Earnings Call Transcript - BIRK Q3 2024

Operator, Operator

Good morning and thank you for standing by. Welcome to Birkenstock's Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. The company allocated 60 minutes in total to this conference call. I would like to remind everyone that this conference call is being recorded. I will now turn the call over to Megan Kulick, Director of Investor Relations.

Megan Kulick, Director of Investor Relations

Hello and thank you everyone for joining us today. On the call are Oliver Reichert, Director of Birkenstock Holding plc and Chief Executive Officer of the Birkenstock Group; and Erik Massmann, Chief Financial Officer of the Birkenstock Group; Klaus Baumann, Chief Sales Officer; David Kahan, President of the Americas; Tiffany Wu, Managing Director of Greater China; and Alexander Hoff, Vice President of Global Finance will join us for the Q&A. Please keep in mind that our fiscal year ends on September 30th. Thus, our third quarter of fiscal 2024 ended on June 30th, 2024. You may find the press release and supplemental presentation connected to today's discussion on our Investor Relations website birkenstock-holding.com. We would like to remind you that some of the information provided during this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the Federal Securities Laws. These statements are subject to various risks, uncertainties and assumptions, which could cause our actual results to differ materially from these statements. These risks, uncertainties, and assumptions are detailed in this morning's press release as well as in our filings with the SEC, which can be found on our website at birkenstock-holding.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During the call, all revenue growth rates will be cited on a constant currency basis unless otherwise stated. We will also refer to certain non-IFRS financial information. We use non-IFRS measures as we believe they represent operational performance and underlying results of our business more accurately. The presentation of this non-IFRS financial information is not intended to be considered by itself or as a substitute for the financial information prepared and presented in accordance with IFRS. Reconciliations of IFRS to non-IFRS measures can be found in this morning's press release and in our SEC filings. With that I'll turn the call over to Oliver.

