Skechers USA Inc (SKX) 2003 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to your Skechers USA Incorporated Third Quarter 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 of Integrated Corporate Relations.

You may begin sir.

Good afternoon and thanks for joining us today.

Before we begin, I'd like to note that today's call may contain forward-looking statements and as a result of various risks factors, actual results could differ materially from those projected in such statements.

These risks factors are detailed in Skechers filing with the SEC.

I'd now like to turn the call over to David Weinberg, Chief Financial Officer.

Thanks Brian.

Good afternoon and thank you for joining us today to review Skechers third quarter and nine-month 2003 results.

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

Third quarter sales were $221.8m compared to $261.1m in the third quarter of 2002.

Sales were higher than we expected when we gave guidance on July 24, 2003, mainly due to our aggressive approach to reduce our inventory level.

As we anticipated, this approach to reduce in our inventory resulted in lower gross margins and earnings for the third quarter.

Our net loss was $5.9m or 15 cents per share.

In the third quarter, we received positive sell-through data at retail from our larger wholesale customers for the back-to-school season.

But we did not experience significant reorder business and what we did receive was largely close out merchandise rather than in-line merchandise.

We believe the trend towards less reorder business was in part due to retailer having a more conservative approach to inventory planning as well as the recent tendency among some accounts to better plan out brands at Skechers is becoming a more mature and stable business.

We believe that our product was and continues to be fashion right and in demand by consumers and that we will continue to be a basic and important part of our accounts inventory plan.

We will continue to focus on our products to ensure that it is on target.

On our second quarter conference call, we stated we were going to be aggressive in our approach to move excess levels of inventory during the back half of the year.

We believe and continue to believe it was and still is prudent to assertively work through our inventory to achieve our year-end goal.

We're pleased that we made significant strides in our inventory reducing it by $66.4m or almost 31% from second quarter 2003 levels, which resulted in an increase in cash of $39.2m to $80.7m and a decrease in accounts payable of $71m to $56m.

We believe that we are ahead of our plan of having inventory in line by year-end 2003 and expect to begin 2004 with inventories that are fresh, current and on plan.

For the nine-months period ended September 30, 2003, net sales were $659.7m compared to net sales of $762.7m during the first nine months of the prior year.

Net income for the nine months ended September 30, 2003 was 476,000 or cent per diluted share compared to net income of 55.6m or $1.39 per diluted share.

We believe several factors resulted in our reported decline in sales and earnings for the first nine months of 2003 over the same period last year.

First, the conservative approach to inventory planning by wholesale accounts due to the retail environment.

This is not an across the board shift, as we have seen some key accounts remain strong.

Second, we have seen more competition at our basic price point and an increase in off-price product purchase versus in-line merchandise.

We believe these will continue to be a factor in the fourth quarter.

Third, increased marketing expenses associated with the launch of new product line, Michelle K, Mark Nason, 310 footwear and Marc Ecko footwear and the signing of Christina Aguilera as our international spokesperson.

Fourth, increased expenses associated with the opening 28 retail stores in the last 12 months including 10 stores opened in the third quarter, three of which were international location.

And finally, the start off expenses associated with establishing new international subsidiaries including the opening of a showroom in Italy and the hiring of sales representatives and marketing teams for Canada, Spain, Portugal, Austria, and the Benelux region and our European distribution center located in Belgium, which began shipping in December 2002.

We see factors such as the unsteady economy starting to abate somewhat and the cost of our international initiatives starting to balance out as our subsidiaries grow to their planned level.

Even so, we believe it is prudent to take steps to better align our expenditures with sales as we become a more mature company

Now that we've made significant strides in reducing our inventory and improving our balance sheet, we have turned our attention to cost cutting initiatives.

Due to the plan still being developed, we are not prepared to give you specifics about the annual savings at that time.

However, I would like to give you some preliminary thoughts on our cost cutting initiatives going forward.

First, by reviewing our advertising and marketing budget.

Our goal is to reduce cost without diminishing the impact to consumers.

We plan to do this primarily by lowering our production and trade show expenditures.

Second, we are curtailing the expansion of Skechers retail stores.

We will concentrate our efforts on maximizing our impact and potential within our existing stores.

