Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to the Samsonite International 2018 third quarter results earnings call. Just a reminder, today's call will be on record. I would now like to hand the conference over to our Chairperson, Mr. William Yue, Director of Investor Relations. Thank you. Please go ahead, sir.
Thank you, everyone, for dialing in to join us on our third quarter earnings call. Today, I'm pleased to have our CEO, Kyle Gendreau, with us to go over first the investor presentation of the third quarter results. After going through the presentation, there will be a Q&A session. Without further ado, I'll hand over to Mr. Gendreau to begin going through the results presentation. Thank you.
Okay, great. Thanks, William. Good morning or good evening, everyone. We have Q3 results in front of us. I would say, given the macro noises we've seen in a few key markets, we're happy with our results. When you look at our Q3 sales growth, constant currency growth of 5.2%, with the brand Tumi continuing to perform very well at 10.3%, and our business, excluding Tumi, growing around 4%. As I guided in the interim results earlier in the year, we're seeing some noise within a few of our key markets, particularly the U.S., China, and Korea, which I'll cover in a bit more detail as we move through the presentation, that have caused some of that pressure. Excluding those, the underlying business is performing very well.
From a gross margin perspective, we continue to see upward momentum in gross margin, driven in part by the Tumi brand, which continues to see margin expansion as we push it into our business. It was up roughly 400 basis points year-over-year for the quarter, along with our direct-to-consumer push, which is pushing margins up, slightly offset by the expanding mix of American Tourister, which has slightly lower gross margins. Our Adjusted EBITDA was down slightly, and from a margin perspective, down around 110 basis points. This is similar to what we were seeing at the half, largely due to expanded distribution costs as we push some of our targeted retail expansion. This is happening particularly in Europe, where we've expanded our retail footprint fairly quickly over the last 12 months, which is impacting that.
In addition, just for the quarter, our advertising spend was up around 10 basis points year-over-year. For the full year, it'll be fairly consistent at around 5.9% full year-over-year. Our adjusted net income is up very strongly, up 24%, mainly due to really three things. We have interest expense reductions off the debt refinancing. We're seeing reduced effective tax rates, in part due to enacted U.S. tax law, and also some lower stock compensation expense driven by a bit of a delay in releasing or issuing our long-term incentive this year, along with some reversals of lapsed options that happened mid-year. If I go to the next page and look at sales by region. Our North America business was up slightly, around 4.4%. Really a few things happening here. One, we're clearly seeing gateway city impacts.
This is international arrivals into the U.S. slowing down, particularly in Q3. This is a function of, I think, some of the Trump rhetoric that's causing consumers to shift, and also a rising dollar, which is making the U.S. a little less attractive from an arrivals perspective. We're clearly seeing Chinese arrivals shifting from the U.S. I think we're seeing more of them show up in Europe in our business, which is impacting our gateway cities for North America. We also, in North America in Q3, and we had started in the year, had a few initiatives that we've talked about in the past. One, our Tumi business. We consciously decided to stop selling to transshippers. These are wholesale customers of our Tumi business in North America, where they were buying in and then distributing elsewhere in the world. We've stopped that in Q3.
That was about a $3 million impact to our Tumi business. If I adjusted that out alone, our North America business would be up around 1.2%. We're also consciously reducing the push of the brand Samsonite in some of our discount customers. We are consciously throttling back sales of Samsonite into these customers. That's had an impact of around $3 million in Q3. That's part of our strategy to elevate the Samsonite positioning in the U.S. and backfill with American Tourister. In the short term, we're actually pulling sales of Samsonite, and the American Tourister hasn't fully filled in yet. Our eBags business, as you know, we're consciously changing the mix of that business to be our own brands.
We are exiting third-party brands in eBags that we think are not beneficial, and that cost about $4.5 million of sales just in Q3 on our eBags business. Our Canada business in North America was very strong, up 11%. If I go to Asia was up 7.2%. We indicated that China and Korea, we were seeing noise, and we did see noise in China and Korea for Q3. If I adjust those out, and I'll go through this more in another slide or two, but if I adjust just China and Korea out, the rest of our Asia business is up 16%. In China, we saw really two things happening. One, consumer sentiment is really being impacted by trade wars. I don't think it's unique to us. I think it's impacting China in general, if you follow the market and other businesses.
In addition, our B2B business was down quite a bit, and this is really government-sponsored B2B orders that we've seen the government trenching in as well. If I adjust the B2B orders out, our core China business was up around 4%, which is, again, lower than where we've been trending, really off the back of consumer sentiment. Korea continues to have its struggles. It was up slightly for the first half. It's down slightly for Q3. I think Korea continues to be a market that's challenged with consumer sentiment and inbound arrivals. If you look around the rest of Asia, we've had very good success. Our India business up 28%, Hong Kong's up 24%, Japan's up 13%. Much of our other markets in Asia continue performing very well against the strategies we're pushing for our Asia business. Europe's continued its strong growth trend, up 10%.
Really generally in line with what we saw for the first half. American Tourister continuing to do very well, up around 42% for the quarter. Tumi is starting to get into stride as we said it would start in the second half. It's up 14% in the second half as well. We continue to see good growth in our adjacent categories of non-travel and also in our mix of direct-to-consumer versus wholesale. Latin America was up 13.4%. Strong growth for the region, despite some pressures in Chile, which we indicated at the half, that continue for Chile. If we look at the markets other than Chile, Brazil is up 52%, Mexico is up 8% and building momentum. In Argentina, which has opened up for us and is part of where Chile sales have gone, off of a smaller base, is up 160%.
We're quite happy with our Latin America growth for the quarter as well. If I move to the next page and look by major markets, you really can see the bigger markets that are feeling some of the macro impacts. U.S., China, Korea, all to the left of the page. We'll cover those in a little more detail. If you look at the rest of what we would label core markets, it's up 12.4% for the rest of the business. If I looked at the business in whole and took out just these three markets, it's a very similar number, up very solid double-digit growth across the rest of our markets. If we get into a little bit of detail on the markets that we're seeing softness. On page seven, we try to give you some color of what we're seeing.
