Q3 2022 G-III Apparel Group Ltd Earnings Call
Good day, and thank for standing by and welcome to the G. III apparel group third quarter fiscal 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one.
On your telephone please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, you'll Nachman CFO. Please go ahead.
Good morning, and thank you for joining us before we begin I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward looking statements within the meaning of the federal Securities laws.
But we're looking statements are not guarantees and actual results may differ materially from those expressed or implied in forward looking statements.
Important factors that could cause actual results of operations or the financial condition of the company to differ are discussed in the documents filed by the company with the SEC.
Company undertakes no duty to update any forward looking statements.
I will now turn the call over to our chairman and Chief Executive Officer Morris Goldfarb.
Good morning, and thank you for joining us.
Also joining me today is Neal Nachman, our Chief Financial Officer.
I'm pleased to report that the momentum in the first half of the year continues into the second half.
For the third quarter of fiscal 2022, we delivered outstanding results with both our top and bottom line exceeding our guidance.
Our World Class team continues to deliver the right product at the right time to meet significant consumer demand and importantly capture additional market share.
We continue to maintain flexibility in navigating supply chain disruptions.
Given the significant demand, we're seeing across our brands combined with a strong order book, we have the confidence to raise our full year fiscal 2022 guidance.
We now expect to deliver the highest annual net income per diluted share in our company's history exceeding pre pandemic fiscal 2020 results by approximately 26%.
We expect to enter the new fiscal year in our strongest financial position affording us the flexibility to invest in our future growth and continue to elevate our position as a global leader in fashion.
Now, let's review the third quarter of fiscal 2022 results.
Net sales for the third quarter, where we're ahead of our guidance at approximately one point out $2 billion. This represented an increase of 23% compared to last year's third quarter net sales of $827 million.
This increase in our third quarter net sales was driven by our wholesale segment, where net sales for the quarter were $1 1 billion up 29% compared to $783 million in last year's third quarter.
Importantly, third quarter net sales for our wholesale segment are quickly approaching pre pandemic levels down only 5% from third quarter net sales two years ago.
Third quarter net income was $2 16 per diluted share, which exceeded the midpoint of our guided range by 27% and is our highest quarterly diluted net income per share in our history.
This compares to a net income of $1 29 per diluted share in third quarter last year and net income of $1 97 per diluted share in the third quarter two years ago.
Now, let's walk you through some of our third quarter highlights our inventory.
<unk> levels are in good position and we continue to experience strong selling at retail across the full range of our casual offerings.
Including outerwear athleisure sportswear jeans, as well as dresses in Korea, where.
Customer response to our fall fashion collections has been strong and.
And we are well positioned for the holiday season with gifting programs.
With robust momentum in each of these categories. We believe our business will continue to grow and we have opportunity for market share gains across these businesses.
Outerwear is a key business for us and in third quarter as we expected it performed well with three leading categories comfort casual product that supports an active lifestyle transitional or layering pieces and an assortment of Softgel jackets.
In athleisure and casual sportswear, we focused on a cleaner aesthetic new fits and a collection of T layering pieces to transition into colder weather.
Comfort performance and functionality drive the athleisure business, while polished pieces anchor the casual sportswear business.
Genes across our power brands again exceeded our expectations and have become a significant contributor to our overall results along with denim bottoms. These collections offer a broad assortment of tops soft shirts sweaters lasers and.
Casual dresses that have become an important wardrobe builder for a younger customer to build a complete outfit.
Our DKNY and Karl Lagerfeld, Paris footwear business far exceeded our expectations with net sales.
Almost 50% higher than pre pandemic levels handbags for DKNY, Calvin Klein and Karl Lagerfeld, Paris also outperformed.
<unk> pre pandemic levels with AUR is in both categories categories up solid double digits.
The demand that began in the second quarter for our dresses in Korea were accelerated and sales at retail surpassed pre pandemic levels with strong sell throughs.
