Skechers U.S.A., Inc.
Q2 2014 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Greetings and welcome to the Skechers USA Incorporated Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this point, I would like to turn the conference call over to Skechers. Please, go ahead.

[Unidentified Company Representative:]

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 statement involve known and unknown risks, including, but not limited to, global, national and local, economic, business and market conditions, in general and specifically as they apply to the retail industry and the Company. There can be no assurance that the actual future results, performance or achievements expressed or implied by such forward-looking statements will occur. Users of forward-looking statements are encouraged to review the Company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of other significant risk factors that may affect the Company's business, results of operations and financial conditions. With that I would like to turn the call over to Skechers' Chief Operating Officer and Chief Financial Officer, David Weinberg. David.

[David Weinberg:]

Good afternoon and thank you for joining us today to review Skechers second quarter 2015 financial results. Our sales for the second quarter were $800.5 million, a 36.4% increase over last year and the highest quarterly sales in the Company's 23-year history. This also resulted in record first half sales of $1.57 billion. Driving the growth in the second quarter was double-digit increases in our three business channels, domestic wholesale with an average price per pair increase of 9%, international wholesale which includes 665 third-party owned Skechers retail stores and our 461 company-owned Skechers domestic and international retail stores with total comp store sales increases of 12.9% for the quarter. The second quarter benefited from both pent-up demand resulting from U.S. port issues in the first quarter as well as a shift in back-to-school shipments due to increased demand in both domestic and international markets. This continued strong demand for our product worldwide also led to record net sales, earnings from operations, net earnings and earnings per share in the second quarter. Second quarter financial highlights include record quarterly revenues of $800.5 million, record earnings from operations of $112.3 million, record net earnings of $79.8 million, record diluted earnings per share of $1.55, gross margin of 46.8% and a strong balance sheet with $513.9 million in cash or approximately $10 per diluted share. Additional second quarter highlights include being added to the S&P 400 Mid Cap Index as of June 30 a reflection of our significantly increased market cap, a 31.9% increase in our domestic wholesale business with a 21% increase in pairs shipped and a 9% increase in average price per pair, a 60.1% sales increase in our international wholesale business with a 51.5% increase from our distributors and a 64% increase from our subsidiaries and joint venture partners. A 23.7% sales increase in our company-owned retail stores which included an additional 48 net new stores compared to the prior year period including eight net new stores opened in the second quarter. Worldwide SKECHERS retail store count including third-party owned Skechers stores now stand at more than 1100 doors. The universal acceptance of our diverse range of men’s women’s and kids footwear has resonated worldwide. We have significant success stories in every key product line allowing us to build upon our product innovation and continue to expand our brand in new territories. We have a team of celebrities that reach best demographic worldwide from Demi Lovato resonating with teens to Ringo Starr speaking to Genex and Baby Boomers. With the signing of Boxing legend Sugar Ray Leonard in the second quarter and pop singer Megan Trainor just last week, the impact of these influencers and traditional media as well as social media will be even stronger. We have increased both efficiency and capacity in our domestic and European distribution centers and are continuing to do so positioning us for ongoing growth. Our year-over-year worldwide backlogs are up mid double-digits at June 30, 2015 which we believe is a clear indicator that our momentum will continue throughout the year. Now turning to our business in detail, in the United States, we are pleased to have both our sales growth and our position within our wholesale accounts and as a leader within the footwear market. According to Sports One Source, we are now the number one work brand and the number one walking brand. In May numerous media analysts reported that we surpass several leading athletic footwear companies to become a number two brand in the United States athletic footwear market. The sales growth is reflective of our increased importance with our wholesale partner. In our domestic wholesale business second quarter sales increased 31.9% or $82 million as compared to the prior year period. The growth in the second quarter was the result of a 21% increase pair shipped and 9% increase in average price per pair and double digit increases in our men’s and women’s footwear as well single digit gains in our kids footwear ones. The highest dollar gains came within our Skechers USA men’s collection which features relax fixed footwear Skechers Sport for women with our lightweight footwear and our women Skechers Gold line. Every major product category showed increased volume and increased gross margins for the quarter. Nearly every division and product line from Skechers GO run and Skechers GO walk to Bob from Skehers Twinkle Toes had a TV front or installer marketing push behind it. This included our first sandal commercial in many years. Our spring marketing push drop excitement for our footwear as we launched new campaigns with legendary drummer Ringo Starr for relaxed fit footwear, Brooke Burke-Charvet for Skechers fit. U.K model and actress Kelly Brook for Skecher Sport and several Skechers go golf commercials with pro-golfer Matt Kuchar among others. Additionally, our in-store and online campaigns with Demi Lovato launched in conjunction with airing of our colorful comfort Skechers Sport print and television campaign. Demi’s impact on social media has been phenomenal as we see fans in the United States and around the world engaging with our post above Skechers and the Skecher Sport daily commercial reached 4.5 million views on YouTube. The signing of the great boxing legend Sugar Ray Leonard for our men’s relaxed fit line is also plus for social media as he regularly posts about Skechers. We’re looking forward to the launch of this television and print campaign later his quarter and we just announced the signing of multi platinum artist Megan Trainor who was currently on her M Train tour across the United States. The press has taken notice of the growth and innovation of our product lines and our brand ambassadors. The Pete Rose in the Hall Skechers campaign continued to create excitement in the sports world and on Twitter as Pete petition the baseball league to be in the hall of fame. The press love the innovative Game Kicks line which features a built-in memory game and of course the media outlets are gearing up for the Star Wars moviies and now