Some of this I've already covered. If you look at our U.S. business, excluding eBags, our business for the first half was up around 4.8%, and for Q3, we see it up around 1.3%. Driving some of that drop is what I covered just a bit ago, which is the trans-shippers that we've consciously exited for Tumi. If I adjust just that out, it's up around 3% North America. We're also seeing the reduction in sales to discounters for Samsonite. Really the bigger piece that's around the macro trends is what we're seeing in our gateway cities from a comp perspective. We're seeing it both in our Samsonite business and our Tumi business. When we look at gateway city comps for Q3, they're down around 8%, and the overall Q3 comps are down around 1%.
If you look at my year-to-date Samsonite business, comps are up around 2%. You can clearly see a lot of the noises within the gateway cities around a lot of the rhetoric around the U.S. market and also trade and tariff wars really starting to impact some of the gateway cities in our U.S. market. If I go to China, I covered this already, but our China business was up 11% in the first half, down roughly 3% in Q3. If I adjust for the B2B orders, our China business is up 4%. Really that delta from first half to Q3 is around sentiment that we're seeing in the marketplace, so consumers clearly acting differently. If I go to Korea, we were up slightly in the first half. We're down slightly in the second half.
The Korea story is really a function of what we've been seeing all along, which is sentiment is clearly down, and we see weaker Chinese arrivals into our Korea business as well. If I look at my overall Asia business, which was up 7.2% for the quarter, and I adjust out just China and South Korea, rest of Asia is up 16%. Much of our strategies are working well. It's really some of the macro backdrop in a few key markets that's causing a bit more softness in our Asia business. If I go to Q3 by brand, if we go across the brands, Samsonite really is up 1.8%. This is really impacted by these three markets that we've talked about. For the first half, it was up 5%.
You can see that the Samsonite brand's feeling a bit of that pressure, particularly in our U.S. market, in China and South Korea as well. Our Tumi business up 10.3%. Really strong continued growth in Asia, up almost 28%. Europe up 14%, building momentum. Our North America business was up slightly, around a half a percent. If I adjust just for these conscious trans-shipment pullbacks, we've stopped selling to wholesalers in the U.S. to really elevate and position the Tumi brand in a better way, our North America business would be up around 3.7% for the quarter. American Tourister continues a very strong run, up 13%. It was up 24% in the first half. As you know, we launched Ronaldo campaign in the first half, that has a lifting effect when it initially launches.
The strength of that campaign and the brand has clearly continued into the back half into Q3. Europe was very strong at 42%. The U.S. was strong at, I think, low teens growth for the U.S. In Asia, sorry, because of China and Korea, saw a little bit softer growth with American Tourister. The rest of the market's doing really well. Our other brands are up slightly, about 1.3%. If you really peel into that, because we would typically expect higher growth in our other brands, most of that is around the Chile business. If you look at our Saxoline brand, which is a Chile-only brand, that's down around 16%. The rest of our brands in this other category, Speck, really doing well, up 10%, Kamiliant up 32%, High Sierra up 5%, Lipault up 4%, as we've reset the strategy for Lipault.
These other brands that we've lumped here together generally are doing very well, other than our Chile business, which is having some macro pressures of its own. That's the quarter. If I go to year-to-date quickly, and go to the overarching slide on page 10. Our constant currency growth year-to-date is still very strong at 10.1%. If I adjust for eBags, because in Q1 we had the lap over of eBags, we bought it in May of 2017, up around 8.5%, really solid growth on a year-to-date basis. Our gross margins are up 80 basis points. For a lot of the same regions we saw in Q3, Tumi for the year-to-date is up 500 basis points. We see expanding direct-to-consumer moving margins, again, offset by a little bit of the mix change for American Tourister. Our EBITDA is up $30 million, or 7.4%.
For the same reasons we talked about in Q3, our EBITDA margins are down year-to-date around 70 basis points. I do expect the Q4 to be stronger, and as I've mentioned off the interim, and we're clearly focused on this as a team for next year to see EBITDA margin expansion. Adjusted net income year-to-date is up 21% for many of the same reasons I talked about for Q3. Interest expense lower. We see lower stock compensation costs, and our tax rate is lower. Our effective tax rate year-to-date is around 26% versus last year was around 29%, and a large part of that is the U.S.-enacted tax changes. That's the year-to-date. By region, quickly, if I go to the next slide, you'll see all regions delivering very strong growth year-to-date. North America up 7.9%, Asia close to 12%, Europe around 11%, and Latin America 15.8%.
North America, if I adjust for the eBags, it's up around 3.6% on a year-to-date basis. By key market, bit of the same story there. We're seeing strong growth across many of our markets. If you look at a year-to-date basis, you see decent growth in the U.S., we see China growing around 5.7%. Korea, as we've indicated, is roughly flat on a year-to-date basis. The rest of our regions across the page here doing very well, other than a slight degrowth in Chile, which we've talked about already. By brand, another good story here. Core brands, Samsonite up just under 4%. Growth across all regions on a year-to-date basis. Tumi up 14%, and we start to see momentum building in Europe as we talked about. Q3, Europe's up 14%, year-to-date it's up 11%.
Our core North America business on a year-to-date basis, 5.5%, which is what we've always thought North America would do on an annual basis, 5%-6% growth. We're quite happy with the Tumi growth. American Tourister up 20%. We've seen the great success of that campaign, and it really is across regions on a year-to-date basis that we're seeing the benefit of American Tourister growth. Other brands on a year-to-date basis up around 13% for much of the same reasons I mentioned for the quarter. We continue to push our direct-to-consumer strategy, which is a mix of targeted brick-and-mortar retail expansion and e-commerce. You can see our direct-to-consumer is up 19.3%. In a constant currency basis, our retail sales are up 12.8%, and our direct-to-consumer e-commerce is up just under 43%.
If I take the eBags effect out for the lag period, it's up close to 27%. We continue to have very good success in driving our own direct-to-consumer e-commerce. Represents 9% of our sales today versus 7% last year for the year-to-date period, up 200 basis points. If I look at our overall sales to e-commerce that we can measure, which is our own direct-to-consumer e-commerce and sales to e-retailers, so exclusive e-retailers that we can track, that is up 240 basis points from 12.1% to 14.5%. A lot of this strategy of pushing direct-to-consumer is working very well and continuing with good momentum. If I go to the next page, our strategy around growing non-travel continues to perform very well. If I look at year-to-date, our travel category is up 8.1%, solid year-to-date growth.
