UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-14429
SKECHERS U.S.A., INC.
(Exact name of registrant as specified in its charter)
Delaware
95-4376145
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
228 Manhattan Beach Blvd.
Manhattan Beach, California
90266
(Address of principal executive office)
(Zip Code)
(310) 318-3100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Class A Common Stock, par value $0.001 per share
SKX
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 27, 2023, 134,270,786 shares of the registrant’s Class A Common Stock, $0.001 par value per share, were outstanding.
As of April 27, 2023, 20,463,521 shares of the registrant’s Class B Common Stock, $0.001 par value per share, were outstanding.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
Form 10-Q
Table of Contents
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
3
Condensed Consolidated Statements of Earnings (Unaudited)
4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
5
Condensed Consolidated Statements of Equity (Unaudited)
6
Condensed Consolidated Statements of Cash Flows (Unaudited)
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
19
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
20
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
21
2
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)
As of
(in thousands)
March 31, 2023
December 31, 2022
ASSETS
Current assets
Cash and cash equivalents
$
760,040
615,733
Short-term investments
89,507
102,166
Trade accounts receivable, less allowances of $61,984 and $59,472
1,052,687
848,287
Other receivables
82,948
86,036
Inventory
1,502,247
1,818,016
Prepaid expenses and other
222,556
176,035
Total current assets ($1,061,021 and $1,014,962 related to VIEs)
3,709,985
3,646,273
Property, plant and equipment, net
1,377,588
1,345,370
Operating lease right-of-use assets
1,239,222
1,200,565
Deferred tax assets
461,614
454,190
Long-term investments
80,743
70,498
Goodwill
93,497
Other assets, net
81,822
83,094
Total non-current assets ($608,819 and $598,973 related to VIEs)
3,334,486
3,247,214
TOTAL ASSETS
7,044,471
6,893,487
LIABILITIES AND EQUITY
Current liabilities
Accounts payable
892,057
957,384
Accrued expenses
269,225
294,143
Operating lease liabilities
247,411
238,694
Current installments of long-term borrowings
100,469
103,184
Short-term borrowings
30,471
19,635
Total current liabilities ($538,025 and $568,158 related to VIEs)
1,539,633
1,613,040
Long-term operating lease liabilities
1,092,711
1,063,672
Long-term borrowings
230,275
216,488
Deferred tax liabilities
8,722
8,656
Other long-term liabilities
126,835
120,045
Total non-current liabilities ($310,148 and $293,726 related to VIEs)
1,458,543
1,408,861
Total liabilities
2,998,176
3,021,901
Commitments and contingencies (Note 10)
Stockholders’ equity
Preferred Stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding
—
Class A Common Stock, $0.001 par value; 500,000 shares authorized;
134,259 and 134,473 shares issued and outstanding
134
Class B Common Stock, $0.001 par value; 75,000 shares authorized;
20,474 and 20,810 shares issued and outstanding
Additional paid-in capital
383,540
403,799
Accumulated other comprehensive loss
(80,217
)
(84,897
Retained earnings
3,411,374
3,250,931
Skechers U.S.A., Inc. equity
3,714,851
3,569,988
Noncontrolling interests
331,444
301,598
Total stockholders' equity
4,046,295
3,871,586
TOTAL LIABILITIES AND EQUITY
See accompanying notes to unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Earnings
Three Months Ended March 31,
(in thousands, except per share data)
2023
2022
Sales
2,001,928
1,819,594
Cost of sales
1,023,349
995,431
Gross profit
978,579
824,163
Operating expenses
Selling
128,560
108,209
General and administrative
626,442
540,050
Total operating expenses
755,002
648,259
Earnings from operations
223,577
175,904
Other income (expense)
9,923
(5,746
Earnings before income taxes
233,500
170,158
Income tax expense
43,216
33,992
Net earnings
190,284
136,166
Less: Net earnings attributable to noncontrolling interests
29,841
14,943
Net earnings attributable to Skechers U.S.A., Inc.
160,443
121,223
Net earnings per share attributable to Skechers U.S.A., Inc.
Basic
1.03
0.78
Diluted
1.02
0.77
Weighted-average shares used in calculating net earnings per share attributable to Skechers U.S.A., Inc.
155,140
155,996
156,755
157,448
Condensed Consolidated Statements of Comprehensive Income
Other comprehensive income, net of tax
Net unrealized (loss) gain on derivative contract
(1,416
5,843
Gain on foreign currency translation adjustment
6,851
1,489
Comprehensive income
195,719
143,498
Less: Comprehensive income attributable to noncontrolling interests
30,596
20,021
Comprehensive income attributable to Skechers U.S.A., Inc.
