Earnings Call Transcript - BIRK Q4 2023

Operator, Operator

Good morning, and welcome to the Birkenstock Fourth Quarter and Fiscal Year 2023 Earnings Call. Please note that all participants are in a listen-only mode, and the call is being recorded. Following the presentation, we will conduct a Q&A session. The company has allocated 60 minutes in total to this conference call. At this time, I would like to turn the conference over to Alexander Hoff, Vice President of Global Finance. Please go ahead.

Alexander Hoff, VP of Global Finance

Good morning, everyone, and thank you for joining us today for Birkenstock's fourth quarter and fiscal year 2023 earnings call, which is our first earnings call as a public company. Earlier this morning, we announced our latest fourth quarter and fiscal year 2023 results. As a reminder, our fiscal year ends in September. You may find a supplemental presentation connected to today's discussion on our IR website, birkenstock-holding.com. Before we begin, 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 actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in the morning's press release as well as our SEC filings, 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. In our call today, all revenue growth rates will be cited in constant-currency basis, unless otherwise stated. We will also reference certain non-IFRS financial information. We use non-IFRS measures as we believe that represent the operational performance and underlying developments of the 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 the IFRS. Reconciliations of IFRS to non-IFRS measures can be found in the morning's press release and in our SEC filings. Joining us on the call today are Oliver Reichert, Chief Executive Officer; Erik Massmann, Chief Financial Officer; David Kahan, President, Americas; Nico Bouyakhf, President, Europe; and Klaus Baumann, Chief Sales Officer. Following our prepared remarks, we'll open the call for your questions. With that, I'm very happy to hand over the floor to Oliver.

Oliver Reichert, CEO

I would like to welcome everyone to the call today, and I'm happy to discuss fiscal '23 and fourth quarter results. On today's call, I will share a quick recap of Birkenstock equity story we presented during the IPO and some highlights regarding our fiscal '23 performance. Next, David, Nico and Klaus will give you an overview about their respective regions. Then, you will hear from Erik and Alexander with the review of the financials and our initial outlook for fiscal '24. So, let me begin with a brief overview of our equity story. We are aware that it's not easy to compare Birkenstock to any other listed company. Our business model is unique in many ways. We are the inventor of the footbed. We are in the footbed business, offering a functional benefit to consumers that never goes out of style. We are guided by a simple yet fundamental insight. Human beings are intended to walk barefoot on natural yielding ground, a concept we refer to as Naturgewolltes Gehen. Our purpose is to empower all people to walk as intended by nature. We are a brand backed by a family tradition of a quarter of a millennium with the resilience and its relevance and credibility of a multi-generational business, which supports a strong heritage and drives the premium feeling of the brand. For us, 2024 is a very special year, in which we celebrate our 250th anniversary. We are a universal brand, catering to all people regardless of age, gender and geography. We have a growing global following, exhibiting high engagement and brand loyalty. For instance, U.S. consumers own 3.6 pairs on average today. And 90% of our buyers come to us through unpaid channels. Our total addressable market is the global population. Our products cover a broad range of price points. We have the significant addressable white space across geography, category extension and user occasion. Additionally, we also have white space with our own store openings and expansion of our DTC penetration. We are made in Germany. Over 95% of our products and 100% of our footbeds are produced in one of our six owned factories in Germany. 100% of our footwear is produced in the EU, one of our most regulated markets in the world. Most raw materials are sourced from Europe, which ensures supply chain reliability, and the materials also adhere to strict quality standards. We are committed to uncompromising premium quality. Our products are made to last. We are a unique business. We are neither luxury nor fashion footwear. But our business model has elements typical of the luxury industry, that is premium quality products, market scarcity and high desirability of the brand, which altogether translates into a premium margin. Other than the luxury industry, which is primarily built on price and social basis, Birkenstock is a true purpose and Zeitgeist brand. As such, we are beyond fashion. Our disciplined engineered distribution model drives consistent and predictable revenue growth by strategically allocating products across channels and segments to maximize profitability and to balance demand and supply to create scarcity in the market. We deliver a strong financial profile, 20% revenue CAGR over a decade, 60% plus gross profit margin, and 30% plus adjusted EBITDA margin, and our fiscal '23 figures underscore this once again. Erik and Alexander will review our financial performance in more detail shortly. But here are a few highlights from fiscal '23. We are very pleased to announce that we delivered extraordinary revenue growth of 20% in fiscal 2023, marking the best year in our history with revenues of EUR 1.49 billion. Our fourth quarter contributed to that development with 22% growth. These numbers tie in with our great performance in the last decade with a revenue CAGR of 20% and demonstrate the sustainability of our growth. We are delivering all that in uncertain times and a macroeconomic backdrop, which reflects our optimism in the future growth trajectory of the business. Our revenue development in fiscal '23 is driven by both unit growth of 6%, and ASP increase of 14%. Compared to fiscal '22, our unit growth doubled from 3% to 6%. Our ASP growth was primarily driven by steering consumers to premium products with higher price points. This effect accounts for 50% of the ASP growth. The ASP is further driven by a favorable channel mix towards B2C and RSP increase, both effects accounted for 25% of the ASP growth. We achieved strong full price realization which demonstrates our unique outlier position and brand strength. Within each of our geographies, we saw high consumer demand for Birkenstock, resulting in double-digit revenue growth in all three segments in fiscal '23. Our two channels; B2B and DTC grew double-digits with DTC especially outperforming and achieving a penetration of 40%. This demonstrates how broad-based our revenue growth is. The same applies to the product perspective where most of our categories grew double-digits. Fiscal '23 marked another year with industry leading margins. We achieved a gross profit margin of 62.1%, and an adjusted EBITDA margin of 32.4%. At this time, I will hand the call over to David and his team for reviewing the Americas performance.

