Skechers USA Inc (SKX) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Skechers USA, Inc., 3rd quarter 2011 earnings conference call.

During today's presentation, all 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, October 26, 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 apply to the retail industry and the Company.

There can be no assurance that the actual future results, performance or achievements, expressed or implied by such forward-looking statements, will occur.

Users of forward-looking statements are encouraged to review the Company's filings with the US Securities and Exchange Commission including the most recent annual report on form 10-K, quarterly reports on form 10-Q, current reports on form 8-K and all other reports filed with the SEC as required by the 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 3rd quarter 2011 results.

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

Net sales were $412.2 million for the 3rd quarter, and income from operations was $2.3 million.

Net income for the 3rd quarter was $8.3 million and diluted earnings per share were $0.17.

For the 9 months, net sales were $1.323 billion, and loss from operations was $31.3 million.

Net loss for the 9 months was $9.8 million and diluted loss per share was $0.20.

Our 3rd quarter 2011 sales decreased by approximately 26% and our first 9 months sales decreased by 15% over the same period last year.

This was due to the difficult comparison against the record 3rd quarter and 9 months in 2010, which primarily benefited from strong sales Toning sales at high ASPs and lower than expected sales across many of our footwear lines within our key wholesale accounts.

We are encouraged that our international distributor and subsidiary businesses grew in the quarter and our domestic and international retail business remained solid.

We cleared out excess inventory in the 3rd quarter and are pleased that our margins, which were 42.5% for the 3rd quarter of 2011, have returned to their historical norm, a reflection of selling more in-line product.

3rd quarter highlights include double digit sales growth in our international distributor business and single digit growth in our international subsidiary and joint venture business.

Double digit sales growth in our international Skechers retail division.

Launching of our new performance footwear line in our key, Company-owned retail stores.

Consolidating our North America distribution facilities into 1 building in Rancho Belago, decreasing our selling expenses by $21.6 million, reducing our inventory by more than $160 million from December 31, 2010, and ending with an extremely strong balance sheet with $248 million in cash or approximately $5.02 per share.

We continue to believe the remainder of the year will post challenges for our business.

But we believe we are well-positioned in terms of product, inventory, and distribution as we go into 2012.

In 2010 our domestic wholesale business was exceptionally strong, especially with the explosive, new, Toning category which carry higher ASPs than our typical product.

This tough comparison resulted in a 3rd quarter decrease of 48% in our domestic wholesale business over the same period last year.

We are learning from both last year's successes and this year's challenges and applying this knowledge to product development and distribution.

We delivered some strong, new, fitness shoes in the 2nd and 3rd quarters of this year, as well as great fall and winter package resulting in improved sales for those lines.

We are also launching our first, true performance footwear line this quarter and have an extensive offering of new lines and styles for men, women, and kids for spring 2012.

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

To support our business in the 3rd quarter, we ran several new television and print campaigns, including 2 commercials for our new, light-weight toning and running product starring Dancing with the Stars host Brooke Burke and several new, kid commercial, featuring well-known characters.

As we launch our first performance line of shoes this quarter with elite athlete and Olympic medalist Meb Keflezighi, who is running in the New York Marathon next month in our footwear, we remain committed to developing our fitness footwear offering and growing it across our key accounts.

Turning to our international business, we achieved record 3rd quarter and 9 month international revenue with sales of $133.8 million for the 3rd quarter and approximately $408.2 million for the first 9 months of 2011.

Our international wholesale business grew year-over-year by 7% in the 3rd quarter.

The growth was the result of quarterly improvements in both our international subsidiary and joint venture businesses, which were up 6% and within our international distributors, which were up 10%.

This growth was attributable to a strong mix of our fitness, lifestyle, and kids footwear in key countries around the world as well as the strengthening of some economies.

While several countries are still facing economic challenges, we are still seeing growth in some of these markets, including Italy where our subsidiary experienced triple-digit growth.

Along with Italy, 4 of our subsidiary countries continue to show positive improvements in sales, including Brazil.

We recently restructured our business in Brazil and expect to see improvements in profitability with the right product mix at the right price.

Of the 6 subsidiaries that did not show improvements in the quarter, 2 of them showed growth for the 9 months and 1 was flat as compared to last year.

Our joint ventures in Asia continue to improve with growth across all 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 55 retail stores and approximately 400 [shop-in-shops] is positively impacting our business.

In the quarter, our joint ventures opened 4 Skechers retail stores.

One concept store each in Thailand and Malaysia, and 2 in Hong Kong.

Within our distributor business, Asia continues to perform well, including South Korea and Indonesia, 2 of our top distributors, and the Philippines, another strong distributor.

Our largest distributor, Panama had double digit growth, which is reflective of the overall strong performance in our distributor and subsidiary business in Latin America.

We do believe the difficulties in western Europe could have an effect in the coming quarters.

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

At quarter end, there were 186 distributor-owned or licensed-Skechers retail stores around the world.

16 distributor stores opened in the 3rd quarter.

One each in Australia, Croatia, Indonesia, Egypt and Morocco.

Our distributors in Taiwan, Mexico and Saudi Arabia each opened 2 stores.

And our distributor in South Korea opened 5 new stores in the quarter, bringing their total number of Skechers stores to 41 with another 9 planned by year end.

One distributor-operated store closed in the quarter.

Marketing is also fundamental to the growth of our international business and most of the regions utilized the proven marketing campaigns we have created domestically.

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

We are presently transitioning our business in Japan from distributor-operated to a subsidiary as we believe we can double this business in the next 3 to 5 years and grow it to become one of our largest subsidiaries.

