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 contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements with regards to future revenue, projected operating results, earnings, spending, margins, cash flow, orders, expected timing of shipment of products, inventory levels, future growth or success in specific countries, categories or market sectors, continued or expected distribution to specific retailers, liquidity, capital resources and market risk, strategies and objectives. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state future results, performance or achievements, and can be identified by the use of forward-looking language such as "believe," "anticipate," "expect," "estimate," "intend," "plan," "project," "will," "could," "may," "might," or any variations of such words with similar meanings. 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 effects of
inflation around the world, challenging consumer retail market in the
United States ("U.S.") and the impact of Russia's war with Ukraine ; and
• 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
Sales exceeded$1.8 billion in the second quarter. This is a new quarterly sales record, reflecting the continued broad-based demand for our product. Sales increased across both of our segments compared to the same period in 2021. This global growth came despite ongoing challenges, including COVID-related temporary store closures and operating restrictions, shipping delays, and macroeconomic volatility. Our core product philosophy of comfort, style, innovation, and quality at the right price continues to resonate with consumers, and we remain focused on delivering our comfort technology footwear as quickly as possible to meet the consumer demand. 17 --------------------------------------------------------------------------------
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, technology projects and activities include:
• Expanding our e-commerce presence internationally.
• Completing the expansion, in July, of our North American LEED Gold
Certified distribution center to increase capacity.
• Continuing development on our LEED Gold Certified corporate headquarters
expansion, which we expect to be completed in 2024.
• Expanding our international distribution and supply chain footprint.
• Exploring new recycled materials to expand our sustainable product offering.
RESULTS OF OPERATIONS - SECOND QUARTER
During the first quarter of 2022, the Company realigned its reporting structure to two reportable segments, Wholesale and Direct-to-Consumer. Prior period amounts have been recast. Wholesale includes sales to department stores, family shoe stores, specialty running and sporting goods retailers, and big box club stores; franchisee and licensee third-party store operators; dedicated e-commerce retailers; and international distributors. Direct-to-Consumer includes direct sales to consumers through an integrated retail format of company-owned physical stores and digital platforms and hosted digital marketplaces in select international markets.
Selected information from our results of operations follows:
Three Months Ended June 30, Change
(in thousands) 2022 2021 $ %
Sales $ 1,867,804 $ 1,661,871 205,933 12.4
Cost of sales 970,225 808,279 161,946 20.0
Gross profit 897,579 853,592 43,987 5.2
Gross margin 48.1 % 51.4 % (330 )bps
Operating expenses
Selling 166,609 141,470 25,139 17.8
General and administrative 576,812 510,912 65,900 12.9
Total operating expenses 743,421 652,382 91,039 14.0
As a % of sales 39.8 % 39.3 % 50 bps
Earnings from operations 154,158 201,210 (47,052 ) (23.4 )
Operating margin 8.3 % 12.1 % (390 )bps
Other income (expense) (19,259 ) 2,158 (21,417 ) n/m
Earnings before income taxes 134,899 203,368 (68,469 ) (33.7 )
Income tax expense 28,739 41,545 (12,806 ) (30.8 )
Net earnings 106,160 161,823 (55,663 ) (34.4 )
Net earnings attributable to
noncontrolling interests 15,756 24,454 (8,698 ) (35.6 )
Net earnings attributable to Skechers
U.S.A., Inc. $ 90,404 $ 137,369 (46,965 ) (34.2 )
Sales
Sales increased $205.9 million , or 12.4%, to $1.9 billion as compared to
$1.7 billion as a result of a 15.4% increase in domestic sales and a 10.0%
increase in international sales, primarily driven by strength in wholesale
sales. Sales increased across both segments including Wholesale growth of 18.3%
and Direct-to-Consumer growth of 4.3%. Sales increased overall due to improved
volume and higher average selling prices.
Gross margin
Gross margin decreased 330 basis points to 48.1% compared to 51.4%, primarily driven by higher per unit freight costs and a higher proportion of wholesale sales, partially offset by average selling price increases.
