Skechers USA Inc (SKX) 2008 Q2 法說會逐字稿

Welcome to the Skechers USA, Inc., 2008 earnings conference call.

(OPERATOR INSTRUCTIONS) This call is being recorded today Wednesday, July 23rd 2008.

I would now like to turn the call over to Andrew Greenebaum, ICR.

Please go ahead, sir.

Good afternoon, and thank you, everyone, for attending Skecher's second quarter 2008 results 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 Litigation Reform Act of 1995 as amended.

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

There can be no assurance as to 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, management's discussion and analysis in the company's latest annual report to stockholders, the company's filings on Form 8-K and other federal securities law filings for description of the other important factors that may effect the company's business, results of operations, and financial conditions.

On the call today are David Weinberg, Skecher's Chief Operating Officer; and Fred Schneider, Chief Financial Officer.

And with that, I would like to turn the call over to David Weinberg.

David?

Thank you, Andrew.

Good afternoon, and thank you for joining us today to review Skecher's second quarter 2008 results.

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

Second quarter 2008 net sales were $354.6 million, a new second quarter record.

Net income for the quarter was $14.6 million, and diluted net earnings per share were $0.31 for the second quarter of 2008.

Record second quarter and six-month revenues are primarily the result of very strong growth across our International business, which were approximately 24% of our total net sales for the quarter, and 26% of our net sales for the year.

Our sales within our domestic wholesale channel were better than anticipated, and we remain confident in our position of the U.S.

market, even with a soft retail environment.

The key highlights for the second quarter were record quarterly sales, with our eighth consecutive quarter of sales over $300 million, high double-digit sales growth in our International subsidiary business, double-digit sales growth in our International Skechers retail division, backlog of double-digits from the prior year at quarter end, improvement in our gross margins by 110 basis points year-over-year, to 44.3% for the second quarter of 2008, versus 43.2% of the same period last year, and a strong balance sheet with nearly $240 million in cash and investments representing over $5.00 a share.

We are continuing to focus on developing stylish in-demand product and aggressively market our brands to further grow our position in the global market place.

This strategy in the second quarter allowed us to maintain our position in the U.S.

market, to continue to grow our International subsidiaries, including our newest in Brazil, and joint ventures in China and Hong Kong, to deliver the right product to our distributors, and experience growth in our retail business.

Now I would like to expand on our second quarter 2008 achievements in our three operating segments, domestic wholesale, International, and retail.

For the second quarter, domestic wholesale net sales decreased by approximately 8% from the same period last year, and for the first six months by 2.5%.

Our domestic wholesale sales, while down for the quarter, were slightly stronger than anticipated, which we feel is meaningful, given the current soft retail environment.

We believe our brand, consumer awareness, and products acceptance remain very strong in the domestic market, based on several indicators.

First, our incoming orders received in Q2 increased double-digits over last year, leading to improved mid-single domestic backlog.

Secondly, the positive response from key accounts during our pre-line meetings earlier this month, and finally, retailer feedback, as reported by NPD, which placed Skechers as the number one brand in three categories, junior's men, junior's women and low-performance footwear, and place Skechers in the top 10 for outdoor, high performance, and skate.

We are pleased with the continued growth of our key Skechers Women's Sport, Men's U.S.A., and Skechers Work lines, and the strong performance of Skecher's Kids.

We are continuing to build on our proven styles, as well as offer fresh looks in each of our Skecher's lines, and are encouraged to report that our backlogs are up for our major lines.

We are taking the same approach with our fashion division, building on our key styles and developing new looks within each line.

While the fashion division did not grow in total, due in part to the closing of several underperforming branches last year, the Kid's fashion line performed well, and the 310 Line experienced growth.

Additionally, the majority of these lines have strong backlogs going into the the remainder of the year.

Also, we are encouraged by the initial sales of BEBE Sport footwear, which had its first shipment in the quarter, and believe the new styles shown as Fannie in our pre-lines will do well in the market, based on our initial reactions from the key accounts.

We are also encouraged with the account reaction and strong initial sales to the recently acquired brands, Punk Rose for women, and and Public Royalty for men.

With an existing small account base, and a fresh approach to junior sneakers, we believe these brands will benefit from our logistics and marketing expertise.

Our approach to marketing remains highly visible, consistent, focused, and aggressive.

We recently signed a new American Idol winner, David Cook, to an 18-month marketing agreement for Skechers Footwear print ads, billboards, kiosks, and in-store visuals.

