Amer Sports Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 21, 2024

There are 12 speakers on the call.

Operator

Thank you for standing by. My name is JL and I will be your conference operator today. At this time, I would like to welcome everyone to the Amherst Sports 1Q24 Earnings Call.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the conference over to Omar Saad, VP of Finance and Investor Relations. You may begin.

Speaker 1

Hello, everyone, and thanks for joining AMER Sports' Q1 2024 earnings call. Earlier this morning, we announced our financial results for the Q1 of fiscal year 2024. The release can be found on our IR website, investors. Ammersports.com. A quick reminder to everyone that today's call will contain certain forward looking statements within the meaning of the federal securities laws.

Speaker 1

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 Zhang and CFO, Andrew Page, followed by a Q and A session until approximately 9 a.

Speaker 1

M. Eastern. Arc'teryx CEO, Stuart Hazleton, will also join for the Q and A portion of the call. With that, I'll turn the call over to James.

Speaker 2

Thanks, Omar. The momentum behind our strong financial performance has continued through the Q1 of 2024 as we delivered sales and the margin above our guidance. Our transformation to our brand direct business model 4 years ago continues to fuel Amerenst bought profitable growth today and we have 4 years to come. Our high performance technical products are resonating with consumers globally and we are gaining share in the premium sports and outdoor market. Our consumers are engaged and our end markets are healthy, giving us confidence that our unique portfolio of brands is well positioned to deliver another great year in 2024.

Speaker 2

In the Q1, we generated 12.6% sales growth or plus 14.2% excluding currency impact, and we achieved an 11% adjusting operating margin above our expectations. We continue to enjoy strong gross margin expansion, which reflects the strong pricing power of our brands as well as ongoing mix shift toward our high margin franchise, Arcariq, which continues to generate best in class financial performance. And as Andrew will discuss, we have significantly improved our balance sheet. Five key factors give me confidence for 2024 and beyond. First, we own and operate a unique and a valuable portfolio of premium outdoor and sports brands.

Speaker 2

Each one is fueled by technical innovation and are positioned at the pinnacle of its respective segments. Our brands have high engagement, conversion and the satisfaction with consumers everywhere, but are still relatively small players on the global stage with significant room to grow. 2nd, our tariffs is a breakout growth story with unprecedented growth and profitability for the outdoor industry. Charting new territory with disruptive DTC model and a strong competitive position. Filled by Arc'teryx, Amersports' highest margin channels, regions and the categories are growing the fastest.

Speaker 2

3rd, Solomon, Wilsons and all of our other brands are also healthy. They have long standing authentic heritage, premium position, high performance products and the leading market share. Although they are earlier in their growth infraction, we are building very strong foundations for future growth for these brands across categories and the geographies. 4th, we believe our deep expertise and the unique scalable operating platform in Great China gives us a significant competitive advantage across the brands in our portfolio in this large and important consumer market. Last but not least is tea.

Speaker 2

Operate journey begins with our great team and we have assembled an experienced management team with a great track record that's energized and motivated to drive value creation for our stakeholders. Okay. Now let's review the performance of our brand segments. 1st, Technipo Apparel. Led by Aptarix, Technical Apparel revenues grew 44% to US510 $1,000,000 in Q1.

Speaker 2

Excluding FX, Technical Parcels increased 48%. The segment was fueled by 46% DTC growth, including a 36% omnicom against a difficult plus 61% comp comparison from last year in the Q1. Technical apparel growth in our direct channel was fueled by both new and existing consumers, and the both strong traffic and the commercial trends in stores and online. As a reminder, Omnicom incorporates growth from both own retail stores and e commerce sites that have been opened at least 13 months. The Arcterix brand continues to experience broad based strength and is over delivering across every region, channel and category.

Speaker 2

DTC remains the core growth engine, but we also experienced strength in the wholesale channel, which grew 40% for the segment. Wholesale growth was driven by existing accounts and doors, not expansion into new accounts or new doors. Wholesale performance was boosted by strong reorders and a continued improvement in on time delivery and inventory availability. Please note that we don't expect Technical Apparel wholesale to continue growing at this rate in Q2 or for the remainder of the year. Regionally, Technic Apparel grows fastest in Asia Pacific led by Japan, followed by the Americas and the Great China.

Speaker 2

In Japan, stores were also lapping very low inventory levels from last year. Email growth was driven by Akerix, offset with a decline at peak performance, which faced a difficult growth comparison due to promotional activities in the prior year period. Importantly, Acterix continues to generate outsized growth in key opportunity areas, including footwear, women's and hogs and accessories. Akerix did a great job executing its commercial expansion strategy in Q1. With several brand developments, I would like to highlight.

