Skechers USA Inc (SKX) 2017 Q3 法說會逐字稿

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

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

I'd now like to turn the conference 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 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' third quarter and 9-month 2017 financial results.

Third quarter net sales increased 16.2% to $1.095 billion and represented a new quarterly net sales record, $22 million above our previous record set in the first quarter of 2017 and surpassed our expectations, resulting in a new 9-month net sales record of $3.2 billion.

The quarterly sales growth was the result of a 25.7% increase on our international wholesale business, a 1.4% increase on our domestic wholesale business and an 18.6% increase in our worldwide company-owned SKECHERS retail stores, which included worldwide retail comps of 4.4%.

The increase in our company-owned retail stores came despite temporary store closures in Texas and Florida as well as continued store closures in Puerto Rico due to the recent hurricanes.

Our international wholesale business comprised 43.4% of our total net sales for the quarter and 41.5% for the first 9 months.

Including international retail, the percentage of total net sales represented 53% for the quarter and 50.1% for the first 9 months.

Our international business remains the biggest growth opportunity, and we believe it will continue to represent approximately 50% or more of our total business.

Third quarter highlights included record revenues of $1.095 billion; gross margins of 47.5%; diluted earnings per share of $0.59; a strong balance sheet with $802.9 million in cash and cash equivalents or approximately $5.12 per diluted share; a 25.7% increase in our international wholesale business primarily due to double-digit gains in most of our subsidiary and joint venture countries; an 18.6% sales increase on our worldwide company-owned retail stores, which included 67 net new stores opened since September 30, 2016, including 13 new stores in the third quarter; growing our company and third party-owned worldwide SKECHERS store base to 2,428 locations with the net addition of 140 stores in the quarter, including the company-owned locations; maintaining our position in the United States as the #1 walking, work and casual lifestyle brand and the #2 women's brand; signing the winningest distance runner in NCAA history, Edward Cheserek, to our SKECHERS Performance elite running team and retired Dallas Cowboys quarterback Tony Romo to a marketing agreement for our men's casual footwear; and introducing our first women's campaign starring multiplatinum recording artist Camila Cabello.

Three consecutive record quarters in 2017 and continued growth across our 3 distribution channels, including the double-digit gains in our international business, are a testament to the strength of our brand and product.

With the continued investments we have made to our infrastructure, our strong cash position, low double-digit increases in backlog on a worldwide basis and new product delivering for holidays as well as spring 2018, we believe the momentum we are experiencing will continue this year and into the coming year.

Now turning to our business in detail.

Our domestic wholesale business increased 1.4% for the third quarter and 2.4% for the first 9 months.

The quarterly growth was the result of a 2.7% increase in pairs shipped and a decrease of 1.3% in average price per pair, primarily due to the strength of our Kids business, which has a lower average selling price.

Our SKECHERS Kids business did particularly well in the third quarter, led by the strength of our lighted footwear and our lightweight sports styles and is indicative of a strong back-to-school period.

For the back-to-school selling season, which typically ships during our second and third quarters, domestic wholesale net sales increased 4% in the second and third quarters combined when compared to the same period in the prior year.

To support our back-to-school business, we ran several campaigns targeted to kids, including Energy Lights, along with our first Camila Cabello campaign targeted to young women and featuring our youthful SKECHERS Street collection.

Our Men's Sport and sport casual footwear also performed very well as did our BOBS, Women's Sport footwear line and sandal collections, which benefited from the warmer weather.

Along with numerous campaigns supporting our men's and women's lifestyle and walking lines, we also ran campaigns featuring our brand ambassadors, Rob Lowe, Brooke Burke-Charvet, Kelly Brooks, Howie Long and Sugar Ray Leonard.

To support our Performance business, we signed Edward Cheserek, a 17-time NCAA champion and the most decorated male runner in the history of the NCAA, to our SKECHERS Performance elite running team.

He is the ideal competitor to lead the SKECHERS athletes as Ed ends his competitive running career later this year.

Earlier this month, SKECHERS elite golfer Brooke Henderson took the New Zealand Women's Open title, earning her second LPGA tournament victory since joining the SKECHERS Performance GO GOLF team; and Colin Montgomerie won his second title at the SAS Championship in North Carolina.

With a team of accomplished golfers, including Matt Kuchar, and our integration into the PGA Golf Tour, our Golf business continues to perform well, achieving triple-digit sales growth in the quarter.

We continue to be the leading walking, work and casual footwear brand and are the second largest women's footwear brand.

The domestic retail environment remains challenging, but we're seeing improvements within some of our leading accounts, and we continue to be a trusted resource for their footwear needs.

We believe our product is unique and will continue to appeal to those seeking comfort, style and value.

Our shipments remain strong, and we are both optimistic and eager to deliver our holiday assortments to our domestic partners.

International wholesale represents the largest piece of our 3 distribution channels, comprising 43.4% of our total business in the third quarter.

Total international wholesale sales increased by 25.7% or $97.2 million in the third quarter and 20.2% or $222.2 million for the first 9 months.

The quarterly increases were the result of 31.4% growth in our subsidiary and joint venture businesses or $92.8 million and 5.4% in our distributor business or $4.4 million.

