Skechers USA Inc (SKX) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

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

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

(Operator Instructions).

This conference is being recorded today, Wednesday, February 16, 2011.

I would now like to turn the conference over to 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 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 fourth-quarter and year-end 2010 results.

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

Net sales were a record $454.6 million for the fourth-quarter 2010 and a record $2.006 billion for the year.

Earnings from operations were $1.4 million for the quarter and $196.7 million for the year.

Net earnings for the fourth quarter were $3.2 million, and diluted earnings per share were $0.07 and $136.1 million and $2.78 for the year.

We believe that achieving sales of over $450 million in the fourth quarter and over $2 billion for the year is a notable accomplishment given that our Company is relatively young.

It is just under 20-years-old.

While we continue to experience growth and the demand for our product remains high, including toning, our earnings and margins in the fourth quarter were negatively impacted by several factors -- clearing of toning inventory, sales of lower margin in-line products through all of our channels of distribution, and lower retail margins relating to promotions.

While our inventory is higher than we would like given our sales volume and backlog, we expect to work through this excess inventory in the next six months and expect overall margins during this period to be below our historical norms.

It is important to note that the majority of our business which is non-toning is selling well and at full margin across all product categories and geographies throughout the world.

We believe that our product remains extremely relevant and that profitability will improved in the back half of the year as we deliver our new, fresh style.

Our record fourth quarter was the result of high double-digit sales growth in our international wholesale business, which is the result of double-digit improvements in both the international subsidiary and international distributor businesses.

Double-digit sales growth in both our international and domestic SKECHERS retail division with combined retail store comps up approximately 3.5%.

Continued demand for our core kids, men's and women's lines, along with a new fitness product and an increase in domestic pairs sold of 13%, offset by an average selling price decrease of 8.2%.

Additional important facts to note for the quarter include domestic and international wholesale backlogs up 29%, an extremely strong balance sheet with $233.6 million in cash representing $4.75 per share.

For the record for the year, we achieved record annual sales of $2 billion, net earnings at $136.1 million, and earnings per share at $2.78.

Double-digit sales growth is in every one of our primary business segments -- domestic wholesale, international wholesale, retail and e-commerce.

Combined retail store comps up over 15%, an increase in domestic pairs sold by 24.9%, and an average price per pair increase of 18.7%.

Broke ground on our new 1.8 million square foot LEED-certified distribution facility in Rancho Belago, which we expect will be operational by year-end, the largest share of the toning market at approximately 60% according to SportsOneSource.

The honor of being named Company of the year from Footwear Plus, and we continue to be the second largest footwear brand in the United States.

With steady sales and shipments in January, positive account meetings at our corporate offices and at recent tradeshows already in 2011, aggressive marketing support for our innovative and diverse product offering, and our continued growth and positive backlog profile, we are confident that we will remain a leading footwear source for both our retail partners and consumers around the world in 2011.

In the United States, our focus in the fourth quarter was further building on our strength in the toning, kids and casual markets, maximizing our presence with marketing on TV, in print and in store, and working through excess toning inventory, which in large part due to cancellations by several customers as the toning market became saturated with lower priced merchandise and over inventory at the higher end as well.

We remain committed to both our retail partners and the toning market, and we are confident when the inventory situation resolves in the next six months we will remain the dominant differentiated brand in the space with the best product at assorted prices and generate strong sales and margins.

In the fourth quarter, our domestic wholesale business increased by 4% over the same period last year.

These improvements came across our men's, women's and kids brands and included our core lines, including women's active, men's and women's sports and USA and kids, as well as from our fitness division and our growing offerings of boots.

The quarterly increase was the result of 13.3% more pairs shipped, but the average price per pair was down just over 8%, the result of the market being saturated with lower-priced toning product and our determination to sell through excess inventory.

Also, negatively impacting our price per pair was Ecko footwear, which did show sales improvement for the quarter and was largely due to the clearance of older styles.

For the year, wholesale net sales improved by 48.3%, a significant gain over last year.

As in the quarter, those gains were across our heritage lines, as well as our newer product offerings, much of which launched in the second and third quarters last year.

We believe that marketing is paramount to our success and continue to take an aggressive approach.

While we are strategically looking at our marketing spend, our intent is to create a unified image and a strong presence across all platforms and to build brand recognition in consumer demand.

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

In the fourth quarter, we had numerous initiatives underway, including a holiday campaign staring TV personality, Brooke Burke, and the launch of the comeback campaign with NBA great Karl Malone, which featured a cameo from Kareem Abdul-Jabbar.

We also initiated several other marketing strategies last quarter such as the signing of Kim Kardashian and Kris Jenner.

That materialized this first quarter, including the development of the Kim Kardashian inaugural Shape-ups commercial during the Super Bowl.

We also have football legend Joe Montana and hockey great Wayne Gretzky on our roster.

