Good day and thank you for standing by. Welcome to the Under Armour Second Quarter Fiscal 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Lance Allega, Senior Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you. Good morning and welcome to Under Armour second quarter fiscal 2023 earnings conference call. Today's event is being recorded for replay. Joining us on today's call will be Under Armour Executive Chair and Branch Chief Kevin Plank, Interim President and CEO, Colin Browne; and CFO, David Bergman. Our remarks today include forward-looking statements that reflect Under Armour management's current view and certain forecasts elements of our business as of November 3, 2022. Statements made are subject to risks and other uncertainties detailed in documents regularly filed with the SEC including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Today's discussion also includes the use of non-GAAP references. Under Armour believes these measures provide investors with a useful perspective on underlying business trends. These measures are reconciled to the most comparable U.S. GAAP measures a reconciliation of which along with other further information can be found this morning's press release on our website at about.underarmour.com. With that, I'll turn the call over to Kevin.

Thank you, Lance. And good morning, everyone. I'll start with a brief update on our CEO search and that we remain on track to announce our permanent leadership before the years end. I want to thank our Board for their incredible engagement in this process. And a special thanks to Colin for his strong steady and thoughtful leadership throughout. As he is of course a serious candidate. Now onto the call. 17 years into our life as a public company. We have learned experience evolved and grown as an organization. We're operating in a complicated uncertain time for every industry including ours. Still beyond the macro factors we all face, it's a pivotal time for Under Armour, we will not miss the opportunity to reposition and establish our sector leadership wherever we choose to compete. But that starts with knowing where we are today. Our eyes are wide open, and we know exactly where we are, how others see us, where we're positioned, and specifically what we need to do to drive more love for the Under Armour brand. A company let alone a brand is a constant work in progress. And we've made great progress toward that broader love in just the last six months, and our momentum is building. We are evolving our strategy to address the near to mid-term environment by leaning into our strength as we pivot to growth. Protecting our house through continued operational discipline and investing in growth initiatives to capitalize on the upside potential we know is there for the taking. This require problem solving innovative products for athletes delivered with designs that combine clean aesthetics with cultural style, brought to life through epic storytelling and meeting our consumers where they choose to transact with us. All the while driving quality top and…

Thank you, Kevin. And good morning, everyone. I'll start by underscoring that I'm in a highly challenging retail environment, we're pleased that we're able to deliver second quarter results that were in line with our expectations. This demonstrates our team's ability to operate through near term volatility, staying focused on execution and delivering the world's best sports performance products. As we navigate this environment, we are working to amplify opportunities for our existing core business, while laying the groundwork to accelerate broader product considerations for more pronounced growth in the years to come. Essential to this effort is ensuring we keep athletes at the center of everything we do, and ensuring we continue our strong operational discipline. I want to stress that again, this is an end and not an all. We are taking action to empower our ability to deliver the growth we know we're capable of over the long-term and protecting our brand as we scale. As we strengthen our foundation and architecture of evolving path forward. Our growth strategies are focused on product, story, digitalization, and culture. I'll start with product. It's at the core of our DNA and what inspires and drives athletic performance. Under Armour's promise to athletes is to make them better to provide them with performance solutions they didn't know they needed, and once they have them cannot imagine living without. We are at our best when we empower those who strive for more. To equip athletes on the journey is a privilege we honor and respect. We love athletes. Expect them to reach nearly $6 billion in revenue this year, we've done an incredible job at building an iconic brand. Still, as we continue to fine tune our strategy, there are areas we are good at, and areas that we must address…

