David Weinberg - EVP, COO and CFO

Scott Krasik - Buckingham Research David Buckley - Cowen and Company Jay Sole - Morgan Stanley Tom Nikic - Wells Fargo Corinna Van Der Ghinst - Citi Dan Isaacson - Macquarie Capital Christopher Svezia - Wedbush Securities Sam Poser - Susquehanna Financial Group Jeff Van Sinderen - B. Riley & Co. Inc.

Greetings and welcome to the Skechers USA Inc. First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would know like to turn the conference over to Skechers. 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 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' first quarter 2017 financial results. First quarter net sales increased 9.6% to $1.073 billion and represented both a quarterly sales record and the first time we surpassed the $1 billion in a single quarter. The sales growth was primarily the result of a 16.8% quarterly increase in our international wholesale business and a 12.8% increase in our worldwide company-owned Skechers retail stores, which included retail comps of 2.9%. Our international wholesale business comprised 45.7% of our total net sales for the quarter. Including retail, the percentage increased to 51.3% of our total sales. Our domestic wholesale business was relatively flat as we shipped 4.5% more pairs than the first quarter of last year but had a decrease in average price per pair of 4.8%, or $1.10 per pair. This is due to the shift in product mix including strong sales in our sandals and casual lines and BOBS from Skechers. First quarter highlights include record revenues of $1.073 billion, gross margins of 44.4%, a strong balance sheet with $607.8 million in cash and cash equivalents or approximately $3.90 per diluted share, a 16. 8% sales increase in our international wholesale business, a 12.8% sales increase in our company-owned retail stores, which included 59 net new stores opened compared to the prior year period including 14 net new stores in the first quarter, growing our company and third-party-owned worldwide Skechers store base to 2,055 locations, with a net addition of 60 stores in the quarter. International wholesale and retail now comprises more than half of our total business and holding our position in the United States as the number one walking, work, and casual brand and the number two brand for all women's footwear. We'd like to note that the first quarter of 2017, sales growth came on top of challenging comparisons. The first quarter of 2016 had growth of 12.1% on our domestic business, 47.1% in our international business, and 23.2% in our company-owned retail stores. Further, this year, we did not have the benefit of an additional day in February and Easter falling into March. We are pleased with the growth and strong market share we achieved and maintained in the first quarter of 2017. Our worldwide backlogs increased low double-digits with all of our business units being positive and already in April, we have high single-digit comps in our global company-owned stores. We remain optimistic about our domestic wholesale business and expect our international business will continue to grow as we continue to deliver new offerings in every category. Now, turning to our business in detail, our domestic wholesale business was relatively flat. This was the result of the decrease in price per pair of 4.8% and an increase in pairs shipped of 4.5%. The highest growth came from our women's sandals, BOBS from Skechers, men's casual and women's sport active lines, which have lower ASPs than our Sport and Performance business. For our Spring business, we ran numerous marketing campaigns supporting our brands including new campaigns with Rob Lowe, Brooke Burke-Charvet, and Meghan Trainor, along with other campaigns supporting our men's and women's lifestyle lines. In addition, we ran a new campaign for Kid's Memory Foam and lighted footwear for kids. Two keys, Skechers sponsored marathons occurred in the first quarter, the Skechers Performance Los Angeles Marathon and the Houston Marathon. Along with sponsoring these events, we ran commercials for our GOrun and GOwalk footwear as well as our growing Golf collection, which included our golf ambassadors, Matt Kuchar, Russell Knox, Billy Andrade, Brooke Henderson and Wesley Bryan, who just earned his first PGA Tour victory. As we continue to be the leading resource for walking, work and casual footwear, we're focused on maintaining our position on the floor while managing our inventory flow into key wholesale accounts. We are delivering more key styles on our new proven out sole and our men's, women's and kid's lines, and while the domestic retail environment remains challenging, we believe our product is unique and will appeal to those seeking style and value. While we are cautious due to the closing of numerous stores in 2016 and again, in the first quarter of 2017, we remain optimistic and poised to move quickly to fulfill consumer demands in our dedicated wholesale accounts. International wholesale now represents the largest piece of our three distribution channels, making a 45.7% of our total business. Total international sales increased by 16.8% or $70.4 million in the first quarter, primarily due to Asia and the Americas. The increases were the result of growth of 17.6% or $61.5 million in our subsidiary and joint venture businesses and 12.5% or $8.9 million in our distributor business. Our joint ventures are beginning to benefit from the transition of our distributors in Israel and South Korea in the second half of 2016. Transitioning these important markets to joint ventures will allow us to better manage and grow our business and maximize the potential in each market. We expect these markets, along with the region in Central Eastern Europe and Latin America that transition to subsidiaries in 2015, to have a positive benefit on our total international sales in the near