Steven Madden's (SHOO) CEO Ed Rosenfeld on Q2 2016 Results - Earnings Call Transcript

| About: Steven Madden, (SHOO)

Steven Madden, Ltd. (NASDAQ:SHOO)

Q2 2016 Earnings Conference Call

August 2, 2016, 08:30 ET

Executives

Jean Fontana - ICR

Ed Rosenfeld - Chairman & CEO

Derek Browe - Director, Finance and IR

Analysts

Camilo Lyon - Canaccord Genuity

Jay Sole - Morgan Stanley

Erinn Murphy - Piper Jaffray

Jeff Van Sinderen - B Riley

Scott Krasik - Buckingham Research

Corinna Van der Ghinst - Citi

Steve Marotta - C.L. King & Associates

Eddie Plank - Jefferies

Sam Poser - Susquehanna

Operator

Welcome to the Steve Madden Second Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Jean Fontana of ICR. Please go ahead, ma'am.

Jean Fontana

Thank you. Good morning, everyone. Thank you for joining us today for the discussion of Steve Madden's second quarter 2016 earnings results. Before we begin, I would like to remind you that statements made on this conference 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 SEC.

Also, 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 replied upon as current after this date. I will now turn the call over to Ed Rosenfeld, Chairman and CEO of Steve Madden.

Ed Rosenfeld

Thanks, Jean. Good morning, everyone and thank you for joining us to review Steve Madden's second quarter 2016 results. With me to discuss the business is Derek Browe, the Company's Director of Finance and Investor Relations. We were pleased with our solid second quarter performance in a challenging retail environment. We posted a slight increase net sales driven by strong growth in our retail business and a 130 basis point expansion in gross margin, driven by improvement in our wholesale footwear segment.

For the quarter, we recorded diluted EPS of $0.42, up from $0.40 in the prior year and in line with our expectations. Our core Steve Madden women's footwear business was the highlight in the quarter with strong performance in both the wholesale and retail channels. Steven his team have created an outstanding merchandise assortment with strength across a range of product categories and this on-trend product is enabling the Steve Madden brand to be clear out-performer in a tough environment.

In wholesale, our Steve Madden women's footwear division recorded a second consecutive quarter of strong sales growth and importantly, also continues to see outstanding sell-through on the floors and websites of our wholesale partners. Our partners retail sales of Steve Madden continue to outpace inventory levels of our product in the channel by a significant margin. And in our own retail business, the Trend Right Collection enabled us to achieve a robust comparable store sales gain despite an extraordinarily challenging comparison from the prior year. We recorded a 5.4% same-store sales increase on top of an 18.5% comp increase in second quarter last year.

Clearly, our flagship brand is strong and our product is on target. While we're discussing Steve Madden, I want to touch briefly on an important step we took in the quarter to position the brand for future growth outside the U.S.. In June, we formed SM Europe, a joint venture with SPM Shoe Trade that will manage the Steve Madden footwear and handbag business in much of Europe, including Germany, France, England, Switzerland, the Benelux region, Scandinavia, central Europe and the Baltic states.

Consumer demand for the Steve Madden brand in Europe has increased dramatically over the past few years and so we thought the time was right to transition from a distributor model to a joint venture model in these territories. By operating the business directly with our joint venture partner rather than through a distributor, we're able to better control the merchandising and overall brand positioning in the market. And by cutting out the middleman, we're able to offer a more compelling price value proposition to the consumer. While the financial impact of this new JV will be modest in 2016, we believe this new business model positions us for significant growth in the region in the coming years.

Turning back to the financial results in Q2. Another highlight in the quarter was the continued strong performance of Dolce Vita. We had another quarter of outstanding top-line growth in Dolce Vita and like Steve Madden, Dolce Vita was a positive outlier for its wholesale partners in the spring season in terms of sell-through performance. In June, we relaunched dolcevita.com on our e-commerce platform. Previously it had been outsourced to an e-commerce solutions provider.

This was the final significant milestone in our integration of Dolce Vita and we're confident that it will drive improved sales and profitability for dolcevita.com as well as enable us to communicate our brand and marketing message more clearly. We also recently signed a lease for a Dolce Vita flagship store in Soho in New York City. It's a beautiful space and we look forward to being able to showcase the brand and its collection in one of the most important shopping districts in the world. This store will be open at the tail end of 2016 or early 2017.

