Skechers USA Inc (SKX) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to Skechers U.S.A.

Second Quarter and Six-Month 2003 Earnings Conference Call.

At this time all lines have been placed on a listen-only mode, and the floor will be open for questions following today's presentation.

It is now my pleasure to introduce your host, Mr. Brian Yarbrough.

Sir, you may begin.

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 to turn it over to David Weinberg, Chief Financial Officer.

Thank you Brian.

Good afternoon and thank you for joining us today to review Skechers' second quarter and six-month 2003 results.

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

Second quarter 2003 sales were $229.3m compared to $256.7m in the second quarter of 2002.

Net loss per share was 6 cents.

For the six-month period ended June 30, 2003, net sales were $437.9m compared to net sales of $501.6m in the first six months of the prior year.

Diluted earnings per share for the first six months were 17 cents.

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

First, the difficult retail environment continued to negatively impact our sales.

While wholesale unit volumes were 1.5% below last year's level, there was a 14.5% decrease in the average price per pair due to product mix at lower price points and higher levels of close outs.

Second, we increased advertising and marketing expenses in the second quarter in an effort to stimulate demand at retail in order to increase the sell troughs and relieve the inventory levels.

Finally, as we build our business in newly established direct markets including Canada, Spain, Portugal, and the Benelux region, we have incurred start up expenses and not realized high enough sales volumes to generate optimal operating margins.

The products and brand have been well received in many European markets, but we are not growing the brand as quickly as anticipated in some regions.

We expect sales to ramp up as these subsidiaries become an integral part of our international sales in the long-term.

As I mentioned on the first quarter '03 conference call in April, we significantly increased our inventory commitment during the fourth quarter of 2002 and first quarter of 2003.

In Q2, we diligently attempted to sell through inventory with aggressive advertising to generate at-once orders during the second quarter.

We were not as successful as we had anticipated in this endeavor.

Additionally we were not able to achieve our inventory goals due to early shipments of new inventory from the factories during the second quarter.

We will continue to work through our inventory levels, which will have an adverse impact on margins in the short time.

On a positive note, at June 30,our total commitment to inventory, which includes our units on hand and in-production was only 2.2% higher than last year.

We have seen sales pickup slightly in the latter part of the second quarter and we believe that the inventory will be in line by year-end 2003.

We continue expect a tough retail environment to be a near-term challenge and believe that with our flexible business model, diversified distribution channels, and financial strength, we can maintain our position in the marketplace.

We have many of our major initiatives in place.

We will reevaluate and adjust our overhead as needed over the next six months.

We are currently entering new footwear markets through the introduction of new lines to the international markets and our existing lines, and signing new licensing deals for the domestic and international markets.

We have also opened key retail stores in North America and Europe and we will continue to selectively do so through the remainder of the year.

With the [coop proven] styles and inventory for fall shipment, we are also focusing on new product that we feel will be key selling style for back-to-school and looking at what we think the trends will be for spring '04.

In June and July, we ship some back-to-school product that has received a good reception, but it is too early to tell how sales will be as this product has not hit retail shelves yet.

We believe that the Skechers Sport Stamina and Skechers Sport Premium will be leading Skechers styles for men, women, and kids for all based on the present reaction at retail from initial shipments and from accounts who are expanding their offering based on early sell troughs.

While sport is very strong for Skechers, we also had key styles in Skechers U.S.A.

Somethin'Else from Skechers and Skechers Kids.

These lines have grown into integral parts of our product offering and showed the diversity of Skechers.

The major department stores have supported the Michelle K line are continuing their offering for fall, including Bloomdale which has increased its store count from 5 in spring '03 to 17 in fall '03.

This season will mark the official launch of [Mark Nason] a new line of high-end designer footwear for men.

The line was tested with a soft launch in Nordstrom stores in Q2 and had a positive reaction in retail and has booked strong at major fashion independents for fall '03 and has been well received by major department stores that reviewed for holiday '03.

We expect this line to appear a better department and specialty men stores.

During our pre-line meetings at our headquarters over the past two weeks, we have seen numerous major accounts react very strongly to our spring '04 offering with some accounts looking to Skechers for expanded looks such as [Mortaled] junior fashion heels and sandals.

