Q3 2021 Skechers USA Inc Earnings Call
[music].
Greetings and welcome to the Skechers third quarter 2021 earnings conference call.
At this time, all participants around the listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Minder. This conference is being recorded I would now like to turn the conference over to the Skechers team. Please go ahead.
Thank you everyone for joining us on Skechers conference call today.
I'll now read the Safe Harbor statement.
Certain statements contained herein, including without limitation statements addressing the beliefs plans objectives.
Our expectations of the company or future results or events may constitute forward looking statements that involve risks and uncertainties specifically the COVID-19 pandemic has and is currently having a significant impact on the company's business.
Financial conditions cash flow and results of operations.
Forward looking statements with respect to the COVID-19 pandemic include without limitation the company's claims in response to the pandemic.
At this time, there is significant uncertainty about the duration and extent of impacts of the COVID-19 pandemic.
The dynamic nature of these circumstances means that what is said on this call could change at any time and as a result actual results could differ materially from those contemplated by such forward looking statements.
Additional forward looking statements involve known and unknown risks, including but not limited to global national and economic business and market conditions, including supply chain delays and disruptions in general and specifically as they apply to the retail industry is in the company.
There can be no assurance that the actual future results performance or achievements expressed or implied by any of our forward looking statements will occur.
Users of forward looking statements are encouraged to review the company's filings with the U S Securities and Exchange Commission, including the most recent annual report on Form 10-K quarterly reports on Form 10-Q current reports on form 8-K, and all other reports filed with the SEC as required by Federal Securities Law for a description of all other significant box.
That may affect the company's business.
So conditions cash flow and results of operations.
With that I would like to turn the call over to Skechers, Chief Operating Officer, David Weinberg, and Chief Financial Officer, John Van Tomorrow.
You bet.
Yeah.
Thank you for joining us today for our third quarter Conference call I Hope you your colleagues and loved ones are all doing well.
As the pandemic remains a challenge in our business and personal lives. We are focused on the safety of our teams around the world. We are appreciative of the resiliency of the entire Skechers organization without them. We wouldnt have achieved our strong results and do what we do best design deliver and market what we believe.
It's the most comfortable and innovative footwear available today.
Before we shared details of our record third quarter sales. It is important to note that the pandemic continues to impact our business globally.
While many markets, including the United States, and Europe East restrictions, others, particularly the Asia Pacific region experienced extended and even renewed lockdown measures further the global supply chain disruptions, including the congestion at ports around the world, especially in the United States and the <unk>.
<unk> related closures of factories in South Vietnam, where we manufacture a limited amount of our product have delayed our ability to ship goods transit times doubled from what they were in the pre pandemic period.
Our supply chain team is working to overcome these issues and I would like to extend a special note of appreciation to them for their diligent work as well as thank our factories, who partnered with us through this period.
This is a global phenomenon that we believe will continue to impact our business into the first half of 2022.
However, we are seeing positive signs that conditions are improving factory production in south Vietnam has restarted, albeit at a reduced capacity in some areas and the congestion at some global ports has improved we are optimistic given our strong start to the fourth quarter.
Get your third quarter revenue of 1.55 billion was a new record for the period and a remarkable achievement given the ongoing global supply chain disruptions just discussed.
For the nine months period, we also achieved a sales record of over $4 6 billion.
Quarterly gross margin remained strong at 49, 6%, primarily driven by higher average selling prices and fewer promotions and our direct to consumer business, partially offset by increases in freight costs.
The third quarter sales gain of 19% was the result of a 20% increase in our domestic business and a 19% increase in our international business, which represented 58% of our total sales for the period.
We achieved double digit increases across all our reportable segments driven by the continued global demand for our comfort technology footwear.
<unk> direct to consumer business achieved the highest quarterly sales gains increasing 44%.
Ribbon by a 61% increase in our international business and a 35% increase in our domestic business.
Worldwide comparable same store sales increased 31%, including 34% domestically and 25% internationally.
Importantly, the unit volume improved 17% with an average selling price per unit increase of 23% reflective of a less promotional stance. The success of our comfort technology product and a return to a more normal lifestyle and shopping behavior.
