Samsonite International S.A. (SMSOF) Q2 2023 Earnings Call Transcript

Samsonite International S.A. (OTCPK:SMSOF) Q2 2023 Earnings Conference Call August 16, 2023 9:00 PM ET

Company Participants

William Yue – Investor Relations

Kyle Gendreau – Chief Executive Officer

Reza Taleghani – Chief Financial Officer

William Yue

Great. Good morning, everyone. Thank you for taking the time to join the Samsonite’s First Half Results Presentation. Today, we have our CEO, Kyle Gendreau; CFO, Reza Taleghani, with us.

And without further ado, Kyle will begin the presentation.

Kyle Gendreau

Okay. Great. Thanks, everyone. Well, we’re pretty excited to be back in Hong Kong. It’s been a bit of time since we’ve been here. We’ve been traveling quite a bit, but we’re here. And I think it’s a perfect time to be here talking about our first half results, which are really tremendous. And so, we’ll walk you through that. William, are you turning the slides? You’re already on the page.

So, a little differently, I’m going to start with Q2, because I think the trends and what we’re seeing continue to move in a way that are very positive. And each quarter that passes, we’re seeing actually building momentum. So, if you look at Q2 and you look at where we are, our net sales up 36% versus last year, 15%.

I think importantly, in Q2, look at gross margin, really an amazing number in our adjusted EBITDA, which is at 19.3%. Everyone is going to ask me at the end, what’s your guidance for margin for the rest of the year. We’ll cover that. But really an amazing EBITDA for the quarter.

Adjusted net income, really tremendous, up 50%. Gross margin is at 59.4%. We’re going to cover it in the deck. But really, what’s happening with margin is the mix effects of brands like Tumi moving at a faster pace. Asia really kind of kicking in from a growth perspective. China is starting to be part of that as we get into Q2 at a positive 10%, delivering a really amazing gross margin story for us.

And against an advertising spend that’s stepping up, we’re doing a little bit of catch-up in Q2, we’re pretty close to 7% advertising, but despite advertising at 7%, EBITDA margin well into the 19% range. And importantly, and Reza will cover that in his section, our fixed SG&A, which we’ve been guiding for several quarters that we’ve been able to adjust the cost structure of the business and really fundamentally change the profit profile of the business. You can really see it perfectly played out in Q2. So, even for the half, you see it. And a big driver of that is not only the gross margin, but what we’ve done on the cost structure, which is delivering on the bottom line. So, we’re quite half the quarter.

My next slide, really, this is a look of the last six quarters, just to give you a sense, and I labeled the slide, firing on all cylinders. When we look at everything that’s working in our business, you can go across each of the segments and everything is delivering probably slightly ahead of all of your own expectations, if you’re kind of modeling us, and even a little bit ahead of our expectations when we look at kind of the trends that we’re seeing. So sales, really tremendously strong, $924 million in sales in Q2. Look at where we were just in Q1 of last year. It’s really quite dramatic movements.

On the gross margin side, every quarter, we’re banking more gross margin expansion. And again, there’s a mix effect. Do I think that margin will kind of play out for the full year? I think it will probably settle at around 59% or so, but really strong for the second quarter.

You can see the EBITDA margin, and the EBITDA margin, and I have advertising off to the right as well on the bottom of the chart, but you have to look at those in tandem. But regardless of what’s going on with advertising, EBITDA margin is moving every month as we layer in sales and the business continues to get to north of 2019 levels, you’re seeing the margin profile really transform, and it really shows up in Q2 quite strongly, against an advertising, as I said earlier, in Q2, almost 7%. So, this is really a tremendous result for the quarter.

The half is amazing, too. So I wouldn’t normally have started with the quarter, but I think it gives you a trend, but the half was tremendous. So, our first half sales up close to 46% to last year. Importantly, up 16.2% to 2019. And it’s really around international travel continuing to recover. There’s not a lot of recovery in this deck, because we’re starting to think about forward. This is a business that’s actually beyond recovery, though there’s recovery still happening in international travel. So, there’s plenty of upside coming, but this is a business that’s delivering across each of our regions.

Definitely Asia kicking in, in a bigger way. Asia versus last year for Q1, up 87%, different than the other markets. I’ll cover those in a second. And up 18% to 2019 for the half, okay? This was a region that was negative at the end of last year to 2019. And so, as China kicks in and the rest of Asia starts to move, you dramatically change the Asia profile.

Just for color, and we’ll have it later in the deck, but from a growth perspective versus last year, all regions really delivering: 87% for Asia; North America, up 25% to 2022; Europe, 30%; Latin America, 30%; and blended up 45%. Versus 2019, every region delivering: Asia 18%, as I said; North America, plus 7%, and that’s really with that bumpy Q2, which is we’re seeing kind of rebounding in Q3, so really a great number; Europe, 27% up to 2019; and Latin America, up 69%. So there isn’t one pocket within the regional structure, and I might even tell you at the country level that isn’t now delivering in positive territory versus 2019.

And then on the EBITDA margin side — let me cover gross margin real quick. Gross margin even for the half, almost 59%, up 310 basis points to the prior year. So, really a terrific story there. We’ll cover that in a bit.

Adjusted EBITDA up — is $334 million, up 73% or $141 million to prior year. EBITDA margin 18.8%. And this is with Q1 where China was still negative and things still catching up and moving, and you can get a sense for where the EBITDA margin profile is moving in the business as well. And again, even ahead of our guidance, I think we started the year thinking 16.5%, maybe getting to 17%. And we start to think about an EBITDA margin that’s really more like 19% for the full year. It’s your first guidance comment because everybody is curious. That’s really where it’s looking and it’s building because we see Q2, I can tell you the start of Q3, tremendously strong, we’ll cover that in a bit as well, feeding into the story. So we’re quite excited what we’ve achieved there.

From a margin basis perspective, and I have the next slide, but I’ll cover it here, 340 basis points better than last year from an EBITDA margin perspective, but importantly, versus ’19, transformative, 660 basis points. We were at last — in 2019 first half, just around 12.5% EBITDA margin. And here we are really close to 19%. So really tremendous.

And when Reza and I look at the business, really sustainable. If you’re really looking and judging and trying to decide where we are, the ability to sustain the margin transformation that we’ve had in the business is a high focus of ours. And you can see even in our own expectations, we keep even doing better than what we’re looking to sustain. So it’s quite exciting for us.

And this is on the backdrop of advertising. You’ll notice in my presentation today, I have like 4 or 5, 6 pages on advertising versus 5 or 6 pages on product because product is really terrific. I spent last quarter talking about product and award-winning products, but the ability to really drive your business with advertising dollars and tell your story about what you’re doing across your three core brands on innovation, sustainability, really just engaging the market as the market is reengaging in travel. And so that’s feeding into advertising. So — not only are we able to deliver these margin numbers, but we’re able to step on the gas on the advertising side. And I think that will continue to fuel rest of year into next year as well. So we’re quite excited really about everything. And in many ways, this page captures kind of the high level of what’s really making us excited about the business.

The next slide, I’ve shown once before, this is just another view at this to show really the fundamental transformation of the profit profile of the business. And this is reported dollars, but on reported sales that are just, let’s call it up slightly $21 million constant currency, it’s much higher, if I adjust it for ebags and Speck things that we kind of adjusted in the business, tremendous growth there. But look at the profit profile. It’s really this $121 million of improvement in EBITDA versus 2019. The margin is the most impressive part of this. This is a transformed business delivering margins really in that upper teens level with real confidence that we can continue that.

I’m going to do a quick walk around regions, just really fast to give you a sense. And I’ll give you a sense for how regions are trending as we get into Q3. So Asia, as I said, up 86%, 18% to 2019. We tend to get the comment that it’s being driven by China. But China is just starting in these numbers in many ways. If I guided you that China was negative 10% in Q1 and positive 10% in Q2, July for China is looking like positive 17%. So there’s a building trend with China. But when you look at what’s happened in the first half, it’s really all of Asia that’s delivering really amazing numbers to deliver this growth profile. Overall, Asia for July is at 22% growth. So the trend really just continues.

And my sense is a market like India, which is delivering amazing growth, still delivering amazing growth, that will start to settle down, because you’ll start to kind of comp and lapse. But at the same time that India maybe goes from up 70% or 80% to up 50%, China is kicking in. And so I think the Asian number really has the ability to continue to deliver these meaningful growth numbers.

