Q3 2019 Earnings Call
Greetings welcome to the Skechers third quarter 2019 earnings conference call.
At this time all participants are in listen only mode. A brief question and answer session will follow the formal presentation, if any watch or acquire operator assistance.
During the conference. Please press Star Zero on your telephone Keypad. As reminder, this conference is being recorded I would now like to turn the conference over to Skechers do you may begin.
Thank you everyone for joining us on Skechers conference call today.
Now I'll 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 that the private Securities Litigation Reform Act to 1990 fives 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 could be no assurance that the actual future results performance or achievements expressed or implied by such forward looking statements will occur.
Users a forward looking statements were encouraged to review the company's filings with the U.S. Securities 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 FCC as required by federal Securities laws for a description of all other signal.
Good risk doctors that may affect the company's business results of operations and financial conditions.
With that I'd like to turn the call over to Skechers, Chief Operating Officer, David Weinberg, <unk>, Chief Financial Officer, John Benda more David.
Good afternoon, and thank you for joining us today.
The momentum we experienced with the first half of 2019 continued in the third quarter as both our domestic and international businesses flourished.
Resulting in a new quarterly sales record up 1.35 billion.
This was an increase of 177.6 million was 15.1% over last year.
On a constant currency basis, the increase was 202.5 million or 17.2%.
Our international business continued to drive growth with an increase of 21.9% representing a record 58.8% of our sales in the quarter.
Our domestic business also added to our strong growth, including a 5% increase in our domestic wholesale business.
We believe that international will continue to our all growth, especially as we move into leading positions in many markets open more retail stores at further expand our international footprint.
In the quarter, we grew in all regions, achieving the strongest increases in Germany, the United Kingdom, and Spain, India, you AG, and Turkey, as well as China, Russia and Japan.
[noise] Skechers direct to consumer business continues to grow acting as a showcase where consumers can experience our brand and shop, our complete product collection at quarter end, we had 30 307 skechers stores around the world, including 779 company owned stores.
Our direct to consumer business continue achieve strong sales growth with quarterly increases a 13.3%, which included 7.7% comparable store sales worldwide.
We believe our global success is the result of <unk> innovative relevant and comfortable products supported by our 360 degree marketing efforts that create awareness and generate demand.
Additionally, our best product offerings from award, winning running golf and walk footwear to occupational work boot and slippers, it's been shoes, I styles with relaxed white and arch fit for men and women has allowed us to develop a diverse distribution strategy games shelf space as well it entered new door.
Yes, such as golf specialty and leading fashion and independent Chico retailers.
Additional product highlights in the quarter included the release of Skechers premium Heritage collection in the United States in Europe .
The continuation of our collaboration like Asia is popular line French property and limited edition footwear partnerships with several premium retailers, including at most in Japan and opening ceremony in the United States.
Our on trend styles appeared on numerous fashion week runways in the quarter from New York to London in Milan with global trends site, I bait and high east covering skechers product launches that Influencers and key opinion leaders, appearing in social media posted in nearly every country. We're all product is available.
For more for foreigners Division. The go run racial street took the top honor in one of his world as it was awarded gear of the year end of September October issue, marking the fifth went this year for a collection of hyper first shoes.
To support our diverse range of key initiatives, we have a team of global and local athletes celebrities and influencers that appear in our marketing campaigns.
In the third quarter, we saw in Los Angeles Dodgers, All Star pitcher three Times Saga Award winner latent Kershaw to our team.
And we'll be playing and Skechers performance cleat designed specifically for him and his collaborating on several training styles for 2020.
We're looking forward to the future marketing campaigns with this all star and certain hall of Famer.
[noise] Skechers continued growth included <unk>, including record sales for the third quarter is a testament to the strength and demand for a diverse product offerings around the world.
Based on early reads from my direct to consumer business at feedback from our key accounts and numerous markets, we see our momentum continuing in the fourth quarter.
Now turning to our domestic business in detail.
Our domestic sales increased 6.7%. This was driven by a return to growth in our domestic wholesale business, a 5% well we saw a pairs shipped increased by 2% with an average price increase of 3.1%.
Further propelling growth domestically, our direct to consumer business increased 8.7% with comparable same store sales increasing by 6.8% for the quarter.
We also saw month over month acceleration in the direct to consumer business with September achieving a high single digits comp.
At quarter end, we had 480, a company owned Skechers retail stores in the United States.
In this third quarter, we opened 12 stores across eight states I closed one location in Seattle.
We also remodeled two stores and expand the two locations to date in the fourth quarter three company owned stores have opened in the United States with another five plan before the end of year.
In our domestic business. The biggest increases came from our men's casual street and sports volumes women's Gowalk and sport lines and sketches work.
We're pleased that our boss footwear is also continuing to show growth in the United States.
Due to its success, we have been able to help more than 750000 pets since the inception of the program several years ago.
