Q3 2022 On Holding AG Earnings Call
Mhm.
[music].
Ladies and gentlemen, thank you for standing by.
Welcome and thank you for joining the Army holding AG Q3, 2022 results called throughout todays recorded presentation. All participants will be in listen only mode. The presentation will be followed by a question and answer session.
If you would like to ask a question you May press star followed by one on your touch.
Our key followed by zero for operator assistance.
I would now like to turn it over to Jarrett Pizza.
Please go ahead.
Good afternoon, and good morning, and thank you for joining on 2022 third quarter earnings conference call and webcast.
With me today on the call our executive co Chairman and co founder David I'll do one.
CFO and co CEO , Martin Hoffman and <unk>.
Mark.
Before we begin I would like to remind everyone that the remarks during today's call will contain forward looking statements regarding future events performance within the meaning of the federal Securities laws.
These forward looking statements reflect our current expectations and beliefs only.
Statements are subject to certain risks and uncertainties that could cause actual results to differ materially.
Please refer to our 20-F filed with Securities and Exchange Commission on March 18th for a detailed discussion of such risks and uncertainties.
Please further note that this call will also contain certain non <unk> financial measures.
Adjusted EBITDA and adjusted EBITDA margin.
These metrics are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with <unk>.
Please refer to today's release for reconciliation no Niobrara bench.
Bench measure to the most comparable measures prepared in accordance with item right.
We will begin with David followed by Martin leading to todays prepared remarks after.
After which we are looking forward to opening the call for a Q&A session.
With that I am very happy to turn over the call to David.
Thank you very much and a warm welcome from here in Zurich to everyone around the globe joining us today.
Delighted to be here to speak about another outstanding quarter, and the exciting recent progress and developments at all.
You will have seen in our release. This morning net sales for the third quarter increased by more than 50% to 328 million Swiss francs, our strongest quarter in history.
It makes all of 1 billion Swiss franc net sales company, we're looking at the 12 months, leading up to the end of September .
And it allows us to increase our full year outlook.
During our last earnings call, we talked about <unk> are focusing on building a company that is set up for durable growth with the goal of being the number one brand on <unk>.
Today, I delve deeper into the strengths of <unk> brand and to our most recent innovation achievements before handing over to Martin for a detailed review of our third quarter financial performance and details on the outlook for the rest of the year.
12 years ago on started from out of nowhere and has built a powerful grassroots movement of millions within a few short years.
It feels maybe price that you continue to inspire and attract a record amount of new Rama straws.
There is simply an incredible amount of momentum around on right now and I want to focus on three of the key areas that are driving this growth and setting us up for sustained success.
Firstly, we are expanding the reach of the brand like never before.
<unk> has seen a record number of visitors coming to our website with almost 10 million sessions per month recorded so far this year.
Our Instagram followers, just crossed the $1 million and engagement is high.
We are attracting new consumers every day due to our ability to drive awareness and then their individual needs. Once we have gained to retention.
We're doing this in a number of ways not least via our highly successful omnichannel approach.
Our strategy connect us with consumers been and where they want to shop.
Be that by our own physical and digital stores wholesale partners or immersive digital platforms.
In September we began piloting a fully redesigned website designed to deliver a richer more immersive shopping experience.
The pilot test in the UK has delivered great results and we cannot wait to roll it out globally in the coming months for all of our fans to enjoy.
We're also partnering with external digital platforms, such as to have each had E Commerce mini program in China.
Chinese consumers can now seamlessly shop for all products without ever leaving the E check ecosystem.
Our increasing brand visibility is also driven by powerful marketing campaigns that resonate with our core community and reach a new breed of useful or others.
Ramos, who are inspired by an emerging run culture that elevates rolling to a lifestyle.
Proceed of this culture was planted during the pandemic and new habits have now been formed.
These campaigns are usually distinctive and impactful during the Berlin Marathon you Couldnt escape out brand as we took over hundreds of out of home sites across.
The city to support our dream on campaign.
We also partnered with the <unk> Music festival to provide a unique take on how running inspired creativity.
And during the launch of <unk> in New York City Marathon strongest joined up at point to an emergency for exhibition that explored the magical mind space that can only be accessed through running.
October also sold a hotly anticipated second lower wait times, all collection of performance footwear.
It launched to much fanfare, particularly in the APAC region, but it was heavily featured in influential style media such as Japan.
Either choosing to build the brand is also contributing to our momentum.
Namely by staying true to our focus of performance innovation.
I am thrilled to see how our newest performance products like the cloud monster the clouds, rather than to clouds co are resonating with runners in a major way.
Coming to the fastest growing product lines at our retail partners.
These styles are now driving volume for off not only in running specialty doors, but also in general sporting goods channels like Dick's sporting goods.
Crucially are running shoes that resonate so well with consumers are powered by the very same technology you see on the feet of our successful professional athletes MTL Atlantic's club, our elite track and field team.
At least like the Norwegian triathlete, Gustaf Eaton, who want that Vance Iron Man World Championships in Hawaii in October .
He delivered an unbelievable performance with the new course record.
But not only did gustaf set new overall of course record.
We played a part in Gustaf running of course directed to marathon to finish off the rate secured devine and on onshore specifically created to meet these needs.
Of course, this groundswell of professional athletes wanting to where our innovative products influences thrombus to choose <unk> for their daily routes and workouts.
This was on full display around to New York Marathon, where our New York City store locked the strongest two days in history.
