Skechers USA Inc. (SKX) Q2 2021 Earnings Call Transcript

Skechers USA Inc. (NYSE: SKX) Q2 2021 earnings call dated Jul. 22, 2021

Corporate Participants:

Unidentified Speaker —

David Weinberg — Chief Operating Officer

John Vandemore — Chief Financial Officer

Analysts:

Jay Sole — UBS — Analyst

Alex Straton — Morgan Stanley — Analyst

Gabby Carbone — Deutsche Bank — Analyst

Jim Duffy — Stifel — Analyst

Omar Saad — Evercore ISI — Analyst

Laurent Vasilescu — Exane BNP Paribas — Analyst

Brian McNamara — Berenberg Capital Markets — Analyst

Susan Anderson — B. Riley FBR — Analyst

John Kernan — Cowen — Analyst

Sam Poser — Williams Trading — Analyst

Presentation:

Operator

Greetings. Welcome to the Skechers Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to Skechers. Please go ahead.

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. 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 conference call. I hope you, your colleagues and loved ones are healthy as the COVID pandemic continues to be a global challenge. We appreciate the resiliency of the Skechers organization over the past 18 months and hope that those facing the ongoing COVID-related challenges are staying safe.

Skechers second quarter financial results exceeded expectations as we achieved record quarterly sales of $1.66 billion, a 127% increase over 2020 and a 32% increase over 2019. This marks the first time our quarterly sales have exceeded $1.6 billion and together with our first quarter yields a new six-month record of over $3 billion.

We also achieved a record gross margin of 51.2%, record quarterly diluted earnings per share of $0.88, an exceptionally strong operating margins of 12.1%. Our record revenues were the result of increases of 147% in our domestic business and 114% in our international business and both businesses increased over 30% compared to 2019. International sales comprised 56% of our total sales in the quarter. This growth, a result of increases across all reportable segments, is reflective of higher average selling prices on significantly more units sold, less promotional activity during the period and consumers embracing our comfort technology in our seasonal, athletic and casual footwear lines, in addition to our apparel offering.

It is important to note that these exceptional second quarter results came despite the ongoing global pandemic. COVID continue to clearly impact some countries in the second quarter, most notably India, but also remains a challenge for many other markets with lockdown restrictions, temporary closures and reduced store operating hours. The pandemic and other factors also continue to challenge our global supply chain. We appreciate the dedication and focus of the Skechers teams around the world. Without them, we wouldn’t have achieved the results we had.

Our international wholesale business grew 95% from the second quarter last year and 37% from 2019. The quarterly sales growth was primarily driven by China with an increase of 51% over the same period in 2020 and a 68% increase from 2019, as well as Europe, which had an increase of 150% over 2020 and 85% over 2019.

Our joint venture businesses increased 56% for the quarter compared to 2020 and 46% as compared to 2019. In addition to China, Mexico and Israel also improved over both periods. Subsidiary sales increased 163% from 2020 and 48% from 2019 despite temporary closures and reduced operating hours in many regions, including India, Canada, Japan and parts of Europe and South America. The UK, Germany, Canada, France, Spain and Italy all achieved notable growth of about 2020 and 2019’s comparable periods.

Our distributor business improved 122% over last year, though it was down 7% from 2019. Several markets achieved growth not only compared to 2020 but also 2019. These include Australia, Russia, Taiwan, Algeria, South Africa, Scandinavia and Ukraine, among others. Our largest distributor, the UAE, which handles much of our business across the Middle East and parts of Africa and Eastern Europe, saw significant improvements over 2020 and we believe it is continuing to improve.

Skechers direct-to-consumer business increased 138% over 2020 and 26% over 2019 despite temporary store closures, primarily in India, Canada, Japan and Chile and reduced hours in many of our international company-owned stores due to local health guidelines. Worldwide comp store sales were up 109% compared to 2020, including 96% domestically and 165% internationally. As compared to 2019, worldwide comp store sales increased 13%, including an increase of 22% domestically and a 9% decrease internationally, reflecting the ongoing store closures.

Our direct-to-consumer average selling price per unit rose 17% compared to 2020, indicative of our less promotional stance and the success of our comfort technology products. Given the unpredictability of the coronavirus and its continued impact on many markets, we remain cautious about our return to normal traffic and sales in many international stores but believe that we will see improvements where we are fully open and restrictions will ease.

Our domestic direct-to-consumer sales increased 101% compared to the second quarter of 2020 and nearly 30% compared to 2019. Driving this growth was a 232% increase in our retail store sales or 11% over 2019. The domestic retail store improvement was partially offset by a decrease in our domestic e-commerce channel of 25%, which faced difficult comparisons to the prior year. However, it is important to note that domestic e-commerce sales were up 337% over 2019.

Our international direct-to-consumer business increased 259% over the second quarter of 2020 and 20% over 2019. The growth as compared to 2019 was the result of a larger international company-owned retail store base and increases in our e-commerce business. A number of markets achieved growth over both 2020 and 2019, including the UK, Spain, Germany, Mexico and others.

Our e-commerce channel remains a meaningful growth opportunity and continues to grow this business. We recently launched our new loyalty program in the United States, which we will be capitalizing on in the coming weeks. We’re also looking forward to the planned expansion of our worldwide e-commerce presence this year and into 2022.

