Q3 2022 Allbirds Inc Earnings Call
[music].
Okay.
Good afternoon, ladies and gentlemen, and welcome to the Albert's third quarter 2022 conference call. All participants have been placed in a listen only mode.
After managements prepared remarks, there will be a question and answer session at which time instructions will follow.
I'd like to turn the call over to Katina, Mr. Dockets, VP of Investor Relations and business development at all birds.
Good afternoon, everyone and thank you for joining us with me on the call today are Joe Kim.
Kim Brown Albertas co founders and co Ceos and microphone Albers Chief Financial Officer.
Before we start I'd like to remind you that we will make certain statements today that are forward looking within the meaning of the federal securities laws, including statements about our financial outlook.
'twenty two.
<unk> term guidance targets impacts duration of external headwinds.
Simplification initiatives and other matters referenced in our earnings release issued today.
These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.
Please also note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise any statements to reflect changes that occur after this call.
Please refer to the SEC filings, including our quarterly report on Form 10-Q for the quarter ended September 32022 for a more detailed description of the risk factors that may affect our results.
Also during this call we will discuss non-GAAP financial measures that adjust our GAAP results to eliminate the impact of certain items.
These non-GAAP items should be used in addition to and not as a substitute for any GAAP results.
Unless otherwise noted we will be speaking to adjusted net revenue, which is a non-GAAP financial measure when referring to net revenue during today's call.
During today's call, we will also be referring to our active customers.
Active customers are defined as the total number of unique customers, who have made at least one purchase in the preceding 12 month period measured from the last date of such period.
You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures to the extent reasonably available in today's earnings release.
Now I will turn the call over to Joe to begin the formal remarks.
Thank you Katrina and good afternoon, everyone.
I'd like to start us off today by taking a moment to commemorate the one year anniversary of our IPO, which is a critical step in building <unk> into a defining global brand for this century.
And what a year it's been.
Despite the external headwinds and uncertainty it's been a year full of wins, including cutting edge materials innovations a deep pipeline of new style introductions. The addition of our new third party channel and the launch of our rerun program to enable a circular economy for our product.
And through it all we remain on track to deliver on all commitments from our sustainability principles and objectives framework that we outlined in our S. One and we continue to lead the conversation on sustainability in the footwear and apparel industries.
I could not be more proud of what our brand stands for the incredibly passionate team and culture. We have built and are fiercely loyal customer base Needless to say, Tim and I remain tremendously optimistic about the future of all births.
Before digging into the quarter I want to provide a bit of context on the consumer environment as I see it back.
Back in Q2, thanks to our direct relationship with our customers and sophisticated data platform. We believe we were early to identify changes in demand signals. Our diagnosis of the market is playing out as we expected and we entered the third quarter prepared for the demand environment. Thanks.
Thanks to these insights coupled with some great work from our team I am proud to report that we exceeded our Q3 net revenue and adjusted EBITDA guidance targets, while taking market share and delivering on our sustainability goals.
Yes.
Since we last spoke we are seeing increased choppiness in the external environment. In addition to worsening FX headwinds and extended Covid lockdown in certain areas of China.
We expect Q4 to be negatively impacted by persistent inflation and high levels of promotional activity, which will impact our U S business, along with a weaker consumer backdrop in Europe , and worsening FX headwinds and SaaS, we are preparing for a scenario in which consumer headwinds worsen in the coming months and as.
The full impact of these myriad market dynamics are fully digested by consumers.
Okay.
We have taken this complex operating environment as an opportunity to streamline processes and optimize our cost structure and continue to execute against the simplification initiatives announced during Q2, while also investing in a customer experience that we believe best positions our business for continued growth with meaningful adjusted EBITDA.
Movement in 2023 and beyond.
On the balance sheet, the high quality evergreen nature of our inventory has allowed us to tighten our open to buy something we'll continue to do going forward targeting increased turns to free up working capital and increased margin from lower holding costs.
Despite a cautious outlook on consumer demand given the economy, we expect a meaningful increase the inventory turns in 2023 as these initiatives fully take hold.
These points validate my belief that the actions we took last quarter were the right things to do at the right time.
Okay.
Looking ahead to holiday season, we expect the external environment to be the most promotional we've experienced since launching the company in 2016. Despite that we have prepared a great product roadmap alongside the right mix of inventory and we've coupled that with a strong holiday marketing campaign taken together I feel confident as we head into this all important season.
Despite the noise the external environment.
And while we are taking a more conservative approach to planning our business. We continue to prudently invest behind our three growth initiatives, one expanding and energizing our product portfolio to growing our store fleet and three scaling our international business.
Starting with product we are incredibly proud of our recent launch of plant leather a first of its kind innovation performing similarly to bovine leather, but with 100% plastic frame is material.
