Skechers USA Inc (SKX) 2008 Q4 法說會逐字稿

Welcome to the Skechers USA Inc fourth quarter 2008 earnings conference call.

During the presentation, all parties will be in a listen-only mode.

Following the presentation the conference will be open for questions.

(Operator Instructions) As a reminder, the conference is being recorded, Wednesday, the 18th of February, 2009.

I will now turn the call over to Andrew Greenebaum.

Good afternoon and thank you for joining us for attending the fourth quarter and year end 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 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 in conditions in the retail industry.

No assurance that the actual future results performance or achievements expressed or implied by such forward-looking statements will occur.

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

With that, I would like to turn the call over to Skechers Chief Operating Officer, David Weinberg.

David.

Good afternoon and thank you for joining us today to review Skechers fourth quarter and fiscal 2008 year end results.

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

Year end 2008 net sales were $1.441 billion, a new record for annual revenues and fourth quarter 2008 sales total 298.1 million.

Our record annual sales are primarily the result of significant increases in our international wholesale sales over the past year as we continue to build our business on a global basis.

Net income for 2008 was 55.4 million.

Net loss for the fourth quarter 2008 was 20.4 million.

Diluted net earnings per share were $1.19 for the full year with a net loss of $0.44 for the fourth quarter of 2008.

The earnings in the fourth quarter is primarily due to significant margin pressure in our domestic wholesale business.

An extremely weak retail environment caused US retailers comps to be significantly.

The closing of doors from some of our retail partners, a number of department and specialty store bankruptcies, a reduction in open to buy, a decrease in orders and an increase in cancellations.

Due to this, we began managing our inventory levels down at reduced prices and took reserves of over $15 million.

We believe this process and the challenges at retail will continue to have a negative impact on our sales and profitability in the first half of 2009.

We do believe upon completion of the process, we will return to profitability in the second half of the year.

We also believe we will emerge as an even stronger company due to our well known and trusted brand, wide range of product at reasonable prices and our ability to fill sizes and at ones needs.

I would like to expand on the 2008 business within three operating segments, domestic wholesale, international and retail.

Domestic wholesale decreased by 3% for the full year and by 1% for the fourth quarter.

As discussed, the decrease in sales is the result of continued downturn in the economy which has caused many retailers to order fewer products, shut their doors and even in some cases, file for bankruptcy as consumers have significantly cut back on shopping.

In this difficult economic environment, we have maintained our market share and growing several lines.

In the fourth quarter, we experienced double digit growth in a key woman's line, Sketchers Kids, Unlimited by Mark Ecko and Mens and Womens Zoo York lines.

We also experienced single digit growth in the several of our other mens and women Skechers and fashion lines.

We are continuing to add fresh styles to our Heritage line and have seen these new looks widely embraced by accounts both in our recent freeline and Active WSA.

Our fashion division is up double digits for the quarter.

This is in part due to the addition of BEBE Sport and Punk Rose in 2008.

BEBE Sport is through a licensing agreement with the fashion company BEBE, while Punk Rose is a juniors line we purchased.

We believe the lines will grow as we continue to design fresh styles and support the brands with marketing.

We showcased the new line to the industry at last week's WSA, We recently acquired the license to sell the footwear of this well established, mixed marshall arts brand and believe this sport represents an emerging category in the US.

Each of our brand is supported by targeted marketing that may include print, television and outdoor advertising.

In 2008 this advertising included the power of American Idol winner and recording artist, David Cook for Skechers, High School Musical stars, Ashley Tisdale and Vanessa Hudgens for Red by Mark Ecko, and Eva Longoria for BEBE Sport.

Along with the celebrity advertisements, we also executed lifestyle and product focused print and television campaign.

For our kids line, these campaigns included our animated characters, Cool Breeze, Z Strap, Elastica, and Heidi High Top.

We continue to believe that advertising our brands in unique and targeted manner will positively impact sales.

Given the current retail environment, we are pleased by the positive reaction to our fall products and recent orders at WSA and believe we will maintain our position in the market.

We are focusing on delivering the right product at the right time into the right accounts which we believe it's especially important during the difficult times.

Now moving to international.

For the fourth quarter, international wholesale increased by 1%, and for the year, was up by 24%.

While we believe the strong growth for the year is an indication of the continued strength of Skechers and the opportunities available to the Company on a global basis to continue to gain market share, we are also aware that countries around the world are experiencing economic downturns and expect our business in some regions would be negatively impacted.

The strong growth in our international wholesale business is primarily due to our subsidiaries which improved by 42% for the year.

All of our subsidiaries which now number nine achieved double digit growth for the year except for Austria, Switzerland and Brazil, both of which achieved triple digit growth.

In its first year of operations, Brazil sales are on plan for Skechers and Mark Ecko footwear and we are pleased with their growing backlog.