We are pleased with our record international sales which represented 32% of our total business.

However, due to the fact that internationals product deliveries follows the US, and we had significant deliveries in the 4th quarter of last year, as well as the transition of Japan, one of our largest distributors, to a subsidiary, we expect international to be down in the 4th quarter.

In our Company-owned retail business, domestic sales decreased 2%, and our international retail sales increased approximately 12%.

We had negative, domestic comp store sales of 10.6% and positive international comp store sales of 3%.

At quarter end, we had 319 Company-owned Skechers retail stores.

In the 3rd quarter, we opened 11 domestic and 3 international stores, including a Skechers fitness store in a Chicago suburb and our 4th Skechers store in greater London.

This month we have opened a concept store in West Covina, and 2 warehouse outlets.

Later this week, we will open another store in Illinois and an outlet store at our new distribution store in Rancho Belago.

This quarter, we plan to open another store in Arizona as well as 1 store each in Chile and England.

Before we move onto our financial review, I'd like to mention our licensing division, an additional profit channel for the Company.

We are developing Skechers into a head-to-toe brand with kids apparel, backpacks, socks, scrubs, and eye wear, all branded Skechers.

We will also be launching Skechers watches this holiday and luggage in the spring.

We recently signed a licensing deal for men's and women's Skechers fitness apparel and accessories with leading manufacturer [Leanthong], which will come to market in 2012.

We are working on additional licensing opportunities.

Turning to our 3rd quarter 2011 numbers in more detail, as I mentioned earlier, 3rd quarter sales were $412.2 million compared to $554.6 million in the 3rd quarter of 2010, a decrease of approximately 26%.

The decrease from the prior year was primarily due to the difficult comparison against a record 3rd quarter, the decline in higher-priced, toning footwear, and lower than expected sales across many of our Skechers footwear lines.

3rd quarter gross profit was $175.2 million or 42.5% of sales up sequentially from 2nd quarter of $143.3 million or 33% of sales, but down $77.5 million compared to last year's gross profit of $252.7 million or 45.6% of sales.

The year-over-year decrease in gross profit was due to the lower sales volumes and lower average selling prices.

Importantly, our gross profit margin for the quarter trended back to our historical range of 42% to 43%.

And we expect it to remain at this level going forward as we have seen a return to more full-priced selling combined with more in-line inventory levels.

3rd quarter selling expenses significantly decreased by 21.6% to $37.9 million or 9.2% of sales compared to $59.5 million or 10.7% of sales in the prior year.

The lower selling expenses for the quarter were primarily the result of lower marketing expenses.

For the 3rd quarter, general and administrative expenses were $136.4 million or 33.1% of sales compared to $139.5 million or 25.1% of sales in the prior year.

The decrease in the G&A dollar amount was due to a combination of decreased salaries and wages, temporary help, travel and entertainment expenses, partially offset by higher insurance costs, professional fees, rent and depreciation for an additional 44 stores.

Total operating expenses for the 3rd quarter decreased 12.4% to $174.3 million or 42.3% of sales compared to $199 million or 35.9% of sales in the 3rd quarter of 2010.

Throughout the 3rd quarter, we have been carefully monitoring and reducing expenses and we will continue to seek to reduce costs in many areas of our business to better position ourselves for profitable growth in the future.

During the 3rd quarter of 2011, income from operations decreased to $2.3 million from $55.6 million a year ago primarily due to lower product sales.

Net income decreased to $28.1 million [to] $8.3 million compared to $36.4 million last year.

Net earnings per diluted share in the 3rd quarter were $0.17 on approximately 49.4 million average shares outstanding compared to net earnings per diluted share of $0.74 on approximately 49.2 million average shares outstanding in the prior year.

During the 3rd quarter we had an income tax benefit of $6.7 million compared to an income tax expense of $16.3 million during the same period last year.

The income tax benefit during the 3rd quarter included a $4.6 million benefit or $0.09 per diluted share due to recording a US Federal Tax Research and Development Credit.

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

At September 30, 2011, we had $248 million in cash or $5.02 per share, which provides us with sufficient capital for our many growth initiatives.

Trade accounts receivable at quarter end were $252.1 million, and our DSOs at the end of September 30, 2011, were 53 days versus 45 days in the prior year.

Total inventory including merchandise in transit at September 30, 2011, was $238.4 million representing a decrease of $88.3 million from the prior-year period and a decrease of $160.2 million from December 31, 2010.

We will continue to aggressively manage our inventory over the coming quarters to remain in line with business trends.

Long-term debt at September 30, 2011, was $79 million compared to $51.6 million for the same period last year.

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

Shareholders equity was $943.2 million versus $942.6 million at September 30, 2010.

Book value or shareholders equity per share stood at approximately $18.32 as of September 30, 2011.

Working capital decreased $63.8 million to $602.3 million versus $650.2 million in the prior-year period.

Cash and cash equivalents at September 30, 2011, were $248 million compared to $233.6 million at December 31, 2010.

During the next 6 months, we are expecting additional cash receipts of approximately $78 million of which approximately $61 million is due to tax refunds of US federal, and state tax overpayments, and [all our] carry-backs, and research and development tax credits.

In addition, we expect to receive sales proceeds from our Ontario, California distribution center of approximately $17 million which we expect to close during the 4th quarter of 2011.

We expect the sale of this facility to generate a pretax $10 million gain.

Capital expenditures for the 3rd quarter were approximately $21.4 million of which $8.2 million consisted of 14 new store openings and several store remodels, $5 million from our new, domestic distribution center and $5.6 million for our domestic distribution equipment.

