Brooke Roach: Good morning, and thank you for taking our question. Scott, I wanted to follow-up on Bob’s question and just get a little bit more sense of what’s changing in the macro outlook that’s caused you to be a little bit more cautious on the year. And it sounds like a little more caution into the first half of next year, despite the ongoing strength of your brands and the share gains. Is there any one particular region, channel, or type of product that’s causing this incremental conservatism?
Scott Baxter: So, Brooke, not cautious really at all. Still feel great about the business. From the standpoint of our POS, our POS is still strong and continues to be positive. Now, our customer might be a little bit more cautious in their ordering patterns and what have you. But let me be really clear here. This is a really interesting point. Because our gains are so strong, share gains, our POS is so good, and our demand creation right now is hitting on all cylinders, it creates an atmosphere where you have to go ahead and order our products. So I feel really good about what’s happening in our business right now. I mean, I’ve been here now as the CEO for five years, and I’ve told the team here recently, I have never felt better than I feel right now. This team, this business, these brands, the product that we’re creating, the decisions we’re making, I feel really confident. So not from me. Joe, anything to add there?
Joe Alkire: No, I think you covered it.
Brooke Roach: Great. And then maybe a follow-up for Joe. Can you elaborate on the incremental changes in your outlook for gross margin beyond the duty charge? How much additional margin headwind are you seeing this year from inventory clearance actions? And then can you contextualize the level of transitory headwinds that are still weighing on gross margin in 4Q, where we might see some better visibility on those returning to normalized levels into 2024? Thank you.
Joe Alkire: Sure, Brooke. So for the quarter, excluding the duty charge, the gross margin was flat. That included the inventory management actions that we took. That was about 30 basis points. So excluding those, the gross margin increased year-over-year pretty much as we expected, and the main drivers of that were really price mix and lower transitory costs, such as air freight offset by still higher input costs, moderating as we expected versus Q2, but still higher. So for the full year, we were at 42.5 or 42.9 when you exclude the duty charge. That’s about 60 basis points off of the low end of our prior outlook, and the biggest driver of that really is the inventory actions that we took. There’s a little bit of mix-related impact in there as we tightened up the revenue range, and you’ve got ongoing strength from U.S. wholesale.
But I think importantly for Q4, we’ve got about 300 basis points of expansion embedded in the outlook. Again, the drivers are really the same pricing mix, but as we’ve said all year, we have input costs flipping to a tailwind in the fourth quarter, and that will really continue into next year.
Brooke Roach: Thank you so much. I will pass it on.
Operator: Thank you. The next question is coming from Will Gaertner of Wells Fargo. Please go ahead.
Will Gaertner : Hey, guys. Thanks for taking my question. So just to start off, so cash generation, you’re improving your inventory significantly here. Could you just discuss your capital allocation optionality here? I noticed you didn’t have any share purchases this quarter. Just can you maybe discuss how you’re thinking about that going forward?
Scott Baxter: Yes, so go ahead, Joe, and then maybe I’ll jump in at the end.
Joe Alkire: Yes, maybe I’ll start here, Will. So on the capital allocation front, the priorities are unchanged. Organic reinvestment in the business, given the performance we have across both brands, maintaining that superior dividend, which you saw what we did this quarter, and then we’ve got share repurchases in M&A. So I think near term, we’re continuing to focus on working capital improvement. We’re really pleased with the progress on the inventory front, and I think we’re almost there on the inventory side. Leverage is in good shape. It’ll come down further next year, as we expect an increase in cash generation and gross margin recovers and our inventory normalizes further. So we’ve got a lot of optionality. We’re going to remain really disciplined here, but certainly an opportunity to more actively deploy capital in a TSR creative manner.
Scott Baxter: So just a quick comment. I agree with everything Joe said, obviously, right? But if you think about how we think about this as a company and how pleased we are with the position that we’re in, and if you think about the industry and the world that we operate in right now, to have a balance sheet like this, to be in the position that we’re in, to be able to do what we need to do to drive this business. And I think the other thing that makes me more excited about anything, or anything that we’ve talked about, is the fact that we can do multiple things. We aren’t tied to just one thing by any. You saw in my prepared remarks and Joe’s remarks, we increased our dividend. That was just one thing we did recently. But we have the ability to do multiple things at the same time.
And I think being in that position in this day and age and the time and the environment right now really puts us at a big, big distinctive advantage, especially with these brands and how they’re operating right now.
Will Gaertner : And maybe just one follow-up. So on SG&A, you’re cutting from mid-single-digit growth to low single-digit growth. Can you just discuss where you’re taking costs out and maybe if there’s opportunity in the next year to continue to do so?
Joe Alkire: Yes, I’ll take that. So really no change to the investments in the strategic priorities, DTC, demand creation, and innovation. The reduction is really on the discretionary expense side, and we’re just being a little bit more cautious, given our outlook on the overall environment.
Will Gaertner : Great. I’ll pass it on. Thank you.
Operator: Thank you. The next question is coming from Jim Duffy of Stifel. Please go ahead.
Peter McGoldrick : Hi, this is Peter McGoldrick on for Jim. Thanks for taking our question, and welcome, Joe. First, on free cash flow, can you talk about the puts and takes of the operating cash flow guidance? I recognize this is a new guidance slide item, but with inventory managed more tightly than previously anticipated, I was curious to get a sense of the working capital items and other drivers of the $335 million operating cash flow guide.
Joe Alkire: Yes, so I’ll take that, Peter. How are you doing? Yes, so we’ve got a pretty strong fourth quarter in terms of cash generation. That’s really two things, margin recovery in the business, mainly driven by gross margin, and then further unwinding of the net working capital, mainly inventory. So we’ve got about $335 million for the year. I think we’re somewhere around $175 million or $180 million in the fourth quarter, and roughly $100 million of that will be a further reduction in overall inventory levels.
Peter McGoldrick : Okay. And one follow-up. As we zoom out and think of the long-term financial capacity of the business, can you discuss the structural gross margin potential and any updated assessment you might have of a bridge towards the prior 46% gross margin potential outlook?
Joe Alkire: Yes, I’ll start. So nothing fundamentally different, Peter. I think we still see that algorithm largely intact. You’ll have the structural margin drivers in DTC and international as input costs normalize. Here, we’re going to recover a lot of what we lost over the past couple of years from inflation and supply chain disruption. And then we’ve got a handful of other initiatives that I talked about in my prepared remarks that are more mid- to longer-term in nature on the supply chain front that are significant. These are gross margin and networking capital related. We’ll share more details on those, but those will unfold over a multi-year period, and we may start to see some of those bear fruit in the second half of next year.
