Skechers USA Inc (SKX) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to the SKECHERS USA, Inc. third quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS).

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

Please go ahead, sir.

Thank you.

Good afternoon, and thank you, everyone, for attending SKECHERS' third-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 events or results, 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 not limited to, the general economic and business conditions and conditions in the retail industry.

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

Users of forward-looking statements are encouraged to review the Company's latest annual report on Form 10-K, its filings on Form 10-Q, Management's Discussions and Analysis in the Company's latest annual report to stockholders, the Company's filings on Form 8-K and other federal security law filings, for a description of the other important factors that may affect the Company's business results or operations and financial condition.

With that I'd like to turn the call over to SKECHERS' Chief Operating Officer, David Weinberg.

Thank you, Andrew.

Good afternoon, and thank you for joining us today to review SKECHERS' third quarter and nine-month 2006 results.

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

Third quarter 2006 net sales increased 21.4% over the prior-year period to 331.1 million, a record quarter, and the Company's 11th consecutive quarter of topline increases on a year-over-year basis.

Net earnings for the quarter were 22.2 million, versus net earnings of 12.6 million in the third quarter of 2005.

Diluted earnings per share were $0.49 on 46.2 million shares outstanding, compared to $0.30 on approximately 44.8 million shares outstanding.

We are extremely pleased with our record third-quarter results, which were primarily due to double-digit sales growth in our domestic wholesale division, driven by our strong SKECHERS men's, women's and kid's lines, and our 310 Motoring, Rhino Red and Mark Nathan lines; double-digit sales growth in our international subsidiary business, and positive sales growth in our distributor business; double-digit sales growth in both our domestic and international retail stores; increased average selling price per pair of $1.42, or more than 7%, and an increase of pairs shipped by more than 13%; and accelerated advertising and marketing, including increased TV exposure.

As I mentioned in the second-quarter conference call, the second and third quarters should be viewed together due to the potential for shipments to ship between June and July.

Looking at the combined sales for the two quarters, we had a 16.1% increase in sales volume over the same period last year.

For the nine-month period ended September 30, 2006, net sales were 900.9 million, which is a nine-month record, compared to net sales of 783 million in the first nine months of 2005.

Net earnings were 56.4 million compared to net earnings of 38.8 million in the first nine months of 2005.

Net earnings per diluted share in the first nine months of 2006 was $1.27, versus net earnings per share of $0.92 for the same period last year.

Our third quarter and nine-month 2006 sales also represent two major new accomplishments -- surpassing 300 million in net sales for a single quarter, and 900 million for the first nine months.

Financial highlights for the third quarter include -- record net earnings and earnings per share, with a net earnings increase of over 75% evidencing the positive leverage we are experiencing in our business; significant improvement in our gross margin by 190 basis points to 44.2% versus 42.3% for the same period last year; and a strong balance sheet with more than 200 million in cash and short-term investments.

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

Domestic wholesale net sales increased by almost 22% from the same period last year.

We believe that the key reasons for the significant growth in the quarter are our on-target product offering across our SKECHERS and fashion line, along with powering up our advertising and marketing efforts in the second and third quarters.

As we mentioned on the last two conference calls, we believe increasing our exposure on TV, print and outdoor for our many brands during key selling period's has a positive impact on sellthroughs.

Third-quarter selling expenses increased to 35.7 million, or 10.8% of sales, compared to 27.2 million, or 10% of sales in the prior period.

We ramped up our presence in various advertising mediums for both our SKECHERS and fashion brands.

This included new TV campaigns for adults and kids, as well as more celebrity-endorsed advertisements featuring Carrie Underwood for SKECHERS, Evangeline Lilly for Michelle K, Terrence Howard for 310, and The Game for a Signature 310 sneaker line.

Again, we believe our marketing efforts resulted in improved sales and visibility, as more consumers read, saw and heard about our brands and the new offerings.

We are very pleased with the continued momentum of our SKECHERS line for men, women and children.

For women, key drivers continue to be our Fusion product in both our SKECHERS Active and SKECHERS USA lines, as well as key looks from our SKECHERS Sport collection.