While we still believe that we will continue to face challenges in this last quarter of 2011, we are pleased with the strides we have made to better position our business for 2012.

These include significantly reducing selling and marketing expenses, consolidating our North American distribution facilities into 1 building, and cleaning up our inventory.

We are also evaluating our overhead to better control spending while seeking new expansion opportunities in product development and international and retail sales.

As we look forward to 2012, we believe Skechers continues to be a relevant, global brand; and there are many opportunities to grow our business in the future, including the transition of our distributor-operated business in Japan to a Company-owned subsidiary.

Throughout the year, we have leveraged our experience and learning in the Toning category to develop new footwear in both our Coral lifestyle line and in our rapidly-evolving fitness division.

Our first, true performance footwear line was delivered to our own Skechers retail stores in the 3rd quarter.

And the initial sell-throughs have seen solid.

We believe this product will see strong sell-throughs with our key accounts.

Further, we have many new developments in our men's, women's, and kids' products lines, and are looking forward to delivering this product in holiday 2011 and spring 2012.

As we look ahead to 2012, we believe Skechers continues to be a significant brand globally; and there are many opportunities to grow our business in the future.

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

(Operator Instructions).

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

Please go ahead.

Hi, David.

How is it going?

Good morning, Scott.

Pretty good.

I guess I'm speechless.

Let me just start.

I'm trying to understand the sales, I guess first.

So in the US the business was down almost 50%, but the international is still up.

Your commentary suggests that the international will probably be down in the fourth quarter.

Do you still expect international -- or US to be down at the same level as well?

I'm not sure it's the same level, but it will be down significantly in Q4 as well.

Okay.

So, is there any reads early on?

Your retail business is better than your wholesale business?

Are you getting anything that gives you any confidence for the future in terms of new products?

Yes.

Some of the stuff in the stores is testing very well.

As a matter of fact, the stores are doing better in comp units than they are comp dollars, obviously, which means that our customers are still there and the product is still moving.

What you're seeing in our domestic wholesale business is we've developed a whole new line of footwear, and they take longer to test and get it through.

That's why we're more excited about first quarter than Q4, because the stuff is just going.

As a matter of fact, what's testing very well in our stores, this new product, is just being delivered for the first time now to our third party retailers, so they can't even taste it until Q1, and we're bringing a lot of new product out.

So everybody has sort of moved away from the inventory and we've cleaned out some of the old and there's a lot of new stuff in the marketplace and a significant piece of it testing well in our stores, which is keeping the units fairly level, it's just at lower price points.

We feel very good about the new product line and we know we'll hit and start to increase it and get some more orders as we get through Q1.

As we said before, we plan on just right sizing and getting the business in great shape for the beginning of January 2012, which meant bringing all this new stuff to market and starting to clean out some of the old stuff, getting our stores better aligned with new product, and having a bigger fitness piece and obviously, right sizing the inventory and looking at the expense structure and our advertising campaign.

All of that is pretty much on target for the end of the year.

Since you mentioned the unit momentum versus the dollar, wouldn't spring still be a bad comparison for that?

And wouldn't fall of 2012 be more optimistic on that front?

I think that's true, but I think we can make progress from Q3, Q4 into Q1.

Even if it doesn't catch last year, we had a pretty good Q1 this year.

Over $475 million.

So if we get back in the mid-$400 millions, $450 million, $460 million, we think international will grow.

We'll have 40 more stores.

We might not have as bad a comparison, but it's too early to tell, but certainly we expect the new product to continue to develop and be very exciting by the time we get to back to school.

Okay, thanks.

And then, just in terms of selling expenses.

You proved to everybody you can cut marketing when you want to, is this something that we should -- on terms of a dollar decrease is that something we can expect into Q4?

And maybe even into Q1 next year?

Q4 is a lower advertising quarter so you'll certainly see reductions.

Whether it's the same dollar amount.

That would be much tougher.

But you'll see something certainly in the equivalent percentages.

I just want to remind you, it's not so much advertising, we're very committed to imaging.

This is these things that go around that we've cut our shows and the shows we attend significantly.

And we don't have as many celebrities.

They'll be rolling off through this year, and we're not making as many commercials which is production costs.

We're trying to be more efficient with our advertising dollars, so I think what we're doing now is getting a better hold and getting much more image per dollar invested and I think that will continue as we go to Q4 and Q1 and into Q2 next year.

Then I guess G&A, consistent with what you said, you're not able to really do any big cuts there until you get to Q1 next year.

Do you still feel comfortable.

Besides the DC, which I know you should start to get some benefits in January, February of next year.

Maybe talk about the other places where you can get some G&A reductions?

Well, I think if you look at it, if you remember my remarks, our G&A for Q3 is down $3 million.

When you add to that the fact that our rent for the opening of the 44 stores was an increase of $2 million and depreciation was another $1 million and we had professional fees that went up significantly as we expanded internationally for various reasons, of another $2 million.

We basically on the non-store, non-professional fees that we're stuck with for Q3, have taken $8 million out of our controllable operating expenses, and that's while we were switching DCs, so it's started, and there's plenty of places to attack as we go forward around the world.

So we have started, and I think it will start to increase as we get to the end of the year and into Q1.

Okay.

All right.

I'm jump back in.

Thanks so much, David.

Thank you.

Thank you.

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

Please go ahead.

Hi, David.

Hi.

When did you become Chris and not Christopher?

It's the same thing, just the shortened version.

It sounds strange.

It's okay.

