Greetings, and welcome to the SKECHERS USA, Inc. Second Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this point, I'd like to turn the conference call over to SKECHERS. Please go ahead. .

Thank you, everyone, for joining us on SKECHERS' conference call today. I will now read the safe harbor statement.

Certain statements contained herein, including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended..

Such forward-looking statements involve known and unknown risks, including, but not limited to, global, national and local economic business and market conditions, in general and specifically, as they apply to the retail industry and the company.

There can be no assurance that the actual future results, performance or achievements expressed or implied by such forward-looking statements, will occur..

Users of forward-looking statements are encouraged to review the company's filings with the 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' second quarter 2015 financial results. Our sales for the second quarter were $800.5 million, a 36.4% increase over last year and the highest quarterly sales in the company's 23-year history. This also resulted in record first half sales of $1.57 billion..

Driving the growth in the second quarter was double-digit increases in our 3 business channels, domestic wholesale, with an average price per pair increase of 9%; international wholesale, which includes 665 third-party-owned SKECHERS retail stores; and our 461 company-owned SKECHERS domestic and international retail stores with total comp store sales increases of 12.9% for the quarter..

The second quarter benefited from both pent-up demand, resulting from U.S. port issues in the first quarter as well as a shift in back-to-school shipments due to increased demand in both domestic and international markets.

This continued strong demand for our product worldwide also led to record net sales, earnings from operations, net earnings and earnings per share in the second quarter..

Second quarter financial highlights include record quarterly revenues of $800.5 million, record earnings from operations of $112.3 million, record net earnings of $79.8 million, record diluted earnings per share of $1.55, gross margin of 46.8% and a strong balance sheet with $513.9 million in cash or approximately $10 per diluted share. .

Additional second quarter highlights include being added to the S&P 400 MidCap Index as of June 30, a reflection of our significantly increased market cap; a 31.9% increase in our domestic wholesale business, with a 21% increase in pairs shipped and a 9% increase in average price per pair; a 60.1% sales increase in our international wholesale business, with a 51.5% increase from our distributors and a 64% increase from our subsidiaries and joint venture partners; a 23.7% sales increase in our company-owned retail stores, which included an additional 48 net new stores compared to the prior-year period, including 8 net new stores opened in the second quarter; worldwide SKECHERS retail store count, including third-party-owned SKECHERS stores, now stand at more than 1,100 doors..

The universal acceptance of our diverse range of Men's, Women's and Kids footwear has resonated worldwide. We have significant success stories in every key product line, allowing us to build upon our product innovation and continue to expand our brand in new territories.

We have a team of celebrities that reach a vast demographic globally from Demi Lovato, resonating with teens, to Ringo Starr speaking to Gen X and Baby Boomers.

With the signing of boxing legend, Sugar Ray Leonard, in the second quarter, and pop singer, Meghan Trainor, just last week, the impact of these influencers in traditional media as well as social media will be even stronger. .

We have increased both efficiency and capacity in our domestic and European distribution centers and are continuing to do so, positioning us for ongoing growth..

Our year-over-year worldwide backlogs are up mid double digits at June 30, 2015, which we believe is a clear indicator that our momentum will continue throughout the year..

Now turning to our business in detail. In the United States, we are pleased that both our sales growth and our position within our wholesale accounts and as a leader within the footwear market. According to SportsOneSource, we are now the #1 work brand and the #1 walking brand..

In May, numerous media outlets reported that we surpassed several leading athletic footwear companies to become the #2 brand in the United States athletic footwear market. The sales growth is reflective of our increased importance with our wholesale partners..

In our domestic wholesale business, second quarter sales increased 31.9% or $82 million as compared to the prior-year period.

The growth in the second quarter was the result of a 21% increase in pairs shipped, a 9% increase in average price per pair and double-digit increases in our Men's and Women's footwear as well as single-digit gains in our Kids footwear.

The highest dollar gains came within our SKECHERS USA Men's collection, which features Relaxed Fit footwear, SKECHERS Sport for Women with our lightweight footwear and our Women's SKECHERS GO line. Every major product category showed increased volume and increased gross margins for the quarter.

Nearly every division and product line from SKECHERS GOrun and SKECHERS GOwalk to BOBS from SKECHERS and Twinkle Toes had a TV, print or in-store marketing push behind it. This included our first sandal commercial in many years..

Our spring marketing push drove excitement for our footwear, as we launch new campaigns with legendary drummer, Ringo Starr, for our Relaxed Fit footwear, Brooke Burke-CHARVET for SKECHERS Stretch Fit, U.K. model and actress, Kelly Brook, for SKECHERS Sport and several SKECHERS GO GOLF commercials with pro golfer, Matt Kuchar, among others. .

Additionally, our in-store and online campaigns with Demi Lovato launched in conjunction with the airing of her Colorful Comfort SKECHERS for print and television campaign.

Demi's impact on social media has been phenomenal, as we see fans in the United States and around the world engaging with her post about SKECHERS, and the SKECHERS Sport Demi commercial reached 4.5 million views on YouTube..

