JOANN Inc. [JOAN] Conference call transcript for 2022 q3
2021-12-02 23:37:06
Fiscal: 2022 q3
Company Representatives: Wade Miquelon - President, Chief Executive Officer Matt Susz - Chief Financial Officer Ajay Jain - Director of IR
Operator: Welcome to the Fiscal Year 2022, Third Quarter Earnings Call. My name is Adrian and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note, this conference is being recorded. I’ll now turn the call over to Ajay Jain. Ajay, you may begin.
Ajay Jain: Thank you, operator, and good afternoon. I’d like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and the company undertakes no obligation to update or revise any forward-looking statement to reflect subsequent events, new information or future circumstances. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today management may refer to certain non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was filed today with the SEC today and posted to the investor relations section of JOANN's website at investors.joann.com. On the call today from JOANN are Wade Miquelon, President and Chief Executive Officer; and Matt Susz, Chief Financial Officer. I will now turn the call over to Wade for his prepared remarks.
Wade Miquelon: Thank you, Ajay. Good afternoon. I’d like to welcome earnings joining the call today for their interest in JOANN. Today I’ll provide some color on our third quarter results. As an organization, we continue to execute at a very high level despite unprecedented ongoing supply chain challenges, as well as some of the most unique sales comparisons on record at JOANN due to the pandemic. I'd be remiss if I didn't start by thanking all JOANN team members for their stellar contributions to help us be fully prepared for our all-important holiday season. I'd also like to introduce two new team members to JOANN’s Senior Executive Team. Lisa Wittman-Smith has just joined JOANN as our new Senior Vice President, Inventory Management & Business Insights. Lisa comes to us with an extensive background leading highly sophisticated planning groups across a variety of retail sectors, including department stores, specialty retail and optical retail. Over the last several years she’s built a high performing analytics team focused on delivering actionable business insights and forecast from consumer end market data. We’ve also promoted Joe Thibault to Senior Vice President of Store Operations. Joe has been with JOANN since 2002 and has served in many different leadership roles across our organization. Joe has been the leader of our store operations team for the past three years, where his outstanding work has improved our customer experience and operational efficiency. Please join me in congratulating Lisa and Joe in their new roles. As the nation's leading sewing and crafts retailer, we continue to see encouraging industry trends overall. We have a solidly growing revenue on a two year comparison with very strong gross margins even after absorbing unprecedented supply chain costs. We are pleased to see that our customer is engaging in a wide variety of sewing and crafting activities across our broad portfolio of categories. It reflects a far more diverse profile across multiple demographic measures. And we are as strong positioned financially, whereby our balance sheet, operating earnings and cash flow are allowing us to simultaneously invest in our strategic initiatives, dividend payments, modest share buybacks and further debt reduction. During the third quarter, our total comparable sales increased by 8% based on a two year stack. Adjusted EBITDA also continued to grow significantly compared to pre-pandemic levels, reaching $72.6 million, an increase of $33.2 million or plus-84% versus the third quarter of fiscal year 2020. These results were bolstered by improved performance across all of our customer segments, particularly our more seasonal customer the drove what was a very solid fall and Halloween business. Recall that this more seasonal customer cohort is where we experienced some incremental softness during the second quarter. We’ve also been successful in managing our pricing and promotions as well as shrink and clearance cost, driving growth in our gross profit dollars at 16.3% after adjusting for $11.3 million of higher excess ocean freight and related supply chain costs during the third quarter. We continue to evolve our position as a leading digital retailer in our space, but much more to come as we go into the balance of the year and beyond. Our omni-channel sales grew by 137% in the quarter on a two year basis and represented 11% of total company revenue. We are seeing robust increases in both online traffic and conversion, with the customer increasingly choosing to shop us digitally, especially through our industry leading mobile app. We launched new payment methods to our customers this quarter, notably adding Apple Pay and Klarna’s BuyNow, Pay Later services and we are seeing high level of initial adoption. Our BOPUS and curbside pickup services are especially popular with extremely high net promoter scores associated to these customers. Based on third party data, we benchmark among the best in specialty retail in delivering curbside in just two minutes. We are also