Skechers USA Inc (SKX) 2015 Q1 法說會逐字稿

Greetings and welcome to the Skechers USA Incorporated first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

At this point, I would like to turn the conference over to Skechers.

Please go ahead.

Thank you everyone for joining us on Skechers conference call today.

I will now read the Safe Harbor statement.

Certain statements contained herein including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the Company or future results or events may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

Such forward-looking statements involve known and unknown risks including, but not limited to, global, national and local economic, business and market conditions in general and specifically as they apply to the retail industry in 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 10K, quarterly reports on form 10-Q, current reports on form 8K 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' first-quarter 2015 financial results.

Our sales for the first quarter were $768 million, a 40.5% increase over last year and the highest quarterly sales in the Company's history.

The outstanding first-quarter growth is attributable to the continued strong demand for our men's, women's and kid's footwear collections globally.

This resulted in double-digit increases in our domestic and international wholesale and Company-owned retail businesses and single-digit increases in our domestic e-commerce business.

Further, in the first quarter, our average price per pair increased by 5.9%, or $1.25, in our domestic wholesale business.

We saw a 9.3% comp store increase in our global Company-owned retail business.

We also achieved double-digit increases in several key countries that were negatively impacted by currency and triple-digit increases in two of our largest international markets.

All of these factors are a testament to the continued strong demand for our brand and product.

First-quarter sales and financial highlights include: record quarterly revenues of $768 million; a 38.2% increase in our domestic wholesale business, with a 30.5% increase in pairs shipped and a 5.9% increase in average price per pair; a 59.5% increase in our international wholesale business, with a 62.7% increase from our distributors and a 58.5% increase from our subsidiaries and joint venture partners; a 19.9% increase in our Company-owned retail stores, which included an additional 54 net new stores compared to the prior-year period, including net four stores opened in the first quarter; earnings from operations of $88.2 million; gross margin of 43.3%; net earnings of $56.1 million and diluted earnings per share of $1.10; inventories up 25.6% from the prior-year period and in line with expected sales; and a strong balance sheet, with $396.7 million in cash, or approximately $7.76 per diluted share.

Despite headwinds, including the stronger US dollar, the slow down at the West Coast ports, unseasonably cold weather in certain key markets and less efficient operations than originally anticipated at our European distribution center, due to the transition to a new automated system, combined with higher than expected sales, we nevertheless achieved a new quarterly sales record, maintained an 11.5% operating margin and strong gross margins of 43.3%.

We believe that these accomplishments are due to the strength in demand of our many product lines and the diversification of our business across many accounts globally.

With significantly increased worldwide bookings, our year-over-year worldwide backlogs are up mid-double digits at March 31, 2015, which we believe is a clear indicator that our momentum will continue throughout the year.

Now turning to our business in detail.

As I highlighted earlier, in our domestic wholesale business first quarter sales increased 38.2%, or $88.8 million, as compared to the prior-year period, with a 30.5% increase in pairs shipped, a 5.9% increase in average price per pair.

The growth was a result of double-digit increases in our men's, women's and kids footwear.

Specifically, we achieved triple-digit increases in our women's Sport Active and Women's USA lines, double-digit increases in our men's and women's Skechers Sport, Skechers GO and Skechers Work, Men's USA, Mark Nason, as well as our Women's Active, Cali and On The Go line.

To further drive sales and support our many product lines, we ran numerous commercials, print and digital campaigns and participated in several key events during the first quarter.

In January, we were again the official footwear and apparel sponsor of the Houston Marathon.

Before the event, in which Meb ran a half marathon in Skechers GOmeb Speed 3, we blanketed the city with Meb and Kara Goucher Skechers Performance advertisements.

We also ran TV campaigns featuring the two elite runners throughout the quarter and are very proud of Meb who, at nearly 40 years of age, finished in the top 10 at the Boston Marathon earlier this week after coming off a 2014 victory at the event.

February began the Super Bowl and our Relaxed Fit Pete Rose commercial.

The campaign created a buzz in the press and social media, as we champion the baseball great's place in the hall.

Also, Demi Lovato, who regularly appears in Skechers shoes, is creating tremendous engagement on social media, gaining hundreds of thousands of likes, shares and comments.

Our Skechers TV campaign has more than 3.9 million views on YouTube.

In the quarter we also added several new adult campaigns, including Stretch Fit, featuring Brooke Burke-Charvet; Skechers Memory Foam, featuring British actress Kelly Brook, who was also starring in the NBC comedy One Big Happy; Skechers GO Gulf, featuring pro golfer Matt Kuchar; Skechers GOwalk 3; and our first sandal campaign in many years.