I also want to point out that the strength in our Steve Madden women's and Dolce Vita wholesale footwear divisions resulted not only in top-line gains but in gross margin improvement as well. Strong consumer reception to our products in each of these brands enabled us to minimize close-out sales and reduce markdown allowances, fueling significant gross margin gains in these divisions.

While these core brands and businesses are performing well and continue to have nice momentum, there were two areas where we're seeing softer trends than we anticipated. The first is our private label footwear business where initial boot orders have come in below our expectation. The second is in our international distributor business. While our owned and joint venture international businesses are on plan, we have seen a slowdown in orders and shipping to our distributors in Asia and the UAE.

Our Asian distributor which has been our largest international distributor for many years, has seen inventory backup and has sharply reduced orders in order to rationalize its stock position. Current challenges notwithstanding, the Steve Madden brand is positioned well in the region, particularly in China and we continue to believe that the brand has tremendous growth potential there. We're currently evaluating alternatives for this business, including, but not limited to, a change in the business model from a distribution arrangement to a joint venture structure.

Turning to the UAE, our business there has slowed along with that of many other retail companies, as consumer spending in Dubai which of course, relies heavily on tourism, has been negatively impacted by currency movements, lower oil prices and regional turmoil. Based on the softer than expected trends in private label footwear and our international distributor business, we're reducing our sales outlook for the year to 0% to 1% growth from the prior year.

However, our expectation for gross margin has increased, partly because of sales mix. Remember the private label and international distributor businesses are lower margin businesses. And partly because of stronger than anticipated trends in businesses like the Steve Madden women's and Dolce Vita wholesale footwear divisions. This improved gross margin combined with the impact of a reduction in the forecasted full-year tax rate, enabling us to maintain our earnings guidance for the year, continue to expect diluted EPS to be in the range of $1.93 to $2.03.

To sum it up, we delivered a solid performance in the second quarter despite the challenging retail environment. As we look ahead, we remain confident in our long term prospects because the underlying fundamentals of our business are sound. Our Steve Madden brand is as strong and relevant as ever and our product assortment is resonating with consumers. With that, I will now turn the call over to Derek to review our financial performance for the quarter in more detail.

Derek Browe

Thanks, Ed and good morning, everyone. Turning to our financial results for the second quarter, consolidated net sales grew 0.6% to $325.4 million compared to the prior-year net sales of $323.6 million. During the quarter, sales growth in our retail business was partially offset by a modest decline in our wholesale segment.

Wholesale footwear net sales decreased 1.8% to $195.4 million. Strong increases in our Steve Madden women's and Dolce Vita divisions were more than offset by declines in our private label and international distributor businesses. In wholesale accessories, net sales were $67.4 million in Q2 compared to $67.6 million in the prior-year period. We were pleased to see momentum in this segment compared to the last two quarters, particularly in our branded handbag business, but we remain cautious given industry trends in the category are still challenging.

In our retail division, net sales increased 9.9% to $62.5 million. As Ed mentioned earlier, our comparable store sales for the quarter were 5.4%. Our fashion sneakers and dress categories continued to be highlights for us as we had a number of key product offerings that resonated with our customers. Additionally, styles with block heels also performed very well.

Regarding new stores opening in retail, during the quarter, we opened one full-price store in Mexico, one full-price store in South Africa and seven new U.S. outlook locations. We ended the quarter with 180 company operated retail stores, including 48 outlets and 4 e-commerce sites.

Turning to other income. Our commission and licensing income net of expenses was $2.8 million in the quarter versus $3.1 million in last year's second quarter. Commission income was down due a reduction of first cost business with certain private label footwear customers. Licensing royalty income was flat versus the prior-year quarter.

Consolidated gross margins expanded by 130 basis points to 37.2% compared to 35.9% in the prior year, driven by an increase in wholesale gross margin, partially offset by a decrease in a retail gross margin. Wholesale gross margin increased to 31.1% from 29.8% last year. The improvement was the result of lower closeouts and reduced markdown allowances due to strong product performance in wholesale footwear as well as in the impact of sales mix shifts.

