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Steven Madden, Ltd. (NASDAQ:SHOO)

Q2 2012 Results Earnings Call

July 26, 2012 8:30 AM ET

Executives

Jean Fontana – ICR, IR

Ed Rosenfeld – Chairman and CEO

Analysts

Jeff Van Sinderen – B. Riley

Kate McShane – Citi Research

Scott Krasik – BB&T Capital Markets

Camilo Lyon – Canaccord Genuity

Jane Thorn Leeson – KeyBanc

Corinna Freedman – Wedbush Securities

Steve Marotta – C.L. King & Associates

Sam Poser – Sterne, Agee

Operator

Please standby as we are about to begin. Good day, everyone. And welcome to the Steve Madden Limited Second Quarter Fiscal 2012 Earnings Conference Call. Today's call is being recorded.

For opening remarks and introduction, I would like to turn the call over to 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 2012 earnings results. Before we begin, I would like to remind you that statements made in this conference call, that are not statements of historical or current facts, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve risks and uncertainties and other unknown facts, that could cause actual results of the company to differ materially from historical results, or any future results expressed or implied by forward-looking statements.

The statements contained herein are also subject generally to other risks and uncertainties as described from time-to-time in the company's reports and registration statement filed with the SEC.

Also please refer to the earnings release for more information on risk factors that could cause actual results to differ. Finally, please note that any forward-looking statements used in today's call cannot be relied upon as current after this date.

I would now like to 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 today, as we review our second quarter results and discuss our outlook for the remainder of the year. Second quarter of 2012 was in some respects a more challenging quarter than we have seen in some time.

The overall retail environment soften somewhat during the quarter and fashion footwear in particular was challenged by weakness in the sandal category. Nevertheless, we delivered strong financial results with net sales increasing 38% from the prior year to $288.7 million and net income up 13.1% to 26.9 million or $0.61 per diluted share.

We believe this solid performance in the face of a challenging environment is a testament to the power of our brands, talent of Steve and his design team, and the enduring strength of our business model.

Importantly, we also continue to make progress in each of the four major growth areas we outlined at the beginning of the year: One, new brands; two, direct-to-consumer; three, categories outside footwear; and four, international.

Before I get into the details of our second quarter performance, I’d like to touch briefly on the highlights with regard to each of those growth opportunities.

First growth area is expanding new brands. For spring of this year, we launched Superga, a fashion sneaker brand out of Italy for which we have been licensee for North America. Superga is 101-year old brand with a great heritage and an iconic style, the classic canvas sneaker call the 2750. While Superga is well known throughout Europe, prior to our involvement, it had very little presence in North America.

We knew we needed to do some creative marketing to position the brand in the United States. After signing the license agreement, we installed Ashley Olsen and Mary-Kate Olsen as creative directors for Superga and also partnered with them on the collaboration with their designer brand The Row.

The Row for Superga collection consists of the Classic 2750, a luxurious fabrications like Italian Linen and Cashmere. Initial shipments of the collaboration sold out quickly of retailers, including Bergdorf Goodman, Neiman Marcus and Barneys.

We also opened the Superga flagship store on Crosby Street in SoHo. In connection with the opening Ashley and Mary-Kate hosted a launch party that generated outstanding coverage in both traditional press and the blogosphere. These efforts have served to create enormous buzz around the brand and so far the launch of Superga has exceeded all expectations.

Regular Superga line is currently carrying retailers like Nordstrom, Bloomingdale's and J.Crew, as well as top independent boutiques across the country. Initial sell-throughs has been nothing short of outstanding. We are very excited about the opportunity with this brand as we move ahead.

Our next brand introduction comes this quarter, with the launch of Betseyville, as an exclusive brand J.C. Penney. The first Betseyville product ships at the end of August and will be on the floor at the beginning of September.

We will be doing footwear, handbags, fashion scarves, cold weather accessories and sunglasses in-house, and we have licensed now jewelry, watches, intimate apparel and hosiery. Betseyville will be carrying approximately 600 J.C. Penney doors.

