Earnings Call Transcript - AS Q4 2023

Operator, Operator

Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Amer Sports Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Omar Saad, Vice President of Finance and Investor Relations. Omar, you may begin your conference.

Omar Saad, Vice President of Finance and Investor Relations

Hi, everyone. Thanks for joining Amer Sports fourth quarter and fiscal year 2023 earnings call, which is our first earnings call as a public company on the New York Stock Exchange. Earlier this morning, we announced our fourth quarter and full year 2023 results. The release can be found on our IR website. 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 reconciliations to the most comparable IFRS measures. We will begin with prepared remarks from our CEO, James Zheng and CFO, Andrew Page, followed by a Q&A session until 9 A.M. Eastern. Our three segment leaders will also join for the Q&A portion of the call: CEO of Arc’teryx, Stuart Haselden; CEO of Solomon, Franco Fogliato; and CEO of Wilson, Joe Dudy. With that, I'll turn the call over to James.

James Zheng, CEO

Thanks, Omar. I'm very proud to lead Amer Sports first earnings call as a New York Stock Exchange listed company. Amer Sports may be new to the U.S. equity markets, but we come from a long and rich heritage in sports and outdoor activities. Our brands are loved and trusted by millions worldwide. Whether used by elite competitors or aspirational enthusiasts, our equipment, footwear and apparel deliver the best technical quality and performance. We are excited about the opportunity to drive growth across our three segments: Technical Apparel, Outdoor Performance, and Ball & Racquet Sports. Although 2023 was another strong year of sales growth and margin expansion for Amer Sports, we are still in the early stages of our profitable growth following our transformation to a decentralized brand direct operating model in 2020. This transformation has been critical to unlock the value of our portfolio led by our high growth flagship brand, Arc'teryx. Several factors give us confidence for the future. First, we operate a unique portfolio of premium outdoor and sports brands, each positioned at the pinnacle of their respective market. Second, our brands have high engagement and satisfaction with consumers around the world, but are still relatively small players in those large global outdoor and sports markets. Third, the premium segment of the outdoor sports markets remains healthy and growing, especially in Greater China and the Americas, where we continue to outperform peers. Fourth, our highest margin brands, regions, channels and categories are growing the fastest, and we have assembled a strong and experienced management team that's energized and motivated to drive value creation for our stakeholders. Before I review the performance of our brand segments, I want to focus on what I see as our path forward. First, we believe Arc'teryx is a breakout growth story with unprecedented growth and profitability for the outdoor industry. It's truly charting new territory with its disruptive DTC models and a very strong competitive position. The growth and profitability of this franchise will fuel Amer Sports for years to come. Second, Solomon and Wilson, along with all our other brands, are very strong, with longstanding authentic heritage, premium positioning within their respective segments, and amazing products. Although they are early in their growth trajectory, we are building a very strong foundation for future growth for these brands across categories and key geographies. Third, we believe our unique expertise in Greater China and our success embedding top talent in our brand teams in this important growth region give us a clear competitive advantage across all brands in our portfolio. Before I turn it over to Andrew to discuss our company results, margins, balance sheet, and guidance, I will provide a review of our three brand segments. First, Technical Apparel led by Arc'teryx, revenues grew 26% to $550 million in Q4, driven by 42% direct-to-consumer growth, including a 33% omni-channel performance. This was partially offset by a 5% decline in wholesale, which was expected and primarily related to the supply chain-related sales shift from Q3 into Q4 in 2022, which created a more difficult comparison. For the full year 2023, Technical Apparel grew 45%, driven by 57% DTC growth, including a 55% omni-channel performance. Arc'teryx continues to experience very strong brand momentum across all regions, channels, consumer segments, and product categories. In both stores and online, the DTC channel experienced strong traffic and commercial trends. The brand achieved key milestones in its DTC evolution in 2023, including premium