future. Driving the sales was a mix of our men's and women's athletic lifestyle footwear. Our GOwalk collection, our heritage Skechers D'Lites footwear and key styles in our kid's line, all supported by global and regional marketing campaigns. Further detailing our growth internationally, the sales increases within our subsidiary business came primarily from Canada, Chile, Spain, Central Eastern Europe, and Latin America. Our business in the United Kingdom was significantly impacted by currency headwinds as we achieved sales growth of 6.1% in local currency, but a decrease of 8.2% in dollars. Further, one of the U.K.'s leading footwear chains has gone into administration, the equivalent of bankruptcy, resulting in cancellation of some orders for Skechers. Our joint ventures grew by 52.9% in sales for the quarter, led by a 39.6% gain in China and an 85.1% increase in India. China shipped 3.7 million pairs in the quarter and opened 35 freestanding Skechers retail stores, primarily through franchisees, bringing their total Skechers store count to 551. We now have approximately 2,110 points of sale in China and an extremely strong e-commerce business with growth just short of triple digits for the first quarter. In India, where our business is in the developmental stage, five Skechers stores were opened in the quarter, bringing the total store count to 72. As mentioned, we transitioned Israel and South Korea to joint ventures in the second half of 2016 and already South Korea is our second largest joint venture and was one of our largest distributors. Our international distributor net sales increased by 12.5% in the first quarter. The growth came across South America, Australia, Asia, in particular Indonesia, and the Philippines, Europe, primarily Turkey, and the Middle East, and Africa. Through our international distribution partners, joint ventures, and a growing network of franchisees, there were third-party Skechers stores in a total of 85 countries. At quarter end, there were 1,471 Skechers branded stores owned and operated by third-parties outside the United States. These include 510 distributor-owned or franchised stores, 830 Skechers stores in our joint venture countries, including those run by franchisees in the region, and 131 franchise stores in the countries where we have subsidiaries. In the first quarter, 65 third-party-owned stores opened, which included 35 in China, five in both India and Saudi Arabia, three in Turkey, two each in France, Indonesia and Japan and one each in Curacao, Egypt, Italy, Mexico, Morocco, Nigeria, Paraguay, The Philippines, Taiwan, Thailand, and the UAE. 19 stores closed in the quarter, including 11 in China and four in South Korea. 15 third-party-owned Skechers stores have opened in the second quarter to-date and two have closed. We expect another 425 to 475 third-party-owned Skechers branded stores to open in the remainder of 2017. International wholesale, which includes subsidiaries, joint ventures and distributors, now represents our largest business channel at 45.7% of our total sales at year-end. Combined with international company-owned retail stores, it represented 51.3% in the first quarter. We expect this number to continue to grow as we increase our presence in these markets that have transitioned to subsidiaries and joint ventures and as we introduce new lines worldwide later this year. In the quarter, domestic company-owned retail store sales increased by 8.2% and international retail stores sales by 28% for a combined worldwide retail sales increase of 12.8%. This included positive comp store sales of 1.5% domestically and 8.2% in our international stores for a combined total comp store sales increase of 2.9%. At the end of the quarter, we had 584 company-owned Skechers retail stores, of which 162 were outside the United States. In the first quarter, we opened 14 stores, including two concept stores in the U.K. Six company-owned stores have opened to-date in the second quarter, including a concept store in Century City, California, four stores in Japan, and a store in Italy. Adding to the growth in the quarter was our domestic e-commerce business, which grew by 23.5%. We also have company-operated e-commerce sites in Chile, Germany, and the U.K. and plan to launch additional sites in Spain and Canada this quarter. 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 an additional 55 to 70 Skechers stores in 2017, including the six that have already opened in the second quarter. Now, turning to our first quarter numbers in more detail. As I've mentioned earlier, we achieved yet another record quarter with first quarter net sales of $1.073 billion versus $978.8 million in the prior year period, an increase of 9.6%. Our growth in the quarter was primarily the result of net sales increases in our worldwide company-owned retail stores and our international wholesale business, and specifically, a 52.9% increase from our joint ventures. Our domestic wholesale business, which was relatively flat, was impacted by the Easter shift in the second quarter of 2017 and one less day in February. Gross profit was $476.5 million compared to $432.2 million in the prior year period. Gross margin remained strong at 44.4% compared to 44.2% in the prior year period. Additionally, the negative currency translation impact on our gross margins for international wholesale and international company-owned retail businesses for the quarter was $6.1 million. Selling expenses increased $19.9 million to $73. 