Skechers USA Inc (SKX) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Skechers USA’s second quarter, fiscal 2002 conference call. All parties 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, Allison [Malkin], of Integrated Corporate Relations. Please go ahead.

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 as a result of various risk factors actual results could differ materially 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.

Thank you, Allison. And good afternoon and thank you for joining us to review the company’s second quarter and six-month results. Here with me today is David Weinberg, our Chief Financial Officer, who will discuss the financials, following my opening remarks. We are pleased to report record second quarter sales in net earnings results that surpassed both analysts and our own internal expectations, both before and after, excluding the footwear shipments, that were delivered to retailers somewhat earlier this year, versus last year. To this point, second quarter net sales rose by 11.2 percent and diluted earnings per share increased 18.2 percent, to 52 cents a share, as compared to 44 cents in the second quarter of the prior year and versus the first call consensus estimates of 41 cents per share. We believe that the early delivery of goods, stemming from the strong performance of the brand and the anticipated longshoreman’s strike, benefited second quarter sales in diluted earnings per share by approximately $20 million and 5 cents per share respectively.

Our ability to reach record levels of sales and profitability can be attributed to the broad-based global acceptance of our product offering, the infrastructure that supports our brand and to the strict financial disciplines. During the second quarter, we continued to build on Skechers key competitive advantage. Which is the company’s unique ability to consistently translate the latest trends into wearable styles for a wide range of consumers. This strength has led to a heightened demand for our footwear by consumers worldwide. Examples of such include, first, our steel toe boats for the sport and utility market that sell through some of the current retailers, such as J.C. Penneys and Sears. This category opens up new distribution channels, namely the direct-to-business market, through key distributors such as Lee High, and High Test; as well as a whole host of new distribution channels that we are targeting.

Second, our retro-influenced footwear that now has strong placement within specialty footwear retailers, and the department store sector. Third, the new comfort line for men is performing well within all channels of distribution. Fourth, our sexy and stylish junior sandals from the Something Else division, has major placement now at Dillards, Federated, May Company and Penneys, just to name a few. And fifth, we are also expanding our Men’s collection business with a broader presence in Macey’s, May Company and Rackroom.

Proven success, season after season in product design and innovation, coupled with our ability to meet reorder demand, has led to higher than expected sales at retail. In addition, increased brand awareness has also been achieved through our marketing effort with the Skechers in-store displays and memorable print and television campaigns. Equally important is the infrastructure that is in place to support or growing company. While David will speak to our infrastructure and financial results in more detail later in the call, I would like to highlight a few of our second quarter initiatives.

One such initiative is the expansion of our management team. We recently announced the addition of Tom Nelson to the company as Vice President of Domestic Adult Sales. Tom most recently served as President of Sperry Topsider, a division of StrideRite Corp. and is a 25-year veteran of the footwear industry with companies such as Rockport, Converse and retailers such as Macey’s and the Bon Marché. Due to his wholesale and retail experience, Tom will be a significant asset to the company. Tom will report directly to Joe Phillips, our Executive Vice President of Sales. In addition, we promoted Jim Jesserer to Vice President of Sales for the Domestic Children’s division. Prior to joining Skechers, Jim was Vice President of Sales for [Chimberlin]. We also hired Ted [Dissenger] as National Sales Manager of our Industrial Business, that includes occupational footwear. Previously, Ted was President of Carolina Boot Company. We have identified noteworthy opportunities in the steel-toe and slip resistant footwear market. This market is estimated at $1 billion domestically in annual sales. This is a significant opportunity for a young, desirable brand, such as Skechers, to capture sales in an established business that has seen a significant shift in their consumer demographics. Our ability to bring a desired brand into a stagnant market at affordable prices is an exciting opportunity.

Moving on, we have expanded our revolving credit line with a new $200 million facility with CIT Commercial Services, along with the $86 million that we received from the company’s convertible debt offering that was completed in April. We believe we are in a solid position to capitalize on the many growth opportunities that we see for the brand. Also, we continue the stringent financial disciplines that have enabled us to increase the operating margin. We benefited from improved efficiencies in distribution and production and higher profitability in our company owned retail and international operations. The result of our strategies, determination and focus has placed us in a solid position to capitalize on future growth opportunities. With that said, we are cognizant of the fact that the economy remains challenging and because of this, we have altered the way we handle our business, by acting smarter and faster with regards to all aspects of our business, from production to design and distribution, to finance and administration.

