Amer Sports Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 20, 2024

There are 9 speakers on the call.

Operator

Thank you for standing by, and welcome to the AMER Sports Second Quarter Fiscal 20 24 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I'd now like to turn the call over to Omar Saad, Vice President of Finance and Investor Relations.

Operator

You may begin.

Speaker 1

Hello, everyone. Thanks for joining AMER Sports earnings call for the Q2 of fiscal year 2024. Earlier this morning, we announced our financial results for the quarter ended June 30, 2024 and the release can be found on our IR website investors. Ammersports.com. A quick reminder to everyone that today's call will contain 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'll begin with prepared remarks from our CEO, James Zhang and CFO, Andrew Page, followed by a Q and A session until approximately 9 am Eastern.

Speaker 1

James will cover key operational and brand highlights and Andrew will provide a financial review at both the group and segment level and also walk through our updated guidance. Arc'teryx CEO, Stuart Haselton will join us for the Q and A session. With that, I'll turn the call over to James.

Speaker 2

Thanks, Omar. We are pleased to announce strong second quarter results with sales margin and EPS ahead of our guidance. The momentum behind our unique portfolio of premium sports and outdoor brands continues, and we are generating top tier growth and the margin expansion within industry. Our global end markets are healthy and growing, and we are taking market share, positioning us to deliver another record year in 2024. We generated 16% sales growth in Q2 or plus 18% on a constant currency basis led by our flagship brand, Arcteryx.

Speaker 2

Although we benefit from a 2 point shift of wholesale shipments from 3Q into 2Q, our underlying growth momentum is clear. We achieved nearly a 3% adjusted operating margin, also well above our expectations. And we continue to enjoy strong gross margin expansion driven by the pricing power of our brands and a healthy mix shift toward our highest margin franchise at Carrotz. Looking forward, several facts give me confidence for the rest of 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 the position at the pinnacle of its respective segment. Our brands have high engagement, conversion and satisfaction with consumers everywhere, but are still relatively small players on the global stage with significant room to grow. 2nd, Akerix is a breakout growth story with unprecedented growth and the profitability for the outdoor industry, and they are charting new territory with its disruptive DTC model and a strong competitive position. Arcterius world class products, plus the authentic and the deep connection with consumers is allowing us to have strong success in large new categories such as footwear and the women's and also incredible momentum across all major geographies. 3rd, Solomon, Wilsen and all of our other brands are also healthy.

Speaker 2

They have long standing authentic heritage, premium positioning and high performance products. Both Saramond and Wilsons have leading market share within their heritage equipment business, but still have very small soft goods franchises with large growth opportunities ahead, especially in Saramond footwear. And the 4th, where other consumer companies are having challenge in China, we generally more than 50% growth there and we continue to well outperform the market. Importantly, we are seeing strong momentum across all of our 3 big brands. A few reasons I'd like to highlight why we are doing so well in China.

Speaker 2

Number 1, our brands compete in 1 the highest and the fast growing consumer segments in China, the premium sports and outdoor markets. The outdoor trend in China is very strong. Even beyond the traditional male consumer, the outdoor category is attracting younger consumers, female consumers and that we also see more luxury shoppers spending in our categories. 2nd, the China consumer landscape today has evolved into a market of winners and the losers with some brands doing extremely well and others underperforming. Our still small specialized brands with deep expertise and high quality and the performance resonates strongly with Chinese shoppers.

Speaker 2

Thirdly, and the most important, we believe we have the best team in China. Our deep expertise and the unique scalable operating platform gives us significant competitive advantage across portfolio. Before Andrew's financial discussion, I'd like to share some key highlights from our segments in Q2. Starting with Technic Apparel, which is led by our fastest growing and the now largest brand, Akeris. Octarius delivered another very strong quarter with healthy growth across all regions, channels and the categories, especially footwear, women's and hard shirt jackets.

Speaker 2

Octarius brand momentum was most evident in the very strong omni account performance against a very difficult growth comparison from last year. Globally, Akeris is well executing its retail expansion plan, opening 17 net new brand stores in 1 edge, including 13 net new locations in 2Q, bringing the total owned brand store count to 125. Key new locations this quarter included Broad Street in Toronto as well as La Marais and La Martin in Paris, which have emerged as standout locations with high engagement from local consumers in France. We also opened 3 stores in Great China and the 1 Los Angeles stores in Brentwood. All of these new stores have performed exceptionally well.

Speaker 2

We are also excited to open our New York SoHo flagship store this week with brand opening set for early September. This new alpha store will feature our most pinnacle expression of rebirth yet, including shop bow regear in store for the first time, a large reverse service center facility for care and the repair and then much more. Shifting to products, because that Akeris recently launched its first footwear line that was designed, developed and sourced by our in house footwear team. We continue to extremely pleased with the reception to what we believe is the best line of technical performance footwear designed for the Mountain athlete. Since the launch, penetration of footwear to Akerix total revenues has jumped from 6% to 10%, often setting out of our most popular size, especially the crack.

