Columbia Sportswear Co

NASDAQ:COLM

Earnings Call Transcript 2022-Q3

[Operator]

Greetings, ladies and gentlemen and welcome to Columbia Sportswear Third Quarter 2022 Financial Results Conference Call. [Operator instructions].

It is now my pleasure to turn the floor over to your host, Andrew Burns. The floor is yours.

[Andrew Burns, Director, IR]

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company’s third quarter results. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also available on our investor relations website, investor.columbia.com.

With me today on the call are Chairman, President, and Chief Executive Officer, Tim Boyle; Executive Vice President and Chief Financial Officer, Jim Swanson; and Executive Vice President, and Chief Administrative Officer, Peter Bragdon.

This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations, or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward-looking statement is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings.

We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or changes in our expectations.

I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our earnings release and the appendix of our CFO commentary and financial review.

Following prepared remarks, we will host a Q&A period during which we will limit each caller to two questions so we can get to everyone by the end of the hour.

Now, I'll turn the call over to Tim.

[Tim Boyle, Chairman, President and CEO]

Thanks, Andrew and good afternoon. I hope everybody is well. I am pleased to report the third quarter net sales and earnings growth were very strong considering the economic, geopolitical and supply chain headwinds that we're navigating. Net sales grew 19% and diluted earnings per share grew 18% broadly in line with our expectations.

Bright spots in the quarter included SOREL, which grew 28% year-over-year. The SOREL brand continues to outperform, fueled by function first fashion footwear. We believe fashion SOREL is well on its way to $1 billion in sales and becoming the next global footwear force.

Columbia also had a fantastic quarter growing 19%. The brand's iconic innovation, value proposition and democratic distribution uniquely position the brand to capitalize on the popularity of outdoor activities. Innovations like Omni-Heat Infinity and the newly introduced Omni-Heat Helix are solving problems for consumers and are key differentiators for the brand.

So looking at the current environment, it's increasingly evident that the threat of recession is weighing on the market. Despite this challenging background, our DTC business was up 8% year-over-year in the quarter with balanced growth across brick and mortar and e-commerce.

On our last call, we updated our outlook to contemplate higher order cancellation risk and a more promotional environment compared to the exceptionally favorable environment in the prior year. We experience both these trends in the third quarter and anticipate similar headwinds in the fourth quarter as the marketplace seeks to rationalize inventory levels.

Exiting the third quarter, our inventories were up 47%. As we look to align our inventory position with anticipated demand, it's important to remember that our business model and strategies are well suited to manage this process effectively and profitably.

Our inventory includes a high percentage of evergreen styles that do not change season to season. This reduces our exposure to promotional pricing. Given our strong balance sheet, we can be patient as to when and where we sell our product. If we decide not to carry over product, we will utilize our fleet of outlet stores, which enables us to profitably sell remaining high quality inventory.

Overall, I'm confident our strategies are working and that our brand portfolio has tremendous long term growth potential. With two very important sales months left in the year, we are reiterating our full year net sales and diluted earnings per share outlook. I will provide more data later in the call.

From our review of third quarter 2022 financial performance, I'll reference year-over-year comparisons versus the third quarter of 2021, unless otherwise noted. Third quarter net sales grew 19% on a reported basis and 22% on a constant currency basis. By channel, wholesale net sales increased 24% reflecting earlier shipments of our robust fall '22 order book. DTC net sales grew 8%, driven by 9% e-commerce growth and 8% brick and mortar growth.

Gross margin contracted 270 basis points with the largest driver of contraction being higher inbound expenses. Gross margin performance was roughly in line with our outlook. SG&A leverage partially offset gross margin pressure, but operating margin still contracted 140 basis points. Diluted earnings per share increased 18% to a $1.80.

I will now review net sales performance by region. US net sales increased 19%. We generated mid 20% wholesale growth while timing of fall '22 shipments improved compared to fall '21, they were still later than historical shipping patterns. This resulted in increased order cancellations. Most of our retail partners have now set their fall floor plans.

