Skechers USA Inc (SKX) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Skechers second quarter 2004 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 the presentation.

At this time it is my pleasure to introduce Mr. Andrew Greenebaum from Integrated Corporate Relations.

Sir, you may begin.

Thank you.

Good morning and thanks, everyone, for attending Skechers’ second quarter conference call.

I'll now read the Safe Harbor statement.

Certain statements contained herein including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company for future results or events may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.

Such forward-looking statements involve known and unknown risks, including but are not limited to, the general economic and business conditions and conditions in the retail industry.

There can be no assurance that the actual future results, performance or achievements expressed or implied by such forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the company's latest annual report on Form 10-K, its filings on Form 10-Q, management's discussion and analysis in the company's latest annual report to stockholders, the company's filings on Form 8-K, and other federal securities law filings for a descriptions of the other important factors that may affect the company's business, results of operations and financial condition.

And now I'll turn it over to Skechers’ CFO, David Weinberg.

Thank you, Andrew.

Good afternoon and thank you for joining us today to review Skechers’ second quarter and six month 2004 results.

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

Second quarter 2004 sales were $234.7m compared to $229.3m in the second quarter of 2003, a 2.4% increase.

Net earnings were $8.3m versus a net loss of $2.1m last year.

Net earnings per share were 21 cents, above FirstCall consensus of 17 cents, versus a net loss of 6 cents per share for second quarter 2003.

For the six month period ended June 30th, 2004, net sales were $456.2m, compared to net sales of $437.9m in the first six months of the prior year.

Net earnings were $15.4m compared to net earnings of $6.3m in the first six months of last year.

Diluted earnings per share in the first six months were 39 cents versus diluted earnings per share of 17 cents in the prior year.

As we reported in the first quarter conference call, our sales rose over 6% in the first three months of 2004 due to strong momentum and increased acceptance of our new products, primarily within our international and retail division.

This momentum from the first quarter carried into the second quarter and resulted in positive sales, margins and earnings.

We have now experienced two consecutive quarters of sales increases, resulting in a six months sales rise of 4.2% over last year.

We believe our continued sales improvement is primarily attributable to the broad acceptance of our product across our distribution channels.

In our domestic channels, the momentum has remained strong with a positive response to our in-season styles which resulted in higher margins.

Our domestic retail channel grew significantly due to an increased store base and positive comp store sales for both the three and six month periods.

We continue to view international as a tremendous opportunity for growth, as we have seen new subsidiaries such as Canada excel and existing subsidiaries such as Germany and Spain report strong increases over last year.

Highlights for the second quarter include increased sales for key lines and a stronger demand for new product, higher margins due to the broader acceptance of in-season merchandise, solid sell-through rates, and positive comp store sales at our company-owned and operated retail stores, solid sell-through rates within key wholesale accounts, including a positive response to early deliveries of the new lines, Rhino Red and 310 Motoring, continued improvement in key international markets, including Germany and Canada, SG&A expenses declined to 34.1% of sales during the quarter from 39.2% last year, cash on the balance sheet in excess of $127m at the close of the quarter, increased domestic and international backlogs, and dramatically lower inventory levels due to inventory control initiatives implemented in 2003.

Now I would like to expand on our second quarter 2004 achievements in our four revenue channels, domestic wholesale, international, retail and licensing.

First, domestic wholesale.

In the second quarter we experienced a broader acceptance with our in-season product, resulting in an increase in average selling price per pair and higher margins than the previous year.

The gain in average price per pair was on decreased unit volume.

The unit decrease is primarily related to the large number of close-outs in 2003 associated with our excess inventory.

While sales were flat, we experienced a positive response to fresh product across our diverse lines and we saw double-digit increases in several key lines, including Skechers Sport for women, Somethin' Else from Skechers for juniors and girls, and Skechers Work.

Our focus has been and will continue to be the further development of our existing lines, concentrating on updating proven styles and growing new segments that are missing in the market place.

