Skechers USA Inc (SKX) 2007 Q1 法說會逐字稿

Good day and welcome to the SKECHERS U.S.A.

Inc.

first-quarter 2007 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.

Good afternoon and thank you, everyone, for attending SKECHERS' first 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.

These forward-looking statements involve known and unknown risks, including but are not limited to the general economic and business condition 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 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 filings for a description of the other important factors that may affect the Company's business, results of operations and financial conditions.

And 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' first quarter 2007 results.

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

First quarter 2007 net sales were $344.9 million, an increase of more than 24% over last year and the highest quarterly net sales in our 15-year history.

On a year-over-year basis, our first quarter 2007 sales represent the Company's 13th consecutive quarter of top-line increases.

Net income for the quarter was $23.9 million versus net income of $16.6 million in the first quarter of 2006, a 44% improvement over last year and the highest quarterly net income in the Company's history.

Diluted net earnings per share were $0.52 for the first quarter of 2007.

On a year-over-year basis, our first quarter 2007 net earnings represent the Company's twelfth consecutive quarter of bottom-line increases.

Our focus in the first quarter of 2007 continued to be on delivering the right product into the right markets in the right quantities and then supporting our 10 brands with on-target marketing.

We believe this strategy has resulted in more in-season product being sold and seeing our momentum continue through the quarter which resulted in a new quarterly sales record and growth across all our revenue channels -- domestic wholesale, domestic and international retail, our international subsidiaries and distributors and e-commerce.

Our successful approach to product marketing and distribution resulted in the following accomplishments in the first quarter of 2007 -- double-digit improvements in many key men's and women's SKECHERS lines, driven by the continued demand for our low profile and Vulcanized style; double-digit improvement in our SKECHERS kids' lines that includes SKECHERS Air Raiders for boys, SKECHERS Cali for girls and Cali Gear for and boys and girls; triple-digit improvements in several of our street and fashion lines and double-digit improvement in others; the successful introduction of several new lines, including Cali Gear by SKECHERS and Avirex; double-digit sales growth in our domestic wholesale division; double-digit sales growth in our international subsidiary and distributor business; double-digit sales growth in both our domestic and international SKECHERS retail division with a net increase of 26 stores from Q1 2006, including the net addition of seven in the first quarter; and an increase in average selling price per pair of $0.70, or 4%; and an increase of pairs shipped by approximately 1.5 million, or 15% in United States.

Our key financial achievements in the first quarter include record quarterly sales and our third consecutive quarter of sales over $300 million and our thirteenth consecutive quarter of increased year-over-year sales; our twelfth consecutive quarter of year-over-year bottom-line increases, including record quarterly earnings; backlog up double digits over March, 2006; improvement of our gross margins by 50 basis points year-over-year for 43.2% for the first quarter of 2007 versus 42.7% for the same period last year; a strong balance sheet with more than $176 million in cash and short-term investments; completion of the conversion of our $90 million convertible debt which reduced our long-term debt to $16 million and current and on-plan inventory of 169 million.

We're very pleased with our sales in each of our segments and the position of our brands in the marketplace.

Based on our comp store sales increases, strong backlogs and sell-throughs, we believe the momentum are currently experiencing will continue through the year.

Now, I would like expand on our first quarter 2007 achievements in our four revenue channels -- domestic wholesale, international, retail and licensing.

For the first quarter, domestic wholesale net sales increased by over 19% from the same period last year.

The growth is primarily a result of the continued strong sales on our women's SKECHERS active with its low-profile looks, men's SKECHERS USA with its city style black and brown shoes and SKECHERS kids like with its growing offering for boys, including Air Raiders, as well as from our other lines, including SKECHERS Work and our new line, SKECHERS Cali.

Under our fashion and street lines, the growth is in both our men's and women's Mark Ecko footwear lines, Mark Nason, Kitson and SoHo Lab.

Our Kitson street and fashion division also posted double-digit increases.

