Skechers USA Inc (SKX) 2003 Q4 法說會逐字稿

Good afternoon, and welcome to the Skechers USA incorporated 4th quarter and full-year 2003 conference call.

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

It is now my pleasure to introduce our host, Mr. Brian Yarborough of Integrated Corporations 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.

Thank you, Brian.

Good afternoon, and thank you for joining us today to review Skechers 4th quarter and fiscal 2003 year-end results.

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

Year-end 2003 sales were 835 million, with 4th quarter sales totaling 175.3 million, which was ahead of our original guidance given in October.

The increased sales and the decreased loss was primarily attributable to the stronger than anticipated sales and margins in the month of December.

Our 2003 net loss per diluted share was 31 cents.

2003 was a difficult year for Skechers, but we are happy with our position going into 2004.

While we believe it's too early to see the full impact of these decisions, a better indication should come at the close of the 1st quarter of 2004.

We are pleased with our achievements in 2003.

These include improving our balance sheet from June 30th, 2003 levels with more than 113 million in cash, reducing our inventory levels to 137.9 million, which is 6.8% below our stated goal on the 3rd quarter conference call.

Even more impressive is that we have an additional net 29 retail stores: Establishing a Canadian subsidiary and offices to handle direct wholesale distribution of our footwear in Canada.

Signing a global superstar, Christina Aguilera, to an international endorsement deal.

Successfully launching Skechers kids apparel and signing 12 licensing agreements, including 8 apparel licenses.

The opening of 31 Skechers domestic and international retail stores, including one in Times Square, and the introduction of three new men's and two women's footwear lines.

With the accomplishments and initiatives undertaken in 2003, we believe our company is well-positioned from an operation and financial standpoint heading into 2004.

Now I would like to expand on our 2003 achievements in our four revenue channels; domestic wholesale, international, retail and licensing, as well as our expense structure.

First, domestic wholesale.

In 2003, our design and production teams redeveloped many of our existing product lines, focusing on updating proven styles as well as developing new looks closely linked with current trends.

This new product began to come to market late in the 4th quarter, but is predominantly shipping for spring 2004.

Also, in 2003, we introduced five new lines that will be branded separate from Skechers, increasing our consumer base and potentially our shelf space.

First was the fashion-forward Mark Nason's men's line and Michelle K Sport for women.

The casual division of Michelle K, both of which were delivered in fall 2003.

We then acquired the intellectual property to automotive company 310 Motoring, and introduced a line of Urban Street Footwear of the same name.

We also became the licensee for men's, women's and children's footwear for the in-demand apparel brand Echo Unlimited.

Mark Echo footwear for men and Rhino Red for Women, take its cues from the logo-driven street-stylish apparel and are getting a positive response. 310 Motoring footwear, Mark Echo and Rhino Red will deliver to retail in the 2nd quarter of 2004.

We believe each of these new product lines should have strong growth potential.

Within each of our now 15 lines of product, we feel we have core styles that will be strong sellers, as well as fashion-driven styles that will position us well in the marketplace.

In regards to sales and orders within our domestic wholesale accounts, 2003 was a difficult year.

But at the close of the 4th quarter, we experienced an increase in shipments on in-line product, which we believe is due to stronger retail confidence and our products being available and trend right.

The shipments continued into the first few weeks of 2004, at which time we also experienced overwhelmingly positive reaction to our product and at-once orders during our pre-lines last month.

We remain cautiously optimistic, but are extremely pleased with these early reactions, as well as our successful WSA show earlier this month.

Our domestic backlog accelerated from June 30th, 2003 through the end of the year.

And this trend has continued through January 2004, turning overall backlog positive.

This along with our retail stores trending better and a positive response from our customers, gives us confidence as we head into 2004.

In support of our wholesale accounts and to continue building the brand, we launched aggressive product-focused image advertising, primarily driven by women's and men's sport and casual print ads.

Also in 2003, we launched new Michelle K spring, fall and holiday campaigns, featuring the designer in stylized settings and a Mark Nason campaign that showcased the details of the product.

