SKECHERS USA, Inc. Q4 2009 Earnings Call Transcript

| About: Skechers USA (SKX)


Q4 2009 Earnings Call

February 17, 2010 4:30 pm ET


David Weinberg - Chief Operating Officer


Christopher Svezia - Susquehanna Financial Group

Sam Poser - Sterne, Agee & Leach

Susan Sansbury - Miller Tabak

Elizabeth Montgomery - Longbow Research


Good afternoon and thank you for joining Skechers quarterly financial results conference call. 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 for 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 companies fillings 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 operation, and financial conditions.

With that, Skecher's Chief Operating Officer, David Weinberg will begin with prepared comments.

David Weinberg

Thank you for joining us today to review Skecher's fourth quarter and year end 2009 results. As always, we will open the call to questions following our prepared comments.

Fourth quarter 2009 net sales totaled $388.6 million, a new fourth quarter record, and $1.436 billion for the full year. Net earnings for the fourth quarter were $27.9 million and diluted earnings per share were $0.58. For the year ended December 31, 2009, net earnings were $54.7 million and diluted earnings per share were $1.16.

As discussed in our previous 2009 quarterly conference calls, we anticipated that the weak retail environment would negatively impact our domestic and international business in the first half of the year but the second half of the year would be profitable.

This has been the case as we’ve achieved strong momentum and record sales in both the third quarter and fourth quarter. Our record fourth quarter sales are the result of high double digit sales growth in both our international subsidiary and domestic wholesale businesses, high double digit growth in both our domestic and international Skechers retail divisions with combined domestic and international retail store comps up 17.4%, high double digit growth in our e-commerce division, double digit improvement in our women’s, kids, and work divisions with single digit growth in our men’s business, greatly improved gross margins of 48.7%, the result of less closeouts and more in line, in demand inventory combined with strong sell throughs, an increase in pairs sold of 8% and an increase in average price per pair of $5.27 or 27%.

Key achievements for the year include annual sales of over $1.4 billion in a difficult retail environment, domestic and international backlog of 40% at year end, and an improved balance sheet with approximately $296 million in cash and short term investments, representing $6.21 per share and current and on plan inventory to support our new divisions and retail store growth.

Based on our key performance indicators which include backlog of 40%, positive double digit retail comps and strong sell throughs, all of which continue into the first quarter. We believe we will see continued product and brand momentum in 2010.

During 2009, Skechers was a key footwear resource for our retail partners in the United States as both they and consumers gravitated towards a well known brand with compelling product that met their needs in terms of style and price and supported by relevant marketing.

Our domestic wholesale business increased approximately 38% in the fourth quarter and decreased 5% for the year. The improvement in domestic wholesale revenues in the quarter is particularly significant in comparison to the earlier quarters in the year which saw declines of 10% in the third quarter, 20% in the second quarter, and 18% for the first quarter.

The quarterly improvement is the result of strong sales in key Skechers mens and womens lines, the continuing growth of our kids lines, and an average price per pair up 27%. We saw broad acceptance of key new adult styles which increased our SKU position and existing doors and resulted in the opening of new accounts.

We supported our womens and mens lines with print, outdoor, and television campaigns along with grass roots marketing, creating a buzz across America and inspiring considerable press coverage. With the support of numerous TV spots featuring our cast of characters, our boys and girls lines saw double digit improvement.

The 5% decline in domestic wholesale for the year was primarily due to accommodation of the liquidation of inventory at reduced prices in the first six months, the challenging retail environment, and the closing of several fashion brands. The recent reaction by key accounts to our Skechers spring product has been extremely positive during our pre-line meetings over the last five weeks and at the recent trade shows, WSA and FFANY, which leads us to believe our domestic wholesale business will continue to be strong in 2010.

Our international wholesale business improved by 8% for the quarter from the prior year and was down slightly for the year. The challenges to our international business are primarily the result of the overall global economy, particularly the difficulties in Asia and Eastern Europe.

In the fourth quarter, our subsidiary and joint venture sales improved by 86%. This was due to double digit growth in nearly every subsidiary, triple digit growth in two subsidiaries, the transition of Chile from a distributor to a subsidiary in the second quarter of 2009, and the growth of our joint venture operations in China and Hong Kong and the addition of Singapore.

