Q1 2024 Skechers USA Inc Earnings Call

Participants

David Weinberg; Executive VP, COO & Director; Skechers U.S.A., Inc.

John M. Vandemore; CFO; Skechers U.S.A., Inc.

Karen Lozano

Adrienne Eugenia Yih-Tennant; MD, Senior eCommerce & Brand Retailing Analyst; Barclays Bank PLC, Research Division

Alexandra Ann Straton; America Equity Analyst; Morgan Stanley, Research Division

Christopher Michael Nardone; Research Analyst; BofA Securities, Research Division

James Vincent Duffy; MD; Stifel, Nicolaus & Company, Incorporated, Research Division

Jay Daniel Sole; Executive Director and Equity Research Analyst of Softlines & Luxury; UBS Investment Bank, Research Division

Jesalyn Wong

Krista Kerr Zuber; VP; TD Cowen, Research Division

Laurent Andre Vasilescu; Research Analyst; BNP Paribas Exane, Research Division

Rakesh Babarbhai Patel; MD & Research Analyst; Raymond James & Associates, Inc., Research Division

Samuel Marc Poser; Senior Research Analyst; Williams Trading, LLC, Research Division

Tom Nikic; Research Analyst; Wedbush Securities Inc., Research Division

Presentation

Operator

Greetings, and welcome to Skechers First Quarter 2024 Earnings Conference Call. (Operator Instructions).
As a reminder, this conference is being recorded. I would now like to turn this conference over to Skechers. Thank you. You may begin.

Karen Lozano

Good afternoon, everyone. My name is Karen Lozano. I'm the General Manager of store (inaudible) in Gardena, California, and I've been on the Skechers team for an exciting 11 years. Thank you for joining our 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. Such forward-looking statements involve known and unknown risks, including, but not limited to, global, national and local, economic business and market conditions, including the impact of inflation, foreign currency fluctuations, challenging consumer retail markets in the United States awards, as award and other conferences around the world and supply chain delays and disruptions in general and specifically as you apply to the retail industry and the company.
There can be no assurance that the actual future results performance or achievements expressed or implied by any of our forward-looking statements will occur. Users of forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of all other significant risk factors that may affect the company's business, financial conditions, cash flows and results of operations.
With that, I would like to turn the call over to Skechers' Chief Operating Officer, David Weinberg; and Chief Financial Officer, John Vandemore. David?

David Weinberg

Good afternoon, and thank you for joining us today for our first quarter 2024 conference call, which marks our 100 as a public company. We started the year with a new quarterly sales record of $2.25 billion, an increase of 12.5% or $250 million compared to last year and adjusted diluted earnings per share record of $1.33.
Additionally, we achieved gross margins of 52.5% and an operating margin of 13.3%. These impressive results were driven by growth in both our reportable segments, direct-to-consumer and wholesale as well as across all regions of the world. The strong global demand for our brand was due to fresh innovations in our proven styles, a more robust offering of our many comfort technologies and the expansion of our performance and Lifestyle divisions into new categories and collections. The newer offerings include our partnership with Snoop Dog and the Skechers' football and basketball lines. As the comfort technology company, we focus first on delivering the ultimate and innovative comfort and style across our product lines. So that every payer looks and feels exceptional. This includes our machine washable footwear for kids, durable outdoor styles and sports styles and our street and court fashion collections. For our Performance division, great attention and detail is paid to elevating the fit and comfort while meeting the needs of elite athletes and enthusiasts of football, basketball, golf and pickleball as well as running and walking. Brooke Henderson, Matt Fitzpatrick, Catherine Parenteau and many others around the world are competing in Skechers and embracing our comfort that performs.
This enthusiasm from those at the top of their game is also resonating with consumers and the media, including Shape Magazine, which just named Skechers Viper Court, the best Pickleball shoe in their 2024 report and Sports Illustrated, Germany, which featured Harry Kane on the cover, wearing our SKX-01 football boots and Skechers performance apparel. The brand at each of these product initiatives are supported by impactful marketing initiatives, be it this year's commercial for the Super Bowl with Mr. T. and Tony Romo to our first basketball campaigns with Julius and Terance. In the quarter, we launched new spots for kids, BOBS, Max Cushioning and work, all with Skechers hands-free slippers. And just last week, we added a new lineup of commercials that includes Skechers UNO with actress Ashley Park and go walk Slip-ins and apparel with TV host Amanda Kloots.
Along with these on-air campaigns, we employ a 360-degree marketing approach, reaching consumers at multiple touch points. To achieve the notable growth that we have this quarter and to continue to meet the needs of consumers around the world, it takes the effort and dedication of the entire global Skechers team, our designers and supply chain partners who ensure our product is at the highest quality and our third-party retailers whom we have valuable relationships with. We thank each associate, employee and colleague for working together for our continued success.
Looking at our first quarter results. Sales increased 12.5% to $2.25 billion. International sales increased 15%, representing approximately 65% of our total sales in the first quarter, and domestic sales increased 7.8%. By region, EMEA increased 17%, APAC by 16% and the Americas by 7.8%. Additionally, both wholesale and direct-to-consumer grew nicely in the quarter. Our wholesale sales increased 9.8%, reflecting a return to growth in both international at 11% and domestic at 7.7%. Internationally, the increase was due in part to improved inventory position at certain partners, the growth of our distributors across geographies and particularly strong sales in China, Germany and the U.K. For domestic, the return to growth was a result of significant improvement in the flow of orders with both improved ASPs and volume. SKECHERS is in demand by many of our customers around the world as is evidenced by our strong sales.
Direct-to-consumer, which increased 17%, continues to be an important segment of our business and an indicator of positive consumer appetite for our brand. With growth in nearly every market for both our brick-and-mortar and e-commerce stores, we saw a 24% increase internationally and an 8% increase domestically. We ended the quarter with 5,203 Skechers branded stores worldwide, of which 1,671 are company-owned locations, including 565 in the United States. We opened 52 company-owned stores in the quarter, including 22 in China, 10 in the United States, 5 in Colombia and 2 in both India and Korea. We closed 29 stores in the quarter. Also in the period, 95 third-party stores opened, including 54 in China, 9 in Indonesia and 3 each in Australia, the Philippines and Turkey. This brings our third-party store count at quarter end to 3,532.
In the second quarter to date, we've opened 15 stores, including 3 company-owned stores in both China and the United States. We expect to open 155 to 170 company-owned stores worldwide over the remainder of 2024. Our record sales in the quarter, along with our efforts to manage inventory levels, resulted in a 9.4% reduction year-over-year and an 11% reduction from December 31, 2023. We believe our inventory levels are healthy and comprised largely of proven sellers fresh innovations and new product categories. To efficiently manage our inventory flow, we continue to invest in our logistic capabilities, including our new distribution center in Panama, which is expected to be operational in the second quarter as well as a new company-operated DC in Colombia, which we plan to move into later this year to efficiently grow our business worldwide and meet the needs of consumers seeking the ultimate and comfort technology. We continue to invest in our operations, product and marketing.
With our numerous accomplishments over the past quarter, we look forward to strategically growing our business in the coming year as well as in the years ahead. And now I'd like to turn the call over to John for more details on our financial results.

