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 U.S. 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 - Chief Operating Officer

Good afternoon, and thank you for joining us today. 2019 was a milestone year for SKECHERS as we surpassed $5 billion in sale and set records in each quarter of the year. We achieved sales of $5.22 billion, a year-over-year increase of 12.5% or $578 million. Typically, the fourth quarter is our smallest quarter of the year, yet it was the second highest in our history with net sales of $1.33 billion, a 23.1% increase. The growth in the quarter was a result of a 13% increase in our domestic business and a 31.2% increase in our international businesses. Every region contributed double-digit growth. This included, as anticipated, a return to double-digit growth in our domestic wholesale business as well as double-digit growth in our direct-to-consumer segment. Importantly, strong increases in our international business resulted in it being 59.3% of our total sales in the quarter, and 57.9% for the year. We believe that our international businesses will continue to be our leading growth driver. Our direct-to-consumer business achieved strong sales growth with a quarterly increase of 19.4%, which included 9.9% comparable same-store sales worldwide. At the year-end, we had 3,547 SKECHERS stores around the world, including 800 company-owned stores.

Our efforts in 2019 not only resulted in sales improvement, but also more than 25 awards for product innovation and design. Most notably, for performance shoes featuring our Hyper Burst technology and Company of the Year and Kids Design Excellence awards from Footwear Plus magazine. Highlights in the fourth quarter include the addition of Arch Fit to our product offering, which also includes Relaxed, Wide, Classic and Stretch Fit; the signing of Dodgers' pitching ace Clayton Kershaw as the new men's ambassador; opening of SKECHERS flagship store on Rome's Via del Corso and at Disneytown in Shanghai, our first location on a Disney property; a course record win by SKECHERS' elite golfer, Colin Montgomery, at the Invesco Championship in California; being named #1 footwear and apparel brand on YouGov's top buzz brands for 2019; and the reduction of plastic in our packaging to 7%, all of which is a 100% recyclable. At the core of our global success is our ability to develop a vast range of footwear for active lifestyles that delivers on style, innovation and, most importantly, comfort. We believe our unique and competitive product offering, along with our pervasive marketing sets us apart from other global brands. Our continued momentum and success throughout 2019 are confirmation of the strength and demand for our products around the world.

With our strong backlog and growing direct-to-consumer business, we are extremely optimistic about 2020 and beyond. While we are deeply concerned by the health crisis in China and the well-being of those affected, including our employees, partners and vendors, we remain optimistic about the strength of SKECHERS in China and committed to our long-term growth strategy in the country. John will address how we have incorporated our current understanding of the situation into our guidance. Now turning to our domestic business in detail. In the fourth quarter, our domestic sales increased 13%, driven by a 16.3% increase in our direct-to-consumer business with comparable same-store sales increasing 10.3% for the quarter. Our domestic wholesale growth of 10.4% was the result of a 12.9% increase in pairs shipped for the quarter, along with a modest increase in average price per pair of about 1%. With a broad distribution strategy and vast product offering, we are a valuable resource for both our domestic account base and consumers who are seeking comfort, style, innovation and quality in their footwear. At quarter end, we had 497 company-owned SKECHERS retail stores in the United States. In the fourth quarter, we opened nine stores across seven states.

We also remodeled one store and expanded two locations. To date, in the first quarter, seven company-owned stores have opened in the United States, three have closed. We are currently planning for another 75 to 85 new stores, predominantly, in our warehouse format to open before the end of the year. Our men's, women's and kids domestic business improved in the fourth quarter. Specifically, the biggest increases came from our sport and work lines for men and women. Our BOBS from SKECHERS collection, women's GOwalk and our men's casual and performance line as well as our kids business returning to growth in the quarter. To keep SKECHERS top of mind over the holidays and into 2020, we supported our domestic business with several marketing campaigns from print, outdoor, digital and broadcast. This included television commercials for our kids footwear as well as spots for our new Max Cushioning and Arch Fit collection. Based on our domestic direct-to-consumer January sales, comping up low double digit and strong backlogs within our domestic wholesale channel, we believe our domestic business will continue to show positive growth in the first quarter.

Now looking in detail our international business, which represented 59.3% of our total sales in the quarter. Sales increased 31.2% or 32.3% on a constant currency basis, reflecting growth in our subsidiary, joint venture and distributor businesses and across each region. For the fourth quarter, the biggest drivers in terms of dollar increases were China, India, the United Kingdom, UAE and Mexico, which transitioned to a joint venture in 2019. The only subsidiary or joint venture markets that didn't grow were Chile and Hong Kong, both of which faced unusual political unrest during the quarter. Specifically, the sales growth was the result of a 32.8% increase in our wholesale business and a 24.7% in our direct-to-consumer business with an 8.8% increase in comparable store sales. At quarter end, there were 3,050 international retail stores, a net increase of 231 in the fourth quarter. Of those stores, 2,747 are owned and operated by international distribution partners, joint ventures and a network of franchisees. In the quarter, 12 company-owned international stores opened: three in the U.K.; two each in Poland, Spain and Chile; and one each in Peru, India and Italy, which opened on a highly traffic Via del Corso in Rome; also a store was remodeled and another relocated.

We plan to open another 40 to 50 wholly-owned company stores in international markets including 15 in India. In the fourth quarter, 259 joint venture and third-party owned stores opened across 35 countries. New store openings included 143 in China, 25 in India, eight in Indonesia, seven in Malaysia, and five in both Mexico and Romania. 40 stores closed in the quarter. In 2020, we anticipate between 550 and 650 SKECHERS third-party stores to open. To support our global business expansion, we utilized television, outdoor, digital and print campaigns to drive consumers to stores where SKECHERS are available. This included underground campaigns in the U.K. and France, perimeter boards at sporting events in Canada and Central, Eastern Europe, kiosks across Turkey, massive billboards in Spain and Chile, fashion weeks in the UAE and Greece, events that engaged consumers in India and Mexico, and windows in key avenues and malls across Europe and Asia.

