Skechers USA Inc (SKX) 2014 Q3 法說會逐字稿

Greetings and welcome to the SKECHERS USA Incorporated Third-Quarter 2014 Earnings conference call.

(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 the 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 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 2014 Financial Results.

Our sales for the third quarter were $674.3 million, a 30.7% increase over last year, marking the highest quarterly sales in the Company's 22-year history.

The growth followed record first and second quarters, resulting in a 29.5% net sales increase for the first nine months of 2014, compared to the same period last year.

Our product and marketing are resonating with consumers around the world, leading to the strong demand for our men's, women's and kids' lightweight and comfort offerings in the lifestyle and performance divisions.

This translated into double-digit increases in our domestic and international wholesale and worldwide Company-owned retail business, which included an 11% comp store net sales increase.

We are continuing to support our growth with targeted marketing that speaks to our vast demographic, including the addition of legendary athletes Pete Rose, Joe Namath and Mariano Rivera; multi-platinum recording artist Demi Lovato; elite runner Meb; and our most recent signing, Ringo Starr.

And we are continuing to invest in our global infrastructure to create efficiencies.

This includes the addition of a new distribution facility in Chile and an installation of an automated system in our European Distribution Center.

Third-quarter sales and financial highlights include an 18.5% increase in our domestic wholesale business, with a 16.1% increase in payership and a 1.2% increase in average price per pair.

A 60.6% increase in our international wholesale business, with an 87.3% increase from our distributors and a 52.2% increase from our subsidiaries and joint venture partners.

A 25% increase in our Company-owned retail stores, which included an additional 62 new stores opened in the last year, 22 of which were opened in the third quarter.

Earnings from operations of $74.1 million, or 11% of net sales.

Gross margin of 45.2%.

Net earnings of $51.1 million, and diluted earnings per share of $1.

In-line inventories, which were relatively flat from year end and up 17.1% from a year ago.

And a strong balance sheet with $440.8 million in cash or approximately $8.65 per diluted share.

The third quarter continued the momentum we experienced in the first half of the year, which was the result of the demand for our innovative footwear globally.

Also in the third quarter, we achieved record bookings, resulting in worldwide backlogs up over 50%.

And we believe this is a clear indicator that our momentum will continue well into 2015.

Our marketing continues to be on point, with television commercials for each key line; a strong digital and social media presence; and key window and in-store campaigns with numerous accounts.

We are looking forward to the debut of our Fall/Winter 2015 product during our buy meetings with our domestic key accounts over the next two months at our corporate offices, and to our international distributors and subsidiaries at our bi-annual Product Conference in November.

We believe the feedback will be very positive and the demand strong.

Now turning to our business in detail.

In our domestic wholesale business, sales increased 18.5% or $41.9 million for the quarter, with a 16.1% increase in pairs shipped and a 1.2% increase in average price per pair versus the same period last year.

The growth was the result of double-digit increases in our women's and men's footwear, offset by single-digit decreases in our kids' offering.

Strong sales came throughout our men's and women's Sport; women's Sport Active; SKECHERS GO; women's winter boots; and SKECHERS USA, which saw a triple-digit growth.

Additional increases included double-digit gains in our men's SKECHERS GO, women's SKECHERS Active, and men's and women's Work lines.

While we experienced a single-digit decrease in our kids footwear in the quarter, we'd like to note that we had a single-digit increase for the first nine months.

The decline in the quarter is in part due to the plan decrease within one account in the South and the shift of some back-to-school product into the second quarter.

We expect our kids business to stabilize in the first quarter of 2015, and are excited about the growing lightweight sport collection -- take-downs from proven successful adult styles.

The consistent theme across all our product lines is comfort.

We are including comfort features in our lifestyle, lifestyle athletic, performance and kids' footwear.

We are continuing to see consumers asking for our comfort lines, and our accounts are embracing it by featuring our brand in their stores and websites, thus creating an omni-channel marketing approach with some of our key partners.

To support our many successful lifestyle adult lines, we had multiple TV commercials in the third quarter, including Relaxed Fit campaigns featuring TV personality Brooke Burke-Charvet and sports legends Pete Rose and Joe Namath.

We also add product focus commercial to our men's and women's sports collections, SKECHERS work and BOBS.

Along with our targeted TV commercials, we ran print, digital and outdoor campaigns to further drive sales.

We continued to support our kids business with our animated commercials, as well as new live-action spots geared toward tweens, featuring take-downs of our adult performance and sport footwear.

Additionally, both our men's and women's SKECHERS GO experienced double-digit sales growth in the quarter.

Key drivers in our performance lines were the updates to our SKECHERS GOwalk platform, including the successful Super Sock and integration of GOga Mat technology.

We support the SKECHERS performance division through television campaigns for our running footwear featuring Mat and our SKECHERS GOwalk Super Sock campaign, as well as boots at events across the country.

Also in the quarter, our golf ambassador, Matt Kuchar, wore his SKECHERS GOgolf footwear at the Ryder Cup, showcasing this new product to the world at this prestigious event.

This quarter will see the launch of SKECHERS GOrun 4 at the New York Marathon, with an accompanying marketing campaign.

Our elite athletes, Matt and Kara Goucher, will also both race at the event early next month.

We are continuing to invest in the support of our products through new marketing campaigns, including several new commercials for this holiday.

We are also bridging the gap between adults and kids by targeting teens with multi-platinum recording artist Demi Lovato.

Demi has a massive social media following, and each of her tweets and posts about SKECHERS garners many thousands of likes and shares globally, and connects with our brand with teens and young adults around the world.

