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Edited Transcript of SHOO earnings conference call or presentation 21-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Steven Madden Ltd Earnings Call

Long Island City Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Steven Madden Ltd earnings conference call or presentation Friday, April 21, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Derek Browe

* Edward R. Rosenfeld

Steven Madden, Ltd. - Chairman and CEO

* Megan Crudele

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Conference Call Participants

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* Camilo R. Lyon

Canaccord Genuity Limited, Research Division - MD

* Corinna Gayle Van der Ghinst

Citigroup Inc, Research Division - VP and Small-Cap and Mid-Cap Analyst

* Erinn Elisabeth Murphy

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

* Jay Daniel Sole

Morgan Stanley, Research Division - Executive Director

* Jeffrey Wallin Van Sinderen

B. Riley & Co., LLC, Research Division - Senior Analyst

* Randal J. Konik

Jefferies LLC, Research Division - Equity Analyst

* Samuel Marc Poser

Susquehanna Financial Group, LLLP, Research Division - Analyst

* Scott David Krasik

The Buckingham Research Group Incorporated - 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, and welcome to the Steve Madden First Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms. Megan Crudele. Please go ahead.

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Megan Crudele, [2]

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Thank you. Good morning, everyone. Thank you for joining us today for the discussion of Steve Madden's first quarter 2017 earnings results.

Before we begin, I'd like to remind you that statements made on this call that are not statements of historical fact constitute forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties and other unknown factors that could cause actual results to differ materially from historical facts or any future results expressed or implied in the forward-looking statements. These statements contained herein are also subject to the risks and uncertainties as described from time to time in the company's reports and registration statements filed with the SEC. Please refer to the company's earnings release for information on the factors that could cause actual results to differ.

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

Hosting the call today are Ed Rosenfeld, Chairman and CEO of Steve Madden; and Derek Browe, Director of Finance and Investor Relations.

I'll now turn the call over to Derek.

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Derek Browe, [3]

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Thanks, Megan, and good morning, everyone. Before I turn the call over to Ed, I'd like to note that the financial results presented below are on an adjusted basis unless otherwise noted. Please refer to our press release for a reconciliation of GAAP to non-GAAP financial measures.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [4]

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Thanks, Derek. Good morning, everyone, and thank you for joining us to review Steve Madden's first quarter 2017 results.

We got off to a great start to 2017 with net sales growth of 11% and adjusted diluted EPS growth of 20% compared to the year-ago period. These results, achieved despite a challenging retail environment, are a testament to the power of our brands, the strength of our product assortments and the durability of our business model.

Our wholesale footwear business recorded outstanding financial performance in the quarter as our trend-right collections enabled our brands to outperform the competition.

Our core Steve Madden Women's business was again the highlight. Steve and his design team continued to hit the ball out of the park with the Steve Madden collection, creating trend-right footwear that is resonating with the consumers, and in turn, enabling us to take market share at our key wholesale customers.

While Steve Madden Women's was the largest growth driver in the quarter, the rest of the Steve Madden brand family also performed well. Steve Madden Men's, Steve Madden Kids, Madden Girl and Steven all achieved double-digit percentage sales growth in Q1. We believe this performance, achieved despite shrinking overall open-to-buy budgets at many of our largest wholesale customers, demonstrates that our flagship brand is stronger than ever.

And the rest of the brand portfolio had nice momentum as well. Our newer brands, Dolce Vita and Blondo, grew double digits in the quarter and so did brands that have been in our portfolio longer, but have recently seen a reacceleration, including Betsey Johnson, Superga and Report.

Our international business also had a double-digit increase. Our new joint venture, SM Europe, was the standout. Like consumers in the U.S., European consumers are responding very favorably to the Steve Madden footwear collection, and results in the JV are trending well above our initial expectations.

Our performance for the online wholesale customers like Zalando is particularly strong. Looking forward, we are very excited about the growth potential with SM Europe as we further expand our presence and raise brand awareness in the region.

We also continue to work on finalizing a new joint venture for China and remain hopeful that we will be able to begin conducting business in China under the new JV in the back half of 2017.

In addition, we are also in discussions with respect to potential joint ventures and/or distributor relationships in other countries in Asia. We'll continue to keep you updated throughout the year on how these discussions develop.

We are also off to a good start with our newest acquisition, Schwartz & Benjamin, which made a slightly above-plan sales contribution of approximately $14 million in the quarter. The integration process is moving along well and on schedule, and while we expect the transaction to be approximately breakeven to EPS this year, we are confident that Schwartz & Benjamin can be a meaningful profit contributor in 2018 and beyond.

