Skechers USA Inc

NYSE:SKX

Earnings Call Transcript 2020-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Skechers Third Quarter 2020 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I, Skechers request that analyst limit themselves to one question and one follow-up question only to allow all analyst to have the opportunity to ask the question. [Operator Instructions]

I would now like to turn the conference over to Skechers. Please go ahead.

[Unidentified Company Representative]

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 that involve risks and uncertainties. Specifically, the COVID-19 pandemic has had and is currently having a significant impact on the company’s business, financial conditions, cash flow and results of operations. Such forward-looking statements with respect to the COVID-19 pandemic include, without limitation, the company’s plans in response to this pandemic.

At this time, there is significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. The dynamic nature of these circumstances means that what is said on this call could change at any time. And as a result, actual results could differ materially from those contemplated by such forward-looking statements.

Additional 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 any of our forward-looking statements will occur.

Users of forward-looking statements are encouraged to review the company’s filings with the U.S. 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, financial conditions, cash flows and results of operations.

With that, I’d like to turn the call over to Skechers’ Chief Operating Officer, David Weinberg and Chief Financial Officer, John Vandemore. David?

[David Weinberg, Chief Operating Officer]

Thank you for joining us today for our third quarter 2020 conference call. I hope you, your colleagues, and loved ones are healthy and staying safe.

The pandemic continues to impact business throughout the world, but Skechers has seen meaningful improvements from the second quarter including a return to growth in many markets. Third quarter sales were $1.3 billion, which was a 3.9% decrease from the prior year but a 78.3% increase over the second quarter, a significant accomplishment and an encouraging sign of the health of our brand.

Growth came from each of our segments as the retail environment steadily improved with our wholesale channel stabilizing and in several instances growing. We believe our third quarter results speak to the relevance of our product, resilience of our company's distribution model and our plan to emerge from the pandemic even stronger than before.

In these uncertain times when people are predominantly working from home and more focused on their well-being, consumers desire comfort and we have the product they want and need. Athletic and casual footwear and apparel with a focus on comfort is precisely in our wheelhouse.

In our domestic wholesale business, growth came primarily from our adult athletic, casual and sandal footwear, along with single-digit improvements in our men's and women's collections. We experienced double-digit improvement in our kids' footwear, which is particularly notable given the absence of a traditional back-to-school selling season and many children still learning remotely.

Our domestic wholesale business returned to growth in the quarter, rising 6.3% a result of pent-up demand and the relevance of our product. We saw similar sales trends for our comfortable footwear and our other business channels with a return to growth in many markets and quarterly improvements in our own direct-to-consumer business.

The more than 3,770 Skechers stores e-commerce sites and availability in many of the leading retailers worldwide gave us the opportunity to fulfill demand and satisfy customers as the markets reopen.

The pace of recovery has differed across geographies but where markets are stable and open, Skechers experienced solid growth in sales. Our joint venture business was up 14% led by an increase of 23.9% in China where our e-commerce business was particularly strong.

Our European subsidiaries were up 18.1% overall led by fantastic growth in Germany as well as in France and Central Eastern Europe. Our distributor business was down double digits due to ongoing store closures in several markets including our largest distributor, which covers the Middle East. However several markets recorded positive sales including Australia New Zealand and Scandinavia among others.

By the end of the third quarter all but a few Skechers retail locations were open although many were operating with limited hours. In the quarter we also opened 24 pre-COVID planned stores including flagship locations on Rue de Rivoli, the premier shopping street in France Oxford Circus in London and Shinjuku in Tokyo. And two stores in Colombia and another 19 domestic and international locations.

One store closed in the quarter. We plan to open several key locations in the fourth quarter including our first in Munich and Berlin. In the third quarter, our direct-to-consumer business decreased 16.9%, as consumer traffic remained challenged mostly in tourist and destination concept stores as well as continued store closures in some markets.

However, our domestic e-commerce business continued to grow significantly, even as our retail locations reopened increasing 172.1% in the quarter. That said we showed sequential improvement in our brick-and-mortar stores particularly in our big box locations throughout the third quarter and from the fourth -- from the second quarter.

We continue to invest in our direct-to-consumer experience. During the quarter we began a full-scale update to our point-of-sale system. And are now connected with our e-commerce channel, allowing consumers to shop our product online and pick up in one of our more than 500 U.S. locations, either in-store or curbside.

