Skechers USA Inc (SKX) 2018 Q3 法說會逐字稿

Greetings, and welcome to the SKECHERS Third 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.

Thank you, you may begin.

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

I will now read the Safe Harbor statement.

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

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

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

Users of forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of 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' third quarter 2018 financial results.

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

We achieved a new third quarter sales record of $1.176 billion, a 7.5% increase over last year.

This was the result of our total international business increasing 12.5% and total domestic increasing 1.8%.

On a constant currency basis, our sales growth in the quarter was 8.5%.

With 3 record quarters, we achieved a new 9-month high of $3.56 billion.

The growth came from a 19.7% increase in our total international business and a 3.4% increase in our total domestic business.

In addition to the record sales, third quarter highlights include: diluted earnings per share of $0.58; operating margin of 10.5%; an 11.8% sales increase in our international wholesale business, the result of both double-digit increases in our international distributor and international joint venture businesses; a 10.6% sales increase in our global company-owned retail stores with a comp store sales increase of 1.9%, international representing 55.5% of our sales; expanded our SKECHERS retail network to 2,802 stores worldwide, including the opening of 13 new company-owned stores and 108 third-party stores; maintained our position in the United States as the #1 walking, work, casual lifestyle and women sandals brand; elite golfer Brooke Henderson winning her seventh LPGA title in her home country of Canada; and elite golfer Russell Knox winning the Irish Open, both wearing Skechers GO GOLF; and repurchased 1.4 million shares of common stock.

We believe we are in a unique position in the footwear market.

Our core customers remain strong and loyal to SKECHERS.

The resurgence of the chunky shoe trend around the world is resulting in new interest from fashion-minded consumers and taste makers, as SKECHERS D'Lites gains broad acceptance as the originator of the trend.

This has allowed us to [point] over the accounts that cater to this market, as well as appear in the editorial sections of fashion and speaker publication and on the catwalk at 7 designer shows during New York's fashion week last month.

We also expanded our collaboration with the best-selling anime series, One Piece, and SKECHERS D'Lites to North America as well as in Europe.

Now turning to our business.

Our domestic wholesale business decreased 3% for the third quarter and was flat for the first 9 months.

In the quarter, we shipped 1.5% more pairs.

For the first 9 months, we increased our shipments by 4.9%.

The average price per pair decreased 4.4% or $1.03 in the quarter, partially due to the strength of several lower-priced collections.

However, domestic wholesale margins increased 110 basis points in the quarter.

Our business within our core accounts remained solid during the quarter, as we maintained our position as a leading brand for men and women in numerous categories.

Our product strength in the United States came across multiple divisions, including walk, sandals and BOBS for women, as well as casuals, work and golf for men and women.

To support our domestic business, we ran multiple campaigns and aired the following commercials: For women, a SKECHERS D'Lites campaign with Camila Cabello; a SKECHERS D'Lites fashion campaign and Skechers GOwalk Joy.

For men, sport and casual slip-on spots, starring Tony Romo, Relaxed Fit with David Ortiz, and wide width footwear featuring Howie Long.

And for kids, we ran commercials on children's programming for our lighted and lightweight sports footwear as well as Twinkle Toes.

Our golf business continues to grow.

During the third quarter, golfer Brooke Henderson won her seventh LPGA championship in her home country of Canada, and Scottish golfer Russell Knox won the Irish Open.

Both are SKECHERS ambassadors and competed in GO GOLF.

Through our efforts with BOBS, we have donated more than 15 million pairs of shoes to children in need since its launch in 2011, including 15,000 pairs to Puerto Rico in the third quarter for continued hurricane Maria aid.

Through our efforts with BOBS for Dogs, we have helped 583,000 shelter pets through donations of more than $3 million over 3 years.

We believe our product and marketing are both on point.

As we begin account meetings this week, we are looking forward to presenting our 2019 collection and are pleased with the initial reaction.

Further, we believe our wholesale business remains strong, and we will achieve high single- to low double-digit growth for the fourth quarter.

International wholesale remains our single largest distribution channel and continues to represent an increasing share of our total sales.

45.2% in the third quarter and 44.2% for the first 9 months.

Combined with international retail, it represented 55.5% for the quarter and 53.7% for the first 9 months.

Our total international wholesale business increased by 11.8% in the third quarter.

The increase was the result of double-digit growth in our distributor and joint venture businesses, with China contributing significantly with gains of 21.9%.

For the first 9 months, our international wholesale business increased by 18.9%.

Further detailing our international growth, for the quarter, our wholly owned international subsidiary business grew by 1.4%.

This growth was against a tough comparison of subsidiary sales increases of 31.4% in the third quarter of 2017.

In the third quarter of 2018, our joint venture sales grew by 22.9%, with growth across each region.

For the quarter, the highest dollar gains came from Italy, Spain and Columbia within our subsidiaries, and China and India, within our joint ventures.

As mentioned, China continues to be a strong force in our international business, with an increase of 21.9% and approximately 5.6 million pairs shipped in the quarter.

A retail base of 793 SKECHERS freestanding stores and 2,340 points of sale.

Our international distributor business returned to double-digit growth in the quarter after experiencing some challenges in a few markets.

