Q2 2023 On Holding AG Earnings Call
Speaker 1: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the on second quarter 2023 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Chair Peter, head of investor relations. You may begin your conference.
Speaker 2: Good afternoon, good morning. Thank you for joining on 2023, second quarter earnings conference called and webcast.
And don't forget that a recent trial the clouds boom Echo Street, the long distance running shoe worn by all athletes to win some of the biggest radiuses around the globe, including the Ironman World Championship.
The majority of our product sales dense from shoes exclusively made for runners.
Lot of Vitale.
From the already mentioned <unk> franchise.
You will appreciate that all of the product success has a uniquely broad base with several franchises that have evolved from a single product into a major building block for the business.
He never aspired to be a one trick pony.
Obviously, I can't speak of Pony without mentioning the stellar reception that our new kitchen business has experienced.
Ladies and franchise and major building block for all in the making.
Number two all brands vitale to resonate with a new generation of customers.
You know that dream all is our men shop as the community driven brand we challenge the status quo you can I think the human spirit through movement.
A Prime example is our latest retail store in Williamsburg, New York opened onshore 30th.
If you have already visited you know, it's a true community space.
During the opening week, we hosted a five K Rowling and block party, featuring local dj's and dancers attracting over 1200 community members.
We also highlighted our social impact program right to run it.
It is aimed at supporting community organizations that break down barriers to movement.
From assisting individuals with disabilities, and running races to encouraging syndicates to explore the countryside.
Our goal is to amplify these efforts and uphold everyone's rights to Ron.
Yeah.
The screening of the short fill right to rates plus the various basketball.
Premiering on Eurosport on World record today. It tells the inspiring story all at least Dominique low volatile.
The Diamond League maintenance is on his journey or whole from for being Sudan to his class for the Olympics.
We are humbled to support Dominique and eager to see him at the starting line in Paris next year.
In June Paris joined in late logging and Vietnam in hosting on track nights.
Unlike typical track humans. These nights infuse festival culture, creating an all forgettable atmosphere for runners and spectators.
They will continue to be a pillar in our ambition to engage the community celebrate the sport of Ronnie and build a loyal fan base 40 owned brands.
This also brings me to my third point.
One is driving fast global expansion with a localized approach and this is backed by global initiatives that drives to be talking to you all as.
<unk> performance driving brands.
The uk's growth more than doubling in Q2 exemplifies this strategy.
Initially or distribute to market taking it in house has allowed us to make even more costly informed decisions on focused locations.
Partnering with retailers like JD foot locker and premium department stores.
Our local Regent Street store introduced earlier this year, it's a huge success exceeding our expectations and driving brand awareness.
Additionally, a targeted cloud most of pop up in Liverpool and made tailored to local demographics provided opportunities to engage with fans three events and Ron flops.
These trends hold true across our global markets and we are building a strong playbook of specific initiatives that make tangible impact on brand awareness and sales.
You can bet that we're not just tracking the metrics there.
Stiffly monitoring how the old brand is perceived by consumers.
Our commitment to performance running and continuous innovation is hitting the mark and we are pleased with the results. We observed this in the U S where the outstanding results of our athletes in recent months has significantly elevated.
<unk> credibility of our brand and products.
We have already spoken about Hello varies Boston marathon being <unk>.
Recent successes with our cloud spike on shorter distances have further propelled all his reputation at.
At the U S track and field Championships in early July All Atlantic Club members Jarrett will boost.
Joe collector and Alicia also reached combined four podium finishes in the 1500, the 5010 thousand meter races. So you can expect all athletes to be ready for Buda Palace worth of Atlantic's Championships this coming weekend.
As you see the strategy of integrating local community outreach with the global approach is proving highly effective, particularly in new or emerging markets.
Regions, such as the UK, northern and southern Europe , the Middle East, China, Japan, Latam I'll now vital parts of our growth contributing a quarter of our overall business.
The success in these areas.
This caused a tremendous potential for further expansion.
So in conclusion.
<unk> is full of vitality striving in product innovation brand residents and global expansion like never before.
Now, let's take a pause and look back.
We're approaching our two year anniversary post IPO is coming mid September .
Our life as a public company has been marked by a remarkable progress and significant achievements.
Exceeding nearly all expectations, we set two years ago.
We view this milestone that's an opportunity to update all our investors on our plans and trajectory for the future.
Therefore, we are thrilled to announce E mail host an analyst and Investor Day on October four 2023 in Zurich.
Look forward to many of you joining the <unk> team as we continue to dream.
Now, it's my pleasure to hand over to Martin for the detailed Q2 financial review empty updated outlook for the year.
Market.
Thank you, David and Hello to everyone on the call.
It has been another outstanding quarter, driven by the strengths of the brand across all channels regions and product categories.
This is a very founding of the company on his team and innovation driven print.
It is happening across all departments for filings to talent from aberrations to retail and marketing.
But ultimately culminate in the amazing products, our world class teams develop for offense.
David mentioned the product launch of the cloud Omega three.
It's a huge step in enabling the most ambitious run us all over to cloak to lease up at races, and our highest performing shoots yet.
And we are extremely pleased with the base of positive feedback and coverage. It has received.
We are convinced that pinnacle products like this one will continue to increase the share of top runners in autos.