Thanks, Colin. At the halfway point of fiscal 2023, our second quarter results demonstrate that our operational execution has not wavered amid an uneven global market. Despite several developing factors during the quarter, we protected our health and stayed disciplined, allowing us to deliver results aligned with our outlook. As a reminder, due to our fiscal year change, our second quarter of fiscal 2023, ending September 30 is comparable to the third quarter of fiscal 2021. Diving right in, our second quarter revenue was up 2% to $1.6 billion compared to the prior-year. Excluding the negative impact of foreign currency, revenue was up 5%. As discussed on our last earnings call, this result includes approximately five points of headwinds from proactive reductions and cancellations that we made late last year and early this year, due to COVID-19 related supply chain constraints. On a regional basis, North American revenue declined by 2% coming in at just over $1 billion for the quarter, with wholesale down slightly due primarily to the proactive order reductions and cancellations previously noted. In North America DTC solid performance in our e-commerce business was offset by declines in our Factory House stores as late arriving inventory and a challenging retail environment tempered sales. The EMEA was a standout again for us this quarter with revenue up 9% to $263 million or up 20% on a currency neutral basis. This was driven by growth in our wholesale business, partially offset by a decline in our DTC business. Following logistical challenges in the first quarter, positive operational progress helped us better serve strong demand. APAC revenue was up 7% to $226 million, or up 14% on a currency neutral basis. Despite ongoing COVID challenges and a relatively muted economic recovery in China, we saw growth in all channels, led…

Thank you. [Operator Instructions] Our first question comes from Matthew Boss with JPMorgan. Your line is now open.

Thanks. So maybe for Kevin or Colin, how would you describe the current health of the brand? Any material changes that you're seeing with forward wholesale orders and what do you see as the timeline for that pivot to growth that Kevin, I think you've decided to kick off the call.

I think we found that few things playing out there. I think this has been part of our journey for a couple of years now with regards to just trying to exit number of undifferentiated doors. And we're already kind of starting to see more, the quality of the revenue we're showing now is certainly much better than it was kind of three or four years ago. So from that point of view, we already feel as if we're kind of on that journey. We're obviously continuing to build that out. And part of that is kind of this resetting of the core consumer that we talked about this target consumer to 16 to 20 years seems for athletes to pivot into live and allowing us to kind of lean into a larger part of the market as well. So all of this is coming together from the point of view of how do we actually think about continuing to premiumize the brand, and continue to kind of drive the brand further up market and allow us to really start to drive the growth that we know that there is for this brand and the demand there is for this brand. So we're feeling pretty comfortable and confident with regards to how that is starting to manifest itself.

Great, and then maybe just to follow-up on that, Colin so on the strategic opportunities that you cited, I guess first on the accelerated segmentation, should we think about this is offensive? Or is there a cut to grow that we need to consider with that? And then secondly, on the total addressable market opportunity for casual wear, what's your confidence in broadening the base to that segment?

Well, two questions there. One was, I think we don't see this as a necessity to cut to grow, there's clearly a demand for Under Armour to kind of play on this higher, I guess, at this slightly more premium level perhaps than we have been playing here in North America. So working through the mechanics of how we unlock that is something that we believe we can do and accessing that through the 16 to 20 year old teams for athletes, because they clearly drive so much more, they cost a much larger Halo with regards to how they shop across the market. And sorry the second half of your question, could you just repeat that?

Just on the live category that you cited, the casual wear, what's the total addressable market opportunity there and just your confidence of competing in that categories as an expansion of the core?

While we believe there's about a $300 billion opportunity there that we just never, we haven't really focused on or work through how to plan. And so we clearly aware that if we look at kind of where we meet the athlete at this moment in time, we talked about the journey to compete, train, compete, recover, which has been the three kind of aspects of the journey of compete that we're focusing on today. And if you think about that, Matthew, it really only probably encompasses probably 30%, 20%, 30% of that day. So the opportunity of leaning into the other 70% of the day is clearly a huge opportunity there. And when we talk to athletes as well, it's clear, they want to have access to our product, or they want to feel comfortable to wear our product backwards. And as they're traveling to this, the court, field or pitch. So the opportunity for us to lean into that it feels as if -- it's an open door for us, we need to just do a better job of working through how we execute against that. And that's the pivot to live that we're putting in place at this moment in time. And you're starting to see a little bit throughout this show up through SlipSpeed. So yes, clearly we feel there's a big opportunity there and we're leaning into it.

That's great color. Best of luck.

