Allbirds, Inc. Q2 FY2023 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Allbirds' Second Quarter 2023 Conference Call. All participants have been 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. I would now like to turn the call over to Christine Greany of The Blueshirt Group. Please go ahead.

Good afternoon, everyone, and thank you for joining us. With me on the call today are Joe Zwillinger, CEO and Annie Mitchell, 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, Q3 guidance targets, impact and duration of external headwinds, simplification initiatives, strategic transformation plan, and related planned efforts, go-to-market strategy, planned transitions to a distributor model in certain international markets, anticipated distributor model arrangements, expected profitability, cost savings targets, gross margin estimates, product plans and expectations, third-party partnership strategy, marketing strategy, 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 annual report on Form 10-Q for the quarter ended March 31, 2023, 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 the most directly comparable GAAP measures to the extent reasonably available in today's earnings release. Now, I'll turn the call over to Joey to begin the formal remarks.

Thank you, Christine, and welcome, everyone. We are pleased to report another quarter of top and bottom-line results that match our expectations during a transformational time for Allbirds. We laid out a roadmap for our strategic transformation back in March, and now two quarters into our work, we have gained traction and are solidly on track to drive towards profitability expectations. We don't currently have a storm in Missouri, but we believe in the 'show me' faith model. We are sharply focused on reporting sustained and durable cash flow and profit, and we will not rest until we achieve our goals. We continue to make progress on laying the groundwork to drive profitable growth. We are reducing inventory levels, working with our suppliers on cost of goods savings, trimming overhead, and streamlining working capital to grow profitably in our international markets. This past quarter marked incremental progress on all of those dimensions. First, inventory levels declined approximately 24% on a year-over-year basis, ending the quarter below $95 million for the first time in two years. This is the result of prudent financial and inventory planning and our balanced approach to meeting the consumer where they are on price, while maintaining brand integrity. Next, we continued our strategic sourcing efforts, and between materials optimization and factory footprint management, we are confident that we are trending towards the upper end of the target range of cost of goods savings of $20 million to $25 million in 2025 versus 2022 on a volume-neutral basis. Also on cost management, we reaffirm our range of expected SG&A cost savings of $15 million to $20 million by 2025 versus 2022. Lastly, we closed the quarter with $140 million of cash, reflecting significantly improved operating cash usage versus a year ago and our commitment to driving capital efficiency over the long-term. Most recently, we've executed on another material proof point under our Transformation work. We announced today the signing of two letters of intent with international distributors as part of our plan to transition the overseas region from a direct go-to-market model to a third-party distributor model, encompassing an omnichannel scope aimed in part at driving volume via wholesale distribution. These first two transitions are in Canada and South Korea, and we anticipate announcing additional geographies in the coming quarters. Transitioning our international model is one of the four key pillars under our strategic transformation plan. As a reminder, those include one, reigniting product and brand; two, optimizing US distribution and four-wall profitability in stores; three, evaluating a transition of our international direct go-to-market strategy towards the distributor model; and four, improving overall gross margin and leverage on operating expenses. I'll take you through a brief update on each of these strategies and how we're progressing, starting with product and brand. Our product team remains laser-focused on recalibrating our assortment with a focus on revitalizing our core franchises and driving more of the business from these models, while also delivering important innovation to engage with our loyal consumers. With an incredibly strong NPS of 86 in the quarter, we continue to deliver a wonderful experience, which helps to build confidence in our ability to reconnect with our core consumer and drive greater brand momentum over the long term. To be clear, we expect this to begin meaningfully taking shape next year in the spring of 2024. We've delivered thoughtful innovation and select newness this year with measured inventory buys to help delight our customers. Several noteworthy callouts include our recent core franchise extension of the golf dasher, which has met with solid demand and rave reviews from our consumers around the golf world. With PGA Tour players organically finding our products and playing with them in tournaments, having a much more comfortable round out to spec. We dropped our Superlight collection in April, our lightest ever sneaker that is perfect for travel and also boasts our lowest carbon footprint to date. Last month, we debuted our Artist series, a string of collaborations with artists designed to amplify creative voices and reach new consumers. The first in our series is a limited edition Riser created in partnership with London-based fashion designer Olivia Rubin. In the future, you will see us increase focus on our core franchises with this and other collaborations. Most recently, we launched the Tree Flyer 2, a very high-quality technical running shoe. The past couple of years have taught us that our consumers look to us most for versatility in their active lives rather than for support during marathons. In addition to this update, we have introduced important aesthetic changes that elevate the product for lifestyle occasions and have matched the marketing message and approach to meet our consumers' needs better. We have additional innovation we plan to deliver to consumers in the second half of this year, including a key update to the Wool Runner. This will be the first significant and highly visible change to this hero franchise that launched our business in 2016 when it was broadly described as the most comfortable shoe in the world. The Wool Runner 2 will have a modernized aesthetic and deliver superior comfort and durability. Q4 will also begin our execution against a gender-differentiated product strategy with a capsule for her. This will be just a taste of what's ahead in the coming year, leaning into novelty materials and trends to drive further differentiation and seasonally right expressions. While we are exercising discipline in inventory management and more measured buys for new launches this