Skechers USA Inc

NYSE:SKX

Earnings Call Transcript 2022-Q2

[Operator]

Greetings, and welcome to Skechers Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Skechers' Investor Relations. Thank you, and you may begin.

[Patricia Nir, IR]

Thank you, everyone, for joining us on Skechers conference call today. I will now read the safe harbor statement. Certain statements contained herein, including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events may constitute forward-looking statements that involve risks and uncertainties. Specifically, the COVID-19 pandemic has had and is currently having a significant impact on the company's business, financial conditions, cash flow and results of operations. Such forward-looking statements with respect to the COVID-19 pandemic include, without limitation, the company's plans in response to this pandemic.

At this time, there is significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. The dynamic nature of these circumstances means that what is said on this call could change at any time. And as a result, actual results could differ materially from those contemplated by such forward-looking statements. Additional forward-looking statements involve known and unknown risks, including, but not limited to, global, national and local economic business and market conditions, including supply chain delays and disruptions in general and specifically as they apply to the retail industry and the company.

There can be no assurance that the actual future results, performance or achievements expressed or implied by any of our forward-looking statements will occur. Users of forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of all other significant risk factors that may affect the company's business, financial conditions, cash flows and results of operations.

With that, I would like to turn the call over to Skechers' Chief Operating Officer, David Weinberg; and Chief Financial Officer, John Vandemore. David?

[David Weinberg, EVP, COO & Director]

Thank you for joining us today on our second quarter 2022 conference call. This year marks Skechers' 30th anniversary, and our accomplishments this quarter and year-to-date are a testament to the strength of the Skechers brand, the creative talents of our design team who continue to evolve our leading comfort technologies, the strong execution by our management to build efficiencies to better serve our customers and the commitment of our global workforce to drive growth in the face of ongoing COVID-related economic and political challenges.

We would like to recognize the ongoing efforts of our global teams from retail associates on the front lines to our supply chain personnel working diligently to move our product around the world. We would also like to acknowledge our team in China who continue to weather COVID-related restrictions as they safely work through lockdowns and return to business as cities opened.

Skechers is a widely recognized and trusted brand as well as the third largest athletic footwear company in the world, with 4,355 Skechers stores and a network of leading retail partners. While we are a brand with a broad range of products and a fit for every agent need, we also know that not everyone has flipped on Skechers' comfort, innovation, style and quality.

We also recognize that we are relatively new in many markets and have tremendous expansion and growth opportunities. In the second quarter, we focused on meeting the demands of our wholesale partners globally and expanding our Direct-to-Consumer business, including growing our digital commerce footprint, all to ensure our loyal consumers worldwide are able to wear Skechers comfort technology products.

We delivered hands-free, slip-in comfort footwear to men, women and children and continue to develop new styles with Skechers Arch Fit. We launched Skechers Viper Court, our performance footwear designed specifically for pickleball, the fastest-growing sport in America. Awareness for the Skechers Performance Division was also meaningfully elevated with major championship wins from 2 of our elite golfers, Brooke Henderson secured her second major career win at the Amundi Evian Championship in France this past weekend, while Matt Fitzpatrick earned his first major championship last month at the U.S. Open at Brookline.

Skechers, The Comfort Technology Company, remains a leading choice for our customers and consumers worldwide. Our brand strength and the efforts to meet the broad-based demand for our innovative comfort product resulted in a new quarterly sales record of $1.87 billion, an especially remarkable achievement given the macroeconomic headwinds, supply chain issues and COVID-related restrictions, primarily in China.

Total sales growth of 12% or 16% on a constant currency basis was the result of increases in our domestic and international businesses of 15% and 10%, respectively. By region, the growth was driven by increases of 21% in the Americas and 8% in EMEA, which improved 17% on a constant currency basis. APAC sales were flat year-over-year, primarily due to lockdown measures in China, which began easing in June and were offset by strong growth in most other Asia Pacific markets.

On a constant currency basis, APAC sales improved 5%. In the quarter, our wholesale business increased 18%, led by 35% growth in the Americas and 6% growth in EMEA, partially offset by a 3% decrease in APAC. Overall, wholesale sales were driven by an increase in unit volume and average selling price per unit. Our U.S. wholesale business increased 30% due to double-digit improvements across genders and categories, including apparel and accessory lines. This reflected strong consumer demand, along with improved availability of product.

In addition to the growth in the United States, nearly every other market in the Americas achieved double-digit growth, including Mexico and Canada. Growth in EMEA wholesale was primarily driven by strong distributor sales, particularly in the Middle East and Africa as well as Scandinavia and Turkey. The EMEA improvements were partially offset by currency headwinds due to the weakening euro as well as the continued cessation of shipments to Russia.

APAC wholesale sales declined primarily due to the lockdown measures through much of the quarter in China. India, which faced temporary store closures and lockdown measures during the second quarter of 2021 returned to solid growth this year, driven by pent-up demand and the availability of product. South Korea, Malaysia and our distributor in Australia and New Zealand, also a strong improvement.

While China continues to navigate through the effects of COVID, we are confident in the long-term prospects for Skechers in this region. Turning to our Direct-to-Consumer business. Sales increased 4% in the quarter due to growth of 14% in EMEA, 4% in the Americas and 3% in APAC. Domestic DTC sales decreased slightly, primarily due to a difficult retail store comparison to last year, partially offset by growth in digital commerce.

China, which experienced lockdown measures for much of the quarter saw a decline in both stores and online. During the quarter, we saw sequential improvements. Today, the majority of our China stores have reopened, though traffic is not back to preclosure levels. Nearly all other countries showed improvements. In the second quarter, we opened 46 company-owned Skechers stores, including 15 big box stores in the United States, 7 stores in India and 9 in China. We closed 34 locations in the quarter, including 5 concept stores in the United States and 24 in China. We ended the quarter with 4,355 Skechers stores worldwide, of which 2,993 were third-party stores, including 123 that opened in the second quarter.