Thank you.

Thanks, Matt.

Thank you. And our next question comes from Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Thanks. Hey, guys, good morning.

Good morning.

Colin, if I can follow-up on that a little bit. I was just hoping to get your perspective on how you guys are thinking through maybe what external signals might impact and how you think about that balance between the desire to grow versus brand elevation and gross margin. Like I know, the core focus is looking for the future growth, but just reflecting on all the success you've had over the past couple of years of re-elevating the brand and honestly, much to the credit of the team, you're still one of the largest brands in the world, I'm just wondering if there's a scenario where it might make sense to sell less charge more, and then earn more while doing that. And then Dave, I have a follow-up for you after that, if I can.

Sure. I think we already, when we look at the amount of consideration there is out there for the brand, we believe there's clearly an opportunity for us to maintain our current customer base that we have in place now while continuing to work through how do we elevate that, and that's kind of the model we've been running for the past couple of years as we've gone through what we kind of call our constraint model, where we've actually been holding back a tad in order to kind of optimize the way in which the brand shows up and the fact that we've continued to reduce our exposure in the off price market and working away from undifferentiated doors can't say that this morning undifferentiated doors is a great example of how we think we can continue on that journey. So I don't think it requires us to make fundamental shifts, if anything, I think there's opportunities for us to lean into additional parts of the market where we haven't really shown up particularly well, if you think that the mall, the mall kind of stores and the mall traffic is not somewhere where we play particularly well. And footwear is an incredibly important part of our business and continues to grow significantly improving pretty well last quarter. And that's clearly an area where we continue to increase ASPs and really start to resonate in that part of the market as well. So we believe we can certainly kind of continue to drift upwards a little bit in the way in which the brand is showing up. But we don't believe that requires us to do a wholesale kind of restructuring from the point of view of how we're thinking of selling through. Dave, I'm not sure if you want to add anything.

Yes, I would maybejust add to that too that as you think about a lot of what we're focusing on with our investments right now around really leaning in on the digital on the ECOM front with a lot of the different things that Colin already mentioned in his prepared remarks. And being able to leverage that to be able to show a broader range of our product and more, best level product as well. And same thing relative to brand house stores and leaning in there on the concepts and wanting to roll out more full price brand house stores, especially in North America as we go into next year. So I think controlling that and being able to show the premium assortment in a bigger way is going to be helpful, all while continuing to kind of step off and slow down relative to use of kind of a third-party off price channel, which we've done a lot of work to bring that down into kind of that 3% range of revenue over the last few years. So a lot of different things at play there. But I think we're definitely on the right track. And there's a lot of opportunity to lean in even further when we go further into the live side of the product.

I agree.

Thanks for the question.

Thanks, guys. Thanks and then Dave, if I could a quick follow-up. It looks like there is across the channel, maybe a footwear versus apparel dynamics. So within the full-year guide, how you're thinking about footwear versus apparel, and then if you could just elaborate a little bit more on the ability to hold gross margin guidance, despite the revenue, I think that'll be helpful, because that's obviously encouraging. Thank you.

Yes, I mean, a couple of things there, I would say. First of all, you're right in that there is a little bit of a headwind relative to driving and performing so well on the footwear side, which we're excited about. And that's something we can absolutely plan for and lean into. I would say, though, that that product mix headwind is getting smaller and smaller. As we build more scale in footwear and continue to get better in our design and overall efficiency, that product margin gap is getting smaller between our apparel and footwear. So it's not as much of a differentiating headwind on gross margin than it used to be. The second thing I would say is that, we -- when you think about three months back, when we gave our outlook then and we took our gross margin down then, in that we had contemplated a very pressured environment especially in Q3 fiscal of this year. And so I think we were pretty aggressive and got ahead of it, then. And we're planning to hold at that level. Again, this is where we want to try and keep the brand as premium as possible. We understand there's going to be a lot of discounting of promotion out there. And we are going to play in that. But we are not planning to go kind of below 2019 levels. And that's reflected in our revenue update. So again, it is a little bit of maybe less is more, relative to how we finish out the back half of the year, but we feel confident in holding our outlook there. And I'd say that, it's not that there hasn't been any noise per se, when we think about it. We have had some additional FX pressure developing from three months back. But then on the flip side, we're also planning a little bit less business with third-party off price. And those two things kind of offset a little bit as well. So there's been some small puts and takes on our view of gross margin, but we still feel like we're in a great spot when the outlook that we're reaffirming here on gross margin.

