Skechers USA Inc (SKX) 2002 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Skechers U.S.A. fourth quarter Fiscal 2002 conference call. All participants will be in a listen only mode until the question and answer session. This conference is being recorded and may not be reproduced in whole or in part without written permission from the company. I would now like to introduce your host for today's call,

of

.

Good afternoon and thanks for joining us today. Before we begin, I'd like to note that today's call may contain forward-looking statements and other

of various risk factors. Actual results could

from those projected in such statements. These risk factors are detailed in Skechers' filings with the SEC and with that, I would like to turn the call over to Michael Greenberg, President of Skechers U.S.A.

Thank you, Alison. And good morning and thank you for joining us to review the Skechers first quarter results. With me today is David Weinberg, our CFO. David will discuss our financial results in more detail later in the call.

We are very pleased with our first quarter performance, which exceeded both internal and external forecasts on a number of different levels. We also made some significant strides, both operationally and financially that better position our company for the future. Let me begin by reviewing some of the highlights. Sales increased by 7.7 percent to $244.9 million, which was ahead of our expectations of flat growth.

Our

was a function of the strong performance from our Skechers Kids, Men's Collection and Something Else From Skechers product categories, as well as better than expected results at our retail stores and continued robust growth in our international business. Ongoing cost containment initiatives improved SG&A as a percentage of sales by 210 basis points to 27.9 percent from 30 percent in last year's first quarter.

These savings came somewhat faster than expected and, combined with better than expected sales growth, helped fuel our strong bottom line performance. To that end, fully diluted earnings per share increased to almost 18 percent to 53 cents, which was above the first call earnings per share consensus of 43 cents and compared to 45 cents last year. Lastly, as most of you probably saw, we recently completed a $75 million convertible debt offering that was well received by the investment community.

This deal provides us with tremendous amounts of financial flexibility as we move ahead. During the third quarter of Fiscal 2001, we began to discuss two main operating goals for our company. First, building efficiencies into our business with a major cost cutting plan and, second, improving our inventory management. David will discuss our progress in expense and inventory management in more detail later.

However, I think that it is important to note that we made significant strides with regards to both during this past quarter. It positively impacted our bottom line. Last year we outlined cost cutting initiatives, which included reducing our head count by five percent, closing our catalog division, building efficiencies into our distribution center and realigning our sales organization, which will result in considerable savings for Fiscal 2002.

We are pleased to report that we have already begun to experience the benefits of these initiatives during the first quarter. This accomplishment is noteworthy, given the ongoing investment in the company's future growth opportunities, such as international and company-owned retail stores. With regards to the balance sheet, we improved our inventory levels to 111 million, representing a reduction of 46.5 million from year-end inventory of approximately 158 million.

Additionally, we ended the quarter in an excellent position from a cash flow standpoint, with cash flow from operations in excess of $37 million. As we move forward, we will continue to focus on streamlining operations, controlling cost, and further improving our balance sheet. Now let me take some time to discuss our wholesale and retail performance of the quarter. Let's begin with the US.

In general, our domestic wholesale business has performed essentially on plan or better than planned in the first quarter, with particularly strong results within Skechers Kids and Men's Collection. We are also very pleased with our new lines, including Something Else From Skechers, the Women's Active Line and Sketchers 4 Wheelers. Skechers Kids continues its strong performance at retail, reporting substantial gains at Shoe Carnival, JC Penney's, Kohl's and Famous Footwear.

Top performing styles for girls and boys include fashion sandals, slip-ons, active styles,

, Glimmers and joggers. Skechers Men's Collection gained momentum during the quarter by posting strong growth at Macy's West, Rack Room Shoes and

among others. Highlights within the Men's Collection included strong sales of fisherman sandals, one band slides, euro sport styles, updated dress shoes and casual loafers.

In addition, we're gaining

distribution at Nordstrom, Famous Footwear and Shoe Carnival within the Men's Collection area. Our women's sport and USA business performed as expected with both divisions reporting solid gain at the respective

. With the start of the spring season, sales have

across all accounts, which we expect to continue, given our introduction of the

, retro

loafs and retro joggers.

The one soft spot in our business during the quarter was in mens' sport. Quite frankly, we overestimated the demand last year and found ourself having to clear basic inventory during the first quarter, without the benefit of having fresh new product on the floors. The good news is we are now in a position to ship new styles and categories that should greatly improve sales in the second quarter and beyond.

Giving us confidence is the strong response to our new offerings within the retro, old school looks, trail and classic categories that have been received well by our largest accounts, such as Foot Locker, Foot Action,

. As we look ahead to the second quarter, we expect retailers to remain cautious and conservative with their buys. All the backlog at quarter end was slightly down from the prior year, which can point to five key reasons why we believe our backlog is not indicative of our near term performance.

First, we have experienced improving order trends with retailers since March. And our orders have increased in strength in April. In fact, as of April 23rd, orders are running ahead by approximately 10 percent, compared to the same period last year. Second, retailers have changed their buying patterns this year. They are placing orders closer to the season. This fact has caused our backlog orders to come in later this year, versus last year.

Third, we are not placing bulk orders with the

at the same high levels as in the past, a prudent strategy, in our opinion, as it reduces the likelihood of cancellations. Fourth, it is widely known that retailers are now

to place a greater emphasis on

and orders versus prior to September of last year, when for the most part orders were placed ahead of season and captured in our reported backlog figures.

This year we have seen a three percent shift favoring in season orders. To this end, our first quarter in season demand was stronger than expected and, due to this, we were unable to fulfill certain at once orders. We are now in a better position to meet in season demand, as we have reduced our production cycle time significantly.

And fifth, and giving me the most comfort, is the discussions I have had with the senior management of our major customers, who I have developed long term and strong personal and professional relationships with. Based on the

sales plans of our largest retailer accounts and my discussions, I know that we will exceed our sales levels.