Oliver Reichert, CEO

Good morning, everybody, and thank you for joining today's call. It was great seeing many of you in June during our most recent roadshow. We thank you for your love for the brand and kind support. We are happy to be here today to discuss another exceptional record-setting quarter for our company. We achieved the highest quarterly revenue in our history. This was driven by the unbreakable and growing demand for our products across all segments, channels, and categories. As promised during our IPO and secondary offering, we're delivering mid-to-high teens revenue growth, gross margin of 60%, and adjusted EBITDA margins of over 30%. We are expanding into the white space opportunities we identified, such as closed-toe silhouettes, orthopedics, professional, outdoor, the important APMA region, and owned retail. Now let's have a look at the third quarter. Birkenstock achieved 19% revenue growth in constant currency. As a super brand, we are taking share and gaining the attention of our key retail partners and their consumers. Consumers are becoming increasingly selective and more intentional in their spending, seeking out more physical touch points with the product. They are searching for brands they love, and Birkenstock is one of these global super brands. Our 19% revenue growth in the quarter was driven by 23% growth in our B2B business and 14% growth in our D2C business, well outpacing our peers. Birkenstock is a product that needs to be seen and touched, and we benefited from this shift towards more in-person shopping. This movement is validated through increasing sell-through rates and reorders at our key retail partners. Accordingly, our B2B business was a bigger part of our third quarter than it has ever been. We continue to see growth in revenue from our key wholesale accounts, with over 90% of our B2B growth coming from within existing doors. Our partners increased order sizes and added new categories, doing a great job presenting our brand to new consumers. Younger consumers prefer to shop in-store, a trend we are seeing more and more. 12,400 wholesale doors are important brand touchpoints for our consumers. With a limited but steadily growing fleet of 64 owned retail stores worldwide, we rely on our B2B business for its reach, predictability, and margin strength. Simply, the B2B business of a super brand like Birkenstock decreases risk with a very healthy margin. While ASP was up year-over-year, volume was a bigger contributor to revenue growth this quarter, given the strong B2B growth and the additional capacity provided by our factory expansion. As promised, we will never compromise our engineered distribution model and are maintaining our disciplined approach to relative market scarcity to keep supply comfortably under demand. Retail remains an important white space opportunity for us. We continue to selectively add to our footprint globally, adding seven new stores in the third quarter, bringing the total to 64. Our digital business continues to perform well with double-digit growth in the quarter. We continue to add to our fast-growing membership program, which grew 36% year-over-year to 6.9 million members. These members are highly engaged, spending more frequently and spending over 25% more per transaction than non-members. We saw a continued shift towards closed-toe silhouettes, including clogs and premium products during the quarter. Sales from closed-toe silhouettes grew more than double the rate of the overall brand in the quarter and revenue share increased 400 basis points year-over-year. We continue to generate significant momentum and compelling top-line performance from our newest style and have excellent new products in the pipeline in each category and region. Our Core Silhouettes also maintain very strong momentum. Revenue from our top five Core Silhouettes, most of which have been around for close to 50 years, was up 24% in the quarter. This highlights the continued commercial relevance of these iconic models in our most recognizable styles. Now let's move to our discussion of segment performance. Within our largest segment in the Americas, strong consumer demand for our brand continued in the third quarter. Revenue in the region was up 15% compared to the same period a year ago. Our B2B channel was especially strong in the quarter, with particular strength in department store accounts, which were up over 25%. Many accounted for meaningful brand exposure with 250 year anniversary statement displays in which they allocated more space to Birkenstock to support the initiatives. They celebrated the rich heritage of the brand and also included expansionary products such as closed-toe premium executions. Full price realization remained very strong at 95%. This resulted in continued strong replenishment orders and backlog into '25. We carefully managed business to support our relative scarcity model across our wholesale partners, and our stock-to-sales ratios remained very healthy. New points of distribution in the Americas accounted for a single-digit percentage of revenue growth. Newly opened doors were focused on specialty retailers in the white space areas we identified including professional, outdoor, and running specialty retailers, where the benefits of our footbed as a recovery tool are finding strong demand. We saw a noticeable shift to in-person shopping during the quarter, with increased traffic at our own stores and increased sell-through at our B2B partners. Still, growth in the third quarter in our DTC channel was up in the high single digits. Our own store retail sales were up over 60%, driven by strong sales from closed-toe and premium products. With an owned retail fleet of currently eight stores in the US, we view the 6,600 wholesale doors as key assets to connect with consumers. Consumers want to shop for Birkenstock, and we have the ability to interact with them wherever they are searching for our brand, whether online or in-store. We opened three new owned retail stores in the US during the third quarter, including our newest flagship in Austin. We plan to open additional stores in Boston and Nashville over the coming months. We continue to be selective in our retail expansion, seeking the right markets and ideal locations that allow for the 12 to 18 month payback required. We will further leverage the strength of our B2B partners to connect with Birkenstock fans in person more broadly. In our second largest segment, Europe, we delivered another exceptional quarter, growing 19% underpinned by continued strong consumer demand across the region. Birkenstock continues to grow double digits and take share in a market that remains soft. We realized strong double-digit growth across the whole region, with the best performance in countries where we recently phased out distributors and replaced them with our own distribution, such as France and Benelux. We saw strength in both the DTC and B2B channels. But similar to the Americas, B2B outpaced the double-digit growth of DTC in the third quarter. Our focus on better alignment with key strategic retail partners led to increased orders and strong sell-through performance from these targeted accounts. As we saw in the Americas, over 90% of the growth in B2B came from within existing doors. Our partners continued to add to their Birkenstock assortment to meet the expanding consumer demand. Birkenstock is one of the top performing brands across the region for our wholesale partners. Similar to the Americas, we saw a move towards more in-store purchasing this quarter. This is why it is so important that we continue to balance a strong, stable, and profitable B2B business with our DTC business and increase our owned retail fleet. With our engineered distribution, we can easily adapt to any changes in consumer spending patterns to meet market demand. Within Europe, we saw very strong consumer adoption of newer models coming from the Pasewalk factory. The Shinjuku, Mogami, Theda, and Reykjavik had strong sell-throughs of up to 90% and were sold out in many sizes and colors. Lastly, I want to congratulate the team on the successful launch of our new line of sneaker footbeds and insoles during Paris Fashion Week and on the recent opening of our newest European flagship store in Paris, located in the heart of the historic Marais district. The APMA was again our fastest-growing segment in the third quarter of fiscal 2024, with revenue growth of 41% driven by strong growth in both volume and ASP, with growth in the region largely driven by our DTC channel. We added four new owned retail stores, including three in India and one in Japan, bringing the total in the APMA region to 23. We also saw a healthy increase in B2B in the third quarter of fiscal 2024, driven by an expansion within our mono-brand partner stores and the addition of 10 newly opened stores. Demand in APMA is broad-based and like other regions has benefited from closed-toe silhouettes including clogs, which more than doubled compared to the same quarter last year. We saw particularly strong growth from our two large markets in the region, Japan and Australia. Greater China, which currently makes up less than 15% of the APMA revenue, grew over 25% in the quarter and remains an important expansionary market for Birkenstock. We are still in the early stages of our market rollout there and are starting to see the benefits of our efforts already. We had a very successful opening of our Shanghai pop-up store in April, generating significant brand awareness and interest. Brand search on WeChat more than tripled in the third quarter, and Birkenstock was a top-five brand in our category in the most recent 618 Event on Tmall and JD. I will now turn it over to Erik to discuss our financial results in more detail. Thank you.

