Skechers USA Inc. (SKX) Q2 2020 Earnings Call Transcript

Skechers USA Inc  (NYSE: SKX) Q2 2020 earnings call dated July 23, 2020

Corporate Participants:

Unidentified Speaker

David Weinberg — Chief Operating Officer

John Vandemore — Chief Financial Officer

Analysts:

Laurent Vasilescu — Exane BNP Paribas — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Jay Sole — UBS Investment Bank — Analyst

Gabriella Carbone — Deutsche Bank — Analyst

Tom Nikic — Wells Fargo — Analyst

Sam Poser — Susquehanna Financial Group — Analyst

Susan Anderson — B. Riley & Co. Inc. — Analyst

Omar Saad — Evercore ISI — Analyst

Jim Duffy — Stifel — Analyst

Christopher Svezia — Wedbush Securities — Analyst

Presentation:

Operator

Greetings and welcome to SKECHERS Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

I’d now like to turn the call over to SKECHERS management team to begin their presentation.

Unidentified Speaker

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 the 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 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. The users of forward-looking statements are encouraged to review the Company’s filings with the US 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 law 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 — Chief Operating Officer

Thank you for joining us today for our second quarter 2020 conference call. Once again we are nearly alone in our normally busy corporate offices in Manhattan Beach. In early June we added additional safety features and began allowing a limited number of personnel back with staggered work schedule, while most of our talented team continued to successfully work from home. As always, our top priority is the health and well-being of our employees and partners around the world. The pandemic remains a deep concern driving our everyday decisions. We continue to actively review inventory balances and production commitments across the globe, managing both to bring them in line with forecasted demand.

With the closure of most markets, it should be clear that the pandemic significantly impacted our business during the second quarter. However, China led the path to recovery, first by stabilizing and then moving to growth by the end of the quarter. As a result of the pandemic, our second quarter sales decreased 42% to $729.5 million, which consisted of a 37.8% decrease in our international businesses and a 47.3% decrease in our domestic businesses. Despite the decreases, we believe the sales we achieved during the quarter are due to the strength of our product and the determination of our teams to drive sales where possible.

The primary drivers in the quarter were Asia, led by China with a 11.5% growth and our company-owned e-commerce business with sales growth of more than 400%. With nearly all stores open in China during the second quarter, we gained insight into how to safely and efficiently reopen during the pandemic. Additionally, we experienced pent-up demand for our product and saw our brand resonate with a wider and younger audience in our e-commerce channels in North America, Chile and Europe.

While our international wholesale business decreased 29.9%, China offered a model of recovery, stabilization and then growth in the quarter. Every country’s progress has been at a different pace. But we began to see similar recoveries and stabilization trends in other markets. These include Australia, France, Germany, Indonesia, Spain, South Korea, Taiwan, among others. Each market has reopened at different times and under distinctive guidelines, but we are seeing positive signs within each of these regions.

At this time, more than 90% of the third-party SKECHERS stores around the world have reopened. Feedback from many of our global partners has been that SKECHERS remains a go-to footwear brand in the markets as consumers seek casual, comfort and value during this challenging time.

Our domestic wholesale business decreased 57.2% reflecting the majority of retail store closures during much of the quarter. Many of our partners have now reopened. The demand remains high and we are shipping at an active rate. We believe, based on early indicators from our partners and consumer sentiment, that SKECHERS will remain a key resource for these leading accounts.

With nearly all company-owned SKECHERS stores closed for most of the quarter, our direct-to-consumer business decreased 47.1%, which includes a 428.2% increase in our e-commerce business. Comparable same-store sales in our direct-to-consumer business decreased 45.6%, including a decrease of 35.9% in the United States and 66.9% internationally. We saw our direct to consumer comps improve month over month with total comp store sales down low double digits and domestic comps down single digits in June.

As of today, more than 90% of our global company-owned stores have reopened under heightened safety protocols. Traffic and sales have been strongest within our big box and outlet locations, as well as our non-tourist stores. Our company-owned stores that remain closed are primarily in South America.

As far as new store openings, we opened seven stores in the quarter; one in Germanyand three each in the United States and Japan, all locations that were under development prior to COVID-19. Further 102 new third-party SKECHERS stores opened across 28 countries, bringing our total store count to 3,615 worldwide at quarter-end. The key sales driver within our direct-to-consumer channel has been e-commerce which grew by triple digits in each of our platforms in North America, South America and Europe. This week, we launched our new online shopping platform in the United States, which we believe will provide a better customer experience. We plan to roll out the same platform to multiple countries later this year with even more countries planned for 2021 and beyond. Additionally, South Korea has launched an e-commerce platform this month and several of our distributors are developing SKECHERS e-commerce websites.

Also after a successful pilot program during the second quarter, we will continue the rollout of our new retail POS system, providing a more efficient checkout experience in addition to BOPIS and BOPAC capabilities.

We believe consumers are gravitating toward comfortable and casual footwear. At SKECHERS we design and deliver comfort, innovation, style and quality at a reasonable price in every one of our collections, from our athletic lifestyle footwear and a variety of fits under our SKECHERS Sport and SKECHERS Active lines, casual slip-on styles for men and women, work footwear for men and women, including styles designed for first responders, walking and running footwear and, of course, our kids footwear, which meets the needs of growing children. Our natural product development cycles helped us navigate these unique times as we are more flexible, can easily pivot design and production and offer a flow of fresh product to meet the needs of the buy now, wear now consumer.

The progress we have made through the second quarter from a product and sales perspective couldn’t have been achieved without our faster, flexible and focused business approach. This has included actively reviewing inventory balances and production commitments across the globe, bringing both in line based on our forecast for demand and managing our expenses, while still supporting the businesses that are performing well, including a shift towards digital advertising to support our online sales.

Before I turn the call over to John, I’d like to say that we remain confident in our ability to continue to manage our business throughout the crisis. Several integral factors are proving beneficial during this time and are helping ensure both the stability and success of the SKECHERS brand, our comfortable casual product at a reasonable price, the diversity of our distribution channels and broad-based customer demographics, the solid relationships with our factories and wholesale partners and our exceptionally strong balance sheet and ample liquidity. Although the near term remains uncertain as some markets are still closed and the fluidity of the pandemic continues to be a substantial concern, we believe that the SKECHERS brand will continue to have a worldwide appeal.