The renewed strength in our kids' business was driven by our growing collection of light weight sport footwear; the innovative new Game Kicks line, which features a built in memory game; new developments within our Twinkle Toes, Hot Lights and Z-Strap offerings.

Each of these lines were supported by television campaigns designed to appeal to kids.

Further, we signed a licensing agreement for co-branded Star Wars footwear for boys, which will launch in fall 2015.

To support our men's lifestyle business, earlier this month we launched a Relaxed Fit television campaign starring legendary drummer Ringo Starr and signed legendary boxer Sugar Ray Leonard, whose campaign will begin later this year.

We believe both Ringo and Sugar Ray will not only help elevate our men's business in the states, but also around the world.

Based in our domestic wholesale backlog, our continued focus on delivering innovative product and relevant marketing and spring sell-throughs, we believe we will continue to achieve strong gains in 2015.

International achieved the highest percentage gains of all of our distribution channels.

Total international wholesale and distributor sales increased by 59.5% in the first quarter.

Further, our subsidiary and joint venture sales improved by 58.5% and our distributor sales improved by 62.7%.

As in our domestic business, we believe this success is attributable to our innovative and diverse product range and our on-target global marketing and branding campaigns.

Additionally, we are pleased with the continued growth in our international business, especially given foreign currency headwinds, particularly in Europe and Canada.

Our wholly owned subsidiary saw net sales increase of 42% for the quarter.

In our European subsidiaries, we achieved increases of 58.1% for the quarter.

The highest dollar increases came in our two largest subsidiaries, Germany and the UK, both of which also shipped more than one million pairs in the quarter.

The only market we did not achieve growth in sales was in Canada, which was down slightly, where the currency headwinds had a negative impact, though we still had a 15% increase in pairs shipped in the quarter.

To maximize our presence in Central Eastern Europe in the first quarter, we begin transitioning several distributors to a wholly owned subsidiary that will oversee 14 countries, including Croatia, the Czech Republic, Hungary, Romania and Serbia.

With headquarters opening in Budapest in the second quarter, we believe this new subsidiary will positive begin to impact our operations in 2016.

With the increased shipping of the subsidiaries handled through our distribution center in Belgium, we believe we are already outgrowing our new automated European distribution center.

We are in the process of two expansion phases, doubling the size of our EDC, bringing us to more than one million square feet of distribution space by early 2016.

Our joint ventures in Asia grew by 136.9% for the quarter.

This growth includes triple-digit increases in Singapore, India and China.

We believe China, our biggest joint venture, will be a standalone $100 million business in 2015.

Our international distributor growth of 62.7% for the quarter is the result of triple-digit growth in Scandinavia, Turkey and the United Arab Emirates, and double-digit growth in Australia/New Zealand, Indonesia, South Korea, the Philippines and Taiwan, as well 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 and we have a growing network of franchise Skechers stores.

At quarter-end, there were 610 Skechers branded stores owned and operated by our joint ventures, franchisees and distributors outside of the United States.

Of these, 392 are distributer owned or franchise Skechers retail stores.

185 Skechers stores are in our joint venture countries in Asia, including those run by franchisees in the region.

Additionally, there 33 Company franchise stores in Brazil, Canada, France, Ireland, Portugal and Spain, countries where we directly distribute our product.

34 third-party stores already opened in the first quarter, including five each in China and Taiwan, three in India, two each in Austria, Hong Kong, Malaysia, Saudi Arabia, South Korea and Sweden and one each in Bahrain, Denmark, England, Indonesia, Latvia, New Zealand, Portugal, Turkey and the UAE.

Three stores closed in the quarter.

Eight third-party Skechers scores have opened to date in the second quarter, including our first in the Czech Republic and Nigeria and another 140 to 150 are expected to open during the remainder of the year.

International is fast becoming in sync with our new product launches and marketing.

Kids' and men's are growing in countries worldwide, mirroring the product mix in the United States and wherever you go around the world, you see the same strong looks in every market.

In Asia, we have also reintroduced one of our heritage styles, which has caught on with young men and women.

Our advertising campaigns are translated into numerous languages, appearing on TV and in magazines around the world.

With double-digit backlog increase, the strong growth planned in many countries, including Germany, the UK, China and the UAE, we believe this will momentum will continue to the back half of 2015.

Now at over 37% of our total sales, we expect international to become 50% of our total business in the next three to four years.

Worldwide sales in our Company-owned retail stores increased by 19.9% for the quarter, with domestic sales growing by 18.1% and international sales by 28.5%.