Strong sales by region, but importantly, the cost structure within Asia, both the margin mix, what’s driving the business, and what we’ve done to manage fixed costs. And Subrata is here today in the room, managing the Asia region, doing an amazing job with his team and all of our teams to manage the cost structure to deliver margin expansion. And Asia has always been a higher-margin region for us, but you can see versus first half ’19 was roughly 20%. Here we are at 24.8% and again, China is just starting to kick in. So as we move through the year, our ability to continue to deliver that, I think, is very strong.

And then, from an advertising perspective and even that margin that I’m showing you, this is with advertising at 7.1%. This is a meaningful investment push in this region to push the business across the countries that we have. So really exciting moment for Asia. You can see across the board, many positives.

North America, really a significant adjustment in EBITDA margin, I’ll cover why there, in a business that’s actually growing. And I think if you were listening to our Q1 call, I mean, our — yes, Q1 call, and we guided, hey, Q2 might be a little bit softer for North America. And the reality is and what we said is timing, and we’re really seeing timing. We saw a strong Q1 for North America. We’ve seen a slightly softer Q2, still in a strong position at 7% — for the half, up 7%. But we’re seeing building momentum as we step into Q3, and that is the timing shift. So as we’re sitting here today, it looks like July for North America blend is 8% up. August in an early glimpse north of 10% is the way I would think about North America.

So, North America business, it’s a mix of Tumi, Samsonite, American Tourister. Tumi is really delivering amazing numbers, really it’s my next point. Tumi’s up 33% in the half. And a similar number as we step into Q3. So, this Tumi performance is really helping fuel along with what we did to adjust the business for Speck. We exited Speck because remember during pandemic and we called some of the third-party brands for ebags, which were driving sales, but no profits, and that changed the profile.

And really what the amazing transformation is North America going from roughly 12% EBITDA in 2019 first half to 19.9%, call it 20%. That’s really tremendous. It’s a mix of everything working, a mix of Tumi really kicking in. And the work that Lynne and the team have done to manage cost structure and deliver margin across the overall business. And this is, again, with advertising stepping up, so 5.7% versus just 5% last year. So again, a really positive North America story.

Europe is tremendous. Europe just continues to be tremendous. I don’t know if you’ve traveled to Europe, but Europe is as busy as I’ve ever seen it. We’ll be there this weekend. But I’ve been in and out of Europe, probably eight times in the last six months, and it is booming. Any country that I’m going to, I think, Italy is insane; London is very, very busy. And you can see it in the travel numbers. That’s inbound travel, but just generally, these are markets that are moving in life fully back to normal.

Our first half sales were up 30% to prior year and 26% to 2019. We guided last call that Q2 had a little bit of disruption because we’re putting a warehouse management system. These are numbers, including some of that disruption. This — and that was short-lived. We were guiding just so you would see it, but the numbers are really amazing. So Q2 is up 24%. Despite that, and I thought it was important that we guided you for that, as we come out of that or if we adjust that Q2, the number probably is more like 32% adjusting for the handful of leaks that we’re managing at the warehouse system. So again, really tremendous growth.

And if you look at August, for example, really on the other — full other side of the warehouse management system, north of 40% growth in Europe versus last year. So really amazing momentum, really continuing. I think summer along the way guided an amazing summer travel season in Europe. It is amazing plus is the way I would describe it. It’s very, very strong, and we can see it in our numbers.

And that’s with EBITDA margin moving. EBITDA margin, if you look at it versus last year, slightly down, but totally transformed advertising spend, so we’re up to 6.5% versus roughly 4.5% last year, as we really start to lean in and push the business on the advertising side. So again, a terrific performance across the board in Europe, with strong momentum as we go into Q3.

And then, Latin America, this was a project that I think Reza and I picked up really in 2019 around how do we transform Latin America’s growth profile, but importantly, its profit profile to kind of be in line and contribute to our overall profit profile for region that I think should grow into $400 million or $500 million in sales. You can see for this year, first half were just over $100 million in sales. So, we’re well on our way versus where we were in ’19 and particularly in ’18, but more importantly is the transformation of profit. So this is a business that adjusted its way to market in markets like Brazil, really took action on the cost side, driving direct-to-consumer, direct-to-consumer e-commerce, which in some of these markets wasn’t up and running fully yet, is up and running. And all of that’s feeding into a terrific gross margin story for this business.

And importantly, an EBITDA margin story that’s now allowing the business to move at an accelerated pace. And here, you can start to put advertising in. So this is a business spending almost 6% on advertising versus a year ago, we were at 3% because we’re navigating in prior periods, even lower than that. So I’m excited about the long-term prospects for Latin America as well. And that trend continues. July, just for scale, is up 64%. So this is a market that’s still continuing to deliver in line with what we’re showing. That’s 64% to 2019.

All of our brands are delivering. And we have a handful of brands that are smaller, very tactical. Reza is going to cover those growth profiles. Those are great. But our core brands really drive our business. And when you look at our numbers and you take a look at what’s driving, I’ll start with Samsonite on the left side, $880 million in the quarter, up 48.7% versus last year and 25% to ’19, okay, this is really right in the heart of our business, delivering amazing growth.

Tumi growing at $420 million, up 52%, growing at a slightly faster pace versus last year, up around 22% to 2019. A little less than Samsonite because we had a little bit of store restructuring going on within Tumi. So but the business is overachieving to what our expectations are as well. So very, very strong.

And American Tourister, which is entry-level branded. I might argue when we’re looking and I’ve had some questions along the way this year on how consumers are acting. Higher-end consumers are still actively buying. Lower-end consumers are still engaged. They’re traveling. But maybe just at a slightly slower pace. And you can kind of see it in our American Tourister numbers, still amazing numbers, up 43% — call it, 44% to last year and up 15% to 2019. And you’ll see some of our advertising campaigns. You can see some of the products really delivering on that front as well.

So, all three of our core brands, all contributing in a meaningful way. I might argue our higher-end brands contributing just a bit more, which is also helping on the gross margin side and profit side of the business.

With that, we’re leaning into marketing spend. We’re at the position, all the work we’ve done to position the business, deliver a meaningful EBITDA margin profile for the business and now allowing ourselves to properly invest back into the business to push it. And again, this is against the competitive landscape that’s highly fragmented. So share of voice and our ability to deliver campaigns and content and tell consumers what we’re doing with the products that we’re making on the sustainability front, innovation, really transformative products, and you’ll see some of it around the room, you’ll see some of it in some of the clips I’m going to show you, that is a game changer.

We can drive sales growth against a fragmented market and gain market share and particularly as we’re coming out of pandemic. And we’re sitting on such a strong footing on inventory on some of the best product collections we’ve had, and I often say that every year, but it’s amazing. We won 12 Red Dot awards — actually 13 Red Dot awards this year alone across all of our brands, it’s really tremendous. And so, we can really message these key differentiators and allow our scale to really move and gain market share in the business. And so we’re doing a lot of that.

And so, I have pages here to talk about advertising marketing versus product because one of these advantages we have is we can continue to push the business to deliver growth, and that’s exactly what we’re doing. As we allocate, you’ll see us allocate a bit more to Tumi. Tumi can move at a faster pace. It’s growing in markets that we’ve been really just laying the foundations for us. So, we can overspend in Asia, we can overspend in Europe on Tumi. We’re also accelerating our e-commerce across all of our brands and channels and a lot of our advertising dollars ends up there anyways. But we can really drive these important initiatives on driving the business.

So, just quickly and then we’ll show a video, but stunning visuals on this ECOdiver product, which is really an amazing product. This product very quickly went into our top 5 in Europe, and this is an amazing product, incorporating sustainable materials. It’s got backpacks, but it’s got unstructured luggage, duffles, wheel duffles. Younger good consumers are traveling this way. If you really look at airports today and you see what younger consumers are moving, you see a lot of them moving in this kind of way. And this product is hitting it. And it’s been very, very successful. It’s launching in the U.S., I think, this week. And it’s really been a tremendous story for Europe. And so if we could, let’s play this video campaign.

[Commercials]

So I might say this campaign was really super successful in Europe. Very inexpensive to make to, I’ll tell you that. It was really an amazing like influencer-driven campaign that was tremendous. But you think about the competitive landscape that we’re dealing with and our ability to launch a product, an eco product really with meaningful amounts of sustainable content. And then tell a story as powerful as that and be able to spend dollars to tell consumers about it, really drives the needle. And amazingly, and when you have a good product, the consumers gravitate to it. And so again, a top 5 within Europe very quickly, you’ll see it spreading across the rest of the world as well. So that was ECOdiver.

