Steven Madden Ltd (SHOO) Q4 2018 Earnings Conference Call Transcript

SHOO earnings call for the period ending December 31, 2018.

Motley Fool Transcribers
Motley Fool Transcribers
Feb 27, 2019 at 1:30PM
Consumer Goods
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Steven Madden Ltd  (NASDAQ:SHOO)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2018 Steve Madden Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call may be recorded.

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

Danielle McCoy -- Director of Corporate Development and Investor Relations

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

Before I begin, I'd like to remind you that during our call, we may make certain forward-looking statements as defined in the federal securities laws regarding our expectations or predictions about the future. Generally, these statements relate to projections involving anticipated revenues, earnings or other aspects of the Company's operating results.

Because these statements are based on current assumptions and expectations, they involve known and unknown risk, uncertainties and factors not within the Company's control and as such, our actual performance and results may differ materially from these statements.

Our Annual Report and other reports filed with SEC from time-to-time include detailed discussions of the risk the Company faces and we urge you to refer to these. Any forward-looking statements represent our judgment as of the time of this call and cannot be relied on upon as current after today's date.

We disclaim any intent or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under applicable law.

The financial results presented are on an adjusted basis, unless otherwise noted. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release.

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thanks Danielle. Good morning, everyone and thank you for joining us to review Steve Madden's fourth quarter and full year 2018 results.

We are pleased to have delivered a strong fourth quarter, with net sales growing 13% and diluted EPS increasing 31%, compared to the prior-year period, driven by continued strength in our flagship Steve Madden brand in both footwear and handbags as well as outstanding growth in Blondo and in our private label accessories business. The strong fourth quarter capped a very good year for Steve Madden as we recorded 7% net sales growth and a 23% increase in diluted EPS, compared to 2017. We also made progress on a number of key initiatives that position us for growth in 2019 and beyond.

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

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

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

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

At the end of the year, we also transitioned another key market from the distributor model to an ownership model, with the formation of a joint venture in Israel. We own 51% of the new JV and our former distributor, Inner Jeans (ph) owns 49%. Steve Madden was introduced to the Israeli market in 2005 and thanks to the good work Inner Jeans has done as our distributor, the brand has a very strong position in the market already.

We currently have 14 Steve Madden stores in Israel as well as wholesale distribution to approximately 50 doors. Under the JV model, we believe we can improve the productivity of the existing stores, add approximately 10 stores over the next three years and significantly expand the wholesale business. Overall, continuing to grow our international business will be a top priority in 2019 and beyond.

Another highlight in 2018 was the performance of Blondo, the waterproof boots and -- excuse me, the waterproof brand we acquired in 2015. Blondo's combination, a fashionable styling with waterproof functionality continues to resonate with consumers and its net sales increased more than 50% for the year.

In addition to continued outstanding performance in its core category of women's waterproof boots, the brand made solid inroads into new categories like women's sneakers as well as men's, which had a very successful test with a key customer in fall 2018 and will be rolling out to additional doors for 2019. We also introduced a Blondo diffusion line called Aqua College into the US. There too initial sell-through performance was strong and we will see door expansion in 2019. Overall, we couldn't be happier with the momentum in Blondo and look forward to continued growth of the brand in 2019.

We also added a new brand to our portfolio, Anne Klein. At the end of January 2018, we signed an agreement to become the licensee for Anne Klein footwear and handbags and began shipping product in fall 2018. With its dedication to timeless American classics, the Anne Klein brand is complementary to the other brands in our portfolio and we were pleased with its initial performance under our belt in fall 2018.

We are also very excited about the prospects for the brand in 2019 as this spring marks the first season in which we have control over all processes from design to delivery and we are confident we can begin to drive significant gross margin expansion. In terms of revenue, we remain on target to achieve our initial goal of $80 million to $90 million in net sales in Anne Klein footwear and handbags in the first 12 months of shipping, which encompasses the back half of 2018 and the first half of 2019.

