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Skechers USA Inc (NYSE:SKX)

Q32012 Earnings Call

October 24, 2012 4:30 pm ET

Executives

David Weinberg - Chief Operating Officer and Chief Financial Officer

Analysts

Jeff Van Sinderen - B. Riley

Sam Poser - Sterne, Agee & Leach

Scott Krasik - BB&T

Christopher Svezia - Susquehanna Financial Group

Operator

Greetings and welcome to the Skechers USA, Incorporated third quarter 2012 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. (Operator Instructions) As a reminder, this conference is being recorded.

At this point, I would like to turn the conference 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 statements involve known and unknown risks, including but not limited to, global, national and local economic, business and market conditions in general and specifically as they apply to the retail industry and the company. There can be no assurance that the actual future results performance or achievements expressed or implied by such forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other reports filed with the SEC as required by Federal Securities laws for a description of 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

Thank you for joining us today to review Skechers' third quarter 2012 results. Net sales for the third quarter were $429.4 million and income from operations was $20.3 million. Net earnings for the third quarter were $11 million, and diluted earnings per share were $0.22 on approximately 49.9 million average shares outstanding.

Our third quarter 2012 sales increased by 4.2% over the same period last year. This was the result of growth in our domestic wholesale, international distributor and company owned retail businesses. We are particularly pleased with our international distributor business as we achieve growth despite the transition of one of our largest distributors, Japan, to a subsidiary which was completed at the close of the second quarter. These improvements were offset by decreased sales in our international subsidiary business which were negatively impacted by the challenging economic environments in Europe, the euro exchange rate, the restructuring of our Brazilian business and labor strikes in Brazil, as well as toning sales in the same period last year.

Third quarter sales and product highlights include 7.2% increase in domestic wholesale revenues with an additional 9.1% of pairs shipped, a 10.9% increase in international distributor sales, a 13.9% increase in domestic and international retail sales, a 22.2% increase in e-commerce sales, the addition of Japan as a subsidiary with three Skechers stores and the launch of Relaxed Fit Footwear for men and the expansion of our performance division with new lines.

The third quarter financial highlights include improved gross margins of 43.7%, reduced selling expenses by $3.6 million and total SG&A expenses by $5.1 million and a strong balance sheet with $307.9 million in cash or approximately $6.17 per share. We believe our performance in the third quarter, improved backlogs and the positive response we are seeing from our retail partners to our product lines are key indicators to the significantly positive trend of our business and the strength of our brand in the fourth quarter and in to 2013.

In our domestic business, third quarter sales increased 7.2% or $11.6 million over the same period last year. This was due to strong sales in our kids and performance divisions and in many of our women and men's lifestyle lines and a 9.1% increase in pairs shipped. This growth also came despite our close out sales in our fashion brands in the third quarter 2011. Excluding our fashion lines, Skechers brands were up $22.8 million or 15.2%.

Along with double digit improvements in our women sport, women's active, kids and work lines, we experienced triple digit growth in our charitable line BOBS from Skechers. The continued sales growth with BOBS has resulted in more than 2 million pairs of shoes donate to children in need around the world. We are also very pleased with the continued demand for our performance division which, for the quarter, was almost equal to the sales for the first six months of the year.

In the performance division, we have built on our initial and successful Skechers GOwalk and Skechers GOrun offering with Skechers GOtrain and Skechers GOtrail, both of which were delivered in the second quarter and a zero drop style Skechers GObionic and the enhanced cushioning of Skechers GOrun Ride both of which launched in the third quarter. We began airing the Skechers GOwalk campaign for back to school and Skechers GOrun Ride was supported by two television commercials. The first featured, career highlights of elite marathon runner, Meb and the second was a sequel to our successful Super Bowl spot and starred a French bulldog, Mr. Quiggly.

We are also extremely proud of Meb's accomplishment at the London Games in August. Wearing Skechers performance footwear, he was the first American to finish and came in fourth overall in the marathon. The growing acceptance of our performance product with the core running community including the influential publication Runner’s World, which named Skechers GObionic Editor’s Choice in the U.K. gives further credibility to our technical footwear. We are looking forward to the launch of the next generation of performance footwear which we will begin delivering holiday 2012.