The Wayne Gretzky campaign launched during Super Bowl weekend, and the first print image appeared in Sports Illustrated's Swimsuit Edition out this week.

We believe the star power of these celebrities will build sales, drive purchase intent, and further leverage our men's and women's business.

As our SKECHERS kids business continues to grow, we continue to create captivating commercials that capitalize on the success of our animated characters, all of whom appear in their own television campaigns on the leading children's network.

These characters have become brand names and have perpetuated the strong ongoing demand for our kids footwear.

We are confident in the direction of our domestic business.

Our domestic shipments in 2011 have been consistent, our account meetings both in our offices and at tradeshows in January and February were positive, and we have Kim Kardashian, one of the most buzzed about celebrities with the Shape-ups commercial that launched during the Super Bowl.

The reaction to our product and the talk around our brand remains very strong, and we're looking forward to delivering fresh styles in the spring and summer.

Our international wholesale business grew by over 64% for the fourth quarter and 33% for the year.

The growth was the result of significant improvements in both our international subsidiary and joint venture businesses, which were up over 52% for the quarter and 39% for the year and within our international distributors, which were up 87% for the quarter and 19% for the year.

We believe this growth is attributable to the growing demand for our toning and kids footwear in key countries around the world, as well as the strengthening of some economies, including Russia where our international distributors saw significant improvements.

Several countries are still facing economic challenges, including parts of Western and Eastern Europe.

And while our business is not growing in a few of these markets, we have been able to grow significantly in others, including Spain, where our business improved by triple digits in the quarter and double digits for the year.

Our subsidiary countries continue to show very positive improvements in sales, marketing and product mix.

The few subsidiary countries in the Americas and Europe that did not show improvements in the quarter grew for the year and based on their incoming orders will continue to grow this year.

With our largest and most established subsidiaries, we focused on maintaining our strong position in the marketplace and capitalizing on the strength of our brand by developing product extensions such as toning.

With our smaller European markets and newer businesses in Brazil and Chile, the focus is on building brand recognition, introducing the consumers to an increased product offering, and developing the toning business to maximize our sales in these countries where we see tremendous potential.

Our joint ventures in Asia are continuing to improve, and key markets are showing growth, including China which has double-digit growth for the year.

We believe that our efforts over the last two years to build our presence through advertising and by opening retail stores, 44 at year-end, and Stop & Shop's, which are now at approximately 375, is positively impacting our business.

The Pan Asian market is a major focus for SKECHERS.

We believe the improvements in our joint venture business and significant growth in South Africa, South Korea, Philippines and Australia and New Zealand where we have distributors can be emulated in neighboring countries given the right products, marketing, distribution and management.

We are also particularly excited about Mexico.

We are within six months of launching a SKECHERS business.

Our distributor opened three SKECHERS stores in the leading malls in Mexico City, one in Leon and a fifth in the fourth quarter in a neighboring community of Mexico City.

Each of the concept stores mirrors the look and design of our SKECHERS stores in the United States.

They have also launched the country's leading department store and have plans to open another three stores in 2011.

We believe Mexico will positively impact our business in 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 145 distributors owned or licensed SKECHERS retail stores around the world.

13 distributors stores opened in the fourth quarter, one each in Mexico, the UAE, Costa Rica, Honduras, South Africa, South Korea, Taiwan and the Philippines and two each in Croatia and Indonesia.

Three distributor-owned stores closed in the quarter.

This quarter two distributor-owned stores have already opened, the first store in India and the fourth store in Indonesia.

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 product.

Like in our domestic business, marketing is an integral part of our global success.

Our international subsidiaries utilize 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.

As an iconic American brand, our joint ventures use SKECHERS corporate creative supported by local models in China and a local celebrity in Hong Kong and Singapore.

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

We are pleased with the continued momentum of our international business, which is growing across each of our segments, subsidiaries, joint ventures and distributors.

At almost 22% of our total business, we believe there is tremendous growth opportunity and believe it will be come an even larger percentage of the overall Company in the near future.

The triple-digit growth of Chile for the year and Italy for the quarter, along with significant gains in the year made by all of our subsidiaries and their strong backlog, gives us confidence that there is great opportunity to expand our subsidiary business.

And we are closely monitoring our business in key markets in Asia and South America where we anticipate significant growth in the near future.

Based on our double-digit backlogs and the sell-throughs of our current product, we expect mid-double-digit growth in our total international business in 2011.

Our combined domestic and international retail sales for Company-owned stores were up approximately 16% for the fourth quarter with our domestic sales improving approximately 12%, while our international retail sales were up 52%.

For the year, combined sales improved approximately 27.5%, while domestic was up over 24%, and international improved just over 62%.

Comp stores sales on a combined basis increased approximately 3.5% for the quarter.

At year end, we had 287 Company-owned SKECHERS retail stores.