Within the U.S., we’re advertising. We’re back to doing some advertising on brand side. This was a collaboration with our endorsement with Chloe Fineman. This is Elevation Plus. This was a Red Dot Award-winning product, really interesting opening in the front, really a sophisticated piece of product. Again, in the top 10 for the U.S. and this launched just a few quarters ago. Really an amazing story there, incorporating recycled content within the liners as well.

Importantly, in India, we’ve actually relaunched Samsonite in India. We started this year as the business was really running and building headway to be able to invest and push and drive the business. And India, as most of you know, has been for a long time an American Tourister-driven business. Samsonite has been there, but we have ability to really move. I think the Indian consumer is moving. I think that when you look at forward travel and forward expectations for growth five years and ten years, India really becomes a huge part of the global economy. From a travel perspective, I think it’s super strong.

And so, we’ve leaned in here in a meaningful way with advertising, endorsing with one of the most historic actors within India, famous cricketers in India, with really powerful campaigns. And we’ve seen our Samsonite business tremendously move to all of our surprise just in Q1 and Q2 off the back of these campaigns. So, you should expect more from us on India when you — when we’re talking about India next year, you’ll see Samsonite becoming a bigger and bigger piece of that mix, not at the sake of American Tourister. It’s really — American Tourister is delivering tremendous growth. A lot of what you’ve seen over the last five and six quarters is really an American Tourister-driven story. But Samsonite now can play a bigger role, which will also help move margin profile in India as well.

So we’re very, very excited here. These campaigns are super powerful. I think our competitors — it’s one market where we have bigger competitors. I think they were quite surprised at the magnitude of what we showed up in market with from a campaign perspective. So we’re excited there as well.

On the Tumi side, this is a business that we’re really pushing with advertising, but really with celebrity endorsement. It’s super important. We have collaborations with brands like McLaren that are doing tremendous. We have amazing cast of international characters. We have Lando Norris, as you know, Renee Rapp, Richarlison and Sunny from Korea, all delivering amazing benefits to the brand. And they’re all really passionate Tumi consumers as well. So I think that’s even more fun when we’re on shoots with these guys. They’re really amazing believers of this Tumi brand. And all of that — and if you’re following Tumi at all, you can’t miss these characters, I call them characters, they’re really assets or amazing talents within the world, delivering a good story for Tumi with amazing product. And I think most importantly for Tumi, the product is just tremendous, and we continue to deliver tremendous product.

There’s a video here as well will show, but this 19 Degree collection, we have it here on the front of the stage for Tumi, 19-degree aluminum, 19-degree polycarbonate with recycled content and recycled liners, a lot going on with this collection that’s really become a bit of a collection asset for the brand Tumi. It’s a signature almost for Tumi, and it’s delivering growth in every single region that we’re operating on. So I might show a really good video here as well.

[Commercials]

Just terrific. It really speaks to the power of Tumi and our ability and our real task to properly invest behind these brands. So as a percent of sales, you’ll see our advertising higher on this brand as we really move and push it and really moving the needle. So we’re very excited what we’re seeing with Tumi.

On the American Tourister side, again, this is a really young, fun, colorful brand, tons of energy with this brand. Products the best we’ve seen. We have a really wonderful collection of products in the back of the room here for American Tourister. And the campaigns match the brand. They match the playfulness of the brand, the youthfulness of the consumer. And so Find Fun Everywhere was a campaign, and this is a collection of what we’ve been doing around Asia, particularly on the brand. And so, we’ll play a quick snippet of what we’ve been doing within Asia for the brand American Tourister.

[Commercials]

And so importantly, it’s really a fun clip, and you can watch a lot of that online if you want. The really amazing part here is that when you’re in this branded entry level and you’re really grabbing consumers that maybe are stepping from an unbranded to branded product or — nobody can do this. Nobody can create that level of content and drive to help drive the business against a product offering that’s just tremendous and continuing to develop and build over time. And so a lot going on over there.

I think lastly, on the product are two more slides, Rollio, we launched this. We talked about this at the last earnings, there’s some of that here in the back. This is a fun collection. This isn’t going to drive massive volumes of sale, but the reception of this really fun, different look at luggage, which you can do with American Tourister, has been tremendous. And again, a Red Dot Award-winning product, really a lot of fun. You have a lot more license to play with some of this within the brand American Tourister. And again, it differentiates and positions this brand different than a sea of, I might label, unbranded products in this at this level. So very exciting there.

Lastly, on sustainability. We’re very focused on our responsible journey. I have a slide right after this. But I wanted to show you Essens, which is the next generation of what I would say, significantly incorporating recycled material, so that the outer shell is a meaningful percentage of recycled content. The interior lining is Recyclex. This is built for repairability. This is an amazing product where you can — if a wheel breaks, we can just mail you a wheel. You can — with your pen, you can change the whole wheel housing, boom, we can send it to you. If you think about sustainability, not only is it recycling materials, but how do we keep your bag running as long as you want it to run, and how do we think about design for repairability, which we are doing across all of our brands, but this is really an interesting capture of exactly that on this brand. Well, well supported.

If you have a chance to look at this product, it’s interesting on the inside. So the inside has packing cubes, full packing cubes on both sides that when you get to your hotel, you can just clip them out and put your stuff right in the drawer and you can put your case away. If you’re in a small hotel and you don’t have a space to put this, you can take your stuff and literally manage your room in a really interesting way. Consumers are loving it. It’s different in the marketplace, doing really, really well, in this wonderful sustainable story. This kind of design to matter made to last, I think, really captures part of the essence of this product actually. And again, if you get a chance to look at, it’s the next generation of Magnum Eco in many ways. If you remember Magnum Eco, we launched a year ago, which was successful. This really just elevates the game even that much more, and I think it’s terrific.

And then just lastly, on our responsible journey. Importantly, first off, as I hired a new VP of Sustainability for the business. Marina Dirks joined us. She was running that initiative for Tiffany. I think she’s a wonderful add to our business. If I described her very, very talented, knowledgeable, but importantly, a very good communicator. And for me, and you’ve heard me say this before, if you’re going to move a sustainability strategy for an organization, the whole organization needs to come along. And her ability to communicate and bring an organization along, every one of us in the company has some thinking and decisions to drive our responsible journey when you think about the compass of what we’re driving at. And I think Marina is doing that very well. She’s been with us for a few months, and I think she’s doing terrific. And I think you’ll really start to see some of her impact as we get into next year and the year after as well.

What are we focused on for 2023 and beyond. We’re going to redo our materiality — comprehensive sustainability materiality assessment. The last one we did was in ’18 when we were launching this. And so we’re going to — we’re really leaning into that. This will cover not only internally, but third-party suppliers, social and civil reach out, really, everybody that’s in our network will be part of this assessment, which companies that are really serious about driving change on ESG and sustainability needs to be doing. So, we’re doing that.

We’ll use that to start to continue to solidify our targets, targets that will start to become measurable. We’re not so far away from needing to get limited assurance on some of these statements that we’re making, and so really being smart about the KPIs and the targets that we set really across all fronts, product sustainability, which is an obvious one, but science-based climate targets, which are becoming more and more important for this business off the back of this assessment, we’ll be able to start to do that. Human rights and all the issues that get caught up in, again, our ESG responsible journey, we’ll come out of this, and we’ll set some KPIs.

We’re evolving the system and software to track this data. So a lot of companies are doing that, we’re doing the same. We’ve just launched some tracking tools. You’ll continue to see us make the right investments to do this, along with really building our team. And so under Marina, we’ve added resource. You’ll see us add more resources here as we move the needle and drive our strategy. And again, it’s planet, product, people focus, along with underlying foundation of governance, which we’re very focused on. So again, I’m really passionate about our responsible journey in our ESG journey, we’re doing really tremendous work. And I have zero doubt that we’ll transform our industry as far as the on the sustainability front. And so continue to watch what we’re doing on that front.

So with that, I will turn it to Reza. I’ll come back at the end. Thank you.

Reza Taleghani

Thank you so much. I’ll just also add that it is really nice to be in Hong Kong to see all of you in person after being on the phone for several years.

