Skechers USA Inc (SKX) 2017 Q2 法說會逐字稿

Greetings, and welcome to the SKECHERS Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now turn the conference call over to SKECHERS.

Please go ahead.

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

I will now read the safe harbor statement.

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

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

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

Users of forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of other significant risk factors that may affect the company's business, results of operations and financial conditions.

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

David?

Good afternoon, and thank you for joining us today to review SKECHERS' second quarter and 6 months 2017 financial results.

Second quarter net sales increased 16.9% to $1.026 billion and represented a new second quarter net sales record.

The sales growth was the result of a 6.4% increase in our domestic wholesale business, an 18.6% increase in our international wholesale business and a 28% increase in our worldwide company-owned SKECHERS retail stores, which included worldwide retail comps of 7.1%.

Our international wholesale business comprised 35.1% of our total net sales for the quarter and 40.5% for the first 6 months.

Including international retail, the percentage of total sales represented 45.6% for the quarter and 48.5% for the first 6 months.

Second quarter highlights include: record revenues of $1.026 billion; gross margins of 47.6%; a strong balance sheet with $751.6 million in cash and cash equivalents or approximately $4.81 per diluted share; a 6.4% increase in our domestic wholesale business, with an increase of 11.4% in pairs shipped; an 18.6% sales increase in our international wholesale business; a 28% sales increase in our worldwide company-owned retail stores, which included 68 net new stores opened compared to the prior-year period, including 31 new stores in the second quarter; grew our company and third-party owned worldwide SKECHERS store base to 2,305 locations with the net addition of 343 stores in the quarter; maintained our position in the United States as the #1 walking, work and casual lifestyle brand and the #2 brand for all footwear, all casual athletic footwear and all women's footwear; signed multiplatinum recording artist, Camila Cabello, to a multiyear marketing agreement for our women's footwear and recently retired Dallas Cowboys quarterback, Tony Romo, for a marketing agreement for our men's footwear; and celebrated our 25th year in business this past May.

Second quarter net sales exceeded our expectations, achieving a new record for the quarter and making the first half of 2017 a new record with sales up $2.099 billion, an increase of 13%.

We are particularly pleased that the growth came across all 3 of our distribution channels, especially our domestic wholesale business, which was flat in the first quarter.

With low double-digit backlogs globally, our planned retail expansion and the development and delivery of our new products, we believe our momentum will continue in the second half of 2017.

Now turning to our business in detail.

Our domestic wholesale business increased 6.4% for the second quarter and 2.8% for the first 6 months.

The quarterly growth was the result of an 11.4% increase in pairs shipped, though the average price per pair decreased 4.5%.

The leading growth categories in the second quarter were our men's and women's casual, women's SKECHERS GOwalk, Active, sandals and BOBS from SKECHERS.

In addition, we delivered new products in the second quarter, including YOU by SKECHERS and SKECHERS Street, both of which sold in strong.

Our Energy Lights collection for boys and girls also performed well at wholesale.

To support our business, we continued our campaigns featuring Rob Lowe, Brooke Burke-Charvet, Kelly Brook, Howie Long, Sugar Ray Leonard and Meghan Trainor, along with other campaigns supporting our men's and women's lifestyle and walking lines.

In addition, we ran our Energy Lights commercial and a new spot for YOU by SKECHERS.

Many of these companies also ran on select digital networks.

To support our GO GOLF line, which grew by mid-double digits, we continued to air our humorous campaigns featuring our brand ambassadors Matt Kuchar, Russell Knox, Billy Andrade, Brooke Henderson, Belén Mozo and Wesley Bryan on the golf channels.

We continue to be the leading walk, work and casual footwear brand and are second for the categories of all footwear and all casual athletic, accomplishments we are proud to have achieved and maintained.

While the domestic retail environment remains challenging with the closing of numerous stores in 2016 and through the first half of 2017, we believe our product is unique and will appeal to those seeking comfort, style and value.

We are pleased with our strong mid-single digit growth in the second quarter.

We experienced the pull forward of shipments in the last few weeks of June, which we believe is an indicator of the demand for our product.

Our July shipments have been strong as well and we remain optimistic and poised to move quickly to fulfill consumer demands in our dedicated wholesale accounts.

We're looking forward to robust sell-throughs for our back-to-school product.

And in the third quarter, we are delivering new offerings in our active, casual and sport categories for men, women and new lighted footwear for the holiday.

International wholesale represents the largest piece of our 3 distribution channels, making up 35.1% of our business.

Total international wholesale sales increased by 18.6% or $56.5 million in the second quarter and 17.5% or $126.9 million for the first 6 months.

The second quarter increases were the results of growth of 19.4% or $44.8 million in our subsidiary and joint venture businesses and 16.1% or $11.7 million in our distributor business.

Driving the increases was double-digit growth in key markets globally, from the Pan Asia region to South America and Europe to the Middle East.

Israel and South Korea transitioned from distributors to joint ventures in the second half of 2016.

And Central and Eastern Europe began shipping as a subsidiary in the first half of 2016.

Along with Latin America, we see great potential in these markets and think they will become more positive contributors in the near future.

