Skechers USA Inc (SKX) 2002 Q4 法說會逐字稿

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Good afternoon Ladies and Gentlemen, and welcome to Skechers USA fourth quarter and year-end 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, Brian [Yarborough] of Integrated Corporate Relations.

Sir the floor is yours.

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 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.

I would like to turn the call over to David Weinberg, Chief Financial Officer of Skechers USA.

Thank you Brian.

Good afternoon and thank you for joining us today to review Skechers' fourth quarter and fiscal 2002 year-end results.

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

Year-end 2002 sales were at 943.6 million, well in excess of 900 million for the second consecutive year, and within approximately 2% of 2001 sales.

Our 2002 earnings per share were $1.20.

While 2002 year-end results did not meet our initial expectations, we believe that with a notable year for Skechers for the following reasons: We maintained our market position, holding market share gains achieved over the two prior years.

We strengthened our balance sheet, increasing cash to 125 million, eliminating short-term bank borrowings and improving working capital to $287 million.

We began direct wholesale distribution in key international markets, including Spain, Italy, Portugal, the Benelux region, and Austria.

We successfully completed a $90 million convertible debt offering.

We opened a 240,000 square foot distribution center in Liege, Belgium.

We signed three licenses with major companies in the sock, sport watch and children's clothing sectors.

We maintained this position and strengthened the company despite soft consumer spending, the West Coast port strike and reduction of revenue due to the elimination of our catalog business in 2001.

We believe this to be a testament to the strength of our brand, diversity of product offering and our reach across global markets.

We feel our strengthened financial position will provide us with the flexibility to capitalize on future growth opportunities.

I would like to expand on our achievements in 2002 and our four revenue channels.

Domestic wholesale, international, domestic retail, and licensing.

First, domestic wholesale.

With the addition of a couple new lines in 2002, we have increased our product offerings to 11 diverse lines for men, women and children, meeting most retailers' and consumers' needs.

In the first six months of 2002, we achieved strong sales in most of our product lines and in the remaining six months of 2002, with a sluggish retail environment, we experienced solid sales in key categories and styles, including the 2002 launch of Skechers Active and the subcategory Skechers Retro.

While we remain conservative in our plans for our domestic wholesale division, we are encouraged by the January 2003 preline meetings in our Manhattan Beach Headquarters with the top accounts responding positively to our 11 lines and the continued enthusiasm during the World Shoe Association earlier this month.

We continue to believe that there is an opportunity for our brand to increase penetration within our current retail partners through both new product introductions, and expansion of existing product categories.

Second, international.

Skechers footwear is available in more than 100 countries and territories around the world through more than 30 distribution partners and international subsidiaries.

We continue to export our business model to key European regions by either assuming direct control of the business or launching the brand in countries like Spain, Italy, Portugal and the Benelux region.

To more efficiently handle the distribution of our product in Europe, we established our own distribution center in Liege, Belgium.

This 240,000 square foot facility, will meet our near term needs and has expansion capability on a as needed basis, of up to 1 million square feet.

In January 2002, we assumed the distribution and marketing of our brand in Canada, where we will now be able to offer a much broader selection of our products due to relative close proximity of our distribution center in Ontario, California.

In the fourth quarter of 2002, we opened international flagship stores in Frankfurt, Germany and Toronto, Canada.

And in February 2003, we opened our sixth international retail store at [Trapper] Center in Manchester, England.

We expect to open an additional four stores internationally in 2003.

Fueled by strong sales within our subsidiaries and growing brand awareness, our international division has grown from just over 12% of sales in 2001, to almost 15% in 2002, bringing us closer to our three to four year goal of international sales representing 25 to 30% of total revenues.

Going forward, our objective with our gather subsidiaries and with many of our distributors is to integrate additional product lines into their distribution plans.

Historically, Skechers sport and to some extent, Skechers USA and Skechers kids have been the sole lines distributed overseas.

We believe many of the diverse styles from all our product categories will be broadly accepted by international consumers.