The second big growth opportunity we have outlined is expanding our direct-to-consumer business, after shrinking the store base by 17% from 2007 to 2011 as we focused on improving the profitability of the existing stores. We now have a rejuvenated and highly profitable retail business and we are once again in expansion mode in 2012.

We now expect to open 13 Steve Madden full-price stores and five Steve Madden outlets in 2012, in addition to the one Superga store, I mentioned earlier. We also acquired seven stores in the acquisition of SM Canada, and we are adding e-commerce store as well.

We opened the Superga online store earlier this year and we plan to launch the Betseyville Internet store in early Q4. Also we expect to end the year with a 108 company-operated stores, including three Internet stores. The 29% increase in store base compared to the end of 2011.

Third growth area we identified is expanding our business outside of footwear and this is the one where we're seeing the most dramatic results right now. Our wholesale accessories business was up 85.6% in the quarter, including 65% organic growth.

Our handbag business is absolutely on fire. Steve Madden handbag net sales increased over 100% year-over-year for the second consecutive quarter, with strong gains in key customers like Macy's and Dillard's. And as I mentioned on the last call, we will start shipping Steve Madden handbags to Nordstrom for the first time next month.

Rest of the handbag business is also extremely strong, Betsey Johnson handbags, Big Buddha handbags and our Madden’s own private label handbag business were all up over 40% in sales in the quarter compared to the prior year.

In addition, we continue to expand our licensing business. Steve Madden loungewear launches as a six-month Nordstrom and Hudson Bay exclusive next month. Initial shipments of Betsey Johnson luggage had better department stores in May and Betsey Johnson’s new fragrance Too Too Pretty we found in support starting in September.

Finally, we’ve signed a term sheet with the new licensee for Betsey Johnson apparel and expect to have a definitive agreement within days. Our new licensing partner will launch Betsey Johnson dresses for spring 2013.

And finally, our fourth major growth opportunity is growing our international business, and another quarter of greater than 50% year-over-year growth in our international division, including particularly robust gains with our partners in Dubai and Latin America, as well as strong performance in Canada, where we operate the business in-house after our acquisition of our Canadian licensee in February.

We’ve already opened two new retail stores in Canadian since the acquisitions and have two more planned for Q4. We expect to end the year with 11 company-operated locations in Canada.

We also enter in number of new territories this year. Earlier this year, we launch Steve Madden United Kingdom with the Dune Group and for fall we are entering Germany, France and Scandinavia, as well as North Africa and various CIS countries.

Also for fall, we are opening our first international stores under the Betsey Johnson banner. We expect to have three Betsey Johnson stores open in China by the end of the year.

As you can see, we’re making great strides with regard to each of our key growth opportunities. We believe these effects position us for strong sales and earnings growth in the back half of 2012 and over the years to come.

Now, let’s turn to the details of the financial results for the quarter. Consolidated net sales in Q2 grew 38% over the prior year -- prior year period to $288.7 million. If we exclude net sales from topline, Cejon and SM Canada, organic net sales rose 18.5% on a consolidated basis.

Wholesale net sales in the quarter rose 41.7% to $248.1 million, compared to $175.2 million in the second quarter of last year. Including topline, Cejon and SM Canada, organic wholesale net sales increased 19.8%.

Wholesale footwear net sales were $198.7 million, up 33.8% compared to Q2 2011. Excluding sales from topline and SM Canada, organic net sales gross -- net sales growth, excuse me, was 10.8%, driven by strong gains in our Adesso-Madden wholesale private label business, Olsenboye and International. Wholesale accessories net sales were $49.4, an 85.6% increase over the prior year period.

Excluding Cejon, organic wholesale accessories sales growth was 65%. As I mentioned earlier, this was driven by exceptional growth across our various handbag brands, particularly Steve Madden.

Turning to retail, we had another strong quarter there with net sales up 19.4% to $40.6 million in Q2. Comparable store sales grew 6.8% on top of an 11.6% increase in the prior year. We were able to drive the comp, despite a decline in traffic at our brick-and-mortar stores to improve conversion.

