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Edited Transcript of SHOO earnings conference call or presentation 27-Feb-19 1:30pm GMT

Q4 2018 Steven Madden Ltd Earnings Call

Long Island City Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Steven Madden Ltd earnings conference call or presentation Wednesday, February 27, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Danielle Marie McCoy

Steven Madden, Ltd. - Director of Corporate Development & IR

* Edward R. Rosenfeld

Steven Madden, Ltd. - Chairman & CEO

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Conference Call Participants

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* Camilo R. Lyon

Canaccord Genuity Limited, Research Division - MD & Head of US Consumer Research

* Christopher Svezia

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Erinn Elisabeth Murphy

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Laura Allyson Champine

Loop Capital Markets LLC, Research Division - MD

* Laurent Andre Vasilescu

Macquarie Research - Consumer Analyst

* Matthew Gregory Degulis

KeyBanc Capital Markets Inc., Research Division - Associate

* Richard Magnusen

* Ross Ladd Licero

Telsey Advisory Group LLC - Analyst

* Samuel Marc Poser

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Steven Louis Marotta

CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst

* Tom Nikic

Wells Fargo Securities, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2018 Steve Madden Earnings Conference Call. (Operator Instructions). As a reminder, this conference call may be recorded.

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

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Danielle Marie McCoy, Steven Madden, Ltd. - Director of Corporate Development & IR [2]

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Thanks, Lauren, and good morning, everyone. I'm Danielle McCoy, Director of Corporate Development and Investor Relations for Steve Madden, and I'd like to thank you for joining our fourth quarter and full year 2018 earnings call and webcast.

Before I begin, I'd like to remind you that during our call, we may make certain forward-looking statements as defined in the federal securities laws regarding our expectations or predictions about the future. Generally, these statements relate to projections involving anticipated revenues, earnings or other aspects of the company's operating results. Because these statements are based on current assumptions and expectations, they involve known and unknown risk, uncertainties and factors not within the company's control and as such, our actual performance and results may differ materially from these statements.

Our annual report and other reports filed with the SEC from time to time include detailed discussions of the risk the company faces, and we urge you to refer to these. Any forward-looking statements represent our judgment as of the time of this call and cannot be relied on -- 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 presented are on an adjusted basis, unless otherwise noted. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release.

Joining the call today is Ed Rosenfeld, the Chairman and CEO of Steve Madden. With that, I'll turn it over to Ed.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [3]

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Thanks, Danielle. Good morning, everyone, and thank you for joining us to review Steve Madden's fourth quarter and full year 2018 results. We are pleased to have delivered a strong fourth quarter, with net sales growing 13% and diluted EPS increasing 31% compared to the prior year period, driven by continued strength in our flagship Steve Madden brand in both footwear and handbags as well as outstanding growth in Blondo and in our private label accessories business.

The strong fourth quarter capped a very good year for Steve Madden, as we recorded 7% net sales growth and a 23% increase in diluted EPS compared to 2017. We also made progress on a number of key initiatives that position us for growth in 2019 and beyond. Let me briefly touch on the highlights.

First and foremost, we once again delivered on our promise to offer our customers trend-right fashion footwear at great values in our flagship Steve Madden brand. Steve and his design team created on-trend product assortments with strength across a range of categories, most notably fashion sneakers.

In our core Steve Madden Women's U.S. wholesale footwear division, net sales were up mid-single digits on a percentage basis on top of mid-teen percentage sales growth in the prior year as we consolidated the market share gains we have made in this business over the past few years. Most importantly, our sell-through performance at retail continues to outpace the competition, positioning us for continued strong performance in this division in 2019.

Our Steven division also continues to gain momentum. Net sales in Steven increased mid-teens on a percentage basis on top of high single-digit growth in the prior year. And Madden NYC, the new brand exclusive to Kohl's that we launched in spring 2017, had an outstanding second year. We have now rolled out selected women styles to all doors at Kohl's. And for spring 2019, we are launching men's in 50 doors.

Importantly, our Steve Madden brand is resonating not only in the U.S. but increasingly in international markets as well. In 2018, our overall international net sales increased 22% compared to the prior year, with strong increases in our owned markets, Canada and Mexico, as well as greater than 40% growth in our SM Europe joint venture and in our distributor business led by robust gains with our distribution partners in the Middle East, India and Italy.

At the end of the year, we also transitioned another key market from the distributor model to an ownership model with the formation of a joint venture in Israel. We own 51% of the new JV and our former distributor, Inner Jeans, owns 49%. Steve Madden was introduced to the Israeli market in 2005 and thanks to the good work Inner Jeans has done as our distributor, the brand has a very strong position in the market already. We currently have 14 Steve Madden stores in Israel as well as wholesale distribution to approximately 50 doors. Under the JV model, we believe we can improve the productivity of the existing stores, add approximately 10 stores over the next 3 years and significantly expand the wholesale business. Overall, continuing to grow our international business will be a top priority in 2019 and beyond.