In the third quarter to date, we've opened 4 company-owned stores, including 2 international stores and an additional 115 to 135 company-owned locations are planned by year-end. The rollout of our new e-commerce platform continued in the second quarter with the launch of new sites in Belgium, the Czech Republic, Hungary, Italy, Netherlands and Portugal. We expect to launch 2 additional sites in Europe, 2 in South America and 1 in Japan.

Further, we plan to roll out our robust domestic Skechers Plus Loyalty Program to international markets, beginning with Canada, the U.K., Germany and Spain. To achieve our goal of $10 billion in annual sales by 2026, we will continue to strategically open Skechers stores, expand our digital commerce reach, enhance our DTC omnichannel capabilities through investments in our global point-of-sale systems and grow and upgrade our logistics centers to more efficiently distribute our best footwear assortment.

Our belief in the long-term position of the Skechers brand and growth opportunities has never been stronger. As mentioned, moving our goods throughout our network of distribution centers has been a primary focus of our logistics team. The LEED certified Gold expansion of our 2.6 million square foot North American distribution center is almost complete, and we have begun testing the new operating system. We have seen an increased flow of goods from the port, which has put a strain on our processing and that of our accounts during the quarter.

COVID-related operating restrictions in China also led to inventory delays, particularly in Europe. Our ongoing efforts with our factories and logistics teams to expedite and process our shipments will allow us to work through COVID-related challenges in order to meet the broad-based demand for our products. Phase 2 of our China distribution center expansion is planned to begin this year with a goal of completion in 2024.

We have also begun development on a new 1.1 million square foot IGBC Platinum pre-certified distribution center in India. The first phase of the facility outside Mumbai will be 660,000 square feet and is planned to be fully operational by mid-2023. We have also secured a location outside Vancouver, Canada for a new 427,000 square foot distribution center slated to open in early 2023, and we are currently moving into a new facility in Panama.

We also expanded our current distribution facility in Colombia this year with plans to develop a new facility to be completed in 2024 that will grow our capacity from 85,000 square feet to approximately 500,000 square feet. Hand in hand with product development is marketing designed to drive awareness and create strong global demand.

In the quarter, we saw our elite athletes winning on the golf course, pickleball courts, baseball fields and road races on foot as well as in sports cars, branded with Skechers. Our team of athletes from All-Star Clayton Kershaw to major winners, Brooke Henderson and Matt Fitzpatrick; sports legends from Sugar Ray Leonard to Tony Romo; TV personalities, including Amanda Kloots, Brooke Burke and Martha Stewart; and music artists from Willie Nelson to Chesca appeared in multimedia marketing campaigns designed to promote our innovations, showcase our fashionable products and appeal to an ever-widening consumer base.

These celebrities were joined by local talent from Jamie Redknapp in the U.K. to Kriti Sanon in India to Park Seo Joon in Southeast Asia as well as influencers relevant to the many countries in which we sell our footwear to also drive awareness in key markets. We believe we are in a unique position as a brand that delivers on comfort, style, innovation and quality at a reasonable price, all especially desirable given our current macro environment. And now I'd like to turn the call over to John for more details on our financial results.

[John Vandemore, CFO]

Thank you, David, and good afternoon, everyone. Skechers achieved a new quarterly sales record of $1.87 billion, growing 12% on an as-reported basis and over 16% on a constant currency basis. Growth was geographically distributed and evident in both our wholesale and our Direct-to-Consumer segments despite significant COVID headwinds in several markets, most notably in China.

In fact, excluding China, where operational activities were limited, sales grew 20%. These results reflect strong consumer demand for our distinctive value proposition and comfort technology products. Before delving further into our financial results, I want to first provide an update on supply chain dynamics. In the second quarter, we continued to experience challenges from shipment delays, particularly in Asia as a result of COVID-related countermeasures to domestic processing congestion in our distribution centers and those of our customers.

Our supply chain and logistics teams are working diligently to ensure our products are delivered to our customers and stores and ultimately reach our consumers as quickly and efficiently as possible. However, we do expect supply chain disruptions to continue to constrain our ability to fully meet consumer demand and to drive distribution inefficiencies throughout the balance of the year.

Yet, we remain confident that our expanding operational capacity and disciplined execution will gradually moderate the impact of these dynamics. Now let's turn to the details of our second quarter financial results and operating segment performance. Wholesale sales increased 18% year-over-year to $1.14 billion, led by 30% growth domestically and 10% growth internationally despite ongoing COVID-related restrictions in China.

Momentum in the Americas continued throughout the second quarter with double-digit growth in nearly every country. Direct-to-Consumer sales increased 4% year-over-year to $727.5 million driven by a 10% growth internationally, partially offset by a 2% decline domestically, where we faced difficult comparisons to last year when markets reopened, and federal stimulus payments drove outsized consumer demand.

We remain enthusiastic about the growth opportunities in our Direct-to-Consumer business as we saw strength in nearly every country during the quarter. We also continued to invest in our online presence and omnichannel capabilities to drive deeper connections with our consumers. And now turning to our regional sales.

In the Americas, sales for the second quarter increased 21% year-over-year to $1 billion, an impressive achievement amidst persistent supply chain challenges. Our results are indicative of our brand strength and the compelling value proposition of our distinctive product portfolio. In Europe, Middle East and Africa, or EMEA, sales increased 7.6% to $374.5 million. We experienced some inventory shipment delays during the quarter, which weighed on wholesale results. But we also saw robust consumer demand as shoppers returned from last year's lockdowns.