Growing in look and demand and rounding out the SKECHERS women's offering is SoHo Lab, a line of fashion boot, sandals and flats that allows young women to look to SKECHERS as a one-stop shop for all their footwear needs.

With the warmer weather, boots did not play a significant part in our Q3 domestic sales.

We are getting positive reeds on the boots in the market, and they are just kicking in.

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

Updates to our Urbantrack outsole in both our SKECHERS Sport and SKECHERS USA lines continue to be leaders, along with our now classic (technical difficulty)

We also experienced strong sales with our utility (indiscernible) boot and shoe looks, which remain part of our core basic business and are now experiencing a trend resurgence.

For SKECHERS Kids, back-to-school season resulted in double-digit improvements for both boys and girls.

Girls have historically been the larger of the two businesses, with a combination of bikers, Mary-Janes, [energies] as well as boots being strong Q3 style.

In the quarter we experienced great success in boys with updates to our existing outsole, and with the introduction of our Aerators line, which have the top two boys' shoes.

We believe the success with this line is driven by the styling, the technology of an air pump to cool the foot, and the marketing support in the form of TV and in-store POP.

Adding to the growth in the domestic wholesale business is our group of fashion and street lines for men and women, led by 310 and Rhino Red, both of which achieved triple-digit increases.

Also achieving triple-digit increases was the Mark Nathan line and our children's fashion division, which includes 310 and Unlimited by Marc Ecko for boys, and Rhino Red and Kitson for girls.

New to our fashion and street division is Zoo York footwear, which delivered at the end of the third quarter.

The Zoo York brand has a solid reputation in the skate and suburban communities, and we believe that footwear has strong potential to become a solid business.

We also believe the launch of Hurricane II, The Game's follow-up to his inaugural 310 signature shoe, to coincide with the release of his second album in November, will further propel the already in-demand 310 brand.

Each of our established fashion and street brands -- 310, Michelle K, Mark Nathan, Rhino Red, Unlimited by Marc Ecko, and Kitson -- still have great growth potential, and we are looking forward to the continued growth of our fashion business.

We also believe that our continued aggressive advertising efforts in key selling seasons, including the Ashlee Simpson campaign for SKECHERS, which has just begun in a few select magazines and will be accelerated to outdoor and mall kiosks for spring, and new SKECHERS men's and kids campaigns will further propel our SKECHERS lines.

We're optimistic about the continued growth in our core styles as well as with the launch of new looks and lines.

Now moving on to international.

International wholesale is 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.

SKECHERS aggregate international sales increased almost 21% for the third quarter and almost 11% for the first nine months over the comparable periods last year.

Our international subsidiary business was up approximately 32% for the third quarter and 12% for the first nine months.

In the quarter, the strongest improvements came from the Benelux region and Canada, while we also saw significant growth in the UK, Switzerland and Spain.

Germany remains our strongest country and continues to post double-digit growth.

We believe the launch of the Ashlee Simpson campaign across Europe will positively impact sales.

Ms. Simpson has been appearing in London's adaptation of the hit musical Chicago, and receiving rave reviews and a great deal of media attention in the UK and other European countries where SKECHERS are sold.

We also believe the launch of The Game's Hurricane II shoe for 310 will be positive for sales in France, Germany, the UK, and the Benelux region.

Europe holds many possibilities for SKECHERS and for the fashion brands, with Zoo York launching in spring 2007 in most of our subsidiaries in Europe, the vulcanized Kitson line ideal for spring/summer, and the new Game 310 shoe.

Our network of international distributor business improved by approximately 7% for the third quarter and 9% for the first nine months.

The growth came across several regions -- The Americas, Pan Pacific, Europe and the Middle East.

The only area in which we have not seen growth is in Japan, where the distributor has not kept pace with our overall growth and has not kept a consistent flow of new styles in the market.

We are presently working with them in an effort to improve our SKECHERS business.

We are also now just seeing the first shipments of some of our fashion brands hit in these countries, and feel that [with] the advent of Marc Ecko footwear, which will be expanding into these areas as existing footwear licenses expire in 2007, there is the potential for added shelf space.

