Amer Sports (AS) 19 Nov 242024 Q3 Earnings call transcript

Hello, everyone, and welcome to Amer Sports Third Quarter Fiscal 2024 Earnings Call. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand over to Omar Saad, Vice President of Investor Relations.

You may now begin.

Hello, everyone. Thanks for joining Amer's Sports earnings call for the third quarter of fiscal year 2024. Earlier this morning, we announced our financial results for the quarter ended September 30, 2024, and the release can be found on our IR website, investors.amersports.com.

A quick reminder to everyone that today's call will contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current expectations and beliefs only and are subject to certain risks and uncertainties that could cause actual results to differ materially. Please see the safe harbor statement in our earnings release and SEC filings.

We will also discuss certain non-IFRS financial measures. Please refer to our earnings release for important information regarding such non-IFRS financial measures, including reconciliations to the most comparable IFRS financial measures.

We will begin with prepared remarks from our CEO, James Zheng; and CFO, Andrew Page, followed by a Q&A session, until approximately 9 a.m. Eastern. James will cover key operational and brand highlights, Andrew will provide a financial review at both the group and segment level and also walk through our updated guidance.

Arc’teryx CEO, Stuart Haselden, will also join for the Q&A session. With that, I'll turn the call over to James.

Thanks, Omar.

Third quarter was very strong for Amer Sports Group across our operating segments, geographies and the channels.

Our premium technical brands are taking market share and creating wide space in sports and outdoor markets around the world.

We are executing well against our largest growth opportunities in Arc’teryx and Salomon footwear, while our market-leading Ball & Racquet and Winter Sports Equipment franchise both grew faster than expected. Amer Sports Group generated 17% sales growth in Q3, led by our flagship brand, Arc’teryx. We achieved a very strong 14.4% adjusted operating margin, well above our expectations.

We continue to enjoy strong gross margin expansion driven by the pricing power of our brands and a healthy mix shift towards our highest-margin franchise, Arc’teryx.

Within our Outdoor Performance segment, Salomon soft goods continues to grow double digits, led by footwear, while Ball & Racquet sales trends improved, reaching double-digit growth in Q3. We believe Amer Sports very uniquely positioned the company within the global sports and outdoor space. and several factors give me confidence for the rest of this year and beyond.

First, we own and operate our unique and valuable portfolio of premium outdoor and sports brands. Each one is filled by technical innovation and the positioning at the pinnacle office segment.

Our brands have high engagement, conversion and satisfaction with consumers, but are still relatively small player on the global stage with significant room to grow.

Second, is a breakout growth story with standout growth and profitability for the outdoor industry, charting new territory with its disruptive DTC model and a unique competitive position.

Our growing store network, clinical products and the deep community connections allow us to continually attract new consumers to our brands and also have success expanding into newer categories such as footwear and Third, we believe that Salomon, our brand born in the mountains has a unique technical performance position and the design aesthetic within the global sneaker market, but still has low market share and a long runway of growth ahead, especially at this time, when consumers are more open to new sneaker choice than ever before.

Fourth, Wilson and our Winter Sports Equipment brands have long-standing authentic heritage, premium position, high-performance products and the leading market position because they already enjoy strong equipment market share. They will deliver slower long-term growth in their core equipment business but still have large soft goods potential, especially in the Wilson Tennis 360 line. And the fifth, while other consumer companies face challenge in Great China. In Q3, we generated 56% growth there, continue to well outperform the market.

We are seeing strong momentum across all of our three big brands, including strong consumer confidence following the government's stimulus actions.

I'd like to highlight some of the key reasons behind our standout performance in Great China. Number one, our brands competing one of the healthiest and the fastest growing consumer segment in China, the premium sports and outdoor market. The overall trend in China continues to be very strong, attracting younger consumers, female consumers and even luxury shoppers.

Additionally, the China consumer landscape today has evolved into a market of winners and losers, with some brands doing extremely well and others underperforming.

Our still small specialized brands are known for their properties, high quality and technical innovations, which resonate with Chinese shoppers. Further and the most important, we believe we have a great team in China.

Our deep expertise and a unique scalable operating platform gives us a significant competitive advantage across the portfolio.