Speaker 2

This was the 1st full quarter for our new Shanghai flagship, which we call the music. This 4 storey, one of our kind, highly expression store in Wheelock Square represents the pinnacle expression of the Arterix brand at retail and has created incredible buzz for us in the market. We expect this store to generate sales well over US20 $1,000,000 in its 1st year. Globally, we executed well our retail expansion plans, opening 9 new garage locations in total in Q1, including Pasadena, Nanjing, China, Coventry Garden London and in Paris, a shopping shop in La Samaritaine department store. 2nd, Arcadix launched its 1st footwear line that was designed, developed and sourced by the in house footwear team in Portland, Oregon.

Speaker 2

Apteres started its footwear journey 7 years ago, leveraging Sonoma's existing platform. And 3 years ago, Aptelix began building in house footwear capabilities. This launch represents the first model designed by the Arc'teryx team. We are very pleased with the market reception to what we believe is the best line of technical performance footwear designed for the mountain assay. Since the launch, the penetration of footwear to Akeri's total revenue has jumped from 6% to 10%, and the crack has emerged as our breakout style.

Speaker 2

Based on the enthusiastic response from consumers and the key wholesale accounts, we are gaining early confidence that footwear can become a meaningful profitable growth avenue for the brand. Lastly, I'd like to address upcoming 2025 change in regulation bans, PFAS for our chemicals. This new regulation are not expected to have an adverse impact on our business. We have been at the forefront of the industry, developing alternative work through materials with our key partners for a number of years, and the early read from the consumers are very encouraging. The Apt Labs team has already started selling the new PFAS compliant materials in our most popular model with no negative impact on sales trends.

Speaker 2

The consumer isn't reacting to any difference in the look, feel or performance of the new materials. Across the rest of the portfolio, our other brands have much lower exposure and are already well done the path of transition to PFAS free inventory by next year. Turning to the Outdoor Performance segment, where revenue increased 6% to US400 $1,000,000 above our guidance for fresh sales. Excluding FX, outdoor performance sales increased 6%. The upside was driven by strong top line performance in Salomon DTC and the soft goods, particularly footwear in Asia Pacific and Great China.

Speaker 2

This strength was partially offset by softness in our winter sports equipment franchise, which were negatively impacted by warm weather late in the ski season, 2022 delivery shift and the elevated inventory levels in the market. Although winter sports equipment sales declined in Q1, when we look at the performance of that business over the entire winter ski season, which starts with wholesale shipments in the Q3, our portfolio of brands had a strong season overall and a top market share. The industry is healthy with solid annual bookings and the traffic in the big skiing epicenter in Europe and the Americas. In the DTC channel, outdoor performance grew 42% in Q1, driven by strong results in both e commerce and the stores fueled by increased traffic and conversion. Wholesale declined 3% and was negatively impacted by challenging trends in the outdoor sporting goods channels in the Americas.

Speaker 2

Originally, Gweich China more than doubled, while Asia Pacific rose double digits driven by an over achievement in footwear, especially Solomon's sports style category. The growth in Asia was partially offset by a decline in the Americas as the North America business has been affected by soft pre orders from key retailers, who are relying more on refreshment orders as they order start closer to need. EMEA single digit growth was led by softwares, partially offset by winter sports equipment softness. As you know, we are undergoing our management transition at Salomon, and I'm operating as interim brand CEO, where we perform a comprehensive search for the next brand leader. Now 6 weeks into my interim low, I'm even more confident in the Salomon brand, our team.

Speaker 2

Salomon is a strong and a unique brand with a sizable opportunity to grow its footwear franchise globally. We believe the global sneaks market is at a unique crossroads. More than ever before, consumers are open to new brands, styles and the products. And we believe Solomon's authentic mountain sports heritage and the unique performance technology will allow us to become one of the most impactful and the coming unique brands. I see 3 key strategic priorities for the Salomon brand as we look to accelerate footwear growth globally, particularly in e mail and North America.

Speaker 2

Number 1, the new customer acquisition. Number 2, amplifying leadership in footwear and the number 3, elevating the accessibility and the visibility of Solomon's products. I believe it's very important for the brand to win its home market of Europe and we are focused on revenue both the Paris Olympics this summer and the 2026 Milanosportina Olympic Games, where Solomon is an official partner. These high profile events will elevate profile and the reach of Solomon across Europe to support our commercial strategy in email and to build upon our brand feed along these events, we are opening a Solomon flagship on the Shanghai Lize in addition to our recent store opening, Lemonade. I'm confident in the brand and our team headquarters in NSE, France to deliver continued profitable growth in the near and the long term.

