Skechers USA Inc (SKX) 2002 Q3 法說會逐字稿

Welcome to Skechers USA's third quarter earnings conference call.

All the 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 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 would like 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 at the SEC and with that I would like to turn the call over to Chief Financial Officer of Skechers, David Weinberg.

Thank you Allison.

Good afternoon and thank you for joining us today to review Skechers' third quarter and nine months fiscal 2002 results.

As always we will open the call to questions following my comments.

We are pleased to have achieved the high end of our revised estimates that were provided at the beginning of September even as the retail environment continue to weaken throughout the month.

Third quarter net revenues totaled 261.1 million, above our range of 245-255 million and diluted earnings per share rose to 35 cents compared to our guidance of between 30 and 35 cents per share.

However, we are not satisfied that our third quarter shares and earnings were below our initial expectation, that were initially set at the end of our second quarter.

We are especially pleased that we achieved steady sales during the first nine months of the year, following the dramatic increase in our business in the prior two years.

We grew sales at a compound annual rate of approximately 50 percent per year with revenues rising from 425 million in 1999 to 960 million in 2001.

We believe we were able to hold our leadership position through the back-to-school season due to the strength of our brand, the competitive advantages that we have due to our size and diversification strategies we have implemented.

We achieved it in a weak retail environment that turned out to be quite a bit weaker than we had anticipated at the end of the second quarter.

Going forward we remain aggressive, committed and focused on expanding our presence through each of our divisions with the exceptional talent abundant throughout our company.

We also achieved our expense and balance sheet management goals with strong improvements in several key areas, which I will touch on in greater detail later in the call.

While we currently expect the economic climate to remain weak over the near term, we are currently working on ways to capitalize on our core strengths, thereby enabling us to grow our leadership position in our domestic wholesale business.

Our core strengths are in the areas of design, product, marketing, sales and distribution.

Equally important, the company is stronger on a number of fronts, strategically, operationally and financially positioning us solidly for the future.

Skechers is a brand in high demand by both consumers and retailers.

We have built enormous brand equity over the past ten years, which has enabled us to continually increase our loyal base of Skechers customers.

At nearly a billion in sales, we command a sizable market share that offers us leverage and diversification.

Our four-pronged operating model of domestic wholesale, international wholesale, retail and licensing, affords us multiple opportunities to increase in volume and profitability.

All of our operating units are well on their way to achieving this and in the case of licensing we expect to achieve broad acceptance in the marketplace.

In domestic wholesale, we operate over ten distinct product lines covering most footwear categories from mens, womens, and children.

Over the near term given the sluggish retail sales outlook, we remain conservative in our plans for this division.

However we are encouraged by our ability to achieve essentially flat back to school sales this year vs. last year, when adding back the 20 million in sales that shifted into our second quarter, and we are also equally encouraged by a strong response to our spring 2003 product offering by retailers who met with us during a WSA show in August.

Longer term we believe that each of our lines and category offers us opportunity for expansion.

On the international front our year to date sales increased by 40 percent and now comprises over 13 percent of our total company sales.

This growth has been driven by the success of our company owned subsidiaries which we operate in eight European markets, United Kingdom, France, Germany, Italy, Switzerland, Austria and most recently the Benelux region and Spain which are currently in the starter phase.

Going forward our plans are to continue our business model, which includes increasing both number of accounts that sell our footwear and also expanding the number of styles offered at retail.

We will support our international effort with aggressive advertising that includes television and print, in-store displays, Skechers flagship locations in prime retail areas including a full of European flagship location scheduled to open Frankfurt Germany during the fourth quarter.

To accommodate our expected growth, we recently leased a new 240,000 square foot distribution center in Liege, Belgium.

Our plans are to move from our current third party 130,000 square foot facility in Gent, Belgium by the first quarter of 2003.

During the third quarter we recorded a decline in our distributor sales volume primarily due to the weak economy and uncertain political environment in certain Latin American countries.

This is expected to continue to limit our total international sales growth in the fourth quarter.

Longer term we believe we are on track to grow our international sales to represent 25 percent to 30 percent of our total sales.

Licensing will also serve as an important vehicle for us to extend our product reach beyond footwear and heighten awareness for the brand.

To date, we have signed a stock and hosiery license with Rental Corporation and earlier this month we added a second license in the category of sports watches with Advanced Group, Inc.

We are currently reviewing a number of opportunities to license our many brands within the accessories and apparel categories.

Company owned retail has always been identified as a profitable way to grow awareness of the brand by showcasing the full range of our footwear in a Sketchers-friendly environment.

During the quarter, we opened three concept stores and one outlet store bringing our total store base to 90.

View the strength of our brand and our success to date, we are being offered some of the best retail locations and prestigious models across the country and in prime international shopping districts.

We plan to open a premier flagship store in Times Square, New York and an international flagship store in Toronto, Canada by the year-end.

Operationally, we have greatly improved up on our efficiencies both in distribution and production.

During the quarter, we improved total expenses by 16 million dollars as compared to the third quarter last year.

This improvement is a direct result of our focused streamline operations by creating efficiencies and reducing costs throughout all areas of our company, including sales, distribution, finance, and operations, without compromising the integrity of our products or service.

