Caleres Inc (CAL) 2019 Q3 法說會逐字稿

Good afternoon, and welcome to the Caleres Third Quarter Earnings Conference Call.

My name is Catherine, and I will be your conference coordinator.

(Operator Instructions) As a reminder, this conference is being recorded.

At this time, I'd like to turn the call over to Ken Hannah, Senior Vice President and Chief Financial Officer.

Please go ahead.

Good afternoon.

I would like to thank you for joining our third quarter 2019 earnings call and webcast.

A press release with detailed financial tables as well as slides is available at caleres.com.

Please be aware, today's discussion contains forward-looking statements, which are subject to a number of risks and opportunities.

Actual results may differ materially due to various risk factors, including, but not limited to, the factors disclosed in the company's Form 10-K and other filings with the U.S. Securities and Exchange Commission.

Please refer to today's press release and our SEC filings for more information on risk factors and other factors, which could impact forward-looking statements.

Copies of these reports are available online.

The company undertakes no obligation to update any information discussed in this call at any time.

Joining me on the call today is Diane Sullivan, CEO, President and Chairman.

I would now like to turn the call over to Diane.

Thanks, Ken, and good afternoon, everyone.

It was good to see many of you at our Investor Day in October.

Thank you for joining our third quarter call and for your continued support of Caleres.

Now during the third quarter, we continued to successfully execute on our strategies as we broadened the reach and power of our brands and products, strengthened connections with consumers and accelerated the innovation of capabilities and operations.

Our drive to leverage our investments and insight, combined with our industry-leading footwear capabilities, allowed us to deliver continued positive same-store sales growth at Famous Footwear and increased market share within the Brand Portfolio.

As it relates to strengthening our connections with consumers, we're excited to have opened the new Famous Footwear store in New York City, ahead of the busiest shopping period of the year.

This store in Herald Square, which is just down the street from our original 34th Street location, will enable us to broaden the reach of the brand, featuring world-class, in-demand brands at a great value.

This high-impact, brand-enhancing location is going to feature dedicated trend shops that will deepen our emotional connection with the customer and truly make them feel a little famous when they shop with us.

As it relates to broadening the reach and power of our brands and products, we also launched 27 Edit, our halo brand for our Naturalizer brand family, in over 50 brick-and-mortar doors, following a successful online performance in spring.

This collection of premium footwear combines all the fit and comfort components that Naturalizer is known for while elevating the design and materials with a more contemporary aesthetic.

Most importantly, this collection was based on feedback from our consumer insights division, which identified a demand from our target customer not met from our current brand offerings.

We're also proud to report that the Dr. Scholl's Herzog Sneaker, a versatile and eco-conscious sport shoe, took home the first prize ever and a footwear honor at the Accessories Council's Design Excellence Award.

This shoe brings to life the brand's mission to make shoes in a new more eco-conscious way featuring things like repurposed scrap leather, plant-based foam insoles, linings and top-cloth made from recycled bottles and natural soles made from a blend of rice husks and rubber.

And by this time next year, Dr. Scholl's will feature eco-conscious materials in all of its shoes.

And as it relates to accelerating the innovation of capabilities and operations, we also further expanded our consumer fulfillment capabilities by completing the final automation of our in-house distribution facility in the third quarter.

I'm very pleased to report that the facility has performed as planned since the cutover.

Now turning to the details of the third quarter.

At Famous Footwear, we had an excellent back-to-school, allowing us to generate our eighth consecutive year of positive back-to-school same-store sales growth.

This was the biggest 10 selling weeks in history of Famous and contributed to a 2.5% increase in same-store sales for the quarter.

We experienced strength in our athletic, boots and sandal categories and saw increases in all channels across all of our back-to-school timing zones.

Our kids business was particularly strong in the quarter, and our decision to elevate our assortment of trend-right premium, in-demand brands and styles with key programs delivered what our consumer was looking for.

We also benefited in the quarter from continued improvements from our key athletic vendor.

We are seeing our customers respond to our enhanced offering as they recognize that Famous offers the best brands and styles at a great value.