Speaker 2

With that, I will turn it over to Andrew to discuss Ball and Racket as well as the Bloop results and the outlook.

Speaker 3

Thanks, James. Moving to Ball and Racket, revenue decreased 14% to $273,000,000 as Wilson continues to be constrained by challenges comparing against strong growth and profitability last year in Q1. Recall, this time last year, both retailers and consumers were buying earlier in the season to avoid stockouts. Retailer ordering patterns have now returned to a more normal seasonal cadence and are back to buying stock closer to need. Importantly, Wilson continues to hold or gain share in terms of retail sell through in almost every one of its categories, which positions us well for when order trends improve.

Speaker 3

From a category perspective, in Q1, Wilson Sportswear achieved very strong double digit growth, although off a small base, which was more than offset by declines in other categories. Tennis declined due to slowness in the overall market across geographies except for slight growth in China. Despite the decline, Wilson returned to the number one performance racket brand in the U. S. Fueled by the launch of the new Blade bracket in February.

Speaker 3

During Q1, Wilson opened 4 new brand stores, 2 in the U. S. And 2 in China. We are seeing positive signals in China DTC with the new Wilson store and Shenzhen generating extremely strong early sales results led by our Tennis 360 presentation. Looking ahead, we are confident that our market leadership position and flow of innovative products positions ball and bracket well for when industry inventories reach balance and retailer orders and sell ins begin to reaccelerate, which we still anticipate beginning in H2 this year.

Speaker 3

We're getting some early indications from retail partners of improving future order trends and we're also seeing reorder velocity pickup. Given the inventory cleanup in the back half of last year, our year over year comparisons will become easier in Q3 and Q4. Wilson has strong product plans in place for the second half of the year, including a unique partnership for an exclusive line of basketballs with Caitlin Clark, which we announced earlier this morning. Caitlin Clark is one of the most visible and popular basketball stars in the game right now and she will be the new face of Wilson Basketball. Caitlin is a true sports and cultural superstar and will play a leading role in developing our basketball marketing campaigns from men's to women's and youth and professional, a clear sign that the women's game and its influence is exploding.

Speaker 3

The women's NCAA championship game was more watched than the men's final for the first time ever this year. Not only will Caitlin start in our marketing, we will also develop with her a dedicated Caitlin Clark basketball product line to express her personal story through our innovative basketball products. Additionally, Wilson is accelerating its new baseball glove merchandising strategy to flow more newness and colorway launches more frequently. We are also happy to announce that Wilson and the NFL has renewed its contract for a long term extension, ensuring that Wilson will continue to be the only brand to ever score a touchdown in NFL history for more years to come. This news coincides with the opening of a new state of the art leather football manufacturing facility in Ada, Ohio.

Speaker 3

This cutting edge plant will also become a center of excellence for customization and personalization. Lastly, we are relaunching our NBA ball with new products and storytelling at retail, which will be our most extensive product refresh since our contract began in 2021. Now to the numbers. As James alluded to, the fast growth of our high margin Arteryx franchise is elevating the growth and profitability profile of Amyris Sports Group in total. This dynamic allows us to deliver best in class profitable growth for shareholders while continuing to reinvest in the many growth opportunities across our portfolio of brands, especially Arc'teryx and Sullivan.

Speaker 3

In summary, 14% constant currency growth means that we are winning with consumers, allowing us to deliver results ahead of the expectations we set in March. At the group level, sales growth was fueled by outperformance in technical apparel and strong growth in the D2C channel, China and Asia Pacific. Turning to profitability, adjusted gross profit margin rose 110 basis points to 54.3% in Q1, primarily driven by the company's highest gross margin business, Arc'teryx, growing faster than the other brands. Lower logistics costs, improved sourcing performance and channel and regional mix also drove gross margin expansion. This was partially offset by an unfavorable FX impact in technical apparel and inventory adjustments related to the outdoor performance and ball and racket segments.

Speaker 3

Adjusted SG and A expenses as a percentage of revenue increased 4 20 basis points and represented 43.7% of revenues in Q1, in line with our expectations and guidance. The primary drivers of higher SG and A include anticipated spend related to the higher mix of DTC sales as well as key investments to support our growth including IT infrastructure investments and new store openings. Adjusted operating margin fell 240 basis points from 13.4% in 1Q of 2023 to 11% in the Q1 of 2024, above our guidance of 9% to 10%. Looking at margins by segment, Technical apparel adjusted operating margin contracted 40 basis points to 23% versus a strong margin comparison in Q1 of last year driven primarily by lower gross margin from foreign exchange losses. Peak performance was also a slight drag on technical apparel segment margin.

