Q3 2024 On Holding AG Earnings Call
Ladies and gentlemen, thank you for standing by my name is Krista and I will be your conference operator today at this time I would like to welcome everyone to arm Holdings AG third quarter 'twenty 'twenty four results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during that time simply press star followed by the number one on your telephone keypad and if you'd like to withdraw that question I can press star one. Thank you I would now.
Speaker Change: I'd like to turn the conference over to Jarrett, Peter head of Investor Relations Jared you may begin.
Jarrett, Peter: Good afternoon, and good morning to our Investor community. Thank you for joining on 2024 third quarter earnings call and webcast.
Jarrett, Peter: With me today on the call are all executive co Chairman and co founder Kasper Eddy CFO and close CEO, Marc Hoffman and co CEO Marc Mauer.
Jarrett, Peter: Before we begin I will briefly 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, only and are subject to certain risks and uncertainties that could cause actual results to differ materially.
Jarrett, Peter: Please refer to our 20-F filed with the SEC on March 12.
Jarrett, Peter: Tailed discussion of such risks and uncertainties.
Jarrett, Peter: We will further reference certain non <unk> financial.
Jarrett, Peter: <unk> financial measures such as adjusted EBITDA adjusted EBITDA margin.
Jarrett, Peter: These measures are not intended to be considered in isolation or as a substitute for the financial information presented in accordance with Libre.
Jarrett, Peter: Please refer to today's release for reconciliation to the most comparable <unk> measures.
Jarrett, Peter: We will begin with Casper, followed by Martin leading through today's prepared remarks.
Jarrett, Peter: To which we're looking forward to opening the call for Q&A session.
Speaker Change: With that I am very happy to turn over the call to Kasper.
Kasper Eddy: Our barbell come from my side and thank you for joining us today I'm very excited to speak about this record quarter for on VF reached 636 million Swiss francs and that sales in Q3 growing by 33% on a constant currency basis.
Kasper Eddy: Very importantly, we also continued to deliver on our ambition to combine significant growth with ongoing profitability expansion.
Kasper Eddy: These strong results are supported by the incredible work that our team has done over the past months.
Kasper Eddy: Their efforts and dedication that first and foremost allows us to make significant progress on the strategic building blocks that we outlined a little more than a year ago, that's part of our dream on vision.
Kasper Eddy: Ultimately to position <unk> as the most premium global sportswear brand.
Kasper Eddy: A long runway of profitable a durable growth in the years to come.
Kasper Eddy: One of these core building blocks is centered around boosting global brand awareness amongst our core communities.
Kasper Eddy: Of course this included our presence at the Olympics and the inspiring stories, our athletes have shared with the world through their achievements or heartbreaking journey.
Kasper Eddy: Stories that have been amplified through traditional and social media surrounding this great debates.
Kasper Eddy: Reaching fans, both locally and globally.
Kasper Eddy: With these upper funnel investments, we're also reaching new communities.
Kasper Eddy: Our authentic long term partnerships like the ones with Cindy or FCA tweaks are reaching younger demographics, bringing in a new group of fans for connecting to answer a movement in a broader sense.
Kasper Eddy: We see this reflected in our quarterly proprietary brand survey in the U S awareness of the brand has doubled since last year now reaching close to 20%.
Kasper Eddy: And the city of Paris.
Kasper Eddy: Most of the Olympics, our aided brand awareness almost tripled year over year.
Kasper Eddy: All of this confirms our efforts are paying off but also that we have a lot more room to grow.
Kasper Eddy: At the same time, our running community remains by far our largest marking another big pillar in our strategic growth plan.
Kasper Eddy: We're thrilled to see how our presence at the Olympics and innovations like lights rate continued to increase our visibility and engagement with runners.
Kasper Eddy: Recently recognized as one of times 200, best inventions of 2024.
Kasper Eddy: On groundbreaking light spray technology convenience to turn heads.
Kasper Eddy: During medicine week in New York thousands of people stopped by hour unless pop up in Soho to see the spray process in action.
Kasper Eddy: Yes.
Kasper Eddy: Only a few lucky members were able to secure a pair of the hell out of the area proves cloud whom strike like spray.
Available for the first time in an ultra limited production drops.
Kasper Eddy: After her being in Boston and the broth in Paris earlier this year, Helen topped off Theyre one of a kind season was the second place in the New York City Marathon.
Speaker Change: We are delighted to see how our core running franchises continued to develop and grow.
Speaker Change: In particular, our strategic focus on building the cloud months or cloud surfer and cloud ran their families through clear product segmentation is paying off.
Speaker Change: With the all new cloud, Sir for Nex, and the cloud runner to proving to have immediate blockbuster potential.
Speaker Change: As you remember from Investor Day, our growth plan includes three additional sizable building blocks apparel owned retail and Asia.
Speaker Change: In recent quarters, you have heard a lot about our strategic vision for apparel retail. So today I would like to spend some more time on that third area.
Speaker Change: Incredible growth and momentum we are experiencing in our fastest growing region APAC led by both Japan and China.
Speaker Change: Both for Q3 and year to date, we have massively increased our APAC business and are ahead of our plan growing over 85% on a constant currency basis in the first nine months.
Speaker Change: The consistency of execution and exceptional momentum in the region are making it an increasingly meaningful part of our business in fact for the third quarter in a row patch has contributed over 10% total global net sales number.
Speaker Change: And still with a very small base of close to 35 minutes with strength and do you see.
The opportunities for growth are palpable.
Speaker Change: In China. This strong expansion is driven by own retail stores and E com.
Speaker Change: The vast majority of our new store openings. This years has been in China, and we continue to accelerate the rollout given the broad based success of our store formats, allowing us to dream bigger.
Speaker Change: So much so that we have decided to bring our proven and large global flagship for metrics to at least two premium locations in China next year.
Speaker Change: In China, we are further reaching a notably younger and mobile first consumer visible in the meaningful AECOM share from Livestream channel.
Speaker Change: During the recent double 11 shopping festival, we have continued to see incredibly strong online results, including our all time, China single day sales record during the first peak of the event.
