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Skechers USA Inc (SKX) Q2 2019 Earnings Call Transcript

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Skechers USA Inc (NYSE: SKX)
Q2 2019 Earnings Call
Jul 18, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the SKECHERS Second Quarter 2019 Earnings Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I would now like to turn the floor over to SKECHERS to begin. Thank you.

Unidentified Speaker

Thank you, everyone for joining us on SKECHERS conference call today. I will now read the Safe Harbor statement. Certain statements contained herein including without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the Company or future results or events, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements involve known and unknown risks, including but not limited to global, national and local economic business and market conditions in general and specifically as they apply to the retail industry and the Company.

There can be no assurance that the actual future results performance or achievements expressed or implied by such forward-looking statements will occur. Users of forward-looking statements are encouraged to review the Company's filings with the US Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of all other significant risk factors that may affect the Company's business, results of operations and financial conditions.

With that, I would like to turn the call over to SKECHERS' Chief Operating Officer, David Weinberg; and Chief Financial Officer, John Vandemore. David?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Good afternoon and thank you for joining us today. SKECHERS' continued growth, including record sales for the second quarter is a testament to the strength and demand for our diverse product offerings around the world. From golf to running, from kids to men's and women's sport and casual, and our brand recognition due to our global marketing efforts. Based on sales and shipping trends in the second quarter, and already in the third quarter, as well as reactions from key accounts in numerous markets, we see our momentum continuing in the back half of 2019.

We delivered record results for the second quarter with sales of $1.26 billion, an increase of 10.9% or 13.7% on a constant currency basis. We also delivered a 69% increase in our earnings per share to $0.49. This was the result of solid sales increases across all regions. The biggest dollar gains came from our distributor in the Middle East, India and the conversion of Mexico to a joint venture business in April, as well as our company-owned direct-to-consumer business, which had mid-single digit comps worldwide. With a net increase of 112 stores in the second quarter, we have 3,172 SKECHERS stores around the world, which are comprised of 768 company-owned stores and 2,404 third-party stores.

Our SKECHERS stores and e-commerce platforms give us the opportunity to tell the entire product story as they feature key initiatives of course each division and allow consumers to shop the breadth of our men's, women's and kids offerings. As the world become smaller, the acceptance of new trends has increased. We continue to evolve our business to be more globally minded, ensuring speed to market around the world. With simultaneous product introductions, we can replicate success globally. This was done through sales drivers in each of our category, especially within men's and women's street, sport and work line, including SKECHERS D'Lites, Skech-Air and the resurgence of our GOwalk category.

In 2018 and '19, we introduced several collaborations, including the popular anime series One Piece for a limited edition collection available in Asia, Europe and North America. We are continuing with collaborations and limited edition collections, including free commemorative SKECHERS energy styles marking the 20th anniversary of this signature chunky style in the second quarter. And we just announced a collaboration with well-know LINE FRIENDS in the United States. Other collections will be announced later this quarter.

Our product focus continues to be on comfort, innovation, style and quality as we design and develop our diverse offering. Our efforts in the Skechers Performance division resulted in several awards in the second quarter for SKECHERS GO Run 7 Hyper and Skechers GO Run Maxroad 4 Hyper form Runner's World, Outside Magazine and Shape. These awards followed another from Runner's World in March for Skechers GOrun Razor 3 Hyper.

Further, in April SKECHERS' elite athlete Edward Cheserek, who is the winningest NCAA runner, who won the Carlsbad 5000, tying the record and what is known as the world's fastest 5K. Additionally, in April, Brooke Henderson won the Lotte Championship at Hawaii. And then in June, she won the Meijer LPGA Championship in Michigan. With this latest win at just 21 years old, Brooke took sole ownership of the most wins ever by a professional Canadian golfer. Earlier this month, Brooke was also named best female golfer at the ESPY Awards'. We couldn't be prouder as Brooke achieved victory after victory in SKECHERS GO GOLF. Former NFL quarterback and SKECHERS Ambassador, Tony Romo has also achieved several victories at golf tournaments, including his latest at the American Century Celebrity Championship last week in Lake Tahoe. Tony's retirement from football has been followed with a noted career as a play by play broadcaster and an accomplished golfer, all while wearing SKECHERS both on and off the course.

Now, turning to our domestic business in detail. Our domestic sales increased by 1.5%, the result of an 8.6% increase in our direct-to-consumer business, which was comprised of a 7.3% increase in our brick-and-mortar stores and a 36.1% increase in our e-commerce business. Comparable direct-to-consumer sales increased 4.2% for the quarter. We also saw a month over month acceleration in our direct-to-consumer business, with June achieving a high-single digit comps for the month at an average price per pair increase of 3%. Our domestic wholesale business performed better than expected with a decrease of 3.8%. We continue to believe it will be flat to slightly positive for 2019.

At quarter end, we had 477 company-owned SKECHERS retail stores in the United States. In the second quarter, we opened four warehouse stores and closed one store in Union Square in New York. We also remodeled one store, relocated two stores and expanded three locations. In our domestic direct-to-consumer business, we saw the best increases in women's and men's Sport and Work, men's Streetwear, BOBS and GOwalk. In our domestic wholesale business, the biggest increases also came from our men's sport, streetwear and work line. Our chunky shoes from the SKECHERS D'Lites collection continued to resonate with consumers in the United States.

To support our domestic business, we ran numerous marketing campaigns, including ads and fashion magazines for our chunky shoes, radio and digital campaigns, including those featuring our women's heritage Footwear, Street Creek and Skechers Energy, spot featuring football legends Tony Romo and Howie Long and an array of commercials for our kids footwear. As noted, we experienced an upward trend in our domestic direct-to-consumer business in the second quarter, which has continued in July. Based on our account meetings in June as well as this month, the same is also occurring with our domestic customers.

