Skechers USA Inc (SKX) 2011 Q2 法說會逐字稿

Welcome to the Skechers USA, Inc.

second quarter 2011 earnings conference call.

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

Following the presentation, the conference will be open for questions.

(Operator Instructions).

Today's conference is being recorded, July 27, 2011.

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

Please go ahead.

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 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 applied 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 a 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' second quarter 2011 results.

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

Net sales were $434.4 million for the second quarter and operating loss was $48.4 million.

Net loss for the second quarter was $29.9 million and diluted loss per share was $0.62.

For the six months, net sales were $910.6 million and operating loss was $33.6 million.

Net loss for the six months was $18.1 million and diluted loss per share was $0.38.

Our second quarter 2011 sales decreased by 14% over the same period last year due to the difficult comparison against a record second quarter 2010, which primarily benefited from strong toning sales at high ASPs.

During the second quarter, we also aggressively reduced our excess toning inventory by selling two million pairs of our original Shape-Ups for a loss of $21 million.

We recorded an additional $4.4 million reserve for our remaining toning product.

The impact of these two transactions was a loss of $0.31 per diluted share and a reduction in margins from what would have been 41.5% to 33% for the quarter.

We believe the clearing of the excess original toning inventory will better position us for the future as we deliver new product over the coming quarters.

In an effort to better serve our accounts in the second quarter, we reorganized our domestic sales force and created a Skechers Fitness Team and a team to handle our lifestyle and core products.

Second 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, double-digit sales growth in our kids division, launching of our new lightweight running and walking footwear, and extremely strong balance sheet with $250.8 million in cash, or $5.19 per share.

Overall, we believe we are well-positioned in terms of product design, marketing, and distribution as we continue to introduce new footwear.

A year ago in the second quarter, domestic wholesale business was exceptionally strong due to higher ASPs, as well as the growing surge in the toning market.

This tough comparison, as well as the clearing of inventory, resulted in a decrease of 32% in our domestic wholesale business over the same period last year.

Along with clearing our inventory, our focus in the second quarter was on delivering new lifestyle and performance product in the market and building on the strength of our core lines with fresh looks.

We experienced double-digit growth in our kids footwear, growth in several fitness lines, and solid sales in several our of the core lines.

In the second quarter, we developed several new television campaigns, including two commercials for our new lightweight toning and running product starring "Dancing with the Stars" host Brooke Burke, as well as a new Kim Kardashian and Kris Jenner commercial.

These commercials will support our fall and holiday business.

We also have print advertisements with these celebrities in our new products that appear in targeted magazines, outdoor billboards, and in airport security bins further leveraging the power of these celebrities.

We are excited about our recent signing of upcoming football star Danny Woodhead to represent Skechers.

As an underdog in his field, we believe the new England Patriots' running back is an ideal choice to represent our new performance running and training footwear.

We also developed several new kids lines, including Belle Ballerina, which launched in our retail stores in the second quarter.

With solid sales in this line and several of our other existing kids lines, we believe these shoes will sell well during our back to school season.

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

We remain committed to both our retail partners and the fitness market.

We believe the restructuring of our sales force to create a Skechers Fitness Team and a team to handle our lifestyle and core product will better serve our accounts and reflect our revolving product offering.

We have received positive feedback from key accounts that were in our offices this month reviewing new product that will launch later this year and early next year.

Turning to our international business, we achieved record second quarter and six-month international revenues with sales of more than $105 million for the second quarter and approximately $275 million for the first six months.

Our international wholesale business grew year-over-year by 35% in the second quarter.

The growth was the result of significant quarterly improvements in both our international subsidiary and joint venture businesses, which were up 23%, and within our international distributors, which were up 67%.

This growth was attributable to a strong mix of our toning performance, casuals, 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.

As we mentioned on the first quarter conference call, we are particularly pleased with our growth in Italy, which improved again by triple digits for the quarter due to the broad acceptance of our toning and fitness product in that market.

