UNITED STATES
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, 2009
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
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 whether the registrant has submitted electronically and posted on its
corporate Website, if any, every interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes o 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 o
|
|
Accelerated filer þ
|
|
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, 2009, 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 $329 million based upon the
closing price of $9.77 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, 2010: 34,245,088.
The number of shares of Class B Common Stock outstanding as of February 15, 2010: 12,359,615.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement issued in connection with the 2010 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, 2009
i
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 2010 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, 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. These forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those projected in
forward-looking statements, and reported results shall not be considered an indication of our
companys future performance. Factors that might cause or contribute to such differences include:
|
|
|
international, national and local general economic, political and market conditions
including the ongoing global economic slowdown and financial crisis; |
|
|
|
entry into the highly competitive performance footwear market; |
|
|
|
sustaining, managing and forecasting our costs and proper inventory levels; |
|
|
|
losing any significant customers, decreased demand by industry retailers and
cancellation of order commitments due to the lack of popularity of particular designs
and/or categories of our products; |
|
|
|
maintaining our brand image and intense competition among sellers of footwear for
consumers; |
|
|
|
anticipating, identifying, interpreting or forecasting changes in fashion trends,
consumer demand for the products and the various market factors described above; and |
|
|
|
sales levels during the spring, back-to-school and holiday selling seasons. |
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. We operate
in a very competitive and rapidly changing environment. New risks 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 the
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, you should not place undue reliance on forward-looking statements as a prediction of
actual results. Moreover, reported results should not be considered an indication of 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.
1
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 several
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 catalog and Internet retailers. Along with wholesale distribution, our footwear is
available at our e-commerce website and our own retail stores. We operate 90 concept stores, 92
factory outlet stores and 37 warehouse outlet stores in the United States, and 22 concept stores
and five 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 2009, our Skechers brand was supported by: print, television and
outdoor campaigns for men and women; animated kids television campaigns featuring our own action
heroes and characters; print and outdoor campaigns featuring our endorsee and American Idol winner
David Cook; and family-focused celebrity ads that included television personality Cesar Millan, and
actors Brooke Burke and David Charvet. Our Punkrose, Marc Ecko and Zoo York footwear lines are
also supported by print and television ads developed by Marc Ecko. The Red by Marc Ecko womens
line featured High School Musical star Vanessa Hudgens in print and television campaigns through
2009, while the Zoo York campaign featured skateboarders Donny Barley and Kevin Shetler.
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 offers multiple branded product lines for men, women and children as well as other
products sold under established names not associated with Skechers. Within these various product
lines, we also have numerous categories, some of which have developed into well-known names. Most
of these categories are marketed and packaged with unique shoe boxes, hangtags and in-store
support.
2
Skechers USA. Our Skechers USA category for men and women includes: (i) Casuals, (ii) Dress
Casuals, (iii) Relaxed Fit (for men only), (iv) Seriously Lightweight (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 oxfords and slip-ons, lug outsole and fashion 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. |
|
|
|
The Dress Casuals category for men 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. The Dress Casual line for women is comprised
of trend-influenced stylized boots and shoes, which may include leather uppers, shearling or
faux fur lining or trim. |
|
|
|
Skechers Relaxed Fit 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 Skechers Relaxed Fit styles in a shoe box that is distinct from that of other
categories in the Skechers USA line of footwear. |
|
|
|
Our Seriously Lightweight styles for men primarily consist of designs similar to our
casual looks, but feature ultra lightweight outsoles, making them ideal travel and work
shoes. A category with unique features, we market and package the Skechers Seriously
Lightweight styles in a shoe box that is distinct from that of other categories in the
Skechers USA line of footwear. |
|
|
|
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 to 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. |
Skechers Sport. Our Skechers Sport footwear for men and women includes: (i) Joggers, Trail
Runners, Sport Hikers, Terrainers, (ii) Performance (for men only), (iii) Skechers DLites (for
women only) 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. |
|
|
|
Skechers DLites are ultra lightweight womens sneakers that feature sturdy, sculpted
midsoles for all-day comfort, durable rubber treads for improved traction and a sole design
that provides superior flexibility and cushioning. The uppers are designed in leather,
suede, nubuck and mesh. |
|
|
|
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. |
3
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. The Active line now includes low-profile, wedge and sporty styles. The line, with lace-up,
Mary Janes, sandals and open back styles, 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-zag and cross straps, among others. Active sneakers are typically retailed through specialty
casual shoe stores and department stores.
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, Hot Lights by
Skechers and Luminators by Skechers, (iii) Skechers Cali for Girls, which is trend-inspired boots,
shoes, sandals and dress sneakers, (iv) Airators by Skechers, (v) Skechers Super Z-Strap, (vi)
Skechers Bungees, (vii) HyDee HyTop from Skechers, (viii) Twinkle Toes by Skechers, (ix) Pretty
Tall by Skechers, (x) Sporty Shorty by Skechers and (xi) 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 and Hot Lights by Skechers are lighted sneakers and sandals for boys and girls.
The S-Lights combine patterns of lights on the outsoles and sides of the shoes while Hot
Lights feature lights on the front of the toe to simulate headlights as well as on other
areas of the shoes. New to the offering with lights, Luminators from Skechers feature
glowing green lights and a marketing campaign with the Luminator character. |
|
|
|
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. The line is marketed with the character Kewl
Breeze. |
|
|
|
Skechers Super Z-Strap is a line of athletic styled sneakers with a unique z shaped
closure system for easy closure. The line is marketed with the character Z-Strap. |
|
|
|
Skechers Bungees is a line of girls sneakers with bungee closures. The line is marketed
with the character Elastika. |
|
|
|
HyDee HyTop from Skechers is a line of colorful high-top sneakers for young girls. The
line is marketed with the character HyDee HyTop. |
|
|
|
Twinkle Toes by Skechers is a new line of girls sneakers and boots that feature
bejeweled toe caps and brightly designed uppers. The line is marketed with the character
Twinkle Toes. |
|
|
|
Pretty Tall by Skechers is a new line of girls sneakers with a hidden wedge. The line is
marketed with the character Pretty Tall. |
|
|
|
Sporty Shorty by Skechers is a new line of athletic-inspired sneakers for girls who like
to wear sport-style footwear off the field. The line is marketed with the character Sporty
Shorty. |
|
|
|
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. |
Shape-ups by Skechers Fitness Group. Shape-ups are stylish fitness footwear for men and women
who want to incorporate more fitness into their daily lives. Ideal for walking around town, work or
home, Shape-ups unique kinetic wedge and rocker bottom are
4
designed to give the sensation and benefits of walking on soft sand a construction that
studies show may help promote weight loss, tone muscles, improve posture, and reduce joint stress.
The Shape-ups offering includes sneakers, Mary Janes, sandals and boots for women, and sneakers for
men. Also available, Shape-ups Slip-Resistant footwear for men and women in the service and
occupational industries. Shape-ups are available at athletic footwear retailers, department stores
and specialty shoe stores.
Tone-ups by Skechers. Targeting 18- to 34-year-old fitness- and trend-conscious women,
Tone-ups by Skechers are casual and athletic-inspired sandals that feature a gradual density
midsole designed to stimulate underused calf, thigh and gluteus muscles, burn calories and reduce
stress. Tone-ups uppers range from leather to microfiber suede, mitobuck and nylon webbing. The
offering is available in department stores and casual shoe retailers.
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 Skechers Work line incorporates
design elements from the other Skechers mens and womens line. 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.
FASHION AND STREET BRANDS
The Fashion and Street Division and its brands are marketed and packaged separately from Skechers.
Unltd. by Marc Ecko and Red by Marc Ecko. Unltd. by Marc Ecko is a line of mens
street-inspired traditional sneakers, fusion sneakers and urban-focused casuals. Red by Marc Ecko
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. 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, women
and boys. The Zoo York footwear follows the color palette and trends of Zoo York apparel and
targets skateboarders and those that embrace skate fashion. The licensed brand is available in
skate and specialty shops as well as select athletic and department stores.
Mark Nason, Siren by Mark Nason, and Lounge 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. Lounge by Mark Nason
is a collection of boots and casual loafers that have many similar design elements as the Mark
Nason line, but are constructed in Asia, giving consumers a more price-conscious option. The Lounge
by Mark Nason line is available in many of the same stores as Skechers USA line.
Punkrose. Skechers acquired the junior brand Punkrose in 2008. Punkrose for women is
cutting-edge street ready footwear, inspired by music, art, fashion, and action sports. Punkrose
styles include sneakers, high-tops, skimmers, boots and sandals. Vibrant color combos and
get-noticed prints are a trademark of this brand. Punkrose is available at department stores,
sneaker shops and specialty boutiques.
5
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 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. 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 five different manufacturers. During 2009,
five of our contract manufacturers accounted for approximately 69.1% of total purchases. One
manufacturer accounted for 29.7%, and three 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- day financing, depending on the factory. We believe that
the use of these arrangements affords 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.
6
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 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 230-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 product turnaround time and ensure timely
delivery of finished footwear. In addition, we require our manufacturers to certify that neither
convicted, forced nor 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 websites and trade shows are effective
marketing tools to both consumers and wholesale accounts. We have historically budgeted advertising
as a percentage of projected net sales.
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 for men and women. Our ads are designed to provide merchandise flexibility and to
facilitate the brands direction.
To further build brand awareness and influence consumer spending, we have selectively signed
endorsement agreements with celebrities whom we believe would reach new markets. American Idol
winner David Cook appeared in Skechers marketing campaigns through 2009. To develop family ads that
would appeal to a broad range of consumers, we also developed the Nothing Compares to Family
campaign with celebrities and their families. In 2009, these campaigns included actors Brooke Burke
and David Charvet with their children, and television personality and author Cesar Millan with his
family and dogs. 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, Marc Ecko, Zoo York, and Punkrose lines through individual unique
print and/or television advertisements some of which may include celebrity endorsees. For Mark
Nason, we have focused on key-selling styles in product-driven ads that captured the brands
7
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 commercials for Unltd. by Marc Ecko for
boys. During 2009, High School Musical star Vanessa Hudgens was the face of Red by Marc Ecko,
appearing in print, outdoor and television advertisements. For Punkrose, the approach has been
lifestyle advertisements that embrace the feeling of the footwear.
With a targeted approach, our print ads appear regularly in popular fashion and lifestyle
consumer publications, including GQ, Cosmopolitan, Shape, Lucky, In Style, Seventeen, Maxim, Mens
Fitness, and Womens Health, as well as in weekly publications such as People, Us Weekly, Sports
Illustrated and InTouch, among others. Our advertisements also appear in international magazines
around the world.
Our television commercials are produced both in-house and through producers that we have
utilized in the past and who are familiar with our brands. In 2009, we developed commercials for
men, women and children for our Skechers brands, including our animated spots for kids featuring
our own action heroes. We have found these to be a cost-effective way to advertise on key national
and cable programming during high selling seasons. In 2009, many of our television commercials were
translated into multiple languages and aired in Brazil, Canada, United Kingdom, France, the Benelux
Region, Germany, Spain, Italy, Chile, Austria and Switzerland.
Outdoor. In an effort to reach consumers where they shop and in high-traffic areas as they
travel to and from work, 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. In addition, we advertised on football perimeter boards in the United Kingdom
and Germany. We believe these are effective and efficient ways to reach a broad range of consumers
and leave a lasting impression for our 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 gain 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. We have also
amassed an array of prominent product placements in magazines including Lucky, Seventeen, OK!, US
Weekly, Health and Nylon. In addition, our brands have been associated with cutting edge events and
select celebrities, and our product has been seen worn by celebrities including Britney Spears,
Denis Leary, Vin Diesel, Forest Whitaker and Vanessa Hudgens.
Promotions. By applying creative sales techniques via a broad spectrum of media, 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; GDS, MICAM, Bread & Butter, Mess Around and Whos Next in Europe; and Couromoda and Francal
in Brazil. 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.
8
Internet. We promote and sell our brands through our e-commerce websites www.skechers.com,
www.soholab.com and www.myshapeups.com. These websites enable fans and customers to shop, browse,
find store locations, socially interact, post a shoe review, photo, video, or question and immerse
themselves in our brands. These websites are a venue for dialog and feedback from customers about
our products which enhances the Skechers and fashion brands experience while driving sales through
all our retail channels. In addition, we established a unique website for Mark Nason
(www.marknason.com) designed to serve primarily as a marketing tool.
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 specialty stores.
Internationally, our products are available through wholesale customers in more than 100 countries
and territories via our global network of distributors in addition to our subsidiaries in Asia,
Europe, Canada and South America. 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. Thirteen distributors have opened 112 distributor-owned Skechers retail stores in 24
countries as of December 31, 2009.
Domestic Wholesale. We distribute our footwear through the following domestic wholesale
distribution channels: department stores, specialty stores, athletic specialty shoe stores and
independent retailers, as well as catalog and Internet retailers. While department stores and
specialty retailers are the largest distribution channels, 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, variety of styles and the 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
and joint ventures in Canada, France, Germany, Spain, Portugal, Italy, Switzerland, Austria,
Malaysia, Thailand, Singapore, Hong Kong, China, the Benelux Region, the United Kingdom, Brazil and
Chile; (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.
9
|
|
|
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.
Skechers-owned retail stores in Europe include nine concept stores and three factory
outlet stores located in seven countries, including the key locations of Covent Garden and
Oxford Street in London, Alstadt District in Düsseldorf and Kalverstraat Street in Amsterdam.
To accommodate our European subsidiaries operations, we operate an approximately
490,000 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 three concept stores; Toronto Eaton Centre, West
Edmonton Mall, and Richmond Centre; and two factory outlet stores in Toronto and Alberta.
Malaysia, Singapore and Thailand
We have a 50% interest in a joint venture in Malaysia and Singapore, and a 51% interest
in a joint venture in Thailand that generate net sales in those countries. The joint
ventures operate four concept stores and six shops-in-shop in Malaysia, four concept stores
in Singapore, and one concept store and 15 shops-in-shop in Thailand. These joint ventures
are included in our 2009 consolidated financial statements.
China and Hong Kong
We have a 50% interest in a joint venture in China and a minority interest in a joint
venture in Hong Kong that generate net sales in those countries. Under the joint venture
agreements, the joint venture partners contribute capital in proportion to their respective
ownership interests. The joint ventures operate 15 direct-owned stores and in excess of 70
shops-in-shop in China and nine direct-owned stores and 10 shops-in-shop in Hong Kong. The
joint ventures are included in our 2008 and 2009 consolidated financial statements.
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 manufacturers
factories in China and occasionally from our U.S. distribution center in Ontario, California.
Chile
We have established a subsidiary in Chile, Comercializadora Skechers Chile Limitada, to support
the 10 retail stores which we acquired from a former distributor in 2009 as well as wholesale
accounts in that country. Product sold in Chile is primarily shipped directly from our
contract manufacturers factories in China and occasionally from our U.S. distribution center
in Ontario, California.