With 124 locations worldwide by year-end 2003, we believe we have already established Skechers retail stores in the prime market such as Time Square, Universal CityWalk, Beverly Center, Mall of America, and the upcoming Las Vegas Fashion Show Mall and Eaton Centre in Toronto, Oxford Street in London, and the [Alstadt] district of Düsseldorf.

We planned to open only 4 additional locations in 2004.

Third, we have no plans to directly expand our international business into new markets.

We will continue to support our existing subsidiaries and focus on bringing each subsidiary's expenses in line with its sales.

Lastly, we try to kind to create a more efficient business and in part by looking at our overall expense structure line items by line items.

We believe the majority of our programs will be implemented by year-end 2003.

For the most part, the cost saving effects of the plan will have a little or possibly negative impact in the fourth quarter, but we are better positioned as for 2004 and beyond.

Again, realigning the company should allow us to continue to design and develop quality footwear and partner with quality licensees, support our existing initiatives in a more efficient manner, grow our recently established ventures to their potential, and remain competitive in the marketplace.

While our focus for the near-term is on containing cost and maintaining our position, we do see several opportunities for growth within set initiatives that will require little or no additional capital investment.

These include international, licensing, and recently launched lines.

In regards to our international business, we began directly handling our product in Germany in 2000, when we saw the opportunity to grow our international sales.

Shortly thereafter, we established direct operations in the United Kingdom and France and today through eight subsidiaries we handle the marketing, sales, and distribution of our footwear in 12 European countries plus Canada.

We've made progress in many of these markets but are I am most pleased with our position in our first subsidiary, Germany, where we have seen our orders for the first quarter 2004 up double digits over the last year for the same period.

With the introduction of new lines internationally, we have the opportunity to grow our subsidiary business and are looking to do so in a strategic and controlled fashion.

Our recently opened stores in the [Alsadt] district of Düsseldorf [Alderstaat] in Amsterdam along with the existing stores in Toronto, London, Manchester, and Paris, we'll further build a brand in these markets.

Furthermore, we believe that our international sales will also be positively impacted by superstar, Christina Aguilera, our new international spokesperson for women's lines.

The first ads of Ms. Aguilera in our Skechers sports stamina sneakers are appearing in International Fashion and Lifestyle Magazine this month in conjunction with her sold-out European tour.

Moving on to licensing; since the signing of out first license with Rental Corporation for Skechers branded socks in spring 2002, we have signed seven additional licenses.

Our arsenal of license products now includes Skechers Kids apparel with Kids Headquarters launched in U.S. department stores in August 2003.

Men's and women's Skechers sports watches with the Advance Group, Inc., which began shipping in fall.

Skechers collection, men's jackets and coats with Garson international scheduled to ship for holiday.

Men's and women's apparel in Japan was Mitsui & Co. Ltd., which is scheduled to ship for spring '04 and most recently something else from Skechers junior sportswear apparel in the Unites States and Canada was Federal Jeans, Inc.

Michelle K women's apparel was L'Koral industries, and maker of [seven for all mankind] jeans and Skechers kids clothing in Canada with the Multi Group.

All of which were launched in stores were back-to-school for '04.

We are extremely pleased with the response that Skechers kids' apparel received in key department stores.

According to licensee Kids Headquarters, our children's apparel was receiving double digit sell-through.

We see licensing as an ideal opportunity to extend the brand to beyond footwear in key global markets, and believe there are additional opportunities for Skechers branded product in domestic and international markets.

As I mentioned on the second quarter call, we expect a minimum of 7-8 cents per share in pre-tax profits from licensing revenues during 2004.

And finally another area for growth is within our new product lines.

We now have nine product lines branded with the Sketchers name and four lines that do not include the Sketchers name.

Of those four lines, three are new and one, Michelle K, is approximately two years old.

For the designer line, Michelle K we see growth potential occurring with an in-store launch of the Michelle K branded apparel lines in fall of 2004 and the recently opened Michelle K store on trendy Robertson Boulevard in Los Angeles.

For the men's high fashion line, Mark Nason, which just launched in fall of 2003, we are entering a new market for Skechers with fashion footwear for men and believe we are making good initial steps for the couple department stores on board as well as boutiques.

The additional two lines launched in spring 2004 are footwear licensing agreements where the popular car specialist 3-1-0 motoring or 3-1-0 footwear and Ecko Unltd for men's women and children's Marc Ecko footwear, which will coordinate the Ecko Unltd and Ecko Red apparel.

