Skechers USA Inc (SKX) 2010 Q3 法說會逐字稿

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

Welcome to the SKECHERS third-quarter 2010 earnings conference call.

(Operator Instructions).

This conference is being recorded today, Wednesday, October 27, 2010.

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

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 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 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' third-quarter 2010 results.

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

Third-quarter 2010 net sales were $554.6 million, the highest in our 18-year history, and $1.5522 billion for the nine months.

Earnings from operations were $55.6 million for the quarter, and $195.4 million for the first nine months.

Net earnings for the third quarter were $36.4 million.

And diluted earnings per share were $0.74.

And for the first nine months of the year they were $132.9 million and $2.71.

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

We are proud to have achieved a new quarterly sales milestone, over $550 million during this back-to-school, as this selling period is not a seasonally strong one for toning.

While we continue to experience growth, and the demand for our products remain high, including toning, several domestic accounts overbooked for back-to-school, which resulted in some cancellations and more inventory than initially planned.

This inventory is current and is selling well at retail.

Our expectations are to work through the inventory in the next six months or so without any significant margin deterioration.

The growth has come from domestic and international wholesale and retail and is across our men's, women's and kids brands.

Our strong sales and the buzz from our accounts, including key accounts who have been reviewing spring 2011 product in our Manhattan Beach showroom over the last week and a half, positive reaction from consumers, and extensive coverage from the media, has positioned SKECHERS as a leader in the lifestyle and athletic footwear industry.

In addition, according to SportsOneSource, SKECHERS represented 55% of the toning market for the month of September.

Our third-quarter performance was the result of high double-digit sales growth in our domestic wholesale business, combined with double-digit growth in our international subsidiary and distributor businesses, double-digit sales growth in our international and domestic SKECHERS' retail division, with combined retail store comps up 6%, gross margins of 45.6%, the result of in demand inventory, combined with strong sell-through, an increase in domestic pairs sold of almost 30%, and an increase in average price per pair of $4.15, or over 19%.

Additional achievements for the quarter include a new quarterly sales record and our first-ever over $550 million, record third-quarter earnings and EPS, domestic and international wholesale backlogs continuing at mid to high double-digit, and a strong balance sheet with approximately $248 million in cash, representing $5.06 per share.

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, recent account meetings and our own comp store sales, we believe that we will continue our brand momentum in the United States and around the world.

The growth in the third quarter is primarily attributable to our domestic wholesale business, which increased 54% over the same period last year.

For the nine-month period net sales improved 66% over the same period.

The quarterly increases were the result of double-digit improvements in our women's, men's and kids segments at an average price per pair increase of 19%.

The growth was spread across several of our divisions from our Heritage line, including men's USA, kids, Cali and women's sport to our newer toning line.

We take an integrated approach to marketing, creating multiplatform campaigns for print, television, outdoor, in-store, online and public relations.

The intent is to create a unified image and a strong presence across all platforms, and to build brand recognition and consumer demand.

We believe these campaigns, which are continually updated, have a halo effect from collection to collection and across genders.

Recent additions to our marketing efforts include the signing of NBA great, Karl Malone for our comeback campaign, which followed the Joe Montana comeback campaign launched during the Super Bowl earlier this year.

The Malone spot began airing last week, and we believe, like the Montana print and TV campaign, will further grow our men's business.

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

We believe several of these lines have relevance in select markets, and we are addressing the styling and product development.

We have kept our marketing spend in line with current sales results.

We are confident in the direction of our domestic business as we head into the fourth quarter and next year.

We are in the midst of two weeks of product meetings with key accounts in our Manhattan Beach offices.

And these accounts expect their businesses to be strong next year and have placed orders for spring 2011.

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 over 24% for the third quarter and first nine months.

The growth was primarily the result of strong improvements in our international subsidiary and joint venture businesses, which were up over 26% for the quarter and 36% for the first nine months.

All but one of our subsidiaries showed growth in the quarter, with five showing double-digit, and one triple digit growth.

The one country that was down in the quarter was primarily a result of timing with respect to product purchases, and we expect them to be up strongly in the fourth quarter.

For the nine months all of our subsidiaries had double-digit growth, except one, which had triple digit growth.

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

Some subsidiaries have also developed local marketing efforts that appeal to consumers in their markets.

Our joint venture countries in Asia are continuing to improve, and some markets are showing substantial growth.

The focus here is on building the SKECHERS brand through retail stores and shop-in-shops.

At the end of the quarter there were 43 stores in the region.

Through our joint ventures in Southeast Asia we are focusing on increasing our points-of-sale, which are now at approximately 375.

To build SKECHERS as an American brand, our joint ventures use SKECHERS Corporate Creative, supported by local models in China and a local celebrity in Hong Kong and Singapore.

As in our joint ventures, we are seeing strong growth out of most of our distributors in Asia.

South Korea has grown substantially, and Australia and Taiwan also grew.

And Indonesia has a new SKECHERS store with another to open soon.

Our international distributor business improved by over 19% in the third quarter, and was down just 2% for the nine months.

We believe the quarterly growth is the result of overall acceptance in the international marketplace of our new product and the improvement of retail environments around the world.

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

At quarter end they were 137 distributor-owned or licensed SKECHERS retail stores around the world.

Six distributor stores opened in the third quarter; one each in South Korea and Mongolia, and four in Mexico.

One distributor-owned store in the Ukraine closed in the quarter.

This quarter two distributor-owned stores have already opened.

The seventh store in the Philippines and the eighth in the UAE, and other 15 are planned by year-end.