Another highlight in 2018 was the performance of Blondo, the waterproof boot -- excuse me, the waterproof brand we acquired in 2015. Blondo's combination of fashionable styling with waterproof functionality continues to resonate with consumers, and its net sales increased more than 50% for the year. In addition to continued outstanding performance in its core category of women's waterproof boots, the brand made solid inroads into new categories, like women's sneakers as well as men's, which had a very successful test with a key customer in fall of 2018 and will be rolling out to additional doors for 2019.

We also introduced a Blondo diffusion line called Aqua College into the U.S. There too, initial sell-through performance was strong, and we will see door expansion in 2019. Overall, we couldn't be happier with the momentum in Blondo and look forward to continued growth of the brand in 2019.

We also added a new brand to our portfolio, Anne Klein. At the end of January 2018, we signed an agreement to become the licensee for Anne Klein footwear and handbags and began shipping product in fall of 2018. With its dedication to timeless American classics, the Anne Klein brand is complementary to the other brands in our portfolio, and we were pleased with its initial performance under our umbrella in fall 2018. We're also very excited about the prospects for the brand in 2019 as this spring marks the first season in which we have control over all processes, from design to delivery, and we are confident we can begin to drive significant gross margin expansion. In terms of revenue, we remain on target to achieve our initial goal of $80 million to $90 million in net sales in Anne Klein footwear and handbags in the first 12 months of shipping, which encompasses the back half of 2018 and the first half of 2019.

Another bright spot in 2018 was our wholesale accessories business, which had net sales growth of 17% and EBIT growth of 20% versus 2017. Our Steve Madden handbag business continues to benefit from an improved product assortment that is better aligned with our fashion-forward footwear styling and we are seeing that in the results. Steve Madden handbag net sales grew nearly 20% in 2018 on top of a mid-teen percentage increase in the prior year.

In addition, our private label handbag business delivered outstanding growth, driven by strong gains with mass merchant customers. And Cejon, our cold-weather accessories business, recorded significant improvement in profitability as we expanded gross margin and cut costs. Finally, our wholesale accessories segment benefited from the addition of Anne Klein handbags in fall. We expect another year of strong top and bottom line growth in wholesale accessories in 2019.

In our retail segment, we had an overall comparable store sales increase of 2.8%. After being roughly flat in the first half, comps improved to up mid-single digits in the back half. The driver was a significant acceleration in our e-commerce business as we saw the benefits of a number of new initiatives put in place in 2018. We began offering free 2-day shipping to loyalty members, provided earlier online access to new styles, introduced new payment methods, including Afterpay, and increased our social media marketing efforts just to name a few. We also migrated our e-commerce sites to the Shopify Plus platform, a cloud-based solution that is reducing our operating costs while improving our speed and flexibility and enhancing our ability to add new features and functionalities to the site.

Our stevemadden.com business saw significant sequential improvement throughout the year with net sales going from a year-over-year decline in Q1 to 13% growth in Q2, 19% growth in Q3 and then 30% growth in Q4. Importantly, we saw gross margin trends improve over this period as well as we reduced discounting on the site. Gross margin on stevemadden.com in the back half was 600 basis points higher than in the prior year.

Finally, in 2018, we continued to utilize our strong balance sheet and healthy free cash flow to return capital to shareholders. We bought back 3.4 million shares, or approximately 4% of the company, for $106 million, including open market repurchases and shares acquired to the net settlement of employee stock awards. We also initiated our first regular quarterly dividend in Q1 2018 and paid a total of $47 million in dividends to our shareholders in 2018.

In summary, 2018 was a very good year for Steve Madden, as we delivered strong financial results and also made progress on a number of key strategic initiatives that position us for growth in the future.

As we look ahead to 2019, we are encouraged by the strength we are seeing in our flagship Steve Madden brand, the growth opportunity in newer brands like Anne Klein and Blondo, the momentum we have in accessories, the acceleration in our e-commerce business and the runway we have in international markets.

That said, we do face a couple of headwinds in 2019. First, Payless ShoeSource filed for Chapter 11 on February 18, approximately 18 months after emerging from its prior bankruptcy. Payless has been a meaningful private label customer for Steve Madden since the company's acquisition of Topline in 2011.

During 2018, we conducted some of our business with Payless through the wholesale model, in which we recognized net sales, and some of our business with Payless through the first cost model, in which we did not recognize sales on the top line but instead showed a profit in the line called commission and licensing fee income net. As such, our reported net sales to Payless in 2018 were $52 million. But if we were to include the First Cost business as well, we had $105 million in sales from Payless last year. When compared to 2018, our guidance for 2019 reflects an adverse impact from losing Payless as a customer of approximately $0.16.

Secondly, our guidance reflects a forecasted 2019 tax rate of approximately 22%, up from 18.9% in 2018. This is partially driven by the loss of income related to Payless, which carried a lower tax rate. But it also reflects a change in the breakdown of our remaining earnings by tax jurisdiction as well as lower forecasted discrete benefits related to stock-based compensation. Excluding the impact related to Payless, the higher forecasted tax rate in 2019 results in an adverse impact to 2019 EPS of $0.05 when compared to 2018 for an overall combined adverse impact from the Payless bankruptcy and a higher tax rate of $0.21.

