Columbia Sportswear Company

Greetings, ladies and gentlemen, and welcome to the Columbia Sportswear Third Quarter 2022 Financial Results Conference Call. At this time, all participants have been placed on listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Andrew Burns. The floor is yours.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's Third Quarter Results. In addition to the earnings release, we furnished an 8K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also available on our Investor Relations website, investor.columbia.com. With me today on the call are Chairman, President, and Chief Executive Officer Tim Boyle, Executive Vice President and Chief Financial Officer Jim Swanson, and Executive Vice President and Chief Administrative Officer Peter Ragdon. This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations, or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward-looking statement is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings. We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our earnings release and the appendix of our CFO commentary and financial review. Following our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions so we can get to everyone by the end of the hour. Now I'll turn the call over to Tim.

Thanks, Andrew, and good afternoon. I hope everyone is well. I'm pleased to report the third quarter net sales and earnings growth were very strong considering the economic, geopolitical, and supply chain headwinds that we're navigating. Net sales grew 19% and diluted earnings per share grew 18%, broadly in line with our expectations. Bright spots in the quarter included Sorrel, which grew 28% year over year. The Sorrel brand continues to outperform, fueled by function-first fashion footwear. We believe Sorrel is well on its way to $1 billion in sales and becoming the next global footwear force. Columbia also had a fantastic quarter, growing 19%. The brand's iconic innovation, value proposition, and democratic distribution uniquely position the brand to capitalize on the popularity of outdoor activities. Innovations like OmniHeat Infinity and the newly introduced OmniHeat Helix are solving problems for consumers and are key differentiators for the brand. Looking at the current environment, it's increasingly evident that the threat of recession is weighing on the market. Despite this challenging background, our DTC business was up 8% year over year in the quarter with balanced growth across brick and mortar and e-commerce. On our last call, we updated our outlook to contemplate higher order cancellation risk and a more promotional environment compared to the exceptionally favorable environment in the prior year. We experienced both these trends in the third quarter and anticipate similar headwinds in the fourth quarter as the marketplace seeks to rationalize inventory levels. Exiting the third quarter, our inventories were up 47%. As we look to align our inventory position with anticipated demand, it's important to remember that our business model and strategies are well suited to manage this process effectively and profitably. Our inventory includes a high percentage of evergreen styles that do not change season to season. This reduces our exposure to promotional pricing. Given our strong balance sheet, we can be patient as to when and where we sell our product. If we decide not to carry over product, we will utilize our fleet of outlet stores, which enables us to profitably sell remaining high-quality inventory. Overall, I'm confident our strategies are working and that our brand portfolio has tremendous long-term growth potential. With two very important sales months left in the year, We are reiterating our full year net sales and diluted earnings per share outlook. I will provide more data later in the call. From our review of third quarter 2022 financial performance, I'll reference year-over-year comparisons versus the third quarter of 2021, unless otherwise noted. Third quarter net sales grew 19% on a reported basis and 22% on a constant currency basis. By channel, Wholesale net sales increased 24% reflecting earlier shipments of our robust fall 22 order book. DTC net sales grew 8% driven by 9% e-commerce growth and 8% brick and mortar growth. Gross margin contracted 270 basis points with the largest driver of contraction being higher inbound freight expenses. Gross margin performance was roughly in line with our outlook. SG&A leverage partially offset gross margin pressure, but operating margins still contracted 140 basis points. Diluted earnings per share increased 18% to $1.80. I will now review net sales performance by region. U.S. net sales increased 19%. We generated mid-20% wholesale growth. While timing of fall 22 shipments improved compared to fall 21, they were still later than historical shipping patterns. This resulted