In the fourth quarter, we opened 12 stores, including a Shape-ups store on Hollywood Boulevard next to Grauman's Chinese Theater and a concept store at Miracle Mile Shops at Planet Hollywood's Resort & Casino in Las Vegas.

We also opened our largest store, a 24,000 square feet warehouse outlet in Las Vegas that we believe will be an ideal location for many Casino and restaurant employees to shop for their work footwear.

We currently own and operate 44 international stores.

In the quarter, we opened two stores in Chile, giving us 15 in the country and two stores in Germany, one in Berlin and one outside Hamburg, giving us four in the country.

This quarter we have opened one store in Florida and have another four planned, including our first international Shape-up store, which will be located in greater London.

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 with another 30 to 35 planned for the year.

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

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.

Last year SKECHERS kids apparel and SKECHERS bags, backpacks, belts and wallets launched in the United States, and SKECHERS eyewear launched in North America and select countries around the world.

In addition, we have SKECHERS branded socks and scrubs available and have licensing agreements for SKECHERS luggage and watches.

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

As I mentioned earlier, fourth-quarter sales were $454.6 million compared to $388.6 million in the fourth quarter of 2009.

The 17% increase in fourth-quarter revenues was driven by significant growth across the board in our domestic wholesale and international businesses and our Company-owned retail stores, as well as an aggressive stance with respect to liquidation of excess inventory.

Fourth-quarter gross profit was $184.2 million or 40.5% of sales compared to last year's gross profit of $189.3 million or 48.7% of sales.

Our gross margin percentage for the quarter tended back to the low 40s, and we would expect margins to continue to be below our historical norms over the next couple of quarters.

Fourth-quarter selling expense were $40.5 million or 8.9% of sales compared to $31.4 million or 8.1% of sales.

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

For the fourth quarter, general and administrative expenses were $143.7 million or 31.6% of sales, compared to $116.8 million or 30% of sales for the prior year.

The increase in the G&A dollar amount was due to a combination of the higher sales volume, increased rent from our retail expansion, warehouse and distributions, salaries and professional fees.

Total operating expenses for the fourth quarter were $184.2 million or 40.5% of sales compared to $148.2 million or 38.1% of sales in the fourth quarter of 2009.

Given the addition of 41 retail stores and several new international initiatives, we feel we have done a good job managing our costs, while still building our global infrastructure to position the Company well for the future.

During the fourth quarter of 2010, we saw income from operations of $1.4 million compared to $41.7 million a year ago.

Net earnings were $3.2 million compared to $27.9 million last year.

Net income per diluted share in the fourth quarter of 2010 was $0.07 on approximately 49.2 million average shares outstanding compared to net income per diluted share of $0.58 on approximately 48.3 million average shares outstanding in the prior year.

Our effective income tax rate for the year was 30.6%, which was down from our estimated tax rate of 32% for the first nine months of 2010, primarily due to lower profitability in the US as a percentage of the total during the fourth quarter.

As a result, when we recorded an income tax benefit of $2.3 million during the fourth quarter of 2010 as compared to a tax expense of $12 million during the same period last year, we expect our effective tax rate for 2011 to be in the same range as 2010.

Net sales for the year ending December 31, 2010, increased to $2.006 billion compared to $1.436 billion in the prior year, an increase of 39.7%.

Gross margin was $911.9 million compared to $621 million.

Selling expenses were $186.7 million compared to $129 million from last year.

General and administrative expenses were $533 million compared to $421.1 million last year, and total operating expenses were $719.7 million compared to $550.1 million net year.

Net earnings for the year ended 2010 was $136.1 million compared to $54.7 million last year.

Diluted earnings per share were $2.78 on approximately 49 million average shares outstanding compared to diluted earnings per share of $1.16 on approximately 47.1 million shares last year.

And now turning to our balance sheet, which remains extremely strong.

At December 31, 2010, we had approximately $233.6 million in cash or $4.75 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 $266.1 million, and our DSO at the end of December 31, 2010, were 44 days versus 50 days in the prior year.

Total inventory, including merchandise in transit at December 31, 2010, was $398.6 million, representing an increase of $174.5 million from the prior year period.

Of this increase, $65 million is to support the growth in our international and retail business, and $110 million is related to our domestic wholesale business.

While this inventory is clearly higher than we would like to see, we are confident we will successfully work through it over the next six months.

The combination of our continued strong backlogs, broad international business that is seeing substantial growth, and the expansion of our Company-owned retail stores, as well as the positive feedback on our new product from key customers and retailers alike, are the primary reasons for this confidence.

Long-term debt increased $36 million to $51.6 million at December 31, 2010, compared to $15.6 million for the same period last year.

The increase in long-term debt primarily relates to a five-year $39.2 million financing agreement with Bank of America for our equipment in Rancho Belago distribution facility, which we closed during the fourth quarter of 2010.

Shareholders equity was $945.8 million versus $749.4 million at December 31, 2009.

