Skechers USA Inc (SKX) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the Skechers USA Incorporated third quarter earnings call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(OPERATOR INSTRUCTIONS).

This conference is being recorded, Wednesday, October 24, 2007.

I would now like to turn the conference over to Andrew Greenebaum.

Please go ahead, Sir.

Good afternoon.

Thank you, everyone, for attending Skechers' third quarter conference call.

I will now read the Safe Harbor statement.

Certain statements contained herein including without limitation statements addressing the beliefs, plans, objectives, estimates or expectations of the Company or future results or events may constitute forward-looking statements in the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

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

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

Users of forward-looking statements are encouraged to review the Company's latest annual report on Form 10-K, filings on Form 10-Q, Management's Discussion and Analysis of the Company's latest annual report to stockholders, the Company's filings on Form 10-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.

Now I'll 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' third quarter 2007 results.

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

Third quarter 2007 net sales were $395 million, an increase of 19.3% over last year and the highest quarterly net sales in our 15-year history.

On a year-over-year basis our third quarter 2007 sales represent the Company's 15th consecutive quarter of topline increases.

Net income for the quarter was $24.7 million versus $22.2 million for the same period in the prior year.

Diluted earnings per share were $0.53 compared to $0.49 in the third quarter of 2006.

Earnings were negatively impacted by onetime expenses and charges that Fred will discuss in more detail later.

Our top and bottom line results were higher than our guidance on our second quarter conference call and release.

This is due to a combination of higher revenues, tighter control of expenses, increased focus on marketing of our core lines and continued strong gross margins.

We will continue to invest in our brands to grow our business, including the reported new distribution facility we plan to occupy in the first quarter of 2009.

For the nine-month period ended September 30, 2007, net sales increased 21.2% to $1.09 billion compared to net sales of $900.9 million for the same period in 2006.

Net income was $63.6 million versus $56.4 million for the first nine months of 2006.

Diluted earnings per share were $1.37 compared to $1.27 for the first nine months of 2006.

Our continued successful approach to product, marketing and distribution resulted in the following accomplishments in the third quarter and 2007 -- double-digit sales growth in our domestic wholesale division led by double-digit improvements in our key Skechers men's, women's and kids' lines as well as our men's and women's Marc Ecko footwear; the addition of Cali Gear by Skechers for men, women and kids and Zoo York footwear; mid double-digit sales growth in our international subsidiary business led by strong improvements in two of our largest subsidiaries, the United Kingdom and Canada; double-digit sales growth in our international distributor business; double-digit sales growth in both our domestic and international Skechers retail division with a net increase of 30 domestic and three international stores from Q3 2006, including the net addition of 10 in the third quarter; and an increase of [pairs shipped] by approximately $1.5 million or 15% in the United States.

Our key financial achievement to the third quarter include record quarterly sales and our fifth consecutive quarter of sales over $300 million and our 15th consecutive quarter of increased year-over-year sales.

A new record for nine-month sales and the first time we surpassed $1 billion in sales for the period; strong gross margins of 43.5%; a strong balance sheet with approximately $224 million in cash and short-term investments; and current and on-plan inventory of $186.8 million compared to $177.2 million at September 30, 2006.

We are very pleased with our sales in each of our segments and our financial position.

Based on our comp store sales increases and sellthroughs, we believe the strong revenue momentum we are currently experiencing should continue into the new year.

Now I would like to expand on our third quarter 2007 achievements in our three revenue channels.

Domestic wholesale, international, and retail.

For the third quarter, domestic wholesale net sales increased by 14% in the same period last year and 15% for the first nine months of 2007.

Our continued growth through the back to school season, especially given the reportedly difficult retail environment, reflects the strength of our brand.

Also the diversity of our product has been important to our past growth and we believe it will continue.

The success within Skechers brand is broad-based and comes from the continued strong sales in our women's Skechers [assets] with its low-profile look; men's Skechers sport with its diverse range of sneakers; Skechers USA for men; Skechers work and Skechers kids with its growing offering of easy closure shoes for both boys and girls.

Additionally our recently launched Cali Gear by Skechers molded footwear line for men, women and kids also added to our growth.

Within our fashion and street brands the growth is primarily from our men's and women's Marc Ecko footwear, Zoo York for Men, our kids fashion footwear and the addition of Zoo York for Women.

Our strength and unique place in the market lies in targeting each of our brands to the right customer and distribution channel and then supporting the brand with a combination of great product in marketing.

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

Multiplatinum recording artist Ashlee Simpson has recently appeared in campaigns for our Cali Gear by Skechers, Skechers Cali and Skechers active line while multiplatinum R&B artist JoJo emblazoned our Rhino Red ads.

And there are two new faces for women's read by Marc Ecko line, "High School Musical" star Vanessa Hudgens and Ashley Tisdale.

We believe our continued focus approach to marketing including our array of TV spots for Skechers Kids and Unlimited by Marc Ecko for Boys; Skechers Women's and Men's and a spot each for Unlimited by Marc Ecko and Rhino Red had a positive impact on sales for these brands in the third quarter.