flagship openings in Osaka, Beijing, Toronto, and the most recently, our 20,000 square foot store in Shanghai, which has taken the brand's retail presentation to new heights. Arc'teryx is also doubling down on innovation, including a significant new footwear launch with the first fully in-house designed and developed footwear for mountain athletes. Arc'teryx continues to drive deep relationships in mountain communities through global academies and hosted more than 25 Australian participants at Whistler, San Anton, Chamonix, Squamish, and the Yangtze Academies across 2023. Regionally, Technical Apparel grew 30% in both Greater China and America. Technical Apparel grew more than 40% in APAC, where we are evolving our operating model to accelerate DTC expansion. Importantly, in Q4, Arc'teryx also posted outsized growth in key opportunity areas, including footwear and hard goods and accessories. Turning to Outdoor Performance. Revenue grew 2% in Q4 to $523 million, driven by strong top and bottom line performance in our Winter Sports Equipment franchise, partially offset by an expected deceleration in Salomon footwear in the wholesale channel. DTC experienced strong growth, while wholesale declined due to the challenging comparison versus Q4 2022 mentioned above. Regionally, Greater China and APAC experienced healthy increases, partially offset by declines in the Americas and EMEA. Although wholesalers in the Americas and EMEA remain cautious with preorders as they focus on maintaining lean inventories and rely more on refresh orders. Solomon continues to enjoy strong demand at retail. The brand performed well in both owned retail and partner stores, including a very strong double-digit growth across all regions and formats. There are continued signs that Solomon footwear is generating strong brand heat in the community. Our new sports style line was ranked as the number one shoes brand on StockX last year. Although it's worth noting the strong Winter Sports Equipment performance in Q4, particularly in APAC, Greater China, and EMEA, aided by favorable weather conditions, strong bookings, and timely inventory deliveries. For the full year 2023, Outdoor Performance grew 18%, growing in all regions driven by the 146% growth in Greater China and the 44% growth in APAC. By channel, DTC led growth at 42%. Key brand highlights from 2023 include Solomon becoming an official partner for the 2026 Milano Cortina Olympic Games, including supplying 25,000 volunteers and providing Salomon Apparel, Footwear, and Accessories. The launch of Salomon's first low running super shoe, the PHANTASM 2, which sold out in 30 days. And the success of Solomon athlete, Courtney Dauwalter, the best trail runner on the planet, and the first person ever to win the Western States 100, the Hardrock 100, and the UTMB in a single season. The year 2024 starts with a splash when Solomon launches the 'Welcome Back to Earth' brand campaign during the Super Bowl. In Winter Sports Equipment, Atomic reinforced its global leadership in Alpine Skis and achieved the number two position in the global Ski Boot market. Our star athlete, Mikaela Shiffrin, had an exceptional year, breaking the 24-year-old record for most World Cup victories of all time, now with 93 wins. Moving to Ball & Racket, where revenues declined 3% to $242 million in Q4. Ball & Racket had promising growth in EMEA and Greater China. This growth wasn't enough to offset declines in its largest channel, U.S. wholesale. From a category perspective, the growth in sportswear, golf, and balls wasn't enough to offset weakness in baseball and racket sports. The U.S. sports equipment market was significantly hampered in 2023 due to elevated inventories across the industry carried forward from 2022. In Q4, we made the strategic decision to take promotional actions necessary for Ball & Racket to begin 2024 with healthier wholesale inventory levels. Wilson continues to be a market share leader in its core business of Tennis, Baseball, and Golf, and we remain confident in the brand's long-term outlook. Some of our recent key highlights over the past year include launching the first-ever 3D printed basketball, which debuted at the 2023 NBA All-Star contest, and expanding the brand's retail footprint with new flagship stores in Santa Monica, Minneapolis, Mall of America, Garden State Plaza, Galleries in Houston, as well as additional stores in China and Korea. Wilson's strength in tennis continues as 32% of competitors at the recent Australian Open are using our racquets, making us the number one racquet at the tournament. For the full year 2023, Ball & Racket grew 7%, led by double-digit gains in DTC, Greater China, and APAC. With that, I will turn it over to Andrew to discuss our company results and outlook.

