Greetings and welcome to Skechers Third Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the Skechers team.

Please go ahead..

Thank you everyone for joining us on Skechers conference call today. I will now read the Safe Harbor statement.

Certain statements contained herein, including without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the company or future results or events may constitute forward-looking statements that involve risks and uncertainties, specifically the COVID-19 pandemic had and is currently having a significant impact on the company’s business, financial conditions, cash flow and results of operations.

Such forward-looking statements with respect to the COVID-19 pandemic include without limitation, the company’s plans in response to this pandemic. At this time, there are significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic.

The dynamic nature of these circumstances means that what is said on this call could change at any time and as a result, actual results could differ materially from those contemplated by such forward-looking statements.

Additional forward-looking statements involve known and unknown risks, including but not limited to, global, national and economic business and market conditions including supply chain delays and obstructions in general and specifically as they apply to the retail industry and the company.

There can be no assurance that the actual future results, performance or achievements expressed or implied by any of our forward-looking statements will occur. Users of forward-looking statements are encouraged to review the company’s filings with the U.S.

Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other reports filed with the SEC as required by federal securities law for a description of all other significant facts that may affect the company’s business, financial conditions, cash flows and results of operations.

With that, I would like to turn the call over to Skechers’ Chief Operating Officer, David Weinberg; and Chief Financial Officer, John Vandemore.

David?.

Thank you for joining us today for our third quarter conference call. I hope you, your colleagues and loved ones are all doing well. As the pandemic remains a challenge in our business and personal lives, we are focused on the safety of our teams around the world. We are appreciative of the resiliency of the entire Skechers organization.

Without them we wouldn’t have achieved our strong results and do what we do best; design, deliver, and market what we believe is the most comfortable and innovative footwear available today. Before we share details of our record third quarter sales, it is important to note that the pandemic continues to impact our business globally.

While many markets, including the United States and Europe eased restrictions, others particularly the Asia Pacific region experienced extended and even renewed lockdown measures.

Further, the global supply chain disruptions, including the congestion at ports around the world, especially in the United States and the COVID-19 related closures of factories in South Vietnam where we manufacture a limited amount of our product have delayed our ability to ship goods.

Transit times doubled from what they were in the pre-pandemic period. Our supply chain team is working to overcome these issues and I would like to extend a special note of appreciation to them for their diligent work, as well as thank our factories who partnered with us through this period.

This is a global phenomenon that we believe will continue to impact our business into the first half of 2022. However, we are seeing positive signs that conditions are improving. Factory production in South Vietnam has restarted, albeit at a reduced capacity in some areas and the congestion at some global ports has improved.

We are optimistic given our strong start to the fourth quarter. Skechers third quarter revenue of $1.55 billion was a new record for the period and a remarkable achievement given the ongoing global supply chain disruptions just discussed. For the nine months period we also achieved a sales record of over $4.6 billion.

Quarterly gross margin remained strong at 49.6% primarily driven by higher average selling prices and fewer promotions in our direct-to-consumer business, partially offset by increases in freight costs.

The third quarter sales gain of 19% was the result of a 20% increase in our domestic business and a 19% increase in our international business, which represented 58% of our total sales for the period. We achieved double-digit increases across all our reportable segments, driven by the continued global demand for our Comfort Technology footwear.

Skechers direct-to-consumer business achieved the highest quarterly sales gains, increasing 44%, driven by a 61% increase in our international business and a 35% increase in our domestic business. Worldwide comparable same-store sales increased 31% including 34% domestically and 25% internationally.

Importantly, unit volume improved 17% with an average selling price per unit increase of 23%, reflective of our less promotional stance, the success of our Comfort Technology product and a return to a more normal lifestyle and shopping behavior.

The increase in our domestic direct-to-consumer business was driven by a 43% gain in our brick-and-mortar stores where we saw higher traffic and normalized operating hours. Our domestic e-commerce channel increased 3% year-over-year, but 180% over the same period in 2019.

Our domestic e-commerce business was particularly impacted by limited product availability in the quarter. The increase in our international direct-to-consumer business was primarily driven by a rebounding demand and easing of COVID restrictions.

