Skechers USA Inc (SKX) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the SKECHERS USA, Inc.

second quarter 2010 earnings conference call.

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

Following the presentation the conference will be open for questions.

(Operator instructions).

This conference is being recorded today, Wednesday, July 28, 2010.

I would now like to turn the conference over to you, SKECHERS.

Please go ahead.

Good afternoon and thank you for joining SKECHERS' quarterly financial 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 not limited to global, national and local economic, business and market conditions in general and specifically as they apply to the retail industry and the Company.

There can be no assurance that 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 filings with the US Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws, for a description of other significant risk factors that may affect the Company's business, results of operations and financial conditions.

With that, SKECHERS' Chief Operating Officer, David Weinberg, will begin with prepared comments.

Thank you for joining us today to review SKECHERS' second quarter 2010 results.

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

Second quarter 2010 net sales were $504.9 million, the highest in our 18-year history, and $977.6 million for the first six months.

Earnings from operations were $58.8 million for the quarter and $139.8 million for the first six months.

Net earnings for the second quarter were $40.2 million, and diluted earnings per share were $0.82, and for the first six months of the year they were $96.5 million and $1.97.

Our revenues, net earnings and earnings per-share all represent new second-quarter and six-month records.

We are extremely proud to have achieved over $500 million in quarterly sales for the first time and to do so at a time when the retail environment has only slightly improved over last year.

This further confirms the strength of the brand.

Our strong sales and the buzz from our accounts, positive reaction from consumers and extensive coverage from the media has positioned SKECHERS as a leader in the lifestyle and athletic footwear industry.

Growth has come from all our business platforms, domestic and international wholesale and retail and e-commerce, and is across our men's, women's and kids brands.

Our second quarter was the result of high double-digit sales growth in our domestic wholesale business, combined with double-digit growth in our international subsidiaries, high double-digit sales growth in our domestic and international SKECHERS retail division with combined retail store comps up 30%, double-digit growth in our e-commerce division, gross margins of 47.1%, the result of more in--line, in-demand inventory, combined with strong sell-throughs, and increase in domestic pairs sold of 50% and an increase in average price per pair of $5.96 or 31.5%.

Additional important achievements for the quarter include a new quarterly sales record, and our first ever over $500 million; record second-quarter earnings and EPS, domestic and international wholesale backlogs accelerating to triple digits, an even stronger balance sheet with approximately $273 million in cash representing $5.66 per share and current and on-plan inventory to support both our new and existing divisions as well as our Company-owned retail store growth.

Our growth and continued strong performance is attributable to the combination of our innovative and diverse product offering, broad distribution strategy and global marketing force.

Based on our key indicators, including our backlog, sell-throughs, and our own comp store sales, we believe that 2010 marks a new phase in SKECHERS' development and that we will continue to be an increasingly sought-after branded the United States and around the world.

The growth in the second quarter is primarily attributable to our domestic wholesale business, which increased 97.5%.

While the comparison is to a weak second quarter 2009 which declined by 20% over the prior year, it is still significant and represents approximately a 58% increase over the solid second quarter of 2008.

For the six-month period, net sales improved approximately 73% over the same period last year.

The quarterly increases were the result of triple-digit improvements in our women's segments and double-digit improvement in our men's, work and kids segments and an average price per pair increase of 31.5%.

The growth was spread across many of our divisions, from our heritage lines, including men's and women's sport, work, active and kids, to our newer fitness lines.

We support our divisions with an integrated approach to marketing and have seen a halo effect from collection to collection across genders.

SKECHERS images can be seen in magazines, on billboards, wrapped around buses and on key television programming.

Our advertising is consistently updated with new images and product to remain fresh and relevant.

We also create powerful in-store presentations with our branded imaging to create SKECHERS destinations on the sales floor of our key accounts.

We continue to support our kids division with fresh television campaigns featuring our cast of characters on major cable networks during prime viewing times.

Our fashion brands continued to decline due to the refocusing of some lines and the closing of others.

We believe several of these lines, including Zoo York, which continues to post growth, and Marc Ecko, have relevance in select markets, and we are addressing the styling and product development.

We have just completed three weeks of product and marketing meetings with key accounts at our Manhattan Beach offices this week, and the reaction to our new offering for holiday 2010 and spring 2011 has been very positive.

We are looking forward to delivering these fresh styles and believe consumers will continue to seek out our latest offerings.

Our international wholesale business improved by 26% for the second quarter and nearly 25% for the first six months.

