Skechers USA Inc. Q3 2008 Earnings Call Transcript

Oct.22.08 | About: Skechers USA (SKX)

Skechers USA Inc. (NYSE:SKX)

Q3 2008 Earnings Call

October 22, 2008 4:30 pm ET

Executives

Andrew Greenebaum - Integrated Corporation Relations

David Weinberg - Chief Operating Officer, Executive Vice President & Director

Frederick Schneider - Chief Financial Officer

Analysts

Chris Svezia - Susquehanna Financial Group

Scott Krasik - CL King

Sam Poser - Sterne, Agee

Jeff Mintz - Wedbush Morgan

Richard [Kine] – Kensington

Adam Comora – EnTrust Capital

Kelly Duvall – BB&T Capital Markets

Operator

Welcome to the Skechers USA, Inc. third quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Andrew Greenebaum, with ICR.

Andrew Greenebaum

Thank you everyone for attending Skechers third quarter 2008 results conference call. I’ll 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 they are not limited to, the general economic and business condition and conditions in the retail industry. 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 latest annual report on Form 10K, its filings on Form 10Q, management’s discussion and analysis and the company’s latest annual report to stockholders, the company’s filings on Form 8K and other federal securities law filings for a description of the other important factors that may affect the company’s business, results of operations and financial conditions.

Now I will turn it over to Skechers’ Chief Operating Officer, David Weinberg.

David Weinberg

Good afternoon and thank you for joining us to discuss Skechers’ third quarter 2008 financial results. As always, we will open the call to questions following our prepared comments.

Third quarter 2008 net sales were $403.2 million, our first quarter over $400 million. Sales for the nine months ending September 3, 2008 rose 4.6% to $1.143 billion. Increased third quarter revenues were driven by strong growth in our international business which was approximately 25% of our total net sales for the quarter. The domestic environment continues to be a challenge and while we anticipated our domestic wholesale sales to be flat for the quarter, our actual results down approximately 5% is still good given the soft retail environment.

Our company owned retail stores are posting mixed results with comps down high single digits through these extremely difficult economic environment. Net income for the quarter was $28.3 million and diluted earnings per share were $0.60 for the third quarter 2008. For the first nine months of 2008 earnings were $75.8 million and diluted earnings per share were $1.62. Earnings for the third quarter 2008 reflect a tax benefit resulting from an advanced pricing agreement reached with the Internal Revenue Service during the quarter which will lower our ongoing effective annual tax rate from 34% to 27%.

The key highlights in the third quarter were: Our first quarterly revenues over $400 million, double digit sales growth in our international subsidiary business, double digit sales growth in our international distributor business, backlog up high single digits from the prior year at quarter end and a strong balance sheet with over $239 million in cash, cash equivalents and long-term investments representing over $5 per share.

We are continuing to focus on developing stylish, in demand products and aggressively marketing our brand to further grow our position in the global marketplace. This strategy allows us to achieve further strong growth in our international distributor and subsidiary businesses, develop our brand in our newest subsidiary in Brazil and successfully establish stores and operations with our new joint ventures in Hong Kong. It also allows us to maintain our position in our U.S. accounts and to open additional Skechers retail stores.

Now I would like to expand on our third quarter 2008 achievements in our three operating segments, domestic wholesale, international and retail.

For the third quarter domestic wholesale net sales increased by almost 5% from the same period last year and by 3% for the first nine months year-over-year. When we reported our second quarter financial results in July we anticipated our domestic wholesale sales to be flat based on early third quarter sales, incoming orders and backlog. Although we believe we have fared relatively well in this soft retail environment our revenues were slightly lower than anticipated due to the reduced traffic at retail and general economic conditions. It is important to note the diversity of our product offerings and our reasonable price point have always resonated with consumers and we believe this is even more so in this very difficult environment. We are pleased to see our customers gravitating to a brand they can rely on to deliver what they need at a price they can afford.

While our domestic sales are not as previously anticipated we see continued strength in our Skechers lines and believe our brand, consumer awareness and product acceptance remains strong. We are continuing to build on our proven style as well as offer fresh looks in each of our Skechers lines. In addition, we have several exciting new product initiatives coming for adults in the fourth quarter and first quarter 2009.

Within kids a new line of boys’ initiative hit retail in back to school and proved successful with a TV campaign to back it. We are launching a new girls’ initiative, Heidi High top, this quarter which has a supporting TV campaign as well. The kids business will also be supported with an apparel line to launch in fall 2009. We are encouraged to report our backlogs are up in most of our major lines.

The fashion division grew in total by approximately 16% in part due to the addition of Bebe Sport and the Punkrose Public Royalty line. Punkrose and Public Royalty had a successful first launch at retail and we are eager to develop more styles for this trend-right junior’s line. Along with our new lines, Mark Ecko men’s, women’s and kids footwear continue to grow as do the Zoo York men’s and women’s lines. The backlog for our fashion lines are very strong going into the remainder of the year.

