Skechers USA Inc (SKX) 2017 Q4 法說會逐字稿

Greetings, and welcome to the SKECHERS Q4 and Full Year 2017 Earnings Conference Call.

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

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

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 all 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, David Weinberg; and Chief Financial Officer, John Vandemore.

David?

Good afternoon, and thank you for joining us today to review SKECHERS' fourth quarter and year-end 2017 financial results.

Joining me on the call today is John Vandemore, SKECHERS' new Chief Financial Officer, who will discuss our financial results in detail.

Fourth quarter sales increased 27% to $970.6 million and full year sales increased 16.9% to $4.16 billion, both record sales achievements, which are a testament to the strength and relevance of our product, marketing and brand worldwide and our focus on building our global infrastructure.

Fourth quarter highlights include a 40.2% sales increase in our international wholesale business, primarily due to significant double-digit gains in our key subsidiary and joint venture countries, including China, and a triple-digit gain in several subsidiary markets; international wholesale and retail growing to 52.6% of our total business in the quarter; a 25.8% sales increase in our worldwide company-owned retail stores, with comparable same-store sales up 12% globally; domestic wholesale gains of 11.6% with an increase in pairs shipped of 13.9%; maintaining our position in the United States as the #1 walking, work and casual lifestyle footwear brand and the #2 casual athletic brand and women's footwear brand; and a strong balance sheet with $736.4 million in cash and cash equivalents or approximately $4.70 per diluted share.

Full year highlights include growing annual sales to more than $4 billion through 4 consecutive record quarters and double-digit growth across our 3 distribution channels and expanding our global retail footprint to 2,570 company and third party-owned SKECHERS stores, including the net addition of 142 stores in the quarter.

Subsequent to the quarter end, our board authorized a 3-year, $150 million stock repurchase program.

Now turning to our business channels in detail.

Our domestic wholesale business increased 11.6% for the fourth quarter and 4.1% for the year.

The quarterly growth was the result of a 13.9% increase in pairs shipped and a 2% decrease in average price per pair, primarily due to the product mix and strength of several collections that have lower average selling price.

Our men's and women's footwear achieved double-digit growth in the quarter.

Our kids business was flat for the period but increased 6.4% for the full year.

We believe that the fourth quarter results in our kids business was due to a timing issue as we were up 37.9% in the third quarter, in part, to prepare for the holiday selling season.

The growth in our men's and women's businesses was across multiple lines, including GO, On the GO, GOLF, casuals and work, among others.

Men's sport also performed extremely well.

For the holiday period, we ran several digital and television campaigns, including product-focused spots for SKECHERS GOwalk Joy, Skech Knit, Mark Nason and kids lighted footwear.

We also ran campaigns for our sport and relaxed fit footwear featuring our brand ambassadors, Sugar Ray Leonard and Howie Long, who also appeared in our Super Bowl campaign this year.

We also launched a new campaign in English and Spanish with baseball legend David Ortiz.

Targeting teens and young women, we ran our Camila Cabello SKECHERS campaign both on TV and on social media.

Camila released her debut solo album last month and broke records with her album's #1 position in more than 100 markets within 24 hours of its release.

Also in the fourth quarter, SKECHERS ambassador, Meb, completed the final race of his storied career.

At 42, the beloved marathoner placed 11th at the New York Marathon wearing SKECHERS Performance footwear.

Meb will continue to work with SKECHERS Performance team as he has done over the past 6 years.

We ended the year again as the leading walking, work and casual lifestyle and casual dress footwear brand and the second largest casual athletic footwear brand.

With a resurgence in retro styling and our heritage footwear lines, we believe our domestic business will remain strong as consumers seek comfort and style at a compelling price.

International wholesale remains our biggest distribution channel, representing 41.5% of our total sales for the year, while international wholesale and retail combined represented 50.6% for the same period.

Total international wholesale sales increased by 40.2% or $116.4 million in the fourth quarter and 24.3% or $338.7 million for the full year.

The quarterly increases were the result of 53.6% growth in our subsidiary and joint venture businesses and 3.1% growth in our distributor business.

The quarterly growth is attributable to double-digit increases in nearly every subsidiary and joint venture market as well as double-digit growth in several of our key distributors, including Australia/New Zealand, the Philippines, Russia and Turkey, and triple-digit gains in Ukraine.

Additionally, several countries experienced pull forward into the fourth quarter to ensure timely spring deliveries.

We were also able to achieve the international increases within our distributor business despite continued unrest in the Middle East, which negatively impacted results for the region for 2017.

Further detailing our growth internationally.

For the quarter, our wholly-owned international subsidiary business grew by 41.8%, and our joint venture sales grew by 58.9%.

The markets with the highest dollar gains were China, South Korea and the U.K., and those with the highest percentage gains were Italy and Spain.

China shipped 5.2 million pairs in the quarter and 17 million for the full year.

This includes 1.4 million pairs for Single's Day, which is an increase of 76% over last year.

China opened 74 freestanding SKECHERS retail stores primarily through franchisees, and with the closing of 10, they ended the fourth quarter with 796 SKECHERS stores.

At quarter end, we had approximately 2,446 points of sale in China and a strong e-commerce business, which grew double digits in the fourth quarter.

At year-end, there were 1,925 SKECHERS-branded stores owned and operated by international distribution partners, joint ventures and a growing network of franchisees.

