Steven Madden Ltd (SHOO) 2021 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Steve Madden, Ltd.

Third Quarter 2021 Earnings Conference Call.

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

I would now like to turn the conference over to your host, Danielle McCoy.

Thanks, Phyllis, and good morning, everyone.

Thank you for joining our Third Quarter 2021 Earnings Call and Webcast.

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

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

Such statements may include discussions involving the ongoing COVID-19 pandemic, including its current and expected impact on our business operations and results as well as the company's plans to respond to such uncertain and dynamic events.

Because these statements are based on current assumptions and expectations, they involve known and unknown risks, 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 after today's date.

We disclaim any intent or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under applicable law.

The financial results discussed are on an adjusted basis, unless otherwise noted.

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

Joining the call today are Ed Rosenfeld, Chairman and Chief Executive Officer; and Zine Mazouzi, Chief Financial Officer.

With that, I'll turn the call over to Ed.

Ed?

Thanks, Danielle.

Good morning, everyone, and thank you for joining us to review Steve Madden's Third Quarter 2021 Results.

In the third quarter, we delivered the highest quarterly sales and earnings in our history, with revenue increasing 5% and diluted EPS increasing 22% compared to pre-pandemic third quarter 2019 - results that demonstrate the company's disciplined execution of its key strategic priorities.

Our #1 priority, as always, is to create trend-right product and get it to market ahead of our competition, and I could not be happier with our team's performance on that front.

We have relied on our proven model, which combines our talented design teams led by Steve, our test and react strategy and our industry-leading speed-to-market capability to deliver trend-right product assortments that are winning with the consumer and enabling us to outperform the competition and take market share, particularly in our flagship Steve Madden brand.

We are also supporting this great product with increased investment in marketing.

In addition to continuing to scale our digital marketing efforts to drive our e-commerce business, last month, we also launched our largest brand campaign in years called the Maddenverse.

The campaign features 3D avatars of artists and social media favorites, Normani, Sydney Sweeney, Nessa Barrett, Justine Skye and Jordan Alexander, bold, creative, empowered and authentic women that embody the spirit of the Steve Madden brand.

The campaign harkens back to our iconic big head girl ads from the '90s, reflecting the same fun and Rebellious attitude but with modern elements like Avatars and immersive content that includes an augmented reality shoe try-on feature and Instagram filters that enable consumers to morph into the avatars of their favorite artists.

This combination of outstanding product and enhanced marketing is driving deeper connections with consumers, which in turn is fueling our progress on our next strategic initiative, accelerating our direct-to-consumer business led by digital.

Our retail segment revenue grew 62% in the quarter compared to 2019, including outstanding performance in both digital and brick-and-mortar channels.

Our e-commerce business continued its exceptional momentum with revenue increasing 84% versus 2020 and 200% versus 2019.

And our brick-and-mortar business accelerated meaningfully.

Global brick-and-mortar comp store sales increased 16% compared to 2019, including a 23% comp store gain in our U.S. stores.

The outstanding revenue performance, combined with strong gross margin due to low levels of promotional activity as well as controlled expenses, resulted in EBIT contribution from the retail segment of $22.5 million in the quarter compared to $3.5 million in the third quarter of 2019.

Another of our strategic initiatives is to expand our business outside of footwear.

And here, we are focused on our largest non-footwear category of handbags as well as our emerging apparel business.

In handbags, our multi-year investment in our Steve Madden branded handbag business continues to pay dividends with that business reaching new heights this year in both wholesale and direct-to-consumer channels in both domestic and international markets.

While third quarter Steve Madden handbag revenue was down to 2019 due to wholesale shipments that moved out to Q4 as a result of supply chain delays, the Steve Madden bag business remains on track to increase approximately 20% for the full year compared to 2019, including more than 100% growth in direct-to-consumer channels.

We also continue to gain traction in our BB Dakota Steve Madden apparel business, where we are seeing strong sell-through performance at our key wholesale accounts driven by success with dresses, shirt jackets and vegan leather across all classifications.

Another key priority is to grow our international business, and we also continue to make progress on that initiative.

Earlier this year, we acquired the remaining 49.9% share that we did not already own of our European joint venture, and that business remains our leading international growth driver.

