David Weinberg - Chief Operating Officer John Vandemore - Chief Financial Officer

Jay Sole - UBS Laurent Vasilescu - Macquarie Omar Saad - Evercore ISI Jeff Van Sinderen - B. Riley FBR Sam Poser - Susquehanna John Kernan - Cowen & Company Chris Svezia - Wedbush Tom Nikic - Wells Fargo Jim Chartier - Monness Crespi & Hardt

Greetings and welcome to the Skechers Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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 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 all 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, David Weinberg and Chief Financial Officer, John Vandemore. David?

Good afternoon and thank you for joining us today to review Skechers third quarter 2018 financial results. With me on the call is John Vandemore, Skechers’ Chief Financial Officer who will discuss our financial results in detail. We achieved a new third quarter sales record of $1.176 billion, a 7.5% increase over last year. This was the result of our total international business increasing 12.5% and total domestic increasing 1.8%. On a constant currency basis, our sales growth in the quarter was 8.5%. With three record quarters, we achieved a new 9-month high of $3.56 billion. The growth came from a 19.7% increase in our total international business and a 3.4% increase in our total domestic business. In addition to the record sales, third quarter highlights include diluted earnings per share of $0.58, operating margin of 10.5% and 11.8% sales increase in our international wholesale business, the result of both double-digit increases in our international distributor and international joint venture businesses, a 10.6% sales increase in our global company-owned retail stores with a comp store sales increase of 1.9%, international representing 55.5% of our sales, expanded our Skechers retail network to 2,802 stores worldwide, including the opening of 13 new company-owned stores and 108 third-party stores. Maintained our position in the United States is the number one walking, work, casual lifestyle and women’s sandal brands, Elite golfer Brooke Henderson winning her 7th LPGA title in her home country of Canada and Elite golfer Russell Knox winning the Irish Open, both wearing Skechers GO GOLF and repurchased 1.4 million shares of common stock. We believe we are in a unique position in the footwear market. Our core customers remained strong and loyal to Skechers. The resurgence of the chunky shoe trend around the world is resulting in new interest from fashion-minded consumers and pacemakers as Skechers D'Lites gains broad acceptance as the originator of the trend. This has allowed us to partner with accounts that cater to this market as well as appear in the editorial sections of fashion and sneaker publication and on the catwalk, at 7 designer shows during New York Fashion Week last month. We also expanded our collaboration with the best selling anime series One Piece and Skechers D'Lites to North America as well as in Europe. Now, turning to our business, our domestic wholesale business decreased 3% for the third quarter and was flat for the first 9 months. In the quarter, we shipped 1.5% more pairs. For the first 9 months, we increased our shipments by 4.9%. The average price per pair decreased 4.4% or $1.03 in the quarter partially due to the strength of several lower priced collections. However, domestic wholesale margins increased 110 basis points in the quarter. Our business within our core accounts remained solid during the quarter as we maintained our position as a leading brand for men and women in numerous categories. Our product strength in the United States came across multiple divisions, including walk, sandals and BOBS for women as well as casuals, work and golf for men and women. To support our domestic business, we ran multiple campaigns and aired the following commercial. For women, a Skechers D’Lites campaign with Camila Cabello, a Skechers D’Lites Fashion campaign and Skechers GOwalk Joy. For men, sports and casual slip-on spots starring Tony Romo, Relaxed Fit with David Ortiz, and Wide Fit footwear featuring Howie Long. And for kids, we ran commercials on children’s programming for our lighted and lightweight sports footwear as well as Twinkle Toes. Our golf business continues to grow. During the third quarter, golfer, Brooke Henderson, won her 7th LPGA Championship in home country of Canada and Scottish golfer, Russell Knox, won the Irish Open, both are Skechers’ ambassadors and competed in our GO GOLF. Through our efforts with BOBS, we have donated more than 15 million pairs of shoes to children in need since its launch in 2011, including 15,000 pairs to Puerto Rico in the third quarter for continued Hurricane Maria aid. Through our efforts with BOBS for Dogs, we have held 583,000 shelter pets through donations of more than $3 million over 3 years. We believe our product and marketing are both on point. As we begin account meetings this week, we are looking forward to presenting our 2019 collection and are pleased with the initial reaction. Further, we believe our wholesale business remains strong and we will achieve high single to low double-digit growth for the fourth quarter. International wholesale remains our single largest distribution channel and continues to represent an increasing share of our total sales, 45.2% in the third quarter and 44.2% for the first 9 months. Combined with international and retail, it represented 55.5% for the quarter and 53.7% for the first 9 months. Our total international wholesale business increased by 11.8% in the third quarter. The increase was the result of double-digit growth in distributor and joint venture businesses with China contributing significantly with gains of 21.9%. For the first 9 months, our international wholesale business increased by 18.9%. Further detailing our international growth, for the quarter, our wholly-owned international subsidiary business grew by 1.4%. This growth was against a tough comparison of subsidiary sales increases of 31.4% in the third quarter of 2017. In the third quarter of 2018, our joint venture sales grew by 22.9%, with growth across each region. For the quarter, the highest dollar gains came from Italy, Spain and Colombia within our subsidiaries and China and India within our joint ventures. As mentioned, China continues to be a strong force in our international business with an increase of 21.9% and approximately 5.6 million pairs shipped in the quarter, a retail base of 793 Skechers freestanding stores and 2340 points of sale. Our international distributor business returned to double-digit growth in the quarter after experiencing some challenges in key markets. The growth primarily came from Russia, Indonesia and the Middle East as well as Australia, New Zealand and the Philippines. At quarter end, there were 2,121 Skechers branded stores owned and operated by international distribution partners, joint ventures and a network of franchisees. In the third quarter, 108 third-party-owned stores opened. These included 30 in China, 26 in India, 60 each in Indonesia, South Korea and Taiwan, 4 in Malaysia, 3 each in Iraq, Israel and Spain, 2 each in Greece and Hong Kong and 1 each in Australia, Croatia, Egypt, Finland, France, Hungary, Japan, Mauritius, New Zealand, Northern Ireland, Pakistan, The Philippines, Romania, Sweden, Switzerland, Ukraine and Uzbekistan. 36 third-party stores closed in the quarter. 4 third-party owned Skechers stores have opened so far in the fourth quarter, we expect another 75 to 100 third-party owned Skechers branded stores will open in the remainder of the year. We believe our international distributor business will grow high single-digits in the fourth quarter and our international subsidiary and joint venture business will grow double-digits in the same period. We continue to see international as the biggest growth opportunity for the company. In our company-owned global retail business, sales increased 10.6% in the third quarter, which was the result of the sales increase of 8.1% in our domestic retail stores and 15.7% in our international stores, which on a constant currency basis was 17.7%. Worldwide positive comp store sales increased 1.9% in the quarter, which included a 3% domestic increase offset by a decrease of 0.8% in our international stores. However, on a comp basic domestic pairs increased 1.7% and international pairs increased 1.8% in our retail stores. For the first 9 months, sales increased 13.7%, which was the result of an increase of 23.2% in our international stores and 9.2% in our domestic retail stores. Adding to our direct-to-consumer growth was our domestic e-commerce business, which grew 15% for the quarter. We also have company-owned and operated e-commerce sites in Chile, Germany, the UK, Spain and Canada. At quarter end, we had 681 company-owned Skechers retail stores, of which 216 were outside the United States. In the third quarter, we opened 13 stores, including 6 international locations; 3 in Peru, 2 in the UK and 1 each in Canada and Chile. We also remodeled, relocated or expanded 6 locations. To-date in the fourth quarter, we have opened 4 stores, 3 of which were in the UK and 1 in Italy. For the remainder of 2018, we expect to open an additional 7 company-owned Skechers stores and remodel, relocate or expand an additional 10 existing stores. Now I will turn the call over to John to review our financials.

