Vince Holding Corp (VNCE) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Vince Holding Corp Q3 earnings conference call.

(Operator instructions.) Thank you. I would now like to turn the call over to [Jennifer Poland], Vice President of Finance.

Thank you, Sally, and good morning, everyone. Welcome to our third quarter and year-to-date fiscal 2014 earnings conference call.

I'm Jennifer Poland, Vice President of Finance. Joining me today is Jill Granoff, our Chairman and Chief Executive Officer, and Lisa Klinger, our Chief Financial Officer, who will be your speakers for today's call.

Before we get into the discussion of our results, I need to remind you that any forward-looking statements we make today are subject to our cautionary statements regarding forward-looking statements found in our press release and SEC filings.

Our third quarter and year-to-date earnings release and related financial information are available on our website under the Investor section. For those who cannot listen to the entire live broadcast, a replay will be available for 30 days on our website at www.vince.com.

I would also like to point out that on November 27, 2013, Vince Holding Corp. completed its initial public offering. As a result of the IPO and the related restructuring transactions, Vince became the sole operating business of Vince Holding Corp., while the non-Vince businesses were separated.

Additionally, on July 1st, 2014, certain stockholders of the company completed a secondary public offering of the company's common stock, with all proceeds going to those stockholders.

In today's discussion we are presenting our financial results in conformity with GAAP, including the financial results of the non-Vince businesses for the third quarter and year-to-date fiscal 2013 as discontinued operations.

In addition, we will be presenting financial results relating to the third quarter and year-to-date fiscal 2013 on an adjusted basis in order to exclude the impact of results of the non-Vince businesses and certain public company transition costs, as well as year-to-date fiscal 2014, on an adjusted basis in order to exclude the impact of secondary offering expenses.

These adjusted results are non-GAAP measures and include adjusted measures. Discussions of these non-GAAP measures and reconciliations of them to their most comparable GAAP measures are included in today's press release and related schedules, which are available in the Investor section of our website.

After our prepared comments, we will be available to take your questions for as long as time permits. Now I'll turn the call over to Jill.

Thank you, Jennifer, and thank you all for joining us. I would like to welcome each of you to our third quarter and year-to-date fiscal 2014 Vince earnings call. We look forward to today's discussion.

Before we jump into the results, I'd like to take a moment to celebrate our one year anniversary as a public company, which occurred a few days ago. While it has been a tremendous undertaking, I am so very proud of the team and the accomplishments we have achieved in the last 12 months.

We believe we have delivered against virtually all of the various business initiatives we have previously outlined. More importantly, we remain confident in our long-term strategy to deliver 15% to 20% net sales growth and 20% to 25% net income growth annually for the foreseeable future.

Now turning to the third quarter, it was another strong performance for the Vince brand. We delivered total sales growth of 20% as we again achieved double digit increases across all distribution channels.

In wholesale, sales grew over 17%. And in the direct-to-consumer segment, we delivered growth of over 30%. This sales growth was broad based and driven by strong category performance in women's ready-to-wear, men's sportswear, and our licensed footwear business.

We also continued our trend of gross margin rate improvement by delivering 50 basis points of expansion over last year's third quarter rate, despite the overall promotional intensity in the retail sector.

With our strong sales growth and continued margin improvement, we were able to increase diluted earnings per share to $0.35, an increase of 25% over last year's adjusted level of $0.28.

We believe these results further demonstrate the strength of our product offering and reinforce Vince's position as one of the leading contemporary fashion brands in the marketplace today.

In just a few moments I will provide you with an update on our various strategic initiatives and our updated guidance for fiscal 2014, but first I'd like to turn the call over to Lisa, who will provide additional details on our financial results for the third quarter and year-to-date fiscal 2014 period. Lisa?

Thank you, Jill. As we mentioned in our introductory comments, the company will be presenting both GAAP as well as adjusted financial results in order to provide investors with additional information to evaluate our comparable operating performance.

In looking at the third quarter, the company delivered strong total sales growth of 20%, with net sales of $102.9 million versus $85.8 million in the prior year period.

Our wholesale segment sales increased 17.3%, driven by continued strong domestic and international demand as well as our growing licensing business.

Our direct-to-consumer segment sales increased 30.2%, as we added 10 new stores, grew our comparable store sales by 5.2%, and continued to see strong growth in our e-commerce business. If we were to include e-commerce sales in our comparable store sales measure, our third quarter increase would have been 8%.

As of November 1st, 2014 our comparable store base consisted of 26 stores out of over 2,400 points of sale in total, or approximately 1% of our distribution, and comprised 14% of our total net sales.

Moving on to profitability, gross profit in the quarter increased 21.4% to $50.6 million versus the third quarter of fiscal 2013, as a result of both an increase in net sales as well as an increase in the gross profit rate.

Gross profit as a percentage of net sales increased 50 basis points to 49.2% from 48.7% last year. The gross profit rate increase was driven primarily by supply chain efficiencies and increased sales penetration of our direct-to-consumer, international, and licensing businesses, partially offset by higher promotions, markdowns, and returns allowances.

Selling, general, and administrative expenses in the quarter were $25.8 million, or 25.1% of sales, compared to $24.2 million, or 28.2% of sales, for the third quarter of last year.

