Skechers USA Inc (SKX) 2018 Q1 法說會逐字稿

Greetings, and welcome to the SKECHERS First Quarter 2018 Earnings Conference Call.

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

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

You may begin.

Thank you everyone for joining us on SKECHERS's 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's Chief Operating Officer, David Weinberg; and Chief Financial Officer, Jan Vandemore.

David?

Good afternoon, and thank you for joining us today to review SKECHERS's first quarter 2018 financial results.

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

First quarter sales increased 16.5% to $1.25 billion, which marks a new quarterly sales record, a result of the growth we achieved across our 3 distribution channels: domestic wholesale, international wholesale and our global company-owned SKECHERS retail stores.

This is a testament to the worldwide strength and relevance of our brand.

First quarter highlights include: a new quarterly sales record, an 8.5% sales gain in our domestic wholesale business with an increase of 15.1% in pairs shipped; a 17.9% sales increase in our international wholesale business, primarily due to our subsidiary and joint venture countries; a 26.4% sales increase in our global company-owned retail stores, with comp store sales increasing 9.5% globally; international wholesale and retail represented 54% of our total business; expanding our SKECHERS retail network to 2,651 stores worldwide; achieving a new record shipping quarter for both our North American and European distribution centers; we repurchased 76,000 shares at a cost of $3 million.

Now turning to our business channels in detail.

Our domestic wholesale business increased 8.5% for the first quarter.

The growth was the result of a 15.1% increase in pairs shipped, with a 5.7% decrease in average price per pair, primarily due to product mix and the strength of several collections that have a lower average selling price.

Our men's and our kids' footwear achieved double-digit growth in the quarter, and our women's business had mid-single digit gains.

The growth was across multiple lines, including On the GO, BOBS, sandals, sport and work.

To support our spring domestic business, we ran multiple media campaigns targeted at men and women, including SKECHERS D'Lites, SKECHERS's Street, SKECHERS GOwalk Joy, BOBS, Skech Knits and sandals.

For young women, we also ran a new Camila Cabello's SKECHERS D'Lites TV commercial and digital campaign.

The resurgence of this shoe style brought new attention to SKECHERS D'Lites from fashion-forward youth and influencers who sought the originator of this retro look.

For men, we also utilized our legendary athletes with commercials featuring David Ortiz, Howie Long and a new campaign featuring Tony Romo.

Further, both Camila Cabello and David Ortiz aired in English and Spanish.

To support our running business, we again sponsored the Houston Marathon, and we were the title sponsor of the SKECHERS Performance Los Angeles Marathon.

SKECHERS athlete, Weldon Kirui, won the men's division for the second time in 3 years, achieving victory in SKECHERS Performance footwear.

For our growing golf business, we have multiple leading golf ambassadors, competing in our GO GOLF footwear and apparel.

Just this past weekend, the lead golfer, Brooke Henderson, won the LOTTE Championship in Hawaii wearing SKECHERS GO GOLF, footwear and apparel.

For younger kids, we ran new Twinkle Toes and Energy Lights commercials, and for youth and tweens, we aired 2 comfort sport commercials.

In January, trend-leading online publication HYPEBAE noted SKECHERS was about to become the new it-shoe of 2018.

The attention from media accounts and consumers was evident in the growth we achieved in the quarter.

The renewed interest we are experiencing in our heritage footwear lines, as well as in our new offerings, leads us to believe our domestic wholesale business will continue to be strong in 2018.

International wholesale remains our biggest distribution channel, representing 46.2% of our total sales, while international wholesale and retail combined represented 54% for the quarter.

Our total international wholesale business increased by 17.9% or $87.6 million in the first quarter.

The increase was the result of a 25.7% growth in our subsidiary and joint venture businesses and was offset by our distributor business, which decreased by 22.2%.

As expected, this decrease was primarily the result of the unstable political and economic environment in the Middle East, combined with the timing of several key partner shipments.

Further detailing our international growth, for the quarter, our wholly-owned international subsidiary business grew by 25.9% and our joint venture sales grew by 25.4%.

All of our European subsidiaries achieved double-digit growth, with the U.K., Germany, Italy and Spain experiencing the highest dollar gains.

Canada also continues to achieve strong gains.

China remains a dominant force in our Asia business, with approximately 4.4 million pairs shipped in the quarter, a retail base of approximately 800 SKECHERS freestanding stores and 2,400 points of sales and a strong e-commerce business, which grew by high double digits in the first quarter.

In addition, India, South Korea and Singapore all had considerable dollar and percentage sales gains in the first quarter.

We are pleased with the continued growth we are experiencing with our distributors in Scandinavia, Russia and Turkey, as well as with several others.

Our distributor in the UAE who handles our business across much of the Middle East and South Africa still faces some challenges in the regions, but they are expecting improvements to their business by year end.

At year end, there were 1,994 SKECHERS branded stores owned and operated by international distribution partners, joint ventures and a growing network of franchisees.