This growth came from triple-digit increases in Chile and Korea and double-digit increases in the United Kingdom and Mexico, as well as strong growth in Canada, Peru and India.

We continue to invest in our e-commerce infrastructure and launched new sites on our new platform in Ireland in September and the United Kingdom this month, with more markets planned for the fourth quarter and into 2022.

In the third quarter we opened 10 company-owned Skechers stores, including two in Columbia and one each in Peru, India, Germany and France. We also opened a store in downtown Los Angeles in a renovated historic building, marking our first street location in this evolving urban center. We closed one location in the quarter.

To date in the fourth quarter, we've opened three stores, including one in Naples, Italy and we plan to open an additional 15 to 20 locations by year end. An additional net 119 third-party Skechers stores opened in the third quarter across 28 countries, including a net new 67 in China, 9 in India, 6 in Australia, and 4 in New Zealand.

In total, at quarter end, there were 4170 Skechers stores around the world. Our international wholesale business grew 11% year-over-year. The quarterly sales growth was primarily driven by an increase of 62% in our distributor business and a 10% increase in China.

Our distributor business performed well, reflecting a more normal selling environment, particularly with our largest partner base in the Middle East and Africa. Our joint venture business increased 5% for the quarter due to a 10% increase in China, as well as strong sales in Mexico and Israel.

These improvements were partially offset by declines in several markets in Asia due to continuing COVID related restrictions. Subsidiary sales increased 6%, primarily driven by improvements in India, as well as Colombia and Canada. This growth was partially offset by a 11% decrease in Europe, primarily due to supply chain issues.

We are currently seeing progress in European ports with improvements in the flow of goods resulting in a strong October. Sales in our domestic wholesale business improved 10% in the third quarter.

The growth came primarily from women's GO WALK, men's sport, work, all [ph] from Skechers, as well as our performance in casual running style for men and women. Central to our global success is our Comfort Technology footwear. Comfort, innovation, style and quality are the Skechers product tenets.

In the third quarter and over the last 18 months, consumers have been increasingly loyal to Skechers Comfort as we elevated our products with more fit offerings, as well as lightweight cushioning options and added durability to many styles. We also have focused our efforts on an expanding collection at futures recycled materials.

Our ongoing goal is to meet consumers' needs with comfortable footwear at a reasonable price. We drove awareness of our available collections through our multiplatform approach to marketing that included television, outdoor, digital, influencers and more.

This approach resulted in influencers from Tokyo, London, and Los Angeles, all wearing Skechers times, Kansai Yamamoto limited edition collection and localized campaigns featuring key opinion leaders in key global markets. Given Skechers global growth, we are strategically investing in both our distribution and corporate infrastructure.

Our UK and China distribution centers became fully operational in the third quarter and we narrowed down locations for a new DC in India.

We completed the first phase of our corporate headquarters expansion at Manhattan Beach and we are working on the expansion of our North American distribution center that will bring our facility in Southern California to 2.6 million square feet in 2022. Both of these expansions will be LEED certified gold.

We believe our record results in the third quarter reflect our powerful global brand. With factory production in South Vietnam restarted and transit times and port constraints improving, we are optimistic about the holiday season. And now, I would like to turn the call over to John for more details on our financial results..

Thank you, David, and good afternoon everyone. Our results this quarter demonstrate the strength of our brand as the Comfort Technology leader, as well as our immense opportunities for global expansion.

What makes us even more impressive is that we delivered this growth despite severe and ongoing supply chain challenges that significantly restricted product availability across the globe. Let me elaborate on that topic first. There has been a lot of discussion about the factory closures in Vietnam over the summer.

This certainly impacted production at Skechers, though to a more limited degree than others as the majority of our Vietnam production is not in the South of the country. The more disruptive issues have been widespread shipping container shortages, port congestion and last mile transportation delays.

The combination of these factors negatively impacted Skechers sales in the third quarter. This is evident in our quarter end inventory balance which includes an incremental 218 million in-transit inventory, a year-over-year increase of over 140%.

Under normal conditions we believe a meaningful portion of that inventory would have been delivered to customers in the third quarter.

