Steven Madden, Ltd. (SHOO) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Steve Madden Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Director of Corporate Development and Investor Relations, Danielle McCoy. Please go ahead, ma'am.

Thanks, Chris, and good morning, everyone. Thank you for joining our third quarter 2019 earnings call and webcast. Before we begin, I'd like to remind you that during our call, we may make certain forward-looking statements as defined in the federal securities laws regarding our expectations or predictions about the future. Generally, these statements relate to projections involving anticipated revenues, earnings or other aspects of the company's operating results. Because these statements are based on current assumptions and expectations, they involve known and unknown 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 SEC from time to time include detailed discussions of the risk the company faces, and we urge you to refer to these. Any forward-looking statements represent our judgment as of the time of this call and cannot be relied upon as current after today's date. We disclaim any intent or obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable law. The financial results discussed are 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, the Chairman and CEO of Steve Madden. With that, I'll turn it over to Ed. Ed?

Thanks, Danielle. Good morning, everyone. And thank you for joining us to review Steve Madden's third quarter 2019 results. We are pleased with our third quarter performance, which included earnings that significantly exceeded our expectations. Our flagship Steve Madden brand was the highlight in the quarter with strong performance across the channels in which we operate. For Steve Madden, it all starts with product and Steve and his design team continued to create trend right product assortments in both footwear and handbags that are resonating with consumers and enabling us to outperform the competition. We are also supporting the brand with increased marketing investment that is serving to deepen the brand's connection with its core customers. In Q3, we launched a co-branded capsule collection of footwear with supermodel Winnie Harlow, with a marketing campaign shot by renowned photographer Steven Klein, that has generated outstanding editorial coverage and social media buzz. And we continue to focus on building our digital business and are seeing truly outstanding results. Sales on stevemadden.com accelerated in Q3 and are now up 66% for the first nine months of the year, compared to the comparable period last year. Overall, we believe our flagship brand is stronger than it's ever been. We also completed two acquisitions in the quarter that provide the company with meaningful growth opportunities going forward. On August 12, we announced that we had acquired GREATS a Brooklyn based to digitally native sneaker brand. Founded in 2014, GREATS has attracted a devoted following, particularly among millennials based on stylish classic designs that fit today's more casual lifestyle, along with unique marketing that connects the brand to culture. With $13 million in trailing 12 month net sales through June 30, we believe the GREATS brand is much bigger than the current business. And we are optimistic that we can grow this business significantly in the coming years. The acquisition was completed for $12.5 million in cash plus an earn out and is expected to be modestly dilutive to earnings in the first year. And then on August 13, we announced that we had acquired BB Dakota, a California based contemporary women's apparel company. We had been following BB Dakota for many years as we have long thought that the BB Dakota brand and product assortments were aligned with the spirit of the Steve Madden brand, and that BB Dakota would make an ideal apparel partner for us. So we were thrilled when the opportunity arose to acquire it. Beginning fall of 2020 we will transition to BB Dakota brand to become a co-branded BB Dakota Steve Madden line. And we see significant opportunity for the BB Dakota Steve Madden collection in BB Dakota’s existing distribution, as well as new distribution both domestically and abroad. In the trailing 12 months through June 30, BB Dakota had net sales of $43 million and we completed the acquisition for $24 million in cash plus an earn out. The BB Dakota acquisition is expected to be modestly accretive to earnings in the first year. So on a combined basis, the acquisitions of GREATS and BB Dakota are expected to be approximately breakeven in year one. We look forward to updating you on our progress with these two acquisitions as we move forward. We are also pleased to announce that in September, we formed a new joint venture in China with Channel Link [ph]. Channel Link offers superior capabilities both online and offline, with a successful track record as the China e-commerce partner for various international footwear brands, as well as a family apparel business that operates approximately 550 multi brand stores under its own brand Gaga, as well as approximately 230 franchise stores for other brands. The new JV is owned 51% by Steve Madden and 49% by Channel Link. The JV is already operating the Steve Madden business on Timo and we are expecting to launch on JD in early 2020 and on VIP in the back half of 2020. We're also planning to open our first store in Shanghai this quarter, and to open two to three additional locations in spring 2020. Now, I'd like to update you on the current tariff situation. In August, the Trump administration announced it would impose a tariff of 15% on List 4 products, which includes footwear, apparel, and certain other accessories that we produce. List 4 was divided into two categories, List 4A, which went into effect on September 1, and List 4B which is slated to go into effect on December 15. Of our List 4 products roughly half were on 4A and half were on 4B. Our approach to mitigating this tariff is similar to the strategy we have employed with respect to the List 3 tariff that has impacted handbags and certain other accessories that we produce. We are one, moving production out of China; two, working with our suppliers to get price concessions on the good that remain in China; and three, raising selling prices. After mitigation, we estimate that the negative impact to 2019 earnings from the List 4 tariff is approximately $0.02 per share. This is in addition to the $0.05 per share negative impact from the List 3 tariff that we have previously discussed, for a total negative impact from tariffs in 2019 of approximately $0.07 per share. Despite the incremental earnings pressure from the List 4 tariff, we are raising our 2019 EPS guidance today based on the above planned performance in third quarter, and the underlying strength in our business overall. We have faced a number of significant challenges this year, including not only tariffs, but also the Payless bankruptcy, and a higher year-over-year tax rate. And so we are pleased to be on track to deliver solid earnings growth this year despite those headwinds. We think that's a testament to the power of our brands and the strength of our business model. And we continue to believe that we are well positioned to drive further earnings growth and to create significant shareholder value over the long-term. With that, I'll turn it over to Danielle to review our financial results and our revised outlook in more detail.

