Skechers USA Inc (SKX) 2015 Q3 法說會逐字稿

Greetings and welcome to the Skechers USA Incorporated third 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 over to Skechers.

Thank you.

Please go ahead.

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

I will now read the Safe Harbor Statement.

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

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

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

Users of forward-looking statements are encouraged to review the company's filings with the US Securities and Exchange Commission, including the most recent annual report on form 10-K, quarterly reports on form 10-Q, current reports on form 8-K, and all other reports filed with the SEC, as required by federal securities laws.

For a description of other significant risk factors that may affect the Company's business, results of operations and financial conditions.

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

David?

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

Please note that all share and per share information mentioned on today's call has been retroactively adjusted for the three for one stock split, which was effective October 15, 2015.

Our sales for the third quarter were $856.2 million, a 27% increase over last year and the highest quarterly sales in the Company's 23-year history.

This also resulted in record nine-month sales of $2.4 billion.

Third quarter financial highlights include record quarterly revenues of $856.2 million, earnings from operations of $95.6 million, net earnings of $66.6 million, diluted earnings per share of $0.43, gross margin of 45.2%, and a strong balance sheet with $510.7 million in cash or approximately $3.31 per diluted share.

Of note, the Company's diluted earnings per share for the third quarter of 2015 was negatively impacted by several factors, including foreign currency translation and exchange losses, increased legal expenses due to legal settlement and pending litigation, and increased deferred rent expenses related to our new Fifth Avenue location, which opened during the third quarter, and our second Sketchers retail store in Times Square, which opened in the fourth quarter.

In total, these three items reduced diluted earnings per share by $0.15 during the third quarter of 2015.

Additional third quarter highlights include an 11.8% increase in our domestic wholesale business, with an increase of 6.8% in average price per pair, a 52.9% sales increase in our international wholesale business, which include a strong double-digit gains in Europe and triple-digit growth in China and the Middle East.

A 20.9% sales increase in our company-owned retail stores, which also included an additional 64 net new stores compared the prior-year period, including net 18 stores opened in the third quarter and 17 stores that we are transitioning from distributor-owned to company-owned through a newly established subsidiary in Latin America.

Worldwide Skechers retail store count, including third-party-owned Skechers stores, now stands at more than 1,200 locations.

We saw a record incoming order rates for the quarter, resulting in backlogs up 28%.

We shipped the first introductions of our co-branded Star Wars Skechers footwear for boys.

Global pop singer, Meghan Trainer, joined the roster of celebrity endorsees, that now also include musicians Demi Levato and Ringo Starr, and we became the title sponsor for the Los Angeles Marathon.

We are pleased that we continue to achieve significant gains in our international business despite the negative impact of foreign currency exchange rates in several key markets, including Brazil, Canada, Chile, and Russia.

In the United States, we are now the number two athletic brand.

We believe our continued growth speaks to the strength of our brand, despite a sluggish retail environment in the latter portion of the back-to-school season.

The third quarter was our best yet in terms of sales and our year-over-year worldwide backlogs are up 20% at September 30, 2015, both clear indicators that our momentum will continue throughout the remainder of the year and into 2016.

Now, turning to our business in detail.

In our domestic wholesale business, third-quarter sales increased 11.8% or $31.7 million, as compared to the prior-year period.

The growth in the third quarter was the result of a 4.6% increase in pairs shipped, a 6.8% increase in average price per pair, and double-digit increases in our Men's and Women's footwear, as consumers embraced our lightweight, comfortable styles.

In addition, we had strong double-digit increases in our in-line Kids' footwear business.

The highest dollar gains came within our men's business, led by our Skechers Sport and Skechers USA Men's collection which features Relaxed Fit footwear.

Women's USA, Sport Active, Active and Sketchers GO lines also had significant dollar gains in the quarter.

Within our Kids' line, our boys product performed particularly well and we continue to see successes within the take downs in lightweight Sport footwear and the initial launch of our co-branded Star Wars Skechers footwear, which we begin delivering to our accounts at the close of the quarter.

We believe our Star Wars Skechers footwear for boys and men will be an in-demand holiday item as the excitement for the new franchise film builds for its December premiere.

For the back-to-school season, we powered up our kids advertising, running numerous animated campaigns along with Demi Levato and a life-action Twinkle Toes commercial.

For adults, we debuted the new Skechers GOwalk Flex commercial which features both our Flex apparel and footwear, and new spots from boxing legend, Sugar Ray Leonard and former baseball closer Mariano Rivera, both for the Skechers Sport Relaxed Fit collection.

Our marketing push also included legendary drummer Ringo Starr for Relaxed Fit footwear, Brooke Burke-Charvet for Sketchers Stretch Fit, UK model and actress Kelly Brook for Skechers Sport, and the several Skechers GOgolf commercials with pro-golfer Matt Kuchar, among others.

Additionally, our campaigns with Demi Levato continue to draw hundreds of thousands of likes and favorites on our social media channels, and the press surrounding the recent filming of our new Skechers television campaigns, created impact in the media with Demi in the spotlight with just-released new album.