year, we are still bringing excitement and newness to consumers and we're pleased to see sell-through trending on plan and in some cases ahead of our expectations. Looking further ahead, we are pleased by the consumer and industry buzz around our release of the M0.0NSHOT Project, further cementing our leadership in sustainability with the world's first net-zero carbon shoe. While small in volume, we anticipate this project will pave the way for important collaborations that have the potential to catalyze momentum in 2024 and beyond. To showcase all of this newness and to drive traffic, we continue to employ a social-first, influencer-led marketing approach. Building on the success of our supernatural exploration campaign this spring, we will be expanding our influencer programs throughout the second half of 2023 and leading up to the holiday selling season. We anticipate that this refined marketing approach, coupled with compelling price offers during consumer-led promotional windows like back-to-school and Labor Day, will help continue our execution during this transition year. Turning to our second pillar, optimizing US distribution and store profitability. We know that brick-and-mortar, both our own and third-party, is an important way to reach new consumers and also increase spend among our valuable omni-channel consumers. During Q2, we opened two full-price US stores in Greenwich, Connecticut, and Walnut Creek in the Bay Area, bringing our total US door count to 44 at quarter end. Subsequent to the close of Q2, we opened one additional US store in Columbus, Ohio. As a reminder, these three locations were opened against early 2022 lease timing, and we currently have no further US openings planned. On the international front, we opened a new location in Homburg, Germany during Q2, marking our last overseas store opening planned for 2023. Returning to the US store base, traffic remains challenging, and we expect this to persist through the end of the year. As we work to optimize our US store profitability, we are underway on a number of initiatives designed to help establish a consistent selling and performance culture across the organization. This includes new visual messaging and more targeted merchandising strategies that bring greater excitement and energy to our floor sets. In wholesale, we made substantial progress working down existing inventory so that we exit this year in a healthy position. Promotional levels remain somewhat elevated, but have trended lower over the past couple of months. We are fortunate to be working with marquee partners who understand our priority to recalibrate our product lineup, closely manage inventory levels, and move at a very measured pace as we bring newness to the channel. One noteworthy example of the strength of our third-party relationships is the opening of our Selfridge carbon concept pop-up store in mid-July, located in a premier location on London Oxford Street. The six-week immersive experience highlights our mutual commitment to sustainability while delivering style and comfort to global consumers. The buzz has been tremendous, bringing visibility to our brand in the UK, enhancing our credibility, and paving the way for future collaborations and partnerships. Now onto our third pillar, transitioning our direct go-to-market strategy towards a distributor model in international markets. We believe today's announcement of our expected transition to distributors in Canada and South Korea will mark the beginning of a more profitable path to growth for the Allbirds brand in overseas markets. We've been searching for the right partners with strong merchandising capabilities to drive the right products for the right channels as well as the ability to connect with the local consumer, enhance brand equity, and fuel customer engagement. The goal of this strategic shift towards the distributor model is multi-faceted and is designed to position the Allbirds brand for long-term and scalable growth internationally. First, we believe these partnerships will help us build upon our global brand equity by leveraging regional expertise and wholesale capabilities to resonate with local consumers in each respective geography. We're very excited about the cumulative years of experience these distributors will bring to our operation and the growth plans they're committed to helping us attain, which we anticipate will generate unit sales growth in excess of what we might achieve on our own in the short and mid-term. A secondary benefit of this strategic shift is to reduce overall complexity and lower operating expenses to improve profitability. Lastly, the adoption of this model positions us to free up cash tied up in inventory internationally and reduce our overall inventory balance. As a directional blueprint, based on the timing of the letters of intent, we anticipate that these arrangements in Canada and South Korea will be multi-year in duration and we plan to include volume minimums and marketing commitments. We expect our business under these international partnerships to deliver gross margins below our US wholesale business, but anticipate equal or higher contribution margin and expect strong cash flow dynamics with expected title transfer from us to our distributor partners at the appropriate time. Looking ahead, we are impressed by the caliber of potential partners we are hearing from in other international markets. This includes distributors with industry expertise who have a high regard for the Allbirds brand and are eager to collaborate. Our ongoing discussions in other countries give us confidence that we will be able to announce additional transitions in future quarters. Moving to our fourth and final pillar, improving overall gross margins and managing operating expenses. We made continued progress in Q2 and entering the second half of the year, we are on track to deliver the cost savings targets we outlined previously. This includes $20 million to $25 million in savings on COGS and $15 million to $20 million in savings in SG&A by 2025 compared to our run rate at the end of 2022. Annie will provide additional context with you shortly. Before I pass it over to her, I want to note how well our flock is performing. The resolute spirit, hard work, and resilience in the face of big change have allowed us to make such important progress thus far in our transformation. Our teams are aligned on our core objectives, focused on superior execution, and energized by the opportunity to win as we work collectively to take Allbirds into our next phase of growth. I'm proud to see everyone stacking hands and doing the tough work that transformations like this require. We are entering the second half of the year with confidence in our trajectory and our relentless focus on managing cash and achieving our goal of positive adjusted EBITDA in 2025. As always, underpinning both our near-term objectives and long-term vision is our unwavering commitment to create better things in a better way. Now, I'll turn the call over to Annie to discuss the financials.