Gross margin in the retail division decreased to 62.8% compared to 64.5% due to a benefit in Q2 of 2015 of insurance proceeds that were received in the quarter that related to prior-period losses as well as a negative impact in the current-year quarter of a stronger U.S. dollar on our international business.

Operating expenses for the quarter increased to $88 million or 27% of net sales compared to operating expenses of $82.5 million or 25.5% of net sales in the same period last year. Operating income for the quarter totaled $35.9 million or 11% of net sales compared to last year's second quarter operating income of $36.8 million or 11.4% of net sales. Our effective tax rate for the quarter was 32% compared to 33.9% in the same period last year and net income for the quarter was $24.7 million or $0.42 per share diluted compared to $24.5 million or $0.40 per share diluted in the second quarter of 2015.

We continue to have a strong balance sheet. As of June 30, 2016, we had $199 million of cash and marketable securities and no debt. Inventory increased 3.6% to $116.4 million compared to $112.4 million in the prior year, the increase due to our retail segment. Our retail inventories increased primarily due to the addition of 19 net new stores since Q2 of the prior year, while in our wholesale segment, inventory was slightly down versus the prior-year quarter. CapEx for the quarter was $4 million and during the quarter, we repurchased approximately 793,000 shares for approximately $27 million. This includes shares acquired through the net settlement of employee stock awards.

Turning to guidance. As Ed mentioned, the full year, we now expect that net sales growth will be 0% to 1%. We continue to expect that diluted EPS for the full-year 2016 will be in the range of $1.93 to $2.03. As Ed mentioned earlier, the full-year guidance includes a reduction in our forecasted full-year tax rate.

The reduction reflects our anticipated early adoption of a new accounting standard update that was released earlier this year that effects how we account for the tax impact of stock-based awards provided as compensation. The accounting standard update requires that excess tax benefits or decision fees which result from differences from book and tax treatment of stock compensation, we recorded part of income tax expense rather than as part of additional paid in capital in the shareholders equity section of the balance sheet.

Adoption of the new guidance will require us to reflect the adjustments as of January 1, 2016 and hence, will impact our previously reported quarters which in our financial filings for the remainder of the year, will be reflected in the year-to-date results. While we're still evaluating the guidance and finalizing our calculation, we're forecasting that the full-year tax rate will be approximately 30%.

However, we continue to expect that the effective tax rate for both Q3 and Q4 to be approximately 32% as the change will primarily benefit first-half results. As we look at Q3, we expect that diluted EPS will be approximately flat to the prior-year quarter as we're lapping the one-time Madden Girl Cold-Weather Capsule Collection that we did with Kohl's which generated approximately $15 million in net sales in Q3 2015 that will not be anniversaried. Now, I would like to turn it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And we will take our first question from Camilo Lyon with Canaccord Genuity.

Camilo Lyon

Ed, you said in your prepared remarks that your partner's retail sales, your wholesale partner's retail sales are outpacing your inventory in the channel. So it sounds like the take away from that is that there are some sales being left on the table that demanded outstripping supply. In your discussions with your wholesale partners, how long can that last? How long can they go experiencing good sell-through rates with you without having orders to match that demand?

Ed Rosenfeld

This is something that we touched on, I believe, on the last call that we're seeing this very strong sell-through. I'm going to focus on Steve Madden, in particular, Steve Madden women's business. We're seeing a strong sell-through and again, retail sales up dramatically and stock levels, in many cases, down.

And when you see that kind of a relationship, it generally means that if they would get some more shoes, they would do some more business. So we have been banging on our wholesale customers to increase stock levels of Steve Madden and it's made a little bit of progress, but certainly not, we haven't seen them step up with their orders the way we would normally see with this type of sell-through or this type of imbalance in the stock to sales relationship. How long can that last? It is hard to say.

We know that, on an overall basis, a lot of these customers have the inventories. That's a lot of pressure from top management to improve inventory turn, but we also know that when they have good products, they're going to want to eventually get more of them into the store so that they can do more business, so we will keep chipping away at it.

