Skechers USA Inc (SKX) 2006 Q2 法說會逐字稿

Good day and welcome to the Skechers USA Inc. second-quarter 2006 earnings conference call.

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

It is now my pleasure to turn the floor over to your host, Mr. Andrew Greenebaum of Integrated Corporate Relations.

Please go ahead, sir.

Good afternoon and thank you everyone for attending Skechers' second-quarter conference call.

I will now read the Safe Harbor statement.

Certain statements contained herein, including without limitation statements addressing the beliefs, plans, objectives, estimates or expectations of the Company or 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, 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, filings on Form 10-Q, Management's Discussion and Analysis in the Company's latest annual report to stockholders, the Company's filings on Form 8-K and other federal securities law of filings for a description of the other important factors that may affect the Company's business, results of operations or financial condition.

Now I will turn it over to Skechers' Chief Operating Officer, David Weinberg.

Thank you, Andrew.

Good afternoon and thank you for joining us today to review Skechers' second-quarter 2006 results.

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

Second-quarter 2006 net sales increased 10.7% over the prior year period to 292 million, a record quarter and the Company's 10th consecutive quarter of top line increases on a year-over-year basis.

Net earnings for the quarter were 17.6 million versus net earnings of 15.9 million in the second quarter of 2005.

Diluted earnings per share were $0.40 on 46.1 million shares outstanding compared to $0.38 on approximately 44.1 million shares outstanding.

For the six-month period ended June 30, 2006, net sales were 569.7 million compared to net sales of 510.1 million in the first six months of 2005.

Net earnings were 34.2 million compared to net earnings of 26.2 million in the first six months of 2005.

Net earnings per diluted share in the first six months of 2006 were $0.77 versus net earnings per share of $0.62 for the same period last year.

We're extremely pleased with the second quarter and six-month results which were achieved in spite of a shift in back-to-school shipments from late June into July, a possibility we discussed during the first quarter conference call.

To illustrate this point, our backlog at June 30, 2006 was up 34% from the prior year as compared to 19% at March 31, 2006 on a year-over-year basis.

We achieved our record second quarter and improved six months sales due to trend-right product across our Skechers and fashion line.

Brand highlights for the quarter include double-digit sales increases for several key Skechers lines, including Skechers Active, Skechers USA for Women and Skechers for Men.

Double-digit sales increases from many of our fashion lines, including Michelle K, Mark Nathan, Unlimited by Marc Ecko, Rhino Red and 310 Motoring, and increased selling price per pair of $0.79, or more than 4%, and an increase of pairs shipped by approximately 4.5%.

By continuing to build our brand by delivering fresh product across all of our lines and creating effective and powerful advertising to communicate our message, we achieved the following in our second quarter -- record quarterly net sales, double-digit sales growth in our domestic retail business, double-digit sales growth in our international retail business, improved sales in our domestic and international wholesale businesses, significant year-over-year improvement in our gross margins by 240 basis points to 44.7% versus 42.3% for the same period last year; a 34% increase in backlog as of June 30, 2006 compared to June 30, 2005 and a very strong balance sheet with more than 204 million in cash.

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

For the second quarter, domestic wholesale net sales increased by 8% from the same period last year.

The growth was due to both our Skechers and uniquely branded fashion and street lines as we continued to develop existing product categories and further build on newer brands.

Looking at our Skechers line, the growth came from both our men's and women's division.

We believe our sales were positively impacted by our increased advertising presence in print, outdoor and in malls, with a high-profile Carrie Underwood campaign and the men's [stacked ads].

For TV, we're running the real-life commercials airing on national and cable networks, as well as four television sponsor spots supporting our kid's line.

The first features our Z-strap closure shoes for boys and girls; the second is the animated monster spot, which features our boys Annex sneakers; this third is for our S-Lights and the final spot is for our boys [Air] Raiders.

With the launch of a new Carrie Underwood campaign for back-to-school and the announcement of a multi-platinum recording artist Ashlee Simpson as the upcoming face of our women's brand, we believe the sales of our women's divisions will continue to have positive trends throughout the year.

For women, key drivers continue to be our fashion product, primarily trend-right update to the Bikers as well as the additions of new silhouettes.

The fusion styles remain central to the strong denim trend, as well as their flexibility to transition into spring and summer apparel trends.

Our women's sandals business, driven by Heat Wave and signature donut outsole were also strong in the quarter.

As in women's, the growth in men's has come from the demand for our Sport Fusion and fusion looks.

