Earnings Call Transcript - BIRD Q3 2022

Katina Metzidakis, VP of Investor Relations and Business Development

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, 2022 and medium-term guidance target, impacts to duration of external headwinds, our simplification initiatives 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 the 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 the 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. Unless otherwise noted, we will be speaking to adjusted net revenue, which is a non-GAAP financial measure when referring to net revenue during today's call. 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. 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. Now I'll turn the call over to Joey to begin the formal remarks.

Joseph Zwillinger, Co-Founder and Co-CEO

Thank you, Katina, and good afternoon, everyone. I'd like to start us off today by taking a moment to commemorate the one-year anniversary of our IPO, which is a critical step in building Allbirds into a defining global brand for this century. And what a year it's been. Despite the external headwinds and uncertainty, it's been a year full of wins, including cutting-edge materials innovation, a deep pipeline of new style introductions, the addition of our new third-party channel and the launch of our rerun program to enable a circular economy for our products. And through it all, we remain on track to deliver on all commitments from our sustainability principles and objectives framework that we outlined in our S-1, and we continue to lead the conversation on sustainability in the footwear and apparel industry. I could not be more proud of what our brand stands for, the incredibly passionate team and culture we've built, and our fiercely loyal customer base. Needless to say, Tim and I remain tremendously optimistic about the future of Allbirds. Before digging into the quarter, I want to provide a bit of context on the consumer environment as I see it. Back in Q2, thanks to our direct relationship with our customers and sophisticated data platform, we believe we were early to identify changes in demand signals. Our diagnosis of the market is playing out as we expected, and we entered the third quarter prepared for the demand environment. Thanks to these insights, coupled with some great work from our team, I am proud to report that we exceeded our Q3 net revenue and adjusted EBITDA guidance target while taking market share and delivering on our sustainability goals. Since we last spoke, we are seeing increased choppiness in the external environment, in addition to worsening foreign exchange headwinds and extended COVID lockdowns in certain areas of China. We expect Q4 to be negatively impacted by persistent inflation and high levels of promotional activity, which will impact our U.S. business, along with a weaker consumer backdrop in Europe and worsening FX headwinds. In fact, we are preparing for a scenario in which consumer headwinds worsen in the coming months as the full impact of these myriad market dynamics are fully digested by consumers. We've taken this complex operating environment as an opportunity to streamline processes and optimize our cost structure while continuing to execute against the simplification initiatives announced during Q2. On the balance sheet, the high-quality evergreen nature of our inventory has allowed us to tighten our open-to-buy, something we'll continue to do going forward, targeting increased turns to free up working capital and increase margin from lower holding costs. Despite a cautious outlook on consumer demand, given the economy, we expect a meaningful increase in inventory turns in 2023 as these initiatives fully take hold. These points validate my belief that the actions we took last quarter were the right things to do at the right time. Looking ahead to the holiday season, we expect the external environment to be the most promotional we've experienced since launching the company in 2016. Despite that, we have prepared a great product roadmap alongside the right mix of inventory, coupled with a strong holiday marketing campaign. Taken together, I feel confident as we head into this all-important season despite the noisy external environment. While we are taking a more conservative approach to planning our business, we continue to prudently invest behind our three growth initiatives: one, expanding and energizing our product portfolio; two, growing our store fleet; and three, scaling our international business. Starting with product, we are incredibly proud of our recent launch of plant leather, a first-of-its-kind innovation performing similarly to bovine leather, but with 100% plastic-free materials. This is a key point of differentiation from other leather alternatives. Our first product with plant leather was on a new silhouette called the Pacer, which provides our customers with an elevated sneaker style, expanding the use occasions where consumers can select a pair of Allbirds. We also have good product flow for the holiday that we expect our customers to love. Moving to stores, our owned retail channel grew net revenue 53% year-over-year. We opened eight new stores during the quarter, including six in the U.S. It's important to note that nearly half our current store fleet is still in the ramp-up phase, which has historically taken around four quarters to reach revenue maturity. However, that sales ramp is taking longer right now given the macro headwind. Our stores remain a powerful acquisition tool, allowing us to gain leverage on marketing spend to lower customer acquisition costs, increase the penetration of valuable omnichannel repeat customers, and are ultimately the best expression of our brand. Our U.S. stores maintained an impressive score for NPS of above 90, which we believe positively correlates to repeat purchases and the health of the Allbirds brand. That said, we continue to be negatively impacted by traffic levels that remain below pre-COVID levels. The slow traffic recovery appears to be consistent across our industry, and though we believe that we will recover the majority of this traffic, the timing of that recovery is unclear given the operating environment. Even in a choppy environment, we continue to see an overall uplift in omnichannel sales in markets with stores above what we see in e-commerce-only regions. Turning now to third-party. I am happy to report that we are tracking ahead of our expectations with strong early sell-throughs. We are thrilled to have added REI as our most recent retail partner, along with our 20 million-plus co-op members. REI's belief in the transformational power of nature and their dedication to climate action aligns perfectly with our goal of making better footwear and apparel products in a better way. I'm also pleased to announce that we will be furthering our partnership with Dick's Sporting Goods beyond the company's public land banner. In the coming weeks, we will enter DSG's newest house of sport format, which delivers a fantastic customer experience in three doors and intend to expand to other DSG core format stores beginning in Q1. We are taking a methodical approach to develop unique and compelling stories for customers with each of our marquee partners. Our center stage activation at Nordstrom was a great example of this, as is the holiday activation that we currently have in REI flagships. At just over 100 doors, we have a long runway of potential growth ahead of us in third-party. Similar to our direct retail strategy, a key tenet of our third-party strategy is to use the channel to meet consumers who have not yet heard about our wonderful brand and fantastic products. We believe that our third-party footprint is already increasing new customer acquisition and brand awareness. In fact, we have found very little overlap between our direct channel customers and those of our third-party partners, providing a fantastic runway and opportunity for brand discovery. As we noted last quarter, the journey we take to achieve our strategic and financial goals may shift, but the destination looks the same. In a time of significant volatility, we continuously evaluate our channel strategy to determine the optimal balance between third-party and owned retail stores. As we plan growth across our channels, including digital, stores, and third-party, we will be conscious of and deliberate on the balance between top line growth, profitability, and importantly, capital efficiency. I look forward to providing more updates on upcoming calls as we continue along our journey and methodically grow the marketplace for our products. Turning quickly to our international business. Revenues grew nearly 11% despite an approximate 1,500 basis points year-over-year headwind from foreign exchange. Though we remain confident in the long-term demand in our international markets, as we mentioned last quarter, we are primarily focused on five key geographies as we continue to navigate this choppy macro environment: the U.K., Germany, Canada, Japan, and China. As an example of this focus at work, we are experiencing strong momentum in the U.K. despite the overall environment being challenged in Europe. During Q3, we saw over 20% growth in local currency, driven by solid comps in our established Allbirds stores in London and positive initial response to our new Kings Road store. We also opened a Selfridges shop-in-shop, which is increasing brand awareness and driving sales. In closing, I am proud of the work we are doing to build Allbirds into a generation-defining brand and remain confident we can simultaneously drive efficiency into the business.

