David Weinberg - Chief Financial Officer, Chief Operating Officer, Executive Vice President, Director.

Corinna Van der Ghinst - Citi Sam Poser - Sterne, Agee Jeff Van Sinderen - B. Riley Chris Svezia - Susquehanna Danielle McCoy - Wunderlich Scott Krasik - Buckingham Jim Chartier - Monness, Crespi, Hardt Corinna Freedman - BB&T.

Greetings, and welcome to the Skechers USA Inc. third quarter 2014 earnings conference call. (Operator Instructions). A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this point, I would like to turn the conference 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 U.S.

Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of other significant risk factors that may affect the company's business, results of operations and financial conditions.

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

David?.

Good afternoon, and thank you for joining us today to review Skechers' third quarter 2014 financial results. Our sales for the third quarter was $674.3 million, a 30.7% increase over last year, marking the highest quarterly sales in the company's 22-year history.

The growth followed record first and second quarters, resulting in a 29.5% net sales increase for the first nine months of 2014, compared to the same period last year.

Our product and marketing are resonating with consumers around the world, leading to the strong demand for our men's, women's and kid's lightweight and comfort offerings in the lifestyle and performance divisions.

This translated into double-digit increases in our domestic and international wholesale and worldwide company-owned retail business, which included an 11% comp store net sales increase.

We are continuing to support our growth with targeted marketing that speaks to our vast demographic including the addition of legendary athlete Pete Rose, Joe Namath and Mariano Rivera, multiplatinum recording artist Demi Lovato, elite runner Meb and the most recent signing Ringo Starr and we are continuing to invest in our global infrastructure to create efficiencies.

This includes the addition of a new distribution facility in Chile and installation of an automated system in our European distribution center.

Third quarter sales and financial highlights include an 18.5% increase in our domestic wholesale business, with a 16.1% increase in pairs shipped and a 1.2% increase in average price per pair, a 60.6% increase in our international wholesale business with an 87.3% increase from our distributors and a 52.2% increase from our subsidiary and joint venture partners, a 25% increase in our company-owned retail stores, which included an additional 62 new stores opened in the last year, 22 of which were opened in the third quarter, earnings from operations of $74.1 million or 11% of net sales, gross margin of 45.2%, net earnings of $51.1 million and diluted earnings per share of $1, in-line inventories, which were relatively flat from year-end and up 17.1% from a year ago and a strong balance sheet with $440.8 million in cash or approximately $8.65 per diluted share.

The third quarter continued the momentum we experienced in the first half of the year which was the result of the demand for our innovative footwear globally. Also in the third quarter, we achieved record bookings, resulting in worldwide backlogs up over 50% and we believe this is a clear indicator that our momentum will continue well into 2015.

Our marketing continues to be on point with television commercials for each key line, a strong digital and social media presence and key window and in-store campaigns with numerous accounts.

We are looking forward to the debut of our fall winter 2015 product during our buy meetings with our domestic key accounts over the next two months at our corporate offices and to our international distributors and subsidiaries at our biannual product conference in November. We believe the feedback will be very positive and the demand strong.

Now turning to our business in detail. In our domestic wholesale business, sales increased 18.5% or $41.9 million for the quarter with a 16.1% increase in pairs shipped and a 1.2% increase in average price per pair versus the same period last year.

The growth was the result of double-digit increases in our women's and men's footwear offset by single-digit decreases in our kids offering. Strong sales came throughout our men's and women's sport, women's sport active, Skechers GO, women's winter boots and Skechers USA, which saw triple digit growth.

Additional increases included double-digit gains in our men's Skechers GO, women's Skechers Active and men's and women's work line. While we experienced a single digit decrease in our kid's footwear in the quarter, we would like to note that we had a single-digit increase for the first nine months.

The decline in the quarter is in part due to the planned decrease within one account in the South and the shift of some back-to-school product into the second quarter. We expect our kid's business to stabilize in the first quarter of 2015 and are excited about the growing lightweight sport collection takedowns from proven successful adult styles.

The consistency across all our product lines is comfort. We are including comfort features in our lifestyle, lifestyle athletic, performance and kid's footwear.

We are continuing to see consumers asking for our comfort lines and our accounts are embracing it by featuring our brand in their stores and websites, thus creating an omni-channel marketing approach with some of our key partners.

To support our many successful lifestyle adult lines, we aired multiple TV commercials in the third quarter, including relaxed fit campaign featuring TV personality Brooke Burke-Charvet and sports legends Pete Rose and Joe Namath. We also aired product focused commercial to our men's and women's sport collection, Skechers Work and BOBS.

Along with our targeted TV commercials, we ran print, digital and outdoor campaigns to further drive sales. We continue to support our kid's business with our animated commercials, as well as new live-action spots geared towards tweens featuring takedowns of our adult performance and sport footwear.

Additionally, both our men's and women's Skechers GO experienced double-digit sales growth in the quarter. Key drivers in our performance lines were the updates to our Skechers GOwalk platform including the successful super sock and integration of Goga mat technology.

We support the Skechers performance division through television campaigns for our running footwear featuring Meb and our Skechers GOwalk super sock campaign, as well as booths and events across the country.

Also in the quarter, our golf ambassador Matt Kuchar wore his Skechers GO GOLF footwear at the Ryder Cup, showcasing this new product to the world at this prestigious event. This quarter will see the launch of Skechers GO Run 4 at the New York Marathon with an accompanying marketing campaign.