This included positive comp store sales of 8.3% domestically and 14.8% in our international stores, for a total 9.3% comp store sales increase worldwide.

At the end of the quarter, we had 453 Company-owned Skechers retail stores around the world, including 88 international locations.

In the first quarter, we opened six stores, including an outlet in England.

We closed two domestic stores in the quarter.

With 45 to 55 planned for the remainder of the year, including 15 to 20 stores this quarter, of which 10 are expected to open internationally, we should reach the 500 Company-owned store milestone by year end.

Domestic e-commerce sales increased 7.9% for the quarter and currently comprise less than 1% of our total net sales.

In an effort to make the shopping experience more intuitive and provide a more impactful branding platform, we are revamping the Skechers.com site to a more responsive design, ideal for mobile devices, which will also include unit generated content.

Now turning to our first quarter 2015 numbers in more detail.

As I discussed earlier, first-quarter sales increased 40.5% to $768 million compared to $546.5 million in the first quarter of 2014.

The significant growth from the prior-year period was the result of both double- and triple-digit improvements in our domestic and international wholesale and retail businesses, benefiting from our universally appealing men's, women's and kids' product.

The to a shorter product introduction cycles and our worldwide distribution capabilities, our international business continues to grow at a faster pace than our US business.

First-quarter gross profit was $332.5 million, or 43.3% of sales, compared to gross profit of $240.4 million, or 44% of sales, in the prior-year period.

The 70 basis point decrease was primarily attributable to negative currency impact.

First-quarter selling expenses were $49.1 million, or 6.4% of sales, compared to $36.7 million, or 6.7% of sales, in the prior year.

The dollar increase in advertising and marketing expenditures was to support our diversified product categories, both domestically and internationally.

For the first quarter, general and administrative expenses were $197.1 million, or 25.7% of sales, compared to $158.5 million, or 29% of sales, in the prior year.

Of the $38.6 million increase in G&A, $7.6 million was related to operating an additional 54 stores when compared to the prior-year period and $18.5 million was due to the increased expenses related to our international operations, which included increased personnel costs of $7.3 million, primarily at our European distribution center from the implementation of our new automated equipment.

We expect to leverage the operating cost of our international DC as we move through the year.

During the first quarter of 2015, earnings from operations were $88.2 million, or 11.5% of revenues, compared to $48.2 million, or 8.8% of revenues in the first quarter of 2014.

This 270 basis point improvement reflects the operating leverage in our model as we continue to expand globally.

Also included is a $9.8 million negative currency translation and transaction impact.

Net income increased 81% to $56.1 million, compared to $31 million in the prior-year period.

Net income per diluted share in the first quarter was $1.10 on approximately 51.1 million average shares outstanding, compared to $0.61 on approximately 50.8 million average shares outstanding in the prior-year period.

In the first quarter, we recorded the income tax expense of $19.1 million, compared to approximately $11.4 million in the prior-year period.

Our effective tax rate was 23.7%.

We currently anticipate our effective tax rate for 2015 to be 21% to 25%.

Now turning to our balance sheet, at March 31, 2015, we had $396.7 million in cash, or approximately $7.76 per diluted share.

Traded accounts receivable at quarter end were $442.7 million and our DSOs at March 31, 2015, were 42 days versus 45 days at March 31, 2014.

Total inventory, including merchandise in transit at March 31, 2015, was $392.2 million, representing an increase of $80 million from the prior-year period and a decrease of $61.6 million from December 31, 2014.

Given the strength of our business, including our extremely strong backlogs and increased retail store count, we are comfortable with our current inventory position.

Long-term debt at March 31, 2015, decreased to $13.7 million, compared to $113.4 million at March 31, 2014.

The decrease is primarily due to the reclassification of long-term debt to short-term debt on our distribution center and distribution center equipment.

We expect to refinance the distribution center building before the end of 2015.

Shareholders equity of March 31, 2015 was $1.2 billion versus $1 billion at March 31, 2014.

Book value, or shareholders equity per share, stood at $23.40 as of March 31, 2015.

Working capital was $832.9 million versus $743.4 million at March 31, 2014.

Capital expenditures for the first quarter were approximately $14.6 million, of which $5.4 million was related to 6 new stores and 12 store remodels and $2.8 million was related to continuing phases of the automation upgrades in our European producing center and $3.3 million for additional equipment upgrades at our domestic distribution center.

We expect our capital expenditures for 2015 to be approximately $55 million to $60 million, which includes 50 to 55 retail store openings, equipment upgrades at our European and domestic distribution centers and an additional real estate purchase.

