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Skechers USA Inc (NYSE:SKX)
Q3 2019 Earnings Call
Oct 22, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, welcome to the SKECHERS Third Quarter 2019 Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to SKECHERS. You may begin.

Unidentified Speaker

Thank you, everyone for joining us on SKECHERS conference call today. I will now read the Safe Harbor statement. Certain statements contained herein, including without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the Company or future results or events may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as amended.

Such forward-looking statements involve known and unknown risks, including but not limited to, global, national and local economic, business and market conditions, in general and specifically, as they apply to the retail industry and the company. There can be no assurance that the actual future results, performance or achievements expressed or implied by such forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the Company's filings with the US Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other reports filed with the SEC as required by federal securities laws for a description of all other significant risk factors that may affect the Company's business, results of operations, and financial conditions.

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

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Good afternoon, and thank you for joining us today. The momentum we experienced through the first half of 2019 continued in the third quarter as both our domestic and international businesses flourished, resulting in a new quarterly sales record of $1.35 billion. This was an increase of $177.6 million, or 15.1% over last year. On a constant currency basis, the increase was $202.5 million, or 17.2%. Our international business continued to drive growth with an increase of 21.9%, representing a record 58.8% of our sales in the quarter.

Our domestic business also added to our strong growth, including the 5% increase in our domestic wholesale business. We believe that international will continue to power our growth, especially as we move into leading positions in many markets, open more retail stores and further expand our international footprint. In the quarter, we grew in all regions, achieving the strongest increases in Germany, the United Kingdom and Spain, India, the UAE and Turkey, as well as China, Russia, and Japan.

Skechers' direct-to-consumer business continues to grow. Acting as a showcase, where consumers can experience our brand and shop our complete product collection. At quarter end, we had 3,307 Skechers stores around the world, including 779 company-owned stores. Our direct-to-consumer business continued to achieve strong sales growth with quarterly increases of 13.3%, which included 7.7% comparable store sales worldwide. We believe our global success is the result of our innovative, relevant and comfortable products supported by our 360 degree marketing efforts that create awareness and generate demand.

Additionally, our best product offerings from award winning running, golf, and walk footwear to occupational work boot and slip resistant shoes and styles with relaxed, wide and arch fit for men and women has allowed us to develop a diverse distribution strategy and gain shelf space as well as enter new doors, such as golf specialty and leading fashion and independent sneaker retailers. Additional product highlights in the quarter included the release of our Skechers premium heritage collection in the United States and Europe.

The continuation of our collaboration like, Asia's popular line, French-Property and limited edition footwear partnerships with several premium retailers, including Atmos in Japan, and Opening Ceremony in United States. Our on trend styles appeared on numerous Fashion Week runways in the quarter, from New York to London and Milan, with global trends sites, High Bay and High East [Phonetic] covering Skechers product launches and influencers, and key opinion leaders appearing in social media post in nearly every country, where our product is available.

From our performance division, the GOrun Razor 3 took the top honor in Runner's World, as it was awarded Gear of the Year, in it's September-October issue, marking the fifth win this year for our collections of Hyper Burst shoes. To support our diverse range of key initiatives, we have a team of global and local athletes, celebrities and influencers that appear in our marketing campaigns. In the third quarter, we signed Los Angeles Dodgers all-star pitcher and three times Cy Young Award winner, Clayton Kershaw to our team.

Clayton will be playing in Skechers performance cleats designed specifically for him and is collaborating on several training styles for 2020. We are looking forward to the future marketing campaigns with this All-Star and certain Hall of Famer. Skechers continued growth included -- including record sales for the third quarter is a testament to the strength and demand for our diverse product offerings around the world. Based on early readings from our direct-to-consumer business and feedback from our key accounts in numerous markets, we see our momentum continuing in the fourth quarter.

Now, turning to our domestic business in detail. Our domestic sales increased 6.7%. This was driven by a return to growth in our domestic wholesale business of 5%, where we saw player shift [Phonetic] increase by 2%, with an average price increase of 3.1%. Further propelling growth domestically, our direct-to-consumer business increased 8.7% with comparable same-store sales increasing by 6.8% for the quarter. We also saw month-over-month acceleration in the direct-to-consumer business with September achieving a high-single digit comp.

At quarter end, we had 488 company-owned Skechers retail stores in the United States. In the third quarter, we opened 12 stores across eight states and closed one location in Seattle. We also remodeled two stores and expanded two locations. To date in the fourth quarter, three company-owned stores have opened in the United States with another five planned before the end of the year. In our domestic business, the biggest increases came from our men's Casual Street and Sportline, women's GOwalk and Sportline and Skechers Work. We are pleased that our BOBS footwear is also continuing to show growth in the United States.

Due to its success, we have been able to help more than 750,000 pets since the inception of the program several years ago. To support our domestic business, we ran numerous marketing campaigns, including ads in fashion magazine for our chunky shoes, digital campaigns and numerous television commercials for our kids footwear, Sport, Heritage and GOwalk footwear; and our men's lines starring football legend Tony Romo and Howie Long. Based on October sales in our direct-to-consumer business as well as feedback from our wholesale partners, we believe our domestic business will continue to show positive growth in the fourth quarter.

