SharkNinja, Inc. Q3 FY2024 Earnings Call

Good morning, and thank you all for attending the SharkNinja's Third Quarter 2024 Earnings Conference Call. My name is Brika, and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. I would now like to pass the conference over to your host, Arvind Bhatia, Senior Vice President, Investor Relations. Thank you. You may proceed, Arvind.

Good morning, and welcome to the SharkNinja’s third Quarter 2024 Earnings Conference Call. Our third quarter earnings release was issued this morning and can be found on the Company's website at ir.sharkninja.com. And shortly after today's call, a webcast will be available there for replay. Let me remind you that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. If you refer to the earnings release and the Company's most recent SEC filings, you will see a discussion of factors that could cause the Company's actual results to differ materially from these forward-looking statements. The Company undertakes no obligation to update or revise these forward-looking statements in the future. During the call, we will make several references to non-GAAP financial measures. We believe these measures provide investors with useful perspective on the underlying growth trends of the business. We have included a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures in our earnings release. With me today are Chief Executive Officer, Mark Barrocas; and Chief Financial Officer, Patraic Reagan. Mark will provide a business update, Patraic will review our Q3 financial results and discuss our 2024 outlook, Mark will share a brief closing remarks, and we will then open the call for your questions. Now I will turn the call over to Mark.