165,123
123,477
Condensed Consolidated Statements of Equity
Shares
Amount
Accumulated
Class A Common Stock
Class B Common Stock
other comprehensive loss
Balance at December 31, 2022
134,473
20,810
Foreign currency translation adjustment
4,680
2,171
Distributions to noncontrolling interests
(750
Net unrealized loss on derivative contract
Stock compensation expense
14,252
Shares issued under the incentive award plan
225
Shares redeemed for employee tax withholdings
(99
(4,498
Repurchases of common stock
(676
(1
(30,013
(30,014
Conversion of Class B Common Stock into Class A Common Stock
336
(336
1
Balance at March 31, 2023
134,259
20,474
Balance at December 31, 2021
135,107
20,939
135
429,608
(48,323
2,877,903
3,259,344
282,728
3,542,072
1,501
(12
(4,650
Net unrealized gain on derivative contract
753
5,090
17,967
566
(192
(7,971
(652
(24,999
(25,000
Balance at March 31, 2022
134,829
415,357
(46,822
2,999,126
3,367,817
298,099
3,665,916
Condensed Consolidated Statements of Cash Flows
Cash flows from operating activities
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization
41,424
36,516
Provision for bad debts and returns
9,792
14,024
Stock compensation
Deferred income taxes
(6,146
5,365
Net foreign currency adjustments
(9,605
2,281
Changes in operating assets and liabilities
Receivables
(185,430
(280,334
325,478
24,012
Other assets
(76,533
3,515
(70,945
(65,404
Other liabilities
2,549
(28,871
Net cash provided by (used in) operating activities
235,120
(134,763
Cash flows from investing activities
Capital expenditures
(71,213
(89,398
Purchases of investments
(37,942
(17,992
Proceeds from sales and maturities of investments
40,356
32,178
Net cash used in investing activities
(68,799
(75,212
Cash flows from financing activities
Repayments on long-term borrowings
(3,875
(18,642
Proceeds from long-term borrowings
14,947
2,247
Net proceeds from short-term borrowings
10,836
49,050
Payments for employee taxes related to stock compensation
Net cash used in financing activities
(13,354
(4,966
Effect of exchange rate changes on cash and cash equivalents
(8,660
8,566
Net change in cash and cash equivalents
144,307
(206,375
Cash and cash equivalents at beginning of the period
796,283
Cash and cash equivalents at end of the period
589,908
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest
4,910
4,402
Income taxes, net
25,687
29,213
Non-cash transactions
Right-of-use assets exchanged for lease liabilities
86,643
61,451
Notes to Condensed Consolidated Financial Statements
(1)
General
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Skechers U.S.A., Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S‑X. In the opinion of management, all normal adjustments and accruals considered necessary to provide a fair statement of the results of operations for the interim periods presented have been included. The December 31, 2022 balance sheet data was derived from audited financial statements; however, the accompanying notes to condensed consolidated financial statements do not include all of the annual disclosures required under GAAP and should be read in conjunction with the Company’s 2022 Annual Report on Form 10-K. Certain reclassifications have been made to the condensed consolidated financial statements in prior years to conform to the current year presentation.
Noncontrolling Interests
The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products throughout Mexico, Asia and the Middle East or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIE”), and the Company is considered the primary beneficiary. This determination is based on the relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. Specifically, the Company has both of the following characteristics: (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance; and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE, or the right to receive benefits from the entity that could potentially be significant to the VIE. The assets and liabilities and results of operations of these entities are included in the Company’s condensed consolidated financial statements, even though the Company may not hold a majority equity interest.
The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted, as they are not available for general business use outside the context of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value hierarchy as defined by applicable accounting standards prioritizes the use of inputs used in valuation techniques into the following three levels:
•
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions.
The Company’s Level 1 investments primarily include money market funds, United States (“U.S.”) Treasury securities and actively traded mutual funds; Level 2 investments primarily include corporate notes and bonds, asset-backed securities and U.S. Agency securities; and the Company does not currently have any Level 3 assets or liabilities. The Company has one Level 2 derivative instrument which is an interest rate swap related to the refinancing of its U.S. distribution center (see Note 4 – Financial Commitments) classified as other assets, net. The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
The carrying amount of receivables, payables and other amounts arising out of the normal course of business approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based on current rates and terms available to the Company for similar debt.
DERIVATIVE INSTRUMENTS
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Company uses an interest rate swap as part of its interest rate risk management strategy. The Company’s interest rate swap, designated as a cash flow hedge, involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. By utilizing an interest rate swap, the Company is exposed to credit-related losses in the event that the counterparty
fails to perform under the terms of the derivative contract. To mitigate this risk, the Company enters into derivative contracts with major financial institutions based upon credit ratings and other factors. The Company continually assesses the creditworthiness of its counterparties. As of March 31, 2023, all counterparties to the interest rate swap had performed in accordance with their contractual obligations.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as amended and supplemented by subsequent ASUs (collectively, “ASU 2020-04” and “ASU 2022-06”), which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for borrowing instruments, which use LIBOR as a reference rate, and is available through December 31, 2024. The Company has evaluated this ASU and does not expect its adoption to have a material impact on its condensed consolidated financial statements.