we have Star Wars for Skechers footwear for boys and men coming in the second half of 2015. Finally in the second quarter we've recahed a 12 million pair donation mark for Bob footwear. To better prepared for continued growth we recently completed capacity inefficiency upgrades to our domestic distribution center and believe we are well positions with increased shipments and demand. Based on our domestic wholesale backlog are continued focus on delivering innovative product and relevant marketing including our increased team of Skechers brand ambassadors, strong sell through for spring and early feedback on our four products, we believe we will continue our sales momentum though the back half of 2015. International achieved the highest percentage in dollar increase of our three distribution channels. Total international wholesale and distributor sales increased by 60.1% in the second quarter. Further our subsidiary and joint venture sales improved by 64% and our distributor sales improved by 51.5%. Several countries shipped more than a $1 million pairs in the quarter including China, the United Kingdom and UAE who handle a distribution of Skechers across most of the Middle East additionally we are pleased with the continued growth in our international business despite foreign currency headwinds in several markets. We believe this success is attributable to our innovative and diverse product range as well as our on target marketing and branding campaign, Ringo, Demi and international celebrities like the UK’s Kelly Brook are resonating with consumers in many global markets and a K-pop group Sistar are having positive impact with consumers across Asia. In fact, we are excited to see the first window displays of Demi Lovato in Spain, Germany and Panama, Ringo in the U.K and Kelly Brook in the UK Further detailing our growth in international, our wholly owned subsidiary saw a net sales increase of 64% for the quarter. In our European subsidiaries, we achieved increases of 53.2% for the quarter. The highest dollar increases came in our three largest subsidiaries Canada, Germany, and the UK. The only market in which we did not achieve sales growth was in Chile, which was due to currency headwinds as they in fact had an increase in pairs shipped in the quarter. Additionally in the second quarter, we began shipping into Central Eastern Europe as a subsidiary of the transitioning several distributors to a whole-owned subsidiary about oversee 14 countries. We are pleased that we have already begun to see key accounts in our newly opened CEE headquarters in Budapest and we believe business new subsidiary will positively impact our operations in 2016. To prepare for the accelerating growth in Europe, we are also increasing the capacity and efficiencies in our European distribution center with two expansion phases, doubling the size of our EDC which will bring us to more than one million square feet of distribution space by mid-2016. In the second quarter, we began transitioning our business from our distributor based in Panama to a subsidiary, the plant subsidiary Skechers Latin America will oversee Peru, Columbia, Coasta Rica, Panama, and several other countries in the region. With numerous Skechers retail stores, we believe there is great opportunity to grow our business in this well established. We expect the agreement to be signed shortly and we will announce it, when it is complete. Our joint ventures in Asia, grew by 116.8% for the quarter, led by a triple digit increase in China, which shipped more than 1 million fairs in the second quarter. Our international distributor growth of 51.5% for the quarter is the result of trip digit growth in Indonesia, Scandinavia, Tiwan and the UAE and double-digit growth in Australia and New Zealand , South Korea, and Turkey as well as strong results from many other countries. As in the United State, this growth is being driven by a diverse range mens, women’s and kid’ light weight, Skechers go and Skechers USA footware. To showcase the complete offering, most of our international distribution partners have open Skechers retail stores and we have a growing network of, get your sores, at quarter end there 665 Skechers branded sores owned and operated by our joint ventures, franchises and distributors outside the United States. Of these 406 I’ll distribute around the franschise Skechers retail stores, 216 Skechers stores in our joint venture countries in Asia including those turn by franchises in the region. Additionally there are 43 company franchise stores and those countries and where we directly distribute our product. 63 third-party stores opened in the second quarter, including first two stores in the check republics and our first kids only stores in Hongknog. Additional sketches branded stores open in the quarter include 18 and China five the UAE, four each in Brazil, Twain and Malaysia, three in Mexico two each in Australia, Kuwait, Spain, and Singapore among others. Six doors closed in the quarter. five third party Skechers stores have opened today in the third quarter and on there 90 to 100 are expected to open during the reminder o the year. Over the past few year, we have aggressive introduce new product lines and innovations and we are grateful that so many of our initiates our initiatives have resonated with consumers around the work.. we are building Skechers brand across the contents with our powerful marketing yet Demi Lovato windows in Australia, televisions campaigns in Brazil, where the unisex port and go offer commercial running in nearly every international market that Skechers TV commercial. In addition, Asia has built a young trend business with our heritage men’s and women’s port style that took off in South Korea, and was embraced like consumers in China, Hong Kong, and South East Asia. With double-digit backlog increases and strong growth plant to many countries we believe this momentum will continue through the back half of 2015. Now with 30% of our total sales, we expect international to grow at a faster rate and domestical sale and retail and become 50% of our total business in the next three to four years. World wide sales in our company owned retail stores increased by 23.7% for the quarter with domestic sales growing by 21% and international sales by 35%. This included positive com stores sales of 13.1% domestically and a 11.8% in our international stores were a total of 12.9% comp stores sales increases worldwide. At the end of the quarter, we had 461 company-owned Skechers retail stores around the world of which 95 are in our international markets. In the second quarter, we opened 12 stores including our first store in Alaska and Brazil and two stores each in Japan and Canada. We closed four domestic stores in the quarter. Already in the third quarter, we’ve opened seven stores including a store in Fifth Avenue between 42nd and 43rd Streets of Manhattan, we have 30 to 35 planned for the remainder of the year and the transition of several stores in Latin America to company-owned stores we should reach 500 company-owned stores by year end. Now turning to our second quarter 2015 numbers in more detail. As discussed earlier, we achieved both the record second quarter and highest sales quarter on our 23 year history with sales of $800.5 million, up 