Skechers USA Inc (SKX) 2016 Q3 法說會逐字稿

Greetings and welcome to the SKECHERS third quarter 2016 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to the SKECHERS team to 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 achieves expressed or implied by such forward-looking statements will occur. Users of forward-looking statements are encouraged to review the Company's filings with the US Securities and Exchange Commission including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on form 8-K and all reports filed with the SEC as required by Federal Securities Laws for a description of other significant risk factors that may affect the Company's business, results of operations and financial conditions.

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

Good afternoon and thank you for joining us today to review SKECHERS' third quarter 2016 financial results. The third quarter net sales increased 10.1% to $942.4 million and represented a new third quarter sales record which led to a new net sales record of $2.8 billion for the first nine months. The quarterly sales increase was primarily the result of 18.3% growth in our international wholesale business which now comprises 40.1% of our total net sales, or 47.9% including international retail.

Additionally, the negative currency translation impact on our international wholesale and retail sales for the quarter was $15.9 million. We believe that our international business represents the greatest growth opportunity with many countries continuing to show strong sales increases in the quarter, including China at over 50%.

To further grow our business in several markets we have transitioned several international distributors to our subsidiary or joint venture model including Israel in the third quarter to a joint venture and we are in the final stages of South Korea moving to a joint venture as well.

Also adding to our record question was to global retail business which improved 16% in net sales over the prior year period with positive retail comps of 3.2%. This was offset by a decline of 3.4% in our domestic wholesale business, though our number of pairs shipped increased by 6/10ths of 1% compared to the third quarter of 2015.

The decline in dollars was due to a $0.97, or 4% decrease in average selling price per pair. We continue to believe the retail environment in the United States remains challenging which has resulted in several retailers either closing doors or ceasing operations, and widespread promotions on normally full priced brand.

Third quarter highlights include record third quarter revenues, gross margin of 45.6%, diluted earnings per share of $0.42, a strong balance sheet with $665.3 million in cash or cash equivalents, or approximately $4.29 per diluted share. An 18.3% sales increase in our international wholesale business including a 35.4% increase in our subsidiary and joint venture business.

A 16% sales increase in our Company owned retail, which included 61 net new stores open compared to the prior year period of which 11 opened in the third quarter. Growing our Company in third party owned worldwide SKECHERS store base to 1,716 locations with the opening of 137 new stores in the quarter.

We should note that this is a 10.1% third quarter sales growth came on top of challenging comparisons with strong increases in the third quarter of 2015 which included 11.8% in our domestic wholesale business, 52.9% in our international wholesale business and 20.9% in our Company owned global retail business for a combined 27% increase.

Additionally, the third quarter 2016 growth came during a challenging retail environment.

Now turning to our business in detail. As noted, our domestic wholesale net sales decreased 3.4% in the third quarter on a 6/10ths of a percent increase in pairs shipped which was offset by a $0.97, or 4% decline in average price per pair as compared to the third quarter of 2015.

Even with the decrease in domestic wholesale, we saw growth in our women's on the go, work, sandal lines and our largest division, women's sport. Additionally, our Go Walk core business introduced in the second quarter has done well but we have seen a shift in the last two quarters towards the more fashionable On The Go collection which we believe will continue in the fourth quarter with our lined booths on the walk platform.

For the back to school selling season, we ran numerous marking campaigns supporting our brand including campaigns with Demi Lovato, Brook Burke-Charvet, Sugar Ray Leonard, Howie Long, Kelly Brook and Meghan Trainor in addition to multiple animated and live action commercials for kids. We continue to support our SKECHERS performance division with a Go Walk collection commercial and both MEB and Matt Kuchar competed in the Olympics in SKECHERS performance footwear with Matt receiving a bronze medal in men's golf. Our golf ambassador line up continues to grow, most recently with the addition of Brooke Henderson who is currently the No. 3 ranked LPGA golfer.

While our core product continues to resonate with consumers, we are seeing a shift in certain trends. Our speed to market lets us react quickly to these new trends and we are able to move in virtually any direction due to our diverse platform and flexible design teams. We are excited to showcase these new styles during our interim meetings this month with our accounts and believe that our partners ordering closer to season will allow us to deliver the freshest product to retailers.

Presently our focus is maintaining our position on the floor with the growth we received earlier this year and last, managing our inventory flow into accounts and we remain poised to move quickly as consumers begin to shop for what they want as well as what they need. International continues to achieve the highest percentage in dollar gains with our combined subsidiary and joint venture business surpassing our domestic wholesale business in dollars.

Total international sales increased by 18.3%, or $58.4 million in the third quarter, and 30% and $254.5 million for the first nine months of 2016. The highest dollar and percentage gains came from our subsidiary and our joint venture businesses with an increase of $77.3 million, or 35% over the third quarter 2015, and 45.3% and $265.4 million for the first nine months of 2016.

These gains were offset by an 18.6% decrease in our distributor business due in part to the transitioning our Latin American and central eastern European distributors to subsidiaries in the third quarter of 2015. Driving the sales was a mix of our men's and women's athletic lifestyle foot wears and our walk collection. Additionally, our heritage SKECHERS Delight footwear has become a big trend across Asia and we are seeing this resurgence spread across the world. Our speed to market and design processes aided in our global growth as we are able to capitalize on trends and deliver both global and regional collections that represent the SKECHERS DNA.