We also believe that our capacity to process product by shipping single pairs offers us a distinct advantage in that we are able to meet retailers reorder demands to their exact specifications.

We are also a stronger company financially as evidenced by our improved cash, inventory and receivable position versus the same period last year.

Cash on the balance sheet rose to more than 108 million dollars as compared to 15.6 million in the same period of a year prior.

We had no short-term borrowings versus borrowings of 84.2 million in the same period last year.

Credit accounts receivable improved by 13 percent with this metric standing at 122.8 million at September 30, 2002 versus a 141 million in the same period of the prior year.

Also, inventory improved to 129.7 million, down 18.2 percent from 158.5 million in the prior year third quarter.

For the third quarter 2002, sales were 261.1 million compared to 287.9 million last year. 9.3 percent of sales decline was in line with our updated guidance and primarily the result was lower than anticipated re-order demand within our domestic wholesale business, which we attribute to the macroeconomic environment.

Gross profit declined 11.3 percent to 108.8 million versus 122.6 million in the same period a year ago.

Second quarter gross margin was 41.7 percent in line with our expectations and consistent with our gross margin performance from the first half.

Gross margin was lower than last year's second quarter gross margin of 42.6 percent, mainly due to a continuation of a more accommodative stand with our accounts.

This shift began in the beginning of the year in order to maintain a clean inventory of retail.

To a lesser extent, the decline was due to changes in the mix of our business.

We also continued to achieve our cost containment goals.

Total operating expenses as a percentage of sales improved 250 basis points to 32.5 percent from 35 percent in the third quarter of fiscal 2001.

Third quarter selling expenses improved to 32.5 million or 12.5 percent of sales as compared to 40.8 million or 14.2 percent of sales in the prior year period.

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, realignment of our sales force, as well as efforts to contain marketing expenses while maintaining the same presence with consumers.

Also contributing to the improvement in selling expenses was the elimination of our catalog operations, which was completed during the fourth quarter of 2001.

On a percentage basis, advertisement expenses was 10.4 percent of sales in the third quarter of 2002 as compared to 11.3 percent in last year's third quarter.

General and administrative expenses were 52.2 million representing 20 percent of sales compared to 59.9 million or 20.8 percent of sales in the last year's third quarter.

We were able to improve our general administrative expenses as a percent of sales even while absorbing additional costs related both to our retail and international expansion.

Rent expense rose by 700,000 dollars due to the opening of 17 retail stores, two international subsidiary offices, and showrooms since the end of the third quarter of 2001.

In addition, we recorded 1.4 million in non-cash expenses - - in additional non-cash expenses associated with the increased depreciation and amortization of cost.

The comparison purposes for general administrative expenses were 16.4 percent below last year after subtracting increased rent and depreciation and amortization cost from this year's third quarter.

Once again, total operating expenses improved 250 basis points to 32.5 percent of sales versus 35 percent in the third quarter of the prior year, even with additional depreciation, amortization, and increased infrastructure expenses that I previously mentioned.

Third quarter operating profit was 24.1 million compared to an operating profit of 22 million in last year's third quarter.

The operating margin rose by 160 basis points to 9.2 percent compared to 7.6 percent in last year's third quarter.

Net earnings were 14.1 million compared to net earnings of 11.4 million in the prior year period.

Fully diluted earnings per share was 35 cents on 41,962,000 shares compared to a fully diluted earnings per share of 30 cents on 38,275,000 shares in the third quarter of last year.

During the third quarter, diluted share has increased by approximately 3 million due to the convertible bond offering we completed in April 2002.

This required us to assume the conversion of the 90 million in notes and if they had already taken place.

Trade accounts achievable at quarter end were approximately 122.8 million as compared to 120.3 million at December 31st, 2001.

Our DSOs at September 30th 2002 were 43 days compared to 44 days in the same period of 2001.

Inventory at quarter end was on plan and current at a 129.7 million, representing a reduction of 28.8 million or 18.2 percent form the 158.5 million at the end of September 2001.

Going forward, our plan calls for a continued modeling of our inventory purchasing.

This is the same model that we've used historically to purchase inventory.

This allows us to maximize sales while businesses strong and reduce inventory when the environment is difficult.

We ended the quarter in a fluid cash position.

At September 30th 2002, cash on the balance sheet totaled 108.1 million compared 15.6 million at the end of 2001.

Increase in cash is mainly due to the completion of our 90 million dollar convertible debt offering that netted up approximately 86 million dollars.

Without the offering, we would still have had more than 22 million in cash and no short-term bonds.

Working capital rose substantially totaling 296.4 million at quarter end versus 140 million at December 31st 2001.

Cash flows provided by operations exceeded 90 million for the nine months ended September 30th, 2002.

In fact the cash used in operations of 8.4 million during the same period in 2001.

Long-term debt rose to a 117.6 million.

Of this amount [90] million is related to our convertible debt offering.

Remainder is related to the mortgages that we have on our distribution center and corporate headquarters and capital lease obligations.

CAPEX during the first nine months was approximately 7.9 million dollars, primarily stemming from new store openings and leasehold improvement.

For 2002, we continue to project total capital expenditures of 12 million.

A majority of this amount is related to our retail and international expansion.

For international operations we are in the process of moving our newly leased facility located in Liege, Belgium, which we believe should more effectively and efficiently manage our plant growth for the flexibility we require in current and new European regions.

