Amer Sports, Inc. (NYSE:AS) Q3 2024 Earnings Call Transcript

Amer Sports, Inc. (NYSE:AS) Q3 2024 Earnings Call Transcript November 19, 2024

Operator: Hello everyone and welcome to Amer Sports third quarter fiscal 2024 earnings call. Please note that this call is being recorded. After the speakers’ prepared remarks, there will be a question and answer session. If you’d like to ask a question during that time, please press star, one on your telephone keypad. Thank you. I’d now like to hand over to Omar Saad, Vice President of Investor Relations. You may now begin.

Omar Saad: Hello everyone. Thanks for joining Amer Sports earnings call for the third quarter of fiscal year 2024. Earlier this morning, we announced our financial results for the quarter ended September 30, 2024, and 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 financial measures. We will begin with prepared remarks from our CEO James Zheng, and CFO Andrew Page, followed by a Q&A session until approximately 9:00 am Eastern. James will cover key operational and brand highlights, and Andrew will provide a financial review at both the group and segment levels and also walk through our updated guidance. Arc’teryx CEO, Stuart Haselden will also join for the Q&A session. With that, I’ll turn the call over to James.

James Zheng: Thanks Omar. The third quarter was very strong for Amer Sports Group across operating segments, geographies and channels. Our premium technical brands are taking market share and creating white space in sports and outdoor markets around the world. We are executing well against our largest growth opportunities in Arc’teryx and the Salomon footwear, while our market leading ball and racquets and the winter sports equipment franchise both grew faster than expected. Amer Sports Group generated 17% sales growth in Q3, led by our flagship brand, Arc’teryx. We achieved a very strong 14.4% adjusted operating margin, well above our expectations. We continue to enjoy strong growth margin expansion driven by the pricing power of our brands and a healthy mix shift toward our highest margin franchise, Arc’teryx.

Within our other performance segments, Salomon soft goods continue to grow double digits, led by footwear, while ball and racquet sales trends improved, reaching double-digit growth in Q3. We believe Amer Sports is very a uniquely positioned company within the global sports and outdoor space, and several factors give me confidence for the rest of this year and beyond. First, we own and operate our unique and valuable portfolio of premium outdoor and sports brands. Each one is fueled by technical innovation and positioned at the pinnacle of its segment. Our brands have high engagement, conversion and [indiscernible] with consumers but are still relatively small players on the global stage with significant room to grow. Second, Arc’teryx is the breakout growth story with standout growth and profitability for the outdoor industry, charting new territory with its disruptive D2C model and the unique competitive position.

Our growing store network, pinnacle products and deep community connections allow us to continually attract new consumers to our brands and also have success expanding into new categories, such as footwear and women’s. Third, we believe that Salomon, our brand born in the mountains, has a unique technical performance position and design esthetic within the global sneaker market, but still has low market share and a long runway of growth ahead, especially at this time when consumes are more open to new sneaker choice than ever before. Fourth, Wilson and our winter sports equipment brands have longstanding, authentic heritage, premium position, high performance products, and a leading market position. Because they already enjoy strong equipment market share, they have delivered slower long term growth in their core equipment business but still have large soft goods potential, especially the Wilson Tennis 360 line.

Fifth, while other consumer companies faced challenges in Greater China, in Q3 we generated 56% growth there, continuing to well outperform the market. We are seeing strong momentum across all of our three big brands, including strong consumer confidence following the government stimulus actions. I’d like to highlight some of the key reasons behind our standout performance in Greater China. Number one, our brands compete in one of the healthiest and the fastest growing consumer segments in China, the premium sports and outdoor market. The outdoor trend in China continues to be very strong, attracting younger consumers, female consumers, and even luxury shoppers. Additionally, the China consumer landscape today has evolved into a market of winners and losers, with some brands doing extremely well and others underperforming.

Our three small specialized brands are known for their [indiscernible] properties, high quality and technical innovation which resonate with Chinese shoppers. Thirdly and the most important, we believe we have a great team in China. Our deep expertise and unique scalable operating platform gives us a significant competitive advantage across the portfolio. Now coming down to some key highlights from our segments in Q3, starting with technical apparel, which is led by our fastest growing and now largest brands, Arc’teryx, Arc’teryx delivered another very strong quarter with healthy growth across all regions, channels and categories, especially footwear, women’s, and [indiscernible] jackets. The brand momentum was most evident in its strong [indiscernible] performance against a very difficult growth comparison from last year.