As we look to spring, we are excited about the launch of the two new Demi marketing campaigns and the upcoming campaign for our recent ambassador, multi-platinum pop artist, Meghan Trainer.

Based our double-digit domestic wholesale backlog, our continued focus on delivering innovative product, including new Star Wars Skechers styles, GOwalk and lightweight sports updates, among other collections, and relevant marketing, we believe the holiday season will be strong and the momentum will continue into 2016.

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

Total international sales increased by 52.9% in the third quarter.

Subsidiary and joint venture sales improved by 45.3% and our distributor sales improved by 72.2%.

In the quarter, our UK subsidiary shipped over 1 million pairs.

Our China joint venture shipped 1.5 million pairs and our UAE distributor, who handles the sales of Skechers across much of the Middle East and into Africa, shipped over 2.5 million pairs.

As in our domestic market, the growth is coming across our many product categories for men, women and kids, and is being supported by marketing campaigns including: field perimeter boards with Skechers Sport in soccer stadiums in Mexico and Germany; underground and above ground billboards in China and Hong Kong, starring their local celebrities in Skechers D'Lites; store openings with Kelly Brook in northern Ireland; and windows across the UK with Ringo Starr; and Skechers GOwalk windows in store campaigns in Australia and UAE.

Further detailing our growth in international, our wholly-owned subsidiaries combined saw net sales increases of 20.2% for the quarter.

Our European subsidiaries had sales increase of 28.4% for the quarter, led by significant increases in the United Kingdom, Germany, Italy, and Spain.

Additionally in the third quarter, we began shipping into central Central Eastern Europe as a subsidiary after transitioning several distributors to a subsidiary that now oversees 14 countries.

With headquarters in Budapest, we believe this new subsidiary will positively impact our operations in 2016.

To prepare for the accelerated growth in Europe, we are increasing the capacity and efficiencies of 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.

Our subsidiaries in Brazil, Chile, and Canada continue to face currency headwinds, while Brazil showed sales growth, Chile and Canada did not, although both had an increase in pairs shipped in the quarter.

Also in the third quarter, we completed the transition of our distributor in Panama to a subsidiary.

The new Latin American subsidiary is comprised of Peru, Colombia, Costa Rica, Panama, and several other countries in the region.

We believe there is great opportunity to grow our business in this well-established market, and expect it to positively impact our sales over the next two years.

Our joint ventures in Asia grew by 121.9% for the quarter, led by an approximately 175% increase in China, due to growing popularity of the brand, which has led to an increased franchise opportunity.

Numerous countries led to our growth of 72.2% with our international distributor business, most notably our partner in the UAE with double-digit growth and significant dollar gains.

Additional markets with strong dollar and percentage gains for the third quarter are Australia/New Zealand, Taiwan, Indonesia, Scandinavia, South Korea and Turkey, as well as strong results from many other countries.

Along with thriving wholesale businesses, most of our international distribution partners have opened Skechers retail stores and we have a growing network of franchise Skechers stores in countries where we handle the distribution of our product.

At quarter end, there were 714 Skechers branded stores owned and operated by our joint ventures, franchisees, and distributors outside of the United States.

Of these, 378 are distributor-owned or franchised Skechers retail stores, and 263 Skechers stores are in our joint ventures countries in Asia, including those run by franchisees in the region.

Additionally, there are 73 company franchise stores in those countries where we directly distribute our product.

78 third-party stores opened in the third quarter, including our first two stores in Northern Ireland.

Additional Skechers branded stores opened in the quarter include 41 in China; 5 in Germany and India; 3 in Indonesia; 2 each in Australia, Taiwan, Czech Republic, France, and Saudi Arabia; 1 each in Brazil, Brunei, Denmark, Ireland, Mexico, Morocco, the Philippines, Russia, South Korea, Sweden, and Thailand.

Six stores closed in the quarter.

12 third-party Skechers stores have opened to date in the fourth quarter and another 45 to 55 are expected to open during the remainder of the year.

The growing retail base and strong international sales are a testament to the strength of the Skechers brand and our diverse product offering.

Retailers and consumers around the world are embracing our comfortable and stylish lifestyle footwear as well as the Skechers GO platform.

In addition, Asia has built a young trend business with our heritage Men's and Women's Sport styles.

That took off in South Korea and is now embraced by consumers in China, Hong Kong, and Southeast Asia.

Though the fourth quarter isn't historically a strong period for international, we believe we will see growth around the world and with double-digit backlog increases and strong growth planned in many countries, we believe this momentum will continue in 2016.

In the first nine months of 2015, international comprised 40% of our total sales, growing closer to the expected 50% of our total business in the next three years.

Worldwide sales in our company-owned retail stores increased by 20.9% for the quarter, with domestic sales growing by 17.7% and international sales by 33.8%.

This included positive comp store sales of 10.1% domestically and 11.5% in our international stores, for a total of 10.4% comp store sales increases worldwide.

At the end of the quarter, we had 496 company-owned Skechers retail stores, of which 119 are outside the United States.