Further, our vast marketing support from global campaigns to regional ones has resulted in impactful window and in store displays, translated commercials, and digital and social media campaigns that drive purchase intent and build brand awareness with key audiences. Further detail in our growth and international in the third quarter. All of our subsidiaries showed increases in the quarter with the highest percentage gain's coming from Chile, Fentilux, Japan and Spain and the highest dollar gains also coming from Chile and Spain.

Additionally, the United Kingdom shipped more than 1.2 million pairs, a 20% increase but grew only 11% due to the weaker pound. The price increases we implemented earlier this year to offset the currency fluctuations have by and large been accepted by customers and consumers. And we are continuing to adjust prices in markets such as the United Kingdom although we have still been negatively affected by currency. Additionally, both our new subsidiaries, central eastern Europe and Latin America are positively impacting our sales.

Also of note, the low double-digit growth that Canada achieved in the third quarter resulted in the country becoming our second largest subsidiary for the period behind the United Kingdom and just ahead of Germany.

Our joint ventures grew by 51.2% for the quarter led by more than 50% gains in China and triple-digit gains in India. China shipped more than 2.8 million pairs in the quarter and opened 82 free-standing SKECHERS retail stores primarily through franchisee's bringing their total SKECHERS store count to 341.

We now have approximately 1860 points of sale in China and an extremely strong e-commerce business with high double-digit growth. We believe there's still tremendous opportunity across the country to further build the brand. In India where our business is in the development stage, five SKECHERS stores were opened by franchisee's in the quarter bringing the total store count to 49.

Further in the third quarter, Israel transitioned from a distributor to a joint venture and began shipments in the period. Six stores transitioned in the transaction. Our international distributor net sales decreased by 18.6% in the third quarter and 4.6% for the first nine months. The decline is the result of several factors. The conversion of Latin America and central eastern Europe from distributors to subsidiaries and the transition of Israel to a joint venture in the third quarter.

A difficult comparison with 72.2% growth in the third quarter of 2015. The current transition of South Korea to a joint venture from a distributor. Political unrest in several markets primarily in the Middle East, and timing shifts within several distributors. The quarterly growth within our international distributor business was most notably from our partners in Indonesia, Taiwan, Russia and South Africa.

Along with their 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 product.

At quarter end there were 1,160 SKECHERS branded stores owned and operated by our joint ventures, franchisee's and distributors outside the United States. Of these, 503 are distributor owned or franchise SKECHERS retail stories and 540 SKECHERS stores are in our joint venture countries including those run by franchisee's in the region.

Additionally, there are 117 franchise stores in countries where we have subsidiaries. In the third quarter 137 third party owned stores opened. These were 82 in China, five in both India and Saudi Arabia, four in Germany, Taiwan, the UAE and Vietnam, three in both Hong Kong and Turkey, two each in Australia, Japan, South Korea, Singapore, Qatar and the Philippines and one each in Croatia, Denmark, Hungary, Italy, Malaysia, Mexico, Morocco, New Zealand, Sri Lanka, Tyland and Zimbabwe.

Ten stores were closed in the quarter. 11 third party owned SKECHERS stores have opened in the fourth quarter to date. We expect another 130 to 140 third party owned SKECHERS branded stores to open in the remainder of 2016. International wholesale now represents our largest business channel at 40.1% of our total sales in the third quarter or 39.4% for the first nine months of the year. Combined with international Company owned retail stores, it represents 47.9% and 45.9% respectively.

Worldwide sales in our Company owned retail stores increased by 16% for the quarter and 17.7% for the first nine months. In the quarter, domestic retail sales increased by 8.1% and international retail sales by 45.3%. This included positive comp store sales of 8/10ths of 1% domestically and 12.7% in our international stores for a total comp store sales increase of 3.2%.

At the end of the quarter, we had 556 Company owned SKECHERS retail stores of which 150 were outside the United States. In the third quarter, we opened 11 stores including a store in the World Trade Center shopping complex and three in both the UK and Canada and two in Chile. We closed one domestic store in the quarter. Two Company owned stores have opened to date in the fourth quarter. Another in Canada, and our second in Romania.

Adding to the growth in the quarter is our domestic e-commerce business which grew 13%. Also in the quarter, we launched a SKECHERS.com app which includes one touch pay and shoppable user generated content. We also have Company run e-commerce sites in Chile, Germany and the UK and plan to launch sites in Spain and Canada shortly. With a strategy of continuing to open retail stores in key global markets, to further build the brand and meet consumer demand, we expect to open approximately 15 to 20 more stores for the remainder of this year.

Now, turning to our third quarter numbers in more detail. As I mentioned earlier, we achieved another net sales record of $942.4 million verse $856.2 million in the prior year, an increase of 10.1%. Gross profit was $430 million compared to $387 million in the prior year period. Gross margin increased to 45.6% compared to 45.2% in the prior year period.

The higher gross margin during the quarter was primarily due to slightly higher domestic wholesale margins offset by slightly lower global retail margins as well as the product mix. Selling expenses increased $4.1 million to $67.8 million, or 7.2% of sales compared to $63.7 million, or 7.4% of sales in the prior year quarter. As a percentage of net sales, advertising expenses were 5.6% and 5.5% for the third quarter of 2016 and 2015 respectively.