We also believe these will be ideal opportunities to enter targeted markets that Skechers presently has little or no distribution in.

Now turning to our third quarter nine-month numbers.

For the third quarter 2003, sales were 221.8m compared to 261.1m last year.

The decrease was due to lower domestic wholesales which decreased 21.1% to 150.9m driven by an 18.6% decrease in average price per pair, on 3.1% less volume.

Gross profit decline to 78.6m versus 108.8m in the same period a year ago.

Third quarter gross margin was 35.5% compared to 41.7% in the same period last year.

The gross margin decrease was mainly due to our aggressive pricing and a higher level of close outs during the period to bring our inventory more inline with our plan and to a lesser extent to higher freight costs.

Total operating expenses as a percentage of sales increased to 37.9% from 32.5% in the third quarter of fiscal 2002.

Third quarter selling expenses improved to 20.6m or 9.3% of sales as compared to 32.6m or 12.5% of sales in prior year period.

The reduction in selling expenses is due to lower sales commissions, trades show cost, and our planned reduction in advertising and promotional costs.

On a percentage basis, advertising expense was 6.9% of sales from the third quarter of 2003 as compared to 10.5% in last year's third quarter.

General and administrative expenses were 63.5m representing 28.6m of sales compared to 52.2m or 20% of sales from last year's third quarter.

The increase in general and administrative expenses was attributable to higher salaries, wages and related taxes, rent, insurance, depreciation and legal fees.

Third quarter operating loss was 4.1m compared to an operating profit of 24.1m in last year's third quarter.

Net loss was 5.9m compared to a net earning of 14.1m in the prior year period.

Loss per share was 15 cents on 37,925,000 shares compared to fully diluted earning per share of 35 cents on 41,926,000 shares in the third quarter of last year.

We did not include the dilution effect of the shares that would be issued under our convertible note for the third quarter 2003.

For the nine months ended September 30, 2003 net sales were 659.7m versus net sales of 762.7m for the first nine months of 2002.

Gross profit was 258.6m compared to 317.6m for the same period of the prior year.

Selling expenses for the first nine months of 2003 were 67.1m compared to 72.6m for the first nine-months of 2002.

G&A expenses was a 181.7m compared to 150.7m in the same prior -- same period last year.

We provided 4.1m for income taxes for the nine months ended September 30, 2003, which is an effective tax rate of 90% of earnings before taxes compared to an effective tax rates of 36.7% last year.

The increase in the effective tax rate is due to losses incurred and low tax rate international jurisdictions, offset by higher rate domestic tax provision.

Net earning for the first nine months of 2003 were 476,000 compared to net income to 55.6m.

Diluted earnings per share were one cent on 38,114,000 diluted shares outstanding versus diluted earnings per share over $1.39 on 41,004,000 diluted shares for the same period last year.

Trade account receivable at quarter end decreased 16.8% from September 30, 2002.

Our DSOs at September 30, 2003 were 41 days versus 44 days in the same period of 2002.

Inventory at quarter end stood at 150.7m representing an increase of 21m from 129.7m at the end of September 2002.

Inventory levels continued to be above last year's level but improved substantially from levels at the end of the second quarter 2003.

We believe that we are ahead of our plan of having inventories in line by year-end 2003 and expect to begin 2004 with inventories that are current.

At September 30, 2003, cash on the balance sheet totaled $80.7m compared to $41.5m at the end of second quarter 2003.

The increase in cash is mainly due to lowering our inventory levels and converting receivables to cash during this third quarter.

Working capital totaled $284.9m as of September 30, 2003.

Long-term debt fell to $120.2m, of this amount $90m is related to our convertible debt offering.

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

In addition, there is no outstanding balance on our revolving line of credit.

CAPEX during the first nine months was approximately $18m, primarily stemming from new store openings and leasehold improvement.

For 2003 we continue to project total capital expenditures of $25m with the majority of this amount related to our retail and international expansion.

Now turning to guidance.

We currently expect fourth quarter 2003 sales in the range of $155-165m compared to $180.8m in the fourth quarter of 2002 and a loss per share of between 45 and 55 cents.

This assumes that fourth quarter margins will be comparable with third quarter actuals.

As we complete 2003 and move into 2004 with a clean inventory, I want to reiterate our focus to realign our expense structure with our sales, to maintain our position in the marketplace, and to grow the recently established initiatives including the licensing arm of our company.