In addition to delivering compelling products, we are pleased with the results that we've been seeing in our revamped loyalty program, FAMOUSLY YOU REWARDS, and that's driving increased engagement among existing members and continued growth in our new and reactivated membership base.

Existing rewards members are shopping more frequently across all channels and spending more per shopping occasion.

And of course, we're going to continue to learn and evolve to the -- as we move to the next phase of this program and make sure that we're continuing to connect with consumers.

Looking forward for Famous, we are well positioned for holiday from both a product mix and a total inventory standpoint and are very confident about our assortment.

We have a promotional plan and a marketing strategy in place, including a return to TV that we feel will deliver our sales and margin plans.

Now turning to the Brand Portfolio, where our sales were short of our internal plans as we experienced a later start to fall, along with a moderation of our core products and associated replenishment programs.

In total, we were again able to take share in the quarter at the Brand Portfolio, experiencing sequential improvement over the course of the quarter.

Our fall styles are resonating with the consumer and our boot selling is very strong.

The relative sell-through of our brands at our retail partners continues to outpace the market while we adjust to an industry shift to more dynamic and on-demand ordering as evidenced by the increases that we are seeing in our e-commerce-related sales.

Importantly, we have carefully managed our inventory with nearly an 8% reduction year-over-year exiting the quarter, and we're happy with the quality and the freshness of our -- of the inventory in the marketplace.

It's critically important that we have built the flexibility into our model because this is allowing us to meet increasing consumer demand for newness in an environment where retailers have become even more focused on inventory discipline.

On balance, we are well positioned to deliver on these changes in consumer and retailer preferences, given the investments that we have made in our capabilities, enabling speed, agility and efficiencies.

So now let me give you a brief update as well on two of our most recent acquisitions, Blowfish Malibu and Vionic.

Blowfish Malibu product has performed very well in the marketplace.

And the brand is really naturally positioned to capture what the consumer is looking for right now, that sport and casual lifestyle, this fresh and very young spirit, a constant newness in their assortment, and you just top it all off with a can't-beat price/value equation.

This combination is delivering results, and Don and the team have done a terrific job by capitalizing on these trends, and we're really looking forward to seeing what's next from that team.

And at Vionic, we're working rapidly to ensure that the brand can react with more speed and agility to meet the needs of the consumer.

We've worked with the team to ensure that the brand has the capabilities to deliver trend-right product and newness more frequently, and they've already moved to a 4-season calendar.

We also think it's -- that we needed to make sure they have the capabilities to test and validate new constructions ahead of mass market launches.

They are now using our data and predictive analytics for the consumer that we found successful in our Brand Portfolio.

And then when you add that all up, in the end, this is going to result in leaner inventories and fresh product as we will no longer be front-loading but slowing and chasing items.

As Dan Friedman and Chris Gallagher have worked together, they have already streamlined Vionic's process, taking weeks out of their commercialization and development calendar.

These actions provide even more fuel and support to this brand that has such a unique value proposition.

And finally, before I turn the call over to Ken, I wanted to briefly address tariffs and their impact on our business.

This quarter, the increase in tariffs that were put into place in early September with almost immediate effect, created some headwinds in the quarter.

As a result, our third quarter earnings results include a $0.07 gross impact associated with the tariff increase.

We were able to offset $0.04 of the tariff headwinds by taking disciplined action and maintaining strong price controls, but our earnings were still impacted by $0.03 this quarter.

We expect another $0.02 net impact in Q4 for a total of $0.05 for the year.

As a result, we are narrowing the top end of our full year adjusted EPS guidance range by $0.05 to $2.35 to $2.40.

I'm confident that the teams are focusing on what we can control and operating with the necessary discipline to deliver our guidance.

And with that, I'd like to turn the call over to Ken for a financial review.

Thank you, Diane, and good afternoon, everyone.

For the third quarter, we reported earnings per share of $0.69.

This included $0.02 of Vionic integration-related expense and $0.07 related to the fair value adjustment associated with the mandatory purchase obligation for Blowfish Malibu, reflecting the strength in their business Diane mentioned earlier.

Our adjusted earnings per share, excluding these items was $0.78 and includes a $0.07 gross impact and a $0.03 net impact in the quarter related to the tariffs that went into effect September 1.

