John Kernan

John Kernan asked Kristin Wolfe to elaborate on the opportunity to increase new store openings and the cadence of growth, specifically regarding the new store pipeline and productivity. He also asked if the company is more bullish on new stores and margin expansion, but more cautious on comparable store sales, as a correct characterization of the long-range model.

Answer

CFO Kristin Wolfe highlighted strong new store performance, reinforcing site selection and appeal, noting that Q3 total sales growth was driven by new stores. She confirmed an increase to 104 net new stores for 2025 and at least 110 for 2026, supported by a robust pipeline including 45 leases from Joann Fabrics. She affirmed the characterization of being more bullish on new stores and margin expansion, while maintaining a belief in 4-5% average annual comparable store sales growth for the long-range plan, but with near-term caution due to external uncertainty. She also noted significant progress towards the $1.6 billion operating income goal by 2028, having achieved 170 basis points of the 400 basis points margin opportunity despite tariffs.

John Kernan asked about Burlington's opportunity to increase new store openings and the cadence of growth, focusing on the real estate pipeline and new store productivity, and then sought confirmation on the long-range model's emphasis on new stores and margin expansion over comp sales.

Answer

Kristin Wolfe (EVP and CFO) highlighted strong new store performance, citing pulled-forward 2026 openings and 45 new leases from a bankruptcy as reasons for increasing 2025 (to 104) and 2026 (to 110+) net new store targets, with a healthy long-term pipeline. She confirmed the long-range model's emphasis, reiterating confidence in achieving the $1.6 billion operating income goal by 2028, pleased with 170 basis points of margin expansion despite tariffs, and affirming bullishness on new stores and margin while maintaining a cautious 4-5% average annual comp growth target.

John Kernan of TD Cowen requested more detail on the company's inventory position, specifically the contrast between comp store inventory being down 8% while reserve inventory grew to 50% of the total. He also asked for a summary of the recent changes to the company's debt structure and the outlook for interest expense.

Answer

CFO Kristin Wolff explained that lower comp store inventory was a deliberate strategy to drive faster turns and reduce markdowns, while the higher reserve inventory is a result of opportunistically buying pre-tariff merchandise. SVP David Glick detailed the capital structure changes, including raising $500M in term loan debt to fund a DC purchase and upsizing the ABL facility to $1B. He updated the quarterly interest expense forecast to $50 million.

John Kernan of TD Cowen asked for the potential risks and upside drivers for the full-year comp guidance and sought more detail on the contingency related to ocean freight costs.

Answer

CEO Michael O'Sullivan identified a macro slowdown and inflation as key risks, while potential upsides include a widening value gap, favorable tax legislation for consumers, and company-specific initiatives. EVP & CFO Kristin Wolfe clarified that while ocean rates are contracted, the guidance assumes the company will not face significant exposure to higher spot market rates due to potential shipping volatility.

John Kernan requested details on category and regional performance during the fourth quarter, and asked how traffic and average ticket contributed to the 6% comparable sales growth. He also sought clarification on the net impact of weather on Q4 results.

Answer

CEO Michael O'Sullivan stated that the Q4 comp was driven by both an increase in transactions and a higher average transaction value, with higher traffic and AUR being the strongest metrics. He highlighted relative strength in accessories, beauty, and home, though all major categories comped well. Regionally, the Southeast and Southwest were above the chain average, but all regions saw at least mid-single-digit growth. EVP & CFO Kristin Wolfe added that weather had a net negative impact of about one percentage point on the Q4 comp, primarily due to unseasonably warm weather in November hurting cold-weather businesses.

John Kernan asked CEO Michael O'Sullivan about his long-term commitment to the role and his assessment of the executive team. He also asked for more details on supply chain savings initiatives and the expected basis point opportunity in 2025 and beyond.

Answer

CEO Michael O'Sullivan affirmed his long-term commitment, stating he is 'not going anyway' and intends to see the 2028 plan through. He praised his executive team as the 'A team'. CFO Kristin Wolfe explained that supply chain savings are ahead of schedule, with about 50 bps of the 100 bps long-range goal expected to be realized in fiscal 2024. The remainder is expected in '25 and '26, with further opportunities from new, more automated distribution centers like the one opening in 2026.

John Kernan asked for an explanation of the differing back-half margin guidance between Q3 and Q4 and inquired about the outlook for the balance sheet, cash flow, and share repurchases amid elevated CapEx.