10
Where we do not sell direct through our international subsidiaries and joint ventures,
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 13 of these distributors, 112 distributor-owned
Skechers retail stores are open in 24 countries, including 28 stores that were opened in 2009
less 10 stores that were acquired in 2009 from our distributor in Chile and are now
company-owned stores. Our distributors own and operate the following retail stores:
|
|
|
|
|
|
|
|
|
STORE |
|
NUMBER OF |
|
|
REGION |
|
FORMAT |
|
STORES |
|
LOCATION(1) |
Asia |
|
Concept |
|
29 |
|
Japan (4); Korea (17); Philippines (6); Taiwan (2) |
|
|
Warehouse |
|
4 |
|
Japan (4) |
|
|
|
|
|
|
|
Australia |
|
Concept |
|
3 |
|
Chadstone, Melbourne, Sydney |
|
|
Warehouse |
|
6 |
|
Cairns, Canberra, Jindalee, Melbourne, Southwharf, Sydney |
|
|
|
|
|
|
|
Central America/
South America |
|
Concept |
|
37 |
|
Aruba; Columbia (9); Costa Rica;
Ecuador (2); Guatemala (3); Panama (3); Peru (4); Venezuela (14) |
|
|
Warehouse |
|
1 |
|
Columbia |
|
|
|
|
|
|
|
Eastern Europe |
|
Concept |
|
15 |
|
Czech Republic; Russia (11); Turkey; Ukraine (2) |
|
|
|
|
|
|
|
Northern Europe |
|
Concept |
|
3 |
|
Estonia (2); Lithuania |
|
|
|
|
|
|
|
Middle East |
|
Concept |
|
12 |
|
Bahrain (2); Kuwait (2); Saudi Arabia (2); UAE (6) |
|
|
Warehouse |
|
1 |
|
UAE |
|
|
|
|
|
|
|
South Africa |
|
Concept |
|
1 |
|
Sandton |
|
|
|
(1) |
|
One store per location except as otherwise noted. |
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 formats enable 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, 2010, we owned and operated
90 concept stores, 92 factory outlet stores and 37 warehouse outlet stores in the United States,
and 22 concept stores and five factory outlet stores internationally. During 2009, we opened 16
domestic stores and four international stores, purchased ten stores from our distributor in Chile,
contributed six stores to our joint ventures with operations in Malaysia and Thailand, and closed
two domestic stores. We plan to open an additional 25 to 30 stores, including approximately seven
international stores by the end of 2010.
|
|
|
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, Union Square and
34th Street in New York, Powell Street in San Francisco, 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 Covent Garden and Oxford Street in London, Alstadt District in Dusseldorf,
Torontos Eaton Centre,
|
11
|
|
|
Vancouvers Richmond Centre, and 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. In 2009, we opened six domestic concept stores and two
international concept stores, and we closed two domestic concept stores. We also purchased
ten international concept stores from our distributor in Chile, including six in Santiago,
Chile, and contributed six international concept stores to our joint ventures with operations
in Malaysia and Thailand. |
|
|
|
|
The typical Skechers concept store is approximately 2,500 square feet, although in
certain markets we have opened concept stores as large as 7,800 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. |
Our factory outlet stores are generally located in manufacturers direct outlet centers
throughout the United States. In addition, we have five international outlet stores two in
Canada, two in England, and one in Scotland. 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 ten domestic factory outlet stores and two international
factory outlet stores in 2009.
|
|
|
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 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
to facilitate the timely transfer of inventory that we want to liquidate as soon as
practicable. We did not open any new warehouse outlet stores in 2009.
Electronic Commerce. Our websites, www.skechers.com, www.myshapeups.com and www.soholab.com
are virtual storefronts that promote the Skechers and Fashion and Street Divisions 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. These virtual stores have provided a convenient alternative-shopping environment and
brand experience. These websites are an efficient and effective additional retail distribution
channel, and they 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 to design and market their
footwear.
As of January 31, 2010, we had 15 active domestic and international licensing agreements in
which we are the licensor. These include agreements for the recently launched Skechers Kids
apparel, and soon to be launched Skechers Scrubs for health care
12
professionals and Skechers Eyewear. We have international licensing agreements for the design
and distribution of mens and womens apparel in Germany, India, Israel, South Africa, and Korea;
bags in Panama; and watches in the Philippines.
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 490,000 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.
In January 2010, we entered into a joint venture agreement to build a new 1.8 million square
foot distribution facility in Moreno Valley, California, which we expect to occupy when completed
in 2011. This single facility will replace the existing five facilities located in Ontario,
California, of which four are on short-term leases and the fifth we own. We will lease the new
distribution center from the joint venture for a base rent of $933,894 per month for 20 years.
BACKLOG
As of December 31, 2009, our backlog was $454.7 million, compared to $325.3 million as of
December 31, 2008. Backlog orders are subject to cancellation by customers, as evidenced by the
cancellations that we have experienced over the past two years due to the weakened U.S. economy.
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.
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 95
foreign countries. We also have design patents and pending design and utility patent applications
in both the United States and approximately 27 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
13
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., and V.F. Corporation. Our
athletic lifestyle and performance shoes compete with footwear offered by companies such as Nike,
Inc., adidas AG, Puma AG, New Balance Athletic Shoe, Inc. and K-Swiss Inc. The intense competition
among these companies and the rapid changes in technology and consumer preferences in the markets
for performance footwear, including the walking fitness category, constitute significant risk
factors in our operations. 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.
EMPLOYEES
As of January 31, 2010, we employed 4,698 persons, 2,160 of whom were employed on a full-time
basis and 2,538 of whom were employed on a part-time basis. None of our employees is 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.
The Effects Of The Ongoing Global Economic Slowdown May Continue To Have A Negative Impact On Our
Business, Results Of Operations Or Financial Condition.
The ongoing global economic slowdown has caused disruptions and extreme volatility in global
financial markets, increased rates of default and bankruptcy, and declining consumer and business
confidence, which has led to decreased levels of consumer spending, particularly on discretionary
items such as footwear. These macroeconomic developments have and could continue to negatively
impact our business, which 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. As a result, we may not be
able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new
14
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. If the global economic slowdown continues for a significant period
or continues to worsen, our results of operations, financial condition, and cash flows could be
materially adversely affected.
We Have Recently Entered The Highly Competitive Performance Footwear Market.
Although the design and aesthetics of our products have traditionally been the most important
factor in consumer acceptance of our footwear, we recently incorporated technical innovation into
our product offerings to capitalize on recent trends in the performance footwear market by
introducing walking fitness footwear in late 2008. The performance footwear market is keenly
competitive in the United States and worldwide, and new entrants into that market face many
challenges. Our historical reputation as a fashion and lifestyle footwear company, consumer
perceptions of our performance features, competitive product offerings and technologies, rapid
changes in footwear technology and consumer preferences, any negative professional and expert
opinions on our technical features and performance claims that may arise, and any negative
publicity and media attention associated with this product category that may arise may constitute
significant risk factors in our operations and may negatively impact our business.
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 2009 or
2008. 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.
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.
It Is Difficult To Predict The Effect Of Regulatory Inquiries About Advertising And Promotional
Claims Related To Our Products In The Walking Footwear Fitness Market.
The walking fitness footwear market is a relatively new product category dominated by a
handful of competitors who design, market and advertise their products to promote benefits
associated with wearing the footwear. Advertising and promoting benefits associated with these
products routinely comes under regulatory review. As noted under Legal Proceedings in Part I,
Item 3 of this annual report, we have received requests for information relating to our advertising
claims for Shape-ups. It is difficult to predict the outcome of these inquiries and what, if any,
material adverse effect, they may have on our business.
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
15
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.
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 inventory of certain products
that we anticipate will be in greater demand. However, the ongoing global economic slowdown makes
it increasingly difficult for us and our customers to accurately forecast product demand trends,
and 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.
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 Could Be Adversely Affected By Changes In The Business Or Financial Condition Of
Significant Customers Due To The Ongoing Conditions In The Global Financial Markets.
The recent global financial crisis affecting the banking system and financial markets and the
possibility that financial institutions may consolidate or go out of business have resulted in a
tightening in the credit markets, more stringent lending standards and terms, and higher volatility
in fixed income, credit, currency and equity markets. There could be a number of follow-on effects
from the credit crisis on our business, including insolvency of certain of our key distributors,
which could impair our distribution channels, or our significant customers, including our
distributors, may experience diminished liquidity or an inability to obtain credit to finance
purchases of our product. Our customers may also experience weak demand for our products or other
difficulties in their businesses. If conditions in the global financial markets become more severe
or continue longer than we anticipate, our forecasted demand may not materialize to the levels that
we require to achieve our anticipated financial results. Any of these events would likely harm our
business, results of operations and financial condition.
We May Have Difficulty Managing Our Costs As A Result Of The Ongoing Global Economic Slowdown.
Our future results of operations will depend on our overall ability to manage our costs.
These challenges include (i) managing our infrastructure, including the anticipated addition of our
new distribution center in Moreno Valley, California, (ii) retaining and hiring, as required, the
appropriate number of qualified employees, (iii) managing inventory levels and (iv) controlling
other expenses. If the global economic slowdown worsens and leads to an unexpected decline in our
revenues without a corresponding and timely reduction in expenses or a failure to manage other
aspects of our operations, that could have a material adverse effect on our business, results of
operations or financial condition.
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
16
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, 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 Business And Operating Results Could Be Negatively Impacted If Our New Domestic Distribution
Center Is Not Completed As Expected In 2011.
Our domestic distribution center currently consists of five warehouse facilities located in
Ontario, California, and we occupy four of these facilities under short-term leases. We recently
entered into an agreement with a real estate developer to form a joint venture to build a new 1.8
million square foot distribution facility in Moreno Valley, California that is intended to replace
the five existing warehouse facilities. We plan on moving our domestic distribution operations out
of the existing facilities and into the new distribution facility when it is expected to be
completed in 2011. However, because of the potential for construction delays or changes in
construction scope and schedule, we cannot predict with certainty when or if the new distribution
facility will be completed. Even if the construction proceeds as scheduled, it is possible that
contracted parties may not fulfill their contractual obligations or that unsatisfactory performance
could increase the cost associated with the construction. Any delays, cancellations, scope changes
or unsatisfactory performance by others could materially increase the construction expenses and
other costs of our new distribution facility.
Additionally, the leases of the four facilities that we currently occupy expire between March
2010 and June 2011. If the new distribution facility is not completed as expected in 2011, which
would prevent us from moving our domestic distribution operations as planned, we cannot be assured
that the landlords of the leased facilities will continue to provide short-term leases that address
our needs on terms favorable to us or that, if not available, we will be able to find alternate
facilities available for short-term lease on terms that are at least as comparable to us as the
terms of the existing leases. These risks could have a material adverse effect on our business and
results of operations.
Our Childrens Shoe Business May Be Negatively Impacted By The Consumer Product Safety Improvement
Act Of 2008.
The Consumer Product Safety Commission has issued new standards, effective February 10, 2009
and August 14, 2009, under the Consumer Product Safety Improvement Act of 2008 (CPSIA) regarding
lead content in consumer products directed at children 12 years of age and under, including
childrens shoes. The lead limits on the outer or accessible part of a childrens shoe was
decreased to 600 parts per million beginning February 10, 2009, and subsequently reduced on August
14, 2009 to 300 parts per million. The new standard applies retroactively to all products that
exist on February 10, 2009 and August 14, 2009, respectively, and it is not limited to new
manufacturing. We have been working to ensure that covered products are appropriately tested, and
we are regularly monitoring the evolution and interpretation of the regulation to ensure
compliance. There is still uncertainty regarding the meaning of the CPSIA and how it applies to
products or product components and the level of detail that each of our retailers will require.
Consequently, we are unable to predict whether the total financial impact of these new standards
will have a material adverse impact on our business, results of operation or financial condition.
We Depend Upon A Relatively Small Group Of Customers For A Large Portion Of Our Sales.
During 2009, 2008 and 2007, our net sales to our five largest customers accounted for
approximately 25.1%, 24.1%, and 25.3% of total net sales, respectively. No customer accounted for
more than 10.0% of our net sales during 2009, 2008 and 2007. One customer accounted for 11.3% of
net trade receivables at December 31, 2009. No customer accounted for over 10.0% of net trade
receivables at December 31, 2008. 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.
17
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 success of
individual malls, and an increase in store closures by other retailers may lead to mall vacancies
and reduced foot traffic. 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 the global economic slowdown, political, social or military events or otherwise, is likely to
adversely affect sales in our existing stores, particularly those with street locations. The
effects of these factors could reduce sales of particular existing stores or hinder our ability to
open retail stores in new markets, which could negatively affect our operating results.
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, 2009 were derived from
sales of footwear manufactured in foreign countries, with most manufactured in China and, to a
lesser extent, in Italy and Vietnam. 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 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 H1N1 (Swine) 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 6.86 Yuan per U.S. dollar at December 31, 2009. 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 a potentially material 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
18
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.
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
2009 and 2008, the top five manufacturers of our products produced approximately 69.1% and 64.6% of
our total purchases, respectively. One manufacturer accounted for 29.7% and 30.6% of total
purchases during 2009 and 2008, respectively. Three other manufacturers accounted for over 10.0%
of our total purchases during 2009. One other manufacturer accounted for over 10.0% of our total
purchases during 2008. 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
19
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 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.
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, Chief Operating Officer and Chief Financial 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®, Performance-S Shifted Design® and
Shape-ups® 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
20
in marketing our products. We also have a number of design patents and a limited number of
utility patents covering components and features used 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 56 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 Exert Significant Influence Over All Matters Requiring A Vote
Of Our Stockholders And His Interests May Differ From The Interests Of Our Other Stockholders.
As of December 31, 2009, Robert Greenberg, Chairman of the Board and Chief Executive Officer,
beneficially owned 36.3% of our outstanding Class B common shares and members of Mr. Greenbergs
immediate family beneficially owned an additional 22.7% of our outstanding Class B common shares.
The remainder of our outstanding Class B common shares is held in two irrevocable trusts for the
benefit of Mr. Greenberg and his immediate family members, and voting control of such shares
resides with the independent trustee. The holders of Class A common shares and Class B common
shares have identical rights except that holders of Class A common shares are entitled to one vote
per share while holders of Class B common shares are entitled to ten votes per share on all matters
submitted to a vote of our stockholders. As a result, as of December 31, 2009, Mr. Greenberg
beneficially owned approximately 28.1% 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,
they beneficially owned approximately 46.7% of the aggregate number of votes eligible to be cast by
our stockholders. Therefore, Mr. Greenberg is able to exert significant influence over all matters
requiring approval by our 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 significant influence over our management and operations. As a
result of such influence, certain transactions are not likely 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 shares. Because Mr.
Greenbergs interests may differ from the interests of the other stockholders, Mr. Greenbergs
significant influence on actions requiring stockholder approval may result in our company taking
action that is not in the interests of all stockholders. The differential in the voting rights may
also adversely affect the value of our Class A common shares to the extent that investors or any
potential future purchaser view the superior voting rights of our Class B common shares to have
value.
21
Our Charter Documents And Delaware Law May Inhibit A Takeover, Which May Adversely Affect 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 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 five premises
in Manhattan Beach, California, which consist of an aggregate of approximately 150,000 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 base rent for the leased property is approximately $0.5
million.
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 1,410,000 square
feet, with an annual base rent of approximately $5.2 million. The owned distribution facility is
approximately 264,000 square feet. The property leases expire between March 2010 and June 2011, and
these leases contain rent escalation provisions. In January 2010, we entered into an agreement
with HF Logistics I, LLC (HF) to form a joint venture (JV) to build a new 1.8 million square
foot distribution facility in Moreno Valley, California that we expect to occupy when completed in
2011. This single facility will replace the existing five facilities located in Ontario,
California, of which four are on short-term leases. We will lease the new distribution center from
the JV for a base rent of $933,894 per month for 20 years. The JVs objective is to operate the
facility for the production of income and profit. The term of the JV is fifty years. The parties
are equal fifty percent partners. Skechers, through Skechers RB, LLC, will make an initial cash
capital contribution of $30 million and HF will make an initial capital contribution of land.
Additional capital contributions, if necessary, would be made on an equal basis by Skechers RB, LLC
and HF. The JV is in the process of obtaining $55 million in construction financing, the closing of
which is subject to certain conditions. In the event that either the construction loan is not
finalized or construction does not begin by June 1, 2010, the JV is null and void and the parties
are entitled to receive return of their initial capital contributions in the form contributed.
Our European distribution center consists of a 490,000 square-foot facility in Liege, Belgium
under a 20-year operating lease with base rent of approximately $2.6 million per year. The lease
agreement also provides for early termination rights at five-year intervals beginning in April
2014, 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 April
2010 and June 2023. 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 $32.7 million for the year ended
December 31, 2009.
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, Netherlands, and Chile. The property leases expire at various dates between May 2010 and
November 2019. Total base rent for the leased properties aggregated approximately $13.6 million
for the year ended December 31, 2009.
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.
22
ITEM 4. RESERVED
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, 2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
13.13 |
|
|
$ |
5.20 |
|
Second Quarter |
|
|
12.56 |
|
|
|
6.50 |
|
Third Quarter |
|
|
19.26 |
|
|
|
8.95 |
|
Fourth Quarter |
|
|
30.00 |
|
|
|
16.39 |
|
YEAR ENDED DECEMBER 31, 2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
23.36 |
|
|
$ |
16.05 |
|
Second Quarter |
|
|
25.20 |
|
|
|
17.14 |
|
Third Quarter |
|
|
24.00 |
|
|
|
15.56 |
|
Fourth Quarter |
|
|
16.84 |
|
|
|
9.25 |
|
HOLDERS
As of February 15, 2010, there were 96 holders of record of our Class A Common Stock
(including holders who are nominees for an undetermined number of beneficial owners) and 21 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
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.
