News

Skechers U.s.a. (NYSE: SKX)
Q1 2024 Earnings Call
Apr 25, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Skechers' first quarter 2024earnings conference call At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 -- General Manager

Good afternoon, everyone. My name is Karen Lozano. I'm the general manager of Store 2 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, wars, acts of wars and other conflicts around the world and supply chain delays and disruptions in general and specifically as they apply to the retail industry and the company. There can be no assurance that the actual future results, performance, or achievements expressed or implied by any of our forward-looking statements will occur.

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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 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 Financial Officer

Good afternoon, and thank you for joining us today for our first quarter 2024 conference call, which marks our 100th 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 an 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. These newer offerings include our partnership with Snoop Dogg 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 pair looks and feels exceptional. This includes our machine washable footwear for kids, durable outdoor styles and sport 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. Top professional athletes like Harry Kane, Oleksandr Zinchenko, Julius Randle, Terence Mann, 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 and each of these product initiatives are supported by impact for marketing initiatives.

This year's commercial for the Super Bowl with Mr. T and Tony Romo to our first basketball campaigns with Julius and Terence. In the quarter, we launched new Spots for kids, BOBS, Max Cushioning and Work all with Skechers Hands Free Slip-ins. 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 of 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, five in Colombia, and two 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, nine in Indonesia, and three 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 three 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 in 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 Vandemore -- Chief Financial Officer

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 toward 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 where 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% as the inventory congestion impacting certain partners, particularly in Europe abated.

We remain 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 two-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 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% 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. 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 a 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 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 -- Chief Financial Officer

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 gross 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 tenets 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 Vandemore -- Chief Financial Officer

Actually, before turning to the operator, I want to take a moment to commemorate this, our 100thearnings callas 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 100thearnings 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.

Questions & Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] And our first question comes from the line of Jay Sole with UBS. Please proceed with your question.

Jay Sole -- UBS -- Analyst

Great. Thank you so much. My question is just there's so many positives in Q1, really strong guidance raised for the full year. If you could boil down really what was above your expectations and what really drove the strong results in Q1 to one or two things, what would you say?

David Weinberg -- Chief Financial Officer

Product, don't we always?

John Vandemore -- Chief Financial Officer

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'd 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 Sole -- UBS -- Analyst

OK. 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 Vandemore -- Chief Financial Officer

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, the 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.

Jay Sole -- UBS -- Analyst

OK. Thank you so much.

John Vandemore -- Chief Financial Officer

Thanks, Jay.

Operator

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

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

Good afternoon. Thank you very much for taking my question. And congrats on the beat, the raise, and David for your 100th call and to many more calls together. John, I wanted to ask, last quarter, I think you kind of called out that wholesale should grow high-single-digits for the year.

Should we assume that grows low-double digits now? And, if that's the case, can you maybe parse that how do we think about domestic versus international wholesale for the year?

John Vandemore -- Chief Financial Officer

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 to 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 wholesale. We 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 will 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 the things will continue to grow, which is a great position for the brand to be in.

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

Fantastic. Good to hear. John, your 10-K calls out that you are 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 Vandemore -- Chief Financial Officer

Well, taking your last bit of the question first, nothing has diminished our enthusiasm for our opportunity to get first into the double-digits, those double-digits that we have spoken about. Obviously, a 13% operating margin this quarter was exceptional. We are 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 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 waypoint, 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 these irregular items as adjustments.

We'd rather just embed them into the guidance and they're fully encapsulated in what we've given you.

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

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 three MLB players. You've entered basketball.

You've entered global football. Should we assume that you're going to enter the baseball category? And I don't know if you can comment anything about indeed wearing Skechers shoes as of late. That would be great. Thank you very much.

David Weinberg -- Chief Financial Officer

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 additional category. We think it's great that Joel is wearing his shoes. He's trying them 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 he works through this, but that's coming. He is obviously more involved right now in the playoffs.

And 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 Randle, who we're sorry he is missing because it would have been great in the playoffs. He was playing great.

Terence is playing great in his shoes. There's other people we're talking to. Our football business continues to grow. We've actually signed a cricket player as we move forward in sponsoring the Mumbai Indians as we go forward as a team.

So, we're moving into a lot of sports, 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 comfortable they are even though they are 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 fitting together and feels very, very good right now.

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

That's great to hear. Thank you so much.