In summary, we are extremely pleased with our continued strong financial performance, specifically our record quarterly sales in the first quarter, our strong gross margins at 43.3% and double-digit growth in our domestic and international wholesale and retail businesses.

We are also please of these achievements came in spite of weak currencies in Canada, Europe and the UK, the West Coast port slowdown and additional challenges we faced in the period due to cold weather and stronger than expected sales in Europe, which resulted in less efficiencies than originally anticipated in our European distribution center.

Between our three business segments, domestic wholesale, international wholesale and Company-owned retail stores, the highest rate of growth in dollars and percentages came from international, with most of our key countries achieving double-digit increases in the first quarter and several key markets, including China, achieving triple-digit growth.

Given the significant increase in our backlogs, we expect this momentum to continue as we look to international to become 50% of our total business in the next three to four years.

Based on the reaction by key accounts during our interim meetings this month in our corporate offices, we believe the strength of our brand and product has not slowed.

In our Company-owned retail business, we expect to open another 45 to 55 Skechers stores this year, reaching the 500 mark for Company-owned stores by year end 2015.

We believe the global growth in our business is due to the continued strong demand for our men's, women's and kids' products, as well as our focused market execution, including new campaigns with Demi Lovato, Ringo Starr and Meb.

With few exceptions, the key sales drivers around the globe were consistent and were comprised of our stylish, comfortable footwear across our light weight sport, casual and walking lines.

We are introducing new lines for adults and kids this year, including the Star Wars co-branded line for boys that will be available in the United States and select markets around the world.

Our record 2015 first quarter and a strong start to April in terms of revenues and backlogs, including double-digit domestic and international retail comps, leads us to believe that our accelerated growth trend will continue through the second quarter and into the back half of 2015.

We believe we are well positioned to maintain this growth, with $396.7 million in cash and in-line inventory levels.

We are looking forward to what we believe will be a record for second quarter, delivering our back-to-school product and new annual sales record.

Given the key performance indicators, we are comfortable with the second-quarter analyst estimates and believe there is upside opportunity in the third quarter.

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

(Operator Instructions)

Sam Poser, Sterne Agee.

Quick question.

International, it is trending so strong, is this -- does this hit $1 billion this year, just based on what, based on how it's going?

And can give us some idea of sort of the kind of increase you are seeing, you are foreseeing for the full year, given this start?

Are we looking at in the 40%, 40%-plus range?

We usually don't go out that far, but I will tell you I would be very surprised if international did not hit $1 billion this year.

As far as the growth rate continuing, the back half is a slower time.

I would be surprised if it fell below 40% for the full year.

(Multiple speakers) unless there are significantly more currency transactions.

That is something we cannot control.

They were a little sharper in the first quarter than we had originally anticipated.

But I mean, as you think about it, is it going to dip a little bit more in Q2 just because you brought in a lot of stuff earlier and then ramps back up from a year-over-year increase in the back half?

I do not think that's true.

We didn't get things out too much earlier in Europe.

We try to bring some stuff in early but the inefficiencies in the distribution center obviously got better through the quarter, so we were not able to send it out at the early stage.

I think they got them the we completed them, but we were basically on time, so nothing really came in too much earlier.

I think the differential, certainly in percentages, is because last year's second quarter already had a very big step up and it was a significantly higher increase in the first quarter and the comparisons are much tougher.

It is never a very strong quarter for our subsidiaries.

They're much bigger in the first and third.

That is why we say even with the increases in third quarter, we think the significant upside is in the third quarter, certainly as far as percentages are concerned.

And then when we think about the US, the domestic wholesale business, the same kind of thinking there?

How are we thinking about that?

Yes, it gets up in comparisons but they'll stay pretty lofty.

I don't know if they stay quite at 38% but I'd be surprised if they dip significantly.

We're at the early stages now.

We have booked very well for the initial stages of back to school, and barring any significant downturn, which we have not heard of any yet, we actually started to sell very well going through Easter, is my understanding.

Even at the retail level, I really wouldn't anticipate any significant slowdown in the growth at domestic as we get into the third quarter.

Thanks.

You had originally guided the first two quarters for the gross margin, or the first quarter to be gross margin to be down 100 to 200 basis points.

It did not come down that much.

Would you expect gross margins in Q2 to be in line with what they were in the first quarter?

I do not see too much of a change.

I think the reason they were not down as much as we anticipated, obviously we try to take a conservative view anyway, was China, which did not have an issue, and Great Britain had lesser of an issue, then the euro held up very well and increased on that level and sort of compensated for a more sharp decline in Canada.

