Allbirds, Inc. Q4 FY2022 Earnings Call

Good afternoon, everyone, and thank you for joining us. With me on the call today are Joe Zwillinger and Tim Brown, Allbirds' Co-Founders and Co-CEOs, and Mike Bufano, Allbirds' Chief Financial Officer. Before we start, I'd 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 financial outlook, including cash flow and adjusted EBITDA expectations, Q1 guidance targets, impact and duration of external headwinds, simplification initiatives, strategic transformation plan and related planned efforts, go-to-market strategy, expected profitability and cost savings, product plans and expectations 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 including our quarterly report on Form 10-Q for the quarter ended September 30, 2022, for a more detailed description of the risk factors that may affect our results. Also during this call, we will discuss non-GAAP financial measures that 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 measures to their most directly comparable GAAP measures to the extent reasonably available in today's earnings release. During today's call, we will also be referring to our active customers. Active customers are defined as the total number of unique customers who have made at least one purchase in the preceding 12-month period, measured from the last date of such period. The supplemental slide presentation is also available in the Investors section of Allbirds' website. Now I'll turn the call over to Joey to begin the formal remarks.

Thanks, Katina, and good afternoon everyone. 2022 came to a challenging close as we ended the year below our guidance range, ending the year with nearly $300 million in net revenue, representing 7% year-over-year growth or 10% excluding an $8 million impact related to FX. Our adjusted EBITDA for the year was negative $60 million, which includes a $17 million impact primarily associated with the previously announced discontinuation of certain first-generation apparel. Like the industry, we were impacted by weak consumer demand, but we also made some strategic and executional missteps that impacted results. The most important thing we want you to hear from us today is that we know we need to improve performance, particularly our path towards elevated and sustained operating margins, and the set of actions we will outline today strive to do just that. We're announcing new transformation initiatives designed to get the business back on track with an emphasis on profitable growth. But before we talk about where we're going, let's talk about how we got here. In our first full year as a public company, we made important progress. We launched new materials innovations such as SwiftFoam and Plant Leather; built third-party selling relationships with Nordstrom, REI, Shield, and DICK'S Sporting Goods; executed on our simplification initiative; and added key leadership at the management and Board level. And we did all of this while remaining true to the sustainability principles upon which we were founded. These achievements will be important to our future success. However, in this journey, we also made some missteps. First, we overemphasized products that extended beyond our core DNA. And as a result, some products and colors have had narrower appeal than expected. Because we were spending significant time and resources on these new products that did not resonate well, we underinvested in our core consumers' favorite products. Finally, we did not increase our brand awareness to the level that we anticipated. In essence, over the past couple of years, we shifted our focus away from our core consumer, and we must refocus sharply on this large and attractive group. Taking a look at Q4 specifically, this dynamic was exacerbated by the fact that the final weeks of December were exceptionally promotional, and we did not sufficiently promote to meet consumers' expectations. As a result, Q4 was the first quarter of negative growth in our history. We are disappointed with these results, and we know that, as we look ahead, the status quo is not enough. In response to these challenges today, we are outlining four areas of focus as part of the strategic transformation designed to drive growth, expand gross margin, and transition to an asset and OpEx-light model that will enable us to reconnect with our core consumers and meet new consumers in a capital-efficient manner. To support this effort, we hired a Chief Transformation Officer named Jared Fix at the end of last year. Jared brings significant experience driving operational improvement across organizations and in consumer-facing industries. Importantly, the initiatives we are announcing today represent the first step, and we will continue to evolve as we chart the path forward. There are four key areas of focus. One, reignite product and brand, with a more focused product strategy that will enable us to reconnect with our core consumer and better appeal to new consumers. Two, slow the pace of Allbirds store openings in the US and continue to partner with third-party customers to enhance brand awareness and drive sales. Three, evaluate operational efficiencies; and four, enhance growth and operating margins by building upon and further accelerating the cost and cash optimization work we began in mid-2022. I'll now dive into each. The first initiative centers on reconnecting with our core consumer and driving brand momentum through product and marketing. Just six years ago, we created an amazing brand, which achieved an incredible level of commercial success due to our unique value proposition, thoughtfully designed, naturally derived, comfortable athleisure footwear. Roughly two years ago, and after a period of considerable growth, we made a decision to diversify our product beyond the core DNA of what has made us one of the most beloved brands in footwear in an effort to reach a younger, fashion-forward, and performance-oriented consumer. We overinvested in seasonal trend colors and new silhouettes like the Pacer and the Flyer. And while we created a number of breakthrough material innovations, we have yet to commercialize them effectively. These products did succeed in attracting new consumers to the brand, but they have lower conversion rates and sell-throughs compared to our classic styles across channels. Ultimately, we have come to recognize that our overinvestment in newness came at the expense of focus on consumers who are loyal to our brands and on nurturing our core franchises such as the Runner and Dasher. We recently conducted a deep consumer study, which confirmed some key insights about our core consumer, and found that the fundamentals of our brand are very strong. For context, our target consumers are fairly evenly split by gender, though our core consumer actually skews female relative to industry peers and are between the ages of 30 to 40. One key takeaway from this study is that we have an opportunity to improve conversion with female customers through a dedicated product offering focused on meeting her needs. This is a substantial growth opportunity as we address this moving forward. Overall, our consumers lead an active lifestyle, are adventurous, and travel the world. They care about the environment and making a positive impact. They tend to be affluent and are partial to premium products and brands, and are well represented across the general population in terms of geography. Importantly, our Net Promoter Score was the second highest in our peer group. We continue to have a strong level of brand loyalty and satisfaction with 96% of our shoppers in the past year in the survey stating they would consider purchasing from Allbirds again. The quality, comfort, and design are the three key reasons why our consumers recommend our brand. In fact, the primary reason consumers did not make another purchase was that the products they wanted were not available, which we believe is a byproduct of this assortment expansion at the expense of core franchise development. Again, this represents a huge opportunity. However, this doesn't mean that newness is irrelevant. While we update classic styles in the near term, thoughtful innovation and new product introductions beyond our core, with more measured buys and marketing investment will remain key to unlocking our full growth potential. One final insight I will share from the study is how we fit into consumers' lives and the whitespace in the market that we will target. Specifically, we found that products we have categorized as performance can be more effectively positioned by promoting an active lifestyle as opposed to a technical performance offering. We have already begun to recalibrate our assortment to increase focus on core franchise management, embracing our Super Natural North Star and deliberately connecting this to the consumer to whom we have, frankly, paid too little attention over the last two years. We expect to make significant strides by offering a more curated seasonal color offering utilizing a gender-specific color segmentation. We will also leverage our various materials platforms to create embellishments across core franchises. In total, we believe these actions will offer the freshness our consumers want while increasing SKU productivity. However, during this transition, we do expect to face margin pressure as we utilize markdowns to ensure we recalibrate the line and move into 2024 with a cleaner inventory position. Our focused product strategy will be complemented by increased investments into mid-funnel brand marketing, embracing