Skechers posted earnings for the third quarter that missed analysts' expectations, despite a new sales record. Net profits decreased by 2.2 percent from the year-ago quarter to $65.1 million, falling below analysts' forecasts. Profits were negatively impacted by foreign exchange losses of approximately $8.1 million. After Skechers reported its results, the stock plunged by 17.0 percent.
Sales rose by 10.1 percent to $942.4 million. While the domestic wholesale business declined by 3.4 percent, wholesale revenues from the rest of the world grew by 18.3 percent, representing 40.1 percent of Skechers' total sales. Adding retail revenues, the turnover generated outside the U.S. made up 47.9 percent of total revenues.
The fastest-growing foreign subsidiaires were those in Chile, Benelux, Japan and Spain. The company sold 20 percent more pairs in the U.K., but the weakness of the pound led to an increase of only 11 percent in dollars.
Some of the international growth was due to the takeover of the distribution in certain countries, about which we have already reported. Conversly, this led to an 18.6 percent drop in sales to foreign distributors in the quarter.
Skechers has continued to transition certain international distributors to a subsidiary or joint venture model. Like in the case of the recent transitions in Central Europe and Central America, they tend to result in quickly doubling Skechers' local business
More recently, Skechers set up a joint venture in Israel, and it just announced the establishment of a joint venture in South Korea with Luen Thai Enterprises, run by Willie Tan.
The new Skechers Korea Co. will use a dedicated team from LS Networks, which has distributed the brand in Korea since 2009. Skechers has been operating in the country for more than 15 years. There are 55 Skechers stores in the country.
Opportunities for further growth remain particularly in China, where sales grew by more than 50 percent year-on-year in the quarter, and in India, where Skechers scored a triple-digit gain. While Skechers is just getting started in India, its sales in China have gone up by 78 percent so far this year, with 82 new store openings that have brought the total in the country to 341. Skechers predicts that it will make more than $1 billion a year in China in four to five years' time.
Globally, the brand's retail sales rose by 16.0 percent in the quarter, despite a negative currency effect of $15.9 million, and they were up by 3.2 percent on a comparable store basis. Sketchers opened 10 new company-operated stores in the quarter, raising their total number to 556, of which 150 are outside the U.S. Additionally, third parties opened 137 Skechers stores and the management expects another 130 to 140 new ones to start up by the end of the year. Including partner stores, there are now 1,716 Skechers stores operating worldwide.
The management blamed the sluggish retail environment in the U.S., the closure of many stores and a shorter back-to-school period for the 3.4 percent drop in Skechers' domestic wholesale business. The number of pairs sold in the U.S. actually rose by 0.6 percent but unusually heavy discounting led to a 4.0 percent dip in average selling prices.
Noting that U.S. sales had been much higher in the year-earlier quarter, the management feels that the latest drop was an aberration rather than a “new normal.” Retailers are buying closer to need, they say, echoing the statements of other industry executives, but channel inventories are in better shape. Orders are up on the domestic and international fronts, but less so in the U.S. than elsewhere.
The gross margin gained 0.4 percentage points to 45.6 percent, primarily because Skechers decided to be restrained in its discounting policies, but also because of a better mix from the expanding retail business and the reduced distributor business overseas, which offset lower product margins. Higher investments abroad caused the operating margin to inch down by 0.2 percentage points to 11.0 percent.
For the fourth quarter of 2016, the company forecasts net sales in the range of $710 million and $735 million. Wall Street had been forecasting $800 million for the quarter.