Now looking in detail at our International business, which represented 58.8% of our total sales in the quarter. Sales increased 21.9% or 25.7% on a constant currency basis and reflects growth in our subsidiary, joint venture and distributor businesses. The biggest drivers were China, which grew 21% on a constant currency basis and Mexico, which transitioned to a joint venture earlier this year followed by the United Kingdom and Japan. Additional growth drivers were India, Germany, and Spain within our subsidiaries; and our distributors, Russia, Turkey, and the UAE, who handles the majority of our business in Middle East.

Specifically the sales growth was the result of a 21.7% increase in our wholesale business and a 22.3% increase in our direct-to-consumer business with a 9.9% increase in comparable store sales. At quarter end, there were 2,819 international retail stores, an increase of 124 in the third quarter. Of those stores, 2,528 are owned and operated by international distribution partners, joint ventures and a network of franchisees. In the third quarter, two company-owned international stores opened; one in the UK and one in India, and two company-owned stores closed. To date in the fourth quarter, four company-owned stores have opened in Europe, with another five to ten planned before the end of the year, including a flagship store in Rome.

In the third quarter, 171 joint venture and third-party owned stores, opened across 38 countries, including our first locations in Andorra, Ghana and Suriname. New store openings included 87 in China, 14 in India, five in both South Korea and Australia and four each in Taiwan, Spain, Malaysia and Indonesia. 47 stores closed in the third quarter, including 17 in China. Six third-party-owned Skechers stores have opened so far in the fourth quarter with another 130 to 150 expected for the remainder of the year.

To support our global business, television, outdoor, digital and print campaigns drove consumers to stores where Skechers are available. This included the underground in the UK and France, perimeter boards and sporting events in Canada and Mexico; music and dance festivals in the Netherlands and China; and in-store events in support of kids day across South America. Our growth, product innovation and marketing leadership, also resulted in Skechers being awarded Best Brand of the Year from Schuhkurier in Germany. This is an achievement we are particularly proud of as Germany was one of our first subsidiaries and we view the country as one of the leading European markets for Skechers.

We believe International remains the primary growth driver for our business. Nearly every international distribution center that we operate had double-digit increases in pairs shipped in the quarter, which we believe will continue into the fourth quarter. Additionally, we are benefiting from the conversion of India to a subsidiary in the first quarter and Mexico to a joint venture in the second quarter, both of which we feel will result in significant additional growth over the coming years. With strength across every region, we believe the momentum we are seeing in our business worldwide will continue in the fourth quarter and into 2020.

Now, I'll turn the call over to John to review our financials and discuss our outlook.

John Vandemore -- Chief Financial Officer

Thank you, David. Our third quarter sales totaled $1.35 billion, an increase of $177.6 million, or 15.1%. On a constant currency basis, sales increased $202.5 million, or 17.2%. This quarter represents a new quarterly record for the company and illustrates the power of our strategy and our experienced, executional capabilities. Skechers grew in all segments and in every region. This despite unforeseen headwinds from foreign exchange rates and the announcement and introduction of incremental domestic tariffs.

International wholesale sales increased 21.7%, including a 27% increase from our wholly owned subsidiaries, a 24.2% increase in our joint ventures and a 4.4% increase in our distributor business. Direct-to-consumer sales increased 13.3%, the result of an 8.7% increase domestically, and a 22.3% increase internationally. Domestic direct-to-consumer sales growth was driven by a 6.8% increase in comparable store sales and the net addition of 23 new stores. International, direct-to-consumer sales grew 22.3% due to a 9.9% increase in comparable store sales and the addition of 14 new stores. Our domestic wholesale sales returned to growth in the quarter, rising 5% or $14.2 million, primarily due to increases in both our men's and women's divisions. We continue to see encouraging signs for Skechers business among our domestic wholesale customers and currently expect fourth quarter sales to grow year-over-year. Gross profit was $653.1 million, up $89.2 million compared to the prior year.

Gross margin increased by 30 basis points to 48.2% primarily due to margin expansion in our international businesses. Our domestic gross -- our domestic wholesale gross margins were lower year-over-year, due to increases in the average cost per unit, which were partly attributable to increased tariffs effective during the quarter. Total operating expenses as a percentage of sales were flat to prior year at 37.8%, but increased in dollar terms by $67.1 million or 15.1% to $511.9 million in the quarter.

Sales expenses increased by $7.4 million to $97.5 million due to higher advertising expenses in international markets. General and administrative expenses increased by $59.7 million to $414.4 million, reflecting additional spending of $24.4 million to support the growth of our international businesses, including in China and the addition of operations in Mexico and $18.5 million associated with 37 new company-owned stores, including 14 that opened in the quarter. Earnings from operations increased 19% to $147.4 million versus the prior year and our operating margin improved 40 basis points to 10.9% from 10.5% in the prior year.

Net income increased 13.6% to $103.1 million, or $0.67 per diluted share on $154 million diluted shares outstanding, compared to net income of $90.7 million or $0.58 per diluted share on 156.3 million diluted shares outstanding in the prior year period. On a constant currency basis, earnings per diluted share outstanding was $0.71. Our effective income tax rate for the quarter increased from 13.7% in the prior year to 15.8%, primarily reflecting the impact of the Tax Cuts and Jobs Act enacted in 2017. We now expect our effective tax rate for the full year to be between 17% and 19%.