We feel optimistic that spring '04 will be strong if the retail environment improves.

So we will have a better stance after WSA in early August.

We continue to view our international businesses a key area for growth over the long term with estimated sales anticipated at 20-25% of our total sales in 2-4 years.

We are looking at affective means to further build the brand and increase our sales in the diverse global marketplace.

We now handle our business directly in 13 countries;

England, Ireland, Germany, France, Italy, Austria, Switzerland, Spain, Portugal, Belgium, Luxembourg, Holland, and Canada through eight subsidiaries.

Our cost structure is in line with what we anticipated for building these direct operations and implementing the necessary infrastructure, including our distribution center in Liege, Belgium.

As we expand our product offering and build the brand through marketing efforts and opening of retail stores in fine locations like Madrid where we opened the store this quarter, we expect our European subsidiary sales to benefit from these efforts.

In regards to our international retail operations, we expect to open our first store in the Netherlands, Amsterdam, our third flagship store in Germany, Düsseldorf, and our fourth store in England, Birmingham, in Q3.

Additionally through our distributor in Japan, the fifth Skechers Japanese retail location will be opening in Shizuka later this year.

As I mentioned on the Q1 call in April, we are continuously speaking with distributors in South America, Central America, and other parts of the world about opening Skechers retail stores as we believe these will positively impact the brand's presence and our sales.

In the second quarter, we continued to open Skechers retail stores in the domestic market to further build brand exposure and test product including a concept store in the Houston Galleria and the relocation of our Beverly Center Store to the main level near the [GAP], Baby Gap, Betsy Johnson, Pottery Barn, and Hugo Boss.

We plan to open another 10-15 domestic retail stores by year-end.

Moving on to the licensing, we recently expanded our scope of licensed product that reflect our image in international market.

In the first quarter, we signed a licensing agreement with Mitsui & Co for apparel and accessories for men, women, and kids in Japan and in the second quarter with MultiGroup Inc. in Canada for infants, toddlers, and kid’s apparel.

We see these two international licensing agreement as ideal opportunities to extend the brand beyond footwear in key global markets and believe there are additional opportunities for Skechers branded products in the domestic and international market.

Skechers sports socks are now available in major department stores while Skechers Kids apparel will be available to consumers in August at department stores across the United States.

Skechers' sport socks for men and women will follow in late fall and Skechers' collection outerwear is scheduled for holiday '03 in-store delivery.

With the availability of Skechers license products, Skechers is growing into head-to-toe lifestyle brand.

We now expect a minimum of 7-8 cents pre-tax profit from licensing revenues during 2004.

Finally, as a lifestyle footwear company with the strong image, our consistent exposure in multiple mediums is essential to our brand image.

Print advertising remains a center point of our advertising plan, but it is supported television, visual merchandizing, and additional mediums including [Mokia].

In Q2, our advertising expenditures were higher due to Easter occurring later in the year as well as aggressive advertising efforts and marketing-related promotions to create demand in the marketplace.

In Q2 '03, we spent 24.1m in advertising and marketing versus 17m in Q2 '02.

We also ramped up our advertising with the new Kids television commercial and new print ads to increase sell troughs and reduce our inventory.

In Q3 the focus will again be on print with new campaigns for Skechers Sport, Somethin'Else from Skechers, and Skechers Collection.

These are predominantly single [inaudible] single page ads that spotlight the footwear in a direct and attitude intensive way.

We will also use the images in multiple shopping centers across the country to target the top malls where teens and their parents will be shopping for back-to-school.

The Michelle K ads featuring the designer will also begin appearing in fall.

Now, turning to our second quarter and six-month numbers.

For the second quarter, sales were 229.3m compared to 256.7m last year.

The lower sales in 2003 were due to lower consumer spending, decrease in mall traffic, and abnormal weather condition.

Gross profit was 89.6m versus a 105.8m in the same period a year ago.

Second quarter gross margin decreased 210 basis points to 39.1% compared to last year's gross margin of 41.2%.

Our gross margin decreased due to taking a more accommodative stance with our wholesale accounts and higher levels of clearance product.