Speaker Change: We achieved this despite remaining committed to a full price strategy and this very promotional environment, a testament to exceptional brand strength.
Speaker Change: However, no engagement on our various E comm channel can get anywhere close to the level of engagement with the brand that bring our partner Roger Federer can drill.
Speaker Change: During his visit to the Shanghai tenants masses in early October we invited a group of kids from the Wild Elephant tennis club to meet their idle in Shanghai.
Club is based in our rural Mountain region and allows children from ethnic minority groups with limited resources to chase their tenant screens, Russia.
Russia coach played it even got challenged by the kids on the court truly creating a moment they will never forget.
Speaker Change: The event captured unprecedented attention 40 on brand and some of the largest domestic media and spread across the globe from there.
Speaker Change: Our key markets, Japan, and China will continue to lead our growth, Germany, India region, we are rapidly increasing our scale in South Korea next year. It will be the first complete year that our own distribution it will be fully up and running in the country.
And we are incredibly excited about the opportunities that this brings.
Speaker Change: Finally, we're also planting seeds for the future and our merchant growth markets like Indonesia, and the Philippines.
Speaker Change: Looking forward, we are excited to continue to co create and pioneer run culture in the region.
Speaker Change: As the Sunset of the Olympic year, we are setting our sights towards Tokyo home of the World Atlantic's Championships in 2025.
Speaker Change: You can expect this to be a big global priority for all next year, including the opening of our second Tokyo store.
Speaker Change: And you can also expect the team to be ready once again, when the fastest runners hit the track in our fastest growing market.
Speaker Change: We hope you can feel it as well we are incredibly excited about the momentum in the region and the huge opportunity that it presents.
Speaker Change: <unk> journey of significantly scaling our presence and brand awareness has just begun.
Speaker Change: Overall, one year after announcing on strategic three year plan through 2026, we are happy to report that we are well on track on all core strategic building blocks, which in turn will be the key drivers for sustained growth in the coming years.
Speaker Change: With that I'm happy to hand over to Martin who will share more about the incredible energy that we have experienced in Europe and of course provide a detailed review of the quarter.
Speaker Change: Congrats on your New York Marathon finish Martin.
Thank you Kasper and welcome from my side, thus far.
Speaker Change: I wish I would have been able to accelerate my speed in the second half of the rates in the same way, we're able to accelerate our net sales growth in the third quarter of the year.
Speaker Change: Over the past weeks, our team has done an amazing job improving our operational execution.
Speaker Change: Which allowed us to capture a very strong brand momentum that we have built through so many incredible highlights turning to summer.
Speaker Change: As a result, we have achieved all time quarterly records across top line and profitability.
Speaker Change: As you know our culture and our team are at the core.
Speaker Change: We invest into our culture of innovation and excellence Mr goal to provide our customers with the best products rooted in performance design and sustainability.
Speaker Change: And with the best premium experience.
Speaker Change: A few innovation excellence as the two foundational pillars that fundamentally to guide the way we work.
Speaker Change: Innovation is at the heart of what we do.
Speaker Change: It fuels, our dreams and allows us to explore different paths and find new solutions.
Speaker Change: Breaking technologies like light spray are Great example of what the culture of innovation can achieve.
Speaker Change: Excellence, it's about how we bring our vision to life today and in the future.
Speaker Change: The consistent attention, we put into every detail and debate we approach our work to ensure we reach the goals we set out to achieve.
Speaker Change: The third quarter offers a great case study of how we strive for excellence in all aspects of our execution.
Speaker Change: It's no secret that we were not entirely happy with our level of operational excellence during Q2.
But in a very short timeframe. The dedicated work of our team has allowed us to do a much better shot at fulfilling the incredible demand for our products and to deliver our by far biggest quarter in history in Q3.
Speaker Change: We are convinced that we have the right team and culture in place to succeed in the areas that will define our long term success.
Speaker Change: Or are you just disruptive manufacturing processes, new product innovations premium print executions or supply chain and warehouse efficiency.
Speaker Change: It will all require the right mix between innovation and excellence and we are.
Speaker Change: We're excited for the growth journey ahead of us.
On this journey, we are focused on our mission to ignite the human spirit movement.
Our efforts are centered around the goal to lift at UK and enable movement.
Speaker Change: The marathon in New York August offers a particularly powerful reminder of the transformative impact of movement, but it also highlights the fact that access to sports and physical activity.
Speaker Change: Kevin.
Kevin: So right to run our social impact partnership program.
Kevin: The chance to meet with a number of partners in New York to understand how we can amplify the transformative inspiring work they are doing to breakdown carriers to movement.
Kevin: An example is our partner equity decided.
I could you decide and closely works with schools into promised gray broke cramps that encourage physical activity for both kids and adults.
Kevin: <unk> focuses on reducing health disparities and closing the gap between health and wealth and underserved communities.
Speaker Change: That's fair our senior leadership team recently spend a day getting to know another one of our right to run park.
Kevin: <unk>.
Kevin: With mission is to enable access to sport and movement in long term refugee camps.
The efforts and dedication of our partners very huge inspiration for myself and our entire team.
Speaker Change: Well, it's a huge privilege for us to partner with them. It comes with an obligation to think about how we can further elevate the impacted right to run can have in the future.
Speaker Change: And how we can promote the importance of movement and the access to it.
Speaker Change: With that.
Let's move on to the detailed financial review of the third quarter.
Q3 has been with quite some distance the strongest quarter in our history.
Speaker Change: We reached record net sales of $635 8 million Swiss francs in Q3.
Speaker Change: <unk> by 32, 3% on a reported basis and 33, 2% on a constant currency basis.
Speaker Change: In the early years of the brand we have the big Dream to reach the magic number of 1 million pairs of shoes sold on an annual basis.
Speaker Change: Before I hand, it reached at exploration in 2016.
Speaker Change: In Q3, we had to first single week in our history with more than 1 million pairs sold.
Is it a stretch to strong demand for the brand and even more of the operational ability to continue our strong growth into the future.
Q3 is another strong validation of the power of our premium position, our multichannel distribution our commitment to drive the growth both in terms of net sales and adjusted EBITDA.
