Amer Sports, Inc. (AS) Q4 2023 Earnings Report, Transcript and Summary

Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amer Sports Fourth Quarter 2023 Earnings 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. [Operator Instructions] Thank you. I would now like to turn the conference over to Omar Saad, Vice President of Finance and Investor Relations. Omar, you may begin your conference.

Hi, everyone. Thanks for joining Amer Sports fourth quarter and fiscal year 2023 earnings call, which is our first earnings call as a public company on the New York Stock Exchange. Earlier this morning, we announced our fourth quarter and full year 2023 results. The release can be found on our IR website, investors.amersports.com. A quick reminder to 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. Please see the safe harbor statement in our earnings release and SEC filings. We will also discuss certain non-IFRS financial measures. Please refer to our earnings release for important information regarding such non-IFRS financial measures, including reconciliations to the most comparable IFRS measures. We will begin with prepared remarks from our CEO, James Zheng and CFO, Andrew Page, followed by a Q&A session until 9 A.M. Eastern. Our three segment leaders will also join for the Q&A portion of the call: CEO of Arc’teryx, Stuart Haselden; CEO of Solomon, Franco Fogliato; and CEO of Wilson, Joe Dudy. With that, I'll turn the call over to James.

Thanks, Omar. I'm very proud to lead Amer Sports first earnings call as a New York Stock Exchange List Company. Amer Sports may be new to the U.S. Equity markets, but we come from a long and rich heritage in sports and outdoor activities. Our brands are loved and trusted by a million worldwide. Whether used by elite competitors, [indiscernible] aspirational enthusiasts (ph), our equipment, footwear and apparel delivers the best technical quality and performance. We are excited about opportunity to drive growth across our three segments, Technical Apparel, Outdoor Performance and the Ball & the Racquet Sports. Although, 2023 was another strong year of sales growth and the margin expansion for Amer Sports, we are still in the early stage of our profitable growth in fact (ph) following our transformation to a decentralized brand direct operating model in 2020. This transformation has been critical to unlock the value of our portfolio led by our high growth flagship brand, Arc'teryx. Several factors give us confidence for the future. First, we operate a unique portfolio of premium outdoor and sports brands, each position at the pinnacle of their respective market. Second, our brands have high engagement and the satisfaction with consumers around the world, but are still relatively small players in those large global outdoor and the sports markets. Third, the Premium segment of the Outdoor Sports markets remains healthy and growing, especially in Great China and Americas, where we continue to outperform peers. Fourth, our highest margin brands, regions, channels and the categories are growing the fastest and we have assembled a strong and experienced management team that's energized and motivated to drive value creation for our stakeholders. Before I review the performance of our brand segments, I want to [indiscernible] on what I see as our path forward. First, we believe Arc'teryx is a breakout growth story with unprecedented growth and profitability for the Outdoor industry. It's truly charting new territory with its disruptive DTC models and a very strong competitive position. The growth and the profitability of this franchise will fuel our Amer Sports for years to come. Second, Solomon and Wilson and all our other brands are very strong, have longstanding authentic heritage, premium position with their respective segments and amazing products. Although, they are early in their growth infection, we are building very strong foundation for future growth for these brands across categories and the key geographies. Third, we believe our unique expertise in Great China and our success embedding top talent in our brand teams in this important growth region, give us a clear competitive advantage across all brands in our portfolio. Before I turn it over to Andrew to discuss our company results, margins, the balance sheet and the guidance, I will provide a review of our three brand segments. First, Technical Apparel led by Arc'teryx, revenues grew 26% to $550 million in Q4, driven by 42% direct to consumer growth, including a 33% omni-comp. This was partially offset by a 5% decline in wholesale, which was expected and the primarily related to the supply chain related sales shift from Q3 into Q4 in 2022, which create a more difficult comparison. For the full year 2023, Technical Apparel grew 45%, driven by 57% DTC growth, including a 55% omni-comp. Arc'teryx continues to experience very strong brand momentum across all regions, channels, consumer segments and the product categories. And in both stores and online, the DTC channel experienced strong traffic