Skechers USA Inc (SKX) 2015 Q2 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded.

At this point, I'd like to turn the conference call over to Skechers.

Please go ahead.

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

I will now read the Safe Harbor statement.

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

Such forward-looking statements involve known and unknown risks including, but not limited to, global, national, and local economic, business and market conditions in general and specifically as they apply to the retail industry and the Company.

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

Users of forward-looking statements are encouraged to review the Company's filings with the US Securities and Exchange Commission including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other reports filed with the SEC as required by federal securities laws for a description of other significant risk factors that may affect the Company's business, results of operations and financial conditions.

With that, I would like to turn the call over to Skechers Chief Operating Officer and Chief Financial Officer, David Weinberg.

David?

Good afternoon, and thank you for joining us today to review Skechers second-quarter 2015 financial results.

Our sales for the second quarter were $800.5 million, a 36.4% increase over last year, and the highest quarterly sales in the Company's 23-year history.

This also resulted in record first-half sales of $1.57 billion.

Driving the growth in the second quarter was double-digit increases in our three business channels, domestic wholesale, with an average price per pair increase of 9%; international wholesale, which includes 665 third-party owned Skechers retail stores; and our 461 Company-owned Skechers domestic and international retail stores, with total comp store sales increases of 12.9% for the quarter.

The second quarter benefited from both pent-up demand resulting from US port issues in the first quarter, as well as a shift in back-to-school shipments due to increased demand in both domestic and international markets.

This continued strong demand for our product worldwide also led to record net sales, earnings from operations, net earnings, and earnings per share in the second quarter.

Second-quarter financial highlights include record quarterly revenues of $800.5 million, record earnings from operations of $112.3 million, record net earnings of $79.8 million, record diluted earnings per share of $1.55, gross margin of 46.8%, and a strong balance sheet with $513.9 million in cash, or approximately $10 per diluted share.

Additional second-quarter highlights include being added to the S&P 400 MidCap index as of June 30, a reflection of our significantly increased market cap; a 31.9% increase in our domestic wholesale business, with a 21% increase in pairs shipped, and a 9% increase in average price per pair; a 60.1% sales increase in our international wholesale business, with a 51.5% increase from our distributors, and a 64% increase from our subsidiaries and joint venture partners.

A 23.7% sales increase in our Company-owned retail stores, which included an additional 48 net new stores compared to the prior-year period, including 8 net new stores opened in the second quarter.

Worldwide Skechers retail store count, including third-party owned Skechers stores, now stand at more than 1,100 doors.

The universal acceptance of our diverse range of men's, women's and kids footwear has resonated worldwide.

We have significant success stories in every key product line, allowing us to build upon our product innovation and continue to expand our brand in new territories.

We have a team of celebrities that reach a vast demographic globally, from Demi Lovato resonating with teens, to Ringo Starr speaking to Gen X and Baby Boomers.

With the signing of boxing legend Sugar Ray Leonard in the second quarter and pop singer Meghan Trainor just last week, the impact of these influencers in traditional media, as well as social media, will be even stronger.

We have increased both efficiency and capacity in our domestic and European distribution centers and are continuing to do so, positioning us for ongoing growth.

Our year-over-year worldwide backlogs are up mid-double-digits at June 30, 2015 which we believe is a clear indicator that our momentum will continue throughout the year.

Now, turning to our business in detail.

In the United States, we are pleased that both our sales growth and our position within our wholesale accounts and as a leader within the footwear market.

According to SportsOneSource, we are now the number one work brand and the number one walking brand.

In May, numerous media outlets reported that we surpassed several leading athletic footwear companies to become the number two brand in the United States athletic footwear market.

The sales growth is reflective of our increased importance with our wholesale partners.

In our domestic wholesale business, second-quarter sales increased 31.9%, or $82 million, as compared to the prior-year period.

The growth in the second quarter was the result of a 21% increase in pairs shipped, a 9% increase in average price per pair, and double-digit increases in our men's and women's footwear, as well as single-digit gains in our kids footwear.

The highest dollar gains came within our Skechers USA men's collections, which features Relaxed Fit footwear, Skechers Sport for women with our lightweight footwear, and our women's Skechers GO line.

Every major product category showed increased volume and increased gross margins for the quarter.

Nearly every division and product line from Skechers GO Run and Skechers GO Walk to BOBS from Skechers and Twinkle Toes had a TV, print, or in-store or marketing push behind it.

This included our first sandal commercial in many years.

Our spring marketing push drove excitement for our footwear as we launched new campaigns with legendary drummer Ringo Starr for our Relaxed Fit footwear, Brooke Burke-Charvet for Skechers Stretch Fit, UK model and actress Kelly Brook for Skechers Sport, and several Skechers GO golf commercials with pro golfer Matt Kuchar, among others.

Additionally, our in-store and online campaigns with Demi Lovato launched in conjunction with the airing of her colorful comfort Skechers Sport print and television campaign.