Now, looking in detail at our International business. Sales increased 19.8% for the quarter, representing 55.7% of our total sales. The biggest drivers came from the UAE, who handles the majority of our business in the Middle East, Australia, New Zealand and Indonesia, all of whom are distributors. India, Alpine, Germany, Spain and the United Kingdom, within our subsidiaries. And within our joint ventures China, Singapore, South Korea and Mexico, which transitioned to a joint venture in the second quarter. In China, we grew mid-single digits, but on a constant currency basis, we saw a 12% improvement. Similar to the US, key sales drivers included men's and women's sport, and men's and women's Street.

To support and build SKECHERS business, international markets are creating Skechers D'Lites and sport windows and many leading accounts, billboard and mall campaigns and our TV campaigns are being broadcast in multiple languages. The sales growth was the result of an 18.2% increase in our wholesale business and a 25.8% increase in our direct-to-consumer business with a 6.7% increase in comparable sales. As in the United States, we saw our comp store sales grow at an accelerated great month over month through the quarter. In our international wholesale business, our joint venture sales were up 13.4%, our wholly owned subsidiary sales grew by 18.5% and our distributors grew by 30.7%.

Turning to International retail stores. At quarter end, there were 2,695, an increase of 109 in the second quarter. Of these stores 2,404 are owned and operated by international distribution partners, joint ventures and a network of franchisees. In the second quarter, eight company-owned international stores opened in the UK, Japan, Germany and Colombia, and one company-owned store closed in the quarter. To date in the third quarter, one company-owned store has opened in the UK.

In the second quarter, 153 joint venture or third-party owned stores opened across 37 countries, including our first locations in Afghanistan, Kyrgyzstan and Lithuania. New store openings includes 69 in China, 13 in India and six each in Indonesia and Vietnam. 51 stores closed in the second quarter, including 20 in China. Four third-party owned SKECHERS stores have opened so far in the third quarter, including our first in Andorra.

For the remainder of 2019, we expect another 250 to 300 company-owned and third-party SKECHERS branded stores to open. We believe international remains the primary growth driver to our total business. We are seeing continued strength across all regions, especially Asia-Pacific and Europe, which had a record shipments out of our distribution center in Belgium. Plus, we believe both India, which converted to a subsidiary in the first quarter, and Mexico, which converted to a joint venture in the second quarter, which will result in significant additional growth over the coming years. With the momentum, we are seeing in our business worldwide, we believe it will continue to grow double-digits this year.

Now I'll turn the call over to John to review our financials and discuss our outlook.

John Vandemore -- Chief Financial Officer

Thank you, David. Our second quarter results reflect the success of our ongoing strategy to aggressively grow our international and direct-to-consumer businesses, while responsibly investing for the future. Our second quarter sales totaled $1.26 billion, an increase of 10.9%. On a constant currency basis, sales increased $155.6 million or 13.7%. These results exceeded our own expectations on the strength of our international business, which represented 55.7% of total sales and on increased consumer demand, as its evident in our direct-to-consumer business.

International wholesale sales increased 18.2%, including a 30.7% increase in our distributor business, a 13.4% increase in our joint ventures, and an 18.5% increase from our wholly owned subsidiaries. Direct-to-consumer sales increased 14.4%. The result of an 8.6% increase domestically and a 25.8% increase internationally. Comparable store sales increased 4.9%, including e-commerce sales growth of 34.3%. We added 39 new company-owned stores compared to the same period last year. These results include for the first-time, our joint venture operations in Mexico. Excluding Mexico, our international wholesale business would have grown 15.9% and our international direct-to-consumer sales would have grown 15.1%. Our domestic wholesale business performed slightly better than expected, registering a mild decline of 3.8% in the quarter. We continue to believe the domestic wholesale business will be flat to slightly positive on a full year basis.

Gross profit was $609.8 million, up $48.8 million compared to the prior year. Gross margin decreased by 100 basis points to 48.5% and we're pressured by promotional efforts to clear seasonal merchandise and select international markets. This was partially offset by improved pricing and a decrease in promotional activity within our consumer direct business domestically, where the average price per pair was up 3%. Total operating expenses increased by $20.2 million or 4.2% to $505.1 million in the quarter. As a percentage of sales, this represents a 260 basis point improvement from 42.7% in the prior year to 40.1% this year.

Selling expenses decreased slightly in the quarter and totaled $113.5 million or 9% of sales. This was a 100 basis point improvement from 10% of sales in the prior year and was primarily related to lower domestic advertising expenses. General and administrative expenses increased by $20.7 million or 5.6% to $391.6 million, but decreased as a percentage of sales by 160 basis points from 32.7% in the prior year to 31.1% this quarter. The dollar increase primarily reflects additional spending of $18.5 million in our direct-to-consumer business from 39 new stores, including 12 that opened in the quarter.

Earnings from operations increased 36.5% to $111.1 million versus the prior year. Operating margin improved 170 basis points to 8.8% versus 7.2% in the prior year. Net income for the second quarter was $75.2 million or $0.49 per diluted share on 153.9 million shares outstanding, compared to net income of $45.3 million or $0.29 per diluted share on 157.1 million shares outstanding in the prior year period. Our effective income tax rate for the quarter decreased from 18.8% in the prior year to 18.4%. We continue to expect that our effective tax rate for the full year will be between 17% and 20%.

During the second quarter, we acquired approximately 500,000 shares of common stock at a cost of $15 million, representing an average price of $29.39 per share. Since announcing our share repurchase program in 2018, we have acquired almost 4.6 million shares at a cost of $130 million, representing an average price of $28.11 per share. At June 30, 2019, $20 million remained available under our existing repurchase authorization.

