Amer Sports - Q3 2024

Transcript

Operator (participant)

Thank you. I'd now like to hand over to Omar Saad, Vice President of Investor Relations. You may now begin.

Omar Saad (VP of Investor Relations)

Hello everyone. Thanks for joining Amer Sports' earnings call for the third quarter of fiscal year 2024. Earlier this morning, we announced our financial results for the quarter ended September 30, 2024, and the release can be found on our IR website, investors.amersports.com. A quick reminder to everyone that today's call will contain forward-looking statements within the meaning of the federal securities laws. 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 reconciliation to the most comparable IFRS financial measures.

We will begin with prepared remarks from our CEO, James Zheng, and CFO, Andrew Page, followed by a Q&A session until approximately 9:00 A.M. Eastern. 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 Haselden, will also join for the Q&A session. With that, I'll turn the call over to James.

James Zheng (CEO)

Thanks, Omar. Third quarter was very strong for Amer Sports across operating segments, geographies, and channels. Our premium technical brands are taking market share and creating widespread success in sports and outdoor markets around the world. We are executing well against our largest growth opportunities in Arc'teryx and Salomon, Wilson, while our market-leading ball and rackets and the winter sports equipment franchise both grow faster than expected. Amer Sports generates 17% sales growth in Q3, led by our flagship brand, Arc'teryx. We achieve a very strong 14.4% adjusted operating margin, well above our expectations. 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, Arc'teryx.

Within our outdoor performance segment, Salomon soft goods continues to grow double digits, led by footwear, while ball and racket sales trends improve, reaching double-digit growth in Q3. We believe Amer Sports is a very uniquely positioned company within the global sports and outdoor space, and several factors give me confidence for the rest of this year and beyond. First, we own and operate a unique and valuable portfolio of premium outdoor and sports brands. Each one is fueled by technical innovation and positioned at the pinnacle of its segment. Our brands have high engagement, conversion, and satisfaction with consumers, but are still relatively small players on the global stage with significant room to grow. Second, Arc'teryx is a breakout growth story with standout growth and profitability for the outdoor industry, charting new territory with its disruptive DTC models and a unique competitive position.

Our growing store network, pinnacle products, and deep community connections allow us to continually attract new consumers to our brand and also have success expanding into newer categories such as footwear and women. Third, we believe that Salomon, a brand born in the mountains, has a unique technical performance position and a design aesthetic within the global sneaker market, but still has low market share and a long runway of growth ahead, especially at this time when consumers are more open to new sneaker choices than ever before. Fourth, Wilson and our winter sports equipment brands have long-standing authentic heritage, premium position, high-performance products, and leading market positions. Because they already enjoy strong equipment market share, they will deliver slower long-term growth in their core equipment business, but still have large soft goods potential, especially the Wilson Tennis 360 line.

Fifth, while other consumer companies face challenges in Greater China, in Q3, we generated 56% growth there, continuing to well outperform the market. We are seeing strong momentum across all of our three big brands, including strong consumer confidence following the government's stimulus actions. I'd like to highlight some of the key reasons behind our standout performance in Greater China. Number one, our brands compete in one of the healthiest and the fastest-growing consumer segments in China, the premium sports and outdoor markets. The outdoor trend in China continues to be very strong, attracting younger consumers, female consumers, and even luxury shoppers. Additionally, the China consumer landscape today has evolved into a market of winners and losers, with some brands doing extremely well and others underperforming. Our still small specialized brands are known for their expertise, high quality, and technical innovations, which resonate with Chinese shoppers.

Thirdly, and the most important, we believe we have a great team in China. Our deep expertise and a unique scalable operating platform give us a significant competitive advantage across the portfolio. Now, coming on to some key highlights from our segment in Q3, starting with technical apparel, which is led by our fastest-growing and now largest brand, Arc'teryx. Arc'teryx delivered another very strong quarter with healthy growth across all regions, channels, and categories, especially footwear, women, and hard-shelled jackets. The brand momentum was most evident in its strong omni-comp performance against a very difficult growth comparison from last year. Arc'teryx is executing well its retail expansion plan, opening nine net new brand stores globally in Q3, bringing the total owned brand store count to 134. Key new locations include four openings in the United States, two in Canada, two in Australia, two in China, and one in Germany.

Arc'teryx opened another brand store at the Fashion Island Mall in Newport Beach, California, bringing us to four stores in Los Angeles, an epicenter market for us. The brand is resonating well with LA consumers, giving us confidence that Arc'teryx has large growth potential even in warmer markets. Doubling down on our commitment to the LA community, we are hosting our first-ever Arc'teryx backcountry academy in Mammoth, California this winter, a reflection of the opportunities we see in this region. In Europe, we have opened net five new stores this year so far, and we are seeing exciting results, including strong affinity with both tourists and the locals. In Paris, local consumers are embracing our store in Le Marais.