Karl Lagerfeld Paris.
This business is outpacing our expectations pre pandemic the brand's total net sales were $135 million.
And this year the total sales footprint is to be approximately $175 million.
Last year, we lost Lord <unk> Taylor, one of the brand's largest customers, but we were able to expand the collection at Macy's, which has been incredibly successful and rapidly growing.
We're also adding 10 retail stores this year.
We believe Karl Lagerfeld, Paris is on a clear path to achieving annual net sales of $500 million over the next several years.
Digital remains a key priority, we're investing to capture and accelerate growth to become a best in class Omnichannel organization.
Compared to two years ago sales on our partners sites increased over 45% and over 60% on our own sites.
And China digital sales are now larger than store sales and <unk> digital sales were also up compared to two years ago.
We remain focused on several digital priorities.
Improvements to our digital platforms for DKNY, and Karl Lagerfeld, Paris are progressing well.
The first phase complete the new look and feel of the sites has a modern aesthetic that customers are responding to.
And the next phase our re platforming will add additional enhancements to technical operations to allow seamless navigation of these sites.
This is expected to boost performance in productivity next year.
We continue to invest in improving and improving our technological and operational capabilities with data analytics best in class reporting tools and building our internal team.
We're creating operational efficiencies that standardized standardized workflow across our brands to become more agile efficient and effective.
We're also building out our capabilities to grow our presence on leading pure play global retail sites, including Amazon Orlando and fanatics.
These investments.
We're already providing internal and external insights into customer behavior, and our actionable and are increasing our ability to make better faster data driven decisions.
Direct to consumer warehousing and shipping is transitioning to our new logistics partner, <unk>, which will drive operational efficiencies.
In marketing, we are increasing our investments with a focus on digital to drive qualified new and younger audience to brands throughout two to our brands through a combination of paid media celebrity seating and Influencer marketing.
DKNY campaign features diverse and related bullet influent, and Influencers and the Karl Lagerfeld, Paris campaign highlights our exciting new <unk> ski collection.
Both are leveraging across our digital ecosystem with a multi pronged approach that is building momentum into the holiday season.
Our international business for DKNY is growing.
We are thoughtfully, expanding our omni channel footprint with wholesale.
Wholesale partner operated stores and territories. In addition to pure play sites.
In Europe sales are back to pre pandemic levels, even with restrictions in place.
We entered Turkey, and Israel through wholesale distribution and will open two new partner operated stores for Donna Karan This quarter, one in Saudi Arabia, one in Riyadh with a third to follow next year in Kuwait.
In China, we expect to double our sales this year as compared to two years ago.
They'll broken registered another strong quarter with positive retail sales growth compared to pre pandemic levels and double double digit growth in the U S. We celebrated the 50th anniversary of the brand with exclusive collaborations, including Palm Angels and space Jam.
The movie, creating increased customer interest.
This status brands.
This status brand.
<unk> offering across lifestyle and athleisure categories are driving sales, especially in warm weather destination, which are becoming primarily primary residences.
The wholesale order book, including distributors operating Millbrook can stores is strong setting the stage for accelerated growth into next year.
We believe there continues to be a meaningful opportunity to expand the brand.
Licensing our own brands enables us to grow into additional lifestyle categories and international markets.
This generates a capital light royalty stream that is highly accretive and an important profit driver.
We've created solid licensing royalty income based with.
Best in class partners in categories like fragrance.
<unk> watches intimates and sleepwear.
For DKNY and Donna Karan, we have approximately 25 licenses and the brands total sales at retail are approaching $2 billion.
This quarter, we announced that inter parfums will take over their fragrance license with much more ahead.
We will continue to leverage our expertise in these partnerships to expand our brand presence across the portfolio.
Now, let's look at our retail operations trends continue to improve in store online and through our virtual selling programs, which we consider a third leg to our omnichannel operating model.
As I mentioned on last quarters call. We are opening some new stores with good economic terms.
