Greetings and welcome to the Skechers First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Skechers to begin today's call..

Thank you everyone for joining us on Skechers conference call today. I will now read the Safe Harbor statement.

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

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

There can be no assurance that the actual future results performance or achievements expressed or implied by such forward-looking statements will occur. Users of forward-looking statements are encouraged to review the company’s filings with the U.S.

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

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

David?.

Good afternoon and thank you for joining us today to review Skechers first quarter results. With me on the call is John Vandemore, Skechers’ Chief Financial Officer who will discuss our financial results in detail. We achieved a new quarterly sales record of $1.28 billion, a 2.1% increase over the first quarter last year.

On a constant currency basis, our sales growth for the quarter was 5.2%. This was a result of our international business increasing 9.3%, 15% on a constant currency basis, which was partially offset by a 6.3% decrease in our domestic business.

In addition to the record sales, first quarter highlights include earnings from operations of $165.9 million a 11.5% increase; international represented 57.8% of our sales with constant currency growth of 15% and record shipments from our distribution centers in Europe and Japan, diluted earnings per share of $0.71, operating margin increased to 13%, inventory decreased 7.4% from the prior year, the expansion of our Skechers retail network to 3,060 stores worldwide, including the opening of 12 new company-owned stores and 89 third-party stores, purchased the minority share of our joint venture in India converting it to a subsidiary, repurchased approximately 458,000 shares of Class A common stock and received the Editor's Choice Award from Runner's World for GOrun Razor 3 Hyper.

Our new quarterly sales record was a noteworthy accomplishment given the shift of Easter into the second quarter of this year, the negative impact of foreign exchange rates and the challenging domestic environment.

International continues to be the bright spot, both from a growth perspective and the opportunities we have to grow our brand and to expand on our reach beyond the current 57.8% of total sales.

Already this year, we've purchased a minority stake of our India joint venture converting it to a subsidiary and we just finalized a joint venture with our distribution partner in Mexico. Both of these investments are expected to be accretive to our earnings in 2019.

We continue to deliver relevant product with targeted marketing around the world, building our brand and expanding our product offering while driving profitability.

Now, turning to our business in detail, our domestic business decreased by 6.3% comprised of a 3.3% increase in our direct-to-consumer business which included a 35.3% increase in our domestic e-commerce business. This was offset by a 10.9% decrease in our wholesale business.

Comparable store sales including e-commerce was slightly positive at 0.2% for the quarter. Domestic wholesale gross margins were flat while domestic retail margins increased 260 basis points due to improved pricing and a decrease in promotional activity. At quarter end we had 474 company-owned Skechers retail stores in the United States.

In the first quarter we opened 8 stores and closed 4. We also remodeled 2 stores, relocated 2 stores and expanded 1 location. For the quarter we maintained our position in the United States as the number one walking, work, casual lifestyle and casual dress brand and we moved up to the second position in the casual athletic category.

We are also the third largest footwear brand in the United States according to SportsOneSource. To support our domestic business we ran several commercials in the first quarter including the launch of the new Tony Romo commercial during the Super Bowl in which we see significant fresh coverage through the Tony's play-by-play during the broadcast.

We also ran white big commercial starring football legend Howie Long. In domestic wholesale our men’s business was particularly strong, including gains in our core men's sport and casual categories.

We also saw strong growth in our men's and women's work division and our charitable BOBS from Skechers lines and of course, our chumpy [ph] shoes from the Skechers D’Lite collection continue to resonate with consumers. Our spring television campaigns began earlier this month and we have positive expectations for Easter sell through.

This week we also began our buy meetings at our corporate offices at Manhattan Beach. Initial feedback through our new spring 2020 product has been positive. For the remainder of the year we expect to open an additional 30 to 35 Skechers stores in the United States.

For international, sales increased 9.3% or $62.8 million for the quarter representing 57.8% of our total sales. The sales increase was the result of an 8.7% increase in our wholesale business and a 13.2% increase with 2.3% increase in comparable sales in our direct-to-consumer channel.

Note that this comparable same-store number excludes our joint venture stores and in this quarter the newly transitioned India stores. Further detail in our international wholesale business, our wholly-owned subsidiary sales grew by 2.4%. Our joint venture sales were up 10% and our distributors grew by 36.3%.

Within our subsidiaries, the significant dollar gains came from Germany, Spain, India and Japan and in our joint ventures China, Singapore and South Korea. China remains the largest country within our international portfolio with approximately $1.1 million pairs shipped in the quarter.

At the close of the quarter, we had 900 Skechers freestanding stores in China, a total of 2399 points of sale and a 32% increase in our online business. Our International distributor business had an extremely positive quarter with the strongest gains coming from Indonesia, the Middle East and Australia-New Zealand.

Turning to international retail stores, at quarter end they were 2586, an increase of 64 from year-end. Of those stores, 2302 are owned and operated by international distribution partners, joint ventures and a network of franchisees.

In the first quarter 89 third-party owned stores opened including our first location in Bosnia and 27 third-party stores closed.

Stores that opened included 35 in China, 9 in Malaysia, 7 in India, 5 in South Korea, 4 in Denmark, 3 each in Taiwan and Turkey, 2 each in Israel, Japan and Russia, and 1 each in Azerbaijan, Brunei, Bulgaria, Finland, Guam, Hong Kong, Hungary, Indonesia, Netherlands, New Zealand, Pakistan, Romania, Saudi Arabia, Sri Lanka, Switzerland and the UAE.

