[Operator Instructions]. Please note this conference is being recorded. I would now like to turn the floor over to SKECHERS to begin..

Thank you, everyone, for joining us on SKECHERS conference call today. I would 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 this 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 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?.

69 in China; 13 in India; and 6 each in Indonesia and Vietnam. 51 stores closed in the second quarter, including 20 in China. 4 third-party owned SKECHERS stores have opened so far in the third quarter, including our first in Andorra. For the remainder of 2019, we expect another 250 to 300 company-owned and third-party SKECHERS-branded stores to open.

We believe international remains the primary growth driver to our total business. We are seeing continued strength across all regions especially, Asia Pacific and Europe, which had a record shipments out of our distribution center in Belgium.

Plus, we believe both; India, which converted to a subsidiary in the first quarter; and Mexico, which converted to a joint venture in the second quarter, which would result in significant additional growth over the coming years. With the momentum we are seeing in our business worldwide, we believe that we'll continue to grow double digits this year.

Now I'll turn the call over to John to review our financials and discuss our outlook..

Thank you, David. Our second quarter results reflect the success of our ongoing strategy to aggressively grow our international and direct-to-consumer businesses while responsibly investing for the future. Our second quarter sales totaled $1.26 billion, an increase of 10.9%. On a constant-currency basis, sales increased to $155.6 million or 13.7%.

These results exceeded our own expectations. On the strength of our international business, which represented 55.7% of total sales and on increased consumer demand as is evident in our direct-to-consumer business.

International wholesale sales increased 18.2%, including a 30.7% increase in our distributor business, a 13.4% increase in our joint ventures and an 18.5% increase from our wholly owned subsidiaries. Direct-to-consumer sales increased 14.4%. The result of an 8.6% increase domestically and a 25.8% increase internationally.

Comparable store sales increased 4.9%, including e-commerce sales growth of 34.3%. We added 39 new company-owned stores compared to the same period last year. These results include, for the first time, our joint venture operations in Mexico.

Excluding Mexico, our international wholesale business would have grown 15.9%, and our international direct-to-consumer sales would have grown 15.1%. Our domestic wholesale business performed slightly better than expected, registering a mild decline of 3.8% in the quarter.

We continue to believe the domestic wholesale business will be flat to slightly positive on a full year basis. Gross profit was $609.8 million, up $48.8 million compared to the prior year. Gross margin decreased by 100 basis points to 48.5%, and we're pressured by promotional efforts to clear seasonal merchandise and select international markets.

This was partially offset by improved pricing and a decrease in promotional activity within our consumer-direct business domestically, where the average price per pair was up 3%. Total operating expenses increased by $20.2 million or 4.2% to $505.1 million in the quarter.

As a percentage of sales, this represents a 260 basis point improvement from 42.7% in the prior year to 40.1% this year. Selling expenses decreased slightly in the quarter and totaled $113.5 million or 9% of sales.

This was a 100 basis point improvement from 10% of sales in the prior year and was primarily related to lower domestic advertising expenses. General and administrative expenses increased by $20.7 million or 5.6% to $391.6 million, but decreased as a percentage of sales by 160 basis points from 32.7% in the prior year to 31.1% this quarter.

The dollar increase primarily reflects additional spending of $18.5 million in our direct-to-consumer business from 39 new stores, including 12 that opened in the quarter. Earnings from operations increased 36.5% to $111.1 million versus the prior year. Operating margin improved 170 basis points to 8.8% versus 7.2% in the prior year.

Net income for the second quarter was $75.2 million or $0.49 per diluted share on 153.9 million shares outstanding compared to net income of $45.3 million or $0.29 per diluted share on 157.1 million shares outstanding in the prior year period. Our effective income tax rate for the quarter decreased from 18.8% in the prior year to 18.4%.

We continue to expect that our effective tax rate for the full year will be between 17% and 20%. During the second quarter, we acquired approximately 500,000 shares of common stock at a cost of $15 million, representing an average price of $29.39 per share.

Since announcing our share repurchase program in 2018, we have acquired almost 4.6 million shares at a cost of $130 million, representing an average price of $28.11 per share. At June 30, 2019, 20 million remained available under our existing repurchase authorization. And now turning to our balance sheet.