This quarter, we opened four new Karl Lagerfeld, Paris stores, which are off to a great start.
We expect to end the year with 36, DKNY and twenty-three Karl Lagerfeld Paris stores.
S as thoughtfully as we thoughtfully expand the omnichannel footprint, we expect to be able to further leverage our expense base.
Now let me discuss a few initiatives, we're working on with significant potential ahead.
We just completed the acquisition of Sony Ricky Al and iconic luxury European fashion brand with incredible global awareness.
We're in the early stages of the relaunch, which leverages the backend infrastructure of our European operations.
Our first collections across multiple categories are expected to be available next fall in France than rapidly expand throughout Europe, and then globally. We believe in the untapped potential for this brand.
Another initiative, we've been working on Leverages, a brand we already own GH bass.
There is significant value in its 150 year old rich legacy, which provides a licensing royalty stream.
Additionally, we are harnessing the brand to develop incremental businesses and just launched bass outerwear outdoor.
The collection capitalizes on the secular shift towards.
Active outdoor lifestyle by offering practical innovative and sensibly designed footwear and apparel for men and women.
It launched this past quarter and 150, Macy's doors in Macy's Dotcom, and Vas that com and is off to a good start.
With this launch combined with our Karl Lagerfeld, Paris men's business, we're developing our men's apparel design and production capabilities.
Present, an additional growth Avenue.
Both <unk> and Vas outdoor represent untapped opportunities for growth in our wholesale business as we expand distribution for these brands.
Summing up the third quarter based on the continued strength of our business our flexibility to adjust as needed to capitalize on market share opportunities and incredibly strong order book, we are raising our guidance for the full 2022 fiscal year.
We now anticipate full fiscal year net sales to be approximately $2 77 billion.
Wholesale net sales of first are fast approaching our pre pandemic levels of two years ago.
We expect to deliver our highest annual net income per diluted share exceeding pre pandemic results in fiscal 2020 by approximately 26%.
We also expect to be in our strongest financial position.
I'll now pass the call to Neil for a discussion of our third quarter financial results as well as the guidance for the full fiscal year 2022.
Thank you Morris.
Net sales for the third quarter ended October 31, 2021 increased approximately 23% to $1 $2 billion from $827 million in the same period last year and well above our guidance of $1 billion.
Net sales of our wholesale operations segment increased approximately 29% to $101 billion from $783 million last year.
Net sales of our retail operations segment were $26 million for the third quarter compared to last year's net sales of $58 million.
This decrease is a result of the restructuring of our retail segment in which all the wilsons leather and GH bass store operations will close by the end of fiscal 2021.
Sales at our DKNY and Karl Lagerfeld, Paris businesses were up compared to the prior year when sales were impacted by the pandemic.
Our gross margin percentage was 34, 2% in the third quarter of fiscal 2022 compared to 36% in last year's third quarter.
Last year's gross margins included benefits from Covid related adjustments.
Gross margins were 35, 4% two years ago.
The current year's decrease compared to two years ago is primarily attributable to the decreased penetration of the retail segment due to the store closures.
Wholesale operations segment gross margin percentage was 33% compared to 35, 5% in last year's comparable quarter and 33, 2% in the comparable quarter of two years ago.
Wholesale gross margin percentages in this year benefited from clean inventories at retail, resulting in less promotional activity combined with selective price increases.
These improvements were offset by the significant increase in freight costs, which we had anticipated would have more of an impact on gross margins in the second half of the year.
Last year's gross margins included significant one time benefits from the reversal of previously anticipated Mark down accruals that were no longer necessary due to the reduction in sales to our retail customers.
The gross margin percentage in our retail operations segment was 49, 8% compared to 33, 9% in the prior year's quarter and 49, 3% two years ago.
Last year's percentage was negatively impacted by the restructuring of our retail operations segment, which resulted in the liquidation of inventory in connection with closing stores.
