SKECHERS USA INC - Annual Report: 2007 (Form 10-K)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-14429
SKECHERS U.S.A., INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 95-4376145 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
228 Manhattan Beach Blvd., Manhattan Beach, California | 90266 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (310) 318-3100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on | ||
Title of Each Class | Which Registered | |
Class A Common Stock, $0.001 par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405) is not contained herein, and will not be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of June 30, 2007, the aggregate market value of the voting and non-voting Class A and Class B
Common Stock held by non-affiliates of the Registrant was approximately $957 million based upon the
closing price of $29.20 of the Class A Common Stock on the New York Stock Exchange on such date.
The number of shares of Class A Common Stock outstanding as of February 15, 2008: 33,009,788.
The number of shares of Class B Common Stock outstanding as of February 15, 2008: 12,851,789.
The number of shares of Class B Common Stock outstanding as of February 15, 2008: 12,851,789.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement issued in connection with the 2008 Annual
Meeting of the Stockholders of the Registrant are incorporated by reference into Part III.
SKECHERS U.S.A., INC.
TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2007
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EXHIBIT 32.1 |
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SPECIAL NOTE ON FORWARD LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements that are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including
statements with regards to future revenue, projected 2008 results, earnings, spending, margins,
cash flow, orders, expected timing of shipment of products, inventory levels, future growth or
success in specific countries, categories or market sectors, continued or expected distribution to
specific retailers, liquidity, capital resources and market risk, strategies and objectives.
Forward-looking statements include, without limitation, any statement that may predict, forecast,
indicate or simply state future results, performance or achievements of our company, and can be
identified by the use of forward looking language such as believe, anticipate, expect,
estimate, intend, plan, project, will be, will continue, will result, could, may,
might, or any variations of such words with similar meanings. Any such statements are subject to
risks and uncertainties that could cause actual results to differ materially from those which are
managements current expectations or forecasts. Such information is subject to the risk that such
expectations or forecasts, or the assumptions underlying such expectations or forecasts, become
inaccurate.
Risk factors include but are not limited to the following: international, national and local
general economic, political and market conditions; intense competition among sellers of footwear
for consumers; changes in fashion trends and consumer demands; popularity of particular designs and
categories of products; the level of sales during the spring, back-to-school and holiday selling
seasons; the ability to anticipate, identify, interpret or forecast changes in fashion trends,
consumer demand for our products and the various market factors described above; the ability of our
company to maintain its brand image; the ability to sustain, manage and forecast our companys
growth and inventories; the ability to secure and protect trademarks, patents and other
intellectual property; the loss of any significant customers, decreased demand by industry
retailers and cancellation of order commitments; potential disruptions in manufacturing related to
overseas sourcing and concentration of production in China, including, without limitation,
difficulties associated with political instability in China, increases in labor or raw material
costs, the occurrence of prolonged adverse weather conditions, a natural disaster or outbreak of a
pandemic disease in China, or electrical shortages, labor shortages or work stoppages that may lead
to higher production costs, production delays and/or transportation delays; changes in monetary
controls and valuations of the Yuan by the Chinese government; increased costs of freight and
transportation to meet delivery deadlines; violation of labor or other laws by our independent
contract manufacturers, suppliers or licensees; potential imposition of additional duties, tariffs
or other trade restrictions; business disruptions resulting from natural disasters such as an
earthquake due to the location of our companys domestic warehouse, headquarters and a substantial
number of retail stores in California; changes in business strategy or development plans; changes
in economic conditions that could affect the Companys ability to open retail stores in new markets
and/or the sales performance of the Companys existing stores; the ability to attract and retain
qualified personnel; the disruption, expense and potential liability associated with existing or
unanticipated future litigation; and other factors referenced or incorporated by reference in this
report and other reports that we filed with the United States Securities and Exchange Commission
(the SEC).
The risks included here are not exhaustive. Other sections of this report may include
additional factors that could adversely impact our business and financial performance. 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. Moreover, reported results shall not be considered
an indication of our companys future performance. 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.
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PART I
ITEM 1. BUSINESS
We were incorporated in California in 1992 and reincorporated in Delaware in 1999. Throughout
this annual report, we refer to Skechers U.S.A., Inc., a Delaware corporation, and its consolidated
subsidiaries as we, us, our, our company and Skechers unless otherwise indicated. Our
Internet website address is www.skechers.com. Our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, Form 3s, 4s and 5s filed on behalf of directors,
officers and 10% stockholders, and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our
website as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. You can learn more about us by reviewing such filings on our website or at
the SECs website at www.sec.gov.
GENERAL
We design and market Skechers-branded contemporary footwear for men, women and children under
several unique lines. Our footwear reflects a combination of style, quality and value that appeals
to a broad range of consumers. In addition to Skechers-branded lines, we also offer eight uniquely
branded designer, fashion and street-focused footwear lines for men, women and children. These
lines are branded and marketed separately from Skechers and appeal to specific audiences. Our
brands are sold through department stores, specialty stores, athletic retailers, and boutiques as
well as our e-commerce website and our own retail stores. We operate 70 concept stores, 72 factory
outlet stores and 35 warehouse outlet stores in the United States, and 14 concept stores and two
factory outlets internationally. Our objective is to profitably grow our operations worldwide
while leveraging our recognizable Skechers brand through our strong product lines, innovative
advertising and diversified distribution channels.
We seek to offer consumers a vast array of fashionable footwear that satisfies their active,
casual, dress casual and dress footwear needs. Our core consumers are style-conscious 12 to 24
year-old men and women attracted to our youthful brand image and fashion forward designs. Many of
our best-selling and core styles are also developed for children with colors and materials that
reflect a playful image appropriate for this demographic.
We believe that brand recognition is an important element for success in the footwear
business. We have aggressively promoted our brands through comprehensive marketing campaigns for
men, women and children. During 2007, we continued our celebrity driven ads with platinum
recording artist Ashlee Simpson as our Skechers celebrity endorsee. We also developed television
campaigns for our mens, womens and childrens lines, including our first animated campaign for
Airators by Skechers and Cali Gear from Skechers. In 2007, our marketing for children focused on
television spots, while our adult efforts utilized television, print and outdoor. Select fashion
brands including Marc Ecko Footwear are supported by television commercials. Our Unltd. by Marc
Ecko Rhino Red and Zoo York footwear lines are also supported through print ads developed by Marc
Ecko. The Red by Marc Ecko line was also supported by print and television campaigns featuring
platinum recording artist and actress JoJo, and High School Musical stars Ashley Tisdale and
Vanessa Hudgens.
Since we introduced our first line, Skechers USA Sport Utility Footwear, in December 1992, we
have expanded our product offering and grown our net sales while substantially increasing the
breadth and penetration of our account base. Our mens, womens and childrens Skechers-branded
product lines benefit from the Skechers reputation for contemporary and progressive styling,
quality, comfort and affordability. Our lines that are not branded with the Skechers name benefit
from our marketing support, quality management and expertise. To promote innovation and brand
relevance, we manage our product lines separately by utilizing dedicated sales and design teams.
Our product lines share back office services in order to limit our operating expenses and fully
utilize our managements vast experience in the footwear industry.
SKECHERS LINES
Skechers USA. Our Skechers USA category for men and women includes five types of footwear: (i)
Casuals, (ii) Dress Casuals, (iii) Comfort and Lightweight (for men only), (iv) Outdoor (for men
only) (v) Sandals and (vi) Casual Fusion. This category is generally sold through mid-tier
retailers, department stores and some footwear specialty shops.
| The Casuals line for men and women is defined by lugged outsoles and utilizes value-oriented and leather materials in the uppers. For men, the Casuals category includes black and brown boots, shoes and sandals that generally have a rugged urban design some with industrial-inspired fashion features. For women, the Casuals category includes basic black and brown |
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oxfords and slip-ons, lug outsole boots, and casual sandals. We design and price both the mens and womens categories to appeal primarily to younger consumers with broad acceptance across age groups. | |||
| For men, the Dress Casuals category is comprised of basic black and brown mens shoes that feature shiny leathers and dress details, but may utilize traditional or lugged outsoles as well as value-oriented materials. For women, the Dress Casual line is comprised of trend-influenced stylized boots and shoes, which may include leather uppers, shearling or faux fur lining or trim. | ||
| Skechers Comfort is a line of trend-right casuals for men who want all-day comfort without compromising style. Characteristics of the line include comfortable outsoles, cushioned insoles and quality leather uppers. A category with unique features, we market and package the Skechers Comfort styles in a shoe box that is distinct from that of other categories in the Skechers USA line of footwear. | ||
| Our Outdoor styles for men primarily consist of hiker-influenced constructions including boots and shoes. While this category includes many technical performance features, we market this category of footwear primarily on the basis of style and comfort. Outsoles generally consist of molded and contoured hardened rubber. Many designs include gussetted tongues to prevent penetration of water and debris, cushioned mid-soles, motion control devices such as heel cups, water-resistant or water-proof construction and materials, and more durable hardware such as metal D-rings instead of eyelets. Uppers are generally constructed of heavily oiled nubuck and full-grain leathers. | ||
| Our Sandals collection for men and women is designed with many of our existing and proven outsoles for our Casuals, Dress Casuals and Casual Fusion lines, stylized with basic or core uppers as well as fresh looks. These styles are generally made with quality leather uppers, but may also be in canvas or fabric. | ||
| Our Casual Fusion line is comprised of low-profile, sport-influenced Euro casuals targeted at trend-conscious young men and women. The outsoles are primarily rubber and adopted from our mens Sport and womens Active lines. This collection features leather or nubuck uppers, but may also include mesh, and may be in shades of browns and beiges as well as in black, gray, greens and blues. |
Skechers Sport. Our Skechers Sport footwear for men and women includes: (i) Joggers, Trail
Runners, Sport Hikers, Terrainers, (ii) Performance (for men only), (iii) Street Casuals and (iv)
Sport Sandals. Our Skechers Sport category is distinguished by its technical performance-inspired
looks; however, we generally do not promote the technical performance features of these shoes.
Skechers Sport is typically sold through specialty shoe stores, department stores and athletic
footwear retailers.
| Our Jogger, Trail Runner, Sport Hiker and cross trainer-inspired Terrainer designs are lightweight constructions that include cushioned heels, polyurethane midsoles, phylon and other synthetic outsoles, as well as leather or synthetic uppers such as durabuck, cordura and nylon mesh. Careful attention is devoted to the design, pattern and construction of the outsoles, which vary greatly depending on the intended use. This category features earth tones and athletic-inspired hues with contrasting pop colors such as lime green, orange and red in addition to traditional athletic white. | ||
| The Performance category is comprised of multi-purpose running shoes that are marketed as mens lifestyle athletic footwear. Some styles include 3M reflective accents, breathable upper construction, quality leathers, abrasion-resistant toe and heel cap, removable moisture wicking molded ethyl vinyl acetate (EVA) sock liner, outsole forefoot flex grooves for improved flexibility, non-marking rubber lugs with impact dispersment technology (IDT), aggressive all terrain traction lugs, external torsion stabilizer and tuned dual-density molded EVA midsole with pronation control. | ||
| Street Casual incorporates lower profiles, classic details and skate, street and fusion influences in a collection of essential, basic casual sneakers. The uppers are designed in leather, suede, nubuck, canvas and/or mesh, and many include vulcanized outsoles. Street Casual is targeted to young consumers, but also appeals to a broader demographic. | ||
| Our Sport Sandals are primarily designed from existing Skechers Sport outsoles and may include many of the same sport features as our sneakers with the addition of new technologies geared toward making a comfortable sport sandal. Sport sandals are designed as seasonal footwear for the consumer who already wears our Skechers Sport sneakers. |
Skechers Active. A natural companion to Skechers Sport, Skechers Active has grown from a
casual everyday line into a complete line of fusion and sport fusion sneakers for females of all
ages. Marked by low-profile outsoles, the Active line is available in a multitude of colors as well
as solid white or black, in fabrics, leathers and meshes, and with various closures traditional
laces, zig-
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zag and cross straps, among others. The line also now includes Mary Janes, sandals and open
back styles. Active sneakers are typically retailed through specialty casual shoe stores and
department stores.
Skechers Cali. Launched in 2006, Skechers Cali is a line of sneakers, skimmers, wedges and
sandals for young women designed to typify the California lifestyle. The uppers are primarily in
canvas, fabrics and leather with unique prints, some with patch details. The sandals range from
dress casual looks to casual to beach thongs. Skechers Cali is sold through specialty casual shoe
stores and department stores.
Skechers Work. Expanding on our heritage of cutting-edge utility footwear, Skechers Work
offers a complete line of mens and womens casuals, field boots, hikers and athletic shoes. The
Skechers Work line includes athletic-inspired, casual safety toe, and non-slip safety toe
categories that may feature lightweight aluminum safety toe, electrical hazard, and slip-resistant
technologies, as well as breathable, seam-sealed waterproof membranes. Designed for men and women
with jobs that require certain safety requirements, these durable styles are constructed on
high-abrasion, long wearing soles, and feature breathable lining, oil and abrasion resistant
outsoles offering all-day comfort and prolonged durability. The uppers are comprised of
high-quality leather, nubuck, trubuck and durabuck. Our safety toe athletic sneakers, boots,
hikers, and casuals are ideal for environments requiring safety footwear and offer comfort and
safety in dry or wet conditions. Our slip-resistant boots, hikers, athletics, casuals and clogs
are ideal for the service industry. Our safety toe products have been independently tested and
certified to meet ASTM standards, and our slip-resistant soles have been tested pursuant to the
Mark II testing method for slip resistance. Skechers Work is typically sold through department
stores, athletic footwear retailers and specialty shoe stores, as well as marketed directly to
consumers through business-to-business channels.
Skechers Kids. The Skechers Kids line includes: (i) Skechers Kids, which is a range of
infants, toddlers, boys and girls boots, shoes and sneakers; (ii) S-Lights, which is lighted
footwear for toddlers, boys and girls; (iii) Skechers Cali for Girls, which is trend-inspired
boots, shoes, sandals and dress sneakers; (iv) Airators by Skechers; (v) Skechers Super Z-Strap;
and (vi) Babiez by Skechers. Skechers Kids and Skechers Cali for Girls are comprised primarily of
shoes that are designed as takedowns of their adult counterparts, allowing the younger set the
opportunity to wear the same popular styles as their older siblings and schoolmates. This
takedown strategy maintains the products integrity by offering premium leathers, hardware and
outsoles without the attendant costs involved in designing and developing new products. In
addition, we adapt current fashions from our mens and womens lines by modifying designs and
choosing colors and materials that are more suitable for the playful image that we have established
in the childrens footwear market. Each Skechers Kids line is marketed and packaged separately with
a distinct shoe box. Skechers Kids shoes are available at department stores and specialty and
athletic retailers.
| The Skechers Kids line includes embellishments or adornments such as fresh colors and fabrics from our Skechers adult shoes. Some of these styles are also adapted for toddlers with softer, more pliable outsoles and for infants with soft, leather-sole crib shoes. | ||
| S-Lights is a line of sneakers and sandals with a combined pattern of lights on the outsole and other areas of the shoes. We market and package the S-Lights styles in a shoe box that is distinct from that of other categories in the Skechers Kids line of footwear. | ||
| Skechers Cali for Girls is a line of sneakers, skimmers and sandals for young women designed to typify the California lifestyle. The sneakers are designed primarily with canvas uppers in unique prints, some with patch details, on vulcanized outsoles. The skimmers and flats are designed with many of the same upper materials and outsoles as the sneakers. | ||
| Airators by Skechers is a line of boys sneakers with a foot-cooling system designed to pump air from the heel through to the toes. | ||
| Skechers Super Z-Strap is a line of athletic styled sneakers with a unique z shaped closure system for easy closure. | ||
| Babiez by Skechers is a line of crib shoes for infants. The uppers and outsoles are designed in leather and are extremely flexible for newborn feet. |
Cali Gear by Skechers. Launched in 2007, Cali Gear by Skechers is a new line of nano
liteTM molded footwear for men, women and children. Designed with many of our signature
outsoles as well as uppers, the lightweight footwear is available in a multitude of colors and
patterns consistent with the Skechers image. The majority of styles for children, as well as some
adult styles, are available with Skechers Cali Bits, which are decorative accessories inserted into
designed holes in the uppers. The Skechers Cali Bits are also
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available for purchase and include licensed properties such as The Simpsons and Spiderman. The
Cali Gear footwear is also non-slip and odor-resistant. Primarily displayed on hanging fixtures and
wall units, the footwear is available at department stores, footwear specialty chains and
independents.
FASHION AND STREET BRANDS
The Fashion and Street Division and its brands are marketed and packaged separately from Skechers.
Unltd. by Marc Ecko, Rhino Red and Red by Marc Ecko. Unltd. by Marc Ecko is a line of mens
street-inspired traditional sneakers, fusion sneakers and urban-focused casuals. Rhino Red is a
line of womens classic and fashion-forward fusion sneakers sandals and Mary Janes for young women.
Targeted to the street-savvy 18 to 34 year-old consumer, the footwear reflects Ecko Unltd.s mens
apparel and the Ecko Red womens apparel, and effectively utilizes the globally recognized Rhino
logo on the majority of sneakers and casuals. Within the Rhino Red line is the Red by Marc Ecko
offering, a line of designer dress and dress casual footwear for the urban chic woman. The mens
and womens footwear collections are designed in leather, canvas, mesh, as well as other materials.
Unltd. by Marc Ecko for boys and Rhino Red for girls sneaker lines primarily consist of takedowns
from the adult Marc Ecko footwear lines with additional or different colorways geared toward
children and that reflect the boys and girls Ecko Unltd. and Ecko Red clothing. The licensed
brands are sold through select department stores and specialty retailers.
Zoo York. Zoo York footwear is a line of action sports and lifestyle footwear for men. Zoo
York footwear is designed by Marc Ecko Enterprises and borrows from the color palette and trends
from Zoo York apparel that targets core skaters and those that embrace skate fashion. Zoo York
footwear is available in skate and specialty shops as well as select athletic and department
stores.
310 Motoring. The 310 footwear collection for men utilizes top-quality leathers, a
fashion-forward approach to design and comfort, and materials that are derived from 310 Motorings
customized cars, including wood burl and carbon fiber. A multi-tiered approach, the line consists
of high-end and high-design boots and shoes, sophisticated driving-inspired shoes and boots, and
stylized athletics. 310 footwear is available in select department stores, specialty retailers and
urban independents.
Mark Nason and Siren by Mark Nason. Mark Nason is a sophisticated and fashion forward footwear
collection, marketed to style-conscious men, designed to complement designer denim and dress casual
wear. Primarily crafted and constructed in Italy, the Mark Nason collection is comprised of classic
and modern boots, shoes and sandals with distinctive profiles and luxurious hand-distressed
leathers. The Mark Nason line distinguishes itself with high quality individual styling and may
utilize unique materials such as premium leathers, etched and tattooed leathers, hand-treated,
hand-scraped and hand-cut leathers, hand-treated leather uppers and soles, snakeskin and eel skin.
Siren by Mark Nason is the ultimate accompaniment to designer denim and casual couture for
discerning women. The lines boots are fueled with bold profiles, alluring details and distinct
textures. Handcrafted in Italy, the boots utilize premium leathers, hand-treated details, leather
outsoles, and some may include snakeskin and other exotic materials. The Mark Nason lines are
available in better department stores and boutiques.
SoHo Lab. Targeting 18 to 34 year-old trend-savvy women and men, SoHo Lab is comprised of
stylish dress shoes, boots and sandals. The mens SoHo Lab collection includes classic tailored and
fashion-forward lasts in a variety of styles. The womens styles also include heels and flats. The
footwear is manufactured in Europe, Brazil and China. The mens styles are typically sold in
department stores, specialty stores and independent merchants, while the womens styles are only
available at Skechers retail stores.
PRODUCT DESIGN AND DEVELOPMENT
Our principal goal in product design is to generate new and exciting footwear in all of our
product lines with contemporary and progressive styles and comfort-enhancing performance features.
Targeted to the active, youthful and style-savvy, we design most new styles to be fashionable and
marketable to the 12 to 24 year-old consumer, while substantially all of our lines appeal to the
broader range of 5 to 40 year-old consumers, with an exclusive selection for infants and toddlers.
While some of our shoes have performance features, we generally do not position our shoes in the
marketplace as technical performance shoes.
We believe that our products success is related to our ability to recognize trends in the
footwear markets and to design products that anticipate and accommodate consumers ever-evolving
preferences. We are able to quickly translate the latest fashion trends into stylish, quality
footwear at a reasonable price by analyzing and interpreting current and emerging lifestyle trends.
Lifestyle trend information is compiled and analyzed by our designers from various sources,
including the review and analysis of modern music, television, cinema, clothing, alternative sports
and other trend-setting media; traveling to domestic and international fashion markets to identify
and confirm current trends; consulting with our retail and e-commerce customers for information on
current retail selling
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trends; participating in major footwear trade shows to stay abreast of popular brands,
fashions and styles; and subscribing to various fashion and color information services. In
addition, a key component of our design philosophy is to continually reinterpret and develop our
successful styles in our brands image.
The footwear design process typically begins about nine months before the start of a season.
Our products are designed and developed primarily by our in-house design staff. To promote
innovation and brand relevance, we utilize dedicated design teams, who report to our senior design
executives and focus on each of the mens, womens and childrens categories. In addition, we
utilize outside design firms on an item-specific basis to supplement our internal design efforts.
The design process is extremely collaborative, as members of the design staff frequently meet with
the heads of retail, merchandising, sales, production and sourcing to further refine our products
to meet the particular needs of the target market.
After a design team arrives at a consensus regarding the fashion themes for the coming season,
the designers then translate these themes into our products. These interpretations include
variations in product color, material structure and embellishments, which are arrived at after
close consultation with our production department. Prototype blueprints and specifications are
created and forwarded to our manufacturers for a design prototype. The design prototypes are then
sent back to our design teams. Our major retail customers may also review these new design
concepts. Customer input not only allows us to measure consumer reaction to the latest designs, but
also affords us an opportunity to foster deeper and more collaborative relationships with our
customers. We also occasionally order limited production runs that may initially be tested in our
concept stores. By working closely with store personnel, we obtain customer feedback that often
influences product design and development. Our design teams can easily and quickly modify and
refine a design based on customer input. Generally, the production process can take six months to
nine months from design concept to commercialization.
SOURCING
Factories. Our products are produced by independent contract manufacturers located primarily
in China and, to a lesser extent, in Italy, Vietnam, Brazil and various other countries. We do not
own or operate any manufacturing facilities as we believe that the use of independent manufacturers
substantially increases our production flexibility and capacity while reducing capital expenditures
and avoiding the costs of managing a large production work force.
When possible, we seek to use manufacturers that have previously produced our footwear, which
we believe enhances continuity and quality while controlling production costs. We attempt to
monitor our selection of independent factories to ensure that no one manufacturer is responsible
for a disproportionate amount of our merchandise. We source product for styles that account for a
significant percentage of our net sales from at least four different manufacturers. During 2007,
four of our contract manufacturers accounted for approximately 58.4% of total purchases. One
manufacturer accounted for 29.7%, and two others each accounted for over 10.0% of our total
purchases. To date, we have not experienced difficulty in obtaining manufacturing services.
We finance our production activities in part through the use of interest-bearing open purchase
arrangements with certain of our Asian manufacturers. These facilities currently bear interest at a
rate between 0% and 1.5% for 30 to 60 days financing, depending on the factory. We believe that the
use of these arrangements afford us additional liquidity and flexibility. We do not have any
long-term contracts with any of our manufacturers; however, we have long-standing relationships
with many of our manufacturers and believe our relationships to be good.
We closely monitor sales activity after initial introduction of a product in our concept
stores to determine whether there is substantial demand for a style, thereby aiding us in our
sourcing decisions. Styles that have substantial consumer appeal are highlighted in upcoming
collections or offered as part of our periodic style offerings, while less popular styles can be
discontinued after only a limited production run. We believe that sales in our concept stores can
also help forecast sales in national retail stores, and we share this sales information with our
wholesale customers. Sales, merchandising, production and allocations management analyze historical
and current sales and market data from our wholesale account base and our own retail stores to
develop an internal product quantity forecast that allows us to better manage our future production
and inventory levels. For those styles with high sell-through percentages, we maintain an in-stock
position to minimize the time necessary to fill customer orders by placing orders with our
manufacturers prior to the time we receive customers orders for such footwear.
Production Oversight. To safeguard product quality and consistency, we oversee the key aspects
of production from initial prototype manufacture through initial production runs to final
manufacture. Monitoring of all production is performed in the United States by our in-house
production department and in Asia through an approximately 250-person staff working from our
offices in China. We believe that our Asian presence allows us to negotiate supplier and
manufacturer arrangements more effectively, decrease
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product turnaround time and ensure timely delivery of finished footwear. In addition, we
require our manufacturers to certify that neither convicted, forced or indentured labor (as defined
under U.S. law) nor child labor (as defined by law in the manufacturers country) is used in the
production process, and that compensation will be paid according to local law and that the factory
is in compliance with local safety regulations.
Quality Control. We believe that quality control is an important and effective means of
maintaining the quality and reputation of our products. Our quality control program is designed to
ensure that not only finished goods meet our established design specifications, but also that all
goods bearing our trademarks meet our standards for quality. Our quality control personnel located
in China perform an array of inspection procedures at various stages of the production process,
including examination and testing of prototypes of key raw materials prior to manufacture, samples
and materials at various stages of production and final products prior to shipment. Our employees
are on-site at each of our major manufacturers to oversee production. For some of our lower volume
manufacturers, our staff is on-site during significant production runs or we will perform
unannounced visits to their manufacturing sites to further monitor compliance with our
manufacturing specifications.
ADVERTISING AND MARKETING
With a marketing philosophy of Unseen, Untold, Unsold, we take a targeted approach to
marketing to drive traffic, build brand recognition and properly position our diverse lines within
the marketplace. Senior management is directly involved in shaping our image and the conception,
development and implementation of our advertising and marketing activities. The focus of our
marketing plan is print and television advertising, which is supported by outdoor, trend-influenced
marketing, public relations, promotions and in-store support. In addition, we utilize celebrity
endorsers in our advertisements. We also believe our Internet websites and trade shows are
effective marketing tools to both consumers and corporate accounts. We have historically budgeted
advertising as a percentage of projected net sales.
Advertising. The majority of our advertising is conceptualized by our in-house design team. We
believe that our advertising strategies, methods and creative campaigns are directly related to our
success. Through our lifestyle and image-driven advertising, we generally seek to build and
increase brand awareness by linking the Skechers brand and our fashion and street brands to
youthful, contemporary lifestyles and attitudes. We have built on this approach by featuring
select styles in our lifestyle ads. In addition to our compelling Skechers lifestyle ads, we have
also created product specific ads for our mens lines to appeal to men as well as women who
purchase footwear for men. Our ads are designed to provide merchandise flexibility and to
facilitate the brands and product designs direction of evolving footwear fashions and consumer
preferences.