Early season sell through trends reflect healthy demand and are tracking slightly below fall '21, which you will remember was exceptionally strong. Sell through is well above pre-pandemic levels, reflecting growing consumer interests in our product. Our US DTC business was resilient in the third quarter, despite broader economic headwinds. We generated high single digit DTC growth with balanced performance across e-commerce and brick and mortar.

Turning to our international business, all regions outside the US were unfavorably impacted by foreign exchange rates. For international regions, I will reference constant currency growth to illustrate underlying growth in each market. Latin America, Asia Pacific region or LAAP, net sales increased 24%.

Despite the ongoing impacts of China's COVID policy, China was up mid-single digit percent in the quarter driven by strong dtc.com performance. Continuing waves of COVID outbreaks caused sporadic store closures and traffic decreases in various regions throughout the quarter. With that being said, our e-commerce business in China was quite strong led by the successful launch of our TikTok store.

Japan increased high teens percent driven by strong consumer demand as we anniversary the state of emergency declarations, which hindered sales in the prior year. Korea grew low single digit percent led by strong DTC performance. Interest in outdoor activities continues to fuel strong demand in this market. LAAP distributor markets were up almost 150% due to higher fall '22 shipments following depressed pandemic impacted shipments in the prior year.

Europe, Middle East, Africa region or EMEA, net sales increased 54%. Europe direct grew 20% despite mounting economic pressures in the region. We experienced strong performance in our DTC e-commerce and wholesale business. Our, EMEA distributor business was up almost 150% due to the later shipments of fall '22 Orders to our Russia-based distributor.

Shipment to Russia in the third quarter consisted of pre-existing contractual obligations for orders taken prior to the invasion. As we have previously noted, we have paused taking any new orders for the Russian market. Canada net sales were flat with strong DTC performance offset by lower wholesale shipments, which were unfavorably impacted by timing shifts.

Looking at performance by brand, Columbia brand net sales were up 19% in the third quarter. Growth was relatively balanced across apparel and footwear. Following the highly successful launch of Omni-Heat Infinity last year, we're building on this momentum with an expanded collection for fall '22. This differentiated visible technology remains a top priority from a product and marketing standpoint.

We're running a worldwide marketing campaign focused on how the Omni-Heat Infinity technology works and why it matters for consumers. Columbia's Omni-Heat Infinity technology received numerous accolades in several top publications this fall. The men's and women's Pinnacle Peak jacket have been named one of the best puffy jackets in Outside Magazine's coveted Winter Gear Guide. For the slopes, the Platinum Peak three layer show was selected as one of the best ski jackets of this season by the editors at Ski Magazine.

This fall, we also introduced Omni Heat Helix, our new disruptive poly fleece technology. Historically, the poly fleece category, which is one of the outdoor industry's mainstays has had little innovation. Columbia's Omni Heat Helix is a patent pending visible technology that utilizes highly efficient insulation cells to maximize warmth and ensure breathability. We're excited to build on this differentiated new innovation in the seasons ahead.

Omni Heat Helix was featured on a recent Forbes magazine article about a gear test conducted on Alaska's Spencer Glacier. The journey which included hiking, kayaking and camping, served as a proven ground for a collection of key fall '22 styles. As we emphasize at our recent Investor Day, footwear is a growth accelerator for the Columbia brand, and we will continue to prioritize investment in this category.

For fall '22, we launched the peak free two collection of lightweight technical hiking footwear. The launch is being supported by an integrated marketing campaign showcasing the shoe's Freaky Good Grip. Our Columbia Montreal performance running line received several callouts during the quarter. The Montreal Trinity Ag was featured in the Runners World's spring footwear review issue. It was one of the 23 styles selected out of over 200 models tested.

News also recently featured the Montreal Trinity MX as a shoe to know for 2023. The Trinity Collection is equipped with our branded technologies, tech with plush and adapt Trex to provide added cushioning and traction in all conditions.