8 million or 6.9% of sales compared to $53.9 million or 5.5% of sales in the prior year quarter. The increase was primarily due to higher international advertising and sales commissions, primarily related to our international subsidiaries and joint ventures. As a percentage of net sales, advertising expenses were approximately 93 basis points higher versus the first quarter of 2016. General and administrative expenses were $282.5 million or 26.3% of sales compared to $242.3 million or 24.8% of sales in the prior year quarter. The $40.2 million quarter-over-quarter increase was primarily due to Skechers' investments to achieve long-term global growth initiatives. This included $13.2 million associated with the company's 59 additional domestic and international retail stores and $18.3 million to support our international growth, of which $9.3 million was due to increased cost in China, $3.4 million for the transition of our South Korean distribution to a joint venture, $1.7 million in support of our new Latin American subsidiary, and $3.4 million in Japan. Domestic wholesale general and administrative expenses increased $8.6 million during the first quarter, primarily due to increased headcount in the United States to support our expansion worldwide. Earnings from operations from the first quarter decreased 10.2% to $124.4 million or 11.6% of revenues compared to $138.6 million or 14.2% of revenues in the first quarter of 2016. Net income was $94 million compared to $97.6 million in the prior-year period. Net income per diluted share in the first quarter was $0.60 on approximately 155.9 million average shares outstanding compared to $0.63 on approximately 154.8 million average shares outstanding in the prior-year period. Our effective tax rate was 14% compared with 21.8% in the prior-year period. The decrease was due to higher international pretax income in lower foreign tax jurisdictions. We expect our effective tax rate to be between 14% and 19% in 2017. And now turning to our balance sheet. At March 31st, 2017, we had $607.8 million in cash and cash equivalents or $3.19 per diluted share. Trade accounts receivable at quarter end were $551.6 million, an increase of $9.2 million from March 31st, 2016, and our DSOs were 37 days at March 31st, 2017, compared to 41 days in the same period last year. Total inventory including merchandise in transit was $585.8 million as of March 31st, 2017, an increase of $84 million or 16.7% compared to March 31st, 2016. Compared with December 31st, 2016, total inventory including merchandise in transit decreased $114.7 million or 16. 4%. The year-over-year increase was in line with our expectations and we are very comfortable with our current inventory levels due to increased revenues in our global business, increased store count worldwide, new product introductions, and increased backlogs. Long-term debt was essentially flat at $68.8 million compared to $68.5 million at March 31st, 2016. Shareholder's equity was $1.8 billion versus $1.5 billion at March 31st, 2016. Book value or shareholders' equity per share stood at approximately $11.56 as of March 31st, 2017. Working capital was $1.31 billion versus $1.07 billion at March 31st, 2016. Capital expenditures for the first quarter were approximately $28 million, of which $14.9 million was primarily related to 14 new company-owned domestic, international store openings and several store remodels; $7.1 million for international wholesale operations, $1.4 million for corporate office upgrades and $2.4 million in our China joint venture. For the remainder of 2017, we expect our ongoing capital expenditures to be approximately $40 million to $45 million, which includes corporate office upgrades, an additional 55 to 75 company retail store openings, and several store remodels, and an additional $25 million for infrastructure, primarily in our China joint venture. In summary, 2017 marks a new milestone for Skechers as we achieved quarterly sales above $1 billion for the first time in our 25-year history. This achievement was despite the shorter February and Easter falling into April this year. The growth in the first quarter was the result of strong sales in our international wholesale business and our worldwide company-owned retail business. With this growth, our international wholesale and retail became 51.3% of our total business in the quarter. With the transition of South Korea to a joint ventures and Peru and Columbia becoming subsidiaries through the transition of our businesses in Latin America, and the strong growth in Canada, China, Spain, Australia and many other markets, we believe International can become an even larger segment of our business. Our Retail segment continues to be profitable as we grow our company-owned store base to 584 stores, with retail comps of 2.9%. Together with our third-party stores at quarter end, there were 2,055 Skechers retail stores around the world. Our Domestic business maintained its solid market position with an increase in pairs shipped of 4.5% and sales relatively flat for the quarter, a result of lower ASPs. We remained the number one company in walking, work, and dress comfort casual footwear and the second largest women's footwear brand, this, in a market that has faced significant challenges in the last nine to 12 months. Looking ahead to our outlook, we are pleased with the growth and position we achieved and maintained in the first quarter of 2017. We ended the first quarter with low double-digit increases in backlog on a worldwide basis with all of our business units up a minimum of mid-single-digits. Already in April, we've achieved high single-digit comps in our company-owned retail stores, which also benefited from Easter falling into this month. Based on these indicators, we believe net sales for the second quarter to be in the range of $950 million to $975 million, which would be a second quarter sales record and earnings per share of $0.42 to $0.47. This projection includes flat to slightly positive sales increases in our domestic wholesale business and increases in our company-owned retail stores and international business. And now, I'd like to turn the call over to the operator to begin the question-and-answer portion of the conference call.

