Skechers U.S.A., Inc.

Greetings, and welcome to SCECHR's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, SCECHR's investor relation. Thank you, and you may begin.

Thank you, everyone, for joining us on SCECHR's 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, the company's plans in response to this 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, including supply chain delays and disruptions, 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 of 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 8-K, and all other reports filed with the SEC as required by federal securities laws 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 Skechers Chief Operating Officer, David Weinberg, and Chief Financial Officer, John Vandemoer. David?

Thank you for joining us today on our second quarter 2022 conference call. This year marks Sketch's 30th anniversary, and our accomplishments this quarter and year to date are a testament to the strength of the Sketch's brand, the creative talents of our design team who continue to evolve our leading comfort technologies, the strong execution by our management to build efficiencies to better serve our customers, and the commitment of our global workforce to drive growth in the face of ongoing COVID-related economic and political challenges. We would like to recognize the ongoing efforts of our global teams, from retail associates on the front lines to our supply chain personnel working diligently to move our product around the world. We would also like to acknowledge our team in China who continue to weather COVID-related restrictions as they safely work through lockdowns and return to business as cities open. Skechers is a wisely recognized and trusted brand as well as the third largest athletic footwear company in the world, with 4,355 Skechers stores and a network of leading retail partners. While we are a brand with a broad range of products and a fit for every age and need, we also know that not everyone has flipped on Skechers comfort, innovation, style, and quality. We also recognize that we are relatively new in many markets and have tremendous expansion and growth opportunities. In the second quarter, we focused on meeting the demands of our wholesale partners globally and expanding our direct-to-consumer business, including growing our digital commerce footprint. All to ensure our loyal consumers worldwide are able to wear Skechers comfort technology products. We delivered hands-free, slipping comfort footwear to men, women, and children, and continue to develop new styles with Skechers ArchFits. We launched Skechers Viper Court, a performance footwear designed specifically for pickleball, the fastest growing sport in America. Awareness for the Skechers performance division was also meaningfully elevated with major championship wins from two of our elite golfers. Brooke Henderson secured her second major career win at the Amundi Evian Championship in France this past weekend. while Matt Fitzpatrick earned his first major championship last month at the U.S. Open at Brookline. Getchers, the comfort technology company, remains a leading choice for our customers and consumers worldwide. Our brand strength and the efforts to meet the broad-based demand for our innovative comfort product result in a new quarterly sales record of $1.87 billion, an especially remarkable achievement given the macroeconomic headwinds supply chain issues, and COVID-related restrictions primarily in China. Total sales growth of 12% or 16% on a constant currency basis was the result of increases in our domestic and international businesses of 15% and 10% respectively. By region, the growth was driven by increases of 21% in the Americas and 8% in EMEA, which improved 17% on a constant currency basis. APAC sales were flat year over year, primarily due to lockdown measures in China, which began easing in June and were offset by strong growth in most other Asia-Pacific markets. On a constant currency basis, APAC sales improved 5%. In the quarter, our wholesale business increased 18%, led by 35% growth in the Americas, and 6% growth in EMEA, partially offset by a 3% decrease in APAC. Overall, wholesale sales were driven by an increase in unit volume and average selling price per unit. Our U.S. wholesale business increased 30% due to double-digit improvements across genders and categories, including apparel and accessory lines. This reflected strong consumer demand along with improved availability of products. In addition to the growth in the United States, nearly every other market in the Americas achieved double-digit growth, including Mexico and Canada. Growth in EMEA wholesale was primarily driven by strong distributor sales, particularly in the Middle East and Africa, as well as Scandinavia and Turkey. The EMEA improvements were partially offset by currency headwinds due to the weakening euro, as well as the continued cessation of shipments to Russia. APAC wholesale sales declined primarily due to the lockdown measures through much of the quarter in China. India, which faced temporary store closures and lockdown measures during the second quarter of 2021, returned to solid growth