Timothy Brown, Co-Founder and Co-CEO

Thanks, Joey, and good afternoon, everyone. As we look at what's happening in the world, never has it felt more important to emphasize our sustainability goals. We recently published our 2021 sustainability report, and I'm proud to highlight that while growing our revenue by 27% in 2021, we actually reduced our average product carbon footprint by 12%. Our teams are energized by our goal to cut our already low product carbon footprint in half by 2025 and drive it to near zero by 2030. In support of this long-term plan, we are proud to have made groundbreaking tangible progress and set a new industry standard for others to follow. We've done this by focusing on three key periods: regenerative agriculture, renewable materials, and responsible energies, which have helped make 2021 a banner year towards meeting our brand promise for consumers. In regenerative agriculture, we partnered with Supplier New Zealand Marina and other brands to pave the way for regenerative wool in New Zealand through the ZQ Rx framework. To date, nearly 500 growers have signed up, representing 15% of New Zealand's farmland, committing to work with nature to continuously improve human, animal, and environmental outcomes. In renewable materials, we introduced our updated line, reducing its carbon footprint by 5% by introducing a midsole that was 21% lighter and removing unnecessary components. And on renewable energy, in 2021, we procured 100% of our energy from renewable sources to meet our electricity needs at manufacturers in the U.S. and Vietnam. Across the globe, our manufacturing partners work to install on-site solar at their facilities. In addition, we increased our share of ocean shipping, which has a significantly lower carbon footprint than shipping by air, from 80% in 2020 to 84% in 2021 and over 90% this quarter. In addition to carrying a lower carbon footprint, ocean shipping has real benefits for our gross margin. This signifies the essence of our model—the more sustainable we are, the better our business is. These are just a few of the many things we're up to, and I encourage all of you to take a look at our latest sustainability report to see how we continue to lead the conversation in sustainable footwear. Turning to product, Q3 was a big materials innovation quarter for Allbirds. We launched plant leather, a first-of-its-kind leather alternative that is 100% plastic-free, 100% vegan, and exclusively contains natural materials like plant oils and agricultural byproducts. We also launched two lighter-weight materials, Woven Wool and Canvas, which make up a growing and robust suite of materials that we worked hard to build. Moving forward, we will continue to inject these into our new and existing product franchises to expand and enhance the supernatural comfort experiences we offer. Looking across our broader product portfolio, we have made meaningful progress in both performance and lifestyle this quarter. We remain very happy with our performance footwear portfolio. In fact, the Flyer was just recognized by Men's Health as a top running sneaker for 2022. We continue to see the Flyer franchise as another important step forward in building our performance offering. In lifestyle, our new plant leather silhouette, which is available in limited supply, broadens our lifestyle repertoire with a true stylish shoe, providing additional use occasions for our consumers. We intentionally launched the line as a limited supply, and we are encouraged by the media and consumer reaction. We will continue to invest in growing this new franchise moving forward. Continued style innovation will be paramount to our next phase of growth and play a key role as we move into third-party distribution. I'm also excited about our strong product pipeline going into the holiday, including our recently launched cold weather run collection, which combines our best-selling water-repellent midsole material and performance support, as well as our new fluff wool collection, which is perfect for gifting and at the heart of our recently launched holiday campaign focused on our core brand offering of supernatural comfort. In closing, amidst all the volatility, we are continuing to do the hard work of material innovation and product creation, and remain focused on leading the conversation on sustainability in the footwear space with great products made from supernatural materials.