At Skechers our main objective remains delivering great comfort infused products to our dedicated consumers and once product availability is normalized, we fully expect to deliver even better results than the remarkable growth of this quarter.

Now let's turn to our third quarter results, where we will provide comparisons to both prior year and where appropriate 2019. Sales in the quarter achieved a new third quarter record totaling $1.55 billion, an increase of $250.1 million or 19% from the prior year, and a 15% increase over the third quarter of 2019.

On a constant currency basis, sales increased $222 million or 17% from the prior year. Direct-to-consumer sales increased 44% year-over-year supported by growth in domestic and international markets of 35% and 61% respectively. Both markets delivered meaningful improvements in gross margins and strong year-over-year average selling price growth.

As compared with the third quarter of 2019, direct-to-consumer sales increased 20% the result of a 14% increase domestically and a 30% increase internationally. International wholesale sales increased 11% year-over-year and grew 10% compared to the third quarter of 2019.

Our distributor business grew 62% year-over-year, but still remained about 9% below 2019 levels. This channel continues to make good strides toward recovery, particularly in critical markets like the Middle East and Russia. Particularly sales increased 6% year-over-year and as compared to the third quarter of 2019 grew 8%.

The improvement was primarily the result of higher average selling prices and a strong recovery in India, as well as increases in Latin America and Canada.

Our joint ventures grew 5% year-over-year led by 10% growth in China, driven by strong e-commerce demand, somewhat tempered by slower traffic patterns in retail stores, as well as temporary pandemic related store closures. Continuing weakness in several adjacent markets also weighed on joint venture growth in Asia.

Domestic wholesale sales grew 10% year-over-year and as compared to the third quarter of 2019 increased 17%. We continue to see very positive underlying trends with the majority of our domestic wholesale partners, including healthy sell-through rates and steady and average selling prices.

Gross profit was $769.4 million, up 23% or $144.3 million compared to the prior year. Gross margin for the quarter was 49.6%, an increase of 150 basis points.

On a year-over-year basis, gross margins improved as a result of higher average selling prices, partially offset by a higher unit cost across all segments and the impact of product mix in our wholesale business.

Total operating expenses increased by $94.5 million or 18% to $630.7 million in the quarter versus the prior year, but decreased 50 basis point as a percentage of sales from 41.2% to 40.7%. Selling expenses in the quarter increased year-over-year by $33.8 million or 39% to $119.8 million.

The year-over-year increase was primarily due to higher demand creation spending as markets reopened globally. General and administrative expenses in the quarter increased year-over-year by $60.7 million or 13% to $510.9 million. However, as a percentage of sales, this represented a year-over-year decrease of 170 basis points.

The dollar increase was due to a combination of factors, including increased retail store labor, incentive costs, rent expense related to new store openings and distribution center expansions, as well as volume-driven warehouse and distribution expenses.

This is partially offset by the $18.2 million corporate compensation expense last year related to the one-time cancellation of restricted share grants. Earnings from operations were $146.2 million versus prior year earnings of $92.1 million, an increase of $54.1 million or 59%.

Operating margin improved 230 basis points to 9.4% as compared with 7.1% in the prior year. Net earnings were $103.1 million or $0.66 per diluted share on $157.1 million diluted shares outstanding. This compares to prior year net earnings of $64.3 million or $0.41 per diluted share on $155 million diluted shares outstanding.

Our effective income tax rate for the quarter was 15.6% versus 15.4% in the prior year. And now turning to our balance sheet. Our cash and liquidity position remained extremely healthy. We ended the quarter with $1.18 billion in cash, cash equivalents and investments. This reflects a decrease of $318 million or 21% from September 30, 2020.

But as a reminder, we fully repaid our revolving credit facility in the second quarter of which approximately $450 million was outstanding last year. Trade accounts receivable at quarter end were $758.7 million an increase of $49.8 million from September 30, 2020, predominantly the result of higher wholesale sales.

Total inventory was $1.23 billion, an increase of 17% or $177 million from September 30, 2020.

However, as previously noted, this balance reflects a significant increase in in-transit inventory of $218 million on an inventory, that is inventory available to deliver to customers and our retail stores was lower by approximately 5% overall and in critical markets like the United States and Europe on-hand inventory was lower by over 20%.