Book value or shareholders equity per share stood at approximately $19.28 as of December 31, 2010.

Working capital was $666 million versus $558.5 million in the prior year.

Capital expenditures for the fourth quarter were approximately $31 million, of which $5.4 million consisted of 12 new store openings and several story remodels, $18.9 million for our new domestic distribution center, and $1.9 million for corporate real property purchase, as well as IT equipment upgrades.

Capital expenditures for 2010 were approximately $96.6 million, of which $22 million consisted of 41 new store openings and several store remodels, $3.6 million for corporate real properties purchased, and $57 million for our new domestic distribution center in Rancho Belago, California, as well as IT equipment upgrades and the completion of our corporate headquarters.

Excluding the costs to complete our domestic distribution center equipment of $45 million and the building of approximately $40 million, we expect ongoing capital expenditures for 2011 to be between $25 million and $30 million.

In summary, 2010 was an incredible year for SKECHERS in regards to product initiatives, marketing, global growth and sales as we reach $2 billion.

We are extremely proud of our achievements and the strength of our brand globally.

We took ownership of the toning market with a 60% share for the year, and we were named Company of the year by Footwear Plus Magazine.

We launched a new fitness store format and several new lines that expanded our reach into new markets, and we signed Kim Kardashian, one of the hottest celebrities, to our roster of stars for Shape-ups.

We also broke ground for our new 1.8 million square feet distribution facility, which when completed later this year will result in ongoing cost savings and increased efficiencies.

We are addressing our expenses in inventory, which we expect to work through in the next six months.

We believe that our profitability will improve in the back half of the year as we continue to work through inventory and transition into new fall offerings.

With fresh products being developed now in all our key divisions, we see growth opportunity across each of our primary distribution channels -- domestic wholesale, international wholesale, and retail.

As we look ahead, we believe the Pan Asian, Mexico and subsidiary markets are tremendous opportunities to grow our total sales.

We will continue to look at more retail locations, including for our new store format and expand our retail licensing into more markets.

Our record sales and exceptional testimonials and feedback from consumers and our accounts reinforce the relevance and strength of our brands.

With a healthy double-digit backlog, $233.6 million in cash and fresh product lines delivering this year in accounts across the country and around the world, we believe our momentum and growth will continue.

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).

Scott Krasik, BB&T Capital Markets.

A couple of questions about gross margin.

We are about halfway through the first quarter.

You made some comments that you are still going to be below your historical average.

But are you generating lower margins now on the business as we see further and further price cuts on the older product than we did in the fourth quarter, and I guess is it going to be sequentially even worse in the second quarter?

And then I have a follow-up.

It is kind of early to tell.

So far in January and early February, we have no real difference in excess inventory margin.

What has held up a little better than we thought so far in the first quarter is our international margins.

They are slightly higher than we anticipated, so we have a slight offset.

So I think it is fair to say we are still on track to remain somewhere between our normal margins and what we showed in the fourth quarter give or take so far this quarter.

Directionally for the second quarter, then you don't think that it would be worse than the first quarter?

I don't know yet.

It depends how aggressive we get and what happens at retail.

We are at a point right now where we have not had any kind of spring weather, and in those few days that are warm, actually because it is a walking shoe that we are looking to move the most of, sales have picked up significantly, and our stores have held up very well.

So there was always a case to be made that as weather warms into the second quarter, we will be able to move significantly more.

But it is too early to tell.

So we will hold that until we see what happens more for spring.

Okay.

And then just your comments about returning to historical levels in the second half of the year, how did the other moving parts around cost inflation and promotionality -- you said you had to be higher or heavier discounting in the fourth quarter.

How will those things play out relative to your historical margins you have 42% plus?

Well, we think they will get to that point and higher.

What is happening is we're going to get a slight benefit from the removal of the anti-dumping duties in Europe.

Some will pass along, and some we will keep, and it seems our international businesses will continue to have higher margins than in the United States.

And since that is the growing piece, that certainly gives us an offset.

We think our stores, as they clean up and get some new inventory and they will be the first to have it in the back half of the year, will start to increase their margins back to the top end of what we saw at the beginning of this year, which will leave the domestic wholesale piece, and that will depend on how much inventory is left and how much new stuff we put into the marketplace.

But we're fairly confident we will get to at minimum our historical rates of margins as we get to the back half of the year.

I guess just one last question on backlog, of the 29% increase that you say, what is the domestic backlog?

The domestic backlog is obviously lower than -- and we don't usually break them out -- is obviously lower than the overall.

The biggest increase in backlog from a percentage basis was international.

But it is still in the low double-digits for domestic.

It is still positive low double digits?

It is still positive.

Okay.

And that does not reflect anything around orders that were pushed out in the second half of 2010 that have been cleaned up?

Some of them obviously have shipped.

Some of them are pending shipments.

