Andrew Greenebaum - Investor Relations David Weinberg - Chief Operating Officer and Chief Financial Officer

Corinna Van Der Ghinst - Citi Jeff Van Sinderen - B. Riley & Company Jay Sole - Morgan Stanley Scott Krasik - Buckingham Research John Kernan - Cowen & Company Corinna Freedman - BB&T Laurent Vasilescu - Macquarie Jim Chartier - Monness, Crespi, & Hardt

Greetings and welcome to the Skechers USA Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to SKECHERS USA. Thank you. You may begin.

Thank you everyone for joining us on Skechers’ conference call today. I will now read the Safe Harbor statement. Certain statements contained herein, including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statement involve known and unknown risks, including, but not limited to, global, national and local economic, business and market conditions in general and specifically as they apply to the retail industry and the company. There can be no assurance that the actual future results, performance or achievements, expressed or implied by such forward-looking statements, will occur. Users of forward-looking statements are encouraged to review the company’s filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by Federal securities laws for a description of other significant risk factors that may affect the company’s business, results of operations and financial conditions. With that, I would like to turn the call over to Skechers’ Chief Operating Officer and Chief Financial Officer, David Weinberg. David?

Good afternoon and thank you for joining us today to review Skechers’ second quarter 2016 financial results. We achieved a new second quarter sales record of $877.8 million, an increase of 9.7%, which resulted in a new fiscal first half net sales record of $1.86 billion. Our growth in the quarter was primarily the result of net sales increases in our worldwide company-owned retail stores and our international business, specifically in our subsidiary and joint venture distribution channels. This growth also positively impacted our gross margins in the quarter, which were 47.4%. Our international wholesale and retail business combined represented 41.9% of our total sales for the second quarter and 45% for the six months ended June 30. Second quarter highlights include record second quarter revenues, gross margin of 47.4%, diluted earnings per share of $0.48, a strong balance sheet with $628.8 million in cash or approximately $4.06 per diluted share, shipping 8 million plus pairs from our North American distribution center in June, a new monthly record, expanding our European distribution center to over 1 million square feet, a 25.5% sales increase in our international wholesale business, including a 34.6% increase in our subsidiary and joint venture business, a 15.4% sales increase in our company-owned retail stores, which included 85 net new stores opened compared to the prior year period, of which 23 opened in the second quarter, including 12 international stores and growing a worldwide Skechers store base to 1,548 locations, with the opening of 133 net new stores in the quarter, including our first stores in Belgium, Norway and Finland. Last year’s second quarter was extremely strong. And this year, we had second quarter shipments pulled forward into the first quarter of 2016, which significantly reduced our domestic wholesale shipments for April. International has the largest gains in the second quarter with our subsidiary and joint venture business growing by 34.6% and our Skechers International retail business increasing by 40.5%. Further, June was a record shipping month in our North American distribution center, which distributes our product across the United States and Canada. June was also the strongest month in the second quarter for our newly expanded European distribution center. Of note, our diluted earnings per share for the second quarter of 2016 were negatively impacted by several factors, including foreign currency translation and exchange losses of $8.3 million or $0.05 per diluted share. In addition, we had G&A expenses for additional VAT taxes in Brazil of $2.7 million and a fire in our Malaysia warehouse, which resulted in a pre-tax loss of approximately $900,000. These factors reduced diluted earnings per share by $0.02. In addition, our annual effective tax rate for the second quarter was 12.7% and 18.1% for the first six months. The annual effective tax rate is significantly lower than our previous guidance primarily due to reduced projected domestic earnings combined with increased projected earnings from our China operations, which has a lower tax rate than our U.S. effective tax rate. Although U.S. retailers are currently in a promotional retail environment, we believe we are a trusted and reliable brand for our customers and consumers who seek comfort, quality and style in their footwear. We look forward to maintaining our position as a brand leader and further growing our market share around the world. Now, turning to our business in detail, our domestic wholesale net sales decreased 5.4% in the second quarter, which is attributable to the significant pull forward of orders into the first quarter this year as well as the challenging and promotional retail environment, which included closing of some account doors and a surplus of product in the marketplace. Net sales were down 25% in the month of April due to the shift, though we were up 6.5% in June and only down 5.4% in total for the quarter. For the first six months of 2016, our domestic wholesale business increased by 3.2%, a further indication of the strong first quarter from our domestic business. Even with the decrease in domestic wholesale, we saw growth in our Kids division as well as Women’s Active and Sandals and Men’s Sport, and Men’s and Women’s On The GO and Work. For the spring selling season, we ran numerous marketing campaigns supporting our brands, including campaigns with Demi Lovato, Brooke Burke-Charvet, Sugar Ray Leonard, Kelly Brook and Meghan Trainor, which featured her hit song, No. These commercials as well as ones for women sandals and our sport division supported our many key lifestyle initiatives. In support of our kids business, we ran multiple animated and live action commercials, including a commercial featuring lightweight sport footwear geared toward tweens. For our Skechers’ performance division, we ran several Skechers GOgolf commercials featuring our roster of four professional golfers, Skechers GOrun commercials with Meb and Kara Goucher as well as one for our successful GOWalk division. We are looking forward to the Olympics this summer as Meb will be running in Skechers Performance footwear with the intent to again win a medal in the marathon for the U.S. while Matt Kuchar will be wearing Skechers GOgolf as golf returns to the Olympics. In support of back-to-school, multiple new boys and girls Skechers Kids commercials are already airing to support our many new styles for younger and older kids, including new S-Lights and Skech-Air for Boys. Within a few weeks, we will begin airing our men’s and women’s campaigns, including new commercials with our team of ambassadors as well as two new commercials with football legend and sports analyst, Howie Long. We are also excited that both Meghan and Demi have begun their summer tours in the U.S. and Canada and that Howie will be on air when the NFL preseason starts in August. With a new record shipment month in our North American distribution center in June, which is largely comprised of shipments to the United States, some positive and anecdotal trends and sell-throughs, including that of our leading online account, we believe we are maintaining our position in the domestic marketplace, which is being impacted by both the political environment and an excess of sale price product. As in the first quarter, international wholesale achieved the highest percentage in dollar increase of our three distribution channels. Total international sales increased by 25.5% or $61.6 million in the second quarter and 37.2% and $196 million for the first six months of 2016. The highest dollar and percentage gains came from our subsidiary and our joint venture businesses. Fueling these gains was the shipment of 2.3 million pairs by our China joint venture and 1.4 million pairs by the United Kingdom. As in the domestic market, our international businesses focus on marketing our lifestyle, performance and kids product, with traditional media such as airing on many commercials in their local languages. We also utilize in-store and window displays as well as brand shops and enlist the power of Skechers brand ambassadors and local celebrities, most notably in the UK, as well as in the UK, as well as in the Asian market with a Korean pop group. Further, we sponsor and exhibit at running, walking and sports events, including the Pan-European Ironman, which we sponsor. Additionally, more than a dozen Skechers Performance brand ambassadors will be participating in the Rio games and the entire Belgian team is wearing Skechers in the country’s colors off the field. Also, our growing third-party retail base of just over 1,000 Skechers stores is positively impacting brand recognition and acceptance as the store showcase a more complete offering of our diverse stylish and comfortable footwear collection. Further detailing our growth in international combined, our wholly owned subsidiaries saw net sales increases of 34.6% in the quarter and 48.1% for the first six months of 2016. For the quarter, the highest percentage gains came from Brazil, Canada and France, with Canada also achieving the highest dollar gains with more than 935,000 pairs shipped in the period and over 2.2 million pairs for the six months. After transitioning several distributors in Central Eastern Europe and one in Panama to subsidiaries, we began shipments in the second half of 2015 into these two regions that cover many countries, including 10 key markets. We believe that as we continue to open stores and build our wholesale base, both markets will positively impact our sales in the next couple of years. To prepare for the accelerated growth in Europe, we completed the expansion of our European distribution center to 1 million square feet in the second quarter and are anticipating the automation portion of the expansion to be completed by the end of this year. Having eliminated the operational inefficiencies we noted in the prior year and with the expansion of the third phase last year, we reached a new milestone of more than 12 million pairs shipped out of the EDC for the first six months of 2016. Our joint ventures in Asia grew by 65.5% for the quarter led by high double-digit gains in China and triple-digit gains in India. In China, we opened 42 freestanding Skechers retail stores in the quarter, bringing their total Skechers store count to 233. And we have approximately 1,550 points of sale and extremely strong e-commerce business with high double-digit growth. We believe there is still tremendous opportunity across the country to further build the brand. In India, where our business is in the development stage, we opened seven Skechers stores in the quarter, bringing the total store count to 44. Our international distributor net sales increased by 3.2% in the second quarter and 5.8% for the six months ending June 30. The quarterly growth within our international distributor business was most notably from our partners in Indonesia, Israel, Philippines, Russia, Scandinavia, Taiwan, Turkey, South Africa and the UAE. We are also about to complete an agreement with our distributor in Israel to transition to a joint venture which will give the brand additional support to fully realize the potential in the region. Our distributor sales were impacted by Latin America and Central Eastern Europe transitioning from a distributor model to subsidiaries in the first half of 2015. Along with the thriving wholesale business, most of our international distribution partners have opened Skechers retail stores and we have a growing network of franchised Skechers stores in countries where we handle the distribution of our product. At quarter end, there were 1,002 Sketchers branded stores owned and operated by our joint ventures, franchisees and distributors outside the United States. Of these, 484 are distributor owned or franchised Skechers retail stores and 409 Skechers stores are in our joint venture countries in Asia, including those run by franchisees in the region. Additionally, there are 109 franchised stores in countries where we have subsidiaries. In the second quarter, 120 third-party stores opened including our first in Norway, Finland and Belgium. Additionally, the following stores were opened. 42 in China, 11 in Saudi Arabia, eight in Taiwan, seven in India, six in Australia, five in Hong Kong, three each in Indonesia, Israel, Malaysia and Turkey, two each in Brazil, Portugal and Thailand and one each in Armenia, Bahrain, Canada, France, Hungary, Ireland, Italy, Japan, Kenya, Kuwait, Mexico, Nepal, New Zealand, Nigeria, the Philippines, Poland, Spain, Trinidad, the UAE and Vietnam. 10 stores closed in the quarter. Four third-party Skechers stores have opened in the third quarter to-date and one store is closed. We expect another 70 to 80 third-party Skechers branded stores to open in the remainder of 2016. International wholesale continues to be a key growth driver for Skechers and now represents 34.6% of our total sales in the quarter and 39% for the first six months. Combined with international company-owned retail stores, it represents 41.9% and 45% respectively, bringing it close to our short-term goal of international representing 50% of our total business. We believe there was a tremendous opportunity to continue to grow the Skechers brand around the world as we build our presence through marketing, retail expansion and gaining shelf space within our wholesale accounts. Worldwide sales in our company-owned retail stores increased by 15.4% for the quarter and 18.7% for the first six months, in the quarter, domestic retail sales increased by 8.8% and international retail sales by 40.5%. This included flat comp store sales domestically and a positive comp store sales of 9% in our international stores for a total comp store sales increase of 1.5% worldwide. At the end of the quarter, we had 546 company-owned Skechers retail stores, of which 142 are outside the United States. In the second quarter, we opened 23 stores, including a store in a trendy shopping district of Harajuku in Tokyo, another store in Japan, four both in the UK and Canada and one each in Austria, Poland and Chile. We closed two domestic stores in the quarter. Two stores have opened to-date in the third quarter, one in New York and one in the UK With the strategy of continuing to open retail stores in key global markets to build the brand and meet consumer demand, we plan to open approximately 30 to 35 more stores this year, including a store in the new One World Trade Center. Now turning to our second quarter numbers in more detail, we had record second quarter net sales of $877.8 million versus $800.5 million in the second quarter of 2015, an increase of 9.7%. The improvement was a result of sales increases of 34.6% in our international subsidiary and joint venture businesses and a 40.5% increase in our international company-owned Skechers retail stores. With the international stores, our company retail stores increased 15.4%, which includes a 1.5% increase in comparable store net sales for the quarter. Our sales were offset by a decrease of 5.4% in our domestic wholesale business due to a pull forward of shipments from April into March, resulting in significantly reduced shipments for April. For the first six months of 2016, we saw an increase of 3.2% in our domestic wholesale business and as mentioned earlier, we are seeing positive momentum in July as we experienced our largest shipping month from our North American distribution center in June. Additionally, our