Operator: Our next question comes from the line of Christian Carlino with JPMorgan.
Christian Carlino: My first question is on what’s your general view on the current health of the enthusiast customer? Are you seeing any increased caution from either resellers or the end customers later in the quarter and quarter-to-date? And that’s my first question.
Matt Stevenson: As I had in my prepared remarks, Q3 for us is typically our lowest order demands from a seasonal perspective. And we’re seeing those order demands normalize, as we’ve talked about in previous quarters, there’s a lot that happens in the fourth quarter in terms of as our enthusiast consumers start to buy products, they prepare for their builds that they begin in the winter, ultimately to have those cars on the road in the late spring and the summer. So there’s a lot that goes on in the fourth quarter for us and various historic promotions and things of that nature. So really looking forward to seeing how the demand shakes out over the fourth quarter to get a better gauge of what we’re going to see going into ’24.
Christian Carlino: And I guess, depending on the top line. But as you look ahead, how should we think about the path to the 40% gross margin and 20% EBITDA margin targets? Is there enough self-help and cost savings that you can get there without hitting the 6% to 7% top line growth?
Jesse Weaver: I think that as Matt has been here, and we’ve talked about the cost to serve project and the work that we’ve done that I think you can see some of the results in Q3 and Q4, we do think that there’s still opportunity for us to drive further efficiencies in the operations in our cost overall to yield even better margins at comparable sales levels. I think it’s a little early for us to say exactly when we would hit the 40%-20% as it relates to growth, I mean, growth would be a part of that equation. But long term, this industry has demonstrated resiliency in most markets. And as we get into ’24, we’ll have a better sense as we see Q4 and the first few weeks of Q1 of ’24, to be able to give you a sense as to that 40%-20%, something that we would be able to achieve in the next 12 months or what does the timing look like?
But nothing has changed structurally. Like we said before, in the industry. There’s no Netflix moment in the auto aftermarket that gives us any caution to say anything other than getting back there is definitely achievable from what we can tell today.
Operator: Our next question comes from the line of Joe Feldman with Telsey Advisory.
Joe Feldman: I wanted to just kind of follow up on that last question about the gross margin. Like I get the 40%-20%, longer term, it will take some time. But what about in the near term? Like should we assume you guys can sustain this kind of high 30s, 37% plus in the next 12 months or so? Or like should we start to see a more steady rate over the coming months?
Jesse Weaver: I think it’s important to kind of look back at historical trends in the quarterly seasonality of this margin, not to get into the accounting nature of our business being a manufacturer business with cap variants and all those fun things. But when you look at sort of Q1, Q2, it’s typically when we see our higher gross margin rates as we get leverage on fixed costs and then Q3, Q4, I mean, I think it’s pretty sequential as you can see, we dropped from a revenue perspective due to seasonality, about $20 million from Q2 to Q3 with 50% flow-through in any given short period of time, that explains sort of that drop quarter-to-quarter. And what we’re targeting when we say 40%-20% is not necessarily any given quarter. Otherwise, we would have probably rung the bell in Q2, but rather a full year view of what the margin profile would look like for gross margin and EBITDA.
And so that, to Christian’s earlier question is what we are trying to get our arms around for what is the timing of being able to achieve that. And I think to what Matt said and I repeated, seeing how Q4 shakes out in the early parts of Q1, we’ll have a better indication as we finish up our planning for next year.
Joe Feldman: And then another question on just capital allocation. How should we think about capital allocation now? You’ve done a great job managing the balance sheet and we have made some [indiscernible]. Should we assume there’s more to go there? Or will it be more continuing to invest in growth of the products? How will you allocate capital?
Jesse Weaver: We’ve repeated throughout the year that getting our balance sheet in line and paying down debt with excess free cash flow, which we’ve generated a pretty meaningful amount this year and demonstrated our commitment to that with what we did in Q3 is our primary focus from an excess cash perspective. I think as a reminder, this is a capital-light business. I mean, to be spending roughly $6 million to $8 million in capital in the year with a business that’s generating this level of revenue, I think it shows you it doesn’t take a lot of capital to grow the business overall. So I wouldn’t suspect if that’s kind of what you’re looking for. Could there be investments on the capital side that would get in the way of us meeting our debt commitments? That is not at all something that we view as a real issue here as we drive for growth.
Joe Feldman: So we should expect a little bit more of excess cash being used to pay down debt, I guess, in the near term?
Jesse Weaver: Well, as we see how the cash profile looks throughout Q4, it’s something that, as we said in our last call for Q3, we were looking at, but we’re not going to make any commitments at this time on what we would do with that. We just need to really see how the cash profile looks and have a discussion internally and with our board about what the right moves are.
Operator: Our next question comes from the line of Michael Baker with D.A. Davidson.
Michael Baker: So one clarification and then one follow-up question. The clarification, just to be sure I heard it right. So you raised your full year sales guidance towards the middle to high end, but you’re saying the fourth quarter should be towards the low end of the implied guidance. I just want to make sure I heard that right?
Jesse Weaver: Yes. I think whenever you do those squeeze, Michael, that is exactly what we’re saying is whenever we take a view of the range, we feel like it’s — based on what we’ve talked about seeing the revenue come in towards the mid to low end of the range for the Q4 implied number and the EBITDA being at the midpoint to slightly above and based upon what we talked about, which is feeling good about the cost savings that have been put in place and the efficiencies that we are seeing to kind of make the shape of that relationship work is where we would point investors for this call.
Michael Baker: So maybe I’ll try to squeeze 2 questions into the follow-up. One, last quarter, you said third quarter and fourth quarter combined would be about 48%-52% split. It seems like, I think if I’m doing my math right, that might be a little different now. So what’s changing? And then the real follow-up question is there’s been no comments on like sell-in versus sell-through, what you’re seeing from your customers in terms of stock levels, destocking, et cetera? Any color you can provide on sell-in versus sell-through or those kind of metrics, I think, would be helpful.
Jesse Weaver: Yes. It’s a good question. And I would say, to your point, you’re reading what we talked about and what we’re guiding to right now, just right on where from a shipment perspective, I think what we are seeing based on our imputed guide here is about a 50%-50% split between Q3 and Q4. The order split, I think, is really kind of what has changed there where we’ve seen the order trends that we’re taking a look at and the promotions that we’re putting in place, fully expecting these to be big drivers for Q4. But I think it’s the question of the timing of when those come in and our ability to get those out because a lot of these orders come in, in December and needing to kind of put all cylinders in gear, if you will, to get those out would really make the difference on how we’re able to get more to that 48%-52%.