SG&A expenses were $182 million in this quarter compared to $178 million in last year's third quarter.
The increase in expenses compared to last year is correlated to an increase in sales as well as an increase in compensation expense, primarily as a result of bonus accruals offset by reduction in our retail store expenses and bad debt expenses.
Net income for the third quarter was $107 million or $2 16 per diluted share compared to $63 million or $1 29 per diluted share in last year's third quarter and included direct losses from Wilsons and bass store operations was $12 million with 25 per share.
Net income for the third quarter, two years ago was $95 million or $1 97 per share and include a direct losses from Wilsons and bass store operations of $4 million or <unk> <unk> per share.
Looking at our balance sheet accounts receivable were $844 million compared to $721 million at the end of the third quarter of the previous year.
Inventory decreased to $449 million from $462 million at the end of the third quarter of last year.
We ended the quarter in an improved net debt position of $238 million compared to $359 million in the prior year.
We have cash and availability under our credit agreement of over $900 million.
We believe that our liquidity and financial position provide us the flexibility to invest in our future growth and continue to elevate our position as a global leader in fashion.
As for our guidance.
As indicated based on strong demand for our products and our order book, we feel good about our business, giving us the confidence to raise our previously provided guidance.
Our guidance does not include the impact of the current supply chain conditions does include the impact of the current supply chain conditions and delays in receipts. However.
However, our guidance does not contemplate any pandemic related impacts that we are not aware of already we have not anticipated new store closures or the impact of tighter government restrictions that could arise from the recent variance or other new variants.
For the full fiscal year ending January 31, 2022, we now expect net sales of approximately $2 77 billion compared to $2 <unk> $6 billion last year.
Adjusting for the closed wilsons leather and GH bass store sales.
<unk> $252 million in fiscal 2020, the current guidance leaves us approximately 5% below our pre pandemic sales levels in fiscal 2020.
We now expect net income for the full fiscal year 2022 to be between 180 $190 million or between $3 65, and $3 75 per diluted share.
This will be the highest annual net income per diluted share in our company's history exceeding pre pandemic fiscal 2022 results by approximately 26%.
This compares to net income of $24 million 48 per diluted share in fiscal year, 2021, and $144 million or $2 94 per diluted share in fiscal year 2020.
For your reference disclosed in our press release issued this morning is the impact by quarter for the last two fiscal years as the Wilsons leather and GH bass store operations.
That concludes my comments I'll now turn the call back to Morris for closing remarks.
Thank you Neil.
<unk> has emerged as an even stronger organization by successfully navigating the pandemic.
Our high performing a forward thinking teams combined with our experienced senior leadership with consistently executed through challenging environments and delivered great results to our stakeholders.
We will remain disciplined in our approach with a keen eye on fueling profitable growth.
With our globally recognized power brands and our dominance in a diversified range of lifestyle categories. G. III remains a vendor of choice in our industry given the strong demand we're seeing across our brands combined with a strong order book, we are confident in our business outlook for the remainder.
For the year.
We have the ability to use our balance sheet talent expertise and capabilities to further expand our global reach and are well positioned to gain market share over time and increase shareholder value.
I'd like to thank our entire G III organization and all our stakeholders for their continued support.
Operator, we're now ready to take some questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound key.
Question comes from Edgar Roma with Keybanc. Your line is open.
Hey, good morning, guys Morris congratulations on a fantastic quarter.
I guess just a couple questions for me first obviously very strong margin performance.
How much of this is due to just kind of lower markdowns lower concessions versus what was more pricing and I guess I'm just trying to understand kind of what's transitory given the industry inventory condition versus what do you think is a more permanent step up in margin and then as a follow up you guys had some very constructive comments on lagerfeld at Macy's.
Yes.
Is the business size wise relative to what it was that Lord <unk> Taylor and how should we think about that ramp to $500 million. Thank you.
Thank you Ed Thank you for your questions.