Speaker 2

Because of the unique position of Akerix footwear in the market, the strong sales in our DTC channel and the infuses interest from wholesale accounts, our confidence in growing that footwear will become a very sizable and profitable growth avenue for the brand both in own stores and the brand relevant wholesale accounts. Women's continues to perform extremely well, growing faster than the brand overall. Weemix outperforms is driven by soft share and the winshare, particularly Gummer and the Squamish franchises. Women's shares of sales is already more than 20% of the business and we see great upside in the category as we add more colorways, models and the style options that resonate with her. In May, Arc'teryx also recently opened a cutting edge creation center in Tokyo.

Speaker 2

This design space will serve as an innovation hub, reflecting local creativity, culture and outdoor community. A quick update on our new EPE product, which comprised with the ban on PFAS for ever chemicals traditionally using waterproof materials. Sales of our iconic beta jacket have accelerated since switching to compliant material. Our customers love the look, feel and the performance of the new material. Akeris also continues to execute cutting edge community engagement programs.

Speaker 2

This summer, Akeris launched a gym residence in climbing gyms from New York to Paris to San Francisco As part of the brand Summer of Time, investments in brand awareness and activation that fit of the global excitement and the popularity of climbing is driven awareness and the position of our carriers, which is at the heart of this phenomenon. Moving to the outdoor performance segment, which also delivered upside to our expectation led by Salomon footwear, partially offset by softer trends in winter sports equipment. A quick reminder that the outdoor performance is comprised of 2 business that operates in unique environment. First, winter sports equipment, which includes ski, snowboard and the snow sports equipment across the Solomon, Atomic and Armada brands. These are long standing winter sports equipment franchise that already have high market share, a very strong competitive position and the industry leading scale and the profitability, although less growth runway ahead given the already high market shares.

Speaker 2

Then we also have the Salomon footwear and apparel franchise, which is a higher margin, faster growing business, but still with very low market share of the global sneaker market. Today, it will represent approximately 66% of outdoor performance segment sales, up significantly from 54% in 2022. We believe, Salomon sneakers have an authentic and a unique position with technical features designed for the mountain, but also great for everyday use. Salomon shoes offers consumers unique style and technical attributes at a time when consumers are more receptive than ever to wearing new sneaker brands. Looking forward, we expect Solomon soft goods to grow double digit annually over the long term.

Speaker 2

In the Q2, StyleM footwear showed especially strong traction in Great China and in APAC, where consumers love our sports style offering that combines the distinct trendy look with high technical features. In China, we have created an entire new category called outdoor sneakers, which especially resonates with young consumers. We opened 27 salami shops in Q2, including both owned store and the licensed stores in Great China, bringing our total count to 136. We expect to end 2024 with about 200 owned and licensed Solomon stores in China with opportunity to grow several 100 locations just in Tier 1 and Tier 2 cities. In 2Q, we also opened a new shop in Osaka, Japan, which has become one of highest productivity shops, we are received by both local consumers and the tourists.

Speaker 2

In the French home market of France, ahead of the recent Paris Olympics, we opened a Solomon flagship store on the Champs Elysees in addition to our recent store opening in La Marais. Both new stores have performed extremely well in the 1st month and they represent the high demand consumers have to engage with the Solomon brand in its own environment. The Champs Elysees store has created a landmark presence to showcase the breadth and the depth for Solomon's unique offering in its home market, while La Marre shop is a footwear only concept store, which has proven to be a particularly successful model that we will replicate across EMEA with 3 more stores in Paris, 2 in London and 2 in Milan. We are also excited to share that we will open in October a pop up store in New York City in SoHo, which will see the market with our 1st brand store in the city ahead of our plan to open 1 to 2 permanent New York stores in 2025. As you know, we are undergoing a management transition at Salomon, and I'm operating as Interim's Brand CEO, where we perform a comprehensive search for the next brand leaders over the next 12 months.

Speaker 2

Over 4 months in the low, I'm confident in the Solomon brand and our team, as we continue to optimize the go to market strategy and the sales structure to maximize potential of our Solomon footwear finish. Moving on to Ball and the racquet highlights. We will please let Ball and the racquet return to growth in 2Q as we expect it driven by improving selling to the retail channel. While still in its early stage, our 10,360 strategy is proving to be our key driver for the Weresen franchise led by apparel and footwear growth, accelerating expansion of Weresen 10,360 shops in China and the key new product launch. We are particularly excited that Roger Taylor is back and active with the Worson brand again.

Speaker 2

Roger will have his own line of premium performance rackets, bags and accessories at Worson called RF, which launched on his birthday, August 8. As you know, Roger is a living legend in tennis and this new product line has been met with a very enthusiastic response from the market. Versum is also launching the 1st tennis shoe designed explicit for female tennis players called the Intrigue. This shoe combines the comfort and the support of modern foam technology without removing any of the side to side stability required for tennis. Our 360 tennis athletes, Mada Kostjet, will wear it for the first time in the U.

Speaker 2

S. Open later this month. Worson Tennis and the Worson China had a big moment recently during the Summer Olympics when Qing Wen Zheng went out and playing with her Worson rackets. This feat didn't go unnoticed in her home countries as sales of Worson Records rose 20 times that day. There are 90,000,000 tennis participants in Great China.