While the first print ad debuted early in the fourth quarter, we believe the holiday launch of our TV commercial in the US will allow us to tap into this hard-to-reach demographic.

For spring, we're very excited to have Ringo Starr join our growing team of male superstars to represent our men's footwear, which now also includes recently-retired New York Yankees closer Mariano Rivera.

We also believe Ringo will not only elevate our men's business in the states but also around the world.

We are just beginning our Fall 2015 buy meetings with our domestic wholesale accounts, but are pleased with our double-digit backlogs and early reads on sales in the quarter to date.

This gives us confidence that the demand for our footwear will continue in the first half of 2015 with our key retail partners in the US.

In the third quarter, our total international subsidiary joint venture and distributor sales increased by 60.6% as a result of the strength of our diverse product initiatives.

Our subsidiary and joint venture sales improved by 52.2%, and our distributor sales improved by 87.3%.

These increases came despite headwinds from foreign currency exchange in some key markets.

With a combined 72% growth, our European subsidiaries have performed significantly beyond our initial expectations for this year.

To increase our capacity and to continue to leverage our growth in the area, we are automating our European Distribution Center and expect to have the first phase completed before the end of 2014.

To further grow our business in the region and leverage our efficiencies in the European Distribution Center, we are looking at transitioning several European markets that are now distributors to wholly-owned subsidiaries.

Additionally Canada, Japan and Brazil all had double-digit growth, while Chile had single-digit growth, primarily due to the weakening Chilean peso and slowing economy.

Our Southeast Asia joint ventures continue to perform very well, with combined growth of 48.8% for the quarter, which includes a 92.9% increase in our China business.

The growth in China is due to our men's and women's lifestyle and performance offering, as well as kids, which has launched through the leading kids footwear retailer Good Baby.

Since its launch in 2013, it has grown from 125 points of sale in its first year to 294 today and a planned 337 at year end 2014.

As in our subsidiary and joint venture businesses, our product and marketing is resonating in our international distributor business, which grew at the same rate as it did in the second quarter.

The 87.3% increase was primarily the result of triple-digit growth in Australia, New Zealand, Taiwan and the Middle East, and double-digit growth in Mexico, the Panama region, South Korea, the Philippines, Turkey and Russia, as well as strong results from many other countries.

To showcase the brand and our complete offering, most of our international distribution partners have opened SKECHERS retail stores, including one each in the new markets of Algeria and Angola.

At quarter end, there were 537 SKECHERS stores owned and operated by our joint ventures, licensees and distributors outside the United States.

Of these, 357 are distributor owned or licensed SKECHERS retail stores.

152 SKECHERS stores are in our joint ventures in Asia, including those run by licensees in the region.

Additionally, there are 28 Company-licensed stores in Brazil, Canada, France, Ireland, Portugal and Spain -- countries where we directly distribute our product through subsidiaries.

Further, in the third quarter, 32 stores opened, including 3 stores each in China, Mexico and Australia; 2 each in Malaysia, Saudi Arabia, South Africa and Turkey; and 1 each in Peru, the UAE, Lebanon, Jordan, South Korea, Indonesia, Taiwan, Brunei, Hong Kong, Thailand, France, India and Portugal.

Three stores transitioned from licensed locations to Company-owned.

11 third-party SKECHERS stores have opened to date in October, and another 40 to 50 are expected to open during the remainder of the year.

With the highest percentage of growth coming from our international sales, we are seeing our business in markets around the world mirroring that of the United States.

The double-digit growth internationally is a reflection of the strength of our product marketing and brand.

Our double-digit backlog and the opening of additional retail stores gives us the confidence that this momentum will continue.

We are looking forward to Fall/Winter Product Conference with our international partners in November and the delivery of our new product in 2015.

Worldwide sales in our Company-owned retail stores increased by 25% for the quarter, with domestic sales improving by 16.9% and international sales by 74%.

Which included positive comp store sales of 8.2% domestically and 28.9% for our international stores, for an 11% increase worldwide.

The combined double-digit comp store increase is on top of double-digit comps in the third quarter of 2013.

At quarter-end, we had 432 Company-owned SKECHERS retail stores around the world.

In the third quarter, we opened 22 stores, 14 of which were domestic, and 8 were international.

These included new stores in Arizona, California, Hawaii, Kentucky, New York, Nevada, North Carolina, Louisiana, Massachusetts, Minnesota and Texas.

The international locations opened in the quarter were in Chile, Spain, the UK and Canada, which included the transition of three licensed stores to Company-owned.

We closed three domestic contest stores in the quarter.

We have opened five store so far this month, three in Canada and one each in Nevada and New York.

And we have another 10 to 15 planned for this quarter, including 4 later this week.

Domestic e-commerce sales decreased 5.5% for the quarter and are flat for the nine months.

For the year, we have seen an increase in traffic, new visitors, repeat buyers and page views.

And we are in the midst of revamping the site to a responsive design ideal for multiple devices.

And we will include user-generated content.

Now turning to our third quarter 2014 numbers in more detail.

As I discussed earlier, third-quarter sales increased 30.7% to $674.3 million, compared to $515.8 million in the third quarter of 2013 -- the highest quarterly sales in the Company's history.

Third-quarter gross profit increased to $304.5 million, or 45.2% of sales, compared to gross profit of $230.5 million, or 44.7% of sales, in the corresponding prior-year period.

The positive increase during the quarter was due to a combination of higher sales, strong sell-throughs, and a well-designed mix of diversified product categories within all our distribution channels.