Now coming on to some key highlights from our segments in Q3. Starting with Technical Apparel, which is led by our fastest and now largest brand Arc’teryx. Arc’teryx delivered another very strong quarter with healthy growth across all regions, channels and categories, especially footwear, women's and hardshell jackets. The brand momentum was most evident in its strong omni-comp performance against a very difficult growth comparison from last year. Arc’teryx is executing well its retail expansion plan, opening 9 net new brand stores globally in Q3, bringing the total owned brand store count to 134. Key new locations include 4 openings in the United States, 2 in Canada, 2 in Australia, 2 in China and 1 in Germany. Arc’teryx opened another brand store at Fashion Island Mall in Newport Beach, California, bringing us to 4 stores in Los Angers, an epicenter market for us. The brand resonates well with LA consumers, giving us confidence that Arc’teryx has large growth potential even in warmer markets.

Covering down on our commitment to the community.

We are hosting our first ever Arc’teryx back country academy in California, this winter, a reflection of the opportunities we see in this region. In Europe, we have opened net 5 new stores this year so far, and we are seeing exciting results, including strong affinity with both and the local. In Paris, local consumers are embracing our store in Le Marais, 13 years of engaging with French and European at our climbing academy in has generated significant brand recognition and appreciation with French consumers even before we open our first store there.

We also opened our New York City flagship store at 580 Broadway in September. This new offer store features our most clinical expression of including shoppable in store for the first time, a large service center facility for care and repair and our unique in-store coffee shop. This unique collection delivers the brand in a slightly new way in the U.S., taking cues from the success of our retail format in China, present much of the assortment by activity instead of by category, which creates a strong energy and engaging presentation of our products. The store is performing very well relative to our internal expectations in its first few months.

Shifting to products. Innovation is at the heart of DNA. Recently, we were clear that our motorized hiking was recognized by Time magazine as one of the best inventions of 2024. Designed to support users in their outdoor pursuit, stands for mountain goat, and is the world's first of power hiking pant. integrate robotics with carbon elements and was engineered by the Arc’teryx advanced concepts team alongside external partner, Escape, which is Google X spin of dedicated to tackling mobility challenges. We believe this technology has the potential to increase accessibility to outdoor sports in a meaningful and scalable way regarding this of physical ability. Also, Arc’teryx footwear continued its elevate trajectory since launching its first in-house line, growing strong double digit across all regions and the channels in Q3.

Arc’teryx continues to be widely successful, including our latest version for cooler and winter temperatures. This is a great example of how we will add new dimensions to our key franchise with ideas and inspiration coming through collaboration with our SA teams.

We also introduced a new hike shoe model called which has also delivered strong early results. Overall, we are extremely pleased with consumer reception to what we believe is the best line of technical performance footwear designed for mountain And because of the unique position in the marketplace, strong sales in our DTC channels and the enthusiastic interest from key accounts.

Our confidence is growing that footwear will become a very sizable and profitable growth avenue for Arc’teryx both in own retail and certain brand-relevant wholesale accounts.

Women's continued to perform extremely well, growing in very strong double digits, outpacing overall brand growth and represent a near one quarter of sales in Q3. This outperformance was driven by seasonal relevant color and combined with breakout new styles like the pant, we continue to see significant upside in the category as we add more models colorways and style options that resonate with her.

Lastly, an update on our cutting-edge community engagement programs. This summer Arc’teryx launches residents in climbing gyms from New York to Paris to San Francisco as part of the brand's summer The investment in brand awareness and activities that feed up the global excitement and the popularity of timing are diving awareness, culture relevancy and position Arc’teryx at the heart of this phenomenon.

Our academies continue to generate strong brand and affinity for the including our largest academy in the French Alps in with 650-plus participants ranging from beginners to world-class climbers.

Moving to the Outdoor Performance segment, which also delivered a solid quarter and outperformed our expectations led by Salomon soft goods and Atomic, partially offset by softer trends in Salomon Winter Sports Equipment. The higher-margin fast-growing Salomon footwear franchises do represent a very low share of the global sneaker market. Today, Salomon soft goods represent approximately 2/3 of the Outdoor Performance segment, up significantly from 54% in 2022. We believe Solomon sneakers have an authentic and unique market position with technical features designed for the mountain, but also great for everyday use.

Our unique style and technical attributes are resonated with consumers at the time when they are more receptive than ever to wear in new sneaker brands. Long term, we expect Salomon soft goods to grow double digits annually.

In Q3, Salomon footwear continued to show strong traction in Great China and APAC, where consumers love our footwear offerings that combine a distinct trend look with higher technical features. In China, we have created a new category called outdoor sneakers, which especially resonates with young consumers.

Our Salomon contact shop format in China is also working very well. Profitable starting day 1 and 4x more productive per square foot than industry average.