This is just amazing results. I think what we take away from Kyle’s comments is really we have phenomenal brands, great product, great people and ability to invest. And so what’s happened over the last few years, and we’ve repeatedly talked about it, but you’re really seeing it bear fruit now has been all of these investments throughout the pandemic in the business and in terms of fixing the cost structure of the business has resulted in these amazing results for the first half.

So net sales, if you’re looking at it on the first half of the year, up $506 million increase year-over-year, 45.7%. That’s despite some currency headwinds. So if you’re looking at it in terms of the second bullet point on the left-hand side, currency has actually worked against us, but we’re still delivering fantastic results despite that.

Gross margin, we had always been monitoring this. We’re always looking at whether or not there could be an impact in terms of promotional activity, et cetera. But really, the price increases that we talked about last year, we have continued to hold strong on those, the ability of having invested in products and positioning of the brands means that we’re able to maintain the gross margin. And again, another excellent result for the quarter, so that gross margin percentage of approaching 59% continues.

And then, our adjusted EBITDA. Obviously, the cost structure, we are incredibly disciplined about maintaining our cost structure after the hard work of a couple of years ago. And so, for the half, adjusted EBITDA margin of approaching 19%. And obviously, you saw the quarterly number, the second quarter being even better than the first quarter in that regard, and delivering $171 million of net income, more than doubling the net income that we had from last year and the trend continues.

Going on to the next slide. Some of the highlights and Kyle has covered this, so I’ll try to go through some of the relevant points and double-click on some of the points that he raised. Again, constant currency, almost 46% up on sales. Adjusted EBITDA of $334 million, an increase of $139 million. Adjusted EBITDA margin of 19.3% importantly, that’s with advertising at 6.9% of sales. So as you look at the different regions and you look at the year-over-year trend, realize that we’re actually investing even more behind the brands. And we’ll get to a slide that talks about inventory as well. We have also invested significantly in inventory to be able to drive these results.

Gross margin, increase of 310 basis points year-over-year. Fixed SG&A expenses continuing to improve as a percentage of sales. We were 23% as a percentage of sales, 320 basis point improvement from first half of 2022 and 520 basis point improvement from first half of 2019. And please rest assured, we are super disciplined at maintaining that number.

On the next slide, advertising is somewhere where we are consciously increasing our investment. We do view it as an investment. We have almost doubled our spend from $58 million in first half of 2022. So that investment, you should expect us as a percentage of sales to run somewhere between 6.5%, 7% for the foreseeable future. I think that drives — helps drive sales, but also helps invest behind the brands and the positioning of the brands as well. So that strong profitability continues.

You may have noticed, I think this is an important point because oftentimes, I get questions around our balance sheet. We refinanced our debt and extended the maturities. So, most of our debt, which is all of our bank debt and our term loan B, our pro rata facilities now have an additional five years before we have to address it again. So the balance sheet has been addressed. And in this market, it’s rather rare to see us actually reducing our interest expense as a result of doing that. And the way that we did that, and I’ll cover it in a little bit greater detail, is really by shifting between the various debt capital markets that we have to try to take advantage of some of our wonderful banking relationships.

Our net leverage, when we got together last quarter, we were at 2.5 turns of net leverage. We had guided towards net leverage at the end of the year, approaching 2 turns. Already at the half, we’re at 2.15 turn. So it seems like the delevering will actually exceed what we had said by the end of the year as well. So we’re very, very happy with the delevering of this business.

And ample liquidity, liquidity of approximately $1.344 billion, which includes $745 million available on our revolving credit facilities.

On Slide 28, strong net sales, again, we did cover most of this, across every region. I think the message here is every single region is delivering and delivering at very strong levels. And that trend, we — I’m sure we’ll get the question, but yes, we are seeing that trend continue into July as well as August. So, we feel that this will continue as we go through. Again, just to look at the numbers quickly: Asia, 76.4% growth year-over-year; 24.8%, North America; 25.5%, Europe; and 3.2% for Latin America.

If you’re looking at the various channels, obviously, we have been throughout the pandemic talking about the investments that we made in e-commerce — DTC e-commerce showing really, really good continued growth. If you’re looking in terms of the percentages, 55.6% looking at DTC e-commerce, 52.2% year-over-year for the half, looking at our retail channels.

One thing that we should just note around our retail channels, you’re looking at these growth numbers and keep in mind how many stores that we’ve shut. So if you were to look at the comp store sales, these are phenomenal results because our fleet is significantly reduced compared to where we were in 2019. In 2019, we had just shy of 1,300 stores. We’re now running around 1,000 stores for our fleet globally and still delivering unbelievable results as a result of that on a much, much smaller store fleet. And obviously, that helps in terms of the fixed cost leverage that we’re getting into the business.

And then, our core wholesale business continuing to grow as well and contribute up 41.1% year-over-year.

And then looking at travel versus non-travel, both categories performing. Obviously, the travel category, what we had seen initially is when a market opens up, there’s a lot of demand for the travel category. Usually the first SKUs that are performing are the larger luggage sizes. As a market continues to evolve over time, it gets into a more natural mix between travel and nontravel, people start going back to business. We start to see backpacks and unstructured luggage performing as well. The story is that all of our categories are continuing to perform.

We talked about all of the larger brands in Kyle’s presentation, every single brand performing. So we do see — and you see it in the gross margin numbers, the more premium brands of Tumi and Samsonite are growing at a slightly faster clip, but every brand is contributing. Obviously, we’re continuing to invest between some of the smaller brands. They don’t move the needle as much, but we do feel that strategically, over time, Gregory, Lipo and some of the others are obviously core product offering as well, and they play a product, but every brand performing at very healthy levels as well.

This is the point that we’re extremely proud of, and we’re going to continue highlighting it for you. So I’m looking at my friend Dustin, who through the years, would always ask me about distribution expenses. So hopefully, you’re pleased with these numbers. Significantly lower fixed cost percentage as a percentage of sales. We are — as you think about guidance and where we’re looking at this going forward, it’s the percentage number that I would encourage to be focused on. We’re expecting that percentage as a percentage of sales to continue to improve. Obviously, if you’re looking at it versus 2019, where we’re sitting here last year, we would say in absolute terms, we would have $200 million of improvement that is where it has shaken out. But now we’re going on five years later. So we have to really start to look at it as a percentage of sales. For the first half of 2023, 23% as a percentage of sales just compared to last year, that’s a massive improvement from 26.2% as a percentage of sales. So that fixed SG&A is something that we are continuing to focus on.

The balance sheet, I think the story on the balance sheet is we have a very, very healthy position. Our leverage is the lowest that it’s been since I’ve been here. So very, very proud to report that, continuing to delever and most importantly, the refinancing, which I’ll cover on the next slide. Ample liquidity here, and we’ll touch on inventory levels as well.

Why don’t we go to the next slide, William, if you don’t mind. So, we refinanced our senior credit facilities, just to give you a little bit of greater granularity on that. When we talk about that, it’s basically our pro rata debt facilities and our Term Loan B. So we have new five-year maturities, $800 million of senior secured Term Loan A, which is with our core relationship banks, $600 million of senior secured Term Loan B and $850 million revolver. That’s basically the upsized revolver that we put in at the beginning of the pandemic, which should serve our needs for the foreseeable future. We extended all the maturities. So there’s no concerns around it going current anytime soon.

We reduced our outstanding debt by $65 million during that time as well, because we often talk about net debt, but we do care about the gross debt numbers as well. So we repaid some debt when we executed that transaction. And the net result of all of that is that we’ve lowered our annual cash interest payments by approximately $5 million as a result of this refinancing.

You should expect that we’re going to generate cash flow going forward. It was a great quarter again in terms of cash flow generation. The use of proceeds for that is to continue to delever.

On to the next slide. Working capital. You can see this inventory number. All of you have been following our story for quite some time. We have been chasing inventory over the course of the last year-and-a-half. We are in a very healthy inventory position. We are — and again, the beauty of our supply teams is the way that we manage inventory is we can basically look at our product purchases and work this level down as the sales are there. This is unlike other retail and apparel companies where you have seasonal risk, et cetera. We feel very good about where the inventory stocks are. The reason we feel good about it is we’re able to deliver on sales. So, we have essentially paid for this inventory that is sitting on our balance sheet as we generate sales that generates cash because we basically have already paid for these inventory and we convert that into cash. So, it helps our leverage position as we go forward. And again, this is yet another one of those examples of investments that we’ve made. We’ve made investments in products. We’ve made investments in people, in the brands and the advertising, and we made significant investments in making sure that we have good stock so we do not miss sales.

