statement or report issued by any analyst, regardless of the content of the report. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

FINANCIAL OVERVIEW
   We have four reportable segments - domestic wholesale sales, international
wholesale sales, retail sales, which includes domestic and international retail
sales, and e-commerce sales. We evaluate segment performance based primarily on
net sales and gross margins. The largest portion of our revenue is derived from
the domestic wholesale segment. Net earnings for the three months ended
March 31, 2009 were $8.2 million, or $0.18 per diluted share. Revenues as a
percentage of net sales were as follows:

                                              Three-Months Ended March 31,
                                               2009                   2008
      Percentage of revenues by segment
      Domestic wholesale                            52.5 %                 57.4 %
      International wholesale                       29.0 %                 25.9 %
      Retail                                        17.5 %                 15.7 %
      E-commerce                                     1.0 %                  1.0 %

      Total                                          100 %                  100 %

As of March 31, 2009, we owned 210 domestic retail stores and 14 international retail stores, and we have established our presence in most of what we believe to be the major domestic retail markets. During the first three months of 2009, we opened two domestic concept stores, one international outlet store and five domestic outlet stores, and we closed two domestic concept stores. During the remainder of 2009, we intend to focus on: (i) enhancing the efficiency of our operations by managing our inventory and reducing expenses,
(ii) increasing our international customer base, (iii) increasing the product count of all customers by delivering trend-right styles at reasonable prices, and (iv) continuing to pursue opportunistic retail store locations. We periodically review all of our stores for impairment, and we carefully review our under-performing stores and may consider the non-renewal of leases upon completion of the current term of the applicable lease.

RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected information
from our results of operations (in thousands) and as a percentage of net sales:

                                                            Three-Months Ended March 31,
                                                        2009                            2008
Net sales                                     $ 343,470          100.0 %      $ 384,922          100.0 %
Cost of sales                                   218,041           63.5          212,750           55.3

Gross profit                                    125,429           36.5          172,172           44.7
Royalty income                                      272            0.1              840            0.2

                                                125,701           36.6          173,012           44.9


Operating expenses:
Selling                                          21,510            6.3           25,534            6.6
General and administrative                       98,038           28.5           99,221           25.8

                                                119,548           34.8          124,755           32.4

Earnings from operations                          6,153            1.8           48,257           12.5
Interest income                                     706            0.2            2,459            0.6
Interest expense                                    (42 )            -           (1,006 )         (0.2 )
Other, net                                         (218 )         (0.1 )            (97 )            -

Earnings before income taxes                      6,599            1.9           49,613           12.9
Income tax (benefit) expense                       (753 )         (0.2 )         16,769            4.4

Net earnings                                      7,352            2.1           32,844            8.5
Less: Net loss attributable to
noncontrolling interest                            (868 )         (0.3 )              -              -

Net earnings attributable to Skechers
U.S.A., Inc.                                  $   8,220            2.4 %      $  32,844            8.5 %

THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THREE MONTHS ENDED MARCH 31, 2008
Net sales
Net sales for the three months ended March 31, 2009 were $343.5 million, a decrease of $41.4 million, or 10.8%, as compared to net sales of $384.9 million for the three months ended March 31, 2008. The decrease in net sales was primarily due to lower sales in our domestic wholesale segment.
Our domestic wholesale net sales decreased $40.3 million to $180.5 million for the three months ended March 31, 2009, from $220.8 million for the three months ended March 31, 2008. The largest decreases in our domestic wholesale segment came in our Women's Active and Cali Gear divisions. The average selling price per pair within the domestic wholesale segment decreased to $17.11 per pair for the three months ended March 31, 2009 from $17.94 per pair in the same period last year. The decrease in the domestic wholesale segment's net sales came on a 14.3% unit sales volume decrease to 10.5 million pairs for the three months ended March 31, 2009 from 12.3 million pairs for the same period in 2008.
Our international wholesale segment sales increased $0.1 million to $99.6 million for the three months ended March 31, 2009, compared to sales of $99.5 million for the three months ended March 31, 2008. Our international wholesale sales consist of direct subsidiary sales - those we make to department stores and specialty retailers - and sales to our distributors who in turn sell to retailers in various international regions where we do not sell direct. Direct subsidiary sales decreased $4.0 million, or 5.4%, to $70.1 million for the three months ended March 31, 2009 compared to net sales of $74.1 million for the three months ended March 31, 2008. The largest sales decreases during the quarter came from our subsidiaries in the United Kingdom and Canada. Our distributor sales increased $4.1 million to $29.5 million for the three months ended March 31, 2009, a 16.1% increase from sales of $25.4 million for the three months ended March 31, 2008. This was primarily due to increased sales to our distributors in Panama.
Our retail segment sales decreased $0.6 million to $60.0 million for the three months ended March 31, 2009, a 0.9% decrease over sales of $60.6 million for the three months ended March 31, 2008. The decrease in retail sales was due to negative comparable store sales (i.e. those open at least one year) partially offset by a net increase of 29 stores. For the three months ended March 31, 2009, we realized negative comparable store sales of 6.9% in our domestic retail stores and 28.3% in our international retail stores due to the challenging retail environment and unfavorable currency translations. During the three months ended March 31, 2009, we opened two new domestic concept stores, five domestic outlet stores and one international outlet store, and we closed two domestic concept stores. Despite negative comparable store sales, our domestic retail sales increased 1.8% for the three months ended March 31, 2009 compared to the same period in 2008 due to a net increase of 31 domestic stores. Our international retail sales decreased 29.5% for the three months ended March 31, 2009 compared to the same period in 2008 attributable to decreased comparable store sales and unfavorable currency translations.
Our e-commerce sales decreased $0.7 million from $4.1 million for the three months ended March 31, 2008 to $3.4 million for the three months ended March 31, 2009, a 17.1% decrease due to the challenging retail environment. Our e-commerce sales made up 1% of our consolidated net sales for the three months ended March 31, 2009 and 2008.
Gross profit
Gross profit for the three months ended March 31, 2009 decreased $46.8 million to $125.4 million as compared to $172.2 million for the three months ended March 31, 2008. Gross profit as a percentage of net sales, or gross margin, decreased to 36.5% for the three months ended March 31, 2009 from 44.7% for the same period in the prior year. Our domestic wholesale segment gross profit decreased $31.6 million, or 35.9%, to $56.5 million for the three months ended March 31, 2009 compared to $88.1 million for the three months ended March 31, 2008. Domestic wholesale margins decreased to 31.3% in the three months ended March 31, 2009 from 39.9% for the same period in the prior year. The decrease in domestic wholesale margins was due to higher closeouts, product mix changes and

continued price pressure resulting from the weak U.S. retail environment, partially offset by a decrease in the reserve for obsolescence of $5.6 million from December 31, 2008.
Gross profit for our international wholesale segment decreased $12.3 million, or 26.9%, to $33.6 million for the three months ended March 31, 2009 compared to $45.9 million for the three months ended March 31, 2008. Gross margins were 33.7% for the three months ended March 31, 2009 compared to 46.2% for the three months ended March 31, 2008. The decrease in gross margins for our international wholesale segment was due to weaker retail environments abroad and unfavorable currency translations. International wholesale sales through our foreign subsidiaries achieve higher gross margins than our international wholesale sales through our foreign distributors. Gross margins for our direct subsidiary sales were 36.2% for the three months ended March 31, 2009 as compared to 52.0% for the three months ended March 31, 2008. Gross margins for our distributor sales were 28.0% for the three months ended March 31, 2009 as compared to 29.4% for the three months ended March 31, 2008.
Gross profit for our retail segment decreased $2.4 million, or 6.9%, to $33.6 million for the three months ended March 31, 2009 as compared to $36.0 million for the three months ended March 31, 2008. Gross margins for all stores were 55.9% for the three months ended March 31, 2009 as compared to 59.5% for the three months ended March 31, 2008. Gross margins for our domestic stores were 56.5% for the three months ended March 31, 2009 as compared to 60.0% for the three months ended March 31, 2008. The decrease in domestic retail margins was due to higher closeouts, product mix changes and continued price pressure resulting from the weak U.S. retail environment. Gross margins for our international stores were 47.2% for the three months ended March 31, 2009 as compared to 54.6% for the three months ended March 31, 2008. The decrease in international retail margins was due to weaker retail environments abroad and unfavorable currency translations.
Our cost of sales includes the cost of footwear purchased from our manufacturers, royalties, duties, quota costs, inbound freight (including ocean, air and freight from the dock to our distribution centers), broker fees and storage costs. Because we include expenses related to our distribution network in general and administrative expenses while some of our competitors may include expenses of this type in cost of sales, our gross margins may not be comparable, and we may report higher gross margins than some of our competitors in part for this reason.
Selling expenses
Selling expenses decreased by $4.0 million, or 15.8%, to $21.5 million for the three months ended March 31, 2009 from $25.5 million for the three months ended March 31, 2008. As a percentage of net sales, selling expenses were 6.3% and 6.6% for the three months ended March 31, 2009 and 2008, respectively. The decrease in selling expenses was primarily due to lower advertising expenses of $3.3 million.
Selling expenses consist primarily of the following: sales representative sample costs, sales commissions, trade shows, advertising and promotional costs, which may include television, print ads, ad production costs and point-of-purchase (POP) costs.
General and administrative expenses
General and administrative expenses decreased by $1.2 million, or 1.2%, to $98.0 million for the three months ended March 31, 2009 from $99.2 million for the three months ended March 31, 2008. The decrease in general and administrative expenses was primarily due to decreased bad debt expense of $1.6 million and lower travel and entertainment costs of $1.3 million, partially offset by higher rent expense of $1.5 million due to an additional 29 stores from prior year and $0.8 million related to the write-off of impaired leasehold improvements at three of our domestic retail stores. In addition, expenses related to our distribution network, including the functions of purchasing, receiving, inspecting, allocating, warehousing and packaging of our products, increased $1.1 million for the three months ending March 31, 2009 compared to the same period in 2008. As a percentage of sales, general and administrative expenses were 28.5% and 25.8% for the three months ended March 31, 2009 and 2008, respectively.
General and administrative expenses consist primarily of the following:
salaries, wages and related taxes and various overhead costs associated with our corporate staff, stock-based compensation, domestic and international

