Skechers USA (SKX) Earnings Preview: Can Q3 Overcome China’s Slowdown?

Skechers USA (SKX) is poised to release its Q3 earnings, with investors paying close attention to the numbers and guidance, particularly in light of macroeconomic headwinds in China and softening U.S. consumer trends. The current FactSet consensus expects EPS of $1.16 and revenue of $2.31 billion, aligning closely with the company’s own guidance range provided in the Q2 report.

However, given the recent warning about deteriorating conditions in China’s consumer market, it is unclear if Skechers can meet these expectations without facing further pressure.

China’s Impact: A Major Challenge for Q3

Skechers’ September 19 announcement of weaker-than-expected consumer demand in China was a major catalyst for a 10% drop in its stock price. Despite some recovery in subsequent weeks, shares of SKX have not fully regained their footing, reflecting lingering investor concerns about the impact of China’s economic slowdown on Skechers’ overall performance.

China has been a critical growth driver for Skechers, and any significant decline in consumer spending there poses risks to the company’s broader financial health. While SKX managed to post a modest 2.2% increase in sales across the APAC region in Q2 despite similar challenges, the company’s recent bearish commentary suggests that Q3 might not see similar resilience.

The weakness in China’s discretionary spending is expected to impact Skechers’ top line, and investors will be keen to assess just how severe this impact might be in the upcoming report.

U.S. Market: A Mixed Bag

Skechers’ performance in its domestic market also presents a complex picture. Last quarter, brick-and-mortar traffic in the U.S. was weaker due to softer consumer spending trends, consistent with the broader challenges facing the retail sector. However, Skechers did manage to offset some of these declines through its domestic eCommerce platform.

The direct-to-consumer (DTC) channel posted growth of 1.4%, despite the challenge of lapping a strong +29% comp from the same quarter last year. This highlights the importance of Skechers’ eCommerce operations in sustaining domestic sales momentum, even as traditional retail channels face challenges.

International Strength: A Key Bright Spot

One of the most positive aspects of Skechers’ recent performance has been its international DTC business. Last quarter, the international DTC segment posted a robust 15% sales growth, supported by both physical retail and online channels. The company’s EMEA region, in particular, has been a standout performer, delivering 14% growth in Q2 despite supply chain disruptions. This shows that while Skechers faces challenges in the Chinese and U.S. markets, its global footprint and diversified presence help mitigate risks.

The continued strength in EMEA sales and the resilience of international DTC channels will be crucial in Skechers’ ability to balance out weaknesses elsewhere. The company’s ability to navigate supply chain issues and still grow in these markets demonstrates effective operational management, which could play a critical role in maintaining its overall sales trajectory.

Margin Expansion: An Important Silver Lining

Outside of sales figures, investors will be closely watching Skechers’ gross margin performance in Q3. In Q2, the company reported a 290 basis point expansion in gross margin, reaching 53.7%. This was largely driven by lower per-unit costs and reduced freight expenses, factors that might continue to provide support in Q3.

Maintaining or expanding margins will be vital for Skechers, especially if sales growth in key markets like China falls short of expectations. Skechers’ ability to manage costs effectively could help cushion the impact of softer sales and provide a buffer against declining demand. Additionally, if freight costs remain favorable, this could help sustain margin growth, reinforcing the company’s profitability even amidst global challenges.

Outlook and Forward Guidance

Beyond Q3 results, investors will be highly attentive to Skechers’ guidance for Q4 and beyond. The current FactSet consensus for Q4 expects EPS of $0.76 and revenue of $2.21 billion. Skechers’ ability to offer clarity and maintain a positive outlook will be crucial, particularly given the uncertainty in China. If the company provides a cautious or downward revision, it could signal that the macroeconomic pressures in China and elsewhere are expected to persist into the final quarter and potentially into 2025.

On the other hand, if Skechers can reassure investors that its international performance—especially in EMEA—and its domestic eCommerce growth will help offset the headwinds, it could provide a more optimistic outlook and stabilize investor sentiment.

Conclusion: A Critical Juncture for Skechers

Skechers’ upcoming Q3 earnings report will serve as a crucial indicator of whether the company can successfully navigate the twin challenges of a deteriorating Chinese consumer market and softer U.S. retail conditions. The stock’s performance since the September 19 warning shows that investors are cautious, and any further negative news could push shares lower.

However, there are several factors that could work in Skechers’ favor. The strength of its international DTC business, particularly in EMEA, and its focus on margin expansion through cost management are critical components of its strategy. If these elements remain strong, they could help offset some of the weaknesses in the Chinese and U.S. markets, providing a balanced outlook.

In summary, while an earnings beat is far from guaranteed due to the significant macroeconomic headwinds, Skechers’ diversified business model and proactive management strategies offer hope. Investors should closely watch the Q3 report and subsequent guidance for insights into whether the company can continue its trajectory of growth amidst global challenges.