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Skechers U.S.A. (NYSE: SKX)
Q3 2024 Earnings Call
Oct 24, 2024, 4:30 p.m. ET

Skechers Reports Record Sales in Q3 2024: A Look at Growth and Strategy

Key Highlights from the Earnings Call

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Skechers’ third quarter 2024 earnings conference call. All participants are currently on mute, and a Q&A session will take place following the presentation. Please note that this call is being recorded. I will now turn it over to Skechers.

Thank you. You may begin.

Melissa Tankersley — Manager, Digital Marketing Team

Good afternoon, everyone. I appreciate your participation in Skechers’ Q3 2024 earnings call. I am Melissa Tankersley, a manager on our digital marketing team. I’ve been with Skechers since 2021. My favorite product is the Eden LX from our Court and Classics collection. Present on the call are Skechers’ COO, David Weinberg, and CFO, John Vandemore. Before we proceed, I want to highlight that today’s discussion will include forward-looking statements based on our current expectations, including plans, objectives, and future results.

Financial Performance in Q3 2024

Our forward-looking statements carry known and unknown risks that may cause actual results to differ significantly from what we project. We encourage you to refer to our SEC reports for more details on these risks. I now pass the floor to our COO, David Weinberg.

David Weinberg — Chief Operating Officer

Good afternoon, and thank you for joining us on our third quarter 2024 conference call. We achieved a record high in quarterly sales, totaling $2.35 billion, which is a 16% rise, or an increase of $323 million. Our earnings per diluted share stood at $1.26, reflecting a 35% growth. Notably, we experienced a 21% surge in wholesale sales and a 9.6% increase in direct-to-consumer sales. Both international and domestic markets contributed significantly, with gains of 16% and 15%, respectively.

These impressive figures demonstrate the growing customer preference for Skechers products. We’ve focused on offering innovative, comfortable footwear that meets our customers’ needs at a reasonable price, distinguishing Skechers in the marketplace. Our ongoing commitment to new product development and our signature comfort technology plays an essential role in our success.

The Skechers Performance division presents a bright opportunity for further growth, especially in technical running, golf, and pickleball footwear. We are just beginning to explore team sports, partnering with Olympians and elite athletes across sports like basketball and soccer.

Enhancing customer awareness and purchase intent for our Lifestyle and Performance Technologies has been vital to our expansion efforts. This quarter, we launched dynamic marketing campaigns, featuring celebrity ambassadors like Snoop Dogg and NBA star Joel Embiid. Joel’s Team USA earned a gold medal, while Snoop celebrated athletes globally with his Skechers by Snoop Dogg Go shoes.

Additionally, Harry Kane, a leading striker, received the Golden Boot Award for being Europe’s top scorer this year. He wore limited-edition Gold Skechers boots during his 100th match for the England national team. In expanding our ambassador roster, we welcomed TV host Howie Mandel for a North American campaign and former footballer Ruud Gullit, who debuted his adverts in Europe last month.

On the consumer front, we noted positive shopping behavior across our channels, showing an uptick in demand for our comfort-focused products. In Q3, international sales climbed 16%, accounting for 61% of our total sales.

Regionally, EMEA saw an impressive 30% growth, fueled by successes in all markets, while the Americas grew by 14%, primarily from the U.S. and Canada. APAC regions rose by 7.4%, led by strong performance in Japan, Korea, and India. Despite some challenges in the Chinese market, we remain optimistic given our long-standing presence and capable team there.

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Skechers Achieves Record Third-Quarter Performance Amid Global Challenges

In India, a notable recovery was recorded this quarter, showcasing 24% growth. The company continues to collaborate effectively with its local team and regulators to enhance its sourcing strategy. Positivity is evident as Skechers aims to expand its footprint not just in lifestyle products but also in performance categories.

Expanding Sports Sponsorships and Local Engagements

Skechers has established numerous run clubs across 10 cities and is now venturing into new sports. This year, they became the kids’ sponsors for the All India Pickleball Association and signed several players. They also entered the cricket market, sponsoring the Mumbai Indians and signing players from the Indian national team. Additionally, in September, Skechers formed a partnership with NBA India to sponsor its youth basketball team.

