Skechers USA Inc (SKX) 2011 Q1 法說會逐字稿

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

Welcome to the Skechers USA, Inc.

first quarter 2011 earnings conference call.

(Operator Instructions).

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

Thank you, everyone, for joining us on Skechers conference call today.

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 for 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 U.S.

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 SCC 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, I would like to turn the call over to Skechers Chief Operating Officer and Chief Financial Officer, David Weinberg.

David?

Thank you for joining us today to review Skechers first quarter 2011 results.

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

Net sales were $476.2 million for the first quarter and operating income was $14.7 million.

Net earnings for the first quarter were $11.8 million and diluted earnings per share were $0.24.

We view our first quarter 2011 sales of more than $475 million as a solid accomplishment, a testament to the strength of our core business, and are pleased with the steady and significant growth in our international businesses, both wholesale and retail, which improved by 37% and 51% respectively.

Our first quarter 2011 sales decreased by 3.4% over the same period last year due to the difficult comparison against a record first quarter 2010, which primarily benefited from strong toning sales.

In addition, the clearing of toning inventory negatively impacted our margins, which were 40.4% for the first quarter.

First quarter highlights include high double digit sales growth in our international wholesale business, which is the result of double digit improvements in both our international subsidiary and international distributor businesses.

Double digit sales growth in our international Skechers retail division; continued strong demand for our core kids, mens, and womens lines, as well as select key toning lines; and an extremely strong balance sheet with $197.9 million in cash, or $4.02 per share.

Overall, we believe we are in a good position in terms of product design, marketing, distribution, logistics and with nearly $200 million in cash.

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 first quarter, our domestic wholesale business decreased by 23% over the same period last year.

This, as I previously mentioned, is primarily due to a combination of the very difficult comparison to the prior year and the clearing of toning inventory.

Our focus in the first quarter was on building on the strength and these growing lines.

Developing and delivering new product; maximizing our presence with marketing on TV, in print, and in store; and working through excess toning inventory.

This continues to be our focus and priority.

While we are strategically looking at our marketing spend, we continue to believe that marketing is an integral part of our success as it builds brand recognition and creates consumer demand.

In the first quarter, we aired our first Kim Kardashian TV campaign during the Super Bowl.

We ran our first ads featuring her in entertainment and fashion magazines and had our first in-store image with Kim wearing one of our hottest fitness styles.

Along with the Kim Kardashian advertising, we also launched a comeback campaign with hockey great Wayne Gretzky which included a TV spot and a print ad that appeared in the Sports Illustrated Swimsuit Edition.

We also ran print and TV ads starring TV personality Brooke Burke, sports legend Karl Malone which featured a cameo from Kareem Abdul Jabbar, and Joe Montana.

Every style within our Skechers kids footwear falls under an animated character.

The majority of these characters now have television commercials on leading children's networks, which we believe creates a strong demand for the product and builds the characters into brand names.

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

Key accounts are in our offices this week reviewing new product that we'll be launching later this year and next year, and reaction has been very positive.

We are confident in the direction of our domestic business.

Our domestic shipments in 2011 have been consistent, sell-throughs of our new product in our retail stores has been very strong, and we have some of the most buzzed-about celebrities supporting our brand.

Our international wholesale business grew by over 37% for the first quarter.

The growth was the result of significant quarterly improvements in both our international subsidiary and joint venture businesses, which were up 31%, and within our international distributors, which were up 61%.

We believe this growth is attributable to the growing demand for our toning, casual boots, and kids footwear in key countries around the world, as well as the strengthening of some economies.

Several countries are still facing economic challenges, including parts of eastern Europe, and while our business is slowing in a few of these markets, we've been able to grow significantly in others.

Our subsidiary countries continue to show very positive improvements in sales, marketing, and product mix, and all grew by double digits, except one which was down slightly.

We are particularly pleased with our growth in Italy, which improved by triple digits for the quarter due to the broad acceptance of our toning and fitness products in that market.

With our largest and most established subsidiaries, we focused on maintaining our strong position in the marketplace, 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 consumers to an increased Skechers 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.

Each area showed at least double digit improvements for the quarter.

We believe that our efforts over the last two years to build our presence through advertising, and with 44 retail stores and approximately 375 shopping shops, is positively impacting our business.

