Q3 2019 Earnings Call
Thank you for standing by moving to the Steve Madden earnings Conference call.
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I would now like to end the conference over to your Speaker today director of corporate development in Investor Relations Danielle Mccoy. Please go ahead.
Thanks, Chris and good morning, everyone. Thank you for joining our third quarter 2019 earnings call and webcast.
Before we begin I'd like to remind you that during our call. We may make certain forward looking statements as defined in the federal Securities laws.
Regarding our expectations or predictions about the future.
Generally these statements relate to projections involving anticipated revenues earnings or other aspects of the company's operating results.
Because these statements are based on current assumptions and expectations, they involve known and unknown risk.
Uncertainties and factors not within the company's control and as such our actual performance and results may differ materially from these Damon.
Our annual report and other reports filed with the FCC from time to time include detailed discussion of the risk the company faces and we urge you to refer to Steve.
Any forward looking statements represent our judgment as of the times this cool and cannot be relied upon his current after today's date.
We disclaim any intention or obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise, except as required under applicable law.
The financial results discussed on an adjusted basis, unless otherwise noted a reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release.
Joining the call today, it's Ed Rosenfeld, the chairman and CEO seasonality with that I'll turn it over to Ed.
Thanks, Dan you [noise] good morning, everyone and thank you for joining us to review, Steve Madden third quarter 2019 results.
We're pleased with our third quarter performance, which included earnings that significantly exceeded our expectations.
Our flagship Steve Madden brand was the highlight in the quarter with strong performance across the channels in which we operate.
For Steve Madden, It all starts with product and Steve and his design team continued to create trend right product assortments in both footwear and handbags that are resonating with consumers and enabling us to outperform that competition.
We're also supporting the brand with increased marketing investment that is serving to deepen the brands connection with its core customers.
Q3, we launched a co branded capsule collection of footwear was supermodel, Winnie Harlow, where the marketing campaign shot by renowned photographer Stephen Cline that has generated outstanding editorial coverage and social media buys.
And we continue to focus on building, our digital business and are seeing truly outstanding results.
Sales on Steve Madden Dot com accelerated in Q3 and are now up 66% for the first nine months of the year compared to the comparable period last year.
Overall, we believe our flagship brand is stronger than it's ever been.
We also completed two acquisitions in the quarter that provide the company with meaningful growth opportunities going forward.
On August 12, we announced that we had acquired grades in Brooklyn based digitally native sneaker brand.
I wondered in 2014 Grace has attracted a devoted following particularly among millennials based on stylish classic designs that fit today's more casual lifestyle, along with unique marketing that connects the brand to culture.
With $13 million in trailing 12 month net sales through June Thirtyth, we believe the grades brand is much bigger than the current business and we're optimistic that we can grow this business significantly in the coming years.
The acquisition was completed for $12.5 million in cash plus an earn out and is expected to be modestly dilutive to earnings in the first year.
And then on August 13th we announced that we acquired Baby Dakota, California based contemporary women's apparel company.
We had been falling BB Dakota for many years as we have long thought that the BB Dakota brand and product Assortments were aligned with the spirit of the Steve Madden brand and they'd be Dakota would make an ideal apparel partner for us. So we were thrilled when the opportunity arose to acquire it.
Beginning fall to the excuse me getting fall 2020, we will transition to BB Dakota brand to become a co branded BB Dakota, Steve Madden line, and we see significant opportunity for the Baby Dakota, Steve Madden collection in BB decoded existing distribution as well as new distribution, both domestically and abroad.
In the trailing 12 months through June Thirtyth, BB Dakota had net sales of $43 million and we completed the acquisition for 24 million in cash plus an earn out.
The Baby Dakota acquisition is expected to be modestly accretive to earnings in the first year. So on a combined basis the acquisitions of grades and be Dakota are expected to be approximately breakeven in year one.
We look forward to updating you on our progress with these two acquisitions as we move forward.
We're also pleased to announce that in September we formed a new joint venture in China with channel link.
Channeling offers superior capabilities, both online and offline with a successful track record as the China ecommerce partner for various international footwear brands as well as a family apparel business that operates approximately 550 multi brand stores under its own brand Gaga as well as approximately 230 franchise stores for others.
Since.
The new JV his own 51% by Steve Madden and 49% by channeling.
The JV is already operating the Steve Madden business on Timo, and we're expecting to launch on J.D. in early 2020, and Onvia VIP in the back half of 2020.
We're also planning to open our first store in Shanghai this quarter and to open two to three additional locations in spring 2020.
Now I'd like to update you on the current tariffs situation.
Yes, the Trump administration announced it would impose a tariff a 15% on list for products, which includes footwear apparel and certain other accessories that we produce.