11 third-party owned Skechers stores have opened so far in the second quarter which brings us to 2313 third-party owned stores as of today. At quarter end we had 284 international company-owned stores. This includes 61 Skechers stores in India that were previously operated as part of our joint venture and are now classified as company owned.

In the first quarter, we opened four International stores, 2 in Germany and one each in Austria and Italy and we closed three stores in the period. We also remodeled one store and relocated 3. Another store opened during the second quarter in Germany and we have relocated a store in Peru.

For the remainder of 2019 we expect in excess of 400 Skechers branded stores to open including approximately 30 to 35 company-owned. With the conversion of India to a subsidiary, we have the full benefit of a relatively young business which grew by 46% for the quarter and has significant growth opportunities ahead.

With this change, we have increased our company owned store count by 61, added a new high potential e-commerce platform, and are able to more efficiently merchandise and market to India's 1.3 billion people.

Similarly, our agreement this month to establish a joint venture with our current distribution partner in Mexico gives us a clear path to grow our business in a proven market by leveraging our product and marketing strategies. With more than 70 stores today we believe this market can support significant additional growth over the coming years.

We anticipate international will be a growth driver in 2019 and continue to believe international will be an increasing percentage of our business as we go through the year. Now, I'll turn the call over to John to review our financial and discuss our outlook..

Thank you, David. In the first quarter sales increased $26.7 million or 2.1% over the prior year to $1.28 billion and represented a new quarterly record for the company. Total sales on a constant currency basis grew $65.1 million or 5.2% year-over-year.

International wholesale sales increased 8.7% which included a 36.3% increase in our distributor business, a 10% increase in our joint ventures and a 2.4% increase from our wholly-owned subsidiaries. Our direct-to-consumer sales increased 6.7%, the result of a 3.3% increase domestically and a 13.2% increase internationally.

Our domestic wholesale business was down 10.9% in the quarter, although our footwear sales were down less at 8.9%. The balance of the decline stems from a shift in timing of our continuing apparel tests at wholesale.

Keeping in mind last year's robust first quarter performance and the shift in timing of Easter, we believe the domestic wholesale business remains stable and our expectation is that our sales will be flat year-over-year for the full year. Gross profit was $590.5 million up 7.4 million compared to the prior year.

Our gross margin decreased slightly by 40 basis points to 46.3%. Gross margins were pressured by lower international margins from higher discounts and negative foreign exchange rates.

These were partially offset by improving pricing and a decrease in promotional activity within our domestic retail stores which drove the average price per pair up 4.6% or $1.51 per pair. Total operating expenses decreased by $10 million or 2.3% in the quarter a 150 basis point improvement from 35.2% in the prior year to 33.7% this year.

Selling expenses decreased $14.2 million to $70.2 million or 5.5% of sales which was a $130 basis point improvement from 6.8% of sales in the prior year. The decrease was primarily due to lower domestic advertising. General and administrative expenses were up 1.2% to $359.6 million.

As a percentage of sales this was a 20 basis point improvement from 28.4% in the prior year to 28.2% this quarter. This increase reflects additional spending of $7.8 million to support continued growth in China and $8 million in retail to support the operations of 40 new stores, including 12 that opened in the quarter.

These expenses were partially offset by the receipt of a performance based government rebate in China of $15.8 million. Earnings from operations increased 11.5% to $165.9 million versus the prior year. Operating margin improved 110 basis points to 13% versus 11.9% in the prior year period.

Net income for the first quarter was $108.8 million or $0.71 per diluted share on 154.1 million shares outstanding compared to net income of $117.7 million or $0.75 per diluted share on 157.6 million shares outstanding in the prior year period.

Our effective income tax rate for the quarter increased to 19.5% which reflects the negative impact of several discrete items totaling $0.02 per diluted share. In the prior year our effective tax rate was 9.6% reflecting the positive impact of a discrete item associated primarily with the Tax Cut & Jobs Act totaling $0.07 per diluted share.

The net effect of these discrete items is the year-over-year impact of approximately $0.09 per diluted share. We now expect our effective tax rate for the full year to be between 17% and 20%.

It is also worthwhile to note that in the quarter we experienced a significant year-over-year difference in the balance sheet translation charge from foreign currency exchange rates. In the first quarter we recorded a loss, whereas in the prior year we recorded a gain.

The net effect of this swing is approximately $0.04 per diluted share versus the prior year. During the first quarter, we acquired approximately 458,000 shares of common stock at a cost of 15 million representing an average price of $32.77 per share.

Since announcing our share repurchase program in 2008 we have acquired almost $4.1 million shares at a cost of $115 million representing an average price of $27.95 per share. At March 31, 2019, $35 million remained available under our existing repurchase authorization.

Before reviewing our balance sheet in detail, I'd like to note that on January 1, 2019 we adopted the new lease accounting standard ASC 842. As a result, we began accounting for operating leases consistent with the provisions of this standard.

The impact of this new standard is the recognition on our balance sheet of a right of use asset of $970.4 million and an operating lease liability of $1.05 billion.

And now turning to our balance sheet in detail, at March 31, 2019 we had $879.8 million in cash, cash equivalent, and investments which was a decrease of $186.2 million or 17.5% from December 31, 2018 and an increase of $161.2 million or 22.4% from March 31, 2018.

As a reminder, we completed the cash purchase of our minority interest in India in the first quarter. Our cash and investments represented approximately $5.74 per diluted share outstanding at March 31, 2019. Trade accounts receivable at quarter end were $736.6 million, an increase of $44 million from March 31, 2018.