In support of their SKECHERS business, 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 SKECHERS retail stores in select countries both build the brands and positively impact sales.

To date, 15 distribution partners have opened 44 retail stores across 19 countries, including our first store in Kuala Lumpur, Malaysia, which opened in the third quarter, and our first store in Shanghai, China, which opened in the second quarter.

In the next two months, SKECHERS distributors plan to open another five to seven stores, including the first in Thailand, two more in China, and additional stores in South America and Australia.

As in our subsidiary business, we believe there is great growth potential for the SKECHERS line with their network of distributors.

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

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.

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

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

The improved sales are due to a combination of double-digit comp increases and a 13-store increase on a year-over-year basis.

Domestic retail sales have increased almost 18% from the third quarter of 2005, marking the 13th consecutive quarter of double-digit year-over-year sales increases in our domestic retail division.

International retail sales improved almost 30% from the third quarter of 2005.

The positive international sales were a result of improvements in each region, especially the UK, and a new store in Canada.

To date, we have won 49 company-owned and operated retail stores, of which 136 are in the United States, including our first concept stores in Denver, the Greater Phoenix area, Tampa and Reno, and the key shopping destinations of Woodbridge Center in New Jersey and the Wisconsin Dells.

We also opened three SoHo Lab locations in the third quarter and one already in Q4, bringing our total to seven.

These include San Diego's Gaslamp District, Queens, the new outdoor promenade in Del Amo Mall, and the Pier at Caesars in Atlantic City, which opened last week.

In addition to the domestic stores, we also have 10 company-owned and operated SKECHERS stores in Europe and three in Canada.

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

We are, obviously, 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.

Looking ahead to the fourth quarter and into 2007, we plan to continue to profitably grow our retail business with approximately four additional stores this year and the addition of approximately 20 to 25 stores next year.

These stores will primarily be in the US, but may also include international locations.

Moving on to our licensing initiatives.

We continue to see licensing as an effective brand imaging tool that will also add to our revenue stream without requiring the Company to build its infrastructure.

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

Adding to our royalty line is SKECHERS kids and apparel in Canada, through a separate licensing agreement, SKECHERS socks in the United States, as well as international licensing arrangements for SKECHERS goods in Mexico, South Africa, Israel, South America, Germany, and China.

Our most recent international launch is with the largest mail-order catalog in Europe, the German-based [OTTO].

With the soft launch in spring/summer '06 and a bigger push for back-to-school '06, we introduced SKECHERS apparel in Germany, Austria, Switzerland and The Netherlands.

They were also pleased with the quality, design and sales of our apparel in Israel, which is supported by advertisements by the SKECHERS Israeli spokesperson, Agam.

Given SKECHERS brand recognition 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 opportunity for SKECHERS branded merchandise and apparel.

I will now turn the call over to Fred to go over the third quarter and nine months 2006 financial results in more detail.

Thank you, David.

As previously mentioned, third-quarter sales were 331.1 million compared to 272.8 million last year.

The improvement in sales is due to a combination of factors, including strong sales in key SKECHERS Men's, Women's, and Children's divisions, as well as in the key fashion line.

The improvements were also the result of growth in our international subsidiary and distributor business, and positive comp store sales.

Third-quarter gross margin was 44.2% compared to last year's gross margin of 42.3%.

The 190 basis point improvement is due to a combination of more in-line wholesale business and increased retail, which carries a higher margin.

While we are extremely pleased with our improved margin, we feel that 42 to 43% gross margin is appropriate for modeling our business.

Gross profit was 146.3 million versus 115.5 million in the same period a year ago.

Total operating expenses as a percentage of sales decreased to 34.2%, compared to 35.2% in the third quarter of fiscal 2005, principally due to the positive operating leverage we experienced on our increased sales volume.

Third-quarter selling expense increased to 35.7 million, or 10.8% of sales, as compared to 27.2 million, or 10% of sales in the prior period.

