Q3 2020 Earnings Call
Good day, everyone and welcome to the guest third quarter fiscal 2020 earnings conference call on the call our Carlos I'll briefly Chief Executive Officer, and guaranteed Reddy, Chief Financial Officer. During today's call. The company will be making forward looking statements, including comments regarding future plans.
Business and financial opportunities strategic initiative capital allocation and short and long term financial outlook. The Companys actual results may differ materially from current expectations based on risk factors included in today's press release, and the company's quarterly and annual reports filed with the FCC.
No I would like to turn the call a richer Carlos.
Thank you operator, good afternoon, and thank you all for joining us today.
We reported our third quarter results today, and we were very pleased to deliver operating earnings and earnings per share I bought the high end of our guidance for the period.
Adjusted operating earnings increased 4% versus last year, driven by a 2% revenue increase on a gross margin increased 90 basis points, which was offset by an adjusted SGN a rate increase up 90 basis points due to pressure from corporate investments during the quarter.
Our performance reflected mixed results across our regional businesses.
Europe had a terrific quarter with very strong performance across all channels.
Well the Americas showed strength in our wholesale business, we experienced deceleration in our retail business with comp sales below our expectations.
Asia was also a weaker and our licensing business had a better performance than we expected in the core.
I believed that our business in North America was influenced by factors at a macro level, primarily impacting customer traffic, including weather and tourism and internal factors related to our fall winter product collection and inventory position.
As we focused on operating our retail business with leaner inventories, we believe our ownership and product for certain classifications would have benefited from more inventory depth and breadth to comp last year as volumes.
We are correcting this as we speak and are confident that will be in a much stronger position in the new here.
Regarding Asia the issues, we faced earlier in the year and our three major markets of Greater China, South Korea, and Japan still persist today.
Similarly to the Americas retail business, we believe that some of the factors impacting our business here I've macro driven not in our control.
These include specific regional issues, such as the Hong Kong protests situation on the China Trade War developments.
But there is a lot about our product assortment and styling, our inventory levels and our promotional cadence that are totally in our control and we can impact going forward to improve on our current trends.
All consider we continue to believe that the guess Brent and our product offering are very relevant to the Asian consumer and that the long term opportunity in this region is very compelling and remains intact.
Bite of the current challenges.
Were monitoring the situation very closely and have adjusted our investment plans for the region based on the current trends and our medium term expectations.
Regarding our product in Asia, specifically, we strongly believe that we have an opportunity to improve our offering by developing a more local assortment that caters to specific customer needs and taste regarding styling sizing and fit which are very different by market or sub region I know.
So different from our existing lines.
We're mobilizing our teams to create product capabilities to address this.
In addition, we should have had more newness on the floor and online but were impacted by the high level. So folder sees on inventory that we came into the year with.
As we work through the inventory on hand, we're ensuring that future by incorporate the newness because the consumer where do you expect from our brand.
In terms of marketing, we believed that we can do a better job partnering with local celebrities and influencers white, leveraging social media platforms, unlike streaming capabilities to market to consumers more effectively.
Lastly, regarding our promotional cadence the Chinese market is very competitive we have an opportunity to adjust prices for certain products, where local brands have been very aggressive with fast development and sharp pricing to capture share.
We're also taking action on this in the fourth quarter.
Our business in Europe had a very strong quarter with revenues up 9%, an operating earnings I hundred 63% for the period.
Operating margin more than doubled in the quarter, we're very pleased with our performance across all channels and all markets in the region.
During the quarter, we continue to manage our company's overall inventories effectively and we ended the period with a reduction in global inventory of 5% versus last year and we are on track to end the year with a decrease of inventory in the double digit range.
We continue to make good progress in reducing our dependency on China sourcing and mitigating potential terrorists RIS without compromising the quality of our products, while improving cost performance.
Our product development and sourcing teams are doing a phenomenal job with this.
And I believe that their work will have a significant long term impact in our infrastructure and in our product capabilities regarding quality speed and cost optimization.
We also reaching productive costing negotiations with vendors that remain committed to China sourcing, but are willing to offer very compelling prices in spite of potential terrorists increases.
We saw our expected percentage of China sourced apparel product may increase from 12% to 23% for next year.
This increase well have no negative impact on our costs, if the new targets gets enacted.
Let me know comment on our updated guidance for the year.
We have raised the low end of our EPS guidance by three cents due to our Q3 beat while maintaining high end up guidance.
The fact that we have been able to do this in light of revenue softness in the Americas retail and Asia speaks to the strength of our diversified business model what are the positive momentum this year in Europe on Americas wholesale coupled with effective expense management have helped offset the weakness that we are seeing into two other.
Regions.
Hi, I'm very confident that we have several levers to pull as we continue to drive improved profitability in our business model.