This is a key point of differentiation from other leather alternatives, our first product with plant whether it was on a new silhouette called the Pacer, which provides our customers with an elevated sneaker style expanding the use occasions, where consumers can select apparel walbert.
We also have good product flow for holiday that we expect our customers to love.
Moving to stores, our own retail channel grew net revenue, 53% year over year.
We opened eight new stores during the quarter, including six in the U S.
It is important to note that nearly half of our current store fleet is still in the ramp up phase, which has historically taken around four quarters to reach revenue maturity. However.
However that sales rep is taking longer right now given the macro headwinds.
Our stores remain a powerful acquisition total allow.
Allowing us to gain leverage on marketing spend to lower customer acquisition costs increased the penetration of valuable omnichannel repeat customers and are ultimately the best expression of our brand.
Our U S stores maintained an impressive score for NPS of above 90, which we believe positively correlates to repeat purchase and the health of the Alberta brand.
That said, we continue to be negative negatively impacted by traffic that remain below pre COVID-19 levels. This slow traffic recovery appears to be consistent across our industry and that we believe that we will recover the majority of this traffic the timing of that recovery is unclear given the operating environment.
Wrapping up on retail even in a choppy environment. We continued to see an overall uplift in omnichannel sales in markets with stores above what we see in E Com only region.
Turning now to third party I am happy to report that we are tracking ahead of our expectations with strong early sell throughs.
We're thrilled to have added Rei as our most recent retail partner along with their $20 million plus co op members.
<unk> belief in the transformational power of nature and their dedication to climate action aligns perfectly to our goal of making better footwear and apparel products in a better way.
I'm also pleased to announce that we will be furthering our partnership with Dick's sporting goods beyond the company's public lands banner.
In the coming weeks, we will enter Dsg's newest houses sport format, which delivers a fantastic customer experience and three doors and intend to expand to other DSG core format stores beginning in Q1.
We are taking a methodical approach to develop unique and compelling stories for customers with each of our marquee partners.
Our center stage activation at Nordstrom was a great example of this as is the holiday activation that we currently have in Rei's flagship.
At just over 100 doors, we have a long runway of potential growth ahead of us and third party.
Similar to our direct retail strategy strategy, a key tenant of our third party strategy is to use the channel to meet consumers, who have not yet heard about our wonderful brand and fantastic products.
We believe that our third party footprint is already increasing new customer acquisition and brand awareness and.
In fact, we have found very little overlap between our debt direct channel customers and those of our third party partners, providing a fantastic runway and opportunity for brand discovery.
As we noted last quarter the journey, we take to achieve our strategic and financial goals may shift, but the destination looks the same.
In a time of significant volatility we continuously evaluate our channel strategy.
To determine the optimal balance between third party and owned retail stores.
As we planned growth across our channels, including digital stores and third party, we will be conscious of and deliberate on the balance between top line growth profitability and importantly capital efficiency.
I look forward to providing more updates on upcoming calls as we continue along our journey and methodically grow the marketplace for our products.
Turning quickly to our international business revenues grew nearly 11% despite an approximate 1500 basis points year over year headwind from FX.
So we remain confident in the long term demand in our international markets. As we mentioned last quarter. We are primarily focused on five key geographies as we continue to navigate this choppy macro environment, the U K, Germany, Canada, Japan and China.
As an example of this focus at work we are experiencing strong momentum in the UK. Despite the overall environment being challenged in Europe .
During Q3, we saw over 20% growth in local currency.
Driven by solid comps in our established Albert stores in London and positive initial response to our new Kings Road store.
We also opened Selfridges shop in shop, which is increasing brand awareness and driving sales.
In closing.
I am proud of the work we are doing to build <unk> into a generation defining brand and remain confident we can simultaneously drive efficiency into the business.
Thank you for taking the time to be with us on the call today and with that I'll turn it over to Tim.
Thanks, Joe and good afternoon, everyone.
As we look at what's happening in the World never has it felt more important to emphasize our sustainability goals.
We recently published our 2021 sustainability report and I'm proud to highlight that while growing our revenue by 27% in 2021, we actually reduced our average product carbon footprint by 12%.
Our teams are energized by our goal to cut our already low product carbon footprint and half by 2024.
And drove it to near zero by 2030.
In support of this long term plan. We are proud to have made groundbreaking tangible progress and set a new industry standard for others to follow.
We've done this by focusing on three key areas.
<unk> heard of agriculture, renewable materials and responsible entities, which.
Which have helped make 2021 of any year towards meeting our brand promise and shoes.
And regenerative agriculture, we partnered with suppliers as you Wanna Marina and other brands to pave the way for regenerative world easily through the <unk> <unk> framework.
To date, nearly 500 grows have signed up representing 15% of new Zealand's farmland committing.
Committing to work with nature to continuously improve human animal and environmental outcomes.
In renewable materials, we introduced <unk> II running shoe, reducing its carbon footprint by 5% by introducing a mid solar was 21% water and removing unnecessary components.
