Vince Holding Corp. (VNCE) Q3 2014 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to the Vince Holding Corp., Q3 Earnings Conference Call. All participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the meeting over to Jennifer Poland [ph], Vice President of Finance.

Thank you Sally and good morning everyone. Welcome to our third quarter and year-to-date fiscal 2014 earnings conference call. I am Jennifer Poland, Vice President of Finance and joining me today is Jill Granoff, our Chairman and Chief Executive Officer; and Lisa Klinger, our Chief Financial Officer, who will be your speakers for today’s call. Before we get into the discussion of our results I need to remind you that any forward-looking statements we make today are subject to our cautionary statements regarding forward-looking statements found in our press release and SEC filings. Our third quarter and year-to-date earnings release and related financial information are available on our website under the investor section. For those who cannot listen to the entire live broadcast a replay will be available for 30 days on our website at www.vince.com. I would also like to point out that on November 27, 2013 Vince Holding Corp. completed its initial public offering. As a result of the IPO and the related restructuring transactions Vince became the sole operating business of Vince Holding Corp., while the non-Vince businesses were separated. Additionally, on July 1, 2014 certain stockholders of the company completed a secondary public offering of the company’s common stock with all proceeds going to those stockholders. In today’s discussion we are presenting our financial results in conformity with GAAP, including the financial results of the non-Vince businesses for the third and year-to-date fiscal 2013 as discontinued operations. In addition we will be presenting financial results relating to the third quarter and year-to-date fiscal 2013 on an-adjusted basis in order to exclude the impact of results of the non-Vince businesses and certain public company transition costs, as well as year-to-date fiscal 2014 on an adjusted basis, in order to exclude the impact of secondary offering expenses. These adjusted results are non-GAAP measures and include adjusted measures. Discussions of these non-GAAP measures and reconciliations of them to their most comparable GAAP measure are included in today's press release and related schedules, which are available in the investor section of our website. After our prepared comments we will be available to take your questions for as long as time permits. Now I'll turn the call over to Jill.

Thank you Jennifer and thank you all for joining us. I would like to welcome each of you to our third quarter and year-to-date fiscal 2014 Vince earnings call. We look forward to today’s discussion. Before we jump into the results I would like to take a moment to celebrate our one year anniversary as a public company which occurred a few days ago. While it has been a tremendous undertaking I am very proud of the team and the accomplishments we have achieved in the last 12 months. We believe we have delivered against virtually all of the various business initiatives we have previously outlined. More importantly, we remain confident in our long-term strategy to deliver 15% to 20% net sales growth and 20% to 25% net income growth annually for the foreseeable future. Now turning to the third quarter, it was another strong performance for the Vince brand. We delivered total sales growth of 20%, as we again achieved double-digit increases across all distribution channels. In wholesale, sales grew over 17% and in the direct-to-consumer segment we delivered growth of over 30%. This sales growth was broad-based and driven by strong category performance in women’s ready-to-wear, men’s sportswear and our licensed footwear business. We also continued our trend of gross margin rate improvement by delivering 50 basis points of expansion over last year’s third quarter rate, despite the overall promotional intensity in the retail sector. With our strong sales growth and continued margin improvement we were able to increase diluted earnings per share to $0.35, an increase of 25% over last year’s adjusted level of $0.28. We believe these results further demonstrate the strength of our product offering and reinforce Vince’s position as one of the leading contemporary fashion brands in the marketplace today. In just a few moments I will provide you with an update on our various strategic initiatives and our updated guidance for fiscal 2014. But first I would like to turn the call over to Lisa who will provide additional details on our financial results for the third quarter and year-to-date fiscal 2014 period. Lisa?