We have become a stronger company, both creatively and financially. As we enter the second half of the year, we believe we are poised to continue growing, despite the challenges at retail. Our confidence is based on our strong brand image, terrific product and strong consumer value equation. All of which are becoming increasingly important to consumers.

I would like to now share with you six key reasons why we remain positive about the back half of the year. First, our shelf-to rates are strong. We continue to achieve strong, second quarter, shelf-to rates, an indication of the demand that exists for our brand and extremely important to retailers. Highlights of our shelf-to rates include 16 percent per week in The Monaco, one of the Men’s dress sandals, 20 percent per week across all channels of distribution with the Spiral, a style that is represented in the Something Else position. Also, in Women’s sport, our Retro sneakers are enjoying 12 to 28 percent shelf-to rates per week. Our new Scooter Out is selling between 10 percent and 15 percent per week. And our Energy II is achieving 8 to 10 percent selling per week. Within Kids, our girl’s Jammers and boy’s Norwood sandals are selling consistently at plus 8 percent per week. Second, new product line launches: Michelle Kay, Something Else from Skechers, Skechers Active, along with the sub categories of Retroes, Men’s Comfort and Outdoor have met with initial success and are being expanded by increasing penetration and existing doors and adding new distribution in additional doors. For example, Burdines, Bon Marché and Macey’s West have all expressed major interest in expanding their Something Else business. Also, major department stores such as May Company, Federated and Dillards plan to maximize their Skechers Retro categories, both in Women’s and Men’s.

Third, in season reorder demand remains strong. We are continuing to receive in-season reorders based on consumer demand, versus placing large orders ahead of season. We are well positioned to handle higher in-season orders due to one of the initiatives that the company set when it was founded, which allows us to ship single pairs of shoes from our distribution centers, versus the industry practice of only shipping in case-backs. This allows us to increase our inventory turn and improve full price selling at retail, as well as replenishing merchandise to the retailer’s exact specifications. Also enhancing our flexibility to ship retailers is the improvement in our lead-time to 90 days, from the more common industry average of 120 plus days. Fourth, emerging trends are in our favor. As we stated earlier, one of the company’s core strengths is our unique ability to translate new trends into wearable footwear styles for a broad range of consumers. Typically, one or two trends emerge each year. A number of new trends have emerged, that we feel confident the Skechers brand can capitalize on, including Euro Casual Style footwear, Outdoor Trail looks, Old School and Heritage styles, and Comfort shoes and sandals. This newness in the market has enabled us to greatly broaden our footwear offerings in each of these high-demand categories.

Fifth, we are very encouraged by the positive feedback from the retail executives and buyers that have visited us at the FFANY Show and our most recent pre-line meetings in Manhattan Beach. Our top retailers are planning increases in their Skechers business for the back half of the year. In total, we met with more than 75 retailers, accounting for the majority of our domestic wholesale business and their reaction was extremely positive across all product divisions, reinforcing the strength of our brand.

And lastly, our international expansion continues to post strong gains with sales increasing 45 percent in the second quarter, mainly due to growth in our international subsidiaries in the U.K., Germany, France, Spain and Switzerland. We look forward to a strong growth; the strong growth continuing internationally and are pleased with the results that we have achieved to date. As we look ahead, we are proud of our accomplishments, having amassed 10 product lines, 87 company-owned retail stores, five international subsidiaries and international distribution in more than 100 companies.

Going forward, our plans are to expand upon our leadership position and grow our market share in the global footwear market that is estimated at more than $40 billion. Achieving these plans is based on our core strategies that allows for multiple expansion opportunities. This is the direct result of our ability to market our brand to a wide range of consumers by broadening our product lines and categories domestically, growing international sales, expanding our product reach through licensing and increasing our company-owned retail presence. We expect to garter a larger share of the global footwear market.

I would like to expand on one of our newest growth initiatives, licensing. Through licensing, we can enhance our brand image while creating a profitable income string. The company signed our first licensing agreement with Renfro Corporation, one of the largest manufactures of hosiery in the U.S. Initially, we are exploring licensing opportunities in the areas of accessories and related apparel for Brittany 4 Wheelers and for Michelle Kay, where we see an enormous opportunity to create a lifestyle brand utilizing a designer name. To prepare ourselves for this growth, we’ve expanded our management team to include Faith Walls as Vice President of Licensing. The strategy here is to align the company with experts in their respective field, so that each product extension furthers Skechers overall potential.