Wholesale and Direct-to-Consumer Growth in India

The demand for Skechers products remains strong, as highlighted by the third-quarter results. Wholesale sales surged by 21%, fueled by a 26% increase domestically and 18% internationally. The health of the domestic market is reflected in the notable double-digit growth observed in the men’s, women’s, and kids’ footwear segments.

Internationally, the company noted significant growth, particularly in EMEA, benefiting from heightened demand for innovative products and more efficient shipment timing. Direct-to-consumer sales rose by 9.6%, mainly due to a 14% increase in international markets, alongside improvements in both retail and e-commerce efforts. Domestically, sales rose by 3.7%, building on last year’s 14% growth driven by a strong shift towards online shopping.

Store Expansion Throughout the Globe

As of the end of the quarter, Skechers operates 5,332 branded stores worldwide, with 1,743 being company-owned locations, including 592 in the United States. During this quarter, 68 new company-owned stores were launched, while 27 were closed. Notably, 121 third-party stores opened, bringing the total to 3,589. In the fourth quarter thus far, Skechers opened 21 additional company-owned stores and expects to reach between 55 and 60 new openings globally.

Strategic Priorities and Market Resilience

Skechers aims to enhance its product offerings, amplify demand, and build its retail presence to meet consumer needs effectively. Now, I will hand over to John for further insights on our financial performance.

John M. Vandemore — Chief Financial Officer

Thank you, David, and good afternoon. Skechers delivered outstanding third-quarter results with sales reaching $2.35 billion, a 16% increase, and earnings per share rising 35% to $1.26. This growth is attributed to strong international performance, consistent domestic wholesale momentum, and solid gross margins. Our diverse range of comfort technology products continues to resonate with consumers, solidifying Skechers’ position as a trusted brand in the industry, particularly amidst a challenging quarter.

Challenges in China and Global Opportunities

Turning to the Chinese market, we experienced a 5.7% decline in sales year over year, falling short of our expectations. However, our dedicated local team has adapted our plans to manage ongoing economic uncertainties. Historically, we have established a strong brand presence in China, and we remain focused on long-term growth potential in that market.

Contrastingly, we have witnessed substantial improvements in several international markets, particularly in Europe, due to successful supply chain strategies. Additionally, India has shown promising recovery thanks to our ongoing partnerships. Overall, our double-digit sales growth this quarter underscores the strength of our brand and our teams’ effective execution across global markets.

Direct-to-Consumer and Wholesale Insights

Direct-to-consumer sales increased by 9.6% year over year to $931.7 million, with international sales up by 14%. Domestic sales rose by 3.7%, reflecting stable growth in our e-commerce and physical stores. We anticipate these trends will continue into the fourth quarter, especially as the holiday season approaches.

Wholesale sales also grew by 21% to $1.42 billion, with domestic growth of 26% attributed to strong consumer demand. International wholesale sales rose 18%, indicating robust global interest, except for China. In the Americas, third-quarter sales climbed by 14% to $1.16 billion, buoyed by strong domestic wholesale momentum.

Europe (EMEA) saw an impressive 30% increase, driven by strong wholesale and direct-to-consumer growth. Meanwhile, the Asia-Pacific market experienced a 7.4% increase, heavily influenced by performance in India, especially when excluding disruptions in China.

Financial Margins and Operational Efficiency

Gross margin for the quarter stood at 52.1%, down 80 basis points year over year due to a slight increase in promotional activity. Operating expenses decreased to 42.2% of sales. While selling expenses increased 20 basis points to 9% due to investments in brand awareness, general and administrative expenses showed a 40 basis points reduction to 33.2%, thanks to operational efficiencies.