And now to John.

John Vandemore — Chief Financial Officer

Thank you, David. First, I hope you’re all staying safe and healthy. Before I discuss our second quarter results, I would like to once again thank the SKECHERS global team who has worked diligently to help us manage through this pandemic. Despite the challenges of the second quarter, demand for our product remains strong, as evidenced by the explosive growth of our online business, a return to growth in China and the steady month-over-month improvement we saw in the quarter across most of our businesses. Today the majority of our stores are now fully operational and SKECHERS’ value proposition continues to resonate with consumers, as our core casual athletic styles are decidedly on trend in a predominantly work-at-home environment.

We also continue to make investments, notably in our digital capabilities, which included an aggressive pivot towards digital advertising this quarter and the relaunch of our web site completed just this week, which will be followed by a new mobile app and a new loyalty program over the next few quarters. We are also modernizing our in-store point-of-sale system to better integrate engagement with our customers both online and in store. Overall, we remain extremely confident in our ability to manage through this crisis and optimistic about the long-term future of the SKECHERS brand.

Now turning to our second quarter results. Similar to last quarter, I will not be detailing each and every impact of the pandemic. But it should be clear that the closure of our stores and the stores of our wholesale customers for much of the quarter, negatively impacted our results nearly everywhere. Sales in the quarter totaled $729.5 million, a decrease of $529.1 million or 42% from the prior year quarter. On a constant currency basis, sales decreased $516.2 million or 41%. Domestic wholesale sales declined 57.2% or $174.6 million as operations at many of our wholesale customers were closed, particularly in the first half of the second quarter. International wholesale sales decreased 29.9% in the quarter. Our wholly-owned subsidiaries were down 43.7% and our distributor business decreased 58.1%. However, our joint ventures were down only 6.4% as China sales grew 11.5% for the quarter led by e-commerce, which was especially strong over the 6-18 selling period.

Direct-to-consumer sales decreased 47.1%, the result of a 35.4% decrease domestically and a 66.6% decrease internationally, reflecting the impact of temporary store closures globally, partially offset by a 428.2% increase in our e-commerce business.

Gross profit was $368.6 million, down $241.2 million compared to the prior year on lower sales volumes while gross margin increased by approximately 210 basis points to 50.5%. The higher gross margins were attributable to a favorable mix of online and international sales.

Total operating expenses decreased by $73 million or 14.5% to $432.1 million in the quarter, reflecting the swift actions we took during the quarter to reduce all non-essential discretionary spending. Selling expenses decreased by $53.3 million or 46.9% to $60.2 million, primarily due to lower advertising expenses globally, partially offset by an increase in digital advertising spend.

General and administrative expenses decreased by $19.7 million or 5% to $371.9 million reflecting reductions in discretionary spending and compensation related costs and despite the inclusion of an incremental $10.2 million in bad debt expense due to the expected impact of the pandemic on wholesale customers across the globe.

Loss from operations was $61 million versus the prior year earnings from operations of $111.1 million. Net loss was $68.1 million or $0.44 per diluted share on 154.1 million diluted shares outstanding compared to net income of $75.2 million or $0.49 per diluted share on 153.9 million diluted shares outstanding in the prior year. Our effective income tax rate for the quarter decreased to 7.2% from 18.4% in the prior year and resulted in a net tax benefit of $4.3 million.

And now turning to our balance sheet. At June 30th, 2020, we had over $1.56 billion in cash, cash equivalents and investments, which was an increase of $524.5 million or 50.9% from December 31st, 2019 reflecting the drawdown of our senior unsecured credit facility last quarter. Importantly, this represents an increase in net cash balances over last quarter of $189.3 million, reflecting our prudent inventory, working capital and operating expense management and including $75.9 million of capital expenditures.

Trade accounts receivable at quarter-end were $478 million, a decrease of 25.9% or $167.3 million from December 31st, 2019 and a decrease of 25.5% or $163.4 million from June 30th, 2019. The decrease in accounts receivable was primarily due to successful collection activities during the quarter, coupled with lower global wholesale sales.

Total inventory was $1.03 billion, a decrease of 3.9% or $42.1 million from December 31st, 2019, but an increase of 20.1% or $172.1 million from June 30th, 2019. The increase in year-over-year inventory levels is attributable to Asia where sales have largely recovered from the most serious effects of the pandemic. We continue to aggressively manage product supply in light of anticipated demand, aiming to prudently balance our inventory to position us constructively for the back half of the year and 2021.

Total debt, including both current and long-term portions, was $763.3 million compared to $121.2 million at December 31st, 2019. The increase primarily reflects the drawdown of our senior unsecured credit facility in the first quarter.

Capital expenditures for the second quarter were $75.9 million, of which $20.5 million related to our new China corporate office space, $13.8 million related to several new store openings worldwide, $12.4 million was associated with our new distribution center in China and $10.9 million related to the expansion of our domestic distribution center.

As we discussed on our last call, we prioritized our capital expenditures this quarter to focus only on business critical and highly strategic projects, like the launch of our new digital platform and completion of our new distribution center in China. As mentioned previously, our new web site launched this week and several supporting digital initiatives will follow. In China, our distribution center progress has been slowed by the impacts of the pandemic which has particularly hampered the installation and testing of our automation. We now expect the distribution center to begin limited operations in the third quarter and to become fully operational over the first half of 2021.

As our businesses continue to recover, we expect to restart investments that have been paused like the rollout of a new global point-of-sale system and significant additional capacity at our US distribution center. However, given the ongoing dislocation in the retail environment, we expect to continue tightly regulating our new store opening plans. We now expect total capital expenditures over the remainder of the year to be between $100 million and $150 million. We have also commenced the expansion of our US distribution center, which is owned and financed through a joint venture that we consolidate for accounting purposes. We expect incremental capital expenditures related to that expansion to total between $90 million and $110 million this quarter — this year, sorry, of which approximately $10 million has already been recorded.

