Q3 2023 On Holding AG Earnings Call
Hello, and welcome to the on Holdings AG Q3, 2023 results 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'd like to ask a question. During this time simply press star one on your telephone keypad, if you'd like to withdraw your question again press Star one well now turn the conference over to Jared Peter Head of Investor Relations. Please go ahead.
Good afternoon, good morning, and thank you for joining bought 2023 third quarter earnings conference call and webcast.
With me today on the call our executive co Chairman and co founder tester capacity CFO and co CEO Martin Hoffman.
And co CEO of horsepower.
Before we begin I would like to remind everyone that today's call will contain forward looking statements within the meaning of the federal securities laws.
These forward looking statements reflect our current expectations and beliefs Obi.
Certain risks and uncertainties that could cause actual results to differ materially.
Please refer to our 20-F filed with the SEC on March 21st for a detailed discussion of such risks and uncertainties.
We will further reference certain non <unk> financial measures such as adjusted EBITDA and adjusted EBITDA margin.
These measures are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IRS.
Please refer to today's release for a reconciliation to the most comparable measures.
We will begin with Casper, followed by Martin leading through today's prepared remarks, after which we look forward to opening the call for a Q&A session.
With that I'm very happy to turn over the call to Kasper.
Is that a great pleasure to be here today with us to discuss the results of our thriving business and continues to have a very strong momentum in.
In Q3, the outstanding demand for our brands resulted in another record topline quarter with over 480 million Swiss francs net sales.
This represents 47% growth year over year, or even 58% on a constant currency basis.
Many of you joined US six weeks ago, Cobre Investor day in Zurich, and with tremendous enjoyed sharing more about <unk> unique culture.
The <unk> pipeline and brand vision with you.
We aim to be the most premium global sportswear brand rooted in innovation design and sustainability.
Allow me to share how we have made progress towards this goal in the third quarter.
The on brand is in very high demand and is further gained in popularity and desirability youre.
We're seeing great success, I connecting our celebrity athletes to product innovation.
Then shelton storms to the semi finals at the USO for instance be amplified this skyrocketing popularity through the on brand campaign Dream on.
As announced we are making strategic shifts in our marketing spending to further build global awareness for all of them.
The headline dream on Helen of Barry could also be seen on Billboards across New York City in the recent weeks and three months you did with her dominated win at the marathon, making Helen the first woman to be in Boston and New York in the same season in 34 years.
Cannot emphasize enough how important successes like this one are for our brand and for our ambition to become the number one running brand.
Performance is at the very core of beyond brand and our superior products allow us to command premium prices.
More importantly performance is also a passion across the team.
Last month, our Cofounded Olivier spent the good week in Boulder to support our local teams during Helen's final preparations for New York and the testing of New racing technologies for your upcoming Olympics with the honestly at this club and let US share another anecdote with you that illustrates our culture.
10, OFC athletes travel to New York from Boulder to Portland.
Among them World Class athlete Jarrett news when September one to 15 on the beaches and the Diamond League meeting in Zurich.
You may not be used to hearing these kind of stories in an earnings call, but we feel that how we achieve our results is just as important as the results themselves.
As shared during Investor day, one as a very strong product innovation pipeline in recent months, we were able to deliver a number of highly successful product launch let me name a few.
The cloud Eclipse is catering to runners who are looking for a maximum cushioning experience.
It is built on our newest patented cushioning platform called flex space, which consumers have already adopted so quickly on the call Sir.
And cloud could face isn't just for running shoes ons computer optimized outsole technology has been adapted for ultimate all day comfort as well.
I'm of course talking about the all new cloud tilt, which we prelaunch and a hugely successful coloration with leaving.
Retailing at $490 the model filled out almost entirely within a few days and generated significant traction across our social platforms.
We are excited to see how Florida cloud field will go when it becomes more widely available to consumers in February next year.
Our design in collaboration with GW I'm missing it lately is a testament to the premium positioning of the brand and in particular to ons apparel range, which will again be featured in the collaboration with database in the coming months.
Speaking of apparel, we've seen exciting launches in the past weeks have been very presence around the globe with our campaign run together.
Another key innovation milestone in apparel was the pace collection, which launches today.
It is made from capture carbon emissions and we are proud to bring ons clean cloud technology to apparel for the first time.
The strong presence on the tennis Court has also increased demand for <unk> apparel range and we look forward to introducing specific tenants performance of lifestyle apparel in spring.
Congratulations to you guys. We had thanks for taking the Wpa final style and returning to world number one.
Q3 also marks a milestone in the continuing shift of how we reach our customers.
With 55% growth on <unk> DTC business has significantly outpaced wholesale business, which grew 43%.
We are very encouraged by the strong performance across both E com and one retail.
Which saw store openings in Miami, and London battlefields in recent weeks.
In line with our three year plan, we expect DTC to continue to grow faster than wholesale which will remain an important channel for our business I'm happy to say that as a brand. We have found the wholesale partners that we want to work with and going forward. We will focus on deepening these partnerships and joint to delivering an intimate consumer experience.
Across categories through these channels.
As we enter the holiday season, and prepare for more product launches to surprised that our fans in 2024.
We are grateful to shared at the owned brand has never been stronger than today.
And they have never had more reasons to be optimistic about the future trajectory of our business.
This is a pivotal moment in our story as we are successfully transforming from a challenger in the running category. Two are running leader from a running brands to a multi sport brand from a wholesale led to a true omni channel brand and from a footwear brand to a sportswear brand.
With this I will now hand over to Martin for the detailed discussion of our business and the financials.
But not without correcting my earlier mistake of not naming him ammonia <unk> feeds of our top athletes.
Congratulations on your finished in the New York Medicine market.
Thank you Kasper and Hello to everyone on the call I.
I still have goosebumps, but thinking back to the energy from the Amazing route along the course in New York City.
Most extremely proud and inspired to see so many athletes of on site to run partners and of course too.
This is walt ignite the human spirit from <unk> is all about.
Which is also why we attempt to incorporate the movement session and all into actions with our teams our partners and guests also at our first Investor day.
