Q3 2020 Steven Madden Ltd Earnings Call
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Thanks, Susan and good morning, everyone.
Thank you for joining our third quarter 2020 earnings call and webcast.
Before we begin I'd like to remind you that during our call we may make certain forward looking statements.
And the federal Securities laws regarding our expectations or predictions about the future.
Generally these statements relate to projections involving anticipated revenue 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 risks uncertainties and factors not within the company's control.
And as such our actual performance and results may differ materially from these statements.
Our annual report and other reports filed with the FCC from time to time include detailed discussions of the risk the company faces and we urge you to refer to these.
Typically the COVID-19 pandemic has had and its currently having a significant impact on the company's business operations and results.
Such forward looking statements with respect to the COVID-19 pandemic include without limitation statements with respect to the company's plans in response to this pandemic at.
At this time, there is significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic.
It does it does not make nature of these circumstances statements made on this call regarding the company's response to the cold in 19 pandemic could change at any time.
Any forward looking statements represent our judgment as of the time this cool and cannot be relied upon as current after today's date.
Disclaims any intent or obligation to publicly update or revise any forward looking statements.
As a result of new information future events or otherwise, except as required under applicable law.
The financial results discussed are on.
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 is Ed Rosenfeld, Chairman and CEO of C met and with that I'll turn it over to Ed Ed.
Thanks Danielle.
Good morning, everybody and thank you for joining us to review, Steve Madden third quarter 2020 results.
Well the COVID-19 pandemic continues to have a negative impact on our business I'm pleased with the progress we made in the third quarter delivering revenue and earnings that significantly exceeded our expectations and also executing on initiatives that position the company to take market share and drive profitable growth going forward.
It's Steve Madden It all starts with product and Steve and our design teams continue to execute on what they do better than anybody in our industry.
Identify new trends quickly, creating product that reflects those trends and getting that product to market ahead of the competition.
During this period of rapidly changing consumer preferences, we have leaned on our proven test and react model and industry, leading speed to market capability to quickly adjust our merchandise assortments to align with what our customers are looking for now.
Expanding growing categories like slippers, and slides, while reducing the penetration of down trending categories like dress shoes.
We also continue to make great progress in advancing our digital commerce growth agenda.
We have accelerated our investments in talent digital marketing and new E Commerce and omni channel initiatives.
I just missed that position us for continued strong growth in this critically important channel going forward.
Well, we have invested in digital we have also looked for ways to reduce and rightsize our expense base in other areas of the company.
Polluting, making the difficult decision that we discussed on the last call determinate about 250 corporate employees in the third quarter, which will result in annual savings of approximately $25 million.
Finally, we've moved quickly to manage our inventories and dispose of the excess stock created by the COVID-19 store closures and cancellations.
As of today, our inventories are in line with sales trends and we have disposed of four have orders for more than 95% of the excess inventory created by COVID-19 disruption.
She has to play offense as we move forward.
We are confident that these actions combined with our strong brands pristine balance sheet and proven business model will enable us to continue to navigate the crisis and to thrive once conditions normalize.
Now, let's turn to our results for the quarter.
Consolidated revenue declined 31% and diluted EPS was down 42% compared to last years third quarter.
Obviously these are numbers, we are not accustomed to its Steve Madden and we don't plan on having to use to them that's.
That said given the unique circumstances, we're pleased with where we came out for the quarter with results that exceeded our forecasts on both the top and bottom lines.
In wholesale footwear revenue declined 32% compared to our expectation of down 35%.
Our core Steve Madden Women's Division declined mid teens on a percentage basis coming in significantly ahead of forecast as we reacted to early reads strong or early reads on boots, particularly loved bottom styles and accelerated boot shipments to key wholesale customers into September.
Our Steve Madden Europe business was also a standout in the quarter with revenue increasing from the prior year driven by strong gains with E commerce customers Londo NHS.
In wholesale accessories, and apparel revenue decreased 33% compared to our forecast of a 40% decline.
We have been pleasantly surprised by the relative strength, we're seeing in the handbag category compared to our expectations, both branded and private label handbags are trending ahead of forecast with private label recording a year over year sales increase in Q3, driven by gains in the mass channel.
Apparel also contributed to the Overachievement to plan.
The co branded BB Dakota, Steve Madden product hit stores and websites in August, including Nordstrom revolved bloomingdales and shop off as well as the man Dot Com of course, and we have seen strong initial sell throughs, particularly in dresses and sweaters.
Looking ahead, while our wholesale business will continue to be under pressure due to the impact of the pandemic. We do expect to see nice sequential improvement in Q4 compared to Q3, driven primarily by continued recovery in our flagship Steve Madden brand in both footwear and handbags.
We expect fourth quarter wholesale revenue to decline high teens on a percentage basis compared to the prior year period.