Turning to sales results. Second quarter, 2002 revenues rose 11.2 percent, reaching 256.7 million as compared to 230.9 million in the second quarter of the prior year. Strength was achieved both domestically and abroad with the strongest gains achieving in our Men’s U.S.A., Men’s Collection and children’s line as well as robust sales in our newer lines such as Women’s Active, Retroes and Something Else from Skechers. We also achieved above-planned performance from our international and retail division. In domestic wholesale, we achieved above-planned performance for the first half of the year. Highlights of the growth within our Women’s division include strong sales of our new open-back, slip on in woven Energy IIs. Also in high demand was the Jammer and Stitch-Out sandals, our new Retro styles, traditional white leather sneakers and platform casuals. Within our Men’s line, we achieved robust growth from our Comfort and Retro categories. We also experienced solid gains with the Energy wovens and classic styles. Children’s once again -- our Children’s division surprised us, on the upside, gaining momentum for our ability to translate junior and young Men’s looks into smaller sizes. With the addition of kid-friendly colors, appliques and other nuances.

Highlights of our best performers in the division include Energy IIs, Energy joggers, Gators for girls and boys, fashion boots, Velcro styles and school uniform shoes. Turning to backlog. While our backlog has not improved from the first quarter, we continue to maintain that due to the change in the dynamics regarding how we approach our business and how retailers are placing orders, that backlog is not indicative of our future performance.

I would now like to further explain some of the dynamic changes that we’ve made to improve operations. At the end of 2001, we made a conscious decision against pricing up-front bulk orders. The reason behind this move is that bulk orders are subject to cancellations based on the general environment at retail. The company’s current strategy is to accept less bulk orders up-front and fill in product based on demand. This strategy is proving highly successful. This has also provided for tighter inventory levels at retail and on our balance sheet. Second, based on retailers decisions to place orders closer to season, our backlog orders are coming later this year, versus last year. To this end, our backlog is out only four months this year, versus six months at the same time last year. This phenomenon causes backlog to be less comparable to the prior year. Now, turning to our retail stores.

Skechers is becoming a recognizable and powerful force as a specialty footwear retailer. To support this fact, Skechers has recently opened or will be opening in some of the most prestigious malls across the country, including [Alamauana] Mall in Hawaii, King of Prussia Mall in Pennsylvania, Mall of America in Minneapolis, and Woodfield Mall in Chicago. Currently, we operate 87 stores. Our retail stores serve a dual role by providing a profitable source of income and add to our brand awareness. While we are frequently offered new leases for space, our strategy is to select only those opportunities that further enhance our brand and offer the highest potential for sales and earnings. For example, we are excited to announce that we recently completed negotiations and will soon be opening a flagship location in New York’s Time Square. We are excited about this new location, both in terms of earnings potential and major brand building. This year, Skechers remains on-track to open eight to 12 retail stores.

Now turning to our international expansion. Our performance internationally has been stellar. Mainly due to our ability to transport our domestic success overseas and to support this initiative with a solid foundation from which to grow. This has included hiring experienced executives and building our international infrastructure in the same manner as we have in the U.S., from distribution, to finance, to customer service. In the second quarter we grew international sales by more than 45 percent, reaching total sales in excess of 35 million. We established our fifth direct subsidiary by assuming control over the operations in Spain.

In support of this move, we opened offices and a show room in Madrid. We also expect to further our international momentum with our latest ads featuring the [jag] line, “Find your groove and pure fun”. The end of our second quarter also marks an important milestone for us. The first decade of the company’s history. A decade whereby we accomplished many of our key strategies, some of them ahead of schedule. I’m pleased to announce that on a trailing 12-month basis, we have now reached $1 billion in sales. This reinforces our belief that the Skechers brand continues to increase its momentum and positioning in both the domestic and worldwide market.

In closing, we remain excited about the company’s prospects over the short and long term. Our commitment is to implement our plans and strategies while maintaining a strict discipline with regards to the balance sheet and cash flow measures. The result of which is an extremely powerful formula that has enabled us to become a leader in four areas: sales, product, marketing and operations. And with that, I would like to turn the call over to David Weinberg.