We are particularly pleased with the significant quarterly growth in the UK, Germany, and Canada, our largest subsidiaries. Gains in market share in Spain, France, Italy, and the outlying regions and the steady growth in Brazil which we believe will become one of our largest subsidiaries.

With 10 Skechers stores and a growing account base, we also see Chile as a great opportunity to grow our business in South America. 2010 will be its first full year as a subsidiary and we look forward to building our business in the region. Our international subsidiaries utilize the proven marketing campaigns we have created domestically, often modifying them with certain key styles, particularly suited, and popular in their markets.

Additionally, they will translate our campaigns into multiple languages to support their sales efforts. In 2009, Chile utilized a well known Chilean actress appearing in their print and TV campaigns.

The relaunch of our business in Hong Kong, Malaysia, and Singapore is a joint venture resulting in increased brand presence and sales in the region. In 2009, we added an additional 7 stores in Hong Kong, Malaysia, and Singapore and another 3 in China, with 1 store closing in China bringing our total in the region to 33 at year end.

Later this quarter, the fifth store will open in Singapore and the second in Thailand. In China, we are focusing on increasing our points of sale which are now at approximately 100. Unique marketing with local celebrities is utilized in China, Hong Kong, and other Asian countries where we have established joint ventures. The marketing image reflects the Skechers identity while also embracing the culture in these regions.

Our international distributor business was down by 38% in the fourth quarter and 20% for the year. This was the result of several factors including the transition of Chile from a distributor to a subsidiary and declining economies in several countries, in particular Eastern Europe and Asia.

We have seen improvements in several of these regions including our largest distributor and believe our international distributor business will improve significantly in the second half of 2010. We are excited about our new distribution agreements in Mexico and India, both of which were announced in 2009. India began delivering product in the fourth quarter and we are encouraged by the early sell throughs.

Mexico recently hosted meeting with key accounts and will begin delivering product to the market in mid 2010. Skechers stores are also planned for later this year in Mexico City and Leon, marking our first in Mexico. We believe we have the opportunity to build both strong wholesale and retail businesses in these two important countries and think they will contribute to our international growth and positively impact our business over the next 3 to 5 years.

Many of our key distribution partners continue to open Skechers retail stores in regions where they sell our footwear. At quarter end, there were 112 distributor owned or licensed Skechers retail stores across South America, South Africa, the Middle East, Eastern Europe, Asia, and Australia. 13 new distributor stores opened in the fourth quarter, including locations in Panama, Colombia, Venezuela, Korea, the Philippines, and Ukraine, and 7 stores closed.

This quarter, an additional 6 stores have already been opened by our distributors, including our first in Israel with another 9 planned this quarter. Similar to our company owned stores, these distributor stores serve as marketing tools building brand recognition as well as offer local consumers a more complete assortment of the Skechers brand and products.

The majority of our distributors use the marketing campaigns we create in house to support our brands in their regions, while certain others create ads that reflect the local flavor. Currently, Taiwan, Japan, South Africa, and the Republic of Korea are using the power of local celebrities.

While some of our distributors continue to face challenges due to the tough economic climate in their countries, we believe most will improve their Skechers business in 2010. We believe our subsidiaries will continue to grow based on an improved backlog, reaction from key accounts during January pre-lines, and the broad acceptance of our new product offering.

Over the long term we see many opportunities to further grow our product lines around the world and will continue to focus on improving our existing business and building the brand in promising new areas.

With the relatively recent launches in China, India, and Brazil and continued growth in many key countries, we believe our international business now at approximately 25% of our total will become a significantly larger percentage in the future.

Our combined domestic and international retail sales were up 31% for the quarter and nearly 14% for the year. We realized positive comp store sales of 17% for the quarter and 2.5% for the year. At year end we had 246 company owned Skechers retail stores. In the fourth quarter we opened 2 retail stores including a flagship store in London’s Covent Garden and in Huntington Beach, California.

This quarter we have 5 stores planned to open, including our first in Porto, Portugal and concept stores in Valencia, California and Columbus, Ohio. We are planning to open a total of 25 to 30 stores this year including 3 in the UK, 2 in Canada, and our first 2 in Italy. We are also planning to open our first airport store in Orlando, Florida.

