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Presentation

Operator: Greetings, and welcome to the Skechers First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to Skechers. Thank you. You may begin.

Ashley Keith: Hello, everyone. My name is Ashley Keith from the FP&A team. Thank you for joining us on Skechers conference call today. I will now read the Safe Harbor statement. Certain statements contained herein, including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events may constitute forward-looking statements that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, including, but not limited to, global, national, and local, economic, business and market conditions, including the impact of inflation, foreign currency fluctuations, Russia’s war with Ukraine and supply chain delays and disruptions in general and specifically as they apply to the retail industry and the company.

There can be no assurance that the actual future results, performance or achievements expressed or implied by any of our forward-looking statements will occur. Users of forward-looking statements are encouraged to review the company’s filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of all other significant risk factors that may affect the company’s business, financial conditions, cash flows and results of operations. With that, I would like to turn the call over to Skechers’ Chief Operating Officer, David Weinberg; and Chief Financial Officer, John Vandemore.

David?

David Weinberg: Thank you for joining us today on our first quarter 2023 conference call. For the first time in our history, we achieved quarterly sales of $2 billion and a first quarter record earnings of $1.02. These results were attributable to the strength of our brand and the demand for our comfort technology products, supported by impactful marketing and distribution capabilities. With a product-first approach to our business, we are focused on staying true to our design principles; style, comfort, innovation, and quality, all at a reasonable price to ensure consumers worldwide have the footwear they need to enjoy their lives comfortably. Whether in the office, gym, school or home, whether walking, running, golfing or playing pickleball, we have something for everyone.

We ensure Skechers remains top of mind through memorable advertising. This quarter, we launched marketing campaigns that included a Super Bowl ad with Snoop Dogg, Martha Stewart, Tony Romo and Howie Long; national television commercials for Skechers Slip-ins with Amanda Klootz and Brooke Burke, among others; and targeted digital and out-of-home advertising for Skechers Uno with Ashley Park. We also further improved operations at our distribution facilities, ensuring a more efficient and continuous flow of inventory through our direct-to-consumer channels as well as timely shipments to our wholesale partners. Our success combines the talents of many individuals across our business, including those in our corporate offices, sales teams and distribution centers, retail associates interfacing with consumers around the world and so many others.

This quarter’s record sales wouldn’t have been possible without the nonstop support, determination and flexibility of the global Skechers organization and our partners at every step along the way. For the first quarter, Skechers achieved sales of $2 billion, a 10% increase year-over-year or 13% on a constant currency basis. This incredible achievement was led by an increase of 24.5% in direct-to-consumer as well as 3.5% growth in wholesale. International sales increased 21%, representing 63% of our total sales for the quarter. Domestic sales decreased 5% due to declines in our domestic wholesale business of 18%, related to inventory congestion issues impacting many of our partners. However, we also faced a very difficult comparison to a particularly strong quarter last year due to the alleviation of the West Coast port congestion.

This is evident when compared to the first quarter of 2021 against which this quarter’s domestic wholesale sales increase was an impressive 17%. By region, EMEA and APAC each grew 21%, the latter of which included 3% growth in China, as consumers started shopping, eating out and traveling again after a long period of COVID restrictions. Sales in the Americas were flat as domestic wholesale declines masked robust growth in most other markets. Wholesale remains a critical element of our growth strategy, representing 65% of our total sales for the quarter. The 3.5% year-over-year sales increase was driven by 20% growth in our international wholesale business where nearly every market achieved double digit growth. Overall, wholesale average selling price per unit increased 5% and unit volume decreased 2%.

EMEA wholesale grew 20% driven by double digit increases in most markets, including Spain, Italy and Germany, and APAC wholesale increased 24% led by strong double digit growth in India and single digit growth in China. Sales to our distributors also improved in the region driven by growth in Australia, New Zealand, Indonesia and Taiwan. The Americas wholesale business decreased 13%. However, excluding the United States, sales grew 10%. Our marketing efforts and increased traffic and conversion along with our improved ability to replenish inventory in our company-owned stores resulted in a 24.5% sales increase in our direct-to-consumer segment. The increase was the result of 29% growth in the Americas, 18% in APAC and 30% in EMEA. In total, direct-to-consumer unit volume increased 27% and average selling price decreased 2%.

Domestic direct-to-consumer sales increased 25% due to double digit growth in both our brick and mortar and e-commerce channels. International direct-to-consumer sales grew 24% due to double digit increases in nearly every market and even triple digit in some. In China, direct-to-consumer grew due to the return of consumers to a brick and mortar shopping experience. The highest gains came from Hong Kong, South Korea, Chile, Thailand and Canada. In the first quarter, we opened 56 company-owned Skechers stores and closed 25. Store openings included 18 in China, 13 in the United States, six each in Thailand and Vietnam, and three each in Germany and Israel. We ended the quarter with 4,549 Skechers stores worldwide, of which 3,074 were third party stores, including 108 opened in the first quarter, 71 of which were in China, 15 in India, and our first store in Tajikistan.

In the second quarter to-date, we have opened one company-owned store in the United States. We expect to open between 125 to 140 stores worldwide over the balance of the year. We remain focused on growing our direct-to-consumer segment to efficiently drive sales and connect with our loyal consumers. During the first quarter, we launched our Skechers Plus loyalty program in Canada, the United Kingdom, Germany and Spain and expect to roll out this program to more countries. We’re also in the process of updating our existing e-commerce platform in Chile, which is already one of our most productive international sites with plans to launch additional e-commerce sites internationally. During the first quarter, we launched our limited edition collaborations which included the popular James Goldcrown collection and our first with Diane von Furstenberg.