Thanks, Michael. For the second quarter of 2002, sales increased 11.2 percent to 256.7 million, compared to 230.9 million last year. The increase in sales is attributable to above planned performances within our domestic, wholesale and retail divisions as well as continued strong gains internationally. As Michael previously mentioned, approximately 20 million of the $25.8 million increase in second quarter sales was attributed to a shift in certain back-to-school items into our second quarter that were previously slated to ship in our third quarter. We view this shift as extremely positive, as it is reflective of the heightened demand for our footwear at retail and by consumers heading into the back-to-school season. Many of our retail accounts requested early delivery dates to ensure that our footwear would be on their floors ahead of the impending strike in Long Beach. Another positive is that we could experience and extra inventory turn this year.

After excluding the sales related to this ship, second quarter sales rose almost 3 percent, which was above our expectations of flat growth. Gross profit increased 6.7 percent, to 105.8 million, versus 99.2 million in the same period a year ago. Second quarter gross margin was 41.2 percent, in line with our expectation. The gross margin was lower than last year’s record second quarter gross margin of 43 percent, mainly due to the growth of our children’s product line, which carries a lower gross margin than our other product lines, and our retail division. It is now comprised of a larger percentage of outlet and big-box stores, as compared to last year. In addition, we were more accommodative with our accounts than in the past, in order to maintain clean inventory of retail.

During the quarter we made solid progress towards obtaining our cost containment goal. Total operating expenses as a percentage of sales, improved 280 basis points to 27.4 percent, from 30.2 percent in the second quarter of fiscal 2001. Second quarter selling expenses improved to 21.4 million, or 8.3 percent of sales, as compared to 24.2 million, or 10.5 percent of sales in the prior year period. The reduction in selling expenses as a percentage of total sales, reflects the continued benefit from the cost-cutting initiatives that we implemented at the end of last year, such as changes to our commission and bonus structure as well as efforts to contain marketing expenses in the area of trade shows, while maintaining the same presence with the consumer. Also contributing to the improvement in selling expenses was the elimination of our catalogue operations, which was completed during the fourth quarter of 2001. On a percentage basis, advertising expense was 6.7 percent of sales in the second quarter of 2002 as compared to 8.2 percent in last year’s second quarter.

General and administrative expenses were 48.9 million, representing 19 percent of sales, compared to 45.6 million, or 19.7 percent of sales in last year’s second quarter. We were able to improve our general and administrative expenses as a percent of sales, even while absorbing additional cost relating to both our retail and international expansion. Rent expense rose by 1.4 million due to the opening of 16 retail stores, subsidiary offices and showrooms since the end of the second quarter of 2001. In addition, we recorded 1.4 million in non-cash expenses associated with increased depreciation and amortization costs, year-over-year.

For comparison purposes, general and administrative expenses were 1 percent ahead of the prior year after subtracting increased rent and depreciation and amortization costs from this year’s second quarter. Second quarter 2002 general and administrative expenses also improved over the first quarter. In dollar terms, general and administrative expenses were reduced by $700,000 in the second quarter, versus the first quarter, even as we grew second quarter sales 4.8 percent over first quarter levels. As a percentage of sales, our second quarter general and administrative expense improved by 130 basis points over first quarter general and administrative expense of 20.3 percent as a percentage of sales. So, once again, total operation expenses improved 280 basis points to 27.4 percent of sales, versus 30.2 percent in the second quarter of the prior year, even with additional depreciation, amortization and increased infrastructure expenses that I previously mentioned.

Our second quarter record sales growth, coupled with leverage and expenses enabled us to deliver increased operating profits of 35.9 million, compared to an operating profit of 29.4 million in last year’s second quarter. The operating margin rose by 130 basis points to 14 percent, compared to 12.7 percent in last year’s second quarter. Net earnings increased 26.4 percent to 21.3 million, compared to net earnings of 16.8 million in the prior year period. Fully diluted earnings per share rose to 52 cents on 41,909,000 shares, compared to fully diluted earnings per share of 44 cents on 38,653,000 in the second quarter of last year. During the second quarter, diluted shares increased by approximately 3 million due to the convertible bond offering we completed in April. This requires us to assume the conversion of the 90 million in note as if they had already taken place.