To further build brand awareness and influence consumer spending, we have selectively signed
endorsement agreements with celebrities whom we believed would reach new markets. In 2006, we
signed pop star Ashlee Simpson to appear in Skechers marketing campaigns through 2007. In past
years, we had similar endorsement agreements for Skechers with singers Carrie Underwood, Christina
Aguilera and Britney Spears, professional basketball player and actor Rick Fox, and actors Robert
Downey, Jr., Matt Dillon and Rob Lowe. From time to time, we may sign other celebrities to endorse
our brand name and image in order to strategically market our products among specific consumer
groups in the future.
In addition to advertising our Skechers branded lines through mens, womens and childrens
ads, we also support Mark Nason, 310, Marc Ecko and Zoo York lines through individual unique print
and/or television advertisements some which may include celebrity endorsees. For Mark Nason, we
have focused on key-selling styles in product-driven ads that captured the brands essence. For
the Marc Ecko footwear brands, Marc Eckos design team has created relevant targeted print and
television commercials for men and women. These include a multi-media mens campaign featuring our
graffiti painted shoe as well as the first commercial for Unltd. by Marc Ecko for boys. In 2007,
singer/actress JoJo became the new face of Rhino Red and appeared in print and outdoor advertising
and a television commercial, and in late 2007, High School Musical stars Ashley Tisdale and Vanessa
Hudgens became the faces of Red by Marc Ecko, appearing in print campaigns. Television commercials
have also been developed and are being run in 2008.
With a targeted approach, our print ads appear regularly in popular fashion and lifestyle
consumer publications, such as GQ, Cosmopolitan, Elle, Lucky, In Style, Seventeen, Maxim, Slam,
Road & Track, and Complex, as well as in weekly publications such as People, Us Weekly, Star,
Sports Illustrated and InTouch, among others.
Our television commercials are produced both in-house and through producers we have utilized
in the past and are familiar with our brands. In 2007, we developed commercials for men, women and
children for our Skechers brands, including our first animated spots for Airators by Skechers and
Cali Gear by Skechers for kids. We have found these to be a cost-effective way to advertise during
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key national and cable programming in key selling seasons. Our media buyer strategically
selects the ideal programs and geographic areas for our commercials for maximum consumer impact.
Outdoor. In an effort to reach consumers where they shop and in high traffic areas as they
travel to and from work or while running errands, we continued our multi-level outdoor campaign
that included kiosks in key malls across the United States, and billboards, transportation systems
and telephone kiosks in North America and Europe. We believe these are effective and efficient
ways to reach a broad range of consumers and leave a lasting impression of our many brands.
Trend-Influenced Marketing/Public Relations. Our public relations objectives are to secure
product placement in key fashion magazines, place our footwear on the feet of trend-setting
celebrities, and garner positive and accurate press on our company. Through our commitment to
aggressively promote our upcoming styles, our products are often featured in leading fashion and
pop culture magazines, as well as in select films and popular television shows. Our footwear and
our company have been prominently displayed and referenced on news and magazine shows including The
Today Show, Good Day L.A., Entertainment Tonight, and E!; and on television programs, including Law
& Order, Entourage, and The Big Idea with Donny Deutsch, among others. We have also amassed an
array of prominent product placements in magazines including Lucky, Seventeen, OK!, Teen Vogue,
CosmoGirl, InStyle, Maxim, Slam, Dime and Footwear News. In addition, our brands have been
associated with cutting edge events and select celebrities, and our product has been seen worn by
trend-setters like Denis Leary, Chris Cornell, Debra Messing, Nicole Richie, Paris Hilton and Jamie
Foxx, among others.
Promotions. By applying creative sales techniques via a broad spectrum of mediums, our
marketing team seeks to build brand recognition and drive traffic to Skechers retail stores,
websites and our retail partners locations. Skechers promotional strategies have encompassed
in-store specials, charity events, product tie-ins and giveaways, and collaborations with national
retailers and radio stations. Our imaginative promotions are consistent with Skechers imaging and
lifestyle.
Visual Merchandising. Our in-house visual merchandising department supports wholesale
customers, distributors and our retail stores by developing displays that effectively leverage our
products at the point of sale. Our point-of-purchase display items include signage, graphics,
displays, counter cards, banners and other merchandising items for each of our brands. These
materials mirror the look and feel of each brand and reinforce the image as well as draw consumers
into stores.
Our visual merchandising coordinators (VMCs) work with our sales force and directly with
our customers to ensure better sell-through at the retail level by generating greater consumer
awareness through Skechers brand displays. Our VMCs communicate with and visit our wholesale
customers on a regular basis to aid in proper display of our merchandise. They also run in-store
promotions to enhance the sale of Skechers footwear and create excitement surrounding the Skechers
brand. We believe that these efforts help stimulate impulse sales and repeat purchases.
Trade Shows. To better showcase our diverse products to footwear buyers in the United States
and Europe, and to distributors around the world, we regularly exhibit at leading trade shows.
Along with specialty trade shows, we exhibit at WSAs The Shoe Show, FFANY, ASR and MAGIC in the
United States, and GDS, MICAM, Bread & Butter, MODA, MIDEC and Whos Next in Europe. Our dynamic,
state-of-the-art trade show exhibits are developed by our in-house architect to showcase our latest
product offerings in a lifestyle setting reflective of each of our brands. By investing in
innovative displays and individual rooms showcasing each line, our sales force can present a sales
plan for each line and buyers are able to truly understand the breadth and depth of our offerings,
thereby optimizing commitments and sales at the retail level. For select non-Skechers branded lines
such as 310, Zoo York and Marc Ecko Footwear, we have created individual exhibits to ensure their
brand integrity.
Internet. We also promote our brands through our e-commerce websites www.skechers.com and
www.soholab.com to consumers who access the Internet. We have also established a unique Internet
website for Mark Nason (www.marknason.com) designed to serve primarily as a marketing tool. These
websites currently enable us to present information on our products, provide a brand experience and
store locations to consumers, and allow consumers the ability to directly order products on the
Internet. These sites also provide us a mechanism for customer feedback as well as allowing us to
receive and respond directly to consumer feedback. Our websites are intended to enhance the
Skechers and fashion brands and increase sales through all our retail channels. Our websites also
allow us to leverage our brand awareness at a lower cost than traditional distribution channels.
PRODUCT DISTRIBUTION CHANNELS
We have four reportable segments domestic wholesale sales, international wholesale sales,
retail sales and e-commerce sales. In the United States, our products are available through a
network of wholesale customers comprised of department, athletic and
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specialty stores. Internationally, our products are available through wholesale customers in
more than 100 countries and territories through our global network of distributors and our
Canadian, Brazilian, Asian and European subsidiaries. Skechers owns and operates retail stores
both domestically and internationally through three integrated retail formatsconcept, factory
outlet and warehouse outlet stores. Each of these channels serves an integral function in the
global distribution of our products. Fourteen distributors have opened 60 distributor-owned
Skechers retail stores in 21 countries as of December 31, 2007.
Domestic Wholesale. We distribute our footwear through the following domestic wholesale
distribution channels: department stores, specialty stores, athletic shoe stores and independent
retailers. Department stores and specialty retailers are the largest distribution channels, but we
believe that we appeal to a variety of wholesale customers, many of whom may operate stores within
the same retail location due to our distinct product lines and variety of styles, from which
retailers can select those lines and styles that best satisfy the fashion, function and price
criteria of their specific customers. Management has a clearly defined growth strategy for each of
our channels of distribution. An integral component of our strategy is to offer our accounts the
highest level of customer service so that our products will be fully represented in existing retail
locations and new locations of each customer.
In an effort to provide knowledgeable and personalized service to our wholesale customers, the
sales force is segregated by product line, each of which is headed by a vice president or national
sales manager. Reporting to each sales manager are knowledgeable account executives and territory
managers. Our vice presidents and national sales managers report to a senior vice president of
sales. All of our vice presidents and national sales managers are compensated on a salary basis,
while our account executives and territory managers are compensated on a commission basis. None of
our domestic sales personnel sells competing products.
We believe that we have developed a loyal customer base through exceptional customer service.
We believe that our close relationships with these accounts help us to maximize their retail
sell-throughs. Our visual merchandise coordinators work with our wholesale customers to ensure that
our merchandise and point-of-purchase marketing materials are properly presented. Sales executives
and merchandise personnel work closely with accounts to ensure that appropriate styles are
purchased for specific accounts and for specific stores within those accounts as well as to ensure
that appropriate inventory levels are carried at each store. Such information is then utilized to
help develop sales projections and determine the product needs of our wholesale customers. The
value-added services we provide our wholesale customers help us maintain strong relationships with
our existing wholesale customers and attract potential new wholesale customers.
International Wholesale. Our products are sold in more than 100 countries and territories
throughout the world. We generate revenues from outside the United States from three principal
sources: (i) direct sales to department stores and specialty retail stores through our subsidiaries
in Canada, France, Germany, Spain, Italy, Portugal, Switzerland, Austria, Malaysia, Thailand, the
Benelux Region, the United Kingdom and Brazil; (ii) sales to foreign distributors who distribute
our footwear to department stores and specialty retail stores in countries and territories across
Eastern Europe, Asia, Latin America, South America, Africa, the Middle East and Australia, among
other regions and (iii) to a lesser extent, royalties from licensees who manufacture and distribute
our non-footwear products outside the United States.
We believe that international distribution of our products represents a significant
opportunity to increase sales and profits. We intend to further increase our share of the
international footwear market by heightening our marketing in those countries in which we currently
have a presence through our international advertising campaigns, which are designed to establish
Skechers as a global brand synonymous with trend-right casual shoes.
| International Subsidiaries |
Europe
We currently distribute product in most of Western Europe through the following
subsidiaries: Skechers USA Ltd., with its offices and showrooms in London, England;
Skechers S.a.r.l., with its offices and showrooms in Lausanne, Switzerland; Skechers USA
France S.A.S., with its offices and showrooms in Paris, France; Skechers USA Deutschland
GmbH, with its offices and showrooms in Dietzenbach, Germany; Skechers USA Iberia, S.L.,
with its offices and showrooms in Madrid, Spain; Skechers USA Benelux B.V., with its
offices and showrooms in Waalwijk, the Netherlands; and Skechers USA Italia S.r.l., with
its offices and showroom in Verona, Italy.
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Skechers-owned retail stores in Europe include eight concept stores and one factory
outlet store located in five countries, including the key locations of Oxford Street in
London, Alstadt District in Düsseldorf and Kalverstraat Street in Amsterdam.
To accommodate our European subsidiaries operations, we operate an approximately
240,000 square foot distribution center in Liege, Belgium. This distribution center is
currently used to store and deliver product to our subsidiaries and retail stores
throughout Europe.
Canada
Merchandising and marketing of our product in Canada is managed by our wholly-owned
subsidiary, Skechers USA Canada, Inc. with its offices and showrooms outside Toronto in
Mississauga, Ontario. Product sold in Canada is primarily sourced from our U.S.
distribution center in Ontario, California. We have two concept stores, one located in
Torontos Eaton Centre, and one in the West Edmonton Mall and one factory outlet store
located in Toronto.
Malaysia and Thailand
Merchandising and marketing of our product in Asia is managed by two of our
wholly-owned subsidiaries, Skechers Malaysia Sdn Bhd and Skechers (Thailand) Ltd. with
their respective offices in Kuala Lumpur, Malaysia and Bangkok, Thailand. Product sold
in Asia is primarily sourced from a third party distribution center in Selangor,
Malaysia. We have four concept stores, one located in Kuala Lumpur, Malaysia, two
located in Selangor, Malaysia, and one in Bangkok, Thailand.
Brazil
Merchandising and marketing of our product in Brazil is managed by our wholly-owned
subsidiary, Skechers Do Brasil Calcados LTDA., with its offices located in Sao Paulo,
Brazil. Product sold in Brazil is primarily shipped directly from our contract
manaufacturers factories in China and occasionally from our U.S. distribution center in
Ontario, California.
| Distributors |
Outside of Western Europe and Canada, our footwear is distributed through an extensive
network of more than 30 distributors, who sell our products to department, athletic and
specialty stores in more than 100 countries around the world. Through agreements with 14 of
these distributors, 60 distributor-owned Skechers retail stores are open in 21 countries,
including 13 stores that were opened in 2007. One distributor-owned store was closed and two
became company operated in 2007.
STORE | NUMBER OF | |||||||
REGION | FORMAT | STORES | LOCATION(1) | |||||
Asia
|
Concept | 4 | Japan (2); Philippines; Taiwan | |||||
Warehouse | 4 | Japan (4) | ||||||
Australia
|
Concept | 1 | Sydney | |||||
Warehouse | 2 | Melbourne, Sydney | ||||||
Central America/South
America
|
Concept | 34 | Chile (10); Columbia (8); Ecuador; El Salvador; Guatemala (2); Panama (4); Peru (2); Venezuela (6) | |||||
Eastern Europe
|
Concept | 7 | Baltics (2); Greece; Poland; Russia (2); Ukraine | |||||
Northern Europe
|
Concept | 1 | Finland | |||||
Middle East
|
Concept | 6 | Saudi Arabia; UAE (5) | |||||
South Africa
|
Concept | 1 | Sandton |
(1) | One store per location except as otherwise noted. |
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The distributors are responsible for their respective stores operations, have ownership
of their respective stores assets and select the broad collection of our products to sell to
consumers in their regions. In order to maintain a globally consistent image, we provide
architectural, graphic and visual guidance and materials for the design of the stores, and we
train the local staff on our products and corporate culture. We intend to expand our
international presence and global recognition of the Skechers brand name by continuing to
sell our footwear to foreign distributors and by opening flagship retail stores with
distributors that have local market expertise.
Retail Stores. We pursue our retail store strategy through our three integrated retail
formats: the concept store, the factory outlet store and the warehouse outlet store. Our
three-store format enables us to promote the full Skechers product offering in an attractive
environment that appeals to a broad group of consumers. In addition, most of our retail stores are
profitable and have a positive effect on our operating results. As of February 15, 2008, we owned
and operated 70 concept stores, 72 factory outlet stores and 35 warehouse outlet stores in the
United States, and 14 concept stores and two factory outlet stores internationally. We closed
three stores and opened 42 new stores in 2007. We plan to open an additional 25 to 30 stores by
the end of 2008.
| Concept Stores. |
Our concept stores are located at either marquee street locations or in major shopping
malls in large metropolitan cities. Our concept stores have a threefold purpose in our
operating strategy. First, concept stores serve as a showcase for a wide range of our product
offering for the current season as we estimate that our average wholesale customer carries no
more than 5% of the complete Skechers line in any one location. Our concept stores showcase
our products in a cutting-edge, open-floor setting, providing the customer with the complete
Skechers story. Second, retail locations are generally chosen to generate maximum marketing
value for the Skechers brand name through signage, store front presentation and interior
design. Domestic locations include concept stores at Times Square and 34th Street in New
York, Hollywood and Highland in Hollywood, Santa Monicas Third Street Promenade, Dallas
Northpark Center, Las Vegas Fashion Show Mall, Seattles Bellevue Square Mall, and Woodfield
Mall outside Chicago. International locations include Oxford Street in London, Alstadt
District in Dusseldorf, Torontos Eaton Centre, Kalverstraat Street in Amsterdam. The stores
are typically designed to create a distinctive Skechers look and feel, and enhance customer
association of the Skechers brand name with current youthful lifestyle trends and styles.
Third, the concept stores serve as marketing and product testing venues. We believe that
product sell-through information and rapid customer feedback derived from our concept stores
enables our design, sales, merchandising and production staff to respond to market changes
and new product introductions. Such responses serve to augment sales and limit our inventory
markdowns and customer returns and allowances. We opened 24 domestic
concept stores and four international concept stores, and we closed one domestic concept store and one international
concept store in 2007.
The typical Skechers concept store is approximately 2,500 square feet, although in
certain markets we have opened concept stores as large as 6,400 square feet or as small as
1,500 square feet. When deciding where to open concept stores, we identify top geographic
markets in the larger metropolitan cities in the United States, Canada, Europe and Asia. When
selecting a specific site, we evaluate the proposed sites traffic pattern, co-tenancies,
sales volume of neighboring concept stores, lease economics and other factors considered
important within the specific location. If we are considering opening a concept store in a
shopping mall, our strategy is to obtain space as centrally located as possible in the mall
where we expect foot traffic to be most concentrated. We believe that the strength of the
Skechers brand name has enabled us to negotiate more favorable terms with shopping malls that
want us to open up concept stores to attract customer traffic to their venues.
| Factory Outlet Stores. |
Our factory outlet stores are generally located in manufacturers direct outlet centers
throughout the United States. In addition, we have two international outlet stores one in
Canada and one in England. Our factory outlet stores provide opportunities for us to sell
discontinued and excess merchandise, thereby reducing the need to sell such merchandise to
discounters at excessively low prices and potentially compromise the Skechers brand image.
Skechers factory outlet stores range in size from approximately 1,900 to 9,000 square feet.
Inventory in these stores is supplemented by certain first-line styles sold at full retail
price points. We opened 11 domestic factory outlet stores in 2007.
| Warehouse Outlet Stores. |
Our free-standing warehouse outlet stores, which are located throughout the United
States, enable us to liquidate excess merchandise, discontinued lines and odd-size inventory
in a cost-efficient manner. Skechers warehouse outlet stores range in size from
approximately 5,200 to 13,500 square feet. Our warehouse outlet stores enable us to sell
discontinued and excess
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merchandise that would otherwise typically be sold to discounters at excessively low
prices, which could otherwise compromise the Skechers brand image. We seek to open our
warehouse outlet stores in areas that are in close proximity to our concept stores in order
to facilitate the timely transfer of inventory that we want to liquidate as soon as
practicable. We opened three new domestic warehouse outlet stores and closed one domestic
warehouse store in 2007.
Electronic Commerce. Our websites, www.skechers.com and www.soholab.com are virtual
storefronts that promote the Skechers and street and fashion brands. Our websites are designed to
provide a positive shopping and brand experience, showcasing our products in an easy-to-navigate
format, allowing consumers to browse our selections and purchase our footwear. This virtual store
has provided a convenient alternative-shopping environment and brand experience. These websites
have become an efficient and effective additional retail distribution channel, and have improved
our customer service.
LICENSING
We believe that selective licensing of the Skechers brand name and our product line names to
manufacturers may broaden and enhance the individual brands without requiring significant capital
investments or additional incremental operating expenses. Our multiple product lines plus
additional subcategories present many potential licensing opportunities on terms with licensees
that we believe will provide more effective manufacturing, distribution or marketing of
non-footwear products. We also believe that the reputation of Skechers and its history in launching
brands has also enabled us to partner with reputable non-footwear brands in order to design and
market their footwear.
As of January 31, 2008, we had 24 active domestic and international licensing agreements in
which we are the licensor. We have international licensing agreements for the design and
distribution of mens and womens active apparel in Israel; mens and womens apparel in select
European countries; bags in select Central and South American countries; watches in the
Philippines, and bags in China.
Additionally, we have signed agreements to design, develop and market footwear for the street
lifestyle apparel brands Ecko Unltd., Ecko Red, Red by Marc Ecko, and Zoo York under the Marc Ecko
Enterprises umbrella.
DISTRIBUTION FACILITIES AND OPERATIONS
We believe that strong distribution support is a critical factor in our operations. Once
manufactured, our products are packaged in shoe boxes bearing bar codes that are shipped either (i)
to our five distribution centers located in Ontario, California, which measure in aggregate
approximately 1.7 million square-feet; (ii) to our approximately 240,000 square-foot distribution
center located in Liege, Belgium or (iii) directly from third-party manufacturers to our other
international customers and other international third party distribution centers. Upon receipt at
either of the distribution centers, merchandise is inspected and recorded in our management
information system and packaged according to customers orders for delivery. Merchandise is shipped
to customers by whatever means each customer requests, which is usually by common carrier. The
distribution centers have multi-access docks, enabling us to receive and ship simultaneously, and
to pack separate trailers for shipments to different customers at the same time. We have an
electronic data interchange system, or EDI system, to which some of our larger customers are
linked. This system allows these customers to automatically place orders with us, thereby
eliminating the time involved in transmitting and inputting orders, and it includes direct billing
and shipping information.
During 2007, we entered into a lease to build a new approximately 1.8 million square foot
distribution facility in Moreno Valley, California. Once completed, we will occupy the facility
under an eleven-year lease with one option to extend the lease four years followed by two options
to extend the lease by additional five-year terms, and we will move out of our existing
distribution facilities in Ontario, California.
BACKLOG
As of December 31, 2007, our backlog was $416.5 million, compared to $322.9 million as of
December 31, 2006. While backlog orders are subject to cancellation by customers, we have not
experienced significant cancellation of orders in the past, and we expect that substantially all
the orders will be shipped in 2008. However, for a variety of reasons, including changes in the
economy, customer demand for our products, the timing of shipments, product mix of customer orders,
the amount of in-season orders and a shift towards tighter lead times within backlog levels,
backlog may not be a reliable measure of future sales for any succeeding period.
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INTELLECTUAL PROPERTY RIGHTS
We own and utilize a variety of trademarks, including the Skechers trademark. We have a
significant number of both registrations and pending applications for our trademarks in the United
States. In addition, we have trademark registrations and trademark applications in approximately 80
foreign countries. We also have design patents and pending design and utility patent applications
in both the United States and approximately 25 foreign countries. We continuously look to increase
the number of our patents and trademarks both domestically and internationally where necessary to
protect valuable intellectual property. We regard our trademarks and other intellectual property as
valuable assets and believe that they have significant value in the marketing of our products. We
vigorously protect our trademarks against infringement, including through the use of cease and
desist letters, administrative proceedings and lawsuits.
We rely on trademark, patent, copyright and trade secret protection, non-disclosure agreements
and licensing arrangements to establish, protect and enforce intellectual property rights in our
logos, tradenames and in the design of our products. In particular, we believe that our future
success will largely depend on our ability to maintain and protect the Skechers trademark and other
key trademarks. Despite our efforts to safeguard and maintain our intellectual property rights, we
cannot be certain that we will be successful in this regard. Furthermore, we cannot be certain that
our trademarks, products and promotional materials or other intellectual property rights do not or
will not violate the intellectual property rights of others, that our intellectual property would
be upheld if challenged, or that we would, in such an event, not be prevented from using our
trademarks or other intellectual property rights. Such claims, if proven, could materially and
adversely affect our business, financial condition and results of operations. In addition, although
any such claims may ultimately prove to be without merit, the necessary management attention to and
legal costs associated with litigation or other resolution of future claims concerning trademarks
and other intellectual property rights could materially and adversely affect our business,
financial condition and results of operations. We have sued and have been sued by third parties for
infringement of intellectual property. It is our opinion that none of these claims has materially
impaired our ability to utilize our intellectual property rights.
The laws of certain foreign countries do not protect intellectual property rights to the same
extent or in the same manner as do the laws of the United States. Although we continue to implement
protective measures and intend to defend our intellectual property rights vigorously, these efforts
may not be successful or the costs associated with protecting our rights in certain jurisdictions
may be prohibitive. From time to time we discover products in the marketplace that are counterfeit
reproductions of our products or that otherwise infringe upon intellectual property rights held by
us. Actions taken by us to establish and protect our trademarks and other intellectual property
rights may not be adequate to prevent imitation of our products by others or to prevent others from
seeking to block sales of our products as violating trademarks and intellectual property rights. If
we are unsuccessful in challenging a third partys products on the basis of infringement of our
intellectual property rights, continued sales of such products by that or any other third party
could adversely impact the Skechers brand, result in the shift of consumer preferences away from
our products and generally have a material adverse effect on our business, financial condition and
results of operations.
COMPETITION
Competition in the footwear industry is intense. Although we believe that we do not compete
directly with any single company with respect to its entire range of products, our products compete
with other branded products within their product category as well as with private label products
sold by retailers, including some of our customers. Our utility footwear and casual shoes compete
with footwear offered by companies such as The Timberland Company, Dr. Martens, Kenneth Cole
Productions Inc., Steven Madden, Ltd., Wolverine World Wide, Inc., V.F. Corporation, and CROCS,
Inc. Our athletic lifestyle shoes compete with footwear offered by companies such as Nike, Inc.,
adidas AG, Puma AG, New Balance Athletic Shoe, Inc. and K-Swiss Inc. Our childrens shoes compete
with footwear offered by companies such as Collective Brands Inc. In varying degrees, depending on
the product category involved, we compete on the basis of style, price, quality, comfort and brand
name prestige and recognition, among other considerations. These and other competitors pose
challenges to our market share in our major domestic markets and may make it more difficult to
establish our products in Europe, Asia and other international regions. We also compete with
numerous manufacturers, importers and distributors of footwear for the limited shelf space
available for the display of such products to the consumer. Moreover, the general availability of
contract manufacturing capacity allows ease of access by new market entrants. Many of our
competitors are larger, have been in existence for a longer period of time, have achieved greater
recognition for their brand names, have captured greater market share and/or have substantially
greater financial, distribution, marketing and other resources than we do. We cannot be certain
that we will be able to compete successfully against present or future competitors, or that
competitive pressures will not have a material adverse effect on our business, financial condition
and results of operations.
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EMPLOYEES
As of February 1, 2008, we employed 4,182 persons, 2,157 of whom were employed on a full-time
basis and 2,025 of whom were employed on a part-time basis. None of our employees are subject to a
collective bargaining agreement. We believe that our relations with our employees are satisfactory.
ITEM 1A. RISK FACTORS
In addition to the other information in this annual report, the following factors should be
considered in evaluating us and our business.
Our Future Success Depends On Our Ability To Respond To Changing Consumer Demands, Identify And
Interpret Fashion Trends And Successfully Market New Products.
The footwear industry is subject to rapidly changing consumer demands and fashion trends.
Accordingly, we must identify and interpret fashion trends and respond in a timely manner. Demand
for and market acceptance of new products are uncertain and achieving market acceptance for new
products generally requires substantial product development and marketing efforts and expenditures.
If we do not continue to meet changing consumer demands and develop successful styles in the
future, our growth and profitability will be negatively impacted. We frequently make decisions
about product designs and marketing expenditures several months in advance of the time when
consumer acceptance can be determined. If we fail to anticipate, identify or react appropriately to
changes in styles and trends or are not successful in marketing new products, we could experience
excess inventories, higher than normal markdowns or an inability to profitably sell our products.
Because of these risks, a number of companies in the footwear industry specifically, and others in
the fashion and apparel industry in general, have experienced periods of rapid growth in revenues
and earnings and thereafter periods of declining sales and losses, which in some cases have
resulted in companies in these industries ceasing to do business. Similarly, these risks could have
a material adverse effect on our results of operations or financial condition.
Our Business And The Success Of Our Products Could Be Harmed If We Are Unable To Maintain Our Brand
Image.
Our success to date has been due in large part to the strength of the Skechers brand, and to a
lesser degree, the reputation of our fashion brands. If we are unable to timely and appropriately
respond to changing consumer demand, our brand name and brand image may be impaired. Even if we
react appropriately to changes in consumer preferences, consumers may consider our brand image to
be outdated or associate our brand with styles of footwear that are no longer popular. In the past,
several footwear companies including ours have experienced periods of rapid growth in revenues and
earnings followed by periods of declining sales and losses. Our business may be similarly affected
in the future.