Our non-travel is up, as you'd expect, at a higher level as we focus here, 13.2%, really being driven by all regions. When I look at our non-travel sales as a percent of sales, we're now very close to 40%, 39.9%. Last year, we were around 38.8%. This is moving in the direction that we've guided, and I would say we're really seeing very good momentum in this front, particularly as we get to more mix of direct-to-consumer we can offer, where we can showcase our products in the non-travel category in a better way. We see really tremendous results there in our brick-and-mortar retail, in our own e-commerce sites. As we know, in Tumi, which is a more direct-to-consumer business, continued terrific success in our women's categories and business categories for the Tumi business.
From an advertising perspective, year-to-date advertising is running around 6.1%, consistent with last year, up around $22 million or $20 million. For the full year, I'm anticipating advertising to end up at around 5.9%, and that'll be very consistent with what the full year of 2017 was as well. You should see advertising in a very consistent manner for the full year. Lastly, just from a balance sheet perspective, balance sheet continues to be strong. One of the things that we've been focused on is driving working capital down. As you know, we had let the working capital, particularly inventory days, expand up, and we're in the midst of adjusting that back. If we look at our operating cash flows for the three months ended September or Q3, that's up 22%. We generated operating cash flows of $91 million versus $74 million last year.
If you remember in the half, that was the other way around, that we were a little bit lower in operating cash flows versus last year. The trend is happening. We are moving the working capital. There's more to go here. I expect that to be strong in Q4, and clearly for next year, we'll get our working capital in line with our targets. Our targets generally have been around 14%. We have a history of running around 13%, and through September we're at 14.7%. From a total leverage ratio, we're at 2.67 times lever versus last year at this time, we're at 2.94 times lever. De-leveraging will continue as the business grows. Lastly, on working capital, I've kind of covered this, but if you look at our inventory days, we're at 148 days.
That's up eight days from last year. If you remember, at the half, we were up 16 days from last year, we're moving in the right direction. In my view, we'll see more progress in Q4, and really carrying into probably Q1 and Q2 of next year, we'll get the working capital targets back in line. That'll generate stronger operating cash flows for the end of this year and for next year as well. We'll see very strong cash flows from this management of the inventory as we go into the beginning of next year. That's the update. I might just do a quick outlook for everybody, and then we can go to questions.
When I look at, and I'm sure a lot of you are thinking, "Well, what's Q4 look like?" I think, when I look at it generally, the economic outlook's a bit more cloudy. Largely to do with some of the macro noises. We have U.S.-China trade tensions, which I think continues to impact Chinese consumers. I think it's impacting customers of ours in the U.S., and we're seeing that impact kind of customers moving around, particularly into the U.S. I think that will continue until we see some clarity on some of the tariffs that I'm expecting in the next few weeks that we start to see some clarity on that. I think Brexit starts to work into a little bit of kind of the U.K. noise and Europe noise. We haven't really seen it impact the business yet.
I think that general volatility around that is out there. If I take all that into the works, I think Q4 probably looks similar to Q3 from a growth rate perspective, with maybe a little bit of upside for holiday. The business is very well positioned to capitalize on the holiday sales, I think similar to slightly up from Q3 is the way I would describe it. We just finished Singles Day, which was hugely successful for our online business in Asia. It was up over 40% year-over-year in that kind of one initiative. I think that's very positive, and we've done a ton of work to get our e-commerce presence within Asia, particularly within China, really well positioned.
The team is super excited about that, and I think we'll see some benefits as we move towards the end of the year there. EBITDA margin, I think for the full year, will be flat to maybe slightly down for the full year. You'll see an improving EBITDA margin in Q4. The teams are very focused. You can see year to date, we're down a bit, and I'm not sure we'll get all the way there to flat, but I think we'll be very close. As we move into next year, and as I've talked to you around the interim, one of the initiatives that we're very focused on is making sure we're delivering EBITDA margin on a balanced sales growth. The teams are focused there, and I still feel very confident in that as we move into next year.
As I said just a minute ago, we're seeing very good working capital progress, more to come in Q4 and clearly into the beginning of next year. I think we're well positioned. When we think about our business, particularly with the macro noises, I think we're well positioned with our leading position in the marketplace, our globally diversified presence, the strategies that you've come to know, which is our multi-brand, multi-category, and multi-channel pushes on a global basis that allow us to continue to deliver growth even if we have some pockets of softness that we've seen in Q3. Travel continues to be very strong. When we look at the year-to-date travel numbers through June, the travel industry or international arrivals are up 6%.
People are still traveling, and I think in our leading position in the portfolio of brands that we're offering, we'll be able to continue to deliver on the story of sustained growth in this industry. With that, I'll turn it over back to you, William, for questions.
Great. Thank you very much, Kyle. We're now open for Q&A. Operator, if you can start taking questions.
Thank you. Ladies and gentlemen, the question and answer section will now begin. If anyone wishes to ask a question, please press star one on the telephone keypad. Once again, if you wish to ask a question, please press star one on the telephone keypad. Our first question is coming from Mariana Kou from CLSA Hong Kong. Mariana, please go ahead.
Thank you. Thanks, management, Kyle and William. Have a question on Tumi. I remember that I think at the presentation just now, you mentioned that we discontinued some sales to customers for the trans-shippers.
Yes.
If you adjust for that, how would the numbers look for Tumi? I was just trying to see, get a sense of the trend compared to Q1.
Yes. Tumi's overall business would be up around 12% for Q3 if I adjusted for that. We're up around 10%. If I take the trans-shipments out, we'll be up around 12%.
Got you.
You remember on the first half. Just on the first half, you have to remember that we were lapsing, kind of taking back distributors in the beginning part of 2017. The first half of Tumi looks higher because of the timing of buying back these distributors in 2017.
Got you.
Just as a reminder.
Also on the distribution expense, can we get a little bit more color on the retail expansion that you mentioned in Europe, and how should we think about the impact of that into Q4 and also next year? Thank you.