Great. Thanks a lot guys. Best of luck for holiday.

Thank you.

Thanks.

Thank you. Our next question comes from Jay Sole with UBS. Your line is now open.

Good morning, Jay.

Great. Thanks for taking the question. Obviously, there's a lot of supply chain costs impacting margins this year. Maybe just talk about a little bit more about supply chain expectations, as you look into next year given spot rates of change and maybe flow of goods as improved. What you're expecting about the kind of margins you can recover and just sort of like the ability to deliver on time and accurately as we go through the rest of the fiscal year into next year?

Yes, Jay, this is Dave. I'll take that. If you think about this year, we've talked about our biggest headwinds being the higher promotions in discounting and then also the elevated freight and product costs. And although we're not ready to give detailed thoughts on next year, we would expect gross margin to improve next year. If you step back and look at two of those big drivers, we would anticipate that the year-over-year freight costs would be better next year than it is this year. We're already ceiling that trend, as we look at Q3 that we're going into right now, that it's starting to kind of stabilize. And then with those rates coming down, we're actually ceiling freight costs become a gross margin tailwind for us in Q4. So we would expect that to definitely continue some next year, which would help year-over-year gross margin. Then also the promotions and discounting, we're not exactly expecting the market to completely get better as we hit April 1, but we also do believe it will get better as we go throughout next year. So the promotion and discounting level, we would expect to probably get a little bit better as well. So there's just two simple factors there that would lead you in a positive direction for next year.

And let me just jump in on the service levels. I think there's a couple of stories there. One is the that we are undoubtedly seeing kind of service levels improve as kind of supply chains getting themselves into a much healthier position. And I mean, the teams have done a lot of work here to make sure that we can optimize that. And so, we're feeling pretty good about our ability to service the business through the balance of the year. Add to that the fact, I think we have done a nice job in managing inventories at the right appropriate level. Although, as you've seen, the numbers are up on a year-over-year basis. It feels as if we are back at the inventory levels, we kind of need to be in order to run this business appropriately. So overall, we're feeling pretty strong with regards to how supply chain is playing out. And our ability to kind of use that actually as a tool for us to continue to drive further growth so.

Yes, and I'd just tag one last thought onto that. Not just the freight rates, but use of air freight late last year and throughout this fiscal year has been a lot higher due to the supply chain challenges and having to ketch up on getting that product. And so, as Colin mentioned, now that we're working through that and supply chain is getting more up to speed and more up to the right timeline. The utilization of air freight, which is pretty costly is starting to go significantly down. And we would anticipate that that would also continue down next year as well. So another little bit of a tailwind for us as we go into gross margin next year.

Got it. That's super helpful. Thank you so much.

Thank you, Jay.

Thanks Jay.

Thank you. And our next question comes from Adrian Lee with Barclays. Your line is now open.

Yes, thank you for taking my question. Two questions, I guess the first is on the promotional kind of holiday and how that's coming through? Are you only seeing that sort of in the athletic apparel? Is it concentrated there? Is it concentrated mostly in the U.S.? Clearly, your footwear was very strong. So I'm assuming the ASPs are nicely up there with units up without a lot of promo. So any color on that? And then finally, are you using any off-price or elevated more off-price than perhaps from last quarter, because I know you had talked about kind of using that channel a little bit more. And then my second kind of topic is on the wholesale order book. When you're having discussions with retailers kind of in the out season, as they had built safety stock and spring of this year? How are they talking about building their inventory in the channel? If that makes any sense, will they be not buying that they've used up or just shifting it to where it normally should be the normal chains of receipts? Thank you very much.