Adjusted selling, general, and administrative expenses as a percent of sales for the third quarter of fiscal 2013 were 24.5%. As we continue to invest in our growth, our SG&A rate deleveraged primarily due to increased labor and occupancy costs related to our retail growth strategy, strategic investments in our marketing programs to build brand awareness and drive traffic to all of our distribution channels, investments in new talent to support our stated growth initiatives, and incremental costs related to our public company status.

We also incurred higher depreciation expense as we strategically invested in new retail stores, wholesale shop-in-shop, and our expanded showroom, design studio, and headquarters facilities.

Operating income this year increased 41.6% to $24.8 million, or 24.1% of sales, compared to $17.5 million, or 20.5% of sales, for the third quarter of last year. Compared to adjusted operating income in fiscal 2013 of $20.7 million, or 24.2% of sales, operating income increased 19.9%.

We were able to essentially maintain our operating margin while making investments to support our various growth initiatives and incurring costs necessary for Vince to operate as a standalone public company. GAAP reported net income for the third quarter of this year increased to $13.3 million compared to a net loss of $2.4 million last year.

Reported diluted earnings per share was $0.35 compared to a diluted loss per share for the prior year's third quarter of $0.09. Compared to adjusted net income in the third quarter of fiscal 2013, net income increased 25.4% and diluted earnings per share increased 25%, compared to adjusted diluted earnings per share of $0.28 in the same period of the prior year.

Now moving on to the fiscal 2014 year-to-date results, net sales were $245.7 million, an increase of 22.6% over the same period last year. This net sales increase was driven by a 19.2% increase in our wholesale segment sales and a 35.9% increase in our direct-to-consumer segment sales.

Our comparable store sales for the year-to-date period increased 7.4% over the same period of fiscal 2013 and increased 10.5% when including e-commerce sales. This comparable store sales performance was driven primarily by an increase in transactions and a modest increase in transaction size.

Gross profit increased 30.4% to $121.1 million compared to the year-to-date period in fiscal 2013. The increase in gross profit was driven primarily by the nearly 23% increase in net sales, as well as an increase in the gross profit rate.

Gross profit as a percentage of net sales increased by 300 basis points to 49.3% from 46.3% in the year-to-date period of last year. The increase in gross profit rate was primarily driven by overall supply chain efficiencies, increased penetration in higher margin products, and increased penetration of sales from our direct-to-consumer, international, and licensing businesses, offset slightly by higher promotions, markdowns, and returns allowances.

Selling, general, and administrative expenses increased 21.6% to $71.1 million, or 29% of sales, versus $58.5 million, or 29.1% of sales, in the corresponding period of last year.

Adjusted selling, general, and administrative expenses as a percentage of sales increased to 28.7% this year from 25.6% last year. Consistent with the third quarter, the deleverage in our SG&A rates for the year-to-date period was driven primarily by increased investments to support our growth initiatives and for Vince to operate as a standalone public company.

Operating income increased by 45.2% to $50 million, up from $34.4 million last year. Adjusted operating income increased 21.5% compared to the same period in fiscal 2013.

As a percentage of sales, adjusted operating margin was 20.6% compared to 20.8% last year. On a GAAP basis, the company reported net income of $25.2 million compared to a net loss of $28 million for the year-to-date period in fiscal 2013.

Diluted earnings per share was $0.66 compared to a net loss per share of $1.06 in fiscal 2013. On an adjusted basis, net income increased 31.9% to $25.5 million, and adjusted diluted earnings per share increased 31.4% to $0.67 compared to $0.51 earned in the same period of last year.

Now moving on to the balance sheet, the company voluntarily reduced its debt by $17.1 million during the third quarter, resulting in total debt outstanding of $122.5 million and a debt leverage ratio of 1.7 times as of November 1st, 2014. During the first nine months of fiscal 2014, we have voluntarily paid down $47.5 million of debt outstanding while investing behind our numerous growth initiatives.

As of the end of the third quarter, the company had $21.9 million of availability remaining under its $50 million asset backed lending facility, providing significant liquidity to the business.

Inventory at the end of the third quarter of fiscal 2014 was $52.7 million versus $36.2 million at the end of the third quarter of fiscal 2013. Additionally, our inventory level decreased 10.1% versus the $58.6 million level as of August 2, 2014.

The planned year-over-year increase was primarily driven by the addition of 10 net new retail stores since the third quarter of last year, increased in-transit inventory as a result of our operational improvement initiatives, an expanded replenishment program, new handbag inventory in preparation for our fourth quarter launch, and overall global sales growth projections.

Capital expenditures for the third quarter totaled $8 million, of which $3.8 million was attributable to new and remodeled stores and shop-in-shop build out. Additionally, $4.2 million of the capital spend during the quarter related to our new headquarters and showrooms in New York and our new design studio in Los Angeles.

As of the end of the third quarter of fiscal 2014, the company had signed four leases for stores that are expected to open in fiscal 2015 or beyond, with several other leases in various stages of negotiation. As of today, December 2nd, the company has 37 stores in the US, including 28 full price stores and nine outlet stores.