Thank you, Jill. As we mentioned in our introductory comments the company will be presenting both GAAP as well as adjusted financial results in order to provide investors with additional information to evaluate our comparable operating performance. In looking at the third quarter the company delivered strong total sales growth of 20% with net sales of $102.9 million versus $85.8 million in the prior year period. Our wholesale segment sales increased 17.3% driven by continued strong domestic and international demand as well as our growing licensing business. Our direct to consumer segment sales increased 30.2% as we added 10 new stores, grew our comparable store sales by 5.2% and continue to see strong growth in our e-commerce business. If we were to include e-commerce sales in our comparable store sales measure our third quarter increase would have been 8%. As of November 1, 2014 our comparable store base consisted of 26 stores out of over 2,400 points of sale in total or approximately 1% of our distribution and comprised 14% of our total net sales. Moving on to profitability, gross profit in the quarter increased 21.4% to $50.6 million versus the third quarter of fiscal 2013 as a result of both an increase in net sales as well as an increase in the gross profit rate. Gross profit as a percentage of net sales increased 50 basis points to 49.2% from 48.7% last year. The gross profit rate increase was driven primarily by supply chain efficiencies and increased sales penetration of our direct to consumer, international and licensing businesses, partially offset by higher promotions, markdowns and returns allowances. Selling, general and administrative expenses in the quarter were $25.8 million or 25.1% of sales compared to $24.2 million or 28.2% of sales for the third quarter of last year. Adjusted selling, general and administrative expenses as a percent of sales for the third quarter of fiscal 2013 were 24.5%. As we continued to invest in our growth our SG&A rate deleveraged primarily due to increase labor and occupancy costs related to our retail growth strategy, strategic investments in our marketing programs to build brand awareness and drive traffic to all of our distribution channels, investments in new talent to support our stated growth initiative and incremental costs related to our public company status. We also incurred higher depreciation expense as we strategically invested in new retail stores, wholesale shop in shops and our standard showrooms, design studio and headquarter facilities. Operating income this year increased 41.6% to $24.8 million or 24.1% of sales, compared to $17.5 million or 20.5% of sales for the third quarter of last year. Compared to adjusted operating income in fiscal 2013 of $20.7 million or 24.2% of sales operating income increased 19.9%. We were able to essentially maintain our operating margin while making investments to support our various growth initiatives and incurring cost necessary for Vince to operate as a standalone public company. GAAP reported net income for the third quarter of this year increased to $13.3 million compared to a net loss of $2.4 million last year. Reported diluted earnings per share was $0.35 compared to a diluted loss per share for the prior year’s third quarter of $0.09. Compared to adjusted net income in the third quarter of fiscal 2013 net income increased 25.4% and diluted earnings per share increased 25%, compared to adjusted diluted earnings per share of $0.28 in the same period of the prior year. Now moving on to the fiscal 2014 year-to-date results, net sales were $245.7 million, an increase of 22.6% over the same period last year. This net sales increase was driven by a 19.2% in our wholesale segment sales and a 35.9% increase in our direct‐to‐consumer segment sales. Our comparable store sales for the year-to-date period increased 7.4% over the same period of fiscal 2013 and increased 10.5% when including e-commerce sales. This comparable store sales performance was driven primarily by an increase in transactions and a modest increase in transactional size. Gross profit increased 30.4% to $121.1 million compared to the year-to-date period in fiscal 2013. The increase in gross profit was driven primarily by the nearly 23% increase in net sales as well as an increase in the gross profit rate. Gross profit as a percentage of net sales increased by 300 basis points to 49.3% from 46.3% in the year-to-date period of last year. The increase in gross profit rate was primarily driven by overall supply chain efficiencies, increased penetration in higher margin products and increased penetration of sales from our direct‐to‐consumer, international and licensing businesses offset slightly by higher promotions, markdowns and returns allowances. Selling, general and administrative expenses increased 21.6% to $71.1 million or 29% of sales versus $58.5 million or 29.1% of sales in the corresponding period of last year. Adjusted selling, general and administrative expenses as a percentage of sales increased to 28.7% this year from 25.6% last year. Consistent with the third quarter the deleverage in our SG&A rate for the year-to-date was driven primarily by increased investments to support our growth initiatives and for Vince to operate as a standalone public company. Operating income increased by 45.2% to $50 million, up from $34.4 million last year. Adjusted operating income increased 21.5% compared to the same period in fiscal 2013. As a percentage of sales adjusted operating margin was 20.6% compared to 20.8% last year. On a GAAP basis the company reported net income of $25.2 million compared to a net loss of $28 million for the year-to-date period in fiscal 2013. Diluted earnings per share was $0.66 compared to a net loss per share of $1.06 in fiscal 2013. On an adjusted basis net income increased 31.9% to $25.5 million and adjusted diluted earnings per share increased 31.4% to $0.67 compared to $0.51, earned in the same period of last year. Now moving on to the balance sheet; the company voluntarily reduced its debt by $17.1 million during the third quarter resulting in total debt outstanding of $122.5 million and a debt leverage ratio of 1.7 times as of November 1, 2014. During the first nine months of fiscal 2014 we have voluntarily paid down $47.5 million of debt outstanding while investing behind our numerous growth initiatives. As of the end of the third quarter the company had $21.9 million of availability remaining under its $50 million asset backed lending facility providing significant liquidity to the business. Inventory at the end of the third quarter of fiscal 2014 was $52.7 million versus $36.2 million at the end of the third quarter of fiscal 2013. Additionally our inventory level decreased 10.1% versus the $58.6 million level as of August 2, 2014. The planned year-over-year increase was primarily driven by the addition of 10 net new retail stores since the third quarter of last year, increased in transit inventory as a result of our operational improvement initiative and expanded replenishment program, new handbag inventory in preparation for our fourth quarter launch and overall global sales growth projections. Capital expenditures for the third quarter totaled $8 million, of which $3.8 million was attributable to new and remodeled stores and shop-in-shop build out. Additionally $4.2 million of the capital spend during the quarter related to our new headquarter and showrooms in New York and our new design studio in Los Angeles. As of the end of the third quarter of fiscal 2014 the company have signed four leases for stores that are expected to open in fiscal 2015 or beyond with several other leases in various stages of negotiation. As of today December 2nd the company has 37 stores in the U.S., including 28 full price stores and nine outlet stores. That concludes my comments regarding our third quarter and year-to-date fiscal 2014 financial performance. I will now turn the call back over to Jill so that she can provide you with an update on our key strategic initiatives and our updated outlook for the year Jill.

