Skechers USA Inc (SKX) 2005 Q3 法說會逐字稿

Welcome to the Skechers USA third quarter 2005 earnings conference call.

This conference is being recorded. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Mr. Andrew Greenebaum of Integrated Corporate Relations.

Good afternoon.

Thank you everyone for attending Skechers’ third quarter conference call.

I’ll now read the safe harbor statement.

Certain statements contained herein, including with out limitations statements addressing the beliefs, plans, objectives, estimates or expectations of the company, or future results of events may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.

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

There can be no assurance that the actual future results, performance, or achievements expressed or implied in 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, filings on Form 10-Q, [inaudible] and analysis in the company’s latest annual report to stockholders, the company’s filings on Form 108-K and other federal securities laws filings, for a description of other important factors that may affect the companies business, results of operations and financial conditions.

Now I’d like to turn the call over to Skechers’ Chief Financial Officer, David Weinberg.

Thank you Andrew.

Good morning, and thank you for joining us today to review Skechers third quarter and nine month 2005 results.

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

Third quarter 2005 sales were approximately $272.8 million, an increase of 5.9% over third quarter 2004. on a year-over-year basis this represents the company’s seventh consecutive quarter of top line increases, and the sixth consecutive quarter of bottom line increases.

Net earnings for the quarter were $12.6 million, or $0.30 per diluted share, 100% higher than net earnings of $0.15 per share in the third quarter of 2004.

For the nine month period ended September 30, 2005 net sales rose 9.7% to $783 million versus $713.9 million in the first nine months of 2004.

Nine month 2005 net earnings were $38.8 million or $0.92 per diluted share compared to $21.4 million or $0.53 per diluted share for the first nine months of last year.

A strong third quarter, combined with our record first and second quarters resulted in the highest nine month revenues in the company’s history.

We believe the seven consecutive quarters is evidence of the strength of our many brands, and the continued momentum we are experiencing.

Continued improvement is the result of an increased demand for our in season Skechers product and a broader acceptance of our new lines.

Product highlights include increased demand for denim friendly sport fusion and casual Skechers footwear for men, women and children in the United States and in many international countries, continued strong sales in our historically proven sports styles for men, women and kids, as well as double digit growth within key lines; significant improvements in our uniquely branded designer and lifestyle lines, many of which have been on the market just over a year, and an increase in pairs shipped domestically of just over 6%.

In the third quarter we focused on our proven product, as well as delivering fresh new styles and efficiently growing our business.

To this end, in the third quarter we achieved the following; seven successive quarters of increased year-over-year sales, double digit sales growth in our domestic retail business, seven new stores open during the quarter, continued growth in our domestic wholesale division, continued growth in our international direct subsidiary sales with double digit improvement in key international markets such as Germany and Spain, significant improvement in our gross margins by 200 basis points year-over-year to 42.3% for the third quarter of 2005 versus 40.3% for the same period last year; a further improved balance sheet with more than $182 million in cash, and current and on planned inventory reduced by more than $17 million from December 31, 2004, and a reduction of $15 million year-over-year.

Now I’d like to expand on our third quarter 2005 achievements in our four revenue channels, domestic wholesale, international, retail and licensing.

First domestic wholesale; for the third quarter domestic net sales increased by more than 5% from the same period last year.

In the third quarter we experienced an increased demand for our denim friendly low profile casual and sport fusion footwear for men and women.

These styles cross numerous lines, but are primarily in our Skechers active line for women, and Skechers U.S.A. line for men and women.

We believe the line of our Carrie Underwood marketing campaign for the back to school season has positively impacted sales and the brand’s image.

Advertisements of the American Idol winner and rising star wearing the now signature Skechers look can be seen in weekly teen and fashion magazines.

These same images have also begun appearing on mall kiosks nationwide, reaching the consumers where they shop.

We’ve had extremely positive feedback from our customers many of whom have place POP, poster and window graphics of Ms. Underwood in their stores.

The initial wave of the Carrie Skechers campaign was timed perfectly to coincide with her first single that was released last week to radio.

With her much anticipated debut album releasing in mid November; we believe the buzz and press surrounding it will continue to positively impact our sales in the fourth quarter and into 2006.

While the energy and its updates, known primarily as premiums, are still core to our men’s, women’s, and children’s Skechers offerings, demand for denim friendly sport fusion and casual shoes has resulted in a more diversified top 25 list.

Bikers, Critics, Urban Track and Premiere are consistent top performers.

Also important in our Skechers branded business is our work line. [Inaudible] posted double digit sales increase.