We supported our lifestyle business with several commercials in the quarter and released Twinkle Toes: The Movie on DVD at major retailers nationwide continuing to grow the popularity of our most successful children's character. To support our new Relaxed Fit from Skechers footwear line, this quarter we began the first of three television commercials. Dallas Mavericks owner Mark Cuban in October, baseball icon Tommy Lasorda will start next week coinciding with the World Series and football legend Joe Montana will follow in November. In addition, we have extended our agreement with Dancing with the Stars host, Brooke Burke, through 2014.

We believe we have been very efficient with our recent marketing campaigns and have been able to create tremendous awareness for our footwear while still reducing our selling expenses by 9.4% to 8% of our net sales. The reception to our new performance and lifestyle product during our buy meetings with key domestic accounts this month has been very positive. We are continuing to update our product divisions and are looking forward to the introduction of some new initiatives in the fourth quarter and in the first quarter of 2013.

In the quarter, our international distributor sales increased by 10.9% while our international subsidiary sales decreased by 14.6% for a total decrease of 8%. We are particularly pleased with the double-digit growth in our distributor business as this increase came without the benefit of any revenues from Japan which fully transitioned from one of our largest distributors to a subsidiary at the end of the second quarter.

The Pan-Asian region is a key driver in our sales growth. In total with subsidiary, JV and distributors combined, Asia is up 35%. The Pan-Asian distributors, Philippines, South Korea, Indonesia, Taiwan and Australia and New Zealand together increased by approximately 21.5% in the quarter. Additionally, our recent joint ventures increased by 25%.

The Middle East also continued to grow and Eastern Europe is improving, although they are still showing some signs of impact from the economic crisis. In regards to our subsidiary business, decline in total sales was due to a combination of several factors. Very difficult comparisons against a record third quarter 2011 for our international subsidiaries, toning sales with higher ASPs in the same period last year, the euro zone crisis and challenging economic environment in the region, the impact of a weaker Euro and labor issues in Brazil.

There were several bright spots in our subsidiary business. First, we are excited about Japan as a subsidiary. In addition, we have taken over three existing Skechers stores and we are looking forward to building our business in the region. Canada and Chile both grew in the quarter and we believe this momentum will continue for the balance of 2012 and into 2013.

Key to growing our brand worldwide is the opening of Skechers retail stores. At quarter end, there were over hundred Skechers stores in our joint venture countries in Asia including those run by licensees and 237 additional distributor-owned or licensed Skechers retail stores around the world. 25 Skechers stores were opened in the third quarter. One each in Costa Rica, Ireland, Hong Kong and Mexico and two each in Australia, Indonesia and the U.A.E. South Korea, one of our leading distributors, opened 15 Skechers stores in the quarter bringing their total freestanding Skechers store count to 72.

Two stores closed in the quarter, one each in Costa Rica and the Baltics. Overall, we are pleased with the direction of our international business especially across Asia and the Middle East. While some countries are still facing economic issues, we believe we are holding our own in the troubled global environment and are seeing signs of improvement in quite a few markets. We are looking forward to receiving the remainder of our spring orders over the next month and are excited to be delivering many of the fresh looks that are now in the United States to countries around the world.

For the quarter, total sales in our company-owned retail business increased by 13.9% with domestic sales improving by 13.2% and international sales by 18%. This was in part due to an increase of 23 domestic or four international stores. For the quarter we had positive domestic comp store sales of 6.3% and international comp store sales were basically flat for a combined increase of 5.5% with gross margins up 230 basis points. At quarter end, we had 346 company-owned Skechers retail stores.

In the third quarter, we opened two stores in Texas and transitioned three distributor owned Skechers stores in Japan to company-owned stores. We closed three stores during the quarter, one each in London, Paris and Salem New Hampshire. Currently in the fourth quarter, we have already opened another store in Texas, a store in Puerto Rico and one in Chile. We expect to open an additional six stores in the fourth quarter.

