Allbirds, Inc. Q3 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Allbirds Third Quarter 2021 Conference Call. All participants will be placed in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session, at which time instructions will follow. Now, I'd like to turn the call over to Kyle Khasigian, Head of Strategic Finance and Investor Relations at Allbirds. You may begin.

Good afternoon, everyone, and thank you for joining us. With me on the call today are Joey Zwillinger and Tim Brown, Allbirds’ Co-Founders and Co-CEOs; and Mike Bufano, Allbirds’ Chief Financial Officer. Before we start, I would like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about our Q4 and fiscal year financial outlook, as well as our preliminary outlook for 2022 and other matters referenced in our earnings release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please also note that these forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise any statements to reflect changes that occur after this call. Please refer to our SEC filings as well as our earnings release and Form 8-K filed today for a more detailed description of the risk factors that may affect our results. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. These non-GAAP items should be used in addition to, and not as a substitute for any GAAP results; you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures in today's earnings release. Now I'll turn the call over to Joey to begin the formal remarks.

Thanks, Kyle. Thank you all for joining Allbirds’ first earnings call. We are thrilled to have this platform to help us further advance our mission and discuss our plans for durable and profitable growth over the coming decades. I'd also like to take a moment to express our gratitude to the Allbirds team, as well as members of the finance community and our investors who helped us shape a successful IPO. And we're of course, pleased to speak with you on the heels of a strong quarter. One that marked continued reacceleration of our business as we emerged from the idiosyncrasies of COVID. When Tim and I started this business in 2015, we held the view that climate change was our most formidable and existential crisis. And as a result, we believe that consumers would eventually connect their purchase decisions with their values on the environment. Yet, most in the footwear and apparel industry have continued to rely on synthetics. Within that tension, we saw opportunity, but we didn't want to make sustainable products for the sake of being good for the planet. We wanted to make incredible products because they're sustainable. We put this purpose at the heart of our business and link it to everything we do, but most notably our R&D investments and our distribution model. These strategic choices have helped to create important and structural advantages that we believe will allow us to outmaneuver competitors well into the future. When we innovate, we harness some of nature's most abundant and high-quality materials to make products that feel different and perform better than synthetics and leathers that the industry has historically relied on. We then connect this product engine to a vertical distribution model that allows us to reach consumers effectively while shrinking go-to-market timelines and enabling us to deliver fantastic value and a great shopping experience to consumers, all while preserving our advantageous gross margins. Since launching the business in 2016, these strategic choices have enabled a strong and differentiated foundation. We have served over four million customers since we sold our first shoe in 2016, and we have maintained a Net Promoter Score greater than 80 in each quarter since Q1 2019. In fact, we logged the global cross-channel NPS of 86 in the first half of 2021. And that wonderful customer experience has led to strong repeat engagement with customer cohorts of a year or more coming back for a second purchase at a rate of 43%. This repeat purchase rate is notable for both the consistency of the high repeat rate, and because it comes from the narrow assortment we have had to-date. As we expand our product offering, we're excited by the opportunity to utilize this expanded assortment, coupled with our technology and data advantage, to grow repeat purchases. We are also energized by how many people have yet to learn about our brand. Our aided brand awareness is low, just 11% in the U.S. as of Q1 2021, with revenues in the trailing 12 months of $260 million. We have a tremendous runway in the global footwear and apparel industry, which is estimated as of 2020 at $366 billion in $1.5 trillion respectively. And we are executing this at top of a brand platform built around the most important consumer trend of this generation, climate change. Now we simply need to reach more customers because of our disciplined approach and product craftsmanship; we have consistently achieved contribution profit in excess of CAC within the initial month of purchase for each annual cohort since inception. And given technology advances over the past decade, our vertical distribution model coupled with a digital heritage and a growing fleet of brick-and-mortar stores is the right way to do this. We've done this successfully against the backdrop of an industry that has principally relied on wholesale for the past 50-plus years. We opened our first store in 2017, and despite the