Speaker Change: 66% gross profit margin and 18, 9% adjusted EBITDA margin at the highest since going public.
Speaker Change: So the eight 8% after a record net sales came from our DTC channel clearly exceeding our expectations.
Speaker Change: You can see net sales in Q3 grew by 49, 8% and even 57% on a constant currency basis, reaching $246 7 million Smith strengths in the quarter.
Speaker Change: Our continued investments into our DTC channel.
Speaker Change: And offline together with our operational improvements allowed us to capture a higher share of the strong consumer demand and deliver our biggest E comm quarter in history.
Besides the success, we already pointed out in China in EMEA. This also includes the continued success of our marketplace answer landfill, bringing.
Bringing a younger community to the on print.
Speaker Change: Additional growth within DTC is driven by our own retail formats. We.
We made significant brokerage in our retail footprint with the opening of several crate and strategically important new stores in Q3.
Speaker Change: In the Americas, we celebrated the opening of our third New York City location and the first ones in Austin and Chicago.
Speaker Change: New York City flat Iron and Chicago, Mark our two largest stores into reach in so far.
Speaker Change: In EMEA, we opened Milan.
Speaker Change: Following the two stores in Paris, France, we continue our expansion of our own retail as an important channel for growth investing in southern Europe.
Speaker Change: In APAC, we opened our first store in Australia in Melbourne, and five new locations in China with three of these locations have any significantly larger square footage and our historical fleet on average.
With three new stores expected in Q4, we will have opened 20 new stores in the full year 2024.
Speaker Change: This number is in line with our ambition to open 20 to 25, new stores annually outlined at our Investor day.
Speaker Change: We are extremely proud of our team establishing owned retail as a new channel that is elevating our brand experience across developed delivering strong topline growth and profitability by driving a high share of apparel sales.
Speaker Change: By the end of 'twenty four we expect nearly 1000 team members working in our retail stores compared to just 380 at the end of 2023.
Speaker Change: Our increasing brand awareness is not only reflected in our DTC channel growth, but also in the continued momentum at our wholesale partners Inc.
Speaker Change: In Q3, our wholesale channel grew by 23, 2% or 24% on a constant currency basis, reaching $389 1 million Swiss francs.
Speaker Change: In line with our strategy, we have expanded our wholesale footprint in a very controlled way. The vast majority of growth is driven by the strength of our existing or new product franchises and our ability to convert more shelf space opportunities with our expanded offerings and running and in our new categories.
Speaker Change: <unk>.
Speaker Change: In sum, we are very pleased to see our multichannel strategy in full effect in.
Speaker Change: In line with our strategic ambition, our D to C channel has significantly outpaced our wholesale channels this year.
Speaker Change: The result is an over 300 basis point D to C share increase versus last year when looking at the year to date period.
Speaker Change: Or even 450 basis points increase for the third quarter specifically.
Speaker Change: With that let.
Speaker Change: Let me move on to the development spread reached net.
Speaker Change: Net sales in the Americas grew by 34, 1% in Q3 or 34, 5% on a constant currency basis, reaching $395 5 million Swiss francs.
Speaker Change: Well, it's just credit performance is certainly a reflection of the operational improvements at first and foremost a reflection of the strengths of the brand and the reach.
Speaker Change: As Kasper shared our Brent building moments over December have converted to higher brand awareness and resulting transactions into key U S market in particular.
Speaker Change: At the same time, we're also very encouraged to see additional upside coming from markets like Canada and Brazil.
Net sales in the EMEA region reached $165 8 million Swiss francs in Q3 growing by 15, 1% year over year or 15, 2% on a constant currency basis.
Speaker Change: In line with the rapid rise in framed awareness bronze climbed up to be our fastest growing market in the region in Q3.
Speaker Change: This of course coincides with the Paris Olympics, and the rock solid and great start of our Champs Elysees store.
Speaker Change: So we are encouraged by the ongoing momentum in default.
Speaker Change: APAC reached net sales of $74 6 million Swiss francs into third quarter.
Speaker Change: Responding to a growth rate of 79, 3% or 85, 7% on a constant currency basis.
Speaker Change: The APAC region made up 11, 7% of our total business in Q3, driven by the continued momentum in China, Japan, but also in South Korea.
Speaker Change: Turning to performance by product in.
Speaker Change: In Q3 net sales from shoes grew by 32, 1% up to $603 7 million Swiss francs.
Speaker Change: Running vertical continues to be the key driver of volumes with franchises like the cloud monster and cloud runner continuing to lead the way.
Speaker Change: As Paul begins many of US few disease, that's an opportunity for fresh stops and praising new behaviors habits and activities.
This inspired us to launch our new back to run campaign interest debt to further double down on our running core.
Speaker Change: The campaign showcased the all new cloud surf indexed which supported a three times increase for our cloud turf of franchise versus the prior year period.
Speaker Change: Apparel grew by 33, 4% in the quarter, reaching $26 8 million Swiss francs.
Speaker Change: But we've put most of our initial focus on improving the product slow on the footwear side the constraints on the apparel side tracked well into Q3, resulting in the growth rate tracking slightly behind our ambition.
Speaker Change: We are confident that we will see a re acceleration here in the fourth quarter and based on the preorders for spring summer twenty-five expect the strong momentum in this focus area to continue into the new year.
Speaker Change: Earlier this year our team spent a full day in the Swiss mountains with Cynthia.
Speaker Change: The result was a pure default campaign.
Speaker Change: With full head to toe looks from our fall winter season at the center.
Speaker Change: With millions of impressions across our different channels. We're excited to continue building long term brand awareness and momentum of our apparel category.
Speaker Change: Moving down to P&L.
Speaker Change: Driven by the exceptional D to C performance, and resulting high D to C share of 38, 8% in the quarter, but reached a very strong gross profit margin of 66% increasing by 70 basis points year over year.
Speaker Change: SG&A expenses, excluding share based compensation, but $292 8 million Swiss francs equivalent to 46% of net sales and reduced from 46, 4% in the prior year period.
Speaker Change: The main benefit resulted from more efficient distribution expenses and did see us period.
