As the latest round of shoe-industry earnings show, Skechers Inc. has been gaining traction as most of the rest of the shoe industry is searching for new ways to appeal to the changing tastes of consumers.
Shoe shoppers lately are buying fewer expensive athletic models with fancy additions such as gels. Instead, they favor styles that the Manhattan Beach-based Skechers has been able to produce quickly: flip-flops, women's flats, skater shoes and other designs that match "fast casual" fashions more closely than Air Jordans.
Sales have increased each month for the past 15 months. The recently reported third-quarter sales of $395 million were a company record.
Skechers added at least eight stores last quarter and now has about 170 retail outlets around the world. There are plans for three more this quarter.
"We're seeing growth because we offer our styling and merchandise correctly and we have a broad range of products," said David Weinberg, Skechers' chief operating officer. "We have an international business that's growing. It comes down to demand for our product."
As part of its expansion mode, Skechers announced last month that it is leasing a mammoth 1.8 million-square-foot distribution center to consolidate its Inland Empire facilities. The goal is to get shoes from the factories to its retail sites faster and more efficiently.
Skechers was started 15 years ago by the father and son team of Robert and Michael Greenberg, now chief executive and president, respectively, after they were ousted from failing shoe company L.A. Gear. They started Skechers to sell Doc Martens, clunky British imports. The company then diversified from work boots, adding women's sneakers. Now it carries shoes and apparel for men, women and children.
"Being from the footwear industry, we always thought we were developing a company that could go many ways in the business," Weinberg said. "We are into the whole development of the company."
Skechers last month reported net income of $24.7 million for the third quarter, up from $22.2 million for the same quarter the year before, an 11 percent increase.
Meanwhile, its New York-based competitor Steve Madden Ltd. is seeking potential buyers amid slumping sales. The net income for L.A.-based K-Swiss Inc., which is facing the challenge of having its best-known model go out of style, has dropped 39 percent.
As the demand for basketball shoes that sell for more than $100 tapers off, consumer are spending less money on footwear in terms of the average price per sale.
"The shoe industry is narrower in terms of what is working with consumers," said Jeffrey Van Sinderen, an analyst at B. Riley & Co. in Los Angeles, who covers several shoe companies including K-Swiss. "There are a few styles that are selling well."
Skechers, which sells a variety of lifestyle shoes for men, women and children without the extravagant additions on some athletic shoes, is able to turn up-and-coming styles around in about three months, partly due to the simplicity of the products and partly due to the speed of its Chinese suppliers.
"They have the fastest turnaround cycle for a publicly traded shoe brand," said John J. Shanley, a financial analyst that covers the company for Susquehanna Financial in New York City. "Compare that with nine to 12 months that it takes for Nike to move a new product to market."
In the third quarter, Skechers was able to expand its product line with a new brand called Cali Gear that resembles the fast-selling brand Crocs, which look like brightly colored gardening shoes.
The Cali Gear line is just getting on its feet and Weinberg expects it to generate more than $100 million in sales for Skechers in its first year. Skechers is taking advantage of Crocs' choice to sell only at selective locations like mall kiosks and upscale department stores such as Nordstrom and Dillards.
"Crocs controlled its distribution and wouldn't sell into family footwear stores like DSW and Famous Footwear or the general merchandise stores like JC Penny and Kohls," Shanley said. "That opened a floodgate of opportunity for other companies."
Companies such as Skechers that produce imitation-Crocs styles quickly have a good shot at big sales, Van Sinderen said.
Skechers has also recently been putting a greater effort into cutting styles that aren't selling well.
In the third quarter, the company got rid of three lines, including its Michelle K shoes and Kitson shoes.
Challenges of growth
The growth of Skechers over the past several quarters caused the bottom line of the company to falter in the second quarter. Though sales increased, the company's net income fell 15 percent, missing expectations.
The shortcomings were attributed to higher-than-expected costs for the Cali Gear product launch, accelerated new-store growth and the cost of the new distribution center, Shanley said.
"The company opened eight more retail stores than they anticipated, which is hard to understand because you usually plan to open them nine months ahead of time," he said. "They had some shifts in their deliveries; some moved from the second quarter to the third quarter. It was a timing thing."
Costs for the new distribution center will carry into the next few quarters, Weinberg said.
The company hasn't released the cost of the lease transaction, but it has been valued by some analysts at around $100 million for 11 years. Whatever the amount, executives decided it was a necessary expense.
"We will move about 60 million pairs through our distribution centers this year," Weinberg said. "We will make the new facility more efficient and we will get more storage space out of it."
The building is currently under construction in Rancho Belago in the Inland Empire and is slated for completion in 2009. Once that happens, Skechers will consolidate its five distribution facilities in Ontario, which total 1.6 million square feet, into the new facility. The building will be one of the largest single-company distribution centers in the world.
"By square feet, it isn't much of an increase. But we feel certain that moving under one roof with a lot more automation will help," Weinberg said. Robots will move merchandise around the factory.
The company believes that it will be able to leverage the cost, as well as the cost of future expansion which will include international expansion into the coming quarters.
The other major publicly traded shoe company in Los Angeles has had less success at keeping up with changes in the marketplace.
K-Swiss has been struggling for several quarters as domestic sales have declined and international sales have slowed. Last week in its third-quarter results, the company reported worldwide sales down 19 percent. The company's stock was down more than 30 percent for the year.
The company, which specialized in the "classic" single-color sneaker for a number of years, has run into problems lately as that segment of the market has slowed with the younger consumer base, Shanley said.
The classic category has been lagging since Adidas bought the Reebok brand, the largest maker of that style of sneaker. When the acquisition was completed, Adidas dumped Reebok's classic inventory on the market, hurting the industry, Shanley said.
The classic shoes turned up at discounted prices and were scooped up by an older demographic. When young people realized that they were wearing the same shoes as their parents and grandparents, they stopped buying them, Shanley said.
This is the third down product cycle that K-Swiss has gone through in recent years, said Van Sinderen.
"They made the mistake of staying where they were," he said. "Like a lot of companies, when you have a successful business model, you tend to stick with it and you don't make changes to the product. That is what they did and the product became stale. It isn't resonating with customers the same way that it used to."
K-Swiss executives did not return phone calls for this article.
The company recently announced it will start leaning more toward specialized shoes for the tennis, running, training and boating sectors of the footwear industry.
But analysts said that even with the changes it will most likely take at least two more quarters for the brand to be considered fashion forward once again in the minds of its core consumers.
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