The signing of the great boxing legend, Sugar Ray Leonard, for our Men's Relaxed Fit line is also a plus for social media, as he regularly posts about SKECHERS. We are looking forward to the launch of this television and print campaign later this quarter.

And we just announced the signing of multi-platinum artist, Meghan Trainor, who is currently on her MTrain tour across the United States. .

The press has taken notice of the growth and innovation of our product lines and our brand ambassadors. The Pete Rose in the Hall SKECHERS campaign continued to create excitement in the sports world and on Twitter, as Pete petitioned the baseball league to be in the Hall of Fame.

The press loved the innovative Game Kicks line, which features a built-in memory game. And of course, the media outlets are gearing up for the Star Wars movies, and now we have Star Wars from SKECHERS footwear for boys and men coming in the second half of 2015..

Finally, in the second quarter, we reached a 12 million pair donation mark for BOBS footwear. .

To better prepare for continued growth, we recently completed capacity and efficiency upgrades to our domestic distribution center and believe we are well positioned for increased shipments and demand.

Based on our domestic wholesale backlog, our continued focus on delivering innovative product and relevant marketing, including our increased team of SKECHERS brand ambassadors, strong sell-throughs for spring and early feedback on our fall products, we believe we will continue our sales momentum through the back half of 2015..

International achieved the highest percentage in dollar increase of our 3 distribution channels. Total international wholesale and distributor sales increased by 60.1% in the second quarter. Further, our subsidiary and joint venture sales improved by 64%, and our distributor sales improved by 51.5%. .

Several countries shipped more than 1 million pairs in the quarter, including China, the United Kingdom and the UAE, who handle a distribution of SKECHERS across most of the Middle East. Additionally, we are pleased with the continued growth in our international business, despite foreign currency headwinds in several markets..

We believe this success is attributable to our innovative and diverse product range as well as our on-target marketing and branding campaign. Ringo, Demi and international celebrities, like the UK's Kelly Brook, are resonating with consumers in many global markets. And a K-pop group, Sistar, are having positive impact with consumers across Asia.

In fact, we are excited to see the first window displays of Demi Lovato in Spain, Germany and Panama; Ringo in the U.K.; and Kelly Brook in the U.K., France and Germany..

Canada, Germany and the U.K. The only market in which we did not achieve sales growth was in Chile, which is due to currency headwinds, as they, in fact, had an increase in pairs shipped in the quarter..

Additionally, in the second quarter, we began shipping into Central Eastern Europe as a subsidiary after transitioning several distributors to a wholly-owned subsidiary that will oversee 14 countries.

We are pleased that we have already begun to see key accounts in our newly opened CEE headquarters in Budapest, and we believe this new subsidiary will positively impact our operations in 2016..

To prepare for the accelerated growth in Europe, we are also increasing the capacity and efficiencies in our European Distribution Center with 2 expansion phases, doubling the size of our EDC, which will bring us to more than 1 million square feet of distribution space by mid-2016..

In the second quarter, we began transitioning our business from our distributor based in Panama to a subsidiary. The planned subsidiary SKECHERS Latin America will oversee Peru, Colombia, Costa Rica, Panama and several other countries in the region.

With numerous SKECHERS retail stores, we believe there is great opportunity to grow our business in this well-established market. We expect the agreement to be signed shortly, and we will announce it when it is complete..

Our joint ventures in Asia grew by 116.8% for the quarter, led by a triple-digit increase in China, which shipped more than 1 million pairs in the second quarter.

Our international distributor growth of 51.5% for the quarter is the result of triple-digit growth in Indonesia, Scandinavia, Taiwan and the UAE, and double-digit growth in Australia, New Zealand, South Korea and Turkey as well as strong results from many other countries.

As in the United States, this growth was being driven by our diverse range of Men's, Women's and Kids lightweight SKECHERS Sport, SKECHERS GO and SKECHERS USA footwear. .

To showcase the complete offering, most of our international distribution partners have opened SKECHERS retail stores, and we have a growing network of franchised SKECHERS stores. At quarter end, there were 665 SKECHERS-branded stores owned and operated by our joint ventures, franchisees and distributors outside the United States.

Of these, 406 are distributor owned or franchised SKECHERS retail stores, 216 SKECHERS stores under our joint venture countries in Asia, including those run by franchisees in the region. Additionally, there are 43 company-franchised stores in those countries where we directly distribute our products.

63 third-party stores opened in the second quarter, including our first 2 stores in the Czech Republic and our first Kids-only stores in Hong Kong.

Additional SKECHERS-branded stores opened in the quarter include 18 in China; 5 in the UAE; 4 each in Brazil, Taiwan and Malaysia; 3 in Mexico; 2 each in Australia, Kuwait, Spain and Singapore among others. 6 stores closed in the quarter.

5 third-party SKECHERS stores have opened to date in the third quarter, and another 90 to 100 are expected to open during the remainder of the year. .