I now have been back with gas for almost 10 months and I feel great about the progress that we're making in multiple fronts I strongly believe the last few months in particular have been critical for our team and our organization as we finalize our strategic business plan.
We look forward to sharing our plan with you during our Investor day event that is planned for this coming Tuesday December Threerd, They Intercontinental Hotel in New York.
For the event.
We'll have a few of our executive percent and Katy Anderson, our new CFO will also participating in the meeting.
Katy joins us from California, Pizza kitchen, where she is currently CFO I'm brings a strong background in finance and strategy.
I hope that you can come to our event and if you haven't been invited I'd have interest in attending we would love to hear from you. Some so we can accommodate you.
This will be a webcast event and we will share our key strategic priorities for the next five years to take gas to the next level of growth and profitability I think you wouldn't like what you will hear.
As we worked on our long term strategy, we continue to operate the business and developing our model. Following the key principles I articulated during my first call back with gas in March.
The first one of those principles relates to capital allocation.
So you know we made the decision to redeploy capital and return incremental value to our shareholders through significant share repurchases, while reducing our dividend by 50%.
During the third quarter, we completed the accelerated share repurchase program, which amounted to $170 million with this we have now repurchased a total of 16.4 million shares representing slightly over 20% of our shares outstanding at the beginning of the year.
The expected accretion for this year is forecasted at 13 cents per share and is included in our guidance.
Regarding cash flows as a result of this transaction of the dividend reduction we continue to expect a positive impact to our cash flow generation of approximately $30 million. This year on $40 million next year.
In addition, we plan to spend not more than 68 million endorsing capex. This year versus 100, an 8 million last year and we also expect a meaningful improvement in free cash flow generation over last year through improved operating results, coupled with better working capital management.
I know the subject of working capital apart from inventory management, we have targeted extending the payment terms to our suppliers to better align them with our cash conversion cycle, the benefits of which we should see in our free cash flows starting next year.
Also as part of our capital allocation review, we have decided to transition the operation of our underwear business in South Korea to our local licensee that has established strength in the category.
This will enable us to focus on our core lines why leveraging the expertise of this licensee partner and reduce our capital investments and the business.
Our guidance for the fourth quarter for Asia reflects this trend season, as we expected to be executed during the fourth quarter.
The second principle I have discussed on previous calls relates to product development and distribution optimization.
We have made good progress that denim development and expanded product presentation in both our stores and online.
All of which is contributing to improved results.
We're also pleased with our progress with their Marciano brand both in North America, and Europe as we have strengthened our design teams have refocused our merchandising efforts.
We also expect continuing improvement in sales and profitability with this business.
Regarding Manson accessories, our efforts to develop products that are more specific to each customer segment are continuing and we expect the results of this effort will benefit us in the next fiscal year.
As we continue to search for efficiencies in our global model, we have identified an opportunity to develop and leverage a single factory outlet nine to serve both North America Europe instead of the two separate lines, though we have today.
It it's clear that the assortments on starting between both lines are very consistent and offer a big opportunity for consolidation.
This will yield even more brand consistency across both regions improved product quality and significant cost savings as we leverage the scale of device and we'd reduced development costs.
Additionally, we plan for our ecommerce offering to be our largest assortment and become the biggest representation of the brands. So that our customers can find their choice of product on our side, if they cannot find that in a store.
This will also equip our store teams with a broader assortment to service our customers. This is an important initiatives to support our Omnichannel vision.
The third principle I have alluded to in the past relates to the opportunity to pursue global strategies across key functional areas.
The main areas that we have focused on our inventory management.
Just takes on distribution sourcing on product development, I T real estate and omni channel capabilities.
This functional capabilities are a critical part of what will drive our strategic base. Since then I will tell you more about our vision for them during our Investor day meeting.
The fourth principle I have mentioned in the past relates to our overall cost structure and opportunities for optimization.
Regarding the is we have plans to optimize the inventory allocation of replenishment process and refine our store labor scheduling model to better align with traffic patterns.
Listen to this we see opportunities for rent reduction and rationalization of our cost structure by simplifying and streamlining processes.
The fifth principle I have mentioned in the past its customer Centricity you will hear more about our approach during our Investor day next week, but our goal is to significantly improve our customer experience scheme.
Hence data capture strengthened data analysis on customer segmentation and develop a strong personalized marketing model.
That's our roadmap we believed that we have a big opportunity here at a global level and this initiatives should result in increased sales productivity and better conversion rates as part of this initiative. We continue to work on our implementation plan for Salesforce. That's our main e-commerce platform to service.
Our business in both North America on Europe .
This will be a critical enabler off they improved customer experience on a driver of future sales growth.
We continue to believe that the new model capabilities should result in increased penetration of ecommerce sales that are more in line with best in class performers in our industry.