Our Business May Be Negatively Impacted As A Result Of Changes In The Economy.
Our business depends on the general economic environment and levels of consumer spending in
the United States and other parts of the world that affect not only the ultimate consumer, but also
retailers, who are our primary direct customers. Purchases of footwear tend to decline in periods of
recession or uncertainty regarding future economic prospects, when consumer spending, particularly
on discretionary items, declines. During periods of recession or economic uncertainty, we may not
be able to maintain or increase our sales to existing customers, make sales to new customers, open
and operate new retail stores, maintain sales levels at our existing stores, maintain or increase
our international operations on a profitable basis, or maintain or improve our earnings from
operations as a percentage of net sales. In addition, the continued threat of terrorist attacks
throughout the world similar to those on September 11, 2001, and the military action, or possible
military action, taken by the United States and other nations in Iraq or other countries may cause
significant disruption to commerce throughout the world. As a result, our operating results may be
adversely and materially affected by downward trends in the domestic economy or the occurrence of
events that slow the global economy or, more particularly, result in delays or cancellations of
purchase orders for our products.
Our Business Could Be Harmed If We Fail To Maintain Proper Inventory Levels.
We place orders with our manufacturers for some of our products prior to the time we receive
all of our customers orders. We do this to minimize purchasing costs, the time necessary to fill
customer orders and the risk of non-delivery. We also maintain an
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inventory of certain products that we anticipate will be in greater demand. However, we may be
unable to sell the products we have ordered in advance from manufacturers or that we have in our
inventory. Inventory levels in excess of customer demand may result in inventory write-downs, and
the sale of excess inventory at discounted prices could significantly impair our brand image and
have a material adverse effect on our operating results and financial condition. Conversely, if we
underestimate consumer demand for our products or if our manufacturers fail to supply the quality
products that we require at the time we need them, we may experience inventory shortages. Inventory
shortages might delay shipments to customers, negatively impact retailer and distributor
relationships, and diminish brand loyalty.
We Face Intense Competition, Including Competition From Companies With Significantly Greater
Resources Than Ours, And If We Are Unable To Compete Effectively With These Companies, Our Market
Share May Decline And Our Business Could Be Harmed.
We face intense competition in the footwear industry from other established companies. A
number of our competitors have significantly greater financial, technological, engineering,
manufacturing, marketing and distribution resources than we do. Their greater capabilities in these
areas may enable them to better withstand periodic downturns in the footwear industry, compete more
effectively on the basis of price and production and more quickly develop new products. In
addition, new companies may enter the markets in which we compete, further increasing competition
in the footwear industry.
We believe that our ability to compete successfully depends on a number of factors, including
the style and quality of our products and the strength of our brand name, as well as many factors
beyond our control. We may not be able to compete successfully in the future, and increased
competition may result in price reductions, reduced profit margins, loss of market share and an
inability to generate cash flows that are sufficient to maintain or expand our development and
marketing of new products, which would adversely impact the trading price of our Class A Common
Stock.
We Depend Upon A Relatively Small Group Of Customers For A Large Portion Of Our Sales.
During 2007, 2006 and 2005, our net sales to our five largest customers accounted for
approximately 25.3%, 24.9%, and 25.4% of total net sales, respectively. No customer accounted for
more than 10% of our net sales during 2007, 2006 and 2005. One customer accounted for 10.0% and
12.0% of net trade receivables at December 31, 2007 and December 31, 2006, respectively. Although
we have long-term relationships with many of our customers, our customers do not have a contractual
obligation to purchase our products and we cannot be certain that we will be able to retain our
existing major customers. Furthermore, the retail industry regularly experiences consolidation,
contractions and closings which may result in our loss of customers or our inability to collect
accounts receivable of major customers. If we lose a major customer, experience a significant
decrease in sales to a major customer or are unable to collect the accounts receivable of a major
customer, our business could be harmed.
We May Be Unable To Successfully Execute Our Growth Strategy Or Maintain Our Growth.
Although our company has generally exhibited steady growth since we began operations, we had a
decrease in net sales in the past and our rate of growth has declined at times as well, and we may
experience similar decreases in net sales or declines in rate of growth again in the future. Our
ability to grow in the future depends upon, among other things, the continued success of our
efforts to maintain our brand image and expand our footwear offerings and distribution channels.
As our business grows, we may need to improve and enhance our overall financial and
managerial controls, reporting systems and procedures to effectively manage our growth. We may be
unable to successfully implement our current growth strategy or other growth strategies or
effectively manage our growth, any of which would negatively impact our business, results of
operations and financial condition. Furthermore, in anticipation of continued increases in net sales,
we have significantly expanded our infrastructure and workforce to achieve economies of scale.
Because these expenses are mostly fixed in the short term, our operating results and margins will
be adversely impacted if we do not continue to grow as anticipated.
Our International Sales And Manufacturing Operations Are Subject To The Risks Of Doing Business
Abroad, Particularly In China, Which Could Affect Our Ability To Sell Or Manufacture Our Products
In International Markets, Obtain Products From Foreign Suppliers Or Control The Costs Of Our
Products.
Substantially all of our net sales during the year ended December 31, 2007 were derived from
sales of footwear manufactured in foreign countries, with most manufactured in China and, to a
lesser extent, in Italy, Vietnam and Brazil. We also sell our footwear in several foreign countries
and plan to increase our international sales efforts as part of our growth strategy. Foreign
manufacturing and sales are subject to a number of risks, including the following: political and
social unrest, including the military presence in Iraq and terrorism; changing economic conditions,
including higher labor costs; increased costs of raw materials; currency exchange rate
fluctuations; labor shortages and work stoppages; electrical shortages; transportation delays; loss
or damage to products in transit; expropriation; nationalization; the adjustment, elimination or
imposition of domestic and international duties, tariffs, quotas, import
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and export controls and other non-tariff barriers; exposure to different legal standards
(particularly with respect to intellectual property); compliance with foreign laws; and changes in
domestic and foreign governmental policies. We have not, to date, been materially affected by any
such risks, but we cannot predict the likelihood of such developments occurring or the resulting
long-term adverse impact on our business, results of operations or financial condition.
In particular, because most of our products are manufactured in China, the possibility of
adverse changes in trade or political relations with China, political instability in China,
increases in labor costs, the occurrence of prolonged adverse weather conditions or a natural
disaster such as an earthquake or typhoon in China, or the outbreak of a pandemic disease such as
the Avian Flu in China could severely interfere with the manufacture and/or shipment of our
products and would have a material adverse effect on our operations. In addition, electrical
shortages, labor shortages or work stoppages may extend the production time necessary to produce
our orders, and there may be circumstances in the future where we may have to incur premium freight
charges to expedite the delivery of product to our customers. If we incur a significant amount of
premium charges to airfreight product for our customers, our gross profit will be negatively
affected if we are unable to collect those charges.
Currency Exchange Rate Fluctuations In China Could Result In Higher Costs And Decreased Margins.
Our manufacturers located in China may be subject to the effects of exchange rate fluctuations
should the Chinese currency not remain stable with the U.S. dollar. The value of the Chinese
currency depends to a large extent on the Chinese governments policies and Chinas domestic and
international economic and political developments. Since 1994, the official exchange rate for the
conversion of the Chinese currency was pegged to the U.S. dollar at a virtually fixed rate of
approximately 8.28 Yuan per U.S. dollar. However, on July 21, 2005, the Chinese government revalued
the Yuan by 2.1%, setting the exchange rate at 8.11 Yuan per U.S. dollar, and adopted a more
flexible system based on a trade-weighted basket of foreign currencies of Chinas main trading
partners. Under the new managed float policy, the exchange rate of the Yuan may shift each day up
to 0.3% in either direction from the previous days close, and as a result, the exchange rate
measured 7.29 Yuan per U.S. dollar at December 31, 2007. The valuation of the Yuan may continue to
increase incrementally over time should the China central bank allow it to do so, which could
significantly increase labor and other costs incurred in the production of our footwear in China,
resulting in an adverse effect on our results of operations and financial condition.
The Potential Imposition Of Additional Duties, Quotas, Tariffs And Other Trade Restrictions Could
Have An Adverse Impact On Our Sales And Profitability.
All of our products manufactured overseas and imported into the United States, the European
Union (EU) and other countries are subject to customs duties collected by customs authorities.
Customs information submitted by us is routinely subject to review by customs authorities. We are
unable to predict whether additional customs duties, quotas, tariffs, anti-dumping duties,
safeguard measures, cargo restrictions to prevent terrorism or other trade restrictions may be
imposed on the importation of our products in the future. Such actions could result in increases
in the cost of our products generally and might adversely affect the sales and profitability of
Skechers and the imported footwear industry as a whole.
Our Quarterly Revenues And Operating Results Fluctuate As A Result Of A Variety Of Factors,
Including Seasonal Fluctuations In Demand For Footwear, Delivery Date Delays And Potential
Fluctuations In Our Annualized Tax Rate, Which May Result In Volatility Of Our Stock Price.
Our quarterly revenues and operating results have varied significantly in the past and can be
expected to fluctuate in the future due to a number of factors, many of which are beyond our
control. Our major customers generally have no obligation to purchase forecasted amounts and may
cancel orders, change delivery schedules or change the mix of products ordered with minimal notice
and without penalty. As a result, we may not be able to accurately predict our quarterly sales. In
addition, sales of footwear products have historically been somewhat seasonal in nature with the
strongest sales generally occurring in our second and third quarters for the back-to-school selling
season. Back-to-school sales typically ship in June, July and August, and delays in the timing,
cancellation, or rescheduling of these customer orders and shipments by our wholesale customers
could negatively impact our net sales and results of operations for our second or third quarters.
More specifically, the timing of when products are shipped is determined by the delivery schedules
set by our wholesale customers, which could cause sales to shift between our second and third
quarters. Because our expense levels are partially based on our expectations of future net sales,
our expenses may be disproportionately large relative to our revenues, and we may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue shifts, which could
have a material adverse effect on our operating results.
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Our annualized tax rate is based on projections of our domestic and international operating
results for the year, which we review and revise as necessary at the end of each quarter, and it is
highly sensitive to fluctuations in projected international earnings. Any quarterly fluctuations in
our annualized tax rate that may occur could have a material impact on our quarterly operating
results. As a result of these specific and other general factors, our operating results will likely
vary from quarter to quarter and the results for any particular quarter may not be necessarily
indicative of results for the full year. Any shortfall in revenues or net income from levels
expected by securities analysts and investors could cause a decrease in the trading price of our
Class A Common Stock.
We Rely On Independent Contract Manufacturers And, As A Result, Are Exposed To Potential
Disruptions In Product Supply.
Our footwear products are currently manufactured by independent contract manufacturers. During
2007 and 2006, the top four manufacturers of our products produced approximately 58.4% and 59.6% of
our total purchases, respectively. One manufacturer accounted for 29.7% and 30.8% of total
purchases during 2007 and 2006, respectively. Two other manufacturers each accounted for over
10.0% of our total purchases during 2007 and 2006. We do not have long-term contracts with our
manufacturers, and we compete with other footwear companies for production facilities. We could
experience difficulties with these manufacturers, including reductions in the availability of
production capacity, failure to meet our quality control standards, failure to meet production
deadlines or increased manufacturing costs. In particular, manufacturers in China are facing a
labor shortage as migrant workers seek better wages and working conditions in farming and other
vocations, and if this trend continues, our current manufacturers operations could be adversely
affected.
If our current manufacturers cease doing business with us, we could experience an interruption
in the manufacture of our products. Although we believe that we could find alternative
manufacturers, we may be unable to establish relationships with alternative manufacturers that will
be as favorable as the relationships we have now. For example, new manufacturers may have higher
prices, less favorable payment terms, lower manufacturing capacity, lower quality standards or
higher lead times for delivery. If we are unable to provide products consistent with our standards
or the manufacture of our footwear is delayed or becomes more expensive, this could result in our
customers canceling orders, refusing to accept deliveries or demanding reductions in purchase
prices, any of which could have a material adverse effect on our business and results of
operations.
Our Business Could Be Harmed If Our Contract Manufacturers, Suppliers Or Licensees Violate Labor,
Trade Or Other Laws.
We require our independent contract manufacturers, suppliers and licensees to operate in
compliance with applicable laws and regulations. Manufacturers are required to certify that neither
convicted, forced or indentured labor (as defined under United States law) nor child labor (as
defined by law in the manufacturers country) is used in the production process, that compensation
is paid in accordance with local law and that their factories are in compliance with local safety
regulations. Although we promote ethical business practices and our sourcing personnel periodically
visit and monitor the operations of our independent contract manufacturers, suppliers and
licensees, we do not control them or their labor practices. If one of our independent contract
manufacturers, suppliers or licensees violates labor or other laws or diverges from those labor
practices generally accepted as ethical in the United States, it could result in adverse publicity
for us, damage our reputation in the United States or render our conduct of business in a
particular foreign country undesirable or impractical, any of which could harm our business.
In addition, if we, or our foreign manufacturers, violate United States or foreign trade laws
or regulations, we may be subject to extra duties, significant monetary penalties, the seizure and
the forfeiture of the products we are attempting to import or the loss of our import privileges.
Possible violations of United States or foreign laws or regulations could include inadequate record
keeping of our imported products, misstatements or errors as to the origin, quota category,
classification, marketing or valuation of our imported products, fraudulent visas or labor
violations. The effects of these factors could render our conduct of business in a particular
country undesirable or impractical and have a negative impact on our operating results.
Our Operating Results Could Be Negatively Impacted If Our Sales Are Concentrated In Any One Style
Or Group Of Styles.
If any one style or group of similar styles of our footwear were to represent a substantial
portion of our net sales, we could be exposed to risk should consumer demand for such style or
group of styles decrease in subsequent periods. We attempt to mitigate this risk by offering a
broad range of products, and no style comprised over 5% of our gross wholesale sales during 2007 or
2006. However, this may change in the future and fluctuations in sales of any given style that
represents a significant portion of our future net sales could have a negative impact on our
operating results.
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Our Strategies Involve A Number Of Risks That Could Prevent Or Delay Any Successful Opening Of New
Stores As Well As Impact The Performance Of Our Existing Stores.
Our ability to open and operate new stores successfully depends on many factors, including,
among others, our ability to identify suitable store locations, the availability of which is
outside of our control; negotiate acceptable lease terms, including desired tenant improvement
allowances; source sufficient levels of inventory to meet the needs of new stores; hire, train and
retain store personnel; successfully integrate new stores into our existing operations; and satisfy
the fashion preferences in new geographic areas.
In addition, some or a substantial number of new stores could be opened in regions of the
United States in which we currently have few or no stores. Any expansion into new markets may
present competitive, merchandising and distribution challenges that are different from those
currently encountered in our existing markets. Any of these challenges could adversely affect our
business and results of operations. In addition, to the extent that any new store openings are in
existing markets, we may experience reduced net sales volumes in existing stores in those markets.
Many Of Our Retail Stores Depend Heavily On The Customer Traffic Generated By Shopping And Factory
Outlet Malls Or By Tourism.
Many of our concept stores are located in shopping malls and some of our factory outlet stores
are located in manufacturers outlet malls where we depend on obtaining prominent locations and the
overall success of the malls to generate customer traffic. We cannot control the development of new
malls, the availability or cost of appropriate locations within existing or new malls or the
success of individual malls. Some of our concept stores occupy street locations that are heavily
dependent on customer traffic generated by tourism. Any substantial decrease in tourism resulting
from political, social or military events, a downturn in the economy or otherwise, is likely to
adversely affect sales in our existing stores, particularly those with street locations. The
effects of these factors could hinder our ability to open retail stores in new markets or reduce
sales of particular existing stores, which could negatively affect our operating results.
We Depend On Key Personnel To Manage Our Business Effectively In A Rapidly Changing Market, And If
We Are Unable To Retain Existing Personnel, Our Business Could Be Harmed.
Our future success depends upon the continued services of Robert Greenberg, Chairman of the
Board and Chief Executive Officer, Michael Greenberg, President, and David Weinberg, Executive Vice
President and Chief Operating Officer. The loss of the services of any of these individuals or any
other key employee could harm us. Our future success also depends on our ability to identify,
attract and retain additional qualified personnel. Competition for employees in our industry is
intense and we may not be successful in attracting and retaining such personnel.
The Disruption, Expense And Potential Liability Associated With Existing And Unanticipated Future
Litigation Against Us Could Have A Material Adverse Effect On Our Business, Results Of Operations
And Financial Condition.
We are subject to various legal proceedings and threatened legal proceedings from time to time
as part of our business. We are not currently a party to any legal proceedings or aware of any
threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, we
believe would have a material adverse effect on our business, results of operations or financial
condition. However, any unanticipated litigation in the future, regardless of its merits, could
significantly divert managements attention from our operations and result in substantial legal
fees to us. Further, there can be no assurance that any actions that have been or will be brought
against us will be resolved in our favor or, if significant monetary judgments are rendered against
us, that we will have the ability to pay such judgments. Such disruptions, legal fees and any
losses resulting from these claims could have a material adverse effect on our business, results of
operations and financial condition.
Our Ability To Compete Could Be Jeopardized If We Are Unable To Protect Our Intellectual Property
Rights Or If We Are Sued For Intellectual Property Infringement.
We believe that our trademarks, design patents and other proprietary rights are important to
our success and our competitive position. We use trademarks on nearly all of our products and
believe that having distinctive marks that are readily identifiable is an important factor in
creating a market for our goods, in identifying us and in distinguishing our goods from the goods
of others. We consider our Skechers®, S in Shield Design® and Performance-S Shifted Design®
trademarks to be among our most valuable assets, and we have registered these trademarks in many
countries. In addition, we own many other trademarks that we utilize in marketing our products. We
also have a number of design patents and a limited number of utility patents covering components
and features used
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in various shoes. We believe that our patents and trademarks are generally sufficient to
permit us to carry on our business as presently conducted. While we vigorously protect our
trademarks against infringement, we cannot assure you that we will be able to secure patents or
trademark protection for our intellectual property in the future or that protection will be
adequate for future products. Further, we have been sued for patent and trademark infringement and
cannot be sure that our activities do not and will not infringe on the intellectual property rights
of others. If we are compelled to prosecute infringing parties, defend our intellectual property or
defend ourselves from intellectual property claims made by others, we may face significant expenses
and liability as well as the diversion of managements attention from our business, each of which
could negatively impact our business or financial condition.
In addition, the laws of foreign countries where we source and distribute our products may not
protect intellectual property rights to the same extent as do the laws of the United States. We
cannot assure you that the actions we have taken to establish and protect our trademarks and other
intellectual property rights outside the United States will be adequate to prevent imitation of our
products by others or, if necessary, successfully challenge another partys counterfeit products or
products that otherwise infringe on our intellectual property rights on the basis of trademark or
patent infringement. Continued sales of these products could adversely affect our sales and our
brand and result in the shift of consumer preference away from our products. We may face
significant expenses and liability in connection with the protection of our intellectual property
rights outside the United States, and if we are unable to successfully protect our rights or
resolve intellectual property conflicts with others, our business or financial condition could be
adversely affected.
Natural Disasters Or A Decline In Economic Conditions In California Could Increase Our Operating
Expenses Or Adversely Affect Our Sales Revenue.
A substantial portion of our operations are located in California, including 46 of our retail
stores, our headquarters in Manhattan Beach, our current domestic distribution center in Ontario
and our future domestic distribution center in Moreno Valley. Because a significant portion of our
net sales is derived from sales in California, a decline in the economic conditions in California,
whether or not such decline spreads beyond California, could materially adversely affect our
business. Furthermore, a natural disaster or other catastrophic event, such as an earthquake or
wild fires affecting California, could significantly disrupt our business including the operation
of our only domestic distribution center. We may be more susceptible to these issues than our
competitors whose operations are not as concentrated in California.
One Principal Stockholder Is Able To Control Substantially All Matters Requiring A Vote Of Our
Stockholders And His Interests May Differ From The Interests Of Our Other Stockholders.
As of December 31, 2007, Robert Greenberg, Chairman of the Board and Chief Executive Officer,
beneficially owned 78.1% of our outstanding Class B Common Stock and members of Mr. Greenbergs
immediate family beneficially owned the remainder of our outstanding Class B Common Stock. The
holders of Class A Common Stock and Class B Common Stock have identical rights except that holders
of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock
are entitled to ten votes per share on all matters submitted to a vote of our stockholders. As a
result, as of December 31, 2007, Mr. Greenberg beneficially owned approximately 62.1% of the
aggregate number of votes eligible to be cast by our stockholders, and together with shares
beneficially owned by other members of his immediate family, he beneficially owned approximately
79.6% of the aggregate number of votes eligible to be cast by our stockholders. Mr. Greenberg may
have different interests than our other stockholders, and because he is able to control
substantially all matters requiring approval by our stockholders, he may direct the operations of
our business in a manner contrary to the interests of our other stockholders. Matters that require
the approval of our stockholders include the election of directors and the approval of mergers or
other business combination transactions. Mr. Greenberg also has control over our management and
affairs. As a result of such control, certain transactions are not possible without the approval
of Mr. Greenberg, including proxy contests, tender offers, open market purchase programs or other
transactions that can give our stockholders the opportunity to realize a premium over the
then-prevailing market prices for their shares of our Class A Common Stock. The differential in the
voting rights may adversely affect the value of our Class A Common Stock to the extent that
investors or any potential future purchaser view the superior voting rights of our Class B Common
Stock to have value.
Our Charter Documents And Delaware Law May Inhibit A Takeover, Which May Cause A Decline In The
Value Of Our Stock.
Provisions of Delaware law, our certificate of incorporation or our bylaws could make it more
difficult for a third party to acquire us, even if closing such a transaction would be beneficial
to our stockholders. Mr. Greenbergs substantial beneficial ownership position, together with the
authorization of Preferred Stock, the disparate voting rights between our Class A Common Stock and
Class B Common Stock, the classification of our Board of Directors and the lack of cumulative
voting in our certificate of incorporation and
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bylaws, may have the effect of delaying, deferring or preventing a change in control, may
discourage bids for our Class A Common Stock at a premium over the market price of the Class A
Common Stock and may adversely affect the market price of our Class A Common Stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters and additional administrative offices are located at four premises
in Manhattan Beach, California, which consist of an aggregate of approximately 100,000 square feet.
We own and lease portions of our corporate headquarters and administrative offices. The property
leases expire between October 2010 and February 2012, with options to extend these leases in some
cases, and the current aggregate annual rent for the leased property is approximately $0.5 million.
Also, construction commenced in 2005 on another corporate facility in Manhattan Beach, California
that is expected to be approximately 55,000 square feet. The exterior of the facility was
completed in 2007, and we are currently working on the interior improvements and we expect to move
in during 2008.
Our U.S. distribution center consists of four leased facilities and one that we own, which are
located in Ontario, California. The four leased facilities aggregate approximately 1,407,000 square
feet, with an annual base rent of approximately $5.3 million. The owned distribution facility is
approximately 264,000 square feet. The property leases expire between May 2009 and May 2011, and
these leases contain rent escalation provisions. During 2007, we entered into a lease to build a
new approximately 1.8 million square foot distribution facility in Moreno Valley, California. Once
completed, we will occupy the facility under an eleven-year lease with one option to extend the
lease four years followed by two options to extend the lease by additional five-year terms, and we
will move out of our existing distribution facilities in Ontario, California. Base rent for the
new facility will be $679,540 per month for month 1 through month 60 and $788,267 per month for
month 61 through month 132.
Our European distribution center consists of a 240,000 square-foot facility in Liege, Belgium
under a 25-year operating lease with base rent of approximately $1.3 million per year. The lease
provides for first right of refusal on three facilities planned for development, allowing for
expansion up to a total of approximately 735,000 square feet. We believe that the capacity
available to us within our lease agreement should allow for further growth of our international
operations. The lease agreement also provides for early termination rights at five-year intervals
beginning in February 2007, pending notification as prescribed in the lease, of which the first
such right was not exercised.
All of our domestic retail stores and showrooms are leased with terms expiring between
February 2008 and January 2019. The leases provide for rent escalations tied to either increases in
the lessors operating expenses, fluctuations in the consumer price index in the relevant
geographical area or a percentage of the stores gross sales in excess of the base annual rent.
Total base rent expense related to our domestic retail stores and showrooms was $24.9 million for
the year ended December 31, 2007.
We also lease all of our international administrative offices, retail stores and showrooms
located in Brazil, Malaysia, Thailand, Canada, Switzerland, United Kingdom, Germany, France, Spain,
Italy, and Netherlands. The property leases expire at various dates between February 2008 and
September 2018. Total rent for the leased properties aggregated approximately $7.4 million for the
year ended December 31, 2007.
ITEM 3. LEGAL PROCEEDINGS
See note 13 to the financial statements on page 56 of this annual report for a discussion of
legal proceedings as required under applicable SEC disclosure rules and regulations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our security holders to be voted on during the fourth quarter of
2007.
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our Class A Common Stock trades on the New York Stock Exchange under the symbol SKX. The
following table sets forth, for the periods indicated, the high and low sales prices of our Class A
Common Stock.
HIGH | LOW | |||||||
YEAR ENDED DECEMBER 31, 2007 |
||||||||
First Quarter |
$ | 38.03 | $ | 31.95 | ||||
Second Quarter |
36.87 | 28.41 | ||||||
Third Quarter |
30.44 | 17.36 | ||||||
Fourth Quarter |
25.57 | 18.75 | ||||||
YEAR ENDED DECEMBER 31, 2006 |
||||||||
First Quarter |
$ | 25.04 | $ | 14.80 | ||||
Second Quarter |
28.35 | 21.19 | ||||||
Third Quarter |
26.00 | 19.70 | ||||||
Fourth Quarter |
33.58 | 23.51 |
HOLDERS
As of February 1, 2008, there were 101 holders of record of our Class A Common Stock
(including holders who are nominees for an undetermined number of beneficial owners) and 16 holders
of record of our Class B Common Stock. These figures do not include beneficial owners who hold
shares in nominee name. The Class B Common Stock is not publicly traded but each share is
convertible upon request of the holder into one share of Class A Common Stock.
DIVIDEND POLICY
Since our conversion from an S Corporation to a C Corporation prior to the initial public
offering of our Class A Common Stock in 1999, earnings have been and will be retained for the
foreseeable future in the operations of our business. We have not declared or paid any cash
dividends on our Class A Common Stock and do not anticipate paying any cash dividends in the
foreseeable future. Our current policy is to retain all of our earnings to finance the growth and
development of our business.
EQUITY COMPENSATION PLAN INFORMATION
Our equity compensation plan information is provided as set forth in Part III, Item 12 of this
annual report.