Thank you, Lisa. We are very proud of our financial performance and the continued progress we are making in our evolution to becoming a global dual gender lifestyle brand. Vince's strong third quarter and year-to-date results stem from the power of our brand and dynamic product offering. During the quarter we maintained our leading position in women’s contemporary apparel with sweaters, knit-tops and blouses remaining our largest categories. In addition we also saw double-digit growth in outerwear, dresses, pants, skirts and in our higher ticket per item. As we have mentioned previously we are focused on addressing a broader variety of wear occasions and our customers are receptive to this expanded product assortment. Our newly elevated men's collection is also resonating with our retail partners and customers alike and we saw double-digit growth in our overall men's business during the third quarter as well. In addition to the strong results of our apparel categories we are happy to share the progress of our new handbag collection which was developed in house. The collection launched a few weeks ago ahead of our first quarter 2015 expectation at our owned retail stores and website as well as exclusively at 26 key Saks stores in the United States and at Saks.com. While it's still very early the initial feedback is promising and we are delighted with the standup editorial coverage the collection has received. We have major exposure in Harpers, Elle, Glamour and InStyle with many of these magazines focusing their coverage on the important gift giving guide section. Based on initial consumer demand we are seeing the strongest receptivity to the Vince's signature collection, especially the small cross body in our fashion colors and the east-west toe [ph] and our Mark craft leather. This new product launch marks the major milestone in our evolution to becoming a global lifestyle brand and reinforces our modern clean DNA and subtle yet sophisticated branding. From a licensing standpoint we continue to see strong demand for Vince's women's footwear, which is one of the best-selling contemporary footwear brands at many of our wholesale partners. The line is now sold in nearly 370 points of distribution and that number is expected to increase to nearly 500 doors worldwide for the spring 2015 collection. Men's footwear recently launched and has had solid initial results and is now distributed in roughly 60 points of distribution. More importantly we believe men's footwear is poised for additional growth with an expanded assortment and increased distribution for our spring 2015 collection. During the third quarter I was fortunate to travel both domestically and internationally to meet with many of our global department store partners, several international distribution partners, Vince retail store leaders and a few of our key vendors. While it is certainly important to focus on the day-to-day operations of the business I believe it is equally important for us to spend time in the market to better understand local trends, our customers’ behaviors and competitive activities, in other words to essentially take the pulse of the business first hand. I must say I was delighted to hear to the external enthusiasm for the Vince brand. Internationally our department store and distribution partners were very excited about the Vince brand evolution and the new product categories we have added. They now see Vince becoming a full lifestyle brand and are eager to find ways to expand our business together. In Canada, which is currently our largest international market we were able to identify key near-term as well as long-term growth opportunities, especially with Nordstrom and SAKS entering the market. I also traveled to Korea, Japan and Hong Kong where we defined growth opportunities from both the distribution and category perspective. While in Asia, I was also able to meet with two of our largest product vendors as well attend the opening of our new Hong Kong sourcing office. With our focus on developing high quality sophisticated products these vendor relationships will become increasingly important and we continue to make them a top priority. Domestically I had the privilege of touring many of our major department store locations and retail stores while engaging with our store associates and brand ambassadors. Since these individuals are the direct interface with our customers it is very important to hear their feedback and the suggestion they have especially as we head into the all-important holiday season. Our direct-to-consumer teams have prepared extensively for the holiday season and we believe we are well situated with holiday gifting guides and expanded sweater and cold weather assortments, handbag training, top client gifting initiatives and increased seasonal coverage in stores. During the quarter we also made great progress on expanding our global distribution as well as enhancing our product presentations in our existing doors. In the U.S. we opened three dual gender full price stores, our first store in Philadelphia, a store in Pasadena, California and a new store in Bal Harbor, Florida. These stores are currently performing in-line, with or ahead of our initial expectations and we view them as great additions to our fleet. We also opened three outlet stores in the third quarter, in the [indiscernible], Massachusetts, Carlsbad, California and St. Marcos, Texas, increasing our outlet store count to nine. Additionally in our domestic wholesale channel we opened six women and five men shop-in-shop, giving us a total of 23 domestic shop-in-shop as of December 2nd. We intend to open up to nine additional domestic men shop-in-shop in the fourth quarter given the strength of our new men’s assortment and strong interest by several retail partners in accelerating our men’s penetration. From an international distribution perspective we leverage the success of our previous shop-in-shop expansion strategy and opened two new shops in Korea. We are also pursuing locations in Canada, Japan and the UK with a goal of bringing our total international shop-in-shop count at the end of this year to a range of 13 to 14 shops. In addition we recently signed a distribution agent agreement for Germany and Austria as well as a lease for our first international showrooms in Paris which we hope to have open in early fiscal 2015. Similar to our new showrooms in New York we plan to display the full breadth of the Vince brand, including both women’s and men’s apparel, footwear as well as handbags and other accessories. We believe both of these initiatives will be key drivers of our European growth strategy. Given our solid third quarter performance and current business insights we are slightly modifying our guidance for fiscal 2014 as follows: First, the company continues to expect to achieve total net sales of $335 million to $345 million, including revenues from nine new retail stores and comparable store sales growth now in the high single-digit range. Comparable store sales growth including e-commerce sales is expected to be in the low double-digit range. Second, the company now expects gross margin expansion of 200 to 250 basis points versus the prior expansion range of 200 to 275 basis points. This expansion will be driven primarily by operational improvements and the higher penetration of direct to consumer sales. Third, we now expect to increase adjusted selling, general and administrative expenses as a percent of sales by 200 to 250 basis points versus the prior range of 200 to 275 basis points over the adjusted fiscal 2013 rate of 25.6%. The increased SG&A rate is being driven by the expansion of our retail network, strategic investments in marketing program and incremental public company cost incurred for a full 12 month period. Fourth, taking into account our current net sales, gross profit and SG&A forecast we reaffirm our guidance of adjusted diluted earnings per share of $0.90 to $0.94 for fiscal 2014. Finally, we now expect our capital expenditures to be in the $20 million to $23 million range in fiscal 2014 versus the prior range of $18 million to $22 million. In summary we remain cautiously optimistic about the balance of 2014 and believe we are on track to achieve our long-term goal of generating high quality revenue and earnings growth. While we recognize that we cannot control the macroeconomic environment we believe we have a long growth runway ahead and our team is working aggressively to build the business with exciting new product introductions, compelling shopping experiences as well as innovative marketing initiative. We'll continue to invest strategically in the business to exploit the full potential of the Vince brand while delivering value to our shareholders. Before turning the call over for questions I would like to thank our amazing Vince team in New York, LA and the field for their tireless efforts in building the brand and driving these impressive results. I would also like to thank our wholesale licensing and international distribution partners who continue to showcase and support the brand. Finally, I'd like to wish everyone a very joyous holiday season. Operator we will now open the call for questions.