David Kahan, President, Americas

Thank you. In the Americas, we achieved a revenue growth of 20% in fiscal '23, making the region the largest contributor to overall revenue growth in 2023. Due to our brand strength, Birkenstock outperformed a generally flat market with retail partners who have seen overall challenges in both traffic and conversion. We know retailers are seeking to shift investments to the highest-performing brands. This is an opportunity for us to increase our share and drive top-line as we are one of the true must-have brands. And while we will take this opportunity to grow with partners, we will do so without compromising on our profit-led product allocation strategy. We chose to remain very disciplined in B2B channels so that we leave a significant unrequited demand and ensure scarcity across all retail partners with healthy inventories at retail. This approach led to B2B revenue growth of 16% in fiscal '23. Using our engineered distribution strategy, we have steered greater inventory to capture more of this consumer demand in our own DTC channels where the profit per pair sold is the highest. DTC revenues grew in fiscal '23 by 26%, on a level far above B2B, which leads to a further expansion of DTC penetration. During fiscal '23, we have also gained significant penetration in our closed toe shoe silhouettes, which supported the ASP increase. Closed toe performance is approximately three times higher in our own channels compared to B2B, which shines the light on the growth potential not only in DTC but also in B2B. In our fourth quarter, revenues increased by 40% primarily driven by a strong B2B quarter with 73% growth. We experienced strong consumer demand in spring and summer, which even gained further momentum in the back-to-school retail season. In Q4, we took advantage of the macroeconomic situation to execute what we term land grabs in white spaces, particularly shoes based on our heightened leverage in sandals and clogs, maintaining strong sell-through and healthy inventory at retail. In addition, we made significant inroads in expanding our distribution so that the benefits of our footbed may be front and center in running specialty shops. This is a new initiative and brings the benefits of our footbed directly where the most discerning consumers purchase their performance sports products and whereby this consumer can benefit from Birkenstock as a recovery item as part of their athletic lifestyle. The mantra we use is, 'run Birkenstock repeat.' And this helps us ensure the benefit of our footbed leaves a growing revenue base to complement purchases made by some who may buy for fashion-led reasons. Please note that by and large, we do not extend distribution other than in some specific doors where we believe an end-user may be underserved. Here, run specialty sport recovery is a good example. Let me now hand over the call to Nico to discuss Europe's performance.