Our elite athletes, Meb and Kara Goucher will also both race at the event early next month. We are continuing to invest in the support of our products with new marketing campaigns, including several new commercials for this holiday. We also bridging the gap between adults and kids by targeting teens with multiplatinum recording artist Demi Lovato.

Demi has a massive social media following and each of her tweets and post about Skechers garners many thousands of likes and shares globally and connects with our brand with teens and young adults around the world. While the first print ad debuted early in the fourth quarter, we believe the holiday launch of her TV commercials in the U.S.

will allow us to tap into this hard-to-reach demographic. For spring, we are very excited to have Ringo Starr join our growing team of male superstars to represent our men's footwear, which now also includes recently retired New York Yankees closer, Mariano Rivera.

We also believe Ringo will not only elevate our men's business in the states but also around the world. We are just beginning our fall 2015 buy meetings with our domestic wholesale accounts, but are pleased with our double-digit backlogs and early reads on sales in the quarter to-date.

This gives us confidence that the demand for our footwear will continue in the first half of 2015 with our key retail partners in the U.S. In the third quarter, our total international subsidiary, joint venture and distributor sales increased by 60.6% as a result of the strength of our diverse product initiatives.

Our subsidiary and joint venture sales improved by 52.2% and our distributor sales improved by 87.3%. These increases came despite headwinds from foreign currency exchange in some key markets. With a combined 72% growth, our European subsidiaries have performed significantly beyond our initial expectations for this year.

To increase our capacity and to continue to leverage our growth in the area, we are automating our European distribution center and expect to have the first phase completed before the end of 2014.

To further grow our business in the region and leverage our efficiencies in the European distribution center, we are looking at transitioning several European markets that are now distributors to wholly-owned subsidiaries.

Additionally, Canada, Japan and Brazil all had double-digit growth, while Chile had single-digit growth primarily due to the weakening Chilean Peso and a slowing economy. Our Southeast Asia joint ventures continue to perform very well with combined growth of 48.8% for the quarter, which includes a 92.9% increase in our China business.

The growth in China is due to our men's and women's lifestyle and performance offering, as well as kids, which has launched through the leading kid's footwear retailer, Goodbaby. Since its launch in 2013, it has grown from 125 points of sale in its first year to 294 today and a planned 337 at year-end 2014.

As in our subsidiary and joint venture businesses, our product and marketing is resonating in our international distributor business, which grew at the same rate it did in the second quarter.

The 87.3% increase was primarily the result of triple digit growth in Australia, New Zealand, Taiwan and the Middle East and double-digit growth in Mexico, the Panama region, South Korea, the Philippines, Turkey and Russia, as well as strong results from many other countries.

To showcase the brand and our complete offering, most of our international distribution partners have opened Skechers retail stores including one each in the new markets of Algeria and Angola. At quarter end, there were 537 Skechers stores owned and operated by our joint ventures, licensees and distributors outside the United States.

Of these, 357 are distributor owned or licensed Skechers retail stores, 152 Skechers stores are in our joint ventures in Asia including those run by licensees in the region.

Additionally, there are 28 company licensed stores in Brazil, Canada, France, Ireland, Portugal and Spain, countries where we directly distribute our products through subsidiaries.

Further, in the third quarter, 32 stores opened, including three stores each in China, Mexico and Australia, two each in Malaysia, Saudi Arabia, South Africa and Turkey and one each in Peru, the UAE, Lebanon, Jordan, South Korea, Indonesia, Taiwan, Brunei, Hong Kong, Thailand, France, India and Portugal.

Three stores transition from licensed locations to company-owned. 11 third-party Skechers stores have opened to-date in October and another 40 to 50 are expected to open during the remainder of the year.

With the highest percentage of growth coming from our international sales, we are seeing our business in markets around the world mirroring that of the United States. The double-digit growth internationally is a reflection of the strength of our product, marketing and brand.

Our double-digit backlog and the opening of additional retail stores gives us the confidence that this momentum will continue. We are looking forward to fall winter product conference with our international partners in November and the delivery of our new product in 2015.

Worldwide sales in our company-owned retail stores increased by 25% for the quarter, with domestic sales improving by 16.9% and international sales by 74%, which included positive comp store sales of 8.2% domestically and 28.9% for our international stores for an 11% increase worldwide.

The combined double-digit comp store increase is on top of double digit comps in the third quarter of 2013. At quarter-end, we had 432 company-owned Skechers retail stores around the world. In the third quarter we opened 22 stores, 14 of which were domestic and eight were international.

These included new stores in Arizona, California, Hawaii, Kentucky, New York, Nevada, North Carolina, Louisiana, Massachusetts, Minnesota and Texas. The international locations opened in the quarter were in Chile, Spain, the U.K. and Canada, which included the transition of three license stores to company-owned.

We closed three domestic concept stores in the quarter. We have opened five stores so far this month, three in Canada and one each in Nevada and New York. And we have another 10 to 15 planned for this quarter, including four later this week. Domestic e-commerce sales decreased 5.5% for the quarter and are flat for the nine months.

For the year, we have seen an increase in traffic, new visitors, repeat buyers and page views and we are in the midst of revamping the site to a responsive design ideal for mobile devices and we will include user generated content. Now turning to our third quarter 2014 numbers in more detail.

As I discussed earlier, third quarter sales increased 30.7% to $674.3 million, compared to $515.8 million in the third quarter of 2013, the highest quarterly sales in the company's history.

