Steven Madden Ltd (SHOO) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2018 Steve Madden Earnings Conference Call.

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

I would now like to introduce your host for today's conference, Danielle McCoy, Director of Corporate Development and Investor Relations.

You may begin.

Thanks, Jiji, and good morning, everyone.

I'm Danielle McCoy, Director of Corporate Development and Investor Relations for Steve Madden, and I'd like to thank you for joining our third quarter 2018 earnings call and webcast.

Before we begin, I'd like to remind you that during our call, we may make certain forward-looking statements as defined in the federal securities laws regarding our expectations or predictions about the future.

Generally, these statements relate to projections involving anticipated revenues, earnings or other aspects of the company's operating results.

Because these statements are based on current assumptions and expectations, they involve known and unknown 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 risk the company faces, and we urge you to refer to these.

Any forward-looking statements represent our judgment as of the time of this call and cannot be relied upon as current as of today's date.

We disclaim any intent or advocation 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 presented are on an adjusted basis unless otherwise noted.

A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release.

Joining the call today is Ed Rosenfeld, the Chairman and CEO of Steve Madden.

With that, I'll turn it over to Ed.

Thanks, Danielle.

Good morning, everyone, and thank you for joining us to review Steve Madden's third quarter 2018 results.

We are pleased to have delivered a strong third quarter, with net sales growth of 4% and diluted EPS growth of 26% compared to the third quarter of 2017.

Our wholesale accessories business was the standout in the quarter, with net sales increasing nearly 20% on the strength of a robust increase in Steve Madden handbags and outstanding performance in our private label accessories business, supplemented by the contribution from Anne Klein handbags in new license.

Excluding Anne Klein, wholesale accessories net sales increased 14.5% in the quarter.

In our wholesale footwear segment, net sales declined 1%.

Compared to the prior year, wholesale footwear top line results in the quarter benefited from sales from our new Anne Klein footwear business, but had an offsetting negative impact from the transition of most of our private label business with Payless to the other income line on the income statement.

Excluding Anne Klein and assuming all sales to Payless were still recorded on the top line, wholesale footwear net sales would have been flat for the quarter.

Strong sales growth in our core Steve Madden Women's business in both domestic and international markets as well as outstanding performance in Blondo was offset by a planned sales decline in the legacy Schwartz & Benjamin business, meaning the Schwartz & Benjamin business excluding the Anne Klein, as we did not anniversary excessive off-price sales from a year ago and have exited certain smaller brands.

In our retail segment, net sales rose 9% including a 5.5% comparable store sales increase, our strongest same-store sales result since Q1 2016.

Importantly, we also recorded year-over-year gross margin improvement in each of our wholesale footwear, wholesale accessories and retail segments which contributed to a 50 basis point increase in third quarter operating margin compared to the prior year.

In addition to the strong financial results, we were particularly pleased with the progress we made on a number of our key strategic priorities in the quarter.

First and foremost, our top priority this year, as it is every year, is to maintain and build upon our fashion leadership position in our core Steve Madden footwear business, and our third quarter results demonstrate that we are executing on that front.

Steve and his design team continue to create on-trend product assortments that are keeping us one step ahead of the competition, as evidenced by the strong sales growth in Q3 in our Steve Madden Women's wholesale footwear business, as well as the 5.5% comp store sales gain in our retail business.

Once again, fashion sneakers were a growth driver, highlighted by our dad sneakers and wedge styles.

Sandals also performed very well in the quarter, as we benefited from trend right styling in the category and a selling season for sandals that extended through September as the customer continues to operate with the buy now, wear now mentality.

Overall, we are very pleased with the momentum we have in our core business.

Secondly, we continue to capitalize on what is perhaps our largest long-term growth opportunity, which is expanding our business outside the United States.

We have ramped up our focus on and investment in our international business over the last few years, and we are seeing the results of those efforts.

In Q3, international net sales grew 24% compared to the prior year period.