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

We are particularly excited about the launch in Mexico during the quarter.

They opened four SKECHERS scores within a month, and leaving off in Mexico City.

And each mirrors the look and design almost exactly of our SKECHERS stores in the United States.

They are also launching a leading department store in the country.

We believe Mexico will significantly impact our business in the next 3 to 5 years.

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

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

We are pleased with our international business on all fronts, subsidiaries, joint ventures and distributors.

Now at approximately 22.5% of our total business, we believe there is significant opportunity for it to continue to grow to be a larger percentage of the overall Company in the near future.

Based on triple digit backlog and the sell-throughs of our current product, we believe our international business will continue to increase for the remainder of the year and into spring 2011.

Our combined domestic and international retail sales for the Company-owned stores were up approximately 17.5% for the third quarter, with our domestic sales improving nearly 14% and our international retail approximately 52%.

For the nine months combined sales improved 32.5%, while domestic was up 29% and international 67%.

Positively impacting the growth is the addition of 10 stores that transitioned from distributor stores to Company-owned when Chile became a subsidiary in 2009.

Comp store sales on a combined basis increased 6% for the quarter.

At the end of the third quarter we had 275 Company-owned SKECHERS retail stores.

In the third quarter we opened 13 stories, including a Shape-up store in a remodeled Santa Monica Place Mall.

We also opened stores in Calgary, Vancouver, our first downtown location in Santiago, Chile, and our first two in Italy.

This quarter we have opened one store in Chile.

We have another 9 to 11 stores scheduled to open in the fourth quarter, including a store in the Miracle Mile shops in Las Vegas, another in Chile, two in Germany, and our third Shape-up store, which will be in Hollywood.

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.

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

Through selectively licensing our name and images, we are extending our brand into new categories, and making it eventually possible for men, women and kids to dressed 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 socks and scrubs available, and have licensing agreements for SKECHERS bags, leather goods, belts, luggage and watches.

Now turning to our third-quarter 2010 numbers in detail.

As I mentioned earlier, third-quarter sales were a record $554.6 million compared to $405.4 million in the third quarter of 2009.

The nearly 37% increase in third-quarter revenues were driven by significant growth across-the-board in our domestic, wholesale and international businesses and our Company-owned retail stores.

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

Third-quarter gross profit was $252.7 million or 45.6% of sales, compared to last year's gross profit of $183.7 million or 45.3% of sales.

Our gross margin percentage for the quarter were slightly higher than our historical range of 42% to 43%, and we currently expect to revert to our historical range for 2011.

Third-quarter selling expenses were $59.5 million or 10.7% of sales compared to $41.2 million or 10.2% of sales.

The increase in the dollar amount of selling expenses for the quarter was the result of increased advertising and promotional expenses and higher tradeshow costs versus the prior year.

For the third quarter, general and administrative expenses were $139.5 million or 25.1% of sales compared to $110.5 million or 27.3% 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.

Although on a percentage of sales basis total G&A expenses were down 210 basis points, as we saw increased operating leverage.

Total operating expenses for the third quarter when $199 million or 35.9% of sales compared to $151.7 million or 37.4% of sales in the third quarter of 2009.

In total this represents a decrease of 155 basis points as a percentage of sales.

The increase in operating expenses was primarily the result of 31 additional retail stores, as well as increased costs in our international business from building our global infrastructure to position the Company well for the future.

During the third quarter of 2010 we saw income from operations of $55.6 million, an increase of over 71% from $32.4 million a year ago.

As previously mentioned, net income was $36.4 million compared to $24.5 million last year.

Net earnings per diluted share in the third quarter of 2010 were $0.74 on approximately 49.2 million average shares outstanding compared to a net income per diluted share of $0.52 on approximately 47.1 million average shares outstanding in the prior year.

The significant EPS improvement is also based on an additional 2.1 million shares outstanding.

Income tax expense amounted to $16.3 million or 30.9% during the third quarter of 2010 from $10.2 million or 30% during the same period last year.

Net sales for the nine-month period ending September 30, 2010 increased 48.1% to $1.552 billion compared to $1.047 billion in the prior-year period.

Gross margin was $727.7 million compared to $431.8 million.

Selling expenses were $146.3 million compared to $97.6 million from last year.

General and administrative expenses were $389.2 million compared to $304.3 million from last year.

Total operating expenses were $535.5 million compared to $401.9 million last year.

Net income for the nine months was $132.9 million compared to $26.8 million last year.

Diluted earnings per share were $2.71 on approximately 49 million average shares outstanding compared to diluted earnings per share of $0.57 on approximately 46.6 million shares last year.

Now turning to our balance sheet, which remains very strong.

At September 30, 2010, we had approximately $248.8 million in cash or $5.06 per share, which provides us with sufficient capital for our many growth initiatives, as well as our continued infrastructure buildout.

Trade accounts receivable at quarter end were $286.1 million.

And our heir DSO at the end of September 30, 2010 were 45 days versus 50 days in the prior year.

Total inventory, including merchandise in transit, at September 30, 2010 was $326.7 million, representing an increase of $102.6 million from December 31, 2009, which was primarily the result of cancellations and an extension of delivery periods we experienced during the third quarter.

Due to our continued strong backlog, broad international business that is seeing substantial growth, our own Company-owned retail stores, and the feedback on our product from customers and retailers, we are confident we will successfully work through this inventory without significant markdowns or closeouts over the next two quarters.

Working capital increased to $650.2 million versus $558.5 million at year-end.

Shareholders equity was $942.6 million versus $749.4 million at December 31, 2009.