Nico Bouyakhf, President, Europe

In our Europe segment, we have cemented our strong position in a challenging market environment, which is driven by consumer caution and increasing sales promotions due to material inventory levels. This strength is built on our disciplined engineered distribution model to manage scarcity, resulting in strong overall sell-throughs and superior full price realization. For Europe, fiscal '23 was a successful year in terms of business transformation with the significant volume shift from lower quality distribution into higher ASPs and higher profitability. We increased revenues by 18% with revenues significantly outgrowing units. Our B2B transformation in Europe is now completed. We have significantly increased our distribution control by converting further distributor markets of Belgium, Netherlands, and Luxembourg to own distribution and by further rationalizing our wholesale partner portfolio with a stronger focus on strategic partners and new distribution in the premium sneaker segment, both supporting our premium brand positioning. Our recently taken back markets; France and Scandinavia both operating as owned distribution markets since fiscal '22, are well set-up both delivering overproportionate growth. These transformational efforts resulted in 15% revenue growth for B2B. Simultaneously we saw great progress in our DTC transformation towards higher quality and stronger member centricity. In fiscal '23, we closed a substantial part of our legacy retail stores and took strategic investments in our membership and analytics capabilities. We experienced consistently strong consumer demand in our own channels with record-breaking sales in both retail and online throughout the summer. Fiscal '23 DTC revenues increased by 24%, significantly outperforming B2B and thus resulting in further DTC penetration. Fourth quarter revenues in Europe were up 5%. The single-digit increase was impacted by shipment timing effects and B2B partner termination effects following our wholesale cleanup. In fiscal '22, we experienced shipment delays in the first half of the year that led to an exceptional revenue level in the second half. This elevated sales level in Q4 of fiscal '22 has been the base for Q4 of fiscal '23. Furthermore, we phased out the biggest terminated wholesale partners in fiscal '23, which has impacted Q4 '23 results. By taking out these timing effects, revenues would have grown double-digit in Q4 of fiscal '23. DTC revenue growth in Q4 was 20%, slightly impacted by store closures in Europe following our transformation and our closed toe shoe penetration in Q4 increased significantly. I'm handing over to Klaus for APMA discussion.

Klaus Baumann, Chief Sales Officer

Our APMA segment showed the highest growth rates of all segments in the fiscal year '23 with 27%. APMA entered into the acceleration mode after a successful distribution cleanup. All over the region, we are with teams on ground to drive future revenues. Within the channels, DTC is the growth backbone in APMA. We managed to double the DTC revenues in fiscal year '23 by capitalizing on the growing demand, adding webshops in different countries and opening our retail stores in India and Japan. We managed to implement premium distribution through partner stores all over the region. We grew in underpenetrated countries like Greater China marketplaces more than 60%. India digital grew more than 70% and Japan digital more than 50%. So let me remind you, at this stage that our DTC expansion is not at the expense of B2B growth. It is all incremental. Despite distribution cleanup, B2B grew double-digits at 12%. We focused on mono branded partner store openings and upscale customers to more premium products by following our global segmentation strategy of placing the right products in right places or adding exclusive products to our own channel. In Greater China, we recently appointed Tiffany Wu as the Managing Director to drive brand equity and sales in the region. With this new appointment, we aim to further strengthen our expanding footprint in the most dynamic APMA region, in the growth region with the largest untapped white space potential for the company alongside with India and Japan. So, having said that, let me hand over to Erik who will review the financial figures in detail.