Thank you, Arvind. Good morning, everyone, and thank you for joining us today. Our third quarter results were very strong. Our global teams once again delivered incredible top and bottom line performance in the quarter. We drove adjusted net sales growth of 35%. Adjusted EBITDA grew 26%, on top of 38% growth in Q3 last year as we continued to reinvest in our growth initiatives. Gross margins remain very healthy. For the quarter, adjusted gross margins were up 160 basis points to 49.4%. This increase was despite the unfavorable impact of Section 301 tariffs, which went into effect in June. Our strategic initiatives around supplier diversification, competitive bidding and value engineering are all continuing to pay off. We're on track to deliver nearly 200 basis points of adjusted gross margin improvement this year. This is on top of approximately 700 basis points improvement last year, an incredible 900 basis point increase over two years. We're not only delivering strong organic growth, but also highly profitable growth, and we're delivering all of that at scale. At the same time, we are consciously reinvesting our strong performance and upside in our growth initiatives to drive long-term shareholder value. These investments are strengthening our moat and accelerating our pursuit of a very large and growing addressable market. While I'm thrilled about our performance in Q3, I'm equally excited about how broad-based our growth continues to be across our four key categories and across our global markets. In Q3, cleaning, cooking, food prep and other, which includes beauty and home environment, all delivered double-digit growth in adjusted net sales. Our North America net sales grew 26% year-over-year. Our International business accelerated with adjusted net sales increasing 62%, on top of 80% growth last year, our toughest quarterly comparison of the year. Our teams continue to drive strong execution across our three-pillar growth strategy. This includes entering new and adjacent categories, increasing our share in existing categories and international expansion. Our first growth pillar, entering new and adjacent categories remains a key growth driver. We remain committed to entering at least two new subcategories annually. In 2024, we have exceeded that goal with entry into four new subcategories, including coolers, fans, frozen drink makers, and most recently, skin care. Earlier this month, we announced that we will be entering the skin care market with the launch of the Shark CryoGlow, an LED infrared and cryo beauty device that focuses not only on anti-aging and blemish reduction, but also instant under-eye puffing. We've gained strong share and garnered a lot of consumer excitement in the hair space. We felt that skin was the next problem for us to solve. With two daughters and a teenage son, I have watched as they look for new ways to help them deal with skin blemishes. As my wife and I look in the mirror each day and see the signs of aging, I recognize that there is an opportunity for one product to appeal to such a broad consumer base solving so many different problems. Our expansion into skin care is the latest example of how we continue to deliver on our mission of positively impacting people's lives. We identified a gap in the market for products that deliver both instant results such as under-eye de-puffing and soothing and long-term skin care benefits like wrinkle and blemish reduction. Traditionally, skin care products are primarily focused only on aging women. Our consumer research identified skin care as a concern for a much broader audience, including men and women of a variety of age groups. Skin, much like hair, is the source of confidence for everyone. CryoGlow is different than competing products in that it combines cutting-edge LED and infrared technology with under-eye cryo cooling, which results in rejuvenated skin. Our engineering and product development teams partnered with global scientists, dermatologists, and wellness experts to develop an at-home solution at an accessible price point relative to competing products. Just like we disrupted the ice cream category with the Ninja CREAMi, we're disrupting the skin care category by offering a versatile product solution versus what's in the market today. We're launching the CryoGlow in the U.K. and Mexico in the coming weeks. Going forward, we see significant upside potential for us as we drive innovation in skin care and the broader beauty category. Ninja SLUSHi, our professional-grade frozen drink maker, continues to strike a chord with consumers. At peak, the waitlist to buy the product from our DTC channel exceeded 200,000 as the product story went viral. To-date, SLUSHi has garnered over 200 million impressions on social media. We are now collaborating with some of the largest ready-to-drink beverage makers and culturally relevant brands to deliver 5-star experiences and continue to drive social engagement. But that's not all. These partnerships are opening opportunities for us to meet consumers in new channels and with new experiences. We see the possibility for grocery store placement and expansion to other channels. Initial sales of Ninja SLUSHi have significantly surpassed our expectations. Our supply chain teams have been working around the clock to ensure availability across our DTC and retail channels for the holiday season. We are also looking forward to launching SLUSHi in our international markets in the first half of next year. We remain very excited about the long-term opportunity for SLUSHi. We are well on our way to becoming the global destination for frozen treats with Ninja CREAMi, the clear leader in the ice cream category and now Ninja SLUSHi. Our Shark FlexBreeze has already made waves in the cooling category by providing incredible performance for indoor and outdoor use. FlexBreeze had an amazing first season this year, establishing a strong beachhead for us. Last month, it was named the best cordless fan by the New York Times Wirecutter. We have a very exciting lineup in this category for 2025. We expect to launch several new SKUs to develop a substantial portfolio of products in the category and drive significant growth and additional market share gains next year. This year, Ninja FrostVault technology and innovation disrupted the cooler category that has seen little demonstrable innovation in a long time. After a successful first year, we're super excited about what's in store for the Ninja FrostVault next year. We plan to continue to disrupt the category in 2025 with SKU expansion, broader distribution, including further penetration in the sporting goods channel and improved product availability during the key selling season. Our 2023 new subcategory launches are also driving significant growth for us. They include everything from deep carpet cleaning, shop-vac, and outdoor oven to in-home beverage making. We're growing sales in these new subcategories as we annualize the launches, enter new markets and additional channels. In the deep carpet cleaning segment, Shark's carpet Expert is now America's number one upright deep carpet cleaner since the launch in 2023. We haven't rested on our laurels and just last month, launched our next-generation extractor and spot cleaning products with our patent-pending HirePro technology. The goal is to keep building out these new categories to cater to different consumer needs and price points. Our second key growth pillar is gaining share in existing categories. Our strategy for expanding market share is fundamentally built on our proven track record of innovating and revitalizing within our established categories. This approach of relentlessly improving and reimagining our offerings serves as the cornerstone of our growth. I mentioned this last quarter, but I think it's important to highlight how our innovation is helping us regain strength in the cleaning category. Adjusted net sales in cleaning grew 19% in the quarter. Our engineering and product development teams have worked relentlessly to bring newness to the category and reignite growth. Our recent innovation in the floor care category includes the launch of our Shark PowerDetect franchise, featuring our most advanced cleaning technology to date