And now turning to our balance sheet. At June 30, 2019, we had $973 million in cash, cash equivalents and investments, which was a decrease of $93 million or 8.7% from December 31, 2018 and an increase of $61.3 million or 6.7% from June 30, 2018. During the quarter, we made our initial investment into our new joint venture in Mexico. Our cash and investments represented approximately $6.35 per diluted share outstanding at June 30, 2019. Trade accounts receivable at quarter end were $641.4 million, an increase of $93.9 million from June 30, 2018.

Total inventory was $855.6 million, a decrease of 0.9% or $7.6 million from December 31, 2018 and an increase of 4% or $33.2 million from June 30, 2018. We believe these inventory levels are in-line with and sufficient to support our growth expectation. Long term debt was $100 million compared to $70 million at June 30, 2018. The increase primarily reflects borrowings associated with the construction of our new distribution center in China. Working capital decreased $78.8 million to approximately $1.59 billion versus $1.67 billion at June 30, 2018, primarily reflecting the recognition of operating lease liabilities from the new lease accounting standard, partially offset by higher cash and investment balances.

Capital expenditures for the second quarter were approximately $86.2 million, of which $42.2 million was used for general corporate purposes, including real estate and transportation. $14 million related to the construction of our distribution center in China, $12.4 million related to 12 new company-owned domestic and international store openings and several store remodels and $8.4 million related to our international wholesale operation.

For the remainder of 2019, we expect our total capital expenditures to be approximately $150 million to $175 million. This includes an additional 13 [Phonetic] to 40 company-owned direct-to-consumer stores and 15 to 20 store remodels, expansions or relocation. This also includes the construction of our new distribution center in China, enhancements to our existing distribution center in Europe, and the expansion of our corporate headquarters in California and other corporate expenditures.

Now, turning to guidance. We currently expect third quarter sales to be in the range of $1.325 billion to $1.35 billion and net earnings per diluted share will be in the range of $0.65 to $0.70. This guidance incorporates the view that our international and direct-to-consumer businesses will continue to grow at a mid-teen and high-single digit rate respectively over the balance of the year. It also reflects our confidence that the domestic wholesale business will likely be flat to up slightly on a full year basis.

And now I'll turn the call over to David for closing remarks.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Thank you, John. We are pleased with our financial performance in the second quarter, including our record sales, strong increases in our earnings from operations, net income and earnings per share, and our positive retail comps in both our domestic and international channels. We believe the consumer reactions and demand for our product and the perception of our brand within our global account base are both very strong. Further, we believe the momentum, we experienced in the second quarter will continue this quarter and our business will flourish both domestically and internationally. As our strong product continues to resonate worldwide, we are committed to investing in our global infrastructure and operational capabilities to meet consumer demand and future sales growth.

And with that, I would now like to turn the call over to the operator to begin the question-and-answer portion of the conference call.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jay Sole with UBS. Please proceed with your question.

Jay Sole -- UBS -- Analyst

Great. Thanks so much. I want to ask about the guidance, gross margin in third quarter. The inventories looks really well controlled. FX is probably a smaller factor, but at the same time, so there's a lot of things happening. Can you give us an idea of what the gross margin year-over-year change might look like. Is there more discounting of products in the international market that you might have to do? If you could start with that, that would be great.

John Vandemore -- Chief Financial Officer

Hi, Jay. Yeah. Thanks. For the third quarter, our expectation is that we're likely to see something relatively close to flat at year-over-year. The discounting that we mentioned, we believe was more temporal than anything else. And again, related to the international markets. The only thing I'd note as an aside is that if you recall last year, the third quarter is when we began to enact the pricing and the lower discounting activity in our domestic retail markets. So last year, you saw an increase that we don't expect will lap this year simply because that pricing has remained durable in the marketplace. So you won't see as much of a jump there. But our expectation at the moment is for a relatively flat year-over-year perspective on gross margin.

Jay Sole -- UBS -- Analyst

Got it. Okay. And then maybe if I can ask on SG&A. I think you talked about how the dollar growth is kind of flat at [Phonetic] stores, if the G&A. Was that something where maybe some investment had shifted out of the quarter into other quarters or it was little bit compressed [Phonetic] for some reason or is that sort of like the run rate based on the back of a lot of investments that have been made in the past couple of years and that's just sort of a normalized number that we're seeing right now?

John Vandemore -- Chief Financial Officer

Well, I think, outside of the direct-to-consumer investments that we made -- that we mentioned with the new stores, you saw some puts and takes in the other side of the business. If you recall last year, there were a lot -- there's a lot of noise in the G&A in the quarter. So I think you're seeing the elimination of some of that. But you're also seeing the early signs of leverage opportunities in the G&A, in particular internationally as the investments that we've made come to fruition. I would generally point out that for the year, we're looking for slight favorability in the overall G&A spend, but not much more specific direction to provide that at the moment.

Jay Sole -- UBS -- Analyst

Okay. Maybe then one last one, you mentioned that the comp rate in the US has improved from April to mid-June. As we get into back half of the year, you mentioned you're not going to be lapping the price increase in the retail business. And obviously, a lot of the investment that you're making in how much probably to -- be more likely that will affect the numbers. How do you think about the comp, back in the back of the year. Can you maintain the current rate, [Indecipherable] higher or lower? How do you think about it?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Well, that's a pretty long range issue, but we -- coming into July, we maintained the same as June, maybe slightly higher. The fact is that comps are slightly easier comparisons from last year. If you remember, it was a much tougher year all around. So we do anticipate, we will be equivalent to Q2 or better as we move through this back-to-school season , barring any big changes in the macro pictures any place in the world. [Phonetic]

John Vandemore -- Chief Financial Officer

Okay. The encouraging sign, in addition to the fact that comp store sales got stronger over the period month by month, as David mentioned is that it was a combination factors. It wasn't just price. It wasn't just conversion. It wasn't just traffic. So there are a lot of factors in play which give us the figure that David mentioned, that the increases will be durable. But at the end of the day, it's all about product, really and what we're seeing is a very good response to the product both coming online and has been online in Q2.