Third quarter gross profit increased to $304.5 million or 45.2% of sales compared to gross profit of $230.5 million or 44.7% of sales in the corresponding prior year.

The positive increase during the quarter was due to a combination of higher sales, strong sell-throughs and well-designed mix of diversified product categories within all our distribution channels. Third quarter selling expenses were $50.2 million or 7.5% of sales compared to $40.2 million or 7.8% of sales in the prior year.

The dollar increase in advertising and marketing expenditures was to promote all our product categories, as well as to support the growth of our business overseas.

For the third quarter, general and administrative expenses were $182.2 million or 27% of sales compared to $147.9 million or 28.7% of sales in the prior-year, representing 170 basis point improvement in operating leverage.

The dollar increase in G&A was primarily due to our increased store count, support for our international growth and increased warehouse and distribution costs related to significantly higher sales volume.

Of the $34.3 million increase in G&A, $15 million was due to increased expenses related to our international operations and $10.6 million was related to operating an additional 22 stores when compared to the same period in the prior year.

During the third quarter of 2014, earnings from operations were $74.1 million or 11% of revenues compared to $44 million or 8.5% of revenues in the third quarter of 2013, a significant increase from the prior year and 250 basis point improvement in operating margin.

Net income during the quarter was $51.1 million, compared to $26.8 million in the prior year period. Net income per diluted share in the third quarter was $1 on approximately 51 million average shares outstanding compared to $0.53 on approximately 50.6 million average shares outstanding in the prior-year period.

It's important to note that diluted earnings per share were negatively impacted by foreign currency exchange losses of $2.3 million net of tax or $0.05 per diluted share and an additional $3.8 million net of tax or $0.08 per diluted share attributable to warehousing costs relating to the first phase of the automation upgrade of our European distribution facility, as well as the transition of Chile from a third-party warehouse to a company-owned facility.

In total, these items resulted in a negative impact to diluted earnings per share of approximately $6.1 million or $0.13 per diluted share in the quarter. Our effective tax rate for the third quarter ending September 30, 2014 was 18.7%.

In the third quarter, we recorded income tax expense of $12.7 million compared to $14.1 million in the prior year period. For the remainder of the year, we estimate the effective tax rate to be in the range of 22% to 26%.

Net sales for the nine-month period ending September 30, 2014 increased 29.5% to $1,808 million compared to $1,396 million in the prior year period. Gross profit was $814.3 million or 45% of sales compared to $618.1 million or 44.3% of sales in the prior-year period.

Selling expenses were $140.8 million or 7.8% of sales compared to $120 million or 8.6% from last year. General and administrative expenses were $504.3 million or 27.9% of sales compared to $426.4 million or 30.6% of sales from last year.

Earnings from operations for the first nine months of 2014 were $176.1 million versus earnings from operation of $76.5 million for the same period last year. Net income for the nine months was $116.9 million, compared to a net income of $40.6 million last year.

Diluted earnings per share were $2.30 on approximately 50.9 million average shares outstanding compared to diluted earnings per share $0.80 on approximately 50.5 million shares last year. And now turning to our balance sheet. At September 30, 2014, we had $440.8 million in cash or approximately $8.65 per diluted share.

Trade accounts receivable at quarter-end were $333.5 million and our DSOs at September 30, 2014 were 42 days versus 47 days at September 30, 2013.

Total inventory including merchandise in transit at September 30, 2014 was $363 million, representing an increase of $4.8 million from December 31, 2013, and an increase of $53 million or 17.1% from September 30, 2013. Given our extremely strong backlogs, we are very comfortable with our inventory position.

Long-term debt at September 30, 2014 decreased to $107.2 million, compared to $116.5 million at December 31, 2013. The decrease is primarily due to payments made on our distribution center and distribution center equipment. Shareholders equity at September 30, 2014 was $1.1 billion versus $979.9 million at December 31, 2013.

Book value or shareholders equity per share stood at approximately $21.73 as of September 30, 2014. Working capital was $841.8 million versus $704.5 million at December 31, 2013.

Capital expenditures for the third quarter were approximately $18 million of which $10 million related to 22 new stores and several store remodels and $6.9 million related to the first phase of the automation of our European distribution center and the transition from a third-party to a wholly-owned distribution facility in Chile.

In summary, the first nine months of 2014 have been exceptional in terms of sales, profitability, product and marketing. We began the year with a record first quarter in net sales, then achieved a new quarterly sales record for the second quarter and now we have broken out record with a third quarter net sales of $674.3 million.

This growth followed the great year we had in 2013 in which we achieved the second highest annual net sales in the company's history. The third quarter was also a new record for incoming orders, further evidence that our momentum will continue.

From a product standpoint, the key sales drivers around the globe were consistent, and were comprised of our stylish comfort footwear across our lightweight sport, casual and walking line, a trend we see continuing as consumers see more innovation without sacrificing fashion.

As always, we supported our diverse offerings with comprehensive marketing campaigns, in-store, online, on TV, in print and elsewhere. We also added many new commercials to the fold. Among others were kid's lightweight sport, an energetic unisex spot, a Skechers GOwalk super sock, as well as Joe Namath and Pete Rose campaigns for relaxed fit.

The strength of our brand, innovations in our broad-based product and targeted marketing led to double-digit growth in our domestic and international wholesale businesses as well as our worldwide company-owned retail stores.