We are taking a detailed look at each expense line item and finding ways to lower our cost structure and maximize our operating margins.

Once we realign our business and begin generating consistent earnings, we will be looking at ways to enhance shareholder value.

In our first ten years, Skechers grew into a global lifestyle footwear brand recognized around the world.

Moving into the next decade, we believe Skechers is a mature and stable footwear brand that is becoming head-to-toe lifestyle brand.

We believe that steps we are taking now will result in a stronger company and a better position for us in the long term.

And now I would like to turn the call over to the operator to begin question-and-answer portion of our conference call.

Thank you.

The floor is now open for questions.

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

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

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

Once again, that's "1" followed by "4" for any questions.

Thank you.

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

Your line is live.

Hi good morning.

Good morning.

A couple of questions.

One thing that looks little different in your strategy here is to add these licensed brands, this 310 Motoring and Ecko Unltd, is there any plan to add additional brands in the future and what kind of distribution do you see for that product relative to the Skechers brands?

In reverse order, obviously, Ecko and 3-1-0 are distributed at the higher end of Skechers and in those places where Skechers doesn't even have significant presence at all.

So that would be -- what would we call department stores and above.

I am sure those of you that have been through the department stores on the higher end have seen the Marc Ecko and Ecko Red clothing, they are very popular now and have been very hot and I think that's a great license for us. 3-1-0 came about before -- that's also a higher price market, it's obviously a different marketplace for those who are familiar with 3-1-0 motoring and their cars and their culture both in the athletic and music world understand it's a very high priced, very fashion forward, for lack of a better word, type of product.

As far as adding additional licenses, I think it's fair to say that we keep an open mind as things come and develop but for the more current period through next year.

We really are not looking for any more initiatives as I said in my prepared statement, we are more working on our core products and cost efficiencies right now rather than expansion of lines or names, but that obviously could change going to the future.

Okay and then I'm sorry if this is repetitive, I missed part of the beginning of the call.

Did you give what your advertising cost was as a percentage of sales in the third quarter?

6.9%.

Okay and then that's below kind of what you've targeted in the past and I understand you are probably reacting to some of the weakness on the sales line.

You did talk about cutting advertising cost going forward.

Where would you peg advertising as a percentage of sales kind of on annualized basis at this point going forward?

I still think 8% is a good target plus or minus 1% depending on how the additional cost come out besides the actual media, but I would like to point out it's 6.9% in the third quarter but its significantly higher for the year.

As we said before, we put a lot of advertising into the end of the middle quarter; less in the first quarter, less in the third quarter, more in the middle quarter for the beginning to back-to-school and what was spring.

And you should also keep in mind that with our reduced volumes right now and increased stores and increased close out, if we take our actual marketing outlay on full price, [it is hard] to support those stores that have it with probably right inline with our historical norm.

We don't want to advertise 8% on the markdowns, lower goods nor necessarily the store volumes.

Okay, that makes sense.

Can you talk a little bit more about what's happening on the top line.

I mean I understand the kind of the Energy has slowed down a little bit, can you talk specifically about that look and products associated with the Energy?

And then do you see anything happening on the horizon from a trend standpoint within footwear that you think might be more appropriate to the Skechers brand or is there any other changes within the product that you think you can make to help kind of stabilize or see improvements going forward?

I think what's happened in the top-line is two fold.

When you look at us historically, we grew actually from 1999 to 2001 we grew from about $420-960m.

That still is the pipeline, its get higher price goods; there is no mark down.

There is really no cost initiatives and what basically happens as you mature, as you get that shelf space there is no chasing, you are planned out.

And when growth slows down, it's very difficult to slowdown the top-line and obviously the G&A that goes with it, but that transition is taking place right now.

Obviously, the Energy was a key driver; our other businesses continue to move forward and so as do these lines, I think the second part of what's happened is, I don't know if you missed the second part of the conference call, we are obviously down more significantly in dollar volume than the number of units in that we had a very free range with our price points when we came in and obviously our success has got a lot of competition in those pricing which has forced more competition.

So we have a pricing issue, a filling the pipeline issue, and obviously a retail issue for a while.

So while we expect to remain competitive in the pricing market and obviously getting our new production and new design to be more competitive in that range and we are keeping our shelf space and hoping that that retail [only].