We also introduced our first collaboration with Martha Stewart, which launched on International Women’s Day in the United States and Canada. These limited releases position the brand to a more upscale audience, drive traffic to our e-commerce channel and create buzz in the media. These collaborations are also part of our brands demand creation efforts by ensuring Skechers stays top of mind with important influencers and designers. We believe leveraging a roster of notable and relatable talent, both globally and in regional markets, is impactful and effective. We have a diverse team that includes Emily in Paris star Ashley Park, the legendary Snoop Dogg and the recently announced movie and A-Team actor Mr. T, which launched last week and exemplifies the breadth of our product offering.

We also connect on the field, thanks to Dodger pitcher Clayton Kershaw and on the course with elite golfers and Skechers ambassadors, Brooke Henderson and Matt Fitzpatrick, who won the RBC Heritage earlier this month while wearing Skechers GO GOLF. With pickleball pros Tyson McGuffin and Catherine Parenteau on our roster playing in our Skechers Viper Court pickleball shoes, and as the official footwear sponsor of the Professional Pickleball Association Tour and U.S. Open, we are connecting to the fastest growing sport in America. The enthusiasm for this sport is spreading to other markets, including Canada, the UK, and Singapore, among others. Our aim is to have consumers see, hear and think about Skechers when they are shopping in stores, browsing websites from the comfort of their home, watching their favorite TV shows, listening to their favorite music station, or traveling the world.

You’ll find Ashley Park wearing Uno on billboards on the streets of Paris and Skechers Slip-ins on a roadshow traveling the country to Spain. Skechers commercials are translated into dozens of languages. Influencers are posting about our products reaching millions of their followers globally. We continue to pursue opportunities to connect with consumers, build brand awareness and drive consumer demand for our innovative products. We have worked diligently to improve shipping within our own logistics facilities, particularly at our LEED certified Gold North American distribution center where inventory and shipping costs have both declined over the previous two quarters. By the end of 2023, we expect to begin shipping out of our new distribution centers in Canada, India, Chile and Panama.

And we also expect to open another phase of our planned LEED certified Gold corporate offices. Just last week, we released our first Impact Report. Our stewardship is focused on minimizing our environmental footprint in the communities where we operate. As an organization, Skechers is thinking about our product, our people and our planet, because we believe it is a critical element of acting responsibly to serve all our stakeholders, including the families who love Skechers. And now, I would like to turn the call over to John for more details on our financial results.

John Vandemore: Thank you, David, and good afternoon, everyone. Skechers delivered another quarter of record financial performance, exceeding both our top and bottom line expectations, as we continue to successfully execute our long-term growth strategy. Sales surpassed 2 billion, growing 10% year-over-year, and quarterly earnings per share exceeded $1.00 for the first time for this period. These results were driven by continued broad-based strength globally, particularly in our direct-to-consumer segment, as well as a return to growth in China. We also made significant progress in moderating our inventory levels, which decreased 17% versus last quarter. These results demonstrate that even amid a dynamic retail landscape and market challenges, consumers around the globe are seeking out the Skechers brand and compelling assortment of stylish, comfortable, high quality and exceptionally priced product.

Before turning to our first quarter results, I would like to highlight the announcement we made this morning regarding the planned acquisition of our Scandinavian distributor. Let me formally welcome the Sports Connection team to Skechers. We are looking forward to working closer together and excited about the prospects of further growing the Skechers brand in the Nordic region. This transaction is expected to close within the coming quarters and to be slightly accretive to earnings. Now let’s review our first quarter financial results. Wholesale sales increased 3% year-over-year to 1.29 billion led by 20% growth internationally. Our fourth quarter momentum of last year carried on through the first quarter with double digit growth in nearly every market as well as an encouraging return to growth in China.

Domestic wholesale sales were as expected to headwind in the quarter, declining by 18%. We continue to see good sell-through of the Skechers brand at our wholesale partners. However, the ongoing challenges of broader inventory congestion is meaningfully impacting orders. That being said, it’s important to keep in mind the last year’s comparable quarter delivered a robust 43% growth year-over-year, as port congestion alleviated and the pace of shipments to our customers recover. In fact, as compared to the first quarter of 2021, this quarter’s domestic wholesale sales actually grew by more than respectable 17%. Direct-to-consumer sales increased 24% year-over-year to 707.4 million, driven by 25% growth domestically and 24% growth internationally.

Growth was both broad and robust, as nearly every market posted double digit gains, which we believe are indicative of the strong underlying consumer demand for our comfort technology products, improved inventory availability, and compelling marketing activations. Deepening our direct relationship with our consumers remains a focal point of our strategy. And we continue to hone our capabilities to raise brand awareness more effectively, and to enable a frictionless omni-channel experience for our consumers. Now turning to our regional sales. In the Americas, sales for the first quarter were essentially flat year-over-year at 945.9 million where the headwinds in the domestic wholesale market masked continued strong consumer trends and double digit growth across most markets, particularly in Chile and Mexico.

Excluding domestic wholesale, the Americas grew 23% year-over-year. In EMEA, the momentum from last quarter continued through this quarter, as sales increased 21% year-over-year to 534.5 million driven by double digit growth across both segments in most countries, led by Spain, Italy, and Germany. In APAC, sales increased 21% year-over-year to 521.5 million, also driven by double digit growth in both segments in most countries, led by India and Korea, and triple digit growth in several markets, including Thailand and the Philippines. Notably, we also experienced significantly better-than-expected results in China, where sales grew by 3% driven by strength in our physical retail stores, as consumers enjoyed a return to in-person shopping. While the Chinese market has been volatile over the last few years, we are cautiously optimistic about the near-term recovery that appears to be materializing and remain confident in our long-term growth opportunity in the market.