Contributing to the international growth was the double-digit increases in Canada, Brazil and most of Europe and Asia.

Further detailing our growth internationally, for the quarter, our wholly owned international subsidiary business grew by 17% due to growth in each of our 13 subsidiaries.

The highest dollar gains came from Germany, Spain, the U.K. and Canada, indicating the strength of our European business and the positive impact of price increases in the U.K.

Our joint venture sales grew by 51.1% for the quarter led by double-digit gains in China and India combined with the additional sales from South Korea, which is now our second-largest joint venture.

China shipped 4.3 million pairs in the quarter and opened 78 freestanding SKECHERS retail stores, primarily through franchisees.

And with the closing of 54, they ended the third quarter with 736 SKECHERS stores.

At quarter-end, we had approximately 2,339 points of sale in China and a strong e-commerce business, which grew double digits in the third quarter.

In China, we're looking forward to next month's Singles' Day, the largest e-commerce shopping day.

In India, where our business is developing, 18 new third-party SKECHERS stores opened in the quarter, resulting in more than 100 stores in this growing market.

Our international distributor net sales increased by 5.4% in the third quarter and 11.1% for the 9 months.

In the quarter, the growth came primarily from Indonesia, Turkey, Scandinavia and Ukraine.

At quarter-end, there were 1,805 SKECHERS-branded stores owned and operated by international distribution partners, joint ventures and a growing network of franchisees, including our first store in Switzerland.

In the third quarter, 140 third party-owned stores opened, which include the already mentioned 78 in China and 18 in India as well as 6 in Indonesia; 4 in Saudi Arabia; 3 each in Australia, Italy and Turkey; 2 each in Denmark, Hong Kong, Macau, Mexico and Vietnam; and one each in Algeria, Israel, Jordan, Latvia, Malaysia, Myanmar, New Zealand, Norway, Romania, Singapore, Sweden, Switzerland, Thailand, Ukraine and the UAE.

Nine stores closed in the quarter.

Nine third party-owned SKECHERS stores have opened in the fourth quarter to date, bringing the total to 1,814 worldwide, and we expect another 120 to 140 third party-owned SKECHERS-branded stores to open during the fourth quarter.

We believe the international growth will be the result of a new product line and further penetration with our established brands, the opening of more SKECHERS stores and expansion into new doors in key markets.

Over the last 2 years, we transitioned Israel and South Korea from distributors to joint ventures as well as Central Eastern Europe and Latin America to subsidiaries.

These transitions occurred because we saw great opportunity to further grow our business in these regions, and we expect these countries will become more positive contributors in the near future.

As mentioned, international wholesale comprised 43.4% of our total net sales for the quarter and, combined with retail, it represented 53% for the quarter.

Our international business remains the biggest growth opportunity, and we believe it will continue to represent approximately half or more of our total business.

With international backlogs approaching mid-double digits, we expect double-digit net sales increases for our international wholesale business in the fourth quarter of 2017.

In our global company-owned retail business, net sales increased 18.6% for the third quarter and 20.6% for the first 9 months.

The third quarter gains were the result of a 9.5% increase in our domestic retail stores and a 43.8% increase in our international retail stores.

This included positive comp store sales of 3.1% domestically and 8.4% in our international stores for a combined total comp store sales increase of 4.4% in the quarter.

Of note, the gains we achieved in our domestic stores came despite the temporary closure of 55 stores in the Texas and Florida regions due to Hurricanes Harvey and Irma and the continued closure of 9 stores in Puerto Rico due to the devastation of Hurricane Maria.

We reported net sales last year of $1.5 million for those days corresponding to the days stores were closed this year due to the hurricanes.

Further, we have seen customers return to our stores in Texas and Florida as they begin to rebuild and address essential needs.

Additionally, our stores in Puerto Rico remain closed, but we are estimating 3 will open in the coming weeks depending on power returning.

At quarter-end, we had 623 company-owned SKECHERS retail stores, of which 187 were outside the United States.

In the third quarter, we opened 13 stores, including the relocation of a new store on New York's 34th Street and concept stores in U.K., Japan, Colombia and Chile.

We closed 4 stores in the quarter, including our concept stores on Palace Street and Times Square, both through the opening of larger square footage stores in better locations nearby.

To-date, in the fourth quarter, one company-owned store opened in the U.K. and 4 stores are slated to open tomorrow, including one each in Chile and Italy and 2 in the U.S.

Adding to the growth in the quarter was our domestic e-commerce business, which grew by 8%.

We also have company-owned and operated e-commerce sites in Chile, Germany and the U.K., and we launched new company-owned e-commerce sites in Spain and Canada during the second quarter of 2017.

With a strategy to have retail stores in key global markets to further build a brand and meet consumer demand, we expect to open an additional 12 to 15 company-owned SKECHERS stores in the fourth quarter and remodel or relocate several other stores to increase our footprint and visibility.

Now, turning to our third quarter results in more detail.

Third quarter net sales increased 16.2% to $1.095 billion versus $942.4 million in the prior year period.

Our record growth in the quarter was the result of net sales increases in all our business segments, including company-owned global retail stores of 18.6%, international wholesale of 25.7% and domestic wholesale of 1.4%.