Third-quarter selling expenses were $50.2 million, or 7.5% of sales, compared to $40.2 million, or 7.8% of sales, in the prior year.

The dollar increase in advertising and marketing expenditures was to promote all our product categories, as well as to support the growth of our business overseas.

For the third quarter, general and administrative expenses were $182.2 million, or 27% of sales, compared to $147.9 million, or 28.7% percent of sales, in the prior year, representing a 170-basis-point improvement in operating leverage.

The dollar increase in G&A was primarily due to our increased store account, support for our international growth, and increased warehouse and distribution costs related to significantly higher sales volume.

Of the $34.3 million increase in G&A, $15 million was due to increased expenses related to our international operations; and $10.6 million was related to operating an additional 22 stores when compared to the same period in the prior year.

During the third quarter of 2014, earnings from operations were $74.1 million, or 11% of revenues, compared to $44 million, or 8.5% of revenues, in the third quarter of 2013 -- a significant increase from the prior year and a 250-basis-point improvement in operating margin.

Net income during the quarter was $51.1 million, compared to $26.8 million in the prior-year period.

Net income per diluted share in the third quarter was $1 on approximately 51 million average shares outstanding, compared to $0.53 on approximately 50.6 million average shares outstanding in the prior-year period.

It is important to note that diluted earnings per share were negatively impacted by foreign currency exchange losses of $2.3 million net of tax or $0.05 per diluted share.

And an additional $3.8 million net of tax, or $0.08 per diluted share, attributable to warehousing costs relating to the first phase of the automation upgrade of our European distribution facility, as well as the transition of Chile from a third-party warehouse to a Company-owned facility.

In total, these items resulted in a negative impact to diluted earnings per share of approximately $6.1 million, or $0.13 per diluted share, in the quarter.

Our effective tax rate for the third quarter ending September 30, 2014, was 18.7%.

In the third quarter, we recorded income tax expense of $12.7 million, compared to $14.1 million in the prior-year period.

For the remainder of the year, we estimate the effective tax rate to be in the range of 22% to 26%.

Net sales for the nine-month period ending September 30, 2014, increased 29.5% to $1.808 billion, compared to $1.396 billion in the prior-year period.

Gross profit was $814.3 million, or 45% of sales, compared to $618.1 million, or 44.3% of sales, in the prior-year period.

Selling expenses were $140.8 million, or 7.8% of sales, compared to $120 million, or 8.6%, from last year.

General and administrative expenses were $504.3 million, or 27.9% of sales, compared to $426.4 million, or 30.6% of sales, from last year.

Earnings from operations for the first nine months of 2014 were $176.1 million versus earnings from operations of $76.5 million for the same period last year.

Net income for the nine months was $116.9 million, compared to a net income of $40.6 million last year.

Diluted earnings per share were $2.30 on approximately 50.9 million average shares outstanding, compared to diluted earnings per share of $0.80 on approximately 50.5 million shares last year.

And now turning to our balance sheet.

At September 30, 2014, we had $440.8 million in cash or approximately $8.65 per diluted share.

Trade accounts receivable at quarter-end were $333.5 million.

And our DSOs at September 30, 2014, were 42 days versus 47 days at September 30, 2013.

Total inventory, including merchandise in transit, at September 30, 2014, was $363 million, representing an increase of $4.8 million from December 31, 2013, and an increase of $53 million, or 17.1%, from September 30, 2013.

Given our extremely strong backlogs, we are very comfortable with our inventory position.

Long-term debt at September 30, 2014, decreased to $107.2 million, compared to $116.5 million at December 31, 2013.

The decrease is primarily due to payments made on our distribution center and distribution center equipment.

Shareholders' equity at September 30, 2014, was $1.1 billion versus $979.9 million at December 31, 2013.

Book value, or shareholders equity per share, stood at approximately $21.73 as of September 30, 2014.

Working capital was $841.8 million versus $704.5 million at December 31, 2013.

Capital expenditures for the third quarter were approximately $18 million, of which $10 million related to 22 new stores and several store remodels, and $6.9 million related to the first phase of the automation of our European Distribution Center and the transition from a third-party to a wholly-owned distribution facility in Chile.

In summary, the first nine months of 2014 have been exceptional in terms of sales, profitability, product and marketing.

We began the year with a record first quarter in net sales, then achieved a new quarterly sales record for the second quarter.

And now we have broken that record with our third-quarter net sales of $674.3 million.

This growth followed the great year we had in 2013, in which we achieved the second highest annual net sales in the Company's history.

The third quarter was also a new record for incoming orders -- further evidence that our momentum will continue.

From a product standpoint, the key sales drivers around the globe were consistent and were comprised of our stylish comfort footwear across our lightweight sport, casual and walking lines, a trend we see continuing as consumers seek more innovation without sacrificing fashion.

As always, we supported our diverse offerings with comprehensive marketing campaigns in-store, online, on TV, in print and elsewhere.

We also added many new commercials to the fold.

Among others were kids' lightweight sport, an energetic unisex spot, a SKECHERS GOwalk Super Sock, as well as Joe Namath and Pete Rose campaigns for Relaxed Fit.

The strength of our brand, innovations in our broad-based product and targeted marketing led to double-digit growth in our domestic and international wholesale businesses, as well as our worldwide Company-owned retail stores.

With international wholesale now 31% of sales for the quarter and 29.8% of sales for the nine months, we see tremendous growth opportunities in our worldwide operations.