These two are supported by the ongoing denim trend and the acceptance of jeans in office and club environments as consumers have found our styles as ideal accompaniments to these more casual looks.

Our familiar [Critics] and Urban Tracks with many updates are still leaders in the category and we have just delivered several updates that we feel will be strong in the coming season.

Adding to the growth adding to the growth in the domestic wholesale business is our group of fashion and street lines for men and women and their accompanying children's division.

Each of our adult lines posted high double-digit increases over the same period last year, including the leader in sales, the men's and women's Mark Ecko footwear and two of our brands achieved triple-digit increases.

Our children's divisions continue to accelerate, partly due to the success of the adult line.

Unlimited by Marc Ecko and Rhino Red continue to post significant growth due to their heritage and iconic brand identity.

There are a range of products that include fusion, street and black and brown and their diverse demographic.

Both brands have experienced growth within major and specialty accounts, as well as reorders on key styles.

310 has hit on two fronts -- the popularity of its luxurious and unique boot and casual shoe collection and the success of the Game Signature sneaker, known as the Hurricane.

Lending a hand to the success of 310's core product base is the smooth and sophisticated actor, Terence Howard.

We believe his continued appearance in ads in leading men's fashion magazines, as well as on kiosks and key metropolitan centers, will increase the recognition of this brand and further position it as a luxury player.

Equally as talented and helping to drive sales is the multi-platinum hip-hop artist The Game, who has propelled a classic all-white and all-black sneaker into top-selling spots at key specialty athletic chains.

The marketing by this brand has been pervasive in stores, on kiosks and urban malls, on billboards, from the Sunset Strip to the side of a New York building, in print ads, in music and men's pop culture magazines and on TV with commercials that feature his powerful music.

The 310 brand has proven itself relevant and we believe there's a lot of growth opportunity to further leverage the brand, both within footwear and beyond.

Michelle K and Mark Mason, our two design lines, have continued to further penetrate key accounts and have built a growing clientele, both of which are reflected in their sales.

Michelle K continues to expand its offering within key accounts, it's on target designer sport fusion styling and continued strong marketing support.

In June, we announce the addition of Evangeline Lilly, start of the hit TV show 'Lost' to the Michelle K family.

Evangeline will begin appearing in Michelle K ads in August/September fashion publications.

We believe with Evangeline as the face of the brand, combined with a growing collection, which includes lifestyle spa lines, skimmers and Michelle's take a on the Vulcanized trend, Michelle K has growth potential in the coming year.

The growth of the Mark Nathan collection can be attributed to the unique nature of the product as well as the premium denim trend.

Better department stores and key boutiques continue to experience solid sell-throughs with retail price points upwards of $250 for sandals and shoes and $375 for boots.

The offering is available in more doors through key accounts and boutiques and many of these accounts continue to expand their SKU count.

Kitson is a collection of Vulcanized fashion sneakers that are right on-trend.

Initial shipments of the footwear began rolling out to the Kitson store in the fourth quarter of last year and are now shipping to select department stores and boutiques in the U.S. as well as to select customers in Europe and Canada.

Initial reactions has been strong and we're pleased that a major specialty store has committed to a 400-door launch in the fourth quarter.

Rounding out our fashion brands is our newest addition, Zoo York, which is owned by Marc Ecko.

Zoo York is a leading urban skate brand with strong apparel business and [poorly] recognized logo.

We plan to launch men's Zoo York footwear in core skate shops, an area which we are underpenetrated, as well as in select specialty and athletic stores in fall 2006.

Each of our established fashion brands and street brands -- 310, Michelle K, Mark Nathan, Rhino Red, Unlimited by Marc Ecko and Kitson -- has grown to be successful and we believe they will continue to do so.

In addition, we believe the new Zoo York brand has great growth potential.

As I mentioned on the first quarter conference call, our plan was to increase our marketing expenses in the second and third quarter to power up our presence in the marketplace.

With a stronger exposure on TV, print and outdoor for our many brands, we saw an increase in second-quarter selling expenses to 31.1 million, or 10.6% of sales, compared to 21 million, or 8% of sales in the prior period.

Now moving on to international.

International wholesale was comprised of eight subsidiaries in Europe and Canada and a network of 30 distributors that service more than 100 countries and territories around the world.

In the second quarter, Skechers' international sales increased almost 9% over last year.

Our international subsidiary business was up approximately 9% with the strongest improvements coming from the Benelux region and Canada.

Germany and Spain also had high dollar gains.