The increase in our domestic direct to consumer business was driven by a 43% gain in our brick and mortar stores, where we saw higher traffic and normalized operating hours, our domestic ecommerce channel increased 3% year over year, but 180% over the same period in 2019.
Our domestic ecommerce business was particularly impacted by limited product availability in the quarter.
The increase in our international direct to consumer business was primarily driven by a rebounding demand and easing of Covid restrictions. This growth came from triple digit increases in Chile, and Korea, and double digit increases in the United Kingdom, and Mexico, as well as strong growth in Canada, Peru and India.
We continue to invest in our e-commerce infrastructure and launched new sites on our new platform in Ireland in September and the United Kingdom. This month with more markets planned for the fourth quarter and into 2022.
In the third quarter, we opened 10, new company owned Skechers stores, including two in Columbia, and one each in Peru, India, Germany, and France. We also opened a store in downtown Los Angeles, and a renovated historic building, marking our first street location in this evolving urban center, we closed one location in the quarter.
To date in the fourth quarter, we have opened three stores, including one in Naples, Italy, and we plan to open an additional 15 to 20 locations by year end.
An additional net 119 third party Skechers stores opened in the third quarter across 28 countries, including a net new 67 in China nine in India six in Australia, and four in New Zealand in total at quarter end, there were 4170 <unk>.
The stores around the world.
Our international wholesale business grew 11% year over year quarterly sales growth was primarily driven by an increase of 62% in our distributor business and a 10% increase in China are.
Our distributor business performed well, reflecting a more normal selling environment, particularly with our largest partner based in the middle East and Africa.
Our joint venture business increased 5% for the quarter due to a 10% increase in China as well as strong sales in Mexico and Israel. These.
These improvements were partially offset by declines in several markets in Asia due to continuing COVID-19 related restrictions.
Subsidiary sales increased 6%, primarily driven by improvements in India, as well as Columbia and Canada. This growth was partially offset by an 11% decrease in Europe, primarily due to supply chain issues. We are currently seeing progress in the European ports with improvements in the flow of goods, resulting in a strong.
On October <unk>.
Sales in our domestic wholesale business improved 10% in the third quarter. The growth came primarily from women's go walk men sport work Bobs from Skechers as well as our performance in casual running styles for men and women.
Central to our global success is our comfort technology footwear.
Humphrey innovation style and quality are the skechers product tenants in the third quarter and over the last 18 months consumers have been increasingly loyal to skechers comfort as we elevated our products with more fit offerings as well as lightweight cushioning options and added durability too many styles.
We also have focused our efforts on expanding collection that features recycled materials. Our ongoing goal is to meet consumers' needs with comfortable footwear at a reasonable price.
All wearing Skechers times, Kansai Yamamoto limited edition collection and localized campaigns featuring key opinion leaders in key global markets.
Given skechers global growth, we are strategically investing in both our distribution and corporate infrastructure.
U K and China distribution centers became fully operational in the third quarter, and we narrow down locations for a new D C in India.
We completed the first phase of our corporate headquarters expansion in Manhattan Beach, and we are working on the expansion of our North American distribution center that will bring our facility in southern California to two 6 million square feet in 2022.
Both of these expansions will be LEED certified gold.
We believe our record results in the third quarter reflect our powerful global brand with factory production in South Vietnam restarted and transit times and port constraints, improving we are optimistic about the holiday season, and now I would like to turn the call over to John for more details on our financial results.
Thank you David and good afternoon, everyone. Our results this quarter demonstrate the strength of our brand as the comfort technology leader as well as our immense opportunity through global expansion.
What makes this even more impressive is that we delivered this growth despite severe and ongoing supply chain challenges that significantly restricted product availability across the globe.
Let me elaborate on that topic first.
There has been a lot of discussion about the factory closures in Vietnam over the summer. This certainly impacted production at Skechers go to a more limited degree than others as the majority of our Vietnam production is not in the south of the country.
The more disruptive issues have been widespread shipping container shortages port congestion and last mile transportation delays. The combination of these factors negatively impacted skechers sales in the third quarter. This is evident in our quarter end inventory balance which includes an incremental two.
$218 million in transit inventory, a year over year increase of over 140%.