First a few of the adoption of our friends with the everyday running community if.
If we look beyond running in Q2.
Both of course, one more huge win that led to significant publicity and promotion of the owned brand.
In early June <unk>, clearly elevated our presence on the Grand Slam tennis courts.
A rating of the French open at Roland Garros marked a huge step in building our credibility in the tenant space and clearly created massive excitement inside and outside the home.
<unk> home country, Poland office, a small proof points of the additional reach and awareness the presence on the <unk> stages Springs.
And so when in Paris, Google searches in Poland increased by over seven times.
What stands out for me when it comes to tenants is how it is the perfect representation of encore.
The highest level of performance combined with the ability for a highly premium execution.
A big congratulations goes to igo.
And also to our team.
But in a very short amount of time has innovated. This unique pieces did have created so much excitement.
Now moving on to the numbers.
As David mentioned, we are extremely proud of coasting on sixth consecutive record quarter.
Achieving net sales of $444 3 million Swiss francs.
By 52, 3% year over year.
Clearly exceeding our expectations.
Our last 12 months trailing net sales have now reached 156 billion.
The strength of the brand and the momentum become even more evident when considering the current FX environment.
Over the last months, we have seen a persistent strength of the Swiss franc versus nearly every other currency around the globe.
Excellent dose negative currency effects on a constant currency basis, our net sales growth was approximately 60% in Q2.
This negative FX impacts of around $23 million with strength on top line.
Importantly, as a result of the high end consumer demand.
Fastest growing channel in Q2 was our direct to consumer business growing at 54, 7% versus the prior year period.
This strong DTC performance resulted in a DTC share of 36, 8% compared to 32, 6% in Q1 and 36, 2% in Q2 last year.
With 160 to $3 5 million Q2, DTC net sales was a quarterly record and even significantly exceeded the very strong results during the holiday season in Q4 2022.
Encouragingly, we have also observed an all time record in traffic Tory com channel growing over 75% year over year.
We see the strengths of the D to C channel as a validation of our ability to bring consistent innovations to the market.
Balance, our wholesale and direct distribution and to build a strong direct bond with our fans around the globe.
We put price and being an innovator not only in the products we offer but also in the way we operate our channels.
A year ago, we launched onward, our research platform for Circularity is at the core since then more than 30000 items I think given the new lives through the program.
And a couple of weeks, we'll publish our search ever impact progress report, where we will share more about our sustainability mission and progress.
Finally on PTSD, we continue to see a small but increasing contribution from our own retail store business again, quadrupling net sales year over year.
It does not yet include a material contribution from our new Williamsburg store given the late June launch, but the store serves as another Prime example of how retail is able to showcase all as a full head to toe brand.
Our wholesale channel also grew rapidly in Q2 up by 51% versus last year to $288 million.
Importantly, the demand for our products is also reflected in strong sell out numbers at our wholesale partners, which ultimately drove strong reorders in Q2.
For example, our top five key account partners in the U S. Combined grew 92% in the first half of 2023.
This does not yet even include the new established business with Dick's Sporting goods.
Importantly, this quarter includes only a very limited number of incremental doors versus Q1 'twenty three.
We are incredibly grateful for the long spending lowest partnerships, we have built globally with all our retail partners.
One of those key partners for many years since <unk>.
We're extremely honored to have been named their vendor partner of the year 2023.
Can only returned to brace and saying what is outstanding collaboration.
Looking ahead and as communicated previously we plan to selectively expand on our key wholesale partnerships by only adding doors with meaningful additive customer basis.
While we expand selectively we expect the net additional door number in the coming quarters to be lower than it has been in the past as we expect to see offsetting strategic door closures in some of our more established markets.
The strong performance of our multichannel strategy is also reflected in strong growth rates across all regions.
EMEA reached $113 6 million Swiss francs net sales in the quarter growing by 28, 9% year over year.
Equivalent to around 35% growth on a constant currency basis.
We are continuing to expand our market share in a very meaningful base, even as we see a more promotion driven environments offline and online from other brands.
During the first half year, our DTC sales grew stronger than our wholesale sales in the reach.
Spike the Covid lockdowns that extended into the first months of 2022.
David mentioned the ongoing strength in the UK.
Another market that is seeing significant growth and momentum as the middle East.
At the moment our presence in this region is very limited highlighting the significant growth opportunity that we have.
Americas grew 59, 8% in the second quarter, reaching $296 6 million Swiss francs.
We're happy to see that this growth continues to be supported by a very healthy full price sell through at our key wholesale partners.
Particular, we also continued to take market share in the specialty run channel. Despite a more promotional driven environment by our competitors.
That fleet feet Theyre currently the fastest growing brand while at the same time, having the highest average selling price by a good margin.
A great showcase of the incredible strong underlying demand alright, innovative differentiated and premium products.
Moving on to the Asia Pacific region, which grew by 92% in Q2 to reach $34 1 million Swiss francs strongly supported by significant momentum in China and Japan.
A few months ago.
Mark and die together with members of our senior leadership team had the privilege of traveling to China at meeting to team in person for the first time since the pandemic.
We visited several of our own stores in Shanghai Chengdu since then.
Which are three of the five key cities that are currently in to focus on rolling out our own retail formats.
In total we currently have 17 owned retail locations.