23
PERFORMANCE GRAPH
The following graph demonstrates the total return to stockholders of our companys Class A
Common Stock from December 31, 2004 to December 31, 2009, 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 graph assumes an investment of $100 on December 31, 2004 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.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2004 |
|
12/31/2005 |
|
12/31/2006 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2009 |
Skechers U.S.A., Inc. |
|
|
100.00 |
|
|
|
118.21 |
|
|
|
257.02 |
|
|
|
150.54 |
|
|
|
98.92 |
|
|
|
226.93 |
|
Russell 2000 |
|
|
100.00 |
|
|
|
104.55 |
|
|
|
123.76 |
|
|
|
121.82 |
|
|
|
80.66 |
|
|
|
102.58 |
|
Peer Group |
|
|
100.00 |
|
|
|
105.95 |
|
|
|
119.14 |
|
|
|
149.03 |
|
|
|
124.95 |
|
|
|
144.58 |
|
24
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, 2009 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 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
STATEMENT OF EARNINGS DATA: |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
Net sales |
|
$ |
1,436,440 |
|
|
$ |
1,440,743 |
|
|
$ |
1,394,181 |
|
|
$ |
1,205,368 |
|
|
$ |
1,006,477 |
|
Gross profit |
|
|
621,010 |
|
|
|
595,922 |
|
|
|
599,989 |
|
|
|
523,346 |
|
|
|
420,482 |
|
Earnings from operations |
|
|
72,582 |
|
|
|
57,892 |
|
|
|
112,930 |
|
|
|
112,544 |
|
|
|
76,296 |
|
Earnings before income taxes |
|
|
71,110 |
|
|
|
60,743 |
|
|
|
118,305 |
|
|
|
112,648 |
|
|
|
72,797 |
|
Net earnings attributable to Skechers U.S.A., Inc |
|
|
54,699 |
|
|
|
55,396 |
|
|
|
75,686 |
|
|
|
70,994 |
|
|
|
44,717 |
|
Net earnings per share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1.18 |
|
|
|
1.20 |
|
|
|
1.67 |
|
|
|
1.73 |
|
|
|
1.13 |
|
Diluted |
|
|
1.16 |
|
|
|
1.19 |
|
|
|
1.63 |
|
|
|
1.59 |
|
|
|
1.06 |
|
Weighted average shares:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
46,341 |
|
|
|
46,031 |
|
|
|
45,262 |
|
|
|
41,079 |
|
|
|
39,686 |
|
Diluted |
|
|
47,105 |
|
|
|
46,708 |
|
|
|
46,741 |
|
|
|
46,139 |
|
|
|
44,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, |
BALANCE SHEET DATA: |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
Working capital |
|
$ |
558,468 |
|
|
$ |
413,771 |
|
|
$ |
523,888 |
|
|
$ |
450,787 |
|
|
$ |
361,210 |
|
Total assets |
|
|
995,552 |
|
|
|
876,316 |
|
|
|
827,977 |
|
|
|
737,053 |
|
|
|
581,957 |
|
Long-term debt, excluding current portion |
|
|
15,641 |
|
|
|
16,188 |
|
|
|
16,462 |
|
|
|
106,805 |
|
|
|
107,288 |
|
Skechers U.S.A., Inc. equity |
|
|
745,922 |
|
|
|
668,693 |
|
|
|
626,663 |
|
|
|
449,087 |
|
|
|
343,830 |
|
|
|
|
(1) |
|
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, 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. |
25
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
GENERAL
We design, market and sell contemporary footwear for men, women and children under the
Skechers brand as well as several 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
While the first half of 2009 was negatively impacted by the continuing weak global economy,
results for the second half of the year saw improved year-over-year results. Despite continued
poor economic news and reduced consumer spending, we finished 2009 with record sales in the third
and fourth quarters.
Our net sales for 2009 were $1.436 billion, a decrease of $4.3 million, or 0.3%, compared to
net sales of $1.441 billion in 2008. Net earnings were $54.7 million, a decrease of $0.7 million
or 1.3% from net earnings of $55.4 million in 2008. Diluted earnings per share were $1.16, which
reflected a 2.5% decrease from the $1.19 reported in the prior year. Working capital was $558.5
million at December 31, 2009, an increase of $144.7 million from working capital of $413.8 million
at December 31, 2008. Cash and short-term investments increased by $180.8 million to $295.7
million in 2009 compared to $114.9 million at December 31, 2008, due to the redemption of our
investments in auction rate securities of $95.3 million, reduced inventories of $39.4 million and
our net earnings of $54.7 million.
2009 OVERVIEW
In 2009, we focused on product development, domestic and international growth, and inventory
and expense management.
New product design and delivery. Our success depends on our ability to design and deliver
trend-right, affordable product in a diverse range. In 2009, we focused on continuously updating
our core styles, adding fresh looks to our existing lines, and developing new lines. This approach
has broadened our product offering and ensured the relevance of our brands.
Grow our domestic business. In 2009, our focus was on maintaining our core Skechers business
in our domestic wholesale accounts while finding new opportunities to add shelf space and expand
into new locations with new Skechers categories. We also focused on expanding our domestic retail
distribution channel by opening 16 additional stores while closing two underperforming locations.
Further develop our international businesses. In 2009, we continued to focus on improving our
international operations by (i) growing our subsidiary business by increasing our customer base
within our existing subsidiary business, including our newest subsidiary in Brazil, and by the
acquisition of our distributor in Chile; (ii) increasing the product offering within each account;
(iii) delivering the right product into the right markets; and (iv) by building the business of our
joint ventures in Asia through additional retail stores and wholesale channels.
Balance sheet and expense management. During the second quarter of 2009, we secured a new
$250 million credit facility to provide us liquidity to fund our future initiatives. We also
focused on returning to profitability in the second half of 2009 by managing our inventory and
expenses to be in line with expected sales.
26
OUTLOOK FOR 2010
In 2010, we are focusing on maintaining our domestic and international market share by
continuing to offer fresh and stylish products at affordable prices while continuing to manage our
inventory and expenses. We are continuing to develop new product, much of which will be launching
in Spring and Fall of this year, and believe these new styles and lines will allow us the
opportunity to broaden the targeted demographic profile of our consumer base, increase our shelf
space, and open new locations without detracting from existing business.
We are focused on growing our international business to 25% to 30% of our total sales. We are
seeking to increase our global presence through our joint ventures in Asia and to continue to
develop our South American subsidiaries businesses in Brazil and Chile. We are also looking to
grow in new markets with new distributors in India and Mexico as well as to increase our presence
in other existing markets.
We will also continue to expand our retail distribution channel by opening another 25 to 30
stores, including approximately seven international company-owned stores, in 2010.
We will continue to develop our infrastructure to support ongoing growth. In January 2010, we
entered into a joint venture agreement with HF Logistics I, LLC to construct approximately
1,820,000 square feet of buildings and other improvements that we will use as our domestic
distribution facility. We expect the building to be completed and ready for operation in 2011.
Once this new facility is available, we plan to move out of our five existing distribution
facilities in Ontario, California, creating a more efficient distribution center.
YEAR ENDED DECEMBER 31, 2009 COMPARED TO THE YEAR ENDED DECEMBER 31, 2008
Net sales
Net sales for 2009 were $1.436 billion, a decrease of $4.3 million, or 0.3%, compared to net
sales of $1.441 billion in 2008. The decrease in net sales was primarily due to lower domestic
wholesale sales in the first half of the year partially offset by growth within our retail segment
and increased sales during the fourth quarter.
Our domestic wholesale net sales decreased $43.5 million, or 5.4%, to $763.5 million in 2009
compared to $807.0 million in 2008. The decrease in our domestic wholesale segment was broad-based
and across several divisions during the first half of the year primarily due to the weak U.S.
retail environment. The average selling price per pair within the domestic wholesale segment
increased to $20.49 per pair for 2009 from $19.21 in 2008, which was primarily the result of the
demand for new styles introduced in the second half of the year partially offset by a large amount
of closeouts in the first half of the year. The decrease in domestic wholesale segment sales came
on an 11.2% unit sales volume decrease to 37.3 million pairs in 2009 from 42.0 million pairs in
2008.
Our international wholesale segment net sales decreased $4.0 million, or 1.2% to $328.5
million in 2009, compared to sales of $332.5 million in 2008. Our international wholesale sales
consist of direct subsidiary sales those we make to department stores and specialty retailers
and sales to our distributors who in turn sell to department stores and specialty retailers in
various international regions where we do not sell direct. Direct subsidiary sales increased $21.3
million, or 10.4%, to $226.3 million compared to sales of $205.0 million in 2008. The increase in
direct subsidiary sales was primarily due to increased sales into China, Chile, and Switzerland.
Our distributor net sales decreased $25.4 million, or 20.0%, to $102.1 million in 2009, compared to
sales of $127.5 million in 2008. This was primarily due to decreased sales to our distributors in
Russia and Dubai as well as the acquisition of our distributor in Chile on June 1, 2009.
Our retail segment net sales increased $38.7 million, or 13.7% to $321.8 million in 2009,
compared to sales of $283.1 million in 2008. The increase in retail sales was due to a net increase
of 22 stores and positive comparable domestic store sales (i.e. those open at least one year).
During 2009, we realized positive comparable store sales of 3.7% in our domestic retail stores,
while we realized negative comparable store sales of 10.0% in our international retail stores due
to unfavorable currency translations. During 2009, we opened 16 new domestic stores and four
international stores, and we closed two domestic stores. We also acquired ten international stores
from our distributor in Chile and contributed six international stores to our joint ventures with
operations in Malaysia and Thailand. These new stores contributed $13.2 million in net sales
during 2009 as compared to new store sales of $13.8 million for 32 other stores opened in 2008.
Of our new store additions, 18 were concept stores and 12 were outlet stores. Our domestic retail
sales increased 13.1% in 2009 compared to 2008 due to a net increase of 14 stores and positive
comparable store sales. Our international retail sales increased 19.8% in 2009 compared to 2008,
attributable to the purchase of ten stores from our distributor in Chile.
27
We had 219 domestic stores and 27 international retail stores as of February 15, 2010, and we
currently plan to open approximately 25 to 30 stores, including approximately seven international
stores, in 2010. In both 2009 and 2008, we closed two domestic stores. We periodically review all
of our stores for impairment. During 2009, we recorded an impairment charge of $0.8 million
related to three of our domestic stores. During 2008, we recorded an impairment charge of $1.7
million related to eight of our domestic stores. 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 net sales increased $4.5 million to $22.6 million in 2009, a 25.3% increase
over sales of $18.1 million in 2008. The increase in sales was primarily due to increased sales of
in-line and in-demand inventory. Our e-commerce sales made up approximately 2% of our consolidated
net sales in 2009 compared to approximately 1% in 2008.
Gross profit
Gross profit for 2009 increased $25.1 million to $621.0 million from $595.9 million in 2008.
Gross profit as a percentage of net sales, or gross margin, increased to 43.2% in 2009 from 41.4%
in 2008. The gross margin increase was largely the result of higher domestic wholesale and retail
margins that were partially offset by lower international wholesale margins. Gross profit for our
domestic wholesale segment increased $15.7 million, or 5.7%, to $292.3 million in 2009 from $276.6
million in 2008. Domestic wholesale margins increased to 38.3% in 2009 from 34.3% for 2008. The
increase in domestic wholesale margins was primarily due to less closeouts and increased sales of
in-line, in-demand inventory during the fourth quarter which offset price pressure during the first
half of 2009 resulting from the weak U.S. retail environment.
Gross profit for our international wholesale segment decreased $19.4 million, or 14.1%, to
$118.4 million for 2009 compared to $137.8 million in 2008. Gross margins were 36.1% for 2009
compared to 41.5% in 2008. The decrease in gross margins for the international wholesale segment
was due to weaker retail environments abroad and unfavorable currency translations, since our
products are predominately purchased in U.S. dollars. International wholesale sales through our
foreign subsidiaries achieved higher gross margins than our international wholesales sales through
our distributors. Gross margins for our direct subsidiary sales were 40.0% in 2009 as compared to
49.2% in 2008. Gross margins for our distributor sales were 27.3% in 2009 as compared to 29.0% in
2008.
Gross profit for our retail segment increased $25.3 million, or 14.7%, to $198.2 million in
2009 as compared to $172.9 million in 2008. Gross margins for all stores were 61.6% for 2009
compared to 61.1% in 2008. Gross margins for our domestic stores were 60.7% in 2009 as compared to
60.6% in 2008. Gross margins for our international stores were 70.5% in 2009 as compared to 66.2%
in 2008. The increase in domestic and international retail margins was due to less closeouts and
increased sales of in-line, in-demand inventory.
Our cost of sales includes the cost of footwear purchased from our manufacturers, royalties,
duties, quota costs, inbound freight (including ocean, air and freight from the dock to our
distribution centers), broker fees and storage costs. Because we include expenses related to our
distribution network in general and administrative expenses while some of our competitors may
include expenses of this type in cost of sales, our gross margins may not be comparable, and we may
report higher gross margins than some of our competitors in part for this reason.
Selling expenses
Selling expenses increased by $2.1 million, or 1.7%, to $129.0 million for 2009 from $126.9
million in 2008. As a percentage of net sales, selling expenses were 9.0% and 8.8% in 2009 and
2008, respectively. The increase in selling expenses was primarily due to higher promotional costs
and selling commissions partially offset by reduced trade show expenses. 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 $7.5 million, or 1.8%, to $421.1 million for
2009 from $413.6 million in 2008. As a percentage of sales, general and administrative expenses
were 29.3% and 28.7% in 2009 and 2008, respectively. The increase in general and administrative
expenses was primarily due to increased salaries and wages of $9.9 million, which included stock
compensation costs of $5.7 million, primarily due to a return to historical employee incentive and
benefit programs, as well as higher
28
rent expense of $8.5 million due to an additional 22 stores, which was partially offset by
decreased bad debt expense of $6.6 million. In addition, the expenses related to our distribution
network, including the functions of purchasing, receiving, inspecting, allocating, warehousing and
packaging of our products totaled $109.2 million and $112.6 million for 2009 and 2008,
respectively. The $3.4 million decrease was due to sales of higher priced products with fewer
units sold as well as efficiency gains.
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 retail markets. We
opened 16 domestic retail stores and four international retail stores in 2009, while closing two
domestic stores. We also purchased 10 international stores from our distributor in Chile and
contributed six international stores to a new joint venture. We currently plan to open between 25
and 30 stores, including approximately seven international stores, in 2010.
We continue to review our cost structure to bring our expenses in line with our anticipated
sales levels in 2010.
Interest income
Interest income for 2009 decreased $5.2 million to $2.1 million as compared to $7.3 million
for the same period in 2008. The decrease in interest income resulted from the repurchase of our
auction rate securities by our investment advisor and the subsequent reinvestment of the proceeds
in U.S. Treasuries that have a lower yield than the auction rate securities.
Interest expense
Interest expense for 2009 decreased $1.6 million to $3.0 million as compared to $4.6 million
for the same period in 2008. The decrease was due to interest on our new corporate headquarters
and warehouse equipment for our new distribution center being capitalized. Interest expense was
incurred on our mortgages for our domestic distribution center and our corporate office located in
Manhattan Beach, California, and on amounts owed to our foreign manufacturers.
Income taxes
The effective tax rate for 2009 was 28.4% as compared to 11.9% in 2008. Income tax expense
for 2009 was $20.2 million compared to $7.3 million for 2008. We expect our ongoing effective
annual tax rate in 2010 to be between 30 and 35 percent.
Income taxes were computed using the effective tax rates applicable to each of our domestic
and international taxable jurisdictions. The rate for the year ended December 31, 2009 is lower
than the expected domestic rate of approximately 40% due to our non-U.S. subsidiary earnings in
lower tax rate jurisdictions and our planned permanent reinvestment of undistributed earnings from
our non-U.S. subsidiaries, thereby indefinitely postponing their repatriation to the United States.
As such, we did not provide for deferred income taxes on accumulated undistributed earnings of our
non-U.S. subsidiaries. As of December 31, 2009, withholding and U.S. taxes have not been recorded
on approximately $82.0 million of cumulative undistributed earnings.