Arc’teryx is executing well its retail expansion plan, opening nine net new brand stores globally in Q3, bringing the total owned brand stores count to 134. Key new locations include four openings in the United States, two in Canada, two in Australia, two in China, and one in Germany. Arc’teryx opened another brand store at the Fashion Island Mall in Newport Beach, California, bringing us to four stores in Los Angeles, an epicenter market for us. The brand is resonating well with LA consumers, giving us confidence that Arc’teryx has large growth potential even in warmer markets. Doubling down on our commitment to the LA community, we are hosting our first-ever Arc’teryx Backcountry Academy in Mammoth, California this winter, a reflection of the opportunities we see in this region.

In Europe, we have opened net five new stores this year so far, and we are seeing exciting results including strong affinity with both tourists and the locals. In Paris, local consumers are embracing our store in Le Marais. Thirteen years of engaging with French and European alpinists at our climbing academy in Chamonix had generated significant brand recognition and appreciation with French consumers even before we opened our first store there. We also opened our New York City flagship store at 580 Broadway in September. This new outlet store features our most pinnacle expression of ReBird, including shoppable ReGear in-store for the first time, our large ReBird service center facility for care and repair, and our unique in-store coffee shop.

This unique flagship delivers the brand in a slightly new way in the U.S., taking cues from the success of our retail format in China, presenting much of the assortment by activity instead of by category, which creates a strong energy and engaging presentation of our products. The store is performing very well relative to our internal expectations in its first few months. Shifting to products, innovation is at the heart of Arc’teryx DNA. Recently, we were thrilled that our MO/GO motorized hiking pants were recognized by Time Magazine as one of the best inventions of 2024. Designed to support users in their outdoor recreational pursuits, MO/GO stands for Mountain Go and is the world’s first pair of powered hiking pants. MO/GO pants incorporate robotics with carbon elements and was engineered by the Arc’teryx advanced concepts team alongside external partner, Skip, which is a Google X spinoff dedicated to tackling mobility challenges.

We believe this technology has the potential to increase accessibility to outdoor sports in a meaningful and scalable way, regardless of physical ability. Also, Arc’teryx footwear continued it’s early trajectory since launching its first in-house line, growing strong double digits across all regions and channels in Q3. The Kragg continues to be wildly successful, including our latest insulated version for cooler fall and winter temperatures. This is a great example of how we will add new dimensions to our key franchise with ideas and inspiration coming through collaboration with our [indiscernible] teams. We also introduced a new hiking model, called the Kopec, which has also delivered strong early results. Overall, we are extremely pleased with consumer reception to what we believe is the best line of technical performance footwear designed for mountaineering, and because of its unique position in the sneaker marketplace, strong sales in our DTC channels and enthusiastic features from key wholesale accounts, our confidence is growing that footwear will become a very sizeable and profitable growth avenue for Arc’teryx, both in owned retail and in certain brand-relevant wholesale accounts.

Women’s continues to perform extremely well, growing very strong double digits, outpacing overall brand growth, and represented nearly one quarter of sales in Q3. This outperformance was driven by seasonal relevant color and [indiscernible] combined with breakout new styles, like the Cartier [ph] pants. We continue to see significant upside in the category as we add more models, colorways and style options that resonate with her. Lastly, an update on our cutting edge community engagement programs. This summer, Arc’teryx launched gym residencies in climbing gyms from New York to Paris to San Francisco as part of the brand’s Summer of Climb. Investments in brand awareness and activities that feed off the global excitement and the popularity of climbing are driving awareness, cultural relevancy, and position Arc’teryx at the heart of this phenomenon.

Our academies continue to generate strong buzz and an affinity for the brand, including our largest ever academy in the French Alps in Chamonix with 650-plus participants, ranging from beginners to world-class climbers. Moving to the outdoor performance segment, which also delivered a solid quarter and outperformed our expectations, led by Salomon soft goods and [indiscernible] partially offset by softer trends in Salomon winter sports equipment. The higher margin, fast growing Salomon footwear franchise still represents a very low share of the global sneaker market. Today, Salomon soft goods represent approximately two-thirds of the outdoor performance segment, up significantly from 54% in 2022. We believe Salomon sneakers have an authentic and unique market position with technical features designed for the mountains but also great for everyday use.

Our unique style and technical attributes are resonating with consumers at a time when they are more receptive than ever to wearing new sneaker brands. Long term, we expect Salomon soft goods to grow double digits annually. In Q3, Salomon footwear continued to show strong traction in Greater China and APAC, where consumers love our [indiscernible] offerings that combine a distinct trendy look with high technical features. In China, we have created a new category called outdoor sneakers which especially resonate with young consumer. Our Salomon compact shop format in China is also working very well, profitable starting day one and four times more productive per square foot than industry average. We are continuing to expand Salomon shops in Greater China, opening 39 net new Salomon shops in Q3, including both owned stores and partner stores, bringing our total count to 165 in Greater China.