Michael Bufano, Chief Financial Officer

Thanks, Tim, and good afternoon, everyone. I'd like to start by adding my thanks to our teams for focusing on controlling what we can control. Their execution led to a solid financial outcome in the quarter. Adjusted net revenue increased 15% to $72 million, 19% when excluding the impact of foreign exchange. Let me break down the growth drivers. Starting with geographies, we saw balanced growth with the U.S. up 17% and international up 11%, 26% when adjusted for foreign exchange. Looking at channels, third-party was a significant growth driver and represented a mid-single-digit percentage of revenue mix. We continue to expect third-party to be an EBITDA-accretive growth driver in 2023. Looking at revenue growth through our customer lens, in our direct business, orders increased 16%, and average order value was up 2%. I'd like to provide some granularity on active customers, which we view as a good indication of the health of our brand and business. In Q3, active customers increased 12% on a year-over-year basis, roughly in line with the trend we saw in Q1 and Q2. In addition to strong growth in active customers, we have seen steady increases in spend per customer. We saw gains across active customers in both digital and retail. As you'd expect with more stores in 2022, retail was the bigger driver. As Joey noted, our stores build brand awareness, efficiently acquire new customers, increased repeat rates of existing customers, and drive omnichannel customer lifetime value. We view our consistent growth in active customers as a strong indicator of brand health and an important proof point that our growth pillars are helping us build a durable business for the medium and long term. Moving on to adjusted gross margin, Q3 came in consistent with expectations at 47.6%. Business segment mix away from our gross margin accretive international business, an increase in third-party sales, and COVID-related cost headwinds were partially offset by increased ocean shipping and a modest early benefit from our simplification initiatives. We also experienced modest pressure from our previously discussed strategic increase in promotional activity, which partially offset some of the benefit of our price increase. We continue to believe that we need to respond to this highly competitive environment and meet customers where they are. Importantly, customers that we have acquired through promotions continue to behave similarly to prior cohorts. Finally, our adjusted EBITDA was negative $12.7 million. We benefited from tight SG&A control tied to the simplification initiatives as well as lower marketing spend. Marketing decreased both sequentially and on a year-over-year basis due to increased efficiencies in our digital channels and the shift of some marketing spend from Q3 into Q4. We feel really good about delivering this result in Q3. Moving to the balance sheet, we ended Q3 with $127 million of inventory, which was up 3% from the end of Q2. In-transit inventory accounted for over one-third of that inventory but has come down slightly compared to Q2. Included in that $127 million is about $5 million of end-of-life products that we're continuing to liquidate as part of the simplification initiatives. We feel good about the makeup of our inventory, the vast majority of which is core evergreen footwear. As mentioned during our last call, we have begun to buy tighter on core footwear as we plan for a more uncertain consumer demand backdrop in 2023. Tighter buying, coupled with our selective promotional strategy, is expected to reduce inventory levels and improve turns. With mid-teens revenue growth this year, a structural slowdown in SG&A spending due to the simplification initiatives, and improved inventory turns, we expect free cash flow to improve and believe our Q3 ending cash position of $181 million is more than ample to fund our growth initiatives for the foreseeable future. Before leaving Q3, I would like to provide an update on the simplification initiatives announced last quarter. These initiatives have set us up to continue delivering top-line growth while keeping us on a path to reach our profitability and cash generation targets. I'll walk through the initiatives and provide updates on each. The first initiative is investing in our supply chain to reduce both cost and our carbon footprint. Later this year, we will commence production with a new factory partner. The full impact of this change will flow through the P&L in 2024, but we expect to significantly decrease our landed product costs on a run rate