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Skechers Reports Strong Q3 Earnings Amid Strategic Growth Efforts

Impressive Earnings Growth and Expanded Market Presence

In the latest quarterly report, Skechers has showcased robust financial performance, realizing earnings from operations of $233.4 million, which marks a 9.5% increase from the previous year. However, the operating margin dipped to 9.9% from 10.5% last year. The company also recorded other income of $11.9 million, a notable rise of $18.9 million, attributed to favorable foreign exchange rates and increased interest income. The effective tax rate for the third quarter significantly decreased to 14.7% from 19.5% last year, due to the release of certain allowances and adjustments.

Earnings per diluted share reached $1.26, reflecting a substantial 35% year-over-year increase, based on 153.7 million weighted average diluted shares outstanding. Examining the balance sheet reveals an inventory level of $1.71 billion, up 24% or $324.8 million compared to last year. This increase is attributed to higher inventory levels in China and elevated in-transit inventory, particularly in the EMEA region. The company anticipates that these issues will resolve as market conditions stabilize and supply chains improve.

At the end of the quarter, accounts receivable stood at $1.19 billion, showing an increase of $257.7 million attributed to higher wholesale sales. The company also reported having $1.6 billion in cash, cash equivalents, and investments, along with total liquidity of $2.42 billion, factoring in its revolving credit facility. Capital expenditures amounted to $113.9 million this quarter, with investments going toward new store openings, corporate office expansion, and distribution infrastructure. Moving forward, these capital investments are aimed at supporting strategic priorities, including enhancing distribution capabilities and expanding the direct-to-consumer segment globally.

During the quarter, Skechers repurchased approximately 1.4 million shares of its Class A common stock, costing $90 million. This aligns with the firm’s commitment to maintaining a strong balance sheet and ample liquidity while deploying capital effectively. Looking ahead, for the full year 2024, Skechers anticipates sales between $8.925 billion and $8.975 billion and earnings per diluted share ranging from $4.20 to $4.25. This forecast suggests a robust annual growth of 12% and 21% respectively at the midpoint.

The projected sales for the fourth quarter are expected to fall between $2.165 billion and $2.215 billion, with earnings per diluted share estimated at $0.70 to $0.75. Skechers foresees the effective tax rate for the year to be between 18% and 19%, while minority interest is anticipated to grow in line with total sales. Overall, capital expenditures for the year are expected to be in the range of $375 million to $400 million. The company aims to achieve $10 billion in sales by 2026, focusing on sustainable growth.

We appreciate your attention today and look forward to sharing our fourth-quarter results, which are expected on Thursday, February 6, 2025. I will now turn this over to David for concluding thoughts.

David Weinberg — Chief Operating Officer

Thank you, John. At Skechers, a leader in comfort technology, our innovation includes products such as hands-free slip-ins, Skechers Arch Fit, and Hyper Burst. Our priority remains designing products that meet consumer needs at accessible prices, ensuring these reach consumers through preferred distribution channels. This consumer-focused approach, alongside innovative thinking across our diverse offerings, has set us apart and contributed to our record sales.

As we continue to develop fresh products, support marketing campaigns, and explore global opportunities, our investment strategy remains strong. We are dedicated to producing high-value products while fostering profitable growth that brings comfort to a wide range of consumers. Our gratitude extends to the entire Skechers team and our partners for their vital contributions to our success this year and beyond. Let’s now move on to questions.

Questions & Answers:

Operator

Thank you for your patience. We will now begin the question-and-answer segment. [Operator instructions] One moment, please, while we gather questions. Our first question comes from Jay Sole with UBS.

Please proceed with your question.

Jay Sole — Analyst

Thank you. David, John, I want to ask about the substantial domestic wholesale growth. A 26% increase is impressive.

You noted that factors included increased customer capacity to add SKUs and adoption of new technologies. Can you provide further details on the sources of this growth? Which categories are driving it, and how did you achieve such significant domestic wholesale growth? Thank you.

John M. Vandemore — Chief Financial Officer

Jay, we should consider the context of where the domestic wholesale market stood last year. Some customers were limited due to excess inventory and an inability to invest in our comfort technology products. This year, as the market matured and these products gained traction, customers are now returning and embracing our offerings.

