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spk12: Good morning, ladies and gentlemen, and welcome to the Steve Madden Limited Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, This conference's call is being recorded. I would now like to turn the conference over to your host, Danielle McCoy.
spk13: Thanks, Phyllis, and good morning, everyone. Thank you for joining our third quarter 2021 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. Such statements may include discussions involving the ongoing COVID-19 pandemic, including its current and expected impact on our business operations and results, as well as the company's plans to respond to such uncertain and dynamic events. Because these statements are based on current assumptions and expectations, they involve known and unknown risk, 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 risks 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 are Ed Rosenfeld, Chairman and Chief Executive Officer, and Zane Mazzuzzi, Chief Financial Officer. With that, I'll turn the call over to Ed. Ed?
spk01: Thanks, Danielle. Good morning, everyone, and thank you for joining us to review Steve Madden's third quarter 2021 results. In the third quarter, we delivered the highest quarterly sales and earnings in our history, with revenue increasing 5% and diluted EPS increasing 22% compared to pre-pandemic third quarter 2019, results that demonstrate the company's disciplined execution of its key strategic priorities. Our number one priority, as always, is to create trend-right product and get it to market ahead of our competition, and I could not be happier with our team's performance on that front. We have relied on our proven model, which combines our talented design teams led by Steve, our test and react strategy, and our industry-leading speed to market capability to deliver trend-right product assortments that are winning with the consumer and enabling us to outperform the competition and take market share, particularly in our flagship Steve Madden brand. We are also supporting this great product with increased investment in marketing, In addition to continuing to scale our digital marketing efforts to drive our e-commerce business, last month we also launched our largest brand campaign in years. Called the Maddenverse, the campaign features 3D avatars of artists and social media favorites Normani, Sydney Sweeney, Nessa Barrett, Justine Skye, and Jordan Alexander. Bold, creative, empowered, and authentic women that embody the spirit of the Steve Madden brand. The campaign harkens back to our iconic big head girl ads from the 90s, reflecting the same fun and rebellious attitude, but with modern elements like avatars and immersive content that includes an augmented reality shoe try-on feature and Instagram filters that enable consumers to morph into the avatars of their favorite artist. This combination of outstanding product and enhanced marketing is driving deeper connections with consumers and which in turn is fueling our progress on our next strategic initiative, accelerating our direct-to-consumer business, led by digital. Our retail segment revenue grew 62% in the quarter compared to 2019, including outstanding performance in both digital and brick-and-mortar channels. Our e-commerce business continued its exceptional momentum, with revenue increasing 84% versus 2020 and 200% versus 2019. and our brick-and-mortar business accelerated meaningfully. Global brick-and-mortar comp store sales increased 16 percent compared to 2019, including a 23 percent comp store gain in our U.S. stores. The outstanding revenue performance, combined with strong gross margin due to low levels of promotional activity, as well as controlled expenses, resulted in EBIT contribution from the retail segment of $22.5 million in the quarter, compared to 3.5 million in the third quarter of 2019. Another of our strategic initiatives is to expand our business outside of footwear, and here we are focused on our largest non-footwear category of handbags, as well as our emerging apparel business. In handbags, our multi-year investment in our Steve Madden-branded handbag business continues to pay dividends, with that business reaching new heights this year in both wholesale and direct-to-consumer channels, in both domestic and international markets. While third quarter Steve Madden handbag revenue was down to 2019 due to wholesale shipments that moved out to Q4 as a result of supply chain delays, the Steve Madden bag business remains on track to increase approximately 20% for the full year compared to 2019, including more than 100% growth in direct-to-consumer channels. We also continue to gain traction in our BB Dakota Steve Madden apparel business, where we are seeing strong sell-through performance at our key wholesale accounts, driven by success with dresses, shirt jackets, and vegan leather across all classifications. Another key priority is to grow our international business, and we also continue to make progress on that initiative. Earlier this year, we acquired the remaining 49.9% share that we did not already own of our European joint venture, and that business remains our leading international growth driver. Revenue for our directly operated SM Europe business increased 45% in the quarter compared to 2019, despite significant wholesale shipment move-outs to Q4, as we