Book value, or shareholders equity per share, stood at approximately $19 .17 as of September 30, 2010.

Capital expenditures for the third quarter were approximally $35.9 million, which primarily consisted of 13 new store openings and several store remodels and $22 million in development costs for our new distribution center.

In summary, the third quarter marks a new quarterly sales record for SKECHERS.

We are proud of our results this quarter, and for the last 12 months with over $1.9 billion in revenues and $3.29 of EPS, which we believe demonstrates the earning power and scalability of our business model.

We believe the continued growth and quarterly records are both a testament to the strength of our brand, product and marketing, as well as positive indicators for the future.

Reports, testimonials and feedback from accounts of consumers around the world reinforce our belief in the continued relevance and strength of SKECHERS.

Our focus in the third quarter was on delivering fresh kids styles for back-to-school, and supporting this offering with a new TV campaign, while building on our heritage collection for men and women, as well as growing our toning and performance footwear with new lines.

And supporting each of these divisions with a multiple medium approach to marketing.

Importantly, our diverse and growing product initiatives are allowing us to expand into new channels and increase our shelf space in existing channels in the United States.

And we're beginning to see this overseas as well.

We are experiencing substantial sales growth in many key international markets.

We are pleased with our launch in Mexico, and with the growth across Pan Asia.

Our retail business, which at quarter end has grown to 275 Company-owned stores in the United States, Canada, Chile and across Europe, remain solid.

And we plan to continue to strategically open new stores in these markets, as well as in other areas.

While our inventory is higher than desired, the consumer demand remains strong for both our core SKECHERS product, as well as our toning product.

And we believe we will work through this inventory at reasonable margins and be back on track by the end of the first quarter.

At the same time, we are evaluating our expense structure to ensure our expenditures are in line with our current sales trend.

As we look to the end of 2010 and Spring 2011, we believe we will continue to experience growth, given our healthy double-digit backlog, $248 million in cash, and fresh product lines delivering now and next year in key athletic and specialty stores, better department stores and independent accounts.

We are looking forward to completing a record year of sales and what the coming year will bring.

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).

Dave Turner, Avondale Partners.

This is actually [Stephan Gregor] of [Hanover Research].

Congratulations, Dave, on a solid quarter, very good numbers.

A couple of things.

Can you provide some color on (inaudible), what is your e-commerce vision going forward and how do you guys [feel] planning some more on SKECHERS.com?

Well, we have our -- we are upgrading our e-commerce site, and we are planning on taking it international as well.

That is all in the process of doing it right now.

We realize that our e-commerce site has limited upside potential for us alone, because we have such an extensive e-commerce business with our business partners around the world.

We are on JCPenney and Amazon and Zappos and shoes.com, as well as a multiple of others.

So we don't compete on price, so there is limited upside, but we are making it more of an advertising campaign and we are moving along with our new site, which will be more user-friendly.

We will move it internationally.

And we will continue on myShapeups.com to educate everyone that is looking for the product.

So really you just have it more than status quo that (inaudible) conflict with other business finders, kind of?

That is correct.

What are you guys doing in terms of mobile?

Are you developing any apps or anything, so someone can download their iPhone app to go to your website, etc.?

Absolutely, that is all in work.

We are working on the apps.

We have -- we currently have a app on walking on the iPhone, so that is a process that continues to go forward.

Do you guys have a sales figure on how much of your total revenue was from just -- not necessarily from the Amazon and the partners but, for instance, SKECHERS.com, and where you would like it to be?

We are okay with -- it will be in the $25 million, $30 million range this year.

And as international comes on it will probably get to the $50 million, $75 million range, which will be very good.

When do you think international is expected to come into play?

What do you think?

Probably first or second quarter of next year.

Okay.

So I am definitely looking forward to some great results hopefully (inaudible).

Final question, going (technical difficulty) for 2011, what would you say if you could accomplish one goal in 2011 for the Company, what would you like to accomplish and how do you plan to get there?

Our goal is always to enhance the brand, and its brand identity.

I think if we sat here today I would tell you that taking ownership of the toning business, which we think is a very viable, strong business, getting it in line with the market demands, and creating new product for it, and bringing along all our existing products for men's, women's and kids, and growing our base around the world to take advantage of this new opportunity, as well as the core competencies we have, would be great.

Do you feel like you're on your way there?

Certainly do.

Okay, thank you very much.

Good luck down the road.

Scott Krasik, BB&T Capital Markets.

So I know you don't like to give guidance, but let me just try and pin you down a little bit.

You mentioned double-digit backlog.

Can you break that out between US and international?

As I said in my prepared remarks, international obviously the percentage is higher.

They are coming into their own, and they are already triple digits.

Domestic remains mid double digits and higher.

We are obviously going through a key time through holiday right now, so I think what is happening is our customers and ourselves are going from a point of trying to overbuild and trying to catch what it is to a more conservative approach.

So hopefully for the holiday period as we go into to first quarter surprises can be on the upside.

How much -- you talked about a couple quarters of some modest margin compression.

But do you see it going back to your historical 42% or should it stay above that?

It is hard to say right now.

We have always said in the past that eventually as the toning product evens out and it becomes a regular category with new placements and replacement of styles and new styles that go in there, we will revert back probably to the -- somewhere 42%, 44% range.

And I think that is what we would expect certainly for the first part of next year.

So even as you clear through the inventory -- I mean, 44% is still maybe a more realistic goal no matter what.

44% is still possible.

There is still a lot of questions to be answered.

We have the benefit now of international growing very well.

We have a bigger business in our subsidiaries than our distributors.