For the six months ended June 30, 2002, net sales were 501.6 million, an increase of 9.4 percent, versus net sales of 458.4 million for the first six months of 2001. Gross profit increased 4.9 percent, to 208.3 million, compared to 198.5 million for the same period of the prior year. Selling expense for the first six months of 2002 improved by $5 million on a year-over-year basis, to 40.1 million, or 8 percent of sales, compared to 45 million or 9.8 percent of sales for the first six months of 2001. GNA expense for the period was 98.5 million, versus 92.9 million a year ago, or 19.6 percent of sales, versus 20.3 percent of sales in the same period of 2001. In total, for the first six months of fiscal 2002, operating expenses were 138.5 million, or 27.6 percent of sales, compared to 138 million or 30.1 percent of sales for the first six months of last year. Operating income for the first half of 2002 rose 15.6 percent, to 70.2 million, or 14 percent of sales, compared to 60.7 million or 13.2 percent of sales for the first half of 2001. Net earnings increased 22.4 percent, to 41.5 million, versus net income of 33.9 million in the first six months of 2001. And fully diluted earnings per share increased 19.3 percent to $1.05, versus 88 cents in the corresponding period a year ago.

Trade accounts receivable at quarter end were approximately 185.1 million, as compared to 120.3 million at December 31, 2001. The vast majority of the increase in receivable above our growth in sales was due to the higher shipments at the end of the quarter. Also accounting for the rise was the growth in our international sales, which have longer payment terms than our U.S. sales. Our DSOs at June 30, 2002 were 56 days, versus 50 days in the same period of 2001. Inventory at quarter end was on plan and current at 139 million, representing a reduction of 14 million or 9.2 percent, from 153 million at the end of June 2001. Part of the decline in inventory versus the prior year, was due to shipping a larger percentage of our back-to-school orders at the end of June, versus last year, when these shipments were delivered in July. Even so, prior to the $20 million shipped in sales, our inventory would have still been lower than last year’s low.

Going forward, our plans call for a continuation of conservative inventory planning. The goal here is to increase inventory terms and equally important, sell-throughs at retail, to increase flexibility arising from both the company’s shortened lee times and excellent relationships with our factories. We also ended the quarter in a fluid cash position. At June 30, 2002, cash on the balance sheet totaled 74.6 million, compared to 15.6 million at the end of 2001. The increase in cash is mainly due to the completion of our $90 million convertible debt offering that netted us approximately 86 million. Working capital rose substantially to 281.7 million at quarter end, versus 140 million at December 31, 2001. Cash flows provided by operation was approximately $55 million for the six months ended June 30, 2002, compared to cash used in operations of 8.7 million during the same period in 2001. Long term debt rose to 118.2 million. Of this amount, 90 million is related to our convertible debt offering. The remainder is related to mortgages that we have on our distribution center and corporate headquarters and capital lease obligation.

Capex during the quarter was approximately 2.5 million, primarily stemming from new store opening and lease hold improvements. For 2002, we continue to project total capital expenditures of $10 to $12 million with the majority of this amount related to our retail and international expansion. We believe that our capital expense requirements will be significantly lower this year than last year. In 2001 we greatly expanded our infrastructure by increasing our distribution capabilities domestically, by assuming the [Etroit] distribution center in Ontario, California, which increased or capacity to 1.4 million square feet. We also added the [new material] handling system and enhanced our MIS system, which increased efficiency rates and is expected to result in a savings of $4 million this year on equivalent volume handle. For international operations we contracted a 130,000 square foot, third party facility in Gent, Belgium, which has sufficiently handled our need thus far. As our business grows over seas, specifically with our direct expansion in Europe, we will re-examine our distribution needs in Europe.

Turning to guidance for the remainder of the year. Due to the forward shift in second quarter sales, we now estimate third quarter sales growth of approximately flat to up 3 percent, versus our previous guidance of a 10 percent increase. Currently, the first call consensus third quarter estimate is 47 cents. Backing out the 5 cents should bring the new first call consensus to 42 cents, representing a 40 percent gain over 2001, third quarter earnings per share of 30 cents. For the fourth quarter we continue to be comfortable with 10 percent sales growth. The current first call consensus estimate for full-year, 2002, is $1.67. We are now comfortable with raising guidance by 6 cents, to $1.73 per share. A new guidance represents a 39.5 percent increase over 2001 diluted earnings per share of $1.24. We do believe that our estimates could prove conservative for the remainder of the year, based on the feedback that we’ve been given during our pre-line meetings and at FFANY. However, at this point, we believe it is prudent to maintain a conservative stance. We feel we will be in a better position to evaluate after the WSA show, where we anticipate a continued strong reception to our product offering.

