Q2 2023 Under Armour Inc Earnings Call
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good day, and thank you for standing by welcomed.
Welcome to the under armour second quarter fiscal 2023 earnings conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone.
You will then hear an automated message advising your hand is race.
Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your speaker today Lance.
Senior Vice President Investor Relations and corporate development. Please go ahead.
Thank you good morning, and welcome to under armour or second quarter of fiscal 2023 earnings Conference call. Today's event is being recorded for replay.
Joining us on today's call will be under armour executive chair and Brexit.
Interim President and CEO , Colin Browne and CFO David.
Our remarks today include forward looking statements that reflect management's current view certain forecast elements of our business as of November 32.
<unk> 2022.
Statements made are subject to risks and other uncertainties detailed documents regularly filed with the SEC, including our annual report on Form 10-K, and our quarterly reports on Form 10-Q.
Today's discussion also includes the use of non-GAAP references and Robert believes these measures provide investors with the useful perspective on underlying business trends.
Measures are reconciled to the most comparable U S. GAAP measures a reconciliation of which along with other information can be found this morning's press release on our website about under armour dot com with that I will turn the call over to Kevin.
Thank you Lance and good morning, everyone.
I'll start with a brief update on our CEO search and that we remain on track to announce our permanent leadership before the year's end.
I want to thank our board for their incredible engagement in this process and a special thanks for calling in for strong steady and thoughtful leadership throughout as he is of course, a serious candidate now onto the call.
17 years into our life as a public company, we have learned experience evolved and grown as an organization. We're operating in a complicated uncertain time for every industry, including ours still beyond the macro factors. We all face. It is a pivotal time for under armour, we will not miss the opportunity to reposition and establish our sector leader.
Ship wherever we choose to compete.
But that starts with knowing where we are today.
Our eyes are wide open and we know exactly where we are how others see us where we're positioned and specifically what we need to do to drive more love for the under armour brand.
Let alone a brand as a constant work in progress and we've made great progress toward that broader love in just the last six months and our momentum is building.
We are evolving our strategy to address the near to midterm environment by leaning into our strengths as we pivot to growth protect.
Protecting our house through continued operational discipline and investing in growth initiatives to capitalize on the upside potential. We know is there for the taking.
Pieces to.
Dwayne the rock Johnson, our roster has some of the greatest ambassadors in the world.
And to be sure we have work to do.
Yet that work is already in motion with calling at the helm well.
Well he'll get into greater detail in a few minutes. There. These are some of the highlights the calling and the team have accomplish over just the last 90 days, including.
Refining our target audience to 16 to 20 year old young athletes and how will strive to connect even more deeply with them.
Accelerating our product and operating rhythm by opening the aperture of our brand and product line to now include live. In addition to train compete and recover which means providing geared to cover all 24 hours of a young athletes life, while considerably expanding the addressable market size that we can attack.
A terrific example of what we mean by this new approach is this week's launch of the future of training footwear.
You a slip speed.
Your performance versatile footwear.
And what you can continue to expect from under armour energy excitement and innovation delivered with cultural relevance products athletes never knew they needed and once they've tried them can't imagine living without.
And finally.
Recognizing that in the products world of good better and best.
We allowed the pendulum to swing too far creating an overemphasis on good level products.
So we are amplifying our efforts to ignite significantly more better and best level products, while never compromising the operating efficiencies we've gained over the last several years.
These are just a few of the things I'm excited about at the core it's about are moving forward one great product at a time and one great story about that product at a time and all the while ensuring we are delivering our product to consumers and irrelevant inspiring and efficient way maximizing our opportunities for growing you as top and bottom line.
Make no mistake, we are leaning forward to growth our product pipeline is full we are in this fight, we're well positioned to grow and we're going to win and.
And with that I'll turn it over to call it.
Thank you Kevin I'm. Good morning, everyone. All stopped by underscoring that I made a highly challenging retail environment. We're pleased that we were able to deliver second quarter results were in line with our expectations.
This demonstrates our team's ability to operate through needs some volatility staying focused on execution and delivering the world's best sports performance products.
As we navigate these environments, we are working to amplify opportunities for existing coal business, while laying the groundwork to accelerate brought up product considerations for more pronounced growth in the years to come.
Essential to this effort is ensuring we keep athletes at the centre of everything we do and ensuring we continue our strong operational discipline.
I want to stress that again this is in and and not and all we are taking action to empower our ability to deliver the growth. We know we're capable of over the long term and protecting our brand as we scale.
As we strengthen our foundation and architects are all evolving path forward on growth strategies are focused on product story digitalization and culture.
I'll start with product, it's at the core of our DNA and what inspires and drives athletic performance.
The Amish promised to athletes is to make them better to provide them with performance solution that they didn't know they needed and once they have them cannot imagine living without.
We are at our best when we empowered those who strive for more to equip athletes on the journey is a privilege, we honor and respect we love athletes.
Expecting to reach nearly 6 billion in revenue. This year, we've done an incredible job and building an iconic brand still as we continued to fine tune our strategy areas. We are good at and areas that we must address more effectively to realize our full potential.
In this respect I'll highlight shoe refinements, we've made to strengthen our long term growth strategy.
First the foundational underpinnings of all unique brand of strong unmistakably presence in the products and how we connect with athletes yet as observed meaningful changes in the market dynamics and consume your behavior over the past few years. It was clear that our consumers energy strategy needs to evolve concert.
Currently we have refined talked audience, which is now centered on the 16 to 20 Euro team sport athletes.
This definitive group personifies on Brian attitude and lives at the intersection of multi generational influence from pushing the boundaries of what's possible in sports scene.