Answer

CFO Kristin Wolfe detailed four factors for the back-half margin outlook, with the primary driver being the 53rd-week calendar shift, which boosts Q3 total sales growth but negatively impacts Q4. Executive David Glick added that despite elevated CapEx for new stores and a major new DC, the company has sufficient cash flow to continue its share repurchase program at a pace similar to recent years.

John Kernan of TD Cowen asked about the potential drivers of risk and upside to the unchanged full-year comp guidance of flat to up 2%. He also requested more detail on the guidance being contingent on ocean freight costs holding at contracted rates and the potential swing factor this represents.

Answer

CEO Michael O'Sullivan identified the primary risks as a macro slowdown and increased inflation, while potential upsides include a widening value gap versus other retailers, legislative tailwinds for consumers, and internal initiatives. EVP & CFO Kristin Wolfe clarified the freight contingency, stating that while domestic freight is secured and international ocean rates are contracted through Q1 2026, the guidance assumes no significant exposure to the volatile spot market, which could be a risk if import surges occur.

John Kernan asked about opportunities for merchandise margin improvement going forward, given it was down slightly but better than expected, and the long-term drivers. He also inquired about distribution costs and whether deleverage will continue into next year.

Answer

Jim Conroy (CEO) and Michael Hartshorn (Group President and COO) stated that merchandise margin, though down slightly, was better than expected due to less ticketing and stronger shrink results. They expect it to be relatively stable but see ongoing opportunity to gain leverage from building branded vendor relationships and closeouts. Jim Conroy noted distribution deleverage in Q3 was due to a new DC and tariff-related processing costs, expecting a slight headwind in Q4 but future leverage from new capacity.

John Kernan asked about gross margin, specifically merchandise margin opportunities going forward given the branded segment initiatives, and the long-term drivers. He also inquired if distribution deleverage from the new DC would continue into next year.

Answer

CEO Jim Conroy stated that merchandise margin, though down slightly, was better than expected due to less ticketing and stronger shrink results, and they expect it to be relatively stable over time, with ongoing improvement capture from branded relationships. Group President and COO Michael Hartshorn added that distribution deleverage from the new DC would continue, but pre-ticketing pressure related to tariffs should improve, expecting a slight headwind in Q4. He noted that new capacity would be leveraged until the next DC opens in 2-3 years.

John Kernan from TD Cowen asked about the near and long-term returns on investments in distribution centers and overall CapEx. He also inquired about the company's long-term earnings growth algorithm.

Answer

COO Michael Hartshorn explained that new DCs are built for capacity and that the company expects to gain leverage on them over the next two years as sales grow. He then detailed the long-term earnings algorithm: a 3% comp drives 3% EPS growth, 5% new store growth adds 2%, EBIT upside contributes 1-3%, and share buybacks add 2-3%, collectively targeting double-digit annual EPS growth.

John Kernan asked about the SG&A rate being higher than pre-COVID levels and where there might be opportunities for leverage beyond simply achieving higher comps.

Answer

Group President and COO Michael Hartshorn attributed the higher SG&A rate primarily to store-related wage increases since the pre-COVID period. He stated that while they continuously seek efficiencies, the leverage point for SG&A remains at about a 3% comparable store sales gain.

John Kernan asked about the current real estate availability for Ross and the broader off-price sector, considering the aggressive store growth plans across the industry.

Answer

Group President & COO Michael Hartshorn characterized the real estate landscape as tight, with limited new construction and increased competition for desirable locations. However, he expressed confidence in the company's strong real estate team and its healthy pipeline to support growth plans over the next several years.

John Kernan asked about the long-term operating margin potential of the business and whether the company has seen a benefit from immigration in border states.

Answer

CFO Adam Orvos reiterated the company's long-term model where an additional point of comp yields 10-15 basis points of margin expansion, with sustained comp growth being the primary driver. Group President and COO Michael Hartshorn acknowledged that border stores perform very well but stated he could not specifically attribute broad regional performance to immigration, noting the fluctuating strength of markets like California and Texas.

John Kernan followed up on the outdoor performance segment margin, questioning the conservatism for a Q4 decline despite strong upside, and asked for insights into next year's margin performance. He also inquired about the year-over-year decline in technical apparel's segment margin, the impact of government grants, and the drivers for Q4 and 2026 margins.