John M. Vandemore

Thank you, David, and good afternoon, everyone. Skechers delivered another strong quarter of record financial performance, exceeding both our top and bottom line expectations. Our diverse portfolio of high-quality products, combined with our commitment to delivering these products at a reasonable price clearly resonates with today's consumer. We achieved record sales of $2.25 billion, growing 12.5% and earnings per share of $1.33, growing 30% year-over-year.
On a constant currency basis, sales were $2.27 billion, and earnings per share were $1.37. These results were driven by a healthy recovery in our wholesale segment, particularly in the United States and Europe and continued momentum in our direct-to-consumer segment. Despite persistent economic headwinds, our performance this quarter underscores the strength of the Skechers brand worldwide and the consumer demand for our innovative products, together, driving us towards our goal of achieving $10 billion in sales by 2026.
Consumers understand that comfort is no longer a luxury, but a requirement that shouldn't come at a cost. Skechers [Excels] were comfort and value intersect as evidenced by the strength of our global direct-to-consumer business, which grew 17% year-over-year to $829.9 million. These results were driven by double-digit growth in our e-commerce and brick-and-mortar stores and increases of 24% internationally and 8% domestically. Our commitment to prioritizing innovation and supporting this with effective marketing powered these results. We remain excited about our omnichannel growth opportunities. and we'll continue to deliver on our strategy to expand our direct-to-consumer presence worldwide.
In wholesale, sales increased 9.8% year-over-year to $1.42 billion, with growth across all regions. As expected, we are seeing a recovery in domestic wholesale with sales increasing 7.7% versus the prior year. Notably, we experienced a significant improvement in the flow of orders including customers taking goods earlier within their shipping windows. International wholesale sales also returned to growth, increasing 11% and as the inventory congestion impacting certain partners, particularly in Europe, evaded. We were encouraged by our wholesale segment, both domestically and internationally, and continue to expect year-over-year growth as we move through the balance of the year.
Now turning to our regional sales. In the Americas, sales for the first quarter increased 7.8% year-over-year to $1.02 billion, reflective of the improvements in our domestic wholesale business, which accounted for nearly half of the growth and the continued strength of our direct-to-consumer segment. In particular, our domestic direct-to-consumer business grew at 8%. Although this represents a step down from the robust growth of the prior year, on a 2-year basis, this reflects a remarkable 35% increase in sales.
In EMEA, sales increased 17% year-over-year to $627.7 million driven by double-digit growth in both segments with broad strength in nearly every country. Our investments to enhance our distribution infrastructure and direct-to-consumer experience, coupled with our strong wholesale partnerships are producing outstanding results for our EMEA business. We also saw notable performance in our direct-to-consumer channels with impressive growth across genders and categories, ranging from athletic to lifestyle and seasonal products. In Asia Pacific, sales increased 16% year-over-year to $604.5 million, led by double-digit growth in most markets.
In China, sales grew 13% and driven by double-digit growth in both our direct-to-consumer and wholesale segments. In India, sales were up slightly as we resolved logistical challenges with our new distribution center. While the regulatory environment in the market is uncertain in the near term, we continue to be confident in the growth opportunities for our brand long term. Gross margin was 52.5%, up 360 basis points compared to the prior year. The improvement was driven by lower freight costs and a favorable product mix as consumers sought out our higher-margin technology-infused products. Operating expenses increased 150 basis points as a percentage of sales year-over-year to 39.2%. Selling expenses increased 50 basis points as a percentage of sales versus last year to 7% primarily due to increased marketing globally, including investments focused on brand building and driving consumer awareness for our Comfort technology products and newly launched categories.
General and administrative expenses increased 100 basis points as a percentage of sales to 32.3%, primarily due to higher labor and distribution costs to support growth in our direct-to-consumer segment and compensation-related costs, partially offset by cost efficiencies realized in our U.S. and Europe distribution centers. Earnings from operations were $298.8 million, a 34% increase compared to the prior year, and our operating margin for the quarter was 13.3% compared to 11.2% last year. Our effective tax rate for the first quarter was 19%, compared to 18.5% in the prior year. Earnings per share were $1.33 per diluted share, a 30% increase on 155.1 million weighted average diluted shares outstanding.
And now turning to our balance sheet. We ended the quarter with $1.25 billion in cash, cash equivalents and investments an increase of $322.2 million versus the prior year, primarily from improved working capital management and operating efficiency. Inventory was $1.36 billion, a decrease of 9.4% or $141.6 million compared to the prior year. Notably, we lowered inventory levels in the Americas by 18% and EMEA by 6.9% compared to the prior year. We believe our current inventory levels are healthy and well positioned to support demand in 2024. And Accounts receivable at quarter end were $1.16 billion, an increase of $105.7 million compared to the prior year, reflecting higher wholesale sales. Capital expenditures for the quarter were $57.1 million, of which $24.3 million related to investments in new store openings and direct-to-consumer technologies, $15.6 million related to the expansion of our distribution infrastructure, and $7.4 million related to the construction of our new corporate offices.
Our capital investments are focused on supporting our strategic priorities, which include growing our direct-to-consumer segment and expanding our brand presence globally. During the first quarter, we repurchased nearly 1 million shares of our Class A common stock at a cost of $60 million. We continue to deploy our capital consistent with our stated philosophy, while maintaining a durable balance sheet and ample liquidity. Now turning to guidance. For the full year 2024, we expect sales in the range of $8.725 billion to $8.875 billion, and net earnings per share in the range of $3.95 to $4.10, representing annual growth of 10% and 15%, respectively, at the midpoint.
For the second quarter, we expect sales in the range of $2.175 billion to $2.225 billion and net earnings per share in the range of $0.85 to $0.90. Earnings per share will be down slightly in the quarter due primarily to the timing of demand creation spending, which is typically highest during the second quarter as we amplify consumer awareness for our product portfolio and position our brand for successful summer and back-to-school periods. We believe this investment is critical to driving growth on a full year basis and one of the reasons why we are fully incorporating this quarter's outperformance into our full year guidance. Our effective tax rate for the year is expected to be between 19% and 20%, and minority interest is expected to grow in line with total sales.
Capital expenditures are anticipated to be between $325 million and $375 million as we continue to invest in our strategic priorities, including opening additional stores expanding our omnichannel capabilities and adding incremental distribution capacity in key markets, including constructing our second distribution center in China, a 2 million square foot facility which will likely elevate our capital expenditures this year and next. We remain confident in our objective of achieving $10 billion in sales by 2026 and are well positioned to drive long-term earnings growth. We thank you all for your time today and look forward to updating you on our second quarter financial results, which we expect to release on Thursday, July 25.
With that, I will now turn the call over to David for closing remarks.