continue to have exceptional momentum in the region, particularly in digital channels. Finally, even as we seek to capitalize on the distribution channel and product category expansion opportunities I've touched on, we remain focused on strengthening the U.S. wholesale footwear business that is the core of our business. This business saw market improvement in the third quarter as our wholesale customers reacted to our strong sell-through performance with increased orders. Due to shipments that moved out to Q4, our overall U.S. wholesale footwear revenue remained down low single digits to 2019 in Q3, but our Steve Madden brand U.S. wholesale footwear revenue was up 15% to 2019, including a 25% increase in Steve Madden women's, demonstrating the brand heat and trend right product assortment in our flagship brand. Looking to head to the fourth quarter, we are poised to deliver strong growth versus 2019 in the U.S. wholesale footwear business overall. As we do all of this, we also continue to embrace the opportunity and the responsibility we have to create positive change for our people and our communities. Highlights in the last three months included the establishment of a new employee resource group for Latinx employees called De La Sol, the launch of our new partnership with the business school at Howard University to reimagine its retail curriculum, and the launches of new collections for our Steve Madden Kids Adaptive Line, as well as for Cool Planet by Steve Madden. We also laid the groundwork to establish the Steve Madden Foundation by the end of the year to organize and enhance our charitable giving strategy as we seek to maximize our positive impacts going forward. In summary, I am very pleased with our performance in the third quarter and, more broadly, with the progress we are making on the key strategic initiatives that will enable us to continue to drive sustainable and profitable growth going forward. Now, I'll turn it over to Zine to review our third quarter financial results in more detail and provide our updated guidance for fiscal 2021.
spk00: Thanks, Ed, and good morning, everyone. Our consolidated revenue in the third quarter was $528.7 million, a 52.4% increase compared to 2020, and a 5.3% increase versus 2019. Our wholesale revenue was $402 million, up 41.6% compared to the prior year, and down 4.6% compared to 2019. These results included a significant impact from shipments that moved out into the fourth quarter due to supply chain delays. We estimate Q3 wholesale revenue would have increased low single digits to 2019 if not for those move outs. Wholesale footwear revenue was $304.2 million, a 42.6% increase from 2020, and a 3.7% decline from 2019. In the US, the Steve Madden women's business was a standout, increasing 25% compared to 2019. Betsy Johnson and Dolce Vita also had strong gains to 2019. These increases were offset by the absence of the Kate Spade footwear license we had in 2019, as well as declines to 2019 in Blondo, Unclined, and Private Label. Outside the US, strong performance in Europe was offset by softness in Canada due to a slower recovery from the pandemic and the impact of the supply chain delays. Wholesale accessories and apparel revenue was $97.8 million, up 38.7% to last year and down 7.4% versus 2019. When comparing to 2019, the decline in the segment was primarily driven by supply chain delays, partially offset by an increase in apparel as a result of only owning BB Dakota for a portion of the quarter in 2019. We expect both wholesale footwear and wholesale accessories and apparel to show strong double-digit growth versus 2019 in the fourth quarter. In our retail segment, revenue was $123.1 million, a 108.6% increase compared to 2020, and a 62.5% increase compared to 2019. E-commerce was the primary driver of direct-to-consumer growth versus 2019. E-com revenue grew 83.7% compared to 2020 and 200% compared to 2019. E-commerce accounted for 49% of our total retail segment sales in the quarter compared to 26% in 2019. Brick-and-mortar performance was also strong, as Ed mentioned, Global comp store sales increased 16% compared to 2019, and domestic stores increased 23% compared to the same period. We ended the quarter with 216 company-operated retail stores, including 66 outlets and 6 e-commerce websites, as well as 17 company-operated concessions in international markets. Turning to our licensing and first-class segments, Our license and royalty income was $2.7 million in the quarter compared to $2.6 million last year and $2.9 million in 2019. First-cost commission income was $1 million compared to $1.5 million last year and $1.9 million in 2019. Consolidated gross margin was 41.6% in the quarter, up from 40.3% in the prior year and 39% in 2019. an increase of 260 basis points versus 2019. Wholesale gross margin was 33.6% compared to 34.6% last year and 33.9% in 2019. The modest decline compared to 2019 was the result of increased freight rates and the non-renewal of GSP partially offset by higher average selling prices and lower markdowns. Retail gross margin was 65.9%, compared to 63.8% last year and 63.3% in 2019. The increase to 2019 included margin improvement in both digital and brick and mortar channels, driven by a reduction in promotional activity, which more than offset the headwind from increased freight rates. Operating expenses were 131.6 million in the