Seamlessly blending fitness music and street culture. This target audience will allow us to bring our product and storytelling into sharper intensity and cross the entire athletes experience influencing the larger target market.
This brings us to our second refinement of Kevin alluded to broadening our product aperture driven by insights we are working to outfit occasions beyond the fields courts in gyms. So we cover young athletes entire day still we won't stray from our unique performance DNA that every product.
Must do something under.
The amas versatility in consideration will spend an athlete's closet by encapsulates a magical fabrics with premium beautiful fresh designs.
Adding live to our trained compete and recover construct nearly triples or total addressable markets are around 300 billion olive strategy has already begun to manifest itself in fiscal 2003, and we expect it will show up even more significantly in fiscal 2004 with expanded product offerings and experiences.
The balance all pumped up an athlete thing.
Within product another area were digging into his segmentation, while we've done a solid job of building good and federal level products, we have opportunities to do more with our best level offerings.
As we look to fiscal 2004 and beyond we are working to elevate the premium aspects of off brands and product portfolio for the greater focus on better and best products to drive growth in key areas, such as footwear women and international.
Also contribute to our ability to drive most significant gross margin expansion over time.
We've also barely scratched the surface on exclusives in collaboration so we believe there was a flywheel opportunity with these offerings to drive improved brand consideration and loyalty.
On our last call, we choose teased and you've put wet platform discovered through athlete insights three days ago. We had our initial limited launch of the $150 under Almous flip speed the world's most versatile training shoe and a perfect example of one but widening aperture while building.
Best level product means.
Speed has a motive convertible hill so the athlete can wear and speed mode with the heel up the training or switch over to the heels down slip mode for recovery.
This new trainer uses award winning flow cushioning, and Boa Proficiently system, which enables a unique lockdown fit this.
This is part of a six feature set which includes being machine washable.
Since Monday with sold out on <unk> Dot Com with limited pay is still available in our North American brand houses and at Dick's Sporting goods.
This was a prequel so a broader launch plan for Valentine's day in February when a full assortment of colors will be offered even more exciting. This is just the start of the launch a platform, where you're looking to leverage into other categories in the future.
Now, let's move to our second strategic focus which is story telling great stories is the most powerful means to influence and inspire this.
Disconnection between athletes passion and performance drives us to do what we do that's at the core of building consumer relationships inspiring them and welcome them into our family.
A recent slip speed launches an excellent example of what you can expect from US moving forward, where the ingredients of innovative product authentic athletes and cultural relevance spilled the story.
Pure performance versus Toth footwork combined with under armour NIF athletes in the north fence accessing doing what they do best and engaging the artist logic to develop the sound for Swift speed.
This demonstrates how we see how we are going to market in the future through combined social channels, we've generated millions of positive primed impressions and just seven days.
A great example of what can happen women combined terrific product story and execution.
Our third strategic focus digitalization and driving a premium frictionless experience as consumers engage operand across state chiming.
Inside some benchmarking of helped inform where we're doing well and where we have work to do.
To address these opportunities, we're investing in mobile speed brand and storytelling <unk> search and loyalty.
This is grounded and improving the user experience further strengthening the under armour brand.
From finding our product quickly, telling inspirational stories with cutting edge visuals.
Product specs and data the frictionless comp building and checkout routines evolving this ecosystem is crucial to how we intend to unlock more significant roy in the future.
We're also committed to delivering premium retail experiences in our physical doors, both full price and outfit wherever you're investing in order management and points of sale systems and advancing are endless I'll buy online pickup installed capabilities.
With more work still to come we're beginning to see the benefit of these investments with solid e-commerce growth in the second quarter, particularly in our largest north American market momentum, we expect to continue for the balance of the year.
Further in the second quarter, we began testing and select markets. Our first ever North America loyalty program rewards members can join for free to unplug, the gearing up and working at.
<unk> will be redeemable for rewards, including exclusive athletes experiences and our latest gear.
It will all be also be able to access member only perks, including special events promotions and expert training tips and buffet rewards.
Only a few weeks into the pilot phase we're encouraged by the results and the initial learnings helping us refine this essential offerings for consumers, we expect to roll this out more broadly in 2023.
And finally this takes us to our thoughts focus culture, which makes under armour unique we've worked hard to cultivate our identity and how our family is defined when an athlete with the U S.
Logo when they run our flag it represents something different it's grit and determination.
Signals when they step into the gym onto the field court or track they putting the work will perform at their best and.
Swagger that all under armour athletes have in common.
This culture starts with the thousands of teammates who work daily to make this the best Athletic performance Brent in the World.
Talented team is more efficient effective and inclusive deliver.
On discipline agility and powerful playbook remains critical advantages, but both the near term environment in the longer term opportunities before us.
Not pivoting thanks to our plan playing both offense and defense is critical in this environment, it's not yet clear how prolonged these conditions may persist.
However, elevated inventories, including late arriving products across our sector high levels of discounting and promotions and softer retail trends have impacted have received the rest of physical twenty-three playing huh.
Based on these factors, we provide a full year outlook.
At the top line, we expect revenues to increase at a low single digit rate.
This revision is related to software retail trends, particularly in North America, along with additional FX headwinds, even so we're holding the line on the gross margin outlook, which reflects are measured approach to maintaining brainpower.
We are also being vigilant, but SG&A, which we now expect to be slightly down as we prioritize investments towards areas with the highest returns and actively managing expenses.
Taking it to the bottom line a full year operating income and EPS outlooks have also been revised slightly.
Additionally, we will remain in a strong cash position and we are proud of our inventory management. The last two years have had us in a defensive position concerning inventory, but also left us with more out of stock and optimal service our business as inventory approaches a more appropriate level for our size and with the competition.