Another bright spot in 2018 was our wholesale accessories business, which had net sales growth of 17% and EBIT growth of 20% versus 2017. Our Steve Madden handbag business continues to benefit from an improved product assortment that is better aligned with our fashion-forward footwear style and we are seeing that in the results.

Steve Madden handbag net sales grew nearly 20% in 2018, on top of a mid-teen percentage increase in the prior year. In addition, our private label handbag business delivered outstanding growth, driven by strong gains with mass merchant customers. And Cejon, our cold weather accessories business, recorded significant improvement in profitability as we expanded gross margin and cut costs.

Finally, our wholesale accessories segment benefited from the addition of Anne Klein handbags in fall. We expect another year of strong top and bottom line growth in wholesale accessories in 2019.

In our retail segment, we had an overall comparable store sales increase of 2.8%, After being roughly flat in the first half, comps improved to mid single digits in the back half. The driver was a significant acceleration in our e-commerce business, as we saw the benefit of a number of new initiatives put in place in 2018. We began offering free two-day shipping to loyalty members, provided earlier online access to new styles, introduced new payment methods, including Afterpay, and increased our social media marketing efforts, just to name a few.

We also migrated our e-commerce sites to the Shopify Plus platform, a cloud-based solution that is reducing our operating costs, while improving our speed and flexibility and enhancing our ability to add new features and functionality to the site.

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

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

In summary, 2018 was a very good year for Steve Madden, as we delivered strong financial results and also made progress on a number of key strategic initiatives that positioned us for growth in the future. As we look ahead to 2019, we are encouraged by the strength we're seeing in our flagship Steve Madden brand, the growth opportunity in newer brands like Anne Klein and Blondo, the momentum we have in accessories, the acceleration in our e-commerce business and the runway we have in international markets.

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

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

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

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

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

Danielle McCoy -- Director of Corporate Development and Investor Relations

Thanks, Ed. We are pleased with our strong fourth quarter performance. Our consolidated net sales increased 12.6% to $410.4 million, compared to prior year net sales of $364.4 million. Our wholesale segment increased 14.1% to $317.4 million compared to $278.2 million in the prior year period, driven by strong gains in both our wholesale footwear and accessories businesses.

Wholesale footwear net sales increased 7.4% to $233.9 million. We saw strong growth in Steve Madden Women's as well as outstanding growth in Blondo. Wholesale footwear also benefited from the addition of Anne Klein, but this was offset by the transition of the business with Payless out of the Topline.

In wholesale accessories, net sales increased 37.9% to $83.4 million, driven by exceptional growth in both Steve Madden handbags and private label handbags. Wholesale accessories also benefited from the addition of Anne Klein.

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

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

Consolidated gross margin decreased 100 basis points to 37.1% compared to 38.1% in the prior year. Wholesale gross margin decreased to 30.1% for the quarter, compared to 31% last year. In addition to margin pressure in wholesale accessories related to a shift in sales mix, as expected, the 10% tariff on handbags and certain other accessory categories implemented on September 24, 2018 and increased ocean freight, driven by high demand for containers in efforts to bring goods in prior to the new year were also headwinds to wholesale gross margin.

Retail gross margin was 61%; up 20 basis points compared to the same quarter last year as a result of improved gross margin in our e-commerce business. Operating expenses for the quarter increased to $117.5 million or 28.6% of net sales, compared to operating expenses of $105.8 million or 29% of net sales in the same period last year.

Operating income for the quarter totaled $37.9 million or 9.2% of net sales, compared to last year's fourth quarter operating income of $36.3 million or 10% of net sales. Our effective tax rate for the quarter was 9.2%, compared to 24.9% in the same period last year due primarily to the impact of the Tax Cuts and Jobs Act.

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

Now, I would likely -- I would like to briefly touch on full year results. Consolidated net sales for 2018 increased 7% to $1.65 billion from $1.55 billion in the prior year. Net income was $157.7 million or $1.83 per diluted share for the year ended December 31, 2018, compared to net income of $129.3 million or $1.49 per diluted share for the year ended December 31, 2017.