David Weinberg

Thank you, John. We started the year on a high note by setting new quarterly sales and adjusted diluted earnings per share records with strong growth and operating margins. We delivered results above expectations and further expanded globally with a growing presence in the technical performance space and our innovative comfort footwear continuing to be a must-have for shoppers around the world. Skechers is delivering on its fundamental design tenants of style, comfort, innovation and quality at a reasonable price, which is resonating with shoppers from all walks of life. We believe comfort is a top priority and that casual and athletic are in high demand. While e-commerce continues to exhibit strength. People are also looking to engage and shop in our physical stores. We are committed to delivering high-performance comfort technical footwear while broadening our offering of Skechers hands-free Slip-ins developing new looks in our sport, street and casual divisions, enhancing the Skechers shopping experience at all touch points and operating in an increasingly efficient manner.
Our extensive product offering best-in-class partnerships with our distribution network and strong global demand give us confidence that we will have another record-breaking year as we continue to evolve and innovate and move toward our goal of $10 billion in annual sales by 2026. We again want to thank our entire supply chain and the Skechers team for delivering another successful quarter. I'd like to take a moment to thank all involved for their continued efforts assisting in delivering these results as we mark our 100th call.
Now I would like to turn the call over to the operator for questions.

John M. Vandemore

Actually, before turning to the operator, I want to take a moment to commemorate this our 100th earnings call as a public company. Skechers began trading on June 9, 1999. Many of the employees present that day continue to be deeply involved in the company, including our management team. However, only one person has been on each and every one of our earnings calls since going public. As we celebrate today's milestone of our 100th earnings call, we want to take a moment to acknowledge and honor the remarkable commitment of David Weinberg, our Chief Operating Officer. For over 30 years, he has been integral to Skechers success and his dedication has been unwavering. So on behalf of Skechers' Board of Directors, senior management team, and employees worldwide, I would like to sincerely thank Mr. David Weinberg.
I also want to extend heartfelt gratitude to the many other key contributors to the earnings process, including Jennifer Clay, our Vice President of Corporate Communications; as well as our dedicated finance, accounting, Investor Relations and legal departments, all of whom have contributed to our journey of growth and success as a public company. With that said, I will now turn the call over to the operator.

Question and Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Jay Sole with UBS.

Jay Daniel Sole

My question is just there's so many positives in Q1, really strong guidance raise for the full year. If you get boiled down, really what was above your expectations, and what really drove the strong results in Q1 to 1 or 2 things. What would you say? .

John M. Vandemore

Product. Don't we always.

David Weinberg

Yes, I think it's the success of the product. It's manifest in a stronger domestic wholesale rebound than we had originally anticipated for the quarter. continued strength on the domestic and international direct-to-consumer front. In a lot of ways, the quarter came out how we hoped it would when we started the year. We just didn't have all the data yet that would suggest we get fully there. And I think what you're seeing in the results, which are, we would argue some of the broadest, strongest results we've seen in a while. It's a reflection of the success of the product across the board.

Jay Daniel Sole

Okay. And maybe, John, if I can follow up on that. Just there's a lot of talk in the industry about a lot of brands getting more focused on the wholesale channel. And potentially what the impact of that is on Skechers. Can you just give us a sense of what you see in your order book as you look out through Q2 and to the extent you have visibility through the rest of the year and how you see the wholesale business developing, obviously, after a very strong quarter.