Jay Sole -- UBS -- Analyst

Okay. Got it. Great. Thanks so much.

John Vandemore -- Chief Financial Officer

Thanks, Jay.

Operator

Our next question comes from the line of Laurent Vasilescu with Macquarie Group. Please proceed with your question.

Laurent Vasilescu -- Macquarie Capital -- Analyst

Good afternoon. Thanks for taking my question and congrats on really solid results. I wanted to follow up on US wholesale business that you guys guided for decline mid-singles. It came in a little bit better. Any directional thoughts on how we should think about the US wholesale business for the third quarter to get to the annual guide?

John Vandemore -- Chief Financial Officer

Yeah. I would suggest that it's going to -- we think it's getting stronger and stronger. If you will Q1 was exhibited some softness from the cause that we discussed after that call, Q2 has gotten a little bit better, Q3 a little bit better than that, and then Q4 is showing up strong on the bookings at the moment.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

A lot of it will depend on flow as well. We had said before we thought we could be relatively flat. If you take the two quarters together, as well as for the whole year. We still think that's true. We do find a lot more demand and a lot more requests to move up deliveries in this quarter. So again, borrowing any big macro changes, we do anticipate that we will start to show positive in the third quarter and then continue to increase as we go through the balance of the year and into the first quarter of last year, given the meetings we've had in US. And by the way, same holds true worldwide. We've had great meetings.

Our bookings for July are at an increased rate to last year around the world for our subsidiary base and for our distributor base. So we do believe, we're on the beginning of a roll that there is a greater demand for our product, that our existing customer base is growing. And that obviously, in US, it always depends on what the macro picture is? How many store closings there will be? How many sales there's going to be? How many outlets are going away? We believe that our direct-to-consumer business will continue to grow. So the US business in and off itself will continue to grow and we believe in increasing paces as we go through the back half of the year.

Laurent Vasilescu -- Macquarie Capital -- Analyst

That's great to hear. And then switching gears to China, I think it was noted that China grew 12% on the CC basis. John, maybe can you tell us how many freestanding stores, point of sales, the number of units shipped for the quarter and how should we think about the growth rate for the third quarter specifically for China?

John Vandemore -- Chief Financial Officer

Well, I mean, let me first address the growth rate. I mean, one thing to recognize is that China faced up very difficult comp to last year. If you recall, last year Q2, China was up north of 40%. So if you look at this on a two-year stack basis, it's a pretty incredible trajectory in that market. I would also just note that obviously the foreign exchange impact in China was significant. It more than have the growth rate in the market. So, we're still very pleased with what China delivered. We have, I think, fairly consistent expectations with where China's going to grow in the back half of the year and for the full year. So, for us, it's still -- it's one of the most exciting markets. I'll get you the [Indecipherable] detail on China later, but we don't want to get into much more specifics beyond that in each market.

Laurent Vasilescu -- Macquarie Capital -- Analyst

Okay. And then maybe just as a follow-up question, just housekeeping question here. With the gross margin, I think it was mostly flat for the second quarter? Can you maybe just parse out FX mix? And then, on the other income line, how should we think about that line item for the third quarter?

John Vandemore -- Chief Financial Officer

Yeah. So from a gross margin standpoint as we mentioned, the real issue was the need to move out some products in a few international markets. It's quite frankly, FX was a small, maybe 10 basis point root cause for the decline. We think that's a temporary issue. It impacted the quarter, a little bit of that in Q1 as well as we mentioned in some markets where we're trading that -- we're in the process of turning the profitability picture that we had some of that and it just continued a little bit into Q2. I think that's the noteworthy element of the gross margin story is the domestic, contributions were very positive and strong. So we think -- as it stands, the margin absent the discounting activity you've seen would have been roughly equivalent year-over-year.

In terms of other income in Q3, and I'll note for Q2, this is the first quarter in a while where we haven't seen something significant come through on FX translation. Last year, if you recall same quarter, we lost $0.03 to $0.04 on that. We did not see anything like that in Q2. And I would tell you, our expectation is that there isn't anything significant that will creep up in Q3. Although, I would just warn that, that's an item that's tough to predict because you have to have the foresight of knowing where foreign exchange rates are going to be the 100% accurate, but much more muted impact this year in Q2 and we're anticipating something similar in Q3.

Laurent Vasilescu -- Macquarie Capital -- Analyst

Great to hear and best of luck.

John Vandemore -- Chief Financial Officer

Thank you.

Operator

Our next question comes from line of Omar Saad with Evercore ISI. Please proceed with your question.

Westcott Rochette -- Evercore ISI -- Analyst

Hi, guys. This is Westcott on for Omar. Good quarter. So you seem to kind of change the tone or lead with the global coordination. Is that -- should we think about the ability to market more directly globally as a change in how you're managing the business, designing the business, making it more efficient as you kind of integrate these markets? How should we think about the benefits of why you are emphasizing that change in your go-to-market strategy?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

I don't think it's a change, it's probably more in the forefront simply for the growth internationally. We've been talking about building our infrastructure and advertising internationally for many years through some hard times as well. So it's not a change in focus, it maybe an acceleration because the business is growing and we have the capacity now to fill that pipeline at a much faster pace. We had said over the last few years that we are absorbing some new additions to our international portfolio. And now that they're all in and all the infrastructure as we started and certainly most will need upgrades as they continue to grow, as we're filling that pipeline and continuing to advertise at a faster pace, continuing to push the growth internationally. So it's been a focus. It remains a focus. We do believe it will continue, as we said, double-digit growth at a significantly faster pace than the core business in the United States and even direct-to-consumer. So it's just a focal point for everybody, an additional one and we just continue to push it.

