David Weinberg: Yes. Historically, we tend to build inventory at the end of the fourth quarter because we need to build Spring early, and it has to be on the water before Chinese New Year’s, which comes early in the next quarter. And we’ve now — given where we stand, we’re trying to get everything in earlier this year rather than later, and we’ll take it in November and December at early January because we have positive feelings about the first quarter. And we’d rather have it early rather than late, not take any chances and be prepared should the demand pick up and move back into the fourth quarter of this year.
Operator: Our next question is coming from the line of Gaby Carbone with Deutsche Bank. Please proceed with your question.
Gabriella Carbone: Hi. Good evening. Thanks for taking my question. So on the margin front, would you help us think about the path for expansion beyond this year, maybe where the biggest opportunities are? And then how should we be thinking about maybe gross margin, particularly, given the potential return of wholesale and the mix shift that could happen?
John Vandemore: Yes. I think on gross margin, I think we just have to recognize for a moment what we’ve done on the year because it’s a pretty astronomical increase year-over-year. Some of that is certainly some benefit of costs that are now fading out of the system, which we do expect to be a meaningful contributor to the improvement we’re going to see in the fourth quarter. Part of it is also, though, that we’re selling more profitable product, and we’re restraining the promotion environment as best we can relative to the competitive environment we’re in. I would say, as a longer horizon view, what do we expect to drive margin? It’s kind of the same factors we’ve talked about before. It’s increasing our mix of Direct-to-Consumer.
It’s increasing our mix of our international Wholesale business, both of which are accretive overall. I think a part of this year’s story is also that, right, which is we’ve increased our overall contribution from both of those categories, in particular, the Direct-to-Consumer with its outsized growth this year. And that’s been a meaningful contributor. We’re not — we’re certainly not looking to give any of that back. And we continue to have abundant opportunities, we think, to open stores, open doors in our retail business. So that — those will continue to be the main factors that drive opportunity. There should be some lingering benefit, although not nearly the scale or size of what we’ve seen this year from cost into the early part of next year.
That won’t be, again, as significant as we saw this year, but there will be some trailing benefits there as well from lower freight. Those are going to be the primary contributors.
Gabriella Carbone: Got it. That’s really helpful. And I just wanted to ask a follow-up. I was wondering if you could just dig into what you’re seeing in the consumer backdrop within Europe. I understand the distributorship. But excluding that, maybe how did trends play out in that market kind of burst your expectation?
John Vandemore: Yes. It’s kind of an interesting situation because it’s becoming a little bit more similar to what we’ve seen in the domestic market, which is our Direct-to-Consumer business, both online and in-store in Europe and EMEA, was incredibly strong this quarter, significantly outperformed what we thought we should expect given the situation. Obviously, it outdistanced the growth in our Wholesale market, although even that was relatively strong. When you take out the distributors, as we mentioned, EMEA Wholesale grew double digits. So that market continues to be very strong. I would say, relative to the fourth quarter, it’s going to face some difficult comparisons. I mean we had some markets last year that were up in the fourth quarter above 40%, 50%.
And that’s a really hard comp to face in Q4, which is one of the drags on Q4. But overall, I would say, in general, the consumer environment remains incredibly encouraging in Europe. And I would also just add to that, the domestic store performance that we saw was also incredibly encouraging of the same variety. So at the consumer level, things look good. Where we continue to see concern is that, that Wholesale customer level who has to sell through to the consumer, that’s if we’re seeing any concerns in order patterns, any unusual behavior. That’s where it remains today.
Operator: Our next question is coming from Jim Duffy with Stifel. Please proceed with your question.
Jim Duffy: Well, thanks. Good afternoon. I have a question on the inventory and then on the D2C business. Tremendous progress from you guys on the inventory, congratulations to the team for that. I’m curious if you can comment what you’re seeing with respect to channel partner inventory. Any sense that that’s becoming more normalized? Or are there still pockets of excess which are a challenge? I’m speaking for the industry, not Skechers-specific necessarily.
John Vandemore: Well, I would say, we can speak to Skechers-specific because we can see that directly. In aggregate, I would tell you, if you compare back as far as 2019 or last year as a reference point, things looked pretty lean. I would say, within that, if you look down a layer, it depends on which account, which customer you’re talking about. Some have grown their business. Some have gotten much more efficient, more turns, et cetera, and some have lagged. And so it’s not in a similar environment for every account. But in aggregate, I would, say things continue to look lean to us. And I would remark about that in context of also seeing, again, good sell-through, good margin, good price. And we know from our own stores that the product we have is more innovative.
It’s new, it’s fresh, that a lot of other accounts out there can offer. So we feel really good about the position, both on our own account, but also downstream. It’s just not yet leading to the reorders that we would expect to see under normal circumstances. And I think the concern is simply what’s going to happen with consumer spending in major markets. Can’t really speak broadly to the industry, other than we have heard very similar stories and tales from other brands, so it seems like that’s a pretty similar setup to what others are seeing.
Jim Duffy: That makes sense. And then I wanted to ask on the D2C business. You do have some unique comparisons versus a year ago, and you had inventory congestions that was limiting inventory availability in the store, compromising store productivity. You’ve made some tremendous gains here lapping that in the D2C business. Do you see that strength continuing? Or is — should we think about there being some degree of moderation, just given the uniqueness of the comparisons?
John Vandemore: Well, I would say, we still expect there to be strength, and we’ve continued to see strength, so far, this quarter. What really happened last year at this time is the stores were suffering from a lack of inventory. Online had much more than ever. We pushed consumers online. And online made up a lot of the detriment we saw from stores not being full. This quarter, we kind of unwound that. Stores were well stocked. They were — they had product available, they had our newer product. And we brought down the inventory available online to a more normalized level. That’s why, in part, we think there was a little bit of a slowdown on e-commerce. It was more than offset, obviously, by what happened in the stores. I would tell you, we’re encouraged by what we’ve seen, thus far, even getting to a point where we’re lapping — having comparable levels of inventory in-store so far this quarter.