Andrew Page, CFO

Thanks, James. Amer Sports continues to enjoy the financial benefits of our transformation to a brand direct operating model. Our strong and authentic brands resonate with consumers and position us well to navigate the challenging macro currents in 2023. With revenue growth above 20% for the full year and continued gross and operating margin expansion, we continue to win with our consumers. Our full year and Q4 results all came in at or above the high end of the ranges we pre-announced in our flash results in January. Q4 results decelerated from Q3, which we expected due to supply chain bottlenecks in the second half of 2022, causing a meaningful shift of sales from Q3 into Q4, creating much harder comparisons. Looking at the second half in total, our underlying sales and margin trends remained healthy. We also experienced a capital structure transformation following our IPO last month. We retired approximately $4 billion worth of shareholder loans and refinanced the remaining $1.8 billion of third-party loans to more favorable terms and extended maturity to 2031. Digging in deeper, starting with our top line. For the fourth quarter, revenue rose 10% to $1.3 billion. For the full year 2023, group revenue grew 23%. DTC continued to grow at a very strong double-digit rate led by Arc'teryx while wholesale revenues for the group fell 4%, with all three segments experiencing declines due to the comparison issues mentioned above. DTC expanded 37% in Q4 led by Technical Apparel in the Americas and Greater China. In wholesale, high inventory levels at retail in the Americas and EMEA were a drag on shipments in the Ball and Racket and Outdoor Performance segments. In Q4, regional growth was led by a 45% increase in Greater China, where all three brand segments experienced solid growth, followed by 22% growth in APAC, albeit off a small base. The Americas grew mid-single digits led by DTC strength, partially offset by declines in our wholesale channel. Turning to profitability. Adjusted gross profit margin rose 170 basis points to 52.2% in Q4 versus Q4 2022, primarily driven by our highest gross margin business, Arc'teryx, growing at a faster rate than our other franchises. This was partially offset by a heavily promotional environment in Ball & Racket, lower logistics costs, improved sourcing performance, and channel and regional mix, which also drove gross margin expansion. In Q4, strong gross profit gains were offset by SG&A deleverage. Adjusted SG&A as a percentage of revenue increased 410 basis points on slower sales growth and represented 42.6% of revenues in the quarter. This drove the 220 basis points decline in our Q4 adjusted operating profit percentage to 10.4%. The key areas of expense growth included variable selling expenses, additional headcount, variable marketing expenses, higher rent costs driven by store openings, and strategic investments in IT. Our Q4 adjusted net income declined to a loss of $41 million compared with $46 million of income in Q4 2022, driven primarily by increased interest expenses on higher variable interest compared to 2022. Adjusted diluted EPS fell to a loss of $0.11 in the fourth quarter as compared to $0.12 of income in the Q4 of 2022. For the full year 2023, we generated a $0.35 adjusted diluted loss per share compared to an adjusted $0.08 loss per share in the prior year. Excluding PPA, our fourth quarter adjusted net income would have been a loss of $31 million or an $0.08 per share loss. For the full year of 2023, adjusted net income excluding PPA would have been a loss of $92 million. Turning to the balance sheet and cash flow. As I mentioned, we improved our capital structure using the IPO proceeds to retire our EUR1.3 billion shareholder loan. We also refinanced $2 billion of debt in the form of a EUR700 million term loan, a $500 million term loan, and an $800 million senior secured notes. Following our IPO and debt restructuring, our net debt to adjusted EBITDA is down several turns to approximately 3 times. We aim to bring that down below 2 times over the next few years through both EBITDA expansion and debt pay down. Based on current interest rates, our net finance costs will run in the range of $45 million to $50 million per quarter, a meaningful improvement from 2023. Inventories finished 2023 in a healthy position, up 21% from the end of 2022, below our revenue growth of 23% for the full year. Our goal is to grow inventories at a rate that is in line with or below revenue growth. Turning to the future, we are happy to share our five-year financial algorithm, which consists of low double-digit to mid-teens annual sales growth, 300 basis points of gross margin expansion, and 30 to 70 basis points of annual adjusted operating margin expansion. The group level top line algorithm reflects mid to high-teens sustainable growth for Technical Apparel, high-single to low-double digits annual expansion for Outdoor Performance, and a mid-single-digit long-term growth rate for Ball & Racket. In the near term guidance, we are off to a solid start in 2024 and continue to enjoy healthy mix shift benefits led by our fastest growing high margin Arc'teryx business. Given the difficult comparison from the strong growth at the beginning of 2023, we expect revenue growth for the group in the range of 6% to 8% in Q1, which will be our slowest growth quarter of the year. This incorporates greater than 30% growth in Technical Apparel, flattish revenues in Outdoor Performance, and a low double-digit decline in Ball & Racket. We expect Q1 adjusted gross profit margin to be approximately 53.5%, driven primarily by mix shift benefits and an adjusted operating profit margin of 9% to 10%. Our net finance costs for the quarter will be $100 million to $110 million, and our effective tax rate will be in the range of 25% to 35%. This equates to adjusted diluted EPS in the range of a $0.01 loss to $0.02 earnings per share. Keep in mind that net finance costs for the quarter include approximately $60 million of non-recurring items associated with the early extinguishment of debt, related hedge contract exit costs, and the higher interest rate on the prior debt for the first 45 days of the quarter. This non-recurring net finance cost would negatively impact Q1 EPS by $0.08 to $0.09 per share. Going forward, we expect recurring net finance costs to be in the range of $45 million to $50 million on a quarterly basis. For the segments, we expect an adjusted operating profit of slightly above 20% for Technical Apparel, mid-single digits for Outdoor Performance, and low to mid-single digits for Ball & Racket. Turning to the full year, we expect mid-teens revenue growth for the group, which incorporates greater than 20% growth in Technical Apparel, 8% to 10% growth in Outdoor Performance, and low to mid-single digits growth in Ball & Racket. We expect more than 100 basis points of adjusted gross margin expansion to 53.5% to 54% in 2024, driven primarily by mix shift. This will be partially offset by SG&A deleverage. We expect adjusted operating margin of 10.5% to 11%. For the segments, we expect adjusted operating margins of slightly above 20% for Technical Apparel, high-single digits for Outdoor Performance, and mid-single digits for Ball & Racket. You should assume full year net financing expenses of $240 million to $250 million, or approximately $180 million to $190 million, excluding the non-recurring items that I mentioned above of $60 million in the first quarter and an effective tax rate of 25% to 35%. This equates to a range of $0.30 to $0.40 of adjusted diluted EPS based on a fully diluted share count of $510.1 million. We are assuming $250 million to $260 million of depreciation and amortization, which includes $100 million to $110 million of ROU depreciation. CapEx is expected to be approximately $300 million, an increase of $120 million over 2023 to support new store expansion, our SAP implementation, and distribution and logistics investments. With that, I'll turn it back to the operator for Q&A.