Our international business remains the primary growth driver for the SKECHERS brand. This was reflected in the exceptional performance of our distribution centers in Europe, Japan, India and Latin America, each of which efficiently handled double-digit increase in pairs shipped in 2019, while simultaneously preparing for the future growth of our business through our infrastructure project. Our backlogs are up across our international segment and we are seeing the benefit from the conversion of India to a subsidiary, and Mexico to a joint venture.

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

John Vandemore - Chief Financial Office

Thank you, David. First, I would like to add my sentiments about the crisis in China. Right now we are most concerned with the welfare of our employees, partners and vendors. These are people we work with closely day in and day out, and we want them to know that SKECHERS will be there for them during this critical time. As David said, the SKECHERS brand is strong in China, and we firmly believe this situation, although challenging, will prove transitory. Our record fourth quarter sales totaled $1.33 billion, an increase of $249.9 million or 23.1% and reflects the strength of our brand, product portfolio and worldwide execution capabilities. On a constant currency basis, sales increased $257 million or 23.8%. As David mentioned earlier, we grew in all segments, in every region, and in, nearly, every country. The growth continued despite enduring headwinds from foreign exchange rate and the impact of incremental domestic tariff. International wholesale sales increased 32.8%, including a 36% increase from our wholly-owned subsidiaries, a 31.4% increase in our joint ventures and a 32.4% increase in our distributor business.

Direct-to-consumer sales increased 19.4%, the result of a 16.3% increase domestically and a 24.7% increase internationally. Domestic direct-to-consumer sales growth was driven by a 10.3% increase in comparable store sales and the net addition of 27 new stores. International direct-to-consumer sales growth was driven by an 8.8% increase in comparable store sales and the net addition of 20 new stores. Domestic wholesale sales grew 10.4% or $28 million, with a double-digit increase in our men's division, and mid single-digit increases in both women's and kids. We continue to see encouraging signals for the SKECHERS business among our domestic wholesale customers into the first half of 2020. Gross profit was $637.7 million, up $122.1 million compared to the prior year. Gross margin increased by 20 basis points to 47.9%, primarily due to the strength in our direct-to-consumer businesses, joint ventures and distributors, partially offset by lower subsidiary and domestic wholesale gross margin, the latter due to increased domestic duties. Total operating expenses increased by $111.5 million or 25.5% to $548.3 million in the quarter.

As a percentage of sales, operating expenses increased by 80 basis points to 41.2% compared to 40.4% in the prior year, largely driven by increased advertising and marketing spending where we chose to strategically invest in the momentum of our global business in order to support both current and future growth. Selling expenses increased by $26.8 million to $88.7 million due to higher advertising expenses in both the domestic and international markets. The increase supported both our growth in the quarter as well as opportunities to build on brand and product awareness worldwide as reflected in our backlog and strong comparable store performance. General administrative expenses increased by $84.7 million to $459.7 million, but remained essentially flat as a percentage of sales. The dollar increases reflect both higher-than-expected sales volumes, which increased variable costs like distribution and warehousing and additional expenses to handle the accelerated arrival of List 4B products, which were exposed at the time to incremental tariff.

The increase also included $28.2 million to support the growth of our joint venture businesses, primarily in China and Mexico, and $32.7 million associated with our direct-to-consumer business, and a net increase of 47 new company-owned stores, including 21 that opened in the quarter. We also incurred startup costs related to the new automation in our distribution center in Belgium, and operational planning for our new distribution center in China. Earnings from operations increased 12.4% to $94 million versus the prior year, and our operating margin was 7.1% compared with 7.7% from the prior year. Net income increased 25.7% to $59.5 million or $0.39 per diluted share on 154.6 million diluted shares outstanding compared to net income of $47.4 million or $0.31 per diluted share on 155 million diluted shares outstanding in the prior-year period. Our effective income tax rate for the quarter decreased to 14% from 15.5% in the prior year. We expect our effective tax rate for 2020 to be between 16% and 18%. And now turning to our balance sheet.

At December 31, 2019, we had over $1 billion in cash, cash equivalents and investments, which was a decrease of $34.5 million or 3.2% from December 31, 2018. Recall that earlier this year, we invested over $180 million to purchase the minority interest of our former joint venture in India and to form a new joint venture in Mexico. Our cash in investments represented approximately $6.72 per diluted share outstanding at December 31, 2019. Trade accounts receivable at quarter end were $699.2 million, an increase of $141.6 million from December 31, 2018, driven by higher sales, particularly in our international wholesale business. Total inventory was approximately $1.1 billion, an increase of 23.9% or $206.6 million from December 31, 2018.

The increase was primarily in our international markets, where we believe our inventory levels leave us well positioned to support our growth expectations. Total debt, including both current and long-term portion was $121.2 million compared to $97 million at December 31, 2018. The increase primarily reflects borrowings associated with the construction of our first distribution center in China. During the quarter, we also replaced our existing $250 million asset-backed credit facility that was due to expire in June of 2020, with a new $500 million senior unsecured credit facility to provide additional liquidity support to the continued growth of our business.

Working capital decreased $45.5 million to approximately $1.58 billion versus $1.62 billion at December 31, 2018, partially attributable to the inclusion of current operating lease liabilities totaling $191.1 million arising from the adoption of the new lease accounting standard for fiscal year 2019. Capital expenditures for the fourth quarter were $66 million, of which $11.8 million was related to the construction of our distribution center in China, $17.1 million related to direct-to-consumer stores and e-commerce investments worldwide and $9.8 million related to our distribution capabilities around the globe as well as general corporate investments. For the full year 2019, our total capital expenditures were $240.7 million. We expect our capital expenditures for 2020 to be in the range of $325 million to $350 million, which includes completing the construction of our China distribution center; the expansion of our U.S. distribution facility; opening 115 to 125 new company-owned SKECHERS stores and 20 to 30 store remodels, expansion and relocation; the expansion of our corporate headquarters; and technology investments, primarily in our direct-to-consumer business.