The move from a third party 130,000 square foot facility in Gent, Belgium to more than 240,000 square foot Liege warehouse, which is expandable to 1 million square feet is expected to be completed by first quarter 2003.

At the outset of the Longshoreman's dispute, we had approximately 900,000 pairs of shoes in transit from Asia to the West Coast.

Based on current reports, we believe large portions of these shipments will be delivered in time for the holiday season.

Going forward we have identified alternative shipping routes for our goods, thereby reducing our exposure to Long Beach Port.

These new routes will remain in place as we continue to monitor the progress of labor negotiations.

We will adjust our plans if necessary based on further developments.

Our alternative shipping methods include routes through East Coast and Vancouver and to a certain extent we will airfreight goods.

The higher costs associated with these moves are currently expected to raise the cost of goods sold by 100 to 200 basis points in the fourth quarter.

As you may recall over the past year cost of goods sold was positively affected by reduced freight costs.

Given the sluggish US retail environment as well as weaker than expected sales through our international distributors, we are reducing our sales guidance to between 195 million and 205 million versus our previous guidance of flat sales.

This compares to last year's fourth quarter sales of 214 million.

Also based on the negative impact stemming from moving to alternative shipping routes, we believe our fourth quarter gross margin will be 100 to 200 basis points lower than normal.

As a result, we are now comfortable with the fourth quarter diluted earnings per share in the range of 3 to 8 cents.

This compares to the current fourth quarter First Call consensus estimate of 11 cents and versus fourth quarter 2001 actual diluted earnings per share of 5 cents.

In fiscal 2002, we estimate diluted earnings per share in the range of 1 dollar and 42 cents to 1 dollar and 47 cents.

This compares to the current First Call consensus fiscal 2002 estimate of a dollar 46.

Our new guidance for fiscal 2002 represents growth of between 14 and 19 percent over 2001 diluted earnings per share of a dollar 24.

We believe we will be in a better position to provide specific 2003 guidance following FFANY, the Footwear Trade Show that is held in December.

However based on current trends, we are not backing away from the current needs first call estimate of a dollar 53.

In closing, Sketchers is a unique footwear company.

We have achieved tangible results throughout our 10-year history by translating the latest trends into strong-selling footwear [Inaudible] across a broad spectrum of footwear category that appeals equally to men, women, and children of all ages.

We remain excited about the future in our company and our ability to drive sales and earning growth over the long term.

And now I would like to turn the call over to the operator to begin the questions and answers portion of the call.

Thank you, sir.

One moment please.

Ladies and gentlemen, we will now conduct the questions and answers session.

If you have a question, please press star 1 on your touchtone phone.

You will hear a three tone 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 2.

Please ensure that you lift the handset if you are using a speakerphone before pressing any keys.

One moment please for your first question.

Your first question comes from Dorothy Lakner from CIBC World Markets.

Please go ahead.

Thanks everyone and good afternoon.

Could you talk a little bit about performance by channel during the quarter.

Department stores, Specialty stores, etc?

What retail comps were, were like in the quarter?

And just give us a little indication of how the business performed by the different branches?

If you can give some of that information, thank you.

As you know, we historically don't break out our brands, nor do we give comp stores sales.

But I think our performance at retail in the channels that we sell is a reflection of how those retail channels have done and where our strength has been primarily in the past.

We have done well in some places like Shoe Carnival and Famous Footwear.

You know, they had problems with comp stores sales in a macro situation, but our business continues to thrive in those places.

We held ground at some of the bigger department stores such as J.C.

Penny and Kohls which we are doing quite well with.

We have been under a slight pressure in some of the department stores as they have [Inaudible] companies of the world.

So, I think the breakdown, it is fair to say that the brand is performing well where it has always performed well, and it is under pressure in those places where we are trying to grow and had a smaller market share.

As far as our retail channels are concerned, as we don't really comment on retail comps, however, we have been quite pleased with the performance at retail, although, what was a very difficult first 9 months in the last quarter.

We find that as we put our new product into the store that perform quite a bit better giving [Inaudible] to the fact that we think our new offerings [Inaudible] going forward, are doing quite well.

And as you said we are not retailers and our concept stores don't compete on a price-basis, never on sales, so they have had [Inaudible] it is fair to say that our concept stores didn't perform as well as our outlet and box stores which did perform quite well during the quarter and continued to do so through the beginning of October.

Okay.

And then just going back to the question I had about brands, even if you can just give some indication of, you know, athletic versus non athletic men's, women's, and kids', and kids' obviously was very strong a year ago.

Can you give us any color there?

I think it is fair to say they all performed well at the market place.

Our strength, continued to be our strength.

We were obviously stronger in women's sport than we were in non-sport, although our women's Black & Brown business within USA and something else from Sketchers is embedded in the market place and continue to perform quite well.

For men's, obviously, our Brown & Black has been stronger than our Sport with greater strides and helped in both the Black & Brown and our Comfort line and in collections.

So, it is fair to say we held strength in the places we were stronger and have continued in the places where we were weaker.

We continue to attack the market place and continue to bring more offering.

And the Kids' business?

The kids' business continues.

I mean, it has been strength for us.

It performs quite well.