In the fourth quarter, 146 third party-owned stores opened, which include the already mentioned 74 in China as well as 22 in India; 7 in Indonesia; 5 each in Australia, Singapore, Thailand and Turkey; 3 in Spain; 2 each in France, Malaysia and Portugal; and 1 each in Brazil, Denmark, Estonia, Hong Kong, Lebanon, New Zealand, Paraguay, the Philippines, Saint Lucia, Switzerland, Ukraine and the UAE.

12 third party-owned SKECHERS stores have opened in the first quarter to date, including 8 in India, bringing the total third party stores to 1,937.

We expect another 500 to 525 third party-owned SKECHERS-branded stores to open in 2018.

Our international business remains the biggest growth opportunity, and we believe it will continue to grow at a faster pace than that of our domestic businesses.

In our global company-owned retail business, sales increased 25.8% for the fourth quarter and 21.9% for the full year.

The fourth quarter gains were the result of a 15.2% increase in our domestic retail stores and a 53.5% increase in our international retail stores.

This included positive comp store sales of 10.5% domestically and 16.5% internationally for a combined total comp store sales increase of 12% in the quarter.

At quarter end, we had 645 company-owned SKECHERS retail stores, of which 196 were outside the United States.

In the fourth quarter, we opened 22 stores, including an 18,000 square foot superstore in Tucson.

Nine of the company-owned stores opened in our subsidiary.

These included 3 in the United Kingdom, 2 each in Peru and Japan and 1 each in Chile and Italy.

In 2018, we expect to open an additional 75 to 85 company-owned SKECHERS stores and remodel or relocate 15 to 25 existing stores.

Adding to our growth was our domestic e-commerce business, which grew by 28.2% for the quarter and 21.9% for the year.

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

Now I'll turn the call over to John to review our financials.

Thank you, David.

Before I begin, I would like to say how excited I am to be here working alongside Robert, Michael, David and the rest of the SKECHERS team.

I look forward to being a part of the continued growth of the SKECHERS brand.

Now let me turn to our fourth quarter and full year results in detail.

Fourth quarter sales increased 27% over the prior year to $970.6 million.

This growth was driven by increases in all our business segments, including company-owned global retail stores of 25.8%, international wholesale of 40.2% and domestic wholesale of 11.6%.

However, we do believe that the fourth quarter results were positively impacted by $20 million to $25 million of shipments originally planned for the first quarter.

Gross profit was $454.1 million, up $97.9 million compared to the prior year, and gross margins increased 20 basis points to 46.8%.

This improvement was attributable to strength in our international company-owned retail business and the higher contribution to our sales from our international subsidiaries.

Selling expenses increased by $4.4 million to $63.9 million or 6.6% of sales as compared to 7.8% of sales in the prior year period, an improvement of 120 basis points.

This increased efficiency reflects our ability to scale operation.

General and administrative expenses were up $67.4 million to $340.8 million, representing 35.1% of sales.

This is compared to 35.8% of sales in the prior year period.

The increase in dollars reflects our ongoing investments in our long-term global growth initiatives.

It included $20.1 million associated with our 75 additional global retail stores and $37.8 million to support our international growth in both our joint venture and subsidiary businesses.

China represented $22.1 million of this investment, in part, to support our record-breaking Single's Day performance and a 78% increase in sales.

Domestic wholesale general and administrative expenses increased $9.6 million year-over-year, primarily due to increased headcount in the United States to support our brand worldwide as well as for improvements to our digital operation and expansion into new categories.

Earnings from operations increased 96.9% to $55.7 million, representing 5.7% of sales and compared to 3.7% of sales in the prior year period.

The leverage we delivered this quarter gives a glimpse into the opportunity before us as we continue to grow the top line and leverage our infrastructure investments of the past couple of years.

Due to the enactment of the Tax Cuts and Jobs Act in December 2017, we recorded an additional income tax expense of $99.9 million for the fourth quarter or an impact of $0.64 per diluted share, which resulted in a net loss of $66.7 million or $0.43 per diluted share.

The additional expense includes a onetime tax on accumulated overseas profits and the revaluation of deferred tax assets and liabilities.

As a result, our reported tax rate, which includes this additional expense, was 194.4% for the fourth quarter and 38.8% for the full year.

Excluding the additional income tax expense, our tax rate would have been 12.2% for the fourth quarter and 12.8% for the full year.

We expect our normalized 2018 tax rate to be in the range of 12% to 17%.

We are still evaluating many aspects of the recently enacted tax law as well as our potential response.

Our guidance represents our best estimate of the rate in 2018, but that may change as the IRS promulgates more regulations and better defines application of the law.

Excluding these onetime expenses, adjusted net earnings were $33.3 million or $0.21 per diluted share on 156.1 million shares outstanding compared to $6.7 million or $0.04 per diluted share on 155.4 million shares outstanding in the prior year period.

For the full year, net earnings were $179.2 million compared to $243.5 million in 2016.

Diluted earnings per share were $1.14 on approximately 156.5 million shares outstanding compared to $1.57 on approximately 155.1 million shares outstanding last year.

However, on an adjusted basis, net earnings for the year were $279.1 million or $1.78 per diluted share.

And now turning to our balance sheet.

At December 31, 2017, we had $736.4 million in cash and cash equivalents.