Westcott Rochette -- Evercore ISI -- Analyst

Okay. That's great. And then just one question on, again with China, seems like you guys are opening stores again after kind of pausing? How are you thinking about your store versus your online kind of strategy in China and any change in kind of consumer trends there, given all the macro noise that's out there in the marketplace?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

We've always wanted to continue on both levels, just as we do everywhere else in the world. Any which way we can get to the consumer, we want the consumer to have the availability of our product. I think it's just the advent of such a big capacity that comes on one time and our growth on the online business sort of slow down the capacity and the man power we had available to open significant number of our own stores, although, we have been opening a significant up number of franchise stores. So there hasn't really been a change in the philosophy nor the select process. And we will continue to open our own stores and continue to push online and continue to look for more franchisees, to continue to grow our business.

I think our franchisees have seen that they can grow the business quite profitably with us and are reaccelerating. We've opened a couple of stores that are in excess of 30,000 square feet now in the Chinese market with some franchise. And they realize that the capacity for us to deliver footwear that's in demand and carry a store of that size for the consumer demand for our product, is going to continue to push our direct-to-consumer significantly in China and we anticipate significant growth.

I think when you saw -- and John mentioned that we had to clean up some inventory. When you change from a franchise model that's growing significantly to an online model and hold your inventory for significant amounts of time. The patterns change and every once in a while you have to clean up, make sure you have all the algorithms correct and are moving forward. So we do feel today that we are clean, that all new inventory is coming into the Chinese market and that we will continue to grow at an accelerated pace, as we go through the back half of the year.

Westcott Rochette -- Evercore ISI -- Analyst

Okay. Great. Thanks a lot and best of luck, guys.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Thanks.

John Vandemore -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.

Sam Poser -- Susquehanna -- Analyst

Good afternoon, gentlemen. I don't have much, just can you give us an update on the timing of the China distribution centers? And how much, given that there was a lot of efficiency in Q2. How much efficiency will that provide once those are open?

John Vandemore -- Chief Financial Officer

So we're still under construction. We anticipate commencing operations probably the middle of next year. The pace of that will depend upon the development process and just the start-up. We're not yet, Sam, in a position to be precise on efficiency. And I would just point out, this is a very similar exercise to what we've done in all of our other markets. First year isn't the optimal year, you continue to get more and more efficient each subsequent year. So as we get closer to the end of the year, we'll provide some perspective on that, but your expectation should be begins operation and continues to become more and more efficient over time as we gain experience operating in market and begin to continue to optimize.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

How do we expect to continue to grow at such a pace that we'll have to build a second one. We won't pick up the whole efficiency factor here. We'll just pick up capacity and somewhat more efficiency and be able to grow into this next distribution center that will help even more.

Sam Poser -- Susquehanna -- Analyst

Well, that's it. That's where I was going with the follow up. I mean, given where you are today and given the international growth, I mean, once you get this DC established, that's going to be a whole lot better middle of next year than it is today. And you're already managing to make that growth more efficient now. So, how -- so I mean, even though it might not be where it could be long run. I mean, if you can grow -- I mean, if you grow China, let's say high-singles, low-double. I mean, when you put this into running, it should provide better returns than it does today. Is that a fair statement?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Yeah. It's certainly a fair statement, but I think we have our idea show bigger opportunity. I will tell you and I've been here so long with -- since the beginning of all this automation and all distribution centers. We can because of our capacity to grow in these marketplace to outgrow these facilities a lot faster than as we originally planned and people think we can. So I think it's fair to say, if you only take high-single digit growth in China, we'll certainly sell more efficiency. We do believe that our growth will accelerate past that point. So we'll pick up even more as we go along just may take some more time.

Sam Poser -- Susquehanna -- Analyst

And you said that you're going to be breaking ground -- you thought you'd be breaking ground in the second DC before the first one was complete. Is that still the case?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

We're still working on the plan. We were working on acquiring the land. It's a timing issue. We're working on it now. So it's only a matter of timing. Whether it happens the first day, we'll finish or a couple months before, a couple months after, it's all timing and acquisition and design work. You can imagine, we're quite busy with all our engineering facilities trying to get to the three distribution centers. We're about to break ground before the end of the year in California. We're putting a significant amount of automation into Belgium. We're finishing this one, so design work and acquisition may be delayed a month or two, but it won't be long after it's done that we plan on starting the second one.

Sam Poser -- Susquehanna -- Analyst

Thanks very much. [Indecipherable] [00:39:11]

John Vandemore -- Chief Financial Officer

Thanks, Sam.

Operator

Our next question comes from the line of Susan Anderson with B. Riley. Please proceed with your question.

Susan Anderson -- B. Riley -- Analyst

Hi. Thanks so much for taking my question. Nice job on the quarter. I was wondering, if maybe you could give a little bit of color how the SKECHERS Street is performing and how it's resonating with the consumer. And maybe also if you could touch on, I think you mentioned there's some limited edition product coming out for the second half, a little bit about what category that will be in and what customer that's going to be catering to? Thanks.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

I will start at the beginning. I'll let -- I'm going to let John finish. I just want to point out that, which customer and which product line. I think we've moved way passed that. We will make sure that people understand the functionality here. I think what we showed this year with the dollar growth in China and the significant growth worldwide and our direct-to-consumer that we are no longer one product for a specific customer that brings us to the dance. We anticipate that all our product categories that we called out in the prepared comments about men's, women's sport, casual, BOBS, the Walk category that's coming back very strong. Kids all have potential and they all have potential multiple parts of the world. It's not a shoe in a specific location or a specific geography. So we do feel that we will bring a myriad of product in all the categories around the world that will continue this growth that we're seeing right now.

