Skechers USA Inc (SKX) 2007 Q2 法說會逐字稿

Good day and welcome to the SKECHERS USA, Inc.

second-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.

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 and 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 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 laws for a description of other important factors that may affect the Company's business, results of operations, and financial conditions.

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

Good afternoon, and thank you for joining us today to review SKECHERS' second-quarter 2007 results.

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

Second-quarter 2007 net sales were $352.2 million, an increase of 20.5% over last year, and the highest quarterly net sales in our 15-year history.

On a year-over-year basis, our second-quarter 2007 sales represent the Company's 14th consecutive quarter of topline increases.

Net income for the quarter was $14.9 million versus $17.6 million for the same period in the prior year.

Diluted earnings per share were $0.32 compared to $0.40 for the second quarter of 2006.

While we're pleased with our topline increases, we are concerned that our earnings are below our previous guidance.

This is due to a combination of several factors, including higher marketing and POP costs to support the launch of new lines; increased warehousing, distribution, IT and personnel costs associated with both our wholesale and retail growth.

Fred will be discussing this in further detail later in the call.

For the six-month period ended June 30, 2007, net sales were $697.1 million compared to net sales of $569.7 million.

Net income was $38.8 million versus $34.2 million for the first six months of 2006.

Diluted earnings per share were $0.84 compared to $0.77 for the first six months of 2006.

Our successful approach to product marketing and distribution resulted in the following accomplishments in the second quarter of 2007 -- double-digit sales growth in our domestic wholesale division; double-digit improvement in our key men's and women's SKECHERS and fashion line and our SKECHERS Kids line, led by SKECHERS Aerators and SKECHERS Z Straps for boys, and Cali Gear for boys and girls, all of which were supported by TV campaigns; high double-digit sales growth in our international subsidiary business, led by strong improvements in our largest subsidiaries, United Kingdom, Canada, and Germany; high double-digit sales growth for our international distributor business; double-digit sales growth in both our domestic and international SKECHERS retail divisions, with a net increase of 32 stores from Q2 '06, including the net addition of eight in the second quarter; and an increase of pairs shipped by approximately 1.7 million or 16.5% in the United States.

Our key financial achievements in the second quarter include -- record quarterly sales and our fourth consecutive quarter of sales over 300 million and our 14th consecutive quarter of increased year-over-year sales; strong gross margins of 43.2%; a strong balance sheet with approximately $219 million in cash and short-term investments; current and on-plan inventory of 204.7 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 and sellthroughs, we believe the strong revenue momentum we are currently experiencing should continue through the year.

Now I would like to expand on our second-quarter 2007 achievements in our three revenue channels -- domestic wholesale, international and retail.

For the second quarter, domestic wholesale net sales increased by 12% from the same period last year, and almost 16% for the first six months of 2007.

With a portfolio of brands that encompasses everything from high-end boots to vulcanized sneakers, core urban shops to trendy coastal independents, we believe the diversity of our brands allows us to penetrate nearly every market in the country without overextending or diluting any one brand.

The growth within our SKECHERS brands is primarily a result of the continued strong sales in our women's SKECHERS active with its low-profile looks; men's SKECHERS Sport with its diverse range of sneakers; SKECHERS Work and SKECHERS Kids lines with its growing offering for boys, including Aerators and Z Straps; as well as from our new lines, SKECHERS Cali and Cali Gear by SKECHERS.

Within our fashion and street brands, growth is primarily in Marc Ecko footwear and Zoo York.

We did experience sales declines for 310 and Michelle K footwear, which we are addressing.

Our strength lies in targeting each of our brands to the right market and distribution channel, and then supporting the brands with great marketing.

Our campaigns can be seen on billboards above Times Square, Venice Boardwalk, and San Francisco's Union Square; on cable stations such as Nickelodeon, MTV and ESPN; as well as in all the leading magazines.

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

These include multiplatinum recording artist Ashlee Simpson for SKECHERS, and actress and multiplatinum R&B artist JoJo for Rhino Red.

We believe the aggressive approach to marketing in the second quarter, especially with our effective outdoor images and an array of TV spots for SKECHERS Kids and Unltd by Marc Ecko for boys, SKECHERS women's and men's, and a spot each for Unltd by Marc Ecko and Rhino Red had a positive impact on sales for these brands in the quarter.

Moving on to international -- for the second quarter, SKECHERS international wholesale sales improved by more than 62% from the same period last year.

Our international wholesale business is comprised of more than 30 international distributors that service more than 100 countries and territories around the world, and direct through our nine subsidiaries, including our newest subsidiary, Brazil, which opened in the latter part of the second quarter.

In total, our European and Canadian subsidiaries improved by over 75%, with all of our eight fully operating subsidiaries posting strong quarter-over-quarter growth.

Three of our subsidiaries posted triple-digit growth, including the United Kingdom, which is our largest.

We are encouraged by the continued improvements in France, which historically had more difficulty penetrating the market, but has shown growth the past three quarters.

First shipments for Brazil are slated for late August.

Our SKECHERS brands represent most of our subsidiary sales.

We expect the introduction of our fashion and street lines into Europe will provide the opportunity to exploit new markets with key lines such as Unltd by Marc Ecko and Rhino Red, as well as Zoo York.

Our international distributor sales grew over 50% from the second quarter of 2006.

The growth in our international distributor business continues to come from several regions, with the best performers being the Americas, Eastern Europe and Australia and New Zealand.

The growth for our distributors is primarily in their SKECHERS business.

But we're also launching our street and fashion brands in many international markets.

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

And we have others, including the Philippines, Russia, and select countries in Eastern Europe that are now booking regular sales based on proven results in their markets from last season.

To support their 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.

At quarter end, 58 SKECHERS retail stores in 22 countries have been opened by 15 distribution partners.