Moving to the balance sheet. Our financial foundation remains strong. As of December 31, 2018, we had $267 million of cash and marketable securities and no debt.

Inventory totaled $137.2 million compared $110.3 million in the prior year. Excluding Anne Klein, and our new Israel JV, inventories were up 17% compared to last year. The inventory increase was primarily driven by our accessories segment as we aggressively work to receive goods prior to the anticipated tariff increase from 10% to 25% beginning January 1, 2019. We remain comfortable with both the levels and the composition of our inventory. Our consolidated inventory turn for the last 12 months ended December 31, 2018 was 8.1 times.

CapEx in the quarter was $4.3 million, bringing our full year CapEx to $12.5 million. During the quarter, we repurchased approximately 1.8 million shares for $55 million or -- and for the full year, we repurchased approximately 3.4 million shares for $105.9 million, both of which include shares acquired through this net settlement of employee stock awards. At the end of the fourth quarter, it was $91 million remaining on the share repurchase authorization.

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

Now turning to our guidance. For the full year 2019, we expect that net sales growth will be 4% to 6% and we expect that diluted EPS will be in the range of $1.75 to $1.83. As Ed mentioned earlier, compared to the prior year, the diluted EPS range reflects a negative impact from the Payless ShoeSource bankruptcy of approximately $0.16 and a negative impact from the higher tax rate of approximately $0.05 for a total of $0.21.

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

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Camilo Lyon with Canaccord Genuity. Your line is open.

Camilo Lyon -- Canaccord Genuity -- Analyst

Hi, thank you. Good morning, everyone. Thanks for the color there. That's very helpful. So, going to the Payless impact, I think you've articulated very well the negative headwinds you're seeing from it. I'd like to hear your thoughts on what you guys are doing to work to recapture that business and any sort of discussions that you're having with retailers now in terms of where that incremental demand will go and how you are going to position yourselves to go after that, that open available market share?

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yeah, good morning, Camilo. It's a good question. I actually saw an interesting statistic yesterday, which is that consumers that shopped at Payless in 2018 nearly half also purchased footwear at Walmart in 2018 and approximately 20% also purchased footwear at Target. And those are the two largest customers in terms of overlap with Payless shoppers.

And so the good news is, we obviously have very significant private label relationships with both Walmart and Target and we've already initiated discussions with each of them and other retailers that think they may be beneficiaries from Payless going out of business in the US, about how we can grow our business there and how we can assist them in trying to capture some of that market share, that's going to be up for grabs. And we think we're well positioned to do that.

Obviously, we have a lot of intelligence about what worked at Payless, because of our relationship there and so we think that we can really help these retailers as they look to go after that business.

Camilo Lyon -- Canaccord Genuity -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

Well, I'd like to see us get some business involved in fall of 2019 for sure. I mean, I think you'll see more of it in 2020 hopefully, but certainly we're going to be going after some business into in fall 2019.

Camilo Lyon -- Canaccord Genuity -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

Well, I mean, frankly, I think the one that's growing the fastest is one that we ready do business with and that's Walmart. We're seeing really strong growth in both footwear and handbags with Walmart and private label, and so we'll look to make up some volume there. But the other thing that you've heard us talk about is the private label business at Schwartz & Benjamin and we really think that's a good platform for us to go after what we call better private label, including department stores.

So, we've got a couple of things that we're pretty excited about there. We've got a very successful private label program, the Aqua Brand, the Bloomingdale's that we're now running out of our Schwartz & Benjamin platform, that's doing very well. We've also got a new program at Dillard's, which will be launching for fall, which is our first private label program there. We continue to have a very success with this in our department store, but we continue to have a very successful private label business with Banana Republic that we run our Schwartz & Benjamin. So, we're excited about continuing to grow that business.