This is a specialty line created solely for the service and occupational industry professional who requires that their footwear meet specific testing standards.

We believe the success of this line is due to the quality of design along with the Skechers name. the consumer can now wear work footwear from a company that they know and trust.

We also support the many Skechers lines with television sponsor spots on select programming.

These spots include Women’s Sport Fusion, Men’s Fusion, Men’s Sport, Men’s Casual, and our work footwear.

Our growth in the domestic market can also be attributed to our uniquely branded designer and lifestyle lines for men, women, and children.

This growth is in part due to three brands, 310 Motoring, Unlimited by Mark Ecko, and Red by Mark Ecko, which were tested by retailers initially, but has just experienced increased store count and strong sales growth. as each of these brands gain market share and consumer acceptance, we believe they will continue to positively impact our domestic sales.

The signing earlier this year of multi platinum hip hop artist The Game to market a signature 310 line has generated a lot of buzz for 310 Motoring.

With the launch of The Game’s first signature sneaker in Footlocker and Finish Line in December 2005, and then to select retail partners nationwide in late January 2006, we believe this brand has longevity.

The two designer brands, Michelle K and Mark Nason, also experienced strong sales growth over the third quarter last year.

This was primarily due to existing major accounts expanding their skus and door counts, as well as the opening of new accounts.

Both brands have product focused ads supporting a line.

Focus of Michelle K on Designer Fusion footwear, and the focus of Mark Nason on boot driven better menswear, we feel these lines have distinct and unique positions in the marketplace.

Although the total sale of designer and lifestyle brands is small in comparison to that of Skechers brand, we believe this segment has great potential to gain market share, and grow sales without taking from the Skechers consumer.

With more than 2,000 styles, our goal is to sell the right product into the right markets and distribution channels.

We are increasing sales by further developing existing product categories, building on initial sales in new lines, and further growing these lines.

Turning to our international channel, we are pleased with our international subsidiary business, which has improved for the quarter, and is up double digits for the nine months.

For the quarter we saw double digit increases in five of our eight subsidiaries, including Germany, our biggest subsidiary.

As in our domestic business, we believe the improvement in our international direct wholesale business, is due to an increased demand for our Fusion designs for men and women, and the offering of more color waves and styles on key low profile [inaudible].

This, along with our continued marketing effort, including the recent addition of Skechers kids television spots and advertorials specific to each country, we believe has created a strong brand acceptance in these international regions.

Adding to our brand recognition and positive perception within our subsidiaries is our company owned and operated retail stores, which also improved in total sales for the third quarter. from these 12 stores the strongest quarter-over-quarter sales improvements came in Canada, primarily due to the addition of one retail store in Toronto in the second quarter of 2005.

We had an overall decrease in total distributor sales during the third quarter and year-to-date.

We believe the reason for the lower sales in some markets is due to a longer cycling of products, resulting in a slower intake of fresh styles.

The result of this is that some of our distributors are placing orders closer to season in an effort to maintain lower levels of inventory while they evaluate current market trends and overall selling strategies. it is important to note that our distributor sales were up 24% year-over-year in 2004. we believe that the decrease in distributor sales for 2005 is also due to the distributors absorbing the 2004 increase.

We expect our distributor sales to be flat on a year-over-year basis, as product backlog continues to show improvements in the fourth quarter.

We also believe that distributor owned Skechers retail stores in select countries will help build the brand and positively impact the sales, as it has in our subsidiary countries and the domestic market.

Using Skechers images and company guidelines, 33 retail stores in 16 countries were opened by 11 distribution partners as of the end of the third quarter. this includes the first Skechers stores in Israel, opened in Tel Aviv early in the second quarter of 2005, and in the UAE, opened in Dubai earlier in 2005. with the addition of two new stores in the fourth quarter, one in Santiago Chile and the other in Caracas Venezuela, total store count is expected to be 38 by the end of 2005.

We believe there is room for continued growth and improvement in our 100 plus countries and regions where Skechers are sold.

As in our subsidiaries, our international distributor business is supported by company created ads, commercials and POP, as well as by regional celebrity endorsement agreements in select countries.

Regional celebrities have been signed in Israel, Japan, Hong Kong, Croatia, and Greece and for much of Central and South America.

Again, we believe our international sales are strong, and we should continue to see growth in our subsidiary business and company owned retail stores, as well as improvements in our distributor business, which currently has a double digit backlog increase.

Turning to retail; we are extremely pleased with our domestic and international retail sales. for the tenth consecutive quarter we achieved double digit year-over-year sales increases in our retail division with double digit comps across all three store formats.