quarter, compared to 93.7 million last year, and 123.6 million in 2019. The increase versus 2019 is primarily driven by our continued investment in performance marketing to fuel the growth of our e-commerce business. Operating income for the quarter was $88.4 million, or 16.7% of revenue, up from 46.2 million, or 13.3% of revenue last year, and 72.3 million, or 14.4% of revenue in 2019. Our effective tax rate for the quarter was 24.4% compared to 29.3% in 2020 and 22.6% in 2019. Finally, net income attributable to Steve Madden Limited for the quarter was 66.6 million or 82 cents per diluted chair from 31.8 million or $0.39 per diluted share in 2020, and $56 million, or $0.67 per diluted share in 2019. Moving to the balance sheet, our financial foundation remains very strong. As of September 30, 2021, we had $259.9 million of cash, cash equivalents, and short-term investments, and no debt. Inventory totaled $201.2 million, up 83.4% compared to last year, or up 35.9% compared to 2019. Note that due to the global supply chain disruption, in-transit inventory was up 229% to 2019 and represented approximately 51% of our inventory at quarter end, compared to approximately 21% at the end of the third quarter of 2019. On-hand inventory was down 16%, at the end of Q3 compared to 2019. Our CapEx in the quarter was $1.8 million. During the quarter, we repurchased approximately 773,000 shares for $31.9 million, which includes shares acquired through the net settlement of employee stock awards. Yesterday, the Board of Directors approved an increase in the company's share repurchase authorization to $250 million. The company's board of directors also approved a quarterly cash dividend of 15 cents per share. The dividend will be payable on December 27, 2021 to stockholders of record as of the close of business on December 17, 2021. Turning to our outlook, while the global supply chain disruption remains a significant headwind, our performance in the third quarter and the momentum we are seeing in our business gives us confidence to raise our fiscal 2021 guidance. We now expect revenue to increase 50% to 52% compared to 2020, and we expect diluted EPS to be in the range of $2.30 to $2.35. And now I would like to turn the call over to the operator for questions. Phyllis?
spk12: Ladies and gentlemen, if you have a question at this time, please press the star button then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Camilla Lyon with BTIG. Please proceed with your question.
spk08: Thank you. Good morning, everyone. Great job on the quarter. I want to start out with the guidance. The Q4 guide is a very strong guidance. I think you raised about the fourth quarter EPS by about 15 cents or so implied above current street estimates. And I think sales are implied to be up 27% versus 19. Again, that's compared to up 5% of Q3. Can you unpack what's driving that acceleration, maybe significantly? parse out the later shipments that slip from Q3 to Q4? How much is it reorders that splits between wholesale and DTC?
spk01: Sure. Well, good morning, Camille. Thanks for the question. So in terms of what gives us confidence to raise the guidance like this, it's really the strength and the momentum and the brand heat that we're seeing in the flagship Steve Madden brand. So if you look at where we have raised our internal forecasts versus where we were three months ago, the two big areas are direct-to-consumer business, which continues to have just incredible momentum in both digital and brick-and-mortar channels, and then also that Steve Madden Women's U.S. wholesale footwear business that we called out earlier was up 25% to 19 in Q3, and we anticipate we'll see even faster growth compared to 19 in Q4. In terms of the acceleration of the business from Q3 to Q4, that's really about the acceleration in our wholesale business. The DTC, we think it's going to grow even faster than wholesale, but it's been growing at a very rapid clip. You know, you saw that was up 62% to 2019 in Q3. But wholesale, which was down about 5% in Q3 to 19, we're forecasting to be up, you know, mid-teens to low-20s. versus 19 in Q4. And that's really just a function of our wholesale customers catching up to these incredible sell-throughs that we've had. We've been talking to you all year about how, if you compare to 19, our sell-throughs were dramatically outpacing our shipping and our stock levels at the wholesale customers, and you're seeing that now catch up. You asked about the move-outs, the impact of the move-outs. There is some benefit to Q4 from move outs from Q3. We estimate that about $30 million of wholesale shipments moved out from Q3 to Q4. However, we've also built into our forecast an assumption of about $20 million falling out of the end of Q4 into Q1. So the net impact there is relatively modest, only about $10 million.
spk08: That's great, Keller. Thank you for that. You know, to follow up to that line of questioning, how does this impact the conversation for the first half of 2022 with your wholesale partners? And then my second question really is more of a broader kind of question on your digital strategy. If you could just give us kind of an update on the progress that you've made with your digital strategy. Where were you, say, three years ago versus where you are today from a sales and profitability perspective? That would be very helpful.