And on renewable energy in 2021, we procured 100% about energy from renewable sources to meet our electricity use manufacturers manufacturers in the U S and Vietnam.
And across the globe, our manufacturing partners work to install onsite solar at their facilities.
In addition, we increased our share of ocean shipment, which has a significantly lower carbon footprint than shipping by year.
80% in 2020% to 84% in 2021 to over 90% this quarter.
In addition to carrying a lower carbon footprint Ocean shipping has real benefits for our gross margin.
This signifies the essence of our model.
The more sustainable the theater up businesses.
These are just a few of the many things we're up to and I encourage all of you to take a look at our latest sustainability report to see how we continue to lead the conversation in sustainable forward turning to product Q3 was a big materials innovation quota holders, we will start with a first of its kind literal tentative that is 100% plastic free.
100% vegan and exclusively contains natural materials like plant rules and agricultural blood products.
We also launched two lighter weight materials woven will in Kansas, which make up a growing and robust suite of materials that we would comparability.
Moving forward, we will continue to inject these into our new and existing product franchises to expand and enhance the super natural comfort experiences we offer.
Looking across our broader product portfolio, we have made meaningful progress in both performance and lifestyle this quarter.
We remain very happy with our performance.
Got it.
The fly was just recognized by men's health as a top running sika for 2022.
We continue to see the <unk> franchise is another important step toward building a pool is critical.
And lifestyle, a new pace of silhouette, which is available in limited supply and plant later.
Broadens our lifestyle repertoire with a true quote sculpsure.
Providing additional use occasions for our consumers.
We intentionally loose pump ISO limited supply we are encouraged by the media and consumer reaction we.
We will continue to invest in growing this new franchise moving forward.
Continued skol innovation will be Paramount to our next phase of growth and play a key role as we move into third party.
I'm also excited about our strong product pipeline going into holiday.
Including our recently launched cope with it run collection, which combines this selling wood repellent mizell material and performance.
As well as our new fluff collection, which is perfect for gifting.
And at the heart of our recently launched holiday campaign focused on our core brand offerings of supernatural comfort.
In closing amidst all the volatility we are continuing to do the hard work and material innovation and product creation.
And remain focused on leading the conversation on sustainability in the footwear space with great products made from Super natural materials.
With that I'll turn it over to Mike.
Thanks, Tim and good afternoon, everyone I'd like to start by adding my thanks to our teams for focusing on controlling what we can control their execution led to a solid financial outcome in the corner.
Adjusted net revenue increased 15% to $72 million, 19% when excluding the impact of FX.
Let me break down the growth drivers.
Starting with geographies, we saw balanced growth with the U S up 17% and international up 11%, 26% when adjusted for FX.
Looking at channels third party was a significant growth driver and represented a mid single digit percent of revenue mix.
We continue to expect third party to be an EBITDA accretive growth driver in 2023.
Looking at revenue growth through a customer lens and our direct business orders increased 16% and average order value was up 2%.
I'd like to go deeper and provide some granularity on active customers, which we view as a good indication of the health of our brand and business.
In Q3 active customers increased 12% on a year over year basis roughly in line with the trend we saw in Q1 and Q2.
In addition to strong growth in active customers.
We have seen steady increases in spend per customer.
We saw gains across active customers in both digital and retail.
As you would expect with more stores in 2022 retail was the bigger driver.
As Joe noted our stores build brand awareness.
Efficiently acquire new customers increase repeat rates of existing customers and drive omnichannel customer LTV.
We view, our consistent growth in active customers as a strong indicator of brand health and an important proof point that our growth pillars are helping us build a durable business for the medium and long term.
Moving on to adjusted gross margin Q3 came in consistent with expectations at 47, 6%.
Business segment mix away from our gross margin accretive international business, an increase in third party sales and Covid related cost headwinds were partially offset by increased ocean shipping and a modest early benefit from our simplification initiatives.
We also experienced modest pressure from our previously discussed strategic increase in promotional activity, which partially offset some of the benefit of our price increase.
We continue to believe that we need to respond to this highly competitive environment and meet customers where they are.
Fortunately customers that we have acquired through promotions continue to behave similarly to prior cohorts.
Finally, our adjusted EBITDA was negative $12 $7 million.
We benefited from tight SG&A control tied to the simplification initiatives as well as lower marketing spend.
Marketing decreased both sequentially and on a year over year basis due to increased efficiencies in our digital channels and the shift of some marketing spend from Q3 into Q4 again, we feel really good about delivering this result in Q3.
Moving to the balance sheet, we ended Q3 with $127 million of inventory, which was up 3% from the end of Q2.
In transit inventory accounted for over one third of that inventory, but has come down slightly compared to Q2.
Included in that $127 million is about $5 million of end of life products that were continuing to liquidate as part of the simplification initiatives.
