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SKX > SEC Filings for SKX > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for SKECHERS USA INC

Form 10-Q for SKECHERS USA INC


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto in Item 1 of this report and our company's annual report on Form 10-K for the year ended December 31, 2011.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of our company as a whole.

This quarterly report on Form 10-Q may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking language such as "intend," "may," "will," "believe," "expect," "anticipate" or other comparable terms. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in forward-looking statements, and reported results shall not be considered an indication of our future performance. Factors that might cause or contribute to such differences include:

international, national and local general economic, political and market conditions including the recent global economic recession and the uncertain pace of recovery in our markets;

our ability to maintain our brand image and to anticipate, forecast, identify, and respond to changes in fashion trends, consumer demand for the products and other market factors;

our ability to remain competitive among sellers of footwear for consumers, including in the highly competitive performance footwear market;

our ability to sustain, manage and forecast our costs and proper inventory levels;

the loss of any significant customers, decreased demand by industry retailers and the cancellation of order commitments;

the continued negative impact from reduced sales of our toning products;

our ability to continue to manufacture and ship our products that are sourced in China, which could be adversely affected by various economic, political or trade conditions, or a natural disaster in China;

our ability to predict our quarterly revenues, which have varied significantly in the past and can be expected to fluctuate in the future due to a number of reasons, many of which are beyond our control; and

other factors referenced or incorporated by reference in our annual report on Form 10-K for the year ended December 31, 2011 under the captions "Item 1A: Risk Factors" and "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations."

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, which reflect our opinions only as of the date of this quarterly report, as a prediction of actual results. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document, except as otherwise required by reporting requirements of applicable federal and states securities laws.


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FINANCIAL OVERVIEW

Our net sales decreased for the first nine months of 2012, compared to the same period in 2011, due to reduced sales of toning products as well as reduced demand for our non-Skechers branded fashion footwear, although sales to date in 2012 have been positively impacted by the release of new styles and lines of footwear. We believe that these new styles and lines of footwear will continue to help offset the decline in sales of our toning products and fashion brands. Gross margins improved to 44.2% for the nine months ended September 30, 2012 from 38.6% for the same period in 2011 due to sales of more full-price product across several product lines. Net income for the three months ended September 30, 2012 was $11.0 million, or $0.22 per diluted share.

The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2012 due to consumer acceptance of our new products as well as the widespread economic slowdown across Europe.

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.

Revenue as a percentage of net sales was as follows:

                                            Three-Months Ended September 30,
                                              2012                     2011
     Percentage of revenues by segment
     Domestic wholesale                            40.5 %                   39.4 %
     International wholesale                       28.6 %                   32.4 %
     Retail                                        29.6 %                   27.1 %
     E-commerce                                     1.3 %                    1.1 %

     Total                                          100 %                    100 %

As of September 30, 2012, we owned 295 domestic retail stores and 51 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 2012, we opened four domestic concept stores, seven domestic outlet stores, eight domestic warehouse stores, one international concept store, and we closed four domestic concept stores and two international concept stores. In addition, we also took over the operations of one concept store and two outlet stores from our distributor in Japan. We review all of our stores for impairment annually, or more frequently if triggering events occur that may be an indicator of impairment, and we carefully review our under-performing stores and consider the potential for non-renewal of leases upon completion of the current term of the applicable lease.

During the remainder of 2012, we intend to focus on: (i) continuing to manage our inventory and expense structure to be in line with expected sales levels,
(ii) growing our international business, (iii) strategically expanding our retail distribution channel by opening another five to seven stores, and
(iv) increasing the product count for all customers by delivering trend-right styles at reasonable prices.


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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,
                                                          2012                        2011                         2012                          2011
Net sales                                        $ 429,429        100.0 %    $ 412,183        100.0 %    $ 1,164,704        100.0 %    $ 1,322,768        100.0 %
Cost of sales                                      241,605         56.3        236,988         57.5          649,842         55.8          811,633         61.4

Gross profit                                       187,824         43.7        175,195         42.5          514,862         44.2          511,135         38.6
Royalty income                                       1,758          0.4          1,406          0.3            4,503          0.4            4,430          0.3

                                                   189,582         44.1        176,601         42.8          519,365         44.6          515,565         38.9

Operating expenses:
Selling                                             34,385          8.0         37,943          9.2          103,834          8.9          128,602          9.7
General and administrative                         134,913         31.4        136,459         33.1          401,172         34.5          417,666         31.6