Erik Massmann, CFO

As outlined earlier, we achieved remarkable revenue growth of 20% in fiscal 2023. Our fourth quarter tied in with this performance and came in with growth of 22%. Gross profit margin for fiscal '23 was 62.1%, up 180 basis points compared to fiscal '22. Let me remind you that last year's number was unfavorably impacted by EUR 24.4 million of expense, reflecting the effect of applying the acquisition method of accounting for the transaction in '21 to inventory valuation and subsequent impact on cost of sales. When adjusting this fiscal '22 effect, gross profit margin slightly decreased 20 basis points from 62.3% to 62.1%. The decrease was driven by inflationary costs for raw materials and labor. In fiscal '22, we took an early sales price increase ahead of the anticipated cost inflation while cost of sales inflation mainly hit us in fiscal '23. However, the unfavorable cost of sales inflation effect in gross margin was largely offset by favorable effects from an increased DTC penetration and further sales price increases. Gross profit margin of the fourth quarter increased by 140 basis points from 64% to 65.4% due to a strong ASP increase following an approved product mix and a slightly higher DTC penetration. Adjusted selling and distribution expenses represented 29.8% of revenues in fiscal '23, up 190 basis points compared to prior year. The increase was primarily driven by higher costs in relation to the above average growth of DTC revenues and cost inflation. Adjusted general administration expenses represented 5.4% of revenues in fiscal '23, down 70 basis points compared to prior year, providing operational leverage. Our fiscal '23 adjusted EBITDA of EUR 483 million was up 11% compared to fiscal '22. With 32.4%, we again achieved top tier EBITDA margins. The margin decline of 260 basis points compared to prior year was driven by inflationary headwinds which impacted us in fiscal '23, while we increased sales prices primarily in fiscal '22. Thus, last year's margin was elevated by this favorable pricing effect. Our fourth quarter adjusted EBITDA was EUR 96 million, slightly down by 6%. The moderate decline was primarily driven by cost inflation and negative FX effects, from currency translation due to the weaker U.S. dollar compared to fourth quarter fiscal '22. Our effective tax rate for fiscal '23 was 51.2% compared to 25.3% for the prior year. This increase mainly relates to one-time non-cash share-based compensation expenses that are treated as non-deductible. The increase also includes one-time IPO costs resulting in tax losses for which no deferred taxes are recognized. Adjusting for the tax rate impacts of the just mentioned extraordinary expenses of EUR 65 million resulting from noncash share-based compensation and EUR 34 million resulting from IPO costs, would lead to a normalized effective tax rate of 27.9%. These results cumulated in pro forma fully diluted adjusted earnings per share of EUR 1.10 in fiscal '23 compared to EUR 0.93 in prior year, representing growth of 19%. Fourth quarter pro forma fully diluted adjusted earnings per share were EUR 0.13. These earnings per share metrics are calculated based on a total number of outstanding shares of 187.8 million representing the post-IPO number. With that, I will hand over to Alexander.

Alexander Hoff, VP of Global Finance

Birkenstock is a cash flow generating business which provides us optionality in terms of capital allocation. In fiscal '23, we achieved cash flow from operating activities of EUR 359 million, up 53% compared to prior year. The increase is primarily driven by a strong operational performance as well as a lower inventory increase compared to fiscal '22. Inventory increased 11% which is approximately half of the revenue growth rate, providing us an improved inventory to revenue per share. We are extremely focused on inventory health, especially as we grow. Let me remind you at this stage that we hold approximately EUR 100 million of raw materials and semi-finished goods as we have the production in-house. Within finished goods, the largest part relates to core and non-seasonal products which we sell for many years or even decades. The majority of finished goods is already contracted or allocated against customers. Accordingly, risks for allowances are low while the inventory gives us flexibility to react fast to an increase in demand and to generate additional sales and gain market share. Net cash flow used in investing activities was EUR 101 million, primarily driven by the production capacity expansion. Our strong cash flow generation allowed us to completely pay for that capital expenditure out of operating cash flow. In addition, we repaid loans and borrowings of EUR 53 million in fiscal '23 while increasing our cash position. As announced in early November of 2023, we continued our deleveraging process post-IPO and utilized the net proceeds together with cash on hand to repay existing debt. We early repaid $450 million of the U.S. dollar terminal fee and EUR 100 million of the vendor loan in the first quarter of fiscal '24, which reduced leverage to below 2.5 post-IPO. Now turning to the future. We will provide guidance on a full year basis rather than quarterly, reflecting the way we steer our business towards long-term success. For fiscal '24, we expect revenue to be in the range of EUR 1.74 billion and EUR 1.76 billion on a consent currency basis. This range represents growth of 17% to 18% relative to fiscal '23, with all segments and channels contributing to their growth. We continue to see strong consumer demand for our brand thus present a range which is better than internal expectation at the time of the IPO. We expect adjusted EBITDA margin to be approximately 30% in fiscal '24, resulting in an adjusted EBITDA between EUR 520 million and EUR 530 million on a constant currency basis based on the earlier mentioned revenue guidance. With the production start of our new factory in Pasewalk September '23, we are very happy in taking an important step of our capacity expansion. We are on track with the project and build the factory on budget and in time. The added capacity will help us to fulfill future demand and we are on schedule to realize the benefits of this capacity expansion later in fiscal '24 and the upcoming years. In the current year we expect modest headwind to adjusted EBITDA margins compared to fiscal '23 due to planned ramp-up costs and initial under-absorption. This impact is consistent with what we communicated with the IPO process. Long term, we expect an adjusted EBITDA margin in the low 30s with slight variations based on our investments. Our capital allocation priorities are first, to invest in the business and second to balance deleverage. We expect to invest approximately EUR 150 million of capital expenditure in fiscal '24, primarily relating to our ongoing production capacity expansion, mainly in Goerlitz and Portugal and our global retail store expansion. In addition, Birkenstock plans to continue its deleveraging process and aims to achieve a leverage ratio below two within the next 18 months. With that, operator, can you please begin Q&A?

