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

Jeff Van Sinderen - B. Riley Jay Sole - Morgan Stanley Scott Krasik - Buckingham Research Corinna Van der Ghinst - Citigroup John Kernan - Cowen & Company Sam Poser - SIG Laurent Vasilescu - Macquarie Jim Chartier - Monness Crespi

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

Good afternoon and thank you for joining us today to review Skechers’ third quarter 2016 financial results. The third quarter net sales increased 10.1% to $942.4 million and represented a new third quarter sales record, which led to a new net sales record of $2.8 billion for the first 9 months. The quarterly sales increase was primarily the result of 18.3% growth in our international wholesale business, which now comprises 40.1% of our total net sales or 47.9% including international retail. Additionally, the negative currency translation impact on our international wholesale and retail sales for the quarter was $15.9 million. We believe that our international business represents the greatest growth opportunity with many countries continuing to show strong sales increases in the quarter, including China at over 50%. To further grow our business in several markets, we have transitioned several international distributors to our subsidiary or joint venture model, including Israel in the third quarter to a joint venture and we are in the final stages of South Korea moving to a joint venture as well. Also adding to our record quarter was our global retail business, which improved 16% in net sales over the prior year period with positive retail comps of 3.2%. This was offset by a decline of 3.4% in our domestic wholesale business, though our number of pairs shipped increased by 0.06% compared to the third quarter of 2015. The decline in dollars was due to a $0.97 or 4% decrease in average selling price per pair. We continue to believe the retail environment in the United States remains challenging, which has resulted in several retailers either closing doors or ceasing operations and widespread promotions on a normally full priced brand. Third quarter highlights include record third quarter revenues, gross margin of 45.6%, diluted earnings per share of $0.42; a strong balance sheet with $665.3 million in cash and cash equivalents or approximately $4.29 per diluted share; an 18.3% sales increase in our international wholesale business, including a 35.4% increase on our subsidiary and joint venture business; a 16% sales increase in our company-owned retail, which included 61 net new stores opened compared to the prior year period, of which 11 opened in the third quarter, growing our company and third party-owned worldwide Skechers store base to 1,716 locations with the opening of 137 new stores in the quarter. We should note that this is a 10.1% third quarter sales growth came on top of challenging comparisons with strong increases in the third quarter of 2015, which included 11.8% on our domestic wholesale business, 52.9% in our international wholesale business and 20.9% on our company-owned global retail business for a combined 27% increase. Additionally, the third quarter 2016 growth came during a challenging retail environment. Now, turning to our business in detail, as noted, our domestic wholesale net sales decreased 3.4% in the third quarter on a 0.06% increase in payer shift, which was offset by a $0.97 or 4% decline in average price per pair as compared to the third quarter of 2015. Even with the decrease in domestic wholesale, we saw growth in our Women’s On the GO, Work, sandals lines, and our largest division, Women’s Sport. Additionally, our GOWalk for business introduced in the second quarter has done well. While we have seen a shift in the last two quarters towards the more fashionable On the GO collection, which we believe will continue in the fourth quarter with our line boots on the walk platform. For the back-to-school selling season, we ran numerous marketing campaigns supporting our brands, including campaigns with Demi Lovato, Brooke Burke-Charvet, Sugar Ray Leonard, Howie Long, Kelly Brook and Meghan Trainor in addition to multiple animated and live action commercials for kids. We continue to support our Skechers Performance division with a GOWalk collection commercial and both Meb and Matt Kuchar competed at the Olympics in Skechers Performance footwear, with Matt receiving a bronze medal in men’s golf. Our golf lineup continues to grow, most recently with the addition of Brooke Henderson, who is currently the number three ranked LPGA golfer. While our core product continues to resonate with consumers, we are seeing a shift in certain trends. Our speed to market lets us react quickly to these new trends and we are able to move in virtually any direction due to our diverse platform and flexible design teams. We are excited to showcase these new styles during our interim meetings this month with our accounts and believe that our partners ordering closer to season will allow us to deliver the freshest product to our retailers. Presently, our focus is on maintaining our position on the floor with the growth we achieved earlier this year and last, managing our inventory flow into account, and we remain poised to move quickly as consumers begin to shop for what they want as well as what they need. International continues to achieve the highest percentage in dollar gains with our combined subsidiary and joint venture business surpassing our domestic wholesale business in dollars. Total international sales increased by 18.3% or $58.4 million in the third quarter and 30% and $254.5 million for the first nine months of 2016. The highest dollar and percentage gains came from our subsidiary and our joint venture businesses with an increase of $77.3 million or 35.4% over the third quarter 2015 and 43.5% and $265.4 million for the first nine months of 2016. These gains were offset by an 18.6% decrease in our distributor business due in part to the transitioning of our Latin American and Central Eastern European distributors to subsidiaries in the third quarter of 2015. Driving this sales was a mix of our men’s and women’s athletic lifestyle footwear and our walk collection. Additionally, our heritage Skechers D’Lite footwear has become a big trend across Asia and we are seeing this resurgence spread across the world. Our speed to market and design process has