Beyond this 13 additional cities are now home to an on store operated by local franchise partners.
Again, a great example of how we are focused and selective but at same time are planting seeds for future opportunities and growth.
It was hugely energizing to see all the fantastic work the team has been doing on the ground and.
And we are now even more excited about the opportunity within China, and the Asia Pacific region more broadly.
Revenue around the world in the last weeks.
We're clearly able to experience the variety and diversity of our products on the feed and bodies along the core running routes. The trail so in the streets of global cities.
Dismissal observation is also strongly supported by our numbers.
The strong growth of the brands is driven by all product groups product franchises and ultimately by all customer communities, we are aiming to reach.
Net sales in <unk> grew by 52, 6%, reaching $428 2 million Swiss francs.
<unk> grew by 45, 9% in Q2 to reach $13 4 million Swiss francs.
Q2 was the second consecutive quarter embittered power growth exceeded 45%.
Solving and $57 million net sales in the last 12 months.
The momentum in DTC and in particular, our own retail stores, but even more our exciting product pipeline provides strong confidence about the opportunity. We have ahead of us.
Supported by the strong interest and share our continued high share of full price sales and then again more normalized supply environment on achieved a gross profit of $264 5 million.
Representing a 64, 4% increase year over year and gross profit margin of 59, 5%.
This is the highest quarterly gross profit margin since our IPO and a strong validation of our strategy and our progress towards our stated midterm targets.
Compared to Q2 'twenty two our gross profit margin increased by 440 basis points from 55, 1% to 59, 5%.
Largely as a result of the discontinuation of extraordinary airfreight usage.
Partially offset by slight headwinds from the current foreign exchange dynamics.
We continue to constantly manage our SG&A expenses alongside our net sales development.
In Q2, SG&A expenses, excluding share based compensation, but 216 million Swiss francs.
And 48, 6% of net sales in Q2 up slightly from 48% in the same period last year.
Let me achieve economies of scale and general and admin expenses distribution expenses were as expected slightly elevated as a result of the ramp up of our own warehouse automation projects alongside some temporary expenses for additional warehouse space needed in the quarter.
As a result of the elevated net sales combined with strong gross profit and our conscious cost management, we have achieved an adjusted EBITDA of $62 $7 million with strengths in the quarter nearly doubled from the $31 4 million in the prior year period.
This corresponds to an adjusted EBITDA margin of 14, 1% increasing from 10, 8% in Q2 2022.
Moving to our balance sheet.
Expenditures were $11 2 million for the strength in Q2 equivalent to two 5% of net sales.
This represents a relative reduction in capex compared to Q2 'twenty two.
During which we incurred expenses in relation to our office build outs in theory can Portland, and invested 11 million Swiss francs was three 8% of net sales overall.
As anticipated and communicated in our two previous results calls.
Our inventory carrying value came down sequentially versus Q1.
While achieving higher net sales or absolute inventory position reduced to $435 9 million at the end of Q2.
$465 2 million Swiss francs at the end of the first quarter.
By actively managing our production plants and more focused efforts across our teams continued to be well on track for even more normalized inventory levels in relation to sales by year end.
Our cash balance at the end of the quarter was $337 1 million.
Importantly, as you will have seen from our 6K on July 10, we.
We entered into a 700 million Swiss franc multi currency credit facility agreement.
Which replaced our existing $160 million credit lines.
We do not expect to draw cash from this facility in the near term.
Rather we see the availability of funding as a procurement of our philosophy to plan prudently and to create future financial flexibility that aligns with the current size at maturity of our company.
And as a basis to drive our future growth out of a position of strength.
With that I would like to move to our updated outlook for the full year.
We have achieved record first and second quarter results and also had a strong start into the third quarter.
We are receiving continued positive feedback from all of our retail partners and have a pipeline of some very exciting new product launches into the second half of the year, both in apparel and in footwear.
Altogether. This provides us with confidence that we have the opportunity to exceed our expectations that we had communicated in may.
As you have seen in our release. This morning, we are therefore again raising our outlook for the full year 2023, and now expect to reach at least $1 76 billion Smith strengths and implied year over year growth rates of 44%.
It's important to point out that.
At current rates compared to our previous guidance. This outlook includes an additional negative FX impact on our U S. Dollar sales of around 3% for the second half of the year or around 20 million Swiss francs.
For the second half of the year, our guidance implies our reported currency growth rate of close to 30%.
This is equivalent to our constant currency growth rate of around 44% for the second half of the year.
And reflects our continued confidence based on the strong momentum and demand across channels regions and products that we are.
<unk> for the on trend closely.
We are well on track to reach our outlook of 58, 5% gross profit margin.
Throughout the rest of the year, we expect continued high share of full price sales and continued normalized supply chain environment.
Unlike the topline and isolated to U S. Dollar weakness has the potential to be somewhat beneficial in the second half of the year when it comes to margins.
Together with the strong first half year gross profit margin of 58, 9%.
We do even see potential upside to the 58, 5% indicates of an ongoing U S dollar weakness at no significant offsets from other currencies.
We also retaining our adjusted EBITDA margin target of 15%, which we continue to use the right tradeoff between profitable expansion and selective additional investments into the business, while driving significantly higher absolute EBITDA at a higher topline outlook.