Before we move on to our financial review, I would like to mention two additional revenue channels. We view Skechers.com, our e-commerce website, primarily as a branding tool that allows us to highlight our marketing, showcase the breadth of our Skechers footwear and direct consumers to the nearest brick-and-mortar location. To further this strategy, we launched an e-commerce site in the U.K. in the fourth quarter of 2011 and in Germany in the third quarter of this year. Though primarily a marketing vehicle, it is also profitable with total e-commerce sales increasing by 22% in the quarter.

Our licensing division is also expanding. We generated $1.8 million in licensing revenue for the third quarter from our many licensing partners which include eyewear, apparel, backpacks, watches and socks, all branded Skechers. Men's and women's Skechers performance and sport apparel are expected to launch in spring 2013.

Now turning to our third quarter 2012 numbers in more detail. As I discussed earlier, third quarter sales increased 4.2% to $429.4 million compared to $412.2 million in the third quarter of 2011. Third quarter gross profit improved to $187.8 million or 43.7% of sales compared to gross profit of $175.2 million or 42.5% of sales in the prior year period. The increase in both growth and gross margin was due to the combination of increased sales volumes, improved quality of inventory and more in-line product as well as strong product sell-throughs in our retail stores.

Third quarter selling expenses decreased 9.4% to $34.4 million or 8% of sales compared to $37.9 million or 9.2% of sales in the prior year. The $3.6 million or 9.4% decrease in selling expenses for the quarter was primarily the result of lower advertising and marketing expenditures from the prior year period.

For the third quarter, general and administrative expenses also decreased to $134.9 million or 31.4% of sales compared to $136.5 million or 33.1% of sales in the prior year. The decrease in G&A was primarily the result of reduced salaries, lower professional fees, primarily legal, lower research and development costs, as well as cost efficiencies in our warehouse and distribution areas due to our new distribution facility.

These decreases were partially offset by increased store operating cost from the additional 27 domestic and international company-owned stores along with approximately $2.5 million of additional depreciation expense and $1.5 million of additional rent expense. It is important to note that our G&A expenses were relatively flat for the second quarter to the third quarter while our sales increased by 12% in the comparable period.

During the third quarter of 2012, earnings from operations increased to $20.3 million compared with earnings from operations of $2.2 million in the third quarter 2011. Net income during the quarter was $11 million compared to net income of $8.3 million last year. Net income per diluted share in the third quarter was $0.22 on approximately 49.9 million average shares outstanding, compared to income per diluted share of $0.17 on approximately 49.4 million average shares outstanding in the prior year. It is important to note that currency translations reduced our net income by $1.4 million during the quarter which reduced our after-tax diluted earnings per share by approximately $0.02.

Net sales for the nine-month period ending September 30, 2012 decreased 12% to $1.16 billion compared with $1.32 billion in the prior year period. Gross profit was $514.9 million or 44.2% of sales compared to $511.1 million or 38.6% of sales in the prior year period. Selling expenses were $103.8 million compared to $128.6 million from last year. General and administrative expenses were $401.2 million compared to $417.7 million from last year. Net income for the nine months was $5.6 million compared to a net loss of $9.8 million last year. Diluted earnings per share was $0.11 on approximately 49.8 million average shares outstanding compared to diluted loss per share of $0.20 on approximately 48.3 million shares last year.

Now turning to our balance sheet which continues to remain very strong. At September 30, 2012 we had $307.9 million in cash or approximately $6.17 per share. Trade accounts receivable at quarter end were $241.2 million and our DSOs as of September 30, 2012 were 49 days versus 53 days in the prior period. Total inventory including merchandising transit at September 30, 2012 was $302.1 million representing an increase of $75.7 million from December 31, 2011 and $63.8 million from a year ago.

Long-term debt at September 30, 2012 was $70.2 million compared to $79 million in the prior year period. The decrease in long-term debt primarily relates to payments made on our distribution facility equipment. Shareholders equity was $916.3 million versus $943.2 million from a year ago. Book value or shareholders equity per share stood at approximately $18.35 as of September 30, 2012. Working capital was $601.8 million versus $523.3 million from a year ago. Capital expenditures for the third quarter were approximately $5.6 million of which $2.2 million consisted of two new store openings and several store remodels.

