Skechers USA Inc (SKX) 2019 Q3 法說會逐字稿

Greetings.

Welcome to the SKECHERS Third Quarter 2019 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to SKECHERS.

You may begin.

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 within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

Such 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 such 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, results of operations and financial conditions.

With that, I will like to turn the call over to SKECHERS' Chief Executive Officer, David Weinberg; and Chief Financial Officer, John Vandemore.

David?

Good afternoon and thank you for joining us today.

The momentum we experienced through the first half of 2019 continued in the third quarter as both our domestic and international businesses flourished, resulting in a new quarterly sales record of $1.35 billion.

This was an increase of $177.6 million or 15.1% over last year.

On a constant currency basis, the increase was $202.5 million or 17.2%.

Our international business continued to drive growth with an increase of 21.9%, representing a record 58.8% of our sales in the quarter.

Our domestic business also added to our strong growth, including a 5% increase in our domestic wholesale business.

We believe that international will continue to power our growth, especially as we move into leading positions in many markets, open more retail stores and further expand our international footprint.

In the quarter, we grew in all regions, achieving the strongest increases in Germany, the United Kingdom and Spain, India, the UAE and Turkey as well as China, Russia and Japan.

SKECHERS' direct-to-consumer business continues to grow, acting as a showcase where consumers can experience our brand and shop our complete product collection.

At quarter end, we had 3,307 SKECHERS stores around the world, including 779 company-owned stores.

Our direct-to-consumer business continue to achieve strong sales growth with quarterly increases of 13.3%, which included 7.7% comparable store sales worldwide.

We believe our global success is the result of our innovative, relevant and comfortable products, supported by our 360-degree marketing efforts that create awareness and generate demand.

Additionally, our best product offering from award-winning running, golf and walk footwear, to occupational work boots and slip-resistant shoes and styles with relaxed, wide and arch fit for men and women has allowed us to develop a diverse distribution strategy and gain shelf space as well as enter new doors such as golf specialty and leading fashion and independent sneaker retailers.

Additional product highlights in the quarter included the release of SKECHERS Premium Heritage collection in the United States and Europe; the continuation of our collaboration, like Asia's popular LINE FRIENDS property and limited-edition footwear partnerships with several premium retailers, including atmos in Japan and Opening Ceremony in the United States.

Our on-trend styles appeared on numerous fashion week runways in the quarter from New York to London and Milan, with global trend sites HYPEBAE and HYPEBEAST covering SKECHERS product launches, and influencers and key opinion leaders appearing in social media posts in nearly every country where our product is available.

From our Performance division, the GOrun Razor 3 took the top honor in Runner's World as it was awarded Gear of the Year in its September/October issue, marking the fifth win this year for our collection of Hyper Burst shoes.

To support our diverse range of key initiatives, we have a team of global and local athletes, celebrities and influencers that appear in our marketing campaigns.

In the third quarter, we signed Los Angeles Dodgers all-star pitcher and 3-time Cy Young Award winner, Clayton Kershaw, to our team.

Clayton will be playing in SKECHERS performance cleats designed specifically for him and is collaborating on several training styles for 2020.

We are looking forward to the future marketing campaigns with this all-star and certain Hall of Famer.

SKECHERS continued growth included -- including record sales for the third quarter, is a testament to the strength and demand for our diverse product offerings around the world.

Based on early readings from our direct-to-consumer business and feedback from our key accounts in numerous markets, we see our momentum continuing in the fourth quarter.

Now turning to our domestic business in detail.

Our domestic sales increased 6.7%.

This was driven by a return to growth in our domestic wholesale business of 5% where we saw pairs shipped increased by 2%, with an average price increase of 3.1%.

Further propelling growth domestically, our direct-to-consumer business increased 8.7%, with comparable same-store sales increasing by 6.8% for the quarter.

We also saw month-over-month acceleration in the direct-to-consumer business with September achieving a high single-digit comp.

At quarter end, we had 488 company-owned SKECHERS retail stores in the United States.

In the third quarter, we opened 12 stores across 8 states and closed 1 location in Seattle.

We also remodeled 2 stores and expanded 2 locations.

To date in the fourth quarter, 3 company-owned stores have opened in the United States, with another 5 planned before the end of the year.

In our domestic business, the biggest increases came from our men's Casual, Street and Sport lines; women's GOwalk and Sport lines; and SKECHERS Work.

We are pleased that our BOBS footwear is also continuing to show growth in the United States.

Due to its success, we have been able to help more than 750,000 pets since the inception of the program several years ago.

To support our domestic business, we ran numerous marketing campaigns, including ads in fashion magazines for our chunky shoes, digital campaigns and numerous television commercials for our Kids footwear, Sport, Heritage and GOwalk footwear; and our men's lines starring football legends, Tony Romo and Howie Long.

Based on October sales in our direct-to-consumer business as well as feedback from our wholesale partners, we believe our domestic business will continue to show positive growth in the fourth quarter.