As David said, while the near term remains uncertain, we are confident that we have taken the necessary actions to ensure that SKECHERS will successfully navigate this crisis. We will not be providing revenue or earnings guidance at this time as the current environment remains too dynamic from which to plan results with a reasonable degree of certainty. However, given the strength of our brands, our compelling value proposition and our healthy balance sheet, we believe SKECHERS is well positioned to continue growing once the situation normalizes.

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

David Weinberg — Chief Operating Officer

Thank you, John. We are more than halfway through what has proven to be an unprecedented year. We have successfully embraced the new way of conducting business both at our corporate offices with safer at-home work guidelines and in our retail stores with extensive safety measures put in place for our employees and customers. We experienced exceptionally strong demand for our brand in Europe, North America and South America with our e-commerce platforms growing more than 400%. Similarly, we saw demand in Asia primarily within [Phonetic] China with a 11.5% growth, including e-commerce growth of 43%. Many of our global partners have indicated that SKECHERS remains a go-to brand in their stores and we ramped up shipments to these businesses.

Nearly all the SKECHERS retail stores around the world are now open following safety protocols. In our company-owned stores we are seeing improved month-over-month comp store sales. As a few countries remain closed, others are reopening and consumer shopping habits are changing. We believe the pandemic will not only continue to be a concern, but it’s also changing the retail and competitive landscape. We believe that SKECHERS is well positioned to accelerate out of the Global Health Conference when it stabilizes and that we will remain a global footwear leader. We are optimistic with the reception of our vast product offering and a reasonable price and the loyalty of our consumers, the positive sentiment towards the safety measures we have taken in our SKECHERS retail stores and the flexibility and determination of our teams around the world.

Now I’d like to turn the call over to the operator for questions.

Questions and Answers:

 

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Laurent Vasilescu with Exane BNP Paribas. Please proceed with your question.

Laurent Vasilescu — Exane BNP Paribas — Analyst

Good afternoon. Thank you very much for taking my questions. John, I was hoping to follow up on a comment that was made on the February call that the e-commerce business was a low double-digit percentage of your complete DTC business. Is it fair to assume that if e-commerce grew 428% then for this quarter alone it represented 80% of your direct-to-consumer business? Maybe you can help us navigate the math on that.

David Weinberg — Chief Operating Officer

Well, Laurent, first of all, it’s good to have you back. It’s clear that the online business represented a much more significant portion of our overall direct-to-consumer revenue. The number you just gave would be a bit higher. What’s most fantastic about this quarter though is that it — clearly the online business continued to perform well. But it also reflected the underlying demand for our product even during the pandemic and its effects on people. They are still seeking out SKECHERS product and the comfort and value it delivers to them.

Laurent Vasilescu — Exane BNP Paribas — Analyst

Okay, very helpful. And then your DTC gross margins were up over 400 bps. Maybe you can talk a little bit about high level, John, just the e-commerce gross margins are — I mean, it would imply that they are potentially over 70%. And more importantly, as we think about the world post pandemic how e-commerce is going to become increasingly important, can you talk a little bit about the bottom line margin profile for that part of the business?

John Vandemore — Chief Financial Officer

Well I don’t want to get into specifics about store type margins which online is one example of. I will say they are accretive to our overall direct-to-consumer presence. Keep in mind, we have a wide swath of footprints out there, right. We have everything from our online business and our concept stores to our outlets and our big box warehouse style stores. So taken as a whole, when you look at e-commerce it is accretive. And that is the large portion of why the direct-to-consumer margins were enhanced this period.

Laurent Vasilescu — Exane BNP Paribas — Analyst

Okay. And then if I can squeeze one more. Sorry for the softball question, but I have to ask about the SKECHERS song. Remind me, but I think you received over 1 billion streaming on TikTok. Can you just talk about the business? Did that help the China number this quarter? And then how do we think about India, which could be the next leg of growth over the next few years?

John Vandemore — Chief Financial Officer

Yeah, I mean I think it’s reflective of a couple of things. One is obviously we’re becoming much more active online. Now obviously, neither David nor I is featured in that song as you can probably tell. But it’s a reflection, in our opinion, of the prominence of the brand, especially outside the United States where the brand registers appreciably higher on consumer recognition pattern and the like.

I have actually lost track of the views. There was another campaign on TikTok, our Million Mask Challenge that generated a donation of over 1 million masks I believe at this point in time for individuals who provided their alternative to the DripReport song. Overall I think what it speaks to is the prevalence of the brand, the health of the brand outside of the US in particular but also inside the United States and also our growing presence online and our growing capabilities to drive those platforms online.

However, also it’s clear this was a bit of an organic element and that is always a component of some of the most successful online efforts that they have an organic appeal that pulls consumers in. In terms of being able to draw a direct correlation between the online activity there, that one in particular and our businesses overall, that’s a little bit more difficult because in the midst of that you had the pandemic and a lot of other activities. But, obviously, it’s healthy and important for the brand.

Laurent Vasilescu — Exane BNP Paribas — Analyst

Thank you very much.

Operator

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Kimberly Greenberger — Morgan Stanley — Analyst

Great. Thank you so much. Good afternoon. I wanted to ask about, I think I heard you correctly, but I wasn’t sure I was typing fast enough, I think you — did you say June domestic comps were down a single-digit percentage? If you could just clarify what you said there that would be really helpful. And if you have any sort of colors here in July, just directionally, so we can understand the trajectory of the business that would be extremely helpful.

And then the markets you talked about, Australia, Germany, South Korea, Taiwan, France among others, David, I think you talked about them as recovering markets. And I’m wondering does that mean you’re starting to see revenue turn positive in those markets as well or is it primarily at this point concentrated in your direct-to-consumer business which perhaps seems to be recovering faster maybe than the wholesale side? Thanks so much.

David Weinberg — Chief Operating Officer

Okay. Well, we’ll see if we type fast enough because that was a lot of questions in that for memory. But yes, we did say it was single digits in the US. July has held up not quite as well, but pretty close. International has gotten a little better and we’re into low double digits. What I remember as far as domestic is concerned for various reasons obviously part of which could be that our wholesale customers are open now and everybody is doing business. So we’re getting into a level playing field.