It was so exciting to welcome many of you to <unk> a few weeks ago.
After having completed our IPO process, mostly in the virtual setting it was great to allow you to experience firsthand.
Similarly, it was very important to us to introduce you to our product team.
We are so grateful for the passionate and talented individuals that are building our <unk> with us.
We hope you learned a lot about who we are about the incredible pipeline of products and innovations that are yet to come and most importantly that you failed the unique culture at all.
For those of you who are not able to join us on the day the materials as well as a replay of the presentation are available on our Investor Relations website.
In addition, before diving into our Q3 results. Let me quickly summarize the key elements of our strategy that we outlined at the Investor day.
We aim to be the most premium global sportswear brand.
Our first pillar includes three strong existing building blocks that we will elevate the person.
We will continue to put a lot of emphasis on running and aim to significantly increase our market share on runoffs parties.
We intend to benefit from the huge potential around the clock by increasing brand awareness among our core communities.
And innovation to continue to be at our core.
As we focus rental fleet on driving on performance credibility and sustainability impact.
Our second pillar is focused on investment areas that we would grow aggressively to expand our reach and depth over the coming years.
This starts with our ongoing commitment to elevate the power of our premium multichannel distribution to reach our fence globally.
We will significantly increase our own retail presence and evolve the channel to contribute meaningfully.
All business.
Finally, we will continue to expand our footprint in China at a rapid pace accelerating market share gains in one of <unk> highest gross markets.
The third pillar consists of new areas to establish our brand with meaningful communities aligns with our mission to be the most premium Clovis sponsored print.
We aim to tap into the training community and light up the tennis courts to significantly increase our addressable market.
And we will further focus on the step machine on a true sportswear brand known for full head to toe looks across all of our existing and new verticals.
With these initiatives, we intend to continue our path of combining high growth with attractive and increasing profitability.
This means that by 2026, we aim to double our net sales to at least $3 5 billion.
Brian Our cross profit margin above 60%.
And increased our adjusted EBITDA margin to more than 18%.
None of this will be easy, but we are extremely excited for what is to come.
That's the first step on this journey and as Kasper mentioned, we are very pleased to say that we started off strong with another outstanding quarter.
With this let me reflect on our Q3 results and our full year outlook and how we few boats and delight of our long term strategy.
This net adds reaching 485 million Swiss francs, Q3 has been our seventh consecutive record quarter.
With 59, 9%, we achieved our highest gross profit margin since our IPO.
$81 3 million adjusted EBITDA marks another record in the history of the company exceeding any asset quarterly adjusted EBITDA by almost 30%.
$58 7 million net profit in the quarter, it's more than in the whole year of 2022.
And we generated significant positive cash flow.
It's fair to say that Q3 has been our most successful quarter in history across all measures.
The demand for the <unk> brand remains very strong our net sales grew by 46, 5% versus the prior year periods.
Due to the ongoing strengths of our reporting currency Swiss francs, the equivalent growth rate at constant currency rates would have been close to 58%.
Or in absolute terms, our reported Q3 top line number would have been over 518 million Swiss francs at last year's rates.
For the second consecutive quarter due to see outpaced wholesale with a growth of $54, 6%, resulting in a <unk> share of 34, 3% compared to 32, 5% in Q3 last year.
DTC net sales for the quarter reached $164 7 million Swiss francs.
As shared in some detail during our Investor day, we are very excited to see how Brent moments such as been success at the U S. Open the wins of our OFC athletes or on a smaller scale in Rochester recent visit to some of our stores in China are visibly leading to higher brand awareness.
And ultimately to increase traffic both on and offline.
As mentioned before on retail will play a larger role in our D to C strategy going forward.
Continued success of our stores is further increasing our confidence in the strategic direction.
With 26 retail stores operating by the end of Q3, our net sales contribution from owned retail more than tripled year over year.
As Kasper mentioned over the recent weeks, we successfully opened two additional retail stores, one in Miami and the other in London spinoffs yields.
We're absolutely thrilled to see the Weizmann communities that I guess, a ring around our retail locations.
In London, we had about 100 dedicated run us joining us for the first so that they run out of the store even.
Even in the face of the typical rainy London Mercer.
The high apparel share of 23% in Miami and 19% in London is another validation of the importance of our own retail channel in establishing on as a head to toe sports footprint.
We continue to win many new fans and to tap into new communities through our wholesale channel.
Also grew by 42, 6% in Q3, reaching $315 7 million Swiss francs.
Due to the disruption in our warehouses in the U S. In Q3 last year and the resulting shift of volume to Q4. This growth rate is slightly elevated.
In addition, we did see some early holiday shipments sent out to our partners in the later part of Q3 this year pulling forward some volumes from Q4.
Independently from these one off effects, we have seen very strong sell out numbers at our wholesale partners and we are very pleased with the level and composition of our in channel inventory.
Given these one offs looking at Tulsa growths for the combined second half of the year will be a more meaningful measure to establish a baseline for onsite growth going forward.
With that let me move on to the development by region.
We have achieved strong growth rates globally.
Net sales in the Americas grew by 65% in Q3, reaching $294 9 million Swiss francs. We are pleased to see that the strong sell in for the fall Winter 2003 season coincides with continued sellout strengths at our partners across the board.
Of course, our U S business was the most impacted by the operational challenges in the prior year periods again slightly helping to reported growth rates in Q3 this year.
Net sales in the EMEA region reached 144 million Swiss francs in Q3 growing by 19, 9% year over year.
Similar to the previous quarters, we have seen a significantly stronger growth in our D to C channel compared to wholesale.
The UK remains one of the key growth engines and to reach.
The growth is very much performance first which is very important for us.
The validation comes from our recent shoe count along key running.
Where we have seen a strong increase of our market share on runoffs feet.
APAC reached net sales of $41 6 million into third quarter corresponding to a growth rate of 71, 5%.
On a relative basis APAC was the most impacted by the FX shifts versus the prior year.
On a constant currency basis gross into reach and would have been over 95%.