Now turning to guidance. First, let me reiterate that there is much we do not know about the current situation in China. As a result, assessing the impact to our business is difficult. What we know is that a meaningful number of SKECHERS stores in China, both company-owned and franchise, have been temporarily closed, and those that remain open are seeing significantly below average traffic and comparable store sales pattern. Incorporated into the following guidance is our best estimate of the influence of these factors on the first quarter of 2020. But if the severity of the situation in China worsens and impacts our businesses outside of China and/or our global supply chain, this guidance may change. We currently expect first quarter 2020 sales to be in the range of $1.4 billion to $1.425 billion, and net earnings per diluted share to be in the range of $0.70 to $0.75. This guidance incorporates the view based upon current trends, backlogs and other indicators that all three of our segments will continue to grow in the first quarter and the impact from the crisis in China aligns with our expectations.

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

David Weinberg - Chief Operating Officer

Thank you, John. As mentioned, we believe our business, product, distribution, marketing and infrastructure is extremely strong. In 2019, we surpassed the milestone of $5 billion in annual sales, grew our international business to 57.9% of our total sales at year-end and achieved double-digit growth in our domestic and international businesses in the fourth quarter. We now have more than 3,500 SKECHERS stores around the world and a strong e-commerce business that we believe will improve greatly with upgrades we are completing in the first half of 2020.

We believe this momentum will continue in 2020 given our strong backlog and the strength of our direct-to-consumer channel, which had low double-digit comps for January. We will continue to assess the potential impact of the health crisis on our business in Asia as well as elsewhere and provide support to our teams in China.

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

Question & Answers

Questions and Answers:

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Operator

Thank you. [Operator Instructions] Our first question comes from the line of Jay Sole with UBS. Please proceed with your question.

Jay Sole - UBS - Analyst

Great, thank you so much. The 9.9% comp was one of the strongest numbers in what was a very strong top line in the quarter. Can you talk about e-commerce growth within the retail business. And David, you just mentioned some upgrades you're making. Can you give us an idea of where you think that business can go from here?

David Weinberg - Chief Operating Officer

Well, I don't think there's a limit to where that business can grow. It's still relatively small, although growing very, very significantly. We don't even measure that anymore in single digits or double digits, well into the double and for some months, even triple digits. However, it's still only now - it is about low double digits of our complete direct-to-consumer sales. So there's plenty of room to it to go. We have invested a lot of money that we've - over the past couple of years and are re-platforming and getting things ready for a new major launch, including our Elite program. On top of that, we're going to use that as a prototype to take around the world. We don't have direct-to-consumer online e-commerce in every subsidiary in the world, but we plan on this in the next year to be online and direct-to-consumer in every country in the world. So when you put it all together, it can be very, very significant.

But we shouldn't take away from the fact that even in this difficult time, while brick-and-mortar is comping up significantly as well, which shows what we have to offer as a destination and to a direct-to-consumer. And when we put them all together in the coming years, in our version of the omnichannel, we think it's going to be, with the great product we have, be even that much better.

Jay Sole - UBS - Analyst

Got it. And then if I can just ask about the guidance. Obviously, China is such a big topic and the coronavirus for every company. Can you maybe sort of split out what impact that you're incorporating from that situation into the sales guidance that you've given this afternoon?

John Vandemore - Chief Financial Office

Well, we don't want to get overly precise because what we're waiting is probability of a lot of different outcomes. But what I would reiterate from the guidance is we still expect every segment to grow. We are planning China down for this quarter. We've taken a fairly severe look at February and parts of March, how that unfolds really is to be determined. But it's really the strength of all of our other business segments that aren't being directly impacted by the situation right now, which is powering that guidance.

So I'd tell you, I think, we've taken an appropriately conservative view about China will impact our first quarter results. I think we'll learn more as the situation unfolds, but every other segment, every other piece of the business, our expectation is that we'll continue to contribute at roughly similar levels to what we've seen, which is very strong performance, as David highlighted.

Jay Sole - UBS - Analyst

Okay. And then maybe one more from me, if I could. You mentioned that India was one of the strongest growers in terms of dollars within the international business. It seems like the India is still probably a pretty small piece of the overall business. So can you give us an idea what percentage type of growth rates you're seeing in India? And what the prospects are for us during that end market?

John Vandemore - Chief Financial Office

Well, I'll start with the prospects because we think the prospects for SKECHERS in India are extraordinarily bright, especially over the long term. It's an incredible market, where we've seen incredible traction for the brand. It continuously ranked in the market as one of the most recognized and loved brands by consumers. I would tell you, this quarter, the rate was fantastic. It was over 50% growth. For the full year, the rate was also near that level. It's starting to become a very meaningful contributor to the overall economics of our international subsidiary business.

So it's a significant driver and we have very high expectations for the continued growth of the market, even in what are somewhat difficult times right now from a consumer discretionary spend environment. And we've seen the brand thus far power through that, which is extraordinarily encouraging.

Jay Sole - UBS - Analyst

Okay, guys, thanks so much.

Operator

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

Chris Svezia - Wedbush Securities - Analyst

Good afternoon guys. Congratulations. I guess, first, one clarification on China. Are you anticipating it gets worse or stays the same? And any thoughts about supply chain. I know what the inventories look like currently, but just where you stand right now as you think about first half product deliveries?

David Weinberg - Chief Operating Officer

So January for China was very good. Right up until about the 23rd, when we saw the travel restrictions go into place. So performance through the early part of January was actually very encouraging. While we are seeing depressed traffic and comp store trends at the moment in our physical stores and in our franchise stores, e-commerce continues to do well. What we've assumed as a result of this quarter is that February is very difficult, partly because of the travel restrictions, partly because of the unknowns of how consumer discretionary spend patterns are going to revitalize and when. We've taken a similar view of March, though not as a fear, assuming at this moment that this situation begins to dissipate. But we've also attempted to incorporate enough leeway that will give us latitude in the guidance we have.