We believe these investments to fully integrate our physical and digital ecosystems, into one omnichannel experience will drive sales as shopping online has become a preference and a growing necessity for many consumers. In addition to the 24 company-owned stores, 189 new third-party Skechers stores opened around the world and 48 closed bringing our total company-owned third-party store count to 3,770 worldwide, at quarter end.

To support the reopening of our business in markets around the world, we strategically heightened our advertising efforts, continuing with the digital focus, while adding in-store, outdoor and new television campaigns for our comfort footwear, including one with baseball great and World Series Champion Clayton Kershaw, who played this week in custom Skechers cleats.

We believe the steps we have taken to protect and improve our business, to reopen stronger than ever, is evident in the growth we have achieved in many markets, including most notably our domestic wholesale channel. As we strive to continue this positive trend worldwide, we are further enhancing our infrastructure as well as our digital business.

Our new 1.5 million square foot China distribution center remains on track. And we are working diligently on the expansion of our North American distribution center, which we expect to be completed in the second half of 2021 bringing our facility to 2.6 million square feet.

We also completed the expansion of our European distribution center, bringing it to 2.1 million square feet and expect to open our first U.K.-based distribution center by the end of this year. Also we have opened new distribution centers in Panama and Colombia, all to pave the way for growth as well as increased e-commerce business.

We are on track to upgrade our e-commerce platforms in Canada, Europe, South America, Japan and India. Further, as we continue to build our logistics centers for growth. And as we experience the pent-up demand for our product, we are ramping up our supply chain with increased factory production capacity, to be in line with our future product needs.

Now, I'd like to turn the call over to John.

[John Vandemore, Chief Financial Officer]

Thank you, David. Before I start, I would like to once again thank our Skechers team worldwide, for the resilience they've demonstrated throughout these turbulent times. Their unwavering dedication has positioned Skechers for the recovery we are beginning to see in our business.

This quarter was a stark improvement over last quarter, as sales improved in each of our segments and total sales grew 78.3%. Where conditions returned to a degree of normalcy, our business responded, with growth reminiscent of prior years. Where pandemic restrictions persisted our businesses weathered the situation and improved steadily.

Our sales were down only 3.9% year-over-year, which we view as a major accomplishment. As conditions normalize further worldwide, we are confident that Skechers will return to growth because our distinctive value proposition continues to resonate with consumers. And our core, casual, athletic, styles are on trend.

Despite the current environment, we continue to invest for growth, with a focus on our direct-to-consumer capabilities and global distribution infrastructure. We are confident these investments will continue to propel our brand, by allowing us to scale quicker and meet growing worldwide demand. Now let's turn to our third quarter results.

Sales in the quarter totaled $1.3 billion, a decrease of $53.1 million or 3.9% from the prior year quarter. On a constant currency basis, sales decreased $65.6 million or 4.8%. Domestic wholesale sales increased 6.3% or $18.8 million, fueled by consumer demand for multiple categories, across men's, women's and kids.

International wholesale sales decreased 0.5% in the quarter. Our distributor business decreased 43.7% in the quarter, reflecting continuing challenges, in distributor-led markets. But our subsidiaries were up 1.5%. And our joint ventures grew 14%. China sales grew 23.9% for the quarter, as demand rebounded, especially in e-commerce channels.

Direct-to-consumer sales decreased 16.9%, the result of a 15.3% decrease domestically and a 19.6% decrease internationally, reflecting both challenged consumer traffic trends and the impact of temporary store closures. However, these results were partially offset by another robust increase in our domestic e-commerce business of 172.1%.

Gross profit was $625.1 million, down $28 million compared to the prior year on lower sales volumes. Gross margin was relatively flat compared with the prior year, as increased promotional activity in our joint ventures was nearly offset by a favorable mix shift in our online and international sales.

Total operating expenses increased by $24.3 million or 4.7%, to $536.2 million in the quarter. Selling expenses decreased by $11.6 million, or 11.9%, to $85.9 million, primarily due to lower global advertising and trade show expenditures.

