Ike Boruchow: Great. Thank you.
Scott Lewis: Thank you.
Operator: Our next question will come from the line of Paul Kearney with Barclays.
Paul Kearney: Hey, good morning. Thanks for taking my question. Two questions. My first one is, I was hoping you can give us some guidance into the cash flow outlook into next year. Just trying to normalize, given the significant working capital inflow that you had this year, how do we think about working capital next year? Then I have a follow-up.
Scott Lewis: Sure, Paul. Good morning. On cash flow, I can — need to step back and kind of talk about what we’re seeing in ’23. To your point, really seeing great working capital benefit this year. Like I mentioned earlier, we reiterated our $500 million cash flow guidance for the year. Around two-thirds of that was working capital-driven. Going — making great progress on inventory, down over $600 million year-over-year. We continue to expect, in fact, be a little bit below $1.5 billion as we finish the year on inventory. But there’s more upside beyond that. As we go into next year, we anticipate we have additional working capital benefit that we can drive. And it’s also important to remember from a margin perspective as you go into next year, again, just using that exit rate of gross margin in that high 30% range, just using consistent sales year-over-year, we’re going to take $200 million of cost out this year-over-year.
So it will be much more of a mix on the profit side than the working capital benefit. But again, we see both are really driving that.
Paul Kearney: All right. Thanks. And my second question is on the Champion business. And I know you’ve touched on the strategic actions, but I’m hoping for a little more detail on that. I guess specifically, what are the changes within the product you’re making within the channel segmentation? And what are the changes within the assortment? Thank you.
Stephen Bratspies: Sure. Yes, thanks. Thanks for the question, Paul. So a little more detail on where we’re going and how we’re doing it. We have a new team, a new road map and a new brand purpose, which are all kind of overlaying all of this. The key in the areas you’re talking about, so product segmentation, channel segmentation. In a brand like this, you need to be really thoughtful about which product goes into which channels and how you manage that. We didn’t do that particularly well in the past, okay? And we’re cleaning that up and we’re fixing that. Meaning there’s certain product has to go to certain accounts, and there’s other product that goes to other accounts. It sounds simple, but we weren’t doing that particularly well, and that hurt us in the marketplace.
The other thing with product is tying it more closely to the brand position, particularly the brand heritage, and you’re starting to see a lot more of that. That’s one of the real clear comments we’ve gotten in our fall and winter sell-in is you’re going to see product that’s more tied to the heritage of the brand, more uniquely Champion that goes to market. And that’s going to be different than it’s been recently. And it’s being well received, and it’s going to be a big difference. The other thing we’re working on is global product, building global platform. This is a global brand between Europe and Asia and domestically, we have a really strong footprint around the globe. And we have a huge opportunity to build global platforms, whether that’s product design, whether that’s fabric platforms, which we’re consolidating, reducing speed to market, all those things are making a really significant difference in how we’re going to show up in the marketplace.
We’re going to manage this like a brand, we’re going to manage it like a global brand. And we’re going to lean in with marketing behind it. Our campaign of Champion, what moves you, is being well received. We’re just getting started but we’re seeing traction with younger consumers, and the product is going to match that campaign. So we’re excited about where we’re going. Lots of work to do. The team is grinding away, but we think we’re working on the right things. So we think it’s going to make a difference for us as we go forward.
Paul Kearney: Thank you.
Stephen Bratspies: Thanks, Paul.
Operator: Our next question will come from the line of Tom Nikic with Wedbush Securities.
Tom Nikic: Hey, good morning, guys. Thanks for taking my question. I wanted to ask about the strategic alternatives for Champion. I guess I’m curious, how intertwined is Champion with the supply chain, the manufacturing base, the systems and processes of the company, et cetera? Essentially, how easy or difficult would it be to kind of detach Champion from the rest of the operation?
Stephen Bratspies: Sure. Good morning, Tom, thanks for the question. It’s really early in the process, obviously. So we’ll see how it plays out over time. And obviously we’ll keep the loop in. The thing I would tell you is we’ve been doing a lot of work over the last couple of years on segmenting our supply chain. I’ve been talking about that from the beginning. And that’s both by product line, by brand, by type of flow is really important, whether it’s a fast-turn product or it’s a long-term replenishment product. We’ve been doing a lot of work on dividing that up, segmenting it, creating new capabilities as we go forward. So a lot has been done there. Fundamentally, we do not anticipate a lot of dissynergies if we were to move ahead with this type of process, but it depends on whether we choose to go forward or not.
But we feel like we can manage this very clearly. There’s not a lot of dissynergies in the business, and the supply chain is set up to manage any choice that we decided to make going forward.
Tom Nikic: Understood. And a follow-up on gross margins. I know it sounds like you’re pretty confident in exiting the year at the high 30s gross margin rate. I guess when we kind of think about like the puts and takes on gross margin like are there other factors that could cause gross margin to come in worse or better than that, discounting or currencies or anything like that, that would cause the gross margin to deviate from that high 30s run rate?
Scott Lewis: Yes. Thanks for your question on the gross margin. So we have a lot of good visibility with gross margin into the fourth quarter. Again, we’ve talked about this earlier that what’s running through our supply chain today is those lower cost, lower-cost products in line with pre-pandemic gross margin levels. When you look at the fourth quarter, there’s a couple of things to factor in. One is from the inflation side, we expect that going from a tail — going from a headwind to a tailwind is the inflationary cost. It’s been a headwind for the first three quarters of the year. That actually flips over to a tailwind of about 150 basis points in the fourth quarter. So that’s a big driver of the expansion in the gross margin.
