Martin Waters: Yes. Thanks, Alex. Thanks for highlighting the international business. We are really pleased with the progress that we’ve been making in that business really over the last two years. The quarter was strong for sure, but it’s a consistent picture over the last eight quarters of really solid progress. There are a couple of maybe three important changes that we made to the international strategy that are paying off. One is working with our partners to open smaller stores than we had previously imagined. Secondly, having a Store of the Future format that’s more modern and more shoppable, more accessible at a significantly lower capital expense, enables partners to open more stores and better stores. And thirdly, we’ve embraced the digital area of international with supporting our partners with digital sales and progressing with digital sales ourselves.
So, those three changes over the course of the last two years are really paying off in a very positive way for us. That’s really what’s driving the change. It’s true to say that our store fleet in international is much younger than it is here. It’s also true to say that we’re executing extremely well. But the fundamental strategy and positioning is the same as it is here in North America. I’m optimistic that the great results we’re seeing in international will be encouraging for our domestic business. The other thing I should mention on international is China, where we had a very difficult business going back pre-pandemic. Our partnership with Regina Miracle has been a real win for us. Regina is a fantastic partner. And for the second consecutive quarter, we’re actually making money in China.
And China is a difficult environment right now. So, for our business to be strong, and when I say strong, we doubled our digital sales in China in the quarter, we’re really seeing some terrific momentum. So, all in all, pleased with how things are going. As it relates to the fourth quarter in the domestic business, all the stuff we’ve been talking about earlier in the year sort of really matures during the fall season. So, it’s our reason to be confident and cheerful, as it were, relate to the fact that we’ve been working hard tirelessly all year on a whole series of initiatives. And I’ve listed some of them already, the launch of new bra collections; the World Tour coming in; there is fashion merchandise associated with the World Tour that will impact the full season; there’s the loyalty program, which starts to give us confidence for the back half.
So, all across the business, the things that we’ve been working on will be delivering in the back half. And so, we’re just optimistic that we’ll get our fair share of the upside. T.J., anything to add to that?
Tim Johnson: No, I think you hit on the — there’s major marketing initiatives, Alex, as Martin mentioned, major customer initiatives, major brand initiatives and good early receptivity to some of the fall merchandise, particularly on the VS side, and a growing assortment of new PINK merchandise that we’re excited about. So, all of those factors contribute to what we think will be an improving sales trend as we move through month-to-month through the fall season. I think additionally, just understanding that two of our largest marketing investments in our short period as a public company are all coming together here in the third quarter. It does put some expense pressure on the third quarter. But as we look to fourth quarter and the halo of those marketing events and a more normal expense structure, growing sales really shows the margin opportunity early in the holiday season going into next year.
So, we feel good about the way that the back half of the year is laid out from an initiative perspective, a cost structure perspective and our ability to chase winners and cut losers in the inventory assortment.
Alex Straton: Thanks a lot. Good luck.
Operator: Our next question is from Ike Boruchow with Wells Fargo. And your line is open.
Ike Boruchow: Hey, good morning, everyone. Two questions for me. I was going to ask about gross margin. Is there a way to kind of talk about expectations for 4Q or what’s embedded in the full year in the 5% to 6% margin? And then just a follow-up is kind of on the direct business, so if you [ex out] (ph) Adore Me, direct is trending down high singles, low doubles, something in that range. In your back half improvement that you guys are hoping for, do you expect to see more improvement on the e-com side, more improvement on the store side, similar, as a rationale? Just kind of curious how to think about both channels. Thanks.
Martin Waters: T.J., do you want to take the gross margin and then I’ll pick up the digital question.
Tim Johnson: Yes, absolutely. So from a margin perspective, Ike, as we’ve moved through the year here in the second quarter, our selling margin was relatively flat and the gross margin decline of 150 basis points was about the B&O deleverage on the lower sales. As we look forward to Q3 and Q4, we actually see selling margin — or merchandise margins up year-over-year for two reasons. First off, as you’ll recall, we have a ‘transform the foundation’ initiative in place, and we’ve mentioned for a number of months now that we will start to see some of the cost of goods sold benefit of lower cost hitting the fourth quarter. So that’s one item positively impacting merchandise margins. And then, the second item was the question that was asked earlier around air and ocean.
We continue to see positive news there from a rate perspective. And I think I’ll throw in a third thing in that the raw material costs that the teams are working on are starting to — those price increases are starting to abate also. So from a merchandise margin perspective, we feel good about how things are trending and we feel good about the inventory levels we came into the quarter and the fall season with. I think also as we move through the fall season and start to see some of our strategic initiatives take hold and improve the North America business, we’d expect the B&O deleverage to start to abate as we move through third and into fourth quarter as well. So that’s what gets us to our guidance for third quarter, Ike, of a gross margin rate that approximates last year and embedded in our guidance is an improving gross margin rate in the fourth quarter.
Martin Waters: Yes. On the difference between the digital and store channels as we look at the back half of the year, we’re expecting performance improvement from both of those channels. However, if I sort of step back from the immediacy and say, what do we think is happening? Well, right now, our share of digital is in the low 30%s of our total system. The industry expectation is that, that will grow over time and likely will get to, say, 40% over the next three years. So we’re prepared for that, and we would expect that our share of digital from our total system will increase. So it’s important that we get to world-class Icon on digital. So what Chris Rupp and her team have been working on is building tons — just loads and loads of capability, like fewer clicks to product removal of category landing pages, visual search being added, shoppable videos embedded within the site, barcode scanning moving from non- crawlable text to fully crawlable text, and enhancing our linking capabilities, all that kind of stuff, as well as personalized e-mail through Da Vinci.