We are continuing to expand Salomon shops in Great China, opening 29 net new Salomon shops in Q3, including both own the stores and the partner stores, bringing our total to 165 in Great China. Approximately -- we expect to end 2024 with approximately 200 Salomon stores in China, with the opportunity to grow to several hundred locations over time in just Tier 1 and 2 cities.

We have also begun testing the Salomon contact shop format outside China, loading up the new location in APAC and EMEA, including Tokyo, Singapore and shop in Paris. We recently opened our first Salomon flagship in Shanghai, a 5,400 square foot clinical brand expression in the shopping district, which combines both footwear and apparel in a comprehensive offering and highly immersive brand experience.

We are also excited to share that we opened a pop-up shop in the heart of New York City in Soho in October. This is our first branch stores in the U.S. and comes ahead of plan to open 1 to 2 permanent New York stores in 2025. Residing in the old Arc’teryx Soho location, the Salomon store is performing very well so far, with strong response from both tourists and the locals.

Globally, we plan to end the year with 404 Salomon shops, including both owned and partner stores, that will come from last year. In Europe, Salomon footwear and apparel are performing well, especially driven by strong reorders. And because Salomon is selling so well, this is also driving our higher preorder rate. In both EMEA and North America, Salomon sports style is still early in its long-term development.

We have evolved our go-to-market organization in both markets. We're clearly separating the Winter Sports Equipment sales team from the Salomon footwear team which should help us reach our potential in both categories, given their unique end markets.

We continue to be very excited about opportunity to translate our strong brand set into broader commercial success in the U.S., the largest markets in the world.

As we evolve as a company, we are announcing two leadership chains to the Amer Sports executive structure effective January 1, 2025.

First, we are pleased to announce that current Chief Product Officer for Salomon has been appointed President and CEO for Salomon.

Additionally, Michael Holgate Chief Operating Officer and Executive Officer for Amer Sports has decided to step down from his current position and will return to his former role as an adviser to the Board of Directors of Amer Sports. We conduct a comprehensive search for the next Salomon CEO, including both internal and external candidates, and conclude that Guang is the right person to take Salomon to the next level. I have worked closely with Guiyang, the last 7 months as interim CEO. He has built a strong reputation during his 28 years at Salomon, and is extremely well respected throughout the company and the industry. and rise in the French Alps and avid skier and outdoor Gyang embodies the core values of Salomon. He brings a strong track record of operational excellence and strategic innovation in diverse leadership across Salomon, including sales, product, innovation and both soft goods and the winter sports equipment.

More importantly, Gian was instrumental in the doubling of Salomon footwear sales over the last 5 years, including creating and developing our key sports car category, which is now operating 1/3 of Salomon's mix sales.

We have the right team and strategy in place. And I have full confidence in Gian to lead Salomon for the next stage of its growth journey.

Moving on to Ball & Racquet highlights.

We are pleased that Ball & Racquet growth trends continue to improve in Q3. Double-digit growth was driven by strong trends in Racquet sport, especially performance boosted by our logic record line and growing tennis popularity in China following gold medal.

While still in its early stage, our Tennis 360 strategy is proving to be a key driver for the Wilson franchise, led by apparel and footwear growth, and accelerating expansion of Tennis 360 shops in China. We saw record sales at our U.S. open shop earlier this fall, and our new line of Roger Federer's premium performance racquet, specs and accessories launched in August has been extremely successful in the first month, driven the strong growth in our key performance racquet segment. potential growth in Q3 as retail inventories normalize and the retail began accelerating refreshment orders.

Our collaboration continues to drive brand heat and strong sell-through. With that, I will turn it over to Andrew.

Thanks, James. I'm excited to discuss our strong Q3 performance and a positive revision to our full year 2024 guidance as well as our first look at our outlook for 2025.

Before diving in, I'll quickly address a couple of housekeeping items.

First, in Q3, we updated the presentation of our credit card processing fees, which were previously recorded as contra revenue and have now been reclassified as selling, general and administrative expenses. The reclass has no impact on operating profit.

We have included a slide in our earnings deck with a schedule of the annual impact since 2021 and the quarterly impact since 2023.

Second, Q3 adjusted operating margin benefited by approximately 100 basis points from $14 million of government subsidies that we received in the third quarter which we previously expected to receive in Q4.