We view our retail stores as living catalogs, a place consumers can shop the largest collection Skechers has to offer in a uniquely identifiable Skechers setting. For this reason they are a tremendous branding and marketing vehicle, key to growing our business in cities or countries where we’re not as widely known or available. Given the profitability of these locations, we plan to continue to grow our domestic and international retail business.

Before we move on to our financial review, I’d like to mention two additional revenue channels: e-commerce and licensing. Though it remains a small part of our total business, our e-commerce revenues improved significantly for the quarter and the year. We are investing in improve software and redesigning the shopping experience to be more user friendly and pleasant for consumers. Like our retail stores, is an opportunity to see a very broad range of merchandise for men, women, and kids, and to speak directly to the consumers through social networking and emails.

We plan to continue to grow this business in the United States and possibly overseas. Through selectively licensing our name and images, we will be able to extend our brand reach into new categories, making it eventually possible for men, women, and kids to dress head to toe in Skechers.

We are excited about the launch of our Skechers kids apparel this quarter in the United States and a global launch of Skechers eyewear later this year. We are in the process of signing additional agreements for several other categories and believe they will continue to profitably build our brand.

Now turning to our fourth quarter and year end 2009 results in detail. As I mentioned earlier, fourth quarter sales were a record $388.6 million compared to $298.1 million in the fourth quarter of 2008. The 30% increase in fourth quarter revenues was driven by significant growth within our international business and double digit growth in many markets including our retail channel as well as our online business.

For the year ended December 31, 2009, net sales were slightly down at $1.436 billion compared with net sales of $1.441 billion for the prior year. Fourth quarter gross profit was $189.3 million or 48.7% of sales compared to last year’s gross profit of $95 million or 31.9% of sales.

The nearly 17 point increase in gross margin percentage was due to a variety of factors including significantly less close outs, strong product sell throughs, and higher initial margins during the quarter. Gross profit for the year was $621 million compared to $595.9 million in the prior year, and gross margin for the year was 43.2% in 2009 compared to 41.4% for 2008.

Fourth quarter selling expenses were $31.4 million or 8.1% of sales compared to $21.9 million or 7.3% of sales. The increase in the dollar amount of selling expenses for the quarter was mainly the result of increased marketing expense associated with some new product categories. For the full year 2009, selling expenses were $129 million or 9 of sales compared to $126.9 million or 8.8% of sales in 2008.

For the fourth quarter, general and administrative expenses were $116.8 million or 30% of sales compared to $109.1 million or 36.6% of sales for the fourth quarter last year. The increase in G&A expense was primarily due to increased store count, increased expenses in our foreign operations, and a return to year end historical employee incentives and benefit programs.

However, on a percentage of sales basis, expenses were down significantly. Total G&A expenses for 2009 were $421.1 million or 29.3% of sales compared to $413.6 million or 28.7% in 2008.

Total operating expenses for the fourth quarter were $148.2 million or 38.1% of sales compared to $130.9 million or 43.9% of sales in the fourth quarter of 2008. For the full year 2009, operating expenses were $550.1 million or 38.3% of sales compared to $540.5 million or 37.5% of sales in 2008.

Given the net addition of 22 retail stores including 10 already existing locations in Chile and several new international initiatives such as Brazil, Chile, Hong Kong, and China, we feel that we’ve done a solid job managing our costs while still positioning the company well for the future.

During the fourth quarter of 2009, we saw income from operations grow to $41.7 million, an increase of over $76 million from a loss of $35.1 million for the same period a year ago. Net income for the fourth quarter was $27.9 million compared to a net loss of $20.4 million last year.

Net earnings per diluted share in the fourth quarter of 2009 were $0.58 on approximately $48.3 million average shares outstanding, compared to a net loss per diluted share of $0.44 on approximately 46.1 million average shares outstanding during the fourth quarter of 2008.

Income tax expense was $12 million during the fourth quarter of 2009 as compared to a tax benefit of $12.9 million during the same period last year due to an advanced pricing agreement reached with the Internal Revenue Service.

Net income for 2009 was $54.7 million versus net income of $55.4 million in 2008. For fiscal year 2009, diluted earnings per share were $1.16 based on 47.1 million weighted shares outstanding versus diluted earnings per share of $1.19 based on 46.7 million weighted average shares outstanding in the prior year. Income tax expense was $20.2 million compared with $7.3 million in the prior year.