Our product innovations are not just confined to footwear.
The potential of our apparel business has never been greater.
Youre doubling down on that parents have recently made a number of key investments to strengthen our design and development team.
In the last few months, we have also seen a great response from our community.
Power products, such as Dlugos collection of hyper reflective running gear and our latest sports bra lines.
And just last week, we had our global meeting where our team and key partners were introduced to our next lineup of products that we will bring to market in the fall winter 2003 seasons.
So price to team with three all new footwear silhouettes, and many new and exciting at power pieces.
As you know brand and product desire build lasting relationships with our consumers and tungsten into eventually.
We also create long term partnerships with retailers to ensure we do everything we can to serve and inspire consumers together.
Although of course, we cant speak about lasting meaningful relationships without mentioning Roger Federer.
Our partnership with Roger has never been an athlete endorsement deal.
Instead, he has long been a partner investor and core entrepreneurialism hours.
He plays a truly instrumental role in the development of the rocks line entered block protein issue.
As a role model to all of his teammates at the same time.
Like many sport fans, we had heavy hearts when rupture announced his retirement from the professional tennis game.
But I'm delighted to say that he will now spend even more time with us to expand to professional alternative business and our performance product offering as a whole.
My last and final point brings me to durable growth not just for <unk>, but for our planet.
We are making fast progress innovations that drive our circle of future.
For us durable growth means growing responsibly.
That's a brand born in the Swiss Alps nature.
Nature is our home and very wrong.
Our sustainability mission has always remained the same namely to make high performance products with the lowest possible footprint and engineered for clarity.
We focus on three core areas recycle reuse.
And reduce.
On recent calls we provided updates on breakthroughs, we made against the first two ambitions.
Namely our cyclone subscription model today.
Today I'd like to focus on the third area of carbon capture.
I'm delighted to say that Q3 was when we finally realized our dream of reducing carbon impact.
We unveiled the first ever shoe made from carbon emissions with our clean cloud material.
This makes all the first company in the footwear industry to use carbon emissions as a primary raw material for shoes Mitchell are.
A huge milestone for the sports industry and something that seemed almost impossible. When we first started developing needs five years ago.
Clean cloud they'll go from proof of concept to commercialization.
Our ambition is to bring this technology to as many consumers as possible in the near future.
Also notable sustainability achievements in the quarter included introduction of onward, our first ever platform to shop and trade in pre owned gear from all.
Customers and products stay with us longer.
<unk> is currently available in the U S and we're looking forward to see how our first foray into the retail market develops in the coming months.
To summarize we are incredibly pleased of the progress we have made over the past 12 months and are extremely excited for the next steps will take on our mission to decouple onto resource consumption from our strong growth.
With that it's my pleasure to hand over to Martin for the Q3 financial review and updated outlook for the full year Martin Please.
Thank you, David and Hello, everyone, joining our call today.
Q3 has been another record quarter for on our net sales growth of 54% to $328 million has been stronger than expected and another step on our journey towards <unk> growth.
Those of you who have followed us since the IPO note that while net sales growth is important to US. We are just as focused on expanding on profitability.
By further reducing the effort share and despite foreign exchange headwinds, we have achieved a record adjusted EBITDA of $56 3 million and adjusted EBITDA margin of 17, 2% in the quarter.
The strong results validate the continued high demand for our brand globally at the same time, they validate our ability to scale and professional lives along all parts of the business.
David mentioned some of the factors that have driven our record sales. The success of our products are expanding collaborations with wholesale partners and our progress to connect even more intensely with our customers.
The high demand that we are experiencing is challenged our logistics network.
While our supply chain teams across the globe has done an exceptional job to cope with the record volumes in mid August we experienced temporary constraints in our U S East coast, well cost by a system upgrade by our <unk> partner.
So our teams worked fast and the situation has been remedied.
We're not able to fulfill all the demand we had in the U S, especially in D. C, where we lost some sales to two longer delivery times and higher cancellation rates.
In addition to strength of the U S dollar in conjunction with the weakness of the euro and ratio to our reporting currency Swiss francs.
The significant negative impact on our gross profit margin and our adjusted EBITDA margin of 250 basis points compared to the third quarter last year.
On total net sales currently developments are mostly neutral while regional sales are impacted.
So even in spite of these headwinds we delivered record results, which is a testament to our strong brand momentum and high quality team based execution.
Now, let me review with the strong quarterly financial performance in more detail.
We again saw a well balanced growth between channels regions and product verticals.
We continue to win market share at existing retail partners, while selectively expanding our distribution to reach the right customers, which helped to drive an increase of net sales in wholesale of 55, 6% versus a very strong prior year period.
As announced we started to pilot it eight Dick's sporting goods locations and are extremely happy how on his resume is a head to toe print with apparel and accessories driving nearly 20% of the units built.
On footwear, Dick's is certainly showing that it can drive our ambition to reach every runner.
Styles, such as the cloud ultra cloud months. Thanks lot Rhonda have been large volume drivers during the pilot phase.
We have also increased our door count with foot locker to 150 doors in the U S. In connection with the fall Winter 2002 season launch, which came to catch up with very strong numbers in Q3, an excellent sell through during the back to school season.
We continue to follow our strategy of seeking preference in the highest quality doors tightly managing stock levels and whenever possible showcasing the strength and designated on shop in shop areas.
A great example is our partnership with Nordstrom.
Where we opened 12 dedicated on shops in September .