In the second quarter, our distribution partners opened six SKECHERS stores, including our first stores in the Philippines and Lithuania.

Additionally, the first international SoHo Lab store was opened in Panama City.

Our distributors plan to open another eight to 12 stores in 2007, up from our previous estimate in the first quarter, due to continued growth in the Americas, Eastern Europe and the Middle East.

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

As in the United States, our aggressive and on-target advertising and marketing efforts overseas, 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, JoJo, The Game, and NaS has further increased our recognition.

Furthermore, our international distributors support their business with Company-created advertisements, as well as regional celebrity endorsement agreements, the most recent being in Russia.

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

Turning to retail -- our domestic and international retail sales are up 20% for the second quarter 2007, marking the 16th consecutive quarter of double-digit year-over-year sales increases in our retail division.

The improved sales are due to a combination of high-single-digit comp increases and an increase of 32 stores from the prior year.

At the close of the quarter, we had 168 Company-owned and -operated retail stores, 156 of which are located in the United States.

Nine SKECHERS stores opened in the second quarter, including stores at Aventura Mall in Miami, at SouthPark Mall outside Cleveland, and our first outlet in Illinois at Chicago Premium Outlets.

We closed one underperforming store during the quarter.

We also opened our first SoHo Lab outlet store in Camarillo, California, bringing our total SoHo Lab store count to seven.

The format is designed to showcase our fashion and street lines, and the stores are generally located in urban or young fashion areas, such as New York's SoHo district, San Diego's Gaslamp Quarter, and at 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 23% from the second quarter of 2007.

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

The only area which did not show improvements year-over-year was Germany, which was impacted by a store closure in Frankfurt.

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

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.

We plan to grow our retail business with an additional eight SKECHERS stores this quarter, including one later this week in Miami's Dadeland Mall and another 10 to 12 in the fourth quarter.

Beyond this year, we will continue to grow and invest in our retail store base, both domestically and abroad.

Given the strength of our business and our brand, and our continued positive comp store sales, we believe this is a prudent investment.

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

Thank you, David.

Now turning to our second-quarter 2007 numbers in detail -- as David previously discussed, second-quarter sales were $352.2 million compared to $292.2 million last year.

The improvement in 2007 is due to a combination of factors, including growth in key SKECHERS lines with significant increases in virtually all of our key international markets, as well as good domestic wholesale growth and retail sales growth, both on a comparative basis as well as an increase in our store base of 32.

Second-quarter gross margin was 43.2% compared to last year's gross margin of 44.7%.

The lower gross margin is due in large part to higher sales from our international distributors, which carry a lower margin than our other businesses, as well as lower margins on our fashion brands.

We believe a 42 to 43% margin is appropriate for our business, and the margin we experienced in 2007 is in line with these expectations, as we've experienced higher-than-expected margins in 2006.

Gross profit was $152 million versus $130.7 million in the same period a year ago.

Total operating expenses as a percentage of sales increased 174 basis points to 37.3% in the second quarter of 2007 compared to 35.6% in the prior year.

The increased expenses over what we expected when we issued our second-quarter guidance was principally a result of the following four items -- one, an increase in sales support merchandise incurred in connection with the launch of our new Cali Gear product; two, increased general and administrative expenses incurred to develop the new Cali Gear product as well as continued development of our fashion brand; three, increased warehousing costs incurred as a result of our increased international and domestic wholesale and retail volume and the need to add the additional distribution -- domestic distribution facility; and four, acceleration of our new store growth.

Similar to our infrastructure investment in our wholesale business, we have made significant infrastructure investments to grow our retail division.

To put things in perspective, our store base at the end of 2004 stood at 125, while we expect at year end 2007 to have approximately 185 to 190 stores representing an increase of approximately 50% of the store count.

This has necessitated the need for significant investments in personnel, systems, warehousing and distribution as well as distinct marketing expenditures.

As David discussed, we feel these are necessary and prudent investments to build and showcase our brand.

Second-quarter selling expense increased to $41 million in the period from $31.1 million in the prior year.

The increase in selling expenses to 11.6% from 10.6% of sales is due to increased advertising and marketing expenses to support our brand and new divisions.

Specifically, we launched our molded footwear Cali Gear by SKECHERS with a TV campaign, and due to its success, ramped up the POP displays to support it.

We also had several TV campaigns for our SKECHERS and Unltd by Marc Ecko kids lines, as well as our several of our adult lines, and outdoor campaigns in key markets from Times Square to the London Underground.

General and administrative expenses were $90.5 million compared to $72.8 million last year.

Our general and administrative costs were up slightly on a percentage basis to 25.7% of sales compared to 24.9% in last year's second quarter.

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

Net income for the second quarter was $14.9 million compared to net income of $17.6 million in the prior-year period.

Diluted earnings per share were $0.32 on approximately 46.8 million average shares outstanding compared to diluted earnings per share of $0.40 on approximately 46.1 million average shares outstanding in the second quarter of last year.

While we are pleased with our topline increases, we're concerned that our earnings were below our previously issued guidance due to the increased expenses previously discussed.

Going forward, we plan to balance our growth goals with the desire to continue to grow profitably as well, and we feel strongly that many of the investments in marketing and store presence will generate positive returns in the future.

We are committed to continuing investing for the long-term health of our global business and plan to prudently invest our marketing dollars and scale our infrastructure to import our increased size while focusing on improving profitability.

Our balance sheet continues to be very strong.

At June 30, 2007, cash and short-term investments stood at over $218.6 million.

(inaudible) accounts receivable at quarter end were $226.3 million, and our DSOs at June 30, 2007 were 53 days versus 52 days at June 30, 2006.

