In re Skechers United States, Inc.

444 F.Supp.3d 498

IN RE SKECHERS USA, INC. SECURITIES LITIGATION

This Document Relates to: All Actions.

18 Civ. 8039 (NRB)

United States District Court, S.D. New York.

Signed March 12, 2020

MEMORANDUM AND ORDER

NAOMI REICE BUCHWALD, UNITED STATES DISTRICT JUDGE

Plaintiffs Local #817 IBT Pension Fund, Local 272 Labor-Management Pension Fund, and Chester County Employees Retirement Fund ("Pension Fund Plaintiffs") bring this federal securities fraud class action on behalf of all individuals and entities that purchased the common stock of Skechers USA, Inc. ("Skechers" or the "Company") between October 20, 2017 and July 19, 2018, inclusive (the "Class Period"). Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder against Skechers, its chief executive officer (the "CEO") Robert Greenberg, its chief operating officer (the "COO") David Weinberg, and its chief financial officer (the "CFO") John Vandemore (collectively, the "Individual Defendants"). Before the Court is defendants' motion to dismiss the consolidated amended class action complaint ("CAC") for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). For the following reasons, defendants' motion is granted.

I. Background

A. Skechers

Skechers is a global footwear designer and marketer that uses its distribution networks, joint ventures, and wholly-owned subsidiaries to sell Skechers-branded shoes in over 170 countries. CAC (ECF No. 32) ¶¶ 2, 34. The Company operates through three reportable segments: (1) domestic wholesale, (2) international wholesale, and (3) retail sales. Id. at ¶ 38. In 2017, the international wholesale segment was the Company's biggest distribution channel, generating 41.5% of its total sales. Id. at ¶ 44.

Skechers expanded in recent years. Id. at ¶ 3. Between 2012 and 2017, its total annual net sales grew by 166%, and its international wholesale segment grew by 300%. Id. at ¶¶ 41, 43. In particular, the Company's growth in China had been pronounced. Id. at ¶ 45. Skechers operates in China through a joint venture named Skechers China Limited, which was formed in October 2007. Id. at ¶ 45. The growth in the Company's sales was also attributable to the expansion of its mono-branded retail store and direct-to-consumer e-commerce businesses. Id. at ¶ 51. Between 2012 and 2017, Skechers' retail sales, including both its retail store and e-commerce operations, grew by 148%. Id.

Contemporaneously with such dramatic growth in sales, Skechers faced substantial increase in its Selling, General and Administrative ("SG&A") expenses.¹ Id. at ¶ 53. During the same period—between 2012 and 2017—its SG&A expenses grew by 135%. Id. at ¶ 64. One of the factors that fueled the Company's SG&A expenses was Skechers' operations in China. Id. at ¶ 58. Because Skechers did not have its own distribution center in China, it had to rely on third-party operational solutions for serving its stores and shipping its products to online customers. Id. at ¶ 59.² Under this operational structure, Skechers incurred additional costs on a per unit basis. Id. Another factor that contributed to the SG&A expense increase was Skechers' expansion of its retail store operations in China. Id. at ¶ 60. As a general matter, opening a new store is planned at least six to nine months prior to the store's actual opening because lead time is necessary to secure a physical location, staff and inventory, among other things. Id.

B. Individual Defendants

Defendant Greenberg has served as Skechers' CEO and Chairman of the Board since the founding of the Company in 1992. CAC ¶ 24. Defendant Weinberg has served as the Company's COO, Executive Vice President, and a member of the Company's Board. Id. at ¶ 25. Until about November 15, 2017, Weinberg also served as the Company's CFO. Id. Defendant Vandemore has served as the Company's CFO since November 15, 2017. Id. at ¶ 26.

C. Alleged Misstatements

1. Earnings Call for 2017 Q3

Plaintiffs allege that Weinberg made three materially false and misleading statements during Skechers' October 19, 2017 Earnings Call for the third quarter of 2017.

First, in response to a Citigroup analyst's question of whether there had been any changes to Weinberg's previous expectation that SG&A growth should start to slow in the first quarter of 2018, Weinberg stated, "All I said was it will certainly continue into the first quarter." Id. at ¶ 112.³

Second, in response to a Morgan Stanley director's question about the Company's projections of SG&A and G&A expenses⁴ for 2018 in dollar terms, Weinberg stated, "I would tell you the anticipation here is that the rate of growth, certainly in the G&A piece, will come down from this year as we end the year. There are no new pieces to pick up." Id. at ¶ 114.