We are thrilled with the underlying sales and margin performance of our brand portfolio. The fast growth of our high-margin Arc’teryx franchise is elevating the financial profile of Amer Sports in total. And this dynamic allows us to deliver strong, profitable growth for our shareholders while reinvesting in the many long-term growth opportunities across our portfolio. Amer Sports grew sales 17% in Q3 on both a reported and constant currency basis. The strong group sales performance was led by Technical Apparel while Outdoor Performance and Ball & Racquet Sports also delivered very solid growth. By channel, the group continues to be led by DTC, which grew 41% and led by our Arc’teryx and Solomon footwear. But also in Q3, we saw wholesale trends improve, growing 8% year-over-year, led by Arc’teryx and Wilson. Regional growth was led by Greater China, which increased 56%, followed by Asia Pacific, which grew 47%.

Importantly, growth in Americas and EMEA accelerated from 1% each in Q2 to 7% and 4%, respectively, in Q3.

Turning to profitability. Adjusted gross margin increased 410 basis points to 55.5% in Q3, primarily driven by positive segment, product, regional and channel mix shift, combined with lower discounting actions.

Going forward, we expect our highest gross margin franchise, Arc’teryx, to continue to grow significantly faster than the rest of the portfolio and continue to be the biggest underlying driver of our ongoing gross margin expansion.

Adjusted SG&A expenses as a percentage of revenues increased 210 basis points and represented 42.3% of revenues in Q3, mainly driven by SG&A deleverage at Outdoor Performance due to Greater China and Asia Pacific growth plan investments. Also, Technical Apparel slightly delevered due to investments in opening stores.

We will open net 30 new Arc’teryx stores in 2024, the highest ever in 1 year. At this time, we do not expect to significantly increase the number of annual Arc’teryx openings from this run rate.

We generated a 280 basis point increase in our adjusted operating margin from 11.6% last year to 14.4% in Q3 2024, above our guidance of approximately 11% to 12%.

As mentioned above, our adjusted operating margin benefited by the $14 million early receipt of government subsidy payments. Adjusted corporate expenses were $26 million versus $23 million in Q3 of last year, driven by higher personnel costs. Depreciation and amortization was $71 million, which includes $32 million of ROU depreciation. Adjusted net finance costs in the quarter was $45 million, at the low end of the $45 million to $50 million range we guided to on our last call. In the quarter, our adjusted income tax expense was $78 million, which equates to an adjusted effective tax rate of 52%, in line with our guidance of 50% to 55%. Adjusted net income was $71 million in Q3 compared to an adjusted net loss of $13 million in the prior year period. Adjusted diluted earnings per share was $0.14 compared to an adjusted diluted earnings per share of $0.03 last year.

Turning to segment results. Technical Apparel revenues increased 34% to $520 million led by Artery. Growth was fueled by 40% D2C expansion, including a 20% omni-comp, a great result comparing against a 68% omni-comp in the third quarter of last year. Arc’teryx DTC momentum was fueled by both new and existing consumers across all regions and channels. The Arc’teryx brand continues to experience broad-based strength and is outperforming across every region, channel and category. DTC remains the core growth engine but we also experienced strength in the wholesale channel, which grew 26% for the segment. U.S. wholesale was a standard, especially for Arc’teryx.

Regionally, Technical Apparel growth was led by Asia Pacific, followed by Greater China and the Americas.

Additionally, EMEA returned to growth, driven by a strong DTC performance. Consumer love Arc’teryx in China continues to grow and the brand's very strong performance in APAC continued into Q3. Technical Apparel adjusted operating margin expanded 370 basis points to 20%, driven by higher gross margins from favorable product, channel and regional mix.

The Technical Apparel segment operating margin also benefited 200 basis points from the Q3 receipt of government subsidy payments that were expected in Q4. Outdoor Performance segment revenues increased 8% to $534 million driven by double-digit top line performance in Solomon footwear and apparel and strong DTC channel growth, especially in Asia Pacific and Greater China. This was partially offset by a decline in Solomon Winter Sports Equipment and the wholesale channel. By channel, Outdoor Performance DTC grew by more than 50%, while wholesale declined slightly, driven by continued soft wholesale market conditions in EMEA and North America for Solomon Winter Sports Equipment.

By region, very strong growth in Greater China and APAC were partially offset by slower sales in EMEA and North America. North America was a tale of 2 businesses. Strong double-digit growth in soft goods, offset by a more challenging environment for Winter Sports Equipment.

As we said last quarter, 2024 will be a slightly softer year for winter sports equipment due to slower trends in North America where ski equipment sales are rebasing after a strong run through and beyond COVID. This is in addition to cautious orders in EMEA after 2 tough snow seasons in Europe.