Gross profit was $520 million compared to $430 million in the prior year period.

Gross margin increased 190 basis points to 47.5% compared to 45.6% in the prior year period.

Selling expenses increased $21.8 million to $89.6 million or 8.2% of sales compared to $67.8 million or 7.2% of sales in the prior year quarter.

The increase was primarily due to increased advertising expenses of $17.2 million, including $3.6 million to support our international subsidiary businesses and an additional $3.5 million in selling commissions from our joint venture in South Korea.

General and administrative expenses were $316.9 million or 28.9% of sales compared to $261.8 million or 27.8% of sales in the prior year quarter.

The $55 million year-over-year increase was primarily due to SKECHERS' long-term global growth initiatives.

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

The expense increases included 8 point -- $18.1 million associated with the additional 67 domestic and international retail stores from the prior year, 13 of which were opened in the third quarter, and $27.2 million to support our international growth and our joint venture and subsidiary businesses.

Given the increases in our international business, we believe international provides the greatest opportunity for continued growth.

We remain committed to investing in the brand, product and infrastructure for all areas that present further growth opportunities.

Domestic wholesale general and administrative expenses increased $9.7 million year-over-year, primarily due to increased headcount in the United States to support the company worldwide improvements in our digital operations and the expansion into new categories and brands.

Earnings from operations for the third quarter increased 12.7% to $116.5 million or 10.6% of revenues compared to $103.4 million or 11% of revenues in the third quarter of 2016.

Net income increased 41.8% to $92.3 million, and diluted net earnings per share for the third quarter were $0.59 compared with $0.42 in the prior year.

Our effective tax rate for the third quarter was 9.4% compared to 24.2% for the third quarter of 2016.

We expect our effective tax rate for fiscal 2017 to be approximately 13%, which is lower than the estimated 15% expected at the end of the second quarter.

The 9.4% tax rate for the quarter is primarily a result of this lower revision in the expected tax rate for fiscal 2017.

Net sales for the 9-month period ended September 30, 2017 set another record, increasing 14.1% to $3.19 billion compared to $2.8 billion in the prior year period.

Gross profit was $1.48 billion or 46.5% compared to $1.28 billion or 45.7% in the prior year period.

Selling expenses were $263.3 million or 8.3% of sales compared to $197.6 million or 7.1% of sales from last year.

General and administrative expenses were $904.6 million or 28.3% of sales compared to $747.4 million or 26.7% of sales last year.

Earnings from operations for the first 9 months of 2017 were $327.2 million or 10.3% of sales versus $342.3 million or 12.2% of sales for the same period last year.

For the 9-month period, net income was $245.8 million compared to net income of $236.8 million in the prior year period.

Diluted earnings per share were $1.58 -- $1.57 on approximately 156.3 million average shares outstanding compared to diluted earnings per share of $1.53 on approximately 155 million shares last year.

And now, turning to our balance sheet.

At September 30, 2017, we had $802.9 million in cash and cash equivalents or $5.12 per diluted share.

Trade accounts receivable at quarter-end were $485.3 million, an increase of $59.2 million from September 30, 2016, and our DSOs were 36 days at September 30, 2017, compared to 38 days in the same period last year.

Total inventory, including merchandise in transit, was $697.7 million, an increase of $174.3 million or 33.3% compared to September 30, 2016.

The year-over-year increase includes $32.2 million of inventory from our new joint ventures in South Korea and Israel, which didn't exist on September 30, 2016.

We are comfortable with our current inventory 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 $2.9 million or 0.4%.

Long-term debt was $71.4 million compared to $67.6 million at September 30, 2016.

Shareholders' equity was $1.9 billion versus $1.6 billion at September 30, 2016.

Book value or shareholders' equity per share stood at approximately $12.01.

Working capital was $1.48 billion versus $1.23 billion at September 30, 2016.

Capital expenditures for the third quarter were approximately $25.7 million, of which $5.8 million was primarily related to 13 new company-owned domestic and international store openings and several store remodels, approximately $14.5 million to support our international operations and $5.4 million domestically for corporate office and showroom upgrades.

For the quarter, we expect our capital expenditures -- for the fourth quarter, we expect our capital expenditures to be approximately $20 million to $25 million, which includes corporate office upgrades, international expansion, an additional 12 to 15 company retail store openings and several store remodels.

In summary, the third quarter marked another milestone for 2017 as we saw continued growth across our 3 distribution channels, a testament to the strength of our brand and the investments we have made to ensure our success this year and in the coming years.

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

In addition, SKECHERS is now a leading brand in many countries around the world, reflecting our commitment to delivering innovative products that resonate with every type of consumer.

Further, in the third quarter of 2017, we exceeded our net sales expectations and achieved a new quarterly net sales record, reaching $1,095,000,000.

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

International once again represented over 50% of our business as it did in the first quarter of this year.

We believe it will remain above the 50% mark for the full year as we see international having the strongest growth potential among our 3 business channels.

The international growth resulted from the continued strength in China, the resurgence of the United Kingdom and growth across all of Europe as well as Canada.

China continues to have double-digit improvements, including its fast-growing online business.