At June 30, 2019, we had $973 million in cash, cash equivalents and investments, which was a decrease of $93 million or 8.7% from December 31, 2018, and an increase of $61.3 million or 6.7% from June 30, 2018. During the quarter, we made our initial investment into our new joint venture in Mexico.

Our cash and investments represented approximately $6.35 per diluted share outstanding at June 30, 2019. Trade accounts receivable at quarter-end were $641.4 million, an increase of $93.9 million from June 30, 2018.

Total inventory was $855.6 million, a decrease of 0.9% or $7.6 million from December 31, 2018, and an increase of 4% or $33.2 million from June 30, 2018. We believe these inventory levels are in line with and sufficient to support our growth expectation. Long-term debt was $100 million compared to $70 million at June 30, 2018.

The increase primarily reflects borrowings associated with the construction of our new distribution center in China.

Working capital decreased $78.8 million to approximately $1.59 billion versus $1.67 billion at June 30, 2018, primarily reflecting the recognition of operating lease liabilities from the new lease accounting standard, partially offset by higher cash and investment balances.

Capital expenditures for the second quarter were approximately $86.2 million, of which $42.2 million was used for general corporate purposes, including real estate and transportation.

$14 million related to the construction of our distribution center in China; $12.4 million related to 12 new company-owned domestic and international store openings and several story remodels; and $8.4 million related to our international wholesale operation.

For the remainder of 2019, we expect our total capital expenditures to be approximately $150 to $175 million. This includes an additional 13 to 40 company-owned direct-to-consumer 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 center in Europe, and the expansion of our corporate headquarters in California and other corporate expenditures. Now turning to guidance.

We currently expect third quarter sales to be in the range of $1.325 billion to $1.35 billion, and net earnings per diluted share will be in the range of $0.65 to $0.70.

This guidance incorporates the view that our international and direct-to-consumer businesses will continue to grow at a mid-teen and high single-digit rate, respectively, over the balance of the year. It also reflects our confidence that the domestic wholesale business will likely be flat to up slightly on a full year basis.

And now I'll turn the call over to David for closing remarks..

Thank you, John. We are pleased with our financial performance in the second quarter, including our record sales, strong increases in our earnings from operations, net income and earnings per share and our positive retail comps in both our domestic and international channels.

We believe the consumer reaction and demand for our product and the perception of our brand within our global accounts base are both very strong. Further, we believe the momentum we experienced in the second quarter will continue this quarter and our business will flourish both domestically and internationally.

As our strong product continues to resonate worldwide, we are committed to investing in our global infrastructure and operational capabilities to meet consumer demand and future sales 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..

[Operator Instructions]. Your first question come from the line of Jay Sole with UBS..

I wanted to ask about the guidance, gross margin in the third quarter. The inventories looks fairly well controlled. FX is probably a smaller factor. But at the same time -- so there's a lot of things happening.

Can you give us an idea of what the gross margin year-over-year change might look like? Is there more discounting of products in the international market that you might have to do? If you could start with that, that would be great..

Hi, Jay. Yes, thanks. For the third quarter, our expectation is that we're likely to see something relatively close to flat year-over-year. The discounting that we mentioned, we believe, was more temporal than anything else and again, related to the international markets.

The only thing I'd note as an aside is that, if you recall last year, the third quarter is when we began to enact the pricing and the lower discounting activity in our domestic retail market. So last year, you saw an increase that we don't expect will last this year simply because that pricing has remained durable in the marketplace.

So you won't see as much of a jump there. But our expectation at the moment is for a relatively flat year-over-year perspective on gross margin..

Got it. Okay. And then maybe if can ask on SG&A. I think you talked about how the dollar growth is kind of flat [indiscernible] store's SG&A.

Was that something where maybe some investment had shifted out of the quarter into other quarters? Or it was a little bit compressed for a reason? Or is that sort of like the run rate based on the back of a lot of investments that have been made in the last couple of years? And that is just sort of a normalized number that we're seeing right now?.

Well, I think, outside of the direct-to-consumer investments that we made -- that we mentioned with the new stores. You saw some puts and takes in the other side of the business. If you recall, last year, there were -- was a lot of noise in the G&A in the quarter.

