Skechers USA Inc (SKX) 2016 Q2 法說會逐字稿

Greetings and welcome to the SKECHERS USA second quarter 2016 Earnings Conference Call.

At this time all participants are in a listen-only mode.

A question-and-answer session will following the formal presentation.

(Operator Instructions).

As a reminder this conference is being recorded.

I would now like to turn the conference over to SKECHERS USA.

Thank you.

You may begin.

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 achievement express or implied by such forward-looking statements will occur.

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

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

David?

Good afternoon and thank you for joining us today to review SKECHERS' second quarter 2016 financial results.

We achieved a new second quarter sales record of $877.8 million, an increase of 9.7% which resulted in a new fiscal first half net sales record of $1.86 billion.

Our growth in the quarter was primarily the result of net sales increases in a worldwide Company-owned retail stores and our international business.

Specifically, in our subsidiary and joint venture distribution channels.

This growth also positively impacted our gross margins in the quarter which were 47.4%.

Our international wholesale and retail business complained represented 41.9% of our total sales for the second quarter and 45% for the six months ended June 30th.

Second quarter highlights include record second quarter revenues, gross margin of 47.4%, diluted earnings per share of $0.48, a strong balance sheet with $628.8 million in cash or approximately $4.06 per diluted share.

Shipping 8 million plus pairs from our North American distribution center in June, a new monthly record, expanding our European distribution center to over 1 million square feet, a 25.5% sales increase in our international wholesale business including a 34.6% increase in our subsidiary and joint venture business.

A 15.4% sales increase in our Company-owned retail stores, which included 85 net new stores opened compared to the prior-year period of which 23 opened in the second quarter including 12 international stores and growing a worldwide SKECHERS store base to 1,548 locations with the opening of 133 net new stores in the quarter including our first stores in Belgium, Norway, and Finland.

Last year second quarter was extremely strong and this year we had second quarter shipments pull forward into the first quarter of 2016 which significantly reduced our domestic wholesale shipments for April.

International had the largest gains in the second quarter with our subsidiary and joint venture business growing by 34.6% and our SKECHERS international retail business increasing by 40.5%.

Further, June was a record shipping month in our North American distribution center which distributes our product across the United States and Canada.

June was also the strongest month in the second quarter for our newly expanded European distribution center.

Of note, our diluted earns per share for the second quarter of 2016 were negatively impacted by several factors including foreign currency translation and exchange losses of $8.3 million or $0.5 per diluted share.

In addition, we had G&A expenses for additional VAT taxes in Brazil of $2.7 million and a fire in our Malaysia warehouse which resulted in a pre-tax loss of approximately $900,000.

These factors reduced diluted earnings-per-share by $0.02.

In addition, our annual effective tax rate for the second quarter was 12.7% and 18.1% for the first six months.

The annual effective tax rate is significantly lower than our previous guidance primarily due to reduced projected domestic earnings combined with increased projected earnings from our China operations which has a lower tax rate than our US effective tax rate.

Although US retailers are currently in a promotional retail environment, we believe we are a trusted and reliable brand for our customers and consumers who seek comfort, quality and style in their footwear.

We look forward to maintaining our position as brand leader and further growing our market share around the world.

Now, turning to our business in detail.

Our domestic wholesale net sales decreased 5.4% in the second quarter which is attributable to the significant pull forward of orders into the first quarter this year as well as the challenging and promotional retail environment which included closing of some account doors and a surplus of product in the marketplace.

Net sales were down 25% in the month of April due to the shift though we are up 6.5% in June and only down 5.4% in total for the quarter.

For the first six months of 2016 our domestic wholesale business increased by 3.2%, a further indication of the strong first quarter in our domestic business.

Even with the decrease in domestic wholesale we saw growth in our kids division as well as women's active and sandals and men's sports and men's and women's on the go and work.

For the spring selling season we ran numerous marketing campaigns supporting our brands including campaigns with Demi Lovato, Brook Burke-Charvet, Sugar Ray Leonard, Kelly Brook and Meghan Trainor which featured her hit song No.

These commercials, as well as one's for women's sandals and our sport division supported our many key lifestyle initiatives and support of our kids business we ran multiple animated and live action commercials including a commercial featuring lightweight sport footwear geared towards tweens.

For our SKECHERS performance division we ran several SKECHERS Go Golf commercials featuring our roster of four professional golfers, SKECHERS Go Run commercials with Meb and Kara Goucher, as well as one for our successful Go Walk division.

We are looking forward to the Olympics this summer as Meb will be running in SKECHERS Performance footwear with the intent to again win a medal in the marathon for the US while Matt Kuchar will be wearing SKECHERS Go Golf as golf returns to the Olympics.

In support of back-to-school multiple new boys and girls SKECHERS Kids commercials are already airing to support our many new styles for younger and older kids including new S Light and SKECH Air for boys.

Within a few weeks we will begin airing our men's and women's campaigns including new commercials with our team of ambassadors as well as two new commercials with football legend and sports analyst, Howie Long.