First quarter also saw us launch a new brand, which is exclusive to Kohl's called Madden NYC. The brand is available in about 450 Kohl's locations and on kohls.com, and the offerings include shoes, accessories, activewear and outerwear. We are off to a very good start with strong initial sell-throughs, particularly in the footwear category. While Madden NYC made only a modest sales contribution in the quarter, the strong early performance at retail gives us confidence this can be a meaningful growth vehicle going forward.

Our wholesale accessories business also recorded strong growth in the quarter, driven by double-digit percentage sales increases in our Steve Madden, Betsey Johnson and private label handbags. While the handbag category overall remains challenging, we are pleased to see improved traction and renewed momentum in the category with our brands.

Finally, in our retail segment, sales were down slightly for the quarter. Comparable store sales declined approximately 6% against the 10.7% increase in last year's first quarter. The 6% decline includes an approximate 200 basis point combined negative impact from the Easter shift and the extra day last year due to leap year.

At the end of 2016, we made the strategic decision to clear slow-moving retail inventory through the wholesale channel, so we entered 2017 with significantly less marked-down inventory in retail than we had the year before. We also made a concerted effort to take a less promotional stance overall, in our retail stores and on stevemadden.com. We reduced the level of promotions and also how we communicated our promotions, moving to fewer big sale signs and more lifestyle imagery in the front windows of our stores.

With Steve Madden performing so well in the highly profitable wholesale channel, we wanted to heighten our focus on protecting the brand positioning. While we are confident this was the right decision for the brand and company overall, it did have an impact on the retail comp, particularly in the highly promotional environment we saw in Q1. Good news is that it also drove a 250 basis point increase in retail segment gross margin. We are also encouraged that retail comps have improved in April even after adjusting for the Easter shift.

Overall, we are very pleased with the momentum in our business, but we remain cautious on the overall retail environment and are planning our business accordingly. That said, we are confident that we are well positioned to continue to outperform the competition and to meet our sales and earnings targets for 2017.

With that, I'll turn it over to Derek to review our financial results in more detail.

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Derek Browe, [5]

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Thanks, Ed. We are very pleased with our robust financial results for the first quarter. Our consolidated net sales increased 11.2% to $366.4 million, compared to prior year net sales of $329.4 million. Excluding the impact from the Schwartz & Benjamin acquisition, consolidated net sales increased 7%.

Our wholesale segment led the way. Wholesale footwear net sales increased 14.2% to $261.4 million. Excluding the impact of Schwartz & Benjamin, wholesale footwear net sales increased 8% led by the strong growth in a number of our branded businesses, most notably our core Steve Madden's Women's business.

Our core Steve Madden Women's business continued to be fueled by newness in various product categories and great selling of key replenishment styles. Sneakers, pool slides, mules and items with embellishment had the strongest performance during the quarter. Hampering our wholesale footwear growth in the quarter was an expected decline in our private label business.

In wholesale accessories, net sales increased 10.8% to $52 million. As Ed mentioned, we were pleased to see growth in our handbag business, with Steve Madden, Betsey Johnson and our private label handbags all performing well with key customers during the quarter.

In our retail segment, net sales decreased 0.9% to $53.1 million, our same-store sales decreased 6% against the tough 10.7% increase last year.

During the first quarter, we opened one full-price store and one outlet store location and closed one full-priced store. We ended the quarter with 190 company-operated retail stores, including 53 outlets and 4 e-commerce sites.

Turning to other income. Our licensing royalty income, net of expense, was $2.4 million in the quarter, compared to $1.6 million in last year's first quarter, while First Cost commission income was $1.5 million, compared to $0.6 --- or $600,000 last year.

Our gross margin was also a highlight for the quarter. Gross margins expanded 130 basis points to 36.6%, compared to 35.3% in the prior year. This expansion was driven by increases in both our wholesale and retail gross margins.

Wholesale gross margin increased to 32.8% for the quarter, compared to 31.2% in the prior year quarter. The 160 basis point improvement was driven by strong performance in wholesale footwear, which benefited from sales mix and our on-trend product assortment.

Retail gross margin was 58.7%, compared to 56.2% last year. And as Ed mentioned, we were less promotional during the quarter and we cleared out slow-moving inventory during Q4 of 2016, both which led to higher margins.

Operating expenses for the quarter increased to $98.4 million or 26.8% of net sales, compared to operating expenses of $88.5 million or 26.9% of net sales in the same period last year. Operating income for the quarter totaled $39.5 million or 10.8% of net sales, compared to last year's first quarter operating income of $29.9 million or 9.1% of net sales.

Our effective tax rate for the quarter was 30.7%, compared to 19.6% in the same period last year. The prior year tax rate included a benefit of $3.7 million resulting from exercising and vesting of share-based awards.