aided in our global growth as we are able to capitalize on trends and deliver both global and regional collections that represent the Skechers DNA. Further, our vast marketing support, from global campaigns to regional ones, has resulted in impactful window and in-store displays, translated commercials and digital and social media campaigns that drive purchase intent and build brand awareness with key audiences. Further detailing our growth in international in the third quarter, all of our subsidiaries showed increases in the quarter with the highest percentage gains coming from Chile, Benelux, Japan and Spain and the highest dollar gains also coming from Chile and Spain. Additionally, the United Kingdom shipped more than 1.2 million pairs, a 20% increase, but grew only 11% due to the weaker pound. The price increases we implemented earlier this year to offset the currency fluctuations have, by and large, been accepted by customers and consumers. And we are continuing to adjust prices in markets such as the United Kingdom, although we have still been negatively affected by currency. Additionally, both our new subsidiaries, Central Eastern Europe and Latin America, are positively impacting our sales. Also of note, the low double-digit growth that Canada achieved in the third quarter resulted in the country becoming our second largest subsidiary for the period behind the United Kingdom and just ahead of Germany. Our joint ventures grew by 51.2% for the quarter, led by more than 50% gains in China and triple-digit gains in India. China shipped more than 2.8 million pairs in the quarter and opened 82 freestanding Skechers retail stores, primarily though franchisees bringing their total Skechers store count to 341. We now have approximately 1,860 points of sale in China and an 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, five Skechers stores were opened by franchisees in the quarter, bringing the total store count to 49. Further in the third quarter, Israel transitioned from a distributor to a joint venture and began shipments in the period. Six stores transitioned in the transaction. Our international distributor net sales decreased by 18.6% in the third quarter and 4.6% for the first nine months. The decline is the result of several factors; The conversion of Latin America and Central Eastern Europe from distributors to subsidiaries and the transition of Israel to a joint venture in the third quarter, A difficult comparison with 72.2% growth in the third quarter of 2015, The current transition of South Korea to a joint venture from a distributor, Political unrest in several markets primarily in the Middle East and timing shifts within several distributors. The quarterly growth within our international distributor business was most notably from our partners in Indonesia, Taiwan, Russia and South Africa. Along with their wholesale business, most of our international distribution partners have opened Skechers retail stores and we have a growing network of franchise Skechers stores in countries where we handle the distribution of our products. At quarter end, there were 1,160 Skechers branded stores owned and operated by our joint ventures, franchisees and distributors outside the United States. Of these, 503 are distributor owned or franchised Skechers retail stores and 540 Skechers stores are in our joint venture countries, including those run by franchisees in the region. Additionally, there are 117 franchise stores in countries where we have subsidiaries. In the third quarter, 137 third-party owned stores opened. These were 82 in China, five in both India and Saudi Arabia, four in Germany, Taiwan, the UAE and Vietnam, three in both Hong Kong and Turkey, two each in Australia, Japan, South Korea, Singapore, Qatar and the Philippines and one each in Croatia, Denmark, Hungary, Italy, Malaysia, Mexico, Morocco, New Zealand, Sri Lanka, Thailand and Zimbabwe. 10 stores were closed in the quarter. 11 third-party owned Skechers stores have opened in the fourth quarter to-date. We expect another 130 to 140 third-party owned Skechers branded stores to open in the remainder of 2016. International wholesale now represents our largest business channel at 40.1% of our total sales in the third quarter or 39.4% for the first nine months of the year. Combined with international company owned retail stores, it represents 47.9% and 45.9%, respectively. Worldwide sales in our company owned retail stores increased by 16% for the quarter and 17.7% for the first nine months. In the quarter, domestic retail sales increased by 8.1% and international retail sales by 45.3%. This included positive stock comp store sales of eight-tenths of 1% domestically and 12.7% in our international stores for a total comp store sales increase of 3.2%. At the end of the quarter, we had 556 company owned Skechers retail stores, of which 150 were outside the United States. In the third quarter, we opened 11 stores, including a store in the World Trade Center shopping complex and three in both the UK and Canada and two in Chile. We closed one domestic store in the quarter. Two company owned stores have opened to-date in the fourth quarter, another in Canada and our second in Romania. Adding to the growth in the quarter was our domestic e-commerce business, which grew 13%. Also in the quarter, we launched the skechers.com app, which includes a one-touch pay and shoppable user generated content. We also have company run e-commerce sites in Chile, Germany and the UK and plan to launch sites in Spain and Canada shortly. With the strategy of continuing to open retail stores in key global markets to further build the brand and meet consumer demand, we expect to open approximately 15 to 20 more stores for the remainder of this year. Now, turning to our third quarter numbers in more detail, as I mentioned earlier, we achieved another net sales record of $942.4 million versus $856.2 million in the prior year, an increase of 10.1%. Gross profit was $430 million compared to $387 million in the prior year period, gross margin increased to 45.6% compared to 45.2% in the prior year period. The higher gross margin during the quarter was primarily due to slightly higher domestic wholesale margins, offset by slightly lower global retail margins as well as the product mix. Selling expenses increased $4.1 million to $67.8 million or 7.2% of sales