[Operator Instructions] Our first question comes from the line of Scott Krasik with Buckingham Research. Please proceed with your question.

Hey David, how are you doing?

Hey Scott, pretty good.

Good job. So, two questions here. First, just trying to understand the backlog, maybe how do we think about mid-single-digits, I guess domestically, I think it was a mid to high single at the end of the year and clearly you're not guiding to that level of growth. So, what's assumed in your flat to up low single-digit growth for the second quarter? Is it much more weighted to 3Q? Does it depend on how back-to-school ships? And then how are the new products sort of built in to that?

Well, those -- all those items you mentioned, what we're trying to get our hands around now as we move through the second quarter into the third quarter. We delivered some key initiatives in April and Easter being so late, it's difficult to get a read now until we get through the season and we're starting our buy meetings now with our bigger accounts this week, so we'll have a better idea. You also know that as far as back-to-school is concerned, there's this big shift between June and July. Until we get our hands around April, I have no way to really forecast if it moves up to June or stays in July for the third quarter. I will tell you that the backlogs have been up mid-single-digits on a domestic and even after we shipped so strongly, as well as being up low double-digits worldwide is a great pleasure to start. Our own stores, as we set her up mid-single-digits this month through April. So, obviously, the shift in Easter was pretty large and we've made up more than we gave back in the first quarter. We actually comped worldwide positive of 1% or 1.5% in March to get to the 2.9% for the quarter. We obviously comped better in January and February where we weren't missing anything. Even though you remember we're on a calendar quarter for retail, so we did give back a day of retail sales this quarter. So, by and large, our stores are holding up, our new product is checking well in our own stores and where we see it delivered to our customer base. So we would be slightly more positive as we go through April, if it holds up, than we would have otherwise been.

And as you look -- I mean are you assuming that a lot moves up into June? Or is your guidance for flat, double or single-digits for not a lot of shifting? And then maybe can you talk about how the new products are doing in your own stores, are they driving that mid-single-digit comp domestically and what are your -- could the wholesale customers chase that then incrementally?

Yes, I think it's fair to say the new product launches are doing very well. I don't know that they drive the entire brand over the entire store comps, it's too new. We're only bringing it in and testing it. It's not like we've flooded the stores and that's the only thing that's selling. So, our core product, which was the basis for being up low single-digits in the first quarter still take hold. We're getting good reports where it's delivered to our wholesale base, chasing would start relatively soon. And as far as going back to the shift, I have no major input in my numbers as to a shift into June or out of June. It's just a normal flow until I get an idea of how big the chase is and which inventory is available.

Okay. Awesome. Thanks so much. Good luck.

Thanks.

Thank you. Our next question comes from the line of John Kernan with Cowen and Company. Please proceed with your question.

Hi, this is David Buckley on for John Kernan. Thanks for taking our questions and congrats on nice quarter.

Thank you.

What changes you guys think need to take place in the domestic wholesale industry for that category to return to growth for you?