our disruptor position, and differentiated brand purpose that resonates with our target consumer. We will create values-aligned products and brand partnerships to better integrate our marketing investments, increase awareness, and drive sales. We estimate Allbirds still has less than 15% aided brand awareness in the US, which gives us an incredible opportunity, reinforced by our consumer insights work. While we are excited about these efforts across products and brands, these initiatives will take time to materialize given the long development lead-times in our industry. Our second initiative focuses on distribution in the US as we aim to make stores a more strategic and effective way to grow our brand. After opening 19 new stores in the US last year, we will significantly reduce the number of new store openings in 2023. This year, we plan to open three stores in the US based on leases signed in early 2022 and shift our focus from opening new stores to enhancing profitability and acquiring new customers from our existing locations, particularly the roughly half of our US stores that have been operating for less than a year. We continue to see both our owned stores and those in third-party partnerships as vital for reaching new consumers and increasing our share of valuable omnichannel shoppers. Our recent insights indicate that shoppers in our stores are less price-sensitive and contribute to our most profitable consumer journey through omnichannel shopping. However, we need to boost foot traffic to our stores and enhance engagement once customers enter. We plan to increase store traffic through higher marketing investments, focusing on omnichannel strategies aimed at our most engaged customers. Additionally, we will work on improving conversion rates via region-specific merchandising, better store navigation, and enhanced associate training to ensure every customer has a tailored experience. To support this initiative, we have appointed a new Head of Stores for North America, who has over 15 years of retail experience with brands like Athleta and Under Armour. She is already making progress in key areas of opportunity. Similar to our direct store strategy, we believe our third-party partnerships can help us achieve our goals, including boosting brand awareness and attracting new consumers. We are optimistic about early activations with REI, DICK'S Sporting Goods, Nordstrom, and Shield, which have shown solid sell-through of our core products. Looking ahead, we plan to continue our measured expansion with our existing partners and consider adding new premium partners in the future. Although it is still early, we feel positive about our progress in this channel and the relationships we are building with partners and consumers. Our third initiative encompasses an evaluation of our international go-to-market strategy and could be the most significant shift of the four key focus areas. To be clear, international growth remains vital to achieving our long-term goals, but we believe a pivot in how we go to market may be necessary to reduce complexity and grow our international business with efficient use of OpEx and CapEx, creating greater flow-through to the bottom line. In many of the markets in which we operate, we have excellent brand positioning and solid growth yet are still subscale. Japan is a great example of a strong brand position where we have seen more than 50% organic growth thus far in Q1. We believe that potentially transitioning the go-to-market strategy in certain markets to partnerships with distributors could unlock profitability and inventory efficiency in these regions while also reducing complexity in our US headquarters. Said another way, we are ultimately seeking higher quality revenues even if that impacts sales growth in the short term. As we evaluate this go-to-market shift, we will speak to distributors with a long track record of embracing the core DNA of partner brands while effectively localizing into their markets. Even in regions where we may shift the distribution strategy, we will work to maintain the option to reclaim direct operations over time. The fourth and final initiative targets cost savings and capital efficiency. This builds upon and further accelerates the cost and cash optimization work we started in mid-2022. To highlight a few of these changes, we plan to fully transition footwear production to our new manufacturing partner in Vietnam by Q4 this year and are already seeing higher quality products with materially lower costs coming off the line. We have also enhanced our strategic sourcing program to drive increased profitability through optimized material costs. As we enhance SKU productivity with our sharpened focus on products that celebrate our core brand DNA, we expect additional cost benefits from downstream logistics. We have identified several additional areas for SG&A savings and cash optimization opportunities, which Mike will walk through in a moment. To deliver against these initiatives, we have made a number of changes to our leadership team. We previously announced the expansion of Kate Ridley's role to encompass both brand and product. Kate has deep roots in the footwear industry, including more than two decades at adidas. We have already seen the impact of her experience as we recalibrate our product portfolio and integrated marketing approach. We have also eliminated our Chief Commercial Officer role and have shifted to a regional focus with an omnichannel North America structure reporting directly to executive management. On our Board of Directors, we welcome Ann Freeman back in August, an industry veteran with over 25 years of experience from Nike. We recently added Eric Sprunk as a Board adviser whose leadership and decades in the footwear industry including his tenure as Nike's COO are catalyzing positive momentum internally. Finally, as we announced earlier today, this will be Mike's last earnings call as our CFO. I want to take a moment to thank him for his partnership with Tim and me, the executive leadership team, and the Board throughout this process of becoming a public company just over a year ago. We appreciate all Mike has done in setting up a strong finance organization within the company and know he'll help ensure a smooth transition. Mike, it has been a pleasure working with you, and we wish you the very best. As we look ahead to Allbirds' next chapter, we're thrilled to announce that Annie Mitchell will join us as our CFO in late April. Annie is a proven finance executive who is wrapping up her role managing finance and insights for Gymshark North America and was previously SVP of Finance and CFO of adidas North America. Annie's deep functional expertise paired with her industry experience will be vital as we execute against our transformation strategy and deliver on our performance goals. We have continued to deepen our bench with talented executives who bring extensive footwear industry experience, proven leadership capabilities, and a hunger to drive improvement across our organization. Many of the changes I've outlined will take time, and 2023 will be a transition year which should set us up to significantly improve profitability in 2024. Against the backdrop of our transformation work, most notably the timing and implications of potential changes to our international business coupled with the uncertain macro environment, we are providing only quarterly guidance today. Year-to-date results have trended similar to Q4 with sales down in the high teens coupled with gross margin erosion from price action we've taken primarily on end-of-season sales. Excluding the impact of any potential international transition over the course of 2023, we are not planning for any improvement in current demand trends. Similarly, we expect gross margin pressure to continue as we use markdowns at a more elevated level than is typical in order to enter 2024 with a healthy mix and size of inventory. Overall, the strength of the Allbirds brand coupled with our experienced and deeply committed team gives us confidence in our ability to reaccelerate growth beginning in 2024. In the short term, we are laser-focused on managing cash and getting to profitability and expect the actions we're taking to help us capitalize on significant revenue and margin expansion opportunities in 2024. As we look further down the line, we expect to achieve cash flow profitability and positive adjusted EBITDA in 2025. We want you to know that management is fully aligned and energized by the opportunities to transform and reinvigorate our brand. As we work to achieve our goals, the members of our executive leadership team will not receive a 2022 performance-based bonus and we have all reduced our 2023 base salaries. In addition, our company-wide 2023 incentive structure has been revised to closely align with the four initiatives I described. Transformations like this take tremendous discipline and focus, and I want to specifically recognize the incredible members of the Allbirds Flock for supporting this effort. Since day one, Allbirds has had an incredible culture rooted in a deeply held commitment to our business, our consumers, and our products. As we've grown and evolved over the years, our goal to prove that comfort, great design, and sustainability don't have to be mutually exclusive has remained at the center of everything we do. I know that this will continue in the months and years ahead. With that, I'll turn it over to Mike to give additional details on Q4 and our plans for the year.