compared to $63.7 million or 7.4% of sales in the prior year quarter. As a percentage of net sales, advertising expenses were 5.6% and 5.5% for the third quarter of 2016 and 2015, respectively. General and administrative expenses were $261.8 million or 27.8% of sales compared to $230 million or 26.9% of sales in the prior quarter. The $31.8 million quarter-over-quarter increase was primarily due to our focus on long-term global growth, including $16.3 million associated with the additional 61 domestic and international retail stores and $20.2 million to support our international growth, of which $9.8 million was due to increased costs in China, $2.6 million in Latin America and $1.1 million in Japan with new offices and distribution center. The increased G&A expenses were offset by reduced domestic wholesale expenses of $4.7 million. Earnings from operations increased 8.1% in the third quarter to $103.4 million or 11% of revenues compared to $95.6 million or 11.2% of revenues in the third quarter of 2015. Net income was $65.1 million compared to $66.6 million in the prior year period. Net income per diluted share in the third quarter was $0.42 on approximately 155.2 million average shares outstanding compared to $0.43 on approximately 154.5 million average shares outstanding in the prior year period. The diluted earnings per share were negatively impacted by current currency translation and exchange losses of approximately $8.1 million or $0.04 per diluted share. Our quarterly tax rate for the third quarter was 24.2%, higher than our previously projected annual effective tax rate between 17% and 22%. Net sales for the nine months period increased 15.4% to $2.8 billion compared to $2.42 billion in the prior year period. Gross profit was $1.28 billion or 45.7% compared to $1.09 billion or 45.1% in the prior year period. Selling expenses were $197.6 million or 7.1% of sales compared to $177.7 million or 7.3% from last year. General and administrative expenses were $747.4 million or 26.7% compared to $628.2 million or 25.9% last year. Earnings from operations for the nine months period were $342.3 million versus $296.1 million for the same period last year. For the nine months period, net income increased 17% to $236.8 million compared to net income of $202.5 million in the prior year period. Diluted earnings per share were $1.53 on approximately 155 million average shares outstanding compared to diluted earnings per share of $1.31 on approximately 154.1 million shares last year. And now turning to our balance sheet, at September 30, 2016, we had $665.3 million in cash and cash equivalents or $4.29 per diluted share. Trade accounts receivable at quarter end were $445.3 million and our DSOs were 38 days at September 30, 2016 and 2015. At September 30, 2016, total inventory, including merchandise in transit, was $523.3 million, an increase of $23.1 million or 4.6% compared to September 30, 2015. This increase is in line with our growth in our higher company-owned store count. Given the strength of our global business, brand and sell-throughs, we are comfortable with our current inventory levels. Long-term debt was $67.6 million compared to $70.1 million at September 30, 2015. The decrease was due to our payments on our domestic distribution center. Shareholder’s equity was $1.67 billion versus $1.33 billion at September 30, 2015. Book value or shareholder’s equity per share stood at approximately $10.81 as of September 30, 2015. Working capital was $1.23 billion versus $994.6 million on September 30, 2015. Capital expenditures for the third quarter were approximately $25.8 million, of which $12.9 million was primarily related to 11 new company-owned domestic and international store openings and several store remodels, and $5.5 million for equipment upgrades and automation of our European distribution center. We expect our capital expenditures for the remainder of 2016 to be approximately $5 million to $10 million, which includes an additional 15 to 20 retail store openings and the completion of our European distribution automation system later this year. In summary, we believe the domestic market is continuing to adjust to the changing retail landscape and retailers are managing inventory with more caution, ordering much closer to season. We continue to focus on delivering relevant product to the market and believe that we are developing product that will be embraced by consumers. In regard to our international business, the fourth quarter is typically the strongest for our distributors, while the first quarter is stronger for our international joint ventures and subsidiaries. Given the transition of several distributors to either a joint venture or subsidiary model and the timing and changes in our international business structure, it’s best to look at these growth drivers over a 2 to 3-year period. For retail, we are selectively opening stores in the U.S. and building the brand around the world with stores and markets we feel hold great opportunity. With over 1,710 retail stores worldwide and a planned 1,850 to 1,875 by year end, we believe they are powerful brand building tools as they showcase our broad collection to consumers. Additionally, we are focusing on our core strengths, developing product with speed and scale like no other footwear company. With our creative, innovative and efficient design and development teams, we are able to develop products year round and easily pivot to new trends in the United States and abroad. As a global footwear company that can move in as many product directions as we can and who has also has extensive operations and infrastructure established worldwide, we are confident in our ability to continue to grow profitably. With our key North American accounts visiting our corporate offices this month and ordering closer to season and our global network coming in November, we are looking forward to the first quarter 2017 and beyond as we deliver these fresh new styles. For our near-term outlet, we expect sales in the range of $710 million to $735 million for the fourth quarter. This assumes single-digit increases in comps in our international wholesale business and total retail business and single-digit decreases in our domestic wholesale business. And now, I would like to turn the call over to the operator to begin the question-and-answer period of the conference call.