Overall growth was broadly distributed across all sub regions and channels with callouts for the very strong momentum in Japan as well as the continued strength of our own retail stores in China.
In particular during the Golden week holiday period.
Turning to the performance byproducts net sets from shoes grew by 47% to $456 9 million Swiss francs.
We continue to be encouraged by the strong performance of newer car running blockbusters like the cloud surfer and monster and a new generation of cloud X clearly showcasing the adoption on it shifts across the globe.
The positive brand momentum around the U S. Open was also demonstrated in the outstanding performance of the Russia firmly Mr.
Miscible and an elevated growth rate of the franchise in our DTC channels versus the prior year.
Apparel grew by 31, 8% in the quarter, reaching $20 1 million Swiss francs.
As many of you saw a few weeks ago in series, we're very excited about the upcoming collections and innovations that will allow us to further emphasize differentiation premium ness of our products.
We're also looking forward to the next generation of our retail store concepts and the role they play in showcasing our full head to toe offerings.
The first store to follow this new concept will be our Paris store due to open later this week.
Finally, while we slightly scaled back on marketing in Q4 last year, we are running a bigger brand campaign in Q4 this year centered around our new apparel collections.
This includes many highly visible Brent moments in key cities around the globe.
One of the highlights our activation at Tottenham Court Road underground station in London with steady traffic of over 200000 people.
For the first time since our IPO, we reached across profit margin close to our midterm target of 60% plus.
Gross profit reached $287 7 million Swiss francs in the quarter, reflecting across profit margin of 59, 9% and an increase of 280 basis points year over year.
This margin increase was driven by continued high shelf full price sales as a result of the premium position of the brand the.
The increase DTC share and lower freight rates.
In addition, we had recorded the last piece of extraordinary airfreight usage in Q3 last year.
SG&A expenses, excluding share based compensation in Q3 were 46, 4% of net sales up from 44, 1% in the same period last year.
In particular distribution expenses remained elevated due to the investment into warehouse automation, which are expected to deliver meaningful scale gains into future.
As a result of the strong net sales our premium gross profit margin and consciously managed expenses adjusted EBITDA reached $81 3 million Swiss strengths in the quarter by.
By far the highest in the history of the company and.
And up from $56 3 million Swiss francs in the previous year.
Our adjusted EBITDA margin reached 16, 9%.
Slightly down from the 17, 2% into same period last year.
Moving to the balance sheet.
Capital expenditures were $8 2 million Swiss francs in Q3 dollars 23, a one 7% of net sales <unk>.
Significantly reduced from the $6 and 7% of net sales in the same quarter in 2022.
In the prior year the elevated expenses had largely resulted from nonrecurring investments into office build outs and Zurich and importantly.
Managing our inventory remains a key focus area.
In Q3 inventory improved to $424 5 million sperm.
Further reduction in comparison to the end of Q1 and Q2, while growing our net sales at the same time.
In line with our previous communication, we expect to maintain the current inventory level by year end.
The reduction in inventories also largely drove the overall reduction in networking capital in Q3.
Contributing to a significant positive cash flow of over 19 million in the quarter.
As a result, net cash increased from $337 1 million at the end of Q2 to $432 million at the end of Q3.
As I've mentioned this positive cash flow marks another historical record fall.
With that I would like to move onto our last outlook for the full year of 2023.
We are experiencing another incredible year with three record quarters and year to date growth rate of over 57%, which was driven by winning millions of new fans like connecting even closer with our existing customers.
This is most directly reflected in the strong growth of our D to C channel by 57, 4%.
The growth was further amplified by the very successful expansion of our wholesale network and important product door rollout with some of the largest global key accounts over the past 12 to 18 months.
As Kessel mentioned in many markets. We have found the wholesale partners that we want to breakfast.
While we will continue to expand our presence in existing stores and carefully expand into new locations.
New doors will drive less incremental growth compared to previous quarters.
In our strategic plan, we outlined our belief in the power of our multichannel distribution and the huge potential of combining all channels and harmony.
And ultimately in our belief to at least double our net sales in the next three years, while at the same time driving a stronger growth in our DTC channels compared to our wholesale channels.
Yes.
We look forward to the final one into half months of the year and are heading into the holiday season with confidence in the strengths of the on trend and in the strength of our products.
This kicked off strongly during the double 11 holiday periods in China.
Despite again following our no discount policy, we saw an overall year over year volume growth of over 70% during the holiday periods.
Indicating the continued brand momentum on in China.
Based on the start of the fourth quarter, our strong Q3 results and our visibility till the end of the year.
We are again, increasing our net says ambition for the full year from $1 76 billion to $1 79 billion Swiss francs imply.
Implying full year growth rate of over 46%.
Homing in on the fourth quarter, our net sales outlook implies a Q4 growth rates versus the prior year of 21% on a reported currency basis.
In line with our strategy outlined above we expect to see a more controlled growth of our wholesale sales while converting to high demand for the brand and continued strong <unk> sales growth.
As we've outlined in our previous quarterly calls our Q4 growth rate will be further influenced by three transitional sectors.
First in 2022, we have seen a delay of some order deliveries from Q3 into Q4 due to the disruption of our largest U S warehouse as a result of the system update at our retail partners.
Second in EMEA focused on the tax season, we will be strategically closing around 200 doors at the beginning of the year, which will have an initial impact on our reorders in the fourth quarter.
As mentioned on our last call that these stores are mainly comfort stores with a low share of performance business and accounted for around 10% of our EMEA wholesale net sales.
Lost.
Primarily due to the strength of the U S dollar.
But also other impactful currencies compared to the Swiss franc in 2022.
We expect the NASA quarter versus strong negative currency impact on our corporate growth rate.
21% anticipated growth rate on a reported basis in Q4 is equivalent to around 30% on a constant currency basis.
As a result of our long term strategy combined with these temporary effects and timing, we expect our reported <unk> growth in Q4 23 in the area of high single digits.
On the other hand, we expect continued strong Q4 growth rates in DTC closer to what we have seen over the past couple of quarters in that channel.