In the second quarter, we opened 13 company-owned Skechers stores, including key locations in Antwerp, Barcelona Berlin and Lima. We closed eight locations in the second quarter as leases expired. We have opened three stores to-date in the third quarter and have another three planned through the end of the month, with another 20 to 25 expected to open by year’s end. An additional net 63 third-party Skechers stores opened in the second quarter across 26 countries, including our first in the Dominican Republic. In total, at quarter end, there were 4,057 Skechers stores around the world. Another 145 to 155 third-party stores are expected to open by year-end.

Sales in our domestic wholesale business improved significantly. 206% in the second quarter compared to the same period in 2020 and 31% compared to the same period in 2019. Nearly every product category we achieved growth in the quarter with the highest gains coming from sports, kids, casual and our seasonal sandal footwear. Additionally, the average selling price per pair increased, reflecting the appeal of our new comfort product and technologies. Innovations in developing footwear technology has been a significant part of our DNA for much of our history.

Going back to our made to last occupational footwear to the lightweight cushioning and performance material for our first generation Skechers GO RUN and GO WALK lines, the features that deliver comfort in every pair. Our core product philosophy of comfort, style, innovation and quality at the right price is resonating with consumers, especially during these difficult times as we believe people are embracing a more relaxed lifestyle and want to incorporate comfort into their work and week end wear.

Throughout the quarter, we were strategic in our approach to marketing, communicating the comfort and innovations of Skechers vast collection of products for men, women and kids. In the second quarter, our multiplatform approach included television, outdoor, print and online in many global markets. This created awareness, helped drive sales and resulted in our record revenues.

To further support our business in the coming year, we are enhancing our infrastructure with new distribution centers in Peru, the UK and Japan and are looking for a location in India. We have completed our new 1.5 million square foot China distribution center, which as of this month is fully operational. We are continuing to work on the expansion of our LEED Gold-certified North American distribution center, which will bring our facility in Southern California to 2.6 million square feet in 2022.

Given our global growth, we are confident that Skechers innovative collection of comfort footwear and apparel resonated with consumers as they began returning to work, dining out, shopping and traveling. Where markets were open and restrictions eased, sales exceeded our expectations. And in the markets that were largely closed due to local health guidelines, we still performed well given the circumstances. We believe our exceptional results in the second quarter are signs of the power of the brand globally.

And now, I’d like to turn the call over to John for more details.

John Vandemore — Chief Financial Officer

Thank you, David. And good afternoon, everyone. Skechers second quarter results were remarkable and even exceeded our internal targets for the period. They clearly illustrate the strength of our comfort technology product portfolio, resident brand and the focused execution of our global growth strategy. And we delivered these results despite lingering obstacles posed by the pandemic, including supply chain challenges, continued store closures and operating restrictions primarily in some international markets.

Now let’s turn to our second quarter results where we will provide comparisons to both prior year and 2019. Since the prior year is heavily influenced by the impact of the pandemic and numerous lockdowns, I will largely focus my commentary on the comparisons to 2019 because we believe it is a more meaningful period against which to assess our performance.

Sales in the quarter achieved a new record totaling $1.66 billion, an increase of $928.3 million or 127% from the prior year and a 32% increase over the second quarter of 2019 with both our domestic and international businesses growing over 30%. On a constant currency basis, sales increased $857 million or 118% from the prior year.

International wholesale sales increased 95% year-over-year and grew 37% compared to the second quarter of 2019. Our joint ventures grew 56% year-over-year, led by China which grew 51% on the strength of robust e-commerce demand, partially offset by weakness in several adjacent markets, which are still being impacted by the pandemic.

As compared to the second quarter of 2019, China grew by 68%. Subsidiary sales increased an impressive 163% year-over-year and as compared to the second quarter of 2019 grew 48%. The improvement versus 2019 was primarily the result of volume increases, particularly in Europe.

Our distributor business grew 122% year-over-year, declined by 7% as compared with the second quarter of 2019. We are pleased by the year-over-year growth in this business, which as expected continues to recover more slowly from the pandemic. However, we remain optimistic that this business retains its attractive long-term growth characteristics.

Direct-to-consumer sales increased 138% year-over-year, supported by growth in both domestic and in international markets, albeit at a lower rate due to store closures in the period. As compared with the second quarter of 2019, direct-to-consumer sales increased 26%, the result of a 30% increase domestically and a nearly 20% increase internationally. Domestic wholesale sales grew 206% year-over-year and as compared to the second quarter of 2019 increased 31%.

As indicated on last quarter’s earnings call, we continue to see very positive underlying trends with the majority of our domestic wholesale partners, including healthy sell-through rates and strong average selling prices. Gross profit was $849.5 million, up 130% or $480.9 million compared to the prior year. Gross margin for the quarter was 51.2%, an increase of over 70 basis points versus the prior year and 270 basis points as compared to 2019. In both instances, gross margins improved as a result of higher average selling prices across all segments. Compared to 2020, the increase in gross margin was partially offset by channel mix, including a lower proportion of e-commerce sales and a higher proportion of domestic wholesale sales.

Total operating expenses increased by $220.3 million or 51% to $652.44 million in the quarter versus the prior year period. Selling expenses in the quarter increased year-over-year by $72.2 million or 120% to $132.4 million. However, as a percentage of sales, this represented a year-over-year decrease of 30 basis points and as compared to 2019, a 100 basis point reduction. The dollar increase year-over-year was primarily due to higher demand creation spending as markets reopened globally.

