Skechers USA Inc (SKX) 2018 Q4 法說會逐字稿

Greetings, and welcome to the SKECHERS Fourth Quarter and Full Year 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' conference call today.

I will now read the Safe Harbor statement.

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

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

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

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

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

David?

Good afternoon, and thank you for joining us today to review SKECHERS' Fourth Quarter and Full Year 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 fourth quarter sales record of $1.08 billion, an 11.4% increase over last year.

This was the result of our international business increasing 17.9% and our domestic business increasing 4.1%.

On a constant currency basis, our sales growth for the quarter was 13.7%.

Our record fourth quarter follows 3 prior quarters of record sale, which resulted in a new annual sales record of $4.64 billion.

The growth came from a 19.2% increase in our international business and a 3.5% increase in our domestic business.

In addition to the record sales, fourth quarter highlights include: earnings from operations of $83.7 million, a 50% increase; diluted earnings per share of $0.31; a 4.8% sales increase in our domestic wholesale business; a 7.5% sales increase in our company-owned retail stores; and 18.4% sales increase in our international wholesale business, the result of double-digit increases in our international distributor, subsidiary and joint venture businesses; expanding our SKECHERS retail network to 2,998 stores worldwide, including the opening of 11 new company-owned stores and 195 third-party stores; breaking ground on our new distribution and logistics center in China; and repurchasing 1.7 million shares of Class A common stock.

Highlights for the full year include: record sales of $4.64 billion; diluted earnings per share of $1.92; gross margins of 47.9%; international representing 54.2% of our sales; record shipments from our distribution centers in North and South America, Europe and Japan; maintaining our position in the United States as the #1 walking, work, casual lifestyle and casual dress brand; and repurchasing 3.7 million shares of Class A common stock.

We believe 4 quarters of record sales and record annual earnings of $1.92 per diluted share are a significant achievement.

The key to our success was our diverse product offering, which allowed us to expand our reach into more fashion accounts in 2018 and our diverse distribution, which offered numerous new growth opportunities.

These opportunities included the launch of e-commerce sites in India and by our distributor in Russia as well as improving the infrastructure of our digital e-commerce capabilities in the United States.

We are still a relatively young brand in developing markets with great opportunities in regions like Latin America and Eastern Europe as well as in high-growth international countries including China, India and Mexico.

In 2019, our focus will be on continuing to drive sales with new product offerings and building our brand in international markets.

Now turning to our business channels in detail.

Our domestic wholesale business increased 4.8% for the fourth quarter and 0.8% for the full year.

Domestic wholesale gross margins increased 140 basis points for the quarter and were flat for the full year.

For the year, we maintained our position in the United States as the #1 walking, work, casual lifestyle and casual dress brand, and moved up to one position to be the third-largest footwear brand in the United States according to SportsOneSource.

We saw our strength across several categories such as men's USA and women's performance, BOBS and work, and in numerous styles such as SKECHERS D'Lites and men's slip-on.

To support our domestic business, we ran multiple marketing campaigns and aired the following commercials during the holiday season: for women, a SKECHERS D'Lites campaign, SKECHERS Sport and SKECHERS GOwalk Joy; for men, sport and casual slip-on spots, starring Tony Romo, and sport and casual wide-width footwear featuring Howie Long.

For kids, we ran commercials on children's programming for our lighted footwear and Twinkle Toes.

And on golf broadcast and networks, our GO GOLF spot featuring our elite ambassadors, including Matt Kuchar, who is already a two-time Champion this season.

We consistently develop new product to meet the needs of our growing consumer base and adapt to changes in trends.

We have begun shipping Spring 2019 product and are looking forward to sell-through for spring as well as account relations -- or reactions to our new Autumn/Winter 2019 collection.

International wholesale remains our single largest distribution channel and continues to represent the largest share of our total sales at 44.3% in the fourth quarter.

Our international wholesale business increased by 18.4% for the quarter.

This increase was the result of double-digit growth in our subsidiary, joint venture and distributor businesses.

China contributed significantly with gains of 21.5% or 27.2% on a constant currency basis.

Our international sales, including both wholesale and retail, increased 17.9% for the quarter, and 19.2% for the year and represented over 55% of our sales in the fourth quarter.

Further detailing our international growth, for the quarter our wholly owned international subsidiary business grew by 14.4% and our joint venture wholesale business by 19.5%.

For the quarter, the significant dollar gains came from Germany, Spain, Japan and Peru within our subsidiaries, and China, India, Malaysia and Singapore within our joint ventures.

China remains the largest country within our international portfolio with an annual sales increase of 29.1% and approximately 22.8 million pairs shipped in the full year.

At the close of the year in China, we had 876 SKECHERS freestanding stores, a total of 2,390 points of sale and a 53% increase in our annual online sales.

To support our growing business, we broke ground on an approximately 1.6 million-square-foot distribution center and logistics facility.