Camilo Lyon -- Canaccord Genuity -- Analyst

Sounds great. And then, I guess just finally on the topic -- on the Payless topic, given that it's such a kind of disruptive event to your business as proceed. Is there any sort of help or guidance you can provide in terms of how the quarterly should be impacted or maybe first half versus second half on just the modeling component there.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yes, sure. So, as you look at the seasonality, it's a little different for sales and earnings. I'll talk about both of them. In terms of sales, the year-over-year growth rate should be a little weaker in first half and a little stronger in the back half and that's because of the reported net sales that we had with Payless last year of $52 million. That was almost all in the first half. And so that goes away.

This first half, it's partially offset by having spring business for Anne Klein, which didn't launch till fall of last year, but Anne Klein is not as big as Payless. So there's about a 200 basis point net drag from losing Payless and gaining Anne Klein in the first half to net sales.

With respect to earnings, it's actually the opposite story, that earnings compared to the prior year, it should look a little bit better in the first half, than in the back half. And that's because the Payless impact is essentially similar all year. We had earnings from Payless all year, last year. Those are going away.

But Anne Klein, we had earnings in the back half of last year. Because we started shipping in the fall, we did not have it in first half. So there's some incremental earnings in the first half from Anne Klein and then once you get in the back half, you anniversary that.

Camilo Lyon -- Canaccord Genuity -- Analyst

Got it. That's very helpful. Great. And then just the final question for me. As you survey the overall competitive landscape, you continue to gain share in your core brands, in the Steve Madden brand, in your private label categories. How do you view the domestic wholesale business from an opportunity perspective, from a market share perspective? Where are the opportunities that continue to exist that you're going after end win?

It seems to be pretty remarkable that you're in this market, where it's fairly low growth, but you're continuing to outpace that growth of the overall market, year in and year out. So, I'm just curious to get your thoughts on where you see that incremental opportunity continue to present itself?

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yeah In terms of the domestic wholesale business, I mean first and foremost, I have to say, we continue to have really strong momentum in the flagship brand. So, I still feel like there is market where we're outpacing the competition in Steve Madden, and that goes really for both footwear and handbags. And I think there is continued opportunity to take share there. We're also pretty excited about some of the newer brands, I mentioned Blondo in the prepared remarks, I mean that brand is just on a tear, had an another outstanding fall season. We mentioned in the men's test, which was very successful. So we're going to be rolling that out in 2019.

We also did this diffusion brand called Aqua College at Macy's, which had an extraordinary first season and that will be going to more doors. And so we're really excited by Blondo. And then Anne Klein, I'm also really pleased with what we're seeing there. We really like that business because it's -- it doesn't cannibalize anything else we do, very different product and customer demographic than the other brands in our portfolio. And we feel really optimistic about the opportunity there.

Camilo Lyon -- Canaccord Genuity -- Analyst

Sounds great, Ed. Thanks a lot and good luck.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thanks, Camilo.

Operator

Thank you. Our next question comes from Erinn Murphy with Piper Jaffray. Your line is open.

Erinn Murphy -- Piper Jaffray -- Analyst

Great, thanks, good morning.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Good morning.

Erinn Murphy -- Piper Jaffray -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Erinn Murphy -- Piper Jaffray -- Analyst

Okay. That's encouraging. And then, sorry, just a clarification on the Payless impact of $0.16. Are you assuming you're doing zero business with them or is there anything still going on internationally with the Payless business?

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Erinn Murphy -- Piper Jaffray -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yeah, that was primarily driven by consummating the Israel JV. So that added 14 stores to the store count.

Erinn Murphy -- Piper Jaffray -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yeah, I mean I would say overall, China has been tough. We've been a little frustrated. I was hoping, we'd be a little bit farther along right now than we are. I do think we're making progress, we're certainly learning a lot, but overall it's been, it's been, I would say mixed at best. Clearly, we don't have the brand awareness that we need.

I think that there is a marketing investment that's required, but at this moment, I think we really feel like the best thing to do is to really focus on getting the merchandise assortment, right, making sure that we have the right products for that market and get our store model right. And once we do that, then we'll really step on the gas in terms of marketing. So we're not going to make a big marketing investment at this moment that could -- that may look different in six months.