We are also excited that both Meghan and Demi have begun their summer tours in the US and Canada and that Howie will be on air when the NFL pre-season starts in August.

With the new record shipment months in our North American distribution center in June which is largely comprised of shipments to the United States some positive and anecdotal trends and sell-throughs including that of our leading online account.

We believe we are maintaining our position in the domestic marketplace which is being impacted by both the political environment and an excess of sale priced product.

As in the first quarter international wholesale achieved the highest percentage and dollar increase of our three distribution channels.

Total international sales increased by 25.5% or $61.6 million in the second quarter and 37.2% and $196 million for the first six months of 2016.

The highest dollar and percentage gains came from our subsidiary and our joint venture businesses.

Fueling these gains was the shipment of 2.3 million pairs by our China joint venture and 1.4 million compared by the United Kingdom.

As in the domestic market our international businesses focus on marketing our Lifestyle, Performance and Kids product with traditional media such as airing on many commercials in their local languages.

We also utilize in-store and window displays as well as (inaudible) shops and enlisted the power of SKECHERS brand ambassadors and local celebrities; most notably into the UK as well as in the Asian market with a Korean pop group.

Further, we sponsor and exhibit at running, walking and sport events including the Pan European Iron Man, which we sponsor.

Additionally, more than a dozen SKECHERS performance brand ambassadors who will be participating in the Rio games and the entire Belgian team is wearing SKECHERS and the country's colors off the field.

Also, our growing third-party retail base of just over a thousand SKECHERS stores is positively impacting brand recognition and acceptance as the stores showcase a more complete offering of our diverse, stylish and comfortable footwear collection.

Further detailing our growth in international, combined our wholly-owned subsidiaries saw a net sales increases of 34.6% in the quarter and 48.1% for the first six months of 2016.

For the quarter the highest percentage gains came from Brazil, Canada, and France with Canada also achieving the highest dollar gains with more than 935,000 pairs shipped in the period and over 2.2 million pairs for the six months.

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

We believe that as we continue to open stores and build our wholesale base both markets will positively impact our sales in the next couple of years.

To prepare for the accelerated growth in Europe we completed the expansion of our European distribution center to 1 million square feet in the second quarter and are anticipating the automation portion of the expansion to be completed by the end of this year.

Having eliminated the operational inefficiencies we noted in the prior year and with the expansion of the third phase last year we reached a new milestone of more than 12 million pairs shipped out of the EDC for the first six months of 2016.

Our joint ventures in Asia grew by 65.5% for the quarter led by high double-digit gains in China and triple digit gains in India.

In China we opened 42 free standing SKECHERS retail stores in the quarter bringing their total SKECHERS store count to 233 and we have approximately sales increases 1550 points of sale and extremely strong E-Commerce business with high double-digit growth.

We believe there is still tremendous opportunity across the country to further build the brand.

In India where our business is in the development stage we opened 7 SKECHERS stores in the quarter bringing the total store count to 44.

Our international distributor net sales increased by 3.2% in the second quarter and 5.8% for the six months ending June 30th.

The quarterly growth within our international distributor business was most notably from our partners in Indonesia, Israel, Philippines, Russia, Scandinavia, Taiwan, Turkey, South Africa and the UAE.

We are also about to complete an agreement with our distributor in Israel to transition to a joint venture which will give the brand additional support to fully realize the potential in the region.

Our distributor sales were impacted by Latin America and central Eastern Europe transitioning from a distributor model to subsidiaries in the first half of 2015.

Along with a thriving wholesale business 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 products.

At quarter-end there were 1,002 SKECHERS branded stores owned and operate by our joint ventures, franchisees and distributors outside the United States.

Of these 484 are distributor-owned or franchise SKECHERS retail stores and 409 SKECHERS stores are in our joint venture countries in Asia including those run by franchisees in the region.

Additionally, there 109 franchise stores in countries where we have subsidiaries.

In the second quarter 120 third-party stores opened including our first in Norway, Finland, and Belgium.

Additionally, the following stores were opened; 42 in China, 11 in Saudi Arabia, eight in Taiwan, seven in India, six in Australia, five in Hong Kong, three each in Indonesia, Israel, Malaysia and Turkey, two each in Brazil, Portugal and Thailand and one each in Armenia, Bahrain, Canada, France, Hungary, Ireland, Italy, Japan, Kenya, Kuwait, Mexico, Nepal, New Zealand, Nigeria, the Philippines, Poland, Spain, Trinidad, the UAE, and Vietnam.

Ten stores closed in the quarter.

Four third-party SKECHERS stores have opened in the third quarter to-date and one store is closed.

We expect another 70 to 80 third-party SKECHERS branded stores to open in the remainder of 2016.

International wholesale continues to be a key growth driver for SKECHERS and now represents 34.6% of our total sales in the quarter and 39% for the first six months.

Combined with international Company-owned retail stores it represents 41.9% and 45% respectively 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 as we build our presence through market, retail expansion and gaining shelf space within our wholesale accounts.

Worldwide sales in our Company-owned retail stores increased by 15.4% for the quarter and 18.7% for the first six months.