Our focus for the past year has been on cleaning up our inventory, carefully managing and reducing expenses, returning to profitability, building a reputable performance division and growing our signature Skechers look while branching out into new trend right styles. We are pleased to have achieved these goals but believe this is just the beginning. We are continuing to focus on managing our expenses to profitably grow. We feel we are still in the early stages of our growing performance division. Having Meb, one of the greatest American marathon runners wearing our footwear on the cover of Runner's World this month is a remarkable step for a brand still new to the technical arena. When we look at our shelf room walls, we see both amazing product coming in 2013 and the opportunity to grow further across our diverse account base.

Now in our 21st year we are proud all we have accomplished including a strong profitable third quarter and we are looking ahead to the many opportunities we see. With improved gross margin, a strong balance sheet, the ability to grow in key international markets and product we believe will result in additional shelf space domestically, we believe the positive momentum will continue in the fourth quarter and into 2013.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed with your question.

Jeff Van Sinderen - B. Riley

Let me first say congratulations on the improving trends. David, can you talk maybe a little more about which segments you are seeing bookings up in and how those bookings have trended over the last couple of months? If you can just talk about domestic bookings or versus European bookings, just to give us a little more color there.

David Weinberg

Well, domestic is obviously the strongest bookings piece for us right this minute. It has all the new product and its coming. It's very difficult to segment it down, tell you which ones are not doing well. We are doing well everywhere. Some of them are actually, if you would have thought about it a year ago, it seems surprising its just about every division between performance, active, sport, both men's and women's, BOBS certainly. We don't have very many divisions now that are not booking well.

Now, we are coming off a very weak quarter last year but domestically speaking I don’t think that any of our larger customers that are planning on anything but up double digits both for fourth quarter and first quarter and certainly going through direct into 2013. So domestic will be a stellar performer for us and I think it's just going to start beginning in Q4.

Jeff Van Sinderen - B. Riley

Okay, good. Then, in Europe I know you are up. Obviously, it is tougher. That’s probably the toughest region for you now. Maybe you can just touch on that, if you think? Is there anything there that shows any stabilization in any countries or anything you can point to there?

David Weinberg

Yes, as a matter fact, as we see the booking start to increase in the back half of the year, we think we are going to make some significant progress in the first quarter. England has held up very well for us and in units even though we have lost something in pricing obviously, because the ASPs are down with that product categories and because of currency. They have held their own.

They are actually going to come in quite equivalent on units shipped for this whole year and they have made up a bunch in the back and they will actually have positive backlog going into first quarter. The biggest problem for this year simply because of its size was Germany and they seem to be picking up. They will certainly have a possibility of turning positive in the first quarter against this year which was a more difficult year, maybe even better.

So the to two big countries for us is showing very positive signs in Europe and the rest is, probably as you have imagined, in red. Spain and Portugal, Italy, very difficult for us and I am sure for everybody else. It just is difficult for our retail to take hold and grow, just on a macro piece. But we can grow our Switzerland for us, it has picked up very well. So, the little one. So we think we can actually, if Germany continues this trend would be overall in that slightly next year just for Europe which will make international even more so.

Jeff Van Sinderen - B. Riley

Okay, great to hear. As far as your own company retail stores, maybe you can just talk about what's the driver behind the comps in your concept stores? Is it transactions? May be if there is any product lines to point out there? Any other color you can give us on the retail comps?

David Weinberg

Actually, that too is across the board. While performance performs very well for us because it's front and center and that’s obviously one of the biggest performance in our own stores. We a little bit everywhere. We have sport and active and men sport even our U.S.A picking up, as you could tell, not only were we up over 6% domestically but we had increased margins of 230 basis points.

So that’s like a double hit to the efficiencies and beyond and profitability of the stores and it just gets easier this quarter. There is no one here that doesn’t feel we will have a minimum of low double digit increases through this quarter and it could even be more than that because we are certainly moving along quite well.

Jeff Van Sinderen - B. Riley

Okay, and then finally, I think in the past, I am not sure if have you given this out recently but do you guys have revenue and gross margin breakdown by segment? Maybe I missed that in the press release.

