David Weinberg - Executive Vice President; Chief Operating Officer and Chief Financial Officer

Scott Krasik - Buckingham Research Jay Sole - Morgan Stanley John Kernan - Cowen & Co. Corinna Van Der Ghinst - Citi Laurent Vasilescu - Macquarie Capital Sam Poser - Susquehanna Financial Group Christopher Svezia - Wedbush Securities Tom Nikic - Wells Fargo

Greetings and welcome to the SKECHERS second 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 now like to turn the conference call over to SKECHERS. Please go ahead.

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 US Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q report, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of other significant risk factors that may affect the company's business, results of operations and financial conditions. With that, I would like to turn the call over to SKECHERS' Chief Operating Officer and Chief Financial Officer David Weinberg. David?

Good afternoon. And thank you for joining us today to review SKECHERS' second quarter and six-month 2017 financial results. Second quarter net sales increased 16.9% to $1.026 billion and represented a new second-quarter net sales record. The sales growth was the result of a 6.4% increase in our domestic wholesale business, an 18.6% increase in our international wholesale business, and a 28% increase in our worldwide company-owned SKECHERS retail stores, which included worldwide retail comps of 7.1%. Our international wholesale business comprised 35.1% of our total net sales for the quarter and 40.5% for the first six months. Including international retail, the percentage of total sales represented 45.6% for the quarter and 48.5% for the first six months. Second quarter highlights include record revenues of $1.026 billion, gross margins of 47.6%; a strong balance sheet with $751.6 million in cash and cash equivalents of approximately $4.81 per diluted share; a 6.4% increase in our domestic wholesale business, with an increase of 11.4% in pairs shipped; an 18.6% sales increase in our international wholesale business; a 28% sales increase in our worldwide company-owned retail stores, which included 68 net new stores opened compared to the prior-year period, including 31 new stores in the second quarter. Grew our company and third-party owned worldwide SKECHERS store base to 2,305 locations, with a net addition of 343 stores in the quarter, maintained our position in the United States as the number one walking, work and casual lifestyle brand and the number two brand all footwear, all casual and athletic footwear and all women's footwear. Signed multiplatinum recording artist Camila Cabello through a multiyear marketing agreement for our women's footwear and recently retired Dallas Cowboys quarterback Tony Romo for a marketing agreement for our men's footwear, and celebrated our 25th year in business this past May. Second-quarter net sales exceeded our expectations, achieving a new record for the quarter and making the first half of 2017 a new record, with sales of $2.099 billion, an increase of 13%. We're particularly pleased that the growth came across all three of our distribution channels, especially our domestic wholesale business which was flat in the first quarter. With low double-digit backlogs globally, our planned retail expansion and the development and delivery of our new products, we believe our momentum will continue in the second half of 2017. Now, turning to our business in detail. Our domestic wholesale business increased 6.4% for the second quarter and 2.8% for the first six months. The quarterly growth was the result of an 11.4% increase in pairs shipped, but the average price per pair decreased 4.5%. The leading growth categories in the second quarter were our men's and women's casual, women's SKECHERS GOwalk, active, sandals and BOBS from SKECHERS. In addition, we delivered new products in the second quarter, including NEW by SKECHERS and SKECHERS Street, both of which sold in strong. Our Energy Light collection for boys and girls also performed well at wholesale. To support our business, we continued our campaign featuring Rob Lowe, Brooke Burke-Charvet, Kelly Brook, Howie Long, Sugar Ray Leonard and Meghan Trainor, along with other campaigns supporting our men's and women's lifestyle and walking lines. In addition, we ran our Energy Light commercial and a new spot for YOU by SKECHERS. Many of these campaigns also ran on select digital networks. To support our GO GOLF line, which grew by mid-double-digits, we continue to air our numerous campaigns featuring our brand ambassadors – Matt Kuchar, Russell Knox, Billy Andrade, Brooke Henderson, Belén Mozo and Wesley Bryan on the golf channels. We continue to be the leading walk, work and casual footwear brand and are second for the categories of all footwear and all casual athletic, accomplishments we are proud to have achieved and maintained. Well, the domestic retail environment remains challenging with the closing of numerous stores in 2016 and through the first half of 2017, we believe our product is unique and will appeal to those seeking comfort, style and value. We are pleased with our strong mid-single digit growth in the second quarter. We experienced the pull-forward of shipments the last few weeks of June, which we believe is an indicator of the demand for our product. Our July shipments have been strong as well and we remain optimistic and poised to move quickly to fulfill consumer demands and our dedicated wholesale accounts. We're looking forward to robust sell-throughs for our back-to-school product. And in the third quarter, we are delivering new offerings in our active, casual and sport categories for men, women and new Lighted footwear for the holiday. International wholesale represents the largest piece of three distribution channels, making up 35.1% of our business. Total international wholesale sales increased by 18.6% or $56.5 million in the second quarter and 17.5% or $126.9 million for the first six months. The second quarter increases were the results of growth of 19.4% or $44.8 million in our subsidiary and joint-venture businesses and 16.1% or $11.7 million in our distributor business. Driving the increases was double-digit growth in key markets globally, from the pan- Asia region to South America and Europe to the Middle East. Israel and South Korea transitioned from distributors to joint ventures in the second half of 2016 and Central Eastern Europe began shipping as a subsidiary in the first half of 2016. Along with Latin America, we see great potential in these markets and think they will become more positive contributors in the near future. Further detail on our growth internationally. For the quarter, our wholly-owned international subsidiary business grew by 5.2% due primarily to growth in Germany, Spain, Benelux, Italy, France and Chile. Our Alpine region was essentially flat on pairs ship, but down in dollars due to currency. UK was also negatively impacted by a leading local retailer shutting its stores after bankruptcy. Our joint venture sales grew by 62.4% for the quarter, led by double-digit gains in China and the addition of sales from South Korea, which is now one of our largest joint ventures, with 53 SKECHERS stores. China shipped 3.7 million pairs in the quarter and opened 107 freestanding SKECHERS retail stores, primarily