spk01: Sure. Yeah, so as we go into the first part of 22, obviously the success that we're having at retail, the sell-throughs that we're seeing, obviously positions us well – with our wholesale customers, uh, you know, for, for nice open to buy commitments for the first part of 22. Uh, you know, I think we're not putting out 22 guidance, uh, today, so I'm not going to put numbers around that, but, but certainly we do feel good, uh, about how we're positioned. We, you know, we've, we've been an outperformer in terms of sell through, uh, and we're taking share in that wholesale channel and expect to for the, for the first part of 22. Uh, In terms of digital, as you know, that has been really a top priority for our company over the last few years. And we have, specifically with respect to our owned and operated e-commerce business, we have invested in talent, we have invested in digital marketing, and we have invested in ongoing site enhancements. And then we have connected that to our strong brands and outstanding product. And the combination of all that has yielded some really powerful results. So you asked about where we were three years ago. 2018, we were doing a little over $50 million. I think it was about $56 million in revenue in our owned and operated e-commerce business and revenue. it was making a single-digit operating margin. So the profit contribution there was less than $5 million. Three years later, 2021, we are going to approach $250 million in owned and operated e-commerce revenue with a 20% operating margin contribution. So I don't think it's overstating it to say that over that three-year period, that's a fundamental... change in the complexion of our business. And I think it also really meaningfully improves our growth opportunities that we have going forward because we really feel like we're still in the early stages of this digital journey.
spk08: That's fantastic, Huller. Thank you. Good luck with the close of the year. Thank you.
spk12: Your next question comes from the line of Erin Murphy with Piper Sandler. Please proceed with your question.
spk07: Great. Thank you. Good morning. Ed, maybe just following up on that conversation, I was hoping you could share a little bit more about your new marketing campaign. What has the customer response been thus far? And then how is it converting within the seed mat and footwear versus the handbag opportunity you spoke to?
spk01: Yeah, thanks for asking about that, Aaron. So we're excited about the new campaign, and we feel really great about the response. You know, we just felt like given the brand heat that we have in Steve Madden and this really, really strong product assortment and what we're seeing in the brand overall, that now is the time to kind of throw gas on it and, you know, really step up with some exciting marketing. And we feel like we've done that here. The response has been great, fantastic digital and social engagement. We've had some viral moments on TikTok, which has been fun. Big increase in the search interest for the brand online. And it's driving traffic and sales online, but also into stores. So really just excited about the customer response. And I'm sure you asked about footwear versus handbags with respect to the campaign. Was that right?
spk07: Yeah, just how it's converting, because I'm just curious how you're seeing the customer convert against that campaign across the two categories.
spk01: Yeah, I guess the campaign was certainly more footwear-focused. So if you're talking about direct... sales that we think are directly coming from the campaign, then that would certainly lean much more towards shoes. But in our direct-to-consumer channels overall, our handbag growth is pretty explosive. And in fact, it's outpacing what we're seeing in shoes. And we're really excited about that momentum in handbags, particularly in direct-to-consumer channels.
spk07: Great. Got it. And then my second question is just around your supply chain. You guys have been very nimble with moving production into Mexico, Brazil. Can you just kind of take a step back and give us kind of an overview of where your biggest concentrations are right now for production, and then what are you seeing with lead times, and have you had to resort to air at all, you know, if you think about holiday and even early spring deliveries? Thanks.
spk01: Sure. Yeah, look, the supply chain, it's no surprise. It's been a big headache for us, as it has been for everybody else. As you point out, we did move close to half of the Steve Madden women's in-line production outside of China or outside of Asia to Brazil and Mexico for fall, and we think that's, you know, we're very pleased that we did that. Not that those Countries have been without their challenges, but we certainly think we're better off for having done that. If you look at the company overall, of course, we're still majority in China. Cambodia would be our second largest country of origin. We make a lot of handbags there. And then we're spread out across a number of other countries. In terms of having to air... Yes, we have had to utilize more air freight. That's primarily in our direct-to-consumer segment in our retail business. A year ago for the year, it was probably about 17% of our goods were coming via air. This year to date, I think we're up around 30%. Zine, is that right? That's correct. 30% this year, 17% last year, and it was about 11% the year before. Yeah, so we have had to utilize more air, and, of course, that's been expensive because air freight rates are up significantly.
spk07: Great. Thank you so much.