Thanks, Ed. We are pleased with our third quarter performance. Our consolidated net sales increased 8.5% to $497.3 million compared to prior year net sales of $468.5 million. Wholesale footwear net sales increased 6.3% to $315.9 million led by gains in Blondo, Steve Madden women's and private label. Our growth in Europe through our SM Europe JV was also a highlight. In wholesale accessories and apparel, net sales increased 15.8% to $105.7 million. Steve Madden handbags was once again the standout in the quarter, marking its fourth consecutive quarter of double-digit sales growth. Net sales also benefited from the addition of BB Dakota. In our retail segment, net sales increased 8.3% to $75.7 million. Our same-store sales increased 5.1% on top of a 5.5% increase in the third quarter last year. Our e-commerce business continues to drive the growth in this segment. We ended the quarter with 227 company operated retail stores, including 67 outlets and 8 e-commerce stores, as well as 32 company operated concessions in international markets. Turning to other income. Our licensing royalty income, net of expenses was $1.5 million in the quarter compared to $2.6 million in last year's third quarter. While first class commission income was $0.6 million compared to $2.4 million last year. Consolidated gross margin increased 20 basis points to 38.4% compared to 38.2% in the prior year. Wholesale gross margin was 33.9% for the quarter compared to 34.3% in the prior year quarter. We achieved a 50 basis point increase in the wholesale footwear gross margins. But this was more than offset by a decrease in wholesale accessories and apparels, due primarily to the tariffs on goods imported from China. Retail gross margin was 63.3% compared to 60.1% in the prior year period, driven by more full price selling and a reduction in promotional activity, particularly on stevemadden.com. Operating expenses for the quarter increased to $120.9 million or 24.3% of net sales, compared to operating expenses of $109.6 million or 23.9% of net sales in the same period last year. Excluding GREATS and BB Dakota, operating expenses as a percentage of sales were flat to the prior year. Operating income for the quarter totaled $72.3 million, or 14.5% of net sales compared to last year's third quarter operating income of $70.6 million or 15.4% of net sales. Our effective tax rate for the quarter was 22.6% compared to 20.8% in the same period last year. Finally, net income for the quarter was $66 million or $0.67 per diluted share, compared to $55.9 million or $0.65 per diluted share in the third quarter of 2018. Moving to the balance sheet, our financial foundation remains strong. As of September 30, 2019, we had $194.9 million of cash and marketable securities and no debt. Inventory totaled $148.1 million, approximately flat to the prior year figure of $147.5 million. Our consolidated inventory turns for the last 12 months ended September 30th was 8 times, and our CapEx in the quarter was $3 million. During the quarter we repurchased approximately 785,000 shares for $25.3 million, which includes shares acquired through the net settlement of employee stock awards. Last, the company's Board of Directors approved an increase in the quarterly dividend of 7% to $0.15 per share. The dividend will be payable on December 27, 2019 to stockholders of record as of the close of business on December 16, 2019. Since 2013, we have returned over $830 million to our shareholders in the form of share repurchases and dividends. Now turning to our guidance, we are raising our 2019 net sales and earnings guidance. For the full year 2019, we now expect net sales growth of 7% to 7.5%, up from 5% to 7% previously, and now expect diluted EPS in the range of $1.92 to $1.95 compared to the previous range of $1.78 to $1.86. Included in this guidance is a tax rate for the full year of approximately 21%. Now, I'd like to turn it over the operator for question. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Sam Poser from Susquehanna. Your line is now open.