Turning to our balance sheet, which continues to remain very strong. At December 31, 2009 we had $295.7 million in cash and short term investments or $6.12 per share which should provide us with sufficient capital for our many exciting initiatives and to fund our planned future growth.

[Traded] accounts receivable at quarter end were $219.9 million and our DSOs at the end of December 31, 2009 was 50 days versus 43 days in the prior year. Total inventory including merchandise in transit at December 21, 2009 was $224 million representing a decrease of $37.2 million from December 31, 2008. We believe our inventory is clean and well positioned for the remainder of 2010.

Working capital increased $558.5 million versus $413.8 million at year end. Long term debt was $15.6 million. Shareholders’ equity increased to $745.9 million versus $668.7 million at December 31, 2008.

Book value or shareholders’ equity per share stood at approximately $16.10 as of year end. Capital expenditures for the fourth quarter were approximately $4.1 million which primarily consisted of 2 new store openings and several store remodels and $0.5 million for warehouse equipment for our new distribution center.

Capital expenditures for 2009 were approximately $35.3 million which primarily consisted of 22 new store openings and several store remodels, corporate real property purchased, and in improvements for our new corporate headquarters and $19.9 million for warehouse equipment for our new distribution center in Rancho Belago, California.

Excluding the distribution center equipment and building which we now expect to be spread over the second half of 2010, we expect ongoing capital expenditures for 2010 to be between $15 million and $20 million.

2009 began as a challenging year for us as we faced a difficult economy but it evolved into a dynamic year for Skechers as we developed unique, well accepted, fresh product and launched new initiatives supported by strong execution and our global infrastructure.

This approach resulted in significant growth in the second half of the year with record third quarter and fourth quarter and relatively flat annual revenues. We also improved our gross and operating margins meaningfully in the fourth quarter due to our ability to manage our expenses and inventory, deliver more in line goods, and the strength of our increasingly global retail business.

Our focus in 2010 is on delivering strong product and marketing, coupled with inventory and expense management, and growth in our domestic, international, retail, and e-commerce distribution channels. We are continuing to develop exciting new product, much of which will be launching in spring and fall of this year and believe that consumers will embrace these new styles.

Our new initiatives are allowing us to grow our presence in existing accounts and to expand it to new channels in the States and overseas. In regards to international, we will focus on developing our new distribution businesses in India and Mexico as well as build our joint venture operations in Asia.

In 2010 we will expand our store base with another 25 to 30 stores planned for the year, including 5 international locations and we are in the process of redesigning our e-commerce website with enhanced and more efficient software while exploring the possibility of launching e-commerce in select international markets where we handle the distribution of our product.

To accommodate this growth, in 2009 we expanded our European distribution center by 250,000 square feet to an adjacent parcel next to our existing facility in Liège, Belgium. For our US distribution facility, we will transition from 1.6 million square feet of distribution space across 5 buildings in Ontario, California to a more efficient, automated, single 1.8 million square feet facility in Rancho Belago, California.

We expect to break ground in the first or second quarter in what will be one of the largest LEED certified buildings in the United States and expect to have the new distribution center operational in 2011. We believe that back to back record quarters and significant growth in our domestic and international subsidiary businesses is the beginning of a very strong trend.

Based on the reaction to our product at our recent domestic and international meetings with key accounts and distributors, as well as our key performance indicators which include continued healthy in domestic backlogs of 40%, and positive retail accounts and strong sell throughs. We expect to see ongoing product and brand momentum through 2010 and beyond.

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from Christopher Svezia - Susquehanna Financial Group.

Christopher Svezia - Susquehanna Financial Group

First on the back log up 40%, how much of your business right now after everything you’ve gone through, are you doing now on a backlog basis? In other words, if you have a retail business of let’s call it 25%, I’m just curious, how much of your business, book based upon those backlogs at this point?

David Weinberg

You’re saying if there was a change in the break down between our [inaudible] components and our back logs?

Christopher Svezia - Susquehanna Financial Group

In other words, is it now 65% of your total business now done based upon your backlog or just trying to get an idea of where that is.