The improvements in the quarter are substantial -- 87.3% in our distributors, 48.8% in our joint ventures, and 53.3% in our subsidiaries, for a combined 60.6% increase for the quarter and 45.7% increase for the nine months.

Based on the double-digit backlogs in our international business and the strength of our largest markets, we believe this positive trend will continue.

Our Company-owned retail business represents 28.2% of sales in the quarter and 27.2% of sales in the nine months.

We are expanding our Company-owned retail base with an additional 10 to 15 stores through the remainder of the year.

Combined with the 40 to 50 third-party stores, we are on target to reach approximately 1,050 SKECHERS stores by the end of the year.

We believe the demand for our brand will result in continued growth worldwide.

We're looking forward to our Fall 2015 buy meetings in our corporate offices over the next two months and our global product conferences in November with our international teams.

Given our retail growth trajectory, accelerated backlogs, and incoming orders for October, we believe we are well-positioned for growth in the fourth quarter and well into 2015.

Although the fourth quarter is historically our smallest sales quarter for our international division, we remain comfortable with the analysts' current consensus for both revenue and earnings for the quarter.

Given the strength of our backlogs for the first quarter of 2015, we anticipate top-line growth to be between 15% and 20% for the first quarter.

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.

(Operator Instructions)

Our first question is from Corrina Van Der Ghinst of Citi.

Thank you.

Hi, David.

Hi.

Obviously, you guys are opening more stores in 2014 then you have in the past; it's also ahead of your long-term guidance of around 40 to 50 stores per year.

But you've also got a lot of other moving pieces, like the European automation costs, the DC expansion costs, coming up next spring.

So how should we be thinking about SG&A expense going into the fourth quarter, and also looking ahead into 2015?

Are you looking for some of these higher expenses to continue into Q4 related to your DCs?

And what kind of leverage are you thinking about for next year?

Well, I think it's a little bit of both.

Obviously with the new store count, they were available to us, and we've always said we have the capacity to open more stores.

And because of our success in international, we're more receptive now to more locations and have achieved more offers of locations internationally, so have stepped it up.

So to that degree, as the store openings continue, we anticipate that will increase our G&A.

But we think that will be reflected into the bottom line somewhere along the line.

We may be a little less efficient at the beginning, but certainly over a long term, we anticipate that those stores will significantly enhance the bottom line.

As far as the distribution centers are concerned, I think for current run rates, we expect the exact opposite; we expect to become efficient.

These additional fees, the $0.05 or $0.06, they for the most part go away at consistent run rates.

In other words, in Chile, we moved to a completely new center, and we will save some money between the rent and people costs.

The reasons for the increases in the third quarter were because we had to run both at the same time.

You can understand that a move from one facility to the next, you have to pay both people.

We pay a per unit fee to one facility; we're paying rent and people at the new facility.

You have to run them both at the same time and get them up and running.

As of today -- or actually as of the 1st of October, I believe, maybe one week into the new quarter, we no longer had any hangover from the old facility.

Everything had been moved and we're shipping alone.

So they should leverage at equivalent volume going forward.

And as volume increases and we open more stores, we should get leverage there.

Also in the European Distribution Center, we opened that -- or we went to automation, we think, just in time.

We had what we thought was a remarkably strong third-quarter when we were putting in this automation.

So, on top of having to close down part of the distribution center because we're putting the automation in, we had to run three shifts rather than two because we had to compact and get some off-premises sites to ship all the shoes; we had to ship them.

When we planned this a year ago, we didn't anticipate shipping this many shoes.

So it's a credit to that facility that we could run three shifts, have to rent off-premises sites while this is being built, and still got it all out very efficiently, as far as operationally is concerned, even though quite a bit more expensive.

We anticipate with the significant growth we're seeing, the automation taking place.

The first phase is Q1 and the second phase at the end of Q2.

By this time next year, we will leverage at current rates of distribution.

But given the increases, we'll leverage even more so as we get to the back half of next year.

That's pretty long-winded, but I think I got it all.

That's very helpful, thank you.

And also, I know you guys had a press release a couple weeks ago, but with a 50% increase in backlogs at the end of the quarter, I was wondering if you could delve a little bit more into the breakdown of that number -- whether international versus domestic.

Or whether you're seeing particular growth in certain categories or specific channels, please?

Well, we're growing everywhere.

It's obviously concentrated more outside of the United States as far as percentage is concerned, although not necessarily for dollar amounts.

International is quite quickly catching up to US wholesale business, even though it's growing.

So I think it's fair to say that domestically, our increase was probably in the mid-to high -- say, low- to mid-40%s, and internationally was probably in the 60% to 70% range of increase over the prior year.

Great, thank you.

Sam Poser of Sterne, Agee.

Hi, David, good afternoon.

Hi, Sam.

A couple of things, David.

Number one, can you -- just a little thing.

What was the $3.9 million in other income on the charge there that was up --

That's mostly the foreign exchange items.

Okay.

And how do you think that's going to impact the next couple of quarters?

Same kind of way?

No.

I think it's -- well, I'm not a currency expert.

But from what I see in early October, the biggest currencies we have, obviously, are the euro and the pound because they're our biggest outside; Brazil, China, somewhat.

It doesn't seem that today anyway, after the first three weeks from what I can see, that the dollar is getting as significantly strong at the same running rate as Q3.

So it seems in the multiple years we've been doing this that Q3 was a significant strength of the dollar, probably not a quarter-to-quarter event.

Okay.

And then, I just want to go back to the G&A.