Total inventory was $740.9 million a decrease of 7.4% or $59.5 million from March 31, 2018 and a decrease of 14.2% or $122.4 million from December 31, 2018. We believe these inventory levels are clean and sufficient to support our direct-to-consumer and international growth expectations.

Long-term debt was $93.8 million compared to $70.6 million at March 31, 2018. The increase primarily reflects borrowings associated with the construction of our new distribution center in China.

Working capital increased $20.9 million to approximately $1.66 billion versus $1.64 billion at March 31, 2018, primarily reflecting higher cash and investment balances partially offset by the recognition of operating lease liabilities from the new lease accounting standard.

Capital expenditures for the first quarter were approximately $51 million of which $10.2 million related to the construction of our distribution center in China, $8.6 million related to 12 new company-owned domestic and international store openings and nine store remodels and $9.9 million related to our international wholesale operations.

For the full year 2019 we expect our total capital expenditures to be approximately $250 million to $275 million. This includes an additional 40 to 50 company-owned retail stores and 15 to 20 store remodels, expansions or relocations.

This also includes the construction of our new distribution center in China, enhancements to our existing distribution centers in the United States and Europe, and the expansion of our corporate headquarters in California.

Now turning to guidance, we currently expect second quarter sales to be in the range of $1.2 billion to $1.225 billion and net earnings per diluted share will be in the range of $0.30 to $0.35.

This guidance incorporates the view that our international and direct-to-consumer businesses will continue to grow steadily at a mid-teen and mid single-digit rate respectively, both in the second quarter and for the full year.

It also reflects our confidence that the domestic wholesale business while likely to be down mid-single-digits in the second quarter will be flat on a full-year basis. It is also worthwhile to highlight that we do not yet foresee a meaningful shift in our domestic wholesale sales between Q2 and Q3.

However, we are monitoring our delivery dates carefully. This guidance also takes into account the commencement of joint venture operations in Mexico as well as current exchange rates and does not anticipate a substantial change in the mix of our business in those currencies. And now I'll turn the call over to David for closing remarks..

Thank you, John. Achieving a new quarterly sales record in the first quarter was a noteworthy accomplishment given the fairly difficult domestic retail environment and the currency headwinds. Even with the foreign exchange rates negatively impacting sales, our international business grew by 9.3%.

This was a result of double-digit increases in our international company-owned, direct-to-consumer and our distributor businesses and a single-digit growth in our subsidiary and joint venture channels. We continue to believe international will be an increasing percentage of our business as we go through the year.

This week begins two months of buy meetings with our key domestic account and next week our international partners will begin reviewing our spring 2020 product offering. With Easter this weekend and our spring marketing hitting earlier this month, our domestic spring season has just begun.

We believe our product and marketing will continue to resonate and our domestic business will strengthen through the year. Additionally our international and direct-to-consumer businesses are on track for another year of strong growth.

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

Thank you. [Operator Instructions] Our first question comes from the line of Jay Sole with UBS. Please proceed with your question..

Great, thanks, good morning. David, you mentioned that you have confidence that domestic wholesale business will be flat on a full year basis once you get to the end of the year.

Can you just talk a little a little bit more about why you have confidence in that number and what are you seeing from the order books and what are you hearing from the customers to give you kind of conviction of that view?.

Yes, certainly. We're getting great reception to the product that we are releasing now and the stuff that we've already had booked going into back-to-school and for the new lines for spring.

So I think it's safe to say our core business we feel is great, although our top 10 customers about eight or nine of them will be positive for the year or at least that's the plan currently including our biggest. What we see is a positive backlog.

You know we don’t talk until it is through the wholesale business, it is starting a little later because our development cycle was a little slower this year and we've got it right. We see a lot more interest back in the performance brands.

We see a lot more interest in our core brands and there are a lot more pieces that have everybody's interest and marketplace seems to be in tune to the products we're going to offer. Additionally we've had the big strain has been the off-price growth.

Now we've seen some positive responses from them and I think there's more product available given what's taken up in the marketplace, but you understand, if you look at our inventory and being down until clean for this year there is no way for us to catch up on an at once basis, we'll have to start making and that also will take place in the back half of the year.

So when you put it together and I'm sure you'll see some of it when you call our biggest core customers for channel checks, it's very positive response, it's very positive plans. The Easter shift will mean something.

We're starting to see some pickup in our own retail stores going into the Easter week making some of this, what happened obviously the beginning of the month and end of the last month. So all of that and all my conversations including the positive, like I said before, backlogs led us to believe that we're going to continue and we will move forward.

A lot of store closures have already played out, a lot of guys are out of business and a lot of stuff that in our marketplace has been for sale, we see that cleaning up. So we see all kinds of positive responses and clean up in the marketplace to give us - me a relatively high degree of confidence to the back half of the year..

Got it okay and then maybe I could just ask one more to John, you know the SG&A in total was up only 1%, that's given if I add back the China rebate.

What kind of level per agent you have in SG&A maintaining this level of growth through the back half or should we expect sort of a pick-up for and if you think you can you tell us why as we get through Q2 and the rest of the year?.

Sure and just before we disregard the rebate in China just noted that first it's actual dollars we received. So there's definitely an economic benefit and we do receive these intermittently over the course of the quarters and year. So we know some of them are going to come back.

This quarter it is a particularly large amount, but I wouldn’t dismiss the economic benefit of those rebates from the government because they are valuable. Just to note that, when they occur in China obviously there acceptable to the minority shares, so the EPS flow through impact of that is maybe not as sizable as one might expect.