And now turning to our balance sheet. At September 30, 2019, we had over $1 billion in cash, cash equivalents and investments, which was a decrease of $44.4 million or 4.2% from December 31, 2018, but an increase of $40.5 million or 4.1% from September 30, 2018. Recall that earlier this year, we invested over $180 million to purchase the minority interest of our former joint venture in India and to form a new joint venture in Mexico. Our cash and investments represented approximately $6.66 per diluted share outstanding at September 30, 2019.

Trade accounts receivable at quarter end were $662.4 million, an increase of $158.4 million from September 30, 2018, driven by higher sales, especially in our international wholesale business. Total inventory was $890.4 million, an increase of 3.1%, or $27.1 million from December 31, 2018 and an increase of 17.9% or $135.3 million from September 30, 2018. The increase was primarily in our international markets where we believe our inventory levels leave us well positioned to support our growth expectations.

Total debt including both current and long-term portions was $122.7 million compared to $87 million at September 30, 2018. The increase reflects borrowings associated with the construction of our first distribution center in China. Working capital decreased $95.5 million to approximately $1.52 billion versus $1.62 billion at September 30, 2018. Capital expenditures for the third quarter were approximately $48.9 million, of which $16.9 million was related to the construction of our distribution center in China, $16.3 million related to retail stores worldwide, and $8.6 million related to our worldwide distribution capabilities.

For the remainder of 2019, we expect our total capital expenditures to be approximately $85 million to $90 million. This includes the construction of our new distribution center in China, enhancements to our existing distribution centers in Europe, the expansion of our corporate headquarters in California, and an additional 15 to 20 company-owned direct-to-consumer stores and 8 to 10 store remodels, expansions or relocations.

Now turning to guidance. We currently expect fourth quarter sales to be in the range of $1.225 billion to $1.25 billion and net earnings per diluted share will be in the range of $0.35 to $0.40. This guidance incorporates the view that all three of our segments will continue to grow in the fourth quarter at rates similar to the third quarter.

And now, I'll turn the call over to David for closing remarks.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Thank you, John. The third quarter represented a new quarterly sales record, driven by growth in our domestic and international wholesale and direct-to-consumer businesses. We believe this is a significant achievement given the brick and mortar retail environment, as well as economic and political tensions around the globe. Even with these challenges, we believe the momentum we experienced in the third quarter will continue and our brand will flourish, both domestically and internationally.

Along with further developing our infrastructure and logistics capabilities at home and abroad, and growing our store base with another 145 to 165 Skechers stores planned around the world before the end of the year, we are designing more resident product and propelling it with marketing to drive sales. Our fourth quarter sales have started off strong, our backlogs are growing, and based on our order book, we believe this positive trend will continue through the fourth quarter and beyond.

And with that, I would now like to turn the call over to the operator to begin the question-and-answer portion of the conference call.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Jay Sole with UBS Investment Bank. Please proceed.

Jay Sole -- UBS Investment Bank -- Analyst

Thanks so much. So I just want to follow up on the sales growth. If you could sort of detail, maybe a little bit more color, what contribution to the growth came from e-commerce sort of initiatives that you've had there. China specifically, if you could talk about the growth rate in China. And then maybe if you could talk about what was really the driver to get to that 5% domestic wholesale growth in terms of like, what channels online, full price or off price? Could you give us some help there that would be terrific. Thank you.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Yeah, Jay. Absolutely, happy to add some color. As you know, when we look at the sales from a direct-to-consumer standpoint, we're agnostic as to whether not it arrives through one of our retail stores or online. I think the really encouraging thing coming out of this quarter for us is that we saw strength in both. Obviously, the e-com rate is meaningfully higher than the brick and mortar. It's also starting-off from a smaller base. But it was a significant growth driver in those rather robust comparable store sales numbers to begin with. In the US, it was in the '70s, internationally, it was above 50%.

China, I think as we mentioned on the call. China on a constant currency basis grew over 20%. Really a very good performance given the headwinds. If you recall, when we were last with you all yuan was at about CNY6.8, CNY6.9 and we end the quarter much closer to an average of CNY7.1. So there were some significant foreign currency headwinds. Even if you strip that out though you're at close to 17% quarter-on-quarter growth rate in China.

The domestic number, I hate to say it, but we have to take the opportunity. We've been talking about a return to growth in domestic wholesale for about six months or seven months now. It's what we saw in the backlogs, it's what we saw in the demand for the product. This is just the fruition of that foresight, we provided after Q1 and Q2. And again, we're encouraged by what we see. We definitely expect growth year-over-year in the fourth quarter as well.

Jay Sole -- UBS Investment Bank -- Analyst

Got it. And then, I can follow-up on gross margin. It sounds like mix was a significant impact, tariffs might had a small impact in FX. Is it possible, you could sort of quantify the impact of each of those drivers and if there was a fourth one, what that would might have been?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Yeah. I don't want to get into abundant detail other than to say. I mean the broader impacts that we felt that were positive came out of the international markets where there was some price and there were some mix benefits obviously detriment it a bit by FX in some of those markets. Domestically, it was early impacts from the new tariffs as well as a few other cost elements that came through in the quarter. Those are broadly irrespective of the market -- those are the broadly the pressures one way or the other.

Jay Sole -- UBS Investment Bank -- Analyst

Okay. Thanks so much.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Thanks, Jay.