and the commercial trends. The brand achieved key milestones in its DTC evolution in 2023, including premium flagship openings in Osaka, Beijing, Toronto, and the most recently, our 20,000 square foot store in Shanghai, that's taken the brand's retail presentation to new highs. Arc'teryx is also doubling down on innovation, including a significant new footwear launch with the first fully in-house designed and developed footwear for the mountain athlete. (ph) Arc'teryx continues to drive deep relationships in mountain communities through global academies and host more than 25 Australian participants at Whistler, San Anton, Chamonix, Squamish and the Yangtze Academies across 2023. Regionally, Technical Apparel grows 30% in both Great China and America. Technical Apparel grew more than 40% in APAC, where we are evolving that operating model to accelerate DTC expansion. Importantly, in Q4, Arc'teryx also posted outsized growth in key opportunity areas, including [indiscernible], footwear and hard goods and accessories. Turning to Outdoor Performance. Revenue grew 2% in Q4 to $523 million driven by strong top and the bottom line performance in our Winter Sports Equipment franchise, partially offset by an expected deceleration in Salomon footwear in the wholesale channel. DTC experienced strong growth, while wholesale declined due to the challenging comparison versus Q4 2022 mentioned above. Regionally, Great China and APAC experienced healthy increases, partially offset by declines in the America and the EMEA. Although, wholesalers in the Americas and the EMEA remain cautious with preorders as they focus on maintaining lean (ph) inventories and rely more on refreshment orders. Solomon continues to enjoy strong demand at retail. The brand performed well in both own retail and the partner stores, including DTC up a very strong double-digit with all regions and the format showing solid gains. There continued to be signs that Solomon footwear is generating strong brand heat in [indiscernible] communities. Our new sports style line (ph) was ranked as the number one clothes brand on StockX last year. Although, worth noting is a strong Winter Sports Equipment performance in Q4, particularly in APAC, Great China and the EMEA aided by favorable weather conditions, strong result bookings and timely inventory deliveries. For the full year 2023, Outdoor performance grow 18%, growing in all regions driven by the 146% growth in Great China, and the 44% growth in APAC. By channel, DTC led growth at plus 42%. Key brand highlights from 2023, include number one, Solomon becoming an official partner for 2026 Milano Cortina Olympic Games, including supplying 25,000 volunteers and [indiscernible] with Salomon Apparel, Footwear and Accessories. Second, the launch of Salomon's first low running super shoe, the PHANTASM 2, which sold out in 30 days. And the third, the successful of Solomon athlete, Courtney Dauwalter, the best trail runner on the planet and the first human even to win the Western States 100, the Hardrock 100 and the UTMB in a single season. And the 2024 start with a splash when Solomon launches, Welcome Back to Earth brand campaign during the Super Bowl. In Winter Sports Equipment, Atomic reinforced its global leadership in Alpine Skis and achieved number two position in the global Ski Boot market. Our star athlete, Mikaela Shiffrin had an exceptional year, breaking the 24 year old record for most World Cup victories of all time and now has 93 wins. Moving to Ball & the Racket, where revenues declined 3% to $242 million in Q4. Ball & the Racked had promising growth in EMEA and the Great China. This growth wasn't enough to offset declines in its largest channel, U.S. wholesale. From a category perspective, the growth in sportswear, golf and the balls wasn't enough to offset weakness in baseball and the racket. The U.S. sports equipment market was significantly hampered in 2023 due to elevate inventories across the industry that are split over from 2022. In Q4, we made the strategic decision to take the promotional actions necessary for Ball & the Racket to begin 2024 with wholesale inventory levels. Wilson continues to be a market share leaders in its core business of Tennis, Baseball and the golf, and we remain confident in the brand's long term outlook. Some of our recent key highlights over the past year include launching the first ever 3D printed basketball, which debuted at the 2023 NBA All-Star [indiscernible] contest and expanding the brand's retail footprint with new version stores in Santa Monica, Minneapolis, Mall of America, Garden State Plaza, the Galleries in Houston, as well as additional stores in China and Korea. Wilsons' strength in tennis continues as 32% of the competitors at the recent Australian Open compete using our Western Racquet, making us the number one racquet at the tournament. For the full year 2023, Ball & Racquet grow 7%, led by double-digit gains in DTC, Great China and APAC. With that, I will turn it over to Andrew to discuss our company results and the outlook.

