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Steven Madden, Ltd (NASDAQ:SHOO)
Q3 2021 Earnings Call
Nov 3, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Steve Madden Limited 3rd Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host Danielle McCoy.

Danielle McCoy -- Director of Corporate Development & Investor Relations

Thanks, Phyllis, and good morning, everyone. Thank you for joining our Third quarter 2021 earnings call and webcast. Before we 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. Such statements may include discussions involving the ongoing COVID-19 pandemic including its current and expected impact on our business operations and results, as well as the company's plans to respond to such uncertain and dynamic events. Because these statements are based on current assumptions and expectations, they involve known and unknown risks, uncertainties and factors not within the company's control and as such and our actual performance and results may differ materially from these statements. Our annual report and other reports filed with the SEC from time to time include detailed discussions of the risks 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 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 discussed 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 are Ed Rosenfeld, Chairman and Chief Executive Officer; and Zine Mazouzi, Chief Financial Officer.

With that, I'll turn the call over to Ed.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thanks, Danielle. Good morning, everyone, and thank you for joining us to review Steve Madden's Third Quarter 2021 results. In the third quarter, we delivered the highest quarterly sales and earnings in our history with revenue increasing 5% and diluted EPS increasing 22% compared to pre-pandemic third quarter 2019, results that demonstrate the company's disciplined execution of its key strategic priorities. Our number one priority, as always, is to create trend right product and get it to market ahead of our competition and I could not be happier with our team's performance on that front. We have relied on our proven move [Phonetic] which combines our talented design teams led by Steve, our test and react strategy and our industry-leading speed-to-market capability to deliver trend right product assortments that are winning with the consumer and enabling us to outperform the competition and take market share, particularly in our flagship Steve Madden brand.

We are also supporting this great product with increased investment in marketing. In addition to continuing to scale our digital marketing efforts to drive our e-commerce business, last month we also launched our largest brand campaign in years called the Maddenverse. The campaign features 3D avatars of artists and social media favorites Normani, Sydney Sweeney, Nessa Barrett, Justine Skye and Jordan Alexander. Bold, creative, empowered and authentic women that embody the spirit of the Steve Madden brand. The campaign harkens back to our iconic Big Head Girl adds from the '90s reflecting the same phone and rebellious attitude but with modern elements like avatars and immersive content that includes an augmented reality shoe try-on feature and Instagram filters that enable consumers to morph into the avatars of their favorite artist.

This combination of outstanding product and enhanced marketing is driving deeper connections with consumers, which in turn is fueling our progress on our next strategic initiative accelerating our direct to consumer business led by digital. Our retail segment revenue grew 62% in the quarter compared to 2019 including outstanding performance in both digital and brick-and-mortar channels. Our e-commerce business continued its exceptional momentum with revenue increasing 84% 2020 and 200% versus 2019, and our brick and mortar business accelerated meaningfully. Global brick-and-mortar comp store sales increased 16% compared to 2019 including a 23% comp store gain in our US stores. The outstanding revenue performance, combined with strong gross margin due to low levels of promotional activity as well as controlled expenses resulted in EBIT contribution from the retail segment of $22.5 million in the quarter compared to $3.5 million in the third quarter of 2019.

Another of our strategic initiatives is to expand our business outside of footwear and here, we are focused on our largest non-footwear category of handbags as well as our emerging apparel business. In handbags, our multi-year investment in our Steve Madden branded handbag business continues to pay dividends. With that business reaching new heights this year in both wholesale and direct to consumer channels in both domestic and international markets. While third quarter Steve Madden handbag revenue was down to 2019 due to wholesale shipments that moved out to Q4 as a result of supply chain delays, the Steve Madden bag business remains on track to increase approximately 20% for the full year compared to 2019 including more than 100% growth in direct to consumer channels. We also continue to gain traction in our BB Dakota Steve Madden apparel business where we are seeing strong sell-through performance at our key wholesale accounts driven by success with dresses, shirts jackets and vegan leather across all classifications.

Another key priority is to grow our international business, and we also continue to make progress on that initiative. Earlier this year, we acquired the remaining 49.9% share that we did not already own of our European joint venture and that business remains our leading international growth driver. Revenue for our directly operated SM Europe business increased 45% in the quarter compared to 2019 despite significant wholesale shipment move-outs to Q4 as we continue to have exceptional momentum in the region particularly in digital channels.

