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Monika Wszeborowska: I'm Monika Wszeborowska. Welcome, everybody, wholeheartedly to the results presentation conference. Marcin Bojko, Deputy Chair of the Board and Chief Financial Officer of the group; and Magdalena Kopaczewska, Director for Investor Relations are going to be your hosts today. Unknown Executive: Ladies and gentlemen, our meeting today is going to be devoted to summing up the results of the LPP S.A. Group for the third quarter of the current year. In our case, that means August, September, and October. And it is what we will start with. Throughout the conference, we will also tell you about our plans for the nearest future and more long distant plans, and we will complete the meeting with a Q&A session. You have a chat box at your disposal. You can see that chat box on your screen, it's going to stay active and it's obvious to you, should you want to pose a question. If you still have any questions to clarify after the meeting has come to an end, please get in touch with our Investor Relations department, lpp.investor.relations@lpp.com and the media are invited to contact media@lpp.com. Our meeting today will last more or less an hour. So we will try to have wrapped everything up by 7 p.m. and stick to this time framework. Let's move on to summing up the results, financial results for the third quarter of the present year. Yes, without further delay since we have a lot of material to cover, let us move on to summing up Q3 2026. The most important pieces of information, like-for-like stores that is those that have been in our network over 12 months, 4.3% of growth in like-for-likes. In a moment, we will see the details, but it is a very nice result. The stores that have been with us for a long time is not the only part of our business. We've been growing systemically. You've noticed that maybe recently that 232 stores opened, including 200 in Sinsay brand, but we also keep on going in the other pillar of ours that is e-commerce sales, PLN 1.7 billion in sales increased by 22% year-on-year in constant currencies, so great dynamics. And what always comes as good piece of knowledge is the payment of the second tranche of the dividends, PLN 330 per share, so over PLN 1.2 billion paid dividends. Recently, the percentage of the dividend is around 4. These are our plans. So this piece of information is always very positive, one that we eagerly share with you. These are our operational results. As for financial results. Here, we have 4 main indicators. Sales in the first -- third quarter, PLN 6.1 billion, 22% dynamics. EBITDA, PLN 1.7 billion; EBIT, PLN 1.2 billion; and net profit, PLN 800 million. big, nice numbers in Q3. They are really lifting our spirits. When we look at the comparison, EBITDA is 48% of growth year-on-year, EBIT, 61% and net profits, 39% growth year-on-year, so increases over the dynamics of sales, which, of course, means greater profitability, as we will see in greater detail in the slides to come. The business results that you've seen in the previous slide nicely translate also on to the financial results. And to begin with, maybe there is one more important disclaimer to share. The results that we've been looking at in terms of profit are those that have been adjusted, which means that they are purely business like results, everybody that is with us here today and go over our cyclical reports to weeks ago, we published one. The decision of the Board having analyzed the market situation was to write off around PLN 800 million from the result. And the write-off result is from the situation of the Russian company of the Russian investor, who in 2022 took over the business after this investment, and we informed you about that in September. We talked about it at -- in extension but the situation is dynamic and after new information that we described in the [indiscernible] report, we had to reevaluate the situation and that is what it led to in terms of business decisions. Just to remind you, the write-off is a noncash one, so it does not mean any cash outlooks from the company. The situation of the company is really comfortable, and I believe that this is something that is reflected in the results we are presenting today. We have enough resources to develop to invest, including into logistic related CapEx. And as we have commented, that is also, of course, stem from the current analysis of the situation, but we see no reasons to change anything in the dividend policy either. We simply keep on focusing on pure business and the results that you see presented in this slide and in the slides to come, focus purely on business. 2026 is also an acceleration of our growth. And traditionally, we show you the status. 232 stores opened in Q3, nearly twofold acceleration over 30, 32 stores in [indiscernible] reserve house Mohito. And the third quarter, over 2,000 [indiscernible]. In the third quarter, we completed with a network that altogether has nearly 3,500 stores. Now moving on to the details of financial results. We are going to look at particular indices in greater detail, the comparable sales like-for-like. This is what we started at the beginning with the 4.3% generated over the last quarter in a broader context, 7.5% in third quarter of the last year. So the basis was high in the period that you can see presented in the slide that was the highest one so the base was demanding. That is why we talk about 4.3% as something positive and something that we are actually happy about. Now, and let's take the results in comparable like-for-likes, and we add new sales then we can see that in the third quarter, the increase in sales reached 22%, 22% off-line and nearly 21% in e-commerce. But up to the 9 months, the entire business' growth bias 20%. An additional piece of information is that there is an increase of net foreign exchange rates that was minus 1% and 5%. So if we purify the results by the macro impact, that would have be higher by 1.5 percentage points. That's our first leverage. The other one is gross profit margin. After the last Q&A session that we had in September, during that session, we signaled that there is the mathematically logical potential for increasing the margin because the second half of the year is clearly better. We've contracted a collection at a more favorable exchange rate. And back then, we could already signal that. Now I'm happy that nothing went wrong. And we can see that everything went according to our plan, and we can report nice, high margin. And again, as was the case with like-for-likes and the scale that you can see here, the highest margin in the last period is to be seen. [indiscernible] was very strong in recent years, and that's something that is also favorable. So sales, gross margin and the third leverage, that is SG&A costs. And in this context, so we are most happy about this particular leverage. Everything is in our hands. At the end of last year, we commented that we are building this scales, the cause, the dynamics that were higher, some of the locations, logistical locations only open themselves and they only learn how to be efficient. But starting with Q1 this year, the costs behave the way we wish them to. We are efficient in the so-called back office. We have mastered the development rules there. We know that the teams that we have are sufficiently efficient and we can grow with them. But two greatest leverages standing behind the drop of cost is, of course, logistics and marketing apart from the off-line stores when we think about the broadly understood [indiscernible], this is the biggest group and owing to our investments in this area, we can optimize the cost. And the other part is performance marketing and here, giving you precise digits. This is -- we spent not even 8% in relation to the profit from the e-commerce channel compared to 9% last year. So this 1 percentage point is quite a leverage. And all in all, when we put these three components together, what we get a really nice dynamic in profit growth. We saw nice numbers at the beginning. We are very happy about those growth because probably at this point last year, there was a lot of uncertainty. Of course, we believe in our strategy is well thought over and now we are bearing fruit of the hard work that we carried out over the last months. The increase in profitability of around 5% at the EBITDA or EBIT level. These are really great results in the third quarter in terms of net profit is around 2.5%. But again, giving you a broader context. This year, we've accelerated with investments quite much. We used the existing banking limits that we have quite extensively put it again, as informed towards the end of November, a big success of the entire organization and of the team involved in the project made it possible for us to close the complex refinancing structure of our debt so we can enjoy financial stability for the next 3 to 5 years, depending on the area of financing and ever since then. So ever since Q4 in consecutive periods, those financial costs are going to be even more optimized. So everything is heading in a really nice direction. And the 9 months with each quarter, we were kept accelerating also show that when you look at the dynamics on average plus/minus 30% of increase at any level reminding you that sales after 9 months grew by 20%, then automatically, that translates into the increases in profitability at any level. Now we can smoothly go to the operational indices inventory. The images [ read great ]. The last bar that you can see is below the second quarter, particularly the line that shows you the value of our inventory per square meter. It dropped significantly here during the first half of the year, where we entered the first half with higher inventory levels. You might remember that in June, we reduced our guidance. With this stock, we've been working pretty actively what was supposed that was delayed in terms of suppliers. And then we lowered the purchase budgets for consecutive periods in order to make some space for this inventory. So this is the result that we got to. We still have some more goods coming before the end of the year, but I don't think that we will get anywhere near 2000. I remember what I said in September when we commented on behalf of the company, still in the first quarter, maybe in the first half, we'll be working in this inventory that we are shifting from those periods. You can see, especially in the Sinsay brand, this margin was under slight pressure, but we can see looking at Q3 that in terms of business challenge, we can really generate nice results. Inventories, of course, are related to the working capital. This is a quite boring slide. We've been able for some time now to generate a negative level and new financing gives us additionally more comfort in terms of reverse factoring inviting. So yet another area as Warren Buffet said that banking should be like that. And we are happy to have this boring comfort, so to speak. Now in terms of logistics, it is marked by high CapEx, our CapEx is for [indiscernible], the blue bar is looking from -- looking bottom up, these are expenditure for stores. So just to remind you, EUR 450 per square meter in Sinsay brand and EUR 800 in other brands is the average. And in terms of logistics, this is the medium part. This is the area that we sped up on already last year, over PLN 1 billion spend