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spk01: Thank you for standing by. This is the conference operator. Welcome to the Skechers' third quarter 2020 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Skechers requests that analysts limit themselves to one question and one follow-up question only. to allow all analysts to have the opportunity to ask a question. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Skechers. Please go ahead.
spk00: Thank you, everyone, for joining us on Skechers' conference call today. I will now read the Safe Harbor Statement. Certain statements contained herein, including without limitation statements addressing the beliefs, plans, objectives, estimates, or expectations of the company or future results or events may constitute forward-looking statements that involve risks and uncertainties. Specifically, the COVID-19 pandemic has had and is currently having a significant impact on the company's business, financial conditions, cash flow, and results of operations. Such forward-looking statements with respect to the COVID-19 pandemic include without limitation statements the company's plans in response to the pandemic. At this time, there is significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. The dynamic nature of these circumstances means that what is said on this call could change at any time, and as a result, actual results could differ materially from those contemplated by such forward-looking statements. Additional forward-looking statements involve known and unknown risks, including but not limited to global, national, and local economic business and market conditions in general and specifically as they apply to the retail industry and the company. There can be no assurance that the actual future results, performance, or achievements expressed or implied by any of our forward-looking statements will occur. Users' forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8K, and all other reports filed with the SEC as required by federal securities law for a description of all other significant risk factors that may affect the company's business, financial conditions, cash flows, and results of operations. With that, I would like to turn the call over to SCETRA's Chief Operating Officer, David Weinberg, and Chief Financial Officer, John Vandemor. David? David?
spk03: Thank you for joining us today for our third quarter 2020 conference call. I hope you, your colleagues, and loved ones are healthy and staying safe. The pandemic continues to impact business throughout the world, but Skechers has seen meaningful improvements from the second quarter, including a return to growth in many markets. Third quarter sales were 1.3 billion, which was a 3.9% decrease from the prior year, but a 78.3% increase over the second quarter. a significant accomplishment, and an encouraging sign of the health of our brand. Growth came from each of our segments as the retail environment steadily improved with our wholesale channel stabilizing and in several instances growing. We believe our third quarter results speak to the relevance of our product, resilience of our company's distribution model, and our plan to emerge from the pandemic even stronger than before. In these uncertain times when people are predominantly working from home and more focused on their well-being, consumers desire comfort, and we have the product they want and need. Athletic and casual footwear and apparel with a focus on comfort is precisely in our wheelhouse. In our domestic wholesale business, growth came primarily from our adult, athletic, casual, and sandal footwear, along with single-digit improvements in our men's and women's collections. We experienced double-digit improvement in our kids' footwear, which is particularly notable given the absence of a traditional back-to-school selling season and many children still learning remotely. Our domestic wholesale business returned to growth in the quarter, rising 6.3%, a result of pent-up demand and the relevance of our product. We saw similar sales trends for our comfortable footwear and our other business channels with a return to growth in many markets, and quarterly improvements in our own direct-to-consumer business. The more than 3,770 Skechers stores, e-commerce sites, and availability in many of the leading retailers worldwide gave us the opportunity to fulfill demand and satisfy customers as the markets reopened. The pace of recovery has differed across geographies, but where markets are stable and open, Skechers experienced solid growth in sales. Our joint venture business was up 14%, led by an increase of 23.9% in China, where our e-commerce business was particularly strong. Our European subsidiaries were up 18.1% overall, led by fantastic growth in Germany, as well as in France and Central Eastern Europe. Our distributor business was down double digits due to ongoing store closures in several markets, including our largest distributor, which covers the Middle East. However, several markets recorded positive sales, including Australia, New Zealand, and Scandinavia, among others. By the end of the third quarter, all but a few Skechers retail locations were open, although many were operating with limited hours. In the quarter, we also opened 24 pre-COVID planned stores, including flagship locations on Rue de Rivoli, the premier shopping street in France, Oxford Circus in London, and Shinjuku in Tokyo. and two stores in Colombia and another 19 domestic and international locations. One store closed in the quarter. We plan to open several key locations in the fourth quarter, including our first in Munich and Berlin. In the third quarter, our direct-to-consumer business decreased 16.9% as consumer traffic remained challenged mostly in tourist and destination concept stores, as well as continued store closures in some markets. However, our domestic e-commerce business continued to grow significantly, even as our retail locations reopened, increasing 172.1% in a quarter. That said, we showed sequential improvement in our