Skechers USA Inc (SKX) 2004 Q3 法說會逐字稿

Good afternoon and welcome to the Skechers USA, Incorporated third quarter 2004 conference call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce our host, Mr. Andrew Greenebaum of Integrated Corporate Relations.

Sir, the floor is yours.

Thank you.

Good morning and thank you everyone for attending Skechers' third quarter conference call.

I'll now read the safe harbor statement.

Certain statements contained herein, including, without limitation, statements addressing 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 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 laws for a description of the other important factors that may affect the company's business, results of operations and financial conditions.

And now I'll turn it over to Skechers' Chief Financial Officer, David Weinberg.

David?

Thank you, Andrew.

Good morning and thank you for joining us today to review Skechers’ third quarter and nine-month 2004 results.

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

Third quarter 2004 sales were $257.7 million compared to $221.8 million in the third quarter of 2003, a 16.2% increase and above previous guidance of $235 million to $245 million.

As we discussed in our second quarter conference call, the momentum we experienced in the first half of the year continued into the third quarter through back to school.

The strong performance during the quarter was due to a better-than-anticipated acceptance of our in-season product and our company-owned retail stores and international business, and the positive reaction to new initiatives launched in our domestic wholesale channels.

This continued improvement and good response to our in-season product resulted in higher margins and increased earnings in the quarter.

Margins were 40.6% versus 35.5%.

At this time last year, we were aggressively moving excess levels of inventory, which resulted in lower margin.

Net earnings for the quarter were $6 million, versus a net loss of $5.9 million in the third quarter of the prior year.

Diluted earnings per share were 15 cents on approximately 43.7 million diluted shares outstanding, compared to a net loss of 15 cents per diluted share on approximately 37.9 million shares outstanding in the third quarter of 2003.

Net earnings for the third quarter were reduced by the effective tax rate of 60% for the three months ended September 30, 2004.

As discussed in our earnings release, Skechers' tax rate is based on projections of its annual domestic and foreign operating results.

While our international business continues to be strong and grow significantly, our profit forecast, after allocation on an annualized basis, resulted in our inability to utilize our tax losses.

As a result of the revisions made to the projections and our inability to utilize tax losses in foreign jurisdictions, the third quarter and nine months ended September 30, 2004, were adversely affected by effective tax rates of 60% and 47.2% respectively.

To better avoid volatility and lower our overall tax rate to the low 40s, we are currently reevaluating our existing tax structure for fiscal 2005 and beyond.

For the nine-month period ended September 30, net sales rose 8.2% to $713.9 million compared to net sales of $659.7 million in the first nine months of the prior year.

Net earnings were $21.4 million, or 53 cents per diluted share, compared to net earnings of $476,000 or one cent per diluted share in the first nine months of last year.

We have now experienced three successive quarters of increased year-over-year sales.

In the first six months, we saw the increases primarily in our retail and international distribution channels.

This was due to an increased store base in our company-owned retail stores and strong comp store sales and the establishment and growth of our recent subsidiaries in Europe and Canada.

In the third quarter, we again saw improvement in these same distribution channels, but we also experienced increases in our domestic wholesale channel, primarily due to the launching of new initiatives and higher sales in key Skechers divisions.

Highlights for the third quarter include increased sales for key Skechers divisions and a stronger demand for new products, resulting in a significant increase in average selling price per pair.

Solid sell-through rates and reorders for three lines introduced in the third quarter, Rhino Red, Rhino Unlimited and 310 Motoring, 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, continued strength in key international markets, including Germany, Spain and Canada, and improvement in France, cash on the balance sheet in excess of $132 million at the close of the quarter, increased domestic and international backlogs and lower inventory levels, and improved margins due to the inventory control initiatives implemented in 2003.

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

First, domestic wholesale.

For the third quarter, domestic sales increased more than 5% over the same period last year, primarily due to the launch of three new lines, higher sales of in-season product within existing line and an increase in average selling price per pair.

As I mentioned, the three new lines launched for back to school are 310 Motoring for men, Rhino Unlimited for men and Rhino Red for women.

Inspired by the automotive customization company of the same name, 310 Motoring targets the aspirational urban consumer with footwear price points above the $100 mark.

The footwear for Mark Ecko's apparel lines, Rhino Unlimited and Rhino Red also targets the urban and street lifestyle consumer and is available in many of the same retailers that carry Ecko Unlimited and Ecko Red clothing.

Branded unique from Skechers, these lines allow the company the opportunity to increase shelf space, SKU count and total sales.

Within existing product lines, the sales increases came primarily from women's, and in particularly women's sport.

While energy updates remain strong players in all divisions, we are continuously focusing on fresh ideas with both new and existent proven outsoles.

Successes for fall include Skechers Sport Premium for women and girls, Skechers Sport Vigor and Stamina for men's and boys, Skechers Active Bikers and Rhythms for women and girls, Skechers USA Critics for men, and something else from Skechers, Gracie for juniors.