encouraged by our international e-commerce expansion, which we began in our second quarter. In less than six months JOANN has gone from shipping to one country to now shipping to 58 countries as customers from around the globe are learning about the JOANN Brand and the vast amount of sewing, fabric and craft SKUs that we can offer at competitive prices, and in many cases finding items that cannot be found anywhere else around the globe. Research indicates that for the Creative Products market in Europe, where there are more limited retail options, it's roughly about the same size as the United States. Beyond Europe they suggest that sewing and crafting are broadly large and vibrant as well. Regarding our announcement earlier today, we are excited to enter into a joint venture with SINGER, a partnership that we believe will transform sewing and craft patterning globally. JOANN has developed a proprietary and innovative technology that streamlines many cumbersome steps through a product that allows sewing enthusiast to both project and cut patterns with ease, as well as customize pattern designs and sizes using artificial intelligence. We expect to roll out this offering to our customers in calendar year 2022. Through a combination of strong intellectual property rates around this technology and our distribution reach in the sewing category, we are very well positioned to do this partnership was SINGER. This joint venture will also capitalize on SINGER’s unmatched sewing technology expertise, as well as global presence, extreme brand loyalty in more than 190 countries at the core of which is an extensive dealer network. This is the first time that we’ve announce what we refer to as one of our Blue Ocean initiatives. These initiatives build from our core and tap into significant new pools of value creation, both of physical products and also digital offerings, both domestically and globally. We’ll continue to unveil more on this opportunity and many other major growth initiatives at the appropriate time. Our physical store locations also continue to be a preferred space for the creative consumer to connect with our team members and with each other, seeking inspiration, education or sometimes just getting advice on their project. Both from the latest quarter and on a year-to-date basis, our net promoter scores continue to outpace fiscal ‘20 and ‘21 and all of our key satisfaction metric showing measurable improvements across our physical store network. The improvement in customer satisfaction is also evident across our newly remodeled stores, as they outpace our chain in all customer satisfaction metrics. While our store refresh initiative is still in early stages, we expect continued momentum as we accelerate the program to launch to over 50 additional locations next year. Excitingly, we are also seeing sales lifts from these earlier projects that will support our four year pay back expectation and also change the game by stepping out of traditional sewing and craft retail space into one that is truly differentiated and completely raises the experiential bar. We continue to be pleased with our ability to retain our newly acquired customers from the record acquisition we’ve achieved in fiscal 2021. Based on our internal tracking, overall retention remains significant higher relative to the pre-pandemic levels. We’ve also continued to add new customers to our database in fiscal 2022, acquiring over $4.5 million new customers. Our email database and our mobile app remain the most attractive new contact channels for customers, with engagement in both digital platforms exceeding the prior year. Despite well publicized supply chain challenges leading to weakened inventory positions for many retailers this holiday season, our in-stock position remains extremely strong as we head into the final stretch of the holiday season. Our proactive measures and decisions to absorb significantly higher ocean freight and additional handling costs in the ports have allowed us to deliver key seasonal goods for the holiday selling season. We remain focused on providing a relevant and inspiring assortment of merchandise in our stores and on joann.com and never give our customers a reason to shop anywhere else. Also our current mix of inventory is very clean, with very low levels of clearance and past season merchandise relative to our total inventory mix. Our team continues to lead through the ongoing challenges associated with port congestion, commodity costs and labor shortages and in that regard, I could not be more proud that our online and retail channels continue to stand tall as evidenced by our customer satisfaction metrics, inventory position and market share metrics as we move into our fourth quarter. We continue to strike the right balance between top-line growth and profitability, but most of all, we continue to keep our customer and their experience with their brand top of line in all what we do. Again, I want to thank all of our team members at JOANN for their efforts and continued dedication, as the conditions remain very focused and better to being a friendly, clever ally to our loyal customers. And with that, I will turn the call over to Matt Susz for a more detailed review of our financial.
