Skechers Management Talks China and Tariffs

Footwear company Skechers (NYSE: SKX) managed to put up solid, if mixed, third-quarter results. Revenue growth was slow, but earnings largely held up, and the company predicted a return to stronger growth to close out the year.

Two related topics that Skechers investors should care about are China, an important market for the company, and tariffs. Management went into detail on both topics during the earnings call, providing investors with some additional data.

Strong growth in China

Skechers now derives the majority of its revenue from its international businesses. About 45% of revenue in the third quarter came from international wholesale, with that percentage rising to more than 55% if international retail is included.

China is particularly important for Skechers, both as a source of demand and as a source of supply. "China continues to be a strong force in our international business with an increase of 21.9% and approximately 5.6 million pairs shipped in the quarter," said COO David Weinberg. Of Skechers' 2,802 worldwide retail stores, 793 are in China, and the company now sells its products through 2,340 points of sale in the country.

For reference, Skechers owns and operates 681 stores, with just 216 outside of the U.S. The rest are operated by distribution partners, joint ventures, and franchisees.

While China is a source of revenue growth, it's also a source of expense growth. Skechers has been investing in its international businesses via higher general and administrative spending to support future growth. Speaking about this spending, CFO John Vandemore said: "This increase reflects our continued investment in our long-term global growth initiative, which included $7.5 million to support continued double-digit growth in China." About one-fifth of the increase in G&A expenses during the quarter was due to China.

Skechers is investing heavily in China because it sees a massive long-term opportunity. In response to an analyst question about growth potential, Vandemore said: "I think we feel there is obviously a ton of runway in front of the brand and if we just take a market like China and you look at our penetration levels by province, there's a lot of white space available to us."

Commenting on the maximum potential points of sale globally, Vandemore made it clear that the sky's the limit: "We don't have a cap on the number at the moment because it's quite frankly, that number would just be too large...there's so much space ahead of the brand across the globe."

Tariff uncertainty

The tariffs enacted by the Trump administration on Chinese goods so far haven't directly affected Skechers. "None of the existing tariffs that have been enacted affect our product, it would only be in this last round of potential tariffs with footwear and apparel begin to get affected directly," Vandemore said.

If that last batch of tariffs is eventually enacted, Skechers may have a problem on its hands. When asked about exactly how much production takes place in China, Weinberg didn't provide hard numbers but said that "it's fair to say that more than half of the business is in China." Some of that production is for the Chinese market, he added, so that muddles the overall picture.

The company has been increasing its production capacity outside of China, and Weinberg said that Skechers is "very flexible" when it comes to where it's producing its products. The company doesn't own or operate any manufacturing facilities, relying instead on third parties primarily in China and Vietnam. That should allow the company to more easily shift around production compared to a company that runs its own factories.

Weinberg expects the company to be just fine: "So, we think we'll be OK, we obviously have some pricing power that we've shown this quarter and in prior quarters and in international basis. So, we believe we'll be OK, it's only a timing thing, it's the one we have to adjust to whatever the final picture turns out to be."

Skechers expects its revenue growth rate to accelerate into the mid-double digits in the fourth quarter, but that likely depends on minimal disruption from tariffs. Only time will tell how much the company is ultimately affected by the escalating trade war between the U.S. and China.

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Timothy Green owns shares of Skechers. The Motley Fool owns shares of and recommends Skechers. The Motley Fool has a disclosure policy.