Speaker 3

The Outdoor Performance segment adjusted operating profit margin contracted 3.40 basis points to 4.8% as expected. This was due to D2C driven gross margin expansion that was more than offset by higher investment and operating expenses to support Solomon's growth opportunities in footwear in both the Americas and Greater China. As expected, the Baller Racket segment adjusted operating margin contracted 10.40 basis points compared to the Q1 of 2023 to 4%. This margin compression was due to a deterioration in gross margin driven mainly by discounts, customer mix, inventory cost update, SG and A deleverage and a difficult margin comparison. Corporate expenses were $18,000,000 and depreciation and amortization was $62,000,000 which includes $26,000,000 of right of use depreciation.

Speaker 3

Adjusted net finance costs in the quarter was $76,000,000 well below the $100,000,000 to $110,000,000 we guided to on our last call. This reflects the benefit of hedging strategies and the exclusion of approximately $17,000,000 of one time finance costs related to our debt restructuring in February. Also note that the $76,000,000 still includes approximately $30,000,000 of other finance costs that won't recur on an ongoing basis. Our effective tax rate in the quarter was 25%. Adjusted net income was $39,000,000 for the Q1 of 2024 compared to adjusted net income of $27,000,000 in the prior year period.

Speaker 3

Adjusted diluted earnings per share was $0.08 compared to adjusted diluted earnings per share of $0.07 for the same period last year. Turning to the balance sheet and cash flow. We significantly improved our capital structure in Q1 using the IPO proceeds to retire approximately $1,400,000,000 of debt. Our net debt to 3rd parties declined from $3,200,000,000 at year end to $1,700,000,000 at the end of the first quarter. Using the midpoint of our 2024 adjusted operating profit guidance, our net debt to adjusted non IFRS EBITDA ratio is already approaching 2.5 times.

Speaker 3

Please note that we will focus on bringing down the leverage ratio to 1.5 times or better in the next few years through both EBITDA expansion and debt pay down. Our focus on inventory discipline is paying off as inventories finish Q1 in healthy condition, up only 6% year over year versus 13% sales growth. This is better than our goal to grow inventories in line with or slower than sales growth, a target we will continue to aggressively pursue going forward. Before discussing guidance, I want to touch on the Envy sale announcement and the status of the Amyr Sports portfolio. As we published in early May, we sold our Envy business.

Speaker 3

This is a small franchise serving the premium cycle market and non core to our portfolio of premium technical sports and outdoor brands. Envy generated approximately $25,000,000 of annual sales evenly spread across the 4 quarters. Following this divestiture, we are comfortable with and very excited about our 10 remaining brands. They all still have significant profitable growth opportunities. Although the Envy sale and other previous divestitures indicate our willingness to evolve the portfolio when necessary as certain franchises are no longer strategic and material to our value creation algorithm, M and A is not a priority in the near term.

Speaker 3

Now turning to guidance. Given our confidence in our portfolio and its financial performance, we are slightly raising our guidance for the full year adjusted diluted EPS despite a higher than originally anticipated effective tax rate. However, the fact that we have only 1 quarter of the year under our belt and absorbing the loss of the ENVY revenue for the remainder of the year, we are not raising full year revenue guidance at this time. However, should trends continue and stronger than anticipated demand materialize, there is no structural reason to prevent us from continuing to deliver financial performance ahead of our expectations. For the full year, we continue to expect mid teens revenue growth.

Speaker 3

Given the upside in Q1, we are more comfortable that we will end the year towards the high end of the mid teens range. This incorporates greater than 25% growth in technical apparel, mid to high single digit growth in outdoor performance, including the Envy divestment and lowtomidsingledigitgrowthinball and racket. For the year, we expect FX to be neutral to reported sales growth at the group level. We slightly increased our adjusted gross profit margin guidance, which is expected to be approximately 54%. We also still expect an adjusted operating profit margin of 10.5% to 11% for 2024.

Speaker 3

Our net finance costs for the year will be $215,000,000 to $225,000,000 and we expect to have an effective tax rate on an adjusted pre tax income of approximately 38% versus the 25% to 35% expected previously. The higher effective tax rate reflects deductibility limitations related to interest expense associated with our debt. We are designing and implementing strategies to reduce our effective tax rate and we are confident that we will be able to reduce our effective tax rate to a level that is consistent with other global consumer companies. We now expect adjusted diluted EPS to be towards the high end of the previous guidance range of $0.30 to $0.40 per share. Looking at the segments, we expect 2024 adjusted operating profit margin of slightly above 20% for technical apparel, high single digit for outdoor performance and a low mid single digit adjusted segment margin for ball and racket.

