Q3 2022 Columbia Sportswear Co Earnings Call
Greetings, ladies and gentlemen, and welcome to the Columbia Sportswear third quarter 2022 financial results Conference call. At this time, all participants have been placed on listen only mode and we will open the floor for your questions and comments after the presentation.
It's now my pleasure to turn the floor over to your host Andrew Burns the floor is yours.
Good afternoon, and thanks for joining us to discuss Columbia sportswear company's third quarter results. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary on financial review presentation, explaining our results.
The document is also available on our Investor Relations website Investor Columbia Com.
With me today on the call are chairman, President and Chief Executive Officer, Tim Boyle, Executive Vice President and Chief Financial Officer, Jim Swanson, and Executive Vice President and Chief administrative Officer, Peter Bragdon.
This call will contain forward looking statements regarding columbia's expectations, anticipations or beliefs about the future.
These statements are expressed in good faith and are believed to a reasonable basis. However, each forward looking statement is subject to many risks and uncertainties and actual results may differ materially from what is projected.
Any of these risks and uncertainties are described in Columbia's SEC filings, we caution that forward looking statements are inherently less reliable, but historical information.
We do not undertake any duty to update any of the forward looking statements. After the date of this conference call to conform the forward looking statements to actual results or changes in our expectations.
I'd also like to point out that during the call. We may reference certain non-GAAP financial measures, including constant currency net sales for further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures. Please refer to the supplemental financial information section.
And financial tables included in our earnings release, and the appendix of our CFO commentary and financial review.
Following our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions. So we can get to everyone by the end of the hour now I will turn the call over to Tim.
Thank you Andrew and good afternoon, I hope everyone is well.
I am pleased to report the third quarter net sales and earnings growth were very strong considering the economic geopolitical and supply chain headwinds that we're navigating net sales grew 19% and diluted earnings per share grew 18% broadly in line with our expectations.
Bright spots in the quarter included Sorel, which grew 28% year over year.
The Sorel brand continues to outperform fueled by function first fashion footwear, we believe Sorel is well on its way to $1 billion in sales and becoming the next global footwear force.
Columbia also had a fantastic quarter growing 19% the brand's iconic innovation value proposition and Democratic distribution uniquely position the brand to capitalize on the popularity of outdoor activities.
Innovations like omni heat infinity, and the newly introduced omni heat helix are solving problems for consumers and our key differentiators for the brand.
Looking at the current environment. It is increasingly evident that the threat of recession is weighing on the market.
Despite this challenging background, our DTC business was up 8% year over year in the quarter with balanced growth across brick and mortar and ecommerce.
On our last call, we updated our outlook to contemplate higher order cancellation risk and a more promotional environment compared to the exceptionally favorable environment in the prior year.
We experienced both of these trends in the third quarter and anticipate similar headwinds in the fourth quarter as the marketplace seeks to rationalize inventory levels.
Exiting the third quarter, our inventories were up 47%.
As we look to align our inventory position with anticipated demand, it's important to remember that our business model and strategies are well suited to manage this process effectively and profitably.
Our inventory includes a high percentage of evergreen styles that do not change season to season. This reduces our exposure to promotional pricing.
Given our strong balance sheet, we can be patient as to when and where we sell our product.
If we decide not to carryover product, we will utilize our fleet of outlet stores, which enables us to profitably sell remaining high quality inventory.
Overall, I'm confident that our strategies are working and that our brand portfolio has tremendous long term growth potential.
With two very important sales months left in the year, we are reiterating our full year net sales and diluted earnings per share outlook.
We'll provide more data later in the call.
For my review of the third quarter 2022 financial performance I will reference year over year comparisons versus the third quarter of 2021, unless otherwise noted.
Third quarter net sales grew 19% on a reported basis and 22% on a constant currency basis by.
By channel.
Wholesale net sales increased 24%, reflecting earlier shipments of our robust fall 'twenty two order book.
DTC net sales grew 8% driven by 9% e-commerce growth and 8% brick and mortar growth.
Gross margin contracted 270 basis points with the largest driver of contraction being higher inbound freight expenses.
Gross margin performance was roughly in line with our outlook.