In closing I want to say that I strongly believe our opportunity to continue to expand globally is very significant and unique due to the power of the guest Brent.
And so it's our opportunity to continue to attract customers with three distinct profiles heritage millennials and generation sees primarily due to our highly differentiated approach.
This customers are engaging with our brand at a deeper level and are very attractive to our company's future.
Last but not least our company has a large sales base. However, our profitability is not a good representation of our business model on margin potential.
And this is despite our adjusted operating profit growing over 30% on during the last two years and our guidance for adjusted operating profit projected to grow about 25% this year.
I believe there is a lot more operating margin expansion opportunity here and it is in our control.
We plan to discuss this topics in more depth next week and hope you will leave the event with a clear understanding of our opportunity and our plan to attack it.
I now want to pass the call to Sundeep, who is here in his last earnings call with US I went to send Sandeep for all his contributions to our company during his last nine years with guess.
Sundeep leaves a very strong team and all his herself responsibility and I know that we will not miss a beat during the transition.
I also want to wish you the very best in your future Sandeep.
It has been great working together during the last few months. Thank you. Please go ahead.
Thank you Carlos that as much appreciated.
Good afternoon, everyone.
During this conference call all comments reference certain non-GAAP adjusted measures.
Please refer to todays earnings release for GAAP, reconciliations or descriptions of such measures.
Third quarter revenues was $616 million up 2% in U.S. dollars and 4% in constant currency what are the prior year.
I would like to highlight that this was our 13th consecutive quarter of revenue growth.
Total company gross margin increased 90 basis points to 37.3% driven by higher I'm use.
This was on top of a 160 basis point improvement in gross margins in Los Filos code costs.
Adjusted as soon as a percentage of sales increased by 90 basis points, primarily driven by pressure from corporate investments.
Adjusted operating profit for the third quarter was $23 million, an increase of 4% what's the the adjusted operating profit last year.
Adjusted operating margin finished at 3.7% flat with last year and better than the high end of our guidance.
The operating margin guidance included a negative impact from the third quarter this year or 50 basis points due to a shift in timing of shipments that benefited the second quarter.
I would like to point out that on the net basis, we reported minimal nonoperating expense in the quarter.
As net unrealized losses on nonoperating assets were offset by unrealized revaluation gains on foreign currency exposures.
This is compared to non operating expense of $5.8 billion in the third quarter last year.
Our third quarter adjusted tax rate was 24% down from 32% lost here, primarily driven by the mix of statutory earnings.
Adjusted diluted earnings per share finished at 22 cents above the high end up our guidance of 18 cents per share driven by better adjusted operating profit and the lower than expected tax rate.
This is compared to last years adjusted diluted earnings per share of 13 cents.
Also included in adjusted the appears this year was two cents an accretion from the convert transaction and share repurchases.
No for some more color by segment.
Americas retail revenues for the quarter finished down 5% in us dollars and 4% in constant currency.
Comp sales for the quarter, improving because were down 3% in us dollars and in constant currency, finishing below our expectations.
The negative comps in the quarter were driven by negative traffic.
You ours as our comp trends for the quarter deteriorated, starting with the labor day weekend.
E Commerce had an immaterial impact on comps for the quarter.
Americas retail operating margins in the quarter contracted 110 basis points.
Breaking a sequence of eight consecutive quarters of operating margin expansion.
The contraction in margins was driven by markdowns and de leverage from lower sales.
Partially offset by better I abuse.
Yeah.
Moving to Americans wholesale.
Revenues grew 7% in us dollars and 8% in constant currency and were driven by a continuing strong performance.
He wants department store specialty.
And off price business.
The Americas wholesale operating margins in the quarter expanded 20 basis points.
European revenues for the quarter grew wasn't as last year by 9% in us dollars and 13% in constant currency and were driven by new store openings group in the wholesale revenue and positive comps.
Comps, including E. Commerce finished up 1% to newest all those and up 5% in constant currency.
E Commerce improved the comes for the quarter by three percentage points.
The comp increase mark the 17th consecutive quarter of constant currency positive comps for the European region.
Our European wholesale business also continues to be very strong.
We closed the order book for the spring Summer 2020 season during the quarter unrecorded us six consecutive season of double digit growth in the region.
European segment margin improved by 410 basis points due to higher I abuse lower distribution costs.
Leverage and lower retail markdowns.
We now expect lower European logistics cost to contribute at least 150 basis points to margin expansion in Europe for the.
Moving to Asia.
Quarter revenues were down 8% in us dollars and down 5% in constant currency.
Comps, including E Commerce were down 21% in us dollars and down 19% in constant currency.
He coleman's decreased comps by two percentage points.