13 years of engaging with French and European apprentices at our climbing academy in Chamonix has generated significant brand recognition and appreciation with French consumers, even before we opened our first store there. We also opened our New York City flagship store at 580 Broadway in September. This new outdoor store features our most pinnacle expression of ReBIRD, including shoppable ReGEAR in store for the first time, a large ReBIRD Service Center facility for care and repair, and a unique in-store coffee shop. This unique collection delivers the brand in a slightly new way in the U.S., taking cues from the success of our retail format in China, presenting much of the assortment by activity instead of by category, which creates a strong energy and engaging presentation of our products. The store is performing very well relative to our internal expectations in its first few months.

Shifting to products, innovation is at the heart of Arc'teryx's DNA. Recently, we were thrilled that our MO/GO motorized hiking pant was recognized by Time Magazine as one of the best inventions of 2024. Designed to support users in their outdoor recreation pursuits, MO/GO stands for Mountain Goat and is the world's first pair of powered hiking pants. MO/GO pants integrate robotics with carbon elements and were engineered by the Arc'teryx Advanced Concepts team alongside external partner Skip, which is a Google X spin-off dedicated to tackling mobility challenges. We believe this technology has the potential to increase accessibility to outdoor sports in a meaningful and scalable way, regardless of physical ability. Also, Arc'teryx footwear continues its elevated trajectory since launching its first in-house line, going strong double digits across all regions and channels in Q3.

The Kragg continues to be widely successful, including our latest insulated version for cooler fall and winter temperatures. This is a great example of how we will add new dimensions to our key franchise, with ideas and inspiration coming through collaboration with our R&D teams. We also introduced a new hike shoe model called the Kopec, which has also delivered strong early results. Overall, we are extremely pleased with consumer reception to what we believe is the best line of technical performance footwear designed for mountain terrain. And because of its unique position in the sneaker marketplace, strong sales in our DTC channels, and reorders from key wholesale accounts, our confidence is growing that footwear will become a very sizable and profitable growth avenue for Arc'teryx both in own retail and certain brand-relevant wholesale accounts.

Women continue to perform extremely well, growing very strong double digits, outpacing overall brand growth and representing near one quarter of sales in Q3. This outperformance was driven by seasonal relevant color and news, combined with breakout new styles like the Kallen Pant. We continue to see significant upside in the category as we add more models, colorways, and style options that resonate with her. Lastly, an update on our cutting-edge community engagement programs. This summer, Arc'teryx launched gym residencies in climbing gyms from New York to Paris to San Francisco as part of the brand's Summer of Climb. Investment in brand awareness and activities that feed off the global excitement and the popularity of climbing have driven awareness, cultural relevance, and positioned Arc'teryx at the heart of this phenomenon.

Our academies continue to generate strong buzz and affinity for the brand, including our largest-ever academy in the French Alps in Chamonix, with 650-plus participants ranging from beginners to world-class climbers. Moving to the outdoor performance segment, which also delivers a solid quarter and outperforms our expectations led by Salomon soft goods and Atomic, partially offset by softer trends in Salomon winter sports equipment. The higher-margin, fast-growing Salomon footwear franchises still represent a very low share of the global sneaker market. Today, Salomon soft goods represents approximately two-thirds of the outdoor performance segment, up significantly from 54% in 2022. We believe Salomon sneakers have an authentic and unique market position, with technical features designed for the mountain but also great for everyday use. Our unique style and technical attributes resonate with consumers at a time when they are more receptive than ever to wearing new sneaker brands.

Long term, we expect Salomon soft goods to grow double digits annually. In Q3, Salomon footwear continued to show strong traction in Greater China and APAC, where consumers love our Sportstyle offerings that combine a distinct trendy look with high technical features. In China, we have created a new category called outdoor sneakers, which especially resonates with young consumers. Our Salomon compact shop format in China is also working very well, profitable starting day one and four times more productive per sq ft than industry average. We are continuing to expand Salomon shops in Greater China, opening 29 net new Salomon shops in Q3, including both owned stores and partner stores, bringing our total count to 165 in Greater China. Approximately 2,000 stores.

We expect to end 2024 with approximately 200 Salomon stores in China, with the opportunity to grow to several hundred locations over time in just Tier 1 and 2 cities. We have also begun testing the Salomon compact shop format outside China, rolling out the new locations in APAC and EMEA, including Tokyo, Singapore, and Le Marais shop in Paris. We recently opened our first Salomon flagship in Shanghai, a 5,400 sq ft pinnacle brand expression in the affluent shopping district, Xintiandi, which combines both footwear and apparel in a comprehensive offering and highly immersive brand experience. We are also excited to share that we opened a pop-up shop in the heart of New York City in Soho in October. This is our first brand stores in the U.S. and comes ahead of plans to open one to two permanent New York stores in 2025.