Now looking in detail at our international business, which represented 58.8% of our total sales in the quarter.

Sales increased 21.9% or 25.7% on a constant currency basis and reflects growth in our subsidiary, joint venture and distributor businesses.

The biggest drivers were China, which grew 21% on a constant currency basis; and Mexico, which transitioned to a joint venture earlier this year; followed by the United Kingdom and Japan.

Additional growth drivers were India, Germany and Spain within our subsidiaries; and our distributors, Russia, Turkey and the UAE, who handles the majority of our business in the Middle East.

Specifically, the sales growth was the result of a 21.7% increase in our wholesale business and a 22.3% increase in our direct-to-consumer business, with a 9.9% increase in comparable store sales.

At quarter end, there were 2,819 international retail stores, an increase of 124 in the third quarter.

Of those stores, 2,528 are owned and operated by international distribution partners, joint ventures and a network of franchisees.

In the third quarter, 2 company-owned international stores opened: 1 in the U.K. and 1 in India, and 2 company-owned stores closed.

To date in the fourth quarter, 4 company-owned stores have opened in Europe with another 5 to 10 planned before the end of the year, including a flagship store in Rome.

In the third quarter, 171 joint venture or third party-owned stores opened across 38 countries, including our first locations in Andorra, Ghana and Suriname.

New store openings included 87 in China; 14 in India; 5 in both South Korea and Australia; and 4 each in Taiwan, Spain, Malaysia and Indonesia.

47 stores closed in the third quarter, including 17 in China.

Six third party-owned SKECHERS stores have opened so far in the fourth quarter with another 130 to 150 expected for the remainder of the year.

To support our global business, television, outdoor, digital and print campaigns drove consumers to stores where SKECHERS are available.

This included the Underground in the U.K. and France, perimeter boards at sporting events in Canada and Mexico, music and dance festivals in the Netherlands and China and in-store events in support of the kids' day across South America.

Our growth, product innovation and marketing leadership also resulted in SKECHERS being awarded Best Brand of the Year from Schuhkurier in Germany.

This is an achievement we are particularly proud of as Germany was one of our first subsidiaries and we view the country as one of the leading European markets for SKECHERS.

We believe international remains the primary growth driver for our business.

Nearly every international distribution center that we operate had double-digit increases in pairs shipped in the quarter, which we believe will continue into the fourth quarter.

Additionally, we are benefiting from the conversion of India to a subsidiary in the first quarter and Mexico to a joint venture in the second quarter, both of which we feel will result in significant additional growth over the coming years.

With strength across every region, we believe the momentum we are seeing in our business worldwide will continue in the fourth quarter and into 2020.

Now I'll turn the call over to John to review our financials and discuss our outlook.

Thank you, David.

Our third quarter sales totaled $1.35 billion, an increase of $177.6 million or 15.1%.

On a constant currency basis, sales increased $202.5 million or 17.2%.

This quarter represents a new quarterly record for the company and illustrates the power of our strategy and our experienced executional capabilities.

SKECHERS grew in all segments and in every region, this despite unforeseen headwinds from foreign exchange rates and the announcement and introduction of incremental domestic tariffs.

International wholesale sales increased 21.7%, including a 27% increase from our wholly-owned subsidiaries, a 24.2% increase in our joint ventures and a 4.4% increase in our distributor business.

Direct-to-consumer sales increased 13.3%, the result of an 8.7% increase domestically and a 22.3% increase internationally.

Domestic direct-to-consumer sales growth was driven by a 6.8% increase in comparable store sales and the net addition of 23 new stores.

International direct-to-consumer sales grew 22.3% due to a 9.9% increase in comparable store sales and the addition of 14 new stores.

Our domestic wholesale sales returned to growth in the quarter, rising 5% or $14.2 million, primarily due to increases in both our men's and women's divisions.

We continue to see encouraging signs for SKECHERS business among our domestic wholesale customers and currently expect fourth quarter sales to grow year-over-year.

Gross profit was $653.1 million, up $89.2 million compared to the prior year.

Gross margin increased by 30 basis points to 48.2%, primarily due to margin expansion in our international businesses.

Our domestic gross -- our domestic wholesale gross margins were lower year-over-year due to increases in the average cost per unit, which were partly attributable to increased tariffs effective during the quarter.

Total operating expenses at a -- as a percentage of sale were flat to prior year at 37.8%, but increased in dollar terms by $67.1 million or 15.1% to $511.9 million in the quarter.

Sales expenses increased by $7.4 million to $97.5 million due to higher advertising expenses in international markets.

General and administrative expenses increased by $59.7 million to $414.4 million, reflecting additional spending of $24.4 million to support the growth of our international businesses, including in China and the addition of operations in Mexico; and $18.5 million associated with 37 new company-owned stores, including 14 that opened in the quarter.