Operator, Operator

Certainly. At this time, we will be conducting a question-and-answer session. To allow for as many questions as possible, we ask that you limit yourself to one question. The first question today is coming from Edward Yruma from Piper Sandler. Edward, your line is live.

Edward Yruma, Analyst

Hey. Good afternoon, guys. Thanks very much for taking my question. I guess, curious on how you feel about inventory on a SKU basis. It seems like you've had a lot of very popular SKUs, like the Boston, particularly in the U.S. So kind of curious how you feel about some of your hotter SKUs right now and kind of inventory levels in the channel. Thank you.

David Kahan, President, Americas

Hi, Ed. Thanks for your question. Yes, a topic we have been discussing before. Inventory compared to revenue came down in '23 from 36% to 30%. So you see, we are constantly working on optimizing this. Still, as you know, more than 75% are already allocated to customers and most is timeless and carryover products and fillets. So nothing I'm worried about. And I'm very positive with the inventory level we have. As a company that's producing our own goods, we always want to be in the position to deliver DTC, which we will grow. So we need inventory. We will increase inventory, but still we optimize it constantly.

Operator, Operator

Thank you. The next question is coming from Matthew Boss from JP Morgan. Matthew, your line is live.

Matthew Boss, Analyst

Great. Thanks and congrats on a nice quarter. So, Oliver, could you speak to maybe the broad-based strength in demand that you continue to see across geographies? Have you seen any change in top-line momentum through holiday or your December end first quarter relative to the more than 20% constant currency growth that you delivered in the fourth quarter? And just how would you rank white space category opportunities in 2024?

Oliver Reichert, CEO

Hi, Matthew. You've observed the 22% growth rate in Q4. Therefore, we don’t foresee any downside for Q1 and the entire year. As you know, we tend to be conservative with our pricing and strive to be realistic. You might have noted the recent inflation increases in Germany, so we are being very cautious in that segment to remain grounded and not overly optimistic. However, the demand for purpose-driven brands remains strong, contrasting with the pressure faced by desire-driven luxury brands. We're experiencing growth across the board. Regarding new territories like APMA, as mentioned in our previous road shows and testing sessions, we do not anticipate any significant impact on our business in 2024 since our efforts are just beginning. Our current focus is on investing in retail and collaborating with the right partners to carefully develop these regions. The results will materialize later, leading to increased growth and enhanced EBIT compared to today.

Operator, Operator

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

Louise Singlehurst, Analyst

Hi, thank you, Oliver, Erik, and team. I appreciate you taking my question. I would like to ask about the factory that opened in September. It's crucial for increasing volume in the upcoming year. It would be interesting to hear about your expectations and any insights gained since the opening. Thank you.

Oliver Reichert, CEO

Hey, Louise. As you know, the new factory in Pasewalk, along with the upgrades in Goerlitz and our factory in Arouca, Portugal, will allow us to double our capacity in the coming years. This is a significant moment for us to expand our capabilities. However, we mentioned earlier that we are facing some negative impacts on our margins in the '24 numbers due to the one-time effects from Pasewalk. To be completely honest, we are also experiencing pressure from inflation in '24. We are very sensitive to these changes, but we believe our customers are quite flexible with our pricing. This provides us with the opportunity to raise prices further and help offset the one-off costs through these factory upgrades and increased investments in capacity. We are on track with these plans, and this will create a completely different scenario starting in '25. We anticipate that our preparations for growth will largely be absorbed in '24, leading to a swift recovery in margins and efficiency, as well as hopefully reduced inflation.

