Skechers USA Inc (SKX) 2013 Q3 法說會逐字稿

Greetings and welcome to the SKECHERS USA Incorporated third-quarter 2013 earnings conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

At this point, I'd 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?

Good afternoon and thank you for joining us today to review SKECHERS' third quarter 2013 results.

The broad-based demand for our men's, women's and kids' product resulted in third-quarter revenues of $515.8 million, making it the second highest quarterly net sales in the Company's history.

The 20% quarter-over-quarter growth was the result of double-digit improvements in our domestic wholesale, Company-owned retail and e-commerce businesses, and a single-digit improvement in our international business.

With key style selling across numerous product categories, we believe we are in a strong position in regards to our product offering and our reach to customers and consumers around the world.

With new product reaching the United States first, the largest increase came in our domestic wholesale business, which improved 30.1%.

This was due to an increase of 25.2% in pairs shipped, combined with an increase of 3.9% in average price per pair domestically as compared to the same quarter last year.

Sales and financial highlights of the third quarter include a 30.1% increase in our domestic wholesale business; a 19.8% increase in our Company-owned retail business, with a 16.9% increase in comp store sales; a 5.8% increase in our international business, with our subsidiary sales increasing by 16.1%; a 30.3% increase in our e-commerce sales; significantly improved earnings from operations of $44 million or 8.5% of net sales; gross margins of 44.7%; much-improved net earnings of $26.8 million and diluted earnings per share of $0.53; in-line inventories, which decreased $29.1 million from year-end 2012 and showed an increase of $7.8 million from a year ago; and a strong balance sheet, with $332.8 million in cash, or approximately $6.58 per share.

The third-quarter improvements are the continuation of the momentum we began to experience in the second half of 2012 and further accelerated with the delivery of our new product initiatives in the first half of 2013.

This resulted in nine-month revenues of $1.4 billion, a 19.8% increase.

We believe this positive trend will continue through the end of the year and into 2014.

Now, turning to our business in detail.

In our domestic wholesale business, sales increased 30.1% or $52.4 million for the quarter versus the same period last year.

As noted, there was an increase of 25.2% in pairs shipped, as well as an increase in the average price per pair of 3.9%, both key indicators of the strength of our newer products.

The growth came from double-digit improvement in women's, kids and work and a single-digit improvement in men's.

Among our SKECHERS lifestyle lines, we experienced double-digit growth in our men's and women's sport and BOBS lines.

We also experienced significant sales in our newer sport active line.

To support our varied lifestyle product lines, we aired numerous commercials for back-to-school.

These included Skech Air, men's SKECHERS sport, men's Relaxed Fit, starring Joe Montana, and two BOBS from SKECHERS commercials, one which featured Brooke Burke-Charvet.

The continued success of BOBS, our charitable footwear line, has resulted in more than 5 million pairs of shoes donated to children in need, including those impacted by the recent floods in Colorado.

Our SKECHERS boys and girls lines also had double-digit improvements in the quarter.

As always, we supported our back-to-school kids business with numerous television commercials starring our cast of characters, Twinkle Toes, Heidi High Top, Bella Ballerina, Mega Flex and Air-Mazing.

We also aired two commercials in support of our new Super Hot Lights shoes for boys and our Lil BOBS shoes for girls.

We continued to innovate in our performance division, evolving both our running and walking footwear, which resulted in significant sales in our SKECHERS GOwalk and on-the-go footwear for women and double-digit growth in our men's performance line.

By working closely with Meb, America's top marathoner, we developed technical footwear with the needs of runners in mind and received numerous awards in the process, including three in the quarter.

This brings our total number of performance awards to 13.

Also in the quarter, SKECHERS was named the official footwear and apparel sponsor for the Houston Marathon.

And next month, Meb will be competing again at the New York Marathon, a race he won in 2009.

Our broad product diversity and multiple key initiatives across our extensive footwear platform have allowed us to further develop and grow our many lines, including the expansion of BOBS into a year-round business, Relaxed Fit footwear for women and the takedown of SKECHERS GOrun Ride and GOwalk into kids.

The demand for our product remains high.

Our third quarter was one of the strongest third quarters for incoming orders, and October is tracking to be one of our strongest Octobers for incoming orders as well, both positive signs for what we believe will be a strong holiday season and first quarter of 2014.

In the third quarter, our total international subsidiary, joint venture and distributor sales increased by 5.8%.

Our subsidiary and joint venture sales improved by 16.1%, offset by our distributor sales, which declined by 17.3%.