The facility is expected to become operational in the second quarter of 2020.

Our international distributor business increased 19.7% in the quarter, primarily due to strong gains from Indonesia, Russia, Turkey and the Middle East.

And despite the sizable headwinds in the first half of the year, our international distributor sales increased 0.8% for the full year.

By quarter end, there were 2,306 SKECHERS branded stores owned and operated by international distribution partners, joint ventures and a network of franchisees.

In the fourth quarter, 195 third party-owned stores opened including our first locations in Cyprus, Northern Cyprus and Tanzania.

Additional stores opened include 105 in China; 24 in India; 6 in Australia; 5 each in Thailand and Taiwan; 4 each in South Korea and Spain; 3 each in Hong Kong, Indonesia and Vietnam; 2 each in Croatia, Honduras, Malaysia, Mexico, Norway and the Philippines; and 1 each in Brazil, Canada, Cambodia, Colombia, Egypt, England, Greece, Iraq, Macau, Netherlands, Northern Ireland, Paraguay, Serbia, Singapore, Switzerland, Turkey, Ukraine and Uruguay.

40 third-party stores closed in the fourth quarter.

25 third-party owned SKECHERS stores have opened so far in the first quarter and 3 have closed, which brings us to 2,328 third-party owned stores as of today.

In 2019, we expect to open in excess of 500 third-party owned SKECHERS branded stores in the remainder of the year.

We continue to see international as the biggest growth opportunity for the company, which is why we have transitioned India from a joint venture to a wholly owned subsidiary.

With approximately 220 SKECHERS retail stores, of which just over 60 are wholly owned, and a new e-commerce platform, India was one of our fastest-growing markets in 2018.

With another 80 to 100 stores planned for 2019, we see great potential to grow our business in this country of 1.3 billion people and believe this will be accretive to our diluted earnings per share in 2019.

Mexico was another attractive growth opportunity for the SKECHERS brand, which is why I have reached an agreement in principle to establish a joint venture with our current distribution partner.

Operating more than 70 stores today, we believe this market can support significant additional growth over the coming years.

When complete, we believe that this transaction will also be accretive to earnings.

In our company-owned global retail business, sales increased 7.5% in the fourth quarter, which was the result of sales increases of 3.3% on our domestic retail stores and 15.9% in our international store, which on a constant currency basis was 20.4%.

Worldwide comp store sales increased 1.1% in the quarter, which was the result of a 3% increase in our international stores and a 0.4% in our domestic sales.

For the full year, sales increased 12%, which was the result of an increase of 7.7% in our domestic retail stores and 21.2% in our international stores.

Domestically, our gross margins increased by 450 basis points in the quarter and by 160 basis points for the full year, due to improved pricing and a decrease in promotional activity.

Our domestic e-commerce business continued to grow in 2018 by 8.9% for the quarter and 11.6% for the year.

We expect to launch improved functionality, accessibility and user interfaces this year and also roll out company-owned sites in more countries.

At year-end, we had 692 company-owned SKECHERS retail stores, of which 222 were outside the United States.

In the fourth quarter, we opened 11 stores, 5 in the U.S., 4 in the UK, and 1 each in Peru and Italy.

We also remodeled 5 stores, relocated 5 stores and expanded 3 locations.

To date in the first quarter, we have opened 2 stores and closed 4, bringing us to 690 company-owned stores.

In 2019, we expect to open approximately 70 to 80 stores, not including the India stores that we'll be opening, and remodel, relocate or expand an additional 20 to 30 existing stores.

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

Thank you, David.

In the fourth quarter, sales increased 11.4% over the prior year to $1.08 billion, and represented a new fourth quarter record for the company.

It is especially gratifying that this growth was driven by contributions from each of our business segments.

International wholesale increased 18.4%, which included a 19.5% increase in our joint ventures, a 19.7% increase in our distributor business and a 14.4% increase from our wholly-owned subsidiaries.

Company-owned global retail same-store sales increased 7.5%, the result of a 3.3% increase in domestic retail, including e-commerce, and a 15.9% increase in international retail.

Domestic wholesale increased 4.8%.

On previous calls, we highlighted our expectation that foreign exchange rates would become a headwind in the fourth quarter of 2018 and the front half of 2019.

For the quarter, foreign exchange rates negatively impacted sales by $22.3 million or roughly 230 basis points of growth.

Total sales on a constant currency basis grew 13.7% year-over-year.

Gross profit was $515.7 million, up $61.6 million compared to the prior year.

And gross margin increased over 90 basis points to 47.7%.

This improvement was attributable to stronger domestic wholesale and retail margins, which were partially offset by the negative impact of foreign currency exchange rate.

SG&A expenses grew $32.1 million or 7.9% this quarter.

