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Here's the 1 Thing Accounting for Skechers Inc.'s Big Earnings Gain

By Rich Duprey - Apr 26, 2016 at 9:06PM

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There were a number of moving parts in the sneaker maker's quarterly results, but there's been one constant over the past few years that's finally moving to the forefront.

Skechers' international operations are carrying more of the weight.

Skechers USA (SKX 3.72%) can no longer be thought of as just a U.S. or North American footwear powerhouse. It must now be considered on its international merits as well. Sure, the sneaker maker's business has long had a significant and growing global component, but the just-reported quarter is the first quarter where its international wholesale business surpassed domestic wholesale in size.

The 47.1% gain in revenues the segment realized not only accounted for this quarter's strong performance, but it may now become the one thing that drives growth going forward, too.

As recently as 2013, Skechers' domestic wholesale operations, which sells its sneakers through third-party retailers such as Dick's Sporting Goods, accounted for 43% of its total revenues, compared with just 26% for international wholesale. Skechers' retail stores accounted for the rest.

But the footwear maker has had as its goal putting the international markets on an equal footing with the domestic ones, and through the end of 2015 the international segment has grown at a compound annual rate of 51%. The domestic segment, while still enjoying strong growth, has grown at only a 23% compound rate, so the fact that international has now overtaken domestic isn't a surprise.

In its Q1 report, Skechers said that international wholesale represented 42.9% of sales and international wholesale and retail represented 47.7%.

While there have been a lot of ebbs and flows in Skechers' results over the past year that have affected its domestic wholesale business -- such as shifts in the holiday calendar pulling sales forward or pushing them back, port strikes, and weather issues -- it's also clear the torrid pace of growth the sneaker maker has experienced in the past is easing up. Even on a two-year basis the sharp edge of growth is getting blunted.

Skechers USA growth rates

Period

Domestic
Wholesale

Domestic Pairs
Shipped

International Wholesale

Q1 '14

20.7%

14.8%

26.3%

Q2 '14

35.4%

30.1%

54%

Q3 '14

18.5%

16.1%

60.6%

Q4 '14

24.3%

15.7%

37.9%

Q1 '15

38.2%

30.5%

59.5%

Q2 '15

31.9%

21%

60.1%

Q3 '15

11.8%

4.6%

52.9%

Q4 '15

8%

5.4%

64.9%

Q1 '16

12.1%

12.1%

47.1%

That's to be expected, of course, as it's now recording almost $1 billion in sales quarterly, but as it begins to challenge bigger industry players such as Nike (NKE 0.85%) and Adidas (ADDYY -0.68%) head to head, it's going to come into play more often.

While Skechers surpassed Adidas last year to become the No. 2 footwear company behind Nike, the industry leader is still able to pad its lead. It posted currency-adjusted sales growth of 14% last month, with footwear sales surging 16% higher in North America and 11% globally. As it already owns some two-thirds of the market, it's still able to put some distance between it and Skechers, even if Skechers itself is edging out its rivals.

Yet the strength of Skechers' international growth can't be ignored and its expansion to a 1 million-square-foot distribution facility in Europe that's expected to be completed in the current quarter will undoubtedly drive greater efficiencies than those it's already enjoying.

As COO and CFO David Weinberg suggests, "At no other time in the company's 24-year history have we been stronger from a product, marketing, and distribution standpoint than over the past year and more specifically in the first quarter of 2016."

Other footwear companies -- heck, other retailers, period -- would love to have Skechers' growth prospects, even if they seem to be slowing. While last year was something of an anomaly in how sales were affected by the various inputs, it remains remarkably robust, such that even the weak retail environment in which it operates can't cause a stumble. With more stores being planned to open worldwide and more partners being brought on board, Skechers may just continue its run ahead of the market.

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Stocks Mentioned

Skechers U.S.A., Inc. Stock Quote
Skechers U.S.A., Inc.
SKX
$35.97 (3.72%) $1.29
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$108.20 (0.85%) $0.91
Dick's Sporting Goods, Inc. Stock Quote
Dick's Sporting Goods, Inc.
DKS
$78.14 (9.69%) $6.90
adidas AG Stock Quote
adidas AG
ADDYY
$91.72 (-0.68%) $0.62

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