Operator

Our next question is from Laurent Vasilescu with Macquarie Group. Please proceed with your question.

Laurent Vasilescu -- Macquarie Group -- Analyst

Good afternoon. Thanks for taking my question. John, I think in your last prepared remarks, you said that we should expect similar growth across the different segments for the fourth quarter. Does that imply, we should think more like a mid-single digit rate for domestic wholesale and if that's the case, was there any shift between 4Q into 3Q or anything to consider on that front?

John Vandemore -- Chief Financial Officer

Yeah. I mean, I think we're trying to give some good guide post for you to use similar rates to what we saw that could be plus or minus in any given segment. Some of that's going to be timing. There isn't anything from a timing standpoint on the domestic front, we're planning on at the moment. But as we've mentioned before that tends to be late-breaking. We will have the inventory for it in particular, because we have the tariffs that could be forthcoming in December and we're preparing for that as well as what we already have on hand. But we're not currently planning anything on that from a timing standpoint hitting domestic wholesale.

Laurent Vasilescu -- Macquarie Group -- Analyst

Okay. Thank you. And then just follow up on Jay's question about gross margins, maybe near-term to fourth quarter, should we think gross margins are up. I mean, it was pleasantly surprising to see GMs up. Just thoughts on fourth quarter and then, how do we think -- without getting into guidance for next year, how do we think about just these 4A, 4B as we think about next year. Any mitigation factors we should consider?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

It's just on the gross margins for the fourth quarter, where we would direct you at the moment is probably something to flat, maybe even down slightly. We're still absorbing the impact of the first round of 4A tariffs. We have put in place mitigation efforts those are ongoing. We've made some decisions to absorb certain elements of the increase in the short-term to the benefit of our customers. So right now, I'd point you it's flat to potentially down slightly and by that I mean maybe 10 to 20 bps. We do think the overall mix benefit of continuing to transition to more sales internationally and more direct-to-consumers help offset that. But there is obviously a quantum differential that will have to take into account once we have a better handle on exactly how holiday sales turn out.

Laurent Vasilescu -- Macquarie Group -- Analyst

Okay. Thank you. And then last question is on G&A. On the international G&A, the $24 million increase, can you parse that out between Mexico and China and how should we think about that for the fourth quarter? And then it looks like it implies a domestic G&A was meaningfully after kind of muted growth for the first-two quarters? Any thought on how we should think about that going forward for the fourth quarter?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Yeah. I don't want to be overly precised on picking the G&A numbers further other than, I'll tell you that Mexico and China combined were probably more than 60% of that international increase. The remainder supports a lot of the growth you're seeing elsewhere in the business. The other major driver that I mentioned and certainly this impacts domestic is the domestic direct-to-consumer business, but also the international direct-to-consumer business.

Domestic wholesale they were -- it was up but it's largely the business elements that support the broader business or supports distribution, which keep in mind -- we keep that those distribution warehousing costs in our G&A profile where others are putting that in the cost of goods sold. So just keep in mind, there is some volume relationships associated with the pairs both sold and shipped that, that are impacting G&A there. And then... [Speech Overlap]

Laurent Vasilescu -- Macquarie Group -- Analyst

Sorry go ahead.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

No, I was just -- I was going to say -- I'll just point out again though that you saw operating margin leverage this quarter, which certainly is what we're looking at most prominently when we're looking at the business and we're certainly proud that. We think that again continues to reflect the benefit of the investments we've made, as well as the capability and the opportunity in the business.

Laurent Vasilescu -- Macquarie Group -- Analyst

Great. Thank you very much for all the color.

Operator

Our next question is from Omar Saad with Evercore ISI. Please proceed.

Omar Saad -- Evercore ISI -- Analyst

Hi. Thanks for taking my question. One thing that jumped out at us is the, kind of, significant increase in the operating consistency in the last couple of quarters, especially, when we think about margin sales rebound combined -- coincided with John coming on the board. Can you talk about how the management of the business has evolved? And how you're being able to drive some of the more predictable consistent performance that we think the market really appreciate? Thanks.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Well, everybody contributes to that. So I think I'll take a little piece of that as well. I think, John certainly has had significant input into it, and we've taken that. But I think what you see here is what we had talked about in the past coming to fruition as well. With [Phonetic] significant piece of the start-ups behind us and are just absorbing Mexico and India, which had been running in the past. We have no start-ups and no unquestionable amounts that we have to push into the marketplace to see what it is. We have to do to drive the business and how much risk, we have to take? And what it is, we might have taken over from our prior distributor or a joint venture. So I think what you're seeing is more consistency around the world as the world tends to grow together and there's is not an influx of what is any new marketplaces.

So what you're seeing is the maturity of the business growing in those places small -- all places continue to leverage. None of them really de-leverage now, even if they are not up to what we believe their full potential is, they continue to perform better on a relative basis then they did the year before. So barring few complications, which are obviously based politically like something that would happen in Hong Kong or something that is going on in Chile right now, where they have turmoil the things closed down. We have a very much more mature business that continues to grow and while, we do push it sometimes and we do have to invest somewhat more as we hit critical mass, they are more predictable as they go through the growth process.