Also increasing my confidence that our backlog will strengthen, is the strong selling that we have achieved at retail today and the great responses to our new products, styles and categories, especially at major trade shows

, a major European trade show that was held in March, and WSA, the World Shoe Association show held in February.

Beyond that, we believe we are very well positioned for back to school selling season and continue to be comfortable with the 10 percent total company sales games the second half of this year. This expectation is based on creative styles that we have developed within existing product lines, as well as new categories and styles we believer are underrepresented in the marketplace.

These categories include active, trail and comfort,

by Skechers, as well as extended offerings in Something Else and

. Realizing there has been a great deal of interest with regards to our newer lines, I'll take a few moments now to talk about each line in more detail. With Something Else From Skechers we plan to expand the styles that are carried within existing accounts and will also add to the door count.

Some examples include adding euro casuals, new boot categories, expanded wedges and dress styles to fill voids in the market. Also, we plan to add doors at the moderate department store level, such as Belk, Profit, Parisians,

,

and

.

has gotten off to a great start.

Growth at

is also expected to come from an increase in styles and in

. Some examples include a significantly expanded offering of sophisticated, sexy footwear categories, boots, dress shoes, and a totally new euro casual group of footwear. Also, we will add doors at Macy's West,

, and we will also increase the books that Michelle Kay is represented in at catalog retails such as Victoria's Secret and Spiegel catalog.

As I mentioned previously, Men's Collection is enjoying strong results. Major developments within the Men's Collection include Shoe Carnival, which plans to expand collection to all 185 doors, from six currently, within the euro sport category this fall. Famous Footwear plans to expand our euro sport and contemporary dress products to 330 doors this June. The door count will increase to 550 doors in September for Euro Sport, versus 75 doors presently.

Also, Nordstrom has Men's Collection planned at all 83 doors, from 51 doors for back to school and will feature multiple categories within the collection line. Skechers Formal

, which includes

, holds much promise, as we seek to turn this national pastime into a leisure activity for the entire family. Currently, our 4 Wheelers skates for men, women and children are being received very well by retailers.

And the Britney Spears signature 4 Wheelers will begin shipping as early as June. To support the launch of Skechers'

, we've begun to open concept shops at retailers nationwide. JC Penny's and Foot Action both plan to open 25 shops this year. Also,

plans to open three shops. We also have plans to open concept shops at Macy's Union and Harold Square locations.

In total, we expect our 4 Wheelers to have a significant presence in most of our major accounts and in every trade channel for back to school and

. Note that our current top five accounts represent 1573 doors of initial distribution. On the international front, we achieved strong results, both through our distributors and through our direct operations.

In the first quarter total, international sales rose by more than 65 percent and represented 13.4 percent of total sales, bringing us closer to our three to five year goal of having international sales represent 20 to 25 percent of total revenues. Our ongoing success overseas continues to be a function of the broad acceptance of our product lines as we enter and further penetrate an increasing number of European countries.

Contributing to our success, our

management team increased sales staff, and our celebrity-endorsed advertising campaigns with Britney Spears, Rick Fox and Robert Downey, Jr. Based on our success to date, we expect to meet or exceed our international financial targets. We believe our direct international business will continue to be profitable throughout 2002 and beyond.

We continue to be excited about the global opportunities for the brand, and point to the vast size of the international market for casual and athletic footwear that is estimated at more than $11 billion. We see this as a major opportunity for us. Now turning to company-owned retail stores. Results in Skechers retail stores were better than expected, both in terms of sales and operating profit.

We attribute this to the enhanced performance of our newly opened stores, our ability to leverage infrastructure costs and to our retail management team, including

, formerly with Famous Footwear, who many of you know joined Skechers as President of Skechers Retail. We ended the quarter with 82 retail stores worldwide, including 30 new

stores, 30 outlet stores and 20

stores. And for 2002, we are on target to open an additional 10 retail stores.

Retail continues to be an important component of our growth strategy. Our stores provide us with a great platform to test product, showcase our lines and build brand awareness while providing us with another source of sales and profitability. On marketing, according to sporting goods intelligence, Skechers is now recognized as one of the top three casual footwear companies in the world. And we firmly believe that our advertising is one of the main reasons why we have achieved this status.

It is our powerful product and celebrity campaigns that build awareness for the Skechers brands. We believe these campaigns give Skechers a cool image with early adopter trend-setting teens, which then translates to added sales by mainstream consumers, regardless of their age or background. In keeping with our wide product offering and consumer base, we have expanded our endorsements that will include celebrities with a lot of appeal.

In addition, we have also just completed launching campaigns for

, and we'll launch some major campaigns for Skechers Active, Skechers Men's and Women's Sport as well as Something Else and

. All in all, we are extremely pleased with the quarter and very encouraged about the prospects for the future. Now I'd like to turn the call over to David.

Thanks, Michael. First quarter sales increased 7.7 percent, reaching $244.9 million, compared to $227.5 million last year. The increase in sales reflects continued strength in our international, kids and retail businesses, as well as strong growth from Skechers Men's Collection, Something Else From Skechers and Women's Active product lines.

to dollars increased to $102.5 million, compared to $99.3 million in the prior year's first quarter. The gross profit margin strengthened considerably versus the fourth quarter of 2001, reaching 41.9 percent from

percent in the fourth quarter.

As stated in our fourth quarter conference call, we were confident going into first quarter that we would be able to move our

inventory at satisfactory margins, and we accomplished this objective. On a comparable quarter

basis, the gross margin was below last year's record first quarter growth margin of 43.7 percent, due to our effort to reduce end of the season merchandise and to a more promotional retail environment this year versus last year.

In addition, the gross margin was impacted by

clear our inventory at retail. Total operating expenses showed substantial improvement in

and on a percentage basis. From the fourth quarter we reduced total operating expenses by $10.4 million,

on a 14.4 percent sales increase, as compared to fourth quarter of last year.

On a percentage basis, total operating expenses have improved dramatically to the 27.9 percent of sales from 36.8 percent of sales in the fourth quarter, and versus 30 percent in the last

first quarter.