What we're seeing in distribution expense is really two things. One, our e-commerce business is growing, and we've added eBags in, so you get a full-year effect of eBags, which has more cost within the distribution center, distribution side for our e-commerce expansion. The bigger component is around kind of our brick and mortar kind of expansion. Then particularly in Europe, in the last 12 months, we've added around 55 doors. Really, as those doors ramp, you end up with the cost of the retail footprint while the sales are growing. That's really what's driving it. It's really a function of retail expense as we kind of rapidly expanded kind of our retail footprint, particularly in Europe last year, over the last 12 months.
You'll start to see those stores, the revenue grow into the cost, which will be part of the improvements for next year. We're also scaling the pace back on the number of doors, so that we're balancing the store growth and allowing the profit to work through. When I think about Europe for next year, we'll probably open somewhere around 15 to 20 doors in Europe versus 55 doors in the last 12 months. The balance of those two will allow the distribution expense to catch up, or said another way, the revenue to catch up to the distribution expense as we move into next year. There's some Tumi expansion as well within there. Those stores are ramping nicely as well. In Asia, we're laying footprint for Tumi stores as well.
There's the timing effect of kind of opening those stores and ramping the revenues. Europe's one of the bigger drivers.
Thank you.
Yep.
Thank you. Our next question comes from Chen Luo from Bank of America Merrill Lynch. Chen Luo, please go ahead.
Thank you, management. I've got three questions. First of all, on the U.S.-China trade wars, can you give us an update on the planned price hikes in the U.S. and the potential impact on the U.S. business?
Sure. What we've had for tariffs that have gone into place already is 10%. I covered this at the interim. We've moved forward with pushing price onto our customers. I think we're ending up at somewhere around a 7% price increase to cover this tariff. Our view on this tariff increase is that we can manage the margins of the business and deliver kind of a similar growth story for our North America business, kind of upper mid-single-digit for North America with some of these pricing plays going in. The harder one is the second tariff, which everybody's kind of sitting and waiting for, right? It's an extra 15% tariff that's set to drop in January. This is what's causing a lot of the uncertainty in the marketplace, particularly with our customers around what's happening with that.
Our view there is that we will take price on that as well. It'll be something 7, 8, 9%, probably when we're done on a blended basis. The entire industries will feel that as well. The harder part on that tariff is what does it do to consumer sentiment, not just for our business, but generally for U.S. consumers if all of the second wave of tariffs go into play. We're watching that very closely. We think that with that second tariff, with price increase, we'll do a decent job of managing margins, but our sense is it probably impacts consumer sentiment a bit. We'll still deliver sales growth with a lot of that coming from pricing. What the harder part of our equation is, what does it do to consumer sentiment in the U.S., and does it change kind of consumer buy-in?
I think we'll manage it well. We're the industry leader here, so the rest of the industry's watching what we're doing in the U.S. They're following suit generally. We're not in a situation of losing market share. The wild card is what does consumer sentiment do if they see this second round of tariffs coming. Much of the first tariffs consumers haven't felt either yet, right? These are just happening now, and it won't be till you step into the beginning of next year that you'll start to see some of that. At the moment, we think the U.S. can manage its revenue profile and can manage its EBITDA profile. The team has done a very good job of managing through that. The second round of tariff is a bit more tricky.
The teams are focused on it, and we're watching very closely to see, and we're ready to move on pricing to maintain margin for the U.S. business. It's a harder one to call, the second tariff.
Thanks, Kyle. In fact, I'm curious to know when we are going to conduct the first round of 7% price hike. Have you already started doing that?
We've already messaged the customers.
exactly for next year
We've already messaged and pushed it into customers. It really will start to show up in pricing to consumers probably at the tail end of this year, most likely into the start of next year. When you think about kind of the lag effect of customers buying in, when I say customers, wholesale customers, we've already messaged and delivered that, it'll really start to show up at the beginning of next year.
Okay. Thanks, Kyle. Second question is on the effective tax rate. The tax rate actually has come down quite a lot in Q3. What's our guidance for the full year effective tax rate?
Yeah. Q3 is a little bit noisy because it was a little bit higher than normal at last year. It was 23% for Q3 and 34%. The tax rate's very difficult to look on a quarter-by-quarter basis. I think our full-year tax rate year to date, Q3 is a better rate to look at. We came in around 26% versus last year was around 28%-29%. I think that's where we'll end up. We'll be somewhere around 26% for the full year, maybe 27%, versus last year was 28%-29%. The year-to-date numbers are better sense of guidance than what the quarter was. Within a quarter, you have little bits of gyration as you're heading to the full-year number. There are some one time.
The last question.
Yeah, go ahead. Sorry.
Yeah. Okay. The last question is on the finance cost. We noticed that the finance cost has also come down pretty nicely in Q3 on the year-on-year basis.
Yep.
Can we actually use the finance cost in Q3 to predict the future quarterly finance cost?
Yeah. Q3 is a good picture. If you remember, in the back of this refinancing that we've done, we've end up in a very good hedge position. It's around 80%, maybe a shade more of our debt is at a fixed rate with both the swaps we had in place and the bond we've put in place. Even though we see rising kind of Libor rates and just generally interest rates rising, we're in a very fixed position. I think Q3 is a good measure for the benefits that we'll see on a go-forward basis. I think for the full year, we ended up saving around $8 or $9 million of interest costs. I think for the quarter, it's a little over $3 million.
That's really a function of the refinancing that we've done, we're in a very good position because we have largely a fixed rate on a go-forward basis. I'm quite happy with where we are on the financing cost and the interest costs for the business.
Okay. That's all my question. Thank you.
Yep.
Thank you. Our next question is come from Frauke Wolkewitz from ODDO London. Please go ahead.
Hello, and thank you for taking my question. I've got a question of understanding from last call. I can remember that you were guiding of an EBITDA margin improvement of 20 to 30 basis points. Now you are talking full year EBITDA margin is flat to slightly down year-over-year. Can you help me with my confusion there, please?
