Matt Puckett: Yes, Michael, the second part of your question on the outlook for next year. And I think certainly, we’re in the midst of our planning process. So, I’m sensitive here in terms of not getting too far ahead of ourselves, but we clearly wanted to provide some expectations and kind of how we’re thinking and how we’re seeing next year unfold as it relates to top and bottom-line. I agree with your kind of sentiment in terms of what it would take. My comment was about double-digit operating earnings growth, I haven’t said anything yet about what it means below EBIT in essence. But we do need to see a little bit of margin improvement and how I think about that and kind of what the puts and takes there are from a from a margin standpoint, it’s primarily in gross margin, I would say, in my view.
There are tailwinds. We do expect an overall lower promotional environment through the year. We’ll come into the year with a bit heavier inventory. But remember, most of that inventory is core carryover replenishment product that won’t necessarily need to be marked down or discounted in a significant way next year. We’re biting the bullet pretty aggressively here in Q4 to move through that seasonal excess which is a bit heavy at the end of December, we’re going to be back at the end of March, kind of at a normal level of seasonal excess coming out of our fiscal year, maybe a little elevated, but something pretty manageable. So, we think the inventory position, while heavy and will create some cost pressures in the short-term, we don’t think it’s a huge overhang from a promotional standpoint throughout next year.
Freight, we expect to be a bit of a tailwind. That’s both — the mode, we’re going to see a lot less usage of air freight. That’s already happened. We’re not going to see a lot here in Q4, by the way. But as you look throughout the year, we’re going to see, we think, some moderating costs on the freight side. We do have some targeted pricing actions; less than we’ve seen in prior seasons that we have some there. And we think mix will be a slight benefit. It was good to see mix come back and be a benefit here in this most recent quarter. There are headwinds for sure. There will continue to be some FOB cost increase, a little bit more modest than we’ve seen over the last few seasons. We expect FX given our hedging program to be a little bit of a headwind as well.
So, there’s definitely some puts and takes that we would net on the side of our gross margin expansion opportunity, which will flow into operating margin.
Michael Binetti: Okay. Thanks a lot for the detail.
Operator: Our next question comes from Brooke Roach with Goldman Sachs. Please state your question.
Brooke Roach: Good afternoon. Thank you so much for taking our question. My question is on the North Face. As you exit the lending selling season, can you talk a little bit about the channel inventories that you have for that brand? And any initial order books that you’re seeing for calendar 2023? Are there any new innovations or product pipelines that we should be focused on? Maybe said another way, how do you comp the comp following a very strong year for the North Face?
Matt Puckett: Let me take the first part of that and then maybe Benno will talk a little bit about kind of the innovation pipeline. Actually, inventories at retail with our wholesale partners are in a pretty good place for the North Face. We had a good selling season. We’ve had good performance in our own channels. Our DTC business grew 18% again in the quarter across the world. And we’re seeing a similar kind of sellout results with our wholesale partners. If anything, we would have probably benefited from having more inventory on the shelves. And Benno referenced the challenge that we faced with the higher cancellations in the North Face and Timberland as well, but certainly the North Face. So, inventories are really in a pretty good position.
Now, that said, the wholesale partners are taking a really cautious approach in the near-term as we look forward. We’re not going to disclose anything about the order. But certainly, contemplated and kind of the underlying expectations for next year is a cautious environment — a cautious wholesale environment in the US and to some degree in Europe as well.
Benno Dorer: Yes. And then to your good question, Brooke, on what we’re doing going forward. So dealing €“ first of all, most importantly, I’m product fanatic, and I think that’s the backbone for every ongoing business success, and we feel good about the pipeline. What the North Face does particularly well is to establish platforms, platform innovation that we can drive over multiple years. And the Summit here is, is one of those platforms that has done well for us for an extended period of time, and we’ll continue to drive that, because there’s so much growth left. Right now, we’re relaunching the platform because there’s a lot of extra awareness and trials to be had. They’re also loyalists that are waiting to buy more products within the platform.
And we’re giving a new apparel and also new footwear. So you’ll see that on our website starting now. The business also does a nice job sequencing. So obviously, the Nuptse jacket is very hot right now, but we have the next generation of jackets waiting in the wings. This winter, we started to see the Sierra jacket, and we expect to ramp up our efforts and growth on that jacket next season, hoping that, that can become the next generation of North Face jackets that will excite consumers. And we have successor to the Sierra already waiting in the wing. So this is a strategic and long-term approach to the innovation pipeline that is complemented by more tactical executions that drive excitement and the cars collab that we executed this last quarter was tremendously successful and is an example of how the brand is able to engage consumers with great products, but also great marketing content.
In particular, in digital. The North Face is the business that has the strongest digital growth among all of our brands, and that’s another area that Vans can learn from, and we’re reapplying some of the North Face learning on Vans. Beyond that, what I would say also reflecting that perhaps knowing that high tides always 2020. When we saw the particularly strong growth on Vans, one opportunity we perhaps missed was to invest into it. And what we’re doing on the North Face now and what you can expect on the North Face in fiscal year 2024, is an increase in our investment towards the consumer. And the money will go towards digital performance marketing, the money will go towards brand building and the money will go towards innovation. We fully realize that we cannot take growth momentum for granted, but that we have to keep earning it.
And we will invest into that. And that coupled with the strong execution and what we know to be strong future plans give us really a lot of confidence on the North Face long-term. We have a lot of momentum, but we’ll keep investing in it.
Operator: Thank you. And our final question for today comes from Jay Sole with UBS. Please state your question.
Jay Sole: Great. Thank you so much. Can you just talk about the business in China? Can you give us an idea of how the business of China has performed since the country started to reopen? And sort of what’s embedded in your guidance for next year as you think about that market recovery? Thank you.