And for the time being, anyway, going to the backend of the year and to first quarter we have a margin benefit from the weakness in the dollar, so that could hold it up.

Our retail is holding margins very well, and they become a bigger percentage just with the store growth, and it is holding up very well.

So there is a possibility that you we don't have a significant margin compression, but it is too difficult to pin it down to the exact number right this second.

Right.

I hear you.

On the -- I mean, just lastly -- well, not lastly -- but G&A, you mentioned you are starting to look at that more closely.

Could your G&A dollars be down next year year-over-year?

Well, they certainly could be down on a running rate by the back half of the year when our distribution center opens and we get rid of some of the rental payments that we have to make going forward, because that is a big piece for us.

We are growing the store base, but it is fair to say that we are under control.

It should hold.

It depends how many stores open, but that certainly builds on it.

We don't have any major infrastructure build in any other subsidiaries or joint venture, so we are pretty stable.

And obviously we had to pump up to build -- to catch this growth as far as toning is concerned.

And now that it is a more level environment, obviously, we expect some expenses from that to cut back as well.

Okay, so maybe second half of the year, particularly around the DC set -- once that --.

Yes, around the DC and a more normal flow of inventory and margins and running rate, we would expect a lot more efficiencies to come into play.

Okay, and then sort of lastly specifically on the toning category, the POS data that I think everybody looks at has shown some modest sequential improvement, maybe not as fast as Reebok or -- how do you feel about your market position there, about channels of off-mall family, athletic specialty, maybe big-box and how you see the category going over the next couple of months?

I think the category is great.

We too have seen an uptick over the last couple of weeks going into this holiday period, so that is all very positive.

I think we still are pretty much the dominant player in the category.

We anticipate staying there.

All the meetings we have had the last week that continue now with our customers are very happy with our performance.

And I would tell you that the indications are that we will become a bigger percentage of the toning category as some of these filler brands that have come in over the last year or so are cleaned out.

You can see a lot of them on sale.

And I think the plan is to have two or three dominant players, of which we certainly will be the biggest as we get into first quarter of next year.

And then ideal distribution, I am sure some of the department stores are going to scale almost all the way back.

But big-box, off-mall athletic specialty, where do you see it?

I haven't heard of anybody going away from the category completely.

But, obviously, our strengths still remain in the family channel and some of this new athletic specialty that we have opened.

The big-box stores for us do quite well.

So I don't think our mix changes significantly, just order of magnitude.

All right, thanks, David.

Good luck.

Sam Poser, Sterne Agee.

How should we look at the selling expenses?

I would assume that some of that is going to be rightsized to the business as well.

You leveraged it in Q2.

Then it deleveraged in Q3.

How should we look at it this coming quarter and going forward?

Well, we are looking at the current quarter now.

But it is late, so I would say there would be slightly more deleveraging for the advertising line in Q4, and that should be the last time.

As we go into 2011 we have much more control and a better idea of where sales volumes are.

So it will be rightsized by first quarter and going through 2011.

So in absolute dollars, flat next year, up a little bit?

How should we think of that then?

We haven't finished our forecast.

I would say under current conditions it will probably be down in real dollars.

But obviously I think people are being very careful now.

And if holiday turns out well and we get strong into Q1, it could be equal.

Then I would just ask the cash question.

Also, you had about -- you had money you had loaned to the factory at the end of the second quarter that wasn't in your cash balance.

Is that -- have you retrieved that, or is that still out there?

We haven't lent any money (multiple speakers) our terms.

And that goes forward.

That hasn't come back yet.

When do you expect to get that back?

Probably over the next 2 to 3 months.

So we should think of adding that back in at the end -- so your cash balance at the end of the year should go out fairly significantly from where it is right now?

It is difficult.

This is a very short small quarter for us, and we are building inventory.

Depending on how fast the inventory comes down, obviously would be the biggest piece of our cash balances.

We don't have significant overhang other than that.

But I think it is fair to assume, and quite correctly, by the end of first quarter and second quarter of next year we are going to build significant cash balances, significantly higher than where they are today, and probably higher than we have ever had, at which time we will look to see what we are going to do with them.

That has been a constant conversation.

Well, it is a constant conversation, but you can understand now that there is a leveling out in the business at a very high level.

And that we are going to liquidate this inventory.

And we think it is going to be very good pacing that when we rightsize the inventory and we have a running rate of $2 billion, we are going to throw off significant amounts of cash.

And as we look into the second quarter, and we see what our really growth potential are and what new product is coming, that is obviously a good time to look and see and make an intermediate and longer-range plan for cash.

So just a few last things.

Thinking about sales in the fourth quarter, given the backlogs and everything, you're probably not going to be able to run the 37% increase again.

How should we be thinking about the kind of revenue increase in the fourth quarter?

You are one-third of the way through it.

I would tell you it depends -- you should check on your channel checks.

Because what we had last year -- we have obviously the toughest comp of the year in the fourth quarter.

It was a very big growth year for us.

And we had a lot of January shipments from last year move into December, because everybody was short product and chasing it.

So I would tell you we are going to be up for October, so I would tell you it is certainly not going to be 37%, but I would say a small increase in volume or a relatively flat volume would be a good conservative to plan to last year.

Then on the gross margin basis on the low end at 43%, or would you -- and the midpoint at around 43%.

That is a good place to model, I would think.

But you are not right-sizing the selling for the back -- for this last quarter.

So I mean --.

I don't know that that is 100% true.

We have some media spend, but we have a lot of special projects that not.

I don't know if there'll be a significant increase.