On the marketing front, we recently announced a multi-season partnership with leading sports and entertainment group Dude Perfect. Colombia and the Dude's will collaborate on several stats and stories this fall and spring, focusing on making the most of the outdoors and inspiring others to do the same. We kicked off the partnership with a segment on ABC's Jimmy Kimmel live, which first aired on September 28.

NFL quarterback, Jalan Hertz was recently featured on the no days of Doc series which highlights young athletes on their journey to achieve their goals. The episode focused on JLens transition from growing up in the Texas heat to getting ready for cold playoff weather in Philadelphia. Jan also spoke about why he likes to enjoy the outdoors. Several Columbia products were featured prominently in the episode, including his Omni-Heat Infinity jacket.

Shifting to our emerging brands. SOREL was our fastest-growing brand in the quarter. Net sales increased 28%, driven by strong wholesale and DTC e-commerce performance. SOREL's growth rate in the quarter was aided by favorable timing of fall shipments compared to the prior year. The SOREL brand remains laser-focused on bringing our relentless flow of compelling products to its unstoppable consumer.

During the quarter, growth was led by winter style categories as well as strong performance in year [indiscernible] and wedge styles. In September, SOREL launched its first partnership with High Bay, which showcases today's female leaders within fashion and culture. SOREL, an illustrator Langley Fox took over the hightb.com homepage to highlight an unstoppable women and the brand's Brex collection.

SOREL also launched its social campaign powered by SOREL. This campaign features behind the same content by celebrity stylists as they get their clients ready for New York Fashion Week and the Emmys. This has been 1 of SOREL's most successful organic video campaigns to date.

Last week, SOREL announced that it will be relocating its headquarters to its own building on the Columbia Sportswear campus. The new location provides additional space with the brand's growing team and enables SOREL to continue attracting industry best talent. prAna net sales increased 3%.

The prAna team is focused on repositioning the brand in the marketplace to energize growth in the coming seasons. Early next year, prAna will sponsor the HBO Max reality series, the climb which will be hosted by after Jason, along with prAna ambassadors, Chris Sharma and Megan Martin. This show will focus on a group of amateur climbers outfitted in Prana, as they ascend some of the most intimidating rock faces in the world.

Mountain Hardware net sales increased 11%. Strong sportswear category sell-through was a highlight in the quarter as well as the introduction of the Summit grid collection, a super packable fleece for lightweight performance on the trail. The Amplify Mountain Hardware's product-driven resurgence, the team is keenly focused on solidifying the brand's identity and growing brand awareness.

I'll now discuss our updated fall '22 financial outlook. This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures related to these statements. We are reiterating our full year net sales and diluted EPS outlook calling for 10% to 12% net sales growth and between $5 to $5.40 in diluted earnings per share.

Gross margin is now expected to be down 220 basis points to 250 basis points and SG&A expenses are forecast to grow roughly in line with sales growth. The result in an operating margin range of 11.9% to 12.7%. Foreign currency exchange headwinds are now expected to unfavorably impact full year net sales growth by 350 basis points and diluted earnings per share by approximately $0.25.

Looking into next year, we plan on providing our 2023 financial outlook when we report fourth quarter results in February. At that time, we will have visibility to fall '23 orders and our planned expenditures. As we indicated at our Investor Day, our Spring '23 order book supports modest wholesale net sales growth in the first half of 2023. We anticipate our on-time delivery performance will greatly improve and be more in line with pre-pandemic service levels.

In summary, I'm confident we have the right strategies in place to navigate this dynamic environment and unlock the significant growth opportunities we see across the business. We are investing in our strategic priorities to accelerate profitable growth create iconic products, tie brand engagement, enhanced consumer experiences, amplify marketplace excellence and empower talent that is driven by our core values.

That concludes my prepared remarks. We welcome your questions for the remainder of the hour. Operator, could you help us with that?

[Operator]

[Operator Instruction] And the first question is coming from Bob Drbul with Guggenheim. Bob, your line is live.