Casuals and fashion sneakers were strong categories. As I mentioned earlier, sandals, particularly flat sandals were disappointing. We opened four Steve Madden full-price stores, one Steve Madden outlet, one Superga store and one Superga Internet store in the quarter.

Stores open for the 12 months ended June 30, 2012 generated a record $849 in sales per square foot. We also saw continued strength in our e-commerce business, which increased 26.1% in the quarter.

Turning to other income, our commission and licensing income, net of expenses was $4.3 million in Q2 versus $4.4 million in last year’s second quarter. First Cost commission income, net of expenses was $2.4 million in the quarter, down from $2.6 million in last year’s second quarter, due to declines with the First Cost customers, bankers, Kmart and Sears.

Licensing royalty income, net of expenses was essentially flat at $1.8 million, excluding Betsey Johnson apparel, where we're transitioning to a new licensee, royalty income net of expenses was up 8% compared to the prior year period.

Consolidated gross margins for the quarter was 36.1%, as compared to 40.2% in last year's second quarter. Wholesale gross margins declined to 31.6% versus 35.4% compared to last year.

The wholesale decline was due primarily to shifts in sales mix, as a result of, one, the impact of Topline and Cejon and two, the significant increase in Adesso Madden and private label wholesale business in the quarter.

Combined, these factors diluted wholesale gross margin by approximately 400 basis points. Excluding these mix shifts, wholesale gross margin was up approximately 20 basis points compared to the prior year.

Gross margin in the retail division was 63.7%, down from 64.8% in the second quarter of 2011, driven primarily by increased promotional activity in the sandal category.

Operating expenses were $66.7 million in the second quarter or 23.1% of net sales, compared to $51.3 million or 24.5% of net sales a year ago. Improvement was driven by leverage on increasing sales, as well as an increased mix of wholesale, which carries lower operating expenses as a percentage of sales in retail.

Operating income for the second quarter of 2012 was $37.5 million or 13% of net sales. Operating income included a $2.5 million charge for a class action lawsuit related to unauthorized text messaging, and a $1.8 million charge or impairment of a note receivable from our former licensee for Betsey Johnson retail and apparel. Excluding these charges, operating income was $41.8 million or 14.5% of net sales, compared to $37.2 million or 17.8% of net sales in last year’s second quarter.

The effective tax rate in the quarter was 31.3% compared to 39% in the second quarter last year, due primarily to a tax benefit of $2.8 million or $0.06 per diluted share related to the year-to-date impact of a portion of our earnings from our foreign operations that have been reinvested indefinitely.

We expect to recognize an additional tax benefit of $0.08 per diluted share in the back half of 2012 related to foreign operations, bringing our effective tax rate in the back half to approximately 35.5%. 2013, the effective tax rate is expected to return to historical levels.

Net income for Q2 was $26.9 million or $0.61 per diluted share, compared to $23.8 million or $0.55 per diluted share in the prior year second quarter. The charge for the text messaging litigation and the charge for impairment of the note receivable from our former licensee for Betsey Johnson retail apparel resulted in a combined $0.06 loss in the quarter and the tax benefit related to foreign operations resulted in a $0.06 gain, so there was no niche net impact to EPS from these three items altogether.

Turning to our balance sheet, as of June 30, 2012, we had $189.8 million in cash and marketable securities and no debt. We ended the second quarter with inventory of $91 million versus $67.7 million in second quarter of last year. Our consolidated inventory turns for the last 12 months was 10.5 times, up from nine times for the prior year. CapEx for the quarter was $4.8 million.

Now, turning to guidance, for fiscal 2012, we continue to expect net sales to increase 24% to 26% compared to fiscal 2011. Diluted EPS on a GAAP basis is now expected to be in the range of $2.67 to $2.77, compared to previous guidance of diluted EPS in the range of $2.62 to $2.72. The updated EPS guidance includes an expected tax benefit related to foreign operations in the back half of approximately $0.08 that was not included in the previous guidance.