We are seeing a stronger presence in many regions across this country of 195 million people and believe that Sketchers brand is making a positive impression on Brazilian consumers.

We do think we will continue to grow our sales in this market and they will eventually become one of our biggest subsidiary.

From a product standpoint, the improved sales across our subsidiaries were the result of the continued growth of the Sketchers lines and significant growth in the Mark Ecko and Zoo York footwear line.

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

Our international distributor sales down 2% for the fourth quarter and up 3% for the year.

While we experienced growth within several countries, key distributors in Chili, Israel and UAD achieved significant growth.

These improvements were partially offset by flat sales or small declines in other countries.

Believe our Skechers and Mark Ecko lines are still very relevant in these markets as we expect sales to remain steady.

We have launched Zoo York in many countries and it continues to be strong.

The majority of our distributors use the marketing campaigns we create in house to support the brands in their regions, while a select few have utilized the power of local celebrities to increase awareness.

In 2008 these countries included Chili, Greece, Taiwan, Israel, Czech Republic, Australia, and South Africa.

Also in support of the Sketchers businesses, many of our key distribution partners have opened Sketchers retail stores in regions where they sell our footwear.

At year end, there were 94 distributor owned Sketchers retail stores across South America, South Africa, Middle East, eastern Europe, Scandinavia, Asia and Australia.

Of these 94 stores, eight were open in the fourth quarter, including one each in Australia, Chile, Taiwan, and the UAE at the Divine Mall and two each in south Korea and Lithuania.

An additional four stores have been opened this year already, one each in Saudi Arabia and Russia and two in the Philippines.

In addition to our subsidiaries and distributors, we established three international joint ventures in 2008.

China was established in the first quarter.

Hong Kong was established in the third quarter and Malaysia, Thailand, Singapore was established in the fourth quarter.

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

We are already encouraged by the 15 direct owned stores and in excess of 90 points of sale in China, and the six direct owned stores and 11 points of sale in Hong Kong.

In 2009, we believe our subsidiaries will maintain their position in the marketplace and we feel that sales will continue to increase on a local currency basis and be relatively flat on a dollar basis.

Within our distributors several countries that were flat in 2008, we are expecting to be down in the coming year due to steep decline in their economies.

These include eastern Europe, Russia and Japan.

However, we do see some bright spots including the largest distributor covering multiple, Central and South American countries, Based in Panama, this distributor has clean inventory, 28 stores across six countries and an economy that is relatively strong and a much improved backlog.

Over the long term, we see many opportunities to grow our Sketchers and fashion lines around the world and will continue to focus on improving existing business and possibly building the brand in promising new areas.

At year end, international wholesalers is approximately 24% of our total sales, an increase of 19% of the total in 2007.

Given our significant global expansion, we believe that the international will continue to build and increase percentage of our total sales.

In regards to retail, 2008 we opened 32 retail stores, one of which was an international store and closed two domestic stores bringing the total to 219 domestic and international stores.

Our combined domestic and international retail sales were down nearly 5% for the fourth quarter and up just over 1% for the full year.

We realized negative comp store sales of 9% for the year and 13% for the quarter.

Like our wholesale partners, we believe our own retail stores have been and will continue to be negatively impacted by the weakened economies in the United States and in Europe.

In the fourth quarter, we opened seven retail stores including the premiere locations of San Francisco Pall Street and New York Union Square.

These flagship stores present great marketing opportunities as they both in the heart of local shopping districts and in tourist destinations.

Also in the quarter, we opened outlets in Jersey Shores, Puerto Rico and Las Vegas.

We opened one new store this year, an outlet in Orlando and have another seven planned for the remainer of the quarter, including a concept store in the Burbank Collections and another outlet in England.

We have closed two stores in the first quarter, our stores in Soho and on Melrose Avenue.

We have approximately ten additional stores planned for this year, with nine in the US and one in Canada.

The 18 stores we have planned for 2009 is significantly down from the thirty two stores we opened last year.

However, it is important to note, we continue to believe these stores serve as a important brand builders as well as profit contributors for our overall business.

While we are confident that our Company owned retail stores will continue to be an Important and profitable growth engine over the long-term, we are being cautious with regard to committing to any additional stores at the present time.

Now, I would like to turn the call over to Fred.

Thank you David.

Turning to the fourth quarter and year end 2008 numbers in detail as previously mentioned, the fourth quarter sales were 298.1 million, which is down 4 million compared to 302 million in the fourth quarter 2007.

With the year ended December 31st, 2008, net sales were 1.44 billion or an increase of approximately 3.3% compared to net sales of 1.39 billion for the prior year.

Fourth quarter gross margin decreased to 31.9% compared to last year's gross margin of 42.1%.