In lines uniquely branded, the Michelle K Sport, London and Vapor Sport Fusion (ph) sneakers and the advertised Mark Nason Cipriani boot led the way for the fashion-forward style.

As in the second quarter, we again experienced a broader acceptance of 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, which is primarily attributable to the large number of closeouts in 2003 associated with excess inventory.

With more than 2000 styles, our goal is to sell the right product into the right markets and distribution channels, thereby increasing sales by further developing existing product categories, building on initial sales in new lines and further growing these lines.

The next natural step, children's footwear.

Therefore, we are launching a children's fashion division comprised primarily of takedowns.

These lines will include 310 Motoring and Rhino Unlimited for boys, Rhino Red for girls and Michelle K girl.

Turning to our international channel.

We are pleased with our sales increases with both our international subsidiaries and distributors.

At the close of Q3 2004, our international wholesale business increased to approximately 19% of total sales, bringing us closer to our goal of international sales representing 25-30% of total sales within the next three years.

We believe the revenue growth is primarily due to our product offering and advertising efforts.

As in our domestic channels, we have taken considerable efforts to deliver the right product to the right market.

To accommodate the differences in the international market, we have developed sport fusion product out of Europe that has been well received in most global markets.

To support our international efforts, Skechers launched a new Christina Aguilera campaign in the third quarter.

The advertisements, three in total, feature the global superstar twice in each ad, allowing us to promote additional styles.

Along with the Christina Aguilera campaign, certain international distributors have utilized regional celebrities to further build the brand through advertising, marketing and PR efforts around these personalities.

Skechers has also supplemented the celebrity efforts with our "We Put the S in Action" advertisements in select international magazines.

Additionally, the distributor-owned and operated Skechers retail store base has increased by 13 since the close of Q3 '03.

These stores have positively impacted Skechers sales in the 13 countries where they are located.

Also, in November of last year, we added one new distributor in India, a region we believe has great potential.

With regard to our subsidiary business, sales remain the strongest in Germany and the United Kingdom, but we have also seen a very positive momentum in Canada, where we had the highest sales percentage increase for the nine-month period, and in Spain, where we had the highest-percentage sales increase for the quarter.

Though France did not realize the sales increase for the quarter, we are continuing to see improvement in the region and are encouraged by the increased sales in our company-owned retail store in the Les Halles district of Paris and by the reaction to our spring '05 product at the French trade show Who's Next.

We are very pleased with the growth we have seen in our international business, both this quarter and for the year to date.

We believe our increased sales and strong backlog are indications of the strength of our brand internationally and point to continued growth ahead.

Turning to retail.

For the third consecutive quarter, our company-owned domestic and international retail stores comped positively.

Like in our wholesale business, the increased sales can be attributed to the growing demand for our product and the effect of our marketing efforts.

Sales have also been positively impacted by an increased store base of eight since September 30, 2003, including the Fashion Show Mall in Las Vegas and Kalverstraat Street in Amsterdam.

From New York's Times Square to London's Oxford Street, our retail stores are profitable in their own right, as well as being marketing vehicles, testing centers and trend indicators for product and business.

Additionally, our locations in prime outlet malls and key regions for big box stores also allow us to effectively and profitably liquidate past-season merchandise.

With approximately 125 locations across North America and Europe, including stores in eight of the 10 largest malls in the United States, such as King of Prussia Plaza and Court, Mall of America and Tyson's Corner Center, we believe we have a strong network of retail stores.

While we do not have plans to open additional stores at this time, we will continue to assess future opportunities as they arise and monitor the profitability of existing stores, closing those we feel are under performing.

To this end, in the third quarter, we elected to close our Newbury Street store in Boston and a New York location on the upper west side.

Again, we are pleased with the continued positive performance of our retail stores and believe this is a strong indicator of the strength and positive trend of our business.

Now in terms of licensing.

With our multiple brands under the Skechers name, as well as 310 Motoring, Michelle K, and other non-branded Skechers lines, we see numerous opportunities for additional licensed merchandise that we believe will contribute to the bottom line without incurring significant capital investment or additional incremental operating expenses.

Our first licensed offering, Skechers Kids, marked its first year in the third quarter.

From its initial offering in back to school 2003, Skechers Kids apparel has doubled in sales and increased its offering to include girls' sleepwear and daywear, outerwear and toddler and infant apparel sizes.

Now in approximately 3,000 doors, Kids Headquarters will continue to broaden its product offering, including planned swimwear.

We further expanded the offering for children in the back-to-school 2004 season in the U.S. and abroad.

In the States, we introduced children's socks through United Legwear in several department stores.

In Canada, we launched Skechers Kids Apparel through licensing multi-group at an exclusive deal at a key department store, with plans to expand distribution and offering in spring '05.

Similarly, in Japan, we've launched children's apparel in select channels through licensing Mitsui with plans to grow the offering in spring '05.

Also in Japan, we launched adult socks and accessories with adult apparel to follow possibly next year.