First quarter gross margins were 48.9%, a significant improvement of 360 basis points compared to the prior year as pricing adjustments made last year in our wholesale segment annualized. And we experienced a favorable channel mix of higher direct-to-consumer unit volumes. Operating expenses increased 210 basis points as a percentage of sales year-over-year from 35.6% to 37.7%. Selling expenses increased 50 basis points as a percentage of sales year-over-year to 6.4%, primarily due to higher brand marketing globally and demand creation expenses in digital. General and administrative expenses increased 160 basis points as a percentage of sales year-over-year to 31.3% due to volume-related impacts of higher sales and the expansion of our retail footprint.

Continuing congestion-related inefficiencies totaled approximately 20 million of incremental costs globally. We have made tremendous progress on improving efficiency at our domestic distribution center since the second half of last year, and we continue to expect incremental logistics costs to decline in magnitude. Earnings from operations were 223.6 million, a 27.1% increase compared to the prior year, and our operating margin for the quarter was 11.2% compared to 9.7% in the prior year. Earnings per share were $1.02 per diluted share on 156.8 million diluted shares outstanding, a 32.5% increase. This included a positive $0.06 impact from foreign currency fluctuations year-over-year. Our effective tax rate for the first quarter was 18.5% compared to 20% in the prior year.

And now turning to our balance sheet, we ended the quarter with 930.3 million in cash, cash equivalents and investments, an increase of 110.4 million from March 31, 2022. This increase was largely attributable to operating cash flow, as working capital needs moderated. Inventory was 1.5 billion, an increase of only 4% or 52.7 million compared to the prior year and a decrease of 17% versus the prior quarter. Notably, domestic inventory declined nearly 24% from the fourth quarter. Accounts receivable at quarter end were 1.05 million, an increase of 42.1 million reflecting higher wholesale sales globally. Capital expenditures for the quarter were 71.2 million, of which 31 million was related to the expansion of our distribution infrastructure globally, 19.9 million related to investments in our retail stores and direct-to-consumer technologies, and 9 million primarily related to the construction of our new corporate offices.

Our capital investments are focused on supporting our strategic priorities, growing our direct-to-consumer business and expanding our brand presence globally. During the first quarter, we also repurchased approximately 676,000 shares of our Class A common stock at a cost of approximately $30 million. We continue to deploy our capital consistent with our stated philosophy. Now turning to guidance. This was an exceptional first quarter, one that exceeded our expectations and demonstrated that the strong brand momentum and robust consumer demand trends for our comfort technology products is continuing. The core assumptions originally embedded in our annual guidance for 2023 remain applicable. And we are still faced with numerous uncertainties about this year, particularly around macroeconomic factors, a dynamic wholesale landscape and the shape of the market recovery in China.

For the fiscal year, we now expect sales to be in the range of 7.9 billion to 8.1 billion and net earnings per diluted share in the range of $3.00 to $3.20. For the second quarter, we expect sales in the range of 1.85 billion to 1.9 billion, and net earnings per diluted share in the range of $0.40 to $0.50. Our effective tax rate for the year is expected to be between 19% and 20%. We expect total capital expenditures to be between 300 million to 350 million, as we continue to invest in our strategic priorities, including additional stores, expanded omni-channel capabilities, and incremental distribution capacity in key markets like India, China, and Chile. Moving ahead, we remain focused on executing our strategy and delivering innovative, stylish, high quality and comfortable products at a reasonable price.

We thank you for your time today. And we look forward to updating you on our second quarter financial results, which we expect to release on Thursday, July 27. With that, I will now turn the call over to David for closing remarks.

David Weinberg: Thank you, John. As we begin our fourth decade in business with plans to reach 10 billion in annual sales by 2026, we couldn’t be more positive about our position in the market, thanks to the strength of our brand, the relevance of our footwear collections, the robust demand for our comfort technology products, the effectiveness of our marketing efforts, and our commitment and ability to execute our strategies efficiently and effectively. Achieving quarterly sales of $2 billion with growth of 10% against the strong comparison to last year despite challenges in one of our core businesses, domestic wholesale, is a significant achievement and one the entire organization should be proud of attaining. As always, we never stop innovating, creating and seeking new opportunities, including the acquisition of our longstanding Scandinavian distributor, engaging with Doja Cat who TIME magazine just named one of the most influential music artists for a marketing and collaboration campaign and building efficiencies to better meet the needs of consumers.

We thank our talented employees and incredible partners for their ongoing commitment and look forward to more successes together in the future. Now I would like to turn the call over to the operator for questions.

Operator: Thank you. We will now conducting a question-and-answer session. . Our first question comes from Jay Sole with UBS. Please go ahead.

Jay Sole: Great. Thank you so much. So obviously a big quarter for Q1, EPS well ahead of consensus. I want to ask about the second quarter guidance. Maybe if you can talk about sales, if you maybe can break down what you’re expecting in the wholesale channel versus the DTC channel? If we can start there, that would be helpful. Thank you.

John Vandemore: Well, thanks, Jay. It was really an exceptional quarter on a lot of fronts. Our second quarter guidance really incorporates all the challenges we’ve been talking about, namely on the domestic wholesale side. There was a little bit of Q2 that ended up shipping a little bit earlier, which impacted Q1. It’s not an extraordinary amount, but it is an amount that came out of Q2 and into Q1 still held the order, which is most important. Absent that, we’re actually incredibly encouraged by what we’re seeing in the shape of Q2. But the domestic wholesale is the headwind we’re facing. We’re also watching the macroeconomic environment, what that means from a direct-to-consumer side of things. But obviously, since you’re seeing these quarterly results, the direct-to-consumer side, the consumer demand for the product remains incredibly robust.