The growth was primarily the result of strong improvements in our international subsidiary and joint venture businesses, which were up 44% for the quarter and just over 42% for the six months.

All of our subsidiaries showed growth in the quarter and the first six months.

[Chilly], which we acquired last year in the second quarter, continues to perform very well with localized marketing campaigns, a strong retail base and a growing wholesale business.

Our international subsidiaries utilize the proven marketing campaigns we have are created domestically, translating them into their local languages.

In addition, we are translating much of the product packaging to more effectively communicate our message in these countries.

We are pleased with our overall results in our joint venture countries in Asia.

They are building the SKECHERS brand through retail stores and shop-in-shops and utilizing our corporate marketing images as well as local celebrities and models to create an approach that resonates with their customers.

At the close of the quarter there were 41 stores in the region, five of which opened in the quarter, including our first store in Cambodia.

Two stores have opened in China already this quarter.

Through our joint ventures in Southeast Asia we are focusing on increasing our points of sale, which are at approximately 350.

Our international distributor business was down by 4% in the second quarter and 12% for the year to date, but we believe they will show double-digit growth in the third quarter, based on a much improved backlog.

We believe the decline we have experienced in many international markets is reversing itself as the retail environment is also improving around the world and our new SKECHERS product and marketing is making its presence felt.

Our international distributor business was negatively impacted by the transition of Chilly from a distributor to a subsidiary.

In spite of the challenges, we have seen improvements in several countries.

We believe our distributor business will be positive in the back half of the year, based on incoming order rates and backlog.

In 2009 we signed distribution agreements in Mexico and India, two countries where we believe we have the opportunity to build both strong wholesale and retail businesses.

India began delivering product in the fourth quarter 2009, and we are encouraged by the early sell-throughs.

The first SKECHERS store in India is planned for Mumbai this quarter.

Mexico opened its first store last week in Mexico City and begin shipping product to its wholesale accounts this month.

Mexico has plans to open another three stores in the third quarter.

We believe both these important countries will contribute to our international growth and positively impact our business over the next three to five years.

Many of our key distribution partners continue to open SKECHERS retail stores in regions where they sell our footwear.

At quarter end there were 129 distributor-owned or licensed SKECHERS retail stores around the world.

14 new distributor stores opened in the second quarter, one each in Australia, Morocco and Malta, two in South Africa and nine in South Korea.

One store closed in the quarter.

This quarter, an additional three distributor-owned stores have already opened, including our first in Mongolia, and another 15 to 20 are planned by year end.

Similar to our company-owned stores, these distributor stores serve as marketing tools, building brand recognition as well as offering local consumers a more complete assortment of the SKECHERS brand and products.

The majority of our distributors use the marketing campaigns we create in-house to support our brands in their regions, while certain others create ads that reflect the local culture.

Currently, Taiwan, India and South Korea are using the power of local celebrities.

We are pleased with our international subsidiary and joint venture businesses and with the positive direction our distributor business is heading in the back half of this year.

We believe our international business will continue to grow in 2010 and into 2011, based on our improved backlogs, the sell-throughs of our current products and the reaction by our international accounts and distributors during our conference in June.

With our new businesses in Mexico and India as well as the relatively recent launches in Southeast Asia and South America, we believe our international business, now at approximately 20% of our total, will become a significantly larger percentage in the near future.

Our combined domestic and international retail sales were up just over 41% for the second quarter with our domestic sales improving by approximately 40% and our international retail by 52.5%, which includes the addition of 10 stores from our distributor in Chile.

Comp store sales on a combined basis increased 30% for the quarter.

At the end of the second quarter we had 262 company-owned SKECHERS retail stores.

In the second quarter we opened 13 stores, including one in both Charlotte and Atlanta.

We also open our first stores in Austria and South Wales, our first airport location in Orlando and our second store in the Netherlands.

We closed one store in the second quarter.

Also in the quarter, we opened a Shape-up store on Fifth Avenue.

This quarter we have opened five stores, including three international stores, our first downtown location in Santiago, Chile, and our first two in Italy.

We have approximately nine scheduled to open before the end of this quarter, including a store in Vancouver and in Calgary and two more Shape-up stores, one in the Santa Monica Place Mall and one in Hollywood.

We have another eight stores scheduled to open in the fourth quarter.

We continue to view our retail stores as tremendous marketing centers, a place where consumers can shop the largest collection SKECHERS has to offer in a uniquely identifiable SKECHERS setting.

Given the profitability of these locations and their value as brand vehicles, we will continue to seek out new locations to grow our retail base.