Thank you, David. I am pleased to share our third quarter results with you today. Third quarter sales increased 7.5% over the prior year to $1.176 billion and represented a new third quarter sales record. On a constant currency basis, sales grew 8.5%. The growth was due to increases in our international wholesale business of 11.8%, driven by 22.9% increase in our joint venture business and an 11.6% increase in our distributor business. China contributed significantly to our growth in the quarter increasing 21.9%. Company-owned global retail store sales also increased 10.6%. This was driven by an 8.1% increase in domestic retail and e-commerce combined and a 15.7% increase in international retail, which was 17.7% on a constant currency basis. These increases were partially offset by a slight decline in domestic wholesale due to lower sales in the off-price channel. Gross profit was $563.9 million, up $43.9 million compared to the prior year and gross margin increased 40 basis points to 47.9%. This improvement was attributable to stronger domestic margin, reflecting higher prices in retail and improved segment mix, which were partially offset by the impact of negative foreign currency exchange rates. Selling expenses were essentially flat versus the prior year at $90.1 million or 7.7% of sales. This was a 50 basis point improvement from 8.2% of sales in the prior year. General and administrative expenses were up $37.8 million to $354.7 million. As a percentage of sales, this was a 120 basis point increase to 30.1% from 28.9% in the prior year period. This increase reflects our continued investment in our long-term global growth initiative, which included $7.5 million to support continued double-digit growth in China. It also included an increase of $13.3 million associated with 58 additional company-owned Skechers stores, of which 13 opened in the third quarter and $11.1 million related to domestic and corporate operation, of which $4.8 million was for distribution and warehouse costs. Earnings from operations increased 6.4% versus the prior year to $123.9 million. Operating margin was essentially flat at 10.5% versus 10.6% in the prior year period. Our income tax rate for the quarter was 13.7% compared with 9.4% in the prior year period. This rate reflects updates to our understanding of the impact of the recently enacted tax reform legislation. Based upon this quarter’s results and our current understanding of the application of the Tax Cuts and Jobs Act, we expect our effective tax rate for 2018 to be between 13% and 15%, which implies a fourth quarter tax rate of between 17% and 20%. Net income for the third quarter was $90.7 million or $0.58 per diluted share on 156.3 million shares outstanding compared to $92.3 million or $0.59 per diluted share on 156.7 million shares outstanding in the prior year period. During the third quarter, we acquired approximately 1.4 million shares of our Class A common stock at a cost of $40 million. Since announcing our share repurchase program earlier this year, we have acquired almost 2 million shares at a cost of $58 million. At September 30, 2018, approximately $92 million remained available under our existing share repurchase authorization. As we have stated before, we remain confident in the strength of our balance sheet and our ability to fund growth initiatives while continuing to return cash to shareholders. And now turning to our balance sheet, at September 30, 2018, we had $959.8 million in cash, cash equivalents and investments, which was an increase of $223.4 million or 30.3% from December 31, 2017, and an increase of $156.9 million, or 19.5% over September 30, 2017. Our cash and investments represented approximately $6.14 per diluted share at September 30, 2018. Trade accounts receivable at quarter end were $504 million, an increase of $18.7 million from September 30, 2017 and our DSOs as of September 30, 2018 were consistent with the last year at 36 days. Total inventory including merchandise in transit was $755.1 million, an increase of 8.2% or $57.4 million from the prior year period. The majority of the year-over-year inventory increase is attributable to international wholesale and global retail, particularly in China. The balance reflects increases in our international inventory position partially offset by decreases domestically. We believe that our inventory levels are in line with our growth expectations for our global business and increased retail store base. Long-term debt was $69.8 million compared to $71.4 million at September 30, 2017. Working capital was $1.6 billion versus $1.4 billion at September 30, 2017 primarily reflecting the aforementioned inventory and accounts receivable levels as well as higher cash balances. Capital expenditures for the third quarter were approximately $36.1 million, of which $12 million was related to 13 new company-owned domestic and international store openings and 6 store remodels, $13.5 million to support our international wholesale operations and $8.2 million for expansion at our domestic distribution center. For the remainder of 2018, we expect our ongoing capital expenditures to be approximately $20 million to $25 million, which includes an additional 10 to 15 company-owned retail store openings, 10 to 15 store remodels, expansions or relocation, as well as office renovation. This estimate excludes capital expenditures related to our distribution centers worldwide, including China as well as office expansion at our corporate headquarters. Now turning to our guidance, we currently expect that fourth quarter sales will be in the range of $1.1 billion to $1.125 billion and net earnings per diluted share will be in the range of $0.20 to $0.25. Underpinning this guidance is the assumption of growth in all three of our reportable segments and across both our domestic and international markets. Lastly, although we obviously cannot predict foreign currency exchange rates, we note that the strength of the U.S. dollar relative to prevailing rates this time last year and in particular the first quarter could continue to represent revenue and earnings headwinds in the future. I will now turn the call back to David for closing remarks.

