Skechers Finally Gets Serious About E-Commerce

Comfort-casual footwear leader Skechers (SKX -0.79%) started its e-commerce business in 1998 as a complement to its mail-order catalog. Over the next 16 years, Skechers built it to a paltry 1.1% of total revenue. In 2015 it stopped reporting the revenue explicitly, seeming to downplay the importance of e-commerce. Since then, however, the company has seemed to realize the importance of this channel to reach a new generation of customers and has made a number of investments in online sales that are starting to pay off.

Read on to learn about Skechers' early efforts in e-commerce, the investments since 2014, and how they are benefiting the company.

Image source: Skechers.com.

Early efforts in e-commerce: 1998-2014

1998 was the year Skechers launched both its interactive website and its mail-order catalog. The website included the ability to shop from the catalog and gave visitors photos, interviews, and information on company-sponsored events. The company noted the site was a brand-builder.

From 1998 to 2006, e-commerce revenue was less than 1% of overall revenue, though 2006 showed a glimpse of success as Skechers saw 61% growth in e-commerce that year. Management indicated in the company's 2006 annual report that they believed the internet was an "efficient and high margin distribution channel" that showed "strong growth potential." The company redesigned the Skechers website and fulfillment process to "improve and expand" its online segment. But these efforts didn't seem to pay off for Skechers, and the view that e-commerce was providing strong growth hadn't been mentioned again -- until recently.

After 2006, Skechers' online revenue continued to be less than 2% of its business and in 2015, the company stopped separately reporting the revenue. The last three years that Skechers reported e-commerce revenue separately are shown in the table below.

Data source: Skechers. 

Maybe Skechers hasn't grown its online business more due to its view that e-commerce is a support to its retail stores rather than a separate, viable channel.

David Weinberg, the current chief financial officer and chief operating officer, described management's view of its online business in its Q4 2014 earnings call. 

Well, we continue to use [e-commerce]. We do quite well with it. We don't compete on our e-commerce site. We never compete on price and it's more of a showcase for us. ... We're not looking to make it significantly large because we make no product to date that is unique to the website, nor do we compete on price. So we only do it as a convenience item where there's more colors, newer items as they come in. ... But we love the views we get ... we get a lot of unique views and we get a lot of visitors and a lot of people interested in what the brand is doing, what the brand looks like, and even what the commercials are, so we think it's a net positive around our entire business.

After all those years, Weinberg made it clear that to Skechers, e-commerce was still just a supporting element for its retail business and not an engine for growing revenue. In that call, there was no mention of additional investment in this space or growth expectations in the year ahead for its online business. It seemed that Skechers had all but given up on e-commerce to produce top-line growth. But since then, there has been evidence that the company has changed its mind about how it thinks about e-commerce.

Is Skechers finally getting serious about e-commerce?

In the next quarter (Q1 2015), Weinberg detailed a plan to invest in the online shopping experience: "In an effort to make the shopping experience more intuitive and provide a more impactful branding platform, we are revamping the skechers.com site to a more responsive design, ideal for mobile devices which will also include [user-]generated content." [Transcript via Seeking Alpha.]

In answering an analyst's follow-up question on the investment in e-commerce, Weinberg said the amount was "negligible ... because most of it flows through our in-house crew." But Weinberg hinted that these efforts were more strategic than ever before for the company, saying, "... this is more branding and becoming usable for the entire generation of new customers that we're getting."

Attracting a new generation of customers seems to be a fundamental shift of emphasis from just convenience and brand-building. In Q3 2016, the company launched the skechers.com mobile app and websites in Chile, Germany and the U.K. were first mentioned. Websites in Spain and Canada are expected to launch this quarter.

The question on most investors' minds is: When is this going to yield real results? Over the past year, the online growth in China and the U.S. have started to become material enough to discuss on earnings calls.

Image source: Getty Images.

E-commerce investments are paying off

The company's online segment started to gain traction in China in the fourth quarter of 2015. That quarter, management described the Chinese e-commerce business as "extremely strong." Every earnings call since, online growth in China has been touted as "extremely strong with high double-digit growth," with the two most recent quarters described as "just short of triple digits." For those counting at home, that's six straight quarters of "extremely strong" growth in a huge Chinese market.

Domestically, e-commerce has been called out in the last three earnings calls with growth of 13%, 36.3%, and 23.5%, respectively. The numbers are much better than the company's 2014 showing of negative e-commerce growth!

The strongest signal that management is taking the online business seriously is the company's comments in the risk section of its most recent 10-K, the first where management calls out the importance of consumer preference shifting from brick-and-mortar stores to e-commerce. "The success of our global retail operations also depends on our ability to identify and adapt to changes in consumer spending patterns and retail shopping preferences globally, including the shift from brick and mortar to e-commerce and mobile channels, and our ability to effectively develop our e-commerce and mobile channels," the company wrote.

Including these statements in the risk section of the 10-K indicates that management understands that not developing e-commerce into a viable channel could adversely impact the company's brand and financial results. While Skechers has been successful growing revenue through its retail and wholesale brick-and-mortar businesses, that may not continue forever. Skechers' online business is still small, but it is certainly worth paying attention to what management says about its reinvigorated online growth going forward.