Consolidated sales for the quarter of $792.4 million were up 2.1% year-over-year.

Famous Footwear delivered a strong third quarter, reflecting significant progress on our product assortment and marketing initiatives.

Our same-store sales were up 2.5% for the quarter, reflecting another strong back-to-school season, and are up 1.1% for the first 9 months of the year.

Total sales at Famous Footwear were $446.6 million, down 0.5% as we operated 47 fewer doors versus the prior year and ended the third quarter with 960 total doors.

Our Brand Portfolio total sales were up 4.9% year-over-year in the quarter, including 2 additional months of Vionic sales in 2019 as well as the planned reduction in Allen Edmonds sales.

As Diane mentioned, our brands gained market share and performed exceptionally well at our retail partners with sequential improvements throughout the quarter.

Let's turn to consolidated gross profit and margin.

For the third quarter, consolidated gross profit of $319.8 million was up 2.9%, and our reported gross margin came in at 40.4%, up approximately 40 basis points from the prior year, with contribution from both Famous Footwear and Brand Portfolio.

For Famous Footwear, third quarter gross margin of 41% was up approximately 30 basis points year-over-year.

The margin improvement we experienced in Q2 continued as the team effectively managed their inventory, allowing them to resist the temptation to increase the level of promotion in the marketplace.

Brand Portfolio reported gross margin of 37.2% in the third quarter, up approximately 30 basis points from the prior year, including the benefit associated with purchase accounting year-over-year.

Our consolidated SG&A expense for the third quarter was up 3.7%, including the additional 2 months of Vionic.

SG&A represented approximately 34.7% of sales, an increase of approximately 50 basis points from the prior year.

Famous Footwear expense was down $2.5 million year-over-year, reflecting lower fixed expenses as they operated 47 fewer doors.

At Brand Portfolio, expense was up, reflecting the incremental 2 months of Vionic and the variable cost of distribution driven by a higher mix of loose pairs shipped this year versus last.

Our depreciation and amortization for the third quarter of $16.2 million was up 2.6% versus the prior year primarily due to the additional trademark amortization related to our Vionic acquisition.

Our third quarter operating earnings were $43.5 million or 5.5% of sales.

Our adjusted operating earnings of $44.4 million were down 5.3% year-over-year and represented 5.6% of sales.

At Famous Footwear, third quarter operating earnings of $27.7 million represented 6.2% of sales and reflected higher gross margins and lower expenses as mentioned earlier.

Our Famous Footwear operating earnings were up 13.4% year-over-year.

For the Brand Portfolio, third quarter operating earnings were $19.4 million or 5.4% of sales.

Our adjusted operating margin was down approximately 200 basis points versus the same quarter a year ago, reflecting the Vionic amortization and an increase in variable cost of distribution related to the higher mix of drop ship business year-over-year.

Our net interest expense for the third quarter of $10.6 million was up $6.3 million from a year ago, reflecting the fair value adjustment associated with the Blowfish mandatory purchase obligation and the use of our revolving credit facility to finance the October 2018 acquisition of Vionic.

Our third quarter tax rate was 21.9%.

Our adjusted EBITDA for the quarter was $63.5 million or 8% of sales, and our adjusted EBITDA for the first 9 months of 2019 was $165 million with adjusted EBITDA margin of 7.4% of sales.

Our capital expenditures were $11.4 million for the third quarter and down approximately $5.8 million year-over-year.

Now turning to our balance sheet.

We ended the quarter with $52.5 million of cash and equivalents.

Our outstanding borrowings under our revolving credit facility were $295 million at quarter end, down from $335 million at year-end and $350 million a year ago, following our 2018 acquisition of Vionic.

We bought back an additional $1.2 million of common stock in the third quarter and returned nearly $40 million to shareholders in the first 9 months of 2019.

Our consolidated inventory position at the end of the third quarter was $644.6 million, down $53.6 million year-over-year or almost 8%.

At Famous Footwear, we ended the quarter with inventory down 3.4% year-over-year.

And for our Brand Portfolio, our inventories were down 12.6% year-over-year as the teams effectively balanced inventory in-house and at our partners, ensuring quality and freshness of inventory in the channel.