In the first quarter, 79 third-party owned stores opened, which included: 21 in China; 19 in India; 7 in South Korea; 3 in both Indonesia and Taiwan; 2 each in Australia, England, Israel, Netherlands, Japan, Turkey and Nigeria; and 1 each in Denmark, Greece, Hungary, Italy, Malaysia, Portugal, Serbia, Sweden, Switzerland, the UAE, Ukraine and Vietnam.

27 stores closed in the first quarter.

Nine third-party owned SKECHERS stores have opened in the second quarter to date, bringing the total third-party stores to 2,003.

We expect another 450 to 475 third-party owned SKECHERS branded stores to open in the remainder of 2018.

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

In our company-owned global retail business, sales increased 26.4%, which was the result of a sales increase of 62.1% in our international stores and 13.5% in our domestic retail stores.

This included worldwide positive comp store sales of 9.5% in the quarter, including 7% domestically and 17.6% internationally.

At quarter end, we had 657 company-owned SKECHERS retail stores, of which 203 were outside the United States.

In the first quarter, we opened 15 stores, including a new store in London's Covent Garden.

Three stores closed in the quarter.

So far in the second quarter, we've opened 2 new concept stores, one in La Jolla, California and the other in Japan, and expanded and remodeled our flagship store in Manhattan Beach, California.

For the remainder of 2018, we expect to open an additional 60 to 75 company-owned SKECHERS stores and remodel or relocate 15 to 20 existing stores.

Adding to our growth was our domestic e-commerce business, which grew by 12.7% for the quarter.

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.

Thanks, David.

I am pleased to share our first quarter results with you, which once again illustrate the tremendous growth potential of our strategy.

First quarter sales increased 16.5% over the prior year to $1.25 billion, a new quarterly record.

This growth was driven by increases in all our business segments, including domestic wholesale of 8.5%, international wholesale of 17.9% and company-owned global retail stores of 26.4%.

The record sales was despite a decline in our distributor sales of 22.2%, due in part to the weakness in the Middle East that David mentioned.

Excluding distributor sales, our international wholesale business was up 25.7% in the quarter.

Gross profit was $583.1 million, up $106.6 million compared to the prior year, and gross margins increased 230 basis points to 46.7%.

This improvement was attributable to strength in our gross margin-accretive international company-owned retail business and international wholesale subsidiaries, due in part to favorable foreign exchange rates, as well as lower sales from margin dilutive distributors.

Selling expenses increased $10.6 million to $84.4 million or 6.8% of sales, which was a 10 basis point improvement from 6.9% of sales in the prior year.

The dollar increase was due to higher international advertising expenses to support our overseas growth.

General and administrative expenses were up $72.9 million to $355.4 million, representing 28.4% of sales compared to 26.3% of sales in the prior year period.

The increase reflects our continued investment in our long-term global growth initiatives and included $37.4 million to support international growth in the company's joint venture and subsidiary businesses.

It also included an increase of $18.3 million associated with 73 additional company-owned SKECHERS stores, of which 15 opened in the first quarter.

Domestic wholesale, general and administrative expenses increased $17.2 million year-over-year, primarily due to increased distribution and warehousing cost, due to greater domestic wholesale and retail sales volumes, as well as increased head count to support new product development and sales capabilities.

Earnings from operations increased 19.6% versus the prior year to $148.8 million and as a percentage of sales, represented a 30 basis point improvement from 11.6% in the prior year to 11.9%.

Our operating leverage was lower than anticipated due to higher than planned international distribution-related costs.

Net income for the first quarter was $117.7 million or $0.75 per diluted share on 157.6 million shares outstanding, compared to $94 million or $0.60 per diluted share on 155.9 million shares outstanding in the prior year period.

Our income tax rate for the quarter was 9.6%, reflecting certain discrete tax benefits, primarily associated with the refinement in our understanding of the various provisions of the Tax Cuts and Jobs Act.

The benefit of these discrete tax items to our diluted earnings per share was approximately $0.07 per share.

We continue to expect our effective tax rate for 2018 to be 12% to 17%.

And now turning to our balance sheet.

At March 31, 2018, we had $700.1 million in cash and cash equivalents or approximately $4.44 per diluted share.

During the first quarter, we began repurchasing shares pursuant to our 3-year, $150 million repurchase authorization.

We acquired and retired approximately 76,000 shares of our Class A common stock at a cost of $3 million.

We remain confident in the strength of our balance sheet and our ability to fund our growth prospects, while simultaneously executing this repurchase authorization.

Trade accounts receivable at quarter end were $692.6 million, an increase of $141 million from March 31, 2017, and our DSOs were 40 days at March 31, 2018, compared to 37 days in the same period last year.

The increase in DSOs was primarily attributable to the timing of sales in the quarter.

Total inventory, including merchandise in transit was $800.3 million, an increase of $214.5 million or 36.6% compared to the same period last year.

This increase in inventory is in line with our growth expectations for our global business.