I don't know. There's too much has to happen. I think we're on the way to consolidation and closing underperforming stores and we are all over inventory. So, I think as we clean out and the inventories come back in line at retail, that we'll start to show increases through that end. It's the transition that's always difficult because of all the closures. And we have actually had, as we said, when we started this thing back in the third quarter of last year, I think sometime around September, there's a lot of -- there was and remains a lot of excess inventory in the marketplace as stores close rather than always go through a DIP and continue to sell. So, there's additional inventory from suppliers and additional inventory just from the going out of business sales. As they clean themselves out, I do believe that retail will get better in the U.S.

Okay, that's very helpful. Thank you. I know you mentioned on your remarks that India had another impressive growth rate this quarter. How large is India now from a sales comparison compared to China and some of the other large international markets?

It's relatively small certainly compared to China. Probably just less than 10% of what China is. But on a retail basis, it's almost equivalent to -- well -- if you put them both together, they're probably about 10% of what China is now and we think that could be fairly equivalent as we go down the road.

Okay, that's very helpful. One last question. How should we think about retail store growth for the remainder of this year?

I think we said in our remarks, it would be somewhere between 55 and 70. And that always depends on what's available because we're now on a worldwide basis so we need availability and the infrastructure continues to grow to build stores all over the world. So, we're going to be as aggressive as we can be, but we're very particular as to where we open in our locations and the size of the stores we get. So, we'll be opportunistic on it, but right now, our plan remains another 55 to 70 stores.

Sounds good. Thanks David and best of luck this quarter.

Thank you.

Thank you. Our next question comes from the line of Jay Sole with Morgan Stanley. Please proceed with your question.

David selling expenses were up $20 million year-over-year, can you give us an idea if that's the run rate going forward that we should expect in the three quarters that we have in the rest of the year?

No, I don't think so. I think part of it is because as we've pointed out in the comments, some of the payments for -- we do in our new joint ventures flow through there, particularly in Korea because they use a lot of third-parties and they pay commissions for processing for them and some of our other joint ventures. So, once we get to the base rate, then they don't increase that significantly unless there's a significant increase in volume.

So, does that mean that what we saw in 1Q was kind of a one-time event and then we're essentially lapping that in 2Q and going forward? Or is that Korea -- and I know it not going to happen again in 2Q or when does it stop?

Well, they go to many of the joint ventures, so some of them will be lapping as we get through the second quarter and some not until we get to the end of the year. But there's a slowdown across the Board as we move forward.

Okay. And then on the stores, if we're talking about 50 to 75 stores this year, it seems like last quarter, you're talking about 70 to 90. Is there anything -- is there any reason for that change or is that just based on availability and just timing?

Well, it's always based on availability, but we said 55 to 70 and we opened 14 in the first quarter. So, I think we're pretty close.

Got it. Okay. And then maybe just one more. There's a lot of talk about some of your bigger -- on the athletic side, bigger competitors continuing to be very promotional. One other athletic competitor is making a big effort to move into the family footwear channel, some European names continue to be strongly growing. What do you have to do to win in the second half of the year with the competition kind of increasing? And how much visibility right now do you feel like you have in the second half of the year, specifically in domestic wholesale?

For us it always comes down to the same thing. We're about product, branding product and image. And I think the fact that we shipped significantly more pairs as taste change and we're moving more to a non-technical taste as far as consumers are concerned was very positive for us and the fact that we have positive backlogs now even though we're just releasing some brand new product into the marketplace, I think we're overall positive. I think for us, it has to do with product. I think we will be very competitive and I don't think anybody really just comes in and takes it away.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Tom Nikic with Wells Fargo. Please proceed with your question.

Hey David, how are you? I guess I was just trying to think about the margins for the business, I guess kind of for the remainder of the year and when we kind of get through the full year. Should we kind of think of gross margins continuing to creep a little bit higher? And then as we kind of go through the year, maybe the SG&A growth tapers off and maybe you get margin expansion in the back half? Basically, I'm just trying to think of the margin progression as the year goes on.

Well, obviously, a lot of that has to do with topline and where your numbers come in as far as the back half is concerned. I think the thought process is absolutely correct. I think we can have some significant top line and some margin creep, depending on -- for us, the margins come from more shift, depending on which grows. I think it's fair to assume that our retail and international, where margins are higher, outside the distributor base will grow at a faster pace than the distributor base for domestic wholesale. So, that's always upside unless there's currency issues that run through the gross margin. And I think as we start to improve our topline going into the back half of the year if and when this retail environment gets better for us domestically, because I think we're doing quite well in it, then we should see some operating margin expansion as we get to those increased volumes in the back half of the year.