While these headwinds pose a near-term challenge, we continue to feel very good about the underlying strength in our business, and we remain optimistic that our strong brands and proven business model will enable us to drive sales and earnings growth and generate significant value for shareholders over the long term.

With that, I'll turn it over to Danielle to review our financial results in more detail and provide you with our initial guidance for 2019.

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Danielle Marie McCoy, Steven Madden, Ltd. - Director of Corporate Development & IR [4]

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Thanks, Ed. We are pleased with our strong fourth quarter performance. Our consolidated net sales increased 12.6% to $410.4 million compared to prior year net sales of $364.4 million.

Our wholesale segment increased 14.1% to $317.4 million compared to $278.2 million in the prior year period, driven by strong gains in both our wholesale footwear and accessories businesses. Wholesale footwear net sales increased 7.4% to $233.9 million. We saw strong growth in Steve Madden Women's as well as outstanding growth in Blondo. Wholesale footwear also benefited from the addition of Anne Klein, but this was offset by the transition of the business with Payless out of the top line. In wholesale accessories, net sales increased 37.9% to $83.4 million, driven by exceptional growth in both Steve Madden handbags and private label handbags. Wholesale accessories also benefited from the addition of Anne Klein.

In our retail segment, net sales increased 7.9% to $93 million. Our same-store sales increased 4%, driven by strong performance in e-commerce. We ended the quarter with 229 company-operated retail stores, including 62 outlets and 7 e-commerce stores, as well as 42 company-operated concessions in international markets.

Turning to other income. Our licensing royalty income, net of expenses, was $3 million in the quarter compared to $3.1 million in last year's fourth quarter, while First Cost commission income was $0.1 million compared to $0.3 million last year.

Consolidated gross margin decreased 100 basis points to 37.1% compared to 38.1% in the prior year.

Wholesale gross margin decreased to 30.1% for the quarter compared to 31% last year. In addition to margin pressure and wholesale accessories related to a shift in sales mix, as expected, the 10% tariff on handbags and certain other accessory categories implemented on September 24, 2018, and increased ocean freight driven by a high demand for containers in efforts to bring goods in prior to the new year were also headwinds to wholesale gross margin.

Retail gross margin was 61%, up 20 basis points compared to the same quarter last year as a result of improved gross margin in our e-commerce business.

Operating expenses for the quarter increased to $117.5 million or 28.6% of net sales compared to operating expenses of $105.8 million or 29% of net sales in the same period last year.

Operating income for the quarter totaled $37.9 million or 9.2% of net sales compared to last year's fourth quarter operating income of $36.3 million or 10% of net sales.

Our effective tax rate for the quarter was 9.2% compared to 24.9% in the same period last year, due primarily to the impact of the Tax Cuts and Jobs Act.

Finally, net income for the quarter was $35.7 million or $0.42 per diluted share compared to $27.5 million or $0.32 per diluted share in the fourth quarter of 2017.

Now I would likely -- I would like to briefly touch on full year results. Consolidated net sales for 2018 increased 7% to $1.65 billion from $1.55 billion in the prior year.

Net income was $157.7 million or $1.83 per diluted share for the year ended December 31, 2018, compared to net income of $129.3 million or $1.49 per diluted share for the year ended December 31, 2017.

Moving to the balance sheet. Our financial foundation remains strong. As of December 31, 2018, we had $267 million of cash and marketable securities and no debt. Inventory totaled $137.2 million compared to $110.3 million in the prior year. Excluding Anne Klein and our new Israel JV, inventories were up 17% compared to last year. The inventory increase was primarily driven by our accessories segment as we aggressively worked to receive goods prior to the anticipated tariff increase from 10% to 25% beginning January 1, 2019. We remain comfortable with both the level and the composition of our inventory.

Our consolidated inventory turn for the last 12 months ended December 31, 2018, was 8.1x. CapEx in the quarter was $4.3 million, bringing our full year CapEx to $12.5 million.

During the quarter, we repurchased approximately 1.8 million shares for $55 million or -- and for the full year, we repurchased approximately 3.4 million shares for $105.9 million. Both of which include shares acquired through the net settlement of employees stock awards. At the end of the fourth quarter, it was $91 million remaining on the share repurchase authorization.

Last, the company's Board of Directors approved a quarterly cash dividend of $0.14 per share. The dividend will be payable on March 29, 2019, to stockholders of record as of the close of business on March 19, 2019.

Now turning to our guidance. For the full year 2019, we expect that net sales growth will be 4% to 6%, and we expect that diluted EPS will be in the range of $1.75 to $1.83.

As Ed mentioned earlier, compared to the prior year, the diluted EPS range reflects a negative impact from the Payless ShoeSource bankruptcy of approximately $0.16 and a negative impact from the higher tax rate of approximately $0.05 for a total of $0.21.

The diluted EPS guidance also assumes the recently implemented tariff on handbags and certain other accessory category remains at 10% for the remainder of the year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Camilo Lyons with Canaccord Genuity.