In summary, despite a challenging environment in Q2, we delivered solid financial results. We believe our brands and our business model are stronger than ever. And as we look ahead, our increasingly diversified platform provides us with a number of meaningful growth opportunities that should enable us to continue to drive strong sales and earnings gains in the back half of 2012 and beyond.

Thanks for listening. And now, I'd like to turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we will go first to Jeff Van Sinderen with B. Riley. Please standby for that question.

Jeff Van Sinderen – B. Riley

Hello.

Operator

Your line is open, sir.

Jeff Van Sinderen – B. Riley

Okay. Ed, can you hear me?

Ed Rosenfeld

Yeah. Good morning, Jeff.

Jeff Van Sinderen – B. Riley

Okay. Good morning. Okay. So maybe you can just talk a little bit more about the sandal business, what you think was triggering the weakness there? And then, if you can just kind of give us a sense of how much of your business in total was sandals in Q2? And then, if there’s any sort of carryover affect going into Q3 from sandals, maybe we can start with that?

Ed Rosenfeld

Sure. So, sandals as a whole in both wholesale and retail except somewhere between or made up somewhere between 35% and 40% of our women's shoe business in the second quarter, that was down from last year when it was between 40% and 45% of the women shoe business.

And it was a challenging category this year, particularly the flat sandals did not perform the way that we had hoped and one of the tricky things about this year was that we got, guess what you could call sort of a false positive read early in the season because sandals did sell very well early. We had nice selling of sandals in first quarter.

And in retrospect, I think what happened there was that, there was unseasonably warm weather. The weather turned very nice early this year and there were not a lot -- was not a lot of supply of sandals on the floor at that time, so there was some demand created by the warm weather, not a lot of supply and so the sandals that were on the floor sold quite well.

But as we got into the season, it turned out that was not really the trend. Closed-up casuals performed much, much better, things like ballerinas and oxfords and smoking slippers, et cetera.

And so we were forced to be more promotional in a sandal category and we and everybody also. I don’t think this was a Steve Madden’s specific problem. This was an industrywide issue for people in the fashion footwear area. But we were -- we did -- we were -- we did have to be more promotional in that category.

In terms of Q3 and beyond, in wholesale, we are really done with sandals. We still have, there is still going to be, the wholesale -- within wholesale sandal categories is virtually not exiting in Q3.

In retail, it’s still going to be about, let’s say 20%, 22% of our sales in, again women's shoes in the retail stores. But we feel pretty good that we’ve moved through that inventory. We are on schedule to be out of it, when we want to be out of it and we are not looking for any meaningful impact in Q3.

Jeff Van Sinderen – B. Riley

Okay. And then maybe you can just update us on your latest thoughts on the outlook for the boot business as we think about the second half?

Ed Rosenfeld

Yeah. That’s the good news is that, we've got very good early indications on boots and booties. As you know, the Nordstrom anniversary sale is in progress right now and we've got very good reads from that.

We think our business is actually going to be up year-over-year in that sale. We feel, we’ve got very good reads on tall sharp driving boots. We also feel very good about the real short booties, what we call shooties. So far boots and booties are looking good.

Jeff Van Sinderen – B. Riley

Okay. Great. And then, can you just remind us, I know you mentioned, going into some areas of Western Europe, as the year progresses and I know that's not a big exposure for you. But can you just give us kind of a sense as, of how much your business is Europe at this point?

Ed Rosenfeld

Oh! It’s tiny. I’m talking about 1% of the total.

Jeff Van Sinderen – B. Riley

Okay. That’s great to hear that you don’t have exposure there at this point. Okay. Thanks very much. Good luck this quarter.

Ed Rosenfeld

Thanks, Jeff.

Operator

And we’ll hear next from Kate McShane with Citi Research.

Kate McShane – Citi Research

Hi. Thanks. Good morning, Ed.

Ed Rosenfeld

Good morning.