Also, in 2003, we believe there are still many opportunities to be explored in the international arena and we'll work towards our goal of increasing distribution in those countries where we have established subsidiaries.

Now, domestic retail.

Believing that our retail stores promote brand awareness and enhance profitability, in 2003, we opened 13 domestic retail locations including the high profile, Mall of America and [Alamawana] Mall, bringing the year-end total to 91 domestic stores.

In January 2003, we opened a premier flagship store in one of the busiest tourist centers in the world, Times Square.

The innovative 6400 square foot venue provides consumers with the ultimate in shopping and entertainment in a Skechers lifestyle setting.

We are pleased with initial results and continue to believe it will be our highest sales volume store.

In 2003, we plan to open an additional 20 to 25 retail locations.

And finally, licensing.

With a goal of ultimately making Skechers a complete lifestyle brand, we launch our licensing division in 2002 with three licenses: Skechers men's and women's socks from Renfro Corporation are planned in stores in Spring 2003.

Skechers kids apparel from Kids Headquarters just received strong reviews from major department and specialty stores at the Magic Trade Show this week and is scheduled to be on floors in July 2003 in time for "Back to School".

And Skechers sport adult watches from Advance Group, Inc. will be available in the second half of 2003.

We believe that we can further build brand awareness by selectively pursuing licensing opportunities in targeted areas and our continuing to evaluate potential licensing opportunities.

We expect to announce several new licenses over the next few months.

In support of our division's domestically and internationally, we will continue our philosophy of spending 8 to 10% of our sales on advertising and marketing.

For 2003, we are launching aggressive product-driven campaigns in print and television.

These ads and spots will feature multiple key style for men, women and kids.

For the fourth quarter, sales were 180.8 million, compared to 214.1 million last year.

The sales were better than our updated guidance primarily due to stronger than anticipated shipments during the last two weeks of December.

We believe these stronger sales during the last two weeks were a function of lighter inventory levels and better sell throughs at retail.

Gross profit decreased 18.3% to 69.6 million verses 85.1 million in the same period a year ago.

Fourth quarter gross margin was 38.5%, compared to last year's gross margin of 39.7%.

Fourth quarter 2002 gross margins were affected by additional air freight and rerouting costs due to the West Coast dock strike, along with a reserve for skate inventory, including the Brittany line, which combined impacted margins by over one and a half%.

Total operating expenses as a percentage of sales increased to 45.2% from 36.8% in the fourth quarter of fiscal 2001.

We have a relatively fixed operating expense structure and when sales drop below certain levels, our expenses tend to deleverage as a percent of sales.

Fourth quarter selling expenses improved to 21.6 million or 12% of sales as compared to 25.6 million or 12% of sales in the prior period.

We continue to see benefits from our cost cutting initiatives we put into place in late 2001.

To a lesser extent, we saw improvement due to closing down of our catalog operations in the fourth quarter of 2001.

On a percentage basis, advertising expense was 10.3% of sales in the fourth quarter of 2002, as compared to 9.1% in last year's fourth quarter.

General and administrative expenses were $60 million representing 33.2% of sales compared to 53.1 million or 24.8% of sales in last year's fourth quarter.

Our general and administrative expenses increased due to higher insurance costs, rent expense, and several nonrecurring expenses during the fourth quarter.

Rent expense was up by approximately $1.3 million due to the opening of 15 retail stores, a new distribution facility in Belgium and establishing a subsidiary request offices and a showroom in Madrid.

We incurred about $4 million in nonrecurring items, such as reserves, and establishment of our distribution facility in Belgium.

Net loss for the fourth quarter of $8.6 million, compared to net earnings of $2 million in the prior year period.

The net loss per shares 23 cents on 37,568,000 diluted weighted shares outstanding, compared to diluted earnings per share of 5 cents on 37,476,000 diluted weighted average shares outstanding in the fourth quarter of last year.

Due to the loss during the fourth quarter, we did not assume the conversion of shares granted under stock options and our convertible notes.

Now, for the year.

