Q3 2021 Allbirds Inc Earnings Call

November 30, 2021

Good afternoon, ladies and gentlemen, and welcome to the <unk> third quarter 2021 conference call. All participants will be placed in a listen only mode. After management's prepared remarks, there will be a question and answer session at which time instructions will follow now I'd like to turn the call over to Kyle because he.

Head of strategic Finance and Investor Relations at all birds you may begin.

Good afternoon, everyone and thank you for joining US with me on the call today are Joey's Willinger, and Tim Brown, Albert's co founders and co Ceos, and Mike Bufano, Ahlborn, Chief Financial Officer, before we start I would.

To remind you that we will make certain statements today that are forward looking within the meaning of the federal securities laws, including statements about our Q4 and fiscal year financial outlook as well as our preliminary outlook for 2022 and other matters referenced in our earnings release issued today.

These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please.

Please also note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise any statements to reflect changes that occur. After this call. Please refer to our SEC filings as well as our earnings release and form 8-K filed today for a more detailed description of the risk factors that may.

Affect our results.

Also during this call we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.

These non-GAAP items should be used in addition to and not as a substitute for any GAAP results you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's earnings release.

Now I'll turn the call over to Joe to begin the formal remarks.

Thanks, Kyle and thank you all for joining I'll burden. His first earnings call. We are thrilled to have this platform to help us further advance our mission and discuss our plans for durable and profitable growth over the coming decades.

I'd also like to take a moment to express our gratitude to the Albert's team as well as members of the finance community and our investors had helped us shape a successful IPO.

And we're of course pleased to speak with you on the heels of a strong quarter, one that Mark continued reacceleration of our business as we emerge from the Syncrisis of Covid.

When Kevin I started this business in 2015, we held the view that climate change was our most formidable an existential crisis and as a result believe that consumers would eventually connect their purchase decisions with their values on the environment yet most in the footwear and apparel industries continued to rely on synthetics.

Within that tension we saw opportunity.

But we didn't want to make sustainable products for the sake of being good for the planet, we wanted to make incredible products because they are sustainable.

We put this purpose at the heart of our business and link it to everything we do but most notably our R&D investments in our distribution model. These strategic choices have helped to create important and structural advantages that we believe will allow us to outmaneuver competitors well into the future.

We innovate we harness some of nature's, most abundant and high quality materials to make products that feel different and performed better than synthetics and leathers that the industry has historically relied on.

We then connect this product engine to a vertical distribution model allows us to reach consumers effectively while shrinking go to market timeline, and enabling us to deliver fantastic value and a great shopping experience to consumers all while preserving our advantage gross margins.

Since launching the business in 2016. These strategic choices have enabled a strong and differentiated foundation. We have served over 4 million customers. Since we sold our first shoe in 2016, and we have maintained a net promoter score greater than 80 in each quarter since Q1 2019.

In fact, we logged a global cross channel NPS of 86 in the first half of 2021.

And that wonderful customer experience has led to strong repeat engagement with customer cohorts of a year or more coming back for a second purchase at a rate of 43%.

This repeat purchase rate is notable for both the consistency of the high repeat rate and because it comes from the narrow assortment we've had to date.

As we expand our product offering we're excited by the opportunity to utilize this expanded assortment coupled with our technology and data advantage to grow repeat purchases.

We are also energized by how many people have yet to learn about our brand. Our aided brand awareness is low just 11% in the U S. As of Q1 2021.

With revenues in the trailing 12 months of $260 million, we have a tremendous runway in the global footwear and apparel industries estimated as of 2020 at $366 billion of one five trillion respectively.

And we are executing this a top of brand platform built around the most important consumer trend of this generation.

Climate change.

Now, we simply need to reach more customers because of our disciplined approach and product craftsmanship.

We have consistently achieved contribution profit in excess of CAC within the initial month of purchase for each annual cohort since inception.

And given technology advances over the past decade, our vertical distribution model coupling of digital heritage with a growing fleet of brick and mortar stores is the right way to do that.

We've done this successfully against the backdrop of an industry that has principally relied on wholesale for the past 50 plus years.

We opened our first store in 2017 and despite the slowdown of this channel during the pandemic. We now operate a fleet of 35 stores globally with 23 in the U S.

Each store has strong standalone four wall economics, but we've come to learn that it is our omnichannel repeat customers who are the most valuable to us these customers spend one five X when compared to digital only repeat customers, giving us more reason to continue our store expansion.

Now zooming out over these past five years, we havent cut corners and have been focused on building a strong foundation for the future. While we always envisioned building a global lifestyle brand, we opted to make shoes first and now that we have gained consumers trust. We believe they will now embraced our material innovations apply to <unk>.

All categories.

We have been almost 100% vertical in our sales model and we made early investments in our global reach deploying technology, establishing supply chain and placing teams on the ground at each of our core international markets.

This disciplined approach coupled with the authenticity of our brand ethos is how we have built the foundation that we expect to rely upon to grow at a healthy clip for decades to come.

Which brings me to our growth algorithm.

We're driving the topline primarily through three areas, one our growing store portfolio to international expansion and three product innovation, which fuels, new customer growth and increases the lifetime value of existing customers.

I'll briefly go into each of these.

On the first growth pillar, our real estate portfolio is highly productive and as an efficient means with which to acquire customers.

Our stores generate strong returns on invested capital and have attractive payback period.

And when we opened new stores. It drives increased brand awareness provides a halo effect on the overall business and hence we improve the efficacy of our marketing spend.

These impacts along with lower return rates and more efficient transportation means that growth in physical retail also drives margin expansion.

We have a strong pipeline of new stores ahead, and ultimately we see white space for hundreds of stores over time.

On international expansion. It is important to note that we planted flags early in key markets across Europe, and Asia with that foundation established and relatively low sales penetration in these markets. We have line of sight to attractive growth as a result, particularly in the digital channel.

And as is true as we shift the channel mix as we grow international we expect to expand gross margins due to our pricing architecture and an efficient logistics network.

Underpinning the opportunity to drive growth in our retail and international businesses is an incredible product pipeline led by footwear with a growing and important apparel offering.