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Camilo R. Lyon, Canaccord Genuity Limited, Research Division - MD & Head of US Consumer Research [2]

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So going to the Payless impact, I think you articulated very well the negative headwinds you're seeing from it. I'd like to get your thoughts on what you guys are doing to work to recapture that business and any sort of discussions that you're having with retailers now in terms of where that incremental demand will go and how you're going to position yourselves to go after that open available market share.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [3]

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Camilo, it's a good question. I actually saw an interesting statistic yesterday, which is that consumers that shopped at Payless in 2018, nearly half also purchased footwear at Walmart in 2018 and approximately 20% also purchased footwear at Target. And those were the 2 largest customers in terms of overlap with Payless shoppers. And so the good news is, we obviously have very significant private label relationships with both Walmart and Target, and we've already initiated discussions with each of them and other retailers, that think they may be beneficiaries from Payless going out of business in the U.S., about how we can grow our business there and how we can assist them in trying to capture some of that market share that's going to be up for grabs, and we think we're well positioned to do that. Obviously, we have a lot of intelligence about what worked at Payless because of our relationship there, and so we think that we can really help these retailers as they look to go after that business.

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Camilo R. Lyon, Canaccord Genuity Limited, Research Division - MD & Head of US Consumer Research [4]

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So as you think of kind of the unfolding of the year and how the progression goes, could it be that the back half of '19 sees some of that incremental demand flow through to Walmart and Target such that it will flow to your P&L? Or is that too soon to expect any sort of recapture and maybe it's more of a 2020 event?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [5]

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Well, no, I'd like to see us get some business in fall of 2019 for sure. I mean, I think you'll see more of it in 2020, hopefully. But certainly, we're going to be going after some business in fall 2019.

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Camilo R. Lyon, Canaccord Genuity Limited, Research Division - MD & Head of US Consumer Research [6]

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Got it. And then I guess just shifting gears but staying on the private label topic. Are there any other opportunities that you guys are exploring outside of the Payless situation that would help offset some of this kind of macro-driven headwind? Are there any other customers that you're not currently doing business with that you have a potential to do so or are exploring any avenues to increase that potential?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [7]

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Well, I mean, frankly, I think the one that's growing the fastest is one that we already do business with and that's Walmart. We're seeing really strong growth in both footwear and handbags with Walmart in private label, and so we'll look to make up some volume there. But the other thing that you've heard us talk about is the private label business at Schwartz & Benjamin, and we really think that's a good platform for us to go after what we call better private label, including department stores. So we've got a couple of things that we're pretty excited about there. We've got a very successful private label program, the Aqua brand in Bloomingdale's, that we're now running out of our Schwartz & Benjamin platform. That's doing very well. We've also got a new program at Dillard’s, which we'll be launching for fall, which is our first private label program there. We continue to have a very -- department stores, but we continue to have a very successful private label business with Banana Republic that we run out of Schwartz & Benjamin. So we're excited about continuing to grow that business.

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Camilo R. Lyon, Canaccord Genuity Limited, Research Division - MD & Head of US Consumer Research [8]

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Sounds great. And then I guess just finally on this topic, on the Payless topic. Given that it's such a kind of disruptive event to as near to your business as we're seeing, is there any sort of help or guidance you can provide in terms of how the quarterlies should be impacted or maybe first half versus second half on just the modeling component there?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [9]

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Yes, sure. So as you look at the seasonality, it's a little different for sales and earnings. So I'll talk about both of them. In terms of sales, the year-over-year growth rate should be a little weaker in first half and a little stronger in the back half. And that's because of the reported net sales that we had with Payless last year of $52 million. That was almost all in the first half. And so that goes away. This first half is partially offset by having spring business for Anne Klein, which didn't launch until fall of last year, but Anne Klein is not as big as Payless. So there's about a 200 basis points net drag from losing Payless and gaining Anne Klein in the first half to net sales. With respect to earnings, it's actually the opposite story that earnings compared to the prior year should look a little bit better in the first half than in the back half. And that's because the Payless impact is essentially similar all year. We had earnings from Payless all year last year. Those are going away. But Anne Klein, we had earnings in the back half of last year because we started shipping in the fall. We did not have it in first half. So there's some incremental earnings in the first half from Anne Klein, and then once you get into back half, you've anniversaried that.

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Camilo R. Lyon, Canaccord Genuity Limited, Research Division - MD & Head of US Consumer Research [10]

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Got it, that's very helpful. Great. And then just the final question for me is, as you survey the overall competitive landscape, you continue to gain share in your core brands, in the Steve Madden brand, in your private label categories. How do you view the domestic wholesale business from an opportunity perspective, from a market share perspective? Where are there opportunities that continue to exist that you're going after in what seems to be pretty remarkable that you're in this market where it's fairly low growth, but you're continuing to outpace that growth of the overall market year in and year out. So I'm just curious to get your thoughts on where you see that incremental opportunity continuing to present itself.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [11]

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Yes. In terms of the domestic wholesale business, I mean, first and foremost, I have to say we continue to have really strong momentum in the flagship brand. So I still feel like there's markets where we're outpacing the competition in Steve Madden, and that goes really for both footwear and handbags. And I think there's continued opportunity to take share there. We're also pretty excited about some of the newer brands. I mentioned Blondo in the prepared remarks. I mean that brand is just on a tear, had another outstanding fall season. We mentioned the Men's test, which was very successful. So we're going to be rolling that out in 2019. We also did this diffusion brand called Aqua College at Macy's, which had an extraordinary first season and that will be going to more doors. And so we're really excited about Blondo. And then Anne Klein, I'm also really pleased with what we're seeing there. We really like that business because it's -- it doesn't cannibalize anything else we do, very different product and customer demographic than the other brands in our portfolio. And we feel really optimistic about the opportunity there.