Long-term debt was $70.6 million compared to $68.8 million at March 31, 2017.

Working capital was $1.6 billion versus $1.3 billion at March 31, 2017, primarily reflecting the aforementioned inventory and accounts receivable's levels.

Capital expenditures for the first quarter were approximately $34.5 million, of which $14.9 million was related to 15 new company-owned domestic and international store openings and 9 store remodels or expansions and $8.2 million to support our international wholesale operations and $1.5 million for our domestic corporate office renovations.

For the remainder of 2018, we expect our ongoing capital expenditures to be approximately $50 million to $55 million, which includes an additional 60 to 75 company-owned retail store openings, 15 to 20 store remodels, expansions or relocations and office renovations.

This estimate excludes capital expenditures related to our distribution centers worldwide, including China, as well as our office expansion here in the South Bay, some of which may break ground later this year.

Turning to our second quarter guidance.

With new product deliveries and expanded global infrastructure and a strong cash and inventory position, we believe we will achieve second quarter sales in the range of $1.12 billion to $1.145 billion, and net earnings per diluted share of $0.38 to $0.43.

To note, this guidance includes the expected shift of some shipments from the second quarter into the back half of the year for several key international distributors, as well as domestic wholesale accounts.

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

Thank you, John.

The first quarter marked a new quarterly sales record, a significant achievement on top of a record 2017 and an indicator of the strength of our brand, product and marketing worldwide.

The record sales were a direct result of the commitment of our teams worldwide to provide consumers with the style and comfort they want at the right price.

In the quarter, we achieved strong increases in our 3 distribution channels and in our men's, women's and kids businesses.

Further, with a diverse product offering, we are resonating with a broad demographic base, including a growing teen and fashion-forward audience with SKECHERS Street and the resurgence of SKECHERS D'Lites.

To reach this developing audience worldwide, we increased our marketing support and continued to invest in relevant influencers and ambassadors.

Going forward, we are well positioned for growth within these channels and markets, and we'll continue to maintain our edge in product innovation, development and distribution.

To ensure our success this year and in the coming years, we are making investments in our operations and logistics worldwide, and we continue to believe that the global market poses our strongest growth potential.

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 is from Jeff Van Sinderen from B. Riley FBR.

I wonder if you can just walk us through a little bit more detail on why orders are shifting more to the second half.

I guess, how much of an impact of that is due to the issues in the Middle East?

Maybe if you could just give us kind of the buckets of what's going on there.

Is there something with the calendar shift?

Weather?

Also, is there any change in sell-through rates at your wholesale accounts due to a fashion shift or something else?

And can we rule out an issue, I guess, with product content being part of the reason?

Just trying to, I guess, get a sense of why they're deferring receipt of merchandise.

Okay, Jeff.

Now that's a multifaceted question.

It is.

And it crosses a number of the issues you raised.

The first of which, I do believe, is partially the weather.

As we completed our cycle and we were so hot in the marketplace, especially in the U.S. and Europe, they took everything that we had available for the first quarter.

Nothing slipped into the second quarter and if they had something available early, they picked it up slightly early.

The weather being what it was, we were checking well, but they still have to clean out their inventory and they're probably running somewhat behind.

So the anticipation is, that rather than any movement from July to June, which was big last year, if there's any movement, it would go the other way, from June to July simply so they get ready for the back-to-school season.

It also includes the Middle East, which won't be coming back online until the middle of the second or probably the end of the second quarter if things go well.

They do see some improvements, but that's going to be an issue for us going forward, at least until third quarter.

So we have a lot of prospects building for a very positive and significantly higher first quarter -- third quarter, sorry.

Also in Europe, weather was a concern, and while we shipped better than we anticipated, it still is going to take them a while longer to get it done.

And then there, they historically start in third quarter, so there's no real pick-up.

So what you have is a relatively light quarter.

If first and third quarters are going to be so strong, then second quarter has very little places to pick it up from.

Europe doesn't have business that starts then, Southeast Asia doesn't grow as significantly, Q3 is certainly bigger.

And with the U.S. moving things from Q2 to Q3, it's a limited amount of positive news for Q2, although very positive for Q3 and going into year end.

So we do believe we're still on target.

Our backlogs and incoming order rates don't show this significant change as we see in the third quarter.

It's more a timing shift rather than orders or relevance or product and delivery.

So if you put that all together, we end up with a very strong Q1, a modest Q2 and a very strong Q3, which is what we're anticipating at this time, and really have no change in how we feel about the year, other than timing that we had 3 months ago.

Okay, that's helpful.

And then, just as we're thinking about Q3 and Q4, I guess, I don't know, is there anything you can give us, I guess, on Q3 in terms of how we should think about domestic and international growth there?

I know you've, obviously, the Middle East is sort of a moving target.

Yes.

I think -- this is John.

So I think, as we look forward to the year for domestic, we're still on track for what we anticipated and saw in Q1.

It's just as David mentioned, we have a bit of a lull in Q2, due to some timing.

We also have a tough comparable.