The reduction in operating expenses versus fourth quarter and improvement on a percentage basis quarter over quarter can be directly attributed to our cost containment strategies.

Specifically, we reduced costs in each of our targeted areas, including salaries, bonuses, overhead related to our catalog operations that we have since

, and streamlined operations in our distribution center.

Breaking down expenses by category. First selling expenses. selling expenses were $18.7 million and

to 7.6 percent of sales, compared to $20.8 million, or 9.2 percent of sales the prior year. The improvement in selling expenses as a percentage of total sales reflects our cost cutting initiative, that include change to

structure, as well as efforts to contain marketing expenses in the area of trade shows, while maintaining the same presence with the consumer.

On a percentage basis, advertising expense improved 5.6 percent of sales in the first quarter of 2002, as compared to 6.9 percent in the last year's first quarter, and versus 9.1 percent in the fourth quarter of 2001. General and administrative expenses were $49.6 million, versus $47.4 million in last year's first quarter. This includes an additional $1.5 million in non-cash expenses associated with increased appreciation and amortization expense in this year's first quarter.

Subtracting this non-cash expense, all the general and administrative expenses rose by $700,000 in cash over the last year. This year we have 21 additional stores, two international subsidiary offices, including overhead, as well as an increased distribution center, all coming on line subsequent to last year's first quarter.

As a percentage of G&A expenses improved to 23.3 percent, from 20.8 percent in the prior year, reflecting our cost cutting strategies. In total, and reiterating

, total operating expenses improved 210 basis points to 27.9 percent of sales, versus 30 percent in the first quarter of the prior year, even with additional depreciation, amortization and increased infrastructure expenses previously mentioned.

Our record sales growth

with leverage and expenses enables us to deliver increased profits of $34.3 million, compared to an operating profit of $31.3 million in last year's first quarter. The operating margin rose to 14 percent, compared to 13.8 percent in last year's first quarter. Net earnings reached $20.3 million, as compared to net earnings of $17.1 million in the prior year.

diluted earnings per share rose to 53 cents on 38,172,000 shares. This compared to fully diluted earnings per share of 45 cents on 38,127,000 the prior year. Separately, during the second quarter, the company completed a convertible debt offering. Gross proceeds from the offering were $75 million before the underwriters

.

We were extremely pleased to have completed this offering, as it allows us to reduce short term debt, increase working capital, while at the same time providing us with the financial flexibility to

our growth well into the future. On a pro forma basis, and assuming the deal was completed at the start of this quarter, fully diluted earnings on an

converted basis would have been 51 cents on 41.1 million

outstanding.

In summary, the

added to net earnings, the

for the interest charges associated with the convertible securities, assuming debt was

the entire quarter, and add the assumed converted number of shares to the diluted weighted average shares of 38,172,000. The adjusted number of shares is then divided into adjusted

to arrive at the converted diluted earnings per share figure of 51 cents.

at the end of the first quarter were approximately 145.1 million, from 120.3 million in a comparable period of the prior year. The increase in receivables was due to a higher shipment in the latter part of the quarters, and some customers taking a few extra days to process invoices for

.

Our

for 2002 were 49 days, up from 45 days in last year's first quarter. As we stated during our fourth quarter conference call last year, we expected domestic wholesale inventory to be flat with the prior year by the end of the second quarter. I am proud to say that we achieved this goal in the first quarter.

Inventory as of March 31st, 2002 was on plan and extremely

at 111.1 million, versus 104.1 million in last year's first quarter, representing a decline of

percent from the year end 2001 in inventory of 157.7 million. On a year over year basis, first quarter inventory were up by 6.7 percent and represents inventory for our growing company-owned retail stores and our international operations.

For comparison purposes, a quarter end, total domestic wholesale inventory was down in real dollars. The

compared to the first quarter of last year were due to planned increases to support our growing retail and international businesses. We will continue to aggressively manage

as we move forward, regardless of retail environment. At March 31st, 2002, cash on the balance sheets stood at

, which represents a $47.3 million increase from $15.6 million at year end.

Also, working capital rose substantially, reaching $163.1 million, versus $140 million in year end. At quarter end, long term debt stood at $31.2 million, as compared to $31.8 million at year end.

equity stood at $220.5 million, increasing $21.5 million from year end. We also

cash flow positively at quarter end, with record net cash flow from operation in excess of $37 million for the quarter. First quarter capital expenditures totaled $1.8 million.

The company continues to target a full year cap-ex at $12 million. Now taking a moment to reflect on our backlog. As you know, December 31st, 2001, our backlog was flat with the prior year, and yet we were able to achieve a 7.7 percent increase in sales, in part due to the strength of our retail and international businesses.

our domestic wholesale business, while still being relatively flat with the prior year, we were actually ahead on a gross volume basis.

However, in this year's first quarter, we reported higher mark down allowance than our historical norm. These mark down allowances were given to move our merchandise in a timely manner through our current retail channels. Going forward, mark down and allowances are expected to return to normal levels, which would contribute to our extremely clean inventory

both at retail and within our company.

We also expect our backlog to

based on the strength that we have seen from the brand at retail. We had a comfortable raise in fiscal

to earnings per share estimates by the amount we exceeded analyst estimates in the first quarter. Therefore, we are comfortable with fully diluted earnings per share of a

. We also remain comfortable with the remainder of the quarterly estimates on first call.

We would like to point out that the June/July back to school shipping period occurs over both our second and third quarter, and, as such, shifts the timing of when goods ship may cause sales to move between the two quarters. Therefore, we suggest that analysts view both quarters collectively, as a better indication as the strength of our business.

As Michael mentioned earlier, our confidence for the remainder of the year is based on a number of factors: increased sales plans received from a number of our largest accounts, sell-through rates that we have achieved on our inventory at retail, increases expected from our new product lines, categories and style, as well as strong growth expected from our international and retail expansion.

Also, we plan to aggressively manage inventory and expense level and expect increased cash flows throughout the year. And now, I would like to turn the call over to Michael for closing comments.