We're particularly pleased with these results in light of our retail partners increasingly ordering closer to need.

This is requiring us to carefully balance our ability to take advantage of opportunities with our commitment to managing our inventory risk.

Our year-to-date operating cash flow was $145.7 million, up 54% over the same period last year.

As Diane mentioned, we're narrowing the top end of our EPS guidance range by $0.05 to $2.35 per share to $2.40 per share to reflect the net impact from tariffs in the third and fourth quarter.

We believe we are well positioned to win in the long term with our growth strategies and our business model.

In doing so, we will continue to broaden the reach and power of our brands and products, strengthen our connections with consumers and accelerate innovation of our capabilities and operations.

Now I'd like to turn the call over to the operator for Q&A.

(Operator Instructions) Your first question comes from the line of Rick Patel with Needham Company.

Congrats on the positive comp momentum for back-to-school.

Thanks, Rick.

So my question is on the Brand Portfolio.

With Q3 sales coming up a little bit softer, guidance for this year of low teens implies that the fourth quarter is going to be up in the low double-digit ballpark.

Given that you've now lapped the Vionic acquisition and inventories are also down double digits at the Brand Portfolio, can you give us -- help give us comfort around this acceleration?

Like are there timing shifts coming into play here, new wholesale relationships?

Any context there would be great.

Sure.

Rick, it's Diane.

And here's kind of how we think about the Brand Portfolio in the fourth quarter.

I think in the third quarter, we really saw an acceleration as we moved through the third quarter.

So August -- September was better than August, October was better than September.

And actually, our sell-through rates, even as we're into November, would suggest that that kind of growth rate that we're forecasting for the fourth quarter is certainly possible.

Our inventory and our boot acceleration has been terrific.

Our positioning in terms of our ability to satisfy our direct-to-consumer and our loose pair business is right on track with respect to that on our drop ship.

And I really believe that with the current trend that we're seeing going into the fourth quarter, we feel pretty good about that business.

On the other side, on the Famous side, again, the same kind of thing.

We've seen the trends continue to improve.

We're very pleased about and excited about our holiday plans.

We're adding TV back to the media mix and -- for 3 weeks in the fourth quarter here at Famous, and those trends continue to look good.

Now it doesn't mean we don't always have our work cut out for us, and we've got to make sure that we continue to drive our business.

But as we look at all the trends in our business right now, we feel like we are in great shape.

And last year, we were actually a little light on our inventory and our ability to satisfy boot demands.

And this year, we're in a much better position.

So I think that, that would be a piece of it.

Ken, I don't know if you'd like to talk a bit...

Yes.

No, I guess as we go in -- I think, when we look at that low double-digit, if you go in and you look at Q1, where we were up, all in, a little over 20%, Brand Portfolio in Q2 was up around 18% and then Q3, call it, roughly 5%.

You can actually be flat in Q4 and still be up 10% for the year.

So just -- I know you had mentioned double digit for the quarter.

But we're running well ahead of that as we had 3 quarters where we had the benefit year-over-year of the Vionic sales.

Got it.

And then a question on your initial thoughts for 2020.

So when you look at the range for earnings estimates out there, it's very wide.

I was hoping you can give us some preliminary thoughts on how we should be thinking about the models.

Your long-term algorithm is for low single-digit top line growth and double-digit EPS growth.

Do you see this happening in 2020?

Or is it too early to make that call, especially in -- given the curveball of tariffs?

Any color there would be great.

Well, I think obviously it's tough to give any kind of 2020 guidance at this point in time.

But the -- what we laid out at our Investor Day in terms of what our intentions were and our aspirations and our growth rates, that we would grow at or better than market.

It would be low single-digit top line growth and that we were really looking at continuing to drive double-digit operating margin.

That -- those long-term guideposts that -- guidelines that we've put out there has not really changed.

I can't really say yet what 2020 is going to look like, we will certainly do that in March.

And right now, our position hasn't changed, and we're just finishing off this year and paying attention to controlling what we can and driving our business.

Our next question comes from the line of Laura Champine with Loop Capital.

When we look at the tariff impact moving from $0.03 this quarter to $0.02 next quarter, is that just because next quarter is seasonally lighter in terms of sales?

