Michael Casey: Just the key thing we’re looking at, Jay, as Brian said, the seasonal business was booked down in the second half of this year. Our wholesale customers had to make those decisions in the second half last year. That’s the lead time and that’s when inflation hit and consumer demand pulled back. So they made those decisions on the second half seasonal bookings in the second half last year. And that’s booked down about 10%. But by comparison, the high-margin replenishment business for them and for us is playing up about 10% in the second half this year. That’s the everyday essentials, that’s the milk, bread and eggs equivalent at the grocery store. So those are the big fixture fills of bodysuits, wash clothes, towels, bibs, blankets, all the essentials that parents buy multiples of in those early days, months, years, years of life, that business, that replenishment business at wholesale is trending to be up 10% in the second half.
Jay Sole: Got it. Okay. Super helpful. Mike, thank you so much.
Michael Casey: Welcome.
Operator: Thank you. [Operator Instructions] Our next question will come from the line of Christopher Nardone of Bank of America Global Research. Your line is open.
Christopher Nardone: Great. Thank you, guys. Good morning.
Michael Casey: Good morning.
Christopher Nardone: First question I have is, can you just walk us through the level of gross margin expansion that’s embedded in your fourth quarter guidance? If you can try to help quantify some of the big drivers there. And then as a follow-up, as we zoom out and think about it to next year, can you talk about your confidence in stabilizing the retail business? And maybe talk us through some of the initiatives you have underway to help turn around that business? Thank you very much.
Richard Westenberger: Sure, Chris. On fourth quarter gross margin, we do have significant expansion year-over-year plan. I think that’s been a consistent element of our second half forecast. As you saw, posted an over 200 basis point increase in the third quarter. We’ve got something above that plan for fourth quarter at both ends of our guidance range, it’s above 300 basis points of gross margin expansion. I’d say as it was in the third quarter, the single biggest driver of that is lower transportation costs. These lower ocean freight rates will continue to benefit the fourth quarter. That’s the most substantial. I’d say that’s at least 200 basis points of the improvement we have planned. Beyond that, we do have some further modest pricing realization improved.
Product costs are lower as well as we talked about. We have a mix benefit that accrues to the fourth quarter just because the U.S. Retail business will be a bigger proportion of our sales mix in the fourth quarter than it was in third quarter. We’re expecting, as Mike said, an improving sales trends. So that contributes. And then finally, and a much less significant factor is just our inventory position is much cleaner than it was a year-ago. As we continue to work through our pack and hold inventory. I’m anticipating we’ll have less kind of inventory charges and related costs. So those would be the principal drivers of Retail.
Brian Lynch: Yes. I would just say in terms of Retail, we’ll give you a better outlook in February. But when we think about the business overall, I think we’ve made significant improvements in product. Richard talked about the fact that we’ve got cost reductions coming through the P&L. And our approach in that was really threefold, investing and making the product better, make select price increase – price reductions, I should say, in kind of our key volume items and then improving profitability. So we feel good about the product. Our customer experience. We have teams working really hard to improve our customer experience, where we’re reimagining our store experience. We shared some of the improvements in our side-by-side business there.
We focus on kids different from baby toddler and then significant investments in our online experience to our website. We’ve just replatformed that site with a good headless architecture and got great creative on there. Marketing capabilities, we continue to strengthen. We’ve invested in technology and the team to strengthen our marketing capabilities as we go into next year. We’re going to have continue to focus on store growth. We’re going to have 50 new beautiful stores in the United States, which are the number one generation of new customer acquisition for our company. And overall, I think we’ve got a strong team. We’ve got a lot of good initiatives. We’re doing the right things, I think in terms of in a difficult environment, managing the business effectively, a high-margin business with a strong outlook for the future.
And some of it will turn on macro, too. We are assuming that things will improve as we go forward with inflation moderating and coming off of some of the challenges we’ve had this year.
Christopher Nardone: Great. Thank you.
Operator: Thank you. [Operator Instructions] Our next question will come from Paul Lejuez of Citi. Your line is open.
Paul Lejuez: Hey. Thanks, guys. I’m curious if the weather is impacting traffic and the business overall? Or is it just the seasonal piece of the business where it becomes more of a conversion issue or is it impacting traffic overall? And are you seeing that same pressure on sell-throughs within the wholesale channel amongst your big partners?
Michael Casey: Yes. It’s largely a traffic issue, both online and in the stores, and where weather is cooler, traffic is better. So it’s not – conversion rates have actually been good. Conversion rate. Those who come our buy-in. Those who – and they like the product offering, the conversion has been good. The average transaction values have been higher, but it’s largely been a traffic issue. And where weather is cooler, more seasonal traffic has been better. And I would say we have visibility into our performance in every major retail customer that we do business with. And I would say trends, you’ve seen a noteworthy impact of weather with our wholesale customers as well for our products.
Brian Lynch: Paul, I would say the customers that the big three we call Target, Walmart and Amazon. They’ve got a little bit more of a natural traffic flow for groceries and essentials and what have you. So those that component of the wholesale business, I would say, is less impacted by some of the traffic challenges, they’re impacted. But if you’re selling groceries as well, you’re going to have more regular linear traffic trends.
Paul Lejuez: Got it. And sorry if I miss what was the 50 new stores that you mentioned just on the last response, what was that for? Was that for next year or over the next couple of years?
Michael Casey: This year. This year. That’s the run-rate right now. We’ll probably open up a better part of 50 this year, assuming we continue to see good experience. We’re working on the 2024 openings right now. We assume that we’ll probably open up a better part of 50 next year as well.