Building on the 310 Motoring footwear launch, we began delivery of 310 apparel in September in select markets through licensee signature apparel.

While the apparel will continue to deliver through the fourth quarter, the major push is slated for first quarter of 2005, with urban specialty national chains and better department stores.

Net royalties for the quarter were $1.1 million, which represents $1.8 million in incoming royalties and $700,000 in paid royalties.

We expect licensing royalties to increase slightly in 2005 with the planned launch of additional licensed merchandise.

This includes Skechers loungewear for men and women, and Skechers beach swimwear, which is expected to begin deliveries in select swimwear shops in the first quarter of 2005, expanding into more doors and department stores in the second quarter.

While we are pleased with the reception much of our licensed merchandise has received from accounts and consumers, we would also like to note that some licensees have under performed and not met our expectations for various reasons.

We will continue to examine the performance and suitability of each licensee and to ensure the integrity and reputation of the brand, keeping it intact.

Now turning to our third quarter and nine-month numbers in detail.

As previously mentioned, third quarter sales were 257.7 million, compared to 221.8 million 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 margin.

Third quarter gross margin was 40.6% compared to last year's gross margin of 35.5%.

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

Gross profit was $104.6 million, versus $78.6 million in the same period a year ago.

Total operating expenses as a percentage of sales decreased significantly, to 34.4%, compared to 37.9% in the third quarter of fiscal 2003.

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

Third quarter selling expenses increased to $24.1 million in the period, but were essentially flat at 9.4% versus 9.3% as a percentage of sales.

The increased selling expenses are due to advertising and marketing expenses.

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 on subways like the London Underground.

Excuse me.

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

General and administrative expenses were $64.6 million compared to $63.5 million last year.

We realized operating leverage from our general and administrative costs as they declined to 25.1% of sales compared to 28.6% last year, while at the same time increasing our store count by net eight stores.

We also realized expense savings in outside services, professional fees and supplies.

Net earnings for the third quarter were $6 million, compared to a net loss of $5.9 million in the prior year.

Diluted earnings per share were 15 cents on approximately 43.7 million shares outstanding, compared to a diluted loss per share of 15 cents on approximately 37.9 million shares outstanding in the third quarter of last year.

As I previously mentioned, net earnings for the third quarter were reduced by approximately 2.6 million due to the expected tax rate of 60% for the three months ended September 30, 2004.

This effective tax rate for the third quarter resulted in a lower earnings per share of five cents for the three months ended September 30, 2004.

The third quarter rate was higher as a result of changes in Skechers' income projections for fiscal 2004.

This then required us to report a higher projected tax rate for the nine months ended September 30, 2004 to compensate for the lower tax rate applied in the first half of 2004.

This affected our nine-month 2004 net income, which was reduced by $2.1 million to $21.4 million, or 53 cents per diluted share, compared to $500,000, or one cent per diluted share in the same period last year.

For the nine months ended September 30, 2004, net sales were $713.9 million, versus net sales of $659.7 million for the first nine months of 2003.

Gross profit was $289.7 million, compared to $258.6 million for the same period of the prior year.

Selling expenses for the first nine months of 2004 were $61 million, compared to $67.1 million for the first nine months of 2003.

G&A expense was $184.9 million, compared to $181.6 million in the same period last year.

In total, for the first nine months of 2004, operating expenses were $245.9 million compared to $248.7 million for the same period last year.

Our balance sheet continues to be strong.

At September 30, cash on the balance sheet stood at over $132 million.

Trade accounts receivable at quarter end were $127.6 million, and our DSOs at the end of September were 43 days versus 41 days at September 30, 2003.

Inventory at quarter end was $147.9 million versus $137.9 million at year end.

We continue to focus on managing our inventory levels and the positive sales momentum we are currently experiencing.

Working capital rose 10.9% to $305.2 million at quarter end, versus $275.1 million at December 31.

Long-term debt was $113.7 million.

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

The remainder is related to mortgages on certain real estate, along with capital lease obligations.

Shareholder's equity at quarter end increased 12.3% to $287.1 million versus $255.7 million at year-end 2003.

Capital expenditures for the nine months were approximately $14 million of which $11 million is the purchase of our corporate headquarters versus $18 million in the prior year.

We expect Capex to be around $15-$17 million for the full year versus $21 million in the prior year and now turning to guidance.

We currently expect fourth quarter sales to be between $175 and $185 million and a loss per share of seven to twelve cents on approximately 39 million basic shares outstanding assuming an effective tax rate of 47.2%.

Again as we noted in the release, the fourth quarter loss calculated on basic shares will be three to eight cents on a full year, fully diluted basis.

For the full year we currently believe year-end sales will be in the range of $888-$898 million and earnings per share of forty-five to fifty cents on approximately 44 million fully diluted shares outstanding assuming an effective tax rate of 47.2%.

While historically fourth sales are not as strong as the first three quarters, we expect to see improvements from last year and margins to be approximately 40%, which we feel is appropriate for our business.