Matt Susz: Thank you, Wade. I would like to open by reemphasizing Wade’s comments and by thanking all of our over 20,000 team members for all they do to create a fantastic experience for the JOANN customer, both online and in our store locations. I’ll first cover the key highlights of our third quarter performance in fiscal 2022. We reported net income of $22.8 million in the third quarter with earnings per share up $0.53. Our adjusted EPS was $0.73 in the third quarter compared to $1.84 last year and a loss of $0.11 for the same quarter in fiscal year 2020. Adjusted EBITDA improved to $72.6 million compared to $39.4 million in fiscal 2020, an 84% increase on the two year basis. Net sales were $611 million reflecting a decrease in total comparable sales of 14.2% to last year's third quarter and up 8% on a two year basis. Recall that we cycled a comparable store sales increase of 25.2% during Q3 of last year. Our sales trends in the third quarter continue to be driven by a strong omni-channel business, with e-commerce sales up 137% to two years ago and representing 11% of our total revenue. We are pleased that coming out of the pandemic, our sales are normalizing geographically, with all of our regions driving healthy increases on a two year basis. Our strong improvement in gross profit dollars continued in the third quarter. Gross profit dollars increased by 16.3% to $330.1 million on a two year basis, as adjusted for excess ocean freight cost of $11.3 million and 12.3% to $318.8 million on a GAAP basis. After adjusting for excess one-time supply chain cost, we reached another high water mark in quarterly gross margin rate of 54%, a 410 basis point improvement over two years and a 30 basis point sequential improvement over this year's second quarter. On a GAAP basis our gross margin rate was 52.2% in Q3, down 30 basis points to the same quarter last year and up 230 basis points from the same period in fiscal 2020. This improvement continues to be driven by optimized promotional levels, lower strength and lower penetration of clearance inventory, offset by challenges in import and domestic supply chain costs. Despite well documented supply chain challenges across the retail industry, our proactive steps to engage with our ocean freight carriers, pay what we must to move product on-time and work around bottlenecks has left us in a great position competitively on availability of seasonal items for our customers. We have received more than 90% of our fashion and seasonal merchandise for the critical fourth quarter selling season and are working quickly to move the balance to our stores. This did require us to absorb significantly higher ocean freight and related supply chain costs in the quarter versus the same period last year of approximately $16 million, of which we reflected $11.3 million as an adjustment to EBITDA as excessive one-time costs that we feel will normalize as current global supply chain issues resolve. For our fourth quarter, we expect the impact of these supply chain cost challenges on our gross margin to be roughly double what we experienced in the third quarter. Our third quarter selling, general and administrative expenses totaled $257.6 million, a decrease of 12% compared to the same period last year and an increase of 2.9% over the past two years. The decrease compared to last year reflects our ability to reduce certain variable costs on a lower sales base, as well as the fact that we incurred additional expenses last year related to the COVID-19 pandemic. As a percent of sales, our third quarter SG&A expenses were 42.2%, a reduction of 180 basis points when compared to the same period in fiscal 2020. Efficiencies gained in our store operations and leverage from higher sales compared to the same quarter two years ago are being partially offset by higher costs of hourly labor compared to what we were paying two years ago. Depreciation and amortization expense decreased slightly for the quarter by $0.7 million from last year to $19.6 million. The pre-opening and closing costs were $1.6 million during the quarter, $0.5 million higher than last year as we are beginning to ramp up our store refresh activity. Interest expense for the quarter decreased by $2.2 million compared to last year to $11.8 million. The decline in interest expense reflects the combined impact of our rate financing activities, which lowered our blended interest rate as well as the lower average debt level. Our effective income tax rate was 23.5% for the third quarter compared to 5.9% for the same quarter last year, as last year was positively impacted by the company's ability to take advantage of certain provisions of the CARES Act. Moving to the balance sheet and cash flow metrics, cash and cash equivalents were $30.9 million as of October 30, 2021 compared to $33.2 million at the end of the third quarter last year. Our net long term debt was $853.8 million as of October 30, 2021, a decrease of $67.8 million from October 31, 2020. We entered the third quarter with inventory of $744.3 million, an increase of $46.6 million or approximately 7%. That increase is driven primarily by increased ocean freight cost on products that have not yet sold, but also by hiring inventory investment in seasonal and basic craft products that are exhibiting strong sales trends. As announced