slowdown of this channel during the pandemic, we now operate a fleet of 35 stores globally, with 23 in the U.S. Each store has strong standalone four-wall economics, but we have come to learn that it is our omni-channel repeat customers who are the most valuable to us. These customers spend 1.5 times when compared to digital-only repeat customers, giving us more reason to continue our store expansion. Now zooming out, over these past five years, we haven't cut corners and have been focused on building a strong foundation for the future. While we always envisioned building a global lifestyle brand, we opted to make shoes first. And now that we have gained consumers' trust, we believe they will now embrace our material innovations applied to apparel categories. We have been almost 100% vertical in our sales model, and we made early investments in our global reach, deploying technology, establishing supply chains, and placing teams on the ground at each of our core international markets. This disciplined approach, coupled with the authenticity of our brand ethos, is how we have built the foundation that we expect to rely upon to grow at a healthy clip for decades to come, which brings me to our growth algorithm. We're driving the top line primarily through three areas: one, our growing store portfolio; two, international expansion; and three, product innovation, which fuels new customer growth and increases the lifetime value of existing customers. I'll briefly go into each of these. On the first growth pillar, our real estate portfolio is highly productive and is an efficient means with which to acquire customers. Our stores generate strong returns on invested capital and have attractive payback periods. When we open new stores, it drives increased brand awareness and provides a halo effect on the overall business. Thus, we improve the efficacy of our marketing spend. These impacts, along with lower return rates and more efficient transportation, mean that growth in physical retail also drives margin expansion. We have a strong pipeline of new stores ahead, and ultimately we see white space for hundreds of stores over time. On the international expansion, it's important to note that we planted flags early in key markets across Europe and Asia. With that foundation established and relatively low sales penetration in these markets, we have line of sight to attractive growth as a result, particularly in the digital channel. And as is true, as we shift the channel mix, as we grow international, we expect to expand gross margins due to our pricing architecture and an efficient logistics network. Underpinning the opportunity to drive growth in our retail and international businesses is an incredible product pipeline, led by footwear with a growing and important apparel offering. Our robust R&D engine means that we're continually innovating. In our short history, we've proven that our material and innovation platform creates a powerful flywheel, enabling us to build winning franchises while empowering us to expand into new categories. More on this from Tim shortly. We are ideally positioned to execute against our strategic roadmap because of our amazing Allbirds flock. We are fortunate to have world-class teams who are energized by our mission and the potential ahead. The team’s attention is now focused on achieving our medium-term targets. These include a revenue growth of 20% to 30% annually, gross margin of over 60%, and adjusted EBITDA margin in the mid to high teens, rising to north of 20% over the long-term. Simultaneously, we intend to reduce our CO2 emissions by 95% by 2030, helping us to drive towards our company mission while unlocking profitable growth. We’re pleased with our year-to-date performance in 2021 and feel great about our positioning as we wrap up the year and look ahead to 2022 and beyond. Different governments have responded to the pandemic with varying techniques, ranging from severe isolation and lockdowns to more permissive approaches. New variants are bound to emerge and government response will continue to evolve, but we hope and believe that the worst is behind us. As the world emerges from an environment marked by the most depressed retail traffic we’ve seen in decades, we believe the macro recovery that’s underway will buoy our prospects as we flex our product innovation engine, see recovery in our existing fleet of stores, and unlock our new store pipeline. And briefly on Q3 results, which Mike will walk through in more detail, I’ll note that this quarter was headlined by 33% top-line growth year-over-year, reflecting solid execution by our teams and robust global demand for the Allbirds brand. Revenue was strong across channels and geographies, with particular strength in the U.S. retail as consumers returned to in-store shopping. We opened four new stores in the U.S. in Q3 and another two in the fourth quarter, bringing us to 35 locations globally, which is where we will end the year. On the international front, we grew sales by 10% despite a choppier recovery from COVID across some of our core regions outside the U.S. Our team has navigated a difficult supply chain environment well, and we feel well-positioned to capture demand for a holiday season that is shaping up to be quite strong, particularly in the U.S. With that, let me turn it over to Tim to talk to you about product innovation and what lies ahead for the brand.