Thanks, Joey. Our second-quarter results reflect ongoing progress with our transformation work with significant improvement across the key benchmarks we laid out in March, including lower inventory levels, reduced usage of operating cash, and cost control. Q2 revenue of $70.5 million declined 10% year-over-year and came in ahead of our expectations. Excluding an estimated $700,000 impact from foreign exchange, Q2 revenue would have been $71.2 million, which would have represented a 9% decline year-over-year. We delivered significant expansion in gross margin for Q2, which came in at 42.8%, that's up 6.7 percentage points compared to Q2 2022, and reflects a few key factors. First, inventory write-downs were significantly lower on a year-over-year basis. Second, we captured some benefit from lower inbound freight expense, and lastly, we benefited from an increased mix of higher-margin sales in Asia. These factors contributed to higher promotional activity in the second quarter of 2023 versus the second quarter of 2022. We're pleased with the continued progress towards our $20 million to $25 million COGS reduction targets for 2025 versus 2022. In Q2, we largely completed the transition to our new manufacturing partner in Vietnam, and our material optimization initiatives are continuing to progress. Moving to expenses, SG&A, excluding depreciation and stock-based compensation, increased just $4.5 million compared to Q2 2022. That reflects continued improvement in trends as we focus on careful cost control, most notably the ongoing tightening of discretionary expenses. Looking at the second half, we anticipate that SG&A dollars in Q3 will be flat to up slightly from Q2 levels. Additionally, we anticipate that Q4 SG&A dollars will be up on both a sequential and a year-over-year basis, primarily reflecting our larger store portfolio. Marketing expenses declined $3.3 million or 21% compared to Q2 2022. In the first half of the year, we made the strategic decision to pull back on marketing as we focused on our transformation plan and navigated the promotional environment. Looking ahead, we are preparing to support our recalibrated product lines in Q4 and into 2024 with new campaigns. Entering the second half, we expect Q3 marketing dollars to decline slightly from Q2 levels, followed by a modest uptick from the third quarter into the fourth quarter. In Q2, we incurred $1 million in restructuring charges associated with our strategic transformation. The combination of better-than-expected top-line performance and careful cost control drove an adjusted EBITDA loss of $18.3 million in Q2. That's ahead of our guidance for negative $20 million to $23 million and represents an improvement of 12% versus a year ago. Turning now to the balance sheet and cash flow, I'm pleased to report that we made significant improvement within both areas. First, you know that we've been laser-focused on inventory. We ended the quarter with inventory levels down approximately 24% compared to Q2 2022 and down 21% from year-end. The improvement reflects more selective and disciplined buys, resulting in lower levels of inventory on hand. Looking at the remainder of 2023, we expect to see ongoing progress from quarter-to-quarter and in the year with a healthier composition and clean position. Now let's look at cash. At the close of Q2, we had $140 million in cash on the balance sheet. We dramatically cut our operating cash use during the second quarter, generating positive cash flow of close to $1 million compared to negative operating cash flow of $24 million a year ago. The improvement can be traced to our aggressive actions to bring down inventory levels and reduce operating expenses. For added perspective, our working capital needs typically peak in the first and third quarters as we prepare for the spring and holiday selling seasons. Looking at the balance of the year, we anticipate seasonally higher working capital needs in Q3 compared to Q2, with a moderating trend in Q4. Moving to guidance, we are maintaining a cautious outlook given the extent of transformation work we have underway, including our methodical approach to right-sizing existing inventory to enable us to drive healthy growth in 2024 and beyond. We're providing the following outlook for the third quarter of 2023, which reflects the ongoing work we are doing to execute against our transformation plan. Q3 revenue is expected to be in the range of $56 million to $61 million, representing year-over-year comparisons of negative 23% to negative 16%. The deceleration trend from Q2 to Q3 can largely be traced to dynamics around promotional intensity levels as well as the lapping of significant sell-in to the third-party channel last year. Adjusted EBITDA loss is expected to be in the range of $20 million to $23 million. Looking ahead, we anticipate that our expected shift to a distributor model in Canada and South Korea will benefit working capital and the profitability of these markets on a go-forward basis. The agreements contemplated by the letters of intent we signed with the distributors in these two geographies are expected to be completed in the second half of the year. To that end, we expect to be in a position on our next earnings call to provide a framework for how the transitions will strengthen our financial model over the long term. The transformation plan we laid out in March is designed to reignite growth, improve capital efficiency, and drive improved profitability. While the majority of our product and branding initiatives will be coming to market in 2024, you can expect to see us continue to aggressively manage inventory, cash, and costs in both the near and long-term. Now I'll ask the operator to open the call for Q&A.

