Steven Madden Ltd (SHOO) 2013 Q3 法說會逐字稿

Good day and welcome to the Steven Madden third-quarter 2013 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Jean Fontana of ICR.

You may begin.

Thank you.

Good morning, everyone.

Thank you for joining us today for the discussion of the Steve Madden third quarter 2013 earnings results.

Before we begin, I would like to remind you that statements made in this conference call that are statements of historical facts constitute forward-looking statements to the meaning of the Private Securities and Litigation Reform Act of 1995.

Such forward-looking statements involve risks and uncertainties and other unknown facts that could cause actual results of the company to differ materially from historical results or any future results expressed or implied by forward-looking statements.

The statements contained here in are also subject generally to other risks and uncertainties as described from time to time in the Company's reports and registration statements filed with the SEC.

Also, please refer to the earnings release for information on risk factors that could cause actual results to differ.

Finally, please note that any forward-looking statements used in today's call cannot be relied upon as current after this date.

I would now like to turn the call over to Ed Rosenfeld, Chairman and CEO of Steve Madden.

Thanks, Jean.

Good morning, everyone, and thank you for joining us today.

Overall, we delivered solid financial results in the third quarter despite a difficult retail environment.

We believe that our ability to perform well during this challenging period is attributable to the strength of our diversified business mode, which includes multiple brands, product categories distribution and geographic territories.

Solid net sales for the quarter increased to 10.6% to $394.8 million, and net income grew 16.1% to $44 million, or $0.60 per diluted share.

Despite the soft retail environment, we remain on track to meet our sales and earnings goals for the full year 2013.

Our wholesale net sales in the quarter were $345.9 million, compared to $311.5 million in the prior year's third quarter, an 11% increase.

Our largest segment -- wholesale footwear -- was the clear stand out for the company in the quarter.

Wholesale footwear net sales $272.7 million up 19.2% from $228.7 million in Q3 2012 turning to it's broad base with 11% increase in our branded wholesale footwear and a 38% increase in private label footwear.

Within branded footwear, our two largest divisions -- Steve Madden Women's and Madden Girl -- each reported double-digit percentage increases in net sales, both benefited with gains with Macy's, where the transition of Steve Madden to the [impulse] department continues to pay dividend.

Strength of the flag ship brand extended into other categories as well, as Steve Madden Men's and Steve Madden Kids each also increased double digits on a percentage basis, compared to the prior year.

Finally, our internal national business was outstanding in the quarter.

International net sales rose 25% in the quarter on the strength of 41% increase in sales to international partners but particularly robust increases in China, Dubai and Mexico, combined with a solid double-digit percentage gain in owned operation in Canada.

As I mentioned private label wholesale -- but were also -- had an extremely healthy increase in the quarter significantly exceeding our expectation due to very strong reorder business.

We recorded big gains with [just that] Target, Payless and Wal-Mart.

Of course, while this business is a significant contributor to profitability and generate excellent returns on capital because there is no inventory investment, it carries a lower margin so the 38% increase in this business did have an unfavorable impact on overall gross margin.

Last thing I want to comment on with respect to wholesale is where is the strong performance of our newer brands.

As I said before, these brands are small in size that [lays] to our overall business but they are an very important part of our growth strategy.

Freebird by Steven, our higher priced boot line manufactured exclusively in Mexico has been getting a lot of buzz, and we're seeing strong consumer acception of the product at retailers including freepeople, Bloomingdales and Nordstrom.

(Inaudible) also grew significantly in the quarter with a successful collaboration with the blogger, Man Repeller, and strong gains at Bloomingdales [shop box] and [mid] markets.

Lastly, Mad Love continues to exceed expectations at Target, as it has consistently, since it's launch at the exclusive brand for Target beginning in last year's fourth quarter.

Now, onto the wholesale accessories, which was considerably more challenging in the quarter than wholesale footwear.

Our wholesale accessories net sales $73.3 million in Q3 compared to $82.8 million in the prior-year period.

The largest factor in the sales decline was our cold weather accessories business.

As we expected and discussed on the Q2 earnings call, retailers pulled back on early receipts of merchandise in this category after two consecutive years of warm fourth quarters and poor retail performance of cold weather goods, until we saw a decline in our [sageon] business in Q3.

In addition, we had a sales decline in fashion belts, a category which has been tough all year.

And, finally, we were down in private label handbags.

Now, the decrease there was a function of timing of shipments, and we expect that business to show a strong gain in Q4.

On the bright side, our branded handbag business grew over the quarter.

The highlight was the Steve Madden division, which recorded 17% net sales increase versus the prior year period.

Net sales of Betsy Johnson handbags rose 5%.

So, we are pleased with -- in light of the fact the bulk of the shipments of our major holiday gifting program to Macy's were shifted from Q3 last year to Q4 this year.