The decrease is due to the continuation of several factors we mentioned on our last conference call, including political, currency and economic issues.

The solid growth of our subsidiaries is attributable to improvements in seven of our 11 regions, including double-digit increases in two of our largest subsidiaries, Chile and Canada.

We are also pleased that Germany, another of our large subsidiaries, has rebounded from the economic situation in the country and is showing growth, and that Brazil and France, two countries that have historically been a challenge for us, experienced double-digit growth.

Spain and Italy, two subsidiaries that have been impacted by economic challenges in their countries throughout the past year, did not show improvements in the quarter.

But we believe they have bottomed out and are starting to show signs of turning positive with their growing backlogs.

Japan, our newest subsidiary, showed decreases this quarter, but they are just getting started.

Bookings indicate that the first half of 2014 will be strong and we expect the country to positively impact our international sales in the next year or two.

The very strong joint-venture growth is attributable to triple-digit improvements in China and double-digit improvements in Hong Kong and Malaysia and Singapore, as well as the addition of India as a joint venture, which is still in the very early stages.

We are pleased with the continued success in the region and the growth that we have experienced in China, which could be one of our largest international markets.

India, which has two stores already open, will begin to positively impact our international sales in the next 2 to 3 years.

As I mentioned, the decrease in our international distributor business is due to a combination of political, currency and economic issues in several countries, including Venezuela, Colombia, Egypt and Kenya.

We are pleased that many of the distributors negatively impacted in these markets are taking steps to shore up their business in other regions they manage, which should result in positive performance next year.

We expect distributor sales to be slightly down for the full year.

However, we believe the product successes we are experiencing in the US and international subsidiaries will positively impact our international distributor business in 2014.

Several distributors did experience growth in the quarter, including Australia, Indonesia, Mexico, Russia and Turkey.

At quarter end, there were 294 distributor-owned or licensed SKECHERS retail stores around the world; 128 SKECHERS stores in our joint venture countries in Asia, including those run by licensees in the region; and an additional 26 Company-licensed stores in Brazil, Canada, Spain, Portugal, Ireland and the Netherlands.

Of the 448 SKECHERS stores owned operated by our joint ventures, franchisees and distributors, 26 were open in the third quarter, including our first stores in Turkey and Brazil, and five additional stores in Mexico, which brings their total to 31.

Additional store openings in the third quarter include three in the Philippines, two each in India, Indonesia, Peru, Saudi Arabia and Taiwan, and one each in Australia, Canada, Hong Kong, Malaysia, Portugal and South Korea.

One additional store was just opened, our first in Kazakhstan, and another 40 to 45 distributor, joint venture or licensed SKECHERS stores are on plan for the balance of the year.

We anticipate our international sales to be up in the total for the year-end, and we believe the momentum we are experiencing in the US is translating positively around the globe, first through our subsidiaries and JVs and then to our distributors.

Already, we see Canada's growth mirroring that of the States, moderate growth in Brazil, a strong growth surge in China, as well as Southeast Asia, and newer markets like Turkey establishing a strong footprint.

As more and more retail stores open, the new product delivers and the brand strengthens, we anticipate our international business will see growth and be in line with our domestic business by the second half of 2014.

For the quarter, total sales in our Company-owned retail business increased by 19.8%, with domestic sales improving by 19.5% and international sales by 22.2%.

For the quarter, we had the positive domestic comp stores sales of 17.3%, and international comp store sales were up 14.4%, for a combined increase of 16.9%.

At quarter end, we had 370 Company-owned SKECHERS retail stores.

In the third quarter, we opened 16 stores, eight domestic and eight international locations.

These included new concept stores in New York, New Jersey and Puerto Rico, as well as two in Toronto and one in Leeds, England.

We also open three stores in Spain and another store in Chile, bringing our total store in Chile to 22.

We closed two US locations in the quarter.

To date in the fourth quarter, we've opened four stores, including a new concept store in Paris.

We've also closed one store and do not have additional closures planned for the balance of this year.

We anticipate opening another 17 to 20 stores this year in the US, Chile, Canada and the UK.

We view our SKECHERS retail stores as profitable branding vehicles, and along with opening new stores, we continue to remodel key locations.

Though a small part of our total sales, e-commerce and licensing contributed to our revenue in the quarter.

SKECHERS' e-commerce business in the US continues to grow, with an increase of 30.3% in the third quarter.