In our retail segment revenue declined 22% compared to our expectation of a 25% decrease.
Our E commerce business, particularly on Steve Madden Dot com remains a bright spot.
Revenue on Steve Madden Dotcom increased 82% for the quarter on top of a 72% increase in last years third quarter.
This was our second consecutive quarter of greater than 80% year over year growth in that business.
We continue to see robust returns on our increased investment in digital marketing and strong consumer reception to our new initiatives like try before you buy.
With respect to bricks and mortar we started the quarter with just over 50% of our U.S. doors open well.
Well, we reopened almost all the balance in July we had to re closed 14 stores in California from mid July through the end of September due to reimpose government restrictions.
Outside the U.S. our stores were opened throughout the quarter with the exception of two stores in Mexico, which reopened in August and 21 stores in Israel, which we closed in September and remain closed due to the reimposed lockdown.
[noise] hours of operation in our stores have been reduced by 25% to 30% on average we are planning on increasing hours of operation and the majority of our stores beginning November.
Traffic and sales and reopened stores have shown some improvement over the last two months, but this door business remains under significant pressure.
Looking ahead, we expect fourth quarter retail segment revenue to decline in the high teens on a percentage basis compared to the prior year.
Overall, our operating margin for the quarter was 13.3% compared to 14.4% in the same period last year.
Consolidated gross margin increased 130 basis points, driven by our E Commerce business, which had higher margins and accounted for a significantly higher percentage of our total mix compared to the prior year.
As expected operating expenses de leveraged versus last year due to the decline in revenue, but we mitigated the impact through cost cutting measures, which drove operating expenses down 24% compared to the prior year.
Looking ahead, we expect fourth quarter operating expenses to decline approximately 10% compared to the prior year.
Overall, we were pleased with our execution in an extremely challenging quarter.
As we move forward, we are clear eyed about the challenges we will continue to face in the near term.
We're also excited about the opportunities ahead of us.
With our strong brands powerful business model rock solid financial Foundation, and most of all our exceptionally talented and dedicated employees, we are well positioned to capitalize on market share opportunities and drive sustainable growth in the years to come.
And with that I'll turn it over to Danielle to walk you through the details of our financial performance in the quarter.
Thanks, Ed.
Given the challenging retail landscape, we were pleased with our third quarter results that came in significantly ahead of our expectation.
In the third quarter, our total revenue decreased 30.9% to 346.9 million compressed compared to prior year total revenue of 500 in 2.1 million.
Our wholesale segment declined 32.7%.
283.8 million compared to 421.6 million in the prior year period, including a decline in wholesale footwear of 32.5% to 213.3 million and a decline in wholesale accessories and apparel.
33.3% to 70.5 million.
In our retail segment revenue decreased 22.1% to 59 million as our brick and mortar business remained under significant pressure during the quarter.
In our E Commerce business performance remains strong despite the reopening of our stores.
Digital sales rose, 63.3% in the quarter, including 81.8% growth on Steve Madden Dotcom.
We ended the quarter with 221 company operated retail stores, including 67 outlet.
E Commerce stores as well as 17 company operated concessions in the international market.
Turning to our licensing and first cost segments.
Our licensing royalty income, which is now included in total revenue.
2.6 million in the quarter compared to 2.9 million in last years third quarter.
First cost Commission income, which is also now concluded in total revenue was 1.5 million in the third quarter of 2020 compared to 1.9 million last year.
Consolidated gross margin in the quarter increased 130 basis points to 40.3% comp.
Pair to 39% in the prior year period.
Wholesale gross margin rose 70 basis points to 34.6% compared to 33.9% last year, driven by an increase in wholesale accessories and apparel.
Retail gross margin rose 50 basis points to 63.8% compared to 63.3% in 2019 due to stronger margins in ecommerce.
Operating expenses for the quarter decreased 24.2% to 97 point excuse me 93.7 million compared to 123.6 million in the prior year's third quarter, reflecting the actions taken to reduce payroll and scale back on honest.
Essential operating expenses.
Operating income for the quarter totaled 46.2 million compared to last year's third quarter operating income of 72.3 million.
Our effective tax rate for the quarter was 29.3% compared to 22.6% in the same period last year.
Finally, net income attributable to Steve Madden limited for the quarter was 31.8 million or 39 cents per diluted share compared to net income of 56 million or 67 cents per diluted share in the third quarter of 2019.
Moving to the balance sheet.
Financial Foundation remains strong.
As of September Thirtyth 2020, we had 257.2 million of cash cash equivalents and short term investments and no debt.
Inventory totaled 109.7 million down 25.9% compared to the prior year figure of 148.1 million.
Capex in the quarter was 1.2 million.
Given the significant uncertainty related to the COVID-19 pandemic.
Not providing earnings guidance at this time.
Now I'd like to turn it over to the operator for questions.