Yes, assuming we run to the same change and there is no more significant currency changes, which is always a caveat, I would anticipate this would be, give or take, a little bit at the running rate as we go forward.

As far the (multiple speakers) being down about 70 BPs until we get to the fourth quarter, when you would expect it to probably improve, just because you should have lapped most of it by then?

Well, it won't lap until, really, first quarter.

There will be some in the fourth quarter.

Like I said, it really is in the dark because currencies, you do not know how far the euro or the Canadian dollar will depress based on all the interventions in those currencies.

Given the current running rate and the current currencies, that is what we would anticipate.

All right.

Thanks, David.

Continued success.

Jay Sole, Morgan Stanley.

Just want to follow up on that.

With the sales growth is so strong, and the outlook seems, even as we speak today, it seems really even better than you maybe anticipated last quarter.

Can you talk about SG&A and the trade-off, or how you're thinking about between letting a lot of that incremental sales growth flow through, or maybe investing some of the upside in projects that would hit SG&A, whether it is marketing or systems or whatever it might be?

How are you thinking about the flow-through versus incremental investing that can drive the business even years out?

I don't think our thinking has changed significantly at all.

As we've said in the past, it would depend where the growth is coming.

An outsized growth will require outsized investment at a faster or earlier time than was originally anticipated.

If you think back, our European business is one of our oldest businesses and it was very stable, but this new product cycle and competitive nature in Europe has outsized the growth significantly.

We planned the distribution center up, what we thought was a significant amount from the running rates of the last couple of years, and we were significantly behind.

I think it is fair to say, we will do whatever is necessary to do it at all, in all parts of the world.

I think we would have shown even more flow through to the bottom line had we been more efficient in the distribution center and we will catch that is a goes forward.

We are increasing our spend this year.

We're doubling the size of our distribution center.

That doesn't all flow into additional G&A because we had to rent some offsite premises just for storage, because it got so big, and we had to turn so much merchandise.

But we are doubling the size.

It will be 1 million square feet, more efficient.

We are now contemplating more automation in this new part of the system to become even more efficient and anticipate that sometime going into the end of the year, certainly through 2016, it will become as efficient and leverage quite well as it does in the United States.

China remains to be seen.

I assume if they continue to have 100% growth year over year that we will have to, sooner than later, go into more sophisticated distribution there.

The rest remains to be seen.

They are too new.

Chile is up and running on its own and do not anticipate to require too much distribution automation in that country.

Right now, we're in pretty good shape.

We only have Europe to really grow, China to think about on the horizon, and we should leverage even more as we continue to grow into the back half of the year and the early part of next year.

Got it.

Maybe can you speak to the other piece that you mentioned in the prepared remarks just about updating the website, making -- updating the mobile site.

Is that something that will go global and how does that impact, what kind of investment does that take to do what you really want to accomplish there to enhance the brand online?

Given the balance of what we're doing, in other words, the 55 stores and the distribution centers, it is negligible.

It is a small investment, relatively speaking, because most of it flows through our in-house crew.

We're not going to hire too many more people so it is just a matter of time.

We use it as a branding tool.

We're not very big on our own E-commerce sales or driving them too hard.

This is more branding and becoming usable for the entire generation of new customers that we are getting.

We continue to do it in-house, we continue to invest in it.

It will continue to get better and the investment won't be significant compared to the overall capital investments we talked about for the first -- for the full year.

Got it.

Okay.

Thank you so much.

Karina [VanDergenst], Citi.

First question, the 40% top line was much stronger than your guidance implied for the quarter.

Can you comment on where specifically you saw the biggest upside versus your internal expectations?

And just to clarify on your language in the prepared remarks, are you saying that the backlog accelerated from the 60% you reported in February?

The second part first.

No, it did not accelerate from the 60%.

It actually came down somewhat in real dollars, not a significant amount.

I think it is in, let's say it has come down but not a significant amount.

But most of the decrease is currency denominated.

In constant dollars, it would have accelerated from the year end.

That is the first part.

The biggest surprise, I do not know how to rate them from top to bottom as far as surprises are concerned.

I think given all the headwinds, between the weather and the port and the distribution center in Europe, the fact that we powered through and continued all of them at probably pretty much peak.

We always evaluate each channel of distribution and prepare for the year, but there is always some downside.

We were pretty much at peak and shipped very efficiently throughout the quarter.

I think our brand stayed hot.

There were no cancellations, there were no move out.