Finally, our adjusted net income for the quarter was $27.5 million or $0.47 per diluted share, compared to $23.9 million or $0.39 per diluted share in the first quarter of 2016.

Moving to our balance sheet, which has remained strong. As of March 31, 2017, we had $193.2 million of cash and marketable securities and no debt. Inventory totaled $97 million, compared to $80.4 million in the prior year. Excluding inventory related to Schwartz & Benjamin, inventory was $88.9 million or up 10.6%. The increase in inventory was primarily related to Steve Madden Women's wholesale business, which has seen significant sales growth, and our retail business, which has more inventory due to the amount of stores in our portfolio this year versus last year.

Our consolidated inventory turn for the last 12 months ended March 31 was 8.1x, and our CapEx in the quarter was $3.3 million. During the quarter, we repurchased approximately 912,000 shares for approximately $33.2 million, which includes shares acquired through our net settlement of employee stock awards.

Now turning to guidance. For the full year 2017, we continue to expect that net sales growth will be 8% to 10%. We expect that diluted EPS for the year will be in the range of $1.97 to $2.03 on a GAAP basis. Excluding one-time expenses related to the acquisition of Schwartz & Benjamin as well as the Payless bankruptcy, which are outlined further in our press release, we continue to expect that diluted EPS will be in the range of $2.12 to $2.18.

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) We'll go first to Camilo Lyon with Canaccord Genuity.

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Camilo R. Lyon, Canaccord Genuity Limited, Research Division - MD [2]

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Ed, I was hoping you could just speak about what do you think is driving your performance at wholesale. Clearly, it's a pretty fantastic number in a tough retail environment. And then if you could just help us understand, what are you thinking about that core Steve Madden Women's business as the year progresses? Because it seems like your comparison will ease a little bit, yet you're not really embedding any sort of acceleration in that core business.

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

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Yes, in terms of what's driving the performance, really, I think it's product. We've really just nailed the trends in Steve Madden and have had a few seasons in a row now of real strong outperformance versus the competition in terms of sell-through, and the product looks great. It's performing across a range of categories, Derek called some of them out, but sneakers, mules, pool slides, anything with sort of novelty like pearls or embroidery. So we've got a lot of different trends working, and it's enabling us to -- despite the fact our wholesale customers, many of them are shrinking their overall budgets, they're -- we're taking share and growing in the teeth of that. In terms of the comparisons for Steve Madden Women's throughout the year, they actually do get tougher in the back half. We were up sort of mid- to high singles in Steve Madden Women's wholesale footwear in the first half last year, and then we were up mid- to high teens in the back half last year. So we have assumed, based on that, that the growth of that business moderates over the course of the year.

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Camilo R. Lyon, Canaccord Genuity Limited, Research Division - MD [4]

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Okay, got it. And as you think about the back half and the composition of boots, clearly, that's been a declining category for the past few years, boots and booties, is there any sense of how the current trends will -- could overtake the category or offset some of those declines that it seems like you're embedding into your business?

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

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Yes, I mean, we've got a lot of product categories working, as I mentioned, and many of them can continue or evolve into fall. Sneakers, obviously, being one that comes to mind immediately. But to your point, we don't know yet what the boot season is going to look like. And that is one that the initial indications are retailers are going to be planning conservatively.

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Camilo R. Lyon, Canaccord Genuity Limited, Research Division - MD [6]

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Great. And then just -- with this performance out of Q1 being so strong, how does this impact the reorder picture for Q2? You did mention that you assume there would be a pickup in your retail comps. Now in April, with the Easter shift having basically come and gone, is that something that the wholesalers are also benefiting from? And giving -- given that dynamic, is that also beneficial to the reorder --- composition of order book this year versus last year?

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

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Yes, certainly. If we focus on Steve Madden Women's in particular, the sell-through has continued to be very healthy so far in spring, and our reorder activity looks very good and we expect that to continue to look good into Q2.

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Camilo R. Lyon, Canaccord Genuity Limited, Research Division - MD [8]

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Great. And then just finally for me. Just on gross margin. You had a really good performance overall. Obviously, good retail contribution as well as wholesale. Just give us a little bit of an outlook on how you think that unfolds for the rest of the year. I think on prior calls, you talked about a little bit of a drag with the Schwartz & Benjamin becoming a bigger -- a full quarter composition of that, dragging that business down. But is there an opportunity for further gross margin expansion, given what we saw in the first quarter?