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Our first question comes from the line of follow up Paul Lane Mayhew wins from TD.
Your line is now open.
Hey, Thank you guys I'm curious if you can maybe talk a little bit about how you're planning that first half of 21, maybe speak to what your order book looks like this time and just from talking to your wholesale partners are they are they holding off placing orders you know two until later date and.
And also kind of related to that can you maybe talk a little bit about your private label business performance in the mass channel and what that might look like as a percent of total as you think about 21 versus where you were let's say enough 19. Thanks.
Sure Yeah in terms of how they the wholesale customers are thinking about spring I think that.
Overall, they're taking a fairly conservative approach and most folks are planning that business down to a two.
If you want to compare to 19 art or compared to what the plans looked like for 20 at this time last year.
I think that.
On average the plans are probably down 15% to 20%.
Ken This is for.
For their overall businesses.
You know not.
At this point going to provide exactly what we think it's going to look like for us.
But that's those are the types of numbers, we're hearing from the wholesale customers.
And then in terms of a of private label, Yes, we feel you know.
We feel fortunate that we have this private label business with the mass merchants that that's very significant for US you know, it's it's close to $300 million business between the.
Two big mass merchants, and ER, and we're doing well with them and we're a word.
In a lot of discussions with them about new initiatives and that business should grow for us in 21 and so.
So yes, I do anticipate it will it will makeup.
Makeup a more significant percentage of the mix next year.
Got it. Thank you had just just one follow up can you maybe talk a little bit about what you're seeing from an E. Com perspective, just in terms of the average order size online.
During this this period versus let's say last year, our average order size U.P.T. return rate screens, you could just speak to what you're seeing on the Oh that direct business. Thanks.
Sure.
Yeah, well certainly over the summer we we saw a decline in the U.R.. We were we were more promotional on our own website than we were a year ago. As we were utilizing that channel to clear through some of the excess inventory created by all the COVID-19 disruption. We're also selling some lower you are items like that like Mad.
Thanks.
But as we come into fall here, we're seeing that you are creep back up a and I think going forward it should be more in line with what we've seen historically.
Terms of U.P. T on the other hand that was up over the summer that was helping us to to.
To counteract some of the.
The decrease in the or you are a and also as weve used up.
I think we've talked in the past about about the success that we've had with with our installment payment program, which which we've.
Modified over the summer to add this try before you buy concept and we've talked about how that drives a significant percentage of our checkout now and on those orders, we see a very nice lift in the <unk> and the average order value compared to the balance of our order. So that's also helping to.
To drive average order value up.
I don't think I'm return rates like Oh, I'm, sorry, Yeah return rates have.
Have not moved significantly from where they've been historically.
Great. Thank you good luck.
Thanks.
Next question comes from the line its Camilo Lyon can be key <unk>. Your line is now open.
Thanks, Good morning, how are you guys.
And in the past he.
You mentioned the disparity between full price wholesale partners in the off price channel.
Can you talk about if that disparity in that gap is still present and when do you anticipate that gap from an order perspective to close.
Yes. Good question. So definitely in Q3, we saw that our sales to those full price accounts.
Were considerably better than what we saw in selling into the off price channel. This is I'm talking about our shipments on our sell through.
But we're going to see that start to get much better in Q4, and I think it should be the channel should be more aligned going forward.
That's great and then.
I think shifting gears, a little bit towards the market your comments that you've been making we've seen that as well given your new units in the end the products, even bringing to market is it.
Have you started to see that reflected in your order patterns or is it still a little bit too early I'm sure that's actually materialize in whether its at once orders reorders or even spring orders.
Oh, Yeah, no I mean look we've got some weve got.
Some strong selling products and we're seeing the seen the retailers react to it and Weve certainly chased into some some items here for for fourth quarter, particularly in the boot category.
I mentioned I think that the love boots in the prepared remarks, and those are doing great for us so.
So yes. We are we are starting to see are starting to see the retailers react to that.
Great and just last one from me is on the gross margin you didn't give any color on where you thought could Q4 gross margins would shake out, but just judging by the last two quarters margins have been up about 130 basis points and with Q4 being a bigger DTC quarter safe to say that God. So at least we should shake out for Q4 margins.
I don't know I would say at least but I definitely do think that we can see a see.
See some year over year gross margin improvement.
You commented on that on the DTC a issue that's that's one thing but also.
You know just our inventories are very well controlled you saw that they were down 26%.
At the end of Q3, and we've guided revenue to down high teens in both wholesale and retail so so obviously.
Very well controlled inventories and I think that we should be able to drive a drive a little bit of gross margin improvement in Q4.
Great. That's a luck in the holiday.
Thanks Bill.
Our next question comes from the line of airing Murphy from Piper Sandler. Your line is now open.
Yes.
Any movie from Piper Sandler Your line is now open.
Erinn Murphy.