Our efforts have resulted in leading styles across various product lines, including the Stamina in Skechers Sport for men, the Bikers in Skechers Active, the Heatwaves in Skechers USA for women and the Vigor in Skechers Kids for girls.

Additionally, we are pleased with the continued reorders for sandals and believe the strength of our top-selling styles is a testament to our brand momentum.

While focusing on our existing lines, we have also developed three new lines that are launching now for back-to-school, 310 Motoring for men and the Marc Ecko footwear, Rhino Red for women and Rhino Unlimited for men and the three new children's lines that will launch for holiday '04, spring '05, Rhino Red for girls, Rhino Unlimited for boys and Michelle K girl.

From early shipments of Rhino Red and 310 Motoring that delivered in the second quarter and the reaction from retailers, we believe these new lines have great growth potential and will positively impact our wholesale business in the future.

We expect these lines will broaden our urban and street consumer base, increase our shelf space in existing accounts and allow us to open new urban and streetwear-focused accounts.

Early indicators are positive for back-to-school, including increased backlog, improved performance at our retail stores and positive account reactions at Fanny [ph] and during our July pre-line.

These lead us to believe that our domestic wholesale business should continue to improve.

We have the marketing in place, from a prominent billboard in Times Square to bus boards and mall kiosks, from a high-flying kids commercial to print campaigns for Skechers, Michelle K, 310 Motoring, Rhino, Mark Nason and others.

Additional marketing opportunities include targeted back-to-school mailers with key retailers, including one that reaches more than 2 million homes and an upcoming style show hosted by designer Michelle K.

Again, given early indicators, including current sell-through rates and backlog for back-to-school '04, we believe the momentum should continue.

Turning to our international channel, for the second quarter our subsidiaries increased and our distributors decreased, resulting in a slight net decrease for international.

The increase in our subsidiaries in the second quarter and first six months can be attributed, in part, to the establishment of a new subsidiary in Italy, but largely due to the increased acceptance of our brand in key regions such as Germany, Canada and Spain.

Our wholesale businesses in France, the United Kingdom and the Benelux regions are off, but our backlogs are significantly higher in the UK and Benelux.

France continues to be a challenge, but we are encouraged by our retail store sales in the Leal [ph] district of Paris and are addressing issues in this market to improve our sales.

We believe there is synergy between our wholesale business and having a direct retail presence, therefore we have grown our company-owned international retail stores to 11 across 6 countries where we have distributors-- subsidiaries, sorry.

Our distributor business was done in the second quarter compared to last year, but our backlogs are up significantly.

We believe our distributor business remains strong and our distribution partners continue to support their Skechers business with Skechers retail stores and marketing efforts.

Distributors have opened 22 Skechers retail stores from Tokyo in December 2001 to Seoul and Kiev in the second quarter of 2004.

In regards to marketing, our distribution partners utilize the marketing tools we create for the United States, such as our, ``We put the S in Action,'' campaign and the advertisements designed for international use only, such as the new Christina Aguilera campaign.

Additionally, our international distributors create their own events and advertisements targeted to their specific market, including the signing of regional celebrities such as singer/dancer Yumiko in Hong Kong, singer BoA in Japan and top model Agam [ph] in Israel for Skechers footwear and apparel.

We are pleased with the performance in key markets for both our distributor and subsidiary business and see significant potential in other regions.

We believe our strong wholesale sales in markets such as Canada, Germany, Spain, Panama and Japan are gauges for the strength and potential of our brand internationally.

Turning to retail.

Designed to be brand-building marketing vehicles as well as test centers for product, our retail stores are also profitable.

For Q2 our domestic and international retail stores comped positively over last year.

The higher sales for the quarter are attributed to growing demand for our products and increase of the 18 Skechers-owned and operated retail stores since June 30, 2003, including the premier locations of Las Vegas Fashion Show Mall, the Michelle K boutique in Los Angeles, Kalverstraat Street in Amsterdam and the Bull Ring in Birmingham, England.