John Vandemore -- Chief Financial Officer

In particular relative to your question on the collaborations, we're obviously not going to announce anything here. But I think what we've seen -- similar to what you've seen in the industry, is that strategic collaborations have an opportunity to help drive both brand heat as well as revenue. And we're going to continue to follow up on brand right opportunities to collaborate. So you'll see that continue both in the second quarter or in the third quarter and beyond. And I apologize, I actually couldn't hear clearly the first part of your question. So if you don't mind repeating that, we can address that more specifically.

Susan Anderson -- B. Riley -- Analyst

Yeah. Sure. Yeah. So I was asking about the SKECHERS Street line and how it's performing and resonating with the consumer?

John Vandemore -- Chief Financial Officer

I'm sorry. I couldn't hear it at that time either. Maybe it's us.

Susan Anderson -- B. Riley -- Analyst

Got it. Yeah. No, the SKECHERS Street line, I was wondering, if you could give any color around...

John Vandemore -- Chief Financial Officer

Street?

Susan Anderson -- B. Riley -- Analyst

Yeah, exactly.

John Vandemore -- Chief Financial Officer

Okay. Sorry, I apologize.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

We did call that out on the comment that it's doing very well in multiple parts of the world. So that does continue.

John Vandemore -- Chief Financial Officer

Yeah. I think, I add onto that, you see a Street continuing to grow, street growing in men's and in the women's category as well. I mean, you're seeing, and I think to David's point earlier, a lot of broad increases across the product line. So it's not just one category or one style that's growing. It's fairly broad and there are definitely some commonalities between what we see happening in the US and internationally, which is why we pointed out in the beginning of David's comments, the ability we now have, we think to exercise opportunities to grow and introduce the style or brand across the globe simultaneously and that's we're seeing that is a really, really big strength.

Susan Anderson -- B. Riley -- Analyst

Great. That's very helpful. Thanks so much. Good luck next quarter.

John Vandemore -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Jim Duffy -- Stifel -- Analyst

Thanks. Hi, guys. Hope, you are doing well.

John Vandemore -- Chief Financial Officer

Hi, Jim.

Jim Duffy -- Stifel -- Analyst

I wanted to start on the SG&A, the moderating growth in the SG&A really stands out. Not too long ago, you guys were growing in the 20% plus range. Year-to-date you're up just 1%. That implies some pretty impressive efficiency outside of incremental spend from retail expansion. Where are you guys finding that efficiency and related to that, how much more opportunity do you think there is for additional efficiencies?

John Vandemore -- Chief Financial Officer

Yeah, I mean, it really -- I mean, it's across the board. So the first thing I'd note that it's not any one area. Keeping in mind that we called out the investments, we continue to make in the direct-to-consumer business. And look, we're not trying to manage G&A to deliver a certain result. We're trying to manage the business to drive further growth in the brand and you'll continue to see that. Where we saw some efficiency this year, as I mentioned, there were some abnormalities last year that evaporated that help to offset some of the more natural organic increases that just running the business. But I would point out also the international markets, as we've continue to make investments, those investments are coming to fruition such that you're starting to see a little bit of the leverage come through. So you're seeing kind of a natural evolution, I think of many of those businesses to the point where they're delivering some of the SG&A leverage that is obvious in the results this quarter.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Yeah. I think it's part of what we've said in the past. We don't have anything brand new, even though we acquired the second piece of India, it still flows through the same way and tends to leverage as it continues to grow. And Mexico is not a start-up. So while there's a significant investment it doesn't start below zero as far as efficiency and operating margins are concerned. So as we said in the past, we anticipate not that, as John pointed out, we're not looking to save money and not spend. What we're looking to do is drive sales and leverage the operating lines as we grow in these countries and with nothing new, unless this is a one-off in a country. We do anticipate increased sales will bring with the increased operating efficiency.

Jim Duffy -- Stifel -- Analyst

Great. And then changing gears to inventory margin. You've seen some nice benefits to average selling prices and margin in the domestic business from tightening up inventory. Is there opportunity for that in international markets and if so, how far along are you guys in getting after that?

John Vandemore -- Chief Financial Officer

Definitely some opportunities. Although I'd say the inventory position is really a global position. You're seeing really healthy inventories in almost every market. So that's already incorporate into what you're seeing. And again, the only abnormality went out in the quarter was the discounting we did to get rid of some of the seasonal stuff, Absent that, you would have seen pretty good strength. There are potentially incremental opportunities. Keeping in mind that we've been battling ForEx, negative headwinds from ForEx for a while this year. So, we're looking at what opportunities may exist. Now, obviously most important is just making sure you're priced right for each market. And you're dealing with a lot of different currency markets in the current environment that have, up to this point in time being drags from an FX standpoint. So, we continue to believe that there is opportunity, but we would also point out that, we're making sure that we're priced right in each market to enable growth of the brand.

Jim Duffy -- Stifel -- Analyst

Great. And then last one for me, can you speak to any cost relief you're seeing as you negotiate with China sourcing partners?

John Vandemore -- Chief Financial Officer

Yeah. I mean, we haven't really seen any cost pressures and haven't really executed any significant cost opportunities, I mean, we're always diligent about evaluating where there are opportunities, but it's not a one point in time event. It's really a continuous effort overtime. Obviously, one of the bigger factors in there is FX and seeing how FX has changed. So I would point out it's something we look at regularly. And I don't think, we'd ever characterize ourselves as being done with that. So it's more of an ongoing opportunity. We continue to pursue ordinary course of our development process and not, a point in time effort that we that we execute against.

Jim Duffy -- Stifel -- Analyst

Fair enough. Thank you.

John Vandemore -- Chief Financial Officer

Thanks, Jim.