As in recent quarters, we saw a growth across this business with strong increases in our owned markets, Canada and Mexico, as well as outstanding growth in our SM Europe joint venture and in our distributor business, most notably with our distribution partners in India and the Middle East.

Our third key initiative is to expand our newer brands, and that was another area where we showed significant progress in third quarter.

Most notably, our waterproof brand Blondo is on fire.

Blondo's net sales increased over 50% in the quarter, compared to the prior year period, as the brand's unique offering, which marries on-trend styling with waterproof functionality at great values, continues to resonate with consumers.

Third quarter was also the first full quarter of shipping for our new licensed brand Anne Klein.

We are pleased with what we are seeing so far in Anne Klein in both the footwear and handbag categories, and we continue to believe that the brand is a strong complementary addition to the other brands in our portfolio.

We remain on track to achieve our previous guidance of $80 million to $90 million in net sales in the first 12 months of shipping, which encompasses the -- excuse me, the back half of 2018 and the first half of 2019.

While we are off to a good start in fall of 2018, we are also looking forward to spring 2019 which is the first season we will control from start to finish.

We expect to be able to drive improved gross margin in Anne Klein when we own the process from the design to the delivery of the products.

Finally, the fourth strategic initiative we have outlined is expanding our digital commerce footprint.

Beginning earlier this year, we revamped our digital marketing strategies, including among other things, heightening our focus on our most valuable full price customers and offering free 2-day shipping in earlier access to new styles.

We also recently migrated stevemadden.com to the Shopify Plus platform, a cloud based solution that is expected to minutely reduce operating costs, while improving our speed and flexibility and enhancing our ability to add new features and functionality to the same.

Over the last 2 quarters, we have seen a significant acceleration in sales on stevemadden.com, going from a year-over-year decline in Q1 to 13% growth in Q2 and a 19% growth in Q3.

Importantly, we have seen gross margin trends improving over this period as well as we reduced discounting on the sale.

Gross margin on stevemadden.com in third quarter was over 500 basis points higher than the prior year period.

While unfortunate, this was offset by higher shipping costs as a result of our implementation of free 2-day shipping.

The net effect of the transition from discounting to free and fast shipping is a web business that is both more profitable and better for the position of our flagship brand.

In summary, we are pleased with our results in third quarter, and just as important, we are encouraged by the momentum and progress we are seeing with respect to the key initiatives that will enable us to continue to drive top and bottom line growth going forward.

Before I turn the call over to Danielle, I'd like to touch on one last subject, tariffs.

As you all know, in mid-September, the Trump administration imposed tariffs on $200 billion of Chinese imports, including handbags and certain other accessories that we sell.

As of September 24, the items on that list have been subject to an additional 10% tariff on top of existing duties.

And beginning on January 1, 2019, that will increase to 25%.

In 2018, we estimate that we will source approximately $120 million from China in goods on that list.

So applying an additional 25% tariff, all else equal, would result in a negative impact earnings of $30 million.

Of course, all else will not be equal as we are taking a number of steps to mitigate the negative impact.

First, we are aggressively shifting production out of China to other countries, primarily Cambodia.

In 2018, we will source approximately 16% of our goods in the categories impacted by the tariff from countries other than China.

On the last earnings call, I said we were targeting to increase non-China production in those categories to roughly 30% in 2019.

That target has now moved up to 40% and potentially 50%.

Second, we are working with our suppliers in China to provide us with better pricing.

We were able to get our factory partners to absorb half of the impact of the initial 10% tariff from September 24 through the end of the year.

And we expect that we will be able to a further reduction when the tariff increases to 25% on January 1. We are aided in these efforts by the weakening of the RMB, which has depreciated by 10% against the U.S. dollar since April, as well as by the supply and demand dynamics for the Chinese factories as we and others move production out of China.

Finally, we will be raising selling prices in 2019.

Since we are primarily a wholesaler, this requires discussion with our retail partners and those negotiations are underway.

While there is no easy solution to this challenge and it is unrealistic to believe there will be no negative impact, we think we have a solid plan in place to address the issue and mitigate the vast majority of the impact.