basis in early 2023. I'm also pleased to report that just last week in the U.S., we successfully transitioned to our automated distribution centers and new dedicated returns processor. Taken together, these changes have already provided greater logistics cost predictability for Q4, and we expect to see a positive impact on gross margin in 2023. The second initiative is streamlining our organizational structure and reducing SG&A to free up resources to continue to invest in areas that are critical for demand generation. We are on track to deliver the previously communicated corporate SG&A savings target of $4 million to $5 million in 2022 and $13 million to $15 million on an annualized basis starting in 2023. The third initiative is the one-time liquidation of end-of-life inventory, which is proceeding as we expected. Overall, we are on track with the simplification initiatives and continue to expect the total nonrecurring net costs associated with them to be $18 million to $24 million. To echo what Joey said earlier, it is clear to us that these actions were the right thing to do at the right time. I'd like to now turn to our guidance targets for the rest of 2022, which exclude any nonrecurring revenue and costs associated with the simplification initiatives. Our 2022 annual guidance target ranges remain unchanged. We continue to expect adjusted net revenue of $305 million to $315 million, up 10% to 14% versus 2021, 13% to 17% excluding the impact of FX. This implies a Q4 range of $92 million to $102 million, which when compared to Q4 2021, is a range of minus 5% to plus 5%. We expect the U.S. and international to grow at roughly similar rates in Q4. For adjusted gross profit, we continue to expect a range of $150 million to $157.5 million. The midpoint of our revenue and gross profit targets represent an adjusted gross margin of 49.6%. We also continue to expect adjusted EBITDA of negative $42.5 million to negative $37.5 million. One model update is that we are now expecting to open 22 net new stores, up from 16 to 17 as a few projects finished faster than anticipated. By the end of 2022, we expect to have 57 total stores, 42 in the U.S. and 15 internationally. These additional openings will modestly pressure Q4 adjusted EBITDA. Given the choppy consumer environment, we are parsing through all the crosscurrents that are impacting spending this holiday season. Our Q4 guidance targets assume an improvement versus our quarter-to-date trends. We feel confident in that improvement because we have what we believe to be our best holiday marketing and product campaign in our company's seven-year history. We need to meet consumers where they are right now and factor in the competitive environment. Our broader marketing strategy for the season includes an enhanced promotional calendar. Depending on how the holiday season plays out, we could end the year at full-price sell-through of 80% to 85%. That remains much better than industry peers, but below the 85% to 90% we communicated on the Q2 call. I'd like to remind everyone that in the retail channel, we will begin lapping weeks that were pressured by Omicron later this quarter. Finally, there are several additional external macro factors we are considering as we look at the quarter. First, we continue to see increasingly negative FX headwinds. Indeed, our current Q4 estimate is that the year-over-year FX impact is now $4 million to $5 million, which is a couple of million worse than what we factored into the guidance last quarter. Given the volatility in rates, there is potential for further headwinds in the next two months. Second, we continue to see volatility in our China business due to the consumer spending ripple effects of rolling COVID lockdowns. Third, there is a risk that U.S. consumer spending does not rebound fast and could moderate further. Taken together, we believe all these factors create increased risk of Q4 results coming in at the lower end of our guidance target ranges. In closing, while this is a really tough operating environment, we continue to feel confident about how we are positioning our business for the future and our ability to become better operationally, deliver on our sustainability initiatives, and take share. Through our thoughtful approach to our supply chain, operating structure, and processes, we have built a stronger and leaner infrastructure. We believe these actions, coupled with our three growth pillars and our intense focus on cash management, position us to drive the business towards our medium-term profitability targets and create shareholder value.

