Skechers USA Inc (SKX) 2008 Q3 法說會逐字稿

Welcome to the Skechers 2008 third quarter earnings conference call.

During's 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 today Wednesday, October 22, 2008.

I would now like to turn the conference over to Mr.

Andrew Greenebaum.

Please go ahead.

Good afternoon, and thank you, everyone, for attending Skechers' third quarter 2008 conference call.

I will now read the Safe Harbor statement.

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

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 that the actual future results, performance or achievements expressed or implied by such forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the latest annual report on Form 10-K, its filings on Form 10-Q, management's discussion and analysis and the Company's latest report to stockholders, the Company's filings on Form 8-K and other federal securities law filings for a description of the other important factors that may affect the Company's business results of operations and financial conditions.

Now I'll turn it over to Skechers Chief Executive Officer, David Weinberg.

David?

Thank you, Andrew.

Good afternoon, and thank you for joining us today to review Skechers' third quarter 2008 results.

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

Third quarter 2008 net sales were $403.2 million, our first quarter over $400 million.

Sales for the nine months ending September 30, 2008, rose 4.6% to $1.143 billion.

Increased third quarter revenues were driven by strong growth within our international business which was approximately 25% of our total net sales for the quarter.

The domestic environment continues to be a challenge and while we anticipated our domestic wholesale sales to be flat for the quarter, our actual results down approximately 5% is still good given the soft retail environment.

Our company owned retail stores are posting mixed results with comps down high single digits due to the extremely difficult economic environment.

Net income for the quarter was $28.3 million and diluted net earnings per share were $0.60 for the third quarter of 2008.

For the first nine months of 2008, earnings were $75.8 million and diluted earnings per share were $1.62.

Earnings for the third quarter of 2008 reflect a tax benefit, resulting from an advanced pricing agreement reached with the Internal Revenue Service during the quarter which will lower our ongoing effective annual tax rate from 34% to 27%.

The key highlights in the third quarter were our first quarterly revenues over $400 million, double-digit sales growth in our international subsidiary business, double-digit sales growth in our international distributor business, backlog of high single digits from the prior year at quarter end and a strong balance sheet with over $239 million in cash, cash equivalents and long term investments representing over $5 a share.

We are continuing to focus on developing stylish in demand products and aggressively marketing our brands to further grow our position in the global marketplace.

This strategy allows us to achieve further strong growth in our international distributor and subsidiary businesses, build our brand in our newest subsidiary in Brazil and successfully establish stores and operations with our new joint ventures in China and Hong Kong.

This also allows us to maintain our position within US accounts and to open additional Skechers retail stores.

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

For the third quarter, domestic wholesale net sales decreased by almost 5% from the same period last year and by 3% for the first nine months year-over-year.

When we reported our second quarter financial results in July, we anticipated our domestic wholesale sales to be flat based on early third quarter sales, incoming orders and backlog.

Although we believe we have fared relatively well in the soft retail environment, our revenues were slightly lower than anticipated due to the reduced traffic at retail and general economic conditions.

It is important to note that the diversity of our product offerings and our reasonable price points have always resonated with consumers, and we believe this is even more so in this very difficult environment.

We are pleased to see our customers gravitating to a brand they can rely on to deliver that they need at a price they can afford.

While our domestic sales are not as previously anticipated, we see continued strength in our Skechers lines and believe our brand, consumer awareness and product acceptance remains strong.

We are continuing to build on our proven styles as well as offer fresh looks in each of our Skechers lines.

In addition, we have several exciting new products niches coming for adults in the fourth quarter and first quarter of 2009.

Within kids, a new line of boys initiatives hit retail during back to school and proved successful with a TV campaign to back it, and we are launching a new girls initiative, Heidi Hightop this quarter which has a supporting TV campaign as well.

The kids business will be also deployed with an apparel line to launch in the fall of 2009.

We are encouraged to report that our backlogs are up for most of our major lines.

The fashion division grew in total by approximately 16% in part due to the addition of BB Sport and the Punk Rose public royalty line.

Punk Rose and public royalties had a successful first launch at retail and we are eager to develop more styles for this trend right juniors line.

Along with our new line the Marc Ecko men's, women's and kid's footwear continue to grow as do the Zoo York men's and women's foot line.

The back logs of our fashion lines are very strong going into the remainder of the year.

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

We are continuing to invest in our brands through a multi-platform marketing approach that includes outdoor signage in key cities, more kiosks, print and TV advertising.

Nearly every one of our branches seemed to earn this peak selling season on one or several of these mediums, be it lifestyle print and outdoor campaigns for men and women or animated TV spots featuring our own action Heros, the Z-strap, Cool Breeze and Elastica, a new animated Hot Lights by Skechers campaign ad during back to school on key children's networks.

Several men's commercials and a new Skechers work spot were also in rotation on prime men's cable programs.