This balance was impacted by the timing of certain year-end payments in international markets as we sought to efficiently navigate provision of the Tax Cuts and Jobs Act.

Absent these actions, we believe cash balances would have been approximately $120 million higher.

Trade accounts receivable at quarter end were $405.9 million, an increase of $79.1 million from December 31, 2016.

And our DSOs were 32 days at December 31, 2017, compared to 34 days in the same period last year.

Total inventory, including merchandise in transit, was $873 million, an increase of $172.5 million or 24.6% compared to the same period last year.

This increase is in line with our year-end backlogs and incoming order rate and supports the worldwide sales growth we have planned for 2018 as well as our expanded retail footprint.

Long-term debt was $71.1 million compared to $67.2 million at December 31, 2016.

Working capital was $1.5 billion versus $1.2 billion at December 31, 2016, primarily reflecting the aforementioned inventory levels.

Capital expenditures for the fourth quarter were approximately $33.2 million, of which $20.6 million was related to 22 new company-owned domestic and international store openings and several store remodels and $5.9 million for our domestic office and showroom upgrades.

For 2018, we expect our ongoing capital expenditures to be approximately $45 million to $50 million, which include an additional 75 to 85 company-owned retail store openings, 15 to 25 store remodels, expansions or relocations and office renovations.

This estimate excludes capital expenditures related to our distribution center in China, which is currently in the design stage, and we expect to break ground later in 2018.

To date, we have spent $20 million related to this project.

In addition, our capital expense estimate excludes office expansion here in Manhattan Beach and Hermosa Beach, which may break ground later this year.

Our Board of Directors recently authorized a 3-year, $150 million stock repurchase program.

This decision reflects the strength of our balance sheet, confidence in the ability to fund our growth prospects and a commitment to our capital allocation philosophy.

Before turning to our quarterly guidance, it is important to note that we incorporate many performance indicators such as ASPs, mix, incoming order rate, backlog, shipments, comp store sales, new store openings, calendar shifts and more into our estimates.

Comprehensively, these provide the best view into our future performance.

But no one indicator captures the entirety of our diverse businesses, especially as direct-to-consumer offerings comprise an increasing portion of our overall revenue.

As a result, we have made the decision to no longer provide specific information on our wholesale backlog.

However, we will continue to provide sales and earnings per share guidance on a quarterly basis, reflecting the combined input of all our information.

That said, with new product deliveries and expanded global infrastructure and a strong cash and inventory position, we believe we will achieve first quarter sales in the range of $1.175 billion to $1.2 billion and net earnings per diluted share of $0.70 to $0.75.

I will now turn the call back to David for closing remarks.

Thank you, John.

The fourth quarter marked a new record for the period and resulted in a new annual sales record and the first time we achieved $4 billion in annual sales.

The growth in the quarter was the result of double-digit increases in 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.

With international representing over 50% of our total business, we continue to believe that the global market poses our strongest growth potential.

We believe our relevant and innovative brand and diverse distribution allow us to grow in multiple product channels and markets.

To this end, we are continuing to invest in our design, marketing and worldwide infrastructure for our near- and long-term success.

And with that, I would now 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 comes from Corinna Van der Ghinst of Citi.

Welcome to John.

It looks like you guys had a very productive few months.

First of all, it sounds like you guys are still working through the tax change implications, but do you have any initial thoughts on kind of your full year top line growth and operating margins as you work towards that 12% to 13% medium-term margin goal?

Is it reasonable to assume like a mid-teens top line growth given how much global momentum you guys are seeing?

Yes, I think it's fair to say that we think we continue along our path here.

We don't see the growth slowing down, both domestically and internationally.

And while we're still working through the tax changes, and John can talk more to them, we do anticipate that we will continue to grow this year and in the future years.

We see no reason to have this dollar growth we received -- we did this year replicate at least over the next 2 or 3 years to get us to close to $6 billion in 2020.

So we're still on pace for that.

I know it's not a straight line, but we do anticipate that we continue to grow on a worldwide basis with our consumers, and we'll get closer -- continue to leverage as we move further along.

Where along that kind of 12% to 13% spectrum, though, do you guys think that you're going to end up this year?

That's very difficult because we're only giving guidance 1 quarter at a time.

We think it's certainly possible to get there this year, but it's kind of early in the year to give full year guidance and see exactly what's going on around the world both with interest rates, demand, currency and all that.

So while we do believe we're on target for potentially this year, if not certainly next year, it's too early to get committed to that line.

Okay.

That's fair.

And then I just had a quick follow-up on your commentary in the prepared remarks.

With the $150 million in authorized share repurchases, how are you guys thinking about the pace of buybacks for this year?

And then can you just talk a little bit about the women's business.

Are you seeing an inflection in some of the trends there?

And can you talk a little bit more about what categories or channels are driving that and how you feel about the order books from here?

So I'll start with the repurchase.

Obviously, it's a 3-year authorization.

We have a perspective on value right now that we'll use as a guidepost, and we'll look to deploy that over the 3-year window, unless opportunities for undervalued shares continue to present themselves.

Needless to say, one of the reasons why we're excited about it and we think it's prudent is we do believe our shares are undervalued in the marketplace.

And so today, they look like an attractive opportunity for us and, certainly, the near future.

Yes.

And as far as the women's are concerned, we're actually showing strength among all the categories.