I want to be a little more granular.

As we look to Q4, I mean, just give me an idea, I mean, revenues could be down -- how much could the international be down?

Let's start with that, so I have a vague idea.

Is that overall down high singles, it's down low double-digits, I'm just trying to get a sense.

It's kind of early to tell.

We're still booking and can move stuff into Q4 for international certainly from the distributor perspective as things get hot, because they're direct from the factory.

I would think right now in the high singles to low doubles, but not an exact science at this point.

Okay.

So I guess the bottom line revenue number could be somewhere in the $375 million for the total Company for fourth quarter.

Is that ballpark?

It's a pretty big ballpark, but it's a ballpark.

I think that's a little bit aggressive.

The differential between Q3 and Q4 is usually a little bigger than that.

All right.

So it could be more like a $350 million, $360 million number, is that fair to say?

Could be.

Okay.

And on the gross margin side, usually sequentially Q4 it's a little bit lower than you see in Q3.

But given I guess what's going on, your inventories, is it still going to be 42.5%?

That range, even in the fourth quarter?

It's kind of early.

I think it maintains in Q4 simply because retail becomes a bigger percentage and tends to pull it up some.

Retail continues, and it will have its strongest quarter, so without many closeouts and our inventories being that clean, I don't think we'll have any real significant margin deterioration between 3 and 4 this year.

And on the core business, given how much the wholesale business was down, $140 million-ish year-over-year, it's going to be down materially in Q4.

Obviously, it's eroding some of your core business is down.

You talk a lot about the fitness business and the opportunity.

I'm assuming that's go and some other sort of things.

What's going on with kids?

What's going on with the men's business?

What's going on with work and other things like that?

It just seems like those businesses, and even with our channel checks, you always tell us, do your channel checks, do your channel checks, and they're coming back mixed to down.

So I'm trying to get comfort that you believe that a lot of these things are really going to work.

You talk about fitness, but help me out with the other elements to the business.

What's going on with them?

How do they look as you head to spring?

Obviously, as we said, we're redeveloping in all areas, because obviously, we've hit some high selling.

In our stores, the new stuff we've brought in, whether it's active or women's sport or some of the men's stuff and some of the reaction we have to active and sport and men's and the kids lines, especially the girls, for what we'll deliver for holiday and spring have gotten good enough results that we think certainly there wouldn't be any more significant deterioration from there, and certainly good possibilities that the stuff will check in and grow both in our own retail stores and domestic wholesale.

So we've got a lot of new stuff and we continue to bring new stuff.

Historically, when we tend to redo all of our lines as we did in 2003 and again in the end of the 2008 going to 2009, we tend over relatively short periods of time to develop great product that gets some real ignition.

I have no reason to believe at this particular point that it won't happen again this time.

And what about the men's business?

Any thoughts there?

We're bringing new styles and new divisions to men's business as well, so we anticipate that's been very core, and it's been very basic for a long time.

And we are redoing and bringing a lot more new stuff to the marketplace.

So yes, we think that will continue.

That has more difficulty in that it's been up against in recent times, more private label business as it goes through, since it's not a big branded product.

We think some of the new stuff we're bringing in will maintain that place in the marketplace for us.

Outside of the fitness business, I mean, as you look to spring and start to think about spring bookings, I guess that's not up just yet.

If I'm trying to strip out more of the core business at the moment in terms of trend line, it's not positive yet.

You need holiday and spring to check and then you hopefully, work from there.

And that a fair assessment?

That's pretty fair.

Backlogs are tricky in Q4 we had more cancellations than we had incoming orders.

We'll make inroads to the backlog fairly quickly through Q4.

But the actual amount, we won't know until we get through this holiday season, and start getting towards spring.

Real quickly, you have one time things in Q4, the sale of your distribution center, which is going to be a one time gain and something is going on in the tax rate.

From an EBIT perspective, so operating profit, if sales are somewhere in this $350 million, $360 million range, can you -- is it a break even?

Can it be profitable on an EBIT basis during that fourth quarter?

It's possible.

But we'd have to move up from here to get to a positive operating profit, certainly.

And lastly, just on inventory, down maybe $100 million by the fourth quarter year-over-year?

You're down $80 million or so at this point.

How do we think about inventory at year-end.

We're down $160 million to year-end, we're not going to catch another $60 million, I don't believe.

We'll probably build some inventory because we usually, and we're so clean now, we usually build inventory going into the end of the year, because it's spring and it has to ship by December to get the January and early February deal, so it'll go up but it'll be down, I would bet $100 million-plus from year end.

All right.

Well, thank you very much.

Appreciate it.

Okay.

Thank you our next question comes from the line of Jeff Van Sinderen with B.

Riley.

Please go ahead.

Good afternoon, let me say, nice work on gross margins.

David, maybe you can talk a little bit more about some of the parts of your business that were a little below your expectations.

I'm just trying to understand, was it a function of some of the product fresh enough for the marketplace in some of those core segments and you're sort of redoing the whole line at this point.

Maybe you can just tell us a little more about what you saw there during the quarter.

Was it more kids, men's, or women's?

The biggest piece was the toning piece.

The second biggest was probably in the kids because we're coming off a very big product with Twinkle Toes that had settled down some.

So those were kind of the surprises.

I think it's just a function of we're bringing new to the marketplace and we're testing and we still had overhang from the old product categories so we could only test so aggressively as far as our wholesale partners were convinced, as we try to clean out and get through the end of the year.

That continues.

I think it's a little bit everywhere.

There's no 1 overwhelming piece that is significantly different than others, if you take the toning out, it's just an overall.