But there is economic benefit derived from those rebates. Apps and data would tell you if you exclude that and you look at where we are from an SG&A perspective, we believe the balance of the year will match our intent which is to align with top line growth. So we have a pretty high degree of confidence based on what we know today.

That being said, as I point out fairly regularly there is a portion of that SG&A that is definitely volume based. And so as we see volumes change there will be an impact there. Mix can play a role in particular in overseas markets where we're relying on third-party distributors today in particular in that e-com channel, so that can have a play.

Also just to note that when we're giving you the guidance we've provided it is incorporating the Mexico joint venture which will begin operations this quarter and through the balance of year and those will bring new sources of revenue, gross margin but also the operating expenses associated there with.

So all that's coming to play in our SG&A guide that I would tell you should attempt to match out our top line growth rate which is our goal..

Got it and then maybe if I can just one last one, just on the FX impact, could you just, you mentioned a $0.04 I think it was a translational impact, could you just talk about the FX impact on gross margin in the quarter?.

Yes, in terms of the gross margin percentage it was, it wasn’t that sizable, it was between 10 and 20 basis points. What you're really seeing is two dynamics, you're seeing the transactional impact which flows through the P&L which comes off the top line but then gets ratably adjusted as you flow down through the P&L.

What we are mentioning specifically it was the balance sheet translation which is an item that appears in other income and that was a pretty sizable swing this quarter.

In fact if you look at kind of the pick-up in operating income and if you drop down to the EPS you get a handful of unique items, you have the FX swing which is that balance sheet FX translation, you have significantly higher tax rate this year owing in part to some of the discrete items that we mentioned and obviously you have a little bit of more of a take on minority interest because of the pick-up in China operating income from that rebate.

So if you actually look at that, those three things, they cut quite a trend change. If you adjust out, you actually see EPS growing at kind of a - similar to operating income mid teens level which is what we think is more indicative of how the business is actually performing..

Got it, thank you so much..

Thanks Jay..

Thank you. Our next question comes from the line of Jeff Van Sinderen with B. Riley FBR. Please proceed with your question..

Hi good morning.

Can you give us your latest sense of the non-Skechers inventory levels in the channel and how we should think about your price business in the second half? Just wondering what trends you perceive there and what you're anticipating in terms of a rebound in that segment of your business? And also do you think the bankruptcies out there ultimately will facilitate you taking some market share?.

Well, to the second part I absolutely believe those bankruptcies and as retail gets cleaned out and there are less closing of stores and discounting of inventory will be to our benefit among multitude of price ranges that we compete in. As far as inventories in the channel, it is difficult to say. We're just starting our meetings.

We've only met with a few. The few we've met with so far are very positive, don’t seem to have to significant hang-up in their own inventories or without us and are certainly very positive about the new offerings.

So I haven’t heard anything yet in the channel that would change my perception, that we are getting stronger and we'll be growing into the back half of the year..

So just to the point that was made earlier, our inventories were - and as David did show obviously we're incredibly clean. To David's point, when the off price channel goes shopping if you don’t have any excess to deliver you can't fulfill their demand.

So I think in the instance of this quarter we actually saw some indications of demand, but we didn’t have any excess inventories sitting around to fulfill on an at once basis.

You know, if you actually look at the domestic wholesale channel that was a significant portion of the drop, it's just not having some of that fill in at once that we could provide. So I think that overall gives a solid indication that off price is a channel that can come back to us over the latter part of this year.

But until we have product either ordered for or made for it, that would be lean inventory levels, we're not going to be able to fulfill that on an at once basis very easily..

Okay, fair enough.

And then given the average size of your metrics in Q1 just wonder if you can speak to changes in advertising and marketing plans as we head towards back-to-school or maybe run through second half what your plans are there versus last year?.

Yes, I think you'll see over the back half well that is the last three quarters of the year normalized levels. What you saw this quarter was a particular throttling down in the domestic market for the most part.

So I think you can expect over the remainder of the year that levels are going to be pretty consistent with what you've had in past it was this quarter where we saw an opportunity to pull back given the dynamics of the market..

Okay, good to hear. Thanks for taking my questions and best of luck to you too..

Thank you..

Thank you. Our next question comes from the line of Lauren Cassel with Morgan Stanley. Please proceed with your question..

Hey, thanks.

Could you maybe just talk a little bit more about the domestic wholesale business and what specifically drove domestic versus your expectations from early February, is it just the off price sales, just what changed over the past especially for the quarter that drove domestic?.

Yes, I mean just to be clear, when we talked about domestic wholesale coming out of the fourth quarter I think we were especially vigilant of the fact that Easter was shifting and that was a significant item.

I do think you've seen with the onset of some additional bankruptcies as well some of the weather changes and a litany of other explanations you've heard from retailers that demand has been soft in the latter half of the quarter. So that obviously played a role. But I would say generally again we were extremely clean on our inventories.

The off-price channel was a big negative this quarter, again continuing the trend from last year, this is the last real quarter where we will have any prior year comparison of note to work against.

And then after that, the partners really put a finger on any specific timing patterns associated with things like Easter just because the difference between last year and this year is so significant. But other than that, you know I'd tell you generally the headwinds we've seen in domestic wholesale for a while now.

To David's point earlier though, what we see in our core customer base again is very positive indications of how the products were performing and then we couple that with the positive trends we've seen in our own domestic direct-to-consumer channel.

