Skechers USA Inc (SKX) 2003 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Skechers' First Quarter 2003 Earnings Conference Call.

At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation.

I will now like to turn this floor over to your host, Mr. Brian Yarbrough of Integrated Corporate Relations.

Sir the floor is yours.

Good afternoon and thanks for joining us today.

Before we begin, I would 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.

I would now 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' first quarter 2003 results.

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

First quarter 2003 sales were 208.6m and inline with our guidance of the 15-20% decline from first quarter of 2002 level.

Diluted earnings per share were 22 cents.

We believe several factors resulted in our reported sales decline in first quarter '03 compared to first quarter '02.

In first quarter 2002, we have taken an aggressive inventory position due to stronger than expected sales at retail.

As retail -- retailers begin chasing goods with more at-once orders; we had the product to meet their needs which resulted in record sales for Q1 2002.

In Q1 2003 we again tool an even more aggressive inventory position to have product available for at-once orders, but in the first quarter 2003, the at-once orders didn't materialize at the same rate.

Second, our sales in Q1 '03 were affected by the overall political and economic environment, apprehensive consumer spending, and reduced retail activity.

In addition, our first quarter sales were reflected the general decline in footwear spending as recently reported by NPD Fashion World.

While our first quarter 2003 sales has been adversely affected by those near term challenges, we remain in solid financial position with 80.6m in cash, no short term borrowings, and working capital of 291.8m.

In the last year, we have undertaken several initiatives, which we believe will help build the brand in the near term and better position us for growth in the long term.

Such initiatives include the opening of key retail stores in North America and Europe, the establishment of new international subsidiaries, and the European distribution center located in Belgium and the signing of several licensing agreements.

In 2003 we are continuing to implement these initiatives and launch new ones in all areas of our business to further build our brand and position it for growth in the long term.

Similar to our approach in early 2002, we had taken an aggressive stance in regard to our inventory position for several reasons.

First, this will allow us to meet at-once orders from our accounts.

Second, with additional subsidiaries established in Europe and now our Canadian subsidiaries, we expect more products will be required to meet orders as we introduce new lines and build the existing offering to new and already expected accounts.

Third, growing our Skechers' retail base by 15 stores in 2002 and the planned 30-35 total in 2003 will require significant new products especially with the recent high volume stores such as Time Square and Traffic Center in Manchester.

Four, the establishment of new division such as Skechers Work which we believe will be notable incremental business for us.

The growing junior division of Somethin' Else from Skechers, Skechers-Active and Skechers Retros and a launching of a brand new line for fall 2003.

And finally we took inventory earlier than last year, which leaves us with less introduction and development and more available to ship to accounts.

For the most part, our higher than planned inventory levels comprised of current end season product including the Retro line in men's and women's sport.

We are in part focusing our product intensive advertising campaign on these styles.

We expect to work down our inventories to the previously mentioned levels and believe we will have our inventories well inline by the end of the year.

In regards to our wholesale division, our spring '03 sandals and Somethin' Else from Skechers business increased during the first quarter of 2003, compared to the same period in 2002.

We expect our junior division, Skechers-Active and Skechers-Kids to be strong performers during the back to school season.

These divisions have high average price, excuse me -- have average price points lower than many of our other lines which may affect our sales level in Q2.

I will further discuss guidance later in the call.

We are continuing to export our business modeling key international -- we feel have tremendous potential in regards to maximizing Skechers presence and increasing sales or in regions that we believe we could successfully introduce the brand.

In the first quarter of 2003, we resumed the distribution, marketing, and sales of our product in Canada.

Due to the close proximity of Canada to our distribution center in Ontario, California and the marketing campaigns to be launched we believe we can rapidly ramp up sales in the Canadian market place.

We maintain the seamless transition to existing accounts in Canada ensuring that continuous product flow and are presently working aggressively to expand the product offerings and increase our account base.

Also in regard to our international business, our new distribution center in Liege, Belgium is efficiently operating and shipping products throughout the European marketplace where we directly handle the distribution of our products.

We expect our European subsidiary sales to benefit as we expand our international product offerings and increase focus on our marketing efforts.

Our sales and marketing teams are increasing our presence in existing accounts by installing stronger point of purchase materials and in-store shops, and increasing our presence on the streets with additional advertising campaigns including billboards, mall kiosks, and bus billboards.