Net sales for the fiscal year-ended 2002 were 943.6 million, versus 960.4 million for 2001.

Gross profit for the full year 2002 was 386.7 million, compared to 406.2 million in 2001.

Gross margins for the year 2002 were 41%, compared to 42.3% in the same period last year.

Total operating expenses as a percent of sales for fiscal year 2002 decreased 70 basis points to 32.3% compared to 33% in the same period last year.

Selling expenses for the full year were 94.3 million, or 10% of sales, compared to 111.4 million or 11.6% of sales in 2001.

General and administrative expenses were 210.8 million, or 22.3% of sales for the full year, versus 206 million or 21.4% of sales for the comparable period.

Advertising expense continued to be within eight to 10% of our sales for the year 2002.

Net income for the year was 47 million, versus 47.3 million in fiscal 2001, and earnings per diluted share were $1.20 for fiscal year 2002, versus $1.24 in fiscal 2001.

As I mentioned earlier, at year-end, the company was in excellent financial condition with cash on the balance sheet increased to more than 124 million dollars, compared to $15.6 million last year.

We had no short-term borrowing, versus 84 million in outstandings under our credit facility at year-end 2001.

Trade accounts receivable at quarter end were approximately 97.4 million, as compared to 120.3 million at December 31, 2001.

Our DSOs at December 31, 2002, were 42 days, versus 41 days at December 31, 2001.

Inventory at year-end was on plan and current, at 148 million, representing a reduction of $9.7 million, or 6.1%, from 157.7 million at the end of December 2001.

Working capital rose substantially totaling 286.8 million at year-end, versus 140 million at December 31, 2001.

Cash flow provided by operations exceeded $116 million for the 12 months ended December 31, 2002, compared to cash used in operations of 1.7 million during fiscal 2001.

Long-term debt rose to $117.2 million, of this amount, 90 million is related to our convertible debt offering.

The remainder is related to mortgages on our distribution center and corporate headquarters along with capital lease obligations.

Shareholders' equity at December 31, 2002 increased 30% to 259 million, versus 199 million, at the end of 2001.

Cap Ex for the full year-ended 2002 was approximately $14 million, primarily stemming from new store openings and leasehold improvements.

For 2003, Cap Ex is planned at 20 to $25 million.

Now turning to guidance.

In looking at 2003, we acknowledge that the first quarter of 2003 will be difficult, and we remain guardedly optimistic.

For the first quarter, we are currently expect sales to be 15 to 20% below first quarter 2002 sales of 244.9 million.

In addition, we expect pressure on operating expenses as a percentage of sales due to our fixed operating cost structure.

Subsequently, we now expect first quarter diluted earnings per share in the range of 5 cents to 10 cents, compared to diluted earnings per share of 53 cents in the same period of last year.

Our aggressive product stance comprised of 50% new styles for 2003, has received an enthusiastic response from key accounts during this month's WSA shoe show in January preline review.

We believe that this enthusiasm coupled with our new product focused advertising will result in stronger sales in the second half of 2003, compared to the same period in 2002.

Our backlog as of December 31, 2002, was down 7.7%, versus the same period last year.

We want to remind thought meaning of backlog has changed over the past two years due to tighter lead times so this may not be the best indicator of future sales.

Lastly, due to the tough retail economic conditions, retailers have been hesitant to book future orders and are pursuing more at-once business.

In closing, the 2002 year was unique for Skechers as we celebrated our 10-year anniversary and achieved many accomplishments throughout the year.

We believe Skechers continues to be in a great position in the global footwear arena with 11 product lines that meet the needs of all consumers.

We will continue to focus on product innovation and taking a larger share of the global footwear market.

As we remain positive about the future, we are confident in our ability to drive sales and increase shareholder value 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 the conference call.

Thank you.

The floor is now open for questions.

If you do have a question or comment, you may press 1, followed by 4, on your touch-tone phones.

If you're on a speakerphone, we do ask that you please pick up your hand set to minimize background noise and if at any point, your question has been answered, you may remove yourself from the queue, by pressing the pound key.