Residing in the old Arc'teryx Soho location, the Salomon store is performing very well so far, with strong response from both tourists and the locals. Globally, we plan to end the year with 404 Salomon shops, including both owned and partner stores, doubling the count from last year. In Europe, Salomon footwear and apparel are performing well, especially driven by strong reorders, and because Salomon is selling through well, this is also driving our higher pre-order rates. In both EMEA and North America, Salomon sports style is still early in its long-term development. We have evolved our go-to-market organization in both markets, more clearly separating the winter sports equipment sales team from the Salomon footwear team, which should help us reach our potential in both categories, given their unique end markets.

We continue to be very excited about the opportunity to translate our strong brand hit into broader commercial success in the U.S., the largest sneaker market in the world. As we evolve as a company, we are announcing two leadership changes to the Amer Sports executive structures effective January 1, 2025. First, we are pleased to announce that Guillaume Meyzenq, current Chief Product Officer for Salomon, has been appointed President and CEO for Salomon. Additionally, Michael Hauge Sørensen, Chief Operating Officer and Executive Officer for Amer Sports, has decided to step down from his current position and will return to his former role as advisor to the Board of Directors of Amer Sports. We conducted a comprehensive search for the next Salomon CEO, including both internal and external candidates, and concluded that Guillaume is the right person to take Salomon to the next level.

I have worked closely with Guillaume the last seven months as interim CEO. He has built a strong reputation during his 28 years at Salomon and is extremely well respected throughout the company and the industry. Born and raised in the French Alps, an avid skier and outdoorsman, Guillaume embodies the core values of Salomon. He brings a strong track record of operational excellence and strategic innovation in diverse leadership roles across Salomon, including sales, product innovation, and both soft goods and the winter sports equipment. More importantly, Guillaume was instrumental in the doubling of Salomon footwear sales over the last five years, including creating and developing our key sports-style category, which is now approaching one-third of Salomon sneaker sales. We have the right team and strategy in place, and I have full confidence in Guillaume to lead Salomon for the next stage of its growth journey.

Moving on to ball and racket highlights, we are pleased that ball and racket growth trends continue to improve in Q3. Double-digit growth was driven by strong trends in racket sports, especially performance tennis, boosted by our Roger Federer racket line and the growing tennis popularity in China following Zheng Qinwen's Olympic gold medal. While still in its early stage, our Tennis 360 strategy is proving to be a key driver for the Wilson franchise led by apparel and footwear growth and the accelerating expansion of Tennis 360 shops in China. We saw record sales at our U.S. Open shop earlier this fall, and our new line of Roger Federer's premium performance rackets, bags, and accessories launched in August has been extremely successful in the first month, driven the strong growth in our key performance racket segment.

Increasingly, the potential growth in Q3 as retail inventories normalize and the retailers begin accelerating replacement orders. Our Kith collaboration continues to drive brand heat and strong sales through. With that, I will turn it over to Andrew.

Andrew Page (CFO)

Thanks, James. I'm excited to discuss our strong Q3 performance and the positive revisions to our full year 2024 guidance, as well as our first look at our outlook for 2025. Before diving in, I'll quickly address a couple of housekeeping items. First, in Q3, we updated the presentation of our credit card processing fees, which were previously recorded as contra revenues and have now been reclassified as selling, general, and administrative expenses. The reclass has no impact on operating profit. We have included a slide in our earnings deck with a schedule of the annual impact since 2021 and the quarterly impact since 2023.

Second, Q3 adjusted operating margin benefited by approximately 100 basis points from $14 million of government subsidies that we received in the third quarter, which we previously expected to receive in Q4. We are thrilled with the underlying sales and margin performance of our brand portfolio. The fast growth of our high-margin Arc'teryx franchise is elevating the financial profile of Amer Sports in total and this dynamic allows us to deliver strong, profitable growth for our shareholders while reinvesting in the many long-term growth opportunities across our portfolio. Amer Sports group sales 17% in Q3 on both a reported and constant currency basis. The strong group sales performance was led by technical apparel, while outdoor performance and ball and racket sports also delivered very solid growth. By channel, the group continues to be led by D2C, which grew 41%, led by Arc'teryx and Salomon footwear.

