Allbirds Inc

NASDAQ:BIRD

Earnings Call Analysis

Company Anticipates Strategic Gains Amid Downsizing

In a transformative year, we're focusing on streamlining operations and improving profitability. Store closures, switching to a distributor model internationally, and reducing SG&A are key strategies. Full year revenue is estimated between $190 to $210 million, acknowledging a $32 to $37 million impact from strategic decisions. U.S. revenue is projected at $150-$165 million; international at $40-$45 million. Gross margin is targeted at 42-45%, reflecting lower costs and fewer promotions. The adjusted EBITDA loss may reach $63 to $78 million. Q1 revenue is set at $37 to $42 million.

Launching New Products and Focusing on Brand Awareness

In 2024, we are poised to unveil our first major innovation, the Tree Runner Go, aiming to reinvigorate our product line. With a strategic plan to heighten our brand marketing, especially to engage women Changemakers in Q3, our goals are to grow brand awareness—currently at an aided awareness of 15% in the U.S.—and to cultivate full-price sales with a mid to long-term horizon extending into 2025.

Leadership Transition to Drive Strategic Growth

Joe Vernachio has been warmly welcomed as the forthcoming CEO, bringing a wealth of experience from respected brands such as Nike and The North Face, signaling our commitment to operational excellence and international expansion. Joe, alongside our talented team, will focus on a four-pronged strategy elevating product, brand messaging, the U.S. marketplace, and international distribution to rejuvenate customer momentum and propel us towards growth in 2025.

Reaping the Benefits of Stringent Cost Management

Continuing our trajectory of operational and financial improvement, Q4 results were strong, with revenue at $72 million despite a 14.5% decline due to strategic actions to refine inventory and marketing. Our end-of-year cash position of $130 million with no debt underscores our disciplined approach to cash management and structural cost reductions, preparing us well for our journey to profitability in the coming years.

Retail Optimization and Shift to International Distributors

We are optimizing our retail portfolio by planning to close 10 to 15 stores, roughly one-third of our fleet, and transitioning to a distributor model in key international markets—a move that will likely affect gross margins by 15 to 20 percentage points but deliver approximately $14 million in annualized region-specific savings.

Financial Outlook for 2024: Navigating Headwinds with Precision

Our revenue forecast for 2024 is between $190 million and $210 million, accounting for headwinds of $32 million to $37 million from U.S. store closures and distributor transitions. With expectations for U.S. revenue between $150 million to $165 million and international revenue at $40 million to $45 million, our focus is on full-price selling, reduced promotional intensity, and material innovations to enhance gross margins to 42%-45%. Even with these strategic moves, we forecast an adjusted EBITDA loss of $78 million to $63 million as we steer towards profitability.

Prospective Growth Post-Transformation

Forecasting a Q1 revenue of $37 million to $42 million, we are ready for consistent trends and seasonally driven improvements. The lower projected gross margins due to international strategy shifts will be mitigated by reduced overhead for those regions. All efforts are being channeled towards top-line growth in 2025, keeping our sights set on adjusted EBITDA profitability and positive cash flow, despite the recognition that achieving these milestones might require a longer timeframe than initially anticipated.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the Allbirds Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your first speaker today, Christine Greany with The Blueshirt Group.

[Christine Greany]

Good afternoon, everyone, and thank you for joining us. With me on the call today are Joey Zwillinger, CEO; Joe Vernachio, COO; and Annie Mitchell, CFO.Before we start, I'd like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about our financial outlook, including cash flow and adjusted EBITDA expectations, 2024 guidance targets, impact and duration of external headwinds, strategic transformation plan and related planned efforts, go-to-market strategy, planned transition to a distributor model in certain international markets, anticipated distributor model arrangements, expected profitability, cost savings targets, gross margin estimates, products, plan timelines and expectations, third-party partnership strategy, marketing strategy, and other matters referenced in our earnings release issued today.These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please, also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise any statements to reflect changes that occur after this call.Please refer to our SEC filings, including our quarterly report on Form 10-Q for the quarter ended September 30, 2023, for a more detailed description of the risk factors that may affect our results. Also during this call, we will discuss non-GAAP financial measures that adjust our GAAP results to eliminate the impact of certain items.These non-GAAP items should be used in addition to and not as a substitute for any GAAP results. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures to the extent reasonably eventful in today's earnings release.With that, I'll turn the call over to Joey to begin the formal remarks.