spk12: Your next question comes from the line of Paul LaJuice with Citi. Please proceed with your question.
spk14: Hi, this is Kelly Crago on for Paul. Thanks for taking our question. I just want to follow up on your conversation around the retail channel. Just hoping you'd talk about where the penetration of that business overall could grow to over time and where you believe retail EBIT margins could shake out longer term, just given the strength of the e-com channel. And I think in the recent past, I think the retail business has only reached maybe a high single-digit margin at best. So just curious where you think that could go longer term. Thanks.
spk01: Yeah, that's a really – thanks for the question, Kelly. That's something that we're really excited about. And if you look at the business, what it looks like this year versus pre-pandemic, that's a really significant shift. So back in 2019, our retail segment was about 18% of our total sales. And this year, I think it's going to be up about – 800 basis points. It'll be over a quarter of the business. And more importantly, the profit contribution is up dramatically. So whereas it was only contributing about 5% of our profits back in 2019, this year it'll be about a quarter of our profits. And so in terms of the EBIT margins there, Even this year, we're on track to do mid-teens or potentially even a little bit better than that, which we're very excited about.
spk14: I just want to dig into the gross margin a little bit. Could you talk about how much of a drag freight was in 3Q? Would you expect that to be in the fourth quarter? And then when we think about the gross margin trajectory beyond 2021, do you expect some normalization there? in 2022 that could lead to pressure or just, you know, any color on that line item that puts and takes there as we think about the future? Thanks.
spk01: Yeah, I'll let Zim take the freight, and then I'll address 22. Okay.
spk00: So, thanks for the question. So, for Q3, the freight was about 270 basis point drag on the margin, and the GSP was about 50 basis points. And for Q4, we're estimating that the freight will be somewhere around 260 basis points, which brings the year to about 230 basis points, roughly.
spk01: So, yeah, so in terms of next year, again, not providing guidance yet, but I can give you some color on what we see as the puts and takes. Obviously, it's been, there's been very low levels of promotional activity for us this year and for the industry overall. So, we're certainly going to work very hard to maintain that discipline going forward, but there are competitive dynamics at play, and we'll have to see what that looks like for the industry overall next year. So, potential point of pressure. We are also seeing FOB price increases, factory price increases. uh, based on pressure on, you know, labor and as well as materials. So that's, uh, a bit of a, uh, of a headwind going into next year. Uh, however, uh, on the other side, we are also raising our selling prices to combat that. Um, and, uh, we also, uh, are hopeful certainly that GSP is going to get renewed because that's been a significant headwind as, as Zane outlined. And, uh, And then as we go into the back half of 22, we're also hopeful that there's some relief of the freight pressure.
spk13: Got it. Thank you.
spk06: Thanks.
spk12: Your next question comes from the line of Tom Nisik with Web Bush Securities. Please proceed with your question.
spk05: Hey, good morning, everyone. Thanks for taking my question. Ed, I'm kind of looking at your, I guess in the wholesale segment, your, you know, first half of this year versus, you know, second half. And in the first half, I think your, your revenues versus 19, we're still down something like 20%. You know, as we look to the first half of 2022, like, I mean, do we think we get kind of back to, you know, pre COVID levels? Is there like some reason why, you know, your first half revenues would be kind of, you know, structurally lower than they were pre COVID like anything like that. I'm just trying to, you know, think, think about how to think about the, uh, the spring season.
spk01: Well, again, not going to provide specific guidance, but, uh, but obviously we do think we have an opportunity for, uh, for a nice improvement in, in spring of 22 and wholesale compared to what we did this year. And, uh, No, I don't think there's anything structural that would prevent us to get back to 19. Absent, if you recall, we had a one-time program that we did an anniversary in the private label area back in Q2 of 19, which we talked about earlier this year. But putting that aside, in the ongoing businesses, no, I think that we're certainly going to target to get back to 19.
spk05: Got it. Understood. Um, and then I also wanted to touch on Europe. Um, you know, I think you've been pretty bullish on Europe this year. And I think earlier this year you said you were targeting 55 million in revenue, uh, in Europe, uh, this year, which would have put it at about 3% of sales, um, like a, um, you know, is Europe trending better than that? Like, should we think that, you know, Europe is going to come in somewhere better than that $55 million? And then B, you know, I don't know if you can, you know, talk longer term or, you know, like how meaningful do you think, like, Europe can be going to be 10% of sales, you know, anything like that? Just any thoughts on Europe, bigger picture would be great. Thanks.