And as far as the supply chain is concerned, it's obviously an issue but it's not a short-term issue for us in fulfilling what we have available outside of China. We took a lot of stuff early around the world for various reasons. We have capacity and raw materials in those factories that are working and have already gone to work outside of China. Obviously, have somewhat of a decreased demand for the parts of our supply chain that have to supply China since sales will be down. So while we're watching it closely, and there's certainly a significant potential somewhere down the road, we don't think there can be a severe impact for Q1. So we have time to monitor and see what happens as we go through the year.

Chris Svezia - Wedbush Securities - Analyst

Okay, thank you. On - switching gears, U.S. wholesale for a moment. Just 10% growth Q4. Q1, you got a much…

David Weinberg - Chief Operating Officer

What you mean just?

Chris Svezia - Wedbush Securities - Analyst

Gosh, here we go. You hit double digits. Congratulations, by the way. Anyway, just Q1, just you have an easier compare. It seems like there's some momentum here. How do we think about Q1 U.S. wholesale? And if any color you want to give with some of the other segments, DTC comp or anything along those lines, pertains to the revenue guidance.

John Vandemore - Chief Financial Office

Well, I'm going to hold back from saying I told you so on domestic wholesale, although I will note that we are actually very happy with the resurgence we've seen in domestic wholesale. It's gotten stronger every quarter. The product is clearly resonating. I would tell you, at the moment, we view next quarter is likely to be around where we were this quarter. We see great backlog traffic. We see good order flow, good shipping trends. So we are very optimistic that we will see a similar performance or potentially even better relative to Q1. Again, the only asterisk I'd put on that is assessing the global impact of what's happening in China, to the extent that has a knock-on effect elsewhere in the world. But right now, we're seeing good trends in first and even indications in the second quarter, although we're not as fully booked there yet. And I would tell you that, that general guide outside of international wholesale, which obviously is going to be impacted by China is somewhat of the room that we're using this quarter because we're seeing similar trends.

David mentioned that January comparable store sales are up low double digits, which is fantastic. So we're looking for somewhat similar patterns of growth, plus or minus a bit in each of the segments. And outside of China, the international wholesale business continues to do resoundingly well. The backlogs there are phenomenal. So again, what you're going to see in the quarter ahead, we believe, is strength across the portfolio, offsetting the challenge that exists in China, which, again, we're planning down for the quarter at the moment. But it's really the strength of the brand everywhere else that's going to carry us through this quarter, which, again, I think, it's just a testament to the resonance of the product right now.

Chris Svezia - Wedbush Securities - Analyst

Okay. Sounds good. And one final thing, something near and dear to your heart, John, but just on SG&A. I know you took an opportunity here to invest on the selling line in Q4. Is it still the general thought that SG&A or everyone will look at SG&A grows in line with revenues as we move forward? Or is it still opportunistic based on investments you want to make? Or how should we look at that?

John Vandemore - Chief Financial Office

Well, I'm so glad you asked, Chris. Thank you. So generally speaking, that remains our target. Let me take a moment to point out a few things this year that are going to be different. As we mentioned, with the onset of the opening of our distribution center in China, there will be costs throughout the year, that we incur start-up costs. This will most likely be concentrated over the first three quarters. For the full year, we expect them to approximate about USD15 million to USD20 million. So that will have a natural deleveraging effect because they are onetime type costs. I will just also point out we are finalizing the purchase accounting of our investment in Mexico. There's likely to be, quite frankly, a full - a few cents on the full year related to the purchase accounting. It's really just accounting adjustments. But when we have that finalized, which should be at the end of the first quarter, we'll give you some guidance there. So I do want to point those two out because they are anomalies.

Outside of that, though, I would continue to point toward revenue growth as our upper bound. Probably, again, the global caveat there being China, we've - again, we've incorporated some latitude throughout our P&L. It may be that we need to spend some money in China to reignite operations. It wouldn't surprise me if there's a quarter or two where we need to deleverage in China, specifically. But quite frankly, until we get better informed about how that is going to unfold, it would be difficult to really project with specificity when or how much that's going to be. So carving out those unique items, that's still the guidance I would point you to is, SG&A growing in line. It's at the high end with revenue, obviously, with us targeting to do better. I would also emphasize that this quarter was definitely an opportunistic quarter. We've had great strength in the brand. We saw an opportunity to put that into sales and marketing-related expenses. G&A itself was actually in line. So I would think of those largely as investments for the future of the brand.

David Weinberg - Chief Operating Officer

And Chris, I would add in there as well. That, as we mentioned, fourth quarter is usually our smallest of the year. This year, it wasn't - and it showed a reacceleration in many places around the world. That includes Europe and, usually, when we have an acceleration in the fourth quarter from a small quarter like that, it shows insignificant growth in the following year. So when we talk about opportunistic, we have to see what that growth pattern is because it can be significant.

And I would tell you, along with having such a strong fourth quarter, our booking trends for all the subsidiaries in the first quarter were extremely good and significantly higher than last year, which leads us to an acceleration certainly coming into this year. And had China seen any significant growth, we would have even seen some outside growth in Q1 that we still think is available throughout the year. So we'll be getting ready for that kind of growth as well.

Chris Svezia - Wedbush Securities - Analyst

Understood, thank you and all the best. Appreciate it.

Operator

Our next question comes from the line of John Kernan with Cowen & Company. Please proceed with your question.

John Kernan - Cowen and Company - Analyst

Hey, good afternoon, David, John, congrats on a very strong fourth quarter and a good start to this year. John, you and David, were both pretty enthusiastic about Europe when we met with you at Fannie. Clearly, the fourth quarter numbers in international wholesale are extremely robust. I'm just wondering what your thoughts are on Europe for 2020? What regions you're most excited about? And maybe if some of the strength you're seeing in Europe can help to really offset some of the onetime type challenges in China this year.