Once again, ladies and gentlemen, if you do have a question or comment, you may press 1 followed by 4 on your touch-tone phones at this time.

Our first question is coming from Jeff Van Sinderen from B. Riley and Company.

Yes, good morning, I wonder if you can comment a little bit more, give us a little more insight on the current trends at your retail stores?

Current trends as styles or sales in general?

Sales in general, maybe you can comment on, you know, how they've been doing, or how they did in the quarter and how they've been doing recently?

Well, we don't usually give comp. store sales.

I will tell you we are not immune from what's being going on at retail.

Obviously, I think we were actually impacted slightly more than others because we don't go after price.

We don't put any of our concept stores on sale ever.

Having said that, it's heartening for us to note that the new product, as we put it into the store, has sold very well at full price, which leads us to believe that what we've heard from our own customers at the WSA show and from the preline holds true and as new product is delivered, it does perform very well.

At our own retail stores.

And this is the spring product you're talking about, correct?

That's spring, and whatever we've got early deliveries for future product that we test at our stores.

Okay, good.

And then I guess the other question I have is, any further plans to reduce operating expenses?

We take that under consideration and we're having conversations about that, as you might imagine, going forward.

I think currently we feel that there was a downturn and we're not ready to cut dramatically into our operating infrastructure.

However, bringing our new lines to market as we go through second and third quarter and see how things develop, we'll have a more definitive plan for the second half and next year.

Okay.

Very good.

Thank you.

Thank you.

Our next question is from David Turner of BBT Capital.

Thanks.

Good afternoon.

You guys hear me okay?

I don't know, you're a little slurred.

Vaguely.

All right, I'll push through anyway.

I want to ask about guidance, spend a little time on guidance, you had given a sales number and with that, you can kind of back into what an operating expense number is going to be.

And that's largely fixed, right?

So my question is: Can we use that fixed expense for the rest of the year?

And does that include the 25 new retail stores?

Obviously, the first quarter doesn't include the 25 retail stores, they won't be open on that characteristic.

We'll open them throughout the year.

And the timetable is very flexible.

I don't think you can use anything in the first quarter for the balance of the year.

This is a very interesting year for us and we expect to transition from our new product and acceptance at retail.

So a lot of things can happen.

We're trying to remain flexible and we'll adjust as we see fit, both for our business and the company, and future returns.

As we get closer to the second quarter, third quarter, and see exactly what's going on at retail and with the new product categories we're so anxious to get in front of the public.

Okay.

So that -- well, then I'll just ask you directly, is there--what do you envision fixed expenses or operating expenses overall coming out the year flat this year, slightly higher based on the new stores or just trying -- what's the best way to derive operating expenses?

Well, I think the only planned increases would be only for opening the stores.

So whatever it takes to operate a store, obviously is increased overhead.

There's no plans to increase, unless there's significant growth.

Conversely, there's no plans to decrease anything, unless there's not the growth we anticipate in the second half.

So I would take the stores as a guideline.

But remember, we do remain flexible, as we go out a quarter or two to much of our operating overhead.

Okay.

And last question, can you give us a read on, obviously the environment is challenging, that's widely known.

Either how healthy or what your inventory levels at retail are, not at your retail stores, but within the channels that you ship to?

It looks like the inventory levels are pretty well managed.

Have the sell-throughs been there, despite the sluggishness overall?

Well, everything I know about our retail inventories is obviously third hand.

So I suggest everyone go out and check for themselves.

But from what I've heard in the feedback I've gotten in talking to some of the customers is that everybody planned for a difficult time.

We don't know of any significant imbalances in inventory with our retail partners.

So we feel that inventory is fairly clean, and that's what we'll give our new product a good opportunity, as it gets delivered.

Very good.

Thanks.

Thank you.

As a reminder, if you do have a question or comment, you may press one, followed by 4 on your touch-tone phones.

And I'd like to remind our audience to please limit yourself to two questions at a time.