Omar Saad -- Evercore ISI -- Analyst

Is there may be an accelerated digital investment cycle ahead that we should start thinking about, or do you feel like you've got kind of got that, the room and the headroom to make the investments that you need and that kind of how these more consistent predictable trends that we've been seeing?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Omar we've already started to make some, so you would assume or we assume that as it continues to grow just like new ventures, it will now leverage. It's starting to leverage for us already in the United States. We've invest to carried out worldwide. It's growing in all marketplaces. We will continue to invest in it. The biggest investment yet to come is, we're going to upgrade some of our distribution centers that's already begun and that we've been talking about in the past to be able to carry increased capacity on one at a time. So I think that will continue to leverage that's just like a newer business that's now starting to mature that will now leverage upon itself rather than require significant investments from scratch.

Omar Saad -- Evercore ISI -- Analyst

Got it. Thanks for the help, guys. Good luck.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Thanks.

Operator

Our next question is from Chris Svezia with Wedbush Securities. Please proceed.

Chris Svezia -- Wedbush -- Analyst

Good afternoon, guys. Thanks for taking my questions. I guess, first, John for you, I just want to go back to US wholesale. I think previously you've talked about flat to up slightly for the year on US wholesale to kind of get there with 5% in Q3 implies double-digit growth in Q4. Just wonder, if you could maybe address that observation relative to prior comments you made about that.

And then secondarily, as you kind of think about going forward on US wholesale, what sort of growth rate we should think about kind of given the trajectory in a ramp up throughout this year. Just any thoughts as we think about as we move forward into 2020. Is this a mid single-digit growth segment or we back to that level again, any color about that would be helpful?

John Vandemore -- Chief Financial Officer

Yeah. I mean, so we've spoken about attempting to get flat, that's our goal. That's still within sight, it's found by our guidance. So it's close in there depending on a few shipments here or there. Certainly not something we're taking our eyes off of, but again, domestic is probably one of the markets where you can see timing impact us, but that's still our goal. We still, like, I said expect the return to growth continue in the fourth quarter. We see that in the backlogs. We see that in the order flows. The reality is, we're early in the holiday season. So that's going to be a factor. As far as extrapolating that much further into 2020, I could tell you that what we see right now remains very encouraging, still early in terms of full year order books to build up.

But so far, what we see is our very encouraging signs. I think there is also the impact of the tariffs that we have to take into consideration, which is an unknown. So far, again, that has not materially impacted our bookings, or booking volume or booking pace, but there is still the potential out there that the retailers have to react to that, because there hasn't really flown through the supply chain in every capacity. And in some instances, we're choosing to absorb some of that as an aid to those retailers to help them continue to maintain the volume, we've seen them take through on the Skechers brand.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Hey, Christopher, I'll be a little more upbeat as usual on some of that stuff, but I would pass along even though we don't talk about it that often that our incoming order rate from our domestic and subsidiary base and it was fairly evenly distributed was the best we've ever had at Skechers and the year-over-year growth is dramatic. So as we sit here today with what we know. We know that we've barring any shifts from December to January or vice versa and things like that, we will be up in the fourth quarter. We will be up in the first quarter. We have first quarter book to a point where we anticipate at least mid to high single-digit growth rate.

Now to the capacity of moving from January to December that might be, we may have a slightly bigger fourth quarter and slightly small first quarter be hard to believe that we wouldn't grow mid-singles and above in both quarters as we sit here, even if it slip. So the backlog and the orders that we've received have come in at a dramatic pace and indicate that positive growth happens now. As John said, we don't have as significant a site line into the back half of the year, but the reception we've gotten from the first launches of our back-to-school line for 2020, it doesn't give us -- that would give me anyway, any reason to change any of those indications. So I think that barring a major economic or macro shift somewhere, which slows down from that point.

Chris Svezia -- Wedbush -- Analyst

Okay. Thank you, David for the color. And I have never known you to be less than optimistic. So I appreciate that.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

And always within reason.

Chris Svezia -- Wedbush -- Analyst

All right. Just on the direct-to-consumer side, you've seen a nice acceleration in the comp globally. Just any thoughts as we think about Q4, you still got an easy comparison and even as you cycle into the first half of next year, you still have some easy comparisons on the direct-to-consumer side, given some of the initiatives you're doing on e-commerce, loyalty. Is it fair to think that these growth rates are sustainable, if not can accelerate from this level?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Well, what we think is anything is possible. What we know for a fact is in the first-three weeks of October, we've had an acceleration on a comp store basis across the DTC Group to -- in October from September and rate of growth over prior year. So that's always a positive side and what is not obviously the most selling month of the quarter and usually one of the smallest one, but going into the last quarter of the year and having such significant accounts in the first three weeks is certainly a positive way to sign. So I guess that would lead us in that direction.

Chris Svezia -- Wedbush -- Analyst

Okay. Final thing from me. Just on the European distribution center. When can we anticipate getting some efficiencies flowing through the P&L, the automation being completed. Just any thoughts about timing on all that?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Well, the most obvious spot is Q1. We are in testing now, so barring any changes on foreseen, we hope to be up and running and get some of that flow through in the first quarter.

Chris Svezia -- Wedbush -- Analyst

Okay. Thank you very much and all the best.

John Vandemore -- Chief Financial Officer

Thanks, Chris.

Operator

Our next question is from Jim Duffy with Stifel. Please proceed. Jim, please do you have your line muted?

