Skechers USA Inc (SKX) 2005 Q1 法說會逐字稿

Good day everyone and welcome to the SKECHERS USA Inc. first quarter 2005 earning conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the call over to your host Mr. Andrew Greenebaum of Integrated Corporate Relations.

Thank you good afternoon and thank everyone for attending SKECHERS first quarter conference call.

I'll now read the Safe Harbor statement.

Certain statements contained herein including without limitations statements addressing beliefs, plans, objectives, estimates, or expectations of the Company's results or events may constitute forward looking statements.

Within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

These forward-looking statements involve known and unknown risks, including but are not limited to the general economic business condition and the 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 8-K, its filings on form 10-Q, managements discussion and analysis and the Company's latest annual report to stockholders as well as the Company's filings on form 8-K and other Federal Securities laws for a description of the other important factors that may effect the Company's business, results of operations, and conditions with that I would like to turn it the call over to SKECHERS's Chief Financial Officer David Weinberg.

Thank you, Andrew.

Good afternoon and thank you for join is us today to review SKECHERS first quarter 2005 results.

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

For the first quarter of 2005 sales were 246.2 million an increase of 11.2% over first quarter 2004 and the Company's fifth consecutive quarter of year-over-year top line increases and its highest first quarter revenues in its history.

For the first quarter the growth has come from our continued efforts to run our business more profitably, a fresh flow of products from our existing lines, and expanded distribution from our new lines.

The result is a double digit sales growth in both our domestic wholesale and international business.

Strong comps sales in our retail division as well as improved margins driven by increased product acceptance and better sell-throughs.

Net earnings for the quarter were 10.3 million or $0.25 per diluted share at the top end of our guidance range given our year-end 2004 earnings call versus 7 million and $0.18 per diluted share in the first quarter of the prior year.

As in 2004 in the first quarter of 2005 we focused on maximizing the potential and growth of existing initiatives including our new lines launched in 2004.

Mark Ecko footwear and 310 Motoring and the profitability of our existing retail stores.

By focusing on our key strengths we achieved the following in the first quarter.

Record first quarter net sales of 246.2 million.

Improved sales for many of our key lines including significant improvement in our men's SKECHERS Sport, women's SKECHERS Active, and SKECHERS Work lines.

Continued strong acceptance for our recently launched Mark Ecko footwear and 310 Motoring line.

Increased average selling price per pair of $0.41 or 2.5% and an increase of pairs shipped by 7.4% over the same quarter last year.

Double digit growth in our domestic business, double digit growth in our international business, bringing us closer to our previously stated goal of having international represent 25 to 30% of our total business within the next three years.

Continued improvement in our domestic and international retail divisions which are running more profitably and efficiently.

Improved gross margins and controlled SG&A expenses resulting in an increase of more than 46% in net income, a further improved balance sheet with more than 139 million in cash and current and on planned inventory positioning us well for the remainder of 2005, and a higher back log, a sign of our continued momentum and a positive indicator for the remainder of 2005.

Now I would like to expand on our first quarter 2005 achievements and our four revenue channels, domestic wholesale, international, retail, and licensing.

First, domestic wholesale.

We're very pleased with the growth of our domestic wholesale business which increased by 10% in the first quarter 2005 versus first quarter 2004.

This improvement is attributable to our efforts in 2004 to redevelop many of our existing lines, our focus on updating proven styles as well as developing new styles, and the launch of three new brands.

The result more retailers and consumers embracing our men's, women's, and children's product, an increase of over just 7% in pairs shipped in the first quarter 2005 versus first quarter 2004, and an increase of 2.5% in average selling price per pair.

Within our SKECHERS's product lines we saw the strongest improvement in our men's sports line led by updates to Energy and Stamina styles and our women's Active line led by Fresh Bikers and Rhythm styles.

Based on existing orders and sell throughs we believe these styles will remain strong in the second quarter and continue to be robust with updates for the back to school season.

We also saw meaningful improvement in the first quarter in our work division do to the expansion of our slip resistant and never out programs.

Our uniquely branded fashion lines Mark Nason and Michelle K Sport, which have been out more than a year, saw strong percentage increases over first quarter last year.

While the increases were small in dollar terms relative to SKECHERS sport, active, work lines we believe these lines are off to a strong start.

Supported by new product specific advertising campaigns.

Mark Nason and Michelle K Sport has expanded into new accounts and grew the product offering in existing accounts.