Thank you. We will now begin the question-and-answer session. Our first question comes from Matthew Boss at JPMorgan. Please go ahead, Matthew.

Great. Thanks. It's Amanda Douglas on for Matt. So, Joey, with Q2 inventories finishing down 24% year-over-year, could you speak to the composition of inventory levels? Maybe how best to break apart core franchise inventory levels relative to the progress you've made on clearing through some of the obsolete styles? And then just what level of promotional activity have you contemplated in your forward guidance?

Hey, Amanda, thanks for the question. So the way that we've been approaching markdowns and our promotions in terms of what assortment we're putting in is primarily focused on eliminating the long tail of product that is outside of the core franchise and perhaps even deeper when you get to seasonal colors that are no longer relevant. So far, I'm quite pleased at the progress that the team has been making in terms of selecting which assortment and managing the depth of markdown or promotion that we're offering. Where that lands us is a position where in Q2, a very significant portion of the inventory that we moved was in the Tree Flyer franchise, which you may recall from the last couple quarters, we noted was a bit high and outside of what we would consider a core franchise. So as we transitioned to a much more measured buy and a different positioning on the Tree Flyer 2, we wanted to sunset that first generation product. Alongside that, some of the other ancillary products that we will no longer support going forward, plus some of the more flashy seasonal colors. So far, so good in terms of the look back. And in terms of the look forward, again, I think we're seeing a really nice methodical pacing to this. As we flex things like pulling marketing spend back 21% and moving inventory down 24% in the quarter, that's pretty significant progress and much better than the trend on sales. So that is something that we expect to be able to continue. And while, as Annie noted, we continue to deliver some positive news in terms of sequential gross margin on that.