General and administrative expenses were $261.8 million, or 27.8% of sales compared to $230 million, or 26.9% of sales in the prior quarter. The $31.8 million quarter over quarter increase was primarily due to our focus on long term global growth including $16.3 million associated with the additional 61 domestic and international retail stores, and $20.2 million to support our international growth, of which $9.8 million was due to increased costs in China, $2.6 million in Latin America and $1.1 million in Japan with new offices and distribution center.

The increased G&A expenses were offset by reduced domestic wholesale expenses of $4.7 million. Earnings from operations increased 8.1% in the third quarter to $103.4 million or 11% of revenues compared to $95.6 million or 11.2% of revenues in the third quarter of 2015. Net income was $65.1 million compared to $66.6 million in the prior year period. Net income per diluted share in the third quarter was $0.42 on approximately $155.2 million average shares outstanding compared to $0.43 on approximately 154.5 million average shares outstanding in the prior year period.

The diluted earnings per share were negatively impacted by foreign currency translation and exchange losses of approximately $8.1 million, or $0.04 per diluted share. Our quarterly tax rate for the third quarter was 24.2%. Higher than our previously projected annual effective tax rate between 17% and 22%. Net sales for the nine-month period increased 15.4% to $2.8 billion compared to $2.42 billion in the prior year period.

Gross profit was $1.28 billion or 45.5% compared to $1.09 billion or 45.1% in the prior year period. Selling expenses were $197.6 million or 7.1% of sales compared to $177.7 million or 7.3% from last year. General and administrative expenses were $747.4 million or 26.7% compared to $628.2 million or 25.9% last year.

Earnings from operations for the nine-month period were $342.3 million versus $296.1 million for the same period last year. For the nine-month period, net income increased 17% to $236.8 million compared to net income of $202.5 million in the prior year period.

Diluted earnings per share were $1.53 on approximately $155 million average shares outstanding compared to diluted earnings per share of $1.31 on approximately 154.1 million shares last year. And now turning to our balance sheet. At September 30, 2016 we had $665.3 million in cash and cash equivalents, or $4.29 per diluted share. Trade accounts receivable at quarter end were $445.3 million and our DSOs were 38 days at September 30, 2016 and 2015.

At September 30, 2016, total inventory including merchandise in transit was $523.3 million, an increase of $23.1 million, or 4.6% compared to September 30, 2015. This increase is in line with our growth and our higher Company owned store count. Given the strength of our global business, brand and sell throughs we are comfortable with our current inventory level. Long-term debt was $67.6 million compared to $70.1 million at September 30, 2015. The decrease was due to our patients on our domestic distribution center.

Shareholders equity was $1.67 billion versus $1.33 billion at September 30, 2015. Book value, or shareholders equity per share, stood at approximately $10.81 as of September 30, 2015. Working capital was $1.23 billion versus $994.6 million on September 30, 2015.

Capital expenditures for the third quarter were approximately $25.8 million of which $12.9 million was primarily related to 11 new Company owned domestic and international store openings and several store remodels and $5.5 million for equipment upgrades and automation of our European distribution center.

We expect our capital expenditures for the remainder of 2016 to be approximately $5 to $10 million which includes an additional 15 to 20 retail store openings and the completion of our European distribution automation system later this year. In summary, we believe the domestic market is continuing to adjust to the changing retail landscape and retailers are managing inventory with more caution. Ordering much closer to season.

We continue to focus on delivering relevant product to the market and believe that we are developing product that will be embraced by consumers. In regards to our international business, the fourth quarter is typically the strongest for our distributors while the first quarter is stronger for our international joint ventures and subsidiaries. Given the transition of several distributors to either a joint venture or subsidiary model and the timing and changes in our international business structure, it's best to look at these growth drivers over two to three-year period.

For retail we are selectively opening stores in the US and building the brand around the world with stores and markets we feel hold great opportunity. With over 1,710 retail stores worldwide and planned 1,850 to 1,875 by yearend, we believe they are powerful brand building tools as they showcase our broad collection to consumers.

Additionally, we are focusing on or core strength, developing product with speed and scale like no other footwear company with our creative, innovative and efficient design and development teams we are able to develop product year-round and easily pivot to new trends in the United States and abroad.

As a global footwear company that can move in as many product directions as we can, and who has also had extensive operations and infrastructure established worldwide, we are confident in our ability to continue to grow profitably. With our key North American accounts visiting our corporate offices this month and ordering closer to season and our global network coming in November, we're looking forward to the first quarter 2017 and beyond as we deliver these fresh new styles.

For our near-term outlet, we expect sales in the range of $710 million to $735 million for the fourth quarter. This assumes single-digit increases in comps in our international wholesale business and total retail business and single-digit decreases in our domestic wholesale business. And now, I would like to turn the call over to the Operator to begin the question and answer period of the conference call.

Thank you. Ladies and gentlemen at this time we will be conducting a question-and-answer session. (Operator Instructions). And our first question comes from the line of Mr. Jeff Van Sinderen, from B. Riley and Co.

Good afternoon, David. Maybe you could touch on the backlog picture? Just wondering what that looks like domestic versus some of the international areas, any color you can give there would be helpful.