Thanks, Joey, and hello everyone. It feels great to be holding our first public earnings call and welcoming our new shareholders. Allbirds started with an initial insight born out of a frustration with overly logoed, overly synthetic products and a conviction that there was a better way. We launched the Wool Runner in March of 2016 to prove that comfort, design, and sustainability aren’t mutually exclusive, and that fashion shouldn’t just feel good; it should also do good. Our blueprint from day one has been to build franchises. We start with one great product and increasingly bring energy and excitement to the mixture of colors, materials, and partnerships. The Wool Runner and all of our product franchises since start with a deep understanding of our customer. We then leverage our internal capability in natural and sustainable material R&D to create differentiated product experiences, whether they be the amazing soft and cozy comfort in our Wool products or the light and breezy feel from our Tree products. Each utilizes a unique minimalist design philosophy that has created a distinct family of products that represent a new language for sustainable design that highlights beautiful natural materials, rather than flashing logos—something uniquely Allbirds and recognizable on the street when you see someone wearing our shoes. The combination of our distribution model and our product engine has allowed us to build a real structural advantage in footwear, not only establishing ourselves as a leader in sustainability but also gaining authority for both comfort and performance. It’s exceptionally difficult to surpass the threshold in footwear and achieve scale. But once you do that, the customer trusts you to enter other categories. And we’ve seen that innovators come to us as a partner of choice because we do incredible things with our customers. We’re now ideally positioned to be able to connect new apparel offerings to our footwear franchises. Overall, apparel is a small percentage of the business today, just under 10%, but that’s intentional. Our approach is to build the business methodically and carefully to increase basket size and help drive repeat purchasing. We saw a great response in the quarter to our product innovation with strong traction from the Wool Piper Mid, Sugar Rover, and Perform Apparel launch in August, an exciting new collection to complement our performance footwear offering. We continue to be very excited about a growing community marketing program called the Allgood Collective or AGC. Since the beginning, we’ve understood that what’s good for our community is good for our business. This strategy puts local ambassadors tied to our growing retail footprint at the center of our product creation process while simultaneously driving brand engagement and awareness. We now have a series of weekly AGC run clubs in operation in Los Angeles, Atlanta, Seattle, San Francisco, London, Tokyo, and Oakland, alongside supporting events showcasing our growing roster of performance products. We have attracted a growing number of local influencers and community leaders who are using the Allbirds store network to host events. The AGC is also an emerging catalyst for new product testing, product launches, and brand content like our recent Trail shoe launch that featured a series of AGC athletes. Our product partnerships remain a key focus. Product-specific partnerships with Bráulio Amado and our continuing work with Adidas and JUST, Staple, are examples of our partners bringing incredible energy and amplification to existing franchises and our sustainable thought leadership. In Q4, we were also excited to release a Marshawn Lynch get-school content drop that underscored the potential of sustainability and climate change to be a powerful connector to new audiences. Advertising is also an important way that we amplify all of the great organic reach that our product and brand marketing efforts create for the brand. As we have evolved over the past few years, we’ve made a concerted effort to diversify our media mix and now feel like we have an effective and healthy balance through our paid marketing funnel. One important outcome of that effort to diversify our spend is that recent privacy changes and resulting increases in customer impressions and social media channels have had a limited impact on our business. In the end, we know that people don’t buy sustainable products; they buy great products. To us, the very best products are inherently sustainable. We have spent the last five years building a product platform that marries product innovation through natural materials and a purpose-driven brand that meets consumers where they are headed, not where they are. On deck in the next 24 to 36 months, we have the most exciting product pipeline in the history of the company. We can look forward to multiple new lifestyle and performance product launches and new material platforms as we see the benefit of historical investments in team and R&D and momentum from our increasing prominence in the footwear and apparel category as a leading partner for a global network of sustainable material innovators. Now over to Mike to discuss Q3 financials and our full year outlook.