Our performance in the region was significantly below our expectations as traffic trends into stores deteriorated during the second half of the corner.
The weakness was consistent across all our major markets in Asia.
That is Korea, China and Japan.
Operating margin for the Asia segment contracted 520 basis points in the quarter, primarily due to higher markdowns and expense deleverage as a result of the negative comps.
Moving onto the balance sheet.
Accounts receivable was $300 million up 5% in us dollars and 6% in constant currency.
Okay.
Inventories were $520 million down 5% in us dollars and down 4% in constant currency losses last year.
This was another quarter sequentially the improvement.
We've made a lot of progress on inventory. This year, we're still carrying some excess inventory from the end of last here and expect to continue to dispose of this inventory through a combination of selling it in our own retail outlet stores as well as using stock liquidation channels. So we can then be a significant be healthier position than last year.
Free cash flow for the first nine months of the year was negative $79 million an improvement of $43 million was negative $122 million lost her driven by $26 million lower capital expenditures and $17 million of improvement in working capital.
If we exclude the impact of the $46 million you Commission fine paid earlier this year, our free cash flows improved by $89 million versus last year.
As Carlos mentioned during the quarter, we completed the 170 million dollar MSR that we entered into during the first quarter of this year.
Our total of 5.4 million shares were delivered to us in September to close out the has huh.
As a reminder, pipe on 2 million additional says well already delivered to us against the IRSA during the first quarter of this year.
Including open market purchases and the $170 million here. So we have repurchased a total of 16.4 million shares at a cost of $281 million this year.
Resulting in an average price pressure or $17.13.
We ended the quarter with cash and cash equivalents.
$110 million compared to last years $139 million.
Cash less debt at the ended the quarter was negative $207 million compared to $99 million last year.
Moving onto the guidance I should point out the outlook for the fourth quarter and full year fiscal 2020.
Does not assume any asset impairment charges.
Also guidance for revenues and comp sales for the total company owned by segment.
Is included in a supplemental table attached to our earnings release.
For the fourth quarter fiscal 2020, we expect revenues for the quarter to be up 2.5% of 3.5% in constant currency.
Hi, prevailing exchange rates, we estimate that currency will be roughly a 1.5 percentage point headwind on consolidated revenue growth for the quarter.
Our gross margin is expected to be up due to IMU improvement from our supply chain initiatives as well as lower markdowns and obsolescence expense due to a cleaner inventory position than last year.
[laughter].
The industry need rate is expected to be down slightly to up slightly compared to last too.
We are planning an operating margin for the quarter between 11.5% and 12% with a 20 basis point unfavorable impact from currency.
The adjusted earnings per share as planned in the range of a dollar seven per share an adult at 12%, including five cents headwind due to currency.
The earnings per share guidance includes 21 cents, an accretion due to the impact of a convert transaction and share repurchases.
Our adjusted EPS guidance includes an assumption of $1.7 million of cash interest expense and amortization of loan fees related to the convertible debt transaction.
Our tax rate for the quarter is estimated to be 21%.
We expect consolidated revenues for the ought to be up between 5.7% and 6% in constant currency.
At prevailing exchange rates, we estimate currency to have a 3% negative impact on consolidated revenue growth for the year.
For the full year, we expect gross margins to be up due to improved dime use in both the Americas in Europe , as well as lower logistics and distribution costs in Europe .
The adjusted as senior made is expected to be up.
Due to an increase in performance based compensation.
Our adjusted tax rate for the is estimated to be 25%.
We are planning an adjusted operating margin between 5.4, and 5.6% with a 10 basis point negative currency impact on operating margin and our guidance assumes that foreign currencies will remain roughly at prevailing rates.
Adjusted earnings per share as planned in the range of $1.31 and $1.36 with a six cents headwind from currency.
As a reminder, our prior guidance for the was $1.28 to $1.26. So we have raised the low end up our guidance by three cents and maintain the high end.
The guidance includes 13 cents, an estimated accretion due to the share repurchases and convert transaction and includes an assumption of $5.3 million of cash interest and loan amortization expense.
The high end up on new guidance represents a 39% increase over last years adjusted he peers.
Capex for the yards is expected to range from $63 million to $68 million to support store openings.
Key store Remodels and investments in our technology infrastructure to support long term growth.
Please note that this is down from $108 million in the prior.
As I mentioned earlier on the call excluding the impact of the $46 million You Commission fine our free cash flows improved over last year to date by $89 million.
This was driven by improvements in inventory and working capital management. In addition to lower capital expenditures.
We expect to see further improvement in free cash flow in the final quarter of the or have to finished with a 90 million dollar improvement in free cash flow for the year, which is $136 million. Excluding the impact of that you Commission prime due to continued benefits from working capital management and lower capital expenditures.