Further increasing our brand exposure in the European market, we have continued to open retail stores including Traffic Center in Manchester in Q1, which is performing very well to date.

We also have stores planned in Madrid in Q2; our first store in the Netherlands, Amsterdam; our third store in Germany in Dusseldorf, and our third and fourth stores in England, Chester and Birmingham in Q3.

In addition through our distributor in Japan, two more Skechers branded stores have opened this year, one in Osaka and one in Sano, Japan; and another is planned in Q3 bringing the total number of Japanese stores to five.

We are speaking with distributors in South America, Central America, and other parts of the world about opening Skechers retail stores, as we believe these will continue to positively impact the brand's presence and our sales.

In regards to our domestic retail business, we have opened six domestic stores this year-to-date including the high traffic, high volume Time Square location, which is proving to be an ideal global branding and imaging tool, given it's location in one of the busiest tourist centers in the world.

We plan to open an additional 20-25 domestic retail store this year including a concept store in the Houston Galleria and enter new market such as Maine and New Mexico.

We continue to believe our retail store service significant brand building tool as well as ideal environments to test products.

We continue to see licensing as an ideal brand building vehicle as well as the contributor to the bottom line and are on moving forward on several licensing agreements while actively pursuing others.

We are very excited about our most recent license agreement with Mitsui in Japan.

Under the agreement with Mitsui, the company will design, market, and sell Skechers branded men's, women's, and children's apparel, outerwear, and related accessories in Japan.

Our in house creative team will work closely with Mitsui to improve all designs and ensure all Skechers branded items are inline with our image.

Additionally in Q1, we signed our first men's specific license for Skechers collection outerwear with Gardner international.

We believe that signing of this license for our high end men's line with the respected licensee will enhance our presence at better department stores and specialty shops, further building the already successful men's collection line.

Also for the licensing agreement signed in 2002, Skechers branded products will begin appearing in stores in Q2 with back to school and holiday '03, being a major push.

Finally, we are increasing our marketing efforts in Q2 with products focused print advertising campaigns for men, women, and our Somethin' Else from Skechers line.

As well as an image ad for Michel Kay, that will continue to feature design on Michel Kay.

Our absolute marketing expenditures were down in Q1 '03, compared to Q1 '02, due to Easter being later in the year and ads shifting from March to April and May.

We will be utilizing these Q1 advertising dollars in Q2 '03, as well as our usual aggressive 8-10% of sales on marketing to have a very powerful spring advertising push.

We are now running new product intensive ads featuring core styles as well as some more fashion forward looks in higher impact targeted publication such as Teen People, People, Details, InStyles, Lucky, YM, and Seventeen.

In further support of our business, our new television campaigns one for adults and one for children launched on prime networks in cable stations in early April for the spring push, and we will taper off slightly through the summer and ramp up again in mid-July for the back-to-school selling season.

Now turning to our first quarter numbers.

For the first quarter, sales were $208.6m compared to $244.9m last year.

The lower sales in 2003 were due to less mall traffics and consumer spending and sub-comparisons from 2002 as we saw a strong reorder business during the first quarter.

Gross profit was $90.3m versus $102.5m in the same period a year ago.

First quarter gross margins increased 140 basis points to 43.3%, compared to last year's gross margins of 41.9%.

Our gross margins improved during the quarter due to stronger margins in our international subsidiaries as well as retail becoming a higher percentage of our sales compared to last year.

Total operating expenses as a percentage of sales increased to 35.8%, compared to 27.9% in the first quarter of fiscal 2002.

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.

First quarter selling expenses decreased to $17.6m as compared to $18.7m in the prior year.

The decrease in selling expense was due to reduced advertising and promotional costs and sales commissions, partially offset by higher trade show costs.

On a percentage basis, advertising and marketing expense was 6.2% of sales in the first quarter of 2003 as compared to 5.6% in last year's first quarter.

Our actual dollar spent on advertising were down during Q1 2003 when compared to Q1 2002, but up on a percentage basis due to the lower sales volume.

General and administrative expenses were $57.1m representing 27.4% of sales compared to $49.6m or 20.3% of sales in last year's first quarter.

We realized expense increases in rent of $1.8m, depreciation of $650,000, and personnel service cost and related taxes of $3m.

