Q3 2023 Allbirds Inc Earnings Call
Okay.
Good afternoon, everyone and welcome to the all birds third quarter 2023 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a Q&A session at which time instructions will follow this conference call is being recorded and may not be reproduced.
In whole or in part without written permission from the company now I'll turn it over to Christine Greenie from the Blue shirt group. Please go ahead.
Good afternoon, everyone and thank you for joining us with me on the call today are Joe equal injure CEO.
And adding that she'll chief financial officer before we start I'd like to remind you that we will make certain statements today that are forward looking within the meaning of the federal securities laws.
Including statements.
Our financial outlook, including cash flow and adjusted EBITDA expectations.
Q4 guidance targets.
Impact and duration of external headwinds simplification initiatives strict.
Strategic transformation plan and related planned efforts go to market strategy plans to transition to a distributor model in certain international markets.
Anticipated distributor model arrangements expected profitability cost savings target gross margin estimates.
Product plans and expectations.
Third party partnership strategy marketing strategy and other matters referenced in our earnings release issued today.
These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.
Materially.
Please also note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise any statements to reflect changes that occur after this call.
Please refer to our SEC filings, including our quarterly report on Form 10-Q for the quarter ended June 30th 2023.
A more detailed description of the risk factors that may affect our results.
Also during this call we will discuss non-GAAP financial measures that adjusts our GAAP results to eliminate the impact of certain items. These non-GAAP items should be used in addition to and not as a substitute for any GAAP results.
You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures to the extent reasonably available in today's earnings release now I'll turn the call over to Joe to begin the formal remarks.
Thanks, Christine good afternoon, everyone and welcome.
We delivered Q3 results in line with the expectations, we provided in August as well as another quarter of solid progress under our strategic transformation plan.
<unk> is executing well across the board, which we believe is setting up albert's to achieve sustainable and profitable growth and in doing so create durable shareholder value.
During the third quarter, we achieved another set of material proof points that are driving the business forward and positioning the company to hit our 2025 targets, but positive full year, adjusted EBITDA and positive cash flow.
First we made significant progress I guess cleaning up inventory.
Ending the quarter with just under $80 million of inventory on the balance sheet that represents a sequential decline of 14% from Q2 and a year over year decline of 37%.
This is notable given the cautious consumer spending environment. It makes us confident that we can effectively clean up the marketplace to enable us to focus on our fresh and innovative new products as we enter 2024.
Plans to drive resonates with the consumer through a better product mix and key upgrades to our core franchises.
Another critical metric, we use to measure our progress during this transformational year as cash we closed Q3 with $132 million, reflecting minimal operating cash use of $5 million in the quarter, which was required to meet our seasonal working capital needs leading up to holiday.
Next we captured savings from our strategic sourcing efforts keeping us on track to achieve the upper end of our cost of goods sold savings targets of approximately 20% to $25 million versus 2022 on a volume neutral basis.
We also continue to drive towards our 15% to $20 million G&A savings target with notable progress made by our international transitions.
Yes.
While working down inventory, we also kept things fresh for our consumer with the launch of our updated Courier and the Vista Eraser HD models are really the final chapter of product that we had developed pre transformation.
<unk> decided to keep these in the line, but by them tight and for only a limited timeframe to drive freshness in a period, where we knew our primary intent would be to work down inventory.
The we'll run or two that dropped last week is more aligned with the focus for the next generation of product from all of our it this.
This fresh take on our original icon features new innovations and upgrades, including improved comfort are more durable upper and a streamlined aesthetic.
And the launch is supported by a marketing campaign aimed at connecting with our core consumer is in a far more resonant way.
We're thrilled with the step change this represents and it validates the strategy we have for product given that after just a few days of selling that will run or two is our highest sales velocity launch of the year.
We look forward to bringing more innovation like this to the market in 2024.
As we approach another holiday selling season with consumers exercising caution around spending we are prepared for an early and highly promotional holiday period industry wide and prioritize getting inventory to a healthy position in early 2024 with an elevated pace of unit sales through 2023, we intend to remain competitive.
Price with reduced marketing spend.
In fact, Q4 will mark our fourth consecutive quarter of moderated marketing spend which is expected to be down more than 15% for the full year and 23 versus 2022.
Outside of Mark key selling events, such as Black Friday, cyber Monday promotions and markdowns generally focus on noncore styles and those we expect to sunset or a place with next generation versions.
This approach has helped us maintain full price brand integrity, and we expect to increase full price selling when we bring new and more innovative product offerings to market next year.