With the strong initial acceptance of our new molded footwear line, Cali Gear by SKECHERS for men, women and kids, as well as the late 2006 launch of Zoo York and the Q1 launch of Avirex, we believe these new lines have great potential to turn into substantial businesses alongside our other lines.

We believe the diversity of our 10 brands, plus multiple lines within SKECHERS and our 2000-plus styles sold through their respective distribution channels allows us to penetrate nearly every market in the country without over-extending or diluting any one brand.

Our strength lies in targeting each of these brands through the right market and distribution channel and then supporting the brands with great marketing, from print and TV to mall kiosks and in-store displays.

We multiply the effect with the power of celebrities, eight celebrities appropriate for six of our brands.

These include multi-platinum recording artist Ashlee Simpson for SKECHERS, actress Evangeline Lilly from the hit TV show LOST for Michelle K, actor and multi-platinum R&B artist JoJo for Rhino Red, Oscar-nominated actor Terrence Howard, along with hip-hop artist The Game and NaS for 310, legendary skater Donny Barley for Zoo York, and finally recording artist and grill master, Paul Wall for Avirex.

Images of Ashlee Simpson appear on billboards in Times Square and the Venice Boardwalk, while Donny Barley, The Game and JoJo all appear in TV spots wearing our brand.

While the total sales of our division in street brands is still relatively small in comparison to SKECHERS, we believe these lines have great potential to gain in the market share and sales growth.

We also see continued growth opportunities with our SKECHERS brand, including Cali Gear, our new molded footwear line and SKECHERS Cali, a sneaker and sandal line that typifies the California lifestyle.

Now moving onto international.

For the first quarter, SKECHERS international's wholesale sales improved by 48% over the same period last year.

Our international business is comprised of wholesale direct for our eight subsidiaries and more than 30 international distributors that service more than 100 countries and territories around the world.

In total, our European and Canadian subsidiaries improved by 41% with seven of our eight subsidiaries posting quarter-over-quarter growth, including one of our largest subsidiaries, the United Kingdom, as well as the Benelux region, which had triple-digit improvements for the quarter.

We're also encouraged by the continued improvements in France, a subsidiary that has historically been more difficult penetrating the market, but has shown growth for the past two quarters and has a strong backlog.

Italy is the one region that did not post growth in the quarter, but we have been working on building our brand in the region and are encouraged by a positive backlog.

In 2006, we introduced the 310 and Mark Ecko footwear lines in Germany and the Benelux region and received strong sell-throughs and acceptance and in the first quarter, we also introduced these brands as well as Zoo York and Kitson in most of our other foreign subsidiaries.

The reaction has been positive and we believe all of our subsidiaries have an opportunity to increase their sales and shelf space with these brands without taking away from SKECHERS.

With our subsidiary business continuing its momentum, we are looking at opening additional foreign subsidiaries that we believe have great potential for the SKECHERS brand.

These countries include Brazil, China and Malaysia.

Our international distributor business grew 60% over the first quarter 2006.

As in 2006, the growth in our international distributor business came from several regions with the best performance being the Americas, Eastern Europe and Australia-New Zealand.

The growth for our distributors is primarily in their SKECHERS business where we are also launching our street and fashion brands in many international markets.

One of our key distributors launched Unlimited by Mark Ecko and Rhino Red across parts of Central and South America and reported very strong sales.

We believe the Mark Ecko, Zoo York, Kitson and 310 lines will have strong sales in select markets around the world.

To support this SKECHERS businesses, 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 brand and positively impact sales.

As of March 31, 55 retail stores in 21 countries have been opened by 14 distribution partners.

In the first quarter, our or distribution partners opened six stores, our first in Taipei, two more in Dubai and one each in Chile, Colombia and Australia.

A distributor in the Baltics opened its first retail store in Lithuania earlier this month and we have another six to eight additional distributor stores planned for 2007.

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

Like in the United States, we believe our aggressive and on-target advertising and marketing efforts from print ads to outdoor and from mall kiosks to SKECHERS stores has had a positive impact on our international sales.

The added impact of having world-renowned celebrities, such as Ashlee Simpson, The Game and NaS has further increased our recognition.