In the third quarter, we opened 18 new stores, including a key store on Fifth Avenue between the 42nd and 43rd streets in Manhattan, three in Canada, and two in both Japan and Chile.

We closed one domestic store in the quarter.

Already in the fourth quarter, we've opened five stores, including our second store in Times Square, in the heart of this busy tourist and shopping area.

Another 12 to 17 are planned for the remainder of the year.

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

As discussed earlier, once again, we achieved both a record third quarter and highest sales quarter in our 23-year history with sales of $856.2 million, up 27% compared to the $674.3 million in the third-quarter of 2014.

The increase was a result of net sale increases of 11.8% in our domestic wholesale business, 52.9% in our international wholesale business, and 20.9% in our Company-owned global retail business, which includes a 10.4% increase in comparable store net sales for the quarter.

Third-quarter gross was $387 million compared to gross profit $304.5 million in the third quarter of 2014.

Gross margin was 45.2%, in line with the prior period.

Third-quarter selling expenses were $63.7 million or 7.4% of sales compared to $50.2 million or 7.5% of sales in the prior year.

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

Our marketing and product our on target and we continue to invest in our infrastructure and develop new product innovations to advance our brand and drive momentum around the globe.

For the third quarter, general and administrative expenses were $230 million or 26.9% of sales compared to $182.2 million or 27% of sales in the prior-year period.

During the third quarter of 2015, earnings from operations increased 28.9% to $95.6 million or 11.2% of revenues, compared to $74.1 million or 11% of revenues in the third quarter of 2014.

In the third quarter, we recorded income tax expense of $15.8 million compared to approximately $12.7 million in the prior-year period.

Our quarterly effective tax rate was 17.7%, primarily due to increased international sales and profitability.

We currently anticipate our effective tax rate for the fourth quarter of 2015 to be between 20% and 23%.

Net income increased 30.3% to $66.6 million compared to $51.1 million in the prior-year period.

As a reminder, all share and per share data has been retroactively adjusted for a three for one stock split.

Net income per diluted share in the third quarter was $0.43 on approximately 154.5 million average shares outstanding, compared to $0.33 on approximately 153 million average shares outstanding in the prior-year period.

As I mentioned earlier, our EPS for the third quarter of 2015 was negatively impacted by several factors, including foreign currency translation and exchange losses of $13.5 million, and increased deferred rent expenses of $3.5 million related to our new Fifth Avenue Skechers retail store, which opened during the third quarter, and our second Skechers location in Times Square, which just opened.

Additionally, earnings per share for the quarter were impacted by a one-time charge of $5 million in the third quarter to settle personal injury lawsuits arising out of our toning business, and higher legal fees and associated costs of approximately $5.9 million primarily related to intellectual property litigation, including the matter of Converse, Inc.

versus Skechers USA, Inc.

which went to trial before the International Trade Commission in August of this year.

We believe that most, if not all, of these illegal matters will come to a conclusion by early next year.

In total, these three items reduced diluted earnings per share by $0.15 during the third quarter of 2015.

Net sales for the nine-month period ending September 30, 2015 hit a record high, increasing 34.1% to $2.42 billion compared to $1.81 billion in the prior-year period.

Gross profit was $1.094 billion or 45.1% compared $814.3 million, or 45% in the prior-year period.

Selling expenses were $177.7 million or 7.3% of sales compared to $140.8 million or 7.8% from the last year.

General and administrative expenses were $628.2 million, or 25.9% compared to $504.3 million, or 27.9% last year.

Earnings from operations for the first nine months of 2015 were $296.1 million versus earnings from operations of $176.1 million for the same period last year.

Net income for the nine months increased 73.2%, to $202.5 million compared to net income of $116.9 million in the prior-year period.

Diluted earnings per share were $1.31 on approximately 154.1 million average shares outstanding compared to diluted earnings per share of $0.77 on approximately 152.7 million shares last year.

And now, turning to our balance sheet.

At September 30, 2015, we had $510.7 million in cash, or approximately $3.31 per diluted share.

Trade accounts receivable at quarter-end were $396.4 million and our DSOs at September 30, 2015 were 38 days versus 42 days at September 30, 2014.

Total inventory, including merchandise in transit at September 30, 2015, was $500.2 million, representing an increase of $137.2 million or 37.8% from the prior-year period and an increase of $46.4 million from December 31, 2014.

We believe the increased inventory is appropriate based on our strong backlogs and forecasted revenues for the remainder of 2015 and early 2016.

Long-term debt at September 30, 2015 increased to $70.1 million compared to $15.1 million at December 31, 2014.

Increases due to the refinancing of our domestic distribution center loan.

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

Book value or shareholders' equity per share stood at approximately $8.58 as of September 30, 2015.

Working capital as of September 30, 2015 was $994.6 [million] versus $779.3 million at December 31, 2014.

Capital expenditures for the third quarter were approximately $25.2 million, of which $13.8 million was related to 12 new domestic stores and several store remodels, $3.1 million for several international stores, $4.5 million for additional equipment upgrades at our domestic distribution center, and $2.1 million in IT equipment upgrades.