In the quarter, our joint ventures opened 4 Skechers retail stores; 2 in Malaysia, and 1 each in Hong Kong and Singapore.

The Pan Asian market is a major focus for Skechers.

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

We are also particularly excited about the opportunity for Skechers in Mexico.

Although it hasn't been a year since they launched their Skechers business, our distributor has opened eight Skechers stores, including three in leading malls in Mexico City and another three stores across Mexico, in the second quarter.

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

They've also launched in the country's leading department store.

We believe Mexico will begin to positively impact our international business in the next few 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 149 distributor-owned or licensed Skechers retail stories around the world.

9 distributor stores opened in the first quarter; one each in Taiwan, Cutter , Indonesia and India, our first in this country.

Our distributor in South Korea also opened 5 stores, but closed 3, bringing their total number of Skechers stores to 36.

In addition to the closures in South Korea, one store closed in Kuwait in the first quarter.

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

As with our domestic business, strong product execution supported by marketing is an integral part of our global formula for success.

As an iconic American brand, our international subsidiaries, distributors, and joint venture partners utilize the proven marketing campaigns we have created domestically, translating them into their local languages.

Some countries also use local models to create a more regional look, while others use the power of local celebrities.

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

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

At quarter end, the international wholesale represented 36% of our total business.

The strong growth in our subsidiaries, along with significant gains made by our distributors and a strong backlog, gives us confidence that there is great opportunity to further expand our international business.

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

Our combined domestic and international retail sales for the company-owned stores increased approximately 3% for the first quarter.

The growth in our international retail sales of 52% was offset by a small decrease in our domestic sales of 2%.

For the three months ended March 31, 2011, we realized negative comp store sales of 11.2% in our domestic retail stores, and positive comp store sales of 6.8% in our international retail stores.

At quarter end, we had 291 company-owned Skechers retail stores.

In the first quarter, we opened 4 domestic stores including concept stores in Scottsdale and greater San Jose, and one outlet store in Fort Meyers.

We also owned our first international Skechers fitness store in the Quarter in Westfield Mall in London, bringing our total international company-owned and operated stores to 44, with a closure of 1 in Germany.

This quarter, we opened a Skechers fitness store in Las Vegas Forum Shops as well as a Skechers store in Cleveland, and a popular tourist area in North Carolina's Blue Ridge Mountains.

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 25 to 30 planned for the remainder of the year.

Before we move on to our financial review, I'd like to mention our licensing division, an additional revenue and profit channel for the company.

Through selectively licensing our name and images, we are extending our brand and awareness with new categories.

We currently have Skechers branded kids apparel, backpacks, socks, scrubs and eyewear available.

We'll also be launching Skechers luggage and watches later this year.

Turning to our first quarter 2011 numbers in more detail.

As I mentioned earlier, first quarter sales were $476.2 million compared to $492.8 million in the first quarter of 2010.

We view our first quarter 2011 sales of more than $475 million as a solid accomplishment.

The difficult comparison against a record first quarter 2010 resulted in a 3.4% decrease from the prior year.

International wholesale and retail sales improved in the first quarter 2011, but were offset by weak domestic wholesale and retail sales.

First quarter gross profit was $192.6 million, or 40.4% of sales, compared to last year's gross profit of $237.4 million, or 48.2% of sales.

First quarter selling expenses were $37.6 million, or 7.9% of sales, compared to $34.3 million, or 7% of sales in the prior year.

The slight increase in selling expenses for the quarter was primarily the result of increased tradeshow expenses, as well as more advertising and promotional expenses versus the prior year.

For the first quarter, general and administrative expenses were $142 million, or 29.8% of sales, compared to $122.5 million, or 24.9% of sales, in the prior year.

The increase in the G&A dollar amount was due to a combination of increased rent from our retail expansion, temporary help, and professional fees.

Total operating expenses for the first quarter were $179.5 million, or 37.7% of sales, compared to $156.8 million, or 31.8% of sales, in the first quarter of 2010.

During the first quarter of 2011, we saw income from operations of $14.7 million, compared with $81 million a year ago.

Net earnings were $11.8 million, compared to $56.3 million last year.

Net income for diluted share in the first quarter of 2011 was $0.24 on approximately 49.3 million average sales outstanding, compared to net income to diluted share of $1.15 on approximately 48.7 million average shares outstanding in the prior year.