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PERFORMANCE GRAPH
The following graph demonstrates the total return to stockholders of our companys Class A
Common Stock from December 31, 2002 to December 31, 2007, relative to the performance of the
Russell 2000 Index, which includes our Class A Common Stock, and our peer group index, which
consists of seven companies believed to be engaged in similar businesses: Nike, Inc., adidas AG,
K-Swiss Inc., Kenneth Cole Productions, Inc., Steven Madden, Ltd., The Timberland Company and
Wolverine World Wide, Inc. The Stride Rite Corporation was removed from the peer group index
because its stock is no longer actively traded after being acquired by Payless ShoeSource, Inc. in
August 2007.
The graph assumes an investment of $100 on December 31, 2002 in each of our companys Class A
Common Stock and the stocks comprising each of the Russell 2000 Index and the customized peer group
index. Each of the indices assumes that all dividends were reinvested. The stock performance of
our companys Class A Common Stock shown on the graph is not necessarily indicative of future
performance. We will not make nor endorse any predictions as to our future stock performance.
![(PERFORMANCE GRAPH)](https://www.sec.gov/Archives/edgar/data/0001065837/000095012408000975/v38308v3830801.gif)
Company/Index | 12/31/02 | 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | ||||||||||||||||||||||||||
Skechers U.S.A., Inc. |
$ | 100.00 | $ | 96.00 | $ | 152.65 | $ | 180.45 | $ | 392.34 | $ | 229.80 | ||||||||||||||||||||
Russell 2000 |
100.00 | 147.25 | 174.24 | 182.18 | 215.64 | 212.26 | ||||||||||||||||||||||||||
Custom Peer Group |
100.00 | 153.96 | 203.47 | 202.10 | 227.13 | 288.77 | ||||||||||||||||||||||||||
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth our companys selected consolidated financial data as of and
for each of the years in the five-year period ended December 31, 2007 and should be read in
conjunction with our audited consolidated financial statements and notes thereto included under
Part II, Item 8 of this annual report.
(In thousands, except net earnings (loss) per share)
YEARS ENDED DECEMBER 31, | ||||||||||||||||||||
STATEMENT OF EARNINGS DATA: | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||||||
Net sales |
$ | 1,394,181 | $ | 1,205,368 | $ | 1,006,477 | $ | 920,322 | $ | 834,976 | ||||||||||
Gross profit |
599,989 | 523,346 | 420,482 | 370,857 | 317,686 | |||||||||||||||
Earnings (loss) from operations |
112,930 | 112,544 | 76,296 | 49,245 | (1,347 | ) | ||||||||||||||
Earnings (loss) before income taxes |
118,305 | 112,648 | 72,797 | 38,720 | (10,373 | ) | ||||||||||||||
Net earnings (loss) |
75,686 | 70,994 | 44,717 | 23,553 | (11,867 | ) | ||||||||||||||
Net earnings (loss) per share:(1)
Basic |
1.67 | 1.73 | 1.13 | 0.61 | (0.31 | ) | ||||||||||||||
Diluted |
1.63 | 1.59 | 1.06 | 0.59 | (0.31 | ) | ||||||||||||||
Weighted average shares:(1)
Basic |
45,262 | 41,079 | 39,686 | 38,638 | 37,840 | |||||||||||||||
Diluted |
46,741 | 46,139 | 44,518 | 39,800 | 37,840 |
AS OF DECEMBER 31, | ||||||||||||||||||||
BALANCE SHEET DATA: | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||||||
Working capital |
$ | 523,888 | $ | 450,787 | $ | 361,210 | $ | 313,883 | $ | 275,124 | ||||||||||
Total assets |
827,977 | 737,053 | 581,957 | 518,653 | 466,533 | |||||||||||||||
Long-term debt, excluding current portion |
16,462 | 106,805 | 107,288 | 113,038 | 116,047 | |||||||||||||||
Stockholders equity |
626,663 | 449,087 | 343,830 | 294,895 | 255,654 |
(1) | Basic earnings (loss) per share represents net earnings (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share, in addition to the weighted average determined for basic earnings per share, reflects the potential dilution that could occur if options to issue common stock were exercised or converted into common stock and assumes the conversion of our 4.50% convertible subordinated notes for the period outstanding since their issuance in April 2002 until their conversion in February 2007, unless their inclusion would be anti-dilutive. |
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
We design, market and sell contemporary footwear for men, women and children under the
Skechers brand as well as eight other fashion and street brands. Our footwear is sold through a
wide range of department stores and leading specialty retail stores, mid-tier retailers, boutiques,
our own retail stores, distributor-owned international retail stores and our e-commerce website.
Our objective is to continue to profitably grow our domestic operations while leveraging our brand
name to expand internationally.
Our operations are organized along our distribution channels, and we have the following four
reportable sales segments domestic wholesale sales, international wholesale sales, retail sales
and e-commerce sales. We evaluate segment performance based primarily on net sales and gross
margins. See detailed segment information in note 14 to our consolidated financial statements
included under Part II, Item 8 of this annual report.
FINANCIAL OVERVIEW
Skechers achieved record revenue during 2007. Our net sales for 2007 were $1.394 billion, an
increase of $188.8 million or 15.7% percent over net sales of $1.205 billion in 2006. Diluted
earnings per share were $1.63, which reflected a 2.5% increase over the $1.59 reported in the prior
year. Working capital was $523.9 million at December 31, 2007, an increase of $73.1 million from
working capital of $450.8 million at December 31, 2006. Cash and short-term investments increased
by $83.5 million to $304.0 million in 2007 compared to $220.5 million at December 31, 2006,
primarily due to our 2007 earnings.
Our domestic wholesale segment is our largest distribution channel comprising 59.6%, 64.1%,
and 63.0% of our consolidated net sales for the years ended December 31, 2007, 2006 and 2005,
respectively. Our international wholesale sales comprised 19.2%, 15.2%, and 16.3% of our
consolidated net sales for the years ended December 31, 2007, 2006 and 2005, respectively. Retail
sales comprised 20.0%, 19.7%, and 20.0% of our consolidated net sales for the years ended December
31, 2007, 2006 and 2005, respectively, of which our domestic retail sales comprised 18.3%, 18.1%,
and 18.4% of our consolidated net sales for the years ended December 31, 2007, 2006 and 2005,
respectively. Our international retail sales did not comprise more than 10% of our consolidated
net sales in 2007, 2006 or 2005.
Domestic wholesale unit sales volume increased 8.7% to 43.2 million pairs in 2007 from 39.8
million pairs in 2006, and our average selling price per pair decreased 1.2% to $19.22 in 2007 from
$19.44 in 2006. The decrease in average selling price per pair and increase in unit sales volume
were primarily due to the introduction of our Cali Gear line.
2007 INITIATIVES
Our positive results for 2007 were driven by focusing on our core strengths and initiatives
for the year, which included:
New product design and delivery. Our success depends on our ability to frequently introduce
new styles and product lines as well as to design products in anticipation of consumers
ever-evolving preferences. This includes building our existing product lines with updates to
proven sellers as well as creating new styles that we believe will become core to these lines in
upcoming seasons. In 2007, we focused primarily on key sellers in our current divisions, launching
our Cali Gear line and eliminating underperforming brands. During 2007, we discontinued three of
our fashion linesMichelle K, Avirex and Kitson footwear.
Building our brands. As a marketing-driven company, we consistently focus on advertising our
brands in targeted publications, on key television programming and in high traffic areas in better
malls. During 2007, we increased our exposure on TV with more campaigns targeted to men, women and
children for Skechers and our fashion brands. This included our first animated spot for Airators by
Skechers. We also utilized the power of celebrities for Skechers and several of our fashion lines.
Develop our infrastructure to support continued growth. During 2007, we entered into a lease
agreement to build a new approximately 1.8 million square foot distribution facility to consolidate
all of our domestic distribution facilities into one location. Once this new facility is built, we
will move out of our five existing distribution facilities in Ontario, California.
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Further grow our company-owned retail business. With a focus on profitably growing our retail
business, we increased our store count by 39 stores in 2007, and we saw single digit comparable
store sales growth in our domestic retail business during 2007 despite a challenging retail
environment.
Further develop our international businesses. In 2007, we continued to focus on improving our
international operations by (i) increasing our customer base within our existing subsidiary
business; (ii) increasing the product count within each account; (iii) delivering the right product
into the right markets; (iv) launching the Marc Ecko and Zoo York branded lines in select global
markets, including through our European subsidiaries and (v) establishing new opportunities for
growth by entering new markets and growing in existing markets. We also increased our direct
selling effort by opening subsidiaries in Brazil, Malaysia and Thailand as well as increasing our
distributor network into Scandinavia and the Ukraine.
OUTLOOK FOR 2008
We will continue to focus our product offering in 2008 with new products, such as our Cali
Gear line, which do not directly compete with our existing brands and allow us the opportunity to
broaden the targeted demographic profile of our consumer base, increase our shelf space and open
new doors without detracting from existing business. In addition, we will continue to grow our
international business with the goal of increasing that business to 25% to 30% of our total
business. We are also seeking to increase our global presence through a joint venture agreement in
China. We will also continue to expand our retail distribution channel by opening another 25 to 30
company-owned stores in 2008.
YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31, 2006
Net sales
Net sales for 2007 were $1.394 billion, an increase of $188.8 million, or 15.7%, over net
sales of $1.205 billion in 2006. The increase in net sales was due to increased international
wholesale sales, domestic wholesale sales, and retail sales primarily due to acceptance of new
designs and styles for our in-season product including sport fusion, casual fusion footwear and the
introduction of our Cali Gear footwear. The increase in net sales was also due growth within the
domestic retail segment from an increased store base as well as positive domestic and international
comparative store sales increases (i.e., stores open for at least one year).
Our domestic wholesale segment increased 7.5%, or $58.3 million, to $831.2 million compared to
$772.9 million in 2006. The increase in domestic wholesale segment net sales came on an 8.7% unit
sales volume increase to 43.2 million pairs from 39.8 million pairs in 2006. The strongest
increases in domestic wholesale came in our Womens Active, Mens USA, and Kids lines, along with
the introduction of our Cali Gear line. Our average selling price per pair decreased 1.2% to
$19.22 from $19.44 in 2006.
Our international wholesale segment sales increased $83.9 million to $267.6 million in 2007, a
45.7% increase over sales of $183.7 million in 2006. 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 department stores and specialty retailers in various
international regions where we do not sell direct. Direct subsidiary sales increased $49.9
million, or 53.1%, to $144.0 million compared to net sales of $94.1 million in 2006. The increase
in direct subsidiary sales was primarily due to increased sales into UK, Canada, Benelux, and
Germany. Our distributor sales increased $34.0 million to $123.6 million in 2007, a 37.9% increase
over sales of $89.6 million in 2006. This was primarily due to increased sales to our distributors
in Russia, Panama, Serbia and Japan.
Our retail segment sales increased $42.0 million to $279.4 million in 2007, a 17.7% increase
over sales of $237.4 million in 2006. The increase in retail sales was due to a net increase of 36
domestic stores, increased sales across all three store formats and positive comparable store
sales. During 2007, we opened 42 new stores and closed three stores. These new stores contributed
$16.9 million in net sales during 2007 as compared to new store sales of $10.0 million for 22 other
stores opened in 2006. Of our new store additions, 28 were concept stores, 11 were outlet stores,
and three were warehouse stores. In addition, during 2007, we realized positive comparable store
sales increases in our domestic retail stores of 5.1% and 16.7% in our international retail stores.
Our domestic retail sales increased 17.5% due to positive comparable sales and having 22 retail
stores that were opened in 2006 being open the entire year in 2007. Our international retail sales
increased 20.2% in 2007 compared to 2006, due to increased comparable sales, the opening of three
additional stores, as well as favorable currency translation adjustments.
We had 177 domestic retail stores as of February 15, 2008, and we believe that we have a
presence in most major domestic markets. We currently plan to open approximately 25 to 30 domestic
retail stores in 2008. During 2007, we closed two under-performing domestic retail stores, while
we closed three in 2006. We periodically review all of our stores for impairment. During
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2007 and 2006, we did not record an impairment charge. Further, 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.
Our e-commerce sales increased $4.5 million to $15.9 million in 2007, a 40.2% increase over
sales of $11.4 million in 2006. Our e-commerce sales made up 1% of our consolidated net sales in both 2007 and 2006.
Gross profit
Gross profit for 2007 increased $76.7 million to $600.0 million as compared to $523.3 million
in 2006. Gross profit as a percentage of net sales, or gross margin, decreased to 43.0% in 2007
from 43.4% in 2006. This gross margin decrease was the result of the decrease in domestic
wholesale margins and a decrease in retail margins to 61.5% in 2007 from 63.8% in 2006. This was
partially offset by the increase in international wholesale margins, which increased to 37.3% in
2007 from 35.4% in 2006.
Our domestic wholesale segment increased $19.2 million, or 6.4%, to $320.4 million in 2006
compared to $301.2 million in 2006. Domestic wholesale margins decreased to 38.5% in 2007 from
39.0% for 2006. The decrease in domestic wholesale margins was due to lower average selling prices
related to the introduction of our Cali Gear line and lower margins from closing out our
discontinued fashion brands.
Gross profit for our international wholesale segment increased $34.8 million, or 53.4%, to
$99.8 million for 2007 compared to $65.0 million in 2006. Gross margins were 37.3% for 2007
compared to 35.4% in 2006. Gross margins for our direct subsidiary sales were 45.0% in 2007 as
compared to 42.4% in 2006. Gross margins for our distributor sales were 28.2% in 2007 as compared
to 28.1% in 2006. The increase in gross margins for the international wholesale segment was due to
increased subsidiary sales, which achieve higher gross margins than our international wholesale
sales through our foreign distributors.
Gross profit for our retail segment increased $20.4 million, or 13.4%, to $171.8 million in
2007 as compared to $151.4 million in 2006. This increase in gross profit was due to 22 stores
that were opened in 2006 being open the entire year in 2007 and positive comparable store sales
increases of 16.7% and 5.1% in our international and domestic stores, respectively. During 2007,
we opened 38 new domestic stores, and closed two other domestic stores. Gross margins decreased to
61.5% in 2007 as compared to 63.8% in 2006. Again, the decrease in margins was due to lower
average selling prices related to the introduction of our Cali Gear line and lower margins from
closing out our discontinued fashion brands.
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.
Licensing
Net licensing royalties increased $0.1 million, or 1.6%, to $4.2 million for 2007 compared to
$4.1 million in 2006.
Selling expenses
Selling expenses increased by $16.6 million, or 15.1%, to $126.5 million for 2007 from $109.9
million in 2006. As a percentage of net sales, selling expenses were 9.1% in 2007 and 2006. The
increase in selling expenses was primarily due to increased television and print advertising of
$14.5 million and increased promotional costs of $2.4 million due to the launch of our Cali Gear
line. Selling expenses consist primarily of the following: sales representative sample costs,
sales commissions, trade shows, advertising and promotional costs, which may include television and
ad production costs, and expenses associated with marketing materials.
General and administrative expenses
General and administrative expenses increased by $59.7 million, or 19.6%, to $364.7 million
for 2007 from $305.0 million in 2006. As a percentage of sales, general and administrative
expenses were 26.2% and 25.3% in 2007 and 2006, respectively. The increase in general and
administrative expenses was primarily due to increased salaries and wages of $19.3 million, which
includes stock compensation costs of $1.1 million, higher rent expense of $8.5 million due to the
opening of 42 retail stores, and increased warehouse and distribution costs of $8.2 million and
increased temporary help of $5.1 million due to increased sales and the addition
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of another domestic distribution facility. In addition, the expenses related to our
distribution network, including the functions of purchasing, receiving, inspecting, allocating,
warehousing and packaging of our products totaled $97.6 million and $77.6 million for 2007 and
2006, respectively. The $20.0 million increase was due in part to the addition of our fifth
domestic distribution facility in Ontario, California and its functional integration with the
existing domestic distribution facility, as well as increased sales volume.
General and administrative expenses consist primarily of the following: salaries, wages and
related taxes, 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 both legal and accounting, insurance, and depreciation and
amortization, asset impairment, amongst other expenses. Our distribution network related costs are
included in general and administrative expenses and are not allocated to specific segments.
We believe that we have established our presence in most major domestic and international
retail markets. We opened 38 domestic retail stores and four international retail stores in 2007,
while closing two domestic stores and one international store. We currently plan to open between
25 and 30 domestic stores in 2008. In addition, we plan to continue to pursue opportunistic
international retail store locations.
We continue to review our cost structure to develop efficiencies within our operations;
however, we believe that our current cost structure is consistent with our anticipated sales levels
in 2008.
Interest income
Interest income for 2007 increased $1.6 million to $10.0 million as compared to $8.4 million
for the same period in 2006. The increase in interest income resulted from higher average cash and
investment balances during 2007 when compared to the same period in 2006 and interest received on a
legal settlement in 2007. Interest income earned on our short-term investment balances was
primarily tax exempt.
Interest expense
Interest expense for 2007 decreased $4.4 million to $4.8 million as compared to $9.2 million
for the same period in 2006. The decrease in interest expense was primarily due to the conversion
of our 4.5% convertible subordinated notes to shares of our Class A common stock on or prior to
February 20, 2007. Interest expense was incurred on mortgages on our distribution center and our
corporate office located in Manhattan Beach, California, and amounts owed to our foreign
manufacturers.
Other income (expense)
Other income, net for 2007 decreased $0.9 million to $0.1 million as compared to $1.0 million
for the same period in 2006. The decrease in other income was mainly due to foreign currency
losses.
Income taxes
The effective tax rate for 2007 was 36.0% as compared to 37.0% in 2006. Income tax expense
for 2007 was $42.6 million compared to $41.7 million for 2006. The tax provision was computed
using the effective tax rates applicable to each of our domestic and international taxable
jurisdictions. The 2007 rate is slightly lower than the expected domestic rate of approximately
40% due to our non-U.S. subsidiary earnings in lower tax rate jurisdictions and our reinvestment of
undistributed earnings from our non-U.S. subsidiaries, thereby indefinitely postponing their
remittance to the U.S. parent. As such, we did not provide for deferred income taxes on
accumulated undistributed earnings of our non-U.S. subsidiaries. As of December 31, 2007,
withholding and U.S. taxes have not been recorded on approximately $15.5 million of cumulative
undistributed earnings.
YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005
Net sales
Net sales for 2006 were $1.205 billion, an increase of $198.9 million, or 19.8%, over net
sales of $1.006 billion in 2005. The increase in net sales was due to increased domestic wholesale
sales, retail sales and international wholesale sales. The increase in sales was a result of
increased demand for our in-season products and broader acceptance of our new lines, including
sport fusion and casual fusion footwear.
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Our domestic wholesale segment increased 21.9%, or $138.6 million, to $772.9 million compared
to $634.3 million in 2005. The increase in domestic wholesale segment net sales came on a 15.6%
unit sales volume increase to 39.8 million pairs from 34.4 million pairs in 2005. The strongest
increases came in our Womens Active, Mens USA, and Kids lines. Our average selling price per
pair increased 5.4% to $19.44 from $18.45 in 2005.
Our international wholesale segment sales increased $20.2 million to $183.7 million in 2006, a
12.3% increase over sales of $163.5 million in 2005. Direct subsidiary sales increased $10.7
million, or 12.8%, to $94.1 million compared to net sales of $83.4 million in 2005. The increase in
direct subsidiary sales was primarily due to increased sales into UK, Germany, Benelux, and Canada.
Our distributor sales increased $9.5 million to $89.6 million in 2006, an 11.8% increase over
sales of $80.1 million in 2005. This was primarily due to increased sales to our distributors in
Panama, Russia and Serbia.
Our retail segment sales increased $35.8 million to $237.4 million in 2006, a 17.8% increase
over sales of $201.6 million in 2005. The increase in retail sales was due to a net increase of 20
stores, increased sales across all three store formats and positive comparable store sales. During
2006, we opened 22 new domestic stores and one international store, and we closed three other
domestic stores. These new stores contributed $10.0 million in net sales during 2006 as compared
to new store sales of $4.6 million for eleven other stores opened in 2005. Of our new store
additions, 14 were concept stores, eight were outlet stores, and one was a warehouse store. In
addition, during 2006, we realized positive comparable store sales increases in our domestic retail
stores of 10.7% and 14.6% in our international retail stores. Our domestic retail sales increased
17.3% due to positive comparable sales and having seven retail stores that were opened in 2005
being open the entire year in 2006. Our international retail sales increased 22.6% in 2006
compared to 2005, due to increased comparable sales, the opening of one additional store, as well
as favorable currency translation adjustments.
During 2006, we closed three under-performing retail stores, which was the same number closed
in 2005. During 2006, we did not record an impairment charge. During 2005, we recorded an
impairment charge of $0.9 million related to leasehold improvements for two of our stores.
Our e-commerce sales increased $4.4 million to $11.4 million in 2006, a 61.3% increase over
sales of $7.0 million in 2005. Our e-commerce sales made up less than 1% of our consolidated net
sales in both 2006 and 2005.
Gross profit
Gross profit for 2006 increased $102.8 million to $523.3 million as compared to $420.5 million
in 2005. Gross profit as a percentage of net sales, or gross margin, increased to 43.4% in 2006
from 41.8% in 2005. This gross margin increase was primarily the result of increased retail
margins to 63.8% in 2006 from 61.5% in 2005. This was partially offset by the decrease in
international wholesale margins, which decreased to 35.4% in 2006 from 37.2% in 2005. Increased
margins were a result of increased sales volume in our higher margin in-season products and broader
acceptance of our new lines, including sport fusion and casual fusion footwear.
Our domestic wholesale segment gross margin increased $68.8 million, or 29.6%, to $301.2
million in 2006 compared to $232.4 million in 2005. Domestic wholesale margins increased to 39.0%
in 2006 from 36.6% for 2005.
Gross profit for our international wholesale segment increased $4.2 million, or 7.0%, to $65.0
million for 2006 compared to $60.8 million in 2005. Gross margins were 35.4% for 2006 compared to
37.2% in 2005. 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 42.4% in 2006 as compared to 44.0% in 2005. Gross margins for our
distributor sales were 28.1% in 2006 as compared to 30.1% in 2005. The decrease in gross margins
was primarily due to increased discounts and allowances.
Gross profit for our retail segment increased $27.5 million, or 22.2%, to $151.4 million in
2006 as compared to $123.9 million in 2005. This increase in gross profit was due to eleven stores
that were opened in 2005 being open the entire year in 2006 and positive comparable store sales
increases of 14.6% and 10.7% in our international and domestic stores, respectively. During 2006,
we opened 22 new domestic stores, one international store and closed three other domestic stores.
Gross margins increased to 63.8% in 2006 as compared to 61.5% in 2005. Again, increased margins
were a result of increased sales volume in our higher margin in-season products and broader
acceptance of our new lines, including sport fusion and casual fusion footwear.
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Licensing
Net licensing royalties decreased $2.5 million, or 37.9%, to $4.1 million for 2006 as compared
to $6.6 million in 2005. The decrease in net licensing royalties is primarily the result of
decreased royalty revenue associated with our various licensing agreements.
Selling expenses
Selling expenses increased by $28.5 million, or 35.0%, to $109.9 million for 2006 from $81.4
million in 2005. As a percentage of net sales, selling expenses were 9.1% and 8.1% in 2006 and
2005, respectively. The increase in selling expenses was primarily due to increased media
advertising expenses of $22.1 million, increased sales commissions of $3.4 million due to higher
revenues, and higher trade show expenses of $2.8 million.
General and administrative expenses
General and administrative expenses increased by $35.6 million, or 13.2%, to $305.0 million
for 2006 from $269.4 million in 2005. As a percentage of sales, general and administrative
expenses were 25.3% and 26.8% in 2006 and 2005, respectively. The increase in general and
administrative expenses was primarily due to increased salaries and wages of $21.2 million, which
includes stock compensation costs of $2.0 million due to the adoption of SFAS 123(R) in January
2006, increased outside services of $3.5 million, higher rent expense of $3.2 million due to the
opening of 23 retail stores, and increased warehouse and distribution costs of $3.0 million
resulting from increased sales. In addition, the expenses related to our distribution network,
including the functions of purchasing, receiving, inspecting, allocating, warehousing and packaging
of our products totaled $77.6 million and $70.5 million for 2006 and 2005, respectively. We did
not record any impairment charges in 2006. In 2005, impairment charges of $0.9 million related to
the write-off of leasehold improvements at one of our domestic retail stores and one international
retail store.
Interest income
Interest income for 2006 increased $4.0 million to $8.4 million as compared to $4.4 million
for the same period in 2005. The increase in interest income resulted from higher interest rates
and higher average cash and investment balances during 2006 when compared to the same period in
2005.
Interest expense
Interest expense was $9.2 million for both 2006 and 2005. Interest expense is incurred on our
convertible notes, mortgages on our distribution center and our corporate office located in
Manhattan Beach, California, our capital lease obligations, and interest on amounts owed to our
foreign manufacturers.
Other income (expense)
Other income, net decreased $0.3 million to $1.0 million for 2006 as compared to $1.3 million
in 2005. The decrease in other income was mainly due to lower recoveries related to the settlement
of various lawsuits during 2006 as compared to 2005, offset by foreign currency gains.
Income taxes
The effective tax rate for 2006 was 37.0% as compared to 38.6% in 2005. Income tax expense
for 2006 was $41.7 million compared to $28.1 million for 2005. The tax provision was computed
using the effective tax rates applicable to each of our domestic and international taxable
jurisdictions. The 2006 rate is slightly lower than the expected domestic rate of approximately
40% due to our non-U.S. subsidiary earnings in lower tax rate jurisdictions and our reinvestment of
undistributed earnings from our non-U.S. subsidiaries, thereby indefinitely postponing their
remittance to the U.S. parent. As such, we did not provide for deferred income taxes on
accumulated undistributed earnings of our non-U.S. subsidiaries. As of December 31, 2006,
withholding and U.S. taxes have not been provided on approximately $6.0 million of cumulative
undistributed earnings.
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LIQUIDITY AND CAPITAL RESOURCES
Our working capital at December 31, 2007 was $523.9 million, an increase of $73.1 million from
working capital of $450.8 million at December 31, 2006. Our cash and cash equivalents at December
31, 2007 were $199.5 million compared to $160.5 million at December 31, 2006. The increase in cash
and cash equivalents of $39.0 million was the result of our cash flow from operations of $101.4
million and proceeds of $8.2 million from stock options exercised, which was offset by utilizing
excess cash to purchase $44.5 million of short-term investments and capital expenditures of $31.2
million.
During 2007, our operating activities generated $101.4 million in net cash compared to cash
provided by operating activities of $26.0 million for 2006. The significant increase in our
operating cash flows for 2007, when compared to 2006, was mainly the result of our earnings and
lower accounts receivable balances, which was partially offset by a smaller decrease in accounts
payable in 2007 compared to 2006.