Moving onto international, for the third quarter Skechers' international wholesale sales improved by more than 35% 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 network of 10 subsidiaries across Europe, Canada and now Brazil and Malaysia -- both of which began operations during the year.

Our subsidiary wholesale business improved by 46% with double-digit quarter-over-quarter growth in nearly every subsidiary.

The United Kingdom, our largest subsidiary, reported triple digit growth.

Malaysia shipped its first pairs in the quarter and Brazil's first shipment started earlier this month.

Our Skechers brands represent most of our subsidiary sales but we are experiencing triple digit growth among Marc Ecko footwear lines in our European subsidiaries and believe there is a strong potential for the brand in Brazil.

Zoo York, which launched more recently in Europe, is already becoming a viable brand in the regions it is available.

Our international distributor sales grew by 18% from the third quarter of 2006.

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

As in our subsidiaries, the growth for our distributors is primarily in their Skechers business where we are also seeing similar improvements in the recent additions of Marc Ecko footwear and Zoo York footwear.

These fashion brands are getting a foothold in many markets and we believe they have great potential.

New regions for the Marc Ecko footwear have been Central and South America, Philippines, Russia and select countries in Eastern Europe.

To support their Skechers business is many of our key distribution partners have opened Skechers retail stores in regions where they sell our footwear.

At quarter end 14 distribution partners had 58 Skechers retail stores in 20 countries.

Our distributor in Chile opened a flagship store in Santiago during the quarter and three stores that were previously distributor stores in Malaysia and Thailand became Company-owned stores due to Skechers assuming direct distribution in the brand in these countries.

Our international distributors plan to open another seven to 10 stores in this quarter.

As in the United States, our aggressive and on target advertising and marketing efforts overseas from print ads to outdoor and from mall kiosk to Skechers stores has had a positive impact on our international sale.

Our international distributors utilize our Company-created marketing material, translate them into their markets and then build on them with their own promotions and celebrity endorsees.

Presently, five of our international distributors -- Chile, Israel, Russia, Czech Republic and Taiwan -- have signed endorsement agreements with local celebrities.

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

International now represents 20% of our total sales for the quarter and the nine months.

Based on our double-digit backlog, the sellthrough and the launch of Cali Gear by Skechers in many global markets -- as well as the first shipment of our product reaching the Brazilian marketplace -- we are moving closer to our short-term goal of 25 to 30% of total sales.

We have also just entered into a joint venture in China which we believe had tremendous potential and will add significantly to our international sales in the years to come.

Turning to retail.

Our domestic and international retail sales were up 21% in the third quarter 2007 marking the 17th consecutive quarter of double-digit year-over-year sales increases in our retail division.

At quarter end we had 178 Company-owned and -operated retail stores, 163 of which are located in the United States.

Domestic retail store sales increased by 21% for the quarter.

This growth was due to a combination of mid single digit comp increases and an increase of 31 domestic stores, eight of which opened in the third quarter, including our first concept store in Michigan at the Twelve Oaks Center in a suburb of Detroit and our first store in Austin, Texas.

We closed one warehouse store in the quarter that was underperforming.

In addition to the domestic stores we also have 12 Company-owned and -operated Skechers stores in Europe, three in Canada, two in Malaysia and one in Thailand.

International retail sales grew by more than 20% in the prior year due to a combination of double-digit comp store sales in virtually every region and an increase of three stores.

We are pleased with the strong sales in our stores across Europe and Canada, and believe this is in direct response to the growing awareness and acceptance of our brand in these regions.

Based on the strength of our business and our brand and the continued positive comp store sales, we will continue to open retail stores in good locations.

We have opened five stores already this quarter and plan to open eight more before the end of the year, including our first in Maryland and another six to eight in the first quarter of 2008.

Now, I'd like to turn the call over to Fred to go over the financial results in more detail.

Thank you, David.

Now turning to our third quarter 2007 numbers in detail, as David previously discussed, third quarter sales were $395 million compared to $331.1 million last year.

We experienced sales growth across all our business segments with the strongest growth coming from a 36% increase in our international business, combined with continued domestic, retail and wholesale growth.

Third quarter gross margin was 43.5% compared to 44.2% in last year's third quarter.

Slightly below our gross margin from the prior year is due principally to close out the discontinued fashion brands in both our wholesale business and Company-owned wholesale -- warehouse stores during the quarter.

We continue to believe a 42 to 43% margin is appropriate for our business.

Gross profit was $171.7 million versus $146.3 million in the same period a year ago.

Total operating expenses as a percentage of sales increased slightly to 34.4% in the third quarter of 2007 compared to 34.2% in the prior year.

Third quarter selling expense increased to $37.7 million in the period from $35.7 million in the prior year.

Selling expenses decreased as a percent of sales to 9.5% from 10.8% due to a reduced media spending primarily on our discontinued fashion brands.

General and administrative expenses were $98.4 million compared to $77.5 million last year.

Our general and administrative costs were up on a percentage basis to 24.9% of sales compared to 23.4% in last year's third quarter.