John M. Vandemore

Well, if you remember, as we began the year, we expressed optimism in what we were seeing in our early bookings. You see in the domestic wholesale rebound in particular and the returns in Europe that came through. I think it's only gotten stronger since then. So I would say, again, kind of echoing David's original comment on the back of the product that we're delivering innovation that we're bringing to the market as well as entry into some newer categories for us, we continue to see really healthy signs on the wholesale front. We expect that to then carry throughout the year. And so that, I think, again, speaks to the broad strength in the brand right now.

Operator

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

Laurent Andre Vasilescu

Congrats on the beat, the Rays and David, for your tenth call into many more calls together. John, I wanted to ask last quarter, I think you kind of -- you called out that wholesale should grow high single digits for the year. Should we assume that grows low double digits now if that's the case, can you maybe parse out how do we think about domestic versus international wholesale for the year?

John M. Vandemore

Right now, we're anticipating that the wholesale segment will grow kind of mid- to high single digits. Again, we're seeing really encouraging signs in our wholesale activity, our order book as well as just the sell-through that we're seeing. We're seeing also some really good success with partners who have come to fully embrace our Comfort Technology product suite. And so I would suggest you that we're likely to see something between mid- to high single digits. I do think the power for that is going to come from the international side of the business. But we're incredibly pleased with what we saw in domestic coal, but wholesale, you said at the beginning of the year, we are confident we would see some rebound in the first half of the year. We've seen it in the first quarter at about 8%. I expect that we'll see some in the second quarter as well. And then beyond the current booking window, we're starting to receive orders and they all continue to suggest that things will continue to grow, which is a great position for the brand to be in.

Laurent Andre Vasilescu

Fantastic. Good to hear. John, your 10-K calls out that you're going to embark on a multiyear ERP implementation for the audience. Can you maybe talk about the OpEx and CapEx investments embedded in your guide? For this year's ERP. I know it's the first year. And then longer term, once you complete this ERP, where do you think the opportunity is for the operating margin for the company?

John M. Vandemore

Well, taking your last bit of the question first. I mean, nothing has diminished our enthusiasm for opportunity to get first into the double digits to low double digits that we've spoken about. Obviously, a 13% operating margin. Operating margin this quarter was exceptional. We're incredibly pleased with that. still working for this year to get into the double digits.
I would say the implementation for the ERP as well as a lot of other things we're doing in the company speak to our intent to continue to grow this brand. to that $10 billion and beyond. It's one of many investments we are making regularly to improve the opportunity that extends from everything in the system, stores, the distribution functionality. So I would consider it all part of a suite of investments we're making across the globe to continue to drive this business because we believe, again, as we've said before, $10 billion is a way point not the ending point. We will continue to grow this brand beyond that. I would say, from a capital, from an OpEx perspective, it's all embedded in what we've given you and what we will give you going forward so that we don't have to talk about the regular items as adjustments. We'd rather just embed them into the guidance and they're fully encapsulated in what we've given you.

Laurent Andre Vasilescu

That's great. And then just as a final question. You talked about it's about product. In today's press release, you talked about signing up 3 MLB players. You've entered basketball, you entered Global Football, should we assume that you're going to enter the baseball category. And I don't know if you can comment on anything about [MLB] wearing Skechers shoes as of late. That would be great.

David Weinberg

Yes. We're going to continue. Obviously, it's a great starting point for us, and it's part of what we believe will take us out further in the next couple of years for both the brand and the traditional category. We think it's great that Joel is wearing the shoes. He's trying out. He's testing them out. We've had a great relationship with him. We have nothing to announce today, but we will, I believe, shortly as you work through this. But that's coming. He is obviously more involved right now in the playoffs. And I'm sure he's worrying about tonight's game more than he's worried about any announcements or anything like that. But right now, he seems very comfortable in the shoes. It's great that he's wearing them.
But we've got great results from Julius Crandall, who we're sorry, is missing because it would have been great in the playoffs he was playing great. Terance is playing greatness. There's other people we're talking to, our football business continues to grow. We have actually signed a cricket player as we move forward and sponsoring the Mumbai Indians as we go forward as a team. So -- we're moving into a modest course, a lot of categories, baseball, as you mentioned, we think it's all positive for the brand for people's understanding of the quality and intensity we develop shoes with and how comfort comfortable they are, even though they're made very, very well and compete at the highest level.
So we think that's all positive for the brand. But right now, that's just building for the future. The success today comes from what exists today, what we continue to bring forward. our styling. We continue to invest in the product more so than I believe anybody else in our industry, it shows it's part of the answers you'll get about wholesale and direct-to-consumer. It's all about product, brand identity and all those things are hitting together and feel very, very good right now.

Operator

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

James Vincent Duffy

Great job to the Skechers team, very clear evidence of share gain in the otherwise difficult market. And David, that's a phenomenal run 100 earnings calls, that's a lot of time dealing with the sell side. My sympathies are with you for that.
Let me just start on China. I wanted to ask a question about distribution center capacity there, really began to ramp the prior China DC in 2021. And I'm guessing growth in China since and it has been below what you might have forecast. I'm curious where this additional China DC takes your capacity and how you thought about that?

David Weinberg

Well, originally, the first distribution center was not to take care of all the volumes. So we knew we were underutilized when it was finished. We used a lot of third parties logistics people in China because it's spread out and done. We are now taking a bigger piece of that distribution facility, using our work for our own use. So we think when this new facility is done, we will have some excess capacity, but we'll use it throughout the big holidays because it was never meant to do a complete job on Singles' Day, which is an outsize. So we'll do bigger percentages and gain more efficiencies as we move through and grow into the second building. And I think it should set us up very, very well to be significantly more efficient with our online and direct-to-consumer businesses in China.