Indeed, we're looking forward to a number of activities in 2024 across product and marketing that we expect will generate momentum with our consumer.
Zooming out and taking a look at the shape of the transformation 2023 has been a year of diagnosing and fixing most notably our cost structure inventory position and go to market model by region. While also recalibrating, our assortment to drive more residents with our core consumer in 'twenty four and beyond.
Having done this heavy lifting we believe will enter 2024 with a strengthened foundation and a right size cost structure.
This will enable us to allocate resources and effort towards driving growth from our most profitable products and through our most profitable channels and regions.
That's up to improve our bottom line year over year.
The actions, we're taking now give us confidence that even in a challenging environment. We can achieve our goal of positive adjusted EBITDA and positive cash flow in 2025.
Now I'll walk through some updates on the four pillars of our transformation plan.
Starting with product and brand in.
In Q4, we are continuing to flow and updated and refreshed core assortment as I noted earlier, the we'll run or to a fresh take on the biggest icon in the history of our brand just launched last week and we will soon introduce a capsule for her that reflects our new gender differentiated approach and shows how our refocused consumer insights work.
Translates into great product.
In 2024, we're looking forward to launching more innovative assortment with an emphasis on our core franchises along with key upgrades to those silhouettes like we did with the world run or two.
As we embarked on our transformation efforts, we knew that product development cycles would limit our ability to drive substantial newness in 2023. So while we are eager to bring these upgrades to the line. In Q4. This is really just a taste of what's to come in 2024 and beyond.
As I touched on earlier throughout this year, we have deliberately pulled back on marketing spend and remain focused on being as efficient as possible, while we transition and clean up our inventory.
New Influencer program is beginning to build with a material portion of our marketing mix and we are pleased with the early outcomes to drive awareness and consideration, particularly with women.
We believe our upcoming holiday campaign will resonate well and we expect the newness color assortment and promotional cadence to deliver results within the guided range for the quarter, enabling us to finish our transitional year with both marketing spend and inventory reducing at a greater rate than sales.
Turning to our second pillar optimizing U S distribution and store profitability.
When we developed our transformation plan. This pillar was focused on optimizing our U S stores and slowing the pace of openings. We have completed all of the 2023 store openings under the previously committed leases and have no further openings planned lease.
<unk> widened the aperture to optimize our U S distribution more broadly with a continuing focus on improving store profitability.
Q3 in store traffic remained challenging for the retail industry broadly and we experienced this as well.
Given the consumer headwinds affecting the landscape. We expect this to persist in Q4 and have reflected that in our guidance.
Our work in stores across merchandising and marketing staff training and labor scheduling are beginning to show improvements in store operations, but there is still work to do here.
In the digital ecosystem as we seek to optimize our U S distribution, we will be launching on a leading digital marketplace in the coming weeks. We expect this platform to drive an incremental profitable revenue streams, and we will share additional details at launch.
Looking at wholesale this remains a key channel for our future and one that provides us with the opportunity to profitably raise brand awareness, while also providing a unique view into what our consumers truly crave.
Informed by these insights we are collaborating closely with our partners to ensure that we're appropriately represented until we have an assortment that we believe will best resonate with consumers and we expect lower sales from this channel in the second half of this year and into the first half of 2024.
We intend to utilize a pull versus a push strategy focusing on sell through to ensure we're showing up in the right way before expanding door count as.
As we bring on new Assortments to market through 2024, we anticipate re accelerating growth in this channel in the second half and are speaking with new potential partners to selectively broaden the number of accounts.
Now onto our third pillar transitioning our direct go to market strategy towards a distributor model in international markets.
This is the most complex activity within our transformation plan and we believe has the potential to move the needle on profitability quickly.
We're incredibly pleased with the progress we've made on this front and expect to have additional news soon.
During the third quarter, we finalized the previously announced agreements with third party distributors in Canada, and South Korea, and those regions are now transitioned including personnel stores and inventory.
Additionally, we recently signed LOI for two additional important regions with distributors in both Japan, and Australia and New Zealand.
We are thrilled to be partnering with high quality organizations that have extensive brand building and distribution capabilities in their respective regions.
The transitions are expected to occur by mid year 2024.
Three quarters into this strategy, we're pleased to have four regions with clear transition pathways towards a profitable and scalable structure.
We anticipate selectively open out opening up distribution in new regions beginning in the second half of 2024 to further capitalize on this distribution model, which similar to wholesale requires no capital investment from us.
We expect that this opportunity will not only deliver additional profit to us, but also drive volume expansion to support additional manufacturing cost savings through SKU productivity at.