this year, but we will see on the slides that still next year, we'll be spending. We are spending a lot, but less then this year is going to be spent. But as we saw in the OpEx part, these are high-quality investments, and they really allow us to generate nice savings this operational level. And what makes us happy is that our growth is dynamic and fast, but all that is carried out with safe debt level. The first and second quarter, slightly high. But then 1.3 debt to EBITDA that was really comfortable, now it's 1.1. So the situation is really safe. And I guess that the commentary, well, is not really necessary here. So that was the summary of the third quarter and the 9 months, but it is December already. So in Q4 we can now observe what is happening on the market. So over to Magda. Magdalena Kopaczewska: Thank you. Before we move on to our plans and goals for 2026 and '27, A few words about the fourth quarter. In November, we have Black Friday and Black Week. So we can say this is the season for discounts in stores. Today, it's not that clients are not that enthusiastic but the spending these days are much higher than on weekends before and after the black week. We started on the 26th of November, so on Wednesday, and that ended on the first of December. So during Cyber Monday. In conclusion, we can say that we are very happy about the Black Week and this season, 32% in omnichannel. This is the increase online and 25% off-line. Looking at the fourth quarter, from the first November to ninth December, we can say that the fourth quarter began a bit below our expectations. But from the second weekend in Poland, the sales improved. Most probably, this was affected by strong October, where most of the clients did their shopping over there as for the autumn apparel. And then the clients are waiting for the Christmas season. So this shows -- this is presented here in the slide. As for the -- when we look at the fourth quarter, we look at it positively because the trade in December might be supported by the calendar related effect. Christmas Eve is going to be a day off. We also have working Sundays, and the data shows that the average Sunday, these are higher sales than on the Christmas eve. In conclusion regarding the fourth quarter, I would like to say that we plan to open 350 to 400 new stores of all our brands, the majority related to Sinsay. And now we can move on to detailed plans as for 2026 and '27. Unknown Executive: When we look at 9 months of -- a very good 9 months, and we add on top of that, the prospects rather optimistic presented by Magda, we can see improving dynamics. We can confirm what we signaled in Q&A in September. So the market situation and the results that we saw at that time were delivered in the third quarter. So we have now a few weeks of this year, and we can improve our guidance, so the new expectations for this year, at least PLN 23 billion of sales in both channels, 20% increase in off-line and off-line, it does not change compared to the previous information, significantly increased gross profit margin from 54% to 55%. OpEx related to sales, so 40.5% to 41%. And that is the SG&A of sales. So whether this is EBITDA or net profit, naturally, this is increasing compared to our expectations. CapEx, small reduction. This is more cash that stays with the company. This results only from a smaller number of stores open. And net debt rather comfortable PLN 1.1 billion. So such updated guidance for '26 is our new ground for our goals for our targets for '27. The financial year is going to be reported in the second half of March. But we want to provide you the knowledge during this meeting. So here, we have '26 in the first column. So the higher forecast for this year. And from that, we move on to '27. What do we expect? at least PLN 28 billion of sales, over 20%, maybe 25% in offline even as for the increase in '27 after the third and fourth quarter, we can see that the gross profit margin is dropping a bit. This results from the natural participation of Sinsay. We know that this profit margin is a bit lower. With more development it's going to be more diluted. As for SG&A of sales and CapEx give us still room to generate this positive result, so around 40%, 41%. And when we see the EBITDA, similar results as this year, and '22, '23. This is the EBITDA margin. CapEx, a bit smaller compared to this year. This results from lower spending on Logistics. This year, we had accumulation in 2017. We are going to spend for robotization and this is only one investment, one warehouse in [indiscernible] debt net and the floor space increased comparable, so nothing is happening. This is really very positive borrowing situation. So that was the conclusion as for the 9 months from spring. We have this 3-year strategy, a short-term strategy in our company. We provide reports and we provide where we are up to '28. So after this strong acceleration. We have some observations. We continue with our strategy, but some things needed to be adjusted, so the direction does not change. So this is our direction, Sinsay is the growth engine for LPP. The development is going to involve opening of new stores in smaller towns. Maybe not so many locations here in heritage brands with brands that have significant ambitious goals -- single-digit like-for-likes to cover the inflation. And of course, the top target growth with focus on profitability. In June, we showed you the update of the information. Why Sinsay is this drive engine, why we focus on Sinsay, why this is working. We can see that after 9 months of results. When we look at operational details and financial details, the off-line store, 30% of EBITDA here. We know that we have some challenges as for managing the stock. So even with a standard issue here, we can generate significant EBITDA. Historically speaking, whether this is '25, '26, you can see the share of profitable stores. This is much better. When we add more details, on the left, you can see a graph, profitability per store size. So the mini, these are the smaller ones. You remember in June, this format was stopped for a moment. So this -- the tests are happening. We have first conclusions. It is very promising, but we wanted to make sure that when we go back to this plan, these stores are going to be profitable, and we will have good know-how, how to do that, what is happening, what is the offer for the customers. So until we have certainty, we freeze this idea. We can see that other store sizes are very profitable. and the biggest ones even much, much better. This translates into a very good payback period, 16 months. This is one month lower than before when we compare the year with significant challenges in Eastern Europe, [ 20 -- 12 ] or 13 months. This is a good result. So we are very happy about where we are with Sinsay going into the future. I believe that from your perspective, a good important information. So the updated plan for the launch of new stores, so we planned 1,000. We can see that the fourth quarter is going to be the more intense. Some are going to be shifted to the next year. In some regions, we observed a certain slowdown in Slovakia, in Czech and Hungary. These are the regions we don't see a significant interest in such stores on the market. These regions are rather cautious in their approach. So we stop for a moment, the mini format, as I mentioned, until we have hard data and conclusions and certainty. We don't -- though that we have a significant group, we have information coming to us. So when we have certainty, we will go back to that very quickly, but we need to be sure. And in the East Ukraine, we had a significant challenge related to the quality of data. So we entered 15,000, 20,000 towns, and then it turned out that this town was much, much smaller. So we decided that we are not going to enter towns around 30,000. So when we take all these elements into consideration, it means that we take care of the profitability and the updated forecast for the future results from that. So we focus on the higher margin. And in '27 and '28, we can see the potential for slow gradual acceleration. The development of off-line, not only Sinsay but our heritage brands, they also have -- are ambitious in like-for-likes. But e-commerce, we also want to have 20%, 20% plus as for growth. And we have significant leverage. So new markets, Central Asia, our mobile app. This is also working very well, 80% in online through an app in Sinsay. And we broadened our offer in non-government segment, in the following months, this is going to be a very intensive work for us, as for optimization of our offer. But we can see that the sales is good. We still need to work on the margin, but we had a lot of the tasks, and we are going to move on into these aspects. So that is all regarding to sales. The allocation of capital, again a positive note going bottom up. PLN 1.6 billion, a simple number of openings, times, CapEx and visits, and the [ medium one ], these are the expenditure on logistics. We could see the leverage in this area is particularly clear and visible. There's a clear return on investment. So next year, PLN 700 million, and we are continuing robotization in main locations and completing one center in [indiscernible] in terms of a building and 2028 will be the continuation of equipping warehouses and adding robotic solutions. We are still thinking about one more location in terms of e-commerce, but this is still under the analysis of [indiscernible] in two years' time, this is the upper number that we expect. Now if we sum it all up in 2028, that is the last year that we are running to a, now, 3-year perspective, we are reducing top line a bit. So this growth in terms of revenue, so minimum PLN 33 billion in 2028, [ 1.7 ]. That's the growth factor versus 2025. Now [indiscernible] consecutive so gross margin and OpEx, we are improving quality here, clearly, and we see that this operation leverage is working increase of EBITDA at the level of 1.8 versus 2025. So that's improvement in profitability between 21.5% and 22.5%. So systematic growth of revenue. This is what we expect. And of course, that also means that we need to not think about increasing dividends equally. We are a dividend company, as I mentioned, and it has been the case for some years now, the dividend yield is on the rise, and we do not have any reason to modify this trajectory. And I believe that what we started with this positive tone, and I guess we can end also on a similar note. So great results after 9 months updated strategy, but we are remaining on the same trajectory. We know where we are heading recently are approaching it in a slightly different way. The prospects of growth and dividend sharing with our stakeholders, of course, does not change. So I guess we can swiftly move on to our Q&A session now. Unknown Executive: Let us start then, question number 1 concerns insurance related to the fire in Romania and there is a request to define insurance liabilities, what value do we have here in the balance sheet? How much was already given by the insurer? Which quarter was it put into the books? So the main numbers and the main events in the second quarter, PLN 351 million. So the write-off was the loss that we suffered concerning our assets and goods because we rented out the building itself, but the equipment was ours. And we also had the audit term it is possible for us to book