Operator, Operator

Our first question comes from Mark Altschwager with Baird.

Unidentified Analyst, Analyst

This is Amy on for Mark tonight. We've seen you take the footwear assortment in a few different directions this year with the Flyer launch earlier in the performance owning category, not the Pacer's new lifestyle shoe. Where are you focusing now in the product development pipeline? Should we expect to see more internal innovation on the lifestyle side around the performance side?

Timothy Brown, Co-Founder and Co-CEO

Yes. Thank you for the question. We'll continue to stay laser-focused on the idea of supernatural comfort across all the products that we're making. The majority of our product focus and innovation focus remains on the lifestyle space. We're really excited and pleased with the launch of the Pacer, our most recent lifestyle franchise, that has performed well and also introduces a new natural material platform in plant leather that we feel really excited about. We still remain in the early days of our journey into performance. The DASH, our original franchise, is at the core of that offering and the trust continues to perform really, really well for us as an entry-level running product. The Flyer pushed that even further with the new material technology in Swift form, again, that we feel really good about. Overall, performance accounts for about a quarter of the business, and we'll continue to build that and build credibility with it over time while expanding the use case. We continue to think that there's a great white space in the category for natural materials and for the consumer trend around our sustainability purpose. So lots more to come, and we're really, really excited about the product roadmap looking forward to 2023.

Unidentified Analyst, Analyst

Great. And then switching gears, can you talk a little bit more about how you're thinking about your own promotional activity? We noticed the Flyer 15% off on this side is a bit different than your past promotional strategy? Are you seeing customers react to increased promotional cadence? Or is this just coming ahead of what you expect to happen?

Joseph Zwillinger, Co-Founder and Co-CEO

Yes, I think we—thanks, this is Joe. We've signaled early on that we anticipated a very significant increase in the overall environment promotion. If you look around the industry, it's certainly standing out that way. We're feeling it. Mike alluded to the fact that we're expecting a slight uptick in the promotional activity needed to meet the moment and ensure we're competitive for the consumer in this highly promotional environment. So we're elevating that to a certain degree. That said, I'll reiterate, we feel really good about the balance that we're making in terms of meeting the consumer where they are for the moment and still being best-in-class in terms of the premium nature of how we're approaching discounts and promotions. So we're feeling generally pretty good about that, and it's all on track with what we signaled to you all at the last quarterly call.

Operator, Operator

The next question comes from Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson, Analyst

You spoke last quarter about your simplification program setting you up for significant adjusted EBITDA improvement in 2023. As we get closer to 2023, can you provide some numbers or guardrails around your goals or targets for EBITDA?

Michael Bufano, Chief Financial Officer

Yes, Lorraine, it's Mike. We'll get into that more on the next call after Q4 in part, just really thinking through the fact that it's a pretty volatile demand environment right now. When we look at it, we believe we're making material improvements, especially on the gross margin side. As we iterated, the $13 million to $15 million of structural SG&A savings that are coming on the corporate side. Still in the world of the middle, the P&L, and the things that we can have the most direct control over, we feel like we're making really good progress there. The other factor that will play into that for us is when we look at 2023 EBITDA, is the fact that we do believe the third-party channel will add EBITDA accretively. We look forward to talking a little bit more about that when we get into more detail on 2023 in our next call.