This far was divided into two categories list for Hey, which went into effect on September one and list for B, which is slated to go into effect on December 15th.
Our list for products roughly half Ron foray and half were on for B.
Our approach to mitigating this tariff is similar to the strategy. We haven't played with respect to the lifts threed tariff that has impacted handbags and certain other accessories that we produce.
We are one moving production out of China to working with our suppliers to get price concessions on the good that remain in China, and three raising selling prices.
After mitigation, we estimate that the negative impact to 2019 earnings from the list for tariff is approximately two cents per share.
This is in addition to the five cents per share negative impact from the list three tariffs that we have previously discussed for a total negative impact from tariffs in 2019 of approximately seven cents per share.
Despite the incremental earnings pressure from the list for tariff we are raising our 2019 EPS guidance today based on the above plan performance in third quarter and the underlying strength in our business overall.
We have faced a number of significant challenges this year, including not only tariffs, but also the pay less bankruptcy and a higher year over year tax rate and so we are pleased to be on track to deliver solid earnings growth. This year. Despite those headwinds.
We think Thats, a testament to the power of our brands and the strength of our business model and we continue to believe that we are well positioned to drive further earnings growth and to create significant shareholder value over the long term.
With that I'll turn it over to Danielle to review, our financial results and our revised outlook in more detail.
Thanks, Ed.
We are pleased with our third quarter performance, our consolidated net sales increased 8.5% to 497.3 million compared to prior year net sales of 458.5 million.
Wholesale footwear net sales increased 6.3% to 315.9 million led by gains in Blondo.
I didn't women's and private label.
Our growth in Europe through our Essen Europe TV was also a highly.
In wholesale accessories, and apparel net sales increased 15.8% to 100 inside point 7 million.
He met in handbags was once again the stand out in the quarter, marking its fourth consecutive quarter of double digit sales growth.
Net sales also benefited from the addition of BB Dakota.
In our retail segment net sales increased 8.3% to 75.7 million.
Our same store sales increased 5.1% on top of a 5.5% increase and then third quarter last year.
Our E Commerce business continues to drive the growth in this segment.
We ended the quarter with 227 company operated retail stores, including 67, Atlas and E Commerce stores as well as 32 company operated concessions in international markets.
Turning to other income.
Licensing royalty income net of expenses was 1.5 million in the quarter compared to 2.6 million in last year's third quarter.
I'll first class Commission income was 0.6 million compared to 2.4 million last year.
Consolidated gross margin increased 20 basis points to 38.4% compared to 38.2 person in the prior year.
Wholesale gross margin was 33.9% for the quarter compared to 34.3% in the prior year quarter.
We achieved a 50 basis point increase in the wholesale footwear gross margin, but this is more than offset by a decrease in wholesale accessories and apparel due primarily to the terrorist on goods imported from China.
Retail gross margin was 63.3% compared to 60.1% in the prior year period, driven by more full price selling and a reduction in promotional activity, particularly on Steve Madden dotcom.
Operating expenses for the quarter increased to 120.9 million or 24.3% of net sales compared to operating expenses of 100 point 109.6 million or 23.9% of net sales in the same period last year.
Excluding gray MBV Dakota operating expenses as a percentage of sales were flat to the prior year.
Operating income for the quarter totaled 72.3 million or 14.5% of net sales compared to last years third quarter operating income 70.6 million or 15.4% of net sales.
Our effective tax rate for the quarter was 22.6% compared to 20.8% and the same period last year.
Finally, net income for the quarter was 56 million or 67 cents per diluted share compared to 55.9 million or 65 cents per diluted share in the third quarter of 2018.
Moving to the balance sheet, our financial Foundation remains strong.
As of September Thirtyth, 2019, we had 194.9 million of cash and marketable securities and no debt.
Inventory totaled 148.1 million approximately flat to the prior year figure of 147.5 million.
Our consolidated inventory turn for the last 12 months ended September Thirtyth was eight eight times excuse me.
And our Capex in the quarter was 3 million.
During the quarter, we repurchased approximately 785000 shares for 25.3 million, which include shares acquired through the net settlement of employee Stock Award.
Last the company's board of directors approved an increase in the quarterly dividend of 7% is 15 cents per share.
The dividends will be payable on December 27, 2019 to stockholders of record as of the close of business on December 16th 2019.
Since 2013, we have returned over $830 million to our shareholders in the form of share repurchases and dividends.
Now turning to our guidance.
Raising our 2019.
Net sales and earnings guidance.
For the full year 2019, we now expect net sales growth of 7% to 7.5%.
Up from 5% to 7% previously.