Earnings from operations increased 19% to $147.4 million versus the prior year, and our operating margin improved 40 basis points to 10.9% -- or 10.5% in the prior year.

Net income increased 13.6% to $103.1 million or $0.67 per diluted share on 154 million diluted shares outstanding compared to net income of $90.7 million or $0.58 per diluted share on 156.3 million diluted shares outstanding in the prior year period.

On a constant currency basis, earnings per diluted share outstanding was $0.71.

Our effective income tax rate for the quarter increased from 13.7% in the prior year to 15.8%, primarily reflecting the impact of the Tax Cuts and Jobs Act, enacted in 2017.

We now expect our effective tax rate for the full year to be between 17% and 19%.

And now turning to our balance sheet.

At September 30, 2019, we had over $1 billion in cash, cash equivalents and investments, which was a decrease of $44.4 million or 4.2% from December 31, 2018, but an increase of $40.5 million or 4.1% from September 30, 2018.

Recall that earlier this year, we invested over $180 million to purchase the minority interest of our former joint venture in India and to form a new joint venture in Mexico.

Our cash in investments represented approximately $6.66 per diluted share outstanding at September 30, 2019.

Trade accounts receivable at quarter end were $662.4 million, an increase of $158.4 million from September 30, 2018, driven by higher sales, especially in our international wholesale business.

Total inventory was $890.4 million, an increase of 3.1% or $27.1 million from December 31, 2018, and an increase of 17.9% or $135.3 million from September 30, 2018.

The increase was primarily in our international markets where we believe our inventory levels leave us well positioned to support our growth expectations.

Total debt, including both current and long-term portions, was $122.7 million compared to $87 million at September 30, 2018.

The increase reflects borrowings associated with the construction of our first distribution center in China.

Working capital decreased $95.5 million to approximately $1.52 billion versus $1.62 billion at September 30, 2018.

Capital expenditures for the third quarter were approximately $48.9 million, of which $16.9 million was related to the construction of our distribution center in China, $16.3 million related to retail stores worldwide and $8.6 million related to our worldwide distribution capabilities.

For the remainder of 2019, we expect our total capital expenditures to be approximately $85 million to $90 million.

This includes the construction of our new distribution center in China, enhancements to our existing distribution center in Europe, the expansion of our corporate headquarters in California and an additional 15 to 20 company-owned direct-to-consumer stores and 8 to 10 store remodels, expansions or relocations.

Now turning to guidance.

We currently expect fourth quarter sales to be in the range of $1.225 billion to $1.25 billion, and net earnings per diluted share will be in the range of $0.35 to $0.40.

This guidance incorporates the view that all 3 of our segments will continue to grow in the fourth quarter at rates similar to the third quarter.

And now I'll turn the call over to David for closing remarks.

Thank you, John.

The third quarter represented a new quarterly sales record driven by growth in our domestic and international wholesale and direct-to-consumer businesses.

We believe this is a significant achievement given the brick-and-mortar retail environment as well as economic and political tensions around the globe.

Even with these challenges, we believe the momentum we experienced in the third quarter will continue and our brand will flourish, both domestically and internationally.

Along with further developing our infrastructure and logistic capabilities at home and abroad and growing our store base with another 145 to 165 SKECHERS stores planned around the world before the end of the year, we are designing more resonant product and propelling it with marketing to drive sales.

Our fourth quarter sales have started off strong.

Our backlogs are growing.

And based on our order book, we believe this positive trend will continue through the fourth quarter and beyond.

And with that, I would now like to turn the call over to the operator to begin the question-and-answer portion of the conference call.

(Operator Instructions) Our first question is from Jay Sole with UBS Investment Bank.

So I just want to follow-up on the sales growth.

If you could sort of detail, and maybe a little bit more color, what contribution to the growth came from e-commerce and sort of the initiatives that you've had there?

China specifically, you've been talking about the growth rate in China.

And then maybe you if you could talk about what was really the driver if you get to that 5% domestic wholesale growth in terms of like what channels, online, full-priced, off-priced?

If you can give us some help there, that would be terrific.

Yes, Jay.

Absolutely happy to add some color.

As you know, when we look at the sales from a direct-to-consumer standpoint, we're agnostic as to whether or not it arrives through one of our retail stores or online.

I think the really encouraging thing coming out of this quarter for us is that we saw strength in both.

Obviously, the e-comm rate is meaningfully higher than the brick-and-mortar.

It's also starting off from a smaller base, but it was a significant growth driver in those rather robust comparable store sales numbers to begin with.

In the U.S., it was in the 70s.

Internationally, it was above 50%.

China, I think as we mentioned on the call, China, on a constant currency basis, grew over 20%, really a very good performance given the headwinds.

If you recall, when we were last with you all that the yuan was at about 6.8, 6.9, and we ended the quarter much closer to an average of 7.1, so there were some significant foreign currency headwinds.