European distribution center exceeded its planned shipments for June. Second quarter gross profit was $416.3 million compared to gross profit of $374.6 million in the second quarter of 2015. Gross margin increased to 47.4% compared with 46.8% in the prior year period. The increased profitability and higher gross margins during the quarter was due to a combination of higher sales and strong sell throughs of our products, specifically in our international subsidiary and joint venture businesses as well as our company-owned retail stores. Second quarter selling expenses were $76 million or 8.7% of sales compared to $64.9 million or 8.1% of sales in the comparable prior year quarter. As a percentage of net sales, advertising expenses were 7% and 6.1% for the second quarter of 2016 and 2015, respectively. The $12.7 million increase in advertising expenses was primarily attributable to increased international advertising expenses as we further expand our global presence. For the second quarter, general and administrative expenses were $243.2 million or 27.7% of sales compared to $201 million or 25.1% of sales in the prior year. The year-over-year increase in G&A was primarily due to our increased store count, rent, labor and increased depreciation expenses as well as increased warehouse and distribution cost related to higher sales volume. Due to the increased expenses earnings from operations decreased 10.7% in the second quarter to $100.4 million or 11.4% of revenues compared to $112.3 million or 14% of revenues in the second quarter of 2015. During the second quarter, net income was $74.1 million compared to $79.8 million in the prior year period. Net income per diluted share in the second quarter was $0.48 on approximately 155 million average shares outstanding compared to $0.52 on approximately 154 million average shares outstanding in the prior year period. Our diluted earnings per share for the second quarter of 2016 were negatively impacted by several factors including foreign currency translation and exchange losses of $8.3 million or $0.05 per diluted share. In addition, we had G&A expenses for additional VAT taxes in Brazil of $2.7 million and a fire in our Malaysia warehouse which resulted in a pre-tax loss of $900,000. These factors also reduced diluted earnings per share by $0.02. In addition, our annual effective tax rate for the second quarter was 12.7% and 18.1% for the first six months. The annual effective tax rate is significantly lower than our previous guidance primarily due to reduced projected domestic earnings combined with increased projected earnings from our China operations which has a lower tax rate than our U.S. effective tax rate. Net sales for the six month period ending June 30, 2016 increased 18.4% to $1.86 billion compared to $1.57 billion in the prior year period. Gross profit was $848.4 million or 45.7% compared to $707.1 million or 45.1% in the prior year period. Selling expenses were $129.8 million or 7% of sales compared to $114 million or 7.3% from last year. General and administrative expenses were $485.6 million or 26.2% compared to $398.2 million or 25.4% last year. Earnings from operations for the six months of 2016 were $238.9 million versus $200.5 million for the same period last year. For the six month period, net income increased by 26.4% to $171.7 million compared to net income of $135.9 million in the prior year period. Diluted earnings per share were $1.11 on approximately 154.9 million average shares outstanding compared to diluted earnings per share of $0.88 on approximately 153.8 million shares last year. And now, turning to our balance sheet. At June 30, 2016 we had $628.8 million in cash or $4.06 per diluted share. Trade accounts receivable at quarter end were $468.6 million and our DSOs at June 30, 2016 were 40 days versus 41 days at June 30, 2015. Total inventory including merchandising transit at June 30, 2016 was $590.7 million representing a decrease of $29.5 million or 4.8% from December 31, 2015. On a year-over-year basis inventories were up 25.5% or $120.1 million in line with our growth and higher company owned store count. Given the strength of our global business, brand and strong sell-throughs, we are comfortable with our current inventory levels. Long-term debt at June 30, 2016 were $68.1 million compared to $68.9 million at December 31, 2015. The slight decrease was due to payments in our domestic distribution center. During the second quarter of 2016, we made the final principal payment of $11.6 million on our domestic distribution center equipment loan. Shareholder’s equity at June 30, 2016 was $1.6 billion versus $1.4 billion at December 31, 2015. Book value or shareholder’s equity per share stood at approximately $10.27 as of June 30, 2016. Working capital as of June 30, 2016 was $1.16 billion versus $971.2 million at December 31, 2015. Capital expenditures for the second quarter were approximately $22.3 million of which $11.2 million was primarily related to 23 new company owned domestic and international store openings and several store remodels, $2.5 million for the equipment upgrades and automation of the final phase of our European distribution center and $3.5 million for additional office space needed near our corporate headquarters. We expect our capital expenditures for the remainder of 2016 to be approximately $25 million to $30 million which includes an additional 30 to 35 retail stores opening and the completion of our European Distribution Center automation system later this year. In summary, we achieved a new second quarter net sales record despite a shift in shipments from the second quarter to the first quarter and the difficult comparison against previous record second quarter 2015. The growth in the second quarter is primarily the result of increases in our international subsidiary and joint venture business as well as from our company owned retail business. As mentioned, our domestic business was down single digits in the quarter and at low single digits for the first six months of 2016. As we further build our rank globally, we continue to open retail stores in key locations as do our partners around the world. In the quarter 143 Skechers stores opened bringing our total stores count to 1,548 of which 1,144 are outside the United States. We are continuing to expand our retail base and expect to have more than 1,600 by yearend 2016. Our goal is to continue to develop innovative footwear and remain top of mind and drive purchase intent globally through a 360 degree approach to marketing covering in-store, digital, television, print, outdoor, social media and live events. Looking ahead, we are excited for Meb to again run in the marathon at the Olympics and for Matt Kuchar to compete for the first time. And our many other international Skechers brand ambassadors competing for their country next month at the games in Rio. We have already begun supporting the many new kid styles we have introduced for back-to-school with television and in-store campaigns and we will also be supporting our men’s and women’s styles with numerous new commercials and accompanying campaigns. With our biggest shipping month on record in June of 2016 for our North American distribution center, which primarily serves the United States and Canada and a strong start to July, we believe the third quarter will be a new record for the period. Though we remain cautious about the domestic market with political uncertainty uncertainty and a surplus of promotionally priced footwear, we are confident we will remain top of mind and a go to brand. Additionally, we believe our first and third quarters have the potential to become larger relatively to the balance of the quarters as our international business becomes a greater percentage of our total net sales. We believe our third quarter sales 2016 will be in the range of $950 million to $975 million. And now, I would like to turn the call over to the operator to begin the question and answer portion of the conference call.