in increased order cancellations. Most of our retail partners have now set their fall floor plans. Early season sell-through trends reflect healthy demand and are tracking slightly below fall 21, which you will remember was exceptionally strong. Sell-through is well above pre-pandemic levels, reflecting growing consumer interest in our product. Our USDTC business was resilient in the third quarter, despite broader economic headwinds. We generated high single digit DTC growth with balanced performance across e-commerce and brick and mortar. Turning to our international business, all regions outside the US were unfavorably impacted by foreign exchange rates. For international regions, I reference constant currency growth to illustrate underlying growth in each market. Latin America, Asia Pacific region, or LAAP, net sales increased 24%. Despite the ongoing impacts of China's COVID policy, China was up mid-single-digit percent in the quarter, driven by strong DTC.com performance. Continuing waves of COVID outbreaks caused sporadic store closures and traffic decreases in various regions throughout the quarter. With that being said, our e-commerce business in China was quite strong, led by the successful launch of our TikTok store. Japan increased high teens percent, driven by strong consumer demand as we anniversary the state of emergency declarations, which hindered sales in the prior year. Korea grew low single-digit percent led by strong DTC performance. Interest in outdoor activities continues to fuel strong demand in this market. LAP distributor markets were up almost 150% due to higher fall 22 shipments following depressed pandemic impacted shipments in the prior year. Europe, Middle East, Africa region, or EMEA, Net sales increased 54%. Europe Direct grew 20% despite mounting economic pressures in the region. We experienced strong performance in our DTC, e-commerce, and wholesale businesses. Our EMEA distributor business was up almost 150% due to the later shipments of Fall 22 orders to a Russia-based distributor. Shipment to Russia in the third quarter consisted of preexisting contractual obligations for orders taken prior to the invasion. As we have previously noted, we have paused taking any new orders for the Russian market. Canada net sales were flat with strong DTC performance offset by lower wholesale shipments, which were unfavorably impacted by timing shifts. Looking at performance by brand. Columbia brand net sales were up 19% in the third quarter. Growth was relatively balanced across apparel and footwear. Following the highly successful launch of OmniHeat Infinity last year, we're building on this momentum with an expanded collection for fall 22. This differentiated, visible technology remains a top priority from a product and marketing standpoint. We were running a worldwide marketing campaign focused on how the OmniHeat Infinity technology works and why it matters for consumers. Columbia's OmniHeat Infinity technology received numerous accolades in several top publications this fall. The men's and women's Pinnacle Peak Jacket have been named one of the best puffy jackets in Outside Magazine's coveted Winter Gear Guide. For the slopes, The Platinum Peak three-layer shell was selected as one of the best ski jackets of the season by the editors at Ski Magazine. This fall, we also introduced OmniHeat Helix, our new disruptive poly-fleece technology. Historically, the poly-fleece category, which is one of the outdoor industry's mainstays, has had little innovation. Columbia's OmniHeat Helix is a patent-pending, visible technology that utilizes highly efficient insulation cells to maximize warmth and ensure breathability. We're excited to build on this differentiated new innovation in the seasons ahead. OmniHeat Helix was featured on a recent Forbes magazine article about a gear test conducted on Alaska's Spencer Glacier. The journey, which included hiking, kayaking, and camping, served as a proving ground for a collection of key Fall 22 styles. As we emphasized at our recent Investor Day, footwear is a growth accelerator for the Columbia brand, and we will continue to prioritize investment in this category. For Fall 22, we launched the Peak Free 2 collection of lightweight technical hiking footwear. The launch is being supported by an integrated marketing campaign showcasing the shoe's freaky good grip. Our Columbia-Montreal performance running line received several call-outs during the quarter. The Montreal Trinity AG was featured in the Runner's World Spring Footwear Review issue. It was one of the 23 styles selected out of over 200 models tested. Footwear News also recently featured the Montreal Trinity MX as a shoe to know for 2023. The Trinity collection is equipped with our branded technologies, Tech Light Plush, and Adapt Trax to provide added cushioning and traction in all