With that, I'll turn it over to Danielle to review our financial results in more detail and provide you with our updated guidance for 2018.

Thanks, Ed.

We are pleased with our third quarter performance.

Our consolidated net sales increased 3.9% to $458.5 million compared to prior year net sales of $441.2 million.

Our wholesale segment increased 3.1% to $388.5 million compared to $376.9 million in the prior year period.

Excluding the shift of Payless out of the top line and the inclusion of Anne Klein, wholesale sales were up 3% compared to last year.

Wholesale footwear net sales declined 1.1% to $297.3 million.

Excluding the shift of Payless out of the top line and the inclusion of Anne Klein, wholesale footwear sales were relatively flat compared to last year.

In wholesale accessories, net sales increased 19.5% to $91.3 million.

Excluding Anne Klein, wholesale accessories net sales grew 14.5% compared to last year.

In our retail segment, net sales increased 8.8% to $69.9 million.

Our same-store sales increased 5.5%.

We ended the quarter with 210 company operated retail stores, including 59 outlets and 7 e-commerce stores, as well as 46 company-operated concessions in international markets.

Turning to other income.

Our licensing royalty income net of expenses was $2.6 million in the quarter compared to $2.7 million in last year's third quarter, while First Cost commission income was $2.4 million compared to $2 million last year.

Consolidated gross margin increased 60 basis points to 38.2% compared to 37.6% in the prior year.

Wholesale gross margin rose to 34.3% for the quarter compared to 33.9% in the same quarter last year driven by an increase in both wholesale footwear and accessories.

Retail gross margin was 60.1%, up 80 basis points compared to the same quarter last year, as a result of the strategic initiatives to drive greater profitability in our e-commerce business and focus on full price selling.

Operating expenses for the quarter increased to $109.6 million or 23.9% of net sales, compared to operating expenses of $104.7 million or 23.7% of net sales in the same period last year.

Operating income for the quarter totaled $70.6 million or 15.4% of net sales, compared to last year's third quarter operating income of $65.9 million or 14.9% of net sales.

Our effective tax rate for the quarter was 20.8% compared to 32.1% in the same period last year as a result of the impact of the Tax Cuts and Jobs Act.

Finally, net income for the quarter was $55.9 million or $0.65 per diluted share compared to $44.5 million or $0.51 per diluted share in the third quarter of 2017.

Moving to the balance sheet.

Our financial foundation remains strong.

As of September 30, 2018, we had $230.4 million of cash in marketable securities and no debt.

Inventory totaled a $147.5 million, compared to $124.1 million in the prior year, an increase of 18.8%.

Excluding Anne Klein, inventories were up 13.6% compared to last year.

Inventory increase was driven by our accessories segment and Blondo, each of which is poised for a significant growth in Q4.

We are comfortable with both the level and the composition of our inventory.

Our consolidated inventory turn for the last 12 months ended September 30 was 8.3x and our CapEx in the quarter was $2.9 million.

During the quarter, we repurchased approximately 416,000 shares for $15.8 million, which includes shares acquired through the net settlement of employees stock awards.

At the end of third quarter, there was $132.6 million remaining on the share repurchase authorization.

Last, the company's Board of Directors approved a quarterly cash dividend of $0.14 per share, reflecting a 5% increase over the previous quarter's dividend.

The dividend will be payable on December 31, 2018 to stockholders of record as of the close of business on December 21, 2018.

Now turning to our guidance.

We updated our full year 2018 guidance for the high end of our previous range for both net sales and EPS.

We now expect that net sales growth will be 6% to 7% compared to our previous range of 5% to 7%.

We expect diluted EPS will be in the range of $1.76 to $1.78 compared to the prior range of a $1.73 to $1.78.

Factored into this guidance is a $0.02 net gross negative impact from the additional 10% tariff on handbags and certain other accessory categories, half of which was offset by factory price concessions.

Last, we continue to expect the full year tax rate will be approximately 20.5% implying a tax rate of approximately 17% in Q4.

Now, I'd like to turn it over to the operator for questions.