Thank you. [Operator Instructions]. Your first question comes from the line of Robbie Ohmes with Bank of America. Your line is open.

Good morning, guys.

Hey Robbie.

I was going to ask on retail a couple of things, Jill or Lisa, could you just give us the third quarter traffic versus ticket and maybe some color on how outlets versus full line stores did for you and then the follow-up question would be just on the fourth quarter given the full year guidance should we be expecting a mid-single digit comp for the fourth quarter? I think that could get the year ex-e-commerce into the high single digit range. Should we be thinking that way? And then also Jill, any color on what you're seeing out there right now for holiday, how promotionally competitive is it and any other thoughts? Thanks.

Sure. So first in terms of traffic versus ticket, we basically saw flat traffic for the quarter but what we did see was increased conversion on that traffic, which led to higher transactions and in addition to that our ticket was up very slightly. So really no major change there. The biggest issue was higher conversion leading to higher transactions. There was not really a major difference between our outlet stores and our full price stores. The statistics were pretty consistent. So that would be add on the KPIs. In terms of guidance I'll let Lisa talk to you about that and our comps for the fourth quarter.

Yeah, and then just to tag on to what Jill said, obviously our ADS was impacted by rather warm weather for the year. So again we had great velocity in some of our lower ticket items and some of our higher ticket items are just now starting to sell through as the weather has changed. For the year I think we're comfortable with the range that we provided, which is the high single digit for retail stores and then the low double digit range when we include e-commerce. The holiday season is certainly just starting with only week or so sales behind us. It's a little too early to indicate what our thoughts are for the entire holiday sales period. But again as Jill mentioned on her comments we believe we're in a really great position to take advantage of the increased holiday traffic. And as she mentioned we saw nice traffic increases in the third quarter as well. So we are cautiously optimistic.

And just any color on the promotional environment out there competitively?

It’s promotional.

Got it. All right, thanks very much guys.

Your next question comes from the line of Ed Yruma from KeyBanc Capital Markets. Your line is open.

Hi, this is Jessica Schmidt on for Ed. Thank you for taking my questions. So it looks like you did a good job cutting inventory on the balance sheet and we noticed you did a big Vince promotion at RAK [ph]. How do you feel about your current inventory levels and your ability to clear inventory at places like RAK? And can you talk a little bit about how you look to balance your inventory clear through at outlet versus off price?

Sure. Our RAK performance is consistent. So there is not really a big increase there year-over-year. We look to clear inventory in a number of different places. Obviously first we try to market down in store. We find that is the most efficient way to do so during key promotional periods .Then we will also transfer to our outlet stores to move through, although clearly we have nine outlet stores today in different locations. And then after that we will look to go through our various department store partners but we really try to hold our promotional inventory sales at a relatively consistent level and we are fortunate that we have so many other growth opportunities ahead of us to drive our sales clearly through product category extension, opening new stores, driving e-commerce, international growth et cetera. So environment is promotional but we are really trying to hold our promotional sale rate and drive growth through the other levers.

Okay. And just as a follow-up, now that you are longer into evolving the men’s offering, how do you sure about your ability to get customers to buy the full men’s collection instead of just the separate pieces that you had historically seen?