Or are there things you're doing to mitigate the tariffs that -- and if you could give us any kind of comment on what the run rate you think we'll see in 2020, assuming status quo?

Yes.

Laura, the Q3, when we looked at the gross impact of $0.07, we were not able to have much of an impact on price.

I mean by the time those tariffs went into effect, most of those orders were booked for the quarter.

So when we look, there's a little bit of price that is going to be able to help us in Q4.

And then as we move into 2020, we would expect the ability to offset most of the rest of that from a price standpoint.

So it's really consistent with what we have said before.

Over the long term, we don't expect this to have a negative impact.

But in the short term, where it went into effect immediately and we had lots of orders that were already booked, we were only able to pull a couple of the levers.

As we look forward, we will continue to evaluate just different countries where we're producing goods and making sure we can maintain quality and speed.

And then we would hope that we could execute a few more of our actions to mitigate more of it.

Your next question comes from the line of Chris Svezia with Wedbush.

I guess first, I just want to go to Famous Footwear for a moment, can you -- Diane, any color about how comps progressed throughout the quarter at all?

It was a pretty consistent at that 2.5.

And any color...

Yes.

No, it was actually very strong in August, a little weaker in September and then came back again in October.

So it was -- it kind of ran at the gamut, Chris, in the quarter.

Okay.

And where you made a reference to boots being a driver, was that consistent throughout the quarter or did pick up in October where boots inflected?

It was really pretty consistent throughout the quarter.

But obviously, really, October, it did really start to kick in.

But it was really the weather pattern, as you know, in the quarter was a little bit unusual in that August was so warm.

So we had an opportunity on early boot selling to be good and sandals were still good and the athletic was positive.

And as we flipped to October, as the weather changed, boots kicked in again.

So it was -- it worked out very nicely.

The team did a great job of making sure we had the inventory positioned where we needed it to.

And we've always done so well in our sport lifestyle categories, and that was no different this quarter.

So it was really a nice balanced, I think, assortment -- right brands, right styles, really across the board.

And a nice kids business, too.

Right.

And on -- Ken for you.

Just, I guess the tariff piece is really just that incremental 5%.

Is that really what the -- what's new here in the guidance, just to be clear?

Well, there's the incremental 5%, and then there was just the impact in Q3 of not being able to offset all of the incremental 15.

Okay.

All right.

And then on -- so your fourth quarter implies $0.60 to $0.65 in earnings if I've got my math right.

Just maybe walk through -- you're north of $10 million in EBIT growth.

So I'm curious, just walk through, if you can, sort of the puts and takes of what to look for to drive that level of increase, if you could.

Yes.

I mean I think when we look at the momentum we've got going in, obviously, we talked about on the Brand Portfolio, the boot selling.

The inventory, we don't -- we're not carrying excess inventory that we feel like we're going to have to push through at lower margins.

So we're expecting to see some nice margin expansion in Q4 across the Brand Portfolio.

The e-commerce momentum, we sequentially saw that grow as we moved throughout the quarter, and so we're expecting that to continue into Q4.

And then I think from a Famous Footwear standpoint, we had a great back-to-school season.

We finished the quarter really strong, really happy with all 3 -- athletic, boots and sandals -- all were contributing to the growth.

So we feel really good about that.

And we had the margin actually expand at Famous Footwear by 30-some-odd basis points.

And so all of that kind of leads to some incremental earnings power in Q4 over last year.

Does -- just to remind me here, does the -- I think there was some Vionic costs fourth quarter last year and...

Yes.

A year ago -- yes, we had $0.10 of dilution from Vionic a year ago, $0.08 of that in Q4.

So that was in our Q4 numbers a year ago.

Okay.

Well, last thing for me, just to go back to the Branded Portfolio and the outlook.

I don't know, can you walk through, if you did flat, you're still about 10% growth on the year.

I'm just trying to understand, in one regard, it seems like you're saying there's some acceleration potentially from this 5% in Q3.

Is that fair to think that maybe Q4 could be stronger from a growth rate perspective?

Or no?

I'm just trying to get an understanding.

So I guess -- and part of, I think, what Rick was pointing out.