Speaker Change: Reflecting our continued focus on achieving operational efficiency gains.
Speaker Change: This included a temporary strategic shift of volumes to our L. A warehouse during the quarter, which were able to secure at favorable rate.
Speaker Change: The resulting adjusted EBITDA margin for Q3 is 18, 9% significantly up from 16, 9% in the prior year.
It's very strong profitability reflects the flow through of the topline exceeding our expectations.
Together with a slightly more conservative cost planning place considering the operational challenges we had faced in Q2.
Speaker Change: While we continue to take measures to reduce the sensitivity of our results to FX fluctuations.
Speaker Change: Significant trough and Swiss francs are U S. Dollar between the end of Q2 and the low point at the end of Q3 led to considerable unrealized FX loss during the period of $37 2 million Swiss francs.
Speaker Change: We are pleased to have delivered strong net income of $35 million, even despite this impact demonstrating the resilience of our business.
Speaker Change: Which brings me to our balance sheet.
Speaker Change: Capital expenditures were $19 1 million Swiss francs in Q3 equivalent to 3% of net sales.
Our net working capital balance at the end of Q3 stands at $540 1 million Swiss francs. This includes our lowest inventory position in the last 12 months a further testament to the continued operational optimizations, we have been focused on.
This has of course contributed to continued strong cash flow.
Speaker Change: With a positive cash flow of over 125 million Swiss francs in Q3 alone.
Speaker Change: And a year to date positive cash flow of over 250 million Swiss francs, we have significantly increased our cash balance to close to 750 million Swiss francs at the end of the third quarter.
Speaker Change: As I mentioned in our Q2 call, we do expect a higher inventory position at year end as we increase our on hand levels on key styles during the fourth quarter.
Speaker Change: This will include the inbounds for our spring summer 'twenty five launches, including the all new cloud six but we are very excited about.
Now, let me move on to our last outlook for the full year of 2024.
Speaker Change: We are extremely pleased with where we are today.
Speaker Change: We see our mission to ignite the human spirit from movement coming to life around the globe.
Speaker Change: We are successfully executing on every dimension of our strategic plan.
Speaker Change: We grew our brand awareness and broadened our reach to new communities.
Speaker Change: We already had a strong start this quarter and we are heading into the holiday season, with a lot of confidence and excitement and expect to see limited operational constraints to deliver against the continued exception of print momentum we're seeing globally.
Speaker Change: For Q4, we expect a higher constant currency growth rates. Thank you three even after exceeding our expectations into the third quarter.
Speaker Change: For the full year 2024, we are increasing our constant currency net sales growth ambition from at least 30% to at least 32%.
Speaker Change: On a reported basis at current spot rates, our increased outlook reflects the expectation to reach at least 2.2 dollars 9 billion Swiss francs and net sales for the full year 'twenty four.
This impacts the size of both FX headwind that we expect in Q4 across all regions.
Speaker Change: With the Americas reached in Q2 see the biggest impact given the meaningful U S dollar move versus to switch Frank in recent months.
Speaker Change: As a result of the <unk> strengths in Q3, we achieved a 60.1 gross profit margin for the first nine months year to date.
Speaker Change: Driven by the historical strengths of DTC.
Speaker Change: Our disciplined full price strategy, the strong momentum and our balanced inventory position, we expect an even stronger gross profit margin in Q4 and are confident in our ability to significantly overachieve, our previous gross profit margin outlook for 2024.
Speaker Change: We now expect to reach a full year gross profit margin of around 65% an increase of 50 basis points versus our previous outlook.
Speaker Change: As communicated in the past we execute in line with our philosophy of building long term durable growth, which extends to both topline and profitability expense.
Speaker Change: We always seek opportunities to drive additional meaningful long term oriented investments for Brent and businesses went over achieving our net sales and gross profit expectations during the financial year.
Speaker Change: Given the proximity to year end, we expect a higher flow through of the strong gross profit into our adjusted EBITDA.
Speaker Change: We expect our adjusted EBITDA margin for the full year at the upper end of our previous guidance of 16% to 16, 5% potentially even slightly above.
Speaker Change: While we are incredibly thrilled with our Q3 results and this increased outlook for 2024 were even more proud to see the progress we have made against our long term vision announced a little more than a year ago.
Speaker Change: We're excited to continue to build on for the long term and look forward to finishing the year 2024 on a high note.
Speaker Change: We look forward to being back with this audience in 'twenty five.
Speaker Change: Thank you once again for your continued support and your trust.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: I'd like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue.
Speaker Change: And if you'd like to withdraw that question again press star one.
And we would like to ask that you limit yourself to one question. Your first question comes from Cristina Fernandez with Telsey Advisory Group. Please go ahead.
Speaker Change: Hi, good morning, and congratulations on the results.
Cristina Fernandez: I wanted to ask about the increases in brand awareness that youre seeing.
Kasper Eddy: Kasper you gave some detail on the U S.
Speaker Change: Can you share where the increases are coming from if you have any details you can share by demographic.
Speaker Change: Younger cohort.
Speaker Change: Tinder anything else there would be helpful. Thank you.
Speaker Change: Okay.
Hi, Christina.
Speaker Change: Thank you for the question.
Speaker Change: It's been a big focus for us to increase the brand awareness and to see.
Speaker Change: He didn't know come to life and flow through into Q3's results.
Speaker Change: It's been very very positive. So one thing that happened was that Sunday, our escaped wakes and in some of the investment into the younger community clearly helped there'll be very significantly increased brand awareness in the younger community.
Speaker Change: But it's not limited to death, we were also able to increase brand awareness across the globe. So if you look for example at very penetrated countries like Switzerland, We increased brand awareness by 30 percentage points already relatively strongly penetrated country and when we look at the U S.
Speaker Change: From coast to coast, so to say so what we were able to do it you know we were focusing on certain geographies are very clearly from how we spend our marketing money, but we saw some overflow from that into into other regions and into order and see this as well.
Speaker Change: And then lastly, the besides Sunday and SK tweak sent that tapping into the younger community.