That concludes my comments regarding our third quarter and year-to-date fiscal 2014 financial performance. I will now turn the call back over to Jill so that she can provide you with an update on our key strategic initiatives and our updated outlook for the year. Jill?

Thank you, Lisa. We are very proud of our financial performance and the continued progress we are making in our evolution to becoming a global dual gender lifestyle brand.

Vince's strong third quarter and year-to-date results stem from the power of our brand and dynamic product offering. During the quarter, we maintained our leading position in women's contemporary apparel with sweaters, knit tops, and blouses remaining our largest categories.

In addition, we also saw double digit growth in outerwear, dresses, pants, skirts, and in our higher ticket fur items. As we have mentioned previously, we are focused on addressing a broader variety of wear occasions, and our customers are receptive to this expanded product assortment.

Our newly elevated men's collection is also resonating with our retail partners and customers alike. And we saw double digit growth in our overall men's business during the third quarter as well.

In addition to the strong results of our apparel categories, we are happy to share the progress of our new handbag collection which was developed in-house. The collection launched a few weeks ago, ahead of our first quarter 2015 expectation, at our own retail stores and website, as well as exclusively at 26 key Saks stores in the United States and at Saks.com.

While still very early, the initial feedback is promising and we are delighted with the standout editorial coverage the collection has received. We have major exposure in Harpers, Elle, Glamour, and InStyle, with many of these magazines focusing their coverage on the important gift giving guide section.

Based on initial consumer demand, we are seeing the strongest receptivity to the Vince signature collection, especially the small cross-body in our fashion colors and the east-west tote in our mock croc leather. This new product launch marks a major milestone in our evolution to becoming a global lifestyle brand, and reinforces our modern, clean DNA, and subtle yet sophisticated branding.

From a licensing standpoint, we continue to see strong demand for Vince women's footwear, which is one of the best-selling contemporary footwear brands at many of our wholesale partners. The line is now sold in nearly 370 points of distribution, and that number is expected to increase to nearly 500 doors worldwide for the spring 2015 collection.

Men's footwear recently launched and has had solid initial results, and is now distributed in roughly 60 points of distribution. More importantly, we believe men's footwear is poised for additional growth with an expanded assortment and increased distribution for our spring 2015 collection.

During the third quarter, I was fortunate to travel both domestically and internationally to meet with many of our global department store partners, several international distribution partners, Vince retail store leaders, and a few of our key vendors.

While it is certainly important to focus on the day-to-day operations of the business, I believe it is equally important for us to spend time in the market to better understand local trends, our customers' behaviors, and competitive activities; in other words, to essentially take the pulse of the business firsthand. I must say I was delighted to hear to the external enthusiasm for the Vince brand.

Internationally, our department store and distribution partners were very excited about the Vince brand evolution and the new product categories we have added. They now see Vince becoming a full lifestyle brand, and are eager to find ways to expand our business together.

In Canada, which is currently our largest international market, we were able to identify key near term as well as long term growth opportunities, especially with Nordstrom and Saks entering the market.

I also traveled to Korea, Japan, and Hong Kong, where we defined growth opportunities from both a distribution and category perspective. While in Asia, I was also able to meet with two of our largest product vendors as well attend the opening of our new Hong Kong sourcing office.

With our focus on developing high quality, sophisticated products, these vendor relationships will become increasingly important, and we continue to make them a top priority.

Domestically, I had the privilege of touring many of our major department store locations and retail stores while engaging with our store associates and brand ambassadors. Since these individuals are the direct interface with our customers, it is very important to hear their feedback and the suggestions they have, especially as we head into the all-important holiday season.

Our direct-to-consumer teams have prepared extensively for the holiday season. And we believe we are well situated with holiday gifting guides and expanded sweater and cold weather assortments, handbag training, top client gifting initiatives, and increased seasonal coverage in stores.

During the quarter, we also made great progress on expanding our global distribution as well as enhancing our product presentations in our existing doors. In the US, we opened three dual gender full price stores, our first store in Philadelphia, a store in Pasadena, California, and a new store in Bal Harbor, Florida. These stores are currently performing in line with or ahead of our initial expectations, and we view them as great additions to our fleet.

We also opened three outlet stores in the third quarter in the cities of Wrentham, Massachusetts, Carlsbad, California, and San Marcos, Texas, increasing our outlet store count to nine.

Additionally, in our domestic wholesale channel, we opened six women's and five men's shop-in-shops, giving us a total of 23 domestic shop-in-shops as of December 2nd.

We intend to open up to nine additional domestic men's shop-in-shops in the fourth quarter, given the strength of our new men's assortment and strong interest by several retail partners in accelerating our men's penetration.

From an international distribution perspective, we leveraged the success of our previous shop-in-shop expansion strategy and opened two new shops in Korea. We are also pursuing locations in Canada, Japan, and the UK, with the goal of bringing our total international shop-in-shop count at the end of this year to a range of 13 to 14 shops.

In addition, we recently signed a distribution agent agreement for Germany and Austria, as well as a lease for our first international showroom in Paris, which we hope to have open in early fiscal 2015.

Similar to our new showrooms in New York, we plan to display the full breadth of the Vince brand, including both women's and men's apparel, footwear, as well as handbags and other accessories. We believe both of these initiatives will be key drivers of our European growth strategy.