James Vincent Duffy

Great. And John, can you speak to the P&L impact from that investment? Should we expect a delevering contribution as you begin investments there ahead of scaling into the capacity.

John M. Vandemore

Well, that won't really hit until at the earliest 2025, potentially 2026, we're just starting, so the current spend is largely capital in nature. I would echo David's comment, though, what we've seen in China from the first distribution center is pretty similar to what we see across the globe in that once the capacity is installed we get more and more efficient as we utilize the capacity as we learned to utilize it better as we adapt to the market.
One of the benefits of a little bit of the slowdown post COVID in China was actually allowed us to absorb more of that third-party service demand into our own DC. So we actually saw a little bit of an acceleration in the efficiency gain in China than would otherwise have been the case because we had the ability to absorb more of that capacity internally. But I would say it's largely going to be a '25, '26 event before we see any of those start-up costs come into play. But even when we had that with the existing distribution center, it wasn't really extraordinary [due to COVID], we didn't talk about it a lot because it didn't really factor sizably into our results. And that's our current expectation, although as we get closer, we'll refine that and provide perspective as needed.

James Vincent Duffy

Very good. Then just a quick modeling detail question. You spoke to elevated demand creation in the second quarter, should that be a give back in this back half of the year. Is that simply timing of demand creation relative to the prior year?

John M. Vandemore

It's a little bit of both, to be honest. As we mentioned, I think, about the midpoint of last year, we feel it's incredibly important for our message of innovation, particularly around our comfort technologies to be out in the marketplace. And one of those we're leading with -- and as a result, supporting with a lot of marketing is the Skechers hands-free slip-in technology, of which we're seeing a lot of copycat work today. So we want to make sure we get out ahead of that and firmly brand that technology as Skechers. So I would argue, a little bit of it is timing as Q2 is always our most intense period a little bit, it is incremental investment to make sure within the consumers' perception of that technology, it's solidly understood that it's a Skechers comfort technology and not one that can be easily replicated elsewhere.

Operator

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

Krista Kerr Zuber

This is Krista Zuber on for John. And congrats, David. Just 2 questions for us. First on really just ASPs and kind of the expectation for the balance of this year, you're lapping some easier wholesale ASPs in Q2 and Q3, but a little bit more challenging on the DTC side of things. So just kind of how you're expecting that to play out for the balance of the year? And then I just have one follow-up on the slip-ins.

John M. Vandemore

Yes. I would say this year is going to be more about volume than price. We will see and expect some elevation in ASPs, although not nearly what we've seen over the last couple of years. That's largely going to stem from product mix. We continue to see consumers choosing within our portfolio the higher-value Comfort technology-laden products, and that's actually driving ASPs apart from anything we're doing from a pricing perspective. So I would expect that much more of this year's drive in sales is going to come from units. We will -- again, we'll see a little bit of ASP in there, but not a ton.

Krista Kerr Zuber

Okay. Great. And then just on the Slip-in technology. You've mentioned in the past that there's an opportunity here to think about category expansion with this technology. Just kind of any sort of framing that you can give around the sort of the margin profile from this innovation that kind of affords you from the comfort technology, be it Slip-ins Arch Fit, et cetera, and how that's kind of playing out within the total product line at this point?

John M. Vandemore

Yes. I think you're largely seeing that now. I mean it's been coincident with some reductions in landed costs stemming from freight rates coming back to normal, but also evidenced in the gross margin performance we've delivered over the last couple of years is that higher value, again, technology-laden product. I expect you'll continue to see a little bit of gravitation up on the gross margin coming from product and business mix as DTC grows faster than wholesale, you see some benefit from that. So I think that's largely kind of in both what you've seen recently and what you'll continue to see. We will begin to lap that. So there won't be as pronounced a lift coming just from product.
I would also say, I think the design team continues to certainly exceed everybody's expectations with how widely and deeply they've been able to install that technology and products, you would never even dream of benefiting from some of that technology. It's becoming quite prevalent. And then kind of the second iteration design manifestation of the technology is it just keeps getting better. And so I think it's one of the reasons why we believe this is a technology, really a feature that can be employed broadly across the spectrum of our product portfolio that will endure for a very long time.

Operator

Our next question comes from the line of Rick Patel with Raymond James.

Rakesh Babarbhai Patel

0 Congrats on the strong performance and the super impressive milestone, David. Can you unpack the performance of domestic wholesale being up 7.7% a little bit further, what do you see as being the primary driver of that rebound? Is it higher volume within the same accounts? Are you broadening accounts as you launch new products? And secondly, you alluded to orders coming in a little bit earlier than you expected. Does that mean that we should be modeling a slower growth rate in the second quarter? Just some color on the shape of growth for this year would be great as we think about wholesale growing mid- to high single digits for the year.

John M. Vandemore

I think the biggest factor, most immediately was we've seen more wholesale customers embrace the technology. It was this time last year as we really started to proliferate some of our comfort technologies in our own stores. Not everybody in the wholesale world was equipped or poised to be able to take advantage of that. And I think what you're really seeing is post a pretty decent holiday, they were open to buying in and then also supporting with marketing and price those technologies, and they've sold through really well.
So really, what I think we saw more than anything else was not new orders as much as an acceleration of existing orders, customers wanting product sooner to fulfill what is sold out. As we said all of last year, we always saw a really good price sustainability. We saw good margins. Inventories were lean. I think we're starting to finally see the benefit of that as some of the partners out there cleanse themselves of some of the inventory issues they were suffering from last year. And so I think that will continue. As we said at the beginning of the year, we knew the first half of the year would grow. I think you can probably expect at this point a similar level of growth in the second quarter in domestic wholesale.
We'll, we see it always boils down in the second quarter, in particular to the timing of shipments toward the end as accounts start to stock up for back-to-school. But right now, I'd say, again, we continue to see optimistic signals, and that would lead us to expect in the second quarter a pretty similar level of growth.

