And it’s driven in part by the fact that our fuel productivity savings this year are running at almost 6.5% of COGS. And that’s not a coincidence. I mean, that’s nearly 2x what we’ve normally seen in most years. It traces back to Project Phoenix and the decisions to restructure the business, so that the supply chain is a unified force as is procurement, and that’s lending itself to all kind of additional opportunities that we’re seeing. That strong progression is really what’s allowing us to call in the fourth quarter for that gross margin to expand and more importantly, the normalized operating margin based on the commentary we provided is expected to be up, as I said, 290 to 390 basis points. I mean, that’s a huge move in the right direction.
So I know it’s difficult to see all that underneath the surface when you’re looking at the top line compression driven by market contraction and trade destocking principally, but it’s most certainly there. We haven’t provided any specifics on gross margin for next year and we won’t at this time. But we have said that if we look at our evergreen targets of growing op margin 50 basis points per year, we think will be certainly at or above that next year, and most of that will be driven by continued gross margin progress that we’re making.
Peter Grom: Got it. That’s really helpful. And then, just following up on the category performance, which obviously has been called out several times as a big driver of the weaker 3Q. Can you maybe just give us some color on how that really progressed through the quarter? Did it get worse as we kind of were later in August and into September? And have category trends further slowed here into October?
Chris Peterson: Yes. I think, as I mentioned before, that really the driver of the core sales miss versus our guidance in Q3 was the market contraction rate, which came in about 3 points higher than what we expected. We did see that September was the weakest quarter — or weakest month of the third quarter. And so, we did see the trend in terms of market contraction accelerate into the back part of the quarter. And obviously, we’ve got some view of the first part of October, and that is running very much in line with our guidance for the fourth quarter. So, that’s a bit on the sort of the inner quarter play.
Mark Erceg: Yes, if I could, I think it might be helpful because obviously in Q3, as Chris indicated, we saw our core sales down by 9%. For the fourth quarter, we’re effectively saying that we think that our core sales will be down somewhere between 14% and 11%. And I think it might be instructive to try and kind of decompose that for everybody here on the call today. So in both Q3 and Q4, we expect the market to continue to contract. Based on our analytics, we think that will be somewhere mid-single digits to high-single digits, for the sake of argument, let’s call that somewhere down 6% to 7%. That will be true both in the third quarter and we think in the fourth quarter. Trade destocking, we’re getting towards the tail end of that.
We think it was somewhere between minus 1% and minus 2% in Q3. We think that will carry over to Q4 as well. And as Chris indicated, there was a certain element of share loss that we incurred, let’s call that 1 point. And if you do that math on Q3, you’ll see that that’s roughly down the 9% that we obviously just printed in our release. The only two things that are then different in Q4 is, as Chris indicated, we did take pricing action on 07/01. This is part of our enhanced capabilities to actually do more data analytics. You’ll recall that we actually literally looked at the structural economics of 6,000 discrete SKUs and being able to make those pricing actions. So, they were very, very targeted and they were in the right places, but we will lose some distribution as a result of that.
And in Q4, we think that might be 1 point or 2. But again, this is where we’re economically indifferent because the structural economics were so poor that the pricing actions needed to be taken and if the business falls away, it falls away and then the supply chain will make up the differential. The other piece that is really playing into it and gets back to a question that was asked earlier that Chris provided an answer to, is we have about 2 points in the fourth quarter where we think we’re going to have less deep discount promotions because what we’re doing now is making the tough calls today to make sure we set the launchpad properly for ‘24. And so, we’ve had a lot of promotions in the fourth quarter historically where, frankly, we didn’t make any money.
And so what we’re doing is we’re walking away from these structurally untenable decisions that were made in the past to get ourselves on good footing. And from there, we can grow our way back out based on the capability work that’s being done.
Operator: And our next question comes from the line of Brian McNamara with Canaccord Genuity.
Brian McNamara: Congrats on the really strong improvement in cash flow. A question we often get asked is if and when we’ll see top line growth at Newell again. You’ve mentioned that sales will be down again next year. So, I guess, what should give investors confidence that you’ll reach those evergreen targets in 2025?
Chris Peterson: Yes. I think on that question, it’s one that we ask ourselves often as well. And I think when we laid out the strategy, we were very clear that this was going to be a multiyear strategy. And we said that we expected for the next 4 to 6 quarters that we would be below the evergreen target on core sales growth because of the capability investment that was required to get the company back to sustainable core sales growth. We are very much on track with the capability improvement actions that we’ve taken. I feel very good about the progress we’ve made over the last four months since we announced the strategy. We’re only four months into the strategy, but I think we’re making incredibly fast and strong progress against that.
The piece that is sort of overwhelming that at the moment is the market contraction and the retail inventory actions. But we believe that at some point, those are going to weigh. As I mentioned, it’s hard to predict when that’s going to be. As Mark said in his prepared remarks, as we think about next year, we think core sales is likely going to be down next year, but we expect it to be sequentially better next year than this year. And we’re very bullish on the progress we’re making on the strategy, on the capability improvements. We think we’ll be — we’ll have green shoots to point to in ‘24 from that work that will help improve the trend. And we think in ‘25, we’re going to be in a much better place.
Brian McNamara: Got it. And then secondly, with the 20 brands you’ll lose by the end of the year as you reallocate shelf space with your retail partners, are those largely being discontinued or are any of them being sold or licensed or other? Thanks.
Chris Peterson: Yes. I would say that probably 80% to 90% are just being discontinued. There are a handful that we are licensing, and there’s one or two that we are actually going to sell. They won’t be material sales but we are looking at all three alternatives as we go through this. In some cases, we have brands that might be $2 million of revenue and the right answer is just to discontinue the brand because it’s not worth it to go and try to sell them. In other cases, we have brands that are more meaningful that are either a country-specific brand that doesn’t really add to the portfolio and we don’t think is leverageable. And those are the ones that we’re looking to sell. An example there is we have a brand in Italy called Millefiori, which is a home fragrance brand. It’s largely distributed only in Italy and we’ve reached a sale agreement on that brand, where we expected to close the sale of that brand this quarter.