John Vandemore - Chief Financial Office

Yes, John, that - I mean, that pretty much describes it, to be honest with you. We were excited about what we saw in Europe, both in developing and developed markets. Europe as a region grew significantly. It actually grew above the average for international wholesale in the quarter. So we've seen really good continuing trend in that market. As David mentioned, the backlogs are fantastic right now for both the first quarter and we're seeing very encouraging early indications on second quarter. I think the product is resonating, and it's across our stores. It's across our wholesale accounts. It is in our e-commerce channels, where we have them, in the international markets.

And it's going to be those markets and others, again, that pull the business through the headwind, that's going to be our results in China in Q1, as we anticipate them at the moment. So that market continues to be very robust for us from a growth standpoint and we couldn't be, quite frankly, more optimistic about the long-term potential of the brand there. And quite frankly, in South America, in the other parts of Asia that aren't currently facing the challenge, we mentioned that with every region, every segment and nearly every country, and that's right on.

In fact, in many instances, the only instances I can think of where we had a subsidiary or joint venture partner that didn't grow in a country, it was largely because of some sort of extraordinary political strife. So the business and the product is resonating in a lot of different markets all at once, which again, I think, is a testament to the design and the marketing behind it.

John Kernan - Cowen and Company - Analyst

All right. Got it. I wanted to shift gears, maybe just to the company-owned comps; obviously, impressive both in domestic and international. Can you just talk to the drivers of this? Is there an ASP story to this? Is it just traffic? Are you converting more with some of the omnichannel initiatives you put in place? And, obviously, the strength has continued into January, I think, you said comps are running up low doubles. I wonder if you could give us a little bit more color on the overall drivers of this comp.

David Weinberg - Chief Operating Officer

Yes. Well, what we said was up low double digits domestically. It's up as well around the world. The drivers for us are always about product. And what we develop and the brand acceptance as we go around, certainly in a competitive environment. So I think what you see as you go through is, it's a little bit of everything. We have many categories, many of them resonate. We advertise them well. We get traffic through the stores. It's not so much traffic because I don't know that traffic per se is different for us than anybody else in - especially in those places we share. But we do have better conversion. We have customers that come in knowing what they're looking for, which leads to a better conversion and they're always there to purchase. So it is a little bit of everything, a little bit of pricing and ASP, but nothing significant. It is all about acceptance and conversion and the product we have to offer.

John Kernan - Cowen and Company - Analyst

Excellent. Okay, thank you.

Operator

Our next question comes from the line of Gabby Carbone with Deutsche Bank. Please proceed with your question.

Gabby Carbone - Deutsche Bank - Analyst

Hi, good afternoon. Thanks for taking our question. I wanted to ask about category performance. I was wondering if you can dig a little bit deeper and discuss what categories and styles are driving such strong growth? And then I was wondering if you could speak to kind of the kids business. I mean what's kind of aiding that categories return back to growth?

John Vandemore - Chief Financial Office

Yes. Again, I hate to sound like a broken record. We saw a lot of very broad strength across the divisions as we refer to them. I think most encouraging this quarter is, as we mentioned, all genders grew, women's grew, men's grew fantastically. Kids returned to growth. It's been battling some difficult comparisons from our lighted product as well as I would describe kind of a general malaise in kids across all brands. And seeing that come back to light, this quarter, was fantastic. I think it's probably the broad appeal of the general casual look and feel at the moment that is aiding a lot of different divisions. But obviously, bringing GOwalk in a big way has helped us, our street product has done very well. Our work product, which is definitely a completely different category than most, has grown exceedingly well.

David mentioned the awards we've won in our performance category. That's helping the performance category as well. So to be honest with you, it's a lot of different divisions performing very well. I think it's - again, like the casual atmosphere, but also the fact that we have comfort features that many don't. We price comfort unlike anyone else and bringing products to market like Arch Fit in combination with our other products like Relaxed. And I mean it's the whole thing that customers are looking for right now.

David Weinberg - Chief Operating Officer

I think this year, actually, this performance anyway follows what we've been saying all along. We no longer are in search of - while we're in search of, but no longer need a hero shoe or a hero division or a hero territory to carry it, when you look at the amount of growth in the double digit in all the categories. So that's a lot of product in all those geographies. It really is spread out, and it has to do with a broad offering and brand identity and brand awareness and brand acceptance.

John Vandemore - Chief Financial Office

Yes. I left out the BOBS group too, and they would be offended if I did. They've done phenomenally well this year too, so I want to make sure I call it the BOBS team.

Gabby Carbone - Deutsche Bank - Analyst

Got it. Thanks. And then just a follow-up on gross margin. You obviously did a nice job managing that this quarter. I believe in the past, you've said there could be some tariff pressure still in the first quarter. So just an update on how that situation is going.

John Vandemore - Chief Financial Office

Yes, we definitely saw the impacts or the beginning impacts of the tariffs this quarter. And let me just point out in our release this quarter, we have actually included the segment level gross margin breakdowns for you all, so that you can have them before the 10-Q. In that you'll see the domestic wholesale margins certainly took a bit of a hit because of the tariffs. What we have said all along, though, is while we have mitigation and strategies to address the tariff increases, we didn't feel the need to recoup that all in the domestic wholesale segment. And so we took a little bit of a hit there, but you saw our margins accrete elsewhere to offset that, and that drove kind of the overall margin accretion for this quarter.

I should also let you know that the pricing that we had talked about taking earlier was something that we deferred until the first part of 2020. So that wasn't even actually in the mix to help offset some of that cost. The only - the pricing that we are able to see flow through within our own retail that was more on brand strength. So we expect there to be a continuing impact in the first quarter, at least, the way the tariff reductions were put into place. Everything that had arrived prior to the signing of the first phase agreement, still bore the higher tariff costs. So we'll still need to work through some of that higher tariff inventory over the first quarter, maybe a little bit into the second quarter. So we expect a little bit of that pressure coming into Q1.

