Operator: Thank you. One moment for our next question. That will come from the line of Corey Tarlowe with Jefferies. Please go ahead.
Corey Tarlowe: Hi, good afternoon and thanks for taking the question. So, maybe if you could just start, could you talk about within margin, obviously there’s a bunch of puts and takes, but some of those puts and takes might stick throughout from the third quarter into the fourth quarter and then perhaps into the next year, and then some of those might go away, right? So, could you maybe talk about what you see sticking versus what you see going away as it relates to the margin headwinds that you’ve faced this year?
Richard Brooks: That product — just so I’m clear, Corey, is that you’re talking about product margins or gross margins or where are we talking about here?
Corey Tarlowe: I think it would be probably be most helpful to get perspective on gross margin with things like freight, commodity cost pressures, et cetera.
Christopher Work: Sure. Well, let me take a crack it in and then I’ll let Rick add in anything that he might want to. I think if you’re talking about gross margin, I think that the most important thing is obviously just to start with product margin and just think about where we’re at. And as we said in our prepared remarks, we run six years of product margin gains through 2021. So, we were at all time highs for us across all of our entities. So now as we kind of transition into 2022, what’s really interesting is, we have seen this sort of push to private label apparel, right? And actually over the last six years, at least coming into 2021, we did see private label actually declining. We saw a branded cycle that really drove the last six years of product margin, which is kind of counterintuitive to what you would expect, but it’s really just what our customer was looking for and how our buyers were able to work with the brands to build the product margin up.
So, I think — when I think about kind of what moves forward from here, we — if we continue to see that private label push, we will have some stickiness in where product margin goes. The second piece with product margin that I think is really important to note is all of our international entities, Canada, Europe, and Australia, all perform below the US in product margin. And they are also the bigger growth areas of our business at this point. So, we’re seeing margin expansion across those concepts. I think they’re doing a really good job working with brands in each region as they gain scale, being able to push higher levels of margin and also seeing things like private label increase as a percent of their businesses. So, as we see the international entities grow and drive scale, we hope over time that will also drive product margin and drive it closer to our US margin levels.
Now, there will be some mixed shifts in the midterm as we see the international sales grow as a percent at a slightly lower margin, but overall we think that can be a benefit over the long-term. So, I think you kind of start there. And then as we think down kind of through the other components of gross margin, the next biggest item is occupancy. This is really a story of deleverage. As you know, our sales are down, and down meaningfully to not only 2021, but even 2019 levels. And so as we think about that, this is one of the bigger areas of our deleverage. So, our teams have worked extremely hard with our landlord partners and trying to manage this expense, and I think done a really good job. But with the sales declines we’ve had, it still becomes a deleverage item.
So, as we think longer term gross margin, this is about growing sales and therefore being able to leverage the fixed cost associated with occupancy. The other big cost, as you pointed out in your question, is just shipping and where shipping’s been. We have seen increased cost of shipping. We are working very hard on different strategies to minimize that across both the inbound, but probably more importantly on the B2C that falls into gross margin. And I think as we can continue to drive sales and work with our carriers, this is something we can hopefully manage to get more leverage out of that line item as well as we move forward.
Corey Tarlowe: Great. That’s very helpful. And then maybe to just double click on inventory, it seems like those are — that’s in a relatively good spot versus kind of where maybe you initially expected. Could you just talk a little bit about that, how you feel that’s positioned as we head through the key holiday period for most of retail here?
Christopher Work: Sure. Yeah. I think, on the inventory side, we feel good about where our teams are with inventory. We’ve talked about in our prepare remarks we’re about $177 million in inventory. It’s up 1.2% in Q3. It’s pretty in line with where we actually ended Q2 as well. We were up 1.1% at Q2. Obviously, we’re getting a little bit of FX benefit there, but we’re down 3.3% in 2019 as well. So, I think you kind of put all that in perspective. The levels are managed pretty well in regards to what’s happening across the retail landscape. I think entity by entity, North America is slightly more aged, but continues to be at a very healthy margin. Our international inventory is in a better spot than where we were a year ago, much more current than last year.
And as I — we mentioned in our remarks, we’re seeing margin gains there. I think the important thing with inventory as we kind of think about how we’re managing it and our business strategy here is really how we’re thinking about the business overall because we’re doing the work as you would expect to kind of line ourselves up with a lot of the retail market. And our strategy’s just a little different. I mean, we’re really focused on full price, full margin that requires in a cycle like this that you have to be really nimble in how you manage your inventory, so that you can be opportunistic in your buys and really see what’s working with the customer. So, our teams are really pushing that. And then, at the end of the day, I think this is probably part of why our sales may look a little softer than others, because we are really holding price.