That includes Sports, Sport Active, Street, On the Go.

So on a worldwide basis, we're seeing great success across the board, not necessarily to say, as we said in the past, there are different leaders in different parts of the world, but we're showing very strong in our women's products around the world.

International is picking up as well, and Southeast Asia is growing at an even faster pace.

We've got new developments that are just launching in Southeast Asia that haven't come fully to the States yet, and they're showing very, very well.

So we're feeling very good about the whole process and all of them, the men's, women's and kids.

Okay.

Great.

And sorry, if I could sneak in one follow-up as well.

You mentioned the international advertising that you guys added on this quarter.

How are you guys thinking about advertising as a percent of sales going forward as you continue to extend in international?

And can you tell us what it was as a percent of sales in fiscal '17 as well?

We don't have -- we're not giving international percentage.

I mean, I think the most remarkable thing about the quarter was...

Like in total.

In total?

Yes, we'll get that.

But in the quarter, we leveraged selling expenses significantly.

We saw a significant opportunity for leverage, and I think that's a testament to the opportunity for the brand to grow in markets that we've already seeded with selling investments.

Yes, I think as far as advertising is concerned and it depends how you want to define it, not just media but our advertising in in-stores, we anticipate that the rate of growth will continue to slow as it has in the past, and we'll be able to leverage them.

We're going to change focus and advertise obviously more in international and relatively stable in the U.S. We would think that we're okay in the U.S. And all increases will come from international.

So that's very positive and will match the sales.

And we anticipate it would stay in the same range, maybe slight leverage as we go through the year.

For 2017 as a whole, selling expenses as a percent of sales was about 7.9%.

Yes, but that includes some non-advertising pieces.

Correct, absolutely.

(Operator Instructions) Our next question comes from Scott Krasik of Buckingham Research.

Just a couple of questions.

So the sales shift, you called out $20 million to $25 million.

Was that split between domestic and international?

And then in terms of your guidance you laid out for 1Q, are there any expectations around pulling forward in orders in the spring?

And then I have a follow-up.

Yes.

I think the biggest piece to the portfolio is obviously in the States, but we did have some in Europe as well.

If you look at this year how it broke out, we really did explode in December.

So December became a very big shipping month worldwide, which pulled everything up, and obviously, some of that could have gone in January.

So we guess it's about $20 million to $25 million.

We are booked very strongly for February and March, so while we had a good January, we expect February and March to accelerate.

Depending on the sales and the cadence, there's certainly a possibility of moving some of April into March, which would certainly give us a leg up, but the way Easter breaks this year early in April, it really does depend how the season opens up.

But we're feeling very positive.

We came through January very strong and had a very strong incoming order month in January.

So around the world.

We are shipping well now all over, in Belgium, for Europe, here, South America and Southeast Asia.

So we think we're off to a very solid start.

We think the stuff is checking very well, and as weather and temperatures change, we'll see exactly how much more we can move into the quarter.

Okay.

And then just -- thanks for sharing that $6 billion in 2020 sort of long-term target.

As you just think about that between domestic growth or how much domestic sales will represent in that $6 billion versus international, could you give us your thoughts around that?

I think as we said in the past, I do believe that domestic will continue to grow.

It will grow -- on the wholesale end, I believe, mid-single digits, maybe a little more, and we'll certainly grow faster at the direct-to-consumer, which we're doing some of our own and some third party and our own stores, which we're building bigger stores outside the malls that seem to be doing very, very well and give us increased sales per location.

So the rest obviously comes from retail around the world, which was a very positive one.

We think we can expand significantly in our wholly-owned subsidiaries like South America, Europe and Japan, and we think we'll continue to grow in China.

So I think what you see -- the growth drivers you see today or what came through the fourth quarter is what we anticipate will carry us out over the near to mid-term.

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

I just wanted to zero in on both the domestic and international comps in your own retail.

Both the 2-year stock comp trend accelerated pretty meaningfully.

I'm just wondering what you think the biggest drivers of that were and what your expectations are going into the first quarter for comps in the retail business.

Well, we think it's driven by more than an item.

Our stores continue to do quite well, and it's all on new product introductions we've gotten, and we think the brand resonates more.

Excess inventories have cleared out to some degree through some of the channels of distribution.

And so I think our stores -- because of the new stores and the way we're merchandising and picking up well.

It's also that last year, in the last 6 months, starting with Back-to-School and, certainly, in the fourth quarter, retail was in a very difficult position with all the bankruptcies and excess inventory in the marketplace, so it made comps relatively easier in the fourth quarter.

As we go into the first quarter in the month of January, we continued to comp higher than last year.

We are double digits worldwide as far as comps are concerned for January.

We were up mid- to high single digits domestically and, obviously, significantly better than on an international basis.

So we don't see any significant change, and the rate of growth can continue through the quarter.

Impressive.

John, did you give any detail between -- the breakdown between gross margin and SG&A in the first quarter and your expectations?

I know there's a lot of mixed shift between international wholesale, domestic wholesale and retail, but can you just give us a little more detail on the margin expectations in Q1?

Yes.

I think, obviously, it will depend on mix, right, as the biggest trend in our gross margins has been the influence of increasing international participation in our overall revenue mix.

What I would say is we're probably looking for stable to better gross margins in Q1, maybe a little bit better than that due to some mixed shifts.