Our robust R&D engine means that we're continually innovating in our short history, we've proven that our material and innovation platform creates a powerful flywheel, enabling us to build winning franchises, while empowering us to expand into new categories.

On this from Tim shortly.

We are ideally positioned to execute against our strategic roadmap because of our amazing Ahlberg block. We are fortunate to have world class teams, who are energized by our mission and the potential ahead.

The team's attention is now focused on achieving our medium term targets. These include revenue growth of 20% to 30% annually gross margin of over 60% and adjusted EBITDA margin in the mid to high teens rising to north of 20% over the long term.

Simultaneously, we intend to reduce our cotr missions by 95% by 2030, helping us to drive towards our company mission, while unlocking profitable growth.

We're pleased with our year to date performance in 2021 and feel great about our positioning as we wrap up the year and look ahead to 2022 and beyond.

Different governments have responded to the pandemic with varying techniques ranging from severe isolation and locked down to more permissive approaches.

New variants are boundary emerge and government response will continue to evolve, but we hope and believe that the worst is behind us and as the world emerges from an environment marked by the most depressed retail traffic we've seen in decades, we believe the macro recovery that is underway will buoy, our prospects as we flex our product innovation engine see recovery in our existing.

Fleet of stores and unlock our new store pipeline.

And briefly on Q3 results, which Mike will walk through in more detail.

I'll note that this quarter was headlined by 33% topline growth year over year, reflecting solid execution by our teams and robust global demand for the <unk> brand.

Revenue was strong across channels and geographies with particular strength in the U S retail as consumers return to in store shopping.

We opened four new stores in the U S. In Q3 and another two in the fourth quarter, bringing us to 35 locations globally, which is where we will end the year.

And on the International front, we grew sales by 10% despite a choppy recovery from COVID-19 across some of our core regions outside the U S.

Our team has navigated a difficult supply chain environment, well, and we felt well positioned to capture demand for a holiday season that is shaping up to be quite strong, particularly in the U S.

With that let me turn it over to Tim to talk to you about product innovation and what lies ahead for the brand.

Thanks, Joe and Hello, everyone. It feels great to be holding our first public earnings call and welcoming our new shareholders.

We'll get started with an initial insight born out of frustration with Oba logo overly synthetic products and our conviction that there was a bit away.

We launched that will run or in March of 2016 to prove the comfort design and sustainability aren't mutually exclusive in the fashion Shouldnt just feel good that should also do good.

Our blueprint from day, one has been to build franchises, we start with one great product and increasingly bring energy and excitement to the mixture colors materials and partnerships.

But we'll run it and all of our product franchises since start with a deep understanding of our customer.

We then deliver Jones total capability in natural and sustainable material R&D to create differentiated product experiences.

Will they be the amazing soften cozy comfort in our wood products with a lot and Breeze, you feel from our tree products.

<unk> utilizes a unique minimalist design philosophy that has created a distinct family of products that represent a new language for sustainable design that highlights beautiful natural materials, rather than flesh and logos something uniquely all boots and Rick nausea Bull on the street when you see someone wearing our shoes.

The combination of our distribution model and our product engine has allowed us to build a real structural advantage in footwear.

Only establishing ourselves as a leader in sustainability, but also getting authority for both comfort and performance.

It's exceptionally difficult to pass the threshold in footwear and achieve scale. Once you do that the customer trusts us to into other categories and we've seen that innovate has come to us as a partner of choice.

Because we are doing credibility with our customers. We are now ideally positioned to be able to connect new apparel offerings to our footwear franchises.

Overall apparel is a small percentage of the business today, just on the Tim Steve, but thats intentional.

Our approach is to build the business methodically and carefully to increase basket size and helped drive repeat purchasing.

When we saw a great response in the quarter to our product innovation with strong traction from the pipe of mid sugar Rover and outperform apparel launch in August.

Exciting new collection to complement our performance footwear offering.

We continue to be very excited about our growing community marketing program called Yoga collective AGC.

Since the beginning we've understood what's good for our community is good for our business and this strategy puts local ambassadors tied to a growing retail footprint at the center of our product creation process, while simultaneously driving brand engagement and awareness.

We now have a series of weekly AGC run clubs in operation in Los Angeles, Atlanta, Seattle, San Francisco, London <unk>.

<unk> in Oakland, alongside supporting events showcasing a growing roster of performance products.

We have attracted a growing number of local influences and community leaders who are using the <unk>.

The AGC is also an emerging catalyst for new product testing product launches and brand content like our recent trail shoe launch that featured a series of AGC athletes.

Our product partnerships remain a key focus.

Product specific partnerships with broadly of motto and our continuing work with Adidas and Jif staple are examples of our partners, bringing incredible energy and amplification to existing franchises and our sustainable thought leadership.

In Q4, we were also excited to release, our Marshawn Lynch gets school content drop that underlines the potential of sustainability and climate change to be a powerful connected to new audiences.

Advertising is also an important way that we amplify all of the great organic reach that our product and brand marketing efforts create for the brand.

As we have evolved over the past few years, we've made a concerted effort to diversify our media mix and now feel like we have an effective and healthy balance through a paid marketing funnel.

One important outcome of that effort to diversify our spend is that recent privacy changes and resulting increases in customer impressions on social media channels had a limited impact on our business.

In the end we.

We know that people don't buy sustainable products that by great products, but to us the very best products are inherently sustainable.

We have spent the last five years building a product platform that marries product innovation through natural materials and a purpose driven brand that meets consumers with a heated not without.

On <unk> in the next 24 to 36 months, we have the most exciting product pipeline in the history of the company. We can look forward to multiple new lifestyle and performance product launches and new material platforms as we see the benefit of historical investments in team in R&D and momentum from our increasing prominence in the footwear and apparel category as a leading partner.

For our global network of sustainable material innovators.

Now over to Mark to discuss Q3 financials and our full year outlook.

Thanks, Tim and Hello, everyone I'll start by echoing the sentiment you heard from Julien Tam about starting our life as a public company. We're thrilled to be here. We appreciate your interest in all of ours and we're looking forward to spending more time with our analysts and shareholders going forward.