Importantly, as we look ahead to fourth quarter, we expect an wholesale accessory segment to rebound and return to year-over-year growth.

We planned cold weather accessories and belt conservatively.

The year-over-year handbag performance should improve due to shipments that moved from Q3 last year to Q4 this year.

In our retail division, net sales $48.9 million, a 7.8% increase over the $45.3 million in net sales recorded in last year's third quarter.

Increase was driven by an expanded store base, as comparable store sales were down 3.5% in the quarter.

No secret the mall traffic across the industry was sluggish during Q3.

So, we were not immune to this, as we saw a double-digit percentage decrease in traffic in our stores; did however see positive comps and strong overall results in our outlet business.

We opened four locations in the quarter, bringing our total to 16 outlets; double the amount we had a year ago.

We also opened one Steve Madden full-price store and closed our port store, bringing us to 117 company operated stores at the end of the quarter, including three Internet stores.

Turning to other income, our commission and licensing income net of expenses was $4.9 million in Q3 versus $3.9 million in last year's third quarter.

First cost commission income, net of expenses, was $3 million in the quarter, compared to $2.2 million last year's third quarter.

Excluding this charge, first cost commission income was essentially flat to the prior year.

charge -- $1 million charge for bad debt related to bankruptcy of Bakers' footwear.

Last year's figure included a $0.9 million

last year's third quarter.

Licensing royalty income, net of expenses, was $2 million in Q3, up 14% from $1.7 million in That growth was driven primarily by the new Betsey Johnson dress license.

Consolidated gross margin in the quarter was 35.4%, as compared to 36.8% in last year's third quarter.

Wholesale gross margin was 31.9% versus 33.3% in last year's third quarter.

The decline was driven primarily by the out size growth in the lower margin private label footwear business.

In fact, if we exclude our private label divisions, our wholesale gross margin was flat to last year.

Gross margin in the retail division was 60.2% compared to 60.7% in the third quarter of 2012, as we increased promotional activity due to soft retail environment.

Operating expenses were $76.5 million in the third quarter or 19.4% of net sales compared to $73.6 million or 20.6% of net sales in the same period last year.

The 120 basis point improvement reflects strong expense control and operating expense leverage on the increase in sales.

Operating income in the quarter totaled $68.1 million or 17.2% of net sales.

Last year's third quarter, operating income $56.4 million or 15.8% of net sales, and included a $5.1 million impairment charge and $0.9 million -- [$1] charge for bad debt both related to the Bankers' bankruptcy.

And income for the third quarter of 2012 included the -- we have four mentioned charges for impairment and bad debt related to the Bankers' bankruptcy.

At an after-tax basis, these charges negatively impacted net income by $3.7 million or $0.06 diluted share in this third quarter of 2012.

And net income was $44 million or $0.66 per diluted share compared to $37.9 million or $0.57 per in the third quarter of last year.

versus 35.4% Effective tax rate in the quarter was 36.5% of net sales.

or 17.5% Excluding these charges, operating income for the third quarter was $62.4 million per diluted share.

Turning to balance sheet, as of September 30, 2013, we had $234.7 million in cash and marketable securities and no debt.

We ended the quarter with inventory of $99.7 million versus $84 million at the end of last year's third quarter due primarily to the growth in business as well as earlier receipt of booties compared to last year.

Out inventory turn for the last 12 months was 10.3 times.

CapEx in Q3 was $5.8 million, and during the quarter we repurchased 1,042,644 shares or $36.7 million.

As for guidance, for fiscal 2013 we continue to expect net sales to increase 6% to 8% compared to fiscal 2012.

We continue to expect it to [alluded] EPS to be in the range of $1.97 $2.03.

Conclusion -- while Q3 2013 was a challenging quarter in many respect, we are pleased to have achieved solid overall financial results.

Moreover, we believe this quarter demonstrated the strength of our flagship -- Steve Madden brand.

We had double-digit percentage gains in our Steve Madden Women's, Steve Madden Men's, Steve Madden Kids, Steve Madden International and Madden Girl wholesale footwear divisions, as well as in Steve Madden accessories.

In a tough retail climate, our core brand is gaining market share.

In addition, we made progress on a number of our key growth initiatives, including development of new brands, outlet store expansion and international growth.

Putting this altogether, we are well positioned as we move into the balance of 2013 and beyond.

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

Thank you.

(Operator Instructions) And we'll take our first question from Erinn Murphy with Piper Jaffray.

Great.

Good morning, and thank you for taking my question.

Ed, I was just hoping if you could elaborate a little bit more about the current environment?

I mean clearly traffic had been a headwind for a number of companies out there.

Could you just maybe speak first the change you saw in traffic throughout the quarter?

And then as we think about how you're planning your business for the fourth quarter, what are you seeing in the market right now?

Are you seeing traffic and [select] as the weather has gotten cooler?

Just maybe help us kind of think about the context for the environment currently.