If you have any further questions, you may reenter the queue.

Our next question is from Dorothy Lakner of CIBC.

Thanks and good morning or good afternoon, everyone.

The 20 to 25 store openings planned for '03, can you give us some idea of how those might evolve by quarter?

And also, how many leases have already been signed for those stores?

Then also, if you could tell us, what retail representatives as a percent to sales in '02.

And then lastly the tax rate looked lower than we'd assumed in the fourth quarter.

What should we be assuming for a tax rate in '03?

Thanks.

I didn't write all that down, so bear with me.

There's no set time period for the store openings.

We have not -- if we had signed leases, we'd be close to opening.

We have identified in excess of 20 locations that we plan to be opened throughout 2003.

I think it's fair to say that more will be opened in the first half, so far, than the second half.

But that also depends on opportunities and final lease improvements -- lease negotiations.

The last part is the tax rate.

I would assume that the tax rate, from what we see right now, unless there's significant growth outside of the United States, because we have that dual tax plan, should remain in that 37% range.

I believe that we've had -- that seems to be consistent with our business at least for the next couple quarters.

And I don't have the middle question, what was the middle question?.

It was retail, the retail business as a percent of your sales for '02.

You gave us international.

Uhm --

What about the retail business?

Retail is about the same percentage as international.

It's gone up to about 15% of our total.

Okay.

For all of '02?

Yes.

Okay.

Thank you.

I take it back, it's about 13%, about 15% in the fourth quarter, which is usual.

Okay.

Thank you.

Our next question is coming from John Zolidis of Buckingham Research.

Hi, guys, good morning.

Good morning.

I wonder if go you could go over the 4 million in one-time charges that inflated general and administrative costs in the fourth quarter?

Uhm, we're not ready to go into detail.

Some of them have to do with legal settlements and obviously we don't want to push our hand or negotiations.

Part of it has to do with reserves and expenses taken to move.

The biggest single item was expenses to do with the move in -- on to our own distribution center, which was in excess of a million dollars in and of itself.

The balance has to do with, like I said, legal reserves that were set up and some one-time charges that we took.

And we're not ready to go into full detail, we think it would impact some of our negotiating strength.

Okay.

But in total, it's about 4 million of one-time things that you don't expect to recur next quarter?

Correct.

All right.

And then.

That's in addition, by the way, to what we said about the inventory as well.

The reserve and the air freight is not part of the G&A.

Right, that's in the gross margin, isn't it?

Correct.

We want to make sure people don't--

And that was 1.5 percentage points, you said?

Yes, it would've increased gross margin by at least 1.5%.

Okay.

I was wondering if you can give us a little color on men's versus women's verses kids.

I know you don't want to break out all of the 11 different lines, but looking at your backlog, can you give us an idea what's doing a little better, what's doing a little worse, where the positive points are, what's struggling a little bit more?

With all the diverse lines, it's very difficult to compare and give out that kind of detail.

I think it's fair to say that the kids has performed well, and probably as well as anything we have.

Men's and women's in relation to last year, are about on par.

There's not significant differences in the changes year-over-year.

Okay.

And then I'm sorry, did you give a full-year guidance figure or just for first quarter?

Just first quarter.

Okay, great.

Thank you.

Thank you.

Our next question is coming from Mitch Kummetz of Wedbush Morgan.

Thank you.

David, in your prepared remarks, you mentioned on the international side the business there is primarily sport, U.S.A. and kids.

What are your plans to introducing some of other businesses over there, like, you know, retroactive comfort, something else, those businesses?

That is the plan.

In those places, we're taking them out, testing them.

And those places where we have subsidiaries, we see what's going on.

And that's one of the reasons that we've opened stores in all those locations where we have subsidiaries, to be able to test this product and be able to show retailers and realize that consumers are into the product at those price points.

So that's all connected with opening the stores and going direct and bringing our entire business model or as much of it is salable in those particular countries.

So in effect, that the plan.

And your international business as you mentioned is a greater percentage of overall sales for the year, and I haven't done the math, but I assume the business was up for the year, correct?