We expect to end 2024 with approximately 200 Salomon stores in China with opportunity to grow to several hundred locations over time in just Tier 1 and 2 cities. We have also begun testing the Salomon compact shop format outside China, glowing up new locations in APAC and EMEA, including Tokyo, Singapore, and the Le Marais shop in Paris. We recently opened our first Salomon flagship in Shanghai, a 5,400 square foot pinnacle brand expression in the affluent shopping district, Xintiandi, which combines both footwear and apparel in a comprehensive offering and highly immersive brand experience. We are also excited to share that we opened a pop-up shop in the heart of New York City in Soho in October. This is our first branch store in the U.S. and comes ahead of plans to open one to two permanent New York stores in 2025.

Residing in the old Arc’teryx Soho location, the Salomon store is performing very well so far with strong response from both tourists and locals. Globally, we plan to end the year with 404 Salomon shops, including both owned and partner stores, doubling the count from last year. In Europe, Salomon footwear and apparel are performing well, especially driven by strong reorders, and because Salomon is selling so well, this is also driving our higher preorder rate. In both EMEA and North America, Salomon sports style is still early in its long term development. We have evolved our go-to-market organization in both markets, more clearly separating the winter sports equipment sales team from the Salomon footwear team, which should help us reach our potential in both categories given their unique brand markets.

We continue to be very excited about opportunities to translate our strong brand health into broader commercial success in the U.S, the largest sneaker market in the world. As we evolve as a company, we are announcing two leadership changes to the Amer Sports executive structure effective January 1, 2025. First, we are pleased to announce that Guillaume Meyzenq, current Chief Product Officer for Salomon, has been appointed President and CEO for Salomon. Additionally, Michael Hauge Sørensen, Chief Operating Officer and executive officer for Amer Sports, has decided to step down from his current position and will return to his former role as advisor to the Board of Directors of Amer Sports. We conducted a comprehensive search for the next Salomon CEO, including both internal and external candidates, and concluded that Guillaume is the right person to take Salomon to the next level.

I have worked closely with Guillaume the last several months as interim CEO. He has built a strong reputation during his 28 years at Salomon and is extremely well respected throughout our company and the industry. Born and raised in the French Alps, an avid skier and outdoorsman, Guillaume embodies the core values of Salomon. He brings a strong track record of operational excellence and strategic innovation in diverse leadership roles across Salomon, including sales, product innovation, and both soft goods and winter sports equipment. More importantly, Guillaume was instrumental in the doubling of Salomon footwear sales over the last five years, including creating and developing our key sports style category which is now approaching one-third of Salomon sneaker sales.

We have the right team and strategy in place, and I have full confidence in Guillaume to lead Salomon for the next stage of its growth journey. Moving onto ball and racquet highlights, we are pleased that ball and racquet growth trends continued to improve in Q3. Double-digit growth was driven by strong trends in racquet sports, especially performance tennis, bolstered by our Roger Federer racquet line and the growing tennis popularity in China following Zheng Qinwen’s Olympic gold medal. While still in its early stage, our Tennis 360 strategy is proving to be a key driver for the Wilson franchise, led by apparel and fall wear clothes and accelerating expansion of Tennis 360 shops in China. We saw record sales at our U.S. Open shop earlier this fall, and our new line of Roger Federer premium performance racquets, bags and accessories, launched in August, has been extremely successful in the first months, driving the strong growth in our key performance racquet segment [indiscernible] with potential growth in Q3 as retail inventories normalize and the retail begins accelerating replacement orders.

Our [indiscernible] club collaboration continues to drive brand heat and strong sell-through. With that, I will turn it over to Andrew.

Andrew Page: Thanks James. I’m excited to discuss our strong Q3 performance and the positive revisions to our full year 2024 guidance, as well as our first look at our outlook for 2025. Before diving in, I’ll quickly address a couple of housekeeping items. First in Q3, we updated the presentation of our credit card processing fees which were previously recorded as contra-revenue and have now been reclassified as selling, general and administrative expenses. The re-class has no impact on operating profit. We have included a slide in our earnings deck with a schedule of the annual impact since 2021 and the quarterly impact since 2023. Second, Q3 adjusted operating margin benefited by approximately 100 basis points from $14 million of government subsidies that we received in the third quarter, which we previously expected to receive in Q4.

We are thrilled with the underlying sales and margin performance of our brand portfolio. The fast growth of our high margin Arc’teryx franchise is elevating the financial profile of Amer Sports in total, and this dynamic allows us to deliver strong profitable growth for our shareholders while reinvesting in the many long term growth opportunities across our portfolio. Amer Sports grew sales 17% in Q3 on both a reported and constant currency basis. The strong group sales performance was led by technical apparel, while outdoor performance and ball and racquet sports also delivered very solid growth. By channel, the group continues to be led by DTC, which grew 41% led by Arc’teryx and Salomon footwear, but also in Q3, we saw wholesale trends improve, growing 8% year-over-year led by Arc’teryx and Wilson.

