SKECHERS U.S.A., INC. The following discussion should be read in conjunction with our unaudited
condensed consolidated financial statements and Notes thereto in Item 1 of this
report and our annual report on Form 10-K for the year ended
We intend for this discussion to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of our company as a whole. This quarterly report on Form 10-Q may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking language such as "intend," "may," "will," "believe," "expect," "anticipate" or other comparable terms. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in forward-looking statements, and reported results shall not be considered an indication of our future performance. Factors that might cause or contribute to such differences include:
• the COVID-19 pandemic and its adverse impact on our operations and our
business, sales and results of operations around the world;
• our ability to manage the impact from delays and disruptions in our supply
chain;
• our ability to sustain, manage and forecast our costs and proper inventory
levels;
• our ability to continue to manufacture and ship our products that are
sourced in
economic, political or trade conditions, or a natural disaster in
• our ability to maintain our brand image and to anticipate, forecast,
identify, and respond to changes in fashion trends, consumer demand for
the products and other market factors;
• the loss of any significant customers, decreased demand by industry
retailers and the cancellation of order commitments;
• our ability to remain competitive among sellers of footwear for consumers,
including in the highly competitive performance footwear market;
• global economic, political and market conditions including the challenging
consumer retail market in
• other factors referenced or incorporated by reference in our annual report
on Form 10-K for the year ended
1A: Risk Factors" and "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The risks included herein are not exhaustive. Other sections of this report may
include additional factors that could adversely impact our business, financial
condition and results of operations. Moreover, we operate in a very competitive
and rapidly changing environment, and new risk factors emerge from time to time.
We cannot predict all such risk factors, nor can we assess the impact of all
such risk factors on our business or the extent to which any factor or
combination of factors may cause actual results to differ materially from those
contained in any forward-looking statements. Given these inherent and changing
risks and uncertainties, investors should not place undue reliance on
forward-looking statements, which reflect our opinions only as of the date of
this quarterly report, as a prediction of actual results. We undertake no
obligation to publicly release any revisions to the forward-looking statements
after the date of this document, except as otherwise required by reporting
requirements of applicable federal and states securities laws.
OVERVIEW
For the third quarter, sales exceeded$1.5 billion . This is a new third quarter record and second consecutive quarter achieving this sales milestone, reflecting the continued global demand for our product. Sales increased across all of our segments compared to the same period in 2020 and surpassed pre-COVID-19 pandemic levels with growth of over 14% compared to the third quarter of 2019. This growth came despite continued impacts of COVID-19, including temporary store closures and operating restrictions in some regions as well as supply chain constraints, including shipping container shortages, port congestion and delayed shipments to customers. While increased transit times have delayed the timing of product availability and impacted sales, congestion at some global ports has been improving, although we expect supply chain constraints will continue in the fourth quarter of 2021 and into the first half of 2022. Our core product philosophy of comfort, style, innovation, and quality at the right price continues to resonate with consumers during the pandemic. We remain focused on delivering our comfort technology footwear as quickly as possible to meet the consumer demand. 17
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We remain confident in the strength of our brand and the relevance of our distinct product offering. We continue to invest for growth with a focus on enhancing our global infrastructure, direct-to-consumer technologies and developing innovative footwear. Current global infrastructure investments and technology projects include:
• We continued efforts to expand our e-commerce presence internationally.
• Our new
fully operational.
• Development continued on our North American LEED Gold Certifieddistribution center expansion, which we expect to be completed in 2022.