The increased selling expenses as a percentage of sales is primarily due to the previously-discussed increase in advertising and promotional expenses, as well as higher commissions from increased sales volume.

General and administrative expenses for the quarter were 77.5 million compared to 68.8 million last year.

Our general and administrative expenses decreased to 23.4% of sales compared to 25.2% last year.

Net earnings for the third quarter increased 75.7% to 22.2 million, compared to 12.6 million in the prior-year period.

Diluted earnings per share were $0.49 on approximately 46.2 million shares outstanding, compared to $0.30 per share on approximately 44.8 million shares outstanding for the third quarter of last year.

Net earnings were also positively impacted by the non-recurring reversal of a reserve for a discrete income tax exposure item for which the statute of limitations expired during the quarter.

This reversal increased net earnings by approximately 1.3 million, or approximately $0.03 per diluted earnings per share, for the quarter and the nine-month period.

For the nine months ended September 30, 2006, net sales were 900.9 million versus net sales of 783.0 million for the first nine months of 2005.

Gross profit was 395.4 million, compared to 327.4 million in the same period of the prior year.

Selling expenses for the first nine months of 2006 were 87 million, compared to 56.3 million for the first nine months of 2005.

G&A expense was 222.2 million, compared to 200.5 million in the same period last year.

In total, for the first nine months of 2006, operating expenses were 309.2 million compared to 266.8 million for the same period last year and were essentially flat on a percentage basis.

Net income for the first nine months of 2006 was 56.4 million, or $1.27 per diluted share, compared to 38.8 million, or $0.92 per diluted share, in the same period last year.

Our balance sheet continues to be extremely strong.

At December 30th, 2006, cash and short-term investments stood at 204.8 million.

Trade accounts receivable at quarter-end was 172.5 million and our DSOs were 47 days, versus 44 days at September 30, 2005.

Inventory at quarter-end was 177.2 million, representing an increase of 41.1 million for December 2005, which we feel is appropriate given our backlogs and the strength of our business.

[Working class] level declined 5.1% to 343.5 million at quarter-end, versus 361.2 million at December 31, 2005.

This decline was due to the reclassification of our 90 million convertible notes due April 15, 2007 from a long-term debt to a current liability.

This reclassification reduced our long-term debt 16.8 million as of September 30, 2006.

Shareholders equity at quarter-end increased 23.5% to 424.5 million versus 343.8 million at year-end 2005.

Capital expenditures during the quarter were 8.3 million, versus 3 million in the prior-year period.

Our new corporate office building accounted for 4.1 million of these expenses, and the balance primarily is related to store openings, remodels and information technology expenditures.

We expect CapEx for this year to be 30 to 35 million, of which 15 million is related to the new corporate office building.

Now turning to guidance.

Based on our leading indicators, which include double-digit retail sales growth, double-digit backlog increases, incoming order flows and positive sellthroughs at retail, we currently expect fourth-quarter sales to be between 255 to 265 million and diluted earnings per share of 0.22$ to $0.27, both of which will be records for the fourth quarter.

For the full 2006 year, we expect sales to be in the range of 1.156 billion to 1.166 billion, and earnings per share between $1.49 and $1.54.

We are pleased with our continuing record quarters, including our third quarter, which was the 11th consecutive quarter of topline growth.

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

We remain dedicated to profitably growing our business and achieving record results in 2006, as well as having a strong start to 2007.

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

(OPERATOR INSTRUCTIONS).

Liz Dunn, Prudential.

Congratulations on a great quarter.

Is there any more color you can share on the backlog increase?

Because, I guess, looking at inventories up 30%, which is quite a swing from last quarter, is the backlog that strong?

Because your guidance seems to suggest, at the high-end even, sales up 18%.

That's my first question.

My second question is, was there a significant amount of business that came in September related to the strength in September sales trends?

That's something we've heard from others.

And looking at your receivables balance, it would suggest that that was the case.

Thanks.

Yes.

Going back in reverse order, obviously, the backlog increase -- we don't give backlog guidance other than year-end on a usual case.

