Skechers USA Management Discusses Q2 2012 Results - Earnings Call Transcript

Skechers USA (SKX)

Q2 2012 Earnings Call

July 25, 2012 4:30 pm ET

Executives

David Weinberg - Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Director

Analysts

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Scott D. Krasik - BB&T Capital Markets, Research Division

Sam Poser - Sterne Agee & Leach Inc., Research Division

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Matthew Berry - Lane Five Capital Management, LP

William J. Dezellem - Tieton Capital Management, LLC

Presentation

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the SKECHERS USA, Inc. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, July 25, 2012. And at this point, I would like to turn the conference over to SKECHERS. Please go ahead.

Unknown Executive

Thank you, everyone, for joining us on SKECHERS conference call today. I will now read the Safe Harbor statement. Certain statements contained herein, including, without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements involve known and unknown risks, including, but not limited to, global, national and local economic, business and market conditions in general and specifically as they apply to the retail industry and the company.

There can be no assurance that the actual future results, performance or achievements expressed or implied by such forward-looking statements will occur. Users of forward-looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of other significant risk factors that may affect the company's business, results of operations and financial conditions.

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

David Weinberg

Thank you for joining us today to review SKECHERS's Second Quarter 2012 results. As always, we will open the call to questions following our prepared comments.

Net sales for the second quarter were $384 million and loss from operations was $1.5 million. Net loss for the second quarter was $1.8 million, and diluted loss per share was $0.04 on approximately 49.3 million average shares outstanding.

Our second quarter 2012 sales decreased by 11.6% over the same period last year. This was due to lower sales across our domestic and international wholesale channels, which was primarily the result of the clearing of excess toning inventory and the winding down of our fashion brands last year. This was offset by increased sales in our retail stores due to an additional 39 stores, as well as growth in some of our heritage lines in our domestic wholesale business, and the addition of our performance lines.

Our international sales were negatively impacted by a combination of factors: challenging economies in several European markets, the euro exchange rate, and the change of our business operations in Japan from a third-party distributor to a wholly owned subsidiary and the restructuring of our business in Brazil. We expect both of these countries to begin to positively impact our international sales next year.

While our sales decreased in our domestic wholesale business, our average price per pair improved 8.4%, or $1.61, as more in-line product was delivered. Our domestic and international company-owned retail stores also had mid-single-digit improvements, primarily from the addition of 33 new domestic and 6 international stores from the prior period.

Second quarter financial highlights include: increased gross margin percentage by over 1,100 basis points, decreased selling expenses by $14 million and total operating expenses by $18.4 million, reduced inventory by more than $67.7 million from a year ago and a strong balance sheet with over $374 million in cash or approximately $7.59 per share.

We feel positive about the overall direction of our business, including the launch of our Performance division. Our new product looks sensational and is trending positively, and our backlogs are up double digits year-over-year. We are anticipating a return to profitability in the second half of 2012 and building momentum for 2013 and beyond.

In our domestic business, second quarter sales decreased 18% or $39.2 million over the same period last year. The $39.2-million reduction was primarily the result of lower sales of toning and non-SKECHERS-branded product. In the second quarter last year, these items totaled in excess of $35 million.

We are pleased with the improvements in many of our heritage lines, including very strong sales in our women's Sport line. This is the result of numerous new looks and updates to many of our classic styles. We are continuing to update our key product divisions and are looking forward to the introduction of some new initiatives in the second half of the year.

Our charitable line, BOBS from SKECHERS, grew significantly in the quarter. We are pleased to have donated our first million pairs of shoes to kids in need in the United States and around the world as part of our "buy a pair, give a pair" program.

We're also encouraged by the strong initial results of our men's and women's Performance footwear line. SKECHERS GOrun and SKECHERS GOwalk launched earlier this year in our wholesale accounts, and we are looking forward to the introduction of several new Performance lines, which are currently testing very well in our company-owned retail stores.

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