Inventory at quarter end was $204.7 million, representing an increase of $48.3 million from $156.4 million in the prior year period, which we believe is in line with our backlogs, increased store counts, [new] divisions, and the overall strength of our business.

As you may recall, a year ago, we felt our inventory was less than optimal for our growth rate.

Working capital remains a very strong [$488.2 million] at quarter end.

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

Shareholders' equity at quarter end increased 45.4% to $583.1 million versus $401.2 million as of June 30, 2006.

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

Capital expenditures during the quarter ended June 30, 2007 were approximately $8.2 million as compared to $8.8 million in the prior year.

$6.2 million related to new store openings, store remodels, warehouse equipment upgrades, and information technology.

The balance of $2 million relates to our new corporate office building.

We expect our capital expenditures for the remainder of 2007 to be approximately $20 million, which includes the opening of 15 to 20 new stores and store remodels and the completion of our corporate headquarters.

And now I will turn it back to David for guidance and some closing remarks.

Our focus in the second quarter was on continuing to deliver trend-right styles in our proven lines and develop our newer lines in our domestic and international markets.

We are pleased with many of these newer lines and our results.

We believe our focus resulted in a new quarterly sales record and our 14th consecutive quarter of topline increases as more in-season product was delivered.

We're approaching the third quarter and remainder of the year with the same strategy, both in the U.S.

and abroad, which we believe will drive our continued momentum.

We now expect third-quarter 2007 net sales to be in the range of $380 million to $390 million, and diluted earnings per share in the range of $0.43 to $0.48 on approximately 47 million diluted shares outstanding.

We would also like to note that stated 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 just 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.

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

As previously mentioned, our media spend should be no more than 10% over the third quarter of 2006.

Again, we believe the sales momentum we are seeing will continue into the back half of the year based on our key indicator -- account reactions during our July prelines, comp store sales, and our backlog.

We're gearing up for our continued growth, and are focus 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.

Christopher Svezia, Susquehanna International.

Several questions for you -- I guess, David, first could you maybe describe if there was any shift in your U.S.

wholesale business related to back-to-school, maybe retailers pushing back a little bit?

Can you maybe describe and update us on that?

Well, that's hard to tell.

We don't see anything significant.

Actually the top -- in actuality, the topline number was in line with what we had anticipated.

There was some shift, and if you look, our wholesale domestic business was up significantly less than it was in Q1.

And it was made up for by retail and international, which is kind of a switch.

So our backlogs and shipping in July has been fairly strong.

And there may be a case that it was a slight movement, but it would be nothing exceptional -- part of back-to-school being later, so we get a later at-once piece.

And we really won't know that until we get into August.

Okay.

And then could you maybe describe, I guess, your backlog performance by geography?

And I guess from a global perspective, you had mentioned that your inventory being up roughly 30% was in line roughly with your backlogs.

I know you don't give intra-quarter sort of backlog increase, but can you add any color, U.S.

versus international?

Our international by percentage, certainly, although not by dollars, is up significantly higher than domestically.

And that would make sense, because the third quarter is historically a stronger quarter internationally than it is for the -- than the second quarter is.

So they just sell better.

Europe really ships in August and September, where in the States, it's divided between June and July.

So our backlogs for Q3, and our overall backlogs have held up.

They're certainly growing at a slower pace than they did last year.

But last year we had a shift in the third quarter, so we would have expected to have a higher backlog as we entered into July to make up that differential.

I think more key retailers, more of our big retailers are trying to be careful and are trying to buy closer to the vest and have a bigger piece left on the table for at-once.

All right.

Year-ago period -- was it up 34%, I think, going into that third quarter, if I'm not mistaken?

I don't think so.

I didn't even think our inventories were up that much.

I think our inventories only started to increase and show those big increases at the end of the September quarter.

And we had said we had been underinventoried.

And I think inventory was growing slower than sales through June of last year.

And then just I guess maybe can you walk through the delta in the expense line -- and I know, Fred, you walked through some of this on the call here -- relative to your expectations and what you talked about in April?

It seems like a pretty significant number.

And I'm just kind of curious -- as you continue to grow your U.S.

store base, and you have consistently put up a positive comp, is there any leverage opportunity on that store growth?

And with international being up as strong as it has been in the first half of the year, would it be safe to assume, given the fact that you built out infrastructure in 2002 and 2003, that you should be leveraging off that infrastructure, given the revenue growth you're seeing?

That's a mouthful.

We'll probably split off as far as these questions are concerned to (inaudible).

And I'll let Fred walk you through the actual delta (inaudible).

But I'll take the other stuff.

As far is leverage is concerned and international, it would normally be safe to assume that you would leverage as you grow, given all the pieces that are in a puzzle.

You have to realize that we are at a point in that time where the additional infrastructure build and what we're putting into the marketplace and what we have to run through is coming to the ends of our capacity to do it efficiently.

Now we have mentioned that we need a new warehouse.

And we're looking for one, and hopefully we will be able to get one in the next year or year and a half.

Right now, as we said in January -- I think at the first-quarter conference call, we have now had to add a fifth building to our structure in the U.S.

as far as warehousing capacity is concerned.

That is one of the deltas that Fred will be talking about -- the movement between that warehouse and the number of pairs.

And if you want to look at it more dramatically, even aside from the volume -- it didn't come up in this conference call, but usually -- our average unit price was down a little over $0.90 in this quarter, which means the number of units, if you remember my comments, were up 16%, even though domestic sales were only up 12%.

And the concept stores -- the stores were up 20, but that understates what it was, because the store openings have to be all [filled], and you don't get the benefit of that.

So it puts a tremendous amount of strain on the distribution center.

And the fact that we were 2 million over what we previously thought, given the amount of pairs and the extra units I think is something that we understand.

We explained we're trying to get more efficient, get this other building over.

