Skechers USA Inc (SKX) 2016 Q4 法說會逐字稿

Greetings, and welcome to Skechers USA fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference call over to Skechers.

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 achievements expressed or implied by such forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the Company's filings with the US Securities and Exchange Commission.

Including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other reports filed with the SEC as required by federal securities laws, for a description of other significant risk factors that may affect the Company's business, results of operations and financial conditions.

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

David?

Good afternoon, and thank you for joining us today to review Skechers' fourth-quarter and FY16 financial results.

Fourth-quarter net sales increased 5.8% to $764.3 million, and represented a new fourth-quarter sales record, which led to a new annual net sales record of $3.56 billion.

The sales growth was primarily the result of a 17.1% quarterly increase, and a 27.1% annual increase in our international wholesale business.

The negative currency translation impact on our gross margins for international wholesale and retail businesses was $18.4 million for the quarter.

Our international wholesale business comprised 37.9% of our total business for the quarter, and 39% for the year.

Adding in our international retail stores, international represented 46.8% and 46.1%, respectively.

We expect international will be 50% of our total sales this year, as we believe it continues to represent the most significant growth opportunity for the Company.

Also adding to our record net sales was our global retail business, which increased 13.9% for the quarter and 16.7% for the year, due to a higher store count, combined with positive retail comps of 3.6% in the quarter and 4.1% for the year.

The Skechers-owned retail business represented 32.1% of our total sales at quarter-end, and 27.3% for the year.

The fourth-quarter increases in net sales were offset by a decrease in our domestic wholesale business of 11.8%, which included a 4.6% decrease due to the launch of the Star Wars footwear collection in the fourth quarter of 2015.

Fourth-quarter highlights include record revenues, gross margin of 46.6%, a strong balance sheet with $718.5 million in cash and cash equivalents, or approximately $4.63 per diluted share.

A 17.1% sales increase in our international wholesale business, including a 34.3% increase in our subsidiary and joint venture business.

A 13.9% sales increase in our Company-owned retail stores, which included 53 net new stores opened compared to the prior-year period, including 15 net new stores in the fourth quarter.

And growing our Company- and third-party-owned worldwide Skechers store base to 2,012 locations, with a net addition of 189 stores in the quarter.

We should also note that the fourth-quarter 2016 sales growth came on top of challenging comparisons, with strong increases in the fourth quarter of 2015, particularly in our international and retail businesses.

Specifically, the fourth-quarter 2015 increases were 64.9% in our international wholesale business, 20.2% in our Company-owned global retail business, and 8% in our domestic wholesale business, for a combined total increase of 26.8%.

We ended 2016 with positive domestic and international backlogs, and the highest incoming order rate for a fourth quarter and full year in the Company's history.

We achieved mid-single-digit comps in January and high-single-digit comps the first week in February in our global Company-owned stores.

We remain optimistic about our domestic wholesale business, and we believe our international business will continue to grow.

Now, turning to our business in detail.

In 2016, Skechers remained the number two footwear brand, the number one walking brand, the number one work brand, and the number one dress comfort casual brand in the United States.

In addition, we received the 2016 Footwear Plus Design Excellence Award for Children's Footwear.

Our position in the domestic marketplace is an indication of the strength of our brand and product.

Even with the decrease in domestic wholesale we noted earlier, our kids business performed very well, with an increase of 20.5%, excluding the Star Wars sales in the fourth quarter of 2015, as well as growth in our women's sports, women's casual and sandals, and our work business.

For the holiday selling season, we ran numerous marketing campaigns supporting our brand, including campaigns with Demi Lovato, Brook Burke-Charvet, Sugar Ray Leonard, Howie Long, Kelly Brook and Meghan Trainor.

Included in this was a YouTube campaign with our roster of female celebrities.

We also had a men's casual commercial, one for GOwalk 4 collection, and multiple animated and live-action commercials for kids, including our lighted footwear.

Our lighted footwear was a hot item in the quarter, and we're looking forward to building upon this success with more television support, as well as in-store and online marketing.

We have new product launches and deliveries this spring and into the fall, including a new performance lifestyle offering called You by Skechers, and a youthful sneaker line called Skechers Street.

Based on customer feedback and incoming orders for these new lines, and our new offers in our athletic casual lines for men and women, we believe we have hit on several key trends, and our product is on target.

As we deliver these new styles, our focus is on maintaining our position on the floor, while managing our inventory flow into key wholesale accounts.

We remain poised to move quickly as consumers begin to shop for what they want as well as need.

International continues to achieve the highest percentage and dollar gains of all our business channels, and represents the largest piece of our three distribution channels, making up 46.8% of our business, including retail.

Total international sales increased by 17.1% or $42.4 million in the fourth quarter, and 27.1% or $296.8 million for the year.

The increases were the result of growth in our subsidiary and joint venture businesses, with a $54.4 million or 34.3% gain in the fourth quarter, and $319.8 million or 41.6% increase this year over last year.

These gains were offset by a 13.6% quarterly decrease and 7% yearly decrease in our distributor business, due in part to the transitioning of our Latin America and Central-Eastern European distributors to subsidiaries in 2015.

And our Israel and South Korea distributors to joint ventures in the second half of 2016.

Transitioning these important markets through subsidiaries and joint ventures will allow us to better manage and grow our business, and maximize the potential in each market.

We expect each of these markets to have a positive benefit on our total international sales within the next three years.