• We are in the process of opening new distribution centers in
• We opened 279, net company-owned and third-party Skechers stores globally
this year, including our first stores in the
RESULTS OF OPERATIONS - THIRD QUARTER
Selected information from our results of operations follows:
Three Months Ended September 30, Change
(in thousands) 2021 2020 $ %
Sales $ 1,550,957 $ 1,300,886 $ 250,071 19.2
Cost of sales 781,513 675,765 105,748 15.6
Gross profit 769,444 625,121 144,323 23.1
Gross margin 49.6 % 48.1 % 150 bps
Royalty income 7,519 3,216 4,303 133.8
776,963 628,337 148,626 23.7
Operating expenses:
Selling 119,775 85,926 33,849 39.4
General and administrative 510,941 450,285 60,656 13.5
Total operating expenses 630,716 536,211 94,505 17.6
Earnings from operations 146,247 92,126 54,121 58.7
Interest income 813 1,884 (1,071 ) (56.8 )
Interest expense (3,348 ) (4,643 ) (1,295 ) (27.9 )
Other, net (5,514 ) 7,726 (13,240 ) (171.4 )
Earnings before income taxes 138,198 97,093 41,105 42.3
Income tax expense 21,497 14,983 6,514 43.5
Net earnings 116,701 82,110 34,591 42.1
Net earnings attributable to
noncontrolling interest 13,562 17,832 (4,270 ) (23.9 )
Net earnings attributable to Skechers
U.S.A. Inc. $ 103,139 $ 64,278 $ 38,861 60.5
Sales
Sales increased $250.1 million , or 19.2%, to $1.6 billion as compared to
$1.3 billion as a result of a 20.1% increase in domestic sales and an 18.6%
increase in international sales. Domestic and international growth was driven by
increases in both direct-to-consumer and wholesale, as COVID-19 impacts
continued to ease. Sales grew across all segments with increases to Domestic
Wholesale of 10.1%, International Wholesale of 10.6% and Direct-to-Consumer of
44.1%. Sales increased overall due to higher average selling prices and improved
volume, particularly with Direct-to-Consumer consumers.
Gross margin
Gross margin increased 150 basis points to 49.6% compared to 48.1%, primarily driven by increased Direct-to-Consumer gross margins, resulting from higher average selling prices, partially offset by declines in International Wholesale and Domestic Wholesale due to higher average cost per unit, including supply chain related freight increases.
Selling expenses
Selling expenses increased$33.8 million , or 39.4%, to$119.8 million from$85.9 million , due to higher global advertising costs of$28.6 million . Prior year advertising was lower due to worldwide store and market closures. As a percentage of sales, selling expenses were 7.7% and 6.6% for the three months endedSeptember 30, 2021 and 2020.
General and administrative expenses
General and administrative expenses increased$60.7 million , or 13.5%, primarily driven by increased labor costs of$23.5 million , rent of$7.8 million and global warehouse and distribution of$6.3 million primarily due to increased operating hours 18
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and staffing levels within our retail stores, the opening of new stores and distribution center expansions, and volume-driven warehouse expenses. As a percentage of sales, general and administrative expenses improved to 32.9% as compared to 34.6% in the prior year.
Other income (expense)
Interest income decreased$1.1 million to$0.8 million as compared to$1.9 million , primarily due to lower average interest rates compared to the prior year period. Interest expense decreased$1.3 million due to the repayment of our revolving credit facility in the prior quarter. Other, net decreased$13.2 million primarily attributable to losses on unfavorable foreign currency exchange rates. Income taxes
Income tax expense and the effective tax rate were as follows:
Three Months Ended September 30,
(in thousands) 2021 2020
Income tax expense $ 21,497 $ 14,983
Effective tax rate 15.6 % 15.4 %
Our provision for income tax expense and effective income tax rate are
significantly impacted by the mix of our domestic and foreign earnings before
income taxes. In the foreign jurisdictions in which we have operations, the
applicable statutory rates range from 0.0% to 34.0%, which on average are
generally significantly lower than the U.S. federal and state combined statutory
rate of approximately 24.5%. For the quarter, the effective tax rate remained
flat due to the prior-year mixture of our domestic and foreign earnings (loss)
and return to provision adjustments from completing the 2020 U.S. federal income
tax return in the current quarter.