Our effective income tax rate for the quarter was 11.2%, which was down from 32% in the first quarter of 2010, primarily due to increased profitability internationally, combined with lower profitability in the US.

We recorded income tax expense of $1.6 million during the first quarter of 2011, as compared to $25.8 million during the same period last year.

Based on our annual projections, we expect our effective tax rate for 2011 to be in the range of 10% to 15%.

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

At March 31, 2011, we had $197.9 million in cash, or $4.02 per share, which provides us with sufficient capital for our many growth initiatives, as well as our continued infrastructure build out.

Trade accounts receivable at quarter end were $320.2 million, and our DSOs at the end of March 31, 2011, were 56 days versus 47 days in the prior year.

Total inventory, including merchandise in transit, at March 31, 2011, was $376.2 million, representing an increase of $187 million from the prior year period, but a decrease of $22 million from December 31, 2010.

We made significant progress in managing our supply chain.

Reduction commitments from our factory partners were down 12 million pairs, or 24% from the year-ago period, and 5.4 million pairs, or 13%, from December 31, 2010.

We expect these reductions will have a positive impact on our inventory position over the next couple quarters as we continue to manage our overall inventory position.

We believe both our sales and margins will improve in the second half of the year as we deliver more fresh product.

We are also carefully reviewing our expenses, which increased in part due to significant growth last year.

We are looking to trim costs in all areas of our business to position ourself to profitably grow in the future.

We have a healthy backlog in international, and we are planning to open another 25 to 30 company-owned Skechers store this year.

We are confident that demand for our brand remains strong, and we expect improvements to profitability in the latter half of the year.

Long term debt at March 31, 2011, was $50.4 million compared to no debt for the same period last year.

The increase in long term debt primarily relates to the financing of our Rancho Belago distribution facility.

Shareholders equity was $967.5 million versus $818.6 million at March 31, 2010.

Book value or shareholders equity per share stood at approximately $19.63 as of March 31, 2011.

Working capital was $650.9 million versus $609 million in the prior year period.

Capital expenditures for the first quarter were approximately $43.4 million, of which $6.8 million consisted of 5 new store openings and several store remodels, $24.1 million for our new domestic distribution center, and $12 million for our domestic distribution equipment.

In summary, the first quarter was a tough comparison in terms of revenues and margins as we were up against a record quarter last year for both measures.

Our focus this quarter was on reducing our inventory levels and future commitments while also delivering exciting new styles and growing our international business.

We expect the tough comparisons to continue in the second quarter given the record quarterly revenues of $500 million last year, and the historically slower second quarter for international, as well as the need to continue to move older inventory.

Overall, we are pleased with our strong sales, believe it is a testament to the strength of our core business, and we are confident in the direction of our business.

Our domestic shipments in 2011 have been consistent, our international sales are steadily growing, strong sell-throughs of our new product in our retail stores, and we have some of the most buzzed-about celebrities supporting our brand.

We have just rolled out several new lines in our own retail stores and we will be launching additional new adult and kid line over the next month.

As these lines are testing well in our own stores, we believe the toning market is stabilizing, and we are rolling these new fitness lines out to wholesale accounts across the country, as well as to our international subsidiaries and distributors.

We are also unveiling new product to key accounts in our corporate offices this week that will be further developed and shipped around the world for holiday 2011 and spring 2012.

As we manage our expense structure to be in line with expected sales, and work through our excess inventory position, we believe we are on a strong financial footing.

$197.9 million in cash, and a new $1.8 million square foot distribution facility with increased efficiencies slated to be fully operational in the fourth quarter.

With marketing support that includes a talented roster of notable celebrities and fresh product lines delivering this year, and accounts across the country and around the world, we believe the enthusiasm for our product by both retailers and consumers will remain strong, and are looking forward to the second half of 2011.

Again, we remain committed to the fitness market, and we are confident we will remain the dominant differentiated brand in the space with the best product at assorted prices, and generate strong sales and margins.

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

Thank you, sir.

We will now begin the question and answer session.

(Operator Instructions).

Our first question comes from the line of Scott Krasik with BB&T Capital Markets.

Please go ahead.

Hey, David, how are you?

Hey, Scott, pretty good.

Good.

I guess two questions.

First one's on sales, and the second one is on G&A.