36.4% compared to $587.1 million in the second quarter of 2014. Second quarter gross profit was $374.6 million or 46.8% of sales compared to gross profit of $269.4 million or 45.9% of sales in the prior year period. Second quarter selling expenses were $64.9 million or 8.1% of sales compared to $53.8 million or 9.2% of sales in the prior year representing 110 basis points of operating leverage. The dollar increase in advertising and marketing expenditures was to support all of our diversified product categories both domestically and internationally as well as higher sales commissions due to the significant increase in sales. For the second quarter, general and administrative expenses were $201 million or 25.1% of sales compared to $163.6 million or 27.8% of sales in the prior year representing an additional 270 basis points of operating leverage. Of the $37.4 million increase in G&A, $8.7 million was related to operating additional 48 stores when compared to the prior year period and $15.8 million was due to increased expenses related to our international operations. During the second quarter of 2015, earnings from operation increased $58.6 million to $112.3 million or 14% of revenues compared to $53.8 million or 9.2% of revenues in the second quarter of 2014. This 480 basis point improvement reflects improved margins and operating leverage as we continue to aggressively grow our worldwide revenues. In the second quarter, we recorded an income tax expense of $25.4 million compared to approximately $12.2 million in the prior year period. Our quarterly effective tax rate was 22.6%, we currently anticipate our effective tax rate for the remainder of 2015 to be between 21% and 25%. Net income increased 129% to $79.8 million compared to $34.8 million in the prior year period. Net income per diluted share in the second quarter was $1.55 on approximately $51.3 million average shares outstanding compared to $0.68 on approximately $50.9 million average shares outstanding in the prior year period. Net sales for the six months period ending June 30, 2015 increased 38.4% to $1.57 billion compared to $1.13 billion in the prior year period. Gross profit was $707.1 million or 45.1% compared to $509.8 million or 45% in the prior year period. Selling expenses were $114 million or 7.3% of sales compared to $90.6 million or 8% from last year. General and administrative expenses were $398.2 million or 25.4% compared to $322.1 million or 28.4% last year. Earnings from operations for the first six months of 2015 were $200.5 million versus earnings from operation of $101.9 million for the same period last year. Net income for the six months increased $70.1 million to $135.9 million compared to net income of $65.8 million in the prior year period. Diluted earnings per share were $2.65 on approximately 51.3 million average shares outstanding compared to diluted earnings per share of $1.29 on approximately 50.9 million shares last year and now turning to our balance sheet. At June 30, 2015 we had $513.9 million and cash of approximately $10 per diluted share. Trade accounts receivable at quarter end were $434.2 million and our DSOs at June 30, 2015 were 41 days versus 44 days at June 30, 2014. Total inventory including merchandizing transit at June 30, 2015 was $470.6 million representing an increase of $110.1 million or 31% from the prior year period and an increase of $16.8 million from December 31, 2014. We believe the increased inventory when compared to the prior year period its appropriate, based on our strong backlog and our forecasted revenues for the second half of 2015. Long term debt at June 30, 2015 decreased to $1.6 million compared to $15.1 million at December 31, 2014. The decrease is primarily due to the reclassification of long term debt to short term on our distribution center equipment. Shareholders’ equity at June 30, 2015 was $1.3 billion versus $1.1 billion at December 31, 2014. Book value, our shareholders’ equity per share is at approximately $25.16 as of June 30, 2015. Working capital was $909.9 million versus $779.3 million at December 31, 2014. Capital expenditures for the second quarter were approximately $8.4 million of which $9.7 million was related to 12 new stores and several store remodels and $6.3 million for additional equipment upgrades at our domestic distribution center. We continued to expect our capital expenditures for the remainder for 2015 to be approximately $50 million to $60 million which includes 30 to 35 retail store openings, equipment upgrades of European and domestic distribution center and an additional real estate purchase. In summary we set new quarterly records in the second quarter for next sales earnings from operations, earnings per share and operating income and so gross margins of 46.8%. The growth in net sales also let to a record first half sale of $1.57 billion. Our three business segments to a double-digit increase is in the second quarter. Including international wholesales which had the highest increase at $90.8 million or 60% even with this increase domestic wholesale remains at 42% of our total business so we expect international to grow approximately 50% in the next three to four years. The continued growth in 2015 is the result of the strong demand for our brand around the world including our lightweight sport wear for men, women’s and kids, Skechers go walk, relaxed fit footwear and many other product lines. We are excited about the launch of our new marketing campaigns to support this business including our brand ambassadors Demi Lovato, Meghan Trainor, Sugar Ray Leonard among others and a Star Wars Skechers commercial airing in the fourth quarter. To maintain this growth we are continuing to build on our many proven product lines with new designs in color ways well also developing new technologies and products including the new Star Wars Skechers license boys in men filed and the next generation of GO product, go flex. We’re also expanding into new accounts in growing out foothold and existing accounts and building our business in new markets such as the Czech Republic and Romania and expanding our Skechers retail store base to approximately 1250 by year end. To keep up with demand for our brand we’ve added additional equipment upgrades within a 1.8 million square foot domestic distribution center. To meet the growing demand in Europe we’ve updated the automation of our equipment and are now undergoing our second phase of the expansion which will result in more capacity and increased sufficiencies with more than 1 million square feet of distribution center space. Our balance sheet at June 30, 2015 remains strong with $513.9 million in cash and in line inventory of $471 million. This along with double digit backlogs, strong July incoming order rates and spring 2016 by meetings with key accounts in our corporate offices this month give us confidence that the strengthen demand for our brand will continue throughout the year and into 2016. We remain comfortable with the - comfortable with the - current consensus estimates for the back half of 2015. And now I would like to turn the call over to the operator to begin the question and answer portion of the conference call.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jay Seo with Morgan Stanley. Please go ahead.