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Operator [12]

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Our next question comes from Erinn Murphy with Piper Jaffray.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [13]

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Ed, I wanted to ask one of your kind of top retailers yesterday indicated that spring had started off with higher transition receipts. And I'm just curious, broadly, when you look at the North American landscape kind of year-to-date across your core retailers, are you seeing any of them come back to the vendor community trying to adjust receipts? Or just any kind of talk on slowdown post government shutdown earlier in January? Just curious kind of how you guys are approaching the spring season kind of holistically?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [14]

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We really have not felt that at all. I don't know if that's an indication of our products performing better than others or what, but we have not gotten that feedback, and, in fact, we're quite pleased with what we're seeing so far in terms of early sell-throughs on spring product.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [15]

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Okay, that's encouraging. And then sorry, just a clarification on the Payless impact, the $0.16, are you assuming you're doing 0 business with them? Or is there anything still going on internationally with the Payless business?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [16]

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Yes. That's a good question. We have assumed for purposes of the guidance that we do not go forward with them at all. As you point out, they do intend to -- while they're shutting down the U.S. and Canada, they do intend to go forward with their Latin American joint venture and their international franchise business. We will have discussions with them about continuing to do business with them but we -- we'll have to -- that's predicated on us coming to an arrangement with them that we're comfortable with, including credit protection, payment terms, et cetera. And so it's not clear to me that we'll be able to do that, but that's something we'll certainly explore.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [17]

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Okay. And then just on the stores on the retail side of the business, I think you guys ended the quarter at 229 stores. It was the highest, like, sequential uptick we've seen for quite some time. I'm just curious what's driving that. Are there any locations you're trying to secure opportunistically? Just wondering on what drove the acceleration in the fourth quarter on the store count.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [18]

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Yes. That was primarily driven by consummating the Israel JV. So that added 14 stores to the store [count].

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [19]

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Okay, got it. And then just last bigger picture on China. I didn't hear you talk about China in your prepared remarks. I mean you talked holistically about the international business, but what are you seeing there right now? And how is the brand awareness? I know you guys are kind of working on brand studies there. How has that evolved since you've been on the ground, kind of, in this format?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [20]

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Yes. I mean, I would say overall, China has been tough. We've been a little frustrated. I was hoping we'd be a little bit farther along right now than we are. I do think we're making progress. We're certainly learning a lot. But overall, it's been, I would say, mixed at best. Clearly, we don't have the brand awareness that we need. I think that there is a marketing investment that's required. But at this moment, I think we really feel like the best thing to do is to really focus on getting the merchandise assortment right, making sure that we have the right products for that market and get our store model right. And once we do that, then we'll really step on the gas in terms of marketing. So we're not going to make a big marketing investment at this moment. That could -- that may look different in 6 months.

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Operator [21]

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Our next question comes from Chris Svezia with Wedbush.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [22]

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I guess the first question just on the difference between the accessory and footwear growth for the year. Any color about how we think about those 2 pieces that pertains to the 4% to 6% revenue growth just, given the outperformance on the accessory business in '18? Just any color around that.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [23]

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Yes, sure. I think that for wholesale footwear, you should be thinking about low-single-digit growth in 2019, obviously, that includes $52 million of Payless business going away. That did hit net sales in wholesale footwear. Wholesale accessories should be faster than that. I mean, something like high singles, even low doubles.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [24]

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Okay, okay. And from a category perspective, as I think about the footwear business, the success you've had on the athletic side, I would assume that continues, obviously. Maybe a little color about -- on the open-toe business, the sandalized business, footbed sandals, et cetera, just what you see going on there. Just maybe talk a little bit more about the key product drivers you go through '19 on the footwear side?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [25]

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Yes, sure. As I mentioned, we're really pleased with what we think so far in terms of our new spring products. And you mentioned sneakers, and I think I have to start there, because we continue to deliver newness in that category and see it resonating with consumers. We've got some new sneakers in that big bottom sneaker category, what folks call dad sneakers, that are performing very well and we're excited about that. We've also got some platform sneakers at great values that are doing very well. In terms of sandals, that's a category that was strong for us last year. And so far, the early reads on that are quite good this year as well. We had a lot of success last year with what we call flatforms, and those are doing very well for us so far this year. Also, Espadrilles, looking good. In terms of materials, that's -- we're seeing exotics do very well, anything in leopard or snake is performing very well, and that's really across categories, whether it's dress shoes, sandals or sneakers. Nylons -- excuse me, vinyls are doing very well and so -- and then even neons in terms of color. So there's a lot of sort of trend to capitalize on right now. Last thing I should mention, I'm sorry, is closed-up flats, which is a category that hadn't been great for a few years, but we've seen that really pick up. So at any rate, lots of good trends to capitalize on.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [26]