Actually, the difference between low to high is not significant.

Do you think that any of that has to do with the overall general state of the footwear industry, the marketplace, general end demand or do you think it really is more associated with what you're doing with product?

I think it's a little bit of both.

Certainly business is not as exuberant as we could have hoped.

Obviously, some people are doing well, and product is certainly king, and that's why we're always into developing a new product.

We think, if the product is right, it will sell, and we can gain back that shelf space, but I also believe, as we get back that shelf space, even if Toning doesn't become the biggest piece in the world, we can make money at those levels.

Good.

And it sounds like you're happy with how the go product, some of our new fitness product is selling through at your own retail stores at least.

Anything more you can sort of give us on the outlook for the fitness segment as we look into 2012?

It's way too early.

We try to be receptive to the marketplace and see what they're going to do, and we're just delivering it now.

It's a question of how big it can be.

All I can tell you is in our test stores, the stuff we've been able to fly in, we've never had enough quantity, we get to broken sizes very quickly, so it's about as good a start as we've had with anything we've ever brought to the marketplace.

How big it can be and how extensive, and what the product developments are as that continues to go to the marketplace, it's still way too early to get any kind of order of magnitude.

Fair enough.

And then I know your inventory is certainly in a lot better shape now.

And it seems like it's pretty clean and as you said you may build inventory in some categories.

How do you think inventory is overall in the channel as it relates to your business at this point?

I think it has been a little high.

I think it's getting better every day.

We continue to sell, our customers are still out there.

So it's all a process of how good holiday will be for us.

And we've been focused so much on getting everything clean, both the channel and new product in, and getting the Company right and becoming liquid and getting the inventory clean for the end of the year.

We all here feel we're pretty much on target of where we had hoped we were going to be as we close out 2011.

Okay.

Good.

and then one last question and I'll let someone else jump in.

Anything you're seeing that's new in sourcing costs, any relief in sight there?

I think our sourcing costs are like everybody else, they've been going up and they certainly were under pressure.

There's less production now in China so it's a little bit easier to negotiate.

And the margins this year that we reported, the 42.5% are reflective of what we've seen in pricing for the most part, while we continue to negotiate.

I think we're in okay shape for maintaining the margins that we're looking for, 42%, 43% in the existing environment in China.

Good to hear.

Thanks very much and good luck this quarter.

Thank you our next question comes from the line of Sam Poser with Sterne, Agee.

Please go ahead.

Hi, David.

Hi, Sam.

I got a whole pile of questions.

Just some housekeeping stuff.

Total retail sales were up what -- what were they up for the quarter?

I think we were up, we said 2% or 3% domestically, we're down 2% or 3% -- take it back.

We were up 2% or 3% overall, but we comped down about 10% and when you average everything with international together.

And your e-commerce business?

That's not that big.

It's only a rounding number.

E-commerce was actually down double digits, but in real dollar terms, it was insignificant to the whole.

Okay.

And then total US revenue?

Talking about wholesale?

No.

Your total sales.

You give the breakout usually in the Q, US, Canada, other international.

I have domestic wholesale was down 48% and the retail stores were relatively flat.

On a weighted average basis it's probably 25%, 30%.

It will come out in the queue.

All right.

And now for the other stuff.

First of all, what do you expect the same store sales to be for fourth quarter?

Within how you're thinking about things?

We think it's not going to change significantly from last year.

We think Tom store sales will be down high single digits or so.

Okay.

And then, the run rate of the toning business right now, versus peak, or however, you want to answer that question.

Tiny.

Well, you have to redefine toning and fitness.

How about we call it the rocker bottom stuff.

Rocker bottom stuff is a very small piece of our business, now, we continue to clean out our inventory.

It does sell in some places.

The biggest piece is now being marketed by the guy we sold our over-inventory to at the end of Q2.

There's still a demand for it.

People are still looking for it.

It's very price competitive now and still cleaning out old stuff.

It's a very small piece of what we're doing now.

Okay.

Thank you.

And then Japan.

How big is the Japanese business?

How does that report right now?

And how big is that when you shift it to a sub?

How much is that going to help?

What basically happens as we've done in the past, with some others that we've converted like Canada and Chile and Germany, et cetera, is they right now buy on a distributor basis with the cost-plus, so they place orders at the factories and we tack on and it's our lowest margin business.

But obviously, it's the least overhead.

What happens when we go there is we pick up both margins, the margins they're making and the margins we're making to the existing pair shift.

So it increases top line right away.

But obviously -- and we get a higher margin, because we're picking up both margins, but obviously pick up overhead, as well.

We then need a sales office, financial people and customer service.

What then happens is we usually leverage better because we're more price competitive.

We won't take the full boat margins that we've gotten in the past.

And we'll advertise more and we tend to get leverage significantly from the startup costs that we get when we go there.

Japan has always been a large customer.

They've always been between $1 million and 2 million pairs depending on which products talk to them so, we think we can increase it from there.

So it's a significant change for us and we think it's a significant marketplace for us.

So, I mean, $30 million to $40 million business?

Am I thinking about that right?

If it's 2 million pairs on a subsidiary it would be significantly higher than $30 million.

1 million to 1.5 million pairs at a distribution price point is probably somewhat less than $30 million.

So we're looking at $45 million to $55 million or something when it translates.

You're probably looking from going somewhere between $25 million and $35 million to without any significant increase to $45 million or $50 million but if you add another million pairs you get even further.

We think ultimately, we will go for something that's been averaging $30 million or less to somewhere in the $75 million to $100 million range in two or three years and that would be the goal, the plan.