it, and that was the second quarter. Now the current update around 2 weeks ago, we got an advanced payment that was precisely PLN 20 million. Yesterday or the day before yesterday, that's the latest piece of information, we got informed that further EUR 200 million would get into our account owing to this loss concerning the liquidation and the financial part of it. So you need to understand that from the formal side, these are thousands and thousands of documents that we need to deliver but our accountants teams work on that regularly, and we can see that it is heading in the right direction. So these are the amounts that are going to be booked in Q4. And we keep on working systematically on that, so further amounts we'll get into our account. The other part, business interruption insurance, so the loss of margin and additional operational costs this period expires after 9 months. So it will be only in spring in the end of March when we will start summing it up and talk about the payments. So no earlier than probably in Q2, Q3 that we can expect any income from that side. Now inventories quarter-to-quarter dropped by over PLN 400 million. Could you explain that? Well, yes. As I've mentioned, we simply had too much in terms of goods. And once again, 1,500 stores, the initial plan, we will see that we'll open 910 talking about Sinsay so we entered it with a great stock. So this drop after the first quarter when the bikes was positive, we would still be testing what the reason was. We didn't put the break to hold so much. But then as we saw months passing, we -- it became clear that we need to do something about it. And the results offered themselves in quarter 3. So there is no mysterious knowledge, it is the simply hard work of our teams and here, those that deliver the goods and our designers [indiscernible] '27. So the spring and summer season that we are entering slowly, we'll have a greater share of the goods that were ordered beforehand. But we can see that in the first half of the year, we will be -- we'll get [indiscernible] over and done with. It's just a standard business challenge that we are managing as we go. Still on the inventories and the stocks, it's about the optimum level of inventories for another year. So what would be the level we would like to keep it at between PLN 1,700 and PLN 1,800 per square meter. Can you see any chance to benefit -- to increase, improve LFL in Sinsay, what would contribute to that? It is a very good question and again, a broader context. When we look at a slide from our presentation with like-for-likes, we will see that, of course, our appetites were greater, but it is the market. Our teams do their utmost, and we always offer the best voted with their decisions. We have our conclusions. We are entering the SS season with our homework done and lessons learned and 2023 was another period when we had a lot of inventories and the margins were what they were -- the like-for-likes were what they were. Reserved is a different brand. The first half of the year was actually in the same situation, minus 5% on likes in the first quarter and similarly in [ December ], we know how to do our homework. But number-wise, I would call for -- looking at 2024 and since what quarterly dynamics, we had 11 even 12% in like-for-likes. So what naturally this is something that is nearing the average and this biannual approach is not as pessimistic as this readout for the last quarter might suggest. Let me maybe add on the structure of likes for Sinsay. The women collections have very good likes and a different group has lower like, there are questions concerning competitors and whether women collection in Sinsay has poor likes. Well, that's not the case. And since we talk about competitors, how do you evaluate the risk of aggressive strategy of Chinese platforms and their impact on LPP business? And how are you going to compete against these Chinese platforms? I believe that our business model is the best response and I replied to that competition. We are present in two channels, offline and online. The client always has a choice to come and see and they do not need to buy something we've never seen. So we bet on quality, we bet on safety, our application and security. When you look at our application in the second but last quarter, our application was the top 1 in terms of the fashion category than it was in top 2. So those results are improving. We can see that the app is appreciated by the customers. We offer good and fast -- quickly delivered collections. So we can say that this is the reply to the competitors. And talking about the cost, this is the third biggest cost that is performance marketing. That's advertising online. We spend, nevertheless, year-on-year, and thus the internal budget that we planned, we spend even less. So we have quite a reserve here and a lot of tools to sustain this competitive spirit. We always observe our competitors humbly, we treat it as something that makes us perform better. We can see that we have efficient tools that enable us to compete even now. What do you expect -- when we talk about refinancing and savings, and I can't say that the margins, given our scale and the oversubscription that we've commented over 50%. And the margins are much better than they were and versus even monitoring, say, the current reports of other players in the Polish market, those margins are attractive. In terms of a precise estimate, of what kind of saving it is, we will leave it to ourselves because well, the consumption of it will simply be different. There are no two really comparable years. We can see that the Sinsay model is working, and there are the flows as we expect. And what's most important is that in this new structure, we have this comfort of 3 years of current limits that we can flexibly prolong and CapEx that is financing of investment, that's them, a prospect of 5 years to come. That gives us a lot of comfort that in our strategy, we can focus on the development of the business, we are safe in terms of our assets, we can pay out dividends. And financial institutions are interested. So that shows that the broadly understood financial market also believes in our model because these amounts in time, they show the scale of this commitment and hope in the development of us as LPP Group. How about the current situation in the German, U.K. and Ukrainian market? German and U.K. markets enjoy a very sound situation to put it briefly. The likes are improving. That's obvious. Starting in 2023 autumn in the U.K., we added to new stores. I'm talking about the reserve brand in Great Britain in the U.K. They've been on the rise. EBIT is not positive there yet. But every quarter, every season is of a better -- and starting from the beginning of the year, the likes are double digits. Similar is the case in Germany, it's a great e-com market as well when a new reserve store was opened in Oberhausen, we have 18 stores there altogether, I'm looking for confirmation, yes. So there are 18 stores there, and it's just there is a brand. In e-commerce, of course, we offer other brands as well, again, high increases post covered we negotiated favorable conditions. So last year, the German company celebrated their tenth anniversary, and we are very happy that last year, they proved to double digital profitability, and it sticks to it. And the third country asked about was Ukraine, right? Yes, and it nicely relates to the question about likes because those who have been with us and follow our detailed data, Again, I encourage you to keep a close eye on our Investors Relations website. We keep developing the Ukrainian market. So it weighs a lot, particularly in Sinsay and we're talking about certain normalization year-on-year, so very high like last year and now natural drops. So Ukraine is the biggest market with this normalization is really high. After the water, there came a drop, then was the balance of -- that was very high, 40%, 50%. Now we have a double-digit minus there. So again, that's only natural. But when we look at the profitability, the Eastern markets are still most profitable markets in the group. That is why we systematically keep investing there. I mentioned the number of openings. We look at the profitability we keep on learning. That was the first year of the acceleration of our growth, but we draw conclusions as we go. June showed that we are not afraid to stop or to take a step backwards in order to take two steps ahead after. We are focusing on profitability. That's a natural process. So that's what it is like. From some time, we can observe negative LFL regarding Sinsay. What is the diagnosis in your opinion in this situation? And what activities do you plan to improve the situation? I believe a similar situation was already asked, so natural like-for-likes, natural grounds, we start from figures. But of course, the appetite is much, much higher. We learned from the past new project, new season, new hope. So we can do the best work, but the client is going to actually come to the store and buy. So we discussed that good like-for-likes are ground for the new motivation program for our teams, but I don't think they need additional motivation. We want to provide best collections for our clients on natural motivation is the main factor. This is what we believe we can do and the history shows we can. Expansion, Uzbekistan, Kazakhstan, these are new markets with new stores you launched over there. Do you plan to open in new stores around Central Asia or perhaps other markets are also the topic? Central Asia, yes, we opened almost all markets. In Moldavia, we are also there. Sorry, the end of the year is very intensive as for the financial aspect. So we -- this was our debut in Moldavia. We -- this year was a record year as for the loan opening of stores in new markets. So as for the launch, this is all now we are building the scale in particular markets. So we do not plan to launch new stores and enter new markets. So this slowdown regarding Czech and Slovakia focuses our attention on this on the new market. So we are going to look for the potential. So 950 Sinsay stores is going to be delivered. In the fourth quarter, what impact do we have from higher winter temperatures on the sales. We are looking at the calendar. We want to be fair and very transparent. So we are the last to look for excuses as for the temperature. I remember times during my term of office, when September was really difficult because they were really -- the temperatures were really high. And the demand shifted into October. That was 24 and '23. In May this year, it was the coldest May ever. So the first week of June was really difficult. And yes, these were the objective reasons for that. Now higher temperatures, Yes, we -- as Magda presented, the dynamics are improving. That was a long weekend. The clients were probably waiting for the black week. So this is our diagnosis. So the trend is improving like-for-likes from negative are going to positive numbers from October, November to December. So let's not talk about temperatures now. We have still working Sundays, Christmas time and New Year's so let's wait for the final results. What are the plans regarding the marketplace? We've been analyzing all options regarding e-commerce. The app is working really well. Many clients are drawn by Sinsay apps. So this is 30% of business with e-commerce. So this