[Bob Drbul, Guggenheim]

A couple of questions for you. The first 1 is on the cancellations, and I guess, leading into the inventories, can you just elaborate more around the cancellations either by channel, by mix fall '22, spring '23? And just sort of how that's played through. And then I think you talked about the inventories, you've adjusted your purchases going forward to get them in line and it will still take a few quarters.

I guess can you just talk through what you see at retail with your wholesale partners and sort of where you think when you get yours aligned versus supply/demand versus the retailers, where you think the retailers are with the trends that you're seeing out there?

[Tim Boyle, Chairman, President and CEO]

Safe. Thanks. Well, as it relates to the cancellation, they were virtually 100% or very close to that, a function of our inability to deliver on time. So the demand is still there for the product. It's just that we missed the windows and therefore, canceled the product. Virtually, all the cancellations have been fall '22. We really don't have any Spring '23 delivery scheduled prior to December. So none of those have had any cancellations. We expect to be much more timely in our deliveries for Spring '23, and frankly, for the balance of fall '22.

So this resulted in inventory, which is current inventory being in excess. So as we said in our prepared remarks, our plan is to liquidate that over time in a nonpanic way through sales to regular retailers as a result of demand in the fall as well as our own outlet stores in the future. So we're very comfortable with our position there.

As it relates to retailers, I think retailers remember ended up really with very low inventories in -- at the end of fall season '21. So our expectations are that this will be a good season. We have too much -- we have more inventory than we want right now. But I think the market is actually quite good, at least this is how we're seeing it today.

[Jim Swanson, EVP and CFO]

And Bob, with regard to your question on where we've seen cancellations by channel, it's fairly broad-based. As Tim touched on, the cancellations are by and large a factor of being late from a supply standpoint. So that's impacted all retailers relatively equally. So pretty broad-based and balanced in what we've seen from a cancellation perspective.

[Bob Drbul, Guggenheim]

Alright. Great. And then on SOREL, can you talk a little bit about the strength women's versus men's? And sort of where you see the opportunities in Q4 versus a little bit more on '23, early '23?

[Tim Boyle, Chairman, President and CEO]

Yes, certainly. Well, the SOREL business has really grown tremendously, and it really is a function of the concentration on women's. I think we looked this morning prior to the call, and we talked about something like 80% of the SOREL sales being non-winter and something like 85% being women's. So it's really a function of the efforts that the SOREL team has put into the sneaker business, the wedge business and really getting that unstoppable women product that she needs to be going forward with. And the opportunities are enormous in my opinion.

[Operator]

The next question is coming from Laurent Vasilescu with BNP Paribas. Laurent, your line is live.

[Laurent Vasilescu, BNP Paribas]

I wanted to ask about the CFO commentary. My understanding, if I look -- if I compare the slides from 90 days ago, Jim, you were guiding for footwear to grow high teens, it's now low teens. Just curious what's driving that between Colombia and SOREL? And then I saw the same thing with regards to the wholesale high teens to low teens, if I'm not wrong. Was that just purely due to cancellations? Or is there some shift that we should think about from 4Q into 1Q?

[Jim Swanson, EVP and CFO]

Yes. There's some slight shifts in revenue from Q3 to Q4. We had a slight miss relative to the 20% sales outlook that we provided for the third quarter. And that's effectively just a shift in timing of wholesale shipments that we now anticipate and have shipped in the early part of fourth quarter as it relates to any changes in relative growth rates between brands and product categories, they would be slight, Laurent.

I'm not aware of any meaningful shifts from a product category perspective or from a brand level standpoint. And any change would be more related to wholesale cancellations as opposed to DC performance. D2C performance was fairly consistent throughout the quarter.

[Laurent Vasilescu, BNP Paribas]

All right. Very helpful. And then maybe just some commentary about what you're seeing in Europe. I don't know if you're seeing real time in your direct business, any slowdown. I think winter has -- the fall lease has been somewhat warm in Europe versus in the US It looks like we've had a good start to October. And then China seems to be pretty resilient considering the rolling lockdowns. Anything you want to call out on China that we should consider?