And most of that -- and the first time we'll see -- but initially, the spread the basically apples to apples in pairs for the first year?

In pairs, in units.

We'll be selling early.

They're going to deliver Q4 and Q1 and the fill-in with what they have in Q2.

So what you'll see during that period is that we'll pick up some overhead because we are hiring people, and we'll establish a presence there, and then we'll begin selling in Q1.

So we'll pick up some of that expense while they will be very careful and not have significant increased inventory risk.

So you'll see additional -- an increase in overhead for the first couple quarters and probably a decline in sales, but I think you'll see an increase in sales and an increase in profitability as we start to deliver Q3, given any kind of move or pricing or sales effort in the first quarter.

So when we think about next year given that kind of revenue, we're probably looking at the first half of the year to be up maybe a little bit and then the second -- total international and then the shift becomes much more meaningful looking at the third and fourth quarters.

I think international grows.

But while that's one piece, I think, our growth in China and Brazil, which are relatively new markets, can certainly be that big in international as a whole is moving quite well.

That's one of the moving pieces for next year.

So far international this year you're up, like you're up over 20% right now.

You're not looking at that kind of number again next year, right now.

I don't think so right this minute.

But I wouldn't see anything in these numbers given the product that we're coming out with that says it's not possible from where we stand.

It's kind of early.

I wouldn't predict that right this minute but I wouldn't take it off the table, until I see all this product and how it gets tested and moved around international.

And lastly -- thank you, David -- a lot of the new product that you're doing, outside of kids, is very athletic inspired.

It's either fitness or it's athletic inspired product from what I've seen and heard.

Are you doing -- what are you doing in the non-athletic realm?

And are you concerned at all that when you go to the third party retailer with athletic, given the strength of call it Nike, Adidas, Reebok, some of the people that have been in the game a little bit longer, that it's going to be harder to get space, to get floor space versus the kind of success you may or may not have in your own retail stores.

I don't think that's changed significantly.

Our strongest offerings have always been in the women's side, in the athletic-inspired footwear.

Right now, we actually have more new development -- as much development in non-athletic.

We have a much bigger boot business and a much bigger winter business as far as women are concerned than we've had in the past, and our women's active line is checking quite well and has held up quite well in Q3.

For men, our biggest piece has always been men's USA, and it's held up the best for Q3 on a relative basis to last year and we're bringing a significant amount of new non-athletic-inspired product in through men's USA, and we anticipate that will continue as well, so while the percentage of athletic may seem higher because we have the fitness addition, the underlying brands are not deteriorating that are non-athletic and we anticipate that we'll be able to keep them up and we'll have new product available in all of those divisions.

I got a ton more questions but somebody else go and I'll come back.

Thank you.

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

Please go ahead.

Hi, David.

Hi, Claire.

Nobody going to ask me about all the cash I got coming in here and what we're all going to do with it?

Nevermind.

Everybody knows the answer to that, already.

So David, what are you going to do with all that cash that you have coming in?

I'm going to count it.

What did you say?

I'm going to count it.

There you go.

That's good.

So on that note, what should we forecast for your taxes for Q4?

There'll be no taxes for Q4.

I mean the gain.

Given anything changed dramatically, we won't have a profit for the year, technically for the year.

Certainly not in the United States.

What you've seen, there'll be tax credits that continue.

To what degree yet.

Like I said, we're anticipating by the time the year finishes, we'll get $60 million back in taxes.

We've already filed for $26 million or $27 million and there's R&D credits and then the NOLs carry-forwards will generate another $25 million or $30 million.

That will all be in the first six months of next year.

Taxes is a net benefit to us for the balance of the year.

And then really just a point of clarification.

You're talking about international sales dropping off next quarter.

Why?

I don't know if I just missed it.

What's going on there?

I think what happened was we got so hot last year that everything moved into Q4, which is historically the smallest quarter for us internationally.

And because we were so hot, a lot of people moved product into Q4 from Q1 last year.

And our distributors were trying to catch up for some high product and they ship historically the best in December.

I think it's just a timing shift.

I think, from a more running rate basis, it's a more normalized quarter for us, but it got so hot last year, because they caught up later to us for the toning product that it was just an exceptionally large year.

As we look into the first quarter, do you expect that same trend?

Or should it turn and reverse and be positive again?

I think it becomes positive again.

There's certainly a benefit, but that will depend on the product offerings that we have now.

Okay, okay.

And then just again as a point of clarification on the inventory, I know you've been asked a few questions.

Last quarter there was $40 million in toner, Shape-Ups, inventory that was left.

Where does that stand today?

And do you consider it unproductive inventory or is it still, do you feel like it's productive and the sell through is continuing?

I think in the last quarter what we had left, we sold about 10%, mostly through our stores and some international departments that are going down, and they've sold it and they're selling okay in our stores, certainly the outlets and the box stores.

It's still an overhang, but we don't consider it excessively unproductive.

We continue to move it through and we get nice margins on it, it's just a slower moving piece.

Every quarter becomes a smaller and smaller piece of what's left.

So if you think about it, we've decreased our inventory $160 million this year, and still have $30 million or $35 million of toning inventory to move through.

So we've done a great job on the balance of our inventory and we're going into the end of the year as clean as we can be for the most part.

So is this position, the $30 million to $35 million -- are your reevaluating this every so often, whether it's worth holding on to versus just writing it down or that kind of thing?

We're watching the marketplace and things like that, but right now, we're in no hurry.