In the first quarter 2005 we increased the door count for the 310 Motoring and the men's and women's Mark Ecko footwear lines launched in the second and third quarters last year.

Last year many accounts tested the product in a few doors and have expanded their offering in some cases doubling and tripling it for the first quarter.

Other major accounts tested the product in the first quarter and have indicated they are growing their offering in the second quarter '05 and for back to school '05.

As the word spreads on these new lines we are also growing our reach with key independence in prime markets for the coming season.

In addition we launched our children's footwear for these lines and are achieving strong sales especially for Unlimited by Mark Ecko footwear for boys which is receiving great support from Ecko Unlimited boys apparel.

In addition to our continued print efforts we have increased our presence where consumers shop and frequent.

Our mall kiosk program now passes more than 800 shopping areas as well as high-traffic bus kiosks and underground transportation systems.

We've also increased our presence on TV with the sponsorship of cable programming on ESPN and Nickelodeon as well as syndicated day time and evening programming.

These campaigns are for 310 Motoring, SKECHERS USA for men, SKECHERS Sport for men, SKECHERS Active for women and SKECHERS kids.

Boys and girls.

Positive indicators from trade shows, account reactions, and an increase in orders booked in addition to our own retail stores performance lead us to believe that our domestic wholesale business will see improvement in our second quarter year-over-year.

But we would like to note that the back to school shipping period occurs in June and July, overlapping both second and third quarters which has in the past caused sales to shift between the two quarters.

The timing of when goods ship is determined by transportation schedules controlled by our wholesale accounts.

Turning to our international channels.

We are pleased with our international business which has increased to just over 20% of our total sales bringing us closer to our goal of international sales representing 25 to 30% of total sales within the next three years.

This increase is primarily attributable to our international subsidiary business but was also positively impacted by our international, company-owned retail stories.

Since we launched our first subsidiary, Germany in 2000 we've added another seven subsidiaries including our most recent ones Canada, Italy, and the Benelux region.

As we continue to build these newer subsidiaries our business is improving in each of the countries where we're directly responsible for the marketing, sales, and distribution.

The highest gains on a percentage base were seen in Italy, Spain and the Benelux region, but Germany and the United Kingdom also saw strong increases and remain our largest European countries.

We are extremely pleased with our improvements in France.

Both on our wholesale business which is up more than 14% as well as our retail store which improved almost 18% over first quarter 2004.

We believe we're delivering the right product into France and expect to continue to see improvements.

Like our domestic business our subsidiaries are supported by multiple marketing vehicles from advertisements and point of purchase materials both now featuring global superstar Christina Aguilera to trade shows to SKECHERS owned and operated international retail stores.

We currently have 11 11 SKECHERS retail stores in 6 countries where we have subsidiaries.

Our retail focus as it is domestically is to profitably grow our existing international stores and as key locations become available add to our store base to profitably build the brand.

At present we plan to open our second Canadian store in Toronto next month.

Our distributor business was flat quarter-over-quarter, this in part attributable to the early shipment of products planned for January 2005 that shipped in December 2004.

Overall, our distributor business remains strong in key countries and regions but we believe there is room for growth and improvement.

As I mentioned on the year-end 2004 earnings call the SKECHERS international distributor owned and operated stores, our excellent brand building tools, and our increasing SKECHERS' profile abroad.

We have seen this especially true in Central and South America as our business has grown primarily due to our Panamanian distributor who handles the sales of our product in Panama, El Salvador, Guatemala, Columbia, Costa Rica, Ecuador, Peru, Venezuela, among others.

In support of its SKECHERS business in the region this distributor has opened one or more stores in each of these countries.

We also believe our UAE distributor will benefit from last weeks opening of the first store on the region at the newly constructed Iben Batuta mall in Dubai.

Using SKECHERS' images and company guidelines 10 distribution partners have opened 30 retail stores in 15 countries.

In regards to retail, as I mentioned our primary focus in the retail segment continues to be profitably growing our business within existing stores while reviewing underperforming stores as leases come up for renewal.

With this in mind, in the first quarter of 2005 we closed two domestic retail stores bringing our total number of domestic SKECHERS stores to 112.

However, as we see our retail business becoming more profitable, we will selectively open new stores in key locations with the goal of profitably building brand awareness in certain markets.

To date we have plans to open an additional 7 to 10 company owned and operated stores in 2005 including 2 in the greater Seattle region 1 of which is scheduled to open in early May.