Driving the sales was a mix of our men's and women's athletic lifestyle footwear, our Walk collection, and our heritage Skechers D'Lites footwear -- all supported by global and regional marketing campaigns.

Further detailing our growth internationally, historically, the fourth quarter is the weakest of all the quarters for our international subsidiaries.

That said, seven of our subsidiaries showed increases in the quarter, with the highest gains coming from France, Brazil and Chile.

Of note, several countries shipped more pairs in the fourth quarter of 2016 than 2015, but did not show a dollar increase due to weaker currencies.

We are continuing to adjust prices in several markets to offset the recent strength of the US dollar.

Our joint ventures grew by 61.9% for the quarter, led by a 48.5% gain in China, and high double-digit gains in Hong Kong, India and Malaysia.

As mentioned, we transitioned Israel to a joint venture during third quarter, and then South Korea in the fourth quarter.

China shipped nearly 3 million pairs in the quarter, and 10.5 million pairs for the year.

In the fourth quarter, they opened 96 freestanding Skechers retail stores, primarily through franchisees, bringing their total Skechers store count to 545.

We now have approximately 2,080 points of sale in China, and an extremely strong e-commerce business, with growth just short of triple-digits, thanks in part to a highly successful Singles Day in November.

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

In India, where our business is in the developmental stage, 15 Skechers stores were opened in the quarter, bringing the total store count to 67.

South Korea was once one of our largest distributors, and now has 65 Skechers stores, with strong brand awareness in the country.

Our international distributor net sales decreased by 13.6% in the fourth quarter and 7% for the year.

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 and South Korea to joint ventures, a difficult comparison with 91.6% growth in the fourth quarter of 2015, and 69.9% for the 12 months.

Political unrest in some countries, including Turkey and the Middle East.

And timing shifts within several distributors, which will have a positive impact on the first quarter of 2017.

In the quarter, several of our international distributors showed strong increases, most notably in Australia, Indonesia, the Philippines, Taiwan and South Africa.

Through our international distribution partner, joint ventures and a growing network of franchisees, there are third-party Skechers stores in a total of 48 countries.

At quarter-end, there were 1,441 Skechers-branded stores owned and operated by our joint ventures, franchisees and distributors outside the United States.

With the transition of the majority of South Korea distributor-owned or franchise Skechers retail stores to joint venture stores, at year-end there were 490 distributor-owned or franchised stores, and 822 Skechers stores in our joint venture countries, including those run by franchisees in the region.

Additionally, there are 129 franchise stores in countries where we have subsidiaries.

In the fourth quarter, 179 third-party-owned stores opened, which included 96 in China, 15 in both India and Saudi Arabia, 10 in Australia, five in Taiwan, four in both Malaysia and the UAE, three each in France, Indonesia and Qatar, three each in Ireland, Mexico and Spain, and one each in Algeria, Brunei, England, Hong Kong, Italy, Japan, Kuwait, Netherlands, the Philippines, South Africa, Thailand, Trinidad, Turkey, Uruguay and Vietnam.

Five stores closed in the quarter.

10 third-party-owned Skechers stores have opened in the first quarter to date, and two have closed.

We expect another 80 to 90 third-party-owned Skechers-branded stores to open in the first quarter, and a total of 575 to 600 to open in the remainder of 2017.

International wholesale -- which includes subsidiaries, joint ventures and distributors now represents our largest business channel, at 39% of our total sales at year-end.

Combined with international Company-owned retail stores, it represented 46.1% in 2016.

We expect this number to continue to grow as we increase our presence in the markets that have transitioned to subsidiaries and joint ventures, and as we introduce new lines worldwide later this year.

Worldwide sales in our Company-owned retail stores increased by 13.9% for the quarter and 16.7% for the year.

In the quarter, domestic retail sales increased by 8.1%, and international retail sales by 32.5%.

This included positive comp store sales of 1.7% domestically and 10.3% on our international stores, for a total comp-store sales increase of 3.6%.

At the end of the quarter, we had 571 Company-owned Skechers retail stores, of which 158 were outside the United States.

In the fourth quarter, we opened 18 stores, including one concept store each in Hawaii, Romania and Canada, and two concept stores each in Japan and the UK.

We closed three domestic and one international store in the quarter.

One Company-owned store has opened to date in the first quarter, and one has closed.

Adding to the growth in the quarter was our domestic e-commerce business, which grew by 36.3%.

We also have Company-operated e-commerce sites in Chile, Germany, and the UK, and plan to launch additional sites in Spain and Canada shortly.

With the 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 70 to 90 Skechers stores in 2017, including 14 in the first quarter.

Now, turning to our fourth-quarter and full-year numbers in more detail, as I mentioned earlier, we achieved record fourth-quarter net sales of $764.3 million versus $722.7 million in the prior-year period, an increase of 5.8%.

Our growth in the quarter was primarily the result of net sales increases in our worldwide Company-owned retail stores, and our international business, specifically from our joint ventures.

Additionally, the negative currency translation impact on our gross margins for our international wholesale and international Company-owned retail businesses for the quarter was $18.4 million.

The increase in total net sales was offset by an 11.8% decrease, or $30.7 million in the Company's domestic wholesale business, which included a 4.6% decrease due to the launch of Star Wars in the fourth quarter of 2015.

Gross profit was $356.2 million compared to $329.9 million in the prior-year period.

Gross margin increased to 46.6% compared with 45.6% in the prior-year period.

Historically, gross margins for our retail segment are the highest, followed by gross margins for international subsidiary sales, and then domestic wholesale sales, with gross margins for our distributor sales being the lowest.