Thanks, Joe, both for the kind words and your partnership over the last two years. Allbirds is a special company with a unique mission, so this was not an easy decision on my part. I appreciate how you, Tim, and the Board have been working closely with me in a highly collaborative way to facilitate a seamless transition. Before walking through the P&L, I would like to highlight that we have added both a restructuring and an impairment line in the income statement. In 2022, in restructuring, we are capturing costs associated with our previously announced simplification initiatives. In impairment, we are reflecting a charge related to store assets in China that were impacted by COVID-related closures. Going forward, we plan to use the restructuring and impairment lines in the income statement to reflect costs associated with our strategic transformation. Also, in light of the strategic transformation and in order to align with views expressed by members of the staff of the SEC following the receipt of a routine comment letter in December, we are no longer excluding from our non-GAAP measures the revenue and cost of revenue associated with the previously announced discontinuation of our first-generation apparel business. Our guidance targets for Q4 net revenue and adjusted EBITDA loss did exclude these items. The impact of this change compared to our guidance targets was an increase to Q4 revenue of $1.5 million, a decrease to Q4 gross profit of $3.5 million, and an increase to Q4 adjusted EBITDA loss of $3.5 million. After factoring in the impact of this change, Q4 adjusted EBITDA was only slightly below guidance on an apples-to-apples basis. And that's a good transition to Q4, where the headline is that sales were disappointing, but we were able to offset most of that decline in the middle of the P&L, thanks to the positive impact of our simplification initiatives and tight cost management. When we last spoke with you in early November, we identified potential headwinds and tailwinds as we headed into our peak season. At the time, Q4-to-date sales had been trending negatively, but we believed that we could get back to flat as consumer spending patterns shifted to a more normalized holiday cadence and as our holiday marketing campaign, product news, and promotions kicked into gear. After achieving strong results during Black Friday/Cyber Monday week, sales growth turned negative again over the last few weeks of the year. Joe outlined the drivers earlier, but I would like to provide more color on markdowns. As a young and premium brand, we chose not to chase lower prices with markdowns in Q4. Inclusive of elevated discounting in Q4, our full price sell-through was approximately 85% for the year, in line with our expectation of 80% to 85% full price sell-through and well above the industry average. Looking at Q4 sales through a customer lens, we experienced weaker-than-expected new customer acquisition and repeat purchase behavior, which resulted in an 11% decrease in active customers. From a geographic and channel lens, the US business is weak, down 14%, driven by digital softness which fully offset the positive impact of retail, which grew 8% in the quarter; and third-party which was a mid-single-digit percentage of our sales mix in Q4. Again, we were able to offset most of the sales miss, thanks to the positive impact of our simplification initiatives and tight cost management. Moving a little deeper, gross margin was down versus Q4 2021, driven by the previously announced discontinuation of certain first-generation apparel, as well as increased promotions, and was partially offset by COGS savings related to our simplification initiatives. Indeed, since Q2 2022 when we announced our simplification initiatives, on a per unit basis, we have begun to see a mid-teens percent decrease in US warehousing costs, and a nearly 40% decrease in US return processing costs. In addition, the transition to our new manufacturing partner remains on track. The first few products have been transitioned, and we are seeing the expected savings and product cost out of the factory. We expect the savings to start showing up in the P&L in 2023 before fully flowing through in 2024. Moving down the P&L, we chose to reduce marketing spend year-over-year in Q4, given the highly promotional holiday environment. Finally, as sales turned negative, we significantly reduced discretionary SG&A spend, which helped the quarter. Looking at 2022 as a whole, the corporate SG&A component of the simplification initiatives reduced run-rate spend by approximately $5 million in 2022 in line with our expectations. We are on track to deliver the previously communicated target of $13 million to $15 million of annualized savings in 2023. Moving to our balance sheet, inventory was down 8% sequentially from Q3, but up 9% year-over-year due to the slower sell-through of new products and colors launched in H2. That said, I want to highlight that year-over-year inventory growth slowed every quarter this year. Cash burn was $13.6 million in the quarter, continuing the quarter-over-quarter trend of a slowing rate of cash burn. I'll share more about cash and inventory management in a moment as I walk through the financial impact of our strategic transformation. Turning quickly to our Q1 guidance targets. We are targeting total company net revenue between $45 million and $50 million, a decrease of 20% to 28% year-over-year and down 9% to flat on a two-year basis, and we are targeting an adjusted EBITDA loss of negative $29 million to negative $26 million. I'll now provide an overview of the financial implications of our strategic transformation. As Joe said earlier, we intend to significantly reduce operating complexity and costs in addition to focusing on higher-quality revenues. I'll take a few minutes to discuss the financial implications of each of our four key focus areas. Regarding the first initiative, centered on product and brand, there are three implications. One, we plan to spend additional US marketing dollars on a year-over-year basis in 2023 to support our brand, including additional spend for store marketing. Two, over time, our sharpened focus on products that celebrate our core brand DNA should help improve SKU productivity. Three, given the time it will take to recalibrate our product line, in 2023 we anticipate that gross margin will be negatively impacted by significant discounting of the slow-moving products and colors we launched in H2 2022, including the potential for modestly above-cost liquidation. We are committed to bringing down inventory through 2023 as part of this reset. We plan to measure the success of this initiative by tracking our aided brand awareness in the US and the percentage of our sales coming from core franchises and expect to provide periodic updates on how these metrics are trending. Turning to the second initiative. We continue to believe that increased store-based distribution in the US will allow us to grow brand awareness and acquire new customers in a way that leverages our marketing spend. Over the next two years, we plan to continue to grow our third-party business and over the next 12 months to 18 months, significantly slow the pace of new openings of all of our stores. Taken together, we expect this approach will likely be gross margin dilutive, adjusted EBITDA margin accretive and more capital and SG&A efficient. At the same time, we are focused on increasing productivity within our current store footprint, as Joey outlined earlier. In 2023, we expect this channel mix shift to be a drag on year-over-year gross margin. In 2023 and 2024, with fewer planned Allbirds store openings, we also anticipate lower CapEx spending and less SG&A drag from pre-opening and ramp-up expenses. We plan to measure the success of this second initiative by tracking Allbirds store operating metrics as well as our number of third-party doors. Shifting gears to our third initiative, we believe that a potential change in our international go-to-market strategy could have the biggest impact on our financial profile. Although we are evaluating different scenarios, a switch to a partnership model with distributors for certain markets would lead to less revenue on our P&L on an apples-to-apples basis, but it will be higher quality revenue with greater flow-through to the bottom line. If we switch to a partnership model with distributors in certain markets, gross margins in those markets are expected to be lower, but we believe that will be more than offset by reduced market-specific marketing expenses and SG&A as well as reduced SG&A at headquarters. Lastly, we believe a potential change in international go-to-market will improve our balance sheet as we will carry less inventory and will require very little CapEx to support future international growth. It is still early in our evaluation process for a potential shift in our international go-to-market strategy and we expect to provide updates on our discussions with potential partners. That brings us to our fourth and final initiative, delivering profitable growth by building upon the cost and cash optimization actions started as part of our simplification initiatives. We made notable progress in these areas in 2022, which gives us confidence that we can accelerate cost savings across several areas going forward. First, we expect to continue to reduce COGS through our previously announced manufacturing transition. In addition, as part of our transformation plan, we are enhancing our strategic sourcing program and optimizing the use of materials across platforms. Second, we expect our sharpened focus on product and brand marketing that celebrates our core DNA will unlock supply chain and logistics savings through improved assortment productivity. Third, we will continue to leverage savings in warehousing and logistics generated by the simplification initiatives. Fourth, we expect to make an additional SG&A reduction of $15 million to $20 million through the actions we are taking across the other three initiatives. And fifth, we anticipate that operating cash flow will continue to improve through these four actions as well as our enhanced cash management activities, particularly, tight inventory management. We plan to measure the success of this initiative by tracking our landed product margin out of the factories as a percent of product MSRP as well as direct business gross margin and SG&A as a percent of sales and expect to provide periodic updates on how these metrics are trending. To summarize the cost savings actions, while there is still much work to do, we are targeting savings of $35 million to $45 million over the next three years made up of cost of goods savings of $20 million to $25 million and SG&A savings of $15 million to $20 million. Going a little deeper on cash, I'd like to discuss the implications of these changes on our cash position and how we have best positioned ourselves to have no additional need for capital in the foreseeable future. We continue to tighten new inventory buys. Coupled with the actions we are taking to move through inventory of H2 2022 launches, we expect to leave 2023 with lower inventory on hand. With fewer new Allbirds store openings, our 2023 CapEx is expected to come down to between $10 million and $15 million. On the cash management front, we have updated our investment policy and have kicked off working capital improvement initiatives. Finally, we have just put in place an LOI with JPMorgan to extend and upsize our undrawn revolver, which when amended would extend the maturity through 2026 and provide us with access to up to $50 million of committed liquidity and the option to request an upsize to $100 million. When combined with the approximately $167 million we had in cash on hand at the end of Q4, this new facility puts us in a strong liquidity position. Bringing the financial implications of the strategic transformation together, in 2024 we expect to begin to see the P&L benefits and a new financial profile for Allbirds to emerge, one which requires less CapEx and SG&A to grow and with better flow-through from the top line to the bottom line, especially as revenue reaccelerates. Finally, I want to wrap up with some personal remarks as my decision to leave Allbirds was not an easy one. First, it has been a pleasure to work with our investors and analysts. You have all provided a great perspective on the business, and I value the relationships we've built. Second, Allbirds is a unique company with a flock dedicated to the company's important mission into making and selling great products that customers love. This is especially true of the great team I've built and led over the past two years. Third, I welcome Annie to the flock and look forward to supporting her as she comes on board. This moment of transformation from the business provides a natural transition point, which factored into the timing of my decision. I believe Annie will hit the ground running and be successful in the role given her industry experience, the great team she will now lead, and the work we've done around cost savings initiatives and the company's capital structure. Finally, I continue to believe that the company has great opportunities ahead and look forward to following the company's success. As I turn the call over to Tim, I would also like to thank Tim for his inspiration and friendship over the last couple of years and thank the rest of the executive team for their partnership and our time working together.