We feel good about the makeup of our inventory the vast majority of which is core evergreen footwear.
As mentioned during our last call we have begun to by tighter on core footwear as we plan for a more uncertain consumer demand backdrop in 2023.
Tighter buying coupled with our selective promotional strategy is expected to reduce inventory levels and improved terms.
With mid teens revenue growth this year, a structural slowdown in SG&A spending due to the simplification initiatives and improved inventory turns we expect free cash flow to improve and believe our Q3 ending cash position of $181 million is more than ample to fund our growth initiatives for the foreseeable future.
Sure.
Before leaving Q3, I would like to provide an update on our simplification initiatives announced last quarter.
These initiatives have set us up to continue delivering top line growth, while keeping us on a path to reach our profitability and cash generation targets.
I'll walk through the initiatives and provide updates on each.
The first initiative is investing in our supply chain to reduce both cost and our carbon footprint.
Later this year, we will commence production with a new factory partner.
The full impact of this change will flow through the P&L in 2024, but we expect to significantly.
Decrease our landed product costs on a run rate basis in early 2023.
I'm also pleased to report that just last week in the U S. We successfully transitioned to our automated distribution centers and new dedicated returns processor.
Taking together these changes have already provided greater logistics cost predictability for Q4, and we would expect to see a positive impact on gross margin in 2023.
The second initiative is streamlining our organizational structure and reducing SG&A to free up resources to continue to invest in areas that are critical for demand generation.
We are on track to deliver the previously communicated corporate SG&A savings target of $4 million to $5 million in 2022, and 13% to $15 million on an annualized basis starting in 2023.
The third initiative is the onetime liquidation of end of life inventory, which is proceeding as we expected.
Overall, we are on track with our simplification initiatives and continue to expect the total nonrecurring net costs associated with them to be 18% to $24 million to.
To Echo what Joey said earlier it is clear to us that these actions were the right thing to do at the right time.
I'd like to now turn to our guidance targets for the rest of 2022, which exclude any nonrecurring revenue and costs associated with our simplification initiatives.
Our 2020 to annual guidance target ranges remain unchanged.
We continue to expect adjusted net revenue of $305 to $315 million up 10% to 14% versus 2021, 13% to 17% excluding the impact of FX.
This implies a Q4 range of $92 million to $102 million, which when compared to Q4 2021.
As a range of minus 5% to plus 5%.
We expect the U S and international grow at roughly similar rates in Q4.
Okay.
For adjusted gross profit, we continue to expect a range of 150 to $157 5 million.
The midpoint of our revenue and gross profit targets represent an adjusted gross margin of 49, 6%.
We also continue to expect adjusted EBITDA of negative 42, five to negative $37 5 million.
One model update is that we are now expecting to open 22, net new stores up from 16 to 17 is a few projects finished faster than anticipated.
By the end of 2022, we expect to have 57 total stores 42 in the U S and 15 internationally.
These additional openings will modestly pressure Q4 adjusted EBITDA.
Speaking of Q4 like everyone else, leading our consumer business right now we're parsing through all the cross currents that are impacting spending this holiday season I.
I'd like to share a few thoughts on how we're viewing Q4 and what we're doing in response.
And our business Q4 is historically the highest sales volume quarter of the year with November and December alone accounting for over 25% of full year sales in 2021.
So far in the quarter consumer spending habits, and traffic have been notably choppy, especially in the U S.
Our read is that the impact of high inflation and recession fears, it's creating more cautious behavior and we believe consumers will buy closer to need as they wait for promotions of holiday season.
This is different than last year, when spending started earlier because of headlines about supply chain delays.
Q4 guidance targets assume an improvement versus our quarter to date trends.
We feel confident in that improvement because we have what we believe to be our best holiday marketing and product campaign in our company's seven year history.
We have to meet consumers, where they are right now and factor in the competitive environment. So our broader marketing strategy for the season includes an enhanced promotional calendar depending on how the holiday season plays out we could end the year at full price sell through of 80% to 85%.
That remains much better than industry peers, but below the 85% to 90% we communicated on the Q2 call.
I'd also like to remind everyone that in the retail channel. We will begin lapping weeks that were pressured by omicron later this quarter.
Finally, there are several additional external macro factors, we are considering as we look at the quarter.
One we continue to see increasingly negative FX headwinds.
Indeed, our current Q4 estimate is that the year over year FX impact is now $45 million, which is a couple million dollars worse than what we factored into guidance last quarter.
Given the volatility in rates there is potential for further headwinds in the next two months.
Two we continue to see volatility in our China business due to the consumer spending ripple effects are rolling Covid Lockdowns and.
And three there is risk that U S consumer spending does not bounce back and could moderate further.