In closing, I want to reiterate that the company is positioned well to capitalize on many opportunities we see for the brand. We are a well-diversified company in the areas of product, distribution, customer base and global reach. We also have several visible growth opportunities throughout each area of our company. We believe that the planned growth, along with a deeply expended infrastructure and management team, and our initiative to control costs will achieve operating results that will reward share holders over the long term. And now, I would like to turn the call over to the operator to begin the question and answer portion of our conference call.

Thank you. One moment please. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-toned prompt acknowledging your request. Your questions will be polled in the order they are received. If you would like to decline from the polling process, please press star, followed by the two. Please ensure you lift the handset, if you’re using a speakerphone, before pressing any keys. One moment please for your first question. Your first question comes from John Delitis, Buckingham Research. Please go ahead.

Good afternoon or good morning out in California. Question on sales at stores. Can you tell us a little bit about how same-store sales trends have run year-to-date at the stores and what kind of return on investment are you looking for, for your stores going forward?

For our own stores?

Yep.

Well, as you know, we have right now, ten categories and I went ahead and I looked at the top selling categories and our top selling styles under each category and we see the top five from Men’s U.S.A. Collection Sports, Men’s sports. They’re all selling at high single digits up into double-digit sell-throughs as we speak. And we also feel that back-to-school has not kicked in yet. So, based on the sell-through rates that we’re experiencing right now on our stores and back-to-school really kicking in, it’s really the four weeks of August. We’re very bullish on the back-to-school selling opportunities that we see in our own retail stores.

And you mentioned that your own stores -- since you’d opened some more outlets, it had a negative impact on the gross margin. Is that something we should expect to continue going forward?

Well, John, that obviously, depends on how the stores open and what kind of stores open. As we’ve repeated a number of times, we have a differential in gross margin and not necessarily operating margin between the types of stores we have. The differential could be as much as 20 percent from top to bottom, going from concepts to the next step of outlets, to warehouse outlets. In the most current period we’ve obviously opened more outlets and warehouse outlets, so that did impact the gross margin and obviously not necessarily the operating margin of our retail division as we report them. Going forward, as Michael mentioned, we have a few more concept stores. So, depending on how they develop, we are opening Times Square. We just opened Mall of America. We have negotiations with Alamuana. So depending on how they come about and which type of store opens and its impact, that will obviously reflect in our gross margin as we [indiscernible] them quarter to quarter.

Okay. One final question and I’ll hop off. How are sales to the off-pricers during second quarter? Did that increase or decrease? And how do you see business with the off pricers in the second half of the year?

I need a definition of off-pricer from you.

The off-price channel, like a T.J.

Oh. How have we seen our sales with people like Ross and Marmacks?

Exactly. Have you increased or decreased?

Extremely well. I’ll just use Ross as a quick example, because I recently spoke to them. We certainly are up there. We’re probably are their number two vendor or supplier. Our product sells-through in all divisions -- Kid’s, Women’s, Men’s, we’re also in the sport area. And I think that it’s important to point out that many of the forward companies that they do business with are all collectively in a budget or a plan. Skechers is singled out, it has it’s own plan. We actually work directly with the buying office here on the West Coast, which is not normal. Because everyone really works with the buying offices in New York. And I think because of the size and magnitude of the overall business with Ross, we’ve been dedicated our own person in their buying office on the West Coast. So, I hope I answered your question. It is very positive.

Okay. Thank you.

Your next question comes from Joseph Teklits, Wachovia Securities. Please go ahead.

Thanks. Hi guys. Trying to -- Okay, looking at backlog. I’m trying to look through my notes here to see what backlog was into the first quarter. I think it was down slightly. Is that right?

That’d be correct.

So, about the same right now. Was there any time during the quarter that your backlog was actually up? And I’m just curious if the reason your backlog is going to back down to being down slightly is because you’ve shipped a lot of product here at the end of the quarter?

Well, I think it’s a two-fold thing. I think it’s obviously, a part of it is shipping some into the second quarter. It goes into shipments and out of backlog. Which is, like we said, a positive. And the other thing is, it’s been running fairly consistently throughout the year, simply because we haven’t booked-out as far as we have on a continual basis throughout the year -- I guess year-over-year. It may sound a little fuzzy, but you know, we’re constantly booking-out somewhere between three and five months, depending on how close we get to season. Whereas last year it was five to seven months. So, that’s obviously put a damper on what we count as backlog at the end of each month.