                                                   169,298         39.4        174,402         42.3          505,006         43.4          546,268         41.3

Earnings (loss) from operations                     20,284          4.7          2,199          0.5           14,359          1.2          (30,703 )       (2.4 )
Interest income                                        124            0            217          0.1              490            0            1,559          0.1
Interest expense                                    (3,462 )       (0.8 )       (1,203 )       (0.3 )         (9,805 )       (0.8 )         (5,519 )       (0.4 )
Other, net                                          (1,621 )       (0.3 )          490          0.1           (1,205 )       (0.1 )           (846 )          0

Earnings (loss) before income tax expense
(benefit)                                           15,325          3.6          1,703          0.4            3,839          0.3          (35,509 )       (2.7 )
Income tax expense (benefit)                         3,725          0.9         (6,653 )       (1.6 )         (3,007 )       (0.3 )        (25,966 )       (2.0 )

Net earnings (loss)                                 11,600          2.7          8,356          2.0            6,846          0.6           (9,543 )       (0.7 )
Less: Net earnings attributable to
non-controlling interests                              596          0.1             71            0            1,290          0.1              280            0

Net earnings (loss) attributable to Skechers
U.S.A., Inc.                                     $  11,004          2.6 %    $   8,285          2.0 %    $     5,556          0.5 %    $    (9,823 )       (0.7 )%

THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2011

Net sales

Net sales for the three months ended September 30, 2012 were $429.4 million, an increase of $17.2 million, or 4.2%, as compared to net sales of $412.2 million for the three months ended September 30, 2011. The increase in net sales was primarily attributable to increased sales in our domestic wholesale, domestic and international retail segments offset by reduced sales in our international wholesale segment.

Our domestic wholesale net sales increased $11.6 million, or 7.2%, to $174.1 million for the three months ended September 30, 2012 from $162.5 million for the three months ended September 30, 2011. The increase in our domestic wholesale segment was due to strong sales in our kids and performance divisions, and in many of our women's and men's lines. We had significant increases from sales in our GO, Women's Sport, Women's Active, kid's and work lines, as well as significant growth in our BOB's division. The average selling price per pair within the domestic wholesale segment decreased to $21.65 per pair for the three months ended September 30, 2012 from $22.04 per pair for the same period last year primarily due to increased sales of kid's and BOB's styles that sell at lower price points. The increase in the domestic wholesale segment's net sales came on a 9.1% unit sales volume increase to 8.0 million pairs for the three months ended September 30, 2012 from 7.4 million pairs for the same period in 2011.

Our international wholesale segment sales decreased $10.8 million, or 8.1%, to $123.0 million for the three months ended September 30, 2012 compared to sales of $133.8 million for the three months ended September 30, 2011. 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


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we do not sell directly. Direct subsidiary sales decreased $14.5 million, or 14.6%, to $85.1 million for the three months ended September 30, 2012 compared to net sales of $99.6 million for the three months ended September 30, 2011. The largest sales decreases during the quarter came from our subsidiaries in Brazil, Italy, Spain and Germany due to reduced demand for our toning products, the challenging economic environment in Europe, and the reorganization of our business in Brazil with new management and a re-launch of our products in Brazil. Our distributor sales increased $3.7 million to $37.9 million for the three months ended September 30, 2012, a 10.9% increase from sales of $34.2 million for the three months ended September 30, 2011, which was primarily attributable to increased sales to our distributor in the United Arab Emirates ("UAE").

Our retail segment sales increased $15.4 million to $126.9 million for the three months ended September 30, 2012, a 13.9% increase over sales of $111.5 million for the three months ended September 30, 2011. The increase in retail sales was primarily attributable to a net increase of 27 stores, or 8.5%, in comparing the number of stores open on September 30, 2012 to September 30, 2011. For the three months ended September 30, 2012, we realized positive comparable store sales of 6.2% in our domestic retail stores and 0.6% in our international retail stores. During the three months ended September 30, 2012, we opened one domestic outlet store, one domestic warehouse store and we closed one underperforming domestic concept store and two underperforming international concept stores. In addition, we also took over the operations of one concept store and two outlet stores from our distributor in Japan. Our domestic retail sales increased 13.2% for the three months ended September 30, 2012 compared to the same period in 2011 as the result of a net increase of 23 domestic stores and positive comparable store sales. Our international retail sales increased 18.2% for the three months ended September 30, 2012 compared to the same period in 2011, which was primarily attributable to increases in the United Kingdom and Chile a well as a net increase of four international stores, which were partially offset by unfavorable currency translations.