But also in Q3, we saw wholesale trends improve, growing 8% year over year, led by Arc'teryx and Wilson. Regional growth was led by Greater China, which increased 56%, followed by Asia-Pacific, which grew 47%. Importantly, growth in Americas and EMEA accelerated from 1% each in Q2 to 7% and 4% respectively in Q3. Turning to profitability, adjusted gross margin increased 410 basis points to 55.5% in Q3, primarily driven by positive segment, product, regional, and channel mix shifts combined with lower discounting actions. Going forward, we expect our highest growth margin franchise, Arc'teryx, to continue to grow significantly faster than the rest of the portfolio and continue to be the biggest underlying driver of our ongoing growth margin expansion.

Adjusted SG&A expenses as a percentage of revenues increased 210 basis points and represented 42.3% of revenues in Q3, mainly driven by SG&A deleverage at outdoor performance due to Greater China and Asia-Pacific growth plan investments. Also, technical apparel slightly deleveraged due to investments in opening stores. We will open net 30 new Arc'teryx stores in 2024, the highest ever in one year. At this time, we do not expect to significantly increase the number of annual Arc'teryx openings from this run rate. We generated a 280 basis point increase in our adjusted operating margin from 11.6% last year to 14.4% in Q3 2024, above our guidance of approximately 11% to 12%. As mentioned above, our adjusted operating margin benefited by the $14 million early receipt of government subsidy payments. Adjusted corporate expenses were $26 million versus $23 million in Q3 of last year, driven by higher personnel costs.

Depreciation and amortization was $71 million, which includes $32 million of ROU depreciation. Adjusted net finance costs in the quarter was $45 million at the low end of the $45-$50 million range we guided to on our last call. In the quarter, our adjusted income tax expense was $78 million, which equates to an adjusted effective tax rate of 52%, in line with our guidance of 50%-55%. Adjusted net income was $71 million in Q3, compared to an adjusted net loss of $13 million in the prior year period. Adjusted diluted earnings per share was $0.14, compared to an adjusted diluted earnings per share of $0.03 last year. Turning to segment results, technical apparel revenues increased 34% to $520 million, led by Arc'teryx.

Growth was fueled by 40% D2C expansion, including a 20% omni-comp, a great result comparing against a 68% omni-comp in the third quarter of last year. Arc'teryx D2C momentum was fueled by both new and existing consumers across all regions and channels. The Arc'teryx brand continues to experience broad-based strength and is outperforming across every region, channel, and category. D2C remains the core growth engine, but we also experienced strength in the wholesale channel, which grew 26% for the segment. U.S. wholesale was a standout, especially for Arc'teryx. Regionally, technical apparel growth was led by Asia-Pacific, followed by Greater China and the Americas. Additionally, EMEA returned to growth, driven by a strong D2C performance. Consumer love for Arc'teryx in China continues to grow, and the brand's very strong performance in APAC continued into Q3.

Technical apparel adjusted operating margin expanded 370 basis points to 20%, driven by higher gross margin from favorable product, channel, and regional mix. The technical apparel segment operating margin also benefited 200 basis points from the Q3 receipt of government subsidy payments that were expected in Q4. Outdoor performance segment revenues increased 8% to $534 million, driven by double-digit top-line performance in Salomon footwear and apparel and strong D2C channel growth, especially in Asia-Pacific and Greater China. This was partially offset by a decline in Salomon winter sports equipment and the wholesale channel. By channel, outdoor performance D2C grew by more than 50%, while wholesale declined slightly, driven by continued soft wholesale market conditions in EMEA and North America for Salomon winter sports equipment. By region, very strong growth in Greater China and APAC were partially offset by slower sales in EMEA and North America.

North America was a tale of two businesses: strong double-digit growth in soft goods, offset by a more challenging environment for winter sports equipment. As we said last quarter, 2024 will be a slightly softer year for winter sports equipment due to slower trends in North America, where ski equipment sales are rebasing after a strong run through and beyond COVID. This is in addition to cautious orders in EMEA after two tough snow seasons in Europe. However, given our great brands and scale advantages, we are taking market share as our businesses are down less than the market. Longer term, although we expect winter sports equipment to be a slower 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.

Winter sports equipment now represents one-third of outdoor performance. Long term, we expect this business to grow low single digits annually. Outdoor performance adjusted operating margin contracted 40 basis points from last year's record performance to 17.5% this year. This was driven by higher SG&A due to store and team investments to drive regional acceleration for Salomon in China and APAC, offsetting growth margin gains, which were mainly driven by a favorable region, channel, brand, and product mix. Moving to ball and racket, revenue increased 11% to $300 million as inventories normalized in the market and replenishment orders accelerated. Our constant innovation and top-quality products have allowed Wilson to take share during these past few quarters of inventory rebalancing. We are very pleased with the strong rebound and continue to expect ball and racket to grow low to mid-single digits long term.