As far as those countries we mentioned, most of them are stabilizing, although, as in the case of China, Germany is now positive and did perform positively for the quarter and obviously the six months. And our other big piece there in the UK was down some, but certainly made a significantly stronger move for the quarter and probably was positive for the month of June year-over-year and they are starting to accelerate as well. We are seeing significant acceleration in our European business overall and do anticipate a few of those countries being positive for the quarter.

So Taiwan was positive for the quarter, at least on their own books. Remember we book them differently. They are a distributor. So just on their own throughput in their own countries was positive on a year-over-year basis. So we are seeing some green shoots and some very positive performance. We do get the impression that when we are open and have access to our consumers, we perform very, very well.

Kimberly Greenberger — Morgan Stanley — Analyst

Great. That’s very encouraging, David. And if you could just sort of reflect at back on prior periods of time where there was maybe a little bit of a buildup in inventory in the wholesale channel, how long does that generally take, how many quarters does that take to work through? And when do you think you would be getting kind of more normal order flow from your wholesale partners?

David Weinberg — Chief Operating Officer

Well, I wish I knew the answer to all of those. But I think the answer to the last part of the more normal order flows, I think we’re going to be looking for a new normal or define a new normal. And certainly a lot of that will depend on the rate of opening of stores and the rate the pandemic flows through everything and may even depend on when a vaccine is ready and people can come back and create this new normal. We think our inventory by the way is in very, very good shape.

We came through this quite well — maneuvered quite well with our factories, with our customers. We went from — from a personal point of view, I went from a position where I thought inventory would be much more excessive than it is and would be an issue to a point now where we are chasing a number of things and don’t have significant enough inventory in a lot of places as we’re growing. So China, one of them as a matter of fact because they are consolidating again.

So we are moving inventory around the world. It’s what we do very well. We think we’re in great shape for it and we’ll be very reactive to how retail itself opens up for us and our wholesale customers and our partners around the world to make those determinations.

My hope would be by first quarter — hopefully the end of first quarter we will be in a normal position of ordering and inventory control and moving out to our normal growth patterns as the world comes back to norm.

Kimberly Greenberger — Morgan Stanley — Analyst

Great. All very encouraging. Thank you so much.

Operator

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

Jay Sole — UBS Investment Bank — Analyst

Great. Thanks so much. So I appreciate your comments on the direct-to-consumer gross margin. I think the thought was that mix would really impact the gross margin in a positive way. But it looks like your gross margin in domestic wholesale was up about 40 bps and in international wholesale it was up 130 bps. Can you just talk about some of the drivers of the gross margin improvement in those segments, given how promotional it has been globally across the retail space?

John Vandemore — Chief Financial Officer

Yeah, I think in the wholesale business, truth be told, we weren’t feeling a need to be extraordinarily promotional. Certainly we’ve seen some of that in retail, not a significant degree in our own, but some. Quite frankly I think just the strength of the product, the on-trend nature of the product, the value orientation of the product help us sustain pricing.

Obviously, it wasn’t a robust overall top line quarter but that was because a lot of the wholesale customer base was closed. So I don’t have a better explanation other than the strength of the product, the strength of the brand and the fact that we stuck to much of our pricing without feeling a need and certainly having managed the inventories very aggressively as we mentioned on the last call. I think that’s a key element of being able to sustain both your inventory levels at a reasonable pitch as well as the pricing.

Jay Sole — UBS Investment Bank — Analyst

And John maybe then can you just talk about given from — inventory being up 20% year-over-year and whatever third quarter sales are going to be, how do we think about the trajectory of gross margin from here? Can we expect a similar type of improvement across the different segments of the business or will be — will there be some aspects about third quarter that makes the gross margin — the year-over-year change in gross margin different?

John Vandemore — Chief Financial Officer

Well, I guess, stepping back and looking at the gross margin improvement we experienced, there was a significant amount of it that was mix related. So to the extent the business re-emerges the way we certainly hope it will, in particular on the direct-to-consumer side, I would expect the mix benefit to fade, but that means the overall business is getting healthier which is certainly our primary objective.

Now, that is significantly contingent on the performance of the direct-to-consumer channel, which is largely tracking the effects of the pandemic itself. So to the extent we see more closures and less retail opening or operational capacity and the business stays concentrated online, then there could be some favorability. But again, what we’re seeing and what we’re hoping for is that the rest of the business continues to re-emerge and so we get back to a much more normalized mix. And as a result, I would tell you our expectation is we wouldn’t see significant pressure down, but we also wouldn’t see that mix benefit up.

Jay Sole — UBS Investment Bank — Analyst

Got it. Okay. Thank you so much.

John Vandemore — Chief Financial Officer

Sure.

Operator

Our next question comes from the line of Gabby Carbone with Deutsche Bank. Please proceed with your question.

Gabriella Carbone — Deutsche Bank — Analyst

Hi. Good afternoon. Thanks for taking our question. So you guys have done a good job managing expenses in this environment. I was wondering if you could maybe just provide some more color on how we should be thinking about SG&A dollar rate in the back half. Then if you could just speak to kind of what products have been delayed. You mentioned China DC opening. And then, what kind of has been accelerated kind of given the shift to online? Thanks.

John Vandemore — Chief Financial Officer

Yeah, the way I would urge everyone to think about the G&A is contingent on how the business is performing. The biggest driver will be if the retail business begins to re-emerge, again like I just said, as our expectation and certainly our hope because with that it will carry the normal operating cost. Where we’ve been extraordinarily successful managing our discretionary spend has been, as we noted, in advertising, in labor. Those have really been the most significant components of leverage for us. There is a lot of other smaller discretionary accounts. But those have been the biggest two contributors.

To the extent that the retail environment improves and we’re able to open more stores and operate them more fully at a full complement with their workforce, then we won’t see as much of an improvement. But we will have the corresponding top line growth. I wouldn’t expect the significant modulation we made on advertising spend to continue at that level going forward. But we will watch it because we certainly want to make sure that it’s aligned with the opportunity to make sales in the marketplace.