(2)
Cash, Cash Equivalents, Short-term and Long-term Investments
The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment category:
As of March 31, 2023
Adjusted Cost
Fair Value
Cash and Cash Equivalents
Short-Term Investments
Long-Term Investments
Cash
680,416
Level 1
Money market funds
73,375
U.S. Treasury securities
17,552
6,249
11,303
Mutual funds
N/A
5,268
Total level 1
90,927
96,195
79,624
Level 2
Corporate notes and bonds
97,425
76,066
21,359
Asset-backed securities
4,669
4,534
U.S. Agency securities
3,013
2,003
1,010
Total level 2
105,107
78,204
26,903
Total
876,450
881,718
32,171
As of December 31, 2022
539,730
71,503
18,201
2,000
16,201
5,893
89,704
95,597
73,503
101,959
2,500
85,731
13,728
4,641
234
4,407
106,600
85,965
18,135
736,034
741,927
24,028
The Company’s investments consist of U.S. Treasury securities, corporate notes and bonds and asset-backed securities, which the Company has the intent and ability to hold to maturity and therefore are classified as held-to-maturity. The Company holds mutual funds in its deferred compensation plan which are classified as trading securities. The Company may sell certain of its investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s long-term investments are less than two years. The Company minimizes the potential risk of principal loss by investing in highly-rated securities and limiting the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio. Included in long-term investments on the Condensed Consolidated Balance Sheets are company owned life insurance contracts of $48.6 million and $46.5 million as of March 31, 2023 and December 31, 2022. Interest income was $2.6 million and $1.2 million for three months ended March 31, 2023 and 2022.
9
When evaluating an investment for its current expected credit losses, the Company reviews factors such as historical experience with defaults, losses, credit ratings, term and macroeconomic trends, including current conditions and forecasts to the extent they are reasonable and supportable.
(3)
Accrued Expenses
Accrued expenses were as follows:
Accrued payroll, taxes, and other
172,822
143,664
Return reserve liability
66,338
60,482
Accrued inventory purchases
30,065
89,997
(4)
Financial Commitments
The Company had $2.7 million outstanding letters of credit as of March 31, 2023 and December 31, 2022, and approximately $30.5 million and $19.6 million in short-term borrowings as of March 31, 2023 and December 31, 2022. Interest expense was $5.1 million and $4.5 million for the three months ended March 31, 2023 and 2022.
Long-term borrowings were as follows:
HF-T1 Distribution Center Loan
129,505
HF-T2 Distribution Center Construction Loan
73,017
72,098
China Distribution Center Construction Loan
38,569
41,329
China Distribution Center Expansion Construction Loan
27,452
14,507
China Operational Loans
53,910
54,361
Other
8,291
7,872
Subtotal
330,744
319,672
Less: Current installments
Total long-term borrowings
Revolving Credit Facility
The Company maintains a revolving credit facility to manage liquidity, including working capital and capital expenditures. On December 15, 2021, the Company amended its $500.0 million senior, unsecured revolving credit agreement dated November 21, 2019 (the “Amended Credit Agreement”). The Amended Credit Agreement expands its senior, unsecured credit facility to $750.0 million, which may be increased by up to $250.0 million under certain conditions and provides for the issuance of letters of credit up to a maximum of $100.0 million and swingline loans up to a maximum of $50.0 million. The Amended Credit Agreement extends the maturity date of the credit agreement, which was due to expire on November 21, 2024, to December 15, 2026. As of March 31, 2023, there was no outstanding balance under the revolving credit facility. The unused credit capacity was $747.3 million as of March 31, 2023 and December 31, 2022.
The Company is required to maintain a maximum total adjusted net leverage ratio of 3.75:1, except in the event of an acquisition in which case the ratio may be increased at the Company’s election to 4.25:1 for the quarter in which such acquisition occurs and for the next three quarters thereafter. The Company was in compliance with the financial covenants as of March 31, 2023.
In addition, the Company had $30.5 million and $19.6 million outstanding under short-term borrowings as of March 31, 2023 and December 31, 2022. Included in these amounts are $25.0 million and $14.5 million as of March 31, 2023 and December 31, 2022, related to our subsidiary in India, which has a line of credit of $36.4 million and a weighted average interest rate of 8.6% for the three months ended March 31, 2023.