Inventory being most occurrence aged we feel confident in how we are managing this aspect of our business.
And finally for transitioning today I want to highlight significant event that occurred during the second quarter.
In September we published on new sustainability Unimpacted report.
From how we create our project product to our workplace interaction with supplies and key relationships with stakeholders worldwide. We are proud of this work with this strategy in place. The next phase of our journey has begun aligned spot inspired every day by the work our team is doing to reach our targets, while being transparent about our progress and.
Talented.
This is strengthened this is a strengthening step in a long term commitments commitments are running a more sustainable business. Unlike a report titled States what's under matters.
In closing as we navigate this dynamic near term environments I'm emboldened by the opportunities to continue fine tuning our strategy and laying the groundwork under almost makes chapter we are in this fight and I am confident that by leveraging our strengths product innovation deep consumed the connection and under almost unique culture.
We will create better value for all shareholders through more robust profitable growth.
Over the long term.
Now I'll have to call it up to date.
Thanks <unk>.
At the halfway point of fiscal 2023, our second quarter results demonstrate that our operational execution has not wavered amid an uneven global market.
Despite several developing factors during the quarter, we protected our house and stayed disciplined allowing us to deliver results aligned with our outlook.
As a reminder, due to our fiscal year change our second quarter of fiscal 2023, ending September 30th is comparable to the third quarter of fiscal 2021.
Diving right in our second quarter revenue was up 2% to $1.6 billion compared to the prior year.
Excluding the negative impact of foreign currency revenue was up 5%.
As discussed on our last earnings call. This result includes approximately five points of headwinds from proactive reductions and cancellations that we've made late last year and early this year due to COVID-19 related supply chain constraints.
On a regional basis, North American revenue declined by 2% coming in at just over $1 billion for the quarter with wholesale down slightly due primarily to the proactive order reductions and cancellations previously noted.
In North American DTC solid performance in R. E Commerce business was offset by declines in our factory how stores as late arriving inventory and a challenging retail environment temporary sales.
EMEA with a stand out again for us this quarter with revenue up 9% to $263 million or up 20% on our currency neutral basis. This was driven by growth in our wholesale business, partially offset by a decline in our DTC business.
Following logistical challenges in the first quarter positive operational progress helped us better serve strong demand.
APAC revenue was up 7% to $226 million.
Or up 14% on our currency neutral basis.
Despite ongoing COVID-19 challenges in a relatively muted economic recovery in China, we saw growth in all channels led by our southern APAC markets.
And finally, our Latin America business was up 3% to $58 million in the quarter or up 4% on a currency neutral basis.
From a channel perspective wholesale revenue was up 4% to $948 million with increases in our distributor business, partially offset by lower sales to the full price and off price channels.
Direct to consumer revenue declined 4% to $577 million due to declines in our factory and brand how stores, partially offset by a 4% increase in R. E Commerce business.
And licensing revenue increased 7% in the quarter to 33 million driven by a solid performance from our North American business.
Byproduct type in a challenging retail environment or apparel business was down 2% with strength and team sports offset by softness and training.
However, we did see strength and rival fleece across all channels and.
And in our women's business, we continued to see momentum and Infinity Broz and Meridian leggings and there was also a strong sell through of unstoppable pants in our men's business in the quarter.
And footwear revenue was up 14% with positive results in all categories led by significant strength in team sports with outstanding performances from Curry and jet and basketball spotlight RM and highlight cleats in American football and Harper Cleats in baseball.
Additionally, we saw double digit increases in our outdoor and training categories.
Our momentum and footwear, which we expect to continue for the balance of the year is encouraging proof that our innovation is resonating.
And finally, our accessories business was down 12% due mainly to planned lower sales of our sports mass compared to last year.
Taking sports masks out of the comparison accessories were up at a low single digit rate in the quarter.
In line with our expectations gross margin was down 560 basis points during the second quarter driven.
Driven by approximately 300 basis points from higher promotions and discounting.
100 basis points of supply chain impact, mainly due to elevated freight costs <unk>.
70 basis points of various unfavorable channel impacts.
50 basis points of negative effects from changes in foreign currency, and finally about 30 basis points of unfavorable product mix due to the strength of footwear sales.
In the second quarter, SG&A expenses were down 1% to $594 million.
This decrease was primarily due to lower marketing expenses as we normalized against our elevated spending in the first half of calendar 2022.
Partially offset by a 10 million legal expense related to ongoing litigation matters.
In total our marketing expense in the second quarter was 9% of revenue.
Next operating income was $119 million.
Excluding the previously mentioned legal expense adjusted operating income was $129 million, which was above our outlook of $105 million to $115 million, primarily driven by lower than planned SG&A expenses.
After tax we realized and net income of $87 million or 19 diluted earnings per share.
Are adjusted net income was 92 million yielding 20.
Justin diluted earnings per share coming in above our outlook of 15 to 17.
For the second quarter.
Moving to the balance sheet.
At the end of the second quarter, our inventory was up 29% to $1.1 billion.
As a reminder, or comparisons Oregon's leaner inventory levels in 2021, when we ran a proactive constraint model.
As supply chain deliveries continue to rebalance from recent disruptions, we expect elevated inventory growth rates over the next few quarters with a peak in the high Forty's coming in our current third quarter and then closing on our fiscal year in the mid 30% growth range.
Looking at this from a different angle going back and comparing it to pre Covid 2019.
Would put both our estimated three year inventory and revenue growth rates up about 19%.
Further demonstrating our inventory management strength in this environment.