Our Skechers brand is also benefiting from American Idol winner, David Cook who is appearing in Skechers footwear print ads, billboard, kiosks and in-store visuals through 2009.

On the fashion side, Red by Marc Ecko has the power of singer actress, Vanessa Hudgens, as the face of the brand through 2009 and singer actress, Ashley Tisdale, through 2008.

Both women are also leads in the movie High School Musical 3 which is coming out later this week and is certain to bring attention to actresses as well as to the brand.

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 believe we are well-positioned domestically given our multiple unique line comprised of more than 2,500 trend right and reasonably priced styles.

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

We believe our fashionable products, broader 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 24.5% for the third quarter and 31% for the first nine months over the comparable prior period.

This growth reflects the continued strength of our brands in existing markets, the opportunities in new markets and the addition of retail stores around the world.

The strong growth in our international wholesale business is primarily from our subsidiaries which improved by 26% for the quarter compared to last year and marks the 10th consecutive quarter of double-digit increases for them.

In addition, our backlogs at the end of the quarter are off double-digits.

In the first year of operation, Brazil sales are on plan for both Skechers and Marc Ecko footwear and we are pleased with their backlog.

As the Skechers brand continues to make an impression in Brazil, we believe the market will grow to become one of our biggest subsidiaries.

From a product standpoint, the improved sales across our subsidiaries were the result of our improved growth of our Skechers line and the significant growth in the Marc Ecko footwear lines as well as with Zoo York.

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

We are pleased with the continued momentum within our distributor sales which are up just over 22% for the quarter compared to last year.

The growth is attributable to improved sales by nearly all of our distributors.

These distributors span six continents, resulting in sales growth around the world.

We are particularly pleased that two of our biggest distributors had triple-digit growth and of our biggest distributor had double-digit growth.

Key areas that are consistently growing are central and South America, UAE and several countries in eastern Europe.

To support their Skechers businesses, many of our key distribution partners have retail stores in regions where's they sell our our footwear.

At quarter end, 88 Skechers retail stores were open in 27 countries which are owned by 16 of our distribution partners.

End distributors around Skechers stores were open in the quarter including four in South Korea, two in Australia and one each in the Czech Republic, Estonia, Turkey and Ukraine.

In addition one new store was opened in Taiwan this month and one in South Korea, bringing South Korea's total number of Skechers stores to nine.

In addition to our subsidiaries and distributors, we now have three joint ventures in place.

China's was established in the first quarter, Hong Kong was established in the third quarter and Malaysia, Thailand and Singapore was established earlier this month.

We believe these three joint ventures will significantly impact our international business within the next two years.

We are already encouraged by the eight direct owned stores in China as well as more than 55 shop and shops in the country.

Hong Kong opened a store within the first month of business and had a celebrity attended party that grew great crowds.

They have since opened two more concept stores and two shop in shops in shops in Hong Kong.

Malaysia and Thailand were initially managed by a distributor until we took over operations last year.

With four stores in the two countries and the potential to grow further, we felt it prudent to manage the business through a joint venture structure based in Hong Kong.

Through our joint venture, we believe we can better maximize our potential.

While we are pleased with our continued growth in the quarter, we anticipated slightly higher third quarter international revenues than we achieved but we saw a shift of some shipments into October.

Due to this, the fourth quarter is starting stronger than initially planned and we expect to see continued growth internationally.

At quarter end, international wholesale sales were 23% of our total sales.

We continue to believe international wholesale sales can be at least 30% to 35% of our total sales in the near future, and there are many opportunities to grow our Skechers and fashion lines around the world.

Turning to retail, the once again international retail sales increased 1.2% for the third quarter on a net 37 store increase in the prior year and an 8.7% total comp decrease.

The weak economic conditions reduced foot traffic and lowered spending primarily impacted our domestic sales with comp store decreases in each of the three store types.

While sales within our domestic company owned stores were lower than projected, we are pleased that our margins remain consistent with the prior year.

We continue to believe in the strategic long term importance and profitability from our retail concept.

In the third quarter we opened three concept stores and five outlet stores, bringing our domestic and international company owned retail store count to 215.

In addition, last week we opened a flagship store on Palace Street in San Francisco just off the Powell and Market Street cable car stop.

We plan to continue to carefully, yet strategically grow our retail business.

In fourth quarter, we plan to open a concept store in New York's prestigious 15 Union Square West building, our second in Puerto Rico and another four stores across the US bringing our total number of stores opened in 2008 to 30.

For 2009, we are managing our total store growth to 20 to 25 Skechers stores, most of which are already committed though some may move into 2010 and some are located in the international market.

Now I would like to turn call over to Fred for details on our third quarter financial performance.

As previously mentioned, third quarter net sales were $403.2 million compared to $395 million last year.

Third quarter gross profit was $171.5 million compared to last year's gross profit of $171.7 million.

Operating expenses as a percentage of sales increased to 36.6% in the third quarter of 2008 compared to 34.4% in the prior year.