For spring 2004, we have created a new women's and men's sport-focus campaign using an outside design firm to create a unique edgy look.

A Michelle K support campaign and a Michelle K campaign.

We're also working on a print campaign for our junior line, something else from Skechers, and two new television campaigns for adult and children.

Now moving on to international.

Skechers' product is sold in more than 100 countries and territories through our distribution partners and 8 subsidiaries.

Through our subsidiaries, we handle the marketing, sales and distribution of our product in 12 European countries and Canada.

We are working to build each of these businesses to their full capabilities and are pleased that our European bookings increased by 10% at year-end 2003 over last year.

Our first subsidiary, Germany, has double-digit increases in orders booked for the 1st quarter 2004 when compared to the same period last year.

With the introduction of two new lines, Michelle K for Skechers and Rhino Red at GDS in March, we see additional growth possibilities within our existing international subsidiaries and distributors.

In regards to international retail stores, during 2003, we opened 6 stores in 4 European countries, one of which was opened in the 4th quarter, bringing our total Skechers' operated and owned stores, including one in Canada to 11.

Similar to our domestic stores, we share our international stores as ideal brand-building tools, especially in markets where the brand was recently launched.

For our distributors, who have opened retail stores, we believe these two are excellent marketing tools and also a means to showcase an extensive offering of product.

Using Skechers images and company guidelines, six distribution partners have opened 18 retail stores in 12 countries in 2003, bringing the total distributor operated Skechers' stores to 20.

These stores are in major international urban centers, such as Sydney, Moscow, Santiago, Tokyo and Osaka.

Concerning international advertising, in 2003 we launched a major print campaign with global superstar, Christina Aguilera.

The ads, which will continuing running through 2004, feature Christina in key sports styles to drive the women's and men's sport business, which we believe should positively impact sales.

In regards to retail, we started 2003 off with the opening of our biggest Skechers' Flagship store in the most popular tourist location in the world, New York's Times Square.

From there, we opened another 24 domestic retail stores, including 6 in the 4th quarter, which includes the first Michelle K store on trendy Robertson Boulevard in Los Angeles.

We continue to believe that our retail stores are ideal avenues to test product and build brand recognition while showcasing a comprehensive offering of Skechers' product.

But with 125 Skechers' owned stores around the world at year-end 2003, we believe we have already established Skechers' retail stores in prime locations, from Times Square to Universal City Walk, from Oxford Street to [inaudible], we are now able to curtail our expansion to a few markets in 2004 and expect increased sales within our retail distribution channel.

And finally, our 4th revenue channel licensing.

We believe that selective licensing of Skechers brand name and our other branded lines to non-footwear manufacturers, broaden and enhance the brands without requiring significant capital investments or additional operating expenses.

We have signed 15 unique licensing agreements in almost two years, of these 15, we signed 9 domestic, including 5 in the 4th quarter, and 3 international licensing agreements in 2003.

The agreements for apparel, accessories, loungewear and swimwear cover most of our 10 brand names available for licensing.

We are extremely pleased with our first launch of licensed products, Skechers' kids apparel for boys and girls from kids headquarters for back-to-school 2003.

From the July 2003 launch through December 31st, 2003, kids headquarters sold an excess $20 million of Skechers branded apparel at cost.

Due to successful in-store launch of Skechers' kids, we are expanding our licensing agreement with kids headquarters to include infant and toddler apparel and boys and girls daywear and sleepwear.

We also extended our reach with infant, toddler and children's apparel by signing a licensing agreement with Multigroup Inc., for design and distribution of Skechers kids apparel in Canada.

Among the apparel and accessory licensing agreements signed during 2003, we entered into the three primary domestic apparel and one major international arrangement.

In September 2003, we entered into an agreement with Coral Industries, maker of 7 of For All Mankind Jeans, for Michelle K contemporary women's apparel in the United States.

The wearable trend basics will be shown at New York's Couture at the end of this month and is expected to be available in better department stores and boutiques in fall 2004.