Demi's impact on social media has been phenomenal as we see fans in the United States and around the world engaging with her posts about Skechers and the Skechers Sport Demi commercial reached 4.5 million views on YouTube.

The signing of the great boxing legend Sugar Ray Leonard for our men's Relaxed Fit line is also a plus for social media as he regularly posts about Skechers.

We are looking forward to the launch of his television and print campaign later this quarter.

And we just announced the signing of multi-platinum artist Meghan Trainor who is currently on her MTrain Tour across the United States.

The press has taken notice of the growth and innovation of our product lines and our brand ambassadors.

The Pete Rose #PeteintheHall Sketchers campaign continued to create excitement in the sports world and on Twitter as Pete petitioned the baseball league to be in the Hall of Fame.

The press loved the innovative Game Kicks line, which features a built-in memory game, and of course, the media outlets are gearing up for the Star Wars movies, and now we have Star Wars from Skechers footwear for boys and men coming in the second half of 2015.

Finally, in the second quarter, we reached the 12-million-pair donation mark for BOBS footwear.

To better prepare for continued growth, we recently completed capacity and efficiency upgrades to our domestic distribution center and believe we are well-positioned for increased shipments and demand.

Based on our domestic wholesale backlog, our continued focus on delivering innovative product and relevant marketing, including our increased team of Skechers brand ambassadors, strong sell-throughs for spring, and early feedback on our fall products, we believe we will continue our sales momentum through the back half of 2015.

International achieved the highest percentage in dollar increase of our three distribution channels.

Total international wholesale and distributor sales increased by 60.1% in the second quarter.

Further, our subsidiary and joint venture sales improved by 64%, and our distributor sales improved by 51.5%.

Several countries shipped more than 1 million pairs in the quarter including China, the United Kingdom and the UAE, who handle the distribution of Sketchers across most of the Middle East.

Additionally, we are pleased with the continued growth in our international business despite foreign currency headwinds in several markets.

We believe this success is attributable to our innovative and diverse product range, as well as our on-target marketing and branding campaign.

Ringo, Demi, and international celebrities like the UK's Kelly Brook are resonating with consumers in many global markets.

And a K-Pop group, SISTAR, are having positive impact with consumers across Asia.

In fact, we are excited to see the first window displays of Demi Lovato in Spain, Germany, and Panama, Ringo in the UK, and Kelly Brook in the UK, France, and Germany.

Further detailing our growth in international, our wholly owned subsidiary saw net sales increases of 64% for the quarter.

In our European subsidiaries, we achieved increases of 53.2% for the quarter.

The highest dollar increases came in our three largest subsidiaries, Canada, Germany, and the UK.

The only market in which we did not achieve sales growth was in Chile, which was due to currency headwinds as they, in fact, had an increase in pairs shipped in the quarter.

Additionally, in the second quarter, we began shipping into central eastern Europe as a subsidiary after transitioning several distributors to a wholly owned subsidiary that will oversee 14 countries.

We are pleased that we have already begun to see key accounts in our newly opened CE headquarters in Budapest, and we believe this new subsidiary will positively impact our operations in 2016.

To prepare for the accelerated growth in Europe, we are also increasing the capacity and efficiencies in our European distribution center with two expansion phases, doubling the size of our EDC, which will bring us to more than 1 million square feet of distribution space by mid-2016.

In the second quarter, we began transitioning our business from our distributor based in Panama to a subsidiary.

The planned subsidiary, Skechers Latin America, will oversee Peru, Colombia, Costa Rica, Panama and several other countries in the region.

With numerous Skechers retail stores, we believe there is great opportunity to grow our business in this well-established market.

We expect the agreement to be signed shortly and we will announce it when it is complete.

Our joint ventures in Asia grew by 116.8% for the quarter, led by a triple-digit increase in China, which shipped more than 1 million pairs in the second quarter.

Our international distributor growth of 51.5% for the quarter is the result of triple-digit growth in Indonesia, Scandinavia, Taiwan, and the UAE, and double-digit growth in Australia and New Zealand, South Korea and Turkey, as well as strong results from many other countries.

As in the United States, this growth is being driven by our diverse range of men's, women's, and kids lightweight Skechers Sport, Skechers GO and Skechers USA footwear.

To showcase the compete offering, most of our international distribution partners have opened Skechers retail stores and we have a growing network of franchised Skechers stores.

At quarter end, there were 665 Skechers branded stores owned and operated by our joint ventures, franchisees and distributors outside of the United States.

Of these, 406 are distributor-owned or franchise Skechers retail stores, 216 Skechers stores are in our joint venture countries in Asia, including those run by franchisees in the region.

Additionally, there are 43 Company franchise stores in those countries where we directly distribute our product.

63 third-party stores opened in the second quarter, including our first two stores in the Czech Republic and our first kids-only stores in Hong Kong.

Additional Skechers branded stores opened in the quarter include 18 in China, 5 in the UAE, 4 each in Brazil, Taiwan and Malaysia, 3 in Mexico, 2 each in Australia, Kuwait, Spain and Singapore, among others.