Thanks, Mike, and thank you for your partnership and contributions to Allbirds. You've heard us share today a clear plan for reigniting growth across our company. We are an innovative organization. In many ways, this effort is not dissimilar to how we think about innovation itself. Innovation is the search for new solutions. Sometimes these solutions are unique; other times, they are a reconstitution of things that we already know. In all cases, they require taking a step back and looking at things differently. That's what we're doing as we launch Allbirds' strategic transformation plan. This plan is about taking a fresh look at how we deliver on our commitment to develop premium, differentiated, and sustainably built products so that we can better connect with our core consumer and reignite growth. A key role I am playing in this work is getting back to my roots, evangelizing our brand. We have always believed that serving as a force for good for the planet is not only the right thing to do, but it also makes Allbirds a more enduring business for the long term. As we enter this next chapter, I am deeply passionate about helping to define the future of our approach to sustainable innovation in footwear and raising the standards for others across the retail industry. I'm equally focused on building a thriving culture at Allbirds. As you all know, Joey and I founded this company with a mission to create better products in a better way, and we did that by bringing together a group of incredibly talented and passionate people. Our shared commitment to our values has unified our team as we've grown and evolved the business over the years, and will continue to serve as our North Star as we work to refine our operations and strategy. We've learned a lot over the last year, and we're confident that the initiatives we announced today are the right ones to get Allbirds back on track. We are still in the early innings of our journey, but I firmly believe that the core foundation of this 100-year brand is as strong as it has ever been, and our mission has never been more relevant. I know that the strategy outlined today is the right one for us, and I'm thankful that our team has embraced this pivotal moment with such enthusiasm. With that, I'll hand it back to the operator for Q&A.