Lorraine Hutchinson, Analyst

And then as a follow-up, I'll just ask for some details around the comments you made on improving marketing efficiency further. Do you want to start on that, Joey?

Joseph Zwillinger, Co-Founder and Co-CEO

Sure. Yes. What we're really referring to is the continued path towards getting leverage on marketing. Part of that, of course, comes from channel shift, and while we still have our brick-and-mortar fleet in the early ramp-up phase, as we mentioned, about half of it is still getting close to revenue and overall target maturity on profitability. So it's a little bit of that mix shift. Then it's also just being balanced through the funnel and optimizing our creative and media mix. As we've said before, we've done a really nice job as a team navigating IDFA challenges that we were well ahead of, and we continue to drive good leverage throughout the P&L on marketing despite the fact that we continue to invest in the brand.

Operator, Operator

Our next question comes from Bob Drbul with Guggenheim Securities.

Robert Drbul, Analyst

Just a couple of questions. On the store fleet, can you talk a little more around some of your older stores, more established stores, or more mature stores, if that's the right word to use? In terms of what you're seeing there in terms of volume and/or markets? And then on the brand itself, have you guys done any more recent evaluations on sort of aided awareness, unaided awareness, and progress that you think you're making with the brand? That would be helpful.

Michael Bufano, Chief Financial Officer

Bob, I'll start on the stores. Joey alluded to it; it's a tough environment out there overall in retail, as you well know. The pre-2019 stores have not fully returned to the same level of traffic they were at prior to COVID. But we feel pretty good overall about how those stores are performing right now, and they're serving the role that we talked about, which is they help us drive brand awareness. They drive lifetime value for our omnichannel customer and deliver the best customer experience possible going forward. That's how we're viewing it on the retail side. Do either Tim or Joe want to jump in on the brand question?

Timothy Brown, Co-Founder and Co-CEO

Yes, I'll just quickly add, Bob, that it's not a metric that I'd say is reliable quarter-to-quarter in general, which is why we don't really share it all the time. But I can tell you that directionally, we're making great progress, and it continues on a trend line basis to increase. When we look at specific cities where we have retail stores, that really helps drive it a lot. So when we focus on certain concentrations of our target consumers in specific cities and infill that region with stores, it does a great job for us. It's too early to tell on the third-party actual quantitative impact of that, but being in about 100 doors is just a drop in the bucket in the market that we play in. As we outlined in the strategy, you would expect to see a significant uptick on aided awareness there.

Operator, Operator

Our next question comes from Edward Yruma with Piper Sandler.

Edward Yruma, Analyst

I guess, first, you've expanded the SKU count pretty materially, and it sounds like you're going to continue to innovate. How do you think about editing SKUs, making sure the right assortment, given that I think historically, your variation was largely color-driven? And then as a follow-up, on the 5%, I think it was incremental growth from wholesale, how should we think about the gross margin impact, understanding that it is EBITDA positive? If wholesale continues to grow, how should we be thinking about that medium-term model implication?

Joseph Zwillinger, Co-Founder and Co-CEO

Thanks for the questions. I'll jump on the first one and then pass it over to Mike on the second one. As you noted, as we increase the SKU count, there's an inevitability that we need to be a little bit more seasonal with some of those offerings to deliver a balance of freshness to the consumer, being seasonally relevant, and also managing inventory very prudently. It's going to drive some promotional activity, and markdowns for us are a more appropriate way to put that. That is the normal cycle we expect to continue to deliver, all while maintaining that premium brand positioning we desire. We're managing that carefully, and we're also trying to be very smart about how we keep the overall marketplace clean when interacting with third parties, which is why we're adopting a marquee strategic account approach to uniquely building the third-party marketplace, maintaining price control and brand identity effectively across channels.