Finally, even as we seek to capitalize on the distribution channel and product category expansion opportunities i've touched on, we remain focused on strengthening the US wholesale footwear business that is the core of our business. This business saw a market improvement in the third quarter as our wholesale customers reacted to our strong sell-through performance with increased orders. Due to shipments that moved out to Q4, our overall US wholesale footwear revenue remained down low-single digits to 2019 in Q3, but our Steve Madden brand US wholesale footwear revenue was up 15% to 2019 including a 25% increase in Steve Madden women's demonstrating the brand heat and trend right product assortment in our flagship brand.

Looking ahead to the fourth quarter, we are poised to deliver strong growth versus 2019 in the US wholesale footwear business overall. As we do all of this, we also continue to embrace the opportunity and the responsibility we have to create positive change for our people and our communities. Highlights in the last three months included the establishment of a new employee resource group for Latin mix employees called dela sol [Phonetic], the launch of our new partnership with the business school at Howard University to reimagine its retail curriculum and the launches of new collections for our Steve Madden Kids adaptive line as well as for Cool Planet by Steve Madden. We also laid the groundwork to establish the Steve Madden foundation by the end of the year to organize and enhance our charitable giving strategy as we seek to maximize our positive impacts going forward.

In summary, I'm very pleased with our performance in the third quarter and more broadly with the progress we are making on the key strategic initiatives that will enable us to continue to drive sustainable and profitable growth going forward.

Now, I'll turn it over to Zine to review our third quarter financial results in more detail and provide our updated guidance for fiscal 2021.

Zine Mazouzi -- Chief Financial Officer

Thanks, Ed, and good morning, everyone. Our consolidated revenue in the third quarter was $528.7 million, a 52% increase compared to 2020 and a 5.3% increase versus 2019. Our wholesale revenue was $402 million, up 41.6% compared to the prior year and down 4.6% compared to 2019. These results included a significant impact from shipments that moved out into the fourth quarter due to supply chain delays. We estimate Q3 wholesale revenue would have increased low-single digits in 2019 if not for those move-outs. Wholesale footwear revenue was $304.2 million, a 42.6% increase from 2020 and a 3.7% decline from 2019. In the US, the Steve Madden women's business was a standout increasing 25% compared to 2019. Betsey Johnson and Dolce Vita also had strong gains for 2019. These increases were offset by the absence of the Kate Spade footwear license we had in 2019, as well as declines to 2019 in Blondo, Anne Klein and private label. Outside the US, strong performance in Europe was offset by softness in Canada due to a slower recovery from the pandemic and the impact of the supply chain delays.

Wholesale accessories and apparel revenue was $97.8 million, up 38.7% to last year and down 7.4% versus 2019. When comparing to 2019, the decline in the segment was primarily driven by supply chain delays, partially offset by an increase in apparel as a result of only own and BB Dakota for a portion of the quarter in 2019. We expect both wholesale footwear and wholesale accessories and apparel to show strong double-digit growth versus 2019 in the fourth quarter.

In our retail segment, revenue was $123.1 million, a 108.6% increase compared to 2020 and 62.5% increase compared to 2019. E-commerce was the primary driver of direct-to-consumer growth versus 2019. E-com revenue grew 83.7% compared to 2020 and 200% compared to 2019. E-commerce accounted for 49% of our total retail segment sales in the quarter compared to 26% in 2019. Brick-and-mortar performance was also strong, as Ed, mentioned global comp store sales increased 16% compared to 2019 and domestic stores increased 23% compared to the same period.

We ended the quarter with 216 company-operated retail stores including 66 outlets and six e-commerce websites, as well as 17 company-operated concessions in international markets.

Turning to our licensing and first cost segments. Our licensing royalty income was $2.7 million in the quarter compared to $2.6 million last year and $2.9 million in 2019. First cost commission income was $1 million compared to $1.5 million last year and $1.9 million in 2019. Consolidated gross margin was 41.6% in the quarter, up from 40.3% in the prior year and 39% in 2019, an increase of 260 basis points versus 2019. Wholesale gross margin was 33.6% compared to 34.6% last year and 33.9% in 2019. The modest decline compared to 2019 was the result of increased freight rates and the non-renewal of GST partially offset by higher average selling prices and lower markdowns. Retail gross margin was 65.9% compared to 63.8% last year and 63.3% in 2019. The increased in 2019 include margin improvement in both digital and brick-and-mortar channels, driven by a reduction in promotional activity, which more than offset the headwind from increased freight rates. Operating expenses were $131.6 million in the quarter compared to $93.7 million last year and $123.6 million in 2019. The increase versus 2019 is primarily driven by our continued investment in performance marketing to fuel the growth of our e-commerce business. Operating income for the quarter was $88.4 million or 16.7% of revenue, up from $46.2 million or 13.3% of revenue last year and $72.3 million or 14.4% of revenue in 2019. Our effective tax rate for the quarter was 24.4% compared to 29.3% in 2020 and 22.6% in 2019. Finally, net income attributable to Steve Madden Limited for the quarter was $66.6 million or $0.82 per diluted share, up from $31.8 million or $0.39 per diluted share in 2020 and $56 million or $0.67 per diluted share in 2019.