Our licensing division generated $1.6 million in revenue in the third quarter from our licensees, including SKECHERS branded eyewear, socks and backpacks.

Now, turning to our third quarter 2013 numbers in more detail.

As I discussed earlier, third-quarter sales increased 20.1% to $515.8 million compared to $429.4 million in the third quarter of 2012.

Third-quarter gross profit increased to $230.5 million or 44.7% of sales compared to gross profit of $187.8 million or 43.7% of sales in the prior-year period.

The improved profitability and higher gross margin were due to strong sellthroughs across all our divisions, reflected by double-digit gains in both our Company-owned, international and domestic retail businesses, as well as our domestic wholesale division.

Third-quarter selling expenses were $40.2 million or 7.8% of sales compared to $34.4 million or 8% of sales in the prior year.

The dollar increase was primarily due to increased advertising and tradeshow expenses.

For the third quarter, our general and administrative expenses were $147.9 million or 28.7% of sales compared to $134.9 million or 31.4% of sales in the prior year.

This represents a 275 basis point improvement in operating leverage.

The dollar increase in G&A was primarily due to a combination of factors related to increased wholesale volume and our increased store account, which includes higher salaries and wages, rent and employee benefits, as well as increased warehouse and distribution costs.

It is important to note that due to additional professional fees relating to the re-audit of our 2011 and 2012 consolidated financial statements, we incurred approximately $1.7 million in fees for the nine months, of which approximately $900,000 was expensed during the third quarter.

During the third quarter of 2013, earnings from operation were $44 million or 8.5% of net sales compared to $20.3 million or 4.7% in the third quarter of 2012.

Net income during the quarter was $26.8 million compared to $11 million in the prior-year period.

Net income per diluted share in the third quarter was $0.53 on approximately 50.6 million average shares outstanding compared to $0.22 on approximately 49.9 million average shares outstanding in the prior year.

Our effective income tax rate for the quarter increased to 33.2% due to increased domestic profitability, which caused a revision of our previously estimated tax rate of 30% to 32% for 2013.

In the third quarter, we recorded an income tax expense of $14.1 million compared to $3.7 million in the prior-year period.

We currently project our effective tax rate for the remainder of the year to be approximately 32%.

Net sales for the nine-month period ending September 30, 2013 increased 19.8% to $1.4 billion compared with $1.17 billion in the prior-year period.

Gross profit was $618.1 million or 44.3% of sales compared to $514.9 million or 44.2% of sales in the prior-year period.

Selling expenses were $120 million compared to $103.8 million from last year.

General and administrative expenses were $426.5 million compared to $401.2 million from last year.

Earnings from operations for the first nine months of 2013 were $76.5 million or 5.5% of net sales compared to $14.4 million or 1.2% for the same period last year.

Net income for the nine months was $40.6 million compared to $5.6 million last year.

Diluted earnings per share were $0.80 on approximately 50.5 million average shares outstanding compared to diluted earnings per share of $0.11 on approximately 49.8 million shares last year.

And now, turning to our balance sheet.

At September 30, 2013, we had $332.8 million in cash, or approximately $6.58 per share.

Trade accounts receivable at quarter end were $268.7 million, and our DSOs at September 30, 2013 were 47 days versus 49 days in the prior-year period.

Total inventory, including merchandise in transit, at September 30, 2013 was $309.9 million, representing a decrease of $29.1 million from December 31, 2012, and an increase of $7.8 million from a year ago, of which $4 million was directly attributable to retail store growth.

Long-term debt at September 30, 2013 decreased to $119.5 million compared to $128.5 million at December 31, 2012.

The decrease primarily relates to payments made on our distribution center equipment.

Shareholders' equity was $965.1 million versus $919.7 million at December 31, 2012.

Book value, or shareholders' equity per share, stood at approximately $19.07 as of September 30, 2013.

Working capital was $696 million versus $647.8 million at December 31, 2012.

And capital expenditures for the third quarter were approximately $9.5 million, which primarily consisted of several new store openings and store remodels, combined with IT equipment upgrades.

In summary, we are very pleased with our third-quarter achievements, including our second highest quarterly sales in the Company's history.

The growth was due to our broad assortment of new in-demand product, which resulted in gains in our domestic and international wholesale businesses, Company-owned retail business and e-commerce.

We are looking forward to delivering our new product internationally and developing more innovative product for long-term success.