In regards to retail, our focus continues to be on increasing the sales in our existing brand-building retail locations and maximizing their potential profit.

With more than 125 retail stores across North America and Europe, including 2 opened in the second quarter and 1 scheduled to open tomorrow, we believe we have already opened Skechers stores in prime locations.

We currently do not have any plans to open additional retail stores beyond tomorrow's scheduled opening at an outlet in the Miami area.

Furthermore, we will address the profitability of existing stores as leases expire, closing those we feel are underperforming.

We have closed two in California, Brea Mall and San Diego's Horton Plaza, and one on Boston's Newberry Street.

Again, we believe the sales growth in our retail stores is a strong indication of our momentum and continued demand for the brand in the U.S. and overseas.

Now, in terms of licensing.

Skechers' licensing division is a key area of growth, with strong profit potential as we see numerous possibilities for licensed merchandise with our multiple brand lines and are encouraged by consumer responses to our first offerings and account responses to our upcoming offerings launching for back-to-school, fall '04 and spring '05.

Along with being profitable, our licensed merchandise increases brand identity and positions Skechers as a complete lifestyle brand, both in the United States and select international markets.

Skechers Kids Apparel through Kids Headquarters, the company that handles the children's wear for Ecko Unlimited and Rocawear, had a successful back-to-school '03 launch and has continued to sell well in the spring '04 season.

Due to its success we added sleepwear for spring '04 and will be offering infant/toddler apparel for back-to-school '04.

Skechers watches also experienced growth and we are anticipating a positive response to the new watch line for back-to-school.

Royalties generated from the sales of our initial licensed merchandise were approximately $1m for the second quarter.

We believe our royalties will increase significantly in 2005 as key licensed merchandise becomes available.

Upcoming key delivery dates for new licensed products include Skechers Kids Apparel with Multigroup in Canada for back-to-school '04, Skechers Kids socks and hosiery with United Legwear for back-to-school '04, 310 Motoring apparel with Signature Apparel for fall '04, Skechers and Skechers beach swimwear with Christina America for resort '04, spring '05, Skechers and Somethin' Else from Skechers lounge wear with Signature Apparel for holiday '04, spring '05, and Skechers Sportswear with PDI for spring '05.

In regards to the upcoming license merchandise, 310 Motoring Apparel has strong orders from high-end specialty stores, urban specialty and better department stores and Skechers Kids socks in the U.S. and apparel in Canada both have key accounts booked for back-to-school.

We just launched our swimwear at the Miami Swimwear Show last week and we will be launching our lounge wear and apparel at Magic in August 2004.

We will have a better indication of performance from these lines for the third and fourth quarter conference calls.

Now turning to our second quarter and six month numbers in detail.

As previously mentioned, second quarter sales were $234.7m compared to $229.3m last year.

The improvement in 2004 is due to a combination of factors, including significant growth in key international markets, solid sell-through rates in our company-owned retail stores and key wholesale accounts, an increase in stores, positive comp store sales and a broader acceptance of our new styles through our distribution channels, resulting in higher margins.

Second quarter gross margin was 40.7% compared to last year's margin of 39.1%.

We are pleased with the margins and, as discussed in previous calls, feel that a 40% gross margin is appropriate for our business.

Gross profit was $95.4m versus $89.6m in the same period a year ago.

Total operating expenses as a percentage of sales decreased significantly to 34.1% compared to 39.2% in the second quarter of fiscal 2003.

We have a relatively fixed operating expense structure but saw some positive leverage with the increased sales.

Second quarter selling expenses decreased to $20.7m or 8.8% as compared to $28.8m or 12.6% of sales in the prior year period.

The reduced selling expenses are primarily due to a reduction in advertising cost to 6.6% during the second quarter of 2004, compared to 10.5% last year.