Under normal conditions, we believe a meaningful portion of that inventory would have been delivered to customers in the third quarter.
At Skechers, our main objective remains delivering great comfort infused products to our dedicated consumers and once product availability is normalized we fully expect to deliver even better results than the remarkable growth of this quarter.
Now, let's turn to our third quarter results, where we will provide comparisons to both prior year and where appropriate 2019.
Sales in the quarter achieved a new third quarter record totaling 155 billion, an increase of $250 1 million or 19% from the prior year and a 15% increase over the third quarter of 2019.
On a constant currency basis sales increased $222 million or 17% from the prior year.
Direct to consumer sales increased 44% year over year supported by growth in domestic and international markets of 35% and 61% respectively.
Both markets delivered meaningful improvements in gross margins and strong year over year average selling price growth.
As compared with the third quarter of 2019 direct to consumer sales increased 20%. The result of a 14% increase domestically and a 30% increase internationally.
International wholesale sales increased 11% year over year and grew 10% compared to the third quarter of 2019.
Our distributor business grew 62% year over year, but still remained about 9% below 2019 levels.
This channel continues to make good strides toward recovery, particularly in critical markets like the middle East and Russia.
Subsidiary sales increased 6% year over year and as compared to the third quarter of 2019 grew 8% the.
The improvement was primarily the result of higher average selling prices and strong a strong recovery in India as well as increases in Latin America and Canada.
Our joint ventures grew 5% year over year led by a 10% growth in China, driven by strong e-commerce demand somewhat tempered by slower traffic patterns and retail stores as well as temporary pandemic related store closures continuing.
Weakness in several adjacent markets also weighed on joint venture growth in Asia.
Domestic wholesale sales grew 10% year over year and as compared to the third quarter of 2019 increased 17%.
We continue to see very positive underlying trends with the majority of our domestic wholesale partners, including healthy sell through rates and steady average selling prices.
Gross profit was $769 4 million up 23% or $144 3 million compared to the prior year.
Gross margin for the quarter was 49, 6% an increase of 150 basis points on a year over year basis gross margins improved as a result of higher average selling prices, partially offset by a higher unit cost across all segments and the impact of product mix in our wholesale.
Business.
Operating expenses increased by $94 5 million or 18% to $630 7 million in the quarter versus the prior year, but decreased 50 basis points as a percentage of sales from 41, 2% to 47%.
Selling expenses in the quarter increased year over year by $33 8 million or <unk>, 39% to $119 8 million.
The year over year increase was primarily due to higher demand creation spending as markets reopen globally.
General and administrative expenses in the quarter increased year over year by $60 7 million or 13% to $510 9 million.
As a percentage of sales this represented a year over year decrease of 170 basis points.
The dollar increase was due to a combination of factors, including increased retail store labor incentive costs rent expense related to new store openings and distribution center expansion as well as volume driven warehouse and distribution expenses.
This was partially offset by the $18 2 million corporate compensation expense last year related to the onetime cancellation of restricted share grants.
Earnings from operations were $146 2 million versus prior year earnings of $92 1 million, an increase of $54 1 million or 59%.
Operating margin improved 230 basis points to nine 4% as compared with seven 1% in the prior year.
Net earnings were $103 1 million or <unk> 66 per diluted share on $157 1 million diluted shares outstanding. This compares to prior year net earnings of $64 3 million or <unk> 41 per diluted share on 155 million diluted shares outstanding.
Our effective income tax rate for the quarter was 15, 6% versus 15, 4% in the prior year.
And now turning to our balance sheet.
Our cash and liquidity position remains extremely healthy we ended the quarter with $1 $1 8 billion in cash cash equivalents and investments. This reflects a decrease of $318 million or 21% from September 32020, but as a reminder, we fully repaid our revolving credit facility in the second.
<unk> of which approximately $450 million was outstanding last year.
Trade accounts receivable at quarter end were $758 7 million, an increase of $49 8 million from September 32020, predominantly the result of higher wholesale sales.
Total inventory was 123 billion, an increase of 17% or $177 million from September 32020. However, as previously noted this balance reflects a significant increase in in transit inventory of $218 million on.