David Weinberg - Chief Operating Officer

And in fact, I was just - in concert with that, so I know somebody will ask. We do expect there to be some gross margin pressures in the first quarter because of that fact as well as what we anticipate in China is probably being an impact on some ASPs for already delivered product.

Gabby Carbone - Deutsche Bank - Analyst

Great, thank you so much about the color.

David Weinberg - Chief Operating Officer

Thank you.

Operator

Our next question comes from the line of Omar Saad with Evercore ISI. Please pick up the question.

Omar Saad - Evercore ISI - Analyst

Thanks for taking my question. Great quarter guys. Thanks for all the information. I wanted to ask my first question on pricing at AURs. Do you have any sense of what your trends are at retail? It feels like the brand has a lot of pricing power right now, whether it's kind of mixing the customer up from good, better, best or just like-for-like pricing. Maybe give us your thoughts on that? And then I have one follow-up.

John Vandemore - Chief Financial Office

Yes, pricing was a growth driver in the quarter for us at retail. Again, I would attribute that largely to the strength of the brand, it pulling through in the pricing line. We didn't enact any price changes, any major price changes in the wholesale segment this quarter. If you recall, when we were contemplating our action path forward in response to the tariffs, we mentioned pricing. But we also consciously deferred that action until the early part of 2020. We didn't want to reset any pricing that was already - for booked orders. So you didn't see as much of that in the domestic wholesale.

You did see kind of a leveling off on the pricing. I think it was up about 1%. So actually, in the domestic wholesale, we got volume and a little bit of price as well. But again, I think your inclination is correct. It is the strength of the brand and the quality of the product that we're bringing forward that is driving that price relationship.

Omar Saad - Evercore ISI - Analyst

Got you. Okay. And then my one follow-up. Can I thinking about the e-commerce - your commentary around e-commerce and the digital initiatives and the investments you're making. If I think like a few years ago, you guys were still a little bit skeptical, not sure about how the profitability would work in that segment. Maybe you could share with us how some of your views on that channel as a business model, how they've evolved? And given how much you're kind of gearing your investment towards that channel now?

John Vandemore - Chief Financial Office

Well, as David mentioned, it's certainly a source of pretty significant investment, both in people and in technology. This year, you will see the next evolution of that investment. We will replatform our site in the U.S. and then we will take that out across the globe. We're also likely to be relaunching, at least in a beta phase, our loyalty program, which obviously has some significant technology investment behind it. We're also going to completely revamp our POS system for our existing store base, so that it will have greater functionality and interoperability with our online account. So I very much agree with David's earlier statement.

It's very early stage for us in the e-commerce business. The economics are still very attractive to us. They look very good to us relative to our overall retail performance. Something, obviously, we watch carefully, but we think the runway for both e-commerce as a stand-alone element of our offering, but also in concert with the stores, which is where, as David mentioned, the omni-channel solution for SKECHERS will come. We think that has great upside opportunity…

David Weinberg - Chief Operating Officer

Around the world.

John Vandemore - Chief Financial Office

Yes.

Omar Saad - Evercore ISI - Analyst

Understood that. Thanks. Good luck.

Operator

Our next question comes from the line of Sam Poser with Susquehanna Financial Group. Please pick up his question.

Sam Poser - Susquehanna Financial Group - Analyst

Good afternoon. Thanks for taking taking my questions. Can you - you've talked in the past about how big your China sales were in the prior year. So how big were the China sales last year?

David Weinberg - Chief Operating Officer

So I don't want to get overly precise, and I would just ask, keep in mind, China was also dealing with a pretty significant headwind from ForEx last year. It was in - we saw a reasonable increase from the prior year, so within that kind of mid-$800 million range.

Sam Poser - Susquehanna Financial Group - Analyst

And that's - I mean, could we assume that Q1 is approx - you're up again approximately $200 million, then, give or take? And when you're - and when you're knocking it - and when you're planning it down, you might be planning - there might be $100 million or - it's a - can you give us some idea of what that dollar amount is, that is within there? So we - because you're going to get some of that back next year, it should spring. So we should - can you give us some idea what the number is? I mean, other companies have been fairly specific about it. Within your number, I know it may change, but you've given us this revenue guidance. And you know what the number was that you took out of China. So it would be greatly helpful.

David Weinberg - Chief Operating Officer

Yes, but - remember, you're dealing with a whole quarter, Sam, and your $200 million, $100 million, $150 million, they were actually up in January. So the quarter can't be as catastrophic unless it goes really down significantly. So we've taken a significant haircut by month. But we still keep…

Sam Poser - Susquehanna Financial Group - Analyst

So - right, of course. Right, of course. Okay. What percent of your production is now in China? What percent of overall production in China?

David Weinberg - Chief Operating Officer

It hasn't changed significantly from the last time. It's about half, maybe a little less than half. But remember, a big piece in that production is China for China, which doesn't have as much pressure.

Sam Poser - Susquehanna Financial Group - Analyst

Because the sales are not there, so they don't need to make stuff. And what percent of your, let's say, first half product is either on the water or sitting in warehouses right now as far as you can see?

David Weinberg - Chief Operating Officer

Well, there's a couple of things that are going on. So we have taken a significant piece. I don't know that we'll talk about the first half because the first half also goes through June and we still have capacity there. And that, obviously, nothing from June is on the water to date, although they may have raw materials and things like that. As I said before, we are set pretty much for first quarter, with the production that's available, with what we took early, with what's on the water and even some things that we pushed our - some of our factories to make before Chinese New Year that they didn't have a chance to ship, that they will now be shipping as soon as they get in for the quarter.

I don't think there's a significant amount that's at risk for first quarter. April is not a big month for us, so we're waiting to see what happens. We certainly would need more production as we get all the way out to June, but it's kind of early to go through that whole scenario, again.

Sam Poser - Susquehanna Financial Group - Analyst

And then they've talked about the factories, at least, last I heard, they were open, and maybe opening next Monday. But I mean what are you hearing about when these Chinese factories right now are potentially going to reopen?

