Female in activewear sitting and smiling on the sidewalk with her Skechers go walk shoes.

Image Source: Skechers.com.

Skechers (NYSE:SKX) is investing in its company-owned stores, which has both long-term strategic and financial benefits. Skechers' company stores provide critical supply chain data, superior gross profit, and the ability to limit product markdowns.

While company-owned stores provide key benefits for Skechers, they only account for 27% of total revenue. Skechers' wholesale partners provide the volume and scale for the company to reach 15,000-plus doors domestically and over 160 countries and territories globally. The balance of wholesale and company-owned stores provide Skechers with supply chain efficiencies and the scale to sell millions of pairs of shoes globally.

Skechers company-store network explained

Skechers has three types of company stores: concept stores, factory outlet stores, and warehouse stores. Each of these different types of stores plays a specific role in its distribution network. The table below shows the purpose and key benefits for each type of company-owned store.

  Concept Store Factory Outlet Store Warehouse Store
Locations Marquee locations in key metropolitan areas Manufacturer's direct outlet centers Freestanding and in-line outlet stores in close proximity to concept stores.
Size 1,500 to 7,800 square feet   1,000 to 9,000 square feet  4,400 to 30,000 square feet
Purpose
  1. Showcase for full product line
  2. Generate maximum marketing value for brand
  3. Marketing and product testing venues 
Sell discontinued and excess merchandise with certain first-line styles sold at full retail price points.  Liquidate excess merchandise, discontinued lines, and odd-size inventory in a cost-efficient manner.
Benefits Key product sales data to help respond to market changes and new product introductions. Reduces the need to sell merchandise to discounters at excessively low prices and potentially compromise the Skechers brand image. 

Source: Skechers 10-k.

In addition to the specific benefit for each of these stores in the Skechers' supply chain, there are common advantages across these stores. The first is that revenue is recognized at point of sale, allowing Skechers to have real-time visibility to how individual items are selling in its stores globally.

The second advantage is that Skechers sells directly to the end customer, and the gross profit for its retail stores is considerably higher than through the wholesale channels. Skechers' gross profit for the retail segment for the first nine months of 2016 was 59% versus 38% and 44%, respectively, for domestic and international wholesale.

One measure of success for the store network is to get the right products to customers at the right time while minimizing markdowns that could damage the brand. During the fourth-quarter earnings call, chief financial officer David Weinberg offered evidence that the retail network is performing well. 

If you look at our inventory breakdown on a year-over-year basis, we're actually down on a wholesale basis...both in Europe and the United States... And as far as liquidating, we don't have any significant inventory to liquidate, certainly not in the United States or Europe at this point in time... There's a bigger demand for outlets of our product than we actually have for closeouts.

Even though the U.S. holiday retail season was weak for a number of retailers, Skechers' inventory could have ballooned, but the efficient network of stores in the U.S. and European market kept inventory in control and minimized closeouts/markdowns.

Skechers' wholesale partners provide reach and scale

Although Skechers' company-owned stores provide strategic supply chain advantages, these stores can't provide the volume and scale needed to reach its customers across the U.S. and globally.

Wholesale partners enable the company to reach 15,000-plus doors in the U.S. without significant capital investment from Skechers or hiring retail staff. Internationally, wholesale partners can allow Skechers to test new cities/regions without a large commitment, or to scale up sales in a country with minimal effort.

The downside of wholesale partners is not just lower gross profits, but Skechers loses item visibility once the product is shipped to the partners. Skechers accounts for estimated returns, discounts, doubtful accounts, and chargebacks at the time of revenue recognition to wholesale partners, but these charges were only $7.5 million in 2015, less than 0.5% of total revenue.

Skechers has kept a balance of wholesale partner and company-owned retail stores to take advantage of the best of both business models. The percentage of revenue from retail stores has slightly decreased from 30% in 2012 to 27% in 2016 (see below chart), but this is mainly due to the international wholesale segment's faster growth rates. 

4 years of revenue by segment in a stacked bar for Skechers increasing from $1.6 billion in 2012 to $3.6 billion in 2016.  Retail segment dropping as % of total slightly from 30% of total revenue in 2012 to 27% in 2016.

Image Source: Author's chart from Skechers' earnings releases.

Skechers will continue to invest in growing company stores, as they enhance the wholesale partners' stores rather than replace them. Skechers' company stores provide strategic advantages that enable the company's wholesale partners to be successful -- and that's a good thing for Skechers.

Brian Withers has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Skechers. The Motley Fool has a disclosure policy.