We're pleased with the increased profitability in our retail stores and our improved sales.

Especially within our domestic concept stores and international stores.

Both of which had double digit comp increases.

We're particularly proud of the domestic sales increases which were based on three fewer stores.

The increased revenue growth in our international stores was on a true comparable store basis.

In our big box stores we also saw gains.

And while we sold fewer pairs we had an increased dollar volume.

This may impact our total comp store sales but is a positive indicator as to the strength of our brand.

We believe our increased sales in our retail stores is evident of the strength of the SKECHERS brand and the increased demand for our product.

And finally we would like to discuss our licensing initiatives.

At the close of the first quarter 2005 we had ten active domestic and international license agreements.

These agreements are for apparel, swimwear, and accessories, for our SKECHERS and 310 Motoring brand.

Our current focus in regard to licensing is to further build our presence and the impact of the license merchandise already in the market by both growing the offering in existing doors as well as expanding into new accounts.

Additionally we are developing new initiatives to be introduced later this year.

The licensing division continues to be led by our SKECHERS kids apparel which had a successful launch during back to school 2003 and continues to be a strong license.

New for our children's license is the launch of SKECHERS toddler apparel for boys and girls.

While the girl's division of our children apparel is very strong the boys business has not had the same success.

With continued improvement and growth in our SKECHERS boys footwear we believe the boy's apparel has great growth potential.

New in licensing is our SKECHERS swimwear which began shipping in the first quarter of 2005 to swimwear boutiques in the United States and Canada for the resort '05 season.

Initial reception is good and we believe as more of this product comes to market the door count will grow.

While the swimwear royalties are small in comparison to children's apparel we believe the launch of this category further builds the SKECHERS brand especially with our summer and sandal business in the niche market of swimwear specialty shops.

We continue to believe that selective licensing of the SKECHERS brand name and our other branded lines broadens and enhances the line without requiring significant capital investment or additional operating expense.

Now turning to our first quarter 2005 numbers.

For the first quarter net sales were 246.2 million compared to 221.5 last year.

The higher revenues in 2005 were attributable to the continued strength of our brand and the increasing sales across all three distribution channels, domestic wholesale, international, and retail.

The strongest gains came in our international subsidiary business and international company owned retail stores, but we also experienced double digit sales increases in our domestic wholesale business as a result of better average selling prices as well as units shipped in the quarter.

Gross profit in the first quarter was 101.2 million versus 89.7 million in the same period a year ago.

Our first quarter gross margin was 41.1% compared to last year's first quarter gross margin of 40.5%.

We're pleased with the improved margin this quarter but continue to feel that a 40% gross margin is appropriate to assume going forward.

Our royalty income was just over 340,000 versus 1.4 million in the first quarter 2004.

Please keep in mind that this is a net number that includes both royalties paid and received.

Primarily the decrease in net royalties is due to the increase royalties paid to Mark Ecko enterprises for our Mark Ecko footwear men's, women's, and children's line.

Total operating expenses as a percentage of sales decreased to 34.3% compared to 34.8% in the first quarter of 2004 due to the continued management of expenses as well as the positive leverage from increased sales.

First quarter selling expenses were relatively flat on a percentage of sales basis at 7.4% versus 7.3% in the first quarter of 2004.

In dollar terms selling expenses increased to 18.2 million as compared to 16.1 million in the prior year period.

Primarily due to higher sales commissions on the increased sales volume and increased trade show expense due to the addition of our new lines, advertising and related expenses were 5.1% compared to 4.3% for the first quarter 2004.

Historically our advertising expenses are higher in the second quarter as we gear up for back to school.

We would like to note that we anticipate our advertising and related expenses to remain below our historic range of 8 to 10% of sales as we continue to focus on spending our advertising dollars more efficiently without diminishing the impact in front of consumers.

General and administrative expenses were down on a percentage of sales basis at 26.9% versus 27.6% in the first quarter 2004.

General and administrative expenses were 66.3 million compared to 61 million last year.

These expenses while down 70 basis points on a percentage basis were up in absolute dollars due to increased salaries and wages, payroll costs, and temporary help all related to the development of three new lines and increased sales volume.

Net income for the first quarter was 10.3 million compared to net earnings of 7 million in the prior year period.

Diluted earnings per share were $0.25 on approximately 44.3 million average shares outstanding compared to diluted earnings per share of $0.18 on approximately 42.5 million shares outstanding in the first quarter of last year.