There may be a small dollar increase that would -- that comes this year.

But we can make it up in some of the other shows and things like that.

So I don't know that there will be a significant increase, there just won't be a big savings.

In absolute dollars.

So like $34 million versus $31 million last year?

Is that a number; is that reasonable?

That is certainly a place to start.

It gives us some flexibility.

Thank you, good luck.

Camilo Lyon, Wedbush.

A couple of questions, I guess, starting with the cancellations, could you provide some color on the cancellations, what models?

I am assuming a large portion of that is shape-up related.

Maybe talk about the models Gen 1 versus newer models.

That would be helpful.

I don't think it has to do with product or performance on a relative basis.

It just had to do with order of magnitude.

Everybody thought toning was going to grow through to the moon for lack of a better metaphor.

And people bought it.

They bought not only SKECHERS but others that have clogged the marketplace.

What is out there is selling very well in real units.

The percentages are a little short because of all the inventory that was built up, both ourselves.

So it is a matter of some were canceled to get flows right.

And some were moved out into January and February, what would have been November and December.

Certainly moved from third quarter into fourth quarter as well.

So it is a matter of right-sizing inventory in a marketplace for a product that performs very, very well.

It is still a very significant multi-hundred million dollar business for us worldwide at the current running rate.

It is just a matter of rightsizing the inventory.

If inventory had come in slightly lighter, if we had caught it earlier rather than in the middle of back-to-school, we would think we were on a great rate to flatten out and be a $1.9 billion, $2 billion Company with the current running rate of toning over a full year.

It was just frontloaded this year.

So I think it is not a matter of things not selling or thing going away or things that don't work, it is just a matter of there is too much in the marketplace for what the current running rate is.

And we will see what happens for back-to-school.

So it is not concentrated in any model, it is just the flow of the category.

But those same models that they have are ur selling at nice rates that most of our customers, if you do your channel check, they're very happy with.

It is still a very good business for them.

And we went a little overboard in helping them with the cancellation (inaudible), because we think it is a viable category.

We didn't want to clog the market and bastardize it and have a more difficult category at the back half.

I think what happens is we have the wherewithal, certainly the financial capacity, to sit on this inventory.

Feed it into the marketplace on a regular basis.

Be sure that our customers get their right margins, that the category remains down.

And we do believe we will beat the key players in the category and the category will be very sound next year.

So you mentioned something that was interesting that you thought that the cancellations were really kind of widespread across manufacturers.

So not just SKECHERS-related but really toning as a category experiencing some cancellations.

Is that right?

Well, I can't talk to anybody else, but that is certainly my impression.

I think we are still the leaders in the category, so that everybody else has the same results in the same pieces.

I think at the end of the story there will be a limited amount of players, and it will be a viable category for those that do it quite well.

And we still anticipate being the leader of the pack.

So basically it is just a matter of the market digesting the amount of product that is on the market right now?

I think that's correct.

What channel of distribution do you think is best suited for clearing that inventory?

I would assume it is your retail stores, is that right?

We are just going along the same channels we are now.

I don't think anybody has backed away from it.

We are obviously looking for more opportunities.

We will have more opportunities internationally.

We have the logistic capacity to move it anywhere in the world there is a demand.

And demand continues to grow international, so if we need to, we will move it out to international, or it will move to Europe or it will move to Eastern Europe or it will move to Asia or it will move to South America.

I mean, there is no limit.

It is a pretty big marketplace and it is starting to grow significantly, so it is just a matter of time.

Okay, so you've got different avenues to explore to move that inventory?

I think one thing we have shown over the past, while we could be overzealous in some categories, we have a core competency in being able to clean out inventory very quickly.

This is certainly a much easier situation that was in the end of 2008, when categories completely went away and you had to find places, and we still did it very quickly and had new product in the marketplace.

This very product is very sellable.

It sells at very strong rates of sales and a real number basis.

The percentages just don't look as good as they should because everybody thought it would be even three times the size it is today.

You can tell by some people saying that we went from $400 million to $550 million, and that is just not enough, because the category should have been bigger.

That is a very nice category and that is a slow time of year.

We think that remains and continues as we go forward.

It is a matter of patience and making sure we take care of our business and what we think is a great category in the marketplace.

Got it.

How would you describe the international market's adoption for the Shape-up product, for toning in general?

It's a comparable, because I think now we are at that point where the international market is now comfortably nine months behind the US, and you can get a real read for what the uptake is there.

How would you describe that adoption?

I think when we mentioned our increase is in international, that is like here, like there it is across-the-board.

It is on a men's, women's and kids.

And the toning category is taking place.

You don't get triple digit backlog increases in sales numbers like we are talking about.

Our subsidiaries are up 26% for the quarter and 36% year-to-date.

And that will continue as best we can tell into the fourth quarter and through the fourth quarter and into first quarter.

So they are getting some significant numbers, and they are starting to move the needle.

So the thing is that so far for us the world is smaller than the United States.

It takes a little longer for them to absorb, but they are absorbing pieces.

There is no doubt.

So it seems to by your guidance on gross margins that maybe the right price points aren't worth of $100 that the pricing -- the ASPs on the category settle in around -- where would you say would be a right kind of ASP for the category?

Well, I think the category will be broad-based.

We will have offerings in the category that go from $60 to $130.

We have a lot of new product coming in at various price points.

I don't know if there is a right or wrong price point for the category.

There is sometimes it is met by the fact that there is excess inventory that people get nervous about moving.

But I think certainly where they are now in the $80 to $100 range, they move significant portions.