The slightly higher gross margins during the quarter were due to a combination of increased international subsidiary revenues and margins, reduced domestic wholesale and international distributor sales, which were offset by lower retail margins.

Selling expenses increased $1.6 million to $59.5 million or 7.8% of sales, compared to $57.9 million or 8% of sales in the prior-year quarter.

The dollar increase was primarily due to higher international advertising expenses.

As a percentage of net sales, advertising expenses were approximately 20 basis points lower versus the fourth quarter of 2015.

General and administrative expenses were $273.4 million or 35.8% of sales, compared to $221.1 million or 30.6% of sales in the prior-year quarter.

The $52.3 million quarter-over-quarter increase was primarily due to investments to achieve long-term global growth.

This included a $15.3 million expense to operate 53 additional domestic and international retail stores, $27 million to support our international growth, of which $19 million was due to increased costs in China, $2.8 million for the transition of our Korean distributor to a joint venture, $2.3 million in support of our new Latin American subsidiary, and $3.2 million in Japan.

Domestically, general and administrative expenses increased $10 million during the fourth quarter, primarily due to increased headcount in the United States to support the Skechers brand expansion worldwide.

As I mentioned earlier, we will continue to invest in our infrastructure and marketing to support the current and planned growth of our joint ventures and subsidiaries in regions that we believe represent meaningful growth opportunities.

Earnings from operations for the fourth quarter decreased 48.3% to $28.3 million or 3.7% of revenues, compared to $54.7 million or 7.6% of revenues in the fourth quarter of 2015.

Net income was $6.7 million compared to $29.4 million in the prior-year period.

Net income per diluted share in the fourth quarter was $0.04 on approximately 155.4 million average shares outstanding, compared to $0.19 on approximately 154.6 million average shares outstanding in the prior-year period.

Additionally, the negative currency translation impact on our gross margins and our international wholesale and international retail businesses for the fourth quarter was $18.4 million.

Further, our business in the United Kingdom was significantly impacted by currency headwinds, as our wholesale sales were flat for the fourth quarter in local currencies, but down 17.9% in US dollars.

Our quarterly tax rate was 31.5% and 20.6% for the full year, due to lower income in low-tax jurisdictions, which reduced earnings per share by $0.02.

Turning to our full-year 2016 results, we had a net sales record of $3.56 billion, an increase of 13.2% compared to $3.15 billion in the prior-year period.

Gross profit was $1.63 billion or 45.9%, compared to $1.42 billion or 45.2% in 2015.

Selling expenses were $257.1 million or 7.2% of sales, compared to $235.6 million or 7.5% from last year.

General and administrative expenses were $1.02 billion or 28.7%, compared to $849.3 million or 27% last year.

Earnings from operations for the full year were $370.5 million or 10.4% of sales versus $350.8 million or 11.1% for the full-year 2015.

For the full year, net income increased 5% to $243.5 million, compared to net income of $231.9 million in the prior-year period.

Diluted earnings per share were $1.57 on approximately 155.1 million average shares outstanding, compared to diluted earnings per share of $1.50 on approximately 154.2 million shares last year.

And now turning to our balance sheet.

At December 31, 2016, we had $718.5 million in cash and cash equivalents, or $4.63 per diluted share.

Trade accounts receivable at quarter-end were $326.8 million, a decrease of $17 million from December 31, 2015, and our DSOs were 34 days at December 31, 2016.

Total inventory, including merchandise in transit, was $700.5 million at December 31, 2016, an increase of $80.3 million or 12.9% compared to December 31, 2015.

This increase is in line with our growth, higher Company-owned store count, the addition of Israel, Latin America and South Korea, as well as having the highest incoming order rate in our history for both the fourth quarter and full year.

Given the strength of our global business, brand and sell-throughs, we're very comfortable with our current inventory level.

Long-term debt was $67.2 million compared to $68.9 million at December 31, 2015.

The decrease was due to principal payments on our domestic distribution center loans.

Shareholders' equity was $1.7 billion versus $1.4 billion at December 31, 2015.

Book value, or shareholders equity per share, stood at $10.87 as of December 31, 2016.

Working capital was $1.21 billion versus $971.2 million at December 31, 2015.

Capital expenditures for the fourth quarter were approximately $39.5 million, of which $8.2 million was primarily related to 53 new Company-owned domestic and international store openings, and several store remodels.

And $2.6 million for corporate office upgrades, and $4 million was related to the completion of upgrades at our European distribution center.

We expect our capital expenditures for 2017 to be approximately $50 million to $55 million, which includes corporate office upgrades, an additional 70 to 90 retail store openings, and several store remodels.

An additional $25 million for infrastructure, primarily in our China joint venture, will also be added.

In summary, with record annual net sales of $3.56 billion and four consecutive record-sales quarters, 2016 was another significant year of growth for the Company.

We remain the second largest footwear Company in the United States, and number one Company in walking, work, and dress comfort casual.

The second half of 2016 presented some challenges in the United States, with several retailers shuttering doors, and an influx of off-price footwear that is normally full-priced.

While we were impacted by the sluggish retail environment in the United States, we focused on developing fresh new products for 2017, maintaining strong gross margins and keeping our inventory in line.

Our speed-to-market and diverse product offering, as well as our vast distribution network, has been the cornerstone of our success.

In regards to retail, we opened our 2,000th store in December in India.

And at quarter-end, there were 571 Company-owned stores and 1,441 third-party-owned stores.