[Joseph Zwillinger, executive]

Thanks, Christine. Welcome, everyone. We concluded 2023 with Q4 results at the higher end of our expectations, marking the fourth consecutive quarter of meeting or exceeding our guidance with strong execution towards reshaping the business under our strategic transformation plan.This being my last earnings call at the Helm evolver, it's a big moment for me both professionally and personal. I'm incredibly proud of what Tim and I helped create over the last 9 years.I'm also incredibly pleased with the renewed foundation we've established through our transformation work over the past year, not least of which being the incredible management team we have recruited to lead this next tractor of revitalization and growth.Zooming out for a moment, I want to remind everyone about our higher-level opportunity. Allbirds makes shoes that are timeless and versatile in style and innovative in the nature drive materials we use. The blend of our unique approach to design and materials creates a highly differentiated offering, one that our consumer feels immediately when they still don our shoe.The consumer we target a group called the Changemaker represents approximately 20 million people in the U.S. when applying the sharpest definition. And when we include closely adjacent demographic group, this group grows to approximately 68 million people. Only about 5% of that 68 million target have purchased our products since our inception.And with a per capita average of 8 pairs of shoes per year, the untapped potential of this group constitutes a tremendous market opportunity for Allbirds in the U.S. alone. Judged by our consumer views in NPS, we know that people who try our products love them.The challenge we are tackling now is to raise awareness of the brand and compel this group to buy through delivery of great product and storyteller.I will get back to product and marketing in a moment as this is the most essential aspect of our transformation to revitalize momentum behind the brand this year. However, before we could bring our refreshed product line to market as we expect to begin in earnest later this year, and invest behind those introductions with breakthrough marketing, we had to clean up our business.In just 1 year time, we have fundamentally changed and strengthened our underlying operating model, touching all critical aspects of the business, including our store portfolio, international marketplace, manufacturing efficiency, and cost structure.And, we closed out 2023 with our inventory in a clean and healthy position in terms of both composition and absolute volume of finished goods across all channels.This new foundation enables us to drive durable profit as we grow in the years ahead. I'll give you a quick review of what our block delivered in the first year of our transformation. First and foremost, we cleaned up inventory clearing through underperforming legacy products and reducing our inventory levels by 51% year-over-year.As a result, we entered 2024 with a healthy mix of core franchise goods and the ability to lean into the fresh product innovation coming later this year. Relatedly, we significantly improved our rate of full-year operating cash use and ended the year in a strong cash position, providing us with the financial flexibility to continue executing our strategic transformation plan and now invest in profitable growth.The third area of success is cost discipline. We delivered cost of goods and SG&A savings compared to our run rate at the end of 2022, keeping us on track to achieve the 2025 cost reduction targets we have previously communicated.Fourth, we secured pathways for 4 of our international regions to transition to a more profitable go-to-market strategy via distributors.Canada and South Korea transitioned in Q3, while Japan, and Australia, and New Zealand are expected to transition later this year. The final aspect of improving the operating model is related to our work-to-balance and optimize the U.S. marketplace.Related to that, we have signed or anticipate signing agreements to close 10 to 15 underperforming stores in the U.S., all of which are expected to close during calendar 2024.While the groundwork for profitable growth is now late, there will be short-term revenue impact in 2024 as a result of these transformative activities. Between store closures and the shift to a more capital-efficient go-to-market strategy in the international regions, our guidance for the year contemplates between $32 million to $37 million of revenue impact in 2024.Annie will walk through the implications of these actions in detail. The important takeaway is that, we're doing what's right for the business, and this part of our journey is in service of driving long-term profitable growth well into the future.Stores remain a highly effective way to meet new customers and drive omnichannel purchasing, and omnichannel purchasing is the most profitable consumer journey we can generate with their lifetime value far surpassing single-channel repeat customers.As we focus on renewing brand momentum and driving sustained growth in the U.S., we are leaning into our most efficient stores in key cities where we want to win. The wholesale channel also represents an important vehicle for Allbirds, one that can help us build awareness for the brand while further balancing the marketplace.We have always envisioned wholesale as a large portion of our long-term channel mix and continue to see that in the future, offering a major growth vector for us, which we expect to drive solid contribution margin and increased awareness, all coinciding with our objective to introduce consumers to a refreshed product line around our icon.For our international regions, I want to recognize that this is one of the more complex aspects of our transformation plan. And to that end, Annie will provide a detailed walk-through on the economics of these transitions and the related P&L impact. We have secured partnerships in 4 key regions with additional regions in process.This was a significant task and one that the team affected quickly while prioritizing a premium brand presentation to consumers in these regions. The distributor model carries multiple benefits, including improved profitability, inventory efficiency, reduced complexity in our U.S. headquarters, and improved working capital.In the early stages of the transition, there is a short-term headwind to growth, but the benefit is higher quality revenue with greater flow-through to the bottom line. Going forward, we expect to generate approximately 20% contribution margin in the transition and new international regions through this model.With the capability built to effectively serve distributors in international markets, we are now pursuing opportunities to enter new regions, including Southeast Asia, the Gulf Coast countries, and to localize in key regional marketplaces across Continental Europe. We expect to share news of these growth opportunities in the near future.In the U.K., we expect to maintain our direct distribution model as we see big opportunities to win in London, which we view as a strategically important market for other regions and where we have made significant inroads.We will also add wholesale in the U.K. to drive new growth. With the heavy lifting of last year complete and a clean inventory backdrop, our teams have amplified their focus on driving long-term profitable growth.The most critical aspect and the final step in our transformation is to revive brand momentum and reignite top-line growth. The path to do so is through delivery of a relentless flow of compelling products, coupled with resonant stories and to change makers.With our approach to innovation, leveraging a franchise offense with embellishments and distortions to our icon, we intend to drive newness while maintaining high SKU productivity.Given we started this transformation in the beginning of 2023 and had typical lead times of 15 to 18 months and context to consumer, we are on track to begin delivering this refreshed product line in late Q2 of this year. Our first test of this strategy was with the release of the Wool Runner 2 this past November, which was our most successful launch in over a year.And while just an initial test with relatively minor aesthetic adjustments, the success of this product has given us a clear indication of how we can differentiate from others in our category and deliver products that our consumer will come back for time and time again. You'll see our first major innovation of 2024 around an icon in April when we plan to launch the Tree Runner Go.We will follow that with additional innovations, specifically designed to address our opportunity with women Changemakers in Q3. In conjunction with the new life injected into the product line, you should also expect investments in the brand marketing later this year aimed at growing aware.The focus of these investments will be to introduce new consumers to the brand and drive full-price sales as they progress through the funnel with mid and longer-term impact extending into 2025.Our aided awareness is estimated to be just 15% in the U.S., illustrating the big opportunity to showcase our beloved products to new consumers. In support of this effort, we have significantly elevated the horsepower on the creative side of our business. In December, we appointed Kelly Olmstead as our Chief Marketing Officer; as well as Adrian Nyman as our Chief Design Officer.Both of these individuals bring incredible track records and decades of experience in footwear and apparel. Adrian helped deliver an enhanced creative vision to his work as an adviser last fall. And since joining as our Chief Design Officer, has accelerated our work towards a cohesive approach to our franchise offer.Kelly is refining the messaging to match the elevated product offering and bolstering efforts with a digital-first influencer program to build awareness and relevancy. With this superb design and marketing leadership in place of our upcoming product cycle, we're eager to create the renewed consumer excitement and margin expansion that we anticipate on the horizon for these leaders.Annie has been successful in driving the operating and financial discipline we have demonstrated through her role as our CFO since joining early last year. And finally, I'll speak about Joe Vernachio, who has our COO, played an integral role in the success of the first year of our transformation efforts.Along with some other longer-term team members, we have assembled the best executive team in the history of the company.With a world-class team in place, I am proud to hand over the rank to Joe to be our next Chief Executive Officer. Joe and I have developed a strong partnership over the past 3 years as I steadily increased the scope of his responsibility. Not only is he an exceptional retail operator, but I learned that Joe's appetite and ability to drive positive outcomes has increased with each expansion to his role.He is a product executive at heart but a human-centered leader who pragmatically focuses on driving outcomes for the company and its shareholders. I'm thrilled to welcome Joe as our next CEO and as a member of our Board of Directors, where I will sit alongside them and continue to support him in rebuilding momentum behind the Allbirds brand. Joe, congratulations.I'll now pass it over to you to share a bit about your background and your initial priorities.