[Jay Seo:]

Hi, good afternoon.

[David Weinberg:]

How are you doing?

[Jay Seo:]

I’m great. I mean these are some staggering numbers, Dave as I wanted to ask you about the one thing you mentioned about international becoming 50% of the business within three or four years are you speaking about just the international wholesales direct or the combined whole retail because I mean even if the Sistar, what you’re saying it sounds like that you’re doing some - of the U.S the domestic business is kind of flat then you’re seeing international potential to grow 20% for that three to four year forecast period, is that kind of what you’re saying or and I understand the right?

[David Weinberg:]

Yes. What we’re thinking is that we’ll accelerate now through our international business but I do count the retail, I count everything that’s outside the United States that in effect is international. And that will start to grow with a faster phase as we continue to open and China continues to open stores so. Well, I don’t anticipate any significant change in our domestic business and its moving quite well, and I think it still has room to grow. I just think international as we’ve set it up now, we’ll start to grow at a significantly faster phase as we get some underperforming territories like Japan, Brazil, New parts of South America, and Eastern Europe moving. And as well as Europe has been doing for us and continues to grow and expect to grow up next we think in the next three or four year counting our retail and expansive franchise openings around the world, that we can’t catch domestic. Of course there is always a scenario that say domestic will reaccelerate again and it will take us a little longer but that’s a high class problem to have, but that’s fine with me.

[Jay Seo:]

Sounds good. And maybe if we could talk about gross margin for a second because, really big deal on gross margin at quarter end I think those quite a few different drivers, pricing internationally [indiscernible] there is pricking in the U.S. that sounds like it’s happening a strong demand lower commodity prices increased operational efficiencies, can you may be just quantify where the strength is coming from.

[David Weinberg:]

Well, it came from everywhere. Still it was surprising like I said in the prepared comments, every major division we had had significant had higher sales and higher gross margin. I think that comes form being more efficient as we come through not a lot of markdowns, not a lot of returns, not a lo of inefficiencies and because June became such a strong month domestically with moving from third quarter to second quarter was all newer product with somewhat higher price points and margins. So that will help move it and that also flow through our retail channels that had significant domestically increased margins. We were pleasantly surprised with the mix in Europe, probably because the UK was one of the biggest growers and they haven’t had any issues with currency but in the UK we ended up with probably higher margins than we anticipated because of the increased new product that would shift in the second quarter that historically would have been shipped in the third quarter. But we are suddenly picking up that. And of course, one of the biggest movers is we have higher margins in China, because China has predominately a retail business although they are into expanding their franchising model significantly and moving and they were more than double, they actually went from $18 million in the second quarter last year to $50 million in the second quarter this year. So that certainly was a positive impact on margins. So when you put it all together, the way I had almost the perfect storm, I don’t know that I would anticipate continues for ever because we will settle into a broader mix of footwear and fillings not only new product but it was a very good and very broad based increase for us in the second quarter.

[Jay Seo:]

Like I said, like said staggering numbers and terrific performance. If I can ask one more margin question, and then I will hop off. Last year, the margins in the U.S. in the EBITDA margin was about 5.3%, international was 14%, and it sounds like you are talking about China, and UK margins in some of these international local continue to rise. You know, can you talk about that U.S. margin, if margins are about 400 basis point so far this year, where is that U.S. margin trending and where do you want it to trend because 5.3% sounds like low given the strength of the brand right now and just overall, it’s just is starin to breath and that with the categoriy and everything that you are doing.