this year, driven by pent-up demand and the availability of product. South Korea, Malaysia, and our distributor in Australia and New Zealand all saw strong improvements. While China continues to navigate through the effects of COVID, We are confident in the long-term prospects for Skechers in this region. Turning to our direct-to-consumer business, sales increased 4% in the quarter due to growth of 14% in EMEA, 4% in the Americas, and 3% in APAC. Domestic DTC sales decreased slightly primarily due to a difficult retail store comparison to last year, partially offset by growth in digital commerce. China, which experienced lockdown measures for much of the quarter, saw declines in both stores and online. During the quarter, we saw sequential improvements. Today, the majority of our China stores have reopened, though traffic is not back to pre-closure levels. Nearly all other countries showed improvements. In the second quarter, we opened 46 company-owned Skechers stores, including 15 big-box stores in the United States, seven stores in India, and nine in China. We closed 34 locations in the quarter, including five concept stores in the United States and 24 in China. We ended the quarter with 4,355 Sketchers stores worldwide, of which 2,993 were third-party stores, including 123 that opened in the second quarter. In the third quarter to date, we've opened four company-owned stores, including two international stores, and an additional 115 to 135 company-owned locations are planned by year-end. The rollout of our new e-commerce platform continued in the second quarter with the launch of new sites in Belgium, the Czech Republic, Hungary, Italy, Netherlands, and Portugal. We expect to launch two additional sites in Europe, two in South America, and one in Japan. Further, we plan to roll out our robust domestic sketches plus loyalty program to international markets beginning with Canada, the UK, Germany, and Spain. To achieve our goal of $10 billion in annual sales by 2026, we will continue to strategically open Skechers stores, expand our digital commerce reach, enhance our DTC omnichannel capabilities through investments in our global point-of-sale system, and grow and upgrade our logistics centers to more efficiently distribute our best footwear assortment. Our belief in the long-term position of the Skechers brand and growth opportunities has never been stronger. As mentioned, moving our goods throughout our network of distribution centers has been a primary focus of our logistic team. The LEED certified gold expansion of our 2.6 million square foot North American distribution center is almost complete and we have begun testing the new operating system. We have seen an increased flow of goods from the port, which has put a strain on our processing and that of our accounts during the quarter. COVID-related operating restrictions in China also led to inventory delays, particularly in Europe. Our ongoing efforts with our factories and logistics teams to expedite and process our shipments will allow us to work through COVID-related challenges in order to meet the broad-based demand for our products. Phase two of our China distribution center expansion is planned to begin this year with a goal of completion in 2024. We have also begun development on a new 1.1 million square foot IGBC platinum pre-certified distribution center in India. The first phase of the facility outside Mumbai will be 660,000 square feet and is planned to be fully operational by mid 2023. We have also secured a location outside Vancouver, Canada for a new 427,000 square foot distribution center slated to open in early 2023, and we are currently moving into a new facility in Panama. We also expanded our current distribution facility in Colombia this year. We plan to develop a new facility to be completed in 2024 that will grow our capacity from 85,000 square feet to approximately 500,000 square feet. Hand-in-hand with product development is marketing designed to drive awareness and create strong global demands. In the quarter, we saw our elite athletes winning on the golf course, pickleball courts, baseball fields, and road races on foot, as well as in sports cars branded with Skechers. Our team of athletes, from all-star Clayton Kershaw to major winners Brooke Henderson and Matt Fitzpatrick, sports legends from Sugar Ray Leonard to Tony Romo, TV personalities including Amanda Kloos, Brooke Burke, and Martha Stewart, and music artists from Willie Nelson to Cheska, appeared in multimedia marketing campaigns designed to promote our innovations, showcase our fashionable products, and appeal to an ever-widening consumer base. These celebrities were joined by local talent, from Jamie Redknapp in the UK, to Kriti Sanan in India, to Park Sejoon in Southeast Asia, as well as influencers relevant to the many countries in which we sell our footwear to also drive awareness in key markets. We believed We are in a unique position as a brand that delivers on comfort, style, innovation, and quality at a reasonable price, all especially desirable given our current macro environment. And now, I'd like to turn the call over to John for more details on our financial results.