In Asia Pacific, or APAC, sales were flat. But outside of China, nearly every market saw growth with notable strength in India, South Korea and Malaysia. Excluding China, sales rose 44%. In China, sales declined 20%, which was better than we had originally anticipated. As restrictions eased, we saw sequential improvement, especially in June. While we remain optimistic about the long-term health of our brand in the APAC region, we continue to take a cautious view relative to expected financial performance over the balance of the year, especially as the pandemic continues to impact operations.

Second quarter gross margins decreased 330 basis points year-over-year to 48.1% as a result of increased freight costs and an unfavorable mix impact from higher wholesale sales, partially offset by improved pricing. Operating expenses increased 50 basis points as a percentage of sales year-over-year from 39.3% to 39.8%. Selling expenses increased 40 basis points as a percentage of sales, primarily due to higher demand creation spending globally.

General and administrative expenses increased 10 basis points as a percentage of sales, largely due to volume-driven increases in labor expenses and higher rent as we continue to grow our retail footprint and increase our distribution capacity. Earnings from operations decreased 23% compared to 2021, and our operating margin for the quarter was 8.3% as compared with 12.1% in the prior year, primarily due to the gross margin pressures previously mentioned.

Earnings per share were $0.58 per diluted share on 156.7 million diluted shares outstanding, a 34% decrease year-over-year. This includes a negative $0.11 impact from foreign currency, absent which diluted earnings per share would have totaled $0.69. Our effective tax rate for the second quarter was 21.3% compared to 20.4% in the prior year.

And now turning to our balance sheet. We ended the quarter with $946.4 million in cash, cash equivalents and investments. This is a decrease of $375.1 million or 28% from June 30, 2021, as we continue to invest in working capital to drive sales and ensure we have product to meet the needs of our customers. Inventory was $1.56 billion, an increase of 48% or $506.6 million compared to the prior year. But compared to December 31, inventories were up only slightly at 6.3%. This includes nearly $475 million of in-transit inventory, a year-over-year increase of 69%, reflecting longer lead times required to ensure we have product available to meet customer needs.

Accounts receivable at quarter end were $916.8 million, an increase of $138.6 million from June 30, 2021, resulting from higher wholesale sales. Capital expenditures for the second quarter were $74.1 million, of which $24.4 million related to investments in our retail stores and Direct-to-Consumer technologies, $22.7 million related to the expansion of our distribution infrastructure globally and $17.1 million in investments, primarily related to our new product design center.

For the fiscal year 2022, we expect total capital expenditures to be between $250 million and $300 million. During the second quarter, we repurchased approximately 636,000 shares of our Class A common stock at a cost of $24.2 million. We will continue to deploy our capital consistent with our stated philosophy toward maintaining a strong balance sheet and making investments in our business, while opportunistically providing direct returns to shareholders in the form of share repurchases.

Now I will turn to guidance. Much has changed since we announced our first quarter earnings results. While I don't think we need to belabor the myriad economic challenges that we face and have already been documented by others, we would like to emphasize that the environment has become much more uncertain. As a result, while we remain focused on our long-term growth strategy and are confident in the strength of our brand, we are increasingly cautious about the balance of the year.

For fiscal 2022, we expect sales to be in the range of $7.2 billion to $7.4 billion and net earnings per diluted share to be in the range of $2.60 to $2.70. For the third quarter, we expect sales to be in the range of $1.8 billion to $1.85 billion and net earnings per diluted share in the range of $0.70 to $0.75. It is important to note that this guidance includes the impact of adverse foreign currency movements, both those we have already experienced and those we expect over the balance of the year as well as continued headwinds from COVID, particularly in the APAC region.

We anticipate that gross margins will continue to close the gap to prior year over the third and fourth quarter and that our effective tax rate for the year will be between 19% and 20%. As we continue to navigate through ongoing pandemic-related disruptions in our global supply chain, headwinds in China and the macroeconomic volatility, we are committed to executing on our strategy to drive long-term growth and create value by investing in our Direct-to-Consumer capabilities, enhancing our global distribution infrastructure, deepening direct relationships with our consumers and above all else, delivering great product.

And now I'll turn the call over to David for closing remarks.

[David Weinberg, EVP, COO & Director]

30 years in business, and we're showing no signs of slowing down. In fact, we are celebrating with a new quarterly sales record, new product innovations that we successfully rolled out in the United States and with early deliveries in other markets, they appear to be equally embraced by consumers. Our team of brand ambassadors are as unique and different as our product offering and combined with a dedicated and loyal global employee base working hard to spread the Skechers message of comfort, style, innovation and quality, we look forward to continued success and growth.

While we are still faced with COVID-related challenges and now the impact of the war in Ukraine, which is being felt in many global markets, we believe in the mission, message and offering of Skechers and are seeing signs of this strengthening within our partners and consumers. To reach $10 billion in annual sales by 2026, we will work more efficiently to deliver the comfort and quality consumers expect from Skechers and to make it easier for them to shop through the expansion of our digital platforms, retail stores as well as our reach through global accounts.

We know this isn't the beginning, but we approach each day with the idea of the best is yet to come. And through the strength of our brand and this determination, we will drive sales growth in the back half of the year and the years to come.

Now I would like to turn the call back to the operator for questions.

[Operator]

[Operator Instructions]. And our first question comes from the line of Alex Straton with Morgan Stanley.

[Alexandra Straton, Morgan Stanley]

Great. It's Alex Straton, Morgan Stanley. Great quarter, guys. I wanted to just quickly ask on how you guys think about a potential slowing down of the economy. A lot of us have been thinking about Skechers in terms of a potential trade down beneficiary given its value positioning. Could you talk about any benefit you saw in prior recessions or how you think about that potential advantage as you kind of build in this revenue deceleration into the back half? And also maybe just remind us what the average household income is of a Skechers customer or maybe kind of the distribution across your customer base?