Speaker Change: Performance was a very very important focus for us. So we really use the olympics to continue to penetrate on as an innovation branded but also the performance community. So when you look at our run counts over also to able to increase share across all running routes across the globe and so we're very very confident in how this is all.
Speaker Change: Lifting on as a brand overall.
Speaker Change: Yeah.
Speaker Change: Your next question comes from the line of operates Iannello with BNP Paribas. Please go ahead.
Speaker Change: Okay.
Speaker Change: Hey, thanks, so much for taking the questions and congrats on the results.
Speaker Change: I wanted to hear more if you could just kind of dive into some of the drivers of the 50% DTC growth in the quarter, maybe from a product perspective.
Speaker Change: And then what's giving you the confidence that that constant currency revenue growth should accelerate in <unk>. What are your early read so far as we approach holiday season.
Speaker Change: Yeah, Let me quickly take the D to C question and Martin M will elaborate on the second one so.
Speaker Change: I think when you look at our recent quarters, then I think we in most of the quarters, we were able to execute on our growth plan and then our strategy, which is basically to increase the D to C share over time I think the last quarter was almost a bit.
Speaker Change: The outlier in the negative direction and due to the operational constraints that'd be saw and now but really back to to seeing the brands kind of tapping into this strength and being able to convert it. So I think this is a reconfirmation and before our long term strategy and not just a positive outlier as of quarter end.
Speaker Change: When we look into this quarter specifically.
Speaker Change: Elaborated on a little bit before soap brand awareness was at a very big driver. So the Olympics and they are really really helped and it helped in all regions. So if we compare D to C growth Europe versus the U S. For example, we are in a very very similar growth level and then APAC is a positive outlier due to the strength in Japan.
Speaker Change: China.
Speaker Change: And then I think we saw a very successful product launches that has been the second driver of that.
Speaker Change: So so they were really really resonating and it was not limited to one it was the full kind of portfolio of launches that'd be brought to life, and obviously light spray and sharing the innovation story and also converting that standing to our performance products like the cloud boom strike that really.
Speaker Change: Really resonated with our consumers.
Speaker Change: Then lastly, we've invested a lot into the D to C environment over the last couple of months. So this is really allowing us to not only capture and new traffic in a very efficient way, but also to further continue to penetrate our existing consumer base in an even more efficient way.
Speaker Change: Yes.
Speaker Change: Alright.
Speaker Change: But the drivers.
That gave us the confidence into the holiday season.
Speaker Change: So we don't think they are exhausted, yet and they continue to drive.
Speaker Change: Our outlook.
Speaker Change: We.
Speaker Change: We leave Q3, but there's a lot of momentum and we also continue.
Speaker Change: Seeing that momentum in the in the first weeks of the quarter. So take Asia Pacific For example, we just had our record months there in October.
Speaker Change: So the momentum clearly continuous.
Speaker Change: For China October I'd say, it's a super.
Speaker Change: Important months leading into it.
Speaker Change: The 11th season.
Speaker Change: And then.
Speaker Change: That's that positivity is reflected in the increased guidance that we have given.
Speaker Change: It will allow us to focus on our full priced premium business during the holiday season, which is important for us and at the same time it will allow us to.
Speaker Change: Focus on preparing our important spring summer 'twenty five launches, which includes the new cloud six.
Speaker Change: Our key franchise, which we'll update in.
Speaker Change: In early next year.
Speaker Change: The holiday season, clearly it's go time for retail so for the first time in history. We ended the season with a 51 retail stores.
Speaker Change: And we are ready to deliver a premium experience to all the customers.
Speaker Change: All those stores and at the same time, having that positive momentum also allows us to invest into the future of the business. So it will allow us to invest into our team into a product into innovation sustainability technology. So so many important pillars for future growth.
Speaker Change: And I think this is this reflected in the positive outlook that we have.
Speaker Change: Your next question comes from the line of Alex Stratton with Morgan Stanley. Please go ahead.
Perfect. Thanks, so much for taking the question and congrats on another great quarter here I just wanted to focus on the inventory and supply chain constraints just from a constrained when should those be mostly behind you and then how will your channel prioritization change into 2020 by them and then just on inventory.
Speaker Change: Is that where you want it from a level perspective, and then how are you planning next year would be helpful. Thanks a lot.
Speaker Change: Yes.
Speaker Change: Yeah.
Speaker Change: Very happy to take the question. So I think looking back we had.
Speaker Change: While the impacts that that limited our ability to capture the full demand in Q2.
Speaker Change: Inventory was one the warehouse situation both was another one.
Speaker Change: We're incredibly proud of.
Speaker Change: How our team has basically take multiple measures to improve the product flow to our customers.
Speaker Change: We have shifted volumes and inventory to our west coast warehouse.
Speaker Change: We have used airfreight in a meaningful but balanced way.
Speaker Change: We very actively manage our order book also in close collaboration with our wholesale partners.
Speaker Change: And this really has a risk.
Speaker Change: Resulted in significantly improved delivery quality and also in a strong increase in the net promoter score that we are seeing both in <unk>.
Speaker Change: At the same time.
Speaker Change: Those measures are effective in the short term, but the goal that we have is to build a supply chain in the warehouse infrastructure and an inventory level that will allow us to grow taller aspirations outlook outlined at the Investor day.
Speaker Change: So what we need to achieve is to have two highly automated and reliable warehouses on the U S East coast in the West Coast and this is what the team is focused on.
Speaker Change: The automation project in Atlanta, and with the expected go live in.
Speaker Change: In spring 'twenty five and then also ramping up the volumes. So I think it's it's all playing together that we need to ensure that we have the right inventory in the right warehouse at the right time and and.
Speaker Change: We have made huge steps there.
Speaker Change: As I said on the calls towards year end, we expect that our inventory levels will rise a bit because of the inflow of new cloud, which is important to be ready for it for that major launch.
Speaker Change: I think we still have many opportunities to improve our.
Speaker Change: Broke around inventory in the long term, but we are extremely happy with where we are at the moment.
Speaker Change: Dan are you asked around channel strategy for 425.
Speaker Change: So we're basically really continuing the journey that we've laid out in Investor day, and that's already elaborated on before so we want to continue to grow our D to C share you can expect on to again open 20 to 25 additional own retail doors will which will allow us to meet our.