Answer

Andrew Page, CFO of Amer Sports, explained Q4 conservatism for outdoor performance due to early sports equipment shipments in Q3 and planned meaningful marketing investments in Q4 (Olympics, awareness). He reiterated potential for over-delivery if demand continues. For technical apparel, he noted the Q3 margin decline was due to a timing shift of government grants (higher portion received in Q3 last year). He expects Q4 margins to be in line and full-year technical apparel margins in the low 20s.

John Kernan asked about the conservatism in the Q4 outdoor performance segment margin guidance, which implies a decline, and the outlook for outdoor performance margins into next year. He also inquired about the technical apparel segment margin, specifically the impact of government grants and drivers for Q4 and 2026.

Answer

Andrew Page, CFO of Amer Sports, reiterated that the Q4 outdoor performance outlook reflects early sports equipment shipments into Q3 and significant Q4 marketing investments for the Olympics and brand awareness, noting potential for over-delivery if demand persists. For technical apparel, he clarified that the Q3 margin drag was due to a higher portion of government grants received in Q3 of the prior year, with Q4 margins expected to be strong and full-year margins in the low 20s.

John Kernan of TD Cowen asked for a more detailed breakdown of the drivers behind the significant gross margin expansion in the second half of 2024 and for the full-year 2025 guidance.

Answer

CFO Andrew Page identified the primary driver as the mix shift toward the higher-margin Arc'teryx brand, along with lapping a more promotional period in the Ball & Racquet segment. Arc'teryx CEO Stuart Haselden added that within Arc'teryx itself, lower transportation costs, reduced markdowns, and higher initial product margins all contributed to the expansion.

John Kernan inquired about the expected split between DTC and wholesale channels in Q3 and Q4, and specific actions being taken to re-accelerate DTC same-store sales or omnichannel comps, particularly in the U.S. He also asked about the long-term operating margin structure, specifically if north of 20%+ operating margins is the company's long-term view, and if the gross margin pressure guided for the back half of this year is expected to carry into the first half of next year.

Answer

CFO Steve Fasching stated that total company DTC is expected to see continued improvements in Q3 and Q4. He explained that earlier wholesale expansion in the first half put pressure on first-half DTC, and that wholesale growth will begin to slow while DTC picks up, aligning with the long-term goal of a 50/50 wholesale to DTC balance. Regarding profitability, Steve Fasching affirmed that the company delivered exceptional operating margins last year and expects another strong year despite tariffs, noting that the current year's margin declines are primarily tariff-driven. President and CEO Stefano Caroti added that the strong financial profile allows for investments in innovation and technology. Steve Fasching confirmed that if tariffs remain in effect, the gross margin pressure seen in the back half of this year would carry into the first half of next year.

John Kernan asked about the expected split between DTC and wholesale channels for Deckers Brands in Q3 and Q4, and the specific strategies to re-accelerate DTC same-store sales and omnichannel comps in the U.S. He also questioned the long-term operating margin structure, asking if north of 20% plus is sustainable, and if the back-half gross margin pressure would carry into the first half of the next fiscal year.

Answer

CFO Steve Fasching explained that DTC is expected to show sequential improvements in Q3 and Q4, noting that earlier wholesale shipments in the first half impacted DTC growth. He reiterated the long-term goal of a 50/50 wholesale to DTC balance. Regarding profitability, Steve Fasching stated that the current year's exceptional operating margin (21.5%) is impacted by tariffs, which will continue to be a headwind into FY2027, confirming that the magnitude of gross margin pressure from the back half of this year is expected to carry into the first half of next year if tariffs remain.

John Kernan from TD Cowen requested guardrails for the expected growth in US versus international markets for Q2 and asked about the anticipated timing for a positive inflection in HOKA's US direct-to-consumer (DTC) business.

Answer

CFO Steven Fasching indicated that for Q2, international growth would moderate from Q1's high rate while the domestic business would see some improvement, though international remains the primary growth engine. For HOKA's US DTC, he guided towards continued incremental improvement rather than a dramatic inflection, citing the near-term pressure from ongoing wholesale channel expansion.

John Kernan from TD Cowen sought guidance on the expected U.S. versus international growth mix for Q2. He also asked about the anticipated timing for a positive inflection in HOKA's DTC channel growth, particularly within the U.S.

Answer

CFO Steven Fasching indicated that for Q2, international growth would moderate from Q1's high rate while the U.S. would see some improvement, though international would still be the main growth driver. He described the U.S. HOKA DTC recovery as a continued, incremental improvement rather than a sharp inflection, partly due to ongoing wholesale expansion.