The sales came in a lot better than what we were thinking.

To what extent, particularly the 66% increase in the distributor business, it's sort of one-time in nature or channel-fill, and then they work that down.

How do you feel about the sales growth going forward?

It's certainly a lot better than what you laid out on the fourth quarter call.

And then in terms of expenses, you had spoken about a $10 to $15 million increase in G&A on the last quarter call.

It obviously was worse than that.

What controls have you put in place?

When do we start to see that come down?

And how do you feel about that going forward?

Okay.

As far as international is concerned, I think it's the growing area.

While this was outrageously quite a bit higher than we had anticipated, I think we continue to grow, it's not all channel-filling.

It's obviously growth in places in southeast Asia, China continues to grow, Korea continues to grow, Hong Kong continues to grow.

We had obviously very good growth where our business has already been established in western Europe.

So it was pretty much across the board.

There probably was a catch-up as far as distributors are concerned, and I would expect that to moderate as we get into the back half of the year.

So I think it's fair to say, while this is a big push, I think we continue to grow at international, albeit at lower levels since we did start to grow there at the back half of last year, and it would be a nice, solid double digit growth as we go through this year.

As far as expenses are concerned, the G&A expense, not counting selling, was up about 15%.

And we said 10% to 15%, so I think in real dollars it went from actually $122 to $142 million.

And obviously that has to do with a number of issues.

One is the amount of inventory, that's the first piece.

As it comes down onto control and as we move into our new distribution facilities, that will certainly moderate and we'll get a much cleaner running rate, and I think actually we'll be -- it will be as (inaudible) as we had planned, maybe even more so.

We are picking up probably on some more expenses in completing the distribution center, we have people on-site, we're doing testing, we have to pick up some of those people as they roam through to set up the equipment.

So, there's a little bit of those expenses are starting to come into play, all of which moderate.

The other piece is that international was so strong certainly more in our subsidiaries and our joint venture partners.

So, it's a two-fold thing.

We had, obviously, a currency benefit which benefited the sales and some of the margins in those international where we have functional currencies in those countries, but obviously we have to pick up that increase as expenses as well.

So you see some of that increase both in southeast Asia, which is growth and some currency, and in Europe, where it's strictly currency running our distribution centers and payments.

We're probably slightly positive as far as overhead is concerned, certainly from the G&A perspective.

As far as getting control, we're looking at it now.

We think a big piece is moving into the automation and the piece for the distribution center.

Obviously, the stores will continue to pick up expenses as we pick up new stores, but we think -- and our overhead outside of that, especially as far as advertising, while we had said that we would continue to advertise at a very healthy clip, both for first and second quarter, and that was to help loosen inventory which is older and keep -- move as much as we could through very strong periods of ours for selling, which would be through Easter and Mother's Day.

It's fair to say we're looking at the back half of the year to see exactly where we are and what new product is being picked up and where we stand before we make any commitments on advertising there.

So, we're looking at the whole package from the selling and the G&A, and expect to start putting things into place as we get into third quarter and go towards the back half of the year.

Did the G&A surprise you this quarter?

Being up $20 million?

No, not once we got started and we saw the impact of the distribution center and the impact of the currencies.

And also some impact on some one-time items we had as far as outside services that we mentioned in --

So given -- the comments, right.

So given that my estimates assume a fairly significant dollar decrease in G&A in the back half of the year, other than the DC, is there some reason to think that's going to happen?

Or is that overly aggressive?

I think the DC would be the biggest piece.

Advertising would probably be the second-biggest piece.

The rest would depend on international growth.

I mean, we're really moving in international as far as southeast Asia.

To the extent they grow, they obviously will pick up additional overhead in real dollar terms.

I do think we start to leverage it more in the back half of the year.

But there is, as we said in the past, there will be a drag in the back half for the distribution center because we'll start to pay rent on a new one.

And while we've accelerated our moving out of some of the older ones and expect to be fully out of all redundant distribution centers by the end of the year, there will be certain amounts of double rent as we get into the back end of Q3 and Q4.

Okay.

I'll hop back in the queue.

Thanks, David.

Thank you.

Our next question comes from the line of Claire Gallacher with CapStone Investments.

Please go ahead.

Hi, David.

Hey, Claire.

I just wanted to get a sense of where you feel you are with the toner inventory, the aged inventory that you want to move through.