On our year-end 2004 earnings call we stated that we expected an effective tax rate in the range of 40 to 43% for fiscal year 2005 compared to 39.2% recorded in fiscal year 2004.

For the first quarter 2005 we reported an effective tax rate of 39.6% and we now expect the tax rate for the year to be between 40 and 42%.

Our balance sheet continues to improve at March 31, 2005 cash stood at 139 million trade accounts receivable at quarter end were 150.5 million and our DSOs at March 31, 2005 were 50 days up slightly from 47 days at March 31, 2004.

The increased DSOs are attributable to heavier shipments in March and increased European sales which historically have a slow return.

Inventory at quarter end was 130.7 million representing a decrease of 19 million or 12.7% from 129.8 million at December 31, 2004.

These positive figures are a result of the continued sales momentum we're presently experiencing and indicative of our continued focus on our inventory control initiatives.

We would like to note that our quarter end inventory is up from March 2004 by $19 million primarily due to the launch of our new fashion brands Mark Ecko footwear for men, women, and children. 310 Motoring for men's and boys.

And Michelle K girls.

Working capital totaled 324 million at quarter end versus 288 million at March 31, 2004.

Long-term debt including the current portion was 115.3 million.

Shareholders equity at quarter end was 306.8 million.

Capital expenditures for the first quarter 2005 were approximately 1.3 million.

We expect CapEx to be in the range of 6 million to 8 million for the full year.

We have complied with the requirements of the Sarbanes-Oxley Act as of December 31, 2004 and we're continuing to review our control environment in order to address the ongoing SOX compliance requirements.

And now turning to guidance.

Based on early indicators we believe we will see an improvement in our second quarter year-over-year.

These indicators include double digit sales increases in our domestic wholesale business due to our strong spring product offering for both our SKECHERS line and our Mark Ecko and 310 Motoring footwear.

Continued growth in all our international subsidiaries, strong retail comps, and the positive reaction to our back to school product and the resulting higher backlog.

We currently expect second quarter sales to be between 245 million and 255 million and diluted earnings per share to be in the range of $0.21 to $0.26.

It is important to note however, that historically SKECHERS's back to school shipping period occurs in June and July overlapping both the second and third quarters which has caused sales to shift between the two quarters.

The timing of when goods shipped is determined by the delivery schedule set up by the Company's wholesale accounts.

We're pleased with our performance in the first quarter across our three distribution channels domestic wholesale, international, and retail and with the reaction and the orders for our SKECHERS' product line as well as our new fashion line which are finding their place in the market as is evident by the growing numbers of accounts indoors.

We saw the momentum we experienced in 2004 continuing in the first quarter and we believe this will continue during the remainder of 2005 as we see the relevance of our brand increasing with our continued efforts to deliver trend right product in our on-target marketing plan.

As always, we will continue to focus on making all areas of the business more profitable.

Growing our recent initiatives, and further building the brand equity to ensure SKECHERS' continued relevance.

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

[OPERATOR INSTRUCTIONS] Our first question today is from John Zolidis from Buckingham Research.

Hi good afternoon, nice quarter, David.

Thank you very much.

Couple of quick questions for you.

I'm wondering if you could talk a little bit about trends in brown shoes, if that is starting to pick up as well or if it sells because it's really driven mostly by the athletic component?

For us we saw some increases everywhere.

Obviously our active which is a cross-over, not truly athletic but more casual is our strongest piece but our men's and work together showed nice increases as well, I think we have got a nice line going and we're starting to get some growth in the marketplace in all our groups so we've seen a little growth in both areas.

I was wondering you have got three new lines, obviously those are probably dilutive to earnings at this point.

When do you think we can reach an inflection point where the new lines start to contribute to the bottom line as well.

Well, they're only dilutive in the point of how it matches the whole, they're actually adding a little bit since they're not a drain as they were in the end of 2003 and the beginning of 2004.

So that's sort of mitigated.

I would venture to guess that by this time next year they will not only be not significantly dilutive but significantly accretive by the first quarter of next year.

Do you anticipate adding any additional lines in 2004 as we go forward?

We're always thinking about something but we wouldn't give away trade secrets until we announce them.

Okay.

Thanks a lot good luck with the second quarter.

Thanks.

Our next question comes from John Shanley of Susquehanna Financial Group.

Good evening.