We continue to expect our capital expenditures for the fourth quarter of 2015 to be approximately $40 million to $45 million, which includes 12 to 17 retail store openings, continued equipment upgrades at our European and domestic distribution centers and additional corporate real estate purchase.

In summary, the continued quarterly sales increases we achieved in 2015, including our new quarterly sales record of and $856.2 million, is a testament to the ongoing strength and momentum of Skechers around the world.

This third-quarter growth came despite a sluggish domestic retail environment and foreign currency headwinds in several key international markets.

As the second largest athletic footwear brand in the United States, we believe we still have opportunities to expand our distribution through our innovative and vast product assortment for men, women, and kids.

We are discussing shop in shops as well as online brand shops with several key domestic accounts, and we have opened up new accounts domestically as well, thanks to the strong consumer demand for our comfortable footwear.

We see the greatest potential for growth in our international markets, and believe the growth we are achieving across Asia and Europe is particularly indicative of the broad acceptance of our brand.

We expect to continue broaden our product assortment and open more Skechers stores to meet this demand.

The double-digit retail store comps in the third quarter are a further testament to the demand, and we are excited to increase our retail base with two key stores in the heart of Manhattan.

Further, through our franchise network we have opened stores in the Czech Republic, Northern Ireland, and expect to further expand in Europe.

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

We have a team of celebrities and athletes that reach a vast demographic globally, from Demi Levato, Ringo Starr, and Meghan Trainer to Sugar Ray Leonard, Meb, and Colin Montgomery, as well as many others, and are reaching consumers on TV, in print, outdoor, across the web, and on social media.

We're looking forward to the holiday selling period with more Star Wars Skechers styles as well as Twinkle Wishes and Game Kicks, all perfect gifts; and a marketing push that will include a new commercial with Brooke Burke-Charvet for a new lightweight Sport style, a new Kelly Brook commercial, and several men's commercials as well as the continued push with the hot-selling GOwalk Flex.

We expect the momentum to continue into spring 2016 with the delivery of fresh styles, and we are encouraged by the early feedback from our key accounts during our on-going 2016 buy meetings in our corporate headquarters this month.

Given our double-digit retail comps, backlogs increased by approximately 28% and market share gains, we believe the demand remains strong for our footwear categories worldwide.

With the improved efficiencies in our distribution centers and our solid financial position, we are well-positioned for continued growth.

While we are comfortable with analysts' current consensus for fourth quarter revenue and earnings, we also see significant potential in the first quarter of 2016 as well as the entire year by investing in our product, marketing, and infrastructure.

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

Thank you, ladies and gentlemen.

We will now begin the question and answer session.

(Operator Instructions)

Corinna Van Der Ghinst, Citi.

Hello.

Good afternoon, David.

Hello.

Okay, US wholesale was up 12% this quarter, with more than half of that coming from pricing gains.

It looks pretty different from the industry data out there.

Can you help us understand maybe what channel did better or worse?

And was there anything in particular that surprised versus your plan for the quarter?

Yes, I think it's a number of things.

I think part of it was, obviously, the $20 million that moved from July to June.

And we were anticipating an extra return in September.

For whatever reason, although we were selling very well, I think most of the channels of distributions that were big in had a not-so-good end of September.

And because we don't necessarily participate in a lot of the close-outs, there were no fill-in business and stuff to come.

We were holding up a very well through August, and September seemed to be a lull.

From our meetings, it doesn't seem to have a significant amount to do with the way we are selling or the perception of our brand or what's moving through.

It's just that we lost that the big piece in July to June.

And it didn't get replicated in September because there was a lot of promotional activity.

And there was no need to bring in a lot of new full-price inventory at that time for a lot of the people.

At least, that's my perception anecdotally and from some of the conversations I've had with them currently.

I mean, you see the same information I do.

And we get the same channel checks.

And everything seems to be very positive.

So it was a macro piece in September, specifically, that seemed to be the biggest piece.

Okay.

And then I know September isn't typically a big selling month.

But did you see the trends improve sequentially?

Or are you seeing anything in the quarter-to-date environment now that would give you any reason to see a change in that pattern?

Well, I don't think we would see it right now.

We'd normally see it at the very end of October going into early November.

For the most part, the end of October ends a quarterly reporting for many of the retailers.

And they're trying to get their inventories in line, so taking any new stuff in the beginning of or middle of October beyond certainties.

I mean, we certainly are shipping, but I wouldn't expect to pick up until probably the end of next week going into November before Thanksgiving and after they close their quarter and after they take whatever they need to adjust their overall inventories.

Okay, great.

And then just in terms of your inventories being up 38%, can you give us a little bit more color on how those are positioned for holiday, and maybe what that implies for your top-line growth plans for the fourth quarter?

I think it more reflects the fact that we didn't get the extra turn.

We've always said, we'd like to have the inventory on hand just in case there is an extra turn.

Most of that inventory is certainly spoke for and will ship in October or early November for the excess for the stuff we brought in.