Further detailing our growth internationally, for the quarter, our wholly-owned international subsidiary business grew by 5.2% due primarily to growth in Germany, Spain, Benelux, Italy, France and Chile.

Our business in the United Kingdom and the Alpine region was essentially flat on pairs shipped, but down in dollars due to currency.

U.K. was also negatively impacted by a leading local retailer shutting its stores after bankruptcy.

Our joint venture sales grew by 62.4% for the quarter, led by double-digit gains in China and the addition of sales from South Korea, which is now one of our largest joint ventures with 53 SKECHERS stores.

China shipped 3.7 million pairs in the quarter and opened 107 freestanding SKECHERS retail stores, primarily through franchisees.

And with the closing of 9 stores, they ended the second quarter with 685 SKECHERS stores, including China's largest store to date at more than 14,000 square feet in the Tier 1 city of Guangzhou.

At quarter end, we had approximately 2,235 points of sale in China and an extremely strong e-commerce business with triple-digit growth for the second quarter.

In India, where our business is just developing, 14 SKECHERS stores were opened in the quarter, bringing the total store count to 84.

Our international distributor net sales increased by 16.1% in the second quarter and 14.3% for the 6 months.

In the quarter, the growth came primarily from Australia, Indonesia, Taiwan, Russia and the UAE, which handles much of our business across the Middle East and Africa.

At quarter end, there were 1,691 SKECHERS-branded stores outside the United States that are owned and operated by international distribution partners, joint ventures and a growing network of franchisees.

Through our partners, the first SKECHERS stores opened in Botswana, Bulgaria, Iraq, Kosovo and Pakistan in the quarter, giving consumers the opportunity to now shop at a SKECHERS store in 90 countries as well as the United States.

In the second quarter, 187 third-party owned stores opened, which include the already mentioned 107 in China and 14 India as well as 10 in Indonesia, 8 in Saudi Arabia, 4 in Spain; 3 each in Australia, Turkey, Qatar and Italy; 2 each in Angola, Netherlands, the Philippines, Taiwan, Thailand and UAE; and 1 each in Botswana, Brunei, Bulgaria, Canada, Denmark, Egypt, England, Iceland, Japan, Kazakhstan, Kosovo, Lebanon, Malaysia, Mexico, Northern Ireland, Pakistan, Poland and Vietnam.

Fourteen stores closed in the quarter.

Four third-party owned SKECHERS stores have opened in the third quarter to date, including 2 in India and 1 each in Algeria and Australia.

We expect another 242 to 260 third-party owned SKECHERS-branded stores to open in the second half of 2017.

International wholesale, which includes subsidiaries, joint ventures and distributors, represents our largest business channel at 40.5% of our total sales for the first half of 2017.

Combined with the international company-owned retail stores, it represented 48.5% for the same period.

We expect to further grow our business in the global marketplace with the addition of new product lines through the opening of more SKECHERS stores, including in new cities and countries, such as our first 2 planned in Switzerland later this year and with expansion into more doors.

With international backlogs approaching mid-double digits, we expect strong double-digit net sales increases for international in the second half of 2017.

In our global company-owned retail business, net sales increased 28% for the second quarter and 21.3% for the first 6 months.

The second quarter gains were the result of increases of 14.5% in our domestic retail stores and 67.4% on our international retail stores.

This included positive comp store sales of 7.7% domestically and 5.1% in our international stores for a combined total comp store sales increase of 7.1% in the quarter.

At the end of the quarter, we had 614 company-owned SKECHERS retail stores, of which 179 were outside the United States.

In the second quarter, we opened 31 stores, including concept stores in Tokyo's key shopping area, Shibuya, the renovated Century City mall in Los Angeles and New York Soho area.

In addition, we opened 2 concept stores in leading malls in Lima and Bogotá, which will serve as models for the relaunch of SKECHERS in Peru and Columbia, respectively.

In June, we also opened a 24,000 square foot superstore in Ontario Mills in Southern California, which has dedicated shops for men, women, work, performance apparel and a kids' area, complete with a theater.

In the quarter, we also relocated several stores for improved visibility and in some cases, bigger footprint, including locations in San Francisco's Powell Street as well as Miami's Aventura Mall and Dolphin Mall and Las Vegas Premium North Outlet Center.

Three company-owned stores have opened to date in the third quarter, including 1 in the U.K. and we relocated our 34th Street store to improve visibility.

Further, we plan to open 2 more stores tomorrow, including 1 in Italy.

Adding to the growth in the quarter was our domestic e-commerce business, which grew by 27.9%.

We also have company operated e-commerce sites in Chile, Germany and the U.K. and we launched new company-owned commerce sites in Spain and Canada during the quarter.

With the strategy to continue opening retail stores in key global markets to further build the brand and meet consumer demand, we expect to open an additional 35 to 40 company-owned SKECHERS stores in 2017 and remodel or relocated several other stores to increase our footprint and visibility.

Now turning to our second quarter results in more detail.

Second quarter record net sales increased 16.9% to $1.026 billion versus $877.8 million in the prior year period.

Our double-digit growth in the quarter was the result of net sales increases in all our business segments, including company-owned global retail stores of 28%, international wholesale of 18.6% and domestic wholesale of 6.4%.