Noncontrolling interests in net loss of consolidated subsidiaries
Noncontrolling interest for 2009 increased $1.9 million to $3.8 million as compared to $1.9
million for the same period in 2009. Noncontrolling interest represents the share of net loss that
is attributable to our joint venture partners based on their investments in Skechers China,
Skechers Southeast Asia and Skechers Thailand.
YEAR ENDED DECEMBER 31, 2008 COMPARED TO THE YEAR ENDED DECEMBER 31, 2007
Net sales
Net sales for 2008 were $1.441 billion, an increase of $46.6 million, or 3.3%, over net sales
of $1.394 billion in 2007. The increase in net sales was primarily due to increased international
wholesale sales and growth within the domestic retail segment from an increased store base
partially offset by lower domestic wholesale sales.
29
Our domestic wholesale net sales decreased 2.9%, or $24.2 million, to $807.0 million in 2008
compared to $831.2 million in 2007. The decrease in our domestic wholesale segment was broad-based
and across key divisions primarily due to the weak U.S. retail environment. The average selling
price per pair within the domestic wholesale segment decreased to $19.21 per pair for 2008 from
$19.22 in 2007. The decrease in domestic wholesale segment sales came on a 2.8% unit sales volume
decrease to 42.0 million pairs in 2008 from 43.2 million pairs in 2007.
Our international wholesale segment net sales increased $64.9 million to $332.5 million in
2008, a 24.2% increase over sales of $267.6 million in 2007. Direct subsidiary sales increased
$61.0 million, or 42.3%, to $205.0 million compared to sales of $144.0 million in 2007. The
increase in direct subsidiary sales was primarily due to increased sales into Germany, UK,
Switzerland, and Brazil. Our distributor net sales increased $3.9 million to $127.5 million in
2008, a 3.2% increase over sales of $123.6 million in 2007. This was primarily due to increased
sales to our distributors in Dubai, Panama, and Chile.
Our retail segment net sales increased $3.7 million to $283.1 million in 2008, a 1.4% increase
over sales of $279.4 million in 2007. The increase in retail sales was due to a net increase of 32
stores partially offset by negative comparable store sales (i.e., sales by stores open for at least
one year). For 2008, our domestic retail sales increased 1.0% while our international retail sales
increased 4.7% compared to the prior year. During 2008, we realized negative comparable store
sales of 9.3% in our domestic stores, while we realized negative comparable store sales of 3.3% in
our international stores. During 2008, we opened 31 new domestic stores and three international
stores, and we closed two domestic stores. These new stores contributed $13.8 million in net sales
during 2008 as compared to new store sales of $16.9 million for 42 other stores opened in 2007.
Of our new store additions, 22 were concept stores, 10 were outlet stores, and two were warehouse
stores.
We had 204 domestic stores and 19 international retail stores as of February 15, 2009. During
2008, we closed two stores, and we also closed two stores in 2007. We periodically review all of
our stores for impairment. During 2008, we recorded an impairment charge of $1.7 million related
to eight of our domestic stores. During 2007, we did not record a similar 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 net sales increased $2.2 million to $18.1 million in 2008, a 13.4% increase
over sales of $15.9 million in 2007. Our e-commerce sales made up 1% of our consolidated sales in
both 2008 and 2007.
Gross profit
Gross profit for 2008 decreased $4.1 million to $595.9 million as compared to $600.0 million
in 2007. Gross margin decreased to 41.4% in 2008 from 43.0% in 2007. The gross margin decrease
was largely the result of reduced domestic wholesale margins that were partially offset by higher
international wholesale margins caused by a higher proportion of our revenues coming from our
international wholesale segment through foreign subsidiaries, which achieved higher gross margins
than our domestic wholesale segment or sales through our foreign distributors. Gross profit for
our domestic wholesale segment decreased $43.8 million, or 13.7%, to $276.6 million in 2008
compared to $320.4 million in 2007. Domestic wholesale margins decreased to 34.3% in 2008 from
38.5% for 2007. The decrease in domestic wholesale margins was due to higher closeouts, product
mix changes and continued price pressure resulting from the weak U.S. retail environment.
Gross profit for our international wholesale segment increased $38.0 million, or 38.2%, to
$137.8 million for 2008 compared to $99.8 million in 2007. Gross margins were 41.5% for 2008
compared to 37.3% in 2007. Gross margins for our direct subsidiary sales were 49.2% in 2008 as
compared to 45.0% in 2007. Gross margins for our distributor sales were 29.0% in 2008 as compared
to 28.2% in 2007. The increase in gross margins for the international wholesale segment was due to
increased subsidiary sales, which achieved higher gross margins than our international wholesale
sales through our foreign distributors.
Gross profit for our retail segment increased $1.1 million, or 0.7%, to $172.9 million in 2008
as compared to $171.8 million in 2007. Gross margins were 61.1% for 2008 compared to 61.5% in
2007. Gross margins for our international stores were 66.2% in 2008 as compared to 62.3% in 2007.
Gross margins for our domestic stores were 60.6% in 2008 as compared to 61.4% in 2007. The
decrease in domestic retail margins was due to higher closeouts, product mix changes and continued
price pressure resulting from the weak U.S. retail environment.
30
Selling expenses
Selling expenses increased by $0.4 million, or 0.3%, to $126.9 million for 2008 from $126.5
million in 2007. As a percentage of net sales, selling expenses were 8.8% and 9.1% in 2008 and
2007, respectively. The increase in selling expenses was primarily due to higher sample costs and
selling commissions partially offset by lower promotional costs and reduced trade show expenses.
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 $48.9 million, or 13.4%, to $413.6 million
for 2008 from $364.7 million in 2007. As a percentage of sales, general and administrative
expenses were 28.7% and 26.2% in 2008 and 2007, respectively. The increase in general and
administrative expenses was primarily due to increased salaries and wages along with payroll
expenses and benefit costs of $11.7 million including stock compensation costs of $2.3 million,
higher rent expense of $8.4 million due to an additional 32 stores from prior year and new
international facilities, increased bad debt expense of $5.7 million, and increased warehouse and
distribution costs of $5.6 million. In addition, the expenses related to our distribution network,
including the functions of purchasing, receiving, inspecting, allocating, warehousing and packaging
of our products totaled $112.6 million and $97.6 million for 2008 and 2007, respectively. The
$15.0 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.
Interest income
Interest income for 2008 decreased $2.7 million to $7.3 million as compared to $10.0 million
for the same period in 2007. The decrease in interest income resulted from lower interest rates
during 2008 when compared to the same period in 2007. Interest income earned on our investment
balances was primarily tax exempt.
Interest expense
Interest expense for 2008 decreased $0.2 million to $4.6 million as compared to $4.8 million
for the same period in 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.
Income taxes
The effective tax rate for 2008 was 11.9% as compared to 36.0% in 2007. Income tax expense
for 2008 was $7.3 million compared to $42.6 million for 2007. On August 1, 2008, we received a
decision on our advance pricing agreement (APA) with the Internal Revenue Service (IRS). The
APA provides us with greater certainty with respect to the transfer pricing of certain intercompany
transactions. As a result of this agreement and other discrete items, we recorded an income tax
benefit of $7.0 million, or $0.15 per diluted share, relating to the reversal of income tax expense
recorded in prior years. Excluding the impact of these discrete items, our effective tax rate would
have been 23.4% for the year ended December 31, 2008.
Income taxes were computed using the effective tax rates applicable to each of our domestic
and international taxable jurisdictions. The rate for the year ended December 31, 2008 is lower
than the expected domestic rate of approximately 40% due to our non-U.S. subsidiary earnings in
lower tax rate jurisdictions and our planned permanent reinvestment of undistributed earnings from
our non-U.S. subsidiaries, thereby indefinitely postponing their repatriation to the United States.
As such, we did not provide for deferred income taxes on accumulated undistributed earnings of our
non-U.S. subsidiaries. As of December 31, 2008, withholding and U.S. taxes have not been recorded
on approximately $64.1 million of cumulative undistributed earnings.
The APA obtained in 2008 provided for transfer pricing adjustments which resulted in the
reclassification of approximately $21.4 million of prior year earnings from the U.S. to non-U.S.
subsidiaries. If these reclassified earnings had been accounted for as non-U.S. earnings as of
December 31, 2007, the balance of accumulated undistributed earnings of our non-U.S. subsidiaries
for which withholding and U.S. taxes had not been recorded would have increased from $15.5 million
to $36.9 million.
31
Noncontrolling interest in net loss of consolidated subsidiaries
Noncontrolling interest of $1.9 million for 2008 represents the share of net loss that is
attributable to the equity that we do not own of Skechers China, our joint venture that was formed
in October 2007.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital at December 31, 2009 was $558.5 million, an increase of $144.7 million
from working capital of $413.8 million at December 31, 2008. Our cash and cash equivalents at
December 31, 2009 were $265.7 million compared to $114.9 million at December 31, 2008. Cash and
short-term investments increased by $180.8 million to $295.7 million in 2009 compared to $114.9
million at December 31, 2008, primarily due to the redemption of our investments in auction rate
securities of $95.3 million, reduced inventories of $39.4 million and our net earnings of $54.7
million.
During 2009, net cash provided by our operating activities was $115.1 million compared to cash
used in operating activities of $21.8 million for 2008. The significant increase in our operating
cash flows for 2009 when compared to 2008 was primarily the result of reduced inventory levels as
we significantly managed our inventory levels down in the first half of 2009 offset by increased
accounts receivable balances of $46.6 million.
Net cash provided by investing activities was $25.8 million for 2009 as compared to net cash
used of $68.2 million in 2008. During 2009, we had $95.6 million of long-term investments in
auction rate securities that were redeemed or matured and purchased $30.0 million in short-term
U.S. Treasuries. Capital expenditures for 2009 were approximately $35.3 million, which primarily
consisted of 22 new store openings and several store remodels, and warehouse equipment purchased
for our new distribution center in Moreno Valley, California. This was compared to capital
expenditures of $72.5 million in the prior year, which primarily consisted of 34 new store openings
and several store remodels, corporate real property purchased, and warehouse equipment for our new
distribution center in Moreno Valley, California. Excluding the construction of our new
distribution center in Moreno Valley, California, we expect our capital expenditures for 2010 to be
between $15 million and $20 million, which includes opening between 25 to 30 retail stores
including approximately seven international retail stores as well as investments in information
technology. We are currently in the process of designing and purchasing the equipment and tenant
improvements to be used in our new distribution center and estimate the cost of this equipment and
tenant improvements to be approximately $85.0 million, of which $38.6 million was incurred as of
December 31, 2009. We expect the remaining balance of approximately $46.4 million to be incurred
during 2010. In January 2010, we entered into a joint venture agreement to build our new 1.8
million square foot distribution facility in Moreno Valley, California, which we expect to occupy
when completed in 2011. The Company will make an initial cash capital contribution of $30 million
and the joint venture is in the process of obtaining $55 million in construction financing. In the
event that either the construction loan is not finalized or construction does not begin by June 1,
2010, the JV is null and void and the parties are entitled to receive a return of their initial
capital contributions in the form contributed. Our operating cash flows, current cash, and
available lines of credit should be adequate to fund these capital expenditures, although we may
seek additional funding for all or a portion of these expenditures.
Net cash provided by financing activities was $8.4 million during 2009 compared to $8.6
million during 2008. 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 and a lower
capital contribution by the minority partner to our joint venture during the year ended December
31, 2009.
We have outstanding debt of $16.2 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 June 30, 2009, we entered into a $250.0 million credit agreement (the Credit Agreement) that replaced the
existing $150.0 million credit agreement. The new credit facility matures in June 2013. The
Credit Agreement permits us to borrow up to $250.0 million based upon a borrowing base of eligible
accounts receivable and inventory, which amount can be increased to $300.0 million at our request
and upon satisfaction of certain conditions including obtaining the commitment of existing or
prospective lenders willing to provide the incremental amount. Borrowings bear interest at the
borrowers election based on LIBOR or a Base Rate (defined as the greatest of the base LIBOR plus
1.00%, the Federal Funds Rate plus 0.5% or one of the lenders prime rate), in each case, plus an
applicable margin based on the average daily principal balance of revolving loans under the Credit
Agreement (2.75% to 3.25% for Base Rate Loans and 3.75% to 4.25% for Libor Rate Loans). We pay a
monthly unused line of credit fee between 0.5% and 1.0% per annum, which varies based on the
average daily principal balance of outstanding revolving loans and undrawn amounts of letters of
credit outstanding during such month. The Credit Agreement further provides for a limit on the
issuance of letters of credit to a maximum outstanding amount of $50.0 million. The Credit
Agreement contains customary affirmative and negative covenants for secured credit
32
facilities of this type, including a fixed charges coverage ratio that applies when excess
availability is less than $50.0 million. In addition, the Credit Agreement places limits on
additional indebtedness that we are permitted to incur as well as other restrictions on certain
transactions. We were in compliance with all of the financial covenants of the Credit Agreement at
December 31, 2009. We had $2.1 million of outstanding letters of credit and short-term borrowings
of $2.0 million as of December 31, 2009. We paid syndication and commitment fees of $5.9 million
on this facility which are being amortized over the four-year life of the facility.
On January 30, 2010, we entered into a joint venture agreement with HF Logistics I, LLC
through Skechers RB, LLC, a newly formed wholly-owned subsidiary, regarding the ownership and
management of HF Logistics-SKX, LLC, a Delaware limited liability company (the JV). The purpose
of the JV is to acquire and to develop real property consisting of approximately 110 acres situated
in Moreno Valley, California, and to construct approximately 1,820,000 square feet of buildings and
other improvements (the Project) to lease to us as a distribution facility. The JVs objective
is to operate the Project for the production of income and profit. The term of the JV is fifty
years. The parties are equal fifty percent partners. Skechers, through Skechers RB, LLC, will make
an initial cash capital contribution of $30 million and HF will make an initial capital
contribution of land. Additional capital contributions, if necessary, would be made on an equal
basis by Skechers RB, LLC and HF. The JV is in the process of obtaining $55 million in construction
financing, the closing of which is subject to certain conditions. In the event that either the
construction loan is not finalized or construction does not begin by June 1, 2010, the JV is null
and void and the parties are entitled to receive return of their initial capital contributions in
the form contributed.
We believe that anticipated cash flows from operations, available borrowings under our secured
line of credit, cash on hand, 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 2010. However, in connection with our current strategies, we will have
significant working capital requirements and will incur significant 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, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
17,619 |
|
|
$ |
1,781 |
|
|
$ |
15,838 |
|
|
|
|
|
|
|
|
|
Operating lease obligations (1) |
|
|
680,969 |
|
|
|
78,016 |
|
|
|
140,810 |
|
|
$ |
109,046 |
|
|
$ |
353,097 |
|
Purchase obligations (2) |
|
|
244,160 |
|
|
|
244,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehousing equipment (3) |
|
|
46,357 |
|
|
|
46,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum payments related to our
licensing arrangements |
|
|
1,888 |
|
|
|
1,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
990,993 |
|
|
$ |
372,202 |
|
|
$ |
156,648 |
|
|
$ |
109,046 |
|
|
$ |
353,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, investment balances
and existing cash balances. |
|
(2) |
|
Purchase obligations include the following: (i) accounts payable balances for the
purchase of footwear of $93.5 million, (ii) outstanding letters of credit of $2.1 million
and (iii) open purchase commitments with our foreign manufacturers for $148.6 million. We
currently expect to fund these commitments with cash flows from operations, investment
balances and existing |
33
|
|
|
|
|
cash balances. |
|
(3) |
|
We plan to spend approximately $85.0 million for equipment relating to our new
distribution center in Moreno Valley, of which $38.6 million was incurred as of December
31, 2009. We expect the remaining balance to be incurred in 2010, which we expect to fund
with cash flows from operations, investment balances and existing cash balances. |
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.
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 difficult, subjective and complex 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 and judgments on historical experience, other available information, and
on 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. In
determining whether an estimate is critical, we consider if the nature of the estimates or
assumptions is material due to the levels of subjectivity and judgment or the susceptibility of
such matters to change, and if the impact of the estimates and assumptions on financial condition
or operating performance is material. Actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting estimates are affected by 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, valuation of deferred income taxes, uncertain tax
positions, foreign currency translation.
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 international
wholesale customers in the European community, 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 the 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. While customers do not have the right to
return goods, we periodically decide to accept returns or provide customers with credits.