Operator, Operator

Thank you. The next question is coming from Michael Binetti from Evercore ISI. Michael, your line is live.

Michael Binetti, Analyst

Good morning, everyone, and congratulations on your first quarter. I wanted to clarify a previous comment regarding fiscal '24. Did you mention that the 22% constant currency growth rate in the fourth quarter might be a good indicator for revenue growth in the early part of the year, specifically the December quarter? Also, concerning the new factory coming online, could you discuss how we should expect unit volume growth to develop as we progress through the year, especially regarding the comments about the new factory ramping up later in the year? Lastly, David, could you elaborate on what you referred to as the land grabs in America?

Oliver Reichert, CEO

So, that's a lot of questions. Michael. I will start with the beginning. We do see a unit growth, of course, within '24. This will give us some movement to improve our distribution model. Coming back to your Q4 numbers and the outlook in Q1, I mean, it's really, what? We are conservative, but we were not disconnected from the reality. I mean, our growth rate in Q4 is 22%. Okay? So why should this drop so dramatically? I mean, the full year guidance is between 17% and 18%. But the truth is we are kicking in on a level of 22% in Q4. And yes, this is not dramatically declining, and we are very positive about our Q1 already, but we're talking about a full year guidance. So, as you know, on the conservative side, being rookies in this segment of IPO presentations and communications, we want to make sure that we're on the right side. And that's why we're sticking with our guidance for the full year guidance of 17% to 18%. Okay? And then hand over to David to give you a bit of a color of the U.S. market and yeah.

David Kahan, President, Americas

Thanks, Oliver. Thanks, Michael, for the question. Land grab is a term we use where we really aggressively take some share. I mean, what we're seeing in the U.S. right now is, it's almost a little counterintuitive. But the more challenged the consumer spending power has been, really the better it's been for the brands that are really in high demand. And like Oliver said, what we're seeing is this incredible shift right now in shopping patterns, from general shopping to real intentional purchasing, where people are searching out those products, brands, experiences they really want. And obviously, Birkenstock is one of those few that's benefiting. And when we had an opportunity in the recent months to take some share and to provide, especially our retail partners with a brand that is selling through at near record levels of full price realization, we took that opportunity to fill some more shelf space.

Operator, Operator

Thank you. Next question is coming from Dana Telsey from Telsey Group. Dana, your line is live.

Dana Telsey, Analyst

Hi. Good afternoon, everyone, and congratulations. Oliver, David, Erik, as you consider average selling price and units sold, including by region, what are your thoughts on this?

Oliver Reichert, CEO

Thanks for the question, Dana. We have taken price increases over the past few years on an ongoing basis on our core products. And what we're seeing is the consumer response to leather to more higher priced products has been far beyond our expectations. It's exactly what I spoke about. There's incredible intentional purchases where consumers are brand fans, searching out products. And it just so happens to be that some of those products, especially the closed-toe ones, are obviously at higher average selling prices. So the consumer who has come to our brand due to our core products, as you know, we average 3.6 pairs per consumer. They might come to us from a core purchase, and then their next purchase, and their next purchase and their next 3.6 purchases may be closed-toe or clogged products that just happen to carry higher average tickets. So we're seeing no price compression whatsoever. And we're actually seeing a growing demand for our higher priced products, which are just resonating with the consumers.

Nico Bouyakhf, President, Europe

Hey, Dana. This is Nico. Maybe I can also add a bit color from the European perspective. So in Europe, over the course of the last two years, we have increased pricing weighted average around 25%, which is really significant. And for us, pricing just generally across the group is a seasonal exercise. So every season we look at the entire portfolio, the entire collection, and look at input costs, look at the COGS, and then also look at what equity we have for each and individual product and what can we charge for that product. So we are currently selling in autumn winter '24. We sold in spring summer '24, for Europe, again, a significant price increase in that season, and that's going to continue. The price increases that we have done so far did not result in any negative impact from the consumer perspective. So the demand remains unchanging, remains unbroken, and that's quite special for us as a brand across the globe.