David Weinberg

I think it's important to remember that all of this happens primarily based on sell-through performance of the product that they're seeing now. So if you go back to the original piece is all the good things happen when the consumer likes the product that comes in and shops and move through it. So it starts from sell-throughs, sell-throughs against available inventory, sell-throughs against what you have purchased already where you're open to buy sits and a manipulation of and we're seeing all positive pieces of that around.

Rakesh Babarbhai Patel

Can you also help us with the puts and takes of gross margins going forward. Aside from the DTC outperformance, what's the right way to think about freight? Does that remain a benefit in the second quarter? And how do you expect to exit the year on freight just given the volatility we've seen in the freight rates?

John M. Vandemore

Yes. We don't expect a lot further from this. I think we'd always said that Q1 was the last quarter where you'd see a significant contribution from freight. If anything, right now, as you look forward, although freight rates are stable, generally. Certainly, there's some impact observed in kind of European routes because of the Red Sea situation. We don't think that will be a big impact. But I think it speaks to the fact that rates have kind of returned to normal now. We don't expect that to be a significant driver, either a positive or a negative influence on gross margin. I think what you're going to continue to see us benefit from is that channel mix as well as product mix.

Operator

Our next question comes from the line of Adrienne Yih with Barclays.

Adrienne Eugenia Yih-Tennant

Great. And let me add my congratulations. Fabulous start to the year. My first question is similar on the input cost. So freight sort of starts to expire, but I'm wondering if you have visibility on your non-freight input costs and through the year-end? And then my second question is on the demand creation spend, how should we think about dollar growth in 2Q relative to 3Q and 4Q. But more importantly, it sounds like it's a brand awareness in owning the technology. Have you baked in -- within that midpoint of 10% sales growth, have you baked in more sales growth from the incremental ad spend? Or is this more sort of owning that technology, brand awareness? And if there is any upside, it's on top of that?

John M. Vandemore

In terms of input costs, we don't see anything that's, quite frankly, worth commenting on with regards to our projections. So the honest answer is nothing really worth discussing. There's always movement here and there with input costs, FX, et cetera. But at this juncture, we don't see any of that having a material impact on our product level margins or overall gross margins. I would say on the marketing, it is the quarter in which we lean in. It typically is a couple of hundred basis points higher than average. I think that's kind of the quantum you can expect. In terms of sales, I would say it certainly factors into our projection, but it really is spend that benefits the entirety of the year. So it's not really just about aligning Q2 sales with the marketing. As we said on the call, one of the reasons we flow through the upside that we did to the full year guide is, the marketing is out there, it's working.
We continue to excel in this category of comfort technology in general and our hands pure slip-ins in particular. And so the spend in the quarter will benefit the entirety of the balance of the year. So there's not really a one-to-one correlation. That being said, we've always tried to construct our guidance such that there's a more likely than not chance we can meet or exceed that. Q2 does depend highly on the timing of shipments out of the back end as accounts take stock of where they need to be for back-to-school. So I would say, if anything, I'm probably slightly more optimistic about what we can do in the quarter, but we want to see a little bit more of the quarter materialize before we make any decided calls on that.

David Weinberg

Yes. I should point out from my perspective, it's -- the advertising spend is definitely anticipatory. We try to anticipate where we have potential significant growth in those territories that are growing to try to fuel them. We usually try to take it from those places that are flattening out or showing some deterioration for whatever reason. But we have no deteriorating marketplaces now that we need to go into. So when we anticipate around the world for our growth, and we have a lot of white space, we are investing upfront, and we do anticipate that it comes back at a later time. It may be third quarter, fourth quarter and beyond, but that's what drives our international business. So it is a reflection of what we see out there, the demand, the white space and what space we think we can continue to absorb. So it does reflect our thought process on going forward on what it will do for sales.

Adrienne Eugenia Yih-Tennant

It's great to see a company playing offense these days. So congrats.

Operator

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

Tom Nikic

And David, congratulations on hitting earnings call. Hopefully, we hear you on 100 more.

David Weinberg

I'll let my doctor (inaudible) said that.

Tom Nikic

I wanted to ask about China. So obviously, China has been pretty solid in the last of the quarter, and I think you had 4 straight quarters of double-digit growth. the compares get more difficult in China and some of the macro headlines coming out of China seem a bit mixed. How should we think about the growth opportunities in China for the rest of the year?

John M. Vandemore

Well, first, I'd start off by reiterating what you implied, which is the China story for us continues to be one of a pretty strong recovery, all things considered. We're incredibly pleased with what we saw in China this quarter. And it reflects a lot of work by our team there to succeed despite some of the challenges that persist. As we look at the balance of the year, we remain cautiously optimistic that we'll continue to see more of that recovery. Keep in mind, China is a growth market. We think it has a lot of opportunity long term for the brand. And so when you look at compares, it's not as much of the story as it would be in a more mature market because the brand has a lot of runway. Some of the product that's just getting introduced into China has a long runway.
So we remain cautiously optimistic. We do acknowledge the fact that it's a market in recovery and still has some work to do to kind of fully flush out some of the issues, but I would also remark that despite that, over the last year, 1.5 years, we've continued to see really good growth. And so we remain optimistic, albeit cautiously about the future.