With South Korea now a joint venture, growth in China of 68.9% for the full year, and our new Latin American subsidiary restructuring and refocusing, we believe international continues to hold the biggest opportunity for growth.

We ended 2016 with positive domestic and international backlogs, and the highest incoming order rate for our domestic wholesale, subsidiary and distributor businesses in our history, for both the fourth quarter and full year.

While the backlog numbers include our joint ventures, it is important to note that our incoming orders do not include our joint ventures, which were a positive.

So far in 2017, we have achieved mid-single-digit comps in January and high-single-digit comps for the first week of February in our Company-owned retail stores on a worldwide basis.

Despite an all-time net sales record in the first quarter of 2016, and Easter falling into the second quarter in 2017, we believe we will achieve flat to slightly positive sales in our domestic wholesale business, and increases in our international business and Company-owned retail stores during the first quarter of 2017.

We expect net sales to be in the range of $1.05 billion to $1.075 billion, and earnings per share of $0.50 to $0.55 for the first quarter of 2017.

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

Thank you.

(Operator Instructions)

Our first question is from Laurent Vasilescu of Macquarie.

Good afternoon.

Thank you, David, for taking my questions.

I wanted to ask you, on your costs for the fourth quarter, the G&A, can you provide a little bit more detail on your expenses for the $10 million in the US and then $27 million international?

And then as we think about the first quarter and then the full year, how do you think about SG&A leverage?

Obviously, given the guidance we put in the first quarter, we're going to de-leverage a bit and we'll have higher sales.

But that's because we're still carrying costs for places that can't leverage quite yet, which would be Latin America, Korea and Japan.

So we're getting them started, and we're going.

That's where the big increase in expenses were.

The $10 million that we spent in the United States was where would you expect it to be.

We have some IT issues, because we support the whole world.

We have to increase our support for the distribution centers, as they control the rest of the world.

And we move out to have our own distribution centers in multiple parts of the world.

We have to increase, because of our store count, both internationally and domestically, the back office and buyers and planners for our international stores.

And obviously since we have increased and changed our product offering, we have hired more designers and merchandisers to expand the scope of the brand, both domestically and in the United States.

So it comes really from the growth avenues that we're looking to build as the next year comes forward.

Okay.

And then on gross margins, it looks like on that number you gave us, it looks like the gross margin FX hit the GM by 240 bps for 4Q.

Can you tell us how we should think about gross margins for the first quarter?

And then also the impact on FX for the GM line, as well as the revenue line, guidance that you gave for the first quarter?

The first-quarter guidance is based on what we know today.

There is obviously some fluctuation.

That's because prices change and they go up, and it depends on which types of footwear that we're committed to sell the most.

Because we don't increase all of them at the same time, especially some fill-in orders, as we get to these countries.

As far as the full-year impact, it's very difficult -- to me, I'm not a foreign exchange, and given the political climate in the US, how strong the dollar will get or how low it will be talked down.

So what we do is, plan our business on a local level and let the FX -- we wait for more political disclosure on exactly where FX goes.

But right now, this is our best guess, given the current environment.

Okay.

And if I could squeeze one more in.

International wholesale, I think it was up 34%, I think you mentioned in your prepared remarks.

And I think expectations were high-single-digits.

Was there any shift in timing of deliveries between the quarters?

I missed the beginning of the question, sorry.

Oh, sure.

I think in your prepared remarks you said that international wholesale subsidiaries were up 34%.

Right.

But I think expectations were for a high-single-digit rate.

Was there any shift in timing of deliveries, or you just saw more orders?

I think it comes from where you would expect.

We gave back some in some currencies, with Canada and the UK being the largest, having positives in local currencies and negatives in dollar terms.

But the big piece came from Southeast Asia.

When you think about it, and what we did say, we saw 61% in Southeast Asia, or our joint ventures, and only 48% in China.

Which means other divisions are now starting to even take hold to go to the next level.

Because we had increases equivalent or higher than China on a percentage basis, certainly not on a dollar basis, in Hong Kong, India, Malaysia -- so that's where it really comes from, it came from there.

I will tell you, just on order of magnitude, on Singles Day this last fourth quarter on November 11, we took and shipped the following week just short of 1 million pair.

It totaled 35 million.

And this is from a country that we only did 90 million two years ago.

So the growth there continues to be even ahead of what our calculations were.

Okay, very helpful.

And congrats again.

Thanks.

Thank you.

The next question is from Scott Krasik of Buckingham Research.

Please go ahead.

Yes, hey, David, how you doing?

Hey, Scott.

Pretty good.

Good.

So you made some positive comments about the backlog, both domestic and international.

I just want to put that into some context relative to last quarter, I think your backlog was up low-single-digits, domestic was sort of breakeven, and then international was up low-single.

So can you talk about how that has accelerated from last quarter?

I think it's timing on just the new product that we've gotten in.

We're up mid- to high-single-digits domestically.

We're relatively flat in Europe, where there's currency issues, where the biggest piece obviously is England.

And we are up double-digits in China -- Southeast Asia, in general.

So it's a very positive side from the US.

The US being up high-single-digits going in just means it's a very positive reception to our new product and how we're selling so far.

So while it is just the beginning, it certainly is on a very positive sign.

No, I agree.

Can you help us understand the context?

Constant currency Europe, would that be up in, what, the high-singles, low-doubles?

Yes.

Constant currency is obviously up singles because of the UK.