Thank you. [Operator Instructions] And our first question comes from the line of Mr. Jeff Van Sinderen from B. Riley. Please proceed with your question.

Good afternoon, David. Maybe you could just touch on kind of the backlog picture, just wondering what that looks like domestic versus some of the international areas. Any color you can give there would be helpful?

Sure. As we anticipated, we have turned slightly positive in overall backlog. We are slightly positive in the U.S. and a little more positive in international. And it brings us to a very low single-digit increase for backlog. I think it’s important to note here that with the guidance we have given, it’s – the potential certainly is bigger for Q1 than Q4 as we are booking much stronger going into the Q1 period, which is why we have a little smaller growth this year in the fourth quarter. We just came off – the third quarter was the largest incoming order quarter we have ever had as a company.

Okay. And that kind of dovetails into my next question which is maybe you can just talk a little more about the product or like product content or style shift that you are seeing out there that I think you mentioned in your prepared comments? And then maybe just touch on what type of product – what type of new product is resonating with your accounts and driving, as you said, more potential for Q1 backlog being up and so forth?

We always say on these calls. It’s very difficult for us to go through product categories and give you an idea of what really is hot and where people is resonating without being able to show you, because we sell this product in 19 different rooms that have different categories that each one of them have something new. Some of them are new looks like our Skechers Street, some of them are new introductions from Performance, from our Sport group, from our Active group, from our men’s USA group with new materials and things like that. I think the best thing is for you, you better come down to the showroom or come see us in FFANY when we have our meetings, so that we can get people from each room or each category to show you what’s new and what’s resonating. I will tell you that we just started our pre-line, it’s only the second or third day and we have gotten from the first few very good receptions for a lot of new things that are coming out. So – and there wasn’t many different categories. So, there is a little bit everywhere and certainly, with a very positive reception.

Okay. I will let someone else jump in. Thanks.

And our next question comes from the line of Mr. Jay Sole from Morgan Stanley. Please proceed.

Great, thank you. David, I just want to know if we can just clarify the guidance for 4Q. It sounds like you said domestic wholesale is down single-digit, international wholesale, up single-digit. For the retail piece, are you talking about retail in total up in the single-digit range or the retail same-store sales up double-digit?

Well, it says same-store sales – to note same-store sales in the low single-digits like it is now and maybe high single, low doubles in general for retail.

Got it. And then it sounds like your point on 4Q on the international wholesale piece is that 4Q was the strongest for the distributor business, but many of these distributors have converted to subsidiaries or JVs and those businesses are stronger in Q1 and that compares are tough. So, can you just give an idea of how much would have shifted out of 4Q and into 1Q just because of this transition from distributors into subsidiaries and JVs?

Well, it’s a twofold question. They moved out significantly. And I think Korea is part of that, because obviously we are coming to the tail end of creating a joint venture, which does not include the current operators of the brand in Korea, but a takeover of their assets through a joint venture. So, they have obviously slowed down their ordering and it’s going to take us a quarter or two to get it all back up and running other than the fulfillment of the stores and the franchise stores that are there. But we think that’s a great marketplace and a great advertising piece for the rest of Southeast Asia. So, that has all moved. I think the biggest piece of the distributors is they had a 96% increase last year and while holding onto most of that gain, there has been some difficulties in the two big ones or the three big ones, Korea being one, which we already talked about; the UAE which does have some political strife and has slowed down some of their growth in their territory. So between those, that’s the reason we are going to have a slight decrease in the fourth quarter probably and I would say high to low – high single to low double-digits.

Okay, got it. And then can you just talk about the tax in 3Q, it sounded like that the difference between the guidance and the actual results was that you anticipated profit in certain regions and the result was different. But it seems like the U.S. was a little slower from a sales standpoint than you expected relative to international, but the tax was higher, which implies the profit was greater in the U.S. Was that just because there is more cost-cutting in the U.S. and higher investment spending internationally, so that’s why they had to play out like that?

That certainly is part of it and it was a surprise. You have to remember while gross margins and therefore some operating revenue certainly went up in the United States even though the average price was down, our average – our gross margins were slightly higher as a percentage. But the whole world is not equivalent as far as the tax structure is concerned. The tax structure has multiple, multiple pieces going from Europe to South America into China, into South East Asia and the mix can usually shift things around some. And I think it was the U.S. making slightly more and international as a percentage because of the increased advertising and some of the overhead that we had to put in for growth making growing a little slower at the operational line than we had anticipated. So what happens is the swing is not quite as far as big as you take, you see when you see the 24% category. What basically happened was we had calculated an 18% or forecasted an 18% tax rate for the year when we finished Q2. The tax rate, because of all these shifts have now, on an annual basis, gone up to 20 and the 200 basis points is not outrageously significant. However, because of the earnings in the first two quarters to get the three quarters back to that 20% average that we are going to plan for the year. So this quarter is up to 24%. So when you look at this quarter’s operations against, we had exactly the opposite happen last year where we had a decrease in the quarterly tax rate because we had a decrease in our forecast for the entire year. So that differential was obviously the biggest piece of the change in earnings. And if you throw the $0.04 from currency and the differential in the anticipated tax revenue have more than the offset to the bottom line number.

Understood, alright. And maybe if I can ask more about SG&A, SG&A dollars, I think it was $32 million in the quarter and that’s the deceleration quarter of course up $42 million in terms of year-over-year dollars in Q2, looking ahead, what kind of dollar growth do you expect for 4Q and…?

Well, obviously 4Q is a low growth, so we expect certainly less growth. We won’t have to pump up into many places so that will be a slower growth certainly to the G&A line. The S-line we are still working on. But I think there might be some leverage in that as well. So we are all watching these expenses. But there will be a build up in inventory as we anticipate Q1 will be a very positive start. Now, a couple of things can happen because we are booking so well going through the first quarter, some of that could come back into Q4 and surprise or it could just sit in Q1. And I think that time – timing would be more normal on a going forward basis because the outrageous growth of 25% and 30% and 40% probably behind us for a little while, would be more like the Q1, Q2 shift. That’s a more normalization of the way our business should rollout through the year.