Moving to margins our year to date gross profit margin of 59, 3% reflects the premium position of oil.
Based on the strong performance in Q3, and the planned strength of our DTC business in Q4 <unk>.
We expect to significantly overachieve, our previous full year outlook of 58, 5%.
<unk> increased our full year expectation to at least 59%.
If the environment continues to be favorable we may even see the full year number <unk> beyond this threshold.
The higher net sales in the stronger gross profit margin will allow us to drive additional investments into building brand awareness in Q4, while maintaining our full year guidance of 15% adjusted EBITDA margin.
We continue to think long term and we expect these investments to have a positive effect on future sales and ultimately on our ability to reach our long term goals.
Doubling our net sales by 2026, while increasing our gross profit margin above 60% and our adjusted EBITDA margin to what an 18%.
And so we publicly announced our strategic plan at the Investor Day, we have spend a lot of time internally to share and discuss our ambition of fall.
Just last week, we hosted our global summit, we introduced our fall winter 24 product collection as well as the 2026 strategic roadmap to our full internal team.
And we are already experiencing the energy and the enthusiasm across all parts of the organization to build the future.
And finally, we remain intensely focused on bringing this exceptional year across the finish line.
We are already looking forward to the many highlights that we expect to achieve on the next steps of our churn.
And with that.
<unk>, Mark and I would like to open up the session to your questions.
Operator, we are ready to begin the Q&A session.
Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.
Your first question comes from the line of Jim Duffy of Stifel. Your line is open.
Thank you.
Hello, everyone.
I have a few questions I wanted to start on the fourth quarter guide. The first relates to the state of channel inventories previously you had spoken to the North American market, having three to four months of inventory in the channel does that figure still hold or was the earlier cell and kind of the pull forward of some of the shipments.
Are you now above those levels.
Hi, Jim This is mark speaking. Thank you for your question. So that still holds and so we're very strategically managing debt, especially with all of our key accounts, we have very good visibility and India and this is also what you see reflected in our gross margin. So we were able to drive.
A lot of that full price sell through and so we're very happy with the inventory position a lot of fresh inventory that is that is available at other retailers.
Great and then the fourth quarter, a very important e-commerce quarter can you speak to what Youre seeing in e-commerce trends, including customer acquisition mix new versus retained customers.
I know you had some.
Efforts in social Commerce, what Youre seeing in terms of the contribution from social commerce that'd be helpful. Thanks.
Yeah agendas as its Martin.
So let me maybe sharpen my insights into into the holiday season, So we had to.
Good start into October we clearly see that we are winning market share.
In the current environment.
Last year was an exceptionally strong holiday season, so significantly above votes of what we had seen in previous years.
We see less enthusiasm this year and does this also what we hear and see from our from our retail partners.
But at the same time, we continued to grow strongly and we maintain our full price position with share to success in China. During the double 11 season with 70% growth in an environment where.
Where the market was flat.
And.
What we see at the moment is fully embedded in our guidance of $1 79 billion.
And we believe that this number reflects the current situation quite correctly.
Great.
Martin can you maybe give some comments on customer acquisition historically, you've spoken from about mix of new versus retained customers and your <unk>.
Our DTC business.
Yeah, So the China continues to win new customers.
And two to increase market share. So we focus on both acquiring new customers by increasing the brand awareness, but then also.
Working with the customers that we have.
We have significantly increased the number of members. So so where we have more data and more insights into into our fence as well. The holiday season is usually a season, where you see the.
The benefits and the fruits from from the <unk> throughout the year coming coming to life.
Usually not the moment, where you acquire a lot of new customers.
But as said we are we are very happy with.
How our eco mentioned is performing and how it's supporting our strategy too.
Outperform our wholesale gross with our DTC growth.
Your next question comes from the line of Jonathan Komp of Baird. Your line is open.
Yeah, Hi, good afternoon. Thank you.
I wanted to just follow up when you look at the fourth quarter.
Revenue guidance I know you called out some of the transitory factors could you maybe just discuss.
As you look forward beyond the fourth quarter, you know if any of those factors will continue outside of the wholesale pullback in Europe.
And if you think about next year relative to your long term mid 20% growth target.
Do you have any insight today that would.
Support confidence you know above or below that and could you Kasper maybe talk about.
The pace of some of the upcoming introductions that you're most excited about.
Yeah, so maybe.
Let me start with the last one so we are.
So very excited for 424, I think we have a fire break of new.
The new products coming a lot of innovation.
Big Brent moments plant.
Like the Olympics.
So we have outlined our cross aspiration for the for the next three years and doubling our net sales.
And as we have done in the past, we will provide an updated guidance on <unk>.
24 in our earnings call in March.
For the full year results.
Looking at wholesale and DTC and some of the temporary effects that we are now seeing in Q4.
The store closures from EMEA. This is something that will be visible.
And we spoke about this that'd be the dose to 100 doors to account for around 10% of the EMEA.
EMEA wholesale sales.
And so this volume will be.
We'll be going out of the of the market in over the next 12 months.
And then we outlined in our in our Investor day, our belief in the power of our multichannel distribution and that we see all channels growing that.
But we want to accelerate our expansion in retail all Vista gold to be the most premium performance sportswear brand.
So we expect that all channels are growing but by.
Controlling the wholesale growth and simply having less incremental new doors.
We expect that the increasing brand awareness that we clearly see is converting stronger into the DTC channel and as a result.
We expect stronger growth in DTC and wholesale and we expect this to be already quite visible in our Q Q4 numbers and ultimately being a source for delivering premium financial profile.
The mid and long term.
And John Casper here for your product related question.
There's many things to be excited about this you know you've been here for the Investor day.
Just look at as the recent launches in this quarter.
The cloud Tech face platform. So the new eclipse the that'd be just launched our Max cushioning product has done extremely well.
In early sell through and it's becoming one of the favorite running shoes for many so kind of having a second option. There next to the monster for those that are looking for a very cushion drive.
It's important.