On hand inventory that is inventory available to deliver to customers and our retail stores was lower by approximately 5% overall and in critical markets like the United States and Europe on hand inventory was lower by over 20%.
Total debt, including both current and long term portions was 327 million at September 32021, compared to $812 million at September 32020, reflecting the repayment of our revolving credit facility last quarter.
Capital expenditures for the quarter were $89 4 million of which $38 million related to investments in our new corporate offices and other real estate $16 2 million related to the expansion of our joint venture owned domestic distribution center $15 3 million related to investments in our direct to consumer technologies in <unk>.
<unk> stores and $10 million related to our new now fully operational distribution centers in China, and the United Kingdom.
Our capital investments remain focused on supporting our strategic priorities growing our direct to consumer business as well as expanding the presence of our brand internationally.
For the remainder of 2021, we expect total capital expenditures to be between $80 million and $110 million.
Now I will turn to guidance.
Given the severe supply chain constraints, we experienced throughout the third quarter, which we believe will continue for the remainder of the year and into the first half of 2022, we are updating our previous guidance.
For fiscal 2021, we now expect sales to be in the range of $6. One 5 billion to $6 2 billion and net earnings per diluted share to be in the range of $2 45 to $2 50.
For the fourth quarter, that's implied sales in the range of 151 billion to 156 billion and net earnings per diluted share in the range of 28%.
To 33.
We anticipate that gross margins will be essentially flat compared to last year as freight costs will largely offset improved pricing.
Our effective tax rate for the year will be between 19% and 20% as compared to a rate of five 5% in 2020 and 17, 2% in 2019.
And now I'll turn the call over to David for closing remarks.
Thank you John our third quarter revenues of 155 billion broke our record for the period and represented our second highest sales quarter in our history and we achieved impressive gross margins of 49, 6% and diluted earnings per share of <unk> 66, a.
Our year over year increase of 61%.
Our innovative comfort product resonated with consumers around the world and demand remains strong demonstrated by both units sold and the average selling price increases traffics is increasing and our stores in the Americas across Europe parts of Asia and in the Middle East a welcome change from earlier in the year when much of the World continued.
Operating under Lockdown restrictions we.
We remain focused on developing more comfort footwear, expanding our apparel offering reaching more consumers through our ecommerce expansion and looking at new opportunities to drive sales globally, including in the Philippines, where this month, we have transitioned from a third party distributor model to a directly managing our business.
Our teams are working tirelessly to address the supply chain challenges across all touch points resources factories container shortage as port congestion and in country transit all with the goal of delivering skechers comfort footwear to our customers and consumers. We are also keeping a close watch on local pandemic related restrictions.
And the health of our global teams.
We believe 2021 will be another record year for Skechers, a remarkable achievement given the uncertainties globally. We look forward to 2022, a year that will mark our <unk> anniversary a period. We believe we will be exceptional from a marketing product and sales perspective, and a time, where we will.
Communicating our message to consumers that Skechers is the comfort technology company now I'd like to turn the call over to the operator for questions.
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Our first question comes from Jay sole with UBS. Please proceed with your question.
Great. Thank you so much David you mentioned in your opening remarks that is their supply chain issues will impact fiscal 'twenty. Two can you just give us a sense of.
Q1, and Q2, or just Q1 and it will be an impact on sales or would be an impact on margin. If you can give us a little sense of how much you think that will impact fiscal 'twenty two that would be great. If we could start there.
Yes, I think we know Q1, because we know things are in transit and the ports wont clean up by then.
No matter what it is you know John's comment that we had $200 million additional to last year in transit all represents items that would have been at the port and available for sale.
For the most part in Q3 and certainly early parts of Q4, but things are starting to get somewhat better and we are picking up the pace.
Especially outside the United States. The U S is getting somewhat better, but our facilities in Europe and in parts of South America volume, leading to a stronger October than we had originally anticipated a few weeks ago.
Think if there is an impact because you never know on these things or how long they'll last it'll be more in the first quarter and should start to alleviate in the second but thats a very personal issue and I think they are all sales related I don't know that their gross margin related the commitments, we've made to additional freight already baked in the numbers. So.