Over the past few years, we have aggressively introduced new product lines and innovations, and we are grateful that so many of our initiatives have resonated with consumers around the world.

We're building the SKECHERS brand across the continents with our powerful marketing, be it Demi Lovato, windows in Australia, television campaigns in Brazil, or the unisex sport and GOwalk commercials running in nearly every international market that airs SKECHERS TV commercial.

In addition, Asia has built a young trend business with our heritage Men's and Women's Sport style that took off in South Korea and was embraced by consumers in China, Hong Kong and Southeast Asia. .

With double-digit backlog increases and strong growth planned in many countries, we believe this momentum will continue through the back half of 2015. Now at 30% of our total sales, we expect international to grow at a faster rate than domestic wholesale and retail and become 50% of our total business in the next 3 to 4 years..

Worldwide sales in our company-owned retail stores increased by 23.7% for the quarter with domestic sales growing by 21% and international sales by 35%. This included positive comp store sales of 13.1% domestically and 11.8% on our international stores, for a total of 12.9% comp store sales increases worldwide.

At the end of the quarter, we had 461 company-owned SKECHERS retail stores around the world, of which 95 are in our international markets. In the second quarter, we opened 12 stores, including our first store in Alaska and Brazil and 2 stores each in Japan and Canada. We closed 4 domestic stores in the quarter. .

Already in the third quarter, we've opened 7 stores, including a store in Fifth Avenue between 42nd and 43rd Streets in Manhattan. With another 30 to 35 planned for the remainder of the year and a transition of several stores in Latin America to company-owned stores, we should reach 500 company-owned stores by year end..

Now turning to our second quarter 2015 numbers in more detail. As discussed earlier, we achieved both a record second quarter and highest sales quarter in our 23-year history with sales of $800.5 million, up 36.4% compared to $587.1 million in the second quarter of 2014..

Second quarter gross profit was $374.6 million or 46.8% of sales compared to gross profit of $269.4 million or 45.9% of sales in the prior-year period. Second quarter selling expenses were $64.9 million or 8.1% of sales compared to $53.8 million or 9.2% of sales in the prior year, representing 110 basis points of operating leverage.

The dollar increase in advertising and marketing expenditures was to support all of our diversified product categories, both domestically and internationally, as well as higher sales commissions due to the significant increase in sales..

For the second quarter, general and administrative expenses were $201 million or 25.1% of sales compared to $163.6 million or 27.8% of sales in the prior year, representing an additional 270 basis points of operating leverage.

Of the $37.4 million increase in G&A, $8.7 million was related to operating an additional 48 stores when compared to the prior-year period, and $15.8 million was due to increased expenses related to our international operations..

During the second quarter of 2015, earnings from operation increased $58.6 million to $112.3 million or 14% of revenues compared to $53.8 million or 9.2% of revenues in the second quarter of 2014. This 480 basis point improvement reflects improved margins and operating leverage as we continue to aggressively grow our worldwide revenues..

In the second quarter, we recorded an income tax expense of $25.4 million compared to approximately $12.2 million in the prior-year period. Our quarterly effective tax rate was 22.6%. We currently anticipate our effective tax rate for the remainder of 2015 to be between 21% and 25%..

Net income increased 129% to $79.8 million compared to $34.8 million in the prior-year period. Net income per diluted share in the second quarter was $1.55 on approximately 51.3 million average shares outstanding compared to $0.68 on approximately 50.9 million average shares outstanding in the prior-year period..

Net sales for the 6-month period, ending June 30, 2015, increased 38.4% to $1.57 billion compared to $1.13 billion in the prior-year period. Gross profit was $707.1 million or 45.1% compared to $509.8 million or 45% in the prior-year period..

Selling expenses were $114 million or 7.3% of sales compared to $90.6 million or 8% from last year. General and administrative expenses were $398.2 million or 25.4% compared to $322.1 million or 28.4% last year. .

Earnings from operations for the first 6 months of 2015 were $200.5 million versus earnings from operations of $101.9 million for the same period last year..

Net income for the 6 months increased $70.1 million to $135.9 million compared to net income of $65.8 million in the prior-year period. .

Diluted earnings per share were $2.65 on approximately 51.3 million average shares outstanding compared to diluted earnings per share of $1.29 on approximately 50.9 million shares last year..

And now turning to our balance sheet. At June 30, 2015, we had $513.9 million in cash or approximately $10 per diluted share. Trade accounts receivable at quarter end were $434.2 million, and our DSOs at June 30, 2015, were 41 days versus 44 days at June 30, 2014..

Total inventory, including merchandise in transit, at June 30, 2015, was $470.6 million, representing an increase of $110.1 million or 31% from the prior-year period and an increase of $16.8 million from December 31, 2014.

We believe the increased inventory when compared to the prior-year period is appropriate based on our strong backlog and our forecasted revenues for the second half of 2015. .

Long-term debt at June 30, 2015, decreased to $1.6 million compared to $15.1 million at December 31, 2014. The decrease is primarily due to the reclassification of long-term debt to short-term debt on our distribution center equipment. .