I will also echo what Joey said earlier, we're pleased to report strong Q3 results across the P&L highlighted by revenue growth of 33% above our medium term annual target of 20% 30%.

Continued gross margin expansion of 120 basis points and continued leverage in the marketing line of the P&L.

I'll take a few minutes to walk you through the P&L and explained the drivers of our Q3 performance.

Net revenue increased 33% year over year to $63 million.

As Joann Tim mentioned this growth was primarily driven by strong U S performance and from new product introductions.

Breaking down our net revenue growth a bit further orders were the main driver of the 33% increase. In addition, we saw a strong 13% increase in average order value.

Looking at net revenue by geography, our net revenue in the U S increased by 42%, reflecting strength in both physical retail and digital.

We continue to see a notable uptick in the retail channel as consumers continue to return to stores.

Net revenue in our international markets grew by 10% in some regions, particularly in China, Japan, and New Zealand, our momentum was slowed somewhat by the Covid resurgence.

Finally to close out our commentary on Q3 2021 net revenue growth I'd like to point out that the two year increase in net revenue was 40% when comparing to Q3 2019 I share. This because we believe it's a helpful data point for investors as we begin to lap COVID-19.

Turning to gross profit, we delivered Q3 gross margins of 54, 1%.

That's an improvement of 120 basis points from Q3 2020.

This improvement reflects our ability to make steady progress towards our medium term target of 60% or greater gross margin.

The biggest drivers of gross margin expansion in Q3 were improvements in product Cogs and a favorable year over year mix of higher gross margin products, including our newly launched performance apparel.

Those positives were partially offset by higher warehouse costs and pressure on logistics costs more broadly.

I'll pause here for just a second and state. The obvious we are mindful of the macro headwinds around supply chain and logistics costs, especially with the latest Covid variant news of.

Of course, this is a fluid situation and like everyone in the industry. We're monitoring closely as we have been since the pandemic started.

In that context looking at gross margin for the balance of 2021, I will share that we are experiencing higher than normal holiday season outbound shipping surcharges in the current quarter.

However, even with some headwinds we still expect to achieve full year gross margin year over year improvement of approximately 150 to 200 basis points in 2021.

That translates to an expected full year 2021 gross margin of 52, 9% to 53, 4%.

As we March towards 60% plus gross margins. We are focused on the annual gross margin progress we've been making and believe we will continue to make.

Indeed, we are proud of the progress we have made since 2018, when our gross margin was 46, 9%.

At the midpoint, we would end 2021, and an improvement of over 600 basis points from 2018 to 2021.

Moving down the P&L below gross margin Q3, 2021, SG&A totaled $33 million and increased by 64% year over year.

Let me unpack SG&A a bit for Ya <unk>.

First it's important to note that SG&A includes the operating cost of our stores, such as labor and occupancy as well as Preopening expenses.

Indeed in Q3 2021, the increase in store expenses was the biggest driver of the increase in our total SG&A.

Compared to Q3 2020, we had 11 more stores in Q3 2021, an increase in the number of stores of over 50%.

In Q3, 2021 alone we expanded our store portfolio by four new stores in Manhattan on the upper West side in L. A in century city in the Bay area in Palo Alto and our first store in Atlanta.

One last note on store expenses and that we had approximately $300000 of preopening costs in Q3 2021.

Closing out SG&A another significant driver over the year of the year over year increase was approximately $2 million of incremental costs, we incurred and preparing to be a public company.

We expect to see another $3 million of public company costs in Q4, 'twenty, one, bringing the full year 2021 total to an estimated $5 million.

Looking now at marketing spend we achieved more than 500 basis points of leverage relative to Q3 2020, as our teams focus on scaling marketing efficiency, while maintaining strong sales growth.

Bringing all that together adjusted EBITDA in the third quarter of 2021 was negative $6 3 million compared to negative $3 8 million in the third quarter of 2020.

When you factor out the $2 million of public company costs in the quarter adjusted EBITDA decreased by only about half a million dollars year over year.

I'll finish up my commentary on our Q3 financials with a quick look at the balance sheet and cash flow.

We ended the quarter with $65 million of cash and cash equivalents and $40 million of availability under our revolving credit facility.

Capital expenditures in the quarter totaled $6 $2 million, primarily driven by new store openings.

As you can see on the balance sheet. The big mover this quarter was inventory, which totaled $99 million up 55% from Q3 last year.

Given the macro supply chain and logistics environment. We felt it was prudent to take advantage of our strong balance sheet and increase our inventory positions.

We were well inventoried in Q3 and continue to be so in Q4 and into the first half of 2022.

I think this is a good place to touch on supply chain broadly before moving onto guidance.

From a production perspective, it's important to note that DNR accounts for only about 50% of our manufacturing with more of our production in the north and the south.

Thus far we have not experienced any government mandated manufacturing shutdowns in Vietnam.

Through careful planning secondary sourcing and regional diversification our teams have definitely navigated the challenging environment positioning us to meet demand throughout the holiday season and over the coming quarters.

Huge kudos to our supply chain team.

I'll wrap up my remarks by sharing our outlook going forward.

For full year 2021, we expect net revenue to be between $270 million and $272 million, which equates to an increase of 23% to 24% versus full year 2020.

On a two year basis, that's a 39% to 40% increase when compared to full year 2019.

Looking at the bottom line, we expect full year 2021, adjusted EBITDA of negative $15 million to negative $17 million, including an estimated $5 million of public company cost.

Backing out the public company costs full year 2021, adjusted EBITDA would be negative 10 to negative $12 million.

On an apples to apples basis that would be an improvement of 22% to 35% when compared to full year 2000, Twenty's adjusted EBITDA of negative $15 4 million.

Looking around the corner to 2022, we will be providing detailed guidance on our Q4 earnings call in February 2022.

As a reminder, our seasonality skews towards Q4, and the gifting season. So on an ongoing basis, we plan to provide detailed annual guidance on the Q4 call each year.

That being said with this call occurring off cycle due to the IPO, we did want to share with investors and analysts our preliminary thoughts on the top line next year.

In short we feel we have great momentum in our business and we are confident that in 2022, we can grow net revenue at the high end of our medium term target of 20% to 30%.