So Adrian, a lot to eat -- a lot to that question, I would say, a couple of different things. I would say, as we saw through Q2 from an ASP perspective, our ASPs globally were slightly down, but really not very much. They were down a little bit in North America and APAC, where there's been a little bit more discounting in the market right now. Where they were actually a little bit up in EMEA. So not a huge story though, yet, definitely a mix shift for us though with the higher growth in footwear that absolutely helps us out. And as we think about the back half of the year, and from a discounting strategy, we do expect the higher discounting and promotional activities kind of given the evolving market conditions. But again, we expect to hold the line there and not go kind of deeper than 2019, and prior. So we do think we're well [Technical Difficulty] there to kind of navigate however the environment may develop. So that's kind of how we're seeing things there. And then, Colin, I don't know if you want to comment on the wholesale or if you want me to jump on that?

No, I think just building on that from this point of view, obviously it's a little early to kind of give information, we don't generally give it kind of into quarter kind of numbers with regards to holidays playing out. But yes, there was an expectation that obviously wholesale partners will look to kind of manage their inventories as we all do. As we kind of go through next year, we feel as if, again, we're in a good place from the point of view of being able to service our business. And we have good visibility of our spring summer '23 order books, and we're feeling pretty strong, feeling pretty comfortable, and how that will allow us to continue to execute throughout the year. And we haven't really started taking orders before when the '23 yet. So it's a little early to kind of say how that's going to play out. But undoubtedly, those guys will be managing that inventory appropriately. But we continue to lean into those relationships. We've got a good, strong, solid relationship with our wholesale partners, and we continue to partner with them to ensure we get to the right solution. And again, we do continue to feel more optimistic with regards to what we're starting to see from the point of view of the positivity around the brands that -- and the demand that we feel that there for the brands that will allow us to continue to optimize those relationships as well.

And Adrian, I know kind of the last piece there of wholesale, you mentioned the off-price channel. Within the off-price channel, we are anticipating to keep that in check. And actually, make sure that the business is continuing to kind of stay at that 3% of total mix of revenue for the year. So that is not going to be really a growth area for us or one that we're leaning into that heavily. So right now, that market is pretty tough as well. And pricing isn't that great. So from a brand perspective, it's not really where we want to lean in. We want to lean out if anything there and rely more on our outlet stores and continued type management of our inventory. And I know that our inventory levels are going to be growing year-over-year. And we mentioned that in the prepared remarks. But I think just keep in mind how lean we were running last year, and comping against that. And the fact that we're still going to be running the business at a 3.0 turn or better, as we run through the back half of this year. So I think that's probably a little bit of a better metric than just year-over-year growth with such a volatile environment that we're dealing with.

Yes, and I just add that our inventory is clean and current stock is not particularly aged stock. So I mean, it's the right place -- right stock in the right place at the right time to optimize the market. So I don't think we're going to need to play any more than we've already called out.

Fantastic. Thanks for the color. It's very helpful. Thank you.

Thank you.

Thanks Adrian.

Thank you. Our next question comes from Brian Nagel with Oppenheimer. Your line is now open.

Good morning. Thanks for taking my questions. So a couple of questions and I think both bigger picture. I mean we want a bit of a follow-up your prior question, but I know it's hard. It's difficult to port parses out, but if you look at the promotional activity happening now within the space or even at Under Armour -- apologies. Is that, is it more a function of brands looking through excess inventories? Or so actually a component now that do that that's just more normal promotions and maybe reacting to a potentially softer consumer backdrop? Then the second question I have related to that, you mentioned in your prepared comments about if the overall environment turning more challenging this quarter than what we discussed in the prior quarter. And obviously, that a lot of pressures on the consumer are very well documented out there. But can you talk more specifically about what you're seeing that sort of gives you that view? Thanks.