Moving to the balance sheet, our financial foundation remains very strong. As of September 30, 2021, we had $259.9 million of cash, cash equivalents and short-term investments and no debt. Inventory totalled $201.2 million, up 83.4% compared to last year or up 35.9% compared to 2019. Note that due to the global supply chain disruption, in-transit inventory was up 229% to 2019 and represented approximately 51% of our inventory at quarter end compared to approximately 21% at the end of the third quarter of 2019. On-hand inventory was down 16% at the end of Q3 compared to 2019. Our capex in the quarter was $1.8 million. During the quarter, we repurchased approximately 773,000 shares or $31.9 million which include shares acquired through the net settlement of employee stock awards. Yesterday, the Board of Directors approved an increase in the company's share repurchase authorization to $250 million. The company's Board of Directors also approved a quarterly cash dividend of $0.15 per share, the dividend will be payable on December 27, 2021, to stockholders of record as of the close of business on December 17, 2021.

Turning to our outlook. While the global supply chain disruption remains a significant headwinds, our performance in the third quarter and the momentum we are seeing in our business gives us confidence to raise our fiscal 2021 guidance. We now expect revenues to increased 50% to 62% compared to 2020 and we expect diluted EPS to be in the range of $2.30 to $2.35.

And now I would like to turn the call over to the operator for questions. Phyllis?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Camilo Lyon with BTIG. Please proceed with your question.

Camilo Lyon -- BTIG

Thank you. Good morning, everyone. Great job on the quarter. I want to start out with the guidance. The Q4 guide is a very strong guidance. I think you raised about the fourth quarter EPS by about $0.15 or so implied above current street estimates, and I think sales are implied to be up 27% versus '19. Again, that's compared to up 5% in Q3. Can you unpack what's driving that acceleration? Maybe parse out the later shipments that slipped from Q3 into Q4, how much of is it reorders, the split between wholesale and DTC.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Sure. Good morning, Camilo. Thanks for the question. So in terms of what gives us confidence to raise the guidance like this, it's really that the strength and the momentum and the brand heat that we're seeing in the flagship of Steve Madden brand. So if you look at where we have raised our internal forecast versus where we were three months ago, the big -- the two big areas are our direct to consumer business which continues to have just incredible momentum in both digital and brick-and-mortal channels. And then also that Steve Madden women's US wholesale footwear business that we called out earlier was up 25% to '19 in Q3 and we anticipate -- we'll see even faster growth compared to '19 in Q4.

In terms of the acceleration of the business from Q3 to Q4, that's really about the acceleration in our wholesale business. The DTC, we think it's going to grow even faster than wholesale but it's been growing at a very rapid clip. You said that was up 62% to 2019 in Q3. But wholesale, which was down about 5% in Q3 to '19, we're forecasting to be up mid, mid-teens to low '20s versus '19 in Q4. And that's really just a function of the -- our wholesale customers catching up to these incredible sell-throughs that we've had. We've been talking to you all year about how if you're compared to '19 our sell-throughs were dramatically outpacing our shipping and our stock levels at the wholesale customers and you're seeing that now -- now catch-up.

You asked about the move-outs, the impact of the move-outs. There is some benefit to Q4 for move-outs from Q3, we expect -- we estimate that about $30 million of wholesale shipments moved out from Q3 to Q4. However, we've also built into our forecast an assumption of about $20 million falling out of the end of Q4 into Q1. So the net impact there is relatively modest, only about $10 million.

Camilo Lyon -- BTIG

That's great color. Thank you for that. As a follow-up to that line of questioning, how does this impact the conversation for the first half of 2022 with your wholesale partners? And then -- and then my -- my second question really is more of a broader kind of question on your digital strategy. If you could just give us kind of an update on the progress that you've made with your digital strategy, where were you say three years ago versus where you are today from a sales and profitability perspective, that would be very helpful.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Sure. Yeah. As we go into -- into the first part of '22, obviously, the success that we're having at retail, the sell-throughs that we're seeing obviously positions us well with our wholesale customers for a nice open to buy commitments for the first part of '22. I think we're not putting out '22 guidance today. So I'm not going to put numbers around that but, certainly, we do feel good about how we're positioned. We've been an outperformer in terms of sell-through and we're taking share in the wholesale channel and expect to for the first part of '22.