General and administrative expenses in the quarter increased year-over-year by $148 million or 40% to $519.9 million but decreased as a percentage of sales by almost 20 percentage points. The dollar increase year-over-year was primarily reflective of increased labor and incentive costs as well as volume-driven expenses and warehouse and distribution for all our businesses globally.

Earnings from operations were $201.2 million versus a prior year loss of $61 million, an increase of $262.2 million. Compared to the second quarter of 2019, earnings from operations increased 81%, operating margin was 12.1% as compared with 8.8% in the second quarter of 2019, an increase of 330 basis points. Net earnings were $137.4 million or $0.88 per diluted share on 156.7 million diluted shares outstanding. This compares to prior-year net loss of $68.1 million or $0.44 per diluted share on 154.1 million diluted shares outstanding.

As compared to the second quarter of 2019, net earnings improved 83% from $75.2 million or $0.49 per diluted share. Our effective income tax rate for the quarter was 20.4% versus an income tax benefit of $4.3 million in the prior year and an 18.4% effective tax rate in the second quarter of 2019.

And now, turning to our balance sheet. Our cash and liquidity position remain extremely healthy. During the second quarter, we fully repaid our revolving credit facility, of which $452.5 million was outstanding and still ended the quarter with $13.2 billion in cash, cash equivalents and investments. This reflects a decrease of 234.5 million or 15.1% from June 30, 2020.

Trade accounts receivable at quarter-end were $778.2 million, an increase of $300.2 million from June 30, 2020, predominantly a result of higher wholesale sales. Total inventory was $1.06 billion, an increase of 2.9% or $29.5 million from June 30, 2020. The increase is primarily attributable to higher inventories to support growth in Asia.

Total debt, including both current and long-term portions, was $312 million at June 30, 2021 compared to $763.3 million at June 30, 2020, reflecting the repayment of our revolving credit facility during the quarter. Capital expenditures for the second quarter were $62 million, of which $23.1 million related to the expansion of our joint venture on domestic distribution center in the United States, $14.7 million related to investments in our direct-to-consumer technologies and retail stores, $8 million related to our new now fully operational distribution center in China and $7.8 million related to investments in our new corporate offices in Southern California.

Our capital investments remain focused on supporting our strategic growth priorities, growing our direct-to-consumer business as well as expanding the presence of our brand internationally. For the remainder of 2021, we expect total capital expenditures to be between $150 million and $200 million.

Now, I will turn to guidance. Given our outstanding performance this quarter as well as cautious optimism that the recently resurgent virus impacts will be limited. We expect third quarter and full year results above our previous guidance range in both sales and earnings per share. We expect third quarter 2021 sales to be in the range of $1.6 billion and $1.65 billion and net earnings per diluted share to be in the range of $0.70 and $0.75.

For fiscal 2021, we now expect sales to be in the range of $6.15 billion and $6.25 billion. And net earnings per diluted share to be in the range of $2.55 and $2.65. We anticipate that gross margins over the back half of the year will be up as compared to the back half of 2019. And then, our effective tax rate for the year will be approximately 20% as compared to a rate of 5.5% in 2020 and 70% in 2019.

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

David Weinberg — Chief Operating Officer

Thank you, John. Our second quarter performance exceeded expectations with three new records, quarterly revenues of more than $1.6 billion, gross margins of 51.2% and diluted earnings per share of $0.08. Our innovative comfort product resonated with consumers around the world, conversions and foot traffic improved in many of our retail stores opened during the period and our e-commerce business continued to perform well.

Although we remain in a fluid situation with various government responses to COVID globally, given our performance in the first half of the year, the strength of our brand in our product, we believe, our momentum will continue in the back half of the year and into next year. We remain focused on driving sales by managing our inventory flow, developing and delivering fresh new innovative product and communicating our message to consumers that Skechers is the comfort technology company.

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 Jay Sole with UBS. Please proceed with your question.

Jay Sole — UBS — Analyst

Great. Thank you so much. I want to ask about the domestic wholesale business, just because up 31% versus 2019 obviously had an exceptional result. Can you just give us — maybe elaborate a little bit more on what you saw by channel, whether it’s family channel, off price, clubs, online pure plays. Maybe just give us a sense of maybe what you saw in some of the different parts of that business.

And then, secondly, if you can talk about if the growth was really market share gains, is it sort of restocking based on really good sell through last year in light inventory levels or are you just seeing really strong comps in those stores across the channel? That would be helpful. Thank you.

David Weinberg — Chief Operating Officer

I think it’s all of the above. We’re actually performing better in all the channels that we’re in, family channel, the clubs. We have product that resonates that’s higher priced. So, we were able to move people to a higher price point. Keep the lower price points. They weren’t on sale as often. We had a lot of replenishment and we’ve done relatively well, although it’s very difficult in replenishing them to higher degree than they probably had planned when we went into the quarter. So if you take the higher price points, the availability of product, our performance against competitive brands that are out there and then not being on sale and getting more margin for it. They’ve replaced all the time. So, we’ve got it on all cylinders. So, product resonates. We have higher price points. We’ve kept our traditional price points and we’ve delivered relatively on time.