As we continue to expand our product offering, we are also planning to grow our retail footprint beyond the more than 370 Company-owned SKECHERS stores and more than 445 distributor, JV and license stores, with another 17 to 19 Company-owned stores and 40 to 45 distributor, JV or license stores this year.

We believe the momentum we are experiencing now will continue in 2014 based on our key performance indicators, positive reactions to our product from our accounts during meetings this month.

Domestic and international backlog is up 19.7% from the period last year, and two exceptionally strong incoming order periods, one of the best third quarters and one of the best Octobers.

Our much-improved profitability, operating leverage, cash balances of $332.8 million and in-line inventory levels are an indication of our determination to efficiently manage our business as we leverage our growth.

We are looking forward to building on our solid position in the global marketplace and capitalizing on our proven key initiatives.

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

(Operator Instructions).

Scott Krasik, BB&T Capital Markets.

David, how are you?

Hi, Scott.

I'm doing very well.

Thank you.

So just a couple questions.

The backlog, the 19.8, whatever it is --

19.7.

19.7.

Can you -- what is the growth rate for the fourth-quarter deliveries versus what you have booked for spring so far?

Fourth quarter is up.

It's not that high, because we are obviously into the quarter already.

The biggest piece is obviously for the first quarter or first four months of 2014.

Okay.

And then would you say that the comment around October accelerating is that you think by the time you finally book spring, it could actually be above that 19.7?

It almost has to be right now, because we are booking very, very well for October.

So unless something changes in the last week or two that slows the rate down significantly, we will be well ahead.

And the increase in incoming orders will be significantly larger than the increase in shipping for the month, which means our backlog should grow at a much faster rate.

So I would anticipate it would be significantly -- well, depending on how you define significantly -- but certainly higher at the end of October than it is right this minute.

And then you are done or you still take orders in November and --?

Well, we still take them.

Remember, we always have some inventory and we always have an at-once component, so that continues to move.

Not only that; there's changes -- we have stuff booked for March and April.

As we go through, if things start to move up, if we stay hot, then things booked for April can actually move into first quarter and increase the backlog for first quarter as well.

So there's a lot of moving pieces, but right now we seem to be in a very positive mode.

Great.

Of that 20% roughly backlog, what does your international backlog look relative to domestic?

It's up double digits as well, just not as high as domestic.

But it is certainly still in the double digits.

Okay.

And then you had previously thought distributors would be back ordering in the fourth quarter.

Is that now less likely?

We still have some orders coming in in the fourth quarter.

The first quarter is probably a tougher piece.

But from what we see now, we know from second quarter on, I believe, we should see some significant acceleration.

Okay.

And then just lastly, can you break out that SG&A, like the dollar increase or how you are thinking about?

Because your volumes are up, so I know there is a variable part of the distribution cost, versus like the retail aspect of SG&A growth.

I would tell you in real dollar terms, certainly on a domestic basis, the biggest increase to the G&A line is from retail.

And that flows through rent and salaries, although -- and bigger distribution costs.

And I think the biggest increase in our distribution center would be from retail since it is the most labor-intensive.

So even without giving them the benefit, still the biggest piece comes from retail.

So there's no real offsets, given the volume increases and given the new stores, on a real dollar basis?

I mean, the dollar increases should be similar if not a little bit higher?

Is that fair?

Depending on the volumes certainly and depending on how many new stores we open in the quarter, that's probably true.

Okay.

Okay, good luck, David.

Thanks.

Thank you.

Jeff Van Sindren, B. Riley.

Hi, David.

Maybe you could just talk a little bit more about our retail comps.

They were extremely strong.

Did you mention gross margin for the retail segment?

Maybe I missed it or you (multiple speakers).

I didn't mention it, but they were up as well.

So we continue, just as in times past, to increase both our margins and our top line.

So we are actually getting significantly more efficient.

Okay, good to hear.

And what about your discounting of promotional levels in your own retail stores?

I'm assuming they were either flat or down, because your gross margins are up.

Is that a fair assumption?

Yes, I think the new product carries with it -- I think more goes through the concept stores and more full price at wholesale, certainly less discounting.

We don't discount other than really seasonal merchandise and on and off here through our retail stores.

Certainly not our concept stores, because we don't compete with any of our customers.

So it has more to do with the inherent gross margins in the product and their efficiencies and how much the new product is really in demand.

Okay.

And then is there any more color -- I know obviously a 17% comp, it's a huge number.

I'm just wondering was there a big difference as the months progressed throughout the quarter?

And then any difference you are seeing in October?