This full year outlook implies an adjusted EBITDA margin of around 15, 7% for the second half of the year compared to the 14, 3% in the first six months.
This reflects our aspiration to achieve economies of scale at the higher expected net sales in half year two.
Overall, our updated outlook for 2023 confirms our continued pass of durable growth by combining strong net sales growth while increasing profitability.
And some.
<unk> momentum continues at a very high rate.
During the first half year, we have again achieved many new heights across products geographies and channels and.
We continue to try and model.
The very strong growth of the first six months, resulting in six consecutive record quarters.
Powered by the incredible teamwork of our dedicated teams and partners and required all of them at their best.
We don't take this for granted and are extremely grateful for all the focus and hard work.
But also positive spirit that we have experienced across all our offices factories and warehouses.
With that David market I would like to open up to your questions. Operator, we are ready to begin the Q&A session.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Cristina Fernandez from Telsey Advisory Group. Your line is open.
Hi, good morning, and congratulations on a good quarter.
Wanted to see if you can expand a little bit on the second half outlook.
How are you.
The healthy order books for the second half from your wholesale partners relative to three months ago and I'm looking at it on a constant currency basis to 44% growth that you have embedded.
Does that change.
Hi, Kristina this is Martin thanks for your question.
Let me reiterate on our statement our guidance. So we increased our guidance from $1 74 billion to $1 76 billion.
If the U S. Dollar would have stayed in relation to the Swiss francs, whereas.
Was that the effect of.
Last may where we basically gave the last guidance, we would have increased our guidance to $1 78 billion, but the recent weakness of the U S. Dollar is expected to add an additional negative impact of about $20 million.
For the second half of the year.
Just to put things in perspective, if you could talk about the $1 76 billion and.
Converted into U S. Dollar today, we will talk about $2 billion U S dollar sales.
So we continue to see very strong growth and this is reflected in the 44% currency neutral growth that we that we have for the second half of the year in our guidance.
And we expect strong growth in both channels of course, there will be a strong focus on the holiday season.
Also in the past our second half of the year is driving a higher D to C share compared to the first half of the year.
Important also to remember that we are compounding against a stronger second half of the year.
Last year compared to the first half year last year that was more impacted by the supply shortage.
And.
So we see continued very strong demand at the beginning of the.
Third quarter 93.
We're in a good position when it comes to our inventory. So if we see stronger demand than we will be able to fulfill the strong demand and.
As the <unk>.
As we have said in the past our aspiration is always to exceed our expectations and the order book is strong.
<unk> engine is strong and there'll be going just a little.
Confidence into the second half.
Yeah.
Thank you and then as a follow up can you provide more color as far as the product launches just remind us what's coming out for the back half of the year, both in footwear and apparel. Thank you.
Kristina This is David very happy to do so so as you know add on running remains core and you have heard from our team that we are at the fastest growing brand right now at that fleet feet and so were very excited that we continue with new products and.
You have seen that reached our success recently with new franchises in running and of course, they're doubling down on that so for example, when you look at the cloud monster expects to see.
That are even more cushion than the recent monster expanding that franchise, so making sure that our recently added franchisees remain and continue to grow as substantial building blocks.
For the business. We can also expect then.
New apparel in running.
Especially pilots about new.
Running collection and energy collection that is fully made out of clean cloud material and that is that the clinical or Ron culture, combining running and unique aesthetics.
And punched holes for your start number at the marathon in these pieces in the engineered.
When it comes to.
When it comes to our outdoor.
We are continuing.
The focus on trail, adding.
Adding a lot of lightweight models and then when we come to <unk> you can expect that our collaboration with Roger but then also with <unk> and we expand we learned a lot about and shoes and apparel and we are adding.
Uptight style performance ranges, so as well in tennis, we built from debate performance core and you will see in 'twenty fjord and also at the second generation after Roger.
The pinnacle of our performance tennis shoes.
Okay.
And your next question comes from the line of Alex <unk> from Morgan Stanley . Your line is open.
Great and congrats on another wonderful quarter I've got two for you both.
Maybe first just on the market share gains that you mentioned.
Can you just elaborate on where you're getting those by geography and channel maybe with what types of partners and then how you think about who you are maybe taking share from and then secondly, it sounds like you view, the 150 basis points of adjusted EBITDA margin expansion as the right balance of driving the top line, while also growing profitable.
So just looking ahead is that kind of what you're targeting on a forward basis or how should we think about kind of expansion from here. Thanks a lot.
Hey, Alex This is Mark Nelson welcome also to everyone from my side so.
I think we're very very proud that we are taking market share across the board in a heavy promotional environment. So what we observed in Q2 is that quite a few retailers have relatively high inventory levels and that will also continue into Q3. So that has led other brands to two need to this.
The product and we have paid very very premium end at full price, which has been India and reflected in our in our gross margin.
So we're really gaining share in all geographies.
Including EMEA, including.
Germany, Austria, Switzerland, and we're doing that in different channels. So obviously just started at Dick's Sporting goods for example, and we're seeing very very strong sell through for example, honest the number two running brand in the house of sports stores out of the gate, which surprised us very positively.
And we're also as Martin already mentioned for example, the fleet feet honest the strongest growing brands, so really happy to see that and.