Our approach to marketing remains highly visible, consistent, focused and aggressive. We are continuing to invest in our brands through a multi-platform marketing approach that includes outdoor signage in key cities, mall kiosks, print and TV advertising. Nearly every one of our brands are seen during this peak selling season on one or several of these mediums be it lifestyle print and outdoor campaigns for men and women or animated TV spots featuring our own action heroes; Z-Strap, Cool Breeze and Elastica. A new animated hot life by Skechers campaign ad during back to school on key children’s networks, several men’s commercials and a new Skechers work spot were also in rotation on prime men’s favorite programming.

Our Skechers brand is also benefiting from American Idol winner, David Cook, who is appearing in Skechers footwear print ads, billboards, kiosks and in-store visuals through 2009. On the fashion side, Red by Mark Ecko has the power of singer-actress Vanessa Hutchins as the face of the brand for 2009 and singer-actress Ashley Tisdale through 2008. Both women are also leads in the movie High School Musical 3 which is coming out later this week which will certainly bring attention to the actresses as well as to the brand.

We believe the continuous marketing support we provide and the diversity of our trend right products offering remain a critical part of our business. As our wholesale business indicates we are not immune to the current economic environment but we believe we are well positioned domestically given our multiple unique lines comprised of more than 2,500 trend right and reasonably priced styles. We are able to successfully meet the needs of a diverse customer base in the United States by marketing our products through multiple mediums and to a variety of department, family footwear, specialty, independent and athletic stores. We believe our fashionable products, broad diversification and willingness to support our business through both marketing and diversification make us the right brand for our retail customers and consumers.

Now moving on to international.

International wholesale increased 24.5% for the third quarter and 31% for the first nine months over the comparable prior period. This growth reflects the continued strength in our brands in existing markets, the opportunities in new markets and the addition of retail stores around the world. The strong growth in our international wholesale business is primarily from our subsidiaries which improved by 26% for the quarter compared to last year and marks the tenth consecutive quarter of double digit increases for them. In addition our backlog at the end of the quarter are up double digits.

In the first year of operation, Brazil sales are on plan for both Skechers and Mark Ecko footwear and we are pleased with their backlog. As the Skechers brand continues to make an impression in Brazil, we believe the market will grow to become one of our largest subsidiaries. From a product standpoint, the improved sales across our subsidiaries were the result of the continued growth of our Skechers line and the significant growth in the Mark Ecko footwear lines as well as Zoo York. We believe our brands are in great position in our subsidiary markets in terms of shelf space, reputation and image.

We are pleased with the continued momentum within our distributor sales which are up just over 22% for the quarter compared to last year. The growth is attributable to improved sales by nearly all of our distributors. These distributors span six continents resulting ins ales growth around the world. We are particularly pleased that two of our biggest distributors had triple digit growth and our biggest distributor had double digit growth.

Key areas are consistently growing are Central and South America, UAE and several countries in eastern Europe. To support their Skechers businesses many of our key distribution partners have Skechers retail stores in regions where they sell our footwear. At quarter end 88 Skechers retail stores were open in 27 countries which are owned by 16 of our distribution partners. Ten distributor owned Skechers stores were opened during the quarter including four in South Korea, two in Australia and one each in the Czech Republic, Estonia, Turkey and the Ukraine.

In addition, one new store was opened in Taiwan this month and one in South Korea bringing South Korea’s total number of Skechers stores to nine.

In addition to our subsidiaries and distributors we now have three joint ventures in place. China was established in the first quarter. Hong Kong was established in the third quarter and Malaysia Thailand Singapore was established earlier this month. We believe these three joint ventures will significantly impact our international business within the next two years. We are already encouraged by the more than eight direct-owned stores in China as well as more than 55 stop-n-shops in the country. Hong Kong opened a store within the first month of business and had a celebrity attended party with some great crowds. They have since opened two more concept stores and two stop-n-shops in Hong Kong.

Malaysia and Thailand were initially managed by a distributor until we took over operations last year. With four stores in the two countries and the potential to grow further, we felt it prudent to manage the business through a joint venture structure based in Hong Kong. Through our joint venture we believe we can better maximize our potential. While we are pleased with our continued growth in the quarter we anticipated slightly higher third quarter international revenues than we achieved. We saw a shift of some shipments into October. Due to this the fourth quarter started stronger than initially planned and we expect to see continued growth internationally.

At quarter end international wholesale sales were 23% of our total sales. We continue to believe international wholesale sales can be at least 30-35% of our total sales in the near future and there are many opportunities to grow our Skechers and fashion lines around the world.

Turning to retail. Domestic and international retail sales increased 1.2% for the third quarter on a net 37 store increase from the prior year and an 8.7% total comp decrease. The weak economic conditions reduced foot traffic and lowered spending primarily impacted our domestic sales with comp store decreases in each of the three store types. While sales within our domestic company owned stores were lower than projected, we are pleased that our margins remained consistent with the prior year.