Got it. Thank you, David.

And our next question comes from the line of Scott Krasik from Buckingham Research. Please go ahead.

Hi David, how are you doing?

Scott, pretty good.

Okay. So just to clarify for sure, the international backlog, did you put China into that or no?

We had China. China is up in the low double-digits. And that takes it up to a higher single-digit worldwide backlog.

Okay. So the low single-digit does not include China, its high single-digits if you do include China?

No. It’s mid – low to mid single-digits. China on a standalone basis is up low double-digits.

Okay. I am sorry. Okay. So then just can you help me understand what’s happening or what the expectations are for 4Q subsidiary and JV sales growth, because they are so very strong in 3Q and you are getting the benefit of some of these shifts of distributors, so maybe why the slowdown and then what’s the right run rate?

Well, the timing actually works as a negative when you shift distributors to joint ventures. Because you remember, when distributors are getting ready for the spring season, they almost have to take deliveries at the end of December or certainly have it shipped by the end of December to make their own spring. So we invoice it right away. When they turn into the joint ventures or subsidiaries, we have to wait until the ultimate sale, either to the consumer through our own retail or through wholesale channels to a third-party seller. So it works converse and it works opposite way for distributors. And I think the reason that we don’t believe there is going to be as much growth is that the normalization, as you know, Europe is our biggest piece. China is coming on very strong. Their fourth quarter businesses are by and large the smallest quarters of the year. So there is only so much up room. Europe really does start to deliver in the end of January and February. Now, there is always a possibility that they move forward depending on how good the macro situation is and that would include here in the States. Just not sure I would go out there and tell you that, retailers that good. In a lot of places in the world that people are looking to move up significantly new product. Now, we are testing a lot of new products and so a lot of new stuff going out and a lot of stuff that they have seen here. So it may change the dynamic. If it tests well and of course we are in a situation now where I do believe inventories are in line at retail and are being also conservative and cautious, which means if retail starts to pick-up or we get hot and some of these items do start to check well, as we believe they can, it can move rather quickly. There is no real overhang of outside inventory right now.

Okay. And then just like, I don’t know, key people realistic, you said your backlog is positive for 1Q, you have a shift which is going to help 1Q, do you just want to give your earliest best guess, sales sort of up a lot more than 4Q for sure, right, will they be up double-digits again in 1Q?

Well, certainly possible. We are getting an early start and we have a lot of January deliveries, both domestically and around the world, which is early for us. So we will be off to a good start. It will depend on retail in general and how the stuff performs as we get through holiday and into the spring, but certainly it’s possible.

Okay. And then just one last one, just help us understand, with the ASPs down, I am surprised you are able to have positive gross margins domestically, is there anything that we are not considering, because that’s really strong performance?

Yes. It’s just the shift. Like I said we shipped more products and the taste have been to more price points or open footwear as the season moves through the third quarter and a lot more sandals. So we sold products that had lower ASPs but not lower margins. We didn’t close out anything. I think that’s a good time for us to take note of the fact that a lot of people, you may be one of them, I don’t remember, had give us a hard time about our 25% increase in inventory at the end of Q2, saying it was outsized and given our growth, it couldn’t be the correct number as we had said it was. So now we are only 4% year-over-year and we did not take any kind of margin compression to get to that inventory. That just means that it was a timing issue and we work building it for a very specific reason. And I think that continues. So we are in very strong shape. We don’t have overhang of inventory. We are moving to new product. The product is getting good acceptance. It’s the things we usually do well when taste change. And I think you are going to see here a lot of excitement when you see us at FFANY from both our customers and international customers.

Okay. Thanks.

And our next question comes from the line of Corinna Van der Ghinst from Citigroup. Please go ahead.

Hi, thank you. Hi, David.

Hi.

Hi. I wanted to start with just your U.S., why are you confident in the spring assortment that you have coming out, is it all being driven by this retro look or is there anything else that’s driving that and do you anticipate the U.S. turning positive as we get into Q1 with these new assortments?

It’s certainly possible and I do anticipate it. But I am an optimist anyway. My confidence comes from talking to customers, although we are at the very early stages. Some of the stuff that’s testing at our own retail that we are just bringing in very early and the reactions of the first four or five customers that have been through over the last couple of days and as the samples go out to our international crew and our retail crew around the world, their feedbacks. So there is a lot of very positive pieces from people that actually know more about style and salability than I do from the initial stages.

Okay. And then just in the U.S., can you talk a little bit about what changed in the U.S. environment between your last call in July where you kind of said, U.S. will be flat to low single-digits, at the end of the quarter to drive this down 3% number, are you seeing some of that competitive discounting on other brands, is that starting to subside as we get into Q4?

Yes. My impression is and I don’t really know for the fact because I don’t have any data other than what you guys have, is that most of our customers are clean overall on their inventory, certainly like cleaner than they were going through the third quarter. For us, we got the shelf space. It’s just very difficult sometimes to tell which stuff will check faster and check through even at our own retail. So we had higher margins. We didn’t compete on the price, it’s just the lower price or the average lower priced footwear or the mix of the footwear just turned a little negative from the positive points it’s been. We will certainly take it. We have higher margins, even though it’s margin percentage, even though it’s a lower ASP. So, it’s only the mix.