Taken together, we believe all these factors create increased risk of Q4 results coming in at the lower end of our guidance target ranges in closing while this is a really tough operating environment. We continue to feel confident about how we are positioning our business for the future and our ability to become better operationally deliver on.
Our sustainability initiatives and take share.
Through our thoughtful approach to our supply chain operating structure and processes, we have built a stronger and leaner infrastructure.
We believe these actions coupled with our three growth pillars, and our intense focus on cash management position us to drive the business towards our medium term profitability targets and create shareholder value.
Thanks for your time operator, please open the line for Q&A.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay.
Our first question comes from Mark <unk> with Baird. Please go ahead.
Hi, This is Amy on for Mark Tonight.
You know we've seen you take the footwear assortment at a few different directions. This year with the Flyer launched earlier and the performance running category not the pace isn't your lifestyle shoe why are you focusing on now in the product development pipeline should we expect to see more insured lifestyle side or on the performance side.
Yes. Thank you for the question.
We'll continue to stay laser focused on the idea of supernatural comfort across all the products that we're making the majority of all of our product focus and innovation focus remains on the lifestyle space, We're really excited and pleased with the launch of the Pacer most recent.
Quote shoe store franchise that.
That has performed well and also introduces a new natural material platform importantly, though that we feel really excited about we still remain in the early days of our journey into performance the desk or our original franchise is at the core of that offering and the trade desk to continues to perform really really well for us as an entry level.
Running product the floor push that even further with a new material.
Technologists with firm again that we feel really good about and overall the performance there is about a quarter of the business and we will continue to build that and built credibility with that over time and expand the use case, we continue to think there's a great.
White space in the category for natural materials.
And for the consumer trend around our sustainability purpose, so lots more to come and we're really really excited about the product roadmap looking forward to 'twenty three.
Great. Thank you and then switching gears could you talk a little bit more about how youre thinking about your own promotional activity.
At 115% off on the side, that's a bit different than your past promotional strategy are you seeing customers react to increase promotional cadence.
Coming ahead of what you expect to happen in <unk>.
Yes, Thanks, Joe.
We've really signaled this early on that we anticipated a very significant increase in the overall environment for promotion and I think if you look around the industry.
Certainly panned out that way so.
We're feeling it and Mike alluded to the fact that we're expecting perhaps even a slight uptick in the promotional activity will do as a result of meeting the moment and making sure we're competitive for that for the consumer in this super promotional.
<unk> environment.
We're elevating that to a certain degree that said I'll reiterate we feel really good about the balance that we're making in terms of.
Meeting the consumer where they are for the moment meeting the industry and still being best in class in terms of the premium nature of.
How we're approaching discounts and promotions, so feeling generally pretty good about that and that's all on track with what we kind of say Delta to you all at the last quarterly call.
Alright, thank you.
Thank you one moment for our next question.
Our next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.
Thank you good afternoon.
Look last quarter about your simplification program setting you up for significant adjusted EBITDA improvement in 2023.
We're getting closer to 23 can you provide some numbers our guardrails around your goals and targets for EBITDA.
Yes, Hi, Brian .
Mike.
We'll get into that more on the next call.
After Q4 in part just really thinking through the fact that it's a pretty volatile demand environment right now so when we look at it we think we're making material improvement, especially on the gross margin side reiterated that 13% to $15 million of structural SG&A savings that are coming on that as well on the corporate side. So in the world in the middle of the P&L.
And the things that we can have the most direct control over we feel like we're making really good progress there. The one other factor that will play into that for us as well when we look at 2023 EBITDA is the fact that we do view the third party channel add EBITDA accretive. So once we have a better handle on exactly how much we're going to expect out of that channel and how much we can potentially expand it in 'twenty three.
That will also play into it as well so we look forward to talking a little bit more about that when we get into more detail on 23 in the next call.
Thank you and then maybe I can follow up.
Experts agree details around the comments you made of incredible marketing.
Okay.
Yeah do you want to start on that sure sure.
Yes, so I think.
What we're really referring to is the continued path towards getting leverage on marketing.
Yes part of that of course comes from channel shift.
While we still have our brick and mortar fleet and then I'd say in terms of.
As we mentioned about half of it still in the ramp up phase before hitting revenue and overall target maturity on profitability. So.
It's a little bit of that mix shift and then its also just being really balanced through the funnel and making sure we're optimizing.
Our both our creative and our media mix and as we've said before we've done a really nice job.
Team to navigate through a whole bunch of IVF challenges that.
We were well ahead of and we're able to continue to drive good leverage throughout the P&L on marketing. Despite the fact that we continue to invest in the brand.
Thank you.
Thank you one moment for our next question.
Our next question comes from Bob <unk> with Guggenheim Securities. Please go ahead.
Hey, good evening.
Just a couple of questions on the store fleet can.
Can you talk a little more around some of your older stores more established stores your more mature stores.
If that's the right word to use mature stores, but just in terms of what youre seeing there in terms of volume and our markets and then.