Rounding out the quarter or cash and cash equivalents were $854 million and we had no borrowings under our 1.1 billion revolving credit facility.
And finally, we repurchased 25 million a classy common stock during the second quarter, thus retiring three $2 million previously outstanding shares.
Under our two year 500 million dollar program.
We have repurchased $350 million worth of classy stock.
Thereby retiring 26 million shares.
Next let's turn to our fiscal twenty-three outlook.
As a reminder, the comparable periods of the corresponding quarters from the trailing 12 months from April 1st of 2021 through March 31 of 2022.
As Colin alluded to earlier general economic uncertainty has increased since the last we provided our outlook.
As such we have revised our full year revenue and profitability expectations.
Accordingly, we now expect revenue to be up at a low single digit rate on a reported basis versus our prior outlook of 5% to 7% growth.
Excluding about three points of FX headwinds currency neutral revenue should be up at a mid single digit rate and fiscal twenty-three.
Versus our previous outlook of 7% to 9%.
Cooking down into our full year revenue outlook, we're now expecting north American revenue to be about flat and our international business to be up at a mid single digit rate.
And our apparel business to be about flat with low teen growth and our footwear business.
Next there is no change to our expectation that gross margins should decline, 375% to 425 basis points in fiscal 2003.
This compares with our prior year's baseline rate of 49.6%.
Within this decline, we expect roughly a quarter will be related to negative impacts from higher promotion and discounting.
A quarter from elevated freight and product costs.
And the rest from channel mix changes in foreign currency and product mix.
Moving down the pinel as we manage against the more tempered top line. We are now planning SG&A to be down slightly compared to the prior year.
We remain committed to ensuring our investment dollars or optimize the areas with the highest returns while proactively identifying areas to manage expenses appropriately. Thus further demonstrating our agility and balanced approach to SG&A management.
Dropping this through we now expect our operating income to reach $270 million to $290 million.
Excluding illegal expense related to ongoing litigation matters. Adjusted operating income is expected to reach $290 million to $310 million.
That takes us to diluted earnings per share for fiscal twenty-three, which we now expect to be 56 to 60.
Lowering the range by five versus our previous outlook.
This includes the 28th benefit related to a tax valuation allowance relief expected to be realized mainly during the fourth quarter.
Of this 28 benefit 16 is related to prior restructuring.
Additionally, the previously noted legal expense have a four cent negative impact.
Therefore, excluding these net positive impacts of 12 cents adjusted diluted earnings per share is expected to be between 44 and 48 cents.
Nah, turning the color on the second half of fiscal 2003, where we expect third quarter revenue to be flat to slightly up on a reported basis and up at a low to mid single digit rate on a currency neutral basis.
For the fourth quarter, we expect revenue to be up at a mid to high single digit rate on a reported basis.
And up at a high single digit rate on a currency neutral basis.
As a reminder, the fourth quarter of fiscal 2003 laptop transition quarter of 2022, which was significantly impacted by revenue headwinds from our proactive decision to cancel orders due to COVID-19 related disruptions. Thus.
Thus part of our fourth quarter growth expectation is related to recapturing some of that business.
Next we expect gross margin to be down approximately 550 to 600 basis points in the third quarter due to negative impacts from elevated promotional activities shifts and channel mix changes in foreign currency and changes in product mix due to footwear skewing higher than apparel.
We expect 100 to 150 basis point decline in the fourth quarter as we finished the year.
Bringing this to the bottom line, we expect third quarter operating income to reach approximately 75% to $85 million and nine to 11.
Diluted earnings per share.
This includes the tax valuation benefit of <unk> related to the prior restructuring.
So excluding this benefit.
Justin diluted earnings per share is expected to be between seven and nine.
[noise] surrounded out this would imply an expected fourth quarter diluted earnings per share range of 27 to 2009.
Which includes an estimated 24 benefit related to the tax valuation allowance release.
Excluding the restructuring related valuation allowance benefit of 13.
We expect 14 to 16 of adjusted diluted earnings per share for the fourth quarter.
In closing, we remain bullish about our evolving long term strategy and confident that our playbook positions us well to navigate the challenging near term environment having.
Having the ability to take a balanced approach to mitigate near term pressures, while laying the groundwork for our next chapter of more pronounced growth is due to the hard work, we put into our operational plan and our brand with a team that is relentlessly focused on our product or story and serving athletes globally.
In the near term, we're driving the business efficiently and with agility, while executing the strategic shifts necessary to prime under armor for more sustainable profitable growth over the long term I will turn it back to the operator to we can answer your questions. Thank you.
Thank you as a reminder to ask a question you will need to press star one one on your telephone keypad.
Please stand by while we compile the Q&A roster.
Our first question comes from Matthew Boss was J P. Morgan Your line is now open.
Great. Thanks, So [vocalized-noise], maybe for Kevin or Colin how would you describe the current health at the brand any material changes that you've seen with forward wholesale orders and what do you see as the timeline for that Tibet to growth that Kevin I think you've cited to kick off the call.
I think we have a few things playing out there I think this has been part of our journey for a couple of years now with regards to just trying to exit number of undifferentiated doors and so we're already kind of starting to see more the quality of the revenue. We're showing now is certainly much better than it was kind of three or four years ago. So from that point of view, we already failed.
Kind of on that journey.
Obviously, continuing to build that out and and part of that is the kind of these resetting the coal consumer that we talked about this topic consumer of the 16 to 20 year team sport athlete pivots until live in allowing us to kind of leaning to launch a part of the market as well. So all of this is coming coming together from the point of view of how do we actually think about continue.
Two premiumize the Brian .