In terms of digital, that has been really a top priority for our company over the last -- over the last few years and we have specifically with respect to our owned and operated e-commerce business, we have invested in talent, we have invested in digital marketing and we have invested in ongoing site enhancements. And then we have connected that to our strong brands and outstanding product and the combination of all of that has yielded some really powerful results. So you asked about where we were three years ago. 2018, we were doing a little over $50 million, I think it's about $56 million in revenue in our owned and operated e-commerce business and it was making a single-digit operating margin. So the profit contribution there was less than $5 million.

In -- three years later, 2021, we are going to approach $250 million in owned and operated e-commerce revenue with a 20% operating margin contribution. So I don't think it's overstating it to say that that -- over that three-year period, that's a fundamental change in the complexion of our business and I think it also really meaningfully improves our growth opportunities that we have going forward because we really feel like we're still in the early stages of this digital journey.

Camilo Lyon -- BTIG

That's fantastic color. Thank you. Good luck with the close of the year.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Erinn Murphy with Piper Sandler. Please proceed with your question.

Erinn Murphy -- Piper Sandler

Great. Thank you. Good morning. I may just following up on that conversation. I was hoping you could share a little bit more about your new marketing campaign. What is the customer response been thus far? And then how is that converting within the Steve Madden footwear versus a handbag opportunity you spoke to?

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. Thanks for asking about that, Erinn. So we're excited about the new campaign and we feel really great about the response. We just felt like given the brand heat that we had in Steve Madden and this really, really strong product assortment and what we're seeing in the brand overall that now is the time to kind of throw gas on it and and really step up with some exciting marketing, and we feel like we've done that here. The response has been great, fantastic digital and social engagement. We've had some viral moments on TikTok which has been -- which has been fun. Big increase in the search interest for the brand online and it is driving traffic and sales online but also into stores. So really just excited about -- about the customer response and -- so you asked about footwear versus handbags with respect to the campaign, was that right?

Erinn Murphy -- Piper Sandler

Yeah. Just how it's converting because I'm just curious how you're seeing the customer come -- or convert against that campaign across the two categories.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. I guess the campaign was more -- certainly more footwear focused. So if you're talking about direct sales that we think are directly coming from the campaign, then that would certainly lean much more toward shoes. But our direct to consumer channels, overall, our handbag growth is pretty explosive. And in fact, it's outpacing what we're seeing in shoes, and we're really excited about -- about that momentum in handbags particularly in direct to consumer channels.

Erinn Murphy -- Piper Sandler

Great. Got it. And then my second question is just around your supply chain that you guys have been very nimble with moving production into Mexico, Brazil. Can you just kind of take a step back and give us kind of an overview of where your biggest concentrations are right now for production and then what are you seeing with the lead times? And if you had to resort to air at all, if you think about holiday and even early spring deliveries? Thanks.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Sure. Yeah, look, the supply chain, it's no surprise. It has been a big -- a big headache for us as it has been for everybody else. As you point out, we did move close to half of the Steve Madden Women's in line production to outside of China or outside of Asia to Brazil and Mexico for fall, and we think that's -- we're very pleased that we did that. It has not that -- those countries have been without their challenges but we certainly think we're better off for having done that. If you look at the company overall, of course, we're still majority in China with the Cambodia would be our second largest country of origin. We make a lot of handbags there and then we spread out across a number of other countries.

In terms of having to air. Yes, we have had to do to utilize more air freight. That's primarily in our direct to consumer segment in our retail business a year ago. For the year, that was -- it was probably about 17% of our goods were coming via air. This year to date, I think we're up around 30%. Zine, is that right?

Zine Mazouzi -- Chief Financial Officer

That's correct. 30% this year, 17% last year and it was about 11% the year before.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. So we have utilized more air and of course that's been expensive because air freight rates are up significantly.

Erinn Murphy -- Piper Sandler

Great. Thank you so much.

Operator

Your next question comes from the line of Paul Lejuez with Citi. Please proceed with your question.

Kelly Crago -- Citi

Hi, this is Kelly Crago on for Paul. Thanks for taking our question. I just want to follow up on your conversation around the retail channel. Just hoping you talk about where the penetration of that business overall could grow to over time and we believe retail EBIT margins could shake out longer term, just given the strength of the e-com channel. And I think in the recent past, I think the retail business has only reached maybe at a high single-digit margin at best. So just curious where you think that could go longer term. Thanks.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yes. That's a really -- thanks for the question, Kelly. That's -- that's something that we're really excited about. And if you look about the business when it looks like this year versus pre-pandemic, that's a really significant shift. So back in 2019, our retail segment was about 18% of our -- of our total sales. And this year, I think it's going to be up about 800 basis points. It will be over a quarter of the business. And more importantly, the profit contribution is up dramatically. So whereas it was only contributing about 5% of our profits back in 2019, this year it will be about a quarter of our profits. And so in terms of the EBIT margins there, even this year we're on track to do -- to do mid-teens or potentially even a little bit better than that which -- which we're very excited about.

