JOANN, Inc.

Welcome to the fiscal year 2022 third quarter earnings call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note this conference is being recorded. I'll now turn the call over to AJ and Dan. AJ, you may begin.

Thank you, operator, and good afternoon. I'd like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today, and the company undertakes no obligation to update or revise any forward-looking statement to reflect subsequent events, new information, or future circumstances. Please review the cautionary statements and risk factors contained in the company's earnings press release and the recent filings of the SEC. During the call today, management may refer to certain non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed today with the SEC, and posted to the investor relations section of Joanne's website at investors.joanne.com. On the call today from Joanne are Wade Michelon, President and Chief Executive Officer, and Matt Seuss, Chief Financial Officer. I'll now turn the call over to Wade for his prepared remarks.

Thank you, AJ. Good afternoon. I'd like to welcome everyone joining the call today for their interest in Joanne. Today, I'll provide some color on our third quarter results. As an organization, we continue to execute at a very high level despite unprecedented and ongoing supply chain challenges, as well as some of the most unique sales comparisons on record at Joanne due to the pandemic. I'd be remiss if I didn't start by thanking all Joanne team members for their stellar contributions to help us be fully prepared for our all-important holiday season. I'd also like to introduce two new team members to Joanne's senior executive team. Lisa Whitman-Smith has just joined Joanne as our new senior vice president of inventory management and business insights. Lisa comes to us with an extensive background leading highly sophisticated planning groups across a variety of retail sectors, including department stores, specialty retail, and optical retail. Over the last several years, she's built a high-performing analytics team focused on delivering actionable business insights and forecasts from consumer and market data. We've also promoted Joe Dieboldt to Senior Vice President of Store Operations. Joe has been with Joanne since 2002 and has served in many different leadership roles across our organization. Joe has been the leader of our Store Operations team for the past three years, where his outstanding work has improved our customer experience and operational efficiency. Please join me in congratulating Lisa and Joe on their new roles. As the nation's leading sewing and crafts retailer, we continue to see encouraging industry trends overall. We are solidly growing revenue on a two-year comparison with very strong gross margins, even after absorbing unprecedented supply chain costs. We are pleased to see that our customer is engaging in a wide variety of selling and crafting activities across our broad portfolio of categories. It reflects a far more diverse profile across multiple demographic measures. And we are in a strong position financially, whereby our balance sheet, operating earnings, and cash flow are allowing us to simultaneously invest in our strategic initiatives, dividend payments, modest share buybacks, and further debt reduction. During the third quarter, our total comparable sales increased by 8% based on a two-year stack. Adjusted EBITDA also continued to grow significantly compared to pre-pandemic levels, reaching $72.6 million, an increase of $33.2 million, or plus 84% versus the third quarter of fiscal year 2020. These results were bolstered by improved performance across all of our customer segments, particularly our more seasonal customer that drove what was a very solid fall and Halloween business. Recall that this more seasonal customer cohort is where we experienced some incremental softness during the second quarter. We've also been successful in managing our pricing and promotions, as well as shrink and clearance costs, driving growth in our gross profit dollars of 16.3% after adjusting for $11.3 million of higher excess ocean freight and related supply chain costs during the third quarter. We continue to evolve our position as leading digital retailer in our space, with much more to come as we go into the balance of the year and beyond. Our omnichannel sales grew by 137% in the quarter on a two-year basis, and represented 11% of total company revenue. We are seeing robust increases in both online traffic and conversion, with the customer increasingly choosing to shop us digitally, especially through our industry-leading mobile app. We launched new payment methods to our customers this quarter, notably adding Apple Pay and Klarna's Buy Now, Pay Later services, and we're seeing high levels of initial adoption. Our BOPIS and curbside pickup services are especially popular with extremely high net promoter scores associated to these customers. Based on third-party data, we benchmark among the best in specialty retail and deliver in curbside in just two minutes. We are also encouraged by our international e-commerce expansion, which we began in our second