[David Weinberg:]

Well, we anticipate that will continue to rise, actually, we had a slightly higher tax rate this quarter, than we anticipated, now it’s based on the strength and profitability in the United States both from retail and wholesale because we can leverage so well, so as we’ve said, as we’ve been on the road and as in these calls, we think we continue to leverage, even with out gross margins so significantly high if we scale back to the $44, $45 is that range where we’ve been historically. We still anticipate, we’ll continue to lever that our bottom line and ‘s both and interestinoally. We will leverage fast obviously in the United States because we have more infrastructure here, more automation but we’ll start to catch up in world wide as we put these things in place and we think we’ve continued to leverage just every where. So we keep moving along and expect operating leverage to continue to increase.

[Jay Seo:]

Hey, that sounds great. Thank you, David.

[David Weinberg:]

Thanks.

[Operator:]

Thank you. The next question is from Jeff Van Sinderen of B. Riley. Please go ahead.

[Jeff Van Sinderen:]

Good afternoon and let me add my congratulations. Amazing work by your team. David, maybe you can just give us a little more color on what the backlog mostly consist of, are there any notable changes in concentration and then maybe you could also just go through how much of the business you think was pull forward into Q2 due to high demand that you talked about and based on that I guess so, how should we think about Q3 in terms of the year-over-year increase in revenues?

[David Weinberg:]

It is very difficult to put a number on what was move forward and not, if I had to guess I would assume we were somewhere in the $15 million, $20 million range that normally would have gone into Q3, we had some increased demand in April as well simply because of the port strike and because of the weather issues that we thought we would make up, we made up in April because the brand was doing so well around the United States. As far as the backlog is concerned, it’s obviously down a little bit from second quarter and that is because we moved some shipments in from - to second quarter, so obviously add a backlog into the shipment, customers are having a chance to replace them all at the backend of the cycle for September, October, we anticipate that is coming. Europe is obviously still down some because of the currency translations but in real dollar terms has certainly increased but we are up certainly significantly higher than local currencies than we would be in real dollar terms and moving to forecast for Q3 we think because of this movement into Q2, we’re comfortable with the growth which is still pretty good for Q3 as far as volume and we left the operating or earnings per share number the same because we do anticipate a slight decrease in the gross margin. So slightly higher volume getting to slightly higher EPS number but we do know that there is room for the upside and given such a big shift to June we would have to see some increased demand for back-to-school to get the increases on the back half acquired time. So we are still in the process of that, I think well our stores continue to comp at double-digits through July, there is a case to be made that back-to-school has moved to further in Labour Day at Salt Lake but we are off to a great start in July, so we think a lot of good possibilities out there but we are still comfortable with the growth shown which make very good three quarters for us.

[Jeff Van Sinderen:]

Okay. And then what are you hearing for early back-to-school from some of your wholesale accounts, it sounds like your retail stores continue to be really strong, but just wondering if there is any feedback from them so far in early back-to-school business and then maybe also touch on Star Wars and the kids business?

[David Weinberg:]

Well the kids continues to grow, we saw very close to double-digits in the second quarter and it is up double-digits for the first six months. We’re all very excited about Star Wars commercial and the footwear got a good reception we were expanding and we anticipate as we get closer, we do have some orders already, significant amount of orders are already booked for the fourth quarter to start along with the running of the commercial, we do not have the worldwide, - anybody to be carried away with the worldwide, we wish we had it worldwide but we really have it in the United States is the biggest market and then some selective markets in South America and very few in Southeast Asia. So the biggest piece will be in the United States. So it doesn’t move the needle worldwide and we continue. To get to beginning part of the question, but it all continues to come down, the road we think it is all positive going into third quarter and all what I heard - we hear from - we hear we are performing well for back-to-school, most people do think it is starting slower because of the late Labor Day and but we still continue to perform very positively and get great feedback from our customers. I don’t really have a lot of input on how others in things are faring away from us as in the marketplace for back-to-school so far.

[Jeff Van Sinderen:]

Okay. That’s really helpful. Good. Thanks very much and best of luck for the rest of back-to-school.

[David Weinberg:]

Thank you. Our next question is from Corinna Van Der Ghinst of Citi. Please go ahead.

[Corinna Van Der Ghinst:]

Thank you. A very good afternoon to you, David.

[David Weinberg:]

Thank you.

[Corinna Van Der Ghinst:]

Okay. First off, I had a follow-up question on the margins, SG&A levels were clearly better than you also were expecting after the strong top line in the quarter and in Q1 as well, do you see this level of leverage as sustainable through the rest of the year and would there be any areas where you guys might be planning to reinvest a little more into SG&A based on that side that we have seen this year?

[David Weinberg:]

Well I think the key to that will be more of the gross margin than anything else. So while I do anticipate we can get close to this in Q3 depending on where margins settle in, obviously would be more difficult to have this kind of increased stuff leverage in Q4 which is a much smaller quarter for us and a big advertising quarter so on an overall basis I think it continues and I think it was increased next year so it all depends on where gross margins settling and what we can do some international currencies and what pricing power we may as we move into next year.

[Corinna Van Der Ghinst:]

Okay, great and then secondly what do you think is driving the double digit retail comp that you guys are seeing particularly in your U.S towards, is there some products that’s not being kicked up by the wholesale channel or there some other dynamics that driving that call.