Our e-commerce sales increased $1.0 million, or 22.2%, to $5.4 million for the three months ended September 30, 2012 compared to $4.4 million for the three months ended September 30, 2011. Our e-commerce sales made up approximately 1% of our consolidated net sales for each of the three-month periods ended September 30, 2012 and 2011.

Gross profit

Gross profit for the three months ended September 30, 2012 increased $12.6 million to $187.8 million as compared to $175.2 million for the three months ended September 30, 2011. Gross profit as a percentage of net sales, or gross margin, increased to 43.7% for the three months ended September 30, 2012 from 42.5% for the same period in the prior year. Our domestic wholesale segment gross profit increased $7.7 million, or 13.6%, to $64.7 million for the three months ended September 30, 2012 compared to $57.0 million for the three months ended September 30, 2011. Domestic wholesale margins increased to 37.2% in the three months ended September 30, 2012 from 35.1% for the same period in the prior year. The increase in domestic wholesale margins was attributable to sales of more full price product and reduced close-outs as compared to the same period in the prior year.

Gross profit for our international wholesale segment decreased $6.9 million, or 12.9%, to $47.1 million for the three months ended September 30, 2012 compared to $54.0 million for the three months ended September 30, 2011. Gross margins were 38.3% for the three months ended September 30, 2012 compared to 40.4% for the three months ended September 30, 2011. The decrease in gross margins for the international wholesale segment was primarily attributable to decreased sales in our European subsidiaries, which achieve higher gross margins than our international wholesale sales through our foreign distributors. Gross margins for our direct subsidiary sales were 44.9% for the three months ended September 30, 2012 as compared to 45.3% for the three months ended September 30, 2011. Gross margins for our distributor sales were 23.6% for the three months ended September 30, 2012 as compared to 26.2% for the three months ended September 30, 2011.

Gross profit for our retail segment increased $11.5 million, or 18.6%, to $73.6 million for the three months ended September 30, 2012 as compared to $62.1 million for the three months ended September 30, 2011. Gross margins for all stores were 58.0% for the three months ended September 30, 2012 as compared to 55.7% for the three months ended September 30, 2011. Gross margins for our domestic stores were 58.3% for the three months


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ended September 30, 2012 as compared to 55.6% for the three months ended September 30, 2011. The increase in gross margins was primarily due to reduced sales of discounted toning products combined with increased sales of our newer products as compared to the prior year period. Gross margins for our international stores were 56.4% for the three months ended September 30, 2012 as compared to 56.6% for the three months ended September 30, 2011. The decrease in international retail margins was primarily due to the difficult retail environment in Europe 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 $3.5 million, or 9.4%, to $34.4 million for the three months ended September 30, 2012 from $37.9 million for the three months ended September 30, 2011. As a percentage of net sales, selling expenses were 8.0% and 9.2% for the three months ended September 30, 2012 and 2011, respectively. The decrease in selling expenses was primarily attributable to lower advertising expenses of $4.4 million, which was partially offset by higher trade show and other costs for the three months ended September 30, 2012.

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 $1.6 million, or 1.1%, to $134.9 million for the three months ended September 30, 2012 from $136.5 million for the three months ended September 30, 2011. As a percentage of sales, general and administrative expenses were 31.4% and 33.1% for the three months ended September 30, 2012 and 2011, respectively. The $1.6 million decrease in general and administrative expenses was primarily attributable to reduced temporary staffing costs of $2.4 million and lower rent costs of $1.5 million, which was offset by $2.6 million of additional depreciation expense due to operating an additional 27 retail stores and our distribution center and distribution center equipment. In addition, the expenses related to our distribution network, including purchasing, receiving, inspecting, allocating, warehousing and packaging of our products, totaled $31.9 million and $30.9 million for the three months ended September 30, 2012 and 2011, 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 $0.1 million for the three months ended September 30, 2012 compared to $0.2 million for the same period in 2011. The decrease in interest income resulted from lower interest rates for the three months ended September 30, 2012 as compared to the same period in 2011.


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Interest expense

Interest expense was $3.5 million for the three months ended September 30, 2012 compared to $1.2 million for the same period in 2011. The increase was primarily due to increased interest paid on loans for our distribution center and related equipment. Interest expense was incurred on our loans for our domestic distribution center and equipment and amounts owed to our foreign manufacturers.