As discussed above the increase on an absolute dollar and percentage of sales basis is due to the increase of 33 Company-owned stores from the prior year's third quarter as well as increased salary costs and greater warehousing and distribution costs and rent expense to support this continued retail and wholesale growth.

During the quarter, we incurred $4.4 million of non-recurring costs at the closing of our Taiwan branch, relocation of certain of those employees to China, certain severance and other costs related to the closing and repositioning of several fashion brands.

Partially offsetting this was a legal settlement which was received during the quarter resulting in a gain of approximately $1.4 million.

The net effect of these non-recurring items reduced earnings per share by $0.04 for the quarter.

These actions should reduce our general and administrative expenses by at least $2 million per quarter in the future.

Net income for the third quarter was $24.7 million compared to net income of $22.2 million in the prior year period.

Diluted earnings per share were $0.53 on approximately 46.7 million average shares outstanding compared to diluted earnings per share of $0.49 on approximately 6 -- 46.2 million average shares outstanding in the third quarter of last year.

As discussed in the past we continue to balance our growth pool with the desire to continue to grow profitably; 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 support our increased size, while focusing on improving profitability.

For the nine months ended September 30, 2007, net sales were $1.09 billion versus net sales of $900.9 million for the first nine months of 2006.

Gross profit was $472.7 million compared to $395.4 million to the same period of the prior year.

Selling expenses for the first nine months of 2007 were $105.4 million compared to $87 million for the first nine months of 2006.

G&A expense was $274.9 million compared to $222.2 million in the same period last year.

In total, for the first nine months of 2007 operating expenses were $380.3 million compared to $309.2 million for the same period last year and were up .5% to 34.8% of net sales.

Net income for the first nine months of 2007 was $63.6 million or $1.37 per diluted share compared to $56.4 million or $1.27 per diluted share in the same period last year.

Our balance sheet continues to be very strong.

At September 30, 2007, cash and short-term investments were $224.2 million.

We continued to received inquiries regarding the use of cash.

At the current time we are not ready to announce any decisions regarding this.

(inaudible) accounts receivable at quarter end were $206.3 million and our DSOs at September 30, 2007 were 48 days which is 47 days at September 30, 2006.

Inventory at quarter end was $186.8 million representing an increase of $9.6 million from $177.2 million at September 30, 2006.

We believe these inventory levels are appropriate and in line with our current backlogs, increased store counts and the overall strength of our business.

Working capital remains at a very strong $512.4 million at quarter end.

Long-term debt was $16.6 million which is primarily related to mortgage on certain real estate.

Shareholders equity at quarter end increased 44% to $611.5 million versus $424.5 million as of September 30, 2006.

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

Capital expenditures during the quarter ended September 30, 2007 were approximately $9.5 million as compared to $8.3 million in the prior year.

$8.6 million was related to new store openings, store remodels, warehouse equipment upgrades, and information technology.

The balance of $900,000 relates to our new corporate office building.

We expect our capital expenditures for the remainder of 2007 to be approximately $11 million which includes the opening of approximately 13 new stores and store remodels.

Now I'll turn it back to David for guidance and some closing remarks.

Our formula of delivering a diverse product assortment at an affordable price and to the right channels and supporting it with consistent marketing has allowed us to once again achieve record quarterly sales.

We are particularly proud of our growth in the United States as we know back to school retail environment has been tough for many.

We have exported our formula, product in marketing, to countries around worlds and continue to see double-digit sales improvements in the quarter.

We are continuing to build exceptional products that is relevant in the global footwear market and we believe that our current product offerings and marketing will drive sales through this year and into next year.

It is important to note that 2006 fourth quarter sales were particularly strong, up over 36% from the prior year.

This growth was due to a combination of factors including a very strong retail and wholesale sales and a quarter that benefited from our catching up with the inventory positions during 2006.

We believe our fourth quarter 2007 sales will be in line with last year's quarterly sales which shows the relevance of our brand in a difficult domestic retail environment.

We expect these results in spite of closing two of our underperforming fashion brands -- Michelle K footwear for women and girls, Kitson Apparel for women and Kitson Footwear for women and girls.

We are also repositioning the 310 footwear line to keep it fresh and relevant in the marketplace.

Combined, these brands represented approximately $8 million in sales in Q4 2006 for which sales this quarter will be negligible.

With positive retail comps and a very strong international sales we now expect fourth quarter 2007 net sales to be in a range of $305 million to $315 million and diluted earnings per share in a range of $0.26 to $0.31 on approximately 47 million diluted shares outstanding.

We are focusing on growing our key brands where we continue to see many opportunities, further building our own retail store base with an additional eight stores in the fourth quarter, and improving our wholesale distribution around the world.

Our current positive indicators including our double-digit backlog which did not have the benefit of the lines that we are discontinuing lead us to believe that our positive sales momentum will continue in 2008.

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

(OPERATOR INSTRUCTIONS) Chris Svezia with Susquehanna Financial.

A handful of questions.

I guess first, David, I was wondering maybe if you could address the Cali Gear business and I guess the opportunity as you see it unfolding particularly to 2008?