So I think you're seeing the elimination of some of that, but you're also seeing the early signs of leverage opportunities in the G&A, in particular internationally as the investments that we've made come to fruition.

I would generally point out that for the year, we are looking for slight favorability in the overall G&A spend, but not much more specific direction to provide than that at the moment..

Okay. Maybe then one last one. You mentioned that the comp rate in U.S. has improved from April to mid-June. As we get into back half of the year, you mentioned you're not going to be lapping the price increase in your retail business.

And obviously, a lot of the investments that you're making in commerce probably [indiscernible] be more like that they will affect the numbers.

How do you think about the comps in the back of the year, can you maintain the current rate? Do you expect that higher or lower? How do you think about it?.

Well, that's a pretty long-range issue. But we -- coming into July, we maintained the same as June, maybe slightly higher. The fact is that comps are slightly easier comparisons from last year. If you remember, it was a much tougher year all around.

So we do anticipate we will be equivalent to Q2 or better as we move through this back-to-school season, barring any big changes in the macro pictures any place in the world..

Jay, the encouraging sign, in addition to the fact that comp store sales got stronger over the period, month by month, as David mentioned is that, it was a combination of factors. It wasn't just price. It wasn't just conversion. It wasn't just traffic.

So there were a lot of factors in play, which give us the figure that David mentioned that the increases will be durable. But at the end of the day, it's all about product really. And what we're seeing is a very good response to the product both coming online and has been online in Q2..

Our next question comes from the line of Laurent Vasilescu with Macquarie group..

Congratulations on really solid results. I wanted to follow up on the U.S. wholesale business that you guys guided for decline in mid singles. It came in a little bit better. Any directional thoughts on how we should think about the U.S.

wholesale business for the third quarter to get to the annual guide?.

Yes. I would suggest that it's going to -- we think it's getting stronger and stronger, if you will. Q1 was exhibited some softness from the cause that we discussed after that call. Q2 has gotten a little bit better. Q3 a little better than that and then, Q4 is showing up strong on the bookings at the moment..

A lot of it will depend on flow as well. We had said before we thought we could be relatively flat if you take the two quarters together, as well as for the whole year. We still think that's true. We do find a lot more demand and a lot more request to move up deliveries in this quarter.

So again, barring any big macro changes, we do anticipate that we will start to show positive in the third quarter and then continue to increase as we go through the balance of the year and into the first quarter of last year, given the meetings we've had in the U.S. And by the way, same holds true worldwide. We've had great meetings.

Our bookings for July are at an increased rate to last year around the world for our subsidiary base and for our distributor base. So we do believe, we're on the beginning of a roll that there is a greater demand for our product that our existing customer base is growing.

And that obviously, in the U.S., it always depends on what the macro picture is? How many store closings there will be? How many sales there's going to be? How many outlets are going away? We believe that our direct-to-consumer business will continue to grow. So the U.S. business in and of itself, will continue to grow.

And we believe at increasing pace as we go through the back half of the year..

That's great to hear. And then switching gears to China. I think it was noted that China grew 12% on a CC basis.

John, maybe can you tell us how many freestanding stores, point of sales, the numbers of units shipped for the quarter? And how should we think about the growth rate for the third quarter, specifically for China?.

Well, I mean let me first address the growth rate. I mean, one thing to recognize is that China faced a very difficult comp to last year. If you recall, last year Q2, China was up north of 40%. So if you look at this on a 2-year stack basis, it's a pretty incredible trajectory in that market.

I would also -- just note that obviously, the foreign exchange impact in China was significant. It's more than half the growth rate in the market. So we're still very pleased with what China delivered. We have I think fairly consistent expectations with where China is going to grow in the back half of the year and for the full year.

So for us, it's still -- it's one of the most exciting markets. I'll get you the detail on China later, but we don't want to get into the much more specifics beyond that in each market..

Okay. And then maybe just as a follow-up question, just housekeeping question here. With a gross margin, I think it was mostly flat for the second quarter.

Can you maybe just parse out FX, mix? And then on the other income line, how should we think about that line item for the third quarter?.