Net cash used in investing activities was $75.7 million for 2007 as compared to $87.6 million
in 2006. During 2007, we purchased $44.5 million in short-term investments to better utilize our
cash balances. Capital expenditures for 2007 were approximately $31.2 million, of which $7.1
million related to the construction of our new corporate headquarters and the balance primarily
consisted of new store openings and remodels. This was compared to capital expenditures of $27.6
million in the prior year, which primarily consisted of new store openings and remodels and
warehouse equipment upgrades. During 2005, we entered into a construction agreement with Morley
Construction Company for the construction of our third owned corporate facility in Manhattan Beach,
California. The agreement has a maximum payment clause in which Morley agreed that the
construction cost of the facility will not exceed $18.1 million plus change orders of $1.7 million,
of which $19.2 million was incurred at December 31, 2007. The exterior of the facility was
completed in 2007, and while we are currently working on the interior improvements, we expect to
move in during 2008. Excluding the construction of our corporate headquarters and our new
distribution center in Moreno Valley, California, we expect our ongoing capital expenditures for
2008 to be approximately $25.0 million, which includes opening between 25 to 30 domestic retail
stores and investments in information technology. 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 between $75.0 million and $85.0 million. We currently anticipate that our capital
expenditure requirements will be funded through our operating cash flows, current cash and
short-term investments on hand, or available lines of credit.
Net cash provided by financing activities was $9.9 million during 2007 compared to net cash
provided by financing activities of $22.9 million during 2006. The decrease in cash provided by
financing activities was due to lower proceeds from the issuance of Class A common stock upon the
exercise of stock options during the year ended December 31, 2007 as compared to the prior year.
In April 2002, we issued $90.0 million aggregate principal amount of 4.50% convertible
subordinated notes due April 15, 2007. On January 19, 2007, we called these notes for redemption.
The redemption date was February 20, 2007. The aggregate principal amount of notes outstanding was
$90.0 million. Holders of $89.969 million principal amount of the notes converted their notes into
shares of our Class A common stock prior to the redemption date, which included $2.5 million of
principal amount of the notes held by us. As a result of these conversions, 3,464,594 shares of
Class A common stock were issued to holders of the notes, which included 96,272 shares issued to us
that were immediately retired. In connection with these conversions, we paid approximately $500 in
cash to holders who elected to convert their notes, which represented cash paid in lieu of
fractional shares. In addition, we paid approximately $32,000 to holders who redeemed their notes,
which represented the redemption price of 100.9% of $31,000 principal amount of the notes plus
accrued interest.
We have outstanding debt of $16.9 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.
On May 31, 2006, we amended our secured line of credit, which permits our company and certain
of our subsidiaries to borrow up to $150.0 million based upon eligible accounts receivable and
inventory, which line of credit can be increased to $250.0 million at our request. Borrowings bear
interest at the borrowers election based on either the prime rate or the London Interbank Offered
Rate (LIBOR). Prime rate loans will bear interest at a rate equal to JPMorgan Chase Banks
publicly announced prime rate less up to 0.50%. LIBOR loans will bear interest at a rate equal to
the applicable LIBOR plus up to an additional 1.75%. We pay a monthly unused line of credit fee of
0.25% per annum. The loan agreement, which expires on May 31, 2011, provides for the issuance of
letters of credit up to a maximum of $30.0 million. The loan agreement contains customary
affirmative and negative covenants for secured credit facilities of this type, including a
financial covenant requiring a fixed charge coverage ratio of not less than 1.1 at the end of each
quarter if excess availability of eligible account receivable and inventory is less than $50.0
million at any time during such quarter. Excess availability was not less than $50.0 million
during the year-ended December 31, 2007; hence, the fixed charge ratio
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requirement was not applicable at such date. No amounts were outstanding and we were in
compliance with all other covenants of the loan agreement at December 31, 2007. We had $9.6
million of outstanding letters of credit as December 31, 2007.
We believe that anticipated cash flows from operations, available borrowings under our secured
line of credit, cash on hand, short-term investments and our financing arrangements will be
sufficient to provide us with the liquidity necessary to fund our anticipated working capital and
capital requirements through 2008. However, in connection with our current strategies, we will
incur significant working capital requirements and capital expenditures. Our future capital
requirements will depend on many factors, including, but not limited to, costs associated with
moving to a new distribution facility, the levels at which we maintain inventory, the market
acceptance of our footwear, the success of our international operations, the levels of promotion
and advertising required to promote our footwear, the extent to which we invest in new product
design and improvements to our existing product design, acquisition of other brands or companies,
and the number and timing of new store openings. To the extent that available funds are
insufficient to fund our future activities, we may need to raise additional funds through public or
private financing of debt or equity. We cannot be assured that additional financing will be
available or that, if available, it can be obtained on terms favorable to our stockholders and us.
Failure to obtain such financing could delay or prevent our planned expansion, which could
adversely affect our business, financial condition and results of operations. In addition, if
additional capital is raised through the sale of additional equity or convertible securities,
dilution to our stockholders could occur.
DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table aggregates all material contractual obligations and commercial commitments as
of December 31, 2007:
Payments Due by Period (In Thousands) | ||||||||||||||||||||
Less than | One to | Three to | More Than | |||||||||||||||||
One | Three | Five | Five | |||||||||||||||||
Total | Year | Years | Years | Years | ||||||||||||||||
Other long-term debt |
$ | 21,082 | $ | 1,783 | $ | 3,567 | $ | 15,732 | | |||||||||||
Operating lease obligations (1) |
411,576 | 47,124 | 106,339 | 81,496 | $ | 176,617 | ||||||||||||||
Purchase obligations (2) |
239,523 | 239,523 | | | | |||||||||||||||
Construction contract (3) |
663 | 663 | | | | |||||||||||||||
Minimum payments related to our
licensing arrangements |
41,110 | 10,055 | 15,655 | 15,400 | | |||||||||||||||
$ | 713,954 | $ | 299,148 | $ | 125,561 | $ | 112,628 | $ | 176,617 | |||||||||||
(1) | Operating lease obligations consists primarily of real property leases for our retail stores, corporate offices and distribution centers. These leases frequently include options that permit us to extend beyond the terms of the initial fixed term. Payments for these lease terms are provided for by cash flows generated from operations or, if needed, by our $150.0 million secured line of credit, for which no amounts were outstanding at December 31, 2007. | |
(2) | Purchase obligations includes the following: (i) accounts payable balances for the purchase of footwear of $81.3 million, (ii) outstanding letters of credit of $9.6 million and (iii) open purchase commitments with our foreign manufacturers for $148.7 million. We currently expect to fund these commitments with cash flows from operations and/or cash on hand. | |
(3) | During 2005, we entered into a construction agreement with Morley Construction Company for the construction of our third owned corporate facility in Manhattan Beach, California. The agreement has a maximum payment clause in which Morley agrees that the construction cost of the core and shell of the facility will not exceed $18.1 million plus change orders of $1.7 million, of which $19.2 million was incurred at December 31, 2007. The exterior of the facility was completed in 2007, and we are currently working on the interior improvements and we expect to move in during 2008. |
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any relationships with unconsolidated entities or financial partnerships such
as entities often referred to as structured finance or special purpose entities that would have
been established for the purpose of facilitating off-balance-sheet arrangements or for other
contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations is based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting estimates are affected by more significant
judgments used in the preparation of our consolidated financial statements: revenue recognition,
allowance for bad debts, returns, sales allowances and customer chargebacks, inventory write-downs,
valuation of long-lived assets, litigation reserves, valuations of deferred income taxes, uncertain
tax positions, foreign currency translation and stock-based compensation.
Revenue Recognition. We derive income from the sale of footwear and royalties earned from
licensing the Skechers brand. Domestically, goods are shipped Free on Board (FOB) shipping point
directly from our domestic distribution center in Ontario, California. For our European
international wholesale customers, product is shipped FOB shipping point direct from our
distribution center in Liege, Belgium. For our distributor sales, the goods are generally delivered
directly from the independent factories to our distributors freight forwarders on a Free Named
Carrier (FCA) basis. We recognize revenue on wholesale sales when products are shipped and the
customer takes title and assumes risk of loss, collection of relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or determinable. This
generally occurs at time of shipment. Allowances for estimated returns, discounts, doubtful
accounts and chargebacks are provided for when related revenue is recorded. Related costs paid to
third-party shipping companies are recorded as a cost of sales. We recognize revenue from retail
sales at the point of sale.
Royalty income is earned from our licensing arrangements. Upon signing a new licensing
agreement, we receive up-front fees, which are generally characterized as prepaid royalties. These
fees are initially deferred and recognized as revenue as earned (i.e., as licensed sales are
reported to the company or on a straight line basis over the term of the agreement). The first
calculated royalty payment is based on actual sales of the licensed product. Typically, at each
quarter end we receive correspondence from our licensees indicating what the actual sales for the
period were. This information is used to calculate and accrue the related royalties currently
receivable based on the terms of the agreement.
Allowance for bad debts, returns, sales allowances and customer chargebacks. We provide a
reserve against our receivables for estimated losses that may result from our customers inability
to pay. To minimize the likelihood of uncollectibility, customers credit-worthiness is reviewed
periodically based on external credit reporting services and our experience with the account, and
it is adjusted accordingly. When a customers account become past due, we generally place a hold on
the account and discontinue further shipments to that customer, minimizing further risk of loss. We
determine the amount of the reserve by analyzing known uncollectible accounts, aged receivables,
economic conditions in the customers country or industry, historical losses and our customers
credit-worthiness. Amounts later determined and specifically identified to be uncollectible are
charged or written off against this reserve.
We also reserve for potential disputed amounts or chargebacks with our customers. Our
chargeback reserve is based on a collectibility percentage based on factors such as historical
trends, current economic conditions, and nature of the chargeback receivables. We also reserve for
potential sales returns and allowances based on historical trends.
The likelihood of a material loss on an uncollectible account would be mainly dependent on
deterioration in the overall economic conditions in a particular country or environment. Reserves
are fully provided for all probable losses of this nature. For receivables that are not
specifically identified as high risk, we provide a reserve based upon a percent of sales for the
preceding two months. This percentage is based on our historical loss rate. Gross trade accounts
receivable balance was $177.7 million and the allowance for bad debts, returns, sales allowances
and customer chargebacks was $10.3 million at December 31, 2007.
Inventory write-downs. Inventories are stated at the lower of cost or market. We review our
inventory on a regular basis for excess and slow moving inventory. Our review is based on inventory
on hand, prior sales and our expected net realizable value. Our analysis includes a review of
inventory quantities on hand at period end in relation to year-to-date sales and projections for
sales in the near future. The net realizable value, or market value, is determined based on our
estimate of sales prices of such inventory through off-price or discount store channels. A
write-down of inventory is considered permanent and creates a new cost basis for those units. The
likelihood of any material inventory write-down is dependent primarily on our expectation of future
consumer demand for our
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product. A misinterpretation or misunderstanding of future consumer demand for our product or
of the economy, or other failure to estimate correctly, could result in inventory valuation
changes, either favorably or unfavorably, compared to the requirement determined to be appropriate
as of the balance sheet date. At December 31, 2007, our gross inventory value was $206.1 million
and our inventory reserve was $1.9 million.
Valuation of long-lived assets. When circumstances warrant, we assess the impairment of
long-lived assets that require us to make assumptions and judgments regarding the carrying value of
these assets. The assets are considered to be impaired if we determine that the carrying value may
not be recoverable based upon our assessment of the following events or changes in circumstances:
| the assets ability to continue to generate income; | ||
| any loss of legal ownership or title to the asset(s); | ||
| any significant changes in our strategic business objectives and utilization of the asset(s); or | ||
| the impact of significant negative industry or economic trends. |
If the assets are considered to be impaired, the impairment we recognize is the amount by
which the carrying value of the assets exceeds the fair value of the assets. In addition, we base
the useful lives and related amortization or depreciation expense on our estimate of the period
that the assets will generate revenues or otherwise be used by us. If a change were to occur in any
of the above-mentioned factors or estimates, the likelihood of a material change in our reported
results would increase. In addition, we prepare a summary of store contribution from our domestic
retail stores to assess potential impairment of the fixed assets and leasehold improvements. Stores
with negative contribution opened in excess of twenty-four months are then reviewed in detail to
determine if impairment exists. For the year ended December 31, 2007, we did not record an
impairment charge.
Litigation reserves. Estimated amounts for claims that are probable and can be reasonably
estimated are recorded as liabilities in our consolidated balance sheets. The likelihood of a
material change in these estimated reserves would depend on new claims as they may arise and the
favorable or unfavorable outcome of the particular litigation. Both the amount and range of loss on
a large portion of the remaining pending litigation is uncertain. As such, we are unable to make a
reasonable estimate of the liability that could result from unfavorable outcomes in litigation. As
additional information becomes available, we will assess the potential liability related to our
pending litigation and revise our estimates. Such revisions in our estimates of the potential
liability could materially impact our results of operations and financial position.
Valuation of deferred income taxes. We record a valuation allowance when necessary to reduce
our deferred tax assets to the amount that is more likely than not to be realized. The likelihood
of a material change in our expected realization of our deferred tax assets depends on future
taxable income and the effectiveness of our tax planning strategies amongst the various domestic
and international tax jurisdictions in which we operate. We evaluate our projections of taxable
income to determine the recoverability of our deferred tax assets and the need for a valuation
allowance. As of December 31, 2007, we had net deferred tax assets of $23.3 million reduced by a
valuation allowance of $0.7 million against loss carry-forwards not expected to be utilized by
certain foreign subsidiaries.
Uncertain tax positions. Effective January 1, 2007, we adopted the provisions of Financial
Accounting Standards Board Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109 Accounting for Income Taxes (SFAS 109), which
contains a two-step process for recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109. The first step is to determine whether or not a tax benefit should
be recognized. A tax benefit will be recognized if the weight of available evidence indicates that
the tax position is more likely than not to be sustained upon examination by the relevant tax
authorities, assuming the tax authorities have full knowledge of all the relevant information. The
second step is to measure the tax benefit of those tax positions meeting the more-likely-than-not
recognition threshold. The tax benefit is measured at the largest amount of benefit that is more
than 50% likely of being realized upon ultimate settlement with the tax authorities. The
recognition and measurement of benefits related to our tax positions requires significant judgment
as uncertainties often exist with respect to new laws, new interpretations of existing laws, and
rulings by taxing authorities. We recognized approximately a $3.4 million increase in the liability
for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007
balance of retained earnings.
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Foreign currency translation. Our international operations generally use their respective
local currencies as their functional currency. In accordance with Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation (SFAS 52), revenues and expenses from our
international subsidiaries are translated using the monthly average exchange rates in effect for
the period in which such revenues and expenses occur. International subsidiaries that use their
local currency as their functional currency translate their assets and liabilities using current
rates of exchange at the balance sheet date. The resulting translation gains and losses for such
subsidiaries are included within accumulated other comprehensive income as a separate component of
stockholders equity. One international subsidiary has a functional currency of the U.S. dollar.
Resulting remeasurement gains and losses from this subsidiary are included in the determination of
net earnings. A substantial portion of our intercompany loans are considered long-term investments
and the gains or losses from currency fluctuations are included as a component of translation
adjustment in other comprehensive income.
Stock-based compensation. Beginning on January 1, 2006, we implemented and adopted a new
critical accounting policy, Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)), which requires us to recognize compensation for stock options, nonvested
shares and employee stock purchase plan (ESPP) shares at fair value. Under the fair value
recognition provisions for SFAS 123(R), stock-based compensation cost is estimated at the grant
date based on the fair value of the awards expected to vest and recognized as expense ratably over
the requisite service period of the award. We have used the Black-Scholes valuation model to
estimate the fair value of our stock option awards, which requires various judgmental assumptions
including estimating stock price volatility, forfeiture rates, and expected life. Our computation
of expected volatility is based on historical volatility. In addition, we consider many factors
when estimating expected forfeitures and expected life, including types of awards, employee class,
and historical experience. If any of the assumptions used in the Black-Scholes model change
significantly, stock-based compensation expense may differ materially in the future from that
recorded in the current period. We adopted SFAS 123(R) using the modified prospective method which
requires the application of the accounting standard as of January 1, 2006. Stock compensation
expense as a result of SFAS 123(R) was recorded to general and administrative expenses and was $1.1
million and $2.0 million for the year ended December 31, 2007 and 2006, respectively. In
accordance with the modified prospective method, the consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). The
impact of the adoption is discussed in note 7 to the Consolidated Financial Statements.
INFLATION
We do not believe that the relatively moderate rates of inflation experienced in the United
States over the last three years have had a significant effect on our sales or profitability.
However, we cannot accurately predict the effect of inflation on future operating results. Although
higher rates of inflation have been experienced in a number of foreign countries in which our
products are manufactured, we do not believe that inflation has had a material effect on our sales
or profitability. While we have been able to offset our foreign product cost increases by
increasing prices or changing suppliers in the past, we cannot assure you that we will be able to
continue to make such increases or changes in the future.
EXCHANGE RATES
We receive U.S. dollars for substantially all of our product sales and our royalty income.
Inventory purchases from offshore contract manufacturers are primarily denominated in U.S. dollars;
however, purchase prices for our products may be impacted by fluctuations in the exchange rate
between the U.S. dollar and the local currencies of the contract manufacturers, which may have the
effect of increasing our cost of goods in the future. During 2007 and 2006, exchange rate
fluctuations did not have a material impact on our inventory costs. We do not engage in hedging
activities with respect to such exchange rate risk.
FUTURE ACCOUNTING CHANGES
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards Statement No. 160 Accounting for Noncontrolling Interests (SFAS
160), which clarifies the classification of noncontrolling interests in consolidated statements of
financial position and the accounting for and reporting of transactions between the reporting
entity and holders of such noncontrolling interests. SFAS 160 will be effective for fiscal years
beginning after December 15, 2008. We are currently evaluating the impact of this standard on our
Consolidated Financial Statements; however, we do not expect that the adoption of SFAS 160 will
have a material impact on our financial condition or results of operations.
In December 2007, the FASB issued Statement of Financial Accounting Standards Statement No.
141(R) Applying the Acquisition Method (SFAS 141(R)), which clarifies the accounting for a
business combination and requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their
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fair values as of that date. SFAS 141(R) will be effective for fiscal years beginning after
December 15, 2008. We are currently evaluating the impact of this standard on our Consolidated
Financial Statements; however, we do not expect that the adoption of SFAS 141(R) will have a
material impact on our financial condition or results of operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards Statement No.
159 The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment
of FASB Statement No. 115 (SFAS 159), which provides companies with an option to report selected
financial assets and liabilities at fair value. Furthermore, SFAS 159 establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. SFAS 159 will be effective for
fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this
standard on our Consolidated Financial Statements; however, we do not expect that the adoption of
SFAS 159 will have a material impact on our financial condition or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards Statement No.
157 Fair Value Measurements, (SFAS 157). The standard provides guidance for using fair value
to measure assets and liabilities. The standard also responds to investors requests for expanded
information about the extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value measurements on earnings. The
standard applies whenever other standards require (or permit) assets or liabilities to be measured
at fair value. The standard does not expand the use of fair value in any new circumstances.
Statement 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. We
are currently evaluating the impact of this standard on our Consolidated Financial Statements;
however, we do not expect that the adoption of SFAS 157 will have a material impact on our
financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the potential loss arising from the adverse changes in market rates and prices,
such as interest rates, marketable debt security prices and foreign currency exchange rates.
Changes in interest rates, marketable debt security prices and changes in foreign currency exchange
rates have and will have an impact on our results of operations. We do not hold any derivative
securities that require fair value presentation under FASB Statement No. 133.
Market risk and interest rate fluctuations. Our short-term investments consist of corporate
and municipal debt and preferred stock auction rate securities. Recently, several auctions have
failed as a result of illiquidity and imbalance in order flow for auction rate securities. A
failed auction is not an indication of an increased credit risk or a reduction in the underlying
collateral, however, parties wishing to sell securities could not do so. Based on current market
conditions, it is not known when or if the capital markets will come back into balance to achieve
successful auctions for these securities. If these auctions continue to fail, it could result in
our holding securities beyond their next scheduled auction reset dates and will limit the
short-term liquidity of these investments. We currently believe these securities are not
significantly impaired, primarily due to the collateral underlying these securities and/or the
creditworthiness of the issuer. Based on our expected operating cash flows, and our other sources
and uses of cash, we do not anticipate that the potential lack of liquidity on these investments
will affect our ability to execute our current business plan.
The interest rate charged on our line of credit facility is based on either the prime rate of
interest or the LIBOR, and changes in the either of these rates of interest could have an effect on
the interest charged on our outstanding balances. At December 31, 2007, no amounts were
outstanding that were subject to changes in interest rates.
Foreign exchange rate fluctuations. We face market risk to the extent that changes in foreign
currency exchange rates affect our non-U.S. dollar functional currency foreign subsidiarys
revenues, expenses, assets and liabilities. In addition, changes in foreign exchange rates may
affect the value of our inventory commitments. Also, inventory purchases of our products may be
impacted by fluctuations in the exchange rates between the U.S. dollar and the local currencies of
the contract manufacturers, which could have the effect of increasing the cost of goods sold in the
future. We manage these risks by primarily denominating these purchases and commitments in U.S.
dollars. We do not engage in hedging activities with respect to such exchange rate risks.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page | ||||
37 | ||||
39 | ||||
40 | ||||
41 | ||||
42 | ||||
43 | ||||
64 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Skechers U.S.A., Inc.:
Skechers U.S.A., Inc.:
We have audited the accompanying consolidated balance sheets of Skechers U.S.A., Inc. and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of earnings,
stockholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2007. In connection with our audits of the consolidated
financial statements, we also have audited the related financial statement schedule. These
consolidated financial statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Skechers U.S.A., Inc. and subsidiaries as of December
31, 2007 and 2006, and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in note 7 to the consolidated financial statements, effective January 1, 2006 the
Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment. As discussed in note 10 to the consolidated financial statements,
effective January 1, 2007 the Company adopted the provisions of Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Skechers U.S.A. Incs., internal control over financial reporting
as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated February 28, 2008 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
February 28, 2008
February 28, 2008
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Skechers U.S.A., Inc.:
Skechers U.S.A., Inc.:
We have audited Skechers U.S.A., Incs internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Skechers U.S.A.,
Incs. management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on the effectiveness of the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Skechers U.S.A., Inc. maintained in all material respects effective internal
control over financial reporting as of December 31, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Skechers U.S.A., Inc. and
subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of earnings,
stockholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2007, and the related financial statement schedule, and our
report dated February 28, 2008 expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule.
/s/ KPMG LLP
Los Angeles, California
February 28, 2008
February 28, 2008
38
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SKECHERS U.S.A., INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, | December 31, | |||||||
2007 | 2006 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 199,516 | $ | 160,485 | ||||
Short-term investments |
104,500 | 60,000 | ||||||
Trade accounts receivable, less allowances of $10,284 in 2007 and $10,558 in 2006 |
167,406 | 177,740 | ||||||
Other receivables |
10,520 | 8,035 | ||||||
Total receivables |
177,926 | 185,775 | ||||||
Inventories |
204,211 | 200,877 | ||||||
Prepaid expenses and other current assets |
13,993 | 15,321 | ||||||
Deferred tax assets |
8,594 | 9,490 | ||||||
Total current assets |
708,740 | 631,948 | ||||||
Property and equipment, at cost, less accumulated depreciation and amortization |
98,400 | 87,645 | ||||||
Intangible assets, less accumulated amortization |
78 | 633 | ||||||
Deferred tax assets |
13,983 | 11,984 | ||||||
Other assets, at cost |
6,776 | 4,843 | ||||||
TOTAL ASSETS |
$ | 827,977 | $ | 737,053 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Current installments of long-term borrowings |
437 | 576 | ||||||
Accounts payable |
164,466 | 161,150 | ||||||
Accrued expenses |
19,949 | 19,435 | ||||||
Total current liabilities |
184,852 | 181,161 | ||||||
4.50% convertible subordinated notes |
| 89,969 | ||||||
Long-term borrowings, excluding current installments |
16,462 | 16,836 | ||||||
Total liabilities |
201,314 | 287,966 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred Stock, $.001 par value; 10,000 authorized; none issued and outstanding |
| | ||||||
Class A Common Stock, $.001 par value; 100,000 shares authorized; 32,992 and
28,103 shares issued and outstanding at December 31, 2007 and 2006, respectively |
33 | 28 | ||||||
Class B Common Stock, $.001 par value; 60,000 shares authorized; 12,852 and
13,768 shares issued and outstanding at December 31, 2007 and 2006, respectively |
13 | 14 | ||||||
Additional paid-in capital |
258,084 | 156,374 | ||||||
Accumulated other comprehensive income |
14,763 | 11,200 | ||||||
Retained earnings |
353,770 | 281,471 | ||||||
Total stockholders equity |
626,663 | 449,087 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 827,977 | $ | 737,053 | ||||
See accompanying notes to consolidated financial statements.
39
Table of Contents
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Net sales |
$ | 1,394,181 | $ | 1,205,368 | $ | 1,006,477 | ||||||
Cost of sales |
794,192 | 682,022 | 585,995 | |||||||||
Gross profit |
599,989 | 523,346 | 420,482 | |||||||||
Royalty income, net |
4,179 | 4,114 | 6,628 | |||||||||
604,168 | 527,460 | 427,110 | ||||||||||
Operating expenses: |
||||||||||||
Selling |
126,527 | 109,886 | 81,378 | |||||||||
General and administrative |
364,711 | 305,030 | 269,436 | |||||||||
491,238 | 414,916 | 350,814 | ||||||||||
Earnings from operations |
112,930 | 112,544 | 76,296 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
10,040 | 8,351 | 4,368 | |||||||||
Interest expense |
(4,763 | ) | (9,227 | ) | (9,154 | ) | ||||||
Other, net |
98 | 980 | 1,287 | |||||||||
5,375 | 104 | (3,499 | ) | |||||||||
Earnings before income taxes |
118,305 | 112,648 | 72,797 | |||||||||
Income tax expense |
42,619 | 41,654 | 28,080 | |||||||||
Net earnings |
$ | 75,686 | $ | 70,994 | $ | 44,717 | ||||||
Net earnings per share: |
||||||||||||
Basic |
$ | 1.67 | $ | 1.73 | $ | 1.13 | ||||||
Diluted |
$ | 1.63 | $ | 1.59 | $ | 1.06 | ||||||
Weighted average shares: |
||||||||||||
Basic |
45,262 | 41,079 | 39,686 | |||||||||
Diluted |
46,741 | 46,139 | 44,518 | |||||||||
See accompanying notes to consolidated financial statements.
