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 of$1.9 billion in the third quarter set a new quarterly record, reflecting the robust global demand for our product. Sales increased across both of our segments compared to the same period in 2021. We delivered this global growth despite continued headwinds, including supply chain challenges, adverse foreign exchange rates, 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 of our North American LEED Certified Gold
distribution center and leasing additional warehouse space nearby to
increase capacity.
• Continuing development on our LEED Certified Gold corporate headquarters
expansion and product design center.
RESULTS OF OPERATIONS - THIRD 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 September 30, Change
(in thousands) 2022 2021 $ %
Sales $ 1,878,367 $ 1,558,476 319,891 20.5
Cost of sales 994,432 781,513 212,919 27.2
Gross profit 883,935 776,963 106,972 13.8
Gross margin 47.1 % 49.9 % (280 )bps
Operating expenses
Selling 150,857 127,845 23,012 18.0
General and administrative 603,107 502,871 100,236 19.9
Total operating expenses 753,964 630,716 123,248 19.5
As a % of sales 40.1 % 40.5 % (30 )bps
Earnings from operations 129,971 146,247 (16,276 ) (11.1 )
Operating margin 6.9 % 9.4 % (250 )bps
Other expense (15,139 ) (8,049 ) (7,090 ) 88.1
Earnings before income taxes 114,832 138,198 (23,366 ) (16.9 )
Income tax expense 20,498 21,497 (999 ) (4.6 )
Net earnings 94,334 116,701 (22,367 ) (19.2 )
Net earnings attributable to
noncontrolling interests 8,448 13,562 (5,114 ) (37.7 )
Net earnings attributable to Skechers
U.S.A., Inc. $ 85,886 $ 103,139 (17,253 ) (16.7 )
Sales
Sales increased $319.9 million , or 20.5%, to $1.9 billion compared to
$1.6 billion as a result of a 14.9% increase domestically and a 24.6% increase
internationally, primarily driven by strength in wholesale sales. Both segments
experienced growth, with Wholesale growth of 26.2% and Direct-to-Consumer growth
of 11.9%. Sales increased overall due to improved volume and higher average
selling prices.
Gross margin
Gross margin decreased 280 basis points to 47.1% compared to 49.9%, primarily the result of increased freight and logistics costs, and a higher proportion of distributor sales, partially offset by average selling price increases.
Operating expenses
Operating expenses increased$123.2 million , or 19.5%, to$754.0 million , and as a percentage of sales improved 30 basis points to 40.1% compared to 40.5% in the prior year. Selling expenses increased$23.0 million , or 18.0%, to$150.9 million , primarily due to higher global digital and brand demand creation expenditures. General and administrative expenses increased$100.2 million , or 19.9%, to$603.1 million , and as a percentage of sales improved 20 basis points to 32.1%. These increased expenses were primarily due to higher labor of$56.5 million as a result of supply chain and logistics challenges, and volume-driven warehouse and distribution expenses of$25.0 million .
Other expense
Other expense of
18
--------------------------------------------------------------------------------Income taxes
Income tax expense and the effective tax rate were as follows:
Three Months Ended September 30,
(in thousands) 2022 2021
Income tax expense $ 20,498 $ 21,497
Effective tax rate 17.9 % 15.6 %
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 35%, 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 is the result of revisions to
the estimated provision compared to the 2021 U.S. federal income tax return
finalized in the current quarter and changes in the valuation allowance.
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 - THIRD QUARTER
Wholesale
Three Months Ended September 30, 2022 vs 2021 Change 2021 vs 2020 Change
(in thousands) 2022 2021 2020 $ % $ %
Sales $ 1,191,586 $ 944,465 $ 842,741 247,121 26.2 101,724 12.1
Gross profit 424,600 361,868 344,403 62,732 17.3 17,465 5.1
Gross margin 35.6 % 38.3 % 40.9 % (270 )bps (260 )bps
2022 to 2021 Comparison
Wholesale sales increased
Wholesale gross margin decreased 270 basis points to 35.6% due to higher average cost per unit, driven by increased freight costs which were partially offset by average selling price increases.
2021 to 2020 Comparison
Wholesale sales increased$101.7 million , or 12.1%, to$944.5 million , as a result of growth across all regions. Growth was 17.2% in theAmericas , 8.1% inEurope ,Middle East &Africa , and 7.4% inAsia Pacific . Volume increased 7.3% in the number of units sold and average selling price per unit increased 4.0%.
Wholesale gross margin decreased 260 basis points to 38.3% primarily due to higher average per unit costs and a higher mix of distributor sales, partially offset by average selling price increases.