Looking at CapEx. CapEx levels, we are investing in CapEx. And where you see the CapEx is very targeted. So, it’s refreshing some of the store fleet. You’ll see that in Asia with some of the shorter lease terms that we have in Asia. We are refreshing some of the stores with a focus on obviously the Tumi brand as well as some of the Samsonite fleet that we have here. So you see some retail numbers there. There are selected store openings. Our fleet stands a little over 1,000. So still well within where we were historically, but we are absolutely targeting select store openings in all regions in a targeted manner. Overall CapEx for the half were at just shy of $21 million in total with a focus on those two categories primarily.

On the next slide, to the outlook. Kyle will cover, and then we’ll open it up for questions.

Kyle Gendreau

Okay. Thanks, Reza.

So again, it’s really amazing first half performance, you can see, and we are excited about the growth prospects. We’ve guided a bit around what we’re seeing for trends into Q3, very strong. I might even tell you building momentum. And as travel continues to rebound, and we haven’t had a lot of recovery slides here, but there’s still recovery to go.

International travel is still down 25%. China is driving a big piece of that. But within the rest of the world, there’s still recovery within international travel. We’re excited for that. That will come, and that will fill in this year and into the start of next year. And as it rebounds, the position that we have in this business, the ability to drive investments in marketing and advertising to capture all of this, I think, will really just drive fundamental growth for our business at a different profit profile.

We are seeing a quick recovery in China and Asia, okay? I was on Bloomberg this morning. It started with. “Tell me what’s going on with China?” Because everybody is quite interested. We’re seeing it. We’re seeing it within Q1, which was slightly negative to a positive Q2. As I guided you, July, positive 18%. So, a building trend. This reopening of group travel to some 70 countries, which just happened here for a week, that’s going to take a few months to get into play, capacity, airline capacity. But that will build now that this is here. And so for me, China will not only deliver growth for Q3, but more importantly, Q4 and Q1 and Q2 is that capacity build and international travel really starts to open, not just Chinese traveling, but in and out of China is quite difficult still. The number of flights in and out of China to the U.S., dramatically lowered than what it’s been historically. And so as that capacity builds, I think you’ll see that the travel will build there as well.

But I don’t want to overplay China for Asia. Asia is tremendous growth despite China. If you look at our underlying growth in markets like Southeast Asia, India, Japan, which has moved into really comfortable double-digit positive territory. Two quarters ago, Japan was still negative or flat, it’s up 16%. Korea for the first moment is positive, positive 5.3% in the last month. In Korea, as China opens, Korea will really see the benefits of that. And so there’s so much growth still to come, I guess, is the way we describe it within Asia. Of which China will help fuel some of it, but the rest of Asia is actually delivering an amazing story. And so we’re quite excited about the growth prospects here.

I might add, it’s not on this page, business travel. We’re really clearly seeing business travel come back. We’re here. Some of you are here. Some of you have traveled in from China to be here. I think as we come out of the summer holiday season and kids get back to school and the world kind of really get back to the business, there are so many more people back in their offices. Think about what it was a year ago to where it is today as far as people back to their office, the days of coming in one day a week is changing rapidly around the globe. And all of that feeds to, in my view, business travel recovering and we’re starting to see that. I think that will continue as well. So there’s lots of fundamental growth in the business from a recovery perspective.

And then, I would tell you what we’ve done on the product side, again, ahead of anybody in our space on product development, sustainability, well supported with advertising will fuel a great story for us as well. And so I think there’s a lot to go on the growth side. We’ll cover some of that as well, I’m sure you’re going to ask. And I really think flight capacity building back in is really going to drive international travel. We’re seeing that.

Most markets, domestic travel and the flight capacity is almost back to normal. In Europe, it’s actually slightly positive. U.S. is normal. I think within Asia, there’s still some domestic travel to go. It’s really this international travel that’s going to move. And again, as I said, off the back of that and off the back what we’ve done to adjust the cost structure, you should see us really drive and invest in advertising, which is why I spent some time here today talking about it. We have 6.5% is our target. If we’re doing better, you’ll see a step on the gas even a little bit more here, particularly with brands like Tumi, where we can push the needle even at a faster pace. And I really think that will help drive sustainable growth for us.

As Reza covered really well, we’re very disciplined on SG&A, fixed SG&A, all costs in our business. We fundamentally have changed the way we think about cost structure in the business, not just Reza and I, but within the organization because the organization all went through and what we did to adjust the cost structure. And so as we go into budget cycle for next year, one of the things we’re laser focused on is what’s the cost structure doing. And everybody knows it. We don’t even have to push anymore. People are showing up, telling us what they’re doing on cost structure. So again, I think this will continue to deliver on the margin side, and we have an organization that really understands that very well.

Tons of liquidity, right? Liquidity is not our issue, guys. We have amazing liquidity with a reset balance sheet from a debt perspective, but deleveraging will be below 2x. I’ve zero doubt we’ll end the year below 2x leverage. That’s something we’ve been guiding. I think when I started the year, we thought we’d end the year at 2.1x, 2.2x. We’re going to go right through that and be below 2x for the year. I think that’s a really powerful story with tremendous relationships with our banks. We delivered an amazing debt reset refinance at a moment where the debt markets were a little moving in interest rates, but we delivered a terrific story. One of the best refinancing, I think happened in the first half of the year.

We intend to resume distribution to shareholders for dividends. For us, we’re distributing to shareholders. And we’ve guided that last quarter. We definitely will do that as we get into next year. And it’s the right thing to do. So we can continue to delever, but use the cash generation to put the yield back to our shareholders as well. And I think that’s important. We have that in place for a long time pre-pandemic. We’re now able to put it back in the right way. So that’s coming, and that will be in line with our dividend distribution policy.

We have this amazing ongoing commitment for sustainability and innovation. You should never doubt on the innovation side. We’re laser focused across all of our brands on innovating products and incorporating sustainability into what we do, maybe materials but also repairability, durability, which has always been our story, all tied into a story that I think sticks us out apart from the industry that we’re in as far as our ability to do that. We are the innovators in this space. And we have really amazing teams around the world, but we shouldn’t underestimate. This is a business that’s gone through a pandemic, but our teams are largely intact. They’re the same people driving the story and are really highly passionate about it. I hope you can sense that Reza and I are passionate about the business. But our teams are probably equally, if not more passionate around product development, design, marketing, delivering these great campaigns you saw. And all of that, I think, is going to help fuel growth in market share for our business.

And so lastly, I think the energy levels are high in the business. I often think you get numbers and you get presentations. But energy levels matter in the business. And I would tell you, our energy levels within this business across every region are really strong. I’d like to thank the team. A lot of our team are here and some are listening. But this is an organization that is driven by an amazing group of people across the globe, and they are delivering. And so I want to thank everybody and thank all of you for continuing to follow us along in our journey, and hopefully, you enjoyed what we’ve delivered in this half.

So with that, we can happily take questions.

Question-and-Answer Session

A – William Yue

Great. Why don’t we start with Linda of Macquarie.

Unidentified Analyst

Hi. Thank you very much management for your attendance today. So, I have two very simple questions for you. Number one is that I want to ask about the secondary listing in the United States, because some of your peers, they are quite eager to do that here in Europe or somewhere else. So I just want to know the possibility for Samsonite. And how do you plan to use this amount? If you have any like a big amount of the proceeds from this secondary listing? So that’s number one.

Number two, I want to ask about the India market, because I do notice that the Indian market right now, the contribution is getting higher and higher. But we know that India is a very complicated retail market. So, maybe can you just share with us how do you engage for this market? And what is your strategy by branding? And especially what is your foothold for the brand to expand in India? Thank you.

Reza Taleghani

So listing, and I know there was a Bloomberg article that came out and even though we went on the record to say we’re not doing anything, they still said that we were, I guess. Look, as a former banker, bankers pitch us ideas all the time, we evaluate it. Ultimately, we do what’s best for our shareholders and the company. There are no plans currently to do anything. We evaluate it. Hong Kong has served us well. We do look at other markets because the liquidity is the point is really the reason that we evaluate it.

But frankly, if you look at our share price performance and now we’re part of the Southbound Connect as well, so there’s ways that we think we can address that liquidity point, and we’ve been on the road and we’ve spent a lot of our times looking at our shareholder place globally. And if you look at who our shareholders are, it’s a who’s who of institutional investors in U.S., in Asia as well as Europe as well. So I do think that we get access to the right investors here in Hong Kong currently. But again, we have to look at things. We have to evaluate things. But it’s not like we have to do some things like some of the others that you raised. So that’s really on the listing point.