Speaker 2

Last but not least, Katherine Clark is also elevating Brian Keith as a face of Worson Festival. Her signature festival collections sold exclusively online so far sold out in record time. And we expect our Catering Club franchise to accelerate in H2 with the launch in select wholesale accounts. With that, I will turn it over to Andrew.

Speaker 3

Thank you, James. I'm excited to discuss our strong Q2 performance and the setup for the remainder of the year. Our underlying results exceeded our guidance on sales, gross margin, operating margin and earnings per share, giving us confidence to raise full year guidance. Before diving into our financial performance in Q2 and going through our updated guidance, I want to quickly discuss 2 timing items that affected Q2 and the cadence of our guidance for the rest of the 2024. First, there was a 2 point top line benefit from early shipments of certain wholesale orders that moved into Q2 from Q3, driving approximately $0.01 of EPS upside.

Speaker 3

2nd, we had a $0.04 EPS benefit in Q2 related to the resolution of uncertain tax positions that were contemplated in the full year guidance that we previously provided, but were expected to be resolved in Q3 and Q4 this year. Excluding these timing shifts, our underlying operations still drove a strong beat in the quarter, which is reflected in our full year top and bottom line guidance raise. With that, let me focus on Q2 results and guidance. The fast growth of our high margin Arteric franchise is elevating the financial profile of Amyris Sports Group in total. This dynamic allows us to deliver strong profitable growth for shareholders while reinvesting in the many long term growth opportunities across our portfolio.

Speaker 3

At the group level, Ameren Sports sales grew 16% in Q2 or 18.3% at constant currency, well ahead of expectations we set back in May. Even excluding the 2 point wholesale shift from Q3. The strong group sales performance was led by technical apparel and outdoor performance. By channel, the group continues to be led by DTC, which grew 40% led by Arc'teryx. Group wholesale revenues improved plus 2% year over year.

Speaker 3

Regional growth was led by Greater China, which increased 54%, followed by Asia Pacific, which grew 45%. EMEA grew 1% and Americas returned to slight growth with sales up 1%. Turning to profitability, Adjusted gross margin increased 200 basis points to 55.8 percent in Q2, primarily driven by positive segment, product, channel and regional mix shift. The company's highest gross margin business, Arc'teryx, continues to grow significantly faster than the other brands, the biggest driver of gross margin expansion. As expected, adjusted SG and A expenses as a percentage of revenues increased 210 basis points and represented 52.9 percent of revenues in Q2, mainly driven by SG and A deleverage at Ball and Racket and higher spend related to D2C investments, including new store openings and higher retail personnel costs.

Speaker 3

We were pleased to achieve an adjusted SG and A rate in Q2 that was better than what was contemplated in our guidance last quarter, a reflection of the expense leverage in our business model when we deliver meaningful sales upside to our forecast. These factors allowed us to generate a 50 basis point increase in our adjusted operating margin from 2.4% last year to 2.9% in Q2 2024, above our guidance of approximately 0%. Adjusted corporate expenses were $25,000,000 versus $6,000,000 in Q2 of last year, driven by higher personnel costs due to increased headcount and share based compensation. Depreciation and amortization was $63,000,000 which includes $29,000,000 of ROU depreciation. Adjusted net finance cost in the quarter was $45,000,000 at the low end of the range of $45,000,000 to $50,000,000 we guided to on our last call.

Speaker 3

In the quarter, we had an adjusted income tax benefit of $42,000,000 which included the resolution of certain discrete tax items that I mentioned above, resulting in a $20,000,000 benefit to net income or approximately $0.04 per share. Adjusted net income was $25,000,000 in Q2 compared to an adjusted net loss of $86,000,000 in the prior year period. Adjusted diluted earnings per share was $0.05 compared to adjusted diluted loss per share of $0.22 last year. We exceeded the midpoint of our Q2 EPS guidance by about $0.10 Please keep in mind, this includes the $0.05 of timing shifts that I discussed that were already contemplated in our full year guidance. Now turning to segment results.

Speaker 3

Technical apparel revenues increased 34% to $407,000,000 led by Arterix. Growth was fueled by 39% D2C expansion, including a 26 percent omnicomp, a great result comparing against an 80% omnicomp last year in the Q2. Our omnicomp metric incorporates growth from both owned retail stores and e commerce sites that have been open at least 13 months. Arc'teryx B2C momentum was fueled by both new and existing consumers and both strong traffic and conversion trends in stores and online. The Arc'teryx brand continues to experience broad based strength and is outperforming across every region, channel and category.

Speaker 3

B2C remains the core growth engine, but we also experienced strength in wholesale in the wholesale channel, which grew 24% for the segment. Regionally, technical apparel growth was led by Asia Pacific, followed by Greater China and the Americas, which were partially offset by declines in EMEA. Our parent is generating strong results in Europe, especially new store openings, but this is off a small base and was offset by a decline in peak performance, which continues to go through a brand reset to focus on greater full price selling. Technical apparel adjusted operating margin expanded 110 basis points to 14.2%, driven primarily by gross margin from favorable channel and geographic mix. The technical apparel segment margin also benefited from modest SG and A leverage on Arterix's strong sales growth, while continuing key growth investments.