Speaker 3

Looking at Q2, we expect revenue growth for the group to be approximately 10% led by technical apparel. We expect 2Q adjusted gross margin to be approximately 54%, driven primarily by mix shift benefits and an adjusted operating profit margin of approximately 0%. Based on current interest rates, our net finance costs for the quarter will be $45,000,000 to $50,000,000 and an effective tax rate of approximately 38%. This leads to adjusted diluted EPS in the range of a $0.04 loss to $0.08 loss per share. With that, I'll turn back to the operator for Q and A.

Operator

Thank you. The floor is now open for questions. Your first question comes from the line of Lorraine Hutchinson of Bank of America. Your line is open.

Speaker 4

Thank you. Good morning. Regarding Arc'teryx, you spoke about outsized growth in footwear and women's. Can you talk about how big these two categories are today, Goals for the penetration going forward and any margin implications of growing these categories?

Speaker 5

Hey, Lorraine, it's Stuart. Yes, thanks for the question. And very excited about the momentum that we're seeing both in our new footwear line as well as potential that we see for our women's. So women's is just over 20% of our business. Currently, we think that could be upwards of 40% in time.

Speaker 5

We've organized a powerful team inside the company to work on that strategy. Footwear, we've been working on it now for 3 years, exciting launch of the 3 new models that have been designed in our Portland design centers that was mentioned on the prepared remarks. And we see that business growing rapidly through the end of last year, it was right around 6% of sales. Since we launched the 3 new models, we've seen our penetration of footwear grew to 10%, I think as James mentioned. And really seeing exciting momentum with these 3 new models that represent almost 50 percent of sales since we launched them.

Speaker 5

We're seeing in the 10 weeks since the launch of footwear revenues increased over 100%. So we really believe that Arc'teryx has a future as a legitimate competitor in the athletic footwear space. And from a margin standpoint, it's a relatively small business today. It's slightly dilutive to our overall margin, but we think as we grow it, this off par with the rest of our product margin. So not a real challenge for margins.

Speaker 5

In women's margins are very healthy, very strong and on par with our men's margins as well. So, 2 important parts of our business and 2 that we have identified internally as a strategic priority.

Speaker 4

Thank you.

Operator

Your next question comes from the line of Matthew Boss of JPMorgan. Your line is open.

Speaker 6

Great, thanks. Maybe Stuart, just to pick up on that at Arc'teryx. Could you speak to new customer acquisition trends that you're seeing at the brand? And any change in momentum at the brand as we think about Q2 to date just relative to Q1 performance? And Andrew, on gross margin, so this year, 54%.

Speaker 6

Is there any ceiling as we think about gross margin performance moving Hey, Matt. This is Andrew. I'll start off with the gross margin and then

Speaker 7

Hey, Matt. This is Andrew. I'll start off with the gross margin and turn it over to Stuart. With regard to gross margin, as you call, our long term, we thought that we had meaningful upside on a long term basis gross margin about 300 basis points. And we have as you can see, as we continue to grow our business and we grow our fastest franchise and our most profitable channels faster, it's the meaningful compounding effect in margin.

Speaker 7

We've also talked about the fact that we have planned our business and structured our business around what we believe to be prudent growth rates. But to the extent that demand materializes, we are able to service that demand. There's no structural constraints that prevents us from service that demand. So you saw that in Q1 with regard to Arc'teryx and its over performance, again, as a compound impact. So I do think that as we continue to grow that business, it is going to have a strong impact on gross margin that Stuart just alluded to, even the new categories that we've seen that grow as far as women, footwear, we don't see those as deteriorating gross margins as well.

Speaker 7

We continue to drive B2C in our outdoor performance business footwear that's also and it's built in our guidance also.

Speaker 5

Yes. And Matt, to your other questions on our Caring, so really happy with the momentum that we saw in the first quarter, strong KPI fundamentals across regions and channels. You saw the omni comps that we reported and that was up against some very difficult last year comparisons and pleased with the balance of the business regionally, strong results in North America, China, our APAC business as well. So it's a really exciting momentum that we're seeing across really every part of the business. As we look at the Q2, we're seeing these trends continue.

Speaker 5

We're lapping the toughest comparisons this year on a quarterly basis versus the Q2 of last year. And yet we're still very pleased with the omni comp momentum that we're seeing in the 2nd quarter. And it's really a high quality full price growth story. And again, we're continuing to see great balance regionally and by channel. We're in a strong inventory position that we all haven't been throughout all of last year.

Speaker 5

We're much stronger coming into this year, gives us the gas in the tank to outperform if and materialize. So and in regards to your other question on customer acquisition, we're beginning to see strong customer guest file expansion, very healthy average purchase patterns and retention and acquisition statistics that we measure across every region. So we're pleased with how the guest file is expanding and something that we feel we're cultivating a very strong level of engagement that is that may offer years to come.