We did last quarter, simply to solidify the differential on what might ship from June and July, which we wanted to make a solid case for, which obviously came the way we forecasted in Q3.

I think as far as we view our inventory, we were, and I think most people believe we were under-inventoried, probably for the last two quarters, and trying to catch up, as we told a number of people.

Depending on the acceleration of growth, we would catch it sometime before the end of the year, which I think is now.

You have to understand, we have not only backlog, but we've got new store increases to have inventory for and some growth in international to have inventory for.

We think the inventory is in a good place, and not just to be noticed by the growth from the end of the year.

However, we think we have backlog increases that certainly support this kind of inventory.

And it's not -- it certainly doesn't make anybody here uncomfortable.

We think we're in a good spot right now and, obviously, have used our production facilities.

For those people that -- some people have told me they were afraid we wouldn't be able to ramp up production to catch the growth and our place in the marketplace.

We obviously, as we've said in the past, have sufficient capacity to get our growth.

So, we're very comfortable with our inventories.

We think they're in line.

They still might be a little bit short, if anything, for our new divisions and our new growth.

Remember, we're just starting to ship (indiscernible) like Zoo York and our fashion brands are growing at a faster base, and they've got more basics and more new styles going through, as well as the increased number of stores.

By the way, I just wanted to mention, our backlogs are up significantly double-digit.

So, (indiscernible) support the whole structure and our balance sheet right now.

And your other comments about the amount of sales shipped and late in September, the DSOs do indicate that we had a very strong quarter all the way through, and it shifted.

It surprised some of us, obviously.

July was a very strong month in terms of that as it overlapped from June.

But we continued to see strength, positive sellthroughs, and additional shipments in store, strength through August and September -- certainly in Europe, as well as in the United States, which we think is the reason the DSOs were up, because of the much stronger September we had relative to the whole quarter.

Chris Svezia, Susquehanna Financial.

My congratulations as well.

Good quarter.

David, just going on the backlog question, any insights in terms of domestic versus international?

Are they pretty comparable at this point?

On a percentage basis, domestic is still even, believe it or not -- slightly higher than our subsidiaries, and pretty much the distributors as well.

So, we continue to show increased strength in the U.S.

Certainly that's bolstered by our fashion lines (indiscernible) significantly high double digits, going off triple-digit comps for the quarter.

So, we continue everywhere, by the way; nothing is really behind.

We obviously had some slow spots in Japan, France is just starting to turn, and -- but other than that we've shown increases everywhere, slightly better in the U.S. as opposed to international.

Okay.

But it seems like for a specific -- to Europe, specifically, in your subsidiary business, it seems like after several quarters of -- I guess it really hasn't really hit your target in terms of your expectations.

It seems to really start turning the corner.

What's your thoughts as you look into 2007 for that business?

Do you think you've gotten it where you want it to be in terms [of you start seeing] accelerated growth in Europe?

I don't think it's where we think it should be, nor planned it should be.

It's still under-utilized.

It's certainly better, but because we see -- Germany continues for us and it's a very good base.

And the UK has come back very significantly with the changeover in their structure and their distribution and the products that do well for them.

Our stores indicate that we have the right product and that Europe should continue to grow.

Canada has been nothing short of an exceptional story for us and shows well, and that piggybacks the U.S.

And we think the SKECHERS core growth in Europe, as well as the fashion brands starting to be introduced and getting a hold in 2007, will continue to accelerate for Europe.

But I still think we have a long ways to go.

As you look at the fourth quarter, just going off of the inventory question earlier, obviously, you seem to have caught up to some degree with demand at retail.

As you look at the fourth quarter, can you maybe talk about the makeup of that inventory?

Why the increase?

Obviously, you talked about Zoo York; the fashion brands seem to be accelerating as well.

But I guess can you talk about -- we've talked about closeout levels of inventory.

Is closeout still down year-over-year?

Can you maybe just talk about what we should look for in terms of margins for the fourth quarter, given the increase in the inventory level?

I think that's very fair.

And obviously, when you build inventory and there's an (indiscernible), some inventory is better than others.

Right now our closeout sales have not, obviously, been increasing in Q3.