Overall, our subsidiaries ended the quarter with their backlogs up double-digits, which would positively impact their performance in the third quarter.

We believe the launch of our fashion division in select stores across Europe and Canada will have a positive impact on our subsidiary sales in the future.

Our international distributor business improved by over 8% from the second quarter of 2005.

As in the first quarter, we believe we have the right product and marketing in place.

The growth came from the Americas and Pacific, Europe and the Middle East.

The only area in which we have not seen growth is in Japan.

Many of our key distribution partners have opened Skechers retail stores in regions where they sell our footwear.

As with our company-owned Skechers stores, the distributor-owned retail stores in select countries both build the brand and positively impact sales.

To date, 14 distribution partners have opened 43 retail stores across 19 countries, including such locations as Chile, Columbia and our just-opened store in Shanghai, our first in China.

In 2006, Skechers distributors plan to open another six to eight stores, including the first Skechers stores in Greece and Indonesia, and another two in China.

Along with Skechers retail stores, our international distributors support their business with company-created advertisements, as well as by regional celebrity endorsement agreements in select countries.

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

In addition, select countries have further increased our brand exposure by developing Skechers branded goods, including bags and apparel.

In regards to retail, we're extremely pleased with our domestic and international retail sales, which combined, are up over 19% for the second quarter.

The improved sales are due to a combination of double-digit comp increases and an 11-store increase on a year-over-year basis.

Domestic retail sales have increased just over 19% in the second quarter of 2005, marking the 12th consecutive quarter of double-digit year-over-year sales increases in our domestic retail division.

To date, we have 138 company-owned and operated retail stores, of which 125 are in the United States, including new stores at the highly trafficked Hollywood and Highland complex and two SoHo Lab stores, one in the San Diego Gas Lamp District and one that opened last week in Queens at the Queens Center Mall.

With the Gas Lamp District location, we now have five SoHo Lab stores, which are a new formats designed to showcase or uniquely branded fashion and street line, as well as the SoHo Lab line, and our most fashion-forward items in our Skechers collection.

SoHo Lab stores also serve as testing centers for these brands, as well as for new designs.

In addition to the domestic stores, we also have 10 company-owned and operated Skechers stores in Europe and in three Canada, including our first store in Edmonton, which opened this month in the West Edmonton Mall.

These stores are in areas which we directly handle the sale of our product through subsidiaries and we believe help position and further build the brand.

We plan to continue to profitably grow our retail business this year with the addition of approximately 15 to 20 domestic stores, including another SoHo Lab location in Atlantic City, and we will continue to pursue opportunistic international retail locations.

We are very 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.

We have a two-pronged approach to our licensing; first, to find licenses that will add to our revenue stream; and second, to build our brand image through licensing deals.

Our royalty income is primarily derived from our licensed children and toddlers Skechers apparel in the United States.

Adding to our royalty line is the Skechers kid's apparel in Canada through a separate licensing agreement, Skechers socks in the United States, as well as international licensing agreements for Skechers goods in Mexico, South Africa, Israel, South America, Russia, Germany and mostly recently in China.

We've also signed an agreement to create Skechers merchandise items with leading toy companies to build the brand on shelves and stores where our product wouldn't normally be found.

With the belief that the Skechers brand is relevant in the United States as well as around the world, we are continuing to selectively build our existing domestic and international licenses while exploring new opportunities for Skechers branded merchandise and apparel.

We're also looking at opportunities for brands where we own the right for licensing, such as apparel for 310, Michelle K and Mark Nathan.

Now, I would like to have Fred go over the second quarter of 2006 financial results in more detail.

Thank you, David.

As previously mentioned, the second quarter sales were 232.2 million compared to 263.9 million last year, an increase of approximately 11%.

The improvement in sales came from all parts of the business -- domestic wholesale, retail stores and international wholesale.

Our broad-based strength also resulted in a significantly higher gross margin.

Second quarter gross margin was 44.7% compared to last year's second quarter gross margin of 42.3%.

This improvement was due to a combination of improvements in our wholesale businesses, as well as an increase in our retail sales as a percentage of our total sales volume.

Gross profit was 130.7 million versus 111.5 million in the same period a year ago.

Total operating expenses as a percentage of sales increased to 35.5% compared to 32.7% in the second quarter of fiscal 2005, primarily due to increased advertising and promotion costs during the quarter, which increased to 8.3% of sales compared to 5.8% of sales in the second quarter of 2005.