brick-and-mortar stores, particularly in our big box locations throughout the third quarter and from the second quarter. We continued to invest in our direct-to-consumer experience. During the quarter, we began a full-scale update to our point-of-sale system, and are now connected with our e-commerce channel, allowing consumers to shop our product online and pick up in one of our more than 500 US locations, either in-store or curbside. We believe these investments to fully integrate our physical and digital ecosystems into one omnichannel experience will drive sales as shopping online has become a preference and a growing necessity for many consumers. In addition to the 24 company-owned stores, 189 new third-party Skechers stores opened around the world and 48 closed, bringing our total company-owned third-party store count to 3,770 worldwide at quarter end. To support the reopening of our business in markets around the world, we strategically heightened our advertising efforts, continuing with a digital focus while adding in-store, outdoor, and new television campaigns for our comfort footwear. including one with baseball great and World Series champion Clayton Kershaw, who played this week in custom Skechers cleats. We believe the steps we have taken to protect and improve our business to reopen stronger than ever is evident in the growth we have achieved in many markets, including most notably our domestic wholesale channel. As we strive to continue this positive trend worldwide, we are further enhancing our infrastructure as well as our digital business. our new 1.5 million square foot China distribution center remains on track. And we are working diligently on the expansion of our North American distribution center, which we expect to be completed in the second half of 2021, bringing our facility to 2.6 million square feet. We also completed the expansion of our European distribution center, bringing it to 2.1 million square feet, and expect to open our first UK-based distribution center by the end of this year, Also, we have opened new distribution centers in Panama and Colombia, all to pave the way for growth as well as increased e-commerce business. We are on track to upgrade our e-commerce platforms in Canada, Europe, South America, Japan, and India. Further, as we continue to build our logistics centers for growth, and as we experience the pent-up demand for our product, we are ramping up our supply chain with increased factory production capacity to be in line with our future product needs. Now, I'd like to turn the call over to John.
spk04: Thank you, David. Before I start, I would like to once again thank our Skechers team worldwide for the resilience they've demonstrated throughout these turbulent times. Their unwavering dedication has positioned Skechers for the recovery we are beginning to see in our business. This quarter was a stark improvement over last quarter. as sales improved in each of our segments and total sales grew 78.3%. Where conditions returned to a degree of normalcy, our business responded with growth reminiscent of prior years. Where pandemic restrictions persisted, our businesses weathered the situation and improved steadily. Our sales were down only 3.9% year over year, which we view as a major accomplishment. As conditions normalize further worldwide, we are confident that Skechers will return to growth because our distinctive value proposition continues to resonate with consumers and our core casual athletic styles are on trend. Despite the current environment, we continue to invest for growth with a focus on our direct consumer capabilities and global distribution infrastructure. We are confident these investments will continue to propel our brand by allowing us to scale quicker and meet growing worldwide demand. Now let's turn to our third quarter results. Sales in the quarter totaled $1.3 billion, a decrease of $53.1 million or 3.9% from the prior year quarter. On a constant currency basis, sales decreased $65.6 million or 4.8%. Domestic wholesale sales increased 6.3%, or 18.8 million, fueled by consumer demand for multiple categories across men, women, and kids. International wholesale sales decreased 0.5% in the quarter. Our distributor business decreased 43.7% in the quarter, reflecting continuing challenges in distributor-led markets. But our subsidiaries were up 1.5%, and our joint ventures grew 14%. China sales grew 23.9% for the quarter as demand rebounded, especially in e-commerce channels. Direct-to-consumer sales decreased 16.9%, the result of a 15.3% decrease domestically and a 19.6% decrease internationally. reflecting both challenged consumer traffic trends and the impact of temporary store closures. However, these results were partially offset by another robust increase in our domestic e-commerce business of 172.1%. Gross profit was $625.1 million, down $28 million compared to the prior year on lower sales volumes. Gross margin was relatively flat compared with the prior year, as increased promotional activity in our joint ventures was nearly offset by a favorable mix shift in our online and international sales. Total operating expenses increased by $24.3 million, or 4.7%, to $536.2 million in the quarter. Selling expenses decreased by $11.6 million, or 11.9%, to $85.9 million primarily due to lower global advertising and trade show expenditures. General and administrative expenses increased by $35.9 million, or 8.7%, to $450.3 million, which was primarily the result of an $18.2 million one-time non-cash compensation charge related to the cancellation of restricted share grants associated with a recent legal settlement as well as volume-driven increases in warehouse and distribution expenses for both our international and domestic businesses. Earnings from operations was 92.1 million versus prior year earnings of 147.4 million. Net income was 64.3 million, or 41 cents per diluted share, on 155 million diluted shares outstanding. However, adjusting for the one-time non-cash compensation charge previously mentioned, net income was $82.6 