Third quarter selling expenses increased to $40.9 million in the period from $37.7 million in the prior year.

General administrative expenses were $106.5 million compared to $98.4 million last year.

Our general administrative costs increased to 26.4% of sales compared to 24.9% in last year's third quarter.

The higher expenses were primarily due to a combination of increased selling and advertising expense, increased warehouse and distribution costs primarily in our international subsidiaries, increased expenses related to our joint ventures in Asia, increased bad debt expense and higher rents primarily associated with the expansion of our company owned retail stores.

Net income for the third quarter was $28.3 million compared to net income of $24.7 million on the prior year.

Diluted earnings per share were $0.60 on approximately 46.8 million average shares outstanding compared to diluted earnings per share of $0.53 on approximately 46.7 million shares outstanding during the third quarter last year.

Earnings for the third quarter of 2008 reflect a tax benefit, relating from -- to advanced pricing agreement reached with the Internal Revenue Service during the quarter which will lower our ongoing effective annual tax rate from 34% to 27%.

The income tax benefit of $3.6 million during the quarter ended September 30, 2008, included $5.5 million or $0.12 per diluted share, relating to the reversal of reserves recorded in prior years as well as $4.7 million or $0.10 per diluted share relating to the reversal of income tax expense recorded in the first half of 2008.

Net sales rose 4.6% to $1.143 billion for the nine month period ending September 30, 2008.

Gross margin was $500.9 million compared to $472.7 million.

Operating expenses increased to 35.8% from the 34.8% last year.

Selling expenses slightly decreased to $105 million from $105.4 million due to reduced advertising from our discontinued brand.

General and administrative expenses were $304.5 million or 26.7% of sales compared to $274.9 million or 25.2% of sales last year.

Net income for the nine months was $75.8 million compared to $63.6 million last year.

Diluted earnings per share were $1.62 on approximately 46.8 million average shares outstanding compared to diluted earnings per share of $1.37 on approximately 46.7 million shares last year.

Our balance sheet continues to be very strong.

At September 30, 2008, cash plus both short and long term investments stood at over $239 million or approximately $5 per share.

Trade accounts receivable at quarter end were $212.5 million of our DSOs improved from 46 days to 40 -- to 46 days from 48 days last year.

Inventory at quarter end was $250.1 million, representing a year-over-year increase of $63.2 million to accommodate our increased backlog, some of our new lines, our increased retail store count and growth in our international business which includes Brazil and China.

In addition to avoid a price increase, we bought more than a million pair of our basic styles early and we remained comfortable with our current inventory levels.

Capital expenditures for the quarter ended September 30, 2008 were approximately $8.1 million as compared to approximately $9.5 million in the same period last year.

We expect our capital expenditures for the remainder of 2008 to be approximately $13 million to $15 million which includes the opening of approximately seven new stores, store remodels and tenant improvements in our corporate headquarters as well as equipment for our new Reno Valley distribution center.

And now I would like to turn the call back over to David for guidance.

Skechers has been able to maintain a strong position and increase share over the past year in the domestic market, despite the challenging economic environment, and grow strongly in markets around the world.

We believe that our diverse product offering continues to resonate with both domestic and international consumers, and our global business model will allow us to continue to profitably grow.

Given the continued uncertainty of the US economy, we believe the holiday season will be difficult for our wholesale partners as well as our own retail stores.

We are being cautious about our domestic sales, but believe the international markets will continue to grow for us.

Our expectations are based on orders received during the third quarter which resulted in an increase of single-digit domestic backlog and double-digit international backlog.

We now expect fourth quarter 2008 net sales to be in the range of $305 million to $320 million, and diluted earnings per share in a range of $0.15 to $0.23, based on approximately 46.8 million diluted shares outstanding using an annual tax rate of 27%.

We are approaching the remainder of the year conservatively given the soft global economic environment, but we are continuing plans for measured growth in the United States and abroad.

The Company remains financially solid and we are well-positioned for sustainable long term profitability and expect to increase our share of the global footwear market.

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

Thank you, sir.

We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS).

Our first question is from the line of Christopher Svezia with Susquehanna Financial Group.

Please go ahead.

Good afternoon, guys.

Hi.

Hi.

Could you just go back to what's going on with the inventory again in terms of what you did.

You brought in product early to avoid a pricing increase?

It looks like I guess even if you strip that out, inventory is up pretty significantly.

In this environment, what gives you the confidence that that inventory seems good enough shape, given obviously what's going on in the overall market?

Just trying to get an idea what's going on there.

Well, we did bring in an extra million pair this year, so that's a significant amount.

That would represent somewhere between $12 million and $15 million in cost early.

We had price increases come in on anything that was bought after September 1.

Some of that stuff had to come in early and given the price increases that were passing through and those were basic styles that we sell year in, year out.