Erik Massmann, CFO

Thanks, Oliver, and good morning, everyone. I'm very pleased to share Birkenstock's performance in the third quarter of fiscal 2024. The health and strength of our brand are again clearly reflected in our third quarter results. Birkenstock has cemented its position as one of the few must-carry brands in the wholesale channel and also in our D2C channels. They continue to grow as consumers become more intentional in their purchases. Let's have a look into the detail of the third quarter results. Third quarter fiscal 2024 revenue was EUR565 million, growing 19% versus the prior year on a constant-currency basis. We once again generated double-digit growth across all segments and channels, demonstrating the desirability and resilience of our brand. B2B was up 23% in constant currency, and our D2C performance was up 14% versus the prior year. Gross profit margin for third quarter fiscal '24 was 59.5%, up 320 basis points sequentially. It was down 220 basis points compared to the prior year's gross profit margin. Our ongoing capacity expansion accounted for about 120 basis points of the decline compared to the prior year third quarter. The remaining 100 basis points is primarily due to the shift in mix from D2C to B2B compared to a year ago. As we have said in the past, our gross profit margin will vary from quarter-to-quarter based on channel mix as DTC yields a higher gross margin than B2B. Conversely, B2B yields slightly higher EBITDA margin given its lower selling and distribution expenses. Adjusted selling and distribution expenditure was EUR149 million, representing 26.4% of revenue in the third quarter, down 220 basis points year-over-year due to the increased B2B penetration, partially offset by our retail store investments. Adjusted general and administration expenses were EUR25 million or 4.5% of revenue, up 160 basis points year-over-year primarily due to the incremental public company costs. Third quarter adjusted EBITDA of EUR186 million was the strongest quarterly EBITDA in the company's history and up 15% over the third quarter of fiscal 2023. We came out in Q3 with an adjusted EBITDA margin of 33%. This was down 140 basis points from the prior year, impacted by the same temporary and one-time items we discussed regarding gross profit margin as well as the additional cost of expanding our retail and D2C presence and incremental public company costs, partially offset by the mix shift to higher B2B revenue. Adjusted net profit of EUR92 million was up 14%, and adjusted earnings per share were EUR0.49, up 11% from a year ago. Let's now have a look at our balance sheet as of June 30, 2024. Cash and cash equivalents were EUR404 million as of June 30th, 2024, up from EUR176 million at the end of the second quarter. In the third quarter of fiscal 2024, inventory was EUR619 million or about 36% of the last 12-month revenue, down from 40% in the year-ago third quarter. We generated EUR281 million in operating cash flow in the quarter, up 19% year-over-year. Total cash flow was EUR229 million in the quarter, up 93% from the same quarter last year due to the growth in operating cash flow, lower capital expenditures, and financing costs. As we have said before, we will continue to deleverage using cash generated from operations. Our net leverage was 2.1x as of June 30, 2024. Earlier this month, we completed the paydown of approximately $50 million of loans in conjunction with the overall refinancing and replacement of our credit facilities we announced on May 28th. This week, we notified our lenders of our intent to repay an additional $100 million of our US term loan on September 3rd. We remain committed to reaching a net leverage ratio of 2x by the end of the year and will use free cash flow to reduce debt for the foreseeable future. Capital expenditures totaled EUR15 million in the third quarter, bringing the total amount invested year-to-date to EUR50 million, mainly related to our production capacity expansion and new store openings. As we said during our most recent roadshow, we expect capital expenditures to come in below EUR100 million for the fiscal year. With that, I'll hand it over back to Oliver.