Thank you, David. Before I open up the call for questions, I would like to spend a moment discussing why we believe Skechers has been successful over the past several years and why we believe we will continue to grow into the future. As we approach our 10 year anniversary and exceed a billion dollars in worldwide revenues, I believe there have been two major factors that have contributed to our strong and consistent growth.

First is our brand. Over the past decade we have built a powerful brand that is respected by high profile retails and demanded by trend-setting consumers around the globe. The Skechers brand stands for quality, cutting edge product, and is backed by high profile marketing based on our philosophy, what is unseen and untold is unsold.

Secondly, our success is directly related to the degree of diversification in our operating model. Simply put, Skechers is not pigeonholed into any one category, distribution channel, or type of consumer. Over the years, we have truly evolved into a well-diversified global lifestyle company. We have developed our business in a way that has limited the amount of risk we have on a number of fronts through diversification in four key areas.

We are diversified in terms of our product and our categories. Today we offer a broad array of footwear that runs the gamut from sneakers to sandals, to boots, to a wide selection of casual and comfort footwear. Skechers is represented in both the brown and black shoe category, as well as the active categories. We currently operate 10 product lines, including Men's Sport, Men's U.S.A., Men's Collection, Women's Sport, Women's U.S.A., Skechers Active, Skechers Kids, Skechers 4 Wheelers for men, women and children, Something Else From Skechers, and

.

Our strategy is maintain flexibility between the categories that we offer, which leads to top line growth with mitigated risk. We also have a highly diversified distribution structure. Our channels of distribution range from high end department stores to specialty

, to better and moderate accounts through our own retail stores. Moreover, we are not overly exposed to any one particular chain or channel.

While many of you know that our top customers include Shoe Carnival, Famous Footwear, JC Penny's and Kohl's, it is important to note that no one customer represents 10 percent of our sales. Accounts such as

,

, Foot Action and Just For Feet, while extremely important to us, collectively account for less than eight percent of our overall business.

Whether our product lines are sold at high end department stores, chain stores, specialty footwear stores or independent retailers, they all sell equally well. We attribute this phenomenon to our powerful formula that includes one strong brand, stylish product offerings and

price points, all supported by what I consider to be an outstanding Skechers team.

We are also diversified with regards to the consumers that wear our shoes. From age to gender, to ethnicity, Skechers crosses all boundaries. Our product appeals to a very

of lifestyles of men, women and children. From soccer moms to workers at construction sites, to high fashion teens and tweens, to urban-inspired customers and high-powered executives, Skechers meets a broad array of needs.

Finally, we are diversified in terms of our global reach. Today we distribute Skechers product in over 100 countries around the world. While our international business has exceeded the $100 million mark, we believer we are just at the beginning of our plans for worldwide expansion. It is on the strength of our brand and the diversification of our operating model that we will continue to grow into the future.

Our momentum is robust, our growth prospects are good, and we remain committed to furthering our leadership position in the market and capitalizing on the many opportunities that still

. Now I would like to turn the call over to the operator to conduct a question and answer session.

Thank you. Ladies and gentlemen, we will now conduct question and answer session. If you have a question, please press star, followed by the one on your touchtone phone. You will hear a three tone prompt acknowledging your request. Your questions will be pulled in the order they are received. If you would like to be

from the pulling process, please press star, followed by the two.

Please ensure you lift the handset not using speakerphone before pressing keys. One moment please for the first question. The first question comes from

,

. Please go ahead.

Thanks and congratulations on the upside in the quarter. I guess, Michael, I have a question for you, if you could talk a little bit about some of the individual products, the top sellers that are really standing out in the quarter. And then, just go back a second, in the second question, to the backlog and what you said about retailers ordering really close to end of the season.

And if you could just elaborate a little bit on that and whether you think that might change or whether you think that's going to become the way of doing the business from now on.

Thank you. First off, I will answer the first question, styles that are really taking off, we're seeing positive results in retailers across the board.

And I'll touch on a newer category, which is Active. We have styles, Dorothy, like the Triple Play, the Scooters, and, of course, the

. These are all top selling styles.

For example, we have the Active category,

in

today, and they're reporting 16 to 18 percent sell-throughs, which I think is just fantastic. Having good sell-through was something else, as I mentioned, some of the superstars in that category are spirals, boots, Wedges, we have a style called the

, which is about

, which is performing extremely well in retail.

Of course, we're very excited about the Women's Sport, the Energy3, which is coming out. A good response to that product. Men's U.S.A., we have a subdivision in the Men's U.S.A. It's a

package, which we're getting very positive results. Basically, we're sold out of the

product, so we're chasing that business. There's a lot of opportunity there for us.

collection has been a superstar as well.

We have different products in that area that are selling well, the Checkmates, the Weekend,

are doing very well,

are doing well and most products in our girls' and boys' lines are performing exceptionally well at retail. So, we're very bullish on our product lines. As I mentioned, coming out of the WSA and the

show in Europe, the response to the new product has been overwhelming. People are really excited about the new styles coming in.

We have strong sell-throughs, or are experiencing strong sell-throughs at retail now. Basically, retailers are selling through a product. And I would say that they're absolutely in a chase mode with us now.

So you feel pretty confident in terms of mark downs going forward

in line, that should be much less of a problem over the next couple of quarters.

Well, I believe that the good retailers out there with our product, and I'll speak only to our product, are seeing an opportunity to begin to really

our product again and go after it with a lot of excitement. I think, of course, everybody realizes coming into this year, everybody was cautious. And I'm not saying that they shouldn't remain cautious as we remain cautious.

You know, we can't really totally see the future too far out, but the retailers are happy. Their

numbers are showing that they're moving goods through and they're getting that register to

, and that's what's important. So, to answer your second question, Dorothy, as far as retailers ordering closer to the season, I think that that is an absolutely a result of third quarter, fourth quarter, last year, the event that we went through.