Michael Bufano, Chief Financial Officer

I'll take your second part of the question about third parties. Just a couple of things there. First, remember that starting these relationships with some of these retail partners in Q3 and Q4 includes some initial loading, which is part of why we called that out as unique for the quarter. In terms of the gross margin impact, it was not one of the biggest drivers on a year-over-year basis; it was little of the factors we laid out in the call that felt like they really moved gross margin in that environment. Overall, we feel pretty good about where gross margin landed for the quarter, especially in line with our expectations coming into the quarter. Regarding the model implications in the medium term, again, much like my response earlier, I think that's something we'll look more into when we get to the Q4 call, as we will better understand the size of the third-party business in 2023. We've discussed our gross margin objectives and targets focused largely on the direct business. Thus, third-party could be assessed differently over time.

Operator, Operator

Our next question comes from Matthew Boss with JPMorgan.

Matthew Boss, Analyst

So Joey, could you speak to any changes in consumer demand that you saw by region as the third quarter progressed? On the projection for flat revenues at the midpoint for the fourth quarter, could you speak to the choppier trends that you cited? Maybe elaborate on the opportunity for improvement in the back half of the quarter?

Michael Bufano, Chief Financial Officer

That could continue through the holidays. So that's reasonably consistent with what we said. One of the notable bright spots came from the U.K., as we mentioned earlier in the call. China was a different story and was really underpinned by rolling COVID lockdowns that seemed to persist the longest than anywhere in the world. We've seen that lighten up already, with early indications showing some green shoots in consumer reaction during their big festival on Double-11. However, the situation has not fully recovered yet. In the U.S., as we indicated earlier in the last call, we began to see some pullback in consumer demand, which has largely continued into this period. Our expectation, if you consider the two-year stack, is that it's reasonably consistent. We believe that consumers are going to focus buying a little closer to the holiday, as they anticipate more promotions this season. This differs from last year, where spending started earlier due to headlines about supply chain delays. We are aligning our marketing and product flow to meet this moment. Regarding the medium-term targets, if you examine our business this year, excluding the impact of foreign exchange, we're projecting upper-end growth of 17%, which is just below the 20%, the lower end of our target range. Considering factors like inflation, geopolitical conflicts, and COVID lockdowns in our second-largest market, we feel confident about our revenue outlook for 2022. We'll provide more detail on 2023, as mentioned previously, including key drivers for moving the business forward.

Operator, Operator

Our next question comes from Ashley Helgans with Jefferies.

Unidentified Analyst, Analyst

It's Blake on for Ashley. Just wanted to ask a little bit more on the U.S. consumer expectation in Q4. I know you said you've seen some slowdown there. I believe you also said you expect some improvement versus the quarter-to-date based on holiday strategy. Just wanted to make sure I heard that correctly and kind of what gives you more confidence in the holiday period. If you could just give a little bit more color on consumer expectations there for the U.S. in Q4.

Michael Bufano, Chief Financial Officer

Yes, Blake. I'm happy to do it. In terms of how we maintain confidence for the balance of the quarter, again, we've stated that this is our best holiday marketing calendar, with the best execution of our creative holiday content by far. A few folks on this call have even sent us emails regarding a recent launch that drove substantial activity. Coupled with this, we have a strong product pipeline for the holiday season. Additionally, as Joe and I have both mentioned, we recognize the need to meet consumers where they are, which requires a more promotional approach, right now, even for a brand that historically has not engaged in a lot of promotion. We typically see a positive response from customers when we implement these strategies. That's why we feel confident in driving sales.

Unidentified Analyst, Analyst

That makes a lot of sense. I wanted to ask on the store strategy. It sounds like that's still making great progress adding more stores. I know you mentioned that you haven't seen some of those older stores make full traffic recovery. Just wanted to touch base there because obviously, e-commerce has grown so much and now you're shifting into wholesale. How big of a deal is it if you don't get that full traffic recovery? Do you feel like maybe there is some leeway there given the growth in wholesale and direct to consumer?

Michael Bufano, Chief Financial Officer

Yes. Joe and I have tackled that one. I think there's a number side of that and the strategy side of that a little bit. So I'll take a little bit of the numbers. In terms of getting back to pre-COVID levels and how important that is, those stores had best-in-class productivity before COVID. That level of traffic recovery would certainly be fantastic if we achieve that. But we feel confident overall about the role these stores play in driving brand awareness and customer lifetime value, as mentioned earlier. Thus, even if those stores haven’t reached pre-2019 traffic levels, the strong sales and profitability levels are still promising. Perhaps Joe could add a bit more on how we envision the strategy around digital, owned retail, and third-party coming together.

