Skechers (SKX 1.50%) reported third-quarter adjusted earnings per share of $0.53 last week on revenue of $1.3 billion, above consensus projections of $0.36 EPS on $1.2 billion in revenue. The company saw a nice increase in revenue of 78.3% quarter over quarter, driven by strong sales in e-commerce and at its reopened big-box stores. While the quarter saw a monthly sequential improvement in revenue and management is confident about an ongoing recovery, Skechers declined to give guidance.
Here's a deeper dive into the consumer discretionary company's third-quarter earnings and three takeaways for potential investors to consider.
1. Digital revenue was strong
Domestic e-commerce growth was impressive in the third quarter, increasing by 172.1% even as physical stores reopened. This segment's performance was boosted by Skechers' omnichannel strategies, which are designed to improve the customer experience.
During the quarter, Skechers initiated new digital solutions that will help its long-term growth. These included two mobile applications, BOPIS (buy online, pick up in-store) and BOPAC (buy online, pick up at curb) options in most of its U.S. stores, and an update of in-store point-of-sale systems. Convenient and low-contact shopping is on the rise, driven by people wanting to save time and, of course, maintain social distance during the pandemic.
In addition to adding omnichannel options for shoppers, Skechers is investing in expanding its digital business with a new 1.5-million-square-foot distribution center in China and additions to existing centers in Europe, South America, and North America. The company is also upgrading its e-commerce platforms in Japan, South America, Europe, India, and Canada.
COO David Weinberg gave some details on these distribution center projects during the third-quarter earnings call:
We are working diligently on the expansion of our North American distribution center, which we expect to be completed in the second half of 2021 bringing our facility to 2.6 million square feet. We also completed the expansion of our European distribution center, bringing it to 2.1 million square feet and expect to open our first U.K.-based distribution center by the end of this year. Also we have opened new distribution centers in Panama and Colombia, all to pave the way for growth as well as increased e-commerce business.
2. Business is recovering, but Skechers did not provide guidance
Skechers' business is rebounding after challenges earlier this year from COVID-19, with total quarter-over-quarter revenue improvement of 78.3%. Domestic wholesale revenue increased by 6.3% year over year, boosted by broad-based demand across women's, men's, and children's segments. The majority of stores reopened by the end of the quarter, but some are operating with limited hours.
Skechers saw its business improve steadily during the third quarter. September was the strongest month, which bodes well for continued improvement. Further, many key international markets performed well. The joint-venture business increased by 14% in the quarter, driven by a 23.9% increase in China. Germany and France were other strong international markets, helping European subsidiaries attain 18% growth.
While the company is positioning itself for recovery, there could be risks related to a second wave of store closures and restrictions in some areas due to COVID-19. Several countries, including the U.K., France, and Germany, have announced new restrictions related to COVID-19 for November. These new restrictions include the closure of nonessential stores, which would crimp Skechers' sales in the impacted areas.
COO Weinberg said on the third-quarter earnings call, "We remain very aware of the global health crisis, yet we remain confident in our actions and the strength of our brand and business as countries reopen and consumer confidence grows." However, CFO John Vandemore also said that guidance wouldn't be provided because "the environment remains too unpredictable to forecast reliably."
3. Skechers is giving consumers what they want
As more people are embracing working at home and pursuing wellness, they are buying more comfortable clothing and shoes. Skechers will continue to benefit from these trends. Another factor driving purchasing decisions is the volatile economy, which is motivating people to gravitate toward value-priced goods. This should also help Skechers, as it's known for its good-quality shoes at reasonable price points.
Weinberg spoke about how Skechers' comfortable and casual products are appealing to consumers on the third-quarter earnings call: "Athletic and casual footwear and apparel with a focus on comfort is precisely in our wheelhouse. In our domestic wholesale business, growth came primarily from our adult athletic, casual and sandal footwear, along with single-digit improvements in our men's and women's collections."
Impressively, Skechers' children's shoe segment is performing well, even considering the unusual back-to-school season. The business increased by double digits in the third quarter, as many children are learning at home via remote schooling, indicating the resilience of its kids' business.
Overall, Skechers' business is recovering from the closures related to COVID-19 from earlier this year. The lifestyle and footwear company is executing well and offering on-trend products that consumers want. However, investors should be aware of renewed risks around a second round of store closures due to rising cases of COVID-19 in some parts of the country and the world.