Three of our ten subsidiaries did not show improvements in the quarter, however, two of these grew for the six-month period.

Canada was slightly down for the six-month period, which we believe is part the result of the slowing of toning sales in North America.

Our joint ventures in Asia continue to improve with growth across all of our regions, China, Hong Kong, Singapore, and Malaysia.

We believe that our recent efforts to build our presence through advertising and expand our retail footprint with 51 retail stores and approximately 400 shop-in-shops is positively impacting our business.

In the quarter, our joint ventures opened three Skechers retail stores, one concept store in Indonesia and two outlet stores in China.

A key factor for the growth of our distributor business is the opening of Skechers retail stores in regions where they sell our footwear.

These stores serve as marketing vehicles and help to build the brand and brand awareness.

At quarter end, there were 164 distributor-owned or licensed Skechers retail stores around the world; 19 distributor stores opened in the second quarter, one each in Australia, Estonia, Japan, South Africa, and our first store in Greece.

Our distributors in Taiwan and the Philippines each opened two stores, and our distributor in Mexico opened three new stores in the quarter, bringing to eight stores in their first year of operation.

Our distributor in South Korea opened six stores, bringing their total number of Skechers stores to 36 with another 14 planned by year-end.

No distributor operated stores closed in the quarter.

Marketing is also fundamental to the growth of our international subsidiaries, distributors, and joint venture partners, and most of the regions utilized the proven marketing campaigns we have created domestically, translating them into their local languages.

Some countries also use local celebrities to create regional campaigns.

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

We are are pleased with our record international sales, which represented 28% of our total business.

We believe there are continued opportunities for growth in many markets given the right product, marketing, distribution, and management.

We believe that we will continue to see growth in our international businesses through the second half of 2011 based on our strong sales across our subsidiary, joint venture, and distributor businesses.

In our Company-owned retail business, domestic sales were flat and our international retail sales increased approximately 42% for a combined 4% increase for the second quarter.

In the second quarter we had a negative domestic comp store sales of 10.2% and positive international comp store sales of 0.3%.

At quarter end, we had 305 Company-owned Skechers retail stores.

In the second quarter, we opened 16 domestic stores, including our first stores in Kentucky and Iowa and two Skechers fitness stores, one in the Las Vegas Forum Shops and one in San Diego, bringing our total number of Skechers fitness stores to five.

We closed two domestic retail stores during the quarter.

In the quarter, we also expanded our landmark Manhattan Beach store by a 1,000 square feet, creating adjoining Skechers fitness and lifestyle stores that allow consumers to shop a complete Skechers offering for men, women, and kids.

This month, we've opened a concept store in Wisconsin, and later this week we will open our sixth Skechers fitness store, which will be in a Chicago suburb.

We plan to open another 15 stores this year, including stores in Chile and England.

Before we move onto our financial review, I would 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 awareness with new categories.

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

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

We recently signed a licensing deal for men's and women's Skechers fitness apparel and accessories with leading manufacturer Li & Fung, which will come to the market in 2012, and we are working on additional licensing opportunities.

Turning to our second quarter 2011 numbers in more detail.

As I mentioned earlier, second quarter sales were $434.4 million compared to $504.9 million in the second quarter of 2010, a 14% decrease from the prior year due to the difficult comparison against a record second quarter 2010.

Second quarter gross profit was $143.3 million, or 33% of sales, compared to last year's gross profit of $237.6 million, or 47.1% of sales.

The decrease in gross profit during the quarter was due to a combination of the clearing of excess toning inventory and the overall slower sell-throughs at full price compared with the same period a year ago.

Second quarter selling expenses were $53.1 million, or 12.2% of sales, compared to $52.4 million, or 10.4% of sales, in the prior year.

The higher selling expenses for the quarter were primarily the result of continued marketing and advertising expenses that were committed to months ago.

We expect to lower marketing expenditures in the back half of the year.