The growth primarily came from Russia, Indonesia and the Middle East, as well as Australia, New Zealand and the Philippines.

At quarter-end, there were 2,121 SKECHERS branded stores owned and operated by international distribution partners, joint ventures and a network of franchisees.

In the third quarter 108 third-party owned stores opened.

These included 30 in China, 26 in India, 6 each in Indonesia, South Korea and Taiwan, 4 in Malaysia, 3 each in Iraq, Israel and Spain, 2 each in Greece and Hong Kong, and 1 each in Australia, Croatia, Egypt, Finland, France, Hungary, Japan, Mauritius, New Zealand, Northern Ireland, Pakistan, the Philippines, Romania, Sweden, Switzerland, Ukraine and Uzbekistan.

36 third-party stores closed in the quarter.

Four third-party owned SKECHERS stores have opened so far in the fourth quarter.

We expect another 75 to 100 third-party owned SKECHERS branded stores will open in the remainder of the year.

We believe our international distributor business will grow high-single digits in the fourth quarter, and our international subsidiary and joint venture business will grow double digits in the same period.

We continue to see international as the biggest growth opportunity for the company.

In our company-owned global retail business, sales increased 10.6% in the third quarter, which was the result of a sales increase of 8.1% in our domestic retail stores and 15.7% in our international stores, which, on a constant currency basis, was 17.7%.

Worldwide positive comp store sales increased 1.9% in the quarter, which included a 3% domestic increase, offset by a decrease of 0.8% in our international stores.

However, on a comp -- basic domestic pairs increased 1.7% and international pairs increased 1.8% in our retail stores.

For the first 9 months, sales increased 13.7%, which was the result of an increase of 23.2% in our international stores and 9.2% in our domestic retail stores.

Adding to our direct-to-consumer growth was our domestic e-commerce business, which grew 15% for the quarter.

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

At quarter-end, we had 681 company-owned SKECHERS retail stores, of which, 216 were outside the United States.

In the third quarter, we opened 13 stores, including 6 international locations, 3 in Peru, 2 in the U.K. and 1 each in Canada and Chile.

We also remodeled, relocated or expanded 6 locations.

To date in the fourth quarter, we've opened 4 stores, 3 of which were in the U.K. and 1 in Italy.

For the remainder of 2018, we expect to open an additional 7 company-owned SKECHERS stores and remodel, relocate or expand an additional 10 existing stores.

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

Thank you, David.

I'm pleased to share our third quarter results with you today.

Third quarter sales increased 7.5% over the prior year to $1.176 billion and represented a new third quarter sales record.

On a constant currency basis, sales grew 8.5%.

The growth was due to increases in our international wholesale business of 11.8%, driven by a 22.9% increase in our joint venture business and an 11.6% increase in our distributor business.

China contributed significantly to our growth in the quarter, increasing 21.9%.

Company-owned global retail store sales also increased 10.6%.

This was driven by an 8.1% increase in domestic retail and e-commerce combined and a 15.7% increase in international retail, which was 17.7% on a constant currency basis.

These increases were partially offset by a slight decline in domestic wholesale due to lower sales in the off-price channel.

Gross profit was $563.9 million, up $43.9 million compared to the prior year.

And gross margin increased 40 basis points to 47.9%.

This improvement was attributable to stronger domestic margins, reflecting higher prices in retail and improved segment mix, which were partially offset by the impact of negative foreign currency exchange rates.

Selling expenses were essentially flat versus the prior year at $90.1 million or 7.7% of sales.

This was a 50 basis point improvement from 8.2% of sales in the prior year.

General and administrative expenses were up $37.8 million to $354.7 million.

As a percentage of sales, this was a 120 basis point increase to 30.1% from 28.9% in the prior year period.

This increase reflects our continued investment in our long-term global growth initiative, which included $7.5 million to support continued double-digit growth in China.

It also included an increase of $13.3 million associated with 58 additional company-owned SKECHERS stores, of which, 13 opened in the third quarter and $11.1 million related to domestic and corporate operations, of which, $4.8 million was for distribution and warehouse costs.

Earnings from operations increased 6.4% versus the prior year to $123.9 million.

Operating margin was essentially flat at 10.5% versus 10.6% in the prior year period.

Our income tax rate for the quarter was 13.7% compared with 9.4% in the prior year period.

This rate reflects updates to our understanding of the impact of the recently enacted tax reform legislation.

Based upon this quarter's results and our current understanding of the application of the Tax Cuts and Jobs Act, we expect our effective tax rate for 2018 to be between 13% and 15%, which implies a fourth quarter tax rate of between 17% and 20%.

Net income for the third quarter was $90.7 million or $0.58 per diluted share on 156.3 million shares outstanding compared to $92.3 million or $0.59 per diluted share on 156.7 million shares outstanding in the prior year period.

During the third quarter, we acquired approximately 1.4 million shares of our Class A common stock at a cost of $40 million.

Since announcing our share repurchase program earlier this year, we have acquired almost 2 million shares at a cost of $58 million.

At September 30, 2018, approximately $92 million remained available under our existing share repurchase authorization.

As we have stated before, we remain confident in the strength of our balance sheet and our ability to fund growth initiatives, while continuing to return cash to shareholders.

And now turning to our balance sheet.