Thank you. [Operator Instructions] Our first question comes from Corinna Van Der Ghinst with Citi. Please state your question.

Great, thank you. Hi, David.

Hi.

First, I was just hoping to clarify a couple of things from your comments on the U.S. retail environment. Can you give us more color on the closing of account doors that you talked about and also just you mentioned a couple of times that there was a surplus of product, was that in Skechers product or other brands and kind of what categories are you seeing that in the marketplace?

Well, I think it’s pretty wide now, TSA closed, [indiscernible] closed, Bob went through a bankruptcy they had to clean out inventories. Bob’s was a nice sized customer of ours. We did business with TSA. I think all those closures created excess inventory in the marketplace. We see a lot of sale price product from big brands that are very rarely on sale that impacts consumer shopping habits and trend. The excess inventory in the marketplace was not ours which is why you don’t see as significant discount on our product as itself. So I think it’s a matter of both traffic and the fact that there is excess inventory at lower prices now.

Okay. So, just to clarify, those are basically the same doors that you talked about previously. And then I think you said last quarter that backlog might start to accelerate through the year as you started to incorporate orders for the back half of the year. I am not sure if I missed this, but with the backlogs down low single-digits, can you walk us through what your expectations are for top line growth for U.S. wholesale and international wholesale for the back half of the year?

Yes. I don’t think it’s changed from our last call. I think most of this is a timing issue. I think it’s the way orders are placed as well. When we look at our backlog, just as we shipped very big for June, they are just not out as far, our backlogs are quite nice for July and August and September, of course, is an easier comparison for us, but that will depend on how back-to-school goes. So, we still feel that we will be in the low to mid single-digits growth for domestic wholesale as we get through the back half of the year.