To support our domestic business, we ran numerous marketing campaigns, including adds in fashion magazines for our chunky shoes digital campaigns and numerous television commercials for our kids footwear sport Heritage and go walk footwear, and our Mezz lines, sorry football legends, Tony Romo and how we want.
Based on October sales in our direct to consumer business as well as feedback from our wholesale partners. We believe our domestic business will continue to show positive growth in the fourth quarter.
Now looking in detail in our international business, which represented 58.8% of our total sales in the quarter.
Sales increased 21.9% or 25.7% on a constant currency basis and reflects growth in our subsidiary joint venture and distributor businesses.
The biggest drivers, where China, which grew 21% on a constant currency basis, and Mexico, which transition to a joint venture earlier this year, followed by the United Kingdom and Japan.
Additional growth drivers were India, Germany, and Spain within our subsidiaries and our distributors, Russia, Turkey, and the way he who handles the majority of our business in the middle East.
Specifically the sales growth was the result of a 21.7% increase in our wholesale business and a 22.3% increase in our direct to consumer business with a 9.9% increase in comparable store sales.
Quarter, when there were 2819 international retail stores, an increase of 124 in the third quarter.
Those stores 2528, our owned and operated by International distribution partners Joint Ventures, and a network of franchisees.
In the third quarter two company owned international stores open one of the UK and one in India and two company owned stores closed to date in the fourth quarter four company owned stores have opened in Europe with another five to 10 planned before the end of the year, including a flagship store and roll.
In the third quarter 171 joint venture a third party opened stores opened across 38 countries, including our first locations in hand, Dora Donna and sarno.
New store openings, including 87 in China 14 in India, five in both South Korea, and Australia and for Beach in Taiwan, Spain, Malaysia, and Indonesia, 47 stores closed in the third quarter, including 17 in China.
Six third party own Skechers stores have opened so far in the fourth quarter with another 130 to 150 expected for the remainder of the year.
To support our global business television outdoor digital and print campaigns drove consumers to stores, where skechers are available.
This included the underground in the UK in France perimeter boards, and sporting events in Canada, and Mexico music and dance festivals in the Netherlands in China and in store events in support of the Kids day across South America.
Gross product innovation and marketing leadership also resulted in sketches being awarded this brand of the year from shoe Korea in Germany.
This is an achievement, we are particularly proud of as Germany was one of our first substantial subsidiaries and we view the country is one of the leading European markets for Skechers.
We believe international remains the primary growth driver for our business nearly every international distribution center that we operate had double digit increases in pairs shipped in the quarter, which we believe will continue into the fourth quarter.
Additionally, we are benefiting from the conversion of India to a subsidiary in the first quarter and Mexico to a joint venture in the second quarter, both of which we feel will result in significant additional growth over the coming years.
With strength across every region. We believe the momentum we are seeing in our business worldwide will continue in the fourth quarter and into 2020.
Now I'll turn the call over to John to review, our financials and discuss our outlook. Thank you David.
Our third quarter sales totaled 1.35 billion, an increase of 177.6 million or 15.1%.
On a constant currency basis sales increased 202.5 million or 17.2%.
This quarter represents a new quarterly record for the company and illustrates the power of our strategy and our experienced executional capabilities.
Skechers grew in all segments and in every region. This despite unforeseen headwinds from foreign exchange rates and the announcement and introduction of incremental domestic terrorists.
International wholesale sales increased 21.7%, including a 27% increase from our wholly owned subsidiaries a 24.2% increase in our joint ventures, and a 4.4% increase in our distributor business.
Direct to consumer sales increased 13.3% the result of an 8.7% increase domestically and a 22.3% increase internationally.
Domestic direct to consumer sales growth was driven by 6.8% increase in comparable store sales and the net addition up 23 new stores.
International direct to consumer sales grew 22.3% due to a 9.9% increase in comparable store sales and the addition of 14 new stores.
Our domestic wholesale sales return to growth in the quarter rising, 5% or 14.2 million, primarily due to increases in both our mens and womens divisions, we continue to see encouraging signs for skechers business, among our domestic wholesale customers and.
Currently expect fourth quarter sales to grow year over year.
Gross profit was 653.1 million up 89.2 million compared to the prior year.
Gross margin increased by 30 basis points to 48.2%, primarily due to margin expansion in our international businesses.
Our domestic gross our domestic wholesale gross margins were lower year over year due to increases in the average cost per unit, which were partly attributable to increased tariffs effective during the quarter.
Total operating expenses that as a percentage of sale were flat to prior year at 37.8%, but increased in dollar terms by 67.1 million or 15.1% to 511.9 million in the quarter.
Sales expenses increased by 7.4 million to 97.5 million due to higher advertising expenses in international markets.
General and administrative expenses increased by 59.7 million to 414.4 million.
Reflecting additional spending a 24.4 million to support the growth of our international businesses, including in China, and the addition of operations in Mexico and $18.5 million associated with 37, New company owned stores, including 14 that opened in the quarter.