That's helpful, color. Thank you.

Thank you. Our next question comes from the line of Dana Telsey from Telsey Advisory Group. Please go ahead. Dana, your line is open. All right. One moment, please. The next question comes from the line of Alex Straton from Morgan Stanley. Go ahead, Alex.

Great. Thanks for taking the question. Hi, Joey, Annie. A couple for me. Just on the second quarter guide, it looks like it's embedding a deceleration in the underlying revenue growth trend. So I'm just wondering, is that a function of what you're seeing so far quarter-to-date, or is that just some conservatism on your part? Any help there with how you thought that through? And then I think just second on the promo question, I'm wondering if you could speak to the broader environment. And Joey, I think you also said it trended lower in the last couple of months. If you have any sense for what drove that and kind of how it panned out that way. Thanks a lot.

Sure. I'll follow up with that one, and maybe Annie can give a little color on the Q3 guide.

Hi, Alex. The decelerating trend that we're expecting from Q2 and into Q3 is due to a number of factors. First is the elevated promotional activity that we had in Q2 that enabled us to clear through so much of that inventory. We do believe there was some level of a pull-forward of demand from Q3 into Q2. The other major topic that we are looking at is that in Q3 last year, we had a major sell-in moment with our third-party channels. As we were ramping up our presence in that channel last year, therefore, we're up against a tough comparison year-over-year.

And on the promo environment, Alex, it's an interesting situation. We would have expected at this point for it to subside a bit, but what we're seeing in the overall industry is continued elevated promotional cadence, both frequency and depth in terms of the discount rate. We're seeing that kind of anecdotally as well as in the numbers that we look at weekly. In some ways, I think it's a good thing for us because we're able to really surgically use promo and markdowns on our sale page to drive pretty solid conversion and allow us to be competitive on a price basis with an industry that's a bit over-inventoried, while also moving, very importantly, through the inventory that we don't want to support when we start to reignite growth in 2024. So fortunately, we're able to be quite opportunistic during this period and maintain a very premium brand integrity with the way we show up for consumers because of that environment.

Thanks a lot.

Thank you. Our next question comes from the line of Cristina Fernández from Telsey Advisory Group. Go ahead, Cristina.

Hi, good afternoon. Filling in for Dana today. I wanted to see if you can talk about your core styles. How are those performing and how is the full-price selling on those styles?

Hello, Cristina. The core franchises, as we've noted, perform better with higher full-price sell-through trends. When you go from non-core to core, you're going to experience that improvement. Going from seasonal colors, particularly the very bright, high-pop ones with short lifecycles towards more classic neutrals significantly improves sell-through. However, I think we've had a couple of franchises that have been iconic for the brand and have been around for quite a long time now. One of the key focal areas for us in 2024 is to revitalize some of these core franchises with updated tooling, and in many cases, new designs on the upper, both reinforcing from a quality perspective but also modernizing the aesthetic. That will be a significant update for us in Q4 this year concerning the Wool Runner, and we will follow up with subsequent revitalizations of other core franchises in 2024. I would say that this gives us a lot of optimism inside this building about how we're set up for the coming quarters as we approach 2024 and beyond.

And then a second question. I'm not sure how much you can share on the shift to the distributor model, but at least on the ones that you signed the LOIs, will the distributors be running the stores in Canada? And are there any one-time costs here in the second half that we should expect as those deals get closed?

Yes, let me give you a bit of high-level color, and then Annie can fill in for that as well. In general, just to be clear, when we make a transition, we expect a decline in revenue on a volume-neutral basis, but we will be supported by an immediate benefit to profitability and cash flow. What we're also looking for in these partners is the ability to drive additional volume due to their footprint within the wholesale marketplace in their regions. So that's the overall expectation. Because we have not invested in infrastructure for wholesale inside of these international markets, we expect some exciting growth opportunities. We are pleased with the partners we're having conversations with, particularly the two we are mentioning today that we're through the LOI phase with. So that is the high-level view, and maybe Annie can provide any details for accounting on that.