As with our retail stores, we view our e-commerce site both as a marketing vehicle to effectively deliver our messaging and a profitable and efficient distribution channel.

Though it remains a relatively small part of our total business, our e-commerce revenues improved by approximately 60% for the quarter and 96% for the first six months.

We are investing in improved software and redesigning the shopping experience to be more user-friendly for consumers, and we're looking at expanding our e-commerce business to international subsidiary countries where we already directly handle the distribution of our product.

Before we move on to our financial review, I would like to mention our licensing division and additional revenue channel.

Through selectively licensing our name and images, we are extending our brand into new categories, making it eventually possible for men, women and kids to dress head to toe in SKECHERS.

SKECHERS kids apparel, launched in the first quarter of 2010 in the United States, and SKECHERS eyewear, launched in the second quarter in North America and select countries around the world, along with kids apparel and eyewear, we also have SKECHERS' branded [jocks] and [scrubs] available and have licensing agreements with SKECHERS bags, leather goods, belts and watches.

Now, turning to our second-quarter 2010 numbers in detail, as I mentioned earlier, second-quarter sales were a record $504.9 million compared to $299 million in the second quarter of 2009.

The 69% increase in second-quarter revenues was driven by significant growth across the board in our domestic wholesale and international businesses, our company-owned retail stores as well as our online business.

This quarter represents the largest single sales quarter in our more than 18-plus years existence, an achievement we are very proud of.

Second-quarter gross profit was $237.6 million or 47.1% of sales compared to last year's gross profit of $122.6 million or 41% of sales, an increase of over 600 basis points.

The increase in gross profit dollars of $115 million on incremental sales of $206 million speaks to the broad strength of our business.

The very significant increase in gross margin percentage was due to a variety of factors, including improved quality of our inventory, which resulted in reduced closeouts, strong product sell-throughs and a higher-margin product mix.

Second-quarter selling expenses were $52.4 million or 10.4% of sales compared to $34.8 million or 11.6% of sales.

The increase in the dollar amount of selling expenses for the quarter was the result of the significantly higher sales volume, increased advertising and promotional expenses and higher trade show costs than the prior year.

On a percentage basis we had 125 basis points of operating leverage year-over-year.

For the second quarter, general and administrative expenses were $127.3 million or 25.2% of sales compared to $95.8 million or 32.1% of sales in the prior year.

The increase in the G&A dollar amount was due to a combination of the higher sales volume and increase in the breadth of our global operations, though on a percentage base of sales, expenses were down nearly 700 basis points as we saw increased operating leverage.

Total operating expenses for the second quarter were $179.7 million or 35.6% of sales compared to $130.7 million or 43.7% of sales in the second quarter of 2009.

In total, this represents a decrease of 810 basis points as a percentage of sales.

Given the addition of 23 retail stores and several new international initiatives such as Chile, Hong Kong and China, we feel that we have done a solid job of managing our costs while still building our global infrastructure to position the Company well for the future.

During the second quarter 2010 income from operations was $58.8 million, an increase of nearly $66.5 million on a year-over-year basis after a loss from operations of $7.7 million a year ago.

Net income was $40.2 million compared to a net loss of $5.9 million last year.

Net earnings per diluted share in the second quarter of 2010 was $0.82 on approximately 49.1 million average shares outstanding compared to a net loss per diluted share of $0.13 on approximately 46.3 million average shares outstanding in the prior year.

The significant EPS improvement is also based on an additional 2.8 million shares.

Income tax expense was $20.4 million during the second quarter of 2010 as compared to a tax benefit of approximately $1.2 million during the same period last year.

Our tax rate for the quarter was 33.6%, year-to-date 32.5%, and we expect our full-year effective tax rate to be approximately 32.5%.

For the six-month period ending June 30, 2010, net sales increased 55.3% to $997.6 million compared with $642.4 million in the prior year.

Gross margin was $475.1 million compared to $248 million.

Operating expenses were $336.5 million compared with $250.2 million.

Selling expenses were $86.7 million compared to $56.3 million and general and administrative expenses were $249.8 million compared to $193.9 million in the prior year.

Net income for the six months was $96.5 million compared to $2.3 million last year.

Diluted earnings per share were $1.97 on approximately 49 million average shares outstanding compared to diluted earnings per share of $0.05 on approximately 46.4 million shares last year.

To put this growth in perspective, in 2005 our entire revenues for the year were $1.6 million, just $8 million more than the first half of this year, and EPS was $1.06 for the entire year, $0.91 lower than what we achieved in the first six months of 2010.