Shareholders' equity at June 30, 2015, was $1.3 billion versus $1.1 billion at December 31, 2014. Book value or shareholders' equity per share stood at approximately $25.16 as of June 30, 2015. .

Working capital was $909.9 million versus $779.3 million at December 31, 2014. Capital expenditures for the second quarter were approximately $18.4 million, of which $9.7 million was related to 12 new stores and several store remodels and $6.3 million for additional equipment upgrades at our domestic distribution center.

We continue to expect our capital expenditures for the remainder of 2015 to be approximately $50 million to $60 million, which includes 30 to 35 retail store openings, equipment upgrades at our European and domestic distribution center and an additional real estate purchase..

In summary, we set new quarterly records in the second quarter for net sales, earnings from operations, earnings per share and operating income and saw gross margins of 46.8%. The growth in net sales also led to record first half sales of $1.57 billion..

Our 3 business segments saw double-digit increases in the second quarter, including international wholesale, which had the highest increase at $90.8 million or 60%. Even with this increase, domestic wholesale remains at 42% of our total business, but we expect international to grow to approximately 50% in the next 3 to 4 years..

The continued growth in 2015 is the result of the strong demand for our brand around the world, including our lightweight sport footwear for Men, Women's and Kids, SKECHERS GOwalk, Relaxed Fit footwear and many other product lines.

We are excited about the launch of our new marketing campaigns to support this business, including our brand ambassadors Demi Lovato, Meghan Trainor, Sugar Ray Leonard, among others, and the Star Wars SKECHERS commercial airing in the fourth quarter..

To maintain this growth, we are continuing to build on our many proven product lines with new designs and color ways while also developing new technologies and products, including the new Star Wars for SKECHERS license boys and men's style and the next generation of GO product, GO Flex.

We are also expanding into new accounts and growing our foothold in existing accounts and building our business in new markets, such as the Czech Republic and Romania and expanding our SKECHERS retail store base to approximately 1,250 by year end..

To keep up with the demand for our brands, we have added additional equipment upgrades within our 1.8 million square foot domestic distribution center.

To meet the growing demand in Europe, we have updated the automation of our equipment and are now undergoing our second phase of expansion, which will result in more capacity and increased efficiencies with more than 1 million square feet of distribution center space..

Our balance sheet at June 30, 2015, remained strong with $513.9 million in cash and in line inventory of $471 million.

This, along with double-digit backlogs, strong July incoming order rates and spring 2016 buy meetings with our key accounts in our corporate offices this month gives us confidence that the strength and demand for our brand will continue throughout the year and into 2016.

We will remain comfortable with the analysts' current consensus estimates for the back half of 2015..

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 Jay Sole with Morgan Stanley. .

I mean, these are some staggering numbers. Dave, I just want to ask you about the one thing you mentioned about international becoming 50% of the business within 3 or 4 years.

Now are you speaking about just the international wholesale direct or the combined wholesale and retail? Because I mean, even if it's just direct what you're saying it sounds like -- just doing some quick math is if the U.S., the domestic business is kind of flat, then you're seeing international potential to grow 20% for that 3- to 4-year forecast period.

Is that kind of what you're saying? Or am I understanding that right?.

Yes, what we're thinking is that we'll accelerate now through our international business, but I do count the retail. I count everything that's outside the United States than in effect is international. And that will start to grow at a faster pace as we continue to open and China continues to open stores.

So while I don't anticipate any significant change in our domestic business, and it's moving quite well, and I think it still has room to grow, I just think international, as we've set it up now, will start to grow at a significantly faster pace, as we get some underperforming territories like Japan, Brazil, new parts of South America and Eastern Europe moving.

And as well as Europe has been doing for us and continues to grow and expect to grow next year. We think in the next 3 or 4 years, counting our retail and expansive franchisee openings around the world, that we can catch domestic.

Of course, there's always a scenario that says domestic will reaccelerate again, and it will take us a little longer, but that's a high-class problem to have. So that's fine with me. .

Sounds good. And maybe if we could talk about gross margin for a second because -- really big feat on gross margin this quarter. It seems like there's quite a few different drivers, pricing internationally to offset FX. There's pricing in the U.S.

that sounds like it's happening because of the strong demand, lower commodity prices, some increased operational efficiencies.

Can you maybe just quantify where the strength is coming from?.

Well, it came from everywhere, so surprisingly. Like I said in the prepared comments, every major division we had, had significant -- had higher sales and higher gross margins. I think that comes from being more efficient as we come through, not a lot of markdowns, not a lot of returns, not a lot of inefficiencies.

And because June became such a strong month for us domestically with the moving from third quarter to second quarter was all newer product with somewhat higher price points and margins, so that all helped move it, and that also flow through our retail channels that had significant domestically increased margins.

We were pleasantly surprised with the mix in Europe, probably because the U.K. was one of the biggest growers, and they haven't had any issues with currency.

But in the U.K., we ended up with probably higher margins than we had anticipated because of the increased new product that was shipped in the second quarter that historically would have been shipped in the third quarter, but we're certainly picking it up there.