Six stores closed in the quarter.

5 third-party Skechers stores have opened to-date in the third quarter, and another 90 to 100 are expected to open during the remainder of the year.

Over the past few years, we have aggressively introduced new product lines and innovations, and we are grateful that so many of our initiatives have resonated with consumers around the world.

We're building the Skechers brand across the continents with our powerful marketing.

Be it Demi Lovato windows in Australia, television campaigns in Brazil, or the unisex Sport and GO Walk commercials running in nearly every international market that airs Skechers TV commercials.

In addition, Asia has built a young trend business with our heritage men's and women's sports styles that took off in South Korea and was embraced by consumers in China, Hong Kong and Southeast Asia.

With double-digit backlog increases and strong growth planned in many countries, we believe this momentum will continue through the back half of 2015.

Now with 30% of our total sales, we expect international to grow at a faster rate than domestic wholesale and retail and become 50% of our total business in the next three to four years.

Worldwide sales in our Company-owned retail stores increased by 23.7% for the quarter, with domestic sales growing by 21% and international sales by 35%.

This included positive comp store sales of 13.1% domestically and 11.8% in our international stores for a total of 12.9% comp store sales increases worldwide.

At the end of the quarter, we had 461 Company-owned Skechers retail stores around the world, of which 95 are in our international markets.

In the second quarter, we opened 12 stores, including our first store in Alaska and Brazil, and 2 stores each in Japan and Canada.

We closed four domestic stores in the quarter.

Already in the third quarter, we've opened seven stores, including a store on Fifth Avenue between 42nd and 43rd streets in Manhattan.

With another 30 to 35 planned for the remainder of the year and the transition of several stores in Latin America to Company-owned stores, we should reach 500 Company-owned stores by year end.

Now turning to our second-quarter 2015 numbers in more detail.

As discussed earlier, we achieved both a record second quarter and highest sales quarter in our 23-year history with sales of $800.5 million, up 36.4% compared to $587.1 million in the second quarter of 2014.

Second quarter gross profit was $374.6 million, or 46.8% of sales, compared to gross profit of $269.4 million, or 45.9% of sales in the prior-year period.

Second-quarter selling expenses were $64.9 million, or 8.1% of sales, compared to $53.8 million, or 9.2% of sales in the prior year, representing 110 basis points of operating leverage.

The dollar increase in advertising and marketing expenditures was to support all of our diversified product categories, both domestically and internationally, as well as higher sales commissions due to the significant increase in sales.

For the second quarter, general and administrative expenses were $201 million, or 25.1% of sales, compared to $163.6 million, or 27.8% of sales in the prior year, representing an addtional 270 basis points of operating leverage.

Of the $37.4 million increase in G&A, $8.7 million was related to operating an additional 48 stores when compared to the prior-year period, and $15.8 million was due to increased expenses related to our international operations.

During the second quarter of 2015, earnings from operations increased $58.6 million to $112.3 million, or 14% of revenues, compared to $53.8 million, or 9.2% of revenues in the second quarter of 2014.

This 480-basis-point improvement reflects improved margins and operating leverage as we continue to aggressively grow our worldwide revenues.

In the second quarter, we recorded an income tax expense of $25.4 million compared to approximately $12.2 million in the prior-year period.

Our quarterly effective tax rate was 22.6%.

We currently anticipate our effective tax rate for the remainder of 2015 to be between 21% and 25%.

Net income increased 129% to $79.8 million compared to $34.8 million in the prior-year period.

Net income per diluted share in the second quarter was $1.55 on approximately 51.3 million average shares outstanding, compared to $0.68 on approximately 50.9 million average shares outstanding in the prior-year period.

Net sales for the six-month period ending June 30, 2015 increased 38.4% to $1.57 billion, compared to $1.13 billion in the prior-year period.

Gross profit was $707.1 million, or 45.1%, compared to $509.8 million, or 45% in the prior-year period.

Selling expenses were $114 million, or 7.3% of sales, compared to $90.6 million, or 8% from last year.

General and administrative expenses were $398.2 million, or 25.4%, compared to $322.1 million, or 28.4% last year.

Earnings from operations for the first six months of 2015 were $200.5 million versus earnings from operations of $101.9 million for the same period last year.

Net income for the six months increased $70.1 million to $135.9 million, compared to net income of $65.8 million in the prior-year period.

Diluted earnings per share were $2.65 on approximately 51.3 million average shares outstanding, compared to diluted earnings per share of $1.29 on approximately 50.9 million shares last year.

And now, turning to our balance sheet, at June 30, 2015, we had $513.9 million in cash, or approximately $10 per diluted share.

Trade accounts receivable at quarter end were $434.2 million, and our DSOs, at June 30, 2015, were 41 days versus 44 days at June 30, 2014.

Total inventory, including merchandise in transit at June 30, 2015, was $470.6 million, representing an increase of $110.1 million, or 31% from the prior-year period, and an increase of $16.8 million from December 31, 2014.