We anticipate the positive trend to continue in 2005 with higher first quarter sales versus last year due to the positive reaction to our Spring 2005 offering from key accounts at WSA and DDS and some free line, increased domestic and international backlogs and our continued initiatives to manage both expenses and inventory.

We are pleased with our consecutive quarters of growth and the resurgence of demand for our products and from consumers and retailers.

Our efforts are directed at maximizing this trend in 2005 by delivering the right product in the right doors at the right time in both North America and abroad.

We are continuing to develop new product on proven outsoles while delivering new trend-right and core styles in our Sketchers lines.

The successful launch of Rhino Unlimited, Rhino Red and 310 Motoring also gives us confidence as we grow the offering for Spring '05 into more doors and introduce the children's versions of these lines.

We believe the 310 Motoring line will also be boosted by the launch of licensed apparel in key influential markets.

Given the strength of our Sketchers kids apparel we are also looking forward to our other licensing opportunities, viewing this segment of our business as wide open for exploration and development and an area that will also contribute to the bottom line without incurring significant capital investments or additional incremental operating expenses.

As we move within five percent of our goals of our international division representing 25% of our business, we are excited to further develop the new markets and push our existing business with new advertising campaigns and specific products.

Again, we have made progress with our product and advertising which has resulted in strong sales and operating margins in 2004.

We are confident that this trend will continue in 2005 and with strong balance sheet and a focus on both inventory and expense management, we believe we will be increasingly profitable in the coming year .

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

Thank you.

The floor is now open for questions.

[OPERATOR INSTRUCTIONS]

Thank you.

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

Thanks.

Good afternoon or good morning everyone.

I just wanted to get a little bit more color on a couple of things.

One is -- David it seems like you're being pretty conservative on the fourth quarter sales numbers and I realize you said you know third quarter is usually more important for you and so forth but it just seems a little bit conservative given the trends that you've seen thus far this year and the positive response you had a new product.

And then secondly if you could give a little bit more color on the royalty line and what we should expect going forward and if you could give us a little bit more color on the strong performers as well as the not so strong performers in that portfolio.

Thanks.

OK, in answer to the first question as far as conservative sales, I mean we'd like to give numbers that we're comfortable with.

I think what you're seeing here is we're having a much bigger build up for first quarter than we initially anticipated and don't really want to set the street set for high reorder business in the fourth quarter, which is what fourth quarter historically is.

I think customers our there -- our customers are inventory risk averse.

They don't want to buy inventory even if it's starting to move.

Their great goal is to get into spring as clean.

They think we have great products for spring.

Our backlogs are up significantly.

Everybody anticipates having a good spring.

Now to the affect that that might mean if they come out clean after election day business continues to hold up.

Like I said, our comp store sales are up significantly.

Well into the double digits.

I assume and hope that most of our customers are having the same results with our product.

Should it open up, certainly we have some upside potential in the fourth quarter should they come out clean and want to bring spring in early and reorder some of that business.

So we've never taken off the table the fact that this is a conservative very in line with what we see now without taking too much for granted as far as inventory turns or requests for inventory or at one’s business so (ph).

One follow-up on that David.

Are you seeing any issues with shipping -- you know having trouble getting product in because of all of this talk about the ports getting backed up.

Is that possibly an issue in the fourth quarter for you?

The port is absolutely backed up.

We're seeing delays now of up to a week.

As of right now, it's not an issue for us.

I mean we take care of those orders we know we have in hand and October's never been one of -- even for fourth quarter a strong shipping month.

We usually get to that in November so to date it hasn't been an issue yet.

Should business pick up and retail get stronger and as the reorder business that has to met or a product that has to come in early it may become a problem, but right this second it hasn't caused us really any delays.

OK.

But it does exist.

There's no doubt.

OK.

Your second question is royalties.

Obviously our biggest royalty producer is Kids Headquarters, they're a significant piece.

And as we said to begin with we felt we'd have about $4.0 million in -- or call it 8-10 cents pre-tax in royalties this year, I think year-to-date we're already at $4.8 million incoming royalties so we're ahead of that and we expect that to continue.

We expect they’ll be the single strongest performer.

The reason you see the $1.1 million as I tried to say in my prepared remark is that we paid $700,000 in royalties and prepared a net number in the financials.

Now taking it out to its logical conclusion, we hope both of those grow significantly and I guess if I had my druthers I'd rather be paying more than receiving.

I'd like - I think or obviously the biggest license we pay for is Ecko Red in the Ecko Group and we think that has significant potential.

Whether it has more potential for us than our licensed product, we don't yet, so I mean that number -- we'll reserve judgment, but we think both of them can grow significantly and they're both obviously positive.

And you're still comfortable with the eight to ten cents?

With it, yeah.

OK.

I think we're almost already there.

Yeah, OK and one other follow-up question.

What was the backlog or where is the backlog right now?

You know we don't usually comment on backlog but at the end of September it was significantly double digit.

I mean -- since public confidence we put in the queue, we're over 20% ahead.