Last year, if you recall, there was a timing shift into Q2 of about $20 million that is exacerbating the comparability of the 2.

Again, as David mentioned, we see very strong backlogs in Q3 and Q4 now, and our full year prospects, I think, remain similarly positioned as to where they were after the end of Q4.

Okay.

That's helpful.

So just one more.

So it doesn't sound like there's a product issue.

It sounds like there's really just a timing shift.

And then, any color you can give us on whether you think you'll be able to leverage SG&A in Q3?

Well, just on that, I mean, I certainly don't think there's a product issue.

We generated a pretty decent comparable store sales figure, both in the U.S. at 7, and internationally at 17.

So that would certainly lead you to believe the product remains strong and everything we see, again in the backlog orders for the year, would certainly not indicate there's any issue with the product, if anything, it's actually continuing to do extraordinarily well.

Okay.

Good.

And then leverage, do you think leverage on SG&A starting in Q3 again?

I would think so.

That's based on top line and where we're going.

Part of the issue is, we've had more of the same we've had in the prior year.

So Korea was up, but deleveraged somewhat more because we had to put a little more infrastructure in than we had anticipated.

China is anticipating such strong growth that we had to pump up expenses to handle the business that's coming, and a bigger piece of that business is online, which has more infrastructure build because of the uniqueness of shipping one pair at a time for that, the size they are.

So we do believe that we will catch up, that the top line will be such and that we will be able to again start to leverage again in Q3.

It should be a very positive time for us, just like we thought last year Q1 would be a positive change for us this year as well.

And you have to also remember Jeff, that Easter went into Q1.

So of all the things like John was saying of the tough comps, Easter went into Q1, so all deliveries really were taken in Q1.

Bad weather has issues with sell-throughs going through this first quarter, and it's now starting to pick up very nicely, which moves things, then, into second to third quarter.

So we do believe it's all the shifts with and they're positive.

We're always better off shipping earlier like we did in first quarter, and we will pick it up, maybe quicker if the weather holds up and Mother's Day and Father's Day end up very strong.

Our next question is from Chris Svezia from Wedbush Securities.

I guess, just first, just to clarify.

What was probably in Q1, the biggest surprise in terms of the expenses?

In terms of the deleverage effect?

You generated $50 million in upside to revenues, but call it roughly another $50 million or so in expenses.

So maybe if you could just walk through what really surprised you, what came on so strong in sort of the, call it, the last 1.5 months for the quarter, that caused expenses to be as high as they are.

Yes, I think David mentioned the most crucial, and we even put it in the remarks, was that international distribution-related costs were a bit higher than we had anticipated.

I think some of that, as Dave pointed out, is, are beginning to deal with the higher volumes that we now see in China.

I mean, it's grown substantially again this quarter.

So a little bit of maybe growing pains in terms of executing distribution at its peak efficiency.

I would just say, from a dollar perspective as well, recognize that we had some foreign exchange benefits on the top line.

Well that also translates through to domiciled cost in countries.

So from a dollar perspective, that's also exacerbated the issue.

So I think, generally speaking, I'd lump them into distribution-related costs at this point in time.

But again, that's part of growing at a 30% clip in-country, and we'll continue to refine that model as we go forward, but it's also as David said, part of the price you pay for the success that we've had and continue to expect to have in the year in some of our huge international markets.

Could you maybe tell us how much China actually grew in the quarter?

It was over 30%.

And with regard to the inventories, whereby you say it kind of aligns with the growth in the business, or your thoughts about growth in the business being up 37%.

Could you just maybe just add some color about that, timing, comfort level with the inventory position?

Well, I think it's fair to say, we've tried to take inventory at the earliest possible time, usually anticipating shifting some Q3 back into Q2.

So part of it is that we've taken it early.

We don't have a significantly larger piece of any of our inventory that's unspoken for.

As the timing shifts, obviously you end up with more inventory, and then we modify our production as we go forward.

So we do anticipate that, from a numbers perspective, it will come down as we go through the second quarter, even though the second quarter will be relatively light, because we got it in early to begin with, and that has to do with a lot of issues in China and others.

And then, you have to realize that we're building for a bigger retail model.

Our own, our bigger retail model in China, which is all retail, which is -- whether it's franchises or our own inventory for our own stores, we have to build it on an earlier basis, and we're building bigger inventory in China as well simply to support the online business, which is like your own store.

So you don't sell it to somebody and move on.

So we had to store those.

We've also increased our inventory in South America, which we think is just on the border of becoming much larger, and we're opening a significant amount of stores in South America as we go forward.

We've opened more stores in Japan, and have picked up the base.

And in Japan, their big shipping month is April, in the first part of the year.

So when you add March, we had significant amount of inventory, and we expect growth in Japan, one of in April as well.

So a lot of it is timing, a lot of it is new business and a lot of it is trying to get the stuff, we've always had a policy of taking it in early from the factories, even if it's spoken for, should we need it to move things around.