And we will continue to build, as we historically do going to the end of the year because first quarter has turned out to be a significantly larger quarter for us.

I think part of it is the new stores.

It's our new operations around the world.

We have to put inventory into South America more so than we were in the past.

And we put inventory for Central Eastern Europe.

So we own more inventory, more stores; that's part of it.

And part is we didn't get the extra turn in September.

So although the inventory is spoken for, it was here early just in case it was necessary.

And it really is spoken for.

Should we be expecting that inventory number to increase from here into the end of the fourth quarter when you report Q4?

I would anticipate that it will increase because first quarter is very seasonal, both here and in Europe.

We like to ship at the early end.

And remember, even those things that are in transit count, so everything we have to ship through mid-January/February, which is by far, now our biggest growth quarter and will be our biggest quarter internationally.

We'll be building forth through the end of the year.

As we have in times past, we anticipate we will go into the end of the year with higher inventories.

Of course, unless there is a significant shift as things get better through holiday and we start picking up some shipments at the end of December and get the extra turn that way.

And that's way too early to determine right now.

Okay, thanks.

And then, just my last question is on the international wholesale in the fourth quarter.

How should we be thinking about the cadence of that business from Q3 into Q4?

Can you just kind of walk us through your thinking there?

I think it will hold up.

The biggest piece is obviously -- it's a smaller quarter for most of us internationally.

I think it will continue to grow in the fourth quarter, as it has in the third.

I don't know if it will grow 50%, but I think it'll be very close all around.

I think China will continue to grow.

So we anticipate that international will continue its cadence well into the mid-double-digits going through the end of the year, and then continue even though it's against tougher comps in the first quarter of next year.

Okay, I'll let someone else jump on.

Jay Sole, Morgan Stanley.

Good afternoon, David.

So just want to follow up on your comment that you see significant potential in the first quarter of 2016 and the entire year.

Now, is it possible to kind of quantify?

Are you sort of saying that street estimates, you think are too low?

Without maybe putting some number on it yet, tell us a little bit more about what you mean about what you think the Business can generate in terms of earnings and sales for 2016 (multiple speakers) in the full year.

I think what we're saying is that the numbers that are on the street for 2016 seem certainly achievable.

And if certain things break positively and international continues, and we continue our full price and get back to significant growth in the US that there is significant upside to them.

I think China continues to grow very, very well.

The backlogs we have seen and the growth we saw in Europe, even though it was magnificent this year, still seem to be high.

There seems to be a lot of room.

And our backlogs in Europe are significantly higher than the Company as a whole.

So that shows a lot more room.

We think we'll get some benefit out of Central Eastern Europe.

We think we actually will get some benefit out of South America.

On top of which, we think we have some upside as far as gross margins are concerned.

In those countries where we've had significant pain, for lack of a better word, because of the strength of the dollar, we've instituted some price increases that will help get a big, significant piece of those margins back.

And to date, we haven't seen any significant headwinds to those.

So we think we can increase the payers and the gross margins in a continent like Europe, some of South America, certainly Canada.

And barring any big changes in currency or big changes in China, that will continue at a relatively good margin.

So we see upside to serving in the international marketplace in numbers of pairs and margins as we go into next year, although, we're not currency guys.

So if there's another hit, for whatever happens to currencies of significance, some of that may return.

It would certainly be better than the alternatives as we go in.

And certainly, from what we hear from our pre-lines now, we're still very much in favor.

There are no major customers of ours that are planning us anything but up for the first half of next year, and possibly for the whole of next year.

They are very happy with the product assortments they see, from the sell-throughs from this year, the margins they have achieved.

So we anticipate that will show itself also as we go into first quarter, which is very significant for us.

Okay, got it.

So you mentioned FX a couple times.

Can you say how much FX impacted the top line in the quarter?

I'd be telling it off the top of my head.

I just saw it.

It probably, for this quarter, compared to last year, because it's very difficult unless you have a comparison period.

But to last year, I believe it was $8 million or $10 million.

Okay.

And then, is it fair to say that the $11 million in legal costs that are being booked into this quarter, that next year essentially, that will not repeat?

That those are costs that will just come out of the SG&A?

That certainly is the hope, but that's always our hope.

Certainly, the $5 million will not be replicated as it is.

That was a settlement and it goes way.

The $5.9 million that was litigation costs, that's now awaiting a verdict.

So we'll react to that one way or another.

I'm not sure if there are appeals after that or not.

We have to wait for the verdict.

But our hope is that dies down as we go through the back half of this year.

Should new items arise, and we'll refer you to the Ks and Qs for litigation, should hopefully dissipate as well.

So, yes.

It's my distinct hope, although we're not always in control of the litigation, that that just disappears and will not be repeated next year.

Okay.

And then the last one from me is just gross margin in the quarter was better than you signalled at the end of 2Q.

You know, we talked about it going down perhaps in 3Q, but it ended up going up.

What was the big difference in this quarter that gross margin ended up being better than your expectations?

It was a little bit of everything.

First of all, we had better margins in Europe.

We picked up a little bit of pricing.

