Skechers USA Inc (SKX) 2016 Q1 法說會逐字稿

Greetings and welcome to the Skechers USA Incorporated first quarter 2016 earnings conference call.

(Operator Instructions).

As a reminder this conference is being recorded.

At this point I would 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 U.S. 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 first quarter 2016 financial results.

We achieved new quarterly records for sales, earnings from operations and earnings per share.

For the first quarter net sales increased 27.4% or $210.8 million to$978.8 million, a new quarterly record.

Additional quarterly records include net earnings of$97.6 million and earnings from operations of$138.6 million.

Our growth was broad based and the results of net sales increasesacross our domestic wholesale, worldwide company-owned retail stores and our International business.

Our international wholesale business had a record first quarter surpassing domestic wholesale revenues for the first time with a gain of 47.1%.

First quarter highlights include; record first quarter revenues, earnings from operations and earnings per share; diluted earnings per share of $0.63, gross margin of 4.2%.

A strong balance sheet with $443.8 million incash or approximately $2.87 per diluted share.

A 12.1% increase in our domestic wholesale business, including an increase of 12.1% in pairs shipped.

A 47.1% sales increase in our International wholesale business, which brought our international wholesale business to 42.9% of sales and our International wholesale and retail business to 47.7% of sales.

A 23.2% sales increase in our company owned retail stores which also included an additional 72 net stores opened compared to the prior year period of which nine were opened in the first quarter including three International stores.

Worldwide comps of 9.8% in our company owned Skechers retail stores.

And reaching the milestone of a thousand company and third party owned Skechers retail stores outside of the United States.

Last year's second quarter was extremely strong as shipments were pushed from the first quarter into the second quarter of 2015.

While this year shipments were pulled from the second quarter into the first quarter.

We believe this is due in part to our European business strengthening and China increasing its wholesale distribution strategy through a franchise store model, both of which concentrated volume in to the first quarter.

International was the largest component of our total revenues in the quarter.

With the expansion of the European distribution center to 1 million square feet on schedule to be completed in the second quarter of 2016 and the automation fully completed later this year we expect to increase our efficiency in Europe our largest market outside of the United States.

At no other time in the Company's 24 year history have we been stronger from a product, marketing and distribution standpoint than over the past year and more specifically in the first quarter of 2016.

We have remained focus on our product by further developing our proven styles and expanding our product collections both to reach a broader demographic and to meet the strong demand for our brand.

Now turning to our business in detail.

In our domestic wholesale business first quarter sales increased 12.1% or $38.9 million with our pairs shipped also increasing 12.1%.

We are pleased with the growth in the quarter especially given the difficult retail environment.

On a percentage basis the highest growth came from our men's business which was up 22%, but on a dollar basis from our women's business which was improved by $21.8 million or 10.8%.

For the spring selling season we ran numerous marketing campaigns supporting our brand including three Skecher Burst campaigns one with Demi Lovato another with Brooke Burke-Charvet and a men's tech spot and four Relaxed Fit spots each featuring one of our brand ambassadors Sugar Ray Leonard, Ringo Starr, Mariano Rivera and Kelly Brook.

In addition we launched the new Meghan Trainor commercial for our Skechers.

Retro collection which features her hit song "NO." In support of our kids business we ran multiple animated and live action commercials including a new commercial featuring lightweight sport footwear geared towards tweens.

Also during the PGA tour we ran numerous Skechers Go Golf commercials featuring our talented roster of four professional golfers and new commercials featuring Meb and Kara Goucher surrounding the Houston Marathon and Skechers Performance Marathon of which we are now the title sponsor.

We are proud that Meb qualified for the U.S. Olympic Team at the trials in February and Kara Goucher is the first alternate.

As the oldest marathoner in U.S. history to compete in the Olympics we along with much of the country will be cheering him on in Rio as he competes in the Skechers Performance Footwear.

As we prepare to deliver our back to school and fall collections we are developing new commercials to support our wide product offering, including numerous new kid spots, new celebrity campaigns featuring Demi Meghan, Sugar Ray, Brooke Burke-Charvet and Kelly Brook.

And we just signed football legend and sports analyst Howie Long for our men's line.

As we begin our month long buy meetings showing new product for holiday 2016 and spring 2017 with our key accounts at our corporate offices this week we believe we are on track for continued growth in our domestic business.

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

Total International sales increased by 47.1% or $134.5 million in the first quarter.

This sizable growth came despite many of our international distribution partners pulling forward shipments in to the fourth quarter of 2015 and currency and political issues in a few markets including Brazil, Canada, Chile and Ukraine.

As previously discussed we implemented price increases beginning for first quarter shipments to help offset part of the currency headwinds.

For the quarter the growth came from nearly every region with the highest dollar gains coming from our subsidiary business and in particular Europe and our Asia joint ventures.

Fueling these gains was the shipment of 2.6 million pairs by our China joint venture a and the shipment of approximately 1.5 million pairs each by Germany and the United Kingdom and to our distributor in the UAE who handles the sales of Skechers across much of the Middle East and into Africa.

Our growing third party retail base of 872 Skecher stores is positively impacting brand recognition and acceptance as the stores showcased a more complete offering of a diverse stylish and comfortable footwear collection.

The strong global demand for our footwear has also resulted in more exposure in store and online as we see new Skechers branded windows, brand shops and displays from Austria and Croatia to Canada and Russia and many other global markets.

Further detailing our growth in international our combined wholly-owned subsidiaries saw net sales increases of46.1% in the quarter.

For the quarter every subsidiary with a comparable period reported double-digit gains with Japan, Canada, Spain having the highest on a percent basis and the United Kingdom, Germany and Canada having the largest dollar gain.

After transitioning several distributors in Central Eastern Europe and one in Panama to subsidiaries we began shipments in the second half of the 2015 into these two regions that cover more than two dozen countries including 10 in key markets.