[John Vandemore, CFO]

Thanks, Alex. So I'll take a crack at that first and then turn it over to David for some historical context. I would say, as we look forward to the balance year as we noted and really every other company has noted, we are facing a much more uncertain future. We believe we've taken that into account in what we've given you as guidance.

But the fact of the matter is things are changing relatively dynamically. So far, we still see good trends in most of our retail locations, particularly globally. But we're cognizant that the environment is going to make it slightly more difficult for the average consumer. I would say one of the things we always mention is that we believe we're providing very good value in our product along with the comfort, style and quality that we're known for. And we think that is a favorable backdrop in an environment where the economy is under some form of duress.

That being said, I mean, again, it's a unique environment out there. We're watching it carefully. We're definitely optimistic about the demand for the brand long term, though the next couple of quarters are probably going to give us some perspective that we don't have the benefit of.

[David Weinberg, EVP, COO & Director]

Yes. I'd just like to say, historically, as these movements in the economy happens, for me, it's more about product than it is just the price point. People don't tend to shop price if it's not something they want. I think what we offer, and what we offer today with our new entrees into slip-ins and comfort and making it more comfortable across a broad range of categories, certainly gives us plenty of opportunities even in a downturn for people looking for our products simply because they are priced right, although not on the lower end and bring all that quality and comfort with them and their fashion right. So I do think we do have the opportunity as in the past to take advantage of an adverse situation by offering the right product at the right price. It's a combination for us.

[Operator]

Our next question comes from the line of Jay Sole with UBS.

[Jay Sole, UBS]

I just want to follow up on China. I think I heard you mentioned that China was strong in June, but traffic isn't quite back yet to pre-pandemic levels. Maybe could you elaborate a little bit more on what you're seeing in China quarter-to-date and sort of what you're expecting from China from a growth rate perspective in Q3 and Q4?

[John Vandemore, CFO]

Yes. Thanks, Jay. First of all, I would echo the sentiment we provided in the prepared remarks, which is our deepest thanks to the team in China, who's doing a wonderful job navigating a very difficult environment. What we saw in the quarter was a fairly high degree of correlation between our results and the openness of each of the markets in which we participate.

The more open they are, the more successful our results revealed, and that got increasingly better to the point where June was actually better than we had anticipated and showed very good results, particularly coming out of the 618 holiday selling season. I would say, as you've seen restrictions reemerged, that has had an impact on business. For a while now, though, we've also mentioned that the real driver of growth in that economy, certainly subsequent to the first occurrences of COVID has been the digital side. And that was clearly the strongest among our 3 main channels in China, and that continues to be the case, which I think one would expect given the COVID lockdown environment they're facing. I would say we have tempered our expectations for the pace of recovery in China now that we have seen that there are more restrictions and limitations reemerging.

Certainly this month, we've seen that, and we have an anticipation for some level of that over the remainder of the year. So we've baked a little bit of that into our expectations, whereas I think we had previously explained we were hopeful for a relatively V-shaped recovery. It looks like the recovery is going to take a little bit longer. Although, again, at the end of the day, the longer-term view from our perspective remains incredibly encouraging about the market, its response to our products, especially the newer product as well as the strides we're making digitally.

And then the last comment I'd make is, as David mentioned, a testimony to how we feel about that market is that we are beginning our second distribution center on the heels of just recently completing our first. We wouldn't make that type of investment if we didn't have abundant confidence in the brand's trajectory in that market.

[Jay Sole, UBS]

Okay. Got it. If I can ask one more. The Domestic Wholesale growth was obviously very strong. Can you talk about how sell-in versus sell-through is trending? And have you seen any change in orders for the second half of the year?

[John Vandemore, CFO]

Yes. I would say sell-through remains strong. There was a period in kind of the early summer, which you would expect from a seasonality perspective where things dipped off a bit. That did also I would note tend to coincide with some of the more strident commentary about the recession and other environmental factors. We've seen things improve since then a bit. And going into the back-to-school season, we have thus far, although admittedly, it is early, seeing some encouraging signs that things are going to pick up a pace that is more similar to what we had seen earlier in the year.

Overall, we don't have the sense at all that there's a dramatic change underfoot. Consumption and demand remained good. Price points remain stable. Margins remain good, both in our own retail environment, but also in that of our wholesale partners. And then orders remain strong. The best thing that I can give you is orders remain strong, although, again, it's important to recognize that we're looking at longer booking windows than we've ever had because of the challenges on the supply chain side of things.

So we're also looking at windows of delivery further out than we would have traditionally used because of the supply chain challenges we're having.

[David Weinberg, EVP, COO & Director]

Yes. I should add that there's going to be a differential in flows the way we receive orders simply because as John said, we're taking over a longer period of time. We're trying to get back to our normal time frame. Our customers are reevaluating their flows and because of the pickup in the supply chain, we have more time to react to that. So as John says, our position remains strong. We're strong within the current time frame. I think it will change simply because we're going to book at a lower outdate than we have in the recent past.

So you'll see changes that we'll have to explain to everybody as to what it means over a quarter-by-quarter rather than looking at 3 and 4 quarters because we don't anticipate peak booking out as far as we did last year over a significant amount of time.

[Operator]

Our next question comes from the line of Laurent Vasilescu with BNP Paribas.

[Laurent Vasilescu, BNP Paribas Exane]

I wanted to follow up on couple of things here. I think, John, I think you mentioned there due to supply chain disruptions, there might have been some slippage of revenues into -- from 2Q to 3Q. Just curious to know if it was a certain number that we should consider as we think about the quarterly cadence?

And then remind me, John, but I think if I take the midpoint of EPS revised guidance, it's about $0.20 lower. Maybe can you just maybe frame it for us, how much of it is FX, how much of it may be incremental costs or other ancillary items that could have impacted the EPS guidance?