Operator

Thank you. Our next question comes from Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Alex Straton — Morgan Stanley — Analyst

Hi. This is Alex Straton on for Kimberly Greenberger. I have a quick question on ASP and bridges [Phonetic] you’re seeing. I think you said that the direct-to-consumer ASPs grew 17% year-over-year in the prepared remarks. Could you just talk about your pricing strategy or how you think through strategic price increases? Is it on a market-by-market basis or could you see even more increases throughout the year? Just more on the strategy there would be helpful.

Thank you.

John Vandemore — Chief Financial Officer

Yeah. I think, Alex, our approach is to deliver great product and then receive fair value for that. And I think what you’re seeing is that our product, as David mentioned, is performing exceedingly well. It’s infused with comfort technology and that’s resonating with consumers. I mean, as a result, we believe and we’ve seen that we’re able to charge more for that product.

In addition, part of that ASP is clearly a more favorable promotional environment across the board. We certainly benefited from that, as did our wholesale partners. And we see that in our sell-through and ASPs, we see that in their sell-through and ASPs. And I think you’ll continue to see us, where appropriate, take advantage of the value our technology is delivering at the consumer level. On top of that, obviously we watch input costs and that’s something we adjust for occasionally. But I’d say, the predominant driver right now is getting value for the tremendous product we’re delivering to the marketplace.

David Weinberg — Chief Operating Officer

Yeah. I think it’s important to note that it wasn’t like an across the board just price increase that we’re taking more price. What we’ve done is, increased the performance and the features in our footwear to make it a higher price and seen as a higher priced product in the marketplace, not only raising prices of existing. I mean, we now are received as a technical company with great comfort and it’s worth more in the marketplace.

Alex Straton — Morgan Stanley — Analyst

Great. Thanks so much.

Operator

Thank you. Our next question comes from Gabby Carbone with Deutsche Bank. Please proceed with your question.

Gabby Carbone — Deutsche Bank — Analyst

Hi. Congratulations on a great quarter. So, kind of wanted to follow-up on Jay’s question on domestic wholesale, really nice results there. So just wondering if you could dig into your thoughts around the opportunity to take additional shelf space. As some of your competitors pull out of certain retailers, maybe what you think that channel could grow on a more normalized basis from here?

John Vandemore — Chief Financial Officer

Yeah. I mean, I think, to add on to David’s comment earlier in response to Jay, I mean, we’re seeing really good sell-through of the product. It’s driving higher prices for our wholesale partners. There absolutely is an opportunity to gain shelf space as shelf space becomes available. But I would say, independent of that, our product is tremendously effective for our partners. And again, we see this in our own data as well.

I’d like to tell you that I think wherever we can grow domestic wholesale at 200% or 30% clip. But I think it’s probably an opportunity short-term to grow above trend. And then, as we’ve said before, we believe long-term, there is no reason why domestic wholesale can’t, for us at least, grow above-market because we believe we’re exceedingly well positioned with key retailers and in categories and with technologies that consumers value. But certainly growing above the market in the domestic wholesale marketplace long-term is absolutely achievable as well.

Gabby Carbone — Deutsche Bank — Analyst

Got it. And just a quick follow-up. Your gross margin performance was really impressive in the retail segment. I believe about 800 basis points from ’19. What are the biggest drivers there? And like what kind performance could we expect in the back half? Like what’s your kind of hold here and maybe some kind of pressure as we should think about?

John Vandemore — Chief Financial Officer

Well, the driver that we mentioned, it was pricing. That was the most significant driver. And our intention is to have that pricing modality continue in the back half of the year. And as I said, also a contributing factor was the promotional environment. We’re certainly eager to see this environment remain steady. And I think most indications are that what you’ll see, but certainly it’s also a competitive landscape. So we need to be cognizant of what others are going to do.

I don’t want to get into segment specific margin guidance other than to say, the guide we gave relative to the back half of the year is certainly heavily influenced by what we’ve seen it in the direct-to-consumer channel. That’s been a very big wind at our backs and we expect that to continue.

Gabby Carbone — Deutsche Bank — Analyst

Okay, great. Thank you so much.

John Vandemore — Chief Financial Officer

Thanks, Gabby.

Operator

Thank you. Our next question comes from Jim Duffy with Stifel. Please proceed with your question.

Jim Duffy — Stifel — Analyst

Thanks. Hi, John. Hi, David. Hope you guys are doing well.

John Vandemore — Chief Financial Officer

Hi, Jim.

David Weinberg — Chief Operating Officer

Hi.

Jim Duffy — Stifel — Analyst

I wanted to ask — Yeah, indeed. I wanted to get an update on China business trends. Can you just talk about what you’re seeing in retail stores there relative productivity vis-a-vis 2019, what you saw during the 618 holiday period and maybe just comment on throughput through the new distribution center, how that’s working for you and things to watch for with respect to that?

John Vandemore — Chief Financial Officer

Well, I think the first thing to start off with is China performed exceedingly well yet again, kind of the norm, we’ve come to expect out of China. But it’s anything but normal. It was propelled in large part by the e-commerce channel, which has been a characteristic of that market for a few years now. We did see better trends than we had been seeing certainly over the last part of 2020 in the physical stores. I wouldn’t say it’s fully recovered, but I think it’s getting better, which is a good sign.