From Piper Sandler Your line is now open.
Operator can we can we move on and come back to it.
That is getting.
Thanks.
Next question comes from the line its unions teacher from Jefferies. Your line is now open.
Hi, Good morning, Thanks for taking my question me touched a bit on a watch trends for the E. Commerce business. Just wanted to ask about broader you are trends you mentioned some puts and takes in terms of products with some of the triplet. Meanwhile, but then also I think slippers inside trending so are there any implications for how we should think about how you are I'm just from product.
Next is in the fourth quarter. Thank you.
Oh, Yeah, I I think that you know you hit on a you hit on it which is that you know we've got some we've got slippers, which you know is only about 1% of the women's mix in last year's fourth quarter and it will be about 9%. This year. So that's obviously a lower.
Thank you our item I, but on the other hand boots and booties, you know, they're making up a bigger percentage of mix I think that was about 44% last year. It is going to be more like 50%. This year. So so I don't think you know the net effect is a is pretty modest I don't think there is going to be a big swing in that you are in Q4.
Great. Thanks, and then just a follow up on gross margin I think you mentioned that E. Commerce gross margin was bad or was that just a function of I think you mentioned last quarter, you worship shipping more from the warehouses or anything like that going on or anything going on in terms of promotional levels that drove that.
Well yeah.
Ecommerce relative to the bricks and mortar is as we've talked about historically is always a is always higher than bricks and mortar and we continue to to you know do.
I'd be super promotional in E Commerce as I said, we were slightly more promotional particularly early in the summer than we were a year ago.
Uh huh.
But but as you've gone through that.
You know.
Through the third quarter and certainly in the fourth quarter, we dial back on that and even at the tail end of third quarter.
You know when we still had a lot of some some promotional messaging that referred to the fact that the products that we had.
In the clearance buckets, you know, it's a relatively small percentage of the overall stuff on the site and we were still driving a lot of full price full price selling there.
Great. Thank you.
Our next question comes from the line of Matthew degrees from Keybanc capital markets. Your line is Hamilton.
Good morning, guys. Thanks for taking the question [noise] some.
I'm wondering how the growth of E com will will intersect with wholesale maybe maybe next year. So it's what the growth be calm your own E com and I know you've used your own do you come to the test product in the past.
Wondering how maybe a higher and meaning you might know somewhere probably more test product online and get more eyeballs on it might help your case, an increase additional inventory order size from wholesalers and help you take shelf space from wholesalers mover moving forward.
You know I'm sorry, you were you were cutting out at the beginning of that question could you. Please repeat that.
Yeah, I'm, sorry, I, just don't you guys test online.
And now with your ecommerce growing so quickly you get more eyeballs on your touch product I'm wondering how that maybe helps your case with your wholesale customers moving forward and maybe helps you take shelf space next year.
Oh [noise].
Yeah. That's an interesting question look I think that we we had a we had.
[laughter] plenty big enough sample size on our test product, whether we were tested in stores or or online.
Even previous to to what we're seeing now so I honestly don't think that that makes any significant difference.
Got it.
Okay and one one separate question you mentioned a lot of boots, a bit but can you comment a bit more on the overall boots and booties category. This winter, how maybe the the higher and you aren't well will flow through to revenue gross margin I'm I asked because I think the case to be made that you know people want to spend a lot of uptime outside when it slushy.
This winter, which could provide a nice tailwind to a brand like blondo, but I'd love to hear your thoughts.
Yeah look we're seeing some that were seeing nice trends in a in the boot category.
It was I think you were sort of pleasantly surprised about how it started selling early we we initially went into the season, assuming that the spring summer stuff was going to really sell late in the season.
But but what's really came on quite early and as we indicated earlier, we're able to chase into some of that product most motion shipments up into Q3, and then chase into some to some more boot business for Q4.
I mentioned these these lugs styles I think that's interesting because it's it's a casual boot and comfortable which obviously plays into that the broader trends that we're seeing right now but it also.
Has the nineties fashion trend element to it as well. So so we're seeing you know we're feeling very good about that and and overall, we're just seeing as I mentioned, we're seeing that drive a bigger penetration in the in the overall business. So that's baked into the to the sales forecast it that way.
Hi.
Thanks, guys best of luck.
Thank you.
Our next question comes from the line at the samples from Susquehanna.
Your line is now open.
Good morning, you about filling in for Sam here. Thanks for all the color here and thanks for taking my question could you maybe just walk us through some of the highlights in low lights for the other segments of the business maybe by brand, maybe mens and climb Blondo bond girl any color on what you're seeing now and how you see those brands performing as you look at it.
Sure.
Yeah well.
You hit on a couple of other ones that are tougher frankly, you know if you. If you look at our overall performance clearly Steve Madden Women's is outperforming our overall business a kids is also outperforming.