We are pleased at the direction of our business in these markets to date and believe as we continue to open stores and build our wholesale base both will positively impact our sales in the next couple of years.

To prepare for the accelerated growth in Europe we are increasing the capacity and efficiency of our European distribution center.

We are completing the fourth expansion phase in the second quarter of 2016 with the automation anticipated to be completed by the end of this year which will bring our facility to 1 million square feet.

Having eliminated the operational inefficiencies we noted in a prior year and with the expansion of the third phase last year we reached a new milestone of 8.1 million pairs shipped out of the EDC in the first quarter.

Our joint ventures in Asia grew by 94% for the quarter led by triple-digit gains in China.

With 169 Skecher retail stores and extremely e-commerce business with high double-digit growth and approximately 1380 points of sale we believe there is still tremendous opportunity across China to build a brand especially within our men's and kid's divisions that are just getting started in this vast market.

Our International distributors improved by 8.5% in the first quarter the single digital improvements were expected given the 91.6% growth in the fourth quarter of 2015 due to the transition of distributors in Latin America and Central Eastern Europe to subsidiary and a significant ship of distributor orders into the fourth quarter of last year.

Numerous countries led to the quarterly growth within our international distributor business most notably our partners in the UAE, Taiwan, Philippines, Scandinavia and Russia.

Along with a thriving wholesale business most of our distribution partners have opened Skechers retail stores and we have a growing network of franchised Skecher stores in countries where we handle the distribution of our product.

At quarter end there were 872 Skechers branded stores owned and operated by our joint ventures, franchisee and distributors outside of the United States.

Of these 451 are distributor owned or franchised Skechers retail stores.

And 327 Skecher store in our joint venture countries in Asia including those run by franchisee's in the region.

Additionally, there are 94 company franchised store in those countries where we directly sell our product.

In the first quarter 78 third party stores open including our first in Iceland and (Inaudible).

Additional the following stores were opened 23 in China, 7 in Saudi Arabia, 5 each in the Philippines and Taiwan, 3 each in Denmark, Hong Kong, Indonesian and the UAE; 2 each in Algeria, England, France, Mexico and Singapore and 1 each (Inaudible), Brazil, Croatia, India, Israel, Japan, Kuwait, Macedonia, Malaysia, Poland, Portugal, Spain, Turkey and Wales.

One store closed in the quarter.

15 third party Skecher stores have opened in the second quarter to date including our first store in Belgium, three in Israel and a flagship location on a premiere shopping street in Istanbul.

We expect another 160 to 165 third party Skechers branded stores to open in 2016.

International wholesale continues to be a key growth driver for our business and now represents 42.9% of our total sales or 47.7% including our company owned international retail stores.

Bringing it close to our short term goal of international representing 50% of our total business.

We believe there is a tremendous opportunity to continue to grow the Skechers brand around the world.

Worldwide sales in our company owned retail stores increased by 23.2% for the quarter with domestic sales increasing by 15.3% and international sales by 59%.

This include positive comp store sales of 8.2% domestically and 17.7 % in our international stores for a total of 9.8% comp store sales increase worldwide.

At the end of the quarter we had 525 company owned Skechers retail stores of which 130 were outside of the United States.

In the first quarter we opened nine stores, including a store each in Japan, Scotland and the U.K. One store closed in the quarter.

Two stores have opened to date in the second quarter both in California.

For the strategy of continuing to open retail stores in key global markets to build the brand and meet consumer demand we plan to open 55 to 65 more stores in the year including 20 to 25 stores during the second quarter.

Now turning to our first quarter numbers in more details.

First quarter sales increased 27.4% to $978.8 million compared to $768 million in the first quarter of 2015.

The improvement was a result of net sales increases of 12.1% in our domestic wholesale business, 47.1% in our international wholesale business and 23.2% in our Company-owned global retail business which includes a 9.8% increase in comparable store and net sales for the quarter.

In addition we had some pull forward of domestic and international orders into the first quarter due to Easter shift.

First quarter gross profit was $432.2 million compared to gross profit of $332.5 million in the first quarter of 2015.

Gross margin was 44.2% compared with 43.3% in the prior year period.

During the first quarter we continued to experience negative foreign currency translations which impacted gross margins by approximately $9.3 million or $0.05 per diluted share.

First quarter selling expenses were $53.9 million or 5.5% of sales compared to$49.1 million or 6.4% of sales in the comparable prior year quarter as a percentage of net sales advertising expenses were 4.1% and 4.3% for the first quarter of 2016 and 2015 respectively.

The $7.2 million increase in advertising expenses was attributable to an increase of $2.1 millionin domestic advertising and an increase of $5.1 million in international advertising expenses as we further expand our global presence.

For the first quarter general and administrative expenses were $242.3 million or 24.8% of sales compared to $197.1 million or 25.7% of sales in the prior year.

The year-over-year dollar increase in G&A was primarily due to our increased store count, rent and increased depreciation expenses as well as increased warehouse and distribution costs related to significantly higher sales volume.

During the first quarter of 2016 earnings from operations increased 57.1% to $138.6 million or 14.2% of revenues compared to $88.2 million or 11.5% of revenue in the first quarter of 2015.

This increased operating leverage of nearly 270 basis points was the result of higher gross margin combined with SG&A leverage.

Net income increased 4.1% to $97.6 million compared to $56.1 million in the prior year period.

Net income per diluted share in the first quarterwas $0.63 on approximately 154.8 million average shares outstanding compared to $0.37 on approximately153.4 million average shares outstanding in the prior year period.

Our effective tax rate was 21.8% compared with 23.7% in the prior year period.

We expect our effective tax rate to be between 22% and 25% in 2016.

Now turning to our balance sheet.

At March 31, 2016 we had $443.8 million in cash or $2.87 per diluted share.