Our preliminary 2022 net revenue expectation is approximately $350 million, which would represent a 60% two year growth rate a significant acceleration over the two year growth rate in 2021.

In closing I'd, just like to share that we continue to feel confident about how the business is positioned and our ability to capitalize on the opportunities ahead of us through careful investments we have built a solid infrastructure across people supply chain and technology that we believe positions us to profitably grow the business and create shareholder value.

With that I'll turn the call back to the operator to start Q&A.

Ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.

First question comes from the line of Lorraine Hutchinson from Bank of America. Your question. Please.

Thank you good afternoon.

The strength in the quarter driven by physical retail can you talk a little bit about the performance of the digital channel and how you expect this to play out over holiday and then into 2022.

Yeah, Hey, Ryan Thanks.

Yes.

The recovery in the U S has been particularly strong in retail as we noted but digital also has been strong as we kind of noted.

In our remarks, the way that these inter operate is where the power is and we are seeing that in play and we're seeing some really good pickup on digital and we see that continuing through into the early parts of Q4 here, including including this past weekend, so very optimistic and that's both with existing customers and new customer acquisition. So we feel.

Quite good about how that's performing.

Thank you.

Thank you. Our next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your question. Please.

Okay, great. Thank you so much.

I'm wondering.

Look considering everything that's going on in supply chain and looking at your inventory levels.

Do you think it.

Perhaps even prudent to carry more inventory.

Through the year next year for example, just to sort of guard against some of the things that we're seeing in supply chain I'm just interested to hear your inventory management philosophy.

And any.

Any more specific color or comments you can provide about the performance apparel launch and consumer reception.

During the quarter would be helpful. Thank you so much.

Good to hear your voice.

Start on the inventory and supply chain piece, not turn it over to Tim on that performance apparel piece.

It's certainly something we'll continue to monitor really closely and consider about how much inventory.

Hold through 'twenty, two again, our supply chain team, we think has done a fabulous job, helping us navigate through a lot of these recent challenges I would say if we were going to we would probably really lean into our core products were colors core sizes. The stuff that we know there is a nice long tail on and long life on but it's certainly something we're going to monitor pretty closely now active.

Transaction, we obviously havent really strong balance sheet, we're in a great place to be able to use that to our advantage to continue to meet demand and growth business.

Hi, Kimberly.

With thrilled with how the performance apparel launch has been received it's another big step for us into the performance space.

So let me a year and a half into that journey, we have a couple of products, we launched the desk or year and a half ago, It's really really well we've ended the trial shoe, which my opinion is.

I think most would have historically been most technically advanced and then to be able to.

To further our strategy of connecting.

These footwear franchises to our offering I think you see that in the quotes apparel again its throughput with boost that's still the focus.

A majority of our renovation efforts, but we saw an ability in the performance apparel the Liberals materials innovation.

Ported into apparel.

And do something that quite frankly, the rest of the category is not doing in natural materials. So we see the product, it's really differentiated but again, we'll end the year with apparel is something like considering the business, we're going to do it very methodically and slowly.

With a strategy to increase.

Repeat purchase rates increased basket size.

Some step by step, but we're really really pleased by it but our initial sort of initial looks there and how it's been received.

Great color. Thank you.

Thank you. Our next question comes from the line of Matthew Boss from Jpmorgan. Your question. Please.

Great. Thanks, and congrats on your first quarter out of the gate.

Thanks, Matt so.

So on the topline Joey could you speak to your product pipeline, maybe what you're most excited about looking forward and then Mike near term you delivered 40% growth in the third quarter relative to 2019 and guidance at the midpoint I think about this moderation of 34% in the fourth quarter.

Maybe could you just speak to business trends that you're seeing into holiday relative to some of the assumptions that are embedded in your near term guide.

I'll start with that why don't.

Are you starting to get concerned product and I'll talk about that you're sure. So hey, Matt soon.

The product pipeline.

<unk> heard us share previously.

And Tim Tim mentioned it already today.

The next two years is the most exciting aspect of the product pipeline that we've ever created as a company.

The innovations that we're doing on the materials side. They just take a long time and so as we're working those through the innovation cycle, we can't get put them into the front part of our kind of go to market product development cycle, We'll know a lot of those innovations are coming through and we can now use doesn't harvest that and turn them into fantastic products.

As Tim mentioned was a big focus on footwear, and then also coupling that with great material information that we think translates into apparel and so how we do that.

So we think about the use occasions significantly really trying to balance lifestyle and performance.

A nice offering that's balanced across those those types of uses and I would also say that the cadence is something thats come into sharper focus for us and what we've seen throughout this year and particularly in the past.

Q3, but also in the early parts of Q4, when we have a great product cadence and this doesn't need to be a brand new innovation. This can be small things like <unk>.

Collection that we introduced recently.

That speaks to that speaks to the brand really well and it's a great <unk>.

Z comfort right for the moment when we can do things like that even if they are small it engages our customers significantly and it just trends really attractive.

Attractive engagements and limped into our existing customer LTV and so we see a lot of that in the future I think we've gotten a lot of discipline in our go to market.

So as you can see from from what we've done in this past quarter, we really buffered some lead times to make sure that we can deliver through what is a challenging supply chain environment. So it's not just the innovation and design side. It's also just the execution side and making sure. We're getting these two customers at the right time in the right place, which is which is always the trick.

Our business.

Great. Thanks, Joey and Dan for the question then on the two year, Matt I mean, the guy in a business our size I think there is always going to be a little bit of noise kind of when you look at that two year, we feel like Atlanta roughly within the range.

Back when I look at it for the full year of 2020 to two year will be 39% to 40%, we feel really good about that growth, especially with a lot of the COVID-19 volatility, especially stuff. We mentioned international and then for me at that approximately $350 million for 2022, we feel really good about the acceleration over the course of the full year 'twenty two on that.

Two year, just to say, we've given that 20% to 30% medium term revenue target range on an annual basis, we're really focused on hitting that year over year, I'm really delivering the long term the medium and long term growth and we look at the quarter certainly we want to try to deliver consistently but we're really focused on that piece.

Great Best of luck.

Thank you. Our next question comes from the line of Mark <unk> from Baird. Your question. Please.