And then is the category that's tougher.
I think that you know where as.
You know, we're seeing what pretty much everybody else, that's not a big athletic players seen which is that you know if you historically have had success in the dressing dress dress casual part of the men's market. That's that's obviously not doing as well right now and so so we're in the process of trying to.
That's right.
We are changing our you know modifying the merchandise assortment there to get more casual and introduce a.
Or slides and and and.
Slippers, even in casual products.
Incline also you know clearly has a little bit of the winded space given it's a given its historical positioning of being more career and having more dress product.
But the team I think has done a great job of.
[music].
That's again getting some some great new casual styles in going forward and so looking forward to that that business getting better in spring Madden girl I feel good about what we're seeing there in terms of sell through over the spring summer period. They have a really nice position in the foot bed category, that's been important for them.
For the last few years.
So that obviously aligns with what we're seeing in the in the in the COVID-19 world.
And they're like see bad, they're doing quite well with that with boots, and some love boots combat styles et cetera.
So I think that pretty much.
Covers them.
Great Great. That's very helpful. Thank you best of luck on its all that.
Thanks.
Our next question comes from the line of G.. So will you be at your line is now open.
Great. Thank you and can you talk about what you're seeing from your customers in terms of if the trends you're seeing are due to just stay at home trend or more to the casual trend or is it just sort of an economic thing, where obviously, there's somewhat of a recessionary environment out there you sort of talk about what do you think the biggest drivers.
Well of the power of a in terms of what we're seeing in terms of product trends no I definitely think that a that.
To stay at home work from home Casualization, I think that's a that's a very big driver of what we're seeing now and the probably the most significant factor.
You know what are the signs you're going to look forward to decide like what next year is going to look like if we're going to see you know do you think people want to come back to work have you done any studies about or I mean, any thoughts on what we might see next year in terms of how consumers might.
To respond.
Are you talking about in terms of what products would be good or what the numbers will look like not just in terms of like stay at home are people going to continue to want to stay at home and more casual or do you think we'll see a reversal back to you know some of the more traditional dress footwear styles.
[laughter] right look I mean, what we you know as you know what we do is we let the we let the customer I tell US you know we're constantly testing new products.
And ER and then chasing into the to the once the customer response to so I don't think I'm gonna make any.
Predictions about what the world's Gonna look like obviously, what happens with the virus is going to be the biggest or the biggest determinant of that I think that there's a good bet that that whenever things do clear up a with the virus that there's going to be some pent up demand to ER for folks who want to get out and do stuff in probably worsen.
Dress shoes, and but you know, but when exactly that will happen you know I don't have any more insight into that than you do.
Okay, then maybe one more I'm used to elaborate a little bit on somebody accelerated investments, you're making to be calm and digital sort of what what where your focus in what a what the goals are.
Yeah, well look you know, we're we're pulling back on a and expenses throughout the business, but but not in that area and that area, we're really investing.
You know I think for it starts with talent in the organization and we've we've.
We brought on a.
Some some very high level talent that we're very excited about over the last over the last couple of months you know we talked about the digital marketing investments that we're making you know our our digital marketing spend is up dramatically this year versus last year.
And we are getting returns on that you know whether it and that's that's across all the normal channels, you know paid social email text influence or pay search et cetera.
We also we just launched a new app a about a about a month ago.
Which we're excited about.
We're rolling out a lot of new initiatives I mentioned try before you buy you know where I'm also excited I think longer term about the enhanced delivery options. You may recall that a couple of years ago. When we introduced free two day shipping that was a that really was very successful for us and we want to up the ante even further and so earlier this year, we started testing.
Free one day shipping and same day delivery.
No.
Obviously, we offer that where where we can do it cost effectively where we have stores that can that can facilitate the delivery there and that's in a handful of stores now I think about 17 stores now and we'll roll that out to the balance of the chain going forward.
And there's a whole bunch of other initiatives that we're working on that work.
I'm not ready to unveil, yet, but but it's a it's certainly at that.
No.
The number one focus area for our company and we're excited about the momentum that we have there.
That sounds great you know if I can actually sneak one more in just on if you could clarify your comments on amex little bit was it just really in the mass channel, where you saw the surprising strength or was it sort of across all your channels and is the guidance for you know high teens down high teens Fourq, you still does that apply to the wholesale accessories business as well.
Yeah. So we're actually also pleasantly surprised by what we're seeing in the branded side and particularly in in what we're looking at in terms of our orders for Q4 are we seeing a really nice recovery in our branded handbag business, particularly the Steve Madden brand and.
And so yes in terms of that down high teens.
Forecast for Q4 at wholesale I actually think a in this case wholesale accessories and apparel will actually be better than that so.
So wholesale accessories, and apparel should even be a little bit better than wholesale footwear in Q4.
Got it thanks.
Thanks Jay.