Thank you.

Sure.

Well, as you know, traffic has been a challenge all year.

But Q3 was the weakest quarter in terms of year-over-year traffic in our own retail stores of the year.

In terms of the sort of the change over the quarter, we were -- the weakest month was actually September.

So, it got worse in September.

However, in October we have seen a meaningful improvement.

In fact, the quarter-to-date traffic is better than the traffic trend in either of the first three -- in any of the first quarters of the year.

So, as the cold weather has come, we've seen a nice improvement there.

Okay.

That's very helpful.

And then in term of -- I mean as you think about the improvement, is there a specific category you're starting to see lift from a conversion perspective?

Or how should we just think about the category performance currently in the market or in your business, if you will?

Yes.

Over the last few weeks, we've seen a real nice improvement in booties and in tall shaft boots.

So, that's definitely where we've seen the velocity pick up.

Okay.

And then I guess in terms of just the inventory levels.

We've a little heavier at the end of the quarter.

And I apologize if I missed this on the prepared remarks.

But could you just parse out how much was kind of new stores building into kind of your holiday plans and other components in that we need to be aware of?

Sure.

In terms of the inventory, maybe we could talk about wholesale then retail.

Wholesale was essentially in line with -- the wholesale -- the increase in inventory of wholesale was just a little bit greater than the wholesale sales growth, and that's primarily due to us bringing -- having a bigger position on our number one item this year.

Troopa was the number one item last year and this year.

You know Troopa, incidentally, is going to be even bigger this year than it was last year, and we're very pleased about that.

We were really chasing that product last year.

This year we were more prepared for it.

And in fact, we've gone open-stock replenishment on that item, and which obviously requires us to carry a little bit more inventory but also generates a lot of whole price sales with limited mark on liability.

And that's -- we feel comfortable with.

The wholesale is pretty straightforward.

Retail is really where the increase in inventory is greater than the increase in the business.

And that's really a function of booties.

So we brought in a lot more booties earlier this year than we did a year ago.

We were planning to be higher in that category.

Last year, we felt we were light in that category early in the season and we wanted to be prepared because we believe in that category again about what happened in our retail stores.

So number one, we are planing to be a little bit higher in that category.

But then also fall broke late -- the fall styles broke for us in our own retail stores.

So while we were doing quite well with booties in our wholesale channel -- people like Nordstrom and Dillards, remember in our retail stores we have this very heavy exposure to the North East, in particular to New York City.

And so in August and September, given the fact that the weather was -- particularly in September very warm in that region -- and also I think because spring broken late.

So people were maybe not ready for boots and booties yet.

But anyway in our stores, we were still selling a lot of sandals and open-up footwear at the tail end of Q3.

So the booty inventory looks a little elevated at the September 30 balance sheet date you're looking at.

The good news is once we got into Q4 -- as I said that category really took off.

And so, we've really started to move through those goods and feel very good about inventory position in that category in the retail stores now.

But net-net, we're in a good position now in the booty category.

You know I should also add that we did of course look to adjust the (inaudible) that we had for fourth quarter in booties downward a little bit when we had the slow start to that category in the retail stores.

And so that's the benefit of our quick-turn model, which enables us to be nimble.

That's really helpful.

And just one clarification.

Just -- can you remind us what the Hurricane Sandy impact was last year as we think about this time?

Thanks.

Yes.

And I think we said about maybe [a penny] in our earnings last year.

Yes, sure.

We think it was most impactful again because of the exposure to the northeast [in our recall], so it's impactful to our retail business.

and we think it hit us by about 200 basis points in comp store sales.

Okay.

Thank you and best of luck.

And we'll take our next question Kate McShane with Citi.

Good morning.

I wondered, Ed, if you could give more color on wholesale sell-through versus your comp store sales trends that you saw at retail.

Was it a similar negative sell-through?

And if not, can you help us reconcile that?

And is one channel doing better than the other?

And then just a follow-up question to that is just if there is any additional inventory, which it sounds like there is not that much -- now how do you address that over Q4?

Sure.

In terms of wholesale versus retail, I think it really goes a lot to what I was talking about the fall styles breaking later in our stores than in the wholesale channel.

So in wholesale, we were getting very good sell-through on the booties and even boots in the back half of Q3.

If you think about it people like Nordstrom, Dillards, et cetera, they don't have the same exposure that we do to New York City in the Northeast.

Remember, in Steve Madden retail stores, we do about 30% of our business just in New York City in retail.

And then, we add in New York, New Jersey, et cetera, you're talking about north of 40% of the business.

So anyway I think that's really the difference between the sell-through that we saw at wholesale and the somewhat weaker comp store sales trends that we had in our stores.

But as I pointed out, once we got into October, those categories really picked up in the retail stores.

not any big variances there.

We actually had a good performance in the department stores, good performance in mass merchants with our private label.