earlier, our board approved a share repurchase program up to $20 million through March 9, 2022. To-date we have repurchased 978,930 shares at a total cost of $10.8 million. At the end of the third quarter, our trailing 12 month credit facility adjusted EBITDA was $266.8 million, resulting in a leverage ratio for net debt less cash to adjusted EBITDA of 3.2x. The third quarter historically represents our seasonal peak, annual average leverage as we build inventory in preparation for our key holiday selling season. Our long term leverage target of approximately 2.0x remains unchanged and debt reduction remains one of our core capital allocation priorities as a result of our strong free cash flow characteristics. Our second quarter dividend of $0.10 per share was paid on September 24, 2021 to shareholders of record as of September 10, 2021. Our Board of Directors recently declared a cash dividend of $0.10 for the third quarter of fiscal 2022, paid on December 29, 2021 to shareholders of record as of December 15, 2021. For the 39 weeks ended October 30, 2021 capital expenditures net-of-landlord contributions were $41.5 million. With those investments focused on our new multi-use distribution center near Columbus, Ohio, store refresh and facilities maintenance, information technology enhancements, including improvements to our omni-channel and store point-of-sale platforms. We still anticipate capital expenditures, net of landlord contributions to total approximately $65 million for the year, with a focus for the balance of the year on store refresh projects that will be grand opened in early 2023. In order to provide continued visibility for modeling purposes, we are updating our fiscal 2022 outlook for selected items that were also shared during the second quarter earnings call. Pre-opening and closing expenses are expected to be in the range of $7 million to $9 million. Depreciation and amortization is expected to be between $80 million and $82 million. We estimate annual interest expense of $50 million to $52 million and an effective tax rate of 22.5% to 23.5%. As I mentioned earlier, we expect capital expenditures, net-of-landlord contributions to be approximately $65 million for the current fiscal year. Debt net-of-cash in the balance sheet is expected to be approximately $700 million. For the full year we expect the weighted average fully diluted number of shares to approximate 42 million. In summary, we are pleased with the results we have achieved given the ongoing supply chain challenges across the retail industry at this time. We've accomplished a high level of customer engagement and satisfaction and we are well prepared for our holiday selling season. With that, we'd be happy to take your questions.
Operator: Thank you. We will now begin the question-and-answer session. And our first question comes from Liz Suzuki from Bank of America.
Liz Suzuki: Great! Thank you. First I wish to talk about how your things for sales progressed throughout the quarter on a two-year stack basis and what November looked like as winter holiday demand might have started to pick up and you know we've heard a lot about early shopping activity. Just any – curious to hear your thoughts on that.
Wade Miquelon: Yeah, you bet Liz. This is Wade. You know one thing is despite the only quarter in the year, we give more color on that kind of the next quarter, because it is such a big quarter for us and the holidays, so I will do a bit of that. You know in Q3 our quarter started out a little bit slow and then really as we approached Halloween came on extremely strong, so that was kind of the profile of it. If we look at this quarter, this quarter looks a lot like that quarter, where we were a little bit slower in November, but we really had a fantastic Black Friday week. So if you look at kind of that you know Tuesday to Monday period, our sales demand is up about 9% and our total gross margin up about 20%. The thing that surprised us was we had more of a shift to omni than we even thought we would. We were well into the 20’s in terms of our penetration for that period, so that was probably the thing that was different, but overall those numbers that I gave you on sales and gross margin from that period are pretty much almost exactly on our expectations. So you know it's looking like with this momentum we have now that Q4, if we continue the way we're going now, it should shape up a lot like Q3. So, I don't know Matt, if you want to add anything to that, but…
Matt Susz: Yeah, I’d like to just emphasize that those numbers Wade gave on the Black Friday sale were on a two year stack to make sure people are clear on that. But yeah, I think definitely both the third and the fourth quarter, a bit of a slower start than we would've liked or expected, but definitely seeing momentum as we get closer to the holiday I think, where some of the factors your describing more broadly, we're seeing for sure that it's a later arriving shopper around some of the key holidays.
Wade Miquelon: We – you know Liz we’ve said before, we’ve done a lot of work to make sure we're in a good position. We've got meaningfully more seasonal inventory, in particular than we did last year and again, we're pretty optimistic that we're going to be standing tall as the customer's going to come, as we go through the Christmas year.
