SKECHERS USA INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes 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 negative impact on our operations and our
worldwide business, sales and operating results;
• our ability to manage the impact of delays and disruptions to our supply
• our ability to maintain, manage and forecast our appropriate costs and inventory
• our ability to continue to manufacture and ship our products which are
economic, political or business conditions, or a natural disaster in
• our ability to maintain our brand image and to anticipate, predict,
identify, and respond to changes in fashion trends, consumer demand for the products and other market factors;
• the loss of important customers, the decline in demand by the industry
resellers and the cancellation of order commitments;
• our ability to remain competitive with mainstream shoe retailers,
including in the highly competitive performance footwear market;
• global economic, political and market conditions, including challenges
consumer retail market in
the United States("U.S.") and the impact of Russia'srecent invasion of Ukraine; and
• other factors referenced or incorporated by reference in our annual report
on Form 10-K for the fiscal 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.
For the first quarter, sales exceeded
$1.8 billion. This is a new quarterly record, reflecting the continued global demand for our product. Sales increased across both of our segments compared to the same period in 2021. This growth came despite continued headwinds, including temporary store closures and operating restrictions in some regions impacted by COVID and supply chain constraints. 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. 16 --------------------------------------------------------------------------------
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 improving our global infrastructure, direct-to-consumer technologies and the development of innovative footwear. Current global investments in infrastructure, technology projects and activities include:
• Expanding our e-commerce presence internationally. • Continuing development on our North American LEED Gold Certified
the expansion of the distribution center and the head office, which we plan
to be completed in 2022 and 2024, respectively. • Expanding our international distribution and supply chain footprint.
• Explore new recycled materials to expand our sustainable product offering.
OPERATING RESULTS – FIRST 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 operating results is as follows:
Three Months Ended March 31, Change (in thousands) 2022 2021 $ % Sales
$ 1,819,594 $ 1,434,455 $ 385,13926.8 Cost of sales 995,431 748,796 246,635 32.9 Gross profit 824,163 685,659 138,504 20.2 Gross margin 45.3 % 47.8 % (250 ) bps Operating expenses Selling 108,209 91,325 16,884 18.5 General and administrative 540,050 436,666 103,384 23.7 Total operating expenses 648,259 527,991 120,268 22.8 As a % of sales 35.6 % 36.8 % (120 ) bps Earnings from operations 175,904 157,668 18,236 11.6 Operating margin 9.7 % 11.0 % (130 ) bps Other expense (5,746 ) (14,174 ) 8,428 (59.5 ) Earnings before income taxes 170,158 143,494 26,664 18.6 Income tax expense 33,992 28,985 5,007 17.3 Net earnings 136,166 114,509 21,657 18.9 Net earnings attributable to noncontrolling interests 14,943 15,936 (993 ) (6.2 ) Net earnings attributable to Skechers U.S.A., Inc. $ 121,223 $ 98,573 $ 22,65023.0 Sales Sales increased $385.1 million, or 26.8%, to $1.8 billionas compared to $1.4 billionas a result of a 28.7% increase in domestic sales and a 25.5% increase in international sales, primarily driven by strength in wholesale sales. Sales increased across both segments with increases to Wholesale of 32.7% and Direct-to-Consumer of 15.7%. Sales increased overall due to improved volume and higher average selling prices.
Gross margin decreased by 250 basis points to 45.3% from 47.8%, due to higher unit transportation costs, partially offset by average selling price increases.
Operating expenses increased
$120.3 million, or 22.8%, to $648.3 million, and as a percentage of sales, improved 120 basis points to 35.6% compared to 36.8% in the prior year. Selling expenses increased $16.9 million, or 18.5%, to $108.2 millionprimarily due to higher demand creation expenditures. General and administrative expenses increased $103.4 million, or 23.7%, to $540.1 million, due to increased volume-driven labor of $61.0 million, and warehouse and distribution expenses of $11.4 million.
Other income (expenses)
Other expenses decreased
The income tax expense and the effective tax rate are as follows:
Three Months Ended March 31, (in thousands) 2022 2021 Income tax expense
$ 33,992 $ 28,985Effective tax rate 20.0 % 20.2 % 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 34%, which on average is significantly lower than the U.S.federal and state combined statutory rate of approximately 25%. For the quarter, the effective tax rate remained essentially flat.
Non-controlling interests in net income of consolidated joint ventures
Non-controlling interests represent the share of net earnings attributable to our joint venturers. Net income attributable to non-controlling interests decreased
RESULTS OF SEGMENT OPERATIONS – FIRST QUARTER
Wholesale Three Months Ended March 31, 2022 vs 2021 Change 2021 vs 2020 Change (in thousands) 2022 2021 2020 $ % $ % Sales
$ 1,251,306 $ 943,110 $ 886,145308,196 32.7 56,965 6.4 Gross profit 454,960 369,565 333,393 85,395 23.1 36,172 10.8 Gross margin 36.4 % 39.2 % 37.6 % (280 ) bps 160 bps
Comparison 2022 to 2021
Wholesale sales increased
Wholesale gross margin decreased 280 basis points to 36.4% due to higher average cost per unit, driven by increased freight costs, partially offset by average selling price increases. 2021 to 2020 Comparison Wholesale sales increased
$57.0 million, or 6.4% to $943.1 million, led by growth in Asia Pacificof 63.8%, offset by declines in Europe, Middle East& Africaand the Americasdue to impacts from COVID. Volume increased 1.7% in the number of units sold and average selling price per unit increased 4.6%.