It obviously could have grown more in a better environment, but I am sure our kid's business is very stable and has become a very basic item for most kids' channels.

So, we feel very good about all of our offerings, all of our businesses and their acceptance as we move into next year.

Kids' obviously, has been our strongest shoe for us in the past and we do expect that to continue.

Great.

Thank you.

Then just one question on the West Coast port situation.

Given the change in guidance to the fourth quarter, how much of that would be associated with that situation.

And if you could sort of break it down by the environment versus what's going on the West Coast port?

I think it is fair to say most of the revision in the fourth quarter is due to the macro situation that exists.

While the port is of concern and if things deteriorate from where we are now, could become even more of a concern.

Right now, we are very comfortable with a large portion of the goods in transit and what will have on time.

There are obviously a few things that are going to be late.

But some of these new products, we don't anticipate it to be a significant problem.

It is more in demand but [shippings] deteriorate and [Inaudible] obviously a good change.

But right now, we think that our biggest carriers are moving through quite efficiently, I think, slightly better than what we hear is going on at the average at the port.

So, the port situation is a problem that is expensive, it requires a lot of manpower but to date we don't feel it is a significant decrease in the fourth quarter volume.

Okay.

Great.

Thank you.

And next question comes from Mitch Kemich from Wedbush Morgan.

Please go ahead.

Yes thank you.

I apologize, I was a little late to the call, so if you covered this, you may already have, but in terms of your Q3 sales, a breakdown domestic versus international versus company wide, could you provide that for me?

Well we haven't given, we don't give specific breakdowns in the past but we did announce in the call that international is now 13.4 percent of sales, that held through the quarter and we did have some growth in domestic retail.

So, I would say to assume that higher than a 10 percent.

That would give you a broad scope of where we are.

Okay.

And then with regards to licensing, which you just announced your second agreement there.

What does the pipeline look like, I mean what might be coming soon or what could be the timing of it in specifically with regards to the two deals that you have announced.

What is the earning impact of those to licensing agreements for 2003?

Well it is difficult to say what they're going to be for '03, both lines are just coming, their first offering to the marketplace will late this year for late spring delivery, so it's hard to tell.

I think it's safe to say those two deals are first two in and of themselves would not have significant impact unless the lines take off for next year.

It will generate some income and generate some brand identity.

As far as where we could go with licensing and its impact, what I can tell you is that we have a brand that is in great demand.

And that means that that number could accelerate quite rapidly depending on how quickly we can negotiate the deals and how comfortably we are with the product.

There's a lot of possibilities out there, a lot of people, a lot of quality companies that are interested and a lot of it depends on how quickly we can come to termination on the deal, and then [Inaudible] look on (ph) to get that product in the marketplace.

So, I think it's premature here to say how much it can be.

I think you stay tuned to the announcements as we make them.

I think it's fair to say, as we start them, the faster we announce them the more it would be.

If we give you a number right now, then we are bound to a number and it may force us to do some things in negotiations that we wouldn't normally do, but I think it's safe if you talk to people around and that two licenses that historically carry brands that are branded in much demand and would do quite well in that licensing arena.

Are you likely to add additional accessory categories through licensing arrangements prior to doing an apparel deal?

[Laughter] That's tough to say, are we likely or more likely or less likely, that depends on the deals that are done.

Apparel is obviously the most difficult.

It's the highest image; it's the one we're most careful with.

That's not to say we can't find somebody that's quality that's in our thought process tomorrow and do a deal quite quickly.

There is a number of them out there and they may come first.

It's the biggest, it's the hardest, so chances are that there'll be other licenses along the way, but we're certainly talking about apparel and there's really no timetable as to when it might happen.

Ok, and then, in the press release, you may have covered this in the call; you mentioned that you have identified several expansion opportunities, could you elaborate on that?

Expansion opportunities, yeah, I think all our lines, all our domestic wholesale lines have opportunity, obviously our international has opportunity, all the issues for licensing are opportunity.

We have significant more choices in our retail, choices for store openings and so all that I would say as is opportunity, plus which, you know, our core strength is always been developing product and the advertising we put through.

We have increased our design phase, we are focused on all 10 plus groups.

We think we got a lot coming into the marketplace both spring and after, it is also significant expansion and we are still going to push our advertising model next year, probably even more so than this year.

So, all of that is opportunity for us to expand.

And then last question, just in terms of retail, how many stores have you opened in the last 12 months and what is the plan for the balance of this year, next year?

Well, we have opened this year 13 stores or 12 stores and will open 3 to 4 more in the fourth quarter and this is anticipated if everything is on schedule.

Next year we plan on stepping up our retail openings.

I would anticipate it would be somewhere between 25 and 35 stores next year.

You already identified real estate there?

We have, as usual, we have identified a lot of real estates, some of them are in the negotiating stage, some of are in the final lease stage and in fact some of them are just conversations but we are obviously looking on broader scale than we did this year.

We have also increased our scope of where we can open stores and we are going to open a significant amount in Europe or at least we are looking for European stores.

We are looking in Spain, we are looking in Holland.

We are looking for significant more presence in Europe and as well as Germany and in France.

So we are looking on a broad scale.

So, I think the 25 to 35 number at least for today's purpose is a good target.

Okay.