Tom Nikic

Understood. If I can just ask a little bit of modeling minutia. John, I think you gave the store opening plans earlier. Can you give us how many stores you plan to close this year so we can get to sort of a net store openings for the year.

John M. Vandemore

We don't give that out specifically. I mean, my objective would be to not close any stores because we'd like them all to be continuing to contribute. I would say, when we put together that guidance, we do incorporate some expectations. So the number we give is attempting to get to a net number. Again, keep in mind, when we're talking about stores, it's much more important for us to open the right store and not just a store. So we'll always want to continue to exercise the discipline about making sure we're opening the right store for us, and that's something we'll continue to do.

Operator

Our next question comes from the line of Jesalyn Wong with Evercore.

Jesalyn Wong

David, John, congrats on a good set of quarters. Just wanting to dig a little bit more into Rick's question earlier. Domestic wholesale orders up 8% this quarter seems to be a positive surprise there. But yet, we're only guiding to mid-single digits to up high single digits. How conservative are there in terms of our estimates. And the other part is on the operating margins. Last quarter, you called out operating margin for this year to be -- course of 200 basis points away from long-term target. But given such a strong first quarter, how should we be thinking about operating margins for this year?

John M. Vandemore

Yes. On the wholesale front, again, the timing comes into play pretty significantly in the second quarter. So I think that's part of why you'll see that range in our incorporated guidance. Again, I would also acknowledge the first quarter came in stronger than we originally thought. So that was a good surprise. If that trend continues, we'll definitely be towards the higher end of that range. But again, we got to be cognizant of the fact that when you get into kind of the end of June, it could be just a timing difference between Q2 and Q3. So we like to put a range on it to keep things realistic given what we've seen. But we are seeing really good trends.
And again, beyond Q2, we're seeing good trends for the balance of the year as well. In terms of the operating margin, again, look, our goal has been to get back into the double digits. We've said that's our goal. I would say certainly this quarter gives us more optimism about our ability to achieve that for the year. It's still our objective. We still have a lot of levers to pull and actions to take to help drive that. And there really isn't anything out there that gives us pause for concern, but I don't want to declare victory until we're closer to the year, but we're certainly optimistic about that progression.

Jesalyn Wong

All right. Maybe just a last question on e-mail. EMEA seems to be holding up very well. Any additional color on exit trends there with the that we have seen even throughout the quarter? And how should we think about second quarter and second half into the year?

John M. Vandemore

Yes, I mean, it was great. Probably the most significant surprise for us was the continued strength on the direct-to-consumer side in Europe. So the side of our business that's closest to the consumer in that market which certainly has had its share of challenges over the course of the last 2 years, performed exceptionally well for us. Strong demand for the products, strong demand for our Comfort Technologies. We recognize it at the dynamic environment. We're watching the consumer just as carefully as everybody else.
But what we saw in the quarter was highly encouraging relative to our business in that market. And we're certainly expecting continued growth there. I think if we're going to see kind of an outsized growth element to the remainder of the year, it's probably going to come from the international DTC side of things, and we expect Europe to be a contributor to that.

Operator

Our next question comes from the line of Chris Nardone with Bank of America.

Christopher Michael Nardone

I was wondering if you could provide an update on the trends you're seeing in your India business, given some of the recent regulation uncertainty in the market. you can comment maybe how large your business is today and what your manufacturing capacity looks like relative to the demand you're seeing?

John M. Vandemore

Yes. We don't size markets, but I would say India is certainly one of our bigger international markets is kind of a stand-alone country, and more importantly, we think one of the bigger opportunities long term. The regulatory environment, it is what it is in the marketplace. We did see a short-term relaxation of some of the recently enacted regulatory limitations on importation. It's not long term, though. So it continues to be an issue we deal with.
We have objectives to continue to manufacture more and more product in India. The issue in the short term is simply the capacity of that market to bear it. And that's not a Skechers issue at all, honestly. That's an industry-wide issue. And that's something we continue to work on with our manufacturing partners. So it's something we'll continue to watch. I was pleased that India came up a little bit in the quarter because it's also had some influences from macro concerns and now they're involved with the world's largest election, which takes an awful long time to get done. And so we're cautiously optimistic about what we'll see over the balance of the year, but the regulatory scheme is ultimately going to need to be resolved for the benefit of Skechers and the broader community of footwear and apparel providers before we have, I think, full clarity and kind of the near-term runway. But again, long term, a great market. We continue to be enthusiastic about and we'll be visiting in a month.

Christopher Michael Nardone

That's very helpful. And then just a quick follow-up on your international business. More broadly, can you help frame what inning we're in, in terms of rolling out your Slip-in technology across markets?

David Weinberg

Are we talking Baseball or Cricket? Or -- I'm joking. Look, I think it's early, but I would argue it may even be early for the United States. We don't -- this is a fantastic technology that's resonating with consumers, has a lot of runway. We're incorporating it into more and more products, I think, in a unique way that will appeal to consumers. And so I would say, whichever measure you choose to use its early stages. I would also though mention, Chris, that it's not just about Skechers hands-free Slip-ins. This isn't in isolation. It's the portfolio of technologies we're bringing forward. It's our Max Cushioning, our Arch Fit, it's our concentration on wide widths for individuals who have that need our Hyper Burst technology.
I mean there's a lot to it. And I would say we're continuing to press those advantages and develop more for both the domestic as well as the international markets. Definitely more room to go on the international side just due to the timing of the rollouts. But it's hard to call a specific percentage complete at this juncture because we're continuing to surprise ourselves sometimes on how that technology can be deployed in different products and in different ways.