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Okay. Got it. And then just on the -- just so I understand something about the Payless piece. So I guess first half of the year, it's a revenue and profitability drag. Given the conversion last year of the First Cost business, is that coming out of the royalty first come -- first income line -- First Cost line? Or just clarify how we think about, from a P&L perspective, what's coming out first half versus second half, what the differences are?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [27]

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Yes. So I'll tell you for the full year, I mean, it's a little complicated. There's a gross margin hit, which is, as you pointed out, is pretty much all in the first half. There's a commission and licensing income hit, and then there's also you're going to see SG&A going up. And that's because SG&A, which -- we show that commission in licensing income line, net of expenses, and SG&A that was previously showing up in that line, net of expenses, is now being reallocated to other businesses and shows up on our operating expenses line. So I'll give you some numbers here. I think in the -- for the full year, it's about $5.5 million of gross margin hit, maybe $3.3 million in commission and licensing income hit, and then SG&A goes up by $5.4 million, that gets you to about a $14.2 million EBIT impact.

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Christopher Svezia, Wedbush Securities Inc., Research Division - SVP of Equity Research [28]

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Okay. And just a final -- so I'm clear on this, the tariff impact on handbags, accessories, you're just assuming the 10% for the balance of the year? You're not assuming any potential step-up at this point that's sort of off the table at this point in the guidance?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [29]

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That's right. The guidance assumes that it remains at 10%.

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Operator [30]

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Our next question comes from Tom Nikic with Wells Fargo.

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Tom Nikic, Wells Fargo Securities, LLC, Research Division - Senior Analyst [31]

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So I just wanted to ask, so you clarified the Payless headwind to this year, you clarified the tax rate headwind. Net-net the tariffs on the handbags, I'm just kind of wondering. You sort of gave some indications last quarter about what that would look like. I'm just wondering net-net, how we should think about the tariff impact to your EPS in 2019?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [32]

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Sure. Yes. I'm pleased to report that the team has really done a great job of managing through this, and we think that we've really -- at this 10% rate, that we've really mitigated the vast majority of the impact. And in fact, in the guidance that we've outlined today, the impact is really immaterial from the 10% tariff. And we've done that through -- primarily through 2 levers. One is moving production out of China, and our sourcing team has been working feverishly on that. And we are now really approaching 50% of our production in the categories that are impacted by the tariffs outside of China, and that's primarily Cambodia. As you'll recall, that was at 16% in 2018. And then on the remaining 50% that is still in China, we've been able to get some pretty nice price concessions out of our factory partners there in and around 10%. And so between those 2 initiatives, we've been able to basically mitigate the impact at 10%. Now obviously, if that were to go to 25%, that's a different story.

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Tom Nikic, Wells Fargo Securities, LLC, Research Division - Senior Analyst [33]

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All right, that's good to hear. And then just one follow-up. So your CapEx was $12.5 million this past year, which -- it's kind of come down each of the last couple of years. You're sort of basically at the lowest level of CapEx spending essentially since the recession, and spending less than 1% of sales on CapEx. I'm just sort of, like, wondering, is there going to be a point where you're going to need to sort of reaccelerate that spending and maybe invest in, I don't know, your e-com platform or some sort of like infrastructure? Just kind of seems like the spending has been pretty tight there, and just sort of wondering if there's going to be any sort of ramp as we look to the next couple of years.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [34]

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Yes. It's a good question. And in fact, this year, you will see the CapEx rise. I think you should think about that as being closer to $17 million this year, which gets us back to some of those historical levels that you were referring to or maybe even above in some cases. And the big increase there is more system spending. So we've got some spending on data centers as well as the new warehouse management system this year.

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Operator [35]

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Our next question comes from Steve Marotta with CL King & Associates.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [36]

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Can you talk a little bit about the expected international growth as a whole in fiscal '19 as well as the largest areas of opportunity?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [37]

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Sure. Yes, that business was up 22% for us in 2018. We have forecasted that it will moderate this year, still nice double-digit -- should be a nice double-digit grower for us. We continue to think that SM Europe will be -- our joint venture there will be a strong driver of growth. I think our -- we're excited about this new joint venture in Israel. Mexico continues to perform very well. We have assumed a modest decline in Canada in the wholesale business. That's largely due to some customer bankruptcies out there, most notably TOMS shoe, which was -- or, going out -- I guess TOMS shoe closing. Maybe I shouldn't say bankrupt. That was a significant customer for us. But overall, the brand is performing very well across the international markets, and we continue to feel really optimistic about our long-term prospects there.

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [38]

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That's helpful. Also can you provide to the extent that you can talk about any Amazon update, the pace of sales there, opportunities in the new year, where you see that consumer -- where it is now and where you see it going?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [39]

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Yes. Interestingly, our growth with Amazon proper has slowed, but our growth with Zappos has really reaccelerated. So with the company overall, we're still seeing strong growth. And it's obviously an important customer for us, but it's -- but we've really seen the Zappos business pick up significantly.