At September 30, 2018, we had $959.8 million in cash, cash equivalents and investments, which was an increase of $223.4 million or 30.3% from December 31, 2017, and an increase of $156.9 million or 19.5% over September 30, 2017.

Our cash and investments represented approximately $6.14 per diluted share at September 30, 2018.

Trade accounts receivable at quarter-end were $504 million, an increase of $18.7 million from September 30, 2017, and our DSOs, as of September 30, 2018, were consistent with the last year at 36 days.

Total inventory, including merchandise in transit, was $755.1 million, an increase of 8.2% or $57.4 million from the prior year period.

The majority of the year-over-year inventory increase is attributable to international wholesale and global retail, particularly in China.

The balance reflect increases in our international inventory positions, partially offset by decreases domestically.

We believe that our inventory levels are in line with our growth expectations for our global business and increased retail store base.

Long-term debt was $69.8 million compared to $71.4 million at September 30, 2017.

Working capital was $1.6 billion versus $1.4 billion at September 30, 2017, primarily reflecting the aforementioned inventory and accounts receivable level as well as higher cash balances.

Capital expenditures for the third quarter were approximately $36.1 million, of which, $12 million was related to 13 new company-owned domestic and international store openings and 6 store remodels, $13.5 million to support our international wholesale operations and $8.2 million for expansion at our domestic distribution center.

For the remainder of 2018, we expect our ongoing capital expenditures to be approximately $20 million to $25 million, which includes an additional 10 to 15 company-owned retail store openings, 10 to 15 store remodels, expansions or relocations, as well as office renovations.

This estimate excludes capital expenditures related to our distribution centers worldwide, including China, as well as office expansion at our corporate headquarters.

Now turning to our guidance.

We currently expect that fourth quarter sales will be in the range of $1.1 billion to $1.125 billion and net earnings per diluted share will be in the range of $0.20 to $0.25.

Underpinning this guidance is the assumption of growth in all 3 of our reportable segments and across both our domestic and international markets.

Lastly, although we obviously cannot predict foreign currency exchange rates, we note that the strength of the U.S. dollar relative to prevailing rates this time last year and in particular, the first quarter, could continue to represent revenue and earnings headwinds in the future.

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

Thank you, John.

The third quarter marked a new sales record for the period and along with a record second quarter and the highest sales quarter ever in the first quarter, we achieved a new 9-month record of $3.56 billion.

The growth in the quarter was due to the acceptance of our new and core styles for men, women and kids around the world and came against the backdrop of the significant growth we experienced in 2017.

In addition, foreign exchange rates negatively impacted revenue by approximately $11.8 million or roughly 100 basis points.

The most impactful quarterly sales gains came from our joint ventures led by China, company-owned global retail business and our international distributors.

We now have worldwide network of 2,802 SKECHERS stores, and we are developing an expanded e-commerce business in the United States and around the world.

We continue to be a global leader in the lifestyle athletics footwear market with the resurgence of our heritage SKECHERS D'Lites style globally and a collaboration with SKECHERS D'Lites and One Piece.

This week, we begin our buy meetings with our domestic accounts for fall 2019, and next month with our international distributors, subsidiaries and joint venture partners.

We're looking forward to 2019 with fresh product in the pipeline.

We are continuing to invest in our brand and our infrastructure, and we expect to break ground for our new corporate offices and for the new distribution center in China later this quarter.

With inventory levels in line, a strong cash position and balance sheet, we are well positioned for global growth.

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 Jay Sole from UBS.

David, my question is on SG&A.

In the quarter, the SG&A was $445 million.

Going into the quarter, the consensus was forecasting $465 million, which was roughly based on the guidance.

What was the key to really controlling SG&A this quarter and coming in at that $445 million number?

We actually do feel with necessity.

So our top line was a little lower than expected.

We had completed a bigger piece in the previous quarter of our expansion in China.

So in watching overall, as we had said in the past, we're getting close to that inflection point, where we've built significant amount of infrastructure and depending on what we see for growth will be the determinant for how much we'll have to invest, certainly, in advance of some big growing quarters.

So we are taking it very seriously.

We always have about expenses and try to be very careful.

But when we had such growth, we figured we had to chase it and now we're at a time where we've had a quarter that we're slightly below expectations, which gave us the chance to catch up on some of our infrastructure and automation and to benefit in the G&A line.

Got it.

So then, maybe on sales.

You mentioned it was a little slower, the low end of the guidance range going into the quarter was $1.2 billion.

And even with the FX, it was about -- so adjusted for FX was about $1.19 billion.

Was -- is there -- was there a factor, 1 or 2 dominant factors that sort of explain the difference between the guidance and the actual sales?

Yes, I mean, I think we mentioned the FX impact, so that was certainly a bigger drag than we had expected.

Also, I'd say that a little bit probably ends up being timing on the domestic side.

We had always spoke about growth in the second half of the year.

And so relative to Q3, Q4, quite frankly, is relevant to us.

We still have very strong expectations for domestic wholesale growth over the back half.

And then, obviously, you have consumer demand in the retail channel, and I think it's certainly no secret that in some of the international markets, demand has not been as healthy as in the U.S. That being said, I mean, I think what you see is we are very close to where we guided, and we feel very good about the fourth quarter guidance we've given now and our prospects in the fourth quarter.