Thanks, Tim, and hello everyone. I’ll start by echoing the sentiment you heard from Joey and Tim about starting our life as a public company. We’re thrilled to be here. We appreciate your interest in Allbirds, and we’re looking forward to spending more time with our analysts and shareholders going forward. I’ll also echo what Joey said earlier. We’re pleased to report strong Q3 results across the P&L highlighted by revenue growth of 33%, above our medium-term annual target of 20% to 30%. Continued gross margin expansion of 120 basis points and continued leverage in the marketing line of the P&L. I’ll take a few minutes to walk you through the P&L and explain the drivers of our Q3 performance. Net revenue increased 33% year-over-year to $63 million. As Joey and Tim mentioned, this growth was primarily driven by strong U.S. performance and from new product introductions. Breaking down our net revenue growth a bit further, orders were the main driver of the 33% increase. In addition, we saw a strong 13% increase in average order value. Looking at net revenue by geography, our net revenue in the U.S. increased by 42% reflecting strength in both physical retail and digital. We continue to see a notable uptick in the retail channel as consumers continue to return to stores. Net revenue in our international markets grew by 10%. In some regions, particularly in China, Japan, and New Zealand, our momentum was slowed somewhat by the COVID resurgence. Finally, to close out our commentary on Q3 2021 net revenue growth, I'd like to point out that the two-year increase in net revenue was 40% when comparing to Q3 2019. I share this because we believe it's a helpful data point for investors as we begin to look beyond COVID. Turning to gross profit, we delivered Q3 gross margins of 54.1%. That's an improvement of 120 basis points from Q3 2020. This improvement reflects our ability to make steady progress towards our medium-term target of 60% or greater gross margin. The biggest drivers of gross margin expansion in Q3 were improvements in product costs and a favorable year-over-year mix of higher gross margin products, including our newly launched performance apparel. Those positives were partially offset by higher warehouse costs and pressure on logistics costs more broadly. I'll pause here for just a second and state the obvious; we are mindful of the macro headwinds around supply chain and logistics costs, especially with the latest COVID variant news. Of course, this is a fluid situation and like everyone in the industry, we're monitoring closely as we have been since the pandemic started. In that context, looking at gross margin for the balance of 2021, I will share that we are experiencing higher than normal holiday season outbound shipping surcharges in the current quarter. However, even with some headwinds, we still expect to achieve full-year gross margin year-over-year improvement of approximately 150 to 200 basis points in 2021. That translates to an expected full-year 2021 gross margin of 52.9% to 53.4%. As we march towards 60% plus gross margins, we are focused on the annual gross margin progress we've been making and believe we will continue to make. Indeed, we are proud of the progress we have made since 2018 when our gross margin was 46.9%. At the mid-point, we would end 2021 at an improvement of over 600 basis points from 2018 to 2021. Moving down to P&L below gross margin, Q3 2021 SG&A totaled $33 million and increased by 64% year-over-year. Let me unpack SG&A a bit for you. First, it's important to note that SG&A includes the operating costs of our stores, such as labor and occupancy, as well as pre-opening expenses. Indeed, in Q3 2021, the increase in store expenses was the biggest driver of the increase in our total SG&A. Compared to Q3 2020, we had 11 more stores in Q3 2021, an increase in the number of stores of over 50%. In Q3 2021 alone, we expanded our store portfolio by four new stores in Manhattan on the Upper West Side, in LA, in Century City, and the Bay Area in Palo Alto, and our first store in Atlanta. One last note on store expenses is that we had approximately $300,000 of pre-opening costs in Q3 2021. Closing out SG&A, another significant driver of the year-over-year increase was approximately $2 million of incremental costs we incurred in preparing to be a public company. We expect to see another $3 million in public company costs in Q4 2021, bringing the full year 2021 total to an estimated $5 million. Looking now at marketing spend, we achieved more than 500 basis points of leverage relative to Q3 2020 as our teams focus on scaling marketing efficiency while maintaining strong sales growth. Bringing all that together, adjusted EBITDA in the third quarter of 2021 was negative $6.3 million compared to negative $3.8 million in the third quarter of 2020. When you factor out the $2 million public company costs in the quarter, adjusted EBITDA decreased by only about $0.5 million year-over-year. I'll finish up my commentary on our Q3 financials with a quick look at the balance sheet and cash flow. We ended the quarter with $65 million of cash and cash equivalents and $40 million of availability under our revolving credit facility. Capital expenditures in the quarter totaled $6.2 million, primarily driven by new store openings. As you can see on the balance sheet, the big mover this quarter was inventory, which totaled $99 million, up 55% from Q3 last year. Given the macro supply chain and logistics environment, we felt it was prudent to take advantage of our strong balance sheet and increase our inventory positions. We were well inventoried in Q3 and continue to be so in Q4 and into the first half of 2022. I think this is a good place to touch on supply chain broadly before moving on to guidance. From a production perspective, it's important to know that Vietnam accounts for only about 50% of our manufacturing. With more of our production in the north and the south, thus far, we have not experienced any government-mandated manufacturing shutdowns in Vietnam. Through careful planning, secondary sourcing, and regional diversification, our teams have navigated the challenging environment, positioning us to meet demand throughout the holiday season and over the coming quarters. Huge kudos to our supply chain team. I'll wrap up my remarks by sharing our outlook going forward. For the full year 2021, we expect net revenue to be between $270 million and $272 million, which equates to an increase of 23% to 24% versus the full year 2020. On a two-year basis, that's a 39% to 40% increase when compared to the full year 2019. Looking at the bottom line, we expect full year 2021 adjusted EBITDA of negative $15 million to negative $17 million, including an estimated $5 million in public company costs. Backing out the public company costs, full year 2021 adjusted EBITDA would be negative $10 to negative $12 million. On an apples-to-apples basis, that would be an improvement of 22% to 35% when compared to full year 2020's adjusted EBITDA of negative $15.4 million. Looking around the corner to 2022, we'll be providing detailed guidance on our Q4 earnings call in February 2022. As a reminder, our seasonality skews towards Q4 and the gifting season. So on an ongoing basis, we plan to provide detailed annual guidance on the Q4 call each year. That being said, with this call occurring off-cycle due to the IPO, we did want to share with investors and analysts our preliminary thoughts on the top line next year. In short, we feel we have great momentum in our business and we are confident that in 2022, we can grow net revenue at the high end of our medium-term target of 20% to 30%. Our preliminary 2022 net revenue expectation is approximately $350 million, which would represent a 60% two-year growth rate, a significant acceleration over the two-year growth rate in 2021. In closing, I'd just like to share that we continue to feel confident about how the business is positioned and our ability to capitalize on the opportunities ahead of us. Through careful investments, we have built a solid infrastructure across people, supply chain, and technology that we believe positions us to profitably grow the business and create shareholder value. With that, I'll turn the call back to the operator to start Q&A.

