Skechers USA Inc (SKX) 2012 Q2 法說會逐字稿

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

Welcome to the Skechers USA, Inc., second quarter 2012 earnings conference call.

(Operator Instructions) This conference is being recorded today, Wednesday, July 25, of 2012.

At this point, I would 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 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 2012 results.

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

Net sales for the second quarter were $384 million, and loss from operations was $1.5 million.

Net loss for the second quarter was $1.8 million, and diluted loss per share was $0.04 on approximately $49.3 million average shares outstanding.

Our second quarter 2012 sales decreased by 11.6% over the same period last year.

This was due to lower sales across our domestic and international wholesale channels, which was primarily the result of the clearing of excess toning inventory and the winding down of our fashion brands last year.

This was offset by increased sales in our retail stores due to an additional 39 stores, as well as growth in some of our heritage lines and our domestic wholesale business, and the addition of our Performance lines.

Our international sales were negatively impacted by a combination of factors -- challenging economies in several European markets, the euro exchange rate, and the change of our business operations in Japan from a third-party distributor to a wholly owned subsidiary, and the restructuring of our business in Brazil.

We expect both of these countries to begin to positively impact our international sales next year.

While our sales decreased in our domestic wholesale business, our average price per pair improved 8.4% or $1.61 as more in-line product was delivered.

Our domestic and international Company-owned retail stores also had mid single-digit improvements primarily from the addition of 33 new domestic and 6 international stores from the prior period.

Second-quarter financial highlights include increased gross margin percentage by over 1,100 basis points, decreased selling expenses by $14 million and total operating expenses by $18.4 million, reduced inventory by more than $67.7 million from a year ago, and a strong balance sheet with over $374 million in cash or approximately $7.59 per share.

We feel positive about the overall direction of our business, including the launch of our Performance division.

Our new product looks sensational and is trending positively, and our backlogs are up double digits year-over-year.

We are anticipating a return to profitability in the second half of 2012 and building momentum for 2013 and beyond.

In our domestic business, second-quarter sales decreased 18% or $39.2 million over the same period last year.

The $39.2 million reduction was primarily the result of lower sales of toning and non-Skechers branded product.

In the second quarter last year, these items totaled in excess of $35 million.

We are pleased with the improvements in many of our heritage lines, including very strong sales in our women's sport line.

This is the result of numerous new looks and updates to many of our classic styles.

We are continuing to update our key product divisions and are looking forward to the introduction of some new initiatives in the second half of the year.

Our charitable line, BOBS from Skechers, grew significantly in the quarter.

We are pleased to have donated our first million pairs of shoes to kids in need in the United States and around the world as part of our buy a pair, give a pair program.

We're also encouraged by the strong initial results of our men's and women's Performance footwear line.

Skechers GOrun and Skechers GOwalk launched earlier this year in our wholesale accounts and we're looking forward to the introduction of several new Performance lines which are currently testing very well in our Company-owned retail stores.

Our Performance lines benefited from the continued airing of our Super Bowl campaign in the second quarter, and Skechers GOrun has received positive reviews from influential bloggers and the running media, including being most innovative by two running magazines, Competitor and Women's Running.

To help launch the next generation of our Performance lines, we began airing a new campaign in June that featured elite marathon runner Meb Keflezighi in Skechers' GOrun Ride.

Our kids' footwear business was also supported by several new commercials that ran on key children's networks in the quarter.

In addition, on July 31, Twinkle Toes, The Movie will be available on DVD at major retailers nationwide continuing to build on our most successful children's character.

We believe we have been very efficient with our recent marketing campaigns and have been able to create tremendous awareness for our footwear lines while still reducing our selling expense by 26%, a significant accomplishment.

The reception to our new product offering, both Performance and Lifestyle, during our buy meetings in our Corporate offices this month has been very positive.

While our domestic wholesale business is down compared to 2011, we believe we are stabilizing, and our backlogs have improved double digits to last year.

We are also seeing many new opportunities in several Lifestyle and Performance segments to grow our business.

In the quarter, our international distributor sales decreased by 5%, and our international subsidiary sales by 21% for a total decrease of 16%.

This was due to a combination of several factors.