Good afternoon, and congrats on your first report here.

Mike I was hoping you could give us a bit more color on how youre thinking about gross margin for Q4.

The annual guidance you gave does imply a fairly wide range for Q4, specifically so maybe just talk about the factors that might drive you towards the upper end there versus the lower end based on what Youre seeing today.

And similar question just as we think about 2022 I think some of the freight pressures may be intensifying had been in the early part of the year, but just any update there in the various levers that youre using to to offset thank you.

Okay.

Yeah. Thanks, Thanks for the question Mark So.

Q4 gross margin.

Look I think the reality is our highest volume quarter of the year folks who look at the seasonality of the business as we shared in the road show and it would be sharing in the S. One. So I think the range may not be quite as wide. If you look at on a full year basis, because Q4 doesn't have the bulk of the volume in there and then the factors that play into our some of the stuff that I mentioned on the Cogs certainly dealing with.

Housing pressure, we're feeling some outbound shipping pressures. So I think there is a host of factors that are kind of moving along there.

On your point about what we can do to offset it we actually already took one step.

In Q3, where we took a modest price increase on our core items. So from $95 $98 that was very well received from a customer perspective, we didn't really see any drop off in demand. When we did that so that's one step we took to kind of mitigate some of these costs and that obviously will carryover into 2022 as well, we're not going to get.

Specifically right now into 2022 gross margin guidance and the factors I mean, youre right. Its a pretty volatile environment. We're monitoring it really closely but we'll keep updating analyst and investors when we get that detailed guidance in Q4.

The Q4 call I have to say when when appropriate.

That's very helpful. Thank you and best of luck.

Thanks Mark.

Thank you. Our next question comes from the line of Bob <unk> from Guggenheim Securities. Your question. Please.

Hey.

Just a quick question for me.

Is essentially on the pricing, we just mentioned Mike I think the trail runners are sort of at the higher end of your pricing spectrum.

I think Tim called it out a little bit in terms of his excitement around it can you just talk about the success at these higher price points that you're seeing and then the second question is can you talk a little bit more about the new store openings that you've done and how they've opened versus your plan and what youre seeing there. Thanks.

Yeah I think these are both good Joey questions, Bob I'm going to turn it over to him to answer that yes sure. Thanks Bob.

So.

We have historically seen that when we introduce products with a technical edge to it.

Customers' willingness to pay goes up significantly and we've seen this before on our materials basis. We've also seen it when we weatherproof products are Ms. Online is part of that will run in franchise and we add a weatherized treatment to it for winter time in it.

Fantastic producer for us, particularly in the colder colder weather months and people want to pay more for it.

So that's one aspect of <unk> is another.

Proof point for Us and the trail further extend this and so we're really really pleased with the response.

And Thats a technical technical performance. We've also seen that Mike just mentioned when we move from 95% 98 on some of our core product. There was really no perceivable volume impact and so we know we can continue to do this and I would just say.

Back to the previous question, we have a lot of exciting newness coming in the next two years and more so than <unk>.

You kind of consider for a mature company. So meeting that a larger percentage of the sales that will contribute in the next couple of years is it going to come from products that don't exist today, and we don't sell today and so as we do that we have an opportunity to really cement our premium premium branded premium price position with consumers and we.

Expect us to go really well based on what we've seen so far.

And new stores versus plans that came this year, yes, the new stores have been performing so far.

Really positive I think we've obviously recalibrated expectations were in this kind of.

What we would call that kind of messy middle zone of Covid, where we're neither in the shelter in place nor are we completely emerge from Covid and so we've recalibrated just to take a conservative approach when we underwrite our stores in these new leases.

And what's happening is we're getting we're getting really attractive lease terms given that we're looked at as a tenant that is a traffic driver to multi property owners. So we're getting great terms and we're still underwriting conservatively for sales calls on these on these leases and we're outperforming them significantly in that.

That's really encouraging.

I would say that in particular, because some of the news on physical retail traffic is that it is still not coming back in a way that that people had hoped.

Travel bans are lifted and people at the border for the U S. In particular opened up in the early part of November we kind of expected to see a bunch of traffic recovered, particularly the key metro areas and we really haven't seen that as much and despite all that the stores are performing fantastically and we're really encouraged with it and that was that was a big driver of some of the growth.

If you are seeing in this past quarter and you would expect it to continue into Q4.

Thank you.

Thank you. Our next question comes from the line of Erinn Murphy from Piper Sandler Your question. Please.

Yeah.

Great. Thank you. Good afternoon can you hear me okay.

Yes, we can hire.

Hey, nice to hear from you all just two questions for me.

The 10, both in international in Q3.

Asia was a little bit weaker, but talk about Europe, and then into the fourth quarter are you seeing any change in trend with the new variant, particularly in the European market and then.

If I can ask one follow up to Bob any price increases planned in your 2022 preliminary guide of 350 million. Thanks, so much.

So we definitely hear the second question I think I picked up on the first question let me just.

They are asking to make sure I followed it I think you are asking.

And we saw international Q3 into Q4 are we seeing any impact from that the latest COVID-19 variance is that the first question.

You got it I apologize for my receptivity.

No no no no no worries no worries at all.

The short answer is we felt like I said on the call we felt a little bit of Choppiness in international.

Because of Covid in Q3, I think we haven't noticed anything right now in the business.

And the last week or two.

And what we are kind of 1 billion in Q3, I think overall, we feel pretty good about the momentum, especially when you look at the two year stacks on the international side of the business.

So we're not overly concerned right now, but clearly we are monitoring it very closely like Joey said when you were talking about were in the middle point of Covid. That's certainly true in the U S and it's even a little bit different in other parts of the world.

There is a material update to give there will obviously kind of follow up and let you know.

As we get into end of the quarter and into the beginning next year.

Second question is easier to answer which is you know is there any additional price increase built into the $350 million estimated 2022 net revenue. The short answer is no no move above the 98, but some of that Joey was talking about about the new product launches and.

And how we've been able to take more price on these more technical products. Some of that will continue in to 2022 and some of the new product launches and you'll see that comments, we launched the items and that's factored in now into how we're thinking about the overall revenue growth for next year.