And that to us is the most encouraging signal, because it means consumers are out there. They want the brand. They want the products that we’re offering. And so long term, we know that’s going to be the key to success. But in the second quarter, in particular, the headwinds going to be what it was in the first quarter shaping up to be a little bit more austere, partly because of that timing shift and partly just because of how the bookings came together. And so while we’re hopeful that we’ll start to see a turn in that soon, the route is what we can bank on at the moment foreshadows that headwind continuing. And remember, when we had talked about the year, we very much typify this as a first half, second half story. If you look at this in aggregate over the first half, it’s really shaping up to be very similar to what we said for the most part on the domestic wholesale side of things, and then better than we expected on the direct-to-consumer, and in particular, in China.

And so if you aggregate the first half quarters together, I think you’d see it’s a very encouraging sign overall. But that’s the headwind we’ll continue to face in Q2.

Jay Sole: I understand. Maybe if I can ask one more, and then I’ll pass it on. But just, John, to follow up on what you just said, obviously there’s macro uncertainty out there. The shape of the China recovery you mentioned is uncertain, wholesale China dynamics are what they are. But are you seeing that impact the business now? It sounds like you still are really positive about what you’re seeing in the DTC channel. So it’s more like your baking in conservatism, but not necessarily seeing it at the moment. And I guess just to follow up on that as well, China, how did the quarter trend in terms of — obviously, you’re lapping some store closures as we went through March. How are you seeing China play out in Q2 right now?

John Vandemore: So on the direct-to-consumer — it’s hard not to be encouraged by 25% growth overall, almost precisely well balanced between our international estate and our domestic estate, 25% and 24% growth. So there’s really nothing to take out of the direct-to-consumer side of things other than fantastic encouragement, again, really around the brand and around the product, our Arch Fit continues to do really well. Our Slip-in products continue to do well. All of our comfort technology features are doing really well. And I think it’s hard not to conclude that our marketing is resonating in a way that is driving traffic. The metrics in direct-to-consumer were great across the board. So really hard not to be incredibly encouraged by that.

Now, obviously, we’re always going to take a little bit of a cautious view as we look forward, because we don’t know what the future holds. But I would say thus far in April, that positive trend is still continuing, which is good. China’s shaped up I think a lot like you’ve heard elsewhere. There’s a little bit of a headwind mentality in the early part. I think as they still dealt with the ongoing effects of COVID, things got stronger. Probably what’s most encouraging to us is the fact that both you saw a return to consumers in stores and out shopping, which is an intentional effort to get out and to shop. And that’s, as we noted, our retail stores in China did incredibly well. But also some total, even with a little bit of a headwind in the first half of the quarter, China grew.

And that’s fantastic. So again, we’re optimistic — cautiously optimistic as you I think expect us to be, but optimistic about what we’re seeing. It looks like some of our conservatism early on may not have been fully warranted because this quarter certainly was better than we expected. But we want to watch things a little bit further. Net-net though it really isn’t anything that we see in that market that isn’t encouraging at this point.

Jay Sole: Okay, got it. Thank you so much.

Operator: Next question comes from Gaby Carbone with Deutsche Bank. Please go ahead.

Gaby Carbone: Hi. Good afternoon. Congrats on a nice quarter. Was wondering if you can help us think about the trajectory of gross margin for the remainder of the year, considering the strong expansion experienced in 1Q? And what are some of the biggest tailwind you’re facing, if you could remind us?

John Vandemore: Well, we had said earlier, and I would stick to this as the best guidance to give you, is we expect gross margins to continue to do better every quarter. We had long expected this quarter to be the biggest pickup, because a year ago, it’s when we really began to suffer from increased logistics costs, in particular the freight rates, but others as well. We expect to continue to see improvements, maybe not at this magnitude, maybe a more modest magnitude, because a big part of that is the pricing we implemented last year took place, and we’re not annualizing as much of that. But we are continuing to expect better each quarter of gross margins throughout the year. Some of that is mix. Some of that is the benefit of pricing.

In the back half of the year, we expect a little bit more of that to be the pickup from some of those lower logistics costs. But just again to caution, we have to burn out the inventory that landed at higher rates. But we are seeing current rates and we expect contract rates to be certainly beneficial as compared to last year, and that should begin to materialize in the back half of the year.

Gaby Carbone: And then just one quick last question. On the incremental logistics costs, did you quantify what the impact that was in 1Q? And then of the 90 million you experienced last year, how should we be thinking about like recouping that in the back half of this year?

David Weinberg: Yes, so we — the number this quarter was about 20 million. It was actually meaningfully less on the domestic side. But as we had mentioned last quarter, we had started to see some issues creep up in Europe. They’re not as significant that the total in the quarter was about 20 million. Now you actually bring up a really good point and something I think is worth noting. We spent a lot last year to deal with what can only be described as an abnormal amount of incoming orders. But I think what you’re seeing now is the benefit of that. Our stores, they have the product they need. They’re well stocked. And that’s why they were generating we believe that 25% uptick on volume. So it was in retrospect, although painful, money very well spent to clean up our position and to take the inventory into our own supply chain so that we can deal with it versus relying on others or seeing things back up.