At the same time, we believe the distributor model will drive increased brand awareness internationally and provide greater access to both new and existing customers.
As a reminder, initially the move from direct model to a distributor model will result in a decline in revenue for the impacted regions, but we expect strong flow through to the bottom line, making this higher quality revenue.
Andy will provide more color around the economic model shortly.
Moving to our fourth and final pillar, improving overall gross margins and managing operating expenses.
We are firmly on track to achieve our stated goal is to capture 20% to $25 million of Cogs savings and $15 million to $20 million of SG&A savings by 2025 as compared to our run rate at the end of 2000 to 2022.
We continue to ramp up shipments from our new manufacturer in Vietnam During Q3, and expect the transition to fully take shape by year end.
P&L benefits beginning in 2024.
We now expect that our work in this area will allow us to deliver the high end of the expected cost of goods savings range by 2025.
Additionally, as we continue to work through inventory and bring new products to market and reduce the depth of promotions. We believe this will allow us to move the consumer back towards a full price model improving gross margin.
Entering the final stretch of the year, we are pleased with the progress under each of the four pillars and we remain confident that our transformation plan is positioning us to improve capital efficiency and drive profitability.
We're fortunate to have an experienced team to SMB.
<unk> the highly disciplined operational approach this enabled us to take decisive action in 2023 to lay the groundwork for improved year over year profitability in 2024 with a path to our first expected calendar year of positive adjusted EBITDA and cash flow in 2025.
We have significantly improved our inventory position heading into the important holiday selling season.
We have excitement building for 2024 product launches, we are well on our way to transforming our international business and we have institutionalized rigor across the organization.
Our path is clear and after approaching the end of year. One of this transformation, we are acting with discipline to drive long term growth via products regions and channels that have the greatest potential to deliver elevated levels of profit.
We appreciate the support of our analysts and shareholders and believe the progress we are making will compound into strong shareholder returns in the future.
Now over to Andy to walk through specifics on the quarter and commentary on the shape of the remainder of this year.
Thanks Joey.
We're pleased to report another quarter of operating and financial progress Q.
Q3 results came in within our expected range on the top line.
Exceeded expectations, we provided on the bottom line and for the third quarter in a row, we delivered solid improvement across our key metrics inventory cash and cost.
Third quarter revenue of $57 $2 million declined 21% versus a year ago and largely reflects our strategic actions to clear through legacy inventory as well as planned declines in wholesale revenue to ensure we are set up to drive high sell through with our fresh and updated assortment in 2024.
Gross margin came in at 43, 5%.
That compares to 44, 8% a year ago, and primarily reflects higher promotional activity as we continue to work down noncore styles and colors, leading up to our new product introductions planned for 2024.
Before we get to next year, we are focused on ensuring that we engage and delight. The consumer this holiday season, which means increased promotional activity versus a year ago.
Simply put as you've heard from Joey we intend to be competitive on price.
As a result, we anticipate that fourth quarter gross margin will be below 40%.
Turning now to expenses, we brought down SG&A, excluding depreciation and stock based compensation by $1 $8 million or 5% versus a year ago.
This came in better than we expected and can be traced to our careful cost control most notably the ongoing tightening of discretionary expenses.
As we talked about last quarter, we continue to expect that Q4, SG&A dollars will be up both on a sequential and a year over year basis.
Marketing expenses reflect our plan decline of $2 5 million or 19, 6% compared to Q3 2022.
Looking at Q4 marketing spend we continue to expect a modest uptick from Q3 levels as we support the well run or two launch and the holiday sales push.
In Q3, we incurred $1 $2 million and restructuring charges associated with our strategic transformation and.
An increase of <unk> 5 million compared to Q3 2022.
Taken together, our topline results and careful cost control drove a better than expected adjusted EBITDA loss of $19 million in Q3.
Moving to the balance sheet and cash flow I am pleased to report another quarter of solid progress against two of our key benchmarks.
First I'll talk about inventory, we ended the quarter inventory levels down 37% versus a year ago and down 32% from yearend.
The improvement reflects more selective and disciplined buyers and our commitment to achieve a healthier composition and clean position by year end.
Indeed, we expect to end the year with inventory levels of approximately $70 million, reflecting a year over year decline of approximately 40%.
Now, let's look at cash at the close of Q3, we had $132 million of cash on the balance sheet.
Our aggressive actions to bring down inventory levels and reduced operating expenses allowed us to narrow our operating cash used versus a year ago.
During the third quarter operating cash use was just $5 million compared to $18 million a year ago.