General and administrative expenses for the quarter were 72.8 million, or 24.9% of sales, as compared to 65.3 million, or 24.7% of sales last year.

Net earnings for the second quarter increased 10.7% to 17.6 million, compared to 15.9 million in last year's second quarter.

Diluted earnings per share amounted to $0.40 on approximately 46.1 million shares outstanding, compared to $0.38 per share on approximately 44.1 million shares outstanding for the second quarter last year.

Weighted average shares outstanding increased due to a combination of our higher average stock price and stock option exercises.

For the six months ending June 30, 2006, net sales were 569.7 million versus sales of 510.1 million for the six months of 2005.

Gross profit was 249.1 million compared to 212.0 million in the same period last year.

Selling expenses for the first six months of 2006 were 51.2 million, compared to 39.1 million for the first six months of 2005.

General and administrative expense was 144.7 million, compared to 131.6 million in the same period last year.

In total for the first six months of 2006, operating expenses were 196 million compared to 170.8 million for the same period last year.

Net income for the first six months of 2006 was 34.2 million, or $0.77 per diluted share, compared to 26.2 million, or $0.62 per diluted share in the same period last year.

Our balance sheet continues to be very strong.

At June 30, 2006, cash on the balance sheet stood at 204.5 million.

Trade accounts receivables at the quarter end was 188.7 million, and our DSOs at the end of June were 52 days versus 53 days at June 30, 2005.

Inventory at quarter end was 156.4 million, which represents a decrease of 7.7 million from June 30, 2005 and an increase of 20.2 million from December of 2005.

Working capital declined 10.2% to 324.4 million at quarter end versus 361.2 million at December 31, 2005.

This decline was due to the reclassification of our $90 million convertible note offering due in April of 2007 from long-term debt to a current liability.

This reclassification reduced our long-term debt to 16.9 million as of June 30, 2006.

Shareholders equity at quarter end increased 16.7% to 401.1 million, versus 343.8 million at year-end 2005.

Capital expenditures during the quarter were at 8.8 million, versus 5.5 million in the prior year period.

Our new corporate office building accounted for 3.2 million of these expenses and the balance primarily is related to store openings, remodels and information technology expenditures.

We expect CapEx for the full year to be 25 to 30 million, of which 15 million is related to the new corporate office building.

And now turning to guidance.

We currently expect third quarter sales to be between 310 and 320 million, which would be another record quarter, and earnings per share of $0.37 to $0.42.

Based on current backlogs and sell-throughs, back-to-school looks very positive.

We continue to be pleased with the customer reaction on orders within our Skechers product lines and we believe that our fashion and street lines are finding their place in the market, as is evident by the growing numbers of accounts and doors.

We're proud of our record quarter and the 10th consecutive quarter of year-over-year top line growth, our strong profitability and the continued demand for our product from consumers and retailers.

Our efforts are directed at maximizing this trend for the remainder of 2006 in North America and abroad.

We are continuing to focus on profitability growing our business and we believe we're now on our way to another record year, both in terms of revenue and profitability.

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

John Zolidis, Buckingham Research.

Hi, guys.

Nice top line results in the quarter.

And also, I would like to see that that's continuing into 3Q.

Can you talk about the orders that are shifting between June and July?

Have you guys already shipped those orders?

Was it just one specific large order, or was it kind of a pattern by retailers to delay receipt of goods?

I think all of those would be kind of significantly.

We find that it's across the board.

We had mentioned in I think the Q1 conference call or in conversations that things seemed to be moving out.

We had a much stronger March than we had February, and usually we'd have equivalent.

We had a much stronger May in the second quarter, rather than an equivalent April and May, so things seem to be moving out.

It's very difficult to know what is actually delayed and what's shipped.

Everything that's being shipped is being shipped on time, and we believe the ship that occurred between June and July has already shipped.

We had a very strong shipping the first week in July.

However, to talk about the ship, it seems that it's moving (indiscernible).

I think retailers, it's not that they don't want the goods, it's trying to cut it as close to the vest and as close to the selling season as they can primarily because a lot of them are graded on ending inventory.

And we're even finding in July that there has been a shift.

Other than a very strong opening for July, we find ourselves accelerating through the month rather than being heavier in the beginning of the month and tapering off at the end.

So we actually find ourselves as busy this last week in July as we usually are in the first week of July or the last week in June.

But we think that's all positive as a timing type of shift, and I don't think it's any one thing or any account or any thought process of the shift.