And just lastly, could you just maybe walk through what you expect in Q2 between U.S. wholesale, international, subsidiary distributor and retail, just give any color and context relative to the overall revenue outlook for the quarter?

The top line?

Yes.

Yes, I -- so as David mentioned, the domestic wholesale for us, we expect it'll be down slightly, probably mid-single digits.

International wholesale will kind of continue on the pace that it's been the last couple of quarters, probably a little bit better than this quarter.

The distributors, we still expect to carry over the same effects that occurred in Q1.

So we expect those to be down probably in the 20% range again.

And then global retail, we think is mid-teens growth, going forward.

It's continuing to do phenomenally well, the comps have been strong and that's where we see things.

Have the comps held up as you've gone into Q2?

What have they been like so far in April?

Well, this is difficult time, Chris, because we're comping against Easter last year.

So they are down, but we're comping up for the Easter, against Easter and anticipate after this week, when we get back to like-for-like, they'll continue to increase.

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

I think the SG&A dollar growth is obviously a point on the income statement that the sell sides had trouble modeling the past year or so, and it looks like the guidance implied for Q2 is pretty significant in terms of overall growth.

You're now guiding to leverage, as I understand it, in Q3.

Can you just help us understand how you see SG&A dollar growth and SG&A rates progressing for the rest of the year, because I think there's -- it's just creating a lot of volatility in terms of expectations.

Yes.

I mean, listen, I think we had some irritation in the G&A line during the first quarter.

We mentioned that having to do with distribution.

We don't forecast that, that was more of an occurrence that was required to help propel the growth.

And I think we haven't been too shy about asserting that we're going to make sure we fund the top line growth.

That's more important to us at the moment than ensuring that we're optimizing every penny in G&A.

I think for the balance of the year, we continue to expect to see opportunities for leverage.

Q2 will be tough because it's a lighter quarter.

We also -- the distributor sales, while they benefit us on the gross margin line, it's important to remember that there's a very high flow through on those sales down through to operating income, and that, that does have an effect when you look at operating income leverage because we're not getting the high quality distributor sales from that perspective.

That's something to keep in mind.

I mean, ultimately our vision for the goal -- our vision for the year is to continue to look for opportunities to leverage.

We think that's possible.

We leverage in selling expense this quarter.

So we very much look at those 2 together.

Tough comp in Q2 though is going to be the main challenge to operating leverage there.

Okay.

And then just on the working capital side, the accounts receivable line and the inventory line, obviously, growing in excess of sales.

Just wondering, do you feel like you're properly reserved on those line items and with the inventory up 36%, can you just help us understand the composition of that by geography and channel?

How much of the issues in the Middle East are playing into this, and how do you expect to bring that down more in line with sales as we go on through the year?

Well, basically, the Middle East, it's a nonevent as far as our inventory is concerned.

They are a third-party distributor, we don't carry inventory for them specifically, they buy direct from the factories.

So it's fair to say the inventory growth is in those places we continue to grow.

It's in South America, it's in the Far East, especially China, as we said, it was the big piece, and for store growth as well.

It's grown here somewhat, like I said, most of the stuff here is spoken for, our backlogs are still at a big pace, we've just taken it in early.

So we said in the past, we usually monitor our inventory not so much about how much is physically here at a time, but what is spoken for and what is not spoken for, what is speculative and what we have commitments for and purchase orders for.

So there hasn't been a significant change, which means we're building inventory units for the stores.

So what can happen is obviously, the stores could need more or somewhat less, based on their situation and depending on weather and sell-throughs and how fast they sell through, which has been very positive in the quarter.

And for our customer base, our wholesale customer base, both in Europe, the U.S. and in China, it will depend on weather and sell-throughs.

And if we can deliver this stuff earlier, we certainly will, if not, we'll just have enough to deliver in May and June.

And I would absolutely say we're completely comfortable with the reserve levels we have, both of those line items.

AR is all a matter of timing, and we feel completely comfortable with the reserves we have in place.

Okay.

And then just 2 quick follow-up questions.

One, just on product cycle.

What are you most excited about in the back half of the year?

And then the final, kind of clean up question is, you've got pretty significant amount of cash on your balance sheet relative to your after-hours market capital.

Just wondering, are you willing to kind of step up the share buybacks?

I think it was fairly small in the quarter, in the first quarter.

I'm just wondering how you're thinking about capital allocation in the back half of the year.

Yes.

On the cash side, I mean, we, the reason that the share repurchase was modest in the quarter is we simply had to make the arrangement, begin executing against that.

So that was certainly not due to a lack of appetite at the prices that were prevailing.

It was rather more of a logistical challenge.

And that will certainly be a use of cash for the foreseeable future.

We have the authorization we have.

We don't -- we just put it in place last quarter, there's no need to amend it now, but we will certainly be looking at the share prices that prevail, following today and use that as an opportunity to further execute on the repurchase authorization.

And then, to be clear, we do have some near term expenditures on the growth side that we want to make sure we have funding for.

