The first quarter of 2019 didn't quite shape up the way Skechers (NYSE: SKX) investors thought it would. The $1.28 billion in sales and the $0.71 per share in earnings were both near the bottom end of guidance provided during the end-of-2018 report a few months ago. And shareholders chose to worry that that the forecast mid-single digit sales increase for the second quarter was indicative that the shoemaker's growth story is coming to an end.
Not to worry. Though external factors outside of Skechers' control had a big impact on results, the effects should be temporary. Plus, the company is still doing just fine expanding its international footprint -- its largest and most promising segment.
The floating Easter holiday is a big deal
First, addressing Skechers' U.S.-based business helps put the headline figures in perspective. Domestic revenue dropped 6.3% year-over-year in the quarter -- led by a 10.9% decline in U.S. wholesale. At 42% of total revenue, the U.S. business decline is a big reason why total sales only managed a 2% increase over last year.
Blame Easter for the ugly numbers -- at least in part. The holiday, which can land in either March (during the first quarter) or April (the second quarter) depending on the year, can make quarterly business results vary wildly. Since Easter is a popular apparel shopping holiday, its occurrence in mid-April this year versus April 1 in 2018 means Skechers expects some of those lost domestic sales to shift into quarter number two.
Long story short, management expects its domestic sales to rebound in 2019 and finish the year flat compared with 2018. Not exactly a high point from the report, but that's better than a decline. On another note, the domestic e-commerce business surged 35%, helping direct-to-consumer sales grow a total of 3.3%. Cutting out the middle-man is a good thing for apparel manufacturers, as it leads to higher profit margins and the ability to better compete on merchandise pricing.
Image source: Skechers.
King dollar took a big cut in Q1
With domestic sales in retreat, how did Skechers still manage a 2% revenue increase? International results provided the bailout, delivering a 9.3% year-over-year increase. Overseas sales now represent 58% of Skechers' total.
However, selling shoes outside the U.S. isn't always so simple. Because Skechers is a U.S. company, it needs to convert international sales into dollars, which can lead to variable results depending on exchange rates. During the first quarter, the U.S. dollar strengthened against other currencies, which led to lower-than-expected international revenue. Indeed, excluding fluctuating exchange rates, international revenue growth would have been 15% instead of the actual 9.3% reported.
The upshot is that currency fluctuations are temporary. If foreign exchanges gain some ground against the dollar later in the year, that will equate to a more favorable rate for Skechers, so no need to be too concerned yet.
International presence keeps growing
Foreign currency concerns aside, the international business is still the most important concern for Skechers. Managemen t report ed a record number of shoes were shipped in Europe and Japan in the first quarter, and China (now the largest country in the international segment) had a 32% increase in online sales during the quarter.
With a presence in China now well established, the shoe company is turning its attention to the world's second-most populous country: India. Chief Operating Officer David Weinberg commented:
With the conversion of India to a subsidiary, we have the full benefit of a relatively young business, which grew by 46% for the quarter and has significant growth opportunities ahead. With this change, we have increased our Company-owned store count by 61, added a new high potential e-commerce platform and are able to more efficiently merchandise and market to India's 1.3 billion people. Similarly, our agreement this month to establish a joint venture with our current distribution partner in Mexico gives us a clear path to grow our business in a proven market by leveraging our product and marketing strategy.
Granted, India is not as economically developed a country as China, but that is changing fast. The Indian economy has been consistently one of the fastest-growing in the world the last decade, and that's showing up in the huge double-digit quarterly increases for Skechers within that geography, thus the decision to buy out a stake in the joint venture there and convert the Indian business to a subsidiary during the first quarter. That should help keep Skechers international results rolling in the years ahead.
Though first quarter results weren't memorable, Skechers is still a healthy business driven by fast expansion outside the U.S. Look for a rebound as early as the second quarter.
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Nicholas Rossolillo and his clients own shares of Skechers. The Motley Fool owns shares of and recommends Skechers. The Motley Fool has a disclosure policy .