We also delivered significant improvement for the year to date period with operating cash used narrow into $25 million versus $82 million.
We anticipate that operating cash usage will increase slightly in Q4 compared to Q3 level.
Before turning to guidance I'd like to share some data points to help you understand the financial implications from our transition to third party distributors in international markets.
Starting at a high level prior to the transition to a distributor model all group had a presence in the following six international regions, representing approximately 26% of total revenue for the nine month period, ending September 30, yet.
Australia, and New Zealand combined.
Canada.
China.
Europe, including both the EU and U K.
Japan.
And South Korea.
During the third quarter, we completed the previously announced transition of our Canadian and South Korean businesses to local distributors in those countries.
This encompasses all of our its e-commerce bricks and mortar and wholesale businesses across both regions.
The transaction was recorded in Q3 as a nonoperating loss on the sale of business and totaling $2 $3 million and is excluded from adjusted EBITDA in the quarter.
Next after quarter end, we signed LOI for the distributors and two additional regions, Japan, and Australia New Zealand.
Those transitions are expected to be completed midyear in 2024 as noted in our press release today.
In New Zealand agreement is contingent upon the employee consultation process, which is standard in that country.
For added perspective, Canada, and South Korea combined represented approximately 4% of total company revenue year to date in 2023.
And Japan, and Australia, New Zealand combined represented approximately 8% of total company revenues year to date in 2023.
So very good progress on this strategic pillar three quarters into the transformation with four region and approximately 12% of the overall business and transition to a simpler model that we believe is better positioned to grow.
Now I will turn to some additional data points that underscore the benefits of the distributor model.
First we will be selling products directly to the distributors at a lower price versus our prior direct sale to the consumer at full retail.
While this will result in initial impact to revenue, we anticipate that the expertise and local knowledge of our distributors will help drive brand visibility and growth over the coming years.
Next under this model of selling directly to distributors gross margin will naturally be below both DTC and typical wholesale margins.
Because this model requires lower operating expense, we anticipate strong flow through from gross profit to the bottom line.
As each region transitions, we expect them to be immediately profitable.
Turning now to Q4 guidance, our expectations assume a few key factors.
One we are prepared for a cautious consumer in a highly promotional environment. This holiday season.
We know the consumer will be looking for great products at great price points, and we have a targeted promotional plan to ensure we're competitive throughout the quarter.
It's important second it's important to note that this promotional stance will impact both sales and gross profit.
Third the outlook, we're providing today also reflects a full quarter of revenue under the new pricing model for Canada, and South Korea.
This results in a $2 $5 million negative impact to revenue in Q4.
For the fourth quarter revenue is expected to be in the range of $60 million to $72 million representing year over year comparisons of negative 22% to negative 15%.
Adjusted EBITDA loss is expected to be in the range of negative $26 million to negative $23 million.
Given the progress, we're making within all of our strategic pillars, especially the international piece of the transformation, we expect to return to full year guidance in 2024 on our call in March.
We also anticipate that we'll be positioned to provide increased granularity around top line expectation and the related impact of the international transition to help you most effectively model the business going forward.
Now I'll ask the operator to open the call for Q&A.
Thank you.
At this time, we will conduct the question and answer session.
As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Please standby, while we compile the Q&A roster.
Our first question comes from Bob <unk>.
<unk> with Guggenheim Your line is now open.
Hi, good afternoon.
I guess just two quick questions for me. The first one is just on the on the inventory side.
One more in terms of the quality of the inventory the newness of the inventory.
And then I think the second piece, just love to hear a little bit more about the product changes and women's and will grow what you guys are planning as you think through.
Some of the newness heading into next year. Thanks.
Hi, Bob Thanks for your question I mentioned, Cory it's definitely a part of.
Most excited about in terms of our progress I really appreciate you are asking about it.
We're absolutely pleased with the progress that we've made cleaning the marketplace and moving our inventory composition toward core products. That's really been the effort. This year in 2023 to make sure that we end the year with the right composition.
Year to date inventories are down 32% and we expect to end the year down about 40% year over year.
With that we do by doing all the heavy lifting already this year, we expect to exit the year well positioned to bring in fresh and updated product for 2024, and I know that Joe is excited to talk a little bit about that.
Yeah. Thanks, Bob.
So I think the.
Yes.
We will run or two is probably a great example to start with.
I would say at the high level.
We're looking at moving to a franchise offense and this is kind of what we've been speaking about all year.
The core franchises or have an opportunity if we embellish them correctly and merchandise effectively to really create a lot of brand equity around the silhouette and drive a lot of growth with our existing consumer.