Earnings from operations increased 19% to 147.4 million versus the prior year and our operating margin improved 40 basis points to 10.9% from 10.5% in the prior year.
Net income increased 13.6% to 103.1 million or 67 cents per diluted share on 154 million diluted shares outstanding compared to net income of 90.7 million or 58 cents per diluted share on 156.3 million diluted shares outstanding.
In the prior year period.
On a constant currency basis earnings per diluted share outstanding was 71 cents.
Our effective income tax rate for the quarter increased from 13.7% in the prior year to 15.8%, primarily reflecting the impact of the tax cuts and jobs Act enacted in 2017.
We now expect our effective tax rate for the full year to be between 17 and 19%.
And now turning to our balance sheet at September Thirtyth 2019, we had over 1 billion in cash cash equivalents and investments, which was a decrease of 44.4 million or 4.2% from December 30, Onest 2018, but an increase of 40.5 million or 4.1%.
From September Thirtyth 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 and investments represented approximately $6.66 per diluted share outstanding at September Thirtyth 2019.
Trade accounts receivable at quarter end were 662.4 million an increase of 158.4 million from September Thirtyth 2018, driven by higher sales, especially in our international wholesale business.
Total inventory was 890.4 million, an increase of 3.1% or 27.1 million from December 31, 2018, and an increase of 17.9% or 135.3 million from September Thirtyth 2018, the increase was primarily in our international Mark.
Thats, where we believe our inventory levels leave us well position to support our growth expectations.
Total debt, including both current and long term portions was 122.7 million compared to 87 million at September Thirtyth 2018, the increase reflects borrowings associated with the construction of our first distribution center in China.
Working capital decreased 95.5 million to approximately 1.52 billion versus 1.62 billion at September Thirtyth 2018.
Capital expenditures for the third quarter were approximately 48.9 million of which 16.9 million was related to the construction of our distribution center in China 16.3 million related to retail stores worldwide and 8.6 million related to our worldwide distribution capabilities for.
The remainder of 2019, we expect our total capital expenditures to be approximately 85 to 90 million.
This includes the construction of our new distribution center in China enhancements to our existing distribution center in Europe . The expansion of our corporate headquarters in California, and an additional 15 to 20 company own direct to consumer stores and eight to 10 store remodels expansions or relocations.
Now turning to guidance. We currently expect fourth quarter sales to be in the range of 1.2 to 5 billion to 1.25 billion and net earnings per diluted share will be in the range of 35 to 40 cents.
This guidance incorporates the view that all three of our segments will continue to grow in the fourth quarter at rates similar to the third quarter and now I'll turn the call over to David for closing remarks.
Thank you John .
The third quarter represented a new quarterly sales record driven by growth in our domestic and international wholesale and direct to consumer businesses. We believe this is a significant achievement given the brick and mortar retail environment as well as economic and political tensions around the globe.
Even with these challenges we believe the momentum we experienced in the third quarter will continue and our brand will flourish, both domestically and internationally.
Along with further developing our infrastructure and logistic capabilities at home and abroad and growing our store base with another 145 to 165 Skechers stores planned around the world before the end of the year, we're designing more resin in product and propelling it with marketing to drive sales.
Our fourth quarter sales have started off strong our backlogs are growing and based on our order book. We believe this positive trend will continue through the fourth quarter and beyond and with that I would now like to turn the call over to the operator to begin a question and answer portion of the conference call.
Thank you if he would like to ask a question. Please press star one on your telephone keypad.
Affirmation until indicate your line is in the question Q you May press star to if he would like to remove your question from the Q4 participants using speaker equipment and made the necessary to pick up your handset before pressing the star Keith. Please ask one question and one follow up question than retail for additional questions.
Our first question is from Jay So what you'll be S. investment Bank. Please proceed.
Thanks, so much so I just want to follow up on the sales growth if you could sort of detail, maybe a little bit more color.
What contribution to the today to the growth came from ecommerce it sort of initiatives that you've had there.
China, specifically could you talk about the growth rate in China, and then maybe if you're talking about what was really the driver to get to that 5% domestic wholesale growth in terms of like what channels online pure plays off price do you ever give us out there that be terrific. Thank you.
Yes, absolutely happy to add some color.
When we look at the sales from a direct to consumer standpoint, we're agnostic as to whether or not it arrives through one of our retail stores or online I think the really encouraging thing coming out of this quarter for US is that we saw strength in both obviously the E com rate is meaningfully higher than the brick and mortar. It's also starting off from a smaller base but.
It was it was a significant growth driver in those those rather robust comparable store sales numbers to begin with.
In the US it was in the in the seventies internationally it was above 50%.
China I think as we mentioned on the call tied on a constant currency basis grew over 20%.
Really a very good performance given the headwinds if you recall when we when we were last with you all that the won was at about 6869, and we ended the quarter much closer to an average of seven one. So there were some significant foreign currency headwinds, even if you strip that out though you're at.
Close to 17% quarter on quarter growth rate in China.