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Operator [40]

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Our next question comes from Jeff Van Sinderen with B. Riley FBR.

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Richard Magnusen, [41]

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This is Richard Magnusen, in for Jeff Van Sinderen. First question is, how should we think about the impact of the calendars shift this year as it relates to the cadence of shipments of spring and summer merchandise and the Q1 and Q2 cadence of business?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [42]

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I don't think there's much to call out other than that the Easter is later this year, right? So Easter is going to -- so there's going to be a bit of Easter shift. When you look at our retail comps, for instance, there's probably a 200-basis-point swing from Q1 to Q2 given the Easter shift.

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Richard Magnusen, [43]

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Okay. And then back to the manufacturing outside of China, if the tariffs were to go away, how would that change your plans?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [44]

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Well, obviously, there would be less pressure to move goods out of China. Although we're quite pleased with what's coming out of Cambodia for us in -- particularly in the handbag category. And so I expect a lot of that might stay in Cambodia, but it would obviously just give us more flexibility and options in terms of where we place the production.

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Richard Magnusen, [45]

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Okay. And then can you delve a bit more on how you're planning to evolve the e-com segment this year and what changes are in the works for 2019?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [46]

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Yes. So in terms of our own in-house e-commerce businesses, as I talked about in the earlier remarks, that business is really accelerating for us. We're really pleased with the trends that we're seeing there, and we're looking for very strong growth out of that business this year in both sales and profitability. And I called out some of the initiatives there but we're very -- again, we're very pleased with the transition of the platform over to Shopify Plus. We think that's providing us with a whole lot of benefits, lower operating costs, we're more flexible and more nimble. I think it's a better mobile experience, fewer clicks to check out, et cetera. And then we're also really excited about some of the things that we're doing on the marketing side. I mentioned the free 2-day shipping. We're really seeing some good results with our paid social program, and that's something that we've ramped up recently. Afterpay is doing very well for us. So there's a whole lot of the initiatives that we feel good about. We've got some more in the works, which we'll tell you about throughout the year. But that's a business that's got really nice momentum.

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Richard Magnusen, [47]

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All right. And then can you touch on the latest trends, I'm sorry, on -- you introduced some lower-point merchandise. Can you just frame that more for us and maybe give us a sense of if you see that benefiting your business in 2019?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [48]

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I'm sorry, I'm not -- could you repeat the question? I'm not exactly sure what you're referring to?

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Richard Magnusen, [49]

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You recently introduced some lower-price-point merchandise. Can you just frame that for us and maybe give us some sense of how you see that benefiting your business in 2019?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [50]

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I don't know what that is. Honestly, the retail prices are really consistent with where they've been.

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Operator [51]

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Our next question comes from Sam Poser with Susquehanna.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [52]

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A couple of things. One, just related to the Afterpay, what percent of transactions are currently being done there? And where do you see it heading?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [53]

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Well, that's nothing that we're going to disclose, but I'll tell you it's a significant percentage, higher than we originally anticipated. And the nice thing is that on those transactions, we're seeing a nice increase in the average order value.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [54]

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And then in -- within your guidance, where are you thinking of same-store sales just on an annual basis?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [55]

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As usual, we don't provide comp guidance.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [56]

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Okay. Now let me ask, when you're talking about how strong your own digital business is, when you think about digital sort of holistically between your wholesale partners as well as your own, what percent of your overall sales do you think are being done on digital when you think about with nordstrom.com or Amazon or -- and so on? I mean, can you give us some idea of sort of how that's evolved over the last few years?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [57]

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Yes. Obviously, it's been moving up, and I think at this point, we're probably in the high-teens overall.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [58]

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And then I missed this. What was the gross margin for footwear wholesale and accessory wholesale?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [59]

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Yes. I don't think we provided that, but footwear was up modestly and accessories was down. The biggest factors -- there was really 3 factors. The biggest one was mix because of the dramatic growth that we saw in private label accessories business. And then the other 2 factors were the 10% tariff that was implemented at the end of September. And the increase in freight, as everybody was rushing to bring goods in prior to January 1, ocean freight became considerably more expensive in Q4. The good news is that we've seen that return to more normalized levels now.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [60]

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And then just your gross margin -- in the guidance, your gross margin hit is going to be more weighted on the front half of the year and your SG&A hit is going to be more weighted on the back half of the year. Is that basically the way to think about it?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [61]

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Yes. I think that's right.

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Operator [62]

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Our next question comes from Laurent Vasilescu with Macquarie.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [63]

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I think it was noted that international grew 22% in 2018, which would imply international grew mid- to high single digits for the fourth quarter. Curious to know how much FX impacted that number or just any other factors to consider. And how should we think about international growth for the first quarter?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [64]

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Sure. Yes, I think we're up -- actually up about 13% in Q4 in international. And I don't have the FX impact, but I don't think it was significant. And then I'm sorry, the last part of the question was?

