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

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Skechers USA (SKX)

Q3 2017 Earnings Conference Call

October 19, 2017 4:30 PM ET

Executives

David Weinberg - Chief Operating Officer and Chief Financial Officer

Analysts

Corinna Van Der Ghinst - Citi

Scott Krasik - Buckingham Research

Jay Sole - Morgan Stanley

Sam Poser - Susquehanna Financial Group

Jeff Van Sinderen - B. Riley & Co. Inc.

John Kernan - Cowen Inc.

Laurent Vasilescu - Macquarie Capital

Christopher Svezia - Wedbush Securities

Tom Nikic - Wells Fargo

Presentation

Operator

Greetings. Welcome to the SKECHERS third quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. An interactive question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I now like to turn the conference over to SKECHERS. Thank you. You may begin.

Unidentified Company Representative

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 report, 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

Good afternoon. And thank you for joining us today to review SKECHERS' third quarter and nine-month 2017 financial results.

Third quarter net sales increased 16.2% to $1.095 billion and represented a new quarterly net sales record, $22 million above our previous record set in the first quarter of 2017 and surpassed our expectations resulting in a new nine-month net sales record of $3.2 billion.

The quarterly sales growth was the result of a 25.7% increase in our international wholesale business, a 1.4% increase in our domestic wholesale business, and an 18.6% increase on our worldwide company-owned SKECHERS retail stores, which included worldwide retail comps of 4.4%. The increase in our company-owned retail stores came despite temporary store closures in Texas and Florida as well as continued store closures in Puerto Rico due to the recent hurricanes.

Our international wholesale business comprised 43.4% of our total net sales for the quarter and 41.5% for the first nine months, including international retail, the percentage of total net sales represented 53% for the quarter and 50.1% for the first nine months. Our international business remains the biggest growth opportunity and we believe it will continue to represent approximately 50% or more of our total business.

Third quarter highlights included, recorded revenues of $1.095 billion, gross margins of 47.5%. Diluted earnings per share of $0.59, a strong balance sheet with $802.9 million in cash and cash equivalents or approximately $5.12 per diluted share, a 25.7% increase in our international wholesale business primarily due to double-digit gains in most of our subsidiary and joint venture countries, an 18.6% sales increase in our worldwide company-owned retail stores, which included 67 net new stores opened since September 30, 2016, including 13 new stores in the third quarter.

Growing our company in third party owned worldwide SKECHERS store-base to 2428 locations with a net addition of 140 stores in the quarter including the company-owned locations. Maintaining our position in the United States is the number one walking, work and casual lifestyle brand and the number two women's brand.

Signing the winningest distance runner in NCAA history, Edward Cheserek, to our SKECHERS Performance elite running team and retired Dallas Cowboys quarterback Tony Romo to a marketing agreement for our men's casual footwear, and introducing our first women's campaign starring multi-platinum recording artist Camila Cabello; three consecutive record quarters in 2017 and continued growth across our three distribution channels, including the double-digit gains in our international business, are a testament to the strength of our brand and product.

With the continued investments we have made to our infrastructure, our strong cash position low-double digit increases in backlog on a worldwide basis and new product delivering for holiday as well as spring 2018, we believe the momentum we are experiencing will continue this year and into the coming year.

Now, turning to our business in detail, our domestic wholesale business increased 1.4% for the third quarter and 2.4% for the first nine months. The quarterly growth was the result of a 2.7% increase in pairs shipped and a decrease of 1.3% in average price per pair primarily due to the strength of our kids business, which has a lower average selling price.

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 our strong back-to-school period.

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