We had an increase in -- obviously had to put some inventory in Brazil.

We had 37 more stores.

We pick up the inventory in China which had their locations and obviously will support the coming years and we have some excess inventory obviously we had planned this year being higher but we have received good feelings from the places where we usually sell our inventory.

This is want an unusual for us.

We don't have a significant amount that's not selling through nor that we can't continue to use and adjust our buying cycles with going through the end of the year and first quarter so we feel we'll be in great shape as we go through the year and first quarter.

Our inventory will be in line and we'll have the increased carrying for some of our new entities.

So for -- so as you go into the fourth quarter, does that inventory start to get pared down or is it more first quarter?

I'm just trying to get an idea how the inventory flows through based to your guidance.

Our plan would be to pare down some of the inventory in fourth quarter and the balance in first quarter, because some of it is seasonal.

That we wanted -- some of it is basic that we use throughout the year and some of it we bought early for first quarter.

I would say given the next six months that there will be and what everybody would consider it in line given our new growth on our international businesses.

Okay.

Clearly given the environment -- how the third quarter unfolded and it seems like obviously, the environment certainly hasn't gotten any better.

What -- if you would run through what your thoughts are for that fourth quarter and for your outlook in terms of what are the elements to it.

Whether it's US wholesale, the international piece and obviously, given the inventory position are you expecting the merchandise margin rates to be under pressure versus last year as a result of that?

I don't know that the merchandise will create significant margin pressure.

Our stores even though they did comp down as I mentioned in my prepared remark,s we never put them on sale.

Our gross margins weren't significantly changed from the year prior.

We don't expect any margin change in our retail which is a big piece of fourth quarter given the Christmas environment.

We probably will have small margin pressure due to the stress of the dollar which is a reversal of last year in our international which will be a big growing business, our subsidiary certainly where we do have some currency risk as pertains to Europe.

Certainly not with our distributors as they continue to grow and our domestic wholesale, I don't think will be significantly different than it was for Q3.

We were down 100 basis points basically in Q3.

I don't know that it would be significantly different as we get into Q4, unless something dramatically changes or there's a change in the top line if we move significantly more inventory through than we anticipate for an at once piece.

I wouldn't plan on too big an at once piece given the economy as it stands, but you never know on those things how they turn and how Christmas will turn out.

Our model doesn't indicate significant downturn in gross margins.

We've always said we're happy between 40% and 42% or 41% and 43% margins, and we don't think there's any change going into the fourth quarter.

And in terms from a top line perspective is it fair to assume -- the US domestic wholesale piece is down, call it mid single digits?

The international is up maybe high teens and the US retail piece is up low single digits?

Is that a fair barometer?

Yes.

I think that's not significantly different than we had in Q3 or different order of magnitude.

We think our retail will be relatively flat, maybe up slightly given the new stores, and our wholesale business will be down slightly and theoretically be offset by our increases in international.

And last question I have here is just broadly speaking on expenses, you guys have always had this mantra and this viewpoint that you wanted to continue to spend to grow market share, develop the business both internationally and domestically and opening up stores.

Here in this quarter obviously sales fell below planned.

I think they fell below plan in Q2, yet you continue to make investments and continue to spend.

As it looks to the fourth quarter, it doesn't look too much different from an experience perspective.

At what point do you see you have some level of variability in your expenses in this environment, whether it's store growth, whether it's things on the marking line, whether it's G&A?

Where can we start to see changes on the expense line relative to sales?

Well, I don't think anything would really happen prior to second quarter.

If you look at us historically, fourth quarter and first quarter are historically our smallest advertising quarters as you go throughout the year so the changes there are not as significant on an overall basis.

Where we really start to grow is Q2 and Q3 for the advertising end.

We'll make those decisions as we get closer to Q2.

As far as store openings, the stores that were open in Q3 and the stores that are projected for Q4, and especially those that we have in our guidance for 2009 have been spoken for for quite some time.

We don't believe we're in a position that we would walk away from leases that are signed and where we have already in works TIs for stores that are coming on board.

Where we can look is to the end of 2009 and into 2010.

If you remember, we originally gave guidance of about 30 to 35 stores for 2009.

We're down now to 20 to 25 stores because those have already been committed.

Unless something very good comes along, we have to look at it very closely.

As we said, in that number of 20 to 25 stores, there's certainly a potential given today's environment in financing that some of the new malls that we're slated to be in in 2009 will be put off to 2010 or may never open additionally.

I would tell you that the most realistic form would be some downside pressure on store openings for 2009, but it's early to say that and obviously that would go through 2010.

We don't feel we're in a position to do anything dramatic right this minute.

We're still profitable.

The stores are still profitable.

They continue to throw off positive cash flows and we don't have to make any significant advertising commitments till Q2.

Q4 is already spoken for and Q1 is not as big of one.

It's already pretty much in the books and not significantly different than last year maybe, and we still have some time to think about that.

