Supply chain challenges, pricing and China lockdowns were on the minds of investors on Tuesday during Skechers’ quarterly conference call.

The Los Angeles-based footwear brand, which reported $1.87 billion in sales for the second quarter of 2022, discussed its strategy on how to tackle each of these headwinds as it looks to keep its momentum going in order to achieve its goal of reaching $10 billion in annual sales by 2026.

“To achieve our goal, we will continue to strategically open Skechers stores, expand our digital commerce reach, enhance our DTC omnichannel capabilities through investments in our global point-of-sale systems and grow and upgrade our logistics centers to more efficiently distribute our best footwear assortment,” Skechers COO David Weinberg said on the call.

Weinberg, along with Skechers CFO John Vandemore, discussed these issues and more on Tuesday. Here are three things to know from Skechers second quarter earnings call.

A slow rebound in China

One of Skechers pain points came from persistent COVID-related lockdowns in China in the second quarter. Throughout the quarter, Weinberg noted that the company saw a decline in both stores and online in the country but have since seen some “sequential improvements” now that the majority of its Chinese stores have reopened.

Pressed further by Jay Sole of UBS, Vandemore reiterated that the company saw a fairly high degree of correlation between its results and the openness of each of the markets in which it participates.

“For a while now, we’ve also mentioned that the real driver of growth in that economy, certainly subsequent to the first occurrences of COVID has been the digital side,” Vandemore said. “And that was clearly the strongest among our three main channels in China, and that continues to be the case. I would say we have tempered our expectations for the pace of recovery in China now that we have seen that there are more restrictions and limitations reemerging.”

Skechers’ CFO went on to add that as the company was hopeful for a “relatively V-shaped recovery,” but now it looks like the recovery is going to take a little bit longer in China.

Supply chain challenges persist, but relief is on the way

On the company’s earnings call on Tuesday, Weinberg noted that the company will continue to experience supply chain challenges. “It’s certainly unavoidable in the current environment,” he declared. But, Weinberg did note that he expects shipping delays and port backups to “normalize” in the next two quarters, at least when it comes to Skechers’ business.

“For us, the question internally is how quickly we can get our new distribution center portion opened in the United States that was supposed to open earlier but got caught up in its own supply chain issues,” he added.

On the call, Weinberg noted that the company’s distribution centers are undergoing a large overhaul. “The LEED certified Gold expansion of our 2.6 million square foot North American distribution center is almost complete, and we have begun testing the new operating system,” he said. “We have seen an increased flow of goods from the port, which has put a strain on our processing and that of our accounts during the quarter.”

Elsewhere around the world, Weinberg added that phase two of its China distribution center expansion is planned to begin this year with a goal of completion in 2024. Skechers has also begun development on a new 1.1 million square foot IGBC Platinum pre-certified distribution center in India. The first phase of the facility outside Mumbai will be 660,000 square feet and is planned to be fully operational by mid-2023. “We have also secured a location outside Vancouver, Canada for a new 427,000 square foot distribution center slated to open in early 2023, and we are currently moving into a new facility in Panama,” Weinberg added.

What’s more, its current distribution facility in Colombia was expanded this year, and there are plans to develop a new facility to be completed in 2024 that will grow its capacity from 85,000 square feet to approximately 500,000 square feet.

Promotional pricing is expected

Asked by Gaby Carbone from Deutsche Bank on how consumers are reacting to price increases and the future of promotions, Vandemore noted that response has been “stable.” “Prior to this point, certainly on the retail side of things, [consumer reaction] had been very constructive from our perspective,” the CFO said. “Obviously, we’re sensitive to any price increases. So, we try to be very thoughtful about when we introduce those and under what circumstances.”

Looking ahead however, Vandemore says the company does expect some level of promotional pricing to reemerge in the back half of the year. “We don’t consider it to be significant or drastic but some level of promotionality I think is to be expected given the kind of ideal circumstances we’ve been under for the previous five or six quarters,” he added.