We think although it's too early to tell that while -- Energy still remains quite a good base for us, it's obviously not a growth driver but does have a place in the marketplace that fashions are changing and as fashions change we never know how we'll fit in the mix but we always feel that the change is good for us so the fact that fashions are changing now, we feel will be a positive and we do still have some new products that are selling very well at retail and beginning to grow.

So we are still at the early stages of some of this new product that's going out there.

Okay.

Thank you and looking forward to improved results down the future.

As are we.

Thank you.

The next question is coming from Dorothy Lakner of CIBC World Markets.

Your line is live.

Good morning.

Morning.

David, I wonder if you could -- tagging on to John's question, just give us a little bit more color on the top line and just a performance of the categories of Skechers product if you could differentiate between men's, women's, and kids for example I think that would be a big help and which lines are performing best, which ones can we expect to see strength from?

And then going back to the pricing issue, what are you doing with prices?

Are they coming down or are you just promoting as needed in order to compete in a more competitive pricing market?

And then finally, you mentioned closeouts earlier, I wonder how much of the inventory that you're pairing down are you able to dispose off in your own outlets and how much of it is going to off pricers?

Thanks.

In reverse order just so I read back this--

Okay.

The less inventory we have, the more we move through our own outlets and the less we use to third parties whatever they might be.

So you might -- as you might imagine, the third party use was significantly high in the third quarter.

It continues but it continues at the higher end of closed outlets.

Was it more in the third quarter than in the second or is it beginning to come down a little bit?

It was more in the third quarter than the second.

Third quarter was the biggest piece of--

Of the inventory.

Of inventory movement that's why you saw the increase not much of a decrease in units year-over-year but significantly decreases in volumes.

Okay.

As far as pricing, I think we get pricing leverage and pricing power obviously as we get our inventory in line.

We are building shoes with initial markups that will fit into the market place in the price points we see as our strength and to our point but obviously the excess inventory in those price points have just taken down.

Everybody goes for the opportunity and my thought is as we get our inventories in line and as the merchandise starts to sell, and is selling through that we will have less of a markdown and sort of -- well price points will decrease, they won't be as much as in the third quarter, so only by the time we get into the first quarter.

So we should assume going forward the average price per pair continues to come down?

I don't think it comes down from here.

I think it will rest somewhere between our historical norms, somewhat you saw in the third quarter.

But year-over-year it's probably still going to be down.

Year-over-year it will probably still be down.

That's the nature of the marketplace.

Okay.

And then just take us through the Skechers lines, what's -- where were the -- was there any strength?

Where was it?

Let's kind of prioritize which of the lines are good drives and growths and which are not?

Well we think they can all drive growth since they were all down to varying degrees not significantly different.

Obviously our strongest group is women's sport which given that conversation we had about energy and its strength obviously suffered the most when that product leveled out but we are getting certainly some good sell throughs from some of the newer product that we have out in the market place and that obviously remains our strongest potential as we think we do that market place well and is home forte and we are very competitive in that market place, we think it holds for us quite well.

Our men's USA, taking together the whole work in men's USA has been stable taken as a combination and that's just a more stable type of product.

It's a market place we have been in and it didn't show much growth or as significant growth through the growth areas and obviously not a significant decline through this area taken as a group.

Sorry?

Kids?

Kids has been down slightly but obviously it's starting to come back.

We think that marketplace next to women's sport is probably our strongest market place with this -- with the most potential.

Our girls business is starting to pick up and we are getting some results at retail and our boys business is not significantly far behind but certainly not as strong as the girls.

Great.

Thank you.

Thank you.

The next question is coming from Harris Hall of Wedbush Morgan Securities.

Your line is live.

Good morning.

Good morning.

Just on the domestic wholesale, I know you went through the unit decline and volume decline, can you just give me those numbers again?

I believe it was at 3.1% decline in units and whatever the volumes I think--

Is it 18 or something?

18.9 or 19% in volume.

18.9% decline, okay.

And some of our other companies are reporting FX benefits and the weaker dollar in the US and international sales.

Are you seeing any of that?

Yeah.

We are seeing it.

We think actually that's one of the reasons that Germany is performing so well and that we are starting to pick up in Europe.

It's just not big enough to impact the overall yet.