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 or, in some cases
minimum royalty payments. 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, financial statements issued by the
customer and our experience with the account, and it is adjusted accordingly. When a customers
account becomes significantly past due, we generally
34
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 countries or industries,
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 from 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 our historical loss rate as a
percentage of sales. Gross trade accounts receivable balance was $234.3 million and $189.9
million and the allowance for bad debts, returns, sales allowances and customer chargebacks was
$14.4 million and $14.9 million, at December 31, 2009 and 2008, respectively.
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, existing orders from
customers 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 based upon historical sales
experience on a style by style basis. 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 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. Our gross
inventory value was $227.7 million and $274.4 million and our inventory reserve was $3.7 million
and $13.2 million, at December 31, 2009 and 2008, respectively.
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, 2009, we recorded a $0.8 million
impairment charge for three of our domestic stores. For the year ended December 31, 2008, we
recorded a $1.7 million impairment charge for eight of our domestic stores. We did not record an
impairment charge in 2007.
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
35
results of operations and financial position. For the year ended December 31, 2009, we
recorded $2.5 million related to a legal settlement.
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, 2009, we had net deferred tax assets of $27.3 million reduced by a
valuation allowance of $5.7 million against loss carry-forwards not expected to be utilized by
certain foreign subsidiaries.
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 domestic and a portion of our
international product sales as well as 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 2009 and 2008, 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.
RECENT ACCOUNTING CHANGES
Effective January 1, 2009, the Company adopted ASC 805-20 (formerly 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. Our
adoption of ASC 805-20 did not have a material impact on our consolidated financial statements.
In June 2009, the Financial Accounting Standards Board (FASB) issued ASC 105-10 (formerly
Statement of Financial Accounting Standard (SFAS 168), The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles. ASC 105-10 became the
source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernment entities.
It also modifies the GAAP hierarchy to include only two levels of GAAP; authoritative and
non-authoritative. ASC 105-10 is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. We adopted ASC 105-10 during the third quarter of 2009.
Our adoption of ASC 105-10 did not have a material impact on our consolidated financial statements.
In December 2009, the FASB issued Accounting Standards Update (ASU) 2009-17, which codifies
SFAS No. 167, Amendments to FASB Interpretation No. 46(R) issued in June 2009. ASU 2009-17
requires a qualitative approach to identifying a controlling financial interest in a variable
interest entity (VIE), and requires ongoing assessment of whether an entity is a VIE and whether
an interest in a VIE makes the holder the primary beneficiary of the VIE. ASU 2009-17 is effective
for interim and annual reporting periods beginning after November 15, 2009. We do not expect the
adoption of ASU 2009-17 to have a material impact on our consolidated financial statements.
36
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 ASC 815-10 (formerly SFAS 133).
Interest rate fluctuations. 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,
2009 we had $2.0 million of outstanding short-term borrowings subject to changes in interest rates;
however, we do not expect that any changes will have a material impact on our financial condition
or results of operations.
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 currently engage in hedging activities with respect to such exchange rate risks.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
63 |
|
38
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Skechers U.S.A., Inc.:
We have audited the accompanying consolidated balance sheets of Skechers U.S.A., Inc. and
subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of earnings, equity and comprehensive income, and cash flows for each of the years in
the three-year period ended December 31, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2009, 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Skechers U.S.A., Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated March 5, 2010 expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ KPMG LLP
Los Angeles, California
March 5, 2010
39
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Skechers U.S.A., Inc.:
We have audited Skechers U.S.A., Inc.s internal control over financial reporting as of December
31, 2009, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Skechers U.S.A., Inc.s
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 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, 2009, based on criteria established in Internal
Control Integrated 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, 2009 and 2008, and the related consolidated statements of earnings, equity and
comprehensive income, and cash flows for each of the years in the three-year period ended December
31, 2009, and the related financial statement schedule, and our report dated March 5, 2010
expressed an unqualified opinion on those consolidated financial statements and financial statement
schedule.
/s/ KPMG LLP
Los Angeles, California
March 5, 2010
40
SKECHERS U.S.A., INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
265,675 |
|
|
$ |
114,941 |
|
Short-term investments |
|
|
30,000 |
|
|
|
|
|
Trade accounts receivable, less allowances of $14,361 in 2009 and $14,880 in 2008 |
|
|
219,924 |
|
|
|
175,064 |
|
Other receivables |
|
|
12,177 |
|
|
|
7,816 |
|
|
|
|
|
|
|
|
Total receivables |
|
|
232,101 |
|
|
|
182,880 |
|
Inventories |
|
|
224,050 |
|
|
|
261,209 |
|
Prepaid expenses and other current assets |
|
|
28,233 |
|
|
|
31,022 |
|
Deferred tax assets |
|
|
8,950 |
|
|
|
11,955 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
789,009 |
|
|
|
602,007 |
|
Property and equipment, at cost, less accumulated depreciation and amortization |
|
|
171,667 |
|
|
|
157,757 |
|
Intangible assets, less accumulated amortization |
|
|
9,011 |
|
|
|
5,407 |
|
Deferred tax assets |
|
|
13,660 |
|
|
|
18,158 |
|
Long-term marketable securities |
|
|
|
|
|
|
81,925 |
|
Other assets, at cost |
|
|
12,205 |
|
|
|
11,062 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
995,552 |
|
|
$ |
876,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Current installments of long-term borrowings |
|
$ |
529 |
|
|
$ |
572 |
|
Short-term borrowings |
|
|
2,006 |
|
|
|
|
|
Accounts payable |
|
|
196,163 |
|
|
|
164,643 |
|
Accrued expenses |
|
|
31,843 |
|
|
|
23,021 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
230,541 |
|
|
|
188,236 |
|
Long-term borrowings, excluding current installments |
|
|
15,641 |
|
|
|
16,188 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
246,182 |
|
|
|
204,424 |
|
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; 34,229 and
33,410 shares issued and outstanding at December 31, 2009 and 2008, respectively |
|
|
34 |
|
|
|
33 |
|
Class B Common Stock, $.001 par value; 60,000 shares authorized; 12,360 and
12,782 shares issued and outstanding at December 31, 2009 and 2008, respectively |
|
|
13 |
|
|
|
13 |
|
Additional paid-in capital |
|
|
272,662 |
|
|
|
264,200 |
|
Accumulated other comprehensive income (loss) |
|
|
9,348 |
|
|
|
(4,719 |
) |
Retained earnings |
|
|
463,865 |
|
|
|
409,166 |
|
|
|
|
|
|
|
|
Skechers U.S.A., Inc. equity |
|
|
745,922 |
|
|
|
668,693 |
|
Noncontrolling interests |
|
|
3,448 |
|
|
|
3,199 |
|
|
|
|
|
|
|
|
Total equity |
|
|
749,370 |
|
|
|
671,892 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
995,552 |
|
|
$ |
876,316 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
41
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
$ |
1,436,440 |
|
|
$ |
1,440,743 |
|
|
$ |
1,394,181 |
|
Cost of sales |
|
|
815,430 |
|
|
|
844,821 |
|
|
|
794,192 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
621,010 |
|
|
|
595,922 |
|
|
|
599,989 |
|
Royalty income, net |
|
|
1,655 |
|
|
|
2,461 |
|
|
|
4,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
622,665 |
|
|
|
598,383 |
|
|
|
604,168 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
128,989 |
|
|
|
126,890 |
|
|
|
126,527 |
|
General and administrative |
|
|
421,094 |
|
|
|
413,601 |
|
|
|
364,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
550,083 |
|
|
|
540,491 |
|
|
|
491,238 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
72,582 |
|
|
|
57,892 |
|
|
|
112,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2,070 |
|
|
|
7,337 |
|
|
|
10,040 |
|
Interest expense |
|
|
(3,045 |
) |
|
|
(4,606 |
) |
|
|
(4,763 |
) |
Other, net |
|
|
(497 |
) |
|
|
120 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,472 |
) |
|
|
2,851 |
|
|
|
5,375 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before taxes |
|
|
71,110 |
|
|
|
60,743 |
|
|
|
118,305 |
|
Income tax expense |
|
|
20,228 |
|
|
|
7,258 |
|
|
|
42,619 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
50,882 |
|
|
|
53,485 |
|
|
|
75,686 |
|
Less: Net loss attributable to noncontrolling interests |
|
|
(3,817 |
) |
|
|
(1,911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to Skechers U.S.A., Inc. |
|
$ |
54,699 |
|
|
$ |
55,396 |
|
|
$ |
75,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share attributable to Skechers U.S.A., Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.18 |
|
|
$ |
1.20 |
|
|
$ |
1.67 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.16 |
|
|
$ |
1.19 |
|
|
$ |
1.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculating earnings per share
attributable to Skechers U.S.A., Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
46,341 |
|
|
|
46,031 |
|
|
|
45,262 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
47,105 |
|
|
|
46,708 |
|
|
|
46,741 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES |
|
|
AMOUNT |
|
|
|
|
|
|
ACCUMULATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLASS A |
|
|
CLASS B |
|
|
CLASS A |
|
|
CLASS B |
|
|
ADDITIONAL |
|
|
OTHER |
|
|
|
|
|
|
SKECHERS |
|
|
NON |
|
|
TOTAL |
|
|
|
COMMON |
|
|
COMMON |
|
|
COMMON |
|
|
COMMON |
|
|
PAID-IN |
|
|
COMPREHENSIVE |
|
|
RETAINED |
|
|
U.S.A., INC. |
|
|
CONTROLLING |
|
|
STOCKHOLDERS |
|
|
|
STOCK |
|
|
STOCK |
|
|
STOCK |
|
|
STOCK |
|
|
CAPITAL |
|
|
INCOME |
|
|
EARNINGS |
|
|
EQUITY |
|
|
INTERESTS |
|
|
EQUITY |
|
Balance at December 31, 2006 |
|
|
28,103 |
|
|
|
13,768 |
|
|
$ |
28 |
|
|
$ |
14 |
|
|
$ |
156,374 |
|
|
$ |
11,200 |
|
|
$ |
281,471 |
|
|
$ |
449,087 |
|
|
|
|
|
|
$ |
449,087 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,686 |
|
|
|
75,686 |
|
|
|
|
|
|
|
75,686 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,563 |
|
|
|
|
|
|
|
3,563 |
|
|
|
|
|
|
|
3,563 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,249 |
|
|
|
|
|
|
|
79,249 |
|
Cumulative
effect of accounting change -
adjustment to retained earnings upon
adoption of ASC 740-10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,387 |
) |
|
|
(3,387 |
) |
|
|
|
|
|
|
(3,387 |
) |
Redemption of convertible subordinated
notes |
|
|
3,368 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
88,743 |
|
|
|
|
|
|
|
|
|
|
|
88,746 |
|
|
|
|
|
|
|
88,746 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,081 |
|
|
|
|
|
|
|
|
|
|
|
1,081 |
|
|
|
|
|
|
|
1,081 |
|
Proceeds from issuance of common stock
under the employee stock purchase plan |
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,066 |
|
|
|
|
|
|
|
|
|
|
|
2,066 |
|
|
|
|
|
|
|
2,066 |
|
Proceeds from issuance of common stock
under the employee stock option plan |
|
|
506 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
6,126 |
|
|
|
|
|
|
|
|
|
|
|
6,127 |
|
|
|
|
|
|
|
6,127 |
|
Tax benefit of stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,694 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
$ |
626,663 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,396 |
|
|
|
55,396 |
|
|
$ |
(1,911 |
) |
|
|
53,485 |
|
Net unrealized gain (loss) on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,151 |
) |
|
|
|
|
|
|
(8,151 |
) |
|
|
|
|
|
|
(8,151 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,331 |
) |
|
|
|
|
|
|
(11,331 |
) |
|
|
110 |
|
|
|
(11,221 |
) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,914 |
|
|
|
(1,801 |
) |
|
|
34,113 |
|
Capital contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
5,000 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,337 |
|
|
|
|
|
|
|
|
|
|
|
2,337 |
|
|
|
|
|
|
|
2,337 |
|
Proceeds from issuance of common stock
under the employee stock purchase plan |
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,780 |
|
|
|
|
|
|
|
|
|
|
|
1,780 |
|
|
|
|
|
|
|
1,780 |
|
Proceeds from issuance of common stock
under the employee stock option plan |
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,876 |
|
|
|
|
|
|
|
|
|
|
|
1,876 |
|
|
|
|
|
|
|
1,876 |
|
Tax benefit of stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
123 |
|
Conversion of Class B Common Stock into
Class A Common Stock |
|
|
70 |
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
33,410 |
|
|
|
12,782 |
|
|
$ |
33 |
|
|
$ |
13 |
|
|
$ |
264,200 |
|
|
$ |
(4,719 |
) |
|
$ |
409,166 |
|
|
$ |
668,693 |
|
|
$ |
3,199 |
|
|
$ |
671,892 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,699 |
|
|
|
54,699 |
|
|
|
(3,817 |
) |
|
|
50,882 |
|
Net unrealized gain on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,151 |
|
|
|
|
|
|
|
8,151 |
|
|
|
|
|
|
|
8,151 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,916 |
|
|
|
|
|
|
|
5,916 |
|
|
|
66 |
|
|
|
5,982 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,766 |
|
|
|
(3,751 |
) |
|
|
65,015 |
|
Capital contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
4,000 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,736 |
|
|
|
|
|
|
|
|
|
|
|
5,736 |
|
|
|
|
|
|
|
5,736 |
|
Proceeds from issuance of common stock
under the employee stock purchase plan |
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,590 |
|
|
|
|
|
|
|
|
|
|
|
1,590 |
|
|
|
|
|
|
|
1,590 |
|
Proceeds from issuance of common stock
under the employee stock option plan |
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,217 |
|
|
|
|
|
|
|
|
|
|
|
1,217 |
|
|
|
|
|
|
|
1,217 |
|
Tax benefit of stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
(81 |
) |
|
|
|
|
|
|
(81 |
) |
Conversion of Class B Common Stock into
Class A Common Stock |
|
|
422 |
|
|
|
(422 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
34,229 |
|
|
|
12,360 |
|
|
$ |
34 |
|
|
$ |
13 |
|
|
$ |
272,662 |
|
|
$ |
9,348 |
|
|
$ |
463,865 |
|
|
$ |
745,922 |
|
|
$ |
3,448 |
|
|
$ |
749,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
43
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
54,699 |
|
|
$ |
55,396 |
|
|
$ |
75,686 |
|
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests in subsidiaries |
|
|
(3,817 |
) |
|
|
(1,911 |
) |
|
|
|
|
Depreciation and amortization of property and equipment |
|
|
19,694 |
|
|
|
17,069 |
|
|
|
17,220 |
|
Amortization of deferred financing costs |
|
|
741 |
|
|
|
|
|
|
|
95 |
|
Amortization of intangible assets |
|
|
935 |
|
|
|
674 |
|
|
|
437 |
|
Provision for bad debts and returns |
|
|
3,249 |
|
|
|
10,787 |
|
|
|
1,610 |
|
Tax benefits from stock-based compensation |
|
|
(81 |
) |
|
|
123 |
|
|
|
1,456 |
|
Non-cash stock compensation |
|
|
5,736 |
|
|
|
2,337 |
|
|
|
1,081 |
|
Provision for deferred income taxes |
|
|
1,954 |
|
|
|
(1,988 |
) |
|
|
(1,102 |
) |
Loss (Gain) on disposal of equipment |
|
|
(18 |
) |
|
|
167 |
|
|
|
272 |
|
Impairment of property and equipment |
|
|
761 |
|
|
|
1,676 |
|
|
|
|
|
(Increase) decrease in assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(46,562 |
) |
|
|
(27,462 |
) |
|
|
7,948 |
|
Inventories |
|
|
39,362 |
|
|
|
(58,240 |
) |
|
|
(3,045 |
) |
Prepaid expenses and other current assets |
|
|
2,812 |
|
|
|
(17,609 |
) |
|
|
1,417 |
|
Other assets |
|
|
(1,023 |
) |
|
|
(6,221 |
) |
|
|
(1,671 |
) |
Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
28,136 |
|
|
|
385 |
|
|
|
2,956 |
|
Accrued expenses |
|
|
8,531 |
|
|
|
2,988 |
|
|
|
(3,005 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
115,109 |
|
|
|
(21,829 |
) |
|
|
101,355 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(35,341 |
) |
|
|
(72,461 |
) |
|
|
(31,175 |
) |
Purchases of investments |
|
|
(30,000 |
) |
|
|
(11,725 |
) |
|
|
(249,450 |
) |
Maturities of investments |
|
|
375 |
|
|
|
20,600 |
|
|
|
204,950 |
|
Redemption of auction rate securities |
|
|
95,250 |
|
|
|
|
|
|
|
|
|
Intangible additions |
|
|
(4,500 |
) |
|
|
|
|
|
|
|
|
Cash paid for acquisitions |
|
|
|
|
|
|
(4,640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
25,784 |
|
|
|
(68,226 |
) |
|
|
(75,675 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from the issuances of stock through employee
stock purchase plan and the exercise of stock options |
|
|
2,807 |
|
|
|
3,656 |
|
|
|
8,193 |
|
Contribution from noncontrolling interest of consolidated entity |
|
|
4,000 |
|
|
|
5,000 |
|
|
|
|
|
Excess tax benefits from stock-based compensation |
|
|
|
|
|
|
|
|
|
|
2,238 |
|
Increase in short-term borrowings |
|
|
2,006 |
|
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
(413 |
) |
|
|
(99 |
) |
|
|
(520 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
8,400 |
|
|
|
8,557 |
|
|
|
9,911 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
149,293 |
|
|
|
(81,498 |
) |
|
|
35,591 |
|
Effect of exchange rates on cash and cash equivalents |
|
|
1,441 |
|
|
|
(3,077 |
) |
|
|
3,440 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
114,941 |
|
|
|
199,516 |
|
|
|
160,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
265,675 |
|
|
$ |
114,941 |
|
|
$ |
199,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized |
|
$ |
4,445 |
|
|
$ |
4,902 |
|
|
$ |
4,714 |
|
Income taxes |
|
|
17,492 |
|
|
|
17,834 |
|
|
|
41,481 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Chilean distributor |
|
|
4,382 |
|
|
|
|
|
|
|
|
|
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 during
the year ended December 31, 2007.