In the current quarter the board of directors approved a quarterly dividend of 11 cents per share payable to shareholders of record of the close of business on December 11 2019.
Before I close the prepared remarks, I would like to take the opportunity to say that it's been a privilege to work against for the past nine years.
It has been an incredible journey for me both personally and professionally.
I would like to thank my finance team for their support over the years.
I'm, so proud of them for the wave of all the function.
Finally, I would like to think Carlos Paula Mores Marciano, the board and only associates I've worked with for their partnership and which the company continued success in the future.
With that I will conclude the company's remarks and open the call up for your questions.
Thank you leave will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you're using your speakerphone. Please pick up your handset first before pressing any numbers once again, if he would like to ask your question. Please press Star then one on your Touchtone phone.
Our first question comes from Susan Anderson from B. Riley FBR. Your line is now open.
Hi, good evening nice job on the corner and I guess I would like to maybe get a little hi has gone a little bit more colour on the Americas retail comp and tended to step back that we're seeing it take and then ended the fourth quarter as well as the operating margin.
You know what are your thoughts I guess around the store base given now that slower comp and then also that de leverage on the operating margin Frank and do you think you can get the comp back positive. Thanks.
Thank you Susan this is Carlos good afternoon Carlos.
You know just what what we saw added during the third quarter.
It was primarily driven by traffic and you are we traffic has been a negative and for the early part of the year first quarter on second quarter. However, what we saw in the first and second quarter was we were able to more than offset the traffic decline.
And with a conversion and you BT improvements so.
During the third quarter.
I work Conversant and Youve Btwob why was a better than a year ago was jobs.
As.
<unk> positive I think was earlier in the year to be able to more than compensated traffic declines on the or you are declines as well.
We as we mentioned in the prepared remarks were also lighting very specific key categories, where we like breadth and depth I think that that might have impacted conversion to certain extent and even when conversant wasn't tailwind as I indicated was not as strong with it.
Ben.
We do expect this trends to continue into Q4, even when we are making changes to our inventory position as fast as we can to really strengthen those categories that were what we were light.
With respect to the the comps going for a while we see that pressure in the fourth quarter. We are we were up against a you know healthy comps in the third quarter and that we were up against even healthier comps in the fourth quarter from last year. So while we see.
Press are impacting Oh, we think that are going into the new year things are going to be very different than of course, we are correcting the inventory position that we go into next year with we definitely have time to be able to adjust you know I think at your question was also about.
The store base on the de leveraging.
As we are pleased with the stores on the portfolio that we have obviously, we continue to look at a opportunities to improve on a occupancy cost structure and as we have many stores that are coming to lease expiration, we take every single opportunity.
To try to improve on that and if.
The numbers don't look a compelling oh, we do what we have always done which is as we exit the location if we cannot.
He a reasonable deal every store has to stand on its own.
And I think you aastrom separate operating margin and the cadence going into Q forces and so.
I think obviously with the comp guidance for Q4 are down mid single digits to down low single digits, which is.
A bit of a deceleration against Q3, there is going to be in pressure on operating margins into the fourth quarter as well, but as Carlos mentioned, we take note of actions to actually remediate that as we go into the end of the going into next year. So I think were fully expecting to start recovering as those initiatives take hold.
One more thing I would say is.
Just said during the quarter, a we saw tourist locations underperforming the non tourist locations. Obviously, if this is a global brands and and we are impacted by how to it as a react and how they're shopping.
Also weather was not ideal on because it was warmer it wasn't conducive to for cold weather product. So and this is a key a classification both in inside the third quarter and also impacting fourth quarter or we have I think got terrific assortment of product.
That is conducive for cold weather and obviously the weather in the fourth quarter couldn't be a major urban factor to really move both.
The the Liberal business and also you are.
Got it and then if I could just add a follow up on Asia and it looks a little bit work that they are also I know that's been at TEP and geography for a lot of people given the macro issues and are you seeing any stability at all with some of that initiatives.
Moving on in terms that fit and adjusting the product and marketing and maybe if you could talk about you know what else you're doing that kind of try and get that back on track.
Yes, thank you well.
Definitely the softness in Asia, you know has been not with us for a few quarters.
We saw very sudden change and trends as you know at the beginning of the here and there was just after Chinese new year, we experienced softness in our three major markets I'm talking about greater China.
China, and Korea, and <unk> and those are trends got even softer during the Q Q3, as you indicated that James is a you know when you look at what happened and how it happened you know this change is lead us to believe that there is something that is playing out a macro level.
And we know that there's a lot that is impacting the region that is completely outside our control like the Hong Kong situation that China, you Trade War also Korea, and Japan Trade War unusual weather, the where a lot of things that happened. During this quarter I don't know those are the reason why the softness accelerated.