Speaker 3

Outdoor Performance segment revenues increased 11% to $304,000,000 driven by strong double digit top line performance in Solomon Footwear and Apparel and in the D2C channel, particularly in Asia Pacific and Greater China. This was partially offset by a decline in winter sports equipment. Outdoor performance sales also benefited from earlier than anticipated shipments that shifted from Q3 into Q2. By channel, outdoor performance D2C grew 55%, while wholesale sales declined slightly, negatively impacted by slower pre orders in the North America sporting goods and ski channels, which increasingly relies upon replenished orders. 2024 will be a slightly softer year for winter sports equipment due to slower trends in North America with ski equipment sales are rebasing after a strong run through and beyond COVID.

Speaker 3

This is in addition to cautious orders in EMEA after 2 tough snow seasons in Europe. Given our great brands and scale advantages, we expect to take market share. Although we don't expect winter sports equipment to be a high growth business, the industry remains healthy and the consumer demand for ski vacations remains consistent and strong irrespective of weather, especially as resorts have become adept at making their own snow. When a sports equipment now represents 1 third of outdoor performance and long term we expect this business to grow low single digits annually. Regionally, outdoor performance sales growth was led by Greater China, APAC and EMEA offset by a decline in Americas, which has been affected by softer pre orders as retailers increasingly rely on replenish orders.

Speaker 3

The Outdoor Performance segment adjusted operating profit margin expanded 3 80 basis points to negative 2.1%. This was driven by a combination of gross margin gains and SG and A leverage. Gross margin gains were mainly driven by a favorable region and channel mix, lower discounts and we also leveraged expenses including payroll, administrative and IT costs. Moving to ball and bracket. Revenue increased 1% to $283,000,000 as Wilson returned to growth as expected after a double digit decline in Q1, driven by improving wholesale sell in.

Speaker 3

Our Tenet 360 strategy continues to be a key driver for the Wilson franchise led by footwear and apparel growth, accelerated expansion of Wilson Tennis 360 shops in China and some of the new footwear and racket product launches James mentioned. Golf also returned to growth driven by the Americas and EMEA led by premium clubs. The growth in sportswear, racquets and golf was partially offset by declines in baseball and inflatables. Baller racket segment adjusted operating profit margin contracted 160 basis points compared to the Q2 of 2023 to 1.1%. This margin compression was due to SG and A deleverage, which was driven by retail investments in the U.

Speaker 3

S, China and Korea. Footwear and apparel investments and timing of advertising and promotion spend. Generating consistent margin performance is a key management priority for Ball and Racket given its low single digit growth profile. We are pleased by our lean inventory position in Ball and Racquet, which is down significantly versus last year and positions us for much better profitability in the second half, especially in Q4 when we cycle to get the high discounts from last year. Looking ahead, we are confident that our market leadership position and flow of innovative products positions Ball and Bracket well as market inventories reach balance and retailer orders reaccelerate in the second half, especially in Q4 when we face our easiest comparison and also have our strongest pipeline of new products.

Speaker 3

Turning to the group balance sheet and cash flow. We ended the quarter with $1,800,000,000 of net debt. Using the midpoint of our 2024 implied adjusted operating profit guidance, our net debt to adjusted non IFRS EBITDA ratio is already approximately 2.6 times. Deleveraging our balance sheet remains a priority and our goal is to reduce our leverage ratio to 1.5 times or better over the next few years through both EBITDA expansion and debt pay down. Also, our focus on inventory discipline is paying off as inventories finished Q2 in healthy condition, up only 2% year over year versus 16% reported sales growth within our target to grow inventories in line with or slower than sales.

Speaker 3

Now turning to guidance. Given our strong Q2 results and confidence in our brands and their financial outlook, we are raising our guidance for the full year sales, adjusted operating margin and adjusted diluted EPS. As we said on previous earnings call, should strong trends continue and better than anticipated demand materialize, we will be well positioned to deliver financial performance ahead of our expectations. For the full year, we now expect revenue growth of 15% to 17%, which incorporates greater than 30% growth in technical apparel, mid to high single digit revenue growth in outdoor performance and low to mid single digit growth in ball and racket. We are increasing our adjusted gross profit margin guidance from approximately 54% to approximately 54.5%.

Speaker 3

We are also raising our guidance for our full year operating margin and now expect adjusted operating margin towards the high end of our previous 10.5% to 11% range. Our net finance costs for the year will be $200,000,000 to $220,000,000 including approximately $15,000,000 of non recurring finance costs in the Q1 of 2024. We still expect to have an effective tax rate on adjusted pretax income of approximately 38% for the full year of 2024, but the rate will be higher in the back half of approximately 50% to 55%. We continue to be very focused on designing and implementing strategies to reduce our effective tax rate. We're confident that we will be able to reduce our effective tax rate to a level that is consistent with other global consumer companies over the next few years.