We believe the increased inventory when compared to the prior-year period is appropriate based on our strong backlog and our forecasted revenues for the second half of 2015.

Long-term debt at June 30, 2015, decreased to $1.6 million, compared to $15.1 million at December 31, 2014.

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

Shareholders equity at June 30, 2015, was $1.3 billion versus $1.1 billion at December 31, 2014.

Book value or shareholders equity per share stood at approximately $25.16 as of June 30, 2015.

Working capital was $909.9 million versus $779.3 million at December 31, 2014.

Capital expenditures for the second quarter were approximately $18.4 million, of which $9.7 million was related to 12 new stores and several store remodels, and $6.3 million for additional equipment upgrades at our domestic distribution center.

We continue to expect our capital expenditures for the remainder of 2015 to be approximately $50 million to $60 million, which includes 30 to 35 retail store openings, equipment upgrades at our European and domestic distribution center, and an additional real estate purchase.

In summary, we set new quarterly records in the second quarter for net sales, earnings from operations, earnings per share, and operating income, and saw gross margins of 46.8%.

The growth in net sales also led to record first half sales of $1.57 billion.

Our three business segments saw double-digit increases in the second quarter, including international wholesale, which had the highest increase at $90.8 million, or 60%.

Even with this increase, domestic wholesale remains at 42% of our total business, though we expect international to grow to approximately 50% in the next three to four years.

The continued growth in 2015 is the result of the strong demand for our brand around the world, including our lightweight sports footwear for men, women's and kids, Skechers GO Walk, Relaxed Fit footwear and many other product lines.

We are excited about the launch of our new marketing campaigns to support this business, including our brand ambassadors Demi Lovato, Meghan Trainor, Sugar Ray Leonard, among others, and a Star Wars Skechers commercial airing in the fourth quarter.

To maintain this growth, we are continuing to build on our many proven product lines with new designs and colors while also developing new technologies and products, including the new Star Wars for Skechers licensed boys and men's styles and the next generation of GO product, GO Flex.

We are also expanding into new accounts and growing our foothold in existing accounts and building our business in new markets such as the Czech Republic and Romania and expanding our Skechers retail store base to approximately 1,250 by year end.

To keep up with the demand for our brand, we have added additional equipment upgrades within our 1.8-million-square-foot domestic distribution center.

To meet the growing demand in Europe, we've updated the automation of our equipment and are now undergoing our second phase of expansion, which will result in more capacity and increased efficiencies with more than 1 million square foot of distribution center space.

Our balance sheet at June 30, 2015, remains strong with $513.9 million in cash and in-line inventory of $471 million.

This along with double-digit backlogs, strong July incoming order rates, and spring 2016 buy meetings with our key accounts in our corporate offices this month gives us confidence that the strength and demand for our brand will continue throughout the year and into 2016.

We remain comfortable with the analysts current consensus estimates for the back half of 2015.

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

(Operator Instructions)

Jay Sole with Morgan Stanley

Hi, good afternoon.

These are some staggering numbers.

David, I just want to ask you about the one thing your mentioned about international becoming 50% of the business within three or four years.

Are you thinking about just the international wholesale direct or the combined wholesale and retail?

Because, even if it's just direct, what you're saying, it sounds like, just doing some quick math, is if the US domestic business is kind of flat, then you're seeing international potential to grow 20% for that three to four year forecast period.

Is that what you're saying?

Am I understanding that right?

Yes, what we're thinking is that we'll accelerate now through our international business, but I do count the retail.

I count everything that's outside the United States, that, in fact, is international.

And that will start to grow at a faster pace as we continue to open and China continues to open stores.

While I don't anticipate any significant change in our domestic business, that's doing quite well and I think it still has room to grow.

I just think international, as we've set it up now, will start to grow at a significantly faster pace as we get some underperforming territories like Japan, Brazil, new parts of South America, and eastern Europe moving; and as well as Europe has been doing for us and continues to grow and expect good growth next year, and we think in the next three or four years, counting our retail and expansive franchisee openings around the world, that we can catch domestic.

Of course there's always the scenario that says that Domestic will re-accelerate again and It will take us a little longer, but that's a high-class problem to have.

So that's fine with me.

Sounds good.

And maybe if we talk about gross margin for a second.

Really big [feat] on gross margin this quarter.

And it seems like there's quite a few different drivers.

Pricing internationally, just to offset FX, there's pricing in the US that sounds like it's happening because of strong demand, lower commodity prices, some increased operational efficiencies.

Can your just quantify where the strength is coming from?

Well, it came from everywhere.

So surprisingly, like I said in the prepared comments, every major division we had, had higher sales and higher gross margin.

I think that comes from being more efficient as we come through -- not a lot of mark-downs, not a lot of returns, not a lot of inefficiencies.

And because June became such a strong month for us domestically, with the moving from third quarter to second quarter; it was all newer product with somewhat higher price points and margins, so that all helped move it.

And that also flowed through our retail channel that had significant domestically increased margins.