Very difficult comparisons against a record second quarter 2011 for our international business, the transition from toning to new lower-priced products, the transition of our business in Japan from one of our largest distributors to a wholly-owned subsidiary, the restructuring of Brazil with new management and a new -- fresh focus on product, and challenging economic environments across western Europe as well as the impact of the weaker Euro.

Though our international sales declined in the second quarter and the trend is expected to continue in western Europe and Brazil, which together represent a significant portion of our international business, we are seeing improvements in certain key markets.

The Asia Pacific region continued to perform well, led by South Korea and Australia/New Zealand, two of our biggest distributors as well as Indonesia, Taiwan, and Hong Kong.

The Middle East also continues to see growth in spite of unrest, and they continue to open up more stores.

Earlier this month, we began shipping our first pair to accounts in Japan as a subsidiary.

We expect to see growth in Japan year-over-year in the remaining two quarters of 2012, and for Japan to positively impact our international business in 2013.

Key to growing our brand worldwide is the opening of Skechers branded retail stores.

At quarter-end, there were 98 Skechers stores in our joint venture countries in Asia, including those run by licensees, and 219 additional distributor-owned or licensed Skechers retail stores around the world.

18 Skechers stores opened in the second quarter.

One each in Serbia, Jordan, Philippines, Thailand, Guam, and Venezuela; two each in Malaysia, Mexico, and Australia and six in South Korea.

In the second quarter, two stores closed in South Korea and one in China.

We believe that there are continued opportunities for long-term growth in our international markets given the right product, marketing, management, and stabilization of economies.

We do expect to be trending positive in the back half of the year as we begin to deliver more fresh product into our international markets, and Japan will deliver its first full shipment.

For the quarter, total sales in our Company-owned retail business increased by 5%, with domestic sales improving by 6% primarily due to an increase of 33 stores, and international retail sales up by 3%.

For the quarter, we had negative domestic comp store sales of 3.4% and negative international comp store sales of 6.7%.

Importantly, we saw a 4% comp store sales increase in our concept stores which have our new products.

This combined with our increased backlogs provide good leading indicators for our business.

At quarter-end, we had 344 Company-owned Skechers retail stores.

In the second quarter, we opened six domestic stores and one international store in Chile, including a store in Christiana Mall, the largest mall in Delaware, and one in the new premium outlet center in Merrimack, New Hampshire.

We closed two stores during the quarter.

So far in the third quarter, we've opened an additional concept store in Chile.

We expect to open an additional 5 to 7 stores in the second half of the year.

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

We received $1.6 million in licensing revenue in the second quarter from our many licensing partners, which include eyewear, apparel, backpacks, watches, and socks, all branded Skechers.

Men's and women's Skechers performance and sport apparel are planned for a holiday launch, which we believe could add meaningful licensing revenue in the coming years.

Turning to our second quarter 2012 numbers in more detail, as I mentioned earlier, second quarter sales were $384 million compared to $434.4 million in the second quarter of 2011, a decrease of 11.6%.

Second quarter gross profit improved to $171.3 million or 44.6% of sales, compared to gross profit of $143.3 million or 33% of sales in the prior year period.

The increasing gross margin percentage was due to a variety of factors including improved quality of our inventory, strong product sell-throughs in our retail stores, as well as a higher average selling price of 8.4% per pair in our domestic wholesale segment.

Second-quarter selling expenses decreased over 26% to $39.1 million or 10.2% of sales, compared to $53.1 million or 12.2% of sales in the prior year period.

The nearly $14 million decrease in selling expenses for the quarter was primarily the result of significantly lower advertising and marketing expenditures from the prior year period.

For the second quarter, general and administrative expenses decreased by approximately 3% to $135.4 million or 35.3% of sales, compared to $139.8 million or 32.2% of sales in the prior year.

The decrease in G&A was primarily the result of reduced salaries, lower research and development costs, as well as cost efficiencies in our new distribution center.

These decreases were partially offset by increased store operating costs and the additional 39 domestic and international Company-owned stores, along with $3.2 million of additional depreciation expense and $5 million in rent expense.

During the second quarter of 2012, we had loss from operations of $1.5 million compared with a loss of operation of $48.2 million in the second quarter of 2011.

Net loss during the quarter was $1.8 million, compared to net loss of $29.9 million last year.

Net loss per diluted share in the second quarter was $0.04 on approximately 49.3 million average shares outstanding, compared to a net loss per diluted share of $0.62 on approximately 48.3 million average shares outstanding in the prior year.