Kate McShane – Citi Research

I wonder, if you could go into a little bit more detail about what you are seeing in the mid-tier channel. I know that on the last question you talked about sandal inventories. I wondered if could talk about just inventories in general on how the reorder or just orders have been from the mid-tier channel and any additional detail on that.

Ed Rosenfeld

Sure. Well, I think that this sandal issue that I talked about and to a lesser extent, it’s a fairly tough dress category, did results in fewer reorders for the spring season. And there were some people that maybe felt a little backed up with their inventory but at this point, I feel that people are moving -- all the retailers are moving through that inventory and we don't see any major impact on fall from what we saw in the sandal category.

Kate McShane – Citi Research

Okay. Great. And in terms of other category trends again, you indicated that there are early indications of boots and booties are doing well. Can you just highlight other possible strong categories for the fall?

Edward Rosenfeld

Yeah. Well, I think that the [stud] trend that that I know you’re seeing Kate is something that we feel very good about and that works on pretty much anything, we put [studs] on the selling right now. So that’s something that’s going to be important.

And then fashion sneakers, I think, is also something that’s new this year that we're -- that we think is going to be very important. We’re getting great reads on that.

Kate McShane – Citi Research

Okay. Great. Thank you.

Operator

And we will go next to Scott Krasik with BB&T Capital Markets.

Scott Krasik – BB&T Capital Markets

Hey. Good morning.

Edward Rosenfeld

Good morning.

Scott Krasik – BB&T Capital Markets

Couple of questions, how do you feel about, I think you had said before you thought gross margins could grow by about 100 basis points, now that we’ve anniversaried the acquisitions in Q3 or back half of the year. How do you feel about that?

Ed Rosenfeld

Yeah. We still continue to feel that we can return to year-over-year gross margin improvement in the back half.

Scott Krasik – BB&T Capital Markets

You don’t want to put a number around it?

Ed Rosenfeld

No change from our previous guidance. I mean, I don’t recall putting a number above but yeah we always said modest gross margin improvement.

Scott Krasik – BB&T Capital Markets

Okay. And then, most of the things you call out in the organic footwear growth seems to carry lower margins. How did Steve Madden women's do, Steve Madden mens. I know you don’t have specific about brand growth but can you talk about businesses?

Ed Rosenfeld

Yeah. Well, Steve Madden women’s was essentially flat in the quarter, actually down the touch and it was for all the reasons that we just talked about, flat sandals to a lesser extent dress or top. We didn’t get the reorders that we've been accustomed to getting but the good news is that because of the positive raise that we gain on boots and looking at our order file we do expect to return to year-over-year growth in Steve Madden women's in Q3.

Scott Krasik – BB&T Capital Markets

Okay. And then in terms of your retail stores, we’ve been getting reads, maybe some of the New York stores had been hit by a lack of European tourism that toured in Las Vegas and some of the other locations. Did that affect you guys in Q2 and what’s your outlook for that in Q3 and Q4?

Ed Rosenfeld

Yeah. That’s absolutely some thing we did see. As you look at our details by geography in retail stores, we certainly did see a little bit of the downtick in the stores where we have a lot of tourist business. So we were flattish in markets like New York City, Las Vegas and LA yet we were up in the mid teens for instance in South Florida.

Now, obviously there are tourist in Miami but few European tourists, more South American tourists. And so that's a little bit of a headwind but interestingly over the last few weeks that’s gotten a little bit better and the traffic trends which were negative in Q2 have turned to modest positive comp traffic so far this quarter.

Scott Krasik – BB&T Capital Markets

Okay. So comp assumptions for the back half, sort of, mid-single digits?

Ed Rosenfeld

Yeah. I think we still think mid-single digit is a reasonable target.

Scott Krasik – BB&T Capital Markets

Okay. I thank you and I’m so waiting for that invitation to the Olsens’ Superga launch party.

Ed Rosenfeld

We’ll have you at the next one, Scott.

Scott Krasik – BB&T Capital Markets

Thanks.

Operator

Moving on, we have a question from Camilo Lyon with Canaccord Genuity.

Camilo Lyon – Canaccord Genuity

Hey, Ed. How are you?