We're doing well with the shoe chains, et cetera.

So In terms of different channels, I'm not seeing any major difference across channels.

And then in terms of inventory, as I said I actually think that we're in pretty good shape.

We had the booties in a little bit earlier this year but they are moving very well now.

You know we do expect the retail -- I would say in retail to be a fairly promotional environment this year in Q4.

And we were [allowed at more] promotional in Q3 than we were a year ago.

You saw the 50 bases decline in our retail gross margins.

Okay.

That's great.

Thank you.

And just one more question, if I could sneak it in.

With the private label, are we going to lapse back at some point?

How many more quarters can we expect to have some growth margin pressures from a private label mix?

I hope not.

I hope it keeps growing just like this.

So we're going to try to grow that business.

So we don't view that as a negative.

Okay, thank you.

We're generating lots and lots of business capital there.

So, thank you.

Thanks, Kate.

And we'll take our next question from Camilo Lyon with Canaccord Genuity

Thanks, Ed.

Good morning.

Ed, if you could give a little more detail on the components within your retail stores of the comp breakdown, specifically around AUR, and if there was anything that also influenced the -- what you saw from that metric.

Sure.

It's a good question because while the traffic was weak -- and I did say it was the weakest in Q3 -- traffic is weak all year.

We've really made that up in the first part of year through increased conversion and a little bit of AUR increase.

And we did have dramatically improved conversion again in Q3.

But as opposed to the AUR improvement that we had in the first half, we had an AUR decline in retail in Q3.

So I think it's a good thing to talk about.

Where did that come from?

Number one, I think it was the -- we had an impact from fashion athletic category.

Last year was really the height of the fashion sneaker trend in our stores.

And we were selling the wedge sneakers.

Our AUR on that product was over $100.

This year, we're selling a fair amount of units but the AUR is something like $40 less in that category so that had a significant impact.

So we had an AUR decline in that category.

year, that bling is not performing that way it was.

Then in the casual and tailored part of the business, we also had a decline because there was a -- a lot of smoking shoes, other kind of flat last year with a lot of rhinestones and bling that it's the type of embellishment -- to me has a higher AUR.

Again, I'm beating a dead horse there though, the booties have picked up dramatically over the last few weeks.

Now, we were hoping to make that up with booties.

But as I pointed out because fall broke late in the stores, August -- September -- we are still selling a lot of sandals, open-up footwear, which is lower AUR, not as many booties.

And so, we were not able to make that up and we had a 4% AUR decline in the retail stores.

Does that present a favorable comparison for the fourth quarter or is it more apples to apples on the AUR portion?

I think we still could be down a little and particularly because we are expected to be somewhat promotional, and we want to make sure that we're competitive with everybody else out there.

Could you just talk about the number of table doors that you're in and the number of table doors that you think you can still get into in the fourth quarter and then what that compared to last year?

My next question is on the Macy's improvement that you're seeing.

Okay, great.

Yes, sure.

We're at 260 table doors for fall.

I believe we were in 230 for Spring.

And I would have to look back and see what we were a year ago.

But the performance there has been very good.

They were pleased with our performance in the table doors.

We had a smaller group of what they were calling little table doors, which have performed very well, which are going to graduate now -- the full table doors.

And so overall, we're very pleased with the performance.

And again what's nice is it's not just what happened to Steve Madden but you're also seeing Madden Girl grow.

as it doesn't compete with Steve Madden in the same division -- same department rather.

That's great.

What is the total number of doors that you can have a table door presentation in?

I'm sure it's not all doors but I'm sure there's -- it's more than 260.

I -- it's hard to know.

I mean we only want to do it where it's going to be successful.

So, frankly, I don't think there's a huge focus on increasing the number of table doors right now.

It's just making sure we get the right price -- and they're perhaps expanding the assortment of those existing doors.

Okay, great.

And then just -- my final question is on accessories portion.

Could you give us what the dollar impact was from the shift - out of Q3 and what we should expect for Q4?

You know what?

I don't know that dollar number off the top of my head.

say to the tune of about low-to-mid single digits on a percentage basis versus last year.

But as I said, we expect we can be year-over-year positive in that division; I would

Total growth for the category in Q4.

Overall wholesale accessories.

Got it.

Thanks so much.

Good luck in the holiday season.

Thanks.

And we'll take our question from Scott Krasik with BB&T Capital Markets.

Yes.

Hey, thanks for taking my question.

Just a couple questions on the guidance for the year.

The sort of range 4.5% to 12% sales, $25 million, Sir, what would be the swing factors here at the low end -- to get to the low end or the high end?

I mean the biggest swing factor is always going to be retail.

You know we have much better visibility on the whole sale our course because we have the order file.

Retail has been choppy this year, so that's going to end.

Whenever our comp comes out that's obviously going to -- there's potential variance there.

I don't know about $25 million.