The balance sheet supports it and it sells very well, and it seems to be like an annuity for us, so that little piece we continue will continue over the near-term.

We'll continue to move it out in the same quantities we believe as we have.

It moves slower in winter in most places in the United States.

We'll continue with it as it is now, until the marketplace is clean and there becomes a higher demand for it I think.

But we evaluate on a quarterly or more basis, as we see what's going on in the marketplace and with our inventory.

Last question, with the new fitness product that you have coming out, I know you're talking about pulling back marketing and reining in costs.

What do you plan on doing with that product?

I assume there will be dollars dedicated to that launch and that product.

I don't want anybody to get, and I think I made it relatively clear that I don't want anybody to get the idea we're not continuing advertising We're talking about our budget.

It's just an order of magnitude issue.

And I think the advertising piece will continue to be in the forefront.

Some of the production costs and celebrity costs and things like that will come down first, as will trade shows and things to that effect.

And we'll produce less spot as we go forward, or certainly more official spots.

The advertising piece won't come down, certainly not nearly the percentage of the overall marketing spend that we're talking about in these items.

We'll launch pretty big and we will still have advertising.

There's no way you won't see us coming.

Okay.

That's all I got.

Thanks, David.

Thank you.

Thank you.

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

Please go ahead.

Hello.

Can you just talk a little bit more about next year?

Because you must have -- can you just give us some band of what you think revenues might look like next year?

It's way too early to tell.

Right now we're very confident in the product we're bringing.

And I don't want to set a range for what it could be.

We can now, from an infrastructure point of view, handle whatever size it's going to be.

It's way too early for us and we don't give significant guidance, we get you a next year evaluation.

Too early.

I'm kind of looking at the other way around.

You're very successful in cutting selling, but G&A is not down that much as you noted.

And I assume that a lot of those costs are related to retail.

Is that a correct assumption?

Well, the increased costs and the reason they haven't come down significantly in Q3 were related to retail and some other functionality also in R&D and you know the development costs that are going through now.

Those can be modified as well.

It's just a matter of finding the right size of the business.

I don't think we're going to modify the expenses in anticipation of what our volume is going to be.

We'll wait and see what the volume looks like and have this new stuff hit the marketplace, and make the valuations as we go into the end of the year and into 2012.

How do you think about?

Obviously, I'm sure I'm not alone in looking at your historical patterns here.

You mentioned previous periods of where you've sort of reengineered the business or rethought the product line.

How do you think about getting expenses right sized?

And what's the best way thinking about that?

I think it's a reversal of what we've done.

If you look at our expenses from 2009 to 2010 on the G&A side, they were up $100 million.

If you take out the stores and you take out the growth internationally which we think is still viable, you have a pool of in the $60 million range.

That shouldn't be that difficult to reverse.

It's predominantly people and processes.

So that's where we're looking first is where the increases have come from and what doesn't support the growing pieces of the business such as retail and international.

And there's more efficiencies to be gotten.

And we'll get efficiencies from our distribution center that's online.

And testing as we get into the beginning of next year.

There's a number of moving pieces, but it all revolves around people and processes.

There's a lot of things that can be attacked.

And one follow-up.

What percentage of your stores are not profitable on a four wall basis?

Very few.

I would say it's no more than a low to mid-single digit number.

You have to understand, we don't -- we don't load in price.

We don't sell in at a wholesale price.

We sell them at a landed cost so it's completely vertical so the four walls for the most part unless the rent is high and it's a showcase kind of place, they make money.

Even at a minus 10% comp?

Yes.

Okay.

All right.

And also, clearly toning was kind of a magic bullet.

Once in a long period of time.

Other people have asked this question, but if you could elaborate a little bit more on the kinds of things that you're talking about as initiatives and categories have not gone unnoticed by other people like sort of with the lightweight running where other people may be emphasizing forefoot you're emphasizing mid-foot.

There's lots of players in that business.

So in terms of filling the hole of toning, is it going to be -- should we think in terms of a lot of slices of things like that?

It's kind of early now.

I would tell you most of the time, it's a lot of pieces.

The men's business grows and our leisure pieces, if they still use that term, grows.

And we get a boot category and our sandal business grows.

And we continue to expand around that and the rest is expansion.

We expect China to continue to expand.

Brazil to continue to expand.

Do well in Japan.

Chile continues to grow for us.

Places in South America are very fruitful.

So it's a combination of all of those store openings and a particular product that will rock our wholesale business all at once.

That doesn't say that we can't hit a product like that, as we historically do.

When we plateau and redevelop lines, we tend to grow with different orders of magnitude and different degrees of growth.

It's way too early in the process.

We think the key drivers right this minute are retail and international.

But with all the product we have coming out and as good as our merchandising people feel about the product, it could be the product as well.

Okay.

All right.

And one final question, in terms of production and sort of -- I know there's a band.

But what kind of lead time should we be thinking of in terms of your production lead time in China.

Now our production cycle is down to between 75 and 90 days for existing profile and that would be for next factory date.

That would be for -- couldn't hear you.

From order date to when it leaves the Orient.

Order to FOB.

But that's for existing.

For new?

It depends on how intricate it is.

It's all a matter of development and commercialization.

What the patterns are and how long it takes to get the molds and the cutting dyes made.

That could be anywhere from say 120 to 180 days.

If it's a completely new shoe.

So just to make sure I understand.

So a lot of what you're talking about in terms of to drive the business is new.

Well, it's new development that we're delivering now.

So reorders become existing.

A lot of the stuff is new.

And therefore, right now the orders that you're putting in are for a while from now.