Remember we [caught] a lot of this inventory in August and September, and [hasn't] impacted yet. (indiscernible) to the present point, that's why we're still modeling at 42, 43, because (indiscernible) at-once component and trying to keep inventory clean.

There may be a 100 basis point swing here, but it certainly will add it to the top line.

In the numbers we've given out, the 255 to 265 million for the fourth quarter, they do not contain any significant closeout business.

To the extent we decide to do some or push them to or identify some slow moving (indiscernible) or shift in take as we go to the end of the year, they'll certainly move up.

But right now we don't anticipate any significant closeouts and don't have significant closeout inventory to sell for the fourth quarter.

As you look to 2007 -- and I know you've just kind of given preliminary, I guess, what you're anticipating store openings -- can you maybe just talk about -- given the strength and momentum you're seeing here, obviously, some of your bigger retail accounts have seen your spring offerings -- can you maybe just give us some insights -- you're looking at roughly 15% or better topline growth here in '06, 40% or so or better earnings appreciation.

Can you maybe give some insights or your thoughts for 2007 in terms of -- obviously, the drivers bring the fashion brands -- but what retailers are saying and how much more momentum you have in this kind of low-profile type silhouette?

I think it goes beyond the low-profile silhouette, although that is the key to us, and we (indiscernible) we have the fashion brands.

I think it's fairly safe to say that what we now have in the fourth quarter in our backlogs, and what we're booking now is a precursor certainly to Q1 and strength into 2007.

I think I mentioned it on the second-quarter conference call; we seem to be accelerating.

For us to have a 255 to $265 million fourth quarter is quite large.

We think that's amazing.

It's not a quarter that usually shows such big movement, because it really is the end of the season and really doesn't start [until] spring.

I think what you see and what we see for shipments in the fourth quarter is a precursor to what we can expect for first quarter in 2007.

We haven't seen any deterioration in our incoming orders or bookings for spring.

We're certainly well ahead of where we were last year.

The surprise to our company, I think, has been the strength from shipping demand and incoming order perspective, for September and October particularly, which have never been stellar months for us, but are now starting to perform quite well, I think, partially because retailers are starting -- we try to buy later in the season and closer to the vest, and probably -- and partially because we are that much more important to them and performing that well for them at retail.

Congratulations.

John Zolidis, Buckingham Research.

Fantastic results.

A question for you.

I was wondering if you could, if you've got these numbers in front of you, could you talk about the non-SKECHERS brands, I guess, the fashion brands, as a whole?

How big is that business in the third quarter, and is it growing at a rate -- I guess I assume it's growing at a rate much faster than the rest of the business.

But can you either put some numbers around it, or some parameters?

Give us an idea -- how big is it?

How fast is it growing?

It's growing, probably on a percentage basis, at four or five times the percentage rate of the core SKECHERS just as a wholesale brand, not necessarily the Company as a whole.

I think we have given some color on it, and nothing really has changed.

We said it took about 50 million last year and anticipated it would do about 100 million this year.

We are pretty much on target for the 100 million, and the quarter certainly did hold up that perspective.

So, it's 100 million (indiscernible) percentage of the booking with the quarter a little stronger, obviously, in the third quarter than second and before, and continues to grow at that basis, and grow significantly faster than the core SKECHERS, obviously, would at lower dollars.

But we said at the end of 2004, going into 2005, that 2005 would be a good year for it and we could do close to 50 million.

But in 2006 we would certainly start to move the needle. (indiscernible) anticipated getting to 100 million.

I think at the time we didn't actually expect the Company as a hold to grow this quickly, so we thought it would be a (indiscernible) percentage.

But it's held up its end of it, and SKECHERS has gotten that much stronger.

So, the combination of the two has pushed this significantly higher.

That's really helpful.

And I guess I only have one question on the inventory.

Philosophically, if you look at inventory, and you look at the cost of goods sold, do you expect in future quarters -- do you think that you need to have more inventory on hand now than what you expect to sell in the fourth quarter?

I don't know that's an expectation.