So in Q3 this year, we had 3 months of Vionic versus 1 month of Vionic a year ago.

And so when we go back to Q2, we had 3 months of Vionic this year versus no months of Vionic a year ago.

Q4, we'll have 3 months against 3 months.

So a lot of what we have seen early on in terms of the outsized gross was -- growth was coming from the Vionic addition.

So that equates to an apples-to-apples in Q4.

Okay.

So not to beat this to death, so you're expecting more organic growth?

So Vionic, you're lapping pretty much everything at this point.

I think Allen Edmonds is still supposed to be down potentially.

Does that just mean the core business is actually accelerating to some degree?

Allen Edmonds is actually -- in Q4, if you remember, we made the decision to pull back on the level of promotion a year ago, and so we begin lapping that decision in Q4.

Your next question comes from the line of Steve Marotta with CL King Associates.

What are the specific expectations for Famous Footwear's comp in the fourth quarter as well as trend quarter-to-date?

The trend quarter-to-date, I think from a year-to-date, so we were 1.1 year-to-date.

Yes, we're not going to provide quarter-to-date or Q4 expectations.

I mean what we tried to say was, we had 2.5% in Q3.

We saw good momentum as we were kind of coming through the quarter, had a very strong October and all the seasonal fall categories seem to be selling well.

That's helpful.

And you mentioned also that the new DC is fully automated.

When do you feel it'll run at peak efficiency?

Well, we're ramping.

And so we start to see here in Q4 some of the labor come out, and we would expect to be coming down that learning curve going into 2020.

So we'll provide an update on kind of what we think that's going to look like when we do our year-end report and give our guidance.

And we would certainly expect that to continue for a period of time.

Right.

We expect some benefits and some productivity gains next year, but we certainly won't be done at that point in time.

There's a lot more to -- as -- we even increased the demand of our e-com business and all of that, that's going to help the productivity there as well.

Sure.

One more question.

As it pertains to Famous Footwear's promotional cadence through the holiday season, does it differ materially at all from last year?

You know, great question, Steve.

We actually -- even in the third quarter, our promotional cadence shifted a little bit during the quarter.

But if you looked at the total amount of days where we were promoting, it was pretty consistent.

And that's very much of what we're planning to do in December as well.

A little bit of shift of some of our activities.

We're not going to have one of the friends and family events.

We're putting our investment back into the TV and the media.

We think that was the right way to go.

The consumer really responded well.

And so balancing out a little bit of what we're doing in the fourth quarter, but not materially more promotional at all.

We'll see how it all goes.

But right now, the plan is to continue kind of our pattern that we developed early in the third quarter.

(Operator Instructions) Your next question comes from the line of Tim Poser (sic) [Sam Poser] with Susquehanna.

This is Sam Poser.

I'm changing my name.

A few questions.

How many stores, what is -- how many stores -- Famous stores did you open and close in the quarter?

And then what's your plan for store openings and closings for the full year?

Sam, we are looking that up.

Let me get you the specifics.

I think there were 47 fewer.

Yes.

So it looks like we opened in '19 12, we closed 55 for a net loss of 43, so 949 is our ending plan.

Okay.

But where are we now?

960.

950.

960.

And just that so how many did you open in the quarter and how many did you close in the quarter?

We opened 4...

We opened 4...

And closed 17.

And closed 7 -- 17.

And then how many more are you planning on opening again in -- for the full year, you're planning on opening how many?

Just 1 more in the fourth quarter.

And that 1 opened already, I assume, that's New York, right?

Yes.

Yes.

And then you're going to close like another 12, 13, 12 stores.

Correct.

Yes.

Okay.

And then what was the comp for the Brand Portfolio stores?

It was negative 5.

Yes, exactly.

Yes.

And that was the planned reduction in Allen Edmonds.

I think the Naturalizer piece was roughly flat.

Okay.

And then what about the 4B tariffs, you don't have -- I don't know if you have that baked into your numbers or how you're thinking about that.

Because some of your brands, specifically Blowfish Malibu, would be impacted by that fairly significantly, probably also some of the Dr. Scholl's product and LifeStride.