million, or 53 cents per diluted share. These compare to prior year net income of $103.1 million, or 67 cents per diluted share, on 154 million diluted shares outstanding. Our effective income tax rate for the quarter decreased to 15.4%, from 15.8 percent in the prior year. And now turning to our balance sheet. We ended the quarter with $1.5 billion in cash, cash equivalents, and investments, which was an increase of $468.2 million, or 45.4 percent, from December 31, 2019, primarily reflecting the drawdown of our senior unsecured credit facility in the first quarter. Trade accounts receivable at quarter end were $709 million, an increase of 9.9% or $63.6 million from December 31, 2019, and an increase of 7% or $46.6 million from December 30, 2019. The increase in accounts receivable was primarily due to higher wholesale sales both domestically and in international markets. Total inventory was 1.05 billion, a decrease of 1.5 percent, or 16.5 million, from December 31, 2019, but an increase of 18.3 percent, or 163 million, from September 30, 2019. The increase in year-over-year inventory levels is largely attributable to increases in our international markets, especially in preparation for Singles Day in China, domestic inventory levels declined year over year. Overall, we feel confident in our inventory levels and continue to actively manage supply and demand, aiming to position the business constructively for next year. Total debt, including both current and long-term portions, was $812 million, compared to $121.2 million at December 31, 2019. The increase primarily reflects the drawdown of our senior unsecured credit facility in the first quarter. Capital expenditures for the third quarter were $63.6 million, of which $24.6 million related to the expansion of our domestic distribution center, $19.2 million related to new store openings and remodels worldwide as well as a new point-of-sale system, and $11.4 million related to our new corporate offices in the United States. Our capital investments remain focused on our strategic priorities, enhancing our direct-to-consumer relationships and augmenting our global distribution infrastructure. This quarter, we launched several digital solutions, including our new website and two mobile applications, BOPIS and BOPAC capabilities in the majority of our domestic stores, and a refresh of our in-store point-of-sale systems. We also continued to make progress, despite the pandemic, on our new distribution center in China, and expansions to our North American, South American, and European facilities. We have also begun the process of opening a new logistics center in the United Kingdom in anticipation of a post-Brexit environment. We now expect total capital expenditures for the remainder of the year to be between 100 and 125 million, inclusive of the aforementioned projects. Overall, we are pleased with our third quarter performance and remain confident that Skechers will continue to successfully navigate this dynamic environment. However, we will not be providing revenue and earnings guidance this quarter as the environment remains too unpredictable to forecast reliably. And now I'll turn the call over to David for closing remarks.
spk03: Thank you, John. As I discussed at the outset of this call, we are very pleased with our third quarter performance at only a 3.9% decrease from the same period last year, which was also our highest quarterly sales in our history and our ability to remain agile and drive sales during the pandemic. We experienced meaningful improvements from the second quarter in all channels of our business, especially in our domestic wholesale, which grew mid-single digits. Additionally, our wholesale business in many other markets was up single and double digits, Our direct-to-consumer sales improved since the second quarter, and backlogs are up in many key countries, including the United States. We remain very aware of the global health crisis, yet we remain confident in our actions and the strength of our brand and business as countries reopen and consumer confidence grows. The diversity of our distribution channels, broad-based consumer demographics, and our exceptionally strong balance sheet and ample liquidity have been especially beneficial to our success during this challenging year. We believe consumers will continue to gravitate toward comfort in their lives, and our athletic casual product at a reasonable price will continue to have worldwide appeal. We see many opportunities for near and long-term growth and believe we will be in an even stronger position in the future. Now, I would like to turn the call over to the operator for questions.
spk01: Thank you. We will now begin the question and answer session. Skechers request that analysts limit themselves to one question and one follow-up question only to allow all analysts to have the opportunity to ask a question. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question is from Jay Soule of UBS. Please go ahead.
spk02: Great. Thanks so much. I want to ask about how the back-to-school business trended in the United States in the quarter and sort of how that flowed into September. Can you give us an idea of what the U.S. business was like in August and then September, and maybe just tell us if that exit rate in September sort of continued into October, like how you see the business trending from there?
spk03: Basically, there was no back to school defined season, so what we saw was more equal distribution between July, August, and September. Because of that, we had slightly lower comps in August and slightly higher comps in September, simply because the comps in August were higher. That's the traditional back to school. But we saw strength coming through. We closed September. The comps in September were better than the comps for the quarter. or the individual month of August. So we seem to be improving, certainly on a comp basis. And our business is holding up in October as far as our retail is concerned, and as far as
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