Great.

Thank you.

Our next question comes from Dave Turner from BB&T Capital.

Please go ahead.

Good afternoon.

What is the dig behind the guidance a little bit?

The fourth quarter guidance is the 195 in sales.

Does that assume any deterioration in sales of retailer or there is just a continuation of flat to slightly down comps within your channels?

Well I don't know what that means, but I have-- [Laughter].

Just try to get an idea of; you know, is there, what do you backed into your sales assumption?

You know, again are you planning for comp within your retail channels to be flat or slightly down or is there, you know, have you backed in further deterioration?

Not always, I am sorry, it's only that ....

You are right, within the channel, what your sense of?

Well right now, we have no reason to anticipate that retail to get any better.

So, therefore considering that it continues to decline or under perform or become more price-sensitive or something like that in that assumption.

So, we are assuming that there is no great up tick, there is no great chase for at length business or product or something that kind of marketplace.

So, yeah, certain turnaround, the holiday season could certainly change that, but I don't see any reason, personally anyway to foresee that right now.

So, it is safe to say that the model has built around, continuation of weak retail sales throughout most of the channel, continued weakness at the international level predominantly in the South American region where we have had some of the political and financial turmoil where they are having some difficulty making comps offset by the increase on our retail channels through both, we are trying to get some better comps to October, but through the increased number of stores and through our subsidiaries, which was trying to grow.

Some of them in the start of [Inaudible] that it should continue to generate increases for this quarter and into next year.

Okay, thank you.

And you mentioned earlier that you getting a lot of favorable feedback on your spring 2003 product line; you get the sense of that there is any change in retailers becoming less to sensitive or is there some new product that you are introducing?

Or what's the enthusiasm for new spring 2003?

The enthusiasm is always about the product and the offering in the brand in general.

I don't see any retailers really becoming more enthusiastic and enthusiastic about the brand and the product, but do not as enthusiastic about their decisions to build inventory potentially increase sales or they would rather miss the sales and then be over inventory.

So, I think that thought process continues at retail and we will continue until some changes at the retail level.

And one last question, now that you are sitting on a nice cash position that you contemplated or is there any thoughts behind by buying back converge or maybe some subsidiaries (ph)?

We think about everything.

So, my match is again pretty lumpy or so.

How hardy? [Laughter]

Anyway, I will just leave it to that, but thank you.

No, as we said in the past, we raised the money for a very strategic reason, and they are all business related.

We didn't raise the money unnecessarily to buy back stock or to buy back to convert at a lower rate.

Although, we continue to have those discussions as we go forward.

Rather to being over reactionary to the marketplace and jumping on something to use the cash early we had decided [Inaudible] at the end of our third quarter, I believe conference call that we would wait to first and second quarter to see what the business demand, what the growth opportunities, what potential increases we could build with that cash in our business before we decided to go forward with the specific plan.

Prior to that, you can see we have expanded our Horizon on opening stores to 25 to 35, which is a considerable increase from this year.

So part if it goes there because that we could accelerate that as well.

We could potentially accelerate our European and we still have reason to believe at least in generally without getting to carry it away and we got significant growth opportunity to United States that we have some wholesale perspective that we will require capital next year.

So, until we sale and where we are going early part of next year versus second quarter, we will probably not make any definitive decisions on to use with the big piece of the cash.

Okay, thank you.

Your next question comes from Joe Teklits from Wachovia Securities.

Please go ahead.

Hi David.

Hi Joe.

Couple of modeling questions and some bigger picture questions.

First of all, tax rate was down in the quarter and just curious why that's going to continue?

The tax rate is down in the quarter for same reasons as we spoke in the past.

As our International business becomes a bigger contributor to the bottom line, we have more beneficial tax rate on our International business than we do domestic and as that income blend and it becomes a higher piece of International, we will continue to see increased benefits although a big piece has come already but we will continue to grow internationally and there will be a middle ground somewhere as we go forward.

We haven't reached the bottom where we think we could be tax rate wise with the growth that we anticipate from International.

So this 35 percent number then can be used going forward?

Assuming International holds up as well, yeah, I do, the current.

We are actually at a, just about 36 percent, 35 and change we used in the third quarter was to blend out the year to get the first two-- down to the running rate, which is just over 36 percent.

And you said in your comments that gross margin Q4 would be down 100 to 200 basis points from normal levels.

I was kind of curious what the normal levels are?

Do you mean last year?

Well, the first three quarters this year we will run at just over 41 percent.

I think what I am saying is it would be 39 to 40.

Okay, any kind of backlog talk you want to give us for spring or even just some insight into how retailers in different channels are now planning spring in terms of an overall plan up or down from last year.

I mean last year was pretty conservative to begin with and how much product is actually being booked upfront versus being delayed?

Any kind of talk you want to give us there?

Not really, but I will anyway.

Basically, I don't think things have changed since the beginning of the year.

The comments that we have made at the beginning of the year that retailers and we ourselves want to buy closer to divest and put the inventory risk on somebody else continues at the cost of missing a sale going forward.

So, I think, that mentality really hasn't changed at all.

Our bookings continue to hold as well as they have throughout the whole year.

So, we do get some future bookings that arenot as far out as they have been, but we don't require them to be because we are faster in the Orient(ph) and can make those lead time, don't have to speculate as much as on a closer-in timeframe.