Yeah. Well, I think we started the year feeling like we'd deliver some EBITDA margin. As we got to the half, we were hopeful that we would be flat to slightly up for the half. What I'm seeing is, when I look at the latest model, I think we're flat to slightly down on EBITDA margin, and it's really a function of how fast we can move the needle on the distribution cost. As you know, retail costs are fairly fixed, so it's not that there's a lot of levers there, but the teams are focused on it. What you'll see in Q4 is an improving margin. For next year, you'll clearly see-
Sorry to interrupt. Is it a margin improvement versus Q3 or a margin improvement year-over-year?
Margin improvement year-over-year for Q4.
Okay.
Okay. I have the teams very focused on kind of dialing the needle. I was hopeful that we'd be flat to slightly up, which is where I was at interim, and it feels like we're going to be flat to slightly down for the full year. For next year, we will clearly be up. The teams are focused. You'll see momentum coming out of Q4 for that and as these retail stores continue to ramp. They're ramping very nicely. If you look at our comps and look at our comps for Europe, they're fairly strong. That should play out for both our existing stores, and then the new stores are ramping nicely. They're not in our comp number yet, but they're delivering very good growth. It's really a timing game for me. The margin improvement's coming.
It's just we haven't been able to kind of move the needle quite fast enough in Q3. For Q4, you'll see improvement, and next year, I think you'll see improvement as well.
Okay. On the brick-and-mortar expansion, on the door openings, this 55, was it last 12 months or year to date and only in Europe? I did forget that.
That's last 12 months for Europe. If I take last 12 months through September, we've opened around 55 doors. Similar, if I take the last 12 months through June, it was about the same. We've been opening stores in Europe on a more rapid basis for the lastly, let's say, five quarters. As we step into next year, we'll throttle that back just a bit. There's still a huge opportunity for retail in Europe, so we're still very much focused on the strategy. We're just going to get the balance and the pace right, so we allow the stores that we've opened to mature out and be a bit more selective as we open doors so that we can get the balance right of delivering good revenue growth and delivering operating leverage. You'll see the biggest improvement next year in our Europe business.
If you look at the margins across the rest of our businesses, they're fairly consistent year-over-year. Right? You'll see that when you get to the end of the year. It's really Europe that we've consciously been making an investment in this kind of retail strategy, and we've talked about that in the past on why that makes sense for Europe. We're just going to tune the balance a little bit so we can let some operating leverage flow through as well.
Okay. Sorry, last question. This rise in distribution cost, which was due to brick-and-mortar expansion, was it only centered in Europe or other regions as well?
It's largely Europe. As e-commerce is growing, we're seeing a little bit of expansion there, but it's largely in Europe. You'll see some expansion in other markets, but not to the same extent. That's just as we're expanding our e-commerce business, you end up with some distribution costs in there, both from the kind of the variable cost of placement for your e-commerce site and also kind of the freight and shipping and handling that ends up in that distribution side as well. As e-commerce is growing faster, you have some of that as well.
Yep. Thank you.
Yep.
Thank you. Our next question is come from Jessica Poon from Sycomore Paris. Jessica, please go ahead.
Hello. Thanks for taking my question. My first question is, what kind of revenue growth rate in Europe you will need to achieve margin expansion, which you just mentioned? My second question is about the gateway cities in the U.S. What kind of dollar amount we are talking about that was impacted, and what will be the condition that has to happen for this gateway cities situation to normalize? Where are these gateway cities, by the way?
Okay. Let me talk about Europe first. Europe is less a function of a specific growth rate. Our Europe business, as you know, has been growing double-digit 10%, 11%. My sense for next year is it's probably high single-digits, maybe low double-digits for Europe. That's just a function of kind of the footprints we've laid, and they're continuing to mature out. The reality is, even if the growth rate was slightly lower than that, the margin expansion will happen there because you're growing into the cost structure you've laid. That's roughly the Europe number. From a gateway city perspective, I don't have the dollars right in front of me, but from a comp perspective, they're down 8% for Q3.
Our overall comps for our U.S. business were up around 2% year-to-date, but down 1% for Q3, you get a sense where the magnitude of gateway cities. I apologize, I don't have the dollars right in front of me. These gateway cities typically are entry cities for the U.S., we consider some of our Florida market a gateway city, particularly Latin American consumers. We consider many of our N.Y. stores as gateway cities. Major kind of cities we have inbound tourists coming in to fill in our gateway city list, the obvious ones. We're seeing it in our wholesale customers as well that track some of their gateway cities. Customers like Macy's that have N.Y. stores, which are considered a gateway city. They're seeing the same kind of trend in inbound traffic impacting these gateway doors as well.
I think from a normalizing perspective, I think we need some of this trade tension to settle out. We'll obviously kind of lapse next year. At a certain point, you'll be lapsing some of the pressure as you get into next year. As far as when that plays out, it's not 100% sure to me. I think we need to see some of the trade tensions settle out, which I think will play out in the next two or three months. Typically, these gateway locations are really good sources for us, and I expect them to come back. I think we're in a bit of a moment right now where trade tensions and uncertainties are probably driving most of the noise there.
Okay. If I may just add on one more question.
Yeah.
How do you make sure when you push through these price increases of 7%, it will not impact your volume in the U.S.?
Well, that's part of the trick, right? It's a function of the entire industry is feeling the pressure. I think generally, you're going to see everybody move on pricing because they won't be able to manage otherwise. We're all sourcing from the same locations. Could we have some short-term blips in volume? Potentially. I think in the medium term, when you think about two or three quarters, I think it'll be completely fine because the entire industry is going to move there. I think the second round of tariffs, if they go through, I think will be a tougher call because I think not just luggage, but just general consumer goods that U.S. consumers are buying are going to inflate if we see this second round work its way in a way that I think could cause sensitivity off.
That's the harder part to predict as far as what's the impact on volume. I won't pretend to guess. We'll be looking to manage the balance of all, so we deliver growth, maintain margins. The volume piece is the hardest part of the equation.
Okay. Thank you.
Yep.
Thank you. Just to remind again, if you wish to ask a question, please press star 1 on the telephone keypad. Our next question is come from Anne Ling from Deutsche Bank Hong Kong. Anne, please go ahead.