Total debt including both current and long-term portions was $327 million at September 30, 2021 compared to $812 million at September 30, 2020 reflecting the repayment of our revolving credit facility last quarter.

Capital expenditure in the quarter were $89.4 million of which 38 million related to investments in our new corporate offices and other real estate, $16.2 million related to the expansion of our joint venture owned domestic distribution center, $15.3 million related to investments in our direct-to-consumer technologies and retail stores, and $10 million related to our new, now fully operational distribution centers in China and the United Kingdom.

Our capital investments remain focused on supporting our strategic priorities, growing our direct-to-consumer business, as well as expanding the presence of our brand internationally. For the remainder of 2021, we expect total capital expenditures to be between $80 million and $110 million. Now I will turn to guidance.

Given the severe supply chain constraints we experienced throughout the third quarter, which we believe will continue for the remainder of the year and into the first half of 2022, we are updating our previous guidance.

For fiscal 2021 we now expect sales to be in the range of $6.15 billion to $6.2 billion and net earnings per diluted share to be in the range of $2.45 to $2.50. For the fourth quarter this implied sales in the range of $1.5 billion to 1.56 billion and net earnings per diluted share in the range of $0.28 to $0.33.

We anticipate the gross margins will be essentially flat compared to last year as freight costs will largely offset improved pricing. Our effective tax rate for the year will be between 19% and 20% as compared to a rate of 5.5% in 2020 and 17.2% in 2019. And now, I'll turn the call over to David for closing remarks..

Thank you, John. Our third quarter revenues of $1.55 billion was a record for the period and represented our second highest sales quarter in our history and we achieved impressive gross margins of 49.6% and diluted earnings per share of $0.66, a year-over-year increase of 61%.

Our innovative Comfort product resonated with consumers around the world and demand remains strong, demonstrated by both units sold and the average selling price increases.

Traffic is increasing in our stores in the Americas, across Europe, parts of Asia and in the Middle East, a welcome change from earlier in the year when much of the world continued operating under lockdown restrictions. We remain focused on developing more Comfort footwear.

expanding our apparel offering, reaching more consumers through our e-commerce expansion and looking at new opportunities to drive sales globally, including in the Philippines where this month we have transitioned from a third-party distributor model to directly managing our business.

Our teams are working tirelessly to address the supply chain challenges across all touch points, resources, factories, container shortages, port congestion and in-country transit, all with a goal of delivering Skechers Comfort footwear to our customers and consumers.

We are also keeping a close watch on local pandemic-related restrictions and the health of our global teams. We believe 2021 will be another record year for Skechers, a remarkable achievement given the uncertainties globally. We look forward to 2022, a year that will mark our 30th anniversary.

We believe we'll be exceptional from a marketing product and sales perspective and a time where we will continue communicating our message to consumers that Skechers is the Comfort Technology company. Now I'd like to turn the call over to the operator for questions..

Thank you. [Operator Instructions] Our first question comes from Jay Sole with UBS. Please proceed with your question..

Great, thank you so much. David you mentioned in your opening remarks that the supply chain issues will impact fiscal '22.

Can you just give us a sense of will it impact Q1 and Q2 or just Q1 and will it be an impact on sales or be an impact on margin, if you can give us a little sense of how much you think that will impact fiscal '22 that will be great, if you can start there?.

Yes, I think we know Q1 because we know things are in transit and the ports won't clean up by then, no matter what it is. John's comment that we had $200 million additional to last year in transit, all represents items that would have been at the port and available-for-sale for the most part in Q3 and certainly early parts of Q4.

But things are starting to get somewhat better and we are picking up the pace, especially outside the United States. The U.S. is getting somewhat better, but our facilities in Europe and in parts of South America are going leading to a stronger October than we had originally anticipated a few weeks ago.

I think if there's an impact, because you never know all these things on how long that will last, it will be more in the first quarter and should start to alleviate in the second, but that's a very personal issue, and I think they are all sales related. I don't know that they are gross margin related.