On the on.
On the brand itself have you guys done any more recent.
Evaluations on sort of aided awareness unaided awareness progress that you think youre, making with the brands that would be helpful. Thanks.
Hey, Bob I'll start on the stores.
Joey alluded to it's a tough environment out there overall in retail as you well know so the pre 19 stores, they're not all the way back up to the same level of traffic that were before COVID-19, but we feel pretty good overall about how those stores are performing right now and they are certainly serving the role that we talked about which is they really help us drive brand new.
Awareness, they drive LTV for our Omnichannel customer and deliver the best customer experience that we can offer kind of going forward. So.
That's how we're viewing it on the retail side Tim.
Tim or Joe you want to jump in on the brand question.
Be really quick Bob on that it's.
It's not a metric that I would say is reliable quarter to quarter in general which is why we don't but we don't really share all the time, but I can tell you that directionally, we're making great progress and it continues on the trend line basis to increase and when we look at specific cities, where we have retail stores.
That really helps drive it a lot so when we focus on certain concentrations of our target consumers in certain cities and we infill that region with stores. It does it does a really nice job for us and of course, it too much too early to tell on the third party actual quantitative quantitative impact of that but being in 100.
Doors kind of a drop in the bucket in the market that we plan.
But obviously you would expect as we've outlined in the strategy of why we're doing this to really significantly uptick on aided awareness there.
Great. Thank you.
Thank you one moment for our next question.
Our next question comes from Edward <unk> with Piper Sandler. Please go ahead.
Hey, good evening guys. Thanks for taking the questions. I guess first you know you've expanded the SKU count pretty materially and it sounds like you're going to continue to innovate how do you think about editing skus, making sure the right assortment given that I think historically variation was largely colored gribbin and then as a follow up.
On the 5% I think it was incremental growth from wholesale how should we think about the gross margin impact understanding that it is EBITDA positive and if wholesale continues to grow how we should be thinking about that medium term model applications. Thank you.
Ed Thanks for the questions I'll jump on the first one and pass over to Mike on the second one so yes as you noted as we as we increase the SKU count.
There is an inevitability that we need to be a little bit more seasonal or some of those offerings to deliver a balance of freshness to the consumer being seasonally relevant and then also managing inventory very prudently, it's going to drive some promotional activity and markdowns for us.
Markdowns is a better way to put that so would that is that is the normal cycle that we expect to continue to deliver and thats all within kind of that premium brand positioning that we expect to navigate our markdown site discounts and to a certain extent in our physical retail stores. So we're managing that carefully and we're also trying to.
Be very smart about how we how we keep the overall marketplace very clean when we interact with third parties in this which is why we're taking kind of that marquee strategic account approach to building the third party marketplace for us because we really want to maintain as much control over over price and how we show up to the consumer across channel.
As effectively as we can.
I'll take your second part of the question there Ed on third party. So just a couple of things there first.
Remember because we are starting these relationships with some of these retail partners in Q3 into Q4, there is a little bit of load it into the stores into the sales there and thats part of why we call that out as a bit unique for the quarter in terms of the gross margin impact. It wasn't one of the biggest drivers on a year over year basis. It was a little bit of a headwind, but the stuff that we laid.
<unk> in the call or the things that we felt really like move to gross margin and honestly in this environment, we feel pretty good about where gross margin landed for the quarter, especially very much allows our expectations coming into the quarter. Your question on the model implications in the medium term again much like my response delivering earlier I think that's something we'll take on a little bit when we get into the Q4 call.
We have a better sense on the ultimate size of the third party business in 2023, and we can lay that out and I guess, Scott Brown <unk> again, when we've talked about our gross margin objective in our gross margin target. That's been focus on the direct business. So third party, we would probably break out a little bit differently over time and give you visibility on the boat.
Thank you.
Okay. Thank you one moment for our next question.
Okay.
Our next question comes from Matthew Boss with Jpmorgan. Please go ahead.
So Joey could you speak to any changes in consumer demand that you saw by region.
The third quarter progressed and on the projection for flat revenues at the midpoint for the fourth quarter could you speak to the choppy or trends that you cited maybe elaborate on the opportunity for improvement in the back half of the quarter and then just Mike is there a timeline you see is reasonable for a return to the medium term revenue targets.
Yeah.
Thanks.
So I guess the first one in terms of the distribution of kind of trends across geographies as Q3 progressed into Q4.
There was I think we called it pretty clearly in our European market and that has that has gone about as we expected that consumers increasingly are pressured by.
Bye bye.
Kind of the inflation that we're seeing particularly on energy prices.
That to continue through the holiday.
So that's reasonably consistent with what we said.
One of the notable bright spots coming in the UK as we mentioned earlier in the call on China.
China was a different story and that was really <unk>.