through franchisees. And with the closing of nine stores, they ended the second quarter with 685 SKECHERS stores, including China's largest store to date at more than 14,000 square feet in the tier one city of Chengdu. At quarter-end, we had approximately 2,235 points of sale in China and an extremely strong e-commerce business, with triple digit growth for the second quarter. In India, where our business is just developing, 14 SKECHERS stores were opened in the quarter, bringing the total store count to 84. Our international distributor net sales increased by 16.1% in the second quarter and 14.3% for the six months. In the quarter, the growth came primarily from Australia, Indonesia, Taiwan, Russia and the UAE, which handles much of our business across the Middle East and Africa. At quarter-end, there were 1,691 SKECHERS-branded stores outside the United States that are owned and operated by international distribution partners, joint ventures and a growing network of franchisees. Through our partners, the first SKECHERS stores opened in Botswana, Bulgaria, Iraq, Kosovo and Pakistan in the quarter, giving consumers the opportunity to now shop at a SKECHERS store in 90 countries as well as the United States. In the second quarter, 187 third-party owned stores opened, which include the already mentioned 107 in China and 14 in India, as well as 10 in Indonesia, 8 in Saudi Arabia, 4 in Spain, 3 each in Australia, Turkey, Qatar and Italy, 2 each in Angola, Netherlands, the Philippines, Taiwan, Thailand and the UAE, and 1 each in Botswana, Brunei, Bulgaria, Canada, Denmark, Egypt, England, Iceland, Japan, Kazakhstan, Kosovo, Lebanon, Malaysia, Mexico, Northern Ireland, Pakistan, Poland and Vietnam. Fourteen stores closed in the quarter. Four third-party owned SKECHERS stores have opened in the third quarter to date, including two in India and one each in Algeria and Australia. We expect another 240 to 260 third-party owned SKECHERS-branded stores to open in the second half of 2017. International wholesale, which includes subsidiaries, joint ventures and distributors, represents our largest business channel at 40.5% of our total sales for the first half of 2017. Combined with the international company-owned retail stores, it represented 48.5% for the same period. We expect to further grow our business in the global marketplace, with the addition of new product lines through the opening of more SKECHERS stores, including in new cities and countries, such as our first two planned in Switzerland later this year and with the expansion into more doors. With international backlogs approaching mid-double-digits, we expect strong double-digit net sales increases for international in the second half of 2017. In our global company-owned retail business, net sales increased 28% for the second quarter and 21.3% for the first six months. The second quarter gains were the result of increases of 14.5% in our domestic retail stores and 67.4% in our international retail stores. This included positive comp store sales of 7.7% domestically and 5.1% in our international stores, for a combined total comp store sales increase of 7.1% in the quarter. At the end of the quarter, we had 614 company-owned SKECHERS retail stores, of which 179 were outside the United States. In the second quarter, we opened 31 stores, including concept stores in Tokyo's key shopping area Shibuya, the renovated Century City Mall in Los Angeles and New York Soho area. In addition, we opened two concept stores in leading malls in Lima and Bogota, which will serve as models for the relaunch of SKECHERS in Peru and Columbia respectively. In June, we also opened a 24,000 square-foot superstore in Ontario Mills in Southern California, which has dedicated shops for men, women, work, performance apparel and a kids area, complete with a theater. In the quarter, we also relocated several stores for improved visibility and, in some cases, bigger footprints, including locations in San Francisco's Powell Street as well as Miami's Aventura Mall and Dolphin Mall and Las Vegas Premium North Outlet Center. Three company-owned stores have opened to date in the third quarter, including one in the UK and we relocated our 34th Street store for improved visibility. Further, we plan to open two more stores tomorrow, including one in Italy. Adding to the growth in the quarter was our domestic e-commerce business, which grew by 27.9%. We also have company-operated e-commerce sites in Chile, Germany and the UK and we launched new company-owned commerce sites in Spain and Canada during the quarter. With the strategy to continue opening retail stores in key global markets to further build the brand and meet consumer demand, we expect to open an additional 35 to 40 company-owned SKECHERS stores in 2017 and remodel or relocate several other stores to increase our footprint and visibility. Now, turning to our second quarter results in more detail. Second quarter record net sales increased 16.9% to $1.026 billion versus $877.8 million in the prior-year period. Our double-digit growth in the quarter was the result of net sales increases in all our business segments, including company-owned global retail stores of 28%, international wholesale of 18.6%, and domestic wholesale of 6.4%. Gross profit was $488.3 million compared to $416.3 million in the prior-year period. Gross margin remained strong at 47.6% compared to 47.4% in the prior-year period. Selling expenses increased $24 million to $100 million or 9.7% of sales compared to $76 million or 8.7% of sales in the prior-year quarter. The increase was primarily due to increased domestic advertising expenses of $5.2 million and international advertising expenses of $6.4 million, which was primarily due to our European subsidiaries, as well as in Japan and South Korea, and an additional $4.2 million in selling commissions from our joint venture in South Korea. As a percentage of net sales, advertising expenses were approximately 34 basis points higher versus the second quarter of 2016. General and administrative expenses were $305.3 million or 29.8% of sales compared to $243.2 million or 27.7% of sales in that prior-year quarter. The 62.1 million year-over-year increase was primarily due to the investments in our brand and business to achieve both our short and long-term global growth initiatives. This is evident in both the expansion of our company-owned global retail business, which had the highest net sales dollar on percentage gained, followed by our international wholesale business. Given the increase in our international business, which for the first six months represented 48.5% of our total business, we believe the greatest opportunity for expansion is international and we will continue to invest in our infrastructure and marketing to support this progress. The expenses for the quarter included $22.3 million associated with the company's 68 additional domestic and international retail stores and $26.2 million to support our international growth, of which $16.9 million was due to increased costs in China, $3.6 million was related to the transition of our South Korean distributor to a joint venture, and $2.4 million was related to Japan. In addition, $4.2 million was related to increased depreciation. Domestic wholesale general and administrative expenses increased $13.5 million during the second