Camilo Lyon

Okay. With regard to how you have laid out the revised guidance, how do you think about this being the base case? In other words, what is the risk that there is another reduction over the next couple of months to the orders that you have in hand? Or is this now kind of level set the dynamic as we go into the fall season? And conversely, there may be an opportunity for increased orders should they come to the realization that they are dramatically under inventoried.

Ed Rosenfeld

I think that we feel comfortable with this new guidance and that this accurately reflects what we're seeing as of today. Certainly, if a great boot season materializes or if we get some good cold weather that helps our cold-weather accessories business, for instance, then that would put us towards the high end of the range or potentially, even beating the range. But obviously, it is still early. We don't know what that is going to look like and conversely, if we have another winter like we did last year or if boots do not take off this year, that would put us more towards the low end of the range.

Camilo Lyon

And then just the last question I have is could you just update us on how the Amazon relationship is progressing? Maybe give some color on how Prime Day performed for you and just how much you are trying to feed that channel where it seems like the traffic is really going.

Ed Rosenfeld

That has really been a big focus for us this year and we're putting a lot of management time and effort into growing that business and we're really seeing the rewards of that effort already. We're getting really nice increases with Amazon and I think about that as the Amazon group because that includes Zappos as well and particularly in Steve Madden women's seen really nice growth with each of those Amazon and Zappos. We had a really fantastic performance on Prime Day, huge increases versus the prior year, both in the products that we sold them wholesale as well as we had a lot of success with the products that we're drop shipping from our retail stores in our own warehouse. Very excited about what we're seeing with Amazon and we're going to keep the accelerator, keep our foot on the accelerator there.

Operator

And our next question comes from Jay Sole with Morgan Stanley. Please go ahead.

Jay Sole

Ed, you mentioned a really strong same-store sales performance in Q2. Derek touched on some of the fashion trends, but could you give a little more detail about what drove the comp? Was it a conversion issue because of the fashion primarily or was it a promotional issue, was traffic better or something operationally? Any detail you can give us would be great.

Ed Rosenfeld

If we dig into the metrics, traffic was down and AUR was down modestly so we really did it through good conversion and also the team did a nice job of driving increased units per transaction. And that really helped us get to that five comp.

Jay Sole

Okay. And then maybe on Steve Madden Europe, can you can tell us more about why now? It's something that sounds like it's been in the works for the last couple of years, but what drove you to make the decision now to start that JV?

Ed Rosenfeld

I think that we have just seen the demand from the consumer for the Steve Madden brand in particular really increase pretty dramatically over the last several years and we started to identify that Europe was perhaps a bigger opportunity than we have previously understood for us. And so we felt that taking this step was really the right way to capitalize on that opportunity.

Jay Sole

Okay and then maybe just one more for me. It sounds like, I think Derek said, you guided to kind of flat EPS growth in 3Q. So that implies somewhere in the $0.55 range, 20s % percentage type of growth for 4Q is that how we should be thinking about 4Q where the urine growth really accelerates in the quarter?

Ed Rosenfeld

I think there is a little bit of a new ones here which is that Derek discussed this new accounting standards update which is going to impact our full-year taxes . And so what has happening here is that we will get about a 5-cent to six and benefit which is actually going to be attributable to the first half that we already recorded where is you are looking at $0.75 through the first half of the year, that number is really going to be more like $0.81 we adopt this accounting standard update. So if you take that $0.80 and at the roughly $0.70 which is flat to last year Q3 now you're at a dollar 50 going into the fourth quarter and so it is really the range is more like $0.43 to $0.53 for Q4 to get to our guidance.

Operator

Our next question comes from Erinn Murphy with Piper Jaffray. Please go ahead.

Erinn Murphy

Just a couple of questions. Maybe Ed, first on the retail gross margin it was a little bit lighter than we thought. I know there was some timing items from last year that occurred but maybe could you just walk through a little bit more what you are seeing in the promotional environment overall and how should we think about retail gross margins in the third and fourth quarter?