conditions. On the marketing front, we recently announced a multi-season partnership with leading sports and entertainment group Dude Perfect. Columbia and The Dudes will collaborate on several stunts and stories this fall and spring, focusing on making the most of the outdoors and inspiring others to do the same. We kicked off the partnership with a segment on ABC's Jimmy Kimmel Live, which first aired on September 28th. NFL quarterback Jalen Hurts was recently featured on the No Days Off docuseries, which highlights young athletes on their journey to achieve their goals. The episode focused on Jalen's transition from growing up in the Texas heat to getting ready for cold playoff weather in Philadelphia. Jalen also spoke about why he likes to enjoy the outdoors. Several Columbia products were featured prominently in the episode, including his OmniHeat Infinity jacket. Shifting to our emerging brands. Sorrel was our fastest growing brand in the quarter. Net sales increased 28% driven by strong wholesale and DDC e-commerce performance. Sorrel's growth rate in the quarter was aided by favorable timing of fall shipments compared to the prior year. Sorrel brand remains laser focused on bringing a relentless flow of compelling products to its unstoppable consumer. During the quarter, Growth was led by winter style categories, as well as strong performance in year-round sneaker and wedge styles. In September, Sorrell launched its first partnership with Hype Bay, which showcases today's female leaders within fashion and culture. Sorrell and illustrator Langley Fox took over the HypeBee.com homepage to highlight an unstoppable woman and the brand's Brecks collection. Sorrell also launched its social campaign powered by Sorrell. This campaign features behind-the-scenes content by celebrity stylists as they get their clients ready for New York's Fashion Week and the Emmys. This has been one of Sorrell's most successful organic video campaigns to date. Last week, Sorrell announced that it will be relocating its headquarters to its own building on the Columbia Sportswear campus. The new location provides additional space for the brand's growing team and enables Sorel to continue attracting industry-best talent. Prana net sales increased 3%. The Prana team is focused on repositioning the brand in the marketplace to energize growth in the coming seasons. Early next year, Prana will sponsor the HBO Max reality series, The Climb, which will be hosted by actor Jason Moma, along with Prana ambassadors Chris Sharma and Megan Martin. The show will focus on a group of amateur climbers outfitted in Prana as they ascend some of the most intimidating rock faces in the world. We believe this is a unique opportunity to meaningfully raise awareness around Prana as we reestablish the brand's roots in key activities like climbing. Mountain Hardware net sales increased 11%. Strong sportswear category sell-through was a highlight in the quarter, as well as the introduction of the Summit Grid Collection, a super packable fleece for lightweight performance on the trail. To amplify Mountain Hardware's product-driven resurgence, the team is keenly focused on solidifying the brand's identity and growing brand awareness. I'll now discuss our updated 22 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements. We are reiterating our full-year net sales and diluted EPS outlook, calling for 10% to 12% net sales growth and between $5 to $5.40 in diluted earnings per share. Gross margin is now expected to be down 220 to 250 basis points, and SG&A expenses are forecast to grow roughly in line with sales growth. The result in an operating margin range of 11.9 to 12.7%. Foreign currency exchange headwinds are now expected to unfavorably impact full year net sales growth by 350 basis points and diluted earnings per share by approximately 25 cents. Looking into next year, we plan on providing our 2023 financial outlook when we report fourth quarter results in February. At that time, we will have visibility to fall 23 orders and our planned expenditures. As we indicated at our investor day, our spring 23 order book supports modest wholesale net sales growth in the first half of 2023. We anticipate our on-time delivery performance will greatly improve and be more in line with pre-pandemic service levels. In summary, I'm confident we have the right strategies in place to navigate this dynamic environment and unlock the significant growth opportunities we see across the business. We are investing in our strategic priorities to accelerate profitable growth, create iconic products, drive brand engagement, enhance consumer experiences, amplify marketplace excellence, and empower talent that is driven by our core values. That concludes my prepared remarks. We welcome your questions for the remainder of the hour. Operator, could you help us with that?