David Weinberg - Chief Operating Officer

Yes. We don't hear anything more than what's official for you. We have - most of them are planning to go back to work, Monday. We're not sure what the retention piece is or how long it will take them to get started. There are some regions that will open the following week. So it's a mix and match around the country. So we do anticipate that it will take them time to get started. Like I said, I don't know what that means right this minute until we see the retention of workers and what's available as they come out.

Sam Poser - Susquehanna Financial Group - Analyst

Okay. And then lastly, just back to the gross margin. Given the strength of your DTC business and both in-store and e-commerce despite the fact that it's fairly up. From a gross margin perspective, I mean, that is additive, especially with the number of stores you're planning on opening this year. I would think that, that is from a mix of where you're getting your sales, the bigger that gets, the better that is for gross margin.

David Weinberg - Chief Operating Officer

Well, that's true. But that's always as a percentage. So we have so many moving pieces. And when you concentrate on one, you tend to get lost in its number. FX still has more impact depending on what it is and how this plays out in China and how the foreign exchanges around the world move against the dollar as much as a direct-to-consumer. Europe has some. We have some pricing, so there are a number of pieces and a number of things you have to throw into the pot.

And on an average basis, China is higher than the United States. So the fact that we're giving up some - and the aggregate is there although depending on how expenses are. And we've tried to be very careful with that in the guidance, there could be impact certainly of short term, but not necessarily that flow through to bottom line depending on currencies, etc.

Sam Poser - Susquehanna Financial Group - Analyst

All right. Thank you very much continued success.

Operator

Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Kimberly Greenberger - Morgan Stanley - Analyst

Oh, great. Thank you so much. I just wanted to clarify, if I could, starting with Sam's question. Did you say that on the gross margin line, FX can, in some cases, fully offset the benefits of D2C on the gross margin? So FX has been a downward pressure point on gross margin, B2C has been a good new story on gross margin, but often times, one can offset the other?

John Vandemore - Chief Financial Office

Yes. I mean what you saw this quarter is there were kind of two simultaneous positive impacts. One was just general mix, which lifted gross margin and that comes from more DTC. And then, there was also improvement within DTC of the margin, but there was also an offsetting impact from FX. We continue to experience FX headwinds in the quarter, so they almost offset, not totally, and that's why you saw a little bit of accretion.

Like, to David's point, we certainly have seen situations in the past year where that FX impact has been even more severe and has washed away some of the benefits that you get from improved mix overall. Again, the long-term strategy, though, is to continue to advance in our direct-to-consumer and international businesses, both of which are accretive to our overall gross margin.

Kimberly Greenberger - Morgan Stanley - Analyst

Great. Okay. That clarification is super helpful. And then just looking out to 2020, based on current exchange rates, do you have a view of what you think the FX impact on gross margin will be, if any? And then I just wanted to ask about China. If - I'm not sure what the mix between e-commerce and brick-and-mortar revenue is in China, but if you have an estimate as to what portion of lost store sales, you think, could be replaced by enhanced e-commerce sales, I'd certainly be interested in hearing that.

John Vandemore - Chief Financial Office

On the gross margin question, relative to FX, we know what we know based on where we sit today. It looks like, at the moment, there may be some modest pressure from gross - on gross margin from FX in the first quarter. We think it will probably - and if this is already baked into the guidance, it probably dampens our growth by about 100 basis points in the quarter. So there'll be some flow-through of that in the gross margin. That being said, the nature of foreign exchange rates as they are fairly dynamic, so we'll have to wait till the end of the quarter to be certain on that.

Relative to China, I just - it'd be very hard for us to guess at this point how the situation unfolds. What I would tell you is about 1/3 of the revenue overall is e-commerce driven, that changes by quarter, though. There's obviously some rather significant selling events in June and then in the fourth quarter with Singles' Day and now 12.12. So what we're seeing right now is continued strength in e-commerce. But I don't know if that will endure. What we've attempted to do is assume that we have a fairly steady performance in e-commerce. And then obviously, the significant challenge comes through the owned retail stores and our franchise business, but this is a fast-evolving situation. So it's difficult to be fairly precise on that at this point.

Kimberly Greenberger - Morgan Stanley - Analyst

Understood. Thank you. That was helpful.

John Vandemore - Chief Financial Office

Sure.

Operator

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

Susan Anderson - B. Riley FBR - Analyst

Oh, good evening. Nice job on the quarter. I guess a couple of follow-up questions. When you look at the tariff situation, I think, you said that the pricing didn't necessarily flow through this quarter. So should we expect the gross margin pressure to be a little bit less in first quarter? And then also, as we kind of go into the back half or when those tariffs get rolled back, will you continue to keep the pricing higher?

David Weinberg - Chief Operating Officer

Well, so I think the actual cost impact is going to be a little bit higher in the next quarter simply because we're going to continue to roll through that fully tariff product. We don't get the benefit yet of rolling through and absorbing the product that was exempt or reduced - the reduced 4B or 4A rate. So we expect, at the moment, at least, that we'll continue to see pressure throughout the first quarter. The combination of reallocation of resources, our vendor pricing strategies and then the pricing we put in place should begin to offset that, but the timing of that is uncertain, and will have to play out over the first two quarters. It's really that, plus the potential drag from FX and how we plan the situation in China at the moment that gives us some caution on the gross margin line. And that's something we're going to watch carefully, obviously, in the quarter.

Susan Anderson - B. Riley FBR - Analyst

Got it. Okay, great. And then, I guess, just a follow-up on the kids business, nice to see that return to growth. I think you talked about maybe some better marketing but, I guess, also, is there any - are there new products that, I guess, is driving the growth? Or is it more cycling the easy compares? Or how should we think about that?

David Weinberg - Chief Operating Officer

It's always new product. So we're never really stagnant with that. I think what you see is what we've talked about over the last few quarters, when John has mentioned that we were up against tougher comps and it was some product in there that not necessarily comes along with our line features, and now we're back to a more normal setting and - in the environment in the U.S., and now we're starting to grow again within what's our core business group rather than looking for these outside one-time wonders.