Supply chain issues Shouldnt impact on an item basis on gross margins, but certainly timing and sales and I don't know that it impacts sales on the overall picture depending on what the time frames are with all the stuff that Jon talked about in transit is either spoken for by our wholesale customers were necessary to our retail and online businesses.
So and we haven't seen that demand waned at all there's still great reception and we can turn it very quickly because everybody is in need of what we're selling.
Okay, great. So if I can ask one more just to follow up on that point, Jeff you mentioned the gross margin it doesn't sound like there's been there's that much impact, but can you sort of maybe break out for us in Q3 was there a margin impact of weather was in SG&A or gross margin from increased freight costs and how many basis points was that and then if we think about <unk> what is the impact.
Supply chain issues on <unk> are you assuming it's a couple of hundred millions in sales and 50 basis points of gross margin that kind of if you can sort of break that up for us a little bit that'd be helpful.
In Q4, it's hard to tell I mean all.
All of that is reflected in our guidance, so it could be up or down.
I'd like to believe when you could take a quarter's worth that we've been more conservative than we usually are simply because of the issues in Q3 and are pleasantly surprised in October.
I don't know that Theres any significant.
Net margin issues simply because expenses are there the only thing I would tell you is we had originally anticipated a higher.
Third quarter. So we would have had even more leverage to our operating expenses when you're there as far as freight is concerned we do see that alleviating. Some so it's difficult to say the overall picture I think it's fair to say as John said in his opening comments that our gross margins would be equivalent to.
Last quarter and last year.
Higher than last year, I think and unless something changes dramatically that seems to be the picture right now.
Okay got it thank you so much.
Yes.
Our next question comes from Laurent <unk> with Exane BNP. Please proceed with your question.
Good afternoon, and thank you for taking my question.
John I think you mentioned the $218 million of in transit inventory, which I think was up 140% year over year.
Correct me on my math, and I think that's up $128 million.
And then convert that to dollars, it's $250 million is that the right way to think about the slippage from <unk> to <unk> and are you anticipating.
Mothers slippage from.
From <unk> into <unk>.
Is that the right way to think about it.
Well, let me just be clear first on the numbers the $218 million is the increments so that represents.
140%. So if you take that number and that's a cost number we believe a portion of that absolutely would have been available for delivery to customers in the third quarter. So you just have to keep in mind. The markup on that will vary between wholesale and direct to consumer but I think it.
Fair to say the reason we offer the point is that it is illustrative of the type of supply chain constraints, we had on product availability and the impact it had on our third quarter results.
Very helpful and then I think.
I wanted to ask you about China, you've done phenomenally well over the last six years.
The growth rate you still outperform some of the international brands, but just love to hear what you saw over the course of the quarter, maybe some quarter to date commentary that.
That would be very helpful for the audience.
Yes, I mean, I think we outperformed.
What we can observe today of other western brands and I think that's probably the most important point to dry out of it I mean, clearly there were some incremental headwinds in China, owing to the pandemic there were closures there were restrictions on activity.
Our restrictions on movement in that and that had an impact, but we're actually thrilled by the 10% growth we put up because against the backdrop of the struggles you've seen other brands have our brand. We think continued to outperform and we're very optimistic about the continued growth of the brand early returns so far in this quarter our income.
Bridging, but obviously, we're we're coming up to a key selling window in the 11 11 holiday period. So we want to wait and see how that transpires, but overall I would tell you given the situation in China generally we're thrilled with the performance there.
To add color to the areas that struggled or the area as you've heard from others, which is retail foot traffic because of the COVID-19 related limitations put on movement and consumer behavior.
That's great to hear and if I can squeeze one more question and John.
John I think you mentioned last month at Kimberly's conference that you're hoping to get to $10 billion in revenues by 2025 26 can you just maybe parse that out is that organic is that like is that incremental with like apparel or geographies like China are getting to a certain number any color would be would be real.
Great for us.
Yes. The first thing I'll say is we absolutely believe $10 billion by 'twenty five 'twenty six is well within the reach of this brand we spoke about the global expansion opportunities and those continue the formula to get there is pretty similar to what we've done historically.
You've put together.