Our goal is to continue our aggressive advertising focus with traditional formats such as print, while supplementing it with alternative means such as mall kiosks, billboards in prime locations such as Times Square and on buses and subways like New York's subway and Amsterdam's tram and London Underground.

As we stated on the first quarter call, we anticipate our advertising to be at the lower end of our historical range of 8% to 10% of sales or possibly below for the 2004 fiscal year.

General and administrative expenses were $59.3m compared to $61.1m last year.

We realized operating leverage from our general and administrative costs as they declined to 25.3% of sales compared to 26.6% last year, while at the same time increasing our store count by net 18 stores.

We also realized expense savings in warehouse labor, legal fees and outside services.

Net earnings for the second quarter were $8.3m compared to a net loss of $2.1m in the prior year period.

Diluted earnings per share were 21 cents on approximately 43.2 million shares outstanding, compared to a diluted loss per share of 6 cents per share on approximately 37.8 million shares outstanding in the second quarter of last year.

For the six months ended June 30th, 2004, net sales were $456.2m versus net sales of $437.9m for the first six months of 2003.

Gross profit was $185.1m compared to $179.9m for the same period of the prior year.

Selling expenses for the first six months of 2004 were $36.8m compared to $46.5m for the first six months of 2003.

G&A expense was $120.3m compared to $118.2m in the same period last year.

In total, for the first six months of 2004 operating expenses were $157.2m compared to $164.6m for the same period last year.

Net income for the first six months of 2004 was $15.4m or 39 cents per diluted share compared to $6.3m or 17 cents per diluted share in the same period last year.

Our balance sheet continues to be strong.

At June 30th, 2004, cash on the balance sheet stood at $127.3m.

Trade accounts receivable at quarter end were $151.4m and our DSOs at the end of June were 50 days versus 53 days at June 30, 2003.

Inventory at quarter end was $140.6m, representing a substantial decrease of $76.5m from the June 2003 figure of $217.1m.

We believe our improved inventory position is the result of the continued success we are experiencing with regard to our various inventory control initiatives and the positive sales momentum we are currently experiencing.

Working capital rose 3.2% to $301.6m at quarter end versus $292.7m at June 30th, 2003.

Long-term debt was $117.6m.

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

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

Shareholders' equity at quarter end increased 7.9% to $275.9m versus $255.7m at year end 2003.

Capital expenditures for the six months were approximately $2.8m, primarily stemming from new store openings versus $10.7m in the prior year.

We expect cap ex to be around $4m to $6m for the full year versus $20.7m in the prior year.

We'd like to note that we are negotiating the purchase of our corporate headquarters.

Should we consummate this deal, there will be an additional impact to cap ex.

And now, turning to guidance.

We currently expect third quarter sales to be between $235m and $245m, compared to third quarter 2003 sales of $221.8m.

We believe our sales increases in the first half of the year, positive responses to footwear lines launching for back-to-school, increased backlog, positive comp store sales and solid sell-through rates in our company-owned retail stores and with key retailers are strong indicators that our momentum should continue for the balance of the year.

Based on where we sit today, we expect third quarter diluted earnings per share to be in the range of 15 to 20 cents compared to diluted earnings per share of a loss of 15 cents in the same period of last year.

As I said earlier, the momentum we experienced in the first quarter carried into the second quarter, leading to higher sales, increased margins and earnings above second quarter consensus.

We are pleased with our continued momentum and believe our improved performance is a reflection of our dedication to strategically managing our business to be increasingly profitable, delivering trend-right and core products to the market place and growing demand for our brand.

While we continue to manage our existing business, we are excited about the possibility for our upcoming initiatives.

From early indicators we see the new urban streetwear foot lines launching for the coming season and new children's fashion lines launching for holiday '04 and spring '05 as great opportunities to increase our shelf space, store count and customer base, adding to our bottom line.