We believe the increased sales are due to the growing demand for our products, and continued positive effects of our marketing efforts.

In the third quarter of 2005 we opened seven new Skechers owned and operated retail stores, bringing our total number of domestic and international stores to 132 at quarter end.

These include a concept store in Belleview Washington and our first stores in Delaware, New Hampshire and Connecticut.

As in other business channels, our focus is to profitably grow our retail business.

To this end we closed three retail stores in 2005, and opened 10, resulting in a net addition of seven stores.

Additionally we plan to open another store in 2005 and another 10 to 15 in 2006.

Also in 2006 we plan to open our fourth SoHo lab store, and the first one built from the ground up.

This new store will be in San Diego’s hip shopping and tourist area, known as the Gas Lamp District.

As I mentioned on the second quarter 2005 conference call, SoHo lab is a new retail concept that started with the conversion of our Skechers store in New York’s SoHo district, and has grown to include one store in Los Angeles and one in the San Francisco area.

This new format is designed to showcase our brands marketed separately from Skechers, Mark Ecko, 310 Motoring, Mark Nason and Michelle K, as well as select Skechers styles.

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.

Moving on to our licensing initiatives; royalty income for the quarter was $2 million.

The company paid $1.2 million in royalties, which is recorded as cost of sales. in the third quarter of 2005 we announced a new licensing agreement with Kitson, the hottest boutique turned brand in Los Angeles, to design, develop and market Kitson brand footwear for women and girls.

Each style will be exclusive to the Kitson Boutique, and then will roll out to department stores and boutiques in the U.S. as well as select markets overseas.

First delivery is expected in the fourth quarter of 2005.

The agreement for Kitson footwear brings our total number of active domestic and international licensing agreements to 12 at the close of the third quarter. these agreements offer apparel, swimwear and accessories for our Skechers and 310 Motoring brand, as well as footwear under the names Kitson and Mark Ecko.

Outside of our footwear licenses, the licensing division continues to be led by our Skechers Kids’ apparel.

We continue to believe Skechers Kids’ remains relevant in the market.

We have augmented our children’s merchandise business with socks and hosiery.

Although the royalty income is small in comparison to children’s apparel, we have experienced some growth and the reaction was positive for back to school.

In regard to our licensing plan, we are currently focused on building our existing domestic and international license, while exploring new opportunities for Skechers branded merchandise and apparel, as well as for our uniquely branded lines.

In addition, we are open to developing footwear for other established apparel brands along the lines of Kitson.

We continue to believe that selective licensing of Skechers brand and other brands broadens and enhances the brand without requiring significant capital investment or additional operating expenses.

Now turning to our third quarter and nine month numbers in detail; as previously mentioned, third quarter net sales were $272.8 million compared to $257.7 million last year.

The improvement in 2005 is due to a combination of factors, including significant growth in key Skechers lines, and within our new Lifestyle brand, strong domestic wholesale and retail sales, an increase in our retail store base of seven, increased comp store sales, increased sales in many of our key international markets, and an increased demand for in line product and stronger sell throughs, which resulted in higher margins, somewhat offset by our distributor sales.

Third quarter gross margin was 42.3% compared to last year’s gross margin of 40.3%. we are pleased with the margins, and as discussed in previous calls, believe that a 40% to 41% gross margin is appropriate for our business.

Gross profit was $115.5 million versus $104 million in the same period last year.

Total operating expenses as a percentage of sales were 35.2% compared to 34.4% in the third quarter of fiscal 2004.

Third quarter selling expenses increased to $27.2 million from $24.2 million for the same period in the prior year.

The increased selling expenses are primarily due to increased advertising and promotional expense.

In the third quarter we launched two celebrity-associated advertising campaigns, as well as new ads for several other brands.

In addition, we increased our exposure on TV with new Skechers Kids’ spots, as well as multiple adult sponsored spots.

We supplement the more traditional formats with alternative medium such mall kiosks, billboards and underground transportation systems.

As we stated on the second quarter call, we anticipate our advertising to be at the lower end, or below our historical range of 8% to 10% of sales for 2005.

General and administrative expenses were $68.8 million in the third quarter compared to $64.6 million for the same period last year.

Our general and administrative costs were essentially flat, at 25.2% of sales in the third quarter, compared to 25.1% for the same period last year.

The absolute dollar increase is primarily due to the increase in number of our company-owned stores, as well as an increased salary cost.

We also saw some expense savings with temporary help and professional [inaudible].