Mid teens growth rate in the international wholesale side of things you put together a slightly higher direct to consumer growth rate because you have both the stores the international markets and E Commerce, which we've put a lot of investment behind and then we think it's reasonable to expect that domestic wholesale marketplace.
To at least put up.
Our mid single digit growth rate and so if you look back historically, that's almost precisely what we've done and we think more of that is in the future, especially with the product lineup and are focused.
I'm being the comfort technology footwear company in the World and so that's how you get there now whether or not it's precisely on $25 26, I think is.
Is going to be dependent a bit on the market and external factors, but thats, how we piece together an opportunity to grow this brand to that $10 million or $10 billion platform.
It's great to hear thank you very much John for all the color.
Thanks Lauren.
Our next question comes from Kimberly Greenberger with Morgan Stanley. Please proceed with your question.
Great. Thank you so much.
John.
23% increase in average selling price is obviously.
And an indicator of the demand that you guys are seeing and I. Just wanted to know if you could unpack that a little bit for us is that.
Products like for like product increase in ASP or is that channel mix shift or is it.
Consumers mixing into sort of more premium lines that you produce any any color you could offer would be great.
Sure sure Kimberly and I would say at the outset, it's absolutely a testament to the strength of the brand and the product in particular, the technology, we've infused into our shoes to add elements of comfort like arch fit Max cushioning et cetera.
I would say generally speaking it is a combination of slightly higher pricing on some of that premium product and then obviously a much more restrained promotional stance from the company now some of that is aided obviously by the current environment of stringent inventories, but I probably would chalk mora.
Simply to more discipline on our part to ensuring that the value equation continues to work for consumers, but it also continues to work for Skechers I would also point out it's not unique to our stores, we're selling we're seeing very strong asps.
In our wholesale partners, that's driving margin for them, coupled with steady and strong sell through and so.
The composite picture and direct to consumer this quarter is fantastic, but I think it is it's a testament to the strength of the brand the demand for the product and Thats why we expect it to continue certainly in a stable environment to what we've seen in the last couple of quarters, we expect that to continue into it into 2022 and beyond especially with the lineup of products.
We have coming forward for next year, I mean literally the only challenge we're facing at the moment is one we've spoken about already which is being able to land that product and then put it in to our wholesale partners and in our own stores because once it's there it's selling quite well at very attractive asps.
Yes, yes agreed so that that actually brings me to my follow up question, which was the.
The minus 20% number please correct me if I didn't hear you.
Right on that but that's.
A quiet.
I catching it sounds like you're in stock levels in both the U S and Europe are down 20% in store is there a sort of a reasonable path to think about.
That inventory getting replenished because it is obviously it looks like the case that.
There's demand there, but that is not being that because the stores are just not perhaps sufficiently stock and probably revenue being left on the table. So is there a <unk>.
Is it possible by the end of December.
Can you sort of cut that in half or maybe make even more progress.
What are the prospects that you've got in front of you to sort of restore those inventory in stock levels. Thanks.
Sure Let me, let me speak about the amounts and then ill, let David comment on expectations for recovery. The first thing I'd say is that 20% number reflects on hand inventory at the end of the quarter I would say our unfulfilled order due to capacity limitations on available product was actually.
Greater than that in both of those markets.
That's again, a testimonial to the impact of the product available limitations on our sales in the quarter.
In terms of the recovery I think we have modest expectations built in to our numbers and our guidance for the balance of the year as David mentioned, we're seeing very encouraging signs out of Europe.
I think the big question Mark is how quickly the domestic port congestion can remedy itself.
That's I think where we have right now the highest mismatch between available product and core demand plus obviously, our own stores our customers domestically so again.
Can't tell you enough is this there is certainly no lack of demand for the brand for the product for the technology, we're bringing it's really challenge with getting the supply chain to operating as efficiently.
<unk> as it would normally be the case.
Yes, I think it's important to note that we're already starting to make some progress outside the United States. So the question is how quickly will this congestion cleanup now when people talk about the overall impact our supply chain. There's also procurement of raw materials and there is downtime with some of the factories are concerned I think we will.