Retail came in with slightly higher margins.

So those pricing increases you saw were of benefit everywhere.

We thought we might lose some of them on the domestic end or the shift end, but our retail was up.

We just got a little bit of gross margin back in each piece.

So even though our international margins for the most part are lower than they were last year, which was the anticipation, our domestic margins came in somewhat higher with the price increase and no closeout inventory.

Okay.

Great.

Thanks so much, David.

Scott Krasik, Buckingham.

Hello, David.

Thanks.

I just wanted to touch on a couple of those things.

You just eluded to a lack of, I guess, or mix being a benefit domestically that you weren't selling to the closeout channel.

So how would you describe the volumes that you are selling into the traditional closeout channels?

And do you expect that to rise over the next couple of quarters to deal with the inventory, or do you expect to sell the inventory in in-line channels?

Right now, we expect to sell the inventory in in-line channels.

Even though it's just a timing issue.

Our on-sales position to where we stand within our whole production field has not increased, certainly not domestically, over the last six months.

So, it's a timing issue of getting it in early.

I think we pushed some of our suppliers to get inventory in early because of our growth anticipated for 2016 and don't want to push out our production cycle.

So it's stuff that's spoken for.

We're trying to get in on a much quicker basis.

So I don't anticipate any real downturn in that.

Okay, and then to the extent that you either hear directly from your customers or maybe you subscribe to data, but what are the current sell-through rates of your products on average with various retail distribution?

It changes with all of them.

They all have different metrics, and they all have their way to count.

I will tell you, of all the people that have been through, which is certainly at a significantly higher one, there's no one upset with how they're selling or their sell-throughs or using it as a reason to change the showcasing of the brand in their stores.

People are still very, very positive about the brand and about its potential for 2016.

So we take them at their word, and we still see it selling through.

And I think if you look at our stores, the fact that we didn't get an extra turn and there was a lot of some-off price activity in September and within the whole channels, but our stores still comped up over 10%, even domestically for the quarter.

And I could tell you they were up over 10% for the month of September.

Shows you the strength of the brand, and that will manifest itself even at the wholesale level as they clean out some other things as well go forward.

And then in terms of pricing, how much incremental pricing will you be taking on the spring product that we haven't seen at all yet?

It's hard to tell.

I mean, we have some out there.

We haven't booked really fully spring yet.

I think that there's some to be had, but we're waiting to see what the mix looks like.

I think overall on a worldwide basis, we'll get an increase because, like I said, we have some pricing power internationally where there was currency issues.

That could change the outlook in some of those countries significantly.

Okay.

I'll hop back on.

Thanks, David.

Jeff Van Sinderen, B. Riley.

Hi, David.

I wonder if you can give us a little better sense of the breakdown between the international backlog and the domestic backlog.

And then also any substantial changes in the concentration of types of product in the backlog.

And then maybe if you could just touch on what we should look for on gross margin in Q4.

Going in reverse order, gross margin, I think, should be fairly equivalent to what it was in Q3.

There may be some slight upside because retail still has a bigger percentage there.

It has a strong quarter coming up, certainly on a worldwide basis.

As far as backlogs are concerned, it's obviously higher in international than it is domestically.

And it's higher in Europe than certainly places like South America and Canada so far -- the increases because they're coming into some price increases, and it's early in the season.

But where our strength is, is significantly higher.

I would also tell you that we don't really go through a backlog scenario in China since it's predominantly retail.

And now that's moving into franchising model.

We may move into some of that as we go forward, but that doesn't appear anywhere in here.

And obviously, that would be a big driver of significant upside on the international portion of the backlogs.

Okay.

And then as far as inventory goes, there's really nothing in there that would have an aging issue?

As you said, it's all spoken for.

Yes.

The amount of unsold we have and the commitment we're making to inventory hasn't changed over the last six months.

Certainly, it's (inaudible) in the United States.

There's some increases in inventory, obviously, in the additional store count and our additional store count around the world.

And obviously, places like China that have gone at 175% and opening a significant amount of doors to have more standing inventory that they have to get ready for.

And domestically, which is obviously our bigger user, has the same; and it's just come in somewhat early.

And if he we'd have gotten an extra turn, it would have certainly looked the same as the top line.

So I think it's a timing issue.

And we don't see anything there right this minute that is of concern.

Okay.

Any sense you can give us on what the progression was through the quarter for the retail comps in your own stores?

Just wondering if there was a big difference between the months there and then maybe what you're seeing in October?

From what I remember, it was pretty consistent across the quarter.

The comps were better in July and September on a relative basis, although August is still the biggest month for us.

It still came in at, I think, very high singles or very low double digits for the month; so it was fairly consistent.

So far this month, we're seeing mid to high single digits.

But remember, this is now the fourth year.

This quarter starts the fourth year where the stores started to comp at the double-digit basis.

And it's kind of early in the month, and our forecast right now is still for high singles for the quarter.

Got it.

Thanks very much, and good luck for the rest of the quarter.

Sam Poser, Sterne Agee.

Hi, David.

Thank you for taking my call.