Yes, I guess a couple things Brian. I think that when we look at the promotional activities, it's a little bit of both, as far as what you mentioned. We see a lot of brands have been bringing in a lot of inventory, because they assumed, some assumed that the demand was going to be as high as last year. And because a lot of the factory bases were behind, they were really putting in a lot of orders to try and catch up and assume that demand was going to be similar this year. So you've got a lot of inbound inventory, that's coming in to a market that's been softening. So there are a lot of brands that have a fair amount of product out there in the market. And so they are starting to aggressively discount more to be able to move that and not hanging over as much in the next year. So that's definitely a big part of it. But then on top of that, the consumer is getting tighter, their wallet and their spend on discretionary is getting a little bit tighter, you do see a little bit more spend on travel and entertainment. But the overall wallet size is a little bit less. So it's a little bit of both that we're seeing. And as we think about the promotion levels in the back half of the year, keep in mind that we are seeing next quarter or this quarter we're in right now, Q3 expected to be down 550 to 600 basis points. And the biggest part of that is the continued promotional activities we expect to see. So that is built into our outlook. And we're comfortable with kind of where we're sitting in that range.

But I would just add that I think although we are obviously heading into some choppy times in the kind of the midterm, I guess it'd be best way to put it from the point of view of the economy. We do also believe that kind of this part of the market is going to continue to remain strong. I mean there was recently a UPS forecast came out that was suggesting there's a 6.5% global long-term CAGR. And it's kind of part of the industry. So we feel as if we're playing in the right part of the industry. And yes, we're going to have to navigate these short-term, these short-term challenges, but we're in a great position to do that. And we feel we're in the right industry. And with that, we're well set to kind of continue to accelerate through that.

Great, thank you very much.

Thank you.

Thanks, Brian.

Thank you. And our next question comes from John Kernan with Cowen. Your line is now open.

Good morning guys. Thanks for taking my question.

Good morning, John.

Nice job on the quarter. Yes, I think it is, you're proving the ability to manage SG&A dollars in rate, particularly in the back half of this year. Can you talk to as revenues reaccelerate in the fourth quarter on a constant currency basis and potentially into next year? How you're going to manage the rate, both the SG&A rate and dollars?

Let me lead off on this and then I'll hand it to Dave. But I think the work that we've done over the past three to five years and kind of standing up our operating model is one of the reasons why we feel confident that we now have a process through which we can ensure that we're optimizing our SG&A based upon the size of the business, it's clear that -- this has been an important part of the kind of the work that we've had implied for the past couple of years. And obviously over the last kind of 90 days or so we've doubled down on that to make sure that we've been incredibly efficient in how we optimize the operating model. And that's really now starting to pay dividends. And it feels as if we are well positioned for this pivot to grow. We've got SG&A in check, we know how operating model works, we know how to optimize the individual parts of it, and really how to drive leverage out of that. So, Dave, I'm not sure if you want to go through in a little bit more detail.

No, I mean I think that with all the work that we've done that Colin mentioned, fortunately, we removed a fair amount of some of the fixed costs and anchors that were kind of dragging along. So now it allows us to be much more nimble. And I would also say that from the leadership team, we have a very enterprise mindset. So making the decisions of how to reprioritize and therefore some business units having to sacrifice for others to be able to drive forward in key investment areas, whether it be kind of a digital and omni front or whether it be on footwear design, those conversations and making those changes and pivots like that are much, much more efficiently done than in the past. And with all the operating model and restructuring work that we've done, we're in a point now where we've got a really solid base to be able to grow from. So as we step forward, yes, there might be a little bit of a SG&A headwind relative to over index growth from a DTC perspective. But that would come with higher gross margin as well, which would offset. So we're going to keep managing tightly. There's a lot of discipline within the organization at this point, everybody's leaning in, and we're in a good spot to pivot to growth off of that.

Got it. Thank you.

Thank you. Thanks, John.

Thanks, John.

Thank you. And our next question comes from Lorraine Hutchinson with Bank of America, your line is now open.

Thank you. Good morning, I was hoping you could provide a State of the Union on the women's division, can you just talk to the progress you've made, and if you see any investments needed to bolster your position here?