They all remain obviously in backlog, so I don't know what the differential would be.

I mean for the most part our backlogs are out a little further than they were last year.

That is certainly true to say, but they have held up remarkably well given what we have gone through.

And I think sell-through and the brands, especially internationally and a lot of key domestic markets and our own stores, continue to sell at a very good rate.

Okay.

Good luck.

Thank you.

Claire Gallacher, CapStone Investments.

I just wanted to get an update on cancellations for toners.

Is that ongoing, or do you feel like that is starting to slow down?

Well, obviously it has to start slowing down.

There was not -- as we moved through the year, there was not that much on order.

It moved out significantly past the end of the first quarter and moving in.

So it certainly is moderating, and it is slowing down.

It is not as significant a factor as it was in last year at the end of the third quarter and into the fourth quarter.

So we are getting our hands around the business and can see better where we are going.

Okay.

And then you mentioned that I think you said it was Ecko that had some clearance and some promotions.

Are you noticing any other changes in the competitive landscape as we head into -- start the new year?

No, that is strictly for ours.

That is the only non-SKECHERS brand we have, and obviously it has not held up as well as the SKECHERS brand for us as it went through.

I mean we have redone the line and have seen some extension and some acceptance for it.

But we continue to concentrate on the SKECHERS line, and we've had some great responses from our customers, as I said in the remarks, as we have seen them.

So right now it is just a matter of clearing out their shelf space, rightsizing our inventory.

Everybody speaks very well about the product and its potential.

So we still think we are pretty much on the right track.

Okay.

And then from just a channel standpoint, as you're looking to push through -- I believe that number you gave was $110 million -- are you looking to penetrate any specific panel, or are you just going to go wherever you can to move the inventory?

Well, we remain very flexible.

And, by the way, that $110 million number is a domestic number on increase.

I don't know that all of it would be considered close out of the inventory.

We built a case that we made that we were under inventory.

And you have to remember, when we say we had increased inventory in our stores, we only count the stores -- the inventory physically at the stores.

The stuff that is in the distribution center that the stores will take ultimately over the next three or four months that we have not built from still will come out of those increases that are in the distribution center.

So we are moving through it.

We remain quite flexible both on the domestic front and the international front in getting the inventory to the right place and the right site.

Okay.

And then last question, you said ASPs I think here domestically were down about 8% for Q4.

Is that the expectation that we should going forward that down 8%, would that be a good number to use for the first half of 2011?

It is certainly a good place to start, yes.

Do you think it could be lower?

It is hard to say.

It could be because first quarter was so strong from a toning perspective, but it should not be significantly.

Sam Poser, Sterne, Agee.

I just have a bunch of questions.

What was the international gross margin versus the US gross margin if you can give us that?

It was higher internationally significantly this quarter obviously.

So I mean the US gross margin was in the 30s then just to get to the number?

Well, I don't know that we report those numbers.

You could say, yes, domestic margins were -- you could start with -- they were in the 30s, and internationals were in the high 40s.

And do you expect that to continue going forward as you move through this inventory, or do you see the US staying where it is and coming down a little bit internationally?

How are you looking at that?

It depends how quickly we move it and what our decisions are.

We remain pretty flexible on it, so it depends how aggressive we want to be.

But I think -- I don't think margins in the US, unless we get very aggressive, deteriorate significantly past where they were for the fourth quarter.

And looking at your marketing spend, you talk a lot about that on the call.

In absolute dollars looking ahead into 2011, how should we think about the selling line?

Well, we have not finalized everything.

I think it is fair to say we will be watching it closely, and there should not be any increases from a real dollar amount, and there could be some changes as we go through.

I mean you have to understand.

We picked up some international certainly from our joint ventures that roam through and then get a minority interest.

So we are not about to cut back some of those places.

So, in the United States, I think it is fair to say we will be watching it more closely.

But internationally we are still going to be marketing on a very aggressive basis.

So I mean with the $187 million that you did last year, are we -- we should think about it in that ballpark basically, maybe slightly under but that ballpark?

That is a pretty big ballpark.

There could be significant changes.

I mean we have not finalized them yet.

I think if you put to that full-year number, it will be lower this year.

At least that is the plan right now.

Any idea to what degree as you think about it?

It is going to change by quarter, so it is difficult.

Because we're just finishing first quarter right now, and first quarter is the smallest advertising spend of the year.

So it is too early to get into that.

All right.

And then you said also that you would be clean in the next six months.

I'm being literal here, David, but are you talking about six months from now or six months from January 1?

I don't know if it makes that much difference, but (multiple speakers) somewhere in between.

(multiple speakers) It rolls into Q3.

I mean --

Listen, as we continue -- you know, it does not have to go down to zero.

The shoes sell very, very well, and there is a home for them all over the place certainly internationally.

So I know that zero is (inaudible).