I would also just point out in that we saw a significant downtick in inventory levels. So our inventory we believe is probably at the right level now, maybe a little bit more room to gain efficiency, but much improved from where we were both at the end of the year and quite frankly compared to last year, especially with our intentions to grow. So net-net, arguably a tough dollar to spend, but the right dollar to spend to get us to the point where we are now and as a result, see the benefits of the uptick, particularly on the direct-to-consumer side of things, because we think that was a meaningful contributor to the growth we saw this quarter.

Gaby Carbone: Great. Thank you for all the details.

Operator: Next question comes from Laurent Vasilescu with BNP Parabas. Please go ahead.

Laurent Vasilescu: Good afternoon, David. Good afternoon, John. Thanks for taking my question. I wanted to piggyback off of Jay’s question with regards to domestic wholesaling. You mentioned this is a tale to two halves. How do we think about the second quarter? I think you know that John that 1Q over 1Q ’21 was up 17? Did we assume that 2Q is still positive on a two-year stack basis? And how do we think about it for the full year?

John Vandemore: Hello, Laurent. I should have known you were going to ask a two, three or five-year stack question there. The first thing I’d say is — I want to be clear. Our domestic wholesale product lineup, what we’re seeing in reaction from customers is incredibly encouraging. What we’re seeing is that continuing congestion of inventory downstream impacting orders, because like we said, we continue to see good sell through. We know the product is resonant. That same product drove a 25% increase in our direct-to-consumer. So we don’t think there’s any health issues with regard to the inventory we have. I think there’s just continuing to be a downstream congestion impact. Also, as I noted, we saw a little bit of shift of orders out of Q2 into Q1.

And then the natural build of the book had been for the year that Q2 was always going to be the most challenging. So I don’t in all honestly think anything material has changed. If it has in the second quarter, it’s probably a little bit more challenging than we had expected. But again, we picked some of that up in Q1. And we think that as we get past that congestion, the opportunity for the product that’s resonating so strongly in our direct-to-consumer is going to ultimately benefit the wholesale customer base as well. In terms of your two-year stack question, I don’t want to get into specifics on growth by a channel, but we do expect that probably Q2 is going to be the worst of it. And then we’ll move beyond that. And we’re starting to see some good indicators on Q3 and Q4 on that side that are at least green shoots that we’re seeing things come back in a little bit.

Laurent Vasilescu: Okay, very helpful. And then I think people are a little bit surprised by the guide of $0.40 to $0.50 for 2Q. Can you just maybe — I know you don’t usually talk about the minority interest line, but it did double year-over-year. Should we assume that doubles for the full year or is there an anomaly that we should think about for 2Q? And then I’ve got a follow-up question on Scandinavia, if I may.

David Weinberg: Yes. So the minority interest line is, as we’ve long talked about is a fairly direct reflection of activities on our joint venture businesses, particularly and most significantly in the Asia region, including China. So that line will go in concert with that business. I’m not going to give specific guidance on it. I will say that you have to recognize though that that is all the way down past the operating margin line. So occasionally, there can be tax ramifications or other issues that influence it. But I would consider that a proxy for our businesses in Asia, in particular. And then also Mexico, which is a fast growing significant contributor to us as well. So it will perform in line with those countries. And you’ll have a view I’m sure on where they’re going in that, so I would educate your thinking about the minority interest line.

Laurent Vasilescu: Okay, very helpful. Just lastly, when you took over Mexico in 2018, I think you said on the 1Q ’19 call the magnitude of rev conversion and the EPS accretion. I think you’ve diluted EPS accretive, but can you just maybe kind of give us some guardrails, just the revenue shift, as we model distributor revenues, and how much EPS accretion comes from Scandinavia?

John Vandemore: I’ll ask you to put a pin in that for now only because we just announced the deal and we do need to look at how it gets accounted for from a purchase accounting perspective. Once we get through some of that, hopefully, on the next call, we’ll provide a little bit more guidance. But I would say, overall, it’s important, right? It’s a great business. The brand shows very well in that market. We’ve got a good footprint that we think we can expand. We’re acquiring a great team in the Sports Connection team there. And we’re incredibly excited about what that means for us, both in the Nordic region as well as beyond in Europe, because we think we can find ways to continue to work together. But we’ll give more specifics on accretion and kind of the revenue contribution at a later date.

Although you did make a note that I think is important to consider. This is a customer of ours on the distributor side of things. So not all of the revenue is going to be additive, because we have to take out what we were earning from a distributor perspective and put in kind of the growth that we were in, in running the business. So the revenue side of it’s not all not all additive, and we’ll give more color on that as we get closer to or past the close.

Laurent Vasilescu: Very helpful. Thank you very much for taking my questions.

John Vandemore: Of course.

Operator: Next question comes from John Kernan with Cowen and Company. Please go ahead.

John Kernan: Excellent. Congrats on the upside, guys.

David Weinberg: Thanks, John.

John Kernan: Maybe if we can just talk about the first quarter for a second. You had pretty big upside, significant upside to your outlook. I’m just curious, what on the top line surprised you the most? And then what on the margin profile of the business surprised you most in Q1?

John Vandemore: Well, I don’t know that it’s a surprise because we saw the indicators that the business is performing well, and I think we spoke to that throughout the quarter. In all honesty, I think the magnitude of the strength that we saw, particularly on the direct-to-consumer side, was exceptional. There’s really no other way to describe it. And that’s a good response we see to both our execution in the retail side of things which our team does deserves a ton of credit for, but also just the product — the resonance of the product. The margin had long been planned to accrete. That’s because of the pricing adjustments that we had put in place. And then we got an extra kicker on that, to be honest with you, because of the mix on direct-to-consumer was higher because that business outperformed.