Our comfort technology products are performing well, both through our own retail channels as well as with wholesale partners. The primary driver of growth has been the renewed ability of customers to engage fully with the comfort technology message, supported by targeted marketing efforts that raise awareness of our products.

Jay Sole — Analyst

Understood. Shifting focus to India, it appears that the market has made notable strides in the last three months. Can you elaborate on the current situation there and the potential significance of India for Skechers’ future growth? How substantial is this market for Skechers currently, and what are your aspirations for it?

John M. Vandemore — Chief Financial Officer

Absolutely. While I can’t disclose specific market size figures, India is a vital strategic focus for us. We’ve seen impressive growth there over the past 8 to 10 years.

Last quarter was somewhat atypical due to recent regulatory changes that affected our ability to introduce inventory. The alleviation of these challenges has enabled us to bring inventory to the market more effectively, yielding positive results this quarter. The collaboration among our teams, suppliers, and regulators strengthens our foundation for long-term success, paralleling the progress we’ve seen historically. Although there are hurdles regarding local supplier integration, we are actively addressing these obstacles. The current quarter exemplifies the potential when we effectively manage inventory release.

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Financial Outlook Reflects Confidence Amid Global Market Challenges

Jay Sole — Analyst

Thank you, John. I appreciate your insights.

John M. Vandemore — Chief Financial Officer

Thanks, Jay.

Operator

Next, we have Laurent Vasilescu from BNP Paribas. Please go ahead.

Laurent Vasilescu — Analyst

Good afternoon. Thank you for addressing my question. David and John, I noticed that you raised the lower end of your revenue guidance. Given your recent comments about a softer outlook in China for the latter half of the year, could you explain what contributed to this positive adjustment?

John M. Vandemore — Chief Financial Officer

You’ve pinpointed an important factor: the market in China. In my earlier remarks, I highlighted that while we have concerns about current conditions, we remain optimistic about our long-term potential as a brand there. Our skilled team is actively working to navigate the challenges we face.

The recent performance this quarter has boosted our confidence, allowing us to raise our guidance. This marks the second consecutive quarter of upward adjustments, driven by strong sales both in the domestic market and internationally, excluding China. In fact, our wholesale growth across various regions, aside from China, was in double digits.

We anticipate that the current economic difficulties in China will eventually resolve, but it is uncertain when or how that will occur. We are closely monitoring the early results from Singles Day, which are promising so far. We still have a long way to go, similar to the upcoming holiday season for our direct-to-consumer business. Overall, the strength of our operations led us to make this positive revision to our guidance.

Laurent Vasilescu — Analyst

That’s helpful. I have a two-part question. First, John, you mentioned an increase in in-transit inventory, especially around the Red Sea. Can you estimate how much of this will impact Q4 revenue, especially in EMEA? Secondly, regarding gross margins, many were surprised to see an 80 basis point decline. Can you provide more clarity on this, particularly concerning discounting, and how should we approach the gross margin expectations for Q4?

John M. Vandemore — Chief Financial Officer

Let’s start with the gross margin. While we experienced some fluctuations between quarters, it’s worth noting that our gross margins remain historically strong. Although we anticipated some movement due to various factors, including freight costs and challenges in China, we did not foresee a leap in gross margin like we had last quarter. This week’s projections align with our expectations, taking into account the pressures faced internationally, primarily in China.

Looking ahead to Q4, I would advise expecting a stable gross margin, possibly remaining flat or moving slightly up or down compared to last year. We have incurred increased freight costs, particularly to Europe, over the summer that will impact our margin. However, we see a gross margin of approximately 53.1%, which is commendable given the circumstances.

Turning to inventory, two factors are crucial. First, consumer sales performance in China fell below expectations, often leading to short-term inventory issues. We are working on this but remain confident for the long term. Second, the ongoing in-transit inventory challenges that emerged last quarter have partially improved but still affect EMEA and other markets. We expect these issues will be resolved soon, as reflected in our guidance.