And whether or not that will continue, it's hard to say. I believe that we took a very aggressive position in making sure that we could shorten our production cycle, the

cycle, significantly and which we did. As I...

But could you give us an example. How much were you able to reduce that

?

What I would say took us typically 120 days is down to 90 days today.

Okay.

Okay?

Great, thank you.

You're welcome.

The next question comes from

,

. Please go ahead.

Good afternoon and I'll add my congratulations as well. Very nice operational turnaround. I just wanted to get behind the dollar 69

guidance a little bit. You touched on a sales number, or a sales growth number for the second half. It looks like inventory levels are a lot cleaner than they were. Again, pretty easy comparisons. Could you maybe just walk through margin assumptions,

throw in earning estimates, but if you could just give some color, I would appreciate it.

Well, basically, we came into the

with what we thought was a healthy and conservative outlook. And we haven't seen enough at retail yet to become consistently bullish, even though our products are performing quite well. And what we've done is basically to remain conservative, especially for that June/July phenomenon of not knowing how retailers will buy and

,

even though we think there could be maybe no movement at all between the two quarters and will remain consistent.

If you keep the numbers where we have them at year end, and keep our margin assumptions in line for the first half, just to make sure we get it through on a conservative basis, through the back to school, and I feel very positive that that will pick up on the tail end.

Margins should increase in the second half, I would think, slightly from where they are today into more historical norms through last year. I don't think they go quite to the 43 and a half, 44 percent, at least not as of yet.

It's still a competitive marketplace and a price sensitive marketplace. And we feel that our operational efficiencies will continue, given a 10 percent increase in the second half. So we remain conservatively bullish, if such a thing is correct, on the balance of the year and feel that the numbers in place are certainly achievable.

Great. Michael, I think you had mentioned that, as of April 23rd, backlog was about 10 percent ahead of a year ago. Has the trend in the at once business tailed off as retailers turn more towards looking ahead? Or has the at once business kept pace while the backlog has accelerated as well?

David, I'm going to let David answer that question.

Hey Dave, basically what we said, not that that backlog had increased to 10 percent, but our incoming order rate is 10 percent ahead of last year. Basically, it's an important dynamic that people are ordering later in the cycle time. For the first time, however, we had a March incoming order month that was bigger than February.

And April

out of last April, giving that

, that everybody's plans are higher, the orders are just coming in later and we're seeing increased activities in February and March. So, while I don't think we've

to the point that we'd be 10 percent ahead, our backlogs are coming more on-line than they were last April.

And we anticipated them increasing at a faster rate from here through the back to school period.

Okay, I've got you. And on the last conference call, you mentioned our repositioning within the specialty retailers,

in particular, can you tell us how that's progressing and what's been done or what remains to be done?

Well, I think that it's an ongoing process, but we're very bullish with

and

as a whole. Actually, I found out yesterday that in the Men's U.S.A. area, that particular

category, which is the subdivision of U.S.A., they're actually requesting to move up third quarter orders, if they're available for at once. So, within the second quarter.

And I'm not saying that we can move all the product up, but just the fact that it's selling through well for them at retail and they're requesting that they move it up, that's very promising, David.

Congratulations again.

The next question comes from

.

, please go ahead.

Thanks. Well done quarter and opening remarks as well. I hope you can hear me okay. Some follow-ups to

, just looking at the second quarter, inventory, you know, kind of clean, pretty clean, actually very clean, and you're saying allowance is back to normal.

So, but you're also saying gross margin may be not back to the 43 percent level of last year. So, can you just walk through what else affects gross margin, you know, if we can't ratchet it back up to 43 percent in the second quarter?

Well, I didn't say we couldn't. I wouldn't anticipate what is in the marketplace. We always had the model of being moderately priced within our product category. And we're staying true to that with the new products that are coming out. So, we're pricing a little bit sharper, if we can, and also there's some shifts in the business that happen also, both in the distributors are growing at a nice pace and, you know, there is just within the businesses as to how those gross margins fit in.

Okay.

Also, there is some

just to be on the conservative end, that, as business picks up int he orient, that all of this positive we received last year as far as

rates are concerned, either have bottomed out, or will start to increase.

and I'll get into more detail on product mix,

I'm sure everybody realizes that our children's business is growing at a faster rate than

, and children's, by and large, even being more price sensitive than the base of our business, has slightly lower margins, just in and of itself.

Excellent. Can you give an SG&A dollar figure in terms of

share if you have in the past, has that changed it at all?

Well, it hasn't changed. I think what we're doing is we have to see exactly what's going on with the new store openings. We have ranges for new store opening and ranges for business. I think

$25 million in

at fourth quarter, we were talking it off the fourth quarter rate and what existed. So, if you go fourth quarter to fourth quarter, at that time, should there be a flat business, we think we'll be $25 million on the

ahead at SG&A.

Obviously,

is difficult to

. And I mentioned in my first comments, we only spent $700,000 more in

in the first quarter of this year than we did last year.

21 additional stores, two full service international offices, our headquarters overseas. We're going into Spain this year. So, if we don't save the whole $25 million, because we do anticipate volumes going up, we intend to significantly leverage it as we go through

on the

.

Okay. And looking at inventories going forward, is plus 7 percent roughly year over year where you want to be the rest of the year? Or does it come down even further?

That

. I've said in the past, we're reactionaries to how our business is going. And we, hopefully, we see our business and our customers ordering at retail.

So, assuming that the year remains relatively flat and we're only up 10 percent in second half. So I would assume that seven percent inventory growth, given that we stick to that 10 store opening this year, is probably a realistic one.

But we do stay tuned to the marketplace, and as things change in the marketplace, we do change our production commitments.

Okay, and one last question, and I apologize for not quite getting it.

I understand what backlog is, I understand what in season orders are, but when you talk about income for orders being up 10 percent, maybe you can translate again how that impacts backlog or sales or

for me?