By category, the return to double-digit growth was led by our marquee racket sports franchise, as well as our small but fast-growing soft goods segment. Inflatable balls and golf also returned to growth in Q3. Our Tennis 360 strategy continues to be a key driver for the Wilson franchise, led by footwear and apparel growth, performance rackets, accelerating expansion of Wilson Tennis 360 shops in China, as well as padel and pickleball growth. Ball and racket segment adjusted operating profit margin increased 600 basis points compared to the third quarter of 2023 to 6.9%, primarily driven by an increase in new product launches this year, which carry higher gross margins and supported by lower discounting given the inventory clearance that began last year in Q3.

Looking ahead, we are confident that our market share and flow of innovative products positions ball and racket well in Q4 when we face our easiest comparison and also have our strongest pipeline of new products. Turning to the balance sheet, we ended the quarter with $2 billion of net debt, up from Q2, as we typically draw on our revolver in Q3 to fund inventory build ahead of our key winter season. Using the midpoint of our 2024 implied adjusted operating profit guidance, our net debt to adjusted non-IFRS EBITDA ratio was approximately 2.8x at the end of Q3. Deleveraging our balance sheet remains a priority, and our goal is to reduce our leverage ratio to 1.5x or better over the next few years through both EBITDA expansion and debt paydown.

Our focus on inventory discipline is paying off, as inventories finished Q3 up only 12% year over year versus 17% sales growth. Also, I'd like to provide a quick update on our regional sourcing exposures, given the increased market focus on potential U.S. import tariffs. Greater China represents less than 30% of Amer Sports global sourcing, and looking at Amer Sports Group in totality, sourcing from China to the U.S. market represents only 10% to 12% of total group revenues. Similar to the last period of rising China tariffs, our ball and racket segment would be most impacted, predominantly tennis rackets, baseball bats, and basketballs. We have some degree of flexibility to adjust our supply chain, but price increases will be the primary tool we utilize should tariffs occur.

Now, turning to guidance, given our strong third quarter results and confidence in our brands and their financial outlook, we are raising our full-year guidance for sales, adjusted gross margin, and adjusted diluted EPS. As we've said on our previous earnings calls, 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 are raising our revenue guidance to 16%-17% growth, despite greater currency headwinds as a result of the strengthening of the U.S. dollar since the election. This incorporates approximately 34% growth in technical apparel, roughly 8% revenue growth in outdoor performance, and 4% in ball and racket. We are increasing our full-year adjusted gross profit margin guidance from approximately 54.5% to 55.3%-55.5%. However, we are maintaining our full-year adjusted operating margin guidance toward the high end of 10.5%-11%.

Given the strength in our brands, we are choosing to opportunistically accelerate high-return investments to support our key growth opportunities, including marketing and store build-out. Our net finance costs for the year will be $200 million-$210 million, including approximately $15 million of finance costs in the first quarter of 2024 that won't be recurring. We expect to have an effective tax rate on adjusted pre-tax income of approximately 37% for the full year of 2024. We now expect to achieve full-year adjusted diluted EPS in the range of $0.43-$0.45 per share versus our previous guidance of $0.40-$0.44 per share. Looking at the segment margins, we expect a 2024 adjusted operating profit margin slightly above 20% for technical apparel, high single-digit % for outdoor performance, and low to mid-single-digit % for ball and racket.

Lastly, as we begin to look beyond this year, we are confident in our initial 2025 outlook and expect to deliver results consistent with our long-term financial algorithm of low double-digit to mid-teens annual revenue growth and 30 to 70+ basis points of annual adjusted operating margin expansion driven by gross margin expansion. We would also like to highlight two below operating income items to consider for 2025. Our effective tax rate will be approximately 37%, and we expect net finance costs in the range of $180 million-$190 million. With that, I'll turn it back over to the operator for Q&A.

Operator (participant)

We are now opening the floor for question and answer session. If you'd like to ask a question, please press star and then one on your telephone keypad. Please limit your questions to one question and one follow-up.

Your first question comes from Lorraine Hutchinson from Bank of America. Your line is now open.

Lorraine Hutchinson (MD)

Thank you. Good morning. James, can you discuss your view on the Chinese consumer, how that has evolved over the course of the year, and then where do you see Amer Sports' biggest opportunity in the region?

James Zheng (CEO)

Okay. Thank you, Lorraine. And I will say, I mean, the consumer, especially in Chinese markets today, they are, especially in our segments, they are still looking for newness. And we are pretty lucky the sports segment is still booming in Chinese markets. And we estimate there's a high single-digit growth across the board in our sports industry this year in China, and especially outdoor segments grow more than the industry average.

And we can tell more and more consumers, and especially in tier one, tier two cities, they are looking for. They are really, I mean, treating it as a kind of outdoor activity because it is part of the lifestyle. So the participation level is getting higher than our expectations. So it's a very good moment for us, especially our brand, Salomon, sitting in the outdoor segment. We can have a clear benefit from the overall market dynamics.