Continued to kind of to drive to Brian further up market and allow us to really start to drive the growth that we know there is for this brand and the demand. There is for these brands, but feeling pretty comfortable and confident with regards to how that starting to manifest itself.
Great and then maybe just to follow up on that comment so on the strategic opportunities that you cited I guess first on the accelerated segmentation should we think about this is offensive or is there a cut to grow that we need to consider with that and then secondly on the total addressable market opportunity.
For casual aware, what's your confidence in broadening the boots to that segment.
Two questions. One was I think I think we don't see this as a necessity to cut to grow this clearly.
A demand for under armour to kind of play on this.
I guess it is slightly more premium level, perhaps than we have been playing here in North America. So working through the mechanics of how we unlock that is something that we believe we can do in accessing that through the 16 to 20 euro it seems for athlete because they clearly tribes. So much more cost a much larger halo with regardless of how they shop across the market.
The second half of your question could you just repeat that.
Just on the lives category that you cited the casual wear what what's the total addressable market opportunity there and just your confidence of competing in that category.
As an expansion of the core.
While we believe that it's about 300 billion dollar opportunity that that.
Which is never we haven't really focused on or walk through how to plan and so we are clearly aware that if we look at it kind of where we meet the athlete at this moment in time, we talk about the journey to compete trained compete recover.
Which has been the three kind of aspects of the journey of compete that we are focusing on today and if you think about that Matthew it really only probably encompasses probably 32030% of that day. So the opportunity of leaning into the other 70% of the day is clearly a huge opportunity that when we talk to athletes as well it's clear they want to hear.
Access to our product or they want to feel comfortable to wear a product backwards as they traveling to the the court failed to a page so the opportunity of ethylene into that feels as if.
It's an open door for us we need to just do a better job of working through how we execute against them and that's the pivot to live that we're putting in putting in place at this moment in time and you're starting to feel a little bit throughout this show up through cyberspace. So yet clearly we feel that there is a big opportunity Downwardly me into it.
That's a great color best of luck.
Thank you thanks for that.
Thank you.
And our next question comes from.
Simeon Siegel with BMO capital markets. Please proceed with your question.
Hey, guys good morning.
Good morning talent I might want.
If I can follow up on that a little bit I was just hoping to get your perspective on how you guys are thinking through maybe what external signals might impact how you think about that balance between the desire to grow versus brand elevation and gross margin like I know the core focus is looking to the future growth, but just reflecting on all the success you've had over the past couple of years at reallocating the brand and honestly much to their credit.
You're still one of the largest ranch in the World I was just wondering if there's a scenario where it might make sense to sell less charge more and then earn more while doing that and.
<unk> follow up for you after that again.
Sure I think we already when we look at the the amount of consideration there is out there for the Bryan We believe there's clearly an opportunity for us to maintain a current customer base that we have in place now.
While continuing to work through how do we elevate that and that kind of the model we've been running for the past couple of years as we've gone through what we can't pull out constraint model, where we where we've actually been holding back at times in order to kind of optimize the way in which the Brian shows up and and the fact that we've continued to reduce our exposure in the oil price market and and walking away from him differentiated.
Differentiate the doors can't say that this morning differentiate the dose is.
Is a great example of how we think we can continue to on that journey. So I don't think it requires us to make fundamental shift if anything I think there's opportunities for us to to lean into additional pumps the market, where we haven't really shown up particularly well if you think that the mall.
The mall stores in the mall traffic, it's not somewhere where we play particularly well.
Whereas an incredibly important part of our business continues to grow significantly improved pretty well last quarter and that's clearly an area, where we continued to increase increase asp's and really start to resume in that part of the market as well. So we believe we can certainly kind of continued to drift upwards, a little bit and the way in which the Bryan just showing up but we don't.
Belief that requires us to do a wholesale restructuring from the point of view of how we're thinking of selling through Dave I'm not sure. If you want to add I would maybe just add to that to that as you think about a lot of what we're focusing on with our investments right now around.
Really leaning in on the digital on the E Com front with a lot of the different things that Colin already mentioned in his prepared remarks, and being able to leverage that to be able to show a broader range of our product and more best level product as well and same thing relative to brand how stores and leaning in there on the concepts and wanting to roll.
Out more full price brand how stores, especially in North America as we go into next year, So I think controlling that and being able to show the premium assortment in a bigger way is going to be helpful. All while continuing to kind of step off and slowdown relative.
Relatives of use of kind of the third party off price channel, which we've done a lot of work to to bring that down into kind of that 3% range of revenue over the last few years. So a lot of different things that play there, but I think we're definitely on the right track and there's a lot of opportunity to lean and even further when we go further into the live side of the product.
Thanks for the question right. Thanks, guys.
Yeah, and and Dave if I can have a quick follow up it looks like there is across the channel maybe a footwear versatile dynamics. So within all your guide how you were thinking about footwear verse apparel and then if.
If you can just elaborate a little bit more on the ability to hold gross margin guidance. Despite the revenue I think that'll be helpful. Because that is obviously encouraging thank you.
I mean, a couple of things there I would say.
First of all you are right and that there is a little bit of a headwind relative to driving and performing so well on the footwear side, which were excited about and that's something we can absolutely plan for and lean into I would say, though that that product mix headwind is getting smaller and smaller as we build more scale and footwear and continue.
To get better and our design and overall efficiency that product margin gap is getting smaller between our apparel and footwear. So it's not as much of a differentiating headwind on gross margin than it used to be the second thing I would say is that.
We when you think about three months back when we gave our outlook then and we took our gross margin down then in that we had contemplated a very pressured environment, especially in Q3 fiscal this year and so I think we were pretty aggressive and got ahead of it then.
And we're planning to hold at that level.