I think everything was as solid as could be.

I think we just went to the upper end of everything we anticipated could happen, which is very rare.

Okay, great.

That's very helpful color.

Can you provide a little bit more detail on the 26% inventory growth at the end of the quarter?

Are you still air freighting any spring inventories in at this point?

And, are you seeing any changes to the cadence of at-once orders that you are seeing, just given some of the impact from the port delays and the weather and the Easter shift, et cetera?

I'm going to have to take issue with that remark.

Still, we do not air freight a lot, never did air freight a lot, even during the system, although more than in the past, it wasn't outrageously a lot.

I think it has grown because the business has grown.

We have 50 more stores.

We have a business that is doubled in China.

We have moved into central Europe, and Europe is a much more bigger piece, has more stores.

Every place continues to grow.

I think this is base inventory.

If you look physically at the inventory that we had in our warehouse here, domestically in the United States, the growth is not significant enough to support this kind of growth.

It's mostly in transit and the growth is all new stuff.

We haven't seen any -- there is always something left hanging from the port, but the port has picked a very efficiently and we are getting our goods in much quicker.

Our in-transit inventory has not grown as significantly as it did at the end of the year.

We are turning things.

I think that the core inventories is just a larger piece for what we need to support our stores and also to support a bigger shipment in April-May both domestically and internationally because the business has grown.

We're taking in stuff and Easter is later.

We will have a bigger April than last year and that would require more inventory to be in house and in transit at the end of March.

I think it is just our basic inventory, or our inventory around the world has had to grow to support them, and we're having a bigger growth in April-May than we'd usually have, so we have to build for it.

Just as a follow on to that, are you expecting similar ASP growth through the rest of the year as we saw in the first quarter?

Not through the whole year, because if you remember the back half of the year, it picked up then, so I do not know if we will comp on comp.

I don't -- too much of a change in the mix, but I don't remember exactly when we had the big pickups last year.

I don't know what I'm comping against.

But this is pretty much our core movement, unless there's, like we say in the past, shift within category or within countries, we should be pretty much in these price points for this quarter.

Okay, great.

Thanks so much.

Chris Vesio, Susquehanna Financial Group.

I want to go back on the backlog for a second, just not to harp on it too much, but if you were up 60% on a dollar basis because of the movement in currency in Q1, it is obviously incrementally lower than that, but on a currency neutral basis, you didn't give us a currency neutral number before, but I assume it's actually incrementally accelerated from the growth in Q1 or from year end.

Is that what you are saying?

Yes.

Okay.

Q3 revenues, can you just, without being overly specific, but an acceleration potentially in growth rate, is that more like in excess of 25% growth year over year?

Is that fair, given what you're seeing in the backlog and international being a bigger piece in Q3 versus Q2?

I'm loathe to give real number guidance, but that number would not surprise me.

Okay.

These are easy two-word answer questions.

ASPs, just want to go back on that for second.

International, what are you doing there?

I know domestically it was up wholesale.

What is happening on ASPs just to combat some of the FX pressure?

Can you talk about that at all?

I guess I could, but I would rather not in a public forum, because I do not want our strategy to go public before it is announced to customers and things like that.

We are reviewing our pricing and new offerings in all of those territories and would anticipate our margins starting to come back, but not earlier than the back -- at the end of the year or early 2016.

We don't want to be too aggressive on it.

We have our business growing there and we want to be in tune to the marketplace.

It's -- we have a strategy in place, but it is too early to announce it publicly.

Okay.

Fair enough.

The DC in Europe, you mentioned $7 million or so in personnel expense.

Really, I'm just curious, can you maybe walk through how dilutive the inefficiencies are in the DC in Europe?

And when that tide becomes -- starts to turn the other way, at what point?

Is that Q3, it is much more efficient?

In Q3 last year, that is where it really crept up where it started to see some inefficiencies.

That would depend on volume increase, which I don't have a whole handle on.

I would anticipate it would be significantly more efficient in Q3.

It will be even more efficient in the first quarter of next year.

The inefficiencies relate around the $7 million in additional costs.

We would have anticipated significantly less than that, probably $4 million, $5 million less, had the system be as efficient as the plant to be ultimately and did not get overwhelmed with all the volume.

You have to understand, when you have an automated system and it cannot keep up and you have to convert that to a manual system, it is even more expensive than a fully manual system because you have to take it out of a specific flow and out of things that are moving around.

Unless you've been there, it is very difficult to understand.

We became more efficient than we anticipated.