And now expect diluted EPS in the range of $1.92 to $1.90 size compared to the previous range of $1.70 to $1.86.
Included in this guidance is a tax rate for the full year of approximately 21%.
Now I'd like to turn it over the operator for questions operator.
Thank you.
As a reminder to ask a question do we need to press star one of your telephone to withdraw your question. Please press the pound key please stand by what we compile the Q when a roster.
And our first question comes on line of San Posner, We assess Kona no. One is now open.
Good morning. Thank you so much for taking my question I'm kind of few can you walk through sort of the the implied.
Gross margin so on for the full year, an implied in the fourth quarter or or or the that's you know either way you want to go about it so it'd be very helpful.
Yeah sure I'll give you the fault the the full year numbers unless you back into the to the fourth quarter.
I think that that gross margin. It's obviously, you've got the sales up seven to seven and a half we've taken our gross margin expectations.
Based on on the strong performance that we're seeing so we're now thinking that we can end the year up about 50 basis points.
In gross margin.
Well, we think that SJ as percentage of sales will also be up roughly 40 to 50 basis points.
So that should get you there.
Thanks, and then can you talk about the different offsets.
And how that's breaking out between.
Moving production and where you're going to be and try to next year pricing and.
With the factories.
Sure.
So in terms of the mitigation.
Of the if we're talking about list for tariffs, which are the new ones are the mitigation in the back half year. Most of that came through going back to the factories and getting price concessions as well as raising our selling prices.
As we move into next year of course, a bigger piece will be also moving production out of China.
I think if where if you look at our list for products overall.
I think we're about 88% in China this year.
It's a little bit lower than that in shoes, but some of the apparel and other accessory categories that are on this for bring that number up I think shoes were about 84, 85%.
But at any rate next year.
We're still putting those plans together and its and frankly, there's there's a lot of moving pieces, there, but I think a good goal would be to try to get that into the sixties.
Percentage in China anything beyond that is really not achievable I don't think in the first year.
We obviously are going to continue to try and get the price concessions.
I did shot out of the out of China on the goods that remain there and then we will be raising selling prices.
Handbag side, we really only raise selling prices I'd say low single digits, but in footwear I think you'll see that number.
The a little higher maybe more like mid single digits on average going into spring.
And then.
Can you talk about within your comp can you give a you gave them the year to date number for digital but can you give us some idea of the variance between your digital growth in the calm and Youre right.
Good morning.
Yeah brick and mortar was was negative again in the quarter. So.
The growth is coming from digital.
And can you give us some idea as to what degree it was negative.
So we can model with that are going forward.
How about mid singles.
Thanks, very much continued success.
Thanks, Jeff.
Thank you and our next question comes from the line of Edward Yruma with Keybanc capital markets. Your line is now.
Good morning. This is Matt on for Ed. Thanks for taking your questions. So my banks have been strong.
Can you hear me.
Yes, hi, handbags have been strong in retail and wholesale for a couple of quarters now can you update us on what's driving this strength, particularly in private label and since handbags experience tariffs for footwear can you talk a bit about where do you learn from that process and how that's informed you for footwear tariffs.
Sure.
Yeah, well well.
Actually in this quarter with respect to handbags. It was really more the Steve Madden branded handbags, which drove the growth.
Private label was up but but more modestly.
Look I think that you know as Daniel mentioned, we've now had four quarters in a row of double digit growth in Steve Madden handbags, it's really been a a couple of years now a very nice growth there and I think that.
Yeah, we've just really found a better formula there I think the product assortments have gotten much better nice mix of.
Have a core and fashion in that line and a and I think we've been performing well in what is you know obviously somewhat challenging overall handbags handbag market. So we're pleased with <unk> with what we're seeing there.
In terms of.
What we've learned from.
The list three tariffs and how that's helping us thinking about what to do with list for.
Look I think our.
One of the.
If you think about the experienced that we've had analysts three I would say if you think about the plan that we had going in and what we what we've learned I. You know if you think about those three levers I'd say frankly that lever one moving production out of China has been a somewhat more difficult than we anticipated. We certainly moved a lot of goods.
To Cambodian other places.
In the in the handbag category, but it's been challenging we've definitely seen the prices.
Rise significantly in those other countries.
And you know we've run into longer lead times and other challenges. However, we've been I would say pleasantly surprised about the price concessions, we've been able to get.
Out of the factories in China.
So that's something.
Thats, one takeaway that that will keep in mind as we move forward and footwear.
But footwear as a different category for handbags as I mentioned I think we do have a little bit more pricing power in footwear, and so we'll certainly be pulling lever number three which is raising selling prices a more aggressively.