Operating expenses
Operating expenses increased$91.0 million , or 14.0%, to$743.4 million , and as a percentage of sales, increased 50 basis points to 39.8% compared to 39.3% in the prior year. Selling expenses increased$25.1 million , or 17.8%, to$166.6 million primarily due to higher demand creation expenditures. General and administrative expenses increased$65.9 million , or 12.9%, to$576.8 million , primarily due to volume-driven increases in labor and warehouse and distribution expenses of$25.4 million , as well as higher rent and store operating costs of$10.8 million . 18 --------------------------------------------------------------------------------
Other income (expense)
Other expense of
Income taxes
Income tax expense and the effective tax rate were as follows:
Three Months Ended June 30,
(in thousands) 2022 2021
Income tax expense $ 28,739 $ 41,545
Effective tax rate 21.3 % 20.4 %
Our 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%, which on average is significantly lower than the
U.S. federal and state combined statutory rate of approximately 25%. For the
quarter, the increase in the effective tax rate primarily reflects additional
withholding taxes on certain foreign distributions.
Noncontrolling interests in net income of consolidated joint ventures
Noncontrolling interests represents the share of net earnings that is
attributable to our joint venture partners. Net earnings attributable to
noncontrolling interests decreased
RESULTS OF SEGMENT OPERATIONS - SECOND QUARTER
Wholesale
Three Months Ended June 30, 2022 vs 2021 Change 2021 vs 2020 Change
(in thousands) 2022 2021 2020 $ % $ %
Sales $ 1,140,325 $ 964,228 $ 385,862 176,097 18.3 578,366 149.9
Gross profit 414,479 379,426 154,574 35,053 9.2 224,852 145.5
Gross margin 36.3 % 39.4 % 40.1 % (300 )bps (70 )bps
2022 to 2021 Comparison
Wholesale sales increased
Wholesale gross margin decreased 300 basis points to 36.3% due to higher average cost per unit, driven by increased freight costs, partially offset by average selling price increases. 2021 to 2020 Comparison Wholesale sales increased$578.4 million , or 149.9% to$964.2 million , as a result of growth across all regions which experienced COVID restrictions in 2020. Growth was 207.5% in theAmericas , 148.7% inEurope ,Middle East &Africa , and 77.6% inAsia Pacific . Volume increased 143.1% in the number of units sold and average selling price per unit increased 3.1%. Wholesale gross margin decreased 70 basis points to 39.4% primarily due to higher average per unit costs, partially offset by average selling price increases. Direct-to-Consumer Three Months Ended June 30, 2022 vs 2021 Change 2021 vs 2020 Change (in thousands) 2022 2021 2020 $ % $ % Sales$ 727,479 $ 697,643 $ 346,209 29,836 4.3 351,434 101.5 Gross profit 483,100 474,166 216,590 8,934 1.9 257,576 118.9 Gross margin 66.4 % 68.0 % 62.6 % (160 )bps 540 bps 2022 to 2021 Comparison Direct-to-Consumer sales increased$29.8 million , or 4.3%, to$727.5 million , led by increases in theAmericas of 3.7%,Europe ,Middle East &Africa of 13.5%, andAsia Pacific of 2.7%. Volume was essentially flat with a decrease of 1.0% in the number of units sold and average selling price per unit increased 5.3%. Direct-to-Consumer gross margin decreased 160 basis points to 66.4%, primarily due to higher average per unit costs, partially offset by average selling price increases. 19 --------------------------------------------------------------------------------
2021 to 2020 Comparison
Direct-to-Consumer sales increased$351.4 million , or 101.5%, to$697.6 million , driven by increases across all regions which experienced COVID restrictions in 2020. Growth was 127.6% in theAmericas , 439.7% inEurope ,Middle East &Africa , and 48.6% inAsia Pacific . Volume increased 66.2% in the number of units sold and average selling price per unit increased 21.1%. Direct-to-Consumer gross margin increased 540 basis points to 68.0% primarily driven by higher average selling prices, partially offset by higher average per unit costs.