Laurent Vasilescu — Analyst

Thanks for the clarification, John. Wishing you the best for the holiday season.

Operator

Next, we have Jim Duffy with Stifel. Please proceed.

Jim Duffy — Analyst

Thank you. Good afternoon, John. I have a couple of clarification questions. In your remarks, you mentioned continued strong growth in wholesale for Q4 and discussed addressing inventory issues. Were those comments meant to reflect a global perspective, particularly regarding EMEA?

John M. Vandemore — Chief Financial Officer

Those remarks were intended to convey a global outlook. We must consider various factors that differ by market, resulting in a range of projections. The strength we’re seeing, particularly in wholesale, is exciting, with mid- to high teens growth across markets.

Jim Duffy — Analyst

Wonderful. I also wanted to clarify your earlier comments about China. Since your mid-September statements, we’ve heard about economic stimulus efforts following Golden Week. Have you observed any changes in consumer behavior in China, or is it still somewhat stagnant? Additionally, how do you plan to address the inventory challenges in that region?

John M. Vandemore — Chief Financial Officer

We must recognize that there have been shifts in consumer patterns. For instance, the Double 11 holiday has commenced earlier this year compared to past years, making year-over-year comparisons difficult. Therefore, while we await clearer trends in consumer activity, we are focused on adjusting our inventory strategy proactively.

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Strong Financial Performance Amidst Strategic Changes

Early indicators show a positive trend, but it’s still too soon for definitive analysis.

John M. Vandemore — Chief Financial Officer

Thanks, Jim.

Operator

Our next question comes from Alex Straton from Morgan Stanley. Please go ahead.

Megan Alexander — Analyst

Thank you! Congratulations on a solid quarter. I’d like to focus on SG&A. It appears there may be a chance to lower some selling expenses. Where do you foresee that going as a percentage of sales? It seems elevated when compared to historical figures. I’d also like to know your thoughts on G&A in the near and long term.

John M. Vandemore — Chief Financial Officer

Sure. This year, we were upfront about ramping up our marketing investments early on to boost awareness of our comfort technologies and new categories. We initiated this strategy in Q4 of the previous year, so we expect some better comparisons moving forward. With our anticipated top-line growth, we believe we can manage marketing expenses effectively.

Moreover, our distribution team has performed exceptionally well, providing leverage that contributed to improved G&A efficiency.

However, it’s important to note that some comparability issues arose this quarter. Due to supply chain delays, some sales that we expected in Q2 shifted to Q3. This adjustment required considerable effort. Consequently, the record sales achieved this quarter also contributed to our operational efficiencies.

Looking ahead, we do not foresee substantial changes in operating expenses, but we’ll keep a close eye on developments, especially with the holiday season approaching.

Megan Alexander — Analyst

Thanks, John. Just one more question. It seems like your comfort technology is gaining traction. Are you finding that this shifts your wholesale partner relationships?

David Weinberg — Chief Operating Officer

It’s too soon to highlight any significant changes in our wholesale partnerships. However, we’re conducting tests in various regions, and our entry into technical athletics is proving beneficial for the brand.

We also have a strong direct-to-consumer sales channel, providing multiple avenues for growth. This is still early in the process, and while we are making progress, we recognize we have more to achieve in this area. As demand develops, we expect opportunities will arise in previously untapped markets.

Megan Alexander — Analyst

Thank you, and good luck moving forward.

John M. Vandemore — Chief Financial Officer

Thank you.

Operator

Our next question comes from Chris Nardone from Bank of America. Please proceed.

Chris Nardone — Analyst

Thanks. Good afternoon. John, I’d like to follow up on U.S. wholesale. Can you provide insight into how your spring order book is shaping up? I’m interested in your confidence in growing the domestic wholesale segment next year based on this year’s performance, as well as your assessment of the inventory state.

John M. Vandemore — Chief Financial Officer

It’s a bit early to discuss 2025 specifically. However, we’re generally satisfied with early bookings and the conversations occurring with our customers, especially about our products for next year. Most discussions have been encouraging, but I’d prefer to leave it at that for now.