[Joe Vernachio, executive]

Thank you, Joey. I'm excited and honored to be stepping into this role and look forward to getting to know our analysts and investors in the upcoming quarters. This transition marks a high point in my career, which began in 1987 at Patagonia. It was during those early years that I developed a passion for creating exceptional products.I honed my skills in product development, operations, and merchandising over decades working with several iconic brands such as Nike, Calvin Klein, and The North Face, and orchestrated the turnaround at Mountain Hardware.I joined Allbirds nearly 3 years ago, attracted by its potential to become a lasting iconic brand, led by its lifestyle positioning, commitment to sustainability, and inherent consumer value.Since June 2021, I've had the pleasure of working side-by-side with Joey. Initially, I would pass with establishing operational excellence across various functions, including distribution, inventory, and manufacturing, while leading our global commercial activities in digital, stores, and wholesale.As a key player in our operational transformation, I have been able to apply my turnaround experience to our inventory reduction, international transitions, and retail optimization.Most recently, I took charge of our product engine, where I installed Adrian as our Chief Design Officer. Together, we are building a world-class design team. As the year progresses, we look forward to sharing more about our vision of the 2025 product line.As I step into the CEO role, I'm pleased that we have structured the business to deliver profitable growth in the years ahead.Consistent with the pillars under our strategic transformation plan in the near term, I will be prioritizing these 4 areas. Number one is product, ensuring we have a steady flow of compelling product that resonates with the consumer is paramount to my strategy.We believe a combination of focusing on our iconic footwear and incorporating seasonal collections is a recipe for delivering more what our consumers love about Allbirds.Number two is brand messaging that delivers a clear, connected narrative at both the brand and product level that results in increased consumer awareness. Third is developing a robust U.S. marketplace. This includes growing full-price sales in our digital channel, optimizing our own retail performance, and steadily growing our wholesale channel with key partners such as REI, Nordstrom, and DICK'S Sporting Goods.We believe there is tremendous growth opportunity in the wholesale channel for our brand. Fourth is expanding our international business, primarily through distributors. Partnering with these in-region experts can help us extend our reach and drive greater brand awareness in both existing and new geographies over time.As you can tell, my priorities are about driving growth.We have significantly improved our business model and reduced our cost structure over the past year. And now, it's time to regain momentum with our customers and position the brand to return to growth in 2025.As we turn to this next chapter, we are fortunate to have incredible people across the organization who are passionate about the brand, dedicated to our purpose, and committed to winning.Now, I'll pass the call to Annie to discuss the financials and our outlook for 2024.