is a really strong instruments in this marketplace is a natural step. But I believe that this is too early now to talk about it. We are going to analyze that. So once we have a precise information, we will go back during our regular quarterly meetings. The marketing level what was the marketing level regarding the guidelines for '27, that was 9%. When we look at guidance, '27, '28, you believe operational effectiveness is going to improve. In what areas do you plan the improvement and whether this is the result of opening new stores? Very good question with a partial answer. Yes, this is affected by a larger percentage of Sinsay. So the gross margin is going to drop. But Sinsay it's lower -- as for the CapEx, it's not that expensive as other markets, it's improving our leverage. But here we have the area where we can see positive impact looking at the next two years, this is logistics. So more investment, we can see after this sample in bids our biggest e-commerce warehouse, 100,000 square meters. It is working perfectly on the largest case. So the cost regarding to logistics, this is the second group of our cost. So that was a really small change that is generating a significant potential. So what is behind that. Can you tell what was the guidance for '27 regarding the level of sales within the whole group, but also regarding the Sinsay brand? We have ambitious targets, but in our model, these are single digit or lower amounts within single-digit figures. You decided not to enter towns, smaller than 30,000 inhabitants. Do you believe this is related to the Polish market? No, that was a comment regarding Ukraine from the logical point of view. So the data for smaller towns. Well, the situation regarding the war is difficult. We have doubtful quality regarding the data. So if we have a lower number of citizens in smaller terms, so we want to develop, but we want to be also profitable. So this is our cautious approach to that. On a long-term basis, when we look at the logic. So when we do we want the company to grow 20% year-over-year. So don't we expect positive results from this operational leverage or perhaps Sinsay is less profitable than other brands. So maybe this is a side effect of this development. Well, here, this is also a good question. We have our internal targets. We also have guidance. So this year, taught us a lot. We are more humble. So that was a really safe level that we can deliver Internally, our appetite is much larger, of course. This leverage is at the level of one so close to EBIT, so zero plus, we would say. But we believe that it's going to be there. So we have these brackets we want to operate in, so the top or low level of the margin, I believe that with such approach, this margin will be noticeable, more noticeable. So within a 2-year perspective, we are going to report that on the regular basis. So you will then be able to update with more recent information. Do we have -- are you planning to have more write-offs regarding the Russian business? No. This PLN 800 million in the backup, we also have information regarding that. So this is the total write-off so as a company, we are going to fight with the Board as well, we are in close contact. We are going to fight back. But for now to make it easier for us, for a discussion, we want to focus on business these days. So we don't want to go back to it every quarter. So this is a total write-off what happens later on, that would be a plus results. So we just wanted to address this topic and talk about likes, improvement, growth investments in new markets. What markets, in your opinion, are the weakest after the third and fourth quarter? I would like to repeat what I said before, Czechoslovakia and Hungary and Ukraine as well. We can assess that from the perspective of like-for-likes with leased dynamics. Ukraine, of course, when the rates and the bombing is increasing, then we also have drops in the sales. Estonia. It's a small market. I also mentioned that before, we can see that in like-for-likes. The priority -- the governmental priority is to focus on the fiscal approach and the taxation. So this result -- this is the situation. What about any potential attacks on your sites in Ukraine? Well, we cannot predict that. We know the operational side. As for our stock, we don't have just one good location. We keep our stock in different locations. So we have a diversity in our approach. This is what we've changed after recent events. Does the financing make it possible for takeovers or maybe you are planning to approach that differently. Refinancing allows us to do much more. But for now, as [indiscernible] of the capital, when we referred to CapEx, these are investment expenditure logistics sense, new stores and the dividend paid to our shareholders. We don't have such M&A ideas. We can see that in '26, we have a lot of data. We need to be flexible in our reaction. So we need to do business. Maybe another comment. We also have such topics or such offers regarding M&A but as LPP, we are generating bigger profit over weekends. So this is not like the scale we would like to look for. We focus on our organic growth. Another two questions refer to the prospects regarding Europe or Great Britain. Do you believe that since the expansion over this market is possible? Or do you plan a significant growth -- better growth of reserved brand in these markets? As for the first question, Sinsay in the West, no, Note that we close our options for us, but we want to focus on the quality. We observe the market. We can see the history as Marek, our CEO, is looking. We are -- draw conclusions. Other companies went there a bit wrong and had to close business and went bankrupt. So the Sense model is designed to be effective regarding OpEx in the West, it's difficult to look for such cost-related effectiveness so that the workforce and lower CapEx. So we focus on Central Europe, Eastern Europe, Central Asia, Southern Europe, this is what we presented in the slide. So these are the regions that we really focus on with our activities. We can see that we have really good returns on investments, 12, 13, 16 months. So below our benchmark much, much faster. And this is what we focus on. So since they -- and Western Europe, this is not the direction that we want to follow these days. As for reserved and other brands commenting much wider. As I said with the strategy with a larger space, reserved needs at least 1,600 meters. It's difficult to find in Western Europe, referring to question regarding Germany or U.K. So in U.K., we needed 10 years for this profitability in Germany. We are still working on it. So when there is a situation favorable for investment. We are going to go for it. But when we have a good location, we are going to consider that. So like the new opening in Oberhausen, this proves that. But whether this is the scale, well, right now, we don't see this potential regarding to the size of the stores. We focus on the growth of reserved basically in online. We can see a significant potential. What is the payback period from investment in robotization? Up to 2 years. And the last question, we answered that, but we want whether this write-off from Russia is going to affect the payment of the dividend. A very good question. Yes. We started with the dividend. So I believe this is the last question regarding Q&A. So we are going to complete with a dividend as well. No, it is not going to affect the dividend. As we communicated, we have resources, but the Board recommendation and the resolution is going to be adopted for the future. But business-wise, the write-off was a noncash write-off. So the reported profit was just adjusted by this write-off. You can go back to the back up and clear net profit is going to be grounds for the payment of dividends. The dividend was on 70% of net profit. Nothing changes here. So this is the level we have resources. We have really comfortable situation of 1.1 leverage, a very good level. So to reiterate about it. No, it is not going to affect the dividend, payout sharing the profits with you. After 9 months, this prospect is really good. Unknown Executive: [indiscernible] on this optimistic note that we are closing meeting. This is the last conference this year. On behalf of the entire LPP Group, we would like to wish you first and foremost, a very healthy, jolly merry Christmas. May this season be the period of relief have from everyday struggles and for next year, we wish you all the best in making your dreams and targets come true, both in your private and business lives. Thank you very much for today, and see you at another results conference that we are planning for spring. Thank you very much. Goodbye.
The reappointment process had always been an under-the-radar administrative process that didn't attract attention—that is until this year.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Costco Wholesale Corporation First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Thank you. I would now like to turn the conference over to Gary Millerchip, Chief Financial Officer. You may begin. Gary Millerchip: Good afternoon, everyone, and thank you for joining us for Costco's first quarter 2026 earnings call. I'd like to start by reminding you that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results, and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time to time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements, except as required by law. Comparable sales and comparable sales excluding impacts from changes in gasoline prices and foreign exchange are intended as supplemental information and are not a substitute for net sales presented in accordance with GAAP. Before we dive into our financial results, I'm delighted to say that Ron Vachris is once again joining me for today's call. I'll now hand over to Ron for some opening comments. Ron Vachris: Thank you, Gary, and good afternoon, everyone. Thank you for joining us today. I'll start with a few brief comments on some of our key growth initiatives before turning it back to Gary to discuss the results of the quarter. In Q1, we opened eight new warehouses, including a relocation in Canada, our third warehouse in France, four net new US locations, and two additional Canadian business centers. This brings our total warehouse count to 921 worldwide. We continue to see significant opportunities for future warehouse growth, both domestically and across the international markets where we operate. While delays with a couple of our buildings in Spain resulted in us revising our planned net new openings for fiscal year 2026 down to 28, we continue to plan for 30 plus net openings per year in future years. We've increased the size of our real estate team to support this goal, and without compromising on quality, we're being creative with real estate projects to further increase the potential for future growth. Recent examples of this include our new warehouse in Moulouse, France, where we converted an old hypermart into a Costco warehouse, as well as two Canadian business centers that opened in the last month, both of which were refurbished home improvement warehouses. This approach broadens our options for market expansion and lowers the capital investment required. In addition to opening net new buildings, we will continue to relocate select high-volume warehouses to larger locations with more parking and expanded gas