If you could add any color in terms of the challenge to distribution and the opportunities.

Obviously you are in the family footwear channel and that has worked very well for you.

I was just wondering maybe you can talk about additional channels of distribution and product growth as you look into 2008?

Potentially what it could mean for you.

That's a mouthful.

Well it's obviously a very colorful category.

We have spoken in terms of it anticipating $100 million or more business in 2008 and I don't think anybody here would step away from that.

We're getting obviously in the family footwear channels and we are -- everywhere we sell domestically and we are surprised by how well received it is internationally, indicates that it should be very good for us, especially going into the first quarter of next year.

There is obviously new product development but it is very difficult to discuss over the phone and I don't know that we would be in the position to announce them before we show them to our customers during prelines that are coming up in the next few months.

So suffice to say that everything we anticipated and probably even more so is still on the table for us for Cali Gear as we go into 2008.

Can you give us an idea what the makeup is between international sales and domestic sales, by any chance?

It's difficult to say.

As of right now we're probably running about one-third international and two-thirds domestic.

But we are booking at a bigger, at a much faster rate internationally.

So I would anticipate by Q1 that will be much narrower.

That's helpful.

And could you maybe go back?

The -- I guess you made a comment regarding the movement from employees from Thailand to China.

Could you just -- can you say that one more time, Fred?

You made some comment about that.

Can you [redirect] what you said there?

It was Taiwan.

We had am office in Taiwan that we closed during the quarter and there were a handful of employees we moved into mainland China.

And so in that process we should be saving what was otherwise (inaudible) in the Taiwan office.

So the cost to close that and (multiple speakers)?

Sorry.

Sorry.

Can you discuss the cost to close that and the savings?

The cost to close it was included in the $4 million that we saved in the quarter.

It was the biggest single piece of it.

Just by way of clarity, we started our business by having a sourcing office in Taiwan.

Actually in [Taichung] that's growing and -- that does our paperwork and commercialization and then started one in China as most footwear companies to be closer to our production and have less time and more ability to move that.

And we've come to that point in time when to be more efficient and to save expenses, we've closed the existing office in Taichung that we have actually had for about 15 years and have gone exclusively to our office in China.

That included closing down the office itself and rent and severance and moving some people to China that will -- still will work with us in our new facilities.

And there's some expenses going forward to be saved.

That was in Fred's number of $2 million a quarter which is also the biggest single piece, but I think more so than that will be more efficient and more secure.

And there are probably more savings in it, than the strict dollars of carrying both offices.

Okay, that's helpful.

And then can you give any color with regard to the preline, response to the prelines for your Spring 2008 product from a lot of your key retail channels of distribution?

I mean you're talking about backlog still being up.

It seems like double-digit growth and obviously given what's going on here in the fourth quarter closing down the fashion (inaudible), that's not really reflected in the numbers.

Just any color with regard to the response to the product going into 2008?

Well just also, again, by way of clarity, we are way past prelines for Spring.

I mean prelines for Spring were June and July and, obviously, August was WSA so we are moving in.

It is fair to say that given the fact that we will be relatively flat in Q4 to last year with our backlogs being up, that we are booking heavier for first quarter.

And if nothing else I'm sure those that have done channel checks realize that none of our major companies -- customers are anything but planning us up significantly starting in the first quarter.

So all that still remains very positive as we go into Q1.

And the last question I have is any color at all that you can give as you look to 2008?

I know you don't usually give an outlook, but it seems like international business, you have a very strong platform, should continue to do quite well for you maybe possibly double-digit rate.

You continue to grow obviously your retail stores at a pretty notable clip.

Assuming the wholesale business obviously a lot of your key retail customers are starting to grow and or accelerate growth I should say from retail square footage perspective.

Can you add any color about what you believe for potentially 2008 could be and could mean for Skechers in terms of topline?

And, secondly, what from an expense perspective you could potentially look at for 2008 as well given the increases we've seen over the past two years?

That is difficult because I do know that we are ready yet to change our policy of giving guidance one quarter at a time and moving forward and especially now with the macro picture as it is and having no visibility in the second half of next year becomes very difficult for us.

I could tell you just anecdotally that most people here and certainly most of the senior people and feel that our growth at least in real dollars shouldn't slow down in 2008, even given the closing of some of the fashion brands and perhaps could start to accelerate some.

You know, once we start to accelerate like we have in international -- especially in our subsidiaries, given our fire power -- we tend to continue to do that and our backlogs certainly doesn't indicate any slowdown from more than you mentioned double-digit, slightly double-digit growth for our certainly our subsidiaries in the first quarter.

Our stores continue to comp well and carry into next year.

So comping well and growing the store base continues that growth of retail.

And I think certainly that should remain on target which would leave us basically with domestic wholesale which is, obviously, the most difficult one because of the retail environment here.

But given the fact that we continue to perform as well as anybody we know of given the channel checks we are doing ourselves that we certainly suggest everybody continues to do, that the growth should be there at least on a real dollar if not on a percentage basis.

We continue to grow in those places that are growing the most.