What we've tried to show everybody and bring everybody's attention is with this amount in transit we have gone through the biggest piece of factories and raw materials. We've made the product we've actually found containers for a significant amount of the product it only needs to improve every piece of improvement increases supply we already see increases in our.
Our performance at retail in Europe, because those docs are those ports are opened up quicker. So I think youll see constant improvement may is certainly not a straight line through the quarter, but I doubt, we get into full replenishment of our stores until sometime in first quarter, although if the ports to clean up quickly we have a significant amount in transit.
The United States, we would pick up a big piece of that in the next couple of months and it would show in our retail sell throughs.
Very clear thank you so much.
Our next question comes from Gabby Carbone with Deutsche Bank. Please proceed with your question.
Hi, good afternoon, Thanks for taking my question.
So within the U S. Just curious if you saw any differences across regions. This quarter you know what I've got this spike in certain parts of the country.
I would not say that there was a dramatic difference in regions. We did note continued difference in channel behavior, you are still seeing depressed traffic volumes in in mall based offerings and tourist sensitive corridors.
For us the e-commerce business, while not growing as magnificently as it had in the past versus 19 was still up significantly. So that was that was a healthy channel, although although impacted by product availability issues are neighborhood big box warehouse stores continued to outperform.
Traffic outlet and concepts, particularly again those those impacted by tourism. We're certainly below I think on the encouraging side of things conversion picked up almost everywhere, which is certainly translating into some of that growth, but in terms of regional performance I think if you take the totality.
The quarter into view, there wasn't really a significant deviation from that overall trend profile that I just described.
Got it and just a quick follow up I was wondering if you can dig into SG&A, but are there you know is there any color you can provide around the breakdown of marketing investments in labor this quarter and how.
Should we be thinking about SG&A in the fourth quarter.
Yes, I mean, the big drivers I mean, as we as we noted the big drivers in SG&A.
Marketing, because we geared back up marketing.
I think it's it's tough when product availability is your is your core restrained because you've got the demand creation spending out there and it's working really really well and so just from a timing standpoint, that's not something we either wanted to or could throttle significantly in the quarter. So as a result of that under levered a bit but again on the on the plus side.
It's fostering healthy demand.
The other the other major driver was with labor costs and that was everything from stores reopened re equipping stores with the right amount of labor, we did and have put in place.
Mechanisms to ensure the retention of key personnel, particularly in our retail division.
And so that is absolutely.
Driving a bit of cost increase but the productivity of those stores is is definitely keeping pace with the overall profitability profile is still very strong.
And then there are some incentives this year that werent around last year because of the pandemic results.
And then we do have the variable costs associated with the increases in mostly in the wholesale side of things as well just as a side note. We note the operate bringing operational the China distribution center and our U K distribution center. So there is a small amount of incremental costs associated with getting those off.
Operations up and running but overall the two main cost drivers.
0.2, or the or the marketing and the labor related costs, which I think given the restart in many markets. After after Lockdowns last year is completely understandable.
Got it alright, thank you very much.
Kevin.
Our next question comes from Susan Anderson with B Riley. Please proceed with your question.
Hi, good evening, Thanks for taking my question.
Quick follow up I guess on the European business. So the declines there and the distributors is that mainly due to supply chain and then also just curious on the wholesale gross margin why that was down was that also driven by supply chain.
Yes, I would say supply chain is the main culprit in both of those certainly freight costs.
There are some slight.
<unk> differentials year over year that I think stem from the lapse of some of the.
Carve out that had existed previously, but I'd say supply chain is definitely the primary culprit.
Got it.
In Europe, we picked up a significant portion in October because the ports are open and there was more going through and we do see the pickup already in October from what could have been last quarter. So truly okay gotcha.
Great very helpful.
And then I guess I'm, just curious if you're seeing any change in trend and what consumers are buying I mean, it sounds like all of that still come for which is what you guys focus on but are you seeing more fashion comfort selling better versus say walking shoes. There is there any difference there versus what you guys saw last year at this point.
We have a lot more features in our shoes now and we're selling the features and the comfort across a broad spectrum of styles so and.
Obviously, we're seeing that.
More comfort features selling at a higher price and selling through quite quickly. So I think.