And on that same Catholic faith platform, the tilt, which we firm prelaunch now with the lube a collaboration that has exceeded all our expectations.
We're very very excited about the pending launch in Q1 and 24 until it becomes very widely available to consumers.
Hopefully, adding another strong solid next two cloud Novo Roger and cloud.
You know the.
This wouldn't be complete if we wouldn't talk about apparel in there we've had a really strong launch from winter running.
The bra category gets a lot of traction for US and then as we move into spring next year as you know we've announced that we will enter the training category.
And apparel will be to drive it there so a lot of exciting things coming in Q1 and of course also training shoe with the cloud pulse.
That's very helpful. Thank you both fed and Martin just one follow up if I could just given your positive commentary about gross margin could you maybe just highlight the factors that are weighing on adjusted EBITDA margin in the fourth quarter and of those factors should we be expecting any pressures continuing into.
2024.
Thanks again.
Yes, so we.
We established at our Investor day, our aspiration to have a gross profit margin of 60% plus.
We are we are very proud to have achieved that number at.
At least very close in Q3 of this 59, 9%.
We continue to see and expect a favorable environment on the on the freight side.
As Mark mentioned, we have fun and healthy inventory level not only at our retailers, but we have further improved our inventory levels at that at our warehouses.
So we expect continued high share of full price sales.
We don't see a lot of currency impact at the moment on cross profit margins.
So not a lot of other one off effects.
So yes.
I said it in the comments we are we are positive about our gross profit margin and also going into next year and the increasing D to C share.
But as far as the support it.
And then on the on the EBITDA.
So in Q4.
We are.
As I mentioned in the past calls our focus is on.
Achieving the 15% adjusted EBITDA for the full year now the strong Q3, but also the strong margin that we expect in Q4 allows us to.
To double down on some of the brand awareness campaigns that we had planned for.
For Q4 and there they are running are they mentioned some some of those on the call.
Again this is all for for future sales growth, it's not immediately convert to converting into Q4.
But as a result, we expect to see some higher marketing expenses.
Again, just to clear perspective of achieving 15% adjusted EBIT.
Your next question comes from the line of Jay sole of UBS. Your line is open.
Great. Thank you so much Martin two questions when you touched on your prepared remarks.
Sell out in the wholesale channel, it's been quite strong would be possible to share some numbers around that and then secondly, I think on inventory you said that you expect inventory levels to be the same in Q4 as Q3 did you mean that in terms of the growth rate will be the same in Q4 versus Q3 or do you mean in terms of dollars. Thanks, so much.
And so let me start with Mark Cliff with wholesale and just some some anecdotal evidence and.
Hey, we know we know the sell through numbers and in Dallas. The Unfortunately, we cannot share all the numbers here. Some anecdotes. We are the number three brand at 300 feet, which is very very important to us as you know and so we so we continued to gain share from other brands. They're also in a in a market like Germany and we are.
Our debt the number three brand at the running expert which is basically.
Kind of the fleet feet or so.
Summary of some of the doors.
That are very much.
<unk> kind of focused in on running in run specialty cell. So we see that that strategy is really paying out to be very.
Very very strong sell through in in in DSG.
Really exceeding our expectations. We had you know we had to weeks or months February BARDA.
Number one brand in running in DSG by far so I think where we're seeing very strong numbers and this is house, how we will continue to kind of manage the expansion going forward, making sure that we are in a strong position in the doors that we're in and then and then expand from a position of strength.
And then to your to your inventory question.
That comment referred to the absolute number.
So we are very happy with the inventory levels that we have and.
We're proud about the work that the team is truly doing in the focus they're putting on this.
And where we're standing now is what we communicated in the past. So we are executing our planned it for the last six months, we have produced less than what we have sold.
And so we expect to maintain.
Plus minus that current inventory level towards yet while our sales.
Continued to grow and then also in the outlook.
We are maintaining freshness in our inventory.
Which will support our high share of full price sales in the future as just mentioned on the on the gross profit comment.
Terrific. Thanks, so much.
Your next question comes from the line of Alex Stratton of Morgan Stanley. Your line is open.
Perfect. Thanks, so much congrats on another great quarter guys. A quick one for me a number of wholesale peers have expressed more cautious front half order book outlook on their latest calls compared to three months ago or so so I'm. Just wondering how has the first half shaped up for you all relative to your expectations.
And relative to that high single digit level that you're expecting in the fourth quarter.
Thanks, a lot.
Okay. Thank you Alex and for the question. So we're very positive around the around 2024. So from when we spoke last time about it also from me you know when we shared our three year planning in the Investor Day, Nothing has changed we see absolutely no cancellations and <unk>.
So we have the right mix in the order book. So we can really double down on performance. We soon we see new silhouettes and for example, Casper spoke about the cloud tilt resonating really well in being adopted and especially I want to highlight that apparel.
Has seen a very very strong preorder. So so we're very confident in how spring summer 'twenty four is shaping up and Alex if I may add here.
The most premium brand for most of our partners and that means we're also the most profitable brand for them.
Obviously, they're there they're strategically invested in India on brand.
And if anything we expect that the.
Yes.
In a more difficult environment.
Brian will gain versus.
Versus our competitors.
Thanks, a lot good luck.
Your next question comes from the line of <unk> of BNP Paribas. Your line is open.
Hey, Thanks for taking my questions.
I wanted to follow up on gross margin.
To get to your guidance of at least 59% for the year implies four key gross margin.
Flat year over year.
Given that it should be a bigger DTC quarter relative to <unk>, just wondering what some of the offsets are that would prevent <unk> to gross margin from being higher than the gross margin.
Yes, as I mentioned.
The situation continues to be favorable.
As we headed into in the moment in.
In the last weeks and months then we.
We clearly see an upside potential to that.
At the same time like in the past, we wanted to be prudent on our guidance.
But at the moment, we clearly see.
The brand is strong and that's reflected in our strong March.
Alright. Thanks.
I have two quick follow up.
Since the last earnings call you called out in your prepared remarks on athletes and add a lot of hydro power wins could you talk about the impact from these victories have on brand.