So within those timeframes that are given where we are booking and as good a rate as we did this time last year and anticipate that people are, by my personal choices or my personal decision would be or our thought process is that they are under booking spring so as to be more conservative.

So, there should be upside in spring as you get there especially given the product we have had and the acceptance we have had in some of our own sources, it comes out, but we will wait to see how that plays out.

So, how far out do you have deliveries booked for right now?

Right now, we can make anything for deliveries probably 3.5 to 4 months out.

So, while we have some of that to further out in that in plant, certainly they would go further out in that.

All that we require to make the order is somewhere in the 90 to 120 day range which is significantly quicker than last year.

Okay, and then finally looking out to next year, you kind of allude to the fact up today that your marketing spend might be a little more aggressive next year.

I think I heard you correctly, but along with lines, is there any additional cost cutting ability going into 2003, especially if you feel like you do need to get a little more aggressive with marketing.

And then also maybe your CAPEX number for next year?

Well, from market, I think we have always been aggressive.

So, to that point, I think we have never backed-off marketing and we will continue to be so and see within the market.

But as a percentage, it is down this year.

So, what do you do with that?

It's down but it is still over 10 percent for the quarter.

I don't think anybody would back away and I think the imaging that you have seen out there is consistent with prior years.

I still don't believe you can pickup a magazine on an airplane and not see the ads or turn on, if you are a target markets for kids where we have run TV ads or some of the adults had not have seen the commercials.

So, I don't think the instances are there.

There is pricing differences and there is other places to get marketing dollars other than the images presented to the consumers.

So, I think it's, one thing should be clear to everybody.

We are marketing company.

That's what we are, that's a core competency of ours.

We are not going to back away from it.

Our images will be seen and that will be seen all over the world even on a more aggressive basis.

As far as the second part of cost cutting, there is always a place to cut some cost and we become more efficient.

I think it is there to say, as we grow and as our start-up where our [Inaudible] equities grow we will become more efficient within all of those.

So, while there is still some opportunity to cut real dollars, we are now efficient enough.

So, as we grow, we will grow at less cost per unit as we go forward.

So, a lot of that will be tied to growth as we go forward.

And CAPEX next year, you figured that out yet?

CAPEX for next year, right now given the 25 to 35 stores, depending on whether the opening in [Asia] the end of this year or first quarter of next year assuming it's mostly first quarter next year and some upgrades to equipment.

I would say, today I would put it in the 25 million range.

And what was it this year?

This year, it will be about 12.

So, it's double next year.

Yeah, why not.

I went from 12 to 25 to 35 stores and new distribution centers, that will be more efficient.

We just require some CAPEX and I will be more efficient at retail, we are going from 90 stores to what could be a 125 stores with a slight upgrade in computer equipment, which is not a significant piece but certainly a piece to be done.

So yes where our stores are our showcases and we show them and at 35 stores--

So, you are paying these fees?

[Inaudible] that's in our ranges number.

Yeah, the European DC in that number.

Yes.

Correct.

And what's the cost?

I should tell you that, you know, at the impact of cash flow as we are now running at about 18 million plus in depreciation.

So, think of CAPEX in terms of depreciation charges [Inaudible] cash flows for next year.

What's the cost for the DC?

[Inaudible].

What's the cost of the DC next year?

That should come in somewhere our investment, I anticipated [Inaudible] somewhere between 4 and 6 million.

We are still working on the final drawings.

Okay, thanks.

Good luck.

Thanks.

Your next question comes John Zolidis from Buckingham Research.

Please go ahead.

Thank you.

Good morning guys.

Good morning.

Quick question for you.

It looks like, at least in the short term that the retail and international businesses are going to grow faster than the domestic business, the domestic wholesale business that is.

Is that going to have a positive that gave or neutral impact on the operating margins?

That's hard to say right now.

I think it will have a positive effect simply from all the efficiencies; all the companies are more efficient and more efficient to the bottom line.

So, all our growth, whether it is domestic wholesale or retail or international will have positive impact to our operating margins right now.

Okay, but if you look at the retail business separately, does it have a higher operating margin than does the domestic wholesale business?

Well, it's slightly lower on the overall, but we expect, anticipate that stock to increase now because we don't have to build as significant in infrastructure internally for each store we open.

So that's starting to grow in anticipation would be by the end of next year to year-after that would be on the same matrix as our wholesale business for increased dollar volume.

Okay and then one question about US domestic distribution; in 2002, I guess, looking forward into 2003, do you expect to grow distribution or keep it about the same in terms of the number of doors that you are putting your product in?

No.

We only help to grow distribution, I mean, you know, I want to make sure that we don't get the wrong connotation here.

We are not looking to take it outside the channels of distribution that we now exist from where it goes.

We are not looking to go what people would normally called downstairs or anything, but we have said in the past, there is a number of athletic specialty chain, there is a number of other doors where we are either not fully penetrated to all doors or we don't have the widest key base as we think we should have in all doors and that's where we anticipate expansion absolutely coming from.

Are you, do you plan a big launch with new set of SKUs for next year at this point?

[Inaudible]?.

Well, are you widening your SKU offering for next year?