These expenses increased due to the addition of 18 domestic and 3 international retail stores; establishing international subsidiaries in Spain, Canada, and the Netherlands including our distribution center in Belgium, which began shipping in December 2002.

Net earnings for the first quarter were $8.5m compared to net earnings of 20.3m in the prior year period.

Diluted earnings per share were 22 cents on 41,480,000 diluted shares outstanding compared to diluted earnings per share of 53 cents on 38,172,000 shares outstanding in the first quarter of last year.

We did assume the conversion of shares that would be issued under our convertible notes for first quarter of 2003 diluted earnings per share.

On March 31 2003, cash on the balance sheet stood at $80.6m, which represents a $17.7m increase from $62.9m at March 31, 2002.

The company had no short-term borrowings versus $96.6m outstanding under our credit facility at March 31, 2002.

Trade accounts receivables at quarter end were approximately $121.6m as compared to $145.1m at March 31, 2002.

Our DSOs at March 31, 2003, were 48 days versus 49 days at March 31, 2002.

Inventory at quarter end was $174m representing an increase of $63m or 56.6% from a $111.1m at the end of March 2002.

As I mentioned before, we took an aggressive inventory position due to our increased number of retail stores, recently established international subsidiaries, growing product line, and to take advantage of at-once orders, which did not materialize in Q1 at the same rate.

We believe that we will be able to work through these inventory levels by the end of 2003.

Working capital rose substantially totaling $291.8m at quarter end versus a $163.3m at March 31, 2002.

Long-term debt rose to $116.5m.

Of this amount, $90m 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 quarter endings increased 21.9% to $269m versus $220m at March 31, 2002.

Capital expenditures for the first quarter of 2003 were approximately $7.8m primarily stemming from new store openings.

We expect CAPEX to be around $25-30m for the full year.

Now turning to guidance.

We continue to believe that retail environment will remain challenging due to the economic uncertainty, less mall traffic, and global issues.

With these issues in mind, we currently expect second quarter sales to be between $200-210m compared to second quarter 2002 sales of $256.7m.

Of note, second quarter 2002 results experienced an additional $20m in sales due to retailers requesting early deliveries of product, which is not factored into the calculation of $200-210m in revenue estimates.

As we have said in the past, the June-July back-to-school shipping period occurs up above our second and third quarter and as such shipped in the timing of one good ship may cause sales to move between the two quarters.

We also expected to see some pressure on gross margins as we believe freight expenses will increase throughout the year.

In addition we see pressure on operating expenses as a percentage of sales to our fixed operating cost structure and for planned increases for advertising then in the second quarter of 2003, compared to the second quarter of 2002.

As I previously mentioned, our advertising expenses were down in Q1'03 and we are moving those dollars to Q2'03 to create a powerful spring advertising impact.

Subsequently, we now expect second quarter diluted earnings per share to be in a range of loss of 5 cents to earning of 5 cents compared to diluted earnings per share of 52 cents in the same period last year.

We continue to believe that the second half of 2003 will present opportunities to achieve stronger sales than those made in the back half of 2002.

We have received positive responses to our back-to-school '03 lines.

We will be opening high-profile flagship stores.

We have established more efficient distribution of our product in Europe.

We are ramping up by direct business in Canada.

We are launching powerful advertising campaigns and we are continuing to reevaluate -- valuate our product offerings to meet our customers' needs.

We also believe Skechers-branded licensed products available in stores in 2003, will further leverage Skechers performance.

In closing, I would like to say that we continue to operate in a challenging retail landscape and we believe we have the management depth and diversified product lineup to navigate us through those tough times.

We will continue to focus on growing our business and increasing shareholder values 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.

The floor is now open for question.

If you have a question you may press the number "1" followed by "4" on your touchtone phone at this time.

If at any point your question is answered you may remove yourself from the queue by pressing the "#".

We do ask that when you pose you question that you pick up your handsets to provide optimum sound quality.

Please hold while we go for question.

Thank you.

Your first question is coming from John Zolidis of Buckingham Research.

Please state you question.

Hi.

Good morning guys.

Good morning.

I was wondering if you can just give us a little bit more color on which of the various parts of your business are doing better than with -- and where are you seeing some of the -- the most pressure right now, men's, women's?