[John Vandemore, CFO]

Happy to help, Laurent. On the timing differentials, the world is right with timing issues. They're all over the place. There's no amount I would quantify other than to say, obviously, with a supply chain as volatile as that, which we've observed over the last really 4 or 5 quarters now, there's always things that slip to and from. It could be anything from shipment -- outbound shipment delays to port congestion to congestion in RDC to congestion in our customers' DCs. All of those can have an impact.

But I think, unfortunately, it's also difficult to anticipate what the next quarter's impacts are going to be. So there's no guide we give you because we think the quarter is a fair reflection of what we were able to achieve given those constructs and those constructs are not going away anytime soon. So there was absolutely some slippage.

The amount, I think, will, on a net basis, depending on what happens next quarter, what won't change is that we will still continue to experience supply chain challenges. It's certainly unavoidable in the current environment. Again, kudos to our team here that's doing a tremendous job dealing with those.

And as you can see in the numbers we just posted, an excellent job of getting that through to our customers and our consumers. On the EPS guide, one way I would think about it, and we made note of this for a reason is there was an extraordinary impact from FX this quarter. And that's not something we had anticipated.

I would generally chalk up the change on the guide to about 2/3 FX, both that, which we've already experienced as well as that which we expect to continue given some stability in rates at these levels. And then probably 1/3 owing to a combination of supply chain challenges and COVID-related challenges in markets where COVID is having a pretty significant impact one way or another.

[Laurent Vasilescu, BNP Paribas Exane]

Very helpful, John. And as a follow-up question, I think you said in your prepared remarks, the gross margin for 3Q, 4Q should close the gap. Love -- would love to have some guardrails around that, John. And then 4Q implies rev decel to Alex's question, are you anticipating that U.S. wholesale grows in the fourth quarter? Or is there a level of conservatism that you're just baking in here?

[John Vandemore, CFO]

So on the gross margin guidance, what we've said all along, and I was hoping to improve upon our indicator last quarter was that we expect the gap to prior year to continue to close at a rather ratable pace. Now how that ultimately sorts out is going to be influenced by a wide variety of factors, including mix and prevailing input costs, et cetera.

But we expect the differential between this year's gross margin and prior year's gross margin to close and to probably close in ratable steps between Q3 and Q4. That's what we've been aiming for all year as we wait for some of our pricing adjustments to catch up to some of the cost issues that we previously noted. In terms of revenue guidance, we don't obviously provide specifics by segment or country. And the reason for that is we just don't know enough to tell you today exactly where challenges are going to materialize.

And the great exacerbator to that is the supply chain challenges we've been experiencing. They pop up in a market at a given time on their own, and that's very hard to anticipate it. So what we've done is we've attempted to handicap overall results based on a wide variety of factors and then layer that on top of our existing forecasts.

And that gets us to a combined number. We did, like I said, make an adjustment for China. We've made some adjustments to reflect the environment as best we can ascertain. It's going to materialize. And all with the goal of trying to get us to a point where we're providing you better-than-not guidance. But ultimately, in this type of environment, we're going to have to wait and see how that unfolds, especially on a channel or a segment basis.

[Operator]

Our next question comes from the line of Gaby Carbone with Deutsche Bank.

[Gabriella Carbone, Deutsche Bank]

Congrats on a nice quarter. So I just wanted to dig into price increases a little bit more. I was wondering if you could talk about how consumers are responding to the price increases. And then when you expect those to be fully baked in the wholesale channel? And then you can maybe just touch on any changes you've seen in the overall promotional environment. And if that's impacted at all, how you're thinking about price increases.

[John Vandemore, CFO]

I would say the consumer response to price increases thus far has been stable. And prior to this point, certainly on the retail side of things, it had been very constructive from our perspective. Obviously, we're sensitive to any price increases. So we try to be very thoughtful about when we introduce those and under what circumstances.

The retail environment continued to remain relatively stable on a price perspective, which is good. We have, for a while, though, been communicating our expectation that some level of promotionality was likely to reemerge in the back half of the year. We don't consider it to be significant or drastic but some level of promotionality I think is to be expected given the kind of ideal circumstances we've been under for the previous 5 or 6 quarters.

And I would say that anticipation remains true today. On the wholesale price increases, the next 2 quarters will reflect the most material adjustments, again, on a mix neutral basis such that we expect by the end of the year, most of those will be baked in. Customer response to those, I think, is evident in the bookings that we've seen, which, again, we've mentioned remain very strong.

Obviously, we'll continue to watch realized sell-through ASPs to assess the durability of those. But at this juncture, everything remains relatively positive from a customer and consumer response perspective.

[Gabriella Carbone, Deutsche Bank]

Got it. I just had a quick follow-up on gross margin. For the 2Q results, I wonder if you can help us quantify maybe the pressure from freight versus mix and pricing?

[John Vandemore, CFO]

Yes. I think -- so mix was a small impact. The big -- the single biggest driver, by far, almost by a 6:1 ratio is the cost side of things, as we've mentioned before. The pricing we had implemented previously or was in the process of being implemented, just hasn't yet caught up fully to the cost side. There was a slight detriment to mix, which I think if you recall, after Q1, we had mentioned mostly because last year's Q2 was very heavy on Direct-to-Consumer, almost 300 basis points above a normal level on Direct-to-Consumer.

So just having a more robust wholesale result this quarter, which I think is evident in the growth rates there, mixed down the gross margin a bit. The overriding cause on the gross margin pressures has been cost though.

[Operator]

Our next question comes from the line of Tom Nikic with Wedbush Securities.

[Tom Nikic, Wedbush Securities]

When you look at the domestic business, there's a really big spread between the wholesale channel and the DTC channel, both on a 1-year basis and when you look [indiscernible] I mean how should we kind of think about that dynamic? And why are we kind of seeing a lagging performance in DTC, while simultaneously seeing such strong performance in wholesale?