Brand awareness and brand momentum in.
What what affects you are starting to see.
And maybe share with us.
Thanks, a lot for your question.
Look at least wins are very important if you look at Helen winning a New York now after Boston that mainly at the credibility in the running space. This is not necessarily a prime TV moment.
Our brand awareness with go through the roof, that's more the case with tennis and what we've seen definitely in the numbers.
When Ben Shelton reached the USO semis and played against Chaco, which he wants to talk of the town and a lot of people were introduced for the first time.
On mainstream TV and social media.
Two to the owned brand.
And this small is probably comparable.
Two <unk>, one when we announced the Roadshow partnership.
All of a sudden the mainstream name was associated with on and just drove brand awareness.
Athletes.
And especially blinking athletes to brand campaign to product will be a key cornerstone of our strategy going forward.
Thanks, so much congrats.
Your next question comes from the line of <unk> <unk> of Piper Sandler Your line is open.
Great. Thanks for taking my question and congrats on the Marathon Martin I was I was.
Watching I was just affected it but I was just really encouraging to see the numbers on vendors just compared to last year really.
Accelerated just can you give any color on segmentation within wholesale you know as you continue to roll out new product, which varies from something more technical like crowd equipped to more lifestyle like cloud and how you plan to really segment the product.
Yeah, you know we garner.
Can you kind of give you. An example, firsthand consumer segmentation at New York Marathon. So if I ran the marathon I would run in the cloud boom and Martin robust tissue you are uneven stratus so to say.
You see the segmentation is clearly working on their own runner seat in the marathon.
No I think we you know it's.
It's it's.
It's been very important for us that over the last two years, we were able to especially in the running space built franchises that are resonating extremely well and tier them very very clearly and I think we've spoken about that a lot of times. So we are starting with rich consumer and which started actually go into and then kind of you know on which product.
Are resonating with those consumers.
If we take a cloud boom that has been tiered very strongly around run specialty for example, if we take out strongest at the product that is only available in run specialty and on our D to C engine and Daniel have bigger franchises like the cloud monster or the cloud runner that tear down to two more two more accounts and we will continue that.
Strategy, so so expect us to bring.
Kind of to continue to build on running and running space around these franchises and then within the franchises have a certain tearing depending on on that you know the level of the product and I think while we can already share is that we will for example, and introduce a new product next spring that is called the monster high.
So it is an athlete version of the cloud Monster Soda car Monster High per will then be available mainly in D C and in run specialty and the club Monster is is available and broader channels like like ESPN does is how well will continue to execute on our strategy.
Great that makes sense and then just one more on the commentary on the second half wholesale growth is like the rate that we should think of going forward.
And I think that is kind of reported basis close to 25%.
On a reported basis or a constant currency basis, that's how we should think of wholesale growth going forward.
Some more on the.
On a constant currency basis.
But then considering the impacts that we mentioned earlier from the store closures and in Europe.
Okay makes sense. Thank you.
Your next question comes from the line of Cristina Fernandez of Telsey Advisory Group. Your line is open.
Hi, good morning.
Congratulations on the quarter following up on that question.
Can you update us on what the wholesale account.
Q any changes to where it will be at the end of the year.
And how should we think about wholesale door growth for next.
<unk> here.
In light of the Europe closure.
Perfect.
Mid teens rate.
I hope to meet with.
As seen in the first half of this year.
Thank you for the question. So by the end of this year will be roughly in roughly around 10000 doors globally.
In following 23, and we've basically added roughly $200 in the U S and in 50 doors in Asia Pacific and how we can think about this going forward, especially into 2024.
And that will most likely at around 8% to 10% of doors and towards the towards some kind of end of 2024 now what's important is.
That the structure of the doors.
Really differ depending on which markets, we're focusing on right. So we have pretty clear visibility in how we want to grow basically key accounts like ESG, and then footlocker and J D. At the same time, where we're entering markets like Korea, where you will see and doors being added, but but at a slower size per door.
Okay.
Then.
So I'm now.
On the product innovation pipeline, you've given a lot of detail around.
Some of the loan.
Next year should we think about the pace of launches being.
Pretty evenly spread through the year right, they're more weighted to the first half versus the second half.
Thanks for the question.
Yes, we're trying to spread them out across the year.
And of course, you won't have a good balance we have a very very strong innovation pipeline, but of course, we are.
Also don't want to bring too much to the market too quickly we want to make sure that people understand the franchises stay.
Get to know a product that they can re buy it and it doesn't change too much. So we tried to strike this balance so expect a pretty balanced innovation.
A number of innovation launches next year.
Your next question comes from the line of Tom Nicky.
Wedbush Your line is open.
Yeah.
Hi, everybody. Thanks for taking my question.
Follow up on Christine's question.
Yes.
Coca talked about going into some new wholesale doors in North America in early 2024, presumably they are talking about more.
Dick's foot locker JD locations.
Can you give us an update in February.
How many doors you are in for those.
For those retailers and how we should think about the pace of <unk>.
Entering more doors with with Dex foot locker and J D.
Yeah, very happy to do so now you need to be fast in writing it down. So in Q3, we had 200 foot locker doors in the U S and 110 in EMEA.
DST Weaver and by the end of Q3, and 170 doors J D 193 in the U S and 120 EMEA.
<unk> 181, REIT feet to 56 in Nordstrom 94 that basically all the doors that dose that was that those accounts have and so expect us basically to now.
Now over the next quarters.
At around 25 doors per quarter and with some of those accounts, especially footlocker that's meaningful number.
And I think if you if you look at J D. It's similar so.
That's roughly what you will see and that will bring you kind of by the end of the fall winter two 350 doors globally for foot mm $170 cellphone ESG and then two to 300.
38 doors for four J D globally, so you'll see their EBITDA would be the stronger officer.
Great that's very helpful and if I could just follow up there.
As you enter these retailers initially.
How have you seen.
I guess.
Except in the ramp up et cetera.
Has it been similar to what you've seen when you've opened the door.