[Annie Mitchell, executive]

Thanks, Joe, and good afternoon, everyone. We're pleased to report our fourth consecutive quarter of both operational and financial progress. Our Q4 results came in at the high end of our guided range on the top line and ahead of our expectations on the adjusted EBITDA line.We also delivered significant progress across inventory and cash, with inventory reduced by half versus a year ago and operating cash used down both sequentially and year-over-year.Fourth quarter revenue of $72 million declined 14.5%, reflective of our actions to continue clearly through non-core product and reduced marketing investments. Gross margin came in at 38.0% compared to 43.1% a year ago.This was in line with our expectations and was inclusive of our planned promotional activity, which allowed us to end the year in a healthy inventory position. The impact of promotions of more than offset cost of goods savings resulting from lower outbound rate.Looking at expenses. SG&A dollars, excluding stock-based compensation to depreciation and amortization came in better than we expected on a sequential and year-over-year basis.This reflects lower personnel expense as well as ongoing cost discipline. In 2024, we expect SG&A dollars to be down year-over-year as we realize the full-year impact from previous workforce reductions and capture partial-year savings related to 2024 store closures to international transitions.Turning now to Q4 marketing expense. We were up sequentially from Q3 in dollars, which was in line with our plans to increase spend in support of the holiday selling season as well as our Wool Runner 2 launch.Looking at 2024, we expect marketing plan to be down, largely associated with our international transitions with planned incremental investments in the U.S. in the back half. Moving to the balance sheet and cash flow.We delivered another solid quarter of progress on inventory and cash and ended the year in strong financial condition. Year-end inventories totaled $58 million. That's down 51% versus a year ago and reflects the cleanup of noncore pillars and styles, which allowed us to enter 2024 with healthy levels and composition.Our progress on reducing inventory, coupled with strict control of expenses, enabled us to narrow our Q4 operating cash use to $4.7 million versus $8.4 million a year ago. On a full-year basis, operating cash use was $30 million, down significantly from $91 million in 2022.We closed the year with $130 million of cash and cash equivalents and no outstanding borrowings on our $50 million revolver, providing us with the runway and financial flexibility to execute our strategic transformation plan.After a year in which we converted a significant amount of inventory into cash, we anticipate that the operating cash use will naturally increase in 2024 compared to 2023. We're proud of our strong execution in 2023. We did the hard work, achieved our goal, and put us on the path to rightsizing our cost structure.Importantly, we're tracking to the COGS and SG&A savings targets we laid out a year ago.As a reminder, our 2025 target includes $20 million to $25 million of cost of goods savings on a volume-neutral basis to 2022 and $15 million to $20 million of SG&A savings on an annualized basis as compared to our run rate at the end of 2022.As you heard earlier in the call, we're taking actions this year designed to position the business to return to top-line growth in 2025 and set us up to deliver profitability in future years.Now, I'll walk you through the financial impact of 2 key initiatives. First, we're optimizing our U.S. store portfolio to the exit of certain underperforming leases. We are focused on 4-wall EBITDA profitability and anticipate that a leaner portfolio will enable us to improve fleet profitability, working capital, and inventory.Following a rigorous fleet review, we are planning to close 10 to 15 stores in 2024, representing up to 1/3 of the portfolio. In conjunction with the closures, we expect to incur one-time cash charges to settle these leases, largely in the first half of the year.Turning now to our international go-to-market strategy. One of our objectives today is to educate our analysts and investors on the modeling implications and related P&L impact resulting from our transition to a distributor model in the majority of our international markets.Conceptually, the best way to think about each line item is as follows: starting with net sales. From a high-level perspective, we are replacing direct sales to the consumer with sales to the distributors at a lower price, similar to a wholesale model.Following a large initial inventory buy as part of the asset purchase agreement, volumes remain low for the first quarter or so and then begin building in the next quarter.While the distributors will buy from us each quarter, we anticipate volume purchases in Q2 and Q4 will be proportionately higher due to seasonality. The margin and profit profile is also similar to a wholesale model and that gross margin is lower than our direct business and SG&A and marketing test is minimal.We anticipate that gross margin will be approximately 15 to 20 percentage points below total company margin and in region, SG&A and marketing costs will reduce to a normal amount.Taken together, this represents in-region savings of approximately $14 million on an annualized basis. Additionally, our in-region CapEx will be de minimis. For out-of-context, we will leverage global creative investments at the corporate level and maintain limited operational costs within our headquarters, which will be included in total company SG&A.From a bottom-line perspective, despite lower gross margins with minimal overhead in these