Gross profit was $488.3 million compared to $416.3 million in the prior year period.

Gross margin remained strong at 47.6% compared to 47.4% in the prior year period.

Selling expenses increased $24 million to $100 million or 9.7% of sales compared to $76 million or 8.7% of sales in the prior year quarter.

The increase was primarily due to increased domestic advertising expenses of $5.2 million and international advertising expenses of $6.4 million, which was primarily due to our European subsidiary as well as in Japan and South Korea, and an additional $4.2 million in selling commissions from our joint venture in South Korea.

As a percentage of net sales, advertising expenses were approximately 34 basis points higher versus the second quarter of 2016.

General and administrative expenses were $305.3 million or 29.8% of sales compared to $243.2 million or 27.7% of sales in the prior year quarter.

The $62.1 million year-over-year increase was primarily due to the investments in our brand and business to achieve both our short and long-term global growth initiatives.

This is evident in both the expansion of our company-owned global retail business, which had the highest net sales dollar and percentage gain, followed by our international wholesale business.

Given the increase in our international business, which for the first 6 months represented 48.5% of our total business, we believe the greatest opportunity for expansion is international and we will continue to invest in our infrastructure and marketing to support this progress.

The expenses for the quarter included $22.3 million associated with the company's 68 additional domestic and international retail stores and $26.2 million to support our international growth, of which $16.9 million was due to increased cost in China, $3.6 million was related to the transition of our South Korean distributor to a joint venture and $2.4 million was related to Japan.

In addition, $4.2 million was related to increased depreciation.

Domestic wholesale, general and administrative expenses increased $13.5 million during the second quarter, primarily due to increased headcount in the United States to support our expansion worldwide as well as our expansion into new categories and brands.

Earnings from operations for the second quarter decreased 14% to $86.3 million or 8.4% of revenues compared to $100.4 million or 11% -- 11.4% of revenues in the second quarter of 2016, as a result of the significant investment we made to support our future growth.

Net income was $595.5 million compared to $74.1 million in the prior year period.

Net income per diluted share was $0.38 on approximately 156.2 million average shares outstanding compared to $0.48 on approximately 155 million average shares outstanding in the prior year period.

Our effective tax rate was 16.1% compared with 12.7% in the prior year period.

The increase was due to changes in the mix between foreign and domestic taxable income when compared to 2016.

We continue to expect our effective tax rate to be between 14% to 19% in 2017.

Net sales for the 6-month period ended June 30, 2017, set another record, increasing 13% to $2.099 billion compared to $1.857 billion in the prior year period.

Gross profit was $964.8 million or 46% compared to $848.4 million or 45.7% in the prior year period.

Selling expenses were $173.8 million or 8.3% of sales compared to $129.8 million or 7% of sales from last year.

General and administrative expenses were $587.8 million or 28% of sales compared to $485.6 million or 26.2% of sales last year.

Earnings from operations for the first 6 months of 2017 were $210.7 million or 10% of sales versus $238.9 million or 12.9% of sales for the same period last year.

For the 6-month period, net income was $153.5 million compared to net income of $171.7 million in the prior year period.

Diluted earnings per share were $0.98 on approximately 156 million average shares outstanding compared to diluted earnings per share of $1.11 on approximately 154.9 million shares last year.

And now turning to our balance sheet.

At June 30, 2017, we had $751.6 million in cash and cash equivalents or $4.81 per diluted share.

Trade accounts receivable at quarter end were $494.7 million, an increase of $26.1 million from June 30, 2016, and our DSOs were 36 days at June 30, 2017 compared to 40 days in the same period last year.

Total inventory, including merchandise in transit, was $669.7 million, an increase of $79 million or 13.4% compared to June 30, 2016.

The year-over-year increase was in line with our expectations, and we are very comfortable with our current inventory levels due to increased revenues in our global business, increased store count worldwide, new product introductions and increased backlogs.

Compared with December 31, 2016, total inventory, including merchandise in transit, decreased $30.8 million or 4.4%.

Long-term debt was $68.3 million compared to $68.1 million at June 30, 2016.

Shareholders' equity was $1.8 billion versus $1.6 billion at June 30, 2016.

Book value or shareholders' equity per share stood at approximately $11.39.

Working capital was $1.359 billion versus $1.155 billion at June 30, 2016.

Capital expenditures for the second quarter were approximately $47.6 million, of which $26.2 million was primarily related to 31 new company-owned domestic and international store openings and several store remodels.

And approximately $20 million for land to be used for our China distribution center.

For the remainder of the year, we expect our ongoing capital expenditures to be approximately $35 million to $40 million, which includes corporate office upgrades, an additional 35 to 40 company retail store openings and several store remodels.

In summary, we celebrated our 25th year in business in May of 2017, a monumental milestone marked by new records in sales, the launch of new lines and continued international expansion.

The company has come a long way from its roots in men's logger boots and is now the leader in the United States for walking, work and casual lifestyle footwear, and the second largest in all footwear and casual and athletic footwear.

In addition, SKECHERS is now a leading brand in many countries around the world, a testament to the strength of our products globally.