And international wholesale?

That will continue to grow. I mean, that could continue to grow in the 30%, 40% range. A lot of that will depend on currency. It should play – we hate to keep going back to currency as it exists and things change eventually, but the differential in the top line, because the currency changes in those countries, we have significant volume, was about $15 million from constant currency in 2015. So, if you aren’t aware that currency was changing so significantly, that’s a $15 million hit to the top line.

Right, exactly. Okay. And then the updated guidance, did you change your view on the China revenues at all for this year?

No. They are pretty consistent with what we said before. I mean, we are still in the same range.

Okay, sorry. And did you say how much July month-to-date sales are trending?

Both our overall shipments and our comp store sales are higher than we have in our model for those numbers, but it’s very early. The real big piece starts in the next couple of weeks as we get into back-to-school. So, we are off to a good start, but still too early to tell that anything has changed dramatically.

Okay, thank you. I will jump back in the queue.

Our next question comes from Jeff Van Sinderen with B. Riley & Company. Please state your question.

Yes, good afternoon. David, maybe you can just give us a little bit more on kind of the international picture. Obviously, there is Brexit looming in the backdrop and no one really knows kind of how that’s going to play out. But maybe you could just give us kind of refresh our memory on some of the international segments in terms of percentage of your international wholesale business? And maybe speak to the UK concentration in some of the other EU countries. And then also, is there anything you have seen in any of these countries of late since the Brexit announcement in terms of a change in business and maybe touch on what you expect there in UK and EU for that region in the second half?

Yes, I don’t know that I am any smarter than anybody else keeps talking about it. It’s just – I was there for Brexit. It seemed it would have been a bigger deal than it’s shown so far. I think the biggest impact we had was the currency in the UK. I mean, it’s a significant change in a very big country. UK in round numbers, I don’t write them down too specifically, our backlogs in the UK are up 25% in local currency and up high single-digits in U.S. dollars. So, some of those changes are pronounced, but our stores continue to do well. Obviously, there was a hit to the margins, but I think we can get that back over time. And the scores continue to comp up even on a dollar basis, even with that for Europe – for England. In Europe, we haven’t seen a significant change. It’s very – it’s a quiet time for us, while June is the biggest month of the quarter and we shipped well to our expectations. It’s too early. They really get going in August and September. But our anticipation and what we hear for sell-throughs gives us confidence that we continue there and continue to grow certainly on a local constant currency basis and we will continue to grow on a real dollar basis. So, our international business continues. Our Southeast Asia business is doing well. India has actually started to pickup very nicely. And while it’s still small, they are getting close to getting to critical mass, the stores do very well, they are comping, they are profitable and their wholesale business is picking up. So, we still feel very good about our international business just about everywhere.

Okay, good. That’s helpful. And then just as a follow-up maybe, if you can just touch on some of the other metrics that you are seeing in your own retail stores or company-owned retail stores. Just wondering what sort of the backdrop out there, some of the excess product of some of the liquidations and so forth. What kind of your gross margin or your merchandise margin picture look like in your own retail stores and domestic and if you had to be a little more promotional or if you are kind of running flattish promotions and then kind of I guess, what you expect in terms of promotional cadence for back-to-school?

Our gross margins at retail haven’t changed significantly year-over-year. So, there is no new sales posture of trying to get sales by competing in price overall. The only change is maybe somewhat certainly less than 100 basis points within each group and probably more has to do with the changeovers opening more outlets and superstores than it does with the actual gross margin on the footwear and the change of products. So, we are no different than anybody else. April was a very difficult month at retail with the shift of Easter and everybody participated and that’s why we had such a good first quarter. We had very difficult comp store gains. But the strongest month of the quarter for us, both in wholesale shipments and at retail, was June, which is when new product starts to hit. So, we felt very good in the fact that the new product pickup was significant and that’s where we started to churn as the matter of fact. So, embedded in the guidance we have given, we are anticipating a U.S. comp store increase of somewhere between 4% and 5% for the quarter. So, any changes from that could certainly be a positive as we go through.

Okay, that helps a lot. Best of luck for the rest of the quarter.

Thanks.

Our next question comes from Jay Sole of Morgan Stanley. Please state your question.

Hi, David. Good afternoon.

Hey, Jay.

I want to ask you about the G&A. How did the G&A come in relative to your expectation? Was that number higher or lower and what drove that?

It was pretty much to our expectation given the sales volumes, because China increased so much in their manual that comes from there and because so many stores opened in the quarter. We had in excess of 20 store openings. That increases it. The other piece comes from increased depreciation, which is very hard to put in the operating line simply because we get more efficient and we will continue to leverage that as it goes, but when we put the stuff into service before things even out and it tends to impact. So, it’s depreciation, it’s China, it’s also some of the new territories, we have gone to Central Eastern Europe and into Panama, which has most of South America for us and opened about 12 stores there. So, that all increases it. So, I think we are in pretty good shape as far as G&A is concerned. It’s growing where we would anticipate it grow as the volume grows. The biggest leverage point we have is the U.S. So when that flattens out some, it’s more difficult to leverage the balance of the world, although we get into there in a lot of places or getting better at it certainly in a lot of places. So, I think it’s where it’s supposed to be. Part of the selling expense as you go through the whole thing in the second quarter was just a shift, because we are doing more international, which is more second quarter specific rather than first and third, which we use to do more of in the U.S. It’s just the timing issue there.