But obviously what we did basically was pass along a little bit of that pricing weakness of the dollar strength of the euro as we buy in dollars and made ourselves more competitive in the European market and it's done quite well in Germany and it's starting to show in another places like France and some of the new places we started.

So we think it's a positive for us and we do get more pricing strength and we are seeing some increases over there just not big enough as yet.

So are you guys up in constant dollar for the international business?

Are we what?

Sorry?

Are you up in constant dollars with the international business?

Yeah.

We are up in constant dollar as well but you've to convert back.

Great.

Thanks a lot.

Thank you.

The next question is coming from Justin Maria (ph.) of Lloyd Abbott.

Your line is live.

Good afternoon Dave.

Good morning.

Few question for you.

First on the ASP is down to the extent that they are, how much of that is kind of your side of things in inventory clearance versus just kind of market forces?

Is it 90% of what you are doing to clear the inventory and the balance being what the markets doing to the ASPs or--?

I think it's a little bit of both.

Obviously when you close that inventory, it impacts your dollar, your average price but that's not the whole story.

We find pricing is more a significant piece of the market place in general certainly at retail than it was two, three years.

Two, three years ago we found ourselves pretty much alone in those mid-price points and now there's a lot of competition.

So a little bit of both but certainly the market place is the biggest reason for our normal pricing to be down.

Okay.

Is there any particularly weakness or strength across the different categories or is it pretty consistent?

Year-over-year, it's -- I don't know if it's -- exactly it's pretty consistent.

Obviously those -- as I said those at men's USA, they were more stable to begin with the more stable now and those that were thrown the quickest or one of most volatile like our sports business have been impacted, but the impact is pretty much across the board.

It's no one runaway thing and one thing that's dying on here or slow -- a quick death.

Yeah, okay.

And so therefore going into next year you would anticipate that still being down, not -- may be not to the magnitude it is now, but it still probably be down for a while?

Our domestic wholesale is probably -true -- I would anticipate that our international subsidiaries will start to increase and obviously with the increased stores our retail would be up.

But yeah, I would anticipate at this point that our domestic wholesale will still be down year-over-year in the first quarter.

Yeah, okay.

On the CAPEX side for next year, just thinking about what you said about from [culling] the store growth and the international growth and does that imply you are not going to do any stores next year or do you have some on the board that you are going to go ahead and do?

We now have and four stores, I think I said for next year and right now there is no plan to go beyond that.

So right now our plan is that four stores.

So I would say that that's pretty safe at least for the first six months.

Things can change that dramatically unless something really comes out of the woodwork.

Got you.

Inventory target, you said you hope by the end of the year you'll be there, have you guys given a dollar amount?

Well, we haven't given.

We are looking at our mix but I would say anything that's equivalent with last year's original inventory given that we have -- we will have 30 somewhat more stores would be a good target for us.

All right.

And just last couple of things.

First on the G&A run rate, you said you guys are looking at all facets of the business trying to take cost out.

You know not too long ago, your run rate -- I am just kind of looking at it on a quarterly run rate, were below $50m and now you are above $60m.

What do you think the right number may be on the current business level and would any charges be -- would you see any charges needing to be taken to whether it's people or facilities or what have you?

Obviously the current run rate depends on the size of business we come out, and the reason that there is the increases that you see year-over-year in the $12m, is obviously the 30 stores and the subsidiaries in Europe as well as design and marketing efforts for the new lines that we have opened up.

We are evaluating that now, and I don't know that I can give an accurate number now, but obviously somewhere -- if we were looking today we say we have to go below the $50m number on a quarter or in fact into that range.

So unless things change specifically, we obviously are going to be profitable.

So whatever it takes, if the rate is -- today's rate and obviously the margins will pick up a little bit but there won't be so much closeouts.

We are looking to make it profitable.

So if that requires us to get into that $50 to $55m a quarter than that would be our target.

Okay.

Below 60, not below 50.

Right?

I don't know we'd go below 50.

If we're below 50 that will require closing some items either some of the lines or some of the subsidiaries.

I don't see that between now and the end of the year, but it's certainly is possible if performance is in there sometime next year and that might require some charges.

Okay.

You just -- you had said below 50.

I just want to make sure that was -- alright and then just on lastly on the selling expense side, not knowing obviously what the level of revenues is going to look like and therefore a kind of 8% target.

Is there any way to consider it on a dollar base?