SG&A leverage partially offset gross margin pressure, but operating margin is still contracted 140 basis points.
Diluted earnings per share increased 18% to $1 80.
I will now review net sales performance by region.
U S net sales increased 19%.
We generated mid 20% wholesale growth.
While timing of fall 'twenty, two shipments improved compared to fall 'twenty. One they were still later than historical shipping patterns.
This resulted in increased order cancellations.
Most of our retail partners have now set their fall floor plans.
Early season sell through trends reflect healthy demand and are tracking slightly below fall 'twenty, one, which you will remember was exceptionally strong.
Sell through is well above pre pandemic levels, reflecting growing consumer interest in our product.
Our U S. DTC business was resilient in the third quarter, despite broader economic headwinds.
We generated high single digit DTC growth with balanced performance across e-commerce and brick and mortar.
Turning to our international business all regions outside the U S were unfavorably impacted by foreign exchange rates for.
For international regions, I will reference constant currency growth to illustrate underlying growth in each market.
Latin America Asia Pacific region, or L. AAP net sales increased 24%.
Despite the ongoing impacts of China's Covid policy, China was up mid single digit percent in the quarter driven by strong DTC Dot com performance.
Continuing waves of Covid outbreaks caused sporadic store closures and traffic decreases in various regions throughout the quarter.
With that being said our e-commerce business in China was quite strong led by the successful launch of our Tictoc store.
Japan increased high teens percent driven by strong consumer demand as we anniversary the state of emergency declarations, which hindered sales in the prior year.
Korea grew low single digit percent led by strong DTC performance interested in outdoor activities continues to fuel strong demand in this market.
L. A P distributor markets were up almost a 150%.
Due to higher fall 'twenty, two shipments falling depressed pandemic impacted shipments in the prior year.
Europe Middle East Africa region, or EMEA net sales increased 54%.
Europe direct grew 20% despite mounting economic pressures in the region.
We experienced strong performance in our DTC e-commerce and wholesale businesses.
Our EMEA distributor business was up almost 150% due.
Due to the later shipments of fall 'twenty, two orders to our Russia based distributor.
Shipment to Russia in the third quarter consisted of pre existing contractual obligations for orders taken prior to the invasion.
As we have previously noted we have paused, taking any new orders for the Russian market.
Canada net sales were flat with strong DTC performance offset by lower wholesale shipments, which were unfavorably impacted by timing shifts.
Looking at performance by brand.
Columbia brand net sales were up 19% in the third quarter.
Growth was relatively balanced across apparel and footwear.
Following the highly successful launch of omni heat Infinity last year. We're building on this momentum with an expanded collection for fall 'twenty two.
This differentiated visible technology remains a top priority from a product and marketing standpoint.
We were running a worldwide marketing campaign focused on how the omni heat Infinity technology works and why it matters for consumers.
Columbia's omni heat Infinity technology received numerous accolades in several top publications this fall.
The mens and womens Pinnacle peak jacket have been named one of the best Puffy jackets in outside magazines coveted Winter gear Guide.
For the slopes of platinum peak three layer show was selected as one of the best Ski Jackets of this reason by the editors at ski magazine.
This fall, we also introduced omni heat helix, our new disruptive Paul if we use technology.
Historically, the poly fleece category, which is one of the outdoor industries mainstays has had little innovation.
Columbia's omni heat helix is a patent pending visible technology that utilizes highly efficient insulation cells to maximize warmth and ensure breathability.
We're excited to build on this differentiated new innovation in the seasons ahead.
Omni heat helix was featured on a recent Forbes magazine article about a gear tests conducted on Alaska's Spencer Glacier, the journey, which included hiking kayaking, and camping served as a proving ground for a collection of key fall 'twenty two styles.
As we emphasized at our recent Investor day footwear as a growth accelerator for the Columbia brand and we will continue to prioritize investment in this category.
For fall 'twenty, two we launched the Pic free to collection of lightweight tactical hiking footwear.
The launch is being supported by an integrated marketing campaign showcasing the shoes freaky good grip.
Our Columbia Montreal performance running line received several call outs during the quarter the Montreal Trinity a G was featured in the Runner's World Spring Footwear review issue it.