See accompanying notes to consolidated financial statements.
44
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008 and 2007
(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
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 revenue recognition, allowance for bad debts, returns, sales allowances and customer
chargebacks, inventory write-downs, valuation of long-lived assets, litigation reserves and
valuation of deferred income taxes. Actual results could differ from those estimates.
(c) Noncontrolling interests
Noncontrolling interest in the Companys consolidated financial statements results from the
accounting for a noncontrolling interest in a consolidated subsidiary or affiliate. Noncontrolling
interest represents a partially-owned subsidiarys or consolidated affiliates income, losses, and
components of other comprehensive income which is attributable to the noncontrolling parties
interests. The Company has a 50 percent interest in Skechers China Limited (Skechers China), a
joint venture which was formed in October 2007, and made a capital contribution of cash and
inventory of $4.0 million and $5.0 million during the years ended December 31, 2009 and 2008. Our
joint venture partner also made a corresponding cash capital contribution during the years ended
December 31, 2009 and 2008. The Company also has a 50 percent interest in Skechers Southeast Asia
Limited (Skechers Southeast Asia) and a 51 percent interest in Skechers (Thailand) Ltd.
(Skechers Thailand). The Company consolidates these joint ventures into its financial statements
because it holds a majority of seats on the board of directors and, thus, controls the joint
ventures. Net loss attributable to noncontrolling interests of $3.8 million and $1.9 million for
the years ended December 31, 2009 and 2008, respectively, represents the share of net loss that is
attributable to the equity of these joint ventures that is owned by our joint venture partners.
Transactions between these joint ventures and Skechers have been eliminated in the consolidated
financial statements.
(d) Business Segment Information
Skechers operations and segments are organized along its distribution channels and consist 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.
(e) 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
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 actual sales
for the period. This information is used to calculate and accrue the related royalties based on the
terms of the agreement.
45
(f) 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.
(g) 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. Long-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.
(h) Foreign Currency Translation
In accordance with ASC 830-30 (formerly 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 re-measurement 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. Translations of intercompany loans of a long-term investment nature are included
as a component of translation adjustment in other comprehensive income.
(i) 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.
(j) Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10 (formerly SFAS 109), which
requires that the Company recognize deferred tax liabilities for taxable temporary differences and
deferred tax 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 ASC 740-10 (formerly FIN 48), which
contains a two-step process for recognizing and measuring uncertain tax positions. 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.
46
(k) 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, whichever is shorter |
(l) Intangible Assets
Goodwill and indefinite-lived intangible assets are measured for impairment at least annually
and more often when events indicate that impairment exists. Intellectual property, which include
purchased intellectual property, artwork and design, trade name and trademark are amortized over
their useful lives ranging from 110 years, generally on a straight-line basis. Intangible assets
as of December 31, 2009 and 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Intellectual property |
|
$ |
11,300 |
|
|
$ |
6,800 |
|
Goodwill |
|
|
1,575 |
|
|
|
1,575 |
|
Other intangibles |
|
|
840 |
|
|
|
840 |
|
Less accumulated amortization |
|
|
(4,704 |
) |
|
|
(3,808 |
) |
|
|
|
|
|
|
|
Total Intangible Assets |
|
$ |
9,011 |
|
|
$ |
5,407 |
|
|
|
|
|
|
|
|
We recorded amortization expense of $1.7 million, $0.7 million and $0.4 million for the years
ended December 31, 2009, 2008 and 2007, respectively.
(m) 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 in the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The Company recorded impairment
charges for the years ended December 31, 2009 and 2008 of $0.8 million and $1.7 million,
respectively. The Company did not record an impairment charge in 2007.
(n) 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, 2009,
2008 and 2007 was approximately $98.3 million, $97.3 million, and $99.2 million, respectively.
Prepaid advertising costs were $3.9 million and $0.8 million at December 31, 2009 and 2008,
respectively. Prepaid amounts outstanding at December 31, 2009 and 2008 represent the unamortized
portion of endorsement contracts, advertising in trade publications and media productions created
which had not run as of December 31, 2009 and 2008, respectively.
(o) 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.
47
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 |
|
2009 |
|
2008 |
|
2007 |
Net earnings |
|
$ |
54,699 |
|
|
$ |
55,396 |
|
|
$ |
75,686 |
|
Weighted average common shares outstanding |
|
|
46,341 |
|
|
|
46,031 |
|
|
|
45,262 |
|
Basic earnings per share |
|
$ |
1.18 |
|
|
$ |
1.20 |
|
|
$ |
1.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
Diluted earnings per share |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net earnings |
|
$ |
54,699 |
|
|
$ |
55,396 |
|
|
$ |
75,686 |
|
After tax effect of interest expense on
4.50% convertible subordinated notes |
|
|
|
|
|
|
|
|
|
|
361 |
|
|
|
|
|
|
|
|
|
|
|
Earnings for purposes of
computing diluted earnings per share |
|
$ |
54,699 |
|
|
$ |
55,396 |
|
|
$ |
76,047 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
46,341 |
|
|
|
46,031 |
|
|
|
45,262 |
|
Dilutive stock options |
|
|
764 |
|
|
|
677 |
|
|
|
1,121 |
|
Weighted average assumed conversion of
4.50% convertible subordinated notes |
|
|
|
|
|
|
|
|
|
|
358 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
47,105 |
|
|
|
46,708 |
|
|
|
46,741 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
1.16 |
|
|
$ |
1.19 |
|
|
$ |
1.63 |
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 362,653 and 156,716, shares of Class A common stock were excluded from the
computation of diluted earnings per share for the years ended December 31, 2009 and 2008,
respectively because their inclusion would have been anti-dilutive. There were no options excluded
from the computation of diluted earnings per share for the year ended December 31, 2007.
(p) 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 $9.3 million, $8.8 million, and $9.2 million
during the years ended December 31, 2009, 2008 and 2007, respectively.
(q) Fair Value of Financial Instruments
The carrying amount of the Companys financial instruments, which principally include cash and
cash equivalents, 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.
(r) New Accounting Standards
Effective January 1, 2009, the Company adopted ASC 805-20 (formerly 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. Our
adoption of ASC 805-20 did not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued ASC 105-10 (formerly SFAS 168), The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles. ASC 105-10 became the
source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernment entities.
It also modifies the GAAP hierarchy to include only two levels of GAAP; authoritative and
non-authoritative. ASC 105-10 is effective for financial statements issued for interim and annual
periods ending
48
after September 15, 2009. We adopted ASC 105-10 during the 2009 third quarter. Our adoption
of ASC 105-10 did not have a material impact on our consolidated financial statements.
In December 2009, the FASB issued Accounting Standards Update (ASU) 2009-17, which codifies
SFAS No. 167, Amendments to FASB Interpretation No. 46(R) issued in June 2009. ASU 2009-17
requires a qualitative approach to identifying a controlling financial interest in a variable
interest entity (VIE), and requires ongoing assessment of whether an entity is a VIE and whether
an interest in a VIE makes the holder the primary beneficiary of the VIE. ASU 2009-17 is effective
for interim and annual reporting periods beginning after November 15, 2009. We do not expect the
adoption of ASU 2009-17 to have a material impact on our consolidated financial statements.
(2) INVESTMENTS
At December 31, 2009, short-term investments were $30.0 million, which consisted of U.S.
Treasuries with maturities greater than 90 days. At December 31, 2008, investments in marketable
securities consist of certain auction rate preferred stocks and auction rate Dividend Received
Deduction preferred securities aggregating $81.9 million, net of unrealized losses of $13.7
million. During the year ended December 31, 2009, Wells Fargo (formerly Wachovia Securities)
purchased $95.3 million of the Companys investments in auction rate preferred stocks and auction
rate Dividend Received Deduction (DRD) preferred securities at par for cash.
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2009 and 2008 is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Land |
|
$ |
28,951 |
|
|
$ |
28,951 |
|
Buildings and improvements |
|
|
108,367 |
|
|
|
88,181 |
|
Furniture, fixtures and equipment |
|
|
94,293 |
|
|
|
92,209 |
|
Leasehold improvements |
|
|
104,939 |
|
|
|
98,140 |
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
336,550 |
|
|
|
307,481 |
|
Less accumulated depreciation and amortization |
|
|
164,883 |
|
|
|
149,724 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
171,667 |
|
|
$ |
157,757 |
|
|
|
|
|
|
|
|
The Company capitalized $2.2 million, $1.0 million and $0.9 million of interest expense during
2009, 2008 and 2007, respectively, relating to the construction of our corporate headquarters and
equipment for the new distribution facility.
(4) ACCRUED EXPENSES
Accrued expenses at December 31, 2009 and 2008 are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Accrued inventory purchases |
|
$ |
2,678 |
|
|
$ |
5,913 |
|
Accrued payroll and related taxes |
|
|
18,016 |
|
|
|
17,108 |
|
Income taxes payable |
|
|
11,149 |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
31,843 |
|
|
$ |
23,021 |
|
|
|
|
|
|
|
|
(5) LINE OF CREDIT AND SHORT-TERM BORROWINGS
On June 30, 2009, the Company entered into a $250.0 million secured credit agreement with a
group of eight banks (the Credit Agreement) that replaced the existing $150.0 million credit
agreement. The new credit facility matures in June 2013. The Credit Agreement permits the Company
and certain of its subsidiaries to borrow up to $250.0 million based upon a borrowing base of
eligible accounts receivable and inventory, which amount can be increased to $300.0 million at the
Companys request and upon satisfaction of certain conditions including obtaining the commitment of
existing or prospective lenders willing to provide the incremental amount. Borrowings bear
interest at the borrowers election based on LIBOR or a Base Rate (defined as the greatest of the
base LIBOR plus 1.00%, the Federal Funds Rate plus 0.5% or one of the lenders prime rate), in each
case, plus an applicable margin based on the average daily principal balance of revolving loans
under the Credit Agreement (2.75% to 3.25% for Base Rate
49
Loans and 3.75% to 4.25% for Libor Rate Loans). The Company pays a monthly unused line of
credit fee between 0.5% and 1.0% per annum, which varies based on the average daily principal
balance of outstanding revolving loans and undrawn amounts of letters of credit outstanding during
such month. The Credit Agreement further provides for a limit on the issuance of letters of credit
to a maximum of $50.0 million. The Credit Agreement contains customary affirmative and negative
covenants for secured credit facilities of this type, including a fixed charges coverage ratio that
applies when excess availability is less than $50.0 million. In addition, the Credit Agreement
places limits on additional indebtedness that the Company is permitted to incur as well as other
restrictions on certain transactions. As of December 31, 2009, the Company was in compliance with
all financial covenants of the Credit Agreement. On November 5, 2009, the Credit Agreement was
amended to permit the Companys principal stockholder to contribute stock into certain trusts. On
March 4, 2010, the Credit Agreement was further amended to the permit the Company to enter into a
joint venture agreement to construct a new distribution facility. The Company had $2.1 million of
outstanding letters of credit and short-term borrowings of $2.0 million as of December 31, 2009.
During the year ended December 31, 2009, the Company paid syndication and commitment fees of $5.9
million on this facility which are being amortized over the four-year life of the facility.
Amortization expense related to this facility was $0.7 million for the year ended December 31,
2009.
(6) LONG-TERM BORROWINGS
Long-term debt at December 31, 2009 and 2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
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 |
|
$ |
9,034 |
|
|
$ |
9,306 |
|
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 $6,889 due January 2011 |
|
|
7,033 |
|
|
|
7,156 |
|
Capital lease obligations |
|
|
103 |
|
|
|
298 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
16,170 |
|
|
|
16,760 |
|
Less current installments |
|
|
529 |
|
|
|
572 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
15,641 |
|
|
$ |
16,188 |
|
|
|
|
|
|
|
|
The aggregate maturities of long-term borrowings at December 31, 2009 are as follows:
|
|
|
|
|
2010 |
|
$ |
529 |
|
2011 |
|
|
15,641 |
|
|
|
|
|
|
|
$ |
16,170 |
|
|
|
|
|
The Companys long-term debt obligations contain both financial and non-financial covenants,
including cross-default provisions. The Company is in compliance with its non-financial covenants,
including any cross default provisions, and financial covenants of our long-term debt as of
December 31, 2009.
(7) STOCK COMPENSATION
(a) Equity Incentive Plans
In January 1998, the Companys Board of Directors adopted the Amended and Restated 1998 Stock
Option, Deferred Stock and Restricted Stock Plan for the grant of incentive stock options (ISOs),
non-qualified stock options and deferred and restricted stock (the Equity Incentive Plan). 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. Stock option awards are generally
granted with an exercise price per share equal to the market price of a share of Class A Common
Stock on the date of grant. Stock option awards generally become exercisable over a three-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 granting of awards being permitted thereafter, although any awards
50
then outstanding under the Equity Incentive Plan remain in force according to the terms of
such 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 ISOs,
non-qualified stock options, restricted stock and various other types of equity 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.
(b) Valuation Assumptions
There were no stock options granted under the Equity Incentive Plan or the 2007 Plan during
2009, 2008 or 2007. The total intrinsic value of options exercised during 2009, 2008 and 2007 was
$1.3 million, $2.7 million, and $9.9 million, respectively.
(c) Stock-Based Payment Awards
A summary of the status and changes of our restricted stock awards under the Equity Incentive
Plan and the 2007 Plan as of and during the period ended December 31, 2009 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 |
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007 |
|
|
15,167 |
|
|
|
18.32 |
|
Granted |
|
|
218,046 |
|
|
|
16.85 |
|
Vested |
|
|
(10,001 |
) |
|
|
16.26 |
|
Cancelled |
|
|
(5,928 |
) |
|
|
17.16 |
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008 |
|
|
217,284 |
|
|
|
16.97 |
|
Granted |
|
|
2,051,500 |
|
|
|
17.90 |
|
Vested |
|
|
(108,140 |
) |
|
|
16.99 |
|
Cancelled |
|
|
(2,000 |
) |
|
|
13.13 |
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009 |
|
|
2,158,644 |
|
|
$ |
17.86 |
|
|
|
|
|
|
|
|
|
|
Restricted stock awards generally vest over a graded vesting schedule from one to four years.