quarter. In less than six months, Joann has gone from shipping to one country to now shipping to 58 countries as customers from around the globe are learning about the Joann brand and the vast amount of sewing, fabric, and craft SKUs that we can offer at competitive prices. And in many cases, finding items that cannot be found anywhere else around the globe. Research indicates that for the creative products market in Europe, where there are more limited retail options, it's roughly about the same size as the United States. Beyond Europe, data suggests that sewing and crafting are broadly large and vibrant as well. Regarding our announcement earlier today, we are excited to enter into a joint venture with Singer, a partnership that we believe will transform sewing and craft patterning globally. Joanne has developed a proprietary and innovative technology that streamlines many cumbersome steps through a product that allows sewing enthusiasts to both project and cut patterns with ease, as well as customize pattern designs and sizes using artificial intelligence. We expect to roll out this offering to our customers in calendar year 2022. Through a combination of strong intellectual property rates around this technology and our distribution reach in the sewing category, we are very well positioned through this partnership with Singer. This joint venture will also capitalize on Singer's unmatched sewing technology expertise, as well as global presence, extreme brand loyalty in more than 190 countries, at the core of which is an extensive dealer network. This is the first time that we've announced what we refer to as one of our Blue Ocean initiatives. These initiatives build from our core and tap into significant new pools of value creation, both with physical product and also digital offerings, both domestically and globally. We will continue to unveil more on this opportunity and many other major growth initiatives at the appropriate time. Our physical store locations also continue to be a preferred space for the creative consumer to connect with our team members and with each other, seeking inspiration, education, or sometimes just getting advice on their project. Both in the latest quarter and on a year-to-date basis, our net promoter scores continue to outpace fiscal 20 and 21 on all of our key satisfaction metrics showing measurable improvements across our physical store network. The improvement in customer satisfaction is also evident across our newly remodeled stores as they outpace our chain in all customer satisfaction metrics. While our store refresh initiative is still in early stages, we expect continued momentum as we accelerate the program to launch to over 50 additional locations next year. Excitingly, we are also seeing sales lifts from these early projects that will support our four-year payback expectations and also change the game by stepping out of traditional selling and craft retail space into one that is truly differentiated and completely raises the experiential bar. We continue to be pleased with our ability to retain our newly acquired customers from the record acquisition we've achieved in fiscal 2021. Based on our internal tracking, overall retention remains significantly higher relative to pre-pandemic levels. We've also continued to add new customers to our database in fiscal 2022, acquiring over 4.5 million new customers. Our email database and our mobile app remain the most attractive new contact channels for customers, with engagement in both digital platforms exceeding the prior year. Despite well-publicized supply chain challenges leading to weakened inventory positions for many retailers this holiday season, our in-stock position remains extremely strong as we head into the final stretch of the holiday season. Our proactive measures and decisions to absorb significantly higher ocean freight and additional handling costs in the ports have allowed us to deliver key seasonal goods for the holiday selling season. We remain focused on providing a relevant and inspiring assortment of merchandise in our stores and on joann.com. and never give our customers a reason to shop anywhere else. Also, our current mix of inventory is very clean with very low levels of clearance and past season merchandise relative to our total inventory mix. Our team continues to lead through the ongoing challenges associated with poor congestion, commodity costs, and labor shortages. And in that regard, I could not be more proud that our online and retail channels continue to stand tall as evidenced by our customer satisfaction metrics, inventory position, and market share metrics as we move into our fourth quarter. We continue to strike the right balance between top-line growth and profitability, but most of all, we continue to keep our customer and their experience with our brand top-of-line in all that we do. Again, I want to thank all of our team members at Joann for their efforts and continued dedication. As an organization, we remain very focused and committed to being a friendly, clever ally to our loyal customers. With that, I will turn the call over to Matt Seuss for a more detailed review of our financials.