[Inaudible] earnings for the third quarter were $12.6 million, compared to $6 million for the same period in the prior year.

Diluted earnings per share were $0.30 on approximately 44.8 million shares outstanding, compared to earnings per share of $0.15, on approximately 43.7 million shares outstanding in the third quarter of last year.

Skechers’ third quarter and nine months ended September 30th, 2004 results were adversely affected by effective tax rates of 59% and 47.2% respectively.

These rates were due to the company’s inability to utilize tax losses in foreign jurisdictions in the third quarter of 2004.

The company reevaluated its tax structure for fiscal 2005 and beyond in order to decrease volatility and to lower its overall tax rate.

The company’s tax rate for the third quarter and nine months ended September 30th, 2005, were approximately 39.2% and 38.6% respectively.

For the nine months ended September 30th, 2005, net sales were $783 million, vs. net sales of $713.8 million for the first nine months of 2004.

Gross profits were $327.4 million, compared to $288.9 million for the same period in the prior year. [Inaudible] expenses for the first nine months of 2005 were $66.3 million, compared to $61 million for the first nine months of 2004.

Total G&A expense was $200.5 million, compared to $184.9 million in the same period last year.

In total, for the first nine months of 2005, operating expenses were $266.8 million, compared to $245.9 million for the same period last year.

Our balance sheet continues to be very strong.

At September 30th, 2005, cash on the balance sheet stood at over $182 million.

Trade accounts receivable at the quarter end were $130.5 million, and our DSOs at the end of September were 44 days, vs. 43 days at September 30th, 2004.

Inventory at the quarter end was $132.3 million, vs. $148 million a year ago.

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

Working capital rose 13.6% to $356.4 million at quarter end, vs. $313.9 million at December 31st, 2004.

Long-term debt was $107.6 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.

Shareholders’ equity at quarter end increased to 14.5% to $337.8 million, vs. $294.9 million at year end 2004.

Capital expenditures for the nine months were approximately $10 million, which primarily consisted of new store openings, store remodels, warehouse equipment upgrades and information technology hardware.

This was compared to $15 million in the prior year, of which $11 million was related to the purchase of our corporate headquarters.

During the third quarter of 2005, we entered into an agreement with Morley Construction Company, for the construction of our new corporate facility in Manhattan Beach, California.

The agreement has a maximum payment clause, in which Morley agrees that the construction costs of the facility will not exceed $18.1 million.

We expect Cap Ex to be around $12 million to $14 million for the full year, vs. $15 million in the prior year.

And I will now turn to guidance.

We currently expect fourth quarter sales to be between $210 million and $220 million, and earnings per share of $0.02 to $0.07 on approximately 45 million basic shares outstanding.

For the full year, we currently believe year-end sales will be in the range of $993 million to $1 billion, and earnings per share of $0.94 to $0.99 on approximately 45 million fully diluted shares outstanding.

While historically fourth quarter sales are not as strong as the first three quarters, we expect to see improvements from last year and margins to be approximately 40% to 41%, which we feel is appropriate for our business.

We are very pleased with our seventh consecutive quarter of top line growth and sixth consecutive quarter of year-over-year bottom line increases.

Our improved third quarter net sales, operating profit and net income were the result of a combination of growth in our domestic wholesale, international direct channels and Skechers’ own retail stores, as well as less close out for the period and continued cost management on the expense and operational side of the business.

We are also pleased with our strong profitability and the continued demand for our product with consumers and retailers.

Our efforts are directed at maximizing this trend in 2006 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 closeouts [ph] while delivering new trend [inaudible] and course files [ph] in our Skechers line, and further grow our uniquely branded lines, which we believe have incredible potential in the North American market, as well as overseas.

Continued stress of our domestic wholesale and retail businesses gives us confidence that we will end the year with record net sales and continue to see improvements as we head into 2006.

As always, we will continue to focus on making all areas of business more profitable, further growing our recent initiative and continuing to build the brand on a worldwide basis to insure Skechers’ continued relevance.

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

[OPERATOR INSTRUCTIONS] David Turner, Branch Banking and Trust.

Thanks, good afternoon.

I wanted to get behind the inventory number a little bit.

That was a pretty significant drop and, you know, is this a new bench mark for, I guess, in increasing inventory productivity?

Or, is the drop more of a reflection of the market considering how strong the in-season business has been in Q3, if that’s clear?

I think so.

I think it’s a little bit of both.

What you have to remember is last year we had brought new products into the market place.

It was our first deliveries of the Ecko product.