Revenue for our directly operated SM Europe business increased 45% in the quarter compared to 2019 despite significant wholesale shipment move-outs to Q4 as we continue to have exceptional momentum in the region, particularly in digital channels.

Finally, even as we seek to capitalize on the distribution channel and product category expansion opportunities I've touched on, we remain focused on strengthening the U.S. wholesale footwear business that is the core of our business.

This business saw a marked improvement in the third quarter as our wholesale customers reacted to our strong sell-through performance with increased orders.

Due to shipments that moved out to Q4, our overall U.S. wholesale footwear revenue remained down low single digits to 2019 in Q3.

But our Steve Madden brand U.S. wholesale footwear revenue was up 15% to 2019, including a 25% increase in Steve Madden Women's, demonstrating the brand heat and trend-right product assortment in our flagship brand.

Looking ahead to the fourth quarter, we are poised to deliver strong growth versus 2019 in the U.S. wholesale footwear business overall.

As we do all of this, we also continue to embrace the opportunity and the responsibility we have to create positive change for our people and our communities.

Highlights in the last 3 months included the establishment of a new employee resource group for Latinx employees called De la Sole, the launch of our new partnership with the business school at Howard University to reimagine its retail curriculum and the launches of new collections for our Steve Madden Kids adaptive line as well as for Cool Planet by Steve Madden.

We also laid the groundwork to establish the Steve Madden Foundation by the end of the year to organize and enhance our charitable giving strategy as we seek to maximize our positive impacts going forward.

In summary, I'm very pleased with our performance in the third quarter and, more broadly, with the progress we are making on the key strategic initiatives that will enable us to continue to drive sustainable and profitable growth going forward.

Now, I'll turn it over to Zine to review our third quarter financial results in more detail and provide our updated guidance for fiscal 2021.

Thanks, Ed, and good morning, everyone.

Our consolidated revenue in the third quarter was $528.7 million, a 52.4% increase compared to 2020 and a 5.3% increase versus 2019.

Our wholesale revenue was $402.0 million, up 41.6% compared to the prior year and down 4.6% compared to 2019.

These results included a significant impact from shipments that moved out into the fourth quarter due to supply chain delays.

We estimate Q3 wholesale revenue would have increased low single digits to 2019 if not for those move-outs.

Wholesale footwear revenue was $304.2 million, a 42.6% increase from 2020 and a 3.7% decline from 2019.

In the U.S., the Steve Madden Women's business was a standout, increasing 25% compared to 2019.

Betsey Johnson and Dolce Vita also had strong gains to 2019.

These increases were offset by the absence of the Kate Spade footwear license we had in 2019 and as well as declines to 2019 in Blondo, Anne Klein and private label.

Outside the U.S., strong performance in Europe was offset by softness in Canada due to a slower recovery from the pandemic and the impact of the supply chain delays.

Wholesale accessories and apparel revenue was $97.8 million, up 38.7% to last year and down 7.4% versus 2019.

When comparing to 2019, the decline in the segment was primarily driven by supply chain delays, partially offset by an increase in apparel as a result of only owning BB Dakota for a portion of the quarter in 2019.

We expect both wholesale footwear and wholesale accessories and apparel to show strong double-digit growth versus 2019 in the fourth quarter.

In our retail segment, revenue was $123.1 million a 108.6% increase compared to 2020 and a 62.5% increase compared to 2019.

E-commerce was the primary driver of direct-to-consumer growth versus 2019.

E-comm revenue grew 83.7% compared to 2020 and 200% compared to 2019.

E-commerce accounted for 49% of our total retail segment sales in the quarter compared to 26% in 2019.

Brick-and-mortar performance was also strong.

As Ed mentioned, global comp store sales increased 16% compared to 2019, and domestic stores increased 23% compared to the same period.

We ended the quarter with 216 company-operated retail stores, including 66 outlets and 6 e-commerce websites as well as 17 company-operated concessions in international markets.

Turning to our licensing and first cost segments.

Our license and royalty income was $2.7 million in the quarter compared to $2.6 million last year and $2.9 million in 2019.

First Cost commission income was $1 million compared to $1.5 million last year and $1.9 million in 2019.