Trade accounts receivable at quarter end were 542.4 million and our DSOs at March 31, 2016 were 41 days versus 42 days at March 31, 2015.

Total inventory including merchandise in transit at March 31, 2016 was $501.9 million representing a decrease of $118.4 million or 19.1% from December 31, 2015.

On a year-over-year basis inventories were up 28% or $109.7 million which we believe are in line with year-over-year sales growth of 27.4% additional subsidiaries and Company-owned share count.

Given the strength of our business and strong sell through both domestic and Internationally we are very comfortable with our current inventory levels.

Long-term debt at March 31, 2016 was $82.9 million compared to $84.6 million at December 31, 2015.

The decrease was due to a pay off and pay down of our domestic distribution center equipment loan.

Shareholders equity at March 31, 2016 was $1.5 billion versus $1.4 billion atDecember 31, 2015.

Book value or shareholders equity per share stood at approximately $9.68 as of March 31, 2016.

Working capital as of March 31, 2016 was $1.07 billion versus$993.5 million at December 31, 2015.

Capital expenditures for the first quarter were approximately $35.2 million of which $9.1 million was related to nine new Company owned domestic and international store openings and several store remodels,$5.5 million for equipment upgrades and the automation of the fourth phase of our European distribution center and $7 million for a corporate property purchased for future development.

We expect our capital expenditures for the remainder of 2016 to be approximately $45 million to $50 million, which includes an additional 55 to 65 retail store openings; the expansion of our European distribution center to 1 million square feet in the second quarter of 2015; and the completion of its automation systems later in the year.

In summary the first quarter was a new record for revenues with sales of nearly $1 billion.

The growth came from our three business channels what was primarily due to 47.1% increase in International wholesale resulting in International now becoming our largest channel at 42.9% of total revenues for International wholesale and 47.7% for International wholesale and retail.

We achieved $978.8 million in net sales due to the strong demand for our brand globally.

Our goal is to continue to develop innovative footwear and remain top of mind and drive purchase intent and we are doing so with a 360-degree approach to marketing covering in store, digital, television, print, outdoor, social media and events.

Along with the growth in our domestic and International wholesale business our company owned global Skecher retail stores also saw increases of 23.2% for the quarter.

We are continuing to expand our retail base.

There are 1414 Skechers stores opened, and together with our international partners we are on track to have over 1600 stores by year end 2016.

As we look to the remainder of the year it is important to note that last year's second quarter was extremely strong as shipments were pushed from the first quarter into the second quarter 2015 while this year shipments were pulled from the second quarter into the first quarter.

We believe this was in part due to our European business strengthening and China increasing its wholesale distribution strategy to a franchise store model both of which concentrated volume in the first quarter.

We believe the second quarter of 2016 will be a new record for the period with net sales between $875 million and $900 million assuming there is no significant shift or pull forward of orders from the third quarter into the second quarter.

Our firstand third quarters have the potential to become larger relative to the balance of the quarters as our International business becomes a greater percentage of our total net sales.

We therefore believe there could be upside opportunity for the third quarter 2016 and the balance of the year.

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.

(Operator Instructions).

Our first question is from Sam Poser of Sterne, Agee.

Please go ahead.

Hi, David.

Good evening.

A quick question, can you hear me?

Yes, I can hear you.

A quick question, was there also not pull forward into Q2 from Q3 last year?

Didn't that also happened -- you got it on both sides last year; you got push outs from Q1 and pull forwards from Q3, correct in the second quarter?

That's correct.

As I remember it we had about $20 million we identified and it could have been more than that from Q3 in to Q2.

And if you remember not only did we have issues in Europe with our distribution center that moved some things our but Easter was in April last year and we had the port strike and we had significantly bad weather.

I think we would have seen this shift towards higher Q1 volumes and lower Q2 volumes last year had it not been for all those items.

Okay.

Thank you.

And then when we'rethinking about the second quarter revenue guidance how do you break that out how would you think about that domestic wholesale versus International because most of that move around happened in domestic as I remember last year.

It mostly happened in domestic which will put a lot of pressure on domestic this year.

I would expect that domestic would be the slowest growing piece this year in the second quarter.

We still anticipate our International business growing although not as significantly as in Q1 simply because as we said China moving to the franchise model means they have more wholesale business and that would move business in to the first quarter because they want to gear up for second quarter and first quarter is certainly bigger at retail so that doesn't even out that flow and Europe is a much stronger first and third quarter business.

So while they will continue to grow as will our distributors as will our stores certainly the most pressure unless there is significant movement like last year form Q3 to Q2 would be on our domestic wholesale business but that would provide pick up in Q3.

Right.

Exactly.

But would you expect in absolute dollars you did was it $420 million in International wholesale in Q1, which just given what I'm looking at it looks like Q3 in International should be even bigger than the first quarter that is historically the way it has been in absolute dollars; am I thinking about that right?

I think that is correct simply because we will have moresignificant growth while Europe is bigger in first than third certainly China will continue to grow and we anticipate they will be larger and our new subsidiaries in South America and we usually have bigger input from our distributors as well which continue to grow.

So it is certainly possible that Q3 would be larger than Q1 on an overall International basis.

And then if I'm thinking about it correctly we should start to see in the third quarter some improvement in the rate of the G&A; is that correct?

Yes, I think the pressure on G&A is score openings like we said we are opening 25 stores in the second quarter that will put a little bit of pressure I would think depending on what time they open and you get the full benefit of that leverage even though dollars increased by third and fourth quarter.

So yes, as our volume continues to increase I think we will continue to leverage although we are pretty much at a place where we told everybody would be at this running rate in the 14% operating margins we had in Q1.

So we are pretty much on target with all of that and we will continue to leverage as volume increases in the third quarter.

Right, but that means then you are going to get those efficiency from the European distribution that are really got them in Q3 when they tried to kick is that?