Thank you. Good afternoon. You spoke about the strength in the quarter driven by physical retail. Can you talk a little bit about the performance of the digital channel and how you expect this to play out over the holiday and then into 2022?

Yeah. Lorraine, thanks. Yeah, the recovery in the U.S. has been particularly strong and the results we noted. But digital also has been strong as we've kind of noted in the remarks. The way that these inter-operate is where the power is, and we are seeing that in play and we're seeing some really good pick up on digital. We see that continuing through into the early parts of Q4 here, including this past weekend. So very optimistic, and that's both with existing customers and new customer acquisition. So we feel quite good about how that's performing.

Okay, great. Thank you so much. I'm wondering, considering everything that's going on in supply chain and looking at your inventory levels, do you think it's perhaps even prudent to carry more inventory through the year next year, for example, just to sort of guard against some of the things that we're seeing in supply chain? I'm just interested to hear your inventory management philosophy? And any more specific color or comments you could provide about the performance apparel launch and the consumer reception here in the quarter would be helpful? Thank you so much.

Good to hear your voice. I'll start on the inventory and supply chain piece, and I'll turn it over to Tim on the performance apparel piece. Well, look, it's certainly something we'll continue to monitor really closely and consider about how much inventory to hold through 2022. Again, our supply chain team, we think has done a fabulous job helping us navigate a lot of these recent challenges. I'd say if we were going to— we were probably really focused on our core products, core colors, and core sizes—the stuff that we know has a nice long tail and long life on it. But it's certainly something we're going to monitor pretty closely. And now after the transaction, we are in a strong position with our balance sheet; we're in a great place to be able to use that to our advantage to continue to meet demand and grow the business.

Hi Kimberly, the strong outperformance of our apparel launch has been received really well. It's another big step for us into the performance space. We're still only a year and a half into that journey. We have a couple of products, we launched the Dashers a year and a half ago, and it's going really, really well. In my opinion, the trial shoe is possibly the best product we've done and the most technically advanced. We were able to further our strategy of connecting these footwear franchises to our apparel offering. I think you see that in the performance apparel. Again, it's still footwear that’s the focus of the majority of our innovation efforts, but we've applied our material innovation in performance apparel, doing something that, quite frankly, the rest of the category is not doing in natural materials. So we see the product as really differentiated, but again, we'll end the year with apparel being something like inside of the business, and we're going to build that very methodically and slowly with a strategy to increase repeat purchase rates and basket size and do that step-by-step. But we're really, really pleased by the initial launch and how it's been received.

Great, thanks and congrats on your first quarter out of the gate.

Thanks, Matt.

So on the top line, Joey, could you speak to your product pipeline, maybe what you're most excited about looking forward? And then Mike, near-term, you delivered 40% growth in the third quarter relative to 2019 and guidance of the midpoint, I think, embeds this moderation to 34% in the fourth quarter. Maybe could you just speak to business trends that you're seeing into the holiday relative to some of the assumptions that are embedded in your near-term guide?

You must start with that.

Joey, you start talking about products and I'll talk about the two.

Sure. So, Hey Matt. So yeah, the product pipeline. I think you've heard us share previously that, and Tim mentioned it already today. The next two years are the most exciting aspect of the product pipeline that we've ever created as a company. The innovations that we're doing on the material side take a long time. As we're working those through the innovation cycle, we can't get that in place in the front part of our go-to-market product development cycle. Well, now a lot of those innovations are coming through and we can now use those and harvest that and turn them into fantastic products. As Tim mentioned with a big focus on footwear, and then also coupling that with great material innovation that we think translates into apparel. How we do that is we think about the use occasions, focusing significantly on balancing lifestyle and performance and having a nice offering that balances across those types of uses. Also, the cadence is now sharper for us. What we've seen throughout this year, particularly in the past in Q3, but also in the early parts of Q4, is that when we have a great product cadence, and it doesn’t need to be a brand new innovation, small things like the fluff collection that we introduced recently have resonated with this—they speak to the brand really well. It represents great cozy comfort, right for the moment. When we can do things like that, even if they're small, it engages our customer base significantly and drives really attractive engagement and lift into our existing customer lifetime value. So we see a lot of that in the future. I think we’ve grown a lot of discipline in our go-to-market, and as you can see from what we've done in this past quarter, we’ve buffered some lead times to make sure we can deliver through what is a challenging supply chain environment. So it's not just the innovation and design side; it's also about getting these products to customers at the right time and in the right place, which is always the trick in our business.

Right, thanks, Joey. And thanks for the question on the two-year, Matt. I mean, in a business of our size, I think there's always going to be a little bit of noise when you look at that two-year. It lands roughly within the range. I actually step back and I look at it for the full-year of 2020; the two-year will be 39% to 40%. We feel really good about that growth, especially with a lot of the COVID volatility, particularly related to international. Approximately $350 million for 2022 would represent an acceleration over the two-year growth rate in 2021. So all just to say, we’ve given that 20% to 30% medium-term revenue target range; we are focused on hitting that year-over-year on delivering the medium and long-term goals. We look at the quarter and certainly want to try to deliver consistently, but we're really focused on that annual piece.