Operator

Our next question comes from the line of Chris Svezia with Wedbush. Please proceed with you question.

Chris Svezia -- Wedbush -- Analyst

Good afternoon, everyone. Thanks for taking my questions. Nice job. I guess, I just want to go back to US wholesale for a moment. Just maybe walk through your thought process in terms of this inflection. How meaningful it could be for Q3 and what that can mean for Q4? Are we talking just kind of nearly down a little bit, but more like mid-single digit growth for Q3? And then accelerating from double-digits in Q4? Just curious, trajectory there.

John Vandemore -- Chief Financial Officer

Well, first off, we didn't -- we're not making the number up. We're seeing really good trends in the backlog, really good trends, as David mentioned in his prepared comments in activity with accounts, both in orders, but also just in the general dialogue we're having. So you're really seeing the product pulled through even to the point, as David mentioned of some asking for a pull up in deliveries. As we see the back of the year unfolding, as we mentioned earlier, Q3, Q2 together we think would have been, if you take those in aggregate about flat up slightly, and then obviously that would suggest some pretty significant build into the back half in Q4. That's what we see in backlogs. Although, I'll just point on something David touched on timing. It sometimes can bridge over a quarter. So how that exactly plays out remains to be sitting. Suffice it to say, we said at once, now we're saying it twice. We expect for a full year that domestic wholesale to be flat to up slightly and we don't make that forecast slightly.

Chris Svezia -- Wedbush -- Analyst

Is there anything -- maybe if you can just touch on anything different by when you look at certain accounts and the off price business was kind of shut out from last year. How do I think about this year? In other words, what's the component of that wholesale growth? How does it look? Is it across all channels, not all channels, all that's in touch with retail customers or any color about that?

John Vandemore -- Chief Financial Officer

Yeah. It's pretty strong and broad. The off price did get better this quarter, although this is the quarter last year, where we saw the most significant decrease and then it continued out. So a little bit of an easier comp this quarter. But I would say, generally speaking, it's fairly broad. It's in our traditional customers. It's been a little bit of the off price. We are seeing it fairly across the board.

Chris Svezia -- Wedbush -- Analyst

Okay. And then just on switch gears, just on the international side for a second. Just in Europe, just maybe add a little color, I know, I think the UK was called out. I think you mentioned Germany. Just any other color about what you're seeing, whether you want to talk currency neutral, reported just what you're seeing in those markets?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

You could say it any which way you want, that marketplace is growing significantly, continues to grow and it's having an incoming order rate for this month, that's significantly higher than we would have anticipated a few months ago. Going forward and this reception that we're seeing now is for first quarter. So we're looking for significant growth. Their backlogs are up significantly, they're growing. UK is performing quite well and will grow, but not as fast a pace as Germany, just calling out the two largest pieces there, primarily for the macro issues that exist in UK and how their overall retail business is going to shake out.

In Germany, we grow significantly higher than our original forecasts. We are at the beginning of the year, as we move through both going to the end of this year and what we will now anticipate, I guess for first quarter, if we continue on this mode. It is in all channels. We had maybe one country in Europe that wasn't up on a dollar basis. Forget even a currency neutral basis in the last quarter and that's anticipated to be up going through the end of the year. So Europe is one of the great stories on fire and a relatively new piece for them, this third and fourth quarter will continue to get stronger and stronger.

Chris Svezia -- Wedbush -- Analyst

Okay. Thank you very much and all the best. Appreciate it.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Thanks.

John Vandemore -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Tom Nikic with Wells Fargo. Please proceed with your question.

Tom Nikic -- Wells Fargo -- Analyst

Hey, David. Hey, John. Thanks for taking my question. John, first off, just a clarification on the guidance. Did you say balance of the year, so 2H direct-to-consumer up high-singles and international up mid-teens. So did I get that correctly?

John Vandemore -- Chief Financial Officer

I did. I did, a lot of selling to be done on the direct-to-consumer. We thought we'd be kind of a mid-teens in Q2 and we substantially outperformed that. We're taking a conservative view as we look at Q3 and Q4, as we pointed out though, the trends have continued to be positive thus far in July. So that may end up being a conservative view, but that's what we've got factored in the moment.

Tom Nikic -- Wells Fargo -- Analyst

Got it. Okay. And as far as the improvement as you are -- that you are seeing in the backlogs for the US wholesale business. Do you think that one of the drivers is that, this will be the first back-to-school in holiday season after Payless went away and some of your wholesale partners maybe China capture that market share and use your brand as a way of picking up those displaced customers?

John Vandemore -- Chief Financial Officer

Well, I mean, I think broadly, we are all going to try and capture that demand.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

It's not limited to Payless. I mean, all the store closures should increase the business strength of those that are left behind. We certainly anticipate picking it up both in our third-party wholesale business and our direct-to-consumer business. Those are all -- we have a broad spectrum of footwear and categories and price points to deliver. We think we can access pieces of all that as it goes forward. It's interesting. As we said before, we saw increases in our direct-to-consumer and we believe our customer service, same sale through on the wholesale and in the United States through the quarters and it coincides with the liquidation of Payless. I don't know if does cause an effect and it'd be difficult to push such a thing. As we clean out retail, we've been saying this for years, as some of the weaker links move away, those that are left stronger and will pick up the slack and will continue to grow. I still believe that's true.

Tom Nikic -- Wells Fargo -- Analyst

Got it. That's helpful. And just last one from me. India. I think, you talk about how it was one of the biggest growers from a dollar perspective this quarter. Can you contextualize the size of that business for you? What it did in revenues last year, anything like that?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Yeah. We're hesitant to get too specific on each country, but the rate it's growing its quickly coming up the ranks, just to give you a reference point without being terribly specific. India was very close to Germany on a consolidated basis by country. So, I should also note, not only was it a big dollar gainer, it was one of our highest percentage gaining markets. And we couldn't be more thrilled with both the growth in that market and the execution we're seeing from our team there. We think that market has tremendous opportunity over the horizon.