Thank you, ladies and gentlemen. The floor is now open for questions. If you have any questions or comments, please indicate so by pressing star 1 on your touchtone phone. Pressing star 2 will remove you from the queue should a question be answered. And lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions.

And the first question is coming from Bob Durbel with Guggenheim.

Bob, your line is live.

Hi, good afternoon. A couple of questions for you. The first one is, you know, on the cancellations, and I guess leading into the inventories, can you just elaborate more around, you know, the cancellations either, you know, by channel, you know, by, you know, mix, you know, fall 22, spring 23, and just sort of, how that's played through. And then, you know, I think you talk about the inventories, you know, you've adjusted your purchases going forward and, you know, to get the inventories in line, it'll still take a few quarters. I guess, can you just talk through what you see at retail with your wholesale partners and sort of where you think, you know, when you'll get yours aligned versus supply demand versus the retailers, you know, where you think the retailers are with the trends that you're seeing out there. Thanks.

Sure, Bob, thanks. Well, as it relates to the cancellation, they were virtually 100%, or very close to that, a function of our inability to deliver on time. So the demand is still there for the product. It's just that we missed the windows and therefore canceled the product. Virtually all the cancellations have been fall 22. We really don't have any spring 23 delivery scheduled prior to December, and none of those have had any cancellations. We expect to be much more timely in our deliveries for spring 23 and frankly for the balance of fall 22. So this resulted in inventory, which is current inventory being in excess. So as we said in our remarks, our plan is to liquidate that over time. in a non-panicked way through sales to regular retailers as a result of demand in the fall, as well as our own outlet stores in the future. So we're very comfortable with our position there. As it relates to retailers, I think retailers, as you remember, ended up really with very low inventories at the end of fall season 21. So our expectations are that this will be a good season. We have more inventory than we want right now, but I think the market is actually quite good. At least this is how we're seeing it today.

And Bob, with regard to your question on where we've seen cancellations by channel, it's fairly broad-based, as Tim touched on. The cancellations are, by and large, a factor of being late from a supply standpoint. So that's impacted cancellations. all retailers relatively equally. So pretty broad-based and balanced in what we've seen from a cancellation perspective.

Okay, great. And then on Surreal, can you talk a little bit about the strength, you know, women's versus men's and sort of, you know, where you see the opportunities in Q4 versus, you know, a little bit more on 23, early 23? Yeah, certainly.

Well, the Sorrel business has really grown tremendously, and it really is a function of the concentration on women's. I think we looked this morning prior to the call, and we talked about something like 80% of the Sorrel sales being non-winter and something like 85% being women's. So it's really a function of the efforts that the Sorrel team has put into the sneaker business, the wedge business, and really getting that unstoppable woman product that she needs to be going forward with. And the opportunities are enormous, in my opinion. Great.

Thank you very much.

Thanks, Bob.

Okay, the next question is coming from Laurent Falescu with BNP Paribus. Your line is live.

Oh, good afternoon. Thank you very much for taking my question. I wanted to ask about the CFL commentary. My understanding, if I compare the slides from 90 days ago, Jim, you were guiding for footwear to grow high teens. It's now low teens. Just curious to know what's driving that between Columbia and Sorrel. And then I saw the same thing with regards to the wholesale high teens to low teens, if I'm not wrong. Was that just purely due to cancellations or was there some shift that we should think about from 4Q to 1Q? Thank you.

Yeah, there's some slight shifts in revenue from Q3 to Q4. You know, we had a slight miss relative to the 20% sales outlook that we provided for the third quarter. And that's effectively just a shift in timing of wholesale shipments, you know, that we now anticipate and have shipped in the early part of fourth quarter. As it relates to any changes in relative growth rates between brands and product categories, they would be slight, Laurent. I'm not aware of any meaningful shifts from a product category perspective or from a brand level standpoint. And any change would be more related to wholesale cancellations as opposed to D2C performance. D2C performance was fairly consistent throughout the quarter.