Thank you. Our first question comes from the line of Mark Altschwager with Baird. Your line is open.

Good afternoon. Thank you for taking my question. I guess just first I wanted to ask on the product strategy. As you retrench and focus on the core, I guess which silhouette and fabrics are you planning to pull back on or discontinue if any, or is the retrenching and refocusing here more related to the marketing decision and how you're going after your core consumer? Thanks, and then I have a follow-up.

Hey, Mark. Thanks for the question. Yes. And this is Joey for everyone's sake. So it's a little bit of a combination. It's not just the market positioning; it is also really down to the core silhouette. And I'll say that the couple of examples we gave around the Pacer and the Flyer specifically are good examples for you to, I guess, clear out the picture there. So first on the Pacer, that was both the product execution and a marketing campaign that was really oriented around a younger consumer, really outside the sweet spot of the group of people who have really fallen in love with us and love the core franchise for what we do. Similarly, with the Flyer, that was a product that was really marketed with heavy orientation around the technical running performance that that item delivers. It’s a great product; we just found out that the customers who are really in our sweet spot aren't resonating with the core technical performance messaging. Some of that missed execution by us, I think, boils down to us having a little bit of difficulty with signal and noise as we launched the Dasher and saw really tremendous success. And so as we dug in and conducted a bunch of consumer insight work here, what we have found is that this active lifestyle and the central space that really bridges those two separate categories of lifestyle and performance really requires focused efforts around product development and marketing. The Dasher, as I noted, is a great example of a franchise that we think embellishes this story and this message to our consumers in exactly the way that we know it’s going to resonate.