Overall, our wholesale door count in our own market that means excluding distribute our market expense at 9250 doors as of the end of Q3 versus 8000 doors at the beginning of the year, reflecting a strong organic growth within exists.
<unk> stores through both existing and new products.
Expanding distribution in a very controlled way.
Moving over to direct to consumer where net sales grew by 47% in the quarter.
Without the constraints in our U S warehouses, we would have been able to achieve even more sales growth in DTC.
Our DTC growth is well balanced and driven by the strong demand from both our existing customer groups as well as a large number of first time purchases.
That are frequently only just discovering the brand.
As David mentioned.
We are also very excited about the ongoing rollout and the potential of our new online experience to further increase the engagement with our fans.
We are also continuously investing in our data infrastructure to connect more directly with our customers.
Last week I had the opportunity to visit our newest owned retail store that just opened in Los Angeles at Kinney Boulevard in Venice.
The customer response has been incredibly strong and we have heard many times, but this is one of the nicest stores and <unk> St.
Like many of our other locations. It is not only a store, but also the launch pad for our running communities.
Our next locations outside of China will be in London at Miami for which we are looking at the opening early next year.
In China traffic to our owned retail stores has search spec after the largest scale lockdowns in Q2 and has also significantly increased versus the prior year comparable periods.
For example, our existing Beijing store saw a 40% increase in traffic in the month of August versus the prior year period.
At the same time, we opened four additional stores in China since early September tariff two in Shanghai, one in Beijing and one in Chengdu.
The China retail stores also continue to be a showcase of the opportunities we have in apparel when we can actively drive our merchandising.
Our existing store in Shenzhen as an example, but even reached a 30% approach share in Q3.
Overall, considering the performance in dynamics in the quarter, our DTC share was 32, 5% versus 34, 7% in the prior year period.
And moving on to the development by region.
Q3, net sales in North America grew 57, 1% to $176 3 million Swiss francs.
Given by the strong demand for our full product line across all the retail partners and direct channel.
As mentioned before we would have had even more demand from our DTC customers in the region that we were unable to fulfill due to the temporary warehouse concentrates.
Net sales growth in Europe accelerated compared to Q2, and we achieved $116 5 million Swiss francs.
71, eight year over year growth, despite considerable FX headwinds from a strong Swiss franc versus the euro and British pound.
Demand in most key markets continues to be strong and we are very happy to have extremely strong partners in the region as we continue our growth path.
With the expansion of charity, we saw record monthly sales through our footwear in September which helped the U K to double net sales year over year in Q3.
And we are excited to say that Q3 also marked a successful launch with foot locker in Europe , both in selected stores and online.
Finally, Q3 also means marathon Ts in Europe , and we were very present in the weeks, leading up to the marathon in London and Berlin.
<unk> strength campaign showcasing the power of running to ignite the human spirit.
Mark and die of course out there amongst the big believers in this power and so I will admit mark did slow considerably faster than I I am happy to share that with both cross the finish line in Berlin with smiles still on our faces alongside many of our teammates and partners.
Net sales in Asia Pacific grew 85, 2% to $24 $2 million with strength driven by the strong rebound in China. Following the prolonged lockdowns in Q2 as well as the continued momentum in Japan and Australia.
Despite some occasional local lockdowns, China posted a year over year growth rates of 90% in Q3.
This momentum also extends beyond Q3.
For double 11, the biggest online shopping festival in China, almost selected as the only new sportswear brand to be featured online and offline with T mobile in.
In the buildup to the event.
Our core printed design featuring the cloud monster was highly visible and major subway and bus stations across all major cities as well as digitally for the three weeks leading up to double 11.
This together with our strong brand momentum led to an increase of over 135% in terms of items sold versus the prior year at double 11 period.
With a total of seven new own retail stores opening in China in half year two.
And considered an.
Our new <unk> Mini program launched in October we expect China to be a continued growth driver for us for the years to come.
Finally, our rest of world net sales increased 160% to $11 million with strength.
In previous calls we have successfully built a network of new distributor partners across Latin America.
Additionally, we are also seeing a very strong demand to increase in the middle East.
Turning to our performance by product category.
From shoes grew 51, 6%.
In August we launched the cloud goal, which together with the cloud Monster and the cloud runner has completed our line of reinvented performance running products that have driven significant market share gains for them.
We expanded our collection of Undie products to the cloud five and also the cloud mobile and we are excited to showcase this blockbuster franchises in their most sustainable execution to date.
As we are all celebrate Rogers amazing career.
We also expand the Roger line, two new mid top crushing and of course celebrate a drug just last official prominent with Russia Labor Cup Limited edition.
Which caused long lines at the stent during that event in London.
Yeah.
Apparel grew by 32, 4% to $15 2 million Swiss francs.
Similar to last quarter still slightly below our expectations.
But we continue to build the foundation for future success by investing into our internal capabilities, our product assortment and experience <unk>.
Gross profit reached $187 4 million in the third quarter compared to $131 3 million in the previous year period.
Presenting a gross margin of 57, 1% versus 62% in Q3 21.
As expected we use additional efforts to fulfill more of the high demand for some of our new products.
But overall in Q3 to further reduce the reliance on air freight and we are now in a more normalized position, which helped drive continued sequential improvement on gross margin versus Q1 and Q2.
Besides the planned impact of air freight we have experienced pressure on our margins from the lower DTC share as a result of the warehouse constraints and even more importantly from the negative year over year FX developments you mentioned earlier.