Lorraine Hutchinson (MD)

Thank you.

Operator (participant)

Your next question comes from Jay Sole from UBS. Your line is now open. Great.

Jay Sole (MD)

Thank you so much. I guess my first question is on our tailwinds. What changed over the last 90 days that has you most excited, maybe particularly about some of the newer growth drivers? And then secondly, Andrew, you mentioned with respect to the fiscal 2025 initial outlook that you're giving some financing costs.

Can you just talk about capital allocation priorities, how much free cash you expect to generate, and what you plan to do with that free cash?Thank you.

Stuart Haselden (CEO)

Hey, Jay, it's Stuart. So I'll speak to your question on our retail. So yeah, I think one of the biggest milestones in the last 90 days was our Broadway store opening here in Soho in Manhattan. Really exciting expression of the brand. It represents sort of the evolution of how we're creating the store experience, the retail experience. Importantly, the store also has the first-ever dedicated ReBIRD sales floor. And we're learning a lot from that part of the 580 Broadway store that we'll be able to take to other locations as we expand the ReBIRD concept. But it also just included a lot of interesting elements, an expanded Veilance shop, a really strong expression of our footwear line.

I would say a second point I would highlight is just the ongoing success we see in our footwear business, exciting momentum there. We've got new models in the pipeline. We launched our Kopec hiking shoe in the third quarter to a lot of enthusiasm from our guests. So we're excited with the momentum that continued in footwear. And it also in women's. We saw over 50% growth in our women's category in the third quarter. So exciting to see acceleration there. We picked up 200 basis points of sales penetration in our women's category. And we feel like we're just getting started in women's. There's a lot of upside. We feel like the potential assortment is much broader than what you see today in the store. A lot of opportunity to evolve our women's line. So yeah, those are some of the highlights I would mention today.

Andrew Page (CFO)

Hey, Joe. Jay, thanks. This is Andrew. Just following up on capital allocation question, glad you brought that up. It is definitely a priority of ours. As you can see, in 2024, we were intentionally focused on growing the business. We opened up net 30 new Arc'teryx stores this year. We expect a similar run rate next year. As we went into 2024, we talked about capital expenditures approaching $300 million, which is our largest expenditure yet, again, focusing on store build-out and implementation of our expanded ERP system in the business. As we go into 2025, I anticipate that we will continue to focus on growing the business. We will continue to focus through capital expenditures. Another key focus is going to be managing our debt carrying costs.

As an example, you see our net carrying costs coming down slightly as we've gone through and swapped some of our higher interest rate debt for lower interest rate debt. We've repriced our debt and saved, which you'll see an annual run rate of almost $10 million next year on the repricing. So we will continue to focus on growing the business. We will continue to focus on delighting our consumers. We will be focused on debt paydown and managing the carrying costs of the business. And we expect free cash flow to increase next year over what you see this year.

Jay Sole (MD)

Got it. Thank you so much.

Operator (participant)

Your next question comes from Matthew Boss from J.P. Morgan. Your line is now open.

Matthew Boss (Equity Research Analyst)

Thanks, and congrats on a nice quarter.

Stuart Haselden (CEO)

Thanks back.

Matthew Boss (Equity Research Analyst)

Stuart, could you speak to performance versus plan in the third quarter across regions at Arc'teryx?

And maybe just any comments on demands you've seen so far in the fourth quarter relative to the 20 comp in the third quarter. And then, Andrew, raised gross margin, held operating margin. Maybe if you could just elaborate on SG&A investments in the fourth quarter and how best to think about SG&A relative to sales next year.

Stuart Haselden (CEO)

Hey, Matt. It's Stuart. Yeah. So I'll speak to your first question there on Arc'teryx. So we're really pleased with our performance versus plan overall and by region in the quarter. As you heard in our prepared remarks, we exceeded our expectations in every region and every channel and every product category. So strong momentum across the board. And as we've seen in prior periods, our APAC business led by our Japan business has been a standout performer with the highest growth rate of all the regions.

We're really excited for the momentum there. Again, there was a consistent degree of success across the product categories in that region. Our China business was the second fastest growing, followed by North America and Europe. Overall, very pleased with momentum. High full-price sell-throughs, particularly in North America, we saw an acceleration in our full-price sell-through and a reduction in our off-price selling in the period. We're pleased with our comps. Our two-year stack at 88%, we feel, is really strong. I would say that if we had more inventory, we would have had even higher comps. That's probably the opportunity we have as we look into the future. Just we left sales on the table, frankly, as we are now chasing inventory across a number of categories. Footwear, in particular, has been far ahead of our expectations.