I think we're close to 22-23% ahead of last year.

OK, great.

Thank you.

Uh-huh.

Thank you.

Our next question is coming from Justin Mauer (ph) of Lab Abbott (ph).

Good morning David.

I assume that's Lord Abbett?

Yeah.

That's a good one.

Good morning.

A couple of things.

First on type of product.

I know you mentioned that some of the products are doing well.

Obviously seeing in the last couple of weeks the likes of Steve Madden and Kenneth Cole having some difficulties.

Is that safe to say that your brown shoe business is not certainly carrying the weight ; it’s more on the athletic side?

It is more on the athletic and active side and we have seen not quite what they've seen, but the black and brown business has slowed down some and that's in a traditional sense, but we do have a significant backorder in some of the new black and brown business we're shipping in for this quarter, which is more low profile and we do have -- do anticipate and feel that this will pick up the slack from the move from that traditional black and brown business.

But like I said, it's too early to tell other than it's been received well and it's getting ready to ship.

OK, and you mentioned comps up double digits.

Is that -- I assume for the quarter and give us a little color on kind of how the months progressed?

It's a certainly for the whole quarter.

September comped up significantly better than the rest of them on a percentage basis.

We find it interesting -- our comp store sales continue to be well ahead of what we would have thought just at the beginning of the season.

September comped up well.

We're comping up well going into the beginning of October.

October's actually starting out a lot stronger than even September ended with significant comps.

So even these double digit comps we had for September are almost paling in comparison by -- in October.

And we hope it’s just the momentum built to the end of the year, but you never know with these things.

You mentioned - you talked a little bit about ASP's.

Give us a little bit better sense as to how much ASP's are up and units down to get you to the 5% up?

They're down about - we must be down about five or six percent I believe in units on a wholesale domestic basis and we're probably up about $2.00 -- a little over $2.00 a pair.

I mean if there's a significant difference in closeouts only a 100 (ph) –- We feel we are in such a better position now that even when we do have some excess inventory, which is not significant amounts we're getting good prices for them.

I mean our margins are holding up even on the closeout end.

So we know that the product is being received very, very well.

Yes and on the inventory speaking of that that you guys have obviously done a nice job by keeping that in check.

How much -- is there a way to look at it from a 310 Red Ecko standpoint and how much is -- in the stores running up, how much of it is a function of new product or stuff that you guys didn't a year ago?

So if you even stripped that out I assume the core product is even lower, correct?

Well if you look at it on a direct basis our inventory this year is less in dollars than it was this time last year.

It’s only up from the end of the year and we have the new brands in there and our stores are slightly ahead.

I mean it -- there's some more product in the .

We obviously have some base inventory for 310 Ecko et cetera and we have some new product that are hitting that we think carries through spring.

So some of it is just earlier arrivals given some of the problems at the port and the fact that it's not a season specific item.

So we are trying to get our factories to ship what they can as early as possible anticipating a bigger spring.

So I think when you put them all together our inventory's in good shape.

When we look at it on the individual pieces there's obviously some things that we'd like to move out quicker but there's no one piece or no significant amounts that give us discomfort anywhere.

And on the shipping issue do you -- are you thinking that you may have to bring it in a little bit early even though -- I'm sure we're kind of moving through the bubble here, but to make sure you get a product in for spring ship should we expect inventory to be up a little bit by the end of the year or you think you've got plenty of time in January to bring this stuff in?

It's kind of early to tell.

We'll probably make that decision in November.

If things don't clean up at the port obviously we'll try to push our factories to get everything as early as possible.

The problem with waiting until after January, and this is only speculative is you know with the new WTO rules going into effect and quotas being down, those that don't need product at the end of the year are going to try to bring it in for a better rate in January.

And we're trying to get our hands around whether that will dry up a lot of shipping space to take advantage of those no quota rules and if that's the case, we'll even push harder to bring inventory in early, but it's too early for me to give you a definitive answer to that.

I got you and just some additions to the license (inaudible).

Should we expect a quarter to a million you know if I use third quarter as a proxy -- three quarters of a million dollars on the license going out so therefore $2.0 million last year fourth quarter should be $1.25 million or you think the base business is going to grow?

I missed the first part.

I think the base business is going to grow and I think our payment of royalties is going to grow.

Remember, this is only our first season to deliver royalty product.

So $2.0 million net royalty income last year may not be as high this year because you're paying this out?

It won't be net because our incoming royalty will absolutely be above the $4 million range which is what we committed to.

The fact that it will be diluted by outgoing royalties is actually a positive so not to be construed as negative.

Thanks guys.

OK.

Thanks, good luck.

Thank you.

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

Thanks.

Good morning.

I was just curious about the cadence of the sales as the quarter progressed.

You touched on it somewhat, but you've got a real nice backlog number and you've beat my top line estimates but at the same time you're saying that retailers are being more conservative.

So just curious if there was any -- did it spike in August and then kind of slow down or was it generally smooth throughout the quarter?