Oliver Reichert, CEO

Thanks, Erik. Let me summarize our discussion. Our exceptional results during the third quarter and first nine months of fiscal 2024 demonstrate our ability to deliver on the promises we made during our IPO and secondary roadshows. We are delivering strong double-digit revenue growth, strong margins and cash generation, and expanding into the white space areas. We are executing on our proven engineered distribution strategy to drive both volume and ASP growth to meet the growing consumer demand for our products, for both classics as well as new emerging products across all segments and channels. We also have the ability to meet our customers wherever they seek to interact with our brand, whether online or in-store. Our growth continues to significantly outpace our peers in the Americas and Europe, with strong and increasing momentum from our B2B partners and in our DTC footprint. We are entering the next chapter of growth as we tap into our largest white space market, the APMA region. We are increasing brand awareness, educating consumers on the purpose of the Birkenstock footbed, and are taking market share by following our playbook of disciplined, engineered distribution to support ASP. With our growing leadership team in the region, continued investment in digital and retail partnerships, we see a long runway for growth ahead in APMA. We are confirming our fiscal year 2024 guidance for total revenue growth in constant currency of 20% and adjusted EBITDA margin of 30% to 30.5%. We remain fully committed to our medium and long-term targets of mid-to-high teens revenue growth, gross profit margin of 60%, and adjusted EBITDA margin of 30%. I would now kindly ask the operator to open our Q&A session.

Operator, Operator

Thank you. At this time, we'll be conducting a question-and-answer session. The first question today is from Simeon Siegel from BMO Capital Markets. Simeon, your line is live.

Simeon Siegel, Analyst

Thanks. Hey, everyone. Listen, I know the stock may not reflect it right now, but congrats on really impressive top-line growth online. Really ongoing margin strength and the brand health there. I mean that was very impressive. Oliver, could you speak to how units and like-for-like ASP performed versus your expectations? The revenues show that you're clearly enjoying really strong customer demand, and if I'm thinking about it correctly, I think the overall number may still overshadow some important channel nuance that you were talking about. So revenues basically hit consensus while beating adjusted EBITDA margins. And this was on the strong B2B outperformance. So I'm just wondering, could you help me understand this? I guess, do inline revenues on higher wholesale mix suggest you're actually outperforming your internal units? And then maybe just reflect on the strong customer demand. You beat the profit margin. So perhaps remind us how you're thinking about both channels' health and trajectory. And then just lastly, if I can, maybe for Erik, any color you can share just on comfort for guidance, perhaps both Q4 and beyond. It's tough macro out there, but you're still posting industry-leading growth. So curious any puts and takes to keep in mind? Thank you.

Oliver Reichert, CEO

Hi, Simeon. Thanks for the question. A good one. You're thinking about it the right way. Our units sold were very strong and like-for-like ASP was up. So, yes, with a higher B2B mix, we hit our revenue growth expectations and importantly saw improved margins. Our B2B business is very profitable, and it has higher EBITDA margins than our D2C business. Importantly, it is very predictable and less risky. Birkenstock has not seen any consumer spending softness or anything like it. We are selling more units at higher ASP, and we continue to grow and take share. I think that's really the most important part of the story. And as I said in my prepared comments, we saw some movement to in-person shopping during the quarter. We're happy about this, to be honest. Our brand benefits from in-person shopping. The footbed needs to be seen and touched, and that's how we create our fans, and this is how we create new fans. The good news here, in either channel, we have very strong EBITDA margins. Our brand remains very strong. We have full price realization, over 90% globally. Consumer engagement increased, and we grew online membership in the third quarter by over 30%. Our stock-to-sale ratio is among the healthiest in the industry. So I think we are really very, very good. And maybe David, you can add some color on this.

David Kahan, President of the Americas

Yeah, thanks, Oliver. Simeon, first off, great question, and I appreciate it coming from you. The way I look at this is retail is quite simple. It's always been the right product at the right time in the right place. In Q3, we did start to see consumers choosing more physical environments for shopping. The beauty of engineered distribution is we're able to shift our allocations to best meet the demand wherever the consumer may be seeking to make the purchase. As Oliver mentioned in his opening, I believe the biggest driver in the quarter was the quality and breadth of our assortment and how it was presented with our major strategic partners. They did a wonderful job celebrating our brand's 250th Anniversary. We had explosive growth in year-on-year sell-throughs with all partners ranging from small mom-and-pop stores to major chains. We're starting to see an emerging youth consumer. This is a new demographic that is embracing our brand. While some of the styles have been around for 50 years, it's new to them, and they're digitally savvy. Data shows that even if 80% of their purchase decisions have digital facilitation, they largely shop in physical multi-brand environments. The more we win in these environments, where the brand is validated, the more it creates this flywheel where demand escalates across all categories, geographies, and channels. It's a virtual footbed flywheel. The lifetime value of every consumer, regardless of where they make the initial purchase, goes far beyond the mix of how that quarter breaks down DTC or B2B. Also remember, we're at 40% overall digital penetration, which shows we have a lot of white space for physical store expansion, which you're going to start to see over the next couple of quarters.