Even though wholesale grew so strongly D to C was able to outpace wholesale growth, which shows that the strength of the consumer demand.
Alex Let me take the EBITDA question.
So as CFC and we had a very strong first half year, we regenerated two and half times more EBITDA than last year.
Indeed, there is a lot of operational leverage and additionally, compensated for around 50 to 100 basis points of FX headwind.
We always said that we are very consciously managing towards the 15% EBITDA and in a situation like the first quarter, but also now where we are exceeding our expectations on top line. This gives us additional opportunities to invest into the business.
Such into the growth into the future so at the moment.
Those investments.
Areas are clearly around our commercial capabilities into our D to C and customer data engine.
We are we are building in.
Retail organization within the organization and then also investments into our tech backend so.
Our commitment towards the 15%.
If we if we achieve higher net sales and this gives us more opportunities to invest.
But it is very clear.
As for the long term B, we are committed to further increase the EBITDA. So the long term guidance that we gave.
High teens, that's that's still our aspiration.
Okay.
Hearing more at the Investor day, and thanks, guys.
And your next question comes from the line of Jay sole from UBS. Your line is open.
Great. Thank you so much I wanted to ask you about the stores given the performance of the stores that you've opened the last couple of quarters. How has it changed your confidence about opening more stores and what are your plans for store openings over the rest of this fiscal year and even into next year. If you can share that with us.
Okay.
Thank you for the question Matt.
So we are very and we already spoke about in Q1, and we continued to be very pleased on the retail performance. The one store performance, we're able to attract and ignite and inspire new consumers bring them into our own environment, which really helps for example, the apparel sharp.
Because they can experience the brand.
In the full depth so.
Right now basically globally on heads seven stores, the next ones without China outside of China. The next openings are planned for Miami, Paris, and we're relocating and Portland.
I think to come pretty soon so we're really gaining confidence in the model. We are seeing the impact that it has on the consumer and we will provide a more detailed update on the store outlook at the retail outlook at the Investor day.
And how we continued to build on its own spaces.
Great and maybe if I could follow up with one more just on inventory if you could elaborate a little bit more about the inventory because the growth rate really improved a lot sequentially from last quarter to this quarter can you just talk about your comfort with your inventory level and when you see the inventory level getting back in line with the sales growth rate, where at least to a level that you feel like is appropriate.
Yes.
We're really impressed with Mr. <unk> team is doing also in collaboration with our factory partners.
So a lot of flexibility.
We were able to decrease our inventory level compared to the last quarter.
You have seen the numbers so as communicated in the past towards the year end two Prs aspire.
Aspiring to foresee that our inventory levels will be somewhere between our yearend 2002, and our Q1 number.
We also shared that our aspiration at the current growth rate is to land at around 30% of net sales when it comes to our working capital and now that we increased our guidance further debt that would be equivalent to around $460 million of inventory so basically right.
In line with the expectations that we gave.
Importantly, we are very happy with our in channel inventory. So the inventory that is out of our wholesale partners.
In the U S. We are generally between three to four months of inventory in Europe , even below three months. So we have a very healthy channel our inventory and our own warehouse is still fresh and is in line and will allow us to continue selling at full price share.
In the remaining part of the year.
Got it thank you so much.
And your next question comes from the line of Olivia Townsend from Jpmorgan. Your line is open.
Hi, everyone. Thanks for taking my questions and my first one is just on current trading.
We did that.
China has been quite encouraging as Steve had it and Keith Great I'm. Just wondering if you could put any numbers around that as to how you see that new guidance.
Between Q3, and Q4 and then just secondly on the <unk>.
Inventory.
Could you just you gave us some idea as well.
The aging classes and what you would normally expect and what kind of FX or AFP and purchasing and make numbers as well.
Helpful.
Thank you for the questions I'll leave us I'm quickly going to elaborate on.
July and the first days of August and then Martin will give you or tried to give you.
And then throw in the inventory question.
So in July and the first day of August have been very positive for us I think what's what.
Important is not just the number it's how we get to the number so which consumers are already reaching what's the product mix that we're selling is it selling at full price, but the D to C share and so on and how balanced. It is is it across the regions and it also come to a strong second half of 2022.
We still Comping now in the first half of 'twenty three versus a relatively weak first half of 'twenty. Two that was very much supply constraint. So so kind of keeping all of that in mind, we're very very happy with how the first few weeks in Q3 half in folded in how consumers are continuing.
Continuing to adopt on and the products that are very much rooted in performance.
And then to the to the inventory question so that we have.
Have a very high share of in line inventory.
In line with what we have seen in the past.
For us it was always important since the beginning to build the company also from a product lifecycle perspective.
<unk> can maintain full price sales for Florida for a long time and as such protect the premium position of the Brent.
So our products have a relatively long lifecycle and therefore, the shelf out of expected out offline inventory is relatively low.
When it comes to FX, there is no FX impact in the inventory in itself. So.
So it's.
Based on the historical values, but of course 10 minutes comes into our hour.
Cost of goods sold that's where you'll see the impact.
Thank you and maybe if I could just ask a quick follow up just how many stores are you in now and for.
For JD sports and fitness.
Yes, so footlocker by the end of Q2, we were in 175 doors in the U S and 46 in EMEA, we're expecting to add an additional 50 in following through 'twenty three with J D. We were in 166 doors in the U S 60 in EMEA.