With international wholesale now 31% of sales for the quarter and 29.8% of sales for the nine months, we see tremendous growth opportunities in our worldwide operations.

The improvements in the quarter are substantial, 87.3% in our distributors, 48.8% in our joint ventures and 53.3% in our subsidiaries, for a combined 60.6% increase for the quarter and 45.7% increase for the nine months.

Based on the double-digit backlogs in our international business and the strength of our largest markets, we believe this positive trend will continue. Our company-owned retail business represents 28.2% of sales in the quarter and 27.2% of sales in the nine months.

We are expanding our company-owned retail base with an additional 10 to 15 stores in the remainder of the year. Combined with the 40 to 50 third-party stores, we are on target to reach approximately 1,050 Skechers stores by the end of the year. We believe the demand for our brand will result in continued growth worldwide.

We are looking forward to our fall 2015 buy meetings in our corporate offices over the next two months and our global product conferences in November with our international teams.

Given our retail growth trajectory, accelerated backlogs and incoming orders for October, we believe we are well positioned for growth in the fourth quarter and well into 2015.

While the fourth quarter is historically our smallest sales quarter for our international division, we remain comfortable with the analysts' current consensus for both revenue and earnings for the quarter. Given the strength of our backlogs, for first quarter of 2015 we anticipate topline growth to be between 15% and 20% for the first quarter.

And now, I would like to turn the call over to the operator to begin the question-and-answer portion of the conference call..

(Operator Instructions). Our first question is from Corinna Van der Ghinst of Citi. Please go ahead..

Thank you. Hi, David. Obviously you guys are opening more stores in 2014 than you have in the past. You also have your long-term guidance of around 40 to 50 stores per year. But you have also got a lot of other moving pieces like the European automation cost, the DC expansion cost coming up next spring.

So how should we thinking about SG&A expense going into the fourth quarter and also looking ahead into 2015? Are you looking for some of these higher expenses to continue into Q4 related to your DCs? And what kind of leverage are you thinking about for next year?.

Well, I think it's a little bit of both. Obviously, with the new store count, they were available to us and we have always said we have the capacity to open more stores and because of our success in international, we are more receptive now to more locations and have achieved more offers of locations internationally. So I will step it up.

So to that degree, as the store openings continue, we anticipate that we will increase our G&A, but we think that will be reflected into the bottom line somewhere along the line. We maybe a little less efficient at the beginning, but certainly over the long-term, we anticipate that those stores will significantly enhance the bottom line.

As far as the distribution centers are concerned, I think for current run rate, we expect the exact opposite. We expect to become efficient. These additional fees, the $0.5 or $0.06, they for the most part go away at consistent run rate.

In other words, in Chile, we moved to a completely new center and we will save some money between the rent and people costs. The reason for the increases in the third quarter were because we had to run both at the same time. You can understand that a move from one facility to the next, you have to pay both people.

We pay a per unit fee to one facility, we are paying rent and people at the new facility. You have to run them both at the same time and get them up and running. As of today, actually as of October 1, I believe, maybe one week into the new quarter, we no longer had any hangover from the old facility.

Everything had been moved and then we are shipping along. So they should leverage at equivalent volume going forward, and as volume increases, we open more stores. We should get leverage there. Also in the European distribution center, we opened that or we went to automation, we think, just in time.

We had what we thought was a remarkably strong third quarter when we were putting in this automation. So on top of having to close down part of the distribution center because we were putting the automation in, we had to run three shifts rather than two because we had to compact and get some off premises site to ship all the shoes we had to ship.

And when we planned this a year ago, we didn't anticipate shipping this many shoes. So it's accorded to that facility that we could run three shifts, have to rent off premises site while this is being built and still got it all out very efficiently, as far as operation is concerned, event though quite a bit more expensive.

We anticipate with the significant growth we are seeing, the automation taking place, the first phase since Q1 and the second phase at the end of Q2, by this time next year, we will leverage at current rates of the distribution, but given the increases, we will leverage even more so as we get to the back half of next year. That's pretty long winded.

But I think I got it all..

That's very helpful. Thank you.

Also, I know you guys put out a press release a couple weeks ago, but with the 50% increase in backlogs a the end of the quarter, I was wondering if you could delve a little bit more into the breakdown of that number, international versus domestic or whether you are seeing particular growth in certain categories or specific channels, please?.

Well, they are growing everywhere. It's pretty -- it's obviously concentrated more outside the United States as far as percentage is concerned, although not necessarily for dollar amounts. International is quite quickly catching up to U.S. wholesale business, even though it's growing.

So I think it's fair to say that domestically our increase was probably in the low to mid 40s and internationally, it was probably in that 60% to 70% range of increase over the prior year..

Okay. Thank you..

Thank you. The next question is from Sam Poser of Sterne, Agee. Please go ahead..

Hi, David. Good afternoon..

Hi, Sam..

A couple of things, David. Number one, just a little thing, what was of $3.9 million in other income on the charge there? That was up really --.

That's mostly foreign exchange items..

Okay and how do you think that's going to impact the next couple quarters? Same kind of way?.

No. I think it's a loss. I am not a currency expert but from what I see, in early October, the biggest currencies we have, obviously, are the Euro and the Pound, because they are our biggest outside. Brazil, China, somewhat.

It doesn't seem that today anyway, after the first three weeks, from what I could see that the dollar is getting significantly strong at the same running rate as Q3. So it seems in the multiple years we have been doing this that Q3 was a significant strength of the dollar, probably not a quarter-to-quarter event..