Thank you. I'm Kyle, hello, William. I have a couple of questions, just a follow-up question on the U.S. tariffs. With the 7% increase for the first round, may I clarify that this is for the wholesale, is that correct? What does it mean in terms of the hike in the retail price? Then, that increase is possibly mainly for Samsonite and American Tourister. Is that correct? Because I think you mentioned in the previous call that Tumi was mainly manufactured in Thailand. Will there be any changes in terms of your sourcing trend moving forward if we have the second round of tariffs coming in? Yeah.
The reason we're at seven is we don't source 100% from China for the U.S., but a meaningful amount. We're actively looking to shift, but we were already doing that anyway. I think tariff maybe has accelerated us a tiny bit. When we start the year 2018, we're sourcing probably around 95% of our products in the U.S. from China. By the time we get into stride into 2019, I think that's going to shift to roughly 80%. A meaningful kind of shift in sourcing as we move to the middle and back half of the year. Still, the lion's share is sourced from China, and it's really a function of capacity to shift the U.S. volume in other markets. We're working as a team. We're very focused on that.
Again, we were doing that already because costs in China generally have been rising. We're just accelerating it a bit. That's what we're doing to managing the sourcing and the shift in that. Our retail products, we're often changing the assortment of retail within our own doors anyways, we will be looking to maintain the margins we have in our retail business. That will mean us working in price into our retail business as well, a function of both mix of products and some pricing, probably not that dissimilar to what we're talking about on the wholesale side. I think those were your two questions.
For Tumi, is that mainly manufactured-
Yeah.
That's
Tumi has some impact. We have a lot of new releases for Tumi next year, and we're more retail in the U.S. than wholesale, we'll be managing it more ourselves. We're probably around 70, 73% kind of direct-to-consumer. It's easier for us to manage. We're very focused on maintaining the margins in the business, maintaining the margins, we've had great success in moving the gross margin profile of the business. A little bit less than half of our business does come from China, so it's not that Tumi is not sourced some from China. There is sourcing from China, but more of it's outside of China than inside China, compared to the rest of our U.S. business.
I think there will be some increases for our Tumi business, but it'll be a mix of new introductions, along with maybe some select price increases on certain lines that we think have capacity to take it. There won't be a wholesale kind of increase in our Tumi business because it's easier for us to manage.
I see. Some other questions on the accounting side. Regarding Tumi's GP margin, you mentioned that there is a 400 basis point improvement. Does that mean that third quarter you have a 32.9%-- sorry, 72.9% GP margin? I think management have a target of something like 70% by year 2019. May I know whether, with this strong improvement, are we revising our target in terms of Tumi's GP margin? That's the first question. The second one is on the group's adjusted EBITDA margin. When you talk about the flat EBITDA margin, are you referring to the adjusted EBITDA?
Yes. The adjusted EBITDA margin. For Tumi gross margin, we have two things. One, we've set a target for our North America business, which is a big piece of our business, to get the Tumi margins close to 70%. We're very close to that for our North America business. We're very happy with that, and there's been great progress there. The overall margins for Tumi, as Asia grows at a faster clip, which has a slightly higher margin profile, and also Europe, once it gets into stride, will have a margin profile maybe slightly higher than the U.S. business. You'll get some mix effect there. I don't have the numbers right in front of me, but that 72 sounds about right for the consolidated business, where U.S. business is closer to 70, maybe a shade under 70.
As Asia really starts to move at this fast clip, we can see some mix effects of margin for Tumi coming up a bit.
Okay.
If you remember, we were kind of largely distributor for Tumi, we're doing a lot of Tumi in Asia direct now.
Right. Okay. A follow-up on the EBITDA margin. When I compare the EBITDA margin versus the adjusted EBITDA margin, the key difference is actually the share-based compensation, where for this quarter you don't have.
That's the biggest driver, yeah.
Yeah. You don't have any share-based compensation. That's why adjusted EBITDA, it looks a bit lower, but on an EBITDA basis, it's more or less flat, like 16%. My question is, for 4Q, should I be expecting some share option expense?
Yeah, you should. Remember, our grant got pushed out from what would typically be June, and it happened in October. You'll see kind of stock comp expense coming back in a normal way. It's part of the reason why, it's only part of it, but why our operating profit to shareholders is up very strongly because of the stock comp. We take that out in our adjusted EBITDA margin, so you get to kind of really underlying-
Right
what I would label kind of cash flow EBITDA in a way. We take the stock comp component out of that. You'll see that come back. The grant happened in October versus it typically happens in June or July for us.
Would it be retrospective, i.e., normally you get something like five to six million per quarter for the share-based compensation. In that case, with zero for a third quarter, should I be expecting something like $10 million to $12 million for 4Q? Is it just a normal five to six million?
I think it'll be slightly higher than five or six million, but I don't have the number right in front of me to give you a real answer. We'll come back to you, but it'll look like a normalized kind of cost of options, but I don't have the numbers to just quote you a number.
Got it.
It'll be more normalized to what we're typically seeing.
Got it. My last question on the trans-shipment, i.e., some people are trying to sell through the gray market. Is this already done? Like third quarter, we will not have any more impact, or in 4Q, we will still have some impact regarding this kind of controlling of the trans-shipment business in the U.S.
Yeah. I think you'll see some more in Q4, and you'll see a little bit into Q1 of next year. We really started in Q2 and really started to catch up to it in Q3. There'll be more in Q4 and a bit in Q1 as well. Probably a similar number to what you saw in Q3 for Q4.
Okay. Got it. Thank you.
Yep.
We have one question from Chelsea Huang of Morgan Stanley Investment Management. She wanted to know what's our view as far as eBags growth, as our margin performance for eBags rest of this year in 2019?
Yep. From an eBags growth perspective, the growth is slightly muted this year. When you look at our Q3, for example, our eBags business is down around $4.5 million, but that's us consciously exiting third-party brands. The inverse that you're going to see with eBags is our EBITDA margins are improving very nicely. This was a business that was making zero EBITDA in many ways when we bought them. They'll be very close to high single-digit EBITDA margin for 2018. Really, as we go into 2019 and 2020, our ambitions are to move the EBITDA margin for eBags up to a similar level as our U.S. business, let's say 15% or 16% EBITDA margin over those next two years. From a sales perspective, we'll be a bit flattish for the full year this year as we're consciously exiting.