Your next question comes from the line as well that's fine.
Capital Your line is now.
Thanks for taking my question is really a follow up on what you just said Ed so with a lot of retailers, obviously trying to move holiday season earlier for variety of reasons. This year do you actually have better visibility into Q4 trends than you normally would it be end of October.
I don't know I would say that Oh, yes, I think you know, we do obviously anticipate or or are aware that everybody is going to try to start.
Start their promotions.
Really I think for the whole month of November this year and try to elongate the holiday season, but but I can't say that we have better visibility and certainly if you think about you know.
The.
Surging.
COVID-19 cases recently and the uncertainty that that creates I still think it's a pretty a volatile and uncertain environment.
Got it thanks for the context.
Thank you.
Next question comes from the line is <unk>.
You can tell.
Hi, Dana.
Thank you for taking the question as you think about fulfillment and these fulfillment options. What are you thinking and how are you planning on shipping and surcharges that are expected whether it's the holiday season or go forward and then I have a follow up thank you.
Sure.
Yeah, well, so historically with our E commerce business, we've actually fulfill the majority of our orders from our from our stores.
This year, we've done a lot more out of the warehouse given the COVID-19 disruption we would like to.
Swing some of that back to.
To the stores.
But it's a bit it's a bit of a moving target and you know one thing that we did have to spend which I probably should have mentioned earlier when I alluded to free two day shipping was that we.
We have suspended free two day shipping or this year and that's bad originally was due to some of the disruption, but now it's really primarily due to the fact that the shipping carriers are not are not willing to commit to their normal levels of service given the the overwhelming demand that they have right now.
So so we look forward to being able to get back to that early next year.
And then you mentioned the surcharges or you know obviously were.
Oh aware of that issue.
It is baked that into our our internal forecasts here for for Q4. The good news is we do have some contractual protection that ER with a in our contracts with them that you know the caps or how much we can get hurt by that but but certainly it will impact us got it and then as you think about the E commerce.
Margins given the strength there.
Our E commerce margins accelerating as you're scaling the E commerce business and is there any penetration rate that you're looking at as easy as we hopefully get to the other side sometime next year is what percent of the business should be E. Commerce as a result of this thank you.
Yeah, we continue to see profit margins or increase in E. Commerce. So over the last few years, we've driven this very strong sales growth, but I, but each year the growth and profitability has been in excess of <unk> of the growth in top line as we continue to drive that profit margin up so were pleased.
But that we still think we have a some potential for continued improvement.
In the in the profit contribution margins from E com.
In terms of where I think the penetration or will be.
ER look if we're putting the whole the whole thing together wholesale and retail we were at about 20% and 2019 E. Com a this year, it's going to be close to double that I don't know exactly where it will come in but but its up dramatically and.
You know I think certainly at some point, we're going to we're going to probably see 50%.
Got it and all the other expense benefits that you're benefiting from like lease renegotiations anything outlet versus full line stores is it typically outlets done a little better for you what are you seeing there.
Sure.
So in terms of the lease negotiations, yes, we have a.
We've we've.
Weve.
Reached agreement with a with a number of our of our landlords and we've you know we've taken a kind of a custom approach based on the based on the lease. So we've done a few do different things in.
In some cases, we've restructured the leases in essence buying out of the current obligation and replacing it with a percentage rent structure going forward.
We've in other cases, we've just gotten current period abatements.
Also bought out of some leases out right and so we've got a handful of things, but it but we have also a number of those negotiations remain ongoing so we're continuing to work with our landlord partners on that.
ER and then I'm sorry, what was that the second question well outlets outlets versus full line store. That's right. Yes, yes outlets continue to perform better than full line stores. That's not surprising that people are more comfortable going to two I wonder primarily outdoor centers compared to enclosed malls, but you know on average.
Rich outlets have been.
No a thousand basis points better than full price stores or or even more maybe more like 12.
1200 basis points better.
Thank you.
Next question comes from the line.
Hi, Andrew.
Yeah.
Hi, Good morning, Thanks for taking my call I'm curious if you could talk about the usage of after pay on your website and I guess what percent of sales is coming from after paying if you could maybe talk about conversion and basket size there to help with that.
Well I I know I can't give you the actual number but I think we've been pretty clear that it's a very significant percentage of checkout and they were getting very significant lift in the A.O.V. on those items, but but I don't think I can get any more granular than that.
Okay. And then also I was wondering if you had an update on China sourcing exposure as you know potentially could get some sort of change there with that election.
Yeah. So as you know we were working diligently to to shift.
Shift production out of China are back in spring. If you look just at our landed goods excluding that the first cost business. No. We were in the low sixtys out of China, which was down from you know the Ninety's a a couple of years ago. You know I think we've talked on previous calls about the fact that for fall.
We really are.
Suspended that process of continuing to move out of China, because in the COVID-19 environment since.