For the second quarter, general and administrative expenses were $140 million, or 32.2% of sales, compared to $127.3 million, or 25.2% 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 of 43 stores, increased warehouse and distribution costs, and R&D expenses for some of our key new product initiatives.

Total operating expenses for the second quarter were $193.1 million, or 44.4% of sales, compared to $179.7 million, or 35.6% of sales in the second quarter of 2010.

During the second quarter of 2011, we saw a loss from operations of $48.4 million, compared with income from operations of $58.8 million a year ago.

Net loss was $29.9 million, compared to net income of $40.2 million last year.

Net loss per diluted share in the second quarter of 2011 was $0.62 on approximately $48.3 million average shares outstanding, compared to net income per diluted share of $0.82 on approximately $49.1 million average shares outstanding in the prior year.

We reported an income tax benefit of $20.8 million during the second quarter of 2011, as compared to income tax expense of $20.4 million during the same period last year.

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

At June 30, 2011, we had $250.8 million in cash, or approximately $5.19 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 $276 million and our DSOs at the end of June 30, 2011, were 54 days versus 48 days in the prior year.

Total inventory, including merchandise in transit, at June 30, 2011, was $325.8 million, representing a decrease of $72.8 million from December 31, 2010.

We will continue to aggressively manage our inventory over the coming quarters and expect to see further reductions in the back half of 2011.

Long-term debt at June 30, 2011, was $81.1 million, compared to $14.5 million for the same period last year.

The increase in long-term debt primarily relates to the financing, which we completed in the second quarter, for our Rancho Belago facility equipment.

Shareholders equity was $946.9 million versus $945.8 million at December 31, 2010.

Book value or shareholders equity per share stood at approximately $19.59 as of June 30, 2011.

Working capital was $624.3 million versus $666.1 million in the prior year period.

Capital expenditures for the second quarter were approximately $49.5 million, of which $7.5 million consisted of 16 new store openings and several store remodels, $12 million for our new domestic distribution center, and $26 million for our domestic distribution equipment.

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

Also impacting our margins in the second quarter was the aggressive reduction of our excess toning inventory by selling two million pairs of our original Shape-Ups for a loss of $21 million.

We recorded an additional $4.4 million reserve for our remaining toning product, which we believe reflects net realizable value.

We feel this was a big step in reaching our goals for the year, which include right sizing our inventory, bringing new product to the market, and getting our overhead in line with anticipated 2012 sales.

Recently, we have leveraged our experience in learning in a toning category to develop a new footwear in both our core lifestyle lines and rapidly evolving performance division.

This product was delivered to our own Skechers retail stores in the second quarter.

The initial sell-throughs have been strong, and we believe will accelerate as the marketing begins for back to school.

We are now delivering these lines to our wholesale accounts across the country, as well as to our international subsidiaries and distributors, and believe that they will sell well based on early feedback.

We are also pleased with the reception of our Holiday 2011 and Spring 2012 product offerings for men, women, and kids in pre-line reviews throughout this month.

As we manage our expense structure and inventory to be in line with expected 2012 sales, we believe we are on strong financial footing -- $258.8 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.

We expect the tough comparisons to continue in the third quarter given the record quarterly revenues above $550 million last year.

We have a healthy backlog in international and we are planning to open approximately 15 Company-owned Skechers stores this year.

With the clearing of excess inventory, delivering fresh product this year in accounts across the country and around the world, and managing our expenses, we believe we are well-positioned for the future.

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

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.

Hi, Scott.

So a couple questions.

I guess first, on the Shape-Ups that you did sell, the loss of $21 million, where does that leave you then on the Shape-Ups that are left?

We have less than half of what we started with, but we think we kept ourselves the core product.

We've kept some Work, that sells well, and some basic product that we think sells through our retail stores and through some of our international.

We have kept a limited number of SKUs.

So we felt the $4.4 million puts us in pretty good shape.

I would tell you, the inventory's probably in the $40 million or less range right now.

And because of the nature of the styles, the impact on what you can sell them for is less?