Okay. And then maybe just to shift to inventory, obviously there is a lot of inventory out there in retail broadly. How long do you think it takes for the inventory, the entire retail channel to get clean?

Well, it depends on how retail does in general. But I would certainly hope that it would be done before we get too far into back-to-school. I am not sure what was in the pipeline for all these guys that left that can’t be replaced. I don’t think people are pretty uncertain as to what would happen to TSA and how many stores would actually close. So, I am not sure what the inventory commitments were, but I certainly hope that by the end of back-to-school, at the latest, we will be in a clean environment.

Okay, got it. And then maybe on tax rate, how do you anticipate the tax rate develops over the rest of the year? Will it go back to where it was? Do you think that this is kind of – this can be closer to the rate that we are at in 2Q?

Well, no, it won’t be the 2Q rate. It will be the running rate for 2Q which was about 18% which in the Q, you will see it’s between 17% and 22% is what our calculation is. The big piece is that we got very favorable tax rulings in China for one of the provinces and obviously that’s a big moneymaker. So, that differential and the U.S. earning less than international has taken our tax rate from what we thought was going to be 23% plus to probably somewhere in the 20-plus range. So we will – we should keep down at least 300 basis points in the tax rate as we go through the third quarter.

Okay, got it. And maybe just one more for me, just can you talk about GOWalk 3 and how that ended up and what the outlook is GOWalk, if there is anything from a fashion perspective that maybe impacting the numbers one way or the other?

I am not sure, there may be some fashion shifts, obviously some people doing better if you look at the weekly numbers than they have in the recent past, GOWalk 3 were transitioning into GOWalk 4. So it’s basically at the end of its big run. It slowed down a bit at the end. I think part of that is the advent of GOWalk 4 and some of it was the pricing in the marketplace. But I think the transition now is going smoothly and we are getting very good results on the GOWalk 4, even given that promotional environment. So GOWalk 3 slowed down a bit at the end, but I think GOWalk 4 is now starting to take its place and saw some increases as we go through the quarter.

Got it. Thanks so much.

Our next question comes from Scott Krasik of Buckingham Research. Please state your question.

Hi, David. Thanks.

Thanks Scott.

Just some housekeeping, so what was the ASP in domestic wholesale?

It was down a couple of cents from last year, I think.

A couple pennies, so sort of like...

Yes. It’s like a nickel or a dime, nothing significant. It was more like changes in the product styles offered domestically and the way they are sold.

And then you gave a little bit of color, but just what was sort of the monthly cadence in the retail comps?

Well, not to get into too much detail. They were the weakest on an overall basis in April and May, probably an increase to what we think is our running rate into the mid-singles for June.

Okay. Close to mid-single digits. Okay. And then for the backlog, so down low-single, that still doesn’t include China, by the way, is this the last quarter you are going to report that without China?

We are going to try, I make no commitments until I actually see the numbers come through, we have validity to them, but I hope so.

Okay, alright. So that’s good to know. So the down low single-digits, how does that split up between domestic and international?

Well, domestic is obviously down, probably a little – probably in the low to mid-singles, I mean that’s the biggest piece of our backlog. The reason that the world came down was mostly more of the currency issue than a local currency issue. So that’s part of this. But it’s more in the U.S. And I think part of that is because we shipped so well in June and people are not ordering out, but they are all waiting for back-to-school. If you remember, last year, September was the weakest, so while we had strong backlogs carrying into September, a lot of that product moved into October, November as well and has slowed down the cadence then. So people are buying to the level. Should it pick-up and we have an easy comp in September and back-to-school hold up very well, we can show increases for September. But it’s all the timing thing. I think with book, obviously this quarter than we outlook are looking into the fourth quarter. So...

Okay, sorry. So I am just trying to understand international, so ex-China, the international backlog will also be negative?

No, no. It’s positive.

The international backlog is positive.

Positive, it should be more positive in constant currency.

Constant currency, yes, okay. So then if I just plug in the low to mid single-digit growth in domestic wholesale, you mentioned 30% to 40% growth in international and even if you just keep comps flat for retail, just for the square footage, you are still getting like over $1 billion in sales and you are guiding to only $950 million or something like that…?

I think we have a different base. When I work out the numbers I come in right into the range of $950 million to $975 million, given comp store sales where they would be at the 4% and international as well as the new comp store openings and the comp store sales. So you want, we can go through them all even through the differential where your numbers are from mine. But I hope you are right.

Okay, that’s fine. And then so just to help me understand what’s happening in domestic, so you shipped back-to-school, but just you shipped last because they wanted to see how it actually plays out than you normally do?

We shipped less there, less committed for the back half, September, October, November than they were this time last year when we went into a very strong season and then had a big slowdown. As everybody looks at last year to see what it was in September as we announced on the third quarter conference call last year was the holdup in the quarter.