We are excited about the photo shoot later this week, and look forward to the new ad.

We are excited about the extension of the singer/actress Vanessa Hudgens, agreement Red by Marc Ecko Footwear, and the debut of her first single, "Sneaker Nights", from her recently released new album.

The official music video for the single features several shots of Red by Marc Ecko sneakers, and has received more than 3.5 million hits on You Tube.

This song is also featured in the new Red by Marc Ecko commercial.

BEBE Sport Footwear has the power of Eva Langoria-Parker who will continue to appear in ads through the fall.

Along with our celebrity campaign, we also focus our marketing effort on products with print-focused lifestyle ads and TV campaigns for nearly every one of our brands.

We create our children's television campaigns for the kids by developing memorable, animated spots, featuring appealing characters, including Skechers Z-strap, Cool Breeze for Aerators by Skechers, Cali Bear for Cali Gear by Skechers, and Elastica for Skechers Bungees.

We also have two new campaigns.

Hot Lights by Skechers for young boys, and Heidi High Tops for tween girls.

The Skecher's men and womens' commercials highlight our diverse product range.

We have developed four new men's commercials, a new Skechers work spot, and are in development on a women's campaign.

Our television campaigns appear on leading network and cable stations, while our ads appear in publications as diverse as "US Weekly", "Maxim", and "Cosmo Girl".

We believe the continuous marketing support we provide and the diversity of our trend-right product offering remains a critical part of our business.

As our wholesale business indicates we are not immune to the current economic environment, but we also believe we are extremely well positioned, given our multiple unique lines, comprised of more than 2,500 trend-right and recently priced styles.

We are able to successfully meet the needs of a diverse consumer base in the United States, by marketing our product through multiple mediums and to a variety of department family footwear, specialty, independent and athletic stores.

We believe our fashionable product, broad diversification, and willingness to support our business, through both marketing and execution, makes us the right brand for our retail customers and consumers.

Now moving on to International.

International wholesale increased year-over-year by 30% for the second quarter, and 35% for the first six months, which we believe is further evidence of the strength of Skechers overseas, and reflects the opportunities available to the company to continue to gain market share increase profitability and on a global basis.

The strong growth in our wholesale business is primarily from our subsidiaries, which improved by 54% for the quarter, and marks the ninth quarter of double-digit increases from our subsidiaries.

Spain, the Benelux Region, Italy, and Switzerland had triple-digit growth, while our three largest operations, Canada, the United Kingdom, and Germany continue to grow at double-digit rates.

In addition, our backlog at the end of the quarter were up double-digits for virtually every subsidiary.

Brazil, our newest subsidiary, turns a year old this quarter, and is on plan for its sales of both Skechers and Marc Ecko Footwear.

We are encouraged by Brazil's strong performance this quarter, and believe it has potential to become one of our biggest subsidiaries, We believe our products and tailored marketing efforts are on target, and we look forward to continued growth.

From a product standpoint, the improved sales across our subsidiaries with the result of the continued growth or our Skechers Men's, Women's and Kid's lines, as well as the significant growth and in the Marc Ecko Footwear lines.

We believe that our brands are in great positions, in our subsidiary markets, in terms of shelf space, reputation, and image.

Our distributor sales were up just over 6% for the quarter, an improvement over our past few quarters.

We are pleased to see renewed growth from our distributor.

We see the growth coming from several areas, but are particularly satisfied with the improved sales and backlogs from our biggest distributor, who covers Central and South America, with our two Russian distributors, who combined represent one of our largest distribution countries, and in Greece with double-digit growth supported by great marketing.

We are also pleased with our two newest distributors that cover Turkey and South Korea.

Our team in Turkey has a lot of enthusiasm for the brand, and it shows, with solid first shipments and good incoming orders.

And South Korea is really one to watch.

They have already opened five stores, three of which were in the second quarter, and one this quarter, established Skechers apparel, and have a reality show, mostly tied in with Skechers.

To support their Skechers business, many of our key distribution partners have Skechers Retail Stores in regions where they sell our footwear.

At quarter's end, 78 Skechers Retail Stores were opened in 25 countries, from 14 of our distribution partners.

This includes two new stores, one in the Philippines and one in Russia.

Our distributor in the Czech republic opened their first store earlier this month, and eight additional stores are planned for this year.

In addition to our distributor-owned stores, at quarter end, we have five concept stores in China, through our new joint venture, which launched in the first quarter.