You know, obviously the consumer still is looking for our product and taking our products really I think more about the retail struggles or the other market base broadly..

Understand.

And then you called that increased discounting internationally, maybe just give us a little additional color on what regions or businesses you saw that in? And then how should we think about that as we head into the second quarter and any outlook for gross margin there?.

Yes and it wasn’t very big to be honest with you. There were a couple of idiosyncrasies in the quarter.

I mean one example, we've talked a little bit about some of the Asian markets for us that haven’t been performing up to expectation as we have started to turn those around we had some discounting to drive out some of those older styles that were prevalent in those markets in particular. So that was the stores.

In China there was activity towards the tail end or at the beginning part of the quarter in the e-commerce realm more promotional than discounts I should say, so more about capturing incremental demand on the e-commerce channels around Chinese New Year and the like.

And then a little bit in Europe as well, but again I would just note there is slight amount, we actually are incredibly pleased with the gross margin trends overall. If you look in the U.S. the domestic retail continued to grow which was fantastic.

Domestic wholesale, while the appearance that is flat to down slightly actually on a footwear basis was doing very well and where they had a significant uptick. So overall we're incredibly pleased with the gross margin trends that we've seen so far..

Great, thanks so much..

Thank you. Our next question comes from the line of Laurent Vasilescu with Macquarie. Please proceed with your questions..

Well, good morning. Thanks for taking my question.

I wanted to followup on China, I think you guys talked about some metrics like 1.1 million pairs, like John or David could you guys actually parse out the growth rate on the reported and the constant currency basis for the first quarter and then your expectations for the overall year for China?.

Yes China, I mean again continues to be a fantastic market for us. I think the major headwind the first part of this year and this quarter as well as next quarter, Q2 is going to be FX where we're seeing pretty significant headwinds year-over-year.

Just to give you an example, on a reported basis this quarter they grew about 6.5%, that would have been double had it not been for foreign currency exchange rates. So we think again the full-year basis it continues to grow quite well definitely into that low teens range and the FX we’re just going to have to drive-through.

Although, you know, I would note I think when we ultimately get resolution to this trade dispute you could see a pretty significant benefit when currencies start to work back to where they had been previously.

So, again good, great underlying growth, good channel growth and if it weren’t for the FX, you would have been down the low teens this quarter..

Yes, I think it is important to note also, that it’s not only related to China.

If you look at our business in Europe, we actually had pair increases and no significant discounting and increase of, it would have been high single low double-digits that related to a very low single-digit growth as far as dollars were concerned, so you would see it there as well.

Also, when John speaks about Korea had to cleanout inventory and things like that, we’ve spoken in the past that the positive move that those new territories of ours, Latin America, Korea, were a drag on our bottom line simply because it was a start-up and they were losing money. Those have turned. Japan turned positive in the first quarter.

Korea actually made money even with the cleanouts in the first quarter and Latin America was very close to turning to the positive and making money. So you see that in here as well and you would have gotten a significantly bigger boost to the bottom line and the operating margins if it weren’t for the FX.

But those countries underlying continue to grow as does Europe on a much bigger pace than you would anticipate when they convert back to dollars. Now what happens going forward is, we’re looking at places where we could take advantage with price increases, as we’ve done in the past and you saw it basically in Europe and in Great Britain.

We have an opportunity when these things happen to raise prices and we’re looking to selectively do that as we go through the back half of the year. So to John’s point, should things change and currencies come back we could get a double boost as we get to the back half of the year if the currencies turn somewhat positive.

So we think we’re sitting in international in a very, very positive place. No significant drags. No countries other than probably Brazil that would continue to be unprofitable as we go through the back half of the year. As we said before we have 46% growth in India that’s now a 100% regenerable [ph] to us and we will be accretive in Mexico.

So we’re sitting in a very, very positive place internationally even with the headwinds that exist..

Okay, that’s very helpful and actually on the last point on Mexico, I think you mentioned Mexico should be accretive for the year.

At the same time the prepared, the press release says that Mexico JV that there is commencement cost for the second quarter, maybe you can parse out how much it should be of an impact for the second quarter maybe than the back half for the year to get to accretion for the full year?.

Yes, so just a couple of dynamics there. So, the commencement note was intended to convey that there was a beginning, so the reality of why we have expectations built into our, the full-year perspective we provided there is certainly the likelihood that as we start up, things either go faster or slower than we anticipated.

So, I don’t know that we want to be terribly specific on the precise accretion we expect. That being said, I will also note that because Mexico was previous licence revenue stream for us, what you’re going to see is a full consolidation of the operating results, but that licence revenue that had been resident on our P&L is going to go away.

So, when we look at the accretion it’s even after the removal of that that licence stream, we expect on the full-year it’s probably in the range of $70 million to $80 million all in, but again the timing of how the joint venture begins operation as well the FX rate in Mexico will play at that.

And we think at the end of the day, this year given the partial year, given the exchange of the royalty, it’s probably a couple of pennies of accretions, but again that’s, partly because of start-up, partly because we're getting used to removing the royalty streams and we expect again that to have a lot of growth opportunity ahead of it.

And just a side note though, you know we would still receive the royalty from Mexico. It’s just because of the accounting, we won’t be able to recognize it in the same manner we had previously. So that value still accretes to the company, it is just not recognized directly on the P&L..

Okay thank you very much for all the color..

I did mention it, it’s important and I’ll be saying it gives rise also to minority interest because we’re a 60% owner that means there’s going to be a 40% minority share to be taken out..

Okay, understood. And then last question if I can squeeze one in.