The commitments we've made to additional freight already baked in the numbers, so supply chain issue shouldn’t impact on an item basis our gross margins, but certainly timing and sales.

And I don’t know that it impacts sales on the overall picture depending on what your timeframes are, because all the stuff that John talked about in transit is either spoken for by our wholesale customers or necessary to our retail and online businesses. So and we haven't seen that demand wane at all.

There is still great reception and we can turn it very quickly because everybody is in need of what we're selling..

Okay great, so if I can ask one more, just to follow-up on that point, David you've mentioned that gross margin doesn’t sound like there's been, there is that much impact, but can you sort of maybe break out for us in Q3 was there a margin impact, whether it was in SG&A or gross margin from increased freight costs and then how many basis points was that? And if we think about 4Q, what is the impact of some patching [ph] issues on 4Q are you assuming it's a couple hundred million in sales and 50 basis points in gross margin, that kind of if you can sort of break that out for us a little bit, that will helpful?.

In Q4 it's hard to tell. I mean all of that is reflected in our guidance, so it could be up or down, I'd like to believe, and you could take it for what it's worth that we've been more conservative than we usually are simply because of the issues in Q3 and are pleasantly surprised in October.

I don't know that there's any significant net margin issues simply because the expenses are there. The only thing I would tell you is, we had originally anticipated a higher third quarter, so we would have had even more leverage to our operating expenses when you're there.

As far as freight is concerned, we do see that alleviating some, so it's difficult to see the overall picture.

I think it's fair to say, as John said in his opening comments, that our gross margins would be equivalent to last quarter and last year, a little higher than last year I think, and unless something changes dramatically that seems to be the picture right now..

Okay, got it. Thank you so much..

Our next question comes from Laurent Vasilescu with Exane BNP. Please proceed with your question..

Good afternoon. Thank you for taking my question. John, I think you mentioned $218 million in in-transit inventory which I think was up 140% year-over-year.

Correct me on my math, but I think that's up $128 million, and then if I convert that to dollars it's $250 million, is that the right way to think about the slippage from 3Q into 4Q? And are you anticipating a similar slippage from 4Q into 1Q? Is that the right way to think about it?.

Well, let me just be clear first on the numbers. The $218 million is the increment, so that represents a 140%. So if you take that number and that's the cost number, we believe a portion of that absolutely would have been available for delivery to customers in the third quarter.

So you got to keep in mind the market on that will vary between wholesale and direct-to-consumer, but I think it's fair to say the reason we offer the point is that it's illustrative of the type of supply chain constraints we had on product availability and the impact it had on our third quarter results..

Very helpful. And then I think, I wanted to ask about China, you've done phenomenally well over the last six years. The growth rate you still outperformed some of the international brands, but just I'd love to hear what you saw over the course of the quarter, maybe some quarter to date commentary, that would be very helpful for the audience..

Yes, I mean I think we outperformed what we can observe today of other western brands and I think that's probably the most important point to drive out of it. I mean, clearly there were some incremental headwinds in China owing to the pandemic.

There were closures, there were restrictions on activity, restrictions on movement, and that had an impact, but we're actually thrilled by the 10% growth we put out, because against the backdrop of the struggles you've seen other brands have, our brand we think continued to outperform and we're very optimistic about the continued growth of the brand.

Early returns so far in this quarter are encouraging, but obviously we're coming up to our key selling window in the 11/11 holiday period. So we want to wait and see how that transpires. But overall, I would tell you, given the situation in China generally, we're thrilled with the performance there.

To add color, the area and struggle or the areas you've heard from others which is retail foot traffic because of the COVID-related limitations put on movement and consumer behavior..

That's great to hear. And if I can squeeze one more question in, John I think you mentioned last month at Kimberly's [ph] conference that you are hoping to get to $10 billion in revenues by 2025/26.

Can you just maybe parse that out is that organic, is that like incremental with like apparel or geographies, like China getting to a sort of number, any color would be really great for us?.

Yes, the first thing I'll say is, we absolutely believe $10 billion by 25/26 is well within the reach of this brand. We spoke about the global expansion opportunities and those continue. The formula to get there is pretty similar to what we've done historically.