I mean one of our largest customers is Kohls which is doing significant growth and Famous Footwear and some Shoe Carnival that is growing and DSW and Shoe Show.

So we don't at this point see any indication that our growth will slow but it's too early to predict, especially given it before Christmas and having a difficult retail environment with most of our customers being risk-adverse.

Moving on to the expense side.

our biggest expense line item that is usually seen is advertising.

And it is kind of early for us to do that advertising either but we would anticipate at this particular point and be fairly certain that we certainly will have significantly less growth in advertising, especially given our fashion brands not going to be advertised as heavily -- some not at all obviously -- will not grow significantly.

If you take the tack that that advertising will be better placed because we use it in international where we are growing more for the Skechers product, that could be an enhancement.

But there should be no significant growth in advertising when we anticipate to be able to leverage that significantly if we get the growth.

The balance, assuming we don't outgrow this fifth building before we get to our new warehouse in the beginning of 2009, we should be able to leverage our current configuration in the warehouse.

And given that the growth will come from lesser brands, we hope to be able to leverage our facilities in the Orient with less samples and less development because there's less brands although we're not certain how that fits yet.

So we think we have a positive outlook both for top and the expense line.

But it is kind of early to get into any quantification right now.

Jeff Mintz with Wedbush Morgan.

David, did you give the number of units in the ASP for the domestic business?

I may have missed that.

I don't think I -- our ASPs were down I think about $0.20 to $0.25 and our units were up about 1.5 million, almost -- I don't know whatever that -- 1.5 million units in the quarter.

Great.

Then just a couple of questions on the D.C.

Obviously you are planning on moving in in 2009.

Can you just give us some sense of what type of expenses you expect to incur, whether ongoing or CapEx in 2008 from that?

Well, it is a big facility so I -- we are not ready yet to -- we haven't made a final decision on all the automation.

We are still doing studies about payback careers and how much we are actually going to invest.

What I can tell you is that the facility is leased so that there it is really no investment on our part other than the rent, which is not significantly different than the five buildings we pay for now.

So there's not a major increase in rent.

I am not sure what the CapEx portion is because we haven't finalized the final outlook.

We do have a building in Ontario.

One of the ones we own that has significantly increased in value that we anticipate selling along the way.

That will offset some of the CapEx structure.

We are not even sure at this point how much cash we will put in and how much will be leased.

So that's difficult.

The goal is, expenses aside, is to leverage the P&L with whatever system we go to.

So given the depreciation rate and the savings on manpower, we anticipate having a savings for our distribution at the current levels.

And so while we anticipate those levels growing we should save more and more but it is to early to quantify any of those numbers.

I appreciate the color.

Then with regard to marketing in the third quarter, it sounds like marketing spend was down partially based on the disappearance or the closing of the two brands.

Can you give us a sense of where marketing was on an apples to apples basis if you take the marketing for the closed brands out of last Q3?

It wasn't significantly different than we had said.

It was always planned that we would be no more than 10% up on our advertising dollars and we came in just slightly under that.

We were just above flat.

So on the media spend, anyway, which is what we are talking to.

So we were pretty much on plan.

I don't think it's changed significantly with the decision to close down the fashion brands.

[Robert Marson] with [CAN].

Congratulations on an excellent quarter.

I was waiting for someone to say that.

That's a home run quarter.

$0.57 when you guide to low to mid 40s.

I will take it.

I'm a little perplexed about the guidance for the fourth quarter, though.

We have revenues up big, backlog up big, square footage in the retail division up big, wholesale sort of point of sales up big and inventory, down.

I understand the nature of the difficult comparison next -- from last year, but it appears to me that inventory might be as light now as they were this time last year.

So I'm just wondering out loud if you are not being as conservative in this fourth quarter guidance as you were in this third quarter guidance but you sort of blew away.

And the question is, does the number itself include any non-recurring costs from closing the businesses and unwinding the brands that are underperforming?

Thank you very much and congratulations again.

Thanks.

I think and I don't know if they are in exact order but that's as I remember them.

Inventory we don't feel was light this time last year.

We thought this time last year was when we actually caught inventory and were pretty much on target with that.

We have been telling everybody that's been watching inventory for the first six months of this year that we are just anniversarying that point where we caught up last year.

I think it's true to say that everything you said is basically true.

I mean we will grow retail square footage.

We are growing square footage with our wholesale customers and international continues to grow.

The issue primarily is that our wholesale business will probably be flat or slightly down as against last year for a couple of reasons.

A, the risk-adversiveness of our retailers.

The fact that some of them did deliver in September and was one of the reasons we had good comparisons for Q3 that wasn't available to us last year.

And we think a lot of people would like to move their deliveries into Q1 from what last year probably was December because of the risk adversiveness and what everybody is being judged on as far as Christmas sales are concerned.

Now that can certainly change and we could have been deemed conservative if retail opens up for Christmas and we have to fill our reorders in December rather than January.

But we currently wouldn't anticipate that now.

On the other side, our biggest growing piece is international and the fourth quarter is the slowest quarter for us on our international subsidiaries, which is our fastest growing piece.