Speaker Change: Consumers, even in a more premium way across the globe. So they will enter in in all major geographies very much continuing to pass that they're already on and door growth on wholesale or probably continue to come down slightly so if you look at.
Speaker Change: Q3, 22 versus Q3 'twenty three we grew by eight 7% now we grew by six 6% Q3 24, so that number will continue to go slightly down.
Speaker Change: We're basically trying to penetrate existing doors existing doors, even better with our products and then a really big focus is is we'll continue to be on apparel and so we have a very very positive outlook in our preorder for 'twenty to 'twenty five on apparel, which just had our biggest monitoring apparel ever this October.
Speaker Change: So we're really really working closely with our partner to be able to capture on the promised apparel growth.
Speaker Change: Your next question comes from the line of Jay sole with UBS. Please go ahead.
Jay Sole: Great. Thank you so much we've talked a lot about innovation in the prepared remarks around the new styles also mentioned.
Jay Sole: <unk>, that's coming up but I remember at the Investor day about a year ago, you talked about how I think through yet at least.
Speaker Change: Seven franchises that released 5% of total sales could you talk about how much the price assortment has helped create more diversification within the projects weren't you can give us any stats to tell us like how much.
Speaker Change: How wide of a of a set of Skus you have now that are really driving the business rather than just being focused on one which.
Speaker Change: Maybe it was true 10 years ago.
Speaker Change: [laughter].
Speaker Change: Thanks, Joe Yeah excellent question happy very happy to report that we actually achieve the goals that we laid it out.
Speaker Change: I think it's important to not just be a one trick pony I'm, so happy to be a seven or eight trick pony.
Speaker Change: <unk> aside this user of course distributed against different sports different verticals as we call them right. So as we are no longer just a running Brian but we also have a significant business for example in training and tennis and of course on the on the lifestyle side.
Speaker Change: It's important that we have strong franchises and the efforts that we've taken to within each vertical really consolidate.
Speaker Change: Well models into into what we call franchise. So for example, the surfer, we're just coming off a really strong launch of <unk> for next.
Speaker Change: In Q3, and we're doubling down on that with launching the surfer too in Q1 and 25.
Speaker Change: If we move over to the lifestyle side.
Speaker Change: Our goal is to be the most premium brand in sports.
Speaker Change: With the cloud six we're actually delivering a much better product and cloud five and we were all surprised ended at 10 years old as higher allowing us to capture more of that.
Speaker Change: Willingness to pay a premium price for premium products that we see in the market. But then we're also not just resting on laurels in terms of existing franchises, we're very excited.
Speaker Change: Spring will see the launch of cloud zone on March 20th where Cindy will launch with us a lower silhouette that we believe is going to be very much on trend, but not from a retro perspective like some of our competitors do it but with a future feature.
Speaker Change: Futuristic take performance inspired.
Speaker Change: Your next question.
Speaker Change: Our next question comes from the line of Jim Duffy with Stifel. Please go ahead.
Speaker Change: Hi, This is Peter Mcgoldrick on for Jim Thanks for taking my question.
Speaker Change: Moving into the marketing strategy as you just had a huge brand moment for the Paris Olympics and have expanded your association with some cultural icons.
Speaker Change: How should we be thinking about the level and mix of brand marketing versus performance marketing going forward.
Speaker Change: Yeah. Thank you. Thank you for the question.
Speaker Change: I I don't think we want to call it brand market diverting more brand marketing versus performance marketing, you'll see like I'm already mixing up the worst because actually you know for all states.
Speaker Change: I think it's one topic the question is.
Speaker Change: How are we able to authenticate the products that we create with our consumers through the personality said, we're working with right. Then I think what do you see and what you saw happening with me for example, Sunday oven repair tariff Roger is a perfect example of that and this is kind of how we're continuing to.
Speaker Change: Think about it so basically bringing that experience to the different communities.
Speaker Change: In communications really always using that the strongest assets to reach those community. So you can very much expect that the next year to continue in a similar way.
Speaker Change: We will stick to the brand priorities that we already had in 2024 so.
Speaker Change: To build on as a performance broadening brand is going to be very very important for us.
Speaker Change: And we're very excited to continue to build on in training, but also even or even more or accelerating how we're building it in in Tennessee, continuing in tennis and and continuing to build in training and very much looking forward to also bring onto the trail much more and communicate on as.
Speaker Change: That is an outdoor brand and then lastly, the focus so as a head to toe brand.
Speaker Change: Which is also what we combined with a lot of.
Where are our athletes and influencers. So that's really how we're executing in 2025 and so it's a policing good think of it that's very much a continuation of what we've done this year and I think the Qs Q3 shows you that this is really paying out in the right way how consumers perceive our brand.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Jonathan Komp with Baird. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Yeah, Hi, good afternoon.
Speaker Change: That's where I wanted to follow up here.
Speaker Change: Your team has done an impressive job gaining.
Speaker Change: Danny and publicity for light spray and I'm curious how you're viewing.
Speaker Change: Innovation like like spray as an opportunity to raise the consumer awareness for innovation versus.
Speaker Change: Really opportunity to commercialize these types of innovations over time.
Then.
Speaker Change: Martin if I could just ask a follow up on the Q4 implied adjusted EBITDA.
Speaker Change: You've grown adjusted EBITDA margin throughout the year. So can you just talk a little bit more about the assumptions you're baking into Q4.
Speaker Change: Thank you.
Speaker Change: Thanks, John.
Hello glad spray.
Speaker Change: It's not it's not just a marketing story right. This is this has the potential to really disrupt the way put the original manufacturer.
Speaker Change: Remind everybody what it is so it's.
Speaker Change: Well first its a material its basically a new way of making it up but it's also a manufacturing technology because we're bonding the upper end the bottom unit together in one automated step and then thirdly, it's a sustainability angle there not only is it a very sustainable to me, but we can also near shore rate.
Speaker Change: And make it a comparable cost anywhere in the world. So we could.
Speaker Change: As we have right now for the machine into New York City or are we going to have a small production here in Zurich.