You put together kind of a mid teens growth rate in the international wholesale side of things. You put together a slightly higher direct-to-consumer growth rate, because you have both, the stores, the international markets and e-commerce, which we put a lot of investment behind.

And then we think it's reasonable to expect the domestic wholesale marketplace to at least put up a mid single digit growth rate.

And so if you look back historically, that's almost precisely what we've done and we think more of that is in the future, especially with the product lineup and our focus on being the Comfort Technology footwear company in the world.

And so that's how you get there whether or not it's precisely on 25/26 I think is going to be dependent a bit on the markets and external factors. That's how we piece together an opportunity to grow this brand to that $10 billion platform..

That's great to hear, thank you very much John..

Thanks Laurent..

Our next question comes from Kimberly Greenberger with Morgan Stanley. Please proceed with your question..

Great, thank you so much.

John, the 23% increase in average selling price is obviously an indicator of the demand that you guys are seeing, and I just wanted to know if you could unpack that a little bit for us, is that product like-for-like product increase in AFP or is that channel mix shift or is it consumers mixing into sort of more premium lines that you produce? Any color you could offer will be great..

Sure Kimberly, and I would say at the outset it's absolutely testament to the strength of the brand and the product. In particular, the technology we've infused into our shoes to add elements of comfort like Arch Fit, Max Cushioning, et cetera.

I'd say generally speaking, it is a combination of slightly higher pricing on some of that premium product and then obviously a much more restrained promotional stance from the company.

Some of that is eaten obviously by the current environment of stringent inventories, but I probably would chop more up simply to more discipline on our part to ensuring that the value equation continues to work for consumers, but it also continues to work for Skechers. I would also point out it's not unique to our stores.

We're seeing very strong ASPs in our wholesale partners that's driving margin for them coupled with steady and strong sell-through.

And so the composite picture in direct-to-consumer this quarter is fantastic, but I think it is a testament to the strength of the brand, the demand for the product and that's way we expect it to continue certainly in a stable environment what we've seen in the last couple of quarters, we expect that to continue into 2022 and beyond, especially with the lineup of our product we have coming forward for next year.

I mean, literally the only challenge we are facing at the moment is what we've spoke about already, which is being able to land that product and then put it into our wholesale partners hands and in our own stores, because once it's there it's selling quite well at very attractive ASPs..

Yes, agree. So that actually brings me to my follow-up question which was the minus 20% number, please correct me if I didn't hear you right on that, but that's quite eye-catching. It sounds like your in-stock levels in both the U.S. and Europe are down 20% in-store.

Is there a sort of reasonable path to think about that inventory getting replenished because it obviously looks like the case that there's demand there that is not being met because the stores are just not perhaps officially stocked in and probably revenue being left on the table.

So is there is a -- is it possible by the end of December that you can sort of cut that in half or maybe make even more progress? Just what are the prospects that you've got in front of you to sort of restore those inventory in-stock levels? Thanks..

Sure, let me speak about the amounts and then I'll sort of let David come in on expectations for recovery. The first thing I'd say is that 20% number reflects on-hand inventory at the end of the quarter.

I would say our unfulfilled order due to capacity limitations on available product was actually greater than that in both of those markets and that's again a testimonial to the impact of the product available limitations on our sales in the quarter.

In terms of the recovery, I think we have modest expectations built-in to our numbers and our guidance for the balance of the year. As David mentioned, we're seeing very encouraging signs out of Europe.

I think the big question mark is how quickly the domestic port congestion can remedy itself, because that's I think what we have right now the highest mismatch between available product and core demand plus obviously our own stores, our customers domestically.

So again, I can tell you in our business there is certainly no lack of demand for the brand, for the product, for the technology we're bringing, it's really a challenge with getting the supply chain to operating as efficiently as would normally be the case..

Yes, I think it's important to note that we're already responding to make some progress outside the United States. So the question is, how quickly will this congestion clean up. Now, when people talk about the overall impact of supply chain, there is also procurement of raw materials and there is downtime at some of the factories are concerned.