Income taxes

Our effective tax rate was 24.3% and (390.7)% for the three months ended September 30, 2012 and 2011, respectively. Income tax expense for the three months ended September 30, 2012 was $3.7 million compared to income tax benefit of $6.7 million for the same period in 2011. The increase in the effective tax rate was primarily due to a change in the relative mix of domestic and international taxable income and loss as well as our use of actual results, instead of projected full-year results, to calculate the effective tax rate during the quarter ended September 30, 2012.

Estimating a reliable annual effective tax rate for our company for the year has become increasingly difficult due to the uncertainty in forecasting taxable income or loss for the remainder of the year for each of our domestic and international operations. Such forecasts may vary significantly from quarter to quarter and even small changes in forecasts or actual results for either our domestic or international operations can result in significant changes in our estimated annual effective tax rate. Since forecasting an annual effective tax rate under these circumstances would not provide a meaningful estimate, we believe that the actual year-to-date effective tax rate is the best estimate of the annual tax rate in accordance with ASC 740-270. Our income tax expense has been calculated utilizing our actual effective tax rate for the three-month period ended September 30, 2012.

Non-controlling interest in net income and loss of consolidated subsidiaries

Non-controlling interest for the three months ended September 30, 2012 increased $0.5 million to $0.6 million as compared to $0.1 million for the same period in 2011. Non-controlling interest represents the share of net earnings (loss) that is attributable to our joint venture partners.

NINE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2011

Net sales

Net sales for the nine months ended September 30, 2012 were $1.165 billion, a decrease of $158.1 million, or 11.9%, as compared to net sales of $1.322 billion for the nine months ended September 30, 2011. The decrease in net sales was primarily attributable to lower sales during the first half of the year in our domestic and international wholesale segments, which was partially offset by increased domestic and international retail sales.

Our domestic wholesale net sales decreased $105.4 million, or 17.8%, to $485.9 million for the nine months ended September 30, 2012 from $591.3 million for the nine months ended September 30, 2011. The largest decreases in our domestic wholesale segment were in our women's and men's toning divisions compared to last year when we were clearing our toning inventory at discounted prices as well as from reduced sales of our non-Skechers branded fashion products. In addition, we experienced reductions in sales in our kids' and men's divisions from the prior period due to reduced demand for our Twinkle Toes and men's USA divisions. These decreases were partially offset by increases in our Women's Sport, men's and women's GO and BOB's divisions. The average selling price per pair within the domestic wholesale segment increased to $21.10 per pair for the nine months ended September 30, 2012 from $20.16 per pair for the same period last year due to reduced close-outs as compared to the same period in the prior year. The decrease in the domestic wholesale segment's net sales came on a 21.5% unit sales volume decrease to 23.0 million pairs for the nine months ended September 30, 2012 from 29.3 million pairs for the same period in 2011.


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Our international wholesale segment sales decreased $79.1 million, or 19.4%, to $329.1 million for the nine months ended September 30, 2012 compared to sales of $408.2 million for the nine months ended September 30, 2011. Direct subsidiary sales decreased $67.6 million, or 22.6%, to $231.3 million for the nine months ended September 30, 2012 compared to net sales of $298.9 million for the nine months ended September 30, 2011. The largest sales decreases during the period came from our subsidiaries in Brazil, Germany, Italy, and the United Kingdom due to reduced demand for our toning products, the challenging economic environment in Europe, and the reorganization of our business in Brazil with new management and a re-launch of our products in Brazil. Our distributor sales decreased $11.5 million to $97.8 million for the nine months ended September 30, 2012, a 10.5% decrease from sales of $109.3 million for the nine months ended September 30, 2011. This was primarily attributable to the transition of our distributor-operated business in Japan to a wholly-owned subsidiary and decreased sales to our distributor in Russia due to a difficult economic environment.

Our retail segment sales increased $26.5 million to $334.3 million for the nine months ended September 30, 2012, a 8.6% increase over sales of $307.8 million for the nine months ended September 30, 2011. The increase in retail sales was primarily attributable to a net increase of 27 stores, or 8.5%, in comparing the number of stores open on September 30, 2012 to September 30, 2011, which was partially offset by reduced international comparable store sales and flat domestic comparable sales. During the nine months ended September 30, 2012, we . . .

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