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

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I don't think you'll see the same level of gross margin expansion going forward that we saw in Q1. For the full year, I think that, on a consolidated basis, you should be looking for very modest gross margin expansion, maybe up 10 basis points. Keep in mind that, that includes about a 70 basis point negative impact from Schwartz & Benjamin. So excluding the acquisition, we're looking for gross margin for the year to be up about 80 basis points. The reason it'll slow or you won't see the same level of expansion going forward is really a function of mix because, as you point out, you will have a full quarter of Schwartz & Benjamin going forward, so that drag will be greater. As I said, the drag for the full year is about 70 basis points, I think it was only 30 basis points in Q1. And then the other thing is that within our wholesale footwear business, we just had a really wide gap between branded wholesale footwear growth, which was very strong, and private label wholesale footwear growth, which was significantly negative. And while that will continue to be -- while branded will continue to do better than private label for the balance of the year, that gap will not be as wide going forward.

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Operator [10]

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We'll go next to Jay Sole with Morgan Stanley.

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Jay Daniel Sole, Morgan Stanley, Research Division - Executive Director [11]

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Ed, I wanted to just follow up on -- you mentioned private label. Can you tell us how big that business is now and what the main channels that business primarily plays in?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [12]

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Yes, I think private label, Derek, you can correct me, but it's about 1/4 of the overall business now. And big customers there are really the value price retailers. Folks like Target, Payless, Wal-Mart, Kohl's, et cetera.

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Jay Daniel Sole, Morgan Stanley, Research Division - Executive Director [13]

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Now is that percentage that you gave, that's just for the wholesale footwear segment? Or is that for the total Steve Madden enterprise?

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

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No, that's consolidated.

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Jay Daniel Sole, Morgan Stanley, Research Division - Executive Director [15]

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That was consolidated. When -- if -- of that Payless piece, how are you approaching that situation, given the news that --- around Payless that there's been over the last couple of weeks?

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

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Well, we're moving forward with them. Obviously, the business is down quite a bit in 2017 compared to where it was before, but we're going to continue to do business with them. And they plan to reorganize, and we hope they remain an important customer for us.

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Jay Daniel Sole, Morgan Stanley, Research Division - Executive Director [17]

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Okay. Can you talk about just orders overall, relative to the rate of sell-through? I know that the question just came up in the last -- when the last person asked a question. But last year was really about retailers trying to operate with less inventory given it's such a buy-now, wear-now environment. Is that still happening or are you seeing the rates -- the order rates normalize?

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

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Retailers are continuing to try to work closer to season and to place fewer orders upfront and to chase more goods in-season. But the one good thing that's happened for us is that last year, many of our key wholesale customers were dramatically under-inventoried in Steve Madden Women's. And we're -- and I think now they've really reacted to the strong sell-through performance, and that's what you're seeing reflected in the greater shipping numbers that we're seeing, particularly in Q1.

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Jay Daniel Sole, Morgan Stanley, Research Division - Executive Director [19]

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Okay, got it. And then maybe one last one for me. Just thinking bigger picture and taking a step back. As you see, obviously, online growth continue to take a bigger --- the biggest piece of the overall industry growth, and mall traffic continue to slide. Does it change your view about 3 years from now how you want to be -- how your footprint, from a distribution standpoint, should look? Or how you want to target customers?

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

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Sure. I think that we always have to think about how the various distribution channels are growing. And we want to be where the customer wants to shop. And that's why you've heard us talk quite a bit on these calls recently about the emphasis that we've put on growing with folks like Amazon and Zappos, Zalando in Europe. And of course, we're -- we also do a big business with some of the off-pricers that are also continuing to grow. So we're going to always be monitoring which distribution channels are expanding and make sure that we're aligned with them.

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Operator [21]

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We'll go next to Tom Nikic with Wells Fargo.

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Tom Nikic, Wells Fargo Securities, LLC, Research Division - Senior Analyst [22]

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I wanted to ask about the performance on retail in Q1 and how you maybe sacrificed a little bit on the top line with the less promotional stance that you took to drive higher gross margins. Is that something that you think will persist as the year goes on and we should think about a really strong gross margin performance at retail and perhaps not as much top line growth? Or was it kind of isolated to Q1?

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

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Sure. Yes, I don't think the impact will be quite so dramatic going forward. But I will say that we are committed to taking a less promotional stance in our retail stores. And as I mentioned in the prepared remarks, the brand is performing so well in wholesale, which is such a profitable channel for us that we really want to continue to focus on protecting and elevating the brand image in the store. And of course, we have to balance that with driving sales and profitability in the retail stores, and we'll focus on doing that. But we are going to continue to try to be less promotional where we can.

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Tom Nikic, Wells Fargo Securities, LLC, Research Division - Senior Analyst [24]

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Got it. And just a quick follow-up, as long as I'm speaking about retail. Sorry if I missed it. Did you say your store opening and closing plans for the year?