Absolutely, you get them but you know all those pieces they have to add up the business gets much, much larger and your inefficiencies even though they are big we got very significant efficiencies in Q1 from the distribution sample simply because the comps were from last year and we had much difficulty in converting.

We actually spent less in real dollars in our European distribution center in the first quarter certainly significantly less lever than we did last year even though we shipped significantly more pair.

Got you.

Thank you very much.

Good luck.

Good birthday tonight Sam enjoy, have one for me.

Thank you.

Thank you and the next question is from Jay Sole of Morgan Stanley.

Please go ahead.

Hi David good afternoon.

Hi, Jay.

So I just want to ask about the guidance.

You are saying there could be upside opportunity for the third quarter of 2016 and the balance of the year now is that just relative to the history or are you talking relative to street because sometime you speak to street and sometimes it's different.

Can you just maybe clarify that for us a little bit?

Well, I think it's both not I want to get too much detailed about the street but certainly from historical perspective I do think first and third quarter could be as we go forward significantly larger than second quarter and certainly fourth quarter.

So I think you will see significant opportunity there we will see how it develops it's just like we were talking after the third quarter last year when we said fourth quarter is relatively small even though we had a big pull forward from our distributor we said the big opportunities was in Q1 because the way business is laid out, the big opportunities will come as international continues to grow and as we get more filling from our domestic wholesale.

So I think the same holds true for this year Q3, we will have much opportunity as far as international is concerned and if you don't take $20 million forward we have significant opportunity, even have some great growth as far as domestic wholesale is concerned in Q3.

So I would say certainly on a historical basis I guess based on guidance it would depend on what you guys do with numbers after this conference call.

Got it, okay.

And then, maybe just touching on the same store sales, 8% domestic same store sales growth can you talk about maybe the categories or some of the biggest drivers that lead that increasing on the same-store sales biggest driver that led to that increase.

Yes, it's men's and women's like we said it's no different than our wholesale business, our men's is slightly higher price point but it's usually driven by our women's and a little bit of the kids on the new development but this last quarter it was primarily through our women's and it's a very broad based of women's, it's sport, it active, it's the leisure its certainly the performance group and even includes our work group which is all growing very nicely both at wholesale and in our own retail.

Got it.

And then, maybe one more from me.

Last year 1Q in domestic wholesale the growth was 38% and now on this quarter it's up another 12% so on a two year basis I mean the trend looks strong was there something surprised you in this quarter maybe it was the business was strong than you expected and then it kind of it implies that maybe the rest of the year can be a little bit stronger than what's out there and can you just talk about that role and your expectations of maybe what's changed?

Yes, as a matter of fact, in all our honesty we had anticipated or I certainly had anticipated that last year's first quarter would be larger than it turned out to be on overall basis and certainly on the domestic wholesale basis we did get hurt and move that significant amounts because of the port strike and because of the poor weather.

I thought we see this delineation between first and second quarter happen last year but they were confluence of events that moved everything into the second quarter.

So, I was actually thought we had a great quarter and there was no real reason to talk about it but I thought first quarter last year could have been higher.

This year I was surprised because of the weakness that we have seen at the end of the fourth quarter and going in to the first quarter for domestic wholesale alone we held up very well just like our own comp store sales and we came in certainly above the higher end of what I anticipated for domestic wholesale in the US.

So yes, and I think all of that and that the sale through information I hear some of the anecdotal and some of them from our customers that there is upside to the third quarter and the balance of the year.

Got it.

Understood.

Thanks so much.

Thank you.

The next question is from Corinna Van Der Ghinst with Citi.

Please go ahead.

Hi, David.

How are you?

I am pretty good.

I would like to start with maybe addressing some of the questions out there surrounding your US wholesale business.

You had talked about high single digits to low double digits top line growth for US wholesale for this quarter and also for the full year.

I am just wondering are you seeing a bigger slow down in any of your US channels of distribution with that guidance of risk or are there any shifts in distribution that we should be aware of as you kind of head into the rest of the year?

I will say we are pretty much on target for the first quarter and I do think there will be a shift with second and third quarter but right now I think, I am still pretty comfortable with that prognosis high single to low double certainly it's something we would anticipate now given the information we have but obviously things can change as we go into back-to-school, but I think everything I hear still is positive so given a macro boost to retail in general I think that's certainly in the card.

And any color that you can give us just by channel distribution across the US where you may be seeing some particular strength or weakness?

I don't know that it's like most of the things I hear it depends on the individual customer.

Some retailers are certainly doing better than others as far as our products is concerned so it's a broad based it's not specific to a category, it's specific to retailers.

Okay.

And then are you going to give us the backlog number for the end of March?

Don't usually, but it is up in the low to midsingles.

Okay.

And then just last question and I will jump off I know you said you are comfortable with your inventory positioning being roughly in line with sales could you maybe break out where you seeing the increases in inventory levels and is the majority of that growth still going toward some of these newer international markets and direct to consumer or you are kind of building more heavily in the specific areas?

I think it's where it should be.

It's what we said in the conference call it's all on our new territories, it's in our subsidiaries and fast growing subsidiary so we have an inventory built up certainly in Panama and certainly in Europe for Central Eastern Europe.

Panama has 13 stores that go with it that we pick up all that inventory plus a wholesale business something that we try to gear up because we made a subsidiary we try to bring inventory earlier just to make available and start to build the business.

We built certainly in China, China was up over 120% for the first quarter so you can imagine the build up there and then it moved to a franchise model which means they have to build inventory now to support those retail stores or retail operations that are moving forward and as a matter of fact China is on such a growth pace that we did as much in the first quarter as we did for full year 2014 as China is standalone business so obviously it's growing there and it's growing in our retail.