I mean I know it's mostly variable but and along with that is there any aspects of media spend?

You guys just aren't happy with or aren't as productive as you would like and therefore is kind of low hanging fruit to take some of that cost out.

There was a lot -- I would tell you our biggest concern right now is obviously our media and a little bit of -- and some of our in-store promotions where we are in front of the consumers.

Anything that's not directly involved with our consumer is open season and that has to do with production cost and gimmicks and joint efforts with some of our partners and some European things and some distributors and certainly production costs, certainly trade shows certainly things like that so there's a lot outside the media, that we can look at.

Okay so that on a dollar basis, again I know it's hard to look at that way, but it's bounced round from anywhere from 15-30m it looks like on a quarterly basis.

Is there a weighted to guesstimate it to a target, could it be 20m again or you just don't know?

20m?

On a quarterly basis in selling expense?

I think that would be pretty high I mean we may borrow from one quarter to the next like I said second quarter was significantly high, but on an annual basis, its not going to be 80m, so we may borrow from quarter -- it would depend when seasons fall, in other words when Easter falls in spring whether it's a first or second quarter event and how we feel about back-to-school or the holiday season, so we'll take our annual budget and give everybody a prize and our annual budget will obviously come down of course, the board, and whether it peaks or doesn't in a particular quarter, we will try to keep you advised.

So, it would not go down as far as $80m?

As far as --

On an annual basis

Its not 80m now --not 8 or 9% -- it's in $70m range now, we are not going spend 80m on just advertising.

That's the --

[20s] may be but not certainly not on advertising.

Yeah, but I was -- Sorry, I was talking about the selling expense line.

[Volumes] in total they should come down into the $80m range in total.

Yeah.

That wouldn't surprise me much.

Fair enough.

Thank you sir.

Thank you, the next question is coming from Derrick Wenger from Jefferies and Company.

Your line is live.

Yes thank you, what was the depreciation and amortization for the quarter and if I did the math's right your capital expenses came in around 7.27m is that right?

Yeah we'd 18m for the -- we had capital expenditures for the quarter. 18m for the three quarters 7.4m

7.4?

Quarter. 7.18 exactly.

7.418 Okay and D&A?

Was the first [inaudible].

Depreciation and amortization for the quarter?

Depreciation and amortization is running just over 6m a quarter, I think, it was 6.2m.

Okay.

Thank you.

Thank you.

As a remainder for any further questions at this time that's "1" followed by "4".

Thank you.

The final question is coming from Julie Learner of Metropolitan Capital.

Your line is live.

Hi.

Good day.

I guess, I am a little confused, this morning you spoke a bit about the maturity of the business and this morning we're all -- aware that [K Swiss] had nominal results, I guess, I am wondering if the severity is perhaps worse than you guys are letting on in terms of both the current and the future, especially given the huge decline in the expected EPS for the fourth quarter, and what sort of assurances were going to have going forward that you guys can hold together?

I am sure I heard, you broke up on the part of that, but I think as far the assurances going forward, I mean, there is not much I can tell you other than the plan that's in place and the fact that anybody looking from the outside would deem it necessary.

We are certainly looking to protect the business and go forward and become profitable, it's what one does in businesses.

It's -- people have different thoughts about how to get there, but the thought is certainly to protect the business and they are going.

I think, when you look at K Swiss there are obviously phenomenal company that's doing quite well, that it hit fashion like product right now but they are not significantly different in their performance now than we were in two years, going from 1999-2001.

They have a different mentality obviously, but our growth rate during those periods was the same thing.

When you get to be a mature company, and I think in today's day and age, it will be very difficult for us to hide anything from anybody, given the reporting guidelines and everything that we file.

You know, what we know, there is certainly changes in fashions and style in the market place and certainly retail environment.

However, you see what we see and we see a retail environment.

We see definitely there is a home from the brand, when you shop out there, you see the brand, the brand is in demand, you see it when you walk through the street, you see it when you walk through the street, you see it on peoples feet.

There is a home for the brand.

The question is of what size and where it goes and we think now that major growth curve is done, certainly we are not going to go at that level.

At the current time, that doesn't mean preclude us from growing again.

People, fashion goes through cycles and it goes up and down, but the order of magnitude is what you are talking about.

So, I certainly believe I think most people here believe that our time will come again and that we are very solid company.