The domestic number I hate to say, but we have to take the opportunity we've been talking about a return to growth in domestic wholesale for about six or seven months now it's what we saw in the backlogs. It's what we saw in the demand for the product. This is just the fruition of that fore sight. We provided after Q1 in Q2.
Again, we're encouraged by what we see we definitely expect growth year over year in the fourth quarter as well.
Got it and I can follow up on gross margin. It sounds like mix was a significant impact parents about how to small impact of FX, because it possibly could sort of quantify.
Pact of each of those drivers and if there was a fourth what that was quite a bit.
Yes, I don't want to get an abundant detail other than to say I mean, the broader impacts that we felt that were positive came out of the international markets, where there was some price and there were some mix benefits, obviously detriment it a bit by FX in some of those markets domestically. It was early impacts from the new tariffs as well.
A few other cost elements that came through in the quarter.
Yes, this sort of broadly irrespective of the market those are the probably the pressures one way or the other.
Okay. Thanks, so much.
Thanks Jay.
Our next question is from Laura vascular skew.
Sorry Group. Please proceed with your question Oh Good afternoon. Thanks for taking my question.
John I think into your last prepared remarks, you said that we should expect similar growth across the different segments for the fourth quarter does that imply we should think more like mid single digit rate for domestic wholesale and then if that's the case was there any shift between Fourq you into Threeq, you or anything to consider on that front.
Yeah, I mean, I think we're trying to give some so good guide post for you to use similar rates to what we saw that could be plus or minus in any given segment. Some of that's going to be timing there isn't anything from a timing standpoint on the domestic front, we're planning on at the moment, but as we've mentioned before that tends to be.
The late breaking we will have the inventory for it in particular, because we have the tariffs that could be forthcoming in December and we're preparing for that as well as what we already have on hand, but we're not we're not currently planning anything on that from.
From a timing standpoint, hitting domestic wholesale.
Okay. Thank you and then to follow up on Jays question about gross margins, maybe near term fourth quarter should we think gross margins are up I mean, it was pleasantly surprising to see comes up.
Just thoughts on fourth quarter, and then how do we think without getting into guidance for next year. How do we think about this was 44 b.
As we think about next year.
Any mitigating any mitigation factors, we should consider.
Yes, just just on the gross margins for fourth quarter, where we would direct you at the moment is probably something to flat, maybe even down slightly we're still absorbing the impact of the first round a for a tariffs we have put in place mitigation efforts those are ongoing.
We've made some decisions to absorb certain elements of the increase in the short term to the benefit of our customers.
So I right now I'd point, you at flat potentially down slightly in by that I mean, maybe 10 to 20 bips.
We do think the overall mix benefit of continuing to transition to more sales internationally and more direct to consumers helped offset that but there is obviously a quantum differential that we'll have to take into account. Once we have a better handle on exactly how holiday sales turnout.
Okay. Thank you and then last question is on generic.
On the international Gionee, the 24 million dollar increase.
Hey, can you parse out between Mexico, China, and how should we think about.
For the fourth quarter.
And then it looks like it implies a domestic gionee was.
Meaningfully after kind of muted growth for the first two quarters any thought on on on how we should think about that going forward.
For the fourth quarter.
Yeah, I don't want to be overly precise on on picking the gionee numbers further other than I'll tell you that Mexico in China combined were probably more than 60% of that international increase.
The remainder supports a lot of the growth you're seeing elsewhere in the business.
The other major driver that I mentioned in certainly this impacts domestic is the domestic direct consumer business, but also that the international direct consumer business.
You know domestic wholesale they were it was up but it's largely the business elements that support the broader the broader business or supports distribution, which keep in mind, we keep that did those distribution and warehousing costs NRG in a profile were others are putting that in the cost of goods sold to just keep in mind there is some.
All of them relationships associated with the pairs, both both sold and shift that that are impacting DNA there.
And then.
Sorry go ahead.
Yes, I was just I was going to say I'll, just I'll just point out again, though that you saw operating margin leverage this quarter, which certainly is what what we're looking at most prominently when we're looking at the business.
And we're certainly proud that we think that again continues to reflect the benefit of the investments we've made as well as the capability in the opportunity in the business.
Great. Thank you very much for all the color.
Our next question is from Omar Saad with Evercore ISI. Please proceed.
Hi, Thanks for taking my question, one thing that jumped out.
Is the kind of significant increase in the operating consistency the last couple of quarters, especially in when we think about margin sales rebound combined coincide with John coming on the board.
Can you talk about how.
Management of the business has evolved and you know how you are being able to drive some of them are predictable consistent performance that we think the market really appreciate it. Thanks.
Well.
Everybody contributes to that so I think I'll take a little piece of that as well I think John certainly has had significant input into it and we've had.
Taken up I think what you see here is what we had talked about in the past coming to fruition as well with.
Significant piece of the startups behind US and then just absorbing Mexico, and and India, which had been running into path, we have no startups and no unquestionable.