Thank you for that. And then a follow-up, Mike, a lot of changes to the P&L that you talked about today. As the changes take hold, is there a framework we should use to think about contribution margin as growth resumes? I believe you also said you don't see the need for additional liquidity beyond the actions you discussed today, so what is the implicit view there on the timeline to hit positive free cash flow? Thank you.

Yeah. Thanks, Mark. On the second part of that question, we talked about in Joey's comments earlier about getting to EBITDA positive in 2025. So I think you could follow that along on the cash flow side, especially as this new model is going to be much more OpEx light and CapEx light for us. It’s going to be higher quality revenues that flow down to the bottom line. So in terms of contribution margin, I'd say, let us follow up with you on that in future quarters and how we're thinking about the right shape of the P&L. I think the reality is we have to get these international transformations and potential international transformations done. The P&L takes shape; we'll walk everybody through that later on.

Thank you. Please standby for our next question. Our next question comes from the line of Alex Straton with Morgan Stanley. Your line is open.

Hi, this is Keezel on for Alex Straton. Thank you for taking my question. I was wondering, it sounds like you're kind of pulling back from appealing to that younger consumer and more tenable performance. So I was wondering how you're viewing your total addressable market, and if you think it might be lower than it was maybe when you IPO-ed? Thank you.

Thanks for the question. Really, not at all different actually. What we looked at when we last showed a really comprehensive set of consumer data largely mirrors what we're describing here. So I would describe the core consumer. This is a largely affluent set. It's pretty balanced between gender. So currently, it's about 55% women in the SKUs that we sell. But what we've heard from the consumer in that study is that we have even a bigger opportunity with women than we understood. And to previous comments around product calibration, having a really tightly gender-differentiated color strategy and silhouette strategy will offer us a significant opportunity going forward. The geography is really dispersed, so there's not really any big concentrations in any part of the country. And so this demographic and even the psychographic really spreads across the country, so we continue to estimate this core demographic to represent around a third of the population, and a really sizable and attractive group of customers for which we think this message is going to resonate very strongly. And I'll say this whitespace around the active lifestyle urban exploration are territories that are really wide open and we think we have a unique position to capitalize on that.

Thank you. Please standby for our next question. Our next question comes from the line of Edward Yruma with Piper Sandler. Your line is open.

Hi guys. Thanks for taking my questions. And Joe, it's been great working with you. I guess first on technical performance. I'd assume that there are other products in the pipeline, maybe Flyer 2.0. Is there an expectation that other products may get liquidated over time? And then, if I zoom out from that, in terms of liquidation strategy can you help us understand how you can protect the core brand? We've seen some liquidation products end up on like Walmart.com through marketplace vendors or another. So can you maybe talk about your disposition philosophies kind of broadly speaking? Thank you.

Thank you, Ed. I'll start with the second part of your question regarding the Tree Flyer. Our plan involves implementing a higher level of markdowns than usual for our brand, specifically focusing on end-of-season items or styles that we plan to phase out or update. This approach aims to maintain the integrity of our core offerings. We will also run selective promotions to attract new customers seeking deals in a challenging inventory and consumer landscape, which we need to be competitive in. While the markdowns will be elevated partly due to some mixed results we've seen, they will also address the overall volume challenges from Q4 that we need to reconcile. We anticipate entering 2024 with a clean inventory, a good mix, and suitable inventory levels. As we progress through the year, we'll provide updates on how inventory interacts with any international transitions that may occur. Regarding your first question about technical performance and our efforts in running products, we've found that our consumers weren't quite ready for us to take on that role in this space. Going forward, we need to ensure that any upgrades to products like this align better with lifestyle moments and active living, along with realigning our market positioning and marketing strategies. We believe that approach will yield greater success, but it will require us to make more careful purchasing decisions following the challenges we faced with the TF1.

Thank you. Please standby for our next question. Our next question comes from the line of Jim Duffy with Stifel. Your line is open.

Thank you. Good afternoon. Mike, thanks for all the help through these past quarters and so forth. We're going to be sorry to see you go. I wanted to start by asking about the change in go-to-market strategy for the international markets. That seems particularly compelling. Under a distributor structure, do you feel there are clear sight lines to that international business becoming profitable? And then I guess the question that goes along with that is what's the cost associated with exiting the direct footprint in international markets before you can get there? And then is it realistic to expect the change in go-to-market strategies will fully influence the P&L and balance sheet in 2024?

Yes. Thanks for the question, Jim. I'll take the first part of that in terms of how we're thinking about the overall structure and transition and maybe Mike can tackle some of the implications on the financials and how we see that shaping. First of all, we are fairly early in the evaluation process. We went through a period of diligence where we really sought to understand what the overall impact of a strategy like that and a shift like that could make on the business and the financials. What we found from that, which we now after we've gone into the market and started some conversations, continue to believe is that while we're going to shrink the revenue on an apples-to-apples basis, as Mike noted, we are going to immediately see solid flow-through to the bottom line. Once we manage to get over the threshold where we can reduce the complexity inside of HQ to couple with that, that entire part of the business should flip to something profitable and meaningful quite quickly after those transitions are made. I'll note that we've not made investments in our international business for third-party. While we have great partners here in the US like Nordstrom, REI, ESG, and Shields, we have not done that in any material form in international markets. When we look at some of these distribution partnerships, there's an opportunity to plug into an infrastructure that can support third-party distribution and build a really healthy marketplace with higher market awareness in those geographies. It’s still early on in this journey, and we're out ahead of this and talking to you guys about it transparently now Jim. But we would, of course, update you as this goes. We would expect this to be a really positive transition as it relates to having profitability as our core mindset here. Lastly, I’ll just say that as we have shifted into starting to explore these conversations, it’s encouraging that there’s a fair bit of options out there in all of the regions that we might consider for this strategy. So, positive early signs and we’ll give you more detail as we go.