Total operating expenses as a percentage of sales increased to 39.2% compared to 27.4% in the second quarter of fiscal 2002.

We have a relatively fixed operating expense structure and sales drop to a certain level, our expenses tend to de-leverage as a percentage of sales.

Second quarter selling expenses increased to $28.8m as compared to $21.4m in the prior year period.

The increase in selling expenses due to higher advertising and marketing expenses offset somewhat by lower sales commission and trade show expenses.

On a percentage basis, advertising and marketing expense was 10.5% of sales in the second quarter of 2003 as compared to 6.7% in last year's second quarter.

As I previously mentioned, our advertising expense increased in part to the shift in advertising from first quarter 2003 to second quarter caused by Easter occurring in April this year and also our efforts to support the brand and create consumer demand to reduce our inventory level.

General and administrative expenses were $61.1m representing 26.6% of sales compared to $48.9m or 19% of sales in last year's second quarter.

We realized expense increases in [rent] of $2.6m, depreciation of $1.2m, insurance of $1m, and personnel service cost and related taxes of $4.8m.

These expenses increased due to the addition of 18 domestic and 4 international retail stores, international showrooms, and establishing international subsidiaries in Spain, Canada, and the Benelux region, including our European distribution centre in Belgium.

The income tax provision for the 3 months ended June 30, 2003 was a benefit of 211,000.

The second quarter was adversely affected by approximately $800,000 to adjust the tax provision for the current projected fiscal tax rate of 43.1% which is higher than the rate forecast in the first quarter.

Net loss for the second quarter was 2.1m compared to net earnings of 21.3m in the prior year period.

Loss per share was 6 cents on 37,782,000 shares outstanding compared to diluted earnings per share of 52 cents on 41,909,000 shares outstanding in the second quarter of last year.

We did not assume the conversion of shares that would be issued under our convertible notes for the second quarter 2003 loss per share.

For the 6 month ended June 30, 2003, net sales were 437.9m versus net sales of 501.6m for the first 6 months of 2002.

Gross profit was 179.9m compared to 208.3m for the same period of the prior year.

Selling expenses for the first 6 months of 2003 were 45.9m compared to 40.1m for the first 6 months of 2002.

G&A expense was a 118.7m compared to 98.5m in the same period last year.

In total, for the first 6 months of 2003, operating expenses were a 164.6m compared to 138.5m for the same period last year.

Net income for the first 6 months of 2003 was 6.3m or 17 cents per diluted share compared to 41.5m or $1.05 per diluted share in the same period last year.

At June 30, 2003, cash on the balance sheet stood at 41.5m which is a decrease of 33m from June 30, 2002.

The Company had no short-term borrowings as of June 30, 2003.

Trade accounts receivable at quarter end were approximately $154.9m as compared to $185.1m at June 30, 2002.

Our DSOs at June 30, 2003 were 53 days versus 56 days at June 30, 2002.

Inventory at quarter end was 217.1m representing an increase of 78.1m or 56.2% from a 138.9m at the end of June 2002.

Working capital rose 3.9% to 292.7m at quarter end versus 281.7m at June 30, 2002.

Long-term debt was 120.7m compared to a 120.5m at June 30, 2002.

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 obligation.

Shareholders equity at quarter end increased 7.1% to 269.2m versus 251.4m at June 30, 2002.

Capital expenditures for the second quarter and six months 2003 were approximately 3.3m and 11.1m respectively, primarily standing from new store openings.

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

We currently expect third quarter sales to be between 205-215m, compared to third quarter 2002 sales of 261.1m.

We also expect to see some pressure on gross margins as we believe freight expenses will increase throughout the year, and we expect to continue working through our inventory position.

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

Because of this and the challenging retail environment which we expect to continue through the end of the year, we now expect a loss per share of 5 cents to diluted earnings per share of 5 cents in the third quarter compared to diluted earnings per share of 35 cents in the same period last year.

With many new initiatives now in place, we will continue to closely monitor our operating expense structure over the next several months and adjust our expenses so they are in line with our expected sales.

We will take a detailed look at each expense line items to find ways to lower our cost structure and maximize our operating margins.