However, given our great brands and scale advantages, we are taking market share as our businesses are down less than the market. Longer term, although we expect Winter Sports Equipment to be a slower growth business, the industry remains healthy and the consumer demand for ski vacations remains consistent and strong irrespective of weather, especially as results have become adept at making their own snow. Winter Sports Equipment now represents 1/3 of outdoor performance. And long term, we expect this business to grow low single digits annually. Outdoor performance adjusted operating margin contracted 40 basis points from last year's record performance to 17.5% this year. This was driven by higher SG&A due to store and team investments to drive regional acceleration for Solomon in China and APAC, offsetting gross margin gains, which were mainly driven by a favorable region, channel, brand and product mix.

Moving to Ball & Racquet. Revenue increased 11% to $300 million as inventories normalized in the market and replenishment orders accelerated.

Our constant innovation and top-quality products have allowed Wilson to take share during these past few quarters of inventory rebalancing.

We are very pleased with the strong rebound and continue to expect Ball & Racquet to grow low to mid-single digits long term.

By category, the return to double-digit growth was led by our marquee Racket Sports franchise as well as our small but fast-growing softwood segment. Inflatable balls and golf also returned to growth in Q3.

Our Tennis 360 strategy continues to be a key driver for the Wilson franchise, led by footwear and apparel growth, performance rackets, accelerating expansion of Wilson Tennis 360 shops in China as well as Fadel and Pickleball growth. Ball & Racket segment adjusted operating profit margin increased 600 basis points compared to the third quarter of 2023 to 6.9%, primarily driven by an increase in new product launches this year, which carry higher gross margins and supported by lower discounting given the inventory clearance that began last year in Q3.

Looking ahead, we are confident that our market share and flow of innovative products position Ball & Racquet well in Q4 when we face our easiest comparison and also have our strongest pipeline of new products.

Turning to the balance sheet. We ended the quarter with $2 billion of net debt, up from Q2 as we typically draw on our revolver in Q3 to fund inventory builds ahead of our key winter season. Using the midpoint of our 2024 implied adjusted operating profit guidance, our net debt to adjusted non-IFRS EBITDA ratio was approximately 2.8x at the end of Q3. Deleveraging our balance sheet remains a priority, and our goal is to reduce our leverage ratio to 1.5x or better over the next few years through both EBITDA expansion and debt paydown.

Our focus on inventory discipline is paying off as inventories finished Q3 up only 12% year-over-year versus 17% sales growth. Also, I'd like to provide a quick update on our regional sourcing exposures, given the increased market focus on potential U.S. import tariffs. Greater China represents less than 30% of Amer Sports global sourcing. And looking at Amer Sports Group in totality, sourcing from China to the U.S. market represents only 10% to 12% of total group revenues. Similar to the last period of rising China tariffs, our Ball & Racquet Sports segment would be most impacted, predominantly tennis rackets, baseball bats and basketball.

We have some degree of flexibility to adjust our supply chain, but price increases will be the primary tool we utilize should tariffs occur.

Now turning to guidance.

Given our strong third quarter results and confidence in our brands and their financial outlook, we are raising our full year guidance for sales, adjusted gross margin and adjusted diluted EPS.

As we've said on our previous earnings call, should strong trends continue and better-than-anticipated demand materialized, we will be well positioned to deliver financial performance ahead of our expectations.

For the full year, we are raising our revenue guidance to 16% to 17% growth despite greater currency headwinds as a result of the strengthening of the U.S. dollar since the election. This incorporates approximately 34% growth in Technical Apparel, roughly 8% revenue growth in Outdoor Performance and 4% in Ball & Racquet.

We are increasing our full year adjusted gross profit margin guidance from approximately 54.5% to 55.3% to 55.5%.

However, we are maintaining our full year adjusted operating margin guidance towards the high end of 10.5% to 11%.

Given the strength in our brands, we are choosing to opportunistically accelerate high-return investments to support our key growth opportunities, including marketing and store build-out.

Our net finance cost for the year will be $200 million to $210 million, including approximately $15 million of finance cost in the first quarter of 2024 that won't be recurring.

We expect to have an effective tax rate on adjusted pretax income of approximately 37% for the full year of 2024. We now expect to achieve full year adjusted diluted EPS in the range of $0.43 to $0.45 per share versus our previous guidance of $0.40 to $0.44 per share.

Looking at the segment margins.

We expect a 2024 adjusted operating profit margin slightly above 20% for Technical Apparel, high single-digit percentage for Outdoor Performance and low to mid-single digit for Ball & Racquet.

Lastly, as we begin to look beyond this year, we are confident in our initial 2025 outlook and expect to deliver results consistent with our long-term financial algorithm of low double-digit to mid-teens annual revenue growth and 30 to 70-plus basis points of annual adjusted operating margin expansion driven by gross margin expansion.