John Kernan asked for additional details on the UGG brand's significant outperformance in the fourth quarter, including performance by region and channel, and its outlook for fiscal 2026. He also inquired about the biggest opportunities for HOKA's new wholesale partner doors.

Answer

CEO Stefano Caroti attributed UGG's strength to its expansion beyond slippers into new categories like slipper-sneaker hybrids and strong growth in its men's business. CFO Steve Fasching added that the brand's scarcity model and strong underlying demand contributed to the Q4 beat. For HOKA, Caroti reiterated that opportunities exist across specialty and sporting goods channels globally, where the brand remains underpenetrated versus competitors.

John Kernan asked how Q3 U.S. growth compared to expectations, the outlook for international growth into fiscal '26, and how the company can maintain its high operating margin while reinvesting in the business.

Answer

CEO Stefano Caroti confirmed U.S. growth met expectations and reiterated the goal for international sales to eventually reach 50% of the total by outpacing U.S. growth. CFO Steve Fasching added that some U.S. sales shifted earlier into Q3, impacting Q4 inventory. Regarding margins, Fasching acknowledged the strength of the scarcity model but warned that pressures from inflation, freight (a ~150 bps headwind in Q4), and foreign exchange will make current levels difficult to sustain.

John Kernan inquired about intensifying price competition in the market, competitor behavior, and whether CACI has observed any changes, particularly regarding price shootouts or an uptick in protests.

Answer

President and CEO John Mengucci stated that CACI has not lost on price in years, emphasizing their fair pricing strategy and higher margins from investing ahead of customer need. He acknowledged a slight uptick in contract protests, which he views as an early indicator of increased competition, but reiterated CACI's strong position.

John Kernan asked about any impact to CACI's business from the government shutdown, specifically concerning revenue, cash, or unusually soft awards in the first month of the quarter. He also inquired about intensifying price competition or changes in competitor behavior, given the current environment for some peers.

Answer

CFO Jeff MacLauchlan noted slight cash collection disruption (10-15% off) and de minimis revenue attenuation (single-digit millions), which are manageable and expected to recover within the year. CEO John Mengucci stated that CACI hasn't lost on price in 7-8 years, as they avoid price shootouts. He observed a slight uptick in contract protests, which can signal increased competition, but CACI believes its fair pricing and investment in ahead-of-need technology justify its margins.

John Kernan asked about the characterization of inventory in the wholesale channel, given the 2% decline on the balance sheet, and the expected timing for wholesale discounts, a significant gross margin headwind, to begin fading.

Answer

EVP and CFO Matt Friend expressed satisfaction with Q1 inventory levels, noting units were down in North America, EMEA, and Greater China, with APLA being a focus area. He anticipated gross margin benefits in the second half from lapping aggressive clearance actions and expected improvement in the wholesale channel. Matt Friend stated that partner inventory levels are healthy, supported by a positive forward-looking order book, which creates capacity for newness and innovation. He acknowledged other gross margin headwinds in the second half that would mute this benefit. President and CEO Elliott Hill concluded by reiterating confidence in the win-now actions and the sport offense to drive deeper consumer connections and profitable, sustainable growth.

John Kernan asked for a characterization of inventory levels in the wholesale channel, given Nike's balance sheet inventory was down 2%, and the expected timing for wholesale discounts to begin fading.

Answer

Matt Friend, EVP and CFO, expressed satisfaction with Nike's inventory levels, noting unit declines in North America, EMEA, and Greater China, with APLA being an area of focus. He expects gross margin benefits in the second half from lapping aggressive clearance activities and anticipates improvement within the wholesale channel, supported by a healthy forward-looking order book. He also reminded of other gross margin headwinds in H2.

John Kernan asked about new store productivity and the assumptions for the accelerated store opening cadence. He also questioned how the company is planning for significant AUR increases within its guidance, given the pressure on lower-income consumers.

Answer

CEO Steve Lawrence stated that new store productivity is meeting expectations, with recent vintages accelerating to mid-single-digit comps. He explained that while the lower-income consumer is expected to remain pressured, the company's comp guidance relies on the continued trade-in from middle and higher-income consumers drawn to Academy's value proposition.

John Kernan asked Carl Ford about new store productivity, specifically the performance of new boxes and assumptions for ramping store openings in the back half, noting apparent pressure on omnichannel sales per square foot. He also asked Steve Lawrence how Academy Sports + Outdoors is planning for significant average unit retail (AUR) increases in some categories in the back half, particularly within the comp guidance, given the ongoing pressure on middle to lower-income consumers.