And I will give you just an idea of what we are talking about.

The UK was down at December 31 double-digits in dollars, and up low-double-digits in constant currency.

Wow.

The same could probably be said for Canada.

Those are the two biggest.

And then various other ones around.

Actually, China has some as well.

That little piece of South America has actually held up somewhat better.

So in constant currency, we're certainly up in pairs.

No, that's great.

And then just to help put domestic into context, you really haven't shipped the You, you haven't shipped the Energy Lights.

There's a lot of new stuff that you haven't shipped yet.

So that's just reflective there.

If the sell-through -- if we can do our checks and see the sell-throughs are outweighing that level of sell-in, do we get into a situation where you start pulling orders forward again?

Well, we certainly hope so.

That's always the plan.

Yes.

Any sense or anything you can give us around sell-throughs of -- I know the Energy Lights are in your stores.

I don't think the You by Skechers is in your stores yet.

Not yet, but the Energy Lights do extremely well.

We have delivered them to some wholesale partners as well, and they have been doing very well.

So right now, all the things are positive.

I will tell you, while we haven't shipped them yet, our backlogs in shipping continue to hold up.

We were up high-single-digits in shipping on a worldwide basis for January.

Wow, okay.

No, that's great.

And then just lastly, tax rate.

The 31% was much higher than what we were looking for.

So help us understand what tax rate you're expecting for 1Q and then the full year?

We still expect between 20% and 23%.

What happened was, tax rate was only missed from third-quarter estimates by almost 0.6%.

I think we were at 20% or 20.1% for the three quarters, and we had to go to 20.6% for worldwide, just given the sales in fourth quarter.

And what happens is, if you have a much smaller income base on which to make up three-quarters worth of under-withholding tax, it just becomes a bigger piece.

So we look more at the annual rate, which was 20.6%, to carry that forward into Q1 and for the balance of the year.

Okay, thanks.

Good luck.

Thanks.

Thank you.

The next question is from Sam Poser of Susquehanna.

Please go ahead.

Thank you, David, for taking my question.

I only have a couple things.

In the expenses to support a lot of the stuff in Korea and so on, is this a situation where basically you are paying the distributors to run while you're converting, and some of those expenses are going to fall away later once it gets rolling?

Is that the way to think about that?

No, the DX distributor is not involved any more.

What you see is, we have to reposition the stores and continue to shift over personnel to our own.

And when we reposition the stores, we then have to pick up all the rent, all the personnel, whatever we buy the first furniture and fixtures for, set up a new office and IT system, and we refurbish because we like to put our own inventory in.

So they never hold up quite as well.

So while I think they will leverage as you go forward, the transition, and just picking up all the rent and trying to clean out the old inventory and putting new, is what puts pressure on the operating line.

And obviously in the next six, nine months, we'll have a real running rate, and I do believe that they will then start to leverage quite well.

So would you expect to start seeing some SG&A leverage in the bigger picture in Q2, and then improving throughout the year?

That would be my anticipation.

Just like we've talked about in the past, we knew we had to get past Q4.

We have new product delivering.

Q1 was a very tough comparison.

We still think we will do quite well.

We're just delivering some new product, it's getting new checks.

If our stores are any indication, being up mid-single-digits in January and high-single-digits first week in February, while it doesn't tell the whole story, certainly is positive for the new product we're bringing into the marketplace.

Thank you.

And then the Belgian DC, is that up and rolling, completely ready?

Costs associated with the build-out there are done?

Yes.

And so is that levering now, or is that, again, something that starts kicking in as you start shipping?

I think it does lever in Q1.

It was difficult to lever on a dollar basis in Q4, because lines were actually down because of currency shifts.

But yes, we are leveraging on a per-pair cost through the distribution center as we speak.

Two more questions.

One, to Scott's question, could you give us some idea of what that currency-neutral international backlog is?

You say it's up, and then you're saying -- do you have like an FX-neutral number there, so we can get an idea for what the real demand is?

Well, I haven't [been talking] yet, but I would bet it is in the low-single-digits.

Okay.

And then lastly, China.

You talked about it being up a lot.

Can you give us some idea of what kind of volumes are there?

How far away do you think you are from $1 billion?

And how far away are you from having to invest in a DC in China?

We're researching the DC in China now.

I would hope we would be able to start investing by mid- to end-2017.

As you heard in the prepared remarks, we have $25 million allocated through the joint venture for this year, expenses regarding the distribution center.

That may be a little early and it may slip to $18 million, but we're hoping we can get design and land done, and start at least breaking ground before the end of the year.

As to how fast you can get to $1 billion, we ended this year at $375 million.

That was an increase of $150 million.

I think we continue to increase, we get to $500 million and more this year.

So hopefully, in the next five years we get close to $1 billion -- maybe even faster, because we're expanding at a much faster rate as far as the franchise.

If this new product is received as well there as we believe it will be, it could accelerate the pace as well.

Okay, thanks, David.

Thanks very much, and good luck.

Thank you.

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

Great, thank you.

Hi, David.

Hi.

I was wondering if we could talk a little bit more about your US performance this quarter?

I think we pretty much knew that you were lapping the Star Wars product from last fourth quarter, but can you walk us through why the US was weaker than your previous expectation of down mid- to high-single-digits?

I think if you look at the high-single-digits, we weren't significantly off that.

I think it was a change.

We're now selling more of our sport and active and less on the performance until we bring out this You by GO.

And that won't deliver until the end of March or April.

So we're selling lower-priced product to make up the difference.