Kelly Crago -- Citi

Got it. And then I just wanted to dig into the gross margin a little bit. Could you talk about how much of a drag freight was in 3Q? What do you expect that to be in the fourth quarter? And then when we think about the gross margin trajectory beyond 2021, do you expect some normalization there in 2022 that could lead to pressure or just any color on that line item, the puts and takes there as you think about the future. Thanks.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. Zine, take the freight and then I'll address '22.

Zine Mazouzi -- Chief Financial Officer

Okay. So, thanks for the question. So for Q3, the freight was about 270 basis point drag on the margin and the GST was about 50 basis points and for Q4, we're estimating that the freight will be somewhere around 260 basis points, which brings the year to about 230 basis points, roughly.

Edward Rosenfeld -- Chairman & Chief Executive Officer

So in terms of next year, again, not providing guidance yet, but I can give you some color on what we see as the puts and takes. Obviously, it's been -- there has been very low levels of promotional activity for us this year and for the industry overall. So we're certainly going to work very hard to maintain that discipline going forward, but there are competitive dynamics at play and we'll have to see what that looks like for the industry overall next year. So, potential point of pressure. We are also seeing FOB price increases, factory price increases, based on pressure on labor and as well as materials. So that's a bit of a headwind going into next year. However, on the other side, we are also raising our selling prices to combat that and we also are hopeful certainly that GSP is going to get renewed because that's been a significant headwind as Zine outlined. And then as we go into the back half of '22, we're also hopeful that there is some relief of the freight pressure.

Kelly Crago -- Citi

Got it. Thank you.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Tom Nikic with Wedbush Securities. Please proceed with your question.

Tom Nikic -- Wedbush Securities

Hey, good morning, everyone. Thanks for taking my questions. I'm kind of looking at your, I guess, in the wholesale segment, your first half of this year versus second half and in the first half, I think your revenues versus 2019 were still down something like 20%. As we look to the first half of 2022 like, I mean, do you think we get kind of back to pre-COVID levels? Is there like some reason why your first half revenues would be kind of structurally lower than they were pre-COVID, like anything like that. I'm just trying to think about how to think about the spring season.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Well, I, again, not going to provide specific guidance, but obviously we do think we have an opportunity for a nice improvement in spring of '22 in wholesale compared to what we did this year. And, no, I don't think there is anything structural that would prevent us to get back to '19. Perhaps [Phonetic], if you recall, we had some like a one-time program that we didn't anniversary in the private label area back in Q2 of '19 which we talked about earlier this year. But putting that aside in the ongoing businesses, no, I think that we're certainly going to target to get back to '19.

Tom Nikic -- Wedbush Securities

Got it. Understood. And then I also want to touch on Europe. I think you've been pretty bullish on Europe this year, and I think earlier this year you said you were targeting $55 million of revenue in Europe this year, which would have put it at about 3% of sales. Like a, it's -- you are trending better than that. Like should we think that Europe is going to come in somewhere better than that $55 million? And then these -- I don't know if you can talk longer term or like how meaningful do you think like Europe can be going to be 10% of sales, anything like that. Just any thoughts on Europe bigger picture would be great. Thanks.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yes. So we continue to have really strong momentum in Europe. So, is that -- the $55 million you're referring to was for the SM Europe business that we -- the joint venture where we bought out the remaining interest earlier this year and that business has continued to trend up. So it will actually do north of $60 million this year, which puts it over 85% ahead of where it was in 2019. So very strong growth there. If you look at the EMEA region, overall, we're going to be close to $100 million this year, and we continue to feel like we're in the very early innings in that region of our growth journey. And in terms of what the opportunity is, it's multiples of what where we are today.

Tom Nikic -- Wedbush Securities

Understood. Thanks very much and best of luck this holiday season.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thanks, Tom.

Operator

Your next question comes from the line of Janine Stichter with Jefferies. Please proceed with your question.