We would also like to highlight two below operating income items to consider for 2025.

Our effective tax rate will be approximately 37% and we expect net finance costs in the range of $180 million to $190 million. With that, I'll turn it back over to the operator for Q&A.

[Operator Instructions] Your first question comes from Lorraine Hutchinson from Bank of America.

James, can you discuss your views on Chinese consumes. How has it evolved over the course of the year? And then where do you see Amer's biggest opportunity in the region?

Okay. Thank you, Lorraine. And I will say, I mean, the consumer, especially from China markets today, they are -- especially in our segments, they are still looking for and we are pretty lucky the sports segment still booming in China market. And we estimate there is a high single-digit growth across in our sports industry this year in China, and especially outdoor segments grow more than the industry average. And we can tell more and more consumers, especially in Tier 1, Tier 2 cities, they are looking for -- they are really, I mean, treated the kind of outdoor activities become the part of the lifestyle.

So the participation level getting higher than our expectation.

So it's a very good moment for us, especially Arc’teryx, Salomon sitting in outdoor segment, we can have a clear beneficial from the overall market dynamics.

Your next question comes from Jay Sole from UBS.

Great. I guess my first question is on Arc’teryx. What changed over the last 90 days, but has you most excited? Maybe particularly about some of the newer growth drivers? And then secondly, Andrew, you mentioned with respect to the fiscal '25 initial outlook that you're giving some financing costs. Can you just talk about capital allocation priorities, how much free cash you expect to generate? And what you plan to do with that free cash?

Jay, it's Stuart.

So I'll speak to your question on Arc’teryx.

So yes, I think one of the biggest milestones in the last 90 days was our Broadway store opening here in Soho in Manhattan. Really exciting expression of the brand. It represents sort of the evolution of how we're creating the store experience, the retail experience.

Importantly, the store also has the first ever dedicated sales floor. And we're learning a lot from that part of the 580 Broadway store that we'll be able to take to other locations as we expand the concept, but it also just included a lot of interesting elements and expanded shop, a really strong expression of our footwear line. And I would say a second point I would highlight is just the ongoing success we see in our footwear business, exciting momentum there. Where we've got new models in the pipeline. We launched our Copac hiking shoe in the third quarter to a lot of enthusiasm from our guests.

So we're excited with the momentum that continued in footwear. And then also in women's, we saw over 50% growth in our women's category in the third quarter.

So exciting to see acceleration there. We picked up 200 basis points of sales penetration in our women's category. And we feel like we're just getting started in women's. There's a lot of upside. We feel like the potential assortment is much broader than what you see today in the store. A lot of opportunity to evolve our women's line.

So yes, those are some of the highlights I would mention today.

Jay, thanks. This is Andrew.

Just following up on capital allocation question. Glad brought that up. It is definitely a priority of ours.

As you can see in 2024, we were intentionally focused on growing the business. We opened a net 30 new Arc’teryx stores this year.

We expect a similar run rate next year.

As we went into 2024, we talked about capital expenditures approaching $300 million, which is our largest expenditure yet, again, focusing on store build-out and implementation of our expanded ERP system in the business.

As we go into 2025, I anticipate that we will continue to focus on growing the business.

We will continue to focus through our capital expenditures.

Another key focus is going to be managing our debt carrying costs.

As an example, you see our net carrying costs coming down slightly as we've gone through and swapped some of our higher interest rate debt to lower interest rate debt. We've repriced our debt and say what you'll see an annual run rate of almost $10 million next year on the repricing.

So we will continue to focus on growing the business.

We will continue to focus on delighting our consumers.

We will be focused on debt paydown and managing the carrying cost of the business. And we expect free cash flow to increase next year over what you see this year.

Your next question comes from Matthew Boss from JPMorgan.

Congrats on a nice quarter.

So Stuart, could you speak to performance versus plan in the third quarter across regions at Arc’teryx? And maybe just any comments on demand you've seen so far in the fourth quarter relative to the 20 comp in the third quarter? And then Andrew, raised gross margin held operating margin. Maybe if you could just elaborate on SG&A investments in the fourth quarter? And how best to think about SG&A relative to sales next year?

Matt, it's Stuart. Yes.

So I'll speak to your first question there on Arc’teryx.

So we're really pleased with our performance versus plan overall and by region in the quarter.

As you heard in our prepared remarks, we exceeded our expectations in every region and every channel and every product category.

So strong momentum across the board. And -- as we've seen in prior periods, our APAC business, led by our Japan business has been a standout performer with the highest growth rate of all the regions.