And of course, one of the biggest movers is we have higher margins in China because China is predominantly a retail business, although they are into expanding their franchising model significantly and moving, and they were more than doubled.

They actually went from $18 million in the second quarter last year to $50 million in the second quarter this year. So that certainly was a positive impact on margins. So when you put it all together, we had almost the perfect storm.

I don't know that I would anticipate it continues forever because we will settle into a broader mix of footwear and fill-ins, not only new product, but it was a very good and very broad-based increase for us in the second quarter. .

Just I mean, those -- like I said, staggering numbers and terrific performance. If I can ask one more margin question, then I'll hop off. Last year, the margins in the U.S., the EBIT margin was 5.3% and international was 14%. And it sounds like you're talking about China and the U.K., and margins in some of these international locales continue to rise.

Can you talk about the U.S. margin? If margins are about 400 basis points so far this year, where is that U.S. margin trending? And where do you want it to trend because 5.3% sounds like low, given the strength of the brand right now. And just overall, with the strength of breadth and depth of the category and everything that you're doing. .

Well, we anticipate they'll continue to rise. Actually, we had a slightly higher tax rate this quarter than we anticipated. And that was based on the strength and profitability in the United States, both from retail and wholesale because we can leverage so well.

So we -- as we've said -- as we've been on the road and as we -- and these calls, we think we continue to leverage, even without gross margins so significantly high.

If we could scale back to the 44%, 45% set range where we've been historically, we still anticipate we'll continue to leverage to the bottom line, and that's both domestic and internationally.

We will leverage faster, obviously, in the United States because we have more infrastructure here and more automation, but we'll start to catch up in worldwide as we put these things in place, and we think we'll continue to leverage just everywhere. So we keep moving along and expect operating leverage to continue to increase. .

The next question is from Jeff Van Sinderen of B. Riley. .

David, maybe you can just give us a little more color on what the backlog mostly consists of? Is there -- are there any notable changes in concentration? And then maybe you could also just go through how much of the business you think was pulled forward into Q2 due to the high demand that you talked about? And based on that, I guess, how should we think about Q3 in terms of the year-over-year increase in revenues?.

It's very difficult to put a number on what was moved forward and not. If I had to guess, I would assume it was somewhere in the $15 million, $20 million range that normally would have gone into Q3. We had some increased demand in April as well, simply because of the port strike and because of the weather issues that we thought we wouldn't make up.

We made up in April because the brand was doing so well around the United States. As far as the backlog is concerned, it's obviously down a little bit from second quarter, and that's because we moved some shipments in from third to second quarter, so we obviously had a backlog and into the shipments.

Customers haven't had a chance to replace them all at the back end of the cycle for September, October. We anticipate that's coming.

Europe is, obviously, still down some because of the currency translations, but in real dollar terms has certainly increased, but we're up certainly significantly higher in local currencies than we would be in real dollar terms.

And moving to forecast for Q3, we think because of this movement into Q2, we're comfortable with the growth as it -- which is still pretty good for Q3 as far as volume.

And we left the operating or the earnings per share number the same because we do anticipate a slight decrease in the gross margin, so slightly higher volume getting to slightly higher EPS number. But we do know that there is room to the upside.

And given such a big shift to June, we'd have to see some increased demand for Back-to-School to get the increases on the back half. It's usually acquired at that time. So we're still in the process of that.

I think while our stores continue to comp at double digit through July, there is a case to be made that Back-to-School is moved to further out since Labor Day is so late, but we're off to a great start in July.

So we think a lot of good possibilities out there, but we are still comfortable with the growth shown, which will make for a very good 3 quarters for us. .

Okay, and then what are you hearing for early Back-to-School from some of your wholesale accounts? It sounds like your retail stores continued to be really strong, but just wondering if there's any feedback from them so far in early Back-to-School business. And then maybe you can also touch on Star Wars and the Kids business. .

Well, Kids continues to grow. We saw it very close to double digits in the second quarter, and it's up double digits for the first 6 months. We're all very excited about Star Wars and the potential Star Wars commercial and the footwear got a good reception when we were expanding and we anticipate as we go -- get closer.

We do have some orders already -- a significant amount of orders already booked for fourth quarter, to start along with the running of the commercial. We do not have it worldwide. So I don't mean anybody to get carried away with the worldwide.

We wish we had it worldwide, but we really have it, and the United States is the biggest market and then some selected markets in South America and very few in Southeast Asia. So the biggest piece will be in the United States. So it doesn't move the needle worldwide.

And we continue-- I forgot the beginning part of the question, but it all continues to come down the road. We think it's all positive going into third quarter. And what I heard -- we hear from -- we hear we're performing well for Back-to-School. Most people do think it's starting slower because of the late Labor Day.

And but we still continue to perform very positive and get great feedback from our customers. I don't really have a lot of input on how other than us, things are faring away from us in the marketplace for Back-to-School so far. .

Our next question is from Corinna Van der Ghinst of Citi. .