All right, so I want to clarify something.

So basically, some large retailers in the US, because they had goods of yours or from other brands to clear in September, did not step up on the fill-in orders in the manner you would have expected based on the selling that you were seeing.

Am I thinking about that right?

Yes.

I mean, it's anecdotal at this point; but yes.

My understanding is that there were no issues with our sell-throughs or our margins from all the reports I've seen and people I've spoken to.

September wasn't a great month.

There was no step-up, as we've seen in the last two or three quarters to that extent.

Certainly not anything of the extent that moved from July to June.

So if you take the two quarters together, you could sort of even out some of that the flow.

And we're in pre-lines now.

We have a lot of customers rotating through.

We haven't seen that many.

It just started the end of last week, but those we've seen through here still make the same comments.

So now that you have the inventory that you currently have, and some of those styles are styles that'll be in the line for a while, have you now pushed back orders with the factories so you don't get all built up on top of each other?

Like basically, since that turn didn't come, are you making the adjustments in the orders on a forward-basis to make sure (multiple speakers)?

It's a timing thing, and we don't think that holds through until the first quarter.

So I don't think we've made any significant adjustments.

I mean, you have to understand the order of magnitude, what we have here.

As we close September, as we get into the beginning of October, we had somewhere between 1.5 million pairs and 2 million pairs on the dock that were ready for shipment.

Now, in some years, we'll ship 500,00; and some years, we'll ship 1.5 million.

And you're saying, in the United States, that 1.5 million is every bit of $30 million-$32 million, which we get a portion of.

We got a relatively small portion this time.

We will ship all of those through October and early November.

As a matter of fact, we've already shipped in excess of a few million pairs in the first week-and-a-half that were here.

And we still have 2 million pairs on the dock.

It looks like our shipping will start to pick up and hold up as we get to the end of October and early November.

At least that's what it looks like now.

So we really haven't changed any production cycles for the time being.

Like I said, we don't have any more uncommitted inventory in production than we had six months ago.

Maybe you can answer it this way: What is the difference this year versus last year in in-transit inventory?

It's higher this year than last year.

That's a part of the growth.

But we also have somewhat more in-house because we didn't get the extra turn this year.

Okay.

And then, just going back to the backlog question, the total backlog's up 28%.

Could you just give us what international is and what domestic is?

I mean, just can you give us the numbers?

We're getting down into real nitty gritty now, but I'll give them to you this one time so we don't have to worry about it.

Domestic is about 24%; the balance is international.

And that would be in what market?

And now, remember that domestic has a much bigger base.

So international is up -- all that I would think, international is up probably somewhere between 35% and 40% in backlog.

And that does not include China?

And does not include China.

And you said earlier in the year that you expected China to hit around $200 billion this year.

Is that still moving that direction?

Absolutely.

Okay.

And then I guess lastly, just some clarification again on Q1.

You commented that there's lots of opportunity there.

I mean, can you give us some idea of exactly what that means?

I'm going to repeat one of your previous questions/

Yes.

It means there's significant upside.

But upside to what?

Well, if you look at the year, the year has somewhere on the street of a 15% or so growth.

I think we could grow that rate and then top of that rate.

So I think it can grow significantly in the first quarter, certainly over the 15% rate.

But a lot of things still have to break.

I mean we're too early to commit to any of that stuff.

But it certainly is possible from where we stand.

Thank you.

And then are you finding that the big retailers, when they're having problems, like if they're backed up in inventory from other people, they're just basically cutting off all fill-in orders just to be able to clear mark-downs?

Clear the stuff that's underperforming so they make sure they get rid of that rather than just continuing to sell the good stuff?

Is that basically what happened, and what's going on right now?

Well, it's difficult to paint with such a broad brush.

But it depends on the time of the year as well.

You wouldn't anticipate anybody going through that philosophy as you go into back-to-school.

And certainly wouldn't anticipate that going into holiday season at the end.

But in months like October and like May, you can't see that because you have to clear, certainly for quarter-end, and because you to clear up and get ready for holiday.

And it's not a big selling season anyway.

So you would switch those things around and not bring full-price and sell off.

But you certainly wouldn't continue that strategy going into holiday.

So basically, they are going to get clean -- I mean, you're anticipating they get clean by the end of the month and then open up the gates again.

Yes.

But remember, fourth quarter is not historically our strongest.

But they'll open it up, and we should perform well through that and set a very good stage for going into spring.

All right.

Thanks very much.

Good luck.

Thanks.

Corinna Freedman, BB&T.

Hello, David.

Quick question on the backlog.

I know we're beating a dead horse here.

But does that number include reorders and replenishment, or is that just initial orders -- the 28%?

It includes flows as we and our customers anticipate them.

You'd have to define for me what initial and fill-ins are.

I mean, obviously, no one has tested it yet.

There's some repeat business.

There's some styles that they're trying to comp year on year.

There's some new stuff they're testing moving in their flows to the best they can see.

But it's just the beginning end.

We're not out too far.

I mean we haven't finished booking spring yet.

Okay.