I know the comparisons, obviously they start to get a little tougher year-over-year for Q4.

Any more color you can give us on that, I guess, and maybe what you are looking for or what we should think about for comps for Q4?

Well, it's difficult to say now, because we are so -- we are hot.

In Q3, we comped up to almost 18%, but that was on top of last year was about 6% worldwide and a little over 6% domestically.

So we anticipated that.

And I think we saw -- even though it's hard to tell because we comped up every month of the quarter, we did see some slowdown in the comp increases as we came through the end of September, just like most retailers have reported and we saw as well.

The surprise to me has been somewhat October is still holding up well into the double digits, and that's significantly less than we showed for last quarter, at least for the first 2.5 weeks so far.

But that's on top of last year in October we comped up by 14%.

So if this holds through, we are going to have significantly compound upon compound increases for October, and hopefully that holds through for the quarter.

Yes, that's pretty impressive.

Okay, and it sounds like you feel pretty strongly that your bookings are going to be very good for the first part of next year.

Maybe you can just speak a little bit more to what is driving the strong order book.

Are there any particular product lines, categories that are driving it more than others?

Anything you can speak to there or is it really just across the board?

It's still pretty much across the board.

We are seeing positive signs just about everywhere, just as we have had in the past.

We have done -- our active lines and Sport Active lines and sport lines and casual lines have all performed very, very well.

I should point out, though, as we speak, we had an outrageously bigger first quarter last year.

If you remember, we had conversations that because Easter moved into March that the first quarter was significantly higher than it might have been and it sort of flowed through, the second quarter slowed down.

This year, we are going back to the norm.

So the fact that we have so much booked for first quarter is on top of what we think was an artificially high first quarter last year.

So it seems to be doing even better, and we should have more even flow through the second quarter, especially through retail, as Easter moves there.

So we are looking pretty good, we think, right now, given how well October has held up both at retail and in the incoming order level.

Okay, great to hear.

Congratulations and good luck for the rest of the quarter.

Thank you.

Sam Poser, Sterne Agee.

Good morning.

Listen, a couple questions.

Number one, can you walk through -- can you go into more detail on the G&A?

Can you just walk through the components there -- just to follow up on Scott's question -- can you just walk through that in the little more detail and how we should think about it going forward?

I don't think it changes significantly from what you've seen all year.

We will leverage the distribution center from year-over-year.

We pay less dollars for increased volume.

The increases will come predominantly from the retail store openings as we go.

We don't have any really outrageous.

And some slight increases from handling more volume, both in China and domestically.

But primarily, we don't see major increases anywhere other than volume-related.

There is no basic change in the G&A or how it runs.

The warehouse is proving as efficient as we had hoped.

Certainly leveraging -- while we need more people, obviously, as business grows, less people per dollar increase or additional pairs shipped than we have needed in the past, and we are still growing into it.

So it will continue to do that.

We are planning on automating somewhat our European, so we expect to see some of these same efficiencies by the end of next year when we are complete.

We should start by about April 1 and finish by the end of 2014.

So we've still got things going in that will improve efficiencies as we go along.

But right now, I think what you see is just the increased store base.

Remember, it's going to increase significantly more for fourth quarter.

And some of the distribution costs, but that's about it.

There really is nothing special in the G&A.

When we are thinking about it in absolute dollars, I mean, you picked up $12 million over last year -- or $13 million over last year in the quarter.

Are we looking at the same kind of increase in the fourth quarter?

Or in absolute dollars, the same amount, or you think it's going to be a little bit less in absolute dollars?

Just the G&A -- well, you know, historically, selling comes down in the fourth quarter.

For G&A, I think it remains relatively constant.

We do have a couple items, but they are small, like the additional auditing fees and things like that, that could come through, and probably some bonuses that hit in the fourth quarter.

But by and large, I would think we'd have pretty close to the same run rate.

At $148 million?

Yes, maybe a drop less, but yes, right around that rate.

And then right now, the Street is looking for about an 11% increase in revenue for 2014.

Is that a number that you could live with right now?

Yes, I don't really have any problem with that number from what I see right this minute.

And we have heard a lot of talk about BOBS slowing down a bit.

Are you seeing that?

Are you seeing that as well?

We have heard a little bit of a slowdown about BOBS, but they are continuing to sell and sell in our store.

And we have a lot of new product that we are showing for BOBS, so we don't think -- this is certainly not the end of the story.

I mean, there is some small slowdown.

It's not that big a piece nor that big a slowdown.