But ultimately, we have to move under one roof.

And that will take care of that.

International, as well -- we did leverage well in international.

That was one of the bright spots.

We did show significant increases in bottom-line.

But we're at a point now, when you start growing at 50 and 60%, that you catch the capacities of that structure (inaudible) to DCs shortly.

We're not there yet, but it is not as far away as we had anticipated.

So that has leveraged, and we anticipate that the subsidiaries -- the distributors obviously leverage right off the bat.

The subsidiaries will continue to leverage, at least until we need to build some infrastructure as far as distribution is concerned there.

And I would assume or anticipate that that would take another six months to a year at current rates of growth before we really start hitting the peak.

As far as the stores are concerned, we do build the infrastructure -- if you open a number of stores in a [piece] -- our stores -- Fred will take you through the economics of the stores.

But they do very well leverage comp store sales increases.

When you open that many stores and you put the effort on your personnel to train and retrain and open, and your IT [seems to] put in those things, they can take a point where they deleverage -- the new stores, given the amount of them, could deleverage for short periods of time.

As you go forward, the number of stores becomes a smaller percentage to the whole and don't have the same impact, and if the stores continue to comp up and the new stores come online -- and I think our studies show somewhere between the first six and nine months, they start to have positive contribution to the four-wall -- you can expect, as our distribution and warehousing and processing at the stores moves, that they would start to leverage as we move out into that store expansion area as well.

And now Fred can take you through the variances.

Right.

Of the four items that I spoke of, Chris, the first item we talked about was the sales, support, merchandise in connection with the new Cali Gear product.

That's not something that we would expect to continue on, obviously, because there was a new hanging solution put in a lot of stores and racking equipment that was supplied to customers to push that product through.

So I wouldn't expect that to impact or be a drain in the future as much as it was in the current quarter.

As it relates to the stores, David already really kind of touched on that.

We opened 17 stores and closed one during the six-month period.

And the stores that we opened in Q2, absolutely do create a drain, if you will, on our operating margin, because they do not typically start showing positive operating results for at least a quarter.

But sometimes -- and depending on the store, they will mature quicker than not.

But that is -- as we accelerate the store opening rate, and 17 stores in six months is a substantial number of stores, that actually will come -- as some bit of deleverage.

But ultimately, when those start comping, they're going to leverage very, very well.

The warehouse and distribution costs, the third item -- actually the third item I talked about, really relates to what David talked about with the extra distribution center.

And that will be addressed at some point when we get some efficiencies out of the DC by consolidating locations and getting a bit out of the trucking business that we're in now.

And then the G&A builds to develop these brands -- we hope to address that in the future.

Obviously, when you bring out something as new as the molded footwear initiative, it's a completely new product line.

And we're pretty excited about its potential.

And besides that, it will really generate some buzz.

But at the moment, we're investing in it.

Right -- are you investing right now in some of these DC initiatives in terms of efficiencies right now?

Or is it just the fact that you're attempting to -- you have temporary work, you have another facility which you're stocking product -- just kind of weighing between the two of them, how much is which?

Are you making these investments now, and we should hear about lessening expense as we kind of move forward?

Well, in the foreseeable future, Chris, we have -- you can't just open a DC in a quarter and expect to solve things.

This is a fairly significant initiative, that we won't see -- really be able to get the efficiencies that we should be able to get for probably at least a year, over a year from now, and putting in place now plans to do -- get some efficiencies with our facility.

And so right now, we are in a mode where we're spending a bunch more money on temporary labor and labor dollars to move the product between these facilities.

Now on the positive note, we hope to manage these inventories better, potentially get some more volume which will maybe cut back some of the pair count.

But I really can't say, because we really are expecting growth in the business.

And I don't see significant deleveraging of that warehousing cost in the foreseeable future.

So as you kind of move forward between for the balance of this year, do you anticipate these cost levels to continue -- even more importantly, as you get into that fourth quarter?

You saw a significant increase in that fourth quarter a year ago.

Based upon numbers of pairs, we expect that the rate of distribution center costs should be continuing.

That will not leverage; it will continue to grow with the number of pairs that we have.

So we're not going to see any benefits from leveraging of our warehousing infrastructure domestically, I don't think, for the balance of this year.

Well, just -- I don't want to take issue, but you might see some leverage.

We have the sixth building.

To the extent that [it's] more utilized and we don't go to a seventh building, it would leverage some increase in volume because the building already exists, and there's only so much labor in between.

But it's certainly not big enough to take us up significant levels.

So that's a good news/bad news thing.

If we take off as we can and go to significant heights before we can build that building, you'd see some deleverage, but you would see it in the top line.

To the [extent] we remain within these walls, we should be able to leverage those walls a little bit as we go into fourth quarter and first quarter.

Jeff Mintz, Wedbush Morgan.

If I can follow up a couple of questions on the operating expenses, when you look at your new store growth, obviously, the rapid expansion is going to create expenses and deleveraging.

Do you see that as something that will start to level out as we get into 2008, or do you consider this kind of a new level of store opening that might continue these expenses going forward?

I think this is the new level.

I would anticipate that 2008 would be similar to 2007 in the number of store openings.

But then you have to remember that it will be on a bigger base.

The percentage of stores open should be slightly less in 2008 than 2007.

So you won't see quite the same impact.

And you'll get the benefit of comping of some strong comps on the stores open may be a year, year and a half.

And then just kind of in terms of the overall longer-term outlook, what do you kind of see as the target size for the retail chain in the United States?

What's the upper limit that you see at this point?

I don't think we've discussed it in terms of upper limit.

We're out now through 2008.

And I think opening the 30 to 35 stores this year and 30 to 35 stores in 2008 is about as far as we've gone today.

As we get closer to the end of the year, we'll make our plans for 2009.