Even if you strip that out though, you are at a close to 17% quarter-on-quarter growth rate in China.

The domestic number, I hate to say it, but we have to take the opportunity.

We've been talking about a return to growth in domestic wholesale for about 6 or 7 months now.

It's what we saw in the backlogs.

It's what we saw in the demand for the product.

This is just the fruition of that foresight we provided after Q1 and Q2.

And again, we're encouraged by what we see.

We definitely expect growth year-over-year in the fourth quarter as well.

Got it.

And then if I can follow-up on gross margin.

It sounds like mix was a significant impact.

Tariffs might have a small impact on FX.

Is it possible if you could sort of quantify the impact of each of those drivers?

And if there was a fourth one, what that would might have been?

Yes.

I don't want to get into abundant detail other than to say, I mean, the broader impacts that we felt that were positive came out of the international markets where there were some price and there were some mix benefits, obviously detrimented a bit by FX in some of those markets.

Domestically, it was early impacts from the new tariffs as well as a few other cost elements that came through in the quarter.

Those are broadly -- irrespective of the market, those are broadly the pressures, one way or the other.

Our next question is from Laurent Vasilescu with Macquarie Group.

John, I think in your last prepared remarks, you said that we should expect similar growth across the different segments for the fourth quarter.

Does that imply we should think more like a mid-single-digit rate for domestic wholesale?

And if that's the case, was there any shift between 4Q into 3Q or anything to consider on that front?

Yes.

I mean I think we're trying to give some good guideposts for you to use, similar rates to what we saw, that could be plus or minus in any given segment.

Some of that is going to be timing.

There isn't anything from a timing standpoint on the domestic front we're planning on at the moment, but as we've mentioned before, that tends to be late-breaking.

We will have the inventory for it in particular because we have the tariffs that could be forthcoming in December and we're preparing for that as well as what we already have on hand, but we're not currently planning anything on that from a timing standpoint hitting domestic wholesale.

Okay.

And then to follow-up on Jay's question about gross margins, maybe near term fourth quarter, should we think gross margins are up?

I mean, it was pleasantly surprising to see GMs up, so just thoughts on fourth quarter.

And then how do we think, without getting into guidance for next year, how do we think about just List 4A, 4B as we think about next year?

Any mitigation factors we should consider?

Just on the gross margins for fourth quarter, where we would direct you at the moment is probably something to flat, maybe even down slightly.

We're still absorbing the impact of the first round of 4A tariffs.

We have put in place mitigation efforts.

Those are ongoing.

We've made some decisions to absorb certain elements of the increase in the short term to the benefit of our customers.

So I'd -- right now, I'd point you at flat to potentially down slightly, and by that I mean maybe 10 to 20 bps.

We do think the overall mix benefit of continuing to transition to more sales internationally and more direct-to-consumer helps offset that, but there's obviously a quantum differential that we'll have to take into account once we have a better handle on exactly how holiday sales turn out.

Okay.

And then last question is on G&A.

On the international G&A, the $24 million increase, can you parse that out between Mexico and China?

And how should we think about that for the fourth quarter?

And then it looks like it implies that domestic G&A was up meaningfully after kind of muted growth for the first 2 quarters.

Any thought on how we should think about that going forward for the fourth quarter?

Yes.

I don't want to be overly precise on picking the G&A numbers further other than I'll tell you that Mexico and China combined were probably more than 60% of that international increase.

The remainder supports a lot of the growth you're seeing elsewhere in the business.

The other major driver that I've mentioned, and certainly this impacts domestic, is the domestic direct-to-consumer business, but also the international direct-to-consumer business.

Domestic wholesale, they were -- it was up, but it's largely the business elements that support the broader business or supports distribution, which, keep in mind, we keep that -- those distribution and warehousing costs in our G&A profile where others are putting that in the cost of goods sold, so just keep in mind there's some volume relationships associated with the pairs, both sold and shipped, that are impacting G&A there.

And then -- no, I was going to say, I'd just point out again though that you saw operating margin leverage this quarter, which certainly is what we're looking at most prominently when we're looking at the business, and we're certainly proud of that.

We think that, again, continues to reflect the benefit of the investments we've made as well as the capability and the opportunity in the business.

Our next question is from Omar Saad with Evercore ISI.

One thing that jumped out at us is the kind of significant increase in the operating consistency the last couple of quarters, especially when we think about margin sales rebound, combined -- coinciding with John coming on the Board.

Can you talk about how the management of the business has evolved and how you're being able to drive some of the more predictable consistent performance that we think the market really appreciates?

Well, everybody contributes to that, so I think I'll take a little piece of that as well.

I think John certainly has had significant input into it and we've taken it, but I think what you see here is what we had talked about in the past coming to fruition as well.

We've got a significant piece of the start-ups behind us, and it's just absorbing Mexico and India, which have been running in the past.