Further, in the second quarter of 2017, we exceeded our net sales expectations and achieved a new second quarter net sales record with quarterly sales of over $1 billion for the second time.

This growth came across our 3 business channels with double-digit increases on our company-owned global retail business and our international wholesale business and strong single-digit growth in our domestic wholesale business.

International grew to over 50% of our total business in the first quarter, but decreased slightly to 48.5% for the first 6 months due to the strong growth of domestic company-owned retail and U.S. wholesale businesses.

We believe they will again surpass the 50% mark this year, as we see international having the strongest growth potential among our 3 business channels.

China continues to have double-digit improvements.

And our joint ventures in India, Israel and South Korea are in the development stage and we believe will have an increasingly positive impact in the near future.

Additionally, the transition in Latin America from a distributor to a subsidiary model is allowing us to invest and grow in several countries we believe have strong potential, specifically Peru and Columbia.

Our company-owned retail segment continues to grow profitably and now has 614 stores with retail comps of 7.1%.

In the quarter, we opened several key locations including Tokyo's shopping district of Shibuya, the newly renovated Century City mall in Los Angeles and New York Soho.

Together with our third-party stores, at quarter end, there were 2,305 SKECHERS retail stores around the world, spanning an additional 5 countries where SKECHERS stores did not previously exist.

We value our brand image and are continually striving to market SKECHERS globally.

In the second quarter, we signed multiplatinum recording artist, Camila Cabello, to a multiyear deal to support our women's business.

With an enormous following on social media, Camila speaks to young women around the world and we're excited to have her on board.

In addition, we signed recently retired Dallas Cowboys quarterback, Tony Romo, to a multiyear marketing agreement for our men's line, creating an even stronger legends team with our new slugger David Ortiz, who recently retired from the Boston Red Sox.

And now turning to our outlook.

With low double-digit increases in backlogs on a worldwide basis, already a strong July in regards to both shipping and our incoming order rates, we believe we are on track for record sales growth in the back half of 2017.

With the investments we have made in our business globally and our strong cash and inventory position, as well as new product initiatives we are delivering, we believe we are well positioned for continued sales growth in the second half of 2017 and into 2018.

Based on these key indicators, we believe we will achieve net sales in the third quarter in the range of $1.05 billion to $1.075 billion, which would represent a third quarter sales record and earnings per share of $0.42 to $0.47.

This projection includes flat sales in our domestic wholesale business and double-digit increases in both our international wholesale business and domestic international company-owned retail stores.

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

(Operator Instructions) And our first question is from Scott Krasik of Buckingham Research.

So my question -- I guess I have 2 questions on margins.

One, sort of more near-term and then 1 longer term.

If we go back to last quarter, when we talked about the growth in SG&A, at least on a dollar basis, I think you had indicated maybe it would be similar to the first quarter which was up $60 million, and it was up $80 -- a little over $80 million.

So I'm just wondering what level of visibility you have to that, maybe over a 3-month period?

And then you're obviously very bullish on the sales outlook longer term.

So when do you expect to see any operating leverage?

Can margins expand?

What should margins look like if you continue to grow this business double digits next year?

I think as we've spoken before and we've said many times, we think next year is an inflection point as far as operating margins are concerned, unless there's some new additions to our -- transitions from -- to joint ventures and subsidiary, which I don't see right this minute.

So I think what you have to get used to is the fact that our expenses were up in the quarter more than we anticipated and that has to do with all the countries we're converting.

And then moving quite quickly on the sales end and they're a little more expensive to get the stores and the personnel and the amount of people they need, given the size that they're doing.

Also, China is growing extremely strongly and the big piece of their growth is online, which has more cost per dollar.

I mean, you can get the 2 equivalent operating margins, but you've got to fill in the cost.

So I think if you look around, given that we've now created 2 new categories or 3 categories that we're dealing with and constantly looking for more, we have great hopes for SKECHERS Street, BOBS, YOU by SKECHERS, all of which are continuing to move and as well as new additions to our sport and active line.

So we've invested quite largely there.

So I would think, barring any significant change in our merchandising schemes or consumer taste and no more absorption for new companies at the present time, we would certainly begin to leverage as we come into, what I believe, is going to be a very strong Q1 next year.

So -- and is it unrealistic?

I mean, most of the athletics -- global athletic footwear companies have double-digit operating margin.

I mean, can you guys get to 10% next year?

Can you get -- where should we think about it?

I think 10% is a pretty low number.

I think we can get higher than that because I think we'll see significant growth without the same expense increases because we'll be levering about what we're building this year.

So the first few years, and the initial growth are always the hard part, and they tend to pull from your leverage.

But I do think as we get to next year, we should get back into what I would think would be in the 12%, 13% operating margins, maybe even a little better on pretty good growth.

The next question is from Jay Sole of Morgan Stanley.

David, can you talk about domestic wholesale, the guidance for 3Q?

You're talking about flattish.

Is that in line with your expectation maybe from versus 3 months ago?

And what's changed on the margin?

Well, I think what's changed is the movement right now and our hope to be conservative until we see exactly what's going on in our domestic marketplace.

We had a 6% increase, which was significantly larger than we anticipated for this.