Okay, that’s helpful. And then I just wanted to follow-up on a question that was asked earlier. Just to clarify on your international outlook, just based on this conversion period, it sounds like you are also expecting Q1 international wholesale to also be in the single-digits and then you could start to see a reacceleration after Q1?

I don’t know if that’s true. I mean, it depends how you want to break down international. I think international will enter the next year very strongly. Now, if you are talking about currency implications that could impact, the biggest currency pieces we had this quarter were Great Britain and China on the data. I don’t – not an expert on it, I don’t know that, that continues or that the euro goes down or maybe the Canadian dollar gets even stronger and it’s a benefit, because oil prices are going up. I am not really sure yet. I would like to believe after all of this that the biggest parts of the moves are done. But like I said, I am not a currency expert, so that wouldn’t at this particular point come into my thinking other than the pricing change we might have to do in Great Britain because of the currency.

Right. But outside of currency, just purely from the shift of distributors to your own in-house?

Well, that’s a net positive. It’s a positive to the sales number, because we pickup both margins. So, that should be a positive piece. I don’t know if it will quite come in the first quarter. Obviously, the biggest piece out there today to convert is Korea, depending on how fast we can close it and get it up and running. It could have positive impact certainly by the second quarter and for the third quarter. I am just not sure it will hit in the first quarter yet.

Okay, great. That’s what I was trying to clarify. And then should we be expecting SG&A to de-leverage as we get into next year as you – and you talked about some of these international investments that you guys are working on?

That would depend on the growth. We only grew at 10% this quarter and didn’t de-leverage any significant piece, certainly didn’t de-leverage at all other than the currency for the most part. So, it will depend on the growth rate. As we get back to double-digits, I think we can continue to leverage, because we are growing now in places where we have already put in significant more infrastructure and all additional growth should be able to leverage. So, long as we can maintain a significant growth piece, then I think we can continue to leverage.

Okay, I will get back into queue. Thanks.

And our next question comes from the line of Sam Poser from SIG. Please go ahead.

Good afternoon, David. Can you give us some idea of the revenue out of Israel and South Korea like what that wholesale equivalent looks like? So, what like the revenue is as a distributor?

Israel is obviously the smaller piece. Israel is probably in the range of somewhere between 300,000 and 400,000 pairs. You could take part of that at the retail level and part of that to a wholesale level and get it. But Korea has done with us in excess of 2 million pairs a year and I think it grows from there. So, if you take that at an average, 25 price point and a significant retail piece, that could be significant and certainly get to $100 million in the next couple of years.

I understand that, but I mean, but as a distributor, it gives you those two combined give you what kind of revenue? And then when it converts to a stub, what does that sort of just turn into, because you are going to get – you are going to see more – your margins and your revenue just go up from the conversion?

Correct. Does it go up?

If it’s – if you ship the combined, let’s say, 2.4 million pairs between the two, there was how much as a distributor and when you convert to a stub, how much of that would have been revenue?

It could as much as double or more depending on how big a piece is retail and how big a piece is wholesale. Our distributors are our lowest margin business. So, if you take the differential just in margin, you see that, that would pickup also what could be an 18% to 20% margin goes to 40%, 45% margin to begin with. You get double on the sales price and double on the margin and you get more if you go vertical and you have your own stores as we will have in both Israel. So, say at the minimum, it’s close to a double and it can go up from there.

Can you just tell us how much – I mean, can you tell us what the distributor reported revenue is between those two countries right now?

Well, like I said, Korea was slowed down. It was very low this last quarter, because we are transitioning and we are transitioning without the current partner. So, they have no reason to really take in a significant amount. We are now changing all the paperwork to try to bring it in ourselves to get started at the closing.

Could you give us some idea of fiscal ‘15 maybe what you did the last year in those two? And then we could sort of get to where we want to – figure out what that is?

My best guess is we did about somewhere between $15 million and $20 million in Korea and maybe $3 million to $5 million in Israel in ‘15.

So that would go to like 40 – so to about $50 million combined from $25 million give or take?

If the business remains, yes, the same. Like I said, it won’t start that way next year, but certainly, we will get that running when we think there is potential to get significantly larger than that.

Okay. And then just a little bit more on – you mentioned there could be leverage on the SG&A in the fourth quarter, could you give us some idea….

We said next year. I don’t know that you can get any kind of significant leverage. I don’t know you de-leverage outrageously, but you don’t get any leverage in the fourth quarter. That would be not something….

From a de-leverage basis, do you think that SG&A in Q4 will look sort of like SG&A in Q3 then where you de-leverage by about 200 basis points, is that a good ground number to use?

Yes, depending on where you are within the sales line or the guidance, that’s probably okay. I would have to play with that some.

And then you were still expecting – I assume you are expecting gross margin to continue to improve in total again in Q4?

Yes, it will be up slightly just like it was in Q3. I mean, the shift that we anticipate would certainly be to the positive end, because we will get more growth from retail and China, which is the higher end of the spectrum and lower or deceleration from distributors and domestic wholesale, which is the lower end of margins. So, the mix should push without any significant currency changes to a more positive gross margin percentage.

Got it. Well, alright, thank you very much and good luck.

Thanks.

And our next question comes from the line of John Kernan from Cowen & Company. Please go ahead.