Even at the rates we are talking about, doing 800-850m at the rates, we can get our overhead in line to generate significant amounts of cash and then continue to design our products and wait for the next time, and we know the name is in significant demand by the number of licensees we have, by the number of request we have, by the sales of at least the first big license that hit the market place.

In short, the name is in demand and the name has solidity and the name has solidity in retail.

So, other than it sells you see it on people's feet.

Licenses can sell, I don't know what other reassurance that could give you that the brand has validity and to our intentions], you know, other than its what we do it says the business is what we most care about and obviously we will do what we think is necessary to get it in line, to generate the cash we protected for the future.

Thank you.

And the final question is a follow-up coming from Justin Maria of Lord Abbott.

Your line is live.

Sorry, I thought I'd beat you up a little bit more.

On the licensing side, you mentioned I think 78 cents from those initiatives.

You know, back to what you are saying about the, and I just want to make sure I understand it correctly.

In the licensing of Ecko and 3-1-0, could you talk may be a little bit more philosophically about why you guys have decided to kind of go that direction as well as the licensee as opposed to just, you know, feeling that there is enough strength in your brand to take it where you need to take it, is it more just kind of opportunistic and I understand it is not big bet type of stuff, but still may be talk about the decision process by now?

As far as Ecko is concerned, we thought that was a very clear to us.

Ecko will take us in places that I don't know that Skechers can go or the cost to get us excepted in those venues, would certainly be significantly higher than the amount we are investing to get into there with a different line for Ecko and gives us solidity.

Ecko is just a superb line.

It is retailing very well, it's very strong at retail, and obviously we don't sell in the upper end of the department store as to the extent that Ecko does and it will be nice to have a brand in there, and that would also obviously help the overall business structure. 3-1-0, which is more opportunistic.

It came along, they are a local company, they have a very -- they got at least $1b name when you look into the athletic and music, and they have not had a chance to commercialize it.

So, we felt, we could start with footwear, which is very nice [inaudible].

Like I said that -- other than the development of footwear, there is almost no [bet] at all, try to move into those areas of distribution where we really haven't been and it will be very difficult for us to go with Skechers.

Okay, and back to the G&A and/or selling expenses, as you ratchet the cost down, how long do you think the kind of ballpark range as we were talking about earlier, is that a six-month process, is it six-week process that take you the course of '04 in general to get to those type of levels or how long do you guess it's going to take to get to those levels?

I think I would be disappointed if it wasn't all in place by the end of the first quarter.

I think the significant piece can be done in this fourth quarter to that extent, but obviously some things take a little while longer and I think everybody here feels that time is of the essence.

So I think the biggest piece will be done in the fourth quarter and obviously whatever is left should be done by the end of the first quarter unless there is a big strategic move like with our subsidiary or a number of stores or something like that, which I don't see right this minute.

Yeah, okay.

So I know you don't want to give guidance about '04, way too uncertain yet.

I will try to nail it down anyway?

Thank you.

If I look at what you said about what are reasonable revenue for this company could be 800-850 and just to split the difference, take a 40% gross margin once you guys have shown more than the ability to do, once you get the inventory cleared and then you get to the run rates of G&A and our selling expense that we were talking about.

That would imply there is no reason to believe you guys couldn't do, and I am not saying for '04 but just in general a kind of $1 per share type earnings again.

I mean is that -- is there anything I am missing there in terms of exterior events or things that you guys are thinking about that isn't in that number?

No, I mean I am not going to give guidance, you know, for the obvious reasons but if the scenario you just laid out wasn't within our means then I think we would have missed the boat.

I think everybody here is interested in generating the cash that's capable at a company over the next year and those numbers I think hopefully by 2005 would be seen as conservative, but it's too early to tell, we haven't put those pieces in place yet.

Yeah, okay.

Thanks.

Good luck.

I would now like to turn the floor over to management for any closing remarks.

Obviously not the greatest quarter but I think we've made significant strides in our plan to convert this to a mature company and keep our place in the marketplace and have some of these more initiatives on board.

And like we just finished with the last question, we look forward to be able to report significantly better news and a more in-depth plan about our overhead and running rates by the time we finish our next -- by the time we get to our next conference call.

So, thanks everybody for joining.

Thank you.

That does conclude today's conference.

You may discount your lines at this time and enjoy your day.