A summary of the status and changes of our stock options granted under the Equity Incentive
Plan and the 2007 Plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE |
|
|
SHARES |
|
OPTION EXERCISE PRICE |
Outstanding at December 31, 2006 |
|
|
2,485,582 |
|
|
$ |
11.74 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(501,874 |
) |
|
|
12.23 |
|
Cancelled |
|
|
(21,952 |
) |
|
|
16.86 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
1,961,756 |
|
|
|
11.56 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(206,844 |
) |
|
|
9.06 |
|
Cancelled |
|
|
(15,191 |
) |
|
|
19.37 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
1,739,721 |
|
|
|
11.79 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(125,715 |
) |
|
|
9.68 |
|
Cancelled |
|
|
(108,312 |
) |
|
|
11.20 |
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
1,505,694 |
|
|
$ |
12.01 |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, a total of 5,238,382 shares remain available for grant as equity
awards under the 2007 Plan.
51
There was approximately $33.7 million and $2.2 million of total unrecognized compensation cost
related to unvested stock options and restricted stock granted under the Equity Incentive Plan or
the 2007 Plan as of December 31, 2009 and 2008, respectively. That cost is expected to be
recognized over a weighted average period of 2.8 years and 1.2 years, respectively. The total fair
value of shares vested during the period ended December 31, 2009 and 2008 was $1.8 million and $0.2
million, respectively.
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPTIONS OUTSTANDING |
|
OPTIONS EXERCISABLE |
|
|
NUMBER |
|
WEIGHTED |
|
WEIGHTED |
|
NUMBER |
|
WEIGHTED AVERAGE |
RANGE OF |
|
OUTSTANDING |
|
AVERAGE REMAINING |
|
AVERAGE |
|
EXERCISABLE AT |
|
EXERCISE |
EXERCISE PRICE |
|
DECEMBER 31, 2009 |
|
CONTRACTUAL LIFE |
|
EXERCISE PRICE |
|
DECEMBER 31, 2009 |
|
PRICE |
$3.94 to $5.90 |
|
|
25,481 |
|
|
0.1 years |
|
$ |
3.94 |
|
|
|
25,481 |
|
|
$ |
3.94 |
|
$6.95 to $9.28 |
|
|
538,033 |
|
|
3.3 years |
|
|
7.47 |
|
|
|
538,033 |
|
|
|
7.47 |
|
$10.58 to $15.50 |
|
|
785,464 |
|
|
1.1 years |
|
|
13.05 |
|
|
|
785,464 |
|
|
|
13.05 |
|
$19.18 to $24.00 |
|
|
156,716 |
|
|
1.3 years |
|
|
23.69 |
|
|
|
156,716 |
|
|
|
23.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,505,694 |
|
|
1.9 years |
|
$ |
12.01 |
|
|
|
1,505,694 |
|
|
$ |
12.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) 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.
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.
During 2009 and 2008, 189,428 shares and 132,300 shares were issued under the 2008 ESPP for
which the Company received approximately $1.6 million and $1.8 million, respectively. During 2007,
98,349 shares were issued under the 1998 ESPP for which the Company received approximately $2.1
million.
(8) STOCKHOLDERS EQUITY
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
52
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 2009, 2008 and 2007 certain Class B stockholders converted 422,770; 69,404; and 916,400
shares, respectively, of Class B Common Stock to Class A Common Stock.
(9) TOTAL OTHER INCOME (EXPENSE), NET
Other income (expense), net at December 31, 2009, 2008 and 2007 is summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Gain (loss) on foreign currency transactions |
|
$ |
1,830 |
|
|
$ |
307 |
|
|
$ |
(295 |
) |
Legal settlements |
|
|
(2,327 |
) |
|
|
(187 |
) |
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
(497 |
) |
|
$ |
120 |
|
|
$ |
98 |
|
|
|
|
|
|
|
|
|
|
|
(10) INCOME TAXES
The provisions for income tax expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
9,227 |
|
|
$ |
9,026 |
|
|
$ |
33,354 |
|
Deferred |
|
|
5,902 |
|
|
|
(6,714 |
) |
|
|
(301 |
) |
|
|
|
|
|
|
|
|
|
|
Total federal |
|
|
15,129 |
|
|
|
2,312 |
|
|
|
33,053 |
|
|
|
|
|
|
|
|
|
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
1,498 |
|
|
|
3,654 |
|
|
|
7,255 |
|
Deferred |
|
|
1,268 |
|
|
|
(1,643 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
Total state |
|
|
2,766 |
|
|
|
2,011 |
|
|
|
7,189 |
|
|
|
|
|
|
|
|
|
|
|
Foreign: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
3,088 |
|
|
|
2,448 |
|
|
|
2,686 |
|
Deferred |
|
|
(755 |
) |
|
|
487 |
|
|
|
(309 |
) |
|
|
|
|
|
|
|
|
|
|
Total foreign |
|
|
2,333 |
|
|
|
2,935 |
|
|
|
2,377 |
|
|
|
|
|
|
|
|
|
|
|
Total income taxes |
|
$ |
20,228 |
|
|
$ |
7,258 |
|
|
$ |
42,619 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes differ from the statutory tax rates as applied to earnings before income taxes as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Expected income tax expense |
|
$ |
24,888 |
|
|
$ |
21,260 |
|
|
$ |
41,407 |
|
State income tax, net of federal benefit |
|
|
2,051 |
|
|
|
1,710 |
|
|
|
3,963 |
|
Rate differential on foreign income |
|
|
(6,162 |
) |
|
|
(10,697 |
) |
|
|
(9,699 |
) |
Change in unrecognized tax benefits |
|
|
455 |
|
|
|
(7,896 |
) |
|
|
7,024 |
|
Exempt income |
|
|
(207 |
) |
|
|
(1,241 |
) |
|
|
(1,026 |
) |
Non-deductible expenses |
|
|
441 |
|
|
|
188 |
|
|
|
464 |
|
Adjustment to tax benefit - 2008 APA |
|
|
(1,952 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
(1,049 |
) |
|
|
682 |
|
|
|
292 |
|
Change in valuation allowance |
|
|
1,763 |
|
|
|
3,252 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
20,228 |
|
|
$ |
7,258 |
|
|
$ |
42,619 |
|
|
|
|
|
|
|
|
|
|
|
53
The tax effects of temporary differences that give rise to significant portions of deferred
tax assets and deferred tax liabilities at December 31, 2009 and 2008 are presented below (in
thousands):
|
|
|
|
|
|
|
|
|
DEFERRED TAX ASSETS: |
|
2009 |
|
|
2008 |
|
Deferred tax assets current: |
|
|
|
|
|
|
|
|
Inventory adjustments |
|
$ |
2,340 |
|
|
$ |
5,337 |
|
Accrued expenses |
|
|
7,789 |
|
|
|
6,658 |
|
Allowances for bad debts and chargebacks |
|
|
3,486 |
|
|
|
3,401 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
13,615 |
|
|
|
15,396 |
|
|
|
|
|
|
|
|
Deferred tax assets long term: |
|
|
|
|
|
|
|
|
Depreciation on property and equipment |
|
|
10,500 |
|
|
|
10,735 |
|
Unrealized loss on securities |
|
|
|
|
|
|
5,549 |
|
Loss carryforwards |
|
|
6,880 |
|
|
|
5,273 |
|
Stock-based compensation |
|
|
1,977 |
|
|
|
535 |
|
Valuation allowance |
|
|
(5,697 |
) |
|
|
(3,934 |
) |
|
|
|
|
|
|
|
Total long term assets |
|
|
13,660 |
|
|
|
18,158 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
27,275 |
|
|
|
33,554 |
|
|
|
|
|
|
|
|
Deferred tax liabilities current: |
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
4,665 |
|
|
|
3,441 |
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
22,610 |
|
|
$ |
30,113 |
|
|
|
|
|
|
|
|
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 $51.2 million, $27.9 million, and $87.3
million for the years ended December 31, 2009, 2008 and 2007, respectively. The corresponding
income before income taxes for non-U.S. based operations was $19.9 million, $32.9 million, and
$31.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.
As of December 31, 2009 and 2008, the Company had combined foreign operating loss
carry-forwards available to reduce future taxable income of approximately $23.7 million and $17.5
million, respectively. Some of these net operating losses expire beginning in 2011; however others
can be carried forward indefinitely. As of December 31, 2009 and 2008, a valuation allowance
against deferred tax assets of $5.7 million and $3.9 million, respectively, had been set up for
those loss carry-forwards that are not more likely than not to be fully utilized in reducing future
taxable income.
As of December 31, 2009, withholding and U.S. taxes have not been provided on approximately
$82.0 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.
The balance of unrecognized tax benefits increased by $0.1 million during the year. A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in
thousands):
|
|
|
|
|
Balance as of January 1, 2009 |
|
$ |
9,663 |
|
Additions for current year tax positions |
|
|
263 |
|
Additions for prior year tax positions |
|
|
536 |
|
Reductions for prior year tax positions |
|
|
|
|
Settlement of uncertain tax positions |
|
|
(493 |
) |
Reductions related to lapse of statute of limitations |
|
|
(200 |
) |
|
|
|
|
Balance at December 31, 2009 |
|
$ |
9,769 |
|
|
|
|
|
If recognized, the entire amount of unrecognized tax benefits would be recorded as a reduction
in income tax expense.
Estimated interest and penalties related to the underpayment of income taxes are classified as
a component of income tax expense and totaled less than $0.1 million, $0.1 million, and $0.5
million for the years ended December 31, 2009, 2008 and 2007, respectively. Accrued interest and
penalties were $1.3 million and $1.2 million as of December 31, 2009 and December 31, 2008,
respectively.
54
The Company files income tax returns in the U.S. federal jurisdiction and various state, local
and foreign jurisdictions. During 2009, the Company settled certain state examinations which
reduced the balance of prior year unrecognized tax benefits by $0.5 million. The Company has
completed U.S. federal audits through 2003, and is not currently under examination by the United
States
Internal Revenue Service; however the Company is under examination by a number of states. It
is reasonably possible that certain state examinations could be settled within the next twelve
months which would reduce the balance of 2009 and prior year unrecognized tax benefits by $0.3
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 2006. During 2009, the statute of limitations for
the 2005 tax year lapsed for the U.S. federal and several state tax jurisdictions. The lapse in
statute reduced the balance of prior year unrecognized tax benefits by $0.2 million. Tax years 2006
through 2008 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 2006 tax year will lapse for the U.S. federal and most state tax jurisdictions
during 2010, which would reduce the balance of 2009 and prior year unrecognized tax benefits by
$0.6 million.
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company generates the majority of its sales in the United States; however, several of its
products are sold into various foreign countries, which subjects the Company to the risks of doing
business abroad. In addition, the Company operates in the footwear industry, which is impacted by
the general economy, and its business depends on the general economic environment and levels of
consumer spending. Changes in the marketplace may significantly affect managements estimates and
the Companys performance. Management performs regular evaluations concerning the ability of
customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic
accounts receivable, which generally do not require collateral from customers, amounted to $148.3
million and $111.9 million before allowances for bad debts and sales returns, and chargebacks at
December 31, 2009 and 2008, respectively. Foreign accounts receivable, which generally are
collateralized by letters of credit, amounted to $86.0 million and $78.1 million before allowance
for bad debts, sales returns, and chargebacks at December 31, 2009 and 2008, respectively.
International net sales amounted to $358.1 million, $357.2 million, and $291.3 million for the
years ended December 31, 2009, 2008 and 2007, respectively. The Companys credit losses due to
write-offs for the years ended December 31, 2009, 2008 and 2007 were $1.2 million, $8.4 million,
and $2.0 million, respectively, and were primarily from domestic accounts.
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, 2009. 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 $125.5 million and $120.5 million at December 31, 2009
and 2008, respectively.
During 2009, 2008, and 2007, no customer accounted for 10.0% or more of net sales. One
customer accounted for 11.3% of net trade receivables at December 31, 2009. No customer accounted
for more than 10.0% of net trade receivables at December 31, 2008. One customer accounted for
10.0% of net trade receivables at December 31, 2007. During 2009, 2008 and 2007, our net sales to
our five largest customers were approximately 25.1%, 24.1%, and 25.3%, respectively.
The Companys top five manufacturers produced the following for the years ended December 31,
2009, 2008, and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
Manufacturer #1 |
|
|
29.7 |
% |
|
|
30.6 |
% |
|
|
29.7 |
% |
Manufacturer #2 |
|
|
12.2 |
% |
|
|
11.7 |
% |
|
|
11.4 |
% |
Manufacturer #3 |
|
|
11.2 |
% |
|
|
9.3 |
% |
|
|
9.5 |
% |
Manufacturer #4 |
|
|
10.5 |
% |
|
|
6.6 |
% |
|
|
7.9 |
% |
Manufacturer #5 |
|
|
5.5 |
% |
|
|
6.4 |
% |
|
|
7.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69.1 |
% |
|
|
64.6 |
% |
|
|
65.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority 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 and revaluations, 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
55
world, political instability. The Company believes it has acted to reduce these risks
by diversifying manufacturing among various factories. To date, these business risks have not had a
material adverse impact on the Companys operations.
(12) BENEFIT PLAN
The Company has adopted a 401(k) 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 cash contributions to the plan amounted to $1.6 million for the year ended
December 31, 2009. The Company did not make a contribution for the year ended December 31, 2008.
The Companys cash contributions to the plan amounted to $1.2 million for the year ended December
31, 2007.
(13) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases facilities under operating lease agreements expiring through March 2029.
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 September 2014. Rent expense for the years ended December 31, 2009, 2008 and 2007
approximated $65.9 million, $57.4 million, and $48.9 million, respectively.
The Company also leases certain property and equipment under capital lease agreements
requiring monthly installment payments through June 2010.
In January 2010, the Company entered into a joint venture agreement to build a new 1.8 million
square foot distribution facility in Moreno Valley, California, which when completed the Company
expects to occupy in 2011. This single facility will replace the existing five facilities located
in Ontario, California, of which four are on short-term leases. The Company will lease the new
distribution center from the JV for a base rent of $933,894 per month for 20 years.
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, 2009 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
CAPITAL |
|
|
OPERATING |
|
|
|
LEASES |
|
|
LEASES |
|
Year ending December 31: |
|
|
|
|
|
|
|
|
2010 |
|
$ |
103 |
|
|
$ |
78,016 |
|
2011 |
|
|
|
|
|
|
73,394 |
|
2012 |
|
|
|
|
|
|
67,416 |
|
2013 |
|
|
|
|
|
|
56,820 |
|
2014 |
|
|
|
|
|
|
52,226 |
|
Thereafter |
|
|
|
|
|
|
353,097 |
|
|
|
|
|
|
|
|
|
|
$ |
103 |
|
|
$ |
680,969 |
|
|
|
|
|
|
|
|
(b) Litigation
The Company recognizes legal expense in connection with loss contingencies as incurred.
On May 22, 2009, Louis Miranda filed a lawsuit against the Company in the Superior Court for
the State of California, County of Los Angeles, MIRANDA V. SKECHERS U.S.A., INC. (Case. No.
BC414344). The complaint alleges harassment, discrimination based on sexual orientation, failure
to prevent discrimination, retaliation and wrongful termination. The lawsuit seeks, among other
things, general and compensatory damages, special damages according to proof, punitive damages,
prejudgment interest, and
56
attorneys fees and costs. On March 4, 2010,
the parties reached a settlement in principle and as of this filing are reducing the settlement agreement to writing.
The terms of the settlement are confidential. The settlement did not have a material adverse effect on the Companys
financial condition or results of operations.
Our claims and advertising for our products including our Shape-ups are subject to the
requirements of various regulatory and quasi-government agencies around the world and we receive
periodic requests for information. The Company believes that its claims and advertising are
supported by tests, medical opinion and other relevant data and fully cooperates with periodic
requests for information from regulatory and quasi-regulatory agencies.
The Company has no reason to believe that any liability with respect to pending legal actions
or regulatory requests, 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.
(c) 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% for 30- to 60- day financing. The amounts outstanding
under these arrangements at December 31, 2009 and 2008 were $93.5 million and $79.6 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 2009, $3.6 million in 2008, and $3.3 million in 2007. The Company has contractual commitments
relating to licensing arrangements of $1.9 million and open purchase commitments with our foreign
manufacturers of $148.6 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
approximately $85.0 million, of which $38.6 million was incurred as of December 31, 2009.