Chris Nardone — Analyst

Understood. How do you assess the overall state of inventory as we approach the holiday season?

John M. Vandemore — Chief Financial Officer

Overall, we are pleased with our inventory levels. We’ve reviewed the situation closely and see no major imbalances. It’s crucial to consider inventory on a customer basis rather than regionally. While there may be occasional disparities, we feel largely balanced as we head into the key holiday period. Even with some higher-than-expected inventory in certain areas, it predominantly consists of new stock, keeping static inventory levels low, even in China.

David Weinberg — Chief Operating Officer

In those meetings, we focus on maintaining positive relationships and exploring potential avenues to enhance our brand presence.

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Strong Positive Feedback and Promotions Steady for Company as Q4 Approaches

Distribution Centers Running Smoothly Despite October Challenges

Recent feedback from distribution centers indicates that there are no operational hold-ups. October has historically been a slower month for shipments to wholesale partners, but this year, it appears that the situation will be different. Previously delayed shipments are now being accepted, and inventory levels remain stable. Anecdotal evidence from wholesale and retail partners suggests that new products have been well received. Looking ahead, company leadership anticipates a clearer picture for next year as more new items hit the market.

ASP and Promotional Strategies: Current Insights

Chris Nardone — Analyst

Great. Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from Krisztina Katai with Deutsche Bank. Please proceed with your question.

Krisztina Katai — Analyst

Hi. Good afternoon, and thank you for taking the question. I wanted to ask about ASPs and the pricing dynamics heading into the fourth quarter. Can you explain how pricing is expected to respond during the holiday season, especially with consumers actively seeking value? Additionally, have promotional practices changed?

John M. Vandemore — Chief Financial Officer

Promotional activity remains stable. When we do implement promotions, they are effective, albeit limited in scope. In the upcoming fourth quarter, we will face comparisons from last year that may slightly affect ASPs due to differences in product exclusions. Our guidance indicates growth primarily driven by volume, although we do foresee some pricing opportunities. Additionally, we acknowledge that our performance in China has influenced ASPs, which should improve if market conditions get better.

Update on Local Sourcing Strategy in India

Krisztina Katai — Analyst

Thank you. I would also like to inquire about the local sourcing strategy in India. How is production capacity evolving, and what can we expect regarding margins?

David Weinberg — Chief Operating Officer

We’re making significant progress daily. Recent inventory increases in India have allowed us to ramp up production earlier, and we have several factories operational. While margins will likely remain stable in the short term, there is potential for long-term improvement as our capabilities expand. We believe we are ahead of many competitors in establishing production facilities and managing quality, which will eventually work to our advantage.

John M. Vandemore — Chief Financial Officer

It’s worth noting that we already possess a substantial production base in India. However, we aren’t yet able to produce all desired product categories locally, necessitating some imports for the time being.

Insights on Same-Store and E-Commerce Growth

Krisztina Katai — Analyst

Thank you. Best of luck.

John M. Vandemore — Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from John Kernan with TD Cowen. Please proceed with your question.

Krista Zuber — Analyst

Good afternoon. This is Krista Zuber on for John. Can you elaborate on same-store sales growth, e-commerce performance, and new store productivity?

John M. Vandemore — Chief Financial Officer

We have observed solid growth in e-commerce across both domestic and international markets. Internationally, comp store growth is encouraging. In the U.S., although we saw impressive growth numbers last year, we experienced a flat performance in the recent quarter. The numerous new store openings should contribute positively over time, although it may take a while for them to reach full productivity.

Further Discussion on G&A Efficiency

Krista Zuber — Analyst

Great. Thank you. Can you discuss some efficiencies within the supply chain that have positively influenced G&A leverage in Q3?

John M. Vandemore — Chief Financial Officer

[Response pending]

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Skechers CFO Highlights Strategic Achievements Amid Market Challenges

Labor Management and Cost Reductions Drive Positive Outlook

John M. Vandemore — Chief Financial Officer

This quarter focused heavily on labor management, which is crucial for adapting to the fluctuating product flows we experience throughout the year. We also targeted specific practices that allowed us to realize meaningful cost reductions. Overall, improving our distribution network will be vital moving forward. We remain optimistic about achieving further efficiencies in the coming months.