We have no start-ups and no unquestionable amounts that we have to push into the marketplace to see what it is we have to do to drive the business and how much risk we have to take and what it is we might have taken over from a prior distributor or a joint venture.

So I think what you're seeing is more consistency around the world as the world tends to grow together, and there's not an influx of what is -- any new marketplaces.

So what you're seeing is the maturity of the business, growing in those places, small -- all places continue to leverage.

None of them really deleverage now.

Even if they are not up to what we believe their full potential is, they continue to perform better on a relative basis than they did the year before.

So barring a few complications, which are obviously based politically like something that would happen in Hong Kong or something that is going on in Chile right now where they have a turmoil and things closed down, we have a very -- much more mature business that continues to grow.

And while we do push it sometimes and we do have to invest somewhat more as we hit critical mass, they are more predictable as they go through their growth process.

Is there may be an accelerated digital investment cycle ahead that we should start thinking about?

Or do you feel like you've got -- kind of got that room and the headroom to make the investments that you need and then kind of have these more consistent, predictable trends that we've been seeing?

Well, we've already started to make some.

So you would assume or we assume that as it continues to grow, just like new ventures, it will now leverage.

It's starting to leverage for us already in the United States.

We're about to carry it out worldwide.

It's growing in all marketplaces.

We will continue to invest in it.

It's -- the biggest investment yet to come is we're going to upgrade some of our distribution centers.

That work -- that has already begun and that we've been talking about it in the past to be able to carry increased capacity on one at a time.

So I think that will continue to leverage.

That's just like a newer business that's now starting to mature that will now leverage upon itself rather than require significant investments from scratch.

Our next question is from Chris Svezia with Wedbush Securities.

I guess, first, John, for you, I just want to go back to U.S. wholesale.

I think previously you've talked about flat to up slightly for the year on U.S. wholesale.

To kind of get there with 5% in Q3 implies double-digit growth in Q4.

Just wonder if you could maybe address that observation relative to prior comments that you made about that?

And then secondarily, as we kind of think about going forward on U.S. wholesale, what sort of a growth rate we should think about, kind of given the trajectory and the ramp up throughout this year?

Just any thoughts as we think about as we move forward into 2020.

Is this a mid-single-digit growth segment?

Are we back to that level again?

Any color about that would be helpful.

Yes.

I mean so we've spoken about attempting to get flat.

That's our goal.

That's still within sight.

It's bound by our guidance, so it's close in there depending on a few shipments here or there.

It's certainly not something we're taking our eyes off of, but again, domestic is probably one of the markets where you can see timing impact, but that's still our goal.

We still, I guess, expect the return to growth to continue in the fourth quarter.

We see that in the backlogs.

We see that in the order flows.

The reality is we're early in the holiday season, so that's going to be a factor.

As far as extrapolating that much further into 2020, I could tell you that what we see right now remains very encouraging.

It's still early in terms of full year order books to build up, but so far, what we see is -- are very encouraging signs.

I think there's also the impact of the tariffs that we have to take into consideration, which is an unknown.

So far, again, that has not materially impacted our bookings or booking volume and our booking pace, but there is still the potential out there that the retailers have to react to that because it hasn't really flown through the supply chain in every capacity.

And in some instances, we're choosing to absorb some of that as an aid to those retailers to help them continue to maintain the volume we've seen them take through on the SKECHERS brand.

And Christopher, I'll be a little more upbeat as usual on some of that stuff, but I would pass along, even though we don't talk about it that often, that our incoming order rate from our domestic and subsidiary base, and it was fairly evenly distributed, was the best we've ever had at SKECHERS, and the year-over-year growth is dramatic.

So as we sit here today with what we know, we know that we've, barring any shifts from December to January or vice versa and things like that, we will be up in the fourth quarter.

We will be up in the first quarter.

We have first quarter booked to a point where we anticipate at least mid to high single-digit growth rate.

Now to the capacity of moving from January to December, that might be -- we may have a slightly bigger fourth quarter and a slightly small first quarter.

It would be hard to believe that we wouldn't grow mid-singles and above in both quarters as we sit here even if it slips.

So the backlog and the orders that we've received have come in at a dramatic pace and indicate that, that positive growth happens.

Now as John said, we don't have as significant a sight line into the back half of the year, but the reception that we've gotten from the first launches of our back-to-school line for 2020 doesn't give us -- doesn't give me, anyway, any reason to change any of those indications.

So I think that barring a major economic or macro shift somewhere, we'd slow down from that point.

Okay.

And I've never known you to be less than optimistic, so I appreciate that.

But always within reason.

Just on the direct-to-consumer side, you've seen a nice acceleration in the comp globally.

Just any thoughts as we think about Q4, you still got an easy comparison and even as you cycle into the first half of next year, you still have some easy comparisons on the direct-to-consumer side.

Given some of the initiatives you're doing on e-commerce, loyalty, is it fair to think that these growth rates are sustainable, if not can accelerate from this level?