Again, this is where we want to try and keep the brand is premium as possible. We understand there's going to be a lot of discounting approach and out there and we are going to play on that but we are not planning to go below 2019 levels.
And that's reflected in our revenue update so again it is a little bit of.
Maybe less is more relative to how we finish out the back half of the year, but we feel confident in holding our outlet there and I would say that it's not that there hasn't been any noise per se when we think about it.
We have had some additional FX pressured developing from three months back.
But then on the flip side, we're also planning a little bit less business with third party off price and those two things kind of offset a little bit as well. So there's been some small puts and takes on our view of gross margin but.
But we still feel like we're in a great spot with the outlook that we're reaffirming here on gross margin.
Great. Thanks, a lot guys best luck for holiday.
Thank you thanks.
Thank you.
Our next question comes from.
J sold with UBS. Your line is now open.
Great.
Great. Thanks for taking the question, obviously, there's a lot of supply chain costs.
Impacting margins this year.
Maybe just to talk about a little bit more about supply chain expectations are you looking to next year given spot rates of change. It may be flow of goods has improved what you were expecting you about the kind of our margins you can recover and just sort of like.
The ability to deliver on time and accurately as you know we go through the rest of this fiscal year next year.
Yeah J. This is Dave I'll I'll take that if you think about this year, we've talked about our biggest headwinds being the higher promotions and discounting and then also the elevated freight and product costs and although we're not ready to give detailed thoughts on next year.
We would expect gross margin to improve next year, if you step back and look at two of those big drivers, we would anticipate that the year over year freight costs would be better next year than it is this year, we're already seeing that trend as we look at Q3 that we're going into right now that it's starting to kind of stabilize and then with those rates coming down.
We're actually seeing freight costs become a gross margin tailwind for us in Q4. So we would expect that to definitely continue some next year, which would help year over year gross margin and then also the promotions and discounting.
You know, we're not exactly expecting the market to completely get better as we hit April one, but we also do believe it will get better as we go throughout next year. So the promotion and discounting level, we would expect to probably get a little bit better as well. So there is just too simple factors there that would lead you in a positive direction.
<unk> for next year.
Let me just jump on the surface levels I think I think there's a couple of stories that one has to think we are undoubtedly same kind of surface levels improve is kind of supply chain getting themselves into a much healthier position I mean, the teams have done a lot of work here to make sure that we can optimize that and some were feeling pretty good about our ability to service the business through the balance of the year.
Add to that the fact that you know I think we have done a nice job in managing inventories at the right appropriate level of as you've seen on numbers up on a year over year basis. It feels as if women are back in the inventory levels, we kind of need to be in order to run this business appropriately so.
<unk>, we're feeling pretty strong with regards to how supply chain is playing out in our ability to kind of use that actually is a tool for us to continue to drive the growth.
I will just tag one last thought onto that.
Not just the freight rates, but use of air freight.
Late last year and throughout this fiscal year has been a lot higher due to the supply chain challenges and having to catch up on getting that product and so as Colin mentioned now that we're working through that and supply chain is getting more up to speed and and more up to the right timeline the utilization of air freight which is pretty costly it's starting to go significantly down and we wouldn't.
Anticipate that that would also continued down next year as well so another little bit of a a tailwind for us as we go into gross margin next year.
Got it that's super helpful. Thank you so much.
Thanks.
Thank you.
Our next question comes from.
Adrian with Barclays, you're lying his nose.
Yes. Thank you for taking my question two questions I get the first and.
Promotional.
A holiday and how that is coming through are you only seeing that.
Apparently they concentrated there.
Concentrated mostly in the U S. I'm currently you're put where it was very strong.
The 18th of nicely up there with unit.
Without a lot of promise to any color on that and.
And then finally are you using any more.
Perhaps.
From last quarter cause I know, you and talk it out kind of using that channel a little bit more and then my second kind of topic.
On the wholesale order books, when you're having discussions with retailers talent in the season.
Had dealt safety stock in spring.
How are they talking about building their inventory in the channel if that makes any sense, well, maybe not buying that babysat, okay shifting it.
Normally should be the normal team.
<unk>. Thank you very much.
So Adrian Ah lots of lots of that question I would say a couple of different things I would say as we as we saw through Q2 from NASP perspective, our Isps globally were slightly down, but really not very much they were down a little bit in North America in APAC.
Where there has been a little bit more discounting in the market right now where they were actually a little bit up in in EMEA. So not a huge story, though yet definitely a mix shift for us, though with the higher growth in footwear that absolutely helps us out and as we think about the back half of the year and from a discounting strategy.
<unk> <unk>.
We do expect a higher discounting and promotional activities given the evolving market conditions, but again, we expect to hold the line there and not go deeper than 2019 and Pryor. So we do think we're well.
But.
Fish in there to kind of navigate however, the environment may develop so that's kind of how we're seeing things there.
And then call I don't know if you want to comment on the wholesale.
Or if you want me to dump on that no I think just building on that from the point of view.
It'll early to kind of give information, we don't generally giving kind of into coretech kind of numbers with regards to holidays, playing out but yeah. There is an expectation that obviously wholesale palm this will kind.
Manage their inventories as we all do as we kind of go through next year. We feel is this again, we're in a good place from the point of view of being able to service our business and we have good visibility of us, bringing someone twenty-three order book and we're feeling pretty strong feelings.
Feeling pretty comfortable and how that will allow us to continue to execute throughout the year.
We haven't really started taking orders for fall into twenty-three years. So it's a little early to kind of say, how that's going to play out but undoubtedly those guys will be managing that inventory appropriately, but we continued to lean into those relationships. We got good strong solid relationship without wholesale pump.