Some of the things that we sell that will be spoken for, that will move around, that will be completed by Q2 will not ship until Q3 because there may be some seasonal factors and some financial factors for international components of it.

So say some time at the end of Q2, early part of Q3, we anticipate being significantly clean.

And how are you thinking about next year or 2011 from a topline basis?

I mean your backlog is up, but I mean are you expecting to have a topline increase full-year 2011 right now?

I think right now I would not anticipate a full-year increase, although you never know how strong the back half of the year is, and we get it to move very quickly as we have new product out there.

And we certainly have significant potential in some of our newer countries, you know, places like China and Brazil and even our current distributors in Eastern Europe and our subsidiaries in Western Europe have significant capacity certainly as we get to the back half of the year.

So I think it is fair to say that we would probably be down in the first half, although I don't think it is going to be as significant as some people think certainly from a topline and depending on how aggressive we get with closeouts that move through.

And I think we will show considerable growth in the back half.

So while today from a conservative point of view, I would still tell you our volume will be down -- could be down as much as 10% or so for the year.

It is too early to tell how strong the back half can be.

So the first half is going to be down over 20% as you are seeing it at the moment?

No, I don't see it down that much yet.

But second quarter is still going -- it will not be down 20% I don't believe in the first quarter.

Chris Svezia, Susquehanna Financial Group.

So just following up on some of Sam's questions more specifically, I guess as you think about your first quarter based on what you see right now, I mean does that look like that is a down high single-digit quarter in terms of revenue?

And maybe any color on how that breaks out, assuming international is going to be strong since a bigger percentage of the quarter relative to fourth quarter, but how does US wholesale look in terms of direction?

US wholesale will be down for the quarter.

I think that is a pretty safe assumption for the time being.

Obviously we are clearing through some retail channels as well.

And we are up against a significantly strong quarter last year where there was unbelievable demand for brand-new products.

So it is fair to say that domestic volumes or domestic wholesale volume will be down.

I think our retail business grows.

I think comp stores sales will be difficult and probably down in the mid-single-digit range is what we are planning now, more so from a pricing perspective.

That's a big differential from last year rather than units moved.

But it still would show a positive retail growth simply from new store openings over the last year, and international will be up significantly.

So I would say that delta from last year, obviously US sales is the biggest component.

So (multiple speakers) down but like -- I don't think it will be (inaudible).

It almost definitely will not be down 20%, and it is hard to believe it will be down 10%.

But it will be plus or minus that 10% number, probably even less than that.

Okay.

All right.

So based on that, you should show revenue growth for total Company in the first quarter?

Assuming your retail business grows, international continues to grow at roughly the same rate you saw in the fourth quarter, and if US is only down call it 10%, you could show --

I'm sorry -- the overall will be down about 10% or less.

Okay.

So overall -- okay -- so overall total Company could be down 10%?

It could be down less than that.

Or it could be down less than that.

So that would imply that the US wholesale business is down pretty strong in excess of 20%.

Is that fair?

Am I doing that right?

It could be.

I think that is because of the pricing.

Remember, we were selling everything at full price and significantly higher.

I think you're going to have AUR deterioration more than pair deterioration as we go through the quarter I mean to get to a more normal place.

Okay.

All right.

So then if I think about -- and I guess this goes in the second quarter more than likely directionally possibly still down total revenue, but maybe not as bad as you saw in Q1?

Is that fair?

Q2 was a pretty strong quarter, but I think that is relatively fair right now.

It is kind of early to go out that far but yes.

Okay.

Can I ask about -- I guess I'm kind of surprised during the fourth quarter, even with the better revenue, you guys did not leverage on selling or G&A.

I'm just curious, in your comments about how you are looking at expenses, maybe you can just help us.

I mean selling it seems like you are going to basically take your current dollars and work with those dollars if not play them down in reference to an earlier question.

But the G&A piece, how do we think about that in the trendline at least in the first half of the year?

Well, what happens is I think G&A will start to come down probably more second and third quarter certainly than in the first quarter.

Part of the increase in G&A, as we said in the remarks, is the distribution center.

The more pairs and a lesser AUR obviously puts increased pressure per pair.

But as the numbers of pairs come down, we will get back to more like it was the year before.

As the numbers get into -- as we grow -- as we move down the inventory, we will take less pressure on the G&A, and we will be able to leverage some of Europe and some of the international business, I think, as it grows.

But it's coming from different places now.

So, as we set up new stores in the United States and new stores and stop-n-shops in China and new stores in Chile and we increase our wholesale business in Brazil, there are certain inefficiencies we have got to get through.

But I think it is fair to say all of them started and all of them will start to leverage as we get to the back half of the year.

Now we expect to take a lot of pressure off the distribution expense in the United States when the new distribution center is done hopefully at the beginning of Q4.

So, as we move into that, there will be considerable pressure and significant leverage to the G&A line.