We continue to believe in the strategic long-term performance and profitability from our retail concept. In the third quarter we opened three concept stores and five outlet stores bringing our domestic and international company owned retail store count to 215. In addition last week we opened a flagship store on Powell Street in San Francisco, just off Powell and the Market Street cable car stop. We plan to continue to carefully yet strategically grow our retail business.

In the fourth quarter we plan to open a concept store in New York’s prestigious 15 Union Square West building, our second in Puerto Rico and another four stores across the U.S. bringing our total number of stores opened in 2008 to 30. For 2009 we are managing our total store growth to 20-25 Skechers stores, most of which are already committed though some may move into 2010 and some are located in international markets.

Now I would like to turn the call over to Fred for details on our third quarter financial results.

Frederick Schneider

As previously mentioned, third quarter net sales were $403.2 million compared to #$95 million last year. Third quarter gross profit was $171.5 million compared to last year’s gross profit of $171.7 million. Operating expense as a percentage of sales increased to 36.6% in the third quarter of 2008 compared to 34.4% in the prior year.

Third quarter selling expenses increased to $40.9 million in the period from $37.7 million in the prior year. General and administrative expenses were $106.5 million compared to $98.4 million last year. Our general and administrative costs increased to 26.4% of sales compared to 24.9% in last year’s third quarter. The higher expenses were primarily due to a combination of increased selling and advertising expense, increased warehouse and distribution costs primarily in our international subsidiaries, increased expenses related to our joint ventures in Asia, increased bad debt expense primarily associated with our expansion of our company owned retail stores.

Net income for the third quarter was $28.3 million compared to net income of $24.7 million in the prior year. Diluted earnings per share were $0.60 on approximately 46.8 million average shares outstanding compared to diluted earnings per share of $0.53 on approximately 46.7 million shares outstanding during the third quarter last year.

Earnings for the third quarter 2008 reflect a tax benefit relating to an advanced pricing agreement reached with the Internal Revenue Service during the quarter which will lower our ongoing effective annual tax rate from 34% to 27%. The income tax benefit of $3.6 million during the quarter ended September 30, 2008 included $5 million or $0.12 per diluted share related to the reversal of reserves recorded in prior years as well as $4.7 million or $0.10 per diluted share relating to the reversal of income tax expense recorded in the first half of 2008.

Net sales rose 4.6% to $1.143 billion for the nine month period ending September 30, 2008. Gross margin was $509.9 million compared to $472.7 million. Operating expenses increased to 35.8% from 34.8% last year. Selling expenses slightly decreased to $105 million from $105.4 million due to reduced advertising in our discontinued brands. General and administrative expenses were $304.5 million or 26.7% of sales compared to $274.9 million or 25.2% of sales last year. Net income for the nine months was $75.8 million compared to $63.6 million last year. Diluted earnings per share were $1.62 on approximately 46.8 million average shares outstanding compared to diluted earnings per share of $1.37 on approximately 46.7 million shares last year.

Our balance sheet continues to be very strong. At September 30, 2008 cash plus both short and long-term investments totaled over $239 million or approximately $5.00 per share. Trade accounts receivable at quarter end were $212.5 million and our DSO’s improved to 46 days from 48 days last year.

Inventory at quarter end was $250.1 million representing a year-over-year increase of $63.2 million to accommodate our increased backlog, some of our new lines, our increased retail store count and growth in our international business which includes Brazil and China.

In addition, to avoid a price increase we bought more than one million pair of our basic styles early and we remain comfortable with our current inventory levels.

Capital expenditures for the quarter ended September 30, 2008 were approximately $8.1 million as compared to approximately $9.5 million in the same period last year. We expect our capital expenditures for the remainder of 2008 to be approximately $13-15 million which includes the opening of approximately seven new stores, store remodels and tenant improvement in our corporate headquarters as well as equipment for our new Merino Valley distribution center.

Now I would like to turn the call back over to David for guidance.

David Weinberg

Skechers has been able to maintain strong positions and increase share over the past year in the domestic market despite the challenging economic market and grow strongly in markets around the world. We believe that our divers product offering continues to resonate with both domestic and international consumers and our global business model will allow us to continue to profitably grow.

Given the continued uncertainty of the U.S. economy we believe the holiday season will be difficult for our wholesale partners as well as our retail stores. We are being cautious about our domestic sales but believe the international market will continue to grow for us. Our expectations are based on orders received during the third quarter which resulted in an increased single digit domestic backlog and double digit international backlog.

We now expect fourth quarter 2008 sales to be in the range of $305 million to $320 million and diluted earnings per share in a range of $0.16 to $0.23 based on approximately 46.8 million diluted shares outstanding using an annual tax rate of 27%.