So maybe, John, just a follow-up on that.

So you talking about the U.S. wholesale down negative 3% in the quarter, but you're guiding to positive high singles or low doubles in the fourth quarter that sort of a timing that you're talking about.

And then just on the international, is there any particular market to call out, was like U.K. because there's a lot talk about Brexit and weak confidence from the consumer in that market.

Is that one or would there be another market to call out internationally where the consumer's a little weak, it could have effect that retail comp?

On the domestic number, again, I just -- I'd reiterate what we said last quarter, which was, we were confident in second half growth and that's what we see.

So, yes, that's what baked into the domestic wholesale guidance for fourth quarter.

We definitely expect the second half to show growth.

In terms of the international markets, it was actually, quite frankly, a little bit everywhere.

It wasn't any one market in particular on the FX side.

You saw that effect across almost every one of our key markets, but you also saw a little bit less robust consumer in most of those markets as well.

And then, maybe on the tax, just to be clear, so before you were guiding to 17% tax rate that was sort of a forecasted long-term growth rate.

Now you're saying it's 13% to 15%.

Is that sort of the run rate now going forward beyond even fiscal '18?

No.

Again, we think the naturalized rate after we get through dealing with the various true-ups associated with the new tax legislation and other adjustments will likely be still in that 15% to 17% range.

I think the bumpiness we're seeing this year in the quarter has almost everything to do with updates to our understanding of many facets of the tax law.

Okay.

And then, maybe one last one for me.

You mentioned you have $92 million left on the repurchase authorization.

Are buybacks incorporated into the guidance report that you gave?

No.

Our next question is from Laurent Vasilescu from Macquarie.

I just want to follow up on Jay's question regarding U.S. wholesale.

In order to assume that it's growing in the back half, I mean, it seems that at least it should be a high single-digit rate for the fourth quarter, and then correct me if I'm wrong, but I think you might have a new account, new customer.

Is that number still included, should we think about that number as a $20 million benefit for the fourth quarter?

I'm not sure.

There's not any new customer of that order of magnitude domestically.

I think the opposite, some of the big guys like Sears are closing stores down.

It's a switch in timing from what's been an existing and a very good customer.

I think John alluded to it on the last quarter conference call that we got a big orders from them, a big promotions in the first part of the year, last year that were moved to the back half this year so that's the differential.

And we knew we would be up significantly when you take all the timing changes into effect.

Okay, very helpful.

And then on gross margins, maybe you can parse out FX and mixed benefit for the third quarter and any thoughts on the fourth quarter would be very helpful.

Yes, I mean, the first thing I'd note is that we thought transition this quarter to FX being a headwind on the gross margin line.

I mean, they are all -- it's a slight negative, it's about 40 bps.

The balance and the improvement really came out of the stronger domestic margins, which entailed both favorable product mix as well as pricing activity in our retail segment.

And then we did have some natural lift from the overall segment blend just as retail and international gets -- comprised a larger portion of our overall revenue mix.

We are not forecasting anything dramatic really in the fourth quarter at the moment.

We have tended to see though a slight lift quarter-over-quarter -- I'm sorry, year-over-year in the quarters associated with segment benefit.

Okay, very helpful.

And then, international G&A, I think it grew about $13 million for the quarter.

What kind of rate should we -- dollar terms, should we anticipate for the fourth quarter?

Yes, I mean, I think -- we think, we gotten in trouble by giving too specific of a guidance.

What I would tell you is we expect, obviously, that year-over-year SG&A will need to continue to grow both the support, the expansion that we put in place in China and the expansion in our retail business.

So you can expect it will continue to grow in the fourth quarter, we think at a level that's relatively close to what it did this quarter, maybe a little north, maybe a little south depending on a few factors.

One of which that I would call out is the tremendous opportunity that exists before us in Singles' Day in China.

I mean, obviously, that's a significant event -- revenue event, and it does have an impact, as we mentioned last quarter, on those variable components of G&A, in particular, distribution, warehousing, et cetera.

So part of that is to be determined based on the outcomes of events like Singles' Day and obviously, the overall revenue trajectory.

Okay, very helpful.

And then my last question.

I think in the second quarter, you called out $7 million impact from FX to net earnings.

What was the impact for the third quarter, and how much of FX headwind should we think for the bottom line for the fourth quarter?

So I'll take the last part first.

We don't have any significant changes in FX baked into our guidance.

We bake our guidance on what the existing rates are.

So if you will, we've caught up to where current rates are relative to Q4 and that is included in our guidance.

At the end of the day, the flow-through that we estimate from FX in total in the quarter was probably a couple of pennies.

We had both the top line drag and that translated down through to operating income.

And then we also had balance sheet adjustments will come through in other income to a couple of million as well.

So net-net, we estimate the total impact was $0.02 to $0.03.

Our next question is from Omar Saad from Evercore ISI.

I apologize for the background noise.

I wanted to ask you about inventories.

Huge progress in the quarter, but given the sales kind of slight miss relative to your guidance, what were the levels -- levers you were able to pull on the inventory side to be able to get that down from I think 20s to plus 8. And it would be helpful to know if you pushed back on the supply chain or were you able to clear through other channels.

We haven't done anything significantly different.