We were pleasantly surprised with the mix in Europe, probably because the UK was one of the biggest growers, and they haven't had any issues with currency.

But in the UK we ended up with probably higher margins than we had anticipated because of the increased new product that was shipped in the second quarter, that historically would have been shipped in the third quarter, but we're certainly picking up there.

And of course, one of the biggest movers is we have higher margins in China because China is predominantly a retail business, although they are into expanding their franchise model significantly and moving.

And they were more than double.

They actually went from $18 million in the second quarter last year to $50 million in the second quarter this year.

So that certainly was a positive impact on margins.

So when you put it all together, we had almost a perfect storm.

I don't know that I would anticipate it continues forever because we'll settle into a broader mix of footwear and fill in, not only new product.

But it was a very good and very broad-based increase for us in the second quarter.

Like I said, staggering numbers; terrific performance.

If I can ask one more margin question and then I'll hop off.

Last year the margins in the US, the EBT margin was about 5.3%, and international was 14%.

And it sounds like you're talking about China and the UK and margins in some of these international locale continue to rise.

Can you talk about that US margin?

If margins are about 400 basis points so far this year, where is that US margin trending and where do you want it to trend?

Because 5.3% sounds like it's low given the strength of the brand right now and just overall, just with the strength of breadth and depth of the category and everything that you're doing.

We anticipate they'll continue to rise.

Actually, we had a slightly higher tax rate this quarter than we anticipated and that was based on the strength and profitability in the United States, both from retail and wholesale because we can leverage so well.

As we've said as we've been on the road and these calls, we think we continue to leverage, even without gross margin so significantly high if we scale back to the 44% to 45% range where we've been historically.

We still anticipate we'll continue to leverage to the bottom line and that's both domestic and internationally.

We will leverage faster, obviously, in the United States because we have more infrastructure and more automation.

But we'll start to catch up in worldwide as we put these things in place and we think we'll continue to leverage just everywhere.

We keep moving along and expect operating leverage to continue to increase.

Okay.

That sounds great.

Thank you, David.

Thanks.

Jeff Van Sinderen, B.Riley.

Let me add my congratulations.

Amazing work by your team.

David, maybe you can just give us a little more color on what the backlog mostly consists of.

Are there any notable changes in concentration and maybe you could also just go through how much of the business you think was pull forward into Q2 due to the high demand that you talked about?

And, based on that, how should we think about Q3 in terms of the year-over-year increase in revenues?

It's very difficult to put a number of what was moved forward and not.

If I had to guess, I would assume it was somewhere in the $15 million, $20 million range that normally would have gone into Q3.

We had some increased demand in April, as well, simply because of the port strike and because of the weather issues that we thought we wouldn't make up, we made up in April because the brand was doing so well around the United States.

As far as the backlog is concerned, it's, obviously, down a little bit from second quarter and that's because we moved some shipments in from third to second quarter.

So they, obviously, add a backlog into the shipments.

Customers haven't had a chance to replace them all at the back end of the cycle for September, October.

We anticipate that's coming.

Europe is obviously still down some because of the currency translations, but in real dollar terms it's certainly increased, but we're up certainly significantly higher in local currencies than we would be in real dollar terms.

And moving to forecast or Q3, we think because of this movement into Q2 we're comfortable with the growth which is still pretty good for Q3, as far as volume, and we left the operating or the earnings per share number the same because we do anticipate a slight decrease in the gross margin.

So a slightly higher volume getting to higher EPS number.

But we do know that there is room to the up side, and given such a big shift to June, we'd have to see some increased demand for back to school to get the increases on the back half.

It's usually acquired in time.

We're still in the process of that.

I think while our stores continue to comp at double digits through July, there is a case to be made that back to school has moved to further out since Labor Day is so late.

But we're off to a great start in July, so we think there are a lot of good possibilities out there but we are still comfortable with the growth shown, which will make for a very good three quarters for us.

What are you hearing for early back to school from some of your wholesale accounts?

It sounds like your retail stores continue to be really strong, but just wondering if there's any feedback from them so far in early back to school business.

And then maybe you can also touch on the Star Wars and the kids business.

Well, the Kids continues to grow.

We saw very close to double digits in the second quarter and saw double digits for the first six months.

We're all very excited about Star Wars and the potential Star Wars commercial -- and the footwear got a good reception and when we were expanding.

We anticipate as we get closer, we do have some orders already, a significant amount of orders already booked for fourth quarter to start along with the running of the commercial.

We do not have it worldwide, so I don't want anybody to get carried way with the worldwide.

We wish we had it worldwide, but really have it in the United States is the biggest market.

And then some selected markets in South America and very few in southeast Asia.

The biggest piece will be in the United States.

So it doesn't move the needle worldwide.

And we continue -- I forgot the beginning of the question but it all continues to come down the road.

We think it's all positive going into third quarter.

And we hear we're performing well for back to school.

Most people do think it's starting slower because of the late Labor Day.

But we still continue to perform very positively and get great feedback from our customers.

I don't really have a lot of input on how others in our things are faring away from us in the marketplace for back to school so far.