spk01: Yeah. So we continue to have really strong momentum in Europe. So that – The $55 million you're referring to was for the SM Europe business, the joint venture where we bought out the remaining interest earlier this year, and that business has continued to trend up. So it'll actually do north of $60 million this year, which puts it over 85% ahead of where it was in 2019. So very strong growth there. If you look at the EMEA region overall, we're going to be close to $100 million this year. this year. And, you know, we continue to feel like we're in the very early innings in that region of our growth journey. And in terms of what the opportunity is, it's multiples of where we are today.
spk05: Understood. Thanks very much, and best of luck this holiday season.
spk01: Thanks, Tom.
spk12: Your next question comes from the line of Janine Stitcher with Jefferies. please proceed with your question.
spk02: Hi, good morning. I was hoping you could talk a little bit about the trends by product category. I know you've had a bit of a head start in the dressy category. Curious what you saw in sell-throughs there and if you feel like the competition has started to catch up at all. And then initial reads on boots and what you're seeing in that category. Thank you.
spk01: Yeah, so dress shoes continues to be an outstanding category for us. We have seen some of our Competitors get some more product out there in the category, but it has not slowed down our performance at all. And we're seeing success with really a range of products within that category. So opened-up dress, closed-up dress, various heel heights. It's just been a fantastic category for us, and particularly in our direct-to-consumer channels, really driving a significant driver. And then boots are also performing very well for us, doing great with Lug Sol boots, Chelsea boots. So we've got Western boots performing. So there's a bunch of things happening there, too, and that's a very strong category as well.
spk02: Great. And then just to follow up on the price increases, is that something you've taken already or something we should expect more into spring and maybe if you could quantify the magnitude?
spk01: Yeah, so for fall, I think we have layered on some price increases. We've done it selectively. If you were to look at it as an average, it's probably low single digits. But again, that's our initials. The AURs are up much more significantly than that because of the lack of discounting. So if you look at our retail segment, our direct-to-consumer channels, our AURs are up 20% plus versus 19%. But as we go into spring, we're going to take a little bit more price on the initials, and I think you could see that looking more like 5% to 10%.
spk02: Great color.
spk12: Thank you.
spk01: Thank you.
spk12: Your next question comes from the line of Marnie Shapiro with Retail Tracker. Please proceed with your question.
spk10: Hey, guys. Congratulations. Amazing quarter, and the stores look outstanding when they're in stock. I think you just said your spring, I just want to make sure I heard this right, spring initials could be up 5% to 10%. Are you expecting to layer in some level of promotion and some normalcy of promotion so that your AURs end up about the same as the back half of this year, or are you expecting that promotion should remain pretty clean through the back half of this year and into spring? So it would assume that AUR would be up even more.
spk01: Yeah, our plan is to continue to have very controlled promotional activity.
spk10: And even through holiday?
spk01: Yeah, it doesn't mean none, you know, because I think the consumer expects some level of promo activity during holiday. But certainly compared to where we were pre-pandemic, less promotions.
spk10: And can I just ask you one sort of bigger picture question? You guys have some really unbelievable sold-out products, and I see them across the board, whether it's online at your wholesale DTC, your own DTC, in department stores, in your own stores. I'm listening to customers chase products down for like the very last shoe in a chain of stores. When you get in a reorder, and I'm going to pick on the Maxima because it's on my screen right now. When you get in a reorder or delivery of that, how – company-wide, how do you prioritize where that delivery goes? If the black maxima comes in, does it go first to your own stores, your own DTC, wholesale DTC? How does that all factor in so that you're keeping your wholesale partners happy but feeding the best margin businesses? How does that work?
spk01: Well, it's a balancing act for sure. Look, the maxima throughout the year has been in and out of stock, going back to to the early parts of the year. And one of the things we've been doing on our own website is taking a lot of pre-orders or back orders. So customers are placing orders. So those customers, as soon as we get the product in, then we're getting it out to those e-commerce customers who have already placed the order. And we're obviously prioritizing our own direct-to-consumer channels, but we also take care of our best wholesale customers, our full-price wholesale customers. because that remains an important business for us, and we need them to be successful as well.
spk10: Okay, great. Best of luck for the holiday, you guys.
spk12: Thank you. Your next question comes from the line of Jay Soul with UBS. Please proceed with your question.