We believe the transition of Israel and South Korea to joint ventures from distributors, combined with the transition of Latin America and Central Eastern Europe to subsidiaries from distributors, is allowing us to expand our potential in these key markets.

In addition to international wholesale, our company-owned retail segment continues to grow profitably with global retail comps up 4.4% and an expanded network of 623 stores, including 187 outside the United States.

Together with our third party stores at quarter-end, there were 2,428 SKECHERS retail stores around the world or 2,438 with the 10 stores that opened so far in the fourth quarter.

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

In the third quarter, the first campaign for Camila Cabello debuted in the United States, and we're looking forward to her SKECHERS campaign rolling out worldwide in the coming months.

Her youth and appeal is a strong contributor to our team of legendary athletes that now also includes recently retired baseball great David Ortiz and quarterback Tony Romo.

Along with wins by our elite golfers, our elite running squad represented half of the medals at the IRONMAN World Championships in Kona last weekend, achieving second- and third-place wins with 2 of our male athletes and a second-place win by one of our female athletes, all in SKECHERS GOrun Performance footwear.

Now, turning to our outlook.

With low double-digit increases in backlogs on a worldwide basis, new product delivering for the holidays and spring 2018, our global investments and strong cash and in-line inventory position, we believe we are on track for record sales growth for the rest of 2017.

Based on these key indicators, we believe we will achieve fourth quarter net sales in the range of $860 million to $885 million and net earnings per share of $0.09 to $0.14.

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

(Operator Instructions) Our first question is from Corinna Van der Ghinst from Citi Research.

David, nice start to the earnings season.

Well, good for us, I'm sure.

I was hoping to start with just the operating margin components.

Gross margins were well above the 20 to 40 basis points that you guys have kind of anticipated for the quarter even with the strong growth in kids.

So I was hoping you could talk about what's driving that upside.

And would you expect similar increases in fourth quarter and beyond that?

This was top line-driven.

When we did our original models, obviously we were a little shorter than this.

And the growth has obviously come from international and retail, which is higher margin.

So it was just an increase in the mix along partially -- obviously we got a little bigger bang from FX than we might have anticipated at the end of the last quarter.

So I think it's just mix and a little foreign exchange.

Our businesses continue to run within their product categories at very -- at stable margins.

Okay.

And then, could you provide us with your updated SG&A expectations for the fourth quarter?

Are there any changes to your previous expectation that SG&A growth should start to slow down starting in Q1 of next year?

Yes.

I actually think it starts to slow down a little bit in Q4 because we will -- the biggest impact to that would have been Korea and that will start to lap it in the fourth quarter so -- to that degree.

So I would anticipate, on a year-over-year basis, we've actually slowed down the growth a little bit of the expenses.

Okay.

Great.

And then, my follow-up -- sorry.

Yes.

All I said was it will certainly continue into the first quarter.

I think that's where the big possibilities are.

Okay.

Perfect.

And then, my follow-up question was just in terms of your Q4 guidance.

What does it assume for U.S. wholesale growth at this point just given what we know about the broader environment with some of the store closures?

And then, also did you say what the backlog support for U.S. at quarter-end?

All the backlogs in our various supporting entities were up and we are anticipating a low to mid-single -- actually more mid-single digit growth in our domestic wholesale business.

And that's all based on the -- we're not going to give the breakdowns around the world of backlog since they get too finite, but the backlogs are sufficient for us to feel comfortable with mid-single digits.

And we continue to grow, by the way, in our domestic retail business as well.

And we anticipate low to mid-single-digit comps, and we started off October that way.

So we're looking for positive growth in the United States from both factions.

Okay.

Perfect.

And then, are you guys anticipating any shifts in the cadence around your spring shipments between Q4 and Q1 of this year?

Like, are you shipping more in December versus last year?

Too early to tell, obviously.

We have to get into the holiday selling season to see what the pull-forward would be.

I would tell you that I would be leaning more towards an expectation of moving from first back to fourth rather than the other way, but it's way too early to commit on that.

Okay.

Great.

I wasn't sure if there was anything going on with the international businesses this year.

No.

International business, they are more prone to cold weather so it's more difficult for them to mix and match.

But to the extent they clean out on some of the warmer weather places and some of our distributors, I would anticipate there would be a move up based on availability, but that's early.

We still need the sell-throughs for the holiday seasons before we can be better advised on that.

Our next question is from Scott Krasik from Buckingham Research.

Just wanted to dig in international a little bit more with the really good numbers.

So at least relative to your plan, can you say which regions sort of outperformed and maybe what's your most recent thinking in terms of what China will end up doing in sales this year?

Okay.

So I think the biggest up for me personally in my expectations for the quarter in international came from Europe and parts of South America.

If you remember on the second quarter conference call, we said that we had seen some growth in the first quarter.

It wasn't as much as we had hoped.

We were transitioning very well.

And this year, I had anticipated that we would have a stronger third quarter because the more seasonal product and more acceptance of the brand in Europe.

And I think we hit on all cylinders.

Our European business was up, I think, we said 17% or 18%.

Canada continued to grow well, a double-digit grower.

They usually are tougher in the third quarter.

And South America, while -- and Japan and Panama, while still not where we'd like them, showed more growth than we would have thought, and their retail store business is growing very well as well.