Noncontrolling interest in net income of consolidated joint ventures
Noncontrolling interest represents the share of net earnings that is
attributable to our joint venture partners. Net earnings attributable to
noncontrolling interest decreased
RESULTS OF SEGMENT OPERATIONS - THIRD QUARTER
Domestic Wholesale
Three Months Ended September 30, Change
(in thousands) 2021 2020 $ %
Sales $ 350,672 $ 318,449 $ 32,223 10.1
Gross profit 126,233 123,122 3,111 2.5
Gross margin 36.0 % 38.7 % (270 ) bps
Domestic Wholesale sales increased $32.2 million , or 10.1% to $350.7 million due
to a 10.6% increase in the number of units sold, partially offset by a decrease
of 0.4% in average selling price per unit.
Domestic Wholesale gross margin decreased 270 basis points to 36.0% due to higher average cost per unit and unfavorable product mix.
International Wholesale
Three Months Ended September 30, Change
(in thousands) 2021 2020 $ %
Sales $ 711,886 $ 643,393 $ 68,493 10.6
Gross profit 319,557 295,565 23,992 8.1
Gross margin 44.9 % 45.9 % (100 ) bps
International Wholesale sales increased $68.5 million , or 10.6%, to
$711.9 million compared to sales of $643.4 million , primarily driven by growth
of 61.9% in Distributor sales, 10.0% in China and 67.5% in India , partially
offset by an 11.0% decline in our European subsidiaries. Volume increased 4.0%
in the number of units sold and average selling price per unit increased 6.4%.
International Wholesale gross margin decreased 100 basis points to 44.9%, primarily due to higher average cost per unit, partially offset by higher average selling prices.
Direct-to-Consumer
Three Months Ended September 30, Change
(in thousands) 2021 2020 $ %
Sales $ 488,399 $ 339,044 $ 149,355 44.1
Gross profit 323,654 206,434 117,220 56.8
Gross margin 66.3 % 60.9 % 540 bps
19
-------------------------------------------------------------------------------- Direct-to-Consumer sales increased$149.4 million , or 44.1%, to$488.4 million as compared to sales of$339.0 million , primarily driven by growth across all channels, led by domestic and international retail stores of 43.8%. Direct-to-Consumer comparable same store sales increased 31.0%, driven by an increase of 33.7% domestically and 25.1% internationally. Volume increased 16.8% in the number of units sold and average selling price per unit increased 23.2%.
Direct-to-Consumer gross margin increased 540 basis points to 66.3%, due to higher average selling price per unit and reduced promotional activity.
Comparable store sales mentioned above includes stores that have been opened for at least thirteen calendar months as well as sales on our company-owned websites. We did not make any adjustments for the effects of the COVID-19 pandemic and the related impacts of store closures and reduced operating hours. Definitions and calculations of comparable store sales differ among companies in the retail industry, and therefore comparable store sales disclosed by us may not be comparable to the metrics disclosed by other companies.
RESULTS OF OPERATIONS - NINE MONTHS
Selected information from our results of operations follows:
Nine Months Ended September 30, Change
(in thousands) 2021 2020 $ %
Sales $ 4,637,147 $ 3,272,703 $ 1,364,444 41.7
Cost of sales 2,338,587 1,731,349 607,238 35.1
Gross profit 2,298,560 1,541,354 757,206 49.1
Gross margin 49.6 % 47.1 % 250 bps
Royalty income 17,654 11,061 6,593 59.6
2,316,214 1,552,415 763,799 49.2
Operating expenses:
Selling 337,519 220,222 117,297 53.3
General and administrative 1,473,570 1,256,228 217,342 17.3
Total operating expenses 1,811,089 1,476,450 334,639 22.7
Earnings from operations 505,125 75,965 429,160 564.9
Interest income 2,518 5,739 (3,221 ) (56.1 )
Interest expense (10,878 ) (11,428 ) (550 ) (4.8 )
Other, net (11,705 ) 15,882 (27,587 ) (173.7 )
Earnings before income taxes 485,060 86,158 398,902 463.0
Income tax expense 92,027 18,104 73,923 408.3
Net earnings 393,033 68,054 324,979 477.5
Net earnings attributable to
noncontrolling interest 53,952 22,771 31,181 136.9
Net earnings attributable to Skechers
U.S.A. Inc. $ 339,081 $ 45,283 $ 293,798 648.8
Sales
Sales increased $1.4 billion , or 41.7%, to $4.6 billion as compared to $3.3
billion reflecting a 42.4% domestic increase and a 41.2% increase
internationally, with the largest contribution derived from International
Wholesale growth. Sales grew across all segments with increases to Domestic
Wholesale of 36.0%, International Wholesale of 35.6% and Direct-to-Consumer of
58.9%. Sales increased overall due to higher volume and the impact of prior year
market closures related to the COVID-19 pandemic.