[Tim Boyle, Chairman, President and CEO]

Yes, certainly. Well, I want to point out, we've talked at length about both Europe, the European market and the China market, but let me talk about Europe first. That grew well this year in the quarter. And I think our business there is quite strong. Remember that we've underperformed in that market historically. And so now that we've got an excellent team there that's very focused on the right products and strategies that business is coming along well, and I think that's why you're seeing a growth in that market.

Obviously, the headwinds are highly publicized, but we seem to be doing well in that market and no expectations that would change our mind. As it relates to China, again, an area where we've underperformed from recent times. And the expectation is that the team is well underway at the advantage.

The advancement of the business, we have a much more robust digital team there. And as you saw in the quarter, we talked about the TikTok store, which performed so well. So those two markets have been under pressure from us have been reconstructed. And I think what you're seeing is the results of those reconstruction.

[Operator]

Up next, we have Paul Loes with Citigroup. Paul, your line is live.

[Tracy Kogan, Citi]

It's Tracy Kogan filling in for Paul. I was wondering, first, if you can tell us on your gross margin change for the year in your guidance, have you actually seen an uptick in promotional levels already quarter-to-date? Or is it something that you expect based on the inventory levels you see across the industry? And then I have another follow-up question.

[Jim Swanson, EVP and CFO]

Yes. Tracy, it's going to be more of the latter in terms of the economic climate, the level of inventories in the operating environment that we're currently operating in. As we look at the third quarter, as an example, our DTC gross margins were down slightly. We cited that, that related to promotional activity. But even with that increased promotional activity. Our overall D2C margins were quite healthy.

And so as we look out into the fourth quarter, the biggest change that we've made in our gross margin outlook is related to the expectation that given inventory levels more broadly in the market that there's likely to be more promotional activity. Certainly, we're not leading with that, but we'll be ready to react as appropriate.

[Tracy Kogan, Citi]

Got it. And then I guess just a follow-up. I think this quarter, as you just mentioned, your wholesale margin or your DTC channel was more promotional, but your wholesale margins were better. I think last quarter, it was the opposite. So I was wondering what the dynamics were there and what you're expecting for 4Q and as we enter next year for margins by channel?

[Jim Swanson, EVP and CFO]

Well, as it relates to both the D2C and wholesale margins. Keep in mind that that does not factor in the inbound freight, which we've separately indicated is a significant headwind. So if you look at both channels with inbound freight, the gross margins are going to be down.

Now when you look at wholesale being up in the fourth quarter, keep in mind the price increases that we began to implement with our fall season, which were in the high single to low double-digit basis, and we did that in order to mitigate the effects of the inflationary pressures that encompass both product input costs, coupled with inbound freight. So essentially, you're seeing the effects of that here in the third quarter as we ship into fall merchandise. And from a D2C perspective, the third quarter, typically, there'

[Operator]

Up next, we have John Kernan with Cowen. John, your line is live.

[Krista Zuber, Cowen]

This is Krista Zuber on for John. Just first on the earlier shipments. Is there any way you can quantify what that is in dollar terms? And do you also envision earlier shipments of spring goods into Q4 or even Q1 '23? And I have 1 follow-up.

[Jim Swanson, EVP and CFO]

Yes. As it relates to the third quarter, you'll note the rate of growth that we achieved in our wholesale business. Certainly, some of that is related to timing shifts. And as Tim pointed out, there were timing shifts in which typically, we would have seen certain of our EMEA distributor fall '22 shipments haven't been shipped in the second quarter and those shipped in the third quarter.

And then likewise, given supply chain constraints, it's hard to quantify some of this because there's -- it's so unique year-to-year right now, just given the delays we've seen. But our wholesale business on the whole has shipped earlier for fall '22 than it did fall '21, yet still far behind where we ideally like it to be, and that's why we've seen the cancellations.

I think if you were to adjust for the timing effects both between the quarters that I'm referencing, our growth rate for our wholesale business ex timing would still be in the double-digit level percent growth.