Good afternoon, David. Thanks for taking my questions.

No problem.

Can you help us understand the gross margin trajectory into next year, I mean, beyond just Q4? The inventory is in good shape. Can you help us understand the mix shift towards the international wholesale business? The consensus, it looks like for next year is modeling a fair amount of operating margin expansion, which given the SG&A growth profile seems optimistic. But can you help us understand the duress, the direction of margins into next year?

Gross margin, operating margin? You are talking operating margin as I take it from your last comment.

Both.

Okay. Gross margins will obviously depend on mix in currency. We don’t anticipate any significant changes, but there could be some mix there depending if we have an outlier, one piece of the business that’s extensive like Europe, like China or maybe even South America grows at a significantly faster pace than the whole and what percentage our retail will be depending on what our wholesale growth can be. There could be slight shifts in the gross margin. As far as operating margin is concerned, I would just give you my own opinion and that you cannot model our growth in SG&A through a trajectory model, because once we establish, we don’t grow that operating cost at the same level as we do when we have a startup, which would, I would tell you, if you look at the United States, it’s actually had, basically, a decline, but no significant increase in overhead. And as we get more stable and set and larger in some of these countries, other than China, like Europe is about done. So, other than China and South America, maybe a little from Korea, I don’t know that you get the same trajectory of G&A costs certainly next year as you have had in the last 18 months.

Okay. So SG&A might have an opportunity to leverage next – as early as next year for the full year?

Certainly could, it depends where the growth comes from and what it is. But certainly, I wouldn’t take that off the table.

Okay. And can you just give us a little bit more understanding on what you are seeing in the U.S. wholesale channel, obviously, you called out some of the promotions that are there, how does the changing buying patterns of some of the wholesale partners, obviously, buying closer to need affect the way you pull products into the channel?

We are very big on flow, so we measure them all the time. I think right now, we are set up for a very positive time because they are lead on inventory. I think ours as well as the rest of their inventory. So as styles change and taste change, we are going into a new structure now with a lot new products to offer. As it sells through, if it sells through at a faster pace, it gives everyone an opportunity to chase it at a much more rapid pace. And we are usually the best at that, because we develop a lot of products in all our categories. And we can chase all of them and move the needle significantly as demand increases when there is no overhang in a marketplace of inventory.

Okay. And then just finally here, can just tell us a little bit more about China, obviously it’s been a big emphasis for you, I think you think the market have more than doubled from where it was here, so what have you learned about the Chinese consumer, how they are interacting with the brand, can you quantify where you think China can be in the next 2 years to 3 years?

Sure. China could be $1 billion for us in the next 4 years or 5 years. I don’t know how it relates to 2 or 3. We continue to grow and it’s very difficult to go out. We have a lot of franchise stores and businesses that continues to grow. We are up 78% year-to-date in China. So we did more this quarter than we did in fiscal ‘14 in China. So the potential is really great. I mean I don’t know that it’s not a $1 billion brand, how fast it gets there, whether it could be 3 years, 5 years or 6 years, it still remains to be seen. We work on it all the time. Certainly, it will get there, hopefully, in a shorter period of time. But I don’t think there is any doubt that this is at least $1 billion brand in China.

Okay. And then just one, if I can sneak one quick question, the international company owned retail comps accelerated from Q2, can you – what regions drove that, I think they are up 9 last quarter, up 12, almost 13 this quarter?

It’s pretty much across the board, the biggest concentration – so the biggest drivers obviously are in the UK. We have a lot of stores more than any other single place in Europe. And in South America, we have 30 stores in Chile and they have comped up significantly well. So those are the two big from the top line dollar perspective of where the margin improvement has come from.

Okay. Thanks. Best of luck.

Thanks.

And your next question comes from the line of Laurent Vasilescu from Macquarie. Please proceed with your question.

Good afternoon David. I was curious about the domestic comp number for the quarter, can you talk a little bit about how the comp performed by month, I think you had easier compares for September and particularly October of last year?

Well, October is not in this report, but you are basically correct. We had a positive July, a slightly negative August and an even more positive September, so.

Okay. And then for October for quarter-to-date?

Well, for the month-to-date, we are just getting started. It’s not dissimilar in percentages to September, although it obviously is a much smaller month than September would be.

Okay. And then shifting gears to the wholesale international business, European wholesale, how did it perform, like what was the growth rate for European wholesale, do you have a dollar number as well?

Depends on how you define European wholesale. I mean we could go through country-by-country, but by and large, I believe the Europeans were up 18%, 19%, so that would be, not that I memorize all those numbers, top of my head, probably in dollar terms, just for Europe, just wholesale, probably $17 million or $18 million.

Okay. And then on the domestic wholesale business, when – the guidance for fourth quarter for a single-digit decrease, is that down low singles, down mid or down high?

Too hard to say, that’s why we got the broad range. I would say mid to high single.

Okay. And then for this quarter, your domestic wholesale, I think you talked a little bit about men’s and women’s, can you just give us the actual, like how women’s performed this quarter and then also men’s in terms of percentages and potentially dollar terms?

They were both on the very broad stream, which throws everything together, both performance and non-performance and black and brown shoes, not dissimilar to the overall decrease…

So both down low single-digits?

Correct.

And then kids?

Kids was down a little more. We had started to deliver Star Wars this time last year. So that was number one.