It was one of the twenty-three styles selected out of over 200 models tested.
But where news also recently featured the Montreal Trinity Amex as a shoe to know for 2023.
The Trinity collection is equipped with our branded technologies Tech White plush and adapt tracks to provide added cushioning and traction in all conditions.
On the marketing front, we recently announced a multi season partnership with leading sports and Entertainment group Dude perfect.
Colombia, and the Dude's will collaborate on several stance and stories this fall and spring.
Focusing on making the most of the outdoors and inspiring others to do the same.
We kicked off the partnership with a segment on Abc's Jimmy Kimmel Live, which first aired on September 28.
NFL quarterback Jaylen Hurts was recently featured on the no days off documentaries, which highlights young athletes on their journey to achieve their goals.
The episode focused on J Lynch transition from growing up in the Texas heat to getting ready for cold playoff whether in Philadelphia.
<unk> also spoke about why he likes to enjoy the outdoors. Several Columbia products were featured prominently in the episode, including his omni heat Infinity jacket.
Shifting to our emerging brands.
<unk> was our fastest growing brand in the quarter.
Net sales increased 28% driven by strong wholesale and DTC E Commerce performance.
<unk> growth rate in the quarter was aided by favorable timing of fall shipments.
Paired to the prior year.
The Sorel brand remains laser focused on bringing our relentless flow of compelling products to its unstoppable consumer.
During the quarter growth was led by winter style categories as well as strong performance in year round sneaker and wedge styles.
In September Sorel washes first partnership with high Bay.
Which showcases today's female leaders within fashion and culture.
Sorel and illustrator Langley Fox took over the Hyde B Dot com homepage to highlight an unstoppable women and the brands bricks collection.
Sorel also washed its social campaign powered by Sorel. This campaign features behind the scene content by celebrity stylists as they get their clients ready for New York fashion week and the Emmys.
This has been one of <unk> most successful organic video campaigns to date.
Last week, Sorel announced that it will be relocating its headquarters to its own building on the Columbia Sportswear campus. The new location provides additional space for the brand's growing team and enables sorel to continue attracting industry best talent.
Prana net sales increased 3% the prana team is focused on repositioning the brand in the marketplace to energize growth in the coming seasons.
Early next year Prana will sponsor the HBO Max reality series, the climb which will be hosted by actor, Jason Mama, along with Prana Ambassadors, Kris Sharma and Megan Martin.
The show will focus on that group of amateur climbers outfitted in prana as they S and some of the most intimidating rock faces in the world.
We believe this is a unique opportunity to meaningfully raise awareness around the prana as we reestablish the brands roots in key activities like climbing.
Mountain hardware net sales increased 11% strong sportswear category sell through was a highlight in the quarter as well as the introduction of the summit grid collection, a super Packable fleece for lightweight performance on the trail.
To amplify mountain hardware product driven resurgence the team is keenly focused on solidifying the brand's identity and growing brand awareness.
I will now discuss our updated full twenty-two financial outlook.
This outlook and commentary include forward looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements.
We are reiterating our full year net sales and diluted EPS outlook, calling for 10% to 12% net sales growth and between five to $5.40 in diluted earnings per share.
Gross margin is now expected to be down to 120 to 250 basis points and SG&A expenses are forecast to grow roughly in line with sales growth.
The result in an operating margin range of 11.9 to 12, 7%.
Foreign currency exchange headwinds are now expected to unfavorably impact full year net sales growth by 350 basis points and diluted earnings per share by approximately 25.
Looking into next year, we plan on providing our 'twenty to 'twenty three financial outlook. When we report fourth quarter results in February .
At that time, we will have visibility to fall 'twenty three orders and our planned expenditures as.
As we indicated at our Investor day, our spring 'twenty three order book supports modest wholesale net sales growth in the first half of 2023, we.
We anticipate our on time delivery performance will greatly improve and be more in line with pre pandemic service levels in.
In summary, I'm confident we have the right strategies in place to navigate this dynamic environment and unlock the significant growth opportunities, we see across the business.
We are investing in our strategic priorities to accelerate profitable growth create iconic products.