So we'll see how the new product fares as we get it out.

But as I said in my prepared remarks, we made it a year-round business and there's a lot of new product going out there, and we always are innovative, so we don't think it's going to be a significant downturn.

And once you get -- lastly, once you get totally up and going on -- with everything working the way you want it to work, how much leverage are you going to get -- how much leverage do think you can get from G&A?

Because the numbers came in higher than what I think expected and a few other people expected in the quarter, even with the new stores.

And then I have one other thing and I'm done.

Well, there are 16 stores that were opened, so most of it is rent.

We have increased depreciation.

Depreciation, when you look at that number, is running at $3 million a month.

So you can get $9 million or $10 million in depreciation that's in that, it's on the cash flow (inaudible); as we open the stores, you've got to start running them through.

And they are through lease term.

So sometimes they do accelerate some.

There was an extra $1 million that we had to pay the accountants for the reaudit of 2011 and 2012, so there's some moving pieces in there.

There are some bonuses that we pay up out at the midyear.

So I don't think anything's -- (inaudible) a little bit of currency in there too, as the dollar got somewhat weaker on the translation costs.

So altogether, I think we are pretty much where we thought we were going to be.

Of that $1 million -- that $1 million plus the $1.7 million year to date, which I don't remember you talking about the smaller pieces earlier, how did that break out by quarter?

And those are basically nonrecurring charges, because that was as a result of that mess with KPMG, right?

Yes, you're absolutely correct on the second piece.

The $1.7 million is basically Q2, Q3.

So it's $900,000 in Q3 and $800,000 in Q2.

And so would you refer to those as a one-time in nature?

Well, yes, we are going to go back to historical.

We had to pay KPMG obviously for the audits, and then had to repay to redo the two audits to get back in the good graces of the SEC and the New York Stock Exchange.

-- on an accelerated basis.

So that's just the fee; that had nothing to do with quarters or anything else.

Plus the $1 million.

So there was $1.9 million in Q3 and $800,000 in Q2, if you are saying (multiple speakers)?

$900,000 in Q3 and $800,000 in Q2.

The total for the two quarters is $1.7 million.

But you had another $1 million in -- you said in some -- in other fees there as well, on top of the $900,000.

You said some legal fees and so on that was associated with this.

No, I don't think so.

I think we've got them all confused.

There's just the two pieces that we have that relate to the accountants.

Okay.

And lastly, you said once you got through -- in the past, you said once you gotten through getting the DC up and running and all the various -- and getting your business back turned around, which it looks like it has, you'd start to think about uses of cash.

So I figure I might as well just ask.

Well, it's still early in the process, although we do think we are going to generate some cash.

But I think as we've had conversations in the past, or I've made fairly public, we do have some uses for it.

We do have debt on the distribution center, both for the equipment and the building, that we'd like to pay down as we go across.

We ultimately somewhere along the line would like to buy out our joint venture partner on the distribution center, which would make it a lot cleaner for us.

And we are going to put $12 million in the distribution center in Belgium, to get the European and possibly expansion into Eastern Europe more efficient.

So right now, we have some uses and we will consider them as we go forward and generate that kind of cash.

All right.

Thanks very much, David.

(Operator Instructions).

Christopher Svezia, Susquehanna Financial Group.

So first, on gross margin and inventory, inventory looked really good relative to the growth rates, relative to the backlog.

How should we think about that going forward, number one?

And number two, as it pertains to gross margin, how do we think about your gross margin rate sustainability at this level going into the fourth quarter?

Obviously, fourth quarter is usually not as strong, but just your thoughts in and around those two pieces.

Yes, we continue to manage inventory the same way.

We historically grow inventory in Q4 because it's a short season; we like to get it all in hand or underwater before spring really starts to ship.

So there will be some growth.

As far as gross margins are concerned, I don't see any near-term changes, although fourth quarter is somewhat lower.

But -- just by the nature of the quarter.

But I don't see any significant changes to the business and the pieces of the business and their varying relationships and percentages.

So I don't see any major changes to the margins as we get into fourth quarter.

It may come down sequentially, but certainly should be on the higher end of what we've shown in fourth quarters in the past.

So we still think we are looking good.

And [retail] -- like I said, the comps are holding up.

So even if the bigger retailers (inaudible), the (inaudible) margins will hold as well.

And given how well we've comped last October and how well we are comping this October, we still think we are in pretty good shape and still accelerating in it.

Okay, that's good to hear.