So how are you thinking about List 4B if that comes to pass?

Yes.

I mean we have taken that into consideration based on what the current List 4B and the 15%.

So it's about 30% of our production in China.

So 70% is -- was on List 4A and there's about 30% of what we have coming out of China that was on 4B.

But List 4B is almost entirely, I would assume, those 3 brands that I mentioned.

Am I guessing right?

Right.

And then any of the kids-related product is also on there.

Got it.

Can you tell us -- can you give us an idea of what the Vionic sales were in the quarter, if they were up, down?

Or how much they were up or down?

Well, they certainly were up to us because we had an incremental 2 months.

So in our results, they were...

Can you give us the number?

They were up --.

They were certainly impacted in the third quarter.

Ken is looking at that.

But as I was saying, the work that we need to do with them on their core and replenishment categories, we needed to actually accelerate the kind of newness and freshness that they were bringing to the market, Sam.

And so we put -- spent a lot of time working with them on that, moving to 4 seasons a year, making sure that they were using all the capabilities that our sourcing team could bring to bear to continue to drive some speed there.

They need a little more freshness and newness added to their assortment.

So we're really pleased about the pace at which they are doing that, we really think that's going to be beneficial to them and to us as we get into 2020.

But they were certainly a little light in that core and replenishment sort of category during the third quarter.

So how do we think about -- to get to a low double -- I mean to get to low teens for the year for Brand Portfolio, you need a low double-digit increase in the fourth quarter for Brand Portfolio.

How do -- what are, by brand or what are the key drivers that -- you haven't mentioned Sam Edelman at all today.

Can you just give us some idea of what those key drivers are to get to that?

And how much of that is initial orders?

And how much of that is fill-in orders that you're counting on?

I guess some of the initials will be January ship for spring.

But...

Yes.

Sam, the -- so to get to a double-digit increase, all in at Brand Portfolio for the year, I mean I think you go through...

But you said low teens, you said low teens, you didn't say double, you said low teens for the year.

Or did I misunderstand?

I thought you said low teens for the year.

And I think that's in your -- you're saying that you're expecting Brand Portfolio sales for the year to be up low teens.

That's on your...

Right.

What we said was just to back in to get to double digit, it could be flat.

Okay.

But my question is, is what's driving -- to get to low teens, you need an 11% increase in the fourth quarter to get to 13%, so what is going to make that up?

How much of it is fill-ins?

What are the brands that you see really doing the heavy lifting there?

Yes.

Most of that is -- we've seen throughout the year, initial orders continue to be down year-over-year.

I think in Q3, initial orders continued to be down double-digit as was replenishment.

So the e-commerce-related sales, the drop ship-related sales, that's where the growth is coming.

And I think we're starting to lap year-over-year the -- some of the significant shifts in the initial order reductions.

So that's a bit of where you're seeing the growth.

But it's all in newness, fresh product.

I think as Diane mentioned on just what we're doing, Sam and Vionic are -- both of those brands have big core replenishment businesses.

Those -- there's a shift there in both of those to more fashion-oriented product, that's really where the consumer is going, and that's what's driving the growth really across the entire Brand Portfolio.

Okay.

And then could you just tell me how much of your business is -- how much of your Brand Portfolio business is your own e-commerce business?

Because that sounds like it's your in-house e-commerce, plus -- I guess plus drop ship to -- and the drop ship model that you're doing with your wholesale partners that's driving a lot of business.

So can you give us an idea of what percent either each one of those is or the combination of...

Yes.

Well, let me give you a sort of a flavor for what third quarter was, Sam.

About 30% -- 38% of all of our business was in some e-commerce-related sales, whether it was drop ship, e-com to other retailers, our own e-com; and that grew substantially in the quarter, and we expect to see that kind of same kind of pattern, that same kind of growth on the base that we had last year and in the fourth quarter as well.

Right.

But I mean you're also talking about sell-ins to Zappos for argument's sake.

When I'm talk -- when you're -- I'm asking you about your own e-commerce, which is a sell-through number and your drop ship, which is automatically an order from a consumer so if you -- so what is that number, that actual out-the-door sale number as a percent, not what you're selling as a wholesale order to a -- like to famousfootwear.com.