Good afternoon, and congrats on your first report here. Mike, I was hoping you could give us a bit more color on how you're thinking about gross margin for Q4. The annual guide you gave presents a fairly wide range for Q4 specifically. So maybe just talk about the factors that might drive you towards the upper end there versus the lower end based on what you're seeing today. And similar question, as we think about 2022, I think some of the freight pressures may be intensifying in the early part of the year, but just any update there and the various levers that you're using to offset? Thank you.

Yeah, thanks. Thanks for the question, Mark. So on Q4 gross margin, the reality is that it's our highest-volume quarter of the year. Folks that look at the seasonality that businesses we shared in the roadshow and in the S-1, I think the range may not be quite as wide. If you look at it on a full-year basis, because Q4 does have the bulk of the volume in there. The factors that play in are some of the stuff that I mentioned on the call. We're feeling warehousing pressure, we're feeling some outbound shipping pressures. There’s a host of factors that are moving along there. On your point about what we can do to offset it, we actually took one step in Q3 where we took a modest price increase on our core items, moving from $95 to $98. That was very well received from a customer perspective; we didn't really see any drop off in demand when we did that. So that's one step we took to mitigate some of these costs and that obviously will carry over into 2022 as well for us. We're not going to get specifically into 2022 gross margin guidance right now, and the factors—you're right, it's a pretty volatile environment. We're monitoring it very closely, but we will keep updating analysts and investors when we get that detailed guidance in Q4 and in the Q4 call.

Hey, just a quick question for me essentially on the pricing we just mentioned, Mike. I think the trail runners are sort of at the higher end of your pricing spectrum. And I think Tim called it out a little bit in terms of his excitement around it. Can you just talk about the success at these higher price points that you're seeing? And then the second question is, can you talk a little bit more about the new store openings that you've done and how they've opened versus your plan and what you're seeing there?

Yeah, I think these are both good questions. Bob, I'm going to turn it over to him to answer that.

Yeah, sure. Thanks Bob. We have historically seen that when we introduced products with a technical edge to it, customers' willingness to pay goes up significantly. We've seen this before on a material basis. We've also seen it when we weatherproof products. Our middle line is part of the Wool Runner franchise, and we added a weatherized treatment to it for wintertime; it's a fantastic producer for us, particularly in the colder weather months. And people want to pay more for it. So that's one aspect. The Dashers are another proof point for us and the trail further extends this. We're really pleased with the response. Also, as Mike just mentioned, when we moved from $95 to $98 on some of our core products, there was really no perceivable volume impact. We know we can continue to do this. More importantly, back to the previous question, we have a lot of exciting newness coming in the next two years, and more so than you'd consider for a mature company. So meeting a larger percentage of the sales that will contribute for the next couple of years is going to come from products that don't exist today that we don't sell today, thus allowing us to cement our premium brand and premium price position with consumers. We expect this to go really well based on what we've seen so far. And new stores versus plans that said this year?

Yes, how the new stores have been performing so far?

Really positive! We've obviously recalibrated expectations. We're kind of in this messy middle zone of COVID, where we are neither in shelter in place nor completely emerged from COVID. We’ve recalibrated to take a conservative approach when we underwrite our stores and the new leases, and what's happening is we're getting really attractive lease terms given that we're regarded as a traffic driver to multi-property owners. We're getting great terms and still underwriting conservatively for sales calls on these leases; we're outperforming them significantly, which is really encouraging. I say this in particular because some news on physical retail traffic is that it's still not returning in a way people have hoped. As travel bans lifted and the U.S. border opened up in early November, we expected traffic recovery, particularly in key metro areas, and we haven't seen as much of that. Despite all that, the stores are performing fantastically, and we’re really encouraged by that. This was a big driver for some of the growth we saw in this past quarter, and you’d expect it to continue into Q4.

Great. Thank you. Good afternoon. Can you hear me okay?

Yes, we can. Hi, Erinn.

Great. Hey, nice to hear from you all. Two questions for me: international in Q3, some part of Asia was a little bit weaker, but talk about Europe. And then into the fourth quarter, are you seeing any change in trend with the new variant, particularly in the European market? And then if I can ask one follow-up to Bob: any price increases planned in your 2022 preliminary guide of $350 million? Thanks so much.

So Erinn, we definitely heard the second question. I think I picked up on the first question. Let me attempt just to say it back to you to make sure I followed it. I think you're asking, 'The trend we saw international in Q3 into Q4. Are we seeing any impact from the latest COVID variants?' Was that the first question?

You got it? I apologize for my receptivity, yes.