Will continue to partner with them too and to ensure we get to the right solution and again, we do continues to feel more optimistic with regards to what we're starting to see from the point of view the positivity around the brand that and the demand that we feel that there for the Brian that will allow us to continue to customize those relationships as well and Adrian I know kind of the last piece there of wholesale.
You mentioned the off price channel.
Within the off price channel, we are anticipating to keep that in check and actually.
Make sure that the business is continuing to kind of stay at that 3% of total mix of revenue for the year. So that it is not going to be really a growth area for us or one that were leaning into that heavily right now that market is pretty tough as well and pricing isn't that great. So from a brand perspective, it's not really where we want to lean in we want to lean out if any.
Thing there and rely more on our outlet stores and continued type management of our of our inventory and I know that our inventory levels are going to be growing year over year, and we mentioned that in the prepared remarks, but I think just keep in mind, how lean we were running last year and copying against that and the fact that we're still going to be running the business.
A 3.0 turn or better as we run through the back half of this year. So I think that's probably a little bit of a better metric then just year over year growth with such a volatile environment that we're dealing with the fact that our inventory as plain as talent stock is not particularly I installed. So I mean, it's the right place right stuff in the right place at the right time to optimize them off.
So I don't think we're going to need to play any more than we've already cooldown.
Fantastic.
Thank you.
Thank you thanks hatred.
Thank you. Thank you.
Our next question comes from.
Brian Nagle with Oppenheimer. Your line is now open.
Hi, good morning, Thanks for taking my questions.
So a couple of questions.
The bigger picture, we want a bit of a follow up your prior question, but.
I know, it's hard, but it's difficult to port parts of the south cause if you look at the promotional activity happening now within the space or even that.
Even have the underarm apologize.
Is that is.
Is it more a function of.
Brands working through excess inventories or is or actually a component now that.
More normal promotions.
And may be reacting to a potentially softer.
Sumer backdrop, then the second question I have related to that you mentioned in your prepared comments about.
You will go on blind, which are more challenging this quarter, then we'll be discussing prior quarter, and obviously that a lot of pressure on the consumer very well documented out there, but could you talk more specifically about what you are seeing that so does it gives you that view.
Thanks.
Yeah, I guess, a couple of things, Brian and I think that you know.
When we look at the promotional activities, it's a little bit of both as far as what you mentioned.
We see a lot of brands have been bringing in a lot of inventory because they they.
Assume some assume that the demand was going to be as high as last year and because a lot of the factory basis, where behind they were really putting in a lot of orders to try and catch up and assume that demand was going to be similar this year. So you've got a lot of inbound inventory that's coming in to a market that's been softening so.
There are a lot of brands that have a fair amount of product out there in the market and so they are starting to aggressively discount more to be able to move that and not hanging over as much in the next year. So that's definitely a big part of it but then on top of that.
Consumer is getting tighter.
Wallet in their spend on on discretionary is getting a little bit tighter you do see a little bit more spend on travel and entertainment, but the overall wild size is a little bit less so.
It's a little bit of both that we're seeing.
And as we think about the promotion levels in the back half of the year <unk>.
Keep in mind that we we are seeing next quarter or this quarter wearing right now Q3.
Expect it to be down 550 to 600 basis points and the biggest part of that is the continued promotional activities. We expect to see so that is built into to our outlook and we're comfortable with kind of where we're sitting in that range.
With just add that I think although we are obviously heading into some some shopping times in the kind of the midterm I guess, but based on the best way to put it from the point of view of the economy.
We do also believe that kind of this part of the market is going to continue to remain strong I mean, there was recently a UBS bulk up came out that was suggesting that it's a 6.5% global longterm cake or in this kind of part of the industry. So that we feel is definitely playing in the right part of the industry.
And yet we're going to have to navigate these short term. This short term challenges, but we're in a great position to do that and we feel we are in the right industry and with that we're well set to kind of continue to accelerate through them.
Great. Thank you very much.
Thank you thanks, Brian .
Thank you.
And our next question comes from.
Sean Kernan with Cowan your line is known.
Good morning, guys. Thanks for taking my question.
Mortgage out on a quarter.
Q.
Yeah, I think it's you're proving the ability to manage SG&A dollars and right, particularly in the back half of this year.
Can you talk to his revenues reaccelerate in the fourth quarter on a constant currency basis and potentially into next year.
How are you going to manage to rate, both SG&A rate and dollars.
Let me, let me laid off on this and then I'll hand, it over today, but I think the work that we've done over the past three to five years and kind of standing up our operating model is one of the reasons why we feel confident that we now have a process through which we can ensure that we optimizing S. GMA based upon the size of the business, it's clear that we.
Has been an important part of it is kind of the work that we've had in flight for the past couple of years and we obviously over the last 90 days. So we doubled down on that to make sure that we're being incredibly efficient and and how we optimize the operating model and thats really mass starting to pay dividends.
It feels as if we are well well positioned to for this pivot to growth.
S J and check we know how our operating model works, we know how to optimize the individual parts of it and really how to drive a leverage out of that so that if I'm not sure. If you want to go through and a little bit more detail no I mean, I think that with all the work that we've done that Colin mentioned.
Fortunately, we removed a fair amount of some of the fixed costs and anchors that were kind of dragging along so now it allows us to be a much more nimble.
And I would also say that from the leadership team, we have a very enterprise mindset, so making the decisions of how to re prioritize and therefore, some business units having the sacrifice.
For others to be able to drive forward and key investment areas, whether it be kind of the digital an omni fraud or whether it be on <unk>.
[noise] where design.
Those conversations and making those changes in pivots like that are much much more.