SG&A expenses, excluding share based compensation and last just one off transaction cost related to the IPO were 44, 1% of net sales in Q3. This year reduced from 46, 4% in the same period last year.
While we continue to invest in all parts of the business, we're also driving efficiencies and economies of scale.
Adjusted EBITDA reached $56 3 million in the quarter exceeding 50 million Swiss francs for the first time in our history.
This was up from $37 9 million through strength in the previous year, which at that time had been the highest quarterly EBIT da to date.
Adjusted EBITDA margin of 17, 2% decreased slightly from 17, 4% in Q3 'twenty one.
Largely due to the gross margin impacts mentioned earlier.
But was considerably up from the 10, 8% in the last quarter.
Now moving to our balance sheet.
Capital expenditures were $22 million with strength in Q3, 2002, or six 7% of net sales largely consisting of investments into the build out of our offices in Zurich, and Portland into new one retail stores as well as it infrastructure.
Let me go into a bit more detail when it comes to our inventory position.
Inventory increased by $45 7 million Swiss francs, or 21, 1% compared to the end of June .
And by 100.
$18 2 million or 82% compared to the end of the third quarter last year.
A year ago as you remember was unseasonably low due to covet and choose factory shutdown.
If you exclude in transit inventory, which has been significantly reduced reliance on airfreight between September last year of this year.
The inventory growth quite closely followed our net sales growth.
We are currently in a much better position to execute the demand for the upcoming holiday season, and a year ago when inventory levels are at the low point.
The inventory in transit and in our warehouses has been produced to fulfill existing orders on books with ship days in Q4 and in early Q1.
Driven by the higher working capital and Capex investments net cash at the end of Q3 reduced $493 million.
$557 7 million at the end of the second quarter.
Our strong balance sheet allows us to pursue our ambitious growth plans and upcoming investments.
Finally to what's our path of becoming a much larger company in the future.
I'm very pleased to announce that we have secured the capacity that's a third party to build a highly automated functions and then attacked.
Is it warehouse will provide additional capacity and some early next year.
We will replace our existing east coast warehouse by 2025.
But then the automation to significantly decrease our handling cost and dependency on manual labor.
Offering an opportunity for further SG&A leverage and continued increase of our DTC business.
This contract is secured by a bank guarantee and consequently by a dedicated cash balance.
Just looking to our future logistic setup as a great transition to speak about our financial outlook for the rest of the year 'twenty two and into 2023.
Okay.
A very exciting and successful year is coming to the end and we are planning to close the year on a high note.
Based on our strong performance in Q3, we are once again, raising our net sales outlook for 2022 by 25 million from $1 1 billion to one 1% to $5 billion, which includes the confidence in our ability to drive a stronger fourth quarter than assumed in our previous guidance.
This new top line reflects a strong full year growth of 55% compared to 52% in our previous guidance.
The increased outlook considers a few aspects that I would like to point out.
First the temporary constraints in our Atlanta warehouse are behind Us and we are approaching the important holiday season with strong momentum.
Well, we have a strong inventory position, we may see out of stock situations from some fast moving styles, which we see as an important element in driving positive scarcity.
Importantly, our long product lifecycle allow us to remain focused on full price sales given.
Given the good momentum and supply situation. We are now in a position to fully normalize the use of air freight and do not expect an extraordinary impact in Q4.
Second we continue to see a strong demand for our products and October was off to a very quick start for the quarter.
We're staying in close contact with our retail partners and analyze our extensive customer data to carefully observed the macro and micro economic development.
Our order book for Q4 and for the first half of next year confirm our strong outlook and we are clearly planning the business for continued strong growth.
We are also focused on ensuring we stay disciplined and control in our cost structure to ensure we are driving durable long term growth.
Third we expect continued margin pressure from the combination of a strong us dollar and the weak euro both compared to our reporting currency Swiss strengths.
They executed price increases in the U S and the planned increases in Europe as of early next year offset some of the compression.
For 2022, we are increasing our adjusted EBITDA targets for the full year to $148 million.
<unk> confirming our goal of an adjusted EBITDA margin of 13, 2% for the year, even at the elevated topline outlook. Despite the additional challenges described beforehand.
Finally, as we have previously mentioned and due to the structure of our pre IPO equity plans, we would see the majority of the 2022 share based compensation expenses in Q4.
At the current share price level of 17% to 21 U S. Dollar, we anticipate a charge of around $45 million to $50 million with strength.
Each dollar higher or lower than the current share price at the time of trending in early December would then cost of share based compensation charge to change by roughly plus or minus $3 5 million Swiss francs.
Over the past weeks, we have spend a lot of time with our senior leadership team to shape and align tuition for the years to come.
Our order book for the first half of 'twenty three.
The current demand, we are seeing and the much improved supply environment.
US in a strong position to drive continued strong and durable growth both in Q4 and beyond.
They also allow us to approach the year cautiously to protect the position of the Brent even in the current uncertain macroeconomic environment.
Notably we are committed to further increase our absolute and relative profitability with a constant focus on efficiency and improvement of adjusted EBITDA.
David listed some of the most exciting initiatives around our Brent in the last month.
They ultimately led to the strongest quarter in our history and an elevated outlook to close the year on the hi, Andrew.
And we remain fully focused on accomplishing that in this last few months.
All of this would not be possible without our culture and a team that is standing behind it.
The new offices around the world became an incredible source of energy.
We can be thankful enough to everyone in the team for building a culture of high performance, while also focusing on everyone's well being.