Ed Rosenfeld

Sure. Yes. If you break down retail gross margin between domestic and international, the domestic before giving effect to this insurance proceeds issues that Derek called out was basically flat to the prior year. So similar level of promotion and flat gross margin. As Derek pointed out we had a fire in the store and the flood in the store where we took losses and then the insurance proceeds came in Q2 of 2015, so we got a benefit there that we did not obviously anniversary this year.

So basically apples to apples I would say we are flat domestically. We were down in the international stores and that is purely a function of the dollar. Of course, those regions they buy goods in dollars and sell it in their local currencies so with the strengthening of the U.S. dollar that negatively impacts the gross margin.

So as we look out going forward I think that we are looking for certainly domestic business for the promotions to be similar to what they were a year ago for us and so sort of flattish gross margin. Perhaps a little bit of pressure on the international businesses because of the strength of the currency. But I just want to follow more specifically to your question that the overall promotional activity in the industry remains heavy and I think we have to expect it's going to be heavy this fall season.

Erinn Murphy

And then if you could talk a little bit more about the off-price channel right now. I know you have business both with footwear [indiscernible] that you cut specifically for that channel. What are you seeing in terms of trends in the back half in terms of how they are ordering or perhaps not by both of those categories ?

Ed Rosenfeld

I'm sorry. Off-price and what was the other category?

Erinn Murphy

Off-price for both your accessory business--

Ed Rosenfeld

Yes. I think that business has gotten a little better. I think that we were already trending pretty well on the shoe side, with that channel. We had called that out as a headwind on the accessory side, both in Q4 of last year and in Q1 of 2016 and we have seen those retailers come back to us and start to place more normalized level of orders I would say and that's why you saw the accessories business get better. We were flat in wholesale accessories this quarter on the top line compared to the decline in the last couple quarters.

Erinn Murphy

Okay. And then just last on the Nordstrom anniversary sale, can you talk about how that's been faring thus far across Blondo and Dolce Vita as well as Steve Madden?

Ed Rosenfeld

Yes. I think that that has been a bright spot. I think if you do your channel checks you will hear from folks that Steve Madden was a real outperformer in the sale as a company and in particular with the Steve Madden brand much improved sell through performance in the Steve Madden brand compared to last year and really, really outstanding early weeks.

Operator

Our next question comes from Jeff Van Sinderen with B Riley. Please go ahead.

Jeff Van Sinderen

I know you guys talked a little bit Dolce Vita, it sounds like that is building momentum and I'm wondering if you can update us on your outlook for second half for Dolce Vita and also if you could touch on Blondo and your expectations there for second half?

Ed Rosenfeld

Yes. Both of those newer brands are really performing well for us. We called out Dolce Vita sales growth and Dolce Vita was at 50% in the quarter. While I do not expect it to continue at that rate, I think you will see nice growth in the back half as well. One thing I want to point out is that we continue to drive that operating margin, Dolce Vita up as well on the trailing 12 months we are now over 13% in that net margin so we went from a loss when we bought it and it's exceeding the Company average.

And then Blondo is poised for a really strong back half is well. Very strong performance and the Nordstrom anniversary sale and looking for big increases with Nordstrom as well as Zappos and a number of other retailers for the back half. So that should be a strong north of 20% grower for the back half also.

Jeff Van Sinderen

And I know it is still early and you mentioned private label boots but I'm just wondering is there any more color you can give us on the outlook for the boot business? The wholesale boot business in the second half? Any color you are getting from accounts there or anything we should be aware of?

Ed Rosenfeld

Yes. I think it is still early. You know the reads that we've seen so far and this is not surprising at this time of year it's been much more -- we have seen much more hits on booties as opposed to tall shaft boots. One thing I would call out is that we are seeing some nice hits on dress booties which is something new. Those looks are little fresher and we feel good about what we're seeing there, the casual booties are also good but we're cognizant of the fact that there are just a lot of casual booties in the market and anytime there is that much supply in the category we have to be cautious. But overall I think with our branded accounts, the initial boot orders are really in-line with what we anticipated. It's with our private label accounts where they came in below our expectation.

Operator

Next we will take Scott Krasik with Buckingham Research. Please go ahead.

Scott Krasik

So just some clarification questions, what percentage of your sales in the back half are roughly private label versus branded and wholesale?