Net sales for the six-month period ending June 30, 2012, decreased 19.3% to $735.3 million, compared with $910.6 million in the prior year period.

Gross profit was $327 million or 44.5% of sales, compared to $335.9 million or 36.9% of sales in the prior year period.

Selling expenses were $69.4 million compared to $90.7 million from last year.

General and administrative expenses were $266.3 million, compared to $281.2 million from last year.

Net loss for the six months was $5.4 million compared to a net loss of $18.1 million last year.

Diluted loss per share was $0.11 on approximately 49.3 million average shares outstanding, compared to diluted loss per share of $0.38 on approximately 48.3 million shares last year.

And now turning to our balance sheet which continues to remain very strong.

At June 30, 2012, we had $374.2 million in cash or approximately $7.59 per share.

Our cash position reflects payments of approximately $5 million for our previously announced global settlement with the FTC related to our toning products.

The balance of the settlement of approximately $45 million is expected to be paid in the third quarter of 2012.

These expenses were accrued and reflected in our fourth quarter 2011 results, and we do not expect any additional material costs related to the settlement.

Accounts receivable at quarter end were $237.7 million, and our DSOs as of June 30, 2012, were 51 days versus 54 days in the prior year period.

Total inventory, including merchandise in transit at June 30, 2012, was $258.1 million, representing an increase of $31.7 million from December 31, 2011, and a decrease of $67.7 million from a year ago.

Long-term debt at June 30, 2012, was $71.3 million, compared to $81.1 million in the prior year period.

The decrease in long-term debt primarily relates to payments made on our distribution center equipment.

Shareholders' equity was $894.1 million, versus $946.9 million from a year ago.

Book value or shareholders' equity-per-share stood at approximately $18.14 as of June 30, 2012.

Working capital was $569.6 million, versus $624.3 million from a year ago.

Capital expenditures for the second quarter were approximately $11 million, of which $2.1 million consisted of six new store openings and several store remodels, and $6.9 million related to a distribution center and distribution center equipment.

As we reflect on our significant achievements over the last 20 years, we've made incredible strides to become the brand we are today.

Over the last two decades, we have overcome many challenges, and this year remains no different as we focus on our goal to profitably grow.

During the second quarter, we continue to see improvements in our domestic retail business with fresh new product and styles across many of our divisions, including the expansion of our Performance division.

Our domestic wholesale business also benefited from the new styles introduced for Spring 2012, but we're still negatively impacted by the closing of our non-Skechers branded lines and the clearing of toning inventory this time last year.

For our international distributor and subsidiary businesses, we faced the challenges of a record quarter last year, a reduction in toning sales, and negative macro economic conditions across Europe.

As we continue on the path of cleaning up our inventory and bringing in new and relevant product in the diverse categories our brand represents, we believe our increased backlogs and positive pre-lines will result in improvement and increased shelf space in the second half of 2012.

We are delivering new kids' styles for back-to-school, and we will be introducing new initiatives for Performance and Lifestyle.

Holiday 2012, and Spring 2013, buy meetings with our key domestic accounts this month indicate we are on track for continued growth and expansion of shelf space.

We also expect to see improvements in our international and retail businesses.

With improved gross margins, inventory levels in line with our expected sales, continued attention to managing our expenses, and a strong balance sheet, we expect a stronger second half as we build momentum into 2013.

And now, I'd 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) And our first question comes from the line of Jeff Van Sinderen with B. Riley.

Please go ahead.

Good afternoon.

Let me just say congratulations on the improving trends.

Thank you.

David, I wonder if you can talk a little bit more about which specific product is selling best in your own retail stores; what's driving the comp in your concept stores?

Is it transactions or UPT or largely AUR?

And then also, when do you expect your regular domestic and international stores to turn positive comp?

I know I think you said in your prepared comments that you expect retail to be better in the second half.

And then maybe you can also talk a little bit more about wholesale and which product, which products your retail partners are responding to best and where you feel you have the most opportunity as you look at second half.

Well, the opportunities are about everywhere.

And it's -- actually combining the first part and the last part of your question is that our retail partners in our store are experiencing significantly better sales, almost across the board.

It goes from active which has become a very big part, our women's sport, men's sport.

Men's USA is picking up some and certainly our Performance, as well as kids, both girls and boys.