Additionally, we are anticipating increased royalties from our growing licensing division, which will also contribute to the bottom line, without incurring significant capital investments or additional incremental operating expenses.

Again, we believe the results from the first half of the year, combined with sales indicators and our initiatives launching for back-to-school and holiday '04, give us confidence that the momentum we are experiencing currently should continue throughout the rest of the year.

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, sir.

The floor is now open for questions.

If you do have a question, please press star-one on your Touch-Tone telephone at this time.

We do ask that if using a speaker phone to please pick up your handset while posing your question to provide optimum sound quality.

And, once again, that is star followed by one on your Touch-Tone telephone to ask a question.

Our first question is coming from David Turner of Branch Banking.

Sir, your line is live.

Good afternoon.

I wanted to touch on guidance.

You telegraphed some of the improvement, but, you know, the range that you gave would be-- either at the low end or the high end would be a significant sequential acceleration.

You know, it's back-to-school and it's the highest volume season, but is there any one driver or maybe any one catalyst, you know, does the Ecko Red ship materially or, you know, I guess, what's behind the rebound or the re-acceleration of sales?

I think basically while everything helps, it's the basic core Skechers product that's based on the re-acceleration.

Our base company hasn't changed yet and while we're very positive about the Ecko and the 310 and our licensing areas, we're still predominantly a Skechers business.

The other divisions are not big enough to move the needle quite as substantially as we feel we will grow in the third quarter.

We think as we get into 2005 that's certainly possible, but for the time being it's our core businesses, our women's sport.

Our women's active is doing well, our core Men's USA product is doing well.

Our kids product is performing.

Boys product is doing well.

So it's-- our stores are doing much better.

So it is a broad-based base that's growing for third quarter.

OK.

And then the EPS range was somewhat-- well, I guess, maybe a better way to say it is it doesn't-- it seems like they're-- not the entire amount of sales upside, at least relative to my model, flows through.

So are there any-- you know, looking at the various line items, you know, are there any changes?

Are you going to ramp marketing or advertising?

Anything within the costs or expenses that are going to kind of be a non-recurring or maybe an unsustainable change?

It's not unsustainable.

I think what you see, basically, in the third quarter is that marketing holds relatively stable and we have some big shows that we've performed quite well and some of them are expanding a drop.

We have WSA and GDS, which are only second and fourth phenomena.

We have Magic that we have a bigger presence because of our licensed products.

We received some efficiencies in the second quarter based on outside services, which may or may not hold up as we go forward and we did receive-- we did get some big efficiencies in our distribution center in the second quarter and depending on how it lays out -- second quarter is predominantly big in June and we've grown so much more efficient that we haven't had a lot of overtime, even in June with the big shipments.

We're receiving a lot of product.

We are working a little more overtime in July and August for the back-to-school season, so it's hard to tell right now whether we'll get all the same efficiencies through, but I think it's a conservative approach and certainly we could get even slightly more efficiencies than are indicated, but we think that's a good estimate of where we stand right now, both with sales margin and our overhead.

OK.

And one last question.

The retail-- the same-store-- the positive same-store sales at retail, is there any significant disparity between your various concepts, marquee, outlet and whatever-- the other outlet-type that you have?

Yeah, actually our concepts and outlet stores are doing significantly better than our big-box stores and I think that's an indication of new, fresh product that we have in our concept stores and our outlet stores are even significantly stronger than our chain as a whole.

We're obviously moving, still, some of the older product and we're using our box stores to clean out what little we have and we don't have as much close-outs, obviously, as we've had in time past.

So I think when you break it down you get a better indication that the new product is actually performing significantly better since our full-price stores are comping significantly better than our lower-price stores.

Right.

OK.

Thank you very much.

Thank you.

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

Hi.

It's Buckingham Research.

Hey, David, how are you?

We didn't make you an insurance company.

It's OK.

That's all right.

Maybe that's a new opportunity for us.

A question for you on kind of retail trends.