RESULTS OF OPERATIONS - SIX MONTHS
Selected information from our results of operations follows:
Six Months Ended June 30, Change
(in thousands) 2022 2021 $ %
Sales $ 3,687,398 $ 3,096,326 591,072 19.1
Cost of sales 1,965,656 1,557,075 408,581 26.2
Gross profit 1,721,742 1,539,251 182,491 11.9
Gross margin 46.7 % 49.7 % (300 )bps
Operating expenses
Selling 274,818 232,795 42,023 18.1
General and administrative 1,116,862 947,578 169,284 17.9
Total operating expenses 1,391,680 1,180,373 211,307 17.9
As a % of sales 37.7 % 38.1 % (40 )bps
Earnings from operations 330,062 358,878 (28,816 ) (8.0 )
Operating margin 9.0 % 11.6 % (260 )bps
Other expense (25,005 ) (12,016 ) (12,989 ) 108.1
Earnings before income taxes 305,057 346,862 (41,805 ) (12.1 )
Income tax expense 62,731 70,530 (7,799 ) (11.1 )
Net earnings 242,326 276,332 (34,006 ) (12.3 )
Net earnings attributable to
noncontrolling interests 30,699 40,390 (9,691 ) (24.0 )
Net earnings attributable to Skechers
U.S.A., Inc. $ 211,627 $ 235,942 (24,315 ) (10.3 )
Sales
Sales increased $0.6 billion , or 19.1%, to $3.7 billion as compared to
$3.1 billion as a result of a 21.4% increase in domestic sales and a 17.3%
increase in international sales, primarily driven by strength in wholesale
sales. Sales grew across both segments with increases to Wholesale of 25.4% and
Direct-to-Consumer of 9.0%. Sales increased overall due to improved volume and
higher average selling prices.
Gross margin
Gross margin decreased 300 basis points to 46.7% compared to 49.7%, primarily driven by higher per unit freight costs and a higher proportion of wholesale sales, partially offset by average selling price increases.
Operating expenses
Operating expenses increased$211.3 million , or 17.9%, to$1.4 billion , and as a percentage of sales, improved 40 basis points to 37.7% compared to 38.1% in the prior year. Selling expenses increased$42.0 million , or 18.1%, to$274.8 million from$232.8 million primarily due to higher demand creation expenditures. General and administrative expenses increased$169.3 million , or 17.9%, to$1.1 billion , primarily due to higher labor and incentive compensation costs of$82.8 million , rent of$15.6 million , and volume-driven warehouse and distribution expenses of$14.9 million .
Other income (expense)
Other expense increased
Income taxes
Income tax expense and the effective tax rate were as follows:
Six Months Ended June 30,
(in thousands) 2022 2021
Income tax expense $ 62,731 $ 70,530
Effective tax rate 20.6 % 20.3 %
20-------------------------------------------------------------------------------- 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 theU.S. federal and state combined statutory rate of approximately 25%. Year-to-date, the effective tax rate was essentially flat.
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 - SIX MONTHS
Wholesale
Six Months Ended June 30, 2022 vs 2021 Change 2021 vs 2020 Change
(in thousands) 2022 2021 2020 $ % $ %
Sales $ 2,391,631 $ 1,907,338 $ 1,272,007 484,293 25.4 635,331 49.9
Gross profit 869,439 748,992 487,966 120,447 16.1 261,026 53.5
Gross margin 36.4 % 39.3 % 38.4 % (290 )bps 90 bps
2022 to 2021 Comparison
Wholesale sales increased $0.5 billion , or 25.4% to $2.4 billion , driven
primarily by growth of 38.2% in the Americas and Europe , Middle East & Africa of
24.0%. Volume increased 18.8% in the number of units sold and average selling
price per unit increased 5.9%.