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

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Derek can address that.

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Derek Browe, [26]

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Yes, we didn't. We mentioned that during the quarter, we had opened one full-price, offset by a full-price closure. And then in outlet, we opened one [sic] [ in the ] quarter. But as we look at the full year, I think you --- we'll do about, in total, 7 to 8 outlets and full-price we'll be net 6 or 7 for the year.

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Operator [27]

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We'll go next to Erinn Murphy with Piper Jaffray.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [28]

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A couple questions for me, I guess. Just moving back to the North American wholesale piece. The 8% organic growth, I was curious if there's a way to parse out how much of that growth came from base gains with an existing account, or I guess higher velocity or productivity with an existing account versus new accounts altogether like your Kohl's relationship?

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

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Almost all of it came from existing accounts. The Kohl's thing was really the only thing I can think of that was new, and that was very small.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [30]

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Okay, got it. And then was curious if we could shift gears and talk more about Amazon overall. I mean, can you speak about kind of the private label opportunity there? I know you have a very -- increasingly bigger business there on the branded side, but any thoughts about kind of deepening the relationship to balance the private label there?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [31]

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Yes, look, I think our focus with Amazon has continued -- is going to continue to be branded. One of the nice things about Amazon is that we can sell them pretty much the entire brand portfolio because they have consumers that buy expensive products and inexpensive products and everything in between. They are talking about going into making a private label push in footwear, and that's something we're discussing with them. But it's very early and there's not much I can say about it now because there's not much that has happened. And I want to stress that branded will continue to be the focus there.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [32]

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Okay. And then maybe just shifting across the pond to SM Europe. Can you just remind us, what's the size today? I mean that seemed like a pretty positive callout earlier on in your remarks. And then how big should that business be, over time? And then maybe just talk more about your key accounts there. You've referenced Zalando, but what other key accounts are you really working to grow with scale in Europe?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [33]

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Yes, we have not broken that out in terms of what it's doing today, so I don't think we're going to provide that information. In terms of what it could be, look, it's so early. I mean, we're not even a year in here. I think that we clearly see the brand resonating -- we clearly think there's a big opportunity there, but it's a little too early to try to size that for you. In terms of where we're doing well, I mentioned the online thing, Zalando being the biggest. But you've got Sarenza, you've got Amazon Europe, you've got some other accounts that are important there. And then, of course, we're selling into, as well, department stores and specialty stores in a number of these markets. U.K. is important, Germany, getting going in France, Scandinavia, Eastern Europe. So there's -- we're just starting there, though. We're really scratching the surface.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [34]

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And are you guys in ASOS as well when you think about just the pure play e-tailers over in Europe?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [35]

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Yes. I should have mentioned that. Thank you.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [36]

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Got it. And then just last question for me. On Schwartz & Benjamin, it was a little bit better in the quarter, I think, on the top line and you referenced still breakeven for the year. I guess, how quickly can it ramp to profitability beyond 2017?

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

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We expect a nice profit contribution in 2018. Again, not provide -- we're not ready to provide details on that right now. We'll be able to talk about that in the back half of the year once the integration is complete. But certainly, 2018, it should be a profit contributor.

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Operator [38]

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We'll go next to Randy Konik with Jefferies.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [39]

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Ed, just wanted to ask you about the pendulum of upfront versus in-season buying from the wholesale partners. How much do you think that pendulum will continue to swing more towards in-season? And how are you guys thinking about morphing the supply chain to -- or inventory management to kind of account for this? Curious on how you're thinking about that over the next 4 to 6 quarters.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [40]

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Yes, look, honestly, I don't think the pendulum can swing too much more from where it is because I think that they're going to -- the retailers would be in danger of running out of goods and not being able to fill up their stores. So I think that -- I don't expect it to -- I mean, I think it's moved a considerable way already. I don't know that there's a heck of a lot more room for it to move further. In terms of the supply chain, look, we're always focused on how to get faster. But as you know, that's really our competitive advantage at Steve Madden. That's something we've been doing for a very long time is that we've had this sort of industry-leading speed-to-market capability. And we've been -- what's really happening is they're sort of moving towards the model that we've been doing for a long time because we've been working close to season for many, many years. And so in some cases, it's really the rest of the market moving more towards our model.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [41]

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Got it. And then can I ask on the -- you gave the gross margin guidance for the balance of the year, up --- a little bit more moderated from the great performance in the first quarter. If you were to -- in terms of thinking about the gross margin expansion trend in retail versus wholesale, should we be thinking that, given that you want to be less promotional in retail, that we should expect that the majority of the overall company gross margin increases in the balance of the quarters of the year come mostly from wholesale versus retail to protect that promotional stance or lack thereof in the retail channel? Just curious.