Well, actually, that's a major kind of take-off, if you think of

in the

market. And that would be great. Obviously, our backlog is built on the orders we receive on a monthly basis or a daily basis, less what we would ship, less to what or may or may not be cancelled at the end of the season, which creates the backlog.

Now, the closer time you receive that order to the time you ship obviously impacts backlog, which is the bulk of orders remaining at any point in time that have not shipped.

So, what we're saying is dynamics that would lead to that would be receiving orders on a later basis later in time or closer to the shipping window.

And we give it as an off-growth of our

taking place, and after the first time in our history, we booked more in March in real dollars than we booked in February. So, you would think that dynamic, if February and March ended up booking the same year over year, we'd have a bigger backlog at the end of February, if we booked in February, and a smaller one if we booked it in March.

The same holds true if we're booking a big percentage of our business in April than we did last year, even to a common, or a flat season, we would have a lesser backlog in March, which would then be picked up in April, which is, I think,

question.

Understood, thank you.

The next question comes from

,

. Please go ahead.

Hi, good morning.

Good morning.

Can I have you repeat what advertising was as a percent of sales? I think you gave us three numbers this quarter, fourth quarter and first quarter last year, just repeat the figures?

I believe it was 5.6 percent this year and nine percent last year, first quarter, and

last year.

6.9 percent for the fourth quarter last year.

No, 6.9 percent

read it again

the whole

. I will tell you the selling portion has come down year over year

.

So, the follow-up question to getting these numbers cleared is, obviously, that was a big part of the cost savings you saw in the first quarter.

Just wondering where you're sort of pegging that number to be in the second quarter, if advertising is more important in the second quarter, or if you expect to see that

, or

reduction.

Well, on

basis, we historically advertise more in the second quarter than we do in the first quarter and more in the third quarter than we do in the second quarter. It's just

. But within those

, like I said, that we continue to advertise, I would expect you'd see some efficiencies, but you'd still see a lot of

at the

level.

John, our target is still eight percent for the year.

Okay. So, although that number was down below your annual

rate in first quarter, we should see advertise spending as a percent of sales increasing in the balance of the year.

Yeah, I think that's consistent with last year.

Okay. And then one other thing. I guess the Men's Sport was the weakest part of the business in the first quarter.

I was wondering if that is experiencing, if some of the increase in orders that you're seeing so far in April, or if that's a place you still need to tweak the product a little bit to get it running up along with the rest of the business.

Well, we're seeing orders, and we're seeing a positive response to the new product, but to say that that is impacting the

, I would say not. Overall, our Men's Sport was not, throughout last year, a huge part of our business. We bought into Men's Sport the year prior and, as you know, it's a very competitive market. And we'll continue to drive hard at it. We're very excited, again, with the new retro and old school looks that we're introducing.

We'll start shipping some of these new looks, John, in

the remainder of this year.

Okay, great. And, again, the

spending at 5.6 was this quarter and 6.9 was the fourth quarter and 9.1 was fourth quarter last year?

No, it's the opposite. 5.6 this quarter, 6.9 last year's first quarter, and 9.1 was the fourth quarter.

Okay, great. All right, great job on the quarter, guys. Thanks a lot.

The next question comes from

,

. Please go ahead.

Hi, thanks. Actually, this is

, for

. I was wondering if you could break out product sales in the quarter on a percentage basis between first the men's, women's categories, and then also between athletic and non-athletic styles.

And then also, I believe you mentioned on the call, that over the next three to five years you expect the European business to grow to between 20 and 25 percent of total revenues. I was wondering if you had any sort of idea what kind of target you have for the end of '02.

Well, I'll answer the first part of the question. I'll let David answer the second question. Our men's business is approximately 26 percent of our business in Q1, women's being 45 percent and kids being 26 percent. Overall, I would say that, in round numbers, our casual footwear represents approximately half of the footwear that we put into the market, and sport and Active being the other half.

And, as far as international is concerned, I think the correct statement was that our international

our European subsidiaries would be 25 to 30 percent of the business, because we

the distributor to continue to grow as well. The growth we see in Europe is starting up. And it had been extremely positive. And it certainly, even in the case of England, outstripped what we've done

.

So, we haven't made public any forecasts as to what exactly the European business will be this year, we're just getting our hands around it. Suffice to say that it will grow considerably, and it will be a major piece of our international business this year.

Okay, great. Thank you much. Nice quarter.

The next question comes from

,

. Please go ahead.

Hi, good morning. I just want to clarify something. On the backlog, maybe it would be helpful, what period does the backlog cover?

I mean, it basically sounds like there's no

in the backlog. That's correct?

No, I think

backlog, we don't define backlog by necessarily period. We don't book anything out more than six months from the time we take the order, as we find that too speculative, just as a matter of policy internally.

The backlog represents our entire book of un-shipped orders that were taken from customers.

To the extent it covers back to school, I think it's safe to say, this year it covered the early portion of back to school, whereas last year it covered a significantly longer period throughout the back to school. So, in other words, this year we'll probably be booked most heavily through the end of July,

early August, whereas this time last year we were booked through end of August, early September.

Okay.

And Carol, that's a reflection of retailers being more conservative and buying closer to the season.

Right, right, okay. So, in your comments earlier about adding doors that

, and then you ran through on a number of the businesses, those indications may have just been conversations for which you've not actually had written papers.

Is that correct?

Well, with our largest account, that is, in part, correct. But, understand that with our largest accounts, like Famous Footwear, Shoe Carnival,

, Sears, the significant accounts across the country, these are, in their plans, representing their

buy with Skechers.

So, those are solid conversations. That is not wishful thinking by any means.

No, no, no, I understand that. But that may not be reflected in the number that was on your books at the end of March.

And it all depends, that's correct, it all depends on what season they're talking. As I mentioned, that for holiday, Famous Footwear is going to, I believe I said 550 doors, and I mentioned for back to school they're going into 330 doors with the collection. So, the 330 doors will already be in our backlog. The 550 would not be yet.

Okay, right. Could you perhaps give us a sense of, in the first quarter, I don't know if you look at your sales,

percentage of that was this year versus last year?