[Krista Zuber, Cowen]

And then just on the gross margin discussion that was in the prepared remarks in terms of the increased inventory provisions. Should we assume they're going to take most of the sort of the clearance pain in Q4? Or will this stretch out into spring or fall 2023 as you -- I believe, Tim said he was not going to pull the panic button on the inventory clearance that you have on hand?

[Tim Boyle, Chairman, President and CEO]

Yes, we -- yes, this is Tim. So we have a strong balance sheet, and we believe the best use of our asset in our balance sheet is to do the right thing with the inventories that we own. We'll be paying more for inventories that we buy to replace the existing inventory. So we're better served to keep the inventory and manage it through over the next several quarters. So that's our plan, and that's how we're going to approach it. We will be more promotional, very likely in Q4 just to react to the market in general.

And then as it relates to shipments of Spring '23 merchandise. It's quite common that we would ship a mixture of spring product to our US and North America wholesale partners as well as independent distributor markets in -- at the end of the fourth quarter. But that generally varies from time to time based on the demand and the shipping -- shipment availability.

[Operator]

Up next, we have Mitch Kummetz with Seaport Research. Mitch, your line is live.

[Mitch Kummetz, Seaport Research]

Tim, on the spring order book, I know you're lapping some really strong orders a year ago. And if I recall correctly, I think retailers were writing bigger orders pre books last year in order to kind of guarantee product. But as you mentioned, your inventory is flowing better now, you're approaching more normal service levels.

So does that Spring '23 order book kind of reflect that retailers are going back to a more normal prebook cadence as they're recognizing you don't have to kind of line up in advance in order to guarantee product, and if that is the case, maybe that provides a better kind of reorder opportunity in the first half of '23 versus maybe what you experienced in the first half of '22?

[Tim Boyle, Chairman, President and CEO]

Yes. I would say that we were a poor performer in terms of delivery on time in Spring '22. And so I think retailers were more circumspect in terms of how they place their orders, assuming that in the very likely effect that we will have more inventory available to them to order during the season. So we will be a better -- so we will have better service levels in Spring '23 by a long shot than we had in Spring '22. And the expectation is that we'll -- those full shelves in the early part of the season will bode well for reorders.

[Mitch Kummetz, Seaport Research]

Alright. Got it. And then, Jim, just on the margin guidance, and now you're looking for gross margin this year down 220 to 250 bps. In the CFO commentary, I think the first item that you note is the elevated freight levels. Can you quantify that impact? And can you kind of remind us where sort of like container rates are these days and air freight and kind of how that plays out over the next few quarters and when you might start to see that as a tailwind to the margins?

[Jim Swanson, EVP and CFO]

Yes, you bet Mitchell. As it relates to the impact of inbound freight cost to our gross margin throughout this year, through the first half of the year, it was about 300 basis points of impact, and it was pretty even between Q1 and Q2. And as we sit here in Q3, we've seen that to begin to normalize, but it's still pretty impactful.

So Q3, it was over 200 basis points of impact. And I would suspect that we'll continue to see that normalize in the fourth quarter. I don't know that we necessarily get to that becoming a tailwind in the fourth quarter. But certainly, as we look out to 2023, we would expect to see some benefits as we lap this year's high rates that we've been incurring. .

I think in terms of the rates themselves, they've come down substantially over the course of the last several months here. At its peak, our inbound freight rates were 6x to 7x what they were before we came through this event. As we sit here today and we project out into next year we should be closer to 2x what we were.

So we're not going to get all the way back down at least with what we could see right now, all dependent upon what happens from an overall economic supply and demand perspective and how the ocean carriers manage their business. But it should be a nice benefit to offset other headwinds in our gross margins as we look out to '23.

[Tim Boyle, Chairman, President and CEO]

And Mitch, I just want to make a comment on your question regarding air freight. We avoid that virtually at all costs. So we have a very minimal amount of air freight, certainly this year. And as a historical practice, we really avoid that.

[Operator]

[Operator instructions] Up next, we have Alex Perry with Bank of America. Alex, your line is live.