quarter, primarily due to increased headcount in the United States to support our expansion worldwide as well as our expansion into new categories and brands. Earnings from operations for the second quarter decreased 14% to $86.3 million or 8.4% of revenues compared to $100.4 million or 11.4% of revenues in the second quarter of 2016 as a result of the significant investment we made to support our future growth. Net income was $595.5 million compared to $74.1 million in the prior-year period. Net income per diluted share was $0.38 on approximately 156.2 million average shares outstanding compared to $0.48 on approximately 155 million average shares outstanding in the prior-year period. Our effective tax rate was 16.1% compared with 12.7% in the prior-year period. The increase was due to changes in the mix between foreign and domestic taxable income when compared to 2016. We continue to expect our effective tax rate to be between 14% to 19% in 2017. Net sales for the six-month period ended June 30, 2017 set another record, increasing 13% to $2.099 billion compared to $1.857 billion in the prior-year period. Gross profit was $964.8 million or 46% compared to $848.4 million or 45.7% in the prior-year period. Selling expenses were $173.8 million or 8.3% of sales compared to $129.8 million or 7% of sales from last year. General and administrative expenses were $587.8 million or 28% of sales compared to $485.6 million or 26.2% of sales last year. Earnings from operations for the first six months of 2017 were $210.7 million or 10% of sales versus $238.9 million or 12.9% of sales for the same period last year. For the six-month period, net income was $153.5 million compared to net income of $171.7 million in the prior-year period. Diluted earnings per share were $0.98 on approximately 156 million average shares outstanding compared to diluted earnings per share of $1.11 on approximately 154.9 million shares last year. And now turning to our balance sheet. At June 30, 2017, we had $751.6 million in cash and cash equivalents of $4.81 per diluted share. Trade accounts receivable at quarter-end were $494.7 million, an increase of $26.1 million from June 30, 2016 and our DSOs were 36 days at June 30, 2017 compared to 40 days in the same period last year. Total inventory, including merchandise in transit, was $669.7 million, an increase of $79 million or 13.4% compared to June 30, 2016. The year-over-year increase was in line with our expectations and we're 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. Compared with December 31, 2016, total inventory including merchandise in transit decreased $30.8 million or 4.4%. Long-term debt was $68.3 million compared to $68.1 million at June 30, 2016. Shareholders' equity was $1.8 billion versus $1.6 billion at June 30, 2016. Book value or shareholders' equity per share stood at approximately $11.39. Working capital was $1.359 billion versus $1.155 billion at June 30, 2016. Capital expenditures for the second quarter were approximately $47.6 million, of which $26.2 million was primarily related to 31 new company-owned domestic and international store openings and several store remodels. And approximately 20 million for land to be used for our China distribution center. For the remainder of the year, we expect our ongoing capital expenditures to be approximately $35 million to $40 million, which includes corporate office upgrades and additional 35 to 40 company retail store openings and several store remodels. In summary, we celebrated our 25th year in business in May of 2017, a monumental milestone marked by new records in sales, the launch of new lines and continued international expansion. The company has come a long way from its roots in men's logger boots and is now the leader in the United States for walking, work and casual lifestyle footwear and the second largest in all footwear and casual athletic footwear. In addition, SKECHERS is now a leading brand in many countries around the world, a testament to the strength of our products globally. Further, in the second quarter of 2017, we exceeded our next sales expectation and achieved a new second quarter net sales record, with quarterly sales of over $1 billion for the second time. This growth came across our three business channels with double-digit increases in our company-owned global retail business and our international wholesale business and strong single-digit growth in our domestic wholesale business. International grew to over 50% of our total business in the first quarter, but decreased slightly to 48.5% for the first six months due to the strong growth of domestic company-owned retail and US wholesale businesses. We believe they will again surpass the 50% mark this year as we see international having the strongest growth potential among our three business channels. China continues to have double-digit improvement and our joint ventures in India, Israel and South Korea are in the development stage and we believe will have an increasingly positive impact in the near future. Additionally, the transition in Latin America from a distributor to a subsidiary model is allowing us to invest and grow in several countries we believe have strong potential, specifically Peru and Colombia. Our company-owned retail segment continues to grow profitably and now has 614 stores with retail comps at 7.1%. In the quarter, we opened several key locations, including Tokyo shopping district of Shibuya, the newly renovated Century City Mall in Los Angeles, and New York Soho. Together with our third-party stores, at quarter-end, there were 2,305 SKECHERS retail stores around the world, spanning an additional five countries where SKECHERS stores did not previously exist. We value our brand image and are continually striving to market SKECHERS globally. In the second quarter, we signed multi-platinum recording artist Camila Cabello to a multi-year deal to support our women's business. With an enormous following on social media, Camila speaks to young women around the world and we're excited to have her on board. In addition, we signed recently retired Dallas Cowboys quarterback Tony Romo to a multi-year marketing agreement for our men's lines, creating an even stronger legends team with our new slugger David Ortiz who recently retired from the Boston Red Sox. And now turning to our outlook. With low double-digit increases in backlogs on a worldwide basis, already a strong July in regards to both shipping and our incoming order rates, we believe we are on track for record sales growth in the back half of 2017. With the investments we have made in our business globally and our strong cash and inventory position as well as new product initiatives we are delivering, we believe we are well-positioned for continued sales growth in the second half of 2017 and into 2018. Based on these key indicators, we believe we will achieve net sales in the third quarter in the range of $1.05 billion to $1.075 billion, which would represent a third-quarter sales record, and earnings per share of $0.42 to $0.47. This projection includes flat sales in our domestic wholesale business and double-digit increases in both our international wholesale business and domestic international company-owned retail stores. And now, I'd like to turn the call over to the operator to begin the question-and-answer portion of the conference call.