Erinn Murphy -- Piper Jaffray -- Analyst

Okay.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thanks, Erinn.

Operator

Our next question comes from Chris Svezia with Wedbush. Your line is open.

Chris Svezia -- Wedbush -- Analyst

Good morning and thank you for taking my questions and congrats on the quarter. I guess the first question just on the difference between the accessory and footwear growth for the year. Any color about how we think about those two pieces that pertains about 4% to 6% revenue growth, just given the outperformance on the accessory business in '18? Just any color on that.

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Chris Svezia -- Wedbush -- Analyst

Okay. And from a category perspective, as I think about the footwear business, the success you've had on the athletic side, I would assume that continues obviously. Maybe a lot of color about -- on the (inaudible) sandals, et cetera. Just what you see going on there? Can you talk a little bit more about key product drivers that go through '19 on the footwear side?

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yes, sure. As I mentioned, we're really pleased with what we're seeing so far in terms of our new spring products. And you mentioned sneakers and I think I have to start there because we continue to deliver newness in that category and see it resonating with consumers. We've got some new sneakers in that big bottom sneaker category or what folks call dad sneakers that are performing very well and we're excited about that. We've also got some platform sneakers at great values that are doing very well. In terms of sandals that's a category that was strong for us last year and so far the early reads on that are quite good this year as well.

We had a lot of success last year with what we call flat forms and those are doing very well for us so far this year also. Espadrilles looking good. In terms of materials that's -- we're seeing exotics do very well, anything in leopard or a snake is performing very well, and that's really a cross category, whether it's dress shoes, sandals or sneakers, nylons excuse me vinyls. Vinyls are doing very well and so, and then even neons in terms of color.

So there's a lot of sort of trend to capitalize on right now. Last thing I should mention, I'm sorry, is closed up flats, which is a category that hadn't been great for a few years, but we've seen that really pick up. So in anyway, lots of -- lots of good trends to capitalize on.

Chris Svezia -- Wedbush -- Analyst

Okay, got it. And then just on the -- just so I understand something like the Payless piece, so I guess, first half of the year, it's a revenue and profitability drag, given the conversion last year of our First Cost business, is that coming out of the loyalty first come -- first income line or First Cost line or just clarify how we think about per P&L perspective. What's coming out first half versus second half of the differences are?

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yeah, so I'll tell for the full year and it's a little complicated, there's is a gross margin hit, which as you point out is pretty much all in the first half. There is a commission and licensing income hit and then there's also you're going to see SG&A going up and that's because SG&A, which -- we show that commission and licensing income line, net of expenses, and SG&A that was previously showing up in that line, net of expenses, is now being reallocated to other businesses and shows up on our operating expenses line.

So I'll give you some numbers here. I think in the -- for the full year, it's about $5.5 million of gross margin hit, it'd be $3.3 million in commission and licensing income hit and then SG&A goes up by $5.4 million, that gets you to about $14.2 million EBIT impact.

Chris Svezia -- Wedbush -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Chris Svezia -- Wedbush -- Analyst

Okay, understood. Okay, thank you very much and all the best.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Tom Nikic with Wells Fargo. Your line is open.

Tom Nikic -- Wells Fargo -- Analyst

Hey, good morning, Ed. Good morning, Danielle. Thanks for taking my question. So just want to ask so you clarified the Payless headwind to this year, you clarified the tax rate headwind, net-net, the tariffs, on the handbags, I'm just kind of one -- you sort of gave some indications last quarter about what that would look like. I'm just wondering net-net, how we should think about the tariff impact to your EPS in 2019?

Edward Rosenfeld -- Chairman and Chief Executive Officer

Sure, yeah. I'm pleased to report that the team has really done a great job of managing through this and we -- and we think that we've really at this 10% rate that we've really mitigated the vast majority of the impact, and in fact, in the guidance that we've outlined today, the impact is really immaterial from the 10% tariff and we've done that through primarily through two levers. One is moving production out of China and our sourcing team has been working feverishly on that and we are now really approaching 50% of our production in the categories that are impacted by the tariff outside of China, and that's primarily Cambodia. As you recall, that was at 16% in 2018.