Oliver Reichert, CEO

If I may add to your last comment, Simeon, yes, we are very confident with our guidance for the remainder of the year, and seeing all the demand and very positive sell-through data, it's safe to say we are on the high end of our range.

Simeon Siegel, Analyst

Great. Thanks a lot, guys. Nice job again, and best of luck for the rest of the year.

Operator, Operator

Thank you. The next question will be from Laurent Vasilescu from BNP Paribas. Laurent, your line is live.

Laurent Vasilescu, Analyst

Good morning. Thank you very much for taking my question. Erik, you ended the quarter with over EUR400 million in cash on the balance sheet, generated EUR229 million of free cash flow in the quarter. Leverage is down to 2.1 times, well on your way to the 2 times target for year-end. How should we think about cash use in the future, especially with the bulk of your large capital investments in production expansion behind you? And then I have a quick follow-up after that.

Erik Massmann, CFO

Thanks, Laurent. Yes, you're right. The majority of large investments have been done and it's behind us in Pasewalk and Arouca and expanding Gorlitz. This quarter shows our very strong cash flow. We've said we will reduce our leverage. We will be at 2x by the end of the year but will go further down. Our goal is to have no debt. As you know, it's related to the transaction in 2021. We have no need to carry debt on the balance sheet. We informed the banks to pay down another $100 million beginning in September. This will continue the trend, and there will still be enough cash left over for the relevant investments into the business, which includes building out our own shops and further expanding our factories if needed. The strong cash situation gives us a lot of optionality moving forward.

Laurent Vasilescu, Analyst

Erik, that's very clear and great to hear. As a follow-up, Oliver, David, there are obviously a lot of questions about the US consumer. Can you shed light on what you're seeing with your US consumers? How did trends progress in the quarter? More importantly, any color on quarter-to-date trends? Should we expect double-digit growth in the Americas region for Q4 and for next year?

David Kahan, President of the Americas

Yes, we see increasing consumer demand for the brand. I know that on the macro environment, the consumer is probably challenged, but as we've said for the past year, that just means consumer purchases are becoming much more intentional. People are shopping for the brands they want, particularly relevant products like Birkenstock, which we are selling through at full price. We continue to see escalating demand. The point of transaction where the consumer purchases may shift weekly and quarterly, but what matters most is ensuring we have the right product available and maintaining relative scarcity in the market. Our sell-throughs and metrics with every wholesale partner are significantly outpacing the overall market.

Laurent Vasilescu, Analyst

Great to hear. Thank you very much.

Operator, Operator

Thank you. The next question will be from Paul Lejuez from Citi. Paul, your line is live.

Paul Lejuez, Analyst

Hey, thanks, guys. Curious if maybe you could talk about your sell-through within the B2B business, maybe compare that to how each region performed in terms of what you reported on B2B revenue increases. And then second, would love to hear more about your traffic versus ticket trend within the Americas DTC channel? Thanks.

David Kahan, President of the Americas

Yes, it's a good question. We are a sell-through, not a sell-in company wherever we're selling our product, and it's very consistent across both the EU and the Americas. Suffice to say, while we don't share proprietary sell-throughs from our retail partners, our sell-throughs were ahead of our actual sell-in percentage. This means our stock-to-sales ratios are incredibly healthy. Traffic continues to be strong on our own direct-to-consumer website. Our membership increased by over 30% in the quarter year-over-year. Those members tend to spend 25% more. So we're seeing incredible demand. It's just about where the consumer makes that purchase, which is less of a concern due to our strong business model where the net profitability per channel is not as critical as it is for some other peers.

Paul Lejuez, Analyst

David, just a follow-up on the sell-through. Can you talk about what your order books look like for the spring?

David Kahan, President of the Americas

I don't think that we can give guidance on our backlog, but our confidence in our guidance comes from our backlog. DTC can be more variable. In B2B, we have firm order books showing incredibly positive results and growth in all categories like closed-toe and clogs, not just the sandals. We're not able to provide specific backlog guidance but are confident in our outlook.

Oliver Reichert, CEO

And Paul, just adding here that we are targeting the higher-end of the guidance so you should feel confident about where we are and where we believe the business is headed.

Paul Lejuez, Analyst

Got it. Thank you, guys.

Operator, Operator

Thank you. The next question will be from Jay Sole from UBS. Jay, your line is live.

Jay Sole, Analyst

Great. Thank you so much. Maybe if you can update us a little bit about the factory capacity at this point. What percentage of factory capacity are you using? Is it a constraint at all on your ability to deliver the units you want to the marketplace to meet the demand that you feel is appropriate? If you can just kind of review where you are from that standpoint, that would be super helpful. Thank you.