And also can you comment n whether or not you believe that there is a brown shoe trend coming, there seems to have been some talk of that, have you seen that in your order backlog at all?

Thanks.

Yeah we have seen that taking in from back first.

We have seen some, actually our men's USA which includes our -- the men's line in USA in comfort and collection seems to be holding up and are doing quite well for us.

Going back to the first part, we don't see dramatic changes between men's and women's.

We remain strong where have we historically been strong.

We are stronger in women's sport and men's Black & Brown, and I think we continue along those paths.

Okay.

So, the business is pretty consistent across men's, women's kid's product on product?

Yes.

Okay.

And then on the retail stores, can you just comment on the performance of some of the new retail stores?

And I guess over time it looks like in -- at least in the near term, retail is going to grow as a percentage of the overall business and do you expect that, I guess to help the margins; is that correct?

Well yeah, obviously we have high margins in retails and as it becomes a higher percentage of our sales, they help the overall margin impact.

I am not sure I completely bind to the fact that we anticipate retail being a larger percentage over a longer of period time.

This year obviously we announced we are opening 30-35 stores and given the retail environment which is where our wholesale business, it will be come a slightly larger percentage.

But we do believe our wholesale business will continue to grow and especially our wholesale businesses in Europe.

So I don't know over the long term, over the next couple of years that retail should remain about the same percentage it is now.

It will spike a little and then come back down.

Okay that 30-35 new stores, is that an increase from the last time, you gave guidance on new store openings?

Yes.

As we said last time, I believe we said to 20-25 stores, but we always coutch that with -- as good space becomes available and obviously in these times there is a lot more good space available to us.

We've decided to increase it for this year.

However, we have no commitments outside this 30 or 35 stores and depending on how we reach our performance on overall wholesale business, we'll reevaluate our retail strategy as we go into the third quarter.

Okay, great and good luck, thanks a lot.

Thanks.

Thank you.

Your next question is coming from Mitch Kummetz of DA Davidson.

Please state your question.

Yes, thank you.

I just got a couple of quick questions.

First of all with the first quarter, you mentioned in the press release and also in your prepared remarks that at once business didn't live up to your expectations.

Could you just go over what it was in the quarter either on an absolute basis or percentage basis and then what it was a year ago, just so we get a better idea as to, you know, what it was versus expectations?

Well at once are just expectations of the sales.

I mean, I'm not - we should go into details because they get into very specific definitions of what is at once and what is not at once and what you made for.

I think it's fair to say it was down a significant percentage well into the mid double-digit percentages from what it was last year and our anticipation was that it would have been higher than last year, given any increase in the retail activity which was coming into the year on a more significant lower side.

So I would venture to tell you that we caught it on both sides, it got a little significantly lower and we expected it to be significantly higher.

Okay, and then second question.

In terms of the inventory, you mentioned that you are going to bring -- try to bring that in line by the end of the year.

Can you just sort of talk about what the impact might be on gross margins as you do that?

Yes, that's difficult to say because obviously gross margins on anything we sell is dependent on a number of factors which include how much inventory is available in the marketplace and how well retail is at some of the those people like you did.

I think I could best tell you by saying we don't have any inventory that is seasonal specific that would take major losses such as sandals or open-toed footwear.

This is very basic, some of it's brought it, it's a matter of controlling our production at the end of the year to orders to bring it down and what we call moving some of this -- that's been some of our basics and some of our newer start up divisions that we are just testing product into the marketplace.

So right now, I wouldn't expect a significant deterioration in margins overall moving them out of such a long period through the end of the year, but obviously we have to wait and see what's available to us in the marketplace to move in.

Great thank you.

Thank you.

Your next question is coming from Karen Gets (ph.) of Calamos.

Please state your question.

Can you give any same store number for your distinguished stores?

Historically, as you know we don't give comp store numbers.

We are not retailers, even though it's a growing percentage of our business it's still not an overwhelming piece of our business and we don't report in it either for segmentation purposes.

We don't believe to be retailers.

We don't believe we compete on the same level as retailers.

We only have one brand.

We are very careful with our price points and we don't want to be known as retailers.

Therefore, we have not and continued not to comment on comp store sales.

Okay, thanks.

Thank you.

Your next question is coming Michael Ryan (ph.) of Sidoti.

Please state your question.

Hi there.