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

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Honestly, I think it will be pretty similar. I think that both wholesale and retail will moderate in terms of their level of expansion from where they were in Q1. Keep in mind -- the other thing that happened in retail that we talked about in the last call was that we had cleared out a lot of the excess inventory in Q4, so we came into Q1 unusually clean. And so that was a little bit of a -- something that's not going to keep -- that was sort of a onetime impact to Q1 retail gross margin.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [43]

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Got it. I guess, my last question. Could you clarify -- I think in the remarks you said that the April business got better from the first quarter rate. Did you quantify -- did that business get just less negative or turn positive? And on that note, how should we just be thinking about the comp composition, basically, for the balance of the year? Should we be thinking up, flat, less negative? Just trying to get some sense of how you're thinking about that channel distribution. Clearly, the wholesale business is performing very nicely. Just curious on how you're thinking about the top line, given that you're going to be less -- you don't want to be nicely [ lack ] -- not promotional in the retail channel.

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

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Yes. Unfortunately, it's really our policy not to provide the quarter-to-date comp or comp guidance. We did sort of try to give you a little help in saying that April had gotten better. We wanted to point that out because it is markedly better than the trend in the first quarter. Of course you do have the benefit of the Easter shift there. But even, as we said, excluding that, we've seen a nice improvement. But we're not going to quantify that.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [45]

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All right. But just to clarify, should we be expecting a little bit more promotional stance in the balance of the quarters to get the trend to pick up further? Or do you want to kind of keep the promotional lack thereof -- the lack of promotional posture you had in the first quarter in the balance of the year?

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

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We'll be less -- the plan is to be less promotional than we were a year ago. But the differential from the prior year will probably not be as great as it was in Q1.

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Operator [47]

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We'll go next to Corinna Van der Ghinst with Citi Research.

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Corinna Gayle Van der Ghinst, Citigroup Inc, Research Division - VP and Small-Cap and Mid-Cap Analyst [48]

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I was wondering if we could start with the retail comp decline as well. Maybe you could give us a little bit more color just on what you're seeing in terms of conversion rates and traffic and international tourism since it sounded like it was getting maybe a little bit better when we saw you in March.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [49]

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Sure. In terms of the metrics, traffic was down, conversion was up, as we've seen for a number of quarters in a row, but the AUR was down about 6%. So really, units were flattish and AUR was driving the comp decline, and that's really a function of mix. Boots is still an important category in retail. In the first quarter, we were down in boots. We also were down in dress shoes. Last year, we were selling a lot of expensive dress shoes. And this year, we're selling a heck of a lot more sneakers and pool slides. As we go forward, fortunately, I don't think that AUR impact will be as significant. I think AUR, I'm still expecting it to be down in Q2, but probably cut that 6% in half, maybe a 3% decline. So that should help. In terms of the tourist market, unfortunately, that continues to be a drag. You're right that we saw some signs of improvement, but frankly, then we slid back a little bit. And overall, again, in New York City, we were down about 1,000 basis points from the rest of the chain. So that continues to be a bit of a headwind.

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Corinna Gayle Van der Ghinst, Citigroup Inc, Research Division - VP and Small-Cap and Mid-Cap Analyst [50]

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Okay, that's helpful. And did you guys say what the e-commerce growth was in the quarter? Was that also negative?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [51]

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We did not say. But yes, it was modestly negative at much higher margins, though.

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Corinna Gayle Van der Ghinst, Citigroup Inc, Research Division - VP and Small-Cap and Mid-Cap Analyst [52]

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Okay, so are you seeing a similar trend then just in terms of the lower promotional stance? Is that what's driving the decline there?

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

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Yes, yes. But I just want to point out, in that --- in the case of e-commerce, the gross profit dollars were up significantly because we were way less promotional online.

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Corinna Gayle Van der Ghinst, Citigroup Inc, Research Division - VP and Small-Cap and Mid-Cap Analyst [54]

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Right, okay. And then just in terms of the cost decline, I think you've explained it pretty clearly, but does this say anything about the fashion cycle? I mean, where do you guys kind of think that we are in the fashion cycle at this point in the year after several quarters of pretty strong merchandising strengths?

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

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We still feel good about the level of newness. We're still bringing in a lot of newness, and we have a lot of different categories working, and the customer is still responding to it. The sell-throughs in wholesale are still very strong. And in retail, we have a lot of things working, too. The AUR really hurt us in retail. That's much harder to overcome in retail than in wholesale. In wholesale, we had an AUR decline as well, but we had our wholesale customers expanding the assortment that they bought from us and buying deeper. Obviously, we can't take market share on our own retail stores, we already have 100% market share. So that AUR decline is tougher to overcome. But -- and as I said, I think you'll see the retail get better as well.