retail operations, non-selling related costs of our international operations, costs associated with our domestic and European distribution centers, professional fees related to legal, consulting and accounting, insurance, depreciation and amortization, and expenses related to our distribution network, which includes the functions of purchasing, receiving, inspecting, allocating, warehousing and packaging our products. These costs are included in general and administrative expenses and are not allocated to segments. Interest income
Interest income was $0.7 million for the three months ended March 31, 2009 compared to $2.5 million for the same period in 2008. The decrease in interest income resulted from lower cash balances and lower interest rates for the three months ended March 31, 2009 as compared to the same period in 2008. Interest expense
Interest expense was less than $0.1 million for the three months ended March 31, 2009 compared to $1.0 million for the same period in 2008. The decrease was due to reduced interest paid to our foreign manufacturers and increased capitalized interest on our new corporate headquarters and the warehouse equipment for our new distribution center. Interest expense was incurred on our mortgages on our domestic distribution center and our corporate office located in Manhattan Beach, California, and amounts owed to our foreign manufacturers.
Income taxes
Our effective tax rate was (11.4%) and 33.8% for the three months ended March 31, 2009 and 2008, respectively. Income tax benefit for the three months ended March 31, 2009 was $0.8 million compared to an income tax expense of $16.8 million for the same period in 2008. The income tax benefit for the three months ended March 31, 2009 includes a $1.9 million discrete item adjusting the amount of tax benefit recognized in 2008 relating to the APA with the IRS. Excluding this discrete item we expect our ongoing effective annual tax rate in 2009 to be approximately 18 percent.
The tax provision for the three months ended March 31, 2009 was computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The rate for the three months ended March 31, 2009 is lower than the expected domestic rate of approximately 40% due to our non-U.S. subsidiary earnings in lower tax rate jurisdictions and our planned permanent reinvestment of undistributed earnings from our non-U.S. subsidiaries, thereby indefinitely postponing their repatriation to the United States. As such, we did not provide for deferred income taxes on accumulated undistributed earnings of our non-U.S. subsidiaries. Noncontrolling interest in net loss of consolidated subsidiary Noncontrolling interest of $0.9 million for the three months ended March 31, 2009 represents the share of net loss that is owned by our joint venture partner attributable to the equity of Skechers China which was formed in October 2007.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital at March 31, 2009 was $410.9 million, a decrease of $2.9 million from working capital of $413.8 million at December 31, 2008. Our cash and cash equivalents at March 31, 2009 were $73.2 million compared to $114.9 million at December 31, 2008. The decrease in cash and cash equivalents of $41.7 million was the result of lower payables of $65.5 million and increased receivables of $57.6 million, partially offset by our reduced inventory level of $88.2 million.
As a result of the recent liquidity issues experienced in the global credit and capital markets, periodic auctions for auction rate securities that we hold have failed since mid-February 2008. A failed auction is not necessarily an indication of an increased credit risk or a reduction in the underlying collateral; however, we will not be able to liquidate the investments until a successful auction occurs, a buyer is found outside the auction process, the