And I think will resonate just much more strongly with the with a broader base given that some of these icons are what we became famous for so first and foremost it's a focus on core.
And I think we'll run our two being the highest sales volume launch that we've done this year and even some months prior than that is a really good example of taking that icon and slightly updating it to make sure we deliver amazing quality durability.
And communicate the value of what we're doing with the brand personality that we did through some of the marketing work just.
It's going to work better and that's what we saw in this.
And this launch being the best one so far so that's one of the core insights and I think in that will be trimming out some of the lower productivity skus as we focus the effort on our core franchises and then as you alluded to in your question one of the other key insights that we found is that within our target.
<unk> our target consumer.
Do you have higher awareness with women than we do with men and the consideration on the other hand is flipped there where our consideration is a bit lower as women and so what we do understand is that the brand is beloved bye bye.
By both genders, but in particular there is there is stronger residents currently as you track from have you heard about us to are you going to buy the product with men. So that's the work that we're doing in terms of sharpening up the product offering.
Both on a color and trend perspective, which youll see a little bit of in this quarter, but also in terms of extending some of those core franchises to be a little bit more feminine to resonate more strongly with her so that's.
Overall, the two key aspects I'd draw you to I'd say materially going to start in Q2 next year and continue throughout the rest of 2024 and of course beyond that too.
Thank you good luck.
Thank you.
One moment for our next question.
Yeah.
Our next question comes from Alex <unk> with Morgan Stanley. Your line is now open.
Great. Thanks for taking my question Hi, Joey any good to speak to you again I have one quick high level question and then a more specific a guidance question for Andy maybe Joey the first one for you.
Our strategic transformation plan has been underway for a few quarters now where do you think you've made the most progress or are getting resolved and then maybe on the other end what has kind of proven more challenging than you thought when you started this journey than for any of you have a wide revenue guidance range for the fourth quarter.
Can you just walk us through what that accounts for on the low end and the high end. Thanks a lot.
Hey, Alex Thanks.
Okay. So, let's let's do it in order I would say.
Zoom back and just put it in perspective on how I would characterize what we've done in the last few quarters here as we entered this transformation.
To help answer that question. So I would say at the top level. This year is one where we have fundamentally alter the cost structure in such a way that we can be profitable at a much smaller top line level and we've talked a lot about the work that we've done on cost of goods and some of the G&A streamlining in the <unk>.
Go to market and international regions that has not been a trivial amount of work and execution has been excellent on those elements and so well you don't get to see that benefit in the P&L necessarily as we burn through the inventory.
With that we currently have on the balance sheet.
That is that is probably the most important element of what we've accomplished this year along the way we started the year with I would call. It an unhealthy level of inventory in an unhealthy mix of inventory and we have gotten ourselves on track to really fix that.
So we expect to end the year and enter 2024, and a really healthy position as it comes to inventory and that's going to allow us to then inflect our gross margin in such a way that we can take the benefits of all of those cost savings that we've done throughout the year and also when the customer and the consumer back to a full price sell.
<unk> model by Lightning, the markdown intensity and driving new innovation from the Recalibrated product assortment that we that we introduced in the marketplace at full price.
And so that's that gives us a great focus in 2024 to drive fairly significant gross margin expansion, particularly in the direct channel.
And so thats that I would say just like zooming out is the big thing.
And I'd say in the thing we're probably most proud of that we can we can sit here and hammer hammer down today.
Of course, when we think about the look forward.
It's product that we haven't we haven't yet brought all of this fresh new innovative product that we have on the roadmap to market.
So the proof points are aren't quite there yet, but I will say we're off to a really good start with the with what we've shown for the world run or two and I think it's a really good testament to the type of changes and updates we're going to be bringing to market and the results speak for themselves as far as we are seeing internally and sharing with you today, so pretty encouraged by that albeit that's the one that just <unk>.
The longest lead time, given their product development lifecycle for making footwear. So thats. The one that we're still we're still plugging away at and really cant give you as many proof points as we can on the cost side.
When we're looking at our topline for Q4 and the guidance given specifically the range.
And it primarily reflects the macro driven pressures that's.
Thats affecting traffic and sales industry wide.
Adding on top of that of course is the continuation of our transformation work at which of course is progressing extremely well and setting us up to engage with the consumer and fresh new and innovative ways in 2024.
Combined with that is of course that we are planning for a highly promotional environment. This holiday season.
We know that consumer is going to be looking for a great product at a great price point and we want to ensure that we're going to be competitive throughout the quarter.