Regional growth was led by Greater China, which increased 56%, followed by Asia Pacific which grew 47%. Importantly, growth in Americas and EMEA accelerated from 1% each in Q2 to 7% and 4% respectively in Q3. Turning to profitability, adjusted gross margin increased 410 basis points to 55.5% in Q3, primarily driven by positive segment, product, regional and channel mix shift, combined with lower discounting actions. Going forward, we expect our highest gross margin franchise, Arc’teryx to continue to grow significantly faster than the rest of the portfolio and continue to be the biggest underlying driver of our ongoing gross margin expansion. Adjusted SG&A expenses as a percentage of revenues increased 210 basis points and represented 42.3% of revenues in Q3, mainly driven by SG&A de-leverage at outdoor performance due to Greater China and Asia Pacific growth plan investments.

Also, technical apparel slightly de-levered due to investments in opening stores. We will open net 30 new Arc’teryx stores in 2024, the highest ever in one year. At this time, we do not expect to significantly increase the number of annual Arc’teryx openings from this run rate. We generated a 280 basis point increase in our adjusted operating margin from 11.6% last year to 14.4% in Q3 2024, above our guidance of approximately 11% to 12%. As mentioned above, our adjusted operating margin benefited by the $14 million early receipt of government subsidy payments. Adjusted corporate expenses were $26 million versus $23 million in Q3 of last year, driven by higher personnel costs. Depreciation and amortization was $71 million, which includes $32 million of ROU depreciation.

Adjusted net finance cost in the quarter was $45 million, at the low end of the $45 million to $50 million range we guided to on our last call. In the quarter, our adjusted income tax expense was $78 million, which equates to an adjusted effective tax rate of 52%, in line with our guidance of 50% to 55%. Adjusted net income was $71 million in Q3 compared to an adjusted net loss of $13 million in the prior year period. Adjusted diluted earnings per share was $0.14 compared to an adjusted diluted earnings per share of $0.03 last year. Turning to segment results, technical apparel revenue increased 34% to $520 million, led by Arc’teryx. Growth was fueled by 40% DTC expansion, including a 20% omni comp, a great result comparing against a 68% omni comp in the third quarter of last year.

Arc’teryx DTC momentum was fueled by both new and existing consumers across all regions and channels. The Arc’teryx brand continues to experience broad-based strength and is outperforming across every region, channel and category. DTC remains the core growth engine, but we also experienced strength in the wholesale channel, which grew 26% for the segment. U.S. wholesale was a standout especially for Arc’teryx. Regionally, technical apparel growth was led by Asia Pacific, followed by Greater China and the Americas. Additionally, Amer returned to growth driven by a strong D2C performance. Consumer love for Arc’teryx in China continues to grow, and the brand’s very strong performance in APAC continued into Q3. Technical apparel adjusted operating margin expanded 370 basis points to 20%, driven by higher gross margin from favorable product, channel and regional mix.

The technical apparel segment operating margin also benefited 200 basis points from the Q3 receipt of government subsidy payments that were expected in Q4. Outdoor performance segment revenues increased 8% to $534 million, driven by double-digit top line performance in Salomon footwear and apparel and strong DTC channel growth, especially in Asia Pacific and Greater China. This was partially offset by a decline in Salmon winter sports equipment and the wholesale channel. By channel, outdoor performance DTC grew by more than 50%, while wholesale declined slightly driven by continued soft wholesale market conditions in EMEA and North America for Salomon winter sports equipment. By region, very strong growth in Greater China and APAC were partially offset by slower sales in EMEA and North America.

North America was a tale of two businesses: strong double-digit growth in soft goods offset by a more challenging environment for winter sports equipment. As we said last quarter, 2024 would be a slightly softer year for winter sports equipment due to slower trends in North America, where ski equipment sales are rebasing after a strong run through and beyond COVID. This is in addition to cautious orders in EMEA after two tough snow seasons in Europe; however, given our great brands and scale advantages, we are taking market share as our businesses are down less than the market. Longer term, although we expect winter sports equipment to be a slower growth business, the industry remains healthy and the consumer demand for ski vacations remains consistent and strong, irrespective of weather, especially as resorts have become adept at making their own snow.

Winter sports equipment now represents one-third of outdoor performance, and long term we expect this business to grow low single digits annually. Outdoor performance adjusted operating margin contracted 40 basis points from last year’s record performance to 17.5% this year. This was driven by higher SG&A due to store and team investments to drive regional acceleration for Salomon in China and APAC, offsetting gross margins gains which were mainly driven by a favorable region, channel, brand and product mix. Moving to ball and racquet, revenue increased 11% to $300 million as inventories normalized in the market and replenishment orders accelerated. Our constant innovation and top quality products have allowed Wilson to take share during these past few quarters of inventory re-balancing.