Our margin enhancements.
Sure.
Partly due to how well we buy.
We're fortunate enough to be on target and our choices of categories to go after it with.
The experience the knowledge and I would say, maybe gut feeling that categories that we're not in favor at.
The breakout of the pandemic would likely come back.
Renegotiated all our purchases, we brought down our initial pricing and own the inventory in anticipation of new good business coming across with that.
Our retailers.
That they could increase the price points of the average unit retails on our primary categories.
Prospered.
Well as we did so.
The margins are likely to continue we've proven out important price points that.
Elevate the average unit retail.
And support our initiative of going out and buying fairly aggressively for the coming year.
Our.
Order book supports.
Good business going forward.
The.
Breadth of distribution and now with the.
Further penetration of the globe historically, we've been a north American resource.
<unk> is also enhanced by our distribution in Europe and in.
In China as well as the middle East so.
We're comfortable with our pricing.
<unk>.
The.
Lord <unk> Taylor business, when we acquired <unk>.
Our interest in Karl Lagerfeld, the intention was to build.
Lord and Taylor, Dillard's, Nordstroms, and maybe bloomingdale's business.
And the Bay in Canada.
<unk>.
What afforded us that opportunity was the exit of Jones, New York from our industry.
We took the real estate that that historically, there had been some of the best real estate at retail and filled it with.
With Karl Lagerfeld, Paris product in the accounts that I mentioned.
Performance was good Lord and Taylor was the best of the group.
Unfortunately, the Lord <unk> Taylor went into bankruptcy.
We felt that we had sufficient opportunities.
Lord <unk> Taylor the Bay.
Dillard's.
We would leave macys for a later date.
They came sooner than expected.
Macy's has been.
Great supporter of.
All of our initiatives.
And Macy's true form.
They gave us <unk>.
75 doors to open with.
We're headed toward.
200 doors and likely likely to finish the year with 250 to 300 doors.
Of Karl Lagerfeld, Paris, and the initial performance has been great.
The we've gotten better on the product side.
We're.
Dead on target as to what the DNA of the brand should be.
And the sell throughs that every retailer just amazingly strong.
So we feel comfortable that within the next few years five.
$500 million in top line sales is not a problem to achieve.
Great. Thanks, so much.
Thank you Ed Thanks for your question.
Thank you. Our next question comes from Erinn Murphy with Piper Sandler Your line is open.
Great. Thank you good morning, and happy holidays.
A couple of questions maybe Morris first for you.
<unk> always been very nimble in that supply chain side I'd love to hear more about your product.
Got it and marketing highway manner, it sounds like Theres a little bit.
Hilton.
Higher freight costs and then what's the balance of Airfreight Ocean right now.
How prolonged.
Well my Crystal ball of course.
Talented persisting into 2022, and then I have a follow up.
Let me start with the.
Your last question first.
We believe that we'll incur transportation issues.
Much through through.
All of 'twenty two.
The steeper.
Or the more aggressive problems would probably.
It hit Us for Q1, and Q2, and then calmed down for the back end of the year.
Our anticipation.
But as you being part of Arrow.
<unk>.
Our shareholder group stakeholder group.
You're clearly aware that sourcing is.
Core competency.
We have a well defined organization overseas we have consistent.
Suppliers, we were adamant that we were not going to leave relationships that we've had for 30% and 40 years.
Travel into countries that would present.
<unk>.
Short term growth problems. So we maintain a presence in.
Old friends facilities.
And tell you the truth, that's really what saved us this year.
The loyalty went both ways, we were loyal to them at the break out of the pandemic.
And the payback was we got receipts a product that we bought in the fairly.
A reasonable time period.
Most recently more affected by container space in container costs and adverse.
Factory conditions.
So we were comfortable again.
We bought a fair share of.
Product for.
<unk>.
2022 receipts.
We believe that.
We believe that will start to receive goods a little bit earlier than.
Historic.