Absolutely. To go back to the first part of your question, yes, we do anticipate that our partners in South Korea and Canada will take over existing operations across e-commerce and retail, and will have the opportunity to grow the business with potential wholesale partners as well. In terms of impact, we do expect that any impact from the transition in terms of revenue in Q3 will be de minimis, but look forward to walking you through more details on these transactions in our next earnings call.

Thank you. Our next question comes from the line of James Duffy from Stifel. Go ahead, James.

Thank you for taking my question. Good afternoon. I have a question about the big picture objectives for the international market transition. So, international currently contributing a loss. Upon transition, do the international businesses under a distributor relationship immediately contribute positive profitability?

Yes, that is the expectation we have. Upon transition, we would expect a virtually immediate flip to profitable contributions and also a really nice positive impact from working capital. Just to note, these relationships, the way we expect them to happen, will include a minimum marketing commitment. There will also be a minimum volume commitment that they agree to in our arrangements. They will pick up inventory from us ex-factory, which will positively improve the working capital cycle on an ongoing basis.

Excellent. That seems a meaningful beneficial transition. And then with respect to the big picture objective to be positive by fiscal 2025, I presume the assumption is that the international business is profitable. Would you foresee the domestic business to also contribute profitably at that objective or is that not the framework?

Annie, why don't you fill in color here? Just to be clear, that's on a calendar year basis to be adjusted EBITDA and cash flow profitable for the full year. But in terms of the segment breakdown, do you want to provide a little color for them?

Sure. Yes, moving each of our international businesses to a distributor model will definitely be positive, as Joey has mentioned. We see the immediate benefits, and we also foresee it over the long term. We have additional work to do between now and then to ensure that our overall business is profitable by the end of 2025. I can let you know that our team is in lockstep and we are all marching towards that full-year 2025 target to achieve positive cash flow and positive adjusted EBITDA in that year.

Thank you. Our next question comes from the line of Bob Dribble from Guggenheim. Go ahead, Bob.

Hi. Good afternoon. Just a couple of questions for me. The first one is just on the store optimization. Can you just expand a little bit more on the progress that you've made, sort of how you've approached it and sort of where you see the opportunities for the remainder of the year and into next year? And then, Annie, when you think about the cost savings program, have there been any sort of low-hanging fruit surprises that you've found as you've dug in a little bit more in the last few months?

Thanks, Bob. On the first part of your question, the most critical thing for our store teams is to control what they can within their floors. Our objective in the stores is not only to contribute to marketing and customer experience but also to be profitable on a store-level basis and contribute to our overall profitability. That is the framing we’ve provided. Our teams are starting to see some sequential improvement quarter-over-quarter, and I expect that to continue over time. As we drive to a fresher style of marketing and put our recalibrated product line into place, particularly with materiality coming in 2024, we would expect to start lifting traffic as well. That's how we framed it for the team; I’m pleased with the early progress. They’re working methodically to build the blocks so that when traffic comes significantly, we can hold on to that conversion and drive additional average order value.

In terms of overall cost savings, the major savings this year come from the workforce reduction we undertook in Q2. As you would expect, there are numerous areas across the P&L, particularly in OpEx, where we are reviewing discretionary spending, and we have come up with a plan that we’re executing against. As you can imagine, creating a plan is easier than executing it, and this is where the team is truly coming together to ensure that we are driving towards a more profitable business going forward.

Thank you. Our next question comes from the line of Edward Yruma from Piper Sandler. Go ahead, Edward.

Hey, good afternoon. Thanks for taking the question, guys. I guess first on new products, I know you said in the last call you'll see a lot more in the second half. Just trying to understand the cadence of when it gets released. I thought you guys were exiting technical runs, but we noticed you dropped the new Tree Flyer 2. So I'm just trying to understand that. And then as a bigger picture question, what should we expect marketing expenses to kind of re-ramp into some of these new products and promotions? Thank you.