I mean that you're selling, they do carry their own inventory, and then you also do drop ship.

So what's that drop ship/ --?

Yes.

I think year-to-date, that is roughly 32% of our total direct-to-consumer.

So that does include...

Yes, our own dot com.

Your own dot com is 32% of the Brand Portfolio business right now?

Of the direct-to-consumer business for dot com.

All right.

You -- all right.

I'm going to -- I'm sorry to drive you crazy.

You did $360 million in Brand Portfolio this quarter, of which what percent was the combination of drop ship and your own e-commerce business, which is telling you that like -- all that direct to -- it's all -- that would all be direct-to-consumer...

Yes.

That's what Diane was mentioning, it was like 38% of...

But does that include wholesale orders to Zappos?

Or is that just what you're shipping to Zappos through drop ships?

No, the single care orders directly to the consumer.

Okay.

So it's 38%.

So about 6% of your business is drop ship and then the other 32% is your own business.

And how fast do you foresee that direct drop ship -- sorry, the direct e-commerce business growing for the balance of the year and sort of down the road?

Well, the direct-to-consumer business has been growing at close to 30%.

And...

I'm talking about the e-commerce.

Well, I'm talking about e-commerce part of that.

Our e-commerce business has been growing at a similar rate.

And do you expect that -- I mean looking ahead, I know you're not guiding to next year.

But I mean when you look ahead over the next few years, do you expect that growth to accelerate as you put more effort against it?

Or is -- or not?

We expect it to continue.

And yes, it would accelerate.

I mean that was a significant part of the investment we made on the capabilities of being able to not just do, obviously, [case tax] but single care is directly to consumer.

And all the automation in our distribution facilities, that's been -- the goal is to be able to make sure that we can address that specific consumer need and demand going forward for growth.

And Diane, I would assume that in the fourth quarter that that number goes up as there's more demand -- I mean that's just the nature of direct business?

Yes.

Yes.

And is that a higher-margin business, is -- having that instead of wholesale, is that a higher margin?

Yes, it is.

On the EBIT, on the bottom line?

Yes.

Yes.

And your last question comes from the line of Wayne Archambo with Monarch Partners.

So with the sales up 2% overall, inventories down in the quarter, I know Sam kind of get into a lot of details within these different pockets of your business.

But is there an active strategy to manage working capital accounts more closely?

Are you actively bringing those inventories down?

Or is part of that the net closures of 43 stores?

Or is there an active strategy in place to manage inventories -- inventory turns more efficiently?

Yes.

I mean we've been working at this now for a while.

And clearly, we've been trying to follow much more of the speed model and bring product in much closer to need and making sure that we're not filling the pipeline up too early and responding more in season.

And all of those things, Wayne, have been a key part of what we've -- what we think is going to be critical in terms of how we deliver, we grow and we deliver the kind of earnings we want to over the next couple of years.

Yes.

If you look at -- Wayne, our total inventory was down about 8%.

So Famous with the fewer doors was down I think 3.4%.

The Brand Portfolio, which is where we were up at the end of last quarter, and what we had said was that we were working to shorten some product lifecycles and were hoping to be down by the end of the year.

So we were able to work that through in Q3, and we ended up down year-over-year about 12.6% in inventories in the Brand Portfolio.

So that aligns us with where the consumer is going, which is more freshness, newness, and that's aligned now really across the chain with kind of how the consumer is behaving.

And would we expect the net number next calendar year to decline similar to the net negative 43 on the number of stores at Famous, would you see a continuation of that next year?

Yes.

I mean we haven't finalized the net reduction in the store base.

But in terms of when we think about that as those stores are coming out so, is that associated inventory.

So it's been pretty consistent.

And there are no further questions at this time.

Okay.

Thank you very much.

Just to wrap up, we're really pleased with our ability to react quickly to the changes that we've seen in the environment, and it's -- see this as an important validation of our capabilities and our people and our model.

We are always going to stay focused on operating with excellence and creating consistent, profitable, sustainable growth over the longer term.

And with that, I'd just like to wish everybody a happy Thanksgiving, and we look forward to seeing many of you next week in Market Week.

Thanks.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.