So should we just sort of be doing our checks figuring out what the sell-throughs are, if the sell-throughs are better than that, you expect to ship more or where are they sort of…?

Absolutely. That’s always true for us.

Okay. And then just sort of international by region, maybe help us understand Western Europe, the big markets, how do you expect those to grow in the back half and then Latin American as well?

Yes. I still think they are in the low to mid double-digits. Latin America obviously, grows from almost nothing. So that’s almost incalculable. It would be a good add as much as, I don’t know, $10 million, $15 million, depending on what your base is. And of course our joint ventures, which include India and China and Hong Kong, we still think can grow in the mid to high double-digits.

Alright, okay. So then just to follow-up on that question I didn’t really understand your answer I think for Jay about inventory being clean, so the 25%, 26% increase in inventory, so you are saying these will cleaned by the time you report next quarter, it will be in line with sales growth or what was the comment there?

I think you got two of them mixed. I think our inventories are pretty much in line now. The growth is where you would expect them to be. New distributors that turned into subsidiaries and growing in the joint ventures and the retail. I think the question was when will the channel be cleaned from off price and we said to that, that we are hoping it’s by the end of back-to-school.

Okay, got it. Alright. David, thank you so much. Good luck.

Thanks.

Our next question comes from John Kernan of Cowen & Company. Please state your question.

Hi good afternoon.

Hi.

Can you help us understand how we should think about SG&A dollar growth in the back half, it was pretty consistent in Q1 and Q2 on a year-over-year basis around 20%, as the top line moderates a little bit how do we think about modeling SG&A dollar growth or SG&A rates in the back half?

That would depend on how many stores opened during the period and where we show our growth in China and what we need to support it. But I think it will be pretty consistent with first and second quarter.

Okay, that’s helpful. And then just obviously there are some fairly significant differences in gross margin between international wholesale, retail and domestic wholesale, how does some of those mix shifts affect gross margin in the back half and how do you think we should model that or can you give us an idea as what you are thinking?

I think so long as the mix stays consistent, which I think it does, China has even with the advent of franchises, we spoke last quarter has higher gross margin than domestic wholesale. Our distributors are obviously becoming a slower growing piece simply because we have taken a number of them in-house and they are our lowest gross margins. So all the benefits we have outside of currency is obviously UK has now come back significantly as far as margins are concerned. But the euro is fairly stable. South Americas had some currency issues, so depending on the currency issues, if they are not significant, I would tell you that we still have the bias to the upside as we did in the first and second quarter.

Okay. And then just systematically, have you noticed any changes in the competitive environment, obviously the promotional environment is higher for – across the board in athletic footwear, but it’s in some of our checks we see a lot of our normal [ph] product creeping ripping into the $80 price point range or some other brands that have I think Asics and some of the other running brands have introduced some price points that are getting closer and closer to kind of your sweet spots, is there any change in the competitive environment you are seeing out there that might be putting pressure on the domestic backlog?

I don’t think we are performing quite well, but of course we are watching all of that and seeing how they fit into the price points and we continue to develop as well. So we still feel our core competency is developing if price becomes an issue. I don’t know right now we are selling pretty well. I think our margins are better than most of those for our customers. So right now, we are in a status quo, but we certainly do watch all that to see what will take our space. Haven’t heard that anything is outrageously significant yet, but we are certainly watching them and certainly continue to develop to be more competitive even within those price points.

Okay. So let me just – my final question is your cash balance is up pretty significantly year-over-year, I think $629 million, where you are guiding CapEx and operating income for the rest of the year, you should generate at least $100 million of free cash flow in the year. Any plans on what you might do with that cash as it starts to build?

We haven’t changed anything. We really haven’t discussed it significantly since the last time we spoke at the last conference call, where still growth is the first thing. We now know we have to expand. We need some more office spaces here in California and we are going to start looking at distribution centers and automation in China and some more space in India. So right now, we are still focused on supporting our growth.

Okay. So CapEx, roughly 2% of sales for the year, which is I think a little bit lighter than some of your peers, do you think that has to come higher in 2017 and beyond?

Depending on what the top line is. It depends how much we have to invest in China, which is growing very quickly and we have to get there and automate and be able to process for this buildup of franchisees. So, we are in the early stages. We are going to need a new one in South America as well. So, we are just at the beginning stages. We will have more – probably more information of that as we get closer to year end.

Okay, thanks. I hope to see in Vegas the magic.

There will be there.

Our next question is from Corinna Freedman with BB&T. Please state your question.

Hi, there. Good evening, David. I wonder if you could talk a little bit about that 950, 975 forecast. Does that include any replenishment orders? I know last year there was a bit of a shift from third quarter to second quarter last year. So, is that – is this a clean number or is there a churn baked in there that might not materialize?

No, this is a very basic number. It’s the same calculation we used to get to $850 million to $875 million in – or $875 million to $900 million in the second quarter. We are not assuming any real buildup nor any big slowdown. And like I said, about 4% to 5% in comp store sales in the United States. And all our announcements for store openings is not moving them out too far of getting them open too early.