Speaker 6

Great color. Best of luck.

Operator

Your next question comes from the line of Brooke Roach of Goldman Sachs. Your line is open.

Speaker 4

Good morning and thank you for taking our question. As you contemplate the stronger momentum in the Arc'teryx brand, how are you thinking about reinvesting upside for future growth back into SG and A versus flowing through that stronger leverage to the bottom line? And then perhaps for Andrew, you spoke to improving future order trends from retail partners in North America wholesale. Can you elaborate on inventory levels today for both Ball and Racket outdoor performance and the drivers of your improved confidence for stronger growth in those segments in the back half? Thank you.

Speaker 5

Hey Brooke, it's Stuart. So absolutely from an SG and A standpoint and reinvestment, we are taking a portion of the beat that we're seeing on the top line and reinvesting the business. Given the pace of growth that we're seeing, it's imperative that we are looking into the future and identifying critical strategic investments that we need to have in order to stay in the trajectory and build the business for the long term. We've seen explosive growth over the last 3 years that we can only sustain this, it's building a very solid foundation. Areas that we're focused on for investment include our infrastructure, our supply chain, technology.

Speaker 5

You've heard us talk about in the past the investments that we've made to strengthen our supply chain, our ERP systems and technology, our digital platforms for our e commerce. So these are all areas that we're very focused on ensuring strong and built for the scale of business that we're looking for. And otherwise, just across key parts of our infrastructure from product team to the brand team to our commercial team as well. And the business has seen exciting growth as we've seen and that's only sustainable since we're able to invest. And I'd also mentioned we're seeing very strong store expansion is another important area of investment.

Speaker 5

The 2nd quarter we're going to see the highest number of store openings this year. We'll open 17 or 17 new stores. We'll close 4 or 5 stores in the Q2. That'll be that the most stores that we've opened probably ever and the highest quarterly basis in 2024.

Speaker 7

Thanks, Brook. This is Andrew. And you alluded to inventory North American wholesale and majority. So as we exited 2023, really nice inventory position. You can see as we move through 2024, inventory was up about 6% year over year.

Speaker 7

But exiting 2023 in a strong inventory position set us up well to be very responsive to our wholesale partners. We understand that the ordering cadence and ordering patterns that fit off in 2023 given the fact that wholesalers were rushing to inventory exiting 2022 and in the Q1 of 2023. So that's tough comparison. But we look at both our sell into our wholesale and as importantly we look at our sell through. Our sell through from our wholesale accounts has been big enough.

Speaker 7

It's been leading across most of the categories that we participate in and the velocity to start to pick up some preorders starting. So we have a healthy inventory position, not aged, it's at the levels that we'd like. We're not carrying excess inventory. We've cleaned that up and made meaningful investments in Q4 of 2023. We're well positioned.

Speaker 7

As we stated a couple of times, we do feel like exiting H1 and moving into H2, a couple of things. The one is easier comparison for us because of the investments that I just talked about in cleaning up inventory last year. And signals from our wholesale accounts is that they believe that they are cleaning their inventory up and the data that we get from them is that even in a constrained position, we're taking share and you get out of H1 and we believe that we're going to very welcome take advantage of inventory in the market. But our inventory is

Operator

Your next question comes from the line of Jay Sole of UBS. Your line is open.

Speaker 8

Great. Thank you so much. James, I'm wondering if you can comment on the company's performance in China. Revenue in China was better than expected. And I think there's a view of the consumer spending environment in China is kind of choppy.

Speaker 8

So can you just tell us more about how you're delivering really strong growth in China and if you think that strong growth can continue?

Speaker 2

Hey, Jay, this is James. Thank you for your questions. I give a quick snapshot about how China current retail environment looks like, okay. So actually, overall, Chinese economy still face a big challenge, Okay. We really look at the macro situation and especially in consumer sectors, we have seen certain big slowdown from the luxury segment as well as the cosmetics.

Speaker 2

However, in our sports industry, I think the trend still moving to a very positive directions, even the more and more consumers, they view the health is the most important matter in their lifestyle. So basically there are a lot of consumers, they participate in the sports at a very high level and especially for auto activity. So this gives us a very strong background to basically to grow our business, especially for Carriage and Solomon, both brands really position a very unique premium segment in China auto markets. And especially they are clearly taking on leadership role in Chinese overall Chinese auto segment and this segment which I mean basically is forming at this moment. And likewise, Solomon also in China also created a new batch based on the great introduction about our sports style footwear business in China market.