Underpinned by Rolling Covid, Lockdowns that seem to persist the longest and anywhere in the world we've seen that lighten up already.
Early indications there show some some green shoots in terms of the consumer reaction on their Big Festival on double 11.
Good start to that Hasnt hasnt fully fully eclipse jets, a little early to call. There and then the U S. I think as we said earlier in that call.
And in the last call and we were starting to see some pullback on consumer demand, which is why we adjusted our outlook for the year and I would say that has largely continued.
Into this period, our expectation if you look at kind of that the two year stack is that it's reasonably consistent but right now if you look at it at a.
Where the consumer that I think when you when you look at the situation in the industry last year with.
A lot of.
The company is reporting that they couldnt get the supply into that into the mess that they were looking for versus this year, where theres a lot of inventory outstanding things are going to look a little bit different in the trends and so we are expecting that consumers are going to.
Be a little bit more back loaded than they were last year on their spending and are lining up all of our marketing and product flow to meet that moment.
And then on your question on the medium term targets, Matt If you look at the business. This year, excluding the impact of FX. The upper end of the range of 17%. So really just a hair below the 20% the lower end of the medium term guidance target range, which given record high inflation Award Covid Lockdowns in our second biggest and fastest growing country, we felt pretty.
Good about the revenue outcome, we're driving towards in 'twenty, two and we will talk a little bit more about 'twenty three and like I said earlier on the next call on some of the drivers we have in place to move the business forward.
Great color best of luck.
Thank you.
Our next question.
Yes.
Yes.
Our next question comes from Ashley <unk> with Jefferies. Please go ahead.
Hi, This is Blake on for Ashley Thanks for taking my questions I, just wanted to ask a little bit more on the U S. Consumer expectation in Q4, I know you said you've seen some slowdown there I believe you also said you expect some improvement.
Versus the quarter to date based on holiday strategy, just wanted to make sure I heard that correctly.
And kind of what gives you more confidence in the <unk>.
The holiday period, and if you could just give a little bit more color on the on the consumer expectations are for the U S. In Q4.
Yeah, Blake happy to do it so in terms of how.
Reason, we have the confidence for the balance of the quarter.
Really again to reiterate this is the best holiday marketing calendar best execution actually of our creative and holidays by far I think.
A few folks on the cost <unk> that launched last week and the way the execution is kind of showing up in people's Inboxes and driving activity.
That's backed with a really strong product pipeline as well right now during the holiday season, and then in addition, Mike Joe and I. Both referenced we know we have to meet consumers, where they are being a little bit more promotional right now for a brand that historically has done a lot of that we typically see a nice response from customers. When we do that so that's why we have confidence in getting there.
In terms of adding more than what we're seeing in the U S. Consumer again, Joanne I have covered it a little bit in the call. Our sense of it is the recession fears are really hanging over folks right now the inflation impact is real the fluctuations in gas prices are real for people right now and our read of it is people are waiting until a little bit closer to the holiday things get a little bit more pre.
<unk>, they're buying a little closer to need where last year Theres a lot of pent up demand a lot of pent up personal balance sheets.
And Thats why we really feel like it was important for us to put our best foot forward with everything we're doing on the marketing product and promotional side through the holiday.
That makes a lot of sense. Thank you and then I wanted to ask on the store strategy. It sounds like that's still making great progress, adding more stores. I know you mentioned that you haven't seen some of those older stores make a full traffic recovery.
Wanted to touch base, there because obviously E comm has grown so much and now you're shifting into wholesale.
So really how big of a deal is it if you don't get that full traffic recovery.
Do you feel like maybe there is some leeway there given the growth in wholesale and direct to consumer.
Yes, I think Joanna I'll tag team. This one I think theres kind of a number of side of that and our strategy side of that a little bit so I'll take a little bit of the numbers.
To your question on getting back to the pre COVID-19 levels and how important is that I mean, those stores are best in class productivity like pre Covid I mean, the kind of like per square foot productivity anybody would want so of course, we'd love to get back to those levels and that will be fantastic. If we get there, but again, we feel pretty good overall about the role of the stores are playing an even to those stores that were pre <unk>.
<unk>.
Whereas the sales level. They are now are very strong sales and profitability levels. So we feel pretty good about that part of it Joe you may want to comment a little bit more on the part of the question around how we think about this mix of digital owned retail and third party coming together, yes, I think I think all of this needs to be thought of as a system.
And it's our we're building a very smart marketplace with distribution to fuel what is increasingly a fantastic product engine to deliver a product that customers are going to really want so as we add incremental doors in our third party. As an example, we really do expect that to drive greater awareness.
The brand they may transact with that retailer. They may also just learn about the brand and come back to our direct channel, but we expect even if theyre buying in our retail partners four wall that is going to translate to great. What we would consider new customer acquisition inside of our direct channel and Thats going to buoy not just our digital but also our physical doors. So all of this is how we.