That all being said, I mean, e-commerce is going to continue to be the propellant behind growth in that marketplace. Overall, again, very healthy for us. We didn’t see any negative ramifications from some of the other challenges brands saw in the period. We think we did an exceptionally good job and continuing to grow the brand in the marketplace and then adding the capabilities at the distribution center, which is our first company-owned distribution footprint in the market. That’s gone really well. Given the challenges we face getting it up and running with COVID and the travel restrictions in market and we’re very pleased with it. The point is that at the moment, but there’s also plenty of opportunity to continue to improve. And we’re eager to see that. Obviously we remain critically optimistic about China’s long-term trends for our brand.

Jim Duffy — Stifel — Analyst

Great. John, you referenced some of the backlash for other brands, has there been any detectable change in the promotional environment that you’ve seen in the China marketplace?

John Vandemore — Chief Financial Officer

Not for our brand. I mean, around some of the holiday selling period 6/18 and 11/11, you do see a little bit more intense promotionality. I wouldn’t say it was extraordinary or noteworthy above and beyond what we normally come to expect in those periods. And most importantly, for our brand, we felt very good about the environment both through 6/18 around the balance of the quarter.

Jim Duffy — Stifel — Analyst

Thank you very much guys.

John Vandemore — Chief Financial Officer

Thanks, Jim.

Operator

Thank you. Our next question comes from Omar Saad with Evercore ISI. Please proceed with your question.

Omar Saad — Evercore ISI — Analyst

Thanks for taking my question. Great quarter. I wanted to ask about the e-com versus stores dynamic. I mean, clearly stores are coming racing back even relative to ’19 levels. I think domestically you said stores were up 22, but e-com was down in the ’20s. So you’re kind of seeing that traffic really decline on the e-commerce side as stores come back. Is that something, I mean, it’s clear support for the importance of stores in the equation, but is that something you’ve seen in other markets in China as well when the stores reopen and the traffic comes back and the e-com suffers? And when do you think e-com will start to grow again? Thanks.

John Vandemore — Chief Financial Officer

Yeah. I think, this quarter is an anomaly and marketing completely blunt. I mean, last year at this time, e-commerce was the only business in town, it’s all we had. And I think, you need to look no further than the growth rate on kind of a two-year stack basis at 337%. I mean that’s not too bad of a number. Our expectation is that this quarter is at a bit of an anomaly in the grand landscape of continuing to see e-commerce grow as a business. It was just a very difficult comparison, given in particular the domestic dynamics.

On the international side, even before we’ve completed the rollout of the new platform globally and several other technology solutions that will be going into place over the next year or two, we saw very decent growth in international e-commerce where we operated directly. And then obviously we talked about China being felt by e-commerce. So, I would just take it in context, a 300% two-year stack growth rate is not going to be disappointed in and we continue to be very optimistic about the long-term opportunity for e-commerce to add to our solution at the consumer level.

Omar Saad — Evercore ISI — Analyst

Got it. That’s really helpful context, John. And then, a quick follow-up on the comfort trend you guys are talking about a lot. I’m talking about comfort technology. What gives you confidence that it’s sticky and that we don’t necessarily go back to dress shoes or other maybe less comfortable shoes, when life returns, people go back to work. And any sneak peaks that key comfort products and technologies in the pipeline two, please. Thanks.

David Weinberg — Chief Operating Officer

Well, we always have a significant amount in the pipeline and we certainly try not to go and let everybody know in advance of bringing them in the first time, especially what’s going on around the world. But this is growing around the world. And it seems there are no surveys. But I think it’s common thought process that comfort is here to stay. More people are working from home, people are more comfortable when they go to work. They love the technology that we present and they can wear it in multiple styles. It’s not that we’re only selling a technology in a item. We sell our technology through all the items that fit everybody’s lifestyle. So we hit it on both fronts and we think that’s absolutely going to continue and will continue to develop for it.

John Vandemore — Chief Financial Officer

I would just add. I think it’s also — when you think about comfort, I would also bring into your perspective health. I mean, being comfortable is part of being healthy. And you certainly can’t argue against the general trend of focusing on health and well-being. And it’s not — there’s nothing good about standing on a pair of shoes that aren’t Skechers and being uncomfortable at having your feet hurt. So, comfort to us is also tantamount with a health benefit to the consumer. And I would definitely echo David’s comment. I have a pair of dress shoes from Skechers and our mark needs in line. And they’re the most comfortable dress shoes I own. So it’s not limited just to our core casual and athletic. We infuse that technology across the product portfolio.

Omar Saad — Evercore ISI — Analyst

Thank you.

Operator

Thank you. Our next question comes from Laurent Vasilescu with Exane BNP Paribas. Please proceed with your question.

Laurent Vasilescu — Exane BNP Paribas — Analyst

Good afternoon. Hi, David. Hi, John.

John Vandemore — Chief Financial Officer

Hello, Laurent.

Laurent Vasilescu — Exane BNP Paribas — Analyst

I’ve got a question for you, John, with regards to the guidance. Your second quarter top-line growth was up 32% on two-year stack. The third quarter guide implies 22% growth and then the fourth quarter low-double digits on a two-year stack. Is it due to conservatism or other factors that we should consider, I think, we never [Phonetic] shift from US wholesale into 2Q from 1Q. Any other factors we should consider with regards to the overall top-line?