across robots, cordless and corded vacuums. These products deliver unmatched cleaning performance and set a new industry standard in automation. In cordless, we continue to expand on the auto-empty segment and drive growth in North America and EMEA. Consumer feedback on auto-empty has been overwhelmingly positive. We're delivering a unique product that makes cleaning seamless and saves consumers from the dust cloud of traditional vacuum empty. Our PowerDetect NeverTouch robot is our disruptive entry into the rapidly growing multifunctional vacuum and mopping robot segment. This is our highest consumer-rated robot launch that has received amazing press coverage and has been included on several tech publications' Best of 2024 list. We've already been successful with robots in North America, but we're now a strong competitor in EMEA, including the UK, Germany, and France. With PowerDetect, we have further strengthened our leadership in home cleaning, and we're driving growth across key markets. We have also partnered with actress, producer and entrepreneur, and self-claimed Clean Freak, Courteney Cox to promote our innovative line of PowerDetect robot and cordless vacuums. We've expanded our hard floor cleaning lineup with the launch of the Shark Steam pickup and Shark HydroDuo hard floor cleaners. The hard floor segment presents a great growth opportunity for us and continues to diversify our overall cleaning business. Another great example of how we're driving market share gains in existing categories is our recent success in the coffee and espresso category following the launch of Ninja Luxe Café. Coffee is a multi-billion-dollar global category. Our coffee business has been steady and growing for many years, but there's still very significant market share gains for us to go after. Ninja Luxe Café provides us a big opportunity to significantly expand our market share in an entirely new segment of the coffee and espresso category. Early results have been very exciting, driven by positive consumer feedback and strong demand. We're offering our discerning consumers an affordable multifunctional coffee and espresso machine that is easy to use and has endless drink options. Our consumers are able to enjoy cafe-quality drinks at home. Following the U.S. launch a couple of months ago, we're now rolling out Ninja Luxe Café in the U.K., Germany, France, and other European markets. We continue to drive innovation and disruption in the cooking and beverage category with our September launch of the Ninja CRISPi. This is the first of its kind portable cooking system, which revolutionizes air frying by delivering consistent crispy results with compact versatility. CRISPi shows our commitment to meeting consumer demand for convenience. We already have leading market share in air fryers, but with the CRISPi, we're rethinking, redefining and reinventing the category. We're expanding our market potential and positioning ourselves for continued growth and market share gains in a competitive segment. Our other category performed extremely well with strength across beauty, sands, and air purifiers. Beauty, led by FlexStyle hot air stylers, remains strong both in our domestic and international markets. In early October, we launched Shark FlexFusion styling systems, which addresses a key consumer need we've identified, hot tool styles without the hot tool damage. Our research shows the average woman washes their hair just two to three times a week. There's a clear demand for tools that can restyle dry hair between washes. Also, while consumers love hot tools and stylers, they hate the heat damage they cause. We took on the challenge and created a breakthrough product that solves the problem. FlexFusion is a next-generation air styler that combines powerful air and heat-controlled ceramic for no heat damage styling. FlexFusion positions us to capitalize on the growing demand for multifunctional beauty devices, further strengthening our market presence and potential for continued growth in the beauty category. Next, I will turn to our third key growth pillar, expansion in international markets. Our international business accelerated, delivering 62% adjusted net sales growth in Q3. Germany and France, our largest international markets outside of the U.K., continue to drive triple-digit sales growth and are well positioned to deliver a strong holiday season. Emerging markets like Benelux, Nordics, Italy, Poland, Spain, and the Middle East also continue to deliver very strong growth. The U.K. grew nearly 6% in Q3 on top of already robust growth of 65% in Q3 last year. While the overall U.K. air fryer market, where we hold number one market share, has been down significantly this year, we've been able to diversify into new categories and gain share in existing categories. The U.K. business today is more diversified and overall healthier than ever before. To support strong North America demand for our new products, we've consciously moved some of our U.K. product launches to the first half of 2025. This will have a temporary impact on Q4 revenue but will position us well to grow the U.K. market in 2025. SharkNinja generated a lot of buzz at the 100th anniversary of IFA Berlin in September of this year. This is the world's largest consumer electronics and home appliances show. We announced a staggering 20 new products for the EMEA market. This year, we expanded our floor presence significantly. We also had the opportunity to share our story on stage in a much bigger way. I had the privilege to deliver a keynote, showcasing our innovative product lineup and unique mindset. We had more than 700 meetings with retail partners, nearly tripling year-over-year, and we received extensive media coverage. I'm also proud of the numerous awards we won this year. All said, we were able to generate significant increase in orders, including from many new partners. Within Latin America, Mexico net sales grew strong double-digits, and the market is poised to accelerate for us next year, as we shift to a direct model. We will continue to expand and diversify our Mexico business. We expect to launch additional product categories, increase retail distribution points and capitalize on the direct-to-consumer opportunity. Mexico has been a great market for our hair care products and will become the first North American market to enter skin care with the launch of CryoGlow next week. I'm also excited to announce that in September, we entered Brazil. Early results are promising, and we see significant potential for growth in the market over the long-term. We're also exploring other Latin American markets for launch in the future. Looking forward, we know that consumers are stretched and will remain cautious this holiday season, as they navigate the uncertain macroeconomic environment, including U.S. elections and a shortened holiday shopping season. While we're cognizant of the external challenges, we will continue our relentless focus on execution. We will lead with our innovation. We will deliver amazing products that solve consumer pain points and positively impact consumers' lives. We'll continue to build our brand globally as we leverage our brand partnerships with David Beckham, Chris Appleton, Courteney Cox, and others. We will lean in on our nimble supply chain and omnichannel partnerships to ensure timely supply to our customers this holiday season. Regardless of the outcome of next week's elections, we're well prepared and poised for significant growth. I'm pleased with the progress we're making in diversifying our production outside of China, to mitigate tariff risks. Patrick will share additional details on that in his prepared remarks. Looking at quarter-to-date trends, we're off to a great start. We had a highly successful Prime Day earlier this month. Based on available data, we significantly outperformed the home and kitchen category just as we did on the first Prime Day in July this year. Given our strong third-quarter performance and fourth-quarter trends so far, we're again raising our full-year 2024 guidance on several key metrics. I'll now hand it over to Patrick, who will walk you through our third-quarter financials and share the details of our updated 2024 outlook.