We had said it was we feel very comfortable with our inventory going into the year.

Some of it is a timing issue.

It was predominantly based on growth that was outsized growth in China and our retail business.

So being more mature in the United States, we were able to take more control over the inventory.

We actually had a decrease in inventory, even though the number of pairs were significantly -- were higher for shipping.

So it's just part of our normal management of inventory and our future purchases and flows as they come through and adjusting to what the marketplace is.

We're feeling very good about inventories, although they will go up before the end of the year simply because we're getting ready for a very big first quarter, which will now be our biggest quarter of the year.

And that all has to build as you go through the end of the fourth quarter.

Okay, I appreciate that heads-up.

Looking forward, that's helpful.

One kind of bigger picture longer-term question.

How are you guys -- I mean, you've got thousands of points of distribution and the brand has obviously grown incredible leaps and bounds globally.

How do you think about that footprint for the brand, where you are today, where you think you can be longer term, where you want to be and when you feel like you're getting to the -- reaching to the more maximum extent of the distribution opportunities, then it becomes more -- creating greater productivity in existing distribution at that point.

Yes, I think we feel there's, obviously, a ton of runway in front of the brand.

I mean, if you just take a market like China and you look at our penetration levels by province, there's a lot of white space available to us.

I think the bigger question, Omar, ultimately, will be, is that all in direct-to-consumer retail stores or is it online?

Online grew significantly in China, again, this quarter.

It's likely to be a blend between the 2. We don't have a cap on the number at the moment because it's -- quite frankly, that number would just be too large, so if you think about it -- because there is so much space ahead of the brand across the globe.

Our next question is from Lauren Cassel from Morgan Stanley.

Great.

Two sort of separate questions.

First, obviously, you mentioned in your prepared remarks, FX been volatile this year with the stronger U.S. dollar.

Any updated thoughts on how you're thinking about pricing across Europe and China heading into 2019?

And then secondly, ending the quarter with close to $1 billion of cash and short-term investments on the balance sheet, have you had any discussions with the board on accelerating share repurchases or potentially initiating a dividend at some point?

Sure.

I -- we mentioned some pricing actions in retail we took this quarter, and we've seen those do very well, quite frankly, in the retail segment.

I don't know that there's any FX changes at the moment that would give rise to the need for something more aggressive in those markets, but that's obviously something we will continue to watch.

The currencies themselves being as volatile as they are makes predicting what foreign exchange rates are going to be like in the next quarter exceedingly difficult.

But obviously, we watch our key markets very closely.

In terms of cash, obviously, there's always discussions with the board about what to do with the cash.

I mean, currently, we still have remaining authorization on our existing repurchase, and I think you can -- will continue to see us be aggressive where we think the stock is trading at a discount to what we believe fair value represents.

And then if we get close to exhausting that authorization, we'll have another conversation about where the cash will go.

But we also feel incredibly confident in our balance sheet, and we have some sizable investments to make in the near future.

And even against the backdrop of that cash, we feel very good about where we stand.

Our next question is from Jeff Van Sinderen from B. Riley FBR.

First, just wanted to clarify regarding the expected return to growth in domestic wholesale in Q4.

Was wondering what the latest is you're seeing in the domestic off-price channel, maybe you could touch on where you think closeout inventory is there and when you think your off-price business might be likely to pick up.

Wasn't sure if that was what you might have been referring to in some of your comments, and then just wondering how that's factored into your guidance.

Well, it's factored into our guidance is what we see as far as open orders are concerned and flows for the brand and where we see inventory as we make those -- inventory in the channels, by the way, as we see those plans and try to react to them.

I think you're right on in the fact that our core business is healthy and continues to grow.

The off-price channel has been the drag.

We have seen some increases in requests from the off-price channel.

That is not the reason for the rebirth of order.

We're growing terms that we're having in the fourth quarter.

It's one big customer that moved timing that could hit it back and forth.

And the fourth quarter for us in the U.S. is not one of our biggest quarters, it's really for the first quarter.

But there's always a possibility that we'll start to deliver earlier in December, depending on how hot we are and what the weather is like and what retail is like.

So I think what you're seeing is our settling in and our core customers buying significantly to our plans.

We had no fallout.

We're increasing our online presence, both our own and in third parties.

So it's just a positive move for our core and very basic business.

Okay, good.

And then, anything to update us on in terms of how you're thinking about the tariff situation.

Just wondering what you might think about doing or what your plans might be if more tariffs go into effect for next year in terms of shifting production, perhaps, to some other countries, how we might think about that, and yes...

Well, that's a very difficult one.

I find that if you try to sit and work out all the possibilities of the tariffs, you could spend days and days and days and never get close to what's going on.

I think it's fair to say we'll be very cognizant of what they are.

We do have capacity to move outside of China.

We'll be no different, I believe, than anybody else.

We'll look for where the best availability is at for production, quality and price around the world, even segregating some production of some styles from country to country depending on what the necessities are.

There's a lot of moving pieces.

What happens to the Chinese currency, does that make up for part of the tariff piece?

Some of this -- there's all kinds of moving parts and it's too hard to be out -- upfront.

I think it's fair to say we are very flexible.

We are increasing our production capacity outside of China, just in general.

So we think we'll be okay.