We are approaching the remainder of the year conservatively given the soft global economic environment but we are continuing plans for measured growth in the United States and abroad. The company remains financially solid and we are well positioned for sustainable, long-term profitability and expect to increase our share of the global footwear market.

Now I would like to turn the call over to the operator to begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Chris Svezia - Susquehanna Financial Group.

Chris Svezia - Susquehanna Financial Group

Could you just go back to what is going on with the inventory again in terms of what you did? You brought in product early to avoid a pricing increase. I guess even if you strip that out inventory is up pretty significantly. In this environment what gives you the confidence that inventory is in good enough shape given obviously what is going on in the overall market. I’m trying to get an idea of what is going on.

David Weinberg

We did bring on an extra million pair this year so that is a significant amount. That represents somewhere between $12-15 million in costs early. We had price increases in cost coming on anything that was bought after September 1 so that stuff had to come in early given the price increases we are passing through and those were basic styles we sell at retail year-in and year-out. We had an increase and obviously had to put some inventory in Brazil. We had 37 more stores. We took up the inventory in China which have their locations and obviously we will support in the coming years and we have some excess in the store obviously we planned this year being higher. But we received good feelings from the places where we usually put our inventory. This is not a new thing for us. We don’t have a significant amount that is not selling through or more than we can’t continue to use and adjust our volume cycles going on to the end of the year and first quarter so we will be in good shape as we go through the year and into the first quarter. Inventories will be in line and we will have the increased carrying for some of our new entities.

Chris Svezia - Susquehanna Financial Group

So as you go into the fourth quarter does that inventory get pared down or is it more first quarter? I’m just trying to get an idea of how that inventory flows through based on the guidance.

David Weinberg

I think our plan would be to pare down some of the inventory in the fourth quarter and the balance in the first quarter but some of it is seasonal. Some of it is basics that we use throughout the year and some of it we bought early for first quarter. I would say given the next six months it will be in what everybody considered in line given our new growth in our international businesses.

Chris Svezia - Susquehanna Financial Group

Clearly given the environment obviously how the quarter consolidated it seems like obviously the environment certainly hasn’t gotten any better. What is the run through? What are your thoughts for the fourth quarter in terms of outlook in terms of what are the elements to it? Is it U.S. wholesale? The international piece? Given the inventory are you expecting merchandise margin rates to be under pressure versus last year as a result of that?

David Weinberg

I don’t know that merchandise margin will create significant margin pressure. Our stores, even though they did comp down as I mentioned in my prepared remarks, we never put them on sale and our gross margins weren’t significantly changed for the year prior so we don’t expect any margin change in our retail. This is a big piece of fourth quarter given the Christmas environment. We probably will have small margin pressure due to the strength of the dollar which is a reversal of last year in our international which will be a big growing business with our subsidiaries where we do have some currency risk as pertains to Europe. Certainly not with our distributors as they continue to grow. Our domestic wholesale I don’t think will be significantly different than it was for Q3. We were down 100 basis points basically in Q3. I don’t know that it will be significantly different as we get into Q4 unless something dramatic changes or there is a change in the top line if we move significantly more inventory through than we anticipate for an at-once piece. I wouldn’t anticipate too big of an at-once piece given the economy as it stands but you never know on those things how they turn and how Christmas may turn out.

So, our model doesn’t indicate significant downturn in sales margins. We have always been happy between 40-42% basically 41-41% margins and we don’t think there is any change going into the fourth quarter.

Chris Svezia - Susquehanna Financial Group

In terms of from a top line perspective is it fair to assume the U.S. domestic wholesale piece is down mid single digits? The international is up maybe high teens and the U.S. retail piece is up low single digits? Is that sort of a fair barometer?

David Weinberg

I think that is not significantly different than we had in Q3. It was a different order of magnitude. We think our retail will be relatively flat, maybe up slightly given the new stores and our wholesale business will be down slightly and that will theoretically be offset by our increases in international.

Chris Svezia - Susquehanna Financial Group

Broadly speaking on expenses you guys have always had this long-term viewpoint you wanted to continue to spend to grow market share and develop the business both internationally and domestically and opening up stores. During this quarter obviously sales fell below plan. I think they fell below plan in Q2. Yet you continue to make investments and continue to spend and for the fourth quarter it doesn’t look too much different from an expense perspective. At what point do you see you have some level of variability in your expenses in this environment whether it is store growth, things on the marketing line, things in G&A? Where can we expect to see changes in the expense line relative to sales?

David Weinberg

I don’t think anything really happened prior to second quarter. If you look at us historically fourth quarter and first quarter are historically our slowest advertising quarters as you go throughout the year so the changes there are not that significant on an overall basis. Where we really start to grow is Q2 and Q3 for the advertising end but we will make those decisions as we get closer to Q2. As far as store openings the stores that were opened in Q3 and the stores projected for Q4 and especially those we have in our guidance for 2009 have been spoken for quite some time. We don’t believe we are in a position that we would walk away from leases that are signed and where we have already in the works [GI’s] for stores that are coming on board.