David Weinberg

We do have it. It will come out in the Q but we have our three big segments, both domestic, wholesale, retail and international will be broken out in the Q. It will be up in about a week.

Operator

Our next question comes from the line of Sam Poser with Sterne, Agee. Please proceed with your question.

Sam Poser - Sterne, Agee & Leach

Good afternoon, David. A couple of questions. Number one, can you talk, you rolled through those percentage changes so fast at the beginning, I think that’s why Jeff wanted to get a quick color on them but if you could, they would be greatly appreciated. Number two, can you talk about where you are? Can you give us some idea what you are thinking about for the fourth quarter and where your inventory levels are today because the inventories were up probably a little more than what I would like to have seen but how much of that is shipped given that you are expecting this acceleration in the fourth quarter since the end of the quarter? If you can give us some color?

David Weinberg

Well, yes, we are getting our production in line. I am not sure how to give you all the increases or the percentages that I gave you. I think it is fair to assume and what we will continue into the fourth quarter is that our domestic wholesale was optimal. It was up about over 7%. It was up 15% if you take out the closeouts we did for the non-Skechers brands and we were up 9.1% in pair shipped. So that obviously relates to 30% or 35% decrease in ASPs. Distributor sales were up almost 11% and total retail sales of our own which is our own owned, not the franchises or the other, our owns were up just short of 14%.

So those are the key metrics. I think you will see us building on them into Q4. As to what we are expecting in Q4, its hard to tell and we don’t usually give that much guidance but to give you some color, I was going through the numbers on the street and I think the high number on the street was $340 million and I think I would tell you right now today from my perspective that number is conservative and I think we will be ahead of that. So I think we will above what today is the high number on the street.

Sam Poser - Sterne, Agee & Leach

For Q4, and will you do more retail during the fourth quarter, so should we see the gross margins be better than what we saw? Shall we see like Q2 margins in the fourth quarter, especially now that you have liquidated most of that stuff?

David Weinberg

Well, we still have, I don’t know that it works quite that way. While Q4 is our biggest quarter and we expect some significant increases, our domestic wholesale business will be up significantly more than our retail business, as it's planned right now. So the margins will revert more back to norm because domestic wholesale will be, by far, the biggest unit sales even for Q4.

Sam Poser - Sterne, Agee & Leach

Okay, and one last thing. When you are looking at that $340 million number, do you think it is conservative? Can you give us some idea of how conservative you think that might be? How much more a meaningful number might be?

David Weinberg

It's not enough to give you guidance. I would certainly go into the 370s and 380s. So I would tell you that 340 plus or minus $5 million is probably where I start to think there's some upside to that. If things continue to perform as they have, it's kind of early October, it's not a great retail month. It's hard to tell where everybody is going to need filling. So assuming we don't have any slippage in the domestic retail and from fourth quarter in to first, and without significant movement of first quarter back in the fourth quarter which has happened to us certainly. If we get hot enough then we would be in that 340 give or take $5 million or so.

Operator

Our next question comes from the line of Scott Krasik with BB&T. Please proceed with your question.

Scott Krasik - BB&T

Hi, David.

David Weinberg

Are you in with Sam?

Scott Krasik - BB&T

No, fortunately, we were lucky we didn’t hear the unedited version.

David Weinberg

So you actually won the pool. You were, I guess, the closest one for Q4 revenue so far.

Scott Krasik - BB&T

I appreciate that. Okay, so just looking backwards for Q3 for a second. In gross margin, I just really thought, given the lack of closeout business that you still had, that it could be above 44%. Was that just because international was trending down and domestic was trending up here in the 43%?

David Weinberg

Historically, our domestic is at the lower end of that. So and our subsidiaries are significantly higher than distributors and when you have that switch that something happens and it impacts the margin. I think, also what you have to keep in mind is that our kids business is growing dramatically and it has taken an increased percentage of the amount of about four percentage of the domestic business. So that obviously has lower margins. So growing this business and it is growing well. We had a resurgence of our kids, our girls, our boys and Twinkle Toes very dramatically. I think that carries through even more so into the fourth quarter.