We obviously have some pricing power that we've shown this quarter and in prior quarters and in international basis.

So we believe we'll be okay.

It's only a timing thing as to when we have to adjust to whatever the final picture turns out to be.

And Jeff, just to be clear, none of the existing tariffs that have been enacted affect our product.

It would only be in this last rung of potential tariffs when footwear and apparel begin to get affected directly.

Our next question is from Sam Poser from Susquehanna.

I just want to follow up on the guidance.

You -- are you still anticipating the headwind from the FX in -- within the guidance that you've provided in the fourth quarter?

Yes, based on prevailing exchange rates today and this time last year, we have factored that into the guidance we've provided today.

And just so I'm clear, the gross margin in the quarter, up 27 bps, that leaves the -- you had about a 60 basis point -- I'm sorry, you had a 40 basis point headwind there.

So you had the domestic -- or the U.S. gross margins were up almost 60 bps, and do you foresee that happening again?

Well, we haven't factored that in into any of the guidance, largely because it was based on prevailing pricing activity that we started in Q3, and we like to see mature in the business.

But I think it's fair to say that if we continue to see positive take on the pricing action, then you'd see some potential lift in the domestic side of the business as well as, as I mentioned previously, the overall segment mix impact that we get from a higher concentration of international and retail revenue as a part of the whole.

Right.

And then somebody sort of touched on it, but within the guidance, I mean, is that -- I was thinking high singles for domestic wholesale, is that an accurate way to be thinking about things?

Yes.

I think we said high singles, low doubles.

For domestic wholesale?

Yes.

And that would include the $20 million -- that includes the $20 million from last year, so based that -- from that move.

So would that mean that basically the -- that the entire lift is predicated on that -- I mean, you're going to -- they're going to -- you're going to ship it, but of that $20 million, that pretty much gives you that increase.

So is that where the -- is that the thought that it's that shipment of that $20 million?

No, I would describe it more as just the general health we see in the core business, as David mentioned, and then the timing associated with the order that, again, we had mentioned in Q2 prior year that is now almost fully residing in Q4.

I'd also just point out, Sam, if you look at the business kind of on a geographic threshold as well, the domestic business grew, when you take into account both the wholesale and the retail side.

And when your -- as consumer is agnostic as we are in terms of where they buy the product, we feel very good about how the business performed domestically.

Obviously, the balance this time was a little bit stronger retail and a slight decline in domestic wholesale, but as a total domestic grew as well as the international side of the business.

And I think that's important to keep in mind.

And you're expecting the wholesale business to grow significantly more in the fourth quarter than you were in the third quarter.

Yes.

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

How should we think about the company on retail business?

The international comps had been running at a pretty incredible level.

You were up 18 in the first quarter, you were up 11 in the second quarter, and then you went seemingly negative this quarter.

I'm just wondering, a, what drove the international comp deceleration, and I guess, b, how should we think about the overall comp picture that's embedded in your guidance for the fourth quarter?

Yes, I mean, to be clear, this is a very slight decline in international comp.

So it wasn't as if it was a dramatic change.

I mean, one factor at play, obviously, as you mentioned, is the incredibly robust performance this time last year.

So we were facing some pretty difficult comparisons giving the robustness of the business last year.

Having said, you've also, I'm sure, read about some consumer discretionary spend declines and pressure in Europe, in particular Canada.

So that -- and then coupled with that is a third factor.

FX did not help us, obviously, in the retail business.

So you saw the FX impact within the comp store number, obviously, being negative as well.

Again, our prospects for Q4 we think are positive.

We are expecting positive comps, but that's largely going to boil down to how sales perform over the next couple of months, in particular in the holiday season.

And so we're watching that carefully.

Understood.

Just when you look at the high and low end of the guidance, the $0.20 and then the $0.25, what do you think is the biggest variance within that, between the high and low end?

Is it gross margin at this point?

Is it SG&A?

Coming back to the prior question, you did kind of come in well below kind of where consensus sell side was expecting your SG&A this quarter.

So I'm just wondering what you think the biggest swing factor is between the high and low end of the EPS guidance at this point?

Yes, I would answer, it continues to be the consumer.

I mean, the consumer, obviously, has a much more significant bearing on our business today than it ever has as we go more direct-to-consumer.

That's not just in the retail segment, though.

Keep in mind, that's also in markets like China.

Singles' Day obviously is a significant event for us.

So I would continue to point to the consumer, and obviously, that can have a knock-on effect to aspects of gross margin.

Although we've seen very strong and supportive gross margins throughout the year and we have no real cause for concern on that, I think that's probably the biggest factor from my perspective.

And then, obviously, to David's point earlier, if there's opportunities for us to continue to invest and grow the business, you know as well as anyone else that we'll take advantage of those.

We don't see any of those that are extraordinary at the moment above and beyond that which we've already factored into our guidance.

But if an opportunity presents itself, we'll certainly want to look at it hard to continue to grow the brand because, again, I think the guidance we've given illustrates the belief we have that the brand could continue to grow, in particular, in the international markets.

So obviously, we'll be looking hard at that.

Excellent, and then just one final question.

Have you disclosed how much of your sourcing base is actually in China?