This is actually Christopher Setia.

David I have a couple of quick questions.

I guess first, maybe, you can drill down a little bit on the back log for the period?

I was wondering if you could just add a little color in terms of where it stands at this point as you look over the next six months?

Well, over the next six months we're up in the low to mid single digits.

The interesting point is that we get the impression that people are chasing us now because our backlog over the next three months has a higher percentage increase than it does if you look out over the next six months.

I think we're getting a little late in getting August and September into us that's why we're trying to be a little conservative we know people are chasing us and the product is hot.

We have a better short-term increase, at least as far as second quarter is concerned in backlog and our stores are trending up so significantly that we think we still have a good shot to continue to accelerate through back to school.

So the backlog for the second quarter is stronger than the third quarter.

Is that how I interpret it?

On a comparative basis to last year, yes.

How much of that backlog if you can quantify it is being driven to some degree by the new brand and how much of it is being driven by your core SKECHERS' brand?

Most of it is still the core SKECHERS brand.

I mean it is certainly growing over the designer brands but not big enough to make a dent.

Until we get to the point that they can start to ship 15, 20 million a quarter.

I don't think that makes a significant impact.

We're a little bit ways from there yet.

Are you still doing roughly 60% or so of your business, 60, 65% on a future contract basis?

Yes.

On the international front I'm just wondering, maybe you can add a little bit of color I'm hearing from other brands about mixed messages about what is going on in Europe.

Weakness in France and Germany.

I was just wondering you're seeing very strong growth in these countries maybe you can just drill down a little bit, what is driving the growth what are you seeing?

Well, France as I said in my speech is up but obviously it was a small base and it's just starting to turn around.

So the percentage increase doesn't matter.

If I told you Germany was anything other than stellar and growing superbly and it may catch England this year, it's just growing -- and it is all product related and product acceptance and obviously we tell those guys how hard they work in Germany but our German business is excellent for lack of a better word.

Are you growing in new accounts, is it existing accounts?

Well, its growing in both but primarily existing accounts we're still a kid who is playing in that game, we're 5 years old and we've taken shelf space a little bit at a time so we still continue to react on both levels.

We're opening new doors if not significant new accounts and significant new shelf space within those doors.

You also think it is a fashion trend moving more to casual type footwear as well?

For us it always has to do about the product so the product is right.

The overall consumer sentiment is -- I think it is more casual it is certainly more casual there than it was here.

And a lot of that product that was hot here started to get hot in Germany first and in Europe first and then came over and we started it there very early.

So we caught the beginning of the trend and have been riding it up.

Okay.

And my last question is just -- I was wondering maybe if you can just revisit the story about the leverage in the SKECHERS' business model.

Do you see an opportunity as you get towards the back half of the year to really start leveraging the fixed cost in SKECHERS' business model.

Absolutely I think most of our building is already done.

Done through the first quarter.

So where we are -- any increases from where we are now or where we anticipate being would certainly leverage to the bottom line.

It's likely that any additional spending on the SG&A or the marketing side would more than likely grow at a slower rate than your sales growth.

The G&A portion certainly, we'll reserve rights on the advertising, as we had cut it kind of deep last year.

It shouldn't grow any faster then but I'm not sure it will grow slower then.

We're still pretty big advertisers and we have got some new lines to advertise.

Thanks very much.

Moving on we'll here from Dorothy Lakner from CIBC World Markets.

Thanks, good afternoon everyone.

Congratulations on the quarter David.

Just came off of that question again.

If I understand correctly for the adds then, you're going to for the year remain below that historical 8 to 10% of sales?

That's the current plan right now.

Right but it will move up in the second quarter and can I assume also the third and the fourth quarter relative to a year ago versus what you had as a percent in the first quarter.

Yes, I mean first quarter is historically our smallest advertising spend.

It is litigated somewhat by trade shows.

Second and third quarter are historically our largest and they tend to remain so and will remain so.

We're starting to commit to some of the dollar spend so I want to tell you, there might be slight growth but like I said on a percentage basis we won't show significant increases year-over-year.

And then I was just curious about -- I guess you always do say this about gross margin sticking to that 40% kind of guidance.

But it seems like your -- first quarter you're up year-over-year, is there opportunity in gross margin as we move through to the next couple of quarters?

Yes, as in most of our projections we try to stay conservative so we think there is upside in all of the numbers we put out, we try not to go to the top of the line anywhere.