All right. Thanks, Jim, by the way. It's been great working with you. In terms of when we’ll see this reflected in the balance sheet and profit and loss statement, I think the pace of the transitions will really determine that. Given the earlier demand, if we proceed with some of this, we hope to see it as early as 2024, which would clearly have a positive impact for us. Regarding the costs associated with exiting, there will obviously be some costs related to discontinued operations or assets held for sale if distributors end up buying stores from us. However, we believe that the inventory we sell them as they ramp up and fill the channel in those markets, along with the cash and revenue we receive from that, should more than offset any exit costs. Each deal and transaction is a bit unique, and if we move forward, we’ll provide more visibility and updates on how things are progressing. Our hope is that these deals will be cash neutral, if not cash positive.

I realize you still have much to explore, but that does seem a very logical structure. Question for Joey and Tim, and I'll just be direct here. Are the two of you open to exploring the idea that the best future for Allbirds may not be as an independent entity? Yeah. Look, we are always open-minded. We have a belief and have for some time that the opportunity for this brand is really substantial. I think we've more than validated, in fact, surprised ourselves when we ran this most recent and deep consumer insight study that we did with some external partners. So, we continue to believe in the long-term opportunity here of having an incredibly high ceiling, and we want to pursue that with the best path that we possibly can for our shareholders. At this moment, as we look around and of course had discussions with all the right people that you'd expect us to be having, it continues to be our belief and the Board's belief that the best opportunity is as a public company that's seeking an independent future, and that's in the best interest of shareholders, Tim and myself being some of the most significant ones.

Thank you. Please standby for our next question. Our next question comes from the line of John Kernan with Cowen. Your line is open.

Good afternoon, guys. Thanks for taking my question, and Mike, it’s been good working with you.

Thanks, John.

So, Mike, maybe just on OpEx and within operating expenses, the two buckets SG&A and marketing. I think in your prepared remarks, Joey, I think you said marketing dollars would be up again this year. So how do we think about SG&A and overall operating expense dollars and rates as we go into 2023?

Yeah. We're not giving guidance for the full year, John, like Joey said in the call. Obviously, the pace that would happen with the international transitions if those do happen, that's going to have a pretty big impact both on the marketing spend and on the OpEx. So unfortunately, that's a really hard question to give a lot more clarity on. As you all work through your model, I mean, Katina and I are happy to answer some follow-up questions over the next few days as you look at the model. I will tell you that over time as you balance this out when we talk about getting to EBITDA positive in 2025, you’d be looking at a business that obviously has a lot less marketing dollars because they'll be primarily focused on the US and a lot less OpEx dollars, because again it will be a much smaller and simpler go-to-market structure and a lot less CapEx required to grow that business. So I focus a little bit less on just the 2023 piece and a little bit more about the destination of 2025 and why some of these potential changes make a lot of sense for us.

Understood. A lot of helpful commentary on the product strategy and the margin profile. I guess, what about the balance sheet and working capital as we get into 2023, inventory dollars and other areas where you can conserve cash?

Yeah. So I think a couple of pieces there. I think you've already seen some of the benefits of the work we've put into place around inventory management being a lot more judicious about, the rate of our cash burn and that has come down every quarter and our inventory growth has come down every quarter. We feel like we're making a lot of progress there. Joey and I both said earlier during the prepared remarks, I think the reality is we are sitting on a little bit more inventory than we would want right now. A lot of that is some product that comes from the second half of 2022, and those are the ones we talked about that we're going to be a bit more aggressive within our own channels around markdowns and moving some of that out. At the same time, we've been a lot tighter on the inventory buys clearly for 2023 and into the early part of 2024. In terms of working capital, the reality is that once the business is a little bit more third-party oriented and distribution-oriented over time, that’s certainly going to change how we think about working capital. We want more levers for us to pull around working capital. The last thing I'd say is when we think about what would happen with cash in 2023, again to follow up on what we were just saying to Jim's question, we expect any of those transitions, if they happen, to be cash flow neutral or cash flow positive. As you get closer to those potential transactions, you're obviously not going to be buying inventory for the market, so that will start to come down over time. There are lots of levers we have within there. It's just because of the pace of the potential transitions internationally, John, it's hard to give you a very precise answer, but those are the factors we think about as we have confidence in the liquidity position and with inventory coming down over 2023.

Perfect. Thanks for all color there.

Thank you. Please standby for the next question. Our next question comes from the line of Janine Stichter with BTIG. Your line is open.

Hi, thanks for taking my question and for all the color. I was hoping you could elaborate a bit more on what you're seeing on the wholesale side. Curious how effective you've seen these partnerships be in acquiring new customers, if you're seeing any differences there in terms of sell-through versus what you're seeing in your own stores. And then, how much would you or could you accelerate if you think it's the right strategy to go more the wholesale route?