Operator?

(Operator Instructions) And our first question is from Erinn Murphy from Piper Jaffray.

A couple of questions for me.

Maybe just first one clarification on the handbag acceleration.

Is that wholesale partners taking orders earlier just given the tariff that was put in place towards the end of September?

Just curious what's driving that.

And then given that, I'd love to hear a little bit more, Ed, from you on how you are thinking about the last piece of your kind of tariff scenario work on price increases.

I'm imagining you can't do much for Q4, so how should we just think about the gross margin in the fourth quarter and kind of how should we think about what you are thinking for spring summer '19 on pricing?

Sure.

So first of all, the sales acceleration is unrelated to the tariff.

And that's really a reflection of an acceleration in our business, both in our -- particularly in our Steve Madden branded business and also our private label business, which is really taking off.

So we're very pleased with that, and in fact we expect that to accelerate further in Q4.

In terms of price increases on handbags and some of the other accessory categories that are impacted by the tariff, as you correctly pointed out, we did not make any changes for Q4.

We are working on price increases for next year.

As I indicated in the formal remarks, because we are primarily a wholesaler, that does require discussion, negotiation with our wholesale customers.

It's really too early to say where that's going to shake out.

Certainly, I can tell you that in our stores, the price increases will be as much as 10%.

But it's obviously a products by product.

It is not a flat -- it's not a flat increase across the board, it's a product by product decision.

But we'll keep you updated as we go forward on where the average price increases shake out.

And anything on gross margin, just given the tariff that will be fully in place for the fourth quarter?

Should we assume kind of gross margin moderation relative to what you saw in the third quarter?

Yes, as we said, there -- we talked about the EPS or Danielle talked about the EPS impact.

She said it was $0.02 gross and then half of that is offset by the factory price increases to about a $0.01.

If you looked at that in terms of gross margin, I believe it's about a 30 basis point impact to the consolidated margin, more like 40% to wholesale margin in Q4.

Okay, got it.

I missed that, sorry.

And then just on boots as a category, would love to hear how you are thinking about that season?

I know the last quarter you talked about still guiding at flat.

Are you seeing any traction in booties?

Obviously you called out Blondo a couple of times on the significant strength there, but just curious on how that season is shaping up and if any of that was taken into account of your updated full year top line?

Yes, we feel very good about what we're seeing in the boots and booties category right now.

We are trending positively right now in both wholesale and retail.

That said, I still think flat is probably the right way to think about it for the full season because we were down in Q3.

We were actually down double digits in Q3 in the boot category.

I'm keeping Blondo aside frankly, but I'm thinking about the sort of the core business was down double digit, and that was planned because we elected to bring boots and booties in, particularly boots in later this year.

And I think that was the right decision.

Based on how the sell-throughs have looked across the space, I think that was wise.

And now that we do have those products delivered, they are performing quite well.

So I guess to wrap that up, we were down in Q3, we'll be up nicely in Q4, but probably still around flat for the season.

Our next question is from Camilo Lyon from Canaccord Genuity.

Ed, I wanted to ask you about the wholesale performance in Q3.

Were there any collage or any shifts that we should be made aware of?

Yes, I think that there were some shifts this year in terms of timing of wholesale deliveries.

So some goods that went out last week of September last year went out first week of October this year.

And that's why you do see a little bit of fluctuation in the sales growth rate between Q3 and Q4, but I think you'll -- if you look at our implied sales guidance, on a consolidated basis, it's -- I believe it's up 9 on the low end and up 13 on the high end in Q4.

So obviously, if you look at Q3 and Q4 combined or the back half combined, we're actually looking for sales growth to be as strong or stronger than what we saw in the first half.

And then if I could just ask you on the international business.

You're seeing some really good consistency on the growth drivers there.

If you could just maybe highlight what you see on the in-Europe and if there's been a lot of debate around just natural consumer demands on the con end.

I would love to get your take on how the brand is positioned and how it's performing there and what you're seeing there from that perspective.

Yes, Europe continues to be a very positive story for us.