While it is earlier in the season and the retail environment is tough, Skechers back-to-school product has been well received at retail, and we believe that we can maintain our position in the market place.

We will continue to implement our initiatives already in place and support our brand with new advertising and marketing campaigns.

In closing, we will continue to focus on controlling our cost and managing our business during these difficult times.

Looking at opportunities that will make Skechers more profitable and in better position for us -- in better position us for 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 your questions.

If you have a question, please press the numbers "1" followed by "4" on your touchtone keypad at this time please.

If at any point your question has been answered, you may remove yourself from the queue by pressing the "#" key.

Please hold while we poll for questions.

The first question is coming from David Turner of BB&T.

Your line is live.

Thanks.

Good morning.

Question regarding the inventory.

I know this is peak shipping season and there is some language in the press release as well as the prepared comments that indicated sales picked up in June -- late June.

So maybe as -- if we took a snapshot of inventory as of today or you know last week, what would that -- would it be significantly down from the June 30 number?

Well, it depends what you mean by significant.

It would certainly be down and the big pieces as because we've absorbed the in transit.

Our inventory is made up of three pieces and two of them are reflected on the balance sheet, I think we've discussed this before.

It includes the inventory that we physically have control of, which would include our distribution centers in the United States and in Belgium and the inventory that's been with in all of our stores.

In addition, since our terms are FOB [force], when lease the Oriental or any country that we buy from.

All the goods in transit are considered our inventory and obviously the third piece is our production that you don’t see in our balance sheet because we are not completely vertical at the stage at factory level.

Basically, its fair to say that our inventory was up certainly in our stores and couple of more stores and in our distribution center because we were over inventory.

However, the pipe that's related to work and process and production was where the big swing came.

Our working process was -- is down about 35-40% from where it was this time a year ago, so a lot of it came earlier and less of it is in production to come at a later period of time, which is a timing issue to get down to that kind of inventory, and because the fact we bases somewhat slower and anxious to get choose out because of the business environment predominantly in the Orient.

Our in transit, which we do pick up on our inventory were up significantly over the last year which is our new product that came in for July and August.

So it's safe to say that -- add on now since June 30 are in transit on the water or down since June 30 since that has been absorbed and we are now going to slower production times, and our inventory on hand is slight down since the quarter end.

So, we have made some process.

In addition, we continue to sell it off, and we just haven’t got the shipment.

A lot of that stuff is to be delivered throughout the third quarter.

So, more of it is spoken for than what have been achieved on June 30th.

So, while it's not completely done or completely out of the woods, we feel we have made significant progress and feel very comfortable in the fact that that will be in line by the end of the year.

Great.

And is there any one product line or may be category that is -- I guess at the most risk in terms of margin pressure or is it just kind of broad based, you know, -- the inventory spread out amongst your various product lines?

Well, it's spread out.

There's different amounts in different categories.

I think it's safe to say that the Michelle portion of our business was the most difficult throughout the year and probably had the most pressure and is being cleaned out and is closer to being cleaned.

The rest of that would be more issues of some older inventories and not really selling them at significantly lower prices.

So, we have a combination.

So we got top to bottom, and I think Michelle is probably the most difficult for us and then it’s pretty evenly distributed throughout the rest of the branch.

Okay.

And then one last question and kind of playing devils advocate.

Has there been any thought to may be shoving or walking away from for a period of time, some of the product lines are not working and taking some of that and as well as walking -- benefiting form the subsequently reduced marketing and inventory, or I guess working capital requirements?

Sure, we think about those things all the time, but we're not currently involved for growing any business line that we don’t think has significant potential as it goes forward.

So while it might be -- not be readily advisable, when product doesn’t work for us we do scale it down significantly -- we do take it out of our advertising mix and it takes a while to work through because we don’t want to dump it all at once.

But those that -- those blood processes and decisions about product lines and initiatives whether it's retail stores or subsidiaries are constantly being brought up -- it is just not that easy to react within a single quarter when it happens, but we are addressing them and certainly thinking hard about them.

So, it sounds like maybe in the second half you might see some manifestation of the top process -- about [binding] up or you know maybe that's the wrong turn, but just my guess, you know, I'll use that term [binding] up?