And then on the remaining 50% that is still in China, we've been able to get some pretty nice price concessions out of our factory partners there in and around 10%. And so between those two initiatives, we've been able to basically mitigate the impact at 10%. Now, obviously if that were to go to 25% that's a different story.

Tom Nikic -- Wells Fargo -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Tom Nikic -- Wells Fargo -- Analyst

All right, sounds good. Thanks for everything and best of luck this year.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Steve Marotta with CL King & Associates. Your line is open.

Steve Marotta -- CL King & Associates -- Analyst

Good morning, Ed and Danielle. Can you talk a little bit about the expected international growth as a whole in fiscal '19 as well as the largest areas of opportunity?

Edward Rosenfeld -- Chairman and Chief Executive Officer

Sure. Yeah that business was up 22% for us in 2018. We have forecasted that it will moderate this year. Still nice double-digit -- should be a nice double-digit grower for us. We continue to think that SM Europe will be our joint venture there -- will be a strong driver of growth. I think our -- we're excited about this new joint venture in Israel. Mexico continues to perform very well.

We have assumed a modest decline in Canada in the wholesale business. That's largely due to some customer bankruptcies up there most notably Town Shoe which was -- which was going -- I think Town Shoe closed and maybe I shouldn't say bankrupt. That was a significant customer for us. But overall, the brand is performing very well across the international markets and we continue to feel really, really optimistic about our long-term prospects there.

Steve Marotta -- CL King & Associates -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Steve Marotta -- CL King & Associates -- Analyst

Very helpful. Thank you.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Jeff Van Sinderen with B. Riley FBR. Your line is open.

Richard Magnusen -- B. Riley FBR -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Richard Magnusen -- B. Riley FBR -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Richard Magnusen -- B. Riley FBR -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yeah, so in terms of our own in-house e-commerce businesses, as I talked about in the earlier remarks, that business is really accelerating for us. We're really pleased with the trends that we're seeing there and we're looking for very strong growth out of that business this year in both sales and profitability. And I called out some of the initiatives there but we are very, again, we are very pleased with the transition of the platform over to Shopify Plus.

We think that's providing us with a whole lot of benefits. Lower operating costs were more flexible and more nimble. I think it's a better mobile experience, fewer clicks to checkout et cetera. And then we're also really excited about some of the things that we're doing on the marketing side. I mentioned the free two-day shipping. We're really seeing some good results with our paid social program and that's something that we've ramped up recently. Afterpay is doing very well for us.

So there's a whole a whole lot of initiatives that we feel good about. We've got some more in the works, which we'll tell you about throughout the year, but that's a business that's got really nice momentum.

Richard Magnusen -- B. Riley FBR -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

I'm sorry, I'm not familiar. Could you repeat the question? I'm not exactly sure what you're referring.

Richard Magnusen -- B. Riley FBR -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Richard Magnusen -- B. Riley FBR -- Analyst

Okay. All right. We'll probably ask you that offline then. Thank you.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Okay, thanks.

Operator

Our next question comes from Sam Poser with Susquehanna. Your line is open.

Sam Poser -- Susquehanna -- Analyst

Hi, thanks for taking my question. A couple of things. One, just related to the Afterpay, what percent of transactions are currently being done there, where do you see it heading?

Edward Rosenfeld -- Chairman and Chief Executive Officer

Well, that's not something we were going to disclose, but I'll tell you it's a significant percentage higher than we originally anticipated. And the nice thing is that on those transactions, we're seeing a nice increase in the average order value.

Sam Poser -- Susquehanna -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

As usual, we don't provide comp guidance.

Sam Poser -- Susquehanna -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Sam Poser -- Susquehanna -- Analyst

Thanks. And then I missed it, what was the gross margin per footwear wholesale and accessory wholesale?