Gross margin
Gross margin increased 250 basis points to 49.6% compared to 47.1%, driven by higher gross margins in the Direct-to-Consumer segment, which was the result of increased average selling prices and reduced promotional activity.
Selling expenses
Selling expenses increased
General and administrative expenses
General and administrative expenses increased$217.3 million , or 17.3%, primarily driven by higher volume-driven global warehouse and distribution expenses of$63.1 million , labor costs of$55.6 million , incentive compensation of$36.8 million , and rent of$27.7 million . As a percentage of sales, general and administrative expenses were 31.8% and 38.4% for the nine months endedSeptember 30, 2021 and 2020. 20 --------------------------------------------------------------------------------
Other income (expense)
Interest income decreased
Income taxes
Income tax expense and the effective tax rate were as follows:
Nine Months Ended September 30,
(in thousands) 2021 2020
Income tax expense $ 92,027 $ 18,104
Effective tax rate 19.0 % 21.0 %
Our provision for income tax expense and effective income tax rate are
significantly impacted by the mix of our domestic and foreign earnings (loss)
before income taxes. In the foreign jurisdictions in which we have operations,
the applicable statutory rates range from 0.0% to 34.0%, which on average are
generally significantly lower than the U.S. federal and state combined statutory
rate of approximately 24.5%. Yeartodate, the decrease in the effective tax
rate was the result of changes in the mixture of our domestic and foreign
earnings (loss) and the absence of a prior-year non-recurring, non-deductible
charge.
Noncontrolling interest in net income of consolidated joint ventures
Noncontrolling interest represents the share of net earnings that is attributable to our joint venture partners. Net earnings attributable to noncontrolling interest increased$31.2 million to$54.0 million as compared to$22.8 million , primarily due to increased profitability by our joint ventures, predominantlyChina , due to reduced impacts related to the COVID-19 pandemic.
RESULTS OF SEGMENT OPERATIONS - NINE MONTHS
Domestic Wholesale
Nine Months Ended September 30, Change
(in thousands) 2021 2020 $ %
Sales $ 1,124,989 $ 827,148 $ 297,841 36.0
Gross profit 421,331 318,824 102,507 32.2
Gross margin 37.5 % 38.5 % (100 ) bps
Domestic Wholesale sales increased
Domestic Wholesale gross margin decreased 100 basis points to 37.5% due to higher average cost per unit, partially offset by an increase in the average selling price per unit.
International Wholesale
Nine Months Ended September 30, Change
(in thousands) 2021 2020 $ %
Sales $ 2,174,252 $ 1,603,774 $ 570,478 35.6
Gross profit 989,403 716,489 272,914 38.1
Gross margin 45.5 % 44.7 % 80 bps
International Wholesale sales increased $0.6 billion , or 35.6%, to $2.2 billion
compared to sales of $1.6 billion , primarily driven by growth in China of 52.6%,
Europe of 16.1% and distributor sales of 44.5%. Volume increased 26.9% in the
number of units sold and average selling price per unit increased 6.9%.
International Wholesale gross margin increased 80 basis points to 45.5% primarily due to the increase in average selling price per unit, partially offset by an increase in the average cost per unit.