And I would tell you, the biggest piece of that was movement from what would originally be anticipated of July shipments back to June.

So if you pull that back and you get a big mid-single-digit increase in shipments for second quarter, it comes out of backlog, which would begin for third quarter, which is why backlogs for domestic wholesale are only up low single digits.

The key part to this is we still stand to be relatively flat to last year, which is our projections.

But should we get the x returns, we think it's on the conservative side, but should we get the x return into September for a good back-to-school with the stuff being delivered earlier, then that would be some significant upside for us potentially for this quarter and we have to see how back-to-school develops.

Okay.

Got it.

Maybe just -- you talked about your general expectation for international wholesale growth in 3Q and 4Q.

Maybe can you put a finer point around maybe the percent increase that you're looking for in 3Q and maybe the percentage increase you're looking for (inaudible)?

Yes, I think we continue.

We should be in the low double digits for both subsidiaries and distributors.

We may get to 20% or a 20-plus percent on the subsidiaries and joint ventures, but we're waiting to see how that develops.

So I think that growth certainly continues, barring any inflections or changes in the worldwide scene, obviously, with currencies or any -- or business environment.

Got it.

And maybe if I sneak one more in, in terms of how the stores, obviously, 10% comp is very strong in 2Q.

Have you seen that growth rate continue in July?

How are the stores comping so far in 3Q?

The stores are about mid-single digits in the early part of July.

They continue to hold up, U.S. and international, with no major changes but we're waiting to get into the real push for back-to-school.

That's usually our strength, so we'll see how that works out.

The next question is from John Kernan of Cowen.

So shifting to fourth quarter a little bit.

Can you help us understand the SG&A increase -- SG&A dollar increase you'd expect in 4Q?

I know it's a smaller quarter for your P&L, but I just want to see what kind of handle you have and what visibility you have into SG&A beyond just Q3?

Because it did come in higher than your guidance for this quarter and I think some people are worried about getting into spending into next year.

Well, I think this all has to do with new territories and where we stand.

So while I don't -- it would depend on how we get through back-to-school and what the prognosis is for fourth quarter for the expenses.

If we see the opportunity to push sales because we've had a strong third quarter around the world and spring is anticipated to be very strong and if we're moving some deliveries from January into December, which is certainly possible as strong as we foresee this line to be, then we'd obviously spend more to get it all set and started.

So I don't anticipate any outsized increases in Q4.

I don't have anything really new going on other than the fact that I still have South Korea that I haven't had a full year with, so I'm not comping yet.

But other than that, we don't anticipate that there's significant increases in Q4.

It's a relatively small quarter for us, both from the selling line and the G&A, so I don't look to have a lot of pressure there.

Okay.

Can you give us some comments, general comments on next year?

You mentioned 10% operating margin being too low and you're talking towards a 12% to 13% operating margin.

I guess if we look back from 2013 through 2015, you leveraged SG&A well over 500 basis points.

Just wondering what type of SG&A lever -- when this hit with the magnitude of a leverage you think it can be, if the sales line holds up at this rate?

Well, my -- I'm a very optimistic kind of guy.

And if you look at our past, when you see us ramp up, when we said all these things, I mean, this is transitions on 2 levels for us.

Transition based on consumer taste, which has developed new categories for us to compete in, which are significant around the world and building infrastructure in 4 or 5 territories at the same time.

Once we get through this, it would depend on -- or obviously, our operating leverage will depend on top line growth.

So I don't want to put any numbers on there too far in advance of what it could be, but we think some of these territories can grow quite well.

And the bigger they grow, we'll have more possibility to get operating margins back to historical levels and maybe even a little better, depending on where the growth is.

Can -- and if I can sneak one more question in.

The $13.5 million investments in domestic wholesale and SG&A, is that -- are we done with that?

Are you looking to invest more domestically within the United States to support the growth here?

First of all, the growth of domestic wholesale is sort of a misnomer, because we put some of -- all of our designers and merchandisers and actually, it's a worldwide functionality on the new categories.

But yes, I think the biggest part of our increase is done unless there's significant new categories to open up or to start.

So other than retail, which is still a very strong piece for us, and our retail is holding up quite well in the United States and we're looking to move to bigger boxes, we find all our merchandising is working well, not only the footwear but the apparel is starting to pick up and socks and bags, and we have bigger formats that can carry themselves and do quite well.

So other than retail in the United States, which I fully anticipate we'll continue to invest in, we shouldn't [sell] the same growth and increase on domestic expenses.

And then just housekeeping, you mentioned mid-double-digit backlog internationally.

Is that mid-teens?

Is that more than mid-teens?

What type of percentage rate should we expect on that?

It's mid-single digits.

It's very low teens.

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

Just to follow up on your Q3 U.S. footwear guidance, it seems very conservative, based on the momentum and even the backlog (inaudible)...

I'm having trouble hearing you.

You're a little cloudy.

Can you start again?

Can you hear me better?

I just wanted to follow up on your Q3 U.S. wholesale guidance, which it seems very conservative just based on the momentum that you guys are seeing in the marketplace and even with the backlog being adjusted for the pull-forward, but maybe you could walk us through what you're seeing in the environment exactly right now.