Within that, selling expenses decreased $2.1 million to $61.8 million or 5.7% of sales, which was a 90 basis point improvement from 6.6% of sales in the prior year.

General and administrative expenses were up $34.2 million to $375 million.

As a percentage of sales, this was a 40 basis point improvement from 35.1% in the prior year to 34.7% this quarter.

The dollar increase reflects volume gains internationally as well as continued investment in our long-term global growth initiative.

This included $8.8 million to support continued double-digit growth in China.

It also included an increase of $9.4 million in retail from 47 additional company-owned SKECHERS stores worldwide, of which 11 opened in the fourth quarter and $9.7 million related to domestic and corporate operations including increased distribution-related costs driven by higher volume.

Earnings from operations increased 50.4% versus the prior year to $83.7 million.

Operating margin improved 200 basis points to 7.7% versus 5.7% in the prior year period.

Our income tax rate for the quarter was 18.4% compared with 194.4% in the prior year period.

As a reminder, our prior year rate included the impact of the then recently-enacted Tax Cuts and Jobs Act.

Excluding the discrete impact of that tax law change, our prior-year income tax rate would have been 12.2%.

Our current year effective tax rate reflects our final assessment of the impact of the Tax Cuts and Jobs Act.

We expect our effective tax rate for 2019 to be between 14% and 18%.

Net income for the fourth quarter was $47.4 million or $0.31 per diluted share on 155 million shares outstanding compared to a net loss of $66.7 million or $0.43 per diluted share on 156.1 million shares outstanding in the prior year period.

In December 2017 we recorded an income tax expense of $99.9 million, representing $0.64 per diluted share due to the enactment of the Tax Cuts and Jobs Act.

Excluding that discrete tax item, our adjusted net earnings in the fourth quarter of the prior year were $33.3 million or $0.21 per diluted share.

Therefore, on an adjusted basis, our current year net income and earnings per diluted share grew 42.3% and 47.6%, respectively.

During the fourth quarter, we acquired approximately 1.7 million shares of our Class A common stock at a cost of $42 million, representing an average price of $25.22 per share.

Since announcing our share repurchase program last year, we have acquired almost 3.7 million shares at a cost of $100 million, representing an average price of $27.34 per share.

At December 31, 2018, $50 million remained available under our existing repurchase authorization.

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

Our actions this past year reflect that confidence as well as our firm belief that SKECHERS' recent share price meaningfully undervalues our current earnings and cash flow profile as well as our long-term growth prospects.

And now turning to our balance sheet.

At December 31, 2018, we had $1.07 billion in cash, cash equivalents and investments, which was an increase of $312.2 million or 41.4% from December 31, 2017.

Our cash and investments represented approximately $6.94 per diluted share outstanding at December 31, 2018.

Trade accounts receivable at quarter end were $501.9 million, an increase of $96 million from December 31, 2017.

And our DSOs, as of December 31, 2018, were 36 days versus 32 days in 2017.

Total inventory, including merchandise in transit, was $863.3 million, a decrease of 1.1% or $9.8 million from the prior year period.

This reflects our diligent management of inventory levels globally, while fulfilling requirements for our growth expectations and expanded retail store base.

Long-term debt was $88.1 million compared to $71.1 million at December 31, 2017, primarily reflecting borrowings associated with the construction of our new distribution center in China.

Working capital increased $114.2 million to approximately $1.62 billion versus $1.51 billion at December 31, 2017, primarily reflecting higher accounts receivable levels as well as increased cash and investment balances.

Capital expenditures for the fourth quarter were approximately $45.6 million, of which, $19.3 million related to the construction of our distribution center in China, $15.9 million related to 11 new company-owned domestic and international store openings and 6 store remodels, and $8.3 million related to our international wholesale operations.

In 2019, we expect our capital expenditures to be approximately $275 million to $300 million.

This includes an additional 70 to 80 company-owned retail stores, and 20 to 30 store remodels, expansions or relocations.

This also includes the construction of our new distribution center in China, enhancement to our existing distribution centers in the United States and Europe, and the expansion of our corporate headquarters in California.

Now turning to our guidance.

We currently expect first quarter sales will be in the range of $1.275 billion to $1.3 billion and net earnings per diluted share will be in the range of $0.70 to $0.75.

This guidance takes into account the impact of the existing foreign-exchange headwind and a shift in some sales from the first to the second quarter, due to the timing of Easter this year.

It includes the estimated impact of our investments in India but does not include the benefit of our pending joint venture in Mexico.

It is also important to point out that in last year's first quarter, we benefited from a discrete tax item associated with the implementation of the Tax Cuts and Jobs Act, which represented $0.07 per diluted share.

We currently expect no such impact in the first quarter of 2019.

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

Thank you, John.

2018, we achieved several records, most importantly, record annual sales of $4.64 billion, record operating income as well as record shipments from our distribution centers in North and South America, Europe and Japan.