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Corinna Gayle Van der Ghinst, Citigroup Inc, Research Division - VP and Small-Cap and Mid-Cap Analyst [56]

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Okay, great. And then if I could just squeeze one last question in on China. And I know we've talked about it in the past, but maybe you could talk a little bit about what your brand awareness looks like there today. What gives you confidence that this is kind of the right time to do the joint venture? And maybe why you didn't do it earlier in the process?

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

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Yes, yes. I think we've got a pretty good positioning of the brand in China. I have to say that our former distributor, who was our partner for, actually I want to say 8 years or so, really did a good job of positioning the brand, creating brand awareness and really brand affinity in the market. And I think as I've --- as we've talked about before, when we went out to canvass the market for joint venture partners, we got tremendous interest and reception from basically everybody that we talked to. And that's because the brand does have -- we're not starting from scratch there. We really have a nice positioning already. So we feel very good about that and we're excited. You know, just an update on what's going on there. We do have a signed letter of intent with a JV partner. We're working on the definitive agreement. Hope to have that signed soon and, as I said, to start selling some shoes in the back half of 2017. In terms of why we didn't do it earlier, look, we had a distributor relationship that we were pleased with. The partner did do a lot of things very well. And --- but at this point, we really think that now is the time, and that's why we've elected to make this change.

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Operator [58]

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We'll go next to Scott Krasik with Buckingham Research Group.

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Scott David Krasik, The Buckingham Research Group Incorporated - Analyst [59]

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Just interesting, you called out the mules and the slides, obviously, a lot of momentum with the softy. I'm just wondering, you're bringing back the slinky. Is that a big deal? Like is this something that wholesale is really committing to? Or is this just sort of a fast idea, because it was obviously a big shoe for you in the past?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [60]

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Yes, we'll see. I mean, I think there's a lot of interest in sort of '90s revival-type products, and we actually had -- when I came in this morning, I saw we had a huge day in demand on our website for the slinky yesterday. So there's definitely some excitement around that particular iconic product, and we'll see what happens. But it's a little too early to say.

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Scott David Krasik, The Buckingham Research Group Incorporated - Analyst [61]

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Is wholesale -- are you offering it to wholesale or are they placing orders?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [62]

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Yes, but it's not significant right now. But we'll see what happens.

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Scott David Krasik, The Buckingham Research Group Incorporated - Analyst [63]

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Okay. And then did you say in total what international was as a percentage of sales and how much it grew?

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

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I don't think we did, but it was up about 12%, 12.5% overall. And somewhere between 9% and 10% of overall sales.

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Scott David Krasik, The Buckingham Research Group Incorporated - Analyst [65]

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Okay. And then the Asia JV, you said you'll begin to sell product in the second half of the year. I don't think that was in your original guidance. Does that change any of the line items?

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

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Yes, well we have not -- we hope to begin. Obviously, we have to finalize this JV agreement. So because that's not final, we have not included anything in the guidance.

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Scott David Krasik, The Buckingham Research Group Incorporated - Analyst [67]

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If it goes off as planned, would it be material this year?

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

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Certainly not to profitability, no. It might help sales a little bit, but it's not going to be a significant profit contributor.

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Scott David Krasik, The Buckingham Research Group Incorporated - Analyst [69]

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Okay. And then just a small line item. The First Cost business was up, I think, 150%. Just wondering what that was due to? And how you see that going forward?

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

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Yes, I would caution you on that, that I think that there is just a little bit of timing there in terms of when we shipped goods. For the full year, I still think that line should basically be flattish.

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Operator [71]

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We'll go next to Sam Poser with Susquehanna.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Analyst [72]

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I guess, I want to get back to the same-store sales for second. I mean, can you give us some idea of the cadence of the same-store sales in the first quarter?

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

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It was negative each month, but March was obviously the worst because we had the Easter shift there.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Analyst [74]

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And I know you don't -- I mean, this is such a weird year because of that --- of the tax-free holidays, the weather, the Easter shift and so on. I mean, could you give us some idea maybe of a combination of how April-to-date and March are as a combined entity or something so we can get a feel for a real trend? Because March was certainly --- outside of the less promotional activity, it was probably significantly impacted by these shifts.