To China, China was up on a stand-alone basis, almost 50% in the quarter.

I would tell you we are feeling very comfortable with our initial guidelines, which were to the $500 million and potentially higher than that.

We wouldn't really commit to the fourth quarter until I see the order of magnitude of Singles' Day.

So we have very high expectations for Singles' Day now in China.

So that would be a very positive, I believe, for the fourth quarter.

So yes.

So let's just stick there for a second.

So China -- and so Singles' Day, you will actually ship that product and this in -- you won't -- they won't be shipping something you've already shipped in, correct?

That will all be recognized in the fourth quarter?

How does Tmall, like, when do you recognize those sales?

We recognize the sales as they ship.

So basically, what happens is you get 4, 5 days to ship all the sales as you take on Singles' Day.

So by the 16th, we'll have invoiced everything that ships on Singles' Day.

Okay.

And just now, obviously it's difficult to predict, but based on what you know, how many doors do you expect the JV and/or franchisees to open in China next year?

It's hard to say because the big push has been online.

I would -- if you count points of sale, I would guess there's at least 150 to 200.

Our next question is from Jay Sole from Morgan Stanley.

David, one of the other surprise in the quarter was the tax rate was quite low.

Can you maybe add more color on the comments that you made in the prepared statements on was it just that the international business grew so much that profit was -- derived so much more from those other markets that drove the low tax rate?

Or was there other factors in addition?

And then secondly, what do you think about for next year?

What kind of tax rate would you expect for next year?

Well, the tax rate is -- and it's overstated.

And we try to make it a little more simplistic, although taxes are never simplistic.

We have great hopes with what's going on in Washington.

But to this point, they're not simplistic.

So if you go back to the prepared comments and the release, we try to go out of our way to point out that because of our big increase, and they were bigger than we anticipated as we spoke about, in Europe, and certainly Southeast Asia, we reforecasted our projected tax rate to 13% for the year.

It was projected at 15% at the end of the second quarter.

That 2% shift caused us to go down to 9.4%, and there's a discrete item in there or 2. But caused us to go down to 9.4% because we had to make that 2% up for the whole 9 months, not only for the quarter, so it looks outsized.

And that's exactly the opposite of what happened last year of when we were a little more constrained and had to take up our tax rate.

So right now, we anticipate our tax rate is about 13% for this year.

I would tell you we would be in the 12% to 15% range potentially for next year, but that assumes -- and that's a very big assumption, which is why I don't like it, that tax laws, rules and rates do not change around the world.

So they're constantly in motion, and we're constantly researching the best alternatives for us.

Got it, okay.

That's great.

And then the other question is on -- just going back to SG&A for next year, is it possible to put a finer point on where you think you might land in terms of dollars given that you -- given what you know about your store opening plans, the distribution center in China, which I assume is continuing to move forward, where do you think you might end up for dollars in terms of just total SG&A, selling expenses plus G&A, when you get into -- through '18?

We haven't finished forecasting all of '18.

I will tell you the rate of growth was slow, but a lot of that is dependent what our potential top line is, and we pick up the pace.

So currently, we're about to pick up the pace in India, which is starting to grow very, very well for us.

We're past our 100th store, and they've turned very profitable for the business.

They had -- that's one of the big changes for this quarter as well.

We anticipate South America -- our stores are starting to comp well, so we will be revisiting how many store openings we can have in South America, particularly Peru and Colombia.

Europe has picked up well.

We're looking for more stores on the continent.

So we really don't have a final number.

We're trying to reforecast now with this growth and brand acceptance.

From the wholesale end, it will come depending on how big it grows.

China would get to $500 million.

We have -- besides the distribution center, we have significant overhead just to keep running the business to grow at that level.

And after we get finished with Singles' Day, we'll probably reforecast China and Southeast Asia for next year and come up with a better budget.

So I would tell you by the end of -- by the time we get on to the call for our fiscal year end, we'll have a better idea of real dollar expenses.

I would tell you the anticipation here is that the rate of growth, certainly in the G&A piece, will come down from this year as we end the year.

There are no new pieces to pick up.

Got it.

So I guess just to clarify, when you say you see the growth really accelerate in markets like India, does that mean that it makes you want to put more investment dollars in there to drive growth further, which means maybe there's less deleverage near term and more deleverage long term?

Or is it the opposite, where you see the growth, you see better leverage opportunities and, obviously, the margins going up?

I think it's the latter.

We see when places like that start to expand and the brand is accepted, as we move to grow quicker, we leverage that much better because our fixed overhead, other than store openings and some personnel, don't grow as fast as we can grow the top line.

Particularly we have a good wholesale business as part of the mix there, and that leverages very, very well.

Your next question is from Sam Poser from Susquehanna.

I guess the real question here is can you give us a little more detail on the inventory?

Because even after you take out that $30-some-odd million, you're still up 27%.

Is this a timing issue of -- was there a timing issue of deliveries as well in that number?

There may be little timing issues.

We're trying to get everything as early as we can to be ready for the holiday season and going forward.

But I think it's more -- it's 22%, even though we've grown 15%, 16% this quarter.

