Skechers Reports a Rare but Not Surprising Decline in Sales

The full extent of the damage brought on by the coronavirus and the resulting global economic freeze is still unknown, but the initial reports indicate the cost will be severe. With the vast majority of its global retail stores shut down and its wholesale business disrupted, Skechers (SKX 0.16%) is no exception. The shoemaker reported a year-over-year decline in sales during the first quarter of 2020, and the outlook for the rest of the year remains a big question mark. There was some good news, but shareholders, strap in for a seriously wild ride.

Off to a good start but ...

First, the good news: Even with the coronavirus hitting China early in the year (management said on the earnings call the country accounted for some $850 million of its $5.22 billion of revenue in 2019), the new year was getting off to a good start. Chief operating officer David Weinberg said:  

Skechers' business was on track for a new first quarter sales record. We achieved the highest shipments ever from our North American and European distribution centers in January and February, and our worldwide comparable same-store sales increased 9.8% in our company-owned direct-to-consumer business for the first two months of the quarter. We believe that our quarterly performance prior to the disruption is a testament to the strength of our product and brand, all of which leads us to believe that when markets reopen, people return to work, and customers get back to shopping, Skechers will continue in its position as a leading footwear brand.  

Image source: Skechers.

However, in spite of the strong start, things came undone quickly in March, especially once all of Sketchers' retail stores and most of its third-party distributors closed down halfway through the month. As a result, lower sales and higher expenses combined to put a serious dent in the bottom line.

Data source: Skechers. PP = percentage point.  

Operating expenses have since been scaled back to conserve capital, but the line item grew significantly because of Skechers' joint venture in Mexico (a non-cash charge), new store openings, a real estate purchase in Shanghai, and higher digital marketing expenses. 

The future is still anyone's guess

Skechers' management said it isn't able to provide any guidance for the second quarter, as the timing of reopening in most markets is unclear. However, China, Germany, and some other countries in Northern Europe are beginning to ease up on their lockdowns. In China specifically, nearly all retail stores have reopened their doors and are quickly rebounding. And Skechers' e-commerce business has also been doing well, offering some hope that business will rally quickly once the dust settles. 

Skechers did expound on its digital business, saying that e-commerce had grown 70% year-over-year in the first quarter, and had increased over 250% so far in April compared with a year ago. Based on its own direct-to-consumer sales and rough estimates from its partners like Amazon, management said it approximates its total online sales to be at a $500 million a year or more run-rate through April. While still only 10% of total revenue in 2019, at the very least investors can take solace in the fact that the company isn't operating with a zero on the top line.

I'll wax optimistic on this point. To date, the bulk of Skechers' expansion has come from growing into international markets via its own retail stores and distribution to retail partners, and that will continue to be important. But this current crisis at least demonstrates that the company has also simultaneously worked on its digital ecosystem and established the necessary infrastructure to deliver shoes to consumers outside of brick-and-mortar stores. This item had always been shrouded in some mystery before, and while the company still trails behind Nike and its robust in-house e-commerce chops, the rough estimate floated during the first quarter conference call was better than I had imagined it was up to this point.

At the end of the day, though, the immediate future is uncertain. As a result, the stock is going to be volatile. When the world returns to "normal" -- whatever that may look like -- Skechers thinks consumers will be looking for a combination of comfort, style, and value. I agree. And with a strong balance sheet ($1.29 billion in liquidity, $683 million in debt mostly from drawing down its short-term credit facility) and strong growth right before the crisis hit, I also agree with management that the company will come out the other side of the coronavirus crisis ready to regain its momentum.