stations. By doing this, we're able to provide a better experience for our members and significantly accelerate sales growth in those markets. In fiscal year 2026, we have five relocations planned, including three in the US, and one each in Canada and Taiwan. The success of our new warehouse expansion has allowed us to consistently drive top-line revenue well in excess of our comparable sales and gain significant market share. We continue to see improvements in the performance of our new buildings and a reduction in their time to maturity. With fiscal year 2025 openings generating an annualized $192 million per warehouse of sales in the year of opening, that is up from $150 million for new warehouses opened just two years earlier. Turning to digital, our digital vision at Costco is to deliver a seamless experience that builds trust and loyalty with our members both in warehouse and online. We aim to make shopping at Costco easier, faster, and more personal, no matter where or how our members choose to shop. This isn't about technology for technology's sake. It's about using technology to strengthen the fundamentals that make Costco who we are: increasing member loyalty, driving top-line sales, and improving efficiency in our operation so that we can bring goods to market at the lowest possible price. Progress has already begun and is delivering tangible results. In the warehouse, implementation of scanning memberships at entry, the Costco digital wallet, and prescanning small to medium-sized baskets is leading to better member experience and improved productivity. The warehouses that have first adopted this prescan technology have shown checkout speed improvements of up to 20%. And across our US warehouses overall, achieved record levels of checkout productivity in the final weeks of the quarter. Online, we continue to make enhancements to improve the member experience on our site and app. As an example, this quarter, we launched new personalization capabilities that provide members with more relevant product recommendations based on their past search history. The sales lift from this enhancement has been very positive. AI is also being interwoven into our business where we believe it can strengthen our model. Again, we're approaching it in a very Costco way: practical, member-focused, and grounded in tangible business value. An early use case has involved integrating AI into our pharmacy inventory system. This system now compares prescription drug pricing across vendors and autonomously and predictively reorders inventory, improving our in-stocks to more than 98%. This change has played an important role in helping us achieve mid-teen growth in pharmacy scripts filled and has improved margins while lowering prices to our members. We're now in the process of deploying AI tools in our gas business, which we expect will improve inventory management and drive incremental sales by ensuring we're always delivering the best value to our members. These are just a few of the use cases we're developing into our business as we speak. While digital and technology will play an important role in our future, our people are what make Costco special. I'd like to recognize the outstanding work done by our more than 340,000 employees around the world. Their commitment to our company and the Costco experience for our members is what drives our success. I'd like to thank our entire team for their outstanding work this year, especially now during our busiest season. I also wanted to mention that our annual update to Costco's sustainability commitments was made available online earlier this month. This report provides a comprehensive review of the progress we're making towards our sustainability objectives, and I would encourage you to take a look. With that, I'll turn it back over to Gary to discuss the results for the quarter, and I'll jump back on during Q&A to field some questions. Gary Millerchip: Thanks, Ron. In today's press release, we reported operating results for the 2026, the twelve weeks ended November 23. As usual, we published a slide deck under events and presentations on our investor website with supplemental information to support today's press release. Net income for the first quarter came in at $2.001 billion or $4.5 per diluted share, up from $1.798 billion or $4.04 per diluted share the first quarter last year. This year's results include a tax benefit of $72 million or $0.06 per diluted share, relating to stock-based compensation. And last year's results include a tax benefit of $100 million or $0.22 per diluted share also related to stock-based compensation. Excluding these discrete tax items, net income and earnings per diluted share both grew 13.6%. Net sales for the first quarter were $65.98 billion, an increase of 8.2% from $60.99 billion in the first quarter last year. Comparable sales were 6.4%, both before and after adjusting for gas price deflation and FX. Excluding gas sales entirely and adjusting for the impact of foreign exchange, comparable sales were 7.1%. Digitally enabled comparable sales were 20.5% both with and without adjusting for FX. Our segment breakout of comparable sales is disclosed in both our earnings release and the supplemental slide deck. In terms of Q1 comp sales metrics, FX positively impacted sales by approximately 0.1%, while gas price deflation negatively impacted sales by approximately 0.1%. Traffic or shopping frequency increased 3.1% worldwide. And our average transaction or ticket was up 3.2% worldwide, both with and without the impacts of gas price deflation and FX. Moving down the income statement to membership fee income, we reported membership fee income of $1.329 billion, an increase of $163 million or 14% year over year. Adjusting for FX, the increase was also 14%. Last September's US and Canada membership fee increase accounted for a little less than half of membership income growth. Excluding the membership fee increase and FX, membership income grew 7.3% year over year. This was driven by continued growth in our membership base and increased upgrades from gold star to executive membership. At Q1 end, we had 39.7 million paid executive memberships, up 9.1% versus last year. We ended the quarter with 81.4 million total paid members, up 5.2% versus last year and 105.9 million cardholders, up 5.1% year over year. In terms of renewal rates, at Q1 end, our US and Canada renewal rate was 92.2%. And the worldwide rate came in at 89.7%. Both down 10 basis points from last quarter. This slight decline was due to the factors we discussed last quarter and reflects new online members growing as a percentage of our total base renewing at a slightly lower rate than warehouse sign-ups. The decline was less than anticipated due to some early success with targeted communications to expiring members. Our goal is to continue to improve renewal rates by improving engagement with members who signed up digitally. Although for the reasons previously shared, we may still see a slight decline in the overall renewal rate over the next few quarters. Turning to gross margin, our reported rate was higher year over year by four basis points, both with and without gas deflation, coming in at 11.32% compared to 11.28% last year. Core was flat. In terms of core margins on their own sales, our core on core margins were higher by 30 basis points. This increase was broad-based, with nonfoods, foods and sundries, and fresh all higher year over year. Supply chain improvements and an increase in KS penetration benefited margins, as did additional marketing revenue. The improvement in core on core was offset by changes in mix and lapping higher income in our co-brand credit card program a year ago. Ancillary and other businesses' gross margin was higher by seven basis points, primarily driven by pharmacy and hearing aids. LIFO negatively impacted the gross margin rate by three basis points. We had a $1.9 million LIFO credit in Q1 this year, compared to a $19 million credit in Q1 last year. Moving on to SG&A, our reported SG&A rate was higher or worse year over year by one basis point, coming in at 9.6% compared to last year's 9.59%. The operations component of SG&A was higher or worse by one basis point. Our operators did a great job improving productivity and capturing efficiency benefits from the technology investments that Ron referenced earlier. These productivity improvements fully offset wage investments and the impact of extended operating hours and would have created positive leverage in the quarter had we not experienced higher healthcare costs. Central was lower or better by three basis points. This quarter's SG&A also included a charge relating to a tax assessment for prior years, which negatively impacted the rate by four basis points. Below the operating income line, interest expense was $35 million versus $37 million last year. Interest income was $122 million, versus $96 million last year, driven by higher cash balances and FX and other was a $33 million benefit versus a $51 million benefit last year due to lower FX gains. In terms of income taxes, our tax rate in Q1 was 22.5% compared to 22% in Q1 last year. As mentioned earlier, this year's rate benefited $72 million and last year's rate benefited $100 million from annual RSU vestings. Turning now to some key items of note in the quarter. Capital expenditure in Q1 was approximately $1.53 billion. As shared last quarter, we are making additional investments to support a higher number of new warehouse openings, increased warehouse remodels to drive continued growth in existing high-volume buildings, depot network expansion, and digital. We estimate capital expenditure for the full year will be approximately $6.5 billion. Before we take a closer look at core merchandising results for Q1, here are a few fun facts about the holiday selling season so far. Our US food court set a daily record on Halloween, selling 358,000 whole pizzas, an increase of 31% versus last year. Black Friday was a record-breaking day for our US e-business, generating over $250 million in nonfood orders. Our US bakery also set a record in the three days leading up to Thanksgiving, selling 4.5 million pies. That's over 7,000 pies per warehouse over a three-day period. Turning to Q1 merchandising highlights. Our relentless focus on quality, value, and newness continued to deliver market share gains across virtually all departments. Fresh sales were up mid to high single digits, led by double-digit growth in meat. We saw strong growth in higher-cost cuts of beef and even greater unit growth in lower-cost proteins like ground beef and poultry. Bakery experienced high single-digit growth, driven by the introduction of some great new items such as our holiday dessert bars and our crème brûlée bar cake. Nonfoods had comp sales in the mid-single digits. Our buyers continue to do an excellent job finding new and exciting items at great values while also adjusting our assortment to minimize the impact of tariffs. Gold and jewelry, special events, health and beauty were all up double digits. And majors, tires, and small appliances also continue to perform with high single-digit comps. We added a number of new national brand partnerships across a range of nonfood categories in Q1, including Gap and Ulta gift cards, Vera Bradley apparel, and Upper Deck trading cards. Food and sundries comps also grew mid-single digits, with candy and