You'll be able to start seeing that as we go forward.

We don't have anything really new on the horizon.

We had some joint ventures that year that we put money into -- into Hong Kong, China and Brazil and I don't believe anybody in our operation regrets those.

Those will continue to grow just like our international business.

That's a great place to be.

Brazil, like I said, can be one of our biggest ones as we go forward and China/Hong Kong have unlimited potential and they're starting off very, very well.

We think given even what we see now going into 2009,they will be a positive influence on what we do.

We think we're set up in great position, both domestically as the amount of shelf space we have and how much we plan on keeping and gaining as we go through this tough time, and internationally.

We continue to look at all those items and obviously we have made some decisions as to store openings.

We will make decisions on expenses as we get into the middle of second quarter of 2009.

Okay.

All right.

Thank you.

I'll get back in the queue.

Thank you.

Our next question is from the line of Scott Krasik with CL King.

Please go ahead.

Okay, thanks.

David, can you go into the US wholesale business a little bit more in depth?

If you could just -- what's going on in the women's Skechers business, the men's Skechers business, maybe by style a little bit.

Help us to understand what the demand is for some of these key styles.

That would be very difficult for us to do here and we're constantly reinventing and going.

I think it's fair to say that we had no significant changes in the percentage of our businesses that were men's, women's and kids in the last quarter.

Or certainly for year-to-date as it represented percentage.

Obviously some things are changing.

The women's taste is changing and our kids business is growing and getting even more acceptance.

In the women's business, we're starting to pick up more from our Ecko and fashion brands and the mix within Skechers itself, whether it's active or newly designed active or whether sport comes back and whether you call it active or sport, starts to get a fuzzy line to begin with.

I would tell you that we feel very comfortable.

One of our core competencies is to be able to develop product and to get on new trends.

I think if you just move away from one active style that has been on everybody's conversation and think about the Ecko brand and the BEBE brands and Punk Rose and Skechers and sport, and our women's USA, you'll see that we still have a very great women's business that we think will hold market share whether it's in one division or another.

And continue to grow as we get through this environment.

Okay.

On a comp basis, though, looking out -- I don't you don't want to give specific guidance -- but just seeing the decline that you've seen in some of the big categories that you've been selling in for the last 18 months, is there any way you can grow next year?

Sure.

Because we've had offsetting increased growth.

Remember with what you see as limited growth our wholesale business is only down 5% in a very terrible economic environment because we've had increases in places like Punk Rose and Marc Ecko, in women's USA, in women's sport per se.

Our men's business has held up.

Our kids business has held up.

Our fashion show women's business has held up.

I think it's fair to say that the slowdown is no different than what we've seen on overall in the marketplace.

You have to remember we've had some hits.

We've had some significant size customers like Mervyns and Goodies disappear, Certainly, while they were here, were downsized from the prior year along with everything else.

Now it takes us a while to get that business back in our normal channels of distribution, but we have historically in the past when big customers have gone away and we picked up the slack someplace else.

We feel given that customer base change and the strength of the brand and what we see with our divisions growing, and our fashion brands growing that we will pick up that shelf space.

We'll continue to grow and look forward to 2009 as being one of those players that has more shelf space at the end than we had going in.

I know you don't do this, but can you give us any sense either month by month or just generally, how your sales have trended and any sense of what's gone on in October?

I don't think we're any different than anybody else.

We had difficult September which in the end of August and September and October hasn't been great, but I don't think we're any different than the larger macro picture certainly from what I hear today.

Okay.

And then, Fred, just can you help us understand the tax implications?

For Q4, what do you compact the tax rate to be for the full year of '08 and also 2009?

27% is what we would suggest you use in your view of what the tax rate should be as we go forward.

The 27% is an ongoing rate given our current mix of international domestic business.

Okay.

For Q4 use 27 and then ongoing?

Right.

That's what we're telling people to use right now.

Okay.

Lastly, you -- it's not as tough of a question now because of the market, but I know you haven't bought any stock back.

You haven't used the cash.

It didn't look like such a bad idea at this point.

At what point does your stock get attractive to you?

At two and a half, I have EBITDA declining next year by10% plus?

It's still trading at under three times EBITDA.

Is that an attractive point for you to buy your own stock?

We continue to talk about that right now.

Actually, we think we're pretty smart now we didn't buy it.

We got all that cash in that stock to begin.

With we haven't really sat down and picked a point, although one can assume there is a point that exists as we get through this to figure that out.

When we get to that point, we'll certainly make that.

Right now, we have really no plans.

We think there's a lot of opportunities out there.

There's a lot of opportunities for it.

We hope your EBITDA number is even more conservative than we'd like, but we'll see that as we go through.

We'll -- as we get through it, we'll continue to certainly have conversation and let you know if anything changes on that.

In this market, most companies of our size and scope are being very cautious as it respects the balance sheet and being very careful to manage their liquidity.