I think it is fair to say by the end of the year we'll have a better idea what the company really is and when we have it, you will have it, it will pass.

So you'll see the Company shape that's taking for 2004 and where we intend to be aggressive and grow it up.

Yeah, I think by the end of the year -- by the time we get finished with WSA and see the reaction to our brands from our customers, since I'm monitoring those sell through and see where our strength lies and we do think it is coming back, and I have a better idea of what the company will look like going into 2004.

Great.

And see you in Las Vegas.

Thanks.

Thanks.

Thank you.

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

Your line [is open].

Hi good morning.

Good morning.

I guess a follow-up question on the inventory?

Rather than try to project where sales and backlog is going to be at the end of the year, or if can just give us an idea of, you know, ideally if you had your choice where would you have your inventories be right now?

So we can kind of quantify the [overheads]?

I think it's fair to say that they should be equivalent to last year with increases for our new product line, our additional stores, and our additional volume in Europe.

So say last year [flat] maybe 10-15%.

So even with projected sales declines in the third quarter you think inventory should be up 10-15%?

Yes.

I'll have it accreted out, but yes.

Because we have to support the new brands and we have that with basic inventory and we have some new divisions that were selling out of stock.

And we obviously have to support our new stores and our new subsidiary.

So that there is a little inventory build that comes prior to the sales increasing in those particular areas and then flattens out as there is no increase in the initiative.

Okay.

So that implied inventory of about 154m?

Yes.

We --

It’s over about $62m next to your inventory?

You mean like today?

Yeah, at the end of the quarter.

Yes.

You can't be in transits and everything sure, but a lot of that is early inventory.

So, there is a timing issue as well.

So, I don’t think we had 62m to sort of sell down.

Okay.

And then on the infrastructure build -- and I can understand your operating expenses are fixed as the level of lower sales -- that looks likes the operating expenses is actually growing.

Is there any thought to may be slowing down some of the infrastructure build until we start to get some traction with some better product?

As same answers as the other question.

We think about that all the time, but when we say it fairly fix.

We are talking within categories and within initiatives in other words we have opened most recently our office in Benelux and our office in Italy it has -- comes with it some at that current time at least current quarter fixed expense such as sales force and the rent of the showroom and some extra inventory to sell into that -- that's more salable in Italy.

That doesn’t mean that that operating expense structure is fixed in determinate period of time, because each one will be evaluated.

Same is true of opening stores.

We opened 10 stores the first half of this year, through second quarter domestically and two internationally.

We will open another 11 stores domestically in the third quarter and those operating expenses and overhead to open them and start them are fixed in the period of time they are opened but not for an exaggerated period of time.

So it is safe to say that as we slowed down our infrastructure build as we get our stores more inline and we slowed down the growth of stores and the growth of subsidiary.

The growth in that overhead in a real dollar basis slows down and then of course these are brand new initiatives so we don't know how profitable that will be, but over the next year or so, obviously each one will be evaluated and either taken down or eliminated or grown depending on what its potential and what it can add to our bottom-line so over the next year or so we have a lot of flexibility even in those operating overheads.

Okay.

I think -- if you break-up the stores are the store profitable?

The stores are profitable on a whole.

They are certainly profitable at the four walls, and the direct charges to them.

They are less profitable per store than they were last year which also puts some operating pressure on many -- on the overhead per dollar in the retail stores, so I think that is obviously the same issue as everybody else in retailer have with our accounts being down like everybody else, puts more pressure on the operating overhead, we're addressing those things and re-evaluating our store position, our store openings and the existing stores as they are now.

So it's a matter of revaluating just like everybody else.

Okay one final question and then I will hop up.

It seems like the biggest challenge has been this retro athletic trend and the consumers are kind of not really accepted the Skechers brand and the product, I think the products looked pretty good and I think retailer sales looked pretty good in sale and was pretty strong the sell through didn't match up to those expectations.

Are you seeing any change in that retro athletic trend, is it starting to trail off at all?

Are you seeing anything else coming up on the horizon that may be Skechers can take advantage of in terms of trends within footwear?