Speaker 3

We now expect to have full year adjusted diluted EPS in the range of $0.40 to $0.44 versus our previous guidance of towards the high end of $0.30 to $0.40 Please keep in mind the $0.05 timing shift into Q2 from the second half as you incorporate our revised full year and initial Q3 guidance. Looking at the segments, we expect a 2024 adjusted operating profit margin slightly above 20% for technical apparel, high single digits for outdoor performance and low to mid single digit adjusted segment margin for ball and racket. Now looking at Q3, we expect Q3 adjusted gross margin to be approximately 54%, driven primarily by the mix shift towards technical apparel and an adjusted operating margin between 11% 12%. Based on current interest rates, our net finance costs for the quarter will be $45,000,000 to $50,000,000 and we will have an effective tax rate on an adjusted pre tax income of 50% to 55%. We expect adjusted diluted EPS to be 0 point 0 $8 to 0 point

Operator

Thank you. We will now begin the question and answer Your first question comes from the line of Brooke Roach from Goldman Sachs. Your line is open.

Speaker 4

Good morning and thank you for taking our question. I was hoping you could elaborate on the strength that you're seeing at the Arc'teryx brand and provide color on the growth that you're seeing by region. How are you thinking about the sustainability of this outsized comp growth for this brand? And in the near term, what trends have you seen with customer traffic and conversion as you've entered the Q3 in your most important China and North America markets? Thank you.

Speaker 5

Hey, Brook, it's Stuart. So let me try to address your questions. You had a number there that I wanted to speak to. So as we look at the performance of our carriers by region, we were very pleased with how balanced we saw our growth in the Q2. The North America business continued to see good momentum with, as we mentioned on the prepared remarks, Asia Pacific outside of China saw the fastest growth of the 4 regions in which we operate.

Speaker 5

We also saw very strong growth in China. The business in Europe grew a bit slower, but we're still very encouraged by the success of the new stores that we opened in the Europe market. The stores that we opened in Paris, in particular, had really performed ahead of our expectations, which gives us a lot of confidence to continue to lean into our Europe expansion. So we're really pleased across every region where we're operating with the results that we're seeing both from a brick and mortar standpoint as well as from an e commerce business standpoint. The sustainability of the momentum in our Terex business, we really see this as the early innings of our growth story.

Speaker 5

We are far from reaching penetration potential in really any region in which we operate. And so we'll have around 60 stores in North America at the end of the year. We could see the total potential for North America being well over 200, just for an example. And we're even earlier in the development of the Europe market and the Asia Pacific market. China, we're farther along with our store count, but we still see really exciting runway of growth there as we continue to optimize our real estate portfolio and the success of the Shanghai Museum Store is really helping us reset what we see as the potential for the business in China.

Speaker 5

And as we look at some of the other KPIs and customer performance related matters or trends, we were pleased to see very healthy double digit guest file growth in the quarter and that is reflected in really strong traffic. As we look at the results, the omni comp that Andrew mentioned, just the overall sales trajectory of the business, it's really a traffic story. We saw very modest improvements in conversion, but the main KPI that is driving the sales increases in our B2C business has been traffic. And so we see that as a very healthy indicator of the momentum of the brand as we're building brand awareness. And we also saw healthy growth in average spend per customer.

Speaker 5

So really strong customer metrics and very healthy and balanced KPIs across our channels. So I'll yes, and I'd also just add that we're we feel confident that we're taking share in every market in which we operate.

Speaker 1

James, maybe you could address first question.

Speaker 2

Yes. I had a certain comments based on Stuart's explanation. Okay. I think Akerix in China, it's still, I mean, playing a clear leadership role in the segment, I mean, we are sitting, but not only on the segment, but also the whole industry. So we really grow tremendous our sales in Q2 in the first half and really outperformed among all the sports brands in the markets.

Speaker 2

And the trend we see, it's continued to carry on and it's not slowed down, okay, the overall especially on the comp shop growth pattern in China. So it's obviously the Q2, I mean, Q2 is still relatively soft season among the 4 quarters. But we also see I mean, we are in the middle of Q3 already. So we also see big growth patterns in China markets. So I think it's as Stuart mentioned, it's still a preliminary stage for us, not only in China and the rest of the world.

Speaker 2

So we have a very good confidence to continue to grow the Akerix business across board in the world.

Speaker 4

Great. Thanks so much. I'll pass it on.

Operator

Your next question comes from the line of Matthew Boss from JPMorgan. Your line is open. Thanks and congrats on the nice quarter. So James, maybe higher level, could you speak to runway that you see across brands in the portfolio to capture continued market share in the premium sports and outdoor market? And then for Andrew, on the bottom line, maybe could you just help elaborate on the back half margin geography as we think about gross margin drivers relative to SG and A investments that are embedded this year relative to the path to SG and A leverage multiyear?

Speaker 2

Okay, Matthew. Thank you for your questions. I just want to highlight here. Okay, we got very unique proposition in the market. For Emiratesport, we really own 2 distinguished business franchise, which is hard goods, we call it equipment business as well as the soft goods.