Given our solid third quarter performance and current business insights, we are slightly modifying our guidance for fiscal 2014 as follows. First, the company continues to expect to achieve total net sales of $335 million to $345 million, including revenues from nine new retail stores and comparable store sales growth now in the high single digit range. Comparable store sales growth including e-commerce sales is expected to be in the low double digit range.

Second, the company now expects gross margin expansion of 200 to 250 basis points versus the prior expansion range of 200 to 275 basis points. This expansion will be driven primarily by operational improvements and the higher penetration of direct-to-consumer sales.

Third, we now expect to increase adjusted selling, general, and administrative expenses as a percent of sales by 200 to 250 basis points versus the prior range of 200 to 275 basis points over the adjusted fiscal 2013 rate of 25.6%. The increased SG&A rate is being driven by the expansion of our retail network, strategic investments in marketing programs, and incremental public company costs incurred for a full 12 month period.

Fourth, taking into account our current net sales, gross profit, and SG&A forecast, we reaffirm our guidance of adjusted diluted earnings per share of $0.90 to $0.94 for fiscal 2014.

Finally, we now expect our capital expenditures to be in the $20 million to $23 million range in fiscal 2014 versus the prior range of $18 million to $22 million.

In summary, we remain cautiously optimistic about the balance of 2014 and believe we are on track to achieve our long term goals of generating high quality revenue and earnings growth.

While we recognize that we cannot control the macroeconomic environment, we believe we have a long growth runway ahead and our team is working aggressively to build the business with exciting new product introductions, compelling shopping experiences, as well as innovative marketing initiatives. We'll continue to invest strategically in the business to exploit the full potential of the Vince brand while delivering value to our shareholders.

Before turning the call over for questions, I would like to thank our amazing Vince team in New York, LA, and the field for their tireless efforts in building the brand and driving these impressive results. I'd also like to thank our wholesale, licensing, and international distribution partners, who continue to showcase and support the brand. Finally, I'd like to wish everyone a very joyous holiday season.

Operator, we will now open the call for questions.

Thank you. (Operator instructions.) Robby Ohmes, Bank of America.

Good morning, guys.

Hey, Robbie.

Hi, Robbie.

I was going to ask, on retail, a couple of things. Jill or Lisa, could you just give us the third quarter traffic versus ticket and maybe some color on how outlets versus full line stores did for you?

And then, the follow up question would be just on the fourth quarter. Given the full year guidance, should we be expecting a mid single digit comp for the fourth quarter? I think that could get the year, ex e-commerce, into the high single digit range. Should we be thinking that way?

And then also, Jill, any color on what you're seeing out there right now for holiday? How promotionally competitive is it and any other thoughts? Thanks.

Sure. So, first in terms of traffic versus ticket, we basically saw flat traffic for the quarter. But, what we did see was increased conversion on that traffic, which led to higher transactions. And in addition to that, our ticket was up very slightly.

So, really no major change there. The biggest issue was higher conversion leading to higher transaction.

There was not really a major difference between our outlet stores and our full price stores. The statistics were pretty consistent. So, that would be that on the KPIs.

In terms of guidance, I'll let Lisa talk to you about that and our comps for the fourth quarter.

Yes. And then, just to tag on to what Jill said, obviously our ADS was impacted by our rather warm weather for the year. So, again, we had great velocity in some of our lower ticket items, but some of our higher ticket items are just now starting to sell through as the weather has changed.

For the year, I think we're comfortable with the range that we've provided, which is the high single digit for retail stores and then the low double digit range when we include e-commerce.

The holiday season is certainly just starting. With only week or so of sales behind us, it's a little too early to indicate what our thoughts are for the entire holiday sales period.

But, again, as Jill mentioned in her comments, we believe we're in a really great position to take advantage of the increased holiday traffic. As she mentioned, we saw nice traffic increases in the third quarter as well, so we're cautiously optimistic.

And just any color on the promotional environment out there competitively?

It's promotional (laughter).

Got it. All right. Thanks very much, guys.

Ed Yruma, KeyBanc Capital Markets.

Hi, this is Jessica Schmidt on for Ed. Thank you for taking my question. So, it looks like you did a good job cutting inventory on the balance sheet, and we noticed you did a big Vince promotion at Rack. How do you feel about your current inventory levels and your ability to clear-through inventory at places like Rack? And can you talk a little bit about how you look to balance your inventory clear-through at outlet versus off price?

Sure. Our Rack performance is consistent. So, there's not really a big increase there year-over-year.

We look to clear inventory in a number of different places. Obviously, first we try to mark it down in-store. We find that is the most efficient way to do so during key promotional periods. Then we will also transfer to our outlet stores to move through, although clearly we have nine outlet stores today in different locations. And then, after that we will look to go through our various department store partners.

But, we really try to hold our promotional inventory sales at a relatively consistent lever. And we're fortunate that we have so many other growth opportunities ahead of us to drive our sales, clearly through product category extensions, opening new stores, driving e-commerce, international growth, etc. So, the environment is promotional, but we're really trying to hold our promotional sale rates and drive growth through the other levers.