Great. Thank you so much.

Thanks, Dan.

Thank you. Our next question comes from the line of Edward <unk> from Keybanc markets. Your question. Please.

Hey, guys. Thanks, very much for taking the question and congrats on the IPO.

Quick ones from me I guess first some other shoemakers are complaining that theyre going to Miss some of the key running selling season because their their core products are getting delayed that would normally drop in January and February I guess are you seeing some of those delays and does that factor into the guidance and then second.

It seems like you guys did a great job clearing out some of the debt.

Dead stock Skus, you had during the Black Friday, cyber Monday sales I guess any any sense on how clean inventory is and kind of how those promotions one thank you.

Yes, Thanks, Ed I appreciate the question so.

The good news on your first question is we just don't see any issues with the product drop cadence.

We.

Taken the taken the kind of we've had some foresight early on this year really buffer all lead times. So that is why we noted the big increase in inventory in Q3.

And that's not just for Q4 inventory that's also of course not happening.

<unk> hundred 22, so we feel like we're in a fantastic situation and everything that we have planned for the roadmap for the first half of next year and frankly into the second we feel really good about the position a position very strong so no.

No issues to report on there.

Complaints so we feel good there.

And then on the on the second question, Yes, I'll take I'll take the opportunity just to talk about this past weekend, we obviously don't have everything quite yet.

Just given the recency of it but it was a really really good.

Good holiday shopping season for us in this first part Black Friday, Cyber Monday, and we've always had a very premium brand attitude around pricing. We also because of the vertical retail model that we have in terms of distribution. We control how we show up there is no leakage in PAH.

And so we really have the opportunity to show up in a premium way.

Every time, we do something so we know as we grow and we expand the assortment, we really need to have an escape valve for our designers to take risk and to innovate really pushed the boundaries because our product is what's going to is going to win in the long run and so we want we want our team and are proud of the team to take risks and we want to give them an outlet center.

If there is anything slow moving.

Can sell it to consumers and do that in an attractive model. That's also mindful of margin and so.

Previously we built.

We built the muscle with we started to build the muscle with an outlet store in the Bay area. That's one aspect of how we reach a different set of consumers with that and then in this case, we were really surgical looking at inventory and looking at slow moving inventory, where we odds and ends on sizes and whatnot and we put those on the digital offering for cyber Monday.

And the response from consumers with relatively shallow discounts.

It's quite exceptional and so we're really encouraged that at <unk>.

How we're kind of toning this muscle as we go forward, which will be something thats important as.

As we start to take risks and broaden the assortment.

Thank you.

Thank you. Our next question comes from the line of Sharon Zackfia from William Blair. Your question. Please.

Hi, Good afternoon first I have to let you know my son is happy you brought back small birds. So thank you for that one.

One of our many customer that's good to hear.

Exactly.

I loaded up so I guess a question on marketing.

Got a lot of leverage in the quarter on marketing I mean, how are you thinking about leaning into marketing during the holiday season is that something where we should see meaningful leverage again.

And then secondarily on the performance apparel launch I know you've had it for like three minutes, but are you finding that to be a good kind of customer acquisition tool, bringing new customers into the brand or is that really at this point kind of further monetizing and getting more share of closet of your current customer base.

And we'll do a three person we have to answer.

I'll start and comment on the marketing then turn it to Joey to talk about the holiday piece, then I'll share a little bit about the consumer behavior that we started to see and how it shows up in the numbers on the performance apparel and they wanted to talk a little bit more about the target customer there. So on the first part on the marketing leverage just remember part of what's driving that as a percent of sales and what we saw in <unk>.

Three of them will continue into Q4 is the fact that we have more stores on a year over year basis. We have 10 more stores in Q3. This year than we did Q3 last year right now with four more stores. We've opened in Q4, thus far will end. This year with 35 stores. We ended 2020 with 22 stores, so pretty significant increase.

The number of stores, great vehicle for acquiring new customers with no marketing dollars kind of going against that sort of the macro I'd say on the leverage we are seeing with marketing as a percent of sales than there was a second part of that question and then I'll, let Joey answer that was about specifically like how are we thinking about the marketing spend maybe more on the digital side Joe into.

Q4 brought him in digital to get to yet Mike.

I would just point to one of the comments that Jim made earlier on the call.

We've taken a really methodical approach to diversifying our media mix and we're trying to balance the right portion of stem with the right portion of the funnel, meaning are we are we generating awareness are regenerating consideration or purchase or are we focused on reengagement and we've really tried to balance, particularly at that upper end of the funnel.

And diversify the spend and we continue to see.

Great value added varying channels within the media mix and part of the reason, we're able to do that and also understand what's happening within our media mix and as that relates to to output from a sales perspective is because of the data orientation of the company and so we take we take every dollar that we spend and we.

Is that in multiple different ways, because we have every transaction happening between the consumer and our trust in our company. We are able to do a fairly sophisticated multi touch attribution model and that really helps us inform where to spend the dollars and that ranges from offline spend like TV linear and linear broadcast basis although.

Way down to the really highly trackable bottom of funnel things on search and social and so I think we're in a really good place we feel like that Leverages is going to continue and we're going to.

We're going to have a really effective return on AD spend throughout the rest of this year and we hope that continues.

Great. Thanks Joey.

I'll just.

One piece really breathe in and perform apparel, and then turn it over to Tim to answer that part chairman.

So I had mentioned on the call that we saw a 13% increase in average order value in Q3 part of what drove that was apparel broadly not just performance apparel, but we are seeing larger order sizes now with people, whether we relaunched and Stefan shirts or to perform apparel that's one.

One of the ways, it's showing up in the metrics that we saw in the quarter and certainly that type of behavior, while apparel still a small percent of the mix overall that type of behavior is part of what we've considered when we think about 2022 guidance, but Jim maybe you want to talk little more broadly about the consumer and what we're seeing there sure I mean I think.

Really simple terms I think when you make a few issues people trusted.

The apparel that goes with it.

And connecting our performance footwear offering to fluids apparel is that is that the core of the strategy. We're also able to leverage material platforms that some customers, taking a long time to create rules tree.