Speaker Change: I think we.
Speaker Change: Use of time now since the Olympics to really drill down on how we're going to scale. This.
Speaker Change: Don't expect us to hit the market.
Speaker Change: And in a meaningful scale next year already after.
Speaker Change: But we're really now exploring beyond just the performance product that you've seen like now.
Speaker Change: Should that tell them one month.
Speaker Change: And in the Olympics.
Speaker Change: But how can this.
Speaker Change: Be more relevant for everyday runners, but also for lifestyle consumers and then how do we combine several of these spray units into full production line that can be run fully automated.
Speaker Change: So you can imagine the team he read on lapses quite busy figuring these things out.
Speaker Change: But we want to bring it to market at scale and that's definitely the commitment that we have given out yourselves.
Speaker Change: And then to your to your second question.
Speaker Change: So last year at our Investor day, we communicated our midterm aspirations when it comes to gross profit and adjusted EBITDA margin of being 60% plus gross profit margin and and.
Towards 18% plus adjusted EBITDA margin in <unk>.
Speaker Change: We're extremely happy and proud that our Q3 results are a validation of the aspirations that we have and at the same time.
Speaker Change: We said this in the past we are we are fully committed to our philosophy of DARPA growth, which means growing our topline and profitability over time by driving additional investments. So this is this is how we approach Q4 and then also go into into the next year.
Speaker Change: For Q4, specifically on the marketing side.
Speaker Change: We we have two big branded campaigns going on.
Speaker Change: I spoke about <unk> and <unk> to run campaigns.
Speaker Change: If you look at our distribution costs, we had a very.
Speaker Change: Low number in percent of net sales in Q3.
Speaker Change: But.
Speaker Change: The shifts that we were able to do into our west coast warehouse now Q4.
Speaker Change: Heavy months on DTC, and therefore, we expect a higher number in percent of net sales there.
Speaker Change: And so overall.
Speaker Change: Outlined we see ourselves at the high end of the communicated.
Speaker Change: A range of $6, 65% or even slightly above so we clearly will not do anything.
Speaker Change: That is just a short term focused but on the investments that are meaningful in the in the long term and for US looking at the adjusted EBITDA. It's really about this journey from today towards the 18% over the course of the next two years.
Speaker Change: Your next question comes from the line of Ana <unk> with Piper Sandler. Please go ahead.
Speaker Change: Great. Thanks, so much and let Scott add art congrats on the quarter as well I wanted to follow up on wholesale so was the slight moderation there entirely the function of not having enough inventory and supply chain constraints and did you guys quantify what the amount of those volumes lost.
Speaker Change: Watch for the quarter and then secondly, just with Atlanta DC automation project.
Speaker Change: Curious is there any initial thoughts on how we should think about the timelines and the magnitude for a tax benefit from that automation. Thank you so much.
Speaker Change: Thank you, let me quickly elaborate on wholesale and Martin will take them.
Speaker Change: Question so.
Speaker Change: And wholesale D. This is one impact which is basically what do you still see happening as the door closures in Europe that are that are impacted Q3.
Speaker Change: This year versus Q3 last year, so that has an impact a negative impact.
Speaker Change: And I think what's important for US there is that really looking at the brand demand out there and that's also why we elaborated on.
Speaker Change: Very much similar D to C growth rate that we're seeing and what's also important is that part of kind of the door closures. All so we're able to capture a lot of that traffic that in our in our own channels.
Speaker Change: And then when we look at wholesale globally and be very closely track sellout and so for us for what's what's for the brand to see how sell out this behaving and really being able to observe that all of the brand awareness that we've created is not only reflecting in our own channels, but its also reflecting our wholesale channels.
Speaker Change: Very very positive the number that you don't see reported is basically the salary number and how we're how we're supplying the wholesale doors and.
Speaker Change: This is very much in line with our expectations, it's it's a sign off.
Speaker Change: And the long term strategy that we have he wanted to work with the right partners that we want to carefully expand the doors in the range between five and 6%. This next year.
Speaker Change: And so we're really really positive about what we're seeing on the wholesale side.
Speaker Change: Christian to Atlanta, as I mentioned, the team is well on track to.
Speaker Change: To frame the automated solution life in the first half of next year.
Speaker Change: So working very very closely on that one and and and once we have confidence into the reliability of the solution.
Speaker Change: Able to scale up volumes and bring volumes back from our West coast warehouse into our east coast warehouse plus the underlying business growth that we expect on top so we will give them a better outlook on our distribution expenses and in our Q4 call as we have more insights there.
Speaker Change: But the way to think about it is that we have a higher fixed cost base with the automated solution. So.
Speaker Change: It will depend.
Speaker Change: More on the volume that we drive through the warehouse and.
Speaker Change: In the next call, we will be able to give you a better indication also on timing on when we expect that.
Speaker Change: Positive.
Speaker Change: Short term and then also for the long term.
Speaker Change: Your next question comes from the line of Michael Binetti with Evercore ISI. Please go ahead.
Michael Binetti: Hey, guys. Thanks for all the detail here.
Michael Binetti: I guess on the multiyear margin outlook as we look at the framework you gave for 2028. The plan was to drive about 100 basis points of EBITDA per year from the 15% baseline in 2023 up to that 18%. After this year, you'll only have 150 basis points less about 75 per year is it best to think of it like you pulled forward some of that expansion this year.
Michael Binetti: Or can you still drive 100 basis points per year, and maybe the endpoint could be higher and maybe some thoughts if not on what what's running ahead of plan as you approach the 16, 5% this year.
Michael Binetti: And then I think you'd previously said on PTC that fourth quarter would be the strongest growth quarter. Obviously, just put up a really big quarter with a 50, 150% growth this quarter as fourth quarter is still the strongest DTC growth quarter.
Michael Binetti: Yeah.
Speaker Change: So the second question first.
Speaker Change: We said that we expect overall net sales growth in the fourth quarter to be stronger than.
Speaker Change: In the third quarter.
But didn't didn't give indication on on the channel mix.
Speaker Change: But I think you have heard it from the from the outlook that we gave on the holiday season.