Liz Suzuki: Great! And just a question on that comment about you know a pretty big shift into omni in that week and gross margins being up. I mean should we think about you know online versus in-store as being relatively margin neutral or is it generally dilutive, like it is in a lot of categories of retail?
A - Wade Miquelon: You know inventory close to equivalent, you know the difference is typically where we have split shipments, we might have to pay for extra freight, but we do charge a lot of the freight through typically. But in general, we’re close to agnostic in those channels.
Liz Suzuki: Great! Thanks very much.
Wade Miquelon: Thank you.
Operator: And our next question comes from Zack Fadem with Wells Fargo.
David Lantz: Hi! This is David Lantz on for Jack. Thanks for taking our questions. So just to confirm on your prior comments that Q4 is looking like Q3, that means your two year stack will be similar at 11%, implying kind of a negative 10% comp. Is that the right message there?
Wade Miquelon: I look at it as a two year basis in terms of you know the two year sales comp and the two year gross margin dollars, that's what – you know that's how I look at it in terms of being similar to space continues and the other part of the profile is both Q3 and Q4. The first month you know is a little bit slower than we anticipated, but as we got towards the holiday, as we got towards Halloween and now we’ve had a very good, as I said Black Friday week as we head towards Christmas, we think that profile will hold as well.
Matt Susz: But for sure, I mean we would emphasize, you know we would need to see continued strength of what we did see kind of launch this quarter anyway, launching kind of with the Black Friday week events and the thanksgiving time. You know if we see that kind of momentum continuing, you know we could see a quarter that looks a lot like how we performed last quarter.
David Lantz: Okay, great, and then just one on gross margin too. So the adjusted gross margin expanded about 115 basis points year-over-year with kind of 180 to 190 of that from the excess freight. Was – just was curious if you could walk through some of the other puts and takes to that line item?
Wade Miquelon: Yeah, those are kind of the big ones. If you look at kind of our core product margins, so really what’s offsetting that is basically our core product margins. So that’s kind of a blend of our promotional efficiencies and sourcing gains. We made it really over the past several years, and then shrink in clearance what we talked to. So you know what I would say there probably, roughly 20% of that benefit is the shrink in clearance impacts and then the balance would be a combination of product margins and sourcing gains.
David Lantz: Great! Thanks. And the next question comes from Laura Champine from Loop Capital.
Laura Champine: Thanks for taking my question. Gross margin beat our expectations despite the supply chain pressures and that you commented that clearance activity is minimized by pretty clean inventory levels. How sustainable are your current levels of markdowns and clearance; and in Q3 were you in line with your expectations on those metrics?
A - Matt Susz: Yes, thanks Laura. This is Matt. Yeah, I would start off by saying you know we were pretty much on our expectations for those areas. In terms of sustainability, we do feel like our planning and the work our merchants are doing has improved significantly over the last couple of years to the extent that we do feel like that can continue. Now certainly we can always place bets that don't turn out exactly like we would think and you have to clear through some of that inventory. But we're not sitting on anything of that nature today, so certainly for the next couple of quarters we would proceed as continuing to be a benefit for us.
A - Wade Miquelon: And the teams have done until that last point a really great job of changing how they buy flow opposed fashion and the like and I think it’s just – we’re much more agile than we used to be.
Laura Champine: Got it. Thank you.
Operator: And your next question from Peter Keith from Piper Sandler. Your line is open.
Bobby Friedner: Good afternoon. Its Bobby Friedner on for Peter. Thanks for taking the questions. First I wanted to ask around customer engagement and retention trends I assume from some customers, just out of the comparison in cricket imported that bared 90 day customer engagement had dropped to the lowest level in Q3 since the start of COVID. You know I’m wondering if you're seeing a similar kind of pressure and related, you know looking at the 2020 new cohort of you know selling to cricket customers, are you still seeing the 65% retention rate that you’ve historically seen or has there only been – has there been any deviation up or down from that?