Speaker 2

So I would say, first of all, I mentioned about the hard goods business or equipment business for both winter sports equipment and the Wersen. I mean, we all I mean, you guys all can tell, we all got very strong market share in the segment we are sitting, even the growth runway is still a bit small. But we have a very good level of confidence to secure, continue to amplify our market share in the future in the segment we are sitting, not only on the winter sports equipment, but also in rackets, boards and also the increase we mentioned. Okay. So I think that the team got a very good level of confidence to continue to secure our leadership in these kind of delicate segments.

Speaker 2

For Southgood's part, I think, I mean, the great performance from Apteryx already demonstrate our unique proposition at the premium segment of the outdoor industry we are sitting, okay? So, Arcturus really give out a very strong momentum in the Pinnacle sectors in outdoor segment and continue to grow more than, I think, 30% in the markets and really leading the whole growth in the industry. So I think it's I will say it's a hero brand at this moment in the market. And as we just mentioned, we will continue to drive tariffs. It's just at the first I was the first phase for us.

Speaker 2

We are still a great runway for us to continue to accelerate tariffs growth in the future. For Solomon, it's another new area. As I mentioned, for soft goods, Solomon, especially footwear, we are still at the preliminary stage. And we are the leaders in trail running sectors. But you guys all know the market size of the trail running is relatively limited versus the rest of the segments, forward segments.

Speaker 2

So, Solomon, we got kind of a very unique opportunity to create a new category we just mentioned, we call the outdoor sneakers categories, okay. So it's kind of a new segment. And we had a tremendous successful story in the past 2 years. We run this in China. And really, I mean, the shop, I would say, the Solomon footwear compact shop really created a great buzz in China market and taking our leadership roles on the outdoor sneaker segment in the markets.

Speaker 2

And last year, I mean, we literally doubled the count of our shop penetration in China market. By the end of the year, we foresee it at 200 shops in China. In the meanwhile, I mean, we just opened the 1st Solomon footwear shop in France, okay, in Paris. La Marais shop, the 1st compact shop also outperformed a lot, okay, when we opened in May. And we also try to have this kind of format, okay, to check out the market acceptance, okay.

Speaker 2

So we will open another 2 shops in London and 3 more in Paris and 1 more in Milano and 2 more in Milano to further verify the models. So the footwear opportunity for Salomon, it's kind of the greatest opportunities for us to unlock in the future. So we see great we also see a great momentum for us in the future. And for Wireson, I mean, as we just mentioned, we created a segment Wireson 10360, While we continue to secure our leadership for rackets business, we also introduced Versen sportswear, which is Versen apparel and footwear to the market. And we also see good light when we introduce this kind of format both in North America and in China, specifically in China.

Speaker 2

But it's still our infant state. We will continue to explore the opportunities. In nutshell, we will see the soft goods business, I mean, especially combined all the 3 major brands, we will see a tremendous growth potential for our business in the future.

Speaker 3

Matt, hi, this is Andrew Page. Thanks for the question as well. As you think about the margin profile, I'll give you a little bit of perspective both on gross margin and SG and A leverage. As you progress, we had a very, very strong gross margin quarter in the Q2, over 55% on gross margin that's outstanding. As you move through the year, you recall that Q3 is our largest wholesale shipment quarter.

Speaker 3

And so you'll see gross margins somewhat compressed from Q2 and then return to those levels that you saw at Q2 and Q4. And as we talked about our full year gross margin profile, we've upped our guidance to about 54.5%. So you're going to see strong gross margins in the 3rd Q4 with the 3rd quarter being a bit more compressed because it reflects our largest wholesale shipments. As you move from an SG and A leverage perspective, SG and A dollars, obviously, as we get into 3rd Q4, will increase as you go through the year. Back half of the year is meaningfully larger than the first half of the front half of the year, but you're going to see meaningful SG and A leverage when you compare that to Q2.

Speaker 3

I would think about Q3 being meaningfully better than Q2 and Q4 being meaningfully better than Q3. So progressively as a percentage of revenue, SG and A will continue to go down as we move through the year. Hope that answers your

Speaker 5

question.

Operator

Your next question comes from the line of Paul Lejuez from Citigroup. Your line is open.

Speaker 6

Hey, guys. Can you talk about the stores versus e com channel in the China market? And how would you characterize the promotional environment in China? And did you see anything change as the quarter progressed? Thanks.

Speaker 2

Hey, Paul. I just want to mention here. So the China actually, it's a we got the 2 legs to run. Okay. So both our physical shops and the e comms grows extremely well in China markets.

Speaker 2

Okay. So we grow the business more than 54%. And actually this 54% is all coming from it's kind of average coming from the physical retail as well as on e commerce business. It's relatively the same level of the speed. In terms of the promotional environment in China, it's a difficult market so far, I mean for time being.

Speaker 2

Okay. So but we see, I mean, there's still a lot of discount activities in China market to get the brands try to get more revenues, okay, with relatively high level of inventory. But the good thing is for us, I mean, we are sitting many in outdoor segments, okay. So that segment is quite still quite healthy at this moment, I would say. The brand of tariffs and salamone, when we run the business at this moment and we keep to the same level, I mean, as our discount is very small in our regular shop.

