• sustaining, managing and forecasting our costs and proper inventory levels;

• losing any significant customers, decreased demand by industry retailers and cancellation of order commitments due to the lack of popularity of particular designs and/or categories of our products;

• maintaining our brand image and intense competition among sellers of footwear for consumers;

• anticipating, identifying, interpreting or forecasting changes in fashion trends, consumer demand for the products and the various market factors described above;

• sales levels during the spring, back-to-school and holiday selling seasons; and

• other factors referenced or incorporated by reference in our company's annual report on Form 10-K for the year ended December 31, 2008.

The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely impact our business, financial condition and results of operations. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also be aware that while we do, from time to time, communicate with securities analysts, we do not disclose any material non-public information or other confidential commercial information to them. Accordingly, individuals should not assume that we agree with any 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. During the third quarter the weak retail environment continued to negatively impact our domestic business. Net income for the three months ended September 30, 2009 was $24.5 million, or $0.52 per diluted share.

Revenue as a percentage of net sales was as follows:

                                            Three-Months Ended September 30,
                                              2009                    2008
     Percentage of revenues by segment
     Domestic wholesale                             50.1 %                  56.0 %
     International wholesale                        24.7 %                  23.1 %
     Retail                                         23.5 %                  19.7 %
     E-commerce                                      1.7 %                   1.2 %

     Total                                           100 %                   100 %

As of September 30, 2009 we owned 218 domestic retail stores and 26 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 nine months of 2009, we opened five domestic concept stores, ten domestic outlet stores, one international concept store, and two international outlet stores and we closed two domestic concept stores. In addition, we acquired ten international concept stores from one of our distributors and contributed six other international concept stores to a new joint venture. During the remainder of 2009 and in 2010, 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 expect to open between four and eight retail locations in the fourth quarter of 2009 and 20 to 25 retail locations in 2010. 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 applicable lease term.

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 September 30,                          Nine-Months Ended September 30,
                               2009                        2008                         2009                          2008
Net sales             $ 405,374        100.0 %    $ 403,159        100.0 %    $ 1,047,820        100.0 %    $ 1,142,656        100.0 %
Cost of sales           221,648         54.7        231,628         57.5          616,062         58.8          641,760         56.2

Gross profit            183,726         45.3        171,531         42.5          431,758         41.2          500,896         43.8
Royalty income              418          0.1            591          0.2            1,022          0.1            1,660          0.2

                        184,144         45.4        172,122         42.7          432,780         41.3          502,556         44.0


Operating
expenses:
Selling                  41,245         10.2         40,911         10.2           97,568          9.3          105,037          9.2
General and
administrative          110,454         27.2        106,462         26.4          304,340         29.1          304,540         26.6

                        151,699         37.4        147,373         36.6          401,908         38.4          409,577         35.8


Earnings from
operations               32,445          8.0         24,749          6.1           30,872          2.9           92,979          8.2
Interest income             322          0.1          1,618          0.4            1,612          0.2            5,911          0.5
Interest expense           (987 )       (0.2 )       (1,264 )       (0.3 )         (1,944 )       (0.2 )         (3,616 )       (0.3 )
Other, net                2,176          0.5           (828 )       (0.2 )          2,203          0.2              (81 )          -

Earnings before
income taxes             33,956          8.4         24,275          6.0           32,743          3.1           95,193          8.4
Income tax expense
(benefit)                10,175          2.5         (3,639 )       (0.9 )          8,236          0.8           20,175          1.9

Net earnings             23,781          5.9         27,914          6.9           24,507          2.3           75,018          6.5
Less: Net loss
attributable to
noncontrolling
interest                   (679 )       (0.1 )         (375 )       (0.1 )         (2,246 )       (0.3 )           (756 )       (0.1 )


Net earnings
attributable to
Skechers U.S.A.,
Inc.                  $  24,460          6.0 %    $  28,289          7.0 %    $    26,753          2.6 %    $    75,774          6.6 %

THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2008
Net sales
Net sales for the three months ended September 30, 2009 were $405.4 million, an increase of $2.2 million or 0.6%, as compared to net sales of $403.2 million for the three months ended September 30, 2008. The increase in net sales was primarily due to higher sales in our retail and international wholesale segments partially offset by lower sales in our domestic wholesale segment.
Our domestic wholesale net sales decreased $22.7 million, or 10.1%, to $203.0 million for the three months ended September 30, 2009, from $225.7 million for the three months ended September 30, 2008. The largest decreases in our domestic wholesale segment came in our Men's USA, Women's USA, and Women's Active divisions. The average selling price per pair within the domestic wholesale segment increased to $21.71 per pair for the three months ended September 30, 2009 compared to $20.51 per pair for the same period last year which was primarily the result of reduced closeouts and sales of more in-line, in-demand inventory. The decrease in the domestic wholesale segment's net sales came on a 15.1% unit sales volume decrease to 9.3 million pairs from 11.0 million pairs for the same period in 2008.
Our international wholesale segment net sales increased $6.7 million, or 7.2%, to $100.1 million for the three months ended September 30, 2009, compared to $93.4 million for the three months ended September 30, 2008. Our international wholesale sales consist of direct subsidiary sales - those sales 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 increased $11.6 million, or 18.5%, to $74.1 million for the three months ended September 30, 2009 compared to net sales of $62.5 million for the three months ended September 30, 2008. The largest sales increases during the quarter came from our subsidiaries in China, Chile and Germany. Our distributor sales decreased $4.8 million to $26.0 million, or 15.7%, for the three months ended September 30, 2009, compared to sales of $30.8 million for the three months ended September 30, 2008. The decrease in distributor sales was primarily due to decreased sales to our distributor in Panama as well as the conversion of our Chilean distributor to a subsidiary, effective June 1, 2009.
Our retail segment sales increased $16.0 million to $95.3 million for the three months ended September 30, 2009, a 20.2% increase over sales of $79.3 million for the three months ended September 30, 2008. The increase in retail sales was due to a net increase of 29 stores and positive comparable domestic store sales (i.e. those open at least one year). For the three months ended September 30, 2009, we realized positive comparable store sales of 7.8% in our domestic retail stores and negative comparable store sales of 2.1% in our international retail stores due to unfavorable currency translations. During the three months ended September 30, 2009, we opened five stores which consisted of two domestic concept stores, one domestic outlet store, one international concept store and one international outlet store. Our domestic retail sales increased 19.3% for the three months ended September 30, 2009 compared to the same period in 2008 due to a net increase of 20 stores and positive comparable store sales. Our international retail sales increased 29.1% for the three months ended September 30, 2009 compared to the same period in 2008, attributable to the purchase of ten stores from our Chilean distributor.
Our e-commerce sales increased $2.3 million, or 46.9%, to $7.1 million for the three months ended September 30, 2009 from $4.8 million for the three months ended September 30, 2008. The increase in sales was primarily due to increased sales of in-line and in-demand inventory. Our e-commerce sales made up approximately 2% of our consolidated net sales for the three months ended September 30, 2009 compared to approximately 1% for the three months ended September 30, 2008.
Gross profit
Gross profit for the three months ended September 30, 2009 increased $12.2 million to $183.7 million as compared to $171.5 million for the three months ended September 30, 2008. Gross profit as a percentage of net sales, or gross margin, increased to 45.3% for the three months ended September 30, 2009 from 42.5% for the same