We're also expecting to add 15 fall winter 23, those are mainly conversions from finish line into J D.
Most of it in the U S.
Thank you.
And your next question comes from the line of Robert <unk> from BNP Paribas. Your line is open.
Hey, thanks, so much for taking the questions I wanted to ask on gross margin.
Within the 59, 5% gross margin in the second quarter maybe.
Maybe you could break that down a bit in terms of some of the components like storage cost mix FX I think last quarter there.
There were several transitory headwinds just curious how that looked in the second quarter.
Happy to do so so.
I think as we as we also said on the on the on this on the call earlier.
59, 5% gross profit margin in the second quarter is the strongest since the IPO.
It really shows that our the business that we have built is able to deliver the long term margin that we always communicated of 60%.
So we have seen again in more normalization of the.
Supply chain environment, So clearly shipping rates came down at the same time.
We were using a very low share of air freight.
Since we basically have the inventory in our warehouses already.
Last year, we spend about $13 million on air freight and comparisons that this is the key driver for for the for the for the increase compared to last year.
<unk>.
We have.
A bit of headwind from the from the currency environment, but not significant.
So for the second half of the year as we said we.
Continue to expect a similar environment and if the U S dollar in relation to the Swiss franc stays at a low level, we expect that we can.
For the full year drive in EBITDA, Okay. Good gross profit margin above to 58, 5% that we communicated.
And so.
So we currently there is a lot of confidence that we can show that.
Okay.
And your next question comes from the line of Jim Duffy from Stifel. Your line is open.
Thank you good afternoon to you and team.
Hoping you can give us an update on some of the metrics youre seeing in your DTC business, specifically, we're interested in how you're seeing the mix of new customers versus repeat customers and the mix of new products versus legacy products.
Thanks, Thanks for the question.
So USD DTC engine continues to be extremely strong and read it.
The power of our multichannel distribution has proven to be to be very strong again in the numbers.
Facets.
Our long term strategy to grow <unk> stronger than wholesale.
So the Q2 numbers are further validation of that.
If we look into the into the numbers, we continue to see.
And very healthy and comparable mix when it comes to repeat customers.
New customers.
So the growth is really driven by by both customer groups.
Terrific Bye.
Balanced mixed off of.
Of products along the different.
Customer groups that we are trying to reach so.
So from running of course.
With the products that David mentioned earlier.
But then also into into tenders into apparel into into outdoor.
So.
This gives us a lot.
Out of confidence going into into the holiday season, we were able to invest more in upper funnel marketing and brand building compared to last year, where we were reducing our marketing spending to compensate for some of the air freight.
So we have build a strong funnel we laid out on the call that we have seen a record in terms of visitors to our website, which clearly shows the heat of Brent.
So this gives us confidence for the second half of the year.
Great and then it sounds as though the management team has recently returned from marketplace business in Asia.
Can you speak about.
Those visits and the inspiration to the strategy and capital allocation if theres any difference in your view after visiting the marketplaces. Thank you.
Yes, thank you a.
Jim for the question, yes, so we.
Yeah actually there was a there was a picture on the call.
As of Alpha for the ones of you.
<unk> side so.
Quite a sizable group and the management team visit day visit and especially China.
And.
We're constantly visiting markets right. So we spend a lot of time and with our consumers, it's very very important for us to understand.
Where the consumers are moving and what's important to our fans. So this is this is what we're always doing Unfortunately, we were very limited in traveling to China over the last year. So this was the first time since colleague broke out that we could actually go to China. So so we spent time with the team and what what.
We learned.
A debt.
On has a very very strong or kind of reaches a very very strong.
<unk> and consumer segment in China, but it's still very unknown right. So we are at the very very beginning of our journey in China. The local team has been amazingly entrepreneurial in how Dave.
They've built on and how they have responded to the Chinese consumer through a very very difficult time, and so we're seeing huge potential in China and we're also seeing that.
Retail Brooks Ron It works for us in China, and it's it will be an important pillar for our for our future growth. So we feel it's very much an opportunity.
The problem that most stores are too small, which is a great problem to have but we're looking into what's the right size of the stores within China, but also outside of China. So really a lot of insights that we can also take in from China to the rest of the world.
And we also spend some time talking about Japan, and Australia, and just want to highlight here that Japan is a market is a very big couponing and sportswear market an important market and we're doing very very well in Japan, We're super happy about the growth rates, we're very happy with the performance of the owned stores and our E Comm mentioned in China.
And we couldn't be more thankful to the work that the team has done over the last couple of years in Asia Pacific.
Thank you so much.
And your next question comes from the line of Jonathan Komp from Baird. Your line is open.
Yes, hi, good afternoon. Thank you.
Martin I wanted to follow up with a clarification that the distribution expense I believe in the first half of the year Deleveraged by about 130 basis points could you just maybe quantify the extra storage fees that were included in that and then when would you expect those to start to wind down here.
Hi, Sean third there are two effects in that.
The increased number so the first effect comes from.
We indicated this in the past.
From our projects to build additional warehouses.
Which are fully automated so at the moment.
We basically started to rent those warehouses and they're currently being built out vis vis the automation solution and this is already driving some additional cost.
And the second the second element really comes from the fact that we had those high inventory positions we have.