Thank you, Wade. I would like to open by re-emphasizing Wade's comments and by thanking all of our over 20,000 team members for all they do to create a fantastic experience for the JOANN customer, both online and in our store locations. I'll first cover the key highlights of our third quarter performance in fiscal 2022. We reported net income of $22.8 million in the third quarter with earnings per share of 53 cents. Our adjusted EPS was 73 cents in the third quarter compared to $1.84 last year and a loss of 11 cents for the same quarter in fiscal year 2020. Adjusted EBITDA improved to $72.6 million compared to 39.4 million in fiscal 2020, an 84% increase on a two-year basis. Net sales were 611 million, reflecting a decrease in total comparable sales of 14.2% to last year's third quarter and up 8% on a two-year basis. Recall that we cycled a comparable store sales increase of 25.2% during Q3 of last year. Our sales trends in the third quarter continue to be driven by a strong omnichannel business with e-commerce sales up 137% to two years ago and representing 11% of our total revenue. We are pleased that coming out of the pandemic, our sales are normalizing geographically with all of our regions driving healthy increases on a two-year basis. Our strong improvement in gross profit dollars continued in the third quarter. Gross profit dollars increased by 16.3% to $330.1 million on a two-year basis, as adjusted for excess ocean freight costs of $11.3 million, and by 12.3% to $318.8 million on a gap basis. After adjusting for Excess one-time supply chain cost, we reached another high watermark in quarterly gross margin rate of 54%, a 410 basis point improvement over two years and a 30 basis point sequential improvement over this year's second quarter. On a gap basis, our gross margin rate was 52.2% in Q3, down 30 basis points to the same quarter last year and up 230 basis points from the same period in fiscal 2020. This improvement continues to be driven by optimized promotional levels, lower shrink, and lower penetration of clearance inventory, offset by challenges in import and domestic supply chain costs. Despite well-documented supply chain challenges across the retail industry, our proactive steps to engage with our ocean freight carriers, pay what we must to move product on time, and work around bottlenecks has left us in a great position competitively on availability of seasonal items for our customers. We have received more than 90% of our fashion and seasonal merchandise for the critical fourth quarter selling season and are working quickly to move the balance to our stores. This did require us to absorb significantly higher ocean freight and related supply chain costs in the quarter versus the same period last year of approximately $16 million, of which we reflected $11.3 million as an adjustment to EBITDA as excessive one-time costs that we feel will normalize as current global supply chain issues resolve. For our fourth quarter, we expect the impact of these supply chain cost challenges on our gross margin to be roughly double what we experienced in the third quarter. Our third quarter selling general and administrative expenses totaled $257.6 million, a decrease of 12% compared to the same period last year, and an increase of 2.9% over the past two years. The decrease compared to last year reflects our ability to reduce certain variable costs on a lower sales base, as well as the fact that we incurred additional expenses last year related to the COVID-19 pandemic. As a percent of sales, our third quarter FG&A expenses were 42.2%, a reduction of 180 basis points when compared to the same period in fiscal 2020. Efficiencies gained in our store operations and leverage from higher sales compared to the same quarter two years ago are being partially offset by higher costs of hourly labor compared to what we were paying two years ago. Depreciation and amortization expense decreased slightly for the quarter by $0.7 million from last year to $19.6 million. Pre-opening and closing costs were $1.6 million during the quarter, $0.5 million higher than last year as we are beginning to ramp up our store refresh activity. Interest expense for the quarter decreased by $2.2 million compared to last year to $11.8 million. The decline in interest expense reflects the combined impact of our refinancing activities, which lowered our blended interest rate, as well as a lower average debt level. Our effective income tax rate was 23.5% for the third quarter compared to 5.9% for the same quarter last year, as last year was positively impacted by the company's ability to take advantage of certain provisions of the CARES Act. Moving to the balance sheet and cash flow metrics, Cash and cash equivalents were $30.9 million as of October 30, 2021, compared to $33.2 million at the end of the third quarter last year. Our net long-term debt was $853.8 million as of October 30, 2021, a decrease of $67.8 million from October 31, 2020. We ended the third quarter with inventory of $744.3 million, an increase of $46.6 million, or approximately 7%. That increase is driven primarily by increased ocean freight costs on products that have not yet sold, but also by higher inventory investment in seasonal and basic craft products that are exhibiting strong sales trends. As announced earlier, our board approved a share repurchase program up to $20 million through March 9, 2022. To date, we have repurchased 978,930 shares at a total cost of $10.8 million. At the end of the third quarter, our trailing 12-month credit facility adjusted EBITDA was $266.8 million, resulting in a leverage ratio for net debt less cash to adjusted EBITDA of 3.2 times. The third quarter historically represents our seasonal peak annual average leverage as we build inventory in preparation for our key holiday selling season. Our long-term leverage target of approximately 2.0 times remains unchanged and debt reduction remains one of our core capital allocation priorities as a result of our strong free cash flow characteristics. Our second quarter dividend of 10 cents per share was paid on September 24th, 2021 to shareholders of record as of September 10th, 2021. Our board of directors recently declared a cash dividend of 10 cents for the third quarter of fiscal 2022 paid on December 29th, 2021 to shareholders of record as of December 15th, 2021. For the 39 weeks ended October 30th, 2021 capital expenditures, net of landlord contributions were $41.5 million. With those investments focused on our new multi-use distribution center near Columbus, Ohio, store refresh and facilities maintenance, information technology enhancements, including improvements to our omni-channel and store point of sale platforms. We still anticipate capital expenditures, net of landlord contributions to total approximately $65 million for the year, with the focus for the balance of the year on store refresh projects that will be grand opened in early 2023. In order to provide continued visibility for modeling purposes, we are updating our fiscal 2022 outlook for selected items that were also shared during the second quarter earnings call. Pre-opening and closing expenses are expected to be in the range of $7 million to $9 million. Depreciation and amortization is expected to be between $80 and $82 million. We estimate annual interest expense of $50 to $52 million and an effective tax rate of 22.5 to 23.5%. As I mentioned earlier, we expect capital expenditures, net of landlord contributions to be approximately $65 million for the current fiscal year. Debt net of cash in the balance sheet is expected to be approximately $700 million. For the full year, we expect a weighted average fully diluted number of shares to approximate 42 million. In summary, we are pleased with the results we have achieved given the ongoing supply chain challenges across the retail industry at this time. We've accomplished a high level of customer engagement and satisfaction, and we are well prepared for our holiday selling season. With that, we'd be happy to take your questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. There'll be a delay before the first question is announced. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touchtone phone. And our first question comes from Liz Suzuki from Bank of America.