[David Weinberg:]

Well, I think we have our consumer and we have our consumer around the world and I don’t know that it said higher in the U.S then here well, comps were somewhat lower on internationally remember they have currency headwinds that they have to compete against the last year on a units basis. I think they’re comp in even better than U.S. And I think it is how fast we deliver our new product and number and the colors and then, the choices we offer in our stores and it’s a great shopping experience for the family. I don’t think it takes away from many of our wholesale business they continued to do well as well and I think they perform as well as we do. I think it overall it’s just the strength of the brand, the strength of the product, the diversity of the product and what we have to offers to everybody who is in it seems to be doing quite, quite well.

[Corinna Van Der Ghinst:]

Okay, thanks and then just lastly on with the guidance of the international reaching 50% of your sales in that scenario can you just kind of walk us through what you envision your biggest international market would be and also near term what you think the biggest market of driving international growth would be for the back half of this year.

[David Weinberg:]

I think it continues to be where we today, China obviously has the potential to be the biggest market outside the United States simply because of its growth and its population continues to grow at a 100% that’s pretty significant, we had sad that China last year did less than a $100 million and volume at the standalone $950 million in the second quarter so obviously that growth we anticipate may not continue at quite that level but certainly on a real dollar basis will continued to grow certainly for an two years. We think we had significant opportunity in our new areas in South America and Central, Eastern Europe which have been under utilized in Europe for many years and in South America and Latin America because our distributor there just was financially challenged and couldn’t moved has a great marketplace down we think we can grow that significantly specially giving our pricing power. So I think it continues the same way does not, Europe has not done, Eastern Europe has not done. Our distributors certainly are not done. We hear as good things out of our biggest distributors in Australia and UAE from growth as we seen over the past few years. So I think everywhere we are will continued to grow a great rates but if I had to pick one that was going to be the biggest overall significant period of time certainly over four, five years. I still have to stay with China.

[Corinna Van Der Ghinst:]

Okay and I light into just if I thinking follow up to that, is there possibility of seeing outside from that Latin American market and then also Central and Eastern Europe versus your current guidance for this year or is that really a 2016 story.

[David Weinberg:]

That’s mostly a 2016 story, Central, Eastern Europe will - [indiscernible] and we’re just getting product and taking over the stores there is a possibility we could see some positive impact from Latin America in Q4 but its really too early to tell we just taken it over and we just star ting to put product down there so. Its too early to really tell how - quickly we can get up to a critical math.

[Corinna Van Der Ghinst:]

Okay, great. Thank you so much and best of luck.

[David Weinberg:]

Thank you.

[Operator:]

Thank you. The next question is from Sam Poser of Sterne Agee. Please go ahead.

[Sam Poser:]

Well, hi David thanks for taking my question.

[David Weinberg:]

Hi Sam.

[Sam Poser:]

I have few things, number one can you give us, what the - you talked about double digit backlog, could you tell us as a percentage what the backlog was up please?

[David Weinberg:]

We don’t usually do that so…

[Sam Poser:]

You did at last time.

[David Weinberg:]

Yeah, but if I keep doing - i think have to do at every time. So …its still of a - give you a range it’s up between 35% and 45% that’s why we get into our mid double digit. It’s a higher end international identies in the United States.

[Sam Poser:]

Okay and then when you look at the, you said I’m just clarifying you said that domestic, you described to the domestic business to continue to grow at mid-teens for the forseeable future , is that correct.

[David Weinberg:]

I don’t know that I said that but that would vey minimum.

[Sam Poser:]

I mean like when we look outside of this year , I mean, I’m not talking about…

[David Weinberg:]

It’s too early to tell. We have some great things happening and we have to take the temperature of the competition and our whole lot retail environment but I don’t, I won’t at this point say I’m committed to the fact that we can only do in the teens next year.

[Sam Poser:]

Okay. And then, you said $50 million in China for the quarter, when you look at China, I mean, he did about a 100 million last year. So this year is trending, I don’t how it’s weighted but up 50% at least, it sounds like maybe more you talked about that being a $1 billion market at one point, what is your time frame to see that?

[David Weinberg:]

Well, that’s hard to tell. I would say that’s probably a five, six year horizon maybe be a little more. It depends, we can accelerate by the way they are going to be way more than 50% this year, they already did 90 million for the six months of what was left in $100 million last year and they are certainly no going ot deteriorate as we go through although the for them is certainly better, smallest although we have increasing volume on single space all the time. So they will be more than 50%. And continue to do that so if they end this year somewhere close to $175 million to $300 million and double spot to double over the next two or three years, you get the full $500 million in three or four years. And after that it depends on the marketplace and things that, I don’t usually look at that far but currently from there another two or three years after that could get close to a $1 billion.

[Sam Poser:]

And then just one more thing on the gross margin. You said you expect a gross margin potentially to be down slightly that’s also what you said in this quarter, 45.2% gross margin both in Q2 and Q3 and Q4 last year. I mean, when you say a little given the results this quarter and the mix sounds like it’s going to stay about the same and arguably Q4 is higher direct business. Would it be that there may be a hair more pressure on Q3 and then Q4 has were opportunity just because of the mix.

[David Weinberg:]

Probably because Q4 is historically more retail and have higher margins both here and South East Asia, so yes, there is probably pressure on fourth quarter too early to tell, I mean, third quarter too early but probably some upsite potential in Q4, if things continue as we are moving today.