We had 75 more retail stores that we have to support not only with in-store inventory but retail inventory has turned somewhat slower than our wholesale inventory does so I think it's fair to say our inventory in the United States which is our biggest piece and a more mature piece outside of retail has grown the slowest of any of our facilities around the world.

Okay.

Great, that is helpful.

Thank you.

Thank you.

Our next question is from Jeff Van Sinderen of B. Riley & Company.

Please go ahead.

Let me add my congratulations as well, David.

You are the first nobody else congratulated.

Okay.

Well, certainly congratulation in order how should we think about inventory levels at retailers and the domestic channel just wondering what you are hearing from accounts here, overall do I think that they are generally pretty clean, just any more color on that maybe would help.

You are talking about our own or their inventory in general?

Inventory with your retail accounts not your own retail stores?

Yes, but I mean our inventory with them or just their inventory in general?

Both, either or?

They don't talk to us too much about their inventory.

I think it's cleaned up some but business hasn't been great over the last few weeks.

I think it opened up for many people as the weather started to turn warm so we are starting to see some positive results.

We don't hear a lot of our inventory necessarily building in their own channel.

We haven't seen a lot of marked down or anything nor had a lot of conversation so I think our inventory are probably in pretty good shape for the most part at retail.

Okay, good to hear.

And then any thoughts on gross margin what we should expect for Q2 and then any color on maybe puts and takes for gross margin for second half that we should be aware of?

I don't think there is any different than last year.

I think we get a little benefit big piece will depend on the mix we get and sometimes you have to be very careful with that and it's a good opportunity I was going to bring up, some of the differentials we see with gross profit and operating margins we had said that based on our price increases given currencies more stable than it were last year we should see about 100 basis points increase overall and we have certainly write about there.

What we didn't foresee and what's starting to happen is as we said sometimes the mix is changes the gross margin and it's a positive for operating margin.

So as an example, now that our franchise business in China is moving at such an extreme pace ad certainly outpace is what we can open on our own in China currently, we gave up somewhere around 450 or 500 basis points in gross margin in China that's in this number.

So our price increases and the stabilization of the currency would have been significantly better for that but because the wholesale business leverages better 450 to 500 basis points decrease in gross margins led to a slightly higher operating margin for our Chinese joint venture simply because it was the wholesale so you may see a little more of that because they certainly are fast growing.

The only reason we didn't see more drag on the gross margin was because the prices held, the Euro held very well and Europe was dramatically strong for us.

Okay, that is helpful.

And then, in China since we are on the subject of China, is there anything that stands out in terms of the products that's really resonating with them anything new or is it pretty much across the board?

It's pretty much across the board as said in our prepared remarks.

There are little heavier women than we would like to be around the world.

They are starting to pick up men's and kids but they also take at leisure and the performance we don't do much work there.

So it's across the board on the women's products and starting to grow in men's and kids.

Okay, great.

Thanks very much and continued success.

Thanks.

Thank you.

The next question is from Corinna Freedman of BB&T.

Please go ahead.

Hi, David, congratulations, I will be the first to add.

Question on comp trends quarter to-date is that a continuation of first quarter are you seeing any hold back even some of the choppy weather in the US just any color that you can give us there?

We see a little pull back in the first few weeks in April.

I think that's only because we had so strong comp store growth last year.

I mean last year April for most was great.

I think the shift of Easter has shown something in the first part of the year.

I think last year March and April were two strong periods for us as we came out so we have seen a little slow down it started to pick up over the last week or so and we anticipated the increase in strength as we get into the better weather into May and June.

Okay.

And with international clicking above the domestic business now do can you bracket where do you think that could that just non domestic sale could be longer term?

You mean how big of piece of the business how fast they can grow?

Yes, just any longer term like five year plan, three year plan any color on longer term.

For a company that doesn't give guidance that's pretty good, I would tell you that international over the next any period of time certainly as you get through third quarter and move on will grow at a significant pace.

I wouldn't be surprised that it's significantly larger, twice as big because I think US will continue to grow and we are in a slightly weak period now as far as the macro environment for retail is concerned but it will grow significantly I think we are just that the beginning, beginning stages of where we can be pretty much everywhere in the world I mean we are obviously a little further along in Europe but China still has growth and what we see now happening in South America other than the obvious places like Brazil, Argentina, and Venezuela the rest of it including Mexico seems to be very, very strong.

We had a great year in Canada great first quarter in Canada and that's what significant headwind as far as currency is concerned, gross margins are actually down, their currencies is getting killed but even in a translation in real dollars was one of our fastest growing marketplace.

So our international business continues to grow at a very rapid pace and I think will continue to do so.

On that point do you anticipate any other regions are flipping to the franchise model from owned or distributors?

You mean to say subsidiaries and joint ventures?

We are going to transition Israel probably in the next month or so we have already been working on we think that's an opportunity but other than that we have nothing really in works today that would be anything near term.

And my last question is any comments on some of the new distribution that you have been adding in the US such as Dicks and any other potential new customers maybe DSW now that you're adding kids?

Yes both of us are still very much positive.

It's very difficult to say how big they will be but we have had very positive feedback from both, I mean Dicks is further along and still has given us very significant and positive feedback as we move along through this process.

So they are all positive I just don't have anything to really tell you as far as what its end potential could really be.

I think it's still got ways to go.

It's just beginning and it's very positive especially on the Dick side.

Okay.

So that wouldn't be included in your full year top-line commentary?

Not if it explodes from here.

No.

Okay.

Thank you very much.

Thank you, the next question is from Scott Krasik of Buckingham Research.

Please go ahead.

Hi, David, how are you doing.

Hi, Scott, pretty good.

Good.

So just some more details on the backlog so low single digits to mid single digits I am assuming that's our global number?

Yes, but obviously it still doesn't include China and obviously it's still lower than it would be because of all the movement in the first quarter from some of the heavy duty stuff like Europe and our domestic wholesale.