Thanks, James. Amer Sports continues to enjoy the financial benefits of our transformation to a brand direct operating model. Our strong and authentic brands resonate with consumers and position us well to navigate the challenging macro crossed currents in 2023. With revenue growth above 20% for the full year and continued gross and operating margin expansion, we continue to win with our consumers. Our full year and Q4 results all came in at or above the high end of the ranges we preannounce in our flash results in January. Q4 results decelerated from Q3, which we expected due to supply chain bottlenecks in the second half of 2022, which caused a meaningful shift of sales from Q3 into Q4 creating much harder comparisons. Looking at the second half in total, our underlying sales and margin trends remained healthy. We also experienced a capital structure transformation following our IPO last month. We retired approximately $4 billion worth of shareholder loans and we refinanced the remaining $1.8 billion of third-party loans to more favorable terms and extended maturity to 2031. Digging in deeper, starting with our top line. For the fourth quarter, revenue rose 10% to $1.3 billion. For the full year 2023, group revenue grew 23%. DTC continued to grow at a very strong double-digit rate led by Arc'teryx while wholesale revenues for the group fell 4% with all three segments experiencing declines due to the comparison issues mentioned above. DTC expanded 37% in Q4 led by Technical Apparel in the Americas and Greater China. In wholesale, high inventory levels at retail in the Americas and EMEA were a drag on shipments in the Ball and Racket, Outdoor Performance segments. In Q4, regional growth was led by a 45% increase in Greater China, where all three brand segments experienced solid growth, followed by 22% growth in APAC, albeit off a small base. The Americas grew mid-single digits led by DTC strength, partially offset by declines in our wholesale channel. Turning to profitability. Adjusted gross profit margin rose 170 basis points to 52.2% in Q4 versus Q4 2022, primarily driven by our highest gross margin business, Arc'teryx, growing at a faster rate than our other franchises. This was partially offset by heavily promotional environment in Ball & Racket, lower logistics costs, improved sourcing performance, and channel and regional mix also drove gross margin expansion. In Q4, strong gross profit gains were offset by SG&A deleverage. Adjusted SG&A as a percentage of revenue increased 410 basis points on slower sales growth and represented 42.6% of revenues in the quarter. This drove the 220 basis points decline in our Q4 adjusted operating profit percentage to 10.4%. The key areas of expense growth included variable selling expenses, additional headcount, variable marketing expenses, higher rent costs driven by store openings and strategic investments in IT. Our Q4 adjusted net income declined to a loss of $41 million compared with $46 million of income in Q4 2022, driven primarily by increased interest expense on higher variable interest compared to 2022. Adjusted diluted EPS fell to an $0.11 loss in the fourth quarter as compared to $0.12 of income in the Q4 of 2022. For the full year 2023, we generated a $0.35 adjusted diluted loss per share as compared to an $0.08 loss per share in the prior year. Excluding PPA, our fourth quarter adjusted net income would have been a loss of $31 million or an $0.08 per share loss. For the full year of 2023, adjusted net income excluding PPA would have been a loss of $92 million. Turning to the balance sheet and cash flow. As I mentioned, we improved our capital structure using the IPO proceeds to retire our EUR1.3 billion shareholder loan. We also refinanced $2 billion of debt in the form of EUR700 million term loan, a $500 million term loan and an $800 million senior secured notes. Following our IPO and debt restructuring, our net debt to adjusted EBITDA is down several turns to approximately 3 times. We aim to bring that down below 2 times over the next few years through both EBITDA expansion and debt pay down. Based on current interest rates, our net finance costs will run-in the range of $45 million to $50 million per quarter, a meaningful improvement from 2023. Inventories finished 2023 in a healthy position, up 21% from the end of 2022, below our revenue growth of 23% for the full year. Our goal is to grow inventories at a rate that is in line or below revenue growth. Turning to the future. We are happy to share our five-year financial algorithm, which consists of low double-digit to mid-teens annual sales growth, 300 basis points of gross margin expansion and 30 basis points to 70 basis points of annual adjusted operating margin expansion. The group level top line algorithm reflects mid to high-teens sustainable growth for technical apparel, high-single to low double-digit annual expansion for Outdoor Performance, and a mid-single digit long term growth rate for Ball & Racket. Turning to the near term guidance. We are off to a solid start in 2024 and continue to enjoy healthy mix shift benefits led by our fastest growing high margin Arc'teryx business. Given the difficult comparison from the strong growth at the beginning of 2023, we expect revenue growth for the group in the range of 6% to 8% in Q1, which will be our slowest growth quarter of the year. This incorporates greater than 30% growth in Technical Apparel, flattish revenues in Outdoor Performance and a low double-digit decline in Ball & Racket. We expect Q1 adjusted gross profit margin to be approximately 53.5%, driven primarily by mix shift benefits and an adjusted operating profit margin of 9% to 10%. Our net finance costs for the quarter will be $100 million to $110mn and our effective tax rate will be in the range of 25% to 35%. This equates to adjusted diluted EPS in the range of $0.01 loss to $0.02 earnings per share. Keep in mind that net finance costs for the quarter includes approximately $60 million of non-recurring items associated with the early extinguishment of debt, related hedge contract exit costs and the higher interest rate on the prior debt for the first 45 days of the quarter. This non-recurring net finance cost would negatively impact Q1 EPS by $0.08 to $0.09 per share. Going forward, we expect recurring net finance costs to be in the range of $45 million to $50 million on a quarterly basis. For the segments, we expect an adjusted operating profit of slightly above 20% for Technical Apparel, mid-single digits for Outdoor Performance and low to mid-single digits for Ball & Racket. Turning to the full year. We expect mid-teens revenue growth for the group, which incorporates greater than 20% growth in Technical Apparel, 8% to 10% growth in Outdoor Performance and low to mid-single digits growth in Ball & Racket. We expect more than 100 basis points of adjusted gross margin expansion to 53.5 to 54.0 in 2024, driven primarily by mix shift. This will be partially offset by SG&A deleverage. We expect adjusted operating margin of 10.5% to 11%. For the segments, we expect adjusted operating margin of slightly above 20% for Technical Apparel, high-single digits for Outdoor Performance, and mid-single digits for Ball & Racket. You should assume full year net financing expenses of $240 million to $250 million or approximately $180 million to $190 million, excluding the non-recurring items that I mentioned above of $60 million in the first quarter and an effective tax rate of 25% to 35%. This equates to a range of $0.30 to $0.40 of adjusted diluted EPS based on $510.1 million fully diluted share count. We are assuming $250 million to $260 million of depreciation and amortization, which includes $100 million to $110 million of ROU depreciation. CapEx is expected to be approximately $300 million, an increase of $120 million over 2023 to support new store expansion, our SAP implementation, and distribution and logistics investments. With that, I'll turn it back to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Matthew Boss from JPMorgan. Please go ahead.

