Walking shoe company, Skechers (NYSE: SKX), announced its third record revenue quarter in a row. Investors are wondering if the company is back to consistent growth as there was a lot to like in the results this quarter. On the earnings call, management provided detailed insights into the company’s surprisingly positive results for the domestic retail business, China’s continued amazing growth story, and the fact its inventory is positioned for continued growth in the coming year. First, let’s take a look at the encouraging results for U.S retail.
U.S. brick-and-mortar retail is not dead
Skechers saw solidly positive growth in both the domestic wholesale and the company-owned retail segments. The domestic wholesale business had an increase in pairs sold of 11.4% resulting in 6.4% revenue increase. Domestic company-owned stores saw 14.5% revenue increase, on positive same store sales of 7.1%.
For the second half, the company is admittedly conservative in projecting flat year-over-year sales and is cautiously optimistic about the back-to-school selling season with the positive results in the July sales numbers. While management recognizes that the domestic retail market is still uncertain, David Weinberg, chief financial officer, and chief operating officer explained that the company’s products provide it an advantage.
While the domestic retail environment remains challenging with the closing of numerous stores in 2016 and through the first half of 2017, we believe our product is unique and will appeal to those seeking comfort, style and value.
I contributed to Skechers second quarter revenue by buying a pair of Skechers walking shoes for the first time ever. I can relate to the way Weinberg described the company’s products, as those were the same reasons I decided to purchase my pair.
While investors were pleasantly surprised about single digit growth in the domestic market, China’s results continue to delight Skechers shareholders even more.
China is on fire (in a good way)
The company’s joint venture sales grew by 62.4%, led by double-digit gains in China. China sold 3.7 million pairs in the quarter, up 61% from last year. The number of retail stores where you can buy a pair of Skechers in China is now 2,235, up 44% from a year ago. Not only are the brick-and-mortar sales going great in China, e-commerce growth is on fire. Skechers e-commerce in China saw “triple-digit” growth which was the 7th quarter in a row of “high-double-digit” or “triple-digit” growth.
In order to support the projected $500 million of revenue in China this year, Skechers is building a distribution center in China and spent $20 million on land in the quarter to get this important node in the supply chain up and running. As I covered in this article, management wanted to break ground on this facility in 2017, and the company seems to be on track to accomplishing that goal.
With growing revenue in China and around the world, the company needs to ensure it has the right inventory in the right place to serve its customers.
Inventory is “just right”
Skechers inventory is up 13.4% year over year to $669.7 million. Weinberg explained why this inventory position was just right for the company.
The year-over-year increase was in line with our expectations and we’re very comfortable with our current inventory levels due to increased revenues in our global business, increased store count worldwide, new product introductions and increased backlogs.
Having worked in supply chain for part of my career, I call inventory management the “Goldilocks” problem. If you have too much inventory, you end up having to scrap product or sell at steep discounts — which impacts gross margin — as Under Armour and Fitbit are doing from overestimating demand in the 2016 holiday season. If you have too little inventory, customers will end up waiting for their products and companies will miss the opportunity for additional revenue.
Management went on to say that the solid inventory position along with the company’s investments and great cash position sets it up to have continued sales growth in the second half of the year, and into 2018.
Investors should be pleased management has positioned the company for continued growth into the coming year.
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