In absolute dollars, you do $182 million.

What should we be thinking about -- what kind of range in the fourth quarter?

And then, should next year's, with that kind of leverage you talked about, should that run rate be in that $180- to $185 million to $190 million per quarter, more or less, given the new stores and everything else?

Going forward, I think we get some efficiencies in Chile.

We should get some more efficiencies through our own distribution center here as we get to fourth quarter; it's a lighter quarter.

We actually are putting in more automation into this facility because we're running way ahead of schedule when we had planned to put it in.

So I think next year, it's safe to say, we will leverage more in the US.

Next year it's very difficult to say what the running rate would be.

Because while we anticipate significant savings, that whole $3 million after-tax, probably $5 million or $6 million pretax, in our distribution center in the EDC; the volumes won't be equivalent.

We'll have to take a look and see exactly how much they're growing.

I mean, we're going in with a 70% increase year over year in shipment in the third quarter.

If that continues into the back half of the year, we'll be certainly, on a percentage basis, more efficient from a G&A perspective but not from a real dollar strength.

We're at a point now where our growth is not moderating; it's continuing.

So as it does, we may have to put more infrastructure in.

So it's too early for me to say exactly what it looks like for Q3.

Q4.

I think it's safe to say, that we will leverage and it should be down sequentially.

Obviously into Q4, some of these items won't repeat and we should have a smaller, depending on how many stores we actually open.

And depending on currency, we should have slightly lower G&A.

But it's a high-class problem to have.

We may have to push infrastructure at a faster pace than we thought because the growth, obviously, significantly higher than we had thought at the beginning of this year when all the plans went in.

Okay.

And then, when you're thinking -- your backlogs have 50%, and you're saying you're happy with everybody's numbers.

You've come off of two quarters with 30% increases.

Again, not complaining about the kind of sales they are, but why do you think it's going to decelerate down?

With a 50% backlog, why do you think your revenue's going to decelerate down into a lower rate?

I mean the street's not looking for that kind of increase in the fourth quarter, nor in Q1.

Well, it's 60% in fourth quarter, I think, is basically what the street's looking for.

And we're comfortable with that because it's not as strong an international quarter.

And you know, our international has been the big driver of this thing.

Our subsidiaries and joint ventures don't usually gear up in the fourth quarter.

So it's more a domestic facility and some of the distributors, which is certainly lower dollar volume.

Now, that's not to say that there's not some upside potentially if some of January moves into December, if we continue to be hot.

So, I think 16.1% is a good baseline to start with.

I don't know that I'd go higher, but there certainly could be upside, depending on how hot we are and what happens in the marketplace.

Going into first quarter, I don't know that 15% to 20% today is a significant deceleration when you talk about the much higher denominator we have, because we were already up 20%-some odd in the first quarter last year.

So it's on top of, on top of.

We're trying to see now is, because we're so hot, there's a possibility that we're, obviously, a first choice for most of our customers around the world.

And they've all come to give us their orders first to see what their opens to buys would be.

So to the extent we've got orders first, it certainly makes us more efficient, and makes us more efficient with inventory and production.

But should we stay hot and have a reorder business, and this only becomes the benchmark around the world, which is possible, there certainly would be upside to that number.

It's just too early to tell.

I think what we're trying to impress upon everyone was that the numbers we see now for first quarter are the high end or higher than the numbers on the street.

And to let everybody know, that while we don't usually have guidance for the first quarter or that far out, that we're comfortable with numbers coming up, and people should understand that there is some upside if we stay as hot as we are.

All right.

Thank you very much.

Jeff Van Sinderen with B. Riley.

Let me add my congratulations.

And then, David, maybe you can just go through -- I know you mentioned the spring bookings and some new product lines launching for spring.

Is there more color that maybe you can give us on the type of product that you're seeing getting the best reaction?

And maybe speak more to what's really driving bookings in terms of product genre?

Any particular concentration to note there would be helpful.

Yes, we don't see any concentrations.

The good news for us is that it continues across a broad spectrum, very diverse across all the product categories.

Our core business, which is our sport active and sport, both men's and women's, is doing very, very well.

It's doing as well as our GO platform, even though it's a somewhat more mature and a larger business.

So, I think we'd like to dispel some of these thoughts that we're only a one product deal here and it's only GOwalk or something to that effect.

GOwalk and the GO categories are performing quite well around the world, and it's a great new category to have.

But it has not, to date, taken away from our core business, which is our sport and even our USA business; which is growing at an equivalent pace, even though it's a higher-volume business to begin with.

I think it's fair to say that we continue on a very broad base with a significant amount of categories that resonate, and significant amount of geography around the world that's all growing.

So that's all the good news.

It all continues, as far as we can see right now.

Okay, good.

And then also, I know you mentioned evolving e-commerce.

Just wondering how you're thinking about that within the context of all your partners that buy wholesale product.

Maybe you can just touch on that.

Yes, I think it's fair to say we're not pushing for our own volume to increase.

You can see that by -- as hot as we are, we haven't pushed up in our own e-commerce site.

I think it's a two-fold reason that our e-commerce was down or relatively flat for the year.

Our e-commerce business seems to be picking up significantly with our partners that have our products online.

So if you look at everyone who has our product online, and I won't go through the labels, and they do sometimes have a better price than we would have; they continue to resonate, and they're growing quite large.

We've also moved them -- we've got our stores on the Omni Channel now, and they can order from us and they get it from, technically, our on-line facility.

But we credit that sales to our retail department through the store.