I expect that sales profile to kind of build as we push our own brands in there and kind of integrate our eBags business into the rest of our North America business. I'd expect a growth profile that looks like the rest of our North America business once we settle it down, maybe a shade higher because we're driving e-commerce traffic there as well. This year, we're doing a lot of correcting. We're exiting third-party brands that we don't think should be there. They're not adding any value. That coupled with the mix of brands that we are selling is doing what we said it would do, which is moving the margin profile up for the business. You'll see some of that for sure in the full year 2018.
Thank you. Our next question is come from Dustin Wei from Morgan Stanley, Hong Kong. Dustin, please go ahead.
Hi, management. Thanks for taking my question. My first question is related to the top line overall. The U.S. business, you mentioned quite a bit of, I feel it's a one-off items affecting your third quarter number. How many of them will sort of continue into the fourth quarter and then next year? Sort of what kind of number that we should expect for the next year?
Yeah. I think there's really a couple things. This transshipping thing I just answered, there'll be a bit more of that into Q4 and a bit trailing into Q1. Our reducing sales to discounters is largely happening this year. There's probably another similar impact in Q4, let's say $2 million or $3 million, but less of that as we move into next year. The wild card, as we talked about earlier, is kind of gateway cities and just kind of inbound sentiments into the U.S., does that carry into next year? That's a harder one to call. As we look at our profile for next year and what we're expecting for our North America business, we still feel that it looks like where we've always guided, which is it should be kind of in this mid-single-digit growth range for the business.
That's all subject to what I would label a second round of tariffs. If that plays out, it's a little bit more tricky. We'll be trying to deliver that same growth, if the second tariff goes in, we'll have to judge consumer sentiment. A little bit of what we've talked about that are kind of feel like they're one-offs for Q3 will carry into Q4. The underlying growth profile for the North America business, we haven't really changed our view there. We think, take these out of the mix, this business is a three, four, five% growth business, and our team feels very kind of strong, kind of momentum from that perspective.
Right. If I look at these start doing this, stop transshipping in like the third quarter and the gateway cities start kind of maybe slow down or decline in the third quarter and your reduction in the discounter, that kind of shows that your first half 2019, the number won't be too good. You sort of hope for the back half of the next year, you will see stronger rebound in the business.
Yeah, I think some of these big impacts on transshippers, that's why I said it's not quite as big as we move into next year. Much of it's this year. I'm saying a little bit will trickle into next year. The sales to discounters is largely happening this year. There'll be much less of that next year. The transshipment will be largely done this year. A little bit will trail into next year. I think our North America business might maybe start off a little bit slower just because of sentiment and be a bit better in the back half. Your call is as good as mine as far as kind of where we end up on kind of the trade rhetoric and how does that settle things down as we move into next year.
On a blended basis, I think the full year next year for North America is in this kind of three, four, five% range. That's muddled with some price increasing for the tariffs, along with our best guess on what it means for consumer sentiment. Our business is well-positioned in the U.S. We're continuing to gain market share. It's much more to do with what's happening kind of macro in the U.S. that's driving a bit of the noise. Then a few of these conscious decisions to strengthen the Tumi brand globally, for example, with the transshippers.
Okay. Thank you. Regarding China, excluding B2B business, you have roughly four% sales growth in the third quarter. Do you have the number for the first half? Without B2B, what was the growth?
I don't have it right in front of me. Our first half China business was up 11%. If I remember right, B2B was fairly consistent year-over-year. It wasn't really until we got into Q3 that we start to see some more meaningful drop in B2B, which is why we adjusted the number for you. I think if I adjusted it out, it wouldn't move our first half numbers that much for the half, but I don't have them right in front of me. I wouldn't hold me straight to that.
No, no.
It's really Q3 that we saw kind of the reduction happen.
Right.
In the first half, it was fairly consistent.
Right. No problem. How big is the B2B business in China? Is that roughly like 20%-30%?
William Yue, you might have to help me here if I can't remember. I think it's around 15%-20%.
It's a little bit higher than that. It's a little over 20%. I don't have the number right in front of me.
Yeah.
Dustin Wei, if you want, you can just email me tomorrow, and I'll get you the numbers. I'll double-check.
Sure.
It's over 20%.
Okay. It's declining quite significantly, let's say, down more than 10%, 15% kind of thing?
Yeah. No, we're seeing it decline in a meaningful way, yeah, because these are conscious buy-ins, and the government's kind of bought down. We're seeing kind of steps in reduction there. I don't have the numbers right in front of me, a meaningful kind of drop, a noticeable drop. Probably 10%-plus decline.
Okay. Thank you. Overall in Asia, what's your sort of expectation for the 2019, considering the China issues or the South Korea probably will continue to be what's the overall view on Asia?
I would say we need to see how the trade tensions play out for China and just where China sentiment goes in. Probably not that different than my overall outlook for Asia, which is somewhere around upper single digits, 7%, 8%, 9% is probably the way to think about Asia for next year. I think depending on how China plays out will be where we end up in that range.
Right. Okay. For Europe, you have very good number, especially for Tumi and American Tourister. They are going to lap high base into 2019, and 40% growth rate is a little bit hard to imagine that can be sustainable. What kind of risk do we have in Europe, or are you still pretty confident that it can achieve above 10% growth for next year?
Yeah, no. I never said above 10% for next year. I think Europe can be high single, low double digit for next year. You're right, American Tourister will settle down, but Tumi's picking up momentum, and I think there are some opportunities for Samsonite to grow a bit. You're going to see some of our advertising campaign shift to Samsonite for the globe, and particularly, that'll benefit Europe. I think on a blended basis, you'll have some brands maybe coming down a bit. American Tourister's still in tremendous stride. Do we continue the same growth rate for next year? Probably not, just because the base is bigger. Tumi is just getting momentum. If you remember, Tumi was lower in the first half, we're starting to get into stride. That can be a bit higher.
I think the brand Samsonite has a lot to go at, particularly the adjacent categories for Europe. You blend that all together, I think we can be in that high single-digit range, maybe with some good success, low double digit for Europe.