Direct-to-Consumer
Three Months Ended September 30, 2022 vs 2021 Change 2021 vs 2020 Change
(in thousands) 2022 2021 2020 $ % $ %
Sales $ 686,781 $ 614,011 $ 461,361 72,770 11.9 152,650 33.1
Gross profit 459,335 415,095 283,934 44,240 10.7 131,161 46.2
Gross margin 66.9 % 67.6 % 61.5 % (70 )bps 610 bps
2022 to 2021 Comparison
Direct-to-Consumer sales increased$72.8 million , or 11.9%, to$686.8 million , led by increases in theAmericas of 13.8% andAsia Pacific of 10.0%. Volume increased 11.1% in the number of units sold and average selling price per unit increased 0.6%. Direct-to-Consumer gross margin decreased 70 basis points to 66.9%, primarily due to higher per unit freight costs partially offset by average selling price increases. 2021 to 2020 Comparison Direct-to-Consumer sales increased$152.7 million , or 33.1%, to$614.0 million , driven by increases across all regions which experienced COVID restrictions in 2020. Growth was 45.4% in theAmericas , 43.5% inEurope ,Middle East &Africa , and 11.1% inAsia Pacific . Volume increased 10.7% in the number of units sold and average selling price per unit increased 20.2%.
Direct-to-Consumer gross margin increased 610 basis points to 67.6%, primarily driven by higher average selling prices.
19
--------------------------------------------------------------------------------RESULTS OF OPERATIONS - NINE MONTHS
Selected information from our results of operations follows:
Nine Months Ended September 30, Change
(in thousands) 2022 2021 $ %
Sales $ 5,565,765 $ 4,654,802 910,963 19.6
Cost of sales 2,960,088 2,338,588 621,500 26.6
Gross profit 2,605,677 2,316,214 289,463 12.5
Gross margin 46.8 % 49.8 % (290 )bps
Operating expenses
Selling 425,675 360,640 65,035 18.0
General and administrative 1,719,969 1,450,449 269,520 18.6
Total operating expenses 2,145,644 1,811,089 334,555 18.5
As a % of sales 38.6 % 38.9 % (40 )bps
Earnings from operations 460,033 505,125 (45,092 ) (8.9 )
Operating margin 8.3 % 10.9 % (260 )bps
Other expense (40,144 ) (20,065 ) (20,079 ) 100.1
Earnings before income taxes 419,889 485,060 (65,171 ) (13.4 )
Income tax expense 83,229 92,027 (8,798 ) (9.6 )
Net earnings 336,660 393,033 (56,373 ) (14.3 )
Net earnings attributable to
noncontrolling interests 39,147 53,952 (14,805 ) (27.4 )
Net earnings attributable to Skechers
U.S.A., Inc. $ 297,513 $ 339,081 (41,568 ) (12.3 )
Sales
Sales increased $911.0 million , or 19.6%, to $5.6 billion compared to
$4.7 billion reflecting a 19.3% increase domestically and a 19.8% increase
internationally, with the largest contribution derived from wholesale sales.
Both segments experienced increases with Wholesale increasing 25.6% and
Direct-to-Consumer increasing 10.0%. Sales increased overall due to improved
volume and higher average selling prices.
Gross margin
Gross margin decreased 290 basis points to 46.8% compared to 49.8%, primarily driven by increased freight and logistics costs, and an increased mix of wholesale sales, partially offset by average selling price increases.
Operating expenses
Operating expenses increased$334.6 million , or 18.5%, to$2.1 billion , and as a percentage of sales improved 40 basis points to 38.6% compared to 38.9% in the prior year. Selling expenses increased$65.0 million , or 18.0%, to$425.7 million from$360.6 million , primarily due to higher demand creation expenditures. General and administrative expenses increased$269.5 million , or 18.6%, to$1.7 billion , primarily due to higher labor and compensation costs of$139.3 million and volume-driven warehouse and distribution expenses of$39.9 million .
Other expense
Other expense increased
Income taxes
Income tax expense and the effective tax rate were as follows:
Nine Months Ended September 30,
(in thousands) 2022 2021
Income tax expense $ 83,229 $ 92,027
Effective tax rate 19.8 % 19.0 %
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 35.0%, which on average are
generally significantly lower than the U.S. federal and state combined statutory
rate of approximately 25%. Year-to-date, the increase in the effective tax rate
was the result of revisions to the estimated provision compared to the 2021 U.S.
federal income tax return finalized in the current quarter and changes in the
valuation allowance.
20
--------------------------------------------------------------------------------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$14.8 million to$39.1 million compared to$54.0 million , primarily due to lower earnings by our joint ventures, predominantly inChina which were partially offset by improvements in otherAsia Pacific countries.