Yes. So from a gross margin standpoint, as we mentioned, the real issue was the need to move out some products in a few international markets. Quite frankly, FX was a small, maybe a 10 basis point root cause for the decline. We think that's a temporary issue. It impacted the quarter.

We had a little bit of that in Q1 as well, as we mentioned, in some markets where we're trying to -- we're in the process of turning the profitability picture that we had some of that. And it just continued a little bit into Q2. I think that's the noteworthy element of the gross margin story is the domestic. Contributions were very positive and strong.

So we think -- as it stands, the margins, absent the discounting activity you've seen, would have been roughly equivalent year-over-year. In terms of other income in Q3, and I'll note for Q2, this is the first quarter in a while where we haven't seen something significant come through on FX translation.

Last year, if you recall, same quarter, we lost $0.03 to $0.04 on that. We did not see anything like that in Q2.

And I would tell you our expectation is that there isn't anything significant that will creep up in Q3, although I would just warn that that's an item that's tough to predict because you have to have the foresight of knowing where foreign exchange rates are going to be, to be 100% accurate.

But much more muted impact this year in Q2, and we're anticipating something similar in Q3..

Our next question comes from the line of Omar Saad with Evercore ISI..

This is Westcott on for Omar. So you seem to kind of change the tone or lead with the global coordination.

Is that -- should we think about the ability to market more directly globally as a change in how you're managing the business, designing the business, making it more efficient as you kind of integrate these markets? How should we think about the benefits of why you are emphasizing that change in your go-to-market strategy?.

I don't think it's a change. It's probably more in the forefront simply for the growth internationally. We've been talking about building our infrastructure and advertising internationally for many years through some hard times as well. So it's not a change in focus.

It may be an acceleration because the business is growing, and we have the capacity now to fill that pipeline at a much faster pace. We had said over the last few years that we are absorbing some new additions to our international portfolio.

And now that they're all in and all the infrastructure, as we started and certainly most will need upgrades as they continue to grow, it's a -- we're filling that pipeline and continuing to advertise at a faster pace, continuing to push the growth internationally. So it's been a focus. It remains a focus. We do believe it will continue.

As we said, double-digit growth at a significantly faster pace than the core business in the United States and even direct to consumer. So it's just a focal point for everybody, an additional one, and we just continue to push it..

Okay. That's great. And then just one question on, again, with China. It seems like you guys are opening stores again after kind of pausing.

How are you thinking about your store versus your online kind of strategy in China? And any change in kind of consumer trends there, given all the macro noise that's out there in the marketplace?.

We've always wanted to continue on both levels just as we do everywhere else in the world. Any which way we can get to the consumer, we want the consumer to have the availability of our product.

I think it's just the advent of such a big capacity that comes on onetime and our growth on the online business so to slow down the capacity and the manpower we had available to open a significant number of our own stores, although we have been opening a significant number of franchise stores.

So there hasn't really been a change in the philosophy nor the select process. And we will continue to open our own stores and continue to push online and continue to look for more franchisees to continue to grow our business. I think our franchisees have seen that they can grow the business quite profitably with us and are reaccelerating.

We've opened a couple of stores that are in excess of 30,000 square feet now in the Chinese market with some franchise.

And they realize that the capacity for us to deliver footwear that's in demand and carries a store that size for the consumer demand for our products is going to continue to push our direct to consumer significantly in China, and we anticipate significant growth. I think what you saw -- and John mentioned that we had to clean up some inventory.

When you change from a franchise model that's growing significantly to an online model and hold your own inventory for significant amounts of time, the patterns change. And every once in a while, you have to clean up and make sure you have all the algorithms correct and are moving forward.

So we do feel today that we are clean, that all new inventories coming in for the Chinese market, and that we will continue to grow at an accelerated pace as we go through the back half of the year..

Our next question comes from the line of Sam Poser with Susquehanna..

I don't have much.

Just -- can you give us an update on the timing of the China distribution centers? And how much -- given that there was a lot of efficiency in Q2, how much efficiency will that provide once those stores open?.

So we're still under construction. We anticipate commencing operations probably the middle of next year. The pace of that will depend upon the development process, and just the start-up. We're not yet, Sam, in a position to be precise on efficiency.