I think we're anticipating a very big December and first quarter, so some of that is in anticipation to that.

Plus, we have a lot more retail and retail environment if you have to build inventory for Singles' Day in China.

So that's a big hit that comes -- for us to build dramatically, and we expect big growth there.

So that inventory is starting to grow.

The additional stores are continuing to grow.

Our business in Europe is more back end now because we've obviously showed in the third quarter that we can get to be a back half and a bigger piece of business for everybody back half.

So I think it's all in anticipation and all spoken for.

We don't have a significant unsold piece that we're going into.

We're trying to guide towards -- within our retail environment and our backlog, so they're all in line.

We're expecting some nice growth next year.

And even in the fourth quarter -- even the guidance we have on the Street for the fourth quarter is a significant increase from last year in real dollar terms for such a small quarter.

Right.

Can you walk us through the components of the guidance?

Because at $0.14 in the revenue that you're talking about, I mean, I assume -- unless you have very high gross -- really high gross margin, you're looking for some leverage in the SG&A in Q4.

Just let me know where you are there.

Yes.

We're just -- without getting into too much detail because we don't want to put the whole model because if we do move it -- it does move around for us within certain jurisdictions.

But we're anticipating a slower growth in the G&A piece and slight leveraging of the selling line in Q4 in those numbers.

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

Can you give us a little more color on what you're seeing in the spring orders, maybe speak to the domestic piece, the international piece there?

And then I guess maybe where do you see the most substantial upside potential to kind of fill in last minute?

I don't know that there's a significant change.

I really don't know how to answer that question.

We're selling across a broad base.

I have a feeling sometimes people are searching for a hot item, and it's one item that takes us from here to there or something like that, which may be in the mix.

We've had great acceptance across a broader spectrum.

We've had great acceptance at BOBS, at Street, at sport, at sport active.

It continues -- actually, our men's business, our men's sport business is picking up quite nicely as it comes, and our kids business.

So it's, of course, all of those venues.

And a good piece of -- any part of them could be moved up into the quarters, both international and domestic.

We deal from a common inventory pool that we're very good at moving around the world.

So it depends where the demand comes from, but we're very broad based now and are selling in multiple categories, and all are available to maximize both fourth quarter and spring.

Okay, fair enough.

And then as a follow-up, I think you called out international e-com business as being of either accelerating or just generally being really strong.

Maybe you can just give us more on how your e-com strategy is evolving and what initiatives, I guess, you're most focused on as you think about e-com over the next year or so.

I think we said it in our prepared remarks.

We're certainly putting a lot of work and effort into our site and have spent some money on the digital aspect and breaking it out, so we'll have more interplay with our consumers around the world.

I think when we mentioned our plans for e-commerce and the real upside, we were talking about China because Singles' Day, we anticipate significant growth maybe outsized to the way the company's been growing over the last few years.

Domestically, we told you that it was up high single digits.

There's no real change other than offering the same as we have in the past.

We don't necessarily compete online.

We're not the lowest producer.

We're not looking to take it back.

Our online business is growing through third parties as well.

Those third parties that have -- selling us online seem to be the biggest growers with the brand.

So we're facilitating third-party, our own and just bringing our site so we can interact with our consumer base around the world.

And ultimately, we'll make them all e-commerce site.

Your next question is from John Kernan from Cowen and Company.

So just to go back to the U.S. wholesale channel, there's obviously a lot of promotions in this channel right now.

Some of your peers, we see their promotional cadence as reaching levels we've never seen before.

So can you just help us understand what's enabling you to outperform?

Which categories are enabling you to outperform?

Which channels?

And as you look at bookings into next year, is it reasonable to assume that this channel can continue to grow?

Going from the back first, it's absolutely in our plan that this channel continues to grow.

And the United States, in general, will grow.

Maybe our retail will grow somewhat faster, maybe wholesale, but our wholesale channel will continue to grow into next year.

For us, the answer to the original part of your question is what allows us to outperform and continue to get those margins.

It's all about product.

It's about the product offering and the breadth of the product and the newness and the demand by consumer and also our decision not to lower prices and margins trying to compete for market share.

We're very happy keeping the market share we have, growing it by low to mid-single digits at the minimum until all that competition goes away for whatever reason, and then maximize our position.

So I think we're in a good place.

We think the key to us is always product, category expansion by product, by and large, in every category we compete with as well as advertising to make it -- make our customers aware of what's around.

Okay.

Shifting from U.S. wholesale to China.

I know you talked about a potential China DC.

There would obviously be some SG&A dollars and CapEx associated with that.

Can you talk about timing behind that?

Is it a 2018 project?

And can you quantify anything related to the China DC at this point?

Well, we already purchased the land.

It will begin in 2018, but it will be only the CapEx piece.

We hope to break ground third or fourth quarter of 2018 as we're still in planning stages for what kind of automation.

That's a significantly different type of business for delivery capacities and timing throughout the year than we have in the United States or Europe, so we're still working on it.

We hope to get in the ground by third quarter, maybe fourth quarter of next year, which will make it a 2019 completion event.

CapEx, not done yet.

Obviously, we haven't considered all the automation we're looking at, and that will depend on how much labor we can save, obviously, and how much more efficient we can be in the long run.