Good morning. Thank you so much for taking my question. I've got a few, can you walk through sort of the implied the gross margin and so on for the full year and implied in the fourth quarter? Or the SG&A either way you want to go about it that would be very helpful.

Yes, sure. I'll give you the full year numbers and let you back in to the fourth quarter. I think that that gross margin -- so obviously you've got the sales up 7% to 7.5%. We've taken our gross margin expectations up based on the strong performance that we're seeing. So we're now thinking that we can end the year up about 50 basis points in gross margin. Well, we think that SG&A as a percentage of sales will also be up roughly 40 to 50 basis points. So that should get you there.

Thanks. And then, can you talk about the different offsets of the tariffs and how that's breaking out between moving production and where you're going to be in China next year? Pricing and working with the factories.

Sure. So in terms of the mitigation of the -- if we're talking about List 4 tariffs, which are the new ones, the mitigation in the back half year most of that came through, going back to the factories and getting price concessions, as well as raising our selling prices. As we move into next year, of course, a bigger piece will be also moving production out of China. I think if we're -- if you look at our List 4 products overall, I think we're about 88% in China this year. It's a little bit lower than that in shoes, but some of the apparel and other accessory categories that are on List 4 bring that number up, I think shoes were about at 84%, 85%. But at any rate next year, we're still putting those plans together, and frankly, there are lot of moving pieces there. But I think a good goal would be to try to get that into the 60s. The percentage in China anything beyond that is really not achievable I don't think in the first year. We obviously are going to continue to try and get the price concessions out of China on the goods that remain there and then we will be raising selling prices. On the handbag side, we've really only raised selling prices, I'd say low-single digits. But in footwear I think you'll see that number be a little higher, maybe more like mid-single digits on average going into spring.

And then can you talk about within your comp, can you give us -- you gave the year-to-date date number for digital. But can you give us some idea of the variance between your digital growth in the comp and your brick and mortar growth?

Yes, brick and mortar was negative again in the quarter. So all of the growth is coming from digital.

And can you give us some ideas what degree it was negative, so we can model it better going forward.

About mid-singles.

Thanks very much. Continue success.

Thanks, Sam.

Thank you. And our next question comes from a line of Edward Yruma with KeyBanc Capital Markets. Your line is now open.

Good Morning. This is Matt on for Ed. Thanks for taking our questions. So handbags have been strong -- can you hear me?

Yes.

Okay. Handbags have been strong in retail and wholesale for a couple quarters now. Can you update us on what's driving the strength, particularly in private label? And since handbags experience terrace before footwear, can you talk a bit about what you learned from that process and how that's informed you for footwear tariffs?

Sure. Yes, actually in this quarter with respect to handbags it was really more of the Steve Madden branded handbags, which drove the growth. Private label was up but more modestly. And look, I think that as Danielle mentioned, we've now had four quarters in a row of double digit growth in Steve Madden handbags and it's really been a couple of years now of very nice growth there. And I think that we've just really found a better formula there. I think the product assortments have gotten much better a nice mix of core and fashion in that line and I think we've been performing well and what is obviously, somewhat challenging overall handbag market. So we're pleased with what we're seeing there. In terms of what we've learned from the List 3 tariffs and how that's helping us think about what to do with List 4. Look, I think one of the -- if you think about the experience that we've had in List 3, I would say if you think about the plan that we had going in and what we've learned, if you think about those three levers, I'd say frankly, that lever one moving production out of China has been somewhat more difficult than we anticipated. We've certainly moved a lot of goods to Cambodia and other places in the handbag category, but it's been challenging. We've definitely seen the prices rise significantly in those other countries and we've run into longer lead times and other challenges. However, we've been, I would say pleasantly surprised about the price concessions we've been able to get out of the factories in China. So that's something -- that's one takeaway that we’ll keep in mind as we move forward in footwear. But footwear is a different category from handbags as I mentioned, I think we do have a little bit more pricing power in footwear. And so will certainly be pulling lever number three, which is raising selling prices more aggressively and on List 4 with respect to footwear than we did on List 3 with respect to handbags.