Do you feel like half of it got done in the first quarter and the other half is to come, or is that maybe too aggressive as it stands?

Well, I think half is too aggressive, so there's more to come.

What we actually did was slow down the amount we were moving of our own as far as the old toning inventory, the overhang is concerned, because we wanted to protect our customers and retailers.

And that put an excessive amount into the marketplace that would impact their pricing and sell-through since we are looking to protect some shelf space and get to the back half of the year with new product that they're all seeing now and enjoying.

So, once we get through Mother's Day, which is the end of the strong period, we'll re-evaluate and then decide then how quickly or how aggressively we'll move through the balance of the inventory.

But it is coming in line.

As we said, our commitments to production, our commitment for what's coming in overall, which includes the overhang, and our commitment to extra inventory, or fill-in inventory we had in the past, is all coming down.

So we'd expect, by the time we get to Q3 and Q4, to show some significant decrease in inventory that we house here, and certainly the amount that's coming in, and could be even greater if we decide to become even more aggressive on the overhang.

Okay.

So it's fair to assume that the extra inventory likely could go into the third quarter?

That's pretty fair.

Okay.

My second question has to do with domestic distribution for back-to-school and holiday and whatnot.

Are there any meaningful changes this year, adding doors, losing doors, losing shelf space, whatnot?

Are we going to see any kind of change there?

It's hard to say now.

We're booking for back-to-school.

I think as far as customer base is concerned, certainly on a domestic level, we've always been in the same account as far as shelf space is concerned.

I think it's fair to say that we're still looking to see how much shelf space and toning converts to our core product and some of the new fitness product that we're bringing in, so I think it's kind of early to say.

But our core customers and our big customers remain our big customers.

So, the basic distribution framework will remain the same.

Okay.

Last question.

Your domestic comps were down in the first quarter.

Do you expect that kind of same decline going through the second quarter?

Sure.

I mean second quarter was the strongest for us on a comp store basis, so we still will see some declines in Q2.

Some of that is pricing and some of that is, to a lesser amount, units because of the difference in toning product from year-over-year.

And as we get into end of July, August, the comps become obviously easier, and it's a difference, and we expect them to be much stronger in the back half of the year.

Okay, great.

Thanks so much, David.

Thank you.

Our next question comes from the line of Chris Svezia with Susquehanna Financial Group.

Please go ahead

Hey, David.

Hey, Chris, how are you?

I'm pretty good.

So, let's talk backlogs for a second.

Could you just maybe talk about US?

You said international was up, I know you don't want to quantify specifically, but what's US versus international at this point?

Well, US is down year-over-year, needless to say.

but that would be anticipated.

If you take into account how overbooked we were last year, and what led to significant cancellations in this inventory overhang, you would anticipate that backlog's on a current period would certainly be down.

They're not down as dramatically as one might think, but if you take into account the cancellations and what we had to bill for the second half of the year, we're pretty comfortable with where they are.

When you think about backlog Q2 versus Q3 in the US, is it showing improvement in the third quarter?

What's the trajectory look like on that backlog?

You mean what we have to ship in the third quarter?

Right.

In other words, you probably already have some stuff prepared for back-to-school, some orders on hand.

I'm just trying to get a sense, is it starting to show improvement?

I'm sure in second quarter it just looks worse than third quarter?

All the indications are more positive as we go into third quarter, and we're just showing some of that stuff now, that inventory now, new looks.

And we are starting to deliver some new product now, so we're at the very early stages.

But certainly we feel much better about going into the back half of the year than we feel about Q2.

Did you tell me, by any chance, what the US wholesale gross margin rate was in the quarter?

Do you have that handy?

No, but it was down significantly from last -- that was obviously the biggest hit.

Was the US business wholesale, was that profitable in the quarter, or was all the profitability in the international side?

The biggest piece of profitability was on the international side.

How profitable domestic versus international is, is obviously very dependent on how you allocate some common costs.

But for the most part, given the transfer pricing and everything, most of the profitability resided outside of the United States.

How do we think about gross margin as we -- obviously second quarter -- what's the likelihood that you guys, just given the trajectory of expenses and inventory, store openings, marketing plans, and kind of where the gross margin could end up.

Obviously it would be difficult for you guys to be profitable during that quarter.

Is that a fair statement?