A - Wade Miquelon: You know we’re seeing very good customer retention overall. In fact you know might be slightly better than historic. With respect to that one stop cricket specifically would have bundled all machines together, sewing machines, craft and analogy machines. You know quarter-to-date we’re up over 20%, about a two years stack which is incredible given just how many of those have been sold over the past 15 months. That rate is certainly lower than it was six months ago, but still be up on a two-year stack. That kind of rate is very encouraging to us and that's happening you know both on the sewing side and the craft side, which again just bodes well for the future in terms of the consumables that follow behind it. I don’t know Matt if you want to add anything on that, but…
Matt Susz: No, that pretty much covered it.
Bobby Friedner: Okay, thanks. And just separately, last quarter you know noted you know that there’s still record low promo environment in the industry and you thought it would be – remain favorable for a while. You know is that still your current outlook or has there been any change on that front as you know the industry seems to be seeing somewhat normalized sales trends here and maybe in the holiday you know the promo environment has gotten more competitive.
A - Wade Miquelon: We haven’t seen any uptick at all in that environment; it’s still a good environment. Now we’re still high-low, but you know we manage our depths and our breadth to be smart there. I would suspect everybody in the industry is keeping you know one eye open on inflation. So just making sure that everyone's able to mitigate whatever may come there. I think it's just another reason why that environment will stay I think very rational for some time coming.
Matt Susz: Yeah, I think that and supply chain concerns obviously. If they are struggling to refill product, which even for us we've been successful in doing that, but as Wade mentioned, a pretty high cost. It doesn't really make a whole lot of sense to be overly heated in your promotional approach.
Bobby Friedner: Okay, thanks a lot.
Operator: And the next question comes from Paul Kearney from Barclays. Your line is open.
Paul Kearney: Hi everybody! Thanks for taking my question. First, can you just remind us that seasonal growth in the percent of mix, how is that going to impact margin over time?
A - Wade Miquelon: Yeah, I mean our seasonal business is pretty profitable, so I would say across all of our businesses there's not you know a meaningful difference within business. There’ll be a few mixed things you know, so technology versus non-technology can be different for example, but you know seasonal is a not only we think a great growth area for us, but it's an area that’s meaningfully accretive compared to the other businesses.
Matt Susz: Yeah, I think the other thing in terms of margin on that business, we turn that area of the store you know five to six times a year. So really the important thing is that we get good early season selling and that we minimize end of season mark down and clearance and our teams have been doing a really effective job of that lately, which has also helped us kind of maintain really strong margin growth.
Paul Kearney: Okay. Another one and then a follow-up. Are you taking any price increases for some of the elevated costs that you’re seeing on freight?
A - Wade Miquelon: Yeah, so what we've done is we've done a lot of work to kind of understand what we think is potentially sustainable, inflation versus what we think will pass, and the first line of defense for us is to be smarter in promotions. There's a lot of room to run there and you can see it kind of in our margin flow. We've also been really – you know a little aggressive working across our vendors, trying to make sure that we’re working to offset inflation wherever we can, expanding to additional vendors where we might need to. So far we've been able to do a good job with that. There is certainly some opportunities to price, but in general we think we've got good consumer momentum. We think in a lot of key areas, we could be building some share for long term, but we just want to be very measured.
Paul Kearney: Okay. And just lastly, can you just explain to us how you’re estimating what’s one-time in elevated freight, and then if I heard correctly, I think you're saying that you're expected to double for next quarter. Is that just the impact of a full quarter of flying in? And then are you seeing these rates improve as you’re going through the quarter?
Matt Susz: Yeah, I'll make sure I check off on all of those and if I miss one, please correct me. So I’ll start with the methodology. So we have contracted rates. Those have a little more than double in the past year plus that we also always assume we're going to pay some freight in the open or stockbroker market. So that blends to a level that we say is kind of normative, freight again that’s more than double what we’ve historically paid, and then what we are gaining on top of that is what we feel is transitory and hopeful that is transitory, I think all of us do, that is you know 8x to 10x on top of even that doubling that I describe that we're treating as normative. So basically we have a rate per container that we are considering a standard cost. It runs through our normal per store to process and product cost and then anything on top of that is what we're one-lining to our EBITDA adjustment processes.