So it's anticipated because of the tougher comps we had last year when everything was in backlog and we had a very strong second quarter that was left over from first quarter.

So I think it's time more than a real number thing.

Right.

And then to the extent that obviously 2Qs hurt, but 3Q should be held by those shifts so how does the sort of second half of the window look for the backlog specifically?

I think it grows from here and it should grow into the back half in the second quarter unless significant movement happens for whatever reason from third quarter into second quarter.

I am sorry.

Okay.

I get it, so right now the back half of the window isn't that much different from the total you are saying?

No, we are stronger obviously as you get in but we are still booking for third quarter so it's a very early in the process.

Okay, got you.

And then, you have been pretty good about commenting on consensus EPS for the quarter out.

You gave us sales?

Yes, I think, we should be somewhere on the water of last year's EPS give or take a couple of pennies here and there depending on what where we are along the range from 75 to 900.

Okay.

That's helpful and to the extent that you have visibility to back-to-school, is there any differences between domestic or international or is it similar to the relationship we have seen in the last couple of quarters?the relationship we have seen the last cup canl of quarters.

You mean as far as growth is concernedor?

Back log.

International obviously it's country related but yes, it concentrates in first and third quarters so that don't continue to grow and they start a little later in Europe they don't ship anything till August so they have got little more time.

So, I think they will continue with that way I think in third quarter we are going to try to give more clarity on the Chinese backlog and nothing else so that should be the very positive push to give you an idea of exactly how we can grow there.

Okay.

And then just last possibly the selling expense number so good for you any thoughts in terms of sort of dollar growth next couple of quarters in selling?

Not finalized yet, but probably that significantly different than in first quarter.

We may step it up as things get closer to third quarter when we see where we're at international and where we can get the most benefit but right now nothing extreme is planned.

Okay.

Thanks and good luck.

Thanks.

Thank you.

The next question is from Laurent Vasilescu Macquarie Capital, please go ahead.

Hi David.

Congrats on great results.

The domestic wholesale, it sounds like it was flat if I am wrong please correct me if I am wrong, but and if that's the case what were the puts and takes?

It was relatively flat I think it's a mix.

The weather got warmer earlier.

We saw the lot more sandals and lot more bobs they were faster growing piece so rather than heavier footwear so I think it's a mix this year we went through the first quarter.

Okay.

On Europe your European subsidiaries grew about 58% last year first quarter how does that do this quarter and how should we think about the cadence for the rest of the year?

Well, our international subsidiaries grew almost 40%, I think it can't continue at the 40% number but it's still going to be significant double digit there is going to be significant growth for them from what I hear right now.

Our sales through is good there, weather has turned warm and we are performing quite well so I don't think anything slows us down there.

Okay, great.

And then one last question on China, I think your China business grew about 150% last year for the full year your pre-tax income for China essentially tripled can you talk about the gross margin in China points of leverage around SG&A and how should we think about the pre-tax opportunity for this year?

It continues to grow I think it was out-sized in the first quarter simply because we said there is a shift in the franchise model and more wholesale business for them but the leverage the same way we do here other than levers obviously significantly cheaper for them.

And it's a longer time before they automate but obviously as we grow because our price points aren't significantly different but the cost of labor as you increase those things as less they continue to leverage quite, quite well like I said their operating margins are significantly higher than most places we have in the world.

So they keep their gross margins high, the sales force have been very good.

And their additions to labor remember they don't have to develop huge or develop images or lot of the things we pay for here it's a very strict for wall they do some of their own advertising certainly but not the big piece nor development of their own shoes nor dealing with factory so it's a matter of importing selling and their operational efficiency and like I said labor is cheaper and they always been high operating margin kind of group and I don't think that changes.

Okay, great.

And if I can squeeze one last and the FX impact it looks like it was 100 bits can you parse up the other benefits to get to the 90 bits of expansion for year-over-year?

Expansion in what?

In the gross.

In the gross margin?

Yes.

Yes, most like I said the gives and takes we had significant increases in Europe because of the price increase and instability we had a little take back from China and Canada, Canada of course of currencies so it was mostly the price increases and the stable currencies where they come and we got a little benefit in some of the South American places so and we had just higher margins in places like Japan where we opened last year where we just trying to see the markets so even though they had a negative currency then we sell more full price and price stuff so there is gives and takes from every piece of the world that ends up that way but the and the US was fairly stable as far as the wholesale and was concerned slightly higher as far as retailer is concerned as far as gross margin.

But it's just the gives and takes around the world.

Europe was up, England was down China was down for various reasons Canada was down.

So that all leads to where we came from.

Canada was down pretty significantly that their currency took more of a hit than almost any place in the world first quarter to first quarter.

Okay, great.

Best of luck.

Thanks.

Thank you.

The next question is from John Kernan of Cowen & Co, please go ahead.

Good afternoon David.

Thanks for taking my question.

Sure.

The EPS that you kind of talked to for the second quarter does imply some margin contraction it seems like at least towards the mid to high end of your guidance sales guidance.

Te margin extensions have been incredible for the past four years.

I don't think you had it down quarter in terms of operating margin.

How do we think about the re-acceleration in margins in the back half of the year?

Is it largely SG&A driven is there some gross margins expansion opportunities now and FX is kind of rolling up and you are still rolling through pricing?

How do we think about modeling SG&A gross margin and thinking in the back-half of the year?

Yes, I think the back half for the year we get back to certainly more historical levels the only issue with the first quarter is differential that we are bigger business now and we need the bigger infrastructure but the volume was up artificially high last year so you got to give some of that de-lever back just as far as the second quarter is concerned because we have so many more stores and the growth will only be in that in the 10% I think it gets significantly higher than that as we go and that's why we think it will go back to this 14% and 15% operating margins and even higher as we continue to grow into next year.