I think you guys, obviously $4.2 million increase year-over-year in G&A can you parse out how much domestic G&A decreased for the quarter, or maybe asked another way, how much did total international G&A actually increase for the year, for the quarter, excuse me, inclusive of the $7.8 million maybe increase or the offset of the rebate any further color would be great?.

Yes, I don’t know that we want to get into quite a detail by segment on SG&A, again because remember that there’s a lot of shared costs in the domestic number that are benefiting the organization globally.

I will say if you look at the totality of SG&A in the quarter, domestic was a contributor because that’s where we reduced a lot of the advertising expense, that was the net contributor.

Absent that, you would have seen kind of on a pure G&A basis a relatively flat to up slightly G&A composite, but again the majority of our G&A investments tends to revolve around international markets and growing our direct-to-consumer channel. Those are the two most significant items..

Okay, thank you very much and best of luck..

Thank you..

Thank you. Our next question comes from the line of Tom Nikic with Wells Fargo. Please proceed with your question..

Hi, good morning every one. Thanks for taking my question. I wanted to ask John, I believe you said your guidance for the DTC channel for Q2 and the full-year was mid single digit growth.

When I kind of look at what you did in Q1 you were up 6 and change which is sort of at the high end of that mid single digit range and that was with the biggest FX drag of the year and the Easter shift.

So a lot of things working against you in Q1, and you’re sort of guiding to no improvement for the remainder of the year in the DTC channel on a as recorded basis, so I’m just kind of wondering what are the puts and takes in that channel? Thanks..

Yes, there are a couple of dynamics there, first I’d note that you’re going to continue to be FX as a headwind in Q2, so that doesn’t abate. As we get into the back half of the year, while the FX headwind will recede, you also then begin getting into a position where the new stores from last year are now comping on themselves.

So what you see is good underlying trends overall, but it gets messed by those two effects. What I would also tell you is, we’ve seen and I think what we’re probably going to describe as a cautious optimism on the domestic retail market, we saw some very good trends early in Q1, those tended to wane off a bit.

As David mentioned we’re starting to see some recovery. I mean that will play a big role in where we see things fallout over the course of the year. So, I think for us it is a bit of a conservative view taking into account the FX dynamics and the fact that when you start comping a store it’s just comp store growth that you come off.

The one other thing I would note though in Q1 is that our e-commerce revenue for the quarter was up significantly and the growth rate there was fantastic in the mid thirties.

So we continue to see is that it’s important to meet our consumer wherever they want to be able to buy our product which also gives us confidence that the investments we’re making to re-platform our site, add a lot of capability for digital marketing, are going to pay off handsomely once they come to fruition in the back half of the year.

So, I think all those activities are going to show continuing the trend that we saw this quarter that it’s important now to make we’re providing our consumers an opportunity to procure their products from us, wherever they want it, whenever they want it, however they want it..

You should note also that the comp stores sales are held back some by our decisions last quarter at the back half of last year, not to promote so significantly and get the complete growth – margins that we need. So this quarter we had an increase of 240 basis points in gross margin at the retail level from that.

So we've sacrificed a little bit for the gross margin and the flow through to bottom line which we think is very important and shows well for us. So, on an apples-to-apples basis had we promoted more significantly, it would have seemed to certainly significantly more strength from the comp store number although not necessarily as profitable..

Got it, that’s helpful and one quick clarification about India, I believe you said that there were 60 something stores in India that now are treated as company-owned stores.

Does the revenue from those stores now shift into the DTC segment from wholesale or I'm just kind of wondering if there's any sort of like segment shift between the India businesses? Thanks..

Yes, I mean just to be clear, those were always accounted for in our numbers on a consolidated basis. It will just be where they resident within the dichotomy between joint venture and subsidiaries. They will be company-owned, so in the future when we give comp store sales of company-owned, they will be included.

They weren't this quarter because it was a partial - it was a partial quarter..

Got it. All right, thanks very much. Best of luck through the rest of the year..

Yes, thank you..

Thank you. Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question..

Thank you. Good morning.

Can you guys speak in more detail about inventory positions and inventory management strategies? How did the inventory positions differ by regions relative to trends in the business? Is inventory down much more on a year-to-year basis in North America? And then, I guess do you guys see yourself as too light on the inventory or is there a specific strategy to manage inventory more lean than you have in the past?.

Yes. So just for the composition of the inventory reductions we saw, I mean I guess the offset would be in the retail with more stores. It was up slightly. That means the kind of the wholesale side was down although keep in mind we tend to pool our inventory for uses in both channels. It was across the board in multiple markets.

I wouldn't say we relied on inventory. I think I'd just picked up where we felt like we're very clean and I think going into the year, we feel like we're well-positioned with what we need, especially given - given the order books we see and what we have coming in.

So I think it is again just aggressively managing the inventory for cash making sure that we have what we need but not much more. And again, making sure that we have the right inventory in the right spot as evidenced by having it in the retail channel where it's closer to the consumer..

Very good, thanks. And then David, you shared some detail on points of distribution in China.

When you think about growth potential in China, what do you see is the distribution opportunity, said another way, you know how penetrated do you feel you are relative to potential from a point of distribution standpoint?.

We still think we're in the very early stages of what is possible for us. The brand is very well accepted. We had a slight shift last year, more into the online site from our own retail and that shift will probably continue. But we have a lot more interest in the franchisees that we have now.

We've opened the biggest store we have in the world now, is in China, through one of our franchises.