Furthermore, our international distributors support their business with Company-created advertisements as well as by regional celebrity endorsement agreements, the most recent being in Chile with telenovela star Francisco [Luan].

In addition, select countries have developed SKECHERS branded goods, including bags and apparel to further build the SKECHERS brand.

In regards to retail, our domestic and international retail sales are up more than 18% for the first quarter 2007, marking the fifteenth consecutive second quarter of double-digit year-over-year sales and increases in our retail division.

The improved sales are due to a combination of high single-digit comp increases and an increase of 26 stores from the prior year.

At the close of the quarter, we had 160 company-owned and operated retail stores, 148 of which are located in United States.

Eight SKECHERS stores opened in the first quarter, including stores at Topanga Plaza in Southern California and Freehold Raceway Mall in New Jersey.

We closed one store in the first quarter, Frankfurt, Germany.

Included in this count of domestic stores are six SoHo Lab concept stores.

Designed to showcase our fashion and street lines, these stores are located in key urban and hip fashion areas, such as New York's SoHo, San Diego's Gaslamp Quarter and in Queens Center.

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

International retail sales grew more than 30% from the first quarter of 2006.

The positive international sales were a result of improvements in each region, especially Canada which also benefited from a new store in West Edmonton which opened in the third quarter last year.

Our increased retail sales in Europe improved similar to our international wholesale sales in these same markets, confirming our belief that our retail stores enhance our wholesale business.

Our retail stores have historically served as a combination of product testing centers, marketing vehicles, as well as profitable distribution channels.

We plan to grow our retail business with an additional 10 SKECHERS stores this quarter and another 10 to 15 in the second half of 2007 and we will continue to pursue opportunistic international retail locations.

We believe the continued positive performance of our retail stores is a strong indicator of the strength and positive trend of our business and we will continue to selectively expand our store base in good locations.

Moving onto our licensing initiatives.

We continue to see licensing as an effective 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's and toddlers apparel where we also see the most brand building benefit.

We have further grown our children's brand with the licensing of SKECHERS socks in the United States.

We have continued to selectively grow our international licensing agreement through SKECHERS goods in Mexico, South Africa, [Israel] and South America.

We also launch adult apparel in Germany, Austria, Switzerland and the Netherlands in autumn-winter 2006 through the largest mail-order catalog in Europe, German-based [OTTO].

Given the strength of the SKECHERS brand in the United States as well as around the world, we are continuing to selectively explore our licensing opportunities that we believe will enhance our brand, grow our presence within select retailers or provide additional revenue.

Now I would like to have Fred go over the financial results.

Thank you David.

Turning to our first quarter 2007 numbers in detail, as previously mentioned, first quarter sales were $344.9 million compared to $277.6 million last year.

The improvement in 2007 is due to a combination of factors, including significant growth in key SKECHERS lines and with our new fashion brands including an increased at-once business supported by our inventory position, strong invested wholesale and retail sales and increasing our retail store base of 26 and significantly increased sales in virtually all of our key international markets.

This increased demand resulted in higher margins.

First quarter gross margin was 43.2% compared to last year's gross margin of 42.7%.

Gross profit was $149 million versus $118.4 million in the same period a year ago.

Total operating expenses as a percentage of sales decreased 50 basis points at 32.7% in the first quarter of 2007 compared to 33.2% in the prior-year due to positive operating leverage from our higher sales.

First quarter selling expenses increased to $26.8 million in the period from $20.2 million in the prior year.

The increase in selling expenses to 7.8% from 7.3% is primarily due to increased advertising and marketing expenses to support our brand and the new division.

Specifically, we launched new celebrity-related campaigns for Rhino Red and Avirex, as well as Ashlee Simpson print and outdoor.

We increased our exposure on TV with SKECHERS kids and adult campaigns, as well as several spots for our fashion brands.

We launched outdoor and print campaigns in our international subsidiary market and we've created additional POP items to support our new brands.