Tom Nikic -- Wells Fargo -- Analyst

All right. Got it. Thanks for the color.

Operator

Our next question comes from the line of James Chartier with MCH. Please proceed with your question.

James Chartier -- Monness, Crespi, Hardt & Co., Inc. -- Analyst

Hi, Thanks for taking my question. So are the expectations for third quarter, when you say second and third quarter combined be flat to slightly positive. Does that assume any possible pull-forward of demand that you hinted by the curve?

John Vandemore -- Chief Financial Officer

No.

James Chartier -- Monness, Crespi, Hardt & Co., Inc. -- Analyst

Okay. And then, on the running category, how do you guys build on kind of this editorial success that you've had with a running product? Have you been seeing more interest from the retailers or any more interest or growth in the running category and then how big could that ultimately be for you? Thanks.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

So, running is one of the major categories in the world. So it obviously helps, it obviously gives us bigger and broader impact. We have more runners coming into the shoes. We have more requests for the shoes. And by the way, that's on a worldwide basis. So we anticipate that these awards that were only in the last two or three months. We'll certainly continue to pick it up and we will certainly continue to push both the advertising and the online advertising to runners. And if anybody out there that's listening hasn't tried them, you should. These shoes are all they are geared up to be very comfortable and very light. And there's something for everybody, both outdoors and long distance and even for walking. So we do anticipate those categories will continue to grow and give us a great, halo effect to the brand for our major league walking category, it still remains the biggest.

John Vandemore -- Chief Financial Officer

Jim, I just, add onto what David said, these shoes are just hitting the street, a late Q2 and now. But what's really important its not -- the shoe and it's the technology in the shoe, the hyper burst that we have in the shoe in that platform, as David mentioned, is one that we can extrapolate across segments. So it won't always be a running predominant platform for us, It's something we believe can improve and affects positively a lot of other categories, including walk and the like. So we think you're just beginning to see the impact of this because it's just really coming into the inline stuff and the running side. And then it has a lot of opportunity to be carried forward from there.

James Chartier -- Monness, Crespi, Hardt & Co., Inc. -- Analyst

So are you already seeing kind of demand for more casual product with that sort of technology in it for...

John Vandemore -- Chief Financial Officer

We just haven't really got...

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Yes. It's way too new.

John Vandemore -- Chief Financial Officer

Yeah. It's way too new. It just hasn't come up into that -- in those categories yet, but that's obviously the plan over time is to bring that technology down into our array of other categories, not just casual but array of other categories we have.

James Chartier -- Monness, Crespi, Hardt & Co., Inc. -- Analyst

Great. Thanks. Best of luck.

John Vandemore -- Chief Financial Officer

Thanks, Jim.

Operator

And our final question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.

Sam Poser -- Susquehanna -- Analyst

I just have a quick follow up on the selling part of the SG&A. Could the -- was that a shift of some selling expenses that are going to move into the third quarter or as most of the SG&A in the third quarter, going to come from the SG&A line?

John Vandemore -- Chief Financial Officer

So in the second quarter, there wasn't anything noticeable that shifted one way or the other, it was more of a conscious decisions to pull back domestically. We still invested internationally, but it was more of a conscious decision to pull back a little bit domestically. In terms of going forward, we think generally speaking, you're likely to see about the same level, maybe a little bit of leverage in the selling, but that's going to come because of the scale increases we're seeing in across the board. So, we think it's -- I think it continues to be an area we'll invest in where it makes sense, but it's also an opportunity on a full year basis where we'll see leverage.

Sam Poser -- Susquehanna -- Analyst

I mean, on an absolute dollar basis in the quarter you were down in Q1, you were down slightly in Q2. Do we expect as the selling expenses to be down again in Q3 and Q4 or flat or I mean, how should we think about that because, it's the first time in a while we've seen two running quarters for the selling expense down and so that if I'm wondering, how we should be thinking about?

John Vandemore -- Chief Financial Officer

At the moment, it's a dynamic item simply, because we're sensing the main characteristics in the market and are adjusting as we go. As it stands at the moment, I would anticipate something more like on a constant percentage of sales to what we've seen in the last year, over the back two quarters.

Sam Poser -- Susquehanna -- Analyst

So, sort of you're going to see an increase, but maybe get a hair [Phonetic] of leverage on it.

John Vandemore -- Chief Financial Officer

I don't know how you quantify a hair, but yes. I'd say that's generally, directionally accurate.

Sam Poser -- Susquehanna -- Analyst

Slight, leverage [Indecipherable] put it. Anyway. Thanks, guys. All right. Thank you so much.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session, as well as today's conference. I would like to turn the call back over to the company for closing remarks.

Unidentified Speaker

Thank you again for joining us on the call today. We would just like to note that today's call may have contained forward-looking statements. As a result of various risk factors, actual results could differ materially from those projected in such statements. These risk factors are detailed in SKECHERS' filings with the SEC. Again, thank you and have a great day.

Duration: 61 minutes

Call participants:

Unidentified Speaker

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

John Vandemore -- Chief Financial Officer

Jay Sole -- UBS -- Analyst

Laurent Vasilescu -- Macquarie Capital -- Analyst

Westcott Rochette -- Evercore ISI -- Analyst

Sam Poser -- Susquehanna -- Analyst

Susan Anderson -- B. Riley -- Analyst

Jim Duffy -- Stifel -- Analyst

Chris Svezia -- Wedbush -- Analyst

Tom Nikic -- Wells Fargo -- Analyst

James Chartier -- Monness, Crespi, Hardt & Co., Inc. -- Analyst

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