Janine Stichter -- Jefferies

Hi, good morning. I was hoping you could talk a little bit about the trends by product category. I know you've had a bit of a head start in the dress shoe category. Curious what you saw in sell-throughs there and if you feel like the competition start to catch up at all and then initial reads on boots and what you're seeing in that category. Thank you.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. So dress shoes continues to be an outstanding category for us. We have seen some of our competitors get some more product out there in the category but it has not slowed down our performance at all. And we're seeing success with with really a range of products within that category. So open-up dress, closed-up dress, various heel heights, it's just been a fantastic category for us and particularly in our direct to consumer channel is really -- really -- really driving a significant driver. And then boots are also performing very well for us. Doing great with Lug-sole boots, Chelase boots. So that western boots performing, a bunch of things happening there too. And that's a very strong category as well.

Janine Stichter -- Jefferies

Great. And then just a follow-up on the price increases. Is that something you've taken already or something we should expect more into spring and maybe if you could quantify the magnitude.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. So for fall, I think we have layered on some price increases. We've done it selectively. If you were to you to look at it as an average as comfortably low single digits. But, again, that's our initial. The AURs are up much more significantly than that because of the lack of discounting. So if you look at our retail segment, our direct to consumer channels, our AURs are up 20% plus versus '19. But as we go into spring, we're going to take a little bit more price on the initials and I think you could see that looking more like 5% to 10%.

Janine Stichter -- Jefferies

Great color. Thank you.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Marni Shapiro with Retail Tracker. Please proceed with your question.

Marni Shapiro -- Retail Tracker

Hey, guys, congratulations. Amazing quarter and the stores look outstanding when they're in stock. I think you just said your spring -- I just want to make sure I heard this right, spring initials could be up 5% to 10%. Are you expecting to layer in some level of promotion and some normalcy promotion so that your AURs end up about the same as the back half of this year or are you expecting the promotion should remain pretty clean through the back half of this year and into spring? So it would -- it would assume that AUR be up even more.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. Our plan is to continue to have very controlled promotional activity.

Marni Shapiro -- Retail Tracker

And even through holiday?

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. It doesn't mean none because I think the consumers expect some level of promo activity during holiday. But -- but certainly compared to where we were pre-pandemic, less promotions.

Marni Shapiro -- Retail Tracker

And can I just ask you one sort of bigger picture question? You guys have some really unbelievable sold out products and I see them across the board, whether it's online at your wholesale DTC, your own DTC in department stores, in your own stores. I'm listening to customers chase products down the like the last -- very last shoe in a chain of stores. When you get in a reorder and I'm going to pick on the Maxima because it's on my screen right now. When you get into reorder or delivery of that, how companywide, how do you prioritize where that delivery goes? If the black Maxima comes in, does it go first to your own stores, you own DTC, wholesale DTC? How does that all factor in so that you're keeping your wholesale partners happy but feeding the best margin businesses? How does that work?

Edward Rosenfeld -- Chairman & Chief Executive Officer

Well, it's a balancing act, for sure. Look, the Maxima throughout the year has been in and out of stock going back to the early parts of the year. And one of the things we've been doing on our own website is taking a lot of pre-orders. So -- or back orders. So customers are placing orders. So those customers as soon as we get the product in, then we're giving it out to those e-commerce customers who have already placed the order, and we're obviously prioritizing our own direct to consumer channels, but we also take care of our -- of our best wholesale customers, our full-price wholesale customers because that remains an important business for us and we need them to be successful as well.

Marni Shapiro -- Retail Tracker

Okay, great. Best luck for the holiday, you guys.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jay Sole with UBS. Please proceed with your question.

Jay Sole -- UBS

Great, thanks so much. And I'm wondering if you can just elaborate a little bit on if -- where we are in the whole return to work or return to party cycle because it seems like there's a lot of things going on. There's a lot of fashion trends, there is a rebound from the pandemic, there's market share gains. So just wondering how you feel about those different things and specifically like if you still see a lot of rebound potential in the whole wear-to-work and return to group events type business.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. It's a good question. It's hard to say exactly how far along we are, but I will say that in terms of the return to -- I think you called it return to party, we've been seeing that for some time and if you look at the strength that we've had in dress shoes even started spring but continuing through now, I think that's -- evidence is that -- evidence that consumers are returning to going out and going to events, etc. And our dress shoe penetration right now is running ahead of where it was in 2019 and actually by a pretty significant margin and -- but again, that's in Steve Madden, and that's really I think the end use there is going out. It's not -- it's not necessarily going to work. I think that wear-to-work dress shoe business is still not back to where it was pre-pandemic and we'll have to see how that shakes out going forward if it ever -- if it ever returns exactly to where it was.

Jay Sole -- UBS

Got it. Okay, thank you so much.

Operator

Your next question comes from the line of Laura Champine with Loop Capital. Please proceed with your question.