Sure. As we anticipated, we've turned slightly positive in overall backlog. We're slightly positive in the US and a little more positive in international. And it brings us to a very low single-digit increase for backlog. I think it's important to note here that with the guidance we've given, the potential certainly is bigger for Q1 than Q4 as we are booking much stronger going into the Q1 period which is why we have a little smaller growth this year in the fourth quarter. We just came off the third quarter was the largest incoming order quarter we've ever had as a Company.

Okay. And that kind of dovetails into my next question which is maybe you can just talk a little more about the product or the product content or style shift that the you're seeing out there? I think you mentioned in your prepared comments. And then maybe just touch on what type of product, what type of new product is resonating with your accounts and driving, as you said, more potential for Q1 backlog being up and so forth?

You know, we always say on these calls, it's very difficult for us to go through product categories and giving you an idea of what really is hot and what is resonating without being able to show you because we sell this product in 19 different rooms that have different categories and each one of them have something new. Some of them are new looks, like our SKECHERS Street. Some of them are new introductions from performance, from our sport group, from our active group, from our men's USA group with new materials and things like that.

I think the best thing is for you either to come down to the showroom or come see us in FFANY when we have our meetings so that we can get people from each room or each category to show you what's new and what's resonating. I will tell you that we just started our pre lines. It's only the second or third day and we've gotten from the first few very good receptions for a lot of new things that are coming out. And they're within many different categories. There's a little bit everywhere and certainly with a very positive reception.

Okay. I'll let someone else jump in. Thanks.

Our next question comes from the name of Mr. Jay Sole, from Morgan Stanley

David, I just want to know if we can clarify the guidance for 4Q? It sounds like you said domestic wholesale down single digits, international wholesale up single digits. For the retail piece, are you talking about retail in total up in the single digit range? Or the retail same store sales piece is up? Thank you.

It says same store sales. To note same store sales in the low single digits like it is now. And maybe high single, low doubles in general for retail.

Got it. And then it sounds like your point on 4Q on the international wholesale piece, 4Q is the strongest for the distributor business but many of the distributors have converted to subsidiaries or JV's and those businesses are stronger in Q1 and their compares are tough. Can you give an idea how much would have shifted out of 4Q and into 1K just because of this transition from distributors into subsidiaries of JV?

Well, it's a two-fold question. They moved out significantly and I think Korea is part of that because obviously we're coming to the tail end of creating a joint venture which does not include the current operators of the brand in Korea but a takeover of their assets through a joint venture. So they've obviously slowed down their ordering and it's going to take us a quarter or two to get it all back up and running other than the fulfillment of the stores and franchise stores that are there. But we think that's a great marketplace and a great advertising piece for the rest of southeast Asia. So that is all moved.

I think the biggest piece of the distributors is they had a 96% increase last year and while holding on to most of that gain, there's been some difficulties in the two big ones or the three big ones, Korea being one which we already talked about. UAE which does have some political strife and has slowed down some of their growth in their territory. So between those, that's the reason we're going to have a slight decrease in the fourth quarter. Probably in I would say high single to low double digits.

Okay, got it. And then can you just talk about the tax in 3Q? It sounded like the difference between the guidance and the actual results was that, you know, you anticipated profits in certain regions. The result was different. But it seems like the US was a little slower from a sales standpoint than you expected relative to international, but the tax was higher which implies the prof was greater in the US. Is that just because it's more cost cutting in the US and that's why it is like that?

That's certainly is part of it and it was a surprise. You have to remember while gross margins and therefore some operating revenue certainly went up in the United States, even though the average price was down, our gross margins were slightly higher as a percentage. But the whole world is not equivalent as far as the tax structure is concerned. The tax structure has multiple, multiple pieces going from Europe to South America and to China and to southeast Asia and the mix can usually shift things around some. And I think it was the US making slightly more and international as a percentage because of the increased advertising and some of the overhead that we had to put in for growth, making growing a little slower at the operational line than we had anticipated.

So what happens is the swing is not quite as big as you see when you see the 24% category. What basically happened was we had calculated an 18% or forecast an 18% tax rate for the year when we finished Q2. The tax rate because of all of these shifts have now on an annual basis gone up to 20. Now 200 bases points is not outrageously significant however because of the earnings in the first two quarters to get the three quarters back to that 20% average that we're going to plan for the year took this quarter up to 24%. So when you look at this quarter's operation against last, we had exactly the opposite happen last year where we had a decrease in the quarterly tax rate because we had a decrease in our forecast for the entire year.

So that differential is obviously the biggest piece of the change in earnings and if you throw the $0.04 from currency and the differential in the anticipated tax revenue have more than the offset to the bottom line number

Understood. All right. Maybe if I could ask one more about SG&A? SG&A dollars are up, I think, $32 million in the quarter and that's the deceleration quarter, the quarter was up $42 million in terms of year-over-year dollars in Q2. Looking ahead, what kind of dollar growth do you expect in 4Q? (inaudible)

Obviously 4Q is a lower growth so we expect certainly less growth. We won't have to pump up in too many places so it will be a slower growth certainly to the G&A line. The S line we're still working on but I think there might be some leverage in that as well. So we are watching the expenses. But, you know, there will be a build-up in inventory as we anticipate Q1 will be a very positive start.

