price/pair decreased 4.5%
Domestic Retail - +14.5% sales this quarter, same store sale comps +7.7%
Int’l Retail - +67.4% sales this quarter, same store sale comps +5.1%
Go Golf - Grew by mid-double digits, heavy promotion during golf programming
China - Opened 107 freestanding Skechers stores this quarter, bringing total to 685. E-commerce in China also saw triple digit growth. By end of year, China should do little over $500M in sales for full year
Marketing - Signed former Dallas Cowboys QB Tony Romo to multiyear deal for men’s footwear, signed multiplatinum recording artist Camila Cabello for women’s footwear. Continued ad campaigns with Rob Lowe, Brooke Burke-Charvet, Kelly Brook, Howie Long, Sugar Ray Leonard and Meghan Trainor. Ran new Energy Light commercial and new spot for YOU by SKECHERS.
Leading shoe lines - Men’s and women’s casual, women’s SKECHERS GOwalk, active, sandals and BOBS from SKECHERS. Weinberg also said NEW by SKECHERS and SKECHERS Street “sold strong”.
When will we see earnings?
I think this was the crux of the call and the biggest takeaway I have, so I’ll share the full answer. It was also the essence of a great Seeking Alpha article shared on the SKX board a few days ago which can be found here: https://seekingalpha.com/article/4089430-skechers-looks-good…). When asked what margins are going to look like, CFO Weinberg answered:
I think as we’ve spoken before, we said many times we think next year is an inflection point as far as operating margins are concerned unless there’s some new additions to our transition to joint ventures and subsidiaries, which I don’t see right this minute.
So, I think what you have to get used to is the fact that our expenses were up in the quarter more than we anticipated. And that had to do with all the countries we’re converting and they’re moving quite quickly on the sales end and they’re a little more expensive to get the stores and the personnel and the amount of people they need, given the sites that they’re doing.
Also, China is growing extremely strongly. And the big piece of that growth is online, which has more cost per dollar. I mean, you can get to an equivalent operating margin, but you’ve got to fill in the cost.
So, I think if you look around, given that we’ve now created two new categories or three new categories that we’re dealing with and constantly looking for more, we have great hopes for SKECHERS Street, BOBS, YOU by SKECHERS, all of which are continuing to move, as well as new additions to our sport and active line.
So, we’ve invested quite largely there. So, I would think barring any significant change in our merchandising schemes or our consumer taste and no more absorption for new companies at the present time, we would certainly begin to leverage as we come into what I believe is going to be a very strong Q1 next year.
There was then a follow-up question about whether that meant the company could see higher operating margins, maybe 10% next year (they were 8.4% this quarter) and this is how Weinberg responded:
I think 10% is a pretty low number. I think we can get higher than that because I think we’ll see significant growth without the same expense increases because we’re deleveraging what we’re building this year.
So, the first few years and – the initial growth are always the hard part and they tend to pull from your leverage. But I do think as we get to next year, we should get back into what I would think would be in the 12%, 13% operating margins, maybe even a little better, on pretty good growth.
In essence, these huge investments in growth are about to wind down and be lapped. Sales growth has been double digits and now earnings growth, in a quarter or two, should accelerate rapidly. I think those that hold this company, myself included, see that light at the end of the tunnel and believe we’ll get there relatively soon.
Many thanks to Seeking Alpha for providing transcript at https://seekingalpha.com/article/4089286-skechers-usas-skx-m…
That’s my take! Thoughts/questons/comments?
Matt
Long SKX
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