Thank you. [Operator Instructions]. And our first question is from Scott Krasik of Buckingham Research. Please go ahead.

Hey, David. How are you doing? Congrats on a big sales quarter.

Yes. Thanks, Scott.

So, my question – I guess I have two questions on margins. One sort of more near-term and then one longer-term. If we go back to last quarter when we talked about the growth in SG&A at least on a dollar basis, I think you had indicated maybe it would be similar to the first quarter, which was up $60 million and it was up – a little over $80 million. I’m just wondering what level of visibility you have for that maybe over a three-month period. And then, you're, obviously, very bullish on the sales outlook longer-term. So, when do you expect to see any operating leverage? Can margins expand? What should margins look like if you continue to grow this business double-digits next year? Thanks.

I think as we've spoken before, we said many times we think next year is an inflection point as far as operating margins are concerned unless there's some new additions to our transition to joint ventures and subsidiaries, which I don't see right this minute. So, I think what you have to get used to is the fact that our expenses were up in the quarter more than we anticipated. And that had to do with all the countries we're converting and they're moving quite quickly on the sales end and they're a little more expensive to get the stores and the personnel and the amount of people they need, given the sites that they're doing. Also, China is growing extremely strongly. And the big piece of that growth is online, which has more cost per dollar. I mean, you can get to an equivalent operating margin, but you’ve got to fill in the cost. So, I think if you look around, given that we've now created two new categories or three new categories that we're dealing with and constantly looking for more, we have great hopes for SKECHERS Street, BOBS, YOU by SKECHERS, all of which are continuing to move, as well as new additions to our sport and active line. So, we've invested quite largely there. So, I would think barring any significant change in our merchandising schemes or our consumer taste and no more absorption for new companies at the present time, we would certainly begin to leverage as we come into what I believe is going to be a very strong Q1 next year.

And is it unrealistic – I mean, most of the global athletic footwear companies have double-digit operating margin. Can you guys get to 10% next year? Can you get – where should we think about it? Atlantic Aviation I think 10% is a pretty low number. I think we can get higher than that because I think we'll see significant growth without the same expense increases because we're deleveraging what we're building this year. So, the first few years and – the initial growth are always the hard part and they tend to pull from your leverage. But I do think as we get to next year, we should get back into what I would think would be in the 12%, 13% operating margins, maybe even a little better, on pretty good growth.

All right. I’m looking forward to that then. Thanks so much, David. Good luck.

Thank you. The next question is from Jay Sole of Morgan Stanley. Please go ahead.

Great. Good afternoon. David, can you talk about domestic wholesale, the guidance for 3Q, talk about flattish. Is that in line with your expectation, maybe from – versus three months ago and what's changed on the margin?