[John Vandemore, CFO]

Yes. I mean I think from a financial perspective, I think you got to keep in mind, there's been a lot of moving pieces within that question for a while. I mean first, on the Direct-to-Consumer side of things, you have to recognize last year was an extraordinary year from a DTC perspective. And so comping to that, certainly on the -- at the store level was significantly difficult not to cause a slight pullback.

I would note though, within that, our continued growth on the e-commerce side of things was tremendous. And then outside the United States, you didn't see that same dynamic, you didn't have that same fact pattern from the prior year. On the flip side, I think on the wholesale side, we're just seeing tremendous response to the product. We're seeing opportunities for the brand to continue to grow share.

I do -- depending upon your base year on a 2- or 3-year basis, there was certainly some opportunity to kind of grow presence at some of the wholesale partners we work with as well as some restocking that probably needed to occur coming out of 2020. Overall, again, I think we're seeing a fantastic response to the product, though, more than anything else, and that's what's going to continue to carry the day.

I would note, as an aside, I think on the Direct-to-Consumer side of things, we did have some issues getting product into stores as quickly as we wanted to, some of the newer product in particular that had been prioritized and that no doubt created a small headwind on the DTC side that could have been probably evidenced by a slightly more favorable comp store sales performance in the retail side of the business.

But again, overall, we're pleased with the Direct-to-Consumer performance. Certainly, if you pull back and you look at it on a worldwide basis, especially then if you take away China, which obviously had its challenge. If you take the international Direct-to-Consumer side of things and you strip out China, which was a headwind, you had growth of almost 35%. And that's a pretty fantastic rate. So we continue to remain very optimistic about the DTC side of the business and pleased with the performance there.

[Tom Nikic, Wedbush Securities]

If I could quickly follow up on Laurent's question from earlier. I think you said the EPS revision about 2/3 was FX and 1/3 was COVID, and I think related to that. I mean we've heard from both Nike and Adi in the last couple of weeks that they're seeing a very hyper-promotional environment in China following the spring lockdowns. Is that what you're seeing as well? And is that contributing to revision because I mean it seems like the EPS revision is more margin related rather than sales related given that the sales outlook was [indiscernible].

[John Vandemore, CFO]

Yes. I actually probably would suggest that we didn't actually see any sort of significant margin impact in market in the quarter. It doesn't mean that we don't anticipate some challenges from an overall margin perspective. But I guess I wouldn't echo that. That being said, I mean, you got to keep in mind, in particular, in Q2, and in June, where we saw the most significant recovery, you're in the middle of the 618 holiday selling window and that is and of itself a promotional environment.

So I don't think we noted anything that was extraordinary in that window as compared to both prior year and what we would consider to be a more normative environment. So I don't think we've seen that yet.

But obviously, to the extent -- that's a market factor that's going to be influenced by what others do. So we'll definitely be keeping an eye on that. But I guess my short answer is no, we haven't seen that.

[Operator]

Our next question comes from the line of Susan Anderson with B. Riley.

[Susan Anderson, B. Riley Securities]

I wanted to ask maybe about ASP versus units. I think you said that both drove wholesale. So I was curious if it was pretty equal between the 2 of them? And then also, did you see similar trends in your DTC channel? And then also maybe if you could just talk about SG&A expectations for the back half and if anything's changed there versus your original thoughts.

[John Vandemore, CFO]

Thanks, Susan. Yes, on wholesale, we actually saw more units than price, which I think is reflective of what we had mentioned previously that some of the ASP adjustments we had made haven't yet fully caught up, but we did see increases in both. I would say though, it was more units than price there.

On the Direct-to-Consumer side of things, again, reflective of the pricing actions we'd already taken, you essentially saw units close to flat and ASPs up. So it was more of an ASP-driven adjustment there. Now there's a lot of mixing in moving parts there, in particular, with China, but that's the net of it.

On the G&A side, no, nothing new to report. I think the only experience of note is that, again, we continue to experience some supply chain challenges. That does manifest itself in some inefficiencies. We do have expectations. I think reasonable ones that, that will continue as we work to resolve those inefficiencies that present themselves from the volatility on the supply side of things.

So we're continuing to work through those. Otherwise, though, no, I would say no real change in our longer-term objective of attempting to hold G&A and more broadly, OpEx in line with top line performance.

[Operator]

Our next question comes from the line of Omar Saad with Evercore.

[Omar Saad, Evercore ISI]

A couple of quick ones here at the end -- towards the end. Skechers comfort positioning was a huge asset during COVID as consumers became super focused on comfort, comfort footwear, comfortable feet. We have been hearing lately that some of the dressier footwear and maybe less comfortable fashion footwear making a comeback. Are you seeing any shift away from the comfort -- consumer shifting away from comfort in this kind of rebound in fashion footwear, number one.

Then also, I'd love to hear any update on freight. I know you discussed it a little bit but could freight flip from a headwind to a tailwind in the fourth quarter as you begin to lap some of that big ocean air utilization.

[David Weinberg, EVP, COO & Director]

I certainly hope so. That will be pretty good. I mean freight rates are starting to come down, but there's less demand. It will depend on what happens to demand and everything that goes through at the end. And we've taken it a lot more. That's only one piece of the freight that's going. It has to be freight around the country as well. And there's still a potential strike at the port here.

So we hope so. It's certainly starting to trend. We're way too early to find out that's going to be possible, and we're going to absorb that in the fourth quarter. Remember, all the inventory that's here in transit until freight rates come down, still carry the old rate.

And as far as shifting away from comfort, we don't see that at all. I mean we've been building comfort for years. It's not only a pandemic item. I think people want comfort. They enjoy comfort. Kids like it. If you're style right and fashion forward, you remember, I don't believe we're known for just being comfort without being stylish, without being used for sport or wherever you purchase the shoes from, we carry a broad base.