Ed Rosenfeld

Good morning, Camilo.

Camilo Lyon – Canaccord Genuity

I just wanted to get a little clarification on the guidance and how that relates to your view on the back half relative to where it was one quarter ago? Is there any change there?

Ed Rosenfeld

Yeah. There was no change to the back half. So essentially our internal forecast for Q2 was to do roughly $0.64 and we came in, we met our sales target there but came in just shy on the gross margin. It was about 70 basis points of gross margin that we lost versus our internal forecast due again primarily to the sandal issue.

And so we were about $0.03 short and we've assumed that we leave the back half flat to where it was. And so we've reduced the core guidance for the year by $0.03 and then we add in the tax benefit of $0.08 in the back half, that’s how you get to our new guidance which is $0.05 increase, which is the prior guidance.

Camilo Lyon – Canaccord Genuity

Got it. Just stripping out everything, it was just really the impact from the second quarter margins sandal hits?

Ed Rosenfeld

That’s right.

Camilo Lyon – Canaccord Genuity

Okay. And then secondarily on -- the good reads that you’ve been seeing from the boot business at the Nordstrom anniversary sale. How does that reflect in your outlook for the back half boot business, in other words, were these positive reads better than you had anticipated?

Ed Rosenfeld

Yeah. I would say, we certainly feel better than we did a couple of weeks ago. It’s little early to be making dramatic changes to our back half outlook but on the margin, we feel much better.

Camilo Lyon – Canaccord Genuity

Got it. Understood. And then lastly, you talked about the studying and how that should play out for booties and boots in the embellishments. How do you think about ASP trends going into the back half with this kind of fashion trend seemingly become more favorable on the pricing front?

Ed Rosenfeld

Yeah. I still think so far this year, we've been basically flattish in AUR and I still think that’s -- it's reasonable to look at it that way for the back half. Keep in mind that we got fair amount of price right last year. Our prices were up 4% to 5% last year. And so I think we’re going to anniversary that but I don’t see further increases over what we did last year.

Camilo Lyon – Canaccord Genuity

Okay. And then maybe if you could just update us on about the footwear stands and what are the opportunities from a growth prospective whether it’s skew growth or channel penetration or door growth?

Ed Rosenfeld

I mean, that’s the footwear we’re just really getting started. We've got tons of opportunity for door growth and tons of opportunity to expand the assortment within the existing doors. We brought in a new design directors there that we’re very excited about and feels that the shoes look great and we’re really looking to -- start to explode that business really in the back half.

Camilo Lyon – Canaccord Genuity

Great. Good luck with everything. It sounds like you’ve got a lot of -- lot good things going so, best of luck with everything?

Ed Rosenfeld

Thanks, Camilo.

Operator

And we will hear next from Jane Thorn Leeson with KeyBanc.

Jane Thorn Leeson – KeyBanc

Hi. All of my questions have been answered but I just had one question on purchase for your cash usage. How do you feel about potential buybacks and also what you’re seeing in the acquisition landscape than it is today?

Ed Rosenfeld

Sure. I’ll take them in reverse order. We do continue to look for additional acquisitions. Obviously, M&A is something that we've been -- pretty active over the last couple of years and we still have an appetite to do additional things with the caveat that we want to be very disciplined about making sure that we do deals that make sense and prices that make sense.

And there are still a number of opportunities out there. And so we continue to work on things and look at things everyday although nothing is imminent and it will be announced in the acquisition the next week or so.

In terms of share repurchase, I think that it is safe to assume that given the recent pullback in our stock in the fact that we remain confident in the future prospects of business that has moved up on priority list and that something that we’re looking much harder at.

Jane Thorn Leeson – KeyBanc

Okay. Great. And then just lastly, can you remind us about your expectations for the organic sales growth for the remainder of this year would be?

Ed Rosenfeld

Yeah. I believe we said 9 to 11 organic and that numbers is still -- we're so comfortable with that number.

Jane Thorn Leeson – KeyBanc

Okay. Great. Thank you very much.