Where we can look is to the end of 2009 and in to 2010. If you remember we originally gave guidance of about 30-35 stores for 2009. We are down now to 20-25 stores because those have already been committed and unless something very good comes along we would have to look at it very closely. As we said, in that number of 20-25 stores there is certainly the potential given today’s environment of financing that some of the new malls we are slated to be in 2009 will be put off until 2010 or may never open additionally so I would tell you the most realistic form would be some downside pressure on store openings for 2009 but it is kind of early to say that and obviously that would go through 2010.

I don’t feel we are in a position to do anything dramatic at this minute. We are still profitable. The stores are still profitable. They continue to pull off positive cash flows. We don’t have to make any significant advertising commitments until Q2. Q4 is already spoken for and Q1 is not as big a one and it is already pretty much in the books. It is not significantly different than last year. We still have some time to think about that. So you will be able to start seeing that as we go forward.

We don’t have anything really new on the horizon. We have some joint ventures this year that we put money into in Hong Kong, China and Brazil and I don’t believe anybody in our operation regrets those. Those will continue to grow just like our international business. That is a great place to be. Brazil, like I said, can be one of our biggest ones as we go forward and China and Hong Kong have unlimited potential and they are starting off very, very well. We think given even what we see now going into 2009 they will be a positive influence on what we do. So we think we are set up in a great position both domestically with the amount of shelf space we have and how much we plan on keeping and gaining as we go through this tough time and internationally. We continue to look at all those items and obviously we have made some decisions as to store openings and we will make decisions on expenses as we go into the middle of the second quarter of 2009.

Operator

The next question comes from Scott Krasik - CL King.

Scott Krasik - CL King

Can you go in the U.S. wholesale business a little bit more in depth? If you could just say what is going on in the women’s Skechers business, the men’s Skechers business, maybe by style a little bit. Help us to understand what the demand is for some of these key styles.

David Weinberg

That would be very difficult for us to do here. We are constantly reinventing and going. I think it is fair to say we had no significant changes in the percentage of our business that were men’s, women’s and kids in the last quarter or year-to-date as a representative finish. Obviously some things are changing and women’s taste is changing and our kids business is growing and gaining even more acceptance. The women’s business we are starting to pick up more from our Ecko and fashion brands. The mix with Skechers itself whether it is active or newly designed active or whether sport comes back and whether you call it active or sport, you start to get a fuzzy line to begin with but we tell you that we feel very comfortable. One of our core competencies is to be able to develop and get on new trends but I think if you just move away from one active style that has been in everybody’s conversation and I think of the Ecko brand and the Bebe brand and Punkrose and Skechers and Sport and our women’s USA you will see we still have a very great women’s business that we think will hold market share whether it is in one division or another and will continue to grow as we get through this environment.

Scott Krasik - CL King

On a comp basis looking out, I know you don’t want to give specific guidance, but just seeing the decline that you have seen in some of the big categories you have been selling in for the last 18 months is there any way you can grow next year?

David Weinberg

Sure because we had offsetting increased growth. Remember with what you see as limited growth our wholesale business is only down 5% in a very terrible economic environment and we have had increases in places like Punkrose and Mark Ecko and women’s USA and women’s sport per se. Our men’s business has held up. Our kids business has held up. Our fashion show women’s business has held up. I think it is fair to say that the slow down is no different than what we have seen in the market place and you have to remember we have some hits. We have had some significant size customers like Mervyn’s and Goodie’s sort of disappear and certainly while they were here were downsized from the prior year along with everything else. It takes us awhile to get that business back in the normal channels of distribution. We have historically in the past when big customers have gone away we saw given that customer base change and the strength of the brand and what we see with our divisions growing and our fashion brands growing we will pick up that shelf space and will continue growing and look forward to 2009 as being one of those players that has more shelf space at the end than we had going in.

Scott Krasik - CL King

I know you don’t do this but can you give us any sense either month-by-month or just generally how your sales have trended and any sense of what is going on in October?

David Weinberg

I don’t think we are any different than anybody else. We had a difficult September. The wholesale end started at the end of August and September and October hasn’t been great but I don’t think we are any different than the larger macro picture from what I hear today.

Scott Krasik - CL King

Can you help us understand the tax implications for Q4 whether you expect the tax rate to be for the full year 2008 and also 2009?

Frederick Schneider

27% is what we would suggest you use in your view of what the tax rate should be as we go forward. The 27% is an ongoing rate given our current mix of international and domestic business.

Scott Krasik - CL King

So for Q4 use 27% and ongoing.

Frederick Schneider

Yes. That is what we are telling people to use right now.

Scott Krasik - CL King

It is not as tough a question now because of the market, but I know you haven’t bought any stock back and haven’t used the cash and it didn’t look like such a bad idea at this point. At what point does your stock get attractive to you? I mean it is…I have EBITDA declining next year by 10% plus. It is still trading at under three times EBITDA. Is that an attractive point for you to buy your own stock?