Also in September 2003, we entered into an agreement with Federal Jeans, Inc., for something else from Skechers branded junior sportswear apparel in the United States and Canada.

An initial collection has been previewed by key accounts and will be shown to a larger customer base at the magic show next week.

There's Something Else from Skechers' apparel is expected to be available at department stores in the 2nd quarter.

In December 2003, we entered into an agreement with Paul Doril, Inc., maker of Kenneth Cole's men's sportswear and Echo Red apparel for Skechers USA men's and women's casual sportswear.

The line is expected to launch in department and specialty stores in fall 2004.

In March 2003, we entered into our first international licensing agreement with Matsui and Company to serve as our master adult and children's apparel and accessories licensee in Japan.

Initial product offerings began shipping in Q1 2004, with a growing offering plan for fall.

We are pleased with our growing arsenal of licensees and with the success of the first apparel launch.

We expect a minimum of 7 to 8 cents per share in pretax profits from licensing revenues during 2004.

Now moving on to our expense structure.

The following measures were implemented in 2003 as part of a plan to curtail significant expansions and cap expenses in 2004.

Curtailing the expansion of our retail stores, limiting the growth to leases already signed with the belief that we already have Skechers' retail stores in most major markets.

We are also carefully reviewing our underperforming stores, as leases come up for renewals.

Holding our international subsidiary business to the existing 12 countries and 8 subsidiaries, focusing on developing these operations in a cost-efficient manner, we organized our sales organization and support team to create a more cohesive tight team without comprising our wholesale business, reducing the cost of our advertising and marketing expenses, without diminishing the impact to consumers, which will primarily occur with trade show and in-store promotions.

While we have additional trade show booths associated with the launch of new lines, we are keeping within our budget by limiting the changing within existing booths and eliminating lesser regional shows out of our trade show circuit.

While we believe we are through the difficult period we experienced in 2003, and there should be -- not be further deterioration of our business in 2004, we remain cautious in our approach to growth to spending; however, with many of the new initiatives set forth in 2003, including the 5 new product lines and some licensed goods reaching the market or booking now, it's too early to make any definitive decisions on the cost structure associated with these initiatives.

We also believe that we will have a stronger indication of our core business at the end of the 1st quarter when we receive quantitative data on retail performance of our spring product, retail commitments to our product for back-to-school.

Accordingly, we have not made any final decisions on our expense structure and will reexamine it at the close of the 1st quarter.

Now turning to our 4th quarter and year-end 2003 numbers.

For the 4th quarter, sales were 175.3 million, compared to $180.8 million last year.

The sales were above our previous guidance, primarily due to stronger than anticipated shipments of in-line products during December.

We believe these stronger sales were a function of better sales [inaudible] retail, along with having trend-right product available.

Growth profits for the 4th quarter decreased 15% to 59.1 million versus 69.6 million in the same period a year ago. 4th quarter gross margins were 33.7%, compared to last year's gross margin of 38.5%. 4th quarter 2003 growth margin was affected, as anticipated, by higher levels of markdown as a result of clearing our excess inventory.

Total operating expenses, as a percentage of sales, decreased to 42.8% from 45.2% in the 4th quarter of fiscal 2003. 4th quarter selling expenses improved to 17.6 million or 10% of sales, as opposed to 21.6 million or 12% of sales in the prior year period.

The majority of the decrease in selling expenses was due to lower advertising and promotion costs during the 4th quarter when compared to the prior year.

On a percentage basis, advertising expense was about 6% of sales in the 4th quarter of 2003, as compared to 9.5% in last year's 4th quarter.

General and administrative expenses were 57.4 million, representing 32.7% of sales, compared to 60.2 million or 33.3% of sales in last year's 4th quarter.

While we added 31 domestic and international stores, our general and administrative expenses were slightly lower.

Also included in the operating results for the 4th quarter and year-end 2003 are approximately 620,000 of non-cash impairment charges relating to the writedown of 3 company-owned retail stores.