Operator

And we’ll move on to our next question from Corinna Freedman with Wedbush Securities.

Corinna Freedman – Wedbush Securities

Hi. Good morning. Just wondering if you could tell us what your expectations are for the tax rate for the second half given the revise guidance. And I know that you -- I think I had mentioned prior that you were doing or experimenting with a mailer. I’m just wondering if there is anything you could share with us about that initiative? Thanks.

Ed Rosenfeld

Yeah. The tax rate for the back half is -- should be around 35.5% somewhere in there. And then keep in mind that in 2013, it’s -- we expect it will go back to historical levels, which is closer to 39. We did do a test mailer earlier this year and results were okay, not great. I think we had some good learnings from it and it’s something that will continue to look at and figure out if you want to try again. And I think that we figured out somethings that we like about and somethings we didn’t like about it. So we’ll probably, most likely be trying something again over the next few months.

Corinna Freedman – Wedbush Securities

Great. Thank you.

Operator

And we’ll go next to Steve Marotta with C.L. King & Associates.

Steve Marotta – C.L. King & Associates

Good morning, Ed. Speaking the share of purchase, what’s left on your authorization currently?

Ed Rosenfeld

It’s about $45 million.

Steve Marotta – C.L. King & Associates

And you didn’t utilize any in the second quarter, correct?

Ed Rosenfeld

We do not.

Steve Marotta – C.L. King & Associates

Okay. From a costing standpoint, can you talk a little bit about average unit cost coming out the Far East right now, end of the year, we’re trying to maintain pricing this year. I had a -- what you already mentioned as price increase 4% to 5% last year but from a costing standpoint how is that shaping out?

Ed Rosenfeld

Fortunately, as you know, we were all dealing with pretty significant price increases year-over-year last year. This year that has moderated quite a bit. So, there are very modest price increases coming out of China right now, I would say low single-digit. But it’s much more manageable than what we saw last year. And we don’t really -- we’re not forecasting any impact to gross margin on those price increases.

Steve Marotta – C.L. King & Associates

Okay. Can you offer any additional third quarter to-date commentary either in markets where back to school has or potentially started in the last week or to and either from your retail doors or read through from a wholesale standpoint?

Ed Rosenfeld

It’s basically, what we’ve said before. It’s quite good -- I think the most important thing is good earlier reads on boots and booties. And so -- and also the fact that so far in July, in our retail stores, the traffic trends have actually improved a little bit over where they were in June. So, I think overall we are feeling better than we did a month ago about business.

Steve Marotta – C.L. King & Associates

Great. Lastly, your inventory is up about 34% year-over-year. I know the sales are up in a similar fashion, can you parse out a little bit pieces about that inventory?

Ed Rosenfeld

Yeah. I mean there is a couple of things I will point out there. Number one, we do have this Steve Madden Canada acquisition, which is not there last years as well as the number of new businesses like Betseyville, Superga, ShoeMint et cetera. So, that’s almost $9 million of inventory right there that I would classify as sort of non-comp.

When you exclude that, I think we’re up more like 21.5%, which is a number given our sales growth that I think people should be pretty comfortable with. The other thing within the 21.5% keep in mind that we’ve got a number of store openings in the back half. Although looking at 11 bricks-and-mortar stores and then one internet store for Betsey Johnson. So, it’s that inventory to support those store openings as well.

And as I said, I think most importantly, we do expect that we can be up year-over-year in gross margin in Q3. So obviously, that’s an indication that we’re comfortable with the inventory level be in the Q2.

Steve Marotta – C.L. King & Associates

Terrific. That’s helpful. Thank you much.

Operator

And we’ll go to our next question from Sam Poser with Sterne, Agee.

Sam Poser – Sterne, Agee

Good morning. Good morning Ed. Just to clarify, so the organic inventory growth is around 21.5%?

Ed Rosenfeld

Yeah.

Sam Poser – Sterne Agee

Okay. Can you also talk about what percentage of your business was e-commerce in the quarter just some house-keeping stuff here? What was with e-commerce and international?