And I think it's fashion forward and you can buy it with comfort, not just to go out and buy something as comfortable that you're going to [indiscernible] around the house that nobody wants to look at. So that's always been a positive for us. We think we're, for lack of a better term of like, we are hot as we've ever been now. We have so many multiple styles that are in demand that starting as we bring them out and the cadence is a lot quicker than we had anticipated through the releases.

So we're feeling very comfortable in the fact that the marketplace continues to enjoy these, use these for various reasons, not only stay at home, just to be comfortable wherever they are, whether it's running, walking or [indiscernible] going to work. So we think there's still plenty of room. We haven't seen any deterioration. We haven't seen anybody moving away from it, and we haven't seen it in our own sell-throughs, and that's pretty much around the world.

[Omar Saad, Evercore ISI]

Got it. And great job on that pickleball opportunity.

[David Weinberg, EVP, COO & Director]

Yes, I'm going to learn how to play it myself.

[Operator]

And our next question comes from the line of Jim Duffy with Stifel.

[James Duffy, Stifel, Nicolaus & Company]

I'm hoping you can make some comments on the state of your inventories. I appreciate more of the inventories in transit. But even adjusting for that, inventories still well elevated versus pre-COVID norms. I'm curious, is production back to normalized levels? And if so, are you -- if you're more confident in the availability of capacity, are there opportunities to bring inventories back towards what would have been pre-COVID norms?

[David Weinberg, EVP, COO & Director]

Yes, you can find what norms really are going forward. I think what you see here is the confluence of a number of items. And one is that we dealt with our factories. And as shipments slow down, there was still high demand. We brought it all in. We didn't want to slow down production at the early stage of things, simply because we weren't sure as to how long it would last and when the next lockdown would be.

And we use this inventory, and it can move it around the world. So as people stay places stay open, we can modify our inventory. Like I said, we're moving to a much closer purchasing option. So we'll be able to reevaluate as when we go out on the far end. So as this moves forward, given all what we see today and business holds up through the quarter, we'll certainly modify it and grow into it.

The good news is it's all new, it's all in demand. A little bit more of it would have been shipped had not been constrained in our own distribution centers in the United States, but it's still in demand, and we'll move it anywhere in the world we need it, rather than making more on the far end.

So usually, the evaluation of inventory [indiscernible] and what the demand is at retail and at the consumer level. This is all relatively new and very much in demand in a lot of places in the world. So we're already beginning to move it around the world for where it's most needed, where there's been the biggest shortages. So we still feel very comfortable with what it is, what it can mean and how we can use it around the world over the next 6 months.

[James Duffy, Stifel, Nicolaus & Company]

And then maybe a question just to try to benefit from your global perspective, without question uncertainty in every region. But as you follow the end market demand progression since your last report from May and June and across July, any reasons that really stand out as most resilient or strongest? And on the other hand, are there any regions where you see indications that end market demand might be fading faster than others?

[David Weinberg, EVP, COO & Director]

Well, I don't [indiscernible].

[John Vandemore, CFO]

Yes. I mean actually, the note I would probably make on that, Jim, is kind of the opposite. What I was surprised by at least is just the breadth and depth of the strength everywhere. I mean that goes into categories, which we talked about in the prepared remarks. But if you look globally, the vast majority of our markets grew and we're talking growth of multiple digits -- double digits easily.

And so while there were a few markets that were challenged by COVID or whatever prevailing situation impacted them, what we saw generally was very broad and very significant growth across a ton of markets. We talked about the Americas being strong. We talked about EMEA, which would have been even stronger but for FX -- APAC, which, quite honestly, outside of the challenges China experienced, grew north of 40%.

So you're seeing really good, continued growth in the brand globally. And then you couple that with the U.S., which is obviously notably doing very, very well. And I think you get a very good picture of the demand profile for the brand. And to David's comment earlier about how much in demand it is, how hot it is. That's kind of -- that's the note I'd give around the global performance.

[Operator]

Our next question comes from the line of Sam Poser with Williams Trading.

[Samuel Poser, Williams Trading]

A few. Of the speed to market, where are you by region like on -- like -- versus, let's say, where you were 6 months ago on transit times and stuff like that.

[David Weinberg, EVP, COO & Director]

I'm not even sure what that means. But...

[Samuel Poser, Williams Trading]

Well, I mean it's like...

[David Weinberg, EVP, COO & Director]

No, I was going to say, we don't have a differential on the timing for any particular place in the world. We send them all over at basically the same time. The supply chain has certainly picked up. Transit times are not necessarily the issue right this minute. We don't see the port as crowded nor getting containers, and that certainly is getting better.

What changes is throughout the factory base. There are some of our factories that are right up to the minute that do a great job and are keeping it up there. And there are some kinds of products that are specialties or smaller factories that are having more difficulty. So it rotates around. But I think you could tell by our inventory position, even including our own transit and what we've done with sales that we're not having trouble getting goods right this minute. And we are certainly filling the pipeline, and we're getting -- we're trying to get closer to a more normalized time to production. So that's our work in process.

[Samuel Poser, Williams Trading]

Got you. I've got a handful more. And I'll just go through them, and then you can answer all of them, I hope. Wholesale in the back half -- in the big picture of wholesale versus DTC, which do you expect to grow faster? Number two...

[John Vandemore, CFO]

That's going to depend on factors that like China. So as I said, we're not going to give channel or segment level guidance because the way we handicap our prognostications is by probability weighting a variety of outcomes. So we layer on adjustment at the aggregate level.