As you know, we did the SM Europe joint venture a little over 2 years ago now.

And it's been -- it's really exceeded our expectations.

We continue to see very strong growth out of that business.

I think we'll be up something like 45% in our SM Europe JV this year compared to the prior year.

Admittedly not off a huge base, but really positive trends there.

Obviously some others have called out a little bit of weakness and some difficult weather in Europe.

I think we solved a little bit of that, but given that we're at the beginning of our growth curve, it certainly didn't slow us down much.

And I think we are still pleased with the sell-throughs and expect to continue to be on nice growth trajectory in Europe next year.

Yes, in Europe, business is very good.

The other thing I would call out, we do -- still do Italy as a distributor and that business is performing very, very well for us as well.

That's been another business that's really exceeded our expectation.

So very pleased with what we're seeing in Europe overall.

And then I guess just to rounding out the tariff discussion, you talked about implementing some price increases at the wholesale level which makes sense.

I mean you talked about the amount of production that you're shifting of 40% to 50% if I'm not -- I didn't think of that, if I heard that correctly.

Yes.

In the price concessions that you're discussing, that you are in discussions with now, if we bundle all that together, have you done the math on what the net EPS impact could be for the business?

Just to try and isolate what you said at the low end that you could mitigate mostly if not all of the impact, what should be the worst case scenario now that you have this plan in place?

Well, I don't think I want to give a specific number about what we anticipate because there are so many moving pieces here.

But perhaps I could give you an example for last year purposes to help you sort of frame it up.

If I mention that there were really 3 tools that we were using to confront this problem.

The first is moving production out of China, the second is working to get better pricing from our factories in China and the goods that are made in China, and the third is raising selling prices.

So if, for example, we -- in 2019, we're able to get to 40% of our goods on the tariff list outside of China, and we were able to get a 10% reduction in pricing in China on the goods that remain in China, and we were able to raise selling prices on average 2% across these categories overall, that would offset more than 80% of the $30 million impact that we talked about.

Our next question is from Kate McShane from Citi.

If I can just ask another question about tariffs and this is more of a scenario if the administration were to enact the additional $267 billion in tariff and it starts to effect more footwear and apparel, how nimble are you to shift production outside of China if it’s footwear?

Well, yes, I think that we're -- we are pretty flexible relative to most of our peers.

I can't say that clearly similar to handbags, we can't just flip a switch and move everything out of China.

But we are being very proactive in working on diversifying our sourcing outside of China, expanding and developing our capabilities in countries like Mexico, Brazil, Italy, Vietnam, Portugal, India, potentially Cambodia.

So that work is in process, and we're trying to position ourselves so that we are as prepared as we possibly can be if that does take place.

And then to the extent that you can comment on this, at one of the major retailers that you worked with bought a brand with [Parknudo], and I just wondered extensionally what does that mean for your relationship with that retailer and what it potentially means for your relationship with other customers?

Well, look DSW is an incredibly important partner for us.

It's one of our top 5 customers.

We have a very close relationship with them and I don't expect that to change.

We're going to continue to work with them and partner with them the best that we can.

Clearly, they have articulated a goal of increasing their private label penetration over time.

And we understand that.

But as a brand partner there, that just means it's incumbent on us to have the best possible products and to have -- and to make sure that our brands are strong such that that doesn't come out of our eye, that comes out of somebody else's.

Our next question is from Edward Yruma from KeyBanc Capital Markets.

This is Matt on for Ed.

So could you please update us on the men's business and how an increased marketing investment there is performing?

And stepping back, could you also comment on the competitive environment in men's and how it differs from women's and if you believe you are taking share there?

Yes.

Men's has softened up for us a little bit over the last quarter or 2. And specifically, we are -- we have not been as successful in the sneaker category in men's as we have in women's.

So our Oxfords are performing well.

Now that we're into fall, our boots are performing well, both Chelsea boots and chukka boots.

But our sneakers had been mixed.

And specifically, we had some sneakers that at our large departments for our customer that they didn't perform, backed up the inventory a little bit, and we've had to work through that.