Along with the new stores, Skechers China recently opened up a 20,000 square foot showroom, and offices in Guan Zhong, to support its retail stores, shop and shops, and wholesale business, all of which are showing strong initial sales.

We are beginning to see a positive impact on our sales from the China joint venture and believe that our brand awareness is growing in this country of more than 1.3 billion people.

In conjunction with Skechers China, we are establishing Skechers Hong Kong, a new joint venture that will focus on maximizing our potential in Hong Kong, Macao, and the territories, through wholesale and retail.

At the quarter end, International was 2r% of our total sales.

We continue to believe International can be at least 30% to 35% of our total sales in the near future.

There are many opportunities to grow our Skechers and fashion lines around the world.

Turning to retail, in the second quarter, we opened our 200th store on Chicago's hip shopping avenue State Street.

We see this as a significant milestone for a wholesale driven company.

At quarter end, there were a total of 208 domestic and International company-owned retail stores.

Our combined domestic and International retail sales increased nearly 4% for the second quarter.

The improved quarterly sales are due to a net 40-store increase from the prior year, and and approximately 8% domestic comp store decrease.

Consistent with other domestic retailer,s we are seeing reduced foot traffic on our company-owned stores.

We have made significant infrastructure investments to grow our retail division recently.

To put things in perspective, our store base at the end of 2004, stood at 125.

While we expect at year-end 2008 to have approximately 224 to 229 stores, representing an increase of approximately 80% of the number of stores from just four years ago, we continue to believe in our retail concept and have opened 13 stores in the quarter, including our first in Indiana, and our first in Scotland.

We plan to continue to strategically grow our retail business in the second half of 2008, with the addition of 15 to 20 Skechers domestic stores, including three premiere locations, the new South Center, on the south side of Seattle, New York's Union Square, neighboring Abercrombie and Fitch, and on San Francisco's Palace Street.

We will also continue to look for desirable International locations.

Now turning to our second quarter financial performance.

As previously mentioned, second quarter net sales were $334.6 million compared to $352.2 million last year.

Second quarter gross profit was $157.2 million, or 44.3% of sales, compared to last year's gross profit of $152 million, or 43.2% of sales.

Operating expenses, as a percentage of sales, increased to 38.8% in the second quarter of 2008, compared to 37.3% in the prior year.

Second quarter selling expenses decreased to $38.6 million in the period, from $41 million in the prior year, even with an increased media spend.

General and administrative expenses were $98.9 million, compared to $90.5 million last year.

Our general and administrative costs increased to 27.9% of sales, compared to 25.7% last year second quarter.

The higher expense were primarily due to the increased number of company-owned retail stores and growth in our International subsidiary business.

Net income for the second quarter was $14.6 million, compared to net income of $14.9 million in the prior year.

Diluted earnings per share were $0.31 on approximately $46.8 million average shares outstanding, compared to diluted earnings per share of $0.32 on approximately $46.8 million shares outstanding during the second quarter of last year.

Our balance sheet continues to be very strong.

At June 30, 2008, cash, plus both short and long term investments stood at nearly $240 million, or approximately $5.13 a share.

Trade accounts receivable at quarter end were $232.9 million, and our DSO's improved to 49 days from 53 days last year.

Inventory at quarter end was $234.2 million, representing a year-over-year increase of $29.4 million, to accommodate our increased backlog.

Capital expenditures for this quarter ended June 30th, 2008, for approximately $24.8 million, as compared to approximately $8.2 million in the prior year.

We expect our capital expenditures for the remainder of 2008 to be approximately $20 million, which includes the opening of 15 to 20 new stores, store remodels, and tenant improvements in our headquarters.

And now turning to guidance.

We are pleased with our continued growth and new record second quarter revenues, particularly given the soft U.S.

retail environment.

We believe this is due to the reputation of our brand, and increasing awareness in the United States and around the world, our varied product offering, and our global business model.

While we are cautious in our domestic plans given the U.S.

economy, we expect that our momentum will continue through the remainder of 2008.

We believe the third quarter will be stronger than the second quarter, as discussed when we gave second quarter guidance a few months ago.

This expectation is based on orders received during the second quarter, resulting in double-digit backlogs, Internationally, and mid-single digits domestically.

In addition, we've just completed several weeks of pre-line, and received very positive feedback from our key domestic and Canadian accounts.