General and administrative expenses increased by $35.9 million, or 8.7%, to $450.3 million, which was primarily the result of an $18.2 million one-time non-cash compensation charge related to the cancellation of restricted share grants associated with the recent legal settlement, as well as volume-driven increases in warehouse and distribution expenses for both our international and domestic businesses.

Earnings from operations was $92.1 million versus prior year earnings of $147.4 million. Net income was $64.3 million, or $0.41 per diluted share, on 155 million diluted shares outstanding. However, adjusting for the one-time non-cash compensation charge previously mentioned, net income was $82.6 million, or $0.53 per diluted share. These compare to prior year net income of $103.1 million, or $0.67 per diluted share, on 154 million diluted shares outstanding. Our effective income tax rate for the quarter decreased to 15.4% from 15.8% in the prior year.

And now turning to our balance sheet. We ended the quarter with $1.5 billion in cash, cash equivalents and investments, which was an increase of $468.2 million or 45.4% from December 31, 2019, primarily reflecting the drawdown of our senior unsecured credit facility in the first quarter.

Trade accounts receivable at quarter end were $709 million, an increase of 9.9%, or $63.6 million from December 31, 2019, and an increase of 7% or $46.6 million from December 30, 2019. The increase in accounts receivable was primarily due to higher wholesale sales, both domestically and in international markets.

Total inventory was $1.05 billion, a decrease of 1.5% or $16.5 million from December 31, 2019, but an increase of 18.3% or $163 million from the September, 30, 2019. The increase in year-over-year inventory levels is largely attributable to increases in our international markets, especially in preparation for Singles' Day in China.

Domestic inventory levels declined year-over-year. Overall, we feel confident in our inventory levels and continue to actively manage supply and demand, aiming to position the business constructively for next year. Total debt, including both current and long-term portions, was $812 million compared to $121.2 million at December 31, 2019. The increase primarily reflects the drawdown of our senior unsecured credit facility in the first quarter.

Capital expenditures for the third quarter were $63.6 million, of which $24.6 million related to the expansion of our domestic distribution center, $19.2 million related to new store openings and remodels worldwide, as well as a new point-of-sale system and $11.4 million related to our new corporate offices in the United States.

Our capital investments remain focused on our strategic priorities, enhancing our direct-to-consumer relationships and augmenting our global distribution infrastructure. This quarter we launched several digital solutions, including our new website and two mobile applications, BOPIS and BOPAC capabilities in the majority of our domestic stores and a refresh of our in-store point-of-sale systems.

We also continued to make progress, despite the pandemic, on our new distribution center in China and expansions to our North American, South American and European facilities. We have also begun the process of opening a new logistics center in the United Kingdom in anticipation of a post-Brexit environment. We now expect total capital expenditures for the remainder of the year to be between $100 million and $125 million, inclusive of the aforementioned projects.

Overall, we are pleased with our third quarter performance and remain confident that Skechers will continue to successfully navigate this dynamic environment. However, we will not be providing revenue and earnings guidance this quarter, as the environment remains too unpredictable to forecast reliably.

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

[David Weinberg, Chief Operating Officer]

Thank you, John. As I discussed at the outset of this call, we are very pleased with our third quarter performance at only a 3.9% decrease from the same period last year, which was also our highest quarterly sales in our history and our ability to remain agile and drive sales during the pandemic. We experienced meaningful improvements from the second quarter in all channels of our business, especially in our domestic wholesale, which grew mid-single digits.

Additionally, our wholesale business in many other markets was up single and double digits. Our direct-to-consumer sales improved since the second quarter and backlogs are up in many key countries including the United States. We remain very aware of the global health crisis, yet we remain confident in our actions and the strength of our brand and business as countries reopen and consumer confidence grows.

The diversity of our distribution channels broad-based consumer demographics and our exceptionally strong balance sheet and ample liquidity have been especially beneficial to our success during this challenging year. We believe consumers will continue to gravitate toward comfort in their lives and our athletic casual product at a reasonable price will continue to have worldwide appeal. We see many opportunities for near and long-term growth and believe, we will be in an even stronger position in the future.

Now, I would like to turn the call over to the operator for questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jay Sole of UBS. Please go ahead.

[Jay Sole, UBS]

Great. Thanks so much. I want to ask about how the back-to-school business trended in the United States in the quarter and sort of how that flowed into September. Can you give us an idea of what the U.S. business was like in August and then September? And maybe just tell us, if that exit rate September sort of continued into October like how you see the business trending from there?