Operator

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

Jim Duffy -- Stifel Financial Corp. -- Analyst

Thank you. Great job to the Skechers team. Very clear evidence of share gain in an otherwise difficult market. And, David, that 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 want to ask a question about distribution center capacity there. It only began to ramp the prior China DC in 2021. I'm guessing growth in China since then it has been below what you might have forecast. I'm curious where this additional China DC takes your capacity and how you've thought about that.

David Weinberg -- Chief Financial Officer

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 use 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 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.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Great. Thanks. 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 the capacity?

John Vandemore -- Chief Financial Officer

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 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 learn 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 it actually allowed us to absorb more of that third-party serviced 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. If you recall, 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.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Very good. Then just a quick modeling detail question. You spoke to elevated demand creation in the Q2. Should that be a giveback in this back half of the year? Is that simply timing of demand creation relative to the prior year?

John Vandemore -- Chief Financial Officer

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 of it is incremental investment to make sure within the consumer's perception of that technology, it's solidly understood that it's a Skechers comfort technology and not one that can be easily replicated elsewhere.

Jim Duffy -- Stifel Financial Corp. -- Analyst

Very good. Thank you, John. Thank you, David.

John Vandemore -- Chief Financial Officer

Thanks, Jim.

Operator

Thank you. Our next question comes from the line of John Kernan with TD Cowen. Please proceed with your question.

Krista Zuber -- TD Cowen -- Analyst

Good afternoon. This is Krista Zuber on for John and congrats David. Just two questions for us. Thanks.

First on, really just ASPs and kind of the expectation for the balance of this year. You know, 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. Thank you.

John Vandemore -- Chief Financial Officer

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 latent 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 Zuber -- TD Cowen -- Analyst

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

John Vandemore -- Chief Financial Officer

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.

Krista Zuber -- TD Cowen -- Analyst

Thank you. Best of luck.

Operator

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

Rick Patel -- Raymond James -- Analyst

Thank you. Good afternoon and 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 are you seeing -- 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.

David Weinberg -- Chief Financial Officer

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 products sooner to fulfill what it sold out. As we said all of last year, we always saw 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 on the second quarter in domestic wholesale. We'll see it always boils down in the second quarter, particularly 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.

John Vandemore -- Chief Financial Officer

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, you go back to the original piece is all the good things happen when the consumer likes the product and comes in and shops and moves 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 manipulation of and we're seeing all positive pieces of that around.

Rick Patel -- Raymond James -- Analyst

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?

David Weinberg -- Chief Financial Officer

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 of 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.

Rick Patel -- Raymond James -- Analyst

Very helpful. Thanks very much.

David Weinberg -- Chief Financial Officer

Thanks, Rick.

Operator

Thank you. Our next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question.

Adrienne Yih -- Barclays -- Analyst

Great. Thank you very much. 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 and 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? Thank you so much.

John Vandemore -- Chief Financial Officer

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, etc. But at this juncture, we don't see any of that having a material impact on our either 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 100 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's really a 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 Free 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 always try 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 the little bit more of the quarter materialize before we make any decided calls on that.

David Weinberg -- Chief Financial Officer

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 feel 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're investing upfront and we do anticipate that it comes back at a later time. It may be third quarter, fourth quarter 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 Yih -- Barclays -- Analyst

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

Operator

Thank you. Our next question comes from the line of Tom Nikic with Wedbush Securities. Please proceed with your question.

Tom Nikic -- Wedbush Securities -- Analyst

Hey, guys. Thanks for taking my question. And, David, congratulations on hitting 100 earnings calls. Hopefully, we hear you on a on a 100 more.

So, hopefully.

David Weinberg -- Chief Financial Officer

I'll let my doctor really say that.

Tom Nikic -- Wedbush Securities -- Analyst

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

John Vandemore -- Chief Financial Officer

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 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 and compare there's not as much of the story as it would be in a moment, share 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, year and a half, we've continued to see really good growth. And, so we remain optimistic, albeit cautiously, about the future.

Tom Nikic -- Wedbush Securities -- Analyst

Understood. And, if I could just ask a little bit of modeling minutiae. 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 next store openings for the year?

John Vandemore -- Chief Financial Officer

Yes. 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.

Tom Nikic -- Wedbush Securities -- Analyst

Understood. All right. Thanks very much and best of luck for the rest of the year.

John Vandemore -- Chief Financial Officer

Thanks, Tom.

Operator

Thank you. Our next question comes from the line of Jesalyn Wong with Evercore. Please proceed with your question.