And then the 24% domestic backlog, does that include Dicks and some of the new distribution that your testing this year?

Yes.

It includes everything that we have out six months, which is historically our norm.

For Dicks, it's not an outrageous piece.

Remember, they're only testing; they're getting started.

And while it's nice and we anticipate and they anticipate some great results in movement, it's not enough to move the needle.

Okay.

And then for this quarter and for first quarter, do you anticipate any unusual marketing expenses?

I know the marathon is in first quarter.

But do you start accruing for that or expensing that in the fourth quarter?

And will you be on TV for the Super Bowl in the first quarter?

To my knowledge, no final decision has been made on the Super Bowl.

The marathon is in.

We will amoritize it over the life of the contract.

I'm not sure what date it begins.

It might just begin in spring.

But that's all calculated into our marketing spend, so I don't anticipate any wild fluctuations in that.

Okay.

And then just a big-picture question on the Star Wars license.

Understanding not only it started selling in the middle of September, are there any other opportunities for other license properties that you're going after, or is Star Wars just the only one?

Well, right now, it's the only one we have and the only one we're talking about.

There's always some conversations going on, but we're such at the early stages of Star Wars.

Remember they haven't even released the new characters yet.

So it's hard to tell even what it would be as we get through the end of the year into first quarter when new characters becomes available, So it seems to have a very positive vibe now.

But it's very, very early in the game.

It's hard to tell exactly how successful it's going to be.

And my last question is on ASPs and what you're seeing internationally.

Are the ASPs balanced domestic versus international?

Or are they a little bit higher domestic versus international?

They're a little bit higher in domestic, simply because we haven't changed pricing there; and there's the currency differential.

I think you'll see them balance and actually maybe be higher in international, certainly in our subsidiary with -- certainly not the distributors, but the subsidiaries, as this pricing goes through first quarter.

Okay, great.

Thanks.

That's it for me.

Chris Svezia, Susquehanna Financial Group.

Hello, David.

So a question just on the backlog.

When you think about it, I know August and September are big booking months.

Could you just maybe add a little color if there's any difference between the two months?

One was stronger than the other or what the trend line was?

Did things sort of tail off a little bit in September, or was it equally as robust as August was?

The dollar amounts were pretty equal through August and September.

Historically, September is the bigger booking month for us than August.

But August came in as strong, so obviously a higher percentage increase in August.

I think it meant that people are coming in earlier and getting their orders done earlier, both internationally and domestic.

It turned out to be our biggest booking quarter ever.

And that goes back even to some pretty wild swings we had in the Shape Up days.

So without a doubt, it's been our biggest booking quarter to date.

But September didn't really see any meaningful directional change or fall-off as you stepped in September?

And you didn't get that additional turn on inventory?

You didn't see anything fall off in the backlog, I guess, is what I'm asking?

That is correct.

Okay.

Did you see at all, any -- given the fact that you didn't get that extra turn, that product that you had available in the inventory, were there any cancellations of existing orders or no?

There was no change on that one?

Nothing significant.

Nothing significant.

Okay.

When you think about expenses as you go into the fourth quarter, is there anything we should be mindful of?

Legal expenses, or anything like that, that you are aware of now that's not in the number at this point?

Or anything else we should just be mindful of just thinking about that fourth quarter from an expense perspective?

With somebody our size and what happens, there's always something that could be.

But there's nothing that comes to mind right this minute, certainly.

Okay.

So basically, when you think about the consensus growth rate, 24% growth rate in revenues and roughly call it $0.23 in earnings, at this point, there's nothing unusual within that or something that, whether it's legal expense or whatever, you haven't thought of that's not in that number at this point?

Not that I know of.

Okay.

All right.

Just with regard to Europe, could you just touch on what's going on at the disruption center and the efficiencies there?

Because I know first quarter last year could have been better and better margins there if you had the efficiencies.

Just kind of where are we?

What does that mean for the first quarter or first half?

We could have gotten more turns.

We are certainly running better.

We anticipate having 50% of our additional space done and operational by then.

So I would anticipate that we would have significant growth in Europe, and a bigger portion will flow through to the operating line.

Okay.

And last question I have here, just on the wholesale growth.

For US wholesale for the fourth quarter, is it fair to say that we continue this kind of low-teens trend line into the fourth quarter with international being in the 40%, 50% range and direct consumer, your retail business, being close to 20%?

Is that how we should think about it?

Yes.

That's the way we're think about it, although there certainly can be switches and changes for domestic as we get through November/December, depending on the holiday period ends.

But that's the way we have it modeled right now.

Okay.

All right, that's all I have.

Thank you very much.

Scott Krasik, Buckingham.

Yes, thanks David.

I may have missed it.

But when it was asked before about your comfort or your comments around 1Q, I think consensus revenue growth is 15%, 16%, something like that.

Is that what you're comfortable with?

Do you think you can do above that?

What was the comment exactly?

I think that would be a benchmark and I would tell you that I think there are certainly possibilities of upside from there.

Okay.

Thank you.

Thank you, ladies and gentlemen.

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 risks 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.