So at times in the past when somebody might have left the store and we didn't have a size or a color and they buy it from us online, they now can get it from the store and we don't count that sale.

I think it's safe to say we feel comfortable that around world, we resonate very well and sell very well online.

And we have a lot of customers that continue to use us online and do very well with it.

What we're talking about is making ours very interactive, and using it to drive business to our customers, whether it's our own stores or whether it's our wholesale partners -- we're pretty agnostic as to where the sales come from.

We'd certainly like to see our wholesale customers pick up the biggest piece and expand our presence within their country, so we don't push our own online presence and won't compete with them on it.

Except we will make it very fashionable and easy to use and a good place for people to come look at our products, and they can get it elsewhere.

Okay.

So based on everything that you guys are seeing as you look at your bookings and your backlog and what's resonating out there, would it be fair to say that you think we're still in a strong cycle for athletic, athletic derivative, and also for comfort active product as well?

Absolutely.

Okay, great to hear.

Thanks very much and good luck.

Thanks.

Chris Svezia of Susquehanna.

Hi.

How are you, David?

I am pretty good.

First question.

Just when you talk about that fourth-quarter sort of view, 16%-ish kind of revenue growth.

Any color between US wholesale, international and BTC, in terms of the growth rates?

Obviously, the international piece slows because there's not a big quarter.

But any color you could provide by some of those segments?

No, I think you've got it.

We'd pass it along -- I think we're going to see a nice increase in all of them.

Domestic wholesale is obviously our most mature, and it's into its now fourth quarter [when all such things] are possible since our real growth started, so they have tougher comps to go up against.

So, I don't know that there's a significant differential, but it will be driven more by our domestic retail and domestic wholesale, which are more mature and only grow so quickly.

But I don't want to leave anybody to think there's no upside.

We have historically had some January go into December, if we stay that hot.

So I assume if everybody does channel checks and see that we're resonating that well as we go through Christmas -- actually between Thanksgiving and Christmas, people may start to move things into the fourth quarter.

Along those lines, how are your inventory levels at retail?

In other words, what broadly -- I mean, we can obviously pick up the phone and call a couple of them, but I'm just curious what your general sense about SKECHERS' availability of product at retail at this point.

Is it getting clean?

Is it they obviously want more?

Or just your thoughts in and around that.

I think given the indicators we have, which is somewhat anecdotal, that we talk to them -- they'll be in the next two months; they'll be in our office and we'll have a clearer idea.

And the demand for product for spring, I can't imagine that we would have backlogs up that high, over 40% domestically, as hot as we've been for the last two years unless inventory was clean and demand was on the rise.

Selling expense -- any thoughts about how we should think about that in the fourth quarter, relative to the third quarter?

I assume it's not as high because it's not a big marketing quarter.

But any color around that?

It's not as high, but we'll consider the marketing.

I think it's fair to assume that we'll be, by real dollar trends, probably $7 million or $8 million increase over fourth-quarter last year.

And that's predominantly to try and drive holiday traffic here and do a little more international to get ready for first quarter overseas.

Okay.

And then on gross margin, I assume that there's some -- is there some room for that to continue to slowly move higher?

Or just your thoughts about the gross margin trajectory.

Well, I would never tell you we've peaked in growing higher.

I think what you saw this quarter was a mix issue.

We actually grew significantly larger in China and Europe, which are higher gross margins for us, even though distributors are the lowest; and they were a big single piece by real dollar terms.

I think our retail business picked up a little as well, and as well as our domestic wholesale business.

So, while we're comfortable where we are and I don't anticipate big swings, there's always a possibility for some up-ticks.

As far as gross margins is concerned, if you take into account mix.

And even if there is a reversal in the strength of the dollar in some places.

So, some of that is possible, although I wouldn't expect significant changes there.

Okay.

Lastly, just on this -- thoughts about subsidiaries.

You're thinking -- or distributors thinking about converting to subsidiaries.

Any color on that timing, et cetera?

We're going to make sure that our distribution center is up and running and can handle the increased volume.

I think it'd be safe to say the back half of 2015 is what we would target right this minute, barring any glitches in the distribution center or bringing it up online as efficiently as we'd like.

Okay, all right.

And just one last thing, real quick.

When do you guys actually pay off the debt?

I think part of it's related to material handling, the equipment --?

I think there's less than $40 million left, half of it in December 2015 and half of it in June 2016, if I remember correctly.

And that's only because there's a make-whole provision in the loans when we got them, so I have to pay them the interest anyway, so I'm in no rush to give them the money.

Okay, I see.

All right -- all the best.

Thank you.

Thanks.

Danielle McCoy of Wunderlich.

Hi, David.

Hi.

So, just a quick question.

If you could just talk a little bit about sport at Target, and any other type of opportunities for our distribution expansion similar to that.

We look at a lot of things.

I don't know that there's anything right this minute.

I know they're talking, but nothing that I would say is imminent.

That sport is just a test to see how it works and how our production facilities and design, and making standalone brand for some customers, that by rights, don't have SKECHERS.

So it's a test right now.

It seems to be going well.

It's not really big enough to move the needle right this minute, but it is a nice test and it's a good opportunity.

And we will look at others, but I have nothing really to put into any kind of modeling increase for next year.

It's just not there yet.

Okay.

And then just with the new automation in the European DC.

Have there been -- have you guys been doing any tests, or what gives you the confidence that there won't really be any mishaps early in the process?

Well, by order of magnitude and sizes, significantly smaller than we set up here, and it uses the same basics in the same ideas, although not as, obviously in-depth, and doesn't have cranes.