Are there specific channels that you're more cautious about?

Are you seeing an increase in retailers who are holding back their open-to-buy dollars?

And I know you said that the sell-ins are pretty strong for the new product lines, but do you have any read so far on how those are selling through from what wholesalers are telling you right now?

Yes.

I mean, we've had fairly good results coming back on the new product.

But it's so early, it's very difficult.

I don't know that -- while we have some requests for reorders as we get to this early part of back-to-school and some more product in a couple categories that are short, it's way too early for anybody to take today's sell-ins and convert that to new orders and moving the inventory around.

I think it's fair to say it is a conservative.

It's based on having a relatively flat backlog and not being sure how strong back-to-school will be.

But I would think there could be upside to that should we have -- I think we went from a good to a very good back-to-school period.

We're starting to sell well.

Our inventories are in great shape.

We're going through the transition very well and we have every hope that it will be certainly significantly better than flat, but we don't want to get too far ahead of ourselves.

And just in terms of the back-to-school season, what are you kind of expecting for U.S. back-to-school this year?

And are you seeing any pressure from kind of ongoing discounting last year?

I know we talked quite a bit about some of your bigger competitors promoting in the marketplace and that may have put a little bit of pressure on your U.S. numbers.

Is that something that you continue to see, as we get into back-to-school here?

Yes, there's some still going on.

Obviously, there's still sales and still some advertising on TV for lower prices.

But I think we've found our way.

I mean, if you think about it, there's been a change in consumer trends and some of it is lower-priced, a la some of the new and less high tech.

We increased our units by over 11% in the quarter.

That's significant.

That's a significant amount of shelf space.

So I think yes, we -- while we still see it out there, I think we're competing against it quite well and still holding our own.

Obviously, if that goes away, I think we could see an uptick even from here as far, as our sell-throughs and moving through retail.

Okay.

Great.

And then just 1 follow-up on the international.

Is China -- how is China kind of performing relative to your previous guidance of $500 million this year?

Is that kind of still how you're tracking?

Or could you be on pace to do better than that?

Well, we certainly could be on pace to do better than that.

We've done well.

If you take a look, we've done just over -- just short of $250 million year-to-date for the 6 months in China.

There's no reason to indicate that the slow -- that anything will slow down from there.

So if anything, I'd say we're on target to do somewhat over $500 million.

The next question is from Laurent Vasilescu of Macquarie.

I want to follow up on the domestic wholesale dive for the third quarter.

Can you potentially quantify in dollar terms how much was shifted from 3Q into 2Q?

And is there any potential pull forward from 4Q into 3Q that we should consider for this year?

To the second point first, yes, absolutely.

That's where the positive part would come to.

We've booked very well on a slow basis and we're booked very well for the beginning of Q4.

October actually is booked quite strong for us which is never a strong month.

So that always is available to pull up.

So that is certainly there and certainly would be with a positive push.

As far as what moved, it's very difficult, I would guesstimate and it's my own feelings for starters, it's somewhere in the $20 million range that has shifted from what was originally July into June.

I mean, July into the second quarter.

Okay.

And then for the fourth quarter into the third quarter, anything we should consider?

Sorry.

Say that again.

It's for fourth quarter...?

Yes, is there anything we should think about in terms of calendarization for back -- for domestic wholesale between the fourth quarter and the third quarter?

No.

I think it goes through.

Fourth quarter has never been a strong quarter.

It's always been the smallest quarter of the year, although it has on occasion been a springboard to go into first quarter.

So that's how I would look at it.

If back-to-school is strong and we go into the holiday season on a relatively strong basis, good possibility that some of our spring shoes, especially in warmer areas around the world, could move up into the fourth quarter.

That's happened to us since well in the past.

So we're looking for a lot of positive opportunities going forward but we have to wait and see the sell-throughs.

Okay.

Very helpful.

And then on international wholesale, I want to follow up on the guidance for double-digit increases for the third quarter.

I think you get to the midpoint of total company revenue guidance for the third quarter.

It looks like international wholesale can actually be as high as high as 20%.

Is that a fair estimate?

Yes.

I certainly think it can be.

Some of it will depend on currency.

We're doing very well.

We expect to pick up some of those losses from the U.K. although they don't move the needle, in and of itself.

And even in Switzerland, both price increases and the euro and the pound have gotten somewhat stronger now, so there's a lot of good opportunity for us.

Okay.

Very helpful.

And then lastly on China, I think you had mentioned that year-to-date, you've done $250 million.

It looks like for the second quarter, correct me if I'm wrong, but your China revenue is up 45%, around there.

It looks like the China number could be -- it looks like China could be much bigger than $500 million for this year.

Any further guidance on should we think $500 million to $550 million or potentially more?

And then lastly, can you tell us how much you do in China on e-commerce?

I don't know that we want to give that number that specific.

E-commerce is the biggest single piece and it's grown the most.

Obviously, we said it doubled, but it doesn't make up half the business anything quite like that.

I would tell you, is it possible to get to $550 million in China?

I think that would be a stretch from now because we're planning [through to] $500 million.

It's certainly possible.