period in the prior year. Our domestic wholesale segment gross profit decreased $0.1 million, or 0.1%, to $82.3 million for the three months ended September 30, 2009 compared to $82.4 million for the three months ended September 30, 2008. Domestic wholesale margins increased to 40.6% for the three months ended September 30, 2009 from 36.5% for the same period in the prior year. The increase in domestic wholesale margins was due to less closeouts and increased sales of in-line, in-demand inventory.
Gross profit for our international wholesale segment increased $0.1 million, or 0.3%, to $39.3 million for the three months ended September 30, 2009 compared to $39.2 million for the three months ended September 30, 2008. Gross margins were 39.2% for the three months ended September 30, 2009 compared to 42.0% for the three months ended September 30, 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 achieved higher gross margins than our international wholesale sales through our foreign distributors. Gross margins for our direct subsidiary sales were 43.0% for the three months ended September 30, 2009 as compared to 47.8% for the three months ended September 30, 2008. Gross margins for our distributor sales were 28.5% for the three months ended September 30, 2009 as compared to 30.1% for the three months ended September 30, 2008.
Gross profit for our retail segment increased $10.5 million, or 22.0%, to $58.4 million for the three months ended September 30, 2009 as compared to $47.9 million for the three months ended September 30, 2008. Gross margins for all stores were 61.4% for the three months ended September 30, 2009 as compared to 60.4% for the three months ended September 30, 2008. Gross margins for our domestic stores were 61.3% for the three months ended September 30, 2009 as compared to 60.4% for the three months ended September 30, 2008. Gross margins for our international stores were 62.4% for the three months ended September 30, 2009 as compared to 61.2% for the three months ended September 30, 2008. The increase in domestic and international retail margins was due to less closeouts and increased sales of in-line, in-demand inventory.
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 increased by $0.3 million, or 0.8%, to $41.2 million for the three months ended September 30, 2009 from $40.9 million for the three months ended September 30, 2008. As a percentage of net sales, selling expenses were 10.2% for both the three months ended September 30, 2009 and 2008. The increase in selling expenses was primarily due to higher marketing expenses partially offset by lower trade show expenses.
Selling expenses consist primarily of 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 increased by $4.0 million, or 3.8%, to $110.5 million for the three months ended September 30, 2009 from $106.5 million for the three months ended September 30, 2008. As a percentage of sales, general and administrative expenses were 27.2% and 26.4% for the three months ended September 30, 2009 and 2008, respectively. The increase in general and administrative expenses was primarily due to higher salaries of $2.1 million, increased depreciation expense of $1.2 million, and higher rent expense of $1.1 million as a result of an additional 29 stores from the prior year. In addition, the expenses related to our distribution network, including the functions of purchasing, receiving, inspecting, allocating, warehousing and packaging of our products totaled $28.9 million and $30.4 million for the three months ended September 30, 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 store 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 for the three months ended September 30, 2009 decreased $1.3 million to $0.3 million compared to $1.6 million for the same period in 2008. The decrease in interest income resulted from lower interest rates for the three months ended September 30, 2009 as compared to the same period in 2008. Interest expense
Interest expense was $1.0 million for the three months ended September 30, 2009 compared to $1.3 million for the same period in 2008. The decrease was due to increased capitalized interest on our new corporate headquarters and the warehouse equipment for our new distribution center. Interest expense was incurred on our mortgages for our domestic distribution center and our corporate office located in Manhattan Beach, California, and on amounts owed to our foreign manufacturers.
Income taxes
Our effective tax rate was 30.0% and (15.0%) for the three months ended September 30, 2009 and 2008, respectively. Income tax expense for the three months ended September 30, 2009 was $10.2 million compared to income tax benefit of $3.6 million for the same period in 2008. The effective tax rate for the three months ended September 30, 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. 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 subsidiaries Noncontrolling interest for the three months ended September 30, 2009 increased $0.3 million to $0.7 million compared to $0.4 million for the same period in 2008. Noncontrolling interest represents the share of net loss that is attributable to our joint venture partners based on their investments in Skechers China, Skechers Southeast Asia and Skechers Thailand.
NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2008
Net sales
Net sales for the nine months ended September 30, 2009 were $1.048 billion, a decrease of $94.8 million or 8.3%, from net sales of $1.142 billion for the nine months ended September 30, 2008. The decrease in net sales was primarily due to lower sales in our domestic wholesale segment.
Our domestic wholesale net sales decreased $103.5 million, or 16.0%, to $544.4 million for the nine months ended September 30, 2009, from $647.9 million for the nine months ended September 30, 2008. The largest decreases in our domestic wholesale segment came in our Women's Active, Cali Gear, and Men's USA divisions. The average selling price per pair within the domestic wholesale segment increased to $19.17 per pair for the nine months ended September 30, 2009 from $19.10 per pair in the same period last year. The decrease in domestic