Okay, very helpful. And then Tim, maybe just some commentary about what you're seeing in Europe. I don't know if you're seeing, you know, real time in your direct business, any slowdown. I think winter has, fall east has been somewhat warm in Europe versus in the U.S. It looks like we've had a good start to October. And then China is, seem to be pretty resilient considering the rolling lockdowns. Anything you want to call out on China that we should consider?

Yeah, certainly. Well, I want to point out, we've talked at length about both the European market and the China market. But let me talk about Europe first. That grew well this year in the quarter. And I think our business there is quite strong. remember that we've underperformed in that market historically. And so now that we've got an excellent team there that's very concentrated on the right products and strategies, that business is coming along well, and I think that's why you're seeing a growth in that market. Obviously, the headwinds are highly publicized, but we seem to be doing well in that market and no expectations that would change our mind. As it relates to China, again, an area where we've underperformed from recent times, and the expectation is that the team is well underway in the advancement of the business. We have a much more robust digital team there, and as you saw in the quarter, we talked about the TikTok store, which performs so well. Those two markets have been under pressure from us and been reconstructed, and I think what you're seeing is the results of those reconstructions.

Very helpful. Thank you very much, and best of luck with the holiday season.

Thank you.

Okay, up next we have Paul Lujes with Citigroup. Paul, your line is live.

Thanks. It's Tracy Kogan filling in for Paul. I was wondering first if you can Tell us, on your gross margin change for the year and your guidance, have you actually seen an uptick in promotional levels already quarter to date, or is it something that you expect based on the inventory levels you see across the industry? And then I have another follow-up question. Thank you.

Yeah, Tracy, it's going to be more of the latter in terms of the economic climate, the the level of inventories and the operating environment that we're currently operating in. As we look at the third quarter as an example, our D to C gross margins were down slightly. We cited that that related to promotional activity. But even with that increased promotional activity, our overall D to C margins were quite healthy. And so as we look out into the fourth quarter, the biggest change that we've made in our gross margin outlook is related to the expectation that given inventory levels more broadly in the market, that there's likely to be more promotional activity. Certainly, we're not leading with that, but we'll be ready to react as appropriate.

Got it. And then I guess just a follow-up, I think this quarter, as you just mentioned, your wholesale margin or your DTC channel sales, was more promotional, but your wholesale margins are better. I think last quarter it was the opposite. So I was wondering what the dynamics were there and what you're expecting for 4Q and as we enter next year for margins by channel. Thanks.

Well, as it relates to both the D2C and wholesale margins, keep in mind that that does not factor in the inbound freight, which we separately indicated is a significant headwind. So if you look at both channels with inbound freight, the gross margins are going to be down. Now, when you look at wholesale being up in the fourth quarter, keep in mind the price increases that we began to implement with our fall season, which were in the high single to low double digit basis. And we did that in order to mitigate the effects of the inflationary pressures that encompass both product input costs coupled with the inbound freight. So essentially, you're seeing the effects of that here in the third quarters we ship in the fall merchandise. And from a D to C perspective, the third quarter typically there's end of season summer sales and the relative mix of that can distort some of the margin.

Got it. Thanks very much.

Okay. Up next we have John Kernan with Cowan. John, your line is live.

Good afternoon. This is Krista Zuber on for John. Just first up on the earlier shipments, is there any way you can quantify what that is in dollar terms? And do you also envision earlier shipments of spring goods into Q4 or even Q123? And I have one follow-up, thanks.

Yeah, as it relates to the third quarter, and you'll note the rate of growth that we achieved in our wholesale business, certainly some of that is related to timing shifts. And as Tim pointed out, You know, there were timing shifts in which typically we would have seen certain of our EMEA distributor fall 22 shipments haven't been shipped in the second quarter and those shipped in the third quarter. And then likewise, given supply chain constraints, it's hard to quantify some of this because it's so unique, you know, year to year right now, just given the delays we've seen. But our wholesale business on the whole has shipped earlier for fall 22 than it did fall 21, yet still far behind where we'd ideally like it to be, and that's why we've seen the cancellations. I think if you were to adjust for the timing effects, both between the quarters that I'm referencing, our growth rate for wholesale business X timing would still be in the double-digit level percent growth.