And as far as G&A is concerned, while there might be some slump in G&A, as we turn it over as we get into 2019, the anticipation is that it will be like our distribution centers around the world, where they will be a leverage point rather than an increased expense point for earnings as they get up and running.

And have you quantified the size of China right now in terms of total dollars sold?

And how big you think it can be in a fairly reasonable time period?

Say that -- I missed the first one, how big China can be?

Have you quantified the size of China recently.

Quantified the size of China, I believe China hasn't changed significantly.

We said at the last quarter call, now that our guesstimates, which now seem a little light, will be $500 million for China as a standalone, they will be $1 billion.

Pick a time frame, 2, 3 years.

We don't think there's anything standing in our way with that, but that's the anticipation.

China could ultimately be as large as the United States.

We're larger.

Can -- just finally, David, bit of a high-class problem.

You have close to $1 billion in net cash in the balance sheet by the end of this year.

Any plans on capital allocation back to shareholders with this cash going into next year?

I know there's some uncertainty around tax code and repatriation, but can you talk about, ultimately, what you expect to do with all this cash?

I don't think anything on that front has changed significantly from the last conversations we've had.

We do anticipate having conversations on reallocation of that cash, obviously, as we move forward.

A big piece will depend on the taxes and the tax changes, specifically in the United States, and some other places around the world, and our growth plans.

We anticipate somewhere along the line, although we won't commit to what the time frame is or what the key dollar amount we have to have on hand is.

But I will tell you it's dependent on how much is in the United States is -- that's where we'd have to spend it first.

And those conversations will probably pick up as we get into next year and see what the tax codes and what our anticipations are.

Okay, and then just one last question.

The kind of dream -- the dream operating margin target of 13% to 14%, is it reasonable to expect that, that can happen within the next 2 to 3 years?

Yes.

Our next question is from Laurent Vasilescu from Macquarie.

So I wanted to ask about domestic wholesale revenues.

I think last quarter, you called out $20 million shift between July in the second quarter.

So with that in mind, were there any shifts in dollar terms between the third and fourth quarter?

No.

That's usually a smaller piece.

If anything, it was a slight positive.

I think, to just get a better read on that, that's why we called out that the 2 quarters combined were 4%.

And if you remember, we said at the end of the first quarter or at the end of last year, I don't remember, that we anticipated we could get to mid-single-digit growth as we got into 2017, and I think we did that.

And we showed that, timing aside, if you take the 2 quarters together, we're up 4%.

And we certainly anticipate being up by that or more in the fourth quarter.

So we've achieved our targets, and timing will sort of not be the bigger issue.

Okay, that's great.

And then I wanted to follow up on gross margins.

I think FX -- correct me if I'm wrong, but I think FX impacted last year's fourth quarter by almost like 240 basis points.

So considering we're lapping this headwind and the currencies are easing, I mean, where should we think fourth quarter gross margins can go?

I don't think there's a significant change.

The change will come as we get into next year.

It's not all foreign currency.

I mean, it depends how you want to count it.

We said last quarter -- or first quarter, which is the bigger one, that the big hit came from U.K., and that was currency.

But we made up pieces of that -- or a significant piece of that with price increases rather than currency.

So there was some headwind, but we made a lot of it back up with price -- pricing.

So I would anticipate fourth quarter will be somewhat like the rest.

They may be up 150, 175 basis points because -- I don't what the currency shift.

I haven't really looked that closely that's significant year-over-year yet.

And it will, obviously -- depending on what happens this quarter with currency -- so the pound is coming back again, even Chinese yuan has actually gained some strength.

So depending on how they are, there might be a little upside to that number.

Okay, very helpful.

And then on Korea, can you maybe potentially parse out how much you did this quarter in revenues?

Are you still comfortable around $100 million revenue target over the next few years?

And did Korea actually generate profit this quarter?

Or when do you think it makes a profit?

Okay.

Well, the answer to the last part is we hope to make a profit going into next year, certainly, by the back half of next year.

They did not make a profit in this quarter.

So we picked up some volume, and they did it -- well, I don't want to use this going forward because I don't want to break it down that finely.

But just because this is a special instance, they did somewhere north of USD 15 million in the quarter.

Okay, very helpful.

And then last question.

I think you mentioned international backlog's pushing mid-double digits.

Could you maybe fine tune that in terms of a range?

Well, it's double digits.

It's certainly not 30%.

So it's in the 10% to 20% range.

(Operator Instructions) And our next question comes from Chris Svezia from Wedbush.

Just want to go back to a question from earlier.

When you talked about SG&A growth as you start to think about next year, is there a scenario whereby you don't leverage?

In other words, this year you're growing 15% and you're deleveraging roughly 200 basis points or so on SG&A.

Is there a revenue growth rate, given the thought process around some investments in some markets, whereby you wouldn't leverage?

Or is it just next year, under most scenarios, you'll leverage G&A expenses?

Yes.

I'm not a person that would tend to say never, but I think your last characterization of -- for the most part, that most of the scenarios are positive leverage, I think that's correct.

Okay, okay.

And then from -- just on the gross margin, to go back to that for one moment, is there any way -- I know it's kind of hard to break it out, but how much is really from mix?