On the product side, we’ve seen — I don’t think anything per se was delayed that impacted our ability to sell. It’s just really availabilities given the disruptions that occurred in the supply chain and our own aggressive management of inventory levels. We’re still seeing fantastic resonance with a lot of our products. The fit categories, in particular, but again the casual styles. I mean women’s was extraordinarily strong, relatively speaking, in the quarter and we continue to make headway there.

David Weinberg — Chief Operating Officer

Yes. Important to note that we think our supply chain is coming back very strongly and there won’t be any serious issues with it as we get to the end of the year and into next year. The only issue we’ve had this year is most of our customers are not knowing what it is they would need and wouldn’t need. So it’s very difficult to react on a 30-day basis. I think we had most of what they wanted, certainly a significant piece and the rest we are catching up with. And I think given all the circumstances, we’ve come out in as good a shape as we could have hoped from what we saw when we went in.

Gabriella Carbone — Deutsche Bank — Analyst

Great. Thanks for that color. Just a quick follow-up. I was wondering if there is anything you can tell us around the new loyalty program that you’re going to be launching that you mentioned on the prepared remarks.

John Vandemore — Chief Financial Officer

Well, we don’t want to spoil it. But I think it’s going to be a significant improvement to the program we offer today, which is also very healthy. Our online digital team has done a fantastic job of ramping up even during this pandemic to re-launch the site. Precisely when we launch the loyalty program is something we will manage given the upcoming holidays and the continuing rollout of the digital complements that we mentioned.

But when it gets there, we will be very clear about it coming out. But let me be abundantly clear. We’re very proud of the digital progress we’ve made that that team has made. The new site looks wonderful and we’re even more dedicated to growing our omni-channel solution for consumers than we’ve ever been given both the team’s accomplishments and the success we had in online this quarter.

Gabriella Carbone — Deutsche Bank — Analyst

Got it. Thank you so much for all the color.

John Vandemore — Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Tom Nikic with Wells Fargo. Please proceed with your question.

Tom Nikic — Wells Fargo — Analyst

Hey. Good afternoon, guys. Thanks for taking my question. I wanted to ask — I think you made a comment in the prepared remarks about actively shipping in the US wholesale channel. I mean, if you could give any sort of more color around that or anything related to backlog or how you’re thinking about orders for the back half, that would be very helpful.

David Weinberg — Chief Operating Officer

Well, I think it’s pretty much what it sounds like. We are shipping very actively now when we have a higher demand. We have a lot of requests for shipments and dates and to see what we can move around because there is a higher demand than was previously thought of. It’s very difficult to take these things out and permeate them through the next quarter or to the end of the year, just not knowing the extent of the virus and the extent of what further closedowns or lockdowns or shifts are going to be. At this point in time, we are running our distribution center in the US, both for our own stores online and our wholesale business pretty much seven days a week. So there is demand, we are filling, we are moving and we are working weekends as well in Belgium because Europe is growing that well also.

Obviously on the flip side, South America is just about closed, very little going on there. And in China, we’re moving into our new distribution center, as John mentioned, so we have plenty of activity and they are growing significantly as well.

John Vandemore — Chief Financial Officer

I would just also add. I mean, consider the quarter, right, in the first month of the quarter, we weren’t shipping a material amount. So the numbers you see portrayed in our wholesale results domestic and international reflect the build of that business. I think one of the things we are pointing to in that comment was that it’s getting stronger. Backlog is building, shipping is getting stronger, because really in the first month there wasn’t very much activity. So part of the reason we are so encouraged by what we see is that it’s building strength over the quarter. And obviously that’s creating a lot more activity, as David mentioned, that we’re working hard to fulfill.

Tom Nikic — Wells Fargo — Analyst

Got it. All right. That’s helpful. Thanks, guys.

Operator

Our next question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.

Sam Poser — Susquehanna Financial Group — Analyst

Good afternoon, gentlemen. Thanks for taking my question. I guess, first of all, just to follow up on various questions that have been asked. Are you — so how about quarter-to-date is your wholesale business up? Are your whole shipments up quarter-to-date?

David Weinberg — Chief Operating Officer

For the third quarter?

Sam Poser — Susquehanna Financial Group — Analyst

[Indecipherable]

David Weinberg — Chief Operating Officer

We’re not going to comment on the third quarter at this point, Sam.

Sam Poser — Susquehanna Financial Group — Analyst

All right. All right, I’ll move on. In the US you have — there is a number of large retail closures for businesses that you’ve done. How much exposure do you believe you have had to that? We hear about a lot of people closing lots of stores or potentially liquidating, be it J. C. Penney or Stage Stores and so on. I mean how much exposure do you have to some of those more challenged retailers and how do you foresee overcoming that on the wholesale side of things?

David Weinberg — Chief Operating Officer

I think we do it the same as usual. I think John pointed out that we took $10.5 million in additional bad debt expense. That’s around the world for those certainly that have filed and to the best of our ability to figure out what the come back will be to us. We were — what we felt were conservative in those numbers to begin with. So we think we have it pretty much covered, although things can change depending on how the pandemic rises.

As far as the rest of them, most of the ones that have filed are now looking for product. Now we don’t have as many liquidations as you might think. And before the stores closed, they’re still looking for products. So we do have orders from those stores you mentioned as well as the rest of the stores around the world that are under legal proceedings and they continue to remain good.

As far as where do you make it up from, I think that’s been true for us since we’ve been in business. The landscape has constantly changed. One thing we think is constant is that our consumers tend to find us. So it will be a benefit to those wholesale partners of ours that are healthy and continue to go forward and our own direct-to-consumer. So we will find them, we will get them and I think over a period of time always get them back or have in the past anyway.

Sam Poser — Susquehanna Financial Group — Analyst

Thanks. And then just to go back, I am going to beat horses here. June wholesale, was June wholesale up or was that still down as you — to get to the number because probably March was — I’m sorry, April was very, very quiet?