[David Weinberg, Chief Operating Officer]

Basically, there was no back-to-school defined season. So, what we saw was a more equal distribution between July, August and September. Because of that, we had slightly lower comps in August and slightly higher comps in September simply because the comps in August were higher that's the traditional back-to-school. But we saw strength coming through. We closed September -- the comps in September were better than the comps for the quarter or the individual month of August. So, we seem to be improving certainly on a comp basis. And our business is holding up in October as far as our retail is concerned and as far as demand we see outside of our own retail channel.

[Jay Sole, UBS]

Do you think Prime Day has affected the comp in October? Or is that sort of just a part of just the improvement that you've seen in the month?

[David Weinberg, Chief Operating Officer]

It would be difficult to say it was based on one thing or one day. We've seen this improvement coming since we reopened basically in May and going into June. We've gotten progressively stronger more in demand as people are more interested in buying as we open up more retail locations and our customers open up retail locations. And we find that around the world so I doubt it has to do with a single day.

[Jay Sole, UBS]

Got it. And then maybe just one quick one on SG&A, how much did any actions you took in the quarter due to the pandemic impact SG&A specifically?

[John Vandemore, Chief Financial Officer]

Well, I mean the major driver of the SG&A increase as we mentioned is this non-cash onetime charge. If you look at that and take that out as we do because it's a non-operational charge to the business, you can see we're actively mitigating where we can against sales decreases by addressing G&A. On the flip side, you have other markets that are doing quite well. We mentioned the growth in China over 20%. And that needs to be fed by some additional operating expenses.

So, we're continuing to aggressively manage G&A, but we don't want to starve any business that is beginning to recover. And we want to make sure that in the businesses that still remain a bit challenged in particular those that are consumer traffic dependent in malls or in tourist opportunities they still have the chance to operate well. So we continue to manage it but we don't want to starve any business that's recovering. And we want to continue to feed the recovery of the businesses that are starting to make their way back.

[Jay Sole, UBS]

Understood. Thank you so much.

[Operator]

The next question is from Laurent Vasilescu of Exane BNP Paribas. Please go ahead.

[Laurent Vasilescu, Exane BNP Paribas]

Good afternoon. Thanks for taking my question, John, I think you mentioned that international wholesale subsidiaries were up about 2% and then JVs were up about 14% for the quarter. I know, you're not giving guidance, but high level, how do we think about those two line items? Should we assume that they sequentially improve in the fourth quarter?

[John Vandemore, Chief Financial Officer]

Well, what you're really seeing develop is it's a tale of two different types of markets Laurent. You have markets that have largely stabilized and come back to some degree of normal activity. In those markets, we're seeing the business respond quite nicely. We're seeing growth. We mentioned China. There's strength in Europe. We have a couple of markets in Europe that are up tremendously well. And then, you have others that continue to struggle with the effects of the pandemic, and usually government intervention related there too.

In those markets that's where the brand still hasn't had a chance to get back to normal. I mean to the extent the current environment remains static I think you can expect more of what we saw this quarter, maybe up and down a little depending on the individual market. But I think the broader message, we'd share is when things get back to normal the brand gets back to growth much like it was growing last year.

When the brand is restricted, because the pandemic effects are having an impact on consumer traffic or other aspects of the business that's where things aren't yet back to normal. So it really does depend upon the effects of the pandemic. But when things get back to normal, we couldn't be happier with the rate at which we're getting back to growth like China, like Europe and a handful of other markets as well.

[Laurent Vasilescu, Exane BNP Paribas]

Very helpful. And then international wholesale gross margins they were down just a little bit 30 bps. What was driving that? Was that promos in China, specifically other regions? And how do we think about -- again, I know, you're not giving guys at the high level. How do we think about the gross margin puts and takes over the next quarter?

[John Vandemore, Chief Financial Officer]

I mean, the first thing I mentioned is, we're incredibly pleased with the gross margins. We think they evidence two things. One, our discipline on pricing and approaching the market even in these challenging times and you're still seeing that manifest in the results that you're seeing us put up particularly in e-commerce.