We've -- I think that we've sorted that out with them in our position to go in the right direction again there.

But that did cause a little bit of a pause in our men's growth.

Obviously, if you take a step back and widen the lens a little bit over the last few years, we've taken a lot of share in the men's category.

And I feel very good about the long-term trajectory there, but we did have a short-term hick up.

So on sneakers, I know it's still a growth driver for you this quarter, but is it waning in women's as well?

No, sneakers continues a very strong momentum.

Our next question is from Jeff Van Sinderen from B. Riley FBR.

My first question is really about kind of the timing and I know you brought in or you sold in boots a little bit later this year.

Just wondering with kind of the backdrop and talk about potential or lineal impact, how you're thinking about I guess the compares for Q4 and Q1 in terms of any timing shifts that potentially could impact your business, in terms of shipping new spring product?

I don't see any major -- I think that the shift for us is more a Q3 into Q4.

So you will see a benefit year-over-year in Q4 from the timing.

But I don't think there is going to be much -- I don't foresee any big impact to Q1 in terms of timing.

Okay.

And then on your own retail stores, your business has been strong there.

And I know you've been pushing it digital, that's been working well.

As we think about store leases coming up, just wondering kind of what the picture is over the next year.

So -- and how you're thinking about potential rent reductions when leases come up and how that might potentially benefit your profitability in the retail direct segment.

And also been maybe you could just touch on considerations around the kind of the offset of the expenses of 2-day shipping?

Sure.

Well, with respect to rent reductions, obviously when we come to the end of a lease, we're going to get rent reductions where we can.

That said, if you look at our real estate portfolio, we're mostly in any locations and I think the opportunity for rent reduction there is not as significant as what you see with folks that have a lot of stores in C or D malls.

That said, clearly those conversations with landlords are different today than they were 5 years ago when the end of the lease, they automatically want a very significant increases in rent.

So we'll do the best we can there.

I don't think it's going to be a meaningful driver of reduced expense, but certainly we'll -- we should be able to control the rent better than we were able to years ago.

In terms of the free 2-day shipping, yes it does result in an increase in our expense, although because of our store footprint and the fact that we ship the majority of our e-commerce orders from our stores, we are able to do that in a relatively cost effective way.

And I think that we'll actually be able to drive that cost down even further as we tweak the algorithm that determines where the goods are shipped from over time.

Our next question is from Dana Telsey from Telsey Advisory.

Our next question is from Laurent Vasilescu from Macquarie.

I wanted to follow up on the mid-single digit comp.

Can you dimensionalize how that comp progressed by month throughout the quarter and given your high level thoughts on how retail has performed for the month of October?

Sure.

We never provide the quarter-to-date performance.

But I will -- I can tell you that with respect to the third quarter, we were up somewhere between 3 and 3.5 in July, and then August and September were better, I think they were between 6 and 6.5 each of them.

And then on Anne Klein, thanks for parsing out the footwear and handbag wholesale revenues ex-Payless and ex-Anne Klein.

To isolate Payless, can you possibly parse out maybe for this quarter how much Anne Klein contributed to the -- yes, to the third quarter?

I prefer not because we really don't like to disclose sales to any one customer, and so I'd like to pass on that one.

And then last question.

I think last quarter was called out the tax rate would come in around 13.5% for the fourth quarter.

Is that still the expectation?

No.

So one of the things that we're seeing now is there is more fluctuation quarterly in the tax rate particularly because of the discrete benefits that we get related to stock based compensation.

So what happened was Q3 came in below where we previously anticipated in terms of tax rate, but Q4 will be above what we previously anticipated.

So the full year tax rate, we're still looking at 20.5%, which is exactly what we articulated on the last call.

But because Q3 was lower, Q4 is now looking at around 17%.

Our next question is from Steve Marotta from CLK & Associates.

Just 2 quick questions.

As it relates to the $30 million negative hit assuming that there are no offsets, I understand that's a gross number.

Is that pre-tax or after tax?