It was pretty smooth throughout the quarter.

What you saw was not significantly different than usual.

We had our biggest shipments in July and August for back to school.

We had that much strength in our product and price points to hold up and be that far over the line and there was no real movement with it.

The movement will come in fourth quarter if we get that at-once business coming through.

If that sell through happens and if retail really does open up and people are looking for inventory early rather than looking to you know the major function to be clean at the end of the year.

There could be some changes to that.

OK, and then secondly the comps just to drill down to the same store sales by concept.

Is there any real difference between your same store sales by outlet versus Marquee or full price?

Well yeah, I think what we've seen is that our concept stores and our outlet stores are comping significantly better than our box stores.

And that means to us that our new product is getting significantly better reception and the box stores where we sell more closeout products are just holding their own and are selling significant units that they sold last year.

So I think it's more important to us that our concept stores and outlet stores where there's a sprinkling of new products are such significantly higher.

Better proxy.

OK, thank you.

Thank you.

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

Hi David.

Good morning.

Congratulations on the nice year-over-year improvement in top and bottom line.

Thanks.

Can I just get a clarification.

Did you say that backlog was up 20%?

I said over 20%.

OK, that's what I thought.

That's great and just one clean up question.

How many stores did you have a quarter end and what are you thinking about for a number of new stores for '05 if you thoughts at this point?

Well we had 125 stores at quarter end and '05 is just beginning to materialize.

Obviously with the success we've seen in our stores and internally they're increased profitability and efficiencies because we've now digested them and the products of being accepted.

We're now going to go research and see what we're going to do for '05.

So chances of early '05 is only a couple of locations we've looked at, but as we go deeper into '05 as locations become available now that we're out and looking we may have more to announce in some key locations.

But we have nothing definitive yet other than we are now interested in going back into the marketplace and finding good locations for this model that's obviously working very well.

So if I thought a range of five to ten as a preliminary, is that in the ballpark?

Yeah, I'd say that's a conservative preliminary number.

OK, great and then you gave a little bit of indication for 1Q sale sales, saying you expected it to be up year-over-year.

I'm just looking back at 1Q this year that you reported and I'm wondering, was there still some of that clearance activity going on impacting the margins in 1Q of this year?

There was a little bit, but I don't know that it was outrageously significant.

Anytime we get over 40% in margins that means we've been pretty clean.

We're running where we should be.

OK, so we shouldn't be expecting at this point -- I know it's early to give any guidance on margins, but we shouldn't be expecting returning to say for example 2003 margins where you were up at 43%?

Uh no.

I think we said in the last conference call, the 43% is pretty much an anomaly.

It was one quarter out of eight or twelve that went before it and it certainly is possible.

I would never take that out.

We're building product as we get more and more acceptance into this stuff.

It certainly is possible.

We don't have any real pressure on margins, but I wouldn't expect it at this point.

I would still model somewhere from 40-41% maybe a little more aggressive, depending on how you feel when you’re talking to the marketplace and just growth at the top line.

OK, I'll get off and let somebody else ask a question.

Thanks a lot.

Thank you.

Our next question is coming from Charles Siegel (ph) of Elevera (ph) Advisor.

Hey guys.

You know just working through the numbers if you know your growth margins are right at this type of revenue growth rate.

I'm just curious if you work through the numbers and if you get to more normalized tax rate next year it seems like you could be over $1.00 and I'm just curious if that seems realistic or what's your take on what you need to get there?

Well since we're not giving guidance it's hard to say, but I would tell you my personal opinion is while it might be a little bit aggressive, it's certainly not off the table.

And if what we see continues it's certainly possible and I wouldn't tell you it's not.

I mean if we continue to see 20% growth in backlog and the acceptance of the products we see and our stores comping and we open a few more stores and international picks up, the way we can leverage a lot of things are possible.

So I wouldn’t commit to it and I don't want to tell anybody that's my number, but I certainly wouldn't sit here and tell you it's an impossible number where I am.

Sounds good.

Thank you.

Thank you.

Our next question is coming from Vera Van Ert of Wedbush Morgan.

Hi, good morning.

I was wondering if you could just talk about -- a little bit about airfreighting and given the LA port situation, what percentage of your product that you're airfreighting versus a normal range and what that could mean on the gross margin?

And I just have some cleanup questions regarding some of the breakout of the rev for third quarter.

Thanks.

OK.

We try to airfreight as little as possible.

Airfreight is prohibitively expensive.

Their dynamic rates -- as things get more crowded they get more expensive.

My best guess today, from what I just remember going through some rates, it would cost approximately 50 cents a pair to bring a pair of shoes here by boat.

It probably costs 2.5 to $3 a pair to bring it here by plane.

So you can see we're very adverse to it and we don't do it except under dire circumstances.

We try to plan further in advance and we're always of the mentality that we don't push off our factories when goods are ready for delivery.

We ask them to make them as quickly as they can and we will take them rather than waiting for a specified match date or something like that because these things can arise.