Okay and then I just want to go back to the G&A. In absolute dollars, you do $182 million.

What should we be thinking about what kind of range in the fourth quarter? And then should next year, with the kind of leverage you talked about, should that run rate be in that, like it was $185 million to $190 million per quarter, more or less, given your new stores and everything else?.

Yes. Going forward, I think we get some efficiencies in Chile. We should get some more efficiencies through out own distribution center here, as we get (inaudible) quarter. We actually are putting in more automation into this facility because we are running way ahead of schedule when we had planned to put it in.

So I think next year, it's safe to say, we will leverage more in the U.S. Next year, it's very difficult to say what the running rate would be because while we anticipate significant savings, that whole $3 million after-tax probably $5 million or $6 million pre-tax, in our distribution center in the EDC, the volumes won't be equivalent.

We will have to take a look and see exactly how much they are growing and they were going in with a 70% increase year-over-year in shipping in the third quarter. That continues into the back half of the year. We will be, certainly on a percentage basis, more efficient from the G&A perspective, but not from a real dollar spend.

So we are at a point now where our growth is not moderating, it's continuing. So as it does, we may have to put more infrastructure in. And so it's too early for me to say exactly what it looks like for Q4. I think it's still safe to say that we will leverage and it should be down sequentially, obviously, into Q4.

Some of these items won't repeat and we should have a smaller, depending on how many stores we actually open and depending on currency. I wish we had slightly lower G&A, but it's a high-class problem to have.

We may have to push infrastructure at a faster pace than we thought, because the growth is obviously significantly higher than we had thought at the beginning this year when all the plans went in..

Okay and then your backlogs are up 50% and you are saying you are happy with everybody's numbers. You have come off of two quarters with 30% increases.

Why these, again not complaining about the kind of sales you have, but why do you think it's going to decelerate down with a 50% backlog? Why do you think your revenue is going to decelerate down to a lower rate? I mean, the street's not looking for that kind of increase in the fourth quarter, nor in Q1..

Well, 50% in fourth quarter, I think, is basically what the street's looking for. And we are comfortable with that, because it's not as strong international quarter. And you know international has been the big driver of this thing. Our subsidiaries and joint ventures don't usually gear up in the fourth quarter.

So it's more a domestic facility and some of the distributors which are selling lower dollar volume. Now that's not to say that there is not some upside potentially if some of January moves into December if we continue to be hot. So I think 16.1% is a good baseline to start with.

I don't know if they can go higher, but there certainly could be upside depending on how hot we are what happens in the marketplace. Going into first quarter, I don't know that 15% to 20% today is a significant deceleration when you talk about the much higher denominator we have because we were already up 20% somewhat in the first quarter last year.

So it's on top of what -- we are trying to see now is because we are so hot, there is a possibility that we are obviously a first choice for most of our customers around the world, and they will come to give us their orders first to see what their open to buys would be.

So to the extent we have got orders first, it certainly makes us more efficient and makes us more efficient with inventory and production. But should we stay hot, and have a reorder business and this only becomes the benchmark around the world, which is possible, there certainly would be upside to that number. It's just too early to tell.

I think what we are trying to impress upon everyone was that the numbers we see now for first quarter are at the high-end or higher than the numbers on the street and to let everybody know that while we are usually guiding for the first quarter or that far out, that we are comfortable with numbers coming up and people should understand that there is some upside if we stay as hot as we are..

All right. Thank you very much..

Thank you. The next question is from Jeff Van Sinderen of B. Riley. Please go ahead..

Let me add my congratulations.

And then, David, maybe you can just go through, I know you mentioned spring bookings and some new product lines launching for spring, is there more color maybe you can give us on sort of the type of product that you are seeing getting the best reaction? And just maybe speak more to what's really driving bookings in terms of product genre? Any particular concentration to note, that would be helpful?.

Yes. We don't get any concentration. The good news for us is that it continues across the broad spectrum, very diverse across all the product categories. Our core business, which is our sport active and sport, both men's and women's, is doing very, very well.

It's doing as well as our GO platform, even though it's a somewhat more mature and a larger business. So I think we like to dispel some of these thoughts that we are only a one product deal here and it's only GOwalk or something to that effect.

GOwalk and the GO categories are performing quite well around the world, and it's a great new category to have, but it has, not to-date, taken away from our core business, which is our sport and even our USA business, which is growing at an equivalent pace, even though it's a higher volume business to begin with.

So I think it's fair to say that we continue on a very broad base with significant amount of categories that resonates and significant amount of geography around the world that's all growing. So that's all good news there. It all continues as far as we can see right now..

Okay, good. And then also, I know you mentioned evolving e-commerce.

Just wondering how you are thinking about that within the context of all your partners that buy wholesale product? Maybe if you can just touch on that?.

Yes. I would say, I think it's fair to say, we are not pushing for our own volume to increase. You can see that by as hot as we are, we haven't pushed up in our own e-commerce site. I think it's a twofold reason that our e-commerce was down or relatively flat for the year.

Our e-commerce business seems to be picking up significantly with our partners that have our products online. So if you look at everyone who has our product online, and I won't go through the labels, and they do sometimes have a better price than we would have. They continue to resonate and they are growing quite large.

We have also moved and we have got our stores on the omni-channel now and they can order from us and they get it from technically our online facility, but we credit that sales to our retail department through the stores.