spk06: Great. Thanks so much. And I'm wondering if you can just elaborate a little bit on, you know, where we are in the whole return to work or return to party cycle, because it seems like there's a lot of things going on. There's a lot of fashion trends. There's a rebound from the pandemic. There's market share gains. So just wondering how you feel about those different things, and specifically if you still see a lot of rebound potential in the whole where to work and return to group events type business.
spk01: Yeah. Yeah. It's a good question. It's hard to say exactly how far along we are, but I will say that in terms of the return to party, we've been seeing that for some time. And if you look at the strength that we've had in dress shoes, even starting in spring but continuing through now, I think that's evidence that consumers are returning to going out and going to events, etc., And, you know, our dress shoe penetration right now is running ahead of where it was in 2019, and actually by a pretty significant margin. But, again, that's in Steve Madden, and that's really, you know, I think the end use there is going out. It's not necessarily going to work. I think that where to work dress shoe business is still not back to where it was pre-pandemic. and we'll have to see how that shakes out going forward, if it ever returns exactly to where it was.
spk06: Got it. Okay. Thank you so much.
spk12: Your next question comes from the line of Laura Champagne with Luke Capital. Please proceed with your question.
spk11: Hi. Thanks for taking my question. It's about inventories, which I know there's a lot of talk about supply chain issues and out-of-stocks, but inventories were up 80%. I know you run them tight. Is that just to meet demand for some of the products you mentioned has been moved out into Q4, or does this represent you getting a more adequate safety stock in place as we move into reorders?
spk01: So I guess, first of all, I would say I don't think the right comparison is to where we were a year ago. I think it probably makes sense to look back to 2019 and And relative to 19, we were up about 36%. And, you know, as Zine outlined earlier, that's all driven by that in-transit number, which is up significantly. The on-hand is actually down, but in-transit, obviously, because of the much longer lead transit times. is up. I don't know, Zin, is there any other color you want to provide there?
spk00: No, just that it lines up nicely when you look at the in-transit being up 229 percent and the on-hand down 16, as we said before. And you look at what we're guiding for Q4, as well as the shift that we had for orders that were in our inventory at the end of Q3, but were shipping in October because of that 30 million that Ed had mentioned earlier. Everything lines up pretty nicely against our guidance, and we feel good about the health and balance of our inventory.
spk11: Got it. Just as a quick follow-up, how does this kind of gummed-up system impact your strategy for inventory management this spring?
spk01: Well, we do have to place orders a little bit farther out than we normally do. We've also had to encourage our wholesale customers to place their orders farther out than they normally do, which they have done. So, as you know, speed to market is really critical to our strategy, so we don't like the fact that our lead times are lengthened here. But the good news is we do feel that our relative advantage is compared to the competition, is maintained. So while our lead times are extended, everybody else is R2, and we still feel like the speed advantage that we have versus everybody else is intact.
spk11: Understood. Thank you.
spk01: Thanks, Laura. Thanks, Laura.
spk12: Your next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.
spk04: Thanks for taking my question. Most have been answered, but I just want to ask, you talked about the choices about how you're going to allocate some of the product, whether you got the hot stuff. Given the slow production and slow transit that's happening, are you making decisions with the off-price channel or with lower margin accounts? where you're going to feed the full-price businesses more to get the higher-margin product made?
spk01: Yes. As you would expect, our first priority is always feeding full-price channels.
spk04: You're not going to answer that. Also, Zane, it sounds like the merchandise margins were up like 450 basis points in the quarter. Is that right? on a year-over-year basis?
spk01: Let me just wait and then Dean can follow up. There is a mixed shift also here. If you're looking at the consolidated number, there is mixed shift from retail becoming a bigger percentage of the mix. So I don't think you can just necessarily take the consolidated number and then back out the freight and GSP. But certainly, merch margins were up across wholesale and retail. Is there anything else you want to add?
spk04: Can you give us some idea of how much the – can you give us the details on that, especially on wholesale?
spk01: Well, wholesale, I think Zene outlined about 280 basis points of pressure from freight and GSP. That's versus 19. And the overall margins were down 30 bps to 19 in wholesale.
spk04: So, I mean, so you're just selling – now that you sort of have this new normal going on with the merch margins, going forward once the dust settles, whenever that is, how do you go about sort of sustaining, especially at wholesale, that much higher number than 19 or, you know, the pre-pandemic, let's just say?