I think what we're trying to show everybody and bring everybody's attention is, with this amount in transit, we've gotten through the biggest piece of factories and raw materials. We've made the product. We've actually found containers for a significant amount of the product, and only needs to improve every piece of improvement increases the pie.

We already see increases in our performance at retail in Europe, because those docks are open, those ports are opened quicker. So I think you'll see constant improvement and maybe certainly not a slight line through the quarter, but I doubt we'd get into full replenishment of our stores until sometime in first quarter.

Although if the ports do clean quicker, we have a significant amount in transit to the United States, we would pick up a big piece of that in the next couple months and it would show in our retail sell-throughs..

Very clear, thank you so much..

Our next question comes from Gabby Carbone with Deutsche Bank. Please proceed with your question..

Hi, good afternoon. Thanks for taking my question. So within the hat U.S.

I was curious if you saw any differences across regions this quarter, you know there was a spike in certain parts of the country?.

I would not say that there was a dramatic difference in the regions. We did note continued difference in channel behavior. You're still seeing depressed traffic volumes in mall based offerings, in tourist sensitive corridors.

For us to the e-commerce business while outgrowing as magnificently as it had in the past versus 2019, we're still up significantly. So that was a healthy channel, although impacted by product availability issues our neighborhood big box warehouse stores continue to outperform traffic outlet and concepts.

Particularly again, those impacted by tourism, we're certainly below. I think on the encouraging side of things conversion picked up almost everywhere which is certainly translating into some of that growth.

But in terms of regional performance, I think if you take that totality of the quarter and the year, there wasn’t really a significant deviation from that overall trend profile that I just described..

Got it, and just a quick followup, I was wondering if you can dig into SG&A a bit further, is there any color you can provide around freight side of marketing, investment and labor this quarter, and how should we be thinking about SG&A in the fourth quarter?.

Yes, I mean the big driver is, I mean as we noted, the big drivers in SG&A were marketing, because we geared back up marketing. I think it's tough when product availability is your core restraint because you've got the demand creation spending out there and is working really, really well.

And so, just from timing standpoint, that's not something we either wanted to or could throttle significantly in the quarter. So, as a result, that under-levered a bit, but again on the plus side, get sponsoring healthy demand.

The other major driver was labor costs and that was everything from stores reopened, re-equipping stores with the right amount of labor.

We did, and have put in place some mechanisms to ensure the retention of key personnel particularly in our retail division and so that is absolutely driving a bit of cost increase, but the productivity of the stores is definitely keeping pace. So the overall profitability profile is still very strong.

And then there are some incentives this year there weren’t around last year because of the pandemic results. And then we do have the variable costs associated with the increases in mostly the wholesale side of things. As well, this is aside, we note they are bringing operational the China distribution center and our UK distribution center.

So there's a small about of incremental costs associated with getting those operations up and running, but overall two main cost drivers I point to you are the marketing and the labor related costs which I think given the restart in many markets after lockdowns last year is completely understandable..

Got it, thank you very much..

Thanks Gabby..

Our next question comes from Susan Anderson with B. Riley. Please proceed with your question..

Hi good evening. Thanks for taking my questions. A quick follow-up I guess on the European business.

So the declines there in the distributors is that mainly due to supply chain? And then also just curious on the wholesale growth margin, that was down was also driven by supply chain?.

Yes, I'd say supply chain is the main culprit in both of those, certainly freight costs. There were some slight differentials year-over-year that I think stem from the last of some of the carve outs that had existed previously, but I'd say supply chain is definitely the primary culprit..

Yes..

In Europe we picked up a significant portion in October because the ports are open, there was more going through and we do see the pickup already in October from what could have been last quarter. So, truly….

Okay. Great, very helpful. And then I guess I'm just curious if you are seeing any change in trend in what consumers are buying.

I mean, it sounds like all of it is real Comfort which is what you guys focus on, but are you seeing more fashion Comfort selling better versus a walking shoes or is there any difference there versus what you guys saw last year at this point?.

We have a lot more features in our shoes now and we're selling the features and the comfort across a broad spectrum of styles. So and obviously we're seeing the more comfort features selling at a higher price and selling through quite quickly.