Ed Rosenfeld

How much was e-commerce and how much is international?

Sam Poser – Sterne Agee

Correct.

Ed Rosenfeld

Okay.

Sam Poser – Sterne Agee

On a year-over-year basis, if you want.

Ed Rosenfeld

Okay. E-commerce is up 26%. International was up 51%.

Sam Poser – Sterne Agee

In the percent of total?

Ed Rosenfeld

I don’t have it on the top of my head.

Sam Poser – Sterne Agee

All right. And then you’re about to roll in Betseyville into J.C. Penney, are you working on any other exclusive deals? You have a couple of other ones like Wild Pair that you’ve recently gotten hold of and so on. Are you looking to work with other retailers to do exclusives and if so where are you with that?

Ed Rosenfeld

Yeah. Wild Pair, we are close to striking the deal for an exclusive with one big retailer. But we are not there yet. So, we can’t announce anything there.

Sam Poser – Sterne Agee

Does that retailer have three letters?

Ed Rosenfeld

I’ll be happy to tell you as soon as we make a deal.

Sam Poser – Sterne Agee

Okay. And then I mean when your -- would you -- what your stores strategy is like with you had outlets now there. I think the outlets are probably working pretty well, the comp there, as I assume pretty good. Now, I think you roughly flapped a couple of them by now correct?

Ed Rosenfeld

Yeah. We have.

Sam Poser – Sterne Agee

And I mean, I loved to know how those are doing relative to the total comp. And how do you foresee the outlet growth over the next few -- going forward from here?

Ed Rosenfeld

Yeah. Well, interestingly, the outlet comp was actually a little below the full price comp in second quarter and the reason for that is this tourist impact that we’ve talked about earlier, because Las Vegas and Orlando make up about 80% of the comp base and outlet or did in Q2. And those are markets that we’re challenged by the tourist issue.

Overall, however, we still feel very good about the outlet business and how those stores are performing. And for all of our contribution that we’re going to get out of these stores and so we’ve got three more opening in the back half year, one in Florida, one in Texas and one in California.

And we’re working on a package of about three more for early 2013. So, I think provided that we continue to perform where we are, you are going to see us, rollout five, six, seven of these year not more over the next few years.

Sam Poser – Sterne Agee

Okay. Thanks. And then lastly, where do you think you are in sort of and again looking forward overtime in growth with the core Steve Madden line and let’s say the -- and the Madden girl appear or is that something that sort of just going to slowdown just like a steadier growth and more growth is going to come from the newer brand?

Ed Rosenfeld

Well, I mean, when you talk about Steve Madden, we’re only talking about Steve Madden wholesale in the U.S.

Sam Poser – Sterne Agee

Steve Madden Women’s wholesale, yeah, let’s call by U.S. women’s wholesale, yeah.

Ed Rosenfeld

Yeah. Then the challenge is it is a more mature business than our others. Its -- we’re already in basically outdoors that we want to be in. It’s not a turn of door growth opportunity. And we have the number one market share in our department in many of those doors.

That being said, we’ve been in that situation for few years now and we’ve able to bring up very nice organic sales growth in the Steve Madden women’s brand. But certainly, it is more mature. And I think that was one that we should look at as more of a low-to-mid single-digit grower over the long-term.

However, that leaves -- that ignores the fact that we’re going in the handbags where our business is doubling every quarter right now. That we’re growing internationally in Steve Madden where business is up about 50% each quarter. That is still a lot of growth within that -- within the brand. But immediately, within the wholesale business in the U.S. it’s more -- it’s a relatively more mature business.

Sam Poser – Sterne Agee

Thank you very much and continue success. Thanks.

Operator

And there are no further questions in the queue at this time. Mr. Rosenfeld, I’d like to turn the conference back to you for any additional or closing remarks.

Ed Rosenfeld

Okay. Great. Well, thanks very much for joining us on the call. We look forward to speaking with you on the next call.

Operator

And again, that does conclude this call. We thank everyone for participating today.

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