A lot of people out there that are reporting today and recently said that June was like a very difficult month for footwear.

I was wondering if you saw the same kind of slowdown in June relative to other parts of the quarter?

Then I was wondering also if that's continued in July or if you think things are getting any better?

July is still early to tell.

We have seen some positives.

We're not significantly different than anybody else.

June didn't comp as well as April and May for us, but in the aggregate it still comps up pretty well and we've had some modest gains in our concept stores and our outlet stores in June, as well, because of the new product that was put in there.

July seems to be holding its own.

It's not a breakaway month, but it's certainly not a bad month and our new product continues to help us comp where the new product is placed.

So I think it's helping our overall chain.

OK.

So you wouldn't say that the weakness in June had-- that business had decelerated further into July?

No, we haven't seen it in our stores.

OK, great.

And then one thing I think is pretty interesting is I'm looking here at the general and administrative line on the income statement and according to my model, if you-- if you except out the-- there's some one-time expenses in 4Q '02, this is actually the first quarter on a year-over-year basis I've seen those expenses down in dollar terms.

So I was wondering if you could just talk about, you know, what cost-cutting items have been out there and whether we should expect to see SG&A-- whether G&A is an opportunity for more cost-cutting going forward?

It's certainly a place where we can get more efficiencies.

I think what you saw is a deceleration in growth.

The savings -- as we said on the other conference calls, we've let our initiatives run.

So our core overhead hasn't changed significantly, but without opening 34 stores that savings has come back.

We haven't spent excessively on the R&D and development of our new lines.

Our core group is significantly more efficient.

We've gotten more efficient in the distribution center and I think that comes from our increased price points as our brand rebounds and we're getting higher margin and higher price points.

While it costs us the same amount to ship a pair of shoes, the percentage is certainly less per pair and it's reflected as you go forward and we expect to get significant increases in Europe as that business grows.

So unless some of our initiatives change, unless we decide something should not go forward because it's not performing to our standards or we believe something should accelerate at a quicker pace like we have new opportunities for stores or Europe or new lines, you should see a very base case G&A with some more efficiencies as we go forward, assuming volume doesn't increase significantly.

We, however, think our volume is going to increase so while we'll show efficiencies in percentages, I'm not sure there's significant dollar movement there.

OK, great.

Then one last question.

I don't know if you have this information in front of you, but obviously inventory levels were much, much cleaner coming into this quarter and you're still-- and that's continued into the end of this-- the end of 2Q.

I was wondering if you had info on, you know, what your sales to the off-price channel were on a year-over-year basis in 2Q and how much that declined?

It's declined -- you know, it's very difficult for us to monitor that because we offer some off-price opportunities to our existing customer base, as well.

I think the best place it's reflected is in the margins, but it's safe to assume that we had-- not only did we have significantly less close-outs to those channels, but even in sales to those channels had significantly better margins than last year.

So, in other words, even the product that is slower moving that we decide to move on has a better acceptance in the market place and better margins than close out merchandise did last year and when you put the whole package together, I think the increase in margins you saw in the second quarter is only the beginning of the opportunity that can present itself over the next six months.

Great.

Fantastic.

See you out at WSA in a couple of weeks.

Look forward to it.

Thank you.

Our next question is coming from Justin Moore [ph] of Lord Abbott.

I apologize.

Justin has withdrew his question.

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

Good morning.

Good morning.

You gave sort of the cursory on the average selling prices, can you-- do you have the specifics for the domestic ASPs?

Domestically ASPs were up just short of a $1 a pair, on average, across all the groups.

So that would put them up around $18 or so?

I think it's slightly higher than that.

And then units, the same thing?

Units -- that was the unit price, on average.

No, no, no.

Our units were, obviously, down--

Right.

--and sales came in relatively flat, so the offset in units, obviously, came from our close-out units because we had more full-price units and we aggregated to a fairly flat dollar level quarter with more full-price and less close-outs.