On list for with respect to footwear than we did I Miss three with respect to handbags.
Thanks, very helpful and can you talk a bit about the north American wholesale environment, specifically a inventory in the channel in any differences between math family in Department stores and what are your truck.
Expectations for at once orders for the rest of year.
Yeah look I overall, the environment I think is pretty challenging.
If you look at the numbers that have been posted a from the.
Broadline retailers are the multi category retailers throughout the space they haven't been.
Stellar.
We've managed to really outperforming that environment I think we think we have the right products and our products are selling through and we're outperforming the competition and so we've been able to grow.
Despite the the challenging market dynamics.
With respect to our business I don't think Theres, a ton of a variation across channel.
If anything I would say, we're we're seeing.
Better performance.
In the.
What we'd call the first tier so like the department stores.
And the ecommerce retailers.
Maybe a little bit more.
Challenging in the off price channel not not necessarily because our products are performing but I do think that theres a.
Fair amount of excess inventory out there from other vendors are so that.
You know that can reduce the appetite to those off pricers have for for make ups from us or make make up product from us.
Oh, sorry, what was the last part of your question.
At once orders.
Oh.
Yeah, I mean, well, we don't I mean, this that's not something I'd quantify on the call, but but obviously the that baked into the guidance that we provided.
Thank you and we're obviously getting we have products that are performing so yes, we are getting reorders.
Thank you and our next question comes from Janine Stichter with Jefferies. Your line is now.
Hi, Good morning, Thanks for taking my question wanted to ask about the E Commerce business, it's interesting because it sounds like you're seeing accelerating cell therapy, and you're also talk about what sounds like pretty significantly lower promotion. So can you talk about anything differently, you're doing there kind of what's driving that business.
Yeah, we're really excited about a about what we're seeing there, particularly on Steve Madden Dot com.
And as you recall.
In the summer last year, we went.
We went to offering free two day shipping and concurrently with that we really pulled back significantly and the level of promotional activity on the site. So as opposed to discounting Oh, we were sort of marketing ourselves with this stronger shipping offer.
And that has really resonated with the consumer that has really worked for us and as we move forward.
And we've.
We've been able to continually dialed back the promotions online.
I'm now of course, we're also doing lots of other things to drive traffic to the site as well as conversion.
And we're seeing but we're seeing a lot of success with.
We've gotten much better and paid social.
We are doing more work with Influencers and seeing some really great returns there.
And I would just got a lot of good things going again, we've talked in the past about some of the new payment options that we implemented and the nice impact that had of course as you know we did the replatforming, which has been very successful for us and I think really in particular helped to drive up our conversion on mobile so lot of good things happening there and it's a it's a positive.
Story to be able to drive this kind of sales growth.
Without discounting.
Okay, Great and then I'll just wanted to ask about the private label footwear business I think you called that out as being a jive have shrunk as any of that related to what you're seeing from to to recapture from payless bankruptcy. It with some of your other wholesale partners.
Well.
Look we are if you exclude payless, we are running up double digits. This year.
Obviously down still.
You know.
Based on the loss of Payless overall.
It's really hard to tell exactly.
How much of that business that we're dealing with the with the remaining customers is related to them trying to go after that Payless business I think certainly had some of that particularly in Q2, we were pretty Oh, we had communications with them about how they were attempting to try to grab some of that market share and we're in we're placing additional orders to do that.
So there's no way to really give a number there.
Piece of it is definitely related to pay less I don't think it's the majority of it though.
Great. Thank you.
Thank you and our next question comes from amount of Paul Lejuez Citi Research. Your line is now open.
Hey, Thanks, I'm just a couple of questions how much of your wholesale sales increase right now are being is being driven by more units versus hiring you are and I guess the diary. You are you get from also kind of curious.
You've already seen the benefit from some some pricing actions or maybe there is a mix shift. That's also helping you on that and that wholesale business.
Then secondly, wondering if you could just talk a little bit about trends within sneakers dress boots.
Let me cashing changes, you're seeing out there that might drive strength in any one of those pieces of the business in particular thanks.
Sure.
Yeah, you ours overall are up a little bit but.
Units is the primary driver of the gross of the growth that we've seen.
And then in terms of the fashion trends I.
I think what are the things. We're excited about now is what we're seeing in boots and booties.
That's a category haven't heard me talk about as much in the last few years, but that's one where we're seeing nice year over year growth right now.
And that is.
Quite a few things working for us in the boot and Bootie category. So we're doing well with western inspired looks a lot bottoms are good where our combat boots are performing over the knee boots are good again for us.
And then.
Not only in boots, but really across other categories, we're seeing a lot of different.
Uh huh.