Speaker 2

So in nutshell, I would say the market is getting more challenging given the overall economic development and our segment is still very promising and we see more and more consumers like to spend the money on both activity and especially for So the team here, I mean, who still got very high level of the confidence to continue to drive our business based on our current footprint we set up for these 2 major brands.

Operator

Your next question comes from the line of Ike Boruchow of Wells Fargo. Your line is open.

Speaker 9

Hey, good morning everyone. Two questions. Andrew, big picture for you. Just in North America, I guess Jay hit kind of the China macro. Just in North America, kind of just what are you seeing versus 3 months ago?

Speaker 9

Anything to call out by kind of income cohort or price point across the brands? Just kind of trying to understand, it's very dynamic. Just trying to understand if there's anything to read into there, good or bad? And then maybe a quick follow-up for Stuart. Just on the wholesale number for Arteryx in Q1, just kind of explain what exactly drove that robust number and then why we should be expecting everything what exactly what kind of growth rate should we be expecting that to moderate through the rest of the year would be great?

Speaker 9

Thank you.

Speaker 7

Yes. So let me touch on North America again a little bit. And that's on my last question, and I'll let hand it over to Luke to talk about what we're seeing. We really started coming out of 2023, we were definitely hearing whispers that they thought that H1 was going to be a tough year. Retailers thought that H1 was going to be a tough year, Not as much around consumers, but just around the fact that they needed to work their inventory.

Speaker 7

And we set ourselves up to be able to take advantage. We cleaned our inventory up. We made sure that we had premium products available to be able to service the replenish orders as of going into 2024. So 3 months later, what are we seeing? 3 months later, we are actually seeing that we're on strategy.

Speaker 7

There are no indications that would suggest that our expectations coming into 2024 were off of it. In fact, I think about the cadence of Q1, the cadence of Q1 was actually on par with our expectations. If look at how we exited Q1 and into Q2, we're starting to see some pickup in velocity. We're excited. As an example, you think about baseball where we lead the category, we're excited about both our gloves and our bat launches that we have later this season.

Speaker 7

We're excited about some of the things that wasn't in our plan. So the Caitlin Clark Basketball was something that's part of our plan, our blade racket, regaining the number one position in the U. S. And sell through there. So we continue to be excited about what we suspected coming into 2024 and as we've moved through Q1 of 2024, felt like we've built in all the things that we can control in our plan and we've built in the risk associated with the macro environment that's been a surprise to us through the end of Q1.

Speaker 5

Hey Ike, it's Stuart. On the wholesale question, I would say stepping back, we have a new focus on wholesale after several years of building our B2C strategy. We still see B2C as the primary engine for our channel strategy. But we're the important relationships, points of distribution for us on the wholesale side and we're created and focused there and feel good about the mix of the business. I think in the Q1, we were about 70% D2C globally.

Speaker 5

And the upside that we saw in the Q1 from a wholesale standpoint really in our North America region and it was related to just timing of certain delivery shipments with our wholesale partners, saw some revenue that we had originally planned in the Q2 or shipped in the Q1. And it was just a tactical move and

Speaker 7

we want

Speaker 5

to make sure we're servicing accounts in a high quality way. But we see a lower growth rate for wholesale over the course of the year, but still quite healthy. And we're pleased with the overall mix of business, but we see wholesale as a strategic part of our business that we believe is important.

Operator

Your next question comes from the line of Laurent Vasilescu of BNP Paribas. Your line is open.

Speaker 10

Good morning. Thank you very much for taking my question. Andrew, last quarter, you gave us very helpful guidance on segment revenues for 1Q. I think you mentioned this morning that for 2Q, Arteryx will lead. That would make sense.

Speaker 10

For the audience, is

Speaker 2

there any way you can

Speaker 10

give us some kind of bridge across the three segments? And then I have a follow-up question on Solomon.

Speaker 7

I think in prepared remarks I talked about with regard to the revenue development. Outdoor performance is high single to low double digit growth in the 2nd quarter and fall in racket sports is big. Also, we talked about technical

Speaker 2

plus 20.

Speaker 1

Yes, sorry. Omar, I just want to add. So technical apparel over it's still performing extremely well even against the typical comparison. Outdoor performance in Ball and Racket in the second quarter and much more muted performance in single digits. Yes, exactly.

Speaker 10

Okay. Thank you, Andrew. Thank you, Omar. And then as a follow-up question on Solomon, I know Franco recently departed the Solomon brand. James, could you talk about what the criteria you're looking for a new Solomon leader?

Speaker 10

How long do you think you expect that search process to last? And what is both Solomon's growth trajectory going forward, particularly around footwear?