OK.

And then-- and then the revenue by group.

It's usually-- can you break that out for us, wholesale, international and so on?

As percentages?

Yeah.

For the quarter our domestic wholesale remained just short of 70%, in the high 60s, like 68%,69%.

Our wholesale business came in at about 15%-- our international business came in at just over 15%, just short of 16%, and the balance, obviously, retail.

Does that international also include the distributors?

Yes, it does.

OK, great.

On the-- I've spoken to a few retailers and they were talking about-- they're very excited about the Ecko, the Rhino Red product, but they said there were some hiccups in the shipping.

Has that all been resolved?

I mean, and have you seen any initial sell-through so far?

It's just at the beginning.

We've had some sell-through in the department stores and while, as I said in my remarks, they are positive, it's way too early to get any long-term analysis.

We still have great confidence.

There's nothing in the first sell-throughs that would indicate it's anything less than what we'd hoped it was in the first quarter.

As far as shipping issues, that's just-- that was a development and we wanted to make sure it was correct.

It wasn't an internal DC issue.

It was making sure the development was correct and the first product would be as good as it could be.

So it came, I think, just on the back end of our anticipated dates.

We did ship some in the second quarter and have shipped significantly more in July and we'll expect to be all caught up, certainly, by the time the back-to-school season starts.

Great.

And one last question.

It's a follow-up on a question previously regarding June.

Have you seen a difference by channel, mall-based versus free-standing in the sales in June?

For us?

In our stores, you mean?

In your stores and from the retailers that you've-- that you work with?

Well, the information we get from our retailers is mostly anecdotally.

Obviously, our big customers are in malls and in stand-alone.

My impression, though, just anecdotally in conversation is that the malls have done somewhat better than the stand-alone stores.

Our better stores are stand-alone anyway, like Times Square and Soho and in Universal City Walk, so it's difficult for us to ascertain.

We don't have as many prominent mall-based stores, other than our outlet stores, which are doing well across the board.

Thank you.

Our next question is coming from Justin Moore [ph] of Lord Abbott.

Oh, you made it back?

I'm here.

I never left you.

A couple of questions.

First, on the backlog did you say what level-- what are you running?

We haven't announced that.

We usually only announce it at back-to-school, but it's a very healthy increase in backlog, both domestically and certainly on a very conservative basis supports the increase in sales that we're projecting.

And still running 60% to 70% of orders, which you like to be?

You mean as far as inventory and purchases are concerned?

Yes.

Yes.

We're right in that range.

We're feeling very comfortable nowadays.

Things are looking very good for us.

OK.

And then on G&A, just to follow-up on John's question, last year you had some startup stuff and, obviously, the store openings.

I want to be clear on-- the dollar level of SG&A you think to be relatively constant going forward?

Yeah, I would think so, unless something changes.

Last year we had, you know, new services in Europe.

We had a distribution center that wasn't as efficient as it is today.

Our distribution center, for the first time in two years, hasn't made a significant move or expansion for a two-year period and it's become more-- So that's where the big savings come from.

No new store openings.

So we're at a pretty good running rate until we make some strategic changes.

OK.

How many-- total stores now is 120-ish?

One hundred twenty-six at the end of the quarter.

And how many of those -- back to your earlier comment about still looking to maybe close some, how many would you think are on your short list of potentially closing?

Oh, I doubt it's more than a handful, if that much.

You know, most of-- all of our stores, most if not all our stores, are profitable at the four walls.

It's not something that we would go out of our way to take a write-off and close down.

It's just something we evaluate as leases come up whether there's a better opportunity somewhere else rather than redoing those stores.

Got you.

And lastly, I'm just trying to figure out how much you're sandbagging us on selling expense or advertising since we're in the low 6s year to date, percentage-wise.

You're still thinking 8% to 10%.

We shouldn't expect to see a dramatic pickup in the second half, should we?