Efficiently done than in the past and with all the operating model and restructuring work that we've done work in a point now where we've got a really solid base to be able to grow from so you know as we step forward, yes, there might be a little bit of a SG&A headwind relative to overindex growth from a D.
C perspective, but that would come with higher gross margin as well, which would offset so.
We're going to keep managing tightly.
There's a lot of discipline within the organization at this point.
Everybody's leaning in and we're in a good spot to Tibet.
To growth off of that.
Got it thank you.
Thanks for your thanks, John Thanks, John .
Thank you.
And our next question comes from.
Lorraine Hutchinson with Bank of America. Your line is known.
Thank you good morning, I was hoping you could provide.
And the women.
Can you just talk to the progress you've made.
Any of the documents.
Change your position here.
Obviously has and continues to be a major focus from the point of view of how we are continuing to kind of look to drive that that part of the business. We've seen really strong results in areas from a whole Meridian line, which was initially focused on a women's business has done incredibly well with the medium pines.
Moisture infinity and the crust in addition to that things about the prospect Crossback Bross. So we continued to kind of doubled meat continued to see opportunity faster to grow that business. The work, we've done and standing up women's specific running product as well as something that's really started to resume so we expect to continue to double down in that part of the business and certainly as we are.
Thinking about hospitals merchandise the ways in which.
Women's business shows up across IFTTT enterprises, something which we are we continuing to work on and we expect to see that continues to play update you on the jumping yeah again, I think as we look to push hard on all the income investments and also on full price brand how store rollouts.
It's an opportunity for us to be able to really.
Increase the the women share of product assortment there.
And then continue to grow from that so we're excited about where that could go.
But we are continuing to dig deep on that side.
Thank you.
Mmm.
Thanksgiving.
Thank you and our final question comes from.
Michael but many with credit Suisse. Your line is now open.
Hey, Thanks, guys for fit me in here.
And I was just wondering if you could help us I know this is a little bit earlier, you gave us some directional color, but the gross margin guidance.
550, 600, and the third quarter and the hand off to the down hundred to 150 in the fourth quarter.
It seems like those big enough buckets, and I know you highlighted promotional activity, but maybe just if you could try to connect us to the rough scale of the components of that gross margin that you just gave us some of them for two Q. It sounds like promotions are the biggest in the third quarter and then is that is that the biggest piece. It assumed roelof as you go into the fourth quarter.
Maybe just a few thoughts on the biggest buckets between them and then I guess just on the.
As you look at.
[noise] as you look at next year.
And you gave us some set shape of inventory of high forties in third quarter mid thirties at the end of the fourth quarter. How do you know how how do you see inventories coming into alignment how long does that take you think.
Yeah, Michael Great Great questions I'll dive in first on the gross margin. So for Q3, we gave outlook that we expect to be down 550 to 600 basis points.
The largest is definitely the assumed continued elevated promotional activities, that's probably roughly roughly in the range of of three points.
And then I would say kind of the middle or medium sized drivers one would be the shifts and channel mix, which is going to be.
A little bit more.
Distributor base, just based on timing of that business, but overall the channel mix is probably somewhere around.
One or 100 basis points.
FX is continuing to be a pretty big headwind for us.
That's probably in the range of about 100 basis points for Q3 as well so that right. There is definitely the lion's share.
The footwear mix being higher is a smaller headwind as I mentioned earlier on the call.
And then we'll actually see a little bit of an offset a little bit of a tailwind from freight costs in Q3, not much but as those rates are coming down in airfreight utilization is also coming down that actually starts to become a little bit of a a tailwind for us in Q3. So.
Largest again is the promotional levels and then kind of the medium factors are gonna be channel mix in foreign currency.
As we step in the queue for.
We would anticipate that the remaining largest headwind still going to be foreign currency and to your point. The promotional activities is still going to be a headwind, but we don't see it being as large as what we anticipate here for for the current Q3.
And then again product mix with footwear assumed to be a higher growth and apparel is a little bit of a headwind.
And then the tailwind.
From freight costs actually gets larger and becomes a bigger factor to help offset.
So that's kind of how you get to the.
Expectation of being down 100 to 150 in queue for them. So.
So hopefully that gives you some good color there.
And then relative to next year with inventory.
We're not giving details yet on that but we do feel that as we're going through the back half of this year, even though the growth rates are a little bit higher.
We're doing it off of a super lean base last year and now we're getting more towards the right level of inventory for our business.
But at the end of the day, we're probably going to be focusing more on inventory turns than just the growth rates.
And wanting to be able to make sure we stay above three as we run out this year and then continuing to start driving that up as we go forward.
To get to a better place as we get past some of the market challenges, but we feel good about where our inventory is.
<unk> Com mentioned earlier, it's fairly healthy.
More current product.
We believe our outlet stores can handle the excess very well with a small percentage go into the off price channel and we'll keep managing that balance in the most premium ways. We go into next year as well, yeah, and just to close it I mean I think the work we've done on managing gross margin and inventory has left us in.
A strong position to kind of closed out the year and think about what that means for 2024 as well I think the work when we look at Brian consideration and the way in which we believe me, it's still continuing to resonate with consumers and we look at the work we're doing around the strategic shift and kind of making this pivot to growth.
Brings with it a certain swagger in a certain confidence that is starting to grow.
Cross the business as well I think we feel as if we are well positioned to kind of close at the air and grow into 2024. So yeah. Thank you. Thank you for your tons of it I appreciate expressions, Michael very helpful. Thank you.
Thanks, Michael.
Thank you that will conclude our call today I appreciate everybody's participation. Thank you operator, thank you.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
The country.
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