I just wanted to see if you get in -- any kind of grasp of what kind of, you know, future orders you had, you said your -- the back and back to score you are getting positive responses from retailers.

But do you have any kind of grasp of how that's going and you still expect on and off on this -- revenue to go up in the second half from last year?

Well, the expectation is certainly that from some of -- last year's second half that was quite weak, especially in the fourth quarter and we think that makes for an easy comp given the relation -- given the reception we are getting on the product going in.

As far as acceptance, we've had good early acceptances; obviously our backlogs are down slightly from last year.

But we have very good sellings on a lot of new product that we have heard is testing well at our own stores when it's put in there and we when we get test out to retail early.

Even though the weather is not as expected to be going back to school or getting good test.

So, based on that and the weakness we had in the second half, we do anticipate that we have significant opportunity in the second half.

But we'll wait and see what happens as the second half gets closer and develops.

Okay, thank you.

Thank you.

Your next question is coming from Harris Hall (ph.) of Wedbush.

Please state your question.

Hi guys.

Thanks.

Hi.

Just wondering if we get a little more information on how the split was -- between retail and domestic wholesale and international?

Looking it by split percentages.

Yes our dollar values there.

Well we don't really give out dollar values.

As a percentage of the whole, domestic retail increased probably by about 3% and to what it was this time a year-ago; and our international business also is up about 2% or so over what it was as a percentage of the whole last year.

So, those were the [slights], which is away from wholesale into international and retail.

Okay but you can't give us any sense of how much was domestic wholesale down?

That's not down or rough.

That's just as a percentage of the whole.

Right, now I understood.

It's safe to say that the whole company revolves around wholesale.

So wholesale is a big characteristic of our overall and the deviations around wholesale to may be overall number are not outrageously significant.

So I would say you know, wholesale is not significantly different than the company as the whole.

Okay, thanks.

Thank you.

Your next question is coming from Derek Winker (ph.) of Jefferies.

Please state your question.

Yes three questions financial, the depreciation and the amortization in the quarter, also the capital expenditures and the guidance for both of those items for the year and the share count?

Well the share count we believe -- will remain fairly stable this year.

The only thing that really changes that is the way we calculate dilutive earnings per share with the options we have outstanding if and when they are in the money and when they -- they come out of the money.

Depreciation and the amortization for the first quarter was just short of $5m, just over 4.8m.

It will probably increase quarter-to-quarter as we open new stores going forward and they are put into service for depreciation purposes.

I lost track of the last part of..?

Capital expenditures.

I am sorry the depreciation and amortization was 4.8m in the guidance for the year and then the capital expenditures for the quarter in the same?

The guidance for depreciation and amortization, like I said it's not significantly different.

It would probably be in the $20m range as the new stores get on board and have that slight impacts maybe slightly over 20m.

And the capital expenditures?

Capital expenditures were just short of 8m in the first quarter but that includes some non-store items.

We are still on target for I believe 25m, 25-30m in CAPEX for the entire year.

Okay, great.

Thank you very much.

Thank you.

Your next question is a follow-up question from Mr. Mitch Kummetz of DA Davidson.

Please take your question.

Yes thanks.

Just real quickly, what are your at-once expectations implied in your new Q2 sales forecast?

Do you expect them to be down significantly like they were in Q1 or what are your expectations?

We expect them to be not significantly different than last year and I think Q1.

If you take a look at the dynamics of the business that we were in, Q1 is a spring business; it's very specific to seasonal footwear, which is open toe.

So as it sells, it continues to replenish itself while there is any availability of stock as well as the overall system.

If you go into the second quarter, given April-May it's not a very big retail kind of month other than Easter move to retail; it's not a lot of replenishment that is anticipated.

The big part of our shipment is the bills that go into the back-to-school.

So it's more of a function in the second quarter of inventories at retail and how much back-to-school should be shipped at the early part to start early in June as opposed to July rather than a reorder phenomenon for the second quarter.

Okay.

Thank you.

Thank you.

Mr. Weinberg, there appear to be no further questions.

Well we appreciate everybody's interest and tuning in for the call and if there is any other questions you know, we have Brian Yarbrough from ICR that could be contacted or myself and thanks to all listening the call.

Thank you.

This does conclude today's teleconference, please disconnect your lines at this time and have a wonderful day.