There will be some pickup.

There always is.

The first quarter is, by and large, our least advertised quarter.

So it's depending on how you play with the volume in the next two quarters you can get the percentages.

But, you know, it's not going to be an excessive increase like we've seen in second quarter of '03.

We won't see three or four billboards in Times Square, just the one?

Well, you never know.

If we get a good deal, we may see that.

Let's hope not.

Justin, you can't be that adverse to advertising.

It's what drives our brand.

Otherwise we wouldn't be a billion dollars in 10 years.

That's true.

All right.

Good luck.

Thanks.

Thank you.

Our next question is coming from Derek Winger [ph] of Jefferies and Company.

Yes, thank you.

If you could give me the depreciation and amortization for the second quarter, likewise the capital expenditures?

And then the outlook for capital expenditures for the year?

I think, as we said, it's $2m, $2.8m is the second quarter expenditures, $5m is the depreciation charge and we expect it to be between $4 and $6m for the first year, pending the outcome of our negotiations to buy our second corporate headquarters building.

Four to six million cap ex for the year?

Yeah.

Five million D&A and $2.8m of cap for the quarter?

It was this past quarter, correct.

Right.

OK, thank you.

Thank you and, once again, if there are any questions, please press star-one on your Touch-Tone telephone at this time.

Thank you.

We do have a follow-up question coming from David Turner of BB&T.

Thank you.

There's been a lot of discussion on the apparel side of the retail business about a preppy trend that's emerging and I was just wondering if that-- have you see any change in your order flow?

You know, is the cycle shifting more from an athletic classic sneaker business to black and brown?

You know, it may be a little early on this, but is there any type of reading that would indicate that the cycle-- the athletic cycle's coming to an end and a new is picking up, a new black/brown trend, I'm speaking of?

Our Men's USA business is doing quite well and it's picked up over the last couple of years and it's a very basic business.

So it's difficult for us to tell.

We still see great support in sport.

Our women's sport is doing quite well, as is our active, which is the less-athletic portion.

So right now, I think we're coming into our own.

We're getting positive results across the board and it's too early for me to tell you that there's a definitive change in the market place right this minute.

OK.

That's fine.

Thank you.

Thank you.

Our next question is coming from Justin Moore [ph] of Lord Abbott.

I forgot to ask about the building.

How much-- how much we talking?

Well, I can't tell you that yet.

We're still talking to the landlord.

You don't me to tell him what my top number is yet, do you?

How much are you hoping?

We're hoping somewhere between $10 and $11.

OK.

And any impact P&L?

I mean, is it a wash in D&A versus lease expense?

Yeah.

It's 100% occupied by us.

Certainly the depreciation and probably the interest charge would be in the same realm or slightly less than what we pay now in rent.

So P&L would, if anything, be a slight positive, depending on the financing and the amount of financing, et cetera.

Got you.

Thanks.

Thank you.

Our next question is coming from John Samuels [ph] of Palo Alto Investments.

This is actually Ted Janus.

I just have a quick housekeeping question here.

What is the total store count right now and how many of those are free-standing stores?

There's 126 stores today.

Free-standing as opposed to mall?

Yes.

Don't have that number.

That I'd have to get back to you.

Yeah, if you could, get back to me on that.

And I assume all those stores are pretty much in A malls, aren't they?

Yeah, they're A and what we consider A and maybe top B outlet malls.

OK.

That's it.

Thank you.

Thank you.

That will conclude our question-and-answer session.

And, Mr. Greenebaum, your line is live.

Thank you, again.

I just want to thank everyone for joining us and, once again, would like to note that today's call may have contained forward-looking statements and as a result of various risk factors actual results could differ materially from those projected in such statements.

These factors are detailed in Skechers' filings with the SEC.

Again, thank you and have a good day.

Thank you all for your participation.

That will conclude your teleconference.

You may disconnect your lines at this time.

Have a great day.