The markman and apparel products, we think are very differentiated.

One of the founding principles.

The whole brand quite frankly is that we are in the early stages of a transformational shift in the category from synthetics gypsum detection plastics drawn from oil to natural materials Billboards.

It was founded on the idea that we can do this differently and better than the competition before the power was just the start of really understanding how to do that in apparel will continue to focus on.

But we see we see apparel was.

Another asset.

Sure.

Journey to kind of fully realize we would lose as a lifestyle brand.

Okay, great. Thank you.

Thank you. Our next question comes from the line of John Cronin from Cowen Your question. Please.

Excellent.

Thanks for taking my question guys and congrats on the IPO and strong quarter out of gate.

And just on the confidence in the high end of the revenue targets those medium term targets of 20% to 30% next year, that's great to hear any detail on how we should think about channel mix geography, even at a category level on getting to that 30% type growth next year.

Yeah, I would say the stuff that you've seen drive north of 30%. The last couple of quarters. Those are the types of things that will continue into 2022 right. So when we think about the biggest drivers being out of that retail recovery in the U S. Both within existing stores and opening new stores, that's a huge driver of that the white space.

Internationally and the ability and are most of those markets as you know John don't even have a clean non COVID-19 year. So we see a lot of opportunity within those market and then it's a lot of the stuff. The guys have both been talking about when it comes to new product launches and our ability to acquire new customers and grow LTV with those those really are the big drivers of what we expect to see.

Well it gives us real confidence in as we know that stuff is working really well right now.

And we hope we believe it will continue to work as we kind of go into next year and just remember that the range of $50 million in high end. Its preliminary number we'll give a little bit more color in a little more.

A little more info on that once we get through Q4 here, which again is our peak season. So we're happy to talk a little bit more with it.

More with you about it on the Q4 call in February.

Got it my follow up just maybe on the medium term margin targets. The adjusted EBITDA margin, reaching mid to high teens like what's the biggest driver of gross margin expansion as we go forward.

Yes, the biggest drivers of gross margin expansion is really three things.

Get us there over the medium term for the first is our biggest sources of growth like I just referenced.

The whole retail and international those are also both gross margin accretive. So that's a big factor about happening permit we expect to see over time is going to come from that.

Second piece is going to come as we just assume over the course of the medium term, which again, we're defining a five years here, we think what we're going to see some sort of normalization that logistics costs I'm not saying, we'll go all the way back to 2019 or pre COVID-19 levels, but we don't think we'll be at the exception don't think will be at the exceptionally elevated levels. We RNA. So we'll get the normalization there and then the last.

Pizza is we're going to get it through some of the stuff we talked about on the call right launching new products that come at a higher gross margin that really warrant that higher price and have a great technical features.

That customers are looking for and then getting it sort of the old fashioned way I mean, if you think about it that's another 25 to 50 basis points from that third category and we've proven the track record to be able to do that over the last few years like I said on the call will be seen over 600 basis point, if we hit the midpoint of that 2021 gross margin guidance.

Awesome. That's helpful. Thank you and best of luck into as we ran off holiday.

Thanks, John.

Yeah.

Thank you. Our next question comes from the line of Dana Telsey from Telsey.

Your question please.

Good afternoon, everyone and so nice to see the progress.

You talked a little about in the gross margin portion about decrease in product cost can you expand on that a little bit what are you seeing there how long do you see that lasting.

Physical retail.

Do you think is the appropriate size of the store as you grow your product assortment and how do you think of the cadence of store openings going into next year. Thank you.

Yes, so I'll start on the first line and Joey can take the AD physical retail one so on the on the gross margin again, a lot of it really is coming as we get bigger as we add more size as we have more scale I think that's a big part of it and then Robert for engineering, the products and continue to improve them.

Really what the story is there and obviously things like scale on that continuous improvement those will only grow and we will have more power with that as we go forward. So it's definitely one of the contributors as part of that is part of that third bucket that I was just walking John through Dana the improvements on the gross margin overtime. So Joey didn't have a lot more.

Notable recent retail physical retail.

Yes.

I mentioned earlier, we're in the fortunate situation of just being viewed as a great traffic driver for multi property landmarks.

<unk>.

What we've done as a result of that is really work to take the right size and learned throughout this past 18 months about how we how we view the retail lay out between footwear and apparel and how we create a service model that's really exceptional for our customers.

And so we have found a really nice space, where we can have.

Great fitting rooms, and fit all of this service lay out into.

Box, it's around 2500 feet, that's kind of the go forward and you may see flagships that are that are bigger.

And you may see smaller markets with slightly smaller stores of course, but you can see generally in that 2500, maybe up to 3000 square feet.

As the right size and then in terms of pacing well give numbers annually on that and we expect to get give everyone. Here a figure for 2022 will meet when we reach the call in February but I would say just at a high level, we're going to do more than we did this year. This year. We did 13, new openings will be more next year.

And and.

We're trying to be thoughtful about maintaining what we think is just an exceptional customer experience our retail stores in the U S, but really broadly across the fleet is.

Over 90 in NPS and that reflects a fantastic customer experience and the way that we keep that is with great people, we traded we treated and our people fantastically during COVID-19 and our employer brand has improved significantly as a result of that the word of mouth does spread and we're a very attractive.

Tony to come work for in retail and what we've seen is it is the human capital that drives that fantastic experience and we need great assistant store leaders.

Get promoted up to store leaders and that human capital consideration is something that we work on pretty hard and that's probably the most significant limiting factor it's not whether we can get the right deal theres plenty of deals out there for us to do in the real estate side, it's about picking the right ones being being smart about the markets that we go into and then being opportunistic on the specific.

Deals that we pick up based on what comes available and making sure we have the human capital to support it so thats kind of the high level on how we think about it and again, we will give more when we get into that in the next year.

Thing, maybe just just to remind you.

Not you, specifically Dana but everyone.

Yes.

The model that we're working on and the reason why we think this is so powerful is that when we go into these markets.

The store Halo that create something so powerful I mentioned in my earlier remarks, it's important enough to mention again, when we get in there the marketing efficiency improves we often find that customers come in for the first time, they have lower lower return rates because they get to try it on in the store and make sure. It fits right there and then they often do.