It's very difficult to go through each one here both in the broad macro sense of the question, yes, we do see some trailing off the retro look, and we do see better acceptance, like I said in my prepared statement, for the Stamina that we are delivering and other shoes like that and in some of our black and brown shoes.

So yes, we see increases outside the retro look for us and we will be significantly curtailing it, and we think it is slowing down at least somewhat in the marketplace in general.

Okay great.

Good luck and I'll see you -- look forward to seeing of the new products that you sell.

Thanks.

We look forward to it as well.

Thanks.

Thank you.

The next question is coming from Dorothy Lakner of CIBC; your line is live.

Thanks good morning everyone or good afternoon.

Good morning

As the case may be.

Just to go back to inventories for a second.

David could you talk about maybe just what carry-over or older inventory represents as the percent versus the year ago, I know, you said that some of the inventory is early receipt so it's fresh.

Hopefully, the sell troughs are good, you know, how -- what is that as the percent of the business versus the year ago and then could you talk a little bit more about different categories of sales, you know, what’s working the best I know you spoke a little bit to this on -- in your prepared remarks but for example men’s versus women's, women’s versus kids what ,you know, how did they change as a percent of sales in the quarter and then may be just sport versus the non-sport part of the equation, how did those do in general as the percent of total sales in the quarter, thanks?

Okay, don’t remember exactly but we had obviously less closed out inventory than we, last year, than we did this year, not to significantly quantify the expense we think it represents certainly less than 10% of the inventory on hand and in production, so we’ve made a big in roads into it and there’s only some left that we want to move out so it's less of a problem than it was three months ago and it will be less of a problem three months from now.

So is there lasts that you are doing through -- may be off price channels or about the same level, you know --?

Our sales [inaudible] I think we need very dominated people like [Michelle and T J Max] like that is up slightly from last year nothing that you recall significantly, we do have some increases but nothing that outrageous.

We are just taking our time moving it through over a period of time.

Okay trying to move it to your own outlets?

And we are moving some through our own outlets and some of it overseas and although [inaudible] we haven't significantly expanded our distribution base, we have somewhat to move it out obviously with the bigger numbers but not to -- what we think as a significant or anything that will hurt the brand in the long-term.

Okay.

To your other question about changes in percentage of the business, the big pieces of our business, women, men, and kids as a percentage of the overall are deviated less than plus or minus 1%.

So in another words, the percentage of the business that women's was last year within 1% of this year is same for men's obviously, men's and kids.

So, our mix hasn't changed significantly since last year.

And I forgot the third, is there a third part?

Sport versus non-sport?

And sport versus non-sport remains same and I think sport portion came down a little bit, but we anticipate with the [inaudible] premium that that will increase and by the end of the year will be the same or slightly higher at the overall portion.

Okay.

And just one more thing on just the average price for pair of soles, do you have any data you could give us on that?

Let me say, it's down 14%.

Some of the soles are I think it's fair to say that on inline product our average selling price has been reduced somewhere in the 7-10% range across the broad range of categories we sell.

Okay.

Great thank you.

Thank you.

The next question is coming from Michael Ryan of Sidoti & Company.

Your line is live.

Hi.

I just had a quick question going back to gross margins.

I just wanted -- obviously you've had pressure on the wholesale side, I was wondering how they have held up on internationally in the retail business?

Well, in internationally they were up slightly because of the benefit we have receive from the euro and dollar and part of our strategy there was to cash that back to our consumers and retailer build so margins are about the same in Europe and internationally through our distributor base because it costs, but certainly on the percentage basis, let dollars pursue with the margins that held up in international and are down just slightly in our stores not significantly down the stores.

The biggest pressure was obviously from our wholesale customers and some of the [clearance side] of it.

Okay and just do you have a number on your operating cash flow was in the quarter?

Yeah.

I think it was minus $37m.

Okay and do you have any expectations where cash flow is going to be at end of the year?

Yes.

We would anticipate that cleaning out the inventory and cleaning out the receivables given the fact that we are now getting $22m a year in depreciation that we will rebuild it significant if not all the portion of cash that we've used in the first six months.

Okay Thank you.