Actually the guys are really loving it. We obviously have strength in our cashmere sweaters and iconic essential tops, like hoodies and Tees, but they’ve responded very, very well to some of our new pant offerings, especially the jogger. They are loving the outerwear, we are seeing great sell-throughs in some of our elevated skins and leather. Also we had unconstructed [ph] blazer this season that has basically sold out. So we are hearing from our male consumer that they really want us to dress them with head to toe looks and they are very receptive to the expanded product offering.

Okay, great. I’ll pass it on.

Thanks, Jessica.

Your next question comes from the line of Evren Kopelman with Wells Fargo. Your line is open.

Thanks, good morning everyone.

Good morning.

A question on the wholesale business; was the off price business higher this quarter year-over-year and was that part of the gross margin pressure? And then secondly, do you still expect inventory growth at year end to be up, I think you have said 25% to 35%?

Yeah, so we definitely are still targeting the up 25% to up 35% year-over-year inventory increases. Clearly our third quarter was still impacted by some of the year-over-year comparisons with the in-transit shift that we have by moving -- to taking on a certain amount of factories [ph] a little bit thinner, that impacted our year-over-year growth by a little over 30%, that along with our handbag inventory and then clearly the new stores we have in the pipeline, the new shop-in-shops and our replenishment program was another 35%. So we again are very confident in the 25% to 35% range that we indicated earlier. From an off price perspective it’s fairly consistent year-over-year. We had really strong and nice growth in our full price business domestically which was one of the major drivers for our wholesale increase.

Thanks. And then a final follow-up, could you -- so the 50 basis points of increase in gross margin, could you quantify how much the positives and the negatives, so the positive from the supply and the mix benefit, how much was that, just trying to figure out how much was the offset? Thanks.

Sure, so the impact of international licensing and direct‐to‐consumer was a positive of about 130 basis points. The operational improvements added about 50 basis points and then the change in our markdown promotions and returns allowances, combined with some of the other margin changes that we have impacted our gross margin rate by a negative 130.

Perfect, thank you very much.

Your next question comes from the line of Erinn Murphy with Piper Jaffray. Your line is open.

Great, Thank you, good morning. I was just hoping you could just maybe follow up on your commentary earlier on the comp. I mean clearly the environment in the third quarter was challenging for many but maybe just help us understand how the cadence evolved from August, September and October and then if there was any quantification of cannibalization as you open multiple stores in existing markets, if that was the drag at all in the comp in the third quarter?

Sure, well, first I just want to say we think it’s pretty good to have delivered solid single digit comps with gross margin improvement in this quarter in challenging retail environment. So just want to start there when we look at some of the numbers of our peers. In terms of the specific numbers we don’t give monthly guidance but without a doubt it was unseasonably warm. So as you would imagine, as we progressed throughout the quarter our sales of sweaters and outerwear which is higher ticket, they definitely picked up. So directionally the trend improved throughout the quarter even though we don’t give specific monthly numbers. The others thing to think about in terms of our comp performance is first, we are up against roughly 17% comp last year. Second we are seeing a continued shift to online shopping which is why you are now seeing us reporting our comps inclusive of e-commerce, which is something that we will do go forward. We think it’s really important. We actually even stimulate online sales in our stores. It’s how customers are shopping today. So we do think it’s important to think about comps on an aggregated Omni-channel basis. And the other thing as you pointed out is that we are opening new stores in markets where we do have comp store sales, which we think is the right thing to do to grow our market share. So for example in Boston, our comps there were negative 17, yet we grew the market by 182%. And that is what enabled us to deliver over 30% growth in our direct to consumer business overall. The other thing that I think everyone should take into consideration is while comps are certainly an important retail metric we currently have 26 stores in our comp store base, out of 2,400 points of distribution in total. So it’s really about 1% of our distribution and it represents about 14% of our sales. So we think at least at this stage in our evolution it’s really more important to think about the growth in our wholesale and direct-to-consumer segment overall and especially in wholesale where we don’t have a lot of new door expansion; generating 17% growth in wholesale we also think is pretty good. So hopefully this explanation gives you more flavor on our comp performance in the quarter.

No, I appreciate that, thank you. And then just on the handbag launch, Jill, it would be great to hear a little bit more detail, as clearly that’s been fairly exciting in the last few weeks and there has been a lot of press on this, on the silhouettes that have been coming out. Could you just maybe speak a little bit more about how you are thinking about building that business over the next one to two to three years. Thank you?

Yeah, absolutely. We are very, very excited about handbag. We think it’s a natural extension for Vince. We know that it’s a category that will resonate with our customers. Obviously it’s very, very early, just hitting SAKS last week and in our own stores and online for few weeks more than that. But customer receptivity has been good. They really love the baby [ph] cross body which is attracting an aspirational customer as well as the total, both in fashion colors and the mark craft, which is great weekend item. The price points are very compelling. We think that it’s very consistent with our overall brand’s DNA, it’s simple yet sophisticated and in terms of how we are seeing this roll out what we will do is first there will be additional colors and fabrications within existing collections. There will also be some new collections that we introduce for fall 2015 and then in subsequent years we are working on small leather goods as we speak which we think is a great complement, little pouches and other items that can go inside of the bags and then over the longer term we also see an opportunity for men’s leather goods. So that’s how we see the category rolling over the time.