Great. Thanks, and congrats on your Q1 out of the gate.

Thanks, Matt.

So, two part question. Maybe first, could you just elaborate on the momentum that you're seeing at the Arc'teryx brand across regions or channels just supporting the first quarter guidance of more than 30% Technical, Apparel revenue growth? And then for Andrew, could you just help bridge the embedded top line progression from 6% to 8% revenue growth in the Q1 to mid-teens growth for the full year?

Hey, Matt. It's Stuart. So I'll speak to your first question there. So fourth quarter ended very strong for Arc’teryx. We saw results that exceeded our expectations to end the year and we've seen that momentum carry forward into the first quarter. We're actually seeing sequential strengthening in our underlying KPIs and across our direct to consumer business. So traffic and conversion in both our stores and our digital websites performing very well. We're in a very strong in-stock position from an inventory standpoint. So the combination of those things are leading us to the guidance that we shared with you.

Thanks, Matt. This is Andrew. As you think about the progression of our quarters, like, I said in my prepared remarks, Q1 is going to be our lowest growth quarter, given the comparison issues that we talked about exiting 2022 that carried over into the first quarter of 2023. While we haven't given cadence for the full year, what I will tell you is that you could expect each of the -- rest of the year is mid-teens up for the rest of the year to equate to the full year guidance of mid-teens and in Q4, being our strongest quarter of this year. From a growth perspective, again, coming off of easy compare in 2023, for all the reasons that we talked about.

Hey, Matt. It's Omar. I'll just add one thing. So the comparisons get 20 points easier going from the first quarter to the fourth quarter, but also the Arc’teryx store openings. We're opening more new larger Arc’teryx stores this year than we have in any year in the past, including some of the key openings, store opening late in 2023 and in the first half of 2024. So well before the key winter season, which is going to just drive a much bigger kind of conversion and revenue volume in the back half for that brand, which is already growing at a fast rate. Thanks.

Great color. Best of luck.

Your next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.

Thank you. Good morning. Can you talk about the drivers of the decline in outdoor margin that you're guiding to in the first quarter? And then what changes to lead to the nice expansion embedded in the guidance for the year?

Yeah. So when you think about the Outdoor Performance, there is meaningful investment built into the first half of this year. As you know, that business is primarily DTC driven in Greater China, but outside of Greater China, the meaningful wholesale business. We will continue to invest in the business, the footwear business related to outdoor performance, and especially into North America. The other phenomenon in there is, Winter Sports Equipment is part of Outdoor Performance. And as you know, when we talked about winter sports equipment having a strong fourth quarter, which is primarily, weather driven in the sense that weather got bad early, people bought early and that's created a softer first quarter. That's, so footwear within outdoor performance is performing really well. Winter Sports Equipment, which is part of Outdoor Performance is having a softer first quarter coming up a really strong fourth quarter.

Lorraine, do you have another one.

No. Thank you.

Your next question comes from the line of Brooke Roach from Goldman Sachs. Please go ahead.

Good morning, and thank you for taking our question. I was hoping you could elaborate on the outlook for North America growth for both the Outdoor Performance and Ball & Racquet segments as you move throughout the year? How are you thinking about the idiosyncratic growth opportunity given the momentum of your brands and growth in footwear and what trends are you seeing with your partners as they manage through inventory and current demand levels? Thank you.

Hi. This is Franco. Thanks for the question. Look at the -- we're at the beginning of accelerating North America. We see definitely some consciousness from the retailers into preorders, but we're seeing also strong in season reorders. We've seen that in Q4 as well as we enter the year. We announced later last year that we have recruited a new leader for our Americas business, a gentleman that used to run the OcA brand of North America. We believe there are plenty of opportunities, in particular creating this unique competitive advantage through the outdoor sneakers, as well as there is a strong demand for an outsider brand into the specialty channel. Yeah, so we're excited about the opportunity.