Direct-to-Consumer
Nine Months Ended September 30, Change
(in thousands) 2021 2020 $ %
Sales $ 1,337,906 $ 841,781 $ 496,125 58.9
Gross profit 887,826 506,041 381,785 75.4
Gross margin 66.4 % 60.1 % 630 bps
Direct-to-Consumer sales increased $0.5 billion , or 58.9%, to $1.3 billion as
compared to sales of $0.8 billion , primarily driven by growth in domestic and
international retail store sales of 60.5%. Direct-to-Consumer comparable same
store sales increased 45.0%, driven by an increase of 49.4% domestically and
33.4% internationally. Average selling price per unit increased 17.7% and volume
increased 34.9% in the number of units sold.
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Direct-to-Consumer gross margin increased 630 basis points to 66.4%, primarily
driven by the increase in average selling price per unit and reduced promotional
activity.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity outlook
Our liquidity remains strong with$1.0 billion of cash and cash equivalents atSeptember 30, 2021 . Amounts held outside theU.S. were$703.1 million , or 73.9%, and approximately$357.4 million was available for repatriation to theU.S. as ofSeptember 30, 2021 without incurring additionalU.S. federal income taxes and applicable non-U.S. income and withholding taxes. InOctober 2021 , approximately$110.0 million of cash was repatriated to theU.S. We fully repaid the$452.5 million balance on our revolving credit facility in the second quarter. Our unused credit capacity under this agreement is$483.3 million with an additional$250.0 million available through an accordion feature. We believe that anticipated cash flows from operations, existing cash and investments balances, available borrowings under our revolving credit facility, and current financing arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipated working capital and capital requirements for the next twelve months.
Cash Flows
Our working capital atSeptember 30, 2021 was$2.0 billion , a decrease of$0.1 billion from working capital of$2.1 billion atDecember 31, 2020 . Our cash and cash equivalents atSeptember 30, 2021 were$1.0 billion , compared to$1.4 billion atDecember 31, 2020 . Our primary sources of operating cash are collections from customers. Our primary uses of cash are inventory purchases, selling, general and administrative expenses and capital expenditures.
Operating Activities
For the nine months endedSeptember 30, 2021 , net cash provided by operating activities was$253.2 million as compared to$57.0 million for the nine months endedSeptember 30, 2020 . The$196.2 million increase in net cash provided by operating activities primarily resulted from increased net earnings and timing of payments to vendors, partially offset by increased inventory purchases.
Investing Activities
Net cash used in investing activities was$256.1 million for the nine months endedSeptember 30, 2021 as compared to$212.1 million for the nine months endedSeptember 30, 2020 . The$44.0 million increase was due to increased capital expenditures of$22.4 million and net investment activity of$21.6 million . Our capital investments remain focused on supporting our strategic growth priorities, growing our Direct-to-Consumer business, as well as expanding the presence of our brand internationally. Capital expenditures for the nine months endedSeptember 30, 2021 were approximately$235.6 million , which included$82.1 million for the expansion of our joint-venture owned domestic distribution center,$59.7 million for investments in our new corporate offices and other real estate, and$42.4 million of investments in our direct-to-consumer technology and retail stores. We expect our ongoing capital expenditures for the remainder of 2021 to be approximately$80.0 million to$110.0 million , which is primarily related to the expansion of our worldwide distribution capabilities, continued investments in retail and e-commerce technologies and stores, and our new corporate offices inSouthern California . We expect to fund ongoing capital expenses through a combination of borrowings and available cash.
Financing Activities
Net cash used in financing activities was$415.5 million during the nine months endedSeptember 30, 2021 compared to$637.4 million in net cash provided by financing activities during the nine months endedSeptember 30, 2020 . The change is primarily the result of repaying$452.5 on our revolving credit facility in the current year and receiving$490.0 million in proceeds from our revolving credit facility in the prior year.
Capital Resources and Prospective Capital Requirements
Financing Arrangements
As ofSeptember 30, 2021 , outstanding short-term and long-term borrowings were$326.8 million , of which$266.8 million relates to loans for our domestic andChina distribution centers,$58.6 million relates to our operations inChina and the remainder relates to our international operations. Our long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. We were in compliance with all debt covenants related to our short-term and long-term borrowings as of the date of this quarterly report. See Note 4 - Financial Commitments of the Condensed Consolidated Financial Statements for additional information.
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