It was basically our first deliveries of 310 product.

So, we were testing the market place and had built up some inventory to test and bring in and deliver.

Now, we have that particular piece more under control.

So, that particular piece is certainly more efficient and we know what the market place wants and that’s why we started to sell through better on those levels.

The balance, as far as Skechers is concerned, I think, is the result of the demand in the market place.

We find we have less need for closeouts and didn’t have to push them this year at the market place, our back offs continue to grow and the products are right and they’re right over a broader range.

So, it’s a little bit of both.

How do you feel about the product in channel?

I mean is it where you want it?

You know, is the demand still there?

I guess, just give a synopsis of what’s on the shelves right now.

Well, from what we hear, our channel checks seem to indicate it’s not significantly different than our own retail stores, that the product is right, it’s still in demand and it sells through quite well, especially where retail is doing well.

OK, and then lastly, the 10 to 15 store openings for next year is a little higher than I think what it was previously.

Is that a reflection of Soho Lab getting behind that, or dedicating some resources to that?

Or, is it the international piece growing?

What’s behind the incremental growth in the stores?

Well, it’s primarily where our strengths are.

We find there are a few more locations available to us of interest, and the stores are doing so well that it seems to be a good time if the right locations are available, that we should step it up just a little bit.

I don’t think they’re significantly increased but the stores are just doing so well that, if the opportunity is there, we’d like to take advantage of it.

OK, thank you.

Good luck.

Chris Stealpah, Susquehanna Financial Group.

Good afternoon, David.

I have a couple of quick questions for you.

I guess first, with regard to just kind of the sales performance during the quarter.

I mean, you came in, to some degree, at the kind of lower end of your guidance of $270 million to $280 million.

Was there anything during the quarter, whether it may be some retailers might’ve held back some orders, maybe a slower start to the back-to-school selling season made you come in sort of at the lower end of your expectations, vs. where you guided at the end of the second quarter?

Well, it’s very difficult to say.

I think part of it is the distributor base that we had.

They are slower.

We had anticipated that they would get behind the products that were hotter in Europe and the United States a little quicker.

And, we had heard at the beginning of the quarter that they were getting some significant sell-through, but for some reason they were slower to pull the trigger than we had anticipated.

That differential, from what we had anticipated on the distributor end, and especially given last year’s performance when they were so strong, to this year probably was 70% of the differential between where we are on the top end of the range.

Having said that, we find that they are testing better.

We have double-digit increases in backlog and anticipate that by the time we get to the first quarter, they will have made up all that difference and started to trend significantly higher again.

That’s also probably a part of the reason that our margins are so big.

Remember that the distributor business is our lowest gross margin type business.

So, it actually impacted it.

From what we saw, we came in pretty close to the top end of where we anticipated domestically for our wholesale business and for our retail stores.

And that’s why we’re so confident going into the fourth quarter and to the first quarter of next year.

OK.

I guess looking at your distributorship businesses, given the fact that it looks like you guys will have roughly $200 million in cash at year end, does it make sense to maybe start looking at acquiring some distributorships at this point?

Do any of them look financially feasible or attractive for you to take advantage of and maybe look at acquiring?

That’s a possibility.

We really haven’t explored that.

I think we’d like to build up our European business, and if we do expand past that, as we said in the past, we’ll probably expand off our European base.

The two biggest distributors that we have and that would make the most sense, obviously, are in the Far East there in Japan, and in South America.

And there are such big nuances in doing business there and we anticipate that that will continue to grow as it goes forward, that it’s doubtful to take over anything of significant size, although we’re always looking to see what’s out there.

OK, and then just turning to the European side of the business, your subsidiaries, I mean you mentioned that five of the eight countries were up double-digits.

Would you just add a little bit more color?

I know Germany’s been strong for you guys.

I know Spain is really coming on pretty strong as well.

Can you add some more color, by each market, in terms of what’s going on and what you’re seeing?

Yes.

I think the only hesitation we have, the only ones that were down basically, was the UK.

And I think that’s a function of the UK and some of the changes in the business over there.

I know some of the people are strong, but there’s a big transition going on, from athletic specialty to different stores over, or different kinds of stores.

And our not being significantly strong, necessarily, in the past, as an athletic specialty player, it was difficult with the shifts that were going on there to maintain our balance.

I think the positive that comes from that is that we shifted and with the new styles and new products we have, we’ve gone into new kinds of distribution places, like Office, that are significantly different, that have shoes that will help strengthen us.