So we're actually higher in pairs.

And I think that's just a timing thing as well.

I think that's why we were up so significantly in the first quarter.

Some of it just didn't ship at the end of December, and it might have last year.

I think the nuance is not significant.

Okay, great.

And then can you help us understand a little bit more the 13% growth in inventory that you guys reported?

How much is that is actually related to inventories in the US?

And I just have a follow-up to that.

I'm glad you asked that, because I do have all that information.

I wasn't sure I would get it out.

If you look at our inventory breakdown on a year-over-year basis, we're actually down on a wholesale basis in the United States.

We're up somewhat low-single-digits in retail.

We're down in Europe, and up somewhat in retail.

So all the growth, the entire $80 million, comes from all our growth opportunity in places we've taken orders.

It sits in Latin America, China, Southeast Asia, Korea with all those new stores, Israel and Japan.

So it's exactly where would you want it to be, with some base inventory growing, and picking up new territories.

We're actually flat to down on a wholesale basis, both in Europe and the United States.

Okay, that's super-helpful.

Then I'm just trying to reconcile that.

It's no secret that retailers are taking a more conservative stance on their upfront orders this year.

And you can mention that your inventories are down in the US wholesale business.

How are you thinking about planning your inventories in the US this year, just given how retailers are ordering now?

And are you going to be making more inventory available to chase in season?

We don't usually speculate on that.

It's not part of our business plan.

What we do is, we order against bookings.

So we don't have any more risk as far as where the order rate is and where our inventory levels are compared to last year.

Deliveries have just moved into February and March, and certainly will be delivered both here and in Europe.

And we're turning it quite quickly, we're getting to be more efficient.

As far as chasing, it's usually the inventory that's spoken for that we're moving up.

We're not going to speculate on inventory.

We have way too many items.

It would be too difficult to bring.

We do speculate some, but certainly not across the board.

When we move up and chase, what we're doing is, leaning on our production capacity and trying to move up orders that are spoken for that we already have materials and have an allocated production space.

And move them to an earlier timeframe to start filling in for the demand.

So it's not we're going out to buy an unlimited amount of inventory so we can fill in need, because we have way too many items to do that with.

And as for as liquidating them, we don't have any significant inventory to liquidate -- certainly not in the United States or Europe at this point in time.

And we use the same places we've used in the past.

There's a bigger demand for outlets of our product than we actually have for closeouts.

Okay, thank you.

And if could I just sneak in one follow-up to a previous question.

Do you have an actual margin target in mind for 2017 at this point?

Yes, I think it's consistent with what you have seen.

As growth changes, I think it would be still biased to the upside, but not as significantly.

Okay, thank you.

Thank you.

The next question is from Jeff Van Sinderen of B. Riley.

Good afternoon, David.

Just wanted to talk a little bit more about your retail segment.

I think you mentioned lower retail margins.

Just wondering if you can talk a little bit more about that?

Your comps were up nicely, which was pretty unusual, I think, for most retailers, at least in Q4.

Just trying to get a sense of -- was it a mix thing, or what got your retail margins down?

I think domestically in the US, it's a mix thing.

We probably had slightly lower margins because of product mix shifts.

But we're opening more outlet stores and big box stores than we are concepts, so the shift is down.

There's a difference between the three kinds of stores.

And that's a very broad-based 10,000-foot view down on retail in general.

If you look, we probably have a higher percentage of outlet stores and warehouse stores than we had at this time a year ago.

Okay.

So it sounds like obviously there's some puts and takes on Q1.

But it sounds like for Q2, we should see an acceleration in metrics.

And I'm just wondering, with the order rate tracking considerably better, how we should think about domestic growth this year?

And then I know it's early, and I don't want to pin to you a number, but I'm also just wondering how we should think about the international growth rate this year?

Well, we don't want to go out to a full year, but we can do some.

You know what our numbers are for first quarter.

I still think international will be into the low-double-digits.

I still believe that domestic will be mid- to high-single-digits, when we get through the balance of the three quarters for the year.

I'm still looking for those positive outlets.

Okay, great.

Good to hear.

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

Thanks.

Thank you.

The next question is from Jay Sole of Morgan Stanley.

Please go ahead.

Great, thank you.

David, did you say what you expected domestic wholesale growth to be in 1Q versus the international wholesale growth?

Yes, I think we said -- or I did say, we'll be up relatively flat to slightly up, as far as we can tell, in domestic.

We will be up probably low-double-digits internationally, a slight decline in the subsidiaries, and a significant increase, simply because we have more subsidiaries and joint ventures now in international.

And that's assuming that nothing major happens with the currencies, and I think that's always in play.

Got it, okay.

And then one of the previous questions was, how do you think about margins for the full year on a directional basis?

And I assume you were talking about EBIT margins.

Do you have a sense -- if we could break that down, just selling expenses -- selling expenses were up 9%-ish, 10%-ish.

Do you expect the same kind of growth in selling expenses this year?

We haven't been out for the whole year yet.

I would think it would be in that range or slightly less.

I don't know that this increases.

We are increasing our advertising in Southeast Asia and in international, but we won't be increasing it in the US to any real degree.

So I think it will grow maybe at the same rate in real dollars, maybe a little less.

Part of that is also affected by currency.

Got it, right.

Okay, and then for the G&A, I think in the guidance for 1Q, it implies the G&A will grow about 20% year over year in 1Q.

And that's kind of been the run rate for the last couple years.

Should we expect more of that in 2017?