The short answer is we felt, as I said on the call, a little bit of choppiness in international because of COVID in Q3. We haven't noted anything right now in the business in the last week or two that is different from what we were feeling in Q3. Overall, we feel pretty good about the momentum, especially when you look at the two-year stats on the international side of the business. We're not overly concerned right now; we're monitoring it very closely. As Joey said, we’re in this middle point of COVID, and it's even a bit different in other parts of the world. On the second question, I’m eager to answer which is: are there any additional price increases built into the $350 million estimated in 2022 net revenue? The short answer is no; no move above the $98. But some of what Joey was talking about—new product launches and how we've been able to take more price on these more technical products—some of that will continue into 2022 with some of the new product launches. You'll see that come as we launch the items, and that's factored into how we're thinking about the overall revenue growth for next year.

Hey guys, thanks very much for taking the question and congrats on the IPO. Two quick ones for me, I guess. First, some other shoemakers are complaining that they're going to miss some of the key running selling season because their core products are getting delayed that would normally drop in January and February. I guess, are you seeing some of those delays and does that factor into the guidance? And then second, it seems like you guys did a great job clearing out some of the dead stock shoes you had during Black Friday, Cyber Monday sales. I guess, any sense on how clean inventory is and how those promotions went? Thank you.

Yes, thanks, Ed. Appreciate the questions. The good news on your first question is we just don't see any issues with the product drop cadence. We've had foresight early on this year to really buffer all lead times; that is why we noted a big increase in inventory in Q3. That's not just for Q4 inventory; that's also for stuff happening in H1 2022. We feel like we're in a fantastic situation, and everything that we have planned for the roadmap for the first half of next year, and frankly, into the second, we feel really good about, and that positions us very strongly. So no issues to report on there and no complaints, so we're still good there. And then on the second question, yes, I'll take the opportunity just to talk about this past weekend. We obviously don't have everything in quite yet, given the recency of it, but it was a really, really good holiday shopping season for us in this first part, in the Black Friday, Cyber Monday. We've always had a very premium brand attitude around pricing. We also, because of the vertical retail model that we have in terms of distribution, we control how we show up. There's no leakage in price. And so we really have the opportunity to show up in a premium way every time we do something. We know as we grow and expand the assortment, we need to have an escape valve for our designers to take risks and innovate and push the boundaries because our product is what will win in the long run. We want our team and our product team to take risks and give them an outlet to sell slow-moving inventory to consumers in an attractive model. That’s also mindful of margins. Previously, we built that muscle with an outlet store in the Bay Area. That's one aspect of how we reach a different set of consumers. In this case, we were really surgical looking at inventory and slow-moving inventory, where we have odds and ends on sizes. We put those on the digital offering for Cyber Monday, and the response from consumers with relatively shallow discounts was quite exceptional. We’re encouraged to tone this muscle as we go forward, which will be important as we start to take risks and broaden the assortment.

Hi, good afternoon. First, I have to let my son know he is happy. You brought back Small Birds, so thank you for that.

Yes, that's good to hear.

Exactly. I loaded up, so I guess a question on marketing: you got a lot of leverage in the quarter on marketing. I mean, how are you thinking about leaning into marketing during the holiday season? Is that something where we could see meaningful leverage again? And then secondarily, on the performance apparel launch? I know you've had it for only like three months, but are you finding that to be a good kind of customer acquisition tool, bringing new customers into the brand? Or is that really at this point kind of further monetizing and getting more share of closet from your current customer base?

We’ll do a three-person view to answer it. Sharon, I’ll start on one comment on the marketing, then turn it to Joey to talk about the holiday peak. Then I'll share a little bit about the consumer behavior that we started to see and how it shows up in a number on the performance apparel. And then I want to talk a little more about the target customer there. So on the first part on marketing leverage, just remember part of what’s driving that is a percent of sales and what we saw in Q3 and will continue into Q4 is that we have more stores on a year-over-year basis. We have 10 more stores in Q3 this year than we did in Q3 last year. We’ve opened four more stores in Q4 thus far, we’ll end this year with 35 stores; we ended 2020 with 22 stores. So a significant increase in the number of stores—a great vehicle for acquiring new customers with no marketing dollars kind of going against it. That's sort of the macro I’d say on the leverage we’re seeing with marketing as a percent of sales. Then there is a second part of that question, and I’ll let Joey answer that which was about how we’re thinking about marketing spend, maybe more on the digital side, Joey in Q4.

Yes, it’s a bit broader than digital to give—Mike, I would just point to one of the comments Tim made earlier in the call. We've taken a really methodical approach to diversifying the media mix, and we're trying to balance the right portion of spend with the right portion of the funnel, meaning are we generating awareness? Are we generating consideration for purchase or are we focused on re-engagement? We’ve tried to balance particularly that upper edge of the funnel and diversify the spend. Part of the reason we're able to do that and understand what's happening within our media mix, and as that relates to output from a sales perspective, is because of the data orientation of the company. We take every dollar that we spend and analyze it in multiple ways. Because we have every transaction from the consumer to our company, we can employ a fairly sophisticated multi-touch attribution model. That helps us inform where to spend the dollars—which ranges from offline spend like TV on a linear broadcast basis, to highly trackable bottom of funnel items on search and social. We feel we're in a good place; we think that leverage will continue, and we aim to have effective return on ad spend throughout the year. We hope that continues.