I know footwear tends to skew a little bit more towards -- global footprint tends to skew a little bit more towards Vietnam and other regions, but have you discussed at all what percentage the overall factory base right now is in China?

I don't think we bring it out too much publicly.

It's fair to say that more than half the business is in China.

But you have to be very careful with that.

We have a lot of Chinese production for China.

We've grown significantly.

It changes on a monthly basis.

So I think it's fair to say we've moved around.

We're certainly more cross-border now a number of places than we were in the past, and that will continue to change as we move forward, regardless of the tariff situation.

Our next question is from Chris Svezia from Wedbush.

I guess, John, just to clarify something.

Your same-store sales on international are not currency neutral.

They're reported, and if they are reported, can you just tell us what maybe a currency-neutral comp would have been on the international side?

So they are not currency-neutral comp numbers.

If we do constant currency, we will definitely call that out precisely.

It was -- there was an impact.

It varies by market.

Some of the most severe markets impacted were some of our bigger ones.

I would tell you, it wasn't enough to change the trajectory of the comp, but it would have made the decline less significant.

Okay.

Can you maybe just then add some color about just the U.S. comp, up 3%, and just maybe what you saw in the marketplace and your expectation for the fourth quarter?

Is that expected to accelerate from that level?

Or what are you seeing in the market right now on the retail D2C comp?

Yes, we -- I mean, it was really an interesting quarter in the sense that I think you've read about traffic declines in some of the mall-based offerings.

We saw that as well.

Our concept stores certainly felt the impact of lower traffic levels.

Our outlet and warehouse stores continued to perform very well.

They did not see a comparable traffic impact.

In addition, as we mentioned, we implemented some pricing on new product coming into the stores.

That held up well in all of our store categories.

And despite that, we still had the comp store performance growth.

That, I think, is a testament to the, as David mentioned, our ability to price product.

In terms of Q4, we're not expecting anything more -- much more significant than what we've seen recently, and we expect probably the trend, depending on consumer footfall, will hold from this last quarter, where concepts were probably a little bit more under pressure from traffic than the outlet and the warehouse store solutions.

Okay.

And just, when I look at your overall revenue outlook, 13% to 16% growth for Q4.

You talked about the U.S. wholesale getting that high single, low double-digit growth, but that then implies somewhere within -- something accelerates pretty materially relative to Q3.

So can you maybe just -- and I know you mentioned your distributor sales, I guess, are positive or continued to be strong.

Maybe just unpack what's happening in the JV sub piece because it would have to grow close to high teens, maybe 20%, to get you within the range.

So maybe talk about China or just why that confidence of such a material acceleration in the business.

What's happening?

That's what we see so far.

I think, as John pointed out, the biggest impact on international, on a singular basis, would be Singles' Day.

And as John pointed out in his comments and his statement, our -- aside from Singles' Day, our online business is growing triple digit, so high doubles, close to triple digits in China.

It's been a very big focus.

So the possibilities of what can happen in China for Q4 through a Singles' Day make those numbers very well in line.

I mean, we seem to be doing well.

We are anticipating a significant growth year-over-year on Singles' Day.

It was significantly large last year.

I mean, we're talking a big number.

Which is -- so just to that number...

I don't know how else -- sorry, say again?

No, just to that number.

So you did 1.4 million pairs Singles' Day last year, are you thinking more than 2 million pairs on Singles' Day?

Is that how you're thinking about it?

We did more than 1.4 million pairs, I think, last year, somewhat more.

And we are thinking significantly higher than that this year than your number.

And Chris, I would just point out that the joint ventures this quarter actually generated a high teen, low 20% growth.

So it's not -- I don't think it's out of character for what we've seen.

And then, you add on to that the opportunity in Singles' Day, and I think that's how we feel very comfortable with the number.

Yes, you also get growth out of Europe and some of the new places we've taken over.

Remember, Europe was only up low single digits simply because there was a 31% increase last year.

We don't have that same kind of comp, and we are doing very well, certainly on a relative basis.

As John said, Europe is not the strongest retail economy, and we are holding up and continuing to grow throughout.

So I think it's a testament to where we are and that international will continue to, actually, I think, show more improvement in Q4 than Q3 because of the tough comparisons and how big a Singles' Day can be in China.

Okay.

So just to -- get all this down.

China is really a big growth driver on international in terms of acceleration for the growth rate overall, coupled with you clearly expect Europe to improve directionally relative to Q3 just given an easier comparison.

Is that fair?

Yes, absolutely and because of the results we're getting.

Okay.

And I know you don't want to talk too much about just forward thinking into early next year Q1.

But I'm just curious, how are you thinking -- just U.S. wholesale, what are you hearing?

What are your just sort of -- are we going to start getting back to mid-single digit growth?

Or is it too early to tell?

Or would you still be dealing with some of the shifts between core channels, off-price channels?

Just any near term or thought process as you start to dip into next year how we should think about that?

Yes, well, personally, I think we're going to show some increases next year.

The first part is that after first quarter, the comps become easier because we're not comping against an off-price.

So the tendency would be to believe, unless something changes, that we're going to show increases in the off-price channel in certainly the last 3 quarters of next year, and we're very comfortable with our core product.

I mean, if you were to sit next door and see how people are reacting to some of the new stuff we're delivering or showing, and we're booked very well for the first quarter domestically.