That's why it is only $4.4 million?

Correct.

What we did was we sold to the very -- a very strong approach to moving inventory through channels we wouldn't normally.

We think they're going to make money on selling these shoes and the balance, we plan on selling through our own channels, a distribution at this point in time, so there is a big difference.

And these shoes, we think are more basic shoes that we could sell through our own retail division for quite some time.

So is there a big difference between your quarter end balance sheet and where you stand today, or it is just down a little bit?

Well, it's only been three weeks, so it hasn't changed significantly.

You guys can move a lot of shoes in three weeks.

Not through our own retail operations; we're getting for back to school, but we are moving more through there.

Okay, but the nature of wholesale jobbing or discounting, that period of it is done?

So far, yes.

So that's good.

And then on the expenses, I know you didn't guide people towards any cost-cutting for this quarter, but as we look out now and you guys have a little better visibility on fall sales, how do you see the operating expenses shaping up?

No pun intended.

As we stand right now, we are reviewing it, and as I said in my comments, we will be spending somewhat less in marketing, certainly in the production end of it.

We've already finished our commercials and making the animated portion of our commercials, and our media spend will be down for Q3, as well.

As far as the G&A expenses, we have started to attack those.

We plan to be in line by year-end.

They take a little longer to do.

We have some mitigating factors there in that we will start having duplicative costs for the distribution center as we get to the end of this quarter.

And right now, we have training exercises going on, so we have excess personnel out in the distribution centers, as well.

So while you might see some improvement in the real dollar amount, I wouldn't expect to see those until Q3 -- I mean Q4 or early Q1.

In terms of scope or magnet, I mean what's on the potential chopping -- I mean, do you think you could get your G&A dollars below the 2010 level?

Well, I think the goal originally is certainly to get them below 2010 levels.

Our G&A line was increased by $100 million in 2010.

And if you look at those places that are growing, obviously we can't decrease the expenses for the new retail stores nor would we curtail the growth of our operations in southeast Asia, but all the growth aside from those two very distinct pieces are certainly under review to get them back into line with 2010 and before.

And just lastly, aside from any unforeseen write-downs on Shape-Ups that you don't know about right now, a lot of other moving parts in gross margin, but is there anything higher costs, certainly, higher wage rates, all of that, is there anything structurally that makes you think you won't be able to get 41%, 42% gross margins in the back half of this year?

No, I think we should be pretty consistent, even though Q2 was probably our toughest comparison, and we had probably, for what will be the balance of the year, a smaller percentage of new styles that will come out with full margins.

We still would have been at 41.5% without the one sale, so I think structurally, we still anticipate being there.

Okay, excellent.

Thanks very much, David.

Thank you.

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

Please go ahead.

Hi, David.

Hi, Claire.

Just wanted to touch base for a minute on what you are seeing here.

It's early for back to school, but I believe last time we talked, we talked about the shelf space converting, the toning shelf space that you used to have, now converting to the core product and the new fitness product, so if you could maybe give us an update on how that is going and what you are seeing and if you are maintaining shelf space or maybe if you lost some, just an update would be great.

I think it is early to give you the overall on the core.

On the core, we seem to be fairly stable.

There are some switches between men's and women's, and certainly kids has maintained their presence, and obviously everybody is just seeing the new fitness for the first time, so I wouldn't tell you that we've kept all of our shelf space from what was toning last year.

That certainly would have been a high piece.

What I can tell you is some of the new product we're testing in our own stores for the fitness and for kids, certainly Bella Ballerina and some of the new fitness and lightweight running are testing very, very well in our stores.

We believe they are testing well in a few places where we've delivered them to third-parties, although it's early in the game, and we anticipate they'll pick up through back to school.

And from everything I can tell and all the feedback I've gotten from the customers that were in for pre-line, they at least are very impressed with the new offerings we have and there's a significant amount of them.

So I assume you guys will do your channel checks as we get finished with this conference call and see how they feel about it and then see how they test through back to school and early holiday, and we think everybody will be impressed with it.