And should that change for the fourth quarter, like...?

Yes. I don’t know about the fourth quarter. Fourth quarter was a big delivery, but it certainly should change for the first quarter.

Okay. Thank you very much and best of luck.

I would imagine we could comp the Star Wars fourth quarter shipments for the kids business.

Sure, okay. Thank you.

[Operator Instructions] Our next question comes from the line of Scott Krasik from Buckingham Research. Please go ahead sir.

Yes. Hey David. Thank you. So you didn’t give specific fourth quarter guidance, but – for EPS, but do you expect to make money in the fourth quarter, breakeven, lose a little money?

Right now, I would expect to make money.

Okay. Thank you. And then can you just define the backlog, I think you said in China, it was at low double-digits, how do you define low double-digits and that’s lower than your sort of 70% pace year-to-date, so what’s the reason for that?

Well, yes, because there is big sell-ins from the year before and the year after that. And they also buy a little closer for their existing and they are learning the business better. But I define low as I did before, 10 to 30.

Okay. Thanks very much.

And our next question comes from the line of Sam Poser from SIG. Please go ahead.

Okay. So when we look at the – when we look at your overall business internationally, it would be that there is a – Q1 is going to pickup steam again and then Q2 should be significantly better, is that the flow based on the transition of the distributors, number one?

You are talking about just distributors?

I am talking about in general, but I mean the distributors – but the distributors have a lot to do with that, so like there is an underlying growth of your subsidiary and JV businesses and then you have acceleration from those new subs and JVs and in Q3 and Q4 of this year, you are lapping the setups of Chile and Eastern Central Europe, correct, so that’s why they settled down because they are lapping the setups from last year?

Chile, we have had for almost 10 years. It’s Latin America, a little Colombia, etcetera.

That’s right, Latin America. I apologize.

Yes. It will be lapping in the second half. Korea should be coming on. And we are still looking for big growth from China and India. So the distributors become the smaller piece of it and they will be concentrated in about four or five bigger distributors that are left. That would be sort of Indonesia and Australia and the Middle East. And then whatever we start to build in Africa through South Africa and moving up. But they – and concentrated depending on what those areas are like from a macro picture and a retail picture. We are moving more and more into the biggest – certainly, the biggest piece is joint ventures and subsidiaries.

Thank you. Then lastly, there is a big difference between sell-in and sell-through, so the question I wonder is, are you in the kids business and in some of the other categories, are you seeing despite the fact that your sell-in rate has declined especially in the United States, are you seeing changes in the sell-through rate at retail given from your wholesale partners as well as your own retail store?

Yes. It’s held up very well. I think the biggest issue nowadays is will be the Star Wars. That’s why everybody is positive about going into first quarter.

And from what I remember about Star Wars, it did well, but maybe not as the sell-through rates probably were modestly disappointing relative to the sell-in rate.

I would say that’s correct, if you lost the modestly.

Okay. And so your sell-through rates this year could be better even though your sell-in rates are not as high?

Absolutely and...

Hello.

Yes. I am still here. I didn’t hear you say anything else.

So I would say you are about to say something…?

No, I said absolutely, I hope you heard that and anticipated.

Alright. Thanks again David.

Okay.

And your next question comes from the line of Jim Chartier from Monness Crespi. Please go ahead.

Thanks for taking my question. Just – are you seeing the same fashion shifts or product shifts overseas that you are seeing in the U.S.?

It’s different in some different countries. But yes, it’s shifting in a lot of places around the world.

And is the shift lagging the U.S., is it kind of happening coincidently?

It depends where. Parts of Europe are coincidental; parts are after. Parts of Southeast Asia are – no one is exactly the same time, but a little slower. And certainly, the slowest and the biggest lag would be in South America.

Okay. And then in terms of the new product that seems to be getting good response in the U.S., have the – have your international partners seen it and are you getting a similar response in different markets?

They have seen pieces of it. Like we said in the comments, they will be here next month in Mass for the big sales conference. The pieces they have seen and what they have already been shown, they do like. And I have no doubt that they will like the stuff when they get here and see it.

Thanks and best of luck.

Thanks.

And our final follow-up comes from the line of John Kernan from Cowen. Please go ahead.

Hi. Thanks for letting me follow-up here. Just to go back to the fourth quarter kind of implied EPS guide, it sounds like you feel pretty good about gross margin and we should expect gross margin to be up, but SG&A is a little bit tricky to figure out because you are up 20% in the first half on a dollar basis, you are up 12% in the third quarter, what does SG&A dollar growth look like in Q4?

I don’t know. I am not really sure yet. I don’t really want to come out with any numbers, but if you look at the G&A number last year, it went down from third quarter to fourth quarter in real dollar terms. And unless there is a significant growth, it usually does drop some from third quarter to fourth quarter and a lot of that is volume based.

Okay. Thanks.

There are no further questions at this time. I will turn the call back over to management for any closing remarks.

I think we are all set here. We look forward to seeing everybody in New York. If you have an opportunity, there is a lot of new product. We have been moving very, very well. You should get an idea of how it’s perceived and really what it is. So if you get the opportunity, we would love to host everybody in – within reason certainly, at FFANY in New York in December. So thanks again and we will sign off from here.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. Thank you for your participation and you may disconnect your lines at this time. Have a wonderful rest of the day.

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.