Speaker 2

Okay. So we don't literally, we don't give it a discount in our regular shop. And we have the outlets, I mean, that discount ratio is only 20% to 25% off from the regular price, still at a very healthy track. So I mean, our 2 brands in the segment, so they all perform extremely well for time being. We also encounter level of the shutoff supply for both brands.

Speaker 2

And so I mean, we are quite confident, I mean, to continue to have this kind of a trend in China for our 2 brands business.

Operator

Your next question

Speaker 3

comes from

Operator

the line of Jay Sole from UBS. Your line is open.

Speaker 7

Great. Thank you so much. Can you talk a little bit about your inventory position? Maybe tell us a little bit about inventory by brand and how you see inventory growth trending over the rest of the year given that I think it was only up around 2% this quarter? Thank you.

Speaker 3

Jay, thanks. This is Andrew. Yes, inventory position as you talked about grew about 2% this year compared to 16% top line revenue growth. I just want to start off with saying that this was really set up as we exited 2023. As you recall, we did a very intentional job in the back half, especially in the Q4 of 2023, cleaning up inventory across each of our brands.

Speaker 3

And we came into 2024 with a very disciplined buying approach, merchandising approach and focus sell through. And so where you see our inventory levels, as James talked about, some of our high velocity as you think about the Artix crack shoe and sometimes that we do we are selling out quickly. We have really, really strong relationships with our sourcing partners. So we feel good about being able to be responsive to elevated demand, but we feel good about that inventory. You're going to continue to see the trends that you saw in Q2 with inventory growing below revenue.

Speaker 3

You're going to continue to see that trend as we go through the year. It is a key KPI for us and this is not an aberration in the sense that we're short in inventory. We are lean in inventory by design and by discipline.

Speaker 7

Got it. Thank you

Speaker 2

so much. I want to add one more color on this. So for the brand part, okay, all these 3 major brands, they got a very healthy inventory proposition at this stage, Okay. We don't have we see the growth and we also build a relevant inventory position to feed up the future growth, but it's all under good control right now.

Operator

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

Speaker 8

Hey, good morning everyone. Congrats on the quarter. I wanted to dig in a little bit more on Europe. Can you just kind of talk about your expectations for the region the rest of the year relative to your revenue guide? Obviously, it looks like it's not really showing much growth the past couple of quarters.

Speaker 8

Would love to notice a little bit more about what you guys see in the market. Basically, what do you see at POS and comp growth for your retail stores versus what are the conversations with your retail partners? Are they getting more reluctant to take product? Kind of just trying to get a flavor of the appetite from a retail perspective in that region specifically?

Speaker 2

Okay. Let me give you the high level answer on this. Okay. So it's a we got multiple brands doing business in Europe. Each brand got a different proposition.

Speaker 2

So I start with the Solomon. Okay. So Solomon in Europe, I do believe, okay, so this year, we will continue to grow our footwear business at the right level. And while we also face the level of challenge from winter sports equipment. So that part, so it's kind of a variance.

Speaker 2

So it's for Solomon Europe specifically, it's more or less mid to high single digit growth, okay? For Akerix, I think it's a we just started with a very small base. I think at Keryx we will grow meaningfully from Europe, but it's a still small base for us. And the Worson more or less we will keep the mid to low single digit growth for our business. Peak performance, we will face a level of the challenge.

Speaker 2

We want to find a good way to mitigate the risk, okay? So especially our business really focus on Nordic area. So in Russia, okay, I think in Europe, business as a whole, I mean, when we look at this, it will be like a mid single digit growth in Europe for the whole year. It's kind of outlook for the group perspective.

Speaker 8

So if I'm understanding, it's really a peak performance issue in the Europe region and all the other brands are posting some level of growth?

Speaker 2

That's right.

Speaker 6

Okay, cool. All right. Thank you. Yes. Our fixed

Speaker 2

performance still represent a very small percentage of the business for us anyway. So as a whole, okay. So but that we yes.

Speaker 6

Okay. Thank you, guys.

Operator

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

Speaker 6

Good morning. Thank you very much for taking my question and congrats again on strong results. James, I wanted to ask about the Solomon DTC strategy. I think you called out in your prepared remarks you have 136 owned and franchised stores in China. Can you for the audience maybe talk about the number of stores that you own and operate globally?

Speaker 6

And if I recall correctly, I don't think you have a store in the key North American market. Should we assume at some point in time that you're going to expand Solomon's stores into North American market?

Speaker 2

Yes. Lauren, I just want to re enhance. I mean, we are just at the preliminary stage to expand our Solomon direct to consumer channels, mainly from our own retail expansion in China first. We see a good example from China. And then, I mean, from that success, we also expand the model to Japan and Asia Pacific.

Speaker 2

And we start to try also in Europe from May this year, okay, in Paris 1. So it's still infant stage for us in the outside of China. We were luckily the shop we opened both in Osaka and Paris, they all outperformed. So give us a good level of confidence to continue to try this kind of a format. We call the Salomon footwear compact shop, okay?

Speaker 2

And in U. S, I will say, we will open pop up shop in October this year in New York City, in Soho areas. That's the first try for us. We will test that model to see how the market responds. And I hope next year we can open 1 to I mean within 5 shops maybe, okay, 1 to 2 in New York City and another 1 or 2 shops in the rest of the city in North America and to further verify the models we experienced in China.