Well, I think what's changed is the movement right now and our hope to be conservative until we see exactly what's going on in domestic marketplace. We had a 6% increase which was significantly larger than we anticipated for this. And I would tell you the biggest piece of that was movement from what had originally been anticipated – July shipments back to June. So, if pull that and you get a big mid-single digit increase in shipments for second quarter, it comes at a backlog which would begin for the third quarter, which is why backlogs for domestic wholesale are only up low single digit. The key part to this is we still stand to be relatively flat to last year, which is our projections. But should we get the extra return – we think it's on the conservative side. But should we get the extra turn into September for a good back-to-school with the stuff being delivered earlier, then that would be some significant upside for us potentially for this quarter. And we have to see how back-to-school develops.

Okay, got it. Maybe just – you talked about your general expectation for international wholesale growth in 3Q and 4Q, maybe can you put the finer point around maybe the percent increase that you're looking for in 3Q and maybe the percentage increase [indiscernible]?

I think we continue. We should be in the low-double-digits for both subsidiaries and distributors. We may get to 20% or 20-plus percent on the subsidiaries and joint ventures [indiscernible]. But I think that growth certainly continues, barring any infections or changes in the worldwide scene, obviously, with currencies or business environment.

Got it. And maybe if I sneak one more in. In terms of the how the stores – obviously, 7% comp is very strong in 2Q. Have you seen that growth rate continuing in July? How are the stores comping so far in 3Q?

The stores are about mid-single digits in the early part of July. They continue to hold up US and international with no major changes. We are waiting to get into the real push for back-to-school. That’s usually our strength, so we'll see how that works out.

All right, got it. Thanks, David.

Thank you. The next question is from John Kernan of Cowen. Please go ahead.

Good afternoon, David. Thanks for taking my question. So, shifting to fourth quarter a little bit, can you help us understand the SG&A increase – SG&A dollar increase you would expect in 4Q? I know it's a smaller quarter for your P&L, but just want to see what kind of handle you have and what visibility you have into SG&A beyond just Q3 because it did come in higher than your guidance for this quarter? I think some people were worried [indiscernible] into next year.

Well, I think this all has to do with new territories and where we stand. So, it would depend on how we get through back-to-school and what the prognosis is for fourth quarter for the expenses. If we see the opportunity to push sales because we've had a strong third quarter around the world and spring is anticipated to be very strong and if we're moving some deliveries from January into December, which is certainly possible, as strong as we foresee this line to be, then we'd obviously spend more to get it all set and started. So, I don't anticipate any outsized increases in Q4. I don't have anything really new going on other than the fact that I still have South Korea that I haven't had a full year with, so I’m not comping yet. But other than that, we don't anticipate if there's significant increases in Q4. It's a relatively small quarter for us, both from the selling line and the G&A. So, I don't look to have a lot of push there.

Okay. So, you gave us some comments – general comments on next year. You mentioned 10% operating margin being too low. You're talking towards 12% to 13% operating margin. I guess if we look back from 2013 through 2015, your leveraged SG&A well over 500 basis points. I’m just wondering what type of SG&A level – when this hit, what the magnitude of the leverage you think it can be if the sales line holds up at this rate?

Well, I’m a very optimistic kind of guy. And if you look at our past, when you see us ramp up, when we said all these things – I mean, this is a transition on two levels for us. Transition based on consumer taste, which has developed new categories for us to compete in which are significant around the world, and building infrastructure in four or five territories at the same time. Once we get through this, it would depend – obviously, our operating leverage would depend on topline growth. So, I don't want to put any numbers out there too far in advance of what it could be. But we think some of these territories can grow quite well. And the bigger they grow, we'll have more possibility to get operating margins back to historical levels and maybe even a little better depending on where the growth is.

If I can sneak one more question in, the $13.5 million investments in domestic wholesale and SG&A, are we done with that? You were going to invest more domestically within the United States to support the growth here.

First of all, the growth in domestic wholesale is sort of a misnomer because we put some of – all our designers and merchandises and actually is a worldwide functionality and the new categories. But, yes, I think the biggest part of our increase is done unless there's significant new categories to open up to start. So, other than retail, which is still a very strong piece for us, and our retail is holding up quite well in the United States and we're looking to move to bigger boxes, we find all our merchandising is working well. Not only the book value, but the apparel is starting to pick up and socks and bags, and we have bigger formats that can carry themselves and do quite well. So, other than retail in the United States, which I fully anticipate will continue we will continue to invest in, we shouldn't show the growth on domestic expenses.

And then just housekeeping, you mentioned mid-double-digit backlog internationally. Is that mid-teens? Is that more than mid-teens? What type of percentage rates should we expect out of that?

It's very low teens.

Okay, thank you.

Okay.

Thank you. The next question is from Corinna Van Der Ghinst with Citi. Please go ahead.

Thank you. Hi, David.

Hi.

Just to follow up on your Q3 US sell-through guidance, it seems like [indiscernible] based on the momentum and even the backlog and even with the pull-forward…

I'm having trouble hearing you. You're a little cloudy. Can you start again?

Sure. Hi. Can you hear me better?

Oh, much better.