The other aspect of the gross margin story right now is that in some markets like China there has been a little bit more promotional activity, but that's been accompanied with a significant increase in volume and a bit of a channel shift. E-commerce is doing very, very well in China.

The other channels are doing well, but not quite up to that level. So you're seeing a little bit of a mix shift. And in China, you tend to see a little bit more promotional activity online as an inducement in part, because their sales cycles tend to evolve around promotional days something like Singles' Day, but other elements there too.

So the reality is we feel really good about the gross margin overall. We did see a little bit more promotional activity in Asia, but that was more than offset by -- or almost entirely offset by the mix benefits we got from having more international and more e-commerce within the retail footprint.

[Laurent Vasilescu, Exane BNP Paribas]

Very helpful. Thank you very much. And then maybe, if I could squeeze one more in non-competition charges, if I exit out of the G&A, G&A was up about $18 million. John was that entirely driven by this warehouse and distribution expense? And is it really -- is that one quarter effect? Or do we think about that for the fourth quarter due to capacity constraints?

[John Vandemore, Chief Financial Officer]

Yeah. So excluding the onetime charge, it's really volume-driven costs in G&A. And remember, we put our distribution costs into G&A not in cost of sales like some others. So really the best way to think about, those are volume-driven changes. There's a lot of offsets working against that to minimize the volume-driven changes. But that's largely how I would think about it. And it really depends on the mix of business to be honest with you. In that instance, it was focused on Asia, where we saw significant growth and on e-commerce being a big step-up for us.

[Laurent Vasilescu, Exane BNP Paribas]

Very helpful. Thank you very much John.

[John Vandemore, Chief Financial Officer]

Sure.

[Operator]

The next question is from Kimberly Greenberger of Morgan Stanley. Please go ahead.

[Kimberly Greenberger, Morgan Stanley]

Great. Thank you so much, and really nice quarter here. The upside surprise both domestically and in international wholesale revenue was very -- really substantial particularly relative to our estimates. And I'm wondering, is there any catch-up phenomenon from the depressed revenue growth rate in the June quarter. Was there any sort of catch-up that helped the September quarter? Or was this all organic original third quarter orders that you would expect to be able to lap when we get to third quarter next year? Thanks.

[David Weinberg, Chief Operating Officer]

Well, we always expect we'll be able to lap it when we get to next year. That's not a problem. And I don't know, if you can talk in this year in terms of organic growth. It was a catch-up from the point of view that what was not taken in second quarter became high demand in third quarter. So we did have that catch-up effect. There was -- when the stores were closed there was difficulty getting inventory there. And as it opened up what we saw was an increased demand as a matter of fact probably a shortage of where we stood with our inventory and what we could process through.

I mean, as John mentioned we were actually down in inventory in the United States year-over-year. That is all that catch-up process and getting through in the high demand for our inventory.

So we're of the mindset that our growth could have been significantly higher this year. We started this year going on to a significantly higher growth pattern. We hit the second quarter with the pandemic, which closed down most of the world. The only places we had positive was China was starting to pick up.

And then when the world came back in those places that are open and some places opened later, which is why we're still $50 million behind for the quarter, but we had great catch-up and we do feel in those areas -- and even from the question that came before we are set up for significant growth in those places that are growing around the world for the fourth quarter as well as the third quarter.

Places like China and Europe their backlogs their momentums indicate that we will continue to grow. And that also includes the United States. The only caveat, I would put in there at this particular time obviously is there was resurgence in a pandemic some in Europe, some in the U.S., but none in China so to speak. So those are the only things to watch.

We haven't seen anything. It's obviously just starting. But there are closedowns in Europe, which is a very strong market. We do feel we'll make it up somewhere along the line as we get into Q1 because the demand has been that strong and we're chasing dates. We're actually increasing our capacity for production in order to meet all the demand we're seeing around the world, which includes some countries that are actually down, but are showing increased volume as their countries open up some.

So we think we're in a positive mode that we will power through. And depending on how the pandemic goes which is the serious question we'll be ready for significant growth as we get into 2021. And if it's not in the first quarter it certainly will as we continue through the year and things open up more.

[Kimberly Greenberger, Morgan Stanley]

Great. That's excellent. And that brings me to my follow-up, which is on inventory. It sounds like you are chasing inventory here into the fourth quarter. And I'm looking at the total inventory balance I think it's up 18%. So it looks like in aggregate you've got inventory, but maybe it's lacking either in certain geographies.