David Weinberg

In fourth quarter actually there wasn’t a significant change. We actually had a high or maybe even slightly higher [at lunch] business. We’re not obviously going into first quarter with this back log and there still remains demand for the product, so I’m not sure how it will end up but I don’t believe there’s going to be a significant change in that structure of the business.

Christopher Svezia - Susquehanna Financial Group

Now that you’ve done [inaudible] lines in a lot of key accounts, how have your back logs looked just directionally, have they continued to accelerate, have they been pretty stable relative to that 40% as you’ve gone into the first quarter?

David Weinberg

I think as we indicated in the prepared remarks, they’re accelerating as we go into first quarter so they’re increasing significantly from that, using 40% as that baseline for December 31.

Christopher Svezia - Susquehanna Financial Group

On the gross margin line, how should we be thinking about that as we move forward? Obviously you’ve cleaned up a lot of inventory, inventories are down and you have a 40% backlog and increasing, are you short product, are you just being a little bit more efficient, do you have less closeouts? Talk to us about how we should look at inventories and gross margin rates as we go out to 2010.

David Weinberg

I never know how to answer that question. I think our inventories are in great shape. I don’t believe we’ve missed any significant sales. Our backlog growth as it grows from the end of the year to the first quarter is as much a statement of future, second and third quarter, as much as it is [inaudible] once pipeline. Obviously as we move forward, I think our margins obviously will come back more in line with historical perspective if we build inventory and as lines change and if there’s closeouts and depending on new product offerings and their initial margins, but I would say that’s a future event.

That’s something to speculate about. There’s nothing that would indicate a significant change other than like we talk about always, a structure of the business, as the kids business starts to grow faster or retail grows faster or distributors grow faster than subsidiaries, it will change that slightly, but other than that, there’s no indication that there’s going to be a significant down draft for margin. Certainly not in the first quarter.

Christopher Svezia - Susquehanna Financial Group

[inaudible] first half, you’ve gotten the comparisons from last year if you look at a 46% or 47% gross margin rate, wouldn’t be out of the realm of possibility?

David Weinberg

I think that would be quite in the realm of all possibilities.

Christopher Svezia - Susquehanna Financial Group

As you look at second quarter, I know it’s further down the pipeline, but in terms of the product that you have, turnouts in what you’re doing and the Shape Ups, your kids business, your mens business, work business. Typically second quarter has been a tougher quarter for you guys seasonally. How do you guys think about second quarter now that you’re as strong as you are, your backlogs are in the shape that they’re in. Could second quarter finally be a strong quarter? Could we potentially see that strength continue into the second quarter? I know there’s been shifts because of back to school but I’m just kind of curious how you’re looking at the second quarter at this point.

David Weinberg

It’s kind of early and we’re not as taken with June/July shift as you guys are because of the quarterly reporting, but it looks now that as we’re continuing to build inventory into Q2, we certainly will show increases in Q2 and the question of how good can Q2 be this year, I think is an order of magnitude one and I think it’s too far ahead.

We’re showing a big piece of the increased back logs are for Q2. They’re certainly not all for Q3 so there will be significant increases. We have the shift of Easter I believe into April this year so that bodes well for Q2, and our distributors are figuring to increase as we go into Q2, now Q2 is historically a strong quarter for them, and as we get out of our doldrums and our backlogs with them pick up, I believe, I don’t know if that’s a true consensus, but I believe we’re going to have a good fourth quarter.

Like I said, it’s an order of magnitude issue. It’s certainly not going to be Q1 or Q3 but I think we’re going to have a very solid Q2 as its building up right now as we go through this whole new product cycle.


Your next question comes from Sam Poser - Sterne, Agee & Leach.

Sam Poser - Sterne, Agee & Leach

I just missed what you said about the domestic wholesale business, it was up how much in the quarter?

David Weinberg

It was up double digits.

Sam Poser - Sterne, Agee & Leach

You called out a number in the prepared remarks.

David Weinberg

I don’t remember what it was. I think it was 38%.

Sam Poser - Sterne, Agee & Leach

When you’re talking about Q2 and the revenue in Q2, you’re talking about in absolute dollars [what we saw] but the increases could still be there, correct?

David Weinberg

Absolutely. Increase is actually because it’s a smaller base, could have equivalent percentages or more.