Got it. And I think on the last call, you said that your full year op margin was potentially biased to the upside, but not significantly. Do you still kind of think that that's in the cards or--

Well, you put me down to that, I'll tell you that's probably in the cards, but I'm feeling a little more positive now. So, by the time we get to next conference call, we'll know more. I think our new stuff is checking on the performance of the stores in April had been very good. So, assuming that continues to sell on some level through and through the next holiday period going into back-to-school, there could be some changes as we get through this quarter.

All right, sounds good. Thanks David. Best of luck the rest of the year.

Thank you. Our next question comes from the line of Corinna Van Der Ghinst with Citi Research. Please proceed with your question.

Good afternoon David. How are you?

Pretty good. Thanks.

So, I just wanted to kind of go back to the topline guidance for Q2. Where do you think your topline guidance could be conservative, just given the Easter shift and the acceleration in comps that you guys have seen April-to-date?

I think it's conservative because if we get into chase mode anywhere around the world, it moves up into second quarter. So, it will depend on what happens from here on out because we don't have any real significant change of deliveries between June and July in these assumptions. So, I think it's fair to say that we could be surprised, certainly, to the upside anywhere; domestic wholesale, our retail, our comp store sales for the quarter, which we don't have currently in the forecast at high single-digits. And certainly, our international business, as the new product continues to flow through our international subsidiaries and distributors. So, there's potential in every place we're doing business. I think that includes South America. So, I wouldn't take any of our divisions off the table as far as potential for growth.

Okay. And how are you thinking about the U.S. wholesale cadence through the rest of the year? I know you guys gave guidance for Q2, but are you looking for a stronger inflection in the back half or what is your kind of updated thinking there?

I don't think it's any different than what we just talked about. It continues to sell through the way it is now and the new product sells that well and our stores continue and our wholesale partners continue. I think there's room, especially given how difficult last year's third quarter was domestically, for significant improvements as we get to the back half of the year. I'm just too early in the cycle right this minute to tell you on what order of magnitude.

Okay, great. And then just for my follow-up question. Have you guys changed your thinking at all this year in terms of your general -- your strategy around pulling forward orders? Are you planning to take on more inventory risks to chase some of the business strategically as some other retailers have talked about this year?

We don't do that ever as a matter of course. Our full forwards are not based on speculative inventory, it's based on a supply chain that can deliver at the earliest parts of the date and we try to get them in somewhat prior to the start ship date. So, what we're doing is actually taking spoken for goods and changing the date and adding at the back end. We haven't changed our thought process overall as far as that's concern. So, while we still have the capacity to pull forward and our supply chain continues to do very well, I don't know that it requires speculative inventory to make a big move.

Okay. And then just strategically, are you guys thinking at all about how you are positioned to maybe chase some of the Payless business this year?

Well, I don't know that we go through and then identify what our plan is against a specific target. But I think it's known as price points move down, as we've just saw some of our more moderate prices have sold well, I think some of that would bode well even for that customer. So, ours is always about product and price points and whatever is available in the marketplace, we're certainly researching and plan on having an offering.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Laurent Vasilescu with Macquarie. Please proceed with your question.

Hi, this is Dan Isaacson on for Laurent. I think last call, you guys outlined that China would grow by about $125 million to $500 million this year. Do you still feel comfortable with that number and do you think there's any potential upside there?

Yes, I don't know why we wouldn't be. We're up somewhere around $30 million, $35 million this year as China's standalone, sometimes we talk about the joint ventures, but as a standalone, $30 million, $35 million, I don't know that I would take that often. Of course, anytime we do new business and anytime we bring new product to the marketplace, there's always potential for upside.

Okay. And then moving to the lower tax rate guide for 2017, this is clearly a function of more international earnings and we're just curious is this going to be something that can go into 2018, 2019 and so on? Or is it -- the tax rate should potentially step up from here after 2017?