Laura Champine -- Loop Capital

Hi, thanks for taking my question. It's about inventories, which I know there's a lot of talk about supply chain issues and out-of-stocks but inventories were up 80%. I know you run them tight. Is that just to meet demand for some of the products you mentioned has been moved out into Q4 or does this represent you're getting a more adequate safety stock in place as we -- as we move into reorders?

Edward Rosenfeld -- Chairman & Chief Executive Officer

So, I guess, [Indecipherable] I would say, I don't think the right comparison as to where we were a year ago. I think it's probably make sense to look back to 2019 and relative to '19, we were up about 36% and as Zine outlined earlier, that's all driven by that in-transit number, which is up significantly. Beyond hand is actually down but in- transit obviously because of the much longer lead transit times is up.

And, Zine, is there any other color you want to provide there?

Zine Mazouzi -- Chief Financial Officer

No. It's just that it lines up nicely when you look at the in-transit being up to 129% and the on-hand, down 16 as we said before, and you look at what we're guiding for Q4 as well as the shipped that we had for orders that were in our inventory at the end of Q3 but we're shipping in October because of that $30 million that I had mentioned earlier. Everything lines up pretty nicely against our guidance and we feel good about the health and balance of our inventory.

Laura Champine -- Loop Capital

Got it. Just as a quick follow-up, how does this kind of gummed up system impact your strategy for inventory management this spring?

Edward Rosenfeld -- Chairman & Chief Executive Officer

Well, we do have to place orders a little bit farther out than we normally do. We've also had to encourage our wholesale customers to place their orders farther out than they normally do, which they have -- which they have done. So, as you know, speed to market is really critical to our strategy. So we don't like the fact that our lead times are lengthened here, but the good news is, we do feel that our relative advantage compared to the competition is maintained. So while our lead times are extended, everybody else is our too and we still feel like the speed advantage that we have versus everybody else is intact.

Laura Champine -- Loop Capital

Understood. Thank you.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thanks, Laura.

Operator

Your next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Sam Poser -- Williams Trading

Thanks for taking my question. Most -- most have been answered, but I just want to ask you talked about the choices about how you're going to allocate some of the products, what do you got the hot stuff. Given the product -- the slow production and slow transit that's happening, are you making decisions with the off-price channel or with lower large -- lower margin accounts where you're going to feed the full price business is more to get the higher margin product made?

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. So as you would expect, our first priority is always feeding full price channels.

Sam Poser -- Williams Trading

Also, Zine, the merch mar -- I mean, it sounds like the merchandise margins were up like 450 basis points in the quarter, is that right on a year-over-year basis?

Edward Rosenfeld -- Chairman & Chief Executive Officer

Let me just where [Indecipherable] can follow up. There is a mix shipped also here. If you look at the consolidated number, there is a -- there is mix shipped from retail becoming the bigger percentage of the mix. So I don't think you can just necessarily take the consolidated number and then back out the freight in GSP. But certainly merch margins were up across wholesale and retail. Is there's anything else you can add?

Sam Poser -- Williams Trading

You give us some idea of how much the merch -- can you give us the details on that especially on wholesale given well...

Edward Rosenfeld -- Chairman & Chief Executive Officer

Well, wholesale, I think Zine outlined about 180 basis points of pressure from freight and GSP, that's versus '19 and the overall margins were down 30 bps to '19 in wholesale.

Sam Poser -- Williams Trading

So, I mean, so just you're selling [Indecipherable] now. Now that you sort of have this new normal going on with the merch margins going forward once the dust settles, whatever that is, how do you go about sort of sustaining especially in wholesale that much higher number than '19 for the pre-pandemic [Indecipherable].

Edward Rosenfeld -- Chairman & Chief Executive Officer

Well, I mean that's mostly about inventory management and discipline around inventory, around markdowns and that's something that we feel is a core strength of our company and we're going to continue to lean on that.

Sam Poser -- Williams Trading

And then last -- thank you. And then lastly the -- your business with Walmart and Target, that business, what does that look like now? Do they take possession at the factory and are they shipping the goods? Can you give us a little color on that on the private label business?

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. So most of that business, they take possession overseas. And so they are the ones bring bringing it over here. We do have part of that business where we land the goods. But again, most of it, they take possession overseas.

Sam Poser -- Williams Trading

And how does that business looking these days?

Edward Rosenfeld -- Chairman & Chief Executive Officer

It's doing well. The private label was down in Q3 because of move-outs. Poducts that we were hoping to get out, be it talent of Q3 that fell into Q4, but we do anticipate -- so it was down in both -- our private label is down in both shoes and accessories compared to '19 in Q3 but we expect to be up in both shoes and accessories in Q4.