Wholesale gross margin decreased 290 basis points to 36.4% due to higher average
cost per unit, primarily driven by increased freight costs, partially offset by
average selling price increases.
2021 to 2020 Comparison
Wholesale sales increased$0.6 billion , or 49.9% to$1.9 billion , as a result of growth across theAmericas of 51.4%,Europe ,Middle East &Africa of 35.4% andAsia Pacific of 70.5% which were impacted by 2020 COVID-related market closures. Volume increased 43.6% in the number of units sold and average selling price per unit increased 4.5%.
Wholesale gross margin increased 90 basis points to 39.3% primarily due to higher average selling prices.
Direct-to-Consumer
Six Months Ended June 30, 2022 vs 2021 Change 2021 vs 2020 Change
(in thousands) 2022 2021 2020 $ % $ %
Sales $ 1,295,767 $ 1,188,988 $ 707,656 106,779 9.0 481,332 68.0
Gross profit 852,303 790,259 436,113 62,044 7.9 354,146 81.2
Gross margin 65.8 % 66.5 % 61.6 % (70 )bps 480 bps
2022 to 2021 Comparison
Direct-to-Consumer sales increased$106.8 million , or 9.0%, to$1.3 billion , led by increases in theAmericas of 6.8%,Europe ,Middle East &Africa of 44.2%, andAsia Pacific of 5.3%. Volume decreased 0.4% in the number of units sold and average selling price per unit increased 9.4%.
Direct-to-Consumer gross margin decreased 70 basis points to 65.8%, driven by increased freight costs, partially offset by average selling price increases.
2021 to 2020 Comparison
Direct-to-Consumer sales increased$0.5 billion , or 68.0%, to$1.2 billion , driven by increases of 68.8% in theAmericas , and 61.8% inAsia Pacific , and 100.6% inEurope ,Middle East &Africa which experienced COVID restrictions in 2020. Volume increased 47.0% in the number of units sold and average selling price per unit increased 14.2%.
Direct-to-Consumer gross margin increased 480 basis points to 61.6% primarily driven by higher average selling prices and lower average per unit costs.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity outlook
We have cash and cash equivalents of$751.9 million atJune 30, 2022 . Amounts held outside theU.S. were$587.3 million , or 78.1%, and approximately$232.4 million was available for repatriation to theU.S. as ofJune 30, 2022 without incurring additionalU.S. federal income taxes and applicable non-U.S. income and withholding taxes. 21 -------------------------------------------------------------------------------- In the second quarter of 2022, we fully repaid the$50.2 million balance on our revolving credit facility that had been drawn down during the first quarter. As ofJune 30, 2022 , our unused credit capacity under this agreement was$747.0 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 atJune 30, 2022 was$2.0 billion , an increase of$0.1 billion from working capital of$1.9 billion atDecember 31, 2021 . Our cash and cash equivalents atJune 30, 2022 were$751.9 million , compared to$796.3 million atDecember 31, 2021 . 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 six months endedJune 30, 2022 , net cash provided by operating activities was$154.7 million as compared to$317.2 million for the six months endedJune 30, 2021 . The$162.5 million decrease in net cash provided by operating activities primarily resulted from increased inventory purchases and receivables balances on wholesale sales.
Investing Activities
Net cash used in investing activities was
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 six months endedJune 30, 2022 were$163.5 million , which included$50.7 million of investments in our expanded corporate offices domestically and inIndia ;$49.9 million related to the expansion of our global distribution infrastructure; and$49.1 million related to investments in our retail stores and direct-to-consumer technologies. We expect our ongoing capital expenditures for the remainder of 2022 to be approximately$100.0 million to$150.0 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 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
Capital Resources and Prospective Capital Requirements
Financing Arrangements
As ofJune 30, 2022 , outstanding short-term and long-term borrowings were$326.7 million , of which$261.6 million relates to loans for our domestic andChina distribution centers,$57.1 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.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles inthe United States of America . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates did not change materially during the quarter endedJune 30, 2022 .
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