Skechers is suffering from excess inventories of toning shoes, as demand in this segment is slowing down and new competitors are joining the fray. The management says it could take until the summer for the U.S. company to clean up millions of pairs of unsold toning shoes, largely by cutting prices. In commenting on Skechers' results, the company's chief operating officer and chief financial officer, David Weinberg, stressed that the cleanup is not “a fire sale” and that the company continues to believe in the future of toning shoes. He stressed that these round-soled athletic shoes, which are aimed to exercise one's legs and buttocks while walking, are still selling well even if the size of the market has shrunk.
In the fourth quarter, the group was hit by order cancellations for toning shoes due to the slowdown in demand and oversupply. As a result, Skechers' overall inventories rose by $174.5 million at the end of 2010 to $398.6 million. The bulk of the additional stock, $110 million, is destined for the domestic wholesale business and the remainder is earmarked for the international and retail businesses.
In the fourth quarter, Skechers' total wholesale turnover in the U.S. still increased by 4 percent, with gains in men, women and children's products. Volumes shipped were 13.3 percent higher but the average price per pair fell by 8.2 percent due to the toning market being saturated with lower-priced products and the group's own efforts to sell excess inventory.
Chinese sales growth reached a double-digit figure. The group is also upbeat about Mexico. Within six months of launching the Skechers business in the country, the group's Mexican distributor has opened three stores and plans another three this year. At the end of 2010, there were 145 stores run by distributors or licensees worldwide. The international business now represents 22 percent of the group's sales and is expected to post “mid-double-digit” growth this year.
Directly operated stores (DOS) increased sales by 16 percent in the fourth quarter, with domestic sales up by 12 percent and foreign revenues up by 52 percent. Comparable store sales were up by about 3.5 percent. At the end of 2010, the group had 287 directly managed Skechers stores, of which 44 are operating outside the U.S. The group plans to open an additional 30-35 DOS this year. Confirming its licensing policy, the management says it wants to expand the Skechers name to new products and eventually enable men, women and children to fully dress with the brand's products.
The company expects U.S. wholesale revenues to drop in the first quarter of 2011, while comparable store sales should be off by around 5 percent due to promotions. Nevertheless, global retail sales are expected to rise thanks to stores opened over the past year and strong growth outside the U.S.
Overall, first-quarter revenues could drop by nearly 10 percent and average selling prices are expected to be about 8 percent lower than a year earlier throughout the first half of 2011, according to Weinberg. He also anticipates first-half sales to be lower and did not rule out a decline for the full year, despite an expected surge in sales in the second half. Financial analysts forecast 2011 sales at $1.95 billion against the record $2.0 billion booked in 2010.
The group's difficulties with toning shoes affected fourth-quarter results, which were below market expectations, sending the share price reeling 9 percent lower the day the results were announced. Fourth-quarter sales only rose by 17.0 percent to $454.6 million compared with a 39.7 percent jump for the full year. The operating margin in the fourth quarter narrowed to 40.5 percent from 48.7 percent a year earlier. Margins in the U.S. were in the 30-39 percent bracket and foreign margins close to 50 percent.
For the full financial year, the operating margin reached 45.4 percent compared with 43.2 percent in 2009. Skechers warned that operating margins will continue to be under pressure in the first and second quarters but should recover in the second half of the year as the company returns to full-price selling. Skechers considers $65-120 to be the regular price bracket for its toning shoes. The international business will continue to register higher margins than the domestic operations. Margins are also expected to enjoy a slight boost from the removal in April of European anti-dumping duties on Chinese and Vietnamese leather shoes. Financial analysts expect the company's operating margin to lie slightly below 42.0 percent in 2011.
Net profits fell to $3.2 million the fourth quarter from €27.9 million a year earlier but went up to €136.1 million from €54.7 million for the full year. The group had $233.6 million in cash at the end of 2010.