Great, thank you. Could you just talk about how your claims for sales progress throughout the quarter on a two-year stack basis and what November looks like as winter holiday demand might have started to pick up? And, you know, we've heard a lot about early shopping activity. Just curious to hear your thoughts on that.

Yeah, you bet, Liz. This is Wade. You know, one thing is, This is probably the only quarter of the year we get more color on the next quarter because it is such a big quarter for us in the holidays, so I will do a bit of that. In Q3, our quarter started out a little bit slow, and then really, as we approached Halloween, came on extremely strong. So that was kind of the profile of it. If we look at this quarter, this quarter looks a lot like that quarter where we were a little bit slower in November, but we really had a fantastic Black Friday week. So if you look kind of that Tuesday to Monday period, our sales demand is up about 9% and our total gross margin of about 20%. The thing that surprised us was we had more of a shift to Omni than we even thought we would. We were well into the 20s in terms of our penetration for that period. So that was probably the thing that was different. But overall, those numbers that I gave you on sales and gross margin for that period were pretty much almost exactly on our expectations. So, you know, it's looking like with this momentum we have now that, you know, Q4, if we continue the way we're going now, should shape up a lot like Q3. So I don't know, Matt, if you want to add anything to that.

Yeah, I could just emphasize the numbers we gave on the Black Friday sale were on two-year stacks. to make sure people are clear on that. But, yeah, I think definitely both the third and the fourth quarter, a bit of a slower start than we would have liked or expected, but definitely seeing momentum as we get closer to the holiday. I think, Liz, some of the factors you're describing more broadly, we're seeing for sure that it's a later arriving shopper around some of the key holidays.

And we, you know, as we said before, we've done a lot of work to make sure we're in good position. We've got, you know, meaningfully more, you know, seasonal inventory in particular than we did, you know, last year. And, again, we're pretty optimistic that we're going to be standing tall and the customer is going to come as we go through Christmas year.