We always say, with all our business now being merchandised on an independent basis and all being developed independently.

It's safe to assume that we will increase it all our offerings.

Okay great.

Thank you very much.

And next question comes from Carol Marie from Solomon Smith Barney.

Carol Pope Murray Hi good afternoon, I guess it is good morning to you David, a couple of questions, I missed the number in the beginning, so this is just a house keeping item, but I think you gave what you international sales growth was year-to-date and I missed that number, do you have that number available?

Yeah I believe it is 30 somewhat percent.

Carol Pope Murray 30 plus percent?

Uh-uh

Okay, we have seen your inventory position on you know, relative to obviously the timing of receipts with the West Coast strike, where do you think your inventories might, think it will be you know, above year-ago levels at the end of the year, I mean it seems like there is a lot of different moving parts on the inventory equation because there is strike and the re-routing.

So, any feel on where year-end numbers might be heading?

By the way, just for a clarification also could be considered bookkeeping, the port strike had absolutely no impact on our reportable inventory.

As I think we have said in the past and is clear once the merchandize leaves the factory, or actually more technically, once it leaves Hong Kong ex-port, it is counted in our in transit, in our inventory or reportable number that we give out and include it in these.

So, that 900,000 pairs that were on the water, whether they were on the water or in the warehouse would not have changed our reported inventory.

So the inventory is what it is, our inventory in the warehouse, you can assume is significantly lighter since that 900,000 pairs spot that would have been in the warehouse at quarter close as apposed to the other.

So continuing I think we continue this trend of inventory into the year-end.

We don't have any plans right now to overly increase although we are bringing separate string.

We always have that dynamic in December/January.

If our factories have spring product ready in December, we are going to put it on the water so, there might be a little fight right there, but I don't anticipate anything else.

Does it routing, your re-routings in your alternatives you won't be getting earlier receipt, whether it is over there or over here, you don't expect that to dramatically influence your year-end balance at all?

No, because once it is in transit we have it on our year-end balance, so it would have been in transit no matter what, but that is in our reportable inventory.

What we watch is more the cost because it takes a longer period of time and it is more expensive through all the alternatives.

Okay.

And to the extent we could get what our, you know, our factories facilities to ship them earlier so that we don't have to air freight and do some alternatives, we might have slightly more in transit, but I don't think it will be in an excessively large number.

Okay, on the, in the quarter, do you have a sense of you know, relative to last year, which obviously you know, had its own set of issues relative to 9/11 you know, what the, directionally how much was your fill in business off relative to last year?

It is hard to say, when we do it all, I think it is fair to say that fill in business was down dramatically and since it usually averages in the 25 to 30 percent range, I would be surprised that if we go back and evaluate that, it was anywhere near half of that.

Just going back to an earlier question, we you know the market in athletic seems to be very much focused right now on retro products and I know that that was you know, a kind of a big push for Skechers, if you just comment on the performance of your kind of the retro lines in the third quarter?

Yeah, I think where they, its a mixed bag obviously, where they delivered and in our own stores where we see them, I think they perform quite well, I think it only depends on a) how you identify retro, some people some things retro, some not, they could be active, they could be a lot of things and it sort of shades, but I think in our stores the new product that delivered has been selling quite well and in various places at retail it has been selling quite well, I think it is hard to make an overall evaluation because of the weakness in the market place in general, but right now we are happy where we are, we have some new offerings coming, we got some great acceptance and I think as we go to Spring they'll even perform quite a bit better.

With respect to marketing or promotions during the, not promotional activity, but just kind of campaigns is there any thing that, I know last year the 4 Wheelers was a big push for holiday, is there any kind of big focus either more categories for holiday 2002.

I think this year we're just focusing on what we have overall and promoting all our distinct business groups and the Skechers name and the Skechers brand as we have done in the past.

So yeah, we are going to do a little bit for with in a have the marketing not be focused on one item, but be focused on the brand and the multiple offerings in general.

So, I think that's an enhancement.

Okay.

And I wasn't really clear on some thing that was said earlier.

In the quarter, I think Dorothy had asked about some category commentary and you said your kids businesses remains solid.

Does that mean it was up in the quarter or it was just a relative basis better than the average?

I think it's fair to say on a relative basis it is better than the average.

Okay, and then just lastly I just wanted another clarification, did you say that in your own stores that retail sales actually had improved a bit in October?

Yeah.

I mean, I couldn't get into comp stores, we see as we are delivering some of this new products that we are seeing distinct pickups at retail.

So it gives us quite a bit of comfort in the new product offerings and the acceptance of the brand for the new offerings we are signing to bring in.

Last question.

Any comment on product pricing, we have heard more in the athletic channel that you know there has been a shift in average selling prices, maybe more in the traditional sports brand as performance is being replaced by demands for retro on the margin, any noticeable change in your sales mix in terms of an average selling price?

We haven't seen any significant one yet, we are down a little bit certainly not anything has dramatic in the marketplace.

I think it's fair to say that part of our secret is out and there is more people and more competition which should make the marketplace that much better and we think that applied to our core competency as people try to play where we have been over the last few years.

We think our developments and our offerings in the marketplace and the brand name we have developed in that marketplace will be sold quite well as we go forward into next year into spring and future.

Okay and then just for your comment that you are comfortable initially with next year's guidance or next year's consensus numbers.