Absolutely.

Most companies aren't as cheap as yours.

Okay.

Thanks, guys.

Thank you.

Our next question is from the line of Sam Poser with Sterne, Agee & Leach.

Please go ahead.

Good afternoon.

On the domestic wholesale, could you give us what the increase of average selling price and -- or what the change in average selling price in units were?

Yes.

As I remember it, the change in average selling price on a gross basis was about $0.20, $0.25.

And units?

I don't have that exactly.

I don't think there was a significant change.

It was down -- the differential, we were down as you'll see in the Q, we were down many about $10 million or $11 million in wholesale and had a $0.25 average price increase.

I'll let you do the math rather than trying to do it in my head here.

Okay.

And then you spoke a little bit about Mervyns and Goodies.

There's a lot there.

A few others that seem to be on the ropes right now.

How is it affecting you and how are you handling some of those situations -- some of the other department stores?

Well, it's a twofold thing.

We obviously look at every situation as it comes.

Now the fact that those went out of business probably cost us about $2 million or $3 million in sales volume that we would have had at just the lesser volume than we had the prior year for credit reasons and for going through the DIP, and for their own store closures and things like that.

It's been one of those quarters where it's almost a perfect storm.

We talked about our overhead and how our overhead had grown through the quarter.

You have to remember that we also took -- because of the times an increased provision at $1.8 million more than it was last year.

That really is, we think, hope anyway, a non-recurring expense that goes through.

We probably suffered about $2.5 million in lost sales by the decreasing currency between July 1 and the end of the quarter September 30.

On our international sales that have currency risks that was just out there.

We had part of our expenses increased overall.

It is about a $1.5 million foreign exchange loss, just on converting the balance sheet for the quarter because the dollar got so strong so quickly that continued.

I think when you put it all together, the weakened environment and the fact that there are some credit risks out there.

Ad the fact that consumers stayed back and that we've had some currencies reversed, we've had an actually very good quarter where we had expenses very well in line and gave way some top line, some for expenses, some for general economics and some for poor credit conditions and our customer base.

Just to confirm, you said the bad debt was a $1.8 million additional?

Correct.

Year-over-year.

That was those store closures and what not -- that was people just going out on you?

Well, it's a multiple of things.

It's partially Mervyns.

It's partially bad debt.

It's partially as we go through each of our accounts and do an evaluation of risk for a bad debt reserves.

We've had reserves for some guys that are in trouble that may not have physically filed yet or we had to take additional reserves when -- after they filed because the payback in today's environment is less than we originally anticipated, but we think we got it all.

We're trying to be as aggressive as we can be and having increased our bad debt reserves by $1.8 million year-over-year which covers everything we've seen and certainly all the bankruptcies we've seen.

We'll see what happens as we go forward.

Okay.

And then one last question.

You were dealing -- you've made movements for -- towards Healey's.

Have we heard any update on that?

No.

We've also heard recently you might be looking for a few new licenses.

Are there any on the horizon?

We always have licenses on the horizon.

We have constant conversation, constant talk, nothing that we're ready to announce yet.

Nothing close enough to announce yet.

Okay.

Thank you.

Thank you.

Our next question is from the line of Jeff Mintz with Wedbush Morgan Securities.

Please go ahead.

Thanks very much.

David, can you just talk a little bit about how you see your inventory in the retail channel?

Do you feel like it's well controlled in terms of what's already at retail?

Yes.

From what we can tell, we obviously -- everybody is being risk diverse when it comes to inventory.

Everybody is trying to react -- we're talking about our customers as well as ourself as quickly as possible.

We identify them and we go out.

Obviously the downturn was at slightly higher than most customers anticipated, so there are some slight inventory issues.

I think in order of magnitude not styles that are not working.

We think we're in pretty good shape.

We don't have anything that makes us nervous from what we've heard from our bigger customers -- is what we may talk about doing to keep our shelf -- to keep their turns going up so, so I don't see anything significant going out there right this minute.

Okay, great.

Thanks and then on the D.C.

-- the new Moreno Valley, D.C.

It sounds like you're going to start or you already have started doing capital expenditures for that.

What's the status in terms of opening that and getting it up and running?

Is that going to be something that's going to happen in late '09 at this point?

We're still scheduled for October of 2009 to go there.

What we've been doing is obviously -- we had to purchase or make commitments to some of that structure that we're going to put inside because of the long lead times and the fact that it's got to be here as the building is ready.

As we stand today, we have two thing going on.

One in Belgium and one in the United States.

Our building in Belgium is absolutely on time.

Actually it might be early.

That will be occupied by the end the first quarter of '09 and obviously has much lesser TIs or investments to be made inside.

That's part of what you see or what we'll see as we go into this.

As far as Marino Valley is concerned, we still anticipate, although we haven't broken ground yet, we're still on schedule as far as our EIRs are concerned and our plans with the city of Moreno Valley, and the meetings that we've had.