So we're getting a very good sell-through across the board.

It's not one particular item, although the fitness product is still going very strong for us and doing well, but it's added to by everything else.

Almost every part of our brand is showing increases and very solid sell-throughs and growth year-over-year.

And you're correct, we anticipate that the retail stores in totality will turn positive in the fourth -- in the third quarter.

Certainly for easier comps, and we're off to a good start, so we feel pretty confident that we'll get to positive comps this quarter.

Okay.

Great.

And just wondering if there's anything else in the GO line.

You know you said GOrun is still doing well, and GOwalk.

Anything else new developing there, in terms of some of the newer generation GO products that you're seeing?

Well, we continue to develop.

If you come up and see our room, you'll see them at the shows when we present.

The line can move out to significant categories.

But to date, the only other thing we've delivered to our stores so far is GO Bionic, and that's very recent and its off to a good start as well.

Okay, great.

Maybe you can touch a little bit more on what you're seeing in western Europe and some of your other international segments that are worth pointing out.

Well, as we said, I believe western Europe is obviously down significantly, and we anticipate it will remain down certainly through the third quarter, although we see some positive signs, some product selling.

It's just across the board, it's in the places you'd imagine.

Germany also shows down.

The only one we have that's holding its own and possibly could break even for the back half of the year is the UK, and since it's our largest, that's certainly something.

But Germany, Italy, Spain, very difficult.

And it's anticipated it will stay that way.

The balance, as you go around the world, South America, both Chile and our distributor that handles the biggest part of South America being Venezuela, Colombia, and all the way up to Mexico, along with Mexico, seem to be doing very well.

Brazil, as I said, we retrenched.

We were very overly committed to non-Skechers brands and Shape-ups last year, so it was quite a significant cleansing process.

And if you know anything about business in Brazil, it's very difficult, and you have to cleanse it in Brazil.

It's just -- you get no duty back; the duty rates are horrific, and you have to cleanse it out in Brazil.

So that set us back a bit.

But we're now showing new product, delivering some new product, and we're getting some good results, and it's just a matter of time before we continue -- we start growing and become significantly positive there.

Southeast Asia has held up well for us.

Korea continues to do well.

Australia/New Zealand continues to do well.

Our joint ventures outside of China -- Hong Kong, Singapore, Malaysia do very, very well and continue up.

China's starting to get closer to positive.

We still anticipate they'll be positive profit-wise by the end of the year, and they do continue to grow and continue to open stores.

And eastern Europe where, in Ukraine and Russia, where we have significant businesses are going to show increases in the back half.

So right now we've seen the most difficulty in western Europe.

We've had problems with the currency, obviously the euro there, as well as the existing business.

And it is a big piece of our business but that's going to take a little while before it comes back.

Okay.

One more question, and I'll jump back in the queue.

Is it possible or feasible for you guys to be profitable given the improvement in trends you're running in Q4?

Well, I think we said before it's certainly possible.

It's way too early to tell.

As we get acceleration from this type of product, certainly around the world, anything is possible.

It would take some increases from here, but we still remain very, very positive.

It seems, you know, our goal has always been to build up and to be very positive, to go into first quarter of '13.

And that means if we perform well for back-to-school and these products are as good as we think they are, and as good as our customers are telling them they are, some of it could move back to December and push the whole quarter up significantly, so yes, it's possible still.

Okay.

All right.

Great to hear.

Thank you very much, and good luck this quarter.

Thanks.

Thank you.

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

Please go ahead.

Hi, David.

Hi, Scott, how are you?

I'm good.

Thanks.

I missed it.

What exactly was US wholesale down in Q2?

It was down $39 million.

I think 11% -- 18%, something like that.

18.

Okay.

Is US wholesale based on your best guest right now; is that going to be positive in Q3?

Yes.

We anticipate it's going to turn positive in Q3.

We tried to bring out in the prepared remarks, although it might have been difficult to pick up, our non-toning, non-fashion brands, the eco stuff that we're discontinuing now, came pretty close last year to being flat, although obviously with low margins and no performance in it, so yes, it's anticipated that our domestic wholesale business turns positive this quarter.

Okay.

And I mean, you mentioned kids.

Is kids going to be positive?

And, you know, are you all the way around on Twinkle Toes again?