Net worth for the 4th quarter was 12.3 million, compared to a net loss of 8.6 million in the prior year period.

The net loss per share was 33 cents on 37 million 939 thousand diluted weighted shares outstanding, compared to diluted loss per share of 23 cents on 37 million 568 thousand diluted weighted average shares outstanding in the 4th quarter of last year.

Due to the net loss during the 4th quarter of both 2002 and 2003, we did not assume the conversion of shares granted under stock options and our convertible notes.

Now for the year.

Net sales for the fiscal year ended 2003 were 835 million versus 943.6 million for 2002.

Gross profit for the full year 2003 was 317.7 million, compared to 386.7 million in 2002.

Gross margins for the year 2003 were 38%, compared to 41% in the same period last year.

Total operating expenses as a percent of sales for fiscal 2003 was 38.8%, compared to 32.3% in the same period last year.

Selling expenses for the full year were 84.7 million or 10.1% of sales, compared to 94.3 million or 10% of sales in 2002.

General and administrative expenses were 239.1 million or 28.6% of sales for the full year versus 210.8 million or 22.3% of sales for the comparable period.

Advertising expense was 8.6% for the year 2003, compared to 8% in 2002, which is in line with our stated goal of 8 to 2% of our sales.

Net loss for the year was 11.9 million versus net earnings of 47 million in fiscal 2002.

And loss per diluted share was 31 cents for fiscal 2002 versus earnings per diluted share of $1.20 in fiscal 2002.

As I mentioned earlier, at year-end, the company was in excellent financial condition with cash on the balance sheet of 113 million or $2.98 per share, and no short-term debt.

Trade accounts receivable at quarter-end were approximately 98.8 million as compared to 97.4 million at December 31st, 2002.

Our DSO's at December 31st, 2003 were 43 days versus 42 days at December 31st, 2002.

Inventory at year-end was on plan and current at 137.9 million, representing a reduction of 10.1 million from December 2002 and 79 million from June 30th, 2003.

With the goal of being flat for December 31st, 2002 levels, we are extremely pleased that our inventory levels are 6.8% below the targeted benchmark.

Working capital was healthy, 277.8 million at year-end versus 286.8 million at December 31st, 2002.

Long-term debt fell to 116 million.

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

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

Shareholders equity at December 31st, 2003 totalled 255.7 million or $6.72 per share.

Depreciation and amortization for the full-year 2003 was 21.2 million.

CapEx for the full-year ended 2003 was approximately 21 million, primarily stemming from new store openings and leasehold improvements.

For 2004, CapEx is planned at 4 to $6 million.

Now turning to guidance.

In looking at 2004, we believe that 1st quarter sales will be in the range of 190 million to 200 million, and earnings per share will be in the range of 5 cents to 10 cents per diluted share.

We believe that our revenue declines are beginning to level off, and we expect to see improvements as the year progresses.

We believe this is achievable for several reasons.

One, our product is starting to experience better sales at retail, and our backlog has accelerated the past month.

Two, we have easy margin comparisons due to higher levels of markdowns to move inventory in 2003.

And three, we expect to have a healthier business at retail due to better customer acceptance of our existing product lines and the addition of new product lines including footwear for the streetwear brand Echo Unlimited.

Our backlog as of December 31st, 2003 was down 5% versus the same period last year.

Our domestic wholesale was down slightly more than 5%, offset by an increase of 10% in our European bookings.

As of January 31st, 2004, our domestic wholesale backlog end bookings are up slightly from January of last year, and the initial numbers from WUSA earlier this month look stronger than last year.

It is too early to comment on exact figures, as we are still waiting for complete reports on at-once orders booked and late spring, summer and fall 2004 bookings.

We continue to see retailers booking more at-once business as they are reluctant to commit to inventory.

In closing, 2003 was a difficult year from a sales and earnings standpoint.

But we believe we have positioned the company for longer term profitability and growth.