Our growth in the year came despite foreign currency headwinds, economic and political challenges in several markets and tough comparisons due to the strength of our sales in 2017.

We believe the growth is attributable to our diverse product range, which is focused on style, comfort, quality and innovation at an affordable price.

We are pleased that the year brought growth in both our heritage looks as well as newer looks from SKECHERS Cali, BOBS from SKECHERS, men's sport and casual, among others.

We continue to invest in our brand through the opening of SKECHERS retail stores ending the year at 2,998 company-owned and third-party owned stores.

With the opening of stores in the first quarter, we now have more than 3,000 SKECHERS stores around the world.

Further, we are planning to unveil a fully upgraded SKECHERS e-commerce site in the United States and several other countries in the second half of 2019.

We continue to believe international holds the greatest growth potential, and to this end this week we completed the repurchase of the minority stake of our India joint venture, transitioning it to a subsidiary and are in the process of transitioning our Mexico distributor to a joint venture.

We believe these efforts will be accretive to earnings.

As always, we remain focused on efficiently growing our business and are pleased that our efforts resulted in both record annual sales and earnings in 2018, and believe we can continue to achieve strong results in 2019.

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

(Operator Instructions) Our first question comes from the line of Laurent Vasilescu from Macquarie Group.

I wanted to follow up on the China numbers, they looked particularly strong in the fourth quarter.

How do we think about China for 2019?

Well, we see continued growth and while it's in our numbers and guidance for the first quarter, it's understated by the significant difference in currency.

So while they'll be up significant double-digits, well, at least double-digits as far as we can see in local currency and in pairs shipped, there will only be a slight increase in volume unless something changes significantly.

But we think as we go through the year, the currency will sort of not have as great an impact, and we'll continue to show significant double-digit growth as we move into the balance of the year.

Very helpful.

And then on gross margins, John, maybe you can help us, maybe walk through the drivers of the fourth quarter gross margin and how do we think about the first quarter gross margin?

So fourth quarter gross margins were strong on the back of, as we said, domestic wholesale and retail performance.

As we had mentioned previously in the retail environment, we had reduced some discounting activity and taking some limited pricing.

That continues to power through the retail business, and they performed exceedingly well on a gross margin basis.

We also saw favorable trends in our domestic wholesale business, both in terms of average price up and then costs down.

So we saw good mix trends there.

The offset, as we mentioned, was foreign-exchange.

But again, good solid performance on the margin basis going through our domestic businesses, which I think speaks to the health overall of our domestic businesses, when you include both the retail and the wholesale portion.

And obviously, that speaks to the health of the consumer for us, which has been performing well.

As you look at early 2019, we expect some modest improvement in Q1; remains to be seen exactly how material that is based on mix but we definitely expect some slight improvement in Q1.

I would only caveat, as David mentioned, that the foreign exchange rate again will continue to bedevil us over the first half of 2018 in some of our core markets like China where the exchange rate differential is pretty severe in the first quarter, at least based on what we know today.

Very helpful.

And then if I can squeeze one last one in.

International G&A, I think just backing out it looks like it increased by $15.9 million.

Half of that is China.

How do we think about that line item over the course of the first quarter and then potentially for the full year?

Well, we're not going to give country-specific guidance but I think what you saw in the fourth quarter was really probably more driven by volume gains.

As we've mentioned before, the P&L structure of China wherein our distribution partners are third party there does tend to be a correlation with volume gains.

So we definitely saw that in the fourth quarter.

And I would expect it to be roughly in line with volume gains going into 2019.

Although again, in any given quarter we can see timing shifts as we saw over the course of 2018.

So we'd be conscientious of that as well.

Your next question comes from the line of John Kernan from Cowen & Co.

John, can you just help us understand a little bit more about the first quarter and the implied top line guidance, both for domestic wholesale and then the international piece as well?

I think there is some timing around Easter that's moving numbers around as well.

So just any detail you can give us there would be very helpful.

Yes, so I mean and obviously, the Easter timing kind of put a question mark at the end of the quarter as to exactly how things shake out.

What we see at the moment is probably a flat to maybe slightly down domestic environment.

Again, part of that is timing associated with the holiday and part of that is, I think the continued retail shakeout we see.

In terms of international, international will be a bit of a mixed bag.

We actually expect following a tough Q1 last year that our distributor business will come back, probably be a high-single-digit, low-teen type performance and.

And that's counterbalanced with the modest single-digit growth internationally, which I would tell you, if it were not for foreign exchange would be almost double.

Because, again, we are really seeing the headwinds come in our key markets in the first half of 2019.

And then our retail business we believe will be a high single-digit, maybe low double-digit number depending upon retail performance.

We've seen good trends thus far this year, certainly in the domestic market but there's a lot of selling to be done still.

So that's, generally, how we believe it shakes out.