We wouldn't anticipate breaking ground in Moreno Valley, or moving dirt as they say, until the end of December.

We really can't make any changes to our plan or our plans of occupying the building, whether it's earlier or later until we physically break ground and get through all the paperwork at the city and state level.

Right now, we're still on target, as far as we can tell, for October of '09.

Okay.

Great.

Thanks.

And then on your ad spending, can you talk a little bit about what you're seeing in terms of -- I know you guys aren't cutting back on ad spending.

It sounds like others are.

Are you starting to see that in terms of costs for the ad spending?

Are you getting more bang for your buck now or do you see that coming down the pipe?

Like I said, this is not a big advertising quarter for us, so I'm not really sure how it stands right this minute.

I don't think there's been a significant change for us for third quarter because that was committed in advance.

Our next big commitments won't be until first and second quarter.

We will have to keep you apprised on that.

We have changed our advertising structure, by the way.

We advertised significantly more in Europe than we did last year, and we've taken out all the brands that we no longer have from here.

I think we're getting more bang for the buck simply because we've got great advertising and our kids business is doing quite well given the advertising.

We started to put them on TV in Europe and we're getting great identification for that, and great growth with our kids business outside the United States.

As we say, we always think we get bang for our buck as we advertise because it's a good thing but we haven't seen any significant changes yet in media costs that I could tell.

We'll keep you apprised.

It obviously could change as we go forward.

Okay.

Thanks very much and good luck.

Thanks.

Thank you.

Our next question is from the line of Richard [Kine] with Kensington.

Please go ahead.

Hi.

Quick question.

The $88 million long term investment, what's that?

That's the auction rate securities that we talked about in the past.

They are liquid at the present moment, even though we have a commitment from Wachovia which now is Wells Fargo for their conversion until in June.

Until there's a point of certain fact, we've taken the usual accounting guidelines and accounting for them as a long term asset as if they were a long term bond of their liquidity.

And you anticipate getting it back when?

June.

June, they'll take them back.

The press release out on Wachovia's website that has stated that they expect to purchase these back in June of next year.

Okay.

Thanks.

Thank you.

And our next question is from the line of Adam Comora with EnTrust Capital.

Please go ahead.

Yes.

Hi.

Thanks.

Last year in the fourth quarter, I think you guys generated about $80 million or so of cash.

Given your comments earlier about starting to work down some inventory in the fourth quarter, can you give us any guidelines into -- what the cash balance may look like at the end of the year?

Do you think it's in that 300, 320 range?

Yes, I do.

Okay.

And what's total CapEx now look like for 2009?

Too early to tell.

We had the warehouse in Marino Valley.

If that comes on board, we haven't given it a final number.

That aside, we're probably talking about 20, 25 stores and some IT and some development, so probably in the $20 million, $25 million range, not counting our distribution centers.

Okay.

And what's -- in terms of total for the distribution centers, are you guys comfortable giving out a number or not yet?

Not yet.

Why don't you give us till next year first quarter when we see what the scheduling is and what the final costs are going to be.

And by the first quarter when we announce year-end in first quarter next year, we'll have a better handle and tell you what the numbers are going to be.

One quick clarification on the tax rate.

It looks like so far through the nine months, the tax rate was about 21%.

Now you're saying or it should be 27% for the full year or -- which would imply a higher rate for the fourth quarter?

Or are you just saying use 27% in the fourth quarter and for '09 and going on?

No.

If you listen to Fred's comments, he said $5.5 million or $0.12 was a reversal of a reserve we took last year.

If you take out that $5.5 million, you'll find 27% for the nine months and 27% anticipated for the year-end.

Got it.

Sorry about that.

Thanks.

Okay.

No problem.

Thank you.

Our next question is a follow-up question from the line of Chris Svezia with Susquehanna Financial Group.

Please go ahead.

Yes.

Help her with your name, will you?

What?

Help her with your name.

Oh.

I won't go there.

Just on the international piece, when you guys talk about 30% to 35% in the near term; two parts to this.

I wonder if you could -- I know of course, classify what you mean by that.

Secondly, just looking at some of these major markets -- what's going on in southern Europe, et cetera.

It seems like there are obviously some softening but I know you guys are continuing to gain shelf space, continuing to gain access to new doors and bringing new product out there.

Realistically as you look early at your prelines and early into next year is this still a -- call it a 20% or so give or take constant currency growth business for you?

You talking about international in general or southern Europe in specifically?

International in general and I was wondering if you could give us an update in terms of what's going on in Europe.

I will tell you that Q1 is historically our strongest quarter in Europe.

We see no downturn from that, nor if you take that 25% to 30% increase in southern Europe, that would certainly be born out with our increase in backlog.

That's not an issue and that's obviously our biggest non-US currency marketplace for the time being.