We believe we are starting to see the results of our effort with good reviews of our diverse footwear offering and a trend of increased shipments of in-line products.

We continue to expend our licensing opportunities and expect they will be accretive to the bottom line for 2004 and beyond.

We believe our brand is strong, advertising is focused and our team is intent on growing the the business profitably.

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

Thank you.

The floor is now open for questions, if you do have a question, you may press 1followed by 4 on your touch-tone phones.

If you're on a speaker phone, we do ask that you please pick up your handset to minimize any background noise.

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

Once again, ladies and gentlemen, if you do have a question, you may press 1, followed by 4 on your touchtone phones.

Please hold while we poll for questions.

Thank you.

Our first question is coming from Dorothy Lakner of CIBC World Markets.

Good afternoon, everyone, or good morning, I guess, as the case may be.

David, could you tell us what you're looking for in terms of advertising and marketing spent in '04 versus '03, or at least what percent of sales you're going to be targeting?

Also, just in terms of the guidance for the first quarter, certainly if you'd like to use guidance for the year, that would be welcomed too, but in terms of the first quarter, what gross margin assumption are you making to get to the 5 to 10 cents a share?

And also, just a housekeeping detail, what tax rate should we be using as we model '04 numbers.

Thanks.

As for the -- in order, I guess, as I've written them down, for advertising, we still haven't put to bed the whole budget for the entire year.

It's still safe to say that we're in the 8 to 10% range of sales for advertising, but we'll be looking for a major impact this year as well.

There may be some changes as you look forward, not to get too carried away with the year, but last year, we had an extremely heavy 2nd quarter advertising campaign, that was as inventory started to build and we started to push the brand forward.

So I would anticipate that we would get at more evening out throughout the year, and probably a benefit in the 2nd quarter that may be taken up in the 3rd or 4th quarter, it hasn't been decided yet.

As to the gross margin assumption, we're assuming in our models that we'll get back to a minimum of 40% gross margin in-house, at least for the 1st quarter, and the tax rate we're using is give or take 37%.

Okay.

I mean, I'm just looking at the numbers, it's -- if we assume 190 to 200 million in sales, and a gross margin of 40%, and assuming that the licensing revenues continue to grow, it just seems like the 5 to 10 cents might be quite conservative.

Well, we never said it wasn't conservative, but you have to keep in mind that there's not anticipated to be significant licensing revenue growth in the 1st quarter.

What was existing for last year exists now, and it still -- kids headquarters, first spring, which is our biggest license.

Most of the other licenses don't even begin to deliver until 2nd quarter, which means any major change in licensing revenue probably wouldn't take place until Q3 or Q4.

But we could assume it would be about at the same level as it was in the 4th quarter?

4th quarter was pretty strong.

Probably the same level give or take a little bit.

Okay.

Which, obviously, the million dollars -- the little over a million dollars we reported, which is not significant to the earnings picture for Q1.

Okay.

And then just in terms of expenses, because you talked a lot about things, areas where you were kind of reviewing expenses or keeping expenses under check.

Expenses in the 1st quarter would, selling and G&A be at about the same level as a year ago, or should we expect them to go down?

I wouldn't expect then to go down.

I would think they'd be in the same level as last year, give or take.

Those savings we've implemented have probably been taken up by the 30 new stores to come in at the relatively the same values, and we wouldn't anticipate any new initiatives right awa, because we have to bring all our brands and international subsidiaries to market to find out exactly what we are in the marketplace before any big changes are made.

Okay.

Great.

Thank you.

Thank you.

Our next question is coming from Jeff Van Sinderen of B. Riley & Company.

Good morning.

I wonder if you could give us a little bit more flavor for the trends at your retail stores.

Also, how many retail stores do you have at the moment, that are company-owned?

We have 125 company-owned stores worldwide.

Okay.

Can you give us a sense, maybe, how the comps were trending -- I don't know, going back a quarter or so, and how they've been trending in the most recent quarter -- or how they're trending now?

While we don't really give out comp store sales, just to give you a flavor, the 4th quarter had better comps than the balance of the year.