Thanks very helpful. And can you talk a bit about the North American wholesale environment, specifically inventory in the channel and any differences between mass, Stanley and department stores? And what are your expectations for at once orders for the rest of the year?

Look overall the environment, I think is pretty challenging. If you look at the numbers that have been posted from the broad line retailers or the multi category retailers throughout the space, they haven't been stellar. But we've managed to really outperform in that environment. I think we think we have the right products and our products are selling through and we're outperforming the competition, and so we've been able to grow despite the challenging market dynamics. With respect to our brands, I don’t think there's a ton of variation across channel. If anything, I would say we're seeing better performance in the -- what we’d call the first tier. So like the department stores and the e-commerce retailers may be a little bit more challenging in the off price channel, not certainly because our products are performing, but I do think that there's a fair amount of excess inventory out there from other vendors. And so that can reduce the appetite that those off pricers have for makeup from us or make makeup product from us. Sorry, what was the last part of your question?

At once orders?

Yes, I mean, well, we don't -- I mean, this is not something I’d quantify on the call. But obviously that's baked into the guidance that we've provided.

Thank you.

And we're obviously getting -- we have products that are performing. So, yes, we are getting reorders.

Thank you. And our next question comes from Janine Stichter with Jefferies. Your line is now open.

Hey. Good morning. Thanks for taking my question. I want to ask about the e-commerce business that’s interesting because it sounds like you're seeing accelerating sales there. But then you're also talking about what sounds like pretty significantly lower promotions. So can you just talk about anything differently you're doing there or kind of what's driving that business?

Yes, we're really excited about what we're seeing their particularly on stevemadden.com and as you recall in the summer of last year, we went to offering free two day shipping. And concurrently with that we really pulled back significantly on the level of promotional activity on the site. So as opposed to discounting, we were sort of marketing ourselves with this stronger shipping offer. And that has really resonated with the consumer that has really worked for us. And as we move forward we've been able to continually dial back the promotions online. Now, of course, we're also doing a lot of other things to drive traffic to the site, as well as conversion. And we're seeing -- but we're seeing a lot of success with -- we've got much better at paid social, we're doing more work with influencers and seeing some really great returns there. And we've just got a lot of good things going, we've talked in the past about some of the new payment options that we implemented and the nice impact that had of course, as you know, we did the re-platforming, which has been very successful for us and I think really, in particular helped to drive up our conversion on mobile. So lot of good things happening there and it's a positive story to be able to drive this kind of sales growth without discounting.

Okay, fair. And then also just wanted to ask about the private label footwear business, I think you called that out as being a driver of strength, is there any of that related to what you're seeing from recapture from the Payless bankruptcy with some of your other wholesale partners.

Well, look, we are -- if you exclude Payless, we are running up double digits this year, obviously, down still based on the loss of Payless overall. It's really hard to tell exactly how much of that business that we're doing with the remaining customers is related to them trying to go after that Payless business. I think certainly had some of that, particularly in Q2, we were pretty -- we had communications with them about how they were attempting to try to grab some of that market share and were placing additional orders to do that. So, there's no way to really give a number there. A piece of it is definitely related to Payless. I don't think it's the majority of it, though.

Thank you.

Thank you. And our next question comes from the line of Paul Lejuez with Citi Research. Your line is now open.

Hey, thanks. I had just a couple questions. How much of your wholesale sales increase right now are being -- is being driven by more units versus higher AUR? And I guess the higher AUR, I guess, I'm also kind of curious if you've already seen the benefits of some pricing actions or if maybe there's a mix shift, that's also helping your AUR in that wholesale business? And then secondly, wondering if you could just talk a little bit about trends within sneakers, dress boots, and any fashion changes you're seeing out there that might drive strength in any one of those pieces of the business in particular. Thanks.

Sure. Yes, our AURs overall are up a little bit. But unit is the primary driver of the growth that we've seen. And then in terms of the fashion trends, I think one of the things we're excited about now is what we're seeing in boots and booties, that's a category you haven't heard me talk about as much in the last few years. But that's one where we're seeing nice year-over-year growth right now. And there's quite a few things working for us in the boot and booty category. So we're doing well with western, inspired looks, low bottoms [ph] are good, our combat boots are performing, over the knee boots are good again for us. And then not only in boots but really across other categories, we're seeing a lot of different materials trending. So snakes are very good, animal prints are performing, rhinestones, vinyls, studs, camo. So there's a lot for us to work with in terms of materials, and we're having some nice success with that.