And then from an SG&A perspective, we think it will begin to show the leverage that we've experienced in Q4.

To what degree?

Somewhat matters on the opportunity because much of our SG&A spend has been linked to the growth in China.

China alone was a significant top line grower and, obviously, a contributor on the SG&A line.

And there's also other influences that we don't have great visibility into right now like currency and FX rates that will impact us.

Our next question comes from Sam Poser of Susquehanna Financial Group.

Well, just to dig into the pull forward a little more.

Was the majority of that pull forward domestic?

Or how is that $20 million to $25 million split?

I think we addressed that the biggest single piece was domestic, but there was little pieces everywhere in the world.

And $25 million is a guesstimate, because some of them could have originally been [splitted], we felt, even though we were significantly higher than what we had forecast last year, we picked up most of it in the quarter.

But we think a big piece like $20 million to $25 million, that could be somewhat more than that move from January to December because December was quite a bit stronger than the rest of the month against forecast.

So basically, given the early Easter, you're expecting basically a lot acceleration into Easter, but that may not allow for as much pull forward if Easter was, let's say, a week later?

(inaudible)

Obviously, the more time -- if Easter came later, I don't know that'll be a pull forward because our quarter ends March 31.

So it depends on delivery.

So I think we're at maximum if we sell through very well over the next 5 or 6 weeks, that there'll be a pickup to be ready in store for Easter, which we see.

But like I said, it's way too early to tell.

Big deliveries are just starting at February, which is probably our biggest shipping month, both domestic and internationally, with Europe, certainly in the quarter.

So we're on a good roll, Jeff (sic) [Sam], but it's way too early to make those assessments.

And keep in mind, Sam, as David mentioned, Easter straddles right on our quarter end.

So it's not a significant shift out of one quarter into another that you normally experience, maybe a slight benefit to retail, but in terms of overall results, not extraordinary.

So when we think of this $1.2 billion number you've guided to, it's -- I mean, I would -- how do we -- how would you break that out by group?

I mean, you said you expected some comps to remain strong, but that would be a meaningful deceleration, especially most likely in international wholesale unless you're looking at a flat domestic wholesale number, which I don't think you're doing, if I read the tea leaves properly here.

Yes.

Let me put some color.

I think, as David mentioned, domestic wholesale is probably in that same mid-single-digit range.

Keep in mind, international wholesale comprises everything from our subsidiaries all the way through distributors.

And even in this quarter, you saw distributors weren't as aggressive, so that's a blended rate you'd see there.

And then global retail, certainly, we're seeing excellent early-season trends, but there's a lot of selling to be done.

We don't expect a meaningful deceleration, but we still expect something of the -- kind of the mid- to high-single digits trends throughout the quarter.

The one drag we do have, however, is the distributors.

Because our largest distributor in the Middle East has come out of the year on a weaker basis.

We were actually forecasting in this model that the distributor base will actually decline on a year-over-year basis because so much had moved -- a little piece of it had moved into Q4, and our biggest distributor is now looking to come back.

And we see some signs that they will pick up, but there won't be any increases early in the first quarter.

On the -- also, because -- you're talking about trends.

We picked up bigger in the back half of the year in places like Europe than we have in the first quarter.

First quarter was always strong and always the toughest comp.

So I think we're trying to be conservative but honest in the fact that we moved some forward.

We're full at our customers, they're all trading very, very well.

We do have some opportunities at the back end of the quarter, and I don't think this is -- if you take it out and you take the quarters in sequence, that you'll see actually a slowdown as you carry this forward.

So basically, combine Q4 and Q1, sort of combine those 2 and then the momentum picks back up?

Correct.

Depending on the switches at the end of the month.

I mean, if you think about it, we grew 24% in the quarter.

There has to be some deceleration because we don't make inventory that fast, that complete.

We have some pickups we can make in April, but it doesn't compound itself because of availability.

Got you.

So this is -- now, you've got to just deal with what the demand looks like as we get -- it gets warmer?

It's what we see on order, and everybody's coming at the early part of their dates to deliver as we get to a better sell-through visibility.

We'll know what that means at the end of the quarter.

Our next question comes from Jeff Van Sinderen of B. Riley FBR.

Let me add my congratulations, and welcome to John.

I wonder if you can give us a sense -- are you factoring in any pull forward from Q2 into the higher end of your revenue guidance?

And if so, maybe order of magnitude, if there -- if you can add that?

No, it's too early for us, as David explained, until we see sell-through.

Too early for us to conjecture as to what kind of pull we might get into Q1.

So no, none of that is included at this point.

Okay.

That's good to know.

And then, on the China DC, just wondering what your latest estimate on the cost of that is and then what you're looking at, at this point in terms of timing of when that will be up and running.

And then, I guess, anything else you can add on, on key initiatives you're most focused on to grow the China business this year.

Well, key initiatives as far as product is concerned?

We are developing products for the China market that then moves to the States, and everybody known how the D'Lites work, and D'Lites are starting -- D'Lites, not lighted for, but D'Lites is working and working here in the states and it's starting to pick up worldwide as well.

As far as cost estimates, it's difficult.

We're going to automate the system and it's going to be 1 million square feet, and we're still finalizing construction cost.

As a placeholder, if you just want to take a look at cash needs, I would venture to guess it's somewhere between $125 million to $150 million for the building and the equipment that we'll be putting inside.