That's our hedge we have we have the capital to receive it we have the warehousing to hold it and we have retailer.
We are a retailer cooperation to take in inventory and help facilitate our process. So.
We're comfortable.
I wish I could give you a 100% comfort I can't.
These are strange times, but we believe we are in control of the bulk of their business.
In response to your question on what percentage airfreight, it's a small percentage of airfreight.
I don't have the number in front of me, but I would tell you it probably doesn't pass 5% of our receipts.
We're predominantly.
Voting will allow product.
We're careful as to the ports that we receive in.
Altering a little bit of that.
And we are negotiating prices that we.
We can live with for the coming year on freight cost.
Great. Thank you so much for that and then just second question is just on your outlook for the holiday season. How is it started what's your expectation in these critical weeks between Thanksgiving and Christmas. Thanks, So much.
So.
As we anticipated.
I have COVID-19 business.
Broke wide open.
Last.
A couple of weeks there was a little concern the weather was.
A little warm.
And as the weather broke sales.
Also came to fruition.
Yeah.
Our business has been excellent.
For for both cyber Monday, and Black Friday.
Creases.
We're better than most.
The compares in Rede.
We highlighted Karl Lagerfeld is a stellar performer.
Cyber Monday.
We're up to 2019 numbers by 119%.
DKNY didn't fare is good but they were up.
Mid teens.
And Black Friday again, Karl Lagerfeld was up.
Sensationally well.
More and more than doubled in business and DKNY was closer to flat.
Traffic is down north of 20%.
My early reads were more like 23% internally.
And in spite of that.
We're closing more transactions or average unit retail is up our margins are up.
We are.
We're in a good position.
Going forward.
As you've seen are as you've heard.
We've.
We've revised our budget.
For the year.
We anticipate strong sales and dramatic growth going forward.
Thank you and I haven't heard you say anything about Calvin Tommy yet just curious on performance there. Thanks, so much.
Our performance there is quite good.
Tommy Tommy has been excellent.
Calvin Klein has been very good.
We dominate the dress area.
Calvin Klein.
The department store level, and we are excited to address business being excellent.
<unk> client leads the charge followed by DKNY and Tommy Hilfiger.
And.
Those brands as strong in every category.
There is no slowdown.
Yes.
Our genes are our margins are better on a company owned brands, but our business is quite good on all our power brands.
Thank you so much and all the best for the holiday season.
Thank you Erin and same to you.
Thank you. Our next question comes from Susan Anderson with B Riley Your line is open.
Hi, good morning, nice job on the quarter.
I was wondering if you could maybe talk about the economics.
The remaining retail business.
Just DKNY and Karl and then also when you expect where you expect that to go particularly as you open more profitable stores that you talked about in Europe. Thanks.
So.
Number one let me hit the last 0.1st the stores that I cited in.
The middle East.
Sure.
Distributor stores, they're not company owned stores.
But actually it is.
Great there their knowledge of the region hedges, our bet and cooperating and supplying product to two.
To Saudi Arabia.
We believe that.
We believe those stores will be great no expense to us and no risk to us the risk is failure.
We take that seriously so we've researched it.
It's a great time to.
To launch Donna Karan in those regions.
Our stores as I said.
Prepared script.
The real estate has been negotiated differently then.
When we had.
<unk>.
North of 300 stores, there are kick outs in the event of failures.
The risk is.
Nowhere near what we had historically.
For the first time in.
Our business career.
Have two amazing brands to build on.
When we had 350 stores it was wilsons, which was a seasonal cold store.
Launched as a leather chain.
And as leather evaporated, so does the prosperity.
The wilsons stores than we had.
Yes.
Where we mismanage the.
The product side of that today.
We have DKNY with amazing product with broad appeal.
And watch out when the tourists comes back it's geared toward.
Just.
Pretty much everybody, it's well recognized throughout the globe.
And Karl Lagerfeld recognize even better.