Got you. And then can you just frame for us the size of the two acquisitions, how did that impact your sales guidance raise for this year. And what are you expecting to -- in terms of the size of those businesses for next year?

Sure. So the businesses, again, BB Dakota at the time of acquisition $43 million in trailing 12 months sales, GREATS $13 million. As far as the raise this year the raise in sales is really reflective of including BB Dakota and GREATS. So I think at the midpoint, we raised our sales guidance, something like $21 million. And that's in and around the number that we expect for BB Dakota and GREATS on a combined basis since we acquired them in the middle of August through the end of the year. I'm going to delay talking about our expectations for next year until next call, when we put out our guidance.

Got you. And then just one more follow up, any appetite for further acquisitions or these two enough for now to digest for you guys? Or are you still looking around?

No, we're always still looking. I think we certainly have the wherewithal to do additional acquisitions if we find the right opportunities. These are obviously relatively smaller deals. We're spending a lot of time on them to make sure that they're successful. But if the right opportunity came along, we'd still be interested.

Got you. Thank you. Good luck.

Thank you.

Thank you. And our next question comes from a line of Susan Anderson with B. Riley FBR. Your line is now open.

Hi, good morning. Nice job in the quarter. I guess just to follow up on the GREATS and BB Dakota acquisitions. Maybe I don't know if you could give some color just on how -- for GREATS how big you think this could be longer term? And are you expecting that brand to replace your men's Steve Madden and sneaker brand? And then for BB Dakota, if you could talk about thoughts on the rebranding of their brand and just not confusing the consumer. And then how big do you think apparel could be one day? And then, I guess, for both of those, if there's any color you could give on the margins versus your current business? Thanks.

Sure. Okay, so I'll start with GREATS. No, we're not -- this is not to replace Steve Madden men's. This is a separate brand with a different identity, different price point, different customer base, et cetera. So, certainly, we'll continue doing what we're doing in Steve Madden men's and we intend to grow that business as well. As far as the opportunity for GREATS, not going to put a number on today, all I can say it clearly could be many multiples of where it is today in terms of overall sales. It's a brand that's still in the early stages of its development. It's got a very limited distribution. It's basically almost all direct-to-consumer on greats.com. They do have one wholesale customer, which is Nordstrom and they have one store in Soho. So we do intend to expand the distribution over time. And, we think we can grow this business pretty significantly. In terms of BB Dakota, I think the question was about the rebranding. So we do intend to do a -- essentially a co-brand starting in fall of 2020. We think that's a way to get the Steve Madden brand into the apparel business, but still capitalize on the credibility that BB Dakota has in the category. And we've spoken to wholesale customers about that and they seem pretty excited about the opportunity there. In terms of margins. Look, we've said GREATS loses money. We've said that that business will be modestly diluted in the first year. We do think we have a plan to get it to break even relatively quickly. But currently loses money and BB Dakota is profitable, but is below our company average in operating margin. And again, there we also think there's opportunity for improvement and to get that more up to where -- to our average company operating margin overtime.

Great. And then if I can just follow up on the boots business, I think you talked about -- you felt good coming out of the second quarter with some early reads and it sounded like this quarter also perform well. Did you see any impact at all from warmer weather in parts of the country in terms of starting of that business? And just if you could talk about how you feel about fourth quarter performance too? Thanks.

Yes, we've heard some others talk about a slow start to the boot year. We really haven't felt that we've been very pleased with our performance in that category so far. We're running up double digits versus the prior year. I do think that some of the more commoditized type boots in the market or cold weather boots may have started off a little slower due to the weather. But fashion boots like what we do are really performing. I guess, the one caveat I would say it's really been about booties, as well as over the knee. So you have that tall shaft boot excluding over the knee hasn't kicked in, or is kicking in later. And so that may be partially related to weather.

Got it, that’s helpful. Thanks so much. Good luck for holiday.

Thank you.

Thank you. And our next question comes from the line of Erinn Murphy with Piper Jaffray. Your line is now open.

Great, thanks. Good morning. I guess, Ed, for you just sticking on the footwear side of the business. A lot of your peers have talked about expecting a higher promotional kind of cadence as we head deeper into holiday. Can you just talk about what your expectation is for promotional activity this holiday season? And then, does the six year days between Thanksgiving and Christmas, does that change any of your go to market strategies for how you plan to attack the holiday season?