In the quarter domestic Retail Sales increased by 8.8% and international Retail Sales by 40.5%.

This included flat comp store sales domestically and a positive comp store of 9% in our international stores for total comp stores sales increase of 1.5% worldwide.

At the end of the quarter we had 546 Company-owned SKECHERS retail stores of which 142 are outside the United States.

In the second quarter we opened 23 stores including a store in the trendy shopping district of Harajuku in Tokyo, another store in Japan, four both in the UK and Canada and one each in Austria, Poland and Chile.

We closed two domestic stores in the quarter.

Two stores have opened to-date in the third quarter.

One in New York and one in the UK.

With a strategy of continuing to open retail stores in key global markets to build the brand and meet consumer demand we plan to open approximately 30 to 35 more stores this year including a store in the new One World Trade Center.

Now turning to our second quarter numbers in more detail.

We had record second quarter net sales of $877.8 million versus $800.5 million in the second quarter of 2015, an increase of 9.7%.

The improvement was a result of sales increases of 34.6% in our international subsidiary and joint venture businesses and a 40.5% increase in our international Company-owned SKECHERS retail stores.

With the international stores our Company retail stores increased 15.4%, which includes a 1.5% increase in comparable store net sales for the quarter.

Our sales were offset by a decrease of 5.4% in our domestic wholesale business due to a pull forward of shipments from April into March resulting in significantly reduced shipments for April.

For the first six months of 2016 we saw an increase of 3.2% in our domestic wholesale business and as mentioned earlier we are seeing positive momentum in July as we experienced our largest shipping month from our North American distribution center in June.

Additionally our European distribution center exceeded its planned shipments for June.

Second quarter gross profit was $416.3 million compared to gross profit of $374.6 million in the second quarter of 2015.

Gross margin increased to 47.4% compared with 46.8% in the prior-year period.

The increased profitability and higher gross margin during the quarter was due to a combination of higher sales and strong sell-throughs of our product, specifically in our international subsidiary and joint venture businesses as well as our Company-owned retail stores.

Second quarter selling expenses were $76 million or 8.7% of sales compared to $64.9 million or 8.1% of sales in the comparable prior-year quarter.

As a percentage of net sales advertising expenses were 7% and 6.1% for the second quarter of 2016 and 2015 respectively.

The $12.7 million increase in advertising expenses was primarily attributable to increased international advertising expenses as we further expand our global presence.

For the second quarter general and administrative expenses were $243.2 million or 27.7% of sales compared to $201 million, or 25.1% of sales in the prior year.

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

Due to the increased expenses earnings from operations decreased 10.7% in the second quarter to $100.4 million, or 11.4% of revenues compared to $112.3 million, or 14% of revenues in the second quarter of 2015.

During the second quarter net income was $74.1 million compared to $79.8 million in the prior-year period.

Net income per diluted share in the second quarter was $0.48 on approximately 155 million average shares outstanding compared to $0.52 on approximately 154 million average shares outstanding in the prior-year period.

Our diluted earnings-per-share in the second quarter of 2016 were negatively impacted by several factors including foreign currency translation and exchange losses of $8.3 million or $0.5 per diluted share.

In addition, we had G&A expenses for additional VAT taxes in Brazil of $2.7 million and a fire in our Malaysia warehouse which resulted in a pre-tax loss of $900,000.

These factors also reduced diluted earns per share by $0.02.

In addition, our annual effective tax rate for the second quarter was 12.7% and 18.1% for the first six months.

The annual effective tax rate is significantly lower than our previous guidance primarily due to reduced projected domestic earnings combined with increased projected earnings from our China operations which has a lower tax rate than our US effective tax rate.

Net sales for the six month period ending June 30th, 2016 increased 18.4% to $1.86 billion compared to $1.57 billion in the prior year period.

Gross profit was $848.4 million or 45.7% compared to $707.1 million or 45.1% in the prior-year period.

Selling expenses were $129.8 million or 7% of sales compared to $114 million or 7.3% from last year.

General and administrative expenses were $485.6 million or 26.2% compared to $398.2 or 25.4% last year.

Earnings from operations for the six months of 2016 were $238.9 million versus $200.5 million for the same period last year.

For the six months net income increased by 26.4% to $171.7 million, compared to net income of $135.9 million in the prior-year period.

Diluted earnings-per-share were $1.11 on approximately 154.9 million average shares outstanding compared to diluted earnings-per-share of $0.88 on approximately 153.8 million shares last year.

And now, turning tour balance sheet.

At June 30, 2016 we had $628.8 million in cash or $4.06 per diluted share.

Trade accounts receivable at quarter end were $468.6 million and our DSO's at June 30, 2016 were 40 days versus 41 days at June 30, 2015.

Total inventory including merchandise in-transit at June 30, 2016 was $590.7 million representing a decrease of $29.5 million or 4.8% from December 31, 2015.

On a year over year basis inventories were up 25.5%, or $120.1 million; in line with our growth and higher Company-owned store count.

Given the strength of our global business brands and strong sell-throughs we are comfortable with our current inventory levels.