Sam Poser - Sterne, Agee & Leach

When we’re looking at the year, do you think, you had a 30%+ increase in the fourth quarter, could we be looking at those kind of run rates right now given the 40% increase in backlog and the momentum of the brand, are we looking at that kind of potential increase or even better going into the first half of the year?

David Weinberg

A 30% increase in the first half? Or did you say the whole year.

Sam Poser - Sterne, Agee & Leach

Whatever you want to talk about.

David Weinberg

I think it’s obviously easier to plan on the first half as it’s such easy comps. When you’re talking the whole year, that’s a significantly larger number. I guess of $1.4 billion, if you’re up 30%, you’re up $420 million. That gets to $1.85 billion which is higher than anybody would be comfortable with. If you’re asking me if it’s possible, I would tell you certainly it’s possible because we don’t know the magnitude. We have a lot of new product out there that’s testing so well we don’t even know the size or order of magnitude, it’s kind of too early to commit that I would tell you yes.

For first half, when you’re only talking about $650 million to [inaudible] up to $200 million, yes, I think that’s very doable. That might even be a little conservative.

Sam Poser - Sterne, Agee & Leach

Since nobody’s asked about the Shape Ups, when do you launch the extended fit products?

David Weinberg

I don’t know if we’re making any announcements on the launches. We’ll be delivering new product as we said starting at the end of Q1, early Q2, all ready for back to school.

Sam Poser - Sterne, Agee & Leach

What categories are giving you the biggest momentum right now, if you could break it out. You talked a little bit about kids. I know you broke it out, the whole Shape Ups group into a separate area. Can you give us a little bit of detail on how you’re looking at some of those different businesses going forward?

David Weinberg

The Skechers businesses, mens, womens, kids, and all the derivatives, so mens sport, womens sport, active USA, if you look at our current backlogs, there’s not one of them that’s not showing increases or significant increases year-over-year. One is only an order of magnitude and some are more developed businesses and some not but I would tell you that the opportunity for us is across the broad spectrum of the whole Skechers family which makes it so exciting for us right now. There’s no place that doesn’t have significant potential, that could move the needle both domestically and worldwide.

Sam Poser - Sterne, Agee & Leach

With the potential of very large growth of gross margin into 2010, again, could you foresee doing like a 47% gross margin for the full year 20?

David Weinberg

Sure. I could. I don’t know what’s happening in the back half yet but if I use my crystal ball I could certainly see it.

Sam Poser - Sterne, Agee & Leach

You’re comfortable on a 47%, 48%, for the first half based on what happened in Q4?

David Weinberg

I would say those are the numbers I would use personally to model more towards the 47% than the 48% because we are moving into stronger times. There will be some closeouts and there will be some new product that’s hitting and sandals are a bigger hit as part of spring so there’s potential for some hit on the initial margins as sandals are a more seasonal kind of business but certainly in that 47% range I don’t have any issues.

Sam Poser - Sterne, Agee & Leach

How should we be looking at SG&A and your selling expenses and marketing and so on?

David Weinberg

That’s still something to be decided. We obviously kicked up advertising at the end of Q4 with tremendous, tremendous results. I can’t even begin to tell you how well the advertising campaign at the end of December and the Super Bowl ad worked from the spikes we saw from orders on our own online sites, from what anecdotally we’ve heard from our customers, so obviously we are continuing to remain advertisers. I would say the real dollar advertising spend is obviously increasing, the percentage probably not as much. We might have slightly higher percentage advertising as we go through this year when we evaluate what we think we need on a worldwide basis. There should be as there was in Q4 significant leverage opportunities on the G&A line because obviously with such a big price per pair increase, the number of pairs moving is certainly leverageable in our system both domestic, international, and at retail. So we’ll get that and I think it’s no different than what you saw in Q4 between the two lines broken out.

Sam Poser - Sterne, Agee & Leach

Once you get the new distribution center up and running in 2011, if you could pull that into 2010, if it was working right now, how much do you think that efficiency would potentially add to the kind of numbers you’re looking at, especially on the G&A line?

David Weinberg

We anticipated, and we’re going to have to go and redo these numbers, it’s been a while, but we anticipate at the current levels of distribution, the current number of pairs moving through the system, that we will initially get savings even net of the new depreciation charges of somewhere between $6 million and $9 million a year.