To finance construction and improvements to the Company’s North American distribution center, the Company’s joint venture with HF Logistics I, LLC (“HF”), HF Logistics-SKX, LLC (the “JV”), through a wholly-owned subsidiary of the JV (“HF-T1”), entered into a $129.5 million construction loan agreement which matures on March 18, 2025 (the “HF-T1 2020 Loan”) with interest of LIBOR Daily Floating Rate plus a margin of 1.75% per annum.
10
HF-T1 also entered into an ISDA master agreement (together with the schedule related thereto, the “Swap Agreement”) with Bank of America, N.A. to govern derivative and/or hedging transactions that HF-T1 concurrently entered into with Bank of America, N.A. Pursuant to the Swap Agreement, on August 14, 2015, HF-T1 entered into a confirmation of swap transactions (the “Interest Rate Swap”) as amended (the “Swap Agreement Amendment”) on March 18, 2020 with Bank of America, N.A with a maturity date of March 18, 2025. The Swap Agreement Amendment fixes the effective interest rate on the HF-T1 2020 Loan at 2.55% per annum. The HF-T1 2020 Loan and Swap Agreement Amendment are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Company’s revolving credit facility. The obligations of the JV under this loan are guaranteed by HF.
The Interest Rate Swap involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of both March 31, 2023 and December 31, 2022, the Interest Rate Swap had an aggregate notional amount of $129.5 million. Under the terms of the Swap Agreement Amendment, the Company will pay a weighted-average fixed rate of 0.795% on the notional amount and receive payments from the counterparty based on the 30-day LIBOR rate, effectively modifying the Company’s exposure to interest rate risk by converting floating-rate debt to a fixed rate of 4.08%.
To finance the expansion of the Company’s North American distribution center, the JV, through HF Logistics-SKX T2, LLC, a wholly-owned subsidiary of the JV (“HF-T2”) entered into a construction loan agreement of up to $73.0 million which matures on April 3, 2025. Under the 2020 Construction Loan Agreement, the interest rate per annum on the HF-T2 2020 Construction Loan based on the Bloomberg Short-Term Bank Yield Index (“BSBY”) Daily Floating Rate (as defined therein) plus a margin of 190 basis points, reducing to 175 basis points upon substantial completion of the construction and certain other conditions being satisfied. The weighted-average annual interest rate on borrowings under the HF-T2 Distribution Center Construction Loan was approximately 6.42% during the three months ended March 31, 2023. The obligations of the JV under this loan are guaranteed by TGD Holdings I, LLC, which is an affiliate of HF.
The Company entered into a 700.0 million yuan loan agreement to finance the construction of its distribution center in China which matures on September 28, 2023. The interest rate at March 31, 2023 was 4.00% and may increase or decrease over the life of the loan, and will be evaluated every 12 months. Beginning in 2021, the principal of the loan is repaid in semi-annual installments of variable amounts. The obligations of the China distribution center construction loan, entered through the Company’s Taicang Subsidiary are jointly and severally guaranteed by the Company’s China joint venture. As of March 31, 2023 and December 31, 2022, the outstanding balance under this loan included approximately $38.6 million and $41.3 million classified as current installments of long-term borrowings in the Company’s condensed consolidated balance sheets.
On October 18, 2022, the Company entered into a loan agreement for 1.1 billion yuan with Bank of China Co., Ltd to finance the construction of its distribution center expansion in China. Interest is paid quarterly. The interest rate at March 31, 2023 was 3.4% and may increase or decrease over the life of the loan, and will be evaluated every 12 months. This loan matures 10 years from the initial receipt of funds. Beginning in 2026, the principal of the loan will be repaid in semi-annual installments of variable amounts. The obligations of this loan entered through the Company’s Taicang Subsidiary are jointly and severally guaranteed by the Company’s China joint venture.
The Company has certain secured credit facilities to support the operations of its China joint venture. The balance of working capital loans was approximately $53.9 million with interest rates ranging from 2.90% to 3.05% per annum as of March 31, 2023. The balance of working capital loans as of December 31, 2022 was approximately $54.4 million with interest rates ranging from 2.90% to 3.41% per annum. As of March 31, 2023 and December 31, 2022, the outstanding balances under these working capital loans included $53.9 and $54.4 million classified as current borrowings in the Company’s condensed consolidated balance sheets.
(5)
Stockholders Equity and Stock Compensation
SHARE REPURCHASE PROGRAM
On January 31, 2022, the Company’s Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its Class A common stock, for an aggregate repurchase price not to exceed $500 million. The Share Repurchase Program expires on January 31, 2025 and does not obligate the Company to acquire any particular amount of shares. As of March 31, 2023, there was $395.7 million remaining to repurchase shares under the Share Repurchase Program.