So we do have some airfreight.

We try to keep it as little as possible and while that might have some -- a little bit of impact to margins, to date it hasn't had a real measurable impact on margins overall when you take the overall picture.

OK, great.

And then can you also just break out in terms of the actual numbers domestic wholesale, international wholesale, retail and your ad spend for the third quarter?

Well, the ad spend is in the sales number.

The biggest piece of the SG&A number, the 24 million, other than sales commissions, is basically advertising of some sort, whether it's trade show advertising, et cetera.

And basically for the quarter our domestic wholesale business came in at about 62% of the total --

OK.

-- and our retail stores at -- our domestic retail stores at 16.5, and the balance was international divvied up between distributors, retail stores and our subsidiaries.

OK, great.

Thank you.

Thank you.

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

Good morning.

What tax rate are you looking for into 2005, David?

We're looking to get into the low 40s at a minimum.

OK.

And can you break out -- I ran the numbers, too, and see there's some opportunities in Q4.

Can you talk about your expenses there and what possible savings there are on the selling and G&A line?

Savings as if in cutback or savings as if we get some leverage if the top line grows, if you're anticipating growth above of the projection.

As we've said in the past, we've cut our G&A expense.

Obviously there's always some opportunities in there, it's not significant.

There's always an opportunity in the selling expense when you look at advertising.

There's no big trade shows, so that obviously changes from third quarter to fourth quarter.

We haven't taken a very aggressive stance in advertising, but we certainly haven't backed off.

But what we have is not probably significantly different than last year's fourth quarter, some increases obviously from the stores and whatnot and we did start to cut back last year.

So the leverage comes from the top line in the margin.

I don't think we're going to get significant cost cuttings from last year's levels, if any, in the fourth quarter.

OK.

All right, great.

I think everything else is answered.

Thank you.

Our next question is coming from Angelique Dab of Whitaker.

Good morning.

Morning.

Could you comment on the cash you have on the balance sheet and what plans you might have for it?

Right now we're actually -- the board is sitting and discussing potential plans for next year.

As we had said in the past, we were getting through this year to see what our running rates would be and what opportunities were available in the marketplace and what our expansion plans are.

So right now we really have no plans to announce, but we are actively sitting down, discussing potential uses for it.

OK.

And then one other question.

Could you talk about how promotionally you see the environment at the present time?

People are trying to be less promotional than they were last year.

Sometimes they're successful, sometimes not.

I don't see an overly promotional marketplace, (indiscernible) see people pointing to each other, people are trying to hold up pricing and margins.

But it shifts through.

I don't think from what we saw September, October were as bad as last year.

But it's not as healthy a retail environment as we'd like to see going into the end of the year.

OK, thank you.

Thank you.

Our next question is coming from Chris Vezio (ph) of Susquehanna.

Good morning.

Just a couple of quick questions, first on the backlog.

I guess more specifically, how much of your business in Q4 is fill-in or at-once versus on a futures basis?

It changes -- it changes from year to year.

I think in the fourth quarter we have a higher percentage of retail sales so that if you consider retail sales at-once sales, it's certainly a higher percentage.

I would think in normal circumstances we get up to probably 20, 25% of our wholesale business is a reorder business, the balance being from backlogs or preorders.

OK.

So then when you talk about being up approximately 20% in backlog, would it be safe to say that a portion of that, a large portion of that is for Q1 spring delivery?

I think the biggest portion is for Q1.

I think what's happening is what I tried to explain in my remarks, that people were adverse to buying inventory.

It's too early for them to reorder and they were nervous about taking backup orders when they book for back to school as back to school got off to a slow start.

So I think if fourth quarter materializes it will be more from an at-once perspective this year, certainly over the numbers we've projected.

But they haven't been hesitant with our product given the sell-throughs, our positive results for the last few springs, and how we sold through with back to school for giving us first quarter paper to protect their own positions.

Right.

And would it be safe to say that your backlog has increased sequentially from Q3?

Increased -- this is an end of Q3 number.

I'm sorry.

From the second quarter.

Yes, it's been going up throughout the year.

OK.

Last question is just on Europe real quick.

Europe has been certainly a challenging environment for most retailers it seems this year and I was just wondering if you can talk in a little more detail about where you're gaining strength, particularly in the UK and in Germany?

Is it with primarily existing accounts or new accounts?

And also if you can just touch briefly on what's happening in Italy?

All right.

The kind of growth we're seeing in Germany and the UK can only partially be answered by new businesses.

When businesses grow to the levels we're now seeing in the UK and Germany, they're based on numbers of tests and significant positive results.

You very rarely -- well, we don't anyway -- break into a new country with an overwhelming success where everybody's just willing to put it in the store without tests and reorders and having four or five seasons behind them.

Germany and the UK are our oldest subsidiaries.

They're doing the best.

That means to us that the product continues to test well and it continues to expand in existing locations and then they're always getting new locations because of its success.

Italy is just shipping its first season.