So this one converted very easily for us in a much larger size.

Also, because it's run by the same people, our people in Rancho Belago, California, will be on-site there with the experience of how it works.

So unless there's a glitch just in the manufacturing end or putting it in, it won't be significantly different than what we do here, and have the expertise of people that have been running it for over three years.

So while it's always a possibility, and I would never say never, I'm more comfortable with this than when it's a standalone start-up and we've never seen it at all as an institution.

So, we can give them a lot of help.

And it's the same engineering firm, although we're using more European parts to do this.

So that's what gives me confidence that we have done it a couple times before, and it seems to be going well; and is the same thought process and the same software and the same operations for the facilities we're putting in there.

And we have expertise of that and can put people on-site there if necessary.

All right, great, thanks.

Good luck.

Thank you.

Scott Krasik of Buckingham.

Yes, hi, David.

Thanks for taking my question.

Hi, Scott.

First on the retail comps.

Any major variation by month?

And then, how are things trending in October, and what's your expectation for comps for the fourth-quarter?

No big deviations.

I think September, by nature, was a little light on a comp basis because it was so strong last year, so we went through.

But July, August and September, as a group filled out very well.

And that's only domestic.

Internationally, we saw nothing change.

We just happened to be very hot there.

In our numbers for fourth quarter, we're putting in a high-single to low-double-digit comp in our own projections.

And October has held up that well so far, although it is the lightest month of the quarter.

Okay, thank you.

And then, is it right you have, is it 404 domestic stores?

We have 432 domestic stores -- no 432 stores all-in.

370 or 380, I believe, domestic.

Can you just talk about what your thoughts are, where you think that can go to in the US?

Well, I think it's 370 -- 360 maybe is the right number.

I take it back, the 360.

You know, we only open 40 or 50 stores a year.

I could certainly go for the next two years.

I know there's more than 460 centers that we would like to be in, and some concepts that we'd like to open.

And so we haven't really thought past that.

We don't have an end-game, just what we're doing year to year.

Okay.

And then, in domestic wholesale, I know you have some strong feelings about some of this market data that's reported weekly.

But your ASP was up 1.2%.

It seems like it's been up higher at the retail level.

Is there any discrepancy there, and how do you look at ASPs going forward for you?

Well, we don't do the mark-down method.

And remember, Europe we use across everything, which includes a lot of kids, and whatever close-outs we may have, and whatever flows through us.

So it's 1.2% on a wholesale basis.

I think it's fair to say margins have increased as well at the retail level.

So the ASPs are going up because we're hotter and they don't have any close-outs.

I don't know that there's a discrepancy.

I think everybody's making money, which is just the way we like it.

It just seems like you're selling a lot more $60 and $65 shoes at retail that I would think would flow through to you.

It has.

Remember, this is the second or third year in a row where they've gone up.

But it's only a mix issue.

Okay.

Where it stands right now.

Thank you, David.

And then maybe just last, I'll ask it -- everyone else has asked it.

Your backlog was up mid-30%s in the first quarter, and you reported mid-30%s sales growth.

Your backlog was up mid-20%s -- low-20%s, sorry.

And domestically, you did a 19%, almost, in domestic.

How do we come up with the backlog that you're reporting, which is so strong with the guidance for 15% sales growth in the fourth quarter, and 15% to 20% in the --

I think it's fair to say that the biggest piece of our backlog is into first quarter.

The big piece, international -- international just doesn't have a big fourth-quarter business for us, so it really does move for the first quarter.

So 16%.

And there is an at-once piece that goes.

And at-once is not usually that strong in the fourth quarter, because you really don't start selling through until you get towards Thanksgiving.

And then through the end, there's not much room, although you can move January to December.

So that's just the way it lays out.

We only have so many distributors, and in Europe, it gets very cold and very dark early, and it's just not a strong period.

So on a comparative basis, you can only grow so much.

In first quarter, we said 15% to 20% because we're not sure what the repeat.

We know everybody's ordering up.

We have to be sure that our business continues to grow and the demand increases, which we think it can.

So that would give us upside there.

Also, when you think about it, it will be the fourth year at retail, and retail can't comp up significant double digits and keep up with what would be consistently higher than a 20% or some odd percent increase, because of its size and because its comps can only continue to increase so far and there's only so many stores to go.

So I think retail could be a drag on the upside on a percentage basis, simply because we can only put so much through the four walls.

Although there is a possibility Omni Channel could help us with that as it goes through.

So that's just the first look.

And the first picture, I would assume, will give you much more color, and you guys will know what's going on as we get through our bi-meetings and we see how people are looking with inventory and what it looks like through Thanksgiving.

I think, certainly, with the possibility of more retail days between Thanksgiving and Christmas, there is some upside.

Although I think the upside is significantly higher in the first quarter than it would be in fourth quarter.

And just one last one.

Sorry, I forgot.

What do you expect inventory to be at year-end?

Well, it's hard to tell.

It will be up significantly from now and probably for next year if we have this conversation every fourth quarter.

Because of the strength of what first quarter will be, we'll try to bring in as much inventory as we can prior to the start of first quarter.

A, it frees up our production facilities because we have more to make as we go through next year, and we'd like it earlier.

And we'd like to deliver as early as possible, which means in the first three or four weeks in January expect a lot to get out, and we don't want it on the water.

So whatever we can get for first quarter into fourth quarter we will take, as far as inventory is concerned.

I don't know what that number is right this minute -- I'd have to go through production schedules.