food showing the strongest results. Newness has been driving growth in this category as well, with on-trend items such as Dubai chocolate performing very well. Kirkland Signature continues to grow at a faster pace than overall sales, with KS items typically offering 15 to 20% value compared to the national brand alternative with equal or better quality. In Q1, we launched approximately 45 new KS items, including dry facial daily clean towels, caramelized blueberry croissants, and various apparel items in addition to our latest food court offering, a caramel brownie sundae. As always, our goal is to be the first to lower prices when we see opportunities to do so. A few examples of lower prices this quarter include KS chicken pot pie from $4.29 to $3.99 per pound, KS bacon from $18.99 to $16.99 per packet, KS whipped cream three-pack from $10.49 to $8.99, and KS Walnut's three-pound pack from $14.49 to $12.99. In digital, site traffic in the quarter was up 24%. And app traffic was up 48%. Sales in nonfoods were led by pharmacy, gold and jewelry, tires, small electrics, apparel, and majors, all of which grew double digits year over year. Our same-day delivery service offered in partnership with Instacart in the US and Uber Eats and DoorDash internationally also performed extremely well, growing at a faster pace than our overall digital sales. Strong traffic and sales growth in digital were aided by continued web and app improvements, as well as the introduction of more personalized member communications. We continue to see many opportunities to enhance digital engagement with our members and look forward to sharing progress on future earnings calls. Within ancillary businesses, pharmacy, food court, hearing aids, and optical departments all had strong quarters. Gas comps were low single digits. Gas prices remained slightly deflationary in the quarter, but this was offset by volume growth. Costco Travel is another way in which we deliver unique membership value, and these services continue to resonate well with our members. Our member-only rates for vacation packages, hotels, cruises, and rental cars often lead to hundreds or even thousands of dollars in savings, in addition to the great service provided by our fantastic Costco travel agents. Costco Travel US set an all-time daily sales record on Cyber Monday, before beating that record a day later on December 2. In all, we achieved over $100 million in gross bookings in the US through Costco Travel in the five days following Thanksgiving, up 12% from last year. Turning to inflation, overall, inflation remained relatively consistent with recent quarters. Fresh and food and sundries saw higher inflation in commodities such as beef, seafood, and coffee, but this was offset by lower inflation in eggs, cheese, butter, and produce. In nonfoods, we saw low single-digit inflation for the third consecutive quarter, primarily driven by gold and imported goods. Our buyers continue to do a great job reducing the impact of tariffs for our members. The strategies being deployed to achieve this include changing the country of production for some items, sourcing more items produced in the US, consolidating buying efforts globally to lower the cost of goods across all our markets, and leaning into Kirkland Signature, where we have more control over the supply chain. Additionally, we are changing our item assortment where appropriate. As discussed last quarter, we have a robust and exciting holiday merchandise selection in our US warehouses, this represents a lower number of SKUs than in prior years. In replacement of some tariff-impacted items, our buyers have sourced a number of alternative great value items including seasonal food, health and beauty, and live goods. In many cases, these items are produced in the US and are largely unimpacted by tariffs. The supply chain has remained stable, and our merchants feel very good about our inventory position. By optimizing our inventory flow and reducing some of the higher inventory levels we built up a year ago in the face of greater supply chain uncertainty at that time, we've been able to improve working capital and lower the labor required to manage inventory without impacting in-stocks or sales. Finally, in terms of upcoming releases, we will announce our December sales results for the five weeks ending Sunday, January 4, on Wednesday, January 7, after market close. That concludes our prepared remarks. We'll now open the line up for questions. Ron Vachris: Thank you. Operator: And we'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question. Again, our first question comes from the line of Michael Lasser with UBS. Your line is open. Michael Lasser: Good evening. Thank you so much for taking my question. Ron, one of the observations that the market has is under your tenure, Costco has had a greater willingness to move with speed, embrace technology, and adopt different modes of retail and change a bit more than in the past. Is that a fair conclusion? And given the benefits of these actions that you're taking, which is greater productivity and efficiency, would you be willing to continue to let the financial benefit fall to the bottom line, or do you see a greater need to reinvest back in the business in areas like technology to continue to drive the top line? Thank you very much. Ron Vachris: You're welcome, Michael. You know, technology and bringing it along has been a focus for several years. We've had to spend a couple of years ago, we really focused on our fundamental base systems and our core systems behind the scenes that will allow us to build for the future. And so we're now coming to fruition where we're starting to see the benefits of that hard work of all the backroom systems that we had to build that are now coming to light and coming to the front face for our members. You know, we feel that technology is going to be part of the peak part of our future. I think it's equally as important as all of our other initiatives that we have out there. But we will never succumb to not being the best price and driving prices down for our members. That's what Costco is known for. That will always be our leading mantra. Operator: And our next question comes from the line of Christopher Horvers with JPMorgan. Your line is open. Christopher Horvers: Thanks. Good evening, guys. So a quick follow-up on the latter and then the former question and then a second question. So as you think about results recently, they're strong and absolute standards. I think the market holds you to very high standards. Is there any concern that you see on the traffic side where there's more of an incidence to invest in price? And then secondly, it looks like executive members per week grew at an accelerated pace from 4Q to January. How are you looking at that in terms of the overall benefit of extending the hours both in terms of the lift that you're seeing in sales, and is this also driving accelerated sign-up? Thanks very much. Gary Millerchip: Yeah. Thanks for the questions, Chris. First of all, I guess, your point around sales and overall sort of membership growth in the business, you know, I think from our perspective, we look at it very much over the last really, six to twelve months. And we look at the sort of trends and step back from what we're seeing with the member, there's a lot of consistency. Actually. You know, overall, I think we've shared on the last couple of quarters when we talk about what members are looking for, they're looking for value and, for quality and for newness. And I think we've done a great job. Our buyers and operators did a great job of bringing that to our members. And when you look at month by month, there's definitely been some lumpiness in the individual monthly sales results that we posted. But a lot of that has been to do with it was uncertainty around tariffs one month to another or port strikes that we have to cycle. And if you sort of take a step back and look at the last seven months that we've reported and the last two quarters, you know, our average sales have been around that six and a half percent growth. We had 6.4% comps adjusted for gas and FX in Q4. We had 6.4 Q1 this quarter. And, actually, if you look at every individual month, there was only two months in that last seven months that were outside of the range of six to 7%. So I think sometimes there's a bit of fixation on individual month or or one particular point of data. But, actually, when we look at what we're seeing with the overall sort of patterns of how members are shopping and how they're behaving, seen a very sort of consistent pattern and a consistency in the results. So our goal is to really continue to make sure we're delivering on that value quality, and newness and ensure that we continue to see that that that growth in in membership accounts and in their frequency of visiting, and in the items that they're putting in the basket. And generally, when you look across whether it's nonfoods, food and sundries, and fresh, we've seen consistency in in performance in growing market share in those areas. So we'll continue to focus on making sure we're delivering that value on that value, but feel good about the the overall sort of consistency and the results that we've been seeing. I think from the second part of your question maybe was around executive membership. And I think we've been very pleased with the membership response to the extended operating hours. And also, you may remember, we added $10 per month as an extra benefit for executive members who shop on Instacart. You know, the the the extended opening hours that we did certainly a major benefit for our executive members having an extra hour in the morning on most days to shop the warehouse, but we also added an extra hour on a Saturday evening for all of our members. And if you think about the the the the earlier hours, it often extends the total shopping members in the warehouse. So it spreads out the traffic if you like to make experience better. For all our members. So we felt very positive about the the change that we've seen. It's it's certainly been well received by members. We've seen a a really nice uptick executive upgrades to your point. And, you know, it gets hard to track the the spend uplift because of the further away from the change you go. You know, it it's more difficult to sort of pass the differences that are happening in the impact on sales. But we still think that sort of 1% lift is a was a reasonable kind of view of what we think the impact was. And, of course, as I mentioned earlier, you see sort of different puts and takes that I would sort of I look at our overall sort of sales trends, I think I look at it as it's probably offset some of that cycling of gift cards and gold that we were expecting at this time of year. We've been able to maintain that that overall sales growth even even with those impacts. Christopher Horvers: Thank you very much. Operator: And our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open. Simeon Gutman: Hey, Ron. Hey, Gary. My question is on warehouse openings in the US. I think we're going to get to the highest number something like twenty years next year. So do you do anything different from a membership perspective? I know we're lapping some of the short-term promotions that you did on membership. Is there anything you do different as you approach next year? Ron Vachris: I