I think that's a fair statement.

I think we certainly have a possibility of showing a small loss or some loss in the second quarter.

It depends how aggressive we get with inventory.

Okay.

And just on the inventory itself, if it drags into this third quarter, at what point in time do you guys make a decision to get more aggressive?

Is that equate to a possibility of a write-down of inventory?

What's still that thought process on the inventory at this point?

Well, it's still early in the game and it depends how it moves.

We have been getting some orders at the lower pricing for what's moving through retail right now from some of our existing customers as well.

So, it's too early to give you a definitive answer of where it goes from here.

We watch it from day to day.

As it cleans itself down, it doesn't have to go to zero in order to have a negative -- or a minor impact on the overall.

Depending on how good this product is and how strong we are from a new product perspective around the world, we'll have the capacity to move some of this stuff in bigger quantities, even if it's -- even at small profits, and won't impact profitability significantly depending on how the rest moves.

And we've seen this with us before as it moves through.

So that our only question is, how much?

Once we get through the significant piece of the overhang, the rest won't be a significant drag.

We're too big a company with too much capacity to make money and increase our margins, especially through our own retail and through international, that it won't remain a significant drag as it gets to the back half of the year if we can move significant pieces.

It doesn't have to go to zero.

Right.

But I guess what I'm saying is of that inventory piece that you have right now and what you want to move, obviously you can't get it all done in second quarter.

And I'm assuming there's really no change on some of that business that you want to get rid of, that sort of older inventory.

It's moving, but maybe not moving as aggressively.

As you get into that third quarter, maybe make that decision to get more aggressively -- get aggressive, it could have a material impact on the gross margin.

I guess that's what I'm trying to get at.

I mean anything is possible.

I tend to doubt it.

There's no real financial reason for us to take a significantly aggressive --.

If we find this to be a very basic shoe that we can carry for a period of time, we will certainly do so.

And get the last pieces of it out over a period of time.

And while it could have an impact on gross margins, given the balance of the business could be of so large, that it would just create higher volumes, and the gross margin dollars would be sufficient to generate significant operating income.

So, it all depends whether it's a marginal sale or if that's just the biggest piece of what we sell on the third quarter.

And right now it looks like our new product is taking hold, so it's way too early to go through that analysis.

Okay.

All right.

Well, thanks.

I'll jump back in the queue.

Appreciate it.

Thank you.

Our next question comes from the line of Sam Poser with Sterne, Agee.

Please go ahead.

Good afternoon, David.

Hey, Sam.

Hey.

On the last call, you gave us some color as to what you expected the gross margins to be for the following quarters.

You basically said (inaudible) in the back half for the year, and I think it was like 40% to 42% in the front half.

So first quarter coming in at just over 40%.

Can we assume that Q2 is going to go down just as you get somewhat more aggressive given the inventory levels?

And, some of that might bleed into Q3 in the fact that it's going to be up from Q2, but maybe not up at that 42% to 43% run rate?

Boy, that's a lot of ifs and I don't know that I have all those answers yet.

I think it's fair to say that second quarter is the more difficult of the two.

How much moves in Q2 and how much new product moves in Q2 and how strong June actually is, because we will be delivering a lot of new product, and how strong it is for our stores and how strong it is for international, are all questions that have to be taken into account before we make a final commitment on our margins throughout the back half of the year.

So, we're still comfortable with that 40% margin so far.

I mean, it's early in Q2, and it's too early to tell, and way too early to make an evaluation of how quickly they come back from 42% or 43%, although it's very, very possible.

It happened very quickly in the back half of this year.

Okay.

And then when we're thinking about the selling costs, the marketing and so on, when we're thinking about that on a year-over-year basis as it's lining up right now, if I was to say to you today, I'm asking you today, what do you -- do you think that -- what degree do you think your selling cost will be up or down on the year-over-year basis for the full year?

In real dollar terms?

In real dollar terms.

I think as we sit here today, it's probably better than 50-50 that they will be down in a real dollar base for the full year.

But a lot of that has to do with the back half of the year, so it's too early for us to make any real commitments as to the order of magnitude.

I was talking about the second quarter, where we're in the middle of it right now and you've been marketing pretty aggressively.

What would you say in Q2?

Well, we had said at the beginning of the year, or at the end of -- when we did the year end conference call, that the first two quarters would be equivalent on a dollar basis for our media buy.