Matthew Boss, Analyst

Great. Thanks, and congrats on your Q1 out of the gate.

James Zheng, CEO

Thanks, Matt.

Matthew Boss, Analyst

So, two-part question. Maybe first, could you just elaborate on the momentum that you're seeing at the Arc'teryx brand across regions or channels just supporting the first quarter guidance of more than 30% Technical Apparel revenue growth? And then for Andrew, could you just help bridge the embedded top-line progression from 6% to 8% revenue growth in the Q1 to mid-teens growth for the full year?

Stuart Haselden, CEO of Arc'teryx

Hey, Matt. It's Stuart. So I'll speak to your first question there. So fourth quarter ended very strong for Arc’teryx. We saw results that exceeded our expectations to end the year, and we've seen that momentum carry forward into the first quarter. We're actually seeing sequential strengthening in our underlying KPIs across our direct-to-consumer business. So traffic and conversion in both our stores and our digital websites are performing very well. We're in a very strong in-stock position from an inventory standpoint. So the combination of those things is leading us to the guidance that we shared with you.

Andrew Page, CFO

Thanks, Matt. This is Andrew. As you think about the progression of our quarters, as I said in my prepared remarks, Q1 is going to be our lowest growth quarter, given the comparison issues that we talked about exiting 2022 that carried over into the first quarter of 2023. While we haven't given cadence for the full year, what I will tell you is that you could expect each of the rest of the year to be mid-teens up for the rest of the year to equate to the full year guidance of mid-teens, with Q4 being our strongest quarter of this year from a growth perspective, again, coming off of easy comparisons in 2023 for all the reasons that we talked about.