But of course, I guess, we're finalizing and we're still watching the growth rate and capacity issues as far as China growth is concerned.

Okay.

And is there a target date for that to be up and running at this point?

We'd like to be up and running at third or fourth quarter of '19.

Okay.

3Q '19, okay.

Good to know.

And any, I guess, order of magnitude you can give us on what the e-com, the direct part of your business is, as a percentage of revenue?

Just want -- that's growing really strong, just wondering kind of where that stands at this point.

That's a moving very target and very difficult.

We do more third party in the United States online, and we have a massive online presence.

We've gone in those -- placed those accounts that do well online.

And in China, we keep it all for ourselves, so use the Single's Day -- 1.4 million pairs, that all is through our own account.

So I think it's fair to say, without talking too deeply about the numbers, that we show very well online, the brand is demanded online, it's searched online, and does sell whether it's directly through us, third parties around the world as we continue to grow our site.

We are investing significant amount of money into our digital capacity, and we will be changing the site.

And once we get the new site developed, which is in work now on, we will bring it out and try to have our own presence around the world, every place we have subsidiaries.

Our next question comes from Omar Saad of Evercore ISI.

Maybe instead of focusing on the first quarter, I wanted to ask maybe a bigger-picture, longer-term question.

How are you guys thinking about the brand?

It's just doing so well in Europe and China and a lot of the international markets.

How should we think about the brand positioning in those markets and the consumer perception around the brand, how it differentiates from what we know here in the United States, and also, the mix of products across different styles and categories and how maybe those markets are different.

It's very pretty interesting to see those phenomenal growth rates and would be helpful to get a better understanding of how the consumer is consuming the brand over there.

That would take us probably the rest of the afternoon if you wanted to go territory-by-territory or country-by-country.

So it's different.

So on a broad picture, and we can certainly talk about this offline as we go forward in more detail.

In the U.S., we've grown predominantly through the mid-channel.

The mid-channel doesn't necessarily exist everywhere in the world.

The brand has the capacity on the top end of what we offer and what you see selling.

And certainly, within the GO product, which has been a big plus for us internationally, I know we've talked in the past that GO has slowed in growth, which is now starting to pick up, by the way, domestically, but that's not been true internationally.

That continues to grow at a very nice pace, especially in Southeast Asia.

So I would tell you that the brand is perceived as quality.

It's not considered as mid, but you can consider that an upper, although not the most expensive.

So quality, designed well, fashion forward at a price, probably on average, slightly higher pricing than we see here in the United States.

So if I had to take it, it's probably a couple levels up in most parts outside the United States, certainly not all, because there are some third-world countries where they -- price is more significant than it is here in the United States.

David, that's really helpful.

Can I also ask, watching the kind of streetwear fashion trend going on and across the fashion industry in sneakers, we're seeing a lot of new brands, the very high end, Gucci and Saint Laurent and Lanvin chasing the sneaker category.

And it feels like that, that kind of opportunity exists at your price point where the SKECHERS brand plays really well.

Is that becoming a bigger part of your business?

Is that a big opportunity for the brand?

Or am I overthinking it?

I'm not really sure.

I have to go think about that myself.

I think there is an opportunity.

We can play in a multitude of styles and categories as they go through the world.

So as they develop, should they become meaningful?

We certainly would participate and put our entrées into those categories.

So it's like we've said in the past, change is good for us because we're so flexible and because we're a footwear company that can go in many categories as things change and purchases have to increase because they were all brand new, they're not rebuying the same type of item, tends to be to our benefit, which is what we think has happened over the last 6 or 9 months.

Our next question comes from Laurent Vasilescu of Macquarie Group.

I wanted to ask about China.

I think in the prepared remarks, you said it was up strong double digits.

I just wanted to get a sense of where it ended up for fiscal year '17?

Is it fair to say $550 million?

And any high-level context of where we should think China can be by the end of fiscal year '18?

Yes, I mean, for the year, it ended above the $550 million we had last spoken about, just a little bit north of $575 million.

So phenomenal growth, 78% for the quarter.

I think for next year, early look would give you a sense that about the same level of dollar increase for the year, maybe not as much in the percentage because you're starting to deal with the law of large numbers there.

And obviously, a significant growth in the stores and then another challenge to overcome and improve on this record single-day performance, but obviously, a phenomenal quarter this Q4.

That's great.

That's phenomenal.

And then, on the fourth quarter gross margin, any sense of how much -- like what happened here with regards to puts and takes, like how much FX was a driver, maybe pricing was a driver?

Were there any offsets to those factors?

And then, any implications for the first quarter gross margin would be great.

Yes, so for Q4, what we saw was about an equal offset between the uptick in improved mix from international contribution and higher margin businesses like retail, with a little bit of in-category decline.

FX was a very slight differential.

So what you generally saw was a push between kind of product mix taking the margins a little bit down and then segment mix, more international, more retail, bringing it right back up.

Q1 is going to be hard to look at right now, simply because we've seen such volatility in foreign exchange.

So there may be a bigger impact there.

It's hard to assess at this point.

The one thing I'll say is, again, as we continue to grow at above average rate internationally, we'll see improvement in gross margin, and David mentioned, we're forecasting a little bit of a letdown from our distributors, which are always a net drag to our gross margin, so maybe a little bit more amplitude in the increase in Q1.