We probably could have narrowed the range a little bit around the midpoint.

Okay.

And then did you have a comp implied in the guidance?

I'd just say that I missed it.

We don't disclose that.

Okay.

And then I think you had previously guided to like 50 to 100 basis points of gross margin improvement for the year, and then maybe you said it'll be a little towards the low end.

Given what happened this quarter, do you still think you can grow gross margins by over 50 BPS?

No, no.

Okay.

I think you have to look for it to be flattish and maybe even a touchdown based on what we've seen.

Okay.

So then just make that up in SG&A?

Keep in mind there's been sort of three changes here.

Number one, retail gross margin is just coming in lower than we anticipated.

We had to be a little bit more promotional.

But number two, our retail sales are lower, which is a mix negative.

And number three, our private label wholesale revenues are much higher, and that's also a mix, in terms of the gross margin.

Thank you.

An then just last -- how do you think about this hyper growth in private label, just given the market share at least that we see at Target, for example.

I mean can you still continue to grow at these very high rates?

And what would be a correct rate of growth then for wholesale footwear in the longer term?

Yes -- I mean look, we're very pleased with how much market share we've been able to take here.

We're going to Continue to focus on that business.

I don't -- certainly you have to expect that that business is going to slow down at some point, given the -- as you point out, the big market share that we've all ready taken in some of the big customers.

But, yes, yes, it's king of slow but I'm not -- I can't give you a long-term number.

With just the total wholesale footwear, are you targeting mid single digit, high single digit growth rate?

For what period?

Just in general.

I mean based on where you sit with the department stores today, where do you sit with the private label customers.

How should we think about business growth?

Yes.

So there's medium term.

I think mid to high singles is a good target for us.

Awesome.

Okay.

Thanks, Ed.

Thanks.

And we'll take our next question from Taposh Bari with Goldman Sachs.

Hey, good morning.

Good morning.

So, I just wanted to, I guess, get some more color around the wholesale trends.

It seems like a lot of moving parts there.

So just correct me if I am wrong; I just wanted to kind of lay it out.

It looks like your brand forward business is on plan' private label footwear, better than expected; accessories, you're got a bunch of timing delays with [stage on] and some of the private label programs.

It seems like the only thing that's really missed on the year is fashion belts.

My -- am I thinking about that correctly?

Yes, I mean cold weather accessories is also down but that was something we anticipated.

Yes, and I guess you're going to get some of that back in the fourth quarter, right?

Yes.

Some of it.

But I still expect that our say [stage-on] business to be down modestly n the fourth quarter not the same degree as it was in third.

Okay.

A guess the question on -- sorry go ahead.

I was just going to say the shifts were really more in the handbag business.

Okay.

Got it.

I guess what I'm trying to get at is -- I mean it seems like you're pretty optimistic around the footwear business, just kind of -- trying to better understand why not take revenue guidance up, if a lot of this is shift related , as just conservatism on your end as of -- and I guess -- I don't know if you're providing wholesale footwear revenue guidance for the fourth quarter or growth -- I know you can have accessories but can you give us an idea of footwear?

Because if I try to get to your [6% to 8%] growth for the year, kind of introduce the pretty wide set of expectations for wholesale footwear for the fourth quarter?

Yes.

Just -- number one keep in mind retail is below our forecast for Q3, and we anticipate it will be below our previous forecast for Q4.

So that's - we had to make up some of that in wholesale footwear.

And then in terms of sort of wholesale footwear growth for Q4 -- is that what you're asking?

Yes.

In and around 10% is a reasonable target.

Okay.

Why would it be down from the [19%] you just did)

Nineteen is not a sustainable rate.

We had -- for instance in these private labels, we had huge reorders that hit -- to tail end of Q3.

We 're not anticipating we will repeat in Q4.

Got you.

Okay.

Moving along, just the cadence of the comp.

I know you Mentioned September was a pretty -- so I guess just going back, I think back -- when we last heard from you in July, you said that things were mixed.

Can you talk about how things progressed throughout the month of -- I think you mentioned that September was the worst but was August negative as well?

And I just to kind of -- I know you referred to traffic but are you technically comping positive here in the month of October?

Yes.

So, in terms of the progression in the quarter, in terms of comp -- July was down, August was close to flat, and then September was down more than July.

Then in terms of quarter to date comp but we're not going to disclose that.

Okay -- and last one for you, Ed.

These capital allocations -- you've accelerated the pace of buybacks every quarter this year.

Fourth quarter is historically your largest cash-generating quarter.

I guess how do we think about your capital allocation program at this point in the year?

At this point, barring anything unforeseen, I think you'll see us continue roughly at the pace that we were at in Q3.

Okay.

Thanks a lot.

Good luck.

And we'll take our next question from Jane Thorn Leeson with KeyBanc.

Hi.

Thanks for taking my question.