One of my highlight every month is to talk to our new startups and to share our history as a starting point to that three day long Onboarding journey.
Because to understand our path is essential to shape our future.
And to three months.
With that David Mark and I'd like to open up the session to your questions.
Operator, we are ready to begin the Q&A session.
Ladies and gentlemen.
At this time, we will begin the question and answer session.
Anyone who wishes to ask a question May press star followed up on that Touchtone telephone.
If you wish to remove yourself from the question queue. You May press star followed by two.
If you are using speaker equipment today, please lift the handset before making your selection.
One who has a question May press star followed by one at this time.
One moment for the first question please.
The first question is coming from Jay sole from UBS. Please go ahead.
Great. Thank you so much Dave.
David You mentioned a lot of innovation.
The company has delivered over the last quarter cloud Monster clean cloud can you just talk about the new product pipeline.
<unk> and the innovation that you have planned for next year.
Do you see this as robust as it's been.
Over the last few quarters and can you talk about the kind of investments you are continuing to make in product innovation to drive the brand forward.
Jay very much very happy to talk about that because you know our goal is to be the number one brand on rollers bodies over time.
So it's super important that we continue to invest in innovation and you've seen that in the past that we regularly launched new technology platforms. Now you also see how have you been.
<unk> closely together with athletes so just look at what our collaboration with good stuff cheap, but also for many many older athletes all the tactics.
To name the name.
Same with group that that also got an incredible followership.
Our core running consumer now for next year and I think we mentioned that also in the previous call.
We're introducing a whole new technology platform, which is cloud tech space, and which was developed computer assisted so that we.
Choose the very best form factor to keep you at the perfect right and so that's just the next integration off on how innovation comes out of all and let me mention here Isabel that.
The foremost that youre using in shoes for our athletes and also just before is can be actually fully biobased you see that in the cycle.
Hi, Colonna you'd be used very very advanced colon.
And that ball speed board and its fully Biobased and recyclable. So you also see that we can combine high performance for athletes, but at the same time also achieve our goal of clarity.
Got it and then maybe Martin if I can follow up just one other one can you just talk about the impact that the warehouse constraints had on sales in terms of a number and then also at the same time within Europe , how much did FX weigh on the growth rate in terms of like basis points. Thank you.
Yes.
Make up the vast constraints was mainly on direct to consumer because the whole of the first channel traditionally has had inventory so.
The impact there was less immediate.
We would have seen in higher D to C share.
If we wouldn't have seen those constraints.
It really lasted for about half of the of the quarter.
So the share of our DTC business would have been more in line with what we have seen in the in the in the past.
So the question on the on the FX impact on on our regions.
If you if you would look at basically the two key regions on the on the rate of last year, then the growth rate in Europe would be more around 41% and the growth rate in the U S about 49% are in North America.
Got it thank you so much.
The next question is coming from Joe <unk>.
From borrowings.
Please go ahead.
Yes, hi.
Uncomfortable.
Hello, everyone I wanted to just first ask Martin if I could follow up could you could you talk a little bit.
More about what's informing your topline revenue growth assumptions in the fourth quarter and since you commented directionally on the order book into the first half of 2023 can you just.
Maybe frame up sort of what youre seeing in terms of.
Qualitatively the growth and the reaction from your wholesale partners and how.
How we should view that those comments in the context of sustaining good topline growth here.
I'm very happy.
So as we mentioned we approach the fourth quarter was a very strong inventory position.
We are we are out of the of the impact from from last year as a factory closures over there also.
The normalized on the use of air freight.
We started the quarter very strongly we had a good start into the into the holiday season.
Spoke about the success during the double 11.
Festival in China was 135% growth.
We have a strong order book.
We see continued strong demand from our retail partners as well as from our end customers.
We feel that the 41% growth that is implied in our quarter and our guidance for the fourth quarter confirmed step and and we also feel that we go with a similar to a strong momentum into the.
The next year.
We have a strong order book for the first half of the year. We are currently in the selling season to basically get the orders booked for the second half of the year, which would then also allow us to give a more precise outlook on the on the full year.
In the in our next call.
Got it. Thank you that makes sense and maybe just one follow up on the margin outlook. If I look at the implied fourth quarter adjusted EBITDA margin it looks.
Here are just slightly below the third quarter.
I wanted to just clarify maybe what youre embedding in that outlook given that you should have less freight.
And we don't have complete history to see always the seasonality third quarter to fourth quarter, but just any any any comments directionally on what youre embedding in the in the fourth quarter our margin outlook.
That's really based on the on the top line that you see in the and the investments that we're planning to do and although the cost base that we definitely have built.
The FX impact clearly lift the mark on gross profit and it shows that we were able to mitigate some of the impacts we benefit from the price increases that we have done.
Benefit from the ability that we have on managing our expenses very carefully.
And therefore, I think it's a it's a strong message that we confirmed the 13, 2% EBITDA margin and increased the outlook further and then for next year, we see that we are able to drive some of the savings from our reduced FHA next year into the bottom.
Line, but that would be also able to reinvest some of those savings in into investments in the brand.
Especially on the onto marketing sides.
Yeah, Great then back congrats to Mark and a great time in Berlin. Thanks, everyone.
Thank you.
The next question is coming from because IL binetti from credit Suisse.
Please go ahead.
Hey, guys congrats on a nice quarter, there with the despite the disruption in Atlanta.