We're across a broad spectrum of style certainly walking is one of our cores and we sell it very well, but I think it's the features throughout multiple proportion of it that is selling it.
That's really important to understand when we talk about comfort technology. It is not particular in every instance to one category or not so it can actually be comfort technology across a lot of different categories and I think thats. The one key strategic approach. We're taking that I think is advantaged. The brand is that you can get comfort in athletics.
Can get it in dress you can get it that you can get it in seasonal sandals and boots, so that layer of technology that comfort focus actually.
Expand across most of our categories. So it feeds into the core strengths we have.
In specific categories at different points in time.
Okay, great. Thanks, so much for the detailed good luck this holiday.
Thank you.
Our next question is from John Kernan with Cowen Cowen. Please proceed with your question.
Good afternoon. This is krista zuber on for John Thank you for taking our questions.
Thank you also for all the color on Asps and gross margin just sort of one follow up there.
No.
If we look into the first half of 'twenty to kind of how do you see the development of ASP from here given.
What we've been hearing about rising input costs, including raw materials inflation, both for your wholesale and your DTC.
Well, obviously, we're not we're not ready to provide guidance on 2022, yet, especially given the volatility, but I would say from a pricing perspective.
Think what we're looking at today and what we've seen really over the last couple of quarters is absolutely something you can expect to continue from a pricing level perspective, I think in response to additional cost we will obviously look at pricing overall, but I think I think the strength you've seen in our pricing right now is truly.
Reflective of the quality of the product and there is no reason in our mind that would that would take any step other than forward. So we think it's going to be.
On ASP trajectory, we can continue and then we will adjust as needed from an input cost perspective, depending on how things move in the marketplace. Some of the input costs, we're seeing particularly freight we don't think thats durable forever, that's going to be a moment in time element. So we want to make sure we consider that.
Other situations, where there's greater feature sets and products that may drive some some costs as well, but overall the goal would be to continue to keep margins in the range of being able to build them over time by mix shift towards international and our direct to consumer businesses, which are more.
Margin accretive activities.
Great. Thanks, and then just on the domestic wholesale side of things could you just give us a little sense of how we should think about how that channel performs or the outlook in terms of sales for Q4.
Any visibility into that order because I realized how much is some transit at this point, but anything you could share would be helpful. Thank you.
And that's the key question is how much we can land, it's not a question of demand our expectations built into our guidance actually reflects a fairly significant handicapping to our order book, Our order book right now looks fantastic.
It's really going to be a question of how much product, we can land and when can we landed.
So I think we've tried to incorporate what we what we see right now in terms of the flow of goods from the port to our distribution center and then onto customers, but that's going to be the great unknown I would say as David commented in his prepared remarks, though October looking good so far so we're encouraged by what we see.
Yeah.
And then again the order book is fantastic right now it's just it's just a question of what can we get landed and as a result get delivered.
Thank you.
Our next question is from Brian Mcnamara with Bahrenburg capital markets. Please proceed with your question.
Yes. Thank you for taking the question I am curious, excluding these supply chain challenges, which I imagine requires a number of assumptions on your part do you believe you're in a position to meet or exceed your prior guidance.
Yes.
A simple yes, I mean look it's tough to be precise about it but we gave you the number because.
We do think that that merchandise in transit.
A meaningful portion of it would have been landed in would have been delivered Andy and the only reason I think that we can credibly say that we work.
<unk> within or above guidance was absolutely supply chain related.
Got it Okay, and then secondly, I assume transportation was a larger headwind in the quarter, but could you quantify your production exposure to Vietnam, particularly in the south.
Yes, I mean, we've talked about it before it's less than 10%.
Certainly less than 10% that was affected by the factors ebb and flow depending on what's being produced where at any given point in time, but as we noted in the again in our commentary the majority of our Vietnamese production is actually not in the south which was good.
The amount impacted by just that issue alone was relatively limited I would just again echo the commentary we've made though that theres more issues than just a factory closures and actually the other issues tended to be for us much more significant.
In restricting product availability in the quarter.
Great Best of luck guys.
Thanks, Brian.
Ladies and gentlemen, we've reached the end of the Q&A session and this concludes today's conference you may disconnect. Your lines at this time and we thank you for your participation.