Skechers halved the inventory of lingering toning shoes by selling 2 million pairs of original Shape-up models at a $21 million loss. The shoes were predominantly sold to one big account. The company booked an additional charge of $4.4 million on the rest of the stock, composed of less than 2 million pairs of more basic models, which it expects to sell through its stores or outside the U.S., where it continues to receive orders for such items.
The aggressive move hit the group's profitability in the second quarter ended on June 30, which showed a $29.9 million loss compared with a $40.2 million gain a year earlier. The company is aiming for a profit in the third quarter, partially through spending cuts in marketing, but remains cautious about the outlook.
Quarterly sales slipped by 14 percent to $434.5 million. A year earlier, Skechers had booked a record turnover of $504.9 million, fueled by strong demand for toning shoes. The top line was hit this time by a 32 percent collapse in American wholesale revenues and the company expects another drop in the third quarter.
Sales at domestic company-owned stores were flat in the latest quarter but same-store sales were down by 10.2 percent. At the end of the quarter, Skechers had 305 directly operated stores (DOS) after opening 16 U.S. locations, including two fitness stores, and closing two. Skechers now has five fitness stores and is opening a sixth one in Chicago. During the quarter, the company reorganized its domestic sales team by creating a Skechers fitness team and a team to handle its lifestyle and core products.
Non-American company stores increased sales by 42 percent, lifting combined sales of DOS by 4 percent. The group plans to open another 15 stores by the end of the year, including sites in Chile and England.
The slowdown in the U.S. toning market has not affected other regions. The international wholesale business continued to boom, with turnover up by 35 percent, lifted by a 23 percent increase at Skechers' foreign subsidiaries and joint ventures and by a 67 percent rise in sales to distributors. Growth was driven by toning shoes and casual and kids' footwear. As in the first quarter, Italy continued to post a triple-digit increase in sales thanks to toning and fitness products.
The group's joint ventures had 51 stores and around 400 shop-in-shops, while distributors operated 164 Skechers stores, of which 19 were opened during the quarter, six in South Korea. The mono-brand network in South Korea totaled 36 stores at the end of the quarter and an additional 14 locations are planned by the end of the year.
The group's gross margin narrowed to 33.0 percent in the second quarter due to the inventory cleanup, down from 47.1 percent a year earlier. Skechers estimates that it can now boost the margin to around 41-42 percent in the coming months barring a further snag stemming from its toning inventory, which is worth about $40 million. The company aims to cut spending after operating expenses surged to 44.4 percent of sales in the quarter from 35.6 percent a year earlier, generating a $48.4 million loss from operations. Selling expenses could be cut by more than $10 million in the third quarter, while general and administrative costs could start to decline in the fourth quarter.
The bottom line found relief in a $20.8 million tax benefit, compared with a $20.4 million tax expense a year earlier.
At the end of June, the group's overall inventory stood at $325.8 million, $72.8 million less than at the end of 2010. Skechers plans to aggressively manage inventory to further reduce it in the second part of the year.