Yes, look, we've certainly heard the same chatter about higher promotional activity across the industry. That's something we're prepared for. That being said, as I pointed out earlier, we've actually raised our gross margin expectations in this forecast because of the strong performance that we're seeing at retail, and our well controlled inventories. And so we don't think we're going to have to be as promotional as others this year. In terms of the shorter holiday season, the shorter number of day -- or fewer number of days between Thanksgiving and Christmas. Yes, look, we tend to essentially design our promotional calendar moving backwards from Christmas. So we'll continue to do that, which just means that typically there's a period after Black Friday, Cyber Monday, and before we really kick into our promotions for holiday where we're not promotional, that period will be a little bit shorter if you're talking about our own retail stores.

Okay, yes. Fair enough. And then just maybe going longer term on your operating margin, I mean, you guys have had very strong performance for a number of years now, even with that your EBIT margin has moved down consistently for the last six years to the low 11% range or I guess mid probably by the end of this year. How do you think about the longer term operating margin from here? Do you think -- are you comfortable with kind of this low 11%, low 12% and then just scaling the business in the top line just help us think about the puts and takes over the next three to five years?

Sure, yes. Look, if there were no tariffs I think that we would be confident that we could start to see operating margins move north here. And in fact, they would have been up this year, excluding tariffs. That being said, the tariffs has been a significant pressure and obviously will continue to further pressure us next year, provided these tariffs stay in place. But, absent that I do think that there's some opportunity for operating margin expansion here, particularly to leverage SG&A as we move forward.

Okay. And then maybe just sticking on the SG&A, you reference at the beginning of your script, just talking about the reinvestment in marketing. Where do you feel marketing will be by the end of this year as a percent of sales? And maybe just talk a little bit about the traction with a little bit more on the Winnie collaboration are there more -- are you expecting kind of further pipeline of collaboration with different individuals? Thanks.

Yes, so look marketing as a percentage of sales overall still below 2%. So still a relatively low number, although it'll be up roughly 40 basis points this year compared to the prior year. So not an insignificant increase in investment and we feel very good about the return that we're getting there. Yes, the Winnie thing was -- has been great, really, I think, provided a really nice sort of brand marketing halo for us really seems to have resonated with consumers. We talked about also all the earned media that we've gotten there in terms of editorial coverage, and in particular, and probably most importantly, tons of social media posts and also engagement from not only consumers, but celebrities and Winnie herself, et cetera. So yes, we'll look at doing things like that going forward I mean honestly, it's not something that we have calendared out every season, but we’ll continue to be optimistic and look for more ways to engage with our consumers.

Great, thanks so much.

Thank you.

Thank you. Our next question comes from the line of Chris Svezia with Wedbush. Your line is open.

Good morning and thank you for taking my questions and nice job on the quarter and some of the tariff mitigation. I guess, first question I have is just on the sales outlook, and what's implied for Q4. If I make some assumptions for the acquisitions it implies the core business is call it kind of flattish, maybe up just slightly, just given the outperformance where maybe you being conservative, what's the caution, is it just comparisons maybe a little color on why maybe the core business would be running about flattish on a year-over-year basis?

A lot of it's just a function of comparisons, if you look at Q3 to Q4 last year, I think that the comparisons get almost 900 basis points more challenging. So I think that's really the big piece of it. I mean, a couple call I said make there if you look at wholesale accessories last year, if you recall, we were up 38% in Q4. We have told people all year and been pretty consistent about trying to get people to prepared for the fact that we would actually be down in wholesale accessories going against that up 38% in Q4, and we do anticipate that we will be down in that area. And then even in wholesale footwear, I think there's a tougher compare. One of the things that we did last year was we shipped in tall shaft boots later and in fact, we think we shipped them in a little bit too late, we shipped them in October last year. We moved that up to September this year. And so that did move some sales from Q4 to Q3.

Okay, that's helpful. On the tariffs, just so I understand is -- are you -- and the $0.02 you’ve called out, are you factoring in the proposed List 4B on 12/15 or no?

Yes, but that has almost no impact to us because it's only two weeks and pretty much anything that we're going to ship out in those last two weeks we brought in before 12/15.

Okay. And then just theoretically on all this the tariffs, just a $0.02 versus I think accessories initially were $0.05 given footwear much larger pieces of the business, it seems like you would have more exposure. Is it just the fact that you have more pricing power, you referenced mid-single digit increasing in pricing to mitigate more of that exposure, just any color around that? And how you’re thinking about existing TOs that were written for the balance of the year? Are you making adjustments to those or are you just -- how does that factor into the thought process?