Ed Rosenfeld

Private label is about a quarter of our business. I do not have the breakdown in the back half.

Scott Krasik

Is it even now?

Ed Rosenfeld

Not significant .

Scott Krasik

Okay and then you commented on 3Q EPS and we all appreciate that. Thank you. Just thoughts around wholesale revenue growth in 3Q given the big item you called out?

Ed Rosenfeld

Yes. I do not think we're going to start giving specific sales guidance by segment for the quarters but clearly it will be down in Q3 and up in Q4 to get to the number.

Scott Krasik

And then in terms of International, so what percentage of sales roughly is international at this point?

Ed Rosenfeld

International is 10% in there.

Scott Krasik

And then sort of how much would Canada and Mexico comprise of that? Two thirds or something?

Derek Browe

I would say the distributor business is maybe, at least as of last year it was probably 35% to 45%.

Scott Krasik

Okay. And last big picture question. Obviously, you have great reads across your business and you've had them for a while in terms of fashion trend. So you know what to do think again, it sort of asked in a different way, what do you think gets the retailers to start ordering or to see that stock to sales ratio sort of back to more normal levels?

Ed Rosenfeld

I think they need to get there overall inventories a little bit more in line. That would certainly help. We just need to continue recording these strong sell-throughs. It is not going to, if we can do this for another season I feel pretty confident that they are going to have to step up. I would've hoped they would've happened by now, and again it is not that they are not, they are not moving the ball forward, is just not happening quite as fast as we would like.

Operator

Next we will hear from Corinna Van der Ghinst with Citi. Please go ahead.

Corinna Van der Ghinst

First of all could you just remind us of what your guidance assumes in terms of order cancellations or reorders for the back half? Should we be thinking of that as netting out and did you see any big order reductions as we headed into the back-to-school season?

Ed Rosenfeld

I'm not sure how to answer the first part about cancellations versus where we as a matter -- I think essentially the guidance reflects our total view on where we’re going to end up. We're not looking for lots of cancellations, certainly and we have baked in some level of reorder activity into the guidance that we provided. In terms of back to school, did you say have we seen order reductions?

Corinna Van der Ghinst

Yes.

Ed Rosenfeld

Yes. Well definitely on the private-label side we have and that’s part of what is reflected in the reduction in the sales outlet. And the branded business has held in nicely.

Corinna Van der Ghinst

Your SGD growth accelerated during the second quarter. Can you just walk us through the buckets of spending does that include the SoHo lease I assume and also for the back half. I know you are not guiding next year yet but how you are thinking about how you're spending growth for next year?

Derek Browe

Yes. Cory, as we look at Q2 and the growth rate, we were out about 6.7% growth in SG&A for the quarter. Some of the buckets that were new for the quarter, the big piece was our retail business. We had a number of new stores since last year's Q2 which was a big driver as well as some additional advertising and promotion in retail. FX was a big part of the increase versus the prior year, as Ed mentioned earlier, with a lot of our foreign business buying in U.S. dollars that impacted their business and then we had some one-time JV related expenses that was back in the quarter. So it jumped up a little bit versus end of Q1 and where we are but we see that from time to time in the quarters but I think for the full-year we are kind of looking around that 5% range that we guided towards. Did you ask next year's expense?

Corinna Van der Ghinst

Yes. Can you walk us through some of the buckets?

Ed Rosenfeld

For next year?

Corinna Van der Ghinst

Yes.

Ed Rosenfeld

Yes, I think next year we're looking at the same growth things. As we open new stores we see increases due to that. I do not think we will see any other significant drivers in their as we look at the business next year.

Corinna Van der Ghinst

And then just one follow-up question in Asia. How long are you guys thinking that it will take to clear out that inventory situation that you are seeing in the marketplace there?

Ed Rosenfeld

They are working pretty diligently to do that. So I am hoping that it will be more normalized as we head into spring '17.

Operator

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

Steve Marotta

Just commenting on the EPS numbers in the first half of the year, you plan on putting out an 8-K with more delineated and specific tax dollars in the first quarter in the second quarter? Or are the analysts just free to make the assumptions in each of their models.