Do you think your retailers are seeing decelerating trends, and/or have you seen any decelerating trends in your own stores?

Absolutely not.

We have -- if anything else, and I'm sure a lot of you that (indiscernible) -- we just finished [pre] lines and we've had nothing but positive responses and more retailers chasing product and seeing an acceleration in their (indiscernible), which I think is more reflected in our backlog than the shift in shipping goods between June and July.

Okay, great.

And then two more questions.

One, if you could just address the ad spending.

It looks like the selling line was up about 50% year-over-year.

Is that rate of increase going to continue, or was there some onetime spending that occurred in the second quarter?

And then what to tax rate should we use going forward?

The tax rate looked like it declined year-over-year?

Thanks.

The ad budget is not a onetime item.

We're obviously advertisers, and as we mentioned in the first quarter conference call, we had picked up advertising for second quarter and third quarter.

Fourth quarter is not quite put to bed yet.

So you can anticipate the same type of increase will appear in the fourth quarter, which is obviously reflected in our guidance numbers, and you can sort of work back with that.

As far as tax rate is concerned, we've had some shift in taxes for this quarter and our annual rate went down to 37.5% and you see a slightly larger tax decrease and rate to catch up to whole year.

We were actually anticipating 38.5 in the first quarter, so we made up the difference in the two quarters now to net out to somewhere just about 37.5.

And we anticipate (indiscernible) in each business environment because we constantly re-forecast, 37.5 is today our best guess for the annual rate.

Great.

Thanks a lot and we'll see you out at WSA.

Chris Svezia, Susquehanna.

Good afternoon gentleman.

I just want to just go back to this backlog being up 34% and just kind of looking at your guidance in terms of what you're looking at for the third quarter kind of implies roughly at the bottom end roughly 13% or so revenue growth and on the top end roughly 17% revenue growth.

I'm just wondering if you can maybe just talk about with the backlog being up as strong as it is and the order flow that you're seeing so far in July, why wouldn't the numbers maybe be a little bit stronger here for the third quarter?

Is it maybe implying that the backlog is stronger as you look out to the fourth quarter as well?

I'm just wondering if you can talk a little bit more about that.

Well, obviously, the backlog is for both quarters and we're starting to book very solidly for Q4 and we anticipate that will pick up in the second -- by the time we get to WSA.

And the reason we have kept the guidance within range, that's what we seen now.

First of all, 34% is an overall top line and it's before a gross to net kind of scenario.

And while we think that our business on the wholesale level could get to that level, you have to realize, we're not anticipating 34% increases on a comp store basis and we're not opening a significant number of stores.

There's an 11-store increase year-over-year.

So when we got 19% increases on a retail basis, that seems to be a pretty good -- pretty healthy number, and we had even healthier numbers for last year back-to-school.

So chances are that our year-over-year on the retail stores, while we still anticipate a double-digit comp won't be in the 19, 20.

So that takes the overall down as well.

So given what we see and the shift, we're trying to be as conservative as we can, allowing for the shift from July to August and possibly from September to October and keep at that range.

But I think if you look at the numbers together as a second and third quarter as we've asked people to do, it still shows very good strength and we still think on the conservative end.

It's not significantly low nor significantly high to what we see right this second.

Just going back on the selling expense line, as you kind of look at the third quarter, could you maybe just talk a little bit more about what exactly -- are we looking basically for a similar increase roughly in the 40% range on the selling expense line?

Because I remember coming out of the first quarter, you talked about roughly a 5 million or so increased marketing expense for the second and possibly for the third quarter as well.

I'm just wondering maybe if you can be a little bit more specific about what you're looking for the third quarter.

We don't talk in terms of percentage of sales or percentage increases, we talk in real dollar terms.

And we said 5 or $6 million I believe in the first quarter.

We came in more like 6 million increase in the ad spend.

And I would at this point tell you that if you were modeling that the same dollar increase exists for Q3.

Okay.

And when you look at -- to just switch gears for one second just on (indiscernible) to Europe, it looks like you're showing double-digit backlog increases as well there.

You didn't really talk too much about UK, France, touched a little bit on Germany.

Maybe if you could just talk about some of the other markets there as well, in terms of what you're seeing?

Well, Germany is increasing, but they're a big dollar amount.

They have difficulty in getting obviously double-digit sales growth.

The backlog in Germany is up double digits as of the end of June.

In England, they're up high-single digits.

So we still have positive results there.