Thank you. And then just on the gross margin discussion that was in the prepared remarks in terms of the increased inventory pivot provisions. Should we assume they're going to take most of the sort of the clearance pain in Q4 or will this stretch out into spring or fall 2023 as you, I believe Tim said he was, you know, not going to pull the panic button on the inventory clearance that you have on hand. Thank you.

Yeah, we, yeah, this is Tim. So we have a strong balance sheet. We believe the best use of our asset in our balance sheet is to do the right thing with the inventories that we own. We'll be paying more for inventories that we buy to replace the existing inventory, so we're better served to keep the inventory and manage it through over the next several quarters. So that's our plan, and that's how we're going to approach it. We will be more promotional, very likely, in Q4 just to react to the market in general. And then as it relates to shipments of spring 23 merchandise, it's quite common that we would ship a mixture of spring product to our U.S. and North America wholesale partners as well as independent distributor markets at the end of the fourth quarter. But that generally varies from time to time based on the demand and the shipping availability.

availability.

Thank you.

Okay, up next we have Mitch Cummets with Seaport Research. Mitch, your line's live.

Yeah, thanks for taking my questions. Tim, on the spring order book, I know you're lapping some really strong orders a year ago, and if I recall correctly, I think retailers were writing bigger orders pre-books last year in order to kind of guarantee product, but as you mentioned, your inventory is flowing better now, you're approaching more normal service levels. So does that spring 23 order book kind of reflect that retailers are going back to a more normal pre-book cadence as they're recognizing you don't have to kind of line up in advance in order to guarantee product? And if that is the case, maybe that provides a better kind of reorder opportunity in the first half of 23 versus maybe what you experienced in the first half of 22?

Yeah, I would say that we were a poor performer in terms of delivery on time in spring 22. And so I think retailers were more circumspect in terms of how they placed their orders, assuming that in the very likely effect that we will have more inventory available to them to order during the season. So we will have better service levels in spring 23 by a long shot than we had in spring 22. And the expectation is that those full shelves in the early part of the season will bode well for reorders.

Okay, good. And then, Jim, just on the margin guide, so now you're looking for gross margin this year down 220 to 250 bps. In the CFO commentary, I think the first item that you note is the elevated freight levels. Can you quantify that? that impact? And can you kind of remind us where sort of container rates are these days and air freight and kind of how that plays out over the next few quarters and when you might start to see that as a tailwind to the margins?

Yeah, you bet, Mitch. As it relates to the impact of inbound freight cost or gross margin throughout this year, through the first half of the year was about 300 basis points of impact, and it was pretty even between Q1 and Q2. And as we sit here in Q3, we've seen that to begin to normalize, but it's still pretty impactful. So Q3, it was over 200 basis points of impact, and I would suspect that, you know, we'll continue to see that normalize in the fourth quarter. You know, I don't know that we necessarily get to that becoming a tailwind of the fourth quarter, but certainly as we look out to 2023, we would expect to see some benefits as we lap this year's high rates that we've been incurring. In terms of the rates themselves, they've come down substantially over the course of the last several months here. At its peak, our inbound freight rates were six to seven times what they were before we came through this event. As we sit here today and we project out into next year, we should be closer to two times what we were. So we're not going to, we're not going to get all the way back down, at least with what we can see right now, all dependent upon what happens from an overall economic supply and demand perspective and, and how the ocean carriers manage their business. But it should be a nice benefit to offset other headwinds in our gross margins. We look at 23.

And Mitch, I just want to make a comment on your comment for your question regarding air freight. We've, We avoid that at virtually all costs. So we have a very minimal amount of air freight, certainly this year. And as a historical practice, we really avoid that.

Okay. All right. Thanks, guys, and good luck for Holly. Thank you.

Once again, if you have a question or a comment, please indicate so by pressing star 1 on your touchtone phone. Up next, we have Alex Perry with Bank of America.