Thank you.

The next question is coming form Sam Poser (ph) of Mosaic Research, your line is live.

Good Morning I have a couple of questions.

Again back to the inventory.

You said that about 10% of the inventory was the product that you need to liquidate, that's correct?

Well I'll tell you [Inaudible] that wouldn't necessarily liquidate, not all of is under water and at a give away prices, but yes inventory that we consider excessive that we would like to sell off during the next six months.

When you said that you should have the 15% more inventory than last year inappropriate in your perfect scenario?

It's give or take.

So that would put a GAAP in that of around of almost $40m even taking that 10% out, what makes up that difference right now?

The higher difference?

Well I mean you take out the 10% you get to 196m in current inventory to take out of the goods you are trying to clear and then you would if you have the 15% more than last year you have a 182, so there is a GAAP of around 40m bucks there?

Well the $40m is the minimum;

I think it's higher than that as the in transit.

Our in transits are up well over $50m between last year and this year at the same period of time.

So in other words we had the same amount of inventory in transit.

You get much right on top of your number.

Okay and what -- obviously, I mean, the new product that you in transit and in production considering that business has done fairly tough lately, you have gotten good indications from your customers that they are doing well with -- this merchandise are doing well.

Please excuse me.

Yeah, I mean, right now it's more anecdotal than it is in fact, but that's obviously the place we have to start with all increases.

We're just going through our [pre-line] with all our major accounts are coming in before WSA and what we've been told is that there is -- they are lot happier or more than excited, I guess, is the best word about the line that's being offered now for spring than they were last year at this time.

So that's always a positive, and they've obviously shopped some of our marketplace.

And they also seem to be anticipating the deliveries of all the stuff for back-to-school that we're just shipping now because they feel that's a significantly better offering than we had this past spring.

So, it's a very positive group of meetings both for the -- which goes well for the fourth quarter and the first quarter but like I said it is, kind of, early to tell other than that it is a good start for us.

And one last question about channel of distribution in the United States.

Where -- besides your [inaudible] stores, I mean, what -- where are you seeing the strength and where are seeing the weakness by channel?

I think it varies.

There are different pieces in [re-channel] around the country that are getting stronger and weaker where we see different customers in different regions; and I don’t think that this would be a good place to just discuss them by name.

No, I that's why [inaudible] I have good idea there.

How about regionally in the United States where you are stronger?

Yeah, I think if I had to state, then Southeast would be the weakest and, you know, the rest of them are close.

It is difficulty that crosses the mind this is everywhere.

It depends who they are, their day actually change by customer within some regions, but I don’t think, I don’t see anybody that tell me out -- anybody in our customer base [from an] outrageously strong retail season yet.

I mean, just on -- just to follow up real quick.

There is not like -- you wouldn't say independent specialties that are outperforming value department store drift in the general sense or anything like that?

No, it's across the board because even within specialty stores some do better than others, and I think it's very specific to the customers and their promotions, and their price points, and their customer base and even within the same customer it varies regionally.

So, it's very difficult to just pinpoint any channel.

Thank you the next question is coming from Derrick Winder (ph.) of Jefferies and Company.

Your line is live.

Yes thank you.

Can you just give me the deprecation and amortization level for the second quarter, also capital expenditures for the second quarter and that outlook for the year?

And then lastly, when do you expect to give us some color on whatever cost structure changes need to be made and how much you might be able to be save out of that?

Okay depreciation was just short of 5.5m for the quarter.

Capital expenditures were 3.3m for the quarter.

Third part, sorry.

Was there any amortization?

No.

Most of it is depreciated -- depreciation and amortization is 5 -- little less than 5.5m.

And the capital expenditures for the year and then color on the cost cutting?

As we said, capital expenditures for the year we'll still be in the $25m range and cost cutting would be probably -- it is hard to tell you, we have no initiatives that where come public with.

As, I mentioned in the previous question between now and the end of the year, we expect it will be in the public domain of exactly what we'll be and how we're setting up for 2004.

Okay.

If you have to look at a particular timeline, you want to be able to come to the market and say this is our plan.

Not yet.

Okay.

Thank you.

Thank you.