So, chances are there will be equivalent in real dollar terms for the selling line.

So, it was a little bit higher in Q -- you don't expect it to be higher again the way it was in Q1, but you would expect it to in line.

And then lastly, in your assumptions, given the tax rate that you said for the full year, it sounds like that you're planning basically continued weak US business for the full year given the tax rate.

Would that be a fair statement?

Well, I don't know if it makes a statement for the whole year.

It's certainly the first two quarters are difficult in the US in how much additional income you can make at the back half of the year to offset.

Remember, the tax year is the calendar year, and it doesn't take growth rates into account.

We still think the biggest part of our earnings this year will be overseas, and, to a lesser extent, in the States, mainly because of the drag in the first half.

So, they're only guesstimates right now for an initial tax rate, and they obviously could change dramatically as we go through the back half of the year.

As we develop new product and we put new product into the marketplace, we always have the potential of having significant new product that checks very well with our consumers and at retail.

So, it's way too early - we're just bringing some of the newer stuff to market - to make any real evaluation of how strong the second half could be.

Okay.

And then I just want one last -- overall retail sales grew at what percent?

I think we were relatively flat, is what we said.

We were down 1% or 2% in the US, and up internationally.

So, basically, I think we were up 2% or 3% overall, down 2% or 3% in the US.

So up slightly, just up low singles?

Yeah, I think we were up 3% or 4% we said, something like that.

And then domestic wholesale, what was -- how did that run for the quarter?

We said it was down 22% or 23%.

Okay.

And when you look at that rate, was the -- in the US, was the outside of toning being down, how did the core perform, if you could break the two out?

Without getting too carried away in analytics, I think it's fair to say that the business was not down as much as toning was down.

So the core was still down, but not as much as toning.

No.

I said the core -- the business in its entirety, the 23%, was less than what it would have been represented by toning the prior year.

So our core business was up, and the decrease in toning was more than the decrease in both percentage and real dollar terms of the whole wholesale business in general.

Got that?

Yeah, I got that.

And then lastly, given -- I mean, you have -- you've got $176 million more inventory than you did a year ago.

Inventory's virtually doubled.

If you were to break that -- if you were to break the increase in buckets, what are the -- I mean, how do the buckets break out?

How do the buckets break down.

I don't know what kind of level of detail you would anticipate, if you just want toning, non-toning.

We said the biggest piece of the overhang was and remains the toning product.

So I think it's fair to say we were under-inventoried last year, we have significant growth, which was part of the inventory we spoke about at the end of last year because we support additional 25 to 30 stores.

We support a bigger business in our subsidiaries and our joint ventures.

So, the overhang remains the existing -- the toning that was in the United States, and, as I've said, we've cut our production levels significantly.

Some of this is timing of when it reaches and when we take account for it, because we account for it as soon as it gets on the water.

And obviously things could have been made a lot quicker now because we're making significantly less product.

We're very -- we're okay and comfortable with where we are.

We understand it.

We're not compounding the problem.

And we'll continue to close it and watch it on a regular basis.

But, we put it in buckets, either it's sold or it's not sold.

All right.

And I am sorry, I have one more, and then everybody is going to get mad at me.

Back to Scott's question on the G&A.

Are we looking at another $15 to $20 million increase this particular quarter, do you think?

Hard to tell, don't know.

I think if you look at it, we had a significantly higher build-up of G&A from Q2 2009 to Canadian Q2 2010 than we did in first quarter, so some of that might have been already absorbed as we grow, although we have the stores.

But, it's still too early for me to tell.

Again, if you were --

But I think it's going to be somewhat less.

Less in absolute dollars, or less of an increase?

No, less of an increase.

I mean absolute dollars is absolute dollars.

We haven't taken out any significant pieces, and we have the bigger distribution center and the overseas operation.

So, they don't change.

So Q2 could look like Q1 in absolute dollars as a place to start?

As far as G&A is concerned, taking out the selling line, that's probably correct.

Okay.

Thank you.

Good luck.

Thanks.

Thank you, and we have time for one final question.

And our final question comes from the line of Camilo Lyon with Wedbush Securities.

Hey, David, how are you?

I am good, thanks.

I just wanted to get a little bit more granularity, if I could, on the inventory position and, obviously, the toning component of that.