don't think so. Next year's openings will be a good mix of some infills in established markets, and we still have some opportunities in some new markets. And so, you know, several of the infill locations don't result in a whole lot of sign-ups, but really drive a lot of top-line sales because it really addresses the frequency aspect of things. And then the new market set, we've done several of those this year, and we have a few more slated for next year. Of markets that we may have been a little reluctant to go into. We've got much greater confidence at this point we will we'll garner a much better new sign-up approach in those markets as well. So a lot of, you know, continuing on with what we've done before but, some different different type of scenarios as we move forward in the US. Operator: And our next question comes from the line of Oliver Chen with TD Cowen. Your line is open. Oliver Chen: Hi. Thanks, Ron and Gary. On the technology side, it's been really exciting. As we think about retail media, there are plenty of companies that really wanna work with you deeply on digital advertising. Love your thoughts there. And, also, as you approach the marketplace in a customer-centric way, we love to have your thoughts on that development. And finally, AI and gas. AI has so many applications across the customer experience as well as employees and inventory management. What's on your road map for, how that will innovate your business going forward? Thank you. Gary Millerchip: Thanks for questions, Oliver. Yeah. I'll I'll take the the the retail media question first. Yeah. You know, we talked about retail media a few times now on the calls, and I I definitely, believe that it's a meaningful opportunity for us. You know, I I always like to start the conversation on retail media though to remind everybody that we have a a pretty large you know, alternative profit business that that many other retailers would define that that way today. And, I called out a couple of them on the call today, you know, outside of financial services, we have a large travel business. We have a a traditional sort of media revenue business that we we generate meaningful dollars today, and both of those were actually travel and and the sort of marketing and media revenue were tailwinds to our business in the quarter. So those a number of strengths that we we have today in that space that are part of our model that I think showed through in ability to keep investing in the member and still expanding our our operating margins during the quarter. You know, that being said, we think of retail leaders as slightly opportunity from those because it really is about tapping into that marketing spend that many of our suppliers are investing in other places to to, you know, to to drive their marketing awareness and drive return on ad spend. We are in the in the early innings. I was still say of retail media. We've been building out, as Ron alluded to earlier, the the sort of data and tech platform that allows us to execute personalization at scale. And I think for us, the first priority with personalization is to deliver a better member experience. To deliver more targeted relevant messaging so we drive more items in the basket, more visits to the warehouse, more visits online. And as you do those things, it just creates an even more compelling value proposition for our media partners While we're building and executing on that capability, we've been introducing some media activity on third party sites. So think of that as being you may have seen, you have the Costco auto program that will run on digital TV, and we've done some targeted MVM amplification campaigns with some of our CPG partners that have been very successful as well. We also launched advertising on our gas pumps as a new channel for us as well around new media opportunities. So so I think the headlines would be we're seeing some early success, but it's still very much know, an opportunity in the future on the road map for us. And bit like Ron mentioned earlier, you know, is all all of our focus is on how to drive more value for the member. So as you might expect, the vast majority of the value create here will reinvest in the member to drive down prices and value and and increase sales. And actually think that's a real advantage with the the the national brand partners that we work with on media because they know that we're committed to really driving the flywheel and driving growth in their overall business. Ron Vachris: And and on the AI front, we're extremely excited about what the future holds for us. I mean, we see many opportunities that that are really business driven, and tangible have great tangible business value for us. And you look at things like our procurement system as we are a global retailer, we buy from around the world, as well as supply chain, what it can do there, and just the tools that we've seen that this has improved our employees' work abilities. And their skill sets as well as they do their day to day work. So we see a lot of value. We're very excited about the journey. We look at it in a two phase approach that concurrently gonna be focusing on member facing, how do we improve the experience for the member through AI, and then business in basics. How do we continue to focus on the business basics? Know, our our mantra is bring goods to market at the lowest possible price. And we think AI has a great asset to that and it really can help us become a much better merchant out there. Oliver Chen: Best regards. Happy holidays. Thank you. Ron Vachris: Thank you. Operator: And our next question comes from the line of Chuck Grom with Gordon Haskett. Your line is open. Chuck Grom: Gary. Hi, Ron. Nice quarter. In your annual report, your your sales waterfall chart is is impressive. The class of '25, $192 million in sales versus $150 million in in 2023. Can you help us think about the opportunity to continue to expand on this front and the steps you're taking to continue to improve productivity within the store? Ron Vachris: You know, we see we see a good horizon on expansion. You know, we continue to the creativity. I mentioned just a couple of examples of things that we're doing differently. We've got a project in Los Angeles where we're working with some developers that there's some affordable housing going above Costco just north of LAX. That project will open up in 2027. That would be a market that we could it's Baldwin Hills is where it's called. That would be a market we would never be able to go into and find 25 acres to build a Costco It just wouldn't happen. So we're finding creative ways to get closer to our members and relieve some pressure from some of our highest volume locations, And, again, like I said, we continue to see some opportunities in markets that we would have questioned in the past due to maybe some competition is there. But we're feel much stronger is going in and attacking these markets. So you know, I like I said in the early opening remarks, good runway for 30 plus locations as we look forward for the next few years for sure. And a good combination of both, both type of openings. And international still presents some very good strengths for us. In our recent Sweden opening, our our second location in Sweden. Our third in France, and we've got quite a few in Asia that are upcoming as well. So we feel really strong about our future expansion. Gary Millerchip: Shubh, I think on the point on on the growth per where, I think Ron's final point there is a really important one around the balance that we're able to get. So we find with many of The US and Canada warehouses where we're filling in, we can accelerate the sales very quickly because Costco is known. We're we're sort of filling capacity where maybe there's some very busy warehouse around. So it really helps the economic model with getting returns from the quick acceleration in sales growth. And then in the international markets or places where we have less penetration of warehouses, it really drives a significant increase in new member count. So it's nice to have a balance between those two. The the returns a little bit different in how you get there, but they both generate strong return on investment. In in different ways, and they create a nice balance in the business overall as we grow. Chuck Grom: Great. Operator: Thanks. And our next question comes from the line of Kate McShane with Goldman Sachs. Your line is open. Kate McShane: Hi. Good afternoon. Thanks for taking our question. The renewal rate The renewal rate softness sounded better than what you had expected. Could you maybe talk to some of the things you did to try and offset the softness from the more digital members? Gary Millerchip: Sure. Yeah. Well, you you're exactly right. You know, when we talked about the, membership renewal rate last quarter, we'd shared that as a result of this change in mix around us adding more new digitally engaged members or signing up digitally to become a member. What we what we've always seen with that group is that they're generally a bit younger, And, generally speaking, renew at a slightly lower rate. That that's always been true, but there's a bigger number of them now coming into the base. So as they flow into the math model, it was impacting the overall renewal rate. And so I think you may have heard us talk last quarter. We said we we think of while while that's sort of a a a mathematical fact, we think there are opportunities for us to be able to change that outcome by delivering more targeted and relevant communication to those members that are have signed up digitally and are reaching that point in maturity where they're considering whether to renew or not to renew their their membership with us. And so our membership team is really focused on delivering targeted relevant messaging to engage those members to ensure continue to see the value of the membership and and really helping them see why there's significant value for them to continue to be members. And what you saw in this quarter was that really some of the early work the team's done to engage those members and improve the renewal rate. And, obviously, it's it's early days, so we wanna make sure that we can continue to build that momentum, but it's been encouraging to see the impact of those changes and we were expecting based on purely flowing through the the sort of the renewal rate that we've seen before to see a slightly higher decline in the quarter and we were able to offset a part of that with the changes that we made in communication with members. Thank you. Operator: And our next question comes from the line of Peter Benedict with Baird. Your line is open. Peter Benedict: Oh, hey, guys. Thanks for thanks for taking the question. I wanna ask about digital. Maybe if there's any metrics you guys can share with the success you're having, maybe the how many what percentage of the member that's engaging with you digitally now versus before? I don't think I I may have missed it, but any stats around Costco logistics how you're doing with with delivery there? Thank you. Gary Millerchip: Sure. Thanks for the question, Peter. Yes, we haven't typically talked about percentage of members that are engaging with digitally. It it does continue to, to grow as you might imagine as we're continuing to make enhancements to the website, to the app, and really as we're delivering more relevancy