While it started about a year ago and we did have some Italian sales on a very exclusive basis being handled by some of our German sales people, we really started our subsidiary until last year and through a first small test.

The first real shipments for significant testing was for what we call back to school, that third quarter this year.

They're getting positive results, their backlogs are increasing year over year, they're still -- obviously they're small base, but there's certainly enough information to see that the product is being accepted and those existing customers are increasing our shelf space and there's new customers coming in.

OK, sounds good.

Congratulations.

Thanks.

Thanks.

Thank you.

Our next question is coming from Jeff Feinberg (ph) of JLF Asset Management.

My questions have been answered.

Thank you very much.

Thanks, Jeff.

Thank you.

Our next question is a follow up coming from Justin Mauer (ph) of Lord Abbett.

David, Capex for '05 assuming the 5 to 10 stores you talked about?

Five to 10 stores, we'd still be in the same as we said this year, probably 3 to 5 million at the outside given some upgrades we need for warehouses, computer equipment in the 5 to 10 stores.

They're not as significantly expensive as they used to be.

We're getting better at that, too.

OK.

Any insight there when you look at the stores, how are you going to measure ROIs or whatever to say we have gotten these things to a level that we want to add more stores now, or how should we look at your considerations for wanting to add stores?

We're looking at our bottom line; we're looking at our operating profits on a store basis.

So they're all becoming profitable, becoming profitable enough to cover all the internal overhead and its allocations.

And we think as these comp stores are increasing, we're getting our operating expenses up higher and getting much closer to our wholesale operating profits on a per-store basis.

So as they continue to perform that well and our comp stores grow and we're making money on each location and we can return probably our investment the way we build stores now, in concept stores certainly within a year or just over a year and in outlet stores probably in six to nine months.

We'll just be looking for good locations that'll showcase our brand and continue to give us the sales per square foot we're receiving in our top outlet stores and concept stores.

And the cash on cash is 30-ish percent or any guess as to what that is?

Do I know what the cash will grow next year?

No, no, no, no, sorry.

Cash on cash return of (inaudible) stores.

Cash on cash.

Well, they'll pay back the investment within the first year, so they should start to return, I would guess in the 20, 30% range.

OK.

I guess I should hope that you grow your cash by 30% next year.

Well, depends what use we have for it, we'll let you know.

Any thought buying back the convert or would you rather not?

I'm not sure; it all depends on the price of the stock, the price of the convert and where we are.

Historically I said I personally would buy the convert back first simply because of the interest rate associated with it and the dilution from the shares.

But I'm not sure yet and we'll take a look and see where the stock is and what our potential is, what our cash growth is and see what the best use is as we go down the road.

But no plans to buy other buildings at this point?

No, I don't have any plans at this point.

You guys have never had a buyback, correct?

That is correct.

Is that something you think you guys would consider just because of the liquidity of the stock it makes it more an issue or --?

No, I don't think we have significant concerns over the liquidity of the stock and I think it's certainly something we will consider, have considered and will consider as we consider use of cash.

It's certainly not something we would take off the table.

Good to have on days today when people don't quite understand what's going on, I guess.

Yes, I know.

And just by way of explanation -- I don't know if there's any more questions -- we try to be as explicit as we can in the release and then I hear things come back this morning that our guidance for the fourth quarter was 7 to 12 cents and not the 3 cents.

And in honesty, we have an as-if converted scenario when it comes to reporting quarterly earnings and anytime you project a loss, albeit how small it is, you lose all that as-if converted functionality.

So in other words, your share count goes from 43 million to 37 million, you no longer get to take the 600 thousand out of operating expenses on an as-if because you give up the shares.

So what happens is it magnifies every loss because that's the conservative way that the SEC wants you to play it, which is fine, which makes it 7 to 12 cents.

However, on the whole year, we go back to the same methodology we use for the year because we're obviously going to have a significant profit for the year.

So when you take out the 600,000 for the quarter in net overhead and divide it by 43 million shares, the net impact on an annual basis is now three to eight cents.

Now that could be saying that the 3 cents is at the top end of our range and some people would have liked us to guide to a breakeven, but right now this is the best, most conservative estimate and it is honestly what we feel and we are in the three to eight cent range when you count it the same way most people count our earnings.

So I just wanted to make sure we clear that up for those that are listening so that there's no misconceptions.

And just lastly in the backlog issue, I think you've said in the past you typically like to be booked about 60 to 70% against orders.

Is that running up a little bit because of --?

Yes, it is at this particular point because we still have time to buy for first quarter and bring it in so we wouldn't commit all that much early.

We'll get more benefit and see what kind of bet we want to place and how we want to maximize first quarter as we get a little bit closer.

Gotcha.

OK.

Thanks.

(Operator instructions.) There are no further questions.

I would like to turn the floor back over to Mr. Greenebaum for any closing comments.

Thank you for joining us today on the call.

Again, I would like to note that today's call may have contained forward-looking statements.

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.

Again, thank you and have a good day.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Have a great day.

Thank you.