So I mean are we supposed to use this sort of mid-20s increase in G&A?

Again, it all depends on revenue, but is that sort of a fair proxy for the first-half $20 million plus per quarter in terms of dollar increase year over year?

Is that ballpark and then -- (multiple speakers)

(multiple speakers) -- $20 million increase.

I don't know that you get a $20 million increase this year from last year.

Last year was a pretty big increase to begin with.

I would sort of make that a little less.

I guess I'm saying is first quarter -- when we look at first-quarter G&A, I mean are we supposed to take -- you did $122 million of G&A first quarter last year.

I'm just trying to understand the magnitude of the increase possible for first quarter.

Is that just maybe another $15 million, $20 million increase on that number?

And then as you go through the year --

(multiple speakers).

I think that is too high.

It would be more in the $10 million, $15 million range given the store openings so far.

Okay.

And then slowly at the years go -- as the quarters go through, the dollar increases, subsides somewhat, particularly as you go into the fourth quarter and you open up a new distribution center, is that fair?

Yes, other than the expense of the move.

There will be one-time charges and potentially hit Q3.

And depending on how well the testing goes and how fast it gets to maximum efficiency, we would expect to see some significant changes either in Q4 or at the latest Q1 2012.

Okay.

Last two quick questions.

One, just on the inventory, where are you?

Because I think previously you had mentioned there was like 3 million to 4 million pairs of toning product that you wanted to move.

I'm just curious where you were at the end of the year and where you are right now today in terms of what that unit number is?

And the last piece is, just on international, how strong that gross margin was?

You're saying it was in the mid to upper 40s.

That is sort of unusually high.

So I'm just curious if that is just growth, if that is just mix more sub versus distributor?

What drove it?

It is more mix, and it is certainly more subs than distributors, and certainly it's a very clean margin for the subs as far as that is concerned.

As far as the inventory is concerned, we've certainly made some progress.

I don't know that we are ready to start giving the exact numbers.

I don't want to negotiate the movement of the inventory on the phone or with analysts.

It is a conversation we could have perhaps off-line or something like that to get directionally where it is.

Because I don't know that we are in a position now that we're going to continue doling how many pairs and what it is so that those people I'm trying to sell it to have an advantage in understanding exactly where my inventory is.

Okay.

All right.

Fair enough, David.

Thanks very much.

We appreciate it.

(Operator Instructions).

Camilo Lyon, Wedbush Securities.

I wanted to ask on the international piece, what are you seeing there from the adoption perspective of the toning category and then the Shape-ups and maybe talk about the differential between older generation and some of the newer styles?

Which styles are people really going towards, or is it just more of the core business that is doing well internationally?

It is both.

It is a core business.

Toning outside the US is obviously slightly less a percentage than it is in the US.

And we have a nice mix out there.

First of all, the second generation, the new generation, that will not be delivered until this year's back half because we have a lot of new items to deliver and a lot of new parts of the category to grow and expand through that.

And there is something for everybody.

Throughout the world, we have the original Shape-ups dates that still used for walking that still have its own following followed by the lower profile ones that go through.

So it is across the board.

I mean it wasn't -- it did not explode as big as the United States, but it is very, very consistent, and it is certainly a significant part of the mix.

As time goes on throughout the year, is that a market they can absorb a lot more of the inventory going forward, the excess inventory, or is that market just really not a place where the consumers are really going to adopt it?

I think they are really going to adopt it.

I think we continue to move inventory through there.

We have moved it through a number of our distributors and subsidiaries already.

That marketplace is just smaller, so it cannot absorb it that quickly.

I think, as we go through the year, it will continue.

But it's not the end-all of all it because the United States is significantly larger.

We will have to find closeout places in the United States, some in our subsidiaries and distributors, and then we will be looking for new territories in places that we have not gotten yet or there is not a big presence to get them started in.

So we are looking everywhere possible, and we will continue to move them and be very flexible as to where we can sell them.

I want to make sure everybody understands this is not a fire sale, nor do we intend to have it or continue to make it as a fire sale as we talk moving through this.

We are big believers in toning.

We think Shape-ups has a home.

We think the original will have a home somewhere as it cleans through it.

There is just too much inventory.

We have many reports of satisfaction and people have with the number of pairs we have sold and the feedback we have gotten, it is a real category, and we are not about to do anything to save a couple of months in sales to devastate the category or to make it something we can't come back from.

We are big believers.

We are being very careful.

But within that being careful, we know we have to downsize it, and we are moving through it as flexibly and as best and as strongly as we can.

But it is not something that we are abandoning.

This is not a fire sale, and we are not going to sell it as fast as we can to whoever just comes down the pike.

Okay.

And to that point, it seems like your timing and expectation around how long it would take you to clear that inventory has been extended.

What do you think that is a result of?

Is it more a price issue?

I mean you said you are not willing to really take price down dramatically, but your Q4 domestic gross margins were fairly impacted negatively.