Furthermore, International business is showing strong growth in nearly every market in which we operate across the globe.

We now expect third quarter 2008 net sales to be in the range of $425 million to $440 million, and diluted earnings per share in the range of $0.57 to $0.65, on approximately $47 million diluted shares outstanding, using a tax rate equivalent to the first six months.

We continue to further lay the foundation for our planned worldwide growth by enhancing our distribution capabilities, building our International business, and looking for new opportunities to grow domestically.

We will continue to support the all of our brands with aggressive marketing efforts to ensure we are top of mind with consumers and that our footwear achieves strong sell-throughs.

We will also continue to support the company with necessary investments and improvements to grow to the next level in the coming year.

We remain focused on profitably growing our business in the future.

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

Ladies and gentlemen, we will begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Chris Svezia, with Susquehanna Financial Group.

Please go ahead.

How are you doing, David?

Pretty good.

A couple of questions here.

Can you add any color with regard to, given the 14% increase in inventory at the end of the quarter, is that a reflection of the improvement in backlog, and can you clarify if there was any shift in product, maybe retailers holding back a little bit at the end of the second quarter and not falling into the third quarter domestically?

You know, shift is very difficult to define.

I will tell you the increase in inventory is primarily due to a bigger backlog going into the second quarter, which obviously the orders were in hand at the end of the second quarter.

So, if you want to say they could shipped, that is probably true.

It also has 40 more stores and significantly higher backlog in Europe, where there is a inventory as well.

And remember that includes work in process, so that's everything coming for the quarter as well.

o, we think it is in line with the backlogs, the stores, Europe, Brazil, China, and obviously we believe we are going to have a stronger third quarter than there was in the second quarter.

Can you maybe clarify in terms of the improvement that you saw in the backlog, you mentioned that you saw during the second quarter, that it accelerated at a double-digit rate during the second quarter, was that domestically?

It was both domestic and International.

On an overall basis, we were up double digits on our incoming order rate, so we had these conversations when we had the first quarter conference call as well, in that Easter was earlier and people were trying to order later.

So, the fact that Easter had cleared in March, and now people were ordering for back to school and trying to hold on to the last minute, that we didn't see those orders in February and March, couldn't plan for it, but certainly did see them in April, May, and June, and now coming into the third quarter on a stronger basis.

So are you trying to say that your third quarter is stronger than your fourth quarter in terms of how the order book looks right now?

Yes, always stronger.

I don't know if you are talking about a relative basis, but it's certainly the bigger percentage is always for third quarter.

Can you maybe just comment, you walked through some of the product lines in the U.S.

that were working well for you, you mentioned the Sport Work and the Kids product.

Can you maybe comment what is going on with your active product line, Low Profile, and is the Status Series, which I think is the next revision to the Low Profile, and the Sport, the Delights, is that really starting to gain traction for you?

Is that enough to offset some of the maturity in the Low Profile silhouette?

You never know until you know.

But we do see still a demand for the Low Profile, and it continues, and there certainly is a market place for it.

We have seen even better results and have great pre-lines as far as the new product in the Sport and in the Delights, and the new active bottoms, with some new bottoms that some of you will see at WSA, so yes, on a net/net basis, on a combined basis, because we like to think of our Women's business as both active and sport, on a combined basis, it continues to grow.

Then just lastly.

Can you clarify on your, obviously, it seems just the overall macroeconomic headlines coming through about softness, and some other brands have talked about just generally a slow-down, retail seems to be a little tougher in the U.K.

Just maybe talk about what you are seeing out there, relative to your business specifically, and maybe just talk about some of the additional opportunities with U.K., Germany, and I know you talked about Brazil.

What do you see in the pipeline, as it relates to the backlogs?

As I said in the prepared comments, we have had great results from a European business.

Now, we have heard obviously that there are macroeconomic issues beginning in Europe, certainly in U.K.

and Germany and most of where it is.

But we still continue to have significant growth, we've had double-digits increases in shipments for Q2, which is not a very strong quarter for them, and it's turned out to do very well.

As a matter of fact, Q2 this year was not significantly smaller than Q3 last year in Europe, so that's a very positive effect, and backlogs are still significantly double-digits up, both on a local currency and a dollar basis.

So, we do hear it, and we do hear we are performing well.

I think it is a case of the same as when we started here in the United States sort of early.

We are such a small piece of the market share and our product is right, that you take little pieces from some of these big guys as they slow down, and it becomes big growth for us, although it's certainly not as meaningful as we'd like it to be in the next year.