Thank you, John. The third quarter marked new sales record for the period and along with a record second quarter and the highest sales quarter ever in the first quarter, we achieved a new 9-month record of $3.56 billion. The growth in the quarter was due to the acceptance of our new and core styles for men, women and kids around the world and came against the backdrop of the significant growth we experienced in 2017. In addition, foreign exchange rate negatively impacted revenue by approximately $11.8 million or roughly 100 basis points. The most impactful quarterly sales gains came from our joint ventures led by China, company-owned global retail business and our international distributors. We now have worldwide network of 2,802 Skechers stores and we are developing an expanded e-commerce business in the United States and around the world. We continue to be a global leader in the lifestyle athletic footwear market with the resurgence of our heritage Skechers D’Lites style globally and the collaboration with Skechers D’Lites and One Piece. This week, we begin our 5 innings with our domestic accounts for fall 2019 and next month with our international distributors, subsidiaries and joint venture partners. We are looking forward to 2019 with fresh product in the pipeline. We are continuing to invest in our brands and our infrastructure and we expect to break ground for our new corporate offices and for the new distribution center in China later this quarter. With inventory levels in line, a strong cash position and balance sheet, we are well-positioned for global growth. And with that, I would now like to turn the call over to the operator to begin the question-and-answer portion of the conference call.

Great, thank you. [Operator Instructions] Our first question is from Jay Sole from UBS. Please go ahead.

Great, thank you. David, my question is on SG&A, in the quarter, the SG&A was $445 million. Going into the quarter, the consensus was forecasting $465 million, which was roughly basically on the guidance. What was the key to really controlling SG&A this quarter and coming in at that $445 million number?

Well, we actually do feel with necessity. So, our top line was a little lower than expected. We had completed a bigger piece in the previous quarter of our expansion in China. So in watching overall, as we have said in the past, we are getting close to that inflection point, where we built a significant amount of infrastructure and depending on what we see for growth will be the determinant for how we will have to invest certainly in advance of some big growing quarters. So, we are taking it very seriously. And we always have about expenses and try to be very careful, but when we had such growth, we figured we had to chase and now we are at a time where we have had a quarter that was slightly below expectations, it gave us the chance to catch up on some of our infrastructure and automation and to benefit in the G&A line.

Got it. So maybe on sales, you mentioned it was a little slower, the low end of the guidance range going into the quarter was $1.2 billion and even with the FX there was about – so FX about $1.19 billion, was there a factor, one or two dominant factors that sort of explain the difference between the guidance and the actual sales?

Yes. I mean I think we mentioned the FX impact that was certainly a bigger drag than we had expected. Also I would say that a little bit probably ends up being timing on the domestic side. We had always spoke about growth in the second half of the year. So relative to Q3, Q4 quite frankly is relevant to us. We still have very strong expectations for domestic wholesale growth over the back half. And then obviously you have consumer demand in the retail channel and I think it’s certainly no secret that in some of the international market demand has not been as healthy as in the U.S. That being said I mean I think what you see is we are very close to where we guided and we feel very good about the fourth quarter. The fourth quarter guidance we given now and our prospects in the fourth quarter.