Materials trending.
So snakes are very good animal prints are performing rhinestones vinyls studs CAMMO. So there's a lot for us to work with in terms of materials.
And we're having a you know we're having some nice success with that.
Got you and then can you frame brown the size of the two acquisitions, how did that impact youre.
Sales guidance range. This true this year.
And what are you expecting too in terms of the size of those businesses for for next year.
Sure.
So.
The businesses again, BB Dakota at the time of acquisition $43 million and trailing 12 months sales great 13 million.
As far as the raise this year, it's been raised in sales is really.
The reflective of including BB Dakota, and Greg So I think at the midpoint, we raised our sales guidance something like $21 million and that's in and around the number that we expect for VB decoding grades on a combined basis.
Since we acquired them in the middle of August through the ended the year.
I'm going to a delay talking about our expectations for next year until next call when we when we put out our guidance.
Okay, and then just just one more follow up but any appetite for further acquisitions are these two enough for now to guide just for you guys are you still still looking around.
You know, we're always still looking.
I think we certainly have the the wherewithal and to do additional acquisitions, if we find and find the right opportunities. These are obviously relatively smaller deals.
Spending a lot of time on them to make sure that they're successful, but but if the right opportunity came along we'd still be interested.
Got it. Thank you good luck.
Thank you.
Thank you and our next question comes from a lot of Susan Anderson with B. Riley of VR, So long as an open.
Hi, good morning myself in the quarter I guess, just a follow up on the grates MPB Dakota acquisitions, and maybe I don't know if you could give some color just on how for great topic, you think could be longer term and are you expecting that brand to replace your amend the Steve Madden mid Sneaker brand and then for BB Dakota, if he could.
Talk about thoughts on the rebranding of their brand and just not consistent fusing. They can see more and then how big do you think apparel could be one day and then I guess for both of those if theres any color you could get on the margins versus your current business. Thanks.
Sure. Okay. So I'll start with great no. We're not this is not to replace Steve Madden mens a this is a separate brand with a different identity different price point different customer base et cetera. So since.
Continue doing what we're doing and see amendment, and we intend to to grow that business as well.
As far as the opportunity for grades.
Not going to put a number on it today I'll I'll I can say that it clearly could be many multiples.
Of where it is today in terms of overall sales. It's a it's a brand that's still in the early stages of its development. It's got a very limited distribution you know, it's basically almost all direct to consumer on great Dot com. They do have one wholesale customer which is nordstrom and.
They have one store in cielo, so we do intend to expand the distribution overtime.
And and we think we can grow this business pretty significantly.
In terms of BB Dakota.
I think the question was about the rebranding yes. So we do intend to do a essentially a co brand starting in fall of 2020.
We think thats the way to get the Steve Madden brand a into the apparel business, but still a capitalize on the credibility that BB Dakota has in the category and.
Spoken to wholesale customers about that and they seem.
Seem pretty excited about about the opportunity there.
In terms of margins.
Look we've said grades loses money, we've said that that business will be.
Modestly dilutive in the first year, we do think we have a plan to get it to breakeven relatively quickly.
But currently it loses money and BB Dakota is profitable, but is a below our company average and operating margin and again there. We also think theres opportunity for improvement and to get that more.
Where tool to our average company operating margin overtime.
Great and then thinking just follow up on the bids business I think you talked about you felt good coming out of the second quarter with some early reads and it sounded like this quarter also performed well, but did you see any impact at all from warmer weather in parts of the country in terms of the starting of that business and just if you go.
Talk about how you feel about fourth quarter performance too. Thanks.
Yeah, you know we've heard some others talk about a slow start to the boot year, Oh, we really havent felt that we've been very pleased with our with our performance in that category. So far we're running up double digits versus the prior year I do think that some of them more commoditized type boots.
In the market or cold weather boots may have started off little slower due to the weather, but fashion boots like what we do I really performing.
I guess, the one caveat I would say that's really been about booties.
As well as over the knee. So you have that tall shaft boot.
Excluding over the knee hasn't kicked in or.
Or is kicking in later and so that that may be partially related to weather.
Got it that's helpful. Thanks, so much good luck for holiday.
Thank you.
Thank you and our next question comes from the line of Erinn Murphy with Piper Jaffray. Your line is now open.
Great. Thanks, Good morning, I guess add for you.
Thinking on the footwear side of the business a lot of your peers have talked about expecting a higher promotional cadence. If we had deeper into holiday can you just talk about what your expectation is for promotional activity. This holiday season, and then the six fewer days between Thanksgiving and Christmas does that change any of your go to market strategies for how you plan to.
Back the holiday season.
Yeah look we've we've certainly heard the same chatter about about.