So in times in the past when somebody might have left the store and we didn't have a size or color and they buy it from us online, they now can get it from the store and we don't count that sale.

So I think it's safe to say we feel comfortable that around the world, we resonate very well and sell very well online and we have a lot of customers that continue to use us online and do very well with it.

What we are talking about is making ours very interactive and using it to drive business to our customers, whether it's our own stores or whether it's our wholesale partners. We are pretty agnostic as to where the sales come from. We certainly like to see our wholesale customers pick up the biggest piece and expand our presence within that country.

So we don't push own online presence and won't compete with them on it, except we will make it very fashionable and easy-to-use and a good place for people to come, look at our product, so they can get it elsewhere..

Okay.

So, based on everything that you guys are seeing as you look at your bookings, your backlog and what's resonating out there, would it be fair to say that you think we are still on the strong cycle for athletic, athletic derivatives and also for comfort, active product as well?.

Absolutely..

Okay. Great to hear. Thanks very much and good luck..

Thanks..

Thank you. The next question is from Chris Svezia of Susquehanna. Please go ahead..

Hi.

How are you, David?.

I am pretty good..

So I guess, first question. Just when you talk about that fourth quarter 16-ish kind of percent revenue growth, any color between U.S.

wholesale, international and EDC in terms of the growth rate? I guess, obviously the international piece slows because it's not a big quarter, but any color you could provide by some of those segments?.

No. I think you got it. We pass it along. I think we are going to see a nice increase in all of them. Domestic wholesale is obviously our most mature and it's moving towards now fourth quarter in a row, if such a thing is possible, since our real growth started. So they have tougher comp to go up against.

So I don't know that there is a significant differential, but it will be driven more by our domestic retail and domestic wholesale, which are more mature and only grow so quickly. But I don't want to lead anybody to think there is no upside. We have historically had some January going to December, if we stay that hot.

So I would assume if everybody does channel checks and see that we are resonating that well as we go to through Christmas, actually between Thanksgiving and Christmas, people may start to move things into the fourth quarter..

Along those lines, how are your inventory levels at retail? In other words, put broadly, we can obviously pick up the phone and call a couple of them but I am just curious what's your general sense about Skechers' availability of product at retail at this point? Is it getting clean? Is it you obviously want more? Or just sort of your thoughts in and around that?.

I think given the indicators we have, which is somewhat anecdotal, but we talk to them. In the next two months they will be in our office and we will have a clearer idea.

And the demand for product for spring, I can't imagine that we would have backlogs up that high, over 40% domestically as hot as we have been for the last two years on the inventory was clean and demand was on the rise..

Selling expense.

Any thoughts about how we should think about that in the fourth quarter relative to the third quarter? I assume it's not as high, because it's not a big marketing quarter, but any color around that?.

It's not as high, but we will consider the marketing. I think it's fair to assume that we will be, by real dollar terms, probably $7 million or $8 million increase over fourth quarter last year, and that's predominantly to try and drive holiday traffic here, and do a little more international to get ready for first quarter overseas..

Okay and then on gross margin.

I assume that there is some -- is there some room for that continue to slowly move higher? Or just sort of your thoughts about the gross margin trajectory?.

Well, I never tell you we peaked and growing higher. I think what you saw this quarter was a mix issue. We actually grew significantly larger in China and Europe, which are higher gross margins for us, even though distributors are the lowest and they were a big single piece by real dollar terms.

I think our retail business picked up a little as well and as well as our domestic wholesale business.

So while we are comfortable where we are and I don't anticipate big swings, there is always the possibility for some upticks as far as gross margin is concerned, if you take into account mix, and even if there is a reversal in the strength of the dollar in some places.

So some of that is possible, although I wouldn't expect significant changes there..

Okay.

Lastly, just on this, thoughts about subsidiaries or distributors you are thinking of converting to subsidiaries? Any color on that timing?.

We are going to make sure that our distribution center is up and running and can handle the increased volume. I think, it would be safe to say the back half of 2015 is what we would target right this minute, barring any glitches in the distribution center or bring it up online as efficiently as we would like..

Okay. All right. And just one last thing, on real quick.

When do you guys actually pay off the debt? I think part of it's related to mature handling?.

I think there is less than $40 million left, half of it in December 2015 and half of it in June 2016, if I remember correctly. And that's only because there is a make whole provisions in the loans when we got them. So I have to pay them the interest anyway. So I am no rush to give them the money..

Okay. I see. All right. All the best. Thank you..

Thanks..

Thank you. The next question is from Danielle McCoy of Wunderlich. Please go ahead..

Hi, David..

Hi..

So just a quick question.

If you could just talk a little bit about S SPORT at Target? And any other type of opportunities for distribution expansion similar to that?.

We look at a lot of things. I don't know that there is anything right this minute. I know they are talking but nothing that I would say is imminent. S SPORT is just a test to see how it works and how our production facilities in design and making a standalone brand for some customers that, by rights, don't have Skechers. So it's a test right.

It seems to be going well. It's not really big enough to move the needle right this minute, but it is a nice test and it's a good opportunity and we will look at others. But I have nothing really to put into any kind of modeling increase for next year. It's not there yet..

Okay and then just with the new automation in the European DC.

I mean, have there been, have you guys been doing any test or what gives you the confidence that there won't really be any mishaps early in the process?.

Well, by order of magnitude and size, it's significantly smaller than we set up here and uses the same basics and the same ideas, although not as obviously in depth and doesn't have cranes [ph]. So this one converted very easily for us in a much larger size.