Omar Saad, Vice President of Finance and Investor Relations

Hey, Matt. It's Omar. I'll just add one thing. The comparisons get 20 points easier going from the first quarter to the fourth quarter, but also the Arc’teryx store openings. We're opening more new larger Arc’teryx stores this year than we have in any year in the past, including some key openings late in 2023 and in the first half of 2024. So well before the key winter season, which is going to drive a much bigger kind of conversion and revenue volume in the back half for that brand, which is already growing at a fast rate. Thanks.

Matthew Boss, Analyst

Great color. Best of luck.

Lorraine Hutchinson, Analyst

Thank you. Good morning. Can you talk about the drivers of the decline in outdoor margin that you're guiding to in the first quarter? And then what changes lead to the nice expansion embedded in the guidance for the year?

Andrew Page, CFO

Yeah. So when you think about the Outdoor Performance, there is meaningful investment built into the first half of this year. As you know, that business is primarily DTC driven in Greater China but outside of Greater China, it has a meaningful wholesale business. We will continue to invest in the business, especially into North America. The other phenomenon in there is Winter Sports Equipment is part of Outdoor Performance. And as you know, we previously talked about winter sports equipment having a strong fourth quarter, which is primarily weather driven—people bought early—and that's created a softer first quarter. Footwear within Outdoor Performance is performing really well. Winter Sports Equipment, which is part of Outdoor Performance, is having a softer first quarter coming off a really strong fourth quarter.

Omar Saad, Vice President of Finance and Investor Relations

Lorraine, do you have another one?

Lorraine Hutchinson, Analyst

No. Thank you.

Brooke Roach, Analyst

Good morning, and thank you for taking our question. I was hoping you could elaborate on the outlook for North America growth for both the Outdoor Performance and Ball & Racquet segments as you move throughout the year? How are you thinking about the idiosyncratic growth opportunity given the momentum of your brands and growth in footwear? What trends are you seeing with your partners as they manage through inventory and current demand levels? Thank you.

Franco Fogliato, CEO of Solomon

Hi. This is Franco. Thanks for the question. Look, we're at the beginning of accelerating North America. We see definitely some consciousness from the retailers into preorders, but we're seeing also strong in-season reorders. We've seen that in Q4 as well as we enter the year. We announced later last year that we have recruited a new leader for our Americas business, a gentleman that used to run the OCA brand in North America. We believe there are plenty of opportunities, particularly in creating this unique competitive advantage through the outdoor sneakers, as well as there is strong demand for an outsider brand in the specialty channel. So, we're excited about the opportunity.

Andrew Page, CFO

And from a Wilson perspective, involving racquet sports, again, we continue to be a market leader in almost every category that we participate. We continue to win with our trade accounts. We have obviously talked about the excess inventory in the trade accounts. Our insights suggest that you're going to see some of that trend with retailers moving through inventory in the first half of the year and that returning to a more normalized cadence in the back half of the year. The important thing to us is that we continue to be category leaders in each of the categories that we participate in. We get strong insights from our retail partners. As that channel normalizes, we think we're going to continue to be a winner there.

Omar Saad, Vice President of Finance and Investor Relations

Yeah. I would add, this is Omar. One of the things that gives us confidence early on in the year is seeing that gross margin actualization rate for the Wilson brand really pop back up again, now that our inventories are clean. Yes. The retailers aren't at the best position, but we feel we are in a really good shape in terms of how our brand is performing and the market share there. Thanks.

Kelly Crago, Analyst

Hi. Just a follow-up. I'm sorry, this is Kelly on for Paul. Thanks for taking our question. Just want to follow up on the Ball & Racquet acceleration that's applied in your full-year guidance. Is that something you see based on your order books or is this something related to some of the new innovation that you plan on putting out, particularly in the baseball category? Anything you could elaborate there? And then just, if we could just give us update on what's going on in China. I know you have very strong performance there, but the macro has been volatile. So if you could provide additional color that would be helpful.