Derek Browe

We have not adopted it yet. So I think you will see it in Q3 and that is a quarter that we adopted and you will see the kind of numbers restated in that filing. But I think Ed gave some guidance on what we expected to be the year and given that we noted it is primarily first half related kind of impact.

Steve Marotta

They will show in the year-to-date numbers offered in the third quarter release?

Derek Browe

Yes.

Steve Marotta

I'm with you. I know it is very, very early but I can't resist asking. If you could talk a little bit about back-to-school, the markets and that that you might be in either directly or indirectly and if there's any particular reads on the strength of early market back-to-schools?

Ed Rosenfeld

It's pretty early I think that honestly it's too early for us to have a real strong read on that. If we think about the early indications I think that the strongest data point is the Nordstrom anniversary sale, and as I said we feel very good about what we saw particularly in Steve Madden in that sale.

Steve Marotta

One last question, as it pertains to China do you feel that that inventory backup was more a function of China slowing down or more a function of a misstep and poor execution by the distributor ?

Ed Rosenfeld

I think there are a few things that are going on there. I think one of them is that in Asia, as in the United States the retail landscape is changing pretty quickly and particularly in terms of China. The customer is moving online and moving to e-commerce shopping and particularly to shopping on the mobile phone at an even faster clip than what is happening here in the United States.

Anytime you have that kind of transition or that kind of disruption, while I think it creates a long-term opportunity for us, in the short term it's greater challenges because we had some stores in store locations in Stop & Shop locations that are not performing the way that they used to and may in fact need to be closed and they created some inventory backup.

The other thing, you've got some other markets. I'm thinking Hong Kong and Macau that are really heavily dependent on tourism and as tourism slowed down to those markets we suffered there, but more broadly speaking I think one of the things that we have to look at as a Company is whether or not this distributor model that we are using their is the right long-term structure for us it. It has been great for many, many years. It's worked great. Our distributor has done well. We have done well. The brand has grown in the market, but one of the things about the distributor model is it tends to do best when you can charge a nice premium for the merchandise in the international market relative to what you get in the U.S. because you do have that middleman in the form of the distributor and so it is helpful to have the extra margin so that all of the mouths can be fed.

For many, many years that worked very well. We charged a good premium over there and the customer paid it and that worked great. I think that as we look at it now in the age of the mobile phone when customers all global price transparency essentially at their fingertips or in their pocket, it becomes harder to be get that premium in the international markets. And that was part of the rationale for moving from the distributor model to the JV model in Europe and I think that’s something that we will have to look at and are looking at currently in Asia. We have not made any final determinations but it is something we are evaluating and we will keep you posted as we move forward.

Operator

Our next question comes from Eddie Plank with Jefferies.

Eddie Plank

Can you guys maybe elaborate a little bit on what's happening with the private-label business? You talk about the softness with boots but is there anything else there that is kind of behind it? I know typically it's a little bit later to adopt some of the stronger trend so maybe a little bit more color there? Thanks.

Ed Rosenfeld

Yes. I think that the big drop really is in the boot and bootie category and that's why we call that out. As I alluded to earlier we plan boots and booties down is a category across the Company and while in the branded segment it's really coming in so far in line with our forecasts. In private label the initial orders are even softer than we anticipated.

I can tell you anecdotally we had customers whose initial orders in that category were down more than 30%, that's not everybody but that’s some significant customers and that was clearly below our expectation and that's why we pulled the number down. Of course, again, these are initial orders. If they get some good early selling they're going to want to reorder, they are going to want to Chase into that category and we may be able to make some of it up but this is what we're looking at today.

In terms of some of the trends I think you raise an interesting point because also the other factor here is that in the branded business, we've been able to make up some of the -- a lot of the decline in boots with increases in categories like fashion sneakers. While fashion sneakers are improving in the private-label tier, that more massive tier where we do our label work, it's definitely has not gotten as big as it has gotten in the branded part of the market and so we are not able to offset as much of the boot softness with sneakers, for instance .

Eddie Plank

And may be a question for Derek, just thinking about the gross margin being as robust as it's been in the first half, how do we think about it in the back half? I know overall you guys are guiding up a little bit better because of the mix shift but I would think the improvements would be more modest given the compares or are you thinking you might achieve a similar level of improvement in the back half? Thanks.