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [65]

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Just any high-level thoughts about the first quarter?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [66]

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Yes. I think it will -- it should continue to grow. As I said, we've expected -- we've said that we think the growth rate will be double-digits this year, but less than the -- certainly less than the 22% that we did in the prior year. I think it will be a little bit of -- in first quarter, as I mentioned, a little bit of pressure on the wholesale business in Canada. And then also perhaps on our distributor business, just based on timing of shipments. But we'll still grow in Q1 and obviously throughout the year.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [67]

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Okay, very helpful. And thank you for all your color on inventories in your prepared remarks. Any way you can parse out how much the inventory in dollar terms or percentage terms was brought into December? And then with overall inventories up 24%, curious to know how we should think about overall first quarter revenue growth.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [68]

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Sure. Yes, so inventory -- you're right, it was up 24% overall. If you take out Anne Klein and the Israel JV, it was up about 17%. And again, most of that was driven by our accessories division. We were up just -- for a little color, we were up 17% in accessories and again, that was as we were trying to bring goods in ahead of the tariff. The other factor I should point out is the Chinese New Year was 11 days earlier this year. So that resulted in more inventory on hand and in transit at the end of the year in both accessories and shoes. So I think that really is -- I wouldn't view -- take the 24% as reflective of what we think our sales growth is going to be in Q1. But hopefully, we try to telegraph that inventory would be up at the end of the year because of the -- mostly because of the tariff but also because of the Chinese New Year.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [69]

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Okay. Very helpful. And then my last question, I wanted to follow up on international concessions. I think you ended the fourth quarter at 42, which I think is down from 46 from the prior quarter. Curious to know how -- what happened there? And was there any conversion or closed concessions? And then how should we think about concessions overall for 2019?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [70]

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Yes. So I mentioned that we've been disappointed in some of the performance in China. We did close 4 concessions in China. And once we got into the sort of 1-year mark there, there was 4 that we wanted to get out of. I think we may get out of more this year. We're still evaluating that but I wouldn't be surprised if that number didn't go down before it goes back up.

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Operator [71]

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The next question comes from Laura Champine will Loop Capital.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [72]

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Ed, do you think that you'll see significant shifts in your vendor base or in your distribution platform this year? Or should it be essentially status quo on an overall basis?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [73]

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Yes. In terms of our vendors, I mean, I think the most significant changes is that we've moved so much production to Cambodia, so we're buying more from folks there. In terms of our distribution, the folks that we distribute to, other than Payless going away, I don't see any major change.

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Laura Allyson Champine, Loop Capital Markets LLC, Research Division - MD [74]

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And is the shift towards Cambodia happening almost entirely in accessories and handbags notably or are you actually moving footwear there too in a material way?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [75]

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No. We're not moving footwear in any material way to Cambodia. We are moving some footwear out of China. I think that in Steve Madden, in particular, we're placing a lot of goods in Mexico right now. But at this moment, the vast majority is still coming from China.

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Operator [76]

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Our next question comes from Edward Yruma with KeyBanc Capital Markets.

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Matthew Gregory Degulis, KeyBanc Capital Markets Inc., Research Division - Associate [77]

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This is Matt on for Ed. I guess one -- just one quick one. I think on the last call, you mentioned price increases for 2019. Can you update us on any expected timing or the breadth of the increase there? And how have your retail partners reacted to any discussion of price increases?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [78]

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Yes. So when we were on the last call, the 10% tariff on handbags and other accessories was scheduled to increase to 25% as of January 1. And based on a 25% tariff, we were in discussions with a number of our wholesale customers about raising prices for 2019. Given that, that increase to 25% has been postponed indefinitely, those pricing -- price increase discussions have really been put on hold as well. So that's why when I mentioned mitigating the 10% tariff, it's really the first 2 levers, moving production out of China and getting price concessions on the goods that remain in China that we've pulled, not the third lever, which is raising retails.

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Operator [79]

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(Operator Instructions) Our next question comes from Dana Telsey with Telsey Advisory Group.

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Ross Ladd Licero, Telsey Advisory Group LLC - Analyst [80]

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This is Ross Licero, on for Dana. Just had a question on Anne Klein. What do you guys expect on the second half of the year once you sort of get through the $80 million to $90 million within the first 12 months?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [81]

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Yes. We do expect to show some year-over-year sales growth in the back half, but I think, frankly, where we see a bigger opportunity is to improve the gross margin. Again, we signed the license in January, we showed product a couple of weeks later in February for fall. That was all product that had been developed and sourced by the -- by Nine West Holdings. And so we didn't really have full control over fall in 2018. But fall 2019, it will be all in our system. Again, we'll control everything from design to delivery. And we think we can show a nice improvement in gross margin in fall.

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Ross Ladd Licero, Telsey Advisory Group LLC - Analyst [82]

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Okay, great. And then just one more. What's your expectation for freight pressure heading into 2019?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [83]

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Well, there's a little bit, but it's not super material here. Again, there was considerable freight pressure in Q4, but we have seen those rates come back to more normalized levels as of now.

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Operator [84]

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I'm not showing any further questions at this time. I'd now like to turn the call back over to Ed Rosenfeld for any closing remarks.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman & CEO [85]

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Great. Well, thanks, everybody, for joining us on the call, and we look forward to speaking with you after first quarter. Have a great day.

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Operator [86]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.