Okay. And then anything you can tell us about the comps from last year? I think I recall that it was pretty strong through September and then September was a bit of a tough month? I just wondered if you could confirm that?

Absolutely. I think September last year was the first non-double-digit comp store growth or the second one for the year and October was our lowest comp or our second lowest comp store increase for the year. So September, October were tough last year.

Okay, great. Thanks. Best of luck.

Thanks.

Our next question comes from Laurent Vasilescu with Macquarie. Please state your question.

Hi, David. Thank you for taking my questions. I think you mentioned 30% growth for international wholesale, should we anticipate similar cadence between 3Q and 4Q?

It’s hard to tell now. Q4 is usually much smaller for our subsidiary and joint venture base. It’s a bigger quarter for distributors to get ready for next year. But as of right now, I would tell you that that would probably be my forecast.

Okay. And then in prior quarters, if you can provide some color on EPS expectations versus the prior year, any sense for 3Q?

What did you say FX?

Yes, for EPS.

EPS. I think EPS will be somewhat higher than last year. I mean, we give you to throw it out and put your own models, because it could vary significantly, but like last year, we said we would be pretty equivalent to last year’s second quarter, which we were taking out the two one-time charges. And I think next year will be 5% to 10% higher in third quarter EPS, give or take, depending on what part of the range we come, because we do leverage quite well within that range.

Okay, great. And then can you talk about EBIT margins for the year, I think in the past, like two quarters ago you talked about 13% range. Is that something we should think about still for the year?

That will certainly depend on second quarter. I think it’s still within – it’s still possible, but I would be more in the 12% to 13% – or 11.5% to 13% range now depending on what happens in back-to-school.

Okay. And then any expectation like how should we think about the gross margins for the third quarter?

I stated on this call, I think the bias is for the upside on a year-over-year basis given the fact that international and certainly, China and our own retail are growing at a faster pace than domestic and our distributor base. So, the bias barring any significant changes in mix or currency should be to the upside.

Okay. And then lastly, I think for domestic wholesale, I think you mentioned the kids was up and then you gave a little bit of color on women’s and men’s. Could you give us the actual percentage breakdown for men’s and women’s?

You mean for the quarter? We don’t usually give that information, but men’s was down the most for us in the quarter on a percentage basis, certainly significantly more than kids or women’s. And then part of that is the very basic business as well. It’s – part of it was in the very basic brown and black business. That’s an annuity business that seemed to get hurt a little more than the rest of the athletic business in the second quarter.

Okay. And if I could squeeze one more in, I forgot if you actually provided this number, but how did China grow in this quarter?

Well, funny you are the first guy that asked, but I will tell you that they grew in the mid to high single-digits – double-digits, sorry, mid to high double-digits.

Okay. And so again I think Corina asked the question, but in the prepared remarks it says that we should anticipate more earnings from China, but yet the range that you originally provided at the high end of the range is still – should we still think about something around $400 million?

In top line?

Yes, correct.

Yes, I think we are still in the $375 million to $400 million. Yes, did we hear that?

Yes, $375 million to $400 million.

Yes.

Okay. Thanks, again.

Our next question comes from Jim Chartier with Monness, Crespi, & Hardt. Please state your question.

Thanks for taking my questions. I just wanted to follow-up on the EPS commentary. Last year, your reported number was $0.43. Are you basing the 5% to 10% growth off that number?

Yes.

So I think you called out last year about $0.06 of legal expenses that should recur this year, so that alone is worth 15% growth. So, just curious what’s offsetting that?

It’s just as we level out we don’t leverage quite as much. We have a lot of startup businesses in South America and Central Eastern Europe and currency issues that have impacted our gross margins in Europe.

Okay. And then on the Latin Americans shouldn’t you be anniversarying kind of the launch of those businesses in third quarter?

Yes, but they start off fairly slow. So, we will still have a positive, certainly, to the top line on the conversion.

Okay. And I guess on ad spend, what’s the impact of the Olympics spend, because that can be a meaningful investment for you?

No, it’s not significant. We don’t invest that significant amount certainly around. It wouldn’t change what we are doing currently.

And then you had mentioned, I think the last couple of quarters, the joint venture given that you have the new franchise business should be stronger in first and third quarter this year. Is that still the case with third quarter should be relatively strong joint venture shipment for you?

Yes, I mean, they have been strong all year. I mean, they are still up pretty significantly both in the first and second quarter, but the third quarter, we anticipate would be a stronger quarter for us.

Okay. And then just again, your expenses, it sounds like your domestic wholesale expectations is lower for the year than it was before. And do you try and manage your expenses down any reduced investment and advertising spend based on a lower sales forecast?

We have really done that to the extent we can. We have moved a lot of that advertising offshore. So, it does the international. So, while the U.S. is relatively – U.S. is probably down year-over-year as far as advertising is concerned. We have pumped up in those places where we think we needed in starting up in Central Eastern Europe and South America and have increased our advertising cadence given all our franchisees in China.

Okay, great. Thanks and best of luck.

Thanks.

There are no further questions at this time. I would like to turn the call back over to Skechers USA for closing remarks.

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

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.