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Sam Poser -- Susquehanna -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yeah I think that's -- I think that's right.

Sam Poser -- Susquehanna -- Analyst

All right. Thanks very much for a continued success.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thanks, Sam.

Operator

Our next question comes from Laurent Vasilescu with Macquarie. Your line is open.

Laurent Vasilescu -- Macquarie -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Laurent Vasilescu -- Macquarie -- Analyst

Just any high-level thoughts about the first quarter?

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Laurent Vasilescu -- Macquarie -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

Sure. Yeah, so inventory, you're right. It was up 24% overall. If you take out Anne Klein and the Israel JV, it was up about 17%. And again, most of that was driven by our accessories division, we were up (inaudible) 70% in accessories. And again that was as we were trying to bring goods in ahead of the tariff. The other factor, I should point out is the Chinese New Year was 11 days earlier this year. So that resulted in more inventory on hand and in transit at the end of the year in both accessories and shoes.

So I think that really is, I wouldn't view that -- take the 24% as reflective of what we think our sales growth is going to be in Q1, but hopefully, we tried to telegraph that inventory would be up at the end of the year because of the -- mostly because of the tariff, but also because of Chinese New Year.

Laurent Vasilescu -- Macquarie -- Analyst

Okay, very helpful. And then my last question, I wanted to follow-up on international concessions. I think you ended the fourth quarter with 42, which I think is down 40 -- from 46 from the prior quarter. Curious to know what happened there? And was there any conversion or closed concessions and then how should we think about concessions overall for 2019?

Edward Rosenfeld -- Chairman and Chief Executive Officer

Yeah, so I mentioned that we've been disappointed in some of the performance in China. We did close four concessions in China. Once we got to those sort of one-year mark there, there was -- whether we want to get out of, I think we may get out of more this year. We're still evaluating that, but I wouldn't be surprised if that number didn't go down before it goes back up.

Laurent Vasilescu -- Macquarie -- Analyst

Okay, very helpful. Thank you very much and best of luck.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Laura Champine with Loop Capital. Your line is open.

Laura Champine -- Loop Capital -- Analyst

Good morning. Thanks for taking my question. Ed, do you think that you'll see significant shifts in your vendor base or in your distribution platform this year or should it be essentially status quo on an overall basis?

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Laura Champine -- Loop Capital -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Laura Champine -- Loop Capital -- Analyst

Got it. Thank you.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Edward Yruma with KeyBanc Capital Markets. Your line is open.

Matt DeGulis -- KeyBanc Capital Markets -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Matt DeGulis -- KeyBanc Capital Markets -- Analyst

Okay, makes sense. Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Dana Telsey with Telsey Advisory Group. Your line is open.

Ross Licero -- Telsey Advisory Group -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Ross Licero -- Telsey Advisory Group -- Analyst

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Ross Licero -- Telsey Advisory Group -- Analyst

Okay, great, thanks a lot.

Edward Rosenfeld -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Edward Rosenfeld -- Chairman and Chief Executive Officer

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

Operator

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

Duration: 59 minutes

Call participants:

Danielle McCoy -- Director of Corporate Development and Investor Relations

Edward Rosenfeld -- Chairman and Chief Executive Officer

Camilo Lyon -- Canaccord Genuity -- Analyst

Erinn Murphy -- Piper Jaffray -- Analyst

Chris Svezia -- Wedbush -- Analyst

Tom Nikic -- Wells Fargo -- Analyst

Steve Marotta -- CL King & Associates -- Analyst

Richard Magnusen -- B. Riley FBR -- Analyst

Sam Poser -- Susquehanna -- Analyst

Laurent Vasilescu -- Macquarie -- Analyst

Laura Champine -- Loop Capital -- Analyst

Matt DeGulis -- KeyBanc Capital Markets -- Analyst

Ross Licero -- Telsey Advisory Group -- Analyst

More SHOO analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.