That's correct.

Would you expect it to be international to be up in the first quarter, given your sales guidance for the quarter?

Ah, not necessarily.

I actually in -- I think international will be flat to down for two key reasons, our subsidiaries in Europe still perform well.

However, you know, we just transitioned Canada.

So whatever sales we had in Canada through our distributors last year won't exist, it will take us to second quarter to start delivering and for our distributor, or late first quarter.

Our distributor finished selling, which will result in no net sales through that channel at all.

And there's still some difficulties on a comparative basis down in South America.

So I think net-net, we're not expecting any growth, probably some decline along those lines in international.

Okay, and then last question, with regards to your fall '03 line, you mentioned -- you prelined that, and then you went to WSA.

What about that leaves you encouraged that sales will be better in the second half than in the first half?

Two things, the conversations with our key customers, and their plans for at least anecdotally and the orders as they're coming in now are tracking very well as compared to last year.

So that leads us to come that even though they're adverse to taking inventory risks this year, probably more so than last year, we're still having a very good February incoming, which is a key month for us.

At least for the first couple weeks, it's been very encouraging, and adds credence to our anecdotal conversations that the product is right on and it's been well received and should take its fair share of wall space coming into "Back to School".

And is it across the line or in any particular parts of business?

No big spike, across multiple lines of the business.

Okay, thank you.

Our next question is from Ted Lynch of Sigma Capital.

Hey, guys, it's [Charlie Segal] and Ted Lynch.

As far as just your outlook for '03, we were wondering, it sounds like you could have a nice pick up pickup in the back half.

We're wondering, is that 10%, 20%-type growth, is that more expected to come from in-season business, when we're in the season, or pre-book?

It just will be prebooked, I guess, later than normal?

Yeah, I believe it will be prebooked later than normal, it's not going to come from inseason, it's difficult for us to build that type of inventory, given our customer base without commitments to prebook.

It will just be closer on the -- constricted time lines.

As to the magnitude of the growth, we're leery about giving guidance.

We don't want to at this particular time increase expectations out there, other than everybody should be aware that it certainly is possible.

And that as we've shown in the past, when it's available to us, we tend to maximize that great product we'll be putting into the marketplace when it's accepted for "Back to School".

Okay, and will the second quarter be about as even with the first quarter as far as earnings or does it snap back for any reason?

It's hard to tell now.

We have that June/July phenomenon.

It's too early to tell the appetite of our retailers, and whether they're going to be taking 'Back to School" early, as they did in June, or more predominantly in July.

So because of that, we'd stay away from that comparison for second quarter.

We think "Back to School" will be up higher obviously with that product, we're not sure the breakdown yet for June and July.

So if it doesn't come in Q2, which I mean, I guess people are pushing out orders, it sounds like it will come in Q3?

It should, yeah.

Okay, all right, terrific.

Thank you.

Our next question is a follow-up from Jeff Van Sinderen of B. Riley and Company.

Yes, I want to know where do you stand on a share repurchase at this point?

It's something that we discussed through our management meeting and our board meetings.

Right now, we haven't announced anything and there is nothing in place.

But it is one of the items that we discuss going forward.

And obviously, there will be a decision on what to do with the cash and when we get a clearer handle on cash generation for this year, it's just too early for us to say that.

And as we get our handles and make our decisions, we'll certainly make them public.

They are under consideration, just nothing's been adopted as of yet.

Okay.

Fair enough.

Thank you.

There appears to be no further questions or comments at this time and I'd like to turn the floor over to our presenter for any closing remarks.

We'd just like to thank everybody for the interest in joining us on the call.

We look forward to more robust second half of the year with that acceptance of our product going forward, and if there's any other questions or follow-up questions, we'll be around, you can get them through ICR.

Other than that, thanks for joining us on the call.

Thank you, ladies and gentlemen, for your participation.

This does conclude this afternoon's conference call.

You may disconnect your lines at this time and have a wonderful day.