Susan Anderson - B. Riley FBR - Analyst

Great. Okay. And then lastly, the pressure in Hong Kong. I guess, how should we think about that for this year? Are you starting to see that ease at all? Or should we expect continued pressure there as we go throughout this year?

David Weinberg - Chief Operating Officer

Well, a year is long time, so we don't know that. But there's, obviously, continued pressure because of tourism and some of those watched being closed, but it's not a significantly large market for us. And it's certainly not as impacted as China just yet. So the effect on an overall basis, while probably significant for Hong Kong, it's not significant to the overall.

Susan Anderson - B. Riley FBR - Analyst

Got it. Okay, great. That's helpful. Thanks so much. Good luck next quarter.

Operator

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

Jim Duffy - Stifel - Analyst

Thanks. Good afternoon. For a moment, I want to focus on green-pasture opportunities in China, just setting the coronavirus aside, if we can. Can you guys comment on the reception that you're seeing to the brand as you expanded Tier three plus cities. As you learn more, are there any differences in these cities that makes growth here more challenging?

John Vandemore - Chief Financial Office

Well, I mean, again, we mentioned both, David and I, that our long-term view on China hasn't changed. We view this as a temporary situation, and that is informed by both the success that we saw coming out of Q4. Q4 in China was a very solid growth quarter. The business did well on Single's Day, did well on 12.12. So we're still seeing the brand resonate and grow with consumers. Part of our strategy over the next few years will certainly be incorporating more Tier three, four and five cities into the mix. The reception we've seen so far has been extremely strong. I think this is probably, at worse, the temporary setback and we'll continue to grow the brand that way.

It's a little bit difficult to say today how the timing of some of those entries is going to play out. I would also point out that, obviously, one of the more significant drivers in the country has been e-commerce, which isn't as bounded by the location of the consumer. That's obviously the big benefit of the solution, and that continues to be a very resonant platform for us with Chinese consumers, who are, if not the world's leading, most digitally savvy, I don't know who is, because they've really embraced both mobile commerce and online commerce.

Jim Duffy - Stifel - Analyst

That's great. That's a good segue to my next question. I wanted to ask where you guys feel you are in terms of leveraging Tmall as it relates to growth in China and, specifically, growth in these new regions? And I'm curious, does the new distribution center simplify logistics to support e-commerce growth?

John Vandemore - Chief Financial Office

So Tmall is a fantastic partner for SKECHERS. It has been for a very long time. If you look at our Tmall rankings by category, they are very strong, especially for an international brand. We value those highly, and we continue to work very closely with Tmall to advance the brand, both on the important selling days of the year like Singles' Day, but also around those [Indecipherable] the year. In terms of the distribution center, I think that's probably more a benefit from a SKECHERS' perspective for both operational efficiency and, quite frankly, ensuring that long term, we have the availability and the reliance on systems that we know across the globe work very, very well for us. It doesn't really change how we interface with key platforms because the interface today is largely through third parties. So I think net-net, it's probably long term, a benefit to SKECHERS. I think if anything, because of the reliability factor, it will enhance our ability to interface with Tmall and others. But it's not really going to be a major change in that relationship from kind of a strategic standpoint.

Jim Duffy - Stifel - Analyst

Very good. Thank you.

John Vandemore - Chief Financial Office

Thank you.

Operator

We have time for one last question. Our last question comes from the line of Tom Nikic with Wells Fargo. Please proceed with your question.

Tom Nikic - Wells Fargo - Analyst

Hey, john. Hey, David. Thanks for squeezing me in here. John, David, just wanted to ask, it seems like based on your guidance, you are really accelerating the pace of U.S. store openings this year. I think you said 75 to 85 stores in the U.S., which is a pretty significant increase from what you've done in recent years. I realize you're comping pretty strongly domestically, but I'm just kind of wondering what drove that decision to sort of step on the gas pedal as far as physical store opening go? And if there's anything, I don't know, from an expense standpoint or deleverage standpoint we should think about in terms of the accelerated store opening?

John Vandemore - Chief Financial Office

I mean, the first and foremost, we are cautious about how and where we open stores. We don't keep unprofitable stores, by and large. So we're opening profitable stores. The stores we're opening right now are our big-box format. So they're a family solution that offers the whole range of the product. We are seeing very advantageous rates in some very attractive locations, where we believe there's an opportunity to grow the business. We're obviously cautious about cannibalizing any presence in market. But even with 800 stores, as a company, we feel there's a lot of opportunity across the globe to continue to grow out our store count. We also think, as David mentioned earlier, and I think it's important - it's a compliment to the online capability, right, our ability to deliver an omnichannel solution needs a physical presence as well as an online presence and a mobile presence.

So it's really a complementary delivery system and presence for consumers, and whether it's online predominantly and in the supplement on the retail footprint or vice versa, so as part of the strategy, most importantly, to get closer to consumers. And again, I just probably would just state the obvious. Obviously, we don't feel like we're fully penetrated in the United States. We feel like there's significant room to run. And again, with the advantageous rates, we're seeing, lease rates, these will be profitable locations.

David Weinberg - Chief Operating Officer

It's good to keep in mind also that we're not chasing what seems to be a deteriorating marketplace here in the United States. We're going to smaller cities. We're not conflicted with other of our own stores. Some of them are the first ones in the city or the first ones in that neighborhood, and it will, like John says, go together with our online presence to be able to see them. And because there are larger multi-stores that are outside of malls and current economics work very well. And are not required to - you don't require the same sort of turnover as you do in some of the malls we've been in. So when you put the economics together with the isolation in some of these territories, it's worked very, very well for us.

Tom Nikic - Wells Fargo - Analyst

Thanks, guys.

Operator

I'd like to hand the call back to management for closing remarks.

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SKECHERS USA INC

Q4 2019

Earnings Transcript

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