So first off, I have a follow-up question on the margin. SG&A leverage was clearly better than any of us were expecting off of a strong top line this quarter and better than Q1 as well.

Do you see this level of leverage as sustainable through the rest of the year? And would there be any areas where you guys might be planning to reinvest a little more into SG&A just based on the upside that we've seen this year?.

Well, I think the key to that will be more the gross margin than anything else. So while I do anticipate we can get close to this in Q3, depending on where margins settle in, obviously, it would be more difficult to have this kind of increased leverage in Q4, which is a much smaller quarter for us and a big advertising quarter.

So on an overall basis, I think it continues, and I think it will increase next year. So it all depends on where gross margins settle in and what we can do with some international currencies and what pricing power we may have as we move into next year. .

Okay, great. And then secondly, what do you think is driving the double-digit retail comp that you guys are seeing, particularly in your U.S.

stores? Is there some product that's not being picked up by the wholesale channel? Or is there some other dynamic that is driving that comp?.

Well, I think we have our consumer. I mean, we have our consumer around the world. And I don't know that it's fair to say they're higher in the U.S. than here. While the comps were somewhat lower internationally, remember, they have currency headwinds that they have to compete against last year.

On a units basis, I think that they're comping even better than the U.S. And I think it is how fast we deliver our new product and number and the colors and the choices we offer in our stores, and it's a great shopping experience for the family.

I don't think it takes away from any of our wholesale business because they continue to do well as well, and I think they perform as well as we do. I think overall it's just the strength of the brand, the strength of the product, the diversity of the product and what we have to offer. So everybody who's in it seems to be doing quite, quite well. .

Okay.

And then just lastly, with the guidance of international reaching 50% of your sales, in that scenario, can you just kind of walk us through what you envision your biggest international market would be? And also nearer term, what you think the biggest market of driving international growth would be for the back half of this year?.

I think it continues to be where we are today. China, obviously, has the potential to be the biggest market outside the United States, simply because of its growth and its population. As it grows -- continues to grow at 100%, that's pretty significant. We have said that China last year did less than 100 million in volume as a stand-alone.

They did 50 million in the second quarter. So obviously that growth we anticipate may not continue at quite that level, but certainly on a real dollar basis, will continue to grow certainly for the next few years.

We think we have significant opportunity in our new areas in South America and Central, Eastern Europe, which have been underutilized in Europe for many years and in South America and Latin America because our distributor there just was financially challenged and couldn't move, has a great marketplace there, and we think we can grow that significantly, especially given our pricing power.

So I think it continues the same way it does now. Europe is not done. Eastern Europe is not done. Our distributors, certainly, are not done. We hear as good things out of our biggest distributors in Australia and UAE from growth as we've seen over the past few years. So I think everywhere we are, we'll continue to grow at great rates.

But if I had to pick one that was going to be the biggest overall significant period of time, certainly over 4 or 5 years, I'd still have to stay with China. .

Okay, and I lied, and just if I could sneak in one follow-up to that. Is there a possibility of seeing upside from that Latin American market and then also Central Eastern Europe versus your current guidance for this year.

Is that really a 2016 story?.

That's mostly a 2016 story. Central Eastern Europe will start to shift, but it won't move the needle. And we're just getting product and taking over the stores. There's a possibility we could see some positive impact from Latin America in Q4, but it's really too early to tell. We're just taking it over, and we're just starting to put product down there.

So it's too early to really tell how quickly we can get up to a critical mass. .

The next question is from Sam Poser of Sterne Agee. .

A few things, number one, can you give us what the -- you talked about double-digit backlog.

Could you tell us, as a percentage, what the backlog was up, please?.

We don't usually do that, so... .

But you did it last time. .

Yes, but if I keep doing it, then I'll have to do it every time. So... .

That's why I'm asking... .

It's still up -- it's tough to give you a range. It's up between 35% and 45%. That's how we get into our mid-double digits. It's up higher in international than it is in the United States. .

Okay. And then when you look at the -- you said -- I'm just clarifying, you said that the domestic -- you expect that the domestic business to continue to grow at mid-teens for the foreseeable future.

Is that correct?.

I don't know that I said that, but I think that would be a bare minimum. .

I mean, like, when we look outside of this year. I mean, I'm not talking... .

It's too early to tell. We have some great things happening. And you have to -- we have to take the temperature of the competition and our whole retail environment. But I don't -- I wouldn't, at this point, say I'm committed to the fact that we can only do in the teens next year. .

Okay. And then we're-- you said you did $50 million in China for the quarter. I mean, when you look at China, I mean, you did about $100 million last year, so this year is trending, I don't know how it's weighted, but up 50% at least, it sounds like, maybe more.

When -- you talked about that being a $1 billion market at one point, where -- what is your time frame to see that?.

That's hard to tell. I would say that's probably a 5-, 6-year horizon, maybe a little more. It depends. We can accelerate. By the way, they're going to be up way more than 50% this year.