And unless there's a big movement from January to December, we'll all sit on our books, be ready to ship on the 1st of January so everybody can get a great start on what we think is going to be a great quarter.

Okay.

The low backlog, or you're just not sure yet?

The growth?

The growth in inventory.

Yes, it will be below backlog, so I doubt it will be up 50%.

I don't know if we can make it that fast.

But if it's up 50%, that would be okay too.

I just tend to doubt it will get that high.

In fact, we just can't put it out that quick.

Okay, David, thanks again for taking my questions.

Jim Chartier of Monness Crespi Hardt.

Thanks for taking my call.

First question, on the one-time DC calls for Europe, should we expect similar costs in the fourth quarter?

Or when do those costs start to abate?

We'll have similar, albeit somewhat lower costs, in the fourth quarter because they just don't ship as much in the four quarter; it's not as packed.

And hopefully, we'll be testing by the end of November, so we should alleviate some of that in December as well.

It does still exist in Europe, probably a somewhat lower magnitude.

Okay.

And then on the kids business, you mentioned you're introducing some takedown of adult styles for kids.

Have you tested those styles in your stores, and if so, how have they done?

We've tested them in the stores and with some key customers of ours, and to date they're testing very, very well.

I think what we can see also is some exchange of older product and everybody getting ready for some newer product that we think happens in first quarter.

Great.

And then any color onto the kids' backlog?

How is that trending?

It's up for first quarter, up over last year.

But it is still early in the game.

It's certainly not up as high as the rest of our business, but it does show an increase and we are sitting on a higher backlog going into the end of the year.

So that bodes well at least for the testing of the new product, and we think it will resonate quite well and make quite a strong comeback throughout the year.

Great.

Thanks, and best of luck

Thank you.

Corrina Van Der Ghinst of Citi.

Hi.

Sorry, David, two quick follow-up questions.

You guys have talked about shifting some of the product mix more toward synthetics.

Are you anticipating any input cost benefit from lower oil prices as you're looking out into 2015?

And how are you thinking about input costs overall?

We think they're fairly stable right now.

It depends on the shoe, but 20% to 30% maybe is based on labor, and that's fairly stable right now in China.

The rest we may or may not; we'll see what develops with it.

I think if it happens, we'll be certainly okay with it.

But I haven't seen it yet and I hate to anticipate, just on the oil price, for the last three weeks to tell you what it's going to be for the whole next season, so it's too early for me.

Okay, understood.

And then, you guys have the 80-door test sets.

Sports Authority recently introduced the brands on both Sports Authority and Dick's e-commerce sites.

Can you talk about how that's going so far and maybe any updates on plans to expand at those retailers ahead?

I think we're going to meet with them as they come in through fourth quarter, to decide what's going on and get a better handle on itself.

I haven't spoken to them yet.

I hear it's gone fairly well, as far as the sales guys are concerned.

But I don't have any in-depth detail, so I'll leave that until we see you in New York, if Andy will have more detail.

Great, thanks so much.

Corinna Freedman of BB&T.

Hi, David.

Thanks for taking my question.

I just wanted to circle back with you on the tax rate.

It seemed much lower than what we were expecting previously.

Can you talk about what you expect for the full year, and how we should think about 2015?

I'm assuming that's because of more international, but I just want to get a better understanding.

Was there anything shifting in the quarter?

Thank you.

No.

I mean there was no discrete items or anything to that effect.

Basically what happened, we did have a discrete item in second quarter, which may have skewed it for some modeling purposes.

But you're absolutely correct.

It is because our increased international business, and specifically in Europe and some of the distributors that even have better results for us.

It's a catch-up; we originally, obviously, didn't anticipate this kind of growth of profitability in international.

So we originally thought it was a 24%, 25% annual tax rate.

When we got to third quarter, our projections now indicate it's a 22% tax rate.

That's why we said it would be like 21% to 26%, I believe, on the Note.

And the catch-up in the third quarter to get it down to about 22.5% or 23% annual rate.

If our projections are right on schedule, which is very difficult, it will be somewhere between 22% and 23% for the year and in the fourth quarter.

But like I said, there's a lot of moving pieces, so that could change up or down a little bit, depending on how business international is against the whole.

Should we expect that for FY15 as well?

That rate?

I would think so.

I would think it would be at that or somewhat lower because we are growing at a faster pace.

It all depends how profitability breaks up.

It's kind of early to say, but I would say in the 23% range -- I would like to see that hold through 2015.

Okay, great.

Thanks so much.

Best of luck.

Thank you.

Sam Poser of Sterne, Agee.

David, just a quick follow-up.

You talked about the international business, Q4 being a slower quarter.

But on a year-over-year basis, it was a slower quarter last year.

So why wouldn't the momentum sustain itself on a year-over-year basis?

Well, it's just a smaller number; I just don't see it yet.

Because everybody seems to have caught up in Q3.

A lot of people are filling a pipeline and they're going in there, and last year, it was a very weak time for us.

So I think the pipeline's been full.

I don't see that much orders out there, and I don't know that they'll push them up that quickly.

There's no structural reason that it wouldn't hold, except look at the pipeline we filled.

We had two quarters in a row, this quarter 66%, 70% in Europe and that's the biggest user.

I don't know that they can compound that in a softer retail quarter.

Got you.

But you have seen your retail comps there sustain themselves?

In Europe?

Yes.

Yes.

Thanks very much.

Continued success.

Thanks.

Thank you.

This does conclude today's (technical difficulty).

I would like to turn the floor back over to management 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.