Great. Thanks, a lot good luck guys.
Thanks, Alex Thank you one moment for our next question.
Our next question comes from Janine Stichter with BTG. Your line is now open.
Hi, everyone. Good afternoon, I wanted to dig in a little bit more into as you think about the optimal channels of distribution for the brand first off on the wholesale side. It sounds like Youre, considering I re ramping that business in the back half of next year. So I'd just be curious to understand the types of potential new partners that you are looking at.
What do you think that brings you both from a new customer acquisition and brand awareness standpoint, and then on the retail business I just would love your thoughts on if you're exploring any potential store closures and just what the profitability of the fleet looks like right now if theres any major variances in performance that should be called out. Thank you.
Yeah.
Okay. Thanks, Jeanine I will tackle the first part of that and maybe on the retail side Andy can jump in.
I mean, when you asked the question about optimal I think it's a good way to frame it.
What we've always envisioned is that we want to be a very.
<unk> effective omnichannel retailer and where our brand first we want to delight consumers, where they want to shop the best.
One of the examples that we gave today is is an impending launch on a digital ecosystem from a digital marketplace in the U S.
Just as an example of making sure that when we have product that we can segment to the right channels that we're going to deliver that and make sure we recapture opportunity to meet consumers, where they want to be met.
What does that look like if you fast forward way down the line I think it's a little hard to say exact percentages, but theres a very material portion of our business that should be in wholesale.
And we think about that as a very profitable and brand building exercise for us where it lifts awareness.
Frankly, you can trade some are the gross margin between direct and wholesale for some of that marketing that you otherwise would spend to drive awareness. So that's very important for us in.
Anticipate building that as we noted, particularly starting in two H 'twenty four.
We expect that to grow much more significantly.
And in terms of the different channels.
There is a whole sequence that we'd like to we'd like to undergo in order to build an effective marketplace working with some smaller accounts that drive.
Perhaps leading indicator of trend for consumers onto other premium segments of the wholesale marketplace like we have in department stores.
Outdoor and sporting goods and I think in some of those channels. There's other noncompetitive accounts that were talking to and are pretty excited about the opportunity to work with so we will give you more detail as we as we get into 2024 and give you a picture for what we expect for the year, but that's generally how we're thinking about it.
Really helpful. Thank you.
Thank you.
When it comes to retail.
Have paused opening new retail doors. This year, we are done with all the doors are going down.
We don't currently have any closures planned at this time.
But we will continually analyze and evaluate our retail fleet performance and options.
As Joey mentioned, our focus to drive growth by focusing on our most profitable product channel two reasons.
And for retail that profitability comes from us executing on the initiatives that we've already start to put in place.
And also let's go back to why do we have stores to begin with we do have a retail footprint because we operate in an ecosystem for our consumer and these stores are the best expression of our brand to that consumer and helps us to grow awareness.
And as well as we combine with our distribution around wholesale we expect at the stores, we will enjoy more traffic and offer more compelling assortment as consumers start to know and understand and love our brand.
Perfect. Thanks, so much.
Please standby for your next question.
Our next question comes from Cristina Fernandez with Tag Your line is now open.
Thank you for taking my questions I wanted to ask first on international It seems like the business took a step down in the quarter not it might just be the function of the year over year comparison, but wanted to see if you can talk about what demand trends are you seeing.
Some of your major international markets and what is the level of promotional activity Youre seeing there.
Similar to the U S or is it better.
Great. Thank you for your question.
And to clarify within Q3, because we transitioned both Canada and South Korea in the month of September the transition of those from the direct model to the distributor was worth $750000 on the topline said another way if we continue to operate them our sales for the quarter would've been higher by 750.
<unk> thousand.
When we look at the overall trends across the region.
We are seeing that Asia is performing year over year in Q3 slightly better than some of the other geographies.
This is largely tied to.
Worldwide macro events.
And it really differs by geography, but I would say that our.
China.
In Japan, we're definitely some of our better performing overall international geographies.
And then promotional intensity is reasonably consistent across regions are still a little plus or minus here or there, but generally pretty consistent.
And I would say that as we have some of these conversations with distributor partners. What we're finding is that the brand is positioned.
Incredibly strongly and these partners are pretty eager to invest capital behind the brand and.
I'm quite optimistic and excited about what they can bring to the business.
Okay.
Okay and then the second question I had is related to some of the pricing actions you took on the on the coal franchise since the original modules for train Brunner and we'll run it we'll run or why reception do you see to those price decreases and is it is there.
Our strategy to keep dose in the lineup will use some said those styles at one or two in treatment or two.