Thanks, Ed. In terms of the recalibrated product, I would clarify that in the second half of this year we'll have some additional products, but probably at the same measured pace we employed in the first half, with disciplined inventory buys giving us a good forward read into rebuys in 2024. The more material changes that we were able to make early this year won't come into play in significant quantity until 2024. However, we should see the benefits of a gender-differentiated approach in Q4, as well as the first significant revitalization of the core franchise with the Wool Runner in November. It's trending a bit more in the direction you described, but the materiality of those changes will hit home more in 2024 for consumers. On the Tree Flyer 2, we're halfway through the year and, as we noted some trends in the initial Tree Flyer, we had already purchased materials for Tree Flyer 2, which was fully through development. The important thing is that while we incorporate stealth technology and technical running components, we can still position the aesthetic more towards that active lifestyle crossover space and expect better results compared to our initial offering which leaned more towards technical running performance that our consumer wasn't ready for. So we're managing that inventory buy, and I feel the colors are fantastic and will perform well for lifestyle occasions, and messaging has improved.

As we plan for marketing spend, we've dialed down our marketing expenses both in Q1 and Q2 by $2 million and $3 million, respectively, compared to the previous year. And we did this to be prudent in light of promotions and margin impacts to drive conversion. We expect our Q3 marketing dollars will decline slightly from Q2 levels, followed by a modest uptick in Q4 as we capitalize on the opportunity to drive greater conversion and full-price sell-through as our product line improves in the latter half of the year.

Thank you. Our next question comes from Dylan Carden of William Blair. Go ahead, Dylan.

Great, thanks. And apologies, I've missed some of this call, but I'm just curious what it might take as far as sort of an internal infrastructure standpoint if you wanted to ramp up North American wholesale more fully. Is that something that you're considering as you assess the landscape and where you've come from after the last year?

Yeah, it's a great question, Dylan. We're building the appropriate infrastructure, both from an IT perspective, personnel perspective on the sales team, as well as the necessary product seasonal muscle required to enter that channel effectively. The one thing holding us back is not infrastructure; it's that we want to drive sell-through and margin for our partners, and that's necessary for success in that channel. We would much rather have high sell-through first and then have a pull strategy where the retailers are really looking for more, at which point we can methodically expand within those accounts with more doors and more SKUs, as well as into select other accounts. The effectiveness of this approach won't materialize until the second half of 2024. We are somewhat behind schedule in recalibrating our product portfolio to fit seasonal selling windows.

Yeah, that makes sense. And again, with the same caveat, any update on golf? I know it's small and sort of more of a test, but I'm just curious if it emboldens you as far as category extension, brand extension.

Yeah, the way to think about the Golf Dasher is more of a dasher than an entry into golf. You know, it's one of those things where we know we have an outstanding product there, but the resources required to really fully get into golf aren't something we're ready to undertake. The idea here is to quench the thirst of customers who have been asking for this for years. It's a phenomenal product. As I mentioned, you might have missed earlier, but there are tour players wearing these on the PGA circuit right now, highlighting the breadth and potential of franchise expansion we hope to bring to all key franchises, ensuring that they continue to energize our consumers.

Thank you. One moment as we get the Q&A roster settled. All right, our next question comes from the line of John Kernan from TD Cowen. Go ahead, John.

This is Alex Douglas on for John. I just had one additional question on the international business. It looks like it's outpaced the domestic business for the last three quarters and inflected positively in Q2, which was nice to see. Are there any specific call-outs from either a product perspective, brand perspective, or consumer behavior driving that? Or is that more of a function of broader market dynamics?

Thanks for the question. I think it's largely a function of the latter. First of all, the international business in each geography is coming off a smaller base. There were also many unique factors by market. If you reflect back on the first half of 2022, a number of regions faced severely COVID-related lockdowns, and we're now experiencing a unique backdrop in terms of retail environments in those regions. We've seen extreme and stellar growth in certain areas that had those lapping periods, despite our considerable pullback on marketing spend. This has allowed us to drive a solid business as we explore these transitions.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to management for closing remarks.

Thanks, Haley. I'll close by noting that we are spending every waking moment focused on driving sustained and durable profit for the future chapter of Allbirds. It is not going to happen overnight, but rest assured that this is our myopic focus, and we are working in all the right areas with the urgency you all would expect. We appreciate your continued support, and we look forward to speaking with you next quarter to update you on our continued progress. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.