That’s helpful and then just a last housekeeping for Lisa. Lisa is there any change in your interest expense assumption in the full year guidance. Thanks.

I mean, in our interest rate assumption is what you said?

Sorry, your interest expense, excuse me that you see now on the guidance.

No, I think where we stand from a debt position right now; we're looking to pay up to an additional $5 million down of debt depending on the cash flow generated in the fourth quarter. It's still consistent with what I believe most have modeled.

Okay, thank you so much. I appreciate it.

Your next question comes from the line of Mark Altschwager with Robert W Baird. Your line is open.

Hi good morning and thanks for taking the question. Jill just following up on your comments on the channel dynamics, I mean you've seen continued momentum in the wholesale channel, some deceleration in the retail comp growth. You also mentioned the shift to e-commerce. So just has there been any change to your thinking to the build-up of the expected 15% to 20% annual revenue growth. Do you still feel good -- do you still feel good about your long-term target of 100 stores.

Yeah. So basically we're just finishing up our budgeting process for next year. We've gone through a three year planning process and all of the growth rates that we've previously communicated still remain intact. We can see continued growth in wholesale obviously by increasing penetration in existing doors with shops in new categories obviously wholesale’s also growing through digital expansion and our expansion of licensing in international categories. From a retail perspective we maintain our growth assumptions there as well. We still believe that there is a 100 door potential roughly 75 full price stores and 25 outlet stores and that is in the U.S. alone. We do believe there are some retail opportunities outside of the U.S. which we're begin to formulate. And e-commerce clearly continues to be one of our fastest growing channel in an area that we are investing behind. So as you know we've re-launched the site and we're now doing mobile optimization. We have a great giving guide. So we basically are standing behind all of the growth assumptions that we have communicated with you previously.

Great, thank you. And then on guidance the updated gross margin and SG&A guidance implies some fairly large ranges for Q4. So any help you can provide us on understanding the key swing factors for each of those and if gross margin were to come in at the to the range. I mean is there the flexibility to pull back on the spending side. So just any context there would be helpful. Thanks.

There is. So the biggest swing is obviously due to any markdown or impacts that we have from our wholesale partners. Again we true that up at year end and so that's why there is a little bit of a broader range at the fourth quarter and why we kept guidance to the 200 to 250 basis point range for the year that we articulated. We certainly do control many of our SG&A costs and we monitor those very, very closely with the biggest portion being corporate expense and store labor. So obviously we do have the flexibility to flex those expenses to help maintain the operating margin guidance that we've previously provided.

Your next question comes from the line Jeff Van Sinderen with B. Riley. Your line is open.

Good morning and I just had a follow-up on the depth and breadth of your markdown promotions. So just wondering was it a little bit of both or was it more breadth or more depth. Any more color if you can give us on that?

Our year-over-year promotions are actually consistent with the market.

Okay.

Are you speaking about the returns in the various allowances that we articulated?

Yeah, exactly right. Yeah, I was just trying to get any more granularity on that.

Yeah so those are actually the allowances. So that's more of a go-forward assumption rather that sort of in quarter. And so in the third quarter we thought that it was prudent to take a bit more of a conservative view in our reserve methodology given the current retail environment. The additional reserves negatively impacted the gross margin rate, as I mentioned by roughly 120 basis points, 130 when you move in some mix shift. And so as with all reserves they will be reviewed quarterly. So at the end of the quarter we'll certainly look at that again and we'll adjust those allowances up or down as the business dictates. But again we are looking to expand our gross margin rate 250 basis points for the fiscal year. So nice for Vince.

Okay, that’s really helpful, and then relevant to inventory I mean at this point do you feel like you are really clean. I mean obviously there are number of moving different parts there or do you feel there are maybe still some smaller ease of access due to the weather I mean I know September October were really warm as you mentioned as well, so what’s your real picture I guess on inventory at this point?

Yeah, I mean our inventories are primarily current. More than 75% of the inventory right now is selling at full price. And then if you include the current season that’s on sale that rate is above 90%. So again it’s very current and these levels are relatively in line with last year sales. So again we are still very confident in the up 25% to up 35% year-over-year guidance that we’ve provided for the year.

Okay, great and then just one final quick one on CapEx, just wondering why you upticked that guidance?

Sure , we recently signed a lease for our Paris showroom, which we are really excited about because we were looking for very long time for the right location but we believe that we have significant opportunity to grow our international business and as we’ve communicated previously Western Europe is a key focus area for us. So we have to look into established apparel showroom. We have identified a location. It will house men’s and women’s apparels as well handbags as well as footwear. Brown Shoe is actually taking a portion of the showroom with us. So we have increased our CapEx estimate because of the international showroom which hopefully will be open in time for February market.

Okay, great. Thanks very much and good luck.