In particular, we have a distribution center that's going to be going up in China.

We have some campus consolidation occurring here in Southern California.

We also made our first payment to the IRS for the transition tax, which as we mentioned, was about $100 million.

So there's certainly some uses.

But we'll continue to monitor our capital allocation approach as the business unfolds and address any excess cash when we feel it's prudent to do so.

And as far as product is concerned, I think it's more of the same.

We're -- In the early part, we had great reception for the stuff we're going to deliver in back-to-school, which is more of the same that you saw at the back half of spring.

Just newness in styles and some new styles in Street and in the D'Lites package, including men's, and we've just started 3 lines now for Q1 next year, and they had very good reception, both domestically and internationally at the very early stage.

So we're still very comfortable that the product cycle will continue to come our way, and that we'll continue to develop product that will keep moving us forward.

Our next question is from Tom Nikic from Wells Fargo.

I was wondering on the gross margin line, I mean, you've sort of had a lot of quarter-to-quarter volatility.

I mean, up 20 bps one quarter, up 200 the next.

Can you just help us sort of understand what's sort of driving that line item and how we think about it for Q2 and potentially the balance of the year?

Yes, this quarter was a bit of an anomaly on the gross margin side for 2 reasons.

The first is, the lack of distributor sales, proportionally lower than what we'd normally see in the international Wholesale business.

The second was the impact of FX rates year-over-year that were tremendously favorable for us in the quarter, on top of the price actions that we had taken in some markets, or -- in particularly, the U.K. So those came to benefit us pretty significantly in the quarter.

We also experienced a general segment mix lift as we continue to overemphasize the growth in international and direct to consumer retail channel.

So that was a help.

On the offset side, we saw some lower gross margin selling product come through, but also, just to think it's the mix of who we're selling to, bigger accounts, bigger scale, there's a little bit of decrement there.

But obviously overall, good movement on the gross margin.

I don't know that we're going to see a sizable shift in Q2.

That's not our expectation at the moment.

But again, part of it is determined by the consumers, and what they choose to focus on.

So part of that is ultimately going to be a product mix issue that we can't control for, but our expectation at the moment is, you'll probably see some slight accretion in Q2, but nothing nearly as substantial as you saw in this quarter.

All right, and sorry if I missed this, but did you quantify how much revenue you think gets pushed out from Q2 to the back half of the year?

We didn't quantify.

And I'll tell you, I think it makes a difference between the slight decline that we anticipate and kind of a more modest mid- to low single digit growth rate that we would've expected otherwise.

Our next question is from Sam Poser from Susquehanna.

All right, I'm going to follow up on Tom's question.

Can you give us a dollar detail on how many dollars are moving from Q2 to Q3 in the domestic wholesale business, please?

Yes, I don't know that we want to be that precise about it, Sam.

I think, hopefully, the comment I just made is indicative enough.

But again, I think the important thing to recognize in Q2 is the shift, which again would swing us from a slight decline to a slight improvement, but also recall last year, there was a $20 million inflow into Q2 from Q3 that exacerbates the comparison this year.

I understand that.

Okay.

So let's move on from that.

The next question is the, about 6 weeks ago, or whenever you announce, or 8 weeks ago, when you announced Q4, you guided the SG&A to a certain level, and the G&A came in well higher.

And I guess, the question is, was -- how much of the incremental spend was last-minute to support, like sort of when did you know that your -- I mean, when did this arise, the need to -- for this additional spend?

And could you -- and then lastly given, sort of it seems like you have the full year sort of laid out, why not give full year guidance so people aren't tripping over quarters the way it is, when a full year -- you know where you're going to be full year, you know where you want to be, and these shifts then wouldn't be making everybody scratch their heads so much.

Well, on the second point, I'd tell you, there's always going to be shifts.

There's always impacts from the market.

We're not, believe it or not, running our business to guide you guys expertly one quarter to the other.

We're running our business to grow the top line, ensure ultimately we have the structure in place to be a growth engine for the $6 billion that we're aiming for in 2020 and make sure that our profitability is on par with the industry.

The year would be challenged with as much potential variability as any given quarter, is because we're responding to consumer tastes that shift pretty quickly, and customer orders that can shift from one quarter to another, or in and out of a year just as easily.

So, while I appreciate the comment on the full year, I think, right now, there's the same level of volatility would attach itself to a full year as it attaches itself to the quarter.

And then about the G&A, when you knew it, and like (inaudible) when that transition happened?

Well, it was a later event.

As John said, it has to do with the distribution cost.

And, by far, March was a much bigger month and a much bigger by average, which is why we were higher than our original guidance as far as business was concerned, both in the U.S., and Europe and in China, which had a bigger piece coming through their franchises and their online business.

It put a lot of pressure on our structure, we had significant amounts of increased labor costs, time we had to rent some additional space so we could process on a more timely basis and get things out.

We've had growth in South America and Japan that started to come on, like I said, in March and April in Japan.