Thank you, Mark, and good morning, everyone. I'll begin with a review of our third-quarter results and then provide an update on our revised 2024 guidance before turning it back over to Mark for closing. Our third-quarter results were very strong as we continue to deliver on our three-pillar growth strategy. Net sales increased 33% and adjusted net sales, which exclude our divested APAC business, were up 35% to over $1.4 billion. As a reminder, we divested our APAC business in Q3 last year. Therefore, beginning in Q4 this year, it will no longer be a factor in our year-over-year comparisons. We delivered adjusted EBITDA growth of 26% to $262 million. Adjusted EBITDA margin declined approximately 130 basis points year-over-year as we continue to purposefully reinvest gross margin upside in product innovation, demand creation, and building our brand globally. Looking at performance by region, net sales in North America were up 26% to over $1 billion, representing 70% of sales with broad strength across key categories. Adjusted net sales in international markets accelerated, increasing 62% to $421 million, driven by robust results in EMEA and Latin America. We remain bullish on our international opportunities and believe we have a long runway for growth. In Mexico, POS sales remain strong. We will experience a transition period as we shift away from our existing distributor and go direct. This will have a small temporary impact on our sales into Mexico as we execute the shift in Q4 and in early Q1. I'll now provide color on Q3 performance in our four major product categories, which all saw strong double-digit net sales growth in the quarter. Adjusted net sales in the cleaning category, which includes vacuums, carpet extraction, as well as other floor care products remained strong, delivering growth of 19% to $527 million from $443 million in the prior year. We continue to see broad-based strength in the category, including excellent performance in cordless, carpet extraction, and hard floor. We also continue to gain market share in uprights and robotic vacuums. With our strong innovation in the cleaning category, we expect momentum to remain strong in Q4. Adjusted net sales in the cooking and beverage category, which includes air fryers, multi-cookers, outdoor grills and ovens, and carbonation accelerated, increasing nearly 22% to $411 million compared to $338 million in the prior year. This performance was primarily driven by growth in Europe, particularly in Germany and France. Food preparation, which includes blenders, food processors, ice cream makers, juicers, frozen drink appliances, and coolers delivered another strong quarter. Adjusted net sales in this category increased 75% to $367 million compared to $209 million in the prior year. Strong performances from our Creamy Ice Cream makers, the launch of SLUSHi Frozen Drink Maker, and continued strength in kitchen systems were the key drivers in this category. Finally, our other category, which includes beauty products such as hair dryers and stylers and home environment products such as air purifiers and indoor/outdoor fans had another excellent quarter. Adjusted net sales in this category were up 79% to $121 million compared to $67 million in the prior year. Beauty remains strong. And as Mark mentioned, we are excited to continue this momentum with our launch into skin care. Now moving to gross profit. In the third quarter, GAAP gross profit increased 43% to $695 million or 48.7% of net sales. Adjusted gross profit increased 39% to $705 million or 49.4% of adjusted net sales as we drove 160 basis points of adjusted gross margin expansion over the prior year. This expansion was primarily driven by our cost optimization efforts in our supply chain, combined with mix and foreign exchange favorability, partially offset by unfavorable impacts of tariffs. In terms of operating expenses in the quarter, we continue to use our financial strength to invest in growth initiatives, bringing our amazing products into consumer homes. We are strengthening our product pipeline, expanding our international footprint and increasing awareness for both the Shark and the Ninja brands. R&D expenses increased 56% to $95 million or 6.6% of net sales compared to $61 million or 5.7% of net sales in Q3 last year. We continue to invest in headcount to support existing and new product categories. In addition, we chose to invest additional prototype costs and headcount to accelerate our manufacturing diversification outside of China. Sales and marketing expenses increased 45% to $301 million or 21.1% of net sales compared to $208 million or 19.4% of net sales in the year-ago period. This increase was driven in part by our planned investment in advertising and personnel-related expenses to support our exceptionally strong new product launches and our expansion into new markets. In addition, a portion of the year-over-year dollar increase resulted from increased delivery and distribution costs driven by higher volumes, particularly in our direct-to-consumer business. General and administrative expenses decreased to $119 million or 8.3% of net sales compared to $125 million or 11.6% of net sales in the year-ago period. The decrease was primarily driven by transaction costs incurred in Q3 last year related to the separation and distribution from our former parent company. This was partially offset by increased legal fees, including a legal settlement reserve related to certain patent infringement