Drive brand engagement.
Enhanced consumer experiences.
Amplify marketplace excellence.
And empower talent that is driven by our core values.
That concludes my prepared remarks, we welcome your questions for the remainder of the hour operator could you help us with that.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please indicate so by pressing star one on your Touchtone phone pressing star two will remove you from the queue should your question to be answered and lastly, well posing your question. Please pickup your handset of listening on speaker phone to provide optimum sound quality. Please.
Please hold while we poll for questions.
And the first question is coming from Bob <unk> with Guggenheim Your.
Your line is lives.
Hi, good afternoon.
Couple of questions for you the first one is.
On the cancellations and I guess leading into the inventories.
Can you just elaborate more around the cancellations either by channel.
Bye.
Mix.
Paul twenty-two spring 'twenty, three and just sort of how that's played through and.
Then.
Think you talk about the inventories.
Adjusted your purchases going forward.
And to get the inventories in line and it will still take a few quarters I guess can you just talk through what you see at retail with your wholesale partners and sort of where you think you.
When you get yours aligned versus supply demand versus the retailers, where do you think the retailers are.
With the trends that youre seeing out there.
Sure Bob Thanks.
Well as it relates to the cancellation.
Virtually.
100% or very close to that a function of our inability to deliver on time. So the demand is still there for the product.
It's just that we missed the windows and therefore canceled the product.
All virtually all of the.
The cancellations have been fall 'twenty two.
We really don't have any spring 'twenty three delivery scheduled prior to December .
None of those have had any cancellations, we expect to be much more timely in our deliveries for spring 'twenty, three and frankly for the balance of 422.
So this resulted in inventory.
Which is.
Current inventory being in excess so as we said in our remarks, our plan is to liquidate that over time and our non panicked way through.
Sales to regular retailers as a result of demand.
In the fall as well as our own outlet stores in the future. So we're very comfortable with Shneur.
As it relates to retailers.
I think retailers as you remember ended up.
Really with very low inventories.
At the end of fall season, 'twenty, one so our expectations are that this will be a good season.
Too much we are going to join them, we want right now but.
I think the market is actually quite good at least this is our.
We're seeing it today.
Bob with regard to your question on where we've seen cancellations by channel.
It's fairly broad based as Tim touched on the cancellations are by and large a factor of being <unk>.
From a supply standpoint, so that's impacted all retailers relatively equally so so it's pretty broad based and balanced in what we've seen from a cancellation perspective.
Okay, Great and then.
On Cheryl can you talk a little bit about the strength.
Women's versus men's and sort of where you see the opportunities in Q4 versus a.
A little bit more on 23.
Early 'twenty three.
Yes, certainly.
While the Sorel business has really grown tremendously and it really is a function of.
This concentration on the womens.
I think we look this morning prior to the call and we talked about something like 80% of them of the Sorel sales being non winter and something like 85% being womens so it's really a function of.
The efforts that the Sorel team has put into the sneaker business, the wedge business and really getting that.
Unstoppable women product that she needs to be.
Going forward with.
The opportunities are.
Our enormous in my opinion.
Great. Thank you very much.
Thanks, Bob.
Okay. The next question is coming from Laurent.
With BNP Paribas your line is live.
Oh, good afternoon, and thank you very much for taking my question.
I wanted to ask about the.
The CFO commentary.
My understanding if I look if I compare the slides.
90 days ago, Jim you were guiding for footwear to grow high teens now low teens, just curious to know what's driving that between Columbia and Sorel and then I saw the same thing with regards to the wholesale high teens to low teens.
Long.
Was that just purely due to cancellations or was there some shift that we should think about from <unk> to <unk> <unk>. Thank you.
Yes, there is some slight shifts in revenue from Q3 to Q4, we had a slight miss relative to the 20% sales outlook that we provided for the third quarter and that's effectively just a shift in timing of wholesale shipments that we now anticipate shipped in the early part of fourth quarter as it relates to <unk>.
Any changes in relative growth rates between brands and product categories.
Slight Murat I'm not aware of any meaningful shifts.
From a product category perspective.
From a brand level standpoint.