Jeff, I think it also is our philosophy that we always want to keep our retail sales in relation to our overall brand sale relatively constant.

So if we grow, our whole brand grows, we will grow retail accordingly.

Okay.

And then turning to the G&A to develop the Cali Gear, I'm just trying to get a sense -- I kind of was surprised to see that fall into the second quarter as opposed to falling into the first.

Can you just kind of talk through how that came through, the expenses, and also what we can look for in the third quarter from that?

It really wasn't exclusively Cali Gear.

I would say Cali Gear and fashion brands -- it's an overall G&A build that we're addressing.

I don't know that that's a quick fix.

We have to kind of see what kind of levels of overhead we're going to need, and we've been rushing -- we've been pushing getting that product market to really capitalize on opportunity.

And we spend -- built up G&A, and now we have to kind of evaluate what is appropriate level of our G&A structure on a go-forward basis.

I don't know that that's a quick fix.

But it's something that we're addressing.

Okay, great.

And then on the sales side, obviously, the sales levels were strong.

But are you seeing anything in terms of pushback from your retailers, concerns about the overall consumer, high gas prices, anything like that that you're hearing from your retailers?

Our retailers are staying we, as a Company -- our product is performing exceptionally well.

But it is a very difficult retail environment.

David, do you want to --

No, that's true.

I think our biggest customers -- those of you who do your channel checks, I'm sure you've heard, we've performed as well as anybody, probably better than most.

So I think what we see, and it's not significantly different than the end of last year, is that our bigger accounts are performing better than the market in general.

So what's happened to us is our stronger, bigger accounts are getting stronger.

We're getting some deterioration at the bottom end.

And we've gotten deterioration, as we've mentioned in some of our fashion brands, because that marketplace, especially urban marketplace for some of those brands has seemed to deteriorate.

As far as SKECHERS is concerned, we don't see any of those issues.

But on the smaller, weaker retailers and some of the fashion brands, we do see some of it.

Great, thanks very much.

Good luck.

Robert Samuels, JPMorgan.

Can you tell us what percentage of the spend was discretionary versus what was needed to drive sales?

And can you quantify each of these four expense buckets?

I've roughly quantified each of those -- they're roughly equal in impact to the quarter.

I don't know that we've drilled down to that level of detail.

But if you look at our overall spend increase and you divide by four, that's somewhat the relative impact of each of those four items.

As far as discretionary and nondiscretionary, I don't know that we cut things that way.

We have expenses -- ultimately, every expense is discretionary to some degree -- rent, opening stores, things like that.

But I think you're talking about the selling line as far as the advertising, and the pushthrough as far as our in-store promotion is concerned.

There's a case to be said that it's all discretionary, and that total is in excess of $30 million for the quarter.

But we're big believers in advertising.

And when a thing like Cali Gear comes along and its potential is so huge and all our customers want to jump on and will give us the floorspace if we put in racks to hang that solution, which is -- we can't even get -- that's bigger than anything we've started over the last two or three years.

It's our nature to jump to the fold, and invest in that and put a couple million dollars into fixtures and fixturization that will continue at a lesser pace, because we've done a lot of it -- in the third quarter, just to get our name out there, which helps the entire Company, and to sell that specific product which we think has tremendous, tremendous opportunity going into '08.

And what percentage of sales during the quarter was Cali Gear?

It's not [measure] -- it wasn't significant.

I mean I doubt it was (multiple speakers)

It's just beginning, really -- (multiple speakers) product --

And I'm just trying to understand these extra expenses, and why they weren't included in your original 2Q guidance.

Can you just explain how you didn't know about these costs during the quarter?

And did you consider preannouncing?

Well, I don't know if -- [we're going] through considerations of what we did we evaluate ['08] -- I don't think -- it's so close to the end of the quarter, and anything is possible as far as volume and profitability is concerned to the end of the quarter.

As far as not knowing, we happened to be a very dynamic Company that has a lot of flexibility.

And we've used that flexibility on the upside.

So we've given leeway to a number of people within range.

When you talk about not knowing these expenses, you're talking about an order of magnitude of less than $7 million on [what was the] potential or calculated spend of 131 of $132 million for a dynamic company that had to move to an extra warehouse and opened 17 stores in the first six months and decided to push something behind.

So I don't know that anybody could fine-tune that kind of growth and that kind of expansion and that kind of infrastructure build to the penny.

Nor -- by the way, and see where the push would be or the pull for what moves into June, what ships in June or what ships in July.

And while our margins are still healthy, they came in at 43% --they were down from last year, probably by about 150 basis points.

And while we thought there would be some movement in those margins that went down, it was a little quicker than we anticipated given the first quarter and the historical rise, and a little bit of that could have been because of the fashion brands as well.

So when you put all of those dynamics in a row, it's very difficult to have a model that doesn't have a plus or minus in any particular field on that level.

The other thing also to keep in mind is some of the costs that we referred to were towards the latter half of the quarter.

There were certain of those costs that really started to accelerate in end of May and June.

Rajiv Kumar, Thomas Weisel.

I see that the gross margin has actually come down [year-on-year] by about 1.5%, so --

I didn't catch that.

Can you say that one more time?

Gross margin?

Yes, the gross margin I see has come down by about 1.5%.

Year-over-year -- yes, that's correct.

Yes, so could you give us more color about whether it's due to merchandise margin, overhead associated with sourcing?

Our margins are fairly clean.

Our sourcing other than transportation costs are not in the margin for the products.

You can assume that's all product-related.

And just as a point of information, it does exist across the board.

It wasn't like one thing dragged anything down.

We had a little extras in some of the fashion brands, but it existed at retail, and at domestic wholesale and at the international wholesale.