Twinkle Toes, we still have new offerings and Twinkle Toes remains a very active part.

It's probable that kids will break about even in Q3.

Okay.

And then you're sort of at the sweet spot still with the inventory super clean.

So I mean, you know, you don't have a lot of sales into the off price from what we hear, so are gross margins still going to be, you know, way above 44?

Right now we have no reason for it to change other than the flip in international.

While we anticipate international will be relatively flat for the quarter, it's going to be a bigger increase in distributors and certainly less from western Europe, and that's obviously a big swing in margins, so we may have margin impact from the switches in international.

So other than that, yes, everything remains status quo.

We think we'll actually pick up some margin at our retail stores in the third quarter.

Of course, they are clean, as well, and they're starting to sell really a lot of the new product, which, as it moves through the outlets will pick up the margins there.

And we should maintain pretty healthy margins in domestic wholesale, so we're still feeling pretty good about that.

Okay.

And then, you know, I think it's on everybody's mind, you know, as we get toward Spring, '13, you made some comment I think that backlog is up double digits.

Or at least it's up double digits from a negative number that you had before, so maybe you can clarify that.

But as we look to Spring 2013, you know, what sort of visibility do you have on sales from the new GO product?

Walk seems to be accelerating.

I don't know that it's changed significant.

We were up double digits, but remember that up double digits also includes a decline for our western European subsidiaries so if that had remained relatively flat, margins would be up significantly more.

The only thing I can tell you about first quarter '13 is the feedback I get from the larger customers we've had buy meetings with the last few weeks and they're all very positive about the product and about the shelf space we can acquire for first quarter.

So while it's not in the bag yet, certainly everybody's still looking around.

All the comments we've received and what we could tell and sell-throughs that we're monitoring as we go into back-to-school seem to indicate that everybody feels we'll have significant upside.

And that includes the fitness and the lifestyle product for first quarter '13.

Could we look at first quarter '11 as a guide, or is that still even too much because that was inflated from Shape-ups?

That was still kind of inflated from Shape-ups, but I wouldn't take it off the table if western Europe and international and Japan picks up as much as we think they might.

Okay.

Thanks, David.

Thank you.

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

Go ahead.

Thanks for taking my question, David.

How are you?

Hello, Sam.

Pretty good.

Can you -- just some housekeeping.

Can you give us the actual dollars for domestic wholesale international, also retail e-commerce and then the US, Canada, other international?

Can you just give us the actual sales numbers?

I'll tell you what, I'll give you an offshoot from what we're going to print in the Q. For the quarter, domestic wholesale was a little over 46% of the whole.

International was just over 23%, that includes distributors and subsidiaries.

Sorry, 23%.

I think I said that.

Retail, both domestic and international, was 29.25%.

And 1% or 1.5% was in our direct marketing, so that's what you can expect to see in the Q.

So that was the e-commerce?

E-commerce is balancing numbers, about 1.25%, 1.5%.

Okay.

Can you tell us -- and then you talked about -- all right, so we have it.

And then the US, we'll deal with that later.

Just to -- when you're thinking about the kind of sales -- I mean, you said they're going to be up for the balance of the year.

You know, what kind of sales increases are you foreseeing at the moment for the balance of the year?

Well, it's kind of early.

Like we said, we don't give guidance.

We show domestic wholesale will be up, and you know, when we get hot like we are now and everybody's chasing some product, it tends to grow pretty significantly.

But it's kind of early.

We're still geared towards first quarter '13 where we think a lot of positive things and a lot of things that we can do with our production facilities happen.

So --

But do you think you can be up -- are you -- I mean, you do generate fast, and you're coming up against horrific decreases last year.

Could we see a 10% increase in domestic wholesale in the third quarter?

In domestic wholesale in the third quarter?

That's certainly possible.

And then when we look at Q4, that should be accelerating from there, theoretically?

Correct.

Okay.

And what -- are you finding as far as the GO series and women's Lifestyle -- women's active product, you know, that you're back hitting the sweet spot in that $50 to $60 price point hard, and that's where -- is that where you're getting a lot of the positive responses from?

In fitness, that's sort of the GOwalk, or the Skechers GOwalk (multiple speakers) price point which is certainly hot, but the balance is higher and they perform very, very well.

In active and sport I would tell you in women's that's probably correct.