Higher promotional activity across the industry, that's something we're prepared for that being said as I pointed out earlier, we've actually raised our gross margin expectations in this forecast because of the.
Strong performance that were seen at retail and are well controlled inventories and so we we don't think we're gonna have to be a.
As promotional.
As others this year in terms of the shorter.
Is holiday season, a shorter number of day or a fewer number of days between Thanksgiving and Christmas.
Look we tend to a essentially.
Design, our promotional calendar moving backwards from Christmas a and so we'll continue to do that which just means that typically there is a period.
After.
Black Friday, cyber Monday, and before we really kick into our promotions for holiday, where we were not promotional that period will be a little bit shorter if you're talking about her own retail stores.
Okay Yep fair enough and then just maybe going longer term on your operating margin. I mean, you guys have had very strong performance you know for a number of years now even with that your EBIT margin has moved down consistently for the last six years below 11% range or I guess mid probably by the end of this year.
How do you think about the longer term operating margin from here do you think you are you comfortable with kind of this level of in low 12% and then just scaling the business from the top line just help us think about the puts and takes over the next three to five years.
Sure Yeah.
Look.
If if there were no tariffs.
You know I think that we would be a confident that that we could start to see operating margins move north here.
And in fact, they would've been up this year excluding tariffs.
You know that being said the tariff is has been a significant pressure.
And obviously, we'll continue to too.
To further pressure US next year provide these tariffs stay in place but.
Absent that I do think that there's there's some opportunity for operating margin expansion here, particularly to leverage as gene as we move forward.
Okay, and then maybe just thinking on the M&A you reference at the beginning of your script is talking about the reinvestment in marketing, where do you feel marketing will be by the end of this year as a percent of sales and maybe just talk a little bit about the traction with a little bit more on the when he collaboration are there more you know are you expecting kind of a further a pipeline of collaboration with different individual.
Thanks.
Yeah, So look marketing as a percentage of sales overall still below 2%. So still a it's still a relatively low number although I it'll be up roughly 40 basis points this year compared to the prior year, so not an insignificant increase investment and we feel very good about.
The return that we're getting there.
Yeah, the winning thing was as has been great.
Really I think.
Provided a really nice sort of brand marketing Halo for us really seems to have resonated with consumers we talked about.
Also all the.
The earned media that we've gotten there in terms of editorial coverage and in particular and probably most importantly tons of.
Social media.
You know posts and also engagement.
From from.
I don't make consumers, but celebrities and winning herself et cetera. So yeah, well look at doing things like that going forward I mean honestly were.
It's not something that we had calendar it out every season, but we'll well continue to be opportunistic and look for more ways to engage with our consumers.
Great. Thanks, so much.
Thank you.
Thank you. Our next question comes from Atlanta, Chris Svezia with Wedbush. Your line is now open.
Good morning, and thanks for taking my questions and not nice job on a quarter and some of the tariff mitigation I guess.
First question I have is just on.
Sales outlook and whats implied for Q4, if I make some assumptions for the acquisitions. It implies the core business is call. It kind of flattish maybe up just slightly just given the outperformance where maybe being conservative what's the caution is it just comparisons maybe a little color.
On why maybe the flat core business to be running about flattish on a year over year basis.
You know a lot of its just a function of comparisons. If you look at Q3 to Q4 last year I think that the comparisons get almost 900 basis points more challenging.
So I think that's really the big the big piece of it I mean.
Couple of call I'd make there if you look at wholesale accessories last year, if you'll recall, we were up 38% in Q4, we have told people all year and been pretty consistent about trying to get people are prepared the fact that we would actually be down in wholesale accessories going against that up 38 in Q4 ends and we do anticipate that we will be down in that.
In that in that.
Area and then even in wholesale footwear I think there's a tougher compare what are the things that we did last year.
As we shift in tall shaft boots.
Later and in fact, we think we ship them in a little bit too late we shipped a minute October last year.
We move that up to September this year.
So that did move some sales from Q4 to Q3.
Okay. That's that's helpful on the on the tariffs.
Just so I understand is are you and a two cents you called out are you factoring in the proposed lists for B on 12, 15 or or no.
Yes, but that has almost no impact to us because it's only two weeks and weve and and pretty much anything that we're going to ship out in those last two weeks. We brought in before 12 15, Okay. And then just theoretically on all this the tariff just a two cents versus I think you know accessories initially were five cents given.
In footwear much larger pieces of business. It seems like you would have more exposure is it's just the fact that you have more pricing power you referenced mid single digit increasing and pricing to mitigate more of that that exposure. It's just any color around that and how you're thinking about existing peos.