Also because it's run by the same people, our people up in the Rancho Belago, California will be on-site there with the experience of how it works.

So unless there is glitch just in the manufacturing and we are putting it in, it won't be significantly different than what we do here and have the expertise of people that have been running it for over three years.

So while it's always the possibility, and I would never say never, I am more comfortable of this than when it's a standalone start-up and we have never seen it at all as an institution. So we gave them a lot of help and it's the same engineering firm, although we are using European parts to do this.

So that's what gives me confidence that we done it a couple times before and it seems to be going well and it's the same thought process and the same software and the same operations for the facilities we are putting in there and we have expertise of that and can put people on-site there, if necessary..

All right, great. Thanks. Good luck..

Thank you..

Thank you. The next question is from Scott Krasik of Buckingham. Please go ahead..

Yes. Hi, David. Thanks for taking my question..

Hi, Scott..

First on the retail comps.

Any major variation by month? And then how are things trending in October? And what's your expectation for comps for the fourth quarter?.

No big deviations. I think September, by nature, was a little lighter on a comp basis, as it was so strong last year as we went through. But July, August and September, as a group filled out very well. And that's only domestic. International, we saw nothing change. We just happen to be very hot there.

In our numbers for fourth quarter, we are putting in a high single to low double-digit comp in our own projections. And October's held up that well so far. Although it is the lightest month of the quarter..

Okay. Thank you. And then is it 404 domestic stores..

We have 432 domestic stores. No, 432 stores all in. 370 or 380, I believe, domestic..

And can you just talk about what your thoughts are? Where you think that can go to in the U.S.?.

Well, I think 360 may be the right number. I take it back. So 360. Well, we only opened 40 or 50 stores a year. It could certainly go for the next two years. I know there is more than 460 centers that we would like to be in and some concepts that would like to open. So we haven't really thought past that. We don't have an endgame.

Just what we are doing year-to-year..

Okay and then in domestic wholesale, I know you have some strong feelings about some of this market data that's reported weekly, but your ASP was up 1.2%. It seems like it's been up higher at the retail level.

Is there any discrepancy there? And how do you look at ASP going forward for you?.

Well, we are going to do some markdown on method and remember, Europe, we use across everything which includes a lot of kid's and whatever closeouts we may have and whatever flows through it. So it's 1.2% on a wholesale basis. I think it's fair to say margins have increased as well at the retail level.

So the ASPs are going up because we are hotter and they don't have any closeouts. So I don't know that there is a discrepancy. I think everybody's making money, which is just the way we like it..

It just seems like you are selling a lot more $60 and $65 shoes at retail. I would think it would flow through to you..

And it has. Remember this is the second or third year in a row where they have gone up, and it's only a mix issue or expense right now..

Thank you, David. And then maybe just last, I will ask because everyone else has asked it. Your backlog was up mid-30s in the first quarter and you reported mid-30s sales growth. Your backlog was up low 20s and domestically, you did a 19% almost in domestic.

How do we come up with the backlog that you are reporting, which is so strong with the guidance for 15% sales growth in the fourth quarter and 15% to 20% in the --.

Well, I think it's fair to say that the biggest piece of our backlog is into first quarter. The big piece is international. International just doesn't have a big fourth quarter business for us. So it really does move for the first quarter, so 15%, and that's at once piece that goes in.

And at once is not usually that strong in the fourth quarter because you really don't start selling through until you get towards Thanksgiving and so there is again not much room although you can move January to December. So that's just the way it lays out.

We only have so many distributors in Europe because it's very cold and very dark early and it's just not a strong period. So on a comparative basis, you can only grow so much. In first quarter, we said 15% to 20% because we are not sure of the repeat. We know everybody is ordering up.

We have to be sure that our business continues to grow and the demand increases, which we think it can. So that would give us upside there.

Also, when you think about it, it will be the fourth year at retail and retail can't comp up significant double digits and keep up with what would be consistently higher than a 20% or somewhat percent increase because of its size and because it's comps can only continue to increase so far. And there is only some new stores to go.

So I think retail could be a drag on the upside on a percentage basis, simply because we can only put so much through the four walls. But always a possibility, the omni-channel could help us with that, as it goes through. So that's just the first look and the first picture, I would assume.

We will give you much more color and you guys will know what's going on as we get through our buy meetings and we see how people are looking with inventory and what it looks like through Thanksgiving. I think certainly with the possibility of more retail base between Thanksgiving and Christmas, there is some upside.

Although I think the upside is significantly higher in the first quarter than that it would be in fourth quarter..

And just one last one, I am sorry, I forgot.

What do you expect inventory to be at year-end?.

I think it will, hard to tell. It will be up significantly from now and probably for next year. We have this conversation every fourth quarter. Because of the strength of what first quarter will be, we will try to bring in as much inventory as we can prior to the start of first quarter.

A, it frees up our production facilities because we have more to make as we go through next year and would like it earlier, and we would look at how we would like to deliver as early as possible, which means in the first three or four weeks in January, expect a lot to get out and we don't want it on the water.

So whatever we can get for first quarter into fourth quarter, we will take, as far as inventory is concerned. And I don't know what that number is right this minute and I have to through production schedule.

And unless there is a big movement from January to December, it will all sit on our books, be ready to ship on January 1, so everybody can get a great start on what we think is going to be a great quarter..

Okay.

The low backlog, or you are just now not sure yet?.