Peter McGoldrick -- Stifel -- Analyst

Hi. This is Peter McGoldrick on for Jim. Thanks for taking my question. I was curious within the international business, what type of lift you saw from the Mexico within wholesale and retail. Is that tracking to your plans as early as it is and does it change your thinking and ownership structure for any of the other international markets?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Mexico continues to perform as expected slightly better to be honest with you. We still have high hopes for the market. It incremental this year to what was a licensing business. So really, if you look at it on a year-over-year basis, it's tough to draw any conclusions, but it contributed, it grew sequentially from last quarter. But I would just point out that even without the addition of Mexico, you saw our international wholesale business grow quite nicely in the high-teens level. So I think the remarkable thing about this quarter and really the last is how pervasive the growth is across all of our regions, across all of our businesses.

Peter McGoldrick -- Stifel -- Analyst

Thank you. And then could you speak a little bit about inventory positioning heading into holiday, are there any regions or product categories that you're seeing excess in or are there any specific product that you've made into holiday that you're looking for consumers to respond to specifically?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Yeah. I mean the inventory is well positioned given where the growth as I mentioned and most of it is international. In terms of bets, we don't take a lot of bets. We are seeing tremendous response to a lot of new product. We're very excited about that product, both in terms of what we think the sell-through will be, but what we've seen in the backlogs. So it's a very encouraging sign.

I would tell you from an inventory standpoint, we feel like we've got the right inventory in the right place to grow. The only thing, I will point out though, is that something like a Mexico again that's incremental inventory that we wouldn't have consolidated last year. So there is a piece of that as well, which is just taking on board the inventory of what is now a joint venture, which was previously a license relationship in the overall total.

John Vandemore -- Chief Financial Officer

Yeah. We should also point out that our direct-to-consumer business is growing and that historically for everybody has a slower turn in our wholesale business. So as that shift will be carrying a little more inventory because the turns are not quite the same as wholesale. So you got to keep that in mind as direct-to-consumer growth as a bigger piece.

Peter McGoldrick -- Stifel -- Analyst

That makes sense. Thank you.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Thanks.

Operator

Our next question is from Tom Nikic with Wells Fargo. Please proceed.

Tom Nikic -- Wells Fargo -- Analyst

Hi, John. Hi, David. Thanks for taking my question. I just wanted to ask about tariffs. I know you mentioned that it saw an impact on your US wholesale business. But no mention of the US, DTC -- but US DTC business, is there a reason why, maybe it would have affected wholesale but not DTC? And can you just help us kind of understand maybe magnitude of the impact in Q3 and how much of it is embedded in the Q4 guidance that you gave today?

John Vandemore -- Chief Financial Officer

Yeah. I mean the impact predominantly held in domestic wholesale because that's the inventory that came in -- that went right back out. It will take a while for the newly tariff product to reach our retail stores that will begin in the fourth quarter. I'll also point out the impact wasn't significant in the sense of the overall cost of product or quite frankly of what we expect the tariffs to yield on a long-term basis. But it was also miss timed and then we haven't had the ability to implement all of our remediation strategies. Those are going into effect, they will go into effect in the fourth quarter.

So we are being a little bit conservative vis-a-vis our domestic wholesale margins and our overall margin guidance to account for the possibility of the tariffs and all that timing not working out perfectly. However, I would tell you, we have been very aggressive about all three of the remediation strategies we've mentioned before, looking at the potential to change distribution points into the US. Looking at vendor concessions and looking at price, all those efforts are under way and we think long-term, probably after the first quarter of 2020 perhaps that this really becomes a mitigated effect. We'll obviously be working make that happen sooner, but that's the efforts we put into place today.

Tom Nikic -- Wells Fargo -- Analyst

Okay. And just one more from me. Just on the G&A expenses, I think you've had sort of a wide range of growth rates this year Q1 was up 1%, Q2 was up 6%, and Q3 was up 17%, which is a pretty sort of dramatic change in the growth rate. I just -- did that G&A line come in higher than you expected? What drove that, and I know that you have quarterly volatility in the G&A, but just if there is some sort of steady state rate of G&A growth you can give us a guide post for would be greatly appreciated?

John Vandemore -- Chief Financial Officer

Yeah. I thought you're going to complement us for precisely matching the G&A. The operating expense growth rate to the top line growth rate, which is what we've said is the upper bound. And that really is the upper bound of what we're managing against, that's going to vary from quarter-to-quarter. This instance were a little bit toward the top end of that, but obviously we're looking to be at that level or lower from a growth standpoint.

I will point out that one of the components in operating expenses this quarter that contributed to that was decision on our part the press marketing, press media. We see the product resonating across the globe. This is an opportunity for us to continue to invest in that and to get back to putting more dollars to work and that's something we did this quarter that we haven't done in the prior two quarters. So, quite frankly, that's more of an opportunistic press on the media spend continue to see the brand resonates against this really great product lineup.

Going forward, again, we'll keep the parameters in place that we had talked about previously, which is trying to keep it at a top line growth rate or better. So sometimes it varies on quarter-on-quarter, I think you can expect that it will press advertising again this quarter, because again we have a hot product. We have got good line up and we want to make sure that gets in the account consumers' awareness in the 360 degree approach that David mentioned.

Tom Nikic -- Wells Fargo -- Analyst

All right. Sounds good. Best of luck for holiday and nice job getting the SG&A growth exactly in line with sales growth.