Pre-tax.

Figured, okay.

The second question I had is with the exception of the tariffs that have already been announced, can you please remind us what your long-term EPS growth rate is and whether initial indications for next year, whether that should deviate significantly from that long-term growth either above or below given what you see in the marketplace as it relates to possible share gains, growth internationally, costing overseas?

If you could just frame it a little bit of what -- if again with the exception of tariffs, there should be any material deviation from that long-term growth rate.

Very creative way of trying to get me to give some guidance.

We've articulated a longer term goal of low double digit EPS growth.

Certainly not going to provide 2019 guidance as of now, but I would say again, absent tariffs, no, I don't see anything particularly unusual about '19.

Our next question is from Janine Stichter from Jefferies.

I want to ask a little bit more about the bricks-and-mortar business.

I think you called out solid gains there.

I think that's the first time we've heard that in a while.

Can you discuss a little bit more what drove it, whether it was traffic, ticket conversion, any specific product categories?

And then how should we think about that as leading indicator for wholesale?

I think the biggest driver in the acceleration there was AUR.

We've been dealing with AUR declines in retail for some time, particularly as boots were slowing down.

That was a big negative factor for us.

We did go to positive AUR last quarter for the first time in some time.

We were up 1%, but in Q3 we were up 5.5% in AUR.

And so that really -- that was very impactful.

That's helpful.

And then just on the cash usage, you raise the dividend after [reinstating] it earlier this year.

Anything we should think about in terms of changes in cash priority or how we should think about the dividend growing going forward?

No, I think that the priorities remain the same.

Obviously, we're going to continue to invest in our business wherever we see opportunities to get a good return.

We'll continue to look for strategic acquisitions.

Obviously, that's been an important part of the growth strategy for us.

And then, we're going to return capital to shareholders both in the form of the dividend, which we certainly would anticipate to grow that over time, as well as share repurchases.

As you know, we've been very active on that front over the last 5 years or so and we will -- we expect to continue.

Our next question is from Laura Champine from Loop Capital.

I was wondering if you could give us what you expect the annual impact on sales and your operating income to be from the shift in your relationship with Payless from wholesale to a buying agency model.

Again, I prefer not to give the sales number because we don't disclose sales to any one customer.

But I will tell you the operating income impact is -- there is no operating income impact.

This is just geography on the income statement.

Our next question is from Tom Nikic from Wells Fargo.

I wanted to ask about the Schwartz & Benjamin business.

I know you said that it was down because you were lapping an overabundance of our price sales last year.

And I think you've had some turnover of the team there.

And can you just talk a little bit about that business and if you view that as a growth driver next year or sort of what the plan is for that business excluding Anne Klein?

Yes, yes.

We have -- you've correctly point out, we've made a quite a few changes there in terms of the senior leadership team, both in terms of management as well as design.

We feel very good about the team that we have in there now.

We're still -- we actually adding another key player who's starting a week from yesterday.

And then I think we'll pretty much have rounded out the team there and we remain very optimistic about growing this part of our business.

We think it's a really strong foundation to go after both branded and private label business that targets that more traditional women's customer and some of the higher prices -- higher price points than where the balance of our business is.

And you said excluding Anne Klein, but we're also very excited about Anne Klein.

I think that that's going to be a nice profitable business for us.

And hopefully, we'll layer on additional brands and businesses beginning next year.

And just one more follow up.

Just as far as another brand that's been a topic of conversation.

I don't think there was any commentary around Dolce Vita on this call.

If you could just give us an update there, that'd be helpful.

Sure.

Yes, we continue to see improvement there.

Obviously Dolce Vita went through a period where it was trending negatively in '17 and even in Q1 '18.

But we think that we've got that stabilized and are moving in the right direction.

We had the second quarter in a row of both top line and gross margin increases versus the prior year.

I think we're all the way where we want to be, but we're moving in the right direction.

And so we are very optimistic about '19.

Our next question from Chris Svezia from Wedbush.

I guess just to go back to the boots for a moment.

I know the ship dates were later for booties and boots.