It seems that your retail partners are clear or getting to a position where they're comfortable with the amount of product that they have.

So, that would then imply that a lot of the inventory really remains at your stores and obviously on your balance sheet, correct?

Fair assessment there?

I would hope so.

All right.

Where are you able to, now that you've gotten the first quarter out of the way, where are you able to redirect that inventory?

Are you having more success internationally clearing that product, that excess toning product, than you are in the States?

Well, I think it's fair to say to date we've been more aggressive internationally than we've been domestically.

There are certainly avenues available to us, and there's still a demand for some of that product internationally that we fulfill out of our warehouse.

It's not quite the same everywhere in the world, and we still have pockets in the world that are still interested in the first season, unfortunately not big enough to clear the entire piece.

So, I think it's fair to say, to date it's been fairly equivalent off-shore/on-shore.

We're still evaluating to see where is the best place to move significant quantities as we get into the back end of Q2 and into Q3.

And then it sounded by some earlier answers that you gave, some questions, that you're extending the period of the timing of expectation of when you think you'll be clear on the inventory, is that correct?

Well, for us it's very fluid and it changes from day-to-day.

But yeah, I think we had always said end of second into third quarter, I think it's very solidly into the third quarter before any big significant moves are completed.

So, certainly by the time they're shipped.

So I guess that's correct.

Okay.

And then, I guess I'm just trying to reconcile how that might impact your domestic gross margins in the back half.

If that's still inventory that you're clearing through in the third quarter, that's clearly going to have some pressure at least on your retail stores, I would assume.

So, how do you think about that going into the back half of the year?

Well, it's a two-fold thing and I think we started to speak about it before.

First of all, I'm not sure about the overall impact as far as retail is concerned because price had already started to break last year at retail, and I'm not sure the overwhelmingly largest piece of this is going to go through retail.

And we could have new product that has higher margins and retail could show actually margin improvement year-over-year for such a thing.

And depending on how big the wholesale business is and how strong this new product is, to close that inventory obviously has a lesser impact to a much larger denominator as far as how big it is and how strong those margins are going in.

What we knew is we feel would be very clear with our retail partners this week going into the back half of the year, we will have our new product there and that will be stand alone.

There will be no givebacks, it will be a very pure margin again.

The question is, what percentage of the closeouts or the overhang will be, again, how strong that business could be, and it's just way too early to tell.

If the new business is very strong, as strong as we've seen in the past, and we just have marginal sales of closeout inventory, no matter how really how big they are, while it may impact the margin percentage, it may not impact the margin dollars so significantly.

And while there's certainly overhead to move each piece, it certainly flows down to a better operating margin line the more full-price product you have on top of this.

So, it's way too early for me to give you, from my own perspective, the potential impact.

Okay.

And then I guess the final question, or final two questions, I have is, or are, how has the velocity of the sell-through of the excess product either changed or accelerated with the price, right?

So, how much more units -- how many more units are you really selling through with each incremental markdown?

You know, I think it depends as much about time of year and amount of product in the marketplace and competitive product in the marketplace as it does to unilateral markdown.

But, I think it's fair to say we're in a stronger season now.

We've seen sell-throughs pick up, both in our own stores and I think outside our own stores, as we got into what we anticipated would be a stronger season through Easter and going into Mother's Day.

And we're still in a period now that's stronger than it certainly was at the end of the year.

So, they picked up, it's not all about unilateral pricing.

It has to do with relative pricing, I believe, in the marketplace and how much inventory is out there.

But, it's safe to say at this time it has accelerated over the last few weeks.

So that would imply that the pricing should remain relatively steady through this kind of warmer period, this walking season, if you will?

At least we're not putting any pressure on pricing between now and certainly not Mother's Day, and as we get into this walking season and then we'll see what happens.

I think we've said that before.

Okay.

So really then the margin pressures, if there were to be more -- further margin pressures, would happen, call it Q3.

The back end of Q2.

Okay.

Great.

Thanks a lot, and good luck, Dave.

Thank you.

Thank you.

And at this time I would like to turn the conference back to Skechers for any closing remarks at this time.

Thank you again for joining us today on the call.

We would just 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 protected in such statements.

These risk factors are detailed in Skechers filings with the SCC.

Again, thank you, and have a great day.