But what we do know is that the return environment is challenging on our customer traffic is down across all market.
There is not that much that we can do on that but we see significant opportunities to improve interrante and many of those things started with product and you referred to that.
We believe that the product requirements for the region are very specific in Korea, and Japan, we are developing specific product and we have been.
For a several years, but we do not do that in China at the moment. So we do have an opportunity to better address the customer needs in terms of product styling sizing on and fit and.
Also we think that as we studied the flow of our inventory. We believe that we have been impacted by insufficient newness in our inventory position, especially in greater China.
The composition of the product offering has been impacted by the high level of folder season inventory that we came into with and and that's we worked through the current inventory and all that X is a you know we are ensuring that we're very careful with how we buy the future proud.
And we do incorporating units.
We think that there was also an upward swing on prices, we have been analyzing our price 0.5 products and compared to some other brands that are have become relevant in the market and that we think that this brands have been aggressive with fast development and also.
Sharp pricing. So we are adjusting to that and then with respect to specific product as you as you know we think that.
That is going to take some time we are.
Really trying to analyze a weather our existing lines from Korea, and Japan can serve that purpose is to a great degree, but we still think that there is a a need for a very specific more localized markets.
Product strategy and that's what we're doing we're building that seem to be able to do that you know they said you didn't ask about marketing, but we think that marketing into is that they factor here too.
We think that there is an opportunity to enhance the how we.
Collaborate with partnerships with the music bands celebrities and a influencers and we have now proven that working with the groups that have high local relevancy is very effective at a great example, this is generations that we use in.
Fine about a year ago, we did a big collaboration I was super successful and and when we go with groups that are not as relevant to the local markets. We don't see the same level of success. So for that reason, we are really doing another collaboration with generations in Japan.
This coming in Q1, and we are excited about that at the end of that day.
The key thing here is that when we look at at the region.
It's the long term potential for gas in Asia, and I am very convinced that this potential remain very compelling and represents a great example of what I call asymmetrical risk what does that mean it means that the business is relatively small compared to our overall business we.
How about relatively variable expense structure.
Especially when you think about a this doors on on flexible rents that we have there or shorter leases on kick out clauses.
And the opportunity for growth, it's incredible, especially with our brand the brand is well known it resonates with the Asian consumer we have done it before and I think that we'll do it again, so we when I look at this obviously is a somewhat disappointing to have to go through the current slowness.
But to when you think about you know the size of the market that we're talking about how we're talking about a roughly at 13 trillion.
Dollars economy in greater China that is a huge or the middle Middle class is the biggest middle class in the world.
So we see a lot of opportunity and we think that we are protecting.
The downside and Oh, we have a business model that can really navigate through a challenging times and especially considering that the size of the business is not that bit compared to the total company. So we are going to talk more about this when we see you on Tuesday, but.
But I think that the opportunity remains a very very powerful and a great one for guess.
Great. That's very helpful. I'll get like this holiday and can be I wish you all the Beth.
Thank you. Thank you so that gives us.
Thanks.
Our next question comes from Janine Stichter from Jefferies and company. Your line is now open.
Hi, Good afternoon, one does that's carrying a little bit and talk about your IP. So that's a nice margin improvement there. It seems like you are beating your own internal forecasts and what you can get them through the European.
The logistics cost on that side of business.
Can you talk a little about what's going on there how your how you're driving that improvement and then ultimately what the time and looks like for recapturing some of that headwind that you saw last year fan and that easy transition.
Sure Jenny and thank you.
We are obviously super Super excited about the business in Europe , we have seen strength across the board across.
Countries across channels. So we couldn't be more pleased when you think about I think sandeep mentioned, how strong our wholesale businesses to you know we have seen several years now have a significant.
Improvement on growth and our wholesale business, that's not easy to do and I think it speaks about the strength of the brand and and how good the product is on how well.
Perceived or you know our business and our relationships are so I'm very excited there with respect to the retail business. There are some major differences to what we see in other parts of the World 10, and it starts with the traffic to our traffic in the retail stores is positive and.
We also see similar type of momentum online. So the momentum overall is a very positive.
I think that that also enabled us to really move very quickly through the inventory or you know just changes that we wanted to make US you may remember we ended last year with some excess inventory in Europe , and we had a plan to really dispose of that.
Through both internal channels like our outlet stores and also using the off price channel and and we have been able to more of a quicker.
You know just as we navigate it those inventories boards, which really also contributed to a giving us more abili T too.
Invest in newness and and really have a very good inventory position already.
So overall I think that up you know the business is doing very well with respect to the operating side. Obviously, we are expecting we're guiding to a major operating margin expansion in Europe . This year and and we feel that that is or something that is definitely.