[Sam Poser:]

Okay. And then, just lastly on the shifting, of the orders from Q3 and Q2, you would also guess I assume given the run rate that than where you are that you said some of the orders for October and other haven’t been written but likely you would expect given the rate that there might be shift from November into October, or sorry October into September, excuse me to help.

[David Weinberg:]

I believe there is certainly a possibility of that as back to school picks up, well we have to see how back to school continues. I mean they took it in early I haven’t heard of any slow down so certainly if we continue at this pace we would anticipate some movement up from Q4 into Q3 but it’s too early to say anything about the order of magnitude and I remember you missed the order of magnitude potential in Q3 toQ2 is certainly significantly larger than Q4 to Q3 because October is a small month and September is the smallest month of the third quarter and so we already passed back to school. So the opportunity is not quite as large as it is right this minute.

[Sam Poser:]

So you are not including any of that in the guidance ahtat you are looking in your plstrcis the numbers that are on the streetthat is - that none of that is within that if it happens that’s over and above where people right now, if I’m…

[David Weinberg:]

Well, there always have to be some of that in our guidance because as we move and nothing is strictly as sits because we are such a dynamic company changes from day-to-day. So we’re always talking running arranges in what see around the world and trying to get that best middle of the road so will under not thing comes out it to the penny as it. So we do have in those number some shift back because we can’t move that much out and expect it to still continue with such a big ___ that a prior year, there was only so much bookr for it but it certainly is possible some of it is in our guidance. Certainly not all that’s possible is in our guidance.

[Sam Poser:]

And then lastly, with the international longer term growth rate to get to the double- mean we are assuming I mean like when you say we have the business, what kind of run rate are you looking at on international versus domestic, I mean are you still expecting the domestic business to be able to grow double-digits and then international business would grow somewhere like three times that kind of thing, is that the right way to think about it?

[David Weinberg:]

Yes domestic, we will continue to grow double-digit, by the way we can move out that projections significantly because we really don’t see any slowdown now in the U.S., so it will be my pleasure to move it out from what I given the maturity of the marketplaces we had originally thought it would be three to five years and given that international is going at a 60% rate and we think that will increase with the takeover of Latin America and Eastern Europe and China starting to hit critical mass but at this particular point of time, I have to tell you that I am not sure of that domestic slows down to the extent that I originally thought.

[Sam Poser:]

Thank you very much for continued success.

[David Weinberg:]

Thanks.

[Operator:]

Thank you. The next question is from Scott Krasik of Buckingham Research. Please go ahead.

[Scott Krasik:]

Yes hi David. Congratulations.

[David Weinberg:]

Hi Scott, thank you.

[Scott Krasik:]

So just to deconstruct the backlog if we just throw a number let’s say 30% domestic, how much of that is with your comp doors and how much would be new distribution and maybe just give us an update in terms of what new distribution is potentially out there domestically?

[David Weinberg:]

I don’t think anything has changed from the last conversation, most of this growth will be in the existing doors, it is not that much, we are still testing with guys like Dickson, Sports Authority and the finish line outside of Macy’s those are still in the very early stages, we think we see some positive indications but nothing major so while there are some new doors, the biggest growth we will have will be through the existing doors with increased product.

[Scott Krasik:]

And to the extent that you’ve started book spring 2016, any indication that any of these tests have the potential to expand further?

[David Weinberg:]

Yes while we’re in that process, so we haven’t booked plenty yet but there are some indications that we will see some increases, I’m not sure it is enough to move the needle but it’s certainly is possible but those are in talk right now I think we will have a better idea at the end of August which is really our big, biggest booking month for the spring season.

[Scott Krasik:]

Okay. And then the gross margin really impressive, can you tell me what was the constant currency gross margin or what was the basis point headwind from unfavourable FX in the quarter?

[David Weinberg:]

Well the top line in Europe alone was $15 million decrease from last year. We don’t have to focus too much on what it could have been because these are the realities of the world we love in and we are going to continue and continue to grow and look for our pricing possibility. So and the margin wasn’t outrageously significant changed because China picked up from Europe.

[Scott Krasik:]

To the extent that you can primarily your visibility in the pricing for spring 2016?

[David Weinberg:]

We’re working on that now because that is a very competitive piece and we don’t want to let it out too early. So we all are working on it and nothing definitive to say right this minute.

[Scott Krasik:]

And then last thanks, of the $200 million in operating income you reported so far this year, can you just give us a rough breakdown how much comes from the domestic side of the business versus international?

[David Weinberg:]

That is very difficult because it’s we allocate such significant pieces but the biggest piece is still from the United States.

[Scott Krasik:]

Okay. Okay thanks and good luck.

[David Weinberg:]

Thanks.

[Operator:]

Thank you. The next question is from Chris Svezia of Susquehanna. Please go ahead.

[Chris Svezia:]

Hey good afternoon David, how are you?

[David Weinberg:]

I’m terrific, you sound like you are in wind tunnel or a tunnel somewhere.

[Chris Svezia:]

I’m sorry I will talk - but so one question demand would you say that [indiscernible] comps are still up double-digits in third quarter?

[David Weinberg:]

Sorry say that again, was what comps?

[Chris Svezia:]

Did you say that retail comps were up double-digits?