That gives us on an average basis, again, taking into account the FX, probably a mid-single-digit number, maybe a little bit lower than that, maybe a little bit higher depending on things how -- how things mix out, but again that would be almost double that if it weren't for foreign exchange.

Sure.

That's helpful.

I guess when you look to fall/holiday 2019, both for domestic and international, I know you're not giving a full year guidance.

But just any detail on how those order books are starting to shake up.

You did exit the fourth quarter with an acceleration both in international wholesale and domestic wholesale.

So one would think that your partners are feeling pretty good in terms of orders for next fall.

We are right in the middle of that process as we speak.

We have had very good pre-lines and very good feedback.

The orders are starting to come in now.

We had a very good January, on top of what was a significantly high-growth incoming order rate last January, so that makes it look even more solid.

So we are getting good reception and we're getting good sell-throughs from the current line that's out there, so I think we all here feel very positive about the transition into fall/holiday and potentially even increased acceleration as we get there.

Our next question comes from the line of Lauren Cassel from Morgan Stanley.

Maybe, could you guys talk about 4Q performance within domestic wholesale by bucket, so off-price versus big box versus family channel, how did those different areas perform?

And then how are you thinking about each of those different channels to perform generally in 2019?

I could definitely talk to Q4.

2019 is a little bit of a prognostication.

I would say, generally, we saw continued trends in the off-price -- again, keep in mind how you define off-price matters for us.

We are looking at those that sell traditionally either liquidated inventory from others.

For us it's made-for product or some in-line product that fits their pricing portfolio.

We did see continued weakness in that, based on really the trend we had been seeing since Q2, although, it did decline a bit.

Outside of that though, generally activity was pretty strong.

Certainly we had some exceptional items going through the holiday that performed very well and that lifted some categories for us.

But generally I'd say outside of kind of the off-price channel, which is again been a bit of a challenge over the back half of 2018, things were positive.

Looking forward, we continue to see, as David mentioned, strong interest in the product, strong response from the lines that they've seen and the lines they are booking on now.

However, I'd just caveat that the retail environment in United States has certainly seen its share of attrition in both stores and doors.

So I think that will have an impact.

What I think we have been very pleased with is that for our key accounts, we've seen certainly in '18 growth and early '19 good indications that they're going to continue to grow.

Okay, great.

And then just within the 0.4% comp in the U.S. during the quarter, just any commentary on full-price versus the outlet stores there?

Again, keep in mind in the middle of the year, we decided to change approaches.

In particular, and probably most pronounced, in our concept stores.

And if you really look at the detail underneath the store performance, that's where you saw slightly lower comp store performance.

But again, that's against the backdrop of delivering significantly better margin.

And actually gross margins were up in every single one of our store types.

It was the most pronounced in the concept side of things.

So again we're incredibly pleased with that response from a financial perspective, and you are seeing good general activity in the domestic market, which I think is probably for us, when we think about the consumer, a more important vantage point.

And David mentioned the domestic business grew and we combined the retail and the wholesale in the quarter.

And that I think speaks to the consumer interest.

Where that's going next year still remains to be seen; there's a lot of selling, but we're not changing our approach and so I would probably suggest you'll see at least in the early part of the year some of the same trends, again, good gross margin performance.

And maybe that costs us a few on comp store sales points on a -- in some of our stores but, generally speaking, a very good financial result at the end of the day.

Our next question comes from the line of Jay Sole from UBS.

I wanted to follow up on SG&A.

John, can you give us an idea of how you're thinking about SG&A dollar growth for Q1?

And then also, maybe in general terms how you're thinking about it for fiscal '19?

Yes, again, keep in mind that a portion, certainly in the international side, is volume driven.

It somewhat depends on the top line.

Basically what we believe we'll see in the early part of the year is you will still see growth in the SG&A category but it will continue to moderate as compared to kind of last year's numbers once you except out the volume gains.

So the volume drives activity and that's certainly the kind of activity we want to see.

We are not planning for anything drastic in kind of a change year-over-year as a percentage of sales, all things considered; maybe some shifts between buckets or between categories within the totality of SG&A.

But more than anything else right now, I think what we're aiming for is stability against the backdrop of the growth that we see.

Because keep in mind when you grow, even though an FX-adjusted growth rate is smaller, when you talk about activities like pairs, which have to move through the system, you don't always get the full benefit of alignment in the top line behavior in the SG&A and in particular distribution-related costs.

So there's some offset there, but I would probably guide you to looking at stability in that as a kind of overall percentage going into the first quarter.

Okay.

And then maybe just a follow-up, there's been big investment been talked about in China, headquarters Los Angeles, that kind of stuff.

Is there -- is all that in the base right now?

And as you look out into your budget for '19 are there any new big projects, whether it be commerce upgrades or some capability, some big projects that might cause a jump in SG&A as you go through the year?