Alexander Hoff, Vice President of Global Finance

Hey, Jay, it's Alexander. We are pleased with the expansion so far. We are still ramping up and adding equipment and machinery until approximately mid-fiscal year '25. The faster we grow, the earlier we will see a positive return from that investment. However, we will not compromise on engineered distribution or scarcity. Production is managed closely and in a very disciplined way, and that is not something we will compromise. For '24, we still expect a full-year margin drag of 150 basis points. This is a transitional year for us, with the largest impact on margins, and we expect better absorption in '25, especially in the back half of the year when we've installed all machines in Pasewalk. We can confirm our plans are still in place to achieve full absorption of this effect in the third quarter of '26. Everything is on plan so far.

Jay Sole, Analyst

Terrific. Thank you so much.

Operator, Operator

Thank you. The next question will be from Matthew Boss from JPMorgan. Matthew, your line is live.

Matthew Boss, Analyst

Great. Thanks. So Oliver, maybe if you put all this together, could you elaborate on current demand trends for the brand globally, across geographies? Maybe thus far in the fourth quarter just relative to the mid-teens implied revenue growth forecast for the fourth quarter? And then, larger picture, just demand signals that you're seeing from your wholesale partners across categories?

Oliver Reichert, CEO

Hi, Matt, thank you for the question. Yes, we are not allowed to give any forward-looking statements, but we are aware of our order book for the next year. Everything looks double-green, maybe triple-green. We're very pleased with the results; they are growing. We still try to fulfill demand by keeping our scarcity. We did have some weather issues in certain areas which can impact our DTC business. Overall, we're super confident. Demand is strong, and consumers are happy with our brand. Our activations during the 250 years of brand celebrations went smoothly and drove significant traffic in our wholesale doors.

Matthew Boss, Analyst

Great color. Best of luck.

Operator, Operator

Thank you. The next question will be from Micheal Binetti from Evercore. Micheal, your line is live.

Micheal Binetti, Analyst

Hey guys, thanks for taking our question here. I had just a couple. First, on Americas, total market up 15%. To sum it up, you feel great on wholesale, the stores, I think you gave a large growth rate, maybe 60%. You mentioned a bunch of times separately that shopping in-store is a big trend. It seems like the math on maybe why Americas decelerated from one quarter to the next was related to the digital business in the Americas. But I think, David, you said you are pretty happy with the traffic to the website. I was a little confused on where maybe the slowdown was. Maybe on the digital side, if you could square that for us. And I’d be curious to hear if you guys were actively prioritizing inventory towards the wholesale channel or if there were stockouts on any places in DTC due to the engineered distribution strategy?

David Kahan, President of the Americas

Yes. Part of the engineered distribution strategy allows for flexibility. Like an NFL quarterback, you call audibles during the game and try to meet demand without overselling. At times, you could be sold out at wholesale or DTC. Demand in total was exponentially up year-over-year. The actual purchase points shifted somewhat. Our retail partners are seeing similar trends. Demographic shifts are leading this change. We are less concerned about the point of distribution as long as we're meeting demand. At the end of the day, if the demand is there, it's there. When someone purchases our product, it's more than a one-time purchase; it's a lifetime consumer.

Micheal Binetti, Analyst

Okay. And then just to help us with our models here as we look at the fourth quarter, I want to clarify something you said on gross margin. I think you mentioned maybe the implied factory deleverage for the year at about 150 basis points. I believe that would imply a meaningful step-up in year-over-year deleverage in gross margin in the fourth quarter relative to the third quarter if I'm right. Then should we use that as a good rule of thumb moving forward? You mentioned that the DTC versus B2B mix in the quarter was about a 100 basis point drag to your gross margin. Is that about right? Two points of year-over-year mix shift is about 100 basis points of gross margin or 50 basis points per point of mix shift?

Alexander Hoff, Vice President of Global Finance

Yes, Michael, you're right that our gross margin will fluctuate with the DTC, implied DTC mix shift. That's just simple math. But we need to look at the big picture and not only focus on one KPI.

Oliver Reichert, CEO

Michael, it's clear that the market reflects that DTC growth is declining, which might suggest a significant impact on margins, but this isn't true for us. Our B2B business model is very healthy; our EBITDA margin from B2B is stronger than DTC. There is a slight impact in gross profit margin, but overall, we care about maximizing EBITDA per pair sold. It doesn't matter where we reach our customer; it's about being present with the right product. We can absorb declines in DTC in certain territories by having a larger owned retail fleet. Our owned retail was up 60%, and our overall growth rates remain strong.