The change would be more related to wholesale cancellations as opposed to D to C performance do you see performance was fairly consistent throughout the quarter.
Okay very helpful and then maybe just.
Some commentary about about what youre seeing in Europe .
I don't know if youre seeing real time in your direct on your direct business any slowdown I think winter is a fall. He says been somewhat warm in Europe versus in the U S. It looks like we've had a good start to two October .
And then and then China seem to be pretty pretty resilient considering.
The rolling Lockdowns.
You want to call out on China that we should consider.
Yes, certainly well I want to point out we've talked at length about both your.
The European market and the China market, but let me talk about Europe first.
That grew well this year in the quarter and I think our business there is quite strong.
Remember that we've underperformed in that market historically.
So now that we've got excellent team there that's very concentrated on the right.
<unk> and strategies that business is coming along well and I think thats why youre seeing a growth in that market.
Obviously, the headwinds are highly publicized.
But we seem to be doing well in that market and no expectations that would change our mind as it relates to China again, an area, where we've underperformed.
A recent times.
The expectation is that the team is well underway.
That's advantage, including the advancement of the business.
We have a much more robust digital.
Team there.
As you saw in the quarter, we talked about the tick tock store, which which performed so well so those two markets have been under pressure.
Pressure from Usha <unk> been reconstructed and I think what Youre seeing is the results of those reconstruction.
Very helpful. Thank you very much and best of luck with the holiday season.
Thank you Bob.
Up next we have Paulo has with Citigroup Paul Your line is life.
It's Tracy Kogan filling in for Paul I was wondering first if you can.
On your gross margin.
Change for the year in your guidance.
In an uptick in promotional levels already.
Quarter to date or is it something that <unk>.
Based on the inventory levels.
You see across the industry.
Then I have another follow up question. Thank you.
Yes, it's getting more of the ladder in terms of the.
The economic climate.
The level of inventories in the operating environment that we're currently operating at as we look at the third quarter. As an example, our D to C. Gross margins were down slightly we cited that that related to promotional activity, but even with that increased promotional activity our overall DTC.
Margins were quite healthy and so as we look out into the fourth quarter. The biggest change that we've made in our gross margin outlook is related to the expectation that given given inventory levels more broadly in the market.
There's likely to be more promotional activity, certainly, we're not leading with that but we'll be ready to to react.
Appropriate.
Got it and then I guess, just a follow up I think this quarter as you know.
You are.
Wholesale margin or your DTC channel.
With more promotion how much of wholesale margins are better I think last quarter. It was.
It was the opposite so I was wondering what the dynamics were there and what you're expecting for <unk> and as we enter next year from margins by channel. Thanks.
Well as it relates to both the DTC and wholesale margins keep in mind that.
That does not factor in the inbound freight, which we separately indicated as a significant headwind. So if you look at both channels with inbound freight.
The gross margins are going to be down now when you look at wholesale being up in the fourth quarter.
Keep in mind, the price increases that we began to implement with our fall season, which were in the high single to low double digit basis, and we did that in order to mitigate the effects of the inflationary pressures that encompass both product input cost coupled with inbound the inbound freight and so essentially you are seeing the effects of.
That.
Here in the in the third quarter as we ship into all merchandise and from a DTC perspective.
The third quarter typically theirs.
We ended season summer sales in the relative mix of that and can distort some of the the <unk>.
Margin.
Got it thanks very much.
Okay.
Okay up next we have John Kernan with Cowen John Your line is live.
Good afternoon. This is Christian on for John .
Just first up on the earlier shipments is there any way you can quantify what that is and in dollar terms and do you also envision earlier shipments.
Spring goods in Q, Q4, or even Q1, 'twenty three and I have one follow up thanks.
Yeah as it relates to the third quarter and you'll note the rate of growth that we achieved in our wholesale business certainly some of that is related to timing shifts and as Tim pointed out there were timing shifts in which typically we would have seen certain of our EMEA distributor fall 'twenty two shipments haven't been shipped in the second quarter and those shipped in the third quarter.
And then likewise.
Given supply chain constraints, it's hard to quantify some of this because it's.