Okay. And just as a follow-up, now that you're longer into evolving the men's offering, how do you feel about your ability to get customers to buy the full men's collection instead of just the separate pieces that you had historically seen?

Actually, the guys are really loving it. We obviously have strength in our cashmere sweaters and the iconic essential tops, like hoodies and tees.

But, they've responded very, very well to some of our new pant offerings, especially the jogger. They're loving the outerwear. We're seeing great sell-throughs in some of our elevated skins and leather. Also, we had unconstructed blazer this season that has basically sold out.

So, we're hearing from our male consumer that they really want us to dress them with head to toe looks, and they're very receptive to the expanded product offering.

Okay, great. I'll pass it along.

Thanks, Jessica.

Evren Kopelman, Wells Fargo.

Thanks. Good morning, everyone.

Good morning.

A question on the wholesale business. Was the off price business higher this quarter year-over-year, and was that part of the gross margin pressure? And then secondly, do you still expect inventory growth at year end to be that up? I think you have said 25% to 35%.

Yes. So, we definitely are still targeting the up 25% to up 35% year-over-year inventory increases. Clearly, our third quarter was still impacted by some of the year-over-year comparisons with the in-transit shift that we had by moving -- to taking ownership from our factories a little bit sooner.

That impacted our year-over-year growth by a little over 30%, that along with our handbag inventory. And then, clearly the new stores that we have in the pipeline, the new shop-in-shops and our replenishment program, was another 35%. So we, again, are very confident in the 25% to 35% range that we indicated earlier.

From an off price perspective, it's fairly consistent year-over-year. We had really strong and nice growth in our full price business domestically, which was one of the major drivers for our wholesale increase.

Thanks, and then a final follow-up. Could you -- so the 50 basis points of increase in gross margin, could you quantify how much -- the positives and the negatives? So, the positive from the supply chain and the mix benefit, how much was that? Just trying to figure out how much was the offset. Thanks.

Sure. So, the impact of international licensing and direct-to-consumer was a positive of about 130 basis points.

The operational improvements added about 50 basis points, and then the change in our markdowns, promotions, and returns allowances, combined with some of the other margin changes that we have, impacted our gross margin rate by a negative 130 basis points.

Perfect. Thank you very much.

Erinn Murphy, Piper Jaffray.

Great, thank you. Good morning. I was just hoping you could just maybe follow up on your commentary earlier on the comp. I mean, clearly the environment in the third quarter was challenging for many. But, maybe just help us understand how the cadence evolved from August, September, and October, and then if there was any quantification of cannibalization as you open multiple stores in existing markets, if that was the drag at all on the comp in the third quarter.

Sure. Well, first I just want to say we think it's pretty good to have delivered solid single digit comps with gross margin improvement in this quarter and challenging retail environment. So, I just want to start there when we look at some of the numbers of our peers.

In terms of the specific numbers, we don't give monthly guidance. But, without a doubt, it was unseasonably warm. So, as you would imagine, as we progressed throughout the quarter, our sales of sweaters and outerwear, which is higher ticket, did definitely pick up. So directionally, the trend improved throughout the quarter, even though we don't give specific monthly numbers.

The others thing to think about in terms of our comp performance is, first, we're up against roughly 17% comps last year.

Second, we are seeing a continued shift to online shopping, which is why you are now seeing us reporting our comps inclusive of e-commerce, which is something that we will do go-forward. We think it's really important. We actually even stimulate online sales in our stores. It's how customers are shopping today, so we do think it's important to think about comps on an aggregated omni-channel basis.

And the other thing, as you pointed out, is that we're opening new stores in markets where we do have comp store sales, which we think is the right thing to do to grow market share. So, for example in Boston, our comps there were negative 17%, yet we grew the market by 182%. And that is what enabled us to deliver over 30% growth in our direct-to-consumer business overall.

The other thing that I think everyone should take into consideration is, while comps are certainly an important retail metric, we currently have 26 stores in our comp store base out of 2,400 points of distribution in total. So, it's really about 1% of our distribution and it represents about 14% of our sales.

So, we think, at least at this stage in our evolution, it's really more important to think about the growth in our wholesale and direct-to-consumer segments overall. And especially in wholesale, where we don't have a lot of new door expansion, generating 17% growth in wholesale we also think is pretty good.

So, hopefully this explanation gives you more flavor on our comp store performance for the quarter.

No, I appreciate that. Thank you. And then, just on the handbag launch, Jill, it would just be great to hear a little bit more detail, as clearly that's been fairly exciting in the last few weeks and there's been a lot of press on the silhouettes that have been coming out. Could you just maybe speak a little bit more about how you're thinking about building that business over the next one to two to three years? Thank you.

Yes, absolutely. We're very, very excited about handbags. We think it's a natural extension for Vince. We know that it's a category that will resonate with our customers.

Obviously, it's very, very early, just hitting Saks last week and in our own stores and online for few weeks more than that, but customer receptivity has been good.

They really love the baby crossbody, which is attracting an aspirational customer, as well as the tote, both in fashion colors and the mock crock, which is a great weekend item. The price points are very compelling. We think that it's very consistent with our overall brand DNA. It's simple yet sophisticated.