Consolidated gross margin was 41.6% in the quarter, up from 40.3% in the prior year and 39% in 2019, an increase of 260 basis points versus 2019.

Wholesale gross margin was 33.6% compared to 34.6% last year and 33.9% in 2019.

The modest decline compared to 2019 was the result of increased freight rates and the nonrenewal of GSP, partially offset by higher average selling prices and lower markdowns.

Retail gross margin was 65.9% compared to 63.8% last year and 63.3% in 2019.

The increase to 2019 included margin improvement in both digital and brick-and-mortar channels driven by a reduction in promotional activity, which more than offset the headwind from increased freight rates.

Operating expenses were $131.6 million in the quarter compared to $93.7 million last year and $123.6 million in 2019.

The increase versus 2019 is primarily driven by our continued investment in performance marketing to fuel the growth of our e-commerce business.

Operating income for the quarter was $88.4 million or 16.7% of revenue, up from $46.2 million or 13.3% of revenue last year and $72.3 million or 14.4% of revenue in 2019.

Our effective tax rate for the quarter was 24.4% compared to 29.3% in 2020 and 22.6% in 2019.

Finally, net income attributable to Steve Madden, Ltd.

for the quarter was $66.6 million or $0.82 per diluted share, up from $31.8 million or $0.39 per diluted share in 2020 and $56 million or $0.67 per diluted share in 2019.

Moving to the balance sheet.

Our financial foundation remains very strong.

As of September 30, 2021, we had $259.9 million of cash, cash equivalents and short-term investments and no debt.

Inventory totaled $201.2 million, up 83.4% compared to last year or up 35.9% compared to 2019.

Note that due to the global supply chain disruption, in-transit inventory was up 229% to 2019 and represented approximately 51% of our inventory at quarter end compared to approximately 21% at the end of the third quarter of 2019.

On-hand inventory was down 16% at the end of Q3 compared to 2019.

Our CapEx in the quarter was $1.8 million.

During the quarter, we repurchased approximately 773,000 shares or $31.9 million, which includes shares acquired through the net settlement of employee stock awards.

Yesterday, the Board of Directors approved an increase in the company's share repurchase authorization to $250 million.

The company's Board of Directors also approved a quarterly cash dividend of $0.15 per share.

The dividend will be payable on December 27, 2021 to stockholders of record as of the close of business on December 17, 2021.

Turning to our outlook.

While the global supply chain disruption remains a significant headwind, our performance in the third quarter and the momentum we have seen in our business gives us confidence to raise our fiscal 2021 guidance.

We now expect revenue to increase 50% to 52% compared to 2020, and we expect diluted EPS to be in the range of $2.30 to $2.35.

And now I would like to turn the call over to the operator for questions.

Phyllis?

(Operator Instructions) Your first question comes from the line of Camilo Lyon with BTIG.

Great job on the quarter.

I want to start out with the guidance.

The Q4 guide is a very strong guidance.

I think you raised about the fourth quarter EPS by about $0.15 or so implied above current consensus estimates, and I think sales are implied to be up 27% versus '19.

Again, that's compared to up 5% in Q3.

Can you unpack what's driving that acceleration?

Maybe parse out the later shipments that sloped from Q3 into Q4.

How much of -- is it reorders, the split between wholesale and DTC?

Sure.

Camilo, thanks for the question.

So in terms of what gives us confidence to raise the guidance like this, it's really the strength and the momentum and the brand heat that we're seeing in the flagship Steve Madden brand.

So, if you look at where we have raised our internal forecast versus where we were 3 months ago, the 2 big areas are our direct-to-consumer business, which continues to have just incredible momentum in both digital and brick-and-mortar channels.

And then also that Steve Madden Women's U.S. wholesale footwear business that we called out earlier was up 25% to '19 in Q3, and we anticipate we'll see even faster growth compared to '19 in Q4.

In terms of the acceleration of the business from Q3 to Q4, that's really about the acceleration in our wholesale business.

The DTC, we think, is going to grow even faster than wholesale, but it's been growing at a very rapid clip.

You said that was up 62% to 2019 in Q3.