Well, what we think is anything is possible.

What we know for a fact is in the first 3 weeks of October, we've had an acceleration on a comp store basis across the DTC group to -- in October from September in rate of growth over prior year.

So that's always a positive sign in what is not obviously the most telling month of the quarter and usually one of the smallest one, but going into the last quarter of the year and having such significant comps in the first 3 weeks is certainly a positive way to sign.

So I guess that would lead us in that direction.

Okay.

Final thing for me, just on the European distribution center.

When can we anticipate getting some efficiencies flowing through the P&L, the automation being completed, just any thoughts about timing on all that?

Well, the most obvious thought is it is Q1.

We are in testing now.

So barring any changes unforeseen, we hope to be up and running and get some of that flow through in the first quarter.

Our next question is from Jim Duffy with Stifel.

This is Peter McGoldrick on for Jim.

I was curious, within the international business, what type of lift you saw from Mexico within wholesale and retail?

Is that tracking to your plans as early as it is?

And does it change your thinking in ownership structure for any of the other international markets?

Mexico continues to perform as expected, slightly better to be honest with you.

We still have high hopes for the market.

It's incremental this year to what was a licensing business.

So really if you look at it on a year-over-year basis, it's tough to draw any conclusions, but it contributed.

It grew sequentially from last quarter.

But I would just point out that even without the addition of Mexico, you saw our international wholesale business grow quite nicely in the high teens level.

So I think the remarkable thing about this quarter and really the last is how pervasive the growth is across all of our regions, across all of our businesses.

And then, could you speak a little bit about inventory positioning heading into holiday?

Are there any regions or product categories that you've seen excess in?

Or are there any specific product bets that you've made into holiday that you're looking for consumers to respond to specifically?

Yes.

I mean, the inventory is well positioned given where the growth is.

I mentioned that most of it is international.

In terms of bets, we don't take a lot of bets.

We are seeing tremendous response to a lot of new product.

We're very excited about that product, both in terms of what we think the sell-through will be, but what we've seen in the backlog.

So it's a very encouraging sign.

I would tell you, from an inventory standpoint, we feel like we've got the right inventory in the right place to grow.

The only thing I will point out though is that something like a Mexico, again, that's incremental inventory that we wouldn't have consolidated last year.

So there's a piece of that as well which we're just taking on board the inventory of what is now a joint venture, which was previously a licensed relationship, in the overall total.

Yes.

We should also point out that our direct-to-consumer business is growing, and that historically, for everybody, had a slower return than the wholesale business.

So as that shifts, we'll be carrying a little more inventory because the turns are not quite the same as wholesale.

So you've got to keep that in mind as direct-to-consumer grows as a bigger piece.

Our next question is from Tom Nikic with Wells Fargo.

I just want to ask about tariffs.

You mentioned that you saw an impact in your U.S. wholesale business, but no mention of the U.S. DTC business.

Is there a reason why maybe it would have affected wholesale but not DTC?

And can you just help us kind of understand kind of maybe magnitude of the impact in Q3 and how much of it is embedded in the Q4 guidance that you gave today?

Yes.

I mean the impact predominantly held in domestic wholesale because that's the inventory that came in that went right back out.

It will take a while for the newly tariffed product to reach our retail stores.

That will begin in the fourth quarter.

I'll also point out, the impact wasn't significant in the sense of the overall cost of product or, quite frankly, of what we expect the tariffs to yield on a long-term basis, but it was also mistimed in that we haven't had the ability to implement all of our mediation strategies.

Those are going into effect.

They will go into effect in the fourth quarter.

So we are being a little bit conservative vis-a-vis our domestic wholesale margins and our overall margin guidance to account for the possibility of the tariffs and all that timing not working out perfectly.

However, I would tell you, we have been very aggressive about all 3 of the mediation strategies we've mentioned before, looking at the potential to change distribution points into the U.S., looking at vendor concessions and looking at price.

All those efforts are underway.

And we think, long term, probably after the first quarter of 2020, perhaps that the -- that this really becomes a mitigated effect.

We'll obviously be working to make that happen sooner, but that's the efforts we've put into place today.

Okay.

And just one more for me.

Just on the G&A expenses, I think you've had sort of a wide range of growth rates this year.

Q1 was up 1%.

Q2 was up 6%.

Q3 was up 17%, which was a pretty sort of dramatic change in the growth rate.

Just did that G&A line come in higher than you expected?

What drove that?

And I know that you'll have quarterly volatility in the G&A, but just if there's some sort of steady-state rate of G&A growth you can give us a guidepost for, would be greatly appreciated.

Yes.

I thought you were going to compliment us for precisely matching the G&A -- the operating expense growth rate to the top line growth rate, which is what we've said is the upper bound, and that really is the upper bound of what we're managing.

Again, that's going to vary from quarter-to-quarter.