And then, the issue with the listening, frankly, is the second corollary to what you raised. We don’t need to issue equity. And the last thing we want to do is dilute our shareholders. And so that’s part of the calculus as well is the way when you end up moving a listing, the way that you get attention is by actually doing a listing so that you have appropriate analyst coverage, et cetera, we don’t have the use of proceeds for that. So that’s actually — there is no need for us to be raising equity at all, right now.

In terms of India, the India performance remains really, really strong. So it’s still — we’re looking at it. It runs anywhere on any given month between up 40% to 2019, up 60%, up 70%, but it is a fundamentally restructured business. If you’re looking at it as a contribution as a percentage of the total of Asia, we’re delivering these strong EBITDA margins in Asia with India contributing at that portion. And it’s kind of funny because we look at it at what the number one country is on any given month, and there’s a healthy battle between our colleagues in India and in China. Ultimately, China is going to outpace India and go back to its number one position quite healthy. I mean, that’s just the reality of it. So we like the fact that India is doing well.

Within the India business, you saw some of the campaigns of what we’re doing, both with Samsonite as well as American Tourister. The positioning of our brands in India has been elevated. We have invested behind the India business. So the margin profile of India has improved as a standalone. But if you’re looking at the contribution overall as a percent of Asia, obviously, as China comes back, you’re going to see a more natural shift to where we’ve been historically as well.

Kyle Gendreau

I think our India team is amazing. If I just cut through India, India is very complex, I fully agree. JK, who runs that region really understands that market. It’s the one sales meet I go to every year where we have 800 or 900 people out because India is — the complexity of India requires you to have people within the market driving the channel and the sales. It’s a mix of your own retailer, some, I’ll call it, franchise stores like partner stores, wholesale. All of that requires an attention to detail that I would tell you, if you weren’t in India driving that, you could not navigate India. But our team has been there for a very long time and really understands that market well.

We know how to make profits. This is a market that’s really close to 20% EBITDA margin. This is — that’s a great story. When you think about American Tourister is a meaningful piece of that mix. But I think there’s upside in that margin over time as Samsonite lays in and becomes a bigger percentage of the story. And the team is really sharp on what they’re executing.

We’re investing in India. We manufacture in India. I think you know that. We’ve expanded that plant a year ago, two years ago. We are expanding it again now. We make over 500,000 pieces a month in that plant alone. And what does that allow us to do? Being very close to market in India. We can deliver products and we manage our destiny. And so a lot of the products you’re seeing here, I don’t want to say a lot, but probably half of that is being manufactured in our distribution in India. We just invested in a new central warehousing system. We used to be a bit more cobbled together. That’s fully in place. That was done in the last two years.

And so the structure in our India business is tremendous. The team is really, I think you couldn’t do India if you didn’t have the level of experience and breadth across that entire market that drives that business. And I think it’s one of our most fascinating businesses. And I honestly think if you take a five-year forward view, India is really going to deliver a story. One, we’re executing well, but as a market, I think it’s going to deliver a real story as well. And so it’s the one market we have bigger competitors, and we’re winning. We continue to win on those fronts. And so it’s super vibrant. We are delivering on product, people. There’s a lot to that story that I’m very excited about. And again, I put a lot of it to the teams that we have there driving the business.

William Yue

Great. Dustin in the front, Morgan Stanley.

Unidentified Analyst

First question regarding the EBITDA margin. I think we are seeing very good EBITDA margin now because of the adverse in the $200 million cost saving going forward, I kind of think that Asia is going to be the big driver, like looking at a 24% EBITDA margin first half and versus the 19% average. And Asia, back to the number one market for the company, it’s going to grow the fastest. So how can you keep that level of the EBITDA margin for the region? You talked about India, but just overall for the region, what’s the plan? And what’s the competition dynamics here? Like my understanding is that in the U.S. and Europe, you might have some of the sort of bigger or longer history kind of players. But in Asia, it’s always been quite fragmented. So emerging brands are here and there come and go. So how could you continue to gain share in this region?

Kyle Gendreau

Yes. I think two-fold. Asia is going to clearly grow and so mix matters on margin profile of the business, okay? And so in many ways, India — Asia getting back to 24%, 25%. There was a period because ’21 wasn’t — I mean, ’19 wasn’t our best year. This is a region that historically probably could run at 22%, 23%. The reason you can see India’s — I mean, Asia’s overall EBITDA margin moving up is there’s mix effect happening. You see Tumi moving at a faster clip, adding to that. You see brand Samsonite really driving good sales. American Tourister, from a profit profile perspective, well managed in India. It’s been here the longest. Its positioning is higher.

As far as competitive dynamics, these in and out brands, we’ve consciously actually not allowed ourselves to fray down into that too much. And if you went back four, five, six years ago, you would have — and I think when I took over CEO, you would have heard me say, we don’t need every dollar of sale, we need the right sales. And so being disciplined within Asia or not getting pulled down into these come-and-go brands or factory brands that come in and out at really low price points because you don’t win anything there. You don’t really gain brand market share. You can kind of fray into that, but distract the business. If we stay discipline in what we’re doing and manage kind of our growth aspirations at a sustainable level, I think the margin profile will look quite good.

Let’s not underestimate the growth that you’re going to see in Tumi in Asia. It’s probably our biggest growth driver for Tumi for the next five years will be what Tumi does here, and so the mix effect of that will be very high. We’re going to disproportionately spend there, but it’s still going to deliver an EBITDA margin north of 25%, with advertising really stepped up to help push that business. On a blended basis, the potential for overall EBITDA margin for Tumi is quite high. And so, those mix effects will drive as well.

Subrata took the team through a really extensive cost exercise during pandemic. A lot of that is playing out here as well. We really thought about because it’s a market that’s a bit more complicated. We run with a center. We have really strong country teams. And we really went into each country and really looked at spans and layers of control and really thought about structure. And that structure is kind of related, and you can kind of see it playing out right here in this first half. And so staying disciplined on that front while pushing because what you don’t want to do is under invest in Asia either. If it’s going to deliver a high growth profile, we need to make sure we’re adding retail stores. We’re adding the right infrastructure. But all that blended, I think it’s going to deliver really a great story.

We listed in Hong Kong. We have a Hong Kong listing venue question. We listed in Hong Kong because the inertia for growth for this company is all regions, but Asia is really can grow at a disproportionate level. We’re on a track to do $2 billion in sales in Asia. Okay? And this is a business that’s probably going to do $1.3 billion, $1.4 billion kind of just guessing off my mind here where we are. And that’s in the next handful of years. So the growth profile is tremendous with a high profit profile gets to your margin question, which is the overall EBITDA margins for the business are quite good. If I was going to guide you for the full year, we’re going to be really close to 19%, right? And that’s different than where we started. Probably even different than what I thought last quarter. You can see Q3, I can tell you, the start of — I mean Q2, the start of Q3 is tremendously strong.

So you’ve got EBITDA margin profile that’s actually heading towards this 19% and allow us to deploy back into the business to drive strategy, things like advertising and push the business, but not drive fixed cost because I don’t think that’s the right sustainable story. Those are the mix points. And if you just do your modeling, we’ve talked about this many times, you will model yourself up higher than 19%. And I think over time, the business probably has potential for that for sure. But you — I think you’re feeling it right now, I think you’ll see it this year right in that ZIP code for the end of the year.

But I had a — I went region by region. Every region is delivering. North America with the effect of the Tumi mix is 19.9% for the half. North America is delivering on margin. Europe will deliver. Europe is a little bit lower now because of the warehouse management systems caused a little bit of a blip in the second quarter. But from an EBITDA margin perspective, there’s no reason why Europe is not that ZIP code. And look what we did to Latin America. Again, it’s small now, but imagine in five years when it’s a $400 million business with an EBITDA margin right in the ZIP code of where we want to be as a company, and it was negative two years ago — or not two years, in 2019.

So all these feed to some real confidence and I kind of lead into it and I lead into it in the last call, this fundamental change in the structure — cost structure of this business, allowing us to push the needle and drive the business. The wildcard is gross margin and competitively what our competitor is doing. And I think that’s where because of our real amazing ability to constantly design and innovate products and manage our supply chain more effectively than everybody else, I think we’ll be able to navigate gross margin at the same level. Arguably, if you do the modeling yourself, and Asia is growing a little faster, and Tumi’s growing a little faster, gross margin actually has a natural tendency to go up because those are slightly higher-margin regions or brands, and they’re going to move at a slightly faster clip. So on the margin side, we have a lot of — gross margin side, we have a lot of confidence as well.