RESULTS OF SEGMENT OPERATIONS - NINE MONTHS
Wholesale
Nine Months Ended September 30, 2022 vs 2021 Change 2021 vs 2020 Change
(in thousands) 2022 2021 2020 $ % $ %
Sales $ 3,583,216 $ 2,851,803 $ 2,114,748 731,413 25.6 737,055 34.9
Gross profit 1,294,039 1,110,859 832,369 183,180 16.5 278,490 33.5
Gross margin 36.1 % 39.0 % 39.4 % (280 )bps (40 )bps
2022 to 2021 Comparison
Wholesale sales increased $0.7 billion , or 25.6%, to $3.6 billion , driven
primarily by growth of 31.7% in the Americas and Europe , Middle East & Africa of
34.8%. Volume increased 20.8% in the number of units sold and average selling
price per unit increased 4.4%.
Wholesale gross margin decreased 280 basis points to 36.1% due to higher average cost per unit, primarily driven by increased freight and logistics costs, partially offset by average selling price increases.
2021 to 2020 Comparison
Wholesale sales increased$0.7 billion , or 34.9%, to$2.9 billion , as a result of growth across theAmericas of 38.3%,Asia Pacific of 40.2%, andEurope ,Middle East &Africa of 25.5% which were impacted by 2020 COVID-related market closures. Volume increased 29.7% in the number of units sold and average selling price per unit increased 4.0%.
Wholesale gross margin decreased 40 basis points to 39.0% primarily due to higher average per unit costs and a higher mix of distributor sales, partially offset by average selling price increases.
Direct-to-Consumer
Nine Months Ended September 30, 2022 vs 2021 Change 2021 vs 2020 Change
(in thousands) 2022 2021 2020 $ % $ %
Sales $ 1,982,549 $ 1,802,999 $ 1,169,017 179,550 10.0 633,982 54.2
Gross profit 1,311,638 1,205,355 720,046 106,283 8.8 485,309 67.4
Gross margin 66.2 % 66.9 % 61.6 % (70 )bps 530 bps
2022 to 2021 Comparison
Direct-to-Consumer sales increased$179.6 million , or 10.0%, to$2.0 billion , led by increases in theAmericas of 9.3%,Europe ,Middle East &Africa of 27.6%, andAsia Pacific of 6.7%. Volume increased 3.4% in the number of units sold and average selling price per unit increased 6.3%.
Direct-to-Consumer gross margin decreased 70 basis points to 66.2%, driven by increased freight costs, partially offset by average selling price increases.
2021 to 2020 Comparison
Direct-to-Consumer sales increased$0.6 billion , or 54.2%, to$1.8 billion , driven by increases of 59.5% in theAmericas , and 43.1% inAsia Pacific , and 71.0% inEurope ,Middle East &Africa which experienced COVID restrictions in 2020. Volume increased 32.7% in the number of units sold and average selling price per unit increased 16.2%.
Direct-to-Consumer gross margin increased 530 basis points to 66.9%, primarily driven by higher average selling prices.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity outlook
We have cash and cash equivalents of$508.3 million atSeptember 30, 2022 . Amounts held outside theU.S. were$440.5 million , or 86.7%, and approximately$146.7 million was available for repatriation to theU.S. as ofSeptember 30, 2022 without incurring additionalU.S. federal income taxes and applicable non-U.S. income and withholding taxes. 21 -------------------------------------------------------------------------------- We borrowed$25.0 million during the quarter on our revolving credit facility for working capital management. As ofSeptember 30, 2022 , our unused credit capacity under this agreement was$722.2 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, 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 atSeptember 30, 2022 were$508.3 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 working capital, selling, general and administrative expenses and capital expenditures.
Operating Activities
For the nine months endedSeptember 30, 2022 , net cash used in operating activities was$42.8 million compared to net cash provided of$253.2 million for the nine months endedSeptember 30, 2021 . The$296.1 million decrease in operating cash flows primarily resulted from increased inventory purchases and receivables balances on wholesale sales and lower net earnings.
Investing Activities
Net cash used in investing activities was$192.7 million for the nine months endedSeptember 30, 2022 compared to$256.1 million for the nine months endedSeptember 30, 2021 . The$63.4 million decrease was due to reduced net investment activity of$91.4 million , offset by increased capital expenditures of$28.0 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, 2022 were$263.6 million , which included$92.1 million related to the expansion of our global distribution infrastructure;$79.9 million related to investments in our retail stores and direct-to-consumer technologies; and$67.0 million of investments in our expanded corporate offices domestically and inIndia . We expect our annual capital expenditures for 2022 to be approximately$300.0 million to$325.0 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 available cash and borrowings.
Financing Activities
Net cash used in financing activities was$48.6 million during the nine months endedSeptember 30, 2022 compared to$415.5 million during the nine months endedSeptember 30, 2021 . The decrease is primarily the result of lower repayments on long-term borrowings of$447.5 million , partially offset by repurchasing$74.2 million of common stock.
Capital Resources and Prospective Capital Requirements
Financing Arrangements
As ofSeptember 30, 2022 , outstanding short-term and long-term borrowings were$393.4 million , of which$293.9 million relates to loans for our domestic andChina distribution centers,$60.6 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.
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 endedSeptember 30, 2022 .
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