But wholesale, which was down about 5% in Q3 to '19, we're forecasting to be up mid-teens to low 20s versus '19 in Q4, and that's really just a function of the -- our wholesale customers catching up to these incredible sell-throughs that we've had.

We've been talking to you all year about how if you compare to '19, our sell-throughs were dramatically outpacing our shipping and our stock levels at the wholesale customers, and you're seeing that now catch up.

You asked about the move-outs, the impact of the move-outs.

There is some benefit to Q4 from move-outs from Q3.

We expect -- excuse me, we estimate that about $30 million of wholesale shipments moved out from Q3 to Q4.

However, we've also built into our forecast an assumption of about $20 million falling out of the end of Q4 into Q1.

So the net impact there is relatively modest, only about $10 million.

That's great color.

As a follow-up to that line of questioning, how does this impact the conversation for the first half of 2022 with your wholesale partners?

And then, my second question really is more of a broader kind of question on your digital strategy.

If you could just give us kind of an update on the progress that you've made with your digital strategy, where were you, say, 3 years ago versus where you are today from a sales and profitability perspective, that would be very helpful.

Sure.

Yes.

So as we go into the first part of '22, obviously, the success that we're having at retail, the sell-throughs that we're seeing obviously positions us well with our wholesale customers for a nice open-to-buy commitments for the first part of '22.

I think, we're not putting out '22 guidance today.

So I'm not going to put numbers around that.

But certainly, we do feel good about how we're positioned.

We've been an outperformer in terms of sell-through, and we're taking share in that wholesale channel and expect to for the first part of '22.

In terms of digital, as you know, that has been really a top priority for our company over the last few years, and we have -- specifically with respect to our owned and operated e-commerce business, we have invested in talent.

We have invested in digital marketing, and we have invested in ongoing site enhancements.

And then, we have connected that to our strong brands and outstanding product, and the combination of all of that has yielded some really powerful results.

So you asked about where we were 3 years ago.

2018, we were doing a little over $50 million.

I think, it was about $56 million in revenue in our owned and operated e-commerce business, and it was making a single-digit operating margin.

So the profit contribution there was less than $5 million.

Three years later, 2021, we are going to approach $250 million in owned and operated e-commerce revenue with a 20% operating margin contribution.

So I don't think it's overstating it to say that, that over that 3-year period, that's a fundamental change in the complexion of our business, and I think, it also really meaningfully improves our growth opportunities that we have going forward because we really feel like we're still in the early stages of this digital journey.

That's fantastic color.

Good luck with the close of the year.

Your next question comes from the line of Erinn Murphy with Piper Sandler.

Ed, maybe just following up on that conversation.

I was hoping you could share a little bit more about your new marketing campaign.

What is the customer response been thus far?

And then how is it converting within the Steve Madden footwear versus the handbag opportunity you spoke to?

Yes.

Thanks for asking about that, Erinn.

So we're excited about the new campaign and we feel really great about the response.

We just felt like given the brand heat that we have in Steve Madden and this really, really strong product assortment and what we're seeing in the brand overall that now is the time to kind of throw gas on it and really step up with some exciting marketing.

And we feel like we've done that here.

The response has been great, fantastic digital and social engagement.

We've had some viral moments on TikTok, which has been fun.

Big increase in the search interest for the brand online.

And it's driving traffic and sales online, but also into stores.

So really just excited about the customer response.

And I'm sorry, you asked about footwear versus handbags with respect to the campaign, was that right?

Yes.

Just how it's converting because I'm just curious, how you're seeing the customer come -- or convert against that campaign across the 2 categories.

Yes.

I guess, the campaign was certainly more footwear-focused.

So, if you're talking about direct sales that we think are directly coming from the campaign, then that would certainly lean much more towards shoes.

But our direct-to-consumer channels overall, our handbag growth is pretty explosive.

And in fact, it's outpacing what we're seeing in shoes, and we're really excited about that momentum in handbags, particularly in direct-to-consumer channels.

Great.

Got it.

And then my second question is just around your supply chain.

You guys have been very nimble with moving production into Mexico, Brazil.

Can you just kind of take a step back and give us kind of an overview of where your biggest concentrations are right now for production.