And I think that's more a function of the product mix moving to some canvas and footwear that, by its nature, and a larger kids business that had a lesser margin.

(multiple speakers)

And I'll point out that in 2006 we really had -- really were light on inventory.

So we were a bit more -- we believe that the current margin is more appropriate for our business model, where we're at now, then it was in '06, as we said on the call.

We've seen that (inaudible) have generally done well this season.

And if you look at the kids assortment you have, that has been doing pretty well, albeit from a very low base.

So considering the new launches, have you planned anything specifically targeting the kids or the younger population?

Well, we have very big kids business.

It represents more than 30% of our buying to begin with domestically, and it's starting to grow internationally.

So we have a lot of initiatives that have to do with kids.

Our fashion brands, the Marc Ecko kids line is doing very well; our own footwear line is -- SKECHERS footwear and Cali Gear is doing very well.

And we plan on continuing to advertise it very well and making it and continuing to keep it a significant part of the business.

Susan Sansbury, Miller Tabak.

My questions have been answered.

Thanks very much.

[Paul Sullid], Slater Capital Management.

It's Steve Martin.

I guess, David, all quarter long, the issues you raised with us were the timing shift of revenues.

And clearly, at end of the day, revenues just weren't the answer.

And while I understand some of these expenses, I just don't understand -- Fred, you're de minimizing, or David, the inability to know within $7 million what your expense levels are.

Pre-opening expenses on retail stores are budgeted.

Whatever number of stores you are going to open, you know what they are.

You know what your rent costs are.

How can you miss your expenses by this much and not have anything else to say?

Well, that would be your opinion, and I understand where you're coming from.

If you deal with a dynamic company that has a $20 average unit that's growing 20% to $350 million a year, and you have to open new facilities and increase the structure of your cost, we can't tell with all of those pieces within 1 million or $1.5 million for those line items when we're starting something new as to what there efficiencies could be.

So if there's somebody out there who can, we will certainly go look for them.

But I don't think that was the issue.

It's just one of those quarters that sometimes comes to be when all of those things that can happen do happen over a significant number of line items that represent less than -- of the total spend, probably less than 4% of the total spend.

And we're not de minimizing it.

We're trying to explain the situation that exists and what we can do to fix it.

And we think the important issue is that we don't leave anything on the table, because in order to meet those guidelines we've set, we would have had to put parameters on some store openings that might have had some issues with them, or our overhead in a warehouse that would not have allowed us to deliver, and those are things that we're just not willing to do, or to make a decision as to not put a significant backing to something that we think is as important to us as Cali Gear by SKECHERS in order to meet a Wall Street guideline.

And that's just not the way we would do it.

We will address it.

We will fix it as we've done in the past.

We think the most important thing is to keep our customers intact, our image in the marketplace intact, and keep the topline growing at significant margins so that these things can be fixed as we go along, even if they were a little more expensive than we anticipated as we went into them.

Yes, but there's an element of -- we talked -- somebody asked a question about discretionary spend.

You're now talking about a third quarter substantially below where everybody expected it to be, as well as substantially below where you indicated it might be.

So I understand you're concerned, and I understand you don't want to cut expenses that will hurt the brand.

But continuing to pour money into some of the fashion brands that you admitted just didn't perform -- at what point does something discretionary in it, at what point do you -- does concern turn into action?

That's a very difficult question.

The timing [doesn't exist] that easy.

It would be fair to assume that no significant action on any brands or any decisions would be made before WSA when we see the advent of back-to-school, because you don't know that everybody's got it right right off the bat because of their commitments upfront.

So I would assume or I could assure you, I don't know -- whichever way you're looking for it, that after WSA when we sit and evaluate where our customers are, where our backlogs are, we will make decisions that we think that are prudent to continue to drive the business and put it on a solid footing.

Yes, but by the time WSA is over, you're halfway through the quarter, and nothing you can do can virtually change the third quarter.

But I don't know that I'm looking to change the third quarter.

We're not a quarter-to-quarter business.

We will set it up for the end of -- for third quarter, for a Q4, for first quarter.

I mean, we have significant upside in our numbers as it is.

Just because we've come out and tried to take a very realistic approach of what the best case is doesn't mean we're not as hot as we've ever been in the marketplace, and in a good back-to-school, we'd sort of explode, because people have been holding things back, and still put even more stress on our infrastructure.

We're not about to back away from any of these decisions or any these pieces until we see what happens at back-to-school.

And I don't know that we would just to protect a single quarter -- not our thought process.

Well, it's not just a single quarter, David.

You're now talking about the second quarter being substantially down versus last year, the third quarter being down versus last year, and a year that is marginally up from last year with a huge increase in revenue.

So you know, I applaud what you guys have done on marketing.

And I applaud what you guys have done on new product generation.

But it's got to come with profitability.

I agree.

We understand.

One last question.

And I know Robert -- well, he's either on the call or not there or whatever -- once again, you've got a lot of cash and your shares are going to get pummeled tomorrow morning.

Would you care to comment on Robert's willingness to support his stock and show his belief in the future, as well as Robert's possibly not selling any more stock until he can restore some confidence in the Company's profitability?

(inaudible), since he is not here and I really can't speak for him, I don't have a comment.

I don't think there's been a discussion about what will happen in the morning with the stock price and what we should do.

I think it's fair to say that we think our brand is intact, our brand is performing well, we're going to do WSA in a very strong position.

And as we go into that and see what develops and what it is, and he assesses his personal information, we will have more details at the end of the show than we have right now.

Sam Poser, Sterne Agee.

I just want to follow up -- one follow up on all this and then another question.

And my question really is, what was the big change from the end of Q1 to now?

A lot of things happened, but how much did you -- how much new information came about here?

Unless you're [talking us] deaf, dumb and stupid, obviously there's a lot of new information, or we would have known it in the first quarter.