Doing a quick study by our own definition for that once, we've had three percent higher shipments this year first quarter than last year

.

Okay, but does that represent 15 or 20 percent of volume, or is it higher than that?

The at once shipments or the increase?

The at once shipments in total.

The at once shipments would be in that 15 percent category.

15 percent range, okay. On kids business, which we've heard fabulous things about, within your plan for 10 new stores, I read somewhere that you had converted one of your stores to a kids

. Do you think you might do that in more locations, or are you planning within the 10 new sites to do any kids only?

Right now, Carol, we're concentrating strictly on Skechers stores that will offer a full range of products in men, women and children. And let me say that we are not ruling out additional kids stores, but at this time, the 10 stores that we have on the books are for the full product range.

And are those concept stores, or the

, which are

.

Those stores, I'll give you a breakdown I have. For 2002 there's three concept stores, there's four outlet stores, which are the factory outlets. And today, you know, I would say that every brand really considers those brand building stores. And there's three warehouse stores.

On your international business, which is growing so quickly, when might you expect that business to kind of be profitable?

Well, the business is profitable today. It's not as profitable, obviously, as when we

for leverage. It's costing us, we're using a third party distribution center in Europe now, and they're obviously more expensive than when we do it ourselves.

But the international division is profitable. As a matter of fact, you could see that profit manifested in the tax rate as it comes down.

The way we're set up, we have an international holding company for a non-U.S. business.

And as that becomes more profitable, we get a more advantageous tax rate all around.

And as that becomes more profitable, we get a more advantageous tax rate all around.

Okay, but within the volume, if you make your plans this year for international, will it still be below the consolidated margin? Or, how big does the international business have to get to be, you know, at parity with the U.S. business?

As far as bottom line is concerned?

In terms of margin.

In terms of operating margin?

Yes.

On a percentage basis, it's probably not that far away on, but, you know, when you talk about that, you have to talk about where you allocate a lot of the processes.

Because we use a lot of

for advertising and building the brand internationally that has to be allocated back and forth and for our research and development.

But if you pull all of that out, I, the bigger, Europe obviously has a higher operating margin as it gets going in our distributor sales. So, I would think probably sometime next year, when the business gets to be in that 30% range, or the year after that 30% range, we'll have operating margins that could be equivalent.

All right. And then just one last question. On the $1.69, is that, does that assume an as converted scenario?

No, it doesn't, that's actually where we were at the end of the first quarter.

So, we may need to make that ex converted adjustment, which would come in a little bit lower? Is that correct?

That's correct.

Okay. And just let me see if I understand this correctly. On the quarterly calculations, I know you gave us what you did for the First Quarter, but basically, adding back about 650 thousand of interest and about 3.5 million shares per base.

Yeah, as...

As rough numbers?

Yeah, rough, actually, basically, the interest on the outstanding convertibles is 843,750 a quarter. So, that would be the interest

. On an after tax basis, that's 529,875. The increase in shares

75 million. So, assuming right this minute that there is no exerciser of the overall lot, it would be 2,880,170 shares.

There's slightly different calculations in the First Quarter, because we pay slightly higher for straight, when you average out the quarter, then we would pay on the convertibles, so we've evened them out. But you are basically correct. You add back the 800 at the, you take out the 843 thousand interest on after tax basis and add two million eight hundred and eighty-eight thousand shares. As the over allotment is taken, we'll come out with the new numbers.

Okay. Thanks very much.

Thank you.

The next question comes from

,

. Please go ahead.

Hi, I just wanna revisit this June, July phenomenon. What I'm hearing is potentially, you have a down sequential second quarter, but you're still comfortable with full year consensus range of a billion to a billion one in revs? Is that, am I on the right track there?

You're absolutely on the right track, and I don't wanna cause anybody undue concern. This exists every year.

Right.

Biggest shipping, if you wanna take it any dynamic you'd like, two weeks, four weeks or six weeks, happens over that June 30th cutoff date. And since we don't, in the United States, anyway, do our own trafficking, we don't send the trucks, nor can we line up trucks and vans. We're all dependent on how the trucks come in, availability of what they call rolling stock and how all our customers want them.

So, there's always the potential, giving that big a window, overlapping the quarter end, that something could shift. It hasn't really in the last couple of years dramatically, but there's always that possibility and we like to remind people of that possibility.

Sure. Okay, and secondly, and David touched on this, on the gross margins. You know, granted, you were over inventoried in the Men's Sports category during the first quarter. And that hurt you by 180 basis points or something. As far as margin levels. And, you know, I think it's prudent for you not to raise your gross margin guidance for second quarter. But getting to operating margins for the year, and not looking at the specific quarters.

Is it reasonable to assume that you're not gonna get any further degradation in your operating margin from the 14% level? Or should we expect selling expenses to increase as a percentage?

Like I said, you start with selling percentages, the lowest finish in the first quarter. So, if you're comparing to the first quarter rather than last year's fourth quarter,

I would say that, given flat growth, you'd see increases in percentage of sales for the selling line.

Okay.

You take that into account.

Right. But then, clearly, you're getting some leverage from G&A. So, I'm just trying to connect the dots here and see.

Right, we're getting leverage from G&A

, and obviously, the more we grow, the bigger leverage we would anticipate for this coming year.

Okay. So, you're getting leverage from G&A, getting leverage from gross margin, you may, you know, selling expenses will probably increase a percentage.

So, it's probably not unreasonable to think that you'd end the year, on an exit basis, that's, you know, 14% operating margin.

Nah, that would be quite

. We'd take it.

Okay. And then just to understand the converter deal a little bit better, how much, what are you looking at for your total interest expense for the year, including the converted interest?

Well, the converted interest is 843,000 a quarter, as they said before. The only other interest we'd pay would be on our mortgages. And we do pay for overturns in the factories. Given that we also have significantly more cash, because we've obviously left interest on. So, I would say slightly less than the First Quarter, because we do, we will be paying the converted interest.