So that true benefit will also come in the first quarter.

So given the catch-up in Q4 last year which blew away numbers and was certainly a catch-up and has moved I -- we believe to Q3 and Q1 and the fact that international growth is more predominantly in Q1, we feel pretty comfortable with these numbers.

Moving on, we don't have any significant onetime charges here although we are just closing down a division and completing the move to China from Taiwan.

There's a slight possibility that we could pick up a benefit in slightly less expenses and those expenses going away a little quicker than we had thought.

But we [wouldn't] anticipate that very strongly and put them in our forecast yet.

Thank you for the answer; if I just could do one follow-up on the big picture.

The operating margins for this year assuming the fourth quarter will come in I guess with around an [eight] handle and many of your competitors including some that are double-digit negative growing their toplines or shrinking are doing between 12 and maybe 16 or in 17% operating margins.

You guys have a stated longer-term target of just 10 to 12%.

Operating margin target.

Is there -- is it fair for us longer-term shareholders to expect to see linear progress in the margin improvement story over the next couple of years, if the sales growth continues at this 15% pace for the next two to three years?

In a word, yes.

All right.

I'm hopeful that 100 basis points a year for the next three years.

I wouldn't back away from it.

Let's see you guys deliver like you are delivering the excellent fashion and topline revenue growth.

Thanks a lot.

I will pass it along to someone else.

Robert Samuels with J.P.

Morgan.

I guess with regards to fashion have you seen anything interesting to note in terms of fashion as out there as some people are complaining about a real lack of newness?

We are seeing some things but we are not ready to come public with them.

We will be developing them and showing them in our prelines for those I guess that come up in December to Fanning, York which is our first preview show.

If there's anything new we will be showing some of it there.

And then, could you just give us a sense of what sort of thing that you are getting from retailers right now with regards to the consumers?

I don't think it's any different than anybody else has heard it.

It's a difficult time and traffic is down and everybody is working on their conversion.

So it has been -- especially through September -- a difficult time for most retailers.

Some obviously better than others.

We think our retailers that we are stronger in like the Famous Footwears and the Shoe Carnivals and the DSWs are in better position that some of their competitors, but it's difficult anyway.

Lastly, can you just talk about any differences that you are seeing in your various distribution channels?

Differences?

Other than the ones I mentioned are certainly stronger.

We finally find the Family Footwear stronger than the Athletic and the department stores are very very specifically by their trade-in and their location, but it's difficult for everybody.

Some are just doing better than others.

Sam Poser.

Sterne Agee.

First question is just a follow-up on the onetime charges.

There are, you don't -- all the onetime charges that $0.04 all came out of Q-- in Q3 and there aren't any more in Q4?

On those issues, Sam, those are in Q3 numbers.

That's in these numbers.

And so we should add back in that $0.04 to the 50 -- to the money that you earned.

That's your -- .

Well, that's an individual (multiple speakers)

I mean it's a onetime -- it's a onetime (multiple speakers).

We only report on GAAP.

We are trying to give color to the business.

The rest is up to you.

The $0.04 is reflected as the cost in the $0.53.

And so all of the closing costs of the brands, the repositioning of those brands all that's done and put to bed right now?

Well, for the most part.

There will be some continued -- we still have some inventory of some of the fashion brands that we will -- but they were going to be sold at maybe a little bit depressed margin, but still positive margin.

So there is no costs related to that in this quarter.

But what there is is that opportunity cost and the infrastructure that's cost to move that product there will be certainly less efficient in the fourth quarter.

There won't be any charges we don't believe, just onetime kind of charges outside the inefficiencies of running those businesses until they're done with.

So you really can't put a value against what that is until after it's over?

Unless you tell the what they're going to sell for.

My crystal ball is not working.

The gross margin in Q3 and Q4 or Q3 at the close brands like on an apples to apples basis there, can you give me some color there please?

They're relatively consistent.

I mean the gross margin, there's been some mix changes.

We've done some internationals growing quite well.

But when you take out some of the decline in the gross margin as a result of the fashion brands that we are closing out, the gross margin for the third quarter of '07 is pretty close to the gross what we've historically -- close to the third quarter of '06.

So that gap goes away without the close brands?

In large part most of the gap goes away.

I mean there's still a slight decrease in overall gross margin.

But it's not as significant as what's in the financial statements because the Q3 '07 has the closeouts for the fashion brands.

Okay and then you mentioned just in one of the -- following up one of the questions regarding the regarding the shipments in Q4 and how you felt some of those goods would move into Q1?

But if business was -- if the retailers felt a little better they may pull them back into Q4.

How much of that is just structural because of the calendar shift versus last year?

I really don't know the answer to that.

That's more a question for the retailers.

But I mean you've seen it happen.

You talked about it at the end of Q2.

At the end of Q2 you talked about a lot of the goods that you -- there was a timing issue in Q2 and the same kind of timing issue could happen in Q -- could you give us the extent of what the timing issue might have been in Q2?

Well, I think if you look at Q2 and Q3 together and taken overall and that what we were short in Q2 and made up in Q3 would be deemed part of that timing issue.