John M. Vandemore

And it's important to remember that it's only a feature. And more -- as importantly or more importantly is the whole brand identity, all the categories we compete in and all the products we bring forward that we continue to showcase and move into new categories with it's -- we're going into technical athletics that may or may not have a piece that you'll use some of the features and not others. But all of our comfort features go into a myriad of product and it's important to keep expanding the brand, expanding the categories, expanding our design capacities to be available for everyone and use all not a specific, but all of this technology is available to us and all the technologies we continue to invent for lack of a better word or bring to the marketplace to enhance our comfort in something that's stylish and that everybody wants to wear.

Operator

Our next question comes from the line of Alex Straton with Morgan Stanley.

Alexandra Ann Straton

Congrats again on a nice quarter. I wanted to zoom in on the first quarter gross margin. It looks like a lot of that expansion came from wholesale, up over 500 basis points. So can you just talk through why that part of the business is hitting highs and how to think about the right kind of gross margin level for it going forward?

David Weinberg

Yes. I think, Alex, we talked about the disparity between kind of this year and last year relative to the impact of a lot of our Comfort Technologies. It was just earlier, and so there weren't as many and that's why we disproportionately benefited in the wholesale side of things on the domestic and international DTC side of things, we're able to put that product into play earlier. And obviously, it did quite well. On the -- and the other way to think about it is the DTC, because it's under our total control is almost always the leading edge for us. And so we're able to impact that business much more quickly than our wholesale side of things, be it pricing, be it any other aspect of the business, seating. And so we saw that benefit ETC in a more pronounced way last year. And we're seeing kind of wholesale catch up, particularly this quarter.

Alexandra Ann Straton

Great. And then maybe just bigger picture on gross margin since they've stepped up so much from pre-COVID levels. Maybe where you think that kind of settles over time? Is this the new kind of rate level? Or has it come down from here?

John M. Vandemore

Well, we'll continue to look for opportunities to drive gross margin. I think on a year-over-year basis, clearly, there'll be some uplift because we had more of the freight in play in the first quarter last year. So that will just naturally accrete. But also as we grow our direct-to-consumer business at an outsized pace relative to our wholesale, that allows for continued accretion. And so I think over the near term, we would expect it to continue to go up, albeit not at the leaps and bounds we've seen over the last couple of years at a more modest pace that it's about the mix of business, mix of product rather than influences from freight or other major input costs, unless something changes.

Operator

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

Samuel Marc Poser

David was on each other a long time. The -- so just -- let me just follow up on the gross margin. I mean how should we think -- I mean, can you give us like a neighborhood of how you're thinking about gross margin for this year. I'm not going to be up 360 bps, but I mean what -- can you give us a range of what we're looking for, for the year?

John M. Vandemore

Again, I'd say we're going to continue to drive it north. This year -- this quarter was higher definitely than we expect over the balance of the year. I think we'd love to see it up 100, 150 basis points. But there's a lot of mix that can come into play there. So it's kind of the range of the neighborhood I'd start out with. But keep in mind, as we see the business unfold as we see the business balance out over the rest of the year, that may change. I mean one of the things I'm always cautious of, as you know, Sam, as we have tremendous success in our distributor business, which is a great operating margin business it could have an effect of dragging down gross margins a bit. But again, that's an incredibly lucrative operating margin business.
So we're not really intent on playing the gross margin gain per se overall. We really focus on what kind of constructive margins are we getting out of the product and out of the accounts and then let the business kind of blend into the increased margin. But if I had to give a number, it would be that 100 to 150 basis point range at this point.

Samuel Marc Poser

And then you talked about the timing of the year, and this is a peculiar year because many of your big wholesale accounts had their 53rd week last year. which means that one of the biggest weeks of back-to-school actually falls into their second quarter where it fell into the third quarter last year, which makes them a little more -- like we need goods earlier than later kind of situation to make sure that they get set up properly for back-to-school. Is that included in your number? I know June 30 versus July 1, switches everything. But I mean, as far as I'm concerned, it looks a little less likely this year that -- you see it's more likely the long goods earlier than later for back-to-school.

John M. Vandemore

Yes, that's just a really tough decision to call for someone. So what we've given is our current expectation based on the way the shipping windows are set up in the order flow. Again, I would comment we saw improvements this quarter from earlier deliveries, certainly feasible that we'd see that in the second quarter, but not certain. And until we start to see some action on actually adjusting shipping windows we're not going to incorporate that fully into the guidance. But Q2, Q3 is always a -- I know you all care about it a lot. We really don't care too much as long as the shipment goes out at one point or another, and we get it in the hands of our customers who can get it to our consumers and it can sell through because that's to David's point earlier, that's the ultimate arbiter of how much business we'll be able to do, and we continue to see really strong sell-throughs.

Samuel Marc Poser

And then one last thing. The gross margin that you've been running, especially on the wholesale side, but in general, to me, it looks like -- can you talk a little bit about how, over the years, I think you've improved in sort of measuring demand, your inventory is in good shape. And I mean, how much of that has played a part outside of mix and currency and various other things. How much is sort of this internal processes, the evolution of the internal processes changed? And where is that going?

John M. Vandemore

Yes, I think you're seeing the results of a lot of work on margin, not just at the product level, although the product team has been integral to that as well. It's about making sure your promotional strategy is properly applied that your discount structures are properly arranged. And for us, because we're operating our direct-to-consumer business alongside with many of the similar styles and products that we're maintaining price integrity in that channel. So it's not just one thing. It's a lot of concerted effort to make sure that we're getting the right merchandise margin for our product.
But it's also the innovation. The innovation is certainly something we've seen pay off at the consumer level. I mean the consumer is willing to contribute more to get the value of that comfort technology. So it's a combination of a lot of factors, you're right to point out. It's not just one thing, but it's a lot of effort internally to align every aspect of our business around driving increasingly better profitability.

Operator

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