11
The following table provides a summary the Company’s stock repurchase activities:
Shares repurchased
676,190
651,774
Average cost per share
44.39
38.36
Total cost of shares repurchased (in thousands)
30,014
25,000
INCENTIVE AWARD PLAN
In the three months ended March 31, 2023, the Company granted restricted stock with time-based vesting as well as performance-based awards. The performance-based awards include a market condition tied to the Company’s total shareholder return in relation to its peer companies as well as a financial performance condition tied to annual earnings per share (“EPS”) growth. The vesting and ultimate payout of performance awards is determined at the end of the three-year performance period and can vary from zero to 200% based on actual results. As of March 31, 2023, there were 2,213,612 shares available for grant as equity awards under the 2017 Incentive Award Plan if target levels are achieved for performance-based awards and 1,271,162 if maximum levels are achieved.
The Company issued the following stock-based instruments:
Granted
Weighted-Average Grant-Date Fair Value
Restricted stock
300,970
43.77
1,221,950
38.58
Performance-based restricted stock
121,225
43.34
116,250
42.46
Market-based restricted stock
59.71
58.85
A summary of the status and changes of the Company’s unvested shares is presented below:
Unvested at December 31, 2022
3,423,902
40.62
543,420
47.23
Vested
(224,750
38.82
Cancelled
(7,500
43.36
Unvested at March 31, 2023
3,735,072
41.68
The Company determines the fair value of restricted stock awards and any performance-related components based on the closing market price of the Company’s common stock on the date of grant. For share-based awards with a performance-based vesting requirement, the Company evaluates the probability of achieving the performance criteria throughout the performance period and will adjust stock compensation expense up or down based on its estimated probable outcome. Certain performance-based awards contain market condition components which are valued on the date of grant using a Monte Carlo simulation model.
For the three months ended March 31, 2023 and 2022, the Company recognized $13.5 million and $17.2 million of incentive stock compensation expense. As of March 31, 2023, the unamortized stock compensation of $102.3 million is expected to be recognized over a weighted-average period of 1.77 years.
STOCK PURCHASE PLAN
A total of 5,000,000 shares of Class A Common Stock are available for sale under the 2018 Employee Stock Purchase Plan (“2018 ESPP”). The 2018 ESPP provides eligible employees of the Company and its subsidiaries the opportunity to purchase shares of the Company’s Class A Common Stock at a purchase price equal to 85% of the fair market value on the first trading day or last trading day of each purchase period, whichever is lower. Eligible employees can invest up to 15% of their compensation through payroll deductions during each purchase period. The purchase price discount and the look-back feature cause the 2018 ESPP to be compensatory and the Company recognizes compensation expense, which is computed using the Black-Scholes valuation model.
For the three months ended March 31, 2023 and 2022, the Company recognized $0.7 million and $0.8 million of ESPP stock compensation expense. As of March 31, 2023, there were 3,815,746 shares available for sale under the 2018 ESPP.
12
(6)
Earnings Per Share
Basic EPS and diluted EPS are calculated by dividing net earnings by the following: for basic EPS, the weighted-average number of common shares outstanding for the period; and for diluted EPS, the sum of the weighted-average number of both outstanding common shares and potentially dilutive common shares using the treasury stock method.
The calculation of EPS is as follows:
Weighted-average common shares outstanding, basic
Dilutive effect of nonvested shares
1,615
1,452
Weighted-average common shares outstanding, diluted
Anti-dilutive common shares excluded above
27
(7)
Income Taxes
The tax provisions for the three months ended March 31, 2023 and 2022 were computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company’s tax rate is subject to management’s quarterly review and revision, as necessary. The Company’s provision for income tax expense and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the foreign jurisdictions in which the Company has operations, the applicable statutory rates range from 0.0% to 35.0%, which is on average significantly lower than the U.S. federal and state combined statutory rate of approximately 25%. The Company’s effective tax rate was 18.5% and 20.0% for the three months ended March 31, 2023 and 2022. The decrease for the quarterly rates is primarily due to the positive impact of discrete items.
(8)
Related Party Transactions
The Skechers Foundation (the “Foundation”) is a 501(c)(3) non-profit entity and not a subsidiary or otherwise affiliated with the Company. The Company does not have a financial interest in the Foundation. However, two officers and directors of the Company, Michael Greenberg, the Company’s President, and David Weinberg, the Company’s Chief Operating Officer, are officers and directors of the Foundation. During the three months ended March 31, 2023, the Board of Directors approved a contribution of $0.5 million. For the three months ended March 31, 2022, the Company made contributions of $0.5 million.