Operator, Operator

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

Paul Lejuez, Analyst

Hey. Thanks, guys. Curious what surprised you, if anything, on a regional basis, both positive and negative, and maybe how does that shape? How you're thinking about growth by region in fiscal '24? Maybe if you can talk about which regions will come on the higher end of that 17% to 18% growth rate that you guided to versus the lower end or below? Maybe if you could provide by region. Thanks.

Oliver Reichert, CEO

Thank you for your question. The key regions, Europe and the Americas, are showing similar growth rates, which is quite encouraging as it reflects strong performance even in traditional markets. However, our production capacity remains limited, which has prevented us from increasing our unit supply in the APMA region, resulting in a 27% growth there. In the future, once we have Pasewalk operational and make improvements to our facilities in Goerlitz and Arouca, we will be better positioned to meet the high demand in China and the wider APMA area. Klaus will provide more details after my explanation. As for the challenges, we did not fully anticipate the impact of inflation. To clarify our transition from last year's numbers with a 35% margin to our conservative outlook of 30% for 2024, it’s important to note that we were unable to implement enough price increases in 2022, which contributed to our strong margins that year. The inflation we faced in 2023 has resulted in a loss of approximately 2.5% margin points. Furthermore, we cannot adjust prices from year to year; we need a lead time of about 10-12 months to prepare for price increases, which we are working on again this year. The uncertainty around inflation in 2024 poses a significant question. Pasewalk will absorb some of this margin pressure, and our estimates indicate that we may lose an additional 120 basis points in 2024 due to inflation, along with the costs associated with the Pasewalk factory setup. Klaus will follow up with some data on China.

Klaus Baumann, Chief Sales Officer

Hello, Paul. Klaus here. Just for your question about positive and surprising effects, the expansion in Greater China or in APMA gives us also a big trust because we're taking over the DTC and we are having more own stores running, which are really overperforming and driving not only the business also, the ASP and obviously the rollout will continue. Also, all the campaigns we are running in Greater China are doing very, very well. So with the growing capacities we have, I mean, we can constantly support that demand and deliver to the countries, but it's very positive.

Operator, Operator

Thank you. The next question is coming from Randy Konik from Jeffries. Randy, your line is live.

Randy Konik, Analyst

Can you hear me now?

Operator, Operator

Yes. Go ahead, sir.

Randy Konik, Analyst

Thank you for your patience. I would like to direct my question to David. You mentioned a flat market in 2023, and I would like to understand your perspective on the market outlook for 2024. It seems you anticipate a more challenging environment. Could you provide more specific insights into your thoughts? Additionally, regarding wholesale opportunities, what potential do you see for expanding door counts? How are you interpreting the current order patterns? Are wholesale accounts increasing their SKUs, units, or volume of existing SKUs? Please share your views on the overall market in the Americas for the upcoming year, as well as any opportunities for growth in door counts and orders. Thank you.

David Kahan, President, Americas

Sure. And just to start, just a reminder, it's not demand-driven from the wholesale side. Everything we do is completely allocated from our side. So it really becomes more of a self-fulfilling prophecy. What I would say is the U.S. consumer, I've said before, is somewhat fragile, but is resilient. And it is a bit counterintuitive because the more the buying power of the consumers has been constrained, the more it's been focused on those products that they most covet and demand. And we are one of the few real key intentional purchases that people are searching for. And I think they're searching with even more vigor than ever before for those few brands that are truly important to them. So we can really manage and dictate a lot more of what you see at wholesale than you've ever seen before. Having said that, we're not going to compromise our discipline in any way. There's no real significant door count expansion except where we think we may have some underserved markets or underserved end-users. But suffice it to say, everything we do will still be done with the highest level of maintaining relative scarcity and a bit of what I would say, unrequited demand, which becomes, quite frankly, a demand flywheel. I mean, the more that we do put into the market, the higher the demand keeps expanding. So I'd say we're expanding but with extreme discipline. And we're also based on the incredible momentum we've had in direct-to-consumer, we're fluid. Even in the middle of a quarter, in the middle of a month, we're able to steer available product wherever we think that the highest return and the most benefit will be. If you look at some of the numbers from the past few quarters, that reflects real-time movement of inventory to capture demand where we think we can best manifest it.