And so as we go, as we get deeper into the fourth quarter, you'll have visibility deeper?

Oh, yes, yes.

We still have samples of that, though, and we're selling it, so we'll know which ones hit and which ones don't and what we have to pump up production on.

Most of the stuff we see now that we're showing to our customers are in various stages of development.

It's not 150 days from today.

What I'm trying to get at is your own visibility on what the revenues for next year certainly for the first half of next year.

A lot of that will depend on sell throughs for holiday.

We can chase a lot of it first quarter, and that will be key to us with all of this new product out there.

Okay, great.

Thanks a lot.

Okay.

Thank you.

Our next question is follow-up from the line of Scott Krasik with BB&T Capital Markets.

Thanks, David.

Just a couple quick ones.

First, on the balance sheet, the prepaid and other current expenses look like they're up about $35 million, $40 million year-over-year.

That's where the taxes are going to come back from.

Okay, okay.

So that's the biggest chunk of that?

Yes.

Okay, and just in terms of demand, is women's sport -- is that whole division dependent on this fitness business?

No, no, no.

Not at all.

Fitness is fitness, and women's sport and women's active as they existed before in those price points, continue to develop.

They're not dependent.

We may take down some of the looks ourselves, like we've done in the past, from what we're bringing in a more high tech fashion, but no, women's sport and active continue to be developed along the old criteria.

So at the end of the day, when do we anniversary this big chunk of business that was done at ASPs much higher than what you had historically acted at, and if the whole business settles out again at $49 retail price or whatever it is.

When will we be there?

Is it third quarter?

If nothing significantly changes, that would be the middle of next year.

Okay.

So that's -- in terms of the kids business, I mean there's a lot Twinkle Toes.

That was probably $100 million business at peak in that range.

Is that right?

Nice range.

So from your perspective the kids business on a go forward basis, has that bottomed out now or will it bottom out in the spring of 2012?

I'm not sure.

I think it's bottomed out now.

Because we're getting good results from women's, girls stuff.

You think even by spring of next year, the new products will off set some pretty good sell-in of Twinkle Toes last spring.

Somewhat.

Certainly.

Okay.

All right.

Thanks very much, David.

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

Please go ahead.

It's Christopher here.

So I'm curious.

How many stores are you going to open next year?

Retail stores, your own?

We're still working on it.

I would use as a ballpark number plus or minus, probably in the 35 range plus or minus 5 or 10 from there.

Anywhere from 30 to 40.

And how many did you open this year?

I think 44 so far.

We'll get to 50 this year.

Any thoughts to slowing that by any chance?

We evaluate on a quarterly basis.

We might.

Right now they're doing very well.

If they start to pick up, I tend to doubt it.

It depends on how many locations.

There's always a possibility.

There's nothing in stone here.

We reevaluate and see.

That's the plan as we sit today.

And then in the fourth quarter you made some comment that the probably the retail store piece would still comp negative high single.

I'm just curious with some of this new product still testing, why wouldn't that be better than that?

It's just seasonality of the fourth quarter or still --

It could be but there's a lot of stuff testing and we run out of sizes pretty quick when new product hits real quick on a first test.

Go for us has been selling at outrageous proportions, but we can't fill it in that quick because we have to get them from the Orient.

They're all in the test base.

And last year we had, on an overall basis, we were still selling significant amounts of Toning product.

Certainly in the outlets and the box stores, it will be tough to compare to this year.

It takes a while to get all that behind us.

Okay.

And then for 2012, I know Faye was asking a lot of questions about this.

I guess if you historically, you guys have done -- and I'll talk percent to sales now -- we don't know what the sales number is going to be precisely, but like selling expense the past several years is 9% range or level.

Is that realistically where it could sort of be?

Or could it be potentially less than that or is it we don't know what sales are going to be.

I have no idea, so therefore it could be anything?

It could be a lot -- I would tell you, there's a lot of flexibility in it and our thought process today is not to overspend the volume unless something gets hot.

So I would tell you, it would go back to historical percentages or slightly less, unless something changes dramatically as we get to first quarter.

And gross margin rate could be something comparable to I guess in this sort of -- 42%, 43% range given the mix of retail, rebound in the wholesale piece et cetera.

It seems that way now.

Back in Q2 we were in the range if you take out the one big sale.

And we're there in Q3.

And certainly, Q4 has different things in it.

There's not a big gross to net issue this year in Q4.

Usually the problem with Q4 you finish selling back to school which is the high volume and you have to give back money on a percentage basis via customers in Q4.

Not a significant amount exists this year.

Certainly less than prior years.

I expect we'll flow through and the percentages of the business done between retail and wholesale is more on the retail favor, so that tends to put a floor under margins as well, so that's why I think that we'll continue in this range.

Last question on US wholesale when do you really, putting on your best hat here, think that US wholesale business can start to trend positive given ASPs, you're driving a lot of units in the first half of this year.

Is it third quarter?

Would that be the first opportunity where we could trend positive.

The opportunity is any time.

But you could certainly trend up through the first half, but the easiest opportunity now given what's happened this quarter and all the testing that's gone on is Q3 is certainly the easiest opportunity to start to trend significantly higher.

Okay.

Okay.

Thank you very much, Dave.

I appreciate it.

Okay, thanks.

That's all the time we have for questions today.

I'd like to turn the conference back to Skechers for closing remarks.

Thank you again for joining us on the call.

We would like to note that today's call may have contained forward-looking statements.

As a result of various risk factors, actual results could differ materially from those projected in such statements.

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

Again, thank you and have a great day.