So, I think it's just a mismatch in volume and the amount of growth you achieve from one way to the other we shouldn't have had such significant leverage last year because all the volume shouldn't come in the second quarter.

So if you even out the two years you see that it continues on a more even basis than it continues to grow year-over-year and should if you take the two quarters together will grow even quarter by quarter.

Okay.

It sounds like there is a lot of opportunities on SG&A and some opportunities in gross margin this year?

Yes, just like it was in last year.

Can you just comment on some of the innovation you are most excited about in the back half of the year, the demand particularly in North America in the wholesale channel.

Is there anything that your wholesale partners particularly are excited about you are excited about for your own channel?

We are going through a lot of those pre-launch now I think we are all excited about the new product and new potentials one of our core competencies has been to develop product I don't think any of that stopped and so we are developing.

It's hard to tell now because what they get excited about or what we see you can't always tell which ones are the biggest success but we see a lot of stuff and a lot of iterations both for performance and our at leisure, so we have got a lot of good acceptance over the first few days of the meetings in the last couple of days from reach out so I think it's the same its broad based development instead of marketplace.

Any comments on apparel I know that was you have seen a little bit of new showrooms, just wondering the opportunity there in the active work category?

I think the opportunity there is tremendous it's just not near term or something we would talk about in the next couple of quarters.

The stuff we are putting out and the stuff we see in our stores it's checking very well our international partners that have retail are bringing it out they have had success I think we are at the beginning of something very, very positive as you go into this apparel.

So I think in the next couple of years it will start to grow and be something very, very significant.

It's just not at today necessarily other than just beginning to get it out into the marketplace and to our customers.

So yes, I think that over the next few years could be a tremendous, tremendous piece worldwide.

Thanks, best of luck.

Thank you.

Thank you.

The next question is from Jim Chartier of Monness, Crespi, Hardt.

Please go ahead.

Hi congratulations and thanks for taking my question.

As someway the fashion shifts towards the most retro product in the marketplace can you just talk about how your retro product has been doing so far to date how do you see yourself competing as the fashion shifts?

Yes, I think it's working for us.

We are starting.

I don't know it would be the biggest piece of what we do but we pour our retro line and we have some of our own retro footwear that's starting to sell well around the world and some of it even in China, but we are out with it but we only and we have got some acceptance of it and we good to see moving, so we do have an on trade into it but I don't know it will be an overwhelming piece of the business as we go forward.

Okay.

And then last quarter you talked about restate in Japan and I think you said it was one of your strongest growers in first quarter, you just talked about what's happening in that market and how big it is today and where you see it go in the future?

It's still at the very early stages.

It won't make $100 million this year.

But we have opened about 7 stores there the stores are doing well.

Our wholesale business has picked up.

We have re-partnered with some on a larger scale with different customers there and we seem to be getting great acceptance so if the sales through is continuous we go through this year we will have some more significant growth and it will be a key contributor in the next year or two.

Great.

Thank you.

Thank you.

The next question is from Chris Svezia of Susquehanna Financial Group.

Please go ahead.

Hi David nice job.

Thank you.

First of revenues just guidance you gave for the second quarter 875 to 900 where are you being potentially conservative in that just given the fact that past several quarters you gave your guidance, you have beaten it pretty handily so I am just curious where as you step back and think about that where there could be levers for upside in the second quarter is it still international if it is?

Well, it could be anywhere.

When you are -- you never know what's going to explode.

It's hard to see, the second quarter has the cost of the comparison to last year it's just a very difficult quarter to get significant growth.

But it could be anywhere certainly China could accelerate with a demand.

It's unlikely that Europe could, South America could accelerate domestic wholesale could certainly accelerate and some of the distributors may move up a significant piece so there is many places the biggest place we usually see given that there is no business shift out in the month of April would be domestic wholesale that can shift from July or June it's just not a phenomena that we see in Europe because their season starts a month later.

Okay.

Are you seeing -- so as a potential domestic wholesale are you starting to see or are retailers coming to you because they are short product because they have been robbed into place pre-orders something like that I mean you are starting to see that at this point or you are still waiting as you get closer to back-to-school and whether or not people want to pull things forward?

I wouldn't anticipate we would see that for another few weeks I think we strongly have a few conversations where I don't see anything significantly definitive because the weather is just turned for those that have are in a good position there their sales just started to open over the last week or so.

And they are all coming in for praline so it's kind of early in the process to seek a significant piece, but the things continue as they had the last week or so I think it certainly would be a positive point as you get out but it's very, very early in the game and we just finished the very first few weeks of April it was very difficult to reach out just about everywhere here.

Switch gear for one second just on the gross margin, I think second quarter last year you had very strong I think full price sales in Europe or in the UK that helped some of that gross margin you would still anticipate in the second quarter that you would still have gross margin improvement or is it just fair to say flat at this point to sort of given the comparisons I am just trying to understand?

Like I said it depends on the mix certainly.

Usually we have some upward potential in second quarter because it's such a - it's a smaller wholesale quarter and can be a larger retailer quarter depending on where the mix is so it's too early to say I would say there was slight not significant but slight upward possibilities for gross margin as you get through second quarter.

Okay.

The balance of the year just help us between gross margin dynamic between China going to a franchise model and what incrementally offsets that as China move from the mix perspective is it just other reasons is it pricing, is that what that helps you give you growth to the gross margin is it fair to say at this point there is sort of flattish in the back-half of the year?

Well, I think it depends on the mix.

I think it has a possibility to go up certainly because I anticipate without any significant currency changes which we will see now will have those price increases in affect Canada could come back some South America starting to come back as far as currency is concerned.

We will wait to see what happens in England, the Euro certainly is getting somewhat stronger.

So I think if the dollar certainly has bottoms or close to it you get all from the currencies.