Now turning to our balance sheet, which remains very strong, at June 30, 2010 we had approximately $273.3 million in cash or $5.56 per share.

Our cash position was impacted by accelerated factory payment of $64 million, which reduces our interest expense by approximately $3.5 million to $4 million annually on our current purchasing volume.

We also made a capital contribution of $30 million to our new domestic joint venture.

We broke ground during the second quarter on our 1.8 million square foot facility in Rancho Belago, California, and expect it to be ready for operation in 2011.

Our cash position provides us with sufficient capital for our many growth initiatives as well as our continued infrastructure buildout.

Trade accounts receivable at quarter end were $305 million, and our DSO at the end of June 30, 2010, were 48 days versus 52 days in the prior year.

Total inventory, including merchandise in transit at June 30, 2010, was $219.4 million, representing a decrease of $4.7 million from December 31, 2009, and an increase of $28.1 million from June 30, 2009.

We believe our inventory is clean and well positioned for the remainder of 2010.

Working capital increased to $612.5 million versus $558.5 million at year end.

Long-term debt was $14.5 million, which represents a note for costs paid by our joint venture partner for our distribution center.

Shareholders equity was $889.7 million versus $749.4 million at December 31, 2009.

The increase in shareholders equity was due to an increase in minority interest of $30 million from the contribution of land for our new distribution center by our joint venture partner, as well as our net earnings.

Book value or shareholders equity per share stood at approximately $18.10 as of June 30, 2010.

Capital expenditures for the second quarter were approximately $37.7 million compared to $10.5 million last year.

Capital expenditures primarily consisted of 13 new store openings and several store remodels, a corporate real estate purchase, corporate office improvement and $24 million for our new distribution center in equipment in Rancho Belago.

Excluding the distribution center equipment and building, which we now expect to be spread over the second half of 2010 and 2011, we expect ongoing capital expenditures for 2010 to be between $15 million and $20 million.

As I mentioned, we are extremely proud of our results this quarter through our financial, product, marketing and execution perspective, especially on the heels of our record first quarter 2010 and record fourth quarter 2009.

We feel our new quarterly revenue record and the first-ever quarter over $500 million a positive achievements and a preview of what is to come for SKECHERS.

We've had many successful quarters and years in the past, but we truly think this year will be our best yet.

The buzz surrounding our brand and numerous product and global growth initiatives is at an all-time high, and we expect it to continue when our new collections hit the market.

Our new initiatives are allowing us to grow our presence in existing accounts and to expand into new channels in the states and overseas.

We are now focusing on developing our new distribution businesses in India and Mexico, building our joint venture operations in Asia and our newer subsidiaries in South America.

Our retail business, which at quarter end has grown to 262 company-owned stores in the United States, Canada, Chile and across Europe, is performing extremely well, and we plan to continue to strategically open new stores in these markets as well as in other areas.

With $273 million in cash, a new 1.8 million square foot distribution center in development and fresh product lines gaining shelf space at key athletic and specialty stores, better department stores and independent accounts and strong sell-throughs across our product lines, we believe we are well positioned for growth.

Based on our many positive factors, four consecutive record quarters, double-digit retail store comps, accelerating triple-digit backlog and consumer demand, we believe the momentum will continue through the back half of 2010.

We are looking forward to the remainder of the year and into next year and what we believe will be significant growth and an increasing global scope and awareness.

And 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) Chris Svezia, Susquehanna Financial Group.

Good afternoon, David, and tremendous job, congratulations.

Just on the backlogs, accelerating sequentially from Q1 of triple digits, any thoughts as we just kind of -- I know you don't give specific guidance.

But as you think about the third quarter, which is obviously typically your biggest quarter, any thoughts about how we should think about the context of growth in that quarter?

Are we thinking potentially up in excess of 50%, total Company, in terms of growth?

Just put any context around that, how we should interpret the backlog?

Well, 50% -- and we had a record quarter, last year's third quarter, so that would be certainly not out of the question, but on the upper end of what we would anticipate.

As we move through this year, because we were so hot, we did have some movement of some early July shipments into June, obviously causing that great June quarter.

So I would tell you that we are still comfortable with the numbers that are on the street, maybe they are conservative and slightly up from there, but I don't know that I'd go to 15% here.

I think what is positive is that our backlogs continue to grow and are further out for Q4 as well, so, where many people had thought that Q4 might have some barriers to growth because it was such a great quarter, looks like it will be higher than last year as well.