So we get our opportunity.

So barring any major changes in retail, I think we get benefits from both.

So you will see some mid-singles, I would anticipate, certainly, for most of the year.

Okay.

A final thing, just real quick, just on the selling expense line, just, John, real quick.

What happens to that in Q4?

It was kind of flat Q3, does that pick up at all in Q4?

Or how should we -- I know you talked about G&A, just curious on the selling line.

Yes, I don't want to be overly precise about components of the expense base.

But I would say, I think you've seen a trend recently of us coming kind of at or below prior year rates.

Obviously, we're being very conscious of promoting the brand where we need to promote the brand, but not spending more than is absolutely necessary.

So I think you can expect that general trend, although there's nothing extraordinary that I would call out relative to Q4 that you want to be aware of.

(Operator Instructions) Our next question is from Tom Nikic from Wells Fargo.

I believe you said that you're going to break ground on the China DC before the end of the year.

And I believe, in the past, you've talked about also having some projects in the European DC and the U.S, DC, some expansions there.

Can you remind us timing of those projects, costs related to the projects, when stuff starts flowing through the P&L from an expense standpoint?

Any help around those projects would be appreciated.

Okay.

It's important to keep in mind, there really isn't a lot of expenses that go through the P&L until the assets, something as big as building that distribution center or office space or putting in some automation equipment that you're talking about for Europe and the United States, until it's completed and put into service.

At which time, we hope to get some efficiencies when they come in any way.

So China should start this quarter, we hope.

They have -- they're no different than we are in some parts of the United States as far as permits are concerned, et cetera.

That's the anticipation right this minute.

It should take somewhere in the neighborhood of 15 to 18 months to get up and running.

I think we said it's in excess of $100 million.

As far as Europe is concerned, we are expanding our automation capacity.

That will start probably the first -- after the first quarter of next year.

The big stuff will be after our busy season in Europe.

It will take somewhere between 7 months and 9 months.

That's the smallest piece that's in the $30 million range, depending on what happens to the euro because we obviously buy a lot of equipment there.

In the U.S., we are looking to expand our capacity, and we know we need more automation, but we're not at a point where we've signed a deal and have the final plans in place.

So that's a moving target.

That's not finalized right this minute.

Got it.

And just one question on the store base.

Last year, you had 74 net openings based on your Q4 guidance.

You'd be kind of in the 45 to 50 net openings this year.

Is that 45 to 50 kind of a reasonable run rate go forward?

Or how should we think about the expansion of your own brick-and-mortar store base?

Yes, I think that you shouldn't anticipate that with -- there's a slowdown, that we're going to take it down to 45 going forward into next year.

We try to expand and be -- and look at spaces available.

Sometimes there's more space available, sometimes not.

We're looking to expand our international footprint.

So you can look for significant store openings in South America, in Japan, in Korea, certainly in India.

Some our own, some franchise.

So I think the pace will pick up.

That's just based on a transition from domestic to international and a relay of the marketplace in the United States.

I think, just to point out, we opened our 700th owned store today.

So we continue to move -- we continue to think it's an important piece and we'll continue.

But I think this was a little bit of a lull not necessarily by design, but based on availability and a transition in the marketplace in the U.S.

Also the stores that we've been opening last -- in Q3 and expect to open in Q4 are bigger footprint stores.

So although, the number of stores is a decline, if you actually look at the square footage, it's not as significant of a down because we're definitely concentrating in the outlet and warehouse expressions, and those carry with them significantly higher square footage.

And our final question is from Jim Chartier from Monness, Crespi and Hardt.

Just a follow-up on the expected acceleration in international wholesale in fourth quarter.

It looks to me like the mix of that business changes dramatically in fourth quarter, where the subsidiaries go from 40% of international wholesale down to like 20% and the JVs go from 40% to 60%.

So is that also a big factor in terms where your fastest growing segments become a much bigger part of the mix and currently the slowest growing become the smaller part of the mix relative to third quarter?

I think that's basically true.

Obviously, with China and such a big Singles' Day, that's changed over the last 3 or 4 years.

Also with weather changes.

It's always been a slower quarter for us in Europe, which is our most mature.

But we do think we'll get some pickup as we go through, it's not to a large degree, in some of our new territories in South America.

So we are breaking down to the fact that Southeast Asia, because of those holidays, and promotions are becoming a bigger piece of the fourth quarter than anything in the past.

Right.

And then you mentioned earlier you're having a lot more success in terms of fashionable editorials and you'd mentioned I think that you were potentially getting distribution in more fashion-forward accounts.

Is that correct?

And then is that happening in the U.S. and/or globally, and then, how meaningful can that distribution be?

Well, it's happening globally.

It's happening some in the United States.

Too early to tell what that could ultimately be.

It would depend on the next offerings and where fashion trends go.

Right now, it continues to grow and it gives us a great halo effect for the brand overall and our strategy.

So it's very positive.

How big it is to move the needle, I'm not sure at this juncture.

It's been a very, very positive move and I do believe we will keep some of that square footage and some of these accounts as we move forward.

This concludes the question-and-answer session.

I'd like to turn the floor back over to SKECHERS for final 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' filings with the SEC.

Again, thank you, and have a great day.