And in terms of how are we seeing this roll out, what we'll do is, first, there will be additional colors and fabrications within existing collections. There will also be some new collections that we introduce for fall 2015.

And then, in subsequent years, we're working on small leather goods as we speak, which we think is a great complement, little pouches and other items that can go inside of the bags. And then, over the longer term, we also see an opportunity for men's leather goods. So, that's how we see that category rolling over the time.

That's helpful. And then, just a last housekeeping for Lisa. Lisa, is there any change in your interest expense assumption in the full year guidance? Thanks.

In our interest rate assumption? Is what you said?

Sorry, your interest expense, excuse me, that you're using now on the guidance.

No. I think where we stand from a debt position right now, we're looking to pay up to an additional $5 million down of debt depending on the cash flow generated in the fourth quarter. It's fairly consistent with what I believe most of you have modeled.

Okay. Thank you so much. I appreciate it.

Mark Altschwager, Robert W. Baird.

Good morning, and thanks for taking the question. Jill, just following up on your comments on the channel dynamics, I mean, you've seen continued momentum in the wholesale channel, some deceleration in retail comp growth. You also mentioned the shift to e-commerce. So, just -- has there been any change to your thinking to the build-up of the expected 15% to 20% annual revenue growth? Do you still feel good about your long-term target of 100 stores?

Yes. So, basically we're just finishing up our budgeting process for next year. We've gone through a three year planning process, and all of the growth rates that we've previously communicated still remain intact.

We can see continued growth in wholesale, obviously, by increasing penetration in existing doors, with shops having new categories. Obviously wholesale is also growing through digital expansion, and our expansion of licensing and international categories.

From a retail perspective, we maintain our growth assumptions there as well. We still believe that there is a 100 door potential, roughly 75 full price stores and 25 outlet stores, and that is in the US alone. We do believe there are some retail opportunities outside of the US, which we're beginning to formulate.

And e-commerce clearly continues to be one of our fastest growing channels and an area that we are investing behind. So, as you know, we re-launched the site and we're now doing mobile optimization. We have a great giving guide. So, we basically are standing behind all of the growth assumptions that we have communicated with you previously.

Great. Thank you. And then, on guidance, the updated gross margin and SG&A guidance implied some fairly large ranges for Q4, so any help you can provide us on understanding the key swing factors for each of those. And if gross margin were to come in at the low end of the range, is there the flexibility to pull back on the spending side? So, just any context there would be helpful. Thanks.

There is. So, the biggest swing is obviously due to any markdown or impact that we have from our wholesale partners. Again, we true that up at year end, and so that's why there's a little bit of a broader range at the fourth quarter and why we kept guidance to the 200 to 250 basis point range for the year that we articulated.

We certainly do control many of our SG&A costs and we monitor those very, very closely, with the biggest portion being corporate expense and store labor. So, obviously we do have the flexibility to flex those expenses to help maintain the operating margin guidance that we've previously provided.

Jeff Van Sinderen, B. Riley.

Good morning. And I just had a follow up on the depth and breadth of your markdowns, promotions. Just wondering was it a little bit of both, or was it more breadth or more depth? Any more color you can give us on that?

Our year-over-year promotions are actually consistent.

With the market.

Okay.

Are you speaking about the returns -- the various allowances that we articulated?

Yes. Exactly, right. Yes, I was just trying to get any more granularity on that.

Yes. So, those are actually the allowances, so that's more of a go-forward assumption rather that sort of in-quarter. And so, in the third quarter, we thought that it was prudent to take a bit more of a conservative view in our reserve methodology, given the current retail environment.

The additional reserves negatively impacted the gross margin rate, as I mentioned, by roughly 120 basis points, 130 when you move in some mix shift. And so, as with all reserves, they'll be reviewed quarterly.

So, at the end of the quarter, we'll certainly look at that again and we'll adjust those allowances up or down as the business dictates. But, again, we are looking to expand our gross margin rate 200 to 250 basis points for the fiscal year, so a nice, nice improvement.

Okay, that's really helpful. And then, relevant to inventory, I mean, at this point do you feel like you're really clean? I mean, obviously there are number of moving different parts there, or do you feel like there may be still some smaller areas of excess due to the weather? I mean, I know obviously September/October were really warm, as you mentioned as well. So, what's the overall picture, I guess, on inventory at this point?

Yes. I mean, our inventories are primarily current. More than 75% of the inventory right now is selling at full price. And then, if you include the current season that's on sale, that rate is above 90%.

So, again it's very current and these levels are relatively in line with last year's sales. So, again, we're still very confident in the up 25% to up 35% year-over-year guidance that we provided for the year.

Okay, great. And then, just one final quick one. On CapEx, just wondering why you up-ticked that guidance?

Sure. We recently signed a lease for our Paris showroom, which we're really excited about because we've been looking for a very long time for the right location. But, we believe that we have significant opportunity to grow our international business.

And as we've communicated previously, Western Europe is a key focus area for us so we have been looking to establish a Paris showroom. We have identified a location. It will house men's and women's apparel as well handbags, as well as footwear. Brown Shoe is actually taking a portion of the showroom with us. So, we have increased our CapEx estimate because of the international showroom, which hopefully will be open in time for February market.

Okay, great. Thanks very much, and good luck.