So we will not build 300, Karl lagerfeld stores in the U S.
There is a possibility that we build 50 stores within the next three to five years.
DKNY little different DKNY being.
More price sensitive.
The broader appeal to the American population does have the opportunity to grow to be north of 100 stores with G. III, but we're cautious we are a different management team.
And we have different systems.
Evaluating our performance and their needs.
So.
Much more comfortable and much more careful on how we build retail.
Great and then thank you just to add one follow up on DKNY now that we're looking at.
Yes.
Past the pandemic, a little bit and it's backing quest mode. I'm curious if you can give us an update on just the sales base, there and where you expect that brand take awhile to longer term and how youre thinking about the op margin for the brand.
So our business and DKNY continues to grow.
<unk>.
Slightly approximately $500 million.
Wholesale sales.
We have a digital business that is growing and as I stated before.
Licenses.
Licensing partners all told.
We believe we have approximately $2 billion in retail sales with this spread.
We have best in class licensees.
Contractually bound to good period of time.
And continue to get better at our product.
And that business has turned around.
<unk> good footwear business.
Is doing well.
And where we are.
One of the top three or four brands in the country on categories like dresses ready to wear.
<unk> performance has picked up its pace. So we see dramatic growth. There is no reason that DKNY an.
In our hands alone.
<unk> reached $1 billion in sales I've said that I've said it before.
I firmly believe that within the next few years, we can get there.
And.
With believe it or not better margin and better product.
Great. Thanks, so much good luck this holiday.
Thank you Susan happy holiday to you.
Okay.
Thank you. Our next question comes from Jay sole with UBS. Your line is open.
Great. Thank you so much I wanted to follow up on the question about supply chain.
You made some comments in your remarks about high level impact of supply chain challenges on margins in this quarter, but is it possibly get a little bit more color maybe detail.
Many basis points like how should we think about the actual impact on gross margin from our challenges and also what's implied in the guidance for <unk> and then how do you see that how does that headwind trending as you get into <unk> based on what Morris said.
To an earlier question. Thank you.
Sure Jay Thank you.
If you noticed our margins on the wholesale business were north of 35% in the first.
First two quarters, you can see we're down below that that really was what we anticipated without quantifying the specific amount who was quite significantly impact from from the freight increases.
With respect to the fourth quarter, we again expect it that that impact will be greater than what we've seen in the first half. So we're still expecting that our gross margins at the wholesale segment will exceed where we were two years ago, but that will be with higher freight costs.
As Morris mentioned as far as going into next year very hard to determine how that happens we think that certainly a lot of people working very hard to try to smooth out a lot of different parts of the whole supply chain. We do expect that we will still have higher freight costs in the first first half of the year and those should put a little pressure on us However, we really.
<unk> all of our spring line I think I think one thing for US is it's a little bit. Some of this is a little more visible to us this year than what we saw last year.
And we're really pricing, we're trying to price into our product all of our inflationary pressures, including the impact of freight.
Got it okay. Thank you so much.
Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Your line is open.
Good morning, everyone and congratulations on the nice progress.
It seems like the wholesale channel has strengthened Morris given your touch points with wholesale how do you see how do you see the wholesale distribution channel changing ballston digital and physical and what does it mean for each of your brands differently. Thank you.
Thank you Dana and thanks for your question.
That's actually a really good question, but.
Wholesale.
Sumption.
Unfortunately.
Is that wholesale means brick and mortar it really doesn't.
We've changed and the industry has changed so much that we see we see retailers spinning off their digital sites, because they're not getting any credit for being pure play digital so theyre, creating pure play digital.
SaaS it will be a great example of that and creating value out of what was just an underlying assumption that it was.
Traditional offline brick and mortar.
So.
We're approaching not far from 50%.
Digital.
As wholesale.
Under the wholesale umbrella.
And that continues to grow the numbers.
Staggering and growth as we all know.
And brick and mortar is getting better as traffic.