And I would just point out, this is a very similar exercise to what we've done in all of our other markets. First year isn't the optimal year. You continue to get more and more efficient each subsequent year. So as we get closer to the end of the year, we'll provide some perspective on that.

But your expectation should be begins operation and continues to become more and more efficient over time as we gain experience operating in market and begin to continue to optimize..

How do we expect to continue to grow with such a pace that we'll have to build a second one? We won't pick up the whole efficiency factor here. We'll just pick up capacity and somewhat more efficiency and be able to grow into this, the next distribution center that will help even more..

So that's it. That's where I was going with the follow-up. I mean given where you are today and given the international growth, I mean once you get this DC established, that's going to be a whole lot better middle of next year than it is today and you're already managing to make that growth more efficient now.

So how -- So I mean even though it might not be where it could be long run, I mean if you can grow the -- I mean if you grow the -- if you grow China, let's say, high single, low double, I mean, when you put this into running, it should provide better returns than it does today.

Is that a fair statement?.

It's certainly a fair statement. But I think we have a -- our idea shows bigger opportunity.

I will tell you and I've been here so long since the beginning of all this automation in all our distribution centers, we tend, because of our capacity to grow in this marketplace, to outgrow these facilities a lot faster than is originally planned than people think we can.

So I think it's fair to say if we only take high single-digit growth in China, we'll certainly sell more efficiency. We do believe that our growth will accelerate past that point. So we'll pick up even more as we go along. It just may take some more time..

And you said that you're going to be breaking ground -- you thought you'd be breaking ground in the second DC before the first one was complete.

Is that still the case?.

We're still working on the plan. We're working on acquiring the land. It's a timing issue. We're working on it now, but it's only a matter of timing. Whether it happens the first day we'll finish or a couple months before, a couple months after, it's all timing and acquisition and design work.

You can imagine we're quite busy with all our engineering facilities trying to get the three distribution centers we're about to break ground before the end of the year in California. We're putting a significant amount of automation into Belgium. We're finishing this one. So design work and acquisition may be delayed a month or two.

But it won't be long. After we've spun that, we plan on starting the second one..

Our next question comes from the line of Susan Anderson with B. Riley..

I was wondering if maybe you could give a little bit of color how the SKECHERS Street is performing and how it's resonating with the consumer. And then maybe just also if you could touch on, I think you mentioned there's some limited edition product coming out for the second half.

A little bit about what category that will be in and what customer that's going to be catering to..

I will start at the beginning. I'll let -- I'm going to let John finish. I just want to point out that which customer and which product line, I think we've moved way past that. We want to make sure people understand the functionality.

I think what we showed this year with the dollar growth in China and the significant growth worldwide and our direct to consumer that we are no longer one product for a specific customer that brings us to the dance.

We anticipate that all our product categories that we called out in the prepared comments about men's, women's, sports, casual, BOBS, the walk category, that's coming back very strong, kids, all have potential, and they all have potential in multiple parts of the world. It's not a shoe in a specific location or specific geography.

So we do feel that we will bring a myriad of product in all the categories around the world that will continue this growth that we're seeing right now..

In particular relative to your question on the collaboration, we're obviously not going to announce anything here. But I think what we've seen, similar to what you've seen in the industry, is that strategic collaborations have an opportunity to help drive those brand heat as well as revenue.

And we're going to continue to follow up on brand right opportunities to collaborate. So you'll see that continue both in the second quarter or in the third quarter and beyond. And I apologize. I actually couldn't hear clearly the first part of your question.

So if you don't mind repeating that, we can address that more specifically?.

Yes. Sure. Yes.

So I was just asking about the SKECHERS Street line and how it's performing and resonating with the consumer?.

I'm sorry. I couldn't hear it at that time either. Maybe it's us..

Got it. Yes. No, the SKECHERS Street line, I was wondering if you could give any color around....

Oh, Street....

Yes, exactly..

Okay. Sorry. I apologize..

We did call that out on the comment that it's doing very well in multiple parts of the world. So that does continue..

Yes. I think to add onto that, you saw -- you see Street continuing to grow, Street growing in men's and the women's category as well. I mean you're seeing, and I think to David's point earlier, a lot of broad increases across the product line. So it's not just 1 category or 1 style that's growing, it's fairly broad.