I think if we had the equivalent volume next year that we had in first quarter this year, I would anticipate that, that $7 million would come down by somewhere in the $4 million to $5 million range.

Okay.

Fair.

Okay.

Last question I have, just on the retail comp being up double digits so far in April.

How much of that is just because of Easter being earlier?

I'm just curious, was it strong in the first half of the month and then weaker in the back half because you are getting closer to the Easter comparison?

Or just color about that.

I will tell you that it is up significantly higher than in the first half of the month.

But when I said double digits, we made a comparison between Easter and the week after Easter, this year to the last year, and it is up 10%.

We took out that timing differential.

For the Easter holiday, we were up double digits.

I don't know if it holds for the whole quarter.

Last year we had significant, I think 12%, 13% comp store increases in the second quarter, which was significantly larger than the first.

I do not know that we can comp double digits upon those double digits, but we have started off that way.

Okay.

Fair enough.

Feel better.

Thank you very much.

Danielle McCoy, Wunderlich.

Just back onto the AUR, if you can give us a little bit of color as you are raising AURs and just between competition, what are your thoughts around how high you guys can take prices versus competition?

I do not know that we think in those terms.

We think of pricing the product we develop and its value in the marketplace.

I do not know if it is all competitive that we have to stay in a certain range.

Certainly that is not true of all product.

But as we develop enhancement, I think, that has higher perception of price and the brand does carry a higher price point now, and we get more technical, we will continue to raise prices as those new things develop.

I do not think we have a floor or a ceiling just based on the competitive nature.

Just based on taste in the marketplace and what kind of product sells and what the demand is and those that we can put more technical features in.

Okay.

In terms of international, is there any differences in the consumer who's shopping Skechers or any differences in shopping behaviors compared to the US that you can call out?

As far as what they buy or how they react to the line?

I guess how they are buying, are they buying more in store, more online, or any specific categories or even age groups that you might have there that you do not have here or vice versa?

It is hard to tell.

I think the demographics are very broad around the world.

There are some places where we have more teens and tweens, but that is growing for us in the United States as well.

I think the nuances, some of them are country specific just based on population as it exists there.

As we said in the prepared remarks, the core products that are the base of pretty much every place we sell in the world are the same.

There are nuances in each country, but basically the core product is the same, which is the same core customer.

I don't think we leave anybody off the table around the world.

We have a very broad demographic and a very broad list of categories that sell.

The nuances between the countries will be very difficult to take up on a phone call.

I have to go country by country.

The basic Skechers brand and product are the same around the world.

All right, great.

Thanks, and good luck.

Jeff Van Sinderen, B. Riley.

Let me add my congratulations.

David, maybe you can help clarify a little bit.

I'm just trying to understand the difference in how much the backlog is up for Q2 compared to Q3.

Maybe you could also touch on the breakout for domestic backlog a little more versus international backlog.

Again, just trying to get a sense of how much -- international is growing faster, obviously.

That would be a good place to start.

I'm not sure where to start.

The backlogs in the United States have been fairly consistent.

They haven't modulated as significantly as international, because there's obviously there's no currency risk, so the change is different.

I would tell you that our backlogs continue at relatively the same level.

The differential is not that big on a domestic level and are only lower than last year because of the currency differential in our international business.

It's held up very, very well.

We still have a significant -- given the scale and pace of our growth, and even after the first quarter -- well, the first quarter was an easier comparison than the second will be, obviously, just because second quarter grew so big last year, both from a wholesale and a retail perspective.

But to still have (technical difficulty) these losses why we have confidence that Q3 can be significantly to the upside.

Q2 will grow, but just given the comparison, it cannot grow at a 40% level because it was just up too high last year.

I don't think anything has really slowed down or changed, it is just the comparisons have changed.

We still see significant growth and significant demand.

As far as where the backlog is, obviously the closer we're booked in, the higher we are full.

We're pretty much booked up for second quarter.

But you understand, in our analysis, also, is we try to keep a very even keel on that June-July differential we have for shipping, where a lot of July can move to June if there's big demand for back to school and vice versa.

That still is out there and could change our outlook for Q2 and Q3.

But right now, given an even distribution and not significant move, we think will have significant growth in Q2, although certainly not the 40%, but the upside in Q3 because that is where demand around the world will converge into the larger shipments.

It wasn't really a matter of a pull forward into Q1, it is really just obviously a tougher comparison in Q2, and then the booking window is still open for part of Q3, correct?

So that could also fill in?

That is also true.

Absolutely true.

We might have had a pull effect in Q1 and made it even bigger, but that was made impossible by the distribution center in Europe and the port slowdown here.