In the comfort of going out and shopping stores comes back to us.
The brick and mortar.
Stores are likely to do far better theyre not dinosaurs in my world.
And theyre not dormant in my World If you look at.
Some of the new concepts that are coming through and even Macy's.
They have a new concept, which is smaller.
Easily.
Sure.
<unk> gotten to in shop.
The investment is significant done Macy's part.
And the report that will come the comeback is that they're doing well so.
I'd say there is a future too.
Brick and mortar as Standalone.
And we create over time is if <unk> is successful.
<unk>.
Creating.
A spin off of the digital piece will find that we've doubled that distribution there'll be a greater focus in greater growth on standalone digital business in the stand alone retail business. So.
I think.
I think they effect.
All our brands in some form or another.
We addressed if.
If you follow our company, which I know you do data.
Where.
Where luxury where mass where mid tier where team license where Europe.
Southeast Asia, where China.
We're going to get that customer regardless of where she tries to hide we're going to find it.
And I said her the next approach their businesses, we're going to build a men's business and if we don't get here, we're going to get him.
We're an agile company.
Is that the nos its way around the consumer.
And I think we've proved that out this company.
I'd like to remind people that we started out as a leather company that did one jacket one color for sizes Thats, all we did and we got here.
<unk>.
There is a long distance to go so we'll find that customer, regardless, regardless, where where the customer is shopping.
And then just one sorry, I got a little wordy on it boy.
A follow up regarding the obviously a lot of change at PVH, given new personnel coming in.
How is that working with you.
Timing of licensing renewals with them. Thank you.
So we've renewed Tommy Hilfiger.
And there is some time left on.
Calvin Klein and I have no reason to believe that it doesn't get renewed.
There is new management.
Different dynamics.
As we all know.
But.
We're here as we were before.
We perform exceptionally well.
Set it in the script several times.
Kind of.
<unk> wholesalers choice of where to do business with.
Prove that out and have no reason to believe that.
PVH would change there.
Their posture and keeping us as a partner.
Thank you.
Thank you our last question comes from Steve Marotta with CL King and Associates. Your line is open.
Good morning, Morris and Neil Neil.
I know that youre, not providing guidance obviously for next year, but maybe you can comment with the exception of elevated shipping costs in the first half are there other puts and takes.
Either in the first half of the year through the whole year that youre looking at that would be say runners up to the puts and takes associated with shipping.
Yes, Steve.
It is early for next year, and obviously there is lots of new uncertainties, but what we've accomplished this past year with respect to the wholesale part of our business is truly astounding.
We're getting higher operating margins on that business.
With less less volume than we did two years ago, We've got significant increase in operating profit in our wholesale business as I mentioned earlier, we think there will be able to offset inflationary pressures, including the freight with respect to.
The original opening pricing.
As Mark mentioned, we've always been grated sourcing. So we think that'll be a solid strength for us I don't see at this point any.
Unusual call outs for next year, it's a bit early I can tell you our order book for the spring is very very strong. So we're very encouraged with the start.
And we really expect to to continue building off of whats really been a phenomenal year for us and what we expect to be a phenomenal year for us.
One just a quick follow up to that you mentioned in your order book for spring is strong and I'm sure you don't want to quantify it and understandably so.
Memory serves me correct in previous conversations that we've had you've mentioned.
Given the supply chain constraints as we had moved into this current year that you were actually ordering overseas much much earlier is that still the case for delivery in the spring in other words that is one.
Critical offset too.
Used to be.
Supply chain snarls.
Yes, Steve Thats been part of our part of our mitigating process has been to try to move up the calendar will get ahead of whatever we can.
Very helpful. Thank you.
Thank you all.
Thanks.
Listening to our call and for your interest in our company I'd like to wish everyone, a happy healthy and safe holiday season, and best wishes for new year. Thank.
Thank you all.
This concludes today's conference call. Thank you for participating you may now disconnect.
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