In this instance, we're a little bit toward the top end of that, but obviously we're looking to be at that level or lower from a growth standpoint.

I will point out that one of the components in operating expenses this quarter that contributed to that was a decision on our part to press marketing, press media.

We see the product resonating across the globe.

This is an opportunity for us to continue to invest in that and to get back to putting more dollars to work, and that's something we did this quarter that we haven't done in the prior 2 quarters.

So quite frankly, that's more of an opportunistic press on the media spend to continue to see the brand resonate against this really great product lineup.

Going forward, again, we'll keep the parameters in place that we had talked about previously, which is trying to keep it at a top line growth rate or better.

So sometimes, it varies on quarter-on-quarter.

I think you can expect that we'll press advertising again this quarter because we have a hot product, we've got good lineup, and we want to make sure that gets into consumers' awareness and the 360-degree approach that David mentioned.

Our next question is from Sam Poser with Susquehanna Financial Group.

Can we just follow-up on the inventory?

Can you give us some idea of what that incremental inventory was to support Mexico?

Sort of can you apples-to-apples the inventory for us because, I mean, you're bringing in a ton and a lot of it -- I thought some of it might -- is any of that inventory right now that came in early preemptive for tariffs in the U.S.?

Number one.

Yes.

There's absolutely a little bit that was preemptive.

It wasn't an enormous component of the overall inventory mix simply because we didn't have enough time to react.

If you recall when we last spoke to you, these tariffs didn't exist, and then within a couple of weeks, they were tweeted and subsequently enacted.

So there's a little bit of growth in the inventory associated with the tariff action.

I would say probably 1/3 of the growth year-on-year in inventory is attributable to the introduction of Mexico inventory into the accounting.

So it's a contributive -- contributor for certain.

Okay.

And then when you think about -- you mentioned -- I think, David, you mentioned that the -- given the growth of the DTC, that the turn would slow down.

I guess the question I have is, what is the -- what is that turn, as you think forward in the way mix is changing, that you guys are looking as sort of a go-forward turn so we can sort of judge the inventory?

Because the year-over-year isn't necessarily the best way to do it right now because of all this noise.

Well, as we said before, we don't really speculate significantly on the wholesale inventory.

So that turns relatively quickly.

That turns for us in probably 45 to 60 days.

I think you would anticipate on a retail business because it flows as they come in and replenishments, we probably have, when you include the in-transits, it's probably a 90-day or a 90-day plus -- 90 to 100-day turn on the inventory, especially with direct-to-consumer.

So it's not as significant right this minute, but if you take that into account for China as well as ourselves and Europe, there were some slight increases that just have to do with holding more inventory for our retail component.

So they're all little pieces to the mix.

No one of them sticks out significantly.

And does any of that inventory -- I mean how much of that -- what percentage -- let me ask it this way.

What percentage of the overall inventory was in your DTC this year versus last year?

Maybe you could break out the DTC inventory growth versus the others, something just to help us because, I mean, when you see your forward weeks of supply go bananas, your year-over-year inventory is up a lot more than your sales are and you're not looking for 60% growth going forward.

So it's -- could you just sort of maybe give us more specifics on how that all put -- gets put together, please?

Well, we'll have to give it to you, but we'll take a look and we can give it to you, but you have to understand, we have 65 more stores.

If you just take the average size of the stores [than] the inventory, you end up with a significant number of pairs, could be in excess of 100,000, 150,000 pairs.

So that in and of itself is a few million dollars that gets put into it just physically there; then you take into account the stores that are going open.

We opened 14 stores in the quarter.

That's obviously also domiciled and just goes out there.

So I don't track that number in my head.

I will get it for you.

And also just add to that, Sam, keep in mind, with e-commerce becoming a more pronounced component of our direct-to-consumer business, that's not -- you don't see an equivalent number of store doors increasing that you can attach to that growth rate, but obviously, to fulfill the e-commerce business, you need to have that inventory in-house.

That's a fast-growing store.

We'll count that as 10 stores.

Got you.

Okay.

And then lastly, you -- when -- can you dive into some of the categories a little bit more because -- and sort of what really are the drivers you talked -- what were really those driving categories and which ones are still sort of lagging or -- and have the opportunity?

I think you talked about men's.

Can you give us some more details on sort of the categories, subcategory by gender?

I guess probably the best way to do it, gender and style?

Well, that would be a long...

We have a lot of categories.

Yes.

It would take a long time to walk through those things, but I think...

Well, I mean you mentioned Work, you mentioned men's and you mentioned some components of men's.

Can you -- but which ones are sort of not where they need to be?

I mean we've heard that women's isn't quite doing as well in general versus -- vis-a-vis -- versus men's, BOBS and Work.

So can you just sort of give us some positioning there?

Well, women's is a bigger business, so growth percentage is obviously -- get delayed or held back from what it is.

I don't know what you've heard about women's.

I think our women's business is performing quite well and has grown faster than the whole domestic wholesale business on its own.