So I'm just curious do you feel like you'll be able to get the appropriate product to the correct regions in order to feed your business? Or is there some risk perhaps that inventory shortages could hold back revenue in the fourth quarter? And then just in aggregate how do you feel about the 18% growth in inventory here at the end of the quarter?

[David Weinberg, Chief Operating Officer]

I think you have to look at where the inventory is. I guess, the answer to the first part of the question is yes, we feel we'll be able to catch everything we see now according to demand. Of course there's always in our case a possibility that demand will grow even faster and we'll still be chasing, but that would be a high-class problem to have.

If you look at the inventory, some of this inventory the reason its up 18% you have to look where it is. As John said it's in China and it's going to Singles' Day. And you have to keep in mind as we build China through online at a faster pace than anything else it does require carrying more inventory.

Being a retailer by its design is more inventory than a wholesaler so you have to carry more inventory per pair sold and that's what we're starting to build. And we will start building I think in the U.S. as well as our stores open. So we think we're in very good shape with our inventory.

We probably could use a little more, but given the uncertainty it's better to be in the position we're in. But we certainly will have enough to get the forecast we have going into first quarter. And hopefully that will be somewhat short and we'll continue to chase it as we go into the back half of the year. But I think everybody here is quite happy with where we sit, what we own and what we have around the world.

[Kimberly Greenberger, Morgan Stanley]

And rightly so. Congratulations. Thanks so much.

[David Weinberg, Chief Operating Officer]

Thank you. Thanks, Kimberly

[Operator]

The next question is from Omar Saad of Evercore. Please go ahead.

[Omar Saad, Evercore]

Hey. Thanks. Good afternoon. Nice job this quarter. I'd really like you guys to talk a little bit more about the wholesale channel and obviously I think outperformed relative to our expectations and others. Maybe you could talk about what's really driving that strength there. Is it reorders? Is it a lack of inventory? Is it their dot-com -- the wholesale dot-com businesses? And how you feel about that and how you feel -- how we should think about that balance between growth in wholesale DTC e-commerce, which obviously you're putting a lot more emphasis and resources behind these days?

And then also -- quickly I would love to know if you're seeing any impact in your businesses anywhere around the world where you're seeing the latest resurgences or closedowns. I know some markets in Europe are starting to shutter again. I'm wondering if you're seeing any effect from that or if you're largely plowing through? Thanks.

[David Weinberg, Chief Operating Officer]

Well, I'll take the first part and tell you that as far as I'm concerned, the wholesale channel all those points you brought up were yes, yes and yes. We have seen online. We have seen demand. We have seen growth in the inventory demand. But we don't have the impression, at least I don't that we're catching the inventory need and that it would slow down anytime in the future. The churn is still there for all our customers that are looking at it. And it certainly is filling, it certainly is lack of product and it certainly is the demand for our product on a very broad base here in the U.S.

I think I mentioned in the last one and John can add his, but we haven't seen anything yet in Europe. It's more an emotional thing when we talk to our people in Europe in the fear of what could happen in such a high-demand area that they're in. I mean you see something in Ireland and France, which have closed down completely. In the other countries we haven't seen a decrease.

Actually John and I were talking this morning. It's been surprising over the last few days. On Continental Europe, we haven't seen any deterioration in our retail sales or comp, which we would have anticipated just from people starting to hunker down. So I'm not sure, it's too early to tell. I'm sure if they close down completely, obviously we will have significant impact. But right now, it's too early, just starting.

[Omar Saad, Evercore]

Thanks, David.

[John Vandemore, Chief Financial Officer]

Yes. I would echo that and then just reemphasize on the wholesale side. It's not like this was one or two customers. We actually saw a broad improvement -- and broad improvement in the categories. As we mentioned, men's women's and kids' were up. And that's a really good sign that the product is working. Our Arch Fit product our Max Cushioning, a lot of our key product foci for the year are really resonating with consumers both in our own retail, but also with our retail partners and wholesale. And that's showing really well in the demand that we're seeing in the wholesale channel.

[Omar Saad, Evercore]

Thanks, John. Thanks, David.

[John Vandemore, Chief Financial Officer]

Thank you.