Expect this to work going forward and Thats fairly similar with how we think about our physical stores and their interaction with our digital channel and our own direct channel. So all of this really needs to work hand in glove and so far so good and that's why we're taking a methodical approach to building the marketplace as we have.
That's great. Thank you very much.
Thank you one moment for our next question.
Our next question comes from Alex <unk> with Morgan Stanley . Please go ahead.
Great. Thanks, so much for taking my question I just wanted to talk about that end of life inventory that youre adjusting numbers for is the majority of that apparel or is there any other part of the composition that we should be aware of and then I was just wondering do you still have more access to clear there and when you expect to kind of be done with with clearing.
Pat.
Hi, Alex Yeah, the majority of it overall majority of apparel.
Of the $127 million, we have on the balance sheet right now about $5 million of that is stuff that we are still clearing through.
First time, we've done something like this were pleased with the progress. The team has made so far I don't know if I can give you an exact date whether that all happened in Q4 semi bleed into Q1, maybe in Q2 next year, it's interesting marketplace out there to be doing this in.
But we're really making good progress on that and happy with what we've seen thus far.
Great. Okay. That's super helpful. Maybe one quick follow up is just it's encouraging to hear that you guys are expanding your your wholesale partnerships I was just wondering if you could give us some color on kind of on how you selected those partners and what Youre looking for as you assess which ones are the right ones to enter.
Yes, I mean, thanks for the question.
We do believe that taking a pretty concentrated approach with a very good partners on the premium end of retail distribution for our category is the right move, particularly as we start here.
And we've really chosen one mark key partner and Ken I would call. It four maybe five different channels and we're trying to show up in a very premium way with our brand expression that is unique and we think resonate with that consumer and we're also trying to keep it narrow enough in the number of partners that we take on that we can really differentiate with our assortment across.
Having still a reasonably lean assortment relative to the rest of our our industry and some of our competitors. We think that's a pretty important and smart approach to concentrate that so a couple of key partners.
The focus on on a great brand expression focus on driving great sell through in great margins for our partners and then allow allow that sell through to indicate strong sell in in the future seasons. So thats kind of thats the build that we're taking in.
And we're certainly happy to update a little bit more as we around Q4 and get into next year conversation.
Great. Thank you so much.
Thank you as a reminder to ask a question. Please press star one on your telephone.
Please standby for the next question.
Our next question comes from Dylan Carden with William Blair. Please go ahead.
Thanks, a lot.
Just curious I think some of the focus here on stores.
Has to do with that you've come sort of a long way quickly and if youre not kind of seen that volume return from prepayment levels.
Pulling forward some openings.
Openings. This year I guess, what guardrails, you kind of have in place and is the cadence that <unk> seen this year something that you expect to kind of carry into next year.
If the environment remains choppy and particularly with wholesale expanding our reach and awareness does that change some of the calculations youre, making around kind of the.
The extent of the retail expansion.
Yes, thanks for the question so.
So as we mentioned half are still in the ramp up phase so obviously not not.
Not fully clear on how quickly those get to revenue maturity and we've noted that given the depressed traffic that we're seeing across the industry. It's just still a little bit of uncertainty there. So we certainly are.
And again, we're not going to give anything super specific.
Super specific in terms of guidance for next year now, but what we can say.
And alluding to in earlier part of the call. We are taking not just into account top line, but we're really focused on the profitability of the channel to drive the right mix and we're thinking about capital efficiency in an era of greater uncertainty with where the consumer is that all of this channel mix is going to be something that we we are.
<unk>.
We're taking it to an important consideration and maybe I'll, just add and say pre COVID-19 levels I will say were.
Very exceptional at the industry they were.
<unk>.
At levels that that frankly were were tough for us to even handle inside of the store footprint that we add so.
Just one thing to consider when thinking about pre COVID-19 versus versus today, particularly when we have Intel and some of those markets with with other stores that take take a little bit of the heat off some of those original ones. So.
So just another thing to keep in mind is as we think about apples to apples given the nascency of the overall slate.
Fair enough.
I guess, it's a related question.
The marketing leverage you saw was nice in the quarter is that our sales mix.
Predominantly or is there anything else to add there as far as how sustainable that is.
Yes.
It's mostly sales mix and a little bit of efficiency on the digital side Ellen.
So there's nothing really out notable there.
Got it.
Alright, I'll say the rest thanks, a lot guys.
Alright. Thanks.
I am showing no further questions at this time I would now like to turn it back to Joe for closing remarks.
Guys. Thanks, Thanks, very much for tuning in.
We're proud of the team's efforts given how choppy the environment has been and just wanted to say thank you to all the block here at Albert. Thank you all for tuning in and we look forward to giving you another update at the end of the year.
Okay.
Thank you for your participation in today's conference. This concludes the program you may now disconnect.
Yes.
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