Answer

CFO Carl Ford stated that new store productivity is meeting expectations, with $12M-$16M in year one sales, EBITDA positive, and 20% ROIC. He noted that stores in new markets are closer to $12M, while those in legacy markets are near $16M. He highlighted the positive comping of new stores (2022/2023 vintages) moving from low-single digits in Q1 to mid-single digits in Q2 once they enter the comp base (after 14 months), expressing excitement for long-term comp waterfall. CEO Steve Lawrence expects the pressure on lower-income consumers (under $50,000) to continue, leading to them opting out or trading down, though the rate of decline is slowing. He anticipates that the acceleration of middle and higher-income quintiles trading into Academy, driven by its relative value proposition, will more than offset any erosion from the low end. He emphasized maintaining the best value on like-to-like items despite rising prices.

John Kernan asked about the outlook for new store productivity as openings accelerate and how the ramp in unit growth will affect the SG&A rate and overall expense modeling.

Answer

CFO Carl Ford reiterated the existing new store productivity framework ($12M-$16M year 1 sales, 20% ROIC hurdle). Regarding SG&A, he noted that while the long-range plan includes deleverage for growth, the team is managing costs tightly, with Q2 expense increases tied directly to growth initiatives. He stated that as the base store comp trajectory improves, the company expects to see leverage, and the current guidance is within the long-range plan's framework.

John Kernan from TD Cowen asked for commentary on the current athletic footwear cycle and the consumer's ability to absorb rising prices. He also requested details on the assumed impact of tariffs on cost of goods sold and gross margin for the second half of the year.

Answer

President & CEO Lauren Hobart described the footwear business as 'very, very strong,' stating that price increases have been selective and surgical, with the 5% comp demonstrating strong consumer demand. CFO Navdeep Gupta added that a small tariff impact is contemplated in the back-half outlook and that the company is actively working with partners on plans for 2026.

John Kernan asked about the biggest operational and financial opportunities within the Foot Locker banner and inquired about the expected overall square footage growth for the year.

Answer

President and CEO Lauren Hobart identified significant opportunities in executing Foot Locker's existing strategies and improving gross margin, noting that Ed Stack will lead a dedicated team to unlock this value. Executive VP & CFO Navdeep Gupta projected total square footage growth to be in the low single-digit range, around 2%, driven by new House of Sport and Fieldhouse locations.

John Kernan asked how the sales and margin for House of Sport and Field House stores are expected to trend in their second and third years of operation, and also inquired about the outlook for the softlines business, particularly footwear.

Answer

CFO Navdeep Gupta stated that stores in their second year are comping positively as community engagement deepens, expressing excitement about their maturation trajectory. He also noted that core categories like athletic apparel and footwear continue to drive growth, with footwear being the 'engine that drives the chain.' He mentioned plans to continue expanding brands like On and HOKA deeper into the store base, with 90% of stores now having premium footwear decks.

John Kernan asked about the company's forward-looking supply chain strategy, including the new distribution center, and the performance of private brands like CALIA, VRST, and DSG.

Answer

CFO Navdeep Gupta explained the new DC is necessary to support significant sales growth and increased product velocity, with no material changes to cost expectations for H2. President and CEO Lauren Hobart added that stores are a critical part of their eCommerce fulfillment strategy. She also confirmed that vertical brands like DSG, VRST, and CALIA are performing exceptionally well, filling key gaps in the portfolio and earning increased floor space.

John Kernan asked about the progression of comparable sales throughout the second quarter, noting an apparent acceleration in late July and August, and also sought to confirm the company's rule of thumb for profit flow-through from sales upside.

Answer

CFO John Klinger confirmed that the quarter started strong, experienced a minor weather-related dip in June, but finished July strongly and entered Q3 with momentum. He also reaffirmed that the company's model assumes 10 to 20 basis points of bottom-line flow-through for every one percentage point of comp sales upside.

John Kernan asked about the performance of categories outside of apparel and home, such as Beauty and Consumables, and also inquired about the long-term drivers of merchandise margin expansion.

Answer

CEO Ernie Herrman confirmed that categories like Beauty and other consumables are very strong, serving as traffic and frequency drivers due to their exceptional value. CFO John Klinger reiterated that while operational efficiencies help, the number one lever for long-term margin expansion is top-line sales growth.