claims and higher professional fees, including increased public company expenses. Moving to tax. Our GAAP effective tax rate was 24.1% in the third quarter and in line with our expectations. GAAP net income for the quarter was $132 million compared to $19 million in the prior year. Adjusted net income was $170 million or $1.21 per share compared to $133 million or $0.95 per share in the prior year, reflecting growth of 27% on a per-share basis. Adjusted EBITDA for the quarter increased 26% to $262 million or 18.4% of adjusted net sales compared to $209 million or 19.7% of adjusted net sales in the prior year, reflecting 160 basis points of gross margin expansion more than offset by continued investments in our growth initiatives. Now to the balance sheet. As of the end of the third quarter, we had cash balance of $128 million, total debt outstanding of $965 million and a net leverage ratio of just under one. We had inventory of $1.08 billion at quarter end, up 36% compared to Q3 of last year. This was in line with sales growth and within our expectations for the quarter. Our inventory mix is healthy. I also want to note that our channel inventory was clean exiting the third quarter. With respect to tariffs, we continue to make significant progress in our efforts to mitigate risk. Our close partnerships with manufacturers and increased tooling investments with our partners is enabling us to move forward at a rapid pace. We have identified new office space in Vietnam and are hiring additional personnel and instituting increased rigor in quality control and compliance as we further expand our presence in Southeast Asia. Overall, we continue to grow in confidence in our ability to diversify and have the capacity to move almost all of our U volume outside of China by the end of 2025. Next, I'll turn to our outlook for 2024 and provide some preliminary high-level thoughts on 2025. With strong Q3 results and quarter-to-date trends in Q4, we are raising our fiscal year 2024 guidance on several key metrics. For the full year, we now expect adjusted net sales to increase between 27% and 28%, above our prior guidance of 22% to 24% increase. We expect adjusted net income per diluted share to be in the range of $4.13 to $4.24, an increase of 28% to 32% year-over-year. This compares to our prior guidance of $4.05 to $4.21 per share or a 26% to 31% increase. Adjusted EBITDA is now expected to be in the range of $925 million to $945 million, representing a growth of 29% to 31% year-over-year compared to our prior expectation of $910 million to $940 million or 26% to 31% growth. Consistent with our previous guidance, we continue to expect net interest expense of approximately $65 million for the year, a GAAP effective tax rate of approximately 24% to 25% and capital expenditures to be between $160 million and $180 million for the year. Our 2024 year-to-date performance has been strong, and we continue to play from a position of strength. We have accelerated the pace of innovation and geographic expansion this year. Our revised outlook includes the impact of additional investments in our world-class product pipeline. It also includes opportunistic and targeted marketing investments we are making to build our brand in newer markets and to support new product launches. We have also made a conscious decision to strengthen our supply chain as we accelerate moving manufacturing outside of China. We are pulling forward investments that will help us increase capacity. In terms of Q4, it is seasonally our largest quarter of the year. While we are very well positioned for the critical holiday period ahead of us, we are aware this year's shopping season is shortened. Next week's US presidential election adds another layer of uncertainty to consumer sentiment and spending. Our updated 2024 guidance reflects our strong growth trajectory, increased investments in growth initiatives, and the continued macroeconomic uncertainty we face as a global company. Looking ahead, while we are not providing formal guidance for 2025 at this time, we did want to provide some high-level comments for you to consider as we wrap this year. First, as you know, 2024 is shaping up to be an exceptionally strong year in which we expect to add over $1 billion in adjusted net sales and over $200 million in adjusted EBITDA year-over-year. This sets a high bar for us as we plan for 2025. Second, as I mentioned, the global macro environment has significant uncertainty with continued geopolitical unrest, the impending US elections, and the cumulative impact inflation has had on our consumers. Third, similar to our approach in 2023 and 2024, we are taking a prudent and measured approach to our 2025 planning. We are balancing our competitive advantages and business momentum with the continued challenges in the global economy. Our 2025 planning is well underway, and we will provide more detailed guidance when we report fourth-quarter earnings in February. To close, we are exceptionally pleased with our year-to-date performance. The broad-based growth and sustained momentum across our business reinforce our strategic vision and execution of our three-pillar growth strategy. We remain committed to making targeted investments that will further elevate our position as an industry leader in identifying, addressing, and solving everyday consumer problems. We are well positioned to deliver robust revenue and profit growth in the remainder of 2024 and beyond. Now I will hand it back to Mark.