Get them get further along.
Yes. Thanks for the question just in general on pricing, what we're working towards sometime in 2024 is going to be some some very clear and distinct price tiers ranging for the bulk of the business between 98 and $1 38 per pair.
The footwear business and sharpening those price points is really something we'd like to do driven from the insights that we've seen in the data that we have in terms of where we drive the most volume from our business, particularly well positioned in that active life territory.
<unk> not.
Not promoting heavily technical running oriented care that might push you above that 140 threshold.
So that's that's where we expect to sit.
And I would say that the most important element of those pricing changes was that it is in the lead up to the launch of a well run or two.
We wanted to make sure they were space between those two models.
And and.
Segment them similar thing is going to we'll do when we introduce new capsules for the true runner and that tree run or two.
Orientation, so same kind of thinking and add those new the new generations.
The business, we would expect that at some point, we would sunset the tradition of the original models, albeit in some cases, we might not do it immediately.
Okay.
One moment for our next question.
Okay.
Our next question comes from Mark All tracker with Baird. Your line is now open.
Good afternoon, and thanks for taking my question.
First off maybe just a modeling question for Andy with respect to the Q4 revenue guidance.
You gave us the breakdown.
What you expect for U S versus international I know there were some comments in the prepared remarks on the distributor changes, but if you could maybe simplify it for us a little bit that'd be helpful.
Yeah.
Yes and to be clear are you looking for year over year growth.
Correct.
Yep.
We anticipate that both the U S and our international business for the ones that we continue to operate directly will be roughly in line with each other so no major differentiation between the two growth rates.
When we look at the impact from the exit of Canada, and Korea in terms of a direct model.
That is worth three points on the top line. So our guidance of down 22% down 15 within there is three points from moving Canada, and South Korea from the direct model to the distributor model, but in terms of the overall trend both the U S International are moving in the same direction.
That's really helpful. Thank you and then switching gears was hoping you could give us some additional context on what you're planning from a promotional standpoint over holiday I guess, you've done a great job cleaning up inventory at least it looks that way and the balance sheet.
These promotions meant it's still clean up some older product or is this more about staying top of mind. During this transition period and I guess <unk>.
Do you worry that the promotional plans, Mike curb the ability to return to full price selling as the new product starts to roll in in 2024. Thank you.
Yes, it's a.
Good question, Mark So I think.
You Shouldnt see anything too while from us over the promotional cadence here I think we're trying to line up what we're seeing in the market is that people are starting to promote pretty early.
Maybe even earlier than what we saw last year from.
When the start of this cadence comes in industry wide and we found if youre if youre not competitive in that moment then.
Leaving opportunity on the table and that's really our objective to get to a really healthy place by the start of next year, we still have a little bit of work to do.
Any guidance.
You all to trying to end the year around 40% down year over year in terms of inventory on the balance sheet, so still a little bit of work to do there.
And and that includes a pretty big event as you well know black Friday, cyber Monday and around that we will do some other select discounting and that will be to trend.
Tale of any remaining styles colors that we don't expect to support in the future.
And maybe over some of the big events.
Offering.
Broader assortment that includes some of our core styles.
So I do think the way we've handled this this year has allowed us to.
Maintain that full price brand integrity predominantly.
Our promotional opportunities for consumers have been around styles that we no longer intend to support and particularly on the color way basis, even in styles that we support their colors that moved really slow we don't expect to bring back and so that's a helpful aspect to how we manage the promotional cadence.
I feel like we've been fairly surgical despite the fact that we've had to increase the depth of promotion.
As well as to some degree the frequency and as we get into next year, that's going to be a helpful Foundation for us to win people back the approach that we're taking is essentially based on two factors. One is that we will have a much better assortment and new innovation coming to market that is generally the best way to get a consumer.
Back to full price and then secondarily, we left some room this year by going fairly deep on our markdowns to work through the inventory that we can lighten the discount intensity and so we may have the same.
Frequency, but the depths will be much shallower and thats going to give us an opportunity to build some brand momentum as well as in.
And flat on gross margin in a fairly material way when you compound that with the cost savings we got from manufacturing changes.
That's really helpful. Thank you and best of luck.
Thanks Mark.
One moment for our next question.
Our next question comes from Tom <unk> with Wedbush Securities. Your line is now open.
Oh, Hey, everybody. Thanks for taking my question.
Obviously, there's been a big pullback in marketing this year.
Yeah.
Transmission product assortment.
Should we think about the need to be in.
Mark.
I guess.
24 and beyond.