And there are definitely some commonalities between what we see happening in the U.S.

and internationally which is why we pointed out in the beginning of David's comment, the ability we now have, we think, to exercise opportunities to grow and introduce a style or brand across the globe simultaneously, and that's -- we're seeing that as a really, a really big strength..

Our next question comes from the line of Jim Duffy with Stifel..

I wanted to start on SG&A. The moderating growth in the SG&A really stands out. Not too long ago, you guys were growing in the 20 percent plus range. Year-to-date, you're up just 1%. That implies some pretty impressive efficiency outside of incremental spend from retail expansion.

Where are you guys finding that efficiency? And related to that, how much more opportunity do you think there is for additional efficiencies?.

Yes. I mean it really -- I mean it's across the board. So the first thing I'd note that it's not any one area, keeping in mind that we called out the investments we continue to make in the direct-to-consumer business. And look, we're not trying to manage G&A to deliver a certain result.

We're trying to manage the business to drive global growth in the brand, and you'll continue to see that. Where we saw some efficiency this year, as I mentioned, there were some abnormalities last year that evaporated that help to offset some of the more natural organic increases of just running the business.

But I would point out also the international market. As we've continued to make investments, those investments are coming to fruition such that you're starting to see a little bit of the leverage come through.

So you're seeing kind of a natural evolution I think of many of those business to the point where they're delivering some of the SG&A leverage that is obvious in the results this quarter..

Yes, I think it's part of what we've said in the past. We don't have anything brand-new. Even though we acquired the second piece of India, it still flows through the same way and tends to leverage as it continues to grow and Mexico is not a start-up.

So while there's a significant investment, it doesn't start below 0 as far as efficiency and operating margins are concerned. So as we said in the past, we anticipate, not that -- as John points out, we're not looking to save money and not spend, what we're looking to do is drive sales and leverage the operating line as we grow in these countries.

And with nothing new, unless there is a one-off in the country, we do anticipate increased sales will bring with it increased operating efficiency..

Great. And then changing gears to inventory and margin. You've seen some nice benefits to average selling prices in margin in the domestic business from tightening up inventory.

Is there opportunity for that in the international markets? And if so, how far along are you guys in getting after that?.

Definitely some opportunities. Although, I'll say, the inventory position is really a global position. You're seeing really healthy inventories in almost every market. So that's already incorporated into what you're seeing. And again, the only abnormality we'd point out in the quarter was the discounting we did to get rid of some of the seasonal stuff.

Absent that, you would have seen pretty good strength. There are potentially incremental opportunities. Keeping in mind that we've been battling Forex, negative headwinds from Forex for a while this year. So we're looking at what opportunities may exist. Now obviously, most important is just making sure you're priced right for each market.

And you're dealing with a lot of different currency markets in the current environment that have -- up to this point in time have been dragged from an FX standpoint. So we continue to believe that there's opportunity but we'd also point out that we're making sure that we're priced right in each market to enable growth of the brand..

Great. And then last one from me.

Can you speak to any cost relief you're seeing as you negotiate with China sourcing partners?.

Yes. I mean we haven't really seen any cost pressures and haven't really executed any significant cost opportunities. I mean we're always diligent about evaluating where there are opportunities. But it's not a one point in time event. It's really a continuous effort over time.

Obviously, one of the bigger factors in there is FX and seeing how FX has changed. So I would point out it's something we look at regularly. And I don't think we ever characterize ourselves as being done with that.

So it's more of an ongoing opportunity we continue to pursue over the ordinary course of our development process and not a point in time effort that we execute against..

Our next question comes from the line of Christopher Svezia with Wedbush..

I guess I just wanted to go back to U.S. wholesale for a moment. Just maybe walk through your thought process in terms of this inflection, how meaningful it could be for Q3 and what that could mean for Q4.

Are we talking just kind of nearly down a little bit but more like mid-single-digit growth for Q3 and then accelerating double digits in Q4? Just curious of the trajectory there..

Well, first off, it's -- we didn't -- we're not making a number up. We're seeing really good trends in the backlog, really good trends, as David mentioned in his prepared comments in activity with accounts both in orders but also just in the general dialogue we're having.