And from a Wilson perspective, involving racquet sports, again, we continue to be a market leader in almost every category that we participate in. We continue to win with our trade accounts. We obviously have talked about the excess inventory in the trade accounts. And our insights would suggest that you're going to see some of that trend and some of the retailers moving through inventory in the first half of the year and that returned to a more normalized cadence in the back half of the year. But the thing that's important to us is that we continue to be category leaders in each of the categories that we participate in. We continue to get strong insights from our retail partners. And as that channel normalizes, we think we're going to continue to be a winner there.

Yeah. I would add, this is Omar. One of the things that gives us confidence early on in the year is seeing that gross margin actualization rate for the Wilsons brand really pop back up again now that our inventories are clean. Yes. The retailers aren't -- the industry is not right where we want it to be and we feel we are really good shape in terms of how our brand is performing and the market share there. Thanks.

Your next question comes from the line of Paul Lejuez from Citigroup. Please go ahead.

Hi. Just a follow-up on the -- I'm sorry, this is Kelly on for Paul. Thanks for taking our question. Just want to follow-up on the Ball & Racquet acceleration that's applied in your full year guidance. Is that something you see based on your order books or is this something related to some of the new innovation that you plan on putting out, particularly in the baseball category? Anything you could elaborate there? And then just, if we could just give us update on what's going on in China. I know you have very strong performance there, but the macro has been volatile. So if you could just provide any additional color that would be helpful. Thank you.

Yeah. Hi. This is Joe Dudy, the CEO of Wilsons. So, I'll comment on the Wilson, question first. And what we're really seeing is that the participation is still strong in our categories. The sell through from feedback from our retailers is positive too, so it's working through the inventories, but as you stated, we have great product launches, especially in Tennis and Baseball, our two largest categories, especially in North America. And, we recently just launched, the blade tennis racket, which is our number one selling tennis racket, and the expectations have been exceeding our outlook so far, so we're confident in that. And then the baseball market, the new season really starts in June, July and we have new product launches there. And one of the things we're doing is, we went through over the COVID period. We ended up moving our bat product launches to two year product launches, and we're moving those back starting this year to one year, product launches to create that newness in in the marketplace. So we have a lot of confidence. And I'd just add that with we got out of the gates really strong last year. We grew 14% across the board in Q1 of 2023. That's not a sustainable number. It was replenishing and probably getting the inventories too high. So the comps as we get through the rest of the year will be easier from the ball sports perspective.

James?

So we see, very positive growth for our business in China markets, and we believe our brand have a very good competitive advantage in China, given the foundation and the infrastructure we build that. And in China, I mean, even the overall economy still face level of challenge, The category we are sitting and still, I mean, very, I would say, there's still on trend. Okay. So, all the brands, especially our character of Solomon, really performed extremely well in 2023 and also the beginning of the year, we also see a great improvement from our business. So we still see a very good progressing of our business in China market.

Thank you.

Your next question comes from the line of Alex Straton from Morgan Stanley. Please go ahead.

Perfect. Thanks for taking the question. I wanted to focus on Technical Apparel, the full year guidance for over 20% growth. Can you just walk us through what you're assuming for DTC, China and North America specifically or any color? And then also what's driving that it looks like a deceleration throughout the year given 1Q is at 30%. Thanks a lot.

Hey, Alex. It's Stuart. So, we're really pleased with the balanced growth that we're seeing regionally across North America and China. Both regions grew at a similar pace, both in the fourth quarter and through the initial portion of the first quarter. So, we're seeing just broad based regional strength for the brand and we're also really happy with what we're seeing in Europe and Asia outside of China. So, in the underlying, strength of the business, as I mentioned, in the earlier question, there is really from the fundamentals of our DTC business. So, traffic, conversion increases, we're actually seeing also reductions in markdown rate and return rate. So -- it's, and it's both within our retail stores as well as our e commerce business. So, broad based strength and we see that also connect to a really strong and healthy inventory position, stronger than we've been in prior periods, just given the supply chain challenges that we had related to COVID going back 18 months. But overall, really healthy position. And as we look forward for the full year guide versus the Q1 guide, we're going to plan the business in a responsible manner. We're going to plan the sales and the inventory in a place that we feel is appropriate for the business. If demand materializes above these levels, we're in a position where we can capture higher sales levels. The inventory position we have will afford that. But we're planning our expenses and our capital investments in a place that we see as responsible and that's connected to that 20% full year guide.

Your next question comes from the line of Ike Boruchow from Wells Fargo. Please go ahead.

Hey, guys. Good morning. Two for me, one specific to the guide and one bigger picture. Just on the guide, maybe to Stuart. Can you give us, specifically what's embedded in your guidance on door expansion this year? And then, if you're able to, can you talk about what comp you're expect omni-comp you're baking in for both the first quarter and the full year? And then, to the team, just more detail how the brands are positioned in China today. How do you think about them? How would it be different over [indiscernible] here? Thanks.