Micheal Binetti, Analyst

I appreciate it. We're still trying to learn how your model moves with the different lines here. So thanks for hanging with us on some of the details.

Oliver Reichert, CEO

That's your model. It's not our model.

Operator, Operator

Thank you. Your next question is coming from Mark Altschwager from Baird. Mark, your line is live.

Mark Altschwager, Analyst

Great. Thank you for taking the question. Great to see the ongoing momentum. I guess, first, I was hoping you could provide us some updated thoughts on the pricing actions you're planning for the 2025 products. And then separately, really nice momentum in closed-toe. I was hoping you could give us some more detail on the trends you're seeing in some of the other product adjacencies, including some early reads from the recent EVA clog launch and this athlete recovery positioning. I think that's opening up some opportunities for new distribution. So any more color on what you're seeing there would be very helpful. Thank you.

Oliver Reichert, CEO

On the product side, the new product introductions have been really encouraging across all categories. We are also introducing new sandals. The one-strap sandal called the Catalina had good sell-throughs. The Boston clog is great, but we also introduced the Lutry clog, which had incredibly strong sell-throughs. In closed-toe, we continue to gain momentum, and you see the exposure at retail. Our new healthcare product, the Birki Air 2.0, has received a strong market response. We're interpreting that DNA into the Birki Flow, which is a broader outdoor product getting strong responses. Every product we deliver expands our range. Over 90% of our revenue growth comes from existing doors, which means we're expanding assortments in those retailers. Our leather products have grown at twice the rate of our synthetic side. Consumers are trading up with us, and retailers are looking to expand their offerings.

Mark Altschwager, Analyst

Thanks again. Best of luck.

Operator, Operator

Thank you. The next question will be from Sharon Zackfia from William Blair. Sharon, your line is live.

Sharon Zackfia, Analyst

Hi. Thanks for taking the question. I wanted to ask about Europe where you've seen kind of accelerating momentum with the wholesale transformation you've done there. Can you talk about what you're seeing with ASPs as a result, particularly with more premium-priced products and with closed-toe? Did you take some price increases in Europe? Are you seeing any consumer sensitivity to those increases? Thanks.

Oliver Reichert, CEO

The truth is we don't see any slowdown in consumer demand. The price sensitivity can be misleading because with different wholesale doors, Birkenstock is getting wider and deeper within these spaces. Comparability between different styles often seems emotional. If you want to buy a pair and it's slightly more expensive than another, it doesn't seem to matter. We see that the price increases executed in '25 don't have an impact on sales. Demand is persistent and strong across various price points.

Operator, Operator

Thank you. The next question will be from Sam Poser from Williams Trading. Sam, your line is live.

Sam Poser, Analyst

Thank you. I've got a handful. Oliver, I know you guys don't normally talk about this, but can you give us the details on the channel sales by geography, especially in the Americas, and that would include wholesale, in the Americas wholesale, the stores, and digital, on how those trended year-over-year? It's just to give everybody clarity. I understand this is, you did this pre-IPO, but haven't done it since. But it would be greatly helpful here just so we can get further understanding of where things stand. And then I have a couple of other follow-ups.

Oliver Reichert, CEO

Sam, you know we can't share this information with you. I mean, we're talking about the third quarter here. So look at the first two quarters, and maybe after the full year we can sit and discuss the overall. But we do not share any of this information here. Honestly, it might not help you and could distract from the major learnings.

David Kahan, President of the Americas

Yes. Sam, this is on your mind. As the person running the region, I tend to be agnostic to the channel. I care more about the product and consumer demand being met, which changes from quarter to quarter. Nothing overly dramatic is changing. But our business model, as Oliver said, our B2B model is unique, and few brands on Earth have a B2B model like we do where our go-in margin reflects our maintained margin. At the end of the day, feeding the consumer where they're purchasing becomes more important than following a rigid business model.

Sam Poser, Analyst

Yes. Okay. Well, I have two more things. But I just want to say, I'm not questioning the way you do it. I'm just trying to get color on the quarter more for the investors that might not necessarily understand it as well. That being said, Erik.

Megan Kulick, Director of Investor Relations

Sam, we're out of time. We're up against time, but you can get one more, okay? You can get one more, make it good.

Sam Poser, Analyst

I know. All right. Well, I'm going to have two. What's the percent of scarcity you're currently running? And two, what is the swing between the gross margin and the SG&A by channel? For instance, SG&A is X basis points lower in wholesale, but as is SG&A lower and the opposite in direct-to-consumer where the gross margin is higher and the SG&A is higher.