Great.

On the kids business, it seems like that's definitely core of the quarters.

You know, obviously, of the Belle Ballerina product, which I've heard really good things about, by the way, but have you changed any distribution there?

Are you adding accounts?

How's it doing internationally?

Could you just maybe walk through what is working for you there?

I think it's the same as always.

We have some new (inaudible) products.

Our kids got great reviews at the new pre-line.

We have new and lighters, and lighter-looking shoes.

I don't think anything structurally has changed.

There is just new product within the places we're strongest.

And I don't think we have changed distribution significantly as far as kids sales are concerned, both in the United States and around the world.

We seem to be picking up momentum.

We have had some great product over the last years that have brought new customers in, and this new product is now keeping them, and it even has potential growth written all over it.

Okay, great.

And quickly on backlog, I think I missed your comment.

Did you say that backlog was up internationally and down domestic, or if you could maybe fill us in there?

Yeah, I think backlogs are now very difficult to compare to last year, so we are a little low to try to get them out.

If you -- they're obviously down from last year, but there are two major circumstances that have to be in and they're very difficult to quantify.

One is that this time last year, our production cycles were out to about five or six months and our backlogs because we were so hot, reflected production schedules out five and six months.

Additionally, this year our production cycles are back to 60 to 90 days, so that will reflect that, as well.

On top of that, you have to go back, and I'm sure it's no surprise, we had major cancellations through the back half of the year.

So if you take out the production cycles and the cancellations, I would say that we're in pretty good shape and think that as this new product starts to sell, we'll continue to improve as we get to the back half of the year.

But your backlog internationally, you did mention that that was up, correct?

Yeah.

That's been up going through the second quarter, but that too is starting to come back because we were only asking them to go out 90 days rather than six months.

Got it.

Okay, great.

Thanks, David.

Thank you.

Our next question comes from the line of Faye Landes with Consumer Edge Research.

Please go ahead.

Hi.

Can you just give us some insight into what the inventory increases year-over-year are likely to look like at the end of Q3 and Q4 and then going into next year?

It is difficult to talk about the timing.

I would anticipate by the time we get to Q4, barring any big changes in production cycle, they will be significantly lower than they were last year at the end of the year, probably somewhat higher than they were in 2009 simply for structural increases in southeast Asia and a bigger retail base and bigger growth in some subsidiaries around the world.

But I think it's fair to say that our domestic inventory will be down year-over-year as we get to the end of this year.

So it will be a negative number on a year-over-year basis?

As it looks right now, yeah.

Okay.

And can you just elaborate a little on what is -- a little bit more on the production issues that you referred to?

There weren't issues --

Changes -- none of the changes -- I'm sorry, the changes in the way the production works.

Oh, because we got so hot last year, we were making shoes, we were making new kinds of shoes that took all our production cycle out six months, and normally, we've been into a 60 or 90-day production cycle to make new stuff, which we're more into now.

We've increased capacity and obviously our volume has come back, so production is more in line with the demand.

I think it's important to note when you compare inventory year-over-year as we go through, from December to second quarter, the inventory is about $70 million, and if you go back historically, you'll see that the end of Q2 is historically a growth piece of inventory because we're going to the strongest part of our year, which is back to school, which we deliver at the end of June and obviously July and early August.

So if you take into account it's historically a growth time and that we've inventoried $70 million, you get an idea of which way the -- the order of magnitude on the decrease in the inventory.

Okay, thanks a lot.

Thank you.

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

Please go ahead.

Hi, David.

Hey, Sam.

A couple questions.

Inventory was up 48% on a year-over-year basis, well over -- over $100 million, and sales are down -- well, I guess first question is what were domestic wholesale in the quarter?

What were we down?

We said we were -- we mentioned at the beginning, we were down 30 some-odd percent or 40% in domestic wholesale quarter-over-quarter.