The month of December had the best comps of the quarter, and so far this year, we've had some significant increase in comp store sales.

So the trend has been positive, probably from 2nd quarter until now in stages.

Okay.

And when --

The 1st quarter being the strongest.

Okay.

And can you give us a sense when you started a comp positive in the stores?

Probably the end of December or January.

Okay.

And then the other question I have is, in terms of managing your inventory, maybe you can give us a sense of some of the changes you've made there, and what we should look for going-forward.

I don't know that we've made significant changes.

Last year, as we reported on a conference call, we made a very conscious decision to build up inventory and pump up advertising.

And the feeling that we'd come up this big growth curve and the marketplace was more the reason in the product line, so we took that and we knew it.

It wasn't that there was a model imbalance or fault assumptions made.

We took a risk that turned out to be a bad one in the 2nd quarter.

The way we watch our inventory is no different.

We watch what our customers are ordering, we trend, we speculate on a certain percentage of the overall and we try to identify a few of those things that are hotter than the norm for us, and build more inventory with those.

But basically, we just build off our backlogs and speculate, depending on how we feel to a certain degree up or down.

So I wouldn't take last year's 2nd quarter as an assumption that the process doesn't work.

It was just a risk that didn't work.

Okay.

Fair enough.

And then finally, I take it you're holding off on guidance for the full year at this point?

Yes.

Okay.

Thank you.

I mean, it's been our policy recently, especially with the volatility that we've seen, and now we're holding it back because we think we're at the beginning of what could be either a false start, but most likely, as most people in our office feel, it's a very positive start.

And we don't want to give guidance to set the bar either too low or too high until we really get through the 1st quarter.

Okay.

Thank you.

Thank you.

Our next question is coming from David Turner of BB&T Capital Markets.

[ no response ]

Mr. Turner, if you're on speaker phone, can you please pick up your handset?

We'll move on to our next question, which is coming from Scott [Crasick] of C.L. King.

Yeah.

Hi, David.

Thanks.

Question on Echo.

If you, you know, both men and women, now that they've had their debuts, looking at it in a couple years, is this a $15 million brand, a $25 million brand?

I mean, can you sort of give some idea of what your expectations are for Echo?

You're talking just for the footwear?

Yeah.

For just the footwear.

And what time period?

You know, three years.

I mean, just sort of looking out a few years.

Oh, my God.

If that's a 15, $20 million brand in three years, we've all missed the boat significantly.

We think it has significant multiples of that annually, starting next year.

I mean, it's difficult for us to tell because we're just starting to deliver the first product.

But as hot as the apparel is and as well as the footwear's been received and the price points that we're talking about, which is slightly higher than Skechers, and as much as everybody wants it and thinks it's going to be a home run, if that's only a $15 million brand next year, we'll be significantly disappointed.

Okay.

And then what's the distribution going to look like at the end of the year?

I know you have the exclusive distribution for a while.

Where are we going to see Echo by the end of the year?

You'll see Echo in the same place as you see apparel in the trendy stores, and obviously on a department store level.

Okay.

Thanks.

Thank you.

We do have David Turner of BB&T Capital Markets.

How's this?

Can you hear me now?

Yeah.

Welcome back.

Tricky mute button got me.

I was curious about the pickup in sales in December.

Did you pick up any new channels, now, obviously, you're already in a lot of channels, but are you getting back into channels that you've kind of been away from for a while, or was it an increase in appetite of your existing account?

It doesn't seem like there was any real pickup in sales in the moderate channel.

So my guess is that you did, indeed, get back into or get into some new channels.

And if you could just talk about, you know, address the dynamic there.

I don't think we have any significant new channels.

That's not what it is.

I think through our existing channels, as the stuff starts to sell better, whether they're having significant success or not, it rotates around.

I think it's fair to say, for those that have done channel checks and look out there, that our product's performing well at retail, and if nothing else, what most likely happened is some of their deliveries move from January into December, and they took them early the second two weeks because of the great test they were having to get more product in.