I am not sure that at the end of the story, by the time we get to back-to-school next year we are not back to $100 on base when there is a demand for it, and you don't have to push the quantities, it is rightsizes.

So I don't know that anybody here is backing away from the price points.

So if that is the case, then help me reconcile why you are thinking those margins settle in at this 43% to 44% level?

Well, because there will be a constant replenishment.

We had always said that the last few quarters have been a perfect storm, where there is no returns, no markdowns, nothing to take back to put new stuff in the shelf space.

We are constantly developing new product.

There will be a flow that continues as we are the leaders in the category.

And it just becomes a normalized taking control of your shelf space and helping clear inventory, and making shelf space available.

I think it is just a normal cycle.

You can't have a perfect storm forever, regardless of what it is (inaudible), that there is things involved.

I think kids business is growing at a faster pace.

We will have certainly kids business going significantly, and that is a lower gross margin business, but a great business in general.

The rest of our business businesses are growing and will be a bigger percentage.

So I think it just all settles in in that range.

Okay, thanks.

I'll jump back in queue.

Thanks.

Chris Svezia, Susquehanna Financial Group.

So I've got a bunch of questions.

First --.

I had no doubt.

How much of your backlog up double digits?

So say US is up 50, international is up in excess of 100, but whatever the numbers are, how much of that is just because retail has had delayed receipts and therefore continue to keep your backlogs [plans], I guess?

Like how much is core, like this is new orders, and how much is just deferral and getting pushed out?

It is a constantly moving target.

I don't know that significant amounts have been pushed out.

It obviously depends on what the sales rates are going to be through back-to-school and holiday.

We have been very open with our customers.

And have not forced them to do -- we are very protective of our shelf space at this particular time, certainly of the toning category, which is the biggest issue.

So there is no reason for them to hold back.

We assume, and I believe it to be true, that they are sizing their on-order bank to their best belief, given the current sales environment of what they're going to need going forward.

So unless there is changes from now -- and like I said, I am hoping that the changes are on the upside, because everybody is so reactive that we hope they have rightsized the backlog so that there is an uptick even more so than we have now for holiday and for spring, which are better toning times of the year, that there will actually be a need.

So it is in the early stages.

I don't think anything that is out there is artificial.

Have the cancellations stopped at this point?

Has everybody -- or is it still an ongoing tweak that continues to happen, or for the most part everyone has kind of stopped at this point and is comfortable with what they have?

I think it is an ongoing tweak.

Every week or two weeks there is sales.

There is a modification of what it is.

And, obviously, for the last couple of weeks there has just been an uptick.

So we'll see what happens as that continues over the next couple weeks.

Okay, production on your end, what have you done in terms of just rightsizing the production, and of the toning business relative to your revenue run rate backlogs, etc., has that been done, so as we get to Q1 your supply/demand are somewhat in line?

Where do you stand on that?

We are working on it now.

It is certainly not going to take until Q1 to get that in place.

We are actually modifying our order rates and our flows with our factories as we speak.

As a matter of fact, if I wasn't talking to you I would probably be there doing it myself now.

So the point is it is not over the quarter.

We are actually modifying to what we believe the current run rate is, not only across-the-board, so moving up some things and moving out some things and changing production schedules, as we speak right now.

Okay, but most of that adjustment will -- as you go -- I guess, what I was saying at end of Q1 going into Q2, you could be at a point where you are rightsized?

Correct?

Absolutely.

That certainly is the timeframe that we're looking at.

On Q4, just more directionally, just so I'm clear about the comments that you made.

You made a comment about revenues could be flattish two up slightly, just given the comparisons.

And you shipped product in December that would have been done in January.

Was that correct and kind of what you had said?

That is what I said.

So upside, I mean are we talking like 5% or is that a fair thought process?

That is a fair place to start for this time of year.

We will know more in another couple of weeks as holiday get started.

Okay, and then just on the selling expense you clarified, and just on near-term, and on the G&A, I guess, it goes down in terms of the dollar growth for fourth quarter because you have less volume, but you obviously had inventory.

So is that -- if you are assuming 5%ish growth is that up by $15 million in dollars?

Or just any perspective on that would be helpful.

It is too early -- I don't know that it is quite $15 million.

It all depends on how the product comes in and how much we have to ship and what we have to work with.

I would think it modifies -- probably not so much -- it is probably up for the 31 stories and for processing more product, just having more inventory.

And we will have a little give back because we are shipping more internationally.

And while we have higher margins there, we also have a translation for the P&L.

So I don't know if $15 million is the right number, but it could be a -- $10 million, $15 million to be a ballpark number.

Then as you think about your backlogs and you think about as you go into Q1, obviously, international is growing significantly, whether it is 30% or 40% -- 40% whatever as you go into to the first quarter.

I would assume that the wholesale -- US wholesale would be down.

I'm just trying to get a sense as -- and I guess more as needs to unfold here, but clearly you should be able to grow revenues in the first quarter.

Is that fair to say?

But does it grow -- potentially does it grow high single digits?

Does it grow double digits based on what you are seeing?

I'm just trying to get a reference about how you're looking at backlogs and what potentially you think the growth could be in the first quarter, based on what you see right now for spring.

I think it is hard to tell now.

Obviously we have that December/January right now.

If things move from December to January this year, obviously we will have a great first quarter, if they will move through it.

I think a lot of that depends on holiday.

After holiday is in the bag and we get through Thanksgiving, we will have a better idea of where first quarter is.

I think it is just too early for us to give any kind of guidance right now.

I think growth is certainly possible, but I think it is very early to try to quantify what that piece is.