Can you give us the actual dollars by category, domestic wholesale, international wholesale, retail, and e-commerce?

I can't.

I don't have them here.

But you will see them in at the Q when it is released in another week or so.

So US wholesale was down 30% to 40%?

Yeah.

And how do you foresee the US wholesale in the third and fourth quarter right now?

Well, it will probably be down in third; it's too early to talk about fourth.

And down equivalent kind of numbers you think?

Don't know yet.

Certainly possible.

And then international should be up maybe as strong, but somewhere above 25%-ish?

Well, they come into stronger comps now.

I would say double-digits, but I don't think it will get quite as high as 25%.

All right.

So then I guess my question is when I look at the inventory levels that you currently have and where you're going to end the year, what is making up the difference?

You said you had like four million pairs of toning at the end of the first quarter, how many pairs do you have now?

A little under two million?

Well, it is under two million.

But that still leaves the inventory levels significantly -- you know, if you take that, if it's $40 million, you had $219 million, sales are going to be down.

You should probably, you know, if everything was perfect right now, have about $200 million to $220 million worth of inventory.

What's making up that difference right now, and is that really going to be able to move at good margins, or are we going to look at a third quarter that is looking like 38% and then possibly in the 40s in Q4 if everything works.

We think the inventory that we have now is clean and does support what we said, the more normalized margins in the 41%, 42% range.

I think it is fair to say that your analysis of inventory is a moving target because last year, I'm sure everybody would agree, we were under inventory or it seemed to be under inventory at the time for what we were making, so you've got to go back to 2009.

And while we have somewhat more inventory, it's fair to say that we brought in some inventory early because our factories had the capacity to make more and we didn't want to leave them hanging.

So it's safe to say while we have more inventory on hand than we would like, it's probably offset by a decrease in production schedules (inaudible) moving forward.

So I think we are where we need to be.

We should have higher inventories than two years ago.

Two years ago, we didn't have any significant inventory in places like Brazil, Chile, Southeast Asia.

Probably in two years, we've opened 80 or 90 retail stores.

And our inventory in Europe has grown significantly, and right now is where you would see it because the end of July and August are big shipping times.

I think if you go back two years and add all of those moving pieces you won't think the inventory is out of line as you think in your very quick back of the envelope analysis you've just done.

Well, if you look at Q3 -- if you look at sales in Q3 of 2009, David, if you look at the inventory you had, you had $191 million worth of inventory at the end of Q3 2009 -- Q2 2009, and you had cost of good sales of $221 million in Q3, and your margins were 45%.

So I go back -- if you were able to do that with those margins and that kind of top line there, I mean, it does seem excessive because your sales are going to fall back on a top line basis probably above that level, but not as profitable, so your cost of goods sold goes up, but not to that degree.

Yeah, and I'm telling you I think part of it is a timing issue for when goods were received (inaudible) and our production cycles from those times, so you'll see at the end of third quarter, but that's my impression right this minute.

All right, but at the end of Q2 -- at the end of Q1, you felt like you could run a 40-plus percent gross margin on the quarter.

Now granted, you took a hit there.

You don't think there is another hit coming though is what you are saying?

I don't think so, otherwise I would have reserved for it, so I don't see one in the third quarter, not of this magnitude, but it is a very fluid business.

It is not something I see nor anticipate.

All right.

Thanks, David.

Okay.

Thank you.

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

Please go ahead.

How are you doing, David?

Hi, Christopher.

What I want to know is of this two million pair that you got rid of during the quarter, where is that right now?

Is that with one particular account or is it spread across several?

Are they moving it as we speak?

Have they already moved it and sold it?

Just kind of, where is it right now?

It is predominantly at one big account, and he is in the process of selling it and moving it.

Okay.

I guess also your current retail accounts, I mean, where do they stand from an inventory position on that category?

I mean, how clean are they at this point?

Because we're hearing from some that they still have product, maybe a little more than they would like.

So I'm just trying to understand what's being liquidated third party, what your existing accounts have, kind of what destruction that might create whether is comes back to you or not?