But we tried a lot of new things and we start -- when you open stores of that magnitude or move to an extra building, and you move significantly more product and less dollar volume, you don't always know the magnitude of how much each move and how much each piece of equipment and how much each person's overtime and how much is coming in specifically from the Orient on which day that you can move it around and do that.

And when you open that many stores, you don't always know the exact inflection point where that pressure on the infrastructure and the opening curve is significant enough to show that -- [a deleverage].

It's something you have to -- we are big believers in the marketing and putting it in the brand.

And when we got into Q2 and realized how big Cali Gear could be, and we had the option of putting that much structure into it -- to do it for Q3, it's not something we balked at.

So those three items, that $6 million, was either an unknown or a that decision was made in the second quarter.

Now as to what it means to the quarter, up until the last quarter, we've had the potential that we could have been $10 million higher, had some shifts occurred in the second quarter in volume that would have made up a significant piece of that interest, or been up 30 or 40 basis points from where we ended up in volume that could take it out -- all of which comes to being in the last couple weeks of June.

So we've been doing this quite a while.

I think we're intimate with our business.

We understand it.

But there are some things when you grow to this level and growth this quickly that are not so easily definable.

And you've got a point where it has to happen at each line item for the them all to meet at the same time.

So that's just one of those things that we think -- when all those pieces are moving at the same time.

A lot of the stores, by the way, and during the quarter -- there's always a shift in when stores get opened from what you plan, based upon when the space is available and what your expected opening date is and when they call.

When the stores, as happened in Q2, open proportionately towards the end of the quarter -- in fact, I think the majority, if not like all but one store, opened either last week of May or in June, you have all the preopening costs associated with those store openings hitting in the month and not a lot of revenue being generated.

And so they do tend -- the shift in when those stores open do impact how they perform during -- when you look at a quarter in isolation, and those do move around between months, between availabilities of when those stores become available.

Can you break out these expenses by how much it was for the building, how much it was for the stores, how much it was for the people, the equipment and so on?

Can you -- give us a picture of what happened and when it happened here?

(multiple speakers) Yes, we told you the $7 million is divided almost equally between the four pieces.

So it's about 1.5 to $1.7 million per line item category that were mentioned to begin with.

And how much of that happened in the last three weeks of the quarter?

A lot of the POP stuff happened towards the end of the quarter, the store opening costs were, like I had already mentioned -- a lot of that was towards (multiple speakers)

And the pressure on the warehouse obviously happens in the month of June.

(multiple speakers) in the month when you open the new stores.

I mean, they're somewhat related.

It was back-end loaded in the quarter -- the majority of it was.

I mean, short of that, I don't know what else to tell you.

Well, as we look out into Q3, you're increasing expenses there.

How is that breaking out in these categories?

We have -- expected start opening dates of the stores that we have -- and I have used that in what I can as far as projecting when they are going to break.

The positive thing is the stores that we actually did open will start performing better.

And so you'll get some positive impact off of those numbers.

But the Cali, the whole push of the POP merchandise and stuff -- that's really behind us, I think, for the most part.

If it continues -- if our retailers do exceptionally well, we will have to see how that goes as far as any additional cost.

But we believe we spent a bunch of that already.

So you have to get down into individual line items, Sam, and look at them.

Okay.

You also -- you continue to talk about your margin getting hurt by the fashion brands.

And you talked about (multiple speakers)

I don't think we said that.

I think we said it was across the board.

The fashion brands probably a little more, but it existed in retail.

It existed in the overall product; [it] exists in domestic wholesale, and it exists in international.

Pretty much all the margins were down.

The fashion brands were down greater than the SKECHERS brands.

But in the aggregate, all the margins were down.

Well, with the fashion brands down greater than the other, and did the fashion brands in total -- how did they perform relative to SKECHERS brand?

Not as well.

And you mentioned two specifically -- (multiple speakers)

Say again --?

You mentioned two brands --

You mentioned Michelle K and 310 Motoring as ones that didn't [bump] up -- [work] up.

But can you walk through some of the other ones and where your strength, where you're having strength, and where that weakness is?

Yes, I think we mentioned -- our strength is from Marc Ecko (multiple speakers) and Zoo York is just beginning.

But it's got a good start.

It doesn't have a comp, so everything has been a positive for it.

Kitson was up.

We expected it to be up more, and it wasn't.

Kitson was not up?

(multiple speakers) I'm sorry -- Kitson -- say that again --

Kitson was up, but we had anticipated it would have a better growth curve, given Q1 and Q2, but it didn't.

We're talking in terms of volume of sales.

And how much is the total -- how much volume is being done annually in the total -- or for the quarter in the total fashion group?

You were talking about $100 million a year ago.

Where is it looking this year?

Well, it's not comping down.

It's just we had anticipated it would go from 100 to $150 million.

And other than Ecko, they're not performing to that level.

Scott Krasik, CL King.

Were ASPs in the SKECHERS-branded product down?

Yes, I think they were down just over $0.90.

Okay.

And then how much of an impact as Cali Girl really rolls out will that have on ASPs on a go-forward basis?

And will that the one of the reasons why gross margins going forward could just be structurally lower?

Well, the fact that ASP's are lower doesn't structurally decrease the margins.

Actually, the Cali Gear margins are as good as or better than all the SKECHERS.

It's the margin dollars and the unit costs and the infrastructure build to support more units per dollar that are at issue.

Okay.

So we can see ASPs going down because Cali Girl is going to get bigger, but that specifically -- margins should be --

The gross margins should be.

Obviously, you have a little more pressure on your operating margin for that division, because the overhead to push more units per dollar of sale.

It's a little bit like the kids business.

Right, okay.