Joe Dudy, CEO of Wilson

Yeah. Hi. This is Joe Dudy, the CEO of Wilson. I'll comment on the Wilson question first. What we're really seeing is that participation is still strong in our categories. The sell-through feedback from our retailers is positive, so it's working through the inventories. We have great product launches, especially in Tennis and Baseball, our two largest categories, especially in North America. We recently just launched the Blade tennis racket, which is our number one selling tennis racket, and the expectations have been exceeding our outlook so far. We're confident in that. The baseball market really starts in June-July, and we have new product launches there. One of the things we're doing is that we moved our bat product launches to two-year launches, and we're moving those back starting this year to one-year launches to create that newness in the marketplace. A lot of confidence there. I'd just add that we got out of the gates strong last year. We grew 14% across the board in Q1 of 2023. That's not a sustainable number, but as we get through the rest of the year, the comparisons will be easier from the ball sports perspective.

James Zheng, CEO

We see very positive growth for our business in China markets, and we believe our brands have a very good competitive advantage in China, given the foundation and the infrastructure we built. Even though the overall economy still faces challenges, the category we are sitting on is still very much on-trend. All the brands, especially Arc'teryx and Solomon, performed extremely well in 2023. We are also seeing great improvement from our business as we begin this year. So we still see very good progress for our business in the China market.

Kelly Crago, Analyst

Thank you.

Alex Straton, Analyst

Perfect. Thanks for taking the question. I wanted to focus on Technical Apparel, the full year guidance for over 20% growth. Can you just walk us through what you're assuming for DTC, China, and North America specifically? And then also what's driving that it looks like a deceleration throughout the year given Q1 is at 30%. Thanks a lot.

Stuart Haselden, CEO of Arc'teryx

Hey, Alex. It's Stuart. We're really pleased with the balanced growth that we're seeing regionally across North America and China. Both regions grew at a similar pace, both in the fourth quarter and through the initial portion of the first quarter. We're seeing just broad-based regional strength for the brand, and we're also really happy with what we're seeing in Europe and Asia outside of China. The underlying strength of the business, as I mentioned earlier, really comes from the fundamentals of our DTC business. We're seeing increases in traffic, reduction in markdown rates, and return rates. It's both within our retail stores as well as our e-commerce business. Broad base strength, and we see that connect to a healthy inventory position, stronger than in prior periods due to the supply chain challenges related to COVID going back 18 months. Overall, a healthy position. As we look forward for the full year guide versus the Q1 guide, we'll plan the business responsibly. We'll plan sales and inventory appropriately for the business. If demand exceeds these levels, we can capture higher sales levels given our inventory position.

Ike Boruchow, Analyst

Hey, guys. Good morning. Two for me, one specific to the guide and one bigger picture. Just on the guide, maybe to Stuart. Can you give us what's embedded in your guidance on door expansion this year? And then, if you're able to, can you talk about what omni-comp you're expecting for both the first quarter and the full year? And then, how are the brands positioned in China today? How do you think about them? How would it differ over the coming year?

Stuart Haselden, CEO of Arc'teryx

Hi, Ike. So I'm planning to open a net of around 30 doors in Arc'teryx this year, with more than half of those stores in North America. We're excited about the new locations we're opening, including important flagships in Europe and North America. We've just opened a 7,000 square foot flagship in Covent Garden, this past week. We'll also open flagships in Toronto and New York City as part of our projection. From an omni-comp standpoint, we've shared mid-teens overall for the full year, and we're confident with that level of growth.

James Zheng, CEO

I would add a few points regarding Arc'teryx. It is being positioned as the pinnacle in the outdoor segments. After four years of cultivation, we have made Arc'teryx the best Golden Goose brand in China, in terms of the quality of the retail environment created in the market as well as store productivity. We’re outperforming in the industry. For example, in January, we opened a 20,000 square foot flagship store in Shanghai, which within 30 days achieved sales revenue of $3.2 million. It is positioned at a premium level, comparable to luxury brands like Moncler in the China market.

Ike Boruchow, Analyst

Got it. Thank you very much.