Great. And just a question on that comment about, you know, a pretty big shift into Omni in that week and gross margins being up. I mean, should we think about, you know, online versus in-store as, you know, being relatively margin neutral, or is it generally dilutive like it is in a lot of categories of retail?

I mean, it's very close to equivalent. You know, the difference is, you know, typically where we have, you know, split shipments, I might have to pay for extra freight, but we do charge a lot of the freight through typically. But in general, we're close to agnostic in those channels.

Great. Thanks very much.

Thank you. Thank you.

And our next question comes from Zach Faden with Wells Fargo.

Hi. This is David Lanson for Zach. Thanks for taking our questions. So just to confirm on your prior comments, that Q4 is looking like Q3, that means your two-year stack will be similar at 11% and find kind of a negative 10% comp. Is that the right message there?

I look at it on a two-year basis in terms of, you know, the two-year sales comp and the two-year gross margin dollars. That's what, you know, that's how I look at it in terms of being similar if this pace continues. And the other part of the profile is both Q3 and Q4, the first month. You know, it was a little bit slower than we anticipated, but as we got towards the holiday, as we got towards Halloween, and now we've had a very good, as I said, you know, Black Friday week as we head towards Christmas, we think that profile will hold as well.

But for sure, we would emphasize, you know, we would need to see continued strength, which we did see kind of launch this quarter anyway, launching kind of with the Black Friday week event and the Thanksgiving time. And, you know, if we see that kind of momentum continuing, you know, could see a quarter that looks a lot like how we performed last quarter.

Okay, great. And then just one on gross margin, too. So the adjusted gross margin expanded about 115 basis points year over year with kind of 180 to 190 of that from the excess freight. Just was curious if you could walk through some of the other puts and takes to that line end up.

Yeah, those are kind of the big ones. If you look at kind of our core product margins, so really what's offsetting that is basically our core product margins, so that's kind of a blend of our promotional efficiencies and sourcing gains we've made really over the past several years, and then shrink and clearance, which we talked to. So, you know, what I would say they're probably roughly 20% of that net benefit is the shrink and clearance impacts, and then the balance would be a combination of product margins and sourcing gains.

Great, thanks.

And our next question comes from Laura Sampine from Loop Capital.

Thanks for taking my question. Gross margin beat our expectations despite the supply chain pressures, and you commented that clearance activity is Minimized by pretty clean inventory levels. How sustainable are your current levels of markdowns and clearance? And in Q3, were you in line with your expectations on those metrics?

Yeah, thanks, Laura. This is Matt. Yeah, I would start off by saying we were pretty much on our expectations for those areas. In terms of sustainability, we do feel like our planning and the work our merchants are doing has improved significantly over the last couple of years to the extent that we do feel like that can continue. Now, certainly, we can always place bets that don't turn out exactly like we would think. And then you have to clear through some of that inventory. But we're not sitting on anything of that nature today. So certainly for the next couple of quarters, we would foresee this continuing to be a benefit for us.

And the teams have done, to build on Matt's point, a really great job of changing, you know, how they buy, flow, pulse, fashion, and the like. And I think we're much more agile than we used to be.

Got it. Thank you.

And our next question comes from Peter Keith from Piper Sandler. Your line is open.

Hey, good afternoon. It's Bobby Friedner on for Peter. Thanks for taking my questions. First, I wanted to ask around customer engagement and retention trends that you're seeing from your own customers, just as a comparison, Cricket. reported that their 90-day customer engagement had dropped to the lowest level in Q3 since the start of COVID. You know, I'm wondering if you're seeing a similar kind of pressure. And related, you know, looking at the 2020 new cohort of new sewing and cricket customers, are you still seeing the 65% retention rate that you've historically seen, or has there been any deviation up or down from that?