Is it more of a shift to your product, or is it more just the fact that you guys are just gaining additional shelf space and also just getting your product into channels and distribution?

A combination of all that?

I think they all tie together.

Obviously, we have the right product, and the product shift is moving towards us, we have better sell-throughs, we have better inventory turns, and people are beginning to depend on us and realize that we are certainly viable for them to grow their businesses or keep their businesses up there in tough times.

All right.

Thank you very much, David.

The next question comes from the line of Scott Krasik, CL King.

Hey, thanks, guys.

David, when you walked into some of your big customers this Spring, whether it's Famous, or Penney's, or even Kohl's to a lesser extent, you guys just seem to own the shoe floor in your category.

As these guys start to look to some of the other athletic players as resources, how do you comp against that?

I'm not really sure how to take that.

You know, in our pre-lines, we've just met with the guys from Penney's and Kohl's, and Famous, and I don't know that anybody's looking to move us around, or on general principal as things move, that we are performing less.

As of a week ago, we still continue to take on our share, and those ones you are talking about, we continue to grow, we get bigger pieces, whether it is our own Sport, or our own Active, our own Kids, our own Men's is doing very well, Open Footwear.

We are in a lot of categories and they have been dependent on us, and we haven't yet heard from then, unless you've heard something different that there is a shift away from our brand, as far as continuing to hold that market space or shelf space and continue to grow with them.

I haven't heard any of them tell me or indicate to our sales guys in conversation or in picking product or them their open-to-buys, that they are slowing down with us all, that that is transitioning away anywhere.

So just as an example, in Women's, if they were ordering 50,000 pairs of a bicycle bottom style, they are taking those 50,000, or maybe even more in two or three different styles, it is not going to Nike or New Balance, or somebody else?

That's correct.

Like someone once said, rumors of our demise are way, way, too early.

First of all the 50,000 pairs of biker bottoms don't go away, they don't all need to be replaced.

They probably straighten out somewhere, and whatever percentage continues.

They've certainly more than made up with our new Sport line and our Delights package, and maybe some open footwear or whatever happens to be hot in the market place, and maybe even some of our black and brown shoes that still sell well.

So, the first part is not all going away, and whatever has slowed down or has become a steady reorder business for us has certainly been made up by the new product that is coming into the market.

Good.

Just lastly, do you still feel comfortable with the marketing portion of your selling expenses being flat year-over-year.

We haven't had any changes.

We have been pretty good.

So far we've actually been doing great, and like I said, we are not backing away from marketing.

I don't want anybody to get the opinion.

We have actually increased our media spend in the second quarter to a decreased selling line by watching other expenses.

f you remember, last year, we had a big launch for a couple of new product lines, that we said created a lot of POP and in-store relationships and one time charges, and we have sort of stayed by that.

And we've actually controlled those expenses and moved them into media, so we have now a higher media expense and a more modified selling line.

Okay.

Thanks.

I will let other people jump on.

Thanks.

Thank you, next question comes from the line of Sam Poser with Sterne, Agee.

Hi, David, can you give us what the change in average selling price is in the change in units?

Say that one more time, sorry?

Average ASPs in units for the quarter, for domestics?

Well, ASPs have gone, you are talking about wholesale ASPs?

Wholesale ASPs for domestic.

We are up in our wholesale ASPs this quarter.

Can you give us what the numbers were for units and sales volume?

We're up $0.28 in our wholesale ASP, on an average prepared basis, we are up to about $18.00, $19.00 at wholesale.

And the units, were down?

The units are down slightly from, we are talking about last year, comp quarter from last year, yes we're down a bit in units.

SP went up and the units are down, and so, you know - -

Okay.

And then on the new product, David, that you have coming in with these good backlogs, is it a situation where there's just a lot of things that nobody's has seen selling yet, so the initial response is good, but the initial response is good, but we don't know what the sales are yet.

You sort of hinted at that when you answered Chris' question.

No, I think from what we've seen is that the initial responses, what we've heard from the pre-line, is that our new product is checking very well and we are getting a reorder timetable started.

It is probably not as strong as we would like to see it, simply because we continue to deliver the first product.

July is a very big month for us to deliver, June and July, for back to school, but we are seeing reorders, and there are constrictions on a lot of retailers on their open-to-buys and end-of-month inventories, but we have indications with the beginning that, as things open up and they really see this stuff start to sell, that it still will continue through back-to-school, and hopefully, as we get into August and September and they are more into their reorders and open-to-buys, we will see the increased at-once order business..