And then what are you seeing with the lead times?

And have you had to resort to [error] at all as you think about holiday and even early spring deliveries?

Sure.

Yes.

Look, the supply chain is no surprise.

It's been a big headache for us as it has been for everybody else.

As you pointed out, we did move close to half of the Steve Madden Women's in line production outside of China or outside of Asia to Brazil and Mexico for fall, and we're very pleased that we did that.

It has not that those countries have been without their challenges, but we certainly think we're better off for having done that.

If you look at the company overall, of course, we're still majority in China with -- Cambodia would be our second largest country of origin.

We make a lot of handbags there, and then we spread out across a number of other countries.

In terms of having to air, yes, we have had to do to utilize more air freight.

That's primarily in our direct-to-consumer segment in our retail business.

A year ago for the year, it was probably about 17% of our goods were coming via air.

This year-to-date, I think, we're up around 30%.

Zine, is that right?

That's correct.

30% this year, 17% last year, and it was about 11% the year before that.

Yes.

So we have had to utilize more air.

And of course, that's been expensive because air freight rates are up significantly.

Your next question comes from the line of Paul Lejuez with Citi.

This is Kelly Crago on for Paul.

I just want to follow up on your conversation around the retail channel.

Just hoping you could talk about where the penetration of that business overall could grow to over time and where you believe retail EBIT margins could shake out longer term, just given the strength of the e-comm channel.

And I think in the recent past, I think the retail business has only reached maybe a high single-digit margin at best.

So just curious where you think that could go longer term.

Yes.

Thanks for the question, Kelly.

That's something that we're really excited about.

And if you look at the business, what it looks like this year versus pre-pandemic, that's a really significant shift.

So back in 2019, our retail segment was about 18% of our total sales.

And this year, I think, it's going to be up about 800 basis points.

It will be over 1/4 of the business.

And more importantly, the profit contribution is up dramatically.

So whereas it was only contributing about 5% of our profits back in 2019, this year, it will be about 1/4 of our profits.

And so, in terms of the EBIT margins there, even this year, we're on track to do mid-teens or potentially even a little bit better than that, which we're very excited about.

Got it.

And then, I just want to dig into the gross margin a little bit.

Could you talk about how much of a drag freight was in 3Q?

Would you expect that to be in the fourth quarter?

And then when we think about the gross margin trajectory beyond 2021, do you expect some normalization there in 2022 that could lead to pressure?

Or just any color on that line item, the puts and takes there as you think about the future.

Yes, I'll let Zine take the freight and then I'll address '22.

Okay.

So thanks for the question.

So for Q3, the freight was about 270-basis-point drag on the margin, and the GSP was about 50 basis points.

And for Q4, we're estimating that the freight will be somewhere around 260 basis points, which brings the year to about 230 basis points roughly.

So yes.

So in terms of next year, again, not providing guidance yet, but I can give you some color on what we see as the puts and takes.

Obviously, there's been very low levels of promotional activity for us this year and for the industry overall.

So we're certainly going to work very hard to maintain that discipline going forward.

But there are competitive dynamics at play, and we'll have to see what that looks like for the industry overall next year.

So potential point of pressure.

We are also seeing FOB price increases, factory price increases based on pressure on labor and as well as materials, so that's a bit of a headwind going into next year.

However, on the other side, we are also raising our selling prices to combat that.

And we also are hopeful certainly that GSP is going to get renewed because that's been a significant headwind, as Zine outlined.

And then, as we go into the back half of '22, we're also hopeful that there's some relief of the freight pressure.

Your next question comes from the line of Tom Nikic with Wedbush Securities.

Ed, I'm kind of looking at your -- I guess, in the wholesale segment, your first half of this year versus second half.

And in the first half, I think your revenues versus '19 were still down something like 20%.

As we look to the first half of 2022, like I mean, do you think we get kind of back to pre-COVID levels?

Is there like some reason why your first half revenues would be kind of structurally lower than they were at pre-COVID?

Like anything like that?

I'm just trying to think about how to think about the spring season.

Well, again not going to provide specific guidance.

But obviously, we do think we have an opportunity for a nice improvement in spring of '22 in wholesale compared to what we did this year.