John Vandemore — Chief Financial Officer

Yeah. We’re not going to give monthly results. That’s not a rat hole we want to go down. But I would tell you, similar to my prior comment, each and every month of the quarter got better and got stronger. And that again is for us the encouraging sign because it illustrates that our wholesale customers are beginning to be able to operate their stores. They need product and so they’re placing orders, taking shipments, and all of that is incredibly encouraging signals for us as we look forward to the balance of the year.

Sam Poser — Susquehanna Financial Group — Analyst

And are you seeing — are you seeing, let’s say, market share gains within your wholesale partners as you potentially replace either smaller brands that don’t have scale, maybe struggling and retailers, private label businesses or private brand businesses?

John Vandemore — Chief Financial Officer

That would be tough for us to figure out at this particular point in time. There are so many metrics to take into effect. And you’re talking about is your wholesale business up for the month of June or July and comments that we get very difficult. You have to take that, it’s such an in-depth analysis because they came in with so much inventory. We think their actual business with the SKECHERS brand is significantly better than what we would show as wholesale shipments as good as they have been. So you got to take the whole picture and get the normalization of the inventory at wholesale.

Given the fact that everybody was closed for probably most of March, April and a good part of May that there was demand at all in June for inventory given their inventory position is a very positive piece and it really surprised me, if nobody else that how busy we got at the end of June and into July with that overhang that existed. So you want to really look at their sell-through of the brand and their demand for the brand now outside from the fact of how much inventory they had when they closed down because they closed down at time that they probably were building inventory in March and April and had significant amount.

Sam Poser — Susquehanna Financial Group — Analyst

All right. One last thing. Thank you, John. You talked about the inventory and how you’re moving goods around the inventory was high because of Asia. Can you net out inventory ex-Asia for what inventory looks like for the rest of the world?

John Vandemore — Chief Financial Officer

Well, I’ll tell you it was — the increases year-over-year were extraordinarily modest outside of Asia. I would also point out just for a refresh to everybody’s memory, last year at this time Asia had an abnormally low inventory level at quarter-end cut-off. So I think the increase in Asia is — and in part that that business has obviously gotten healthier a lot faster than most and we have encouraging expectations for their activity over the balance of the year. But there is also a piece of it where prior year was lower than it would have been normal. So I think the — it’s a bit of an outsized effect relative to Asia. Again excluding that you’re looking at very modest increases anywhere else in the world.

Sam Poser — Susquehanna Financial Group — Analyst

Well, thank you. Thank you very much and continue the success. [Phonetic]

John Vandemore — Chief Financial Officer

Thanks, Sam.

Operator

Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.

Susan Anderson — B. Riley & Co. Inc. — Analyst

Hi. Good evening. Thanks for taking my question. I was wondering maybe you could just talk about your own stores and how you are thinking about your store strategy now going forward, given the changing consumer habits. And do you think that you’ll have fewer stores, I guess, as we look out over the next three to five years?

David Weinberg — Chief Operating Officer

That’s a very long projection window for us. I would certainly say we spoke about it in our comments. We’re continuing to invest in creating the right omni-channel solution for our customers. That includes robust digital and mobile capabilities, that includes buy online, pick up in store, pick up curbside. I think that what you’ll continue to see is us press forward with stores that we can operate profitably in that dynamic. There are certainly some stores that are not as healthy as they’ve been in the past.

So I would probably argue that you’re more likely to see a mix shift than an actual pullback. And we continue to still see abundant possibilities to provide stores in markets where we’re not penetrated today. But I also think it’s going to be something we manage dynamically because of the strength we’re seeing and the overall shift we’re seeing into online for consumers. But that’s clearly — that direct-to-consumer relationship, be it online or in-store, is something that we price and it’s been a significant source of strength for us this quarter and in the past and you’ll continue to see us invest time and energy and money behind that.

Susan Anderson — B. Riley & Co. Inc. — Analyst

Great. That’s helpful. And then I was wondering on the work footwear in the quarter. I guess, how does that hold up versus with just the regular consumers’ footwear? Was it a bigger driver or did it not do as well or maybe if you could talk a little bit about the dynamics there?

David Weinberg — Chief Operating Officer

It did very well. It was part of some promotional activities and advertising activities that we initiated in early part of the quarter. I’d say keeping in mind that a lot — there was a lot of pressure on the business overall. But relatively speaking the work business did well, but it also wasn’t the only one. We had strength in a lot of other categories that complemented our overall results. And so again we’re incredibly encouraged by what we’ve seen from a product and product demand perspective.

Susan Anderson — B. Riley & Co. Inc. — Analyst

Great. That’s helpful. And then lastly, I guess maybe just thinking about the back-to-school season. Obviously it’s going to be a very different season this year. How are you guys thinking about your business, particularly as a lot of schools throughout the country will not fully open for in-person or maybe not all teaching, do you think that’s going to impact your business at all or how are you planning for the kids business?

David Weinberg — Chief Operating Officer

Well we try to be very reactive for right now. What we’re planning is what we see in our retail stores and our wholesale customers and their ordering patterns and I must admit this last quarters of opening, like John was saying, in May and June, we got sequentially stronger and there was no school and there was no back-to-school, certainly.

So we’re waiting to see what the new norm is, but we think we will perform well regardless of which situation. So long as we’re not on lockdown, we find when consumers are out whether they’re working from home or working from the office or part-time here or studying from home that our business does hold up with them as is indicated by the amount of online business we did during this past quarter when more people were home.

Susan Anderson — B. Riley & Co. Inc. — Analyst

Great. That’s very helpful. Thanks so much. Good luck next quarter.

David Weinberg — Chief Operating Officer

Thanks.

Operator

Our next question comes from the line of Omar Saad with Evercore ISI. Please proceed with your question.

Omar Saad — Evercore ISI — Analyst

Thanks for taking my question. Great job this quarter, especially given everything going on. I wanted to ask my first question as a follow-up to your comments around July in the US, maybe a little bit softer than June. Can you tell based on geography if it’s tied to the kind of hotspot areas where we’re seeing kind of second wave of the virus or is it maybe stimulus kind of wearing off before we get the second round of stimulus? Can you tell any of those factors? And I have a follow-up. Thanks.