It's so unique year to year right now just given the delays we've seen but our wholesale business on the whole is shipped earlier for fall 'twenty two than it did fall 'twenty, one yet still far behind where we'd ideally like it to be and that's why we've seen that.
Cancellations I think if you were to adjust for the timing effects.
Between the quarters that I'm referencing our growth rate for our wholesale business.
Ex timing would still be in the double digit level of percent growth.
Thank you and then just on the gross margin discussion that was in the prepared remarks in terms of the increased inventory different provisions should we assume that youre going to take most of the day.
You started the clearance pain in Q4 or will this stretch out.
Spring or fall 2023 as you.
I believe Tim said he was yeah.
We're going to pull the panic button on.
The inventory clearance that you have on hand, thank you.
Yeah. This is Tim so we have a strong balance sheet and we believe the best use of our asset in our balance sheet is to just to do the right thing with the inventories that we own.
We will be paying more for inventories that we buy to replace the existing inventory. So we're better served to keep the inventory and manage it through over the next several quarters.
So that's our plan and that's how we're going to approach. It we will be more promotional very likely in Q4, just to react to the market in general and then as it relates to shipments of spring 'twenty three merchandize, it's quite common that we would ship.
Mixture of spring product to our <unk>.
U S and North America wholesale partners as well as.
Independent distributor markets and at the end of the fourth quarter, but that generally.
Varies from time to time based on.
Demand in the shipping available chip shipment availability.
Thank you.
Okay up next we have Mitch commits with Seaport research Mitch Your line is live.
Yes, thanks for taking my questions.
Tim on the spring order book.
I know you're lapping some really strong orders a year ago, and if I recall correctly I think retailers are writing bigger orders pre books last year in order to kind of guaranteed product, but as you mentioned your inventories growing better now you're approaching more normal service levels. So does that spring twenty-three order book kind of reflect that retailers are.
Going back to a more normal pre books cadence.
No.
They recognize that you don't have to kind of wind up in advance in order to guarantee product in and if that is the case, maybe that provides a better kind of reorder opportunity in.
In the first half of 'twenty three versus maybe what you experienced in the first half of 'twenty two.
Yes, I would say that.
We were a poor performer in terms of delivering on time and spring 'twenty two.
So I think retailers, where we are.
More circumspect in terms of how they place their orders assuming that.
He has been very likely effect that we will have more inventory available to them to order during the season. So.
We will be a better.
We will have better service levels and spring 'twenty three by a long shot than we added in spring 'twenty, two and the expectation is that will be.
Full shelves in the early part of the season will bode well for Reorders.
Okay. Good.
And then Jim just on the on the margin guidance scenario looking for gross margin. This year down 220 to 250 Bips.
In the CFO commentary I think the first item that you note is the.
Elevated freight levels can you quantify that impact and can you kind of remind us where sort of container rates are these days in airfreight.
And kind of how.
That plays out over the next few quarters or when you might start to see that as a tailwind to the margins.
Yeah, you bet Mitch.
As it relates to the impact of inbound freight cost our gross margin throughout this year.
The first half of the year was about 300 basis points of impact and it was pretty even between Q1 and Q2 and as we sit here in Q3, we've seen that to begin to normalize but still pretty impactful. So Q3. It was over 200 basis points of impact and I would suspect that we will continue to see that normalize in the fourth quarter I don't know that we'd necessarily.
Get to that becoming a tailwind in the fourth quarter, but certainly as we look out to 2023, we would expect to see some benefits as we lap this year's high rates that we've been incurring.
Of the rates themselves they've come down substantially over the course of the last <unk>.
Several months here at it at its peak.
Our inbound freight rates were six to seven times, what they were before we came through this event.
As we as we sit here today and we project out into next year, we should be closer to two times. What we were so we're not going to we're not going to get all the way back down at least with what we can see right now all dependent upon what happens from an overall economic supply and demand perspective.
Out of the ocean carriers manage their business, but it should be a nice benefit to offset.
Headwinds in our gross margin as we look out to 'twenty three.
And Mitch I, great Alright.
Your comment your question regarding airfreight.
<unk>.
We avoid that virtually all costs. So we have a very minimal amount of air freight certainly this year.
Historical practice, we really avoid that.