(9)
Segment and Geographic Information
The Company has two reportable segments, Wholesale and Direct-to-Consumer. Management evaluates segment performance based primarily on sales and gross margin. Other costs and expenses of the Company are analyzed on an aggregate basis and not allocated to the segments. The following summarizes the Company’s operations by segment and geographic area:
Segment Information
Wholesale sales
1,294,558
1,251,306
511,999
454,960
Gross margin
39.6
%
36.4
Direct-to-Consumer sales
707,370
568,288
466,580
369,203
66.0
65.0
Total sales
48.9
45.3
13
Identifiable assets
Wholesale
3,759,816
3,682,860
Direct-to-Consumer
3,284,655
3,210,627
Additions to property, plant and equipment
51,516
64,698
19,697
24,700
71,213
89,398
Geographic Information
Geographic sales
Domestic Wholesale
441,903
538,569
Domestic Direct-to-Consumer
298,963
239,448
Total domestic sales
740,866
778,017
International Wholesale
852,655
712,737
International Direct-to-Consumer
408,407
328,840
Total international sales
1,261,062
1,041,577
Regional Sales
Americas (AMER)
945,931
946,886
Europe, Middle East & Africa (EMEA)
534,494
441,201
Asia Pacific (APAC)
521,503
431,507
China sales
281,953
273,031
Domestic
882,901
870,924
International
494,687
474,446
China property plant and equipment, net
274,149
264,422
The Company’s sales to its five largest customers accounted for approximately 8.0% and 10.0% of total sales for the three months ended March 31, 2023 and 2022.
Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the U.S. were $4.6 billion and $4.4 billion at March 31, 2023 and December 31, 2022. Goodwill of $93.5 million is included in the Wholesale segment.
The Company performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable generally do not require collateral. Foreign accounts receivable are generally collateralized by letters of credit. The Company’s additions to the provision for expected credit losses for the three months ended March 31, 2023 and 2022 were $0.7 million and $0.3 million.
14
The Company’s accounts receivables, excluding allowances for bad debts and chargebacks, by geography are summarized as follows:
Domestic Accounts Receivable
394,760
310,138
International Accounts Receivable
719,911
597,621
The Company’s top five manufacturers produced the following:
(percentage of total production)
Manufacturer #1
23.2
17.8
Manufacturer #2
6.1
5.2
Manufacturer #3
5.8
5.0
Manufacturer #4
4.8
Manufacturer #5
5.3
4.4
46.2
37.2
(10)
Commitments and Contingencies
In accordance with GAAP, the Company records a liability in its condensed consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings are inherently difficult to predict, particularly when the matters are in the procedural stages or with unspecified or indeterminate claims for damages, potential penalties, or fines. Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the condensed consolidated financial statements as of March 31, 2023, nor is it possible to estimate what litigation-related costs will be in the future; however, the Company believes that the likelihood that claims related to litigation would result in a material loss to the Company, either individually or in the aggregate, is remote.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto in Item 1 of this report and our annual report on Form 10-K for the year ended December 31, 2022.
We intend for this discussion to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of our company as a whole.
This quarterly report on Form 10-Q contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements with regards to future revenue, projected operating results, earnings, spending, margins, cash flow, orders, expected timing of shipment of products, inventory levels, future growth or success in specific countries, categories or market sectors, continued or expected distribution to specific retailers, liquidity, capital resources and market risk, strategies and objectives. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state future results, performance or achievements, and can be identified by the use of forward-looking language such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will,” “could,” “may,” “might,” or any variations of such words with similar meanings. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in forward-looking statements, and reported results shall not be considered an indication of our future performance. Factors that might cause or contribute to such differences include:
our ability to manage the impact from delays and disruptions in our supply chain;
our ability to sustain, manage and forecast our costs and proper inventory levels;
our ability to continue to manufacture and ship our products that are sourced in China and Vietnam, which could be adversely affected by various economic, political, health or trade conditions, or a natural disaster in China or Vietnam;
our ability to maintain our brand image and to anticipate, forecast, identify, and respond to changes in fashion trends, consumer demand for the products and other market factors;
the loss of any significant customers, decreased demand by industry retailers and the cancellation of order commitments;
our ability to remain competitive among sellers of footwear for consumers, including in the highly competitive performance footwear market; and
global economic, political and market conditions including the effects of inflation and foreign currency exchange rate fluctuations around the world, the challenging consumer retail market in the United States and the impact of Russia’s war with Ukraine; and
other factors referenced or incorporated by reference in our annual report on Form 10-K for the year ended December 31, 2022 under the captions “Item 1A: Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The risks included herein are not exhaustive. Other sections of this report may include additional factors that could adversely impact our business, financial condition and results of operations. Moreover, we operate in a very competitive and rapidly changing environment, and new risk factors emerge from time to time. We cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these inherent and changing risks and uncertainties, investors should not place undue reliance on forward-looking statements, which reflect our opinions only as of the date of this quarterly report, as a prediction of actual results. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document, except as otherwise required by reporting requirements of applicable federal and states securities laws.