Amounts that we have to push into the marketplace to see what it is we have to do to drive the business and how much risk we have to take and what it is we might have taken over from a prior distributor.
Or a joint venture so I think what you're seeing is more consistency around the world as the world tends to grow together and there's not an influx of what is.
Any new marketplaces.
So what you're seeing is that maturity of the business growing in those places mall all places continue to leverage none of them really de leverage now even if they're not up to what we believe that full potential is they continue to perform better on a relative basis than they did to the year before so far.
Few complications, which are obviously based politically like something that would happen in Hong Kong or something that is going on in Chile, right now, where they had turmoil or things close down we have very.
Much more mature business that continues to grow and.
While we do push it sometimes than we do have to invest somewhat more as as we hit critical mass in more predictable as they go through.
The growth process.
Is there maybe <unk> an accelerated digital investment cycle ahead that we should start thinking about or do you feel like you've got it kind of got that <unk> Rio that room in the headroom to make the investments that you need and and that kind of how these more consistent predictable trends that we've been saying well we've already started to make some so you.
I would assume well we assume that as it continues to grow just like new ventures. It will now leverage it's starting to leverage for us are ready in the United States, where best to carried out worldwide. It's growing in all our marketplaces. We will continue invest in it. It's the biggest investment yet to come is we're going to upgrade some of our distribution centers that that's already begun.
And that we've been talking about in the past to be able to carry increased capacity on.
One at a time, so I think that we'll continue to leverage that's just like a newer business. That's now starting to mature that will now leverage upon itself rather than require significant investments from scratch.
Got it thanks without guys good luck.
Thanks.
Our next question is from Chris that's yet with Wedbush Securities. Please proceed.
Good afternoon, guys. Thanks for taking my questions I.
I guess first.
John for you I should go back to U.S. wholesale previously you've talked about flat.
The up slightly for the year on U.S. wholesale to kind of kept their with 5% in Q3 implies double digit growth in Q4, just wonder if you could.
Maybe address that observation relative to prior comments you made about that and then secondarily. If you can think about going forward on your what profile.
For the growth rate, we should think about kind of given the trajectory and ramp up throughout this year, just any thoughts as we think about as we move forward to 2020, that's a mid single digit growth segment. We are we back to that level again any color about that'd be helpful.
Yes, I mean, so we've spoken about attempting to get flat thats our goal that's still within sight.
Founded by our guidance. So it's it's close in there depending on.
Few shipments here or there certainly not something we're taking our eyes off of but again domestic is probably one of the markets, where you can see timing impact us, but that's that's still our goal we still I guess that expect a return to growth continue in the fourth quarter, we see that in the backlogs, we see that in the order flows the reality is.
We're early in the holiday season, so thats going to be a factor as far as extrapolating that much further into 2020 I can tell you that what we see right now remains very encouraging still early in terms of full year order books to build up but so far what we see the are very encouraging signs I think theres also.
So the impact of the tariffs that we have to take into consideration, which is an unknown.
So far again that has not materially impacted our bookings are booking volume in our booking pace, but they're still the potential out there that the retailers have to react to that because it hasnt hasn't really flown through the supply chain and every capacity and in some instances where choosing to absorb some of that.
As an aid to those retailers to help them continue to maintain the volume we've seen them take through on the on the Skechers brand, Hey, Christopher I'll be a little more upbeat as usual on some of that stuff but.
I would pass along even though we don't talk about it that often that.
Our incoming order rate for March domestic and subsidiary base and it was fairly evenly distributed was the best we've ever had.
At Skechers and the year over year growth is is dramatic so as we sit here today with what we know we know that we barring any shifts from December to January or vice versa, and things like that we will be up in the fourth quarter will we will be up in the first quarter, we have first quarter book to a point.
Well, we anticipate at least mid to high single digit growth rate now to the.
Capacity of moving from January to December that might be we may have a slightly bigger fourth quarter slightly small first quarter it'd be hard to believe that we wouldn't grow.
Mid singles and above in both quarters as we sit here, even if it slipped so the backlog and the orders that Weve received have comment on a dramatic pace and indicate that that positive growth happens now as John said, we don't have.
As significant a sight line into the back half of the year, but the reception we've gotten from the first launches of our back to school line for 2020.
Doesn't give us doesn't give me anyway any reason to change any of those indications I think that that.
Barring a major economic or macro shifts somewhere.
Would slow down from that point.
Okay. Thank you David for the peloton I've I've never known you have to be less than optimistic so I appreciate that.
But always within reason.
Correct.
Just on the direct consumer side, you've seen a nice acceleration in the comp globally.
Just any thoughts as we think about Q4, you spoke on an easy comparison and even as you cycle into the first half of next year, you still have some easy comparisons on a direct consumer side, given some initiatives you're doing on E. Commerce loyalty is a fair to think that they youve growth rate for sustainable if not can accelerate.
This level.