David Weinberg

We continue to talk about that. Actually we think we are smart we didn’t buy it. We have all that cash and not in stock to begin with. We haven’t really sat down and picked a point although one can assume there is a point that exists as we get through this to figure that out. When we get to that point we will certainly make it. Right now we really have no plan. We think there is a lot of opportunities out there. There is a lot of opportunity for us. We hope your EBITDA number is even more conservative than we like but we will see that as we go through. As we get through we will continue to have conversations and we will let you know if anything changes in that.

Frederick Schneider

In this market most companies of our size are being very cautious as respect to their balance sheet and being very careful to manage their liquidity.

Scott Krasik - CL King

Absolutely. Most companies aren’t as cheap as yours.

Operator

The next question comes from Sam Poser - Sterne, Agee.

Sam Poser - Sterne, Agee

On the domestic wholesale can you give us the increase of average selling price or what the changing average selling price in units were?

Frederick Steinberg

Our change in average selling price on a gross basis was about $0.20 to $0.25.

Sam Poser - Sterne, Agee

Units?

Frederick Steinberg

I don’t have that exactly. I don’t’ think it was a significant change. The differential we were down, as we said in the Q we were down about $10-11 million in wholesale and had a $0.25 average price increase so I’ll let you do the math.

Sam Poser - Sterne, Agee

You spoke a little bit about Mervyn’s and Goodie’s. There are a few others that seem to be on the ropes right now. How is that affecting you and how are you handling some of those situations with some of the department stores?

David Weinberg

It is a two-fold thing. We obviously look at every situation as it comes. The fact those were out of business probably cost us about $2-3 million in sales volume we would have had at a lesser volume than we had the prior year for credit reasons and we were going through the DIP and for their own store closures and things like that. It has been one of those quarters where saw the perfect storm. We talked about our overhead and how our overhead had grown through the quarter and you have to remember we also took because of the times an increased provision for bad debt that was $1.8 million more than it was last year so that we think or hope is a nonrecurring expense that goes through. We probably suffered $2.5 million in lost sales by the decrease in currency between July 1 and the end of the quarter suffered by our international sales that have currency risk that was just out there. We had part of our expense increased overall about $1.5 million foreign exchange loss just on converting the balance sheet during the quarter because the dollar got so strong so quickly. That continues. So I think if we put it all together with the weakening environment and the fact there are some risks out there and the fact the consumer stayed back and we have seen some currency reversed we have had an excellent quarter where we had expenses very well in line and gave away some top line, some for expenses, some for general economics and some for credit conditions on our customer base.

Sam Poser - Sterne, Agee

Just to confirm you said the bad debt was a $1.8 million additional?

David Weinberg

Correct. Year-over-year.

Sam Poser - Sterne, Agee

And that was those store closures and what not. That was people just going out on you?

David Weinberg

Well it was a multiple of things. It was partially Mervyn’s. It was partially bad debt. Partially as we go through each of our accounts and do an evaluation of risk for a bad debt reserve. We have had reserves for some debts that are in trouble that may not have physically filed yet or we had to take additional reserves after they filed because the payback environment is less than we had originally anticipated. But we think we got it all. We’re trying to be as aggressive as we can be in have increased our bad debt reserves by $1.8 million year-over-year which covers everything we have seen and all the bankruptcies we have seen. We’ll see what happens as we go forward.

Sam Poser - Sterne, Agee

You have made movements towards Heely’s. Any update on that?

David Weinberg

No.

Sam Poser - Sterne, Agee

We have also heard recently you might be looking for a few new licenses. Are there any of those on the horizon?

David Weinberg

We always have licenses on the horizon. We have constant conversations and constant talk. Nothing we are ready to announce yet. Nothing close enough to announce yet.

Operator

The next question comes from Jeff Mintz - Wedbush Morgan.

Jeff Mintz - Wedbush Morgan

Can you just talk a little bit about how you see the inventory in the retail channel? Do you feel like it is well controlled in terms of what is already at retail?

David Weinberg

From what we can tell obviously everybody is being risk averse when it comes to inventory. Everybody is trying to react and we are talking about our customers as well as our sellers as quickly as possible. We identify them as we go out. Obviously the downturn was slightly higher than most customers anticipated so there are some slight inventory issues. I think in order of magnitude not in styles that are not working. We think we are in pretty good shape. We don’t have anything that makes us nervous from what we have heard from our customers as what we may talk about doing to keep our shelves and keep their turns going up. I don’t see anything significant out there right this minute.

Jeff Mintz - Wedbush Morgan

On the new Merino Valley DC it sounds like you are going to start or you already have started doing capital expenditures for that. What is kind of the status in terms of opening that and getting it up and running? Is that going to be something that will happen in late 2009 at this point?