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

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Yes, we're not going to provide that number. As I said, business got significantly better in April. But this -- I'm not going to go any further than that.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Analyst [76]

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And then, in the guidance. With -- how much -- I mean, originally, when you talked about Payless, you expected 1,000 stores to close, they're telling you there are not as many closing. I mean, is that something right now that when you look at what's going on with their business that is not as negatively impactful as you originally anticipated it would be? Where does --- how does that stand there?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [77]

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Well, there's obviously a disruption to our business with Payless due to what's gone on this year and the events leading up to the bankruptcy and the bankruptcy. So in terms of the -- for 2017, in our previous forecast, when we provided guidance to you last time, we included a pretty substantial decline with Payless, and I still think that our current forecast looks pretty similar to what it did when we provided guidance last time. So there's no meaningful change there. Depending on how many stores they close, could that impact what our business looks like in 2018 and beyond? That's possible, but we're really not there yet.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Analyst [78]

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And when you were talking about your private label, are you also including like with the SM New York and stuff -- I'm sorry, the Steve Madden New York City stuff private label?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [79]

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Yes, yes.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Analyst [80]

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So this is purely other people's names on your stuff going into the likes of Payless, Target, Wal-Mart and so on?

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

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Yes. Just one point of clarification, too, the number that we provided earlier was not just private label footwear. It included all the private label accessories that we do as well.

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Samuel Marc Poser, Susquehanna Financial Group, LLLP, Research Division - Analyst [82]

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And then, I guess, lastly. I mean, your handbag business did --- it's inflect in the quarter. I mean, what do you -- you've done a lot of work cleaning all that up. I mean, what do you think was the -- where did things go right, I guess, with that?

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

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Look, in fairness, we have to point out that we had a pretty easy compare in handbags in Q1. But in addition to that, I do think that we've taken a lot of steps to improve the product here. We hired a new Creative Director in Steve Madden, and I think we've really -- I think the line looks much, much better, much -- I think it's more trend-driven, it's more in line with the shoes and the shoe customer, younger, and we feel very good about that. And similarly, in the Betsey Johnson line, we've had a lot of success with this kitschy-type novelty product for many years. And while that continues to be important, we've also introduced more elevated, contemporary-type bags and getting a good response to that. So we feel much better about the direction that we're headed in our 2 big handbag brands, and we'll be looking for continued growth throughout the year there.

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Operator [84]

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We'll go next to Jeff Van Sinderen with B. Riley.

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Jeffrey Wallin Van Sinderen, B. Riley & Co., LLC, Research Division - Senior Analyst [85]

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I know you guys called out sneakers. I'm just wondering if there's anything more you could say about your performance in your best sneakers and maybe where you're expanding the line and the outlook there?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [86]

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Yes, look, sneakers continues to be the top growth category for us. In our Women's wholesale business in Q1, I think we hit 23% of the mix. As you know, Jeff, from following us for a long time, years ago, that was maybe low single digits, so that's pretty significant. We think it will be even higher than that in Q2. So it just continues to grow. We've really carved out a great niche for ourselves. I think we are the player in terms of fashion players doing sneakers, obviously. Not talking about with the athletic guys, but in the department stores. And just continues to be a great category for us. We've expanded the line to more silhouettes, added new colors, added new materials and just continue to get great reaction to it.

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Jeffrey Wallin Van Sinderen, B. Riley & Co., LLC, Research Division - Senior Analyst [87]

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And then anything you feel like you could highlight, I guess, that you're seeing in your retail stores in terms of traction that could be a leading indicator for wholesale or maybe trends later in the year?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [88]

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Well, as you know, for competitive reasons, we really don't talk about that kind of stuff too much. We've sort of hit the highlights of the things that are happening right now. But in terms of prospective trends, we try to keep that pretty close to the vest.

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Jeffrey Wallin Van Sinderen, B. Riley & Co., LLC, Research Division - Senior Analyst [89]

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Okay, I understand. And then finally, at this point, just wondering how you're thinking about your store fleet in terms of what the right number is, about any shifts we might see there as leases come up for renewal?

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [90]

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In terms of the full price stores in the U.S., I think you'll see that -- you'll likely see that number remain pretty constant over the next few years. We may open a store here or there, but we'll be closing a store or 2 each year as well, as leases come up. We do still continue to believe that we have some room to grow outlets in the United States. And then outside of the U.S., there is still some opportunity to grow full-price stores.

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Operator [91]

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And at this time, there are no further questions. I'll turn the call back to Mr. Ed Rosenfeld.

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Edward R. Rosenfeld, Steven Madden, Ltd. - Chairman and CEO [92]

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Great. Well thanks very much for joining us in today's call, and we look forward to speaking with you after Q2. Have a great day.

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Operator [93]

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This does conclude today's conference. We thank you for your participation.