Hi, thanks for taking my questions here. Just first, could you give us maybe a little more color on sort of the shaping for next year? I think, you know, 23 wholesale shipments up modestly, you know, also just trying to sort of think through the puts and takes on the gross margin cadence here with the elevated inventory levels. And, you know, you talked about sort of working that through the outlet stores, you know, maybe partially offset by some of the benefits you sort of expect to see some freight. Just trying to sort of get some color on sort of how we should think about, you know, the business heading into next year. Thanks.

Yeah, Alex, you know, obviously we're not prepared to provide an outlook for 23 here today, you know, aside from what we've described with regard to the, you know, modest growth in our wholesale business through the first half of next year. And, you know, we're looking forward, obviously, to the holiday season, seeing how consumers react. over the course of the next couple months here, and also being able to secure our Fall 23 wholesale order book that will put us in better shape as we come around to our year-end earnings call in February and can share more of that with you. Aside from that, as you look at other elements of the P&L, gross margin-wise, I touched on I think the variables in here, are going to be the upside or the tailwind with regard to freight. I think channel mix, the wholesale business, has grown substantially in 2022. We'll see how channel mix works its way out in 2023. And then on the headwind side, I think the biggest variable that we're dependent upon, as are others, is just what the overall environment, the operating environment entails. with the shape of the consumer and retailer sentiment and what that means in overall promotional cadence. So those are the major variables. I think currency is obviously another challenge and headwind, both from a gross margin perspective as we hedge our inventory production as well as where translation rates are. But we'll look forward to sharing more in February.

That's incredibly helpful. And then maybe off of that, you took some – Pricing above, you know, I think what you've taken historically this year, you know, as you move into next year, is it sort of pricing to offset cost inflation? Or how do you guys think about sort of pricing on a go-forward basis?

Yeah, well, we are in the process of pricing our fall 23 products today. And we've seen increases in labor prices. fairly large increases across almost every market that we source in. There have been some moderation of the costs on material just due to the market reduction in demand, and we would see a commensurate reduction in demand on the ocean freight carriers. So we haven't settled on final pricing yet, and we haven't shared that with our wholesale partners, but Our expectations are that the dramatic increases we've seen over the last several quarters will moderate.

Yeah, I think Tim's referring specifically, you know, we're going to market with fall 23 here pretty quick. As it relates to spring 23 and the order book that we have, you know, certainly we're continuing to operate in an inflationary based environment. And with inflation, our objective has been to increase prices to offset that. And we continue to do that with our spring 23 season. So spring 23 prices are, You know, they're up in the same level of magnitude as what we did for fall 22. So call it the high single digit level is the price increases that we've incorporated into there.

Perfect. That's incredibly helpful. Best of luck in the holiday season.

Okay. The next question is coming from Steve Marotta with CL King Associates.

Steve, your line is live.

Hello, everyone. I know there's been a lot of questions regarding inventory, and I certainly realize that the intent is to piece it out in the channels that are most advantageous over the next three to nine months. Is there a possibility that some of the aspects of the inventory could be packed and held until next holiday specific to either deliver into the wholesale channel or into your DTC?

Yeah, I suppose it's possible, but our intention would be to manage the cadence all the way through our business to be liquidated, as you said, in the most current quarters upcoming.

Yeah, there's certainly, you know, if we've got fall merchandise remaining, Steve, and we're carrying some of that for our outlet stores, as an example, you know, certainly that would be our intent. And then to Tim's point, you know, there's a good percentage of our inventory and our product lines that are evergreen styles. We would prefer to hold that merchandise and sell it at a higher margin next year than liquidate it at distressed margins in the near term.

Understood. Thank you. That's helpful. Okay.

We have a question coming from Jonathan Kump with Baird. Jonathan, your line is live.

Okay, I'd like to turn the call back to management for any closing remarks.

Well, thank you for your attention and time today. We look forward to talking to you in February about the results of Q4. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.