Selling expense.

Last year in the fourth quarter, it was $31 million.

It was up 30 some odd percent.

Are we -- could that be flat just because it was so -- grew so disproportionately strong in the fourth quarter last year, or how should we think of that and (multiple speakers)?

I think it's the same as the year.

I think there is in real dollar terms maybe a $2 million or $3 million increase that I would anticipate, all things being equal, year-over-year.

Okay, okay.

And so just -- I know you don't want to get too specific here, but as you just optically look at the fourth quarter and you kind of know where we are at and what we are thinking about, is there anything that stands out to you that is either out of whack or we are not thinking about?

Everyone is sort of at this $440 million in revenues and going on $0.21 on the bottom line.

Is there anything that optically stand outs to you at all, either aggressively or conservative or (multiple speakers)?

A little bit.

I don't have any real issues with the top line.

And I could be slightly conservative, although not a lot.

But I just don't understand how at $440 million you get to $0.20, when in the first quarter we did $450 million and only had $0.13.

And there may be some efficiencies in there, but certainly not a lot, and certainly not as significant on a margin expansion, although there may be a little bit.

So I would say somewhere in that range is the real number, unless the top line continues to move higher.

Okay.

Wait, did you say in the first quarter you earned -- what did you say again?

In the first quarter of 2013, we did $450 million.

Right.

We had margins of about 43%.

Advertising may be a drop higher than fourth quarter, although nothing outrageous.

Less overhead than we had in third quarter, which some of it is the stores and some of it might not repeat -- and you only end up -- I mean, we reported $0.13 today.

So if you are at $440 million, unless you've got real things to do with margins and you understand we have a higher tax rate now than we anticipated in the first quarter, very difficult that $440 million to get to $0.20.

Okay.

You can play with the top line, you can play with the margins and stuff like that.

But put the two together, you either got to move up your top line or move down your bottom line, I guess is what I'm saying.

Okay.

Just a last question I had was just on the international piece, you made the comment that you expect by second quarter of next year it to be something along the lines of growing in line -- was it growing in line with your domestic business (multiple speakers)?

Yes, growing in line with what we've seen this year, certainly into the double digits.

We expect very good things to come out of Japan, China to continue, Brazil to start to move, especially after you get past the first quarter, and then they're starting to book well.

And we don't see any more deterioration from the distributors, and Q2 was when they really started to have the issues.

So there could even be some positives there, whereas they had a fairly good first quarter.

So I think by second quarter, you've got to get back into double-digit growth for the international piece.

Okay, I got you.

Okay, all right, that's helpful.

All right, thanks very much and all the best.

Karina Friedman, Wedbush.

Hi, David.

I just wanted to follow up on Sam's question on the BOBS line.

I wonder if you could maybe give us a rough estimate of the total dollar size of the brand this year.

Well, we've announced that we've given away 5 million pairs of shoes, and we announce it every year.

So if you track back, I don't know, whatever, 3 million or 4 million pairs we've done this year, and I think the multiplication is fairly simple.

It's certainly not a small business, but at wholesale, it's certainly not an outrageously large one.

Okay.

And maybe could you quantify the current bookings trend specifically for BOBS versus the same time last year?

I don't have that right in front of me.

I don't know that I would give you it by line.

I think they are still up.

I don't have any real major pieces that are not booked ahead, for whatever that's worth.

They are certainly holding up in our stores, so I don't see any significant deterioration there.

Okay.

And what's the growth rate that you are targeting for next year?

Growth rate for --?

For BOBS specifically.

We tend to look at it differently.

We will have a growth target rate probably by the time we see you in December at the show, because we are booking spring now, and some of the new product is being delivered.

So I will have a better idea, and I will hold it until then.

Okay.

Lastly, I wonder if there's a philosophical reason for not providing maybe specific EPS guidance.

I'm just curious what the thinking is behind that.

We got away from it a while ago.

We never thought it felt to our benefit.

It creates floors or ceilings or -- and we just stick to the scope of the business.

Our business moves very, very quickly, and we don't want anybody to think that we sandbagged them or overstated the numbers when we stopped growing.

Because we move very, very quickly.

And over a year's time or something like that, things can change significantly.

You have to remember that two years ago, we had a very, very difficult year, and a lot of people wrote us off.

And two years later, we are now back.

And by three years later, which is next year, we will be back to almost peak levels of our volume and earnings.