Obviously, it continues to be a major focus from the point of view of how we continue to kind of look to drive out that part of the business. We've seen really strong results in areas from our whole meridian line, which was initially focused on our Women's Business has done incredibly well with the Meridian pants and Moisture Infinity in the Crossback. In addition to that, things like the Crossback, Crossback also, so we continue to kind of double and we continue to see opportunity for us to continue to grow that business, the work we've done in standing up women's specific running product, as well as something that's really started to resonate. So we expect to continue to double down in that part of the business. And certainly as we're thinking about how our stores are merchandised the ways in which our Women's Business shows up, across our DTC enterprise is something which we're continuing to work on. And we expect to see that continue to play out. Dave, do want to jump in?

Yes, I mean, again I think as we look to push hard on all the ECOM investments and also on full price brand house store rollouts. That's an opportunity for us to be able to really increase the women's share of product assortment there, and then continue to grow from that. So we're excited about where that could go. But we're continuing to dig deep on that side.

Thank you.

Thanks, Lorraine.

Thank you. And our final question comes from Michael Binetti with Credit Suisse. Your line is now open.

Hey, thanks, guys for fitting me in here. And Dave, I was just wondering if you could help us I know this is asked a little bit earlier, you gave us some directional color, but the gross margin guidance down 550, 600 in the third quarter, and the handoff to the down 100 to 150 in the fourth quarter. It seems like there's big enough buckets and I know you highlighted the promotional activity, but maybe just, if you could try to connect us to the rough scale of the components of that gross margin that you -- what you just gave us some of them for 2Q, it sounds like promotions are the biggest in the third quarter. And then is that the biggest piece that assume to roll off as you go into the fourth quarter? Maybe just a few thoughts on the biggest pockets between them. And then I guess just on the -- on as you look at next year, and you gave us some such shape of inventory of high 40s in third quarter, mid-30s at the end of fourth quarter. How do you see the inventories coming into alignment. How long does that take do you think?

Yes, Michael, great, great questions. I'll dive in first on the gross margin. So, for Q3, we gave outlook that we expect to be down 550 to 600 basis points. The largest is definitely the assumed continued elevated promotional activities, that's probably roughly in the range of three points. And then I would say kind of the middle or medium sized drivers, one would be the shifts in channel mix, which is going to be a little bit more distributor base just based on timing of that business. But overall, the channel mix is probably somewhere around one or 100 basis points. The FX is continuing to be a pretty big headwind for us. That's probably in the range of about 100 basis points for Q3 as well. So that right there is definitely the Lion's share. The footwear mix being higher is a smaller headwind, as I mentioned earlier on the call. And then we'll actually see a little bit of an offset, a little bit of a tailwind from freight costs in Q3, not much. But as those rates are coming down, and air freight utilization is also coming down that actually starts to become a little bit of a tailwind for us in Q3. So largest again is the promotional levels. And then kind of the medium factors are going to be channel mix and foreign currency. As we step into Q4, we would anticipate that the remaining largest headwind is still going to be foreign currency. And to your point, the promotional activities is still going to be a headwind. But we don't see it being as large as what we anticipate here for the current Q3. And then again, product mix with footwear assumed to be higher growth and apparel is a little bit of…

Yes, and just to close it. I mean, I think the work we've done on managing gross margin and inventory has left us in a strong position to kind of close out the year and think about what that means for 2024 as well. I think the work when we look at brand consideration and the way in which we believe we are still continuing to resonate with consumers. And we look at the work we're doing around the strategic shift in the kind of making this pivot to growth, that brings with it, a certain swagger and a certain confidence that is starting to grow across the business as well. I think we feel as if we're well positioned to kind of close out the year and grow into 2024. So yes, thank you for your time today. Appreciate the questions, Michael.

Very helpful. Thank you.

Thanks, Michael.

Thank you. That'll conclude our call today. Appreciate everybody's participation. Thank you, operator.

Thank you. This concludes today's conference call. Thank you for participating, you may now disconnect.