Okay, great. I just wanted to follow up on your Q3 US wholesale guidance, which it seems very conservative just based on the momentum that you guys are seeing in the marketplace and even with the backlog being adjusted for the pull-forward, but maybe you could walk us through what you're seeing in the environment exactly right now. Are there specific channels that you are more cautious about? Are you seeing an increase in retailers who are holding back there hoping to buy dollars? I know you said that the sell-ins are pretty strong for the new product lines, but do you have any read so far on how those are selling through from what wholesalers are telling you right now?

Yeah. I mean, we've had fairly good reports coming back on the new product, but it's still early. It's very difficult – I don't know that we – while we have some requests for reorders as we get to this early part of back-to-school and for more product in a couple of categories that have shortage, it's way too early for anybody to take today's sell-ins and convert that to new orders or moving the inventory around. I think it's fair to say it is conservative. It's based on having a relatively flat backlog and not being sure how strong back-to-school will be. But I would think there could be upside to that should we have anywhere from a good to a very good back-to-school period. We're starting to sell well. Our inventories are in great shape. We're going through the transition very well and we have every hope that it will be certainly significantly better than flat. But we don't want to get too far ahead of ourselves.

And just in terms of the back-to-school season, what are you kind of expecting for US back-to-school this year? And are you seeing any pressure from kind of ongoing discounting last year? I know we talked quite a bit about some of your bigger competitors promoting in the marketplace and that may put a little bit of pressure on your US numbers. Is that something that you continue to see as we get into back-to-school here?

Yes. That is some still going on, obviously. There is still sales and still some advertising on TV for lower prices. But I think we found our way. I mean, if you think about it, there's been a taste in consumer trends. And some of it is lower priced, a la some of the new and less high-tech. We increased our units by over 11% in the quarter. That's significant. That’s a significant amount of shelf space. So, I think, yes, while we still see it out there, I think we're competing against it quite well and still holding our own. Obviously, if that goes away, I think we could see an uptick from here as far as our sell-throughs moving through retail.

Okay, great. And then just one follow-up on the international, is China – how is China kind of performing relative to your previous guidance of $500 million? Is that kind of how you are still tracking or could you be on pace to do better than that?

Well, we certainly could be on pace to do better than that. We've done well. If you take a look, we've done just over – just short of $250 million year-to-date for the six months in China. There is no reason to indicate that anything will slow down from there. So, if anything, I would say we are on target to do somewhat over $500 million.

Great, thank you so much.

Thank you. The next question is from Laurent Vasilescu of Macquarie. Please go ahead.

Good afternoon, David. Thanks for taking my question. I want to follow-up on the domestic wholesale guide for the third quarter. Can you potentially qualify in dollar terms how much was shifted from 3Q into 2Q? And is there any potential pull-forward from 4Q into 3Q that we should consider for this year?

To the second part first, yes, absolutely. That's where the positive [indiscernible]. We booked very well on a flow basis and we booked very well for the beginning of Q4. October actually has looked quite strong for us, which is never strong. So, that always is available to pull up. So, that is certainly there and certainly would be with the positive push. As far as what moved it, it's very difficult. I would guesstimate, and it's my own feeling for startups, it's somewhere in the $20 million range that has shifted from what was originally July into June – I mean, July into the second quarter.

Okay. And then for the fourth quarter into third quarter, anything we should consider?

Sorry, say that again.

Yeah. Is there anything we should think about in terms of calendarization for domestic wholesale between the fourth quarter and the third quarter?

No. I think it goes through. Fourth quarter has never been a strong quarter. It's always been the smallest quarter of the year, although it has on occasion been a springboard to go into first quarter. So, that I would look at. If back-to-school is strong and we go into the holiday season on relatively strong bases, good possibility that some of our spring shoes, especially in warmer areas around the world, could move up into the fourth quarter. That’s happened to us as well in the past. So, we're looking for a lot of positive opportunities going forward. But we have to wait and see the sell-throughs.

Okay, very helpful. And then on international wholesale, I wanted to follow-up on the guidance for double-digit increases for the third quarter. I think to get to the midpoint of total company revenue guidance for the third quarter, it looks like international wholesale can actually be as high as 20%. Is that a fair estimate?

Yes, I certainly think it can be. Some of it will depend on currency. We're doing very well. We expect to pick up some of those losses from UK, although they don't move the needle in of itself. And even in Switzerland, put price increases. And euro and the pound have gotten somewhat stronger now. So, there's a lot of good opportunity for us.

Okay, very helpful. And then lastly, on China, I think you had mentioned that you have done $250 million. It looks like for the second quarter, correct me if I’m wrong, but your China revenues is up 45% around there. It looks like the China number – it looks like China could be much bigger than $500 million for this year. Any further guidance on like – should we think $500 million to $550 million or potentially more? And then lastly, can you tell us how much you do in China on e-commerce?

I don't know that we want to give out numbers that specific. E-commerce is the biggest single piece and has grown the most. Obviously, we said it doubled, but it doesn't make up half the business or anything quite like that. I would tell you, is it possible to get to $550 million in China, I think that would be a stretch from now because we're planning through the $500 million. It's certainly possible. A lot of it will depend on singles day and how things hold up at the back half of this year as well as competition. But I wouldn't take it off the table.