(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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale |
|
$ |
763,514 |
|
|
$ |
807,047 |
|
|
$ |
831,235 |
|
International wholesale |
|
|
328,466 |
|
|
|
332,503 |
|
|
|
267,648 |
|
Retail |
|
|
321,829 |
|
|
|
283,128 |
|
|
|
279,361 |
|
E-commerce |
|
|
22,631 |
|
|
|
18,065 |
|
|
|
15,937 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,436,440 |
|
|
$ |
1,440,743 |
|
|
$ |
1,394,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale |
|
$ |
292,303 |
|
|
$ |
276,604 |
|
|
$ |
320,364 |
|
International wholesale |
|
|
118,440 |
|
|
|
137,840 |
|
|
|
99,759 |
|
Retail |
|
|
198,243 |
|
|
|
172,870 |
|
|
|
171,758 |
|
E-commerce |
|
|
12,024 |
|
|
|
8,608 |
|
|
|
8,108 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
621,010 |
|
|
$ |
595,922 |
|
|
$ |
599,989 |
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Identifiable assets |
|
|
|
|
|
|
|
|
Domestic wholesale |
|
$ |
792,856 |
|
|
$ |
678,881 |
|
International wholesale |
|
|
111,941 |
|
|
|
110,930 |
|
Retail |
|
|
90,049 |
|
|
|
86,236 |
|
E-commerce |
|
|
706 |
|
|
|
269 |
|
|
|
|
|
|
|
|
Total |
|
$ |
995,552 |
|
|
$ |
876,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Additions to property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale |
|
$ |
21,112 |
|
|
$ |
45,709 |
|
|
$ |
11,371 |
|
International wholesale |
|
|
5,568 |
|
|
|
6,893 |
|
|
|
1,346 |
|
Retail |
|
|
8,661 |
|
|
|
19,859 |
|
|
|
18,458 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,341 |
|
|
$ |
72,461 |
|
|
$ |
31,175 |
|
|
|
|
|
|
|
|
|
|
|
Geographic Information
The following summarizes our operations in different geographic areas for the year indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net Sales (1) |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
1,078,335 |
|
|
$ |
1,083,498 |
|
|
$ |
1,102,895 |
|
Canada |
|
|
39,498 |
|
|
|
43,088 |
|
|
|
38,060 |
|
Other International (2) |
|
|
318,607 |
|
|
|
314,157 |
|
|
|
253,226 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,436,440 |
|
|
$ |
1,440,743 |
|
|
$ |
1,394,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Long-lived Assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
160,444 |
|
|
$ |
148,228 |
|
Canada |
|
|
866 |
|
|
|
471 |
|
Other International (2) |
|
|
10,357 |
|
|
|
9,058 |
|
|
|
|
|
|
|
|
Total |
|
$ |
171,667 |
|
|
$ |
157,757 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company has subsidiaries in Canada, United Kingdom, Germany, France, Spain, Italy,
Netherlands, Brazil, and Chile that generate net sales within those respective countries and
in some cases the neighboring regions. The Company has joint ventures in China, Hong Kong,
Malaysia, Singapore, and Thailand that generate net sales from those countries. 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 Switzerland, United Kingdom, Germany, France, Spain, Italy,
Netherlands, China, Hong Kong, Malaysia, Singapore, Thailand, Brazil and Chile. |
(15) RELATED PARTY TRANSACTIONS
The Company paid approximately $183,000, $183,000 and $175,000 during 2009, 2008 and 2007,
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 senior 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, 2009.
58
The Company had receivables from officers and employees of $0.3 million and $0.5 million at
December 31, 2009 and 2008, respectively. These amounts primarily relate to travel advances and
incidental personal purchases on Company-issued credit cards. 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.
(16) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited financial data are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
MARCH 31 |
|
JUNE 30 |
|
SEPTEMBER 30 |
|
DECEMBER 31 |
Net sales |
|
$ |
343,470 |
|
|
$ |
298,976 |
|
|
$ |
405,374 |
|
|
$ |
388,620 |
|
Gross profit |
|
|
125,429 |
|
|
|
122,603 |
|
|
|
183,726 |
|
|
|
189,252 |
|
Net earnings (loss) |
|
|
8,220 |
|
|
|
(5,927 |
) |
|
|
24,460 |
|
|
|
27,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.18 |
|
|
$ |
(0.13 |
) |
|
$ |
0.53 |
|
|
$ |
0.60 |
|
Diluted |
|
|
0.18 |
|
|
|
(0.13 |
) |
|
|
0.52 |
|
|
|
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
MARCH 31 |
|
JUNE 30 |
|
SEPTEMBER 30 |
|
DECEMBER 31 |
Net sales |
|
$ |
384,922 |
|
|
$ |
354,574 |
|
|
$ |
403,159 |
|
|
$ |
298,088 |
|
Gross profit |
|
|
172,172 |
|
|
|
157,193 |
|
|
|
171,531 |
|
|
|
95,026 |
|
Net earnings (loss) |
|
|
32,844 |
|
|
|
14,641 |
|
|
|
28,289 |
|
|
|
(20,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.72 |
|
|
$ |
0.32 |
|
|
$ |
0.61 |
|
|
$ |
(0.44 |
) |
Diluted |
|
|
0.70 |
|
|
|
0.31 |
|
|
|
0.60 |
|
|
|
(0.44 |
) |
(17) SUBSEQUENT EVENTS
On January 30, 2010, the Company entered into a joint venture agreement with HF Logistics I,
LLC through Skechers R.B., LLC, a newly formed wholly-owned subsidiary of the Company, regarding
the ownership and management of HF Logistics-SKX, LLC, a Delaware limited liability company (the
JV). The purpose of the JV is to acquire and to develop real property consisting of approximately
110 acres situated in Moreno Valley, California, and to construct approximately 1,820,000 square
feet of buildings and other improvements (the Project) to lease to the Company as a distribution
facility. The JVs objective is to operate the Project for the production of income and profit.
The term of the JV is fifty years. The parties are equal fifty percent partners. The Company,
through Skechers R.B., LLC, will make an initial cash capital contribution of $30 million and HF
will make an initial capital contribution of land. Additional capital contributions, if necessary,
would be made on an equal basis by Skechers R.B., LLC and HF. HF will be deemed to have extended a
loan to the JV as consideration for assigning the JV all of its interest in the entitlements (e.g.,
specifications, surveys, drawings) relating to the ownership and development of the property. The
JV is in the process of obtaining $55 million in construction financing, the closing of which is
subject to certain conditions. In the event that either the construction loan is not finalized or
construction does not begin by June 1, 2010, the JV is null and void and the parties are entitled
to receive a return of their initial capital contributions in the form contributed. In general,
Skechers R.B., LLC shall have exclusive management over the Projects buildings and operations
after completion of construction, and HF shall have exclusive management over landlord decisions
under the lease, financing the Project or encumbering JV assets, and matters pertaining to
entitling the property and developing the Project.
On February 27, 2010, a major earthquake occurred in Chile. We are still trying to quantify
the impact of the earthquake, if any, on our operations; however; we do not expect it to have a
material impact on our financial condition or results of operations.
59
|
|
|
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) 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, 2009, our internal control over financial reporting is effective.
Our independent registered public accountants, KPMG LLP, audited the consolidated 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, 2009, 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
60
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 2009, and we have completed our efforts regarding
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 2009.
The results of our evaluation are discussed above in Managements Report on Internal Control Over
Financial Reporting.
ITEM 9B. OTHER INFORMATION
On January 19, 2010, our Compensation Committee approved the 2010 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 2010. 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 Chief Financial Officer) and Mark Nason (Executive Vice
President of Product Development) are our net sales and EBITDA, while our net sales will be used
for calculating the incentive compensation of Philip Paccione (Corporate Secretary and General
Counsel). 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 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 is 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 2010, 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 2010 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 2010, 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.
61
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2009 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 2009 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 2009 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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 2009 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 2009 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 38 of this annual report on Form 10-K. |
|
2. |
|
Financial Statement Schedule: See Schedule IIValuation and Qualifying Accounts on page 63
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. |
62
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT |
|
CHARGED TO |
|
DEDUCTIONS |
|
BALANCE |
|
|
BEGINNING OF |
|
COSTS AND |
|
AND |
|
AT END |
DESCRIPTION |
|
PERIOD |
|
EXPENSES |
|
WRITE-OFFS |
|
OF PERIOD |
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 |
|
Year-ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for chargebacks |
|
$ |
2,572 |
|
|
$ |
2,940 |
|
|
$ |
(1,598 |
) |
|
$ |
3,914 |
|
Allowance for doubtful accounts |
|
|
2,348 |
|
|
|
5,495 |
|
|
|
(3,421 |
) |
|
|
4,422 |
|
Reserve for sales returns and
allowances |
|
|
5,364 |
|
|
|
2,352 |
|
|
|
(1,172 |
) |
|
|
6,544 |
|
Year-ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for chargebacks |
|
$ |
3,914 |
|
|
$ |
(672 |
) |
|
$ |
(1,299 |
) |
|
$ |
1,943 |
|
Allowance for doubtful accounts |
|
|
4,422 |
|
|
|
1,863 |
|
|
|
(1,957 |
) |
|
|
4,328 |
|
Reserve for sales returns and
allowances |
|
|
6,544 |
|
|
|
2,058 |
|
|
|
(512 |
) |
|
|
8,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT |
|
CHARGED TO |
|
DEDUCTIONS |
|
BALANCE |
|
|
BEGINNING OF |
|
COSTS AND |
|
AND |
|
AT END |
DESCRIPTION |
|
PERIOD |
|
EXPENSES |
|
WRITE-OFFS |
|
OF PERIOD |
Year-ended December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for shrinkage |
|
$ |
|
|
|
$ |
605 |
|
|
$ |
(495 |
) |
|
$ |
110 |
|
Reserve for obsolescence |
|
|
633 |
|
|
|
1,198 |
|
|
|
|
|
|
|
1,831 |
|
Year-ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for shrinkage |
|
$ |
110 |
|
|
$ |
690 |
|
|
$ |
(635 |
) |
|
$ |
165 |
|
Reserve for obsolescence |
|
|
1,831 |
|
|
|
11,192 |
|
|
|
|
|
|
|
13,023 |
|
Year-ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for shrinkage |
|
$ |
165 |
|
|
$ |
950 |
|
|
$ |
(915 |
) |
|
$ |
200 |
|
Reserve for obsolescence |
|
|
13,023 |
|
|
|
|
|
|
|
(9,568 |
) |
|
|
3,455 |
|
See accompanying report of independent registered public accounting firm
63
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). |
|
|
|
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**
|
|
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). |
|
|
|
10.3**
|
|
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). |
|
|
|
10.4**
|
|
Form of Restricted Stock Agreement under 2007 Incentive Award
Plan (incorporated by reference to exhibit number 10.3 of the
Registrants Form 10-K for the year ended December 31, 2007). |
|
|
|
10.5**
|
|
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). |
|
|
|
10.6**
|
|
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). |
64
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION OF EXHIBIT |
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
|
|
Credit Agreement dated June 30, 2009, by and among the
Registrant, certain of its subsidiaries that are also borrowers
under the Agreement, and certain lenders including Wells Fargo
Foothill, LLC, as co-lead arranger and administrative agent,
Bank of America, N.A., as syndication agent, and Banc of
America Securities LLC, as the other co-lead arranger
(incorporated by reference to exhibit number 10.1 of the
Registrants Form 8-K filed with the Securities and Exchange
Commission on July 7, 2009). |
|
|
|
10.10
|
|
Schedule 1.1 of Defined Terms to the Credit Agreement dated
June 30, 2009, by and among the Registrant, certain of its
subsidiaries that are also borrowers under the Agreement, and
certain lenders including Wells Fargo Foothill, LLC, Bank of
America, N.A., and Banc of America Securities LLC (incorporated
by reference to exhibit number 10.2 of the Registrants Form
8-K filed with the Securities and Exchange Commission on July
7, 2009). |
|
|
|
10.11
|
|
Amendment Number One to Credit Agreement dated November 5,
2009, by and among the Registrant, certain of its subsidiaries
that are also borrowers under the Agreement, and certain
lenders including Wells Fargo Foothill, LLC, as co-lead
arranger and administrative agent, Bank of America, N.A., as
syndication agent, and Banc of America Securities LLC, as the
other co-lead arranger (incorporated by reference to exhibit
number 10.3 of the Registrants Form 10-Q for the quarter ended
September 30, 2009). |
|
|
|
10.12
|
|
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). |
|
|
|
10.13
|
|
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). |
|
|
|
10.14
|
|
Promissory Note, 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 10.26 of the Registrants Form 10-K for the year ended
December 31, 2000). |
|
|
|
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 (incorporated by
reference to exhibit number 10.15(b) of the Registrants Form
10-K for the year ended December 31, 2007). |
10.15(c)
|
|
Third Amendment to Lease Agreement, dated January 29, 2009,
between the Registrant and ProLogis California I LLC,
regarding 1661 South Vintage Avenue, Ontario, California. |
65
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION OF EXHIBIT |
10.15(d)
|
|
Fourth Amendment to Lease Agreement, dated September 23,
2009, between the Registrant and ProLogis California I LLC,
regarding 1661 South Vintage Avenue, Ontario, California. |
|
|
|
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
(incorporated by reference to exhibit number 10.16(b) of the
Registrants Form 10-K for the year ended December 31, 2007). |
|
|
|
10.16(c)
|
|
Third Amendment to Lease Agreement, dated May 7, 2007, between
the Registrant and CLP Industrial Properties, LLC, which is
successor to Cabot Industrial Properties, L.P., regarding 1777
South Vintage Avenue, Ontario, California (incorporated by
reference to exhibit number 10.16(c) of the Registrants Form
10-K for the year ended December 31, 2007). |
|
|
|
10.16(d)
|
|
Fourth Amendment to Lease Agreement, dated November 10, 2007,
between the Registrant and CLP Industrial Properties, LLC,
regarding 1777 South Vintage Avenue, Ontario, California
(incorporated by reference to exhibit number 10.16(d) of the
Registrants Form 10-K for the year ended December 31, 2007). |
|
|
|
10.16(e)
|
|
Fifth Amendment to Lease Agreement, dated January 29, 2009,
between the Registrant and CLP Industrial Properties, LLC,
regarding 1777 South Vintage Avenue, Ontario, California. |
|
|
|
10.16(f)
|
|
Sixth Amendment to Lease Agreement, dated October 26, 2009,
between the Registrant and CLP Industrial Properties, LLC,
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). |
|
|
|
10.17(b)
|
|
Second Amendment to Lease Agreement, dated April 21, 2006,
between the Registrant and ProLogis California I LLC, regarding
4100 East Mission Boulevard, Ontario, California. |
|
|
|
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). |
66
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION OF EXHIBIT |
10.20
|
|
Lease Agreement dated May 20, 2008 between Skechers EDC SPRL, a subsidiary of the
Registrant, and ProLogis Belgium III SPRL, regarding ProLogis Park Liege Distribution Center
II in Liege, Belgium (incorporated by reference to exhibit number 10.1 of the Registrants
Form 8-K filed with the Securities and Exchange Commission on May 27, 2008). |
|
|
|
10.21
|
|
Addendum to Lease Agreement dated May 20, 2008 between Skechers EDC SPRL, a subsidiary of
the Registrant, and ProLogis Belgium III SPRL, regarding ProLogis Park Liege Distribution
Center I in Liege, Belgium (incorporated by reference to exhibit number 10.2 of the
Registrants Form 8-K filed with the Securities and Exchange Commission on May 27, 2008). |
|
|
|
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. |
67
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 5th day of March 2010.
|
|
|
|
|
|
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
Robert Greenberg
|
|
Chief Executive Officer (Principal
Executive Officer)
|
|
March 5, 2010 |
|
|
|
|
|
/s/ Michael Greenberg
Michael Greenberg
|
|
President and Director
|
|
March 5, 2010 |
|
|
|
|
|
/s/ David Weinberg
David Weinberg
|
|
Executive Vice President, Chief Operating Officer, Chief
Financial Officer and Director
(Principal Financial and Accounting Officer)
|
|
March 5, 2010 |
|
|
|
|
|
/s/ Jeffrey Greenberg
Jeffrey Greenberg
|
|
Director
|
|
March 5, 2010 |
|
|
|
|
|
/s/ J. Geyer Kosinski
J. Geyer Kosinski
|
|
Director
|
|
March 5, 2010 |
|
|
|
|
|
/s/ Morton D. Erlich
Morton D. Erlich
|
|
Director
|
|
March 5, 2010 |
|
|
|
|
|
/s/ Richard Siskind
Richard Siskind
|
|
Director
|
|
March 5, 2010 |
68