That is normal, but again, I think for the full year, we're looking for stable to slight improvement overall.

Okay, very helpful.

And then, on inventories, inventories are up, above the sales guide for the first quarter.

So any sense of what's happening here?

Is it like inventory in Asia, Europe, North America?

Any context of maybe by channel, I don't know, maybe you can give some context on that, that would be great.

I think what you see basically is because first quarter is becoming so much larger for us, and we do take into account all the merchandise in transit, that by December 31, you have to have most of the first quarter already booked in, especially with Easter coming up closer and in our International business.

So I think what you see is -- are getting ready, because as we increase and we've done probably over 150 million pairs last year, we try to make sure that our production is in at the early part of the shipping cycle so that we can move it up forward should there be a demand from customers without speculating too significantly on inventory.

If you look through where it's grown, I think you would find that it's grown where you would anticipate it had to grow.

It's grown in Europe, it's grown at our retail stores, it's grown in Southeast Asia and, of course, it's grown in those places that are growing quicker that we just started that were very underutilized last year, like South America and Korea.

So I think we're in good shape.

I think it's there and we're early, and we could take advantage of any opportunity without having taken too much risk.

That's great.

And then, lastly, and last question here is on tax.

I think you guys gave a nice range here of 12% to 17% for the year.

Obviously, there's still a lack of visibility on what's going to happen further going forward.

But at least for the first quarter, any kind of directional guidance on where we could take the tax rate could be for the quarter?

I'm going to stick to the range at this point in time, and it's largely because of the newness of the tax law and the continuing learning, everybody is doing with regards to exactly how that law is going to be applied.

Keep in mind, we're giving you a perspective, and we recorded a tax element that is provisional as we learn more about the application of the law, we're going to learn more about our actual consolidated overseas profit.

So I'm going to stick to the 12% to 17% right now, but we'll try to give you more color as the year goes on and we learn more about the application of the law.

Our next question comes from Chris Svezia of Wedbush Securities.

I would also say congrats on the buyback.

I guess, John, you have the magic touch.

So congratulations on that, too.

Not at all.

As an expression of the company's long-standing capital allocation philosophy, nothing to do with me personally.

Okay.

So I guess, first, I just want to go to Q1.

When you think about the potential for inflection in revenues, in other words, as you get through February and start getting into March, I guess, where's the time line whereby you could either, a, potentially see a pull forward of business from Q2 into Q1, or whereby, if things really start sucking, that there's a replenishment of inventory that's already out there in the marketplace?

I'm just trying to get an idea of how you're thinking about where you would see that point, where things could start to change.

You'll probably see that point somewhere in mid-March, maybe slightly earlier, but not much.

Remember, everybody, because at retail, most fiscal year ends in January, the big shipping month is February.

So just getting to retail in February for the north and then you have weather issues in some of those places that may not take the new spring products.

So we've got to wait until it gets through the system, it's probably by the second week of March.

You have a good idea.

Okay.

And that's on a global basis?

Yes.

Okay.

Would that happen sooner in the U.S.?

Or no?

No, I think on the same time line, it may happen a little bit sooner.

It depends how much sell-through you get.

So February is not usually the strongest sell-through month.

It's coming and new product is hitting, so it really does depend on the environment and the marketplace to come significantly earlier than that.

I would tell you, if it came earlier, like in mid- to late February, it will be on an order of magnitude, probably a large one.

Okay.

Fair enough.

John, maybe a question for you or do you want anyone to answer this, but FX, I know you touched on gross margin, from a top line perspective, just your thoughts there, euro, pound and what's happened there.

I know China has been a little more mixed, but just your thoughts about -- how you're thinking about currency impacting revenues for Q1.

Yes, again, as I mentioned, the movement, the volatility we've seen in currency, just the tail end of Q4 and the beginning of Q1 makes that really hard to predict.

Obviously, the dollar weakening overall, it would lead you to conclude that there's probably some tailwind there.

In Q4, it wasn't a significant driver of top line growth, maybe a percentage point overall, but not much more than that.

And it really depends on how the quarter sells out.

I mean, we've seen a lot of volatility in the market, which makes me certainly hesitant to predict anything in the currency markets going forward.

Okay.

So it's fair to say nothing that material in your forecast for Q1 from a currency perspective?

Yes.

We haven't layered in anything that I would consider extraordinary in terms of -- certainly not top line associated with FX, although we're watching the markets carefully.

Okay, fair enough.

And then just on China, just real quick.

I know you threw out the overall dollar size.

What's the -- what was the actual dollar -- remind us again what the dollar increase was year-over-year?

You mentioned that, John, you could grow in similar dollars.

Is it roughly $200 million, is that the overall dollar increase year-over-year?

Yes, a little north of $200 million.

Okay.

Final thing, just real quick here.

When I think about the international -- so you talked about the U.S. Wholesale business, sort of that mid-single-digit trajectory roughly for the year.

International -- I know there's moving parts on FX, but any reason to think that, that couldn't be north of 20% growth, just given what you're seeing in China, what you're seeing in Europe and some of these other markets as they continue to gain momentum?

Just any context about how we think about the international growth for the year broadly.

Yes, I think, that's all certainly possible.

Right now, the only drag to that number would be the distributor base, which is obviously -- if things straighten out and don't have issues with other distributors, we have some distributors that are doing very small, they're just not -- order of magnitude is biggest for us is the Middle East, and you know how that's moved the needle for us in the past.