regions, they are expected to be immediately profitable and carried average contribution margin of approximately 20%. Additionally, from a working capital perspective, the new model is expected to unlock inventory efficiencies and drive improvement in working capital.To further assist with your understanding of our international transition and progress against our strategic transformation, at the conclusion of this call, we will be posting supplemental materials to our Investor Relations website under quarterly results.The financial guidance we're providing today reflects a full year of operations under the new distributor model for 2 regions, Canada and South Korea, and approximately half year contributions for other regions transitioning or expected to transition this year.To assist with your modeling efforts, through the first-year transition, we are also providing a revenue outlook for each of the U.S. and the international geographies. For the full year in 2024, revenue is expected to be in the range of $190 million to $210 million. This reflects the headwind of $32 million to $37 million related to our strategic actions to close U.S. stores and transition our international markets to a more profitable distributor model.Stepping back and looking at the underlying business, excluding these 2 near-term handsets, we believe the inventory cleanup in 2023 will enable us to return to more full-price selling in 2024. We believe this is the right approach for the brand, but we recognize there may be a natural leg for the consumer after responding to our promotional messages and offers last year.To that end, the low end of our guidance reflects trends down in the mid-teens. The high end of our guide reflects sales down mid-singles, which assumes a modest improvement in consumer response to our new products and storytelling in the second half of the year. Taking a look at revenue by geographical market.Full-year U.S. revenue is expected to be $150 million to $165 million and includes approximately $7 million to $9 million of impact resulting from our anticipated U.S. store closures. Full-year international revenue is expected to be $40 million to $45 million and includes approximately $25 million to $28 million of impact resulting from our anticipated transitions to a distributor model in international markets.Gross margin is expected to be in the range of 42% to 45% and reflects a few key factors: reduced promotional intensity compared to 2023, lower inbound and outbound freight, and initial savings from our factory shift to Vietnam and material innovation. These benefits are expected to be partially offset by lower gross profit in international regions that have transitioned or are planning to transition to a distributor model in 2024.Full-year adjusted EBITDA loss is expected to be in the range of $78 million to $63 million. Turning to Q1 guidance. First-quarter revenue is expected to be in the range of $37 million to $42 million. That includes U.S. revenue guidance of $28 million to $31 million and international revenue guidance of $9 million to $11 million. Adjusted EBITDA loss is expected to be in the range of $27 million to $23 million.As a reminder, through the first quarter, we'll be operating with 2 of our international regions already transitioned to the distributor model, Canada and South Korea. For added perspective, as you think about building your full-year model, we expect top-line trends to remain fairly consistent for the first 3 quarters of the year with seasonally driven improvements in Q4.There are a number of factors driving the anticipated trend line, including the transition of at least 4 international regions, store closures, tough comparisons to promotional activity in 2023, and consumer response to new product introductions as well as marketing investments we intend to make in the second half of the year.Looking further ahead, achieving adjusted EBITDA profitability and positive cash flow on a full-year basis remains our North Star.The timing to get there may take longer than anticipated. We believe the actions we're taking this year will position the business to return to top-line growth in 2025 and feel confident that our transformation work is enabling us to build the operating model needed to drive profitable growth in future years. We appreciate your time this afternoon and look forward to reporting to you on our progress throughout 2024.Now, I'll ask the operator to open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Alex Straton with Morgan Stanley.

[Katie Callahan, analyst]

This is Katie Callahan on for Alex Straton. My first question is no surprise to see sales decline even when adjusting for store closures in the international transition. What's driving that decline? Is it just waiting for the new product to arrive in the second half?

[Annie Mitchell, executive]

Hi, Katie, it's nice to hear your voice again. Yes, when you're looking at our guidance, there are a number of factors impacting some of the quarterly trends as well as the overall numbers. We talked about the closing of the retail doors that did already start in Q1. The international market, the 2 new ones will happen midyear.And then where we expect there to be growth to be coming from is the introduction of refreshed and compelling new products that will happen later this year and really is we're ramping up as we move into 2025.Additionally, we are planning to coincide our marketing investment with the launch of those new products. So, in the first half of the year, we have all of the non-comp impacts, and it started in the back half of the year with the introduction of new product that gives us excitement as we work our way in 2025.