Okay.

That's really helpful.

All good.

Thanks very much.

And best of luck for the rest of back to school.

Thank you.

Corinna Van Der Ghinst, Citi.

Thank you.

A very good afternoon to you, David.

Thank you.

First off, I had a follow-up question on the margins.

SG&A leverage was clearly better than any of us were expecting off of a strong top-line this quarter and better than Q1 as well.

Do you see this level of leverage as sustainable through the rest of the year?

And would there be any areas where you might be planning to invest a little more into SG&A just based on the upside that we've seen this year?

I think the key to that will be more the gross margin than anything else.

So, while I do anticipate we can get close to this in Q3 depending on where margins settle in., obviously, it would be more difficult to have this kind of increased leverage in Q4 which is a much smaller quarter for us and a big advertising quarter.

On an overall basis, I think it continues and I think it will increase next year.

It all depends on where gross margins settle in and what we can do in some international currencies and what pricing power we may have as we move into next year.

Secondly, what do you think is driving the double digit retail comp that you are seeing, particularly in your US stores?

Is there some product that's not being picked up by the wholesale channel or is there some other dynamic that's driving that comp?

I think we have our consumer and we have our consumer around the world.

And I don't know that it's fair to say that they're higher in the US than here.

While the comps were somewhat lower internationally, remember, they have currency head winds that they have to compete against to last year.

On a units basis, I think that they're comping even better than the US.

And it is how fast we deliver our new product and the colors and the choices we offer in our stores and it's a great shopping experience for the family.

I don't think it takes away from any of our wholesale business because they continue to do well, as well.

And I think that they perform as well as we do.

I think overall, it's just the strength of the brand, the strength of the product, the diversity of the product, and what we have to offer.

So everybody who is in it seems to be doing quite, quite well.

Okay, thanks, and just lastly, with the guidance of international reaching 50% of your sales, in that scenario, can you walk us through what you envision your biggest international markets would be?

And also nearer term, what do you think the biggest market driving international growth would be for the back half of the year?

I think it continues to be where we are today.

China, obviously, has the potential to be the biggest market outside the United States, simply because of its growth and its population.

If it continues to grow at 100%, that's pretty significant.

We had said that China last year did less than $100 million in volume as a stand-alone.

And they did $50 million in the second quarter.

So obviously, that growth we anticipate may not continue at quite that level.

But certainly, on a real -dollar basis, we'll continue to grow, certainly for the next few years.

We think we have significant opportunity in our new areas in South America and central eastern Europe which have been underutilized in Europe for many years.

And in South America and Latin America because our distributor there just was financially challenged and couldn't move; has a great marketplace there and we think we can grow significantly especially given our pricing power.

So I think it continues the same way it does now.

Europe is not done, Eastern Europe is not done.

Our distributors certainly are not done.

We hear as good of things out of our biggest distributors in Australia and UAE from growth as we've seen over the past few years.

So I think everywhere we are we'll continue to grow at great rates.

But if I had to pick one that was going to be the biggest over a significant period of time, certainly over four or five years, I still have to stay with China.

And if I could sneak in one follow-up to that.

Is there a possibility of seeing up-side from that Latin American market and then also Central and Eastern Europe versus your current guidance for this year or is that really a 2016 story?

That's mostly a 2016 story.

Central and Eastern Europe will start to shift but it won't move the needle.

And we're just getting product and taking over the stores.

There's a possibility we could see some positive impact from Latin America in Q4, but it's really too early to tell.

We're just taking it over and we're just starting to put product down there, so it's too early to really tell how quickly we can get up to critical mass.

Thank you so much and best of luck.

Thank you.

Sam Poser, Sterne, Agee & Leach, Inc.

Hi, David.

Thanks for taking my question.

A few things, number one.

Can you give us -- you talked about double digit backlog -- could you tell us as a percentage what the backlog was up, please?

We don't usually do that.

You did it last time.

If I keep doing it, then I'll have to do it every time.

That's why I'm asking.

It's still up -- I'll have to give you a range.

It's up between 35% and 45%.

That's where we get into our mid-double digits.

It's higher in international than it is in the United States.

Okay.

I'm just clarifying.

You said that you expect the domestic business to continue to grow at mid-teens for the foreseeable future.

Is that correct?

I don't know that I said that, but I think that would be a bare minimum.

I mean, when we look outside of this year.

It's too early to tell.

We have some great things happening.

And we have to take the temperature of the competition and our whole retail environment.

But I wouldn't at this point say I'm committed to the fact that we can only do in the teens next year.

Okay.

You said you did $50 million in China for the quarter.

When you look at China, you did about $100 million last year so this year is trending, I don't know how it's weighted, but up 50% at least it sounds like, maybe more.

You talked about that being a billion dollar market at one point.

What is your time frame to see that?

That's hard to tell.

I would say that's probably a five, six-year horizon, maybe a little more.

It depends, we could accelerate.

By the way, they're going to be up way more than 50% this year.