Yes, but not those that you mentioned.

And just to be abundantly clear, all the projects that we mentioned coming from the CapEx side, which is everything from the distribution center in China all the way through to consolidating our footprint here in California, those are all capital projects for the year so they won't have a direct -- or not a sizable direct P&L impact.

What will, ultimately, impact the P&L and be visible in categories like SG&A will be when we begin consolidating the joint venture that -- where you have agreed in principle to perform in Mexico.

We don't have a good gauge right now on specific timing.

When we do, we'll obviously give some clarity on that.

But once we begin consolidating those results, we will take on board all the SG&A, all the revenue, the gross margin associated with that business.

Again, we believe it will be accretive but you will see dollar gains in those categories as we onboard those costs.

Outside of that, there's really nothing of significance I would call your attention to at this point in time.

Our next question comes from the line of Jim Duffy from Stifel.

Very nice profitability in the quarter.

Nice to see that, including the SG&A leverage.

John, can you maybe spell out the accretion opportunity from the India JV consolidation?

My understanding is that was a business that was running close to breakeven, are you expecting to get to a leverage point there?

Yes, so just to be abundantly clear on India, so it's been a joint venture, so it's been fully consolidated in our operation from the get-go.

What you will see now with the acquisition of the minority stake is a lower relative takeaway on the minority interest side of things.

Early at the moment but I would say we believe it's probably a couple of pennies on the year.

Obviously, that depends entirely on how the business performs and that is another market where we have seen significant FX headwinds.

But it's contributing so I think it'll probably a couple of pennies on the year, maybe more if things go slightly better than plan.

Okay.

And then with respect to the gross margin, can you speak to what you're seeing from input costs with -- pardon me, with some currency release in China.

Does that suggest an opportunity into the back half of the year?

We're adjusting input costs on kind of a constant basis, almost by shoe, if you will.

So we adjust that as we go.

We did see some cost alleviation in the quarter that was reflected, as I mentioned, in some of the domestic wholesale margin numbers.

But I would probably remark that, generally speaking, we're not seeing a lot of positives and we're not seeing a lot of negative.

We are taking advantage of currencies when we can along the way, but you've got to keep in mind that, that's also bit of a double-edged sword because when the currencies move the opposite direction, you don't want to give that back.

So we're conscientious of that in the context of how we develop product.

So I would say it's been probably a modest to slight net benefit up through this point in time but more on a rolling basis.

And then keep in mind also the style mix changes so significantly as you bring new shoes on, it's really tough to completely compare that question apples-to-apples.

Our next question comes from the line of Sam Poser of Susquehanna.

A couple of things.

With the Easter shift, could -- won't that shift some of your selling expenses from Q1 to Q2?

And also move a good amount of the DTC sales, I mean the -- will DTC be impacted by that?

So on the second part of your question, yes the direct-to-consumer sales are influenced.

And we factored that into the guidance we've given, as best as we can tell at the moment.

So, I was a little confused when you were walking through it.

So how we should think about the direct-to-consumer sales in the first quarter, sort of taking that shift into account.

You were sort of walking through it?

So in the previous numbers I gave, Sam, we've already kind of adjusted out what we believe the impact from the Easter shift is both in terms of the DTC numbers, most significantly, on our retail base and elsewhere.

So what I'm saying -- that you sort of walked through how you expect domestic wholesale and international wholesale and then you add that DTC increase in Q1.

So I just wanted to get a little more clarification on -- you know I think you said something about the, like, mid-single in Q1, but that seems a bit aggressive given the shift and the comparison gap.

Well, again, where we're going to see that DTC impact most significantly will be in our retail base.

And as I had previously mentioned, we expect retail right now, for Q1 to be kind of a high single-digit contributor and that includes what we believe to be the impact from the shift of Easter into Q2.

So you expect it to increase around 9 -- you know like 7% to 9%, is that the way to think about it?

For Q1, yes.

That includes the new stores as well.

Got you.

And then, secondly, when those -- what is the tax rate that you're assuming for the first quarter, is at a lower level?

Yes, again, we're expecting a range of between 14% and 18% for the full year.

It should be relatively evenly applied throughout the year, absent any discrete tax items, changes in law, et cetera.

So I think at the moment, planning for a relatively flat midpoint rate is certainly a decent assumption.

That being said, we're still looking for regulatory opinions on some aspects of the recently enacted tax law and how those are applied.

But I'd say, generally, we think that's a reliable estimate at this juncture.

And then Q4, you -- I mean it looks like your U.S. profitability was, as a rate, higher than international.

So do you expect that to continue into Q1, which would then likely drive the tax rate a little bit higher?

No, we don't think there will be a meaningful impact on the composition of the revenue streams in Q1 that will change that tax guidance.

And then lastly, on India, when those 200-plus stores hit your store base, how does that impact the sales?