We are very pleased with the strong rebound and continue to expect ball and racquet to grow low to mid-single digits long term. By category, the return to double-digit growth was led by our marquee racquet sports franchise, as well as our small but fast growing soft goods segment. Inflatable balls and golf also returned to growth in Q3. Our Tennis 360 strategy continues to be a key driver for the Wilson franchise, led by footwear and apparel growth, performance racquets, acceleration and expansion of Wilson Tennis 360 shops in China, as well as paddle and pickleball growth. Ball and racquet segment adjusted operating profit margin increased 600 basis points compared to the third quarter of 2023 to 6.9%, primarily driven by an increase in new product launches this year which carried higher gross margins, and supported by lower discounting given the inventory clearance that began last year in Q3.

Looking ahead, we are confident that our market share and flow of innovative products positions ball and racquet well in Q4, when we face our easiest comparison and also have our strongest pipeline of new products. Turning to the balance sheet, we ended the quarter with $2 billion of net debt, up from Q2 as we typically draw on our revolver in Q3 to fund inventory build ahead of our key winter season. Using the midpoint of our 2024 implied adjusted operating profit guidance, our net debt to adjusted non-IFRS EBITDA ratio was approximately 2.8 times at the end of Q3. Deleverage on our balance sheet remains a priority and our goal is to reduce our leverage ratio to 1.5 times or better over the next few years through both EBITDA expansion and debt pay down.

Our focus on inventory discipline is paying off as inventories finished Q3 up only 12% year-over-year versus 17% sales growth. Also, I’d like to provide a quick update on our regional sourcing exposures, given the increased market focus on potential U.S. import tariffs. Greater China represents less than 30% of Amer Sports’ global sourcing, and looking at Amer Sports Group in totality, sourcing from China to the U.S. market represents only 10% to 12% of total Group revenues. Similar to the last period of rising China tariffs, our ball and racquet segment would be most impacted, predominantly tennis racquets, baseball bats, and basketballs. We have some degree of flexibility to adjust our supply chain, but price increases will be the primary tool we utilize should tariffs occur.

Now turning to guidance, given our strong third quarter results and confidence in our brands and their financial outlook, we are raising our full year guidance for sales, adjusted gross margin, and adjusted diluted EPS. As we said on our previous earnings calls, should strong trends continue and better than anticipated demand materialize, we will be well positioned to deliver financial performance ahead of our expectations. For the full year, we are raising our revenue guidance to 16% to 17% growth despite greater currency headwinds as a result of the strengthening of the U.S. dollar since the election. This incorporates approximately 34% growth in technical apparel, roughly 8% revenue growth in outdoor performance, and 4% in ball and racquet.

We are increasing our full year adjusted gross profit margin guidance from approximately 54.5% to 55.3% to 55.5%; however, we are maintaining our full year adjusted operating margin guidance toward the high end of 10.5% to 11%. Given the strength in our brands, we are choosing to opportunistically accelerate high return investments to support our key growth opportunities, including marketing and store build-out. Our net finance cost for the year will be $200 million to $210 million, including approximately $15 million of finance costs in the first quarter of 2024 that won’t be recurring. We expect to have an effective tax rate on adjusted pre-tax income of approximately 37% for the full year of 2024. We now expect to achieve full year adjusted diluted EPS in the range of $0.43 to $0.45 per share, versus our previous guidance of $0.40 to $0.44 per share.

Looking at the segment margins, we expect a 2024 adjusted operating profit margin slightly above 20% for technical apparel, high single-digit percentage for outdoor performance, and low to mid-single digit for ball and racquet. Lastly as we begin to look beyond this year, we are confident in our initial 2025 outlook and expect to deliver results consistent with our long term financial algorithm of low double-digit to mid-teens annual revenue growth and 30 to 70-plus basis points of annual adjusted operating margin expansion, driven by gross margin expansion. We would also like to highlight two below operating income items to consider for 2025. Our effective tax rate will be approximately 37% and we expect net finance costs in the range of $180 million to $190 million.

With that, I’ll turn it back over to the Operator for Q&A.

Q&A Session

Operator: We are now opening the floor for a question and answer session. [Operator instructions] Your first question comes from Lorraine Hutchinson from Bank of America. Your line is now open.

Lorraine Hutchinson : Thank you, good morning. James, can you discuss your view on the Chinese consumer, how that has evolved over the course of the year, and then where do you see Amer’s biggest opportunity in the region?