Speaker Change: But we expect strong sell out numbers across all the different channels.
Speaker Change: With regards to EBITDA.
Speaker Change: That said I feel.
Speaker Change: We were in a very fortunate situation here that we can really.
Speaker Change: Invest into the things that will drive the print in the long term and.
Speaker Change: Speed and innovation and sustainability breeding technology and.
Speaker Change: We will do this with a little bit the cadence that you mentioned, so having in mind that that gradual increase of our EBITDA over the course of the three years that we did.
Speaker Change: We communicated at the Investor day.
Speaker Change: Yeah.
Speaker Change: The strength of the business.
Speaker Change: Just shows.
Speaker Change: The capability of the business model and the underlying performance of our premium brands that we have built.
Speaker Change: And so as such we will invest into meaningful things and if we if we can't react to higher top line sales in the short term.
Speaker Change: They see an additional flow through into EBITDA, but our philosophy has not changed for the course of the next two years.
Speaker Change: Your next question comes from the line of Janine Stichter with BT I G. Please go ahead.
Speaker Change: Hi, good morning, and congratulations and just a follow up on margin at the gross margin you're tracking ahead of where we thought it would be it seems like there's more momentum with the DTC business and it sounds like you have maybe some airfreight tailwind going into next year, just help us think about how we can how we should be modeling on medium term gross margin.
Speaker Change: Anything else that would offset some of the tailwind that we would see from channel mix and less airfreight. It sounds like you have some price increases or anything else I should be thinking of there just as we forecast out the gross margin.
Speaker Change: Very very happy to take this one.
So I feel overall we are in.
Speaker Change: In a very.
Speaker Change: Disrupted environment when it comes to global supply chain that are at the moment.
So clearly Q.
Speaker Change: Q2, Q3 showed the strength of the of the brand.
Speaker Change: As we always said I think we always need to factor in some distortion.
Speaker Change: And in the supply chain and so we feel that the 60% plus gross profit margin outlook is.
Speaker Change: Valid.
Speaker Change: But Q3 shows what can what the brand can deliver.
Speaker Change: If basically.
Speaker Change: Very little disruption around the World Kasper mentioned with.
Speaker Change: It's a $10 higher price point for the cloud and.
Speaker Change: The adjustments on other prizes for next year, we clearly put us in a strong position to protect that Brent maybe.
Speaker Change: Maybe also in the light of current discussions around tariffs. So overall, we feel we feel very good about the business that we that we have set up we still have economies of scale on our manufacturing site that we can drive in the underlying.
Speaker Change: Although proportionate growth of the D to C channel of course, it's also very important to deliver.
Speaker Change: Sustainably high gross profit margins that we are having.
Speaker Change: Yeah.
Speaker Change: Your next question comes from the line of Rick Patel with Raymond James. Please go ahead.
Rick Patel: Thank you and congrats on the strong execution I'm, hoping to double click on apparel you touched on the growth rate being somewhat constrained is there anything besides the D. C that could've been a drag and then just bigger picture do you feel the assortment is in a good place.
Rick Patel: In terms of the fit and style that you can hit the accelerator in terms of the growth and if so how do we think about the channel strategy going forward.
Speaker Change: Thanks for your thoughtful questions.
Speaker Change: Look.
Speaker Change: We've made it quite clear in their recorder nodes. So you know it was supply constrained in Q3, we were seeing the constraints are easing.
Speaker Change: Mark already mentioned, we're very optimistic in terms of what we have on order and the interest we see for poor spring 'twenty five.
Speaker Change: You touched upon a very a good point some of you may have purchased on apparel yourself in the past we have done a complete re sizing exercise now across it alone across the line starting in spring 'twenty four and then now in the second half of 'twenty four or so.
Speaker Change: Ons apparel now consistently with.
Speaker Change: With your favorite apparel pieces, whether you're a European U S or Asian customer.
Speaker Change: We're already seeing.
Speaker Change: Very good results from that in terms of like lower return rates.
And it will make it easier to repurchase your apparel piece.
Speaker Change: In terms of channel strategy.
Speaker Change: We're very encouraged by the success of apparel that we see in our own retail and premium wholesale partners our own retail doors can can reach 25%, 30% apparel sure.
Speaker Change: And thats for us reaffirming that our own retail is a key building block for our premium apparel brand.
Speaker Change: Okay.
Speaker Change: We have time for one more question and that question comes from Dylan Carden with William Blair. Please go ahead.
Speaker Change: Really appreciate it thank you.
Dylan Carden: Curious about the running category you've made some efforts here to streamline skus in that channel.
Speaker Change: Steve Moore sort of compatible I guess competitors, just sort of how that.
Speaker Change: Category fit in with the growth that you saw in the quarter.
Speaker Change: And so what if the boost he's asking about six was helpful for you.
Speaker Change: Before them there as well thanks.
Speaker Change: Yes. Thank you for the question.
Speaker Change: You know, how how important running it for us and so this is this is also why.
Speaker Change: I don't know if the runners count as a key metric for the whole company and we are really closely.
Speaker Change: Measuring that we're continuing to grow and we see more and more when we count and the product is.
Speaker Change: Is that the portfolio is more distribute it and we're really able to bring.
Speaker Change: From franchises to different running sites and so very happy how the monster franchise has become one of our top top.
Speaker Change: Franchise and sold a monster month that went into the monster to hyper monster is really capturing that elevate the consumer Kasper mentioned that the clouds. Her for next has been an unbelievably successful.
Speaker Change: The launch also tapping in a in a younger community than the cloud Rhonda is it resonating extremely well. It's it's one of the strongest I am style step that we have in run specialty.
Speaker Change: As well.
Speaker Change: And so.
Speaker Change: Running is really as a category overall growing growing supersonic super strongly it's the strongest category that would be half as tennis actually from a growth perspective, but it's much much smaller and running the second grow it but don't have way way bigger bigger scale. So so we're we're very satisfied with what we see as on being perceived.
Speaker Change: As a core running Brent.
Speaker Change: Yeah.
Speaker Change: And ladies and gentlemen, with that that does conclude today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: [music].