Were written for the balance of the are you, making adjustments to those or you just how does that how does that factor into that and to the thought process.
Sure well.
Couple of things I'd say about that first of all keep in mind that as I mentioned in the in the earlier remarks, only about half of our list for products were on for AG.
So half of them.
I don't see tariffs until 12 15, and so we're not an issue.
We're also able to move some products up to.
He delivered.
Advanced the tariff and so through those two things we were it we were able to get the sort of the gross impact before our steps to mitigate.
Meaning before price concessions in the factories or price increases to our customers down to <unk>, let's say $6 million to $7 million.
And then we went back and got price concessions from the factories on open orders and also on open orders in answer to your question. Yes, We did go back and change our prices to our customers on open orders and they did except those price increases and so thats, how we got that down to the to the roughly two cents.
Impact.
Obviously, you know going into into next year, if you have four and for B well have a more significant impact.
Okay.
That's helpful. And then just lastly, just on the sustainability in the retail business from a gross margin perspective, very strong in the quarter, what's the what's sort of your viewpoint on being able I mean, a lot of that's probably be driven by digital just sort of the thought process sustainability and what's sort of baked into your plan. If you think.
About Q4 gross margin on retail.
Yeah, I think that we are.
We're going to continue to move forward with the strategy that we have which is less discounting, particularly online.
You know Q4 is obviously.
Relatively promotional time these days, particularly.
Bricks and mortar.
So that's what do we have to be cognizant of so you're not going to see the same kind of improvement that you saw in Q3, but could we be flattish to where we were a year ago. When we had a pretty strong fourth quarter gross margin I think thats a good a good target.
Maybe maybe down a touch because of that of the tariff impact.
So that's that's the way I think it Okay final thing that's just on the.
Pricing increases on footwear or how do we think about that retail in terms of <unk> retail stores versus wholesale customers them sort of a accepting those price increases in passing them through just sort of what's been the what's been the response reaction from from Universal customers.
The wholesale well.
The wholesale customers weren't terribly excited about it but they did go along with it and ER and have.
Raised retail the majority of them have raised retails as well and we've obviously raise retails in our retail stores and so far we have not seen any discernible impact to sell through so it seems that the consumer is paying it now again.
These initial.
Yeah.
Initial.
Business here in in fall and holiday, we really raise low single digits or if the tariffs remain in place going into spring and beyond we'd we'd be looking to take a little bit more price.
Okay helpful. Thank you and and all the best thrown holder.
Thanks.
Thank you and our next question comes on line of Steve Marotta.
King and associates on is now.
Good morning, and didn't you know you were pretty clear on what the acquisitions or adding to this year as it or I should say, what the TTM was but just very specific as it pertains to guidance you mentioned that the increase in guidance expectation for sales was due to the acquisitions, primarily can you talk a little bit about.
The earnings Delta and how much of the earnings Delta specifically due to the acquisitions.
Yes, so the acquisitions are pretty much breakeven.
So the increase in earnings is not while the increase in sales is it related to the acquisitions. The increase in earnings is not so what that means is that the organic business, where the business. Excluding acquisitions sales are pretty much in line with our previous forecast, but the earnings have come up and that's really a function primarily of a have a higher X.
Spectating for gross margin, which is which is a function of having the right product that's selling through and having a very well managed inventories.
And then there's also add a.
A little bit improved expectations for operating expenses I think we've controlled the expenses a little bit better than we initially anticipated.
Okay. That's really helpful and also just a follow up on your inventory considering that there were two acquisitions in the quarter and that your business was pretty good.
Flooded inventory is semi heroic can you talk a little bit about Oh, you too late in any places where the puts and takes there that.
Would cause.
<unk>.
Inventory down year over year basis, given those acquisitions and the organic sales growth.
Yes look that's it's a major focus for us as you know a we we do have the inventory that we need to achieve the sales plans. So I don't think you have to worry that were too light there, but we've been highly focused on managing inventory. It is.
As an uncertain environment. It is something that as you know is.
Real priority for this company always and I think the team has done a really good jobs I'm very pleased with a with how they manage that but do you, but you're right I think were down like high singles, excluding the acquisitions in inventory.
Okay, that's great and that is just again inventory management no necessarily early shipments or any other puts and takes just reiterating what you said.
Yeah, that's right I'm, just trying to remember last year third quarter. If we were pulling some thing if we had pulled in a little bit more due to the tariff.
Unless three so there may have been a somewhat easier compare there I'd have to really look back to be honest I can look right I can look like as well. Thank you that's helpful.
Thank you and our next question comes from a lot of Laura Champine with <unk> capital. Your line is now.