And then on the encouraging side of things, although the numbers weren’t what we’re accustomed to from a growth perspective in China, just seeing that market begin to change and turn in the right direction was incredibly encouraging. And we’re still taking a bit of a conservative posture relative to China, because I think there’s more to be learned about how that market is going to recover. It’s been very encouraging. And so we think that there’s certainly the opportunity to continue to outperform expectations, if things continue to go in that direction. And I think the intentionality of the consumer to get out and shop there was probably the best part of it, because it means people are out, they want to shop, they want to get engaged with brands.

And so that to us gives the best indicator of how the market is feeling generally.

John Kernan: Got it. Maybe on that theme of China, obviously returned to growth, you faced a little bit of FX headwinds as well. How should we think about China as we go through the rest of the year? The 1.25 billion or so you generated in ’21, what do you think the timeline for getting back there is? Is it reasonable to assume you can get back there this year? And how should we think about growth in the remaining nine months?

John Vandemore: Well, I’ll tell you, so I’m going again — I’m going to acknowledge, we’re going to continue to be a little bit conservative on this until we see more of the year unfold. I would say, getting into the year, we thought that stepping back into a ’21 level was probably going to be a bit of a challenge, because we saw very much a first half, second half dynamic. Now with the first half coming in a bit stronger, I would say our interim goal is just that is trying to get near ’21. Of course, we’d like to exceed it, but just getting close would be a significant accomplishment given where we started off in Q4. So we’re optimistic that we can push to that level. But I think we need a little bit more seasoning of the market recovery before we can fully commit to that.

But again, I would echo the prior commentary David made here. What we’re seeing in China is very encouraging. And we’re excited by that, because what it means for the brand and then also what it means for our ability to move past this year and continue to grow. The only other note I’d make is, just keep in mind, China still had those core characteristics of some outsize selling windows, the 618 event in June, and then you have Double 11 in the fourth quarter. And so those do kind of somewhat awkwardly weight the results in that market typically. And we do expect that to be the case this year as well.

John Kernan: All right. Last one for me, just on direct-to-consumer, obviously you’re seeing some green shoots there. How do we think about that in terms of the mix on the margin profile for the business that’s embedded in the guidance? And it sounds like you expected the largest freight recovery to happen in Q1? How do we think about the recovery of freight rates as we get through the rest of the year on gross margin?

John Vandemore: Yes, again, we’re seeing the rates favorable now. And again, as we look forward, we expect our contract rates for the next year to embed that favorability. The problem is that it just takes a while for that to work its way into the system. So really we haven’t seen a significant impact to gross margins from those benefits yet. That’s still to come in and that’s something we’re going to benefit on in the back half of the year. In terms of the gross margin pickup, I would say, it wasn’t the most significant contributor to the gross margin improvement on the quarter. But it was a meaningful pickup, because of the mix of the business. And again, I would just echo it was outstanding performance on the direct-to-consumer side that really ticked up its contribution relative to where we would have thought.

So I don’t want to get down into the specifics of breaking apart the basis point differential, but that was definitely a meaningful contributor to the gross margin pop. Again, the biggest though being the benefit of the pricing that we had taken earlier, materializing on an annualized basis on the wholesale side of the business.

John Kernan: Awesome. Thank you.

Operator: Next question comes from Jim Duffy with Stifel. Please go ahead.

Jim Duffy: Thank you. Good afternoon. Really terrific quarter. I want to dig in some on the Americas market, the plus 25 to minus 18 spread between DTC and wholesale performance is just gaping typically to DTC as a good barometer of sell through at wholesale. Guys, I understand compares in the first quarter with the timing of the release of the shipping log jam last year. John, I think you mentioned continued congestion of inventory downstream. Can you be more specific about what that means? Is that inventory issues from other brands? And then what are the sightlines to resolution of that? When would you expect to see more life in that domestic wholesale channel?

David Weinberg: Both those questions relate to timing. And timing can be very difficult. And I’ll take you back just a little bit. When the pandemic first started and all the timing started to change about when we’d recognize revenue and when it was delivered had to do with our distributors and holding inventory. I think we’re seeing now in the first part of your question, the discrepancy between direct-to-consumer and wholesale is the fact that we recognize our direct-to-consumer sales as they get to the consumer. And that shows that the product is resonating, as John has said, and the inventory is moving quite well. And the margins indicate we’re selling it across the board at good margins to hold everything. When you conversely go to the wholesale channel, we ship them a lot at the end of last year and all throughout the year as everything opened up in our distributions.

And unfortunately, for some reason, we do hear around town rather than discuss any of them individually and then none of whom that we intimately know very well, they have inventory issues and their inventory issues are probably across the board. They’re the overall numbers, I don’t know that you’ll see. And they’re trying to clean them up, which means taking in less inventory, trying to sell through what you have, not necessarily re-merchandising the group as it sits. So what you see is those things that they can sell, they’ve sold and they can’t replace them no matter how well they’re doing until they get to an overall inventory scheme, which we understand. We’ve been through it. So we’ve been through that piece. We know we have new merchandise.

We know our merchandise, newer stuff is selling well in the wholesale channel, there’s just has to be room and timing. So when you’re talking about when, that’s always a very interesting indicator, because it depends how well they clean out the overall. And it doesn’t only have to do with us. We know that our direct-to-consumer, I believe, will continue along its current path, while that process is happening through the wholesale channels. So you will continue to see that discrepancy as we go through the second quarter. It’s a matter of how quickly and the consumer has held up. They can get to an open to buy and the time where they can fill in what’s selling for and fill in sizes, fill in those brands that are doing well in the channel and new product.