He happening, but it's still leaves a lot of opportunity for continued growth of operating margin you mentioned logistics and distribution, we're going to talk more about that next week, but we do have a pound to to continue to improve on that we think we as we look at what's happening with other business.
Is that are similar to ours and are they kind of logistics and distribution costs that those businesses.
Consume we know that there is a big opportunity for us to do better and we have a plan to do so.
And I mean, it's Roger.
Something to that Jeanine I think for them, but the mountain recapture that you talked about the thing for the first nine months, we've already over 400 basis points in margin improvement for Europe , We expect to see this continuing trend and if we actually get to that we get very close to double digit margins, because most who we were 5.4% and operating margins and.
So I think the thing about this is it's extremely powerful in terms of the total company business model as well and this common spoke to it.
As a diversified business model the strength of the European business has been able to offset the weakness that we saw in the Americas retail and Asia business and this is really critical industry. The 120 basis point improvement that we're talking about for the current your despite the softness and this much more to the we can actually go forward because.
Operating efficiencies also have contributed in the current here, but there's a lot more that we'll talk about next week.
So I think it's really exciting to see that even with this softness we've been able to drive so much and margin expansion.
That's really helpful color and then kind of quick one also on the Americas wholesale business you saw a nice but at this quarter you haven't seen nice trends and it looks like you're guiding to a decline but are there anything there with timing are you seeing anything in terms of and southeast changing with your wholesale partners.
Yeah no it's.
Actually I think at a better way to look at this is more a on on annualized basis. I mean, obviously, we did have some timing issues that impacted both second quarter on third quarter on now fourth quarter, Oh, we still consider that the business is very healthy and we Uh huh.
Shouldnt think about the negative.
You know number in the fourth quarter to represent anything other than a timing issue or we think that our partners are are really doing very well and we are we have at very strong relationship. Obviously, we continue to see growth and a and that is.
Very unique considering what's happening in the markets out there. So I think it speaks about the brand on the strength of the product.
Great. Thank you so much.
Thank you Tony.
Okay.
Our next question comes from John Kernan from Cowen and company. Your line is now open.
Hey, good afternoon, and thanks for taking my question.
Hi, wont have you.
We have you on the call one last time just wanted to.
Okay growing a little bit on the fourth quarter guidance. It it seems like there's a fair amount of operating margin expansion embedded in the outlook.
Our guiding to negative comps in North America.
And slower comps in.
In Europe , I think there guided up low singles on a constant currency.
Just wanted to drill down on on the machine a leverage assumption that seems to be implied in the EPS guidance can you talk about that you know the dynamic between gross margin and I see in a in the fourth quarter.
So Europe being a very strong region right now or Theres, a lot of margin expansion I'm, just trying to balance that against other areas.
Sure John I think when you look at what happened last year and our cadence in terms of gross margin performance.
We actually had gross margin expansion in all of the first three quarters and the only quarter last year, where gross margins declined with the fourth quarter and the reason a decline in the fourth quarter last year is because we went into the fourth quarter and to have been inventory position how to take markdowns during the quarter and we have to take inventory reserves during before.
<unk> as well by the end of the fourth quarter. This you're in contrast, we entering the fourth quarter in a very good position relative to where we were lost here and we expect to be even plene, though by the end of your and so the assumption that's embedded from a gross margin perspective is definitely be significantly better.
And if you if you look at the Guy that's replacing that history in a basically is roughly flat with last year. So almost all of the gross of the operating margin improvement we're talking about for the company is coming from gross margin and it's it's been very consistent in the first nine months or the your.
It's driven by all the initiatives that we've talked about the IMU improvement the fact that especially in Europe , we've been a lot less promotional on a pretty significant business. All of those things are able to offset some of the weakness that we've talked about and in Asia in Americas and the logistics costs are very material because of the size of the European business.
And that's also contributing in a big me in the gross margin line. So you put all that together that's why we're pretty comfortable with the the operating margin guidance that we provided but it really ties back to the gross margin cadence got it that makes sense. Thanks, and then just maybe a follow up on Europe , you, obviously have a lot of detail on.
At the Investor day on this but can you you know when you think about the white space in Europe can you can you talk to us and how you feel about the dynamic between wholesale and retail both have worked well and came together this year, but I'm just how you're viewing those channels as we head into the fourth quarter and beyond.
And any update on on the backlog going into next year would be helpful. Too. Thank you.
Yes. Thank you John well, let me start that you know during the last few years the company invested considerably to expand this store base and and Europe I'm talking about but you know also in other regions, but I feel that we have.
A great platform right now and I think that are we have an opportunity here to continue to build productivity in those stores. Many of those stores are very new obviously and Oh, we feel that there is a an opportunity to continue to build the retail business.
Through them on on that same store sales growth.