The inventory flowing in earlier than expected. So we had to run some additional warehouses to to unload product from the containers and that's also reflected in the numbers now.
The root cause for the second one is gone for for the rest of the year. So we are we're not having those temporary solutions anymore.
But we are still expecting to see the additional cost for.
Basically the double warehouses.
Until until they go live.
And some some cases that go live date is not as before early 'twenty five.
So we will expect to see a bit.
Increased distribution expenses compared to where we were in 2022.
Before we then see the operation leverage coming from the automation.
Okay. That's very helpful. Thank you and then one follow up longer term question when I when I look back two years ago roughly to the IPO you achieved many of your financial targets set at the time more than.
A year earlier or even better in some cases so.
As we think forward just wondering how are you thinking today about the right pace for growth for the brand and what do you expect topline to eventually settle closer to something like 20, or 25% growth as you slow the door growth rate in wholesale and just how it how should we think about performance versus lifestyle. If you were targeting.
One of those to grow faster than the other thank you.
Okay.
Yes.
We have exceeded all the targets are most of the targets that we have given at the at the IPO, which is false although the last time that we gave a longer term update so we feel that that clearly is a very different company today.
<unk> a different state of our cross curve different level of maturity.
And Thats the reason why we decided to.
To do that at the Investor Day on October the fourth.
We really want to highlight and talk about the points that you mentioned around our CRO strategy about our innovation sustainability.
But also give everyone the opportunity to.
Experienced the culture that we that we see in our offices around the world.
So let us let us put a lot of that information into it into the Investor day.
Understood well look forward to that thank you.
Our next question comes from the line of John Nick <unk> from Wedbush. Your line is open.
Hi, Thanks for taking my question.
So your growth in all the regions has been.
Strong.
The EMEA region has been.
Slower than North America and Asia.
EMEA region.
Slow quite a bit from the first quarter.
I guess, it's somewhat surprising given some of your home market and I would think that you'd have.
Yes.
Brand awareness, there and stuff like that.
Can you talk about.
The trends in EMEA, and what Youre seeing and is there any.
And that's kind of.
Restraining your growth in EMEA and prevented you from seeing that kind of growth that you're experiencing in North America and Asia.
Okay.
And thank you for the question Tom So.
Let me elaborate a little bit on what we're doing in EMEA and how we're looking at the numbers. So I think first of all we want to say on grew in the first half of year in EMEA.
40%, so we feel thats, a strong growth rate and that's very much also in line with our expectations in Q2, and we grew by 29% as already stated in the prepared remarks.
See a very strong demand coming from UK theyre very happy with the consumer mix, we already elaborated.
On the London store that is doing really well, we had pop up space and labor pool.
Tapping into an even.
Consumer segment, so very very happy there than we see the really building markets like France, like Spain, like Italy, and that's why we for example are accelerating the retail store in Paris, which will be a very important one to tap into the French market in an even more advanced way.
And then we're very much refocusing.
One around performance distribution and running distribution in Germany, Austria and Switzerland.
Even though we're doing that the strongest absolute growth contribution comes from those three markets to the European number. So that's very very important on is still gaining market share in those in those three markets. They are growing and they are contributing most of the growth to the EMEA region.
What what you can expect is that in the second half of the year, we will have an impact from roughly 5% to 10% on the European wholesale number from door to door closures that we're closing.
Roughly 200 stores that are not focused around performance and run distribution and that are not reaching on core consumer segment. So this is how we're looking at it we're very.
Happy and how how kind of that effort is unfolding. One example, the cloud will make us really which is our fastest performance product rolled out in Switzerland within 24 hours, which shows that on it's really and being perceived at that performance running Brandon the effort.
Okay.
Understood. Thank you very much and best of luck in the back half of the year.
And your next question comes from the line of <unk> <unk> from Piper Sandler Your line is open.
Great. Thanks, guys for taking my question just in terms of wholesale and a really challenging environment in the U S.
Outperformed obviously there is there any difference you're seeing between performance products and lifestyle products and then is there any guidelines or how youre thinking about what your future opportunity is from market share and especially around channel. Thank you.
Thank you so.
Again here I think.
As already stated we are seeing a very promotional environment and we're very much focused around bringing premium products to life in with our channel partners and our own DTC environment at full price. So what this results in is in our running range growing even stronger than our all day range, which is which.
<unk> is a great sign that basically the performance of the product is being appreciated and we are winning with new launches that we just had that David spoke about so.
Cloud Monster in telco and so on the second thing is on is really playing at this intersection of performance and all day. So when we take a product like the cloud monster that is hugely gaining share on the running routes. It's already the number two on product if we count right now on running routes that also resonates.
Really really well with a younger consumer in channels like J D.
So that leads us down to a product like for example, the cloud Novatel is a running silhouette.
<unk> is an all day product, but still showed very very strong growth rate. So from a product mix, including apparel, we're very very happy with what were seeing despite that environment and theres really nothing where we would need to say hey, this is clear.
Clearly lagging versus auto products, or where we would have expected to see different growth rate.
Yeah.
And your next question comes from the line of Sam Poser from Williams trading your line is open.
Thank you for taking my questions just a couple of everybody let people ask a lot of good ones of one what is your.
