Christine Greany: Thank you, Kosta. Moving on to Jeff, could you put more color around the TAG program and how that’s progressing?
Jeff Boyer: Sure, Christine. As you heard in Sunil’s comments, we are making solid progress on both our initial and our expanded tech initiatives. We initiated these programs earlier this year due to potential business softness, which we are now experiencing. We have prioritized seven key work streams with three main goals or objectives. Our key objectives are to, one, reduce organizational complexity, two, improve gross margins, and three, optimize overhead spending and working capital efficiency. I will share our progress so far on each of these efforts. Regarding our efforts to reduce our organizational complexity, we are very far along in planning the right size of the organization as well as operating on a more global versus regional basis.
Unlike some other efforts we have had in the past, this initiative is focused on fundamentally changing our operating model to be more globally driven and to improve decision making and efficiency. Execution of this work stream is well underway and will continue into next year. One of our most significant value creation pillars is improving gross margins as product cost, one of the most significant expense elements of our operating model. We are working with our current and new suppliers to reduce product costs. And so far, we are very pleased with the response and the support we are getting from our existing and new partners. We are on track to drive benefits from this work stream into the P&L in 2024. We are also focused on increasing our average AUR with customers by refining our pricing architecture, enhancing our promotional and markdown programs, and reviewing terms with our wholesale partners.
Lastly, we are conducting deep dives on our demand signing programs, inventory levels, and product lifecycle management areas and expect additional economic benefits from improvements in each of these areas. On the spending side in supporting our overhead optimization and working capital efficiency initiative, all spend areas are being reviewed from marketing to information technology spend to indirect procurement. We have instituted an expense control tower process to review all significant expenditures requesting lower costs in issuing RFPs for major purchases. Our overhead optimization program also includes initiatives in our retail channel. We are taking a harder look at store rationalization and in-store process optimization. We are also revisiting our DC operations, logistics, and parcel management progress to identify incremental cost savings opportunities.
Working capital initiatives currently being worked on include improving our inventory turnover, reducing customer account DSO and moving a major supplier to more standard industry payment terms. As you can tell, the transformation part of our tech program is extensive and has impacted nearly every area of our business and economic model. After several months of further work, we remain confident in our ability to deliver our TAG goal of $300 billion in benefits that we shared back in August.
Christine Greany: Thank you, Jeff, very helpful. Sunil, how does that $300 million of TAG savings flow through the P&L? And what does the cadence look like beyond that initial $100 million of benefit that you expect to capture?
Sunil Doshi: Yes. Thanks Christine. A quick recap on that first $100 million in annualized benefits. We expect to capture $50 million in 2023 and $50 million in 2024. For the $50 million in 2023, a couple of additional points. First, $45 million of the $50 million is in SG&A and $5 million of that benefit or that expense reduction is in gross margin as it pertains to freight costs. From an SG&A perspective, the $45 million in savings represents about 5.5% of our FY ‘22 actual SG&A expenses. Our current year forecast reflects about a 4% reduction in SG&A. The other 1.5 points from our TAG savings is primarily offsetting underlying inflation that we had coming into the year. With respect to 2024, we will capture the remaining $50 million and another $85 million to $100 million related to the initiatives that Jeff just spoke about.
That brings the total benefits in fiscal 2024 to approximately $135 million to $150 million. There will be some offsets to these benefits as we rationalize some segments of our business and based on our current views of sales trends into 2024. But taken together, the actions from TAG will provide a meaningful improvement to our adjusted operating income expectations for FY 2024.
Christine Greany: Alright. Thanks Sunil. One last question for you, how do you think about capital allocation in the near-term given your expected sales declines?
Sunil Doshi: Yes. Thanks Christine. So, in the near-term, our capital allocation priorities are to focus on business operations and to execute our Transform and Grow initiatives. It’s also important to note that in 2023, we have been able to offset our operating losses by managing our inventory and overall working capital down from 2022 levels. Working capital is down approximately $100 million versus last year. In 2024, we expect a more normalized working capital flow where Q1 to Q3 tend to require some working capital. We do have initiatives included in our Transform and Grow plan that are focused on driving structural improvements in our inventory levels, but those benefits are more back-end weighted and into 2025 based on our development cycle and lead times.
So, with those factors in mind and considering our most recent revenue trends, we think in the near-term, it’s important to preserve capital for business operations while we execute our Transform and Grow plans. Longer term, as we capture planned TAG benefits, work down restructuring costs, and resize the revenue base, free cash flow should be healthier, and we will be in a better position to consider a broader set of capital allocation options.
Christine Greany: Great. Thank you, team for the Q&A. I will just turn the call back to Kosta for closing comments.
Kosta Kartsotis: Well, thanks everyone for joining us today. We appreciate your support. We look forward to speaking to you again about our fourth quarter early next year. Have a good day.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