So again, we’re really in a good position to manage it Dustin. And if anything, you’re feeling it now, like it’s even surprising us a little bit. if I showed you the July numbers, one of your eyebrows would twitch because it’s really an amazing number. And it’s carrying really comfortably to Q3. So again, we’re cautious guys. We’re cautious in our guidance. But really, the things that we’re managing and much of it is things that you physically manage are doing really, really well.

Reza Taleghani

And just to add to the competitive point because I think it’s important. You know this about us, but we are local-local. So, we have these amazing brands, but the way we go to market, and we wanted to give you a flavor of it in the advertising. So we were talking about India advertising to pick up on the point from a little bit earlier. So we are selecting those people that matter for that market. And in India where you have a competitor — a local competitor, we produce in India. So, our cost structure matches what needs to happen in that market. And we do that throughout the globe, and I think that’s what makes it really, really powerful is we have different competitors in different countries, but the way we approach them is at a local level and make sure that we’re addressing it that way.

Unidentified Analyst

No, not a few, but just maybe two. So you mentioned Tumi is going to be a good growth driver in Asia. So, not sure if you can break it down, it’s going to be a more like ASP strategy or category expansion or opening like more stores. So what’s the — so that’s for Tumi, especially one of the key competitor to Tumi, I think they’ve been doing fairly well. So I appreciate your thoughts around it.

And then I think in the announcement, you mentioned the GP margin being strong. One of the reasons is because of the promotional activities. It seems like across region it has been actually low. So wondering to confirm that is actually all the three key regions like demand is so good. So the sort of promotion level still quite low versus pre-pandemic, what’s some of the local colors?

And just lastly, you mentioned the July numbers could make people like raise the eyebrows. So, wondering if you’re going to talk about it or not. Thank you.

Kyle Gendreau

I just did. I gave you a sense for July, which is all I’m really trying to give you is the trend continues. And I would tell you, from a growth perspective, we tend to give that. So July is really up kind of 18%, 19% to 2019. August is better. And we’re not closed with August, but the trend in August moves even to a higher level than that. So the important piece here is the trend story and the trend story across regions is very strong. So I covered it in a little bit of detail in North America under some challenged Q2, but positive Q3. That’s a trend story. So it’s definitely moving in the right way. I think I would leave it at that.

And all of the benefits you’ve seen on gross margin and SG&A and those things are carrying very nicely into July. And let’s not forget, July is often one of our biggest months, and it delivered. I think I started the year of saying, and I think I was on Bloomberg last quarter saying the summer travel season is going to be tremendous, and it 100% is, and we’re seeing it in our numbers. You saw it at the end of Q2 for sure, but July and August, we can feel it across all of the regions. And there’s not one region kind of stepping back and one moving forward. They’re all moving in this way. So it’s very, very positive.

As far as Tumi Asia, it’s a combination of everything you said. It’s not necessarily ASP per se. It’s not an ASP, but as we — as the brand established itself, we continue to have more and more confidence on the higher-end products delivering on sales. So, the mix will drive ASP higher, as 19-degree aluminum doing very well. That’s a high ASP. So that benefits, the margin benefits there as well. But for me, Tumi and Asia is around penetration. So how do we further penetrate the brand, getting in front of more folks? How do we drive more of our digital e-commerce strategy? We have some Tumi team members here driving the Tumi business in Asia. How do we lay more footprint? How do we refresh footprint that we have? I was touring stores yesterday, how do we get bigger stores within Asia?

Because as the brand has continued to establish itself and we have more offerings, not only in kind of business travel that has a little bit of a masculine characteristic to it and travel in general, which has been underrepresented in Asia, how do we do more travel for Tumi in Asia, and how do we get into the — some of the additional categories that we’re really pushing like women category with Renee Rapp and pushing some of these campaigns, you’ll see Georgica collection in Asia today. And that wouldn’t have existed a year ago. So, you need to penetrate the market and expand footprint as well. And so we’re looking at store fleet and how do we expand and update those as well. All of that’s going to feed to a really good Tumi story over the next four or five years.

And it’s delivering now. It’s amazing growth now. I think it can continue on a combination of all that. But for the most part, it’s penetrating the market. Many markets, we’re just starting to touch. Every market we show up with Tumi, it actually performed really well. We haven’t — we didn’t talk about Tumi in Latin America, which is largely a distributor market. But that is booming. The growth of Tumi in Latin America is tremendous as well. You’ll see that story play out across all markets. Even mature markets like the U.S., the U.S. is a mature market for Tumi. It’s up 33% last month versus ’19. These are tremendous numbers. And so it’s a good story.

We’re launching new collections. We’re getting into more lifestyle. There’s Tumi fragrance. There’s things that are bringing this brand full circle from a lifestyle perspective from a brand, with really amazing product. I think you made a comment on competitors. And my personal view, Tumi is in a white space, because its product is borderline luxury, I call it really high and amazing functional product, serves a purpose, delivers not only on the travel side, but on the business products. I got my Tumi bag sitting here because I like to show people. But this is an amazingly functioning business bag that’s just incredible. I have access to hundreds of selections of business bags, I can’t stop using this one because I love it. But the attention to detail that Tumi delivers really moves the needle. In my view, that’s in a space all its own from a competitive perspective and the breadth of what we offer for Tumi at this kind of premium — super premium level with functionality is different than most players in the marketplace. So we’re pretty excited.

I think Tumi — I think we’ve — you’ve heard me say this before, Tumi is clearly on its way to a $2 billion business. When we acquired it, it was a $500 million or $600 million business. And we’re not — if not for pandemic, we’d be $1 billion today. We’re really — we’re getting really close to that, and the growth drivers of that business aren’t slowing down. So I think it’s going to really deliver. There’s nothing not really working in that business as well. And for us, you should be challenging us to make sure we’re investing enough to push it. And the Board does that with me quite well as far as make sure that we’re disproportionately pushing and spending on that brand to move the needle as well.

So, sorry, that’s a really long-winded answer, but we’re really passionate about what that brand can do within our portfolio.

William Yue

Great. I think we have time for a couple of more questions. First, we’ll take Kai from Haitong, and then we’ll end with Chris from CLSA.

Unidentified Analyst

Okay. Thank you for taking my question and congratulations on the outstanding performance. And I have two questions. First is about the wholesale partner. How should we see the wholesale partner sentiment, especially in the U.S.? And also for the guidance, do we still keep the guidance from the revenue side?

And my second question is about the marketing strategy as we have seen the marketing expenses has been rising. So in terms of these two — of these three core brands, how shall we do the marketing strategy for them? Thank you.

Kyle Gendreau

On the wholesale partners, I think we have wholesale partners across the globe, but you’re probably focused on U.S. wholesale partners, right, which are a big piece of that business. I would tell you, from a category perspective, that’s performing really well. Travel is a category that’s driving sales across these customers. I think — and the relationships are tremendously strong. So, if you think about a Macy’s or a Kohl’s or an Amazon, these are really strong relationships. We deliver amazing product for them. We often run or lead the category for them within the footprint, and it’s highly profitable for them. They’re very well entrenched in this space with us.

The sell-through of our product is super strong. I was talking to somebody earlier before the call. You don’t get a sense for underlying North America performance when you blend maybe wholesale customers that are making some buying decisions within a month or they’ve shifted something from Q1 to Q2. Look at Tumi North America, it’s supposed to be a direct-to-consumer brand. It’s up 30%. Our own e-commerce Samsonite, not ex Tumi, up 80% year-to-date. Our retail comps are up 5%, 6%. And that’s with gateway stores not back to break to flat store, they’re actually negative. This is comp sale though, so comp scale because we don’t have inbound Chinese that drive a big chunk of some of these doors. And yet, it’s really positive.

And so our wholesale business is really a function of these customers navigating some of their own inventory challenges, making decisions how they manage. Our category is perfectly fine. If Lynne was here, she would tell you tremendously strong partnership, relationship with these wholesale customers, and I have zero doubt that it’s a big part of our story going forward. And you’ll see positive in Q3. So the noise is that you’re seeing are really timing as we guided last time. And they’re important relationships. The U.S. consumer has been trained to buy there. We’ll continue to drive and push our direct-to-consumer with e-commerce. You’ll see Tumi as a mix growth, so our direct-to-consumer mix will grow in North America. We’ll add more stores there.