And we're seeing very good customer retention overall. In fact, you know, not as slightly better than historic with respect to, I won't talk cricket specifically, but if I, you know, bundle all machines together, sewing machines, craft technology machines, you know, quarter to date, we're up, you know, over 20%, about a two-year stack, which is incredible given just how many of those have been sold, you know, over the past 15 months. That rate is certainly, you know, lower than it was six months ago. but still be up on a two-year stack at that kind of rate is very encouraging to us and that's happening both on the sewing side and the craft side which you know again just bodes well for the future in terms of the consumables that follow behind it. I don't know Matt if you want to add anything on that. I think that pretty much covered it.

Okay, thanks and just separately last quarter you noted that there was still record low promo environment in the industry and you thought it would remain favorable for a while. Is that still your current outlook or has there been any change on that front as the industry seems to be seeing somewhat normalized sales trends here and maybe in holiday the promo environment has gotten more competitive?

We haven't seen any uptick at all in that environment. It's still a good environment. We're still high-low, but we manage our depth and our breadth. to be smart there. I would suspect everybody in the industry is keeping an eye open on inflation, so just making sure that everyone's able to mitigate whatever may come there, I think is just another reason why that environment will stay, I think, very rational for some time coming.

Yeah, I think that and supply chain concerns, obviously, if you're struggling to refill products, which even for us, we've been successful in doing that, but as Wade mentioned, a pretty high cost. It doesn't really make a whole lot of sense to be overly heated in your promotional approach.

Okay. Thanks a lot.

And our next question comes from Paul Carney from Barclays. Your line is open.

Hi, everybody. Thanks for taking my question. First, can you just remind us that seasonal growth is a percent of mix. How is that going to impact margin over time?

Yeah, I mean, our seasonal business is, you know, pretty profitable. So I would say across all of our businesses there's not, you know, a meaningful difference. Within businesses there will be a few mixed things, you know, so technology versus non-technology can be different, for example. But, you know, seasonal is not only, we think, a great growth area for us, but it's an area that's meaningfully creative compared to the other businesses.

Yeah, I think the other thing in terms of margin in that business, we turn that area of the store, you know, five to six times a year. So really the important thing is – Do we get good early season selling, and do we minimize end of season markdown and clearance? And our teams have been doing a really effective job of that lately, which has also helped us kind of maintain really strong margin growth.

Okay. Another one, and then a follow-up. Are you taking any price increases for some of the elevated costs that you're seeing on freight?

Yeah, what we've done is we've done a lot of work to kind of understand what we think is, you know, potentially sustainable, you know, inflation versus what we think will pass. You know, and the first line of defense for us to be smarter in promotions, there's a lot of room to run there, and you can see it kind of in our margin flow. We've also been really, you know, though aggressive, working across, you know, our vendors, trying to make sure that we're working to offset inflation wherever we can, expanding to additional vendors where we might need to. So far, we've been able to, you know, to do a good job of that. There's certainly some opportunities to price, but in general, we think we've got good consumer momentum. We think in a lot of key areas, we could be building some share for the long term, and we just want to be very measured.

Okay. And just lastly, can you just explain to us how you are estimating what's one time in elevated freight? And then if I heard correctly, I think you were saying you expect it to double for next quarter. Is that just the impact of a full quarter of flying in? And then are you seeing these rates improve as you're going through the quarter?

Yeah, I can. I'll make sure I take off on all of those. And if I miss one, please correct me. So I'll start with the methodology. So we have contracted rates. Those have a little more than doubled in the past year. Plus, then we also always assume we're going to pay some freight in the open or spot broker market. So that blends to a level that we say is kind of normative freight. Again, that's more than double what we've historically paid. And then what we're paying on top of that is what we feel is transitory and hopeful that is transitory. I think all of us do. That is, you know, 8 to 10x on top of even that doubling that I described that we're treating as normative. So basically we have a rate per container.

uh that we're considering a standard cost that runs through our normal purchase order process and product costs and then anything on top of that is what we're one-lining through our ebitda adjustment process a couple other things too part of what's in that you know that what we're calling one time is i think we had about 10 million dollars of cost to offload um product from the port which is something nobody's ever done before but it's effectively taking it off one container and putting it onto a truck that was 10 million dollars just to get out of the court this year. We hope that that doesn't ever, or at least in any meaningful way, happen again. You know, as I think I might have said in the last quarter, you know, for a decade, our rates were more or less around $3,000 per container. You know, over the last four or five months to get it done, we've been paying, you know, up to $30,000 a lot in the $20,000 range. You know, already the spot market's down, you know, around the low teens or in some cases lower. So, It is pulling back. It's not at 3,000 level, but as Matt said, when we look out and say, what are our broker rates? And even in a, you know, more than 200% premium to what we've ever paid, we feel that's, you know, a reasonable assumption for what business will be like, you know, six, nine months from now.