David Kahan, President of the Americas

I'll let one of the finance guys answer that. But if you're looking at what percentage of the demand we're filling, I wouldn't put my finger on it, but it's not close to what people are searching for in the brand. Demand is not a finite measure. If I say 70%, maybe it's 70%, but there's no way we're coming close to the demand that people are seeking with the product.

Erik Massmann, CFO

Yes, just a quick note, Sam. As you can see from our presentation, we noted a positive EBITDA effect of 30 basis points according to our channel mix versus the prior year. We also addressed in our gross margin a 100 basis points negative effect. This gives you 130 positive in SG&A, which should help with that math.

Operator, Operator

Thank you. And the next question will be from Dana Telsey from Telsey Group. Dana, your line is live.

Dana Telsey, Analyst

Hi. Good morning, everyone. You've mentioned a number of times about the increase in physical touch points that consumers are making, where they're making their purchases. As you think about it globally, where did you see the biggest differential that way? On your store opening plan, are there any changes that you're looking at to accelerate this? What are the learnings from your stores that you're putting into some of the B2B and wholesale that help to drive that conversion? Thank you.

Oliver Reichert, CEO

Globally, Dana, thank you for the question. The trend is consistent: whenever we open a physical touchpoint with the brand, we measure interaction with guests, the footbed conversation, and teaching about our brand—it leads to higher sales. Quality is just a word until potential buyers feel it firsthand. The lifetime value of these contacts is high and leads to repeat business. We have talented wholesale partners executing well, and our strategy is to expand physical touchpoints globally. Results in regions like India, China, and Southeast Asia are very strong. Consumers are coming in and making purchases.

Dana Telsey, Analyst

Thank you.

Operator, Operator

Thank you. The next question will be from Louise Singlehurst from Goldman Sachs. Louise, your line is live.

Louise Singlehurst, Analyst

Hi. Good afternoon, everyone. Thank you for taking my question. I know we're short on time, so I'll keep it brief. You must be delighted with the B2B in the US, particularly that 90% growth coming from existing doors. I just wanted to check, and I know you've had a few questions on the channel mix, should we expect as we go into the back end, the fourth quarter and obviously early '25 for this same kind of shift in mix between B2B and DTC? Also, did DTC have any impact from product shortages? Should that get easier as the new capacity comes on board? Thank you.

David Kahan, President of the Americas

Again, the mix of DTC versus B2B is near impossible to pin down looking at the next quarter or year ahead. We're clearly seeing a shift toward physical retail across multiple regions. I see that continuing. We do our best to ensure that someone coming to our digital site isn't short on product. We're also ensuring there might be less scarcity on our own website than retail. We monitor this daily. However, there has been an obvious consumer shift to more physical shopping in the last quarter.

Louise Singlehurst, Analyst

Thank you.

Operator, Operator

Thank you. And the final question today will be from Jim Duffy from Stifel. Jim, your line is live.

Jim Duffy, Analyst

Thank you. I wanted to talk about product and assortment. Really encouraging to see the uptake of closed-toe styles. As you look into next year, can you talk about SKU count and color proliferation? I'm curious how you manage that complexity in your B2B channel.

Oliver Reichert, CEO

Thank you for the question, Jim. We don't see any complexity that exceeds our intelligence. It's a positive sign that we're getting wider and deeper with our wholesale partnerships. You may find us across various retail sectors, from sporting goods to high fashion. We're delivering many new products, and the growth rates and sell-throughs are very encouraging. We will develop this step by step while remaining globally relevant. We deliver best-in-class margins and growth rates.

Jim Duffy, Analyst

I wasn't accusing you of naughty things. I'm more curious about how you grow the closed-toe franchise and how you allocate distribution among specific partners.

David Kahan, President of the Americas

Each style and category is allocated by retail partner. Every decision does not depend on style alone. The allocation varies from door to door to meet demand effectively. Additionally, retail exhibitions help validate the product in the market. We maintain extensive oversight on these allocations to ensure they stimulate consumer interest.

Oliver Reichert, CEO

And the allocation strategies can differ depending on the market. For instance, a retailer near the coast may receive a different allocation than one in a mountainous region. While it sounds odd, it's about making precise, well-informed decisions to prevent inventory issues while maintaining high full price realization rates.

Jim Duffy, Analyst

Thank you very much for the insights.

Operator, Operator

Thank you. This does conclude today's Q&A session and this also concludes today's conference call. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.