Okay, and then last thing, just switching gears to the core business for a second.

Can you quantify how much your kids business was up in the quarter and just what you're seeing in the backlogs?

It was up double-digits on a shipping basis, and it is still up double-digits on a backlog basis.

Okay.

Domestically.

Okay, and then what about -- and on the men's side of the business?

(multiple speakers).

Men's was obviously up, but that includes all categories.

If you are talking about the core men's business without toning, they were up mid to high single digits.

Okay, is it fair to say that your core business this year is at a -- clearly a peak in revenue?

Is it fair to say that you're -- I guess, give or take at a peak in terms of the operating margin structure for the business is up there as well, if you strip out -- if you -- I am sure internally you have some thoughts about what it is, but is that a fair statement?

I don't know that we are at optimum as far as operating margin.

We obviously we were planning for a business that would be somewhat bigger in Q3 and Q4, certainly as we went into the quarter.

So there is certainly some room to increase operating margins as we get into next year by rightsizing the overhead and the advertising.

I think it is fair to say that the core business continues to grow, and grow at a nice rate.

If you take the international business and the non-toning business in the United States, you still have a very nice growth curve.

That is certainly something to hang on.

Most of us feel around here that if inventory was down somewhat, that we would be running in a great position.

Everything would be just great.

So it is only a matter of time because the stuff that we are stocked with is brand-new.

And certainly, I would give you an order of magnitude.

We ended the quarter with about $326 million in inventory.

At the time we ended the quarter in excess of $50 million was in transit, hadn't even been here yet.

That is how quick that stuff was coming in and for the growth.

So it is only a matter of patience.

There is nothing old and there is nothing that doesn't sell in this batch that we could tell yet.

Okay, all right.

Thank you.

I appreciate it.

Good luck.

Claire Gallacher, CapStone Investments.

A question about -- let's see, October, how are your stores performing this fall since the new quarter has begun?

They are comping up.

So the stores are performing well.

And we have seen an uptick over the last week or so.

So we are waiting to see what that translates to as we go to holiday, but the stores are certainly still comping up.

Are you seeing that across the categories?

Is it being led by one kids or men's or whatnot or is it across the product platform?

Some are obviously stronger than others.

But it has to be across a broader spectrum, because we don't have one category that can really carry the stores to that degree.

Okay, great.

Then a question about ASPs.

Obviously, you had a nice 19%, I believe you said, ASP lift for Q3.

What are we expecting then going into the fourth quarter?

I know you talked about possible price increases last quarter, so is that still the plan?

How should I be thinking about ASPs this quarter?

Well, I think ASPs for this quarter, just like a lot of things, toning was a big piece of our business last year, so it is a tougher comp.

I think the kids piece is growing, so there is obviously not a lot of increase in ASPs, but they should certainly hold.

So flat year-over-year ASP, would that be fair?

I think that is pretty fair.

Than just to follow-up.

I think Chris just asked about this.

So you're looking at units -- are you talking about units being flat in Q4?

I am just a little confused here.

You are probably talking about volume.

We are talking about whether we are going to be above or beyond that $388 million from last year, I think was the question.

At least that is the way I took it.

You guys are looking for more guidance.

I don't think it matters to you really how much -- how many units, it is dollars and translation.

So we are talking about from a strict volume standpoint.

Okay, okay.

So you're talking about up mid-single digits from a volume standpoint is that right?

Yes, I said flat to up mid-single digits is certainly possible, or more if holiday starts to get even stronger as we are starting to now.

Okay, great.

Then my last question has to do with inventory.

I think I know the answer, but the inventory composition, how much influence does just your core base business have?

Is there really anything material in that inventory number from your base business?

Is it all toning?

How does that breakout?

It is never all anything.

But, obviously, the biggest category -- the one we were chasing the most that we seem to have caught very well is the toning category.

So I think it is fair to say if toning category come in line then all inventories would ill be in line.

Okay, okay, that's great.

Thank you so much.

(Operator Instructions).

Scott Krasik, BB&T Capital Markets.

So I just missed a couple of numbers.

What did you say your US wholesale was up this quarter?

I think 50%, something like that.

50%.

And international was up 24%, did you say?

Yes, 26% or something like that.

So why -- Chris sort of mentioned it under his breath, but why should international -- I feel like they have probably got a full load of new product.

This quarter is a sell-in quarter.

You said there was a timing shift.

That is one thing.

But should international wholesale accelerate much into Q1?

I think so.

Why?

Because their orders are up triple digits.

Obviously, the stuff they put into the marketplace is selling very well, and there is people chasing it significantly.

We are coming from a very difficult point.

The subsidiaries, where the product was earlier, are up in the mid-30s.

It is the distributors that are coming back later that are just up 19%.

It takes them longer to get started.

So the distributors will kick in.

And there is certainly a back end of the year first quarter bigger business.

And our subsidiaries are placing with their accounts, so their account base is growing.

And they are placing more of the toning as well as more of the regular category.

So the feel is, under your breath or not, that it is certainly a minimum even from here, which is a significant growth.

That there is 25%, 30% minimum growth, and it could be significantly higher than that for 2011 for our international business.

You understand, there are some businesses that we have there in their complete infancy.

We are going to open -- we could almost double the number of points-of-sale in our China operation.

We are going to open significant more stories.

They continue to grow very well.

Brazil continues to grow very well.

We are on a big expansion plan in Chile that is doing very, very well.

So there is just a lot of places that are just getting started (multiple speakers).

They are in a chase mode?

Well, they are [single].

We are just setting them up.

They are building an infrastructure.