And no, I don't think there's anything structural that would prevent us to get back to '19.

[Absent], if you recall, we had a one-time program that we didn't anniversary in the private label area back in Q2 of '19, which we talked about earlier this year.

But putting that aside in the ongoing businesses, no, I think that we're certainly going to target to get back to '19.

Got it.

Understood.

And then, I also wanted to touch on Europe.

I think, you've been pretty bullish on Europe this year.

And I think earlier this year, you said you were targeting $55 million in revenue in Europe this year, which would have put at about 3% of sales.

Like, A, is Europe trending better than that?

Like should we think that Europe is going to come in somewhere better than that $55 million?

And then B, I don't know, if you can talk longer term.

Or like how meaningful do you think like Europe can be?

Going to be 10% of sales?

Anything like that?

Just any thoughts on Europe, bigger picture would be great.

Yes.

So we continue to have really strong momentum in Europe.

So that -- the $55 million you're referring to was for the SM Europe business that we -- the joint venture where we bought out the remaining interest earlier this year, and that business has continued to trend up.

So it will actually do north of $60 million this year, which puts it over 85% ahead of where it was in 2019.

So very strong growth there.

If you look at the EMEA region overall, we're going to be close to $100 million this year, and we continue to feel like we're in the very early innings in that region of our growth journey.

And in terms of what the opportunity is, it's multiples of where we are today.

Your next question comes from the line of Janine Stichter with Jefferies.

I was hoping you could talk a little bit about the trends by product category.

I know you've had a bit of a head start in the dress shoes category.

Curious what you saw on sell-throughs there and if you feel like the competition has started to catch up at all.

And then initial read on boots and what you're seeing in that category.

Yes.

So dress shoes continues to be an outstanding category for us.

We have seen some of our competitors get some more product out there in the category, but it has not slowed down our performance at all, and we're seeing success with really a range of products within that category.

So opened-up dress, closed-up dress, various heel heights, it's just been a fantastic category for us.

And particularly in our direct-to-consumer channels, really driving a significant driver.

And then boots are also performing very well for us, doing great with lug sole boots, Chelsea boots, also the Western boot is performing.

So a bunch of things happening there too, and that's a very strong category as well.

Great.

And then just a follow-up on the price increases.

Is that something you've taken already or something we should expect more just bring?

And maybe if you could quantify the magnitude.

Yes.

So for fall, I think we have layered on some price increases.

We've done it selectively.

If you were to look at it as an average, it's probably low single digits.

But again, that's our initials.

The AURs are up much more significantly than that because of the lack of discounting.

So, if you look at our retail segment, our direct-to-consumer channels, our AURs are up 20%-plus versus '19.

But as we go into spring, we're going to take a little bit more price on the initials, and I think you could see that looking more like 5% to 10%.

Your next question comes from the line of Marni Shapiro with Retail Tracker.

Congratulations.

Amazing quarter, and the stores look outstanding when they're in stock.

I think you just said your spring, I just want to make sure I heard this right, spring initials could be up 5% to 10%.

Are you expecting to layer in some level of promotion and some normalcy of promotion so that your AURs end up about the same as the back half of this year?

Or are you expecting that promotion should remain pretty clean through the back half of this year and into spring so it would assume that AUR would be up even more?

Yes.

Our plan is to continue to have very controlled promotional activity.

And even through holiday?

Yes, it doesn't mean none because I think the consumer expects some level of promo activity during holiday.

But certainly, compared to where we were pre-pandemic, less promotions.

And can I just ask you one sort of bigger picture question?

You guys have some really unbelievable sold-out products.

And I see them across the board, whether it's online at your wholesale DTC, our own DTC in department stores, in your own stores.

I'm listening to customers to chase products down, like the very last shoe in the chain of stores.

When you get in a reorder, and I'm going to pick on the Maxima because it's on my screen right now, when you get in a reorder or delivery of that, how company-wide, how do you prioritize where that delivery goes?

If the black Maxima comes in, does it go first to your own stores, your own DTC, wholesale DTC?

How does that all factor in so that you're keeping your wholesale partners happy but feeding the best margin businesses?

How does that work?

Well, it's a balancing act for sure.