Scott Krasik - BB&T

Yes, I know. We have heard the same. That’s great. On the Q3, the selling, you told us last quarter you thought it would like Q2. It came in about $5 million less than Q2. Is that something you change on the fly? Is that a statement that you don’t think you need to spend at that level? How should we think about that? What happened in Q3 and then also for going forward?

David Weinberg

I think what happens is we gear more and we look at the media spend and while it was down a little bit we left us some wiggle room. I think it was the sideline thing, the tradeshows and in-store and internationally we got some benefit from currency for the advertising we spend that brought it down and kept it within that parameter.

Scott Krasik - BB&T

Then in terms of going forward, obviously, now you are not going to put dollars to it. Do you expect to get leverage on selling over the next few quarters?

David Weinberg

As a percentage. I would tell you, in Q4, we haven’t gone much further than that. Dollar wise, we will probably be up a little bit because we have allocated some money for Japan and that was such a small quarter that it really can't come from anywhere. So we wanted get Japan going. So we allocated an additional, I think $1 million or $1.5 million and that should be the delta for Q4. So obviously the percentages are coming way down.

Scott Krasik - BB&T

Right, and then I think you had said that for some reason there was a comp thing that wasn't recurring in Q4. So your G&A, event though it's usually higher than third quarter doesn’t have to be? Is that still accurate?

David Weinberg

That’s still accurate. What we have is, we put in place about three years ago, a restricted stock plan that we have been amortizing at about $1 million a month. That ends October 31. So we actually have a decrease of the $1 million a month. Now it maybe offset a little bit by some, matching a 401(k) that we didn't do last year and some small bonuses that will lock that but we do have and we will have significantly more volume. So that may increase some of the G&A but we certainly have that flexibility and that head start for Q4.

Scott Krasik - BB&T

Okay, and then just sort of a couple of others. Do big orders visibility to the BOBS for spring '13? How does the BOBS do for the quarter?

David Weinberg

BOBS continues to grow dramatically. I don’t know how else to put it.

Scott Krasik - BB&T

Dramatically is like strong double digits?

David Weinberg

Dramatically is, it could double again next year, if from what we see now, if it continues.

Scott Krasik - BB&T

Well, no, that’s a big thing. Is that a U.S. business? Does that hit internationally?

David Weinberg

It hits in some places. It's not consistent throughout the world. It's biggest certainly in the United States and there are some countries around the world that use it very well and some countries that just don’t. So it's the U.S. with very limited amounts outside.

Scott Krasik - BB&T

And it just doesn’t translate, you are saying?

David Weinberg

It doesn’t translate or its price points are just different taste levels, I guess but we continue to try to bring it out. We think if it catches in the States it will catch overseas very big too.

Scott Krasik - BB&T

All right, and then just lastly, I am sorry, just missed your comments. So Germany, you said, was the biggest drag but you thought that could turn positive in Q1. Your other subsidiary business or subsidiary business in total, were you referring to that too?

David Weinberg

I said for next year, we sincerely turn positive depending on the drag of places like Spain and Switzerland. If Germany picks up and become significantly positive along with England, that’s held up very well, they could the whole European piece up which would, even its relatively flat will have major increases in international because Brazil is starting to pick up with this restructuring, Japan will be there and certainly Canada and Chile are picking up very well and the joint ventures which we account for like subsidiaries are growing and will continue to grow. So we think this will be a very positive time for us next year in international.

Operator

(Operator Instructions) Our next question comes from the line of Chris Svezia with Susquehanna Financial Group. Please proceed with your question.

Christopher Svezia - Susquehanna Financial Group

Just a couple of points of clarification. I will start with asking about the selling spend. You took about $2 million increase, that’s year-over-year, correct?

David Weinberg

He was talking about second quarter or third quarter, I believe.

Christopher Svezia - Susquehanna Financial Group

Okay, but if we look at fourth quarter, last year at $23 million, you are talking about a $2 million increase off of that? Or are you talking about from third quarter?

David Weinberg

No, from fourth quarter, year-over-year.