And so maybe John just a follow-up on that, so you are talking on the U.S. wholesale down negative during the quarter, but you are guiding to positive high singles or low doubles in the fourth quarter, that’s sort of the timing that you are talking about. And then just on the international is there any particular market to call was it like UK, because there is lot of talk about Brexit [indiscernible] confidence and for the consumer in that market, is that one or will there be another market to call out internationally with the consumers or the weak could have retail comp?

On the domestic number, again I just I will reiterate what we said last quarter which was we were confident in second half growth and that’s what we see. So yes, that’s what baked into the domestic wholesale guidance for fourth quarter. We believe we definitely expect the second half to show growth. In terms of the international market, it was actually quite frankly a little bit everywhere. It wasn’t anyone market in particular on the FX side you saw that affect across almost every one of our key markets, but you also saw a little bit less robust consumer in most of those markets as well.

And then maybe on the tax just to be clear, so before your guidance is 70% tax rate that was sort of forecasted long-term growth rate, now you are saying 13% to 15% is that sort of the run rate now going forward beyond even fiscal ‘18?

No, again we think the naturalized rate after we get through dealing with the various true-ups associated with the new tax legislation and another adjustment will likely be still in that 15% to 17% range. I think the bumpiness we are seeing this year in the quarter has almost everything to do with update to our understanding of many facets of the tax law.

Okay. And then maybe one last one for me you mentioned $92 million left on the repurchase authorization, are buybacks incorporated into guidance report that you gave?

No.

Okay, great. Thanks so much.

Thank you.

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

Good afternoon. Thanks for taking my question. I just want to follow-up on Jay’s question regarding U.S. wholesale and always assume that it’s growing in the back half and it seems that a lease that should be a high single-digit rate for the fourth quarter and then correct me if I am wrong, I think you might have a new account, new customer, is that numbers still included, should we think about that number as a $20 million benefit for the fourth quarter?

I am not sure. There is not any new customer of that order or magnitude domestically. I think the opposite on the big guys like here are closing stores down. It’s a switch in timing from what’s been an existing at a very good customer. I think John alluded to on the last quarter conference call that we got big orders from them, big promotions in the first part of the year, last year that will move to the back half this year. So that’s the differential and we knew we would be up significantly when we take all the timing changes into effect.

Okay, very helpful. And then on gross margins maybe you can parse out FX and mix benefits for the third quarter and any thoughts on the fourth quarter will be very helpful?

Yes. I mean the first thing I would note is that we thought transition this quarter to FX being a headwind on the gross margin line. I mean they are all at a slight negative, I would say about 40 bps. The balance and the improvement really came out of the stronger domestic margin which entailed both favorable product mix as well as pricing activity in our retail segment. And then we did have some natural lift from the overall segment blend just as retail and international get to be – comprised a larger portion of our overall revenue mix. We are not forecasting anything dramatic really in the fourth quarter. At the moment we have tended to see though slight lift year-over-year in the quarter is associated with segment benefit.

Okay, very helpful. And then international G&A, I think it grew about $13 million for the quarter, what kind of rate should we, in dollar terms, should we anticipate for the fourth quarter?

Yes. I mean, I think we have got in trouble by giving too specific again. What I would tell you is we expect obviously the year-over-year SG&A will need to continue to grow both the support, the expansion that we put in place in China and the expansion in our retail business, so you can expect it will continue to grow in the fourth quarter, we think at a level that’s relatively close to what it did this quarter maybe a little north, maybe a little south depending on a few factors. One of which that I would call out is the tremendous opportunity that exists before us in single day in China. I mean, obviously, that’s a significant event – revenue event and it does have an impact as we mentioned last quarter on those variable component of G&A, in particular, distribution warehousing etcetera. So part of that is to be determined based on the outcomes of events like Singles Day and obviously the overall revenue trajectory.

Okay, very helpful. And then my last question, I think in the second quarter you called out the $7 million impact from FX to net earnings, what was the impact for the third quarter and how much of FX headwinds should we think to the bottom line for the fourth quarter?

So I will take the last part first. We don’t have any significant changes in FX baked into our guidance, because we bake our guidance on what’s the existing rates are. So if you will, we caught up to where current rates are relative to Q4 and that is included in our guidance. At the end of the data flow through that we estimate from FX in total in the quarter was probably a couple of pennies. We had both the top line drag and that translated down through to operating income and then we also had balance sheet adjustments will come through and other income to a couple of million as well. So net-net rate, we estimate the total impact was $0.02 to $0.03.

Okay, great. Thank you very much and best of luck.

Thanks, Laurent.

Our next question is from Omar Saad from Evercore ISI. Please go ahead.

Hi, yes. Thanks for taking my question. I apologize for the background noise. I wanted to ask you about inventories due to progress in the quarter, but given the sales kind of slightness relative to your guidance, what were the levers you are able to pull on the inventory side to be able to get that down from I think 20s to what they that. That would be helpful to know that you pushed back on the supply chain, were you able to clear through other channels?