Sure, well, a couple of things I'd say about that. First of all, keep in mind that as I mentioned in the earlier remarks, only about half of our List 4 products were on 4A. So half of them don't see tariffs until 12/15 and so were not an issue. We were also able to move some products up to be delivered in advance of the tariff. And so, through those two things, we were able to get sort of the gross impact before our steps to mitigate meaning before price concessions from the factories or price increases to our customers, down to let's say $6 million to $7 million. And then we went back and got price concessions from the factories on open orders and also on open orders and the answer to your question, yes, we did go back and change our prices to our customers on open orders, and they did accept those price increases, and so that's how we got that down to the roughly $0.02 impact. Obviously, going into next year, if you have 4A and 4B, you’ll have a more significant impact.

Okay, that's helpful. And then just lastly, just on the sustainability in the retail business, from a gross margin perspective, very strong in the quarter. What's sort of your viewpoint on being able I mean, a lot of that’s probably been driven by digital, just sort of the thought process sustainability? And what's sort of baked into your plan as you think about Q4 gross margin on retail?

Yes, I think that we’re going to continue to move forward with the strategy that we have, which is less discounting, particularly, online. Q4 is obviously relatively promotional time these days, particularly in bricks and mortar, so that's what we have to be cognizant of. So you're not going to see the same kind of improvement that you saw in Q3, but could we be flattish to where we were a year ago and we had a pretty strong fourth quarter gross margin. I think that's a good target. Maybe down a touch because of the tariff impact. So that's the way I think about it.

Okay. Final thing, is just on the -- pricing increases on footwear. How do we think about that retail in terms of your retail stores versus wholesale customers then sort of accepting those price increases and passing them through just sort of what's been the response reaction from your wholesale customers?

The wholesale customers weren't terribly excited about it, but they did go along with it, and have raised retail. The majority of them have raised retails as well. And we've obviously raised retails in our retail stores. And so far we have not seen any discernible impact to sell through. So it seems that the consumer is paying it. Now again, on these initial business here in fall on holiday, we really raised low-single digits. If the tariffs remain in place going into spring and beyond, we’d be looking to take a little bit more price.

Okay, helpful. Thank you and all the best around the holiday.

Thanks.

Thank you. And our next question comes from online of Steve Marotta from CL King & Associates. Your line is now open.

Good morning, Ed and Danielle. You were pretty clear on what the acquisitions were adding to this year or I should say what the TTM was. But just very specific as it pertains to guidance, you mentioned that the increase in guidance expectations for sales was due to the acquisitions primarily. Can you talk a little bit about the earnings delta and how much of the earnings delta is specifically due to the acquisitions?

Yes, so the acquisitions are pretty much breakeven. So the increase in earnings is not -- well, the increase in sales is related to the acquisitions, the increasing earnings is not. So, what that means is that the organic business or the business excluding acquisitions, the sales are pretty much in-line with our previous forecast, but the earnings have come up and that's really a function primarily of a higher expectation for gross margin, which is a function of having the right product that's selling through and having very well managed inventories. And then there's also a little bit improved expectations for operating expenses. I think we've controlled the expenses a little bit better than we initially anticipated.

Okay, that's really helpful. And also, just a follow-up on your inventory, considering that there were two acquisitions in the quarter, and that your business was pretty good, flat inventory is semi heroic. Can you talk a little bit about are you too light in any places or where are the puts and takes there that would cause a flat inventory on a year-over-year basis given those acquisitions and the organic sales growth?

Yes, look, that's a major focus for us as you know. We do have the inventory that we need to achieve the sales plans. So I don't think you have to worry that we're too light there. But we've been highly focused on managing inventory. It is an uncertain environment. It is something that, as you know is a real priority for this company always. And I think the team has done a really good job. So I'm very pleased with how they've managed that. But you're right, I think we're down like high singles, excluding the acquisitions in inventory.

Okay, that's great. And then it's just, again, inventory management, no, necessarily early shipments or any other puts and takes just reiterating what you said?

Yes, that's right. I'm just trying to remember if last year third quarter if we were pulling something -- if we had pulled in a little bit more due to the tariff on List 3. So there may have been a somewhat easier compare there I’d have to really look back to be honest with you.

I can look back. Thank you, that's helpful.

Thank you. And our next question comes from the line of Laura Champine with Loop Capital. Your line is now open.