Christopher Svezia - Susquehanna Financial Group

Okay, that’s what I thought. Then on G&A, just wanted to clear about something. The puts and takes, because last year's fourth quarter, there was so much going on in that G&A number but if you look through Q3 and you did 135, I mean that’s a fair proxy for Q4 when every thing is said and done? As a baseline, assuming 340 in revenues?

David Weinberg

Yes.

Christopher Svezia - Susquehanna Financial Group

Okay, and then gross margins were turning to more normalized levels? That’s 42%, 43%, or is it more 43% and change because you had been doing so much better, the inventory has been clean? Just trying to get a sense what that means.

David Weinberg

It's harder to tell because like I said, domestic is going to grow outrageously significant portion. I would be more in the 42%, 43% range. Maybe 43% and change. It's too hard to tell now exactly what's going to fit where but if you model it up, 43% is not a bad number to use.

Christopher Svezia - Susquehanna Financial Group

Okay, and then you look at the international piece for a second, do you think about the subsidiary business? If Europe continues to be a little bit of a drag as you are going to the fourth quarter, it's not a big number here for Q4 but still the subsidiary piece because of what's going on Japan could be a positive increase year-over-year? Is that fair to say?

David Weinberg

We anticipate our overall international business will be up while I don’t think it will be up double digits, to be fair. I think it will mid to high single digits as an overall basis for international in general.

Christopher Svezia - Susquehanna Financial Group

Okay, and then just when you guys think about and I know you are not going to talk too much about next year if there is so many moving parts but what are the increases as it relates to G&A assuming, throw a number out there, your growth 20% top line growth, you hit $1.8 billion. What are the increases in moving parts on G&A? Is it stores? D&A, maybe incentive compensation, what else is in there? I am just trying to get an idea.

David Weinberg

I think we touched on it. The only big expense items or increases we would anticipate are store growth. If we increase the number of stores that we open from the norm I have of 30 or 35. There maybe some comp increases or comp changes but we don’t have any real structural changes. As we have said in the past, we have no major projects on the drawing board. So assuming it goes as we see it today where the biggest growth will be domestically both in domestic wholesale and our retail domestically, some with comp store gains

We will leverage our distribution center quite well and don't have a lot to add personnel wise. Although given the number of lines we are developing now, we may have some personnel thing and we may have to expand our Q&A and our offices in China but certainly the current structure and the current growth where it is would lead us to believe that we have significant leverage available to us for 2013.

Christopher Svezia - Susquehanna Financial Group

And then when are in this year, where do you stand from of a cash perspective. Is it a 340, 350 number? I am just trying to get a sense.

David Weinberg

It depends how strongly and when inventories stats coming in. I think it's probably not significantly different than our opinion of 315, 325 range.

Christopher Svezia - Susquehanna Financial Group

Okay, and lastly, just on gross margin. This year you had such clean inventories that definitely helped you obviously in the first half of the year. As you think about going forward, retail is obviously your gross margin driver and that has opportunity to improve but can you sustain a 44% level or do we revert a little back in to this 42%, 43% or call it somewhere in the 43% range as we think further out?

David Weinberg

I have said most of the time in the past that we will revert to the main which is 42% to 43%. We haven’t done it yet because we continue to be stronger and bring more product lines into the marketplace that have success than one would anticipate going in: I would have never really thought that BOBS or, and by the by, SKCH Plus 3 was just delivered to our stores and its doing phenomenally well. So we are getting a younger customer with that.

So we are moving and all the pieces seem to be moving very well. So at what point we level out, I am not really sure. Ultimately we will go back to 42%, 43%. It maybe a little later in to next year because as we are bringing this product out its still in very high demand and we are building inventory but we have a lot more of it spoken for as we get into Q1 because we are increasing units and we are trying to increase our production base. So right now I would tell you, we are going to be on the higher end. We ultimately will, but I am not sure it will happen in the next six or nine months.

Operator

Thank you. At this point, we have no further questions. Thank you, and at this time, I would like to turn the conference back over Skechers for any closing remarks.

Unidentified Company Representative

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

Operator

Thank you. This does conclude today's presentation. You may disconnect your lines at this time and have a wonderful day.

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