Speaker 2

But it's still too early to tell in North America specifically.

Speaker 6

Very helpful, Jim.

Speaker 2

But China, as we mentioned, we will quickly grow our penetration and by the end of the year, we will have 200 dedicated Solomon 4 wheel compact shops for both our own retail as well as the franchise shops.

Speaker 6

That's great to hear, James. And Andrew, congrats on raising the full year guide. On revenues, just for the audience, I think it implies 4Q should grow about 20%. I know there's some compares, maybe can you kind of just bridge it for the audience, how do we think about the acceleration into 4Q? And I think you mentioned there was a $20,000,000 shift from 3Q into 2Q.

Speaker 6

Should we was that driven by one segment and should we assume some kind of shift also between 3Q and 4Q?

Speaker 3

Yes. So let me start with the $20,000,000 The $20,000,000 did have some variability between a couple of different segments. Outdoor performance was a little bit more than half of that $20,000,000 and technical apparel was the remainder amount. All of the shift was from Q3 into Q2. And like I said, it had about a 2 point top line impact.

Speaker 3

So if you think about Q2 growing 16%, really it's kind of 14% if you exclude that. And you think about the implied guidance in Q3, it would have grown an additional 1.5% to 2%. So that's how you think about it. The shift was really Q3 to Q2. As you think about the rest of the year, there's not meaningful shifts that you need to build into your models out of Q3 and into Q4.

Speaker 3

We anticipate on a natural basis, Q2 would have been up about 14%, Q3 up similarly and then you're going to see the meaningful mark that we've talked about all year on Q4. Remember Q4 is our biggest quarter by far. It's going to be our easiest comp given the fact that we had a lot of promotional environment activity in Q4 last year.

Speaker 6

Very helpful. Thank you very much. Thank you, Andrew. Thank you.

Operator

Andrew, your final question comes from the line of Lorraine Hutchinson from Bank of America. Your line is open.

Speaker 4

Thank you. Good morning. I just wanted to hear you elaborate a little bit on the macro climate. Are you seeing any change in consumer behavior in any of your key regions?

Speaker 1

James, why don't you take that if you're seeing any consumer behavior? Yes. Stuart, I think would be good to hear if you're hearing any sensitivity to the economy.

Speaker 2

Yes. Let me I think the overall I mean, economic situation still got the level of the challenge, okay. So but different region got different situation. For me, my understanding, China, it's still overall, it's getting through. So people still need to figure out, okay, so how we overcome kind of a short term difficulty is a challenge as a whole.

Speaker 2

But on your side, as I just mentioned, the industry we are sitting and the sports industry is still at an optimal situation. So and people and the participant level from China markets continue to grow and the overall industry, sports industry, we believe still grow more than more or less 5% to 8% on CAGR for coming 3 years. So we think that the market size is still there, okay. And it's just how there are some brands doing extremely good job taking the shares from the some brands are doing social jobs. So it's kind of a shifting, okay.

Speaker 2

It's kind of a shifting. And the Europe, I think it's all about it's kind of a my understanding is kind of a stable market, relatively stable market. And it's all about how you created the kind of excitement, the level of excitement you created. And they all I mean that the market still welcome new players, which can create a distinguished value to the consumers. And the customers also love to try certain new brands, especially in the industry we are sitting.

Speaker 2

So we still see a good level of the opportunity. Likewise in North America. North America, so I still bullish on it. Okay. So I think it's yes, the macro situation is a bit level of challenge, but the consumer is still looking for some, as I say, okay, so some newcomers and with innovative, high technical products and in sports industries.

Speaker 2

And we still see good opportunities for us. So I'm pretty optimistic still for the overall industry I mean in our industry and especially the segment we are sitting, we still see a great runway for us to explore the potential in the markets.

Speaker 5

Hey, Lorraine, it's Stuart. I'll just add to Dave's comments. I think what we're seeing is a bifurcation across the regions we operate. We're seeing a strong division between winners and losers. And companies that are that have a strong market position are taking share and companies that have are just participating in the market are forfeiting share.

Speaker 5

We also see technical innovation as an important competitive advantage that is helping companies, I think, like Arteryx continue to thrive in the marketplace. And it is a focus for how we are building our product strategy. So at this point, our customer dynamics are very strong. The signal the demand signal that we're seeing from all our regions is very strong. But we're also we're reading the same headlines that you are around the world.

Speaker 5

And we're very much building in the contingency plans as we might be ready for any sort of change in the macro signal. But at this point, it's quite robust and we're taking it as an opportunity to play offense and take share from our competitors.

Operator

And that concludes our question and answer session. I will now turn the call back over to Omar for final closing remarks.

Speaker 1

Thanks, Rob. Thanks everyone for joining. Just one quick mention, we're posting on our IR website both the presentation slides that go with the prepared remarks as well as the script of the prepared remarks for those of you who are looking for it. Thanks everyone for joining. We'll see you again in 3 months.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Amer Sports Q2 2024
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