Long-term debt at June 30, 2016 was $68.1 million compared to $68.9 million at December 31, 2015.

The slight decrease was due to payments in our domestic distribution center.

During the second quarter of 2016 we made the final principal payment of $11.6 million on our domestic distribution center equipment note.

Shareholders' equity at June 30, 2016 was $1.6 billion versus $1.4 billion at December 31, 2015.

Book value, or shareholders' equity per share stood at approximately $10.27 as of June 30, 2016.

Working capital as of June 30, 2016 was $1.16 billion versus $971.2 million at December 31, 2015.

Capital expenditures for the second quarter were approximately $22.3 million of which $11.2 million was primarily related to 23 new Company-owned domestic and international store openings and several store remodels, $2.5 million for the equipment upgrades and automation of the final phase of our European distribution center, and $3.5 million for additional office space needed near our corporate headquarters.

We expect our capital expenditures for the remainder of 2016 to be approximately $25 million to $30 million, which includes an additional 30 to 35 retail stores opening and the completion of our European distribution center automation system later this year.

In summary, we achieved a new second quarter net sales record despite a shift in shipments from the second quarter to the first quarter and a difficult comparison against previous record second quarter 2015.

The growth in the second quarter is primarily the result of increases in our international subsidiary and joint venture business as well as from our Company-owned retail business.

As mentioned, our domestic business was down single digits in the quarter and up low single digits for the first six months of 2016.

As we further build our brand globally we continue to open retail stores in key locations as do our partners around the world.

In the Quarter 143 SKECHERS stores opened bringing our total store count to 1,548 of which 1,144 are outside the United States.

We are continuing to expand our retail base and expect to have more than 1,600 by year-ends 2016.

Our goal is to continue to develop innovative footwear and remain top of mind and drive purchase intent globally through a 360-degree approach to marketing covering in-store, digital, television, print, outside door, social media and live events.

Looking ahead we are excited to again for Meb to again run in the marathon at the Olympics and for Matt Kuchar to compete for the first time.

And our many other international SKECHERS brand ambassadors competing for their country next month at the games in Rio.

We have already begun supporting the many new kid styles we have introduced for back-to-school with television and in store campaigns, and we will also be supporting our men's and women's styles with numerous new commercials and accompanying campaigns.

With our biggest shipping month on record in June of 2016 for our North American distribution center, which primarily serves the United States and Canada, and a strong start to July, we believe the third quarter will be a new record for the period.

Though we remain cautious about the domestic market with political uncertainty and a surplus of promotionally priced footwear we are confident we will remain top of mind and a "go to" brand.

Additionally, we believe our first and 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 believe our third quarter sales 2016 will be in the range of $950 million to $975 million.

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.

At this time we will be conducting a question-and-answer session.

(Operator Instructions).

Our first question comes from Corinna Van Der Ghinst, with Citi.

Please, state your question.

Great.

Thank you.

Hi David.

Hi.

First, I was just hoping to clarify a couple of things from your comments on the US retail environment.

Can you give us more color on the closing of account doors that you talked about?

And also, just you mentioned a couple times that there was a surplus of product.

Was that in SKECHERS product or other brands, and kind of what categories are you seeing that in the marketplace?

Well, I think it's pretty wide known.

TSA closed, (inaudible) closed, (inaudible) went through a bankruptcy that had to clean out inventory.

(inaudible) was a nice sized customer of ours we did business at TSA.

I think all those closures created excess inventory in the marketplace.

We see a lot of sales priced product from big brands that are very rarely on sale that impacts consumer shopping habits and trends.

The excess inventory in the marketplace was not ours, which is why you don't see as significant discount on our product as it sells.

So I think it's a matter of both traffic and the fact that there's excess inventory at lower prices now.

Okay.

So just to clarify those are basically the same doors that you had talked about previously?

And then I think you said last quarter that backlogs might start to accelerate through the year as you started to incorporate orders for the behalf of the year.

I'm not sure if I missed this but with the backlogs down low single digits can you walk us through what you're expectations are for top-line growth for US wholesale and international wholesales for the behalf of the year?

Yes.

I don't think so it's changed from our last call.

I think most of this is a timing issue.

I think it's the way orders are placed as well.

When we look at our backlog, just as we ship very big for June, they're just not out as far.

Our backlogs are quite nice and for July and August and September of course is an easier comparison for us but that will depend on how back-to-school goes.

So we still feel that will be in the low to mid-single-digits growth for domestic wholesale as we get through to the back half of the year.

And international wholesale?

That will continue to grow.

I mean, that could continue to grow in the 30%, 40% range.

A lot of that will depends on currency.

You know, at this point we hate to keep going back to currency as it exists and things change eventually, but the differential in the top line because the currency changes in those countries we have significant volume was about $15 million from constant currency in 2015.

So if you weren't aware of that, currency was changing so significantly that's a $15 million hit to the top-line.

Right.

Exactly.

Okay.

And then the updated guidance, did you change your view on the China revenues at all for this year?

No.

They're pretty consistent with what we said before.

I mean we're still in the same range.

