Skechers U.S.A., Inc. (SKX)

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Skechers USA Inc. (SKX)

Q3 2009 Earnings Call

October 21, 2009 4:30 pm ET

Executives

David Weinberg – Chief Operating Officer

Analyst

Chris Svezia – Susquehanna Financial Group

Scott Krasik – C.L. King & Associates

Sam Poser – Sterne Agee & Leach

Dave Turner – Avondale Partners

Presentation

Operator

Thank you for standing by. Welcome to the Skechers third quarter 2009 earnings conference call. (Operator Instructions). This conference is being recorded today, Wednesday October 21 of 2009.

Unidentified Corporate Participant

Good afternoon and thank you for joining Skechers quarterly financial results conference call. 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 for 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 companies fillings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other reports filed with the SEC as required by federal securities laws for a description of other significant risk factors that may affect the company's business, results of operation, and financial conditions.

With that, Skecher's Chief Operating Officer, David Weinberg will begin with prepared comments.

David Weinberg

Thank you for joining us today to review Skecher's third quarter 2009 results. As always, we will open the call to questions following our prepared comments. Third quarter 2009 net sales totaled $405.4 million, a new record, and $1.48 billion for the first nine months. Net earnings for the third quarter were $24.5 million and diluted earnings per share were $0.52. For the nine months ended September 30th, net earnings were $26.8 million and diluted earnings per share were $0.57.

As discussed in our first and second quarter conference calls, we anticipated that the weak retail environment would negatively impact our domestic and international business in the first half of the year, while the second half of the year would be profitable. This has been the case as the third quarter saw a return to profitability and growth in several of our business channels.

The strong profitability in the quarter and our much improved gross margin of 45.3%, with the result of less closeouts and more in line in demand inventory. During the first half of the year and into the third quarter, we carefully managed our inventory which was reduced by $69.4 million from year-end.

And our SG&A expenses, which increased by $4.3 million from the prior year which includes 29 more retail stores, operated in the third quarter of 2009 versus 2008, and significant additional expenses related to our new operations in Chile, as well as our growing business's in Brazil, China and Hong Kong. Based on our record sales and key performance indicators, which include a healthy backlog, positive retail comps, and strong sell-throughs, we believe we are on track for positive results for Q4 and 2010.

Our domestic wholesale business declined 10% in the third quarter and 16% for the nine months. The decline in sales was in part due to the weak retail environment, the closing of several fashion brands and the decrease of availability of off-price merchandise. The reaction by consumers and accounts to o r Skechers fall product has been extremely positive.

While our third quarter sales are not as high as last year, we had more in line full price product and increase in average price per pair from the third quarter 2008,and less closeouts which resulted in much improved profitability and positively impacted margins.

The growth came across key men's, women's, and kid's lines which we believe is the result of continued positive reaction to our core styles and new lines supported by concentrating marketing efforts, strong execution, and attractive and affordable product.

In the third quarter our marketing included High School Musical star Vanessa Hudgens in a TV campaign for Red by Marc Ecko, and our own animated characters who appear regularly in commercials airing on children's television networks such as Nickelodeon, Cartoon Network, and The Disney Channel. Additional print and TV campaigns supported our Skechers and fashion brands.

We believe our domestic sales will improve in the fourth quarter, though we expect the continued soft retail environment will remain a factor. We are confident that we will continue to be one of the key footwear vendors to majority of our accounts, and our product continues to be in demand and sought after by consumers who look to us for style and value.

Our international wholesale business improved by 7% for the third quarter from the prior year, and was down 3% for the first nine months. The improvement in the quarter is significant in comparison to the first and second quarters, which were flat and down 20% respectively.

As in the United States, many international markets are also facing difficult economic conditions. This has impacted our sales in select regions around the world, but we believe that our brand is in a great position in terms of shelf space, reputation and awareness as we continue to increase our presence around the globe.

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