Well, what we think is anything is possible what we know for factors in the first three weeks of October we had an acceleration on a comp store basis across the DTC grew too.
In October from September and rate of growth over prior year. So that's always a positive side and what is not obviously, the most telling month for the quarter and usually one of the smallest led by going into.
The last quarter of the year and having such significant comps in the first three weeks is certainly a positive way to sign so I guess that would lead us in that direction.
Okay final thing for me it just on the European distribution Center. When one can we anticipate getting some efficiencies flowing through the piano the automation being completed just any thoughts about timing on all about.
Well the most obvious spot as Q1, we're in testing now so barring any changes on for seeing we hope to be up and running and get some.
Some of that flow through in the first quarter.
Okay.
Okay. Thank you very much and not all the best.
Thanks, Chris.
Our next question is from Jim Duffy Stifel. Please proceed.
Tim Please yeah, we have I mean it.
Oh, Hi, this is Peter Mcgoldrick on for Jim Thanks for taking my question.
I was curious within the international business, what type of lift you saw from the Mexico.
Within wholesale and retail is that track into your plans as early as it is and does it change your thinking and ownership structure for any of the other international markets.
Mexico continues to perform as expected slightly better to be honest with you. We still have high hopes for the market. It's incremental this year to what was a licensing business. So really if you look at it on a on a year over year basis, its touched stuff to draw any conclusions but.
It contributed grew sequentially from last quarter.
But I would just point out that even without the addition of Mexico you saw our international wholesale business grow quite quite nicely in a high teens level. So I think the remarkable thing about about this quarter and real and really the last is how pervasive the growth is across all of our regions across all of our business.
This is.
[noise]. Thank you and then could you speak a little bit about inventory positioning heading into holiday are there any regions or product categories that you're seeing excess in are there any specific product bets that you've made into holiday that you're looking for consumers to respond to specifically.
Yes, I mean inventory is well positioned given given where the growth as I mentioned that most of it is international in terms of beds. We don't we don't take a lot of a beds. We are seeing tremendous response to a lot of new product.
We're very excited about that product both in terms of what we think the sell through will be but what we've seen in the backlog. So it's very encouraging sign.
Yes, I would tell you brought from an inventory standpoint, we feel like we've got the right inventory in the right place to grow the only thing I will point out, though is that something like a Mexico again, that's incremental inventory that we wouldn't have consolidated last year. So there's a piece of that as well as just which just taking onboard the inventory of of what is now a joint venture which.
Mostly a license relationship.
In the overall total yes, we should also point out.
That our direct to consumer business is growing and that historically from for everybody has a slow returned that our wholesale business. So as that shift will be carrying a little more inventory because the turns or.
Not quite the same as wholesale so you've got to keep that in mind as direct to consumer grows as a bigger piece.
That makes sense. Thank you.
Thanks.
Our next question is from Tom Nick gets with with Wells Fargo. Please proceed.
Hi, John maybe David Thanks for taking my question.
I just wanted to ask about Paris.
You mentioned that it you know you saw an impact in New York wholesale business.
But no mention of the Usdseven USBC businesses, our reason why maybe a whatever affected I'll sell but not PTC and can you just help us kind of understand.
Well, maybe magnitude of of the impact in Q3, and how much of it is embedded in the Q4 guidance that you gave today.
Yes, I mean, the impact of predominantly held in domestic wholesale because that's the inventory that came in that when they went right back out it'll take a while for the newly terra product to reach our our retail stores that will begin in the fourth quarter.
I'll also point out the impact wasn't significant in the sense of the overall cost the product or quite frankly of what we expect the tariffs to yield on on a long term basis, but it was also missed timed and that we havent had to add the ability to implement all of our mediation strategies those are going into effect. They will go into effect in the fourth quarter.
So we are being a little bit conservative vis-a-vis, our domestic wholesale margins in our overall margin guidance to account for the possibility of the tariffs and and all that timing not working out perfectly. However, I would tell you we have been very aggressive about all three of the mediation strategies, we've mentioned before.
Looking at the potential to change distribution points into the us looking at vendor concessions and looking at price. All those efforts are underway and we think long term probably after the first quarter of 2020, perhaps that this is really becomes a mitigated effect will obviously be working to make that happen sooner.
Sure, but that's that's the efforts we put into place today.
Okay, and just one more for me on the DNA expenses.
Yes, I think you've had sort of.
A wide range of growth rates. This year Q1 was up 1% Q2 was up 6% Q3 was up 17%.
Just a pretty sort of dramatic change in the growth rate.
Yes.
That.
DNA lying come in higher than you expected deal what drove that and.
Hey, I know that you'll have quarterly volatility in the DNA, but ill.
There's some sort of steady state.
Radar DNA growth you can give us a guide post for.
Greatly appreciated.
Yes, I thought you are going to complement does for precisely matching the DNA the operating expense growth rate to the topline growth rate, which is what we've said is the upper bound.
And that really is the upper bound to what we're managing against that's going to vary from quarter to quarter. This instance were a little bit toward the top end to that.