Or is that already in, it's just going to change the way the sales report?

That's already in.

The franchises remain franchises, the owned stores remained owned stores when you go in.

The big shift you will see is in the minority interest and the share of profitability.

And I would say, because there was a question that they were unprofitable through this year, that the fact is that they did break into profitability last year and we expect that to increase this year.

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

And then just to clarify, you mentioned stability in SG&A in Q1, I think.

Do you feel like you have an opportunity to leverage as a percentage of sales later in the year?

Yes, so just to be abundantly clear about the stability comment.

I'm looking at overall SG&A as a percentage of sales.

And again, keeping in mind that a significant portion of, in particular the international, SG&A growth you've seen recently has been volume driven.

Yes, we think we are looking for stability from a kind of rate perspective in the early part of the year.

I mean there's always opportunities and we're -- we aggressively pursue those opportunities as they come forward, but there's also risks in the business, and we want to maintain the ability to respond to those.

So again, I think at the moment, what I would probably guide you to is something that is stable as a percentage of sales to last year.

Okay, fair enough.

And then, how should we think about growth -- and I know India and Mexico have been strong growth areas, but maybe you can touch on the growth you're expecting there in 2019 as you kind of are transforming those?

And then any investments that we should think about that you might need to make in those regions in 2019?

Yes, I don't want to get into again country-specific growth profiles.

I'll just point out that India was one of our fastest-growing segments -- or countries over the last really 2 years, certainly on a percentage basis and continues to perform exceedingly well.

That was in part our rationale for taking the action we did to bring it in as a wholly owned subsidiary now.

So we certainly think that there remains significant opportunity to grow that market.

We believe that in-house it will, quite frankly, grow faster as a wholly owned subsidiary than it would otherwise be able to grow.

There may be some modest investments but nothing of the scale that I think would be -- bear worth calling out at the moment.

Mexico, I definitely agree that it's been a good business for us, for the brand.

We believe together with our distribution -- our existing distribution partner, that it can grow faster and better.

There will probably again be some limited investments there but it will be with an eye towards growing the brand, growing the brand presence in the market.

We'll have better indications on that once we have an eye towards exactly when we expect the transition to close.

But suffice it to say, again, it was part of the underlying rationale for taking the action we did.

We felt we could grow it better together in a joint venture format than we'd be able to see otherwise.

So given the attractiveness of that market, it will certainly warrant some investment consideration along the way.

But again, nothing of the scale outside of the original investment into the joint venture that I would point out.

And just to be clear about that, it's an operating business today with our distribution partner, there are existing stores as we mentioned.

So in this instance, we are buying into to form the joint venture and then grow it from there as partners.

Our next question comes from the line of Chris Svezia from Wedbush.

U.S. wholesale, so I'm just curious, Q4 I think the initial guidance was high-single, low-double.

You did 4-and-change, you saw a 5% growth.

Anything unique happened in the quarter either just -- I don't know, just why did it come in at that level versus maybe what you expected.

Any color about that?

Yes, I'd say, you know what -- you probably saw a little more continuance of the off-price deficit we had seen in Q2, in Q3.

I mean not extraordinary but it was a little bit weaker than we even thought -- we were beginning to see new signs of recovery and it didn't come through, I think, at the level that we had hoped.

I would also point out that in Q4, we were comping against an incredible kids number last year from Energy Lights.

It was one of our top 5 styles last year in Q4.

And it just had a tough comparable, so that was probably a little bit weaker than we anticipated.

But again, I'd generally say we were looking for growth in the quarter against kind of the retail backdrop that we saw and some of the traffic numbers that we saw impacting our retail partners.

That was -- we still think the growth that we showed was good growth, taking advantage of the market and the product strength given those 2 other considerations I mentioned.

And as part of that, there's a shift as well from -- in pricing because the pair information was up mid to high single.

So when I think about you have U.S. wholesalers Authority, you talked about maybe flat to down in Q1.

I guess you make that back up a bit in Q2?

Just any thoughts about how we think about U.S. wholesale growth for the year, seems like kids has been a little bit softer given the comparison, women's I guess it depends on what category, men's has been strong, I guess.

But just what kind of growth rate should we should think about for U.S. wholesale as we kind of think about the year and move forward?

Yes, I mean we sit here with kind of half the year fully vetted with customers.

And as David pointed out, initial orders getting booked now for the back half of the year.

So it's fairly early to make a full forecast for the year.

What I would tell you though is we think it's a single-digit environment from a domestic wholesale at the moment.

Again, against the backdrop of store counts dwindling, door counts coming down.

So I think that's probably the best guide.

But again I think it's really early and it's tough to tell.

I would also point out for you just for context, we actually saw women's and men's grow this quarter.

And that was a good sign.

Kids, obviously, facing the really difficult comparable given the Energy Lights phenomena the year before was the only gender category that we saw a decline in the quarter, so that was good and reassuring.