So you're really seeing the product pull through even to the point, as David mentioned, of some asking for a pull-up in deliveries.

As we see the back of the year unfolding, as we mentioned earlier, Q3, Q2 together we think would have been, if you take those in aggregate, about flat to up slightly and then obviously, that would suggest some pretty significant build into the back half in Q4. That's what we see in backlog. So I'll just point on something David touched on, timing.

It sometimes can bridge over a quarter. So how that exactly plays out remains to be seen. Suffice it to say, we said it once, we're now saying it twice, we expect for a full year that domestic wholesale will be flat to up slightly. We don't make that forecast lightly..

Is there anything -- maybe you can just touch on anything different by when you look at certain accounts, the off-price business was kind of shut out from last year.

How do I think about this year? In other words, what's the component of that wholesale growth? How does it look? Is it across all channels? Not all channels, all that's in touch with retail customers.

Or any color about that?.

Yes, it's pretty strong and broad. The off-price did get better this quarter, although this is the quarter last year where we saw the most significant decrease, and then it continued out. So a little bit of an easier comp this quarter. But I would say, generally speaking, it's fairly broad.

In our traditional customers, it's been a little bit of the off-price. We're seeing it fairly across the board..

Okay. And then just on -- switch gears just on the international side for a second, just in Europe. Just maybe add a little color. I know -- I think the U.K. was called out. I think you mentioned Germany. Just any other color about what you're seeing, whether you want to talk currency neutral, reported, just what you're seeing in those markets..

You could say it any which way you want. That marketplace is growing significantly, continues to grow and is having an incoming order rate for this month that's significantly higher than we would have anticipated a few months ago. Going forward, the -- and this reception that we're seeing now is for first quarter.

So we're looking for significant growth. Their backlogs are up significantly. They're growing -- U.K. is performing quite well and will grow but not as fast a pace as Germany, just calling out the 2 largest pieces there, primarily for the macro issues that exist in the U.K. and how the overall retail business is going through a shakeout.

In Germany, we grow significantly higher than our original forecast were at the beginning of the year as we move through -- both going through the end of this year and what we'll now anticipate, I guess, for first quarter, if we continue on this mode. It is in all channels.

We had maybe one country in Europe that wasn't up on a dollar basis, forget even a currency-neutral basis, in the last quarter and that's anticipated to be up going through the end of the year. So Europe is one of the great stories, on fire, and a relatively new piece for them. This third and fourth quarter will continue to get stronger and stronger..

Our next question comes from the line of Tom Nikic with Wells Fargo..

John, first off, just a clarification on the guidance.

Did you say balance of the year, so 2H direct to consumer up high singles and international up mid-teens? Did I hear that correctly?.

I did. I did. A lot of selling to be done on the direct to consumer. We thought we'd be kind of a mid-teens in Q2, and we substantially outperformed that. We're taking a conservative view as we look at Q3 and Q4. As we pointed out, though, the trends have continued to be positive, thus far, in July.

So that may end up being a conservative view, but that's what we've got factored in at the moment..

Got it. Okay. And as far as the improvement that you are -- that you're seeing in the backlog for the U.S.

wholesale business is -- do you think that one of the drivers is that this will be the first Back-to-School and holiday season after Payless went away and some of your wholesale partners are maybe trying to capture that market share and use your brand as a way of picking up those displaced customers?.

Well, I think, broadly, we're all going to try and capture that demand....

It's not limited to Payless. I mean all the store closures should increase the business strength of those that are left behind. We certainly anticipate picking it up both in our third-party wholesale business and our direct-to-consumer business. Those are all -- we have a broad spectrum of footwear and categories and price points to deliver.

We think we can access pieces of all that as it goes forward. It's interesting. As we said before, we saw increases in our direct to consumer, and we believe our customer saw this same sell-through on the wholesale and in the United States through the quarters, and it coincides with the liquidation of Payless.

I don't know if that is a direct cause and effect, and it would be difficult to push such a thing. But as we clean out retail, and we've been saying this for years, as some of the weaker links move away, those that are left move stronger and will pick up the slack and will continue to grow. And I still believe that's true..

