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Skechers U.S.A., Inc. (SKX)

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SKECHERS USA, Inc. (SKX)

Q4 2016 Earnings Call

February 09, 2017 4:30 pm ET

Executives

Unverified Participant

David Weinberg - SKECHERS USA, Inc.

Analysts

Laurent Vasilescu - Macquarie Capital (USA), Inc.

Scott D. Krasik - The Buckingham Research Group, Inc.

Sam Poser - Susquehanna Financial Group LLLP

Corinna Gayle Van der Ghinst - Citigroup Global Markets, Inc. (Broker)

Jeff Van Sinderen - B. Riley & Co. LLC

Jay Sole - Morgan Stanley & Co. LLC

John Kernan - Cowen and Company, LLC

Christopher Svezia - Wedbush Securities, Inc.

Tom Nikic - Wells Fargo Securities LLC

Jim A. Chartier - Monness, Crespi, Hardt & Co., Inc.

Presentation

Operator

Greetings, and welcome to the Skechers USA Fourth Quarter 2016 Earnings Conference Call.

I would now like to turn the conference call over to the Skechers. Thank you. You may begin.

Unverified Participant

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 within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.

Such forward-looking statements involve known and unknown risks, including, but not limited to, global, national and local economic, business and market conditions, 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 such forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other reports filed with the SEC, as required by federal securities laws for a description of other significant risk factors that may affect the company's business, results of operations, and financial conditions.

With that, I would like to turn the call over to Skechers' Chief Operating Officer and Chief Financial Officer, David Weinberg. David?

David Weinberg - SKECHERS USA, Inc.

Good afternoon. And thank you for joining us today to review Skechers fourth quarter and fiscal year 2016 financial results. Fourth quarter net sales increased 5.8% to $764.3 million, and represented a new fourth quarter sales record, which led to a new annual net sales record of $3.56 billion. The sales growth was primarily the result of a 17.1% quarterly increase and a 27.1% annual increase in our international wholesale business. The negative currency translation impact on our gross margins for international wholesale and retail businesses was $18.4 million for the quarter.

Our international wholesale business comprised 37.9% of our total business for the quarter and 39% for the year. Adding in our international retail stores, international represented 46.8% and 46.1%, respectively.

We expect international to be 50% of our total sales this year as we believe it continues to represent the most significant growth opportunity for the company. Also, adding to our record net sales was our global retail business, which increased 13.9% for the quarter and 16.7% for the year due to a higher store count, combined with positive retail comps of 3.6% in the quarter and 4.1% for the year.

The Skechers-owned retail business represented 32.1% of our total sales at quarter end and 27.3% for the year. The fourth quarter increases in net sales were offset by a decrease in our domestic wholesale business of 11.8%, which included a 4.6% decrease due to the launch of the Star Wars footwear collection in the fourth quarter of 2015.

Fourth quarter highlights include record revenues, gross margin of 46.6%, a strong balance sheet with $718.5 million in cash and cash equivalents, or approximately $4.63 per diluted share. A 17.1% sales increase in our international wholesale business, including a 34.3% increase in our subsidiary and joint venture business, a 13.9% sales increase in our company-owned retail stores which included 53 net new stores opened compared to the prior year period, including 15 net new stores in the fourth quarter. And growing our company and third-party owned worldwide Skechers store base to 2,012 locations with a net addition of 189 stores in the quarter.

We should also note that the fourth quarter 2016 sales growth came on top of challenging comparisons with strong increases in the fourth quarter of 2015, particularly in our international and retail businesses. Specifically, the fourth quarter 2015 increases were 64.9% in our international wholesale business, 20.2% in our company owned global retail business and 8% in our domestic wholesale business for a combined total increase of 26.8%.

We ended 2016 with positive domestic and international backlogs and the highest incoming order rate for fourth quarter and full year in the company history. We achieved mid-single digit comps in January and high-single-digit comps in the first week in February in our global company-owned stores. We remain optimistic about our domestic wholesale business and we believe our international business will continue to grow.

Now, turning to our business in detail. In 2016, Skechers remained the number two footwear brand, the number one walking brand, the number one work brand, and the number one dress comfort casual brand in the United States. In addition, we received the 2016 Footwear Plus Design Excellence Award for children's footwear. Our position in the domestic marketplace is an indication of the strength of our brand and product. Even with the decrease in domestic wholesale, we noted earlier, our Kids business performed very well with an increase of 20.5%, excluding the Star Wars sales in the fourth quarter of 2015 as well as growth in our women's sport, women's casual and sandals and our Work business.

For the holiday selling season we ran numerous marketing campaigns supporting our brand including campaigns with Demi Lovato, Brooke Burke-Charvet, Sugar Ray Leonard, Howie Long, Kelly Brook and Meghan Trainor.

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