Yeah. Hi, Ike. It's Stuart. So I'll start with your first question there. So we're planning to open a net of around 30 doors in Arc'teryx this year and we'll see more than half of those stores in North America. So we're excited for a number of the new locations that we're opening and planning across all our regions, but we'll see important flagships in Europe as well as North America. We just opened a 7,000 square foot flagship in Covent Garden, this past week. We'll open flagships in Toronto and also in New York City, a part of the projection that I just mentioned. And then from an omni-comp standpoint, I think we've shared mid-teens overall for the full year, and so pretty confident with that level of growth.

And James on the different brand positioning in China?

Yeah. I just add on certain points here for Arc’teryx. Arc’teryx is really being positioned as the pinnacle in Auto segments and after four years cultivation, I mean, we really made Arc’teryx become the best Golden Goose brand in China. In terms of the quality of the retail environment we created in the market as well as the productivity by stores and we really outperform in the industries. And I'll just give you an example, recently in January -- mid of January, we just opened a 20,000 square foot flagship store in Shanghai, [indiscernible] independent buildings, within 30 days, the sales revenue already reached $3.2 million. So it's, it's a I mean, I think, I mean, when you have chance to visit China and then really you look at the store, I mean, at close stores, it's a big position as a kind of the level of the premiums. I mean, not only premium, but also at the luxury segment and that we are, we are on popular par with a friend like Moncler, okay, so in China markets.

Got it. Thank you very much.

Your next question comes from the line of Michael Binetti from Evercore ISI. Please go ahead.

Hey, guys. Thanks for taking our questions. Congrats on the first quarter out of the gate here. I guess a few on -- coming into the year, any are there Wilson inventory issues past us at this point? And then on the cold weather, I know it's been a little bit unfavorable weather. Any sense from the channel of competitors that might have inventory stuck in the channel that might be cleared or any consideration you added to your gross margin expectations for the year if we do see some competitor clearing?

Yeah. Thanks, Michael. This is Andrew. We feel, we talked about this a lot. We feel really good about how we exited 2023 with our inventory in Wilson. As a matter of context, we cleared about $90 million of inventory in Wilson that was deemed desirable to move through a slower moving in the second half of 2023. And so as we stepped into 2024, we feel good about it. And as Omar alluded to earlier, you can meaningfully see the step up in realized, gross profit per product sold as soon as we got into 2024, which is an indicator in our minds, number one, the heat of our brand, how our retail partners appreciate us and the fact that, moving through and the promotional environment was, as it related to our product was meaningfully tied to getting through December. So we're moving our product at strong gross margins now. We definitely do continue to feel the excess inventory in the market with our retail partners. But we again, we believe that we are positioned primarily as that moves through. And to your point about what we've embedded in our plan, we've embedded in our plan that the first half of 2024 will continue to drive toward normalization and you start to see more normalized rates in the back half of 2024.

And maybe Joe and Franco, you guys could give a quick summary of what you're seeing -- what your retail partners and what you're hearing in the market and what your retail partners are telling you starting with Franco and then Joe?

Yeah. Thanks for the questions. We're seeing inventory normalizing. We're very happy where we stand out there from a Solomon perspective, in particular with footwear. We know retail has been very cautious on their booking for 2024 and this is really translating into very strong replenishment business we are seeing. At the beginning of the year, which was a continuation of Q4. So, we are very pleased with where we stand at the moment. We would like to think the world's will be a little happier, would be in a longer term in a much better position, in the short term of some pain, but we are continuing to eat market shares.

Joe?

Yes. And for Wilson, what we're hearing back is that, the consumer we know that the wholesalers from a trade perspective are being more cautious on their replenishments and waiting till they have stronger visibility, but what we're hearing from them also is that they're seeing that consumers are waiting closer until they need the product. There's not a fear of it maybe being out of stock, so they're waiting closer to, say, the baseball season starts till the weather breaks for golf. So we're positive and we see again that the participation rates are really staying robust and strong, so we expect that consumer demand to come. And then some of the feedback we're getting from our retailers in our leading categories as we continue to outperform the competition in the sell through. So we're excited and it shows that strength in our position in the market place for Wilsom.

Michael, did you have a follow-up?

I'm curious, you said that bigger picture, the gross margin expansion for the year is from mix effects. So I'm curious, Stuart, is it -- how should we think about gross margin in the Arc'teryx brand as you put the offense in, any opportunities to expand the gross margins within the brand?

Yeah. We're pleased with how our margins are performing, gross margins and operating margins. So we do see the opportunity for some modest expansion over the course of the year that we expect to flow through and we expect to grow operating profit faster than we'll grow top line.

Thank you.