John Vandemore -- Chief Financial Officer

Thank you. I appreciate that.

Operator

Our next question is from Sam Poser with Susquehanna Financial Group. Please proceed.

Sam Poser -- Susquehanna Financial Group -- Analyst

Hi, gentlemen. Thanks for taking my question. Can you just follow up on the inventory? Can you give us some idea of what that incremental inventory was to support Mexico, sort of can you apples to apples the inventory for us. Because, I mean you're bringing in a ton and a lot of it -- I thought some of it might, is any of that inventory right now that came in early pre-emptive for tariffs in the US, number one?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Yeah. There is absolutely a little bit that was pre-emptive. It wasn't an enormous component of the overall inventory mix, simply because we didn't have enough time to react. If you recall, when we last spoke to you these tariffs didn't exist. And then within a couple of weeks, they were treated and subsequently enacted. So there's a little bit of growth in the inventory associated with the tariff in action. I would say probably a third of the growth year-on-year and inventory is attributable to the introduction of Mexico, inventory into the accounting. So it's a contributor for certain.

Sam Poser -- Susquehanna Financial Group -- Analyst

Okay. And then when you think about, you mentioned, I think, David, you mentioned that the given the growth of the DTC that the return would slow down. I guess, the question I have is, what is the -- what is that turn as you think forward in the way the mix is changing that you guys are looking as sort of a go-forward turns. So we can sort of judge the inventory, because the year-over-year that's sort of the best way to do it right now, because a lot of noise.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Well, as we said before, we don't really speculate significantly on the wholesale inventory. So that turns relatively quickly, that turns for us in probably 45 to 60 days. I think you would anticipate on a retail business because of the flows as they come in and replenishments. We believe probably have -- when you include the in-transits probably a 90 day or 90 day plus 90 to 100 day turn on the inventory, especially with direct-to-consumer. So it's not as significant right this minute, but if you take that into account for China as well as ourselves and Europe, there are some slight increases that just has to do with holding more inventory for our retail component. So they're all little pieces to the mix not -- no one of them fix out significantly.

Sam Poser -- Susquehanna Financial Group -- Analyst

And is there any of that inventory. I mean, how much of that -- what percentage -- let me ask you this way, what percentage of the overall inventory was in your DTC this year versus last year? Maybe you could break out the DTC inventory growth versus the other something. Just to help us, because I mean when you see your forward weeks of supply go bananas your year-over-year inventory is up a lot more than your -- a lot more than your sales are, and you're not looking for 60% growth going forward. So could you just sort of maybe give us more specifics on how that all, gets put together, please?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Well, we'll have to give it you, but we'll take a look, and we can give it too. As David said we have 65 more stores. If you just think the average size of the stores in the inventory, we end up with a significant number of payers. It could be in excess of 100,000 or 150,000 pairs. So that in and of itself is a few million dollars, that gets put into it just physically then and you take into account the stores are going to open. We opened 14 stores in the quarter. That's obviously also domicile then just goes out there. So I don't track that number in my head. I will get it for you.

John Vandemore -- Chief Financial Officer

Just to add to that, Sam, keep in mind with e-commerce becoming a more pronounced component of our direct consumer business. That's not -- and you don't see an equivalent number of store doors increasing that you can attach to that growth rate, but obviously to fulfill the commerce business, you need to have that inventory in-house.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

That's a fast growing store, look out that as 10 stores.

Sam Poser -- Susquehanna Financial Group -- Analyst

Got you. Okay. And then lastly you know -- when -- can you just dive into some of the categories a little bit more because and sort of what really are the drivers you talked. What we're really those driving categories in which ones are still sort of lagging or and have the opportunity. I think you talked -- you talked about men's. Can you give us some more details on sort of the category subcategory by gender, I guess, probably the best way to do it gender and categorize themselves?

John Vandemore -- Chief Financial Officer

Well, maybe a long [Speech Overlap] we have it take you a long time to walk through those things, but --

Sam Poser -- Susquehanna Financial Group -- Analyst

But when you mentioned men's and you mentioned some components of men's. Can you but which ones are sort of not where they need to be. I mean, we've heard that women's isn't quite doing as well in general versus vis-a-vis men versus men, bobs and work. So can you sort of just give us some positioning there?

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Well women's is a bigger business. So growth percentage is obviously get delayed our animal back from what it is. I don't know what you've heard about women's. I think our women's business is performing quite well and has grown faster than the whole domestic wholesale business on its own. So and you know categories get to why we have many signs, I think what's, what we've said in the past, which is true now, we have more categories and more different styles that are selling well and showing increases. We're not dependent on a single style. We're not dependent on a single category things come and go and we increase especially in our direct to consumer because we have more shelf space to play with, GOwalk has come back, so obviously something else is not moving quite as quickly because GOwalk has taken significant sell space. But we can go through a trade and we have to do that on a more to one-on-one personal basis.

I think it just to fill it out, men's has grown and continues to grow. Women's grows and continues to grow. We've had some issues but I've seen the light at the end of the tunnel we believe in kids that are coming off that lighted footwear that makes the comps difficult and a lot of sales in the marketplace, I think as exit. So we think kids are coming back, we are getting a lot of movement in it, but our adult business is doing very well. It's doing well on a very broad base and I think you guys know us well enough. If there is a category that's not doing well at this time it will do well in the next six months or we're bringing something new to it for back-to-school. Just as when you had issues with performance where women's or one of the other categories we've brought them back. We tend to develop product. We tend to bring it back to concentrate on one category or one product is not what we're about and it is a broad based geographically and by category.