Any further color?

It's very difficult, as we said we don't want to get specific guidance you know.

I don't want to leave with the assumption that we think our business is difficult and it's not going to extend going forward.

We just don't have enough to quantify yet as we go into spring and further on the picture at the port and the picture at retail and what's going on but it's certainly not beyond anybody's belief here that we will still show gains both internationally and domestically and retail wide through next year.

And we will give more guidance and more color as we get through fourth quarter and see exactly what's going on.

Okay.

Thanks David.

Okay.

Thank you.

And next question comes from John Shapiro from Rothschild Investments.

Please go ahead.

Yes.

A quick question regarding spending the money on retailers, opening retail locations instead of buying back shares.

At the current price assuming zero growth you can extinguish yours and take a certain 15, 16% versus opening up of retail location which is a lot more difficult to pull off or I'm just a little at a loss for words as to why you will be more active in buying back your own shares for certain money instead of the risk associated with opening retailers.

I think it's fair to say what we hear is, we heard [Inaudible] to promote push and leave the brand of [Inaudible] and you buy back stock, I think its fair to say that you can only do that for such a period of time.

Your efficiency has gained there on the North flow.

We anticipate our first premise to promote the name, the product, and the brands as we go forward on it.

A short term what could be considered hedge, which could buy back stock rather than promoting name is certainly not the long-term strategy unless we ultimately come to the point that we want to grow quickly enough and then stock at the end of next year.

I think we have to grow and do that and not one at the expense of the other at this particular point in time.

Well.

I can appreciate that and we are all in favor of the business growing as well, but it's when it's a trade off, if you have capital and you can take on additional risk or you can take the free money.

You want to take the free money when it exists and then you are in a better situation either in raising additional capital if new opportunities arise or you know you deluded the overall size of the company and that all the new share holders are existing shareholders are better off.

So I guess I am just a little lost as to why its not being managed more actively on behalf of shareholders.

You know, we can debate this issue I'm sure from now [ad infinitum].

You will get both sides of the story and we have gotten opinions obviously on both sides of the story that are significant.

The decision we have made now is that we don't want to over react and make a short-term advantage to some existing shareholders as opposed to the long-term shareholders and knows that builds the brand and go forward.

So your point is well noted and we will take out, you know, we certainly take it under advise and under consideration, but I don't tend to feel that it is quite an open in such cases [Inaudible] like to make.

So, we'll take it under advice and we certainly have more conversation.

You are certainly welcome to call me offline.

I will again discuss it further and see whether you can convince of what necessary goes right now.

Cooperatively we have made a decision until at least the first two second quarter before we make any significant decisions for the cash.

And sir your next question comes from Jeff Lignelly from Stonebrook Fund Management.

Please go ahead.

I just wanted to review your free cash flow expectations for 2003.

I know earlier on you mentioned you felt that the current consensus of a dollar 53 was reasonable.

I think you mentioned D&A of around 18 and CAPEX of 25.

What would be your working capital increase expectations for 2003?

That would depend on the level of volume and where it comes from and which store level.

We obviously need more working capital.

For the stores, they require more inventory at that particular point and if we are growing our wholesale business, we will also increase inventory and receivables.

I think it is fair to say from a modeling perspective that given no growth either in inventory and receivable, we will net income plus seven million dollars and the rest we will have to take care of that as we give a more defined picture on how much growth and how much we will have to put into working capital to sustain that kind of growth and we will give more guidance at the end of the fourth quarter.

So let us say free cash flow in 2003 could be 50 million or north.

Oh sure.

That could be easy enough.

And then what is your free cash flow expectations for the fourth quarter based on your current guidance?

Current guidance if we make on the low end if we make three cents which is about two million dollars and 15 million dollars in-- I am sorry, 4.5 million dollars in CAPEX would give us six or seven million and it is about three million less to spend.

So given no increase or decrease in inventories as I refer back to we might want to take some inventory early, we could gain about five to seven million dollars in the fourth quarter.

So this current cash number of over 100 million is just going to continually go up really every quarter for the most part.

Well, we are in a position if we are not growing or generating significant amount of cash, the only thing that would take away from our cash generation is growing at a significant rate which we certainly trade up with this point.

We are going to see what the marketplace is like.

Kind of a comments on one of your earlier answers.

I mean given the free cash of over 50 million dollars to make sure free cash of this quarter really doesn't make sense for you guys to spend some more time considering your share repurchase program given that you can grow your business dramatically and still have 50 million dollars of free cash.

I mean, you have an opportunity here with your stock at less than seven times earnings really creates some value for shareholders and buy back stock would Inaudible create earnings per share growth going forward?

And we will certainly take it under advisement, absolutely.

Thanks.

Ladies and gentlemen, unfortunately we don't have any more time for any questions, I would like to turn it back to you Mr. Weinberg.

We do appreciate everybody's attention and interest in the call.

We just want to reiterate one last time that feel very confident very comfortable with the company with its image, with its product, with its potential going forward and look forward to the competition in the marketplace and to be back with hopefully more guidance and information in the fourth quarter.

Once again thanks very much and everybody have a good day.

Ladies and gentlemen, this concludes the conference call for today.

Thank you for participating and please disconnect your line.