Cristina Fernandez • Telsey Advisory Group

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CEO & CFO Martin Hoffmann reiterated confidence in the 60%+ long-term gross margin target, stating that the price increase implemented in July helps, but no further increases are currently needed due to other levers like economies of scale and favorable FX. Co-Founder & Executive Co-Chairman David Allemann attributed the apparel momentum to wider adoption by new customers, the showcase effect of DTC channels, influencer collaborations like Zendaya and FKA Twigs, and technical fabric innovations.

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Co-CEO Martin Hoffmann confirmed the outlook for mid-single-digit door growth remains unchanged. He explained that strong brand demand allows them to be more selective and 'on the brakes' with expansion, prioritizing same-store growth and clean channel inventory. He reiterated that controlled expansion continues, particularly in younger markets.

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Co-CEO Marc Maurer responded that while On is aware of competitors, it operates in a different position due to its premium pricing, which attracts a specific consumer segment. He emphasized that the brand's differentiation comes from its unique blend of performance, design, and sustainability, allowing it to tell a distinct story and maintain a full-price focus through its own channels. This strategy results in a higher margin profile and allows On to avoid direct, price-based competition.

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Co-CEO Marc Maurer attributed the growth to strategic investments and partnerships, such as those with Zendaya and FKA Twigs, which successfully engaged younger consumers. He emphasized that the awareness lift was broad-based, citing substantial growth in mature markets like Switzerland and across the U.S. Maurer also highlighted the Olympics' role in reinforcing On's performance and innovation credentials within the core running community, leading to increased market share.

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Chairman & CEO Farooq Kathwari stated that because approximately 80% of products are custom, the company did not have significant excess inventory, which helped maintain a strong gross margin of nearly 60% despite some promotions. He noted that pricing has been stable due to North American manufacturing but they are monitoring tariff situations. The order increase was attributed to improving consumer attitudes, strong client relationships, and an increased digital marketing spend, which CFO Matt McNulty specified rose to 3.4% of sales from 2.8% a year ago.

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M. Kathwari, Chairman, President and CEO, addressed the questions by stating that deeper promotions are not planned, as they don't believe it would drive traffic in the current environment. He confirmed the State Department contract is active but has seen some recent caution and slightly less business. On SG&A, he clarified that advertising as a percentage of sales actually decreased year-over-year due to greater efficiency from technology, and they plan to continue focusing on efficiency rather than increasing dollar spend.

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Chairman, President and CEO M. Kathwari confirmed that while trends improved throughout the quarter, a major improvement occurred in December due to a special promotion. He explained the decision to increase promotions was driven by the company's improved service position and ability to deliver on higher demand. Regarding margins, he noted marketing spend remains well below historical levels. For Mexico, which accounts for about 25% of total manufacturing, he stated the company has flexibility to manage potential tariffs by raising prices or shifting more production to its North Carolina facility.

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Chairman, President and CEO Farooq Kathwari explained that demand was temporarily impacted by storms in Texas and Florida but has since returned to normal. He specified that headcount reductions occurred primarily in retail and manufacturing, driven by technology adoption which also helped attract stronger talent. For new products, he noted that technology enables designers to showcase a wide range of options without requiring extensive physical floor space. Lastly, he stated that raw material costs are largely stable, with a slight downward trend due to lower overall industry demand.

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Chairman & CEO Gary Friedman declined to share specific sourcing and negotiation details to maintain a competitive advantage. He emphasized that RH has strong, collaborative vendor partnerships to navigate the situation and expects the current tariff uncertainty to resolve in the coming months, leading to a more predictable operating environment.

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Gary Friedman, executive, stated the primary focus is on optimizing the vast assortment of recently introduced products, not just adding more. He attributed the London gallery delay to the inherent and unpredictable complexities of executing large-scale, innovative multi-building development projects, rather than a specific new setback.

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CEO Laura Alber stated that the company has been proactively diversifying its supply chain for years, having already reduced sourcing from China from 50% to 23%, with further reductions made since. She emphasized that the company's flexibility, achieved through double and triple sourcing products, allows it to adapt effectively to the evolving trade environment.

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CEO Laura Alber noted that newness in furniture is performing well, suggesting their consumer is resilient. CFO Jeff Howie attributed the Q3 margin beat to stronger-than-expected merchandise margins from lower input costs, significant supply chain efficiencies, and controlled advertising spend. He cited the shifted holiday calendar, lapping prior-year promotions, and macroeconomic uncertainty as reasons for a more cautious Q4 outlook.

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CEO Laura Alber noted that while the furniture market is soft, new products at medium-to-high price points are performing well, indicating customers respond to value and innovation. CFO Jeff Howie attributed the Q2 operating margin beat to stronger merchandise margins from full-price selling, greater supply chain efficiencies, and less advertising deleverage. He explained this outperformance is not expected to continue at the same level as the company laps prior year improvements.

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CEO John Reed stated that the $10 million impact is the net figure after securing contributions from vendor partners to absorb some costs, and emphasized the benefit of significant U.S.-based production. SVP of Finance Ryan Brody added that the impact would predominantly be felt in the second half of the year. Regarding real estate, Reed explained that showroom growth is a key long-term strategy for building brand awareness and market share, and the company is capitalizing on new opportunities as they arise.

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John Reed, CEO, explained that the high number of openings and relocations in 2024 pulled some projects forward from 2025, keeping them on track on a two-year basis. Regarding inventory, he and another executive cited the needs of new, larger showrooms, strategic investments in in-stock availability for key categories, and an earlier build-up for the outdoor season compared to the prior year.

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CFO Dawn Phillipson explained the revised outlook reflects nuances within the 'low double-digit' demand decline range and the timing of converting late-quarter orders into revenue. CEO John Reed recounted that during past tariffs, Arhaus worked with vendors on margins and passed on modest price increases (7-10%) without impacting sales, a strategy they could employ again.

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President and CEO Mary Dillon and EVP and CCO Frank Bracken reiterated confidence in the Nike partnership long-term, while acknowledging short-term sell-through pressures on some classics. They are focusing on newer, high-performing styles. Regarding store updates, management confirmed that both 'reimagined' and 'refresh' stores are seeing meaningful increases in conversion, basket size, and women's footwear penetration compared to the rest of the fleet.

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CEO Mary Dillon attributed the solid start to the year to the Lace Up plan gaining traction, leading to sequential comp improvement and positive average unit retails (AURs) even as promotions were reduced. She highlighted that future growth will be driven by store refreshes, the new FLX loyalty program, and a return to growth with Nike in Q4. Both Mary Dillon and CCO Frank Bracken emphasized the strength of the Nike partnership, noting close collaboration on multiyear growth plans and excitement about Nike's innovation pipeline, which positions Foot Locker to benefit from Nike's wholesale channel refocus.

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CEO Steve Lawrence stated that the August improvement was primarily driven by traffic and was broad-based across apparel, footwear, and the outdoor division, extending beyond the initial back-to-school period. Regarding private brands, he confirmed they continue to grow, with penetration now in the 22-23% range, and that the company does see consumers trading down to these value-oriented items, which are a key part of the everyday value proposition.

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