Now a couple things can happen. Because we are a booking so well going into the first quarter, some of that could come back into Q4 and surprise. Or, it could just sit in Q1 and I think that timing would be more normal on a going forward basis because the outrageous growth of 25% and 30% and 40% probably is behind us for a little while. We would be more like the Q1, Q2 shift. That's a more normalization of the way our business should roll out through the year

Got it. Thank you, David.

Our next question comes from the line of Scott Krasik, from Buckingham Research. Please, go ahead.

Hey, David, how you doing?

Scott. Pretty good.

Okay. So just to clarify for sure. The international backlog, did you put China into that or no?

We have China. China is up in the low double digits. And that takes it up to a higher single-digit worldwide backlog.

Okay. So the low single digits does not include China, it's high single-digit you do include China?

No, it's mid. It was low to mid-single digits. China on a stand-alone basis is up low double digits.

Okay. Sorry. Okay. So then can you help me understand what's happening or what the expectations are for 4Q subsidiary and JV sales growth because they're so very strong in 3Q and you're getting the benefit of some of these shifts of distributors. So maybe why the slow-down and what's the right run rate?

Well, the timing actually works as a negative when you shift from distributors to joint ventures. Because remember when distributors are getting ready for the spring season, they almost have to take deliveries at the end of December or certainly have it shift by the end of December to make their own spring so we invoice it right away. When they turned into joint ventures of subsidiary, we have to wait until the ultimate sale either to the consumer through our own retail or through wholesale channels to a third party seller.

So it works the opposite way for distributors. And I think the reason that we don't believe there's going to be as much growth is that the normalization, Europe is our biggest piece. China is coming on very strong. Their fourth quarter quarter businesses are by and large the smallest quarters of the year. So there's only so much up-room. Europe really does start to deliver end of January, February. Now there's always a possibility that they move forward depending on how good the macro situation is and that would include here in the States. Just not sure I would go out there and tell you that retail is that good. In a lot of places in the world people are looking to be move up significantly new product.

Now we are testing a lot of new product and there's a lot of new stuff going out and a lot of stuff that they've seen here so it may change the dynamic if it tests well. Because, you have to understand we are in a situation now where I do believe inventories are in line in retail and are being ultra-conservative and cautious. Which means, if retail starts to pick up or we get hot on some of these items do start to check well as we believe they can, it can move rather quickly. There's no real overhang of outside inventory right now.

Okay. And just to like, I don't know, keep people realistic, you said your backlog positive for 1Q. You have the shift which is going to help 1Q. Do you just want to give, you know, your earliest best guess, you know, sales sort of up a lot more than 4Q for sure, right? Could they be up double digits again in 1Q?

Certainly possible. You know, we're getting an early start and we have a lot of January deliveries both domestically and around the world which is early for us. We will be off to a good start. It will depend on retail in general and how the stuff performs as we get through holiday and into spring. But, certainly it's possible.

Okay. And then just one last one. Just help us understand with the ASPs down, I'm surprised you're able to have positive gross margins domestically. Is there anything that we're not considering? Because that's really strong performance.

Yes, it's just the shift. We shift more product and the taste has been to more price points, or open foot wear as the season moved through third quarter, and a lot more sandals. We sold product that had lower ASPs but not lower margins. We didn't close out anything. That's a good time for us to take note of the fact that a lot of people, you may be one of them, I don't remember, gave us a hard time about our 25% increase in inventory at the end of Q2 saying it was out-sized and given our growth it couldn't be correct number as we had said it was.

So now we're only up 4% year-over-year and we did not take any kind of margin compression to get to that inventory. That just means that it was a timing issue and we were building it for a very specific reason. And I think that continues. So we're in very strong shape. We don't have overhang of inventory. We are moving to new product. The product's getting good acceptance. It's the things we usually do well when tastes change, and I think you're going to see here a lot of excitement when you say us at FFANY from both our customers and international customers.

Okay, thanks. I'll let someone else in. Have a good one.

Your next question comes from the line of Corinna Van der Ghinst, from Citigroup. Please, go ahead.

Hi, thank you, David. I wanted to start with just your US. Why are you confident in the spring assortment that you have coming out? Is it all being driven by the retro look or is there anything else that's driving that? And, do you anticipate the US turning positive as we get into Q1 with the new assortment?

It's certainly possible and I do anticipate it but I'm an optimist any way. My confidence comes from talking to customers although we're at the very early stages. Some of the stuff that's testing at our own retail that we're just bringing in very early and the reactions of the first four or five customers that have been through over the last couple days and as the samples go out to our international crew and our retail crew around the world, their feedback. So there's a lot of very positive pieces from people that actually know more about style and sale-ability than I do from the initial stages.

Okay. Just in the US, can you talk a little bit about what changed in the US environment between your last call in July where you kind of said US would be flat to low single digits and the end of the quarter to drive this 3% number? Are you seeing some of that competitive discounting on other brands? Is that starting to subside as we get into Q4?

Yes. My impression is, and I don't really know for a fact because I don't have any data other than what you guys have, is that most of our customers are clean overall on their inventory. Certainly a lot cleaner than they were going through the third quarter. For us, we got the shelf space. It's just very difficult to sometimes tell which stuff will check faster and check through even at our own retail. So we had higher margins. We didn't compete on the price. It's just the lower price or the average lower price footwear or the mix of the footwear just turned a little negative from the positive point it's been. We'll certainly take it. You know, we have higher margins even though it's margin percentage, even though it's a lower ASP. It's only the mix.