For the second quarter, we expect our advertising spend to increase approximately $8 million over our second quarter 2006.

General and administrative expenses were $86 million compared to $71.9 million last year.

Our general and administrative costs saw positive leverage and were down on a percentage basis to 24.9% of sales compared to 25.9% in last year's first quarter.

As discussed, the absolute dollar increase is primarily due to the significant increase in a number of our company-owned stores from the prior-year's first quarter as well as increased salary costs and general -- and greater warehousing and distribution costs to support our continued growth.

In addition, we increased our warehouse and distribution capacity with an additional leased facility during the quarter.

Net income for the first quarter was $23.9 million compared to net income of $16.6 million in the prior-year period.

Diluted earnings per share were $0.52 on approximately 46.8 million average shares outstanding compared to diluted earnings per share of $0.38 on approximately 45.4 million shares outstanding during the first quarter of last year.

Our balance sheet continues to be very strong.

At March 31, 2007, cash and short-term investments stood at over $176 million.

Trade accounts receivable at quarter end were $228.8 million and our DSOs at March 31, 2007 were 53 days versus 51 days at March 31, 2006.

Inventory quarter at end was $169.1 million representing an increase of $50.2 million from $118.9 million in the prior-year period which we believe is in line with our backlogs, increased store count, new division and the overall strength of our business.

As a side note, we would like to point out that we were light on inventory in the first half of 2006.

To illustrate this, from March 31, 2005 to March 21, 2007, inventory was up 29.3% while revenues increased 40.1% during the same period which leads us to believe that our inventory is now in line with our current sales levels.

Working capital rose 5.1% to $473.7 million at quarter end.

Long-term debt was $16.7 million which is primarily related to mortgages on certain real estate.

On January 19, 2007, we called for redemption our $90 million convertible subordinated debt and substantially all of the notes were converted into equity prior to the redemption rate.

Shareholders equity at with end increased 25.3% to $562.8 million versus $449.1 million as of December 31, 2006.

The increase primarily related to our net earnings and the conversion of our convertible subordinated notes into equity.

Capital expenditures for the quarter ended March 31, 2007 were approximately $8 million as compared $4 million in the prior-year.

$4.9 million related to new store openings, store remodels, warehouse, equipment upgrades and information technology.

The balance of $3.1 million related to our new corporate office building.

We expect our capital expenditures for the remainder of 2007 to be approximately $25 million, which includes the opening of 20 to 25 new stores and store remodels and the completion of our corporate headquarters.

And now I will turn it back to David for guidance.

Our continued focus in the first quarter was on delivering the right product into the right markets in the right quantities and then supporting our 10 brands with on-target marketing.

We believe this approach resulted in a new quarterly sales record and our thirteenth consecutive quarter of top-line increases as more in-season product was delivered.

We are approaching the second quarter and the remainder of the year with the same strategy both in the U.S.

and abroad which we believe will drive our continued momentum.

Our double-digit backlog, positive account reaction, strong retail comp sales and new lines, including Zoo York, Cali Gear by SKECHERS and Avirex lead us to believe our growth along with our three-year trend of top-line record-breaking quarters will continue.

We now expect second quarter 2007 net sales to be in the range of $350 million to $360 million dollars and diluted earnings per share in the range of $0.41 to $0.46 on approximately 47 million diluted shares outstanding.

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

The timings of one good ship is determined by the delivery schedules set by our wholesale accounts.

We would also like to note that embedded in our guidance are some important assumptions regarding expenses.

As previously discussed, we expect to continue to make necessary investments in our infrastructure to support our increased scale from k a few short years ago.

To put things in perspective, our sales for 2004 were just over $900 million and this year will be in the range of $1.4 billion in sales.

This increase of nearly $500 million in revenue has necessitated investments in a variety of areas such as warehousing and distribution, retail due to an accelerated store opening program, R&D in China, personnel and other areas.

We believe the increased advertising spend of approximately $8 million over the second quarter 2006 will help drive our sales in the latter half of the year.