So as you could tell, when we gave sort of a background of where we intend to grow with our real stores and franchise stores in China, we now are increasing our capacity to deal with franchises, so that will continue to grow as well as the e-commerce site. And they also are very receptive.

We've shown some of the new styles to our people in China and to some of the franchises and we've gotten a positive result back, I think we're just at the very, very early stages of what we can see in China, as is true in most of the world..

Thank you..

Thank you. Our next question comes from line of Christopher Svezia with Wedbush Securities. Please proceed with your question..

Good morning gentlemen. Nice to speak to you in the morning, I guess.

So I guess one question, the first question is just on gross margin, just kind of how we should think about that Q2 and just kind of as we move forward and color or thoughts you can apply, how we should think about that line item?.

Yes, actually we feel really good about the gross margins. As I mentioned, you saw our domestic retail continue to pull up gross margins, almost 250 basis points, you saw domestic wholesale flattish, but there were some idiosyncratic items coming through there.

If you look at the footwear gross margins, they would have actually pulled up the averages well. Internationally, again there was some slight discounting activity. We mentioned some of the key markets, where we're cleaning things up a little bit. But overall, we've seen strength in the gross margin.

So we think it's a trend that quite frankly started in Q3 of last year and is continuing to be sure, as David mentioned, we are sacrificing some top line growth in the domestic retail market, but we like the profitability, the enhanced profitability that's driving in all of our stores format as a result. We mentioned price per pair being up.

So overall, we really like the concept around gross margin for both the current quarter and for the full year..

I guess more pointedly John, just do you anticipate - how should we think about sort of flattish as we go into Q2 and the balance of the year or are you anticipating any improvement and then on the back half, you've got a little bit more difficult comp on the DTC side, so how should we think when you sort of anniversary that, how does that apply to your thoughts?.

Yes.

So I think going into Q2, we're looking at flattish - you may have some slight downward - by flat I mean 10, 20 basis points at most pressures coming from some mix in the international markets in particular in China where again the second biggest single day of sales outside of 11-11 happens in the second quarter and so as that grow, like it kind of mixes us down.

We expect the domestic retail, direct domestic, direct consumer trend to continue.

So for us, I think Q2 looks a little flat to maybe down slightly, but the balance of the year is definitely stable and we think there's potential to pick up 10 to 20 basis points over the course of those two quarters, in part because we don't fully last the domestic retail activities until the middle of the third quarter, but also as David mentioned, we're contemplating some targeted price actions in markets where FX has been a drag.

So the other thing I'd mentioned does balance off certainly Q2 is we'll continue to have FX pressures that - that's not something we're going to - we don't believe we can escape given the current exchange rates. So taken all together, again I think it's stable.

I think there's opportunities in the back half of the year to get back to a little bit of improvement. But we have good confidence in what we're generating now which are very good gross margins for the company..

Okay. And on the U.S. sports sales, just to pause back for a moment, you're kind of confident in this rebound, obviously, you have an order book I guess against it. So you have some visibility there.

But any way to be more specific about between the off-price channels relative to core channels, any color about, I'm not asking for specific growth rates, but is one going faster than the other? And just anything on categories whether it's a kids rebound, whether obviously, the men's continues to do well, work continues to do well, just women's, just any more detail to give us confidence on our end that much shall take place - don't laugh, come on I'm serious?.

Well, sometimes you've got to just take it that way, that we know what's going on as we've somewhat shown in the past. But I would tell you, it's across the board, what we believe you'll see is an increase more in the adult business obviously than the kids.

The kids take a little longer and we've had some big hits in the kids that are difficult to replace. What we do see is a bigger interest in our performance as well as our core business in women's. Our men's continues to do very, very well.

Our men's sport actually continues to grow, even during issues as we had in the last quarter on a relative basis and our work division continues to grow. So what I think you'll see is a concentration in increase, certainly on the women's side, as you take it across the spectrum from all the divisions.

BOBS, figures to grow, our sport division, where the lites are and our chunky shoes continues to grow and there's some new entries there.

And we've got some very good reviews and tests for our performance division, not only from the awards we won the running pieces and things like that, but from the new GOwalk series and a number of items, that reside now in our performance division, that we intend to pick up. So we think we're making a big comeback.

And the performance will probably be the biggest piece you see, but in the core business certainly in the women's and men's to continue and kids to come along as we get to the back half of the year..

I would add to that, you know, the biggest evidentiary point, we can give you is the backlog. You know obviously we have early backlogs for Q3 and Q4 and those are showing tremendously positive signals. I would also point out something that we mentioned earlier that in our core customer, we're seeing those accounts trend very positive for the year.

So what gives us confidence is what we're seeing both in the booking rates, the order backlog we have and then what we're seeing in kind of the core accounts, also the comparison for off price gets easier and now with some indications that they're coming back to the table for - to open orders, you know that's something we can work on.

We don't want to keep inventory around to speculate that they might be making some last minute calls, but if we can work towards it in an order based environment then it's much easier for us to get back to presence in those channels..

Okay. Thank you. And just one quick minor thing here, just on China and just when you look at last year grew 28%, this year to 113 currency neutral.

How much of that is just the macro backdrop, how much of that is either something you're seeing or what kind of given the moderation in that growth, just kind of curious about that?.

Yes, listen I think, I don't know that we can be very specific about particular trends in China other than noting that over the back half of last year and early part of this quarter, I think you definitely saw a noticeable softening in that market from a macro perspective.