Okay.

Sorry.

Did you say how much July month to-date sales are trending?

Both our overall shipments and our comp store sales are higher than we have in our model for those numbers, but it's very early.

The real big piece starts in the next couple weeks as we get into back-to-school so we're off to a good start but still too early to tell that anything has changed dramatically.

Okay.

Thank you.

I'll jump back in the queue.

Our next question comes from Jeff Van Sinderen, with B. Riley and Company.

Please, state your question.

Yes.

Good afternoon.

David, maybe you could just give is a little bit more on kind of the international picture?

You now, obviously there's Brexit looming in the back drop and no one really knows kind of how that's going to play out, but maybe you could just give us kind of refresh our memory on some of the international segments in terms of percentage of your international wholesale business, and maybe speak to the UK concentration and some of the other EU countries?

And then, also, is there anything you have seen in any of those countries of late since the Brexit announcement in terms of a change in business and maybe touch on what you expect there in UK and EU for that region in the second half?

Yes.

I don't know that I'm any smarter than anybody else keeps talking about it.

It's just I was there for Brexit.

It seemed it would have been a bigger deal than it has shown so far.

I think the biggest impact we had was the currency in the UK.

I mean, it's a significant change in a very big country.

You know, UK in rounds numbers, don't write them down too specifically, our backlogs in the UK are up 25% in local currency and up, high single digits in US dollars.

So some of those changes are pronounced but our stores continue to do well.

Obviously it was a hit to the margins, but I think we can get that back over time.

And the stores continue to comp up even on the dollar basis even with that for Europe, for England.

In Europe we haven't seen a significant change.

It's very, it's a quiet time for us while June is the biggest months of the quarter and we shipped well to our expectations it's too early.

They really get going in August and September, but our anticipation and what we hear for sell-throughs gives us confidence that we continue there and continue to grow.

Certainly on a local currency basis.

And we'll continue to grow on a real dollar basis so our international business continues.

Our Southeast Asia business is doing well.

India has started to pick up nicely and while it's still small, they're getting close to getting to critical mass.

The stores do very well.

They're comping and their profitable and their wholesale business is picking up.

So we still feel very good about our international business just about everywhere.

Okay.

Good.

That's helpful.

And then just as a follow-up maybe if you can just touch on some of the other metrics that you are seeing in your own retail stores or Company-owned retail stores.

Just wondering what sort of the backdrop out there of some of the excess product, of some of the liquidations and so forth what kind of your gross margin or your merchandise margin picture look like in your own retail stores and domestic and if you had to be a little more promotional or if your kind of running I guess what you expect in terms of promotional cadence for back-to-school?

Our gross margins at retail haven't changed significantly year-over-year.

So there's no new sales posture we're trying to get sales by competing in price overall.

The only changes may be somewhat certainly less than a hundred basis points within each group and probably more has to with the change of us opening more outlets and super stores than it does with the actual gross margins on the footwear and the change of product.

So we are no different than anybody else.

April was a very difficult month at retail with the shift of Easter and everybody participated and that's why we had such a good first quarter.

We had very difficult comp store gains, but the strongest months of the quarter for us both in wholesale shipments and at retail was June, which is when new products start to hit.

So we're felt very good in fact that the new product pickup was significant and that's where we started to turn as a matter of fact so embedded in the guidance we have given we're anticipating a US comp store increase of somewhere between 4% and 5% for the quarter so any changes from that could certainly be a positive as we go through.

Okay.

That helps a lot.

Best of luck for the rest of the quarter.

Thanks.

Our next question comes from Jay Sole, of Morgan Stanley, Please, state your question.

Hi, David.

Good afternoon.

Hey, Jay.

I want to ask you about the G&A.

How did the G&A come in relative to your expectation?

Was that number higher or lower and what drove that?

It was pretty much to our expectation given the sales volumes because China increased so much in their manual it comes from there and because so many stores opened in the quarter we had in excess of 120 store openings.

That increases it.

The other piece comes from increased depreciation which is very hard to put in the operating line simply because we get more efficient and we will continue to leverage that as it goes, but when we put the stuff into service before the thing is even out and it tends to impact.

So it's depreciation, it's China, it's also some of the new territories.

We have gone into central Eastern Europe and into Panama which has most of South America for us and opened about 12 stores from.

So that all increases it.

So I think we're in pretty good shape as far as G&A is concerned it's growing where we would anticipate it growing.

The biggest leverage point we have is the US so when that flattens out some it's more difficult to leverage the balance of the world although we're getting there or getting better at it in a lot of places so I think it's where it's supposed to be.

Part of the selling expenses you go through the whole thing in the second quarter was just a shift because we're doing more international which is more second quarter specific rather than first and third which we used to do more of in the US it's just a timing issue there.

Okay.

Maybe just to shift to inventory.

Obviously there is a lot of inventory out there in retail.

How long do you think it takes for the inventory, the entire retail channel to get clean?

Well, it depends on how retail does in general, but I would certainly hope that it would be done before we get too far into back-to-school.