That doesn't mean of course, there will be but certainly we're not pushing the envelope when we give our numbers out.

Right.

And it sort of seems like for top line guidance also, it doesn't seem like you're really pushing the envelope if you look at last year's first quarter, this year's first quarter.

I guess there's that slippage that can occur between the second quarter and the third quarter but it seems like the second quarter sales guidance might be on the conservative side as well.

I'm assuming it is because of that shift that you're being more conservative?

It is twofold.

We think people -- we absolutely believe we're hot and from what our customers are telling us we're hot.

But we can only make projections and conservative projections on we see to the extent that a bigger percentage of what we have booked that slips in the second quarter is certainly possible to the extent that our retail stores comp significantly higher than we have in our projections which is always room as well.

All of those things are certainly possible and when we're hot we think there is a higher percentage we just don't want to go out too bullish on the street until we physically have it in our hands.

Can you give us any sort of estimate as to where royalties would end up for the year?

I think royalties will -- by the end of the year should be break even or slightly negative because I really do think the Mark Ecko brand will grow significantly faster than any new --.

Any royalties you're receiving?

Yes.

Any new licenses we could put on between now and then.

One last question, just I think you were going kind of fast earlier but on the distributor business, the reason why that business was flattish?

Well, as we said the reason for the upside surprise in fourth quarter of last year and we turned positive was our distributor's taking early deliveries for January into December and that sort of just played its way through in the first quarter.

Thank you.

We'll hear next from Deena Friedman from Brean Murray.

Good afternoon.

Hi.

Hi, how are you?

Good.

Just a couple of questions.

I just wanted to get some color on the comps by the different retail channels that is the outlets, the full price stores, and the factory stores, and wanted to get a sense of what you're seeing in terms of pricing trend and volume for the rest of the year.

In retail or overall.

Overall.

I'm glad you asked because I thought no one would ask about retail.

When we said our comps were up significantly and they were slightly less than double digits overall, I think we'd like to point out that our concept stores and our outlet stores were up significantly over double digits, in the low to mid double digit for the quarter.

They were brought down in the overall by our box stores as I alluded to in my prepared speech.

Basically what's happened there is we had a moderate increase in dollar volume and a double digit decrease in unit in those stores leading us to believe and know that we had significantly less closeout product and we could sell higher price in those boxes because even our older merchandise is more stylish to date.

So that's why we're so bullish on the retail piece of it.

As far as pricing going forward, we were up 2.5% in the first quarter, it looks now that that will hold at least through the second quarter and we're leery to go out past that but we still have a long ways to go before we can solidify that prognosis.

Great, thanks a lot.

And our next question comes from Justin Maurer from Lord Abbett.

Hello Mr. Dave.

Hey, Mr. Justin.

A couple of questions on the gross royalty if you look at the last couple of years prior to the Ecko kicking in it was running 5, $6 million.

So if you're saying it is going to be close to neutral would that imply just kind of on a maybe a high single digit royalty rate that you expect that brand to maybe be about $50 million in sales this year is that fair?

That's pretty fair my estimate is a little less than that but in that range.

To your comments on the backlog that the short-term seems a little better than six months out, if you feel like in the retail stores are showing this momentum, are your customers of the thought of kind of a show me posture still that they're not willing to walk out that far with you yet or what do you think the reason is for three months visibility would be better than six.

It's very difficult for me to speculate on the mentality I do get the impression from our fees that people are watching inventories more closely.

And since we have a quicker time to market we're the easiest ones to keep these later orders away from or to be given out later.

I think what people are finding is that they are short product and will be short product and we do have what feels to be -- it's an early part of the year and it's very difficult to make whatever we see now play out for the whole year.

We are seeing more requests for product now than we had last year and I think because what we have that's hot is very hot and people are so nervous about what they read and retailers specifically about end of month inventories, more so than it seems in the past that they're being held at bay by their overall receipts and sell-throughs.

But what we hear, anecdotally and from the meetings we've had with our customers they reinforce of what our retail scores tell us, we have product that is very hot right now and they will be chasing it.

Yes, okay and then just relative to Dorothy's comment about the gross margins at 41, again trying to understand or give you credit for the conservatism but thinking is there anything out there that you're seeing from a cost standpoint, or anything that would say -- and like you said, if the product is still strong that shouldn't be an issue relative to having to make it more accommodating for the retailer.