Because it's a marked increase relative to the run rate you've been doing.

How much is mix?

How much is U.K. pricing?

How much is FX?

Is there any way to kind of parse out some of those buckets as we think about the gross margin?

I'll give it to you in relative terms because it's very difficult to get down to that much detail.

Certainly, can't do it off the top of my head.

But I will tell you that if geography is included in mix and not only product, then the biggest piece is mix.

The second biggest piece would be FX.

The third piece, [depending what it is] is the smallest piece.

Okay, okay.

And then just...

(inaudible) big enough overall to do that all on its own.

Right.

But are you taking price in any other areas internationally outside?

I mean, U.K., and it was one of the largest, but is there any other areas you're taking price?

[Because of] FX?

No.

Yes.

Okay.

Okay.

And then just finally, just on the U.S. wholesale side of the business, you're up against almost a 12% decline fourth quarter last year.

As you think about stepping into the spring of next year, is there any reason to think that U.S. wholesale couldn't or should accelerate from mid-single-digit growth?

In other words, you got an easy comp that helps you a little bit.

But based on the backlog visibility, is there any reason to think that, that wouldn't at least hold that level as you go into the first half of next year?

No.

I actually think it accelerates in the first part of next year, unless some of those orders we've written come back to the fourth quarter.

Okay.

Just a final question on that.

Is there any account -- so when you think of some of the key accounts that you sell into, some of which are closing doors or not growing square footage, how do you kind of then rationalize that in terms of you're just gaining market share in some of these channels or growing in places like Amazon, Macy's, et cetera?

Just maybe kind of talk about the profile of that U.S. wholesale growth, a little bit if you could.

Okay.

Without giving too many specifics about which customers are which, we've been doing this since we've been in business.

Our customer base has never remained static, not in the United States or around the world, over decades or periods of time.

Retailers come, retailers go.

Some get bigger, some take over market share.

We find we are best suited when we live -- stick with our core initiatives, and that would be to build a product and sell it to our core consumer.

We do believe our consumer will find it, especially as widespread as it is around the world.

Even with some closing doors, somebody else will pick up the slack because this consumer is in search of it.

And some of that slack is picked up with our own stores.

I mean, if you look at it, our domestic business is up, I think, almost 4%, 5% in the quarter if you put together our direct-to-consumer and our wholesale business.

So that's significant growth.

We anticipate that, that will accelerate from here, both on the stores and on the wholesale.

So we will make up those lost stores or doors or however -- rooftops, however you'd like to count them, by simply making the best product that people will be in search of.

Our next question is from Tom Nikic from Wells Fargo.

I have a question about the U.S. wholesale guide for Q4.

You have it -- you're talking about mid-singles after being up like 1% in Q3.

Is that improvement relative to Q3 a function of more units shipped?

Or is it a function of maybe the ASP pressure going away?

I think it's most to do with the softness in the quarter last year and the significantly easier comp and the growing demand for the brand as we get to the back half of this year.

They're growing in opposite directions, so that's what -- like Christopher said just on the last call, we were down 12% last year in the fourth quarter.

That makes it a much easier comp as your brand starts to come back.

I don't think any of the dynamics of price changed significantly quarter-over-quarter.

We're not looking for ASPs to grow, certainly.

They probably will decline on the order of what was in the third quarter this year, barring any significant changes in mix.

So I just think it's the brand getting stronger and coming up against easier comps.

Certainly, the number of units shipped in the fourth quarter will be less than the number of units shipped in the third quarter.

It's not a units-to-units comparison.

It's a comparison to the prior year.

Right, right.

I just meant was -- would the growth rate of units sold be higher in Q4 than the growth rate in Q3?

Yes.

Yes, okay.

And sorry if I missed this.

Did you, by any chance, give the gross margin by all the different segments?

No.

I mean, that'll come out in the Q, so I don't know that I have to read it here, okay?

Our final question is a follow-up from Sam Poser from Susquehanna.

Two questions, real quick.

The domestic backlog was up.

Did you give a range there?

I might have missed it.

No.

No.

Well, can you give us a range?

No.

Because I don't want to get into detail.

Everyone's getting away from backlogs with direct-to-consumer and stuff like that.

It's very difficult for us to constantly go back to that same one number when we're trying to make a presentation for the whole brand.

It's up significantly enough that we were comfortable with mid-singles to higher growth in the quarter.

We aren't talking about timing.

Our overall backlogs, they were up mid-single digits.

That includes China, in this particular sense, as the question in the past.

So I think that's enough color for where we are.

Okay.

And then secondly, there's some new styles that you introduced in Asia in September, this DLT-A shoe, which is a much younger, contemporary thing.

I wondered how that was doing and if that stuff is heading this way.

It's doing very well.

It's probably heading this way into next year.

And it's doing very well in Southeast Asia, where it's primarily in China, Hong Kong and Korea.

But like I say, it's just the beginning.

So it's just starting, so we're starting to get deliveries there as well.

It seems to have gotten a very, very good reception.

This concludes the question-and-answer session.

I'd like to turn the floor back over to SKECHERS for any closing comments.

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.

This concludes today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time.