[Katie Callahan, analyst]

And then just one more for me. On the U.S. store closures, is there any specific demographic trend or driving behind the ones that you're closing? Like are they in more suburban markets, or a certain size or any trend we could think about there?

[Joseph Zwillinger, executive]

Yes. I would say the overwhelming theme to think about in the ones that we're closing for the year are really some of the newer ones that were designed with a little bit of a larger store footprint and probably that served with a more robust apparel offering. And as we refocus the product line really sharply on those iconic franchises in footwear.We wanted to make sure that the fleet was rightsized for the go-forward product as well as just a great optimized U.S. marketplace so that we're in the key cities that we need to win, and we can balance out some of those other places with more robust wholesale distribution.

[Operator]

Our next question comes from the line of Janine Stichter with BTIG.

[Janine Hoffman Stichter, analyst]

I want to ask about the wholesale distribution. You talked about it being a long-term larger portion of your mix. What's needed to reaccelerate that there? How should we think about timing and magnitude? And maybe just remind us where you are in that what accounts you're in and what the go-forward plans might look like?

[Joseph Zwillinger, executive]

Hi, Janine, yes, I'll start this off here, and then I'll kick it over to Joe, if you want to add something for the go-forward. So, just context-wise, we had some nasty work to accomplish last year, and that was with a robust set of promotions and markdowns to make sure that we had a very healthy inventory to come into the year in 2024, so, we did that.And along the same timeline, we were also refreshing the product line and moving things through the development cycle, which really is going to start to hit in earnest in Q2 and beyond in 2024. And we think the very optimistic about the back half of it coming as improvement versus '23 and before and really excited about 2025.So, when we think about what we want to do with Wholesale, we want to be great partners there and the biggest and most important element for our partners is to drive great sell-through and margin. So, we want to make sure that the right product is on the shelves, and we're showing up fantastically for the consumer when we really push the acceleration in that channel.And we do think it's a very big part of our business going forward. We've always envisioned it being a sizable chunk when we have the right product to do that. So, that is where we're headed. But we did want to make sure to be cautious and not put product in the channel that we didn't think would resonate strongly with consumers and create a messy marketplace.So, that's the worst thing that could happen. So, we are fairly prudent and cautious about, making sure we had pulled back in that channel so that we could then reaccelerate. And our partners are great to support us there. Joe, maybe you can just mention who we're working closely and what you have in store moving forward.

[Joe Vernachio, executive]

Yes. And overall, Janine, nice to meet you. We believe that Wholesale is a big component of our overall balanced U.S. marketplace along with our own digital and our own retail stores. We think the opportunity in Wholesale is quite significant for us as we move forward.We purposefully held back last year for all the reasons Joey just described to make sure that we weren't putting product into the marketplace, knowing that we had to move through our own inventory. And we're really fortunate that we've got marquee retailer partners to work with. A lot of brands would be very fortunate to have the portfolio that we have.We are working directly with them, and we'll be going on a roadshow over the next series of months to reintroduce our product strategy, our icon strategy, our communication strategy to reinvigorate our sell-in with those retailers, and you should start to see products starting to come online later in this year and early in next year.

[Operator]

Our next question comes from the line of Dylan Carden with William Blair.

[Dylan Carden, analyst]

Kind of some boring ones here. But the breakout between retail and digital growth in the quarter, I'm kind of curious how you're thinking about reporting go forward if you're going to start breaking out the wholesale distribution is kind of like to maybe adjust our models.

[Annie Mitchell, executive]

Dylan, for the immediacy, no, we're not going to be changing the way that we are sharing our segments and our interim information.For this year, we will give the guidance for U.S. and international separate. We did that for the full year for Q1, as we understand that the shift international is going to be meaningful in terms of the modeling. So, for this year, we do anticipate giving those margin guidance. In terms of reporting, no, we do not intend to change our segment split quite yet.

[Dylan Carden, analyst]

So, you're not going to be breaking out retail in digital? Is that what you mean? Nor providing a wholesale?

[Annie Mitchell, executive]

Yes.

[Dylan Carden, analyst]

And then on gross margin, the guide kind of actually up on the year and maybe I've sort of misheard you, but despite the sort of the lower gross margin associated with the distributor model, is that simply because the offset on the promotion cadence or what might I be missing there?