Well, that's a tough question and that question for me goes into the category of be careful what you wish for. It's a percentage and shift thing. I don't know that it's in our best interest to ever plan that it continues to go down in a hole because the U.S. will never come back and we won't be U.S. taxpayers to a larger degree, which we don't think so. I think if tax rates do increase from here, it would come with significantly stronger topline and a bigger move both -- domestically, both in retail and our domestic wholesale. So, I don't know that I'm adverse to that. We're not planning it for the lowest possible number; we're planning it for the best business in every location.

Okay. And then last question. Could you potentially parse out inventory growth by region or by channel maybe?

Yes, it's way too -- ours go down, if you want, you can call in later or send us a note requesting some of that information. I mean, we have extensive inventory everywhere in the world and I don't want to really go through a location-by-location, store-by-store comparison right here.

Okay. Thank you.

Thank you. Our next question comes from the line of Chris Svezia with Wedbush. Please proceed with your question.

Hey David, how are you?

Hey, Christopher. I am doing well.

Good. So, I got a couple of questions for you obviously. I guess, first, just can you just maybe walk a little bit more about Q2 when you said you expect U.S. wholesale to be flattish. Is it fair to say international growth should be topical to the growth rate that you did in the first quarter or high teens and then retail was up in that low double-digit low teen growth rate. Is that fair?

Yes, that's pretty fair.

Okay. Gross margin, curious why the slowdown relative to what you've been doing. Obviously, the mix of business has been unfavorable on international EPC? And what's your thought about the second quarter as we go forward? Is it sort of like the 20 or 30 bps sort of a fair prophecy at this point?

Yes, I think that's the bottom side. I think the shift, there was some currency issues. Certainly, the biggest being the one in England, which we plan on getting back in the third quarter when our price increases go through. But I think for the second quarter, you're probably right, there's still some upside movement probably on the order of first quarter or maybe even a little better.

Okay. And when you answered an earlier question about selling expense and the level that it's at right now and you expect the same level of increase. Just help us frame out how we should think about -- I mean, Q2 should still be an increase year-over-year, but not for the same order of magnitude. Correct?

I believe that's correct.

Okay. Final point here. When I think about international for a moment and when I think previously you talked about being in a 20 [ph] growth rate for the year on international, makes an assumption that you do at least kind of mid-20 growth in back half, so a marked acceleration. Just kind of walk through why you believe that's going to happen? What are the drivers to kind of get you there?

Well, I think the comps are easier in the back half of the year for everywhere and I do think we are starting to get to critical mass and acceleration in our newer places. I think Korea will show well in the back half, I think Latin America will continue to pick up in the back half, China continues to grow in the back half, making another spur with this new product, but it's in the newer territories. And the distributors are certainly starting to pick up. They were relatively flat and tougher to deal with. So, I think everywhere around the world, we certainly have easier comps in the back half and certainly, a lot of potential in all those places to do some significant growth.

Okay. Finally, just when you talk about the new product launching, it's sort of out in the marketplace. We've seen them in stores. I know it's small, so it's not going to move the needle right away. When you talk about all the other product and sort of what's going on, so the co-categories, USA Active, what's going on there that you either change or improve, so that it starts to move the needle and gets you back to growth in the back half in U.S. wholesale?

Well, it's a shift I think in U.S. wholesale, we continue to grow. Our businesses, we had a couple of categories. It's not a one trick pony nor is it a single product in the new stuff in the marketplace. We had significant growth in our sport active business, in our Cali business, in our men's U.S.A business, all domestic, they're all significant. So, I think as we sort of trough here and get through when everybody cleans out their inventory, I think the desire for our product will continue to grow. And we'll pass to other categories as well as new product. For us, it's all about product. We have new offerings in every category we compete in and we think a lot of them are getting some positive responses now.

Okay. All the best and we'll see you soon David. Thanks.

Thanks.

Thank you. Our next question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.

Hi David. How are you?

Hey Sam, pretty good.

Good. Okay, I have three questions. Number one, what percent of actual sales are represented by the backlog?

At any point in time? Historical, I mean [Indiscernible]

Over in the last year? Last year, if you gave backlog with Q1 last year, it was $100, what does that represent to the sales in the quarter? I mean--

Well, it can't represent much more than 60% or 70% because we don't run retail through backlog. So, that comes off the table. And of the rest, I would think it's -- it changes from season-to-season. So, and the account backlog, if things move within quarters, if stuff that's backlog for July moves to June or June to July, would do you consider that -- I mean that's a very--

So, you're saying you're back -- you're giving us a revenue number for Q2 and you said your backlog up x, so what percent -- I mean, I don't want -- you can be specific if you want, but what percent of your backlog is represented for the delivery period you're guiding to, what percent of the backlog are represented in those sale -- or what percent of the sales are represented by the backlog, excuse me?