Okay, that's helpful. And then I just wanted to follow up on a question that was asked earlier just to clarify on your international outlook. Just based on this conversion period, it sounds like you're also expecting Q1 international wholesale to also be in the single digits and then you could start to see a reacceleration after Q1?

I don't know that that's true. It depends how you want to break down international. I think international will enter the next year very strongly. Now if you're talking about currency implications that could impact, the biggest currency pieces we had this quarter were Great Britain and China. I'm not an expert on it. I don't know that that continues or that the Euro goes down or maybe the Canadian dollar gets even stronger and it's a benefit because oil prices are going up. I'm not really sure yet. I would like to believe after all this that the biggest parts of the moves are done. But like I said, I'm not a currency expert so that wouldn't at this particular point come into my thinking. Other than the pricing change we might have to do in Great Britain because of the currency.

Right, but outside of currency, just purely from the shift of distributors to your own in-house?

Well, that's a net positive. It's a positive to the sales number because we pick up both margins. So that should be a positive piece. I don't know if it will quite come in the first quarter. The biggest piece out there today to convert is Korea, depending on how fast we close it and get up and running. It could have positive impact certainly by the second quarter and for the third quarter. I'm just not sure it will hit in the first quarter yet.

Okay, great, that's what I way trying to clarify. And should we be expecting SG&A to deleverage as we get into next year as you talked about some of these international investments that you guys are working on?

That would depend on the growth. You know, we only grew at 10% this quarter and didn't deleverage any significant piece. Certainly didn't deleverage at all other than the currency for the most part. So it will depend on the growth rate. As we get back to double digits, I think we can continue to leverage because we're growing now in places where we've already put in significant more infrastructure and all additional growth should be able to leverage. So, long as we can maintain a significant growth piece, then I think we can continue to leverage.

Okay. I'll get back in the queue. Thanks.

Our next question comes from the line of Sam Poser, from SIG. Please, go ahead.

Good afternoon, David. Can you give us some idea of the revenue out of Israel and South Korea? Like, what that wholesale equivalent looks like? What the revenue is as a distributor?

Israel is obviously the smaller piece. Israel probably in the range of somewhere between 300,000 and 400,000 pairs. You could take part of that at the retail level and part of that to a wholesale level, and get it. But Korea has done with us in excess of 2 million pairs a year and I think it grows from there. So if you take that at an average $25 price point and a significant retail piece, that could be significant and certainly get to $100 million in the next couple years.

I understand that. But I mean as a distributor, it gives you, those two combined give you what kind of revenue and then when it converts to a sub, what does that sort of just turn into because you're going to get -- you're going to see more -- your margins and your revenue just go up from the conversion.

Correct.

Are you asking how much does go up?

If you shift the combined let's say 2.4 million pairs between the two, they're worth how much as a distributor and when you convert to a sub, how much is that worth in revenue?

It could as much as double or more depending on how big a piece is retail and how big a piece is wholesale. Distributors are our lowest margin business so if you take the differential just in margin, we pick up also what could be an 18% to 20% margin goes to 40%, 45% margin to begin with. You get double on the sales price and double on the margin. And you get more if you go vertical and you have your own stores as we will have in both Israel. At the minimum it's close to a double and it can go up from there.

Can you just tell us what the distributor reported revenue is between those two countries right now?

Well, like I said, Korea was slowed down. It was very low this last quarter because we're transitioning and we're transitioning without the current partner. So they have no reason to really take any significant amounts. We are now changing all the paperwork to try to bring it in ourselves to get started at the closing.

Can you give us some idea of fiscal 2015 maybe? What you did last year in those two and then we can sort of get to where we want to figure out what that is?

My best guess is we did about somewhere between $15 million and $20 million in Korea and maybe $3 million to $5 million in Israel in 2015.

So that would go to like 40, so to about $50 million combined from 25 give or take?

After business remains the same, yes. Like I said, it won't start that way next year but certainly we'll get to that. We think there's potential to get significantly with a larger than that.

Okay. And then just a little bit more on you mentioned there could be leverage on the SG&A in the fourth quarter. Could you give us some idea?

We said next year. I don't know that you can get any kind of significant leverage. I don't know that you deleverage outrageously but you don't get any leverage in the fourth quarter. That would be -- (inaudible)

From a deleverage basis, do you think that SG&A in Q4 will look sort of like SG&A in Q3 then? Where you deleverage by about 200 basis points? Is that a good round number to use?

Yes, depending on where you are within the sales volume or the guidance, that's probably okay. I would have to play with that some.

And then I assume you're expecting gross margins to continue to improve in total again in Q4?

Yes, it would be up slightly just like it was in Q3. The shift that we anticipate would certainly be to the positive end because we'll get more growth from retail and China which is the higher end of the spectrum and lower or deceleration from distributors and the domestic wholesale which is the lower end of the margins. So the mix should push without any significant currency changes to a more positive gross margin percentage.

Gotcha. All right. Well, all right, thank you very much and good luck.

Thanks.

Our next question comes from the line of John Kernan, from Cowen and Company. Please, go ahead.