A lot of them have been answered but I just wanted more details or clarity on your hand bag growth trajectory.

Okay.

What specifically are you interested in?

Well just where there's more opportunity.

I know that was likely the biggest percentage of drivers just for the company in general.

Yes, yes.

So as we said, the bread of hand bag piece did well in the quarter.

We pointed out Steve Madden was up 17% so we continued to have nice momentum there.

Betsey Johnson was up 5%, and again that was particularly good because some of our -- or most of our shipping of our big holiday gifting program to Macy's was shifted from Q3 last year to Q4 this year.

So, you should see that both accelerate in Q4 in Betsey Johnson.

And the only thing that was down in hand bags was private label bags or the driver -- actually Big Buddha was down, I apologize.

Big Buddha was struggling a little bit there.

We made some management changes there and we hope to get that turned around.

I think we have been of a product issue there.

But in private label, we were down but that's really a function of the timing of shipments.

Again, we were up big in Q2 and private label would be up big in Q4, and private label hand bags, so nothing to worry about there.

Okay, and the [south retail] is the same as what it's been?

Yes.

Actually -- honestly Betsey I think is the strongest right now.

Betsey is performing very well in the region.

Okay, great.

Thank you.

And we'll take our next question from Sam Poser with Sterne, Agee.

Hi.

Good morning.

A couple questions.

Number one, with the private label business, can we assume that the shortfall in the gross margin is made up by leverage in the SG&A there because you don't touch it so the -- so from an operating margin perspective, it really -- it sort of balances itself out?

For the most part.

I mean yes; the operating expense structure is much lower in private label.

It probably still mixes you down a little bit in operating margin

But it's not as bad as what that gross margin differential would indicate?

That's right.

Okay.

And then secondly, the department stores, specifically Macy's.

I mean we've seen a lot of promotions out of the department stores these days, and because of the way their quarter ends a month after yours, the --give-me-mark down-money mode goes in effect in October and then it goes back to effect in January, and I think there are more promotional than what we have seen.

Have are you -- are you planned sufficiently for them stepping up, given the promotional activity that was more than it was a year ago?

Yes.

I mean keep in mind that's something that we are monitoring with them every week.

There are no surprises at the end of the season.

You know we were working very closely with them at that and we, of course, take appropriate reserves at the end of the quarter for whatever our mark down liability is with those guys.

So, we could assume your reserves at the end of Q3 were higher than you would have expected going into the quarter, given what's been going on as of late?

Yes.

I would say that is right.

And that's one of the reasons for the dip down in that gross margin as well as I think?

Yes.

But it's much more impactful with the private label thing.

Okay.

And then -- I mean if they do step -- I mean that's sort of a moving target.

If they start stepping on the gas and get more promotional, I mean it's sort of everybody pays there.

So how do you handle the situation of that nature if it gets a little more promotional out there in the marketplace, as we get closer to Christmas and so on?

Well, I mean -- we do have some leverage with them.

We're an are important vendor with almost all of these guys, and there's a negotiation about that, particularly if we have items that are -- and products that's moving well and it doesn't necessarily require additional markdowns to push -- to get it out the door, then that becomes a negotiation.

Okay.

Thanks, thanks.

And lastly, you're not really talking about 2014.

But just from the gross margin perspective, are we going to see this -- now that everything seems to have anniversaried each other, are we going to see the gross margin in the flattish range going forward, maybe up a little bit because of the increase growth of private label you got retail getting better but seeing more of the EPS growth coming from SG&A leverage?

Yes.

I mean I really want to postpone most of the discussion next year to the next call.

But generally the way you're are speaking about -- the way you're thinking about it makes sense.

Thanks.

Good luck.

Thanks, Sam.

And we'll take our question from Steve Marotta with from CL King & Associates.

Good morning, Ed.

As it relates to the private label mix, it's about 10% of overall consolidated sales.

Is that accurate?

Private label mix is -- no, it's much bigger than that; say 25% something like that.

Of total consolidated sales?

Yes.

Okay.

And as it relates to the direct sourcing initiative, can you talk about where you are there and where you were a year ago and where you might begoing on the legacy product?

Sure.

Yes.

We're somewhere between 20% to 25% of the legacy product going direct, which is about 10% higher than where we were a year ago, which is essentially right on target, and we continue to be very pleased there.

We think we're getting more consistency in quality and delivery.

We think we're able to have much better monitoring of the factories in terms of their compliance with the social and environmental standards that we require, and we do think there's some gross margin benefit that we continue to get.

The one caviat there is that we have had to step up what we spend in terms of choosing people and people really feet on the grounds to get to the factories and make -- and monitor them for social environmental compliance, and that is chewing up a little bit of that gross margin benefit.

And where do you expect to be next year?

That we'll add another 10% next year.

Great.

And, lastly, can you comment on e-commerce in the third quarter?