We still feel very good about, both how the products are performing in market, the opportunity to increase the franchise base as David mentioned and continue to grow, at especially outside of kind of the top Tier 1 and Tier 2 cities, as we penetrate more regionally. The e-commerce channel continues to build.

The biggest headwind this year is literally this FX in the first part of the year and then obviously we're going to continue to combat the large, large numbers and that you can't grow at the same percentage even though you're bringing the same absolute dollars of growth which is just a math issue there.

But again, very good underlying trends in China; very good opportunities for the brand to continue to grow through the challenges we just outlined..

Okay, thank you guys and all the best. I appreciate it..

Thanks Chris..

Thank you. Our next question comes from the line of Sam Poser with Susquehanna International Group. Please proceed with your question..

Good morning, gentlemen.

Real quick, could you let us know with the sort of - could you give us some idea of how your store comp did versus e-commerce and how much of that and how you're thinking about that in the second quarter?.

Yes - I mean, I can definitely give you some color, but I'd just point out that it doesn't really matter to us if a consumer buys through e-commerce or in the stores.

I think what you see is because I mentioned the e-com trends were very positive kind of in the mid 30s range across the globe that obviously the retail stores again across the whole portfolio were nearly up that much.

So what you'd kind of see is essentially kind of a flat store number and maybe down slightly depending on the reach of the market and then you'd see obviously a fantastic e-commerce growth number. But again, for us the answer is to bring the shoes to the consumer wherever they are and wherever they want them.

I would just also note in that, we don't adjust for FX in our comp store numbers, so that overall number from a retail store basis is impacted by FX..

And then, but we should expect that – that should improve in second quarter, just at Easter right I mean, I mean, you can't really measure that impact but there's an impact there, is that correct?.

We think so, yes..

And then, so I just want to make sure I got - you've guided – international and then can you give us - could you break down, is that – domestic also you expect to be high single digits, international wholesale and total retail how are you thinking about that could you give some clarification?.

Yes. Just what we said in the prepared remarks, we expect both for the quarter and the year, you're going to see total international kind of mid-teens and total direct-to-consumer in kind of that high single digit number..

So total international wholesale is what you are talking about [indiscernible]?.

Correct..

Okay.

And then, the minority interest line, could you walk through how that is going to – could you give us some idea of how to think about that or how that's going to change year-over-year, quarter, full year given the comings and goings of the JVs?.

Yes, probably the best way to think about it Sam is, China continues to be and the Asian joint ventures continue to be the most significant driver of minority interest. We're losing India. We'll be picking up Mexico.

I haven't looked at it precisely, but I'd expect those two will generally offset which is to say again the most significant driver is going to be the Asian market performance..

I mean it was up, you know, it's going to have 2.5 million [ph] 3.5 million [ph] if you want is that a I mean, is that a percent we should use how would…?.

No, that was exaggerated by the rebate we mentioned we received in China. So that drove operating income in China up a little bit this quarter and obviously that's our - the 51-49 partnership. So that - you get an uncommonly large share in this quarter, because of that enhanced profitability from China this quarter..

I'll pop up you guys later. Thank you, that's all..

Thanks Sam..

Thank you. Our next question comes from line of John Kernan with Cowen & Co. Please proceed with your question..

Good morning guys. Thanks for taking the questions. You know, a lot of questions on China. Can you just remind us where the margin structure for that business is and how the DC, that you're building is going to ultimately help you improve cost there? Thank you..

Yes I mean the margin structure for China is, you know as we've said it's an accretive business for us from an operating margin standpoint. You know most of our international operations are and it continues to perform in that manner.

We haven't been specific yet with regards to how the new distribution center will impact operations, if not in effect we expect to feel until next year and as we get closer that we'll be more specific.

In broad brush strokes though the opportunity for us is to get out of the piecemeal fulfillment costs that the vast majority of our units have to flow through simply because we're using a third party distribution center, that allows us, then to leverage a fixed cost base with volume gain over time.

So we'll be more prescriptive on that as we get further into the year and closer to the opening of the distribution center. I'd say in the current period, the cost pressures are not significant.

There are obviously some pre opening that we're getting into especially with the construction ongoing, but at the moment, it isn't really a noteworthy driver..

Got it. And then, the last two quarters both in the fourth quarter and this quarter, saw a significant amount of operating margin expansion, a lot of which was driven by SG&A. Just John, how do you - how should we think about the long term margin structure of this business between gross margin and SG&A.

What do you think your overall operating margin can trend to in next three to five years?.

Well, I think we've been pretty clear about where we think the margins can go to eventually. The only thing standing between that steady state level which kind of is in the low teens range is both the dynamics of things like FX that roll through in a given period of time, but also the investments we're making to grow the business.

That's everything from new stores which put pressure on G&A, but ultimately once they've been up and running for a year, begin to contribute at a commensurate level to adding the distribution center in China.

So again, I don't think there's any reason to believe the steady state operating margins can't be what we've always indicated is because of that low teens range. Between then and now, we're working to chip away at that while also continuing to grow.

I don't know that that's going to be a linear equation, but that's definitely the trend and I think the trajectory we're on even with last year's performance for the balance of the year..

Yes. And going back to those new territories you were in as Japan turns profitable, Korea turns profitable, Latin America turns profitable, Central, Eastern Europe those places we've invested, they will take the operating margins of the whole off if there's no deterioration in any place else..

You got it..

Thank you. This concludes the question-and-answer session. I'll turn the floor back to Skechers for final comment..

Thank you again for joining us on the call today. We would just like to note that today's call may have contained forward-looking statements. As a result 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. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..