What is your forecast is in like what is an optimum inventory turn.
And then secondly.
Many style color ways do you have sort of within like the entire assortment of product and three what is your <unk>.
Wholesale door count now versus globally versus last year.
And what does that look like for the balance of the year.
Hi, Thanks, Thanks for the question so.
Our near term goal for managing our inventory is to finish in that range.
Off of year end and Q1 number.
So with the perspective of maintaining 30% working capital in percent of sales.
We see many levers for improving that number going forward.
So from <unk>.
Better integrated business planning.
Managing our product life cycles.
Even in a better way.
Broking business with more direct shipments towards.
Biggest retail partners.
A lot of opportunities to bring that number further down and we have we have started to work on dose.
We expect in over the course of the next years to.
To improve our inventory situation, but at the moment.
We need to balance basically our production commitments that we gave to our factory partners with the sales that we are that we are having is that we have.
If the right inventory on hand, which is which is important for us.
Of course, managing the number of Skus and having debt.
Economies of scale, there as well is a super important factor when we are planning our future product assortment.
Just add to to continue with that.
Yes cadence into color options I think.
For us we're not looking at an individual level. We are really looking can we increase efficiency in our inventory and are we reaching the right consumer in the right channel with the right variability right. So basically we would do certain color color options. We studied.
<unk> wholesale partners and we've had product that was only available on <unk> comments on <unk> and so how we are able to to react to consumers and shape consumer perception is really what's guiding us here keeping overall efficiency.
In mind and then.
Apparel is growing strongly Amit is growing very strong and our own channel as already mentioned and with that comes more color options on the apparel side, we saw apparel very naturally follow different cycles and you wanted to.
More variability when it comes to your T shirts, and so on so we expect that also to drive some of the color options that youll see going forward and then very quickly on wholesale so by the end of Q2, we had nine roughly 9800 <unk>.
Wholesale doors by the end of Q2 2022, it was eight.
<unk> thousand 600 doors historically, we added roughly four to 500 and the words basically quarter over quarter. We are expecting this to drop a bit as we continue to work with larger partners that are reaching broader consumer segments as well.
So we expect the additional door openings to go down to probably around plus minus 200 still net new doors thats important until year end 2023.
Your next question comes from the line of Ashley Owens from Keybanc capital markets. Your line is open.
Great. Thanks for taking the question just looking at APAC.
High single digit percentage of the business, but this is another quarter, where it grew over 90% just curious on your thoughts for the sustainability of this momentum near term.
If anything it is being low hanging fruit you can capitalize on to help maintain the current strength in the region. Thanks.
Yes, so on APAC really I think the future will be.
Be dominated by by the growth in China and this is really right now it's about how fast can be can be captured consumer demand. This is about our capability to open new doors, because a lot will be owned and franchise distribution, it's about our capability and how we can expand with some of our our E Com partners like Tmall. So we.
Don't see any kind of nature.
Constraints in terms of market size and definitely when it comes to China for a very long time to come.
Importantly, we are building a premium performance sports for our company and that's how we're winning in China, and we're not going to win our price, we're not going to win in a promotional environment. So this is this is dictating in shaping our our pace in Japan and we.
We're a bit further ahead, so so super happy what were seeing right now, Japan definitely still far away as well from from reaching maximum potential, but it's clear that we don't have as many.
Growth ahead of us in Japan, and Australia for that versus China.
Almost untapped the rest of Asia Pacific we are talking about huge countries like Indonesia. For example, so this is very much in distributor less and that's definitely a more long term opportunity for us to focus on when were ready for that market.
Great. Thank you.
And your next question comes from the line of Janine Stichter from BT IAG. Your line is open.
Hi, good afternoon, and congratulations on the strong quarter.
Sarah wholesale door growth over the next several quarters and our selective closures you mentioned is that solely related to the repositioning on the European wholesale or is there anything else in there and then more broadly religious love your thoughts on what parameters you think about when you choose to exited or and then as a follow up as you look at your door base would you expect there'll be any more meaningful closures beyond <unk> of this year.
You.
Yes.
Yes so.
Yes.
As Mark said, we expect.
To close around 200 doors.
In.
In Europe .
And that's.
That's basically what's what's also incorporated in the number that Mark just gave where we expect net additional.
The addition of stores of 200.
So we will we expect the impact on sales a bit distributed across the.
The second half of this year, especially Q4, and then also Q1 and Q2 next year.
The doors are closing or we stopped supplying at the beginning of next year, but of course.
The reorders from those stores, whether they're already pretty significant.
Visible and towards the end of this year.
In General I think we can you can look.
From the wholesale growth, usually 60% is coming from new doors, and 40% is coming from existing doors.
Relatively consistent and.
We're constantly looking at.
What is our optimal environment in which we can reach our consumers in the best possible way. This is Harper broking and with our partners. We have been working with our E comm engine our own stores.
And right now we feel very comfort comfortable with where we are.
We wish to partner landscape, including adhesives is closures and we're not foreseeing any significant impact in for example, 24, how does this really an effort that we're doing now and we're very happy with.
If our auto partners and how we are able to tap into the consumers.
Great. Thanks very much.
And this is the end of our question and answer session and also concludes today's conference call. Thank you for your participation you may now disconnect.
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Yeah.
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Thanks.
Yes.