So it really was a final rush that put us over the top as far as top line was concerned, but did put some strain on our systems.

(Operator Instructions) Our next question is from Laurent Vasilescu from Macquarie.

I think at your March presentation you put out a goal of achieving 12% to 13% operating margins by 2019.

Can you help us bridge that between 2018 and 2019?

Well, I'd say it's still our goal, absolutely.

We're not going to back off of a goal, but I'd also remind you all that we're looking to grow the business.

And if there's an opportunity to grow the business and it may require some near term G&A spending, we're going to make that spend.

I mean, just to think about David's comment about Q1, and the question is, do you ship or do you save G&A dollars and we'd rather ship, we'd rather secure another customer, we'd rather augment the brand's image in a new market.

That's a choice we're going to make 10 times out of 10.

So I'd tell you that the operating margin's still a goal.

We still think it's feasible and realistic, but it's also going to be subject to ensuring that we're optimizing the growth profile of the business across the globe.

And again, if we look at the G&A composition, where we saw the irritation in Q1 was in our international markets, and those are the highest growth potential markets.

So we'll continue to refine our operations there, and over time, be able to optimize down on the G&A, but in the near term, we're looking to make sure we're optimizing the growth and building the brand in those markets, because that's the most important.

Okay, very helpful.

And then, on China, I think you mentioned it grew over 30%.

Should we still think of China growing by $200 million for the full year?

And any other comments on what's happening in China?

Yes, absolutely, it's still the goal.

We'll push it, even grow more if we can.

I think China continues to be one of our most attractive markets, and is growing phenomenally well.

To David's point, it also is our highest growth engine online, which is a great new market for us to tap into, and to benefit from the learnings there across the globe.

So absolutely.

Okay, great.

And then just to follow up on Tom's question about the first quarter gross margin, the 230 bps increase.

Could you just possibly parse out the FX impacts versus the actual mix benefit?

Yes.

The FX impact was maybe 300 basis points, the mix benefit was maybe 100, and then there were offsets in kind of product mix, customer mix that offset some of that, to get you to the net 230.

But I also just know, I mean, it's not just the FX.

It's the fact that when we had a challenged market a year ago, we took pricing successfully, the product, it continues to perform in that market.

So to call it just FX, I think underwhelms the rationale and, I think, the strength of the product and brand in that market.

So I didn't -- it's not as easy as just the FX rates change, I think it's what we did in the face of those to ensure that we remain profitable and growing in some of those markets.

And that's proven to be true.

Okay.

That's very helpful.

And then, the tax rate came in shy of 10%.

Can you help us think about the puts and takes and in terms of like, by quarter, should we think of the second quarter, just to meaningfully step up function to get to your full year tax rate range?

Yes, that's a little tougher, only because we're dealing with an evolving understanding of the Tax Cuts and Jobs Act and its myriad provisions.

What I would tell you about the quarter is, we had an adjustment to our preliminary valuation of certain aspects of the transition tax and that led to about an $8 million favorable adjustment that rolled through that rate.

There's also new accounting for the tax consequences of share based awards to employees.

That came through.

That actually, by requirement, needed to be treated as a discrete item, even though we expect it will continue throughout the year.

If we strip those away though, you would see a normalized tax rate that is certainly in that range, probably toward the higher end of the range we gave you.

In particular, as we see the implementation of the global intangible minimum tax from the new law, that's -- that as we said, is probably going to actually aggravate our rate versus historical standards.

Okay.

Very helpful.

And then last question.

The noncontrolling interest line was nearly $20 million.

How do we think about that line item for the full year?

It continues.

That's a big-piece of China, India, Southeast Asia, those were all the joint ventures flow through.

So the more they earn, the faster they grow, the percentages don't change significantly.

Obviously, we own the same percentage of each business as we did before, but the number continues to grow.

Should we think about that number as like in the $80 million range?

I don't know that the 4 quarters always come out quite that even, but it's certainly a ballpark.

The next question is from Jim Chartier from Moness, Crespi, Hardt.

So on the distribution expense, assuming that those businesses continue to grow at a similar rate the rest of the year, is there something -- actions you can take, or have taken so that the impact, from the distribution perspective isn't as great as it was in first quarter?

Yes, of course, we continue to do that.

We're looking at them.

And to set up when you are outgrowing the facility or you're becoming under duress, is obviously not the most efficient way in the world.

We'll continue to add infrastructure, which includes automation in Europe.

We will do some modifications to our automation to adjust to the way the business has changed and how our inventory flows and the SKUs we have in the United States.

We've already set up an overflow so that won't have to be repeated probably more than -- than we'll need.

So yes, we're constantly looking at making those efficiencies.

And when you get -- we ship, by far, the most pairs out of our distribution center in the U.S. And while we've been leveraging that since it opened 6 years ago, the good news is, we're starting to get to capacity, and we'll have to move forward.

So we will look at and become more efficient over time, within this growth.

So I'm kind of -- the rest of this year though have -- or have you taken issue -- actions, so that you'll leverage distribution better.