wholesale segment net sales came on a 16.3% unit sales volume decrease to 28.4 million pairs from 33.9 million pairs for the same period in 2008.
Our international wholesale segment net sales decreased $9.2 million, or 3.4%, to $261.1 million for the nine months ended September 30, 2009, compared to $270.3 million for the nine months ended September 30, 2008. Direct subsidiary sales increased $1.3 million, or 0.7%, to $183.1 million for the nine months ended September 30, 2009 compared to net sales of $181.8 million for the nine months ended September 30, 2008. The largest sales increases during the nine months ended September 30, 2009 came from our subsidiary in China and Chile. Our distributor sales decreased $10.5 million to $78.1 million for the nine months ended September 30, 2009, a 11.9% decrease from sales of $88.6 million for the nine months ended September 30, 2008. This was primarily due to decreased sales to our distributor in Russia as well as the conversion of our Chilean distributor to a subsidiary, effective June 1, 2009.
Our retail segment sales increased $16.5 million to $227.5 million for the nine months ended September 30, 2009, a 7.8% increase over sales of $211.0 million for the nine months ended September 30, 2008. The increase in retail sales was due to a net increase of 29 stores partially offset by negative comparable store sales. For the nine months ended September 30, 2009, we realized negative comparable store sales of 1.1% in our domestic retail stores and 17.9% in our international retail stores due to the challenging retail environment and unfavorable currency translations. During the nine months ended September 30, 2009, we opened 18 stores which consisted of five domestic concept stores, ten domestic outlet stores, one international concept store and two international outlet stores. In addition, we acquired ten international concept stores from one of our distributors and contributed six other international concept stores to a new joint venture. Despite negative comparable store sales, our domestic retail sales increased 8.4% for the nine months ended September 30, 2009 compared to the same period in 2008 due to a net increase of 20 stores. Our international retail sales increased 2.1% for the nine months ended September 30, 2009 compared to the same period in 2008, attributable to the purchase of ten stores from our Chilean distributor.
Our e-commerce sales increased $1.4 million, or 10.3%, to $14.8 million for the nine months ended September 30, 2009 from $13.4 million for the nine months ended September 30, 2008. Our e-commerce sales made up approximately 1% of our consolidated net sales for each of the nine months ended September 30, 2009 and 2008.
Gross profit
Gross profit for the nine months ended September 30, 2009 decreased $69.1 million to $431.8 million as compared to $500.9 million for the nine months ended September 30, 2008. Gross margin decreased to 41.2% for the nine months ended September 30, 2008 from 43.8% for the same period in the prior year. Our domestic wholesale segment gross profit decreased $51.7 million, or 21.0%, to $194.7 million for the nine months ended September 30, 2009 compared to $246.4 million for the nine months ended September 30, 2008. Domestic wholesale margins decreased to 35.8% for the nine months ended September 30, 2009 from 38.0% for the same period in the prior year. The decrease in domestic wholesale margins was primarily due to higher closeouts and product mix changes, and continued price pressure during the first half of 2009 resulting from the weak U.S. retail environment.
Gross profit for our international wholesale segment decreased $26.3 million, or 22.0%, to $93.1 million for the nine months ended September 30, 2009 compared to $119.4 million for the nine months ended September 30, 2008. Gross margins were 35.7% for the nine months ended September 30, 2009 compared to 44.2% for the nine months ended September 30, 2008. The decrease in gross margins for our international wholesale segment was due to weaker retail environments abroad and unfavorable currency translations. Gross margins for our direct subsidiary sales were 39.1% for the nine months ended September 30, 2009 as compared to 51.2% for the nine months ended September 30, 2008. Gross margins for our distributor sales were 27.6% for the nine months ended September 30, 2009 as compared to 29.7% for the nine months ended September 30, 2008.
Gross profit for our retail segment increased $7.4 million, or 5.8%, to $136.1 million for the nine months ended September 30, 2009 as compared to $128.7 million for the nine months ended September 30, 2008. Gross margins for all stores were 59.8% for the nine months ended September 30, 2009 as compared to 61.0% for the nine months

ended September 30, 2008. Gross margins for our domestic stores were 59.9% for the nine months ended September 30, 2009 as compared to 60.9% for the nine months ended September 30, 2008. The decrease in domestic retail margins was due to higher closeouts and product mix changes, and continued price pressure during the first half of 2009 resulting from the weak U.S. retail environment. Gross margins for our international stores were 58.6% for the nine months ended September 30, 2009 as compared to 61.6% for the nine months ended September 30, 2008. The decrease in international retail margins was due to weaker retail environments abroad and unfavorable currency translations. Selling expenses
Selling expenses decreased by $7.4 million, or 7.0%, to $97.6 million for the nine months ended September 30, 2009 from $105.0 million for the nine months ended September 30, 2008. As a percentage of net sales, selling expenses were 9.3% and 9.2% for the nine months ended September 30, 2009 and 2008, respectively. The decrease in selling expenses was primarily due to decreased . . .