Your next question comes from the line of Jay Sole from UBS. Please go ahead.

Great. Thank you. Andrew just want to ask you about working capital and can you just give us a little reminder about how you expect working capital to develop this year and next year and sort of compare it to 2022 and 2023 kind of explain the differences? Thank you.

I think I think as you as you think about working capital this year, you'll start to see our, our working capital efficiency improve this year, especially as it relates to 2022. We obviously we were building inventory in 2023, exiting 2022 because of the fact that supply chain was pretty erratic. So we built inventory up in 2023, we held it a little bit longer than we needed to. And so you'll start to see it -- start to drive efficiency in 2024. And as you get out of 2024, I think that we start to get to a more normalized rate in 2025. But we're going to grow inventories, our biggest obviously our biggest working capital element is inventory. We're going to keep inventory right in line with revenue growth as we move through the key performance indicator for us. And obviously with the refinance we're going to be able to keep more of our cash to continue to invest in the business as our finance charges go down.

Got it. Okay. And then is you gave some CapEx guidance. Are you giving any sort of free cash flow guidance or operating cash flow guidance for the year?

Yeah. So we haven't given free cash flow guidance and we were just very, very early on in trying to understand where the financing was going to be and so we haven't given free cash flow guidance. I'd like to get through the Q1 and really start to see where we're going to come out with regard to stabilize my interest rates, FX hedging programs, all of those things trying to get them up, squeeze it all in one quarter is a lot.

And you guys saw in the guidance that even the tax rate is a range. So we're still trying to like narrow down the cash tax rate given the jurisdiction of the various debt and interest deductibility etc.

Got it. Thanks, Omer. Thank you.

Your next question comes from the line of John Kernan from TD Cowen. Please go ahead.

Excellent. Thank you. Congrats on a nice quarter [indiscernible]. Stuart, could you talk to Arc’teryx in China? Obviously it's the biggest region for Technical Apparel in Arc’teryx. Just curious how we should think about the growth rate in China both in 2024 and within the long term algo?

Yeah, John. Hey, it's Stuart. So, yeah, our China business has been really strong. It's -- in 2023, it was just over 40% of the total. It is our largest region by sales and by profits. We enjoy slightly higher gross margins as a result of the price advantage that we have in China. The growth rates, what I would tell you have been pretty consistent between North America and China in certainly in the latter part of 2023 and certainly into the beginning of 2024, we want to have balanced growth regionally. And so we're very focused on setting the business up to achieve that. And so I think we gave a little color in the prepared remarks around the pace of growth that we're seeing in China. And we can see we have seen a sequential acceleration into Q1 from Q4 and that acceleration has been consistent with North America and China. So, the stores that we operate there are the most productive of any region in the world. We've been focused on a strategy there of opening fewer stores that are larger and more productive. The stores that will open in North America, we're very happy with and very productive, but the China stores are tending to be larger and more revenue per unit. And we shared some of that in the certainly in the IPO process and with the disclosure to date. So I'll leave it there.

Excellent. Thank you.

Your next question comes from the line of Laurent Vasilescu from BNP Paribas. Please go ahead.

Good morning. Thank you very much for taking my question. I wanted to ask first on my one question Andrew, in 4Q, DTC was up 37%, while wholesale was down 4%. Could you probably share with us, how we think we should think about those two channels for the first quarter as well as the full year? And then a bigger picture question on footwear. Could you maybe share with the audience how big Solomon footwear, was for 2023? Where can it go over the next few years? And are there any key learnings that you can share, from Salomon's success in footwear that could extend into Arc’teryx? Thank you very much.

First to Franco and the Salomon Footwear.

Yeah. Look, we see in Q1 in particular the pressure remaining. We said earlier, the pressure on the order book is there from a wholesale perspective, but DTC performance is very strong at the moment and we see that momentum in DTC to continue in Q1 as well as the strong momentum in Asia. So we're very confident we're off a good start to the year.

Yeah. Thanks. And then as you think about, DTC versus wholesale, obviously, wholesale was down for all the reasons we talked Q4, very promotional environment, excess inventory. We do not anticipate wholesale to be down like that as you move forward. In fact, we believe that wholesale will be -- for us wholesale will be for the full year up high-single digits and DTC will continue to be up around, in the 30s, like below 30%. And that's how we blended.

That's very helpful. If I could squeeze one more in, how do we think about China for this year, Andrew, if you can give some color on that in terms of growth rate?

With regard to the China, the region, we still expect China to see a very strong growth rate. Again, when we talk about disciplined planning, you're going to see us plan a number in the high 20s, low 30s, but we will have the inventory to be able to service it if the demand is there.

Thank you very much.

Your next question comes from the line of Jonathan Komp from Baird. Please go ahead.