I'm not sure what was in the pipeline for all these guys that left that can't be replaced.

I think people were pretty uncertain as to what would happen to TSA and how many stores would actually close.

So I'm not sure what the inventory commitments were but I certainly hope by the end ever back-to-school at the latest we'll be in a clean environment.

Got it.

Maybe on tax rate how do you anticipate the tax rate develops over the rest of the year?

Will it go back to where it was, do you think it's going to be close to the rate that we're at in 2Q?

Well, it don't be the 2Q rate.

It will be the warning rate for 2Q which was about 18%.

In the Q you'll see it's between 17% and 22%, is what our capitalization is.

The big piece is that we got a very favorable tax ruling in China for one of the provides and obviously that's a big money maker.

So that differential and the US earning less than international has taken our tax rate from what we thought was going to be 23% plus to probably somewhere in the 20% plus range.

So we should keep down at least 300 basis points for the tax rate as we go through the third quarter.

Okay.

Got it.

Then maybe just one for me.

Just can you talk about Go Walk 3 and how that ended up, and what the outlook is for Go Walk 4, and if there's anything from the fashion perspective that maybe impacted the numbers one way or the other?

There may be some fashion shift out there so obviously some people doing better if you look at the weekly numbers than they have in the recent past.

Go Walk 3, we're transitioning into Go Walk 4 so it's basically at the end of its big run.

It slowed down a bit at the end.

I think part of that is the advent of Go Walk 4 and some of it was the pricing in the marketplace, but I think the transition now is going smoothly and we're getting very good results on the Go Walk 4 even given that promotional environment.

So, Go Walk 3 slowed down a bit at the end, but I think Go Walk 4 is now starting to take its place and we should see some increases as we go through the quarter.

Got it.

Thanks so much.

Our next question comes from Scott Krasic, of Buckingham Research.

Please, state your question.

Hi, David.

Thanks.

Hey, Scott.

Just some housekeeping.

What was the ASP in domestic wholesale?

It was down a couple cents from last year, I think.

A couple pennies.

So sort of like...

Yes.

Like a nickel or a dime.

Nothing significant.

It was more like changes in the product styles offered domestically.

Okay.

And the way they sold.

And then you gave a little bit of color, but just what was the sort of the monthly cadence in the retail comps?

Well, not to get into too much detail they were the weakest on an overall basis in April, May, probably an increase to what we think is our running rate in the mid singles for June.

Okay.

Okay.

And then for the backlog, so down low single that still doesn't include China.

By the way, is this the last quarter you're going to report that without China?

We're going it try.

I make no commitments until I actually see the numbers come through and we have validity to them, but I hope so.

Okay.

So that's good to know.

So the down low single digits, how does that split up between domestic and international?

Well, domestic is obviously down probably a little, probably in the low to mid singles.

I mean that's the biggest piece of our back log.

The reason that the world came down was mostly more of a currency issue than a local currency issue so that's part of it, but it's more in the US.

I think part of that is because we shift so well in June and people are not ordering out too far.

They're all waiting for back-to-school.

If you remember last year September was the weakest so while we had strong backlogs carrying into September, a lot of that product got moved into October/November as well and it slowed down the cadence then so people were buying to that level.

Should it pick up and we have an easy comp in September and back-to-school holds up very well we could show increases for September, but it's all a timing thing.

I think we're booked better obviously for this quarter than we are looking into the fourth quarter.

So...

Okay.

Sorry.

No.

Go ahead.

So I'm just trying to understand international.

So ex-China the international backlog would also be negative?

No, no.

It's positive.

Oh, the international backlog is positive.

Positive.

It should be more positive in the constant currency.

Constant currency.

Yes.

Yes.

Okay.

So then if I just plug-in the low to mid single digit growth in domestic wholesale you mentioned 30% to 40% growth in international and even if you just keep comps flat, you know, for retail just for the square footage you're still getting over a billion dollars in sales and you're guiding to only 950 or something like that.

Well, I think we have a different base.

When I worked out numbers I come write in the range of 950 to 975 given comp store sales where they would be at the 4% and international as well as when you count store openings and comp store sales so if you want we can go through them offline.

I will give you the differential where your numbers are from mine, but I hope you're right.

Okay.

That's fine.

And then so just to help me understand what's happening in domestic so you shipped back-to-school but just you shipped less because they want to see how it actually plays out than you normally do?

I don't know that we shipped less.

There's less committed for the back half, September, October, November, than they were this time last year when we went into a very strong season and then had a big slowdown.

Because everybody looks at last year to see what it was September as we announced on the third quarter call last year was the hold-up in the quarter.

So should we just sort of be doing our checks figuring out what the sell-throughs are?

If the sell-throughs are better than that you expect to ship more?

Absolutely.

That's always true for us.

Okay.

And just sort of international by region you know maybe help us understand Western Europe, the big markets.

How do you you expect those to grow in the back half and then Latin America as well?

Yes.

I still there I they're in the low to mid double digits.

Latin America, obviously, grows from almost nothing so that's almost incalculable.

It will be, it could add as much as, I don't know, $10 million, $15 million depending on what your base is.