Also Joe, I should add that close to 20 percent of our shortfall in the backlog is due to us not booking bulks. And you’ve heard me talk about not booking bulks with several of our retailers, due to possible cancellations. However, it’s important that I point out with those three retailers that we are not placing bulks with, we will show a positive increase, year-end, in business with them.

Okay. So, those are the two primary reasons. Are your payables down, David, I think, your balance sheet?

I think they’re fairly equivalent.

Paying your bills too fast, so there’s nothing really there?

No, we’re not that comfortable with the increase in cash. It all had to do with the flow from the [Orient]. The closer we buy to the [vest], the closer the payables are. We obviously, buy on terms and the biggest piece of our payables is from merchandise. So, it all relates back to just the flow of merchandise.

Okay. Then finally one last question. You’ve covered everything well. Do you want to comment on fourth quarter EPS? You know, I don’t know if the third quarter got ahead of itself, because you know, you let the analysts get out there, too far, without really honing us in any -- .8 for the fourth quarter. Is that in a comfort level for you?

I think, by definition, we’d have to be comfortable with that number, if that’s the consensus number. Because we’re comfortable with the consensus and taking it up to the $1.73.

Okay. Thanks. Good luck.

Your next question comes from Mitch [Coomats], with Bush Morgan. Please go ahead.

Yeah, thank you. A few questions. I want to start with international, that being a big part of your growth story right now. If you could just add some color there. You mentioned you opened your fifth subsidiary. What percentage of that -- of international, is now direct, versus distributor sales?

Well, it’s constantly growing, so I it’s a changing term. But, right -- for the second quarter, direct sales probably represented about one third of the total international contribution.

Okay. And so, we could expect that to continue to grow as a percentage as you open additional subsidiaries, I assume?

I think it’s two-fold. We expect it to grow both from the opening of additional subsidiaries and the fact that the subsidiaries that exist are on high growth curves.

Okay. And where would you open next? I mean, do you have a plan for opening subsidiaries over the next 12 months?

Yes, we have a plan. But, it’s safe to assume we’re not going to go into too much specific detail. That Western Europe is our coveted target and so, you know where we are. And so the places we’re not are Benelux, Portugal, Italy, so it’s safe to assume that we’re looking at those places quite closely.

Okay. And just one other thing on Europe -- just to get a better feel for that business again. In terms of categories and brands and product, I mean, are you in there already with Retro and Active and Comfort and then the brands like Something Else and Michelle Kay and 4 Wheelers? Is all that product already being shipped there or is there?

It’s a different product mix, obviously. We started most of the subsidiaries, predominantly, in the sport category. And while comfort does exist there, and active certainly, and retro does exist there, it’s not quite to the same magnitude as it is here. The final pieces, Michelle Kay and Something Else are yet to be delivered other than to our own retail stores. But that’s something that’s still on the drawing board and obviously it gives us some comfort for growth in those areas.

Your next question comes from Carol Murray, Salomon Smith Barney. Please go ahead.

Hi, good morning. I have a couple of questions. First, when do you think the Time Square store will be opening? Will it be in time for holiday or is it ’03?

Actually, Carol, we’re planning for the beginning of November.

Great, okay. Is it on 42nd Street or is it on the Avenue?

It’s on 7th and 42nd. It’s on that 42nd Street side of the Reuters Building. You know where the subway entrance is in the Reuters Building? That’s where we are.

On the early -- the 20 million that came forward in the second quarter. You said it was due to retailers accelerating. Was that because of low in-stock positions or because of some just kind of defensive move, because of the longshoreman work issue? Or both?

I think the second is correct. It’s probably -- depending on which retailer you’re talking about, a little bit of both. Some of them were shorter than anticipated in inventory and some, due to the inventory potential slow-down because of the strike, had asked us to see what we could do about even increasing our manufacturing capacity that much quicker. And they would take it earlier if we could make it. So, I think it’s a combination of both.

Okay. The third question is, I look at your media spend for the first half of the year and it’s actually down in dollars. What are you thinking about in terms of the media budgets for the second half?

I don’t know that we give you enough information to talk about media. We say advertising in general.

Well, okay, advertising.