We're chasing the Kragg model in particular has been a really successful model for us and out of stock often. So those are some of the, I think, the headlines by region. In terms of the Q4 outlook, I think that the guidance that we share kind of reflects our perspective. We see, honestly, as a continuation of the strong momentum we've seen through the first three quarters.

Andrew Page (CFO)

Hey, Matt. Thanks for the questions. This is Andrew. We are extremely pleased with our continued gross margin expansion throughout the year. We've continued to deliver high-quality expansion and earnings of the organization, which has allowed us to invest in high-return investments. So as you see, we expanded gross margin in Q4, some of that to the bottom line, but additionally, much of that to continued investment.

Some of the areas that we're going to continue to focus on is our new Arc'teryx stores, Salomon stores in China, which James mentioned, as well as Wilson stores in China and the rest of APAC that are doing very well. We're really excited about the expansion of our Tennis 360 concept that is really generating traction with consumers. In addition, talent acquisition, retention, and technology are additional areas that we believe will drive sustainable growth for us. As we look into 2025, we continue to remain consistent with our plans to be right around flat leverage in 2025 and start to begin to leverage the business post-2025 into 2026.

Matthew Boss (Equity Research Analyst)

Great. Best of luck.

Operator (participant)

Your next question comes from Paul Lejuez from Citi. Your line is now open.

Hi, thanks. This is Kelly for Paul.

Stuart, could you talk a little bit more about our footwear opportunity and potential to expand into wholesale? Where do you see the biggest opportunities there? And do you have the inventory currently to fulfill demand in that channel? And then just separately, it looks like you're seeing good performance in the Salomon footwear in North America. How are you thinking about that growth specifically in the North America market, given some of the challenges you face gaining traction there as we look to F25? Thanks.

Stuart Haselden (CEO)

Hey, Kelly, it's Stuart. So I'll take your first question there. On the Arc'teryx footwear, yeah, we're definitely looking into the future and thinking about the broad strategy for expanding our footwear business. And that will include not only our direct-to-consumer channels, but importantly, wholesale.

And so we have a number of valued, high-quality wholesale points of distribution for our footwear today, but we think it's small in terms of what's possible. We think it's important that we have a strong presence through the wholesale channel, especially for footwear, not only to build brand awareness, but it's also how our guests want to shop for footwear often. And so while we'll continue to have great offerings in our own stores, our own digital points of distribution, wholesale is a critical part of the channel mix. And the inventory planning that's happening now is really obviously aimed into next year. And we have reset our expectations at a higher level in terms of what's possible based on what we've learned in 2024. It's an exciting new part of the business. We've shared previously our penetration of sales had previously been around 6% in footwear.

It's jumped up to 10% since we launched the new model beginning in March. Our midterm goals are to see footwear reach 20% of revenues in the coming years. And so we feel like we're on a good trajectory to achieve that.

James Zheng (CEO)

Hey, Kelly, this is James. I give out the second comment on Salomon development in North America. And first of all, I'd like to say, okay, we are very excited about our innovative product pipelines we built up for Salomon's, especially footwear, and also being through these footwear that we call outdoor sneakers categories, really comparing to the younger consumers in China and the EMEA. We already see a great light. And so for Salomon footwear business in the U.S., I will say we are still on a preliminary stage, and we are on the way to learn how we penetrate the market in the right order.

So the pop-up shop we opened in New York City on October 2nd, it's kind of a showcase for the brand ever to really demonstrate how the brand stands for. And the first month's performance is extremely well and gave us a huge confidence to continue to roll out this kind of a similar we call the footwear concept shop in the United States next year. Meanwhile, we also identify certain key accounts and to try to build up a strong partnership with them.

Besides our long-term partner, REI, we also are actively looking for the retailer like Shoe Palace from the west part of the United States, Nordstrom, and all these kind of new retailers for us and to try to give out the right level of the product assortment and also high-standard merchandising display overall presentation in this kind of shop and see how the market looks like, and also we are also working on the community kind of strategy to really help us to build up our overall Salomon footwear awareness in the markets in the United States, so on preliminary stage, but we already got a very exciting result from the areas. We see a great potential for our Salomon footwear in the United States, so we will keep you guys updated on our overall progress in the future.

Thank you. Best of luck.

Operator (participant)

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

Laurent Vasilescu (MD and Senior Equity Analyst)

Oh, good morning. Thank you very much for taking my question. James, I wanted to ask about Salomon. Great to hear about Guillaume's promotion. Can you talk about what Guillaume brings to the table to lead the brand? What's his vision over the next few years? Salomon soft goods, I think, as you mentioned, is two-thirds of the business. Can that get to 80% over the next few years? And then, Andrew, I appreciate the commentary around FY25. Around the below-the-line items like tax rate just being really high at 37%. I recall last quarter, you talked about maybe having a better tax rate going forward. Where do you think that tax rate can go over time? Thank you very much.