John Vandemore — Chief Financial Officer

Well, I think you hit on the two. I mean, one is, there certainly is a tremendous amount of uncertainty in the marketplace remaining. I mean, even as we sit here today, I don’t think we would have forecast as much of an impact from the pandemic continuing at this point in time. What I think remarkable about the quarter we just delivered is, we delivered in spite of several of those challenges. So, there are still some unknowns we’re baking into the probability weighted outcome, we look at relative to the balance of the year. There are also a few unique costs coming into play in the near-term as we get China and that distribution center up and running as we bring online a distribution footprint in the UK we’ve been talking about more fully.

And as we bring back more labor into the picture as stores improve, I’d also note we’re taking steps like many retailers to ensure that we’re attracting and retaining the best and brightest. So we’re making some adjustments to our part-time labor rates and labor rates in our retail business, where today as we look at it, we’re paying about on average over 40% of prevailing minimum wage in each of the markets in which we sell today. And that has an impact, but it’s one we absolutely can absorb and we think it’s beneficial for the long-term.

I would also just note, as you look at the stores, it wasn’t as if all the stores were working at full capacity. We saw tremendous strength in our big box neighborhood stores. The outlet stores did much better than before, but I wouldn’t characterize as fully recovered. And then, we have some of our concept stores, particularly those in high tourism locations and mall-based properties that are still suffering from restrictions or limited traffic flow that aren’t yet fully back to peak efficiency. And when those come back, that we believe delivers another leg of assistance from a leverage perspective. So all that being said, it’s a variety of factors we’ve baked into the back half guidance, but we’ll also want to look at that again next quarter and see if there is further clarity we can lend.

Laurent Vasilescu — Exane BNP Paribas — Analyst

That’s very helpful, John. And then, second question on the supply chain. Obviously a lot of dynamics at play this year, West Coast, but obviously we’re in the headlines, Vietnam has called for shutdowns — localized shutdowns. I think, in your 10-K, it says the majority of your manufacturers in China and Vietnam, can you just remind us how big is your Vietnam sourcing? Is it 40% of overall revenues as a percent of all revenues and if there is two weeks, could we manage that or when does it become problematic? Is it like a four to six-week shutdown? Any color on that would be very helpful.

John Vandemore — Chief Financial Officer

That’s one piece of many pieces you’re talking about. And I think we should just point out here that the numbers you threw out was Vietnam as a whole. And the issue today for the closure seems to be South Vietnam, which is a smaller piece of our overall Vietnam business to begin with. And two weeks, we can certainly handle. I don’t know at what point it becomes catastrophic, it has to become part of the overall of what’s happening every place else, and the supply chain in general. Right now, we seem to be doing as well as anyone. We’re bringing in and we’re meeting our shipping, but it certainly could be faster. So, South Vietnam is not as important to us as Vietnam is a whole and it will depend on the overall supply chain and availability of containers and shipments and getting it delivered at the port.

Laurent Vasilescu — Exane BNP Paribas — Analyst

Very helpful. If I could squeeze one more in, Europe subsidiary wholesale was up 85% on two-year stack. John and David, but could you guys give us any context of just how big this businesses. And where do you think it goes in 2H ’21.

John Vandemore — Chief Financial Officer

Look, it’s one of our bigger regions. And I’d say, it’s a meaningful contributor. And I think what’s noteworthy about the growth is that it was really in every market. Almost every single market in Europe for us on a two-year stack basis grew by double-digits, some by triple digits. So, I probably don’t want to put a specific size on it other than to say, it’s obviously one of our significant contributors in the subsidiary line.

Laurent Vasilescu — Exane BNP Paribas — Analyst

Okay. Thank you very much and best of luck.

John Vandemore — Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Brian McNamara with Berenberg Capital Markets. Please proceed with your question.

Brian McNamara — Berenberg Capital Markets — Analyst

Hey. Congratulations on the strong results and guidance. So, your full-year guidance implies a flow-through of your better Q2, a better Q3 than expected and then some. So, I’m curious, what has been the biggest surprise over the last 90 days? Is it simply a function of conservatism, given it was your first full year guide in a while or has the strength surprised you relative to your prior expectations?

John Vandemore — Chief Financial Officer

I think we were positively surprised by the durability of some of the trends we saw in late Q1 in the direct-to-consumer channel in particular. We’re optimistic that some of the markets that have been closed over the last quarter come back online. And we work some of that into the situation. And then the pricing held and the promotions held. And I think that is something we were again cautiously optimistic would be durable throughout the balance of the year. Now we’re increasingly comfortable that that’s more likely than not. Again, still keeping some a little bit of dry powder in case we experience unexpected consequences from COVID or now floods in Europe and other events that we’ve had to navigate through. But overall, I’d say, increasing confidence that the actions we’ve taken, the results we’ve seen are a bit more durable than we had believed coming into the quarter.

Brian McNamara — Berenberg Capital Markets — Analyst

Any update on India and kind of obviously that’s been a big area of COVID concern, any update there?

David Weinberg — Chief Operating Officer

So far, they are starting to open up. We have more stores open although traffic still hasn’t returned. I think they still have a ways to go, but they continue to make progress every month, especially in some of the less densely populated if you can call anything in India that areas around. So we’re making progress. They are open, we are doing business there. Past to close down stage for the time being and continue to make progress.

Brian McNamara — Berenberg Capital Markets — Analyst

Great. Thanks very much.

John Vandemore — Chief Financial Officer

Thanks, Brian.