I'm just trying to get some reference there.

I don't believe it comes back to us.

I think he's going to put it into the marketplace at the best product price he can.

While some accounts do have some inventory, there seems to be a price at which they sell it, and I think the plan would be for this person that bought it, is that he has the capital to move it out (inaudible) that when he came to us, we thought we would pass it along to him and try to keep margins at a place where they could get significant margin.

He obviously has a lower cost, so if you keep it at the lower margin and continue to move it and sell it to those places that will continue to have it at nice margins albeit at a lower price point.

So you don't foresee any disruption or anything coming back to you looking for either additional support or things along those lines just because there might be duplicate product at different prices out there at this point?

Well, they're retailers, I'm sure they will always be looking for something, but I don't anticipate it, otherwise I wouldn't have done it.

When you talk about some of the new product, and we visited a lot of your retail account doors, and I at the moment have yet to see it show up, so I am curious what's been the response.

Are they still sort of waiting to maybe pair back some toning inventory first before taking on big commitment, it's just timing issue, because I have yet to really see it in meaningful quantities really at all just yet.

I see some of it in your stores, but not at wholesale accounts.

Right.

I think they came to our stores first.

We're just starting to deliver them, probably mid-June is the earliest they went out.

And obviously, they are in a testing stage.

I don't think anyone came in to decide to have it replaced or try to comp original Shape-Ups with this new product, but they certainly all came and tested.

So you've got to go visit their test stores and see what it is.

From what we hear, there's certainly product that is testing quite well and is due for an expansion of doors, and all the things we've heard from our pre-lines are positive.

So we're waiting for them to re-do plans and see how much space is available and how it tests through and see what growth we are going to get.

And most of that, Dave, is on the new fitness product, correct?

No.

I think what they saw -- the new deliveries are probably fitness first, but what they saw here that we talk about for like back to school and holiday and spring was Active, men's USA, new kids shoes, new Cali, new sandals, so we've shown them a whole plethora of items.

some of the new fitness items -- well, actually, Belle Ballerina, the kid shoe, that's been in our (inaudible) and it's just starting to deliver.

Wherever that's tested, it's tested extremely well, even at third party.

We had our Live shoe out and where that is testing, tests quite well.

So we've got a few items.

We redeveloped all of the categories.

There is no category that we play in that doesn't have new offerings or significant new offerings through this pre-line.

So I would tell you that you've really got to do your channel checks and the way that this stuff goes out and they try it and see how much admission, which we think can be a lot, we really get.

Okay.

I guess more specifically for the third quarter, I guess to ask you more point blank, when you think about the possibility at Q3 US wholesale could be down 25% or 30%, something in that range, and international could be, I don't know, call it a mid-teens rate and the retail piece might be -- fall flattish or depending what the comp is, so then you get a revenue decline somewhere in the mid, high single and maybe 10%.

I am trying to get a sense of if you assume that your gross margin could be at a 41%-ish range, I'm trying to get and understand the magnitude of how much selling expense could actually come in?

Could that drop year-over-year by $10 million?

Is that a realistic assumption?

Or is it down -- I am trying to get conceptually, as you go into the back half, how this expense structure could start to look.

Well, I don't know about committing too far out, but Q3 I would anticipate that our selling expense line is down in the $10 million plus range.

Okay.

And G&A?

G&A, you know, that may come down a little bit; I have offsets.

I think that remains relatively flat, maybe down a little bit because we're starting -- because I have the duplicative costs and it's a big international for our subsidiaries and joint ventures, so I think it's going to be another quarter before you start to see any significant movement at that line.

But that could still be -- I mean, that's still going to be up $10 million plus because you still have stores, have you duplicate DC costs, you are still moving units, correct?

It is not like it is going to be down year-over-year.

No, I think it would be fairly consistent quarter-to-quarter.

Okay.

When you put in all the puts and takes, I mean how, from a profitability perspectively, do you still think you'd be profitable in the third quarter?