The success of our strategies relies partly on the timely arrival of goods and the speed at which we process them. As David mentioned, our team performed remarkably well in meeting many delivery deadlines, despite facing some challenges in Europe. Their achievement in navigating these less-than-ideal conditions deserves commendation.

Strong Demand Fuels 30% Growth in EMEA Region

Operator

Our next question comes from Paul Kearney with Barclays. Please proceed.

Paul Kearney — Analyst

Hi, everyone. Thanks for taking my question. Can you explain what drove the 30% growth in the EMEA region, especially considering some regional challenges? What are your expectations for Q4 growth, given a potentially easier comparison?

John M. Vandemore — Chief Financial Officer

The primary factor remains consumer demand. As we expand our presence with stores in markets where we previously had limited participation, we’ve seen a boost in direct-to-consumer sales. This growth reflects our strong product offerings. Our messaging around comfort technology has resonated well, supported by effective advertising.

Although we’ve been concerned about market conditions for the past few years, consumer interest in Skechers remains solid. In short, the combination of our products and marketing strategy has helped us thrive despite the challenges.

Paul Kearney — Analyst

Thanks for that. One more question on inventory: Can you clarify how much of this quarter’s increase was due to higher inventory levels in China versus EMEA in-transit? What are your expectations for normalizing inventory levels in China?

Inventory Insights and Outlook in China

John M. Vandemore — Chief Financial Officer

I can share that China was the main contributor to increased inventory levels, followed by those in transit. In several markets, on-hand inventory levels actually decreased. The timeline for normalizing our inventory, particularly in China, hinges largely on upcoming sales events like Singles Day, which is significant for the region. The team is focused on addressing this priority, as resolving it will facilitate the introduction of new products, which is key in driving consumer interest.

David Weinberg — Chief Operating Officer

It’s important to note that we are capable of managing inventory globally. It isn’t confined to China. We’ve demonstrated in the past that we can move inventory depending on where demand arises. Most inventory is general and can fill needs across markets, which gives us flexibility. As we monitor the results from Singles Day, we’ll efficiently shift inventory to meet demand as necessary.

Macro Challenges Affecting China Performance

Paul Kearney — Analyst

Thank you. I appreciate the clarity. Lastly, can you provide insight into recent performance in China? Was the underperformance due to macro conditions or missed opportunities in sales?

John M. Vandemore — Chief Financial Officer

The situation in China appears to be driven by broader macroeconomic conditions, rather than specific brand issues. Data from various other brands supports this view. The underperformance we see seems to be widespread.

Jesalyn Wong — Analyst

Thank you. I noticed the updated guidance seems to suggest lower operating margins for the second half of the year. Can you clarify expectations for Q4 margins?

John M. Vandemore — Chief Financial Officer

Previously, we had not detailed Q4 operating margins. As we adjust forecasts, we also reconsider how operating margins will flow through our performance. Importantly, we maintain our expectation for double-digit operating margins this year, which is a notable achievement for us.

Jesalyn Wong — Analyst

Thank you for your insights.

John M. Vandemore — Chief Financial Officer

Thanks, Jesalyn.

Closing Remarks

Operator

We have reached the end of the question-and-answer session. Thank you for your participation in this call.

Duration: 0 minutes

Call Participants:

Melissa Tankersley — Manager, Digital Marketing Team

David Weinberg — Chief Operating Officer

John M. Vandemore — Chief Financial Officer

This article provides a transcript of the conference call prepared for The Motley Fool. Though we aim for accuracy, please conduct your own research and review the company’s SEC filings, as The Motley Fool does not assume responsibility for the use of this content.

The Motley Fool has positions in and recommends Skechers U.S.A. The Motley Fool has a disclosure policy.

The opinions expressed here are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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