But obviously, we're looking to be at that level or or lower from a growth standpoint, I will point out that one of the components and operating expenses. This quarter that they contributed to that was a decision on our part depressed marketing press media.
We see the product resonating across the globe. This is an opportunity for us to continue to invest in that and to get back to putting more dollars to work and that's something we did this quarter that we haven't done in the prior two quarters. So quite frankly, that's more of an opportunistic opportunistic press on the media spend to continue to see the brand.
Can resonate against this this really great product lineup.
Going forward again, we'll keep the parameters in place that we had talked about previously which is trying to keep it at a topline growth rate or better.
So sometimes it varies on quarter on quarter. I think you can expect that will press advertising again this quarter because we can we have a hot product. We've got good lineup and we want to make sure that gets into account consumers awareness in the 360 degrees approach that David mentioned.
Alright sounds good that's one trial, it and nice job getting the Kashi and acreage exactly in line with Phil.
Hi, Thanks I appreciate it.
Our next question is from Sam Poser with Susquehanna Financial Group. Please proceed.
Hi, gentlemen, thanks for taking my question.
Can we just follow up on the inventory can you give give us some idea of what that incremental inventory was the support Mexico sort of can you apples to apples the inventory for us.
Because I mean, you're bringing in a time and a lot of it I thought some of it my is any of that inventory right now that came in early.
Pre emptive for tariffs in the U.S. number one.
Yes, there's absolutely a little bit that was preemptive it wasn't an enormous component of the overall inventory mix simply because we didnt. We didn't have enough time to react. If you. If you recall when we last spoke to you. These terrorists didnt exist and then within a couple of weeks. They were tweeted and subsequently enacted so there's a little bit of growth in the.
Inventory associated with the tariff and action.
I would say probably a third of the growth year on year and inventory is attributable to the introduction of Mexico inventory into the accounting. So it's a it's a contributor to contributor contributor for certain.
Okay, and then and then when you think about you mentioned I think David you mentioned that the you know given the growth of the DTC that the your turn would slow down I guess the question I have is is what is the.
What is that turn as you think forward and the way the mix is changing that.
That that you guys are looking at sort of Oh.
Go forward turns so we can sort of drugs the inventory because the year over year isn't that sort of the best way deal right now because of all the noise.
Well as we said before we don't really speculate significantly on the wholesale inventory. So that turned that that turns relatively quickly that turns for us in probably 45 to 60 days I think you would anticipate on a retail business because the flows.
As they come in and replenishment. We probably have include when you include the and trends, it's probably a 90 day or 90 day, plus 90 to 100 day.
Turn on the inventory.
Actually with direct to consumer so it's not sick as significant right. This minute, but if you take that into account for China as well as ourselves.
And Europe , there are some slight increases that just have to do with holding more inventory for our retail component.
So they're all little pieces to the mix and that no one of that sticks out significantly and does any of that inventory.
I mean.
How much of that what percentage I, let me ask it this way what percentage of the overall inventory was in your DTC. This year versus last year, maybe you could break out the DTC inventory growth versus the other something just to help us because I mean, when you see.
Four weeks of supply go bananas your year over year inventories.
More than your.
A lot more than or sales are and you're not looking for 60% growth going forward. So [laughter] could you just sort of maybe give us more.
More specifics how that'll put gets put together please.
Well, we'll have to give to you, but we'll take a look and we can give it together said we have 65 more stores. If you just take the average size. It is stores in the inventory you end up with.
A significant.
Number of Paris.
Could be in excess of 100100 50000 pairs. So that in of itself is a few million dollars that gets put into it just physically then you take into account the stores that an open we opened 14 stores in the quarter. That's obviously also domiciled in just goes out there.
So I don't track that number in my head I will get it for you.
I also just add to that Sam keep in mind, you know with e-commerce , becoming a more pronounced component of our direct consumer business. That's not you don't see an equivalent number of store doors, increasing that you can attached to that growth rate, but obviously to fulfill the ecommerce business you need to have that inventory in house, that's a fast growing still.
Look out that has 10 stores.
Gotcha and.
Okay, and then lastly, Ah you know you.
When we can you can you dive into some of the categories a little bit more.
'cause I'm sort of what really are the drivers you talked to what we're really those driving categories in which ones are still sort of lagging or or or and have the opportunity. I think you taught you know you talked about man you know can you give us some more details on on sort of.
The category sub category by gender I guess, maybe the best way to do a gender and got it.
Well, that's a habit categories and yet it takes a long time to walk through those things but.
Well I mean, you mentioned they give you mentioned men's and you mentioned some components of man can you, but which ones are sort of not where they need to be I mean, we've heard that women's isn't quite doing as well in general versus visa.
Men Bob's them and work so can you sort of <unk>.
Give us some positioning there well women's is a bigger business so growth percentages obviously.
Get delayed our held back from what it is I don't know what you've heard about women's I think our women's business is performing quite well and has grown.