OVERVIEW
Sales of $2.0 billion in the first quarter set a new quarterly record, reflecting the robust global demand for our product. Sales increased across both of our segments compared to the same period in 2022. Additionally, gross margins improved year-over-year to 48.9% and inventory was reduced by 17.4% from December 31, 2022. Our record sales, expanded gross margins and meaningfully improved inventory levels are an indication of the strength of our comfort technology products and impactful marketing worldwide.
Our core product philosophy of comfort, style, innovation, and quality at a reasonable price continues to resonate with consumers, and we remain focused on delivering our comfort technology footwear to meet consumer demand. We continue to build efficiencies and expand our distribution capabilities around the world. We remain focused on executing against our long-term growth strategies and believe we are well positioned to meet our sales goal of $10 billion by 2026.
On April 22, 2023, we released our first Impact Report. With one of America’s largest LEED Gold Certified facilities and our environmentally minded European Distribution Center, we are committed to reducing our impact on the world through green building
design, operational efficiencies, and waste and water use reduction.
RESULTS OF OPERATIONS – FIRST QUARTER
We have two reportable segments, Wholesale and Direct-to-Consumer. Wholesale includes sales to department stores, family shoe stores, specialty running and sporting goods retailers, and big box club stores; franchisee and licensee third-party store operators; dedicated e-commerce retailers; and international distributors. Direct-to-Consumer includes direct sales to consumers through an integrated retail format of company-owned physical stores and digital platforms and hosted digital marketplaces in select international markets.
Selected information from our results of operations follows:
Change
182,334
10.0
27,918
2.8
154,416
18.7
360
bps
20,351
18.8
86,392
16.0
106,743
16.5
As a % of sales
37.7
35.6
210
47,673
27.1
Operating margin
11.2
9.7
150
15,669
n/m
63,342
9,224
54,118
39.7
Net earnings attributable to noncontrolling interests
14,898
99.7
39,220
32.4
Sales increased $182.3 million, or 10.0%, to $2.0 billion compared to $1.8 billion as a result of a 21.1% increase internationally and a 4.8% decrease domestically. Both segments experienced growth, with Direct-to-Consumer increasing 24.5% and Wholesale increasing 3.5%. Sales increased overall due to higher sales volume in Direct-to-Consumer and higher average selling prices in Wholesale.
Gross margin increased 360 basis points to 48.9% compared to 45.3%, due to higher average selling prices in Wholesale and a greater mix of Direct-to-Consumer sales.
Operating expenses increased $106.7 million, or 16.5%, to $755.0 million, and as a percentage of sales increased 210 basis points to 37.7% compared to 35.6% in the prior year. Selling expenses increased $20.4 million, or 18.8%, to $128.6 million, primarily due to higher brand demand creation expenditures. General and administrative expenses increased $86.4 million, or 16.0%, to $626.4 million. The increased expenses were primarily due to increases in labor costs of $29.8 million, warehouse and distribution costs of $18.1 million, and facility related costs of $15.5 million, including rent and depreciation.
Other income
Other income was $9.9 million for the three months ended March 31, 2023, as compared to an expense of $5.7 million for the three months ended March 31, 2022. The increase of $15.7 million was primarily due to favorable gains on foreign currency exchange rates.
Income taxes
Income tax expense and the effective tax rate were as follows:
Effective tax rate
18.5
20.0
17
Our income tax expense and effective income tax rate are significantly impacted by the mix of our domestic and foreign earnings before income taxes. In the foreign jurisdictions in which we have operations, the applicable statutory rates range from 0.0% to 35%, which on average is significantly lower than the U.S. federal and state combined statutory rate of approximately 25%. For the quarter, the decrease in the effective tax rate is primarily due to the positive impact of discrete items.
Noncontrolling interests in net earnings of consolidated subsidiaries
Noncontrolling interests represents the share of net earnings that is attributable to our joint venture partners. Net earnings attributable to noncontrolling interests increased $14.9 million to $29.8 million compared to $14.9 million in the prior year, due to higher earnings by our joint ventures, predominantly in China.
RESULTS OF SEGMENT OPERATIONS – FIRST QUARTER
43,252
3.5
57,039
12.5
320
Wholesale sales increased $43.3 million, or 3.5%, to $1.3 billion, which includes increases in Europe, Middle East & Africa of 20.1% and in Asia Pacific of 24.1%, partially offset by a decrease in the Americas of 13.2%. Wholesale average selling price increased 5.3% and volume decreased 1.9%.
Wholesale gross margin increased 320 basis points to 39.6% driven by average selling price increases.