John Kernan of TD Cowen asked about the implied revenue deceleration in the second half guidance, seeking color on channel and regional trends. He also inquired about the long-term levers for adjusted EBITDA margin expansion beyond 20%, given the company is already running ahead of its 2023 Investor Day targets.

Answer

CEO & CFO Martin Hoffmann explained that the strong first-half performance allows for a focus on high-quality, durable growth, enabling more selective door openings and a focus on full-price sales. For long-term margin expansion, Hoffmann pointed to a higher DTC mix, growth in the apparel category, and economies of scale. Co-Founder & Executive Co-Chairman David Allemann added that On's positioning at the intersection of performance and fashion, as seen in collaborations like Loewe, creates a higher long-term margin potential than a pure sports brand.

John Kernan of TD Cowen asked about the evolution of Martin Hoffmann's responsibilities following the co-CEO transition and for an update on automation projects and the scalability of LightSpray technology.

Answer

Co-CEO Martin Hoffmann confirmed the company strategy remains unchanged and the leadership transition will be smooth, with an active search for a new CFO underway. He reported the Atlanta warehouse automation is progressing well. Executive Co-Chairman Caspar Coppetti described LightSpray as a 'revolution' and, while not providing a timeline, confirmed more product launches using the technology are planned for this year.

John Kernan of TD Cowen asked about the implied second-half deceleration in revenue and active customer growth within the guidance, and also inquired about the outlook for leverage on selling expenses.

Answer

CFO Sarah Oughtred explained the second-half outlook reflects a greater headwind from the planned pullback in promotions, which will affect customer acquisition and order value. Regarding selling expenses, she expressed confidence in returning to 2023 levels by the next year, noting that progress on efficiencies has been faster than expected, though leverage will be less pronounced with slower back-half revenue growth.

John Kernan requested a breakdown of fiscal '25 selling and G&A expense drivers, particularly the unwinding of fulfillment costs, and asked about the profitability of international and non-scrubwear.

Answer

CFO Sarah Oughtred stated that transitory DC costs in selling expense will normalize but be partly offset by higher fixed facility and international shipping costs. G&A will see higher people costs offset by a ~$13M reduction in stock-based compensation. She confirmed international is profitable and the non-scrubwear mix should grow.

John Kernan asked how the recent investments in selling and fulfillment expenses would carry into 2025 and what returns could be expected. He also followed up on the outlook for marketing spend in Q4 and the long term.

Answer

CFO Sarah Oughtred explained that the 2024 fulfillment center investment positions the company for future scale, and the planned 2025 Canadian distribution center will be a less costly third-party model. She reiterated that Q3 contained the year's outsized marketing spend, with Q4 and 2025 expected to normalize, subject to strategic decisions to drive top-line growth.

John Kernan of TD Cowen asked for a quantification of the net impact of tariffs on gross margin for the year and how to think about the profitability of the North American segment, particularly in the second half.

Answer

CFO Justin Picicci explained that while tariffs are the largest headwind, the company is confident it can be more than offset by tailwinds like AUR growth and promotional pullback, leading to slight gross margin expansion for the year. He acknowledged that cost inflation pressures will disproportionately impact North America, likely shifting the regional profitability mix slightly more toward international.

John Kernan asked about the drivers behind Europe's strong performance, particularly in DTC, and the outlook for the region's high operating margin, which now stands at 26%.

Answer

CFO Justin Picicci attributed the growth to strong brand positioning and effective marketing, while noting the outlook remains cautious due to regional sentiment and geopolitics. President and CEO Patrice Louvet added that the key city ecosystem strategy is transforming the region from its historical wholesale dependency, with plans for 10 new owned stores and 25 partner stores in the fiscal year to expand the DTC footprint.

John Kernan noted the 500 basis point reduction in the global discount rate and asked how much more room the company has to reduce promotions as part of its AUR growth strategy.

Answer

Executive Justin Picicci affirmed that the promotional pullback lever remains a durable driver of AUR growth with significant runway. He highlighted that in Q3, they successfully reduced promotions across all regions and channels, including highly elevated markets like China. He expressed confidence that the company's new customer acquisition muscle, which focuses on full-price consumers, will allow this 'flywheel' to continue.

John Kernan highlighted the impressive 15% comps in Europe and asked about the strategy for expanding the DTC footprint, including both factory and full-price stores, in what is the company's least penetrated region.

Answer

President and CEO Patrice Louvet acknowledged the consistent outperformance in European DTC and confirmed the region is underpenetrated. He stated that significant opportunities remain for selective store expansion in both new and existing key cities, and the company is on track with its Investor Day targets for new store openings while being disciplined in its approach.