We haven’t done anything significantly different. We had said it was – we felt very comfortable with our inventory going into the year. Some of it is a timing issue. It was predominantly based on growth that was outsized growth in China and our retail business. So being more mature in the United States, we are able to take more control of the inventory. We actually had a decrease in inventory even though the number of pairs were significantly – were higher for shipping. So, it’s just part of our normal management of inventory and our future purchases and flows as they come through in adjusting to what the marketplace is, we feel very good about inventories overall. They will go up before the end of the year simply because we are getting ready for a very big first quarter, which will now be our biggest quarter of the year and that all has to fill as you go through the end of the fourth quarter.

Okay, I appreciate that heads-up, looking forward. That’s helpful. Thanks. One kind of bigger picture longer term question, how are you guys bestowed to the points of distribution to the brand that’s obviously growing in kind of both leaps and bounds globally? How do you think about that footprint for the brands, where you are today, where you think you could be longer term, where you want to be and what you feel like you are getting reaching to the more maximum extent of the distribution opportunities and it becomes more, creating greater productivity in existing distribution at that point? Thanks.

Yes. I think we feel that obviously a ton of runway in front of the brand and maybe just take a market like China and you look at our penetration levels by province, there is a lot of whitespace available to us. I think the bigger question, Omar, ultimately will be is that all-in direct to consumer retail stores or is it online? Online grew significantly in China again this quarter. It’s that likely to be a blend between the two. We don’t have a cap on the number at the moment, because quite frankly that number would just be too large and so we think about, because there is so much space ahead of the brand across the globe.

Got it. That’s helpful, John. Thanks, guys.

Thanks, Omar.

Our next question is from Lauren Cassel from Morgan Stanley. Please go ahead.

Great. Thanks so much for taking my questions. Two sort of separate questions. First, obviously, you mentioned in your prepared remarks, FX has been volatile this year with the stronger U.S. dollar, any updated thoughts on how you are thinking about pricing across Europe and China heading into 2019? And then secondly ending the quarter with close to $1 billion of cash and short-term investments on the balance sheet, have you had any discussions with the board on accelerating share repurchases or potentially initiating a dividend at some point? Thanks so much.

Sure. We mentioned some pricing actions in retail we took this quarter and we have seen those do very well quite frankly in the retail segment, I don’t know that there is any FX changes at the moment that would give rise to the need for something more aggressive in those markets, but that’s obviously something we will continue to watch. The currencies themselves being as volatile as they are make predicting what foreign exchange rates are going to be like in the next quarter exceedingly difficult, but obviously we watch our key markets very closely. In terms of cash obviously, there is always discussions with the board about what to do with the cash. I mean, currently, we still have remaining authorization on our existing repurchase. And I think you can continue to see us be aggressive where we think the stock is trading at a discount to what we believe fair value represents. And then if we get close to exhausting that authorization, we will have another conversation about where the cash will go, but we also feel incredibly confident in our balance sheet and we have some sizable investments to make in the near future and even against the backdrop of that cash, feel very good about where we stand.

Okay, thanks so much.

Our next question is from Jeff Van Sinderen from B. Riley FBR. Please go ahead.

Thanks for taking my questions. First, just wanted to clarify regarding the expected return to growth in domestic wholesale in Q4, I was wondering what the latest is you are seeing in the domestic off-price channel, maybe you could touch on where you think closeout inventory is there and when you think your off-price business might be likely to pick up, wasn’t sure if that was what you might have been referring to in some of your comments? And then just wondering how that’s factored into your guidance?

Well, it’s factored into our guidance is what we see as far as [indiscernible] is concerned that flows for the brand and where we see inventory as we make those inventory in the channels by the way as we see those plans and try to react to them. I think you are right on in the fact that our core business is healthy and continues to grow. The off-price channel has been the drag. We have seen some increases in request from the off-price channel that is not the reason for the rebirth of growing terms that we are having in the fourth quarter. It’s one big customer that move timing that could hit it back and forth and the fourth quarter for us in the U.S. is not one of our bigger quarters, it’s really for the first quarter, but there is always a possibility that we will start to deliver earlier in December depending on how hot we are and what the weather is like and what retail is like. So, I think what you are seeing is are settling in, in our core customers buying significantly to our plans, we have no fallout, we are increasing our online presence both our own and in third-parties, so it’s just a positive move for our core and very basic business.

Okay, good. And then anything to update us on in terms of how you are thinking about the tariff situation, just wondering what you might think about doing or what your plans might be if more tariffs go into effect for next year in terms of shifting, production, perhaps to some other countries, how we might think about that? And yes.

Well, that’s a very difficult one. I find that if you try to – didn’t work out all the possibilities of the tariff you could spend days and days and days and never get close to what’s going on. I think it’s fair to say we will be very cognizant of what they are. We do have capacity to move outside of China. We will be no different I believe than anybody else. We will look for where the best availability is up for production, quality and price around the world even segregating some production of some styles from country to country depending on what the necessities are. There is a lot of moving pieces what happened to the Chinese currency, does that make up the part of the tariff fees. I mean, there is all kinds of moving parts and it’s too hard to be upfront. I think it’s fair to say we are very flexible. We have increasing our production capacity outside of China just in general. So we think we will be okay. We obviously have pricing power that we saw this quarter I mean in the prior quarters and in international basis. So we believe we will be okay, it’s only a timing thing, that’s when we have to adjust to whatever the final picture turns out to be.