I expect that to persist for another couple of quarters.

So what leverage do you really need to pull to accelerate the clearing process?

Well, I don't know.

It is hard to answer the first part of that question.

It is never an exact science.

And when you talk about inventory to be moved and it's in the millions of pairs and you are talking about six months or seven months or four months or five months, I don't know that anybody is held to the day or to the minute or the way it can move through or that it has to be a zero.

I think the important piece for us is that it continues to sell well.

It continues to sell well in our stores.

It continues to sell well around the world, and we take our time, and we would do it as best so as not to kill the category -- we certainly have the capacity to do that -- and to make sure we clear enough shelf space to launch our new shoes in the back half of the year, but it is not a race.

I don't know that we feel here or you should feel like we are pinned to an exact minute or an exact day.

So there is not a dropdead date where Gen 1 or bigger rocker bottoms need to be cleared off the shelf so that they don't bring down your new product that's going to hit the stores in April, May and June?

I don't think anything is ever that cut and dried to begin with, although we do anticipate that most of retail will be cleared out by the second half.

But it's never that cut and dried, and we don't use terms like dropdead.

I did not mean to be so somber.

That is okay.

And then just one kind of clarifying question.

If you could just shed a little bit more light on the tax benefit during the quarter.

Well, that is pretty straightforward.

We estimate our tax bill quarter by quarter as we go through.

And, as we estimate it through first, second and even getting into third quarter, we anticipated that the US would hold up significantly better than international and that a bigger percentage of our profit would be in the United States rather than overseas.

Obviously there is a big shift in Q4 that we would not have anticipated as we did our event during the year.

So it is just a true-up.

And if you look at it, what actually happened was we came back to more our norms from the year before, back to that 30% because we leveled out our earnings between the US and outside the US on an annual basis.

So --

Okay.

So it was just more of a timing issue.

Okay.

Thanks.

Good luck with the rest of the year.

Sam Poser, Sterne, Agee.

David, I have just a few follow-ups.

Number one, in the backlog how much of that is toning, you know Shape-ups and Tone-ups and so on?

Well, obviously it is a significantly smaller piece than it was a year ago.

But I mean is that -- is it -- I mean of that -- I guess how much of that part of the business is down?

How about that within the backlog?

Well, I don't know that we ever published how much of it was of our backlog and what it was, and I think it is fair to say it was a big piece of the growth last year domestically in the US.

It is a smaller driver now, but our business will not be down as much as that is down.

It's more over inventory.

The categories are still selling very well at retail.

So I don't know that we are ready to break down what it was, what it is, what we think it will be, and how it changes around right this minute.

Okay.

And then you said that you were going to return to basically regular price selling.

You expected to return to regular price selling in the back half of the year.

I assume that you are talking about in that respect the Tone-ups and the Shape-ups business as well.

What is -- what do you anticipate the new regular price to be in that category?

Well, again, you have seen our product, and you saw it at (inaudible), and I assure you saw it at (inaudible) just now.

We will offer toning product from -- not counting open footwear or specialized or seasonal footwear -- from $65 to $120 at retail.

We will have a very broad range with all kinds of differentiation and different price points.

So we intend on being right in the sweet spot of what we think toning is, and that is from $65 to $120.

Thank you.

And then I'm sorry, I have two more, and that will be it.

The selling expenses in the first quarter, should we anticipate that to be up as well, along with the G&A?

No.

I did not say it would be up.

I said it would be a flat to probably down or relatively flat in the first quarter.

Okay.

And then lastly, you have historically not been -- you have worked with your retail partners but have not -- you have not necessarily given markdown money in the past.

Never?

We have never given markdown money?

Is that what you are trying to tell me?

I said you have not -- you generally have not in the past.

(multiple speakers).

But it is something you really don't like to do.

But to what degree (multiple speakers) did you have to step up with markdown money this best Q4 and maybe into Q1 with the negotiations with your larger retail partners?

You know, like I said before, we are very flexible, and it varies differently from customer to customer.

I don't think we're going to -- if we are not going to go public with how much inventory and how we are going to sell it and how many pairs we have, we are certainly not going to negotiate with all our customers in a public forum over the phone as to who got what and how much that so everybody can point fingers at each other.

I mean it is fair to say we are being as open-minded as we can be.

We would like to have as much shelf space within reason.

But we think our shoes speak for themselves.

They sell well.

They have a consumer following, and it would be hard pressed for anybody not to carry them.

So in between buying lower shelf space and not getting any money at all, there will be some negotiations I am sure between our people and some of our larger customers.

But I don't think we are going to negotiate it on the phone here in public.

Fair enough.

Anyway, all right.

Good luck and thanks.

Ladies and gentlemen, that is all the time we have for a question-and-answer session.

That does conclude the conference call.

You may now disconnect, and thank you for your participation.