If you go past that and assume that that's a basic given that we're going to continue to grow there and that's backed up by our backlogs and our sell-throughs going to being our historically smallest time of the year.

We have the smallest issues out there.

We think that we will come back or we will be very strong in Q1 of next year.

If you take that as a given where the base doesn't deteriorate at all and you look at how we've grown in eastern Europe and how we've grown in South America, and the potential and the sell-ins of our Brazilian subsidiary and what our potentials are in relatively new ones like China, Hong Kong, and Korea, I would tell you that those alone foster a growth rate in the 30%, 35% in the near remember.

It -- and I think -- barring anything moving out further worldwide than we have today, what we see today and how we're growing today and our acceptance in the marketplace, I would tell you 30% to 35% is a pretty conservative estimate but in these days you never know what's conservative and what's aggressive.

What we know today and where our backlogs are and where our sell-throughs and our openings in China, Hong Kong and Korea, we think that's not even a very difficult number.

Okay.

It's 30% of sales possible by -- for fiscal year '09?

Is that a possibility?

Assuming US wholesale pieces down maybe 3% to 5%?

You mean as a whole will we grow 30% to 35%?

No, no.

What I'm getting at is you've thrown out there this 30% to 35% of revenue from the international side in the near term and I'm trying to get an idea if you can put a timeframe around that.

Judging by what you're saying in terms of the growth opportunities, is that doable for fiscal year '09 assuming that the US wholesale piece is maybe down 3 to 5% for the year?

Well, US wholesale is a big piece.

To pick up 10% of US wholesale around the world is a significantly larger than 30% growth for international.

Is it possible in '09?

I think it's certainly possible.

Is it the most likely scenario?

I would think that's more a '10 or so event.

By the way, we're not all believers that for an entire year that domestic wholesale will decrease.

We have tough comps in the first half of '09, but we certainly have much easier comps in the back half of '09 and one doesn't always assume that this will last forever.

I think we have great possibilities for the back half of '09 and I think we'll hold our own in the first half.

Okay.

And then last thing I have is just on the distribution centers.

Anything you can put around, particularly in Belgium, around what that might mean from an efficiency perspective?

I know you're very manual intensive in Belgium and very manual intensive in California as well.

Anything you can put around in terms of what efficiencies?

Maybe it's too early, but what that might yield for you guys?

It's early to tell, but I would tell you with both distribution centers as we look at them, we feel that we will have a net P&L positive once we get over the systems change.

Obviously there's a little expense when you set them up and you have a double expense.

Once we get into a running rate which should take no more than we hope three to six months, that we'll be more efficient and that the overhead costs will more than offset the depreciation increases as we put this stuff in and we'll have a net positive to the P&L in a very short term.

We think they've become efficient from day one.

I'm giving current volumes, don't even need an increase in volume to leverage them once the learning factor is passed.

Okay.

All right.

Okay.

Thank you, guys.

Appreciate it.

Thank you.

And our next question is from the line of Kelly Duval with BB&T Capital Markets.

Please go ahead.

Thanks.

Hi.

I just have one question.

Can you give some quantification on what the foreign currency impact was to the most recent quarter?

I think we just said that.

We think top line sales will decrease by just over $2.5 million.

$2.6 million if I remember correctly and the P&L impact of the foreign exchange was just over $1.5 million.

Okay.

Sorry.

I missed that.

Thanks.

Okay.

Thank you and we do have time for one last question from the line of Sam Poser with Sterne, Agge.

Please go ahead.

Yes.

Just a couple questions real quick.

With the credit crisis out there, are they affecting your distributors or your international retailers ability to get money right now?

Or do you see that worsening going forward or changing?

It's very difficult.

We have seen a couple of distributors take more time to get LCs and get their lines in place and have to fight for some lines.

Nothing of enough significance to impair flow for the time being.

As long as there's no worsening from here, I don't think there's major pieces.

We only have one or two and they're moderate size that are having problems with bank financing.

If it gets worse, I'm not really sure.

I can't tell you that.

I assume if it gets worse, it gets worse for everybody.

But at the current time, it's nothing that would impact our anticipated volume.

I just want to clarify, you said, I think to Adam's question that for next year international growth, we should expect to see in the 30% range.

Is that the ballpark?

We don't give guidance that far out, so I would never tell you to expect that.

I believe the question was is it possible and I said certainly possible and certainly borne out by what we see today but we're not going to give out a one year forecast right this minute.

We think it should be easy given our new territories and everything like that, but it's early to tell.

Okay.

Thank you very much.

Thank you.

Ladies and gentlemen, that does conclude our question-and-answer session for today's conference call.

I would like to turn the call back over to Mr.

Greenebaum for any closing comments.

Thank you for joining us again today on the call.

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

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

Again, thank you and have a great day.

Thank you.

Ladies and gentlemen, this does conclude the Skechers USA, Inc.

third quarter 2008 earnings conference call.

We thank you for your participation.

You may now disconnect.