With respect to the wholesale business I think are we have done the company has done a great job in looking at the up that different distribution that we had by country. A lot of the countries are doing extremely well with a expanding distribution.
It's not necessarily more accounts, though we do have a more accounts, but also more productivity with a different accounts that we have been doing business with so.
And I think all the is at an expanding in a different product categories has a really fuels are they kind of growth that we have experienced doing so many years, so I think that.
The balance is pretty significant and I think at a synergistic for the brand and the third big piece that we will talk more also during next week is a is that about E. Com. You know we believe E. Comm has been growing at a very fast clip and we see that as.
We are equipped the the business with a sales force on a additional.
Capabilities, we can do even better and significantly faster. So we are very excited about that initiative, we will share more about how we are approaching it next week.
But you put it all together and you think about some of the white space that we had in Europe . When I was here 910 years ago, you know our presence in Europe was very limited and it was limited to the southern countries and are now when you see how much of the company has done to.
To really expand north and to the east ER and the and it has done it. So successfully I think it speaks a very very strongly about the more opportunities that we have to continue to grow in the region.
And John you asked about the backlog I think we as we mentioned on the prepared remarks saw the spring summer Twentys backlog is helping the double digits and that's the.
Six consecutive season, which is about three years worth of double digit growth that we've seen in the wholesale business and this as a reminder, that spring summer trendy product.
Ships in the fourth quarter of this year and first quarter of next year when the process of collecting orders for the fall winter to a forward into 20 season, which is coming next year and typically we update during the March call on on that cadence and so we'll have more on that at that point.
Excellent. Thank you look important actually.
Thank you John we're Susan.
As a reminder, if you ever question. Please press Star then one on your Touchtone phone again, if you'd like to ask a question. Please press Star then the number one and you touched on phone Sandy probably for any additional question.
Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is now open.
Good afternoon, everyone high Carlos.
Hi, how are you, saying.
Good how are you as you think about valve business.
Excellent and you think about the wholesale business both in America and in Europe . What are you seeing there in terms of order pattern. What are you seeing there in terms of pricing and promotion and how you working with the wholesale distribution channel. Thank you.
So so we our business in America and the business in Europe at wholesale are very different you know in America. We have a business that is a concentrated on on a few.
Accounts and you have some some on within that.
I have a company like Macy's, which definitely it represents a big big partner for Us.
And then we have some distribution with other retail chains, such as urban and and.
And Pacific Sound, what I'm sorry.
That that represents a very significant opportunity for us to to deal with product that is.
Somewhat different and ER and caters to a consumer that is a younger we have talked about the generation see opportunity here.
I think that when you look at Europe Europe is a much more fragmented business, we have a in excess of 8000 accounts.
The region and and I think that you know obviously there is a very you notice that diversified base of business is depending on where this accounts are located and sat what kind of countries. They are just participating in.
The flow the order flow as being a very inline with what we have seen in the past I think that you know just the Sandeep just talked about Europe and how.
The.
Ah different seasons are extended into each each season is a a six month season, and so what we see and the floor. There is a sales campaign that that is a relatively a rigorous in terms of five times and the weeks that this takes on and what we see.
He is that those autumn order patterns have been pretty much consistent with the path and and exciting to see the growth that we have seen and and the business in the Americas I think at has also been traditional in terms of how the orders have been place.
I think that we are very pleased with the distribution model that we have we're very pleased with our partners and we see opportunities to continue to grow together.
Thank you and the promotional environment as we go into the fourth quarter, how do you think it'll be different than last year.
You know it's a it's a very you know it's pretty hard to say you would probably know more about a you know what is the inventory.
Situation for foremost you know what are the only thing that we know is what we see and what we hear obviously, we have a big change hearing calendars and and obviously that is impacting how the business is behaving. We so you know some level of promotional activity, even before Thanksgiving, which.
As you know was a more unusual in the past, but considering that the current very significantly more compressed you know just kind of makes sense. So we we are happy with where we are in terms of inventory position and so I think we you don't like we said you know.
We are targeting to end the year with inventories are down about a in double digits, which is a break it would be a significant accomplishment for us.
Thank you have a great holiday.
Thank you Dana happy holidays.
As a reminder, if you have a question. Please press Star then one under Touchtone phone again.
Ask your question. Please press Star then one on your Touchtone phone.
[noise] presenters at this time I show no further questions in queue and I would now like to turn the call over to Carlos for closing remarks.
Well in closing I want to thank you all for your participation today, we had a good third quarter on we are well positioned to have a strong fourth quarter and close a terrific year with strong topline growth and significant profit improvement.
We look forward to reporting on our progress on a we certainly hope to see you next week at our Investor Day event were really looking forward to that Sandeep. Good luck to you in your future and thanks again for all you have done a happy Thanksgiving to everyone on enter your time with your family's thank you again.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.