Since the beginning when when obviously there was some disruption in China, China has been the the most reliable place to be and a and we were that was the place where we have the most confident that we'd be able to get that the goods for fall.
Given the you know the.
What's going on a lot of the other countries that we were sourcing from so so.
So far most of the stuff is still coming from China, but I think for spring you're going to see us start to ER.
To continue to diversify out of China, again, and that'll conclude countries like Mexico, Cambodia, Brazil, Vietnam et cetera.
Great and then I guess lastly, as we look out to next year and maybe even the back half of next year. You know how are you thinking about the Knicks and casual which I know you were targeting mix more in Q, but I guess at what point in time do you think you will you know think about kind of reversing that and going back into passion.
Well, well, we're going to we're going to let the customer dictate what the what the category mix looks like.
You know and that's what we've always done a you know we test and we react to what the customer wants and.
We adjust our you know our merchandise mix based on based on consumer preferences and the last thing I'll I'll just say they just want to be clear that that that casual is fashion. So so theres casual shoes and dress shoes, but you know, but our customers still want fashion and even the folks that want more even as we see more casualization.
You know folks so you know our customers still what casual products that are fashionable. So you know a lot of these the styles that were selling on one of the things that the big trends that we're seeing right now really across our business is is how strong we are doing with novelty product and and sort of wow type styles that.
Maybe used to be more fringy kind of styles, but now are really becoming your biggest sellers. So folks are really gravitating, even if they're buying a slipper or slide or or you know are sneaker, they're gravitating towards exaggerated embellishment ornamentation et cetera customers really want that emotional product and you know it's.
I think it doesn't hurt that these are the types of products that really pop on line as well.
But but again, it's just the point I'm, making is that you know were even when we're when we're doing casual products, we're still there's still fashion vote.
Great Yeah that makes sense and well. Thanks, so much good luck next quarter. Thank.
Thank you.
Next question comes from the line of Tom <unk> from Wells Fargo. Your line is now open.
Hey, good morning, guys. Thanks for taking my question I wanted to ask about the.
Cost structure of the business fund.
No Ed you had to be the 25 million interest saving from from the.
Headcount reduction that you did in Q3.
Are there any other cost saves when we kind of think about.
I guess, the the sort of more normalized Opex you know structure the business should we think that.
Ah you know store operating hours will sort of be less than they were pre kobe and ER.
Or any other sort of cost saves that you know, we should think about as we model in.
2021 and beyond.
Well I alluded to the.
To the negotiations with the landlords and we have made significant progress there and ER and you know we've been able to restructure a number of leases we've gotten out of some bad leases and so we will have a significant savings in 21 and beyond are compared to where we were prior.
Yeah, I think given that we have a couple of the big.
Conversations ongoing there I'd prefer to wait to quantify that until we until we resolve those but.
But that's a that's a significant number as well and look we don't we've taken that we're taking a hard look at every expense line item. A you know a lot of the discretionary expenses that we took out this year I think we'll be able to you know to continue to see savings in those buckets going forward.
And you know we're going to we're going to continue to add to really control. It again, we were down 24% in Q3, we said, we think we'll be down about 10% in Q4.
Understood, Thanks, and that's what policies.
Thanks, Doug.
Next question comes from the line of screen said <unk>.
Benjamin from Wedbush.
The line is now open.
Good morning, and good morning to Danielle a nice job on the quarter I've a couple of things I guess on number one I'll just go back to the gross margin on wholesale footwear and accessories the improvement.
You mentioned that it was driven largely by the accessories and apparel piece, maybe unpack a little bit of color about what happened on footwear. I think you were going to be selling a lot of the product you talked reserves for early on here, just maybe unpack, maybe where that stuff footwear, our wholesale margins stand at this point and do they really start to accelerate in Q4.
Beyond or is there still more more pressure there.
Yes, so wholesale footwear was down about 100 basis points in Q3.
And that was better than we had anticipated.
Yeah, we were clearing through a lot of that COVID-19.
Inventory.
But.
We did better than we anticipated that we would on on the clearance of that so we are so the teams did a great job and we got a better recovery.
From the folks that we sold it to a than we thought we would and we also worked with our factory partners to get some concessions.
And that and so overall, we did not take the hit that that we expected.
Clearing that clearing that merchandise and there's a there's some of that that's going to go out in Q4 as.
As well.
But but again I think that margins in wholesale footwear could be flat to even modestly up in Q4, okay.
Okay. That's helpful and I want to go back to the comment you made earlier on the Cuban a you know when you look at the marketplace first half of 2021, and overall, you sat down to 15% to 20%.
For the industry are you just looking across all channels in line math.
No across all channels about what it looks like or is that just more the be inline channels.
That's really the branded channels I think the mass channel should be considerably better than that.
Okay, and then just I'm curious the off price channels.