We front-loaded the increase in advertising expenses in Q1 and Q2 and expect our increase of advertising spend for the second half of the year to be more moderate than in the first half.

Again, we believe the sales momentum we're seeing will continue into the second quarter based on our key indicators.

We're gearing up for our continued growth and are focused on prudently managing our business to continue to grow profitably.

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

(OPERATOR INSTRUCTIONS).

Jeff Feinberg, JLF Asset Management.

Thank you very much, congratulations.

I just had a follow-up question with regard to the normalization of advertising in the second half of the year.

Should we think of this sort of as we did last year when we had some shifting of timing?

And as I recall roughly a year ago we had one quarter with moderate growth, I think it was single digits or 10%, and then we sort of exploded out of that in the second half of the year with very much faster growth that was on the order of 70%-80% in the back half of the year.

Is there a similar concept here where our growth in the second half of the year in terms of the bottom line should be much more rapid as a result of the investments that you're talking about in the first half beginning to be leveraged in the second half?

We don't give guidance for the third quarter, Jeff, but I think on the basic premise, I think that's correct.

I have always felt or I felt this year that there was a structural shift from second to third quarter and that our biggest opportunity would be in the third quarter even though it was a very positive comp for us last year.

It seems back to school has moved back and everybody wants to take their inventory in as late as possible and it's very difficult between the end of June and July.

What we've done this year by front-loading our advertising is try to push everything through and sell everything at retail.

The big piece of our advertising for Q2 is, it was actually the end of Q1 and the beginning of Q2 obviously for Easter, which seems to have worked very well for us with the sell-throughs we hear and the inventory that exists at retail, and then we pushed the back half of the quarter into June to get ready for back to school, especially with our newer brands of Cali Gear and SKECHERS Cali which has done very well and is going into the marketplace very well.

We think if we can build this up and our backlogs continue to grow and we continue to sell through well at retail and sales continue to move into the second half and our increase in advertising moderates in the second half, that is where we think we have significant opportunity and that is where we've been playing to.

And as a follow-up, I think you mentioned in your comments, I didn't get the particulars, but can you give some perspective around the backlog?

I think you mentioned it was up strong double-digits.

Well it's up double-digits.

We try not to give exact numbers, but it's not significantly different than what we reported at year-end, probably a little slightly lower, so a little less in the domestic and then extremely more robust in international.

I apologize -- I don't recall what it was at year end.

I believe it was 29% at year end.

Okay so in that general vicinity.

Great.

And the final question comment is just to make sure that I understand this structural shift, it seems like analogous to last year because I'm looking at the numbers now and you had moderate growth similar to what you're projecting in the second quarter and then there's very strong growth in the second half.

It sounds like if this is the case it might make sense to give some sort of annual guidance prospectively or at least second and third quarter so people don't underestimate the growth of the Company.

I think we try to do that based on channel checks and what's in, but we certainly take that under advisement.

We're not ready to go out for the full-year yet, but if we can get our management comfortable with the whole idea of going back to full-year guidance or second and third quarter together, we'd consider that in the future.

Thank you very much, congratulations.

Jeff Mintz, Wedbush Morgan Securities.

Congratulations on a nice quarter.

A couple of follow-up questions.

On the comps, you said it was plus high-single digits.

Did you notice any differences among the various store concepts, or was it pretty similar across all three?

They were stronger in the outlet stores and then in the concept stores were the two best ones, that's where we look to see them and they have held up pretty consistent over the last year or so.

So they've just continued [alone].

And Fred gave the 20 to 25 store opening number.

I assume that's still the full-year number and not for the remaining three quarters.

No, I think that's the remaining.

That is actually now the remaining three quarters we were up to with the (MULTIPLE SPEAKERS).

We could be up to 30-32 stores depending on -- that is a three-month, the remaining three quarters, sorry, the remaining part of the year.

So that is an increase from what you had previously said.

Yes, that's up to 28 to 33, and like we've said in the past, we try to be opportunistic.

Those leases are available and some of them are actually moved up from last year, so that's a good number for us.

Okay, great.