We’re adding some more outlet stores for the U.S., but at a very calculated way. So you’ll see some mix effect direct-to-consumer, but the wholesale business is tremendously successful for us within that region. And I’d say we have wholesale in all regions, all of those relationships are really, really important to us in delivering. What you shouldn’t lose sight of is the demand for travel is very, very high. The travel trends aren’t going to cause us to miss sales opportunities within these customers. It might be a decision on what they can take in for inventory, but the long-term prospects there are tremendous. And you’ll see it this year. You’ll see the end of the year finish, in my view, very strong for wholesale in North America as well.

So, your second question was marketing strategy. So as I said, and you kind of could read between the lines a little bit. We are spending across all of our brands. I was very conscious to show you three of our core brand campaigns because all brands are being fed in the right proportion. And as a percent of sale, not tremendously different. But you’ll probably see us disproportionately spend on advertising in a market like Asia and Europe on Tumi. I sometimes sit in on budget meeting and I say, “No, you spend more.” And they’re all saying, “Well, how are we going to make that work?” I said, “Don’t worry, it will feed itself. Spend more on brand Tumi.” But it’s not at the sake of cutting what we should be spending for Samsonite.

And often, we judge marketing dollars by share of voice. And can we reach where we’re trying to reach with the spend that we have. And so if our overall spend is going to be 6.5%, maybe next year 7%, it’s not that one is 10% and the other one is 3%, right? It’s one might be 7%, 8%, 9% and the other one is 6.5%. It’s — they’re all getting properly supported. And to not support all those brands would be a mistake. And so they’re all being supported. There’s a very big digital focus to what we do today. So not only is it brand building, but it’s also traffic driving not only to our own doors, but our wholesale customers and all of that across all three of these brands are very carefully managed and delivering.

So I think it’s one of these real scale advantages we have our ability to create the content that you’re seeing and tell our story off of amazing products against really fragmented marketplace that nobody can spend those dollars at anywhere near the same capacity that we have. So their share of voice is very, very limited because of just the sheer size of their business, and we can outspend to drive the business across all regions. It’s really very powerful.

I don’t know, did that answer? Yes. Okay. Good.

Unidentified Analyst

Congratulations on the results. And finally, we got the opportunity to meet in person after all these years. So maybe three quick questions from me. The first one is regarding the inventory days and the second — and the remaining two is regarding China market.

So, regarding the inventory days, you mentioned previously that the second quarter might be seeing the peak of the inventory days of this year followed by some normalization. And what is your expectation on inventory days now heading to the end of the 2023? And also, what could be a comfortable level of your inventory days, maybe in the coming years? Is it still around maybe 130 to 140 days? So this is the first question for inventory days.

For China, two small questions. Firstly, you mentioned that outbound travel is resuming. We understood that we got some real shots of all our brands in terms of marketing, especially Tumi, right? So — and given we actually observed both upgrade and downgrade spending scenarios in China market, just wondering which brand actually takes relatively more market share in China market? Is it Samsonite? Is it Tumi or actually maybe American Tourister?

So, the second question is for China market, is regarding that. Just wondering if you possibly have a breakdown of your Chinese spending. How much of them are realized in China home market before pandemic? And how much are realized in offshore market? And what is your expectation of a new normal after the resume of [indiscernible] in China? Thank you.

Reza Taleghani

Can I take the inventory?

Kyle Gendreau

Yes.

Reza Taleghani

So inventory days, obviously, you’re seeing an improvement from the end of the year already in terms of inventory days to where we are right now. And I think I mentioned a little bit earlier, but the way that we manage inventory, our supply teams are phenomenal. They were great in the pandemic in terms of shutting everything off. They were phenomenal in terms of turning everything on. And that continues. And so the way that we manage inventory is there’s obviously a buying cycle.

And so — and it’s very important because in our category, we are very disciplined, not around discounting. We need to flush out seasonal inventory. We don’t have that issue in our business. And so for us, it’s just around managing the purchasing to naturally get the inventory days to where they need to be. We want the teams to be heavy right now because our anticipation for sales is that sales are higher than what the teams are currently forecasting, and that’s been continuing. So I think that gives us a position of strength as it relates to the market in terms of maintaining those inventory levels.

We do anticipate the inventory days coming down in the back half of the year because we’ve already managed those product purchases to get it back to a more normalized level. But we will still run higher than our historical level because we anticipate next year is probably going to be pretty strong, too. And so we want to make sure that we have the appropriate SKUs in all of the regions. And that’s the case across the business overall.

Did you want to take the next one on China?

Kyle Gendreau

I think you had two points in China. So one is what brands are driving. This is a three-brand strategy, but I would tell you, Samsonite is probably driving the most today. But if you take a forward view, I think it will be a combination of Samsonite and Tumi that we really kind of move the needle at the market is more premium and these brands really perform. It doesn’t mean that there is an American Tourister story. But we’re seeing, and I think if you’re reading kind of data on Chinese consumers and consumption and what people are worried about, it’s more at this kind of entry-level slice of the market that’s maybe moving a little slower. And we can see that in our own business that American Tourister is moving a bit slower. But clearly, Tumi is moving and Samsonite is moving.

I think over time, that will kind of blend out, but you’ll see Tumi grow at a faster clip, next in line would be Samsonite, and I think American Tourister has an important game play. Subrata was just there talking to the team about American Tourister in China. I think there’s probably untapped opportunity for American Tourister in China. And so I think over the next three, four years, you’ll probably see that become a bigger piece of the story. But the real success in China from where I sit is what’s happening with Samsonite and Tumi, probably in that order as far as mix of business. As a percentage of growth, I think Tumi probably can move at a faster clip than Samsonite.

I don’t have good data on your next question. It’s a complicated question around sort of a Chinese consumer spending X within our brands, where is it happening? I think that’s what your question was, right? I’m going to give you my instinct only from the inverse, which is markets like Europe and North America are waiting for the Chinese consumer. But overall, it probably is something like 2%, 3%, 4% of their business. And so, you can do some math to think about what does that mean. They’re not tremendous numbers, but they’re meaningful numbers when we look at growth prospects.

Our business for Chinese consumer and consumption is largely in China, but they do spend when they’re traveling. And often, like anybody else in the world traveling, they tend to take trips, they buy things and they need to get back with their stuff. And we tend to sell a lot of luggage in gateway stores. When I talked about North America comps and the comps are positive 5% doing well, but our gateway stores are down 23%, okay? And that’s inbound tourism, not visiting the gateway. So, gateway would be like destinations that really draw tourist and outlet centers outside of New York, outlet centers outside of Orlando, Florida, things that inbound travelers come in, and then they show up there and they buy. We’re definitely seeing those now. As China gets going, those will come back. But they’re important to the business, but they’re not big drivers. But it will be fuel for next year.

I really think when you look at what’s going on in North America in this growth profile and where we are, as that starts to layer in, that’s going to not only fuel the end of the year, but into next year as well. Europe is going to be the exact same way. Probably Europe before the U.S., you’ll really start to see it. We’re watching — we do things like watch credit card data and see where people are coming from. We’re starting to see the Chinese. And I think when the group tours start coming in, I think those really move the needles. If you’ve visited the U.S. when you’re in an outlet center and you see busloads of group tourism coming to outlet centers to buy these gateway markets. And so that’s not really back yet. And when that comes back, that will help fuel some story for us as well.

Reza Taleghani

And the Korean one we talked about earlier.

Kyle Gendreau

Yes, definitely, Korea. Korea as a market just went positive. Korea needs Chinese tourism, particularly in kind of the airport retail. And so part of that moving positive is that consumer is starting to move back. We definitely have seen Chinese travelers within Asia and a lot of these big successes we’ve had in Southeast Asia is around Chinese consumers showing up there. That will start to broaden in my opinion when the flight capacity broadens for real international flights that the rest of the world start to get some of that. So it’s coming. I think it’s going to fuel Q4, Q1, Q2. If you’re really looking forward, those are important benefits we’ll get from the Chinese consumer moving. Okay?

William Yue

Okay. Great. Thank you very much, Kyle and Reza. Thank you very much, everyone, for attending.

Kyle Gendreau

Thank you very much.

Reza Taleghani

Thanks, everybody.