Jon Anderson

Jon Anderson questioned the impact of declining ocean freight rates, asking if the year-over-year reduction (estimated at 50%) would significantly offset tariffs and lead to a strong 2026 gross margin outlook, and sought clarification on the composition of COGS.

Answer

CEO Martin Roper clarified that tariffs apply to 60% of COGS, making their impact substantial, and noted current ocean freight rates are down about 33% year-over-year, not 50%. CFO Corey Baker explained that transportation, including warehousing, drayage, and ocean freight, constitutes about a third of COGS. Martin also addressed the implied Q4 sales decline, attributing Q3's strength to a major promotion and private label declines, advising a focus on two-year second-half trends for underlying business.

Jon Anderson asked about the impact of ocean freight rates, which have reportedly been cut in half year-over-year, on the 2026 gross margin outlook, suggesting it could be more impactful than tariffs. He also sought clarification on ocean freight as a component of COGS and questioned the implied Q4 sales guidance of around $105 million, representing an unusually large sequential decline from Q3's $182 million.

Answer

Martin Roper, Chief Executive Officer, clarified that while ocean freight is an important offset, the tariff impact (23% on 60% of COGS) is still significant. He noted that current ocean freight rates are down about 33% year-over-year, not 50%. Corey Baker, Chief Financial Officer, explained that the 30-35% figure previously mentioned refers to total transportation costs, which include warehousing, drayage, and internal distribution, with ocean freight being a subset. Regarding Q4 sales, Mr. Roper and Mr. Baker attributed the sequential decline to Q3 benefiting from a major promotion (skipped last year) and the ongoing private label decline, acknowledging the difficulty in modeling Q4 precisely.