Or did it trend similar to your company own door but e-commerce is national so it didn't trend closer to the wholesale?

No.

E-commerce was down modestly in the quarter It was actually more similar to our performance in the retail stores.

And we're having a little bit of a traffic challenge there as well, so we've -- we started to do some additional things to try to drive traffic, some additional online marketing, et cetera, and we actually changed our shipping offer a few weeks ago to -- went to free shipping with no hurdle and that's really -- started to drive some nice traffic.

We've seen a really nice pickup recently on our website.

And then, I think the most important thing going on there is that in January, where we will launching our e-commerce platform, and that's going to do a whole bunch of things.

It's going to be -- enable us to improve the experience a lot on mobile and tablet, we're going to be able to offer expedited shipping, we're going to have better integration with our social media platforms, the product imagery is going to be a lot better, we have 360 degree views, we have gift certificate functionality, all sorts of features and functionality that we think will help give us a little bit of -- or help drive improvement in that business.

That's terrific.

Thank you.

And we'll take our next question from Jeff Van Sinderen with B. Riley Investments.

Hi.

Good morning, and thanks for taking my question.

Ed, I know you spoken to Macy's and just wondering what you're hearing from some of your other retail partners on their cadence to their business, sell-throughs of your product versus competitors maybe?

Does it seem to mirror what you're in for Macy's?

Does it mirror what you're seeing in your retail stores, so how does it differ?

Just trying go get a sense of that.

And then also anything you can give us in terms of what you've been seeing most recently in wholesale orders?

Any more color there?

Thanks.

Yes.

Well, I mean, I think, overall, the retailer sentiment is somewhat cautious.

Everybody has been dealing with some challenging traffic trends.

Spring was tough season.

Back to school wasn't great.

So you've had a -- it's been a somewhat tough year.

The good news is everybody is reporting that they're feeling -- that they're seeing better trends over the last few weeks.

And particularly within footwear, you're seeing a nice improvement in booties and boots.

So that gives people some hope.

But overall I would say it's -- the retailers are fairly cautious.

Okay.

And then just to clarify on the promotional levels because I know that's also been a topic of discussion this morning and obviously you expect Q4 to be promotional but do you think that overall the environment will be more promotional than last year?

Do you expect to be more promotional than the last year?

Just getting to get a gauge on that or if you're thinking more along the lines that's kind of flat promotional levels or what have you.

I would say flat to up.

In our own stores, we're expecting to be slightly more promotional than we were a year ago.

And I think we're bracing for that in the wholesale cam channel as well.

Okay.

That's helpful.

And then finally maybe you can just touch a little bit more on international and what's driving the growth there in the outlook there?

Yes.

International is something we're really excited about.

As you know that's perhaps our -- in our minds, perhaps our biggest long-term growth opportunity.

And we're doing -- we had an excellent quarter there.

We're doing really well, with our partner in Asia, which we think is probably our biggest opportunity, at least on the partner front.

Our partner there is GRI.

They had 32 stores at the beginning of the year and I think they're going to end with 50 -- free-standing Steve Madden stores, and the stores are comping very, very well.

We're really pleased with what we're seeing there.

We're obviously seen big growth with our partner in the UAE and particularly in Dubai, of course.

And then we're also very pleased with what we see in Latin America.

Mexico in particular had a great quarter most recently and we're happy there.

That's all on the partner front.

And then Canada is doing very well, also.

Now, we added another store in Canada, and so we've now doubled the store base from seven to 14 since we acquired it.

That store opened in Vancouver, and so we're getting about -- I think retail was up north of 30% in Canada in Q3.

Okay, great.

Thanks very much and good luck for the holiday.

Thanks, Jeff.

And we'll take our next question from Danielle McCoy with Brean Capital.

Good morning.

Thanks for taking my question.

I was wondering if you can give us a little bit of an update on how loungewear, watches and jewelry is doing?

Sure.

Loungewear -- the sell-throughs have slowed up a little bit, so we're trying to work with the licensee to figure out what to do there.

Watches -- jewelry hit stores in Q3, and the initial reads there have been very good, also from the department stores, and also we're pleased with how it is doing in our own stores.

It hit our own stores a month ago and we've gotten about 20 doors and were pleased with the initial reads there.

And then watches just hit the wholesale channel at the beginning of this month.

We don't have great reads there yet but we also put it online for us and in one store.

But that's brand-new

All right.

Great.

And I guess an update on how you guys are viewing the M&A market.

Well, we're always still out there looking.

But there's nothing to report at the moment.

Okay.

And then just lastly -- housekeeping question.

Tax rate going forward -- it was higher in third quarter.

And then how should we look at it for the rest of the year and into next?

Yes.

I think [36.5] was -- in Q3 is the right rate to use for now.

All right.

Great.

Thanks, guys.

Good luck

And we'll take our next question Mike Richardson with Sidoti Research.

Yes.