Look, the Maxima throughout the year has been in and out of stock going back to the early parts of the year.

And one of the things we've been doing on our own website is taking a lot of preorders or back orders.

So customers are placing orders.

So those customers, as soon as we get the product in, then we're getting it out to those e-commerce customers who have already placed the order.

And we're obviously prioritizing our own direct-to-consumer channels, but we also take care of our best wholesale customers, our full price wholesale customers because that remains an important business for us, and we need them to be successful as well.

Your next question comes from the line of Jay Sole with UBS.

And I'm wondering, if you can just elaborate a little bit on where we are in the whole return to work or return to party cycle because it seems like there's a lot of things going on.

There's a lot of fashion trends.

There's a rebound from the pandemic.

There's market share gains.

So just wondering how you feel about those different things.

And specifically, like if you still see a lot of rebound potential in the whole wear to work and return to group events type business.

Yes.

It's a good question.

It's hard to say exactly how far along we are.

But I will say that in terms of the return to -- I think you want the return to party, we've been seeing that for some time.

And if you look at the strength that we've had in dress shoes, even started in spring, but continuing through now, I think that's evidence that consumers are returning to going out and going to events, et cetera.

And our dress shoe penetration right now is running ahead of where it was in 2019 and actually by a pretty significant margin.

And -- but again, that's in Steve Madden, and that's really -- I think the end use there is going out.

It's not necessarily going to work.

I think that wear to work dress shoe business is still not back to where it was pre-pandemic, and we'll have to see how that shakes out going forward if it ever turns exactly to where it was.

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

It's about inventories, which I know there's a lot of talk about supply chain issues and out of stocks, but inventories were up 80%.

I know, you run them tight.

Is that just to meet demand for some of the products you mentioned has been moved out into Q4?

Or does this represent you getting a more adequate safety stock in place as we move into reorders?

So I guess, first of all, I would say, I don't think the right comparison as to where we were a year ago.

I think, it probably makes sense to look back to 2019.

And relative to '19, we were up about 36%.

And as Zine outlined earlier, that's all driven by that in-transit number, which is up significantly.

The on-hand is actually down.

But in transit, obviously, because of the much longer lead transit times, is up.

I don't know, Zine, is there any other color you want to provide there?

No, just that it lines up nicely when you look at the in-transit being up 229%.

And the on-hand down 16%, as we said before.

And you look at what we're guiding for Q4 as well as the shift that we had for orders that were in our inventory at the end of Q3 but we're shipping in October because of that $30 million that Ed had mentioned earlier, everything lines up pretty nicely against our guidance, and we feel good about the health and balance of our inventory.

Got it.

Just as a quick follow-up.

How does this kind of gummed up system impact your strategy for inventory management this spring?

Well, we do have to place orders a little bit farther out than we normally do.

We've also had to encourage our wholesale customers to place their orders further out than they normally do, which they have done.

So, as you know, speed to market is really critical to our strategy, so we don't like the fact that our lead times are lengthened here.

But the good news is, we do feel that our relative advantage compared to the competition is maintained.

So while our lead times are extended, everybody else's are too, and we still feel like the speed advantage that we have versus everybody else is intact.

Your next question comes from the line of Sam Poser with Williams Trading.

Most have been answered.

But I just want to ask, you talked about the choices about how you're going to allocate some of the product, where you've got the hot stuff.

Given the slow production and slow transit that's happening, are you making decisions with the off-price channel or with a large lower-margin accounts where you're going to feed the full-price businesses more to get the higher-margin product made?

Yes.

As you would expect, our first priority is always feeding full price channels.

Okay.

And also, Zine, the merch mart -- I mean it sounds like the merchandise margins were up like 4450 basis points in the quarter.

Is that right on a year-over-year basis?

Let me just weigh in and then Zine can follow up.

There is a mix shift also here.

If you're looking at the consolidated number, there is mix shift from retail becoming a bigger percentage of the mix.

So I don't think you can just necessarily take the consolidated number and then back out the freight and GSP.

But certainly, merch margins were up across wholesale and retail.

Is there anything else you want to add?

Can you give us some idea of how much -- can you give us the details on that, especially on wholesale?