Got it. That's helpful. And just last one from me, India, I think you talked about how it was one of the biggest growers from a dollar perspective this quarter.

Can you contextualize the size of that business for you, what it did in revenues last year, anything like that?.

Yes, we're hesitant to get too specific on each country, but the rate it's growing, it's quickly coming up the ranks. Just to give you a reference point without being terribly specific, India was very close to Germany on a consolidated basis by country.

So I should also note not only was it a big-dollar gainer, it was one of our highest-percentage-gaining markets, and we couldn't be more thrilled with both the growth in that market and the execution we're seeing from our team there. We think that market has tremendous opportunity over the horizon..

Our next question comes the line of Jim Chartier with MCH..

So are the expectations for third quarter -- when you say, second and third quarter combined would be flat to slightly positive, does that assume any possible pull-forward of demand that you hinted by the curve?.

No..

Okay.

And then on the running category, how do you guys build on kind of this editorial success that you've had with the running product? Have you been seeing more interest from the retailers or any more interest or growth in the running category? And how big could that ultimately be for you?.

So running is one of the major categories in the world. So it obviously helps us. It obviously gives us a bigger umbrella impact. We have more runners coming in for the shoes. We have more requests for the shoes and by the way that's on a worldwide basis.

So we anticipate that these awards that were only in the last 2 or 3 months will certainly continue to pick it up, and we will certainly continue to push both the advertising and the online advertising to runners. And if anybody out there that's listening hasn't tried them, you should.

These shoes are all they're geared up to be, very comfortable, very light and there's something for everybody, both outdoors and long distance and even for walking. So we do anticipate those categories will continue to grow and give us a great halo effect to the brand, so our major league walking category still remains the biggest..

Jim, I'll just add on to what David said. These shoes are just hitting The Street late Q2 and now. But what's really important is not -- it's the shoe and it's the technology in the shoe, the Hyper Burst that we have in the shoe, and that platform, as David mentioned, is one that we can extrapolate across segments.

So it won't always be a running predominant platform for us. It's something we believe can improve and affect positively a lot of other categories including walk and the like.

So we think you're just beginning to see the impact of this because it's just really coming into the in-line stuff and the running side, and then it has a lot of opportunity to be carried forward from there..

So are you already seeing kind of demand for more casual product with that sort of technology in it for....

We just haven't really got....

Yes. It's way too new..

Yes. It's way too new. It just hasn't come up into that -- in those categories yet, but that's obviously the plan over time is to bring that technology down into our array of other categories, not just casual but array of other categories we have..

And our final question comes from the line of Sam Poser with Susquehanna..

I just have a quick follow-up on the selling part of the SG&A.

Could that -- was that a shift of some selling expenses that are going to move into the third quarter? Or is most of the SG&A in the third quarter going to come from the G&A line?.

So in the second quarter, there wasn't anything noticeable that shifted one way or the other. It was more of a conscious decision to pull back domestically. We still invested internationally, but it was more of a conscious decision to pull back a little bit domestically.

In terms of going forward, we think, generally speaking, you're likely to see about the same level, maybe a little bit of leverage in the selling, but that's going to come because of the scale increases we're seeing in -- across the board.

So we think it's a -- I think it continues to be an area we'll invest in where it makes sense, but it's also an opportunity on a full year basis where we'll see leverage..

I mean on an absolute dollar basis in the quarter, you were down in Q1, you were down slightly in Q2. Should we expect the selling expenses to be down again in Q3 and Q4 or flat? Or I mean how should we think about that? Because it's the first time in a while we've seen two running quarters with the selling expenses down.

So I'm wondering how we should be thinking about that..

At the moment, it's a dynamic item simply because we're sensing the main characteristics in the market and we're adjusting as we go. As it stands at the moment, I would anticipate something more like on a constant percentage of sales to what we've seen in the last year, over the past two quarters..

So sort of you're going to see an increase but maybe got a hair of leverage on it..

I don't know how you quantify a hair, but yes. I'd say that's generally, directionally accurate..

Ladies and gentlemen, we have reached the end of our question-and-answer session as well as today's conference. I would like to turn the call back over to the company for closing remarks..

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..