Joseph Zwillinger, Co-Founder and Co-CEO

Yes. We need to consider all these elements as a system. We're building a very smart marketplace with distribution that fuels a fantastic product engine to deliver what consumers want. As we add doors in the third-party channels, we expect that to enhance brand awareness significantly. Customers may purchase from our retail partners, but they also might just learn about us and return to our direct channel. We anticipate this will result in excellent customer acquisition for our direct channel, subsequently enhancing both our digital and retail doors. This is the strategy we aspire toward, and it's been working well so far, which is why we're taking a methodical approach to building the marketplace.

Operator, Operator

Our next question comes from Alex Gratton with Morgan Stanley.

Alexandra Straton, Analyst

Great. I just wanted to talk about that end-of-life inventory that you're adjusting numbers for. Is the majority of that apparel? Or is there any other part of the composition that we should be aware of? And then I was just wondering, do you still have more access to clear through that, and when you expect to kind of be done with clearing that?

Michael Bufano, Chief Financial Officer

Alex, yes. The majority of it is apparel. Of the $127 million we have on the balance sheet right now, about $5 million is in the end-of-life products that we're still clearing through. This is the first time we've done something like this. We're pleased with the progress the team has made thus far. I can't provide an exact end date as to whether it will all be cleared in Q4 or perhaps bleed into Q1 or Q2 next year. It's a challenging marketplace for this, but we're making good progress and are happy with the results we've seen.

Alexandra Straton, Analyst

Great. That's super helpful. Maybe one quick follow-up is just to hear that you guys are expanding your wholesale partnerships. I was wondering if you could provide some color on how you select those partners and what you're looking for as you assess which ones are the right ones to enter.

Joseph Zwillinger, Co-Founder and Co-CEO

Yes. That's an excellent question. We believe that taking a concentrated approach with high-quality partners at the premium end of retail distribution is the way to go, particularly as we begin. We've really chosen one marquee partner in about four or five different channels. We're trying to present a very premium brand expression that resonates with the consumer. We're also being meticulous about limiting the number of partners we take on to differentiate our assortment and maintain a leaner product line relative to our industry competitors. We regard this approach as wise and focused on creating a premium brand expression, achieving great sell-throughs, and strong margins for our partners, enabling robust sell-through in future seasons.

Operator, Operator

Our next question comes from Dylan Carden with William Blair.

Dylan Carden, Analyst

Just curious, I think some of the focus here on stores has to do with the fact you've come sort of a long way quickly. If you're not kind of seeing that volume return from pre-COVID levels and you're pulling forward some openings this year. What guardrails do you have in place? Is the cadence that you've seen this year something you expect to carry into next year? If the environment remains choppy, particularly with wholesale expanding your reach and awareness, does that change some of your calculations around the extent of retail expansion?

Michael Bufano, Chief Financial Officer

Yes, as we mentioned, half of our stores are still in the ramp-up phase, so we do not have full clarity on how quickly those will reach revenue maturity. Given the depressed traffic we see across the industry, there remains some uncertainty. We indeed are focused not only on top-line growth but also profitability in channel selection to drive an optimal mix. We're being mindful of capital efficiency in a time of increasing uncertainty about consumer behaviors. It's also important to note that pre-COVID traffic levels were exceptionally high for the industry, making it challenging to achieve such levels again. Thus, our strategy is taking those historical sales levels into account while considering the current market. Yes, and on the marketing leverage we saw, it is predominantly driven by sales mix and some efficiency on the digital side. There are no notable surprises.

Operator, Operator

I am showing no further questions at this time. I'd now like to turn it back to Joey for closing remarks.

Joseph Zwillinger, Co-Founder and Co-CEO

Thank you all for tuning in. We're proud of the team's efforts given how choppy the environment has been. Thank you to all the staff here at Allbirds for your dedication. We look forward to providing another update at the end of the year.

Operator, Operator

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.