David Weinberg

We are still scheduled for October of 2009 to go there. What we have been doing is obviously we had to purchase and make commitments to some of that structure that is to go inside because of the long lead times and the fact it has got to be there as the building is ready. As we stand today we have two things going on. One in Belgium and one in the United States. Our building in Belgium is absolutely on time and actually might be early. That will be occupied by the end of the first quarter of 2009. Obviously it has much less TI’s or investments to be made inside. That is auto or what we will see as we go into this. As far as Merino Valley is concerned we still anticipate although we haven’t broken ground yet we are still on schedule as far as our EIR’s are concerned and our plans with the city of Merino Valley and the meetings we have had and we wouldn’t anticipate breaking ground in Merino Valley or moving dirt as they say until the end of December. So we really can’t make any changes to our plan or our plans of occupying the building whether it is earlier or later until we physically break ground and get through all the paperwork at the city and state level. So right now we are still on target as far as we can tell for October 2009.

Jeff Mintz - Wedbush Morgan

On your ad spending can you talk a little bit about what you are seeing in terms of I know you guys aren’t cutting back on ad spending and it sounds like others are. Are you starting to see that in terms of cost for the ad spend? Are you getting more bang for your buck now or do you see that coming down the pipe?

David Weinberg

Like I said this is not a big advertising quarter for us. I’m not really sure how it stands for us. I don’t think it has been a significant change for us in the third quarter because that was committed in advance and our next big commitments won’t be until the first and second quarter. We will have to keep you apprised on that. We have changed our advertising structure by the way. We advertise significantly more in Europe than we did last year and we have taken out the brands we no longer have for next year. I think we are getting more bang for the buck simply because we have got great advertising and our kids business is doing quite well given the advertising. We started putting them on TV in Europe and we are getting great identification for that and great growth for our kids business outside the United States. As I said we always think we get bang for our buck as we advertise it is a good thing but we haven’t seen any significant changes yet in media costs that I can tell. We will keep you apprised and obviously that could change as we go forward.

Operator

The next question comes from Richard [Kine] – Kensington.

Richard [Kine] - Kensington

The $88 million long-term investment, what is that?

David Weinberg

That is the auction rate securities we talked about in the past. They are liquid at the present moment even though we have a commitment from Wachovia which I guess now is Wells Fargo for their conversion in June. Until there is a point of certain fact we have taken the usual accounting guidelines and accounting for them as a long-term asset as if they were a long-term bond because of their illiquidity.

Richard [Kine] - Kensington

But you anticipate getting it back when?

David Weinberg

Wachovia says June they will take them back.

Frederick Schneider

The press release on Wachovia’s web site says they expect to purchase these back in June of next year.

Operator

The next question comes from Adam Comora – EnTrust Capital.

Adam Comora – EnTrust Capital

Last year in the fourth quarter I think you guys generated about $80 million or so of cash and given your comments earlier about starting the work out the inventory in the fourth quarter can you give us any guidelines as to what the cash balance will look like at the end of the year? Do you think it is in that $300-320 range?

David Weinberg

Yes we do.

Adam Comora – EnTrust Capital

What does the total capEx now look like for 2009?

Frederick Schneider

Too early to tell. We have the warehouse in Merino Valley. If that comes on board that would probably, we haven’t given a final number so that aside we are probably talking about 20-25 stores and some IT and some development overseas so probably in the $20-25 million range not counting our distribution centers.

Adam Comora – EnTrust Capital

In terms of total for the distribution centers are you guys comfortable giving out a number yet?

David Weinberg

Not yet. Give us until next year’s first quarter when we see what the scheduling is and what the final costs are going to be and by the end of the first quarter when we announce year-end and the first quarter of next year we will have a better handle on it and we will be able to tell you what that number is going to be.

Adam Comora – EnTrust Capital

One quick clarification on the tax rate. It looks like so far through the nine months the tax rate was about 21%. Now you are saying it is 27% for the full-year which would imply a higher rate for the fourth quarter or are you just saying use 27% in the fourth quarter and for 2009 going on?

David Weinberg

If you listened to Fred’s comments he said $5.5 million or $0.12 was a reversal of a reserve we took last year. If you take out that $5.5 million you will find 27% for the nine months and 27% expected for the year.

Operator

The next question comes from Chris Svezia - Susquehanna Financial Group.

Chris Svezia - Susquehanna Financial Group

On the international piece when you talk about 30-35% in the near-term I was wondering if you could classify what you mean by that. Secondly, just looking at some of these major markets and what is going on in southern Europe, etc. it seems like there is some softening but you guys continue to gain shelf space and continue to gain access to the doors and get product out there. Realistically what really is your pre-line into early next year? Is this still a 20% or so give or take constant currency growth business for you?

David Weinberg

You are talking about international in general or southern Europe specifically?

Chris Svezia - Susquehanna Financial Group

International in general and I was wondering if you could just give us an update into what is going on in Europe.