The next question is coming from John Gordon (ph) of Deltec Management (ph).

Your line is live.

Good afternoon.

I just like to step back and ask for your general comments because as I have been listening to the conference call, I can't help it get out of my mind or I can't help it have in my mind the last scene in the "Thelma and Louis" movie, and the increase in inventories is astounding, the increase in SG&A is remarkable, and just from your tone of voice normally an amateur psychologist, but from your tone of voice I don't get any sense of urgency that, you know, something is wrong and something needs to be fixed and yet, obviously, the share price reflects that at least some other people think that.

And I guess, I'd just like to ask two questions; the first is, if you went back to the beginning of this calendar year and you formulated your expectations for the year, how far at variance from those expectations is the current reality and if it is a big variance, I guess, I would think that there would be more of a sense of urgency in your voice.

Secondly, since you seem to be doing a lot of things on multiple fronts to grow the business and yet you sort of began with a good cash position and you have at least some capability of generating meaningful cash -- I'm wondering why you don't go in the opposite direction, and in fact shrink your business and just be profitable and return excess cash to the shareholders.

I'm frankly puzzled, distressed, upset, whatever.

And I'd love to just get your comments on, you know, how happy you think shareholders should be?

And how happy you think we are going to be 6, 12, or 18 months from now?

I never saw the end of "Thelma and Louis" release on a little disadvantage had it ended and what you mean and as far as --

Well it is a --

As far as sense of urgency, I think the sense should be that we're not in panic mode.

I don’t think anything that happened internally should create a panic.

We know we have had issues, we had a problem, the year is certainly not as stellar as we would have anticipated.

We started on a multiple number of initiatives that were not ready to pull the plug on yet.

We have thought about whether it pays to shrink the business or not or whatever.

And we were certainly always working in what we feel is the best interest of stock holders since that -- and that’s ultimately the value that’s perceived.

And we realized that we have some things to fix, but I don’t know that sitting here in a panic and with a sense of urgency that we have to cut everything off of the head would be a correct evaluation of how the senior management feels, nor something that we would convey because it's just not -- simply not true.

We don’t think the business is out of control.

We don’t think -- while we've missed in certain instances and we certainly have places to go.

We think that brand is still strong.

We think we will come through our inventory issues without any significant adversity to the brand or our potential as we go down the road.

We certainly will hold and would anticipate that shareholders will be happier in the next 6-12 months, should we reach our initiatives.

Should these things start to turn money making.

If not we certainly have the capacity to generate cash, given the fact that we have depreciation of $5.3m only at operating loss of $2.2m.

And we think that’s a significantly bad quarter.

So we can -- we have licensing revenue that’s coming.

So I don’t know that anybody would assume its doom and gloom other than the stock price.

We think we have a healthy company that's had a missed up.

We have grown dramatically.

We have taken a piece of the marketplace.

We did apply so and started to trend somewhat down given that the tastes in the marketplace have changed.

We think we set up all our initiatives, both internationally, domestically, and in licensing to take further value as we go down the road.

And I don't think it would be correct to just sit here in a sense of panic saying we don't know what's going on and the business is in significant danger of going away.

I don't thinking any of that is true.

So yes we thought about everything and everything will be under advice, but I don't know that it would be fair to say -- well we've just started these initiatives.

They are less than a year old.

We have some subsidiaries and some stores that haven't been open a month, but because of the stock price we should cut them all up even if we think they are going to be profitable in the next six months to a year.

We have to give them somewhat of a chance to mature -- somewhat of a chance to be evaluated, and then we'll take those dramatic steps if necessary and certainly with an eye towards generating significant cash for the latter part of this year and through 2004.

Thank you.

There appear to be no further questions at this time Mr. Weinberg.

Okay.

We thank and appreciate everybody in these tough times coming out of [cloak] and the ideas.

We certainly anticipate more information being disseminated and a better idea of what's going after those that are coming to WSA.

Most of you think you'll see quite a better display from our customers and what they feel about the product and we hope to report through that for the end of the year.

Thanks again.

Thank you.

That does conclude today's second quarter, sixth month 2003 earnings conference call.

You may disconnect your lines at this time.