So we're really excited for the momentum there. And again, there was a consistent degree of success across the product categories in that region.

Our China business was the second fastest-growing followed by North America and Europe. But overall, very pleased with the momentum. High full price sell-throughs, particularly in North America, we saw an acceleration in our full price sell-through and a reduction in our off-price selling in the period. And we're pleased with our comps, our 2-year stock at 88%, we feel is really strong. And I would say the -- if we had more inventory, we would have had even higher comps. And that's probably the opportunity we have as we look into the future, just we left sales on the table, frankly, as we are now chasing inventory across a number of categories. Footwear, in particular, has been far ahead of our expectations. We're chasing the Crag model, in particular, has been a really successful model for us and out of stock often.

So those are some of the, I think, the headlines by region. And in terms of the Q4 outlook, I think that the guidance that we shared kind of reflects our perspective. And we see, honestly, is a continuation of the strong momentum we've seen through the first 3 quarters.

Okay. Matt, thanks for the question. This is Andrew.

We are extremely pleased with our continued gross margin expansion throughout the year. We've continued to deliver high-quality expansion and earnings of the organization, which has allowed us to invest in high return investments.

And so as you see, we expanded gross margin in Q4.

Some of that's to the bottom line, but additionally, much of that to continued investment.

Some of the areas that we're going to continue to focus on is our new Arc’teryx stores, Solomon stores in China, which James mentioned as well as Wilson stores in China and the rest of APAC that are doing very well. We're really excited about the expansion of our Tennis 360 concept that is really generating traction with consumers.

In addition, talent acquisition, retention and technology are additional areas that we believe will drive sustainable growth for us.

As we look into 2025, we continue to remain consistent with our plans to be right around flat leverage in 2025 to start to begin to leverage the business post 2025 into 2026.

Your next question comes from Paul Lejuez from Citi.

This is Kelly on for Paul. Stuart, could you talk a little bit more about the footwear opportunity and potential to expand into wholesale? Where do you see the biggest opportunities there? And do you have the inventory currently to fulfill demand in that channel? And then just separately, it looks like you're seeing good performance in the Solomon footwear in North America. How are you thinking about that growth specifically in the North America market given some of the challenges you faced gaining traction there as you look to '25?

Kelly, it's Stuart.

So I'll take your first question there. On Arc’teryx footwear, yes, we're definitely looking into the future and thinking about the the broad strategy for expanding our footwear business. And that will include not only our direct-to-consumer channels, but importantly, wholesale.

And so we have a number of valued high-quality wholesale points of distribution for our footwear today, but we think it's small in terms of what's possible. We think it's important that we have a strong presence through the wholesale channel, especially for footwear, not only to build brand awareness, but it's also how our guests want to shop for footwear often.

And so -- while we'll continue to have great offerings in our own stores, our own digital points of distribution, wholesale is a critical part of the channel mix. And the inventory planning that's happening now is really obviously aimed into next year, and we have reset our expectations at a higher level in terms of what's possible based on what we've learned in 2024. It's an exciting new part of the business. We've shared previously our penetration of sales had previously been around 6% in footwear. It's jumped up to 10% since we launched the new models beginning in March.

Our midterm goals are to see footwear reach 20% of revenues in the coming years.

And so we feel like we're on a good trajectory to achieve that.

Gary, this is James. I'll give up the second comments on Salomon development in North America. And first of all, I'd like to say, okay, we are very excited about our innovative product pipeline be built up for Salomon, especially footwear and also the improved this we call outdoor sneakers categories, really comparing to the younger consumers in China and EMEA, we already see a great light.

And so for Salomon footwear business in U.S., I will say we are still on a preliminary stage. And we are underway to learn how we penetrate the market at the right order.

So the pop-up shop we opened in New York City on October 2 is kind of a showcase for the brand ever to really demonstrate how the brand stands for, and the first month performance extremely well. and give us a huge confidence to continue to roll out this kind of a similar recorded footwear contact shop in the United States next year. Meanwhile, we also identify certain key accounts and to try to build up a strong partnership with them besides our long-term partner we also are actively looking for the retailer like a Shoe Paris from West part of the United States, North Stream and all these kind of new retailers for us and to try to give us the right level of the product assortment and also high standard merchandising display overall presentation in this kind of shop and see how the market looks like. And also, we are also working on the community kind of strategy to really help us to build up our overall Salomon footwear awareness in the market in the United States.

So on preliminary stage, but we already got a very exciting result from the areas we see a great potential for our Salomon footwear in the United States.