Are you running channel.
Yeah, I think it's we have to distinguish to channel a bit. So DSG is really a channel sporting goods channel. So silver we had a lot of experience in the past as well if it taken account export check in Germany, and we entered with you know a shop in shops, we were entering with with a big focus in apparel as well and that.
The openings have all been Super Super strong Footlocker, and J D half was really speaking to a different consumer as well. So so it was a slightly new channel for US we were very prudent in how we entered and what we do with both of them is definitely creating a big focus around introducing the brand to their concern.
You must through marketing, but also really focusing underwrite silhouettes and when we take a product like the cloud Nova and that is doing extremely well in both channels and they've been absolutely crucial to building that product and when you look at J D. In Europe. For example, it's our strongest partner on the apparel side, so they're really really.
Helpful. In building some of our key franchises and we're very happy in how the introduction to have worked out.
Great. Thank you very much and best of luck this upcoming holiday season.
Your next question comes from the line of Michael Binetti of Evercore ISI. Your line is open.
Hey, guys. Thanks for taking my question and let me add my congrats on the marathon awesome awesome when for you guys.
I just want to follow up on one of the modeling questions earlier, how should we.
The gross margin being potentially conservative in the fourth quarter, you've had a couple of quarters now over 59 getting pretty close to 60 and you have a bigger.
Impact from D to C. In the fourth quarter can you just tell us where in the underlying business you assumed conservatism in the fourth quarter gross margin is there a channel or region in the quarter.
You guys were looking at that could disrupt that historical mix shift benefit you get from D to C being five or 600 basis point higher mix in fourth quarter this year versus last year.
Also on fourth quarter, I think direct to consumer implies like a low <unk> growth rate a little bit below.
A little bit below the third quarter, just any any reason you think that the sellers and thats something youre seeing currently or is it just conservatism as well.
And then I think.
But the bigger picture question I was wondering one of your biggest competitors is re approaching the wholesale channel over the next year Nike It pulled back a bit over the last two years and I think some of the indications that part of that push will happen in channels, where you guys are obviously very competitive.
And you speak to retailers in those channels do you have any any idea as they're thinking approaching changes to the plan a gram or to the shelf space matrix is one of the bigger brands is presumably going to be taking up some more space than they have in the past few years.
Okay.
Yes, So I think you I assume you mean, Helen first of congratulations to the marathon.
The.
444, our gross profit.
FX remains an uncertainty and clearly an area, depending especially on how some of the non U S dollar currencies developing.
So that's an area, where we remain certain level of conservatism.
No.
The final D to C share will depend.
In wholesale there are always timing topics us as well so.
We left a bit of room in there at the same time.
We.
We are full throttle when it comes to full price sales and doing the right things in the long term two to build a premium Brent.
Collected into strong margin.
And I'm happy to.
Your question on <unk>.
Maybe these are the brands that you have in mind rejoining run specialty look we've been in this space for a short 14 years, but over this time period.
These players have come and gone in the run specialty channel.
For sure I can speak about on and why this is important to us that this.
This channel build credibility, but it is also very stable channel in terms of like they're not any big shifts happening rapidly.
Four.
Our partnership enough extra just spent the last couple of weeks on the road visiting most of these important run specialty partners also too.
Introduced them to the updated on strategy that we shared at Investor day in and really it's a little bit of a love affair.
And we feel that they feel that lasted on has given them over the last decade.
They are definitely very loyal so we're not factoring that into our plan.
Understood.
Your next question comes from the line of Sam Poser of Williams trading your line is open.
Good morning, Thank you for taking my questions.
I have a few one can you tell can you give us some color.
On the wholesale versus DTC business.
Business in EMEA.
And especially in the UK, which you called out.
And then I have a few more.
Hi, Sam.
So we called it out on the on the call for for the last two quarters, we have seen.
Stronger growth in our DTC channel.
In the whole of EMEA.
Compared to our to our wholesale channel.
So it's also reflected in the door counts, so, but what we would see on the on a global level is already reflected.
To a certain extent and in the numbers in Europe, so less incremental door growth.
While at the same time, having a lot of measures in place to increase brand awareness into markets and thats converting into into our D to C channel.
We will see how over to store closures.
Our are capturing an increased an even more increased demand and in DTC.
So that's something to observe how the how the customers is reacting dare.
And then we clearly have markets, where all our channels are growing strongly like.
The U K.
With our very strong flagship store in London, but then also strong partnerships like like like J D.
And also our E com environment, but there it's important it's really performance first growth.
We shared it we are counting on run us.
Sure on Runoffs feet every half year and UK is clearly leading darrin in terms of growth that we are seeing a longer running routes.
Thank you and then.
Can you talk about one what you are.
What you view as your optimum inventory annual inventory turn and then secondly, given the given that you are doing significantly better it looks like on the gross margin growth story does that give you does that would you plan to reinvest that upside is.
<unk> SG&A and then I know you haven't guided next year.
But I mean are we looking I mean, youre going to grow SG&A this year.
Close to 50%.
How should we think about that.
Going into into 'twenty four.
Thanks.
So let me start with us versus SG&A.
We.
Our aspiration for the 44441 and three years is to achieve an adjusted EBITDA margin of 18% plus.
And Jeff and cross profit margin of 36, 60% plus.
So that impacts that we will see and expect to see economies of scale scale gains.
In our SG&A.
We spoke about our automation projects that we're doing on distribution side, which is expected to lower our distribution expenses, but then also scale gains across across the organization.
So.
We our view is that next year will be clearly the first year on the road towards that 18% plus and.
So we expect to to basically.
The higher gross profit margin to some.
To some extent flowing through into the.
Adjusted EBITDA.
Your next question comes from the line of John Kernan of TD Cowen Your line is open.
Excellent. Thanks for taking my question.
So that's a bit of a follow up but it looks like SG&A rates will still be up year over year in Q4 as you invest in growth you've talked about some of the investments in distribution. How do we think about the gross margin and SG&A rates beyond Q4, as DTC starts to take the lead in growth.