If you wanna go on an as converted basis, I would just take that interest, the 843 out of the first quarter's interest calculations. Take it down a little more and carry it through the year. It all depends on which, the

you're more comfortable with.

Yeah, but. Sort of apples to apples, looking at maybe one seven a quarter for the rest of the year?

Correct.

Yeah.

Probably a little less than that.

Okay, great. Thanks a lot. Great quarter.

Ladies and gentlemen, if there are any additional questions at this time, please press the star, followed by the one. As a reminder, if you're using a speaker phone, please pick up the handset before pressing the keys. The next question comes from

,

. Please go ahead.

Thank you. Just wanted to, I'm kind of having some problems with my line here, so I've been kind of fading in and out. I've gotta recap a couple of questions. One, you mentioned about the cash flow from operations, 37 million on the quarter. I assume that's squared off the funds statement. Second question is, if you could give me the first quarter '02 backlog, the actual number, I would appreciate that.

Third, your bad debt reserve expense for the quarter. And, basically, you know, your

, that is, you know for

for counts. And fourthly, what's, you know, just a little more color in what's accrued expenses? And last but not least, my understanding is that $1.69 guidance does not include the convertible unit of the as converted method, just wanted to verify that.

Well, your last question, that is correct, it does not use the as converted method.

Yeah.

Going back to the first question, if you don't mind if I take them out of order.

That's quite all right.

It's, the 37 million is off the

fund statement.

Okay.

For your second question, that backlog, we don't report backlog numbers on an interim basis, only at year end. Nor, the provision for bad debts is, this quarter, I'd say is insignificant. It's

less than a million dollars.

Okay, 'cause...

Everything, and most of our receivables are insured. I lost track of the next, what the last question is.

Well, was that accrued expenses?

There's the normal accrued expenses, they're for production advertising. That may run, that's payable in 30 days, it ends. And it's a normal accrual picture at the end of the month. I don't think there's anything outrageous in them.

Right, it seemed to be relatively slack there, understood. I'm sorry, what was the percentage change in the backlog? Was, I don't know if that was released

. What was the percentage change in backlog from year end to First Quarter? Do you release that figure?

No. No, we just talked to the backlog, we only release the actual backlog numbers at year end and you can find them in the K.

Right. No,

, I just thought I needed to talk percentage terms. Okay. Thank you very much.

Thank you. All right, welcome.

We have a follow-up question from

. Due to time limitation, please limit your question to one. Please go ahead.

My one follow-up is, David, I'm not really clear on a reply that you gave to someone else on the selling line. Does the selling, and maybe you could just walk us through this, the selling expense in the first quarter was down, while sales were up. And it sounds like you had changed the structure for which you're paying commission.

That will not be the case in the latter three quarters? Why wouldn't you be getting leverage for the rest of the year if that change has been made? What am I missing?

I think we can mix and match the selling line with the advertising piece. The overwhelmingly large piece of the selling line is actually the advertising. I'm sure you're aware of that.

Mm hmm.

Those leverages that we got in the, that we have, as far as the commission structure will remain this full year. They will not, however, mitigate the increase we spent advertising from quarter to quarter, the first quarter being the lowest. So, what you see in the first quarter is the commission expense coming down and a decreased advertising.

The commission rate, on a percentage basis, will stay the same, while the climb in our advertising, obviously, will increase in real dollars and as a percentage of sales in the second and third quarter. As

.

Okay,

.

Do you get that, or do you need more detail?

No, that's

. Then, on the G&A, you would expect the G&A dollars would be up in each quarter, but less than the corresponding sales increase?

I think that's correct. We get some dynamics in the second and third quarter, as far as G&A is concerned.

Especially as far as, the big thing is the distribution center. You know, that June is our biggest shipping month, it is more than April and May. It's not as even a flow, nor easily controllable as it is in the first quarter where, where our sales are more even throughout the period.

So, there's significantly more overtime. And

our costs involved, as, and like I said, distribution expense in Europe is higher per pair than it is domestically. Simply because we use a third party that adds add-ons. I would anticipate sometime over the next year or so, or maybe even earlier than that, we'll go to our own distribution in Europe.

So, yeah, with the volume concentration in the second quarter and the increases in the third quarter, I expect G&A to go up in real dollars. But there's a couple of things, also. The store openings that Michael was talking about, you know, are concentrated in the third quarter. So, that, in and of itself, with the openings, would create a G&A increase in real dollars in the third quarter.

Okay. So, but one last question, and then I'll say goodbye. On the second quarter, what

sales guidance for the second quarter? I'm a little

made it clear. First half, you obviously

. Are you assuming second quarter is somewhere between zero and 10%, depending upon your June and July ship period?

Like we said, the, we had projected the first half flat, and we haven't changed our second half. But we'd say second quarter right now in the guidance is flat to last year, which would mean that 231 range, to the extent, at one's business, or that June, July phenomenon that can change, you should change the dynamic. But right now, we're comfortable with a flat top line second quarter.

Okay. Thanks.

The next question comes from

. Please go ahead.

Thanks. Any immediate plans for the newfound cash position? Not newfound, but the newly acquired cash? You know, you raised to $75 million, you had $69 at the end of the first quarter. Any immediate plans for that?

Nothing that's reportable right this minute. Basically, we've done at, you know, our business model has always been based on flexibility. And we think we have significant growth coming over the next few years, and it was an opportunity that we felt we couldn't pass. So, right now, there is nothing, and I'm sure you're looking for your acquisitions to turn around or something to that effect.

Right now, we just we'll remain liquid, we'll use some of the cash, obviously, for the store openings, and some for our expansion into Europe. But by and large, we have no dramatic plans for the cash as we sit right here, until the, until we get through this year and see exactly what was going on.

Thanks.

Gentlemen, there are no further questions at this time. Please continue.

David and I would like to thank you all for your interest and participation on this call. And we're looking forward to reporting a strong second quarter. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.