Yes. Thanks for the question. The we've only selected just a handful of accounts so far, and they're really premium. We went into these relationships understanding that we were going to fill a real need for their consumer that is walking in their doors. That was differentiated and was accretive to our overall ecosystem, being that we expect some of those customers to come back to our direct channel and of course just add aided awareness in the regions that we may not reach with our stores or can best hit with multiple touchpoints. So far that's working; that seems to be working decently here, but we're still so small. It's hard to really clear out the noise and understand what the impact on aided awareness growth has been related to that channel. I'll say, as it relates to product, we've seen a good deal of consistency across all our channels. The sell-through being really strong on the core franchises, that we kind of have described as most resonant with our core consumer. In some of the more technical performance areas, some of those being at elevated price points, that’s been a little bit weaker, and we’re recalibrating that. The overall approach here is we want to have really strong sell-through to support our partners and customers. As we have strong sell-through, we're going to be able to do that by recalibrating and focusing on not just like the sweet spot of core but also these embellishments that we make around the core franchises. Drive sell-through there, which goes into better sell-in in the next season. We can add doors in these accounts because they all have a substantial number of doors that can reach a great consumer. Finally, we will selectively evaluate some additional partners, whether that be on the physical brick-and-mortar side of the wholesale marketplace or even in digital. So we're looking at that. We’re looking at it from a clean marketplace perspective and trying to grow this in a very healthy way and don't want to just go extremely quickly. Theoretically, the numbers would pencil out to be higher flow-through to EBITDA for that, but we really want to make sure we have a clean marketplace and give our consumer a great experience as they come into our company's ecosystem.

Great. That makes sense. On the retail side, as you have transitioned to being more focused on retail and wholesale compared to your initial model, I noticed you mentioned that you didn't promote as much as you anticipated in the fourth quarter. As your sales shift more towards stores and wholesale rather than online, are you finding that you need to align more with the traditional retail calendar? I'm interested in how this affects your promotional strategies and ultimately your gross margin structure.

Yes. I believe that if the wholesale channel becomes significantly more important, we will need to navigate certain constraints regarding our promotion schedule and markdowns. I also anticipate that we can effectively differentiate our product offerings across various channels. It's crucial to recognize the roles played by our wholesale partners, our physical stores, and our digital platforms. In our retail locations, we’ve noticed that customers are less sensitive to prices and have a strong intent to purchase, so we want to ensure they enjoy the best possible experience and receive products that we do not intend to discount heavily or quickly as we manage this inventory and move forward. This is how we are approaching the flow across each segment of our omnichannel offering in the US. Overall, things have been going well. We are implementing lessons learned from the fourth quarter as we progress through the first quarter to ensure everything is handled effectively, allowing us to move through the rest of the year in a healthy and intentional way. I think we're a little over time because we have lengthy prepared remarks. So we'll take one more question, and then we'll address anyone else in the follow-up call. Thank you all for your patience. Let’s take one last question, operator.

Thank you. Our final question comes from the line of Blake Anderson with Jefferies. Your line is open.

Hi, guys. Thanks for fitting us in. Just wanted to ask on the slowdown in the core customer. It sounds like that was mainly product launches in the second half. So I just want to make sure it sounds like you guys saw a step down in Q4. It’s not like this was such a gradual realization that kind of took a step down in Q4 with some products like the Flyer. So how much of the slowdown do you think is macro-related? I don't know if you could size that out. And then just secondly, on getting back the focus to the core customer. I was just wondering how we should think about the pace of innovation. Are you going to try to innovate more products for the core customer, or is just shifting your attention and marketing back to the core customer kind of good enough to improve that part? Thank you.

Thanks, Blake. So the turn down was actually most pronounced in the very end of the quarter, which is unique, and frankly we didn't have as much of an opportunity to react even if we wanted to in terms of increasing some of the promotion or markdown cadence there. That was one element that we saw. In general, the comments around our core customers, that's really what we found, in particular, when we dig into the research. This is a multi-thousand consumer study that we ran, which has shown us that what we became famous for early on, those are things like the Wool Runner, the Tree Runner, and the Tree Dasher. Those are still resonating very strongly. What I alluded to earlier is that we put some of these newer products out there and we did that at the expense of what in the footwear industry is so much more dimensionality we still have yet to offer on the core franchise. That can be in a gender-differentiated color strategy. It can be with trim. It can be with things that are really specifically oriented to hitting consumer needs and some trend-based things that are very wearable and compelling for her, but for both genders, in particular. That’s a bit more of where we’re headed, and those are things that we can impact a little bit more quickly than we can overall silhouette differences. So in terms of the innovation that you should see coming forward or should expect from us, you're going to see a lot more embellishment and emphasis from the marketing side as well around core franchise development. Secondly, as I noted, newness is still really important, so when we sharpen our focus and we hone in on what the consumer is telling us, what her needs are, we should be able to introduce some really interesting new silhouettes and new styles that will branch off of these franchises that we know are a little bit closer to those core products and core consumer needs. That’s generally the sequence that you should expect. And I’m now talking from changes that we can make in the core product mix in 2023 with colors and trim things like that, smaller variables and then greater things on silhouettes in 2024. So that’s generally the pace. Newness is still really important; it’s just directing that newness in a way that’s listening really deeply to these consumer insights that we picked up.

Thank you. I would now like to turn the call back to Joe for closing remarks.

Thank you very much. And thank you everyone for joining us today. I just want to say that our team is really energized and aligned on where we need to go and how to get there. The changes we announced today are substantial, and much of that work will take time, but we are committed to getting this right to create value for shareholders. And on behalf of the entire Allbirds team, I want to thank the investors and the analyst community who believe in the foundation of this brand. We look forward to updating you all on progress in the next quarters.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.