[Alex Perry, Bank of America]

Just first, could you give us maybe a little more color on sort of the shaping for next year? I think '23 wholesale shipments up modestly. Also just trying to sort of think through the puts and takes on the gross margin cadence here with the elevated inventory levels, and you talked about sort of working that through the outlet stores, maybe partially offset by some of the benefits that you sort of expect to see some freight. Just trying to sort of get some color on sort of how we should think about the business heading into next year?

[Jim Swanson, EVP and CFO]

Yes. Alex, we're -- obviously, we're not prepared to provide an outlook for '23 here today, aside from what we've described with regard to the modest growth in our wholesale business through the first half of next year. And we're looking forward, obviously, to the holiday season seeing how consumers react over the course of the next couple of months here and also being able to secure our fall '23 wholesale order book that will put us in better shape as we come around to our year-end earnings call in February, and I can share more of that with you.

Aside from that, as you look at other elements of the P&L gross margin-wise, I touched on, I think, the variables in here are going to be the upside or the tailwind with regard to freight, I think channel mix, the wholesale business has grown substantially in 2022. We'll see how Channel mix works its way out in 2023.

And then on the headwind side, I think the biggest variable that we're that we're dependent upon as are others is just what the overall environment -- the operating environment entails with the shape of the consumer and retailer sentiment and what that means in overall promotional cadence. So those are the major variables. I think currency is obviously another challenging headwind, both from a gross margin perspective as we hedge, our inventory production as well as where translation rates are.

[Alex Perry, Bank of America]

Incredibly helpful. And then maybe off of that, you took some pricing above, I think, what you've taken historically this year. As you move into next year, is it sort of pricing to offset cost inflation? Or how do you guys think about sort of pricing on a go-forward basis?

[Tim Boyle, Chairman, President and CEO]

Yes. Well, we are in the process of pricing our fall '23 products today. And we've seen increases in labor, fairly large increases across almost every market that we source in. There have been some moderation of the cost on material just due to the market reduction in demand, and we would see a commensurate reduction in demand on the ocean freight carriers. So we haven't settled on final pricing yet, and we haven't shared that with our wholesale partners. But our expectations are that the dramatic increases we've seen over the last several quarters will moderate.

[Jim Swanson, EVP and CFO]

Yes. I think Tim is referring specifically, we're going to market with fall '23 here pretty quick. As it relates to spring and the order book that we have, certainly, we're continuing to operate in an inflationary based environment. And with inflation, our objective has been to increase prices to offset that, and we continue to do that with a Spring '23 season. So Spring '23 prices, they're up in the same level of magnitude as what we did for Fall '22. So call it, the high single-digit level is the price increases that we've incorporated into there.

[Operator]

The next question is coming from Steve Marotta with CL King Associates. Steve, your line is live.

[Steve Marotta, CL King Associates]

I know there's been a lot of questions regarding inventory, and I certainly realize that the intent is to piece it out in the channels that are most advantageous over the next three to nine months. Is there a possibility that some of the aspects of the inventory could be packed and held until next holiday specific to either deliver into the wholesale channel or into your DTC?

[Tim Boyle, Chairman, President and CEO]

Yes, I suppose it's possible. But our intention would be to manage the cadence all the way through our business to be liquidated as you said, in the next -- the most current quarters upcoming.

[Jim Swanson, EVP and CFO]

Yes, there's certainly we got the fall merchandise remaining, Steve, and we're carrying some of that for our outlet stores as an example. Certainly, that would be to Tim's point, the there's a good percentage of our inventory and our product lines at our evergreen styles. And we would prefer to hold that merchandise and sell it at a higher margin next year than liquidated at distressed margins in the near term.

[Steve Marotta, CL King Associates]

Understood. Thank you. That's helpful.

[Operator]

We have a question coming from Jonathan Komp with Baird. Jonathan, your line is live. Jonathan, your line is live. All right. I'd like to turn the call back to management for any closing remarks.

[Tim Boyle, Chairman, President and CEO]

Well, thank you for your attention and time today. We look forward to talking to you in February about the results of Q4. Thank you.

[Operator]

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.