And of course our joint ventures which include India and China and Hong Kong we still think can grow in the mid-to-high double-digits.

Right.

Okay.

So then just to follow up on that question I didn't really understand your answer, I think for Jay, about inventory being clean.

So the 25%, 26% increase in inventory, so your saying that it will be clean by the time you report next quarter?

It will be in line with sales growth or what was the comment there?

I think you got two of net mixed.

I think our inventories are pretty much in line now.

The growth is where you would expect them to be, new distributors that turned into subsidiaries and growing into the joint ventures and the retail.

I think the question was when will the channel be cleaned from off-price and we said to that we're hoping it's by the end of back-to-school.

Okay.

I got you.

All right.

David.

Thanks much.

Good luck.

Thanks.

Our next question comes from John Kernan, of Cowen and Company.

Please, state your question.

Hi.

Good afternoon.

Hi.

Can you help us understand how we should think about SG&A dollar growth in the back half?

It was pretty consistent in Q1 and Q2 on a year-over-year basis at around 20%.

As the to line moderates a little bit how do we think about modeling SG&A dollar growth or SG&A rates in the back half?

That would depend on how many stores open during the period and where we show our growth in turn and what we need to support it, but I think it will be pretty consistent with first and second quarter.

Okay.

That's helpful.

And then just, obviously there's some fairly significant differences in gross margin between international wholesale, retail and domestic wholesale.

How do some of those mix shifts affect gross margin in the back half and how do you think we should model that or can you give us an idea as what you're thinking?

I think so long as the mix stays consistent, which I think it does, China has even with the advent of franchises we spoke last quarter has a higher gross margin than domestic wholesale.

Our distributors are obviously becoming a slower growing piece simply because we have taken a number of them in-house and they are our lowest gross margin.

So all the benefits we had outside of currency, because obviously the UK has now come back significantly as far as margins are concerned, but the Euro is fairly stable.

South America has had some currency issues.

So, depending on the currency issues if they're not significant, I would tell you that we still have the bias to the upside as we did in the first and second quarter.

Okay.

And then just (inaudible) have you noticed any changes in the competitive environment?

Obviously, the promotional environment is higher for across-the-board in athletic footwear, but some of our checks we see a lot of Under Armor product creeping into the $80 price point range or some other brands that have I think A-Six and some of the other running brands have introduced some price points that are getting closer and closer to kind of your sweet spots.

Is there any change in the competitive environment that you are seeing out there that might be putting pressure on the domestic backlog?

I still think we're performing quite well but of course we're watching all of that and seeing how they fit into the price points.

And we continue to develop as well.

We still feel our core competency is developing.

If price becomes an issue, I don't know right now we're selling pretty well.

I think our margins are better than most of those for our customers so right now we're in a status quo, but we certainly do watch all of that to see what will take our space.

Haven't heard that anything is outrageously significant yet but we're certainly watching them and certainly continue to develop to be more competitive even within those price points.

Okay.

And my final question is, your cash balance is up pretty significant year-over-year with $629 million.

Where you're guiding CapEx and operating income for the rest of the year you should generate at least $100 million in free cash flow.

Any plans on what you might do with that cash as it starts to build?

We haven't changed anything.

We really haven't discussed this significantly since the last time we spoke at the last conference call.

We're still growth is the first thing.

We now know we have to expand, we need some more office spaces here in California and we're going to start looking at distribution centers and automation in China and some more space in India.

So right now we're still focused on supporting our growth.

Okay.

So CapEx roughly 2% of sales for the year, which is I think a little bit lighter than some of your peers.

Do you think that has to come higher in 2017 and beyond?

Depending our on what the top-line is.

It depends how much we have to invest in China which is growing very quickly and we have to get there and automate and be able to process for this build-up of franchisees.

So we're into the early stages.

We're going to need a new one in South America as well.

So we're just at the beginning stages.

We'll have more, probably more information on that as we get closer to year-end.

Okay.

Thanks.

Hope to see you in Vegas.

We'll be there.

Our next question is Corinna Freedman, with BB&T.

Please, state your question.

Hi there.

Good evening, David.

Hi.

Hi.

I wonder if you could talk a little bit about that 959, 75 forecast.

Does that include any replenishment orders?

I know last year there was a bit of a shift from third quarter to second quarter last year.

So, is this a clean number, or is there a turn baked in there that might not materialize?

No.

This is a very basic number.

It's the same calculation we used to get to 850 to 875, or 875 to 900 in the second quarter.

We're not assuming any real build-up nor any big slowdown, and like I said about 4% to 5% in comp store sales in the United States and all our announcements for store openings not moving them out to too far or getting them open too early.

Okay.

Anything you can tell us about the comps from last year?

I think I recall that it was pretty strong through September and then September was a bit of a tough month.

So just wondering if you could confirm that.

Absolutely.

I think September last year was the first non double digital comp store growth, or the second one for the year, and October was our lowest comp, or our second lowest comp store increase for the year.

So September, October were tough last year.

Okay.

Great.

Thanks.