Thanks, Patraic. SharkNinja's outstanding third-quarter results showcase our continued success in delivering profitable organic growth through innovative high-performance products. Our expanding $120 billion addressable market presents tremendous opportunity as we enter exciting new categories and strengthen our global brand presence. Our consumer-driven innovation engine continues to thrive and is fueling our growth potential. We're leveraging our agile supply chain and ramping up production to meet increasing consumer demand. We're thrilled about our strong market position for this holiday season and the incredible products we offer. Looking ahead to 2025, we're more confident than ever. Our ability to capitalize on our consumer insights, cutting-edge R&D capabilities and expanding range of products to drive sustainable long-term growth puts us in a strong position. We've made tremendous progress in diversifying our production outside of China to mitigate tariff risks. The future is bright for SharkNinja, and we're excited to continue delivering innovative solutions that enhance our consumers' lives. This concludes our prepared remarks, and I'll now turn it over to the operator to kick off Q&A.

Thank you, Mark. We will now begin the question-and-answer session. We have the first question on the line from Brooke Roach with Goldman Sachs. You may proceed.

Good morning, and thank you so much for taking our question. Mark, I was hoping you could elaborate a little bit more on your reinvestment priorities as you look ahead into the fourth quarter and into early 2025. How are you thinking about the rate of potential flow-through on revenue growth and margin expansion as you look ahead? And then for Patraic, could you talk a little bit about the rate of margin that you're seeing in international in the new products and in your DTC businesses? And then finally, can you size the impact of some of these elevated and accelerated supply chain investments that you're making relative to your prior expectations as you look to diversify your supply chain? Thank you.

Thank you for the question, Brooke. This has been a year of significant innovation and growth for us. We achieved 38% growth in our top line in the second quarter and 35% in the third quarter. Despite a slight decline in our market, we are gaining substantial market share in both existing and new categories, as well as through international expansion. Our investments in R&D have required considerable spending, but we have an exciting pipeline looking ahead to 2025. We've seen success with several products, including Luxe Cafe, SLUSHi, CRISPi, FlexFusion, CryoGlow, and POWERDETECT vacuums. In the third quarter alone, we launched 15 new products, although much of that revenue will not materialize until 2024. Instead, we are setting ourselves up for success in 2025 and continuing our pace of innovation through ongoing investments in the latter part of this year and into next year. Additionally, we are entering new markets and experienced 62% growth in our international business, coming from various new countries. We're gearing up for our first significant holiday season in Germany and France, which has necessitated upfront investments across multiple product categories. Regarding our supply chain, my perspective can be divided into two key areas. First, we are actively investing to expedite our manufacturing outside of China quicker than anticipated, not only due to the current political climate but also to seize available capacity elsewhere. This includes hiring manufacturing consultants and quality staff, and as you heard from Patraic, we are establishing an office in Ho Chi Minh City, Vietnam. We are making significant incremental investments to ensure our supply chain can scale as we approach 2025, focusing on diversification, quality, and the ability to produce up to 90 million units annually. Lastly, we are also making strategic investments in a new e-commerce platform. We are excited about growing our direct-to-consumer business, but we need to enhance the consumer experience on our site before we can fully realize this growth. That improvement work is ongoing, aiming for a launch in 2025. My approach over the past 16 years has always been to invest in long-term sustainable growth. We have achieved a lot, but it's crucial to lay the groundwork for continued growth in the years ahead. I'll let Patraic address your other question.

Hey Brooke. It's great to hear from you. Regarding the question on international margin, as Mark mentioned, everything we do aligns with our three-pillar growth strategy. We see EMEA as a significant opportunity to expand the SharkNinja brand. Strategically, we approach new marketplaces with a test-and-learn method. The UK remains our largest and longest-standing market, albeit still relatively young in years, and currently has the highest margin. Our next key markets are France and Germany, where we are both expanding and enhancing our margins. Our strategy for introducing SharkNinja in the rest of EMEA relies heavily on our distributor approach, which allows us to enter new markets with a test-and-learn methodology. Typically, we share our profit model with our distributor; they take a margin and we retain a smaller margin than in other EMEA markets, but with minimal operating expense. Therefore, from an EBITDA perspective, it aligns closely with the overall SharkNinja operating model. I hope that provides some context on the international margin.

Thank you. And we have the next question from Randy Konik with Jefferies. Please go ahead.

Yes. Thanks a lot. I guess what I wanted to ask about is the evolution of your channel partnerships. I guess, first, maybe give us some perspective of how we've come so far with the key partners across Walmart, Costco, Amazon? Because I guess what we're seeing in the field is enhanced presentations, shelf space increases to your products? And then on top of that, can you give us an update on where we are in the beauty, grocery, and sporting goods channels and where we should expect those areas of distribution to go in the next couple of years? Thanks guys.

Thank you for the question. Regarding our channel partners, we've seen increased placement with the retailers you mentioned, including Costco, Walmart, Target, Best Buy, and various European retailers. Our products were prominently featured in Amazon's holiday gift book. These retailers are very supportive of our innovations, helping drive growth and bringing consumers into their stores. For instance, our Ninja Café Luxe, priced at $499, attracts consumers looking for high-value items. Our direct-to-consumer business is also experiencing growth and is expected to outpace our retail business in the coming years. In beauty, we recently launched the Shark FlexFusion, our new hair-styler product that delivers a hot tool finish without the damage, and we'll introduce our Shark CryoGlow in the U.K. and Mexico on November 4th. As we approach 2025, we anticipate substantial placement in Ultas, Sephoras, and our regular retailers. While our entry into skincare may not significantly impact revenue this fiscal year, it is well positioned for growth in the next. On the grocery side, the Ninja SLUSHi is performing well, and we're in talks with Walmart and other grocery chains to feature it alongside premium ready-to-drink brands. Recently, we launched sodas in our Thirsti product, which has received positive social media feedback, further aiding our expansion into grocery. In sporting goods, we missed the cooler season this year but are preparing for 2025 with more SKUs, improved inventory, and stronger support from sporting goods retailers. Overall, our innovation and strategic steps are enhancing our channel partnerships and increasing our retail placements across these new channels.