Okay, Alright, thanks, guys and good luck for holiday.
Okay.
Once again, if you have a question or comment please indicate so by pressing star one on your Touchtone phone up next we have Alex Perry with Bank of America.
Hi, Thanks for taking my questions here.
Just first could you give us maybe a little more color on sort of the shape in for next year I think.
23 wholesale shipments up modestly.
Also just trying to sort of.
Think through the puts and takes on the gross margin cadence here with the elevated inventory levels and you talked about sort of working that through the outlet stores may be partially offset by some of the benefit to you sort of expect to see some freight just trying.
To sort of give.
You can color on sort of how we should think about the business heading into next year. Thanks.
Alex We're obviously, we're not prepared to provide an outlook for 'twenty three here today aside from what we've described with regard to the <unk>.
Modest growth in our wholesale business through the first half of next year and we're looking forward, obviously to the holiday season, seeing how consumers react over the course of the next couple of months here and also being able to secure our fall 'twenty three wholesale order book.
Better shape as we come around to our year end earnings call in February and can share more of that.
With you.
Aside from that as you look at other elements of the P&L gross margin Wise you know you touched on I think the variables in here are going to be.
The upside or the tailwind with regard to freight.
I think channel mix the wholesale business has grown substantially in 2022, we will see how channel mix works its way out in 2023, and then on the headwind side I think the biggest variable.
We are that we're <unk>.
Dependent upon as are others is just what the overall environment.
Operating environment tails with the shape of the consumer and retailer sentiment and what that means overall promotional cadence. So those are the those are the major variables I think currency is obviously another challenging headwind both from a gross margin perspective as we edge.
Our inventory production as well, whereas where translation rates are but.
But we'll look forward to sharing more in February .
I think incredibly helpful. And then maybe after that you took some.
Our pricing above I think what you've taken historically this year.
As you move into next year is it sort of pricing to offset cost inflation or how do you guys think about sort of pricing on a go forward basis.
Yes, well we are in the process.
Pricing, our fall 'twenty three products today, and we've seen increases in labor.
Fairly.
Fairly large increases across almost every market that we source in.
There have been some moderation of the caution on material just due to the market.
Duction in demand.
We would see a commensurate reduction in demand on the ocean freight carriers. So we haven't settled on.
Final pricing, yet we haven't shared that with our wholesale partners, but our expectations are that the.
The dramatic increases we've seen over the last several quarters will moderate.
It tends to referring specifically, we're going to market with all 23 here pretty quick as it relates to spring 'twenty three and the order book that we have.
We're continuing to operate in an inflationary based environment and with inflation. Our objective has been to increase prices to offset that and we continue to do that with our spring 'twenty three season, so spring twenty-three prices.
They're up in the same level of magnitude as what we did for all 22, so call it the high single digit.
Level as the price increases that we've incorporated into there.
Yeah.
Perfect. That's incredibly helpful Best of luck in the holiday season.
Okay. The next question is coming from Steve Marotta with CL King Associates, Steve Your line is live.
Hello, everyone I know theres been a lot of questions regarding inventory and I certainly realize that the intent is to piece it out in the channels that are most advantageous over the next.
Three to nine months is there a possibility that some of.
Some of the aspects of the inventory could be pack and held until next holiday specific to either deliver into the wholesale channel or into your DTC.
Yes, I suppose it's possible, but our intention would be to manage the cadence all the way through or our business.
To be liquidated as you said in the next.
Current quarter's upcoming.
Yes, there's certainly enough we've got fall merchandise remaining Steve and we're carrying some of that for our outlet stores. As an example, certainly that would be our intent and then to Tim's point you know if there are there's a good percentage of our inventory and our product lines that are evergreen styles.
We would prefer to hold that merchandise and sell it at a higher margin next year, then been liquidated distressed margins.
In the near term.
Sure understood. Thank you that's helpful.
Okay. We have a question coming from Jonathan Komp with Baird.
Jonathan Your line is live.
Okay, I'd like to turn the call back to management for any closing remarks.
Well. Thank you for your attention and time today, we look forward to.
Talking to you in February about the results of Q4.
You.
Okay.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.