40
Table of Contents
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(In thousands)
SHARES | AMOUNT | ACCUMULATED | ||||||||||||||||||||||||||||||
CLASS A | CLASS B | CLASS A | CLASS B | ADDITIONAL | OTHER | TOTAL | ||||||||||||||||||||||||||
COMMON | COMMON | COMMON | COMMON | PAID-IN | COMPREHENSIVE | RETAINED | STOCKHOLDERS | |||||||||||||||||||||||||
STOCK | STOCK | STOCK | STOCK | CAPITAL | INCOME | EARNINGS | EQUITY | |||||||||||||||||||||||||
Balance at December 31, 2004 |
22,234 | 17,011 | $ | 22 | $ | 17 | $ | 117,091 | $ | 12,005 | $ | 165,760 | $ | 294,895 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
| | | | | | 44,717 | 44,717 | ||||||||||||||||||||||||
Foreign currency translation adjustment |
| | | | | (4,966 | ) | | (4,966 | ) | ||||||||||||||||||||||
Total comprehensive income |
39,751 | |||||||||||||||||||||||||||||||
Contribution of common stock to the 401(k)
Plan |
59 | | | | 767 | | | 767 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock purchase plan |
135 | | | | 1,550 | | | 1,550 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock option plan |
594 | | 1 | | 5,365 | | | 5,366 | ||||||||||||||||||||||||
Tax benefit of stock options exercised |
| | | | 1,501 | | | 1,501 | ||||||||||||||||||||||||
Conversion of Class B Common Stock into
Class A Common Stock |
360 | (360 | ) | | | | | | | |||||||||||||||||||||||
Balance at December 31, 2005 |
23,382 | 16,651 | $ | 23 | $ | 17 | $ | 126,274 | $ | 7,039 | $ | 210,477 | $ | 343,830 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
| | | | | | 70,994 | 70,994 | ||||||||||||||||||||||||
Foreign
currency translation adjustment |
| | | | | 4,161 | | 4,161 | ||||||||||||||||||||||||
Total comprehensive income |
75,155 | |||||||||||||||||||||||||||||||
Stock compensation expense |
| | | | 2,029 | | | 2,029 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock purchase plan |
122 | | 1 | | 1,907 | | | 1,908 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock option plan |
1,716 | | 1 | | 17,054 | | | 17,055 | ||||||||||||||||||||||||
Tax benefit of stock options exercised |
| | | | 9,110 | | | 9,110 | ||||||||||||||||||||||||
Conversion of Class B Common Stock into
Class A Common Stock |
2,883 | (2,883 | ) | 3 | (3 | ) | | | | | ||||||||||||||||||||||
Balance at December 31, 2006 |
28,103 | 13,768 | $ | 28 | $ | 14 | $ | 156,374 | $ | 11,200 | $ | 281,471 | $ | 449,087 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net earnings |
| | | | | | 75,686 | 75,686 | ||||||||||||||||||||||||
Foreign
currency translation adjustment |
| | | | | 3,563 | | 3,563 | ||||||||||||||||||||||||
Total comprehensive income |
79,249 | |||||||||||||||||||||||||||||||
Cumulative effect of accounting change -
adjustment to retained earnings upon
adoption of FIN 48 |
| | | | | | (3,387 | ) | (3,387 | ) | ||||||||||||||||||||||
Redemption of convertible subordinated
notes |
3,368 | | 3 | | 88,743 | | | 88,746 | ||||||||||||||||||||||||
Stock compensation expense |
| | | | 1,081 | | | 1,081 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock purchase plan |
99 | | | | 2,066 | | | 2,066 | ||||||||||||||||||||||||
Proceeds from issuance of common stock
under the employee stock option plan |
506 | | 1 | | 6,126 | | | 6,127 | ||||||||||||||||||||||||
Tax benefit of stock options exercised |
| | | | 3,694 | | | 3,694 | ||||||||||||||||||||||||
Conversion of Class B Common Stock into
Class A Common Stock |
916 | (916 | ) | 1 | (1 | ) | | | | | ||||||||||||||||||||||
Balance at December 31, 2007 |
32,992 | 12,852 | $ | 33 | $ | 13 | $ | 258,084 | $ | 14,763 | $ | 353,770 | $ | 626,663 | ||||||||||||||||||
See accompanying notes to consolidated financial statements
41
Table of Contents
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings |
$ | 75,686 | $ | 70,994 | $ | 44,717 | ||||||
Adjustments to reconcile net earnings to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization of property and equipment |
17,220 | 16,203 | 22,070 | |||||||||
Amortization of deferred financing costs |
95 | 765 | 765 | |||||||||
Amortization of intangible assets |
437 | 502 | 523 | |||||||||
Provision for bad debts and returns |
1,610 | 4,591 | 2,882 | |||||||||
Tax benefits from stock-based compensation |
1,456 | 4,144 | 1,501 | |||||||||
Non cash stock compensation |
1,081 | 2,030 | | |||||||||
Provision for deferred taxes |
(1,102 | ) | (6,382 | ) | (6,322 | ) | ||||||
Loss on disposal of equipment |
272 | 299 | 170 | |||||||||
(Increase) decrease in assets: |
||||||||||||
Receivables |
7,948 | (47,994 | ) | (22,106 | ) | |||||||
Inventories |
(3,045 | ) | (64,364 | ) | 13,202 | |||||||
Prepaid expenses and other current assets |
1,417 | (3,530 | ) | (871 | ) | |||||||
Other assets |
(1,671 | ) | 1,340 | (2,476 | ) | |||||||
Increase (decrease) in liabilities: |
||||||||||||
Accounts payable |
2,956 | 49,563 | 13,777 | |||||||||
Accrued expenses |
(3,005 | ) | (2,122 | ) | 7,664 | |||||||
Net cash provided by operating activities |
101,355 | 26,039 | 75,496 | |||||||||
Cash flows used in investing activities: |
||||||||||||
Capital expenditures |
(31,175 | ) | (27,560 | ) | (13,627 | ) | ||||||
Purchases of short-term investments |
(249,450 | ) | (113,100 | ) | | |||||||
Maturities of short-term investments |
204,950 | 53,100 | | |||||||||
Net cash used in investing activities |
(75,675 | ) | (87,560 | ) | (13,627 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Net proceeds from the issuances of stock through employee
stock purchase plan and the exercise of stock options |
8,193 | 18,963 | 6,916 | |||||||||
Excess tax benefits from stock-based compensation |
2,238 | 4,966 | | |||||||||
Payments on long-term debt |
(520 | ) | (1,008 | ) | (7,660 | ) | ||||||
Net cash provided by (used in) financing activities |
9,911 | 22,921 | (744 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
35,591 | (38,600 | ) | 61,125 | ||||||||
Effect of exchange rates on cash and cash equivalents |
3,440 | 2,078 | (1,771 | ) | ||||||||
Cash and cash equivalents at beginning of year |
160,485 | 197,007 | 137,653 | |||||||||
Cash and cash equivalents at end of year |
$ | 199,516 | $ | 160,485 | $ | 197,007 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 4,714 | $ | 8,560 | $ | 8,374 | ||||||
Income taxes |
41,481 | 47,064 | 27,914 |
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
The Company issued 59,203 shares of Class A Common Stock to the Companys 401(k) plan, with a
value of $767,000 for the year ended December 31, 2005. No shares of Class A Common Stock were
issued to the Companys 401(k) plan in 2006 or 2007. The Company issued approximately 3.5 million
shares of Class A common stock to note holders upon conversion of our 4.50% convertible
subordinated debt with a carrying value of $89,969 for the year ended December 31, 2007.
See accompanying notes to consolidated financial statements.
42
Table of Contents
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 and 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company
Skechers U.S.A., Inc. (the Company) designs, develops, markets and distributes footwear. The
Company also operates retail stores and an e-commerce business.
The consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States and include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Use of Estimates
Management has made a number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity with accounting principles generally
accepted in the United States. Significant areas requiring the use of management estimates relate
primarily to the revenue recognition, allowance for bad debts, returns, sales allowances and
customer chargebacks, inventory write-downs, valuation of long-lived assets, litigation reserves,
valuation of deferred income taxes, uncertain tax positions, foreign currency translation and
stock-based compensation. Actual results could differ from those estimates.
(c) Business Segment Information
Skechers operations and segments are organized along its distribution channels and consists of
the following: domestic wholesale, international wholesale, retail and e-commerce sales.
Information regarding these segments is summarized in Note 14 to the Consolidated Financial
Statements.
(d) Revenue Recognition
The Company recognizes revenue on wholesale sales when products are shipped and the customer
takes ownership and assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or determinable. This
generally occurs at the time of shipment. Allowances for estimated returns, sales allowances,
discounts, doubtful accounts and chargebacks are provided for when related revenue is recorded.
Related costs paid to third-party shipping companies are recorded as a cost of sales. The Company
recognizes revenue from retail sales at the point of sale.
Net royalty income is earned from our licensing arrangements. Upon signing a new licensing
agreement, we receive up-front fees, which are generally characterized as prepaid royalties. These
fees are initially deferred and recognized as revenue as earned based on the terms of the contract
(i.e., as licensed sales are reported to the company or on a straight line basis over the term of
the agreement). The first calculated royalty payment is based on actual sales of the licensed
product. Typically, at each quarter end we receive correspondence from our licensees indicating
what the actual sales for the period were. This information is used to calculate and accrue the
related royalties based on the terms of the agreement.
(e) Cash and Cash Equivalents
Cash and cash equivalents consist primarily of certificates of deposit with an initial term of
less than three months. For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three months or less to be
cash equivalents.
(f) ShortTerm Investments
In general, investments with original maturities of greater than three months and remaining
maturities of less than one year are classified as short-term investments. Highly liquid
investments with maturities beyond one year may also be classified as short-term based on their
liquidity, managements intentions and because such marketable securities represent the investment
of cash that is available for current operations. Short-term investments consist of auction rate
securities, which are corporate and municipal debt securities and preferred stocks which have
underlying long-term maturities or preferred equity; however, they are traded and interest rates
reset through a modified Dutch auction at predetermined short-term intervals of between 7 and 90
days.
43
Table of Contents
Recently, several auctions have failed as a result of illiquidity and the imbalance in order
flow for auction rate securities. An auction failure means that the parties wishing to sell
securities could not do so. Accordingly, there is no assurance that future auctions will continue
to succeed, and as a result, our ability to liquidate our investments in the near term may be
limited or may not exist. A failed auction is not an indication of an increased credit risk or a
reduction in the underlying collateral. These securities are considered available-for-sale and
recorded on the Companys consolidated financial statements at fair market value, with the
unrealized gains and losses, net of tax, included in stockholders equity.
(g) Foreign Currency Translation
In accordance with SFAS 52, certain international operations use the respective local
currencies as their functional currency, while other international operations use the U.S. Dollar
as their functional currency. The Company considers the U.S. dollar as its functional currency.
The Company operates internationally through several foreign subsidiaries. Translation adjustments
for these subsidiaries are included in other comprehensive income. Additionally, one international
subsidiary, Skechers S.a.r.l. located in Switzerland, operates with a functional currency of the
U.S. dollar. Resulting remeasurement gains and losses from this subsidiary are included in the
determination of net earnings (loss). Assets and liabilities of the foreign operations denominated
in local currencies are translated at the rate of exchange at the balance sheet date. Revenues and
expenses are translated at the weighted average rate of exchange during the period. Translation of
intercompany loans of a long-term investment nature are included as a component of translation
adjustment in other comprehensive income.
(h) Inventories
Inventories, principally finished goods, are stated at the lower of cost (based on the
first-in, first-out method) or market. The Company provides for estimated losses from obsolete or
slow-moving inventories and writes down the cost of inventory at the time such determinations are
made. Reserves are estimated based upon inventory on hand, historical sales activity, and the
expected net realizable value. The net realizable value is determined based upon estimated sales
prices of such inventory through off-price or discount store channels.
(i) Income Taxes
The Company accounts for income taxes in accordance with SFAS 109, which requires that the
Company recognize deferred tax liabilities for taxable temporary differences and deferred assets
for deductible temporary differences and operating loss carry-forwards using enacted tax rates in
effect in the years the differences are expected to reverse. Deferred income tax benefit or expense
is recognized as a result of changes in net deferred tax assets or deferred tax liabilities. A
valuation allowance is recorded when it is more likely than not that some or all of any deferred
tax assets will not be realized.
Effective January 1, 2007, we adopted the provisions of FIN 48, which contains a two-step
process for recognizing and measuring uncertain tax positions accounted for in accordance with SFAS
No. 109. The first step is to determine whether or not a tax benefit should be recognized. A tax
benefit will be recognized if the weight of available evidence indicates that the tax position is
more likely than not to be sustained upon examination by the relevant tax authorities, The
recognition and measurement of benefits related to our tax positions requires significant judgment
as uncertainties often exist with respect to new laws, new interpretations of existing laws, and
rulings by taxing authorities. Differences between actual results and our assumptions, or changes
in our assumptions in future periods, are recorded in the period they become known.
(j) Depreciation and Amortization
Depreciation and amortization of property and equipment is computed using the straight-line
method based on the following estimated useful lives:
Buildings
|
20 years | |
Building improvements
|
10 years | |
Furniture, fixtures and equipment
|
5 years | |
Leasehold improvements
|
Useful life or remaining lease term, which ever is shorter |
44
Table of Contents
(k) Intangible Assets
Goodwill and indefinite-lived intangible assets are measured for impairment at least annually,
and more often when events indicate that impairment exists. Intangible assets with finite lives
continue to be amortized over their useful lives ranging from 510 years, generally on a
straight-line basis. Intangible assets, all subject to amortization, as of December 31, 2007 and
2006 are as follows (in thousands):
2007 | 2006 | |||||||
Intellectual property |
$ | 1,250 | $ | 1,250 | ||||
Other intangibles |
1,000 | 1,000 | ||||||
Trademarks |
1,050 | 1,050 | ||||||
Less accumulated amortization |
(3,222 | ) | (2,667 | ) | ||||
Total Intangible Assets |
$ | 78 | $ | 633 | ||||
(l) Long-Lived Assets
Long-lived assets such as property and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The Company recognized impairment
charges of approximately $0.9 million 2005. The Company did not record an impairment charge in
2006 or 2007. The impairment charges in 2005 related to the write down of leasehold improvements
of under-performing company owned retail stores. Fair value was based on estimated future cash
flows.
(m) Advertising Costs
Advertising costs are expensed in the period in which the advertisements are first run or over
the life of the endorsement contract. Advertising expense for the years ended December 31, 2007,
2006 and 2005 was approximately $99.2 million, $83.0 million, and $58.2 million, respectively.
Prepaid advertising costs at December 31, 2007 and 2006 were $0.8 million and $3.0 million,
respectively. Prepaid amounts outstanding at December 31, 2007 and 2006 represent the unamortized
portion of endorsement contracts and advertising in trade publications which had not run as of
December 31, 2007 and 2006, respectively.
(n) Earnings Per Share
Basic earnings per share represents net earnings divided by the weighted average number of
common shares outstanding for the period. Diluted earnings per share, in addition to the weighted
average determined for basic earnings per share, includes potential common shares which would arise
from the exercise of stock options using the treasury stock method, and the conversion of the
Companys 4.50% convertible subordinated notes for the period outstanding since their issuance in
April 2002 until their conversion in February 2007, if their effects are dilutive.
The following is a reconciliation of net earnings and weighted average common shares
outstanding for purposes of calculating earnings per share (in thousands):
Years Ended December 31, | ||||||||||||
Basic earnings per share | 2007 | 2006 | 2005 | |||||||||
Net earnings |
$ | 75,686 | $ | 70,994 | $ | 44,717 | ||||||
Weighted average common shares outstanding |
45,262 | 41,079 | 39,686 | |||||||||
Basic earnings per share |
$ | 1.67 | $ | 1.73 | $ | 1.13 |
45
Table of Contents
Years Ended December 31, | ||||||||||||
Diluted earnings per share | 2007 | 2006 | 2005 | |||||||||
Net earnings |
$ | 75,686 | $ | 70,994 | $ | 44,717 | ||||||
After tax effect of interest expense on 4.50%
convertible subordinated notes |
361 | 2,553 | 2,487 | |||||||||
Earnings for purposes of
computing diluted earnings per share |
$ | 76,047 | $ | 73,547 | $ | 47,204 | ||||||
Weighted average common shares outstanding |
45,262 | 41,079 | 39,686 | |||||||||
Dilutive stock options |
1,121 | 1,594 | 1,366 | |||||||||
Weighted average assumed conversion of
4.50% convertible subordinated notes |
358 | 3,466 | 3,466 | |||||||||
Weighted average common shares outstanding |
46,741 | 46,139 | 44,518 | |||||||||
Diluted earnings per share |
$ | 1.63 | $ | 1.59 | $ | 1.06 | ||||||
Options to purchase 764,500 shares of Class A common stock at prices ranging from $2.78 to
$24.00 that were outstanding at December 31, 2005 were not included in the computation of diluted
earnings per share because the options exercise prices were greater than the average market price
of the common shares and therefore their inclusion would have been anti-dilutive. There were no
options excluded from the calculation at December 31, 2006 or 2007.
(o) Product Design and Development Costs
The Company charges all product design and development costs to expense when incurred. Product
design and development costs aggregated approximately $9.2 million, $8.3 million, and $6.0 million
during the years ended December 31, 2007, 2006 and 2005, respectively.
(p) Fair Value of Financial Instruments
The carrying amount of the Companys financial instruments, which principally include cash and
cash equivalents, short-term investments, accounts receivable, accounts payable and accrued
expenses, approximates fair value due to the relatively short maturity of such instruments.
The carrying amount of the Companys long-term borrowings approximates the fair value based
upon current rates and terms available to the Company for similar debt.
(q) New Accounting Standards
In December 2007, the FASB issued SFAS 160 Accounting for Noncontrolling Interests, which
clarifies the classification of noncontrolling interests in consolidated statements of financial
position and the accounting for and reporting of transactions between the reporting entity and
holders of such noncontrolling interests. SFAS 160 will be effective for fiscal years beginning
after December 15, 2008. We are currently evaluating the impact of this standard on our
Consolidated Financial Statements; however, we do not expect that the adoption of SFAS 160 will
have a material impact on our financial condition or results of operations.
In December 2007, the FASB issued SFAS 141(R) Applying the Acquisition Method, which
clarifies the accounting for a business combination and requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date. SFAS 141(R) will be effective for
fiscal years beginning after December 15, 2008. We are currently evaluating the impact of this
standard on our Consolidated Financial Statements; however, we do not expect that the adoption of
SFAS 141(R) will have a material impact on our financial condition or results of operations.
In February 2007, the FASB issued SFAS 159 The Fair Value Option for Financial Assets and
Financial Liabilities, Including an amendment of FASB Statement No. 115, which provides companies
with an option to report selected financial assets and liabilities at fair value. Furthermore, SFAS
159 establishes presentation and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types of assets and liabilities.
SFAS 159 will be effective for fiscal years beginning after November 15, 2007. We are currently
evaluating the impact of this standard on our Consolidated Financial
46
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Statements; however, we do not expect that the adoption of SFAS 159 will have a material
impact on our financial condition or results of operations.
In September 2006, the FASB issued SFAS 157 Fair Value Measurements, which provides guidance
for using fair value to measure assets and liabilities. The standard also responds to investors
requests for expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the effect of fair value
measurements on earnings. The standard applies whenever other standards require (or permit) assets
or liabilities to be measured at fair value. The standard does not expand the use of fair value in
any new circumstances. Statement 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is
permitted. We are currently evaluating the impact of this standard on our Consolidated Financial
Statements; however, we do not expect that the adoption of SFAS 157 will have a material impact on
our financial condition or results of operations.
(2) SHORT TERM INVESTMENTS
Short-term investments consist of certain marketable equity securities and other investments
aggregating $104.5 million and $60.0 million at December 31, 2007 and 2006, respectively, and are
included in current assets in the accompanying consolidated balance sheets. Investments in highly
liquid debt securities, municipal bonds and preferred stock are stated at fair value, which
approximates cost. Unrealized gains and losses related to marketable equity securities at December
31, 2007 and 2006 were negligible.
Our available-for-sale securities at December 31, 2007 consisted of $78.8 million of auction
rate preferred stocks and $25.7 million of auction rate municipal and corporate bonds whereby
interest rates are reset on a recurring basis of between 7 and 90 days. The auction rate preferred
stocks are collateralized by portfolios of municipal bonds issued by various state and local
governments, and the fair value of the underlying collateral is required to be maintained at 200%
of the amount of preferred stock. While all of the auctions involving all of the securities were
successful during January 2008, the auctions failed in February 2008, resulting in our continuing
to hold such securities. These failed auction are not an indication of an increased credit risk or
a reduction in the underlying collateral, however it means that parties wishing to sell these
securities could not do so. Based on current market conditions, it is
not known when or if the
capital markets will come back into balance to achieve successful auctions related for these
securities. As of February 22, 2008, including the securities involved in failed auctions, we held
$110.7 million of these auction rate securities.
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2007 and 2006 is summarized as follows (in thousands):
2007 | 2006 | |||||||
Land |
$ | 14,358 | $ | 14,358 | ||||
Buildings and improvements |
56,012 | 49,454 | ||||||
Furniture, fixtures and equipment |
85,354 | 81,164 | ||||||
Leasehold improvements |
79,377 | 66,708 | ||||||
Total property and equipment |
235,101 | 211,684 | ||||||
Less accumulated depreciation and amortization |
136,701 | 124,039 | ||||||
Property and equipment, net |
$ | 98,400 | $ | 87,645 | ||||
The Company capitalized $0.9 million and $0.3 million of interest expense during 2007 and
2006, respectively relating to the construction of our corporate headquarters.
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(4) ACCRUED EXPENSES
Accrued expenses at December 31, 2007 and 2006 are summarized as follows (in thousands):
2007 | 2006 | |||||||
Accrued inventory purchases |
$ | 3,937 | $ | 4,678 | ||||
Accrued payroll and related taxes |
14,919 | 13,914 | ||||||
Income taxes payable |
1,058 | | ||||||
Accrued interest |
35 | 843 | ||||||
Accrued expenses |
$ | 19,949 | $ | 19,435 | ||||
(5) SHORT-TERM BORROWINGS
On May 31, 2006, the Company amended its secured line of credit, which permits the Company and
certain of its subsidiaries to borrow up to $150.0 million based upon eligible accounts receivable
and inventory, which line can be increased to $250.0 million at our request. Borrowings bear
interest at the borrowers election based on either the prime rate or LIBOR. Prime rate loans will
bear interest at a rate equal to JPMorgan Chase Banks publicly announced prime rate less up to
0.50%. LIBOR loans will bear interest at a rate equal to the applicable LIBOR plus up to an
additional 1.75%. The Company pays a monthly unused line of credit fee of 0.25% per annum. The
loan agreement, which expires on May 31, 2011, provides for the issuance of letters of credit up to
a maximum of $30.0 million. The loan agreement contains customary affirmative and negative
covenants for secured credit facilities of this type, including a financial covenant requiring a
fixed charge coverage ratio of not less than 1.1 at the end of each quarter if excess availability
of eligible account receivable and inventory is less than $50.0 million at any time during such
quarter. Excess availability was not less than $50.0 million during the three months ended
December 31, 2007; hence, the fixed charge ratio requirement was not applicable at such date. No
amounts were outstanding and the Company was in compliance with all other covenants of the loan
agreement at December 31, 2007. The Company had $9.6 million and $10.0 million of outstanding
letters of credit as of December 31, 2007 and 2006, respectively.
(6) LONG-TERM BORROWINGS
Long-term debt at December 31, 2007 and 2006 is as follows (in thousands):
2007 | 2006 | |||||||
4.50% convertible subordinated notes due April 15,
2007 (see below) |
| $ | 90,000 | |||||
Note payable to bank, due in monthly installments
of $82.2 (includes principal and interest), fixed
rate interest at 7.79%, secured by property,
balloon payment of $8,716 due January 2011 |
$ | 9,557 | 9,790 | |||||
Note payable to bank, due in monthly installments
of $57.6 (includes principal and interest), fixed
rate interest at 7.89%, secured by property,
balloon payment of $6,776 due February 2011 |
7,268 | 7,383 | ||||||
Capital lease obligations |
74 | 208 | ||||||
Subtotal |
16,899 | 107,381 | ||||||
Less current installments |
437 | 576 | ||||||
Total long-term debt |
$ | 16,462 | $ | 106,805 | ||||
The aggregate maturities of long-term borrowings at December 31, 2007 are as follows:
2008 |
$ | 437 | ||
2009 |
395 | |||
2010 |
427 | |||
2011 |
15,640 | |||
$ | 16,899 | |||
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On January 19, 2007, we called our 4.5% convertible subordinated notes for redemption. The
redemption date was February 20, 2007. The aggregate principal amount of notes outstanding was
$90.0 million. Holders of $89.969 million principal amount of the notes, which included $2.5
million of principal amount of the notes held by us, converted their notes into shares of our Class
A Common Stock prior to the redemption date. As a result of these conversions, 3,464,594 shares of
Class A Common Stock were issued to holders of the notes, which included 96,272 shares issued to
the Company that were immediately retired. In connection with these conversions, the Company paid
approximately $500 in cash to holders who elected to convert their notes, which represented cash
paid in lieu of fractional shares. In addition, the Company paid approximately $32,000 to holders
who redeemed their notes, which represented the redemption price of 100.9% of $31,000 principal
amount of the notes plus accrued interest. As a result of the subsequent conversion of $89.969
million of the notes into equity, the Company has classified such amount as a long-term liability
at December 31, 2006, under Statement of Financial Accounting Standards No. 6, Classification of
Short-Term Obligations Expected to Be Refinanced an amendment of ARB No. 43, Chapter 3.
The Companys long-term debt obligations contain both financial and non-financial covenants,
including cross default provisions. The Company is in compliance with all its material
non-financial covenants, including any cross default provisions, and financial covenants of our
long-term debt as of December 31, 2007.
(7) STOCK COMPENSATION
(a) Impact of the adoption of SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123(R))
On January 1, 2006, the Company adopted SFAS 123(R) using the modified prospective transition
method. Previously, the Company had followed Accounting Principles Board, Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25), and accounted for employee stock options at
intrinsic value. Accordingly, during the year ended December 31, 2006, we recorded stock-based
compensation expense for awards granted prior to, but not yet vested as of, January 1, 2006, as if
the fair value method required for pro forma disclosure under SFAS 123 were in effect for expense
recognition purposes, adjusted for estimated forfeitures. For stock-based awards granted after
January 1, 2006, we have recognized compensation expense based on the grant date fair value using
the Black-Scholes valuation model. For these awards, we have recognized compensation expense on a
straight-line basis. As SFAS 123(R) requires that stock-based compensation expense be based on
awards that are ultimately expected to vest, stock-based compensation for the year ended December
31, 2007 and 2006 has been reduced for estimated forfeitures. For the year ended December 31, 2007
and 2006, stock compensation expense as a result of SFAS 123(R) was $1.1 million and $2.0 million,
respectively, and was recorded to general and administrative expenses which represented a reduction
of earnings before income taxes in the same amount. The impact to 2007 and 2006 net income was a
reduction of $0.9 million and $1.6 million, respectively. No stock compensation expense was
recorded during 2005.
(b) Equity Incentive Plans
In January 1998, the Companys Board of Directors adopted the 1998 Stock Option, Deferred
Stock and Restricted Stock Plan for the grant of qualified incentive stock options (ISOs), non
qualified stock options and deferred and restricted stock (the Equity Incentive Plan). The
exercise price for any option granted may not be less than fair value (110% of fair value for ISOs
granted to certain employees). In June 2001, the stockholders approved an amendment to the plan to
increase the number of shares of Class A Common Stock authorized for issuance under the plan to
8,215,154. In May 2003, stockholders approved an amendment to the plan to increase the number of
shares of Class A Common Stock authorized for issuance under the plan to 11,215,154. Option awards
are generally granted with an exercise price equal to the market price of the Companys stock at
the date of grant. Stock option awards generally become exercisable over a four-year graded
vesting period and expire ten years from the date of grant.