I think they're coming back.

Should they come back strongly in the back half, I would have no problems and no issues with those numbers.

Our next question comes from Tom Nikic of Wells Fargo.

I was just sort of wondering about the -- I guess, it was touched on earlier, the gross margins.

And I mean, Q3 was really, really strong and Q4 was not quite as much.

And then it would seem like Q1 should be somewhere in the middle.

I mean, can you just help us like understand why sort of the gross margins have sort of bounced around a bit the last couple of quarters?

And I know that there's mix and stuff like that, but are there FX impacts or anything like that, that we should really think about when we model out the gross margin?

Tom, I think you're picking up the most significant fact pattern which is the mix.

In particular, the contribution from international and retail has a significant influence.

No doubt gross margins probably would've been higher in Q4, but domestic wholesale grew to 10%, which is a great fact pattern.

I think Q3 was stronger than Q3 traditionally.

If you look at Q4 relative to full year on a historic basis, we're kind of right in line with where you expect the Q4 to result relative to your full year gross margin range.

Q1, the call-out that I'd reinforce is the distributors, to the extent distributors are flat to down, that will increase gross margin, but that's again, a major mix shift.

Right.

So basically your lowest gross margin business should be down in Q1, so you'd get a much better mix than what you saw in Q4?

Exactly.

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

I just wanted to touch on some of the newer international markets you've taken over in the last couple of years, Latin America and Korea.

I know Korea is called out as one of the best growers.

Overall, how are those doing?

Did you start to see any margin improvement in fourth quarter?

And how do you expect margins in those businesses to trend next year?

You talking about operating or gross margins?

Because gross margins...

Operating margin.

Operating margins, relatively flat in Korea, just gaining back some of that momentum.

They are starting to increase in South America, but we are continuing to invest there.

It's brand new -- we're opening a lot of new stores.

It's fair to say in South America, our comp store sales for the last quarter were extremely high, even higher than the company as a whole, but there's a limited number of stores.

So it can't move the needle yet.

So I would tell you, they're starting to take hold, certainly in Latin America, maybe a little more slowly in Korea, but we see great potential, and we anticipate that we can go through this year, through the back half of the year, they will start to increase meaningfully.

Great.

And then last quarter, you talked a little bit about India.

How was that business in the fourth quarter?

And what do you think the ultimate potential there is?

Ultimate depends on your time frame.

India is growing very nicely.

It's doing a big franchise model.

It's got mono-brand stores.

The volume is increasing, but it's at a fairly slow rate, it's a little more difficult to do -- get started in India, but the brand is certainly resonating, and our stores are certainly comping up.

So we've increased, it was a nice size increase, certainly in the double digits.

They did turn profitable last year for the first time.

We expect that to continue.

So we will continue to grow.

As to what the impact is ultimately, right now, we do less than $100 million there , I think $60 million or $70 million as far as India is concerned for the year.

We do believe it can be a multi-hundred million dollar country for us, maybe even closer to $1 billion country for us as we take hold and build through a massive population as the middle class grows.

So it's too early to put -- make them a significant piece of the next 2 or 3 years.

But certainly, if you wanted to take a longer-term perspective as a brand, they will be a key player.

Ladies and gentlemen, we have time for 2 quick follow-ups.

Our first follow-up comes from Scott Krasik of Buckingham Research.

Just a couple of clarifications.

One, did you say what your distributor sales were in the fourth quarter or how much they grew?

3%.

You hear that?

Say again?

3%.

3% in the quarter.

Okay.

And then, what sort of comps you have embedded into your 1Q revenue guidance?

Low double digits worldwide, mid- to high-single digits domestically.

Our final question comes from Sam Poser of Susquehanna Financial Group.

Well, given all these changes with buybacks and everything and given the inconsistency of currency here, do you foresee [starting] the hedge against all this international currency down the road to basically level the playing field for yourself a bit?

No, I think right now, we feel that we manage our exposure to foreign currencies relatively well.

I mean, we will continue, obviously, to the extent the volatility we see becomes the new normal.

We'll look at opportunities, but only if they're accretive to the operations and they drive value.

We know just because we have cash overseas, it doesn't mean it's in a foreign currency.

We already actively manage our exposure there so that we're not seeing foreign currency fluctuations on active cash balances, more than what we need in any given market.

But I'm more referring to how it comes against purchases of inventory and impact to gross margin and SG&A, and so on and so forth.

I mean, from that perspective from -- for the use of -- since you buy everything in dollars.

If you think back, it only is a short-term situation for us.

It's very difficult to take a long-term view on currency.

And it may be more volatile to hedge depending on how the matching can work than it is to live through the process.

In the past, we've done very well with the both sides, both with a stronger dollar and a weaker dollar.

We've shown that we do have pricing power around the world when the dollar tends to get significantly stronger and take advantage and then modestly adjust the price points when the dollar goes the other way.

So I don't know that we look to even out short-term swings when the business is growing so dramatically.

But like John said, we're always open.

Should something develop or a process that we can match closer, then we'd certainly would take a look.

Ladies and gentlemen, we have reached the end of our question-and-answer session.

This will conclude today's conference.

You may disconnect your lines at this time.

Thank you again for joining us on the call today.

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.