Okay, great. Congrats again.

Thanks.

Thank you. The next question is from Sam Poser of Susquehanna International Group. Please go ahead.

Good afternoon, David.

Hey, Sam.

All right. So, just to clarify something regarding all the moving parts of the way the order flowed, the orders that got moved from 3Q to 2Q were really primarily end-of-quarter to allow the retailers to set up earlier for back-to-school. Is that correct?

I don't know if it is in allowance, but that's what happens. Obviously, they had room for it and they come at the earlier part of the cycle and taken it early. But it's certainly good for us.

So, the way this theoretically would flow, if sales went back-to-school, kicks off in early August, late July/early August, that’s outpacing – September orders theoretically would move into the end of August and then October orders would move to fill that gap in September. Is that a fair way to think about it? But it's all going to be predicated on how well the product sells really in the four to six weeks.

Okay. And then on the SG&A, I mean, you're still going to – when you look at 2018, we're still looking at SG&A growth, just fair enough to be not at the degree we've seen this year and that SG&A growth in Q4 of this year would moderate somewhat. Is that a fair…?

That’s a fair assessment at this point.

And then you talked a little bit about the possibility of some early delivery of sandals -- of more warm weather products, and based on [indiscernible] that we've seen, your sand business has been quite good. And that’s really off of a very, very small base. Can you talk a little bit about what you're seeing there and sort of what's working there and where you're seeing it and what kind of opportunity you would see going into next year because it's then really the first foray into that in a major way just based on the data that we've been seeing lately?

I don't know if that's quite the first. We've been doing sandals for a long time, and is stronger in some parts of the world than others. I don't think it's only sandals. Our sandals are doing quite well, but so is the rest of our business. Certainly, our active and new and our sport product…

I was really talking about relative to the early delivery in the warmer weather market. Sandals would certainly be one of those items that…

To the extent customers have opened to buy and places – and they want to test at a bigger level because we're having such a strong season now. I think that would mean that we would move it into December, certainly in the test sites. But there is a lot of warm weather places around the world and in South America where they have opposite seasons, so we can do even stronger. So, again, this is a worldwide phenomenon when we get this high.

And when we're talking about the investments into the JVs, can you sort of take the new JVs and subs, if it's Latin America, South Korea, Israel, China and so on and India, and sort of talk about – Central and Eastern Europe and sort of the magnitude of the ongoing investments and sort of which continues and which falls off as we look forward into next year?

I think they all – Central and Eastern Europe is a sub. But aside from that, on the joint ventures, I think they all continue. We don't have any new territories that we think have peaked. So, we continue to invest. The issue would be that we would then leverage in each of those territories because the investment would grow at a small pace than the top line once we set up the infrastructure, depending on how many stores we open at a time. So, it's no different in our joint ventures than it is in our subsidiaries or here in the United States. We invest, we continue to grow. The investment tends to moderate as you get on a roll and continue to grow based on infrastructure until you have to reinvest again because you’ve either grown too quickly and you need to increase your structure or because there's consumer taste changing and you have to develop new categories and move new product around. So, I don't see a big…

We're right at the beginning of a lot of new categories. And you’ve already spent a lot of money against a lot of those issues that you just brought up. So, theoretically…

I don't see it carrying through it to the first quarter of next year because I think a lot of it has already been spent or being spent this year.

All right. Well, wish you all the best. Thanks.

Okay.

[Operator Instructions]. And the next question is from Chris Svezia of Wedbush. Please go ahead.

Hey, David. How are you?

Hey, Christopher. Pretty good.

Good. A question on US wholesale. What is the leverage point for US wholesale revenue growth? Is it mid-single, is it high single? I know you mentioned there are some additional costs involved, but they are spread globally. But just give us some frame of reference of where that leverage point is right now?

Leverage what to the operating line?

Yes. So, for operating margin for US wholesale, where does that stand right now?

I would think it's in the low to mid-single digit basically because a lot of our fixed expenses will get taken – will be absorbed by the new stores we're opening. And as we extend retail, that takes pressures off the distribution center and certainly the merchandising and all of that. I think the way our stores are growing and our potential there that it only takes low to mid-single digits.

Okay. So, when I go back to the second quarter for a second and you grew the way that you grew for US wholesale. And in aggregate, there was another, call it, $50 million in revenues that you did above the high end, I think, of your guidance. And I know you're opening up stores and that’s a big piece of the expense. China is a big piece of the expense. Was there other thing that really drove the notable amount of de-leverage relative to your plan if US wholesale grew the way did and you can leverage at that level?

The de-leveraging points are slight. So, it's not only a US-centric kind of thing. So, China had a pump up because they started growing at a bigger pace online, which is more expensive. So, their operating margins came down very, very slightly. Korea is still operating at a loss, although their sales are increasing and we're well on our way to $100 million business. The refurbishing of all those stores and the positive feedback we've gotten, it's just more expensive. So, that’s a deleveraging point. In Japan, we decided to open significant amount of stores. I think there's almost 25. So, we de-leveraged that a slight bit. Same holds true for South America where we went into Peru – we think Peru is going to be a great one. We refurbished the stores in the second quarter. And at the end of the second quarter, going into the first quarter, we started to see significant comp store increases and have decided to up the pace of opening stores in South America. So, there was little pieces everywhere that deleveraged. So, it wasn't that the US didn't leverage at all. There was no positive pieces. It's that we made major investments. The 14 stores in India and growing our wholesale business and there's all changes going on. We had a significant infrastructure and new office space. And I think that's holding up very well. All those things will, we believe, I believe, as we get into the end of the year into next year, we'll begin to leverage in and of themselves. So, you don’t even need that much from the US.