Speaker 2

Yes. Lauren, I mean, I so you know that we are on the way to have a search, okay? And the for us, the ideal candidate for Solomon branch as CEO, we really like a person got experience on the CO low in the similar industry footwear and apparel sector, strong and decent knowledge of how to run overall software. And obviously, the leadership, strong leadership, okay, and also criteria. So these are 3 major criteria we are finding our best to find the right candidate.

Speaker 2

So I assume we will have another 6 to 12 months for us to find the right candidate for the brand. And in terms of the overall growth trajectory for the business in Sonoma. So obviously, we will continue to stick on the strategy we give to you guys at the beginning of the year. So basically, the footwear will be the key growth engine for us. So given the successful story, we build up both in China and the APAC, we really believe we have a very strong footwear franchise to build up in the market to address the needs from the cross border.

Speaker 2

We position the brands as a more than outdoor lifestyle brand. And so I know we've also created the new category for outdoor sneakers, driven mainly by the sports style franchise. I think that part will really build us to grow our business, both Europe and the North America. So we are on the way to really drive this. We just opened a new Solomon footwear inspired footwear inspired shop in La Meray, which is the main commercial street in the center of Paris commercial areas and with 100 square meters and the 1st 2 weeks sales really out of our expectation, okay.

Speaker 2

It really demonstrates our new product lines, really adjust the needs in the market besides our quality well established kind of outdoor professional technical outdoor segment, okay. So we really believe this kind of strategy can the products can really drive us to have a higher growth for our footwear base in the future.

Operator

Your next question comes from the line of Michael Binetti of Evercore ISI. Your line is open.

Speaker 11

Hey guys. Thanks for all the detail here today. Appreciate it. I just want to ask one preliminary one before I ask my questions. I think the audio is breaking up a little bit.

Speaker 11

So we had trouble hearing growth rates by segment that you gave. The audio actually broke out. If you wouldn't mind just restating the 3 segments for 2Q. My questions would be, I guess just to maybe go back to a question you spoke on a little bit earlier, Andrew. I'd be interested to know the trajectory of wholesale through the year, particularly for, Solomon Outdoor and I guess Ball and Racquet, seems to be holding back the revenue growth rates a little bit in the Q1.

Speaker 11

You're speaking to sellout improving. Anything maybe on what sellout growth looks like? I guess, sorry, what wholesale revenue looks like? Like when can the growth rate of revenue start to improve and look like more like B2C in those two segments? And then I think Americas was guided to mid teens growth in 2024.

Speaker 11

I'm curious if there's any change to that given where Q1 came in?

Speaker 1

Hey, Michael, it's Omar. Just to kind of clarify, so we're not giving quarterly we're not going to provide quarterly detailed segment guidance, just update the annual, but more rank order. So obviously, technical apparel is leading the growth in the Q2 and for the full year and followed by outdoor performance in ball and racket. And I'd say single digits for the 2nd 2 outdoor performance in ball and racket in the 2nd quarter is probably the right way to think about it. In terms of your other comment around mid teens Americas growth that must have been a miscommunication, that's not guidance that we provided.

Speaker 11

Any thoughts on the wholesale question?

Speaker 7

Yes. Andrew, you can talk about kind of the whole what went.

Speaker 3

Yes. So actually for wholesale, how does

Speaker 1

it build throughout the year, ball and racket versus outperformance? Yes.

Speaker 7

So from a ball and racket perspective, trajectory throughout the year, as we've talked about, wholesale in Q1 was like it's going to be by far our toughest comp. Q2 will continue to be a bit tougher, but we definitely expect we've given guidance that we expect the trajectory to accelerate, especially as you get exit Q2 and then Q3 and Q4. We expect our strongest top quarter with regard to ball and bracket. Similarly, with regard to outdoor performance, we expect a similar trajectory back half weighted primarily and there are different reasons. With ball and racket, you're comping all of the cleanup that I talked about last year from inventory perspective, outbuild performance, you get into benefit.

Speaker 7

You remember last year, added about 97 stores in greater time, some of which were wholesale related stores or partner stores that captured in wholesale. So you get the full year benefit of that. And we're also adding additional stores in Greater China this year. So we expect an acceleration as it relates to our wholesale accounts, outdoor performance, ball and bracket. Again, easier comp for ball and bracket, new store adds, place outdoor performance.

Speaker 1

Operator, unfortunately, I think that's all we have time for, JL.

Operator

Understood. Due to loss of time for further questions, this concludes the Q and A session. I will now turn the conference back over to Omar for closing remarks.

Speaker 1

Thanks, JL. Thanks, everyone, for joining. We look forward to reconnecting with you on our Q2 earnings call in approximately 90 days.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Amer Sports Q1 2024
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