It's very difficult to give specific guidelines year-over-year and quarter-over-quarter and keep doing that, when you can move that quickly, and I don't know that it gets to anybody's benefit.

So we leave you to do your channel checks and see how well we are doing and how well we can do.

We give as much guidance as we can as far as overhead and expenditures for advertising, and that's just the tack we've taken.

Okay, great.

Thanks.

Best of luck for holiday.

Thanks.

Scott Krasik, BB&T Capital Markets.

I think the last time you gave guidance was like 2003, so it's been a while.

Just to further follow up on your fourth-quarter answer, because you occasionally don't answer it as directly as possible.

I mean, it seems like given the higher G&A and the higher tax rate, it doesn't seem like you should come even close to the $0.20.

Am I saying that correctly?

I guess that depends on your top line.

I don't think we do $0.20 at $440 million or $445 million.

That is for certain.

But I think that's a fairly conservative top-line number.

So that's what I'd (multiple speakers) put out there for all of you guys to think about.

Okay, so something more like $0.10?

I mean, it's not out of the realm of possibilities?

I don't think we go down to $0.10, and I don't think we come in quite -- I don't know that we can come in at $440 million or -- we should be somewhat higher than that.

Since you want to press the issue, I would put it more in the $450 million range and not be worried about it and feel that's not an outrageously strong number, especially if things get very positive.

And we certainly have upside from there if we continue to sell and comps hold up as they are, and some of our customers start taking deliveries in December for what they would normally take in the first two weeks in January, we could even do better than that.

But that's more speculative than I would like to be.

And then you just -- okay, that's fine.

And then you called out a turn in Germany.

Is that now building and it should keep getting better?

And also what's happening in the UK?

Yes, the UK was relatively flat, but they never got hurt as bad as the other ones, and their backlogs are up year-over-year.

Germany is a matter -- picked up some.

They actually had positive shipping of low single digits.

And their backlogs are increasing at a nice rate as well, and booking quite nicely, and will show increases going into next year.

So we think we will have increases in all our big countries certainly as we go forward, certainly from the subsidiary and the joint-venture piece.

As I put out, the only ones that are not showing positive results really for the quarter are Italy and Spain.

But we do get the impression they have bottomed and their backlogs are picking up as compared to last year.

So we have a lot of positive signs everywhere in the world.

Just to -- if you know off the top of your head, are backlogs in Germany and the UK up double-digits or high singles or --?

They were up mid to high singles going into October.

But like I said, October, even for Europe, has become a very good month incoming order-wise.

As a matter of fact as we sit here today on the 22nd, they have already surpassed the incoming order rates for the entire October of 2012.

So unless there's just a timing shift, we expect some very positive results as we leave October.

Okay.

And without giving any guidance for next year, same sort of store expansion thoughts.

And then also given the contribution of international, should the tax rate then be lower next year?

We have the possibility of the tax rates coming down, although I don't anticipate any slowdown in growth from the US yet that I can see.

I still think we get very positive from all the customers we've met with.

So that's still a moving target.

And it could come down some, but I don't think we get all the way back to 30% right away, because the US will continue to grow at a very significant pace.

And when I say US for tax purposes, it's US and Canada, because we consolidate those two, even though Canada is part of our international business.

But it's growing quite, quite well.

Okay.

That's helpful, thanks.

Sam Poser, Sterne Agee.

David, you had a couple of nonrecurring charges in the first quarter.

Those aren't there, so those probably aren't going to be there in fourth quarter.

So doesn't that push it up a little bit?

Yes, just a little bit, not $0.07 worth.

But after tax, with a higher tax rate.

There is always offsets to some of those.

Okay.

But also, your mix of business in Q4 leans more to retail, which should be a higher-margin business, theoretically.

Yes, theoretically.

Like I said, you could get some margin, although fourth quarter is usually when we clean whatever is left to clean.

And there are some currency issues as well.

But even if you get 100 basis points, on $400 million, that doesn't -- on a pretax basis after expenses doesn't get you a $0.07 increase, I don't think.

Remember, we were talking about $440 million to $445 million, so you have -- that number actually takes in a $5 million to $10 million decrease from Q1, which is the comparative quarter.

Do you think that your $440 million to $445 million, you believe that is a fairly conservative number anyway, correct?

I think that is more than fair.

I think that's at this point a very conservative number.

Thanks and good luck.

All right.

Thanks.

Thank you.

At this time, I'd like to turn the conference back over to SKECHERS for any closing remarks.

Thank you again for joining us on today's 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.