Thanks for taking my question. So, Ed, you talked about mid-single digit price increases in your spring collection just as you pass off costs you can offset from tariffs. Does it seem early read that that is similar to what your competitors are doing? And can you give us any sort of historical perspective on when the last time footwear vendors made mid-single digit increases to list price?

In terms of the competition, look, we don't have great visibility into that. I think anecdotally, we've definitely heard about our peers raising prices, and we think we're probably in the similar range. As far as history, look, a 15% price shock like we're having with tariffs, there's not a lot of history on that. I will say a handful of years ago and I can't recall exactly what year it was. The dollar weakened against the RMB by about maybe 5%. And the industry did pass through I would say 3%, 4%, 5% price increases to the consumer. And we did not see a lot of pushback at that time. But this is obviously a more significant challenge with a 15% tariff. So, so we'll have to see what happens.

Understood. Thank you.

Thank you. And we have a follow up and our last question comes from Sam Poser from Susquehanna. Your line is now open.

I've got a whole bunch of follow ups. Number one, your inventory at the end of the year, given the potential for the List 4 tariffs, can you give us some idea of where -- do you anticipate those to be higher in that you'll pull forward goods to avoid the tariffs?

Yes, you'll see a little bit of that, but I don't think it should be majorly out of whack.

And then your full year tax rate. Is that -- can you just walk through because it looks like the fourth quarter number is well below where everybody was? Can you just give us some color on where the tax rate is relative to your prior expectation? And how much that was additive, if at all?

Yes, we're looking at, I think 21% for the full year. But I will point out that does imply much higher tax rate year-over-year in Q4. In the first three quarters, we were running up anywhere between 100 to 200 basis points in tax rate compared to the prior year. In Q4, it's more like 500 basis points higher than last year.

And should we think of a 21% rate going forward is fairly normal?

Yes, I mean, there's a lot of -- there are a lot of moving parts there in terms of our earnings by tax jurisdiction, as well as the amount of these discrete benefits that we get or I guess at someday it could be a discrete expense related to stock-based compensation. But, I think, 21% is a reasonable starting point for now.

And if we do not see the 4B tariffs come into impact. Given your speed to market and everything, I would assume that you were impacted more this year by the tariffs, of the existing tariffs than you will be next year given that you have the ability to change. So, when we think about the $0.07 that impacted this year, initially how should we think about next year? And then the same question if we do see 4B roll in.

Look, I think we're going to -- we haven't provided guidance for next year overall yet. We'll do that on the next call. And I think at that time we’ll also try to give you color on what we think the overall tariff impact will be next year.

And then lastly -- thank you. And then lastly, the -- I was just asked about the price of the price increases and so on. But I mean, your deal -- from what -- I gather from what you say that currently given the strength of boots, I assume athletic is good. You had a good sandal year, you likely are getting reads on stuff for next spring that you're probably feeling good about. I mean, you're talking about a lot of new products that one is going to have higher prices. And also, the reason you're able to pass through these prices initially, I would guess is because you've got the fashion, right? And there's a number of trends that you've spoken about over the year thus far that have been helping you. So, for looking at it in the -- who's taking price and getting resistance. That's a, who's getting the shoes right too I assume.

Yes, I think that we're in as good a position as anybody to try to take price given the strength of -- given the momentum that we have in the brand and the strength of our product assortments. But I think it remains to be seen exactly how the consumer will respond to that. And look, it's not only about what we're doing, given that now there's a 15% tariff -- I mean, given that List 4 captured everything else that comes in from China, it's not only us, it's not only other shoe companies, a lot of folks going to be trying to raise prices to consumers. And we'll have to see what that does to overall consumer demand and to the velocity of the sell-throughs for our products and others.

And you also have had some shoes of your mix for a long time, some of the sneakers and others, do you -- as of now, when you think about what's going to happen for spring given the tariffs are you looking to do sort of more of an overall of bringing in obsoleting current product and bringing in newer product. So it's not sort of a straight up price increase, it's an introducing new product at higher price points than they would have been otherwise kind of a situation?

Well, I think your point is well taken that it's easier to raise prices on new stuff than on existing. But I don't think we want to let the tail wag the dog here, I think we want to deliver the products that we think our customer wants. And if those are products that have been in the line for a few years, we're going to continue to have those.

Thank you very much and good luck. Appreciate it.

Thanks, Sam.

Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to Ed Rosenfeld for any further remarks.

Great. Well, thanks very much for joining us today and we look forward to speaking with you on the fourth quarter call. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.