Thank you. We have the next questioner, Andrea Teixeira with JPMorgan. Your line is open.

Thank you, operator, and good morning, everyone. I see that you're being cautious, considering the macro and political uncertainties. What insights do you have regarding consumption in Q4 so far? Nielsen indicates that in the US, consumer takeaway has increased by approximately 50% in just the first three weeks of the quarter. Even with your updated guidance, the anticipated sales growth for Q4 appears to be around 15% at the midpoint, despite the shorter holiday season. However, does your guidance reflect a trend from previous performance, specifically incorporating the results from the third quarter? Are you noticing any slowdowns linked to changes in Mexico and the UK that might push some potential gains into Q1 '25? Additionally, could you provide some estimates on those impacts as we discuss the underlying consumption? Lastly, I would appreciate your comments on inventory levels, as your insights on retail inventory last quarter were extremely helpful, especially regarding the destocking and subsequent restocking that likely occurred in Q3. How should we align our positioning for the upcoming holiday season compared to last year? Thank you.

Yes. So Andrea, on your first question, we're seeing solid demand in the fourth quarter. We have had a strong Amazon Second Prime Day. We took share in that. We hit our forecast. We're seeing good demand in North America. We're seeing good demand in international. I think if there’s any challenge for us in Q4 right now is that, some of our hit products, in particular, SLUSHi, CRISPi, Café Luxe, are going to be constrained from an inventory perspective, and we won't be able to capture all of the upside in Q4 that we would have anticipated. So, on the demand side, though, I think we're seeing solid demand, and I think we expect to see solid demand as we go through the holiday season. Also, our ASPs are strong. I mean we're not expecting to see more discounting this holiday season than last holiday season. So I think from that perspective, Q4 is off to a good start. On the ship and POS side, that story, Andrew, really in the US has kind of quieted down. I mean, roughly speaking, our ship and our POS were flat in Q3. We anticipate it being flat in Q4 as well. So there really isn't a lot of conversations around that. I think areas where we are inventory constrained probably have more to do with us, just not being able to capture the demand that we're seeing from some of the new products than it does from the retailers not buying the inventory. But I'll let Patraic talk about the inventory side.

Yes. Thanks, Andrea, for asking the question, something that we focus on every single day. So, I think there's really three quick things and then one overall overarching comment. One is, as I said in the prepared remarks, both our owned inventory and channel inventories are at very healthy levels, very clean levels. We feel really good about where we are as we closed out Q3 and look into Q4. As Mark mentioned, kind of the restocking, de-stocking, that's largely behind us. We don't really see that at play anywhere near the level of significance that we saw from more of a historical standpoint. So we think that's in the rearview largely. And then just more from like a data point standpoint, as we look at Q3 inventory, we finished up about 35%, 36%. And if you remember back to the last few calls, we also tried to guide and provide some transparency on our inventory to revenue relationship using a two-year stack because we've had particularly low levels of inventory in the beginning part of 2024. That is now normalized. So if you now take a look at a two-year stack, inventory is up roughly 50% on a two-year basis and net revenue is up roughly 50% on a two-year basis. So we feel really, really good, number one, about those levels. And then number two, as we've communicated to the community previously, that's what we expected to happen. And so I think from a data point standpoint, from an analytics standpoint, we feel good. And then finally, just to use a quick 30 seconds to say this really speaks to the strength of our supply chain. So we have a very nimble agile supply chain. You heard Mark speak a little bit earlier about the continued investments that we're continuing to make to preserve that nimbleness and that flexibility. And we view it as one of the core underlying strengths and competitive advantages of what we have here at SharkNinja.

Thank you. We have time for one more question and we have Megan Alexander with Morgan Stanley. Please go ahead.

Hi. Thanks so much for squeezing me in. I'll maybe just ask a follow-up to I think it was Brooke's question a little bit earlier, just maybe ask it in a different way. I'm just trying to understand how to think about maybe the margin trajectory in 2025. As you think about some of the investments you're making, is there any way to kind of contextualize how much is pull forward in a way to kind of set you up for continued growth in 2025 versus maybe what could linger in 2025 related to some of the supply chain work, which is obviously prudent to get ahead of potential tariffs and move things out of China. But just trying to understand kind of the puts and takes around how we should think about the expense drivers into 2025?