Great, thanks, Joey. I'll just touch on one piece briefly on performance apparel and then turn it over to Tim. I mentioned on the call that we saw a 13% increase in average order value in Q3, partly driven by apparel broadly—not just performance apparel—but we are seeing larger order sizes, whether it’s because people are relaunched and picking up items on shirts or the performance apparel itself. That’s one way it shows up in the metrics in the quarter. And that type of behavior, while apparel remains a small percent of the mix overall, is part of what we've considered when thinking about 2022 guidance.

Sure. I mean, simply put, when you make a pair of shoes, they will trust you to make the apparel that goes with it, and connecting our performance offering to our performance apparel is the core of our strategy. We’re also able to leverage material platforms that have taken a long time to create in Wool and Tree, applying it effectively to apparel products that we view as very differentiated. Again, one of the founding principles of the brand is that we’re in the early stages of a transformational shift from synthetics—cheap synthetics and plastics from oil to natural materials. Allbirds was founded on the idea that we can do this well and differently and better than the competition. While footwear should remain at the core of our innovation efforts, we also view apparel as a critical asset in our journey to fully realize Allbirds as a lifestyle brand.

Excellent. Thanks for taking my question, guys, and congrats on the IPO and a strong core out of the gate. Just on the confidence in the high end of the revenue targets, those medium-term targets of 20% to 30% next year—it’s great to hear. Any detail on how we should think about channel mix, geography, and even at a category level on getting to that 30% type growth next year?

Yes. I’d say the things you’ve seen drive over 30% the last couple of quarters are expected to continue into 2022. For us, when we think about the mega-drivers, we know that retail recovery in the U.S., both with existing stores and the opening of new stores, is a huge driver. The white space we see internationally, with most of those markets not having a clean non-COVID year, presents a significant opportunity. Additionally, a lot of what we’ve discussed regarding new product launches, though I believe it’s all working now will continue to drive momentum in 2022. This gives us real confidence, and we really know that the strategies are producing positive outcomes.

Got it. My follow-up, just maybe on the medium-term margin targets for adjusted EBITDA margins reaching mid to high teens—what's the biggest driver of gross margin expansion as we go forward?

Yes. The biggest drivers of gross margin expansion are threefold. First, our biggest sources of growth, like I referenced, physical retail and international, which are also gross margin accretive—this is a significant factor contributing to growth. Second, we expect some normalization of logistics costs during the course of the medium term, which again, we believe should offset some costs brought on by COVID. Lastly, we'll get some growth from launching new products that hit a higher gross margin due to features that customers are looking for in their purchases. This is a proven track record we aim to continue. Like I said on the call, gross margin for this year is heading to a midpoint—improvement of over 600 basis points should we hit our targets.

Good afternoon, everyone, and so nice to see the progress. As you talked a little about in the gross margin portion about a decrease in product costs, can you expand on that a little bit? What are you seeing there? How long do you see that lasting? So with physical retail, what do you think is the appropriate size of the store as you grow your product assortment? And how do you think of the cadence of store openings going into next year? Thank you.

Yes, I’ll start on the first one while Joey can take the physical retail one. So on gross margin, again, a lot of the improvement is coming as we grow, scale up more and engineers improve our product continually. That’s really the story. It is like an engineering effort to reduce product costs; these will only grow, and we’ll have more power with that as we go forward.

For physical retail, we have found a compelling layout that incorporates plenty of space for great fitting rooms and aligns with service models that are exceptional for customers. We're typically looking at about 2,500-3,000 square feet for our go-forward stores. Then in terms of pacing, we expect to give you numbers annually, but I can just say we're going to open more stores than we did this year, where as a whole we expanded our portofolio by 13 this year; our next year’s pacing will be more while focusing on ensuring that we maintain an exceptional customer experience.

I want to cover one very quick thing while we’re also on the call, just for a second. Kyle and I had gotten a couple of questions even while we’ve been on the call about the share count in the earnings release. So just to be clear, this is our share count as of 9/30, the end of Q3, which was the pre-IPO share counts. We're happy to answer any model questions or clean-up questions from analyst or investors tied to that. But I just wanted to cover this on the call so everyone is on the same page discussing that.

Sure, thanks, Mike. We’re thrilled to be on this stage and to continue growing alongside our investors, analysts, and other stakeholders. We couldn’t be happier with the foundation we’ve built in the last five years, and we just wanted to take this opportunity to close with a note of congratulations to the Allbirds team that created the business. A big kudos to everyone. Thank you all. We look forward to speaking with you next quarter.

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.