So -- and categories get divided.

We have many styles.

I think what we said in the past, which is true now, we have more categories and more different styles that are selling well and showing increases.

We're not dependent on a single style.

We're dependent on a single category.

Things come and go and we increase, especially in our direct-to-consumer because we have more shelf space to play with.

GOwalk has come back, so obviously something else is not moving quite as quickly because GOwalk is taking significant shelf space.

But we can go through a trade and we'd have to do that on a more one-on-one personal basis.

I think just to fill it out, men's has grown and continues to grow.

Women's grows and continues to grow.

We've had some issues, but I've seen the light at the end of the tunnel, we believe, in Kids that are coming off that lighted footwear that makes the comps difficult and a lot of sales in the marketplace, I think, as it exists.

So we think Kids are coming back.

We're getting a lot of movement in it.

But our adult business is doing very well.

It's doing well on a very broad base.

And I think you guys know us well enough.

If there's a category that's not doing well this time, it will do well in the next 6 months or we're bringing something new to it for back-to-school.

Just as when you had issues with Performance or with women's or one of the other categories, we've brought them back.

We tend to develop product.

We tend to bring it back.

To concentrate on one category or one product is not what we're about.

And it is a broad base, geographically and by category.

Sam, I would just add to that.

In doing channel checks, I would just ask you all to recognize that most of the channel checks you're getting are domestic.

So it's not always true what holds for the domestic market is holding internationally.

And so there -- even if there's the category that is suspect in the U.S., it's performance outside the U.S. has been strong.

We've seen that before.

So as David mentioned, we're seeing broad comprehensive growth across most of the divisions when you take into account the global footprint of the brand.

And that's, again, another hugely encouraging sign in addition to the growth rates on the top line that we just put up.

Our next question is from Kimberly Greenberger with Morgan Stanley.

This is Alex Straton on for Kimberly Greenberger.

I just wanted to touch base again on the operating margin expansion you guys delivered.

It was pretty nice year-over-year, but just maybe a little shy of what The Street was expecting.

We were hoping you could provide us just maybe with an outlook for 4Q as well as kind of how you guys think about your medium to long-term targets as you move forward.

Yes.

So one, I think it's noteworthy the expansion we saw in the quarter.

It follows now 2 other quarters of contributing on the operating margin line.

As we look forward to Q4, we expect to be kind of flat to up slightly.

Some of that is going to be the impact of the gross margin nuance we mentioned earlier, in particular around the impact of the tariffs, but our objective at the moment is to aim to be flat or up in the fourth quarter.

In terms of our long-term goals, they remain consistent with what we have said in the past.

We will continue to invest in this brand to achieve these above-market growth rates.

For as long as we see the runway, we will want to harvest those investments as you're seeing the success of now to drive operating margin.

We certainly believe the long-term operating margins can rest between -- in the low-teen ranges that we've mentioned before.

We're not changing that guide.

The only caveat we'd give is that if there's an opportunity to invest ahead of the curve, we will do so because that has been successful in driving an increasing rate of growth on the top line so far this year and continued growth that we expect in Q4 and beyond.

And our final question is from Susan Anderson with B. Riley FBR.

I guess just a follow-up really quick on the Kids business.

So it sounds like it was maybe negative in the quarter.

Can you just remind us when you fully start to cycle the tougher compares from the [Light-Up] footwear?

Yes.

It will start in the first quarter of next year.

First and second quarter of next year, we'll start to cycle through.

Again, to David's point, we're certainly seeing some positive trends develop in Kids now.

It's a very difficult comp.

It was a very successful product for us last year and the year before.

So we believe that we will be getting closer to a range of stability, if not returning to growth soon, in the Kids business.

Great.

And I guess just one more question.

I think you mentioned, on the golf line, getting into some green grass shops.

I guess how big do you think the opportunity could be longer term?

Is that something that could potentially move the needle for you guys?

I think it moves the needle for us just in imaging.

I mean golf is only so big.

We're picking it up worldwide and it is growing and it is a nice piece to have.

But I think we look at it in that the golfer, both male and female, around the world are our core customers to begin with, and that's just another way to keep us top-of-mind and in their closet and looking forward.

So just as with any technical shoe, we use it as an umbrella for the product to show the quality and what we can build.

But in golf in particular because it does move along demographics as they get older and it is our core customer, it just keeps top-of-mind of what we can do and make them comfortable as we go.

So we think it's a very positive.

It's just an addition to the brand, another place the brand can go.

Ladies and gentlemen, we have reached the end of the question-and-answer session as well as the conference.

I would like to turn the conference back over to the company for closing remarks.

Thank you again for joining us on the call today.

We would just like to note that today's call may have contained forward-looking statements.

As a result of various risk factors, actual results could differ materially from those projected in such statements.

These risk factors are detailed in SKECHERS' filings with the SEC.

Again, thank you and have a great day.