We're at a point now where we think we're starting to get some traction in our numbers, and the reason that you see the Netherlands up so high or the Benelux region is because they represent the biggest influx to the athletic specialty channel that has a headquarters in the Netherlands that will be using our Ecko and 310 certainly Hurricane product which is shown in these things.

It's a first test and sell-in, so we feel positive about that.

So we're showing double-digit increases pretty much everywhere.

We still have issues in France where they are up in lower to moderate single digits.

Every place else is up is a high single or low double-digit.

So we feel very positive about our flow of goods into Europe.

And the strongest piece for us obviously is Canada.

They're up in the middle-double-digits, but obviously not European, but part of our subsidiary growth base.

So we're feeling positive about what goes in there.

If we have good sell-throughs this year for back-to-school, and you know Europe starts shipping later than the United States because obviously there's a holiday so we tend to ship usually heavier in August and September rather than July and August.

So we're just starting to sell that in.

If we can get some significant reorder business to have our advertising take hold there, we think we can get some traction and really start moving the needle with our international subsidiaries.

Okay.

And then just on the inventory front, in being down roughly 11 or 12%, could you maybe just talk about the opportunity as you go through the third quarter given where forward orders are and able to kind of continue to fill that business and continue to fill retailer orders.

When do you think you will be able to catch up and get inventory where you want it to be?

And is it by any chance you might be missing some sales as a result of inventories being as tight as they are?

We are not as a significantly risk averse as some others when it comes to buy inventory, so we purchase to what we see.

Obviously we have a stronger growth rate than we could have anticipated 90 days ago, 120 days ago to fill up the pipeline.

And in answer to the second part, I hope we never catch it.

If we continue to order more and try to pick up the slack and we continue to accelerate so that the inventory doesn't catch up, that's great.

I think part of it is we -- one of the reason or one of the contributing factors to the shift could be that because orders started late and we mentioned that we had a stronger margin both shipping-wise and incoming order-wise in February.

It wasn't split.

We need to put some pressure on our factories.

And they have moved out from June to July and from July to August so everything is taken and so the production capabilities are holding up.

And as Fred has mentioned before, we don't take orders we could fill.

So if it's in our backlog, we can fill it.

And right now, it's on schedule, barring any changes in factory production schedule.

So we think we can fill that.

We are obviously missing potentially some at-once business and some fill-in business because the stuff has done so well at retail, but there's no way to anticipate that we're using the goods and the stuff that we've had in our pipeline to fill future orders and our bigger customer orders.

So right now, we feel in great shape.

I think the inventory is obviously under what we would like it to be at this particular point being this hot, but we feel in good shape.

We think we are rotating through, we're keeping clean, we're still in the pipeline, and right now to check in well at retail.

So it's good to be hot.

We keep moving through it.

And while we might be slightly under inventory, it's just a great feeling for us financial kind of people.

It also I might add, I reminded you that we're comparing against the June -- if you compare against June 30 last year, we didn't have the full effect of the foreign trade zone.

I think we mentioned that due to the last couple of falls.

That went into play towards the end of the year.

So on a comp basis, it's some effect of that.

Yes, but we still have significantly less inventory.

We have an increase in our retail base of $1.81 million, so that's just running stock.

So, obviously, our carrying stock is less than that.

And had we shipped what was on our dock in June rather than July, that obviously would have come out of our inventory.

So we're running pretty tight on inventory and pretty clean.

We have significantly less closeouts and obviously we're turning very quickly and getting good margins for it, so I think everybody's happy.

We're getting better margins and our customers are getting better margins.

We could certainly use it a little quicker, but we're in great shape.

Thank you.

I will let someone else get in.

Thanks.

Jeff Mintz, Wedbush Morgan.

A question on gross margins.

Clearly this quarter was above what we've seen in the past, and I'm wondering what impact did that, and also whether you think that that raises the bar for the future.

You had previously talked about being comfortable with gross margins in the 42 to 43% range.

Do you think that goes up now?

No, we're still comfortable with 42, 43, but I will -- and make the caveat -- we don't model at 44.5.

It's obviously, that's extreme.

But we don't see anything other than a shift in mix that would take it down in the near future for the coming quarter.

So while we're still comfortable with 42, 43 and we do model in that range ourselves to give us some leeway, we have no indications right this minute that there's any pressure on margins from where we stand either by product mix, by production cycle, retail, or even specifically the mix.

Although we are accelerating quite dramatically in wholesale, so the percentage of that business should increase as a percentage of the whole.