How much of that is in the guidance number or are you just - -

As much as I can see.

You know, I have the same feeling as anybody else.

I have gone through the pre-lines, and I try not to take too many of these conversations to heart as far as moving numbers significantly one way or another, from what I could see.

It's obviously sort of a big package.

Fred and I sit down with them and play with them, try to get all kinds of combinations of what is possible, but certainly we have had a very positive set of pre-lines, and we have seen the beginnings of some reorders.

And, we have been told by some of our bigger customers that the new product is selling when it is put in the stores, and they'd like to either speed up their deliveries and start some reorders based on availability, but it's too small to build a whole quarter on.

So, what you see is what we have got right now.

It's very early in the quarter, so it is very difficult to come up with a number any way.

Got you.

Let me come back.

I will come back on.

Thank you.

Next line is Jeff Mintz with Wedbush Morgan.

David, you guys obviously put up a very strong gross margin again, and you have kind of guided gross margins a little more conservatively than they have been coming in.

Is that primarily driven by the International business, and what is the longer term outlook on gross margins now?

That is a Fred question, he plays with those numbers.

Jeff, I think pretty much, it is really being driven primarily by the mix of our business.

Not only, it is not only the International wholesale business, but a little bit of also the retail component of our business, but predominantly it is this quarter increase in margin is because of the strong growth that we've had Internationally.

Fred, how much of it is currency driven.

ell, you know, we are getting, comparing to - - some of it is, we buy in dollars and we sell in Euros, so some of it is embedded in the margin, in one piece of the International business.

Obviously we have International distributor business, that's dollar-based sales as well.

But, I would say that even, we are having growth in both local currency and in U.S.

dollars, so it is a real growth in that.

And we are also getting to a point where the dollar last year started to weaken at this point in time, so the gulf is beginning to narrow.

Okay.

Looking longer term, you are still looking at 42% to 43% growth margin on a sustainable basis?

It will be a mix an issue.

If the domestic rebounds, we would think that that would be appropriate, and if domestic right now, obviously our domestic business is challenged, as it is for most folks.

I think on a longer term basis, that is still an appropriate margin to use, because we fully expect domestic to come stronger back in the future here.

Okay great.

And then, David, can you talk about what you are seeing in terms of distribution channels In the U.S.

wholesale business?

Is it different between the family footwear channel and the department store channel, are you seeing pretty similar trends across the board?

I think it is very customer-specific.

There is no one rule for one line.

They sort of compete against each other and they have different demographics and different territory.

Some of each category do best.; some department stores do better than others, and some certainly family footwear channels do better than others.

So I would tell you that I think the places we are entrenched our larger customer seems to be doing better than the rest across both of those.

Okay.

Great.

Thanks very much and good luck.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Sam Poser with Stern, Agee.

I just wanted to follow up on the G&A part for the balance of the year and how you are looking at that, and how we should look at that.

Fred, I guess.

Well, we are going to continue to open stores, and so the gross dollars will increase.

I think that the European business is getting to a point where it is going to go up as well, just because we are hitting some infrastructure issues there.

It is more variable cost than a fixed cost, we have to add labor dollars.

It is more manual system over there, so that it is going to grow.

I am talking about pure dollars.

And if domestic comes back, we can leverage a little bit on the G&A line, but we expect the G&A cost and the aggregate to continue to grow and in Q3 along with our forecasted top line growth.

At about the same rate or about the same dollars, would you say?

Same rate and same dollars for what, as to growth?

The growth,in Q2 the G&A was up about $8 million.

Is 8 million a good number to use or is the rate increase what we should be looking at?

I don't think there is going to be - - I am not sure we are looking at deleveraging on an operating basis, so I mean in dollars, if you look at that $8 million divided by the increase in growth, I think - -

You know, some of that will he depend on where it comes from.

We don't pick all of our segments dramatically.

If we have a pick-up in comp store sales, we obviously will leverage significantly more than if we have to pick it up on a reorder business for domestic, and even somewhat to International.

It is safe to say, you can leverage significantly on comp store increases.

We leverage better domestically if there is a significant increase over plan than we would Internationally, since we have more automation and more fixed costs in the game so far domestically than we do Internationally, so a little more people intensive, and obviously in real dollar terms, it also depends on currency since we pay our labor and everything for the subsidiaries.