The growth?.

The growth in inventory..

Yes. It will be below backlog. I would doubt it will be up 50%. I don't know if we can make it that fast, but if it's up 50%, that will be okay too. I just tend to doubt it will get that high. In fact, we just can't put it out that quick..

Okay. Dave, thanks again for taking my questions..

Thank you. The next question is from Jim Chartier of Monness, Crespi, Hardt. Please go ahead..

Hi. Thanks for taking my call. First question.

On the one time DC cost for Europe, should we expect similar cost in fourth quarter? Or when do those cost start to abate?.

Yes. We will have similar, albeit somewhat lower, cost in the fourth quarter, because they just don't ship as much in the fourth quarter. It's not as packed. And hopefully we will be testing by the end of November. So it should alleviate some of that in December as well. So it does still exist in Europe, probably at somewhat lower magnitude..

Okay and then on the kid's business, you mentioned you are introducing some takedowns of adult styles for kid's.

Have you tested those styles in your stores, And if so, how have they done?.

We have tested it in stores and with some key customers of ours, and to-date, they are testing very, very well. I think what you can see also is some exchange of older product and everybody getting ready for some newer products that we think happens in first quarter..

Good and then any color on the kid's backlogs? How is that trending?.

It's up for first quarter, up over last year, but it's still early in the game. It's certainly not up as high as the rest of our business, but it does show an increase. And we are sitting on a higher backlog going into the end of the year.

So that bodes well, at least for the testing of the new product and we think it will resonate quite well and quite a strong comeback throughout the year..

Great. Thanks and best of luck..

Thank you..

Thank you. The next question is from Corinna Van der Ghinst of Citi. Please go ahead..

Hi. Sorry, David. Two quick follow-up questions. You guys have talked about shifting some of the product mix towards synthetic.

Are you anticipating any input cost benefit from lower oil prices as you are looking out into 2015? And how are you thinking about input cost overall?.

We think they are fairly stable right now, I mean 30% of -- it depends on the shoe. But 20% to 30% is based on labor and that's fairly stable right now in China. The rest we may or may not. We will see what develops with it.

I think if it happens, we will be certainly okay with it, but I haven't seen it yet and I hate to anticipate just on oil price for the last three weeks to tell you what it's going to be for the whole next season. So it's too early for me..

Okay, understood. And then you guys have the (inaudible) test for Sports Authority and recently introduced the brands of both Sports Authority and DIX e-commerce sites.

Can you talk about how that's going so far? And maybe any updates on plans to expand at those retailers ahead?.

I think we are going to meet with them as they come in through fourth quarter to decide what's going on and get a better handle of it. So I have not spoken to them yet. I hear it's gone fairly well, as far as the sales guys are concerned. But I don't have any in-depth detail.

So I will leave that until we see in New York, if any, we will have more detail..

Great. Thanks so much..

Thank you. The next question is from Corinna Freedman of BB&T. Please go ahead..

Hi, David. Thanks for taking my question. I just wanted to circle back with you on the tax rate. It seemed much lower than we are expecting previously. Can you talk about what you expect for the full year and how we should think about 2015? I am assuming that's because of more international.

But I just want to get a better understanding was there anything shifting in the quarter? Thank you..

No. I mean, there was no discrete items or anything to that effect. Basically we did have a discrete item in the second quarter, which made us differ for some modeling purposes, but you are absolutely correct.

It is because of our increased international business and specifically in Europe and some of the distributors that even have better results for us. So it's a catch-up. We originally, obviously, didn't anticipate this kind of growth or profitability in international.

So we originally thought it was a 24%, 25% annual tax rate, when we got to third quarter, our projections now indicate it's a 22% tax rate. That's why we said it would be like 21% to 26%, I believe on the notes. And the catch-up in the third quarter to get it down to that 22.5% to 23% annual rate.

And if our projections are right on schedule, which is very difficult, it will be somewhere between 22% and 23% for the year, and in the fourth quarter. But like I said, there is a lot of moving pieces. So that could change up or down a little bit depending on how business international is against the whole..

Okay.

Should we expect that for fiscal 2015 as well? That way?.

I would think so. I would think it would be that or somewhat lower, because we are growing at a faster pace. It all depends on how profitability breaks up. It's kind of early to say, but I would say in the 23% range is I would like to see that hold through 2015..

Okay, great. Thanks so much. Best of luck..

Thank you..

Thank you. And our final question comes from Sam Poser of Sterne, Agee. Please go ahead..

Yes, thank you. David, just a quick follow-up. You talked about the international business, Q4 being a slower quarter, but on a year-over-year basis, it was a fuller quarter last year.

So why wouldn't the momentum sustain itself on a year-over-year basis?.

It's just a small number. I just don't see it yet. Because everybody swings the quarter up in Q3. A lot of people are filling a pipeline and they are going in there and last year it was a very weak time for us. And so I think the pipeline is full. I don't see that much orders out there. And I don't know that they will push them up that quickly.

There is no structural reasons that it wouldn't hold except with the pipeline we filled. We had two quarters in a row. This quarter, 66%, 70% in Europe. And that's the biggest user. I don't know that they can compound that in a softer retail quarter..

Got you.

But you have seen your retail comps there sustain themselves?.

In Europe?.

Yes..

Yes..

Thank you. Thanks very much. Continued success..

Thanks..

Thank you. This does conclude today's. I would like to turn the floor back over to management for any 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..