Obviously, retail cannot accelerate quite that quickly and we know wholesale has lesser margins, at least top line gross margins, than retail.

So that may bring us back down into a little bit with that, depending on how extreme the mix changes.

Retail was up 19% for the second quarter.

The wholesale businesses were not up that high.

Okay.

And second question, just a clarification.

David, you had talked about increases in price per pair and in pairs shipped.

Those were year-over-year numbers you had given, not quarter-over-quarter?

Yes, that's correct.

Great.

Congratulations and good luck in the third quarter.

Susan Sansbury, Miller Tabak.

Hi, yes, thanks.

I want to go back to the backlog if I may.

It's hard for me to visualize without having the numbers in front of me.

But if your backlog is up, what is it, 30-some-odd percent, I'm still a little mystified, getting back to Chris's question, is why the third quarter sales growth is only going to be 13 to 17%?

Can you talk about what period this backlog covers and whether there is a -- if there is a timing shift in shipments, was there also a timing shift in the backlog, and can you just take me through it a little bit?

Sure, we'll try.

Basically as we've said in the past, the backlog in and of itself is not the only indicator of what happens as we go forward.

Our shipments on a quarterly basis encompass the backlog as well as an at-once component, and was in lesser times (indiscernible) a close-out component that's part of our at-once business and the fill-in business.

When accelerate at this level, and to I believe it was Chris's point or of where we're talking about inventory, we don't have as much inventory to fill an at-once pipeline, nor do we have any closeouts to sell that we could incorporate in our model.

So what we're left with is shipping a significantly bigger portion of the quarter out of our backlog, rather than relying on the close-out business or anything to that effect.

So if you think about it, if my backlog was 10 million and I shipped 15 million, 5 million coming out of inventory that is available because I had an at-once business and a close-out business, but now my backlog is 17 million, but I only really have 2 or 3 million left in available inventory to ship in the quarter to sell at an at-once basis, you understand that the growth doesn't come as significantly large as the backlog.

Does that make sense so far?

Right, I'm with you.

What it does mean as well is it does give good visibility and a good feeling towards margin, because obviously I don't have to discount any of that inventory I've brought in for at-once, nor is there any closeouts, nor there's any chasing of it.

The only issue is to get the production schedule on target.

So that's one piece.

And obviously, the other piece is backlogs don't relate to retail, retail stands on its own only and we really don't anticipate another 19% (indiscernible) year-over-year of quarterly increase.

So that takes down your net sales number on a comparative basis as compared to the backlog.

So both of those things are in there and we evaluate what we can and the timing and production cycles and try to see what we can get, and we try to be conservative and realistic and that's where we come up with it.

I appreciate it.

That's very helpful.

Sam Poser, Mosaic Research.

Good afternoon.

One more question on the -- can you just walk through the dollar increase in the ad spend -- can you go Q1, Q2, Q3 for us?

I don't remember Q1 that well.

I believe it was -- in real dollars? (MULTIPLE SPEAKERS) it was about 2 or 3 million.

All right, so of the dollars that were for the ad, for the advertising spend out of the -- what percent of the selling expenses is that ad spend?

What percent of the selling expenses is the -- it's the biggest piece, obviously.

It represents somewhere about 60, 65% of the selling expense.

Okay.

The rest is obviously commissions.

I don't know if there's any trade shows and some of our rep sample expenses and things like that (indiscernible) selling.

So it's the biggest single piece and it was the biggest single increase.

You can be safe to assume that in excess 80% of the increase in real dollars terms of the selling expense year-over-year is advertising.

So in Q3 coming up horribly, are we -- last year, you had selling expenses of $27 million.

Are we looking at having a $35 million selling expense this quarter?

Is that were we are?

That's where we are.

And then are we going to see the same kind of increase on the G&A as well?

The G&A will probably be a lesser percentage.

I mean G&A I think is up a little higher percentage than we have seen because of that shift and we anticipate a slightly higher sale.

And I don't think you'll see it as a percentage.

You might see the same real dollar growth rate.

I think it's growing at about 6 or 7 million a quarter in G&A.

Depending on how many stores are (indiscernible).

The big piece is stores.

We're on an accelerated, Fred said 15 to 20 stores.

The biggest piece is coming in the back half, so you may pick up slightly as we get through the third quarter into fourth quarter because we will be opening a higher percentage of the new stores in that period.

We have a lot of stores opening in Q3, but they're mostly at the end of the quarter.

And then one last question about just back on the backlog.