They already did $90 million for the six months, off what was less than a $100 million last year, and they're certainly not going to deteriorate as we go through, although the fourth quarter for them is certainly the smallest.

Although we have increasing volume on single-space all the time.

They'll be up more than 50% and continue to do that.

So, if they end year somewhere close to $175 million or $200 million and about to double over in the next two or three years, you get the flow of $500 million in three or four years.

And after that depends on the marketplace and things like that.

I don't usually look out that far but certainly from there, another two or three years after that, it could get close to a billion.

And one more thing on the gross margin.

You said you expect the gross margin potentially to be down slightly.

And that's also what you said in this quarter.

You were in a 45.2% gross margin both in Q3 and Q4 last year.

When you say a little, given the results this quarter and the mix, sounds like it's going to stay about the same, and arguably Q4 is a higher direct business.

Would it be that there may be a hair more pressure on Q3 and then Q4 has more opportunity because of the mix?

Q4 is historically more retail.

And they have higher margins both here and in Southeast Asia.

So, yes, there's probably pressure in third quarter.

Too early, but probably some upside potential in Q4 if things continue as we're moving today.

Okay.

And then just lastly, on the shifting of the orders from Q3 into Q2, you had also guessed given the run rate and where you are, you said some of the orders for October and others haven't been written.

But, likely you would expect given the rate that there may be shifts from October into September.

I believe there's certainly a possibility of that as back to school picks up.

We have to see how back to school continues.

They took it in early.

I haven't heard of any slowdowns.

So certainly, if we continue at this pace, we would anticipate up from Q4 into Q3.

But it's too early to say anything about the order of magnitude.

And remember, the order of magnitude potential in Q3 to Q2 is certainly significantly larger than Q4 to Q3 because October is a small month and September is the smallest month of the third quarter.

It's already past back to school.

So the opportunity is not quite as large as it is right this minute.

But you're not including any of that in the guidance in you're blessing the numbers that are on the street.

If it happens, that's over and above where people are right now, if I'm -- ?

There always has to be some of that in our guidance because that has to be movement.

Nothing is strictly as it sits today because we're such a dynamic company.

It changes from day to day.

We're always taking running rates and what we see around the world and trying to get the best middle of the road and some will go over and some will be under.

Nothing comes out to the penny as it stands.

So we do have, in those numbers, some shift back because we can't move that much out and expect it to still continue with such a big plus for the prior year.

There was only so much book for it, but it certainly is possible.

Some of it is in our guidance.

Certainly, not all that's possible is in our guidance.

Lastly, with the international longer term growth rate to get to the double, you're assuming when you say it to be half the business -- what kind of run rate are you looking at on international versus domestic?

And are you still expecting the domestic business to be able to grow double-digits and then international business would grow somewhere like three times, that kind of thing?

Is that the right way to think about it?

Yes.

Domestic will continue to grow double digits.

And by the way, we could move out that projection significantly because we really don't see any slowdown now in the US.

So it would be my pleasure to move it out.

Given the maturity of the marketplace, we'd originally thought it would be three to five years.

And given that international is growing at a 60% rate and we think that will increase with the takeover of Latin America and Eastern Europe and China starting to hit critical mass.

At this particular point in time, I have to tell you, that I'm not sure that domestic slows to the extent that I originally thought.

Thank you very much, continued success.

Thanks.

Scott Krasik, Buckingham Research.

Yes, hi, David, congratulations.

Thank you.

So just to deconstruct the backlog if we just throw a number, let's say 30% domestic -- how much of that is with your comp doors?

And how much would be new distribution?

And maybe just give us an update in terms of what new distribution is potentially out there domestically.

I don't think anything has changed from the last conversation.

Most of this growth will be in the existing stores.

We're testing with guys like Dick's and Sports Authority and the Finish Line, outside of Macy's.

Those are still in the very early stages.

We think we see some positive indications but nothing major.

So while there are some new doors, the biggest growth we will have will be through the existing doors with increased product.

And to the extent that you've started to book Spring 2016, any indication that any of these tests have the potential to expand further?

Yes, we're still in that process, so we haven't booked Spring yet.

But there are some indications that we'll see some increases.

I'm not sure it's enough to move the needle, but it certainly is possible.

Those are in talks right now.

I think we'll have a better idea at the end of August which is really our biggest booking month for the Spring season.

Yes.

And the gross margin -- really impressive.

Can you tell me, what was the constant currency gross margin?

Or what was the basis point headwind from unfavorable FX in the quarter?

The top-line in Europe alone was $15 million decrease from last year.

We try not to focus too much on what it could have been because these are the realities of the world we live in and we're going to have to continue and continue to grow and look for our pricing possibilities.

And the margin wasn't outrageously a significant change because China picked up the slack from Europe.

To the extent that you can [primarily], do you have visibility in the pricing for spring 2016?

Yes, we're working on that now because that's a very competitive piece and we don't want to let it out too early.

We are working on it, but nothing definitive to say right this minute.