So it’s different for everyone. I’m sure you follow a lot of the retailers and some of them are in significantly better shape than others. So it will depend on how it flows through the marketplace. Usually, the pendulum swings fairly quickly. We do see indications that it will be in Q3 certainly as we get to the back half of the year, as John indicated, which to me, because I’m the optimistic one in this group, also means there’s always a possibility that it moves into the back end of Q2 when you get through June and you see what happens on the wholesale end and what it means. So our inventory channels are clean, our warehouses are fairly clean. They’re as clean as they’ve been in a while. So we continue to deliver on time, which sort of cuts the time to market for us from order to delivery.

So we stand ready to do it and move up the timing as best we can. But of course, that’s a market-backed phenomenon. So we’re looking forward to Q3 and onward with a potential of moving some of that forward if the channels clean up for us.

Jim Duffy: Thank you for that, David, helpful perspective. One more, if I may, just on the 10 billion objective. The midpoint of the guide this year, 8 billion. You’ve got a $2 billion gap. In directional terms, how would you see that incremental revenue splitting between North America and international markets and if you can kind of call out any international markets you expect disproportionate contributors, that would be helpful?

David Weinberg: We set them all to be disproportionate, which would then put them back in proportion to better movement.

Jim Duffy: Well played.

David Weinberg: Not to be glib, Jim. The part of it — direct-to-consumer in North America just grew 25%. So I’d say, sometimes even our well crafted plans don’t come out exactly how we want them. But in this instance, it’s all better than that. We’ve long said, the growth engine here is going to be international and direct-to-consumer. How it actually mixes out? I don’t know. I think there’s a lot of markets that can contribute, but not all have to contribute in order to get there. That’s kind of why we feel so confident about that goal. And if I had to ballpark it, I’d say it’s probably one-third, two-third mix toward international being the contributor. But again, when you have a direct-to-consumer business performing as well as we have domestically, that may not be a good guess, because it may continue to outperform our expectations.

Net-net, though, we feel really good about the number. We continue to have our eyes on growing many markets at once. In terms of the most notable, it’s the same ones we would mention all the time. But even from that, I would step back and just note as we sit on the call, we saw a quarter where nearly every market we operate in, but a few — and I mean a few grew double digits, and they did so growing both segments of their business, wholesale and direct-to-consumer were present. So it’s kind of a guess, but we like what we see. And we like the position we’re in relative to that goal given that broad-based strength.

Jim Duffy: Very good. Yes, that gap seems more and more manageable. Thank you, guys.

David Weinberg: Thanks, Jim.

Operator: Next question comes from Rick Patel with Raymond James. Please go ahead.

Rick Patel: Good afternoon, and congrats on the strong performance. I have a question on the updated revenue guidance. So as we think about the midpoint of guidance, it looks like the first quarter came in about 175 million better. And for the year, you raised about 125 million. Does that delta reflect the wholesale shift that you highlighted earlier, or is there an element of caution that’s now factored into guidance?

John Vandemore: Thanks, Rick. It’s a combination of those factors, in all honesty. Some of it’s a timing shift, some of it is a little bit weaker Q2 on the wholesale side of things than we had anticipated and some of that is just us being a little bit conservative. I will note, though, as a group, you all ran to the top side of a range. So as we adjust our range, now we’re a little bit more in line, but I think that’s just us trying to make sure we wait the mechanics that we see unfolding in the marketplace. And also try to make sure we understand where we think foreign exchange is going to hit us and capture some of that as well.

Rick Patel: And how are you planning inventory for the fall season? I’m curious if you see it tracking in line with revenue growth, or if it becomes more leaner? And how does that tie into the inventory that’s earmarked for the wholesale channel versus DTC? The question I’m getting at is like if restocking on the wholesale side happens quicker than expected, how would you be able to manage that?

David Weinberg: It’s only so much management you can do with that. Like I said, we’ve moved up our time to delivery quicker. But as we plan our inventories, I don’t know that they changed significantly going forward. You’re picking up the direct-to-consumer piece here in the United States and we’re building inventory for everyone around the world. And as John said, our inventories decreased significantly more in the U.S. than it has elsewhere because it was higher here than it was elsewhere. We have the capacity to move inventory everywhere around the world. As we have things in production, as delivery times move and change, we have the capacity to move things quicker, to use the same materials to make shoes for different groups.

So to say direct-to-consumer is one, wholesale is the other, we could do some things that have later deliveries that we’re making in our factories and use that material to fill our wholesale business here on a quicker basis, if necessary, within reason as we go down the road. So we’re not building an inventory of significant proportions in order to take this year-end business. It’s something that develops from the market back. As we start to get the order, as John was talking about, as we see what develops, as we deal with our customers, certainly here in the United States and get their flows going, we may take the time to move up those things to see that they get a faster turn and hold them for a little while longer, so long as they’re all spoken for as we go through to alleviate that time.

But there’s only so much you could bring it back. That’s why you can only do so much into Q2. When you see the issues as they are, they can change somewhat by moving some of July maybe even a little beginning of August back into June deliveries, but we’d have to know that shortly. So some things will change. They’ll change at a slower pace, but all that stuff we’re making for Q3 now that is coming into orders for us from our wholesale and around the world, we will mix and match to get the best bang for the buck around the world and deliver everything we can on time. So it could take the end of the second quarter, into the third quarter start getting that and see the change.

John Vandemore: Although to any customers out there listening, we would strongly encourage you to book yours orders now.

Rick Patel: Really helpful. Thanks very much and all the best.

David Weinberg: Thanks, Rick.

Operator: Next question comes from Tom Nikic with Wedbush Securities. Please go ahead.