Wholesale gross margin increased 160 basis points to 39.2% due to average selling price increases partially offset by product mix.
Direct-to-Consumer Three Months Ended March 31, 2022 vs 2021 Change 2021 vs 2020 Change (in thousands) 2022 2021 2020 $ % $ % Sales
$ 568,288 $ 491,345 $ 361,44776,943 15.7 129,898 35.9 Gross profit 369,203 316,094 219,523 53,109 16.8 96,571 44.0 Gross margin 65.0 % 64.3 % 60.7 % 60 bps 360 bps 2022 to 2021 Comparison Direct-to-Consumer sales increased $76.9 million, or 15.7%, to $568.3 million, led by increases in Europe, Middle East& Africaof 157.3%, which lapped COVID restriction in the prior year, the Americasof 11.2% and Asia Pacificof 8.5%. Volume increased 0.5% in the number of units sold and average selling price per unit increased 15.1%.
Direct-to-consumer gross margin increased 60 basis points to 65.0%, due to higher average selling prices resulting from reduced promotions, partially offset by higher average unit costs.
Comparison 2021 to 2020
Direct-to-Consumer sales increased
$130.0 million, or 35.9%, to $491.3 million, driven by increases in Asia Pacificof 80.9%, which lapped COVID restrictions in 2020, and the Americasof 23.0%, offset by declines in Europe, Middle East& Africaof 39.5%. Volume increased 26.5% in the number of units sold and average selling price per unit increased 7.4%.
Direct-to-consumer gross margin increased 360 basis points, or 64.3%, primarily due to higher average selling prices and reduced promotions.
CASH AND CAPITAL RESOURCES
Our liquidity remains strong with
$589.9 millionof cash and cash equivalents at March 31, 2022. Amounts held outside the U.S.were $492.5 million, or 83.5%, and approximately $159.3 millionwas available for repatriation to the U.S.as of March 31, 2022without incurring additional U.S.federal income taxes and applicable non- U.S.income and withholding taxes. We borrowed $50.2 millionduring the quarter on our revolving credit facility for working capital management. As of March 31, 2022, our unused credit capacity under this agreement was $685.7 millionwith an additional $250.0 millionavailable 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.
Our working capital at
March 31, 2022was $2.0 billion, an increase of $0.1 billionfrom working capital of $1.9 billionat December 31, 2021. Our cash and cash equivalents at March 31, 2022were $589.9 million, compared to $796.3 millionat December 31, 2021. Our primary sources of operating cash are collections from customers. Our primary uses of cash are inventory purchases, selling, general and administrative expenses and capital expenditures.
For the three months ended
March 31, 2022, net cash used in operating activities was $134.8 millionas compared to $13.8 millionfor the three months ended March 31, 2021. The $121.0 millionincrease in net cash used in operating activities primarily resulted from the timing of payments to vendors and increased receivables balances on wholesale sales, partially offset by current year reductions in inventory due to improvements of some supply chain constraints.
Net cash used in investing activities was
$75.2 millionfor the three months ended March 31, 2022as compared to $105.5 millionfor the three months ended March 31, 2021. The $30.3 milliondecrease was primarily due to reduced net investment activity of $35.4 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 three months ended March 31, 2022were $89.4 million, which included $32.3 millionof investments in our expanded corporate offices domestically and in India; $27.2 millionrelated to the expansion of our global distribution infrastructure; and $24.7 millionrelated to investments in our retail stores and direct-to-consumer technologies. We expect our ongoing capital expenditures for the remainder of 2022 to be approximately $175.0 millionto $225.0 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 in Southern California. We expect to fund ongoing capital expenses through a combination of borrowings and available cash.
Net cash used in financing activities was
$5.0 millionduring the three months ended March 31, 2022compared to $34.8 millionin net cash provided by financing activities during the three months ended March 31, 2021. The change is primarily the result of net changes in long-term borrowings of $63.3 millionand repurchasing $25.0 millionof common stock, partially offset by increased short-term borrowings of $51.2 million. 19 --------------------------------------------------------------------------------
Capital resources and future capital requirements
March 31, 2022, outstanding short-term and long-term borrowings were $374.3 million, of which $263.7 millionrelates to loans for our domestic and Chinadistribution centers, $52.2 millionrelates to our operations in China, $50.2relates to our revolving credit facility 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 in
the 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 ended March 31 2022.
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