John Kernan asked for an update on the second-half tariff impact, mitigation strategies, the potential for industry-wide price increases, and the health of the company's inventory, which was up 13% in the quarter.

Answer

Chairman, President & CEO Tim Boyle stated that tariff uncertainty remains high, but mitigation efforts include price adjustments, vendor negotiations, and supply chain efficiencies. He expressed caution about consumer demand elasticity with higher prices. EVP & CFO Jim Swanson clarified that the company is absorbing the lion's share of the $35-40 million tariff impact in 2025. He also noted that inventory is in "excellent shape," with the year-over-year increase primarily due to the early receipt of fall inventory to get ahead of potential tariffs.

John Kernan asked what management believes the catalyst will be for improved spending in the competitive and macro-depressed outdoor category. He also questioned the margin structure, noting the high SG&A rate's impact on deleverage over the last five years and how it will be managed going forward. Finally, he asked for a characterization of the North American wholesale channel looking into fiscal '25.

Answer

CEO Tim Boyle identified improved, differentiated marketing and a greater emphasis on underperforming categories like footwear as key catalysts for growth, stating the company is not talking about its superior products enough. Regarding SG&A, both Boyle and CFO Jim Swanson emphasized that top-line growth is the primary lever, supplemented by the ongoing profit improvement program focused on supply chain efficiencies and disciplined cost management to balance investment with profitability. Boyle described the consolidated North American wholesale channel as one where Columbia must be a better supplier with superior product and marketing to drive sell-through.

Questioned if Lululemon is becoming more susceptible to the macro environment in China and Rest of World given its scale and the recent deceleration, and asked for the specific basis point impact of markdowns in the guidance.

Answer

The company's view on its international opportunity has not changed, seeing a long runway for growth due to low market share and brand awareness, despite recent deceleration from high growth periods. The markdown impact embedded in the full-year gross margin guidance is an increase of 20 basis points versus the prior year.

John Kernan noted that marketing spend has reached approximately 5% of sales and asked about the strategy for this spending level in 2025 and the potential to flex it higher to accelerate growth.

Answer

CFO Meghan Frank confirmed that marketing spend is expected to remain around the 5% of sales level in 2025, similar to 2024. She described it as an area the company monitors closely and would consider flexing, dependent on business trends and the effectiveness of new campaigns and activations.

John Kernan asked for an update on the China business, covering both top-line and margin performance, and also inquired about the strategy and confidence behind expanding into new markets in the Rest of World segment.

Answer

CFO Meghan Frank reported continued strength in China, with 36% constant currency growth in Q3 and an outlook for over 30% growth in Q4. She noted healthy operating margin expansion but emphasized the focus is on long-term growth, not near-term margin optimization. CEO Calvin McDonald added that 2025 expansion plans include Italy (company-operated) and four new franchise markets, driven by strong brand momentum and pull from international consumers.

Asked about concerns that gross margin has peaked and SG&A will rise, and whether the core women's customer has changed, making planning more difficult.

Answer

The company is focused on optimizing the bottom line and remains committed to its Power of Three x2 plan for modest operating margin expansion. They continue to acquire new guests across all demographics and are improving size mix allocation, stating they do not see a macro shift in the customer profile that they are behind on.

John Kernan addressed investor fears that Lululemon's gross margin has peaked and SG&A might need to rise. He also asked if the core women's customer has changed, making planning more difficult.

Answer

CFO Meghan Frank countered that the company is delivering strong margins despite slower growth and remains committed to its Power of Three x2 goal of modest operating margin expansion. CEO Calvin McDonald stated that the customer profile has not fundamentally shifted; they continue to acquire guests across all demographics and have improved the size mix entering Q3, indicating planning is adapting effectively.

John Kernan addressed investor fears that Lululemon's gross margin rate has peaked and SG&A might need to increase. He also asked if the core women's customer has changed, making planning more difficult, and what is being learned about new customers.

Answer

CFO Meghan Frank addressed margin concerns by reiterating the company's commitment to its 'Power of Three x2' plan, which includes modest operating margin expansion over five years. CEO Calvin McDonald stated that the company continues to acquire new guests across all demographics and that the team has improved its inventory mix for sizing entering Q3, indicating no major, unaddressed shift in the core customer profile.