They already did $90 million for the 6 months of what was less than $100 million last year, and they're certainly not going to deteriorate as we go through, although the fourth quarter for them is certainly the smallest. Although we have increasing volume on single space all the time. So that they'll be up more than 50% and continue to do that.

So if they end this year somewhere close to $175 million or $200 million and double spot to double over the next 2 or 3 years, you get to $400 million, $500 million in 3 or 4 years. And after that, it depends on the marketplace and things like that. I don't usually look out that far.

But certainly from there, another 2 or 3 years after that could get close to $1 billion. .

Okay, and then just one more thing on the gross margin. You said you expect the gross margin potentially to be down slightly. But that's also what you said in this quarter. You were in a 45.2% gross margin, both in Q2 -- Q3 and Q4 last year.

I mean, are you -- when you say a little, given the results this quarter and the mix, it sounds like it's going to stay about the same. And arguably, Q4 is a higher-direct business.

Would it be that there may be a hair more pressure on Q3? And then Q4 has had more opportunity just because of the mix?.

Probably because the Q4 is historically more retail. And they have higher margins, both here and in Southeast Asia. So yes, there's probably pressure in fourth quarter, too early to tell -- I mean, third quarter, too early. But probably some upside potential in Q4 if things continue as we're moving today. .

Okay. And then just lastly, on the shifting of the orders from Q3 into Q2, you would also guess, I assume, given the run rate that -- and where you are that you said some of the orders for October and others haven't been written.

But likely, you would expect, given the rate that there may be shifts from November into October -- or October into September, excuse me. So how... .

I believe there's certainly a possibility of that as Back-to-School picks up. I mean, we have to see how back-to-school continues. I mean, they took it in early.

I haven't heard of any slowdown, so certainly, if we continue with this pace, we would anticipate some movement up from Q4 into Q3, but it's too early to say anything about the order of magnitude.

And remember, you missed -- the order of magnitude potential in Q3 to Q2 is certainly significantly larger than Q4 to Q3 because October is a small month, and September is the smallest month of the third quarter. It's already past Back-to-School. So the opportunity is not quite as large as it is right this minute. .

But you're not including any of that in the guidance that you're -- in your [indiscernible] the numbers that are on The Street. That is -- none of that is within that -- if it happens, that's over and above where people are right now, if I'm... .

Well, there always has to be some of that in our guidance because as we move -- I mean, nothing is strictly as it sits today because we're such a dynamic company. It changes from day to day. So we're always taking running rates in what we see around the world and trying to get the best middle road. And some will go over on and some will be under on.

Nothing comes to the penny as it stands. So we do have, in those numbers, some shift back because we can't move that much out and expect it to still continue with such a big plus for the prior year. There was only so much book for it, but it certainly is possible. Some of it is in our guidance, certainly not all that's possible is in our guidance. .

Then lastly, with the international, the international longer-term growth rate to get to the double -- I mean, you're assuming -- I mean, like, when you say it's going -- when you said it to be half the business, what kind of run rate are you looking at on international versus domestic? I mean, are you still expecting the domestic business to be able to grow double digits, and then international business would grow somewhere like 3x, that kind of thing? Is that the right way to think about it?.

Yes. Domestic will continue to grow double digits. By the way, we could move out that projection significantly because we really don't see any slowdown now in the U.S. So it would be my pleasure to move it out from what I -- given the maturity of the marketplace is.

We had originally thought it would be 3 to 5 years, and given that international is growing at a 60% rate, and we think that will increase with the takeover of Latin America and Eastern Europe and China starting to hit critical mass.

But at this particular point in time, I have to tell you, I'm not sure that domestic slows down to the extent that I originally thought. .

The next question is from Scott Krasik of Buckingham Research. .

So just to deconstruct the backlog, if we just throw a number, let's say, 30% domestic, how much of that is with your comp stores? And how much would be new distribution? And maybe just give us an update in terms of what new distribution is potentially out there domestically?.

I don't think anything's changed from the last conversation. So most of this growth will be in the existing doors. There's not much that much -- we're still testing with guys like Dick's and Sports Authority and the Finish Line outside of Macy's. Those are still in the very early stages. We think we see some positive indications but nothing major.

So while there are some new doors, the biggest growth we will have will be through the existing doors with increased products. .

And to the extent that you've started book spring 2016, any indication that any of these tests have the potential to expand further?.

Yes. Well, we're still in that process. So we haven't booked spring yet, but there are some indications that we will see some increases. I'm not sure it's enough to move the needle, but it certainly is possible. Those are in talks right now.

I think we'll have a better idea at the end of August, which is really our big -- biggest booking month for the spring season. .

Yes, and then the gross margin, really impressive.

Can you tell me what was the constant currency gross margin? Or what was the basis point headwind from unfavorable FX in the quarter?.

Well, the top line in Europe alone was $15 million decrease from last year. We try not to focus too much on what it could have been because these are the realities of the world we live in, and we're going to have to continue and continue to grow and look for our pricing possibility.

So -- and the margin wasn't outrageously significant change because China picked up the slack from Europe. .