[David Weinberg, Chief Operating Officer]

Thanks.

[Operator]

The next question is from Chris Svezia of Wedbush. Please go ahead.

[Chris Svezia, Wedbush]

Good afternoon gentlemen. Thanks for taking my question.

[David Weinberg, Chief Operating Officer]

Hi, Chris.

[Chris Svezia, Wedbush]

And nice job. I want to ask about U.S. wholesale. So I guess, are you anticipating that you can build on the momentum that you saw in Q3? I guess more specifically does the order book represent something that you can look at Q4 and still see some level of growth? Or is it now you sold in you need to sell through and then if you catch a reorder that's what determines Q4? I'm just trying to understand can you build on the momentum in Q3 to generate some level of growth in Q4? Or is it -- you've got to wait and see sell-through product inventory that flowed in and you have the cash to reorder. So how do I think about that?

[David Weinberg, Chief Operating Officer]

Well right now, we've sold in and I do believe that we're checking well. So I'm sure you'll do your channel checks as you go through. But I haven't seen that there's any backup. So I would anticipate barring in the last answer any changes to this TDM COVID environment as it is in the whole, we would anticipate more. I think more people still even though we've grown and it's growing -- creating demand with their sell-throughs we've still created a situation where they're trying to be careful on what they order because no one knows what's going forward.

So if anything barring an increase in the COVID and closing down, which is certainly always possible I would say they're still underbought Q4 and Q1. And we could get an additional hit for reorders for that just as we did in Q3 because everyone was so conservative it comes out and our brand happened to perform that much better.

So I'm still anticipating that it will continue to happen and that we're selling through quite well wherever we see it. But that's caveat and that's the reason why we're not giving guidance because it makes John nervous with all those clouds. But we're still looking good, feeling good and expecting it to happen. But what -- you do have to keep an eye on what's going on obviously through the whole place. There's a case to be made that if we could ever get this money out of Congress it would make for a great retail environment for -- certainly in the United States for holiday, which would power us through into Q1. But all those things are still hanging, but still a lot of positive things in the air the way we're checking through.

[John Vandemore, Chief Financial Officer]

And I would just -- I would also point out Chris because you gave us the option. I mean remember last year Q4 was a banner quarter for us. We -- over 20% top line growth. So keep in mind that's all against the backdrop of a pretty tough comp that as David pointed out, we feel really good about an opportunity to get the better of this quarter if the pandemic doesn't get in our way.

[Chris Svezia, Wedbush]

Okay. Got it. And then just on China real quick just, I guess impressive to see the growth. I think other brands have referenced some softness that they saw within the environment there. But I'm curious you got big events coming up for Q4. Any reason it would slow materially from what we've seen so far? And just what are the risks there? What are the -- I mean we know what the opportunities are. But any reason why it would slow down materially? Based on your inventory and where it stands, it seems like you're anticipating sustained momentum in China?

[John Vandemore, Chief Financial Officer]

Yes. I mean we're always optimistic about China and it's generally been very well served. I mean the reality is Q4 is largely influenced by Singles' Day. So that's the event we all have to watch. Early indications are good. But it's an event and you have to watch it. And then closely following that you have 12/12. So generally speaking as those two events unfold so does China. But certainly we're optimistic that the business can continue to perform. And based on our checks in the market quite frankly, we see it as one of a couple international brands performing at that level in the market, certainly not all others are. So we're very encouraged by just the overall performance, but also the relative performance to what we're seeing in other brands.

[David Weinberg, Chief Operating Officer]

Yes. And we're seeing good growth in October which is usually a weak month or a smaller month. So the comps are certainly easier because everybody is gearing up for Singles' Day. But they held up pretty well for October, so we have high hope that it continues to power through.

[Chris Svezia, Wedbush]

Okay. Sounds good. All right. I'll leave it there. All the best. And thank you.

[David Weinberg, Chief Operating Officer]

Thanks.

[Operator]

The next question is from Susan Anderson from B. Riley. Please go ahead.

[Susan Anderson, B. Riley]

Hi. Thanks for taking my question. Nice job on the quarter. I was wondering if you could talk about retail business. A little bit more color just on kind of -- I may have missed a bit what percent of the fleet is now open and I guess running on constrained hours?