Thanks.

The next question comes from the line of Joan Payson with Barclays. Your line is open.

Hi, good morning. This is Bridgette Taylor on for Joan Payson. Thanks so very much for taking my question. You provided some helpful color on handbag performance. But could you provide any more detail on other new categories, and how they are performing such as shoes, children wear as well as also performance of stores carrying the broader category offering? And then separately could you provide any detail on what performance or trends you are seeing internationally and if you saw any particularly strong or weak markets, thanks so much?

Sure, so from a new category perspective or at least a part of our core apparel category our women’s footwear business continues to perform very well. You may have listened into Brown Shoes recent earnings call, but we’ve had very phenomenal growth. We are now sold an approximately 370 high end doors worldwide and as we communicated earlier that number should increase to about 500 for spring. So women’s footwear is doing well and it’s doing well in all channels, it’s doing well in department stores, it’s doing well in our owned retail stores and it’s doing well online. And now we are looking to really try to ramp up the roll out internationally, that’s what the Paris showroom is going to help in that regard. We saw growth really across all categories in women’s footwear. Obviously our sneakers continue to do well but also boots, heels and flats. We also introduced men’s footwear as you know and that also is doing well. And we know that as our department store partners are expanding us into additional doors. So while we are in just under 60 doors for the initial launch that numbers is going to increase over 30% or so for spring. We are also going to have an expanded assortment. So similar to women’s we launched ties, and then we rolled out other classifications. So we are going to have slip-on sneakers with men’s, we are also going to have Oxfords and sandals and other product categories. So that’s what happening there. In terms of our kids line we are learning a lot from our consumers with regards to kids. We are seeing the best performance in fashion items. We are seeing lower sell-through in the basic items and we are also seeing a lot of gift purchases in kids. So we continue to work with our licensing partners to evaluate and grow the business. But the important thing to consider is that because these businesses are licensed the P&L impact is primarily through increased royalties to Vince and less so on the top line. And then for the stores that have the complete assortment, stores like Mercer [ph] and others, those stores are doing very well because again our customers are looking for head to toe looks and we have terrific sales associates that could provide that guidance on wardrobing. So the new categories are resonating well in the stores that are able to accommodate the compete assortment. And then international okay, so from an international perspective, the international business is doing well. We continue to remain in the top five in most of our international department store partners. In terms of the markets that are doing well, we are seeing growth in our largest markets; obviously Canada, Japan. We saw nice growth in Korea and we’re seeing nice growth in the Middle East as well, as well as some of our newer markets where we have recently entered into agreements such as Scandinavia, Benelux and Turkey.

Great, thank you so much.

Your next question comes from the line of Richard Jaffe with Stifel Nicolaus. Your line is open.

Thanks very much, guys. And just a couple of follow-on questions, one about real estate and the opportunities to learn from our two toned [ph] real estate whether the big stores, full format stores or vast [ph] store whether you are better with more of the more boutique size stores? And then if you could give us a sense of your visibility into the spring orders and new markets and new categories, how you will be shipping some of the new categories and how much of the international business we’ll be opening up to those new categories?

Okay, well in terms of store size, as I think we have mentioned previously we’re actually seeing that some of our newer larger stores are performing better than some of our smaller stores and that’s partially a function of the fact that the older stores were dark, not well merchandised, couldn’t even have sufficient inventory in the back room to replenish. So the bigger stores that can really accommodate the full assortment and have proper merch flow and area to try and do some things like that are doing better. Without a doubt it’s going to vary by market and so we look at that where in Westport, Connecticut we go with the smaller more boutique store and we opened the flagship down in Soho with a bigger store and similar to what we did in Boston on Newbury Street. So I think it depends on market but in general we are seeing greater sales performance and productivity in some of our larger newer stores. In terms of spring orders we are in market right now. So we have all of the accounts in. We’re really excited because not only are we showing our pre-fall collection we’re also showing our fall 2015 handbag lines. We have a lot of accounts coming in. So as you know we launched exclusively with Saks, but all of our other partners are very eager to pick up the line and in addition we have several of our international partners coming in that are also eager to pick up the line. So on our next conference call we will provide 2015 guidance and be able to give you further insights into what the orders look like and what we think performance will be for next year.

Thank you very much.

Your next question comes from the line of Lindsey Zuckerman [ph] with Goldman Sachs. Your line is open.

Hi, good morning everyone.

Hi Lindsey.

I was curious, you guys have such a solid customer, high end customer who has been a little more insulated from some of the challenges we have seen across the rest of apparel. In your perspective as you talk about how promotional it was out there did something change with the higher end consumer with that segment or is it sort of consistent with what we have seeing all along?

I mean our total growth was over 20% and that’s pretty consistent with the growth measures that we have delivered previously. We said we would grow at 15% to 20% and we’re growing at 20%. You have seen that wholesale was at 17% and direct to consumer was over 30%. So while it is more promotional out there we are able to generate good sell-throughs good sales levels and also deliver margins increases even while taking some reserves for promotional and markdown allowances.