And then can you give the actual ad spending for Q1, either the number or as a percentage of sales?

The actual -- you mean outside the actual selling expense or just in --?

Yes, just the advertising spending.

I'm just trying to get a sense, you said it would be up approximately $8 million in Q2.

Was it a similar order of magnitude in Q1?

No, no, no, not at all.

We're talking about -- if you look at the sales number for last year, it was significantly higher, and it's always higher in Q2 than Q1.

This year, all of our advertising and promotional expenses in the first quarter turned out to be just slightly less than 6% of sales.

They would obviously be significantly higher in the second quarter unless there's a major shift back and forth from second to third quarter.

Okay, great.

And then just kind of a general question on the international business.

Obviously, that really looks like it has turned the corner over the last three quarters.

Can you talk about what you've been doing differently and how you see it growing from here?

We've been selling more shoes.

Obviously, part of it's advertising expense has gone into our international and part of the increase is certainly in international.

I think it's just the merchandising and the product mix and just a timing shift from what we've seen in the United States and pushing hard, both in our subsidiaries and our distributors.

We've made a concerted effort as we've said over the last year to make international a bigger piece of our business and to grow at a faster rate than the domestic business, and all of the things we've put into place, both the sales, the merchandising, our new international group and facilities and the increased advertising and retail stores around the world we think are starting to take hold.

So you think from here, you do expect international to grow faster than the U.S.?

Yes.

We've said I think internally and I think we've made it public is that we would anticipate somewhere in next three to five years getting our international business to at least 25% to 30% as a whole from what was I think last year than 18% of the whole.

So given that we've had a faster structure with growing retail in the United States, that means they would have to grow it considerably faster than the Company in general, more like they did in Q1 to get that result, and that's what we're targeting.

Okay, great.

Thanks and good luck.

(OPERATOR INSTRUCTIONS).

Christopher Svezia, Susquehanna Financial.

Good afternoon gentlemen.

David just a quick question here, just going back to additional expenditures during the second quarter.

I guess can you maybe quantify what the total SG&A increase as it related to marketing expenditures for the year, kind of what you're projecting?

Because obviously you're talking about some level of moderation in the back half of the year -- what the exact number is.

Well I cannot give you an exact number, because obviously we always maintain flexibility and there are business reasons for moving and maneuvering and going through.

Right now as it stands, we are looking at a 50% increase in media spend in the second quarter and are planning somewhere in the low teens, low double-digit increases over the second half, so obviously a significant downplay in the growth.

Okay.

So then would it be fair to say as you go into the back half, particularly that third quarter, that you could leverage SG&A as a percent of sales?

One would certainly hope so, if you few calculate backwards as we have this $8 million increase in sales is equivalent to $0.10 or $0.11 a share projected in the second quarter increased spend over last year.

Assuming we do get acceleration in the back half of the year and volume continues to grow higher and the real dollar spend is only in the low teens, we expect to leverage and that dramatically, barring any big business changes.

Okay.

Can you give us any color at all as to what's happening on the G&A line, given I guess -- is the new distribution center in that line, or is that in gross margin?

No.

The new distribution center is not in -- a good -- it's only a new building, it's not a new distribution center, it's an additional storage capacity and it's rent in and of itself is not a significant increase, although it is an increase in the G&A.

It's more the temp help and the manpower we use because we now have an extra building to move things around.

In so if you look at the increase, it's not that we didn't leverage G&A, we thought we would just leverage a little quicker, but in the first quarter we actually shipped and processed 2 million more pairs than we did in the first quarter last year, and obviously one pair at a time puts a little strain on the mechanics.

So where we had some increases were obviously temp help to help the peak periods both here, by the way, and in Europe because we moved up on both levels.

We've had an increase -- because of our new lines and because of our new brands, we've had to increase our capacity for R&D and development in China and start-up costs are a little more expensive and we've had some new lines.

So if you take -- and there was an increase in rent obviously and personnel for an expansion and store opening.

So those are the big places that we've had additional expenses in the first quarter.