The backlog is becoming a smaller percentage of your overall business, and that's why it's not as indicative of the growth?

It's becoming a bigger piece of our business.

That's why it's indicative of full-price growth because there's a smaller at-once piece and there's a smaller closeout piece, which would flow through in the quarter of what you're doing business, not be in backlog at the beginning of the quarter.

So in Q2, what percentage of your business was done on backlog shipments versus at-once, or what was your at-once percent?

The at-once percent is down.

I don't have the exact number, but I think it was down significantly year-over-year.

Is that something you could get for me?

We've made that public in the past.

We've had some conversations on it and what it is, but I don't know that -- we'll take it under advisement.

Let me think as a corporate initiative whether we start to give that information of what piece is at-once and what piece is closeout and what piece flows through margins.

But if we decide to give it out, we can obviously get it for you.

Thanks very much.

(Operator Instructions). [Andy Keller], [Mirage] Research.

A couple of questions.

I really like the results I'm hearing.

Regarding your selling process, how are you guys streamlining the selling process to reduce order inaccuracies throughout your dealer channel?

Say that again, you loss me completely -- selling profits?

No, how are you guys streamlining your overall selling process to improve your dealer channel communication with your dealer channel reduce order inaccuracies?

We don't have significant order inaccuracies.

We have a very widespread -- we have a significant sales force and we have independent sales forces by division, by staff, and we're in close contact from the top on down.

We think that's one of our core competencies.

We have excellent relationships obviously from our [time in] business with our retail.

Like I said, we meet with them through pre lines, we set up the process, the process has been in place.

Some of them are online, some of them are by e-mail, some of them are direct conversations with our sales people.

We have never had an issue with relationships with our customers as to order, order entry capability.

We're in contact with them constantly.

We keep saying, we don't take orders that we can't fill.

So if we get an order that we could fill by our production cycles or it doesn't give us sufficient time as far as the future order is concerned to build it, we're in touch with that customer right away to either modify the date or the style or the time or the size run.

So we're very protective of our backlog of what we take, what we produce against, which has already created a very close relationship with our customers and it has eliminated that from almost since we've been in business.

Regarding that, how are you guys planning to take the cost out of your sales channel?

I don't know that we're planning to take the cost out of our sales channel.

Our sales channel is not (indiscernible) -- some of these (indiscernible) use a lot of advertising.

We are on a commission basis.

I don't know that we're looking to take on a percentage basis any selling expense that's strictly related to salespeople.

We can control the selling expense line by controlling or deciding how much advertising we think we can fuel in the six-month second quarter and third quarter that we've talked to advertising.

What we saw was a very hot product, Skechers is very hot in the marketplace, our stuff was selling through, but our reorders and our future orders weren't increasing at the pace that we felt it should.

We thought we could increase that demand by advertising and by pushing retailers to realize that it wasn't a one-shot deal and they shouldn't just chase increased sales on lesser inventories to make themselves look bigger, but that there was opportunity out there from a demand perspective to increase our backlog and increase our sell-in.

So what we did was pump up the advertising.

And while some of us here on a financial basis look and think it's a significant spend, it is a controllable spend and it is obviously working.

We've accelerated our backlog, our back-order position, our incoming order position and continue to have excellent sell-throughs at retail, so it's obviously working and bodes very well not only for Q3, but for Q4 and into 2007.

And one other question.

Regarding DSOs, what other improvements are you putting in place to reduce DSOs?

I don't know that we can reduce DSOs significantly.

We basically sell on 45 days terms and we have 52 days outstanding.

We have always had, we've always been very protective of our balance sheet because we started as a company that was financed out of our founders' pockets.

So we have always been cognizant of inventory and receivables and converting everything to cash, is why we move inventory that quickly.

So we're constantly in touch, we have a very -- a credit and collection department that's constantly on it and we modify it every day and we do what we can, but we have a very good customer base.

Most of them are commercially paper rated and we have conversations with them.

And I think that DSOs significantly below 52 days would be difficult.

Do you think that's still a challenge going into '07, or what's your biggest challenge going into '07?

Making enough inventory for as hot as we are.

Sam Poser, Mosaic.

I think the question was answered, thank you.

At this time we have no further questions coming in.

I will turn the conference back over to Andrew Greenebaum for 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 factors, actual results could differ materially from those projected [on] such statements.

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

Again, thank you and have a good day.

We'll talk to you next quarter.

Thank you.

That does conclude our conference.

We thank you all for your participation, we hope you enjoy the rest of your day.