[Annie Mitchell, executive]

Yes. So, we are giving guidance and are expecting there to be margin improvement in 2024 over 2023. It's coming from a number of factors and the largest one being exactly as you just called out, the reduced promotional intensity compared to last year. Last year, we ended up doing a significant amount of promotions to right-size our inventory.We were very successful at doing that, as you can see from the inventory being cut in half from a year ago. We still shifted back to more full-price selling and the consumer is responding when we give them freshness, either through a new product or color drop.So, shifting back to full price is the largest. The next is the lower freight expense and some of the initial COG savings from our factory shift to Vietnam and the material innovations.To add a little more color specifically on the freight. These are results of the proactive efforts that we made last year to drive some savings. The inbound savings are coming from our redesigned shoe boxes, which are allowing for more efficient shipping and the outbound savings are coming from a freight tender that we completed in 2023.But you are correct. That's going to be offset by the distributor model. The gross margin in that is lower. However, with the OpEx and marketing being virtually 0, this is a strategic decision that will overall improve the bottom line, and we expect a contribution margin around 20% coming from the international distributor business.

[Dylan Carden, analyst]

And then, sorry, last one, and again, apologies if I sort of misheard you here. It was going pretty quickly. But the $190-$210 million revenue guide, $32-$37 million loss from store closures, $25-$28 million from distributor model shift. The midpoint of those 2 plus the midpoint of the guide would suggest actually a growth in sales, but the organic guide is sort of down mid-teens, down mid-single digits. I know I'm missing something there, but can you tell me?

[Annie Mitchell, executive]

Yes, Dylan. Yes, we definitely went through it quickly. We're trying to do a lot of messages across today. The total of retail and international is $32-$37 million. That's made up of retail yes, retail is $7 million to $9 million and international is $25 million to $28 million. So, I think there is a little bit of double counting that you might have had going on there.

[Dylan Carden, analyst]

And then so, the organic growth is down mid-teens, so mid-single. It's the right way to think about that?

[Annie Mitchell, executive]

Correct. That's exactly right.

[Operator]

[Operator Instructions] Our next question comes from the line of Abbie Zvejnieks with Piper Sandler.

[Abigail Zvejnieks, analyst]

I have one for Joey, can you talk about the decision to step down? And then I have a follow-up on the SQ&A.

[Joseph Zwillinger, executive]

Sure. We've been now a year into this transformation, and we're all quite happy with the progress, albeit not necessarily with the overall situation that we find ourselves in here. And when we're in this moment, it's incredibly important to have the right leadership team in place both through the various phases of a transformation.And Joe and I have been talking about this virtually since he joined the company almost 3 years ago now, but really in earnest over the last year as an opportunity to get the best retail execution we possibly could at the helm. And I think the timing is fantastic. And Joe has proven to be an exceptionally capable leader and one that I personally thought was best suited to handle the transformation as we go forward here.So, that, in particular, was the decision around myself and Joe, but I just want to underscore the fact that we have work to do, and that work is predominantly around driving growth. And in order for us to do that, we have to get exceptional product teams in place, and we have to have exceptional storytelling. And we have to have the resources to bring the bear to invest behind those people.And fortunately, throughout this process being a deliberate and methodical one. We have a balance sheet that's extremely healthy. And now we have an A+ team in place. And we think we have absolutely everything we need in order to accomplish this next phase, which is all about this return to growth and getting back on offense.

[Abigail Zvejnieks, analyst]

And maybe just as a follow-up to that before my SG&A question. Have you seen any like green shoots on some of the new products that you've put out recently? I mean you know that some of the performance test didn't really connect with your consumer, but some of the newer product launches, have you seen those green tubes yet? Or is this still more of a 2025 story on product?

[Joseph Zwillinger, executive]

No. We should see some in advance of that. And I think we've already demonstrated a bit, and maybe I'll let Joe speak to it and add a little color there.

[Joe Vernachio, executive]

Yes. I think the Wool Runner 2 is probably the best near-term example of our icon strategy coming to life. So, it was our best launch that we've had in a number of years. And the consumer really reacted strongly to the messaging and to the positioning of that product.And coming right behind it will be a product we're calling the Tree Runner Go, which is kind of a sister product to that with more of a summer expression that we'll be launching in the near future, and we expect similar, if not even greater results. The Tree Runner itself is our #1 product in our total offering. We expect this new version to do quite well.We'll have a couple of more coming out the balance of the year, a product we're calling The Glider, which has a more active slant and is oriented more towards a female consumer. And then we've got a really strong Q4 offering coming right behind that.So, we're really excited about the offering that we've got coming this year and then the icon strategy and the distortion of the icons coming through '25, we think are really going to propel our growth and drive full-price sales.

[Abigail Zvejnieks, analyst]

Just SG&A piece, can you talk a little bit more about the cadence of marketing one, you said some reinvestment in the second half. Does that mean that marketing will grow year-over-year in the second half? Or will it still decline but just at a lesser rate than the first half?