Good morning, Ed.

But most of my questions have been answered but I have two quick ones for you.

Has there any pickup in cold weather accessories in October?

Is that mainly just the boots and booties?

And then if you could just let us know how much is left on that share repurchase plan, I would appreciate it.

Thanks.

Sure.

Cold weather accessories has picked up in terms of sell-through over the last few weeks, so that's something we're happy about.

And then in terms of share repurchase, I think we have around $90 million left right now.

Great.

Thank you.

And we'll take our next question from [Chris Eva] with Susquehanna Financial.

Hi.

Hey.

How are you?

Good morning.

Good morning.

So I have a quick question.

I just want to understand something just on the boot business and how you're thinking about it for the fourth quarter.

I mean obviously , it seems like you sold them pretty well.

And I was curious what your thoughts as it pertains to reorder activity.

As you think about fourth quarter obviously -- to some degree the business has picked up so I'm just sort of curious how you're thinking about that for your brand for the fourth quarter?

Up versus last year down or flat versus last year?

No, I think it will be in line with last year.

We had a pretty good reorder activity last year, and we've got some nice reorder business this year as well, particularly with some of our big booty items.

And we've also some tall shaft boots that are doing very well and had become reorders.

Okay.

Do you feel like retailers are just under inventoried o tall shafted -- just [give them one had] last year and coming back a little bit to replenish on that side?

Yes.

I think there was -- the [weatherings] that were done well in that category so far this year I think is because -- is a little bit supply and demand.

Everybody has these booties and there was not as much supply of tall shaft boots this year from the market.

Okay.

And then -- I know it's not a big piece at the moment but just given some folks on boots but any color on the trust business?

I know you guys have called out.

Your dress business has been pretty good.

There's been some movement at the casual I think on the retail side but just any thoughts about maybe dress business you got?

Yes.

Dress is good for us.

That's -- in fact I should have mentioned that earlier because that's really -- other than boots and booties that is most important category for us right now.

We're doing very well with that.

We continue to do well with anything with ankle interest, strap around the ankle or something like that, both platform and single sole are working for us.

So we're very pleased with what we see in the dress category.

Okay.

And then -- but just lastly -- I don't know what color you can add to this.

But just as you think about Spring in your conversations with retailers, given what happened this year just slow start to Spring.

How are they thinking about product delivery for Spring coming into this season versus last year?

Are they willing to hold off a little bit, wait and see, or is it kind of business as usual?

Just any color around that.

I think, yes, they it's basically business as usual.

Although, I would -- I will repeat that I think that overall the retailers are somewhat cautious right now, given what has happened this year.

Okay.

All right.

Well, thank you very much, and all the best around the holiday.

Thank you.

And we'll take our next question from Camilo Lyon with Canaccord Genuity.

Thanks, and just a quick follow-up.

Did you actually give the most -- the gross margin degradation from private label?

So I have that -- what the impact was to the consolidated.

The mix -- the increase or impact from the increased -- the mixed impact from the increase in private label footwear was 120 basis points impact to the consolidated gross margin.

Okay.

So that really speaks to the main driver of it, not so much any change in how the department stores are viewing mark down allowances from you?

No, that was a very minor factor.

Great.

And then just lastly, on the dress category.

The strengths that you've seen there.

Are the -- are your wholesale partners buying into that strength?

Or is that just strength that you're seen in your retail stores that the department stores are still hesitating on committing to orders in that category?

No, it retail and wholesale, and the wholesale customers are -- they're on it.

Great.

Thanks a lot.

Good luck.

Thank you.

And we'll take our last question from Sam Poser with Sterne, Agee.

Thanks again for taking it.

You talked about the different trends that were going on last year at -- are there less newer trends this year than there were a year ago?

I mean how is that looking?

And it sounds to me that the comment that you mentioned that everybody's got the booties this year and stuff.

Is there a search for the big idea?

Or is everybody on one big thing rather than a broader base of larger ideas a year ago?

Does that make sense?

Yes.

I would say that compared to last year, there's probably a little bit less newness or fewer trends to capitalize on that's why we really like the dress -- what we are seeing in dress -- because that's something that wasn't good last year that's new this year.

And then we've got some other things we we're working on that we feel pretty good about that's gotten good recently.

We've got a low profile sneaker and pony hair that we're going to be delivering in about a month to wholesale it -- we think is going to be unbelievable.

We've got very strong reads on that.

So there are new [items] that we're working on.

But I think that you're right for the season overall, there was probably a little bit less to work with in terms of trend.

Thanks for taking my question again and have a great one.

Yes

And that concludes our question-and-answer session.

I would now like to turn the conference back over to Ed Rosenfeld for any closing or additional remarks.

Great.

Well, thanks everybody for joining us, and we look forward to speaking with you on the fourth quarter call.

And that does conclude today's conference.

We thankyou thank you for your participation.