James Zheng: Okay, thank you Lorraine. I will say the consumer, especially from China markets today, they are–especially in our segments, they are still looking for newness, and we are pretty lucky the sports segment is still booming in the China market. We estimate there’s a high single digit growth [indiscernible] in our sports industry this year in China, and especially outdoor segments grow more than the industry average. We can tell more and more consumers, especially in Tier 1 and Tier 2 cities, they are looking for–they are really treating outdoor activities [indiscernible] part of the lifestyle, so the participation level is getting higher than our expectations. It’s a very good moment for us, especially Arc’teryx and Salomon and certain other segments. We can have a clear benefit from the overall market dynamics.

Lorraine Hutchinson: Thank you.

Operator: Your next question comes from Jay Sole from UBS. Your line is now open.

Jay Sole: Great, thank you so much. I guess my first question is on Arc’teryx – you know, what changed over the last 90 days that has you most excited, maybe particularly about some of the newer growth drivers? Then secondly, Andrew, you mentioned with respect to the fiscal ’25 initial outlook that you’re giving, some financing costs. Can you just talk about capital allocation priorities, how much free cash you expect to generate, and what you plan to do with that free cash? Thank you.

Stuart Haselden: Hey Jay, it’s Stuart. I’ll speak to your question about Arc’teryx. Yes, I think one of the biggest milestones in the last 90 days was our Broadway store opening here in Soho, on Manhattan – really exciting expression of the brand. It represents sort of an evolution of how we’re creating the store experience, the retail experience. Importantly, the store also has the first ever dedicated ReBird sales floor, and we’re learning a lot from that part of the 580 Broadway store that we’ll be able to take to other locations as we expand the ReBird concept, but it also just included a lot of interesting elements – an expanded valence shop, a really strong expression of our footwear line. I would say a second point I would highlight is just the ongoing success we see in our footwear business, exciting momentum there.

We’ve got new models in the pipeline, we launched our Kopec hiking shoe in the third quarter to a lot of enthusiasm from our guests, so we’re excited with the momentum that continued in footwear, and also in women’s. We saw over 50% growth in our women’s category in the third quarter, so exciting to see acceleration there. We picked up 200 basis points of sales penetration in our women’s category, and we feel like we’re just getting started in women’s. There’s a lot of upside. We feel like the potential assortment is much broader than what you see today in the store. There’s a lot of opportunity to evolve our women’s line, so yes, those are some of the highlights I would mention today.

Andrew Page: Hey Jay, thanks, this is Andrew. Just following up on the capital allocation question, glad you brought that up, it is definitely a priority of ours. As you can see in 2024, we were intentionally focused on growing the business. We opened up net 30 new Arc’teryx stores this year. We expect a similar run rate next year. As we went into 2024, we talked about capital expenditures approaching $300 million, which is our largest expenditure yet, again focusing on store build-out and implementation of our expanded ERP system in the business. As we go into 2025, I anticipate that we will continue to focus on growing the business. We will continue to focus through capital expenditures. Another key focus is going to be managing our debt carrying costs.

As an example, you see our net carrying costs coming down slightly as we’ve gone through and swapped some of our higher interest rate debt for lower interest rate debt. We’ve re-priced our debt and [indiscernible] you’ll see an annual run rate of almost $10 million next year on the re-pricing, so we will continue to focus on growing the business, we will continue to focus on delighting our consumers. We will be focused on debt pay down and managing the carrying costs of the business, and we expect free cash flow to increase next year over what you see this year.

Jay Sole: Got it, thank you so much.

Operator: Your next question comes from Matthew Boss from JP Morgan. Your line is now open.

Matthew Boss: Thanks, and congrats on the nice quarter. Stuart, could you speak to performance versus plan in the third quarter across regions at Arc’teryx, and maybe just any comments on demand you’ve seen so far in the fourth quarter relative to the 20 comp in the third quarter? Then Andrew, raised gross margin, held operating margin, maybe if you could just elaborate on SG&A investments in the fourth quarter and how best to think about SG&A relative to sales next year.

Stuart Haselden: Hey Matt, it’s Stuart. I’ll speak to your first question there on Arc’teryx. We’re really pleased with our performance versus plan overall and by region in the quarter. As you heard in the prepared remarks, we exceeded our expectations in every region and every channel and every product category, so strong momentum across the board. As we’ve seen in prior periods, our APAC business, led by our Japan business, has been a standout performer with the highest growth rate of all the regions, so we’re really excited for the momentum there; and again, there was a consistent degree of success across the product categories in that region. Our China business was the second fastest growing, followed by North America and Europe, but overall very pleased with the momentum.