And I think we’re starting to see some increases in backlog and I think it will be a more solid base for us to grow off of, based on the styles we have.

So, while the UK was down a little bit, which was a slight drain, we’ve seen a lot of positives there in the products we have and the new distribution we’re gathering.

OK.

What about France?

France is relatively flat.

We expect a big jump there.

You know, they went up 10%, but it’s off such a small base.

We really anticipate that they should become somewhat larger and get closer to what Germany and England are.

So, we’re still working over there.

While we’ve seen some progress, it’s certainly not significant enough for us to really feel that happy about it.

And last question and I’ll turn it over; just, can you maybe just quantify what your [inaudible] order increase is coming out of the third quarter, as you look forward?

Coming out, we’re actually in pretty good shape.

We’re up mid-to-high single digits on backlog for deliveries over the next six months.

All right.

Thank you very much, David.

Vera Van Ert, Wedbush Morgan.

I actually have three questions.

I was wondering if you could comment on new door expansion opportunities, especially as it relates to the Hurricane product that you’re going to roll out in December, the Kitson line and 310 doing as well as it is.

Kind of what the potential is potentially for 2006, new doors, question number one.

Question two, if you could just talk about your anticipated advertising expense for 2006.

Do you see the trending in line with the current lower end of 8% to 10% in 2005?

And then the final question, kind of a stock option expense, as we look to 2006.

Thank you.

I don’t know if I can write that quickly.

I got it, I think.

New door, expecting but you know, that’s a difficult question.

If you talk about potential, and we hate to talk about too much potential on these phone calls, because we don’t want to leave anybody with an over estimate of what it is.

We’re going to deliver the 310 game shoe to Foot Locker and Finish Line.

Now while we’ve always had a business there and it’s been relatively small, I believe everyone ought to understand that it’s a product that they’re interested in, that they’re launching.

As the primary movers in this field, they feel very confident in it to do that.

And the potential is quite large.

I mean everybody knows what the athletic specialty channels are and how big those two players are.

The potential for 310, outside the Game Shoe and the Game Shoe itself, and its potential launch is significantly large.

But we just want to warn everybody that it hasn’t been delivered yet.

So, while we have great expectations, and so do they and we’re working together with it, which is a brand new development for us, and could be large, we really do need first deliveries before we can get our hands around where it can go and how big it can be.

But if you’re talking about potential, it obviously has as significant a potential as any single product we’ve brought to the market place.

Kitson is relatively [inaudible] it’s a smaller store count.

It’s actually getting as much play overseas as it is here.

It would be obviously quite upstairs.

It would be in the boutique and higher-end department stores.

But it does us an [inaudible] and a look and it also is overseas in places like Office in England and stores like that.

And Japan actually has some interest.

So, it’s brand new.

We know Kitson has a great following and a great name, especially on the upper echelon.

So, that’s a smaller potential as far as store count is concerned, but certainly a much wider demographic than we’ve been used to.

We think both of those continue and will help us certainly and not take away from the underlying Skechers brand.

The 2006 advertising expense, we haven’t finalized the budget yet.

We’re just going into next year and we’d like to remain as flexible as possible.

But I think it’s safe to say that we will continue at the lower end of the 8% to 10% range, certainly going into 2006 and what we can see right now.

And lastly, as far as stock options are concerned, we have said in the past we don’t have significant stock option expense.

And, we haven’t issued any over the last year or so and we’re exploring other avenues.

But right now, as it stands, we don’t have any, I don’t believe any quarter going forward has more than $300,000 or $400,000 potential expense as far as stock options are concerned.

So, it’s really the minimus [ph] to the entire structure right this second.

Great, thank you very much.

Scott Krasik, with CL King.

Yes, I have a quick question on the $1.2 million in royalties that you paid this quarter.

Does that represent the minimums, and could there be a truing up in the fourth quarter?

Or, is that what you expect to pay in the fourth quarter as well?

No, not a true up and it’s no back taxes.

That’s an exact percentage of the product that was delivered through the third quarter.

One would anticipate that, since the fourth quarter is historically a slower one and we obviously will sell as much--a lesser product than that, we’re [inaudible] in real dollars, it will be less.

But the percentage to sell licensed product will be the same for the fourth quarter as it was in the third quarter.

OK.

And then, just a little bit more color on gross margins, if you could.

Last quarter and the second quarter, you were up 200 basis points, I guess year-over-year.

This quarter, you’re up 200 bips and then for the fourth quarter, you are guiding to flat, up 1%.

Is there something you’re seeing in one of your segments?

Or, do you think that could just be conservative?