Can you give us some idea within the GO product sort of what percent right now is GOwalk versus the higher ticket product?

I hate to give that number on the street.

We can talk about that directionally later.

But GOwalk is certainly big, but it's not half.

I mean, if you go all around, our men's product is performing quite well, both Run and Ride.

And the women's product in Run and Ride continues to perform well.

It's just -- GOwalk is concentrated when it's very colorful and has a lot of SKUs in it and is an eye-opening experience for our customers, as well.

It fits right in there and they got delivery of that earlier.

Got you.

Thanks, David.

And continued success.

Thanks.

Thank you.

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

Please go ahead.

Hello, David.

Hello, Chris.

So I just wanted to be clear about something.

So if Q3 potentially US wholesale could be up 10%, so just say maybe it's up 5% to 10%, you made some comment, total international, is that flat?

How you break out subsidiary versus distributor?

How do we think about that for the third quarter?

Well, I think it's relatively flat.

I think we'll show significant increases in distributors and slightly down.

I mean, we're going to be down significantly in western Europe, but part of that will be made up by Japan, and part of that will be made up from -- which will be a subsidiary, so the subsidiaries will get that much closer -- and the rest from distributors which will grow significantly.

So we tend to be somewhere around flat, maybe slightly, slightly positive.

But it may have a little bit of margin impact.

Okay.

And then the retail business assuming you comp, say, positive low single and you have store growth, probably taking 10%-ish growth rate for the retail piece?

Certainly possible.

Okay.

So it looks like potentially a 450, somewhere in that 440, 450 revenue number potentially for the third quarter, doesn't seem out of the realm of possibilities?

Certainly a ballpark we would talk about.

So let me -- so if gross margins sort of hold this line, maybe there's a little bit of a margin impact, you did a nice job on marketing expense relative to what -- or selling expense relative to what you communicated to us beforehand last time we got a call.

I mean, is that -- does that incrementally go up in dollars on selling expense line just because it's back to school and marketing initiatives step up?

How should we think about that?

Is that flat year-over-year, or does it go up slightly year-over-year on dollars on the selling line?

I think the selling line remains relatively flat to net last year.

I don't know if there's any projects.

From the media point of view, the biggest single one will be relatively flat.

I think what you're looking at is that third quarter last year and second quarter this year are equivalent in dollars.

And I still would -- that would be the place I'd start my analysis.

Okay.

And just in and around the G&A line, I mean this sort of $135 million number, is that sort of a fair proxy for third quarter, or does that go up slightly because you have more stores?

How do we think about that?

I think there's actually there's some room for improvement as we go through that.

Obviously, there's only five to seven stores in the whole back half of the year.

So I think we can get some efficiencies in there.

I think we'll make up some of that obviously with the legal fees and some you know, we had a big 20th party.

We're not going upgrade the show.

So I think there's a slight amount of positive leverage that we can get or decrease in real dollar terms of the G&A line in the third quarter.

Certainly no increases from last year, and maybe some slight decreases.

Okay.

Then I'm curious, when you guys think about a quarter whereby you can be break even, I mean it did as much revenue as it did here, $380 million, I mean, we're sort of -- how do you think about break even on a quarterly basis?

I mean obviously it would be profitable in the third quarter; I know fourth quarter has yet to be determined, but do you need to be close to a $375 million number to be profitable in the fourth quarter?

I'm just trying to get an idea where that stands at this point.

I don't think so.

If you look at last year's fourth quarter and this year's second quarter, there's a $16 million differential in the selling line.

And I don't think last year's increase in G&A flows through this year, it will be more like, you know, first and second quarter this year.

Right.

So you could take that number down somewhat, and there could be some more efficiencies that we find, as well.

So yes, you could take the number down somewhat from there.

Okay.

So I mean, it could be more like a 350 kind of top-line revenue number, you could start to see break even?

Yes, if you think about $25 million is $10 million in gross margin and you have $16 million to play with, you can play back with the numbers.

I mean if nothing happens, then no efficiencies or gain.

Okay.

Just on the balance sheet, the accounts payable continues to be pretty high relative to inventory.

I'm just curious --

It still has the accrual for the FTC settlement.

Oh.

That's what's in there.

Okay, I see.

So, that will come down third quarter as you pay that out, correct?

If I pay it out, it will come down, yes.