Wade Miquelon: A couple of other things too. Part of what’s in that, you know that we are calling one time is I think had about $10 million of cost to offload product from the port, which is something nobody's ever done before, but its effectively taking it off on container and putting it on to a truck; that was $10 million just to get out of the port this year. We hope that that doesn't ever, or at least in any meaningful way happen again. As I think I might have shared in the last quarter, you know for a decade our rates were more or less about 3,000 per container. Over the last four or five months, to get it done we’ve been paying you know up to 30,000, a lot in the 20,000 range. You know already the spot markets down, you know around the low teens or in some cases lower. So it is pulling back. It’s not at 3,000 level, but as Matt said, when we look out and say what our brokered rates and even more than 200% premium to what we’ve ever paid, we feel that’s you know a reasonable assumption for what business would be like six, nine months from now.
Matt Susz: Yeah, I think the only thing I want to emphasize and then check, is we didn't answer all your questions. The one thing you ought to realize here too is we’re and have been bringing in goods that will sell next year as well at these very elevated rates. So there will be a component, I think I addressed this a bit in the prepared remarks. A bit of this is in our inventory still and up running through the first couple of quarters next year. We are still in the process of trying to get a comfort level on how much that looks like it will be, but you'll see this impact was just unfortunately for next couple of quarters.
Wade Miquelon: For the most of part of the balance sheet we've already paid for this, so reflected in our balance sheet numbers.
Paul Kearney: Yeah. Alright, thank you very much. I appreciate it.
Wade Miquelon: You bet.
Operator: . And we have Martin Braun with JC Clark with a question. Please go ahead.
Martin Braun: Yeah, thank you very much. You mentioned the international side which is growing from a very low base. Internally what are your expectations for this growing part of your business, medium to longer term as a percentage of the overall revenue mix?
Wade Miquelon: We are still kind of learning as we go, and we are stilling ramping as we go. I would say we try to benchmark some other retailers and they’ve seen and you know it wouldn’t be out of bounds for thinking over three years or so you might get to 20% of peer omni in terms of growth there. I think importantly though, we're making a lot of networks and building a brand in a lot of countries and actually looking for bigger orders with distributors wholesalers. They are looking for things particularly on the selling side, so I think it’s exciting. As we said before, today our Blue Ocean initiative is really you know reinventing sewing and the digital offerings that we’ll have there, applied to every seller on the planet too. So in conjunction with SINGER and leveraging what we're building out there, we think we're going to be able to do some very interesting things over time as well.
Martin Braun: Would that obviate the need to establish a bricks-and-mortar presence or brand in the European or other markets? In other words basically piggybacking the SINGER brand as opposed to building or acquiring a regional brand and growing it from there?
Wade Miquelon: You know these initiatives we think we can really build out without any bricks-and-mortar investment, really especially digital ones, but the other ones we can do via our assets here or via partners in places. So our strategy is to make this brand more ubiquitous and create valuable, but again we can do it without investing in any bricks-and-mortar.
Matt Susz: I think one of the unique things about the partnership we announced earlier today too is it’s a key advantage of having SINGER as a partners is they have a very robust dealer network throughout dozens of countries around the world.
Wade Miquelon: 190, including the U.S. to augment what we do.
Martin Braun: Right. And okay one another question very quickly. How much of a debt reduction do you experience or draining that debt, those inventories, that working capital down from end Q3 to end Q4. How much is typical during that three month period as you go from the high end to the low.
Wade Miquelon: As Matt said, we’ll end the year we think about $700 million in net debt. So you know deal with the net debt for the quarter through that and that’s really you know almost all describing the business with the working capital already paid for.
Martin Braun: Alright. Okay, thank you very much.
Wade Miquelon: You bet. Thank you.
:Operator: And that concludes the question-and-answer session. I’d like to turn the call back over to management for any closing comments.
Wade Miquelon: Look, I want to thank everybody for getting on the call, especially evening call for some of you, but I appreciate the support very much. We couldn’t be more optimistic about the business as we go forward here. We think we’ve got tremendous opportunity across all of our customers’ tiers, all of our business segments, all of our geographies, our core and our Blue Ocean and we are excited to be talking to you more about it as time unfolds. So again, thanks for listening. We appreciate it.
Operator: Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.