Okay. Switch gears, gross margin, any thoughts as you think about the third quarter, the earnings range that you gave, talked about revenues, how should we just think about the gross margin sort of run rate? Similar, 20, 30, 40 basis point increase? Largely driven by mix of business? Or any color you can give there.

Yeah. I think you could have at least what we've been seeing there, 20 to 40 basis points or so. I think there's possibility because Q3 is just strong time for international as far as Q3 is concerned. You may get some – a little extra out of that because, like I said, China will grow at a more rapid rate. We think Europe will pick up and we'll get some – hopefully get some gross margin pick up from those currencies that we changed. So, I think we'd get a minimum of the 20, 40 basis points and there's a possibility of somewhat more.

Okay. Last two things. Just China, what's the cost of doing business these days in China? You referenced e-commerce, it's slightly more expensive. I know at some point you're going to do your DC enhancement, but I think that's roughly a year away. And the last question is just on same-store sales on international, up 5%, a little bit lower than what it has been trending. Was there just anything unique about that or any particular market that was a little softer or just any color about that as well?

I missed the last part. What was down 5%?

No, no, no. Up 5%, I think, was the international same-store sales number for DTC. I think the US was up 7.7%. So, I'm just curious, the 5%...

Yeah, I think what you see there is we are now comping in South America and had to refurbish the store. So, they were a drag. And in Japan, the first set of stores that have come up, currency wise and everything else, have comped – have not comped significantly positive. I think it's just the shift of any of these for the comp store sales. At the early part of Q3, international has started to pick up. Our European business is strong. We also lost a little bit because the biggest concentrations of stores in Europe were in England and we haven't raised prices till July 1. So, that impacted the comp somewhat as well. But I don’t think there's anything structurally in there.

Okay. And China, just real quick, the operating cost to do business and that kind of thing?

It's people cost and system cost because we don’t have a lot of automation. So, if you think about online growing that quickly, that shipping one pair at a time. It just takes significant more per pair. But our operating margins in China haven't changed significantly. So, we're making it up in volume.

Okay, thank you very much. Appreciate this.

Thank you. The next question is from Tom Nikic of Wells Fargo. Please go ahead.

Hey, David. How are you?

Hi, pretty good.

So, I just wanted to get a little bit of clarification. I think you said earlier there was about – that the pull forward out of July and into Q2 was about $20 million, which basically accounted for all of the growth in US wholesale in Q2.

I think $20 million is a universal number. We had pull-forwards in Europe as well.

Okay. So, that $20 million was not entirely in the US?

That's correct.

So, I mean, absent that pull-forward, you still would have been a little bit positive in Q2?

Oh, yeah. We always anticipated to be slightly on the positive side.

Got it. And then just on the SG&A, so dollar growth was 20% in Q1, 27% in Q2, how should we be thinking about it the back half? Should we be thinking about 20% growth in in Q3 and Q4, something a little bit less than that? Any help there would be much appreciated.

I would think 20% would be minimum for the third quarter. Slightly higher than that, because like I said, the same things continue when – we won't drop anything. The questions have – the base was the year before. I think it starts to come down from that in fourth quarter and certainly comes down from even that in the first quarter.

All right. Great. Thanks very much.

Thank you. And our final question comes from Scott Krasik of Buckingham Research.

Thanks, David. Just a couple of clarifications. What was the currency, the constant currency revenue growth for international? And I'm particularly thinking about UK probably was hit by that if the price increase didn't come through till July.

Actually, we had a slight positive this year worldwide even with the drag in the UK.

Okay. And then the price increase went through? I mean, any change in the orders with the price increase or that's stuck?

No, we're moving right through it so far.

Okay. And then I think you see more spring 2018 orders in like September time frame. But given some early conversations, you previewed the product, it's [indiscernible]. I'm just wondering how you think about the domestic wholesale acceleration now over the next six months, at least from a bookings perspective?

Yeah. From the booking, I think you'll see it in August and September. We started off July actually very strong, but obviously a smaller month to the aggregate. I hate to get too far ahead of myself, but everything I've heard from all the people that have previewed the product on an international and domestic basis, they're very, very positive on that product. So, if the product today, which is a precursor to that, is selling through that well and we're showing these kind of increases, it's very, very good potential that will see a significant increase even domestically at wholesale as that stuff starts to deliver and we clear through back-to-school. So, I'm anticipating some significant increases in incoming order rates in August and September. But like I said, I’m the eternal optimist.

All right, thanks. Good luck.

Thanks.

That was all the time we had for questions. I would now like to turn the conference back over to SKECHERS for closing remarks.

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

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.