The benefit you get in sales for the weak dollar is [deleveraging] effect to some degree on the real dollar spent.

So, after all that, I will tell you that, yes I think your first premise was basically correct.

ll things being equal and going the way we see them now, that $8 million, $10 million dollars and having a fairly constant selling line, not giving any dramatic changes in volume, is probably a good number to at least start with.

Yes.

That is somewhat consistent with what we see in the guidance.

Then on gross margin, you had a nice pickup in the quarter.

Is that consistent, are we just expecting to see that as well, or do you think that's going to level out a little more.

think this quarter, you can count on, or we would count on still seeing some benefit to the gross margin line, since this is a much stronger quarter for our subsidiary business, certainly in Europe.

It is our first big shipping in Brazil, which will continue to help, that's a subsidiary with equivalent margins, so any benefit you get from there is certainly positive.

And unless there is a big pickup or a big decline, the only other change in that, or I thing you'd have to look at is retail.

If retail comes on real strong, it does show now as comp store increases, rather than flat or decreases, that will certainly push the margins up, unless there is a corresponding big upside in domestic, in which case and you won't have to worry about it because the top line will drive it.

Thank you very much and good luck.

Thanks.

Thank you, next question is a follow up from the line of Scott Krasik, with CL King.

Please go ahead.

Thank you.

David, do you have any how many additional doors in Q3, the fashion brands will be in versus a year ago at the same time?

Domestic, International, worldwide?

Well, domestically, but if you have it Internationally.

Yes, it started in the third quarter, and it is actually growing very, very well.

And we will exceed, if you take the echo line on a International basis, we will probably be as big as we'd hoped the whole fashion group would be this year.

It is significant and well over $100 million as we speak, and certainly would be significantly larger than that.

It is hard to say how many new doors - - it's a significant number of doors.

It is certainly over 1,000.

Okay.

You take the Kids - - Some of it in the test area, it is going into new account, it is broadening out some of its distribution, primarily in Kids, and should be followed by Adults.

So, it is becoming significant, and it is pushing the growth.

hat is becoming a very good business for us, and it is going to be quite large this year, even by our standards.

That's good, so then domestically, do you have a sense that mid single-digit backlog, do you have a sense how that breaks out between Skechers and the fashion brands?

They are not significantly, you know, Skechers is so broad based.

We have some that are bigger than others and it certainly gives itself out.

I think it is fair to say, if you look at the big expansion being in Kids, Kids is certainly higher than the norm domestically.

The adults is probably, on average, same as Skechers, maybe slightly less, because that is still waiting to get its door expansion.

Okay, and then, just lastly.

David Cook is the first male spokesperson you have had in awhile.

Is this a sense Robert is just trying to goose this category, that it's tough to get the men to shop and let's and try something different?

What is the feeling there?

No, we have used them in the past, and by the way, the non-personality ads we used in the past have worked quite, quite well, it is a very strong category, and it is probably as instrumental to our growth internationally as any category we have.

I think we are just opportunistic by nature, and we did well with the American Idol in the female version.

The male became available, we were opportunistic and took it.

It's not any different than our all-out thought process, we've created characters for the kids.

It doesn't mean we are looking to goose the kids any more than we think we can.

So, we just look at each division and what's available and we just go when it's available to us.

Okay, and then Fred, the other income this quarter is about $800,000, $840,000, what was that?

Other income is made up of foreign exchange gains and losses, I believe.

And it is separated by [inaudible], just talking about the other income in the aggregate, yes that is mostly foreign exchange.

Gains and losses that are flowing through the number, some legal settlement, stuff like that.

Did you put your cash in CDs, is that what's going on with interest income, should we expect that to trend down?

Certainly put whatever I could into treasuries, and I wouldn't expect the same run rate of interest in the future.

We still are getting some decent yields on the stuff that we have no liquidity for, but that doesn't compensate for the lack of liquidity in our view.

Yes.

Thanks.

Thank you.

At this time I would like to turn the conference back over to Andrew, with ICR, please go ahead.

Thanks again for joining us today on the call.

Again, I would like to note that today's call may have contained forward-looking statements and as a result various risk factors, actual results could differ materially from those projected.

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

Again, thank you.

And have a great day.

Thank you.

Ladies and gentlemen, that will conclude today's teleconference and thank you for your participation.

At this time you may disconnect.