Our expectation is that both will continue to grow. So we remain optimistic about the prospects for growth in both. I do think China is going to be a huge factor in that because it is a bit disproportionately skewed toward Direct-to-Consumer relative to the rest of the business. So that will have a big factor or play a big role one way or the other.

[Samuel Poser, Williams Trading]

Okay. One, are your expansion in distribution in the United States, are you seeing benefit from Nike vacating other folks? And if so, what degree. Two, what is Skechers Plus, how is that helping you, I mean -- and that's -- those are the 2 other ones. I mean how is Skechers Plus helping you where it's set up right now? And then what do you foresee going forward there?

[John Vandemore, CFO]

Yes. Skechers Plus is the new loyalty program we rolled out beginning last year in the U.S. It continues to do a wonderful job of building a direct-to-consumer relationship for its members. Its members are definitely more productive. They generate more LTV for us than nonmembers. It's a great method to communicate with consumers directly.

I think in general, we're probably still in very early innings, scratching the surface of that. What it allows you to do obviously is use a much more cost-effective method to drive digital and retail sales growth because you're not paying the higher and higher customer acquisition costs you see in the marketplace today.

The next leg for Skechers Plus though is to get it rolled out globally. And that's something we're starting to work on now. Our expectation is over the next year or so, we'll be able to provide that same program on a global footprint equivalent to where we have our Direct-to-Consumer websites and digital assets. And we think that just continues to add more fuel to allowing us to grow our Direct-to-Consumer business, both online and in stores because that's -- the member is a productive contributor in both channels. That's going exceedingly well. It's still early, but we're looking forward to rolling out across the globe and quite frankly, becoming more and more efficient and effective with the tools it's given us.

[Samuel Poser, Williams Trading]

Then about Nike and your wholesale distribution in the U.S. where they pulled out.

[David Weinberg, EVP, COO & Director]

I'm not sure we ever really know whose place we take. We're growing. We're very accepted. We think our product is better. Our price points are better. It fits our consumers better. We anticipate our business is growing. I think Nike is a contributing factor. But I'm not sure given our own Direct-to-Consumer growth and where we've grown around the world, even where that's not as large as the situation in the United States and continue to grow.

So we do think it's the product. We think we're taking some market share. What particular piece is Nike's decision to pull back? I don't know. I don't particularly feel it's that big. I don't have anybody knocking on the door saying, Nike is leaving, what can you tell me? It's just part of the whole process of taking what we offer and how it fits in at retail and continue to grow within our own customer base.

[Operator]

Our next question comes from the line of John Kernan with Cowen.

[John Kernan, Cowen and Company]

Awesome. And a quick question. Just on supply chain. It sounds like there's still a fair amount of shipment delays, you mentioned particularly in Asia. There's also congestion you pointed to in North America. And obviously, some of the supply chain costs we're factoring the 300 basis point plus decline in gross margin. So when do you think the supply chain starts to normalize? Obviously, crystal balls have been pretty difficult for the last 2 years. But is there anything you see that tells us supply chain might normalize in holiday or 2023?

[David Weinberg, EVP, COO & Director]

I think the beginning is easy. It started to move. How fast it moves along the road and to what point and how quickly it get to its destination is difficult. And not all of it is on China side. There are some issues with the ports here, not as much anymore. There are some issues with ground transportation here and truckers and moving things and there's something because everything opened up so quickly that there's saturation coming in a lot of distribution centers around and moving through more volumes than we had to in the past as a group.

That all should normalize. I would hope for us anyway, it would look within the next two quarters. For us, the question internally for [indiscernible] is how quickly we can get our new distribution center portion opened in the United States that was supposed to open earlier but got caught up in its own supply chain issues, which will double our capacity to pick and pack and do singles that we would move through a lot quicker if everything remained the same and the port remained open, and there were no lockdown in Asia.

We would think that, that would get closer to it. But like John says, everything is dynamic. You got to take each piece and evaluate each piece on its own and see where it goes. So we think around the world, it's certainly starting to get better. It's a day-to-day thing, which is why we kept the inventory and didn't leave it overseas [indiscernible] just in case but it's all good and relevant and we're going to change the way we order and we're going to beef up our system so that we get ready as we move throughout the year. We get to a more normalized situation moving even a bit earlier than most anybody else.

[John Kernan, Cowen and Company]

Got it. Maybe just a follow-up to that, David. You mentioned inventory. Q4 is when inventory dollar spiked pretty much across the sector and for Skechers and you started to have big percentage increases year-over-year. I think inventory was up 45% in the fourth quarter last year. It's up 48% now.

How do we think -- as we try to model the balance sheet and free cash flow, how do we think about inventory dollars at year-end? Are we thinking flat? Will there still be growth as we go into next year? How do we think about the working capital picture into the back half?

[David Weinberg, EVP, COO & Director]

A lot of that will depend on supply chain and availability and getting back to normal. I think it's fair to say if we can get ourselves back to 4- or 5-months advanced orders or even better and turn it then quickly, you would see a more efficient and lower inventory at the end of the year. But you got to take all the pieces in all the places in the world into that. So it's a moving target right now, but we're certainly planning on keeping it in light and evaluating using it and not overproducing given what's available to us in Asia. So we're on it, we think the most hopeful path, if not the most likely, depending on what happens on a macroeconomic basis and geopolitically is that inventories will come in line, and we will process and be more efficient every month as we go through this year.

[John Vandemore, CFO]

John, I would just also add to that. If you look at the growth relative to the end of the year, it was only 6%. So the year-over-year comparisons continue to be difficult up to this point. I think in the Q4, as you noted, that's when we saw the elevation last year. So with the supply chain being what it is, relative to the end of the year, you can see that the increase wasn't that much more significant. It was only 6%. So I just throw that out there as another data point as we mentioned because I think this is all about supply chain and not really about anything else.

[Operator]

And we have reached the end of the question-and-answer session, which also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.