On April 16, 2007, the Companys Board of Directors adopted the 2007 Incentive Award Plan (the
2007 Plan), and the 2007 Plan became effective upon approval by the Companys stockholders on May
24, 2007. The Companys Board of Directors terminated the Equity Incentive Plan as of May 24,
2007, with no additional granting of awards being permitted thereafter, although any awards then
outstanding under the Equity Incentive Plan remain in force according to the terms of the
terminated plan and the applicable award agreements. A total of 7,500,000 shares of Class A Common
Stock are reserved for issuance under the 2007 Plan, which provides for grants of stock options,
restricted stock and various other types of awards as described in the plan to the employees,
consultants and directors of the Company and its subsidiaries. The 2007 Plan is administered by
the Compensation Committee of the Companys Board of Directors.
Prior to adopting SFAS 123(R), we presented all tax benefits resulting from the exercise of
stock options as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires cash
flows resulting from excess tax benefits to be classified as a part of cash
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flows from financing activities. Excess tax benefits are realized from tax deductions for
exercised options and vesting of nonvested stock in excess of the deferred tax assets attributable
to stock compensation costs for such options. As a result of adopting SFAS 123(R), $2.2 million
and $5.0 million of excess tax benefits for the year-ended December 31, 2007 and 2006 have been
classified as a financing cash inflow. Cash received from stock option exercises for the year-ended
December 31, 2007, 2006 and 2005 was $6.1 million, $17.1 million and $5.4 million, respectively.
The actual tax benefit realized for the tax deductions from option exercise of stock options and
vesting of nonvested shares totaled $3.4 million, $9.3 million and $1.5 million for the year-ended
December 31, 2007, 2006 and 2005, respectively. The total income tax benefit recognized for
stock-based compensation costs was $0.1 million and $0.4 million for the year ended December 31,
2007 and 2006, respectively. No income tax benefit for stock-based compensation costs was
recognized for the year ended December 31, 2005. The impact of SFAS 123(R) stock-based
compensation expense was a reduction of $0.02 earnings per basic and per diluted share for the year
ended December 31, 2007. The impact of SFAS 123(R) stock-based compensation expense was a
reduction of $0.05 earnings per basic and $0.04 per diluted share for the year ended December 31,
2006. The Company plans to issue new shares for stock options exercised and nonvested shares that
vest.
(c) Valuation Assumptions
For pro forma net earnings purposes, the fair value of each option is estimated on the date of
grant using the Black-Scholes option pricing model that uses the assumptions noted in the following
table. Expected volatility is based on historical share price data. The Company uses historical
employee exercise and cancellation data to estimate expected term and forfeiture rates. The
risk-free rate is based on U.S. Treasury yields in effect at the time of grant. Employees that
have similar historical exercise behavior are considered separately for valuation purposes. Option
valuation methods require the input of highly subjective assumptions including the expected stock
price volatility, expected term and forfeiture rate. Because the Black-Scholes based option
valuation models incorporate ranges of assumptions for inputs, those inputs are disclosed in the
table as follows:
2006 | 2005 | |||||||
Dividend yield |
| | ||||||
Expected volatility |
62 | % | 71 | % | ||||
Risk-free interest rate |
4.52 | % | 3.88 | % | ||||
Expected life of option |
7 | 5 | ||||||
There were no ISOs granted during 2007. Using the Black-Scholes option valuation model the
weighted-average fair value per share of options granted during 2006 and 2005 was $12.70, and
$8.28, respectively. The total intrinsic value of options exercised during 2007, 2006 and 2005 was
$9.9 million, $25.5 million, and $4.0 million, respectively.
(d) Stock-Based Payment Awards
Shares subject to option under the Equity Incentive Plan were as follows:
WEIGHTED | ||||||||
SHARES | OPTION EXERCISE PRICE | |||||||
Outstanding at December 31, 2004 |
4,975,341 | $ | 10.90 | |||||
Granted |
35,000 | 13.52 | ||||||
Exercised |
(593,671 | ) | 9.04 | |||||
Canceled |
(207,233 | ) | 14.89 | |||||
Outstanding at December 31, 2005 |
4,209,437 | 10.98 | ||||||
Granted |
15,000 | 19.49 | ||||||
Exercised |
(1,711,945 | ) | 9.96 | |||||
Canceled |
(26,910 | ) | 10.35 | |||||
Outstanding at December 31, 2006 |
2,485,582 | 11.74 | ||||||
Granted |
| |||||||
Exercised |
(501,874 | ) | 12.23 | |||||
Canceled |
(21,952 | ) | 16.86 | |||||
Outstanding at December 31, 2007 |
1,961,756 | $ | 11.56 | |||||
Options available for grant at December 31, 2007 |
3,258,209 | |||||||
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As of December 31, 2007, there was approximately $0.3 million of total unrecognized
compensation cost related to unvested stock options and restricted stock granted under our Equity
Incentive Plan. That cost is expected to be recognized over a weighted average period of 1 year.
The total fair value of shares vested during the period ended December 31, 2007 was $1.1 million.
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2007:
OPTIONS OUTSTANDING | OPTIONS EXERCISABLE | |||||||||||||||||||
WEIGHTED | ||||||||||||||||||||
NUMBER | WEIGHTED | WEIGHTED | NUMBER | AVERAGE | ||||||||||||||||
RANGE OF | OUTSTANDING | AVERAGE REMAINING | AVERAGE | EXERCISABLE AT | EXERCISE | |||||||||||||||
EXERCISE PRICE | DECEMBER 31, 2007 | CONTRACTUAL LIFE | EXERCISE PRICE | DECEMBER 31, 2007 | PRICE | |||||||||||||||
$2.78 to $3.94 |
29,812 | 2.1 years | $ | 3.93 | 29,812 | $ | 3.93 | |||||||||||||
$6.95 to $9.28 |
717,873 | 5.4 years | 7.46 | 717,873 | 7.46 | |||||||||||||||
$10.48 to $15.50 |
1,047,355 | 3.0 years | 12.65 | 1,033,355 | 12.64 | |||||||||||||||
$19.19 to $24.00 |
166,716 | 3.1 years | 23.71 | 166,716 | 23.71 | |||||||||||||||
1,961,756 | 3.9 years | $ | 11.56 | 1,947,756 | $ | 11.55 | ||||||||||||||
As of December 31, 2007, 2006 and 2005, the number of options exercisable for each year was
1,947,756, 2,261,707, and 3,718,812, respectively. The weighted-average exercise price of those
options was $11.55, $11.97, and $11.27, respectively. The total intrinsic value of options
outstanding and exercisable at December 31, 2007 was $16.3 million and $16.2 million, respectively.
The total intrinsic value of options outstanding and exercisable at December 31, 2006 was $29.2
million and $27.1 million, respectively. The aggregate intrinsic value is calculated as the
difference between the exercise price of the underlying awards and the quoted price of our common
stock for the 1.8 million options that were in-the-money at December 31, 2007.
A summary of the status and changes of our nonvested shares related to our Equity Incentive
Plan as of and during the period ended December 31, 2007 is presented below:
WEIGHTED AVERAGE | ||||||||
GRANT-DATE FAIR | ||||||||
SHARES | VALUE | |||||||
Nonvested at December 31, 2006 |
17,333 | $ | 16.38 | |||||
Granted |
2,500 | 29.26 | ||||||
Vested |
(4,666 | ) | 17.00 | |||||
Nonvested at December 31, 2007 |
15,167 | $ | 18.32 | |||||
The nonvested shares generally vest over a four-year graded vesting period and expire ten
years from the date of grant.
(e) Stock Purchase Plans
Effective July 1, 1998, the Companys Board of Directors adopted the 1998 Employee Stock
Purchase Plan (the 1998 ESPP). The 1998 ESPP provides that a total of 2,781,415 shares of Class A
Common Stock are reserved for issuance under the plan. The 1998 ESPP, which is intended to qualify
as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as
amended, is implemented utilizing six-month offerings with purchases occurring at six-month
intervals. The 1998 ESPP administration is overseen by the Board of Directors. Employees are
eligible to participate if they are employed by the Company for at least 20 hours per week and more
than five months in any calendar year. The 1998 ESPP permits eligible employees to purchase Class
A Common Stock through payroll deductions, which may not exceed 15% of an employees compensation.
The price of Class A Common Stock purchased under the 1998 ESPP is 85% of the lower of the fair
market value of the Class A Common Stock at the beginning of each six-month offering period or on
the applicable purchase date. Employees may end their participation in an offering at any time
during the offering period. The Board may at any time amend or terminate the 1998 ESPP, except
that no such amendment or termination may adversely affect shares previously granted under the 1998
ESPP. During 2007, 2006 and 2005, 98,349, 121,378, and 135,387 shares were issued, respectively,
under the 1998 ESPP for which the Company received approximately $2.1 million, $1.9 million, and
$1.6 million, respectively.
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On April 16, 2007, the Companys Board of Directors adopted the 2008 Employee Stock Purchase
Plan (the 2008 ESPP), and the Companys stockholders approved the 2008 ESPP on May 24, 2007. The
2008 ESPP became effective on January 1, 2008, and the Companys Board of Directors terminated the
1998 ESPP as of such date, with no additional granting of rights being permitted under the 1998
ESPP. The 2008 ESPP provides that a total of 3,000,000 shares of Class A Common Stock are reserved
for issuance under the plan. This number of shares that may be made available for sale is subject
to automatic increases on the first day of each fiscal year during the term of the 2008 ESPP as
provided in the plan. The 2008 ESPP is intended to qualify as an employee stock purchase plan
under Section 423 of the Internal Revenue Code of 1986, as amended. The terms of the 2008 ESPP,
which are substantially similar to those of the 1998 ESPP, permit eligible employees to purchase
Class A Common Stock at six-month intervals through payroll deductions, which may not exceed 15% of
an employees compensation. The price of Class A Common Stock purchased under the 2008 ESPP is 85%
of the lower of the fair market value of the Class A Common Stock at the beginning of each
six-month offering period or on the applicable purchase date. The 2008 ESPP is administered by the
Companys Board of Directors.
(f) Pro Forma Information for Periods Prior to the Adoption of SFAS 123(R)
The following table illustrates the effects on net earnings if compensation cost for the
Companys stock option plans and its stock purchase plans had been determined based on the
estimated fair value at the grant dates for awards under those plans consistent with the fair value
method of SFAS 123 utilizing the Black-Scholes option-pricing model in each period (in thousands):
2005 | ||||
Net earnings, as reported |
$ | 44,717 | ||
Deduct total stock-based employee compensation expense under
fair value-based method for all awards, net of related tax
effects |
(1,853 | ) | ||
Pro forma net earnings for basic pro
forma earnings per share |
42,864 | |||
Add back interest on 4.50% debentures, net of tax |
2,487 | |||
Pro forma net earnings for diluted pro forma earnings per share |
$ | 45,351 | ||
Pro forma net earnings per share: |
||||
Basic |
$ | 1.08 | ||
Diluted |
1.02 |
Pro forma basic net earnings per share represents net pro forma earnings divided by the
weighted average number of common shares outstanding for the period. Pro forma diluted earnings per
share, in addition to the weighted average determined for pro forma basic earnings per share,
includes the dilutive effect of potentially dilutive securities which would arise from the
exercise of stock options using the treasury stock method, and assumes the conversion of the
Companys 4.50% convertible subordinated notes if their effects are dilutive.
(8) STOCKHOLDERS EQUITY
Stock Issuances
The authorized capital stock of the Company consists of 100,000,000 shares of Class A Common
Stock, par value $.001 per share, 60,000,000 shares of Class B Common Stock, par value $.001 per
share, and 10,000,000 shares of preferred stock, $.001 par value per share.
The Class A Common Stock and Class B Common Stock have identical rights other than with
respect to voting, conversion and transfer. The Class A Common Stock is entitled to one vote per
share, while the Class B Common Stock is entitled to ten votes per share on all matters submitted
to a vote of stockholders. The shares of Class B Common Stock are convertible at any time at the
option of the holder into shares of Class A Common Stock on a share-for-share basis. In addition,
shares of Class B Common Stock will be automatically converted into a like number of shares of
Class A Common Stock upon any transfer to any person or entity which is not a permitted transferee.
During 2007, 2006 and 2005 certain Class B stockholders converted 916,400, 2,883,000, and
360,000 shares, respectively, of Class B Common Stock to Class A Common Stock.
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Table of Contents
(9) TOTAL OTHER INCOME (EXPENSE), NET
Other income (expense), net at December 31, 2007, 2006 and 2005 is summarized as follows (in
thousands):
2007 | 2006 | 2005 | ||||||||||
Gain (loss) on foreign currency transactions |
$ | (295 | ) | $ | 116 | $ | (351 | ) | ||||
Legal settlements |
393 | 864 | 1,638 | |||||||||
Total other income, net |
$ | 98 | $ | 980 | $ | 1,287 | ||||||
(10) INCOME TAXES
The provisions for income tax expense were as follows (in thousands):
2007 | 2006 | 2005 | ||||||||||
Federal: |
||||||||||||
Current |
$ | 33,354 | $ | 38,252 | $ | 27,562 | ||||||
Deferred |
(301 | ) | (4,451 | ) | (4,157 | ) | ||||||
Total federal |
33,053 | 33,801 | 23,405 | |||||||||
State: |
||||||||||||
Current |
7,255 | 7,398 | 5,417 | |||||||||
Deferred |
(66 | ) | (586 | ) | (588 | ) | ||||||
Total state |
7,189 | 6,812 | 4,829 | |||||||||
Foreign : |
||||||||||||
Current |
2,686 | 2,192 | 1,423 | |||||||||
Deferred |
(309 | ) | (1,151 | ) | (1,577 | ) | ||||||
Total foreign |
2,377 | 1,041 | (154 | ) | ||||||||
Total income taxes |
$ | 42,619 | $ | 41,654 | $ | 28,080 | ||||||
Income taxes differ from the statutory tax rates as applied to earnings before income taxes as
follows (in thousands):
2007 | 2006 | 2005 | ||||||||||
Expected income tax expense |
$ | 41,407 | $ | 39,427 | $ | 25,479 | ||||||
State income tax, net of federal benefit |
4,444 | 4,611 | 3,585 | |||||||||
Rate differential on foreign income |
(3,119 | ) | (379 | ) | (720 | ) | ||||||
Exempt income |
(1,026 | ) | (260 | ) | | |||||||
Non-deductible expenses |
464 | 949 | 321 | |||||||||
Change in valuation allowance |
194 | (967 | ) | (974 | ) | |||||||
Other |
255 | (1,727 | ) | 389 | ||||||||
Total provision for income taxes |
$ | 42,619 | $ | 41,654 | $ | 28,080 | ||||||
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The tax effects of temporary differences that give rise to significant portions of deferred
tax assets and deferred tax liabilities at December 31, 2007 and 2006 are presented below (in
thousands):
2007 | 2006 | |||||||
DEFERRED TAX ASSETS: |
||||||||
Deferred tax assets current: |
||||||||
Inventory adjustments |
$ | 2,555 | $ | 2,991 | ||||
Accrued expenses |
6,540 | 4,661 | ||||||
Allowances for bad debts and chargebacks |
2,570 | 4,732 | ||||||
Total current assets |
11,665 | 12,384 | ||||||
Deferred tax assets long term: |
||||||||
Depreciation on property and equipment |
11,441 | 9,633 | ||||||
Loss carryforwards |
3,133 | 2,737 | ||||||
Valuation allowance |
(682 | ) | (488 | ) | ||||
Stock-based compensation |
91 | 102 | ||||||
Total long term assets |
13,983 | 11,984 | ||||||
Total deferred tax assets |
25,648 | 24,368 | ||||||
Deferred tax liabilities current: |
||||||||
Prepaid expenses |
3,071 | 2,710 | ||||||
Other |
| 184 | ||||||
Total deferred tax liabilities |
3,071 | 2,894 | ||||||
Net deferred tax assets |
$ | 22,577 | $ | 21,474 | ||||
Management believes it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the net deferred tax assets.
Consolidated U.S. income before income taxes was $101.4 million, $104.8 million, and $66.0
million for the years ended December 31, 2007, 2006 and 2005, respectively. The corresponding
income before income taxes for non-U.S. based operations was $16.9 million, $7.8 million, and $6.8
million for the years ended December 31, 2007, 2006 and 2005, respectively.
As of December 31, 2007 and 2006, Skechers had combined foreign operating loss carry-forwards
available to reduce future taxable income of approximately $8.7 million and $7.4 million,
respectively. Some of these net operating losses expire beginning in 2011, however others can be
carried forward indefinitely. As of December 31, 2007 and 2006, a valuation allowance against
deferred tax assets of $0.7 million and $0.5 million, respectively, had been set up for those loss
carry-forwards not expected to be fully utilized in reducing future taxable income.
As of December 31, 2007, withholding and U.S. taxes have not been provided on approximately
$15.5 million of cumulative undistributed earnings of the Companys non-U.S. subsidiaries because
the Company intends to indefinitely reinvest these earnings in its non-U.S. subsidiaries.
We adopted the provisions FIN 48 on January 1, 2007. As a result of the implementation of FIN
48, we recognized approximately a $3.4 million increase in the liability for unrecognized tax
benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained
earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
Balance as of January 1, 2007 |
$ | 11,241 | ||
Additions based on current year tax positions |
6,836 | |||
Additions for prior year tax positions |
1,015 | |||
Reductions for prior year tax positions |
(287 | ) | ||
Settlement of uncertain tax positions |
(504 | ) | ||
Reductions related to lapse of statute of limitations |
(36 | ) | ||
Balance at December 31, 2007 |
$ | 18,265 | ||
If recognized, the entire amount of unrecognized tax benefits would be recorded as a reduction
in income tax expense.
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Estimated interest and penalties related to the underpayment of income taxes are classified as
a component of income tax expense and totaled $0.5 million, $0.1 million, and $0.1 million for the
years ended December 31, 2007, 2006 and 2005, respectively. Accrued interest and penalties were
$1.3 million and $1.1 million as of December 31, 2007 and December 31, 2006, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and various state, local
and foreign jurisdictions. The Company has completed U.S. federal audits through 2003, and is not
currently under examination by the United States Internal Revenue Service (the IRS); however the
company is under examination by a number of states. It is reasonably possible that most or all of
these examinations could be settled within the next twelve months which would reduce the balance of
2007 and prior year unrecognized tax benefits by $1.2 million.
With few exceptions, the Company is no longer subject to state, local or non-U.S. income tax
examinations by tax authorities for years before 2004. Tax years 2004 through 2006 remain open to
examination by the U.S. federal, state, and foreign taxing jurisdictions under which we are
subject. It is reasonably possible that the statute of limitations for the 2004 tax year will
lapse for the U.S. federal and most state tax jurisdictions during 2008, which would reduce the
balance of 2007 and prior year unrecognized tax benefits by $2.5 million.
We have applied for advanced pricing agreements with various tax authorities related to
the pricing of certain intercompany transactions. It is reasonably possible that we will receive
final decisions on these applications within the next twelve months which would reduce the balance
of 2007 and prior year unrecognized tax benefits by $11.2 million, and, depending on how it is
resolved, that reduction may or may not impact earnings. If the advanced pricing agreements are
not resolved in 2008, we will continue to add to the unrecognized tax benefits, as we did in 2006
and 2007, and that increase could be approximately $8.0 million to $10.0 million.
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company operates in the footwear industry and generates most of its sales in the United
States, although its products are sold into various foreign countries. The footwear industry is
impacted by the general economy. Changes in the marketplace may significantly affect managements
estimates and the Companys performance. Management performs regular evaluations concerning the
ability of its customers to satisfy their obligations and provides for estimated doubtful accounts.
Domestic accounts receivable, which generally do not require collateral from customers, amounted
to $110.3 million and $141.7 million before allowances for bad debts and sales returns, and
chargebacks at December 31, 2007 and 2006, respectively. Foreign accounts receivable, which
generally are collateralized by letters of credit, amounted to $67.4 million and $46.6 million
before allowance for bad debts, sales returns, and chargebacks at December 31, 2007 and 2006,
respectively. International net sales amounted to $291.3 million, $203.3 million, and $179.6
million for the years ended December 31, 2007, 2006 and 2005, respectively. The Companys credit
losses due to write-offs for the years ended December 31, 2007, 2006 and 2005 were $1.6 million,
$4.6 million, and $2.9 million respectively, and did not significantly differ from managements
expectations.
Net sales to customers in North America exceeded 75% of total net sales for each of the years
in the three-year period ended December 31, 2007. Assets located outside the United States consist
primarily of cash, accounts receivable, inventory, property and equipment, and other assets. Net
assets held outside the United States were $126.1 million and $119.1 million at December 31, 2007
and 2006, respectively.
During 2007, 2006, and 2005, no customer accounted for 10% or more of net sales. One customer
accounted for 10.0%, 12.0% and 10.3% of net trade receivables at December 31, 2007, 2006 and 2005,
respectively. During 2007, 2006 and 2005, our net sales to our five largest customers were
approximately 25.3%, 24.9%, and 25.4%, respectively.
During 2007, the Company had four manufacturers which accounted for between 7.9% and 29.7% of
total purchases. During 2006, the Company had four manufacturers which accounted for between 8.9%
and 30.8% of total purchases. During 2005, the Company had four manufacturers which accounted for
between 7.9% and 32.4% of total purchases.
Most of the Companys products are produced in China. The Companys operations are subject to
the customary risks of doing business abroad, including, but not limited to, currency fluctuations,
custom duties and related fees, various import controls and other monetary barriers, restrictions
on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political
instability. The Company believes it has acted to reduce these risks by diversifying manufacturing
among various factories. To date, these risk factors have not had a material adverse impact on the
Companys operations.
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(12) BENEFIT PLAN
The Company has adopted a profit sharing plan covering all employees who are 21 years of age
and have completed six months of service. Employees may contribute up to 15.0% of annual
compensation. Company contributions to the plan are discretionary and vest over a six year period.
The Companys contributions to the plan amounted to $1.2 million, $1.1 million, and $0.8
million for the years ended December 31, 2007, 2006 and 2005, respectively. For 2006 and 2007, the
Company made a cash contribution. For its contribution to the plan for 2005, the Company issued
59,203, shares of its Class A Common Stock. The shares contributed to the plan contain certain
restrictions regarding the subsequent sales of those shares.
(13) COMMITMENTS AND CONTINGENCIES
(a) Construction
During 2005, we entered into a construction agreement with Morley Construction Company for the
construction of our third corporate facility in Manhattan Beach, California. The agreement has a
maximum payment clause in which Morley agrees that the construction cost of the facility will not
exceed $18.1 million plus change orders of $1.7 million, of which $19.2 million was incurred as of
December 31, 2007. The exterior of the facility was completed in 2007, and while we are currently
working on the interior improvements, we expect to move in during 2008.
(b) Leases
The Company leases facilities under operating lease agreements expiring through July 2027. The
Company pays taxes, maintenance and insurance in addition to the lease obligation. The Company also
leases certain equipment and automobiles under operating lease agreements expiring at various dates
through April 2007. Rent expense for the years ended December 31, 2007, 2006 and 2005 approximated
$48.9 million, $40.4 million, and $37.2 million, respectively.
The Company also leases certain property and equipment under capital lease agreements
requiring monthly installment payments through February 2010. The cost of this property and
equipment was $0.1 million with a net book value of $0.1 million at December 31, 2007. The cost of
this property and equipment was $2.0 million with a net book value of $0.5 million at December 31,
2006. Amortization of these assets is included in depreciation expense in the accompanying
consolidated statements of cash flows.
Minimum lease payments, which takes into account escalation clauses, are recognized on a
straight-line basis over the minimum lease term. Subsequent adjustments to our lease payments due
to changes in an existing index, usually the consumer price index, are typically included in our
calculation of the minimum lease payments when the adjustment is known. Reimbursements for
leasehold improvements are recorded as liabilities and are amortized over the lease term. Lease
concessions, in our case usually a free rent period, are considered in the calculation of our
minimum lease payments for the minimum lease term.
Future minimum lease payments under noncancellable leases at December 31, 2007 are as follows (in
thousands):
CAPITAL | OPERATING | |||||||
LEASES | LEASES | |||||||
Year ending December 31: |
||||||||
2008 |
$ | 74 | $ | 47,124 | ||||
2009 |
6 | 55,068 | ||||||
2010 |
| 51,271 | ||||||
2011 |
| 44,559 | ||||||
2012 |
| 36,937 | ||||||
Thereafter |
| 176,617 | ||||||
80 | $ | 411,576 | ||||||
Less imputed interest |
6 | |||||||
Present value of net minimum lease payments |
$ | 74 | ||||||
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(c) Litigation
The Company recognizes legal expense in connection with loss contingencies as incurred.
On March 25, 2003, a shareholder securities class action complaint captioned HARVEY SOLOMON v.
SKECHERS USA, INC. et al. was filed against the Company and certain of its officers and directors
in the United States District Court for the Central District of California (Case No. 03-2094 DDP).
On April 2, 2003, a shareholder securities class action complaint captioned CHARLES ZIMMER v.
SKECHERS USA, INC. et al. was filed against the Company and certain of its officers and directors
in the United States District Court for the Central District of California (Case No. 03-2296 PA).
On April 15, 2003, a shareholder securities class action complaint captioned MARTIN H. SIEGEL v.
SKECHERS USA, INC. et al. was filed against the Company and certain of its officers and directors
in the United States District Court for the Central District of California (Case No 03-2645 RMT).
On May 6, 2003, a shareholder securities class action complaint captioned ADAM D. SAPHIER v.
SKECHERS USA, INC. et al. was served on the Company and certain of its officers and directors in
the United States District Court for the Central District of California (Case No. 03-3011 FMC). On
May 9, 2003, a shareholders securities class action complaint captioned LARRY L. ERICKSON v.
SKECHERS USA, INC. et al. was served on the Company and certain of its officers and directors in
the United States District Court for the Central District of California (Case No. 03-3101 SJO).