The new products that you're developing plays.
Using marketing to.
Right.
Right.
Thanks, Tom.
Sure.
So when we have the kind of fresh product assortment coming in particularly if we're using promotion less.
Less as a lever price is less of a lever we are going to want to spend on marketing and invest behind strength.
What we want to do is focus that on the core franchises. So that we continue to bill.
Build a lot of equity around those core models and that's the work we're embarking on.
That is that is one element that we'll look at in 2024 and beyond.
I would say that.
Another key factor for you to consider is the model still.
Over the coming years will be intended to drive leverage on our marketing as a percent of sales and a lot of large part of that is about the channel mix in the business. So as we shift to international.
From direct distributors.
A much more significant leverage because we don't support those markets with marketing dollars anymore and similarly on the wholesale side just has a much smaller.
Marketing spend as a percent of the overall sales. So that's one aspect of driving leverage in the long term.
And then finally, I'll, just say that our brand.
He has tremendous amounts of affinity with our core consumer and people people do really loved the brand we've seen we've seen that in all the work we do consistently with consumers.
Mirrored by the NPS scores, we collect and the fact that we've we've found consistently that people have a very high degree of desire to come back and consider buying again from us so given that opportunity given that it creates this opportunity where.
We do have opportunities to work with either people or brands that we can partner with in the future and some of those opportunities.
It's hard to sometimes predict how well they come off but some of them can be really catalytic and.
And given that we have such a differentiated offering to the marketplace and a differentiated message we get to go in the door with some pretty compelling opportunities and rest assured that we are working on those very regularly.
Uh huh.
Yeah.
One moment our next question.
Yes.
Our final question comes from Krista Zuber with TD Cowen Your line is now open.
Hi, Thanks for taking our question. This is Chris on for John Kernan.
Two questions first just a modeling question on the distributor economics, just a clarification on the transition impact to revenues I think you're guiding to I think it's two and a half million dollars impact to revenues in Q4 for Canada, and South Korea should that be the run rate we use for the next few quarters until we anniversary.
The transition and should we expect the Australia, and New Zealand and Japan revenue impact to be roughly double than that since they are fair representation of revenue is somewhat higher and I have one follow up thanks.
Yeah.
Great. Thank you for the question, we really appreciate it.
The impact for Canada, and Korea in Q4.
Is very much related to that being the first full quarter that they are on the distributor model. So no we would not expect that to be the overall runway going forward.
We do as we get into 2024 plan on giving additional color and guidance for the full year.
Related to how this is going to overall impact to the business.
When we think about sort of the way that we're going to sell into these distributors pricing will vary based on the exact quantity and mix, but directionally a good way to think about the revenue per unit is is it we're going to sell in.
With a gross margin that's naturally below both DTC and typical wholesale margin.
And we do anticipate very strong flow through to the bottom line based on the low operating expenses in this model and therefore, we expect to generate contribution margins north of 20% with this new international model.
Okay, great. Thanks, and then just sort of one philosophical question answered the margin profile long term.
Would love to get your thoughts on how you see the long term gross margin and adjusted EBITDA margin potential within the construct of the execution of this transformation plan. Thank you.
Yes.
We're not going to want to go into too many long term details when we're in the throes of this I can tell you we still.
We still target our gross margin in our direct business in the U S of targeting 60% gross margin and a lot of the work we've done so far is tracking towards that.
So that's an important element there and you can kind of see gross margin.
Naturally transition across the channels, albeit at different levels.
But the cost savings that we're generating this year certainly applicable cross channel.
That's the.
That's the most I would probably say at this point and.
We'll think about how to get back to you all in terms of what we expect for next year, what we expect for 2025 and give you a longer term picture as we get into 2024 and beyond.
Great. Thanks best of luck.
This concludes the question and answer session I would now like to turn it back to management.
Thanks, everyone just close with a few comments.
Our team is laser focused on profitability and driving high quality sales, even if it does mean sacrificing growth at times.
And while we do that we do intend to seek growth opportunities across products and channels that drive elevated levels of profit.
And the incremental progress, we're making is building on an already strong brand foundation and we expect it to compound into strong shareholder returns in the future.
Thanks for your continued interest in all birds.
We moved through quarter after quarter through this transformation due to the great work, we're doing and we look forward to wrapping up the year with you and looking out to 'twenty four and a few months. Thanks.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
[music].
Hum.
[music].
Okay.
Mhm.
Okay.
[music].
Hum.
Yes.
Yes.
Yeah.
[music].
Okay.
Okay.
Yes.
[music].
[music].
[music].