Tom Nikic: Hi, guys. Thanks for taking my question. I just want to make sure I kind of understand how we’re thinking about U.S. wholesale just because that’s kind of the one piece of the pie that isn’t performing well right now with everything else doing very, very well. Should we assume and embed in our models that the year-over-year decline in U.S. wholesale in Q2 is worse than the 18% decline that you reported for Q1?

John Vandemore: Yes, we don’t give kind of segment or channel specific guidance. But I would say and reiterate what I mentioned earlier, we think Q2 is the worst of it. Some of that is just by virtue of some of the orders moving up into Q1, which I would note, and David I think noted, that is in and of itself an optimistic signal, right? If people are moving up orders when they’ve been holding back, that’s a good sign. But yes, I think the way the timing is shaking out right now, it looks like the second quarter will probably face the most serious headwinds, and then it will alleviate after that. That’s really kind of as we talked about, it’s just a timing thing. If you look at it on a first half, second half basis, it’s actually not drastically different than what we had originally forecast. It’s just a bit of when it ships more than anything else. But to answer your question bluntly, yes, we expect the second quarter to be the worst of it for the year.

Tom Nikic: Okay, got it. And I believe like three months ago, you said that we should think that you can get back to growth in the second half in U.S. wholesale. Is that still the case?

John Vandemore: That’s still the objective. We’re pushing to get there. Some of that’s going to be dependent upon the timing that David mentioned, that’s going to be important. But our objective is to get back to growth in the second half. That’s going to be something we’re focused on intently. Obviously, we have some really strong product, otherwise our direct-to-consumer side of things wouldn’t be growing at the rate it is. We think getting that into the hands of some of our wholesale partners would be both very productive for them as well as good for us. But again, the part of it we can’t control is when they have the capacity to take those very good selling goods with really attractive retail margins. And so that’s the unknown for us. But we’re definitely going to be endeavoring for that.

Tom Nikic: Are you getting any sort of signals from the wholesale partners like, hey, we’ve kind of — we’re starting to work through the inventory, is that where things are getting better here, our inventory of Skechers is leaner than we would like. Are you getting any kind of signals from your wholesale partners along those lines?

David Weinberg: Well, I would reiterate what we said in our prepared remarks, which is the sell through remains good. The pricing attained remains good. It’s really not about as far as we can tell a demand perspective at all. And again, pointing back to our direct-to-consumer, it would be a very awkward situation where demand was only impacting certain retailers and not our own business. So we know that there now. I think if you were to look at it across the wholesale spectrum, you’d really have to go case-by-case to get a good and accurate read. What we continue to hear though is the near-term congestion is the issue. And every retailer out there is attempting to work through it as quickly as they can. And they’re excited for the product we have.

They just don’t have the ability to ingest it at this point. And so that’s what we’ll continue to work on. I would also note though, we really haven’t seen an uptick at all in any sort of cancellation requests or anything that would give you a sense that they want out of the order. So we know they want the product, it’s just a question of when they can ingest it and when it can ship.

Tom Nikic: Got it. All right. Thanks very much, guys. Best of luck for the rest of you.

David Weinberg: Thanks, Tom.

Operator: Next question comes from Alex Straton with Morgan Stanley. Please go ahead.

Alex Straton: Great. Thanks so much for taking my question and good to speak with you, David and John. A quick one for you just zooming out on domestic wholesale, I think historically that was consistently like just over $1 billion business. And now it’s significantly higher than that. Can you just walk us through kind of the drivers of that change and how you think about the sustainability or even growing more off of it into the future? Thanks.

David Weinberg: The growth always comes from building our product and our technologies and getting it out there and demand for our consumers and advertising to our consumers. I just find in the marketplace in general, we’re in higher demand. Our demographics are growing. And we offer what we feel is a great service. We deliver on time. We deliver complete. We deliver what we say we’re delivering. We’re constantly developing new categories. And that all shows everywhere in our wholesale business, I think that’s just true. And it also pertains obviously to what’s new in the marketplace and the macroeconomic picture for some of our competitors and for our customers. So I think we still have a good profile. And I think we are in demand and our consumer is looking for us.

And we are in a very clean inventory position. So we’re not looking to liquidate anything or create issues in the marketplace for our product offering. Conversely, we are competing against a lot of liquidated product in our own channels and in close out channels, that puts a lot of inventory and a lot of pricing out on to try to liquidate inventories. And that’s what a lot of our competitors are doing all the time. So we think we’re creating a demand. There will be a demand for our consumers. There’s not a close out product there as we convert from this handful of inventory that’s got to clear out before they can start taking more stuff in. We continue to sell and we continue to sell good margins in our own stores. So we think we’re keeping the brand in a very solid position that will be warranted and to be taken into our wholesale partners, and will be well received by the customers when they create the space and the shelf space and an environment where you can sell full price product and new stuff rather than trying to promote everything to clean — clean everything out.

Alex Straton: That’s helpful. Thanks. Maybe one more quick one, just any comments on where the broader promotional environment sits would be super helpful? I think you guys had previously said it would remain competitive through the first half. I’m just wondering if your thinking it’s still the same there.

David Weinberg: It’s been pretty stable from our perspective. So we haven’t really sizably changed up or down our promotions. They have been productive. I think you can’t discount its impact on the growth that we saw. I think as we noted, ASPs were down reflecting the promotions, but the volumes were up significantly. So that’s definitely a strategy that continues to resonate at the consumer level. And it really is — there’s nothing substantially different we did this quarter than we had been doing quite frankly at the end of the fourth quarter. But it continued to be very effective.

Alex Straton: Thanks so much. Good luck.

Operator: There are no further questions at this time. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.