Is that the G&A (multiple speakers)

Go ahead, sorry.

Or is it going to -- because one of the other questions was asking, and it sounded like maybe it was going to slow down.

If you can talk about the dollar growth generally speaking, roughly, in a broad range in 2017, that would be helpful.

I think you got it right for the first quarter.

As you go beyond that, I think it doesn't grow as significantly, unless there's some new thing -- if another Korea comes along, or another Israel or Latin America, or there's a major growth piece, it might.

But I don't have anything really planned this minute, so we should start to leverage and not show major increases unless there's major increases in sales in a lot of the places that we're investing in now.

Got it, okay.

And then the last one for me is just -- really strong comp in January and then the first week in February.

What do you attribute that to?

Is it a traffic thing?

Is it a product thing?

Is it just an execution to the store thing, a compares thing?

Why do you see it being stronger recently?

Cause and effect is always difficult.

I think it's because of the new product and the strength of the brand as it goes out.

It's even stronger in Europe, where their currencies are getting weaker.

So I think it is about the product.

For us, it's always about the product.

So I think we have good looks and a lot of stuff that's fashion right, and it has picked up the pace.

And that, as you said that, we had significantly high comp store sales last year in January and February.

The whole first quarter was up significantly.

So this is on top of that, which is very positive for us and very -- we think that's great.

It doesn't tell the whole story, but that's a great place to be right now.

For sure.

Okay, thanks so much.

Thank you.

The next question is from John Kernan of Cowen.

Please go ahead.

Good afternoon, David.

Thanks for taking my questions.

Hi.

Lots of questions on the selling line and the G&A line.

Can you just talk about your expectations for gross margin as well?

It was up every single quarter year over year in 2016.

Are you expecting it to be up again in 2017?

I know there's a lot of mix shift between retail and international wholesale and domestic wholesale.

So what's your outlook for gross margin as we go through Q1 and the rest of the year?

Like I said, I think it's biased to the upside.

It does depend on mix, and will also depend on currency and how fast we can catch up, or if we can catch up to historical gross margins in some parts of the world, when the currency moves too quickly and you can't catch it all in one year.

I would believe that so long as Southeast Asia, which is among our higher gross margins, continues at the pace that exceeds most other places in the world, that there would still be upside bias just from the mix in China.

And that's with their margins actually coming down, because they're moving to a franchise model.

They're still, on the lower level they are now, higher than they are in the US.

So long as retail, Southeast Asia and international lead the pack, we have a positive bias to gross margin.

Okay, that's helpful.

And then shifting to the spending side, CapEx is coming down pretty enormously year over year, despite the fact you're still opening a lot of doors.

Unless there's some big working capital drag, you could generate a lot of free cash flow this year.

You've got over $700 million on the balance sheet now.

What's your plan to use that cash?

Would you buy back stock?

Would you pay some type of dividend?

Why sit with that much cash on the balance sheet?

I'm not sure.

We haven't had that discussion as at what point we do that.

I would think when we decide to return some of that cash, and we think our big growth is over and we don't have a lot of building or distribution centers or new countries to open, that the first step would be stock repurchase, rather than dividends.

Okay, thanks.

Best of luck.

Thanks.

Thank you.

The next question is from Chris Svezia of Wedbush.

Hey, David, how are you?

Hi, Christopher.

Pretty good.

First, just on -- I'm curious.

Just Easter shift and timing of deliveries of product.

Just maybe walk through specifically the Easter shift and what dollar magnitude that could be between Q1 and Q2 on US wholesale?

Could US wholesale return to or be at something along the lines of high-single-digit growth in Q2 because of that shift and the timing of delivery of product?

I'm not sure about that yet.

I don't know that the shift in domestic wholesale is that significant.

We still deliver most by the end of March, because it is early in April.

When we were talking about the shift, I was talking more on a retail basis around the world, where obviously -- and that's a big piece of our business where the impact will be felt more dramatically.

Okay.

But the shift you're talking about -- you're talking about Easter when you talk about a shift?

Right.

Okay.

Can you put a dollar value on what that is, what you are estimating that to be?

No, I don't think we can come out with that.

It's not a calculation that we do.

I have it in broad strokes, but I don't know if that's for publication, simply because I have so many moving pieces.

If I start to go through them from top to bottom on a worldwide basis, of what it means impactfully, it will just get lost.

Okay.

For Q1 gross margin, could you just -- I mean, you're up 100 basis points in Q4.

When you say, use the word positive bias, that [results] to 100 basis points of positive bias, or is that more like 50 basis points?

I'm just trying to get a sense of what you mean by positive bias.

It would depend on the mix.

I would think if US wholesale grows on the top side, it's probably more like 50 basis points.

If China outpaces their projections for the first quarter, it could get to [one].

If the pound comes back, and the Canadian dollar comes back, as we start to put these price increases through, it could go up even more than that.

Depends on how many pieces put together.

So I think the bias is positive, but there's so many moving pieces, it's hard to tell which one will come first.

Okay.

And from an international perspective, you said earlier, low-single-digits prospectively for the year, domestic revenues up to mid- to high-single.

When you're talking about low-single-digits, are you talking about anything from 10 to 99, or are you talking double-digits sub-teens?

I'm just trying to figure out what you mean by that.

It could mean anything.

For the international group?

Yes, the international piece.

So overall international revenue, the low-double-digit -- if you could define that a little bit more?

I think what we're talking about is in the lower double-digits.

It's probably north of 20%.