And on Western Europe, maybe just talk about what's going on there -- U.K., Germany, some of the other markets.

Broadly speaking, take the currency out of the equation.

Obviously currency's a bit of headwind here near term.

But what's going on in those markets?

How has your business been holding up?

Pricing?

Just any color about how we should think about Western Europe as we go forward?

Western Europe continues to be a very positive piece for us, and we will certainly on a local currency basis, grow in the first quarter on top of what's a very good first quarter last year.

We are actually shipping quite well for January and February.

We -- the environment is probably slightly better for growth purposes from Germany, although the U.K. will remain our largest -- the U.K. had some internal issues at the retail level with some bankruptcies and reshuffling, and they will continue to grow, and they're already the largest to begin with.

But I would tell you, that we would anticipate growth in just about every country in Europe on a local currency basis, Western Europe anyway.

Okay.

Last question I have is just on Mexico.

Just any thoughts or can you share with us how big that potentially could be, what's the size?

And I you know you haven't disclosed timing, but is this sort of a second quarter, is it going to happen shortly in the first quarter, or just any color about timing on that?

Yes, we've been working on it diligently recently.

We hope that it will close this quarter but it's taking an operating business and forming a joint venture so it's not as easy as starting from scratch because you're dealing with existing components.

So our anticipation at the moment is that by the end of the quarter, we'll be able to close but I would -- at this point I think quite frankly it's a little bit too early for us to be able to commit with -- in any degree of reliability to a timing number.

Okay.

And John, that's not in your numbers right?

Correct.

We have excluded it from all the guidance at this point in time, and we will update you when we have an idea as to the close, and we will accordingly update guidance if necessary.

(Operator Instructions) Our next question comes from the line of Omar Saad of Evercore.

This is [Wescott] on for Omar.

A question on your e-commerce business.

You had mentioned you were going to roll out new functionality, you know, really put more of an emphasis behind the e-commerce.

Can you expand on that a little bit?

What pieces do you think you really need to improve to really get that business growing kind of in line with some of your peers?

And then, also, is it going to be more dramatically focused or are there things you're doing abroad as well?

Yes, I don't want to go into a ton of detail because it'll be probably too microscopic for everyone.

But I would say, we -- and actually this started a year ago or maybe even before that, really.

We have been investing in our digital assets, our digital capabilities, everything from digital marketing all the way through to what will be a complete replatform of our commerce user interface.

So that's in process, it involves for us working with external partners who are expert in this, building off of what we have today but creating I think a more comprehensive solution, again everything from -- encompassing everything from digital marketing all the way through to actual e-commerce.

I would characterize it as a focus of the moment on a domestic solution but it's with a goal of having as close to a turnkey solution as we can for our global operations so that we can bring similar solutions to our international markets, because some of the same trends you're seeing domestically are beginning to emerge internationally with regards to e-commerce.

I just also want to note as an exception to that, today China is already far, far ahead of many of its competitors and doing exceedingly well in e-commerce.

It grew over 50% this year, so when we talk about e-commerce, it definitely depends on which market you're speaking about but China is already a significant e-commerce business for us and continues to do very, very well.

Okay, perfect.

And then secondly, I know you guys have been rolling out more fashion-forward product, more kind of branding going into specialty and doing some apparel.

As you think about continuing to build that, are you seeing some traction in the brand recognition, moving the customer younger, any kind of metrics you could have there of how it's evolving, how they view -- how the brand overall is viewed domestically and abroad?

We only see more and more increases and more exception -- more acceptance to the brand.

I think on a worldwide basis, we continue to push the brand and to newer styles and the newer looks and continue to trend significantly younger.

And it's now beginning to happen in the U.S. as well.

So we are all positive about our brand offerings, our product offerings and anticipate we will solidify a significantly larger demographic, but we are getting more brand acceptance everywhere in the world.

Our final question comes from the line of Tom Nikic from Wells Fargo.

John, just a quick one on the buyback.

I think you've already used up a pretty significant portion of the authorization.

Should we assume that you'll sort of keep buying back stock and when it expires, you'll look to re-up?

And just kind of thinking how should we think about that?

Yes, I mean that's almost precisely how we think about it.

Our activity year-to-date has been a reflection of where we see value and we've seen tremendous value in the share price.

SKECHERS, as I mentioned, we think is undervalued, plain and simple.

So we took the action that was available to us.

We will continue to pursue completion of the program we have based on the prevailing prices in the market.

And then we'll go from there.

It's an ongoing dialogue we have with regards to capital allocation, so it will definitely be a component of what we talk about with the board going forward and certainly as we near completion of the program that we put in place last year.

We've reached the end of the question-and-answer session.

And I will now turn the call over to SKECHERS for closing remarks.

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.

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

Thank you for your participation.