A lot of it will depend on Singles Day and how things hold up at the back half of this year, as well as competition, but I wouldn't take it off the table.

The next question is from Sam Poser of Susquehanna International Group.

All right.

So just to clarify something regarding all the moving parts of the way the order flows, the orders that got moved from 3Q to 2Q were really primarily end of quarter to allow the retailers to set up earlier for back-to-school.

Is that correct?

I don't know if it's going to allow us, but that's what happened.

Obviously, they had room for it and they've come at the earlier part of the cycle and taken it early, which is certainly good for us.

So if, let's say, so the way this theoretically would flow, if the sales when back-to-school kicks off in early August, late July or early August, that's outpacing.

September orders theoretically would move into the end of August and then October orders would move to fill that gap in September.

Is that a fair way to think about it, but it's all going to be predicated on how well the product sells really in the next 4 to 6 weeks?

I think that's correct.

Okay.

And then on the SG&A, I mean, just given -- I mean, you're still going to -- when you look into 2018, we're still looking at SG&A growth, just fair enough to be not at the degree we've seen this year and that SG&A growth in Q4 of this year would moderate somewhat.

Is that a fair...

That's a fair assessment at this point.

And then you talked a little bit about the possibility of some early delivery of sandals -- of more warm weather products.

And based on some checks we've done, we've seen your sandal business be quite good.

And that's really off of a very, very small base.

Can you talk a little bit about what you're seeing there and what's working there and where you're seeing it?

And what kind of opportunity you see going into next year?

Because it's been really the first foray into that in a major way, just based on the data that we've been seeing lately?

I don't know if that's quite the first.

We've been doing sandals for a long time and it's stronger in some parts of the world than others.

I don't think it's only sandals.

Our sandals are doing quite well, but so is the rest of our business.

Certainly, our active and YOU and our sport product is moving in there...

I'm not talking about relative to the early delivery in the warmer weather market, then sandals would certainly be one of those items that [get more]...

Yes, to the extent customers have open-to-buy and places that they want to test at a bigger level because we're having such a strong season now, I think that would mean that we would move it into December, certainly into test sites, but there's a lot of warm weather places around the world.

And in South America where they have opposite seasons though, we can do even stronger.

So again, this is a worldwide phenomenon when we get this hot.

And when we're talking about the investments into the JVs.

Can you sort of take the new JVs and subs, if it's Latin America, South Korea, Israel, China and so on -- and India and sort of talk about -- and Central Eastern Europe.

And sort of the magnitude of the ongoing investment and sort of, which continues and which falls off as we look forward into next year, which was the incremental...

I think they all -- Central Eastern Europe is a sub, but aside from that, on the joint ventures, I think they all continue.

We don't have any new territories that we think will have peaked.

So we continue to invest.

The issue would be that we would then leverage in each of those territories because the investment would grow at a smaller pace than the top line once we set up the infrastructure, depending on how many stores we open at a time.

So it's no different in our joint ventures than it is in our subsidiaries or here in the United States.

We invest, we continue to grow.

The investment tends to moderate as you get on a roll and continue to grow based on an infrastructure until you have to reinvest again because you've either grown too quickly and you need to increase your structure, or because there's consumer taste change and you have to develop new categories and move new products around.

So I don't see a big degree of that happening.

But we're right at the beginning of a lot of new categories and you've already spent a lot of money against a lot of those issues that you just brought up.

So theoretically, the increment...

I don't see it carrying through into the first quarter of next year because I think a lot of it has already been spent or is being spent this year.

(Operator Instructions) And the next question is from Chris Svezia of Wedbush.

A question on U.S. wholesale, what is the leverage point for U.S. wholesale revenue growth?

Is it mid-single?

Is it high single?

I know you mentioned there are some additional costs involved, but they're spread globally.

But just give us some frame of reference of where that leverage point is right now.

Leverage what, for the operating line?

Yes, so for operating margin for U.S. wholesale.

Where does that stand right now?

I would think it's in the low to mid-single-digit.

Basically, because a lot of our fixed expenses will get taken -- or will be absorbed by the new stores we're opening and as we extend retail, it takes pressure off the distribution center.

And certainly the merchandising and all of that, I think the way our stores are growing and our potential there, that it only takes low to mid-single digits.

Okay.

So when I go back to the second quarter for a second and you grew the way that you grew for U.S. wholesale.

And in aggregate, there was another, call it, $50 million in revenues that you did above the high end, I think, of your guidance.

I mean, and I know you're opening up stores and that's the big piece of the expense.

China is a big piece of the expense.

Is there -- was there one other thing that really drove the notable amount of de-leverage relative to your plan if U.S. wholesale grew the way it did and you could leverage at that level?

Yes, I -- the de-leveraging points are slight.

So it's not only a U.S.-centric kind of thing.

So China had a pump up because they started growing at a bigger pace online, which is more expensive.

So their operating margins came down very, very slightly.

Korea is still operating at a loss, although their sales are increasing and we're well on our way to $100 million business.

The refurbishing of all the stores and the positive feedback we've gotten have reduced more expenses, so that's a deleveraging point.

In Japan, we decided to open a significant amount of stores.

I think there's almost 25.

So we de-levered that a slight bit.