I would be surprised if it gets north of 30%.

Okay.

And finally, just on the G&A, and when you talk about it should start to subside in terms of growth.

At what point do some of these areas that you are investing in -- Korea, et cetera -- begin to leverage?

In other words, the de-leverage really starts to subside.

Does that really start in the third quarter, fourth quarter?

Just give us a sense of when that is supposed to happen?

I would hope it's by the third quarter.

That would be the plan, at least on a broad spectrum.

But you never know.

It took China a couple of years before they really got to critical mass.

While they leveraged a little bit before that, it wasn't significant enough.

It depends when you get the critical mass and demand for the brand.

It could move faster.

So certainly we expect to see some positives by the third quarter.

Hopefully, we start to see the real big push by the first quarter of next year, which is the strongest quarter for most of these joint ventures and distributors.

Okay, got it.

Okay, that's all I have.

Thank you.

All the best.

Okay, thanks.

Thank you.

The next question is from Tom Nikic of Wells Fargo.

Please go ahead.

Hey, David.

Hi.

Thanks for taking my question.

Sorry if you said this already.

The US wholesale business -- did you say in Q4 how that broke down between ASPs and pair shift?

And how do you think about that ASPs versus pairs dynamic in 2017?

Thanks.

Well, in 2017, we hope it reverts out.

But basically we had an ASP decline of about 4% domestically, or the average price per pair on a domestic basis.

So about 4% of it was that, and the balance was actually pairs.

Okay.

And so obviously a lot can happen as the year goes on, but I think you said for Q1, you would still have some ASP pressure.

Is that something that you expect to reverse course in the remainder of the year, and you would have positive ASPs in Q2 and beyond?

You know, I'm not sure, because it depends where growth goes.

So the pressure on ASPs have been, so far in the quarter, in that we are bringing out product that is priced differently.

And we are, so far to date, moving stronger in our sport and active and our USA products than we are in our performance, which is the highest ASP.

So to the extent that performance comes back at a slower rate, then I would anticipate that we wouldn't get that ASP back.

For us to get back that entire ASP differential year over year, performance would really to have grow significantly and catch not only what they've given up year to date with the transition of the GOwalk 3, but catch the growth we expect in some of the more casual footwear lines.

Got it.

And just real quick, how does You by Skechers fit into your pricing structure?

It's performance.

It's like walk, so it's at the higher end.

It's (multiple speakers)

Got it, all right.

And it's positive.

A net positive

All right, thanks very much.

Best of luck this year.

Thank you.

Thank you.

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

Hi, thanks for taking my questions.

Sure.

Just to follow up on the last question, at FFANY in December, I think you talked about last year you took a price decrease on the wholesale business in the US.

And so when do you anniversary that price decline?

I don't know that we ever took one.

It's not like we reduced the price of existing inventory anywhere.

I think it's more a shift in some of the new product, and what was hot in the marketplace was lower price.

I think we brought in some lower ones.

I think you actually -- the ASP pressure that we've seen, you probably start to lap somewhere in third quarter.

Okay.

And then Star Wars -- was there any impact from Star Wars in first quarter of 2016, or was that isolated to the fourth quarter?

There was some, but certainly nothing like the fourth quarter.

Okay.

And then China, I think at the beginning of the year, you estimated business would be between $350 million and $400 million.

Where did that shake out?

And then --

Right in the middle, where it's supposed to.

Okay.

And then how quickly do you think that business can grow next year?

I think on a very conservative basis, I would plan $500 million, and hope that it continues to outpace those projections.

And then do you think the rest of the business, Hong Kong and the other countries you talked about today, continue to outpace China?

I don't know if they outpace.

On a percentage basis, they're either close or higher.

Most of them are expecting significant growth this year.

Okay.

That's all I have.

Thanks, and all the best.

Thank you, ladies and gentlemen.

We have time for one last follow-up.

It comes from the line of Laurent Vasilescu with Macquarie.

Hi, David.

I just have a few follow-ups.

Thank you for the color on the Star Wars impact for the fourth-quarter domestic wholesale business.

Can you tell us how women's and men's did in percentage terms year over year for the fourth quarter, and what your expectations are for the categories in the first quarter?

Women's was down more than men's.

Kids was actually, net of Star Wars, on a positive -- was positive.

Women's simply because it was -- it's comping the performance.

It's the same issues we have every year when you look at like-for-like, and it's a pricing issue in the pairs.

I would anticipate that our women's business would start to pick up.

And it will take more pairs, because it will be in the athleisure base, rather than the performance base.

So I think women's will be relatively flat or up in the first quarter, as will men's.

Okay, very helpful.

And then lastly, the non-controlling interest decline year over year -- and if I remember correctly, this is the China JV.

Maybe you could parse out what happened there?

And then how should we think about, in dollar terms, what that number could be for 2017?

Okay.

The issue is not all -- it's very difficult to give you too much detail on it, because not all the joint ventures are the same, not all the joint ventures are 50/50.

So if there's flows -- like some of the balance of Southeast Asia grew at a faster pace than China, and the minority interests were significantly less than they are in China -- it just builds up at a slower pace.

Okay, great.

Thank you very much, and congrats again.

Thanks.

Actually, we do have time for one more last follow-up, from the line of John Kernan of Cowen.

Actually, it looks like he disconnected from the queue.

I guess he had no last follow-ups.

And with that, I would like to turn it back over to Skechers 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' filings with the SEC.

Again, thank you, and have a great day.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

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