Well, wholesale, I think Zine outlined about 280 basis points of pressure from freight and GSP.

That's versus '19.

And the overall margins were down 30 bps to '19 in wholesale.

So I mean -- so you're just selling -- now that you sort of have this new normal going on with the merch margins, going forward once the dust settles, whatever that is, how do you go about sort of sustaining, especially in wholesale, that much higher number than '19 or the pre-pandemic would you say?

Well, I mean, that's mostly about inventory management and discipline around inventory and around markdowns.

And that's something that we feel is a core strength of our company, and we're going to continue to lean on that.

And then lastly, the -- your business with Walmart and Target, that business.

What does that look like now?

Do they take possession at the factory?

Are they shipping the goods?

Can you give us a little color on that private label business?

Yes.

So most of that business, they take possession overseas, and so they're the ones bringing it over here.

We do have part of that business where we land the goods.

But again, most of it, they take possession overseas.

And how does that business looking these days?

It's doing well.

The private label was down in Q3 because of move-outs, products that we were hoping to get out of the tail end of Q3 that fell into Q4.

But we do anticipate -- so it was down in both -- our private label was down in both shoes and accessories compared to '19 in Q3, but we expect to be up in both shoes and accessories in Q4.

Your next question comes from the line of Susan Anderson with B. Riley.

Hello?

Can you hear me?

I can.

Okay.

Sorry, I guess, I was on mute.

So I just want to follow up on the women's business in the part that you moved to Brazil and Mexico.

I'm just curious, is that allowing you to be better in stock versus your peers?

And are you still seeing some shelf space gains because of that?

And then, I'm just curious, are you able to chase it all with that business given it is closer to North America?

Or is it still tough given the supply chain issues?

Yes.

Thanks for the question.

I do think that we benefited from the shift of production to Brazil and Mexico.

And our ability to chase is better there, particularly out of Mexico.

Still, I think overall, our ability to chase was not what it normally is.

That's for sure.

But Mexico did give us more opportunity to do that.

And yes, I do think that, that helped us overall versus the competition.

But the big thing that's helping us against the competition is that we have shoes that the consumer really wants, and the sell-throughs are great, and the consumer demand for the product is great.

That's really the driver more than the country of origin of the product.

Great.

And then just one other follow-up question on the SG&A for fourth quarter.

I guess, should we think about it being up in similar magnitude as we saw in third quarter '19 levels?

No.

If you're comparing to '19, definitely, the growth will be higher in Q4.

Obviously, the sales versus Q4 are accelerating meaningfully.

And it's also a much higher -- there's a higher penetration of retail or DTC in Q4, which carries higher SG&A.

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

Ed, you sort of answered this a little bit on the last question, but I am curious as to the composition of COGS from the Americas, meaning Central and South America, versus the Far East in the third quarter and what you would expect in the fourth quarter and maybe how that looks next year.

It doesn't have to be more specific numbers to the tenth of percent.

But I'd like to know from a composition standpoint, generally, where it is now and where that will trend towards.

Well, look, I -- again, when you look at the business overall because we have a lot of business -- we've talked a lot about the Steve Madden Women's in-line business, and that shipped to Brazil and Mexico.

But when you look at the business overall, we're still over 70% out of China.

And then when you add in some of the other countries in Asia, that still makes up the bulk of the business.

Brazil and Mexico getting bigger, but still single digits as a percentage of the total because, again, we don't -- as of now, we have not been doing anything in those countries in any of the private label areas or the more moderately priced businesses that we have.

So that's still what it looks like today.

And as of now, I think it is going to look somewhat similar to that next year.

I mean, we'll continue to diversify out of China.

But right now, for instance, we had some of the stuff that was in Vietnam, we pulled back because of, obviously, the shutdowns that were experienced in that country -- the South of Vietnam experienced over the last couple of months.

No major sourcing differentials next year versus this year?

No.

I think, you'll still see Mexico and Brazil grow.

But generally speaking, it will be similar.

And at this time, there are no further questions.

I would like to turn the call back over to management for any closing remarks.

Great.

Well, thanks, everybody, for joining us this morning, and have a great day, and we look forward to speaking with you on the fourth quarter call.

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