And how much -- but how much of it do you think if you could identify a move like those three days?

Is there a percent we could put there because we could probably apply that to what is going to happen between Q4 and Q1 too on a percentage basis?

A, I can't put a percentage on it because like I said it's not a particular item.

It's more actuarial than it is an individual order that moves here and there.

It's a basket of stuff -- a basket of orders and products that's to leave between the end of June and the beginning of July and its almost actuarial about what is or what isn't.

It's just a matter of -- how we take it into account to give our forecast and then how it actually comes in again against that forecast what percentage that can be.

So it's really more difficult to quantify.

Whatever that number is, the back itself, I can't tell you the back of product that is available to ship the end of December and early January is of lesser magnitude than that batch that exists at the end of June and July.

As a percent of the total business?

Correct.

I look forward it to see you at Fannie and continued good success and so on.

Scott Krasik with C.L.

King.

Great job.

Just if you could dig in a little bit more on international?

Obviously the growth is tremendous.

You know, can you give us how many doors you are in?

Will the growth next year continue to be driven by new doors?

Will it be by increased square footage in existing doors?

And what's really the opportunity here over the next several years?

I think on a very broad base the opportunity is obviously both.

The more we grow in our subsidiaries, obviously, we pick up more doors and there's less doors available.

But I think it is fair to say even in our most mature marketplaces we haven't penetrated nearly the amount of doors or the percentage that is available to us as we have in the United States.

So it's available everywhere.

We also have brand-new locations.

I mean, Brazil is a very big marketplace.

The doors available there are very significant.

We've only delivered our first pairs of shoes in the fourth quarter.

We have signed a joint venture agreement in China that we expect to have start in the shipping shoes by the -- at least some shoes in the first quarter of '08, probably gearing up into the back half and obviously that's significant.

We are in a very minimal amount of doors with our current distributor in China.

We signed a new distributor in Korea that is just beginning to open up that's taking place of what was a very inefficient distributor prior.

Those are all brand-new and have significant probably into (inaudible) and beyond, probably more in 2009.

I guess with your subs, your European subs, what types of doors are you not in now?

What channel distribution are you not in that you would like to be in or could be in?

I don't think there's any channel but we are certainly not all doors with a lot of places and in some places like France and Italy and Spain, there are ones you have to time.

There are very few multiple door locations that you can be id.

So we fight those one day at a time and we are making progress in all.

And by order of -- it's that we've always talked about France being difficult for us and holding back but France was up 70% in the third quarter, which still makes it relatively small and underutilized.

But obviously it's getting a foothold and getting tests and moving into that which has significant door expansion.

Our biggest distributor, the UK, was up triple digits.

They more than doubled their volume from last year.

So they are just getting in there and you know they didn't go into all of these new doors full force, getting all the real estate and all doors that they could get.

So we think, obviously, to go from 15% last year, slightly less than 15% of the total, to 20% this year to 25 to 30% short-term and basically after that getting probably 40 and 45%, while we think the United States is continues to grow and we keep building our retail presence means that we still believe that there's got to be significant growth.

Is the incremental margin significant as you grow in the subs?

It is in the subs because they're involved in local currency and that's the only place we, as a company, get the benefit of the weaker dollar and become multinational that they talk about because we sell them and we buy in dollars and sell with them.

And they are local currency so they get the benefit of the weak dollar as well as the strength of the brand.

So we get a double hit in those and that's why we think they can grow up so strong.

Congratulations and then you said six to eight new retail stores in the first quarter of 2008.

Those are all in the U.S.?

Predominantly.

Yes.

And then you have a sense in what it could be for all of 2008 yet?

I think we are talking about 30 to 35.

Congratulations.

Thanks.

Adam Comora with Entrust Capital.

I have a couple of quick ones.

Is there any way you can help us understand the backlog comment of being up double digits?

How that breaks down between the fourth quarter and the first quarter?

The backlog is a six-months backlog.

So what we said was that we anticipate that our domestic business will be flat to slightly down which means it is geared towards first quarter.

Right so if the balance of the backlog is up double digits that would meet the first quarter is up strongly double digits if the fourth quarter is flat to down?

That would be correct but remember, this is a moment in time.

This is not the shipping time.

This is as of opposed to this time last year and we continue to book for first quarter.

So -- .

And that makes sense if a lot of the calendar year probably gets shipped in that first quarter.

That's correct.

And you made a comment earlier on advertising being flat in 2008.

Was that on the dollar percentage versus '07 or is that on a percentage basis?

We said relatively flat to no significant increase, yes, and that's on the dollar basis.

Okay.

So that would mean as a percentage of revenues it would be coming down significant -- will coming down decently.

Correct.

Is international a higher margin business for you guys than domestic?

Gross or net?

Operating.

They are about the same.

All right.

And then I know you guys don't give long-term guidance, but you've given us some snippets here that you think that it's not unreasonable that revenues can grow another $200 million next year which would take us to $1.6 billion.

I think you said you know, you wouldn't back away from 100 basis points operating margins which would take us around 9%.