Of the $200 million in operating income you reported so far this year, can you give us a rough breakdown how much comes from the domestic side of the business versus international?

That's very difficult because we allocate such significant pieces, but the biggest piece is still from the United States.

Okay, thanks.

Good luck.

Thanks.

Chris Svezia, Susquehanna Financial Group.

Good afternoon, David.

How are you?

I'm terrific.

You sound like you're in a wind tunnel or a tunnel somewhere.

I'm sorry.

I'll talk really loud.

I'm on my cell phone.

So, one question I had was, did you say that [DTC] comps were still up double digits [according to the report]?

Say that again, was what comps?

Did you say that your retail comps were up double digits?

In July?

Yes.

Yes, this month to date we're up double-digits both domestic and international.

Okay.

The question on the gross margins, going into the third quarter, if that sustains itself to the degree, why would gross margin be flat year over year or actually decrease?

Does it just come down to the mix of (inaudible) product and lower (inaudible) price.

It comes down to the mix because of -- and the new product.

We'll get to a mix of older product as we fill in too.

Not everything will be brand new at the highest margins as we get through back to school.

But we have a bigger international quarter in the third quarter which is bigger for distributors which is our lowest gross margin.

And we'll be bigger for Europe which is a lower gross margin than China.

So they tend to pick up the pace there, so retail can't grow at a fast enough pace on a comp basis to make that up.

Understood.

How does the European, in efficiencies, (inaudible) distribution center -- how do we think about that year-over-year or over last year?

Any color -- ?

I think you said something about the European distribution center -- the efficiencies.

Yes, the efficiencies or inefficiencies, just how that's trending.

We obviously are not as inefficient as we were in the first quarter but it was a smaller quarter volume-wise, certainly.

And Q3 is still smaller than Q1 as far as Europe is concerned.

We will certainly be more efficient than we were in Q1.

We're not as efficient as we'd like to be.

We're not significantly different than the prior year.

But we expect to be significantly more efficient by the middle of next year when all our new equipment is put in place.

Just on pricing, up 9% US wholesale.

How much of that is mix of new products, how much of that is increasing price points?

It's the mix of new product.

A little bit of is price-point, but mostly it's the mix of product.

Obviously, adults grew at a significantly faster pace than kids which gives you a significant increase right off the bat, especially when stuff moves in from July to June on a larger basis on the adults.

So those are the big pushes.

Okay.

Does the sustainability of that pricing increase?

Are we looking more like mid-single digits for the third quarter from an [AFC] growth?

And [perhaps] the fourth quarter?

I'm not sure about the fourth quarter yet.

But, yes, certainly in the third quarter, we would expect, unless there's a big change in mix.

And I think kids could do better in the third quarter.

We'll have slightly higher margins, but I'm not sure we'll be as good as we are in Q2.

Okay.

Thank you very much.

And all the best.

Thanks.

James Frondo, Sidoti & Company.

All my questions were answered but thank you.

Thank you.

Jim Chartier, Monness, Crespi and Hardt.

Hi, congratulations on a great quarter.

Thank you.

Can you size the Latin America market for us today?

And do you see any opportunity more in growing the retail store base or in expanding the wholesale distribution down there?

On an overall basis, I think it's both.

Right now we're going to take over somewhere around 20 or 21 retail stores.

But we do believe there's a significant wholesale business, at least in Peru, and potentially in Colombia that could be quite large.

Our wholesale business in Chile is quite substantial.

And I don't have know that Peru would be significantly different.

And there's a big group of the same departments stores that are actually owned by the Chile group that do business in Peru that we think we can grow significantly.

I think it's both.

I think the biggest opportunity up front is retail because we'll be taking over the stores right away.

The 20 to 21 stores and then wholesale as we go into 2016.

Is that a $30 million market, $50 million market for you today?

How big is it?

Today we do through a distributor which was lower price points, probably around 5000,000 or 600,000 pairs which would be about $8 million, $10 million, maybe a little higher depending on the mix.

We think that could be a $100 million market for us if you take Latin America all the way down.

Remember this goes from south of Mexico all the way down through Latin America, which would include Venezuela, but we don't have high hopes for Venezuela now.

And actually some other small countries in the Caribbean, as well, where we could open retail.

It's quite an extensive piece of which I think Peru and Colombia will certainly be the largest.

Any update on signing new franchise agreements in China?

In June you said you were close to signing some deals there

We are signing some and we have some pretty big commitments, but we'll wait and see how they lay out.

There are certainly no guarantees that they will meet the size we anticipate.

But they continue to grow and we think the volume in China could actually pick up as we go to 2016 if we get everything we're supposed to out of these franchises.

And then how the do you account for the sales to franchisees?

Is that a wholesale sale for you?

Yes.

Thanks and best of luck.

Thank you.

We have no further questions at this time.

I'll now turn the conference back to Skechers for closing comments.

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 risks factors, actual results could differ materially from those projected in such statements.

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

Again, thank you, and have a great day.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

You may disconnect your lines at this time and thank you for your participation.