SO what is your thought relative to why margins would have to drift back closer to the 40 level.

Margins has to do with mix.

If certain slower margins -- pieces of the business like our distributor business or outlet store business got bigger increases than the balance of the Company, they would sort of not add that margin.

They might add net margin but not gross margin.

But to be very honest with your answer there's really nothing out there if the product stays hot enough that we shouldn't be well over that 40% level.

But you have to assume that business will stay on its current pace or better.

Lastly on cash.

Nice cash balance.

If you do what the estimates are out there.

Maybe end the year with 175, 80 million of cash.

Thoughts?

Same thoughts as before we're still looking.

The three options that are out there is to pay down the debt, buy back stock, make an acquisition, or just wait until it is such a big number like Microsoft and give it a special dividend.

And none of those have -- or are close enough to make an announcement on yet.

We wouldn't have a problem with the latter.

Okay.

Thank you.

We'll hear next from Sam Poser from Mosaic Research.

Good afternoon.

Hi.

The -- can you talk -- can you first of all give us the tax rate of what you're looking at for the year?

We said 40 to 42 and that is on a very conservative basis.

We were at 39.6 for the first quarter so that's the range we're anticipating.

Can you also give us the breakdown on the channels where you're seeing the biggest growth with your wholesale business.

Which customers you're talking about?

No like is it better department stores, independence, that pole.

Well, we're no different than anybody else.

Our bigger -- when we grow at such bounds it's at our bigger customers so it's safe to say it's in our top.

Customers we're seeing it pretty even across the board we see it in specialty stores, in department stores, in chains.

It's not a one item push or a one distribution channel push it's very broad based.

One last question.

You mentioned how strong the women's active business was and the work business.

Is, is, don't say was.

Is.

Thank you.

You mentioned how good it is.

How -- is part of the reason that there may be softness on the latter part of the next six months in your futures because they didn't plan you as well as it was and you might be trying to get out of something else to get back into you and that's why you're seeing them chase it down.

It's always possible, I don't have the individuals on all the stores.

All I can tell you is that all our sell-through reports we get are excellent from all our customers.

They all ultimately -- we feel will be underbought and they will chase it and what we see in our stores which goes back to our consumers and on our internet site is that that stuff is hot and they really don't have enough, so why they do it there are probably different reasons for different folks.

Great, thank you.

Next we'll go to Scott Dowdy from Kennedy Capital Management.

Good afternoon.

I was just curious as to what your plan was for expensing stock options and if you could estimate what you think the impact would be for 2005?

Well, our plans are to do what is required by the accounting boards which means we'll expense them as we go forward.

As we stand right now we have no significant expense after 2005, and when I say no significant expense, it's certainly less than mid six figure number per quarter after we end 2005.

Of course we haven't made any plans on 2005 nor decided whether or not there will be options granted but as we stand today, there's no significant impact on 2006 with the options as they exist today.

Okay.

Thank you.

And we'll take a follow-up question from John Zolidis from Buckingham Research.

Hi just wondering if you could comment on the Federated May company merger and how you think that may impact your business, if at all?

Boy, I don't know.

We're big Federated fans and we did a nice job with May company, just a general comment I guess if Federated is a classy operation if they make it that much better it can only be better for us but I'm not well enough versed in their inner workings to say exactly what it would be.

In talking to our sales guys we get the impression that a worst case would be an even story for us and chances are we'll have a better business with the combined entity but that still remains to be seen it's way too early for us to tell that.

Great, thanks a lot.

We have another follow-up question from Justin Maurer from Lord Abbett.

Dave, just on the option issue, the shares crept up was that merely just stock price related.

Absolutely, I think we have one more traunch somewhere in the 15, 20 range that brings out a low 7 figure stock and after that that's about it.

And then on the inventory up year-over-year is that in units similar to the dollar amount or were units up a little bit less.

Was there some inflation in the inventory.

No, units aren't -- the dollars reflect the units and it's primarily as I said in the fashion brand.

Just building a face inventory, they didn't exist at all last year.

[OPERATOR INSTRUCTIONS] And it appears there are no further questions today Mr. Greenebaum.

I'll turn the conference back to you.

Thank you for joining us today on the call again, I would like to note that today's call may contain forward-looking statements, the results of various risk factors, actual results could differ materially from those projected in such statements.

These factors and details again are filings with the SEC.

Thank you and have a good day.

That does conclude our conference call today, thank you all for your participation.