Michael Binetti, Analyst

Hey, guys. Thanks for taking our questions. Congrats on the first quarter out of the gate here. I guess a few on—coming into the year, are there Wilson inventory issues past us at this point? And then on the cold weather, I know it's been a little unfavorable weather. Any sense from the channel of competitors that might have inventory stuck in the channel that might be cleared or any consideration you added to your gross margin expectations for the year if we do see some competitor clearing?

Andrew Page, CFO

Yeah. Thanks, Michael. This is Andrew. We feel really good about how we exited 2023 with our inventory in Wilson. To provide some context, we cleared about $90 million of inventory in Wilson that was deemed desirable to move through slower moving inventory in the second half of 2023. As we stepped into 2024, we feel good about it. You can meaningfully see the step up in realized gross profit per product sold as soon as we entered 2024, which indicates brand heat, how our retail partners appreciate us, and that moving through the promotional environment was tied to getting through December. We're moving our product at strong gross margins now. We continue to feel the excess inventory in the market with our retail partners, but we believe we are positioned well as that moves through. We've embedded in our plan that the first half of 2024 will drive towards normalization, and that you will start to see more normalized rates in the back half of 2024.

Omar Saad, Vice President of Finance and Investor Relations

And maybe Joe and Franco, you guys could give a quick summary of what you're seeing—the feedback from your retail partners and what you're hearing in the market, starting with Franco and then Joe?

Franco Fogliato, CEO of Solomon

We're seeing inventory normalizing. From a Solomon perspective, we're very happy with where we stand. Retail has been cautious on bookings for 2024, which is translating into strong replenishment business we are seeing at the start of the year, which continues into Q4.

Joe Dudy, CEO of Wilson

For Wilson, the feedback we're receiving indicates that consommé are waiting closer until they need the product. There’s no fear of it being out of stock, so they're waiting closer to when the baseball season starts or until the weather breaks for golf. We're seeing strong participation rates and expecting consumer demand to come back. Retailers in our leading categories are outperforming the competition in their sell-through rates, which shows our strength in the marketplace for Wilson.

Michael Binetti, Analyst

I'm curious, you said that bigger picture, the gross margin expansion for the year is from mix effects. How should we think about gross margin in the Arc'teryx brand as you put the offense in, and any opportunities to expand the gross margins within the brand?

Stuart Haselden, CEO of Arc'teryx

We're pleased with how our margins are performing, gross margins and operating margins. We see the opportunity for some modest expansion over the course of the year and expect to grow operating profit faster than we'll grow top line.

Jay Sole, Analyst

Andrew, I just want to ask you about working capital and can you just remind us how you expect working capital to develop this year and next year, and sort of compare it to 2022 and 2023, explaining the differences?

Andrew Page, CFO

As you think about working capital this year, you'll start to see our working capital efficiency improve, especially as it relates to 2022. We were building inventory in 2023, exiting 2022, because the supply chain was erratic. We built inventory up in 2023 and held it longer than we needed to. Moving into 2024, we'll drive efficiency, and I think by 2025, start to normalize. Our biggest working capital element is inventory, and we will keep inventory right in line with revenue growth as we move forward, which is our key performance indicator. With the refinancing, we can also retain more cash to invest in the business since finance charges are lower.

Jay Sole, Analyst

Got it. Okay. And then, are you offering any sort of free cash flow guidance or operating cash flow guidance for the year?

Andrew Page, CFO

Yeah. We haven’t given free cash flow guidance. We're early in determining where the financing will settle, and therefore, considered it too early to provide a forecast. We want to get through Q1 to stabilize our interest rates, FX hedging programs, and other factors.

Omar Saad, Vice President of Finance and Investor Relations

You saw in the guidance that even the tax rate is given as a range. We're still trying to narrow down the cash tax rate, given the various jurisdictions of the debt and interest deductibility.

John Kernan, Analyst

Excellent. Thank you. Congrats on a nice quarter. Stuart, could you talk about Arc'teryx in China? It's the biggest region for Technical Apparel in Arc'teryx. How should we think about the growth rate in China for 2024 and its long-term potential?