And I'm just curious when you think about the improvement in Q4 from a revenue perspective, what are you implying in terms of the ability to chase or respond to any better than expected demand for Q4?

What's implied in that or is it just too narrow of a window to respond?

We are chasing into some products in the boot and booty category because we have had some good early selling there.

But that said, when you ship -- when you deliver the products later, particularly into the wholesale channel, it does shorten the window and it does limit the reorder opportunity somewhat.

So that's factored into our guidance.

I think it's really can't quantify it.

Update on -- I don't know if you had mentioned China, maybe I missed it, but just any color about what's going on there?

I know you're making some -- excuse me, some changes on product.

I know you're slowing down some of the store growth.

Just any update there in terms of what's going on what you see?

Yes.

We just now started to get some of the product delivered that we have created for China where we've modified some of our products, added some comfort features, et cetera.

And the early results, although again not a lot of -- it's very early, but so far so good with that.

So that gives us some optimism going forward.

Overall, I think it's a very similar story as to what we talked about last time, which is we're very encouraged by what we see online.

Most of that business is on Tmall, although we've now recently expanded to JV, VIP and Red.

And we're very excited about 11:11, which is obviously coming up soon.

And we're optimistic about continuing to grow the online business.

The offline business, it's been pretty mixed so far.

We've got some good locations, but we -- overall, we're not performing to our expectation.

And so we're as you said, we've slowed down the store openings and are going to really try to fix what we have and get the model right before we step on the accelerator there.

Last thing, just circle back on tariffs for a moment.

How quickly do you think you can get some of this pricing pass through the consumers?

In other words, when you step into next year, should we assume that you made a pricing adjustments, all adjustments on day 1 or is it just the lagging effect between store sourcing at China, still absorbing some of these cost increases that maybe by like Q2 you can start adjusting prices, selling into retail.

Just trying to get an idea of timing and flow as we think about how this unfolds on the bag side?

In terms of our increase in selling prices, yes, there will be some increases starting in Q1, but our expectation is that that would build over time.

In terms of getting price concessions from our factory partners, that's going to happen immediately.

And you feel pretty confident about getting that 10% that you talked about on the 25% that's coming on January 1?

Look, I think that was an example.

I wouldn't have given it if I didn't think that was reasonably achievable.

But it's a little early to tell you exactly where that's going to come out.

Our next question is from Sam Poser from Susquehanna.

This is Will on for Sam.

Ed, I just wanted to drill down a little bit more into the same-store sales in New York.

Are you guys seeing an improvement in your New York stores versus -- I know there were some pressure due to tourism, but just curious, any update there?

Unfortunately, New York is still been challenging.

In fact, in Q3, we were positive comp in every district in the company except for New York City.

So that remains a laggard unfortunately.

And just the second question, what's driving the e-commerce business?

So I think we've put a lot of initiatives in place over the last couple of quarters.

And as I talked about, we've really changed pretty dramatically our digital marketing strategies.

I think the free 2-day shipping thing offer is very significant.

As I said, we've been able to reduce discounting and focus more on this free and fast shipping.

We've also -- we're also doing quite a bit more in terms of social media advertising, social media marketing.

We've obviously got the loyalty program when we've now embedded the free 2-day shipping into our loyalty program.

And also, we used to have a incentive to sign the e-mail list.

Now that's been combined with the loyalty program.

And then most recently, what we're excited about -- now this doesn't show up in the Q3 numbers, but is this transition or migration to Shopify Plus.

That's been up for about a week now and we've seen an additional bump in sales, improved conversion.

I think the mobile experience is better.

We've also got some new payment options, something called Afterpay, which has been very successful in the first week.

So there's a lot of initiatives there.

And we think we've got some more coming that are going to continue the momentum.

Thank you.

At this time, I'm showing no further questions.

I would like to turn the call back over to Ed Rosenfeld, CEO, for closing remarks.

Great.

Well, thanks very much for joining us in the call.

We look forward to speaking with you on the Q4 call.

Have a great day.

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