139,082
24.5
97,377
26.4
100
Direct-to-Consumer sales increased $139.1 million, or 24.5%, to $707.4 million, which includes increases in the Americas of 28.6%, Asia Pacific of 17.9% and Europe, Middle East & Africa of 29.5%. Direct-to-Consumer volume increased 27.2% and average selling price per unit decreased 2.2%.
Direct-to-Consumer gross margin increased 100 basis points to 66.0%, primarily driven by lower costs per unit partially offset by average selling price decreases due to increased promotional activity.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity outlook
We have cash and cash equivalents of $760.0 million at March 31, 2023. Amounts held outside the U.S. were $661.0 million, or 87.0%, and approximately $285.4 million was available for repatriation to the U.S. as of March 31, 2023 without incurring additional U.S. federal income taxes and applicable non-U.S. income and withholding taxes.
As of March 31, 2023, we have unused credit capacity of $747.3 million on our revolving credit facility, with an additional $250.0 million available through an accordion feature. We believe that anticipated cash flows from operations, existing cash and investments balances, available borrowings under our revolving credit facility, and current financing arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipated working capital and capital requirements for the next twelve months.
Cash Flows
Our working capital at March 31, 2023 was $2.2 billion, an increase of $0.2 billion from working capital of $2.0 billion at December 31, 2022. Our cash and cash equivalents at March 31, 2023 were $760.0 million, compared to $615.7 million at December 31, 2022, primarily due to our strong operating performance. Capital expenditures were $71.2 million and we repurchased $30.0 million of common stock during the period ended March 31, 2023. Our primary sources of operating cash are collections from customers. Our primary uses of cash are working capital, selling, general and administrative expenses and capital expenditures.
Operating Activities
For the three months ended March 31, 2023, net cash provided by operating activities was $235.1 million compared to net cash used of $134.8 million for the three months ended March 31, 2022. The $369.9 million increase in operating cash flows primarily resulted from decreased inventory purchases and changes in receivables balances.
18
Investing Activities
Net cash used in investing activities was $68.8 million for the three months ended March 31, 2023, compared to $75.2 million for the three months ended March 31, 2022. The $6.4 million decrease was due to decreased capital expenditures of $18.2 million, offset by increased net investment activity of $11.8 million.
Our capital investments remain focused on supporting our strategic growth priorities, growing our Direct-to-Consumer business, as well as expanding the presence of our brand internationally. Capital expenditures for the three months ended March 31, 2023 were $71.2 million, which included $31.0 million related to the expansion of our global distribution infrastructure; $19.9 million related to investments in our retail stores and direct-to-consumer technologies; and $9.0 million of investments in our new corporate offices. We expect our capital expenditures for the remainder of 2023 to be approximately $300.0 million to $350.0 million, which is primarily related to the expansion of our worldwide distribution capabilities, continued investments in retail and e-commerce technologies and stores, and our corporate offices in Southern California. We expect to fund ongoing capital expenses through a combination of available cash and borrowings.
Financing Activities
Net cash used in financing activities was $13.4 million during the three months ended March 31, 2023, compared to $5.0 million during the three months ended March 31, 2022. The increase is primarily the result of net decreased proceeds from short-term and long-term borrowings of $25.5 million, partially offset by decreased repayments on long-term borrowings of $14.8 million.
Capital Resources and Prospective Capital Requirements
Financing Arrangements
As of March 31, 2023, outstanding short-term and long-term borrowings were $361.2 million, of which $268.5 million relates to loans for our domestic and China distribution centers, $53.9 million relates to our operations in China, and the remainder relates to our international operations. Our long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. We were in compliance with all debt covenants related to our short-term and long-term borrowings as of the date of this quarterly report. See Note 4 – Financial Commitments of the Condensed Consolidated Financial Statements for additional information.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates did not change materially during the quarter ended March 31, 2023.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes from the information previously reported under Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Item 4. Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the design and effectiveness of our disclosure controls and procedures, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our CEO and CFO also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
There have been no material developments with respect to the information previously reported under Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the share repurchase activity during the quarter ended March 31, 2023.
Month Ended
Total Number of Shares Purchased
Average Price Paid Per Share
Maximum Dollar Value of Shares that May Yet Be Purchased under the Program
January 31, 2023
425,755
February 28, 2023
202,051
44.50
416,765
474,139
44.34
395,742
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibit
Number
Description
3.1
Fourth Amendment to Bylaws dated March 9, 2023 (incorporated by reference to exhibit number 3.1 of the Registrant’s Registration Statement on Form 8-K filed with the Securities and Exchange Commission on March 9, 2023).
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Financial statements from the quarterly report on Form 10-Q of Skechers U.S.A., Inc. for the quarter ended March 31, 2023 formatted in inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) the Notes to the Condensed Consolidated Financial Statements
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 5, 2023
By:
/s/ John Vandemore
John Vandemore
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Signatory)