Okay. One clarification, I think last year you had called out about $5 million of sales in the third quarter that had shifted into 2Q and into 4Q of 2013. Am I right -- did that timing shift impact your third quarter at all or was that consistent year-over-year?

So the shipping changes were really a comparison issue between ‘13 and ’12. Our shipping cadence this year, so ‘14 versus ‘13 was consistent. So that didn’t impact the 17% wholesale growth that we mentioned on the call.

Okay, got it. And then lastly can you tell us how much off-price matters to your wholesale business as a percentage of sales?

Well, we try to target our off price sales at about 20% of the total. I mean clearly we know that there is an increasing number of outlet stores being opened by our wholesale partners. We are not going into all of the doors that they are opening because we think it is important that we try to maintain a higher percentage of full price sales to really preserve and retain the strength of the brand. So yes there are more doors opening but we are not going into all of them. And again we think we are fortunate at this stage of our brand evolution that we have other growth initiatives available to us through category extensions, new stores, e-commerce and new geographies.

Great. And then maybe just one more follow-up, I think Michele Sizemore joined you guys in earlier mid-2013 and obviously done a lot of great things in improving supply chain and logistics and operations and you called some of gross margin benefit in the quarter. Would you say we are still in the early inning in terms of operational improvements you expect from her leadership and some of the initiatives or are we sort of middle stages or how would you characterize where we are in that?

Yeah, I would say that we are still in the early inning. I mean Michelle has done an amazing in the time that she is here. We have talked in the past about the fact that we have able to really reduce our air shipments and do much more via vessel, which certainly is less costly to us and we have modified our calendar to accommodate that. We have also shifted to LBT to FOB. So we have more visibility throughout the supply chain and we have also looked at consolidating our vendor base. But there is certainly more opportunity to come. We have signed a new sourcing agreement with New Times [ph] as you know and we do believe that is going to provide continued benefit in the future. In addition to that as our volumes grow we can negotiate better rates and I think the other thing that Michelle and team is really beginning to tackle now is supply chain from DC to store. So initially we have focused on the supply chain opportunities from factory to DC and now we believe that there are some additional opportunities from DC to stores. So we do expect continued margin rate expansion as a result of the operational improvement initiatives we put in place.

Great, thank you so much.

Your next question comes from the line of Janet Kloppenburg with JJK Research. Your line is open.

Good morning, everyone and congrats on a good quarter.

Thanks Janet.

Hi. Lisa or Jill if you could talk just a little bit more about this, I don’t believe that you talked about this markdown reserve as much, it sounds like you are being cautious on the fourth quarter, maybe protecting the margin a little bit; if you could talk a little bit about that and if the reserve is higher year-over-year. And then did you also -- I just wanted you to reiterate did you say that your full price business at wholesale was improved in the third quarter versus last year. I think I got it but I am not quite sure. And then I also just wanted to ask about the handbag line. I know a lot of new accounts are coming in to look at it. So will we see a much broader distribution of the assortment going forward in the wholesale channels or will you control that? Thanks so much.

Okay, I’ll take the second and third question. I’ll let Lisa take the first one.

Okay.

In terms of full price sales at wholesale, yes our full price sales at wholesale were up especially in our men’s business as well we are really seeing great traction. I think we mentioned that we have opened several shop-in-shops and we’ll continue to shop-in-shops for men’s which really gives us an opportunity to have a more robust assortment. But our women’s full price sales were up as well at wholesale. So just want to clarify that point. In terms of handbags, yes you will see broader distribution than just the 26 Saks stores. Obviously we will look to sell our handbags in all of the key department stores where we sell our ready-to-wear products but we are not looking to broaden our distribution to new accounts. We are just really looking to roll out our handbag to more doors within our existing accounts.

Thank you.

And then as far as the reserve methodology again, I think we took a bit more of a conservative view. So from a year-over-year perspective the rate is up modestly. It’s not materially increased but again we did take a modest increase given the change in reserve methodology. And again we will see how the quarter plays out and we will true that up at the end of the year either upwards or downwards depending on the actual performance for the holiday.

Yeah, I think one other thing, just to build upon what Lisa said, we haven’t really changed our promo cadence but we are seeing customers buying more on promotion. So that’s why we have really looked at what our reserves are and what’s going on competitively but we really kept our promotional cadence pretty consistent year-over-year.

Great and Lisa, how did that methodology change?

It is a reserve methodology that you take each bucket, each various component, whether that is your market [cross talk] or your final allowances and you make a judgment call on what you think a person is going to sell through at various rates.

No, no, I understand that, thanks. I guess I was misunderstanding, I thought maybe you have changed the timing or the format in which you took that valuation reserve but it sounds like you did not.

No, no, it is just cautious view on how we approach that reserve methodology calculation.

Totally understood. Thanks so much and good luck for the season.

Thank you.

Thank you.

There are no further questions at this time. I will now turn the call back over to Jill Granoff, Chairman and CEO.

Thank you all for listening and participating in our call today. We look forward to speaking with you again in March for our fourth quarter and full year fiscal 2014 earnings call.

This concludes today’s conference call. You may now disconnect.