Home and cause that experiences so good they buy a second time on digital and.

Omnichannel repeat customers are spending one five times, what our digital only repeat customers arent. So you can see what happens when you translate NPS into and great product experience what that what that turns into in terms of repeat engagement and I would just say that in a nutshell I hope everyone walks away from the fact understanding from this from.

My earlier remarks.

We still think we have roughly around 10, 11% aided awareness in the U S.

And the NPS is exceptionally high and when people come and meet the product meet the company. They love Us and we just need to meet more people. So thats. The journey that we're on and I think this is.

That's why the future so Brian.

I'm really optimistic about 'twenty, two and beyond alright.

Alright, so operator were at a time I know Joe you had the closing comment I just wanted to cover one very quick thing, while we're off the oncologists for a second Kyle and I have gotten a couple of questions even on that on the call about the share count that is in the earnings release to just to be clear remember this is our share count as of 930. So the end of Q3, which is the pre.

<unk> IPO share count so we're happy to answer any model questions or clean up questions from the analyst during that period.

Add to that but we did get a couple of questions kind of offline about that.

Say that on the call just so everyone's on the same page looking at that the same way alright. That's the last of my boring finance that Joey why don't you take it home and close out our first earnings call Sharon. Thanks.

Well, thanks to everyone and as we mentioned we're thrilled to be on this stage and to continue to grow alongside you all our investors analysts and other stakeholders and we couldnt be happier with this foundation, we built in the last five years and we just wanted to take this opportunity to close the notice congrats to the whole birds team that created the business.

And.

And just a big kudos and take this stage to thank everyone. So thank you I'll look forward to speaking with you next quarter.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

Okay.

Yes.

[music].

Good afternoon, ladies and gentlemen, and welcome to the <unk> third quarter 2021 conference call.

<unk> been placed in a listen only mode. After management's prepared remarks, there will be a question and answer session at which time instructions will follow now I would like to turn the call over to Kyle because he get head of strategic finance and Investor Relations at offered you may begin.

Good afternoon, everyone and thank you for joining US with me on the call today are Joey's Willinger, and Tim Brown, Albert co founders and co Ceos, and Mike Bufano, Ahlborn, Chief Financial Officer, before we start I would like.

Could cause actual results to differ materially.

The affect our results.

Also during this call we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.

These non-GAAP items shouldnt be used in addition to and not as a substitute for any GAAP results you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's earnings release.

Now I'll turn the call over to Joe to begin the formal remarks.

Thanks, Kyle and thank you all for joining Alberta in his first earnings call. We are thrilled to have this platform to help us further advance our mission and discuss our plans for durable and profitable growth over the coming decades.

I'd also like to take a moment to express our gratitude to the Alberta team as well as members of the finance community and our investors, who helped us shape a successful IPO.

And we're of course pleased to speak with you on the heels of a strong quarter, one that Mark continued reacceleration of our business as we emerge from the Asia Syncrisis of Covid.

One Kevin I started this business in 2015, we held the view that climate change was our most formidable an existential crisis and as a result believe that consumers would eventually connect their purchase decisions with their values on the environment. Yeah. Most in the footwear and apparel industries continued to rely on synthetics.

Within that tension we saw opportunity.

But we didn't want to make sustainable products for the sake of being good for the planet, we wanted to make incredible products because they are sustainable.

We then connect this product engine to a vertical distribution model that allows us to reach consumers effectively while shrinking go to market timeline, and enabling us to deliver fantastic value and a great shopping experience to consumers all while preserving our advantage gross margins.

In fact, we logged a global cross channel NPS of 86 in the first half of 2021.

And now a wonderful customer experience has led to strong repeat engagement with customer cohorts of a year or more coming back for a second purchase at a rate of 43%.

This repeat purchase rate is notable for both the consistency of the high repeat rate and because it comes from the narrow assortment we've had to date.

As we expand our product offering we're excited by the opportunity to utilize this expanded assortment coupled with our technology and data advantage to grow repeat purchases.

We are also energized by how many people have yet to learn about our brand. Our aided brand awareness is low just 11% in the U S. As of Q1 2021.

With revenues in the trailing 12 months of $260 million, we have a tremendous runway and the global footwear and apparel industries estimated as of 2020 at 366 billion and $1 five trillion respectively.

And we are executing this a tap a brand platform built around the most important consumer trend of this generation.

Climate change.

Now, we simply need to reach more customers because of our disciplined approach and product craftsmanship.

We have consistently achieved contribution profit in excess of cap within the initial month of purchase for each annual cohort since inception.

And given technology advances over the past decade, our vertical distribution model coupling of digital heritage with a growing fleet of brick and mortar stores is the right way to do that.

We've done this successfully against the backdrop of an industry that has principally relied on wholesale for the past five plus years.

We opened our first store in 2017 and despite the slowdown of this channel during the pandemic. We now operate a fleet of 35 stores globally with 23 in the U S. A.

All categories.

This disciplined approach coupled with the authenticity of our brand ethos is how we have built a foundation that we expect to rely upon to grow at a healthy clip for decades to come.

Which brings me to our growth algorithm.

I'll briefly go into each of these.

On the first growth pillar, our real estate portfolio is highly productive and as an efficient means with which to acquire customers.

Our stores generate strong returns on invested capital and have attractive payback period.

And when we opened new stores. It drives increased brand awareness provides a halo effect on the overall business and hence we improve the efficacy of our marketing spend.

These impacts along with lower return rates and more efficient transportation means that growth in physical retail also drives margin expansion.

We have a strong pipeline of new stores ahead, and ultimately we see white space for hundreds of stores over time.

On international.

National expansion. It is important to note that we planted flags early in key markets across Europe, and Asia with that foundation established and relatively low sales penetration in these markets. We have line of sight to attractive growth as a result, particularly in the digital channel.

And as is true as we shift the channel mix as we grow international we expect to expand gross margins due to our pricing architecture and an efficient logistics network.

Underpinning the opportunity to drive growth in our retail and international businesses is an incredible product pipeline led by footwear with a growing and important apparel offering.

Q3 2021 Allbirds Inc Earnings Call

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