[David Weinberg:]

In July?

[Chris Svezia:]

Yes, when?

[David Weinberg:]

Yes this month today we are up double-digits both domestic and international.

[Chris Svezia:]

Okay. Just a question on gross margin going into the third quarter, if that stays itself to the degree, why would the gross margin be flat - actually just some bounce in the mix [indiscernible]?

[David Weinberg:]

Yes it comes down to the mix because of and the new - we will get to mix of older product as we fill into not everything will be brand new like the highest margins as we get through back to school but, we have a bigger international quarter in the third quarter which is bigger for distributors which is our lowest gross margin and will be bigger for Europe which is a lower gross margin than China. So they tend to pick the phase there so retail can grow at a faster in pace on comp basis to make data.

[Chris Svezia:]

Understood. How does the European inefficiencies [indiscernible] distribution center, how do you think about that year-over-year - last year or any quarter.

[David Weinberg:]

Alright, I think this is some of the European distribution centre the efficiencies.

[Chris Svezia:]

Yeah, the efficiencies or inefficiencies, kind of how that’s trend?

[David Weinberg:]

Well we obviously are not as inefficient as we were in the first quarter, but it was smaller quarter volume wise certainly and Q3 is still smaller than Q1 as far as Europe is concern. So, we will certainly be more efficient and we were in Q1, we’re not as efficient as we would like to be, we are not significantly different than the prior year, but we expect to be significantly more efficient by the middle of next year whenever our new equipment is put in place.

[Chris Svezia:]

Okay, final question just on pricing up 9% throughout wholesale, how much is that just makes of these product, how much of that is increasing price point…

[David Weinberg:]

It’s the mix of new product a little bit of it’s price, but mostly it’s the mix of product obviously go grew to significantly faster pace than kids which gives you a significant increase right after back especially when especially stock moves in from July to June on a larger basis on the adults, so those are the big pushes.

[Chris Svezia:]

Okay, sustainability of that pricing increase I mean when we looking like mid-single digit to the third quarter about something [indiscernible] growth perhaps

[David Weinberg:]

I am sure about the fourth quarter, but yeah certainly in the third quarter we would expect unless this is a big change in mix and I think kids can do better in the third quarter. So, we will have slightly higher margins, but I am not sure will be as good as we are in Q2.

[Chris Svezia:]

Okay, thanks very much and all the best.

[David Weinberg:]

Thanks.

[Chris Svezia:]

Thank you. Our next question is from James [indiscernible] of Sidoti and company. Please go ahead.

[Unidentified Analyst:]

Hi guys all my questions were answered but thank you.

[David Weinberg:]

Thank you.

[Operator:]

Thank you and the next question is from Jim Chartier of Monness, Crespi, Hardt. Please go ahead.

[Jim Chartier:]

Hi, congratulations on a great quarter.

[David Weinberg:]

Thank you.

[Jim Chartier:]

Can you saw your speed in Latin America market force today and do you see the opportunity more in ground on the retail store base or in expanding the wholesale distribution down there.

[David Weinberg:]

On an overall basis I think it’s both. Right now we are going to take over somewhere around 20 or 21 retail stores. What we do believe there is a significant wholesale business at least in Peru and potentially in Columbia that could be quiet large. Our wholesale business in Chili is quite substantial and I don’t know that Peru would be significantly different and there is big group with the same departmental store so there is actually own by Chili group that two business improved that we think we can grow significantly. So, I think it’s both, I think the biggest opportunity our front is retail because we will be taken over the stores right away the 20 to 21 stores and then wholesalers we go into 2016.

[Jim Chartier:]

And you got a $30 million, $50 million market today how bigger that?

[David Weinberg:]

Today, we do from through a distributor which was lower price probably around 5 or 600,000 pairs which would be about $8 million to $10 million maybe a little higher depending on the mix. We think the $100 million markets were actually take Latin America I would remember this goes from towns of Mexico all the way down through Latin America, which would include [indiscernible] but we don’t high as well as now. And, actually some other small countries and Caribbean as well, will could open retail, so it’s quite an expensive piece which were I think Peru and Columbia were certainly be the largest.

[Jim Chartier:]

And then any update on signing new franchise agreement in China I think we June you said you are close the sign [indiscernible] deal there.

[David Weinberg:]

With our signing some of we have some pretty big commitments, but in a way when you see have a layout there is certainly no guarantees, I said they will meet their, the size we anticipate, but they continued to grow and we think the volume in China could actually pick up as we go to 2016 if we get everything were suppose to out of these franchises.

[Jim Chartier:]

And then, how do you account for the sales to franchises about a wholesale sale for you.

[David Weinberg:]

Yes.

[Jim Chartier:]

Okay. Thanks. And best of luck.

[David Weinberg:]

Thank you. End of Q&A

[Operator:]

Thank you. We have no further question at this time. I would now like to turn the conference back over to Skechers for any closing comments.

[David Weinberg:]

Thank you again for joining us in today’s call. We would just like to note that today's call may have contained forward-looking statements. As a result of various risk factors, actual results could differ materially from those projected in such statements. These risk factors are detailed in Skechers' filing with the SEC. Again, thank you and have a great day.

[Operator:]

Thank you, ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.