So I think, well across a broad spectrum certainly walking is one of our cores and we sell it very well, but I think it's the features throughout a multiple portion of it that is selling it..

You know, I think that's really important to understand. When we talk about Comfort Technology, it is not particular in every instance to one category or not.

So it can actually be Comfort Technology across a lot of different categories and I think that's the one key strategic approach we're taking that I think is advantaging brands is that you can get comfort in athletic, you can get it in dress, you can get in seasonal sandals and boots.

So that layer of technology that comfort focus actually expands across most of our categories. So it feeds into the core strengths we have in specific categories at different points in time..

Okay, great. Thanks so much for the detail. Good luck this holiday..

Thank you..

Our next question is from John Kernan with Cowen. Please proceed with your question..

Good afternoon. This is Krista Giberon [ph] for John. Thank you for taking our questions. Thank you also for all the color on ASPs and gross margin. Just sort of one follow-up there.

As we look into the first half of 2022 kind of how you see the development of ASPs from here given what we've been hearing about rising input costs including materials inflation, both for your wholesale and your DTC?.

Well, obviously we're not ready to provide guidance on 2022 yet, especially given the volatility, but I would say from a pricing perspective, I think what we're looking at today and what we've seen really over the last couple of quarters, that's really something you can expect to continue from a pricing level perspective.

I think in response to additional costs, we'll look at pricing overall, but I think the strength you've seen in our pricing right now is truly reflective of the quality of the product and there is no reason in my mind now that we'd take any step other than forward.

So we think it's going to be an ASP trajectory we can continue and then we'll adjust as needed from an input cost perspective depending on how things move in the marketplace. Some of the input costs we're seeing particularly freight, we don’t think that's durable forever. That's going to be a moment in time element.

So we want to make sure we consider that. Other situations where there's greater feature sets and products that may drive some costs as well.

But overall the goal would be to continue to keep margins in the range of being able to build them over time by mix shift towards international in our direct-to-consumer businesses which are our margin accretive activities..

Great, thanks.

And then just on the domestic wholesale side of things, could you just give us a little sense of how we should think about how that channel performs or give the outlook in terms of sales for Q4? If you have any visibility into that the order books I realize so much is in transit at this point, but anything you could share would be helpful, thank you..

And that's the key question is how much we can land. It's not a question of demand. Our expectations built into our guidance actually reflect a fairly significant handicapping to our order book. Our order book right now looks fantastic. It's really going to be a question of how much product we can land and when can we land it.

So I think we've tried to incorporate what we see right now in terms of a flow of goods from the port to our distribution center and then on to customers, but that's going to be the great unknown. I would say as David commented in his prepared remarks though, October looking good so far, so we're encouraged by what we see.

And then again the order book is fantastic right now. It's just a question of what can we get landed and then as a result get delivered..

Thank you..

Our next question is from Brian McNamara with Berenberg Capital Markets. Please proceed with your question..

Yes, thank you for taking the question.

I'm curious excluding the supply chain challenges which I imagine requires a number of assumptions on your part, do you believe you are in position to meet or exceed your prior guidance?.

Yes, that's simple..

Yes, I mean look it's felt to be precise about it, when we gave you the MIT number, we do think that that merchandise in transit, so a meaningful portion of it would have been landed and would have been delivered.

And the only reason I think that we can credibly say that we were positioned within or above guidance was absolutely supply chain related..

Got it, okay.

And then secondly, I assume transportation is the larger headwind in the quarter, but could you quantify your production exposure to Vietnam particularly in the South?.

Yes, I mean we talked about it before, it's less than 10%, certainly less than 10% that was affected by the fact of ebb and flow depending on what's being produced where at any given point in time.

But as we noted and again in our commentary, the majority of our Vietnamese production is actually not in the South which was good, and so they are now impacted by just that issue alone was relatively limited.

I would just again echo that the commentary we made though that there's more issues than just the factory closures and actually the other issues tended to be for us much more significant in restricting product availability in the quarter..

Great, best of luck guys..

Thanks, Brian..

Ladies and gentlemen we've reached the end of our Q&A session and this concludes today's conference. You may disconnect your lines at this time and we thank you for your participation..