And that's worked well for everybody concerned.

I got you.

And you had commented that the December sales were driven by in-line product.

Does that indicate that it was not clearance, that most of the clearance activity was done by December, so the table is set for 1st quarter of this year to hit that 40% benchmark?

I think your result is true.

I don't know that I said all that.

I think what I basically said was the additional sales going from our guidance, which was 155 to 165 to the 175 was in-line product that was moved forward that did it.

Obviously, by the margins we received for the quarter, it wasn't completely done.

December had better margins than the balance of the quarter, it's safe to say that there was a bigger pickup in in-line merchandise for December and higher margins than we had seen at the beginning of the quarter.

But we did have to clean out some more shipments for our closeout partners, it wasn't all done by November.

So -- but the result is certainly true.

We feel probably as good as we can about where we stand for 2004.

Given where we've come from, and the strength of our balance sheet and our liquidity and the strength of our product and the acceptance, even though it hasn't been tested at retail over our new product line, I would say in June, if we were to write the story ourselves, we wouldn't anticipate being in a better position than we are at year-end.

Okay.

And a lot of new moving parts, exciting potential catalysts.

Are the margins on the Michelle K, the Echo, in particular, they're better than the current model?

The current Skechers' products?

They're higher -- they're somewhat higher than our existing Skechers' product, obviously, but we do pay a royalty on them.

But even net net, there will be no deterioration from margins on those two lines.

All right.

Okay.

Thank you.

Thank you.

As a reminder, if you do have a question, you may press 1 followed by 4 on your touch-tone phones at this time.

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

Good morning, guys.

Good morning.

A couple of numbers I didn't catch.

Your 2004 ad spends, what was that again?

We didn't give an exact number.

I said we're still working on it, and it's safe to assume we're in the 8 to 10%, but there's probably some opportunity from the SG&A in the 2nd quarter since last year, we loaded up in the 2nd quarter.

It'll be more spread out at any rate, so there is some opportunity in Q2.

What was it in 2003?

84 million.

Can you go over the backlog numbers just a little bit more?

You said that -- I'm trying to remember -- backlog was up, but down domestic wholesale.

What we said is we've been trending significantly higher through the year.

If you take where we stood in June 30th against last year, and where we stand in December, we've made up a lot.

And actually, in-house, we were only down 5% year-over-year in backlog.

And if you remember going into last year, last December 31st, the first quarter wasn't the weakest.

It's a nice backlog to go through, which leads us to believe backlog will continue grow, certainly, as a percentage against last year as we go forward.

We then made a comment that backlog actually did turn positive in January, giving us another data point for how well we felt at year-end, that we were starting to check and the orders are continuing to come in.

Now, January is still the smallest month of the 1st quarter of bookingwise, but 1st quarter is always our largest booking quarter.

So it's very key for the rest of the year.

So we're withholding any final comments because we'll know more at March 31st.

Okay.

And then lastly, what was the free cash flow for 2003.

The free cash flow for -- the cash flow provided an operations for the entire year was just over 33 million.

Okay.

Great.

Thanks a lot.

Thank you.

Our next question is coming from Sam poser of mosaic research.

Thank you.

Our next question is coming from Sam Poser of Mosaic Research.

Good morning.

Quick question.

How much -- when you're talking about the -- a couple of the inventory questions.

You mentioned that you speculate on a percent of the overall inventory.

How much -- what percents do you speculate?

It varies from time to time.

And it's not speculating on the overall inventory, we speculate more on a complete overall commitment to production that we've talked about in the past.

We'll put things into work prior to them being booked.

And that doesn't necessarily convert to inventory.

Okay.

And then on the inventory levels, you have at 6% less inventory than last year at the end of the Q4, and you're looking to a -- I guess, business down about 5 to 10% in the quarter.

And your margin -- is that -- all that inventory clean now, or --

Yeah.

There is some mitigating -- first of all, it's down 6.8%, and the business is down, maybe, an equivalent amount, but we've had an increase of $7 million in our retail stores.