Yeah. Hi. Hello. I want to follow-up on the five year targets for Technical Apparel. The targets imply reaching well above $3 billion of revenue over the next five years. So, Stuart, I'm just wondering as you think about Arc'teryx, the long term opportunity, how do you size up the potential and what are some of the key drivers you're looking forward to in the near term here?

Hey, Jonathan. So, yeah, we're very excited for the prospects for the brand globally. We see a long runway in every region. In North America, we ended the year just under 50 stores. We see the potential for over 200, and we see exciting, additional store runway in Europe and Asia, both in China and outside of China. So the very, sort of concrete objective way we're seeing the success in our store strategy is probably the easiest way to think about how we see the revenue development towards the five year targets occurring, we're equally bullish on our digital business. In North America, our digital business is about the same size as our retail business. And, it's an exciting, omnichannel strategy that we have, where channels really closely intertwined. So, we capture demand and fulfill that demand in a very cross channel manner in North America as well as Europe and Asia. Our business in China is more weighted towards retail. And so the store business there is a bigger part of the overall mix. But we also see the continued focus on product innovation. So while we have an exciting channel expansion story, the investments that we're making and the leadership position that we have in the market and product innovation is critical, to how we see our success developing as well. So, the footwear launch that we have happening this week, tomorrow we'll actually launch three new footwear models. The first of which that have been designed in our Portland, footwear, design center, is emblematic of our commitment to innovation and success that we're creating through that strategy. So, I would see certainly the channel expansion, product innovation. And then the third one I would highlight is really investment in our brand and our community strategy. So the brand is very undeveloped or the awareness levels are quite low, in most of the geographies where we operate. And so how we're able to drive brand awareness will also drive engagement with the brand, traffic conversion to our channels. So we see the investments that we're making across our brand and community activities as a third element of how we will achieve the targets that you mentioned.

Operator, I think we have time for one oh, sorry, Andrew you had something.

Yeah. Hey, I just, I want to go back and correct a comment. So on the last question, I think this is an important comment for all of you guys, for my correction on. Wholesale for the full year will be up mid-single digits, I think it's a high single digits, so mid-single digits for the whole year, retail up right around 30%. And in the Q1, as you think about it, wholesale will be down slightly to flat to last year. I remember last year was a very strong wholesale Q1, and DTC will be up around 20%. So I think it's just to make sure that you guys update your models to reflect that.

Operator, time for one more.

Yes. Our final question today comes from Yiren Lu from CICC. Please go ahead.

Yes. Thank you for taking my question. I just have a long term question for Arc’teryx. As you have mentioned, the Arc’teryx expansion, the DTC expansion in the United -- in the North America is a very important strategy for us. I just want to know, while we are very glad to hear our new flagship store opening in North America recently, what has been the changing part of our DTC expansion? And what are our unique strengths that make us doing better than our competitors? Thank you.

Yeah. Hey, Yiren. It's Stuart. So, yeah, North America, we see an exciting story emerging, DTC story, as you reposition the brand from primarily wholesale to now primarily direct to consumer over the last three years. And we're seeing exciting trends in Canada and in the United States. We're probably a little farther ahead in Canada, as it's our home market. But we're really bullish on the United States as well. And so we'll open a couple of flagships that I mentioned. In Toronto, we'll open a 8,000 square foot flagship, on Bloor Street. In New York City, we're going to open a 14,000 square foot, flagship, in the heart of SoHo on Broadway, that we're super excited about Manhattan in July in the summer. But the overall momentum that we're seeing across every part, every region where we're operating in North America is pretty exciting and it's quite balanced as I mentioned between our retail strategies and our e commerce strategies. And as you ask the question like how are we winning market share and how are we distinguishing ourselves in the market, we view Arc’teryx as the pinnacle competitor in the outdoor space. We believe we have the very best products, the highest level of innovation, the highest level of quality that separates our products based on the merits of its performance. And we complement that with what we believe is, really the only vertical brand in the outdoor space. And so, we are building community where we open stores. We are engaging, with our customers in a way we do not see other brands doing. And when you listen to how other brands talk about how they develop their business, they talk about their stores as a transactional platform. We operate our stores as a part of the communities where we operate and we want to engage, in those communities. A good example of this is our rebirth strategy where we not only want to sell you a jacket, we want to help you maintain it. We want to help you clean it properly. We want to help ensure that it's repaired when it needs it. And then when you're ready for a new jacket, you're going to trade it in and we're going to keep that jacket, in service with another guest through our [indiscernible] program. So, we believe this creates a very distinct business model, that is, that is separated in the marketplace today, and is part of the success that we're achieving.

Great. Great.

And that's all the time we have for questions today. I’ll now turn the call the call back over to Omar for closing remarks.

Thanks everyone for joining. We'll see you after next quarter.

This concludes today's conference call. Thank you for your participation and you may now disconnect.