Operator

Thank you. Our next question comes from Susan Anderson with B. Riley FBR. Please proceed with your question.

Susan Anderson — B. Riley FBR — Analyst

Hi, good evening. Nice job on the quarter. I’m curious, just your comfort levels around your inventory, do you feel like you had enough inventory in the quarter or are you feel like there is still kind of some stocking to do particularly within the wholesale channel to satisfy the demand there?

John Vandemore — Chief Financial Officer

I think, truth be known is, we certainly could have sold more had we gotten it here. It was a very difficult transition from slowing down through the pandemic and then having this explosive consumer purchasing program that’s going on. So I think we managed it very well. Like I said, we’re somewhat surprised how well it held up and how well the promotional cadence held up. So — and we were able to bring in more goods than we did in 2019 even with the supply chain issues and fill that pipeline. We certainly could have done some more, but demand has waned. So we will pick that up in Q3. So, there’s still a lot of work to be done and a lot of things to happen, but we’re still trying to get as much inventory as we can and can’t pick up the pace. That’s one of the conservative items.

We’re not sure how fast the supply chain picks up and if we get significantly further along than we are today. I’m sure if we can get it here faster, we could sell it faster and move it out. I think what it’s taught us is that we can be very reactive to inventory needs and we can bring it in. And when we do, it continues to sell through and hold price. So those were the two big positive surprises for the quarter and I think they continue into this quarter.

Susan Anderson — B. Riley FBR — Analyst

Okay, great. That sounds good. And then, just a follow-up on the marketing for the second half. Should we expect increased marketing for the second half again, similar to what we saw in this quarter?

John Vandemore — Chief Financial Officer

I think you should expect it to be relatively steady kind of on a percentage of sales basis to what we’ve traditionally done, maybe a little bit more depending on whether or not we have and David mentioned to be able to satisfy the demand. What we’ve seen this year so far, the marketing we’ve put in place has been extremely effective in driving top line. So, there’s been kind of timing differences. They come at the end of the year normally. And I think you can expect it to be a relatively consistent rate for what we traditionally observe but with some dexterity at our disposal should we feel the opportunity to drive sales.

Susan Anderson — B. Riley FBR — Analyst

Okay, great. And then, if I could just add one more. I’m curious, just on the work shoe business and if that’s come back significantly as some of, particularly the leisure and hospitality workers get back to work. If you’ve seen a big pickup in that type of business?

John Vandemore — Chief Financial Officer

Yeah. I don’t think that business ever went away. That’s something that came back very quickly. It’s a very core business for us. It’s done well and has continued to grow. So we continue with it and we do expect it will continue.

David Weinberg — Chief Operating Officer

Yeah. It’s been an extremely strong division for us throughout well throughout time but even during the pandemic.

Susan Anderson — B. Riley FBR — Analyst

Yeah. Okay, great. Thanks so much. Good luck for the rest of year.

John Vandemore — Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from John Kernan with Cowen. Please proceed with your question.

John Kernan — Cowen — Analyst

Hey. Good afternoon and congrats on the great results, guys.

John Vandemore — Chief Financial Officer

Thanks, John.

John Kernan — Cowen — Analyst

Wanted to go to gross margin. You talked about it being up in the back half. I think there is a scenario you’ll be north of 49% for the year. Where do you think gross margin can go over time? It feels like you’re getting price retail as a mix shift, it seems like you can be a benefit over time. Just curious how we should think about the gross margin line as it relates to your long-term operating margin overall.

John Vandemore — Chief Financial Officer

Yeah. I mean, listen, a portion of that is going to be heavily influenced by mix. So, you got to keep mix in the picture. That being said, our long-term algorithm for gross margin performance has been pretty consistent, which is, we’ll continue to mix up toward direct-to-consumer and international businesses. And given normalized growth rates on the domestic side of things, that will continue to accrete margins in, call it, 25 to 50 bps range annually. Again, I think you got to be cognizant though that we outgrow kind of a normal rate in domestic wholesale. It may not have the accretive margin impact we want, but it creates more gross profit dollars, which is absolutely something we’ll take.

We’re encouraged by what we’ve seen in pricing. We got to maintain vigilance on the marketplace. And we are cognizant there still are input cost pressures out there that the whole industry is dealing with in shipping, a few raw material side of things and tariffs that exclusions are expired. So, part of it is also adjusting to that environment. But again, the long-term profile for growth is continue to benefit our mix towards international and direct-to-consumer. And that’s certainly something we think has significant legs for the business.

John Kernan — Cowen — Analyst

Got it. I guess, one more, just on — there were some earlier questions on the guidance for the back half of the year versus 2019 does indicate a deceleration and you did indicate that there is still lot of uncertainty. I’m just curious, for North America, particularly the US, like how you’re viewing the opportunity for back-to-school and holiday? It does look like fourth quarter implied revenue guidance, assumes another deceleration of 2019. So, any comments on how you see back-to-school and holiday shaping up would be great.

John Vandemore — Chief Financial Officer

I think we’re cautiously optimistic on back-to-school. I mean, I think you have to keep in mind whether or not a back-to-school happens is dependent upon how schools and school districts behave. We — I think, our plan for a reasonable recurrence of back-to-school, similar to what we saw pre-pandemic, but probably not a full throttle return at this juncture. We’re also dealing with the challenges we’ve mentioned in supply chains and making sure we have the product at the right time is going to be going to be a criticality we’ve got to be mindful of in light of this environment.