So we're waiting to see how back to school settles in and what happens with the new product deliveries, and certainly we will be up significantly and the back half of the year.

The question will just be, how much right now.

And as we think about the gross margin rate, which -- 47.1% is pretty good -- any thoughts as to how we think about that as we go into the third quarter in terms of the trend line?

Obviously, your inventory is only up 13%, [seem] exorbitantly lean at this point.

So any thoughts about how we should look at the margin trend for the business for third quarter?

Yes.

I think margins should mirror what they did in the first half, slightly down in Q2 from Q1.

Usually, Q3 is a bigger percentage retail for us.

Obviously, retail does very well in Q3 for back to school, so that would be a moderate upward push on margins as they came out of Q2.

So I think they had a little bit of upside and certainly will be consistent coming through the third quarter, probably into the fourth quarter.

And then, just on the fitness category for a second, the ongoing promotion that's going on, the plant promotion, 20% off lots of generation one shoes that are out there, I guess, can you give us -- we've been hearing there has been a material increase in sell-through volume in the past two weeks, since it's been out there.

Any color you can give in terms of what's going on with the product that's not on promotion and how we should think about the generation one Shape-up post the promotional event?

Has that just become a smaller piece of the business, or -- and all the new product takes over?

Just some color around that.

From what we [saw] -- we hear the same things you do, that there's certainly been an uptick.

Now, I think part of it is the sale and part of it is just that we've come through the doldrums of June, which became very big sandals, never big athletic time, anyway.

We hear that the new product is selling very well, given that there is a sale going on with Shape-up and the basic shoe at the current time.

So that's always a positive thing, and that's true in our own stores as well.

Shape-ups -- I think that the classic shoe, obviously, will have new additions.

But that becomes a very basic, and the new product -- we haven't even seen all the new product delivered.

For those of you that were FFANY and know some of the new product and lower profile and things that are coming that are getting great reviews as well.

So it's hard to tell where it all comes out, but we see accelerated growth through the product and where it actually -- how much the basic business is and how much the new one still remains to be seen.

It's a very new part of the cycle.

What we do know is there is great reaction to the new product and the sale and clearing out the inventory, and impressions could be that people will be, given the numbers that we've seen in the first week or so, could put some pressures on what people are holding that they thought was high at the end of June, at retail, that now could be short, by the time you get really and solidly into back to school.

So that all remains to be seen.

Okay, that's good to hear.

And the last question I have is just on the international side.

I'm assuming that's a pretty material piece of the backlog increase.

Just kind of give us some context about what's driving that, how much the fitness piece is really impacting the international subsidiary and distributorship businesses at this point.

Or, is that still six months behind what's going on in the US?

Well, they still are six months behind, and while their backlogs are up high-double digits, the biggest piece, obviously, was domestic, since we are well into triple digits now on that.

What we do see now is that as we are starting to sell in some of these countries in Southeast Asia and in Europe, especially, and parts of South America, is that for July our order rate is now accelerating to the point that we anticipate international backlog, at least on a percentage basis, obviously a smaller base, will catch the US probably some time at the end of July or mid-August.

And their selling period starts later than ours; they start at the end of August and July because they are on vacation period.

Should we get that, I would anticipate that their backlogs will be well ahead on a percentage basis and have significant growth to make up that little shortfall.

They went from 25% of our business to 20%, and make that up certainly by the first quarter of 2011.

All right, great job.

Thank you very much.

Scott Krasik, BB&T Capital Markets.

Thanks; David, congrats.

Can you just quantify, because I'm sure we'll get the question, what the amount of pull-forward was from Q3 into Q2 were those July shipments?

It's hard to tell because they all fall within those windows.

It just seems to be -- if I was going to guess, I would say not a significant amount, but probably in the $10 million, $15 million range.

Okay, that's helpful, thanks.

And then you had the domestic pair ASP was up 31.5%, the units were, then, up?

Units were up 50% and price was up 31.5%.

Okay, and then, ex-fitness or ex-toning, I think your units were flat to down last quarter.

Were they -- were your units, ex-fitness, up, then?

Our units, ex-fitness, I believe was up.

I'd have to take a look at that.

I know they were up in our [peaks] -- in the SKECHERS brand, certainly up in men's and kids, and the non-fitness women's piece.

There might have been some strength from some of those fashion pieces we've closed down that added units last year, even though they were at a loss.

But our core SKECHERS product was up.

And then any thoughts -- when you hit that summer time and the units started to slow, did you pull back on your media spending as well?