Your next question comes from Susan Sansbury - Miller Tabak.

Susan Sansbury - Miller Tabak

I guess a specific question about Shape Ups and your other new product categories. Is this business big enough now to have been instrumental in moving up your average unit retail that you specified in the fourth quarter and could you shed any light on how much you expect to average unit retail to go up this year as a consequence of having this new business grow as a percent of total?

David Weinberg

I think in the first quarter they’ll be close to what they were in Q4. If you go back to the original part of the question, I think that certainly a contributing factor to the increase in unit pricing I think closeout is a significant piece as well. The lack of closeout, the lack of old inventory, new product offerings that are selling well in the marketplace and average unit increases not only in one division but most of our divisions with the new product has slightly higher average pricing.

So all of those are contributing and all of them moved the needle, including the new category. I think the same holds true for the first half at least, obviously they’re tougher comps in the back half. I think there’s still significant opportunity in Q3.

We’re booking well and had while we had a very good Q3 this year, obviously the toughest opportunity is in Q4, but given the strength of our product, I think what you’ll see is not quite as much unit price increases as volume increases as you get into Q4 and the product takes hold around the world.

Susan Sansbury - Miller Tabak

Is there any order of magnitude, your way to describe how much closeout or markdown inventory or clearance inventory, how much it was down in fourth quarter and for the year?

David Weinberg

It’s difficult because we have to quantify closeouts in different ways. I would say off price merchandise sales in fourth quarter as compared to fourth quarter last year was down probably, and I’m guessing now, probably somewhere between 60% and 75% and last year was a big obviously close out book in fourth quarter and first quarter and this year it’s almost de minimus, it’s very small amounts, some here and there and some fashion brands that were moving around, so the differential is significant.

Susan Sansbury - Miller Tabak

You said if the business continues to strengthen, you will build inventory, and as a consequence, there will be more clearance inventory, but do you have any plans in place to strategically keep a tight rein on that or do you have new planning and assortment systems in place that will allow you to reduce cycle time? You said that you intended to do more in line business. Can you give me any description?

David Weinberg

We haven’t changed significantly. We’re not looking to take on risk and build inventory out of hand to try to capture that marginal sale at the end of the story. I think during a normal cycle, that’s where a bigger company and bigger offerings, you will always have colors that have to close out and new product offerings and new products that replaced old products even within the existing categories, so as you get into that cycle and it gets mature, you’re always going to have a little more closeouts.

We’re not planning on building any more significantly than any time in our past, it’s just part of a normal cycle as you clean out things. You have to remember, this cycle is brand new and comes from an over exuberant cleansing process that happened last year in fourth quarter and first quarter so we think we’ll get back to normal.

It’ll take a while simply because we developed so much good merchandise that it’s taking longer to reach its point in the market cycle. We just haven’t reached the peak of saturation or anywhere close to saturation in most of our categories as we go through Q1 so it’s hard to tell how long that cycle will take to unfold.


Your next question comes from Elizabeth Montgomery - Longbow Research.

Elizabeth Montgomery - Longbow Research

When did the Shape Ups business really start taking off for you guys and have you seen any sign that some of the other companies that are trying to get into this space might be really, certainly not taking market share from you guys, but might be becoming more competitive with you?

David Weinberg

It’s tough to answer. We still think the category is still beginning. It’s only the start of a lot of that category and a lot of the categories in our mends business and our kids business. They’re all just beginning. We’ve only been at this, developing new products, since third quarter and fourth quarter so we’re very early in most of that cycle and developing new product anyway.

As to how well the competitors are doing, there’s always competitors. Unless I know exactly what or how big the categories are, so I know what piece we’re anticipating taking or what size, I know the category for us is bigger than we anticipated and that’s true of all.

Even our kids business is much bigger than what we anticipated six months ago. So there’s always competitors and they will always have a piece but we think we’re right in the heart of all our product offerings and it should do very well over the next six months.

Elizabeth Montgomery - Longbow Research

Internationally, are you distributing Shape Ups internationally? I would think that category internationally is still extremely small.

David Weinberg

It’s smaller and certainly newer. We usually have internationals run about 6 to 9 months behind what we do in the United States. You can use your own timetable and realize it’s even more at the beginning of that process outside the United States.


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

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