Jesalyn Wong -- Evercore ISI -- Analyst

Hi, David. Hi, John. Congrats on a good set of quarter. I'm 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 digit to up high single digits. How conservative are there in terms of our estimates? And the other part, it's on the operating margins. Last quarter, you called out operating margins for this year to be guidepost 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 Vandemore -- Chief Financial Officer

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 toward 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 -- Evercore ISI -- Analyst

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

John Vandemore -- Chief Financial Officer

Yes. EMEA 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 last two years, performed exceptionally well for us, strong demand for the products, strong demand for our comfort technologies.

We recognize it's a 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.

Jesalyn Wong -- Evercore ISI -- Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Chris Nardone with Bank of America. Please proceed with your question.

Chris Nardone -- Bank of America Merrill Lynch -- Analyst

Thanks guys. Good afternoon. I was wondering if you can provide an update on the trends you're seeing in your India business given some of the recent regulation uncertainty in the market. If 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 Vandemore -- Chief Financial Officer

Yes. We don't size markets but I would say in India, 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 in all honesty. That's an industrywide 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 in 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.

Chris Nardone -- Bank of America Merrill Lynch -- Analyst

Thanks, John. That's very helpful. And then just 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?

John Vandemore -- Chief Financial Officer

Are we talking baseball or cricket or --

Chris Nardone -- Bank of America Merrill Lynch -- Analyst

We're talking --

John Vandemore -- Chief Financial Officer

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, it's 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 Hyperburst 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.

David Weinberg -- Chief Financial Officer

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 product 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 it will 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

Thank you. Our next question comes from the line of Alex Straton with Morgan Stanley. Please proceed with your question.

Alex Straton -- Morgan Stanley -- Analyst

Great. Thanks so much and congrats again on 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?

John Vandemore -- Chief Financial Officer

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.

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. So, we saw that benefit DTC in a more pronounced way last year, and we're seeing kind of wholesale catch-up, particularly this quarter.

Alex Straton -- Morgan Stanley -- Analyst

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 right level or has it come down from here?

John Vandemore -- Chief Financial Officer

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 Q1 last year. So, that was 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 as it's about the mix of business, mix of product rather than influences from freight or other major input costs unless something changes.

Alex Straton -- Morgan Stanley -- Analyst

Thanks so much. Good luck, guys.

John Vandemore -- Chief Financial Officer

Thanks, Alex.

Operator

Thank you. And our next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Sam Poser -- Williams Trading -- Analyst

Hey, guys. Thank you very much. David, we've known each other a long time. 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? And that can be up 360 bps, but I mean, what can you give us a range of what we're looking for the year?

John Vandemore -- Chief Financial Officer

Again, I'd say, if 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 basis points to 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, is 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 game 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.

Sam Poser -- Williams Trading -- Analyst

Thank you. 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 that they get set up properly for back to school. Is that included in your number? I know, you know, June 20 June 30th versus July 1st switches everything. But I mean, as far as I'm concerned, it looks a little less likely this year that like, it seems more likely that one good's earlier than later for back-to-school?

John Vandemore -- Chief Financial Officer

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 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.

Sam Poser -- Williams Trading -- Analyst

Thanks. 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 it -- 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 sort of internal processes, the evolution of the internal processes changed and where is that going?

John Vandemore -- Chief Financial Officer

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 payoff at 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.

Sam Poser -- Williams Trading -- Analyst

Thanks very much. Continued success.

John Vandemore -- Chief Financial Officer

Thanks, Sam.

Operator

Thank you. And, we have reached the end of the question-and-answer session, and therefore, this also does conclude today's conference. [Operator signoff]

Duration: 0 minutes

Call participants:

Karen Lozano -- General Manager

David Weinberg -- Chief Financial Officer

John Vandemore -- Chief Financial Officer

Jay Sole -- UBS -- Analyst

Laurent Vasilescu -- Exane BNP Paribas -- Analyst

Jim Duffy -- Stifel Financial Corp. -- Analyst

Krista Zuber -- TD Cowen -- Analyst

Rick Patel -- Raymond James -- Analyst

Adrienne Yih -- Barclays -- Analyst

Tom Nikic -- Wedbush Securities -- Analyst

Jesalyn Wong -- Evercore ISI -- Analyst

Chris Nardone -- Bank of America Merrill Lynch -- Analyst

Alex Straton -- Morgan Stanley -- Analyst

Sam Poser -- Williams Trading -- Analyst

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