And just to be clear. None of the existing tariffs that have been enacted affect our product, it would only be in this last round of potential tariffs with footwear and apparel begin to get affected directly.

Right, exactly that sort of I was forward thinking about, okay, that’s helpful. Thanks for taking my questions and good luck in Q4.

Thanks.

Our next question is from Sam Poser from Susquehanna. Please go ahead.

Good afternoon. Thanks for taking my question. I just want to follow-up on the guidance, are you still anticipating the headwind from the FX within the guidance that you provided in the fourth quarter?

Yes. Based on prevailing exchange rate today and at this time last year we have factored that into the guidance we have provided.

And just so I am clear, the gross margin in the quarter up 27 bps that leaves – you have had about 60 basis – I am sorry 40 basis points headwind there, so you had the domestic or the U.S. gross margins were up almost 60 bps and do you foresee that happening again?

Well, we haven’t factored that into any of the guidance, largely because it was based on prevailing pricing activity that we started in Q3 and we like to see mature in the business. But I think it’s fair to say that if we continue to see positive take on the pricing actions then you would see some potential lift in the domestic side of the business as well as I mentioned previously, the overall segment mix impact that we get from higher concentration of international and retail revenue as a part of the whole.

Right. And then somebody should have touched on it, but within the guidance I mean is that, I was thinking high single for domestic wholesale, is that an accurate way to be thinking about things?

I think we said high singles, low doubles.

For domestic wholesale?

Yes.

And that would include the – that includes the $20 million from last year, so based from that move, so would that be in that basically the entire list is predicated on that, I mean you are going to ship it, but of that $20 million that pretty much gives you that increase, so is that where the – is that the thought that it’s that shipments of that $20 million?

I would describe more about it, just the general health we see in the core business as David mentioned and then the timing associated with the order that again we have mentioned in Q2 prior year that is now almost fully residing in Q4. I would also just point out them if you look at the business, it’s kind of the geographic threshold as well. The domestic business grew when you take into account both the wholesale and the retail side. And when you are as consumer as agnostic as we are in terms of where they buy the product, we feel very good about how the business performed domestically. Obviously, the balance this time was a little bit stronger retail and a slight decline in domestic wholesale but as the total domestic grew as well as the international side of business, I think that’s important to keep in mind.

And you expected the wholesale business to grow significantly more in the fourth quarter than you were in third quarter?

Yes.

Alright. Thanks very much. Good luck.

Thanks Sam.

Our next question is from John Kernan from Cowen & Company. Please go ahead.

Good afternoon guys. Thanks for taking my question.

Hi, John.

So, how should we think about the company-owned retail business, the international comps had been running at a pretty incredible level, Europe 18 in the first quarter, Europe 11 in the same quarter in anyway, anything negative this quarter, I am just wondering a) what drove the international comp deceleration and I guess b) how should we think about the overall comp picture that’s embedded in your guidance for the fourth quarter?

Yes. I mean, to be clear, it was a very slight decline in the international comps. It was a dramatic change. I mean, one factor at play obviously as you mentioned is the incredibly robust performance this time last year. So, we were facing some pretty difficult comparisons giving the robustness of the business last year. Having said, you have also I am sure read about some consumer discretionary spend decline and pressure in Europe in particular, Canada so that and then coupled with that as the third factor FX did not help us obviously in the retail business itself. You saw that FX impact within the comp store number obviously be a negative as well. Again, our prospects for Q4 we think are positive. We are expecting positive comps, but that’s largely going to boil down to how sales perform over the next couple of months, in particular, in the holiday season. And so we are watching that carefully.

Understood, thanks. Just when you look at the high and low end of the guidance the $0.20 and then the $0.25, what do you think is the biggest variance within that between the high and low end, is it gross margin at this point, is it SG&A? Back to the prior question, you did kind of come in well below kind of where consent is sell side was expecting your SG&A this quarter. I am just wondering what do you think the biggest swing factor is between the high and low end of the EPS guidance at this point?

Yes, I would answer, it continues to be the consumer. I mean, the consumer obviously has a much more significant bearing on our business today than it ever has we go more direct-to-consumer, that’s not just in the retail segment though, keep in mind, that’s also in markets like China. Singles Day obviously is a significant event for us. So, I would continue to point to the consumer and obviously that can have a knock-on effect to aspects of gross margin, although we have seen very strong gross margins throughout the year and we have no real cause for concern on that. I think that’s probably the biggest factor from my perspective. And then obviously to David’s point earlier, if there is opportunities for us to continue to invest and grow the business you know as well as anyone else that we will take advantage of those, we don’t see any of those that are extraordinary at the moment above and beyond that which we have already factored into our guidance, but if an opportunity presents itself, we will certainly want to look at it hard to continue to grow the brand, because again, I think the guidance we have given illustrates the belief we have that the brand can continue to grow in particular in the international market. So, we will obviously be looking hard at that.