Each of these class action complaints alleged violations of the federal securities laws on behalf
of persons who purchased publicly traded securities of the Company between April 3, 2002 and
December 9, 2002. In July 2003, the court in these federal securities class actions, all pending in
the United States District Court for the Central District of California, ordered the cases
consolidated and a consolidated complaint to be filed and served. On September 25, 2003, the
plaintiffs filed a consolidated complaint entitled In re SKECHERS USA, Inc. Securities Litigation,
Case No. CV-03-2094-PA in the United States District Court for the Central District of California,
consolidating all of the federal securities actions above. The complaint names as defendants the
Company and certain officers and directors and alleges violations of the federal securities laws
and breach of fiduciary duty on behalf of persons who purchased publicly traded securities of the
Company between April 3, 2002 and December 9, 2002. The complaint seeks compensatory damages,
interest, attorneys fees and injunctive and equitable relief. The Company moved to dismiss the
consolidated complaint in its entirety. On May 10, 2004, the court granted the Companys motion to
dismiss with leave for plaintiffs to amend the complaint. On August 9, 2004, plaintiffs filed a
first amended consolidated complaint for violations of the federal securities laws. The allegations
and relief sought were virtually identical to the original consolidated complaint. The Company has
moved to dismiss the first amended consolidated complaint and the motion was set for hearing on
December 6, 2004. On March 21, 2005, the court granted the motion to dismiss the first amended
consolidated complaint with leave for plaintiffs to amend one final time. On April 7, 2005,
plaintiffs elected to stand on the first amended consolidated complaint and requested entry of
judgment so that an appeal from the courts ruling could be taken. On April 26, 2005, the court
entered judgment in favor of the Company and the individual defendants, and on May 3, 2005,
plaintiffs filed an appeal with the United States Court of Appeals for the Ninth Circuit. As of the
filing date of the Companys quarterly report for the first quarter of 2007, all briefing by the
parties had been completed, and a hearing date had been scheduled for April 18, 2007, but the court
took it off calendar pending a decision from the United States Supreme Court in another matter on
the grounds that the decision from the Supreme Court could affect the outcome of the appeal. The
United States Supreme Court handed down its decision in that matter on September 20, 2007. The
parties prepared briefs based on that decision and oral arguments were presented before the Ninth
Circuit on November 6, 2007. Discovery has not commenced in the underlying action. While it is too
early to predict the outcome of the appeal and any subsequent litigation, the Company continues to
believe the suit is without merit and continues to vigorously defend against the claims.
On March 15, 2007, the Company filed a lawsuit against Vans, Inc. in the U.S. District Court
for the Central District of California (Case No. CV 07-10703 (PLA)) seeking a declaration, inter
alia, that certain of its footwear designs do not infringe Vans claimed checkerboard design and
waffle outsole design trademarks. On April 4, 2007, in its answer to the Companys complaint, Vans
filed counter-claims and cross-claims against the Company and Ecko Unlimited, Inc., respectively,
for trademark infringement, trademark dilution, unfair competition and misappropriation. Vans is
seeking, inter alia, compensatory, treble and punitive damages, profits, attorneys fees and costs,
and injunctive relief against the Company to prevent any future sales and distribution of footwear
that allegedly bears a design similar to Vans checkerboard design or waffle outsole design. On
November 20, 2007, the court denied Vans preliminary
injunction, and Vans appealed this ruling on
December 20, 2007. While it is too early to predict the outcome of the litigation, the Company
believes that it has meritorious defenses to the claims asserted by Vans and intends to defend
against those claims vigorously.
The Company has no reason to believe that any liability with respect to pending legal actions,
individually or in the aggregate, will have a material adverse effect on the Companys consolidated
financial statements or results of operations. The Company occasionally becomes involved in
litigation arising from the normal course of business, and management is unable to determine the
extent of any liability that may arise from unanticipated future litigation.
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(d) Product and Other Financing
The Company finances production activities in part through the use of interest-bearing open
purchase arrangements with certain of its international manufacturers. These arrangements currently
bear interest at rates between 0% and 1.5% per 30 to 60 day term. The amounts outstanding under
these arrangements at December 31, 2007 and 2006 were $81.3 million and $85.0 million,
respectively, which are included in accounts payable in the accompanying consolidated balance
sheets. Interest expense incurred by the Company under these arrangements amounted to $3.3 million
in 2007, $2.9 million in 2006, and $2.3 million in 2005. The Company has contractual commitments
relating to licensing arrangements of $41.1 million through 2012 and open purchase commitments with
our foreign manufacturers of $148.7 million which are not included in the accompanying consolidated
balance sheets. The company is currently in the process of designing and purchasing the equipment
to be used in its new distribution center. The total cost of this equipment is expected to be
between $75.0 million and $85.0 million.
(e) Tax Contingencies
See discussion regarding the liability for unrecognized tax benefits in Footnote 10 Income
Taxes.
(14) SEGMENT INFORMATION
We have four reportable segments domestic wholesale sales, international wholesale sales,
retail sales, and e-commerce sales. Management evaluates segment performance based primarily on
net sales and gross margins. All other costs and expenses of the Company are analyzed on an
aggregate basis, and these costs are not allocated to the Companys segments. Net sales, gross
margins and identifiable assets for the domestic wholesale segment, international wholesale,
retail, and the e-commerce segment on a combined basis were as follows (in thousands):
2007 | 2006 | 2005 | ||||||||||
Net sales |
||||||||||||
Domestic wholesale |
$ | 831,235 | $ | 772,920 | $ | 634,294 | ||||||
International wholesale |
267,648 | 183,687 | 163,523 | |||||||||
Retail |
279,361 | 237,390 | 201,610 | |||||||||
E-commerce |
15,937 | 11,371 | 7,050 | |||||||||
Total |
$ | 1,394,181 | $ | 1,205,368 | $ | 1,006,477 | ||||||
2007 | 2006 | 2005 | ||||||||||
Gross profit |
||||||||||||
Domestic wholesale |
$ | 320,364 | $ | 301,215 | $ | 232,401 | ||||||
International wholesale |
99,759 | 65,034 | 60,758 | |||||||||
Retail |
171,758 | 151,456 | 123,928 | |||||||||
E-commerce |
8,108 | 5,641 | 3,395 | |||||||||
Total |
$ | 599,989 | $ | 523,346 | $ | 420,482 | ||||||
2007 | 2006 | |||||||
Identifiable assets |
||||||||
Domestic wholesale |
$ | 629,377 | $ | 563,956 | ||||
International wholesale |
118,195 | 108,210 | ||||||
Retail |
80,250 | 64,634 | ||||||
E-commerce |
155 | 253 | ||||||
Total |
$ | 827,977 | $ | 737,053 | ||||
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2007 | 2006 | |||||||
Additions to property, plant and equipment |
||||||||
Domestic wholesale |
$ | 11,371 | $ | 17,453 | ||||
International wholesale |
1,346 | 348 | ||||||
Retail |
18,458 | 9,759 | ||||||
Total |
$ | 31,175 | $ | 27,560 | ||||
Geographic Information
The following summarizes our operations in different geographic areas for the year indicated:
2007 | 2006 | 2005 | ||||||||||
Net Sales (1) |
||||||||||||
United States |
$ | 1,102,895 | $ | 1,002,022 | $ | 826,920 | ||||||
Canada |
38,060 | 25,276 | 18,350 | |||||||||
Other International (2) |
253,226 | 178,070 | 161,207 | |||||||||
Total |
$ | 1,394,181 | $ | 1,205,368 | $ | 1,006,477 | ||||||
2007 | 2006 | |||||||
Long-lived Assets |
||||||||
United States |
$ | 96,044 | $ | 81,161 | ||||
Canada |
343 | 764 | ||||||
Other International (2) |
2,013 | 5,720 | ||||||
Total |
$ | 98,400 | $ | 87,645 | ||||
(1) | The Company has subsidiaries in Canada, United Kingdom, Germany, France, Spain, Italy, Netherlands, Brazil, Thailand and Malaysia that generate net sales within those respective countries and in some cases the neighboring regions. The Company also has a subsidiary in Switzerland that generates net sales from that country in addition to net sales to our distributors located in numerous non-European countries. Net sales are attributable to geographic regions based on the location of the Company subsidiary. | |
(2) | Other international consists of Brazil, Malaysia, Thailand, Switzerland, United Kingdom, Germany, France, Spain, Italy, and Netherlands. |
(15) RELATED PARTY TRANSACTIONS
The
Company paid approximately $175,000, $177,000 and $47,000 during 2007, 2006 and 2005,
respectively, to the Manhattan Inn Operating Company, LLC (MIOC) for lodging, food and events
including the Companys holiday party at the Shade Hotel, which is owned and operated by MIOC.
Michael Greenberg, President and a director of the Company, owns a 12% beneficial ownership
interest in MIOC, and four other officers, directors and vice presidents of the Company own in
aggregate an additional 5% beneficial ownership in MIOC. The Company had no outstanding accounts
receivable or payable with MIOC or the Shade Hotel at December 31, 2007.
The Company had receivables from officers and employees of $0.3 million and $0.5 million at
December 31, 2007 and 2006, respectively. These amounts primarily relate to travel advances and
incidental personal purchases on Company-issued credit cards that are not business-related
expenses. These receivables are short-term and are expected to be repaid within a reasonable
period of time.
We had no other significant transactions with or payables to officers, directors or
significant shareholders of the Company.
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(16) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited financial data are as follows (in thousands):
2007 | MARCH 31 | JUNE 30 | SEPTEMBER 30 | DECEMBER 31 | ||||||||||||
Net sales |
$ | 344,896 | $ | 352,211 | $ | 395,033 | $ | 302,041 | ||||||||
Gross profit |
149,039 | 152,028 | 171,670 | 127,252 | ||||||||||||
Net earnings |
23,900 | 14,948 | 24,744 | 12,095 | ||||||||||||
Net earnings per share: |
||||||||||||||||
Basic |
$ | 0.54 | $ | 0.33 | $ | 0.54 | $ | 0.26 | ||||||||
Diluted |
0.52 | 0.32 | 0.53 | 0.26 |
2006 | MARCH 31 | JUNE 30 | SEPTEMBER 30 | DECEMBER 31 | ||||||||||||
Net sales |
$ | 277,565 | $ | 292,183 | $ | 331,126 | $ | 304,494 | ||||||||
Gross profit |
118,374 | 130,736 | 146,303 | 127,933 | ||||||||||||
Net earnings |
16,598 | 17,616 | 22,199 | 14,582 | ||||||||||||
Net earnings per share: |
||||||||||||||||
Basic |
$ | 0.41 | $ | 0.43 | $ | 0.54 | $ | 0.35 | ||||||||
Diluted |
0.38 | 0.40 | 0.49 | 0.33 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Attached as exhibits to this annual report on Form 10-K are certifications of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in accordance
with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This
Controls and Procedures section includes information concerning the controls and controls
evaluation referred to in the certifications.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The term disclosure controls and procedures refers to the controls and other procedures of a
company that are designed to provide reasonable assurance that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act, is recorded,
processed, summarized and reported within required time periods. We have established disclosure
controls and procedures to ensure that material information relating to Skechers and its
consolidated subsidiaries is made known to the officers who certify our financial reports, as well
as other members of senior management and the Board of Directors, to allow timely decisions
regarding required disclosures. As of the end of the period covered by this annual report on Form
10-K, we carried out an evaluation under the supervision and with the participation of our
management, including our CEO and CFO, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that
evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal
control over financial reporting includes those policies and procedures that (i)
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pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the
framework in Internal Control- Integrated Framework, our management has concluded that as of
December 31, 2007, our internal control over financial reporting is effective.
Our independent registered public accountants, KPMG LLP, audited the financial statements
included in this annual report on Form 10-K and have issued an attestation report on the
effectiveness of our internal control over financial reporting as of December 31, 2007, which is
included in Part II, Item 8 of this annual report on Form 10-K.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures or our internal control over financial reporting
will prevent or detect all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control systems objectives
will be met. The design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Further,
because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes to our internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting during the fourth quarter of 2007, we have completed our efforts regarding
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2007.
The results of our evaluation are discussed above in Managements Report on Internal Control Over
Financial Reporting.
ITEM 9B. OTHER INFORMATION
On January 18, 2008, our Compensation Committee approved the 2008 annual incentive
compensation formulae for our executive management, including the Named Executive Officers (as
defined in Item 402 of Regulation S-K), which will allow for executive management to earn incentive
compensation on a quarterly basis in the event that certain specified performance goals are
achieved under our 2006 Annual Incentive Compensation Plan (the 2006 Plan). The purpose is to
provide our executive management with the opportunity to earn incentive compensation based on our
financial performance by linking incentive award opportunities to the achievement of certain
performance goals.
The Compensation Committee approved the business criteria to be used in the formulae to
calculate the incentive compensation to be paid to our executive management on a quarterly basis
for 2008. The business criteria that will be used to calculate the incentive compensation of
Robert Greenberg (Chairman and Chief Executive Officer), Michael Greenberg (President), David
Weinberg (Chief Operating Officer) and Mark Nason (Executive Vice President of Product Development)
are our net sales and net earnings, while our net sales will be used for calculating the incentive
compensation of Fred Schneider (Chief Financial Officer). The Compensation Committee believes that
each of these criteria provides an accurate and comprehensive measure of our annual performance.
The potential payments of incentive compensation to our executive management, including the
Named Executive Officers, are performance-driven and therefore completely at risk. The payment of
any incentive compensation is conditioned on our company
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achieving at least certain threshold performance levels of the business criteria approved by
the Compensation Committee, and no payments will be made to the Named Executive Officers if the
threshold performance levels are not met. Any incentive compensation to be paid to the Named
Executive Officers in excess of the threshold amounts are based on the Compensation Committees
pre-approved business criteria and formulae for the respective Named Executive Officers. In
approving the percentages that will be used in the formulae to calculate the Named Executive
Officers potential payments of incentive compensation for 2008, the Compensation Committee
considered each Named Executive Officers position, responsibilities and prospective contribution
to the attainment of the Companys specified performance goals. The threshold performance levels
for 2008 are attainable, and additional incentive compensation may be earned based on our
companys financial performance exceeding increasingly challenging levels of performance goals,
none of which is certain to be achieved. Consistent with the prior year, the Compensation
Committee did not place a maximum limit on the incentive compensation that may be earned by the
Named Executive Officers in 2008, although the maximum amount of incentive compensation that any
Named Executive Officer may earn in a 12-month period under the 2006 Plan is $5,000,000.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by reference from our
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
our 2007 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by reference from our
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
our 2007 fiscal year.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item 12 is hereby incorporated by reference from our
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
our 2007 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by reference from our
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
our 2007 fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is hereby incorporated by reference from our
definitive proxy statement, to be filed pursuant to Regulation 14A within 120 days after the end of
our 2007 fiscal year.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. | Financial Statements: See Index to Consolidated Financial Statements and Financial Statement Schedule in Part II, Item 8 on page 36 of this annual report on Form 10-K. |
2. | Financial Statement Schedule: See Schedule IIValuation and Qualifying Accounts on page 64 of this annual report on Form 10-K. |
3. | Exhibits: The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Form 10-K. |
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SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Years Ended December 31, 2007, 2006 and 2005
BALANCE AT | CHARGED TO | DEDUCTIONS | BALANCE | |||||||||||||
BEGINNING OF | COSTS AND | AND | AT END | |||||||||||||
DESCRIPTION | PERIOD | EXPENSES | WRITE-OFFS | OF PERIOD | ||||||||||||
Year-ended December 31, 2005: |
||||||||||||||||
Allowance for chargebacks |
$ | 578 | $ | 368 | $ | (323 | ) | $ | 623 | |||||||
Allowance for doubtful accounts |
1,887 | 870 | (792 | ) | 1,965 | |||||||||||
Reserve for sales returns and
allowances |
3,578 | 1,644 | (614 | ) | 4,608 | |||||||||||
Year-ended December 31, 2006: |
||||||||||||||||
Allowance for chargebacks |
$ | 623 | $ | 1,237 | $ | (359 | ) | $ | 1,501 | |||||||
Allowance for doubtful accounts |
1,965 | 1,307 | (573 | ) | 2,699 | |||||||||||
Reserve for sales returns and
allowances |
4,608 | 2,047 | (297 | ) | 6,358 | |||||||||||
Year-ended December 31, 2007: |
||||||||||||||||
Allowance for chargebacks |
$ | 1,501 | $ | 1,684 | $ | (613 | ) | $ | 2,572 | |||||||
Allowance for doubtful accounts |
2,699 | 284 | (635 | ) | 2,348 | |||||||||||
Reserve for sales returns and
allowances |
6,358 | (358 | ) | (636 | ) | 5,364 |
See accompanying report of independent registered public accounting firm
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INDEX TO EXHIBITS
EXHIBIT | ||
NUMBER | DESCRIPTION OF EXHIBIT | |
3.1
|
Amended and Restated Certificate of Incorporation dated April 29, 1999 (incorporated by reference to exhibit number 3.1 of the Registrants Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on May 12, 1999). | |
3.2
|
Bylaws dated May 28, 1998 (incorporated by reference to exhibit number 3.2 of the Registrants Registration Statement on Form S-1 (File No. 333-60065) filed with the Securities and Exchange Commission on July 29, 1998). | |
3.2(a)
|
Amendment to Bylaws dated as of April 8, 1999 (incorporated by reference to exhibit number 3.2(a) of the Registrants Form 10-K for the year ended December 31, 2005). | |
3.2(b)
|
Second Amendment to Bylaws dated as of December 18, 2007 (incorporated by reference to exhibit number 3.1 of the Registrants Form 8-K filed with the Securities and Exchange Commission on December 20, 2007). | |
4.1
|
Form of Specimen Class A Common Stock Certificate (incorporated by reference to exhibit number 4.1 of the Registrants Registration Statement on Form S-1, as amended (File No. 333-60065), filed with the Securities and Exchange Commission on May 12, 1999). | |
4.2
|
Indenture, dated April 9, 2002, between the Registrant and Wells Fargo Bank, National Association, as Trustee, relating to the 4.5% Convertible Subordinated Notes (incorporated by reference to exhibit number 4.2 of the Registrants Form 10-Q for the quarter ended June 30, 2002). | |
4.3
|
Form of Specimen Restricted Global Security (incorporated by reference to exhibit number 4.3 of the Registrants Form 10-Q for the quarter ended June 30, 2002). | |
10.1**
|
Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit number 10.1 of the Registrants Registration Statement on Form S-1 (File No. 333-60065) filed with the Securities and Exchange Commission on July 29, 1998). | |
10.1(a)**
|
Amendment No. 1 to Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit number 4.4 of the Registrants Registration Statement on Form S-8 (File No. 333-71114), filed with the Securities and Exchange Commission on October 5, 2001). | |
10.1(b)**
|
Amendment No. 2 to Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit number 4.5 of the Registrants Registration Statement on Form S-8 (File No. 333-135049), filed with the Securities and Exchange Commission on June 15, 2006). | |
10.1(c)**
|
Amendment No. 3 to Amended and Restated 1998 Stock Option, Deferred Stock and Restricted Stock Plan (incorporated by reference to exhibit number 10.1 of the Registrants Form 8-K filed with the Securities and Exchange Commission on February 23, 2007). | |
10.2**
|
2007 Incentive Award Plan (incorporated by reference to exhibit number 10.1 of the Registrants Form 8-K filed with the Securities and Exchange Commission on May 24, 2007). | |
10.3**
|
Form of Restricted Stock Agreement under 2007 Incentive Award Plan. | |
10.4**
|
2008 Employee Stock Purchase Plan (incorporated by reference to exhibit number 10.2 of the Registrants Form 8-K filed with the Securities and Exchange Commission on May 24, 2007). | |
10.5**
|
2006 Annual Incentive Compensation Plan (incorporated by reference to Appendix A of the Registrants Definitive Proxy Statement filed with the Securities and Exchange Commission on May 1, 2006). |
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EXHIBIT | ||
NUMBER | DESCRIPTION OF EXHIBIT | |
10.6**
|
Indemnification Agreement dated June 7, 1999 between the Registrant and its directors and executive officers (incorporated by reference to exhibit number 10.6 of the Registrants Form 10-K for the year ended December 31, 1999). | |
10.6(a)**
|
List of Registrants directors and executive officers who entered into Indemnification Agreement referenced in Exhibit 10.6 with the Registrant (incorporated by reference to exhibit number 10.6(a) of the Registrants Form 10-K for the year ended December 31, 2005). | |
10.7
|
Registration Rights Agreement dated June 9, 1999, between the Registrant, the Greenberg Family Trust and Michael Greenberg (incorporated by reference to exhibit number 10.7 of the Registrants Form 10-Q for the quarter ended June 30, 1999). | |
10.8
|
Tax Indemnification Agreement dated June 8, 1999, between the Registrant and certain shareholders (incorporated by reference to exhibit number 10.8 of the Registrants Form 10-Q for the quarter ended June 30, 1999). | |
10.9
|
Second Amended and Restated Loan and Security Agreement, dated May 31, 2006, by and among the Registrant and certain of its subsidiaries that are also borrowers under the Agreement, certain of its subsidiaries who are guarantors under the Agreement, and certain lenders including The CIT Group/Commericial Services, Inc., which acts as agent for the lenders (incorporated by reference to exhibit number 10.1 of the Registrants Form 8-K filed with the Securities and Exchange Commission on June 6, 2006). | |
10.10
|
Promissory Note, dated December 27, 2000, between the Registrant and Washington Mutual Bank, FA, for the purchase of property located at 225 South Sepulveda Boulevard, Manhattan Beach, California (incorporated by reference to exhibit number 10.23 of the Registrants Form 10-K for the year ended December 31, 2000). | |
10.11
|
Loan Agreement, dated December 21, 2000, between Yale Investments, LLC, and MONY Life Insurance Company, for the purchase of property located at 1670 South Champagne Avenue, Ontario, California (incorporated by reference to exhibit number 10.25 of the Registrants Form 10-K for the year ended December 31, 2000). | |
10.12
|
Promissory Note, dated December 21, 2000, between Yale Investments, LLC, and MONY Life Insurance Company, for the purchase of property located at 1670 Champagne Avenue, Ontario, California (incorporated by reference to exhibit number 10.26 of the Registrants Form 10-K for the year ended December 31, 2000). | |
10.13
|
Agreement dated August 25, 2005 between Duncan Investments, LLC, a wholly owned subsidiary of the Registrant, and Morley Construction Company regarding 330 South Sepulveda Boulevard, Manhattan Beach, California (incorporated by reference to exhibit number 10.1 of the Registrants Form 8-K filed with the Securities and Exchange Commission on August 29, 2005). | |
10.14
|
General Conditions of the Contract for Construction regarding 330 South Sepulveda Boulevard, Manhattan Beach, California (incorporated by reference to exhibit number 10.2 of the Registrants Form 8-K filed with the Securities and Exchange Commission on August 29, 2005). | |
10.15
|
Lease Agreement, dated November 21, 1997, between the Registrant and The Prudential Insurance Company of America, regarding 1661 South Vintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.14 of the Registrants Registration Statement on Form S-1 (File No. 333-60065) filed with the Securities and Exchange Commission on July 29, 1998). | |
10.15(a)
|
First Amendment to Lease Agreement, dated April 26, 2002, between the Registrant and ProLogis California I LLC, regarding 1661 South Vintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.14(a) of the Registrants Form 10-K for the year ended December 21, 2002). | |
10.15(b)
|
Second Amendment to Lease Agreement, dated December 10, 2007, between the Registrant and ProLogis California I LLC, regarding 1661 South Vintage Avenue, Ontario, California. |
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EXHIBIT | ||
NUMBER | DESCRIPTION OF EXHIBIT | |
10.16
|
Lease Agreement, dated November 21, 1997, between the Registrant and The Prudential Insurance Company of America, regarding 1777 South Vintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.15 of the Registrants Registration Statement on Form S-1 (File No. 333-60065) filed with the Securities and Exchange Commission on July 29, 1998). | |
10.16(a)
|
First Amendment to Lease Agreement, dated April 26, 2002, between the Registrant and Cabot Industrial Properties, L.P., regarding 1777 South Vintage Avenue, Ontario, California (incorporated by reference to exhibit number 10.15(a) of the Registrants Form 10-K for the year ended December 21, 2002). | |
10.16(b)
|
Second Amendment to Lease Agreement, dated May 14, 2002, between the Registrant and Cabot Industrial Properties, L.P., regarding 1777 South Vintage Avenue, Ontario, California. | |
10.16(c)
|
Third Amendment to Lease Agreement, dated May 7, 2007, between the Registrant and Cabot Industrial Properties, L.P., regarding 1777 South Vintage Avenue, Ontario, California. | |
10.16(d)
|
Fourth Amendment to Lease Agreement, dated November 10, 2007, between the Registrant and Cabot Industrial Properties, L.P., regarding 1777 South Vintage Avenue, Ontario, California. | |
10.17
|
Lease Agreement, dated April 10, 2001, between the Registrant and ProLogis California I LLC, regarding 4100 East Mission Boulevard, Ontario, California (incorporated by reference to exhibit number 10.28 of the Registrants Form 10-K for the year ended December 31, 2001). | |
10.17(a)
|
First Amendment to Lease Agreement, dated October 22, 2003, between the Registrant and ProLogis California I LLC, regarding 4100 East Mission Boulevard, Ontario, California (incorporated by reference to exhibit number 10.28(a) of the Registrants Form 10-K for the year ended December 31, 2003). | |
10.18
|
Lease Agreement, dated February 8, 2002, between Skechers International, a subsidiary of the Registrant, and ProLogis Belgium II SPRL, regarding ProLogis Park Liege Distribution Center I in Liege, Belgium (incorporated by reference to exhibit number 10.29 of the Registrants Form 10-K for the year ended December 31, 2002). | |
10.19
|
Lease Agreement dated September 25, 2007 between the Registrant and HF Logistics I, LLC, regarding distribution facility in Moreno Valley, California (incorporated by reference to exhibit number 10.1 of the Registrants Form 8-K filed with the Securities and Exchange Commission on September 27, 2007). | |
10.20**
|
Amended and Restated 1998 Employee Stock Purchase Plan (incorporated by reference to exhibit number 10.1 of the Registrants Form 10-Q, for the quarter ended June 30, 2000). | |
21.1
|
Subsidiaries of the Registrant. | |
23.1
|
Consent of Independent Registered Public Accounting Firm. | |
31.1
|
Certification of the Chief Executive Officer pursuant Securities Exchange Act Rule 13a-14(a). | |
31.2
|
Certification of the Chief Financial Officer pursuant Securities Exchange Act Rule 13a-14(a). | |
32.1
|
Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
** | Management contract or compensatory plan or arrangement required to be filed as an exhibit. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Manhattan Beach, State of California on the 29th day of February
2008.
SKECHERS U.S.A., INC. |
||||
By: | /S/ ROBERT GREENBERG | |||
Robert Greenberg | ||||
Chairman of the Board and Chief Executive Officer |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
SIGNATURE | TITLE | DATE | ||
/S/ ROBERT GREENBERG
|
Chief Executive Officer (Principal Executive Officer) |
February 29, 2008 | ||
/S/ MICHAEL GREENBERG
|
President and Director | February 29, 2008 | ||
/S/ DAVID WEINBERG
|
Executive Vice President, Chief Operating Officer and Director | February 29, 2008 | ||
/S/ FREDERICK H. SCHNEIDER
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
February 29, 2008 | ||
/S/ JEFFREY GREENBERG
|
Director | February 29, 2008 | ||
/S/ J. GEYER KOSINSKI
|
Director | February 29, 2008 | ||
/S/ MORTON D. ERLICH
|
Director | February 29, 2008 | ||
/S/ RICHARD SISKIND
|
Director | February 29, 2008 |
68