And that's some of with mix so like I said it's not necessarily a bet, if it goes down in the back half because of China we will have increased operating margins even with it so it's not a bad thing.

It's like when we have more outlet store business and comp store business because it's cheaper to run them we take a hit in the gross margin but we make a very big positive in the operating margin so something are very positive even if they impact gross margins to a slight degree.

Okay.

Final question from me just on bridging the gap a little bit as you think about the acceleration as you get into the third quarter in terms of revenue growth relative to the backlog and where it is, I know China is not in it I know direct consumer plays a component here and obviously that's not in it do you expect to see an acceleration in the second half of the window in that backlog to get to sort of where most people seem to be and where you like to be which is sort of mid upper teens growth just maybe walk us through that is it more stealing business, more business that helps generate that growth in the third quarter?

No I think it's just natural growth.

I don't know that it's big a at once piece, certainly you get a benefit just because you don't have the pull up I mean there is 20 million left in that third quarter last year the chances are we will be in third quarter this year.

Both pieces are different for domestic wholesale so I do think we will grow it and I think our goals for top-line growth are still at the higher end of anybody else.

I think we are still very confident but we will wait to see what happens.

We don't want to push it any which way we are very happy with the gross over the last few years and hope it continues as we go into the future.

So where there is mid teens or somewhat higher or gets into 20% range that all happens as the natural progress.

We don't have enough inventory for only at-once to be the only driver.

Okay.

So you would anticipate an acceleration of backlog to get you there?

Absolutely.

Okay.

Thank you very much.

I appreciate it.

Thanks.

Thank you.

(Operator Instructions).

And the next question is from Sam Poser of Sterne Agee.

Please go ahead.

Just a follow-up David.

The last year you did $220 million in China for the full year, you guided China to be 350 to 440 this year and those and you were up over 100% in the first quarter is this tracking ahead of that guidance right now and with those numbers and if you were to include the orders you have out for China right now what would your backlog look like?

Well, if I knew that specifically well I should it would be up significantly because the franchise business in China has grown significant as most of the double digit growth you see whether triple digit growth you see.

It comes from the franchise model.

So that would pair even outside as far as backlogs are concerned.

I think it's fair to say that it's tracking better than the lower end of guidance certainly I don't know if that's significantly higher than the top end I don't know if it's quite at the top end.

There will be not as much acceleration in the second quarter because it is franchise model but it will lead to certainly significantly higher potential in Q3 for China.

So I would tell you that those numbers are still in play.

I would have if I had to do it today I would take up the lower end of that range significantly but I don't know that I would take up the top in that range at all.

double-digit growth you see or the triple-digit you see franchise that would appear as far as backlogs are concerned.

I think it is fair to say I don't know that it is significantly hire than the toppened not as much but it will lead to certainly significantly hire potential in Q3 for China I would tell you those numbers are still in play.

If I had to do it today lower end of that it range significantly I don't know it if I would take up the top end of that range at all.

And I mean, what trick I mean you know what inventory you need to drive your China business and you know what inventory you need to drive your own retail why not include the orders for that for both of those businesses in the backlog because I think what's happening is people are sitting disconnect between these extremely large numbers that you are putting out there and then a low to mid single digit backlog when a lot a good chunk of the business directive consumer and China are not impacted by, so backlog appears to be meaning less and less.

So either?

This quarter's volume, but yes I don't disagree on China we said we try to have it by the third quarter.

So we will try to get that as quickly as possible.

Direct to consumer we still looking into because it's sort of selling everybody your own thought process on your own stores as far as comp store sales are concerned so we hope to have China in by the third quarter and we will make a decision on directive consumer by that time as well.

Thank you and again good luck.

Thanks.

Thank you.

The next question is from Jim Chartier of Monness, Crespi, Hardt.

Please go ahead.

Hi, David.

Just quick did you quantify the pull forward the estimate that you think pull forward from the second quarter to first quarter this year?

It's difficult to say because a lot of it has to do with retailers as far as Easter is concerned and what we lost between the port strike and things like that and I think it's always relative to last quarter.

But I wouldn't be surprised if it was on a differential year-over-year basis between first and second quarter that there was somewhere between $70 million and $100 million shift from what would have gone in first quarter last year moved in this year between Easter and everything like that.

If I had it I would tell last year first quarter should have been an access of $800 million and that's the growth you should have gotten that's what moved this year back to first quarter significantly over and that last year second quarter should have probably come in $750 million $760 million range and that's why you will see that growth this year.

All of that has reversed out this year compounded by the fact that Easter has moved from second to first quarter.

Okay.

That is helpful.

Thanks.

Thank you.

The next question is from Scott D. Krasik of Buckingham Research.

Please go ahead.

Sorry about that.

You probably got asked this questions hundred times privately worth commenting here there is all these data sets out there talking about sale through and I guess they were pretty wide the range between what they were predicting so maybe to your best effort what were the sale through rates that you experienced in the first quarter and you see this impacting your business?

The sale through I don't know what that means.

You mean like the sport game information and stuff like that.

I mean they are their opinion right you have what the retailer tell you so sort of how your product is selling how fast it's selling at retail?

Yes, it's very difficult but I think for most cases and a lot of cases we sell through according to plan.

The plans we had with those retailers in some cases and a lot of cases which is why we are up a little bit more in the first quarter we sell better than plan.

So it depends on the retailers I think nobody got heard with inventory so the increased inventory they took in sold through at good rate and it's different for everybody it's hard for me to figure and quantify among on an overall basis I don't know think that inventory.

I would say most cases certainly those retailers that are doing well we sold better than the inventory buildup they had.

Okay, that is helpful.

Okay, Thanks.

Thank you.

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 know that today's call may contain the forward-looking statement as a result of various risk factors actual results could differ materially from those projected in such statement.

These risk factors are detailed in Skechers' filing 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 line this time and thank you for your participation.