This decrease in gross margin percentage was translated into a decrease of over 32 million in gross margin dollars, primarily due to significant margin pressure in our domestic wholesale business, a direct result of the extremely weak retail environment.

This caused US retailers comps to be down significantly as well as a number of both retail bankruptcies and going out of business sales.

Due to the declining economic conditions, we began to manage our inventory levels now at reduced prices that increased our reserves by $15 million in the fourth quarter.

Gross profit was 95 million in the fourth quarter versus 127.3 million in the same period a year ago.

Gross profit for the year, was 595.9 million compared to 600 million in the prior year, and gross margin for the year was 41.4% in 2008, compared to 43% for 2007.

Fourth quarter selling expenses increased approximately 3.7% to 21.9 million or 7.3% of sales, compared to 21.1 million or 7% of sales in the fourth quarter of 2007.

The slight increase in selling expenses as percentage of sales for the quarter was primarly due to not achieving planned sales growth.

For the full year, 2008, selling expenses were 126.9 million or 8.8% of sales compared to 126.5 million or 9.1% of sales in 2007.

The decrease on a year-over-year basis as a percentage of sales was due to lower promotional expenses partially offset by increased sample costs and advertisement.

General and administrative expenses 109.1 million, compared to 89.8 million for the fourth quarter last year.

This increase is primarily due to increase salaries and wages and greater warehousing and distribution costs, higher rent and depreciation expense associated with retail store growth and increase in bad debt expense.

Total G&A expense for 2008 was 413.6 million, or 28.7% of sales for the full year 2008, compared to 364.7 million or 26.2%, in 2007.

Total operating expenses for the fourth quarter were 130.9 million or 43.9% of sales compared to 110.9 million or 36.7% of sales in the fourth quarter 2007.

For the full year 2008, operating expenses were 540.5 million or 37.5% of sales, compared to 491.2 million or 35.2% of sales in 2007.

Net loss for the fourth quarter was 20.4 million versus net earnings of 12.1 million in the fourth quarter of 2007.

Net loss for diluted share in the fourth quarter 2008 was $0.44 approximately 46.1 million average shares outstanding compared to net earnings per diluted shares of $0.26 on approximately 46.6 million shares outstanding during the fourth quarter 2007.

Net earnings for 2008, were 55.4 million, versus net earnings of 75.7 million in 2007.

For fiscal year 2008, diluted earnings per share were $1.19 based on 46.7 million weighted average shares outstanding versus diluted earnings per share of $1.63 based upon 46.7 million weighted shares outstanding in the prior year.

Earnings for 2008 reflect the $6.5 million tax benefit resulting from an advanced pricing agreement reached with the Internal Revenue Service during the year which lowered our overall tax rate to 12% in 2008.

We expect ongoing affective annual tax rate in 2009 to be between 25 and 30%.

Turning to our balance sheet which continues to remain very strong.

At December 31, 2008 cash and investments on the balance sheet stood at over 196 million or approximately $4.21 per share, net of a discount on option rate securities of approximately 13.7 million or $0.30 per share.

We continue to expect these option rate securities to be redeemed at par in June.

Trade accounts receivable at year end were 182.9 million and our DSO's at the end of December 2008 were 43 days versus 45 days December 31, 2007.

Inventory at year end, 2008 was 261.2 million representing increase of 57 million, from the year end 2007.

Working capital decreased 21% to 413.8 million at year end, versus 523.9 million December 31, 2007.

Decrease in working capital of 110.1 million was primarily due to our reclassification of 81.9 million of our investments in option rate securities to long-term assets.

Long-term debt was 116.2 million, shareholders equity at year end increased to 668.7 million versus 626.7 million at year end 2007.

Book value or shareholder equity stood at over $14 per share as of year end.

Capital expenditures for 2008 were approximately 73.1 million, which primarily gives us 32 store openings, and several store remodels, corporate real property purchased, tenant improvements for our new corporate headquarters and 23.1 million for warehouse equipment, for our new distribution center in Mareno Valley, California.

We expect capital expenditures for 2009 to be between 80 and 90 million.

Now, I will turn it over to David for his final comments.

We entered one of the most challenging times of our generation.

We believe the economy will continue to have a negative impact on retailers in the near term and on Skechers.

Because of this, we are managing our expectations for the business for the first half of 2009 to be relatively flat.

We are confident that the combination of our inventory reduction plan, reduced expenses and recent orders at the preline and WSA Trade Show for Back to School will allow us to increase our cash balances and return to profitability in the back half of the year on annual revenues of between of 1.2 billion and 1.3 billion.

Along with our expense control and inventory plan in 2009, we are focusing on maintaining our position in the domestic and international markets by continuing to offer fresh and stylish products at good value.

We had an extremely strong balance sheet, strong liquidity, and significant cash position that we carefully grown and preserved over the last few years.