High full price sell-throughs, particularly in North America, we saw an acceleration in our full price sell-through and a reduction in our off-price selling in the period. You know, we’re pleased with our comps, our two-year stack at 88%, we feel is really strong. I would say if we had more inventory, we would have had even higher comps, and that’s probably the opportunity we have as we look into the future. We left sales on the table, frankly, as we are now chasing inventory across a number of categories. Footwear in particular has been far ahead of our expectations. We’re chasing–the Kragg model in particular has been a really successful model for us and out-of-stock often. Those are some of the headlines, I think by region. In terms of the Q4 outlook, I think the guidance that we shared kind of reflects our perspective.

We see it, honestly, as a continuation of the strong momentum we’ve seen through the first three quarters.

Andrew Page: Hey Matt, thanks for the question – this is Andrew. We are extremely pleased with our continued gross margin expansion throughout the year. We’ve continued to deliver a high quality expansion in earnings of the organization, which has allowed us to invest in high return investments. As you see, we expanded gross margin in Q4, some of that to the bottom line, but additionally much of that to continued investment. Some of the areas that we’re going to continue to focus on is our new Arc’teryx stores, Salomon stores in China which James mentioned, as well as Wilson stores in China and rest of APAC that are doing very well. We’re really excited about the expansion of our Tennis 360 concept that is really generating traction with the consumer.

In addition, talent acquisition, retention and technology are additional areas that we believe will drive sustainable growth for us. As we look into 2025, we continue to remain consistent with our plans to be right around flat leverage in 2025 and start to begin to leverage the business post-2025, into 2026.

Matthew Boss: Great. Best of luck.

Operator: Your next question comes from Paul LeJuez from Citi. Your line is now open.

Kelly : Hi, thanks. This is Kelly on for Paul. Stuart, could you talk a little bit more about the footwear opportunity and potential to expand into wholesale? Where do you see the biggest opportunities there, and do you have the inventory currently to fulfill demand in that channel? Then just separately, it looks like you’re seeing good performance in the Salomon footwear in North America. How are you thinking about that growth specifically in the North American market, given some of the challenges you face gaining traction there as we move into F25? Thanks.

Stuart Haselden: Hey Kelly, it’s Stuart. I’ll take your first question there. On Arc’teryx footwear, yes, we’re definitely looking into the future and thinking about the broad strategy for expanding our footwear business, and that will include not only our direct-to-consumer channels but importantly wholesale, and so we have a number of valued, high quality wholesale points of distribution for our footwear today, but we think it’s small in terms of what’s possible. We think it’s important that we have a strong presence through the wholesale channel, especially for footwear, not only to build brand awareness but it’s also how our guests want to shop for footwear often, and so while we’ll continue to have great offerings in our own stores, our own digital points of distribution, wholesale is a critical part of the channel mix.

The inventory planning that’s happening now is really obviously aimed into next year, and we have reset our expectations at a higher level in terms of what’s possible, based on what we’ve learned in 2024. It’s an exciting new part of the business. We’ve shared previously our penetration of sales had previously been around 6% in footwear. It’s jumped up to 10% since we launched the new models beginning in March. Our midterm goals are to see footwear reach 20% of revenues in the coming years, and so we feel like we’re on a good trajectory to achieve that.

James Zheng: Hey Kelly, this is James. [Indiscernible] comments on Salomon developing in North America. First of all, I’d like to say we are very excited about our innovative product pipeline we built up for Salomon, especially footwear, and also we improved this footwear, that we called out the sneaker category really comparing to the younger consumers in China and EMEA, we already see a great light. For Salomon [indiscernible] in the U.S., I will say we are still at the preliminary stage, and we are on the way to learn how we penetrate the market in the right order. The pop-up shop we opened in New York City on October 2 is kind of a showcase for the brand, to really demonstrate what the brand stands for, and the first month performed extremely well and gives us huge confidence to continue to roll out these kind of similar, we call it a footwear compact shop in the United States next year.

Meanwhile, we also identified certain key accounts to try to build up a strong partnership with them. Besides our long term partner, IEI, we’re also actively looking for the retailer, like [indiscernible] Paris from the west part of the United States, Nordstrom, and all these kind of new retailers for us, and to try to give the right level of product assortment and also high standard merchandising displays, overall presentation in these kinds of shops and to see how the market looks like. Also, we are also working on the community strategy to really help us to build up our overall Salomon footwear awareness in the market in the United States. So preliminary stage, but we already got very exciting results from the areas. We see great potential for our Salomon footwear in the United States, so we will keep you guys updated on our overall progress in the future.

Kelly: Thank you, best of luck.

Operator: Your next question comes from Laurent Vasilescu from BNP Paribas. Your line is now open.