securities are called or refinanced by the issuer, or the securities mature. Accordingly, there is no assurance that future auctions will succeed or that other events will occur to provide liquidity. Our ability to liquidate our investments in the near term may be limited or may not exist, and as a result, our auction rate securities have been classified as long-term investments as of March 31, 2009. In connection with this classification, we recorded a $17.2 million unrealized loss on these securities based on what we believe is a temporary decline in value. During the three months ended March 31, 2009, issuers refinanced $0.4 million of our preferred stock investments at par.
We determined that there were no observable market transactions to reference to determine the fair value of these securities, nor was there a consistent methodology employed by broker-dealers to provide values to their clients for these investments. Consequently, we estimated the fair value of our holdings of these securities based on a calculated discount using internal assumptions and limited market data as well as ongoing plans announced by certain issuers to partially redeem or to attempt to restore liquidity to these securities and whether any of these efforts will be successful. We calculated a discount of $17.2 million of which $4.0 million, or approximately 5.3% of the par value, related to auction rate preferred stocks and $13.2 million, or approximately 68.8% of the par value, related to the auction rate DRD preferred securities. Our valuation is highly subjective and could vary significantly based on the various assumptions used.
The auction rate securities that we hold were purchased from Wachovia Securities. During the quarter ended September 30, 2008, Wachovia Securities announced that it had agreed to a settlement with state and federal regulators whereby it would repurchase all of the auction rate securities it had sold to clients prior to the collapse of the auction rate market in February 2008. We believe that all of our auction rate securities are subject to this settlement and, as a result, we expect to receive an offer to repurchase these securities between June 10, 2009 and June 30, 2009. Until such time as (i) the formal offer is received and Wachovia repurchases these securities, (ii) they are redeemed by the issuer(s) or (iii) they can be sold at par value, we intend to consider these securities as available for sale securities and classify them as long-term assets. In the meantime, the issuers of these securities continue to make interest payments at the maximum rate. We believe our operating cash flows, existing cash balances and credit facilities will provide sufficient liquidity for our ongoing operations and capital commitments through March 31, 2010.
For the three months ended March 31, 2009, net cash used in operating activities was $28.2 million compared to $29.0 million for the three months ended March 31, 2008. The decrease in net cash used in operating activities in the three months ended March 31, 2009, was primarily the result of a larger reduction in our inventory levels, partially offset by a larger decrease in accounts payable balances.
Net cash used in investing activities was $16.0 million for the three months ended March 31, 2009 as compared to $18.9 million for the three months ended March 31, 2008. Capital expenditures for the three months ended March 31, 2009 were approximately $16.4 million, which primarily consisted of warehouse equipment for our new distribution center in Moreno Valley, CA and new store openings and remodels. This was compared to capital expenditures of $13.8 million for the three months ended March 31, 2008, which primarily consisted of warehouse equipment upgrades and new store openings and remodels. Excluding the costs of our equipment for our new distribution center we expect our ongoing capital expenditures for the remainder of 2009 to be approximately $8.0 million, which includes opening an additional 10 to 15 domestic retail stores. We are currently in the process of designing and purchasing the equipment to be used in our new distribution center and estimate the cost of this equipment to be approximately $85.0 million, of which $35.4 million was incurred as of March 31, 2009. We expect to spend approximately $15.0 million for this equipment during the remainder of 2009 and the remaining balance in 2010.
Net cash provided by financing activities was $3.1 million during the three months ended March 31, 2009 compared to $0.7 million during the three months ended March 31, 2008. The increase in cash provided by financing activities was due to a $2.0 million capital contribution by the minority partner in Skechers China.
We have outstanding debt of $16.7 million that primarily relates to notes payable for one of our distribution center warehouses and one of our administrative offices, which notes are secured by the respective properties.

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