So we will keep you guys updated on our overall progress in the future.

Your next question comes from Laurent Vasilescu from BNP Paribas.

James, I wanted to ask about Solomon. Great to hear about Gillam's promotion. Can you talk about what brings to the table to lead the brand? What's his vision over the next few years? Salomon soft goods, I think, as you mentioned, 2/3 of the business. Can that get to 80% over the next few years? And then, Andrew, I appreciate the commentary around FY '25, around the below the line items like rate just being really high at 37%. If I recall last quarter, you talked about maybe having a better tax rate going forward. Where do you think that tax rate can go over time?

Lorraine, thank you for your questions. I just put a bit highlights on Guiyang, and Guiyang has been working for Salomon more than 28 years. And his experience in sales, product innovation of across board in Salomon product divisions, and he brings a very strong track record of operational excellence and strategic innovation in diverse leadership. And also, more importantly, in the past decades, also, he built up the so-called new footwear category, what we call the modern outdoor sneakers, and really made tremendous success in the past 5 years.

So I think -- I mean, we have gone through a rigorous selections since April, and we -- eventually, we think Guiyang is the most fit for candidates for us for time being to lead the Salomon to next chapters. And for future, we also deploy a very clear strategic pillars to develop Salomon business. Obviously, for coming 3, 5 years, there are four major areas we will really focus on. One is the footwear focused.

We will really accelerate our footwear business across-border in the world, not only from China, EMEA but also in North America.

Secondly, obviously, we will put a very clear strategy winning in Europe, okay? So -- and we want to build a strong footprint for our business in European markets and find a breakthrough in North America. And thirdly, and we will continue to drive our business through the building up a strong digital platforms. These are kind of key priorities has been put in the place.

I think Guiyang also got a very high level of confidence to lead the team to fulfill the steps we want to go for next year.

this is Andrew Papes. Thanks for the question. Definitely tax rate is a key initiative of ours.

As you can see, we are exiting 2024 with a 50% effective tax rate, especially in the back half of the year.

So our rate next year is more than 1,000 basis points better than our exit rate coming out of 2024.

We have done a significant amount of work this year to both reduce the nondeductible interest as well as settle outstanding tax constraints that were burdening the business.

Going forward, we continue to expect that rate to continue coming down, both again, focusing on the payment of our debt down and inefficient tax structure jurisdictions where it's nondeductible, as well as the management of certain outstanding tax settlements.

And so we are definitely not stopping here, but 1,000 basis points improvement is well underway, and we see that number coming down to a more normalized rate in the near future in the coming years.

Our next question comes from Michael Binetti from Evercore.

Andrew, just one quick modeling course correction.

I think you said SG&A would be about flat next year.

I think Street models have about 40 basis points of SG&A leverage.

So I just want to make sure I heard you correctly there, and I have the correctly. And then I guess, it sounds like you pulled forward some investment dollars in the fourth quarter for growth initiatives. And as Stuart just suggested, you maybe taking a little bigger look at the plan for Arc’teryx footwear next year, but the revenue guidance is kind of the same algorithm we've heard from you guys for a while. Seems like you see a few potentials for upside. Could you maybe just -- where do you see the most opportunity for upside to the low double-digit to mid-teens revenue growth framework next year? And maybe just some thoughts on what you assume at the low end and at the high end of that range as we think about starting out our models for next year.

Yes. Michael, good to hear from you. From the standpoint of SG&A, we expect next year SG&A to be flat leverage to this year. With regard to our algorithm and looking at low to mid-teens, consistent with this year.

We have consistently said that as demand materializes, we will be able to service that demand in many cases -- in some cases, outperform against our guidance. And that's what we are continuing to look forward to next year as demand materializes, we see our ability to form against that.

Yes. And I'll just I'll add to that, Michael.

We continue to be very excited across the regions we operate. We really feel like we're just getting started in North America, in Europe and Asia Pacific.

We have a tremendous business in China that continues to see strong momentum.

So there's just exciting channel and region opportunities even with the assortment that we have today, if it didn't change at all. And then we look at the opportunities we have across footwear, across women's, and even when our -- within our core franchises, within our men's outdoor business, there's just a tremendous amount of new ideas coming into our product pipeline that we think will continue to create upside into the future. We feel like the guidance that we've framed is responsible and appropriate given where we are right now.

That concludes our question-and-answer session. I'd now like to hand back over to the management for final remarks.

Thanks, everyone, for joining. Look forward to seeing you on the next call in about 3 months.

Thank you so much for attending today's conference call.

You may now disconnect. Have a wonderful day.