I guess could you could you tell us maybe a little bit a continuation on the last question. Besides airframe.
What are the other inputs you have visibility to today and what guardrails, we should think about that may limit.
Upside you said some reinvestment what what else should we think about it is you think you know how next year you get back on track to your longer term goals with gross margins in the high Fifty's EBITA margins over 15.
And then I was also wondering.
Could you speak a little bit more too.
What you think is needed for the unlocking apparel growth rates to move above footwear, given the small base that business. I mean every time you guys opened a company operated store and now it seems like the Dick's test, where you focus on head to toe apparel and accessories seems to shoot up to about 20% of the Max well above the average for the company I'm just wondering what you think is young.
<unk> you need to make that.
Is that kind of mix more relevant across the entire company.
Yeah, I'm happy to to start first with your first part and then maybe David elaborate.
Alright.
On the apparel opportunity.
So as mentioned.
If you look at the excess of air freight that we had.
That's about 350 basis points, probably saving a fee if you think about the normal more normalized.
Europe efforts you its next year and so.
That's basically that.
The parts that we intend to reinvest in our higher bottom line, but also into.
More contribution into into market share and brand building.
We need to we need to observe closely the currency development.
So if we were speaking about the impact that we have seen though in the third quarter and also in the fourth quarter based on the current environment vis vis the weak euro and the strong U S. Dollar. So we are in a position to to approach the harvest the necessary caution when it comes to building expenses and driving.
Our cost lines, though we were able to react.
Two two dose impacts and protect both our gross profit margin as well as our bottom line. In addition, we see that the price increases are accepted.
Strongly from our customers that don't lead to slower demand and we are also seeing that we were able to benefit from our economies of scale with our factory partners and therefore, we do not expect.
Impact from inflation from higher raw material prices on our product cost.
So most of that upside from from high up prices will also be available for four of compensating some of those FX impact.
So Michael I'm very.
Happy to take your question you mentioned it.
Our own stores apparel is up to 20% of share in China, sometimes up to 30% then we feel that's super encouraging because it shows that we have clear product market fit with them with our consumers.
And so we continued that drove it and we also see that Ben we partner with hope at wholesale partners very open stores like for example, the recently and Nordstrom, where we have shopping shops, all Brian did drop in jobs, we get to it we get to a similar share. So we feel product market fit is there now it's about giving it.
Well a bigger presence in the channels, where we operate and then frankly, we're also expanding the portfolio in Asia in apparel, because many of the pieces are actually fan favorite which has been there for a long time and has been continued fan favorites, though that gives us stability and thats.
Where we can scale from them. So it's great to see that that that apparel is coming of age. We've been on this youre talking to Chinese consumers. They don't see them as a footwear company. They see already as the sportswear company and that's reflected in these figures as well.
Okay. Thanks, a lot for the thoughts guys.
The next question coming from Jim Duffy.
From Stifel.
Go ahead.
Hi, Good afternoon, two team in Europe , and congratulations on crossing the billion threshold on a trailing 12 month basis I.
I wanted to start by asking about the wholesale business the wholesale numbers, particularly strong we've spoken about strong orders can you comment on channel inventories, while others are seeing cancellations is that something you've experienced.
I'm curious, how you're seeing the brands share against a more promotional backdrop has that had any impact on demand as others get more promotional.
Mark do you want to take this one.
He has to have all come everyone also from my side. So currently sitting in the APAC region. So it's quite dark out here.
It's great to be part of this call. So so you know we are staying very close to the channels and we actually all spent a lot of time. This we followed biggest purposes.
Really exactly diving into what is what is inventory on hand, and how do they look at the next months and bump. We're seeing is that our inventory position in the channel is very healthy it's sometimes even too low also due to the constraints that'd be hadn't yet length of our house and it's across the board so like in Europe , which in the U S.
In Asia Pacific and Japan has a very very strong sell throughs. For example, if some of our key partners, we're not seeing cancellations at all and and and also with the pre sat in meetings that we had fixed the largest partners now for fall winter has been extremely positive and I think well probably always have too.
Keep in mind is that you know on this right now with 1 billion dollar brands on a 12 months basis, but there's still so much more opportunity versus some of the larger players and I think again, we're not doing that in an incremental game here we have.
But we don't need we're not so dependent on the macro environment that can be gained so much market share still within the channel almost think that's currently what's at play.
And on hedge that has very strong momentum with.
Key partners.
Excellent. Thank you and on the tilt up to the opportunity can you speak to the evolving composition of your business between performance running performance all day in performance outdoor product, particularly interested in momentum in the latter two categories.
Yep Okay.
And probably elaborate on that too so we're seeing quite a balanced growth between the performance run category and the performance all day category. So both developing line I think what's very important for US is is the metric of how is on developing a stronger spot is because that's our core that's our authenticity.
And we're very encouraged when we count on the main running routes something we looked at the run specialty channel.
We currently have roughly 10% share overall.
Very very strong P O the growth of around 70% for spring Summer 'twenty Street that channel. So so we're growing very strongly with the products that we've launched a cloud ran or basic clubs go.
And with the cloud monsters that are tapping into into a broad market.
And so yes, I think you'll see a very balanced growth between the two and then on outdoor which rich ore.
Little bit.
Smaller business at this point.
We see that sale could take away, it's developing very very well so everything that's rooted in trail also on the apparel side is performing strongly.
And we see very encouraging and so that's real numbers on some of those products, especially the cloud Vista and we followed so quite a bit of opportunity into all day market. So they report that Andre on the basically.