Yes, you -- we're constantly at work on -- the answer to that is, it depends how quickly we grow.

There are capacity issues (inaudible).

If we get to the top end, we will probably leverage some, because I don't need any new real expenses.

The question will be how many people, and how concentrated the shipments and how big they are, as we get into third quarter.

But I do believe we will make inroads for that this year.

Okay.

And then on China, more specifically, you're talking about the DC there.

How does that help the cost structure in China over time?

And how far into the future before we start to see any benefit from that?

Well, we're hoping to break ground before the end of this year.

Should be ready in the next 12 to 18 months.

It helps just like everyplace else.

We build an automated system to the best we can, although their business uses are somewhat different and concentrated within different time periods than we've had in the past, but with like any automated system, what you do is, you have that big capital upfront, but it's not a P&L item.

What you do is depreciate it over the life of the asset, and that becomes cheaper and cheaper every year as you go forward, because even in China, there are raises, the people get more benefits and more money, and we try to move that all into an automated process.

So once it's built, we own the building.

There's no increase in rent, there's no increase, and the biggest piece of the production, which is not on people.

So we tend to leverage and become more efficient and that goes right to the operating line, until we get to the point where we have capacity issues.

Again, then we build the next step, and we repeat the cycle.

Our final question comes from Omar Saad from Evercore ISI.

This is Westcott on for Omar.

First question, looking at the domestic wholesale and the ASP being down so much.

I know there's a mix issue, and you gave a gross profit in your filings.

Is there a margin shift as well?

Is the gross margin in the domestic wholesale, has that changed?

Yes.

I mean, it'll show a slight decrement, nothing extraordinary.

And again, that's to the point of mix, both product mix, which again is a consumer driven effect as well as customer mix, right?

If you're selling to larger volume customers who enjoy the benefit of more attractive terms, then you're going to see a mix effect there.

I would just say that, that's one quarter, right?

So it's not anything that we're concerned about, it's just the quarterly effect of demand from the consumers and the mix shift you get with your customers at a given point in time.

And are you seeing a similar mix in your own stores, in terms of product ASP mix?

Yes.

Yes.

The ASP decline was a little bit less in our retail than the overall, and the margins were steady.

But yes, we absolutely saw the same general trend.

And as far as, I guess, visibility in the second quarter, third quarter we'll see, but would you expect a similar type of ASP?

Is that mix shift continuing?

You've seen a fairly long running trend in the market and even in our own results of, slight ASP declines, volume increases and I think it's probably more likely than not to increase in the current season.

You wouldn't see a midseason shift of dramatic proportions, so.

Yes, I think, in general, it would hold, but again, that's against the backdrop of the growth that we've talked about, that we expect to see over the full year.

Yes, of course.

And then, your own retail stores obviously continue to do phenomenally.

A little bit of choppiness in the distribution piece of it coming up.

Just 2 questions with that.

One, what's going on in Middle East?

Is that a delayed kind of shipment, like they're running down?

Do you expect to kind of make that back up?

Or you just -- are those sales kind of gone, and you're going to start at a new lower base?

Well, it's tough for us to say it all to come back.

That would depend on what happens in the economy with the biggest single piece being Saudi Arabia.

If you look into the news, there's a lot of big changes.

There are a lot of high-powered people detained in some hotels, there's a change in the mix there, women are going back to work.

They're going to have -- be allowed to drive.

So they're trying to change it to make it a much more positive environment for selling and for tourism, but we'll see how fast and how quickly that goes.

Right now, just moving those people into the sales force and having them change all their daily habits, it seemed to impact retail in general.

And then in the rest of the Middle East, there's a quasi-war going on.

Everything that relates to -- from Yemen, and the fights politically.

So as that straightens out, we do think that comes back, but you never make that, the lost sale from this quarter.

It just comes back to a higher running rate.

We do believe ultimately, we will get back to historic rates and beyond, but I don't know that will happen in, like in this one year.

Right.

Of course, and just one more, in looking at the success of your retail stores, are you able to take some of that product that was going to be delivered, and run it through your retail channels and kind of divert it, and make some of it up in that way?

Or are there big differences in what's selling in retail versus what you had planned to kind of distribute through your distributors?

The difference is not significant.

We don't make any special product that's only available on our own retail.

So everything is pretty much interchangeable to some level all around the world.

That's one of the benefits, and we feel comfortable with taking inventory early, because there's a lot of places around the world, we can use it at different timing.

So like I said, we don't think there's a significant inventory issue, so I don't know about what it means to force it into it, but certainly, through our outlet stores and box stores, we can move any inventory that's necessary, or that's moved out so far that we can get new production for it and do that, by the way, with all our operating entities around the world, so not a major concern for us at all.

Thank you.

This concludes the question-and-answer session.

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

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's filings with the SEC.

Again, thank you, and have a great day.

This concludes today's teleconference, you may disconnect your lines at this time.

Again, thank you for your participation.