Yeah. I think the other thing I'd want to emphasize and then check is if we didn't answer all your questions, the one thing you'll have to realize here too is we're, and have been bringing in goods that will sell next year as well at these very elevated rates. So there will be a component. I think I addressed this a bit in the prepared remarks. A bit of this is in our inventory still and will end up running through the first couple of quarters of next year. We're still in the process of trying to get a comfort level on how much that looks like it will be, but you'll see this impact with us, unfortunately, for the next couple of quarters.

For the most part of the balance sheet, we've already paid for this, so it's reflected in our balance sheet numbers.

Yeah. All right. Thank you very much. Appreciate it.

You bet.

And as a reminder, if you have a question, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using speakerphone, you may need to pick up the handset first before pressing the numbers. Again, if you have a question, please press star then 1 on your touch-tone phone. And please be patient while we're gathering the questions. Again, it's star 1 to ask a question. Please be patient while we're gathering questions. And we have Martin Byrne from J.C. Clark. Question, please go ahead.

Yeah, thank you very much. You mentioned the international side, which is growing from a very low base. Internally, what are your expectations for this growing part of your business, medium to longer term, as a percentage of the overall revenue mix?

You know, we're still kind of learning as we go. We're still ramping as we go. I would say we try to benchmark some other retailers and what they've seen. And, you know, it wouldn't be, you know, it wouldn't be out of bounds to think that over three years or so you might, you know, be able to get 20% of your pure Omni in terms of growth there. I think importantly, though, we're making a lot of networks and building a brand in a lot of countries. And actually in the name of some bigger orders with distributors and wholesalers, they're looking for things particularly on the selling side. So I think it's exciting. As we said before today, our Blue Ocean Initiative really, you know, reinventing sewing and the digital offerings that we'll have there apply to every sewer on the planet, too. So in conjunction with Singer and leveraging what we're building out there, we think we're going to be able to do some very interesting things over time as well.

Would that obviate the need to establish a bricks-and-mortar presence or brand in the European or other markets? In other words, basically piggybacking the Singer brand as opposed to building or acquiring a regional brand and growing it from there?

These initiatives we think we can really build out without any bricks and mortar investment, especially the digital ones, but the other ones we can do via our assets here or via partners in places. Our strategy is to make this brand more ubiquitous and create value. Again, we can do it without investing in any bricks and mortar.

I think one of the unique things about the partnership we announced earlier today, too, is it's a key advantage of having Singer as a partner is they have a very robust dealer network throughout dozens of countries around the world.

190, including the U.S., too, to augment what we do.

All right. Okay, and one other question very quickly. How much of a debt reduction do you experience or draining those inventories, that working capital down from NQ3 to NQ4? How much is typical during that three-month period as you go from the high end to the low?

As Matt said, we'll end the year, we think, around $700 million in net debt. So, you know, dealing with the net debt for the quarter to the net, that's really, you know, almost all just driving the business with the working capital already paid for.

All right. Okay. Thank you very much.

You bet. Thank you.

And that concludes the question and answer session. I'd like to turn the call back over to management for any closing comments.

Well, look, I want to thank everybody for getting on the call, especially evening call. for some of you, but I appreciate the support very much. We couldn't be more optimistic about the business as we go forward here. We think we've got tremendous opportunities across all of our customer tiers, all of our business segments, all of our geographies, our core, and our blue ocean, and we're excited talking to you more about it as time unfolds. So, again, thanks for listening. We appreciate you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.