And then also, are you seeing sequential improvement there in the fourth quarter? Obviously, it continues to be the weakest part of the business. But just curious how long you think it's going to take for that to recover.

[John Vandemore, Chief Financial Officer]

Yeah. I think a couple of things to keep in mind on that question. First is, when we talk about our retail estate we're talking about a global estate. So you really have to keep in mind the makeup of that. Domestically what we're seeing is really good performance in stores that are not dependent upon either mall-based traffic or tourism. Those stores are doing very well. We're very pleased.

In the quarter, we actually had a couple of handfuls of stores that remain shuttered even domestically because of restriction on operations in mall-based environments. In Europe, we tended to see pretty good performance across the estate, I mean not back to normal, but very encouraging trend.

But there are also parts of South America that were almost completely closed for the majority of the quarter. So, it's really a mixed bag. I think what we're generally observing is that it continues to get better as the situation normalizes, even with some restrictions, because the vast majority of stores are still operating with some hourly restrictions.

Those that are dependent upon tourism mall-based traffic are a little bit behind stores that are on a stand-alone basis. The good news for us is that we have for a while been transitioning to our big box warehouse style stores that are freestanding solutions. And those are seeing the best performance overall.

So, it continues to improve, which is great. We all see the traffic trends though. So that's still a bit of a headwind. In that though, we're seeing good AURs. And we tend to think that as the situation continues to remain stable, that will continue to get better and better each and every month.

[Susan Anderson, B. Riley]

Great. That's really, really helpful. And then, just a follow-up on 11/11 in China. It looks like you're expecting a pretty good day ramping up inventory there. How are you expecting this to play out? Do you think it will be a normal 11/11 as we look over to last year or each year? Or are you expecting it to be more promotional as maybe brands fight for consumer dollars? Or how are you thinking about that?

[John Vandemore, Chief Financial Officer]

I think generally, I would describe it as optimistic, because you have seen e-commerce performed very well in country. Now we even characterize China as still being a little bit more biased towards e-commerce right now as they continue to recover from the effects of the pandemic. I think we're better prepared, quite frankly, than we've been in past years.

How do you manage the margin against the opportunity in the marketplace is always the big question. But based on the brand performance we've seen year-to-date and the lineup, we feel pretty good. But the reality is it's a pretty focused selling season. So we'll have to wait to see how things perform.

But as David pointed out, early October REITs have been strong. Year-to-date REITs have been strong in e-commerce for our brands. So we're optimistic about what Singles' Day can be for us. And again, don't forget 12/12 right behind that, because that's another meaningful day in the period that performs -- traditionally performs very well for us.

[Susan Anderson, B. Riley]

Yeah. That’s sure. Okay, great. Thanks so much. Good luck next quarter.,

[John Vandemore, Chief Financial Officer]

Thank you.

[Operator]

The next question is from John Kernan of Cowen & Company. Please go ahead.

[Jared Orr, Cowen & Company]

Hi, guys. Congratulations on the good quarter. This is Jared Orr on for John. I was wondering if you could talk about the margin implications with e-commerce, now that it's growing as fast as it is both domestically and internationally.

[John Vandemore, Chief Financial Officer]

Yeah. I mean generally, we've been very pleased, but that probably goes in line with our overall commentary. Very pleased with our overall gross margin performance. E-commerce continues to be at an above-average retail gross margin for us. I mean some of that is still size and scale comparatives.

But it also is an environment where we have better insight into who our consumer is and driving traffic there. It's also benefit for some of the success of our recent product introductions, in particular, our Arch Fit solution our Max Cushioning solution. A lot of the Fit solutions do very, very well there. So we continue to be very pleased by that. And we'll continue to invest behind it as a result.

[Jared Orr, Cowen & Company]

So is that the same domestically and internationally?

[John Vandemore, Chief Financial Officer]

Yes.

[Jared Orr, Cowen & Company]

All right. Is that -- that's from a gross margin perspective? Is that also from an EBIT margin perspective?

[John Vandemore, Chief Financial Officer]

Yes.

[Jared Orr, Cowen & Company]

All right. Thank you very much. Congratulations guys.

[John Vandemore, Chief Financial Officer]

Thanks.

[Operator]

This concludes the question-and-answer session as well as today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.