And is there an opportunity to accelerate that in the next month or two, and what the impact of that could be?

The answer is no and yes.

We really didn't pull back.

Those things that happen in June and July are planned more than a week in advance, so it's very difficult to pull them back.

But we have a very extensive advertising campaign, as you might know, for back to school that will be starting in the next couple of days.

And I'm sure everybody will see it.

So I think that will just add strength and momentum to the brand as we get into back to school.

Any discussion with retailers on incremental price breaks on first-generation product this fall?

No.

Okay, good.

And then just your comment on gross margin.

Seasonally, it should pick up in Q3.

Q4 you've obviously got a tougher comparison, but because of bigger retail and some other stuff.

Should it be similar to the Q3 gross margin, or should that come in?

Yes.

I don't see anything right this minute that would change measurably the gross margin as we go through the back half of this year.

Our retail continues to do quite well.

If nothing else, we now actually, over the last few weeks, have a boom from currency.

Our biggest functional currencies outside the United States are Europe and now very [kind of] Southeast Asia.

But for Europe, with the euro back at $1.30 and the pound at $1.55 and showing some strength, that has also put a little extra margin on the plan.

So I don't see anything that really is a negative to margins continuing in the range we have now for the back half of the year.

And then just -- this is a tough question for you, but conceptually thinking about marketing expenses going forward, do you need to continue to spend at this level to maintain this sort of sales volume?

Or, if you're not expecting the same rate of increases, could you spend at a lesser level next year?

Well, we are constantly reevaluating that.

I would anticipate that the levels won't shrink dramatically.

You have to understand, we are now six, nine months behind.

If we could take some from the United States and build on that momentum, we'll take it internationally because we have probably more to gain internationally on a real dollar and, certainly, percentage basis than we did in the United States.

So that marketplace is still open, and I anticipate that we would continue to push those markets as well.

So I don't know that there would be significant change in percentages will continue, but it shouldn't grow significantly as we go forward.

That's helpful.

Thanks and good luck.

Camilo Lyon, Wedbush Securities.

Thanks, and my congrats as well.

Maybe you could touch a little bit about what you are seeing in the marketplace from a competitive standpoint.

There are a handful of other brands in there that are offering the toning comparable shoe, and I wanted to get your sense as to what the retailers are feeling about that and how you view them as a competitor.

Well, we take all competitors seriously.

But beyond that, I think it's better if you talk to retailers themselves.

I don't know if this is a good venue or that I'm very comfortable in giving you my personal opinions on who is competitive in the marketplace and on their products, specifically.

I think it's fair to say that there are certainly more entrants, but we believe and we plan on continuing to be the most prolific builder and offering the most wide variety of anything that any company could bring into this toning category.

So I think that's still on track, and I think that's where we are now.

Sounds good.

And then maybe focusing a little bit on international, if we could, heading out into 2011 -- I know it's a bit early, but I'm just trying to frame maybe the opportunity and how to think about some of the timing of the deliveries, maybe some clue as to how the international partners of yours and some of the subsidiaries are thinking about receiving shipments and when that's going to start to happen so we can maybe start to lay the groundwork and what the international contribution can be in 2011.

It could be significant, it should be significant.

Their backlogs are growing dramatically, and they are delivering product.

The numbers we reported, the increase of 25% overall and 40% of the subsidiaries -- remember, that's ex-toning, for the most part.

They are only tests and getting started, so they should grow significantly.

And the way to frame it the best is to tell you that they are no different than our partners in the states; they want it earlier.

So we will be geared up.

And obviously, Q3 and Q4 of 2011 are the biggest recipients.

I think we'll show growth in Q4 because everybody wanted it as early as we can give it to them.

But obviously, we have significant opportunities through the back half of this year and very large in first quarter of 2011.

And so what type of product are they receiving now?

And when will they get the next-gen shape-ups, and as well as the extension, the product extensions that you have coming in online for the US?

When do you think that hits, in the initial?

That should hit in Q4, for our subsidiaries, the extension.

Some of it will hit in the back half of Q3, and it's just a matter of looking at what we are delivering now and taking out six months, as far as international is concerned.

Okay, so every indication that you are getting from international partners is that they are looking for products, looking for -- seeing the demand that you're putting forth in the US and wanting to get as much as they can?

And their own sell-throughs; and yes, that's true.

And that's obviously having a positive halo effect on the non-fitness part of the business as well, I would assume?

Yes.

The whole business continues to do well.

They are no different than here.