Laurent Vasilescu: Good morning, thank you very much for taking my question. James, I wanted to ask about Salomon – great to hear about Guillaume’s promotion. Can you talk about what Guillaume brings to the table to lead the brand, what’s his vision over the next few years? Salomon soft goods, I think as you mentioned, two-thirds of the business, can that get to 80% over the next few years? Then Andrew, appreciate the commentary around FY25 around below-the-line items, like tax rate just being really high at 37%. If I recall last quarter, we talked about maybe having a better tax rate going forward. Where do you think that tax rate can go over time? Thank you very much.

James Zheng: Hey Laurent, thank you for your questions. I’ll just speak a bit the highlights on Guillaume. Guillaume has been working for Salomon more than 28 years, and he’s experienced in sales and product innovation across the board in Salomon product divisions. He brings a very strong track record of operational excellence, strategic innovation and diverse leadership, and also more importantly in the past decades also, he built out the so-called new footwear category, what we call the modern outdoor sneakers, and really made tremendous success in the past five years. I think–I mean, we had gone through a rigorous selection since April, and eventually we think Guillaume is the most fit candidate for us for the time being to lead Salomon through the next chapters.

For future, we’ll also deploy a very clear strategic pillars to develop Salomon business. Obviously for the coming three to five years, there are four major areas we will really focus on. One is the footwear focus – we will really accelerate our footwear business, cross boarding the work not only from China and EMEA but also in North America. Secondly, obviously we will put a very clear strategy within Europe, okay, so–and we want to build a strong footprint for our business in European markets and to find a breakthrough in North America. Thirdly, we will continue to drive our business through building up a strong digital platform. These key priorities have been put into place, and I think Guillaume has also got a very high level of confidence to lead the team to fulfill the steps we want to go for next year.

Andrew Page: Laurent, hey – it’s Andrew Page. Thanks for the question. Definitely [indiscernible] tax rate is a key initiative of ours. As you can see, we are exiting 2024 with a 50% effective tax rate, especially in the back half of the year, so our rate next year is more than 1,000 basis points better than our exit rate coming out of 2024. We have done a significant amount of work this year to both reduce the non-deductible interest, as well as settle outstanding tax constraints that were burdening the business. Going forward, we continue to expect that rate to continue coming down, both again focusing on the payment of our debt down in inefficient tax structure jurisdictions, where it’s non-deductible, as well as the management of certain outstanding tax settlements. We are definitely not stopping here, but 1,000 basis points of improvement is well on the way, and we see that number coming down to a more normalized rate in the near future, in the coming years.

Omar Saad: Operator, time for one more question.

Operator: Your next question comes from Michael Binetti from Evercore. Your line is now open.

Michael Binetti: Hey guys, great quarter. Thanks for taking our question. Andrew, just one quick modeling course correction, I think you said SG&A would be about flat next year. I think street models have about 40 basis points of SG&A leverage, so I just want to make sure I heard you correctly there, that I have the components correctly. Then I guess it sounds like you pulled forward some investment dollars into fourth quarter for growth initiatives, and then Stuart just suggested you’d maybe take a little bigger look at the plan for Arc’teryx footwear next year, but the revenue guidance is kind of the same algorithm we’ve heard from you guys for a while. It seems like you see a few potentials for upside. Can you maybe just–where do you see the most opportunity for upside to the low double digits to mid-teens revenue growth framework next year, and maybe just some thoughts on what you assume at the low end and at the high end of that range as we think about starting out our models for next year.

Thanks.

Andrew Page: Yes, hey Michael, good to hear from you. From the standpoint of SG&A, we expect next year for SG&A to be flat leverage to this year. With regard to our algorithm and looking at low to mid-teens, consistent with this year, we have consistently said that as demand materializes, we will be able to service that demand and in some cases outperform against our guide, and that’s what we are continuing to look forward to next year. As demand materializes, we see our ability to perform against that.

Stuart Haselden: Yes, and I’ll add to that, Michael, we continue to be very excited across the regions we operate. We really feel like we’re just getting started in North America, in Europe, in Asia Pacific. We have a tremendous business in China that continues to see strong momentum, so there’s just exciting channel and region opportunities even with the assortment that we have today, if it didn’t change at all. Then you look at the opportunities we have across footwear, across women’s, and even within our core franchises within our men’s outdoor business, there’s just a tremendous amount of new ideas coming into our product pipeline that we think will continue to create upside into the future. We feel like the guidance that we framed is responsible and appropriate, given where we are right now.

Michael Binetti: Okay. Best of luck for the holidays.

Stuart Haselden: Thanks Michael.

Operator: That concludes our question and answer session. I’d now like to hand back over to management for final remarks.

Omar Saad: Thanks everyone for joining. Look forward to seeing you on the next call in about three months.

Operator: Thank you so much for attending today’s conference call. You may now disconnect. Have a wonderful day.