Good afternoon, David. Thanks for taking my question.

No problem.

Can you help us understand the gross margin trajectory into next year beyond just Q4? The inventory is in good shape. Can you help us understand the mix shift towards the international wholesale business? The consensus is looks like for next year's modeling a fair amount of operating margin expansion which given the SG&A growth profile seems optimistic. But can you help us understand the direction of margins into next year?

Gross margin? Or, operating margin? You're talking operating margins I take it from your last comment.

Both.

Okay, gross margins will obviously depend on mix in currency. We don't anticipate any significant changes but there could be some mix there. Depending on if we have an outlier, one piece of the business that's extensive like Europe, like China or maybe even South America grows at a significantly faster pace than the whole, and what percentage our retail will be depending on what our wholesale growth can be.

There can be slight shifts in the gross margin. As far as operating margin is concerned, I would just give you my own opinion in that you cannot model our growth in SG&A through a trajectory model because once we establish, we don't grow that operating cost at the same level as we do when we have a start-up which would I would tell you, look at the United States who actually had basically a decline but no significant increase in overhead.

And as we get more stable and set and larger in some of these countries, other than China. Europe is about done. So, other than China and South America, maybe a little bit from Korea, I don't know that you get the same trajectory of G&A costs certainly next year as you've had in the last 18 months.

Okay. So SG&A might have an opportunity to leverage as early as next year for the full year?

Certainly could. Depends where the growth comes from and what it is but certainly I wouldn't take that off the table.

Okay. And can you just give us a little bit more understanding of what you're seeing in the US wholesale channel? Obviously, you called out some of the promotions that are there. How does the changing buying patterns of some of the wholesale partners obviously buying closer to need, effect the way you flow product into the channel?

We're very big on flow so we measure them all the time. I think right now we're set up for a very positive time because they are lean on inventory. I think our, as well as the rest of the their inventory. So as styles change and tastes change and we're going into a new structure with a lot new product to offer. As is sells through, if it sells through at a faster pace, it gives everyone an opportunity to chase it at a much more rapid pace. And we're usually the best of that as we develop a lot of product in all our categories and we can chase all of them and move the needle significantly as demand increases when there's no overhang in the marketplace of inventory.

Okay. And then just finally here, can you just tell us a little bit more about China? Obviously, it's been a big emphasis for you. I think the markets more than double from where it is here. So what have you learned about the Chinese consumer, how they're interacting with the brand? Can you quantify where you think China will be in the next two to three years?

Sure, China could be $1 billion for us in the next four or five years. I don't know how it relates to two or three. We continue to grow. It's very difficult to go out. We have a lot of franchise stores and business as it continues to grow. We are up 78% year-to-date in China. We did more this quarter than we did in fiscal 2014 in China. So the potential is really great. I mean I don't know that it's not a $1 billion brand. How fast it gets there, whether it could be three years, five years or six years, still remains to be seen.

We work on it all the time. Certainly it will get there. Hopefully in a shorter period of time. But I don't think there's any doubt that this is at least a billion dollar brand in China.

Okay. And if I could sneak one quick question. The international Company owned retail comps accelerated from Q2, what regions drove that? I think they were up 9, last quarter, almost 12, 13 this quarter.

It's pretty much across the board. The biggest concentration so the biggest drivers obviously are in the UK. We have a lot of stores more than any other single place in Europe. And in South America we have 30 stores in Chile and they have comp'd up significantly well. So those are the two big from top line dollar perspective of where the margin improvement has come from.

Okay, thanks. Best of luck.

Thanks.

Your next question comes from the line of Laurent Vasilescu, from Macquarie. Please, go ahead.

I was curious about the domestic comp number for the quarter. Can you talk about how the comp performed by month? I think you had easier compares from September or particularly October last year.

October is not in this report but you're basically correct. We had a positive July, a slightly negative August, and an even more positive September.

Okay. And then for October for quarter-to-date?

Well, for the month-to-date we're just getting started. It's not dissimilar in percentages to September although it obviously is a much smaller month than September would be.

Okay. And then shifting gears to the wholesale international business. European wholesale. How did it perform? What was the growth rate for European wholesale, and do you have a dollar number as well?

It depends how you define European wholesale. We could go through country-by-country but by and large, I believe the Europeans were up 18%, 19% so that would be not that I memorize all those numbers in my head, probably in dollar terms, just for Europe, just wholesale, probably $17 million or $18 million.

Okay. And then on the domestic wholesale business, when the guidance for fourth quarter for single-digit decrease, is that down low singles, down mid or down high?

Too hard to say. That's why we left a broad range. I would say mid to high single.

Okay. And then for this quarter, your domestic wholesale, I think you talked a little bit about men's and women's. Can you just give us the actual, like, how women's performed this quarter and then also men's in terms of percentages and potentially dollar terms?

They were both on the very broad stream which throws everything together, both performance and non-performance and black and brown shoes. Not dissimilar to the overall decrease.

For both? For both, down low single digits?

Correct.

And then kids?

Kids was down a little more. We had started to deliver "Star Wars" this time last year. So that was a tougher one.

That's right. Okay. And should that change for the fourth quarter?

I don't know about the fourth quarter. Fourth quarter was a big delivery but it certainly should change for the first quarter.