David Weinberg — Chief Operating Officer

Well, it’s difficult to make a direct correlation. We think it’s the former rather than the latter. It really is the hotspot where we see it and there is no time. That’s why we have to be careful about what we see going forward because we do have a significant number of stores in Florida and Texas as do some of our larger wholesale customers. So we are always on guard watching to see how it happens and how it moves around.

We obviously had a slower business in New York until they came out and reopened retail at a later time. So all of that is part and parcel to the reactions we have to make as things go forward.

Omar Saad — Evercore ISI — Analyst

Got it. That’s really helpful. And then you talked about launching a new website. Maybe you could expand upon that a little bit further and talk to us about what’s going to be different for the consumer with the new platform that you have from a consumer perspective and then over time from a financial perspective, how do you expect that to affect the Company? Thanks.

John Vandemore — Chief Financial Officer

Yeah, I mean the new — I mean, honestly the new site is a complete revamp. So there’s better navigation, better showing of the merchandise, improved back of house systems to support it, better integration with the new point of sale, which will enable buy online and — buy online, pick up in store and buy online pick up at curb. It’s really probably best to think of it in light of a wholesale revamp of the site and really brings the site up to the best-in-class standards.

And then we will follow it with an improved mobile application, which is close to being launched as well and then, like we said, the new loyalty program. The totality of those really will provide what we think is a very high-class standard of consumer engagement across, obviously, many different avenues of reach to the customer.

And then with the point-of-sale system going in, just an overall increase in our ability to transact with consumers efficiently, identify them, identify their buying patterns, make recommendations, everything you’d want to come out of it. To be honest with you, the expectations we had for this site have now been blown away by just the explosive growth we’ve seen in the site over the last quarter. But we have high expectations for its ability to help us improve a wide variety of metrics, not the least of which is our conversion, our loyalty program, depth and breadth, a wide variety of metrics that can only bode well for that business going forward.

Omar Saad — Evercore ISI — Analyst

That’s really helpful. Thanks for the insight, guys, good luck.

John Vandemore — Chief Financial Officer

Thanks, Omar.

Operator

As a reminder, ladies and gentlemen — the next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Jim Duffy — Stifel — Analyst

Thank you. Good afternoon, guys.

David Weinberg — Chief Operating Officer

Hi, Jim.

Jim Duffy — Stifel — Analyst

A lot of evidence of the hard work in these results. Good job.

David Weinberg — Chief Operating Officer

Thank you.

Jim Duffy — Stifel — Analyst

David, as you mentioned, inventory is up 20%, seems like a pretty favorable outcome given the circumstances. Clearly you tempered some receipts, had some cooperation from suppliers. As we look across the balance of the year, can you talk a little bit about how you’re planning inventories absent some sort of a recurrent shock to store closures and what have you? Should we expect the inventory growth continues to moderate?

David Weinberg — Chief Operating Officer

That would depend on the pandemic and how fast we’re chasing and what we have to do with our supply chain. You should keep in mind when we talk about inventory and why we don’t think they were up so significantly, there was a number of things in transit to us when this whole world stopped down in February, March. And we did take everything we could from the factories to bring it in here. And they were spoken for — we weren’t sure when our customers would take them.

So we had a buildup that we’re now moving out around the world other than South America. And we’re trying to move that product elsewhere. Europe has picked up, the US has picked up. China has picked up and all that stuff that came in early. That was on hold and nobody could use is now being shipped before we go into new production.

So you have to keep in mind that we were at an artificially high point in April, because everything we had ordered for those customers to ship March, April, early May never got shipped. So if you think about that and the order of magnitude of what comes in in those specific months and the fact that we ended up outside of China with a very insignificant growth in most places, it’s pretty pretty good. And you would see that at least for July and August, where we couldn’t have significant increase in our production if the shipping holds up that we would have decreases in inventory overall until our new production schedule that started in June starts to catch up. And we were historically on a 60-90-day cycle. So we don’t really get the full swing and the factories were a little slow in starting up. Remember they had their own piece. So, we probably won’t be in full swing until August, September for our needs.

So like I said, I’ve gone personally from the point where I thought we might have too much inventory to the point that I now think we don’t have enough. So that would be my basic comment on the growth and where it goes.

Jim Duffy — Stifel — Analyst

Good enough. That’s a nice segue to my next question. John, as we were discussing throughout the quarter you’ve taken kind of a defensive posture as it relates to inventory. With demand turning on again, are you now shifting to more offensive and you’re looking to step up receipts from your manufacturing partners into the back half of the year?

John Vandemore — Chief Financial Officer

I think David described it best. We’re watching things carefully. We want to make sure we right-size as best we can receipts with demand. We’re also cautious in an environment that remains extraordinarily fluid relative to the pandemic. What we know is if the pandemic starts to re-emerge in the same way it impacted us in Q2, we’re going to have to be more conservative. To the extent, things continue to remain as they have been and things begin to improve, then obviously we will want to be much more aggressive. But again I can’t echo enough David’s sentiment. We feel very, very good about the inventory balances we carry at the end of this quarter. All things considered, it really is a phenomenal effort by our team to manage that.

Jim Duffy — Stifel — Analyst

Great. And then last one for me. Just on the bad debt charge, John was the objective to kitchen sink it in the second quarter with that $10.2 million figure or should we not necessarily think of it that way?

John Vandemore — Chief Financial Officer

Definitely, you should not [Phonetic] think of it that way, in particular for our friends at the SEC. But also we’re not trying to be overly aggressive. We did have, and I’m sure every similar company out there, had exposure to some bankruptcy activities, some distressed activities. So we tried to take a very thoughtful reasonable approach. There is an inherent unknown in this as David alluded to previously. We believe we’ve been prudent without being overly aggressive or foolish. And so we’ll watch how it emerges.

Keep in mind, just because we take a reserve doesn’t mean we don’t pursue with vigor our recovery as best we can. We’d much rather have the cash. But I think it’s a prudent level given the activity and given the known entities out there that have announced intentions do either filed or have already filed for bankruptcy court protection.