Operator, Operator

Thank you. The next question will come from Simeon Siegel from BMO Capital Markets. Simeon, your line is live.

Simeon Siegel, Analyst

Thanks. Hey, everyone. Happy New Year. So congrats on a really strong gross margin this quarter. Can you speak to maybe the drivers there a little bit more? And how to think about that across the year ahead embedded within the guide? And then, just if you can remind us within B2B, what percent of sales now are driven by distributor versus more traditional wholesale in any way to think about the distributor model going forward? Thanks, everyone.

Alexander Hoff, VP of Global Finance

Thanks for the question. Simeon. This is Alexander and I will take that over. So our Q4 this year is up a little bit and is influenced by positive as well as negative effects. We saw a really strong ASP. The colleagues from the sales side already touched on that. We see great performance in our higher price point products. DTC penetration is a little up. We took some pricing. We had some American share which was over proportional, especially in DTC and all that drives gross margin. Then we had some negative effects on the FX side because last year there was roughly parity U.S. dollar versus euro. That gave some headwind, but overall an increase in gross margin. This 65 is clearly also coming from strong DTC penetration this specific quarter. So this is nothing what we guide for the future. I think we also touched on that '24 number where we see some kicking in effects from the capacity expansion. So clearly we will see that in combination with the inflation, which will bring some slight headwind to gross margins.

Nico Bouyakhf, President, Europe

On the distributor side, this is Nico. In Europe, historically we've relied heavily on distributors. As part of our transformation plan, we reduced the number of distributors from ten to five over the last two years. The main distributors now are from Italy, Turkey, and a few smaller ones in Greece, and they will continue to be part of our strategy in the next two to three years. It's noteworthy that in Italy, we operate our own direct-to-consumer channel, and the distributor handles the wholesale aspect because we recognize the complexities of the distribution landscape there and are cautious about market entry. The newly transformed distributor markets in Europe include Benelux, where we've just opened an office in Amsterdam and are established there. The markets we've recently reclaimed are performing particularly well, showing significant growth in terms of revenue.

Klaus Baumann, Chief Sales Officer

Speaking for APMA, the remaining distributors we work with are Australia and Taiwan. We have a long-standing relationship with our distributor in Australia, which is very strong, but the distributor's market share is also declining.

Operator, Operator

Thank you. And the next question is coming from Sam Poser from Williams Trading. Sam, your line is live.

Sam Poser, Analyst

Thank you for taking my questions. I would like to clarify two things and then I have three questions. First, David, what changes have you noticed in the underlying U.S. demand for your product? Additionally, how are you managing that?

David Kahan, President, Americas

Sam, thanks. I use the term the demand flywheel and it really makes a lot of sense. The more product we continually put into the market, as long as we do it in a disciplined manner, leads to more demand. So demand is not a finite measure. Demand keeps going up. The higher we increase our top-line revenue, the more demand keeps outstripping it. So we're learning more and more about how infinite that demand really is, especially as we start to connect with different end-user groups. And that's why that example of like the same shoe just used in a recovery environment opens up a whole new end-use for us. That's the perfect example we gave of how exponential the demand really is.

Operator, Operator

Thank you. That does conclude today's Q&A session. I will now turn the call back to Oliver Reichert for closing remarks.

Oliver Reichert, CEO

Okay. Thank you for joining us in this call. Overall, we are very pleased with our fiscal '23 results. Thanks to the team. We have never been better positioned for both near and long-term financial performance. We believe that once we develop our capacity that we will continue our path also on the margin side, this will definitely be the case. So you shouldn't worry about this. Our outlook overall is very positive and hopefully, you will join us in our Q1 call and then you will understand what I'm talking about. So enjoy the day. Have a nice day, and thanks to the team on both sides. Thank you very much. Bye-bye.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect at this time and have a wonderful day. Thank you for your participation.