Footwear is the darling of fashion retailing these days. With sales growth recently outpacing that of apparel, footwear companies and their stocks are outperforming those of other product categories. Retail prices for shoes, boots, sneakers and sandals are rising faster than other soft goods. One company responsible for some of this excitement is Skechers USA Inc. The 18-year-old Manhattan Beach, CA-based casual shoe company set the industry on fire late last year with the introduction of Shape-Ups, a curved-bottom toning shoe that promises to firm leg muscles, improve posture and increase cardiovascular health.
A New Footwear Category is Born Whether or not their benefit claims are real, Shape-Ups have certainly improved the health of the Skechers business, if not the entire athletic footwear segment. Besides their $100 retail price tag, which is more than double Skecher’s average, and the formidable gross margin, Shape-Ups represent a brand-new performance footwear concept which doesn’t cannibalize any existing business, so sales are incremental. As other companies, namely Reebok, New Balance, Avia and Dr. Scholl’s get into the toning shoe market this year, the category could grow from an estimated $250 million in sales in 2009 to well over $1 billion this year. Pretty impressive, coming from a company originally known for its trendy young men’s casual shoes and junior fashion sneakers!
Other Products The product line boasts hundreds of styles of contemporary, casual and affordable footwear for men, women and children. Most are sold under the Skechers brand. The men’s Casuals styles are made of synthetic and leather and defined by lugged outsoles and a rugged urban design. Women’s casuals are black and brown oxfords, slip-ons, boots, and casual sandals. Dress Casuals are a bit more trend-influenced and detailed. In the running shoe category, products range from running shoes to cross-trainers and hiking-shoe styles. Though most are inspired by performance footwear, they are meant for everyday wear. The kids collection, which represents about a quarter of all sales, includes everything from bungee closure sneakers to lighted sandals. Pretty Tall is a new line of girls’ sneakers with a hidden wedge. Airators is a line of boys sneakers with a foot-cooling system which pumps air from the heel to the toes. In addition to the Skechers brand and brand extensions, the company makes designer and street-style casual footwear under the Unlimited by Marc Ecko, Red by Mar Ecko, Zoo York, Mark Nason and Punkrose brands.
Marketing includes television, outdoor and print advertising in teen, fashion and sports publications. The company’s marketing strategy has always been to associate its styles with celebrity or cartoon characters. Current and past celebrity spokespersons include Britney Spears, Denis Leary, Vin Diesel, David Cook and Vanessa Hudgens. Shape-Ups were advertised during the Super Bowl and Academy Awardsm, propelling them to immediate fame.
Distribution Domestic wholesale shipments of Skechers products comprise over half of annual revenue, and are done through major department stores, national chains, specialty stores, and shoe stores. Top customers include Finish Line, Famous Footwear, and JC Penney. The company has a large and growing retail venture, with 90 concept and 120 outlet stores in the US and another 27 stores abroad. About 25 new stores are slated to open in 2010. The international wholesale segment sells through subsidiaries and joint ventures in Europe, Canada, Asia and South America. Founder Robert Greenberg, who is now Chairman, and his son Michael, who is President, have claimed that international sales and own retail expansion will be a key strategic focus for the company going forward.
Financial Performance From 2008 to 2009, sales fell slightly due to a 5% decline in domestic wholesale business. The drop was somewhat offset by the opening of 22 new stores, which added 22%, or $38.7 million, to own retail sales. In the latter half of 2009, however, sales momentum picked up, increasing $90 million in the fourth quarter and 43%, or $150 million, in the first quarter of this year, when the company posted record sales and income results. Gross margin improved by over 1,000 basis points, and earnings swung from $.18 cents per share to $1.15. Fiscal year earnings are expected to rise 174% over 2009, to $3.18 per share.Competition is intense and plentiful…GapKids, Children’s Place, Disney, Gerber and Gymboree all vie for a piece of the $25 billion children’s under-7 apparel market. The Carter’s and Oshkosh brands have about a 10% market share, combined, and the aforementioned companies have between three and six percent each. An estimated 40% is enjoyed by mass merchants, making them a force to be reckoned with, and the balance distributed among smaller companies.
Will The Toning Trend Continue? The company doesn’t break out toner shoe sales, but some analysts expect it to grow to 20% of Skecher revenues this year. Fourth quarter 2009 sales were $90 million higher than the prior year, and first quarter sales were almost $150 million ahead. However, the jury’s out on whether Skechers be able to sustain the momentum started in the fourth quarter of 2009, or whether intensified competition will hurt the creator of toning sneakers.
The Stock has risen from a low of $5.70 in March 2009 to over $45 in recent days. In the last month, there has been a significant amount of insider selling. President Michael Greenberg sold a quarter of his stock for over $4.8 million dollars, and Director Jeffrey Greenberg sold all of his remaining holdings for a total of $4.4 million.
What’s Next? Although the company has many new styles in the pipeline, including several new specialty fitness products and a $150 Resistance Runner shoe debuting this month, it will be interesting to see whether Skechers can continue to flex its product development muscle and introduce innovative new high-margin products that are as functional as they are fashionable. Whatever happens in the next year, the company has re-energized the Skechers brand and broadened its consumer base, rarely a bad thing.