That will carry through to second quarter, obviously at a lesser percentage because now that we've got it set up, we have more capacity and don't have to keep doing it every quarter unless there is significant growth.

And we are planning on more future in the next 18 months to two years looking at more automation and more consolidation of our distribution and space and R&D facilities in China trying to get even more leverage out on this new running rate.

So as we get closer to that, we will sort of have conversations about that I'm sure over the balance of this year and let you know what we're planning to do.

And then just on pre line that retailers (inaudible) have access to, so your pre lines, what has been the reaction for back to school in terms of product both in the U.S.

and in terms of Europe?

Obviously the near-term backlog numbers look pretty healthy for the second quarter, but maybe talk a little bit about what is happening as you unfold into the third quarter and the back half of the year?

I think they're coincidental.

The backlog that you see now is out certainly and includes at least the beginning of back to school shipments.

So I think it's fair to say that the sell-throughs for spring as well as the acceptance of the line for back to school has created the backlogs you see and it's sort of compounded on compounded.

We were up double-digits last year, we continue to increase by double-digits this year even more so in Europe.

So I think it's fair to say that they are accepted very well.

And from what I can tell and I'm sure you guys are doing as much channel checks as we are, the channel checks indicate that we're selling as well as could be expected or anyone out there currently.

So we have no reason given our own stores and our backlog growth to see anything but a continued robust environment for us at retail, both domestically and internationally.

Okay that is helpful.

Just to clarify, this potential, as we saw last year, this shift in revenue between the second and third quarter, is that to some degree factored into your guidance for the second quarter at this point?

If I knew the answer to that, I could tell you how close we were and I would certainly have a better career as someone who could figure that.

It's that we try to be as conservative as possible.

We tried to do that last year as well.

I don't have any more information than what I said in my prepared comments.

There seems to me, although I have no concrete data yet because it's so concentrated in the last two weeks in June and the first two weeks in July that there is a shift to move -- to take more good into July, and as best we could, we try to take that into account but it's still very difficult and I cannot tell you we're any closer or not closer.

Those last two weeks of June and first two weeks of July by order of magnitude, I don't think the percentage of what we have to deliver, and since we're a significantly larger company, those real dollar terms for the second two weeks of June and first two weeks of July are just enormous and a small percent of shift from one to the other could be very large.

Okay, so the bottom line is we should clearly be looking at Q2 and Q3 together to get an overall gauge of the health of the business (MULTIPLE SPEAKERS).

Right, and we would suggest you look at advertising the same way, and that's just -- we've taken a conservative Q2 and pumped to a lot of advertising into Q2, but if you smooth out the two quarters which is the conversation we all had last year when we announced third quarter, if you put them both together, they will come out probably more even than if you just move them one at a time.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS).

Julie Macklowe, Sigma.

Hi, congratulations on the nice quarter.

My question is this.

It seems that based on your current trajectory you guys should be throwing off $80 million to $100 million in free cash flow and ending the year somewhere $270 million-$280 million in cash.

Have you guys given any thought to what you're going to do with the cash?

We have thought about it, but nothing that we're ready to report yet.

I think currently, we're just keeping our powder dry and seeing what develops.

We obviously this quarter have some use for cash.

Our cash was $170 million.

But as we sit here today, our cash balances are now back over $200 million and growing quite nicely.

So I think your numbers are probably right there.

I think part of the decision is [waiting] because I think we -- our top line and our business around the world is growing at a much faster trajectory than we had thought 18 months ago and we don't think it ends here, so we're going to sit back and wait and see exactly how big we have be and what infrastructure build we have to do to make us more efficient through this bigger volume, bigger company [issuance] and before we make any final decisions on that.

Okay, great.

Thank you.

There are no further questions at this time.

I will turn things back to the speakers for any additional or closing comments.

Thank you for joining us today on the call.

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

As a result of various risk factors, actual results could materially from those projected in such statements.

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

Again, thank you and have a good day.

Thank you.

Once again everyone, that does conclude today's teleconference.

We appreciate your participation today.

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