Outdoor second but a lot of it will also be born.
And all that.
Thank you so much mark.
The next question is coming from Alex <unk> from Morgan Stanley . Please go ahead.
Great. Thanks for taking my question and congrats on another great quarter, guys I wanted to drill down into Europe quickly you guys saw a great nice reacceleration. This quarter can you talk about what drove that change and just remind us what your biggest markets are there as well as how you think about kind of the future opportunity.
Yes.
I think the biggest small I mean, let's talk about the the market starts so the biggest market is Germany.
Do you see U K, which is a very very strong growth.
More and more important in Europe also Vista partnership that'd be havent, JD, but still have quite some significant plug in coming out of Switzerland, industrial or anything it's just the markets that we hadn't been in longest so so it's quite balanced.
Then we have a lot of market instead of just tapping into it. So if you look at Italy. For example, if you look at Spain, which are both very large markets.
And it's just taking them in house and I'm Gonna taking house from from a distributor. So there's still a lot of potential there.
But when we look at the figures I think Martin pointed it out so it's very important for us.
I just would have been even stronger if it wasn't for the FX impact.
And we saw a bit of shift of orders and how we delivered or just between Q2 and Q3, but consumer demand was always there. So you had to pay the impact from how wholesale will take in August .
People are always, especially when you look at Germany, and U K Y Tec in how sellout was developing and I think gets us now come through fully in Q3, and we're also quite choppy on the on what we've seen in October for example, happening in Europe , and especially given the macro environment.
Great. That's super helpful. Maybe one more quick one from me it sounds like the cloud monster in some of your other recent launches.
I have got some great price and acknowledgment for real technical innovation can you just talk to us about when exactly you launch those and maybe not.
You didn't differently with the shoe in terms of either we're talking up on components or even marketing if theres anything different to be aware of thanks.
<unk>.
You know I feel will be around if you're tapping right into a performance innovation, where we are taking our most advanced technology, but then make it much more inclusive like take the cloud Monster, which gives you a lot of cushioning.
Just on the absolute premium phones, but then of course add the very visible technology to it.
Cloud Tech bought they're almost empty person. So I think that gets us a lot of eyeballs and he's very intriguing two hour to hour core running community, but then of course those debentures beyond that's core running technology and so it's.
It's about taking performance routing technology, and making it available and relevant for the masses.
Thanks, so much.
The next question is coming from Tom Nicky.
From Wedbush Securities. Please go ahead.
Yeah.
Hi, Good afternoon, guys and thanks for taking my question a quick clarification did you say that.
<unk> was a 250 basis point impact.
Impact to the gross margin in the second quarter, I thought I heard that but I wasn't sure.
And then can you tell us how much of a.
FX impact you are expecting for the gross margin in the fourth quarter.
Yes, so it was 250 basis points compared to last year's rates.
On the on the quarter. If you look at our year to date, it's a it's 170 basis point impact versus last year's rates.
And we have based our guidance.
After quarter on the current.
Ethics rates and so we expect a similar strong.
<unk> four four for the quarter and then is that going forward price increases will help us to to offset part of that and of course, we we closely observe where dollar and euro.
Compared to the Swiss franc.
Okay understood and just on the gross margin in general I mean, I know that there was also.
The headwind this quarter because of wholesale versus you can see that.
What's kind of sounds like because of some transitory impacts I mean should we kind of assume you know over a longer time period.
Direct to consumer grows faster than wholesale as brand awareness grows and consumers go directly to your brand.
And thus you know over kind of a longer time period, you would expect to see.
Hum.
More of a tailwind to your into your gross margin from from channel mix.
And what we see is that honest hot in both channels.
Marc elaborated on the opportunity that we have into a wholesale channels.
We are just at the starting line of it's already been serviced with Dick's Sporting goods are at the very beginning and foot locker, but in many other.
Peter Collins, then if you look at it our econ business, where we see the strong momentum although not at the start of the holiday season.
We have seen the strong momentum that we had in China.
And then B continue to expand our our.
Owned retail business, which to store now in L. A but then also the expansion in London in Miami earlier next year will also continue to open new stores in China.
So we we will drive growth in both channels and that's important for us and important is that the customers have the best experience in both channels that they find the product where they want to shop for the product and that we talk to the right customer in those channels to attract new customer groups to our products and therefore.
We were less minutes to the share of the different channels, but the health of the of the two channels, but we see strong momentum and growth opportunities in both of them.
Understood. Thanks, very much congrats on all the success to this point in time and best of luck for the remainder of the year.
Yeah.
The next question is coming from heavy steak leaks.
From Piper Sandler. Please go ahead.
Great. Thanks, so much for taking my question. So just broadly I guess, how are you thinking about your consumer and how they may be more resilience and the more difficult macro you know given the performance aspect of the business and then it's great to see inventory levels back in a better position to fulfill that chunk consumer demand for the brand, but can you just talk about your how your lead times have evolved.
And your ability to adjust.
Forward inventory or seek either up or down based on changes in consumer demand and a sensor environment. Thanks.
Abby. Thank you. It's a great question you know.
Sorry, Mark go ahead.
When we when we founded on the Abbvie became right out of the financial crisis, and then Oh.
Yeah, all of that as a young brand we asked ourselves what does that mean now.
And that part of the cycle and.
Back then we realized that people are cutting down on some investments Bob and Deb.