Well, I’m hoping it’s conservative.

I anticipate that it’s somewhat conservative, as I said on the last conference call.

Part of it is, we anticipate the distributor piece to grow up and to come back somewhat and be the same percentage as last year, which does have some effect on some of those margins, although not necessarily significantly on profitability.

And the fourth quarter is usually a bigger closeout quarter for us.

It’s just when we clean out inventory going into a new season, so that’s a potential slight drag.

But there’s nothing I see that that’s a significant decrease, although I think this is at the top end of where we can achieve.

I think the 200-basis point increase from 2003 to 2004 is not really a fair analysis.

In 2003, we had significant amounts of inventory and it was significantly below what we would consider the norm of the running rate.

I think somewhere between 2004 and 2005 is our real running rate as all the pieces we see now come forward.

Going into the fourth quarter, the inventories are in great shape and certainly, the sell through as you said early on, it looks pretty good.

It does look good, it feels good.

OK, thanks.

Justin Maurer, Lord Abbett.

Hello, Mr. Dave.

I’m sorry if I missed it, did you give ASPs, vs. units in the sales number?

Yes.

ASPs are up for the three quarters.

They’re only up slightly year-over-year in the third quarter.

And then the distributor sale issue, is that--I assume that’s apples-to-apples excluding any of the guys you bought, right?

Correct.

No, well that’s only distributors.

We’re not talking about subsidiaries.

Subsidiaries were actually up for the quarter.

So what percentage of your international business today is distributor done, vs. company owned at this point?

Year-to-date, they’re relatively even.

Slightly lower on the distributor base.

Distributors are slightly over 7% and subsidiaries are slightly less than 9%.

OK, of the total sales?

Of total for the nine months.

OK.

Interest expense was down relative to what the run rate has been.

Is there anything quirky going on there?

Yes.

Greenspan keeps raising interest rates and we’ve got $180 million in cash.

The offset is getting bigger.

The offset?

OK, but that’s posted there, as opposed to other income?

Yes, it’s posted there as opposed to other income.

OK, and then the share count as well, looks like it ticked up a little bit [inaudible – two people talking], relative to where it had been running.

Is that just the share price?

Yes, that’s just the opposite.

Share prices have fluctuated [inaudible] I guess some options that [inaudible] into the money for the quarter.

OK, and then, last one on shares, for the fourth quarter guidance, you said 45 million.

That’s diluted, not basic, right?

Correct.

I think you said basic, OK.

And I apologize; that’s fully diluted.

Yes, thanks.

Sam Poser, Mosaic Research.

Hi David.

Your guidance is up low singles and your forward orders are showing up mid to high.

Anything going on there?

No.

It’s tough to break them down between quarters.

When we start to book now, obviously, the first quarter is a seasonal business for sandals and we have more strength in the first quarter so far than we’ve seen in the fourth quarter.

So, I think it just translates through there.

On a year-over-year basis, I mean, how big is the Game Shoe?

How many pairs are you putting out there in Q4, in December?

It’s not going to be a significant amount of pairs in relationship to the whole, because it doesn’t break until the last week of December

Got you, but you’ll be shipping that in the middle of December--.

We’ll ship in December, but in and of itself, it won’t move the needle significantly, other than what it means for going forward.

I mean, it looks to me like one part of your domestic business must be on the flat to down side.

Can you just talk about that?

Or, are there retailers that are not specific, but you know, channels, moderate department stores, vs. better, whatever, that are doing better or worse than one another?

I think it’s fair to say that, in those customers of ours that we’re big into and where we represent a significant piece and they represent the entire line, their growth with us has been larger than the whole company.

So, I think it’s fair to say that, since it’s been a slight downward trend, when you get past our bigger guys, it’s more a macro picture of what inventory movement and places can be.

Because, our big guys are doing better, necessarily, than the whole.

I think the same is true of products.

I think it’s fair to say there’s been a mix in the market place and people are trying to be very, very careful.

But those places where we’re strong, we continue to perform very strongly and continue to grow into an even stronger base.

And I think that will catch up in the whole market place, as we go forward.

OK, and then, I mean, with all your cash, are you looking to do any share buy backs?

I’m not looking to do anything now that I haven’t announced previously.

But, it’s like we said.

We’re going to go through the end of this year and into next year.

And once we decide what to do with the convertible, exactly cash and exactly our store growth and what we might want to do as far as licensed product and how many more brands we’d like to bring into the market place, we’ll make an ultimate decision on bigger uses of cash.