Yeah, because we want to be sure that everybody understands that media is a key part and we’re not sacrificing any significant media. I think it should continue along the lines -- in answer to your question, the way it has now. We’re controlling our expenses -- production expenses. We are looking at our media. And so while it probably will increase slightly in dollars, we expect the percentages to be within the same ranges.

You do expect the back half to be up in dollars even though the first half wasn’t?

I don’t know, up in dollars. The second half will be up in dollars from the first half. I don’t know about year-over-year. Yes, historically, our biggest spend for media is the third quarter and that won’t change this year.

But not necessarily versus last year. On the gross margin, in the second quarter, the gross margin, there was a sequential change between 1Q and 2Q. Was that just the mix of the business or was there something else going on? In the first quarter you reported 41-9 and the second quarter it was 41-2.

I think it’s again -- as I mentioned in my remarks, primarily it was a slight change in the business, both in retail, where we have more outlets and big-box stores than we had last year. Which is a significant change in margins. And it’s some product changes as far as Kids are concerned. And there’s some changes between Sport and Retro. We did have some slight pressure under Men’s Sport that we had mentioned last year. And that is now clean. So, those margins have been taken care of. So, we did have, for us, a slightly more accommodative stance as far as helping retailers to make sure inventories were clean going into back-to-school, which is an important time.

Your next question comes from Laurie Brunner, RBC Capital Markets. Please go ahead.

Hi, thanks. Guys, I saw your Mall of America store on Friday, the day it opened and it’s really a great location. It’s right next door to Abercrombie. So, great job on that. I have a couple of questions. Can you just give me an update where you’re at in terms of the rollout of Michelle Kay. Just kind of how many doors you’re in and what that’s looking like?

Well, the rollout is definitely early. We’re still in the beginning stages of Michelle Kay. The big supporters right now happen to be the department stores, because that’s where the product really belongs at its retail price points. Macey’s West we’re in -- I would say a third of their doors are ready. They’re very excited about the product line. Dillards is a big supporter as well as Burdines. So, again, I do have to tell you that it is early. The line looks great. It’s certainly come a long way since we really introduced the first line. We’ve made some changes. It’s a little more sophisticated. You’ll start to see Michelle Kay in her own ads. You probably -- if you look at “W” this week. A couple of the other fashion magazines, the ads look just sensational. And I do want to say that we went through pre-lines. The last three weeks we had back-to-back meetings with key retailers that flew into Los Angeles to spend the day. From the Federated people to Penneys was here. They’re here today. They were here yesterday. You know, I can’t begin to name all the accounts. And for the first time these ten product lines looked sensational. And I would really encourage every body -- really encourage every body to visit us in Los Vegas and really look at how the product is developed.

And what will determine when that goes into your full-line stores?

Well, the product is for fourth quarter and for first quarter, that we’re showing now. More importantly, they’re my own stores. 79 percent of our business comes from our domestic wholesale account. So, you know, we’re very encouraged because of the reception and the response that we’ve been given over the last three weeks from our wholesale partners.

Okay. Guys, what’s the difference in price points between your outlets and your full-line stores? Is there a generality you could make here?

The difference in price points? Well, that depends on -- I can give you the flip side. Gross margins tend to decrease 10 percent from one venue to the next. So, the gross margin from concepts to outlet stores goes down 10 percent and from outlet stores to big-box stores, down another 10 percent. It’s not necessarily a price point item. It’s on a per-item basis and different seasons have different price points. We do limit the price points in our big-box stores. They historically have lower price points and we don’t put anything in there that sells over $50.

The average unit per transaction in outlets is approximately $35, where as concept stores is above $55.

Okay. And then last question. On the Collection line, have you seen any resistance to the price points at the upper end? And would you consider -- two questions I guess -- and would you consider moving into lower price points with that line as well?

Actually, we’ve seen no resistance and we’re actually at the lower end of the spectrum in price when you compare us to a Kenneth Cole or Johnson Murphy -- some of these other brands that sell the same exact footwear that we sell for $90, they’re selling for $130 on up. So, no. And to answer the second part of your question. We wouldn’t bring Men’s Collection down, because then it would infringe upon the Men’s U.S.A. area.

Okay. Thank you very much.

There are no further questions at this time. Please continue.

Well, again, I just want to thank you for your interest and participation and continued support and we look forward to seeing a lot of you in Los Vegas. Thank you very much.

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.