Okay.
So again, it's embedded in our in our 60 present plus.
The assumed to see share is embedded in there.
We mentioned it on the Investor day.
We also have other effects and mixed effects into in our margin and in the future.
So it's a geographical mix we have countries.
That's run at a lower margin loan countries that run at a higher margin.
Currently our apparel margin is still below our footwear margins.
So there's there are some effects that that also go against the higher D to C share and and as a result.
We established a target of 60% plus.
And for US that's driving an over proportionate bottom line growth.
Understood maybe just one follow up on China, I think you'll have 30 retail stores. There by year end, maybe talk to what Youre seeing on the ground in China with brand awareness and how youre scaling with that consumer.
Yeah. So.
I think we shared in March and shared in the script, how how double 11 event. We are we're seeing a really really good traffic in the stores.
Seeing very strong sell through in the stores I think this is really also reflected in our Q3 numbers. We're also super positive around APAC in general.
But I'll say, especially China, and Japan for Q4, and unfortunately, especially when you look at Japan, there's quite some currency effects that are going against it but if you really look at the number of products and how that grow families coming together, it's a it's extremely positive.
The focus now is in China is going to be to continue to scale.
Obviously, tmall and everything that we're doing on E comm to work with our social channels and how we reach at mini program. For example, it's working so profile, but then to continue to expand the store, but our number of stores, but mainly also on footprint. So we won't invest in bigger stores in China currently the traffic is almost.
Too high for the size of the store so we cant really capture all of that.
And so so as of 'twenty 'twenty four will definitely start focusing.
Around finding bigger locations in some key traffic carriers in general I think there is quite difficult.
Difficult environment in China, right now for many brands.
We don't see it end to end, we can you know we're gaining market share at full price, which is very very positive.
Your next question comes from the line of Anna and driver of Needham <unk> Company. Your line is open.
Great. Thank you so much for taking our questions and congrats on a nice momentum in the business.
We have a couple I just wanted to follow up on wholesale I think you mentioned looking at third quarter and fourth quarter. Together is a good proxy to think about growth going forward just given all the timing shifts and apologies if I missed this but what was the constant currency growth in wholesale in <unk>. It sounds like there should be improve.
<unk> from high single digits.
Next year, even with the door closures.
And then secondly, really great to hear about Balawi collab, working so well at a healthy price point can you talk about how you think about additional collateral that are right for the brand going forward and how do you think about price elasticity. There I know you've taken prices up on footwear in the last year here in the U S and in Europe.
I just curious if youre seeing any pushback.
Thanks, so much.
So on the on your first question on the FX impact.
And basically the FX impact was quite equally spread across our wholesale and DTC.
So you have about 11%.
Gross impact in wholesale and 12% gross impact indeed to see from from the FX in Q3.
So very similar to the overall number.
And then on the call apps.
Okay.
And we believe less more so we're aiming for four very high quality callouts, where theres really connect between the two brands and two designers like in this case kw Henderson and telephone or an hour and actually do spend time together working on the collection of this is not just about combining our social media following.
And by being very.
Selective.
We can support our premium positioning and the ones that we do do make like dilutive on will be more meaningful that labor has become quite a successful not just from a brand perspective, but also from a revenue perspective.
Okay.
Your next question comes from the line of Ashley Owens of Keybanc capital markets. Your line is open.
Okay. Thanks, so much.
Well it looks like we will start enrolling in London are sharply higher.
Sorry, that's working quite well.
Marco.
Parents shiny story.
A follow up.
Yeah. So so I mean, you're referring to the 24% and 19% apparel share that we're seeing and where I think we spoke about again at the Investor day, how we want to continue to grow apparel and own stores are a key element in there. They are very excited about.
The upcoming Paris launch so that will have firm.
It's a story and that Paris Saturday may opening up on the 17th of November and this is we feel really the first store or are you kind of see.
Or take it how we want to bring apparel to life in the future in the store so apparel they'll get way more space, we focused a lot on merchandising the right product, we're focusing a lot on creating categories for different and for a different communities that shop at the store wherever focusing a lot on branding and storytelling. So in the you know you shop apparel way more.
In a self service environment versus footwear, so you want to be.
Kind of you want to find elements of education as you're shopping in that environment.
And and some of these things are already happening in Miami, and London, and that's reflected in India Powershares.
And your last question comes from the line of Janine Stichter of BTG. Your line is open.
Yes. Thank you I just wanted to follow up on the apparel question sounds like it's working really well in DTC, it's actually and on retail as you now look to build apparel at wholesale.
Want to know more about how you are looking to work with your partners to translate that presentation and maybe any numbers you can put around the number of shop in shops again, just how are you going to market with a parallel Sam Thank you.
Yeah. So.
I think it's the exact same playbook right. So it's very important for building shop in shops, you pointed it out that takes a bit of that takes a bit of time. So we don't have them.
We can't have like.
All the wholesale partners.
Shop in shops executed in all of them within a couple of weeks. So we're focusing very much on really bringing the full collection to life then with all the things I've just mentioned and one key element I want to highlight is that we're also building a visual merchandising team out so that whenever you visit those stores that you experience on in our apparel collection and the prime.
Liam way and again, when we spoke about how we're looking at spring summer 'twenty for preorder. This preorder consumer confidence that not only the product test has evolved a lot, but also our capability to execute the apparel collection at wholesale and we.
We believe that kind of in the long in the long term.
Harold will have clearly above 10% shower and our share in our own D to C. So this speaks to retail our retail stores in our already showing now with some of that.
We flounder in Miami and so on that we're clearly tracking above that but also <unk> com should be able to execute versus that and if it take wholesale as a channel overall it will probably stay below 10%, but also because we have many many wholesale channels, where apparel well might not be a focus and we should take one specialty it's still very much focused around around footwear. So.
I'm, giving you a bit of long answer here, but we're excited about what we're seeing on apparel and we're very very positive that in the long run am apparel is going to be an amazing contributor to the growth of them.
Thank you and this concludes today's conference call you may now disconnect.
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