Where where does that stand now it seems like they would have inventory packaway product. We're just shifting into other categories and think about first half is that starting to open up more is that still you know a pressure point in terms of I know, that's typically an opportunity and a very profitable for you guys. I'm just curious how you think about that.
Do you think about that down 15 to 20.
Yeah, you know I'm glad you asked a asked that question because I realize that that I neglected to talk about spring.
When when I address this off price versus full price question earlier. So yes, we have seen a you know after off price trailing full price by a pretty wide margin in Q3, we have seen off price opening up and coming back for Q4.
And you know again, you know, it's a it's better than we anticipated for spring of 21. However, I think you raised a really good point, which is that there is a lot of pack and hold inventory.
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You know that a spring prospering separate products that were sold into those folks that they will be able to put out for for spring and 21 and that definitely will impact their appetite.
For upfront and so.
That's just something for us to be cognizant of as we as we look at spring 21, Okay.
Okay. That's helpful and just on a reminder has gone on private label now seems to be the growth engine for you guys doing really well there just from a profit perspective, maybe on how we maybe think about that relative to the core in line or even the the off price business is that in mind is it's slightly less of sort of where does that.
Where does that fall in the mix.
Well no the body the gross margins are considerably.
ER considerably lower in that business.
It also has a lower operating expense structure, but but even so the operating margins are lower there. It's a nice business because you.
We do it with no inventory risk or investment.
Because we do it on a first cost base is primarily but but yet but the operating margins are lower.
Okay final thing for me just when you think about your your store and I know you I think you said in aggregate between the digital and the retail piece down in this Ah I think high teens, how do we think about your stores and the potential for additional closures as we kind of move through the fourth quarter on holiday are you sort of factoring in kinda.
Stays where it is are you factoring it gets I dunno, how you're thinking about that in terms of how that moves around.
Well, we certainly have not factored in any improvement from where we are today and I think we could we could even soften a little bit and ER and hit that number.
Okay got it Ah Okay. That's all I have that's around the holidays take care. Thank you. Thanks, Chris.
Next question comes from the line of having my P. from from Piper Sandler. Your line is now open.
Thanks, Good morning, and thank you for putting me back in the queue I guess follow up Ed for you just on one of the earlier questions around shipping surcharges are you seeing any pressure build in terms of ocean freight or anything that's starting to bubble up at the ports at this point just given people trying to get ahead of the holiday season.
Yeah. So there's I think there's two issues. There. There is one is just there's delays and then there's also the what it costs. So I think there have been delays.
Sort of throughout the supply chain for us and for for just about everybody else. I think there was a there was a sort of a limited supply or a challenge getting containers and vessels, which slow things down overseas.
And there has been a little bit of port congestion and then even when you get it into the warehouses here you know both our warehouses and the warehouses in particular of our wholesale customers have been slower just be due to the you know some labor shortages and other disruption due to call. It. So that that has been an issue you know, it's it's probably added a couple of weeks to.
To the to the whole process.
You know getting shoes from the factory to the store.
But the other thing is you know that we have seen increases in freight rates you know the big dramatic increase its been an airframe that's up about basically double from.
From where it was earlier in the year.
So we're having to be pretty judicious about what we put on an airplane but.
But even ocean rates are up you.
You know 25, 30%.
Got it Okay. That's helpful and then sorry, if I missed this but just with a second or I guess third wave in some parts of the U.S. kind of hitting across has traffic customer traffic decelerate it even further and they've moved into October.
[noise] at this point, we have not seen a further deceleration, but we have seen a as you know a stagnation in terms of the improvement you know September was considerably better than what we saw in July and August and October has as a sort of flat to September.
Okay. That's helpful. And then just last question just going back to private label and just thinking about target and Walmart in particular, how big do you feel like those businesses could be over time and is there a way that you are trying to balance them that they're not I mean, so big because he can kind of can still keep your you know first market or first here in a branded product into okay. Thank you.
Look I don't have a I don't have a forecast for how big they could be I guess you know.
What I, what I would say is I think it's the strength of our company that we had that position that we do with them.
Because they do have the wind at their backs right now and those customers. You know they are they are taking share across a lot of categories, including you know shoes accessories and apparel.
And so we want to continue to grow with them.
You know I don't.
I don't know how you think about we think about it in terms of what's the percentage compared to everything else. We just you know we want to figure out how to grow our branded business as well and were active and we're committed to doing that whether it's in a digital channels or otherwise but.
We need to.
We definitely yeah, we're not going to constrain the growth of the mass channels for that way.
Got it great. Thank you and all the best.
Thanks Aaron.
I'm showing no further questions at this time I would now like to turn the conference back to Ed.
No.
Okay, well, great well, thanks, everybody for joining us and hope you have a great day and I look forward to speaking with you on the fourth quarter call Bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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