I very much still focused on that on something that keeps them healthy and that is that that is running and it's also one of the most accessible sports one of the most cheap sports are the only thing that you really need is a good running shoe that gives you a unique sensation, but also keeps your injury free and that's how it played out back then.
And that would be so still people are focusing on their on staying healthy.
So we can't predict the future, but that's at least the tails from the from the past.
Maybe I take the question on on inventory. So we mentioned it on the call. We are in a in a very strong inventory position and it's important to understand that we have flown a lot of products that were produced right. After the lockdowns and they have been they have reached our customers already so what we put on the on the ships.
Later on was fresh product so are our warehouse.
And the inventory level stare its really in line with what we expect to deliver in the next in the next wanted a half quarters and then it's also important to understand that there's a premium trends we have relatively long lead time or a product life cycle time. So it allows us to correct.
Also some excessive positions that we have on certain product without going into into this discounting.
And if if you look at the at the growth that we have seen in inventory versus last year than.
Maturity of a part of that growth is coming from from growth in our warehouses, but that's more 60% growth. So it's fully in line with our sales growth and the rest is really the that we felt that the in transit inventory.
Because we started to put our products back into sea freight, whereas this effort.
Great. Thank you.
The next question is coming from Aubrey 10, 11 P M.
Enel or I'm, sorry from BNP.
Please ask your question.
Hey, everyone. Congrats on the quarter and thanks for squeezing me in here.
The first question I wanted to ask is on the the Roger Federer retirement could you guys, maybe talk a little bit about the labor Cup event, what that what that did in terms of impacting the brand visibility.
And then now that he has officially retired how do you plan to work with Roger and more broadly the tenants franchise overall, where you have other athletes as well.
So O'brien I mean of course that was an emotional moment for us when he retired.
Probably the oxides from from that is that he will have more time and do you you have to understand that he dropped your froth is.
According to printer and spent a lot of time, probably 20 days after.
After a year in the lab working with us on the Roger pool, So the pro tennis shoes, but then also on the other parts of the franchise and now you're just going to spend more time together, because you're doubling down on the <unk> business and continue to grow the franchise.
So it's very important that would be that we spent time together and rupture is very committed to that you probably know as well that these houses are short 20 minute drive from our lab. So so that comes together well.
That's great to hear.
And then maybe if I could just one follow up on China can you guys talk about the decision you made to own and operate your own stores there.
As opposed to maybe going with a partner like other brands have what are the benefits that you see by taking out about going this route.
Thank you Hey, I think it's.
What's very important to us instead, we're able to bring a very unique and also consistent consumer experience to life. So wherever you experience on you should you should do that in a premium way.
On the lease out for China is the best way to do that on our own so we decided to.
Most of our stores completely on our own we are partnering with local franchisees in tier two cities, we feel to have better access to staff oral it's a tool for certain retail locations. So you will see that you already see franchise stores in China, but not really flops master franchisee partners.
Obviously it also has a it's also has a positive margin impact from.
The top right the stores completely on our own.
And we very much feel on is that it was a Chinese brand with specific talks that we have a completely local team.
We understand the market very well they feel they have access to the best locations for.
For example, we just relocated stores.
So ground floor level is almost a chemo and that's very very important to us to get even more traffic into the stores. So we feel it can all reach reach all of that on our own.
And that's why we decided to pursue the opportunity.
Large master franchisee partners.
Excellent congrats again, thank you.
There are no further questions at this time.
Ladies and gentlemen, the conference is now concluded.
You may disconnect your.
A telephone thank you for joining and have a pleasant day.
Yeah.
Yes.
Yeah.
[music].
Okay.
Yeah.
Okay.
Okay.
Yeah.
Okay.
Yeah.
Yeah.
Oh.
Okay.
Yeah.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Yeah.
Okay.
No.
Okay.
Sure.
Yeah.
Yeah.
Yeah.
Okay.
Hum.
Okay.
Okay.
Yes.
Okay.
Okay.
Yeah.
Oh.
Okay.
Right.
Yeah.
Yeah.
Yes.
[music].
Yeah.
Yeah.
Yeah.
Yeah.
Yes.
Okay.
[music].
Hum.
Hum.
Hum.
Hum.
Yeah.
[music].
Okay.
Yes.
Okay.
Okay.
Okay.
Yeah.
Yeah.
Okay.
Okay.
Okay.
Okay.
Yeah.
Okay.
Okay.
Yeah.
Yeah.
Okay.
Yeah.
Okay.
Yeah.
Okay.
Sure.
Okay.
Hum.
Okay.
Hum.
Yeah.
Yes.
Sure.
Yeah.
Okay.
Okay.
Okay.
Okay.
Yeah.
Okay.
Hmm.
Yeah.
[music].
Yeah.
Yes.
Okay.
[music].
Hum.
Hum.
Hum.
Hum.
Yes.
Yeah.
Yeah.
[music].
Okay.
Okay.
Okay.
Yeah.
Okay.
Yeah.
Yeah.
Okay.
Okay.
Yeah.
Yeah.
Cool.
Okay.
Okay.
Yeah.
Okay.
Okay.
Okay.
Yeah.
Uh huh.
Yeah.
Okay.
Sure.
Yeah.
Yeah.
Okay.
Okay.
Hum.
Yes.
Yes.
Okay.
Okay.
Yeah.
Okay.
Okay.
Okay.
Yeah.
Yeah.
Yes.
Yeah.
[music].
Yeah.
Yeah.
Yes.
Yeah.