Our men's and women's and kids are very basic around the world and continue to grow.

Claire Gallacher, CapStone Investments.

I'd like to add my congratulations.

I have two quick questions for you.

It sounds like your men's business was quite strong in the quarter.

Just trying to get a sense of -- is the toning business within the men's segment accelerating at a faster rate than maybe you saw in the first quarter?

That's hard to say.

I think it's only that they're delivered later.

We started with women's and then have gone to men's, and we'll be delivering kids shortly.

So I think it just started later and it's a smaller base.

I think our overall men's business got stronger.

Both our very basic black and brown business, our sport business got stronger, fitness added to it, and work continued to be very strong.

So we basically got it on all avenues as far as men's is concerned.

And then just a quick question on your input costs.

Can you give us an update of what you are seeing maybe for the back half of this year?

And if you have any kind of insight into spring '11, that would be great.

Well, we have announced some price increases for the back half of this year, and we anticipate that they will encompass of all of what we can tell so far has been our input costs from the Orient, as far as shoes are concerned.

That's why I don't believe there will be significant pressure on margins as we go to the back half of this year and possibly even to the first quarter of next year.

They are input costs -- you've heard it from everybody, we're no different.

Shipping costs have gone on up some, and obviously production costs and salaries have gone up in the Orient.

And as best we can, I think we are adjusting our pricing, certainly for what delivers the back half of the year and into first quarter, to take those into account.

Okay, great.

And then my last question for you -- the Resistant Runner that you just introduced at the higher price points -- within your own retail stores, are you seeing any kind of consumer resistance to that higher price point?

No, I can't say I've seen any of it.

I don't know where we see it.

We are selling it, we are selling it well.

Our consumers are now used to those pricings, so we haven't seen it.

Sam Poser, Sterne Agee.

Hi, David, how are you?

You sound like you are in a pretty good mood.

I'm in a great mood.

I'm going to be in a great mood for years.

Anyway, a few questions.

Number one, for the first time in a while you have levered your selling costs and -- with a big leverage on the G&A.

Can we -- we really didn't expect, I don't think you expected to do it, either, nor did you expect to do $500 million, I think, at the time.

Can we expect to see leverage on the selling for the rest of the year?

Or, how should we think about that?

I think that depends on volume.

I think, if we hit our numbers, we will see some.

You mentioned that the numbers on the street for the back half of the year as revenue were okay, they could be somewhat conservative, probably especially in Q4, I would think, just as you mentioned, because you still expected some acceleration, a bit more acceleration there.

So if they hit those numbers, the numbers that are on the street right now, is that a place where we could see some lever in the selling?

Yes.

Okay, great.

And then, ex-the fitness product in the SKECHERS line, were ASPs up for the quarter?

And if so, how much?

They were up.

I don't have an exact number of breaking them down by division.

But you know they were up because our kids group now has a higher selling price almost across the board.

And they are as hot as the fitness division.

And obviously, with our men's business growing they have a higher basic price point than kids or women's as well.

So I think it's fair to say we had increasing -- and no closeouts, certainly, to speak of.

So, all that combines that they were up, I would bet, across the board, but probably most significantly in kids.

Okay, great.

And then, with the new product that you have coming out for October 25 that we saw at FFANY, when you launched the Resistance Runner you put it in your own stores first.

Are we going to see some of that brand-new product showing up in your stores in the near future, prior to the shipment to your wholesale accounts, in the same manner?

I would certainly anticipate that they would be on the front end of all our delivery cycles, so probably so.

And can you give us any idea of when we would expect to see that?

They are all different, but I would assume by the back end of back to school, probably in September.

And then can you give us some idea of what percentage of backlog your initial backlog was of your total sales for Q2?

And then what -- when you say your backlog is up triple digits, can you give us some idea of the magnitude of the backlog in dollars?

Probably not, since we've never done that.

And I don't know -- we only do that at year end.

But I think, if you take the year-end numbers and plug in the growth and where exactly around the triple digits you think they are, you get a playable number.

I think it's fair to say that our backlogs now extend out over a significantly longer period of time than they have historically.

So they obviously are lesser correlated, at least directly, with quarterly results.

So I think that's true in this case, but it's very difficult to say on a domestic basis.

We were up high-double digits going into the second quarter, and we were up 97% domestically.

So we were pretty close to where it was, but I think that's because second quarter was a fairly weak comparison, and everybody had it built up on inventory.

I don't know that -- and if people are buying further and further out now, as we (multiple speakers) so I don't know that that holds for Q3.

