Skechers- Some Insights from Their 10K Annual Report

Look, I know Skechers isn’t particularly cool and we don’t pay that much attention it.   But it’s another $2 billion company with a strong balance sheet that’s in most segments of the shoe business and, whether we like it or not, competes with more action sport aligned brands.

This isn’t a full analysis. I just reviewed the 10K and saw a few things I thought you might be interested in. I’ve been bitching and moaning that I don’t know what the term “action sports” means any more. As the boundaries continue to blur, consolidation happens, and retail goes vertical every brand has to begin to define its competitive position and customer base in light of those trends. Part of how you do is to acknowledge that companies like Skechers have an impact, and think about what that impact is. It was with that mindset that I took a brief look at Jarden Corporation a week or two ago.

Skechers does shoes and pretty much nothing but shoes. They do them in lots of categories. Skechers USA, Skechers Sport, Skechers Active, Skechers Kids, Shape-Ups by Skechers, and Fashion and Street Brands. There are various categories under each of these categories. You might click on the 10K link above and look at pages three through six that describe their products and markets they are in. It’s quite a list. Some, of course, have absolutely nothing to do with our market even broadly defined. But a lot do.
 
They divide their business into four segments. In 2010, the domestic wholesale business was $1.31 billion. They sell to “…department stores, specialty stores, athletic specialty shoe stores and independent retailers, as well as catalog and internet retailers.” That’s, uh, kind of pretty much everybody.
 
 International wholesale was $437 million. Their product is sold in more than 100 countries. They sell internationally directly to stores, to foreign distributors and to some licensees. 19 international distributors run 143 distributor owner retail stores which apparently aren’t part of the retail segment because they don’t own them.
 
Retail was $411 million and e-commerce $27.6 million. They own and operate 105 concept stores, 99 factory outlet stores, and 40 warehouse outlet stores in the U.S. They own 28 concept stores and 16 factory outlet stores internationally.
 
The concept stores are basically for brand building, as they “…estimate that our average wholesale customer carries no more than 5% of the complete Skechers line in any one location.” See why I suggested you go look at the pages that describe the breadth of their product line?
 
The factory outlet stores are in direct outlet centers. The warehouse outlet stores are the ones used to “liquidate excess merchandise, discontinued lines and odd-size inventory in a cost-efficient manner.
 
So outlet stores aren’t part of their strategy to get rid of lousy inventory. As I’m sure you’re aware “outlet malls” have become their own retail concept by suggesting to the consumer a better deal that may or may not exist at such malls.
 
In total, Skechers had 244 domestic and 44 international retail stores at the end of the year. They plan to open 30 to 35 more during the year.   
 
Skechers’ U.S. sales were $1.52 billion in 2010. Canada was $54 million and the rest $430 million.
 
The company is projecting lower revenue and margins during the first half of 2011 due to a whole lot of excess inventory (their year over year inventory had increased $172.4 million as of December 31, 2010) that resulted from customer order cancellations during the first half of 2010. They will be busily liquidating that.
 
Those of you who don’t think all that much of Skechers (not me obviously, because I’m always objective) might be thinking, “Great! I hope they choke on that crap!” Sounds like they will choke a little, but that also means all that inventory will be floating around and somewhere, somehow some of our customers will find a deal and that impacts us.
 
You may recall how excited I was when the snow industry managed to tightly control its inventory for the season that’s just ending and what the very positive results were. The shoe business is no different.
 
Skechers spent $154 million on advertising during the last year. You may not look at them as a direct competitor, but they do have an impact you can’t ignore even if all they do is bring prices down.
 
Okay, so  now the article is over, but there was one little financial tidbit that doesn’t quite fit in anywhere else.  Skechers finances its production "…in part through the use of interest bearing open purchase arrangements with certain of our Asian manufacturers.  These facilities currently bear interest at a rate between 0% and 1.5% for 30 to 60 day financing, depending on the factory."  Zero percent is a lot like open terms.  But when it’s higher than that, Skechers has its factories acting as its bank.  I’m not sure if that’s a good deal or not.  1% for 30 days would translate into 12% a year.