Faster then Dan.
The whole domestic wholesale business on its own so it and you know categories get device. We have many styles I think with what we said in the past, which is true now we have more categories more different styles that are selling well in showing increases were not dependent on a single style will not dependent on a single category.
Things come and go and we increase especially in our direct to consumer because we have more shelf space to play with go walk has come back. So obviously something else is it's not moving quite as quickly because go walk is taken significant shelf space, but we can go through a train and we'd have to do that on more one on one personal basis I think okay.
Just to fill it out men's has grown and continues to grow women's grows and continues to grow we've had some issues, but I've seen a light at the end of the tone, we believe and kids that are coming off that light in footwear that makes the comps difficult.
And a lot of sales in the marketplace I think as it exists. So we think kids are coming back we're getting a lot of.
Our movement in it but our adult business is doing very well, it's doing well on a very broad base.
And I think you guys know us well enough if theres a category that's not doing well. This time it will do well in the next six months, so we're bringing something new to it for back to school just as when you had issues with performance. What women is one of the other categories. We've brought them back we tend to develop product we tend to bring it back to concentrate on one Canada.
Mario one.
Rob is not what we're about and it is a broad based geographically and by category.
Sam I would just add to that.
You know in doing channel checks I would just ask you all to recognize that most of the channel checks, you're getting or domestic so it's not always true what holds for domestic market is holding internationally.
And so there there even if theres a category that is suspect in the U.S. its performance outside the us.
As has been strong we've seen that before so.
David mentioned, we're seeing broad comprehensive growth across most of the divisions.
When you take into account the global footprint of the brand and that's again another usually encouraging sign in addition to the growth rates on the top line that we that we just put up.
Alright, Thank you very much and and good luck in the holiday season.
Thanks, Thank you.
Our next question is from Kimberly Greenberger with Morgan Stanley . Please proceed.
Hi, This is Alex straight non front, Kimberly Greenberger I just wanted to touch based again on the operating margin expansion you guys elaborate it was pretty nice year over year, but just maybe a little shy of what the street was expecting.
We were hoping you could provide us just maybe with an outlook for Fourq you as well as kind of how you guys think about your medium to long term targets as you move forward. Thank you.
Yes. Thank you. So one I do think it's noteworthy that the the expansion we saw in the quarter.
You know it follows you know now to other quarters of contributing on the operating margin line.
As we look forward to Q4, we expect to be kind of flat to up slightly some of that's going to be the impact of the gross margin nuance. We mentioned earlier in particular around the impact of the tariffs, but you know our objective at the moment is aimed to be flat or up in the fourth quarter.
In terms of our long term goals they remain consistent with what we have said in the past we will continue to invest in this brand to achieve these above market growth rates for as long as we see the runway.
We will want to harvest those investments as you're seeing the success of now to drive operating margin. We certainly believe the long term operating margins can rest between in the low teen ranges that we've mentioned before.
We're not changing that guide the of the only caveat. We give is that if theres an opportunity to invest ahead of the curve. We will do so because that has been successful in driving.
Increasing rate of growth on the topline so far this year and continued growth that we expect in Q4 and beyond.
That's super helpful. Thank you.
And our final question is from Susan Anderson with B. Riley FBR. Please proceed.
Hi, Good evening, Thanks for taking my question nice job on the corridor.
I guess, just a follow like click on that kids business have it sound like it was maybe negative in the quarter and can you just remind us when you fully start to cycle that tougher compares from that lighting footwear.
Yes, it will start in the first quarter of next year first and second quarter of next year.
Well start to cycle through again to David's point, we're certainly seeing some positive trends developing kids now is a very difficult comp was a very successful product for us last year in the year before so we believe the what are you getting closer to a range of stability if not returning to growth soon in the kids business.
Great and I guess, just one more question I think you mentioned on like offline getting into some green grass shops, I guess, how big do you think that opportunity could be longer term is that something that could potentially moves the needle free guys.
I think it moves the needle for US just an imaging I mean golf is only so big we're picking it up worldwide and is growing and it is a nice piece to have.
But I think we look at it in that the golfer both male and female around the world are all core customers to begin with and that's just another way to keep us on top of mind. It in their closet and looking forward. So just us as with any technical shoe.
We use it as a an umbrella for the product to show the quality and what we can build but in golf in particular, because it does move along a demographic since they get older and it is our core customer. It just keeps top of mind of what we can do and.
Making comfortable as we got so we think it's a very positive assist in addition to rent another place to Franco.
Great. That's helpful. Thanks, So much you guys.
Thanks.
It is gentlemen, we have reached the end of the question and answer session as well as the conference.
I would like to turn the conference back over to the company for closing remarks.
Thank you again for joining us on the call today.
We would just like to note that today's call may contain forward looking statements as a result to various risk doctors actual results could differ materially from those projected in such statements. These risk factors are detailed in skechers filings with the FCC.
Again, thank you and have a great day.