So our wholesale inventory is even down more significantly and even down more than the decrease in business.

And, yeah, conception around this place is that we -- the pendulum's tend to swing, we're probably more under inventory than we have to worry about what's in the warehouse.

Is the goods that's in the warehouse, is that for Q1 sales?

Yeah.

It's for Q1.

It's our basic production.

Some of the stuff, actually, that's coming in early for Q2, some test programs, it's a little bit of all the stuff that will we have.

Well, I mean, just a quick -- if you have 100 -- what is it, 130-some-odd million?

Uh-huh.

138 million.

And if you take the 40% margins, you're going to do about 117 million in costs of goods sold in Q1.

So doesn't that give you a -- I mean, and you're going to have a -- your margins are going to be down 300 basis points over the last year, is what you just said.

I'm wondering, is there a portion of the inventory that's still trying to clear?

We have no significant portion of that inventory that has to clear.

I think what you have to do is take a look at our business more closely.

We feed the stores.

There's always a flow of business.

We have some at-once repeat business in our work division that we sell out of inventory that is just a basic business, and we do have, believe it or not, and I'm sure most of us that know the company know, we have a lot of basic stock, we have a lot of stock that we've been selling for 6, 7 years in our inventory that we sell going-forward all the time.

When you take all of that into account and you look at the inventory, I would tell you, from my perception and my opinion, there's no significant amount there that would move the needle.

I tell you, we still have to move a lot of clearance goods.

It's significantly different than it was 6 months ago.

Even our pricing is moving up, because we don't have a significant amount of closeouts to move.

Thank you.

And our next --

You know, we said -- I think we said that we're looking for a minimum of 40%, not that it would be 40% margins in the 1st quarter.

Thank you, sir.

Our next question is coming from [Conner McGlocklin] of JLF Asset Management

Hey, guys.

I just want to know, is it safe to assume that sales will not deteriorate in 2004, given the strong positive sale three years thing at the current time?

It's an assumption.

I don't know how safe it is, you never know that because it's an assumption.

Our opinion is that they won't deteriorate, that we will make up -- or our intention is to make up all the off-price sales with full-price sales for this year at a minimum.

But like I said, we can't say anything definitively until we really see how we come out of spring, both with bookings and sell-throughs of retail.

Okay.

And just lastly, is there any reason over time you could not get back to the 12% EBIT margin you've had?

Is there any -- No.

I mean, I don't know that there's a reason that you can't.

We certainly think that you can.

We think you can do better than that over time.

The question is, how much time and what kind of business at the time.

But we're certainly looking to be more efficient as we go forward, and with all of these items we have in the pipeline, with all of these new lines and processes, we think we leverage our -- certainly our infrastructure quite quickly as that grows, and we have a lot of capacity before we have to expand that infrastructure, such as distribution centers and financing and software issues.

So we think we leverage quite quickly.

But what do you think is the key to getting to greater than 12% of retirement?

Is it the franchise or the Echo or both?

I think it's both -- I think Echo is just a piece of it.

It's also important that the base Skechers brand remains healthy and throws off its cash.

The rest just adds to it.

So given a healthy Skechers core business, everything else will feel it.

Okay.

Thanks very much, guys.

Thank you.

At this time I'd like to turn the floor back over to management for any closing remarks.

That seems to be a long reflect .

But I just wanted to tell everybody, reiterate that we think we came through this year in as good as shape as we could have, given our position in June 30th.

Everybody here is excited, and if you come to this WUSA show, the one comment that was made that I'd like to pass along is that there's a feeling in the booth and there's a buzz that while very suggestive and non-quantifiable shows that change in our business from June until January.

So right now, we're looking forward to making that progress and coming back at the end of the 1st quarter and giving you all a report as to exactly what direction, and what -- hopefully, what order of magnitude and direction we can get to.

So we look forward to talking to you all on the next conference call.

Thank you.

And thank you, callers.

This does conclude today's conference.

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