Same holds true for South America.

When we went into Peru, we think Peru is going to be a great one.

We refurbished the stores in the second quarter.

And at the end of the second quarter going into the first quarter, we started to see significant comp store increases, and I've decided to up the pace of opening stores in South America.

So there was little pieces everywhere that de-levered.

So it wasn't that the U.S. didn't leverage at all, there was no positive pieces.

As we made major investments, the 14 stores in India and growing our wholesale business and there's all changes going on there.

We had to build a significant infrastructure and new office space, and I think that's holding up very well.

All those things will, we believe, I believe, as we get into the end of the year and to next year, will begin to leverage in and of themselves.

So you don't even need that much from the U.S.

Okay.

So switch gears, gross margin.

Any thoughts as you think about third quarter, the earnings range that you gave, talk about revenues, how should we just think about the gross margin sort of run rate, similar 20, 30, 40 basis point increase, largely driven by mix of business or any color you can give there?

Yes, I think you have at least what we've been seeing that 20 to 40 basis points or so.

I think there's possibility because Q3 is a stronger time for international as far as Q3 is concerned that you may get some -- a little extra out of that because, like I said, China will grow at a more rapid rate, we think.

I think Europe will pick up and we'll get some, hopefully, get some gross margin pick-up from those currencies that we changed.

So I think we'd get a minimum of the 20, 40 basis points and there's a possibility of somewhat more.

Okay.

Last few things.

Just China, what's the cost of doing business these days in China?

You referenced e-commerce.

It's slightly more expensive.

I know at some point, you're going to do your DC enhancement, but I think that roughly a year way.

And the last question, just on same store sales on international up 5%, a little bit lower than what it has been trending.

Was there anything unique about that or any particular market that was a little soft there?

Or just any color about that as well.

I missed the last one, what was down 5%?

No, no, no.

Up 5% I think was the international same-store sales for number for DTC.

I think U.S was up 7.7%.

So I'm just curious, the 5%...

Yes, I think what you see there is we're now comping in South America and had to refurbish the stores, so they were a drag.

And in Japan, the first set of stores that have come up currency-wise and everything else have comped -- not comped significantly positive.

So I think it's just the shift of adding these to the comp store sales.

At the early part of Q3, international has started to pick up.

While European business is strong.

We also lost a little bit because the biggest concentrations of stores in Europe were in England and we haven't raised prices till July 1 so that impacted the comp somewhat as well.

But I don't think there's anything structurally in there.

Okay.

And China, just real quick, the operating cost in -- to do business there in that country?

It's people cost and system cost, because they don't have a lot of automation.

So if you think about online growing that quickly, that's shipping 1 pair at a time.

It just takes significant more per pair.

But our operating margins in China haven't changed significantly, so we're making it up in volume.

The next question is from Tom Nikic of Wells Fargo.

So I just wanted to get a little bit of clarification.

I think you said earlier there was about -- that the pull forward out of July and into Q2 was about $20 million, which basically accounted for all of the growth in U.S. wholesale in Q2?

I think $20 million is the universal number.

We had some pull-forwards in Europe as well.

So that $20 million was not entirely in the U.S.?

That's correct.

Okay.

So I mean, even absent that pull-forward, you still would have been a little bit positive in Q2?

Yes.

We always anticipated to be slightly on the positive side.

Got it.

All right.

And then just on the SG&A.

So I mean, dollar growth was 20% in Q1, 27% in Q2.

I mean, how should we be thinking about it in the back half?

Like should we be thinking about 20% growth in Q3 and Q4?

Something a little bit less than that?

Just any help there would be much appreciated.

Okay.

I would think 20% would be minimum for the third quarter, slightly higher than that because like I said, the same things continue.

We won't drop anything.

The question is how big the base was the year before.

I think starts to come down from that in fourth quarter and certainly, comes down from even that in the first quarter.

And our final question comes from Scott Krasik of Buckingham Research.

Just a couple of clarifications.

What was the currency, the constant currency revenue growth for international?

And I'm particularly thinking about U.K. probably was hit by that, if the price increase didn't come through till July.

Yes.

Actually, we had a slight positive this year worldwide even with the drag in the U.K.

Okay.

And then the price increase went through?

I mean, any change in the orders with the price increase?

Or that took?

No.

We're moving right through it so far.

Okay.

And then I think you see more spring '18 orders in like September time frame.

But given some early conversations, you previewed the product at FFANY.

I'm just wondering how you think about the domestic wholesale acceleration now over the next 6 months, at least from a bookings perspective?

Yes.

From a bookings, I think you'll see it in August and September.

We started off July actually very strong, but obviously a smaller month to the aggregate.

I hate to get too far ahead of myself, but everything I've heard from all the people that have previewed the product on an international and domestic basis, feel very, very positive on that product.

So if the product today, which is a precursor to that, is selling through that well and we're showing these kind of increases, there's very, very good potential that we'll see a significant increase even domestically at wholesale, as that stuff starts delivering and we [get to] back-to-school.

So I'm anticipating some significant increases in incoming order rates in August and September, but like I said, I'm the eternal optimist.

That was all the time we have for questions.

I would now like to turn the conference 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.