David Weinberg — Chief Operating Officer

And there still could be unknown entities. So that would be the difficult piece depending on how this all plays out going forward.

John Vandemore — Chief Financial Officer

I should add on to that, Jim, though that I mean we were incredibly pleased with our ability to process collections in the quarter. I mean it’s one of the reasons why we built cash since last quarter and that was just a diligent application of following up and making sure we could work with customers where we needed to, but still get those receipts in-house and that was incredibly important to us too. As we mentioned last call, we were very much focused on managing for cash over the quarter and I think we did an excellent job of that.

Jim Duffy — Stifel — Analyst

Great. Thank you, guys.

David Weinberg — Chief Operating Officer

Thanks, Jim.

Operator

We have time for one last question. Our last question comes from the line of Chris Svezia with Wedbush. Please proceed with your question.

Christopher Svezia — Wedbush Securities — Analyst

Good afternoon, guys.

David Weinberg — Chief Operating Officer

[Indecipherable] Christopher.

Christopher Svezia — Wedbush Securities — Analyst

Doing well. [Phonetic] Easy question to start. E-commerce, has that changed, slowed, moderated at all as your stores have opened up and as you look at July or is it still trending, call it, north of 300%?

David Weinberg — Chief Operating Officer

Look, I think the important thing is, it continues to significantly outgrow any expectation we would have had at the beginning of the year. It continues to meet consumers’ demand and that’s only just beginning to benefit from the enhanced technology that we brought forward. There has been ebb and flows, almost week by week, to be honest with you, depending on the dynamics.

There certainly has been a bit of a give back once the store is open, which I think is to be expected. But again the demand remains extraordinarily high for the product. We’ve got the new site in. We think that will be a propellant. And so, we’re extremely pleased with what we saw in the quarter, what we’re seeing now and we have robust expectations for the future and quite frankly, a large amount of excitement around it.

Christopher Svezia — Wedbush Securities — Analyst

Got it. Thank you. I want to move to China for a moment. Up 11% for the quarter. I would assume the exit rate was notably higher than that. I know you’re not going to give guidance, per se, but how do we conceptually think about China, as we move forward? Does it return to, call it, historical growth rate, high teens, 20%, as you go into the third quarter, or any reason why it wouldn’t kind of hold those rates or accelerate into those rates?

John Vandemore — Chief Financial Officer

So what we saw from China in the quarter was something David referenced in his prepared remarks. It stabilized in the first month and then it began to climb back into a growth posture. Normally June is a pretty heavy month in China to begin with because of the 6-18 selling holiday. So that was certainly reflected in the results.

Look, I think we’re cautiously optimistic that China can continue to get back toward a path of similar growth to what you’ve seen in prior years. But I don’t think we’re going to see over the course of the full year anything like what we’ve seen historically, in part because the first half of the year has been challenging, but also there continues to be significant unknowns in that marketplace. Towards the tail end of the quarter, they had a re-emergence of the virus in Beijing. That had an impact on the business.

So I think we’re cautiously optimistic that we’ll continue to see growth out of the market, but I wouldn’t expect it to be at the robust levels we’ve experienced in the past. Although we’re obviously eager to get back there because we certainly think the long-term prospects for that market continue to offer that type of growth trajectory for the SKECHERS brand.

Christopher Svezia — Wedbush Securities — Analyst

Okay. And just quickly a follow-up on that. The margins — I guess you’ve cleared through inventory. I guess the margins in China are healthy overall relative to the earlier in the month, early in the quarter, I guess, earlier in Q2.

John Vandemore — Chief Financial Officer

They had a mix shift as well. Remember they grew significantly faster online than through franchises. So — and there was some discounting, some increased discounting activity, in particular in the early part of the quarter as many brands were pulling — trying to pull customers into the marketplace. Nothing that I would consider to be disconcerting.

The overall margins in China continue to be very healthy and very accretive for us. So we — certainly there were some short-term discounting that needed to occur. And as David said, on the online and particularly in the sales windows that happened, but nothing that would give us pause for concern long term.

Christopher Svezia — Wedbush Securities — Analyst

Okay. Just Europe, last thing here, just I’m curious you mentioned, David, Germany has turned — was positive, continues to accelerate. I think France you mentioned has inflected positive. I think UK, you mentioned, in June was positive, which I know of that market opened late. Just any other, I guess, color or commentary? I mean it seems like things are slowly swinging pretty quickly back into positive territory. Any color about any other markets or just any thought process, more specifically about those, whether wholesale versus retail, just how do we think about European market overall?

David Weinberg — Chief Operating Officer

Because that would have to be market by market. I think I would go back to my prepared remarks and tell you that Europe is accelerating quite nicely. I don’t know that there’ll be positive as a whole group for the quarter but I anticipate nothing changes dramatically and that’s always the caveat we have here.

Things could change in a heartbeat. They’re one of the shining stars, they’re growing throughout. UK is showing signs of growing, continuing to increase as well, although they would probably have the most difficult marketplace there. They were late coming out and have some situations in their own retail environment with filings etc.

So Europe in general is trending very, very well, but it’s very difficult to say at this early stage. The US is still trending well. We said South America is basically closed. China is up. Places around China and Southeast Asia is a mixed bag, depending on where you want to go. Australia is doing very well. Indonesia is doing very well. Korea just got a step back towards another closedown again as in Korea with the political strike. So it really is market by market.

Our Eastern European businesses are starting to recover now. I think our business in Northern Europe or Scandinavia per se has held up very well. So it really is geography specific. And I go back to my original point. I think the point we take from this is when we are open and have access to our consumer, we see ourselves growing very well beyond our earlier expectations and the consumer has a demand for the product. So every place we are open that retail is open for us, we are doing well.

John Vandemore — Chief Financial Officer

In my opinion as well.

Christopher Svezia — Wedbush Securities — Analyst

All right. I’ll leave it at that. Thanks for the extra time and all the best.

David Weinberg — Chief Operating Officer

Thanks.

John Vandemore — Chief Financial Officer

Thanks, Chris.

Operator

[Operator Closing Remarks]