Okay. Thank you. In the working capital side, your inventory, they show some of the improvement. From a top-down view, would you describe that as sales sort of weakness, lots of things that you are doing that help your improvement in the working capital? Is there any correlation between the better working capital and the slightly weaker sales growth, or these two set of the numbers are pretty independent?
Yeah, they're very independent. We consciously allowed inventory to go up, and we're working it back down to levels that we want it to be. It has nothing to do with the sales growth profiles. We were bringing it up to support the American Tourister business. It's been very helpful, but we just brought it up too far. There's no correlation between sales growth and inventory. We're doing a good job of managing it. It's moving at a good pace. It's maybe not as fast as I want it to move, but we'll get there because it's all good inventory, and we don't need to sacrifice margins to manage the inventory. We're letting it cook out in an orderly fashion so that we can get back to the levels, and all the teams are focused on it.
Right.
You'll see more improvement in Q4, and you'll see it get back to the levels as we move into next year that we're used to.
All right. Thank you. EBITDA margin, do you have the breakdown by region? Which region will have the weaker EBITDA margin so far in the second half of this year?
I don't have the breakdown by region, it's mostly in Europe, and it's mostly because of the direct-to-consumer push that we have going in Europe. I don't have it in front of me by region, but Europe's a big driver. Asia's been very consistent. The North America business, consistent. Latin America's making a little bit of investment in growth, so you have a little bit of margin reduction in Latin America. You're seeing Europe really in this investment mode and having some of the margin pressures there.
Okay.
I think if you look at our interim results where we do show regional, it'll paint the similar picture for you.
Right. Thank you. You previously mentioned that the sales growth in Europe market is not the way we should look at the potential in the EBITDA margin expansion. If I remember correctly, you have that 3%-4% consumer sales growth for Europe. That actually, I think, is quite healthy, and I think that's a function of the better or worse EBITDA margin. What kind of a same sales growth that you should look for that could drive up the EBITDA margin in Europe?
I've already answered that. I just answered that just a bit ago.
Okay.
I think it's less around some specific growth level. I think the growth range that I just guided for Europe will allow margin expansion. We're also just looking around the place to make sure that we're being as sharp as we can on the cost side. It's a combination of the two.
Okay. Sorry, my last question is that, how likely could you source with your supply chain outside China? Is that likely? Because I imagine there's quite a bit of the supply chain over there to make the luggage. Is that easy, or do you have the mixed percentage sourced outside China going forward?
Well, everything takes work, I would say we're having very good progress. As you know, much of the industry is in China, and much of the raw components are in China. We'll change the mix profile. The team's doing a really great job in doing that. It doesn't change overnight, though, as you can imagine. We're having good success. It's often our suppliers that are moving because their suppliers will shift production to lower cost markets, they just need some time to make that happen. If I rated this team, I think we're doing a great job in managing with what we have and shifting. It's quite a dramatic shift to go from 95% to 80% in a very short window of time.
Right. Just very lastly, do you have any guidance for EBITDA margin next year?
Not yet.
Okay.
I think we'll see in margin, I don't want to spell out a margin yet, but feeling very good about where we are from a margin profile as we look at our plans for next year. We're just finalizing our plans. That's why I say not yet. I just need a bit more time to have that cook out.
Okay. Thanks a lot for taking all my questions. Thank you very much.
Hey, you're welcome.
Thank you.
William, I need to move on.
Yes.
I think we're at a point.
There's just one more caller, Linda from Macquarie, with some questions. She will be the last one.
Yeah.
Okay, thanks.
Hi, Kyle and William. I have two questions. The first one is regarding for our intangible assets. I was wondering that because, Kyle, you just mentioned that outlook seems a little bit cloudy. I was just wondering whether there is any of the risk for the potential intangible asset impairment likely to happen this year. For our intangible assets, can you give us the roughly breakdown, how much belongs to Tumi and how much belongs to Samsonite and American Tourister? The second question is that, do we still looking for any of the M&A opportunity? If so, what will be the direction for our M&A target? Thank you.
I don't see any risk in tangible assets. We have what I would label our business and our strategy and our medium and long-term view for the business are very much intact. We're seeing what I would label a moment of softness in a few pockets within the world that are being driven by some recent kind of macro trends. There's no change in the visions for the business and kind of where we're moving. There will be no impairment risk, as I think about it from an intangibles perspective. This business still has a growth profile that's quite exciting, and the underlying fundamentals of the business are very much intact. I don't see any risk there. I don't have the breakdown in front of me, but if you remember, we acquired Tumi for around $1.8 billion. A good chunk of that was intangibles.
It makes up a meaningful amount of our intangibles. As you know, the Tumi business was doing very well. The rest will be a collection of kind of the smaller brands that we've acquired over time. It'll be less around Samsonite and American Tourister, as you can imagine, because those are brands that we've had in our hands for many years. I don't see an impairment risk. The fundamentals of this business are very much intact, and the growth profile is slightly off because of these few pockets, but the underlying strategy and the momentum in this business, and the success we're having is still very much intact and moving forward. Was there another question you had in that? I thought there was one more.
It's the M&A, because I just want to know.
M&A, yeah.
whether you have any, yeah, looking for any M&A opportunity.
Yeah. As I've said, we're very focused on continuing to play out with what we have. I think Tumi's performing well. We're not actively pursuing anything, but we're always actively listening. There's nothing imminent, but it doesn't mean that we aren't listening to what's out there. There's nothing that we're actively cooking or chasing at the moment. Doesn't mean as we play into 2019, into 2020, that there won't be more opportunities, and there are things that we'd be interested in. We're not kind of pushing the market at the moment. We're kind of listening as we play out with what we have today. I'd like to see the margin profile kind of play out that we've talked about, and often when you bring in deals, they cause a little bit of noise.
Having a period of cleanness so that we can kind of show the margin capabilities of the business I think is important as well.
Okay, got it. Thank you.
Yep. Hey, Brian.
Yes, I'd like to thank everyone for dialing in tonight, and thank you, Kyle, for spending the time with us. As always, if anyone should have additional questions, feel free to reach out to me. Thank you very much, everyone.
Thank you, everyone.
Thank you. The conference call has been concluded.