Eddie Plank

I think as we look at -- we achieved today and the rest of the year as we look at the full-year we would expect about 150 basis point improvement on gross margin.

Eddie Plank

And last, just bigger question, bigger picture question. Thinking about your experience with trend cycles, fashion athletic and the sneakers has been very strong now, how you guys look at that? How long can this really last? I know it's been a big trend beyond, your store business so how are you guys thinking about it in the context of what you are seeing now?

Ed Rosenfeld

Well I think that this is the kind of trend that lasts quite a while. We certainly don’t think that we are in the ninth inning here. I think there is still some legs and keep in mind that sneakers is a trend that’s pretty broad and there are a lot of different ways to do it . So it's the kind of thing we can have sort of sub-trends within the overall sneaker trend and so we still think people are going to be buying a lot of sneakers for the foreseeable future.

Operator

Our next question comes from Sam Poser with Susquehanna.

Sam Poser

A couple of questions, one, what's the relative size of China in the UAE in the midst of all the international businesses and which one is bigger right now?

Ed Rosenfeld

China has historically been much bigger. If you take China and the UAE together, it was probably 35% to 40% of the international distributor business.

Sam Poser

Okay. And then as you shipped over to JV there's some split. What percent of your international business is subsidiary right now or JV's? Is there any? I forget.

Ed Rosenfeld

Yes it's everything except for the distributors which we said was last year 35% to 40% of international.

Sam Poser

Okay. And of your distributor business, if you were to look at that as a JV or sub, what would be the wholesale equivalent size of that business and how would the EBITDA margin structure change if you moved it over I guess from having better brand control and all the other things that go with that but the additional I guess SG&A that goes with that as well.

Ed Rosenfeld

The wholesale equipment would maybe be, maybe you could double the number. If you're doing retail it's probably more like three times. In terms of the operating margin it's just way too early to say, and frankly, it depends on which region we were to move to the joint venture ownership model because it's vastly different profitability by region.

Sam Poser

But would it in general improve, would you expect it to improve significantly over I guess the less volatile and improve over the distributor model as you convert to it in a general sense?

Ed Rosenfeld

Generally speaking, yes. But, you know it is really a business by business conversation. So very tough to speak in generalities.

Sam Poser

So if you look out at a year or two, how much of your business do you foresee the percentage of distributor versus JV or sub over the next few years or vice versa? Do you see the subs becoming about 75% to 80% of the total?

Ed Rosenfeld

I think that clearly owned or joint ventured it's going to grow faster than distributor. I would just be guessing if I told you that.

Operator

And we do have a follow-up question from Scott Krasik with Buckingham Research.

Scott Krasik

So two questions, number one for the quarter for wholesale how much was mix contributing and the improvement in wholesale growth?

Ed Rosenfeld

About half. About half was mixed and about half was apples to apples improvements in places like Steve Madden Women's and Dolce Vita.

Scott Krasik

Okay. And then I'm just getting a lot of questions on the tax changes. Is this because we have never heard about it yet from other Company's or nobodies talk about it yet. Is this something that you have to implement this year? Is this something that you are proactively doing? Maybe I will start there.

Ed Rosenfeld

Okay. Yes. We're early adopting it this year. It will be required for everyone to adopt it first thing next year.

Scott Krasik

Okay. Is it safe to assume then if you did not have to do it this year then if not for that would the guidance be like 188 to 198?

Ed Rosenfeld

Yes, I guess. It is contributing about $0.05. That is the right way to look at that.

Scott Krasik

And then would you consider when you do it just do an adjusted 3Q like a true up instead trying to making an adjusted 3Q EPS with a very low tax rate and trying to go back retroactively change--?

Ed Rosenfeld

You are not allowed to adopt it by taking it to Q3 so it would only put -- we can only post through the year-to-date results.

Operator

And that does conclude our question and answer session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Ed Rosenfeld

Great. Thanks very much for joining us and we look forward to speaking with you on the next earnings call.

Operator

And that concludes today's presentation. We thank you all for your participation. You may now disconnect.

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