Thanks.

Joan Payson with Barclays.

Hi. Good morning. This is Bridgette Taylor on for Joan Payson. Thanks so much for taking my question. You provided some helpful color on handbag performance, but could you provide any more detail on the other new categories, on how they're performing such as licensed shoes, children's wear, as well as the performance of stores carrying the broader category offering?

And then separately, could you provide any detail on what performance or trends you're seeing internationally, and if you saw any particularly strong or weak markets? Thanks so much.

Sure. So, from a new category perspective, or at least outside of our core apparel category, our women's footwear business continues to perform very well. You may have listened in to Brown Shoes recent earnings call, but we've had very phenomenal growth.

We're now sold in approximately 370 high-end doors worldwide. And as we communicated earlier, that number should increase to about 500 for spring. So, women's footwear is doing well, and it's doing well in all channels.

It's doing well in department stores. It's doing well in our own retail stores, and it's doing well online. And now we're looking to really try to ramp up the rollout internationally. That's why the Paris showroom is going to help in that regard.

We saw growth really across all categories in women's footwear. Obviously our sneakers continue to do well, but also boots, heels, and flats. We also introduced men's footwear, as you know, and that also is doing well.

And the way that we know that is our department store partners are expanding us into additional doors. So, while we were in just under 60 doors for the initial launch, that number is going to increase over 30% or so for spring. We're also going to have an expanded assortment.

So, similar to women's, we launched tight and then we rolled out other classifications. So, we're going to have slip-on sneakers with men's. We're also going to have Oxfords and sandals and other product categories. So, that's what's happening there.

In terms of our kids' line, we're learning a lot from our consumers with regards to kids. We're seeing the best performance in fashion items. We are seeing lower sell-through in the basic items, and we're also seeing a lot of gift purchases in kids.

So, we'll continue to work with our licensing partners to evaluate and grow the business. But, the important thing to consider is that, because these businesses are licensed, the P&L impact is primarily through increased royalties to Vince, and less so on the top line.

And then, for the stores that have the complete assortment, stores like Mercer and others, those stores are doing very well because, again, our customers are looking for head to toe looks, and we have terrific sales associates that could provide that guidance on wardrobing. So, the new categories are resonating well in the stores that are able to accommodate the compete assortment.

Oh, and then international. Okay. So, from an international perspective, our international business is doing well. We continue to remain in the top five in most of our international department store partners.

In terms of the markets that are doing well, we are seeing growth in our largest markets, obviously Canada, Japan. We saw nice growth in Korea. And we're seeing nice growth in the Middle East as well, as well as some of our newer markets where we have recently entered into agreements such as Scandinavia, Benelux, and Turkey.

Great. Thank you so much.

Richard Jaffe, Stifel.

Thanks very much, guys. And just a couple of follow-on questions, one about real estate and the opportunities to learn from what you've done with real estate, whether the big stores, full format stores are best, or whether you're better with more of the more boutique size stores.

And then, if you could, give us a sense of your visibility into the spring orders and new markets and new categories, how you'll be shipping some of the new categories and how much of the international business will be opening up to those new categories.

Okay. Well, in terms of store size, as I think we've mentioned previously, we're actually seeing that some of our newer and larger stores are performing better than some of our smaller stores. And that's partially a function of the fact that the older stores were dark, not well merchandised, couldn't even have sufficient inventory in the backroom to replenish. So, the bigger stores that can really accommodate the full assortment and have proper merch flow and an area to try on shoes and things like that are doing better.

Without a doubt, it's going to vary by market. And so, we look at that where, in a Westport, Connecticut, we go with the smaller, more boutique store. And we opened the flagship down in SoHo with a bigger store, and similar to what we did in Boston on Newbury Street. So, I think it depends on market. But, in general, we're seeing greater sales performance and productivity in some of our larger, newer stores.

In terms of spring orders, we are in market right now, so we have all of the accounts in. We're really excited because, not only are we showing our pre-fall collection, we're also showing our fall 2015 handbag line. We have a lot of accounts coming in.

So, as you know, we've launched exclusively with Saks, but all of our other partners are very eager to pick up the line. And in addition, we have several of our international partners coming in that are also eager to pick up the line.

So, on our next conference call, we will provide 2015 guidance and be able to give you further insights into what the orders look like and what we think performance will be for next year.

Thank you very much.

Lindsay Drucker Mann, Goldman Sachs.

Hi. Good morning, everyone.

Hi, Lindsey.

I was curious. You guys have such a solid customer, a high-end customer who's been a little more insulated from some of the challenges we've seen across the rest of apparel. In your perspective, as you talked about how promotional it was out there, did something change with the higher end consumer or with that segment, or is this sort of consistent with what we have been seeing all along?

I mean, our total growth was over 20%, and that's pretty consistent with the growth measures that we have delivered previously. We've said we would grow at 15% to 20%, and we're growing at 20%.

You've seen that wholesale was at 17%, and direct-to-consumer was over 30%. So, while it is more promotional out there, we are able to generate good sell-throughs, good sales levels, and also deliver margin increases even while taking some reserves for promotional and markdown allowances.