John Vandemore -- Chief Financial Officer

Sam, I would just add to that. In doing channel checks, I would just ask you all to recognize that most of the channel checks are getting our domestic. So it's not always true what holds for the domestic market is holding internationally. And so there -- even though is a category that is suspect in the US, its performance outside the US has been strong, we've seen that before, so. As David mentioned, we're seeing broad comprehensive growth across most of the divisions when you take into account the global footprint of the brand and that's again another hugely encouraging sign in addition to the growth rates on the top line that we just put up.

Sam Poser -- Susquehanna Financial Group -- Analyst

All right. Thank you very much and good luck in the holiday season.

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

Thanks.

John Vandemore -- Chief Financial Officer

Thank you.

Operator

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

Alex -- Morgan Stanley -- Analyst

Hi, this is Alex starting on for Kimberly Greenberger. I just wanted to touch base and on the operating margin expansion, you guys delivered and it was pretty nice year-over-year. But just maybe a little shy of what the Street was expecting. We were hoping you could provide us just maybe with an outlook for 4Q, as well as kind of how you guys think about your medium to long-term targets as you move forward? Thank you.

John Vandemore -- Chief Financial Officer

Yeah. Thank you. So one is I do, I think it's noteworthy the expansion we saw in the quarter it follows now to other quarters of contributing on the operating margin line. As we look forward to Q4, we expect to be kind of flat to up slightly some of that's going to be the impact of the gross margin, nuance we mentioned earlier, in particular, around the impact of the tariffs, but our objective at the moment is to aim to be flat or up in the fourth quarter. In terms of our long-term goals they remain consistent with what we have said in the past. We will continue to invest in this brand to achieve these above market growth rates for as long as we see the run rate, we will want to harvest those investments as you're seeing the success of now to drive operating margin.

We certainly believe the long-term operating margins can't rest between in the low teen ranges that we've mentioned before. We're not changing that guide. The only caveat we give is that if there is an opportunity to invest ahead of the curve we will do so, because that has been successful in driving an increasing rate of growth on the top line, so far this year and continued growth that we expect in Q4 and beyond.

Alex -- Morgan Stanley -- Analyst

That's super helpful. Thank you.

Operator

And our final question is from Susan Anderson with B. Riley, FBR. Please proceed.

Susan Anderson -- B. Riley FBR -- Analyst

Hi, good evening. Thanks for taking my question. Nice job on the quarter. I guess just a follow-up very quick on the kids business. So it sounds like it was maybe negative in the quarter. Can you just remind us when you fully start to cycle the tougher compares from lighted footwear.

John Vandemore -- Chief Financial Officer

Yeah, it will start in the first quarter of next year, first and second quarter of next year, we'll start to cycle through again to David's point we're certainly seeing some positive trends develop in kids, now is a very difficult comp with a very successful product for us last year in the year before. So we believe that we'll be getting closer to a range of stability if not returning to growth soon in the kids business.

Susan Anderson -- B. Riley FBR -- Analyst

Great. And I guess just one more question. I think you mentioned on the GOLF line getting into some green grass shops. I guess how big do you think the opportunity could be longer term? Is that something that could potentially move they need all for you guys?

John Vandemore -- Chief Financial Officer

I think it moves the needle for us just an imaging. I mean GOLF is only so big we're picking it up worldwide and it is growing and it is a nice piece to have. But I think we look at it in that the golfer both male and female around the world are our core customers to begin with and that's just another way to keep us a top of mind and in their closet and looking forward. So just as with any technical issue, we use it as an umbrella for the product to show the quality and what we can build. But in GOLF in particular, because it does move along demographics. I think it all there and it is our core customer, it just keeps top of mind of what we can do and make them comfortable as we go. So we think it's a very positive. In addition [Indecipherable] brand, GOLF.

Susan Anderson -- B. Riley FBR -- Analyst

Great. That's helpful. Thanks so much guys.

John Vandemore -- Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session, as well as the conference. I would like to turn the conference back over to the company for closing remarks.

John Vandemore -- Chief Financial Officer

Thank you again for joining us on the call today. We would just like to note that today's call may have contained forward-looking statements. As a result of various risk factors, actual results could differ materially from those projected in such statements. These risk factors are detailed in Skechers filings with the SEC. Again thank you and have a great day.

Duration: 58 minutes

Call participants:

Unidentified Speaker

David Weinberg -- Executive Vice President, Chief Operating Officer and Director

John Vandemore -- Chief Financial Officer

Jay Sole -- UBS Investment Bank -- Analyst

Laurent Vasilescu -- Macquarie Group -- Analyst

Omar Saad -- Evercore ISI -- Analyst

Chris Svezia -- Wedbush -- Analyst

Peter McGoldrick -- Stifel -- Analyst

Tom Nikic -- Wells Fargo -- Analyst

Sam Poser -- Susquehanna Financial Group -- Analyst

Alex -- Morgan Stanley -- Analyst

Susan Anderson -- B. Riley FBR -- Analyst

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