James Zheng (CEO)

Hey, Laurent, thank you for your questions.

I just put a bit of highlights on Guillaume. And Guillaume has been working for Salomon more than 28 years. And his experience in sales, product, innovation across the board in Salomon product divisions. And he brings a very strong track record of operational excellence and the strategic innovation in diverse leadership. And also, more importantly, in the past decades, also he built up the so-called new footwear category, what we call the modern outdoor sneakers. And really made tremendous success in the past five years. So I think, I mean, we have gone through regular selections since April. And eventually, we think Guillaume is the most fit for candidates for us for the time being to lead Salomon to next chapters. And for the future, we also deploy a very clear strategic pillars to develop a Salomon business.

Obviously, for coming three, five years, there's four major areas we will really focus on. One is the footwear focus. We will really accelerate our footwear business cross-border in the world, not only from China, EMEA, but also in North America. Secondly, obviously, we will put a very clear strategy in Europe. Okay? And we want to build a strong footprint for our business in European markets and find a breakthrough in North America. And thirdly, we will continue to drive our business through building up strong digital platforms. These kind of key priorities have been put on the plate. I think Guillaume also got a very high level of confidence to lead the team to fulfill the steps we want to go for next year.

Andrew Page (CFO)

Laurent, hey, this is Andrew Page. Thanks for the question. Definitely, tax rate is a key initiative of ours.

As you can see, we are exiting 2024 with a 50% effective tax rate, especially in the back half of the year. So our rate next year is more than 1,000 basis points better than our exit rate coming out of 2024. We have done a significant amount of work this year to both reduce the non-deductible interest as well as settle outstanding tax constraints that were burdening the business. Going forward, we continue to expect that rate to continue coming down, both, again, focusing on the payment of our debt down and inefficient tax structure jurisdictions where it's non-deductible, as well as the management of certain outstanding tax supplements. And so we are definitely not stopping here, but 1,000 basis points improvement is well on the way. And we see that number coming down to a more normalized rate in the near future in the coming years.

Operator, time for one more question.

Operator (participant)

Our next question comes from Michael Binetti from Evercore. Your line is now open.

Michael Binetti (Senior Managing Director and Fundamental Research Analyst)

Hey, guys. Great quarter. Thanks for taking our question. Andrew, just one quick modeling course correction. I think you said SG&A would be about flat next year. I think Street models have about 40 basis points of SG&A leverage. So I just want to make sure I heard you correctly there and that I have the components correctly. And then I guess it sounds like you pulled forward some investment dollars into fourth quarter for growth initiatives. And then Stuart just suggested you maybe take a little bigger look at the plan for Arc'teryx footwear next year. But the revenue guidance is kind of the same algorithm we've heard from you guys for a while. Seems like you see a few potentials for upside.

Could you maybe just where do you see the most opportunity for upside to the low double-digit to mid-teens revenue growth framework next year? And maybe just some thoughts on what you assume at the low end and at the high end of that range as we think about starting out our models for next year.

Andrew Page (CFO)

Thanks. Yeah. Hey, Michael. Good to hear from you. From the standpoint of SG&A, we expect next year to SG&A to be flat leverage to this year. With regard to our algorithm and looking at low to mid-teens, consistent with this year, we have consistently said that as demand materializes, we will be able to service that demand and in some cases outperform against our guidance. And that's what we are continuing to look forward to next year. As demand materializes, we see our ability to perform against that. Yeah.

Stuart Haselden (CEO)

And I'll add to that, Michael. We continue to be very excited across the regions we operate. We really feel like we're just getting started in North America, in Europe, in Asia-Pacific. We have a tremendous business in China that continues to see strong momentum. So there's just exciting channel and region opportunities, even with the assortment that we have today, if it didn't change at all. And then we look at the opportunities we have across footwear, across women's. And even within our core franchises, within our men's outdoor business, there's just a tremendous amount of new ideas coming into our product pipeline that we think will continue to create upside into the future. We feel like the guidance that we framed is responsible and appropriate given where we are right now.

Michael Binetti (Senior Managing Director and Fundamental Research Analyst)

Okay.

Andrew Page (CFO)

Best of luck for the holidays, Michael.

Operator (participant)

That concludes our question and answer session.

I'd now like to hand back over to the management for final remarks.

Stuart Haselden (CEO)

Thanks, everyone, for joining. Look forward to seeing you on the next call in about three months.

Operator (participant)

Thank you so much for attending today's conference call. You may now disconnect. Have a wonderful day.