It's kind of early to tell.

It certainly is the plan.

And then a tax rate, I'm just curious because you had a $21 million gain in the second quarter, so just kind of curious, maybe you can explain why that was so high and what we should use going forward?

Well, this year is going to be an odd year, so going forward it's going to be a strange tax rate so they've have to stay close to us to find out.

I think basically what happened was, and don't tell anybody in Washington, that we had profitability overseas and losses in the United States so that the tax rate we had sort of flipped around and we've had losses in a high tax jurisdiction in profits in a no-tax jurisdiction, which is why you flip to the 50% number.

I will tell you after this year, we will go back to probably the low 30s if everything evens out.

What should we use for Q3 and Q4?

Q3 and Q4, I would go back to the 30% or 35% -- 30% rate depending on what it is, unless it turns out that we do end up with a loss here and a big profit overseas, in which case that could come down dramatically.

And just last thing, just on the fourth quarter, when you get to the fourth quarter by then the conversions in the new distribution center will be complete.

Will you still be running duplicate facilities by then?

By that time, we anticipate it will be very small.

All but two buildings -- so four of the buildings go away, two buildings we still have to carry to the end of the year, so we will have slight duplicate rent and we shouldn't have any duplicate personnel by the time we get there in August, training should be complete -- I mean October -- at least by the end of October, most of those duplicate costs should be gone.

Could you grow revenues by the fourth quarter, or that just remains to be seen at this point?

I think it remains to be seen, but I would tell you it is probably unlikely that we would catch last year's fourth quarter.

But with you new product we have out there, you never know because we still have a production cycle where we can make for Q4 and could show some dramatic changes.

But I think it is too early to forecast that.

Okay, all right, I will get back in queue.

Thanks, David.

Thanks.

Thank you.

We have time for one final question from the line of Scott Krasik with BB&T Capital Markets.

Please go ahead.

Thanks, David.

Just a few follow-ups.

Can you talk about -- I missed at first, what was the comp, your retail comp domestically?

Minus ten.

What is the composition of those sales as Shape-Ups have slowed down?

Has kids increased as a percentage of the total?

Has it just shifted to other women's product?

It depends on how you count.

Kids is certainly a slightly higher percentage, but that's about it.

Other than that, they've remained relatively stable between women's and men's.

It's just changed and it's a lower ASP.

Actually, our comps are not down as much in units as they are in dollars.

So if you're talking about units, it hasn't changed as significant.

But if you're talking about dollars, obviously, women's has come back and men's and kids is a bigger percentage.

And then just give us some more confidence that the one to two million pairs of Shape-Ups that you have left, I know you said they were more basic styles, but can you give us any evidence of why you think they will continue to sell at a similar rate or price?

Well, they continue to sell in our stores, and we have a lot of pricing power as it cleans out more in the marketplace.

They continue to sell at our stores, and there are some places internationally where we continue to get orders and reorders.

So it's something we have seen.

Do you have any retailers that have a lot of it that will be concerned with any pricing action by anybody?

No, I don't think so.

That's more of what we've just sold.

I don't know that ours is meant -- we haven't kept what we think was necessary for domestic wholesales, more for retail and international that we've kept this (inaudible) of shoes, so to speak.

And then it seems like from our checks, there's nothing hotter in retail right now than Tom Shoes.

Are you guys catching any of that with Bobs?

Yeah, we are having a good start to it.

It's kind of early.

Is there something that can move the needle for you guys?

Certainly, everything we're in can move the needle if it hit.

We don't try anything that we anticipate being small.

And your retailers that you sell to, they don't have access to Toms, correct?

I would think so.

Okay.

Thanks, David.

Okay.

Thank you.

At this time I would like to turn the conference back for any closing remarks.

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 projected in such statements.

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

Again, thank you, and have a great day.

Ladies and gentlemen, this does conclude our conference for today.

Thank you for your participation.

You may now disconnect.