Okay.

As far as the DC in Europe, are we -- are the slowness issues pretty much behind us as we are getting -- it is getting better, but I guess when will they be fully behind us?

Well, hopefully never.

Hopefully we can double every year and we will have to keep chasing it.

It is fair to assume they're getting better now.

They're actually very efficient going into the second quarter, but it is a very small quarter for them, so you would anticipate they get caught up and more efficient in that quarter.

We are making changes and do anticipate that in Q3, with the pickup, that they will be significantly more efficient than they were in Q1.

And then, with the advent of the new building, and when we decide what automation to put into it, they should be significantly more efficient in Q1 and then the balance of 2016.

It will be an ever-tightening slope.

Got it.

Okay.

Thanks for taking my questions and good luck.

Scott Krasik, Buckingham Research.

Congratulations.

You'd said that kids' was up double digits, so relative to some of the stuff that happened last year, is that business totally back on track, and should that grow at the same rate as your adult business or faster, even?

I do not know that it grows the same rate as adult.

It certainly is double-digit growth, but it hasn't caught up to the adults yet.

But I think it will continue to be double digits as we go through.

We're getting very good responses and could even pick up the pace as we get to the back half of the year with Star Wars and the growth in the existing business.

But right now, it is up double digits.

We continue to book and have backlogs up double digits.

So yes, the new product -- and that is true around the world, by the way.

The new product is taking hold and it is growing, and it certainly doesn't have the same issues as last year.

So no question kids' faster growth in the second half than the first half or both halves?

Is hard to tell now, but I would anticipate that.

Okay.

Within domestic wholesale, any new distribution worth calling out or is this all comp growth?

What are we seeing here in [30]?

All the distribution is worth calling out, whatever -- I don't know what it means to the overall total.

We have some accounts that have grown significantly.

We're trying new with us last year but nothing that would move the needle as significantly.

Obviously the big piece of the growth, to see 38% growth requires our bigger accounts to jump on board.

And I think, by and large, from top to bottom, they really have, some more than others, but yes, it resides where we sell the best.

Okay.

No, that's helpful.

Just help us contextualize China.

You said $100 million in 2015.

How many points of distribution would that equate to roughly and what is the growth potential beyond that?

I do not know that China has a quantifiable growth potential when you start with a smaller basis we have, simply because it can be overwhelming with the amount of people.

We are -- it is predominantly franchised and retail oriented, so the amount of locations will grow significantly, probably well into the thousands over the next two or three years, given the franchise model, because there really aren't a lot of multi-branded stores there.

We will have some bigger customers.

There's some franchises that looking to expand to significantly more locations, so the locations must grow at the same rate as sales.

It is just everywhere, but not all of them will be ours, obviously.

The bigger piece, now, will be franchises.

As far as its potential, it certainly has the potential to double and then redouble over the next two or three years.

How many?

Just for perspective, how many points of distribution are there now, roughly?

Not sure exactly.

I would think there's 1,000, 1,500.

So double, triple, something like that?

Yes.

Look at how much territory you have and how much retail there is there.

How is that -- are you marketing there?

Is that positioned as a performance brand, a lifestyle brand, what is the --?

It's positioned just like our stores here.

It is from top to bottom.

It is a men's brand, it's a woman's brand, it's performance, it's casual athletics, it kids' and it is open footwear.

Okay.

Just last, I missed the number.

What did you say the retail G&A was this quarter?

G&A or comp?

The G&A associated with the new -- the retail stores.

I think $5.8 million or $6 million, something like that.

All right.

Thanks.

Jim Chartier of Monness, Crespi and Hardt.

Quickly, in the other expense line, what was the impact of FX trends translations on that line?

I think it was, give or take, $4 million.

I would have to look it up, but something like that.

Then the earnings attributable to non-controlling interest more than doubled.

Has -- did the joint ventures, have they hit an inflection point in terms of profitability?

Can you talk about the margins for that business?

That is very true.

China's becoming significantly more profitable with their growth.

They've already made up all of their NOLs and they are strictly profitable.

As the franchise model grows, they will even accelerate that number.

So they are very profitable and the Southeast Asia joint ventures are obviously the biggest piece of what goes into that.

Okay.

In December, you talked about trying to drive the sandal business this spring.

Could you talk about how that industry has been performing so far?

I think it's performed quite well for us.

We have actually had not many categories of ours that lag.

Obviously the weather in the East Coast was part of the issue, but we've held up pretty well.

I think all our categories have done well.

Great.

Thanks and best of luck.

At this time, I would 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.