(laughter) Can't argue that.

Okay, okay.

All right.

I got you.

Okay.

That's all I have.

Thanks, David.

Appreciate it.

Thanks.

Thank you.

(Operator Instructions) Our next question comes from the line of Matthew Berry with Lane Five Capital Management.

Please go ahead.

Hello, David.

Hi.

David, a couple of questions just on the accounting.

Firstly, the $438,000 you've got in the non-controlling interest line, how much of that is for your sort of the net rent effectively to the DC partner?

I think the biggest piece is the partnership we have in the distribution center certainly.

But it's also a piece -- a fairly significant piece, although certainly not the biggest piece from our joint ventures in China and the beginnings of our joint venture in India.

So how much is to the DC partner?

I'd have to go look.

I don't have that off the top of my head.

If you call me later, I'll give it to you.

Okay.

One other thing on -- just aggregating that a little bit.

When I look at the direct subsidiary sales which are included in your international wholesale, so the non-distributor bit, the direct bit, you include the -- JV, the retail JVs in there, right?

Correct.

What is split of the direct subsidiary sales between the JVs and direct wholesale to third parties?

The joint ventures probably represent about 5% of the total international sales, give or take.

Okay.

And are they -- is that profitable at the moment?

The JVs in total, including China?

Totally, if you include China they're at about break even.

Okay.

Okay, that's useful, thank you.

And then one other thing just on sort of the G&A side of things.

You know, we've talked over this a little bit.

I was wondering if you could give me a little bit of a clue as to what your headcount was like at the end of the first half for full time and part time.

I don't know that we've ever given that out.

And I have to add all the subsidiaries together.

So I look at them usually in pieces of operating pieces.

So it's down significant from last year because of the distribution center.

Other than that, it's remained fairly stable year-over-year.

Okay.

All right.

Is it down from year end?

The distribution center or just in general?

In general, is fulltime headcount down from December?

I'd have to look.

I think it might be down a little bit.

But nothing significant.

Okay.

All right.

Thanks, David.

Yes.

Thank you.

And we have time for one last question and our last question comes from the line of Bill Dezellem with Tieton Capital Management.

Please go ahead.

Thank you.

A couple of questions.

First of all, I believe that you expressed some enthusiasm for western Europe in the first quarter of 2013, that you may see some positive items there.

Could you please share with us what you think is going to overcome what appears to be an ongoing malaise over there?

It is ongoing.

What we see is in some places, that the new product that we've put in while people are certainly being more careful and watching their open to buys and inventory is way down, but what we've delivered seems to be performing quite well, for whatever reason.

And you could call it just being positive about world-wide how our new products are being perceived, is that we believe we can pick up shelf space because of our price points and because of the demand for our product in parts of western Europe.

Great, so this -- you're positive inclination is based on actual sales that you're seeing of the early product being there as opposed to just thinking or hoping that it might actually resonate.

Absolutely.

We're always looking to see sales results before we can make any kind of decisions.

Okay, great.

Thank you.

And then, the next question is relative to inventories, they increased pretty substantially from the first quarter.

Would you help us understand what are the underlying dynamics behind that?

Well, it's a two-fold thing.

We're growing now; we're finished cleaning out and as pendulums tend to swing, we think we've swung too far and our non-toning inventory was certainly as lean as it's ever been.

And if somebody had asked me on the call, we obviously have nothing left for users that we use for closeout material that we still make some positive margins, and certainly some sales from.

So, we think we were a little light going in, and historically we tend to grow inventory at the end of the second quarter.

Certainly if we're going into a positive selling time because we count everything that's in transit to us and since our biggest shipping months of the year are June, July, and early August, there's a lot more in transit to us if we've played it all right to deliver all the stuff for back-to-school.

So, historically, places we beef up, especially when there's a lot of new product in the offering.

So, the component that's different from the normal preparing for the big selling season is just that you started out with inventory that you felt were a little too skinny.

They were skinny, and -- we're not building any, so we would have thought the way we were purchasing we would have started to build a little bit by now, but the product performing so well that we haven't been able to build as much inventory even as we'd like.

So, basically the inventory that we're seeing is -- almost solely for the higher -- your larger selling season.

That's pretty much it right now.

Correct.

Great.

Thank you, David.

Thank you.

At this time, I would like to turn the conference back to Skechers 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.