David Weinberg

I would tell you that Q1 is historically our strongest quarter in Europe and we see no downturn from that nor if you take that 25-30% increase in southern Europe it can certainly be borne out with our increase in backlogs. So that is not an issue. That is obviously our biggest non-U.S. currency marketplace for the time being.

If you go past that and assume that is a basic given that we are going to continue to grow there and that is backed up by our backlogs and our sell throughs with this being our smallest time of the year where we have the small issues out there we think we will be very strong in Q1 next year.

If you take that as a given where the base doesn’t deteriorate at all and you look at how we have grown in eastern Europe and how we have grown in South America and how the potential to sell in our Brazilian subsidiary ,and what our potentials are in relatively new ones like China, Hong Kong and Korea, I would tell you those alone foster a growth rate of 30-35% in the near-term. Barring anything moving out further worldwide than what we see today and how we are growing in our acceptance in the marketplace I would say 30-35% is a pretty conservative estimate but these days you don’t know what is conservative and what is aggressive. What we know today and where our backlogs are and where our sell through and openings in China, Hong Kong and Korea we think that is not even a very difficult number.

Chris Svezia - Susquehanna Financial Group

So is 30% of sales possible for fiscal year 2009? Is that a possibility assuming U.S. wholesale piece is down 3-5%?

David Weinberg

You mean as a whole will we grow 30-35%?

Chris Svezia - Susquehanna Financial Group

What I’m getting at is you have thrown out there this 30-35% of revenue from the international side in the near-term and I’m trying to get an idea if you can put a time frame around that and judging from what you are saying in terms of the growth opportunities that for fiscal year 2009 assuming the U.S. wholesale piece is maybe down 3-5% for the year.

David Weinberg

Well U.S. wholesale is a big piece of pick up. 10% of U.S. wholesale around the world is significantly larger than 35% growth over international. Is it possible in 2009? I think it is certainly possible. Is it the most likely scenario? I would think that is more a 2010 event. By the way we are not all believers that for an entire year that domestic wholesale will decrease. I mean we have some comps in the first half of 2009 but we certainly have much easier comps in the back half of 2009. It doesn’t always assume this will last forever. I think we have great possibilities for the back half of 2009 and I think we will hold our own in the first half.

Chris Svezia - Susquehanna Financial Group

On the distribution centers anything you can put around the facility in Belgium around what that might mean from an efficiency perspective. You are very manually intensive in Belgium and I know you are manually intensive in California as well but anything you can put around in terms of what efficiencies maybe 2009 is too early but what that might yield for you guys.

David Weinberg

It is kind of early to tell but would tell you both distribution centers as we look at them we feel that we will have a net P&L positive once we get over the systems change. Obviously there is a little bit of expense to set them up and you have a double expense but once we get to a running rate which should take no more than we would hope 3-6 months that we will be more efficient and the overhead costs will more than offset the depreciation increase as we put this stuff in and we will have a net positive to the P&L in the very short-term. We think they will be efficient from day one given current volumes and we need an increase in volume to leverage them once the learning factor has passed.

Operator

The next question comes from Kelly Duvall – BB&T Capital Markets.

Kelly Duvall – BB&T Capital Markets

Can you give some quantification on what the foreign currency impact was to the most recent quarter?

David Weinberg

I think we just said that. We think top line sales were decreased by just over $2.6 million and the P&L impact of the foreign exchange change was just over $1.5 million.

Operator

The next question comes from Sam Poser - Sterne, Agee.

Sam Poser - Sterne, Agee

With the credit crisis out there are they affecting your distributors or your international retailers’ ability to get money right now? Do you see that worsening going forward or changing?

David Weinberg

It is very difficult. We have seen a couple of distributors take more time to get LC’s and get their lines in place and they have had to fight for some lines. Nothing of enough significant to impair flow for the time being. So long as there is no worsening I don’t think there is major problems. We have one or two and they are of moderate size that are having problems with bank financing. If it gets worse I’m not really sure. I can’t tell you that. I assume if it gets worse it will get worse for everybody but at the current time it is nothing that would impact our anticipated volumes.

Sam Poser - Sterne, Agee

I just want to clarify; you said I think for next year international growth we should expect to see in the 30% range. Is that ballpark?

David Weinberg

We don’t give guidance that far out so I would never say to expect that. I believe the question was is it possible and I said it is certainly possible and certainly borne out by what we see today but we are not going to go out and give 2009 year forecast right this minute. It should be easy given our new territories and everything like that but it is kind of early to tell.

Operator

Ladies and gentlemen that does conclude our question-and-answer session for today’s conference call. I will now turn the call back over to Mr. Greenebaum for any closing comments.

Andrew Greenebaum

Thank you for joining us again today on the call. We would just like to note that today’s call may have contained forward-looking statements and 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. Thank you and have a great day.

Operator

Ladies and gentlemen this does conclude the Skechers USA Inc. third quarter 2008 earnings conference call. You may now disconnect.

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