Yeah. Look, I think the way that you should think about them, Megan, is that we want to make sure that our business is set up for long-term success. And it's not in our interest to try to we need to spend in the quarters that we need to spend it in. And I think on the supply chain side, we looked at things and said, maybe we could drive this expense through 2025. I think what we're realizing is there's a number of things that are happening in our supply chain. We're having to scale much faster than what we anticipated just the overall total sheer volume of our supply chain. The complexity of the products that we're selling today, I mean, we're in a lot of new categories that are requiring a lot of new quality competencies and manufacturing expertise competencies. And then the diversification of the supply chain outside of China. And I think that we could either look at it and say, let's make these investments over the course of 12 months or let's really go after this and make very significant investments in the third and fourth quarter. And I think that's what we've chosen to do. Do I think that some of it is pulled forward from 2025? I would say that I think some of it is accelerated into 2024 from 2025. I think we anticipate our business growing in 2025, and we've got to make sure that our supply chain is well set up to be able to support it. So that's as it relates to the supply chain side. On the side of international growth, look, we're really driving scale right now in Germany and France and a number of other European markets. And again, I think we can look at the business and say, should we haircut it 4%, 5% spends as a percentage of sales right now? Or should we make the investments and set ourselves up really great for 2025 and beyond? And I think we've made the decision that we think we should spend now, in advance of what we think that could materialize for 2025. So I would say, look, we're not trying to manage this by quarter. We're not trying to manage this by year. We look at kind of what's in front of us right now. And we say what's the right thing for our business for 2025, and the right thing for our business for 2025 is to invest in R&D, to make the supply chain moves that we're making, and to continue to keep investing in our brands in these new markets. And we do believe that long-term, it's going to pay off well for us. Patraic?

I completely agree with what Mark mentioned. Right now and for the foreseeable future, we are in a strong position. Our focus at this time is on the innovations we've introduced to the market in the past three months, as well as over the last year and a half. We've developed a remarkable pipeline of innovation, which we approach in a comprehensive way. To successfully bring that innovation to market and address consumer needs, we need to invest in product design, development, and engineering, especially given the uncertain macroeconomic environment and potential tariff changes in the near future. We are incorporating flexibility into our supply chain. Additionally, as we introduce products to the market, we have compelling stories to share that address consumer issues. However, these products need promotion; they won’t sell themselves. Our consumers are discerning and engage deeply with our products, but we need to ensure they understand the new offerings. A great example is the Ninja Café Luxe. Many consumers find espresso machines daunting, but what we’re launching is user-friendly and appealing. We have a responsibility to educate consumers about the value and benefits our product can bring to their lives. This reflects our end-to-end investment strategy, which is guided by our three-pillar growth strategy, giving you some additional context.

I’m not sure if I’ll be cut off, but I have a quick follow-up. From a supply chain perspective, you mentioned that you're potentially missing some demand this holiday season. What are your expectations for how quickly you can catch up and resume meeting that demand? Additionally, how do you consider the pace of innovation given that you might be losing out on some demand this holiday season?

Yes. In terms of how fast can we catch up, I would say some products in first quarter, some products not until the second quarter. We are pushing out some of our new product launches from the UK just to keep that demand and be able to continue to fulfill US customers. So I would say some will catch in Q1 and some will catch in Q2. In terms of how does it impact our R&D or innovation approach, I don't think it does. Listen, it's hard to forecast new products. It's hard to think about which are the ones that are going to kind of be runaway successes and which are the ones that are just going to be really solid products that sell every day on the shelf. But I think what's encouraging, Megan, more than anything is the hit rate of the innovation is increasing. And I think that's a testament to our consumer insights approach to all the testing that we do before we launch these products, the price testing, the feature testing, the marketing testing. So if anything, I think what 2024 is showing us is we're just getting better and better at product developing and ensuring that we're giving the consumer the right performance at the right quality, at the right price. What we probably need to do as we move forward is kind of think about more flexibility in our supply chain and maybe how do we get kind of earlier read signals as it relates to which of these products are going to really take off and accelerate. But that's obviously a tough one that we're going to continue to work on for the next 10 years.

Thank you. I would now like to turn it back to Mark Barrocas, CEO for some final closing remarks.

Yes. Well, look, thank you for joining us, and we look forward to speaking with you again soon. So have a wonderful day. Thanks.

Thank you all for joining the SharkNinja third quarter 2024 earnings conference call. I can confirm today's call has now concluded, and you may now disconnect from the call, and please enjoy the rest of your day.