Okay, one clarification. I think last year you had called out about $5 million of sales in the third quarter that had shifted into 2Q and into 4Q of 2013. Am I right? And did that timing shift impact your third quarter at all or was that consistent year-over-year?

So, the shipping changes were really a comparison issue between 2013 and 2012. Our shipping cadence this year, so 2014 versus 2013, was consistent, so that didn't impact the 17% wholesale growth that we mentioned on the call.

Okay, got it. And then lastly, can you tell us how much off price matters to your wholesale business as a percentage of sales?

Well, we try to target our off price sales at about 20% of the total.

I mean, clearly we know that there is an increasing number of outlet stores being opened by our wholesale partners. We are not going into all of the doors that they are opening because we think it is important that we try to maintain a high percentage of full price sales to really preserve and retain the strength of the brand.

So yes, there are more doors opening but we're not going into all of them. And again, we think we're fortunate at this stage of our brand evolution that we have other growth initiatives available to us through category extensions, new stores, e-commerce, and new geographies.

Great. And then, maybe just one more follow-up. I think Michele Sizemore joined you guys in early or mid 2013, and has obviously done a lot of great things in improving supply chain and logistics and operations. And you called out some of gross margin benefit in the quarter. Would you say we're still in the early innings in terms of the operational improvements you expect from her leadership and some of the other initiatives or are we sort of middle stages, or how would you characterize where we are in that?

Yes, I would say that we're still in the early innings. I mean, Michele has done an amazing in the time that she's here.

We've talked in the past about the fact that we have able to really reduce our air shipments and do much more via vessel, which certainly is less costly to us, and we've modified our calendar to accommodate that. We have also shifted to LDP to FOB so we have more visibility throughout the supply chain. And we've also looked at consolidating our vendor base.

But, there is certainly more opportunity to come. We have just signed a new sourcing agent agreement with new times, as you know. And we do believe that that is going to provide continued benefit to margin in the future. In addition to that, as our volumes grow, we can negotiate better rates.

And I think the other thing that Michelle and team is really just beginning to tackle now is supply chain from DC to store. So, initially we focused on the supply chain opportunities from factory to DC, and now we believe that there are some additional opportunities from DC to store. So, we do expect continued margin rate expansion as a result of the operational improvement initiatives we've put in place.

Great. Thank you so much.

Janet Kloppenburg, JJK Research.

Good morning, everyone, and congrats on a good quarter.

Thanks, Janet.

Hi. Lisa or Jill, if you could talk just a little bit more about this, I haven't really heard you talk about this markdown reserve as much. It sounds like you're being cautious on the fourth quarter, maybe protecting the margin a little bit. If you could talk a little bit about that, and if the reserve is higher year-over-year.

And then, did you also say -- I just wanted you to reiterate. Did you say that your full price business at wholesale was improved in the third quarter versus last year? I think I got that, but I'm not quite sure.

And then, I also just wanted to ask about the handbag line. I know a lot of your accounts are coming in to look at it. So, will we see a much broader distribution of the assortment going forward in the wholesale channels, or will you control that? Thanks so much.

Okay. I'll take the second and third question. I'll let Lisa take the first one.

Okay.

In terms of full price sales at wholesale, yes, our full price sales at wholesale were up. Especially in our men's business as well, we're really seeing great traction. I think we mentioned that we have opened several shop-in-shops. And we'll continue to open shop-in-shops for men's, which really gives us an opportunity to have a more robust assortment. But, our women's full price sales were up as well at wholesale, so just want to clarify that point.

In terms of handbags, yes, you will see broader distribution than just the 26 Saks stores. Obviously, we will look to sell our handbags in all of the key department stores where we sell our ready-to-wear product. But, we are not looking to broaden our distribution to new accounts. We are just really looking to roll out our handbags to more doors within our existing accounts.

Thank you.

And then, as far as the reserve methodology, again, I think we took a bit more of a conservative view. So, from a year-over-year perspective, the rate is up modestly. It's not materially increased but, again, we did take a modest increase given the change in reserve methodology.

And again, we will see how the quarter plays out. And we'll true that up at the end of the year either upwards or downwards, depending on the actual performance for the holiday.

Yes. I think one other thing just to build upon what Lisa said, we haven't really changed our promo cadence, but we are seeing customers buying more on promotion. So, that's why we have really looked at what our reserves are and what's going on competitively. But, we've really kept our promotional cadence pretty consistent year-over-year.

Great. And Lisa, how did that methodology change?

It's the reserve methodology that you take each bucket, each various component, whether that is your markdowns --.

No, but did that change? Did that change?

Or your return allowances, and you make a judgment call on what you think percent is going to sell through at various rates.

No, no, I understand that. Thanks. I guess I was misunderstanding. I thought maybe you had changed the timing or the format in which you took that valuation reserve, but it sounds like you did not.

No, no, no. It's just a more cautious view on how we approach that reserve methodology calculation.

Totally understood. Thanks so much, and good luck for the season.

Thank you.

Thank you.

There are no further questions at this time. I'll now turn the call back over to Jill Granoff, Chairman and CEO.

Thank you all for listening and participating in our call today. We look forward to speaking with you again in March for our fourth quarter and full year fiscal 2014 earnings call.

This concludes today's conference call. You may now disconnect.