I would also point out that as you look relative to 2020 where you were starting to see early recovery in the pandemic world in those quarters. So those were also very healthy quarters for us overall. That all being said, again, we remain extremely optimistic about the balance of the year and into ’22. We’re planning for some maneuverability should things change because we’re certainly in the habit now seeing some pretty dynamic forces in the marketplace. But we also think the guidance we’ve rolled through reflects that confidence and is a fairly healthy improvement on what we previously discussed. And that’s good.

And also just keep in mind, when you’re looking at EPS, you got to keep in mind the tax rate differentials. If you look back the last couple of years, at 20%, we’re in some instances 500 basis points higher on a tax rate. And so, if you adjust for that, I think, you look at the guide relative to Q3 in particular that adds another 10 percentage points of growth into that number. So, please do keep that in mind.

John Kernan — Cowen — Analyst

Excellent. Thank you.

John Vandemore — Chief Financial Officer

Thanks, John.

Operator

Thank you. Our final question comes from Sam Poser with Williams Trading. Please proceed with your question.

Sam Poser — Williams Trading — Analyst

Thank you, guys, for taking my questions. I’ve got three. Did you — are you seeing given that your inventory, while you could sell more, it looks like it’s in pretty good shape relative to others. Did you shift — are there orders shifting forward because you have availability, you have trucks and do you anticipate that continues to go on? And while you could have more inventory, if there is a problem with Vietnam and other places, when do you think that would –when would you see at a fact of that? Is that something that would be a spring effect or late Q4, just given the way you move product around?

John Vandemore — Chief Financial Officer

I don’t think there’s any shift in there. I mean, what we’re seeing is fantastic sell-through and very strong ASPs at the wholesale partner level. It doesn’t — there is no evidence that our analysis that this is the ship [Phonetic] and they gave us that we could have sold more if we had more, because the demand is strong for the product.

David Weinberg — Chief Operating Officer

Yeah. When you imply shift, you think things are moving and the people are stocking more and it slows down.

Sam Poser — Williams Trading — Analyst

No, no. I mean, they have opened — they have dollars available for your product, your orders before everything just moving and also to smooth it out at the moment.

John Vandemore — Chief Financial Officer

Ground transportation problems here in the US specifically [Phonetic].

David Weinberg — Chief Operating Officer

Yeah, but I don’t know that it’s — our stock to sales positions across the board, as far as our wholesale business is concerned. And even our own retail business is still way down. And so, there’s plenty of place to go. That doesn’t go to shift, it just means we haven’t filled the whole demand yet. I think that would be the opposite.

Sam Poser — Williams Trading — Analyst

And then, two other questions. You said — can you identify sort of the increase in your marketing spend and sort of what kind of return on investment you saw with that? And then lastly, we mentioned about having village. You just said it of diligence in the marketplace. Can you give us some more color as to what you mean by that?

John Vandemore — Chief Financial Officer

On the marketing spend, I mean, I would just — I’m not going to give you anything at a detailed level, other than to say, I think the sales trajectory both in the quarter and what we’ve implied for the balance of the year clearly reflects the power of that marketing. Many markets of which are just restarting marketing coming out of the kind of post-pandemic lockdown period of the primary lockdown period. So you’re seeing good trajectory there. And I think that is certainly driven by the efficiency in our marketing. I’d also point if you look back to Q1, we are a little bit lighter on marketing. So, some of that is a little bit of a catch-up.

David Weinberg — Chief Operating Officer

I’m not entirely sure what your second question relates to, Sam, so maybe if you can clarify a bit would be helpful.

Sam Poser — Williams Trading — Analyst

Well, it was really about — I think, it was in the context of what you — the marketplace was a very clean of inventory holding these high ASP and there’s not a lot of promotions. And I think one of you mentioned that you would have diligence on the marketplace to make, I guess, to make sure it doesn’t go back to more promotional. And I just wondered what that meant and how you could go about doing that?

John Vandemore — Chief Financial Officer

I don’t think we control that. I think, people see how well it sells. And I think most retailers understand now that there is no requirement for that promotional cadence it sells well. They get the higher ASPs and a higher margin. So I think everybody is just doing just common sense type of business going forward. We’re not — we haven’t done to anybody [Indecipherable], they can promote. It’s just not worth it now.

David Weinberg — Chief Operating Officer

But we do monitor — we monitor ASPs, we monitor sell-through rates and inventory levels and all of our key wholesale partners. So we’re watching it carefully. We watch that to help them plan inventory levels and we watch it for us, just the other product performing and then we have also the benefit of our retail business where we can see on an overall market environment, how ASPs and sell-through rates are performing. And that we watch very carefully.

Sam Poser — Williams Trading — Analyst

And one last thing, do you have any, can you give us any color on any — to-date an update on July direct-to-consumer, same-store sales quarter-to-date.

John Vandemore — Chief Financial Officer

I would generally say, the trends have been consistent with what we’ve seen when you kind of adjust for holidays and timings and date and we can things like that. But the general pattern of what we’ve seen remains healthy and consistent.

Sam Poser — Williams Trading — Analyst

All right. Thank you very much and continued success.

John Vandemore — Chief Financial Officer

Thanks, Sam.

Operator

[Operator Closing Remarks]