spk01: Well, I mean, that's mostly about – inventory management and discipline around inventory and around markdowns. And that's something that we feel is a core strength of our company. And we're going to continue to lean on that.
spk04: And then last, thank you. And then lastly, your business with Walmart and Target, that business, what does that look like now? Do they take possession at the factory? Are they shipping the goods? Can you give us a little color on that private label business?
spk01: Yeah. Most of that business, they take possession overseas, and so they're the ones bringing it over here. We do have part of that business where we land the goods, but, again, most of it they take possession overseas.
spk04: And how is that business looking these days?
spk01: It's doing well. The private label was down in Q3 because of move-outs, you know, products that we were hoping to get out at the end of Q3 that fell into Q4. But we do anticipate, so it was down in both, you know, our private label was down in both shoes and accessories compared to 19 in Q3, but we expect to be up in both shoes and accessories in Q4.
spk04: Thanks very much. Continued success.
spk01: Thanks, Tim.
spk12: Your next question comes from the line of Susan Anderson with B. Riley. Please proceed with your question. Susan, your line is open.
spk01: Hello?
spk09: Hello? Can you hear me?
spk01: Hi, Kim.
spk09: Okay, great. Sorry, I guess I was on mute. So just wanted to follow up on the women's business and the part that you moved to Brazil and Mexico. I'm just curious, is that allowing you to be better in stock versus your peers, and are you still seeing some shelf space gains because of that? And then I'm just curious, are you able to chase it all with that business given it is closer to North America, or is it still tough given the supply chain issues?
spk01: Yeah, thanks for the question. I do think that we benefited from the shift of production to Brazil and Mexico, and our ability to chase is better there, particularly out of Mexico. Still, I think overall our ability to chase was not what it normally is, that's for sure, but Mexico did give us more opportunity to do that And, yeah, I do think that, you know, that helped us overall versus the competition. But the big thing that's helping us against the competition is that we have shoes that the consumer really wants, and the sell-throughs are great, and the consumer demand for the product is great. That's really the driver more than the country of origin of the product.
spk09: Great. And then just one other follow-up question on the SG&A for fourth quarter. I guess, should we think about it being up in similar magnitude as we saw in third quarter to 19 levels?
spk01: No. If you're comparing it to 19, definitely the growth will be higher in Q4. Obviously, the sales versus Q4 are accelerating meaningfully, and it's also a much higher growth there's a higher penetration of retail or DTC in Q4, which carries a higher SG&A.
spk09: Got it. Okay, great. Thanks so much. Good luck this holiday.
spk01: Thank you.
spk12: Your next question comes from the line of Steve Morata with CL King & Associates. Please proceed with your question.
spk03: Good morning, Zene and Danielle. I appreciate you taking my question. As it pertains, and Ed, you sort of answered this a little bit on the last question, but I am curious as to the composition of COGS from the Americas, meaning Central and South America, versus the Far East in the third quarter and what you would expect in the fourth quarter and maybe how that looks next year. It doesn't have to be specific numbers to the tenth of a percent, but I'd like to know from a composition standpoint generally where it is now and where that will trend towards.
spk01: Well, look, again, when you look at the business overall, because we have a lot of business, you know, we've talked a lot about the Steve Madden Women's Inline business and that shift to Brazil and Mexico. But when you look at the business overall, we're still over 70% out of China. And then, you know, when you add in some of the other countries in Asia, that still makes up the bulk of the business. You know, Brazil and Mexico getting bigger, but still single digits is a percentage of the total. Because again, as of now, we have not been doing anything in those countries in any of the private label areas or the more moderately priced businesses that we have. So that's still what it looks like today. And as of now, I think it's going to look somewhat similar to that next year. I mean, we'll continue to diversify out of China. But right now, for instance, we had some of the stuff that was in Vietnam, we pulled back. because of, obviously, the shutdowns that that country, the south of Vietnam, experienced over the last couple months.
spk03: So no major sourcing differentials next year versus this year?
spk01: No, I think you'll still see Mexico and Brazil grow, but generally speaking, it will be similar.
spk03: Terrifically helpful. Thank you.
spk12: And at this time, there are no further questions. I would like to turn the call back over to management for any closing remarks.
spk01: Great. Well, thanks, everybody, for joining us this morning. And have a great day. And we look forward to speaking with you on the fourth quarter call. Bye-bye.
spk12: This concludes today's conference. We thank you for participating. You may now disconnect.
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