Excellent. And just one final question, have you disclosed how much of your sourcing base is actually in China, I know footwear tends to skew a little bit more towards, global footwear tends to skew a little bit more towards Vietnam and other regions, but have you discussed at all, what percentage of the overall factory base right now was in China?

I don’t think we bring it out too much publicly. It’s fair to say that more than half the business is in China, but you have to be very careful with that. We have a lot of Chinese production for China. We are growing significantly. It changes on a monthly basis. So I think it’s fair to say we have moved around, we are certainly more cross-border now in a number of places than we were in the past and that will continue to change as we move forward regardless of the tariff situation.

Got it. Thanks, guys. Best of luck.

Thanks.

Your next question is from Chris Svezia from Wedbush. Please go ahead.

Hey, guys. Thanks for taking my questions. I guess John just to clarify something, your same-store sales on the international are not currency neutral that reported and if they all reported, can you tell us what maybe a currency neutral comp would have been on the international side?

So, they are not currency neutral comp numbers. If we do constant currency, we will definitely call that out precisely. It wasn’t impacted. It varies by market, some of the most severe markets impacted with some of our bigger ones. I would tell you it wasn’t enough to change the trajectory of the comp, but it would have made the decline less significant.

Okay. Can you maybe just then add some color about just U.S. comp up 3% and just maybe what you saw in the marketplace in your expectation for the fourth quarter is that expected to accelerate from that level or what are you seeing in the market right now on the retail DDC comp?

Yes. I mean that was really an interesting quarter in the sense that as you read about traffic decline in some of the mall based offering, we saw that as well. Our concept stores certainly felt the impact of lower traffic levels, our outlet and warehouse stores continued to perform very well. We did not see a comparable traffic impact. In addition as we mentioned we implemented some pricing on new product coming into the stores, that held up well in all of our store categories. And despite every store has the comp store performance growth I think it’s a testament to – as David mentioned our ability to price product. In terms of Q4, we are not expecting anything much more significant than what we have seen recently. And we expect probably that the trend depending on consumer footfall will hold from this last quarter where concepts were probably a little bit more under pressure from traffic than the outlet and the warehouse store solution.

Okay. And just when I look at your overall revenue outlook 14% to 16% growth for Q4, I know you talked about U.S. wholesale getting that high single – low double-digit growth, but that then implies somewhere within something accelerates pretty materially relative to Q3, so can you maybe just and I know you mentioned your distributor sales I guess a positive or continued to be strong, maybe just unpack what’s happening in the JV sub piece because it would have to grow of course high teen in 20% to get you within the range, so maybe you talk about China or just why that confidence is such a material acceleration of the business, what’s happening?

That’s what we see so far. I think as John pointed out the biggest impact on international on a singular basis will be Single’s Day. And our – as John pointed out in his comments and his statement are aside from Single’s Day our online business is growing triple digits, so high doubles close to triple digit in China. It’s been a very big focus, so the possibilities of what can happen in China with Q4 through a Single’s Day, it makes those numbers very well in line. I mean we seem to be doing well. We are anticipating significant growth year-over-year on Single’s Day. It was significantly large last year. I mean we are talking a big number.

So just for that number…?

Sorry, say again.

No just for that number, so you did 1.4 million pairs Single’s Day last year, are you thinking more than 2 million pair on Single’s Day, is that how you are thinking about it?

We did more than 1.4 million pairs I think last year somewhat more. And we are thinking significantly higher than that this year than your number.

And Chris, I would just point out that the joint ventures this quarter actually generated high teen, low-20 growth, so it’s not – I don’t think it’s out of character for what we have seen. And then you add on to that the opportunity in Single’s Day and I think that’s how we feel very comfortable with the number.

Yes. You also get growth out of Europe in some of the new places we have taken over. Remember, Europe was only up low single-digits, simply because there is a 31% increase last year. We don’t have that same kind of comp and we are doing very well fairly on a relative basis. As John said Europe is not the strongest retail economy and we are holding up and continuing to grow throughout. So I think it’s the testament to where we are and that international will continue to actually I think show more improvement in Q4 than Q3, because of the tough comparisons and how big Single’s Day can be in China.

Okay. So just to get all this down, China is really a big growth driver on international, in terms of acceleration to the growth rate overall, coupled with you clearly expect Europe to improve directionally relative to Q3 just given an easier comparison is that…?

And because of the results we are getting.

Okay. And I know you don’t want to talk too much about just forward thinking into early next year Q1, but I am just curious how you are thinking just U.S. wholesale, what are you hearing, what are you just sort of – are we going to start getting back to mid single-digit growth or is it too early to tell or would you still be dealing with some of the shifts between core channels, off-price channels, just any near-term or thought process as you start to dip into next year, how we should think about that?

Yes. Well, personally, I think we are going to show some increases next year. The first part is that after first quarter, the comps become easier, because we are not comping against an off-price. So the tendency would be to believe unless something changes that we are going to show increases in the off-price channel and certainly the last three quarters of next year and we are very comfortable with our core product. I mean, if you were to sit next door and see how people are reacting to some of the new stuff we are delivering or showing and we are booked very well for the first quarter domestically. So, we get our opportunity, so barring any major changes in retail, I think we get benefits from both. So, you will see some mid-singles I would anticipate certainly for most of the year.