If I do the math on all that we are getting close to $2.00 in earnings for 2008.

Okay.

No complaints with your math either.

I want to make sure I'm not missing anything.

Remember that's just a very over the top of review possibility.

Certainly not a projection nor any guidance number.

What would be the difficult part of that to achieve.

I don't know that any of it is difficult.

It's all a work in process but I think the macro picture is what makes us all nervous and then we have to keep an eye on our competition and the health of our retail customers.

So all of those pieces certainly play in, but I don't know if there's any one piece.

[Tamara Lukan] with Trivia Capital.

It's Ward Davis with Tamara.

Just a question, just to help us clarify.

From the time you guided last quarter for revenues and for earnings and you went through how the lines of your business played out, but what was at the big delta was there, was you obviously had backlog statistics back then.

But was it primarily a lot of at-once business that filled in?

And just from what it sounds like with the backlog and where you're guiding for Q4 is the sense that retail accounts are being somewhat conservative and if the sellthrough of your brand specifically is good that there is opportunity for further sales from that once type orders?

Thanks.

Well, in reverse order there is always opportunity.

We would never sit here and tell you there's no opportunity.

This business is very dynamic.

We are doing inventory, we are selling very well at retail which leads to opportunities and they certainly are possible whether they are quantifiable in the early part of the year or not is always a question.

As far as the delta for Q3, if you think about it, we actually guided from 380 to 390 and came in at 395.

So given that we tend or try to be on the conservative side the delta is not significant and if you take the top end of that range, which we always thought is possible, the $5 million given a $390 million dollar base and a retail business and stores opening earlier and later is not a significant delta or something that we go back and quantify by all of those little pieces to try to find out where it is.

Sam Poser.

I just wanted to follow up on Adam's question regarding the advertising spend.

Are those flat dollars in media only because I mean, you talked in Q2 about the POP expenses that got added for Cali Gear and so on.

Could you just give us a little more color there?

I don't want it to get out of context.

It is relatively flat and it certainly is leverageable.

But I don't want to be held to a flat number nor anybody really come back and say, you said it was going to be flat and I spent a couple of bucks more.

So it's relatively flat and that is the plan but today and certainly no commitment -- significant commitment long-term.

And yes it's only the media portion that we talked to.

And so could you break out the media portion from the rest for us to give us a percentage idea of where we are?

It's the most significant piece of the advertising.

So as it goes advertising will go as far as leverage is concerned.

I don't know that we break out the exact -- all the pieces how much everywhere each day.

So that's a kind of detail.

But that is the most significant piece certainly.

Robert Marson.

Could you quantify or did you quantify what you think your sellthrough is at your retail distribution channels?

I actually went into a DSW and a Famous Footwear over the weekend to buy some Skechers for my kids and the inventory seemed on the lighter side in a lot of areas.

Do you think your retail customers like that?

Or what do you think their inventory is like?

And what do you think your sellthrough has been?

Is it decelerating from the 20, 25% scanner data range growth rate that I have been seeing?

Or is it flattening?

Thank you very much.

That's a tough one and I'm not really sure I have all the data to support it one way or another.

The fact that they were short of inventory we you went to buy Skechers is probably more a testament to the fact that they are risk-adversive and don't want to be fully inventoried at a time.

Our indications are that our sellthroughs are as good or better than anybody they view, at least in most cases and they are different from each one.

And it just could be that you hit a bad time in acceleration where they are selling the store and the replenishment has to catch up with it.

So I really can't give you enough MPD data as it's too recent.

And I don't really have it right this minute as to what that solid appreciation or acceleration would be as opposed to what you have been looking at because I don't have your base number either.

Our channel checks indicate that we sell as well as everybody and in those times when retail slows down our sellthroughs, obviously, slow down.

But we are still at the top of the curve and we seem to be doing very well and we are product right and are certainly what we feel is in demand at retail.

So that is the best I can give you right now.

Adam Comora.

The $2 million quarter savings that you guys highlighted from shutting down the Fashion Brands and shifting that office from Taiwan into China, is that in addition to what we're talking about in terms of holding advertising flat last year?

Or is that $2 million getting reallocated into what you are talking about relatively flat?

Well, they are independent.

The $2 million that Fred was talking about is operational overhead and costs that we see right now.

Media is an overall spend.

We don't take into account whether it was Fashion Brands or not.

It's whole dollars to Skechers as a whole rather than a percentage itself.

Scott Krasik.

I know you don't give comps monthly but some other consumer companies have talked about your generally October rebounding from August and September.

Can you give some sense at least from your own retail stores if you have seen that as well?

Actually we didn't have any significant issues we thought we could comp better.

We comped up moderate mid to high single digits for the quarter.

August was better than September and October is holding up as well in that same range so far.

So you just never saw the dip?

We never went negative comps for a month.

So we didn't see that part at all.

Ladies and gentlemen, we will now turn back to Andrew Greenebaum for some closing remarks.

Thanks for joining us today on the call.

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

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

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

Again, thank you and have a great day.

Ladies and gentlemen, that does conclude our conference.

You may now disconnect.