We're not really gamblers, and we don't take an approach of speculating on the quarter and buying it.

We react to what's -- who said this in the past?

We have a formula internal to us that we like to keep to that takes a percentage of what our commitment to inventory is -- and that's all work in process and inventory -- as a percentage, different percentages at different times of the year when we're building -- and try to cover that so that we have an at-once component that's of a significant size for us to handle without getting too over-extended in inventory.

And to date, even with the inventory we have today, especially with the inventory today, we are at very conservative numbers with what's selling.

We have an extensively large SKU base, and we have a lot of brands, and we carry sizes, remember, because we are a footwear business.

So, if you put all that together and growing -- 13 stores through the quarter, four more, 20 next year -- carrying Zoo York that had no sales really in Q3 to speak of -- growing at almost triple-digit in fashion brands, and bringing new product in and getting core product.

We think we're very comfortable with slightly under inventory on a carrying basis going forward.

Good luck with the holiday season.

Jeff Mintz, Wedbush Morgan.

Congratulations; very nice quarter.

I just have a couple of questions.

David, if I'm not mistaken, the number of stores you're talking about now for next year, 20, 25, that's a significant increase from what you've previously talked about.

Has there been kind of a shift in thinking there in terms of strategy going forward?

Yes.

We decided to accelerate it some.

We certainly can afford it, and they're certainly doing well enough that the correct locations are available.

And I think part of it -- it's a twofold piece.

A, we thought we would do 15 to 20 this year and maybe slightly go over, and we'll be at the middle of that range, closer.

So, some of that has slid over into 2007, which we're taking into account.

And I think because of the strength and identification of our brand, which also goes from sellthroughs, and our presence and the way our stores look, and our advertising, we're being offered better locations from landlords because of the strength of our brand and what it means to malls.

So, now that we are being offered better locations on a more regular basis, and since we can afford it and retail is doing quite well, we've decided to accelerate some, and could even decide to accelerate even more so as we get through 2007.

Does that potentially change kind of the long-term potential for the size of the retail buildout?

I don't think so.

I guess it depends how far out you want to go.

Even building 20 stores on a 140-store base is not the increase, not giving away the comp store increases, which we think -- which continue to accelerate, to catch up with what we're doing with our fashion brands and our core SKECHERS business.

We still think retail is growing at a faster pace than even that could.

That's helpful.

Fred, just a couple technical questions for you.

On the reversal of the income tax reserve, where did that hit the P&L?

Did that go directly into the tax?

Yes, it went into income tax.

Reduction in income tax expense.

So, how should we think about the tax rate, modeling it forward?

You should take the income tax rate up -- expectations for the income tax rate up in the fourth quarter to closer to what it would be without that 1.3 million.

So, you can calculate the number; it's about 38%

I think 38% is fair.

It's what it was the first six months.

It's what it's anticipated to be in the fourth quarter.

It's what it would have been in the third quarter without the reversal of the one item.

Great.

Thanks very much.

Congratulations again.

(OPERATOR INSTRUCTIONS).

Liz Dunn, Prudential.

Actually, my question was related to selling expenses.

In the fourth quarter of last year, selling expense was somewhat more modest.

And I know your commentary today was that you want to -- you believe in spending around key selling periods.

So should we take that to assume that for the fourth quarter of this year, which is the smallest quarter of the year, we won't see a 10% kind of rate again?

That certainly depends on the topline.

I think we announced in second and third quarter we had planned on an $8 million increase in spend in advertising per se.

It's obviously significantly lower, and the rate of increase is certainly lower in Q4.

I would anticipate that in real dollars, we don't increase our advertising budget by more -- well, somewhere in the neighborhood of $2 million for the quarter as an increase over last year.

And that percentage will be depending on, obviously, how high we get in our range.

And there are no further questions at this time.

Mr. Greenebaum, I'll turn the conference back over to you.

Thank you again for joining us today on the call.

I'd 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 (inaudible) statements.

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

Again, thank you and have a great day.

And this concludes today's conference call.

Thank you, everyone, for joining us.

You may now disconnect.