Okay. A final thing just real quick, just on the selling expense line, just John real quick, what happens to that in Q4, it was kind of flat Q3, does that pick up all in Q4? How should we, I know, you talked about G&A, just curious on the selling line?

Yes. I don’t want to be overly precise about components of the expense base. But I would say I think you have seen a trend recently of us coming at kind of at or below prior year rates. Obviously, we are being very conscious of promoting the brand, where we need to promote the brand, but not spending more than is absolutely necessary. So, I think you can expect that general trend will drive. There is nothing extraordinary that I would call out relative to Q4 that you want to be aware of.

Okay. Thank you and all the best. Appreciate it.

[Operator Instructions] Our next question is from Tom Nikic from Wells Fargo. Please go ahead.

Hi everybody. Thanks for taking my question. I believe you said that you are going to break ground on the China DC before the end of the year. And I believe in the past, you have talked about also having some projects in the European DC and the U.S. DC some expansions there. Can you remind us timing of those projects, costs related to the projects, when stuff starts falling through the P&L from expense standpoint? Any help around those projects would be appreciated? Thanks.

Okay. Well, it’s important to keep in mind, there really isn’t a lot of expenses that go through the P&L until the assets something as big as a building a distribution center or office space or putting in some automation equipment that you are talking about the Europe and the United States until it’s completed and put into service at which time we hope to get some efficiencies when they come in anyway. So, China should start this quarter. We hope they have there are no different than we are in some parts in the United States as far as permits are concerned, etcetera. That’s the anticipation right this minute. It should take somewhere in the neighborhood of 15 to 18 months to get up and running. I think we said it’s in excess of $100 million. As far as Europe is concerned, we are expanding our automation capacity that will start probably the first – after the first quarter of next year. The big stuff will be after our busy season in Europe. It will take somewhere between 7 and 9 months that’s the smallest piece that’s in the $30 million range depending on what happens to the euro, because we obviously buy a lot of equipment there. In the U.S., we are looking to expand our capacity. We know we need more automation, but we are not at a point where we signed a deal and have the final plans in place. So, that’s a moving target, that’s not finalized right this minute.

Got it. Thanks. And just one question on the store base, last year, you had 74 net openings based on your Q4 guidance you would be kind of in the 45 to 50 net openings this year. Is that 45 to 50 kind of a reasonable run-rate go forward or how should we think about the expansion of your own brick-and-mortar store base? Thanks.

Yes. I think you should anticipate that with there is a slowdown that we are going to take it down to 45 going forward into next year. We try to expand and be and look at spaces available, sometimes there is more space available, sometimes not. We are looking to expand our international footprint. So, you can look for significant store openings in South America, in Japan, in Korea, certainly in India some around some franchise. So, I think the pace will pickup that’s just based on a transition from domestic to international and a relay of the marketplace in the United States. I think just to point out we opened our 700th own store today, but we continue to move – we continue to think it’s an important piece and we will continue I think this was a little bit of a lull not necessarily by design, but based on availability and a transition in the marketplace in the U.S.

Also the stores that we have been opening less in Q3 and expect to open in Q4 are bigger footprint stores. So although the number of stores, there is a decline, if you actually look at the square footage, it’s not as significant of a down, because we are definitely concentrating in the outlet and warehouse expression and those carry with them significantly higher square footage.

Got it. That’s helpful. Best of luck for the rest of the year.

Thank you.

And our final question is from Jim Chartier from Monness Crespi & Hardt. Please go ahead.

Hi, thanks for taking my questions. Just a follow-up on the expected acceleration in international wholesale in fourth quarter, it looks to me like the mix of that business changes dramatically in fourth quarter where the subsidiaries go from 40% of international wholesale down to like 20% and the JVs go from 40% to 60%. So, is that also a big factor in terms where your fastest growing segments become a much bigger part of the mix and currently the slowest growing becomes a smaller part of the mix relative to third quarter?

I think that’s basically true, obviously with China and such a big Singles Day that changed over the last 3 or 4 years, also with weather changes, it’s always been a slower quarter for us in Europe, which is our most mature. But we do think we will get some pickup as we go through. It’s not to a large degree in our some of our new territories in South America. So…

Great.

We are breaking down to the fact that Southeast Asia, because of those holidays and promotions are becoming a bigger piece of the fourth quarter than anything in the past.

Right. And then you mentioned earlier, you are having a lot more success in terms of fashion editorials and you had mentioned, I think that you are potentially getting distribution in more fashion forward accounts. Is that correct? And then is that happening in the U.S. and/or globally and then how meaningful can that distribution be?

Well, it’s happening globally. It’s happening some of the United States. It’s too early to tell what that could ultimately be. It will depend on the next offerings and where fashion trends go. Right now, it continues to grow and it gives us a great halo effect for the brand overall and our strategy. So, it’s a very positive, how big it is to move the needle, I am not sure at this juncture. It’s been a very, very positive move and I do believe we will keep some of that square footage and some of these accounts as we move forward.

Great. Thanks and best of luck.

Thanks.

Thank you. This concludes the question-and-answer session. I would like to turn the floor back over to Skechers for final comments.

Thank you again for joining us on the call today. We would just like to note that today’s call may have contained forward-looking statements. As a result, the 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.