Lastly, in response to a Wedbush Securities analyst's question about the likelihood of Skechers leveraging⁵ its G&A expenses in 2018, Weinberg stated, "I'm not a person that would tend to say never, but I think your last characterization of – for the most part, that most of the scenarios are positive leverage, I think that's correct." Id. at ¶ 116.

2. Earnings Call for 2017 Q4 and Fiscal Year 2017

Plaintiffs allege that two of the Individual Defendants' statements during the Skechers Earnings Call for 2017 Q4 and fiscal year 2017, which was held on February 8, 2018, were materially false and misleading.

First, in response to a Citigroup analyst's question about advertising expenses as a percentage of sales for the fiscal year 2017 and going forward, defendant Weinberg stated that "we anticipate that the rate of growth will continue to slow as it has in the past, and we'll be able to leverage them." Id. at ¶ 125.

Second, in response to a Cowen and Company analyst's question about defendant Vendemore's expectations on the gross margin and SG&A expenses in 2018 Q1, Vendemore stated, "And then from an SG&A perspective, we think it will begin to show the leverage that we've experienced in Q4." Id. at ¶ 127.

3. Earnings Call for 2018 Q1

Plaintiffs allege that two of defendant Weinberg's statements during the Skechers Earnings Call for 2018 Q1, which was held on April 19, 2018, were materially false and misleading.

First, in response to a B. Riley FBR analyst's question of whether leverage on the SG&A expenses would start again in 2018 Q3, Weinberg stated, "So we do believe that we will catch up, that the top line will be such and that we will be able to again start to leverage again in Q3. It should be a very positive time for us." Id. at ¶ 139.

Second, in response to a Susquehanna Financial Group analyst's question about what led to a divergence between the guidance on SG&A expenses that Skechers management provided at the time it announced the Company's results for 2017 Q4 and the actual G&A expense results for 2018 Q1, Weinberg stated, "Well, it was a later event. As [Vendemore] said, it has to do with the distribution cost. And, by far, March was a much bigger month and a much bigger by average, which is why we were higher than our original guidance as far as business was concerned." Id. at ¶ 137.

4. SEC Filings

Plaintiffs allege that the following statements in Skechers' SEC filings during the Class Period were materially false and misleading:

• During the remainder of 2017, we intend to focus on: ... (ii) continuing to manage our inventory and expenses to be in line with expected sales levels. (Skechers 10-Q for 2017 3Q, dated November 3, 2017)

• During 2017, we continued to focus on managing our balance sheet and bringing our marketing expenses and general and administrative expenses in line with expected sales. (Skechers 10-K for the fiscal year 2017, dated March 1, 2018)

• During the remainder of 2018, we intend to focus on: ... (ii) continuing to manage our inventory and expenses to be in line with expected sales levels. (Skechers 10-Q for 2018 Q1, dated May 4, 2018)

Id. at ¶¶ 119, 130, 142.

D. Alleged Omission

Plaintiffs allege that defendants were required to disclose Skechers' future expenses in order to prevent the statements described above from being misleading. Pls.' Opp'n (ECF No. 49) at 12-13. Plaintiffs further allege that defendants violated the disclosure obligation imposed by Item 303 of SEC Regulation S-K ("Item 303"), codified at 17 C.F.R. § 229.303, which "imposes disclosure requirements on companies filing SEC-mandated reports," including Form 10-Q and 10-K reports.

Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015). Those requirements include an obligation to:

Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.

17 C.F.R. 229.303(a)(3)(ii). According to plaintiffs, Skechers violated Item 303 by failing to disclose the SG&A expense growth and the trajectory of it that was known to them at the time. CAC ¶¶ 150-55.

E. Alleged Corrective Disclosures

Plaintiffs allege that there were two separate disclosures by defendants that revealed the falsity of challenged statements.

1. Alleged First Corrective Disclosure

Following the close of market on April 19, 2018, Skechers announced its financial results for 2018 Q1. Id. at ¶ 87. Although Skechers reported record-high sales of $1.25 billion, it failed to achieve leverage: compared to 2017 Q1, the SG&A expenses grew 23.4% whereas the sales grew 16.5%. Id. at ¶¶ 87-88. According to plaintiffs, the discrepancy between the financial results for 2018 Q1 and the challenged statements by Skechers management on the prospect of achieving leverage constituted a corrective...