Stuart Haselden, CEO of Arc'teryx

Our China business has been very strong. In 2023, it was just over 40% of the total. It is our largest region by sales and profits. We enjoy slightly higher gross margins due to price advantages in China. The growth rates have been consistent between North America and China in the latter part of 2023 into the beginning of 2024, and we want to ensure balanced growth regionally. We see very strong success in the stores we operate there, which are the most productive in any region. Our strategy focuses on opening fewer but larger and more productive stores. The stores opened in North America are also productive, but China stores tend to have higher revenue per unit. We've also shared some of this during our IPO process.

John Kernan, Analyst

Excellent. Thank you.

Laurent Vasilescu, Analyst

Good morning. Thank you very much for taking my question. I wanted to ask on my one question. Andrew, in Q4, DTC was up 37% while wholesale was down 4%. Could you share how we should think about these two channels for Q1 and for the full year? And a bigger picture question on footwear. Can you share how big Solomon footwear was for 2023? Where can it go over the next few years, and what key learnings could extend from Salomon's success in footwear to Arc'teryx?

Franco Fogliato, CEO of Solomon

In Q1, in particular, we're seeing pressure in wholesale, but the DTC performance is very strong. We see that momentum continuing in Q1 as well as the strong momentum in Asia.

Stuart Haselden, CEO of Arc'teryx

As you think about DTC versus wholesale, obviously, wholesale was down for all the reasons we mentioned in Q4—such as excess inventory. We do not anticipate wholesale to continue declining significantly like that in the future. We believe wholesale will be up mid-single digits for the full year, and DTC will continue up around 30% for the year, blending that growth together.

Andrew Page, CFO

With regard to the China region, we still expect it to see a very strong growth rate. We're going to plan a number in the high 20s to low 30s, but we'll have the inventory to service it if the demand is there.

Jonathan Komp, Analyst

Hi. Hello. I wanted to follow-up on the five-year targets for Technical Apparel. The targets imply reaching well above $3 billion of revenue over the next five years. Stuart, how do you size up the potential for Arc'teryx, and what are some key drivers you’re looking for in the near term?

Stuart Haselden, CEO of Arc'teryx

We're very excited about the prospects for the brand globally. We're seeing significant potential for growth in every region. In North America, we ended the year just under 50 stores; we see potential for over 200 stores. Additionally, there's exciting store expansion opportunities in Europe and Asia, both in China and outside of China. The success of our store strategy is critical to reaching these growth objectives. We're equally optimistic about our digital business, which is about the same size as our retail business in North America. Our omnichannel strategy closely intertwines these channels, allowing us to capture and fulfill demand effectively. Lastly, product innovation is key to our success. For example, we'll launch three new footwear models this week, showcasing our commitment to innovation. We're confident that channel expansion, product innovation, and investments in brand and community will drive success.

Omar Saad, Vice President of Finance and Investor Relations

Operator, I think we have time for one more.

Yiren Lu, Analyst

Yes. Thank you for taking my question. I just have a long-term question for Arc’teryx. As you mentioned, the Arc’teryx expansion and DTC growth in North America is crucial for us. I'm happy to hear about the new flagship store openings. What has been changing in our DTC expansion? What are our unique strengths that differentiate us from our competitors?

Stuart Haselden, CEO of Arc'teryx

North America offers an exciting DTC story as we reposition the brand from primarily wholesale to direct-to-consumer over the last three years. We're seeing strong trends in Canada and the United States, with Canada being our home market where we are further ahead. We're planning to open flagship stores in Toronto and New York City, which are both significant for us. Overall, we're seeing exciting momentum across all regions. How are we winning market share? We view Arc’teryx as the pinnacle competitor in the outdoor space. We have the best products and highest level of innovation and quality, which separate our products based on the merits of their performance. We complement this with what we believe is a truly vertical brand in the outdoor space. We build community where we open stores, engaging customers uniquely. For example, our 'rebirth' strategy aims to not only sell a jacket but also help maintain it, aiding with cleaning and repairs, ensuring it remains in service through our trade-in program. This distinct approach contributes to our success.

Yiren Lu, Analyst

Great. Great.

Omar Saad, Vice President of Finance and Investor Relations

Thanks everyone for joining. We'll see you after next quarter.

Operator, Operator

This concludes today's conference call. Thank you for your participation, and you may now disconnect.