John Kernan of TD Cowen asked for clarification on the planned promotional impact on gross margin for the second half of the year, noting that Q2 guidance implies a significant impact, and questioned how much room was reserved for this pressure.

Answer

CFO Zac Coughlin confirmed that the guidance for the full year includes an approximate 100 basis point negative impact from an increased promotional environment. He stated that the company has assumed the heightened promotional levels observed in the first half will continue through the remainder of the year, and this assumption is built into the current financial outlook.

John Kernan of TD Cowen asked for clarification on the planned promotional impact on gross margin for the second half of the year and how much flexibility was reserved in the guidance for a heightened promotional environment.

Answer

CFO Zac Coughlin responded that the updated guidance assumes the current, more promotional environment will persist for the remainder of the year. He specified that the full-year forecast includes a roughly 100 basis point negative impact from this increased promotional activity, which is factored into the outlook for the second half.

John Kernan of TD Cowen asked about the planned promotional impact on gross margin for the second half of the year, noting that Q2 guidance implies a significant impact, and questioned how much room was reserved for this pressure.

Answer

CFO Zac Coughlin confirmed that the company has factored in a significant promotional impact for the remainder of the year. He stated that the full-year guidance now includes approximately 100 basis points of pressure from an increased promotional environment, a trend observed in Q1 that is assumed to continue through the end of 2025.

John Kernan inquired about how the DTC versus wholesale channel mix factors into long-term targets and asked about any material financial impact from the G-III transition in the next 12 months.

Answer

CEO Stefan Larsson stated the channel mix will ultimately follow the consumer. CFO Zac Coughlin affirmed that the company's 15% EBIT margin target is independent of channel mix, as they aim for profitability across all channels. Regarding the G-III transition, he explained that due to its phased, multi-year nature, no significant, discrete financial impact is expected to be called out in the near term.

John Kernan of TD Cowen asked for guidance on modeling cost of goods sold (COGS) in the new tariff environment, specifically regarding landed cost as a percentage of COGS. He also inquired about the growth strategy for the Direct-to-Consumer (DTC) segment, including new store plans and omnichannel comparable sales performance.

Answer

Executive John Vandemore acknowledged the complexity of modeling COGS, noting that tariffs primarily impact FOB price but also affect other factors like freight and labor when shifting production. Regarding DTC, he confirmed Skechers is still excited to open stores where it is profitable, with a bias towards international markets. He highlighted the strength of the omnichannel model, noting that robust e-commerce growth compensated for more volatile store traffic during the quarter.

John Kernan from TD Cowen inquired about the allocation of the high 2025 CapEx guidance and the long-term operating margin opportunities as Skechers approaches $10 billion in revenue.

Answer

John Vandemore (executive) detailed that the elevated CapEx is for two major, long-term distribution center expansions in China and the U.S., with the latter providing significant efficiency gains. David Weinberg (executive) added the U.S. project replaces expensive off-site storage. Regarding long-term margins, both executives stated that while they aim to sustain and grow the operating margin, the primary focus remains on investing for growth. They believe significant growth potential remains, which will require continued investment.

Krista Zuber, on behalf of John Kernan, asked about trends in same-store sales, e-commerce growth, and new store productivity, as well as the specific supply chain efficiencies driving G&A leverage.

Answer

CFO John Vandemore reported continued strength in global e-commerce and solid international comp store growth. U.S. comps were roughly flat against a tough 14% comparison from the prior year. He attributed the G&A leverage to effective labor management within the distribution network and other targeted cost-reduction initiatives, expressing optimism that more efficiencies could be found.

John Kernan requested more detail on the back-half guidance increase, the potential impact of rising spot freight rates on costs, and insights into customer acquisition cohorts from new product launches.

Answer

Executive David Weinberg and CFO John Vandemore highlighted that the guidance increase is driven by a strong domestic wholesale order book, the timing benefit from delayed European shipments, and continued DTC strength. On freight, Vandemore acknowledged rising spot rates but noted their impact is delayed and partially offset by contractual rates. Weinberg added that customer acquisition is currently driven by expanding the base with comfort features, with a larger push into performance athletics like football and basketball just beginning.

John Kernan asked for a comparison of Vans' performance internationally versus domestically and how the brand is trending across different geographies.

Answer

CEO Bracken Darrell stated his belief that Vans is underdeveloped internationally, which presents a major long-term growth opportunity. However, he also highlighted that fixing the U.S. business represents the single biggest immediate upside for the brand. He concluded that significant opportunities exist both at home and abroad.