And what -- just sort of average numbers -- your new stores, what -- as a percentage of the mature stores, what level of productivity do they open up at?

And now that you're opening stores more rapidly, have you seen your new store openings being more productive than they have in the past?

I think they're following the trends as far as [our new] store opening expectations are.

Initially, when they open, they're not even maybe at half of the expected volume in the first -- not even in the first quarter.

In the first quarter, there's a big drain.

But then by the end of the second quarter, maybe the third quarter, they may be breaking even.

And then they start contributing.

So the thought to open new stores more aggressively is more a marketing effort than you'd seen it -- the profitability increase?

I can't say that.

The stores are comping positive, have been for quite some time.

What will happen is as the store base gets installed -- and whenever you accelerate your store growth, you will have drain on earnings.

But as those get into the -- as they start producing revenues and getting to be profitable, then they start comping, they start really contributing to your profitability in a much [better] -- and leveraging.

So I think -- I don't think there's any fundamental huge change in our store pro forma.

And operating expectations -- rents are continuing to go up, obviously.

And that makes it a little more difficult for us to find suitable locations.

And we'll put some strain on the future potentially on our profitability.

But as we sit here today, we have no -- I don't see a huge change in the profitability of our individual concepts or the different types of stores that we have as far as the pro forma is concerned.

Okay.

Frank, can you tell us what comps work by domestic and foreign?

It will be in the Q, but --

Do I have the comps -- for the quarter?

Yes.

The comps domestically were high single digits.

And they were obviously significantly higher for the international stores, strictly because they do deal in local currency.

And obviously, the strength of the euro and the pound where we have the stores were a contributing factor -- that have been significantly higher.

I think their unit growth increase was slightly higher than the domestic one.

But obviously, if you convert that to dollars, it's significantly higher.

Okay.

And then David, can you talk to maybe department store versus the family channel versus your Foot Locker/Finish Line stores, and differences in some of your distribution channels?

Obviously, we continue to feel our strongest venue is the family footwear channel.

And that continues to be -- hold up remarkably well.

The department stores would be our second, and it depends where.

We're having great success in companies like Penneys and Kohl's, if you consider them department stores -- as well or even better.

The athletic channels, the Foot Lockers and Finish Lines, still remain a struggle for us.

Okay.

So is there any talk about expanding the doors there, or you're now just sort of watching where you are?

We're trying to go very carefully in the athletic channel.

Okay, thanks.

See you next week.

John Pinto, Brightleaf Capital.

Dave, Fred, I guess I don't want to follow up too much on Steve's comments, but to follow up on them a little bit -- we recognize this is not a quarterly business you're managing.

But if I look at the operating margin degradation this quarter and what's being guided to for next quarter -- 300; 150, 200 basis points -- and look at a year that most likely is going to have an operating margin down year-over-year with very strong performance on your part productwise and expansion of diversification of the product line and so forth -- I guess what importance do you put, and will the management team put and Robert on trying to build up operating margin, whether it's on an LTM basis, or -- what kind of metric are you looking at, that is somewhat medium-term, that we can kind of understand, where you will sit down and say we've got to lever operating margin with this type of growth?

What kind of timeframe should we be looking at for that?

I would hope we're talking about 2008, certainly the latter half of 2008, simply because as Fred said, the building of a structure to house this stuff and become more efficient and significantly more scalable within the range would take that much time.

But certainly, we will be working towards it before then.

I think it's important to note -- you know, you say the operating margins are deteriorated, and that is obviously true.

But there is no significant -- or a significant piece of the operating margin deterioration for second and potentially third quarter exists in a gross margin line, which we all knew was significantly high to begin with.

So when you talk about a company that has to have a slight decrease of 100, 150 basis points in gross margin, and that continues through and possibly even more, to get to a realistic margin, then you're talking about increasing your operating efficiencies by 150 basis points to break even.

And when you're growing at this level, it's not always possible on a quarter-over-quarter basis.

But we take issue with some of the things said.

We are cognizant of it.

It is important to us.

We do want to grow.

We want to keep our position in the marketplace.

But growing profitably is important to us, and we will be working on it as we go through and show results as soon as possible, certainly gearing towards the significant pieces in 2008.

Okay.

And so I guess what you're saying is, we can take gross margin as kind of stable point from this point forward --

Well, I don't know that.

I mean, that's what we said last year, and it's more realistic.

But I wouldn't sit here and tell you that it can't go back up 150 basis points in Q3 and change the whole outlook to begin with, depending on how hot we are and how good back-to-school is.

So it's certainly not out of the question.

It's just not something we would model right at this particular point.

Okay.

Final question -- is the product mix in what you have been shipping -- as you said, that partly was to -- the factor for bringing down your gross margin, whether it was more kids or bringing down by fashion -- what do you foresee for the back half of the year in terms of that product mix?

I know your kids business was very strong.

What can you say about that and how that might impact gross margin?

I think our kids business is very strong.

And I do believe that our men's business remains very strong.

We're modeling Q2 as a model for margins as we go forward.

I think it's slightly high, but we do believe there's upside potential in there.

Until we see how the back half (inaudible) up, goes forward, and what really does sell for us at back-to-school, and what the hot products are, and what happens for Q4, we won't have a significantly better handle than we have right now.

Okay, and then finally, so -- given that, I'm assuming then that inventory dollars year-over-year at the end of Q3 -- given, you'll start to comp against -- the increases that you had done last year will start to kind of trend toward either backlog or revenue growth?

Yes, they will certainly get more in line.

We will have a more like number to address.

At the end of Q3.

Yes.

All right.

See you next week.

That concludes the question-and-answer session today.

At this time, Mr.

Greenebaum, I will turn the call back over to you.

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 differ 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.

This does conclude today's conference call, we appreciate your participation.

You may disconnect at this time.