In the coming year, we are also focusing on growing our new subsidiary in Brazil and working with joint venture partners in China and Hong Kong to further grow our business.

We are continuing to explore prudent opportunities around the world to either launch our brands or grow our presence in sales through more involvement by the company.

We also believe, we can continue to take share on a global footwear market by introducing lines and categories domestically.

Skechers is a Company with compelling products talented people and dedicated partners.

We are committed to meeting the footwear needs of our accounts and consumers and profitably growing our Company.

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

(Operator Instructions) Our first question is from Jeff Mintz with Wedbush.

Thank you very much.

Good afternoon, guys.

David, can you talk a little bit about the plans for the distribution center and what your 80 to $90 million 2009 CapEx estimates includes for that?

Yes.

it's -- I don't know if most of you are aware but in Mareno Valley, we got the approval to go forward.

We got City Counsel approval.

It was a 50 vote about two weeks ago.

So we are working on the final plans.

As Fred said in his comments, we spent 23 million committed to purchase for the inside of that.

The total, we believe inside will be somewhere in the 75 to $80 million range.

Give or take an $80 million, we still have 57 million to spend and that is obviously the most significant piece of the 80, 90 million to be spent in 2009.

But that is included, 80 to 90 includes the 57?

Yes it does.

Great.

On gross margin I believe in the press release it said you can get back over 40.

Looking at a longer term you talked in the past about kind of a 42 to 43 range being where you think the Company can be.

Do you see that as being achievable, somewhere down the line again?

As we said in the past, that's usually a mix issue.

Some degree a currency issue.

As we start the joint ventures in China and Hong Kong and Brazil, they are also subject to currency fluctuations.

So we do believe currency somewhere down the road in the next three or four years will become a slightly larger piece of the gross margin than it is today.

We can open hedging opportunities which we are looking in to.

On its basis it is possible given today's environment that we will be back in to the low 40s, 42, 43 plus us in the next couple of years, if retail comes out and stays healthy.

Great.

Finally on the fashion brands and kinds of everything besides Skechers, can you give us a sense of the size of that business now?

How much often impact it has on the overall numbers?

It probably now about 15, 20% of our wholesale business in the United States.

It's probably very close to that on a international basis now.

It can represent somewhere in the range of 15, 20% of our wholesale business as we go down the road.

Okay.

Great, thanks very much and good luck.

Thanks.

(Operator Instructions) Our next question is from Sam Poser with Sterne Agee.

Was that a groan?

I apologize.

I'm on speaker.

I had to take it off.

The composition of the inventory what was written down and what you have encompassing the $261 million right now?

That needs to be taken care of -- what part of it in some details if you could.

They are all huge.

That's the component we are working on.

It's complicated.

More in detail to get forward.

It's safe to say that we think our running rate on inventory when we get to the billion, two billion, three running rate will be equivalent to what it was beginning in 2008, maybe late 2007.

We will take into account the additional stores that we have and increased businesses through the joint ventures that are going to have to be supported with inventory and that would include our subsidiaries and the joint ventures in China, Hong Kong and the new ones in Brazil.

It's fair to say that we are looking at de-inventorying, somewhere in the $40, $50 million range over the first six months.

Can you tell me about what inventory when what that 40 and $50 million is, Cali gear?

What is it made up of?

Bikers or?

You don't want me to put myself in the closeout market let everybody know what it is.

Little bit of everything.

A lot of the businesses will plan to grow bigger and didn't.

Not all of it is under serious distress.

Some of it is just excess inventory given the running rate of the Company.

We are a Company that has 3000 or 4000 styles.

So it is very difficult to go through a style color by color and give you an idea of where it is.

Some brands are obviously stronger than others.

Our Mens brands have held up and kids brands are doing fine.

We thought they would grow at a faster pace.

There is inventory in a number of places, domestic and international that have to be cleaned out.

I don't know if we are quite ready to give a breakdown analysis.

It is pages and pages of certain significant titles of what we plan on moving where.

We are ahead of plan.

In liquidating the inventory and seem to be in great shape and it's moving along quite nicely.

Based on sales guidance for 2009, can we assume that after the first six months the inventory will be below next year and you will be running relative below last year and running relative to the sales?

I don't know below last year because we carry it in different places.

But certainly comparable.

Thank you very much.

Thank you ladies and gentlemen, at this time, we would like to give you a final opportunity to answer any additional questions.

(Operator Instructions) I'm not registering any further questions at this time.

I will turn the conference back to Mr Greenebaum for closing remarks.

Thank you for joining us today on the call.

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

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

These factors are detailed in Skechers filings with the SEC.

Again, thank you and have a good day.

Thank you, ladies and gentlemen.

This does conclude the Skechers USA fourth quarter 2008 earnings conference call.

We thank you very much for your participation.

You may now disconnect.

Have a very pleasant rest of your day