Yes, it changes by country. I would tell you that 80% to 85% of sales in the quarter comes through the backlog.

Okay. Thank you. And then secondly the taxes, when we think about the taxes for the balance of the year, I mean, are you saying we should run it in that range that you gave us or is it looking more like 20%, which gets you to about 18% at the end? I mean how should we think about sort of going forward?

I wouldn't throw out the range of it and anticipate that, that was going to be the range. So, I think you should use that range probably in the middle or so because the way taxes are calculated, we make our best guess for the whole year. And I think it's going to be on the lower end of that range. We just leave some room should business shift as we go out. Right now, that's our best guess.

Okay. And then lastly within your guidance you're running -- you're having a nice comp quarter-to-date, but, I mean, what kind of comp are you building into this revenue guidance right now?

Low to mid-single-digits.

Thank you very much. Good luck.

Thanks.

Thank you. Our next question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed with your question.

Hi David. I wonder if you can just maybe give us a little bit more on the YOU launch. I know it's really early and don't want to pin you down too much, but can you talk about maybe what you've experienced in your own stores in terms of sales so far with YOU? And I guess maybe how that compares to similar product launches in the past? And then maybe give us a little more on what the wholesale rollout to your retail partners looks like with YOU over the next month or so? And then I guess maybe any sense of how many SKUs are initially taking would be helpful.

Okay. But that's kind of difficult. We're still early in the game. We just thought of delivering YOU in April. I think all the positive things we've talked about here on the call are not specific to a single launch or a single item. I don't know that that in particular would change anything. Right now, what we've seen at the very, very early stages and it's just delivering has been very positive, but the whole line has been very positive. So, it's not unique, it's doing well as a launch as is a number of other products that we have. So, it's just too early to identify whether that's the next great -- or a good thing or a moderately great thing. We think it's very positive and it's getting good reception, but it's way too early to make any projections.

Okay. Understood. And then not to beat a dead horse, but on domestic wholesale overall and I think you've guided to flat to up in Q2 and I'm just wondering everything that you have access to you can see everything that we -- a lot of things we can't see, obviously, do you think that the probability has now increased that your domestic wholesale business will be positive in Q3?

I think that depends on Q2, but yes.

Okay, good. And then one final one. Just on CapEx. I think you said -- did you say an additional $40 million to $45 million this year?

Yes and $25 million in China.

Okay, okay. Good enough. Thanks very much and good luck for the rest of the quarter.

Thank you, ladies and gentlemen. We have time for one more question which is a follow-up coming from Scott Krasik with Buckingham Research. Please proceed with your question.

Hey David. Thanks for squeezing me in. Just wanted to clarify the comps. So, for the second quarter that you have in your guidance, you're assuming low to mid-single-digits comps globally.

Yes.

And then just as you look back last year in May and June, do they get much harder compared to April? I know we obviously have the Easter shift, but--

No. April is the Easter shift. May actually is not that tough a comparison, but June did get somewhat better. So, -- and obviously, back-to-school was not as tougher comparison at the back end certainly in September. So, there's certainly some upside in there if things continue to [Indiscernible] in April.

Okay, perfect. And then just last can you give us sort of order of magnitude, there's always a lot of talking about the family channel. I know a bunch of retailers sort of make up the family channel, but if you had to say what percentage of your domestic wholesale business collectively is represented by that, could you give us some sort of percentage?

Probably not. We have to sit down and talk about how you even identify what's in there. Where the department stores go, where some other--

I'm thinking more like the rack room, the shoe show, the famous is, the carnivals, just like the pure family?

None of our groups are half. So, if it's just family, it's certainly less than half of our domestic wholesale business. Certainly, if you count our stores, which is a key grower domestically, it's significantly less than half.

Yes. Okay, great. Thanks David.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the call back to Skechers for closing remarks.

There must have been --

Thank you again for joining us on today's call. We would just like to note that today's call may have contain 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 teleconference. You may disconnect your lines at this time. Thank you for your participation.