To the extent that you can primarily -- your visibility on the pricing for spring 2016?.

Well, we're working on that now because that's a very competitive piece, and we don't want to let it out too early. So we're all working on it, and -- but nothing definitive to say right this minute. .

And then just last thing.

Of the $200 million in operating income you reported so far this year, can you just give us a rough breakdown how much comes from the domestic side of the business versus international?.

That's very difficult because it's -- we allocate such significant pieces. But the biggest piece is still from the United States. .

The next question is from Chris Svezia of Susquehanna. .

So my question, in fact, was did you say that [indiscernible] comps were still up double digits [indiscernible]?.

Sorry, say that again.

Was what comps?.

Did you say that retail comps were up double digits?.

In July?.

Yes, [indiscernible]. .

Yes, this month, to date, we are up double digits, both domestic and international. .

Okay, and -- I just -- the question on the gross margin, going into the third quarter, if that sustains itself to a degree, why would it, the gross margin, be flat year-over-year or actually decrease, just comes down to the mix of new product and lower price?.

Yes. It comes down to the mix, because of -- and the new product. We'll get to a mix of older product as we fill in too. Not everything will be brand new at the highest margins as we get through Back-to-School.

But we have a bigger international quarter in the third quarter, which is bigger for distributors, which is our lowest gross margin and will be bigger for Europe, which is a lower gross margin than China. So they tend to pick up the pace there. So retail can't grow at a fast enough pace on a comp basis to make that up. .

Understood.

How does the European inefficiencies European Distribution Center -- how do we think about that year-over-year from [indiscernible] last year or just any color there, how that's trending?.

We -- I think you said something about the European Distribution Center, the efficiencies?.

Yes. The efficiencies or inefficiencies, kind of how that's trending [indiscernible]. .

Well, we, obviously, are not as inefficient as we were in the first quarter, but it was a smaller quarter volume life, certainly. And Q3 is still smaller than Q1, as far as Europe is concerned. So we will certainly be more efficient than we were in Q1. We're not as efficient as we'd like to be.

We're not significantly different than the prior year, but we expect to be significantly more efficient by the middle of next year when all our new equipment is put in place. .

Okay, final question, just on pricing, up 9% U.S. wholesale.

How much of that is just mix of new products? How much is that is just increasing price points, [indiscernible]?.

It's the mix of new products, a little bit of it is price point, but most of it is the mix of product. Obviously, GO grew at a significantly faster pace than Kids, which gives you a significant increase right off the bat especially when stuff moves in from July to June on a larger basis on the adults. So those are the big pushes. .

Okay.

And sustainability of that pricing increase, I mean, are we looking more like mid-single digits for the third quarter from the ASP growth and perhaps fourth quarter?.

I'm not sure about the fourth quarter yet. But yes, certainly in the third quarter, we would expect, unless there's a big change in mix. And I think Kids could do better in the third quarter. So we'll have slightly higher margins, but I'm not sure we'll be as good as we are in Q2. .

Our next question is from James Fronda with Sidoti & Company. .

All my questions were answered, but thank you. .

The next question is from Jim Chartier of Monness, Crespi and Hardt. .

Can you size the Latin America market for us today? And do you see any opportunity more in growing the retail store base or in expanding the wholesale distribution down there?.

On an overall basis, I think it's both. Right now, we're going to take over somewhere around 20 to 21 retail stores. But we do believe there is a significant wholesale business at least in Peru and potentially in Colombia that could be quite large.

Our Wholesale business in Chile is quite substantial, and I don't know that Peru would be significantly different. And there's a big group of the same department stores that are actually owned by the Chile group that do business in Peru that we think we can grow significantly. So I think it's both.

I think the biggest opportunity upfront is retail because we'll be taking over the stores right away, the 20 or 21 stores, and then wholesale as we go into 2016. .

And you got a $30 million market, $50 million market for you today.

How big is it?.

Today, we do it from -- through a distributor, which was lower price points, probably around 500,000 or 600,000 pairs, which would be about $8 million, $10 million, maybe a little bit higher, depending on the mix, but we think $100 million market for us if you take Latin America all the way down.

Remember, this goes from south of Mexico all the way down to Latin America, which would include Venezuela, but we don't have high hopes for Venezuela now. And actually some other small countries in the Caribbean as well, where we can open retail. So it's quite an extensive piece of which where I think Peru and Colombia will certainly be the largest. .

And then any update on signing new franchise agreements in China? I think, in June, you said you were close to signing some deals there?.

We are signing some, and we have some pretty big commitments, but we're waiting to see how they lay out there.

There are certainly no guarantees, I said they will meet the size we anticipate, but they continue to grow, and we think the volume in China could actually pickup as we go to 2016 if we get everything we're supposed to out of these franchises. .

And then how do you account for the sales to franchisees? Is that a wholesale sales for you?.

Yes. .

We have no further questions at this time. I'll turn back -- turn the conference back to SKECHERS for closing comments. .

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' filings with the SEC.

Again, thank you, and have a great day. .

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