[Annie Mitchell, executive]

Great. When looking at marketing, yes, overall, it will be down, largely related to the international transition. In terms of the overall timing and cadence of it, we do anticipate that each quarter will be down. And the exact timing and the investment in marketing will happen in the back half of the year.But we haven't articulated it into exactly which month or quarter. We want to make sure that we're supporting the products coming to life. And so, while we'll be in the back half of the year, we do anticipate that each quarter will generally be down with potential leasing changes in Q3 and Q4.

[Joseph Zwillinger, executive]

And, Abbie, maybe I can just add from a high-level perspective. I'm just a slightly different way to think about it. You can see in the supplemental deck, we put up some specific timing on the international transitions, and that really drives a lot of the overall decline in marketing.So, that should kind of help you pencil out the timing and some of the relative weighting of what you should expect from that decrease related to the switch of the go-to-market. And then in the organic go-forward business, we really want to time the investment with in marketing to coincide with this refresh product line coming out, and we're going to start getting back on offense there and really showcasing some of the strength of this product offering and just make sure we have the opportunity to meet all the new consumers who haven't even heard of Allbirds yet, and that's the biggest opportunity we probably have.So, that's starting in the back half, and we'll hopefully just gain strength and continue to accelerate.

[Operator]

Our next question comes from the line of Tom Nikic with Wedbush.

[Tom Nikic, analyst]

On the Q3 call, you mentioned that you were still confident in getting to adjusted EBITDA profitability and free cash flow positive in 2025. I mean, do you still have confidence in that timeline and [indiscernible]. There isn't much adjusted EBITDA improvement in the guidance for 2024. So, even with the cost savings and stuff like that. And since it seems like a pretty long bridge across, but just kind of trying to wrap my head around the timeline of upgrading business profitability.

[Annie Mitchell, executive]

Achieving adjusted EBITDA profitability does remain our North Star, and we anticipate that it may take longer than initially communicated. We believe the transformation work that we've done to date and we'll continue to do in 2024 is positioning the business to achieve top line growth in 2025.But this year, the deliberate strategic actions that we're taking are our international and U.S. store closures, we'll only see a partial year impact from these due to timing happening over the course of the year.And in 2025, we will benefit from the full-year profitability improvement, setting us up to drive long-term profitable growth, supported by the new product and marketing coming online later this year and as we ramp up into 2025.

[Tom Nikic, analyst]

And I guess as we think out to 2025, I mean, I guess, there should still be some amount from top-line headwind from store closures and the international distributor transmission as they kind of wrap around?

[Annie Mitchell, executive]

That is correct. When we do the quarterly comp year-over-year, we will continue to have non-comp impact as we go into 2025. But remember, these strategic actions are being made because they will be impactful and positive on the bottom line. And so, that's what we're focusing on as we go into 2025 is improving adjusted EBITDA.

[Operator]

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

[Dana Telsey, analyst]

As you think about your store base and the closing of 10-15, what is the right number of stores that you should have? And by eliminating new stores, what's the revenue impact? And what's the cost impact that you see as a result?

[Annie Mitchell, executive]

Thanks, Dana. The overall back to the top line this year is $7 million to $9 million. That is largely based on about average of a half-year convention with the door closures. So, we do expect the top line to have some non-comp impact as we go in to 2025.In terms of the cost savings, we believe that this change this year, again, largely a partial impact, will be a range of positive $3 million to $5 million from closing these retail doors. And again, that's approximately on a half-year convention. Again, some have already closed, and then some will continue to close over the course of Q2 and into a few into Q3. Does that help, Dana?

[Dana Telsey, analyst]

Yes. And what's the go-forward number of stores that you should have from the existing base after that? What are you looking to retain in terms of stores?

[Joseph Zwillinger, executive]

Dana, I think it's hard to put a number on that because as the base of customers who are aware of us and our purchasing our product expands, I think there's really big white space for the number of stores that could potentially exist.So, we need to revitalize momentum and get some relevance with those new consumers we need, and then we can start thinking about building stores again.I think the most important aspect there is just maintaining balance and where we should and we expect to have a lot of weapons at our disposal, including a much more robust wholesale offering.We have introduced products on Amazon, which has been really successful for us alongside our DTC channel. So, as we see the marketplace develop, it's going to be mostly about balance going forward.And the right number of stores should reveal itself as the business scales and we regain momentum, and that will be a geographic-specific decision and one we want to maintain and drive great omnichannel purchase but do it in a very balanced way.

[Operator]

This concludes the Q&A portion. I'll now turn the call back over to Joe Vernachio for closing remarks.

[Joe Vernachio, executive]

Thank you, everyone, for joining us today. I'm incredibly energized by the opportunity ahead of us at Allbirds. And I'm really personally excited to get to meet and spend time with our analysts and investors in the coming months. Thank you very much.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.