Sam Poser -- Williams Trading

Thanks very much. Continue to excel.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thanks, Sam.

Operator

Your next question comes from the line of Susan Anderson with B. Riley. Please proceed with your question. Susan, your line is open.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Hello?

Susan Anderson -- B. Riley

Can you hear me?

Edward Rosenfeld -- Chairman & Chief Executive Officer

I can.

Susan Anderson -- B. Riley

Okay, great. Sorry. I guess I was on mute. So just wanted to follow up on the women's business and at the price that you moved to Brazil and Mexico, I'm just curious is that allowing you to be better in-stock versus your peers and are you still seeing some shelf space gains because of that and then I'm just curious, are you able to chase it all with that business given it is closer to North America or is it still tough given the supply chain issues?

Edward Rosenfeld -- Chairman & Chief Executive Officer

Yeah. Thanks for the question. I do think that we benefited from the shift of production to Brazil and Mexico and our ability to chase is better there, particularly out of Mexico. Still, I think overall, our ability to chase was not what it normally -- what normally is, that's for sure. But Mexico did give us -- give us more opportunity to do that. And, yes, I do think that -- that helped us overall versus the competition but the big thing that's helping us against the competition is that we have shoes that the consumer really wants and the sell-throughs are great and the consumer demand for the product is great. That's really the driver more than the country of origin of the product.

Susan Anderson -- B. Riley

Great. And then just one other follow-up question on the SG&A for the fourth quarter. I guess should we think about it being up in similar magnitude as we saw in third quarter to '19 levels?

Edward Rosenfeld -- Chairman & Chief Executive Officer

No. If you're compared to '19, definitely, the growth will be higher in Q4. Obviously, the sales versus Q4 accelerating meaningfully and it's also a much higher -- there is a higher penetration of retail or DTC in Q4, which carries a higher SG&A.

Susan Anderson -- B. Riley

Got it. Okay, great Thanks so much. Good luck this holiday..

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Steve Marotta with C.L. King & Associates. Please proceed with your question.

Steve Marotta -- C.L. King & Associates

Good morning, Zine and Danielle. I appreciate you taking my question. As it pertains and as you sort of answered, that's a little bit on the last question, but I'm curious as to the composition of COGS from the Americas, meaning, Central and South America versus the Far East in the third quarter and what you would expect in the fourth quarter and maybe how that looks next year. It doesn't have to be more specific numbers to the 10th of a percent, but I'd like to know from a composition standpoint generally where it is now and where that will trend toward?

Edward Rosenfeld -- Chairman & Chief Executive Officer

Well, look, again, when you look at the business overall, because we have a lot of business. We've talked a lot about the Steve Madden Women's in line business and that shipped to Brazil and Mexico. But when you look at the business overall, we're still over 70% out of China. And then when you add in some of the other countries in Asia, that's still makes up the bulk of the business. Brazil and Mexico getting bigger but still single digits as a percentage of the total because, again, we don't -- as of now, we have not been doing anything in those countries in any of the private label areas or the more moderately priced businesses that we have.

So that's still what it looks like today and as of -- as of now, I think it's going to look somewhat similar to that next year. I mean, we will continue to diversify out of China. But right now, for instance, we had some of the stuff that was in Vietnam, we pulled back because of obviously the shutdowns that were -- that that country, the South Vietnam experienced over the last few couple of months.

Steve Marotta -- C.L. King & Associates

So no major sourcing differentials next year versus this year?

Edward Rosenfeld -- Chairman & Chief Executive Officer

No, I think you'll still see Mexico and Brazil grow. But generally speaking, it will be similar.

Steve Marotta -- C.L. King & Associates

Terrifically helpful. Thank you.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Thanks.

Operator

And at this time, there are no further questions. I would like to turn the call back over to management for any closing remarks.

Edward Rosenfeld -- Chairman & Chief Executive Officer

Great. Well, thanks everybody for joining us this morning and have a great day. And we look forward to speaking with you on the fourth quarter call. Bye.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Danielle McCoy -- Director of Corporate Development & Investor Relations

Edward Rosenfeld -- Chairman & Chief Executive Officer

Zine Mazouzi -- Chief Financial Officer

Camilo Lyon -- BTIG

Erinn Murphy -- Piper Sandler

Kelly Crago -- Citi

Tom Nikic -- Wedbush Securities

Janine Stichter -- Jefferies

Marni Shapiro -- Retail Tracker

Jay Sole -- UBS

Laura Champine -- Loop Capital

Sam Poser -- Williams Trading

Susan Anderson -- B. Riley

Steve Marotta -- C.L. King & Associates

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