Well, thank you, and one last thing.

When we think about Q3, you've had -- I guess Q3 has represented anywhere between 30% to 50% more, 20% to 50% more than the second quarter in absolute revenue over the years.

Now, you had a record revenue quarter.

And you said that your Q3 would still be the biggest quarter of the year.

You said that on a prior call, and you would expect even bigger growth in Q3 than you would in Q2.

I know you said that that might not hold, but are we looking at -- based on the Q2 numbers, could we be looking at 600, 650?

Are those reasonable numbers to think about?

I think, as hot as we are, anything is certainly possible.

That's a higher number than I would present right this minute, not knowing what's going to happen during back to school and how early deliveries will be in our own retail and everybody else.

But I'm not telling you it's impossible because, obviously, any pull forward from Q4 to Q3 could move those numbers significantly.

But I'd tell you right now, for speculative purposes, since we did have a move back of what we -- best we can tell, it's about $10 million, $15 million back from Q3 to Q2, and there was a slow start to July for some retail, until the sale event, but now things are growing, I would take a more conservative stance right this minute.

So like a 40% to 45% increase on a year-over-year basis would not be crazy?

No, I think that actually would be quite conservative.

By the way, I have to take a little bit of issue with the fact that Q3 is always 50% more than --

Sorry, I said it's a range of about 20% to 50%.

Yes, it's been in the 20%, 25% range some.

But remember, we are moving along at a much more rapid -- and I'm not saying that it won't be true.

It certainly could be, and we are certainly that hot.

It would depend on how retail, consumers -- we are no different than anybody else.

When we hear all this stuff on CNBC about how consumers are going to sit on their hands, obviously we worry about it.

That's the only issue that we ever see, is the macro picture right now.

But those numbers are certainly possible.

I would take a more conservative stance until I see how back to school goes.

So, like in the 40% to 45% would be -- that's where you would sit, around somewhere in there, and then --

I think that's the number that's on the street now.

My consensus number, they tell me, is about $560 million.

So I don't know what that is; that's about a 15%, 20% increase from Q2.

Yes, and about 40% over last year.

Yes, and 40% over last year, which would fit right in the range, which is certainly a conservative number where I sit right this minute.

It's a good number to plan around.

Thank you and continued success.

(Operator instructions) David Turner, Avondale Partners.

Good afternoon, David.

Never known you to be in a bad mood, but obviously fundamentals like this can't hurt.

Right?

So I had a couple questions.

I guess the markdown activity that manifested in July -- did that have any impact on the Q2 gross margins, or will that mostly hit Q3, if it hits --

For us?

Yes, if it hits at all, or maybe --

It doesn't hit us at all.

Okay, so there was no -- okay, you didn't -- there was no sharing of the markdown?

And then, secondly, I guess you had mentioned the backlog seems to be smoothing out, or maybe I guess -- I was hoping to quantify, is it more front-end weighted or back-end weighted or is there any way to telegraph what the backlog is going to -- how the backlog in Q4 compares with the backlog as it shapes up in Q3, or is it smooth throughout?

Well, I think it's fair to say we're not finished booking Q4 yet, so there's more room at the end for December, certainly.

But we are constantly modifying flows of product in and out to our customers to make it easy and smooth and maximize everybody's experience with the products.

So it's very difficult to say at this particular point how it weeds out.

But I could tell you that the backlog we see already for Q4, which is kind of early for us, indicates that we will have growth in Q4.

Well, maybe this -- I don't know that you will have this available, but do you have the ASPs for the backlog handy?

The ASP's right now for our backlogs are consistent with Q3.

And then lastly, curious if there's any change between the shipments to new doors versus the shipments to existing doors.

At least, domestically, it seems like most of the growth is coming from growing deeper within the doors that you currently ship to.

Understandably, international, you are going to be adding doors.

So I guess maybe domestically, is there any -- are you expanding distribution to -- as backlog increases, or is it still mainly within the doors you are currently shipping?

I think it's fair to say, the doors are growing.

Our advent into athletic specialty obviously has increased doors, which on a percentage basis would be significantly large, even in the third quarter and for backlogs going forward.

But in real dollar basis, our backlogs are growing in our existing base.

They are such a large force.

Right -- well, thanks, good luck.

Ladies and gentlemen, this concludes our time for the Q&A session, and this concludes our conference.

Thank you again for joining us today on the call.

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 risk factors are detailed in SKECHERS' filings with the SEC.

Again, thank you and have a great day.