Business Description
Amer Sports (AS) is a global company specializing in the design, manufacture, marketing, and sale of sports equipment, apparel, footwear, and accessories. The company operates through direct-to-consumer and wholesale channels, serving customers in over 34 countries. Its portfolio includes iconic brands such as Arc’teryx, Salomon, Wilson, Atomic, and Peak Performance, catering to a wide range of sports and outdoor activities.
- Technical Apparel - Offers premium outdoor apparel, footwear, and accessories, featuring innovative and minimalist designs. Key brands include Arc’teryx, known for high-performance technical outdoor gear, and Peak Performance, which focuses on stylish and functional apparel.
- Outdoor Performance - Provides outdoor apparel, footwear, accessories, and winter sports equipment. Key brands include Salomon, a leader in trail running and hiking footwear, and Atomic, specializing in skis and other winter sports gear.
- Ball & Racquet Sports - Produces high-performance sports equipment, apparel, and accessories for various sports. Key brands include Wilson, a leading manufacturer of tennis, baseball, and other racquet sports products, and Louisville Slugger, known for baseball bats.
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Q3 2024 Summary
What went well
- Strong growth in the Chinese market, with the sports industry in China estimated to grow at high single digits and the outdoor segment growing even faster, providing significant opportunities for Amer Sports brands like Arc’teryx and Salomon.
- Arc’teryx's exceptional performance, exceeding expectations in every region, channel, and product category, including over 50% growth in the women's category and footwear sales penetration increasing from 6% to 10% since March. The successful opening of the flagship store in Manhattan's Soho district further enhances brand visibility.
- Salomon's footwear expansion potential, especially in North America, highlighted by the opening of a pop-up shop in New York City that's performing extremely well, indicating great potential for Salomon’s innovative footwear products in the U.S. market.
What went wrong
- The company expects SG&A expenses to remain flat next year, delaying operating leverage and potentially limiting margin expansion until after 2025.
- An effective tax rate of approximately 37% is expected in 2025, which is relatively high and may impact net income and earnings per share.
- Salomon footwear faces challenges in gaining traction in the North American market, and the business is still in the preliminary stages in the U.S., which may limit growth potential for this segment.
Q&A Summary
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Capital Allocation Priorities
Q: How will you allocate capital and use free cash flow?
A: Andrew explained that they are focusing on growing the business by opening about 30 new Arc’teryx stores this year and expect a similar run rate next year. They anticipate capital expenditures approaching $300 million in 2024, focusing on store build-out and ERP system implementation. In 2025, they will continue to invest in growth, manage debt carrying costs by swapping higher interest rate debt to lower rates, resulting in annual savings of almost $10 million next year. They expect free cash flow to increase next year over this year. -
Revenue Guidance and Potential Upside
Q: Where do you see upside to next year's revenue guidance?
A: Andrew stated they expect low to mid-teens revenue growth next year, consistent with this year. As demand materializes, they can service it and potentially outperform guidance. Stuart added they are excited about opportunities across regions, especially in North America, Europe, and Asia Pacific, with strong momentum in China. They see potential in footwear, women's, and core men's outdoor business, with new products in the pipeline that could create upside in the future. -
Gross Margin and SG&A Outlook
Q: How should we think about SG&A relative to sales next year?
A: Andrew mentioned they are extremely pleased with continued gross margin expansion. In 2025, they expect SG&A to be flat leverage to this year. They plan to invest in new Arc’teryx stores, Salomon stores in China, and Wilson stores in China and APAC. They are also investing in talent acquisition, retention, and technology to drive sustainable growth. They remain consistent with plans to begin leveraging the business post-2025 into 2026. -
Tax Rate Outlook
Q: How will your tax rate change over time?
A: Andrew highlighted that they are exiting 2024 with a 50% effective tax rate. Next year, the rate is more than 1,000 basis points better than their exit rate, meaning it will decrease by over 10 percentage points. They have reduced nondeductible interest and settled outstanding tax constraints. Going forward, they expect the tax rate to continue coming down to a more normalized rate in the near future. -
Footwear Expansion and Wholesale
Q: What is the footwear opportunity and plans for wholesale expansion?
A: Stuart discussed plans to expand their footwear business, including through wholesale channels. Footwear penetration increased from 6% to 10% since launching new models in March. Their midterm goal is for footwear to reach 20% of revenues in the coming years. They believe wholesale is critical for building brand awareness and meeting customer shopping preferences. -
Performance Across Regions
Q: How did Arc’teryx perform across regions in Q3?
A: Stuart reported they exceeded expectations in every region, channel, and product category. The APAC business, led by Japan, had the highest growth rate. China was the second fastest-growing region, followed by North America and Europe. They saw high full-price sell-throughs, especially in North America, and reduced off-price selling. Their two-year stacked comp was 88%, and they could have had higher comps with more inventory. -
China Market Growth
Q: What's happening with Chinese consumers and opportunities in the region?
A: Jie Zheng noted that the sports segment is booming in China, with an estimated high single-digit growth in the sports industry this year. The outdoor segment is growing more than the industry average. More consumers in Tier 1 and Tier 2 cities are embracing outdoor activities as part of their lifestyle. This presents a good opportunity for them, especially for Arc’teryx and Salomon. -
Salomon's New Leadership
Q: What does Gillam's promotion mean for Salomon's future?
A: Jie Zheng highlighted that Guiyang has over 28 years of experience with Salomon. He has a strong track record in sales, product innovation, and operational excellence. He built the modern outdoor sneakers category, achieving tremendous success in the past 5 years. The future strategy focuses on accelerating footwear globally, winning in Europe, building a strong footprint, and leveraging digital platforms. -
Salomon Footwear in North America
Q: How are you growing Salomon footwear in North America?
A: Jie Zheng stated they are in the preliminary stages of expanding Salomon footwear in the U.S.. They opened a pop-up shop in New York City on October 2, which performed extremely well in the first month. They plan to roll out similar footwear concept shops next year. They are building partnerships with key accounts and retailers to enhance product assortment and merchandising. They are also working on community strategies to build brand awareness.
Executive Team
Questions to Ask Management
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Given that your effective tax rate guidance remains elevated at approximately 37% for 2025 , despite efforts to reduce it, what specific measures are you implementing to bring this rate down to more normalized levels over time, and what timeline should investors expect for this improvement?
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With plans to continue opening Arc’teryx stores at a net rate of 30 per year , alongside investments in Salomon stores in China and the rest of APAC , how are you managing the risks of overexpansion and ensuring these investments yield sustainable growth, especially given competitive and economic uncertainties in these regions?
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The Ball & Racquet segment's adjusted operating profit margin increased to 6.9% in Q3, primarily due to new product launches and lower discounting after last year's inventory clearance ; how do you plan to sustain this margin improvement, and what strategies are in place to drive growth in this segment given your expectation of low to mid-single-digit long-term growth ?
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Considering that Winter Sports Equipment represents a third of your Outdoor Performance segment but has shown softer trends, with expectations of low single-digit annual growth due to slower trends in North America and cautious orders in EMEA , what initiatives are you undertaking to revitalize this segment and address market challenges to improve growth prospects?
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With Salomon's footwear business in the U.S. still at a preliminary stage and efforts underway to penetrate the market , what gives you confidence in achieving significant market share in the highly competitive U.S. market, and what specific strategies will you employ to overcome previous challenges in gaining traction as you plan to open new stores and build partnerships with key accounts?