Thanks for taking my question, So and you talked about mid single digit price increases in your spring collection, just as you pass off costs, you can offset from tariffs does it seem early read that that is similar to what your competitors are doing and can you give us any sort of historical perspective.
On when the last time footwear vendors made mid single digit increases to to list price.
In terms of the competition look we don't have great visibility into that I think anecdotally, we've definitely heard about our peers raising a raising prices and we think it we're probably in the similar range.
ER as far as history.
A 15%.
Price shock like we're having with tariffs a there's not a lot of history on that ill say, a handful of years ago and I can't recall exactly what you're it was the dollar.
Weakened against the RMB by about.
Maybe 5% and or the industry did pass through.
I would say three four or 5% price increases to the consumer.
And we did not see a lot of pushed back at that time.
But this is this is obviously a more significant challenge with a 15% tariffs so.
So we'll have to to see what happens.
Understood. Thank you.
Thank you and we have a follow up and all last question comes from Sam positive with Susquehanna. Your line is no.
I've got a whole bunch of follow ups number one <unk> inventory at the ended the year given the potential for the list for tariff can you give us some idea of where do you anticipate those to be higher and that you'll pull forward goods to avoid the tariff.
Yeah, Yeah, you'll see a little bit of that but I don't think it should be a.
I don't think it should be majorly out of whack.
And then your full year tax rate is that can you just walk through because it looks like the fourth quarter number well below everybody was can you just give us some color on where the tax rate is relative to your prior expectation and how much that was additive if at all.
Yeah, we're looking at I think 21% for the full year right, but I will point out that.
That does imply a much higher tax rate year over year in Q4.
You know in the first three quarters, we were running up anywhere between one to 200 basis points in tax rate compared to the prior year in Q4, it's more like a 500 basis points higher than last year.
And should we think about 21 rate going forward is fairly normal.
Yeah, I mean, there's a lot a lot of moving [laughter] parts. There in terms of our earnings by tax jurisdiction as well as the amount of these discrete benefits that we get a or I guess it someday could be a discrete expense related to stock based compensation.
But I think you know, 21% a reasonable starting point for now.
And if the if we do not see the.
For be tariff come into impact.
Given your speed to market and everything I would assume that you were impacted more this year.
The.
Tariff of the existing tariff then you will be next year, given that you have the ability to change through and so when we think about the seven cents that impacted this year.
No initially how should we think about next year and then the same question if we do see for be Roland.
Uh huh.
I think we're going to we haven't provided guidance for next year overall, yet we'll do that on the next call and I think at that time will also try to give you color on what we think the overall tariff impact.
We'll be next year.
And then lastly, the thank you and then lastly, the you know I was just asked about the probably the the price increases and so on but I mean your deal.
What I gather from what you say that currently given the strength of boots I assume athletic is good you had a good sample year, you likely you're getting reads on stuff for next spring that you're probably feeling good about I mean, you're talking about a lot of new product that one is going to have higher prices and also the reason you're able to pass through these prices. Initially I would guess is because.
You've got a fashion and there's a number of trends that you've spoken about over the year, thus far that had been helping so.
We're looking at it in the who's taking price them getting resistant that's a that's a who's getting the shoes right to Uh huh.
Yes, I think that weren't as good a position as anybody to try to take price given the strength of given the momentum that we have in the brand and the strength of our product assortments, but.
I think it remains to be seeing exactly how the consumable respond to that and and look it's not only about what we're doing a.
Given that now there's a 15% tariff I mean, given that list for captured everything else that that comes in from China.
It's not only us it's not on the other should come in is a lot of folks going to be trying to raise prices to consumers and we'll have to see what that does to overall consumer demand and to the velocity of the sell throughs for our products and others.
<unk> you also have had some shoes of your mix.
For a long time.
Some of the sneakers and others do you as of now when you think about what's going to happen for spring given the the terrorists are you looking to do sort of more of an overall.
Bringing in or absolutely obsoleting current product and bringing in newer product. So it's not sort of a straight up price increase its an increasing its and introducing new product that higher price points than they would have been otherwise the situation.
Well I think your point as well taken that it's easier to to raise prices on new stuff then on existing but but I don't think we want to let the tail wag. The dog here I think we want to deliver the products that we think our customer wants and if those are products that have been the line for a few years, we're going to we're going to continue to have this.
Thank you very much in the and good luck.
Thanks, Jim.
Thank you and that does conclude today's question and answer session I would now like to turn the call back and Rosenfeld for any further remarks.
Great well, thanks, very much for joining us today, and we look forward to speaking with you on the fourth quarter call have a great day.
Ladies and gentlemen, this concludes today's conference cool. Thanks for participating you may now disconnect.