Okay. Thank you very much. Best of luck.

I don't imagine we can comp the Star Wars fourth quarter shipments for the kids business.

Sure, okay. Thank you.

(Operator Instructions). Our next question comes from the line of Scott Krasik, from Buckingham Research. Please, go ahead, sir.

You didn't give specific fourth quarter guidance for EPS but do you expect to make money in the fourth quarter, break even, lose a little money?

Right now I would expect to make money.

Okay. Thank you. And then, the backlog I think you said in China was up low double digits. How do you define low double digits, and that's slower than your sort of 70% pace year-to-date? So what's the reason for that?

Well, yes, because there's bill sell-ins from the year before and year after. They also buy a little closer for their existing and they're learning the business better. But I define low as I did before, 10 to 30.

Okay. Okay, thanks very much.

Our next question comes from the line of Sam Poser, from SIG. Please, go ahead.

Okay. So when when we look at your overall business internationally, it would be that Q1 is going to pick up steam again and then Q2 should be significantly better. Is that the flow based on the transition of the distributors? Number 1.

You're talking about just distributors?

I'm talking in general but the distributors have a lot to do with that. So there's an underlying growth of your subsidiary and JV businesses and then you have acceleration from those new subs and JVs and in Q3 and Q4 of this year you're lapping the set-ups of Chile and eastern and central Europe, correct? So, that's why they settled down because they're lapping the set-ups from the last year.

Chile we've had for almost ten years.

Latin America, I apologize.

Yes. We will be lapping in the second half. Korea should be coming on. And we are still looking for big growth from China and India. So the distributors become a smaller piece of it and they will be concentrated in about four or five bigger distributors that are left. That would be sort of Indonesia and Australia and the Middle East. And then whatever we start to build in Africa through South Africa and moving on.

And concentrated depending on what nose areas are like from a macro picture and a retail picture. We're moving more and more into the certainly the biggest piece is joint ventures and subsidiaries.

Thank you. Then lastly, there's a big difference between sell-in and sell-through. So the question I wonder is are you in the kids business and in some of the other categories, are you seeing despite the fact that your sell-in rate has declined especially in the United States, are you seeing changes in the sell-through rate at retail given, from your wholesale partners as well as your own retail stores?

Yes. It's held up very well. I think the biggest issues nowadays will be the "Star Wars." That's why everybody's positive about going into first quarter.

And from what I remember about "Star Wars," it did well but maybe not as the sell-through rates probably were modestly disappointing relative to the sell-in rate?

I would say that's correct if you lost them modestly.

Okay. And so your sell-through rates this year could be better even though your sell-in rates are not as high?

Absolutely.

Okay. Hello?

I'm still here. I didn't hear you say anything else.

I thought you were about to say something so I stopped.

No, I said absolutely. I hope you heard that. And anticipated.

All right. Thanks again, David.

Okay.

Our next question comes from the line of Jim Carter, from Monness Crespi. Please, go ahead.

Thanks for taking my question. Just are you seeing the same fashion shifts or product shifts overseas that you're seeing in the US?

It's different in some different countries but yes, it's shifting in a lot of places around the world.

And is the shift lagging the US or is it kind of happening coincidentally?

It depends where. Parts of Europe are coincidental. Parts are after. Parts of southeast Asia are, no one's exactly the same time but a little slower and certainly the slowest, the biggest lag would be in South America.

Okay. And then in terms of the new product that seems to be getting good response in the US, have the international, have your international partners seen it and are you getting a similar response in different markets?

They've seen pieces of it. Like we said in the comments, they will be here next month in mass for the big sales conference. The pieces they've seen and what they have already been shown, they do like and I have no doubt that they'll like the stuff when they get here and see it.

Great. Thanks and best of luck.

Thanks.

Our final follow-up comes from the line of John Kernan, from Cowen. Please go ahead.

Thanks for letting me follow up here. Just to go back to the fourth quarter kind of implied EPS guide. It sounds like you feel pretty good about gross margin and we should expect gross margins to be up but SG&A is a little bit tricky to figure out because you were up 20% in the first half on a dollar basis. You're up 12 in the third quarter. What does SG&A dollar growth look like in Q4?

I don't know. I'm not really sure yet. I don't really want to come out with any numbers. But it you look at the G&A number last year, it went down from third quarter to fourth quarter in real dollar terms. And unless there's significant growth, it usually does drop some from third quarter to fourth quarter. And a lot of that is volume based.

Okay. Thanks.

There are no further questions at this time. We'll turn the call back over to management for any closing remarks.

I think we're all set here. We look forward to seeing everybody in New York if you have an opportunity, there is a lot of new product. We've been moving very, very well. You should get an idea of how it's perceived and really what it is. So, if you get the opportunity, we would love to host everybody, within reason certainly, at FFANY in New York in December. Thanks again, and we'll sign off from here.

Thank you, ladies and gentlemen this does conclude our tele conference for today. Thank you for your time and partial and you may disconnect your lines at this time. Have a wonderful rest of the day.

Thank you again for joining us on today's call. We will just like to note that today's call may have contained forward-looking statements. As a result of various risk factors, actual results could differ materially from those projected in such statements. These risk factors are detailed in SKECHERS' filings with the SEC. Again thank you and have a great day.