Right now, there’s nothing that we’re married to.

OK, I’ll let somebody else go.

Oran Shacib, Shacib Capital.

Hi Dave.

Could you just break out the revenues for me by domestic, wholesale, international and retail?

Domestic, wholesale, as usual, represent, well in round numbers, probably about 60% to 65% of the whole.

Retail, and this is only for the quarter, retail has gone to just about 20%.

And the balance is international, broken down between distributors and [inaudible] what I’ve just given you before.

OK, and I guess, I just want to ask again about the cash.

I know you just answered the question, but I’m a little confused still.

I mean, it looks to me like you guys could end up the year with close to $200 million in cash.

Is the plan, then, just to kind of let that sit on the balance sheet through ’06, before you kind of make any kind of decisions on how you could possibly use that to further enhance shareholder value?

Well, we haven’t set any time frames.

It’s fair to say that right now, we have not made any extensive or significant decisions as to what to do with it.

So, I think it’s fair to say that we’ll continue to accumulate until we make that decision, and that could be through 2006.

OK, thanks.

Doug MacLane [ph], [inaudible] Capital Management.

Hi, just to follow up on that previous question, so US wholesale, just by throwing in your number there, was up about 10%.

The international and wholesale was down about 15%, is that about right?

About $8 million?

It’s down a little less than that.

There were some odd pieces in between it.

I said it was 60%.

I don’t know that I ever said it was down 10%, or up 10%.

I think we said basically that domestic wholesale was up 6% in the body of my speech.

Differentials are in there.

Oh, so US wholesale is up 6%

Yes.

OK.

I was also just wondering, executive comp, year-over-year, could you talk about that?

Was that a drag on EPS at all?

No.

Are you talking about executive comp?

No, there were no significant changes.

The comp changes come basically from the increased store count and increased exposure in Europe, as we expanded that somewhat, that they’ve grown a little bit.

And in the Orient, where we’re moving some more product and planning on, because we have a more diverse product offering, we’ve had to increase our technical support and quality people, as we move some of the factories around in the Orient.

Those are the biggest pieces of salary changes.

OK, and the selling and marketing, $27 million, or a little bit over that, is that the budget going into the quarter?

Do you see opportunity to actually spend a little bit more, if you decide, you know, spurring demand?

Could you talk about that a little bit?

That was basically the budget going in.

We’ve changed it a little bit and we’ve had some opportunities for some TV, so we took it.

But it wasn’t a significant change, although we always maintain some flexibility in the parameters of the budget going into the quarter

OK, thank you very much.

Justin Maurer, Lord Abbett.

Hey Dave, just a follow up on the building construction, is that in addition to, I think, the $13 million that you spent earlier in the year?

Are you adding onto it, or is it a different facility, or what is it?

The $18 million, you’re talking about?

Yes.

That’s a brand new building that we’re building across the street from one of the buildings we currently occupy.

OK, so the $13 million, I can’t remember if it was late last year or this year--.

No, late last year was $11 million.

That was a different building.

We will now have three buildings in Manhattan Beach, once that one’s completed.

All right, so this is $18 million ground up?

Or are you guys buying an existing one and converting it, or what’re you doing?

No.

We had the property, if you remember, for a couple of years now.

We have just gone into construction because we continue to grow and we have growth anticipation and we’re starting to run out of space.

So, we’re starting to build the building now.

So, how much of that falls into ’06, do you think?

Pretty much all of it.

OK, so it will be $18 million plus, whatever stores you do?

Correct.

OK, thanks.

Sam Poser, Mosaic Research.

David, can you talk about, I mean, are you going to keep the same kind of increases going on with SG&A, the selling and G&A costs in Q4?

That would depend on brand and license expansion and store expansion.

From an infrastructure point of view, as far as the big, big increases of warehousing and IT spending on the warehouse, those are pretty much set.

We can increase capacity now without significant spending, unless we bring new lines to the market place, or open a significant number of stores.

But do you see leverage there in Q4?

I haven’t seen significant leverage in Q4 but I do see it in ’06.

OK, and then your tax rate for Q4, you’re estimating to be?

I might have missed that.

I said about 39%.

OK, great.

Thank you.

With no other questions holding, I’ll turn the conference back to Mr. Greenebaum for any additional or closing remarks.

Thank you for joining us today on the call.

I’d like to note that today’s call may have contained forward-looking looking statements in the results of various factors.

The results could differ materially from those projections or such statements.

Various factors [inaudible-background noise] for details in the company’s filings with the SEC.

Again, thank you and have a good day.