Best of luck.

Thanks.

Our next question comes from Laurent Vasilescu, with Maquarie.

Please, state your question.

Hi, David.

Thank you for taking my questions.

I think you mentioned 30% growth for international wholesale.

Should we anticipate similar cadence between 3Q and 4Q?

It's hard to tell, Matt.

Q4 is usually much smaller for our subsidiary and joint venture base.

It's a bigger quarter for distributors to get ready for next year.

But as of right now I would tell you that would probably be my forecast.

Okay.

And then in prior quarters I think you provided some color on EPS expectations relative to the prior year.

Any sense for 3Q?

What did you say?

FX?

For EPS.

Oh, EPS.

I think EPS will be somewhat higher than last year.

We need to flow it out and put your own models because it could vary significantly, but like last year we said we would be pretty equivalent to last year's second quarter which we were taking out the two one time charges.

And I think next year we'll be 5% to 10% higher in third quarter EPS give or take, depending on what part of the range we come because we do leverage quite well within that range.

Okay.

Great.

And then can you take about EBIT margins for the year?

I think in the past like two quarters ago you talked about 13% range.

Is that something we should think about still for the year?

That will depend on second quarter.

I think it's still within, it's still possible, but I would be more in the 12 to 13 range, or 11.5 to 13 range now depending on what happens in back-to-school.

Okay.

And then, any expectation, like how should we think about the gross margins for the third quarter?

Like I said, I think the bias is to the upside on a year-over-year basis given the fact that international and certainly China and our own retail are growing at a faster pace than domestic, and our distributor base.

So the bias barring any significant changes in mix or currency should be to the upside.

Okay.

And then lastly, I think for domestic wholesale I think you mentioned the kids was up and then you gave a little bit of color on women's and men's.

Could you give us the actual percentage breakdown for men's and women's?

You mean for the quarter?

We don't usually give that information, but men's was down the most for us in the quarter on a percentage basis.

Certainly significantly more than kids or women's.

Part of that is the very basic business as well.

Part of it was in the very basic brown and black business.

That's an annuity business that seemed to get hurt a little more than the rest of the athletic business in the second quarter.

Okay.

And if I could squeeze one more in.

I forgot if you actually provided this number, but how did China grow in this quarter?

Well, funny you are the first guy that asked, but I will tell you that they grew in the mid-to-high single, double-digits.

Sorry mid-to-high double-digits.

Okay.

And so, again, I think Corinna asked a question, but in the prepared remarks it says that we should anticipate more earnings from China so the range that you originally provided at the high end of the range is still should we still think about something around $400 million?

Oh, in top-line?

Yes.

Yes.

Yes.

I think we're still in the 375 to 400.

Did we hear that?

Yes.

375 to 400?

Yes.

Okay.

Thanks again.

Our next question comes from Jim Chartier, with Monness, Crespi and Hardt.

Please, state your question.

Thanks for taking my questions.

I just wanted to follow up on the EPS commentary.

Last year your reported number was $0.43.

Are you basing the 5% to 10% growth off that number?

Yes.

So I think you called out last year that $0.06 of legal expenses recur this year so that alone is worth 15% growth so just curious what's offsetting that?

It's just since we level out we don't leverage quite as much.

We have a lot of start-up businesses in South America and central Eastern Europe and currency issues that have impacted our gross margins in Europe.

Okay.

And then on the Latin American shouldn't you be anniversary-ing, kind of, the launch of those businesses in third quarter?

Yes.

But they start off fairly slow so we'll still have a positive to the top-line on the conversion.

Okay.

And I guess on ad spend, you know, what's the impact of the Olympic spend and is that going to be a meaningful investment for you?

No.

It's not significant.

We don't invest that significant amount.

Certainly around, it wouldn't change what we're doing currently.

And then you had mentioned I think the last couple quarters you had joint venture given that you have the new franchise business should be stronger in first and third quarter this year.

Is that still the case that the third quarter should be relatively strong joint venture shipment for you?

Yes.

I mean they have been strong all year.

They're still up pretty significantly both in the first and second quarter, but the third quarter we anticipate would be a stronger quarter for them.

Okay.

And then just, again, on expenses sounds like your domestic wholesale expectations is lower for the year than it was before.

Do you try and manage your expenses down, any reduced investment in advertising spend based on a lower sales forecast?

We have already done that to the extent we can.

We have moved a lot of that advertising offshore so it does the international.

So while the US is relatively, the US is probably down year-over-year as far as advertising is concerned.

We have pumped up in those places where we think we need it and starting up in Central Eastern Europe and South America and have increased our advertising cadence given all our franchisees in China.

Okay.

Great.

Thanks, and best of luck.

Thanks.

There are no further questions at this time.

I would like to turn the call back over to SKECHERS USA for closing remarks.

Thank you again for joining us on today's call.

We would just like to note that today's call may have contained forward-looking statements.

As a result of various risk factors, actual results could differ materially from those projected in such statements.

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

Again, thank you and have a great day.

This concludes today's conference.

Thank you for your participation.

You may disconnect your lines at this time.