If you go from 375 to 500 points-of-sale in China, and the advertising takes hold and you start to sell the product, as known, toning is doing well, you get significant boost.

I didn't mean China, but international in general, most regions are chasing products?

Yes, other than some of the subsidiaries in Western Europe, everybody else is really late to the dance and chasing.

Then, again, I am not trying to nail you down on guidance, but when you start to (multiple speakers).

You guys do a pretty good job.

If I put through some of these numbers, is there a scenario where you don't have positive EPS in the fourth quarter?

I am sure that is always a scenario, but I think it is a lower probability unless something changed significantly from here.

Okay.

Okay.

All right, thanks, David.

Sam Poser, Sterne Agee.

David, just one last thing.

You mentioned that inventory -- you mentioned that $50 million of the inventory levels were in transit as of the end of September.

Where -- do you have any idea where inventory is right now relative -- relative basis?

Relative to?

Do you know where inventories are today?

Have you started to see the improvement already based on that new -- all that new product, that $50 million of new product that was en route, are you starting to move through it now?

What has the inventory done?

Is it at a higher level than it was at the end of the quarter?

Is it coming back down?

I know you look at it all the time, so --.

Yes, I am a voyeur by nature.

I look at it always.

But I think the point is three weeks is kind of early to have seen any significance.

What we are trying to do is get our handles around it, moving it.

We are certainly setting the stage for moving it and liquidating it.

But I think it is fair to say the first step is to work on our production flows.

We know where this inventory is coming from.

We know what part is spoken for.

Some pieces are spoken for for first quarter.

It is not like we are going to liquidate them and try to bring them back in rather than sit on them.

So I think it is early for us to say there is anything other than the flows are being adjusted so that they will reflect by the time we get into first quarter.

Okay, very good.

One last thing.

If you're up mid-single digits -- I'm going lock you down on guidance, try to.

You're up mid-single digits in Q4, you pick up about -- you do about $34 million in selling and distribution and call it, you pick up around $10 million in G&A.

Is that all -- and a tax rate of -- what -- is it going to be 30%?

Is it going back to 32.5%?

What tax rate should we be thinking about?

We are thinking about 31% and change I think for Q4, but obviously those things can change.

But are those numbers -- are those reasonable numbers?

Scott asked you could you be negative?

What would it cause to be negative?

I am not getting -- at a 43% gross margin and when I just read to you I am not getting --.

Wait, wait, wait, wait.

Scott said is there any scenario that could be written.

Now people can write a lot of scenarios (multiple speakers).

It is not a significant -- any probability, nor is it anything that we give any significant probabilities to.

We think it is more on the order of there are upside surprises from here.

I think we are very down.

We are going to go into -- we could do $400 million in the quarter.

A lot will depend on back-to-school.

I think at a $400 million quarter we are quite solidly positive.

And inventory will start cleaning.

We will start to generate significant amount of cash in the first quarter, we would look very, very good.

I think everybody here is very positive.

I don't give anybody an idea that anybody here thinks it is anything but absolutely a great position we are in.

We have slightly high inventory, but that is a core competency to get through it.

We are now into a new category that has got us into athletics.

That we are going to be in control of, that everybody is happy with, that is selling through quite well.

We will continue to be a $2 billion plus Company and show growth and show growth internationally.

I don't think anybody here is unhappy with where we are.

I'm not going to draw you any scenarios where we are not.

All right, we will leave it at that.

Thank you very much.

Okay.

David Turner, Avondale Partners.

Is actually me this time.

Hello.

It is actually the first question from you this time.

I just wanted to make sure.

Good afternoon.

Just my anchorman here.

Let me -- regarding the backlog, I was curious -- and I don't know if you can quantify this, how much of the excesses is in that backlog number?

So maybe another way, if you stripped out whatever excess inventory levels you have, could you triangulate on the backlog level that doesn't include the clearance (multiple speakers)?

That doesn't include what?

Doesn't include the clearance or the -- I don't know, whatever you would -- the excess product.

Backlogs never include excess product.

I think you're trying to mix and match some numbers.

Our backlog is committed to by our customers.

Right.

That doesn't relate to inventory that -- you mean, if I sold everything in my backlog, would I then not have any inventory issue?

Along those lines, yes.

Well, I think over a matter of time, I think it is a mix and match.

Our backlogs are certainly higher than our inventory levels, even if you take it to the gross margin impact.

But not all of it is in toning or where the excess is.

We have to move through the inventory and see what the demand is as we get to first quarter.

But we certainly could see it from where we are.

So maybe you could -- another backlog question -- compare, if you can, the first half of the backlog window versus the second half, is there any meaningful deceleration?

I know comparisons get tougher, and there is not as much visibility in the back half, but I'm just trying to get a sense of the flow to the growth.

I think it is fair to say our backlogs are more normalized now.

We are probably out about four or five months, which means we are probably booked through February.

Like I said, there is still a lot to be done and a lot to be addressed as we go through the holiday season.

No, understood.

I guess from a percentage perspective, you said domestic was up mid-double-digit, so somewhere between 40% and 50%, is the back half of the backlog window running around a similar trend, up 40% or 50% as the first half of that window is?

It is kind of arcane, I know, but I am just trying to --.

That is difficult for me to quantify, but I believe that to be true, because fourth quarter is certainly not as strong as first quarter.

And we have a lot of bookings in for January and February, which is a big part of the backlog.

So I would have to say it is consistent throughout the shipping term.

Got you.

All right, well, fair enough.

Thanks for your time.

Ladies and salmon, this concludes the question and answer session for today's 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.