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

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Skechers USA Inc (SKX)

Q32012 Earnings Call

October 24, 2012 4:30 pm ET

Executives

David Weinberg - Chief Operating Officer and Chief Financial Officer

Analysts

Jeff Van Sinderen - B. Riley

Sam Poser - Sterne, Agee & Leach

Scott Krasik - BB&T

Christopher Svezia - Susquehanna Financial Group

Presentation

Operator

Greetings and welcome to the Skechers USA, Incorporated third quarter 2012 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.

At this point, I would like to turn the conference over to Skechers. Please go ahead.

Unidentified Company Representative

Thank you everyone for joining us on Skechers' conference call today. I will now read the Safe Harbor statement. Certain statements contained herein, including without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

Such forward-looking statements involve known and unknown risks, including but not limited to, global, national and local economic, business and market conditions in general and specifically as they apply to the retail industry and the company. There can be no assurance that the actual future results performance or achievements expressed or implied by such forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other reports filed with the SEC as required by Federal Securities laws for a description of other significant risk factors that may affect the company's business, results of operations and financial conditions.

With that, I would like to turn the call over to Skechers' Chief Operating Officer and Chief Financial Officer, David Weinberg. David?

David Weinberg

Thank you for joining us today to review Skechers' third quarter 2012 results. Net sales for the third quarter were $429.4 million and income from operations was $20.3 million. Net earnings for the third quarter were $11 million, and diluted earnings per share were $0.22 on approximately 49.9 million average shares outstanding.

Our third quarter 2012 sales increased by 4.2% over the same period last year. This was the result of growth in our domestic wholesale, international distributor and company owned retail businesses. We are particularly pleased with our international distributor business as we achieve growth despite the transition of one of our largest distributors, Japan, to a subsidiary which was completed at the close of the second quarter. These improvements were offset by decreased sales in our international subsidiary business which were negatively impacted by the challenging economic environments in Europe, the euro exchange rate, the restructuring of our Brazilian business and labor strikes in Brazil, as well as toning sales in the same period last year.

Third quarter sales and product highlights include 7.2% increase in domestic wholesale revenues with an additional 9.1% of pairs shipped, a 10.9% increase in international distributor sales, a 13.9% increase in domestic and international retail sales, a 22.2% increase in e-commerce sales, the addition of Japan as a subsidiary with three Skechers stores and the launch of Relaxed Fit Footwear for men and the expansion of our performance division with new lines.

The third quarter financial highlights include improved gross margins of 43.7%, reduced selling expenses by $3.6 million and total SG&A expenses by $5.1 million and a strong balance sheet with $307.9 million in cash or approximately $6.17 per share. We believe our performance in the third quarter, improved backlogs and the positive response we are seeing from our retail partners to our product lines are key indicators to the significantly positive trend of our business and the strength of our brand in the fourth quarter and in to 2013.

In our domestic business, third quarter sales increased 7.2% or $11.6 million over the same period last year. This was due to strong sales in our kids and performance divisions and in many of our women and men's lifestyle lines and a 9.1% increase in pairs shipped. This growth also came despite our close out sales in our fashion brands in the third quarter 2011. Excluding our fashion lines, Skechers brands were up $22.8 million or 15.2%.

Along with double digit improvements in our women sport, women's active, kids and work lines, we experienced triple digit growth in our charitable line BOBS from Skechers. The continued sales growth with BOBS has resulted in more than 2 million pairs of shoes donate to children in need around the world. We are also very pleased with the continued demand for our performance division which, for the quarter, was almost equal to the sales for the first six months of the year.

In the performance division, we have built on our initial and successful Skechers GOwalk and Skechers GOrun offering with Skechers GOtrain and Skechers GOtrail, both of which were delivered in the second quarter and a zero drop style Skechers GObionic and the enhanced cushioning of Skechers GOrun Ride both of which launched in the third quarter. We began airing the Skechers GOwalk campaign for back to school and Skechers GOrun Ride was supported by two television commercials. The first featured, career highlights of elite marathon runner, Meb and the second was a sequel to our successful Super Bowl spot and starred a French bulldog, Mr. Quiggly.

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