to members through those channels. And so we are continuing to see growth. We did share the prepared remarks that traffic was up 24% during the quarter on the the website, and it was up even higher than that in the 40% plus range on the app during the quarter. So we we continue to be pleased with the momentum that we're seeing in, in digital engagement with our members, and our expectation would be that digital sales as we define it would continue to grow at a fast pace over the longer term. Than our average sales overall as as more members engage digitally, and we're able to use some of those targeted personalized communication tools to really help members see the relevancy of of all the offers that we have online also to use those channels to help drive higher engagement into the warehouse as well and really creating seamless experience across the channels. Ron Vachris: Very excited about what we have coming in the app. I mean, more engagement, more lock in. The brick and mortar business with the virtual digital business as well. And, as we as we continue to roll out enhancements, we've got pay ahead for the pharmacy coming We've got ordering cakes and and deli trays online coming. Many of the things that we've heard from our members that could be a little bit clunky are now moving to a digital state, and we're seeing great adoption right out of the chute. So we continue to we see some upside to the continued growth and the digital value of having the app and using the digital membership card, the Costco wallet, those things have all got a very nice road map the next twelve months. We see that number is gonna hopefully continue to outpace the growth of the warehouse. Gary Millerchip: Thank you. Operator: And our next question comes from the line of John Heinbockel with Guggenheim. Your line is open. John Heinbockel: So hey, guys. So two two real estate questions. Lot of opportunity internationally. What does the pipeline look like? Both in some of your European countries and Asia? I know it takes takes a while. And then secondly, you you mentioned remodels. Which I don't think you you you haven't talked about too much. What is the remodel philosophy in The US How many do you do What's the what's the extent of that What's the lift? Know, I don't know how how impactful that is. Thank you. You wanna oh, I can start. You know, a good good runway internationally We see some good growth in Europe, especially in Spain and The UK. We have got a lot of good things going on there, and we see that those two countries will be ramping up. We we continue to see very, very good strength in Asia. And so that market, we see the next five years that we think that those projects do, like you mentioned, do take a little bit longer. They're gonna start coming to fruition. So we'll see a good balance. It we've been about fifty fifty half of the expansion in The US and half outside of The US. And now we're we're seeing even more opportunities in Canada and North America and and Mexico. So a good balance. About half of the 30 should be outside The US we see in the next five years. Expansions and relocations, we'd normally do about five to six relocations a year. The uplift is dramatic. When we do these, we normally are moving a building that is you know, underserving the market and and goes into a larger facility, better parking, If we have a gas station, expanded gas, or we add gas to it, And and a a a variety of uptake to extreme 50, 60% increases when you add a gas station and really add a lot of parking. To 20% uplift to a building that had everything just got into a better facility. So we strategically look at that And then we are continuously investing in our current warehouses too. To make sure that we're updating the fresh foods areas. We're bringing the new ancillary businesses in there. So it's a it's a a process we go through every year of planning ahead. And we look out several years in a good combination of all three. New, locations, relocations, and taking care of the existing buildings that we're doing business in as well. Gary Millerchip: Thank you. Operator: And our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open. Rupesh Parikh: Afternoon. Thanks for taking my questions. So I just want to go back to the comments on SG and A leverage. So it sounds like this quarter higher health care costs prevented your team from leveraging costs. So just curious about the dynamics there. And then as you think about productivity, how do you think about the runway there? It sounds like a could continue for a few more quarters. Thank you. Gary Millerchip: Yes. Thanks for the question, Rupesh. Yes. You've summarized it pretty well actually from how we looked at the quarter. If I just take a step back, there were kind of four main sort of headwinds or investments, if you like, that we had during the quarter. When you think about the impact on the warehouses. The first, of course, is the investments that we make through our employee agreement each year. So was the March 25 agreement, and that on an incremental basis was sort of mid single digits headwind that the team had to kind of overcome in in improving productivity. The second was, of course, the extended operating hours that we implemented in June. And then you mentioned it that we had higher health care costs in the quarter. It We we we've generally seen, of course, health care costs increasing. This was perhaps the first quarter where we've seen health care costs grow at faster pace than our sales. So we saw a little bit of a headwind overall from health care costs in the quarter. And then we also had the four basis point impact from the the tax charge that relates back to multiple years ago that we we took during the quarter as well. So overall, we were one basis point negative on productivity. If if we'd have not had the the sort of sales and use tax charge that we had during the quarter, And without the health care costs, we'd have been sort of a mid single digit or so positive leverage during the quarter. Without those sort of factors. Now I would say as you look forward, you know, we we're still gonna have, of course, the the the the continued investment that we've we've already implemented around wages. So we have to continue to support those costs. We've implemented the extended opening hours We think the operator did a great job of of absorbing that as you've seen the last couple of quarters. The health care costs, you know, that's something we're taking action to make sure that we're comfortable with the trends that we're seeing. But, of course, there's possibilities those costs could continue to be to be higher in the future. We wouldn't expect to have the sort of the the four basis point impact that we had from from tax. So when I think when you take all those things and and look at it going forward, know, if historically said that we need to get to about mid single digit sales to be able to leverage SG and A. And I think with the the work the team's done to offset extended operating hours, the the work the team's done to offset the employee agreement. I think we're in that kind of ballpark. And actually in the in the first quarter, have we not have had the the adjustment for sales tax? I think we do we'd have actually seen some leverage during the quarter. So I think that's the way to sort of think about it overall. Rupesh Parikh: Great. Thank you, Bhaskar. Operator: And our next question comes from the line of Greg Melich with Evercore ISI. Your line is open. Greg Melich: Hi. Thanks. Gary, think you you mentioned that in was running similar. I just wanted to make sure I got the the numbers right. It was it was up low single digits in general merchandise. Was was food in inflationary or not in the quarter? And and how do you see that trending? Gary Millerchip: Yeah. Food and and fresh. Food and some reason fresh, Greg, would have been slightly inflation, so low single low to mid single digit. No real change really from last quarter. There there are quite a few puts and takes in there, as I mentioned in the prepared comments that you've got a few of the commodities that would be inflationary right now when you look at items like beef and seafood and coffee. But then you've got produce, which is deflationary currently, and there are other items like eggs and cheese, which are still inflationary year over year, but at lower inflation than they were earlier in the year. So you've got kinda puts and takes that are offsetting each other, which really essentially sort of leveled it all out at the same level as it was the last couple of quarters. Greg Melich: It would it be fair to say that most of the ticket growth in comp was driven by inflation? Gary Millerchip: I think there'd be a combination of both in there. We have know? And and I remember for us, there's inflation for us the way we measure it would be it could be the members buying a bigger pack size or it could be the members buying an upgraded item of a newest electronic or appliance. So I think you kinda have to look at it. There's there's sort of probably a comb or there is a combination of some level of natural inflation on like for like items, some level of inflation of members buying bigger pack sizes, and increasing you know, the moving to the newer model if you like, and then some level of unit growth as well in there. Greg Melich: Got it. That's great. Good luck, and have a great holiday. Gary Millerchip: Thank you. You too. Operator: And our next question comes from the line of Edward Kelly with Wells Fargo. Your line is open. Edward Kelly: Wanted to dig into total pay members. You've had remarkable growth over the last you know, few years. Model's obviously resonated, and 5%, you know, this quarter is still very good. But it has slowed a little over the last few quarters. I was wondering if you could just maybe discuss, you know, what you're seeing there Is that more so in The US? Then have you seen any stabilization in that? I think the math would kinda suggest that maybe know, exit rate lower than 5.2. So just thoughts there. Thank you. Gary Millerchip: Yeah. Thanks, Ed. Yeah. You know, our membership, as you mentioned, in general, we've been really pleased with the results that we've seen in the quarter with the the new members and the younger population that we're recruiting. The acceleration in upgrades, and overall growth that you mentioned just over 5% in exec up nine. So we're we're pleased with the results that we've seen I think your point's accurate that if you look at the the year over year growth, it has slowed a little bit from where it's been over the last couple of years. And I think some of that's just starting to cycle some strong growth in the last year or so. But we still feel really good about the health of the the membership growth. And we think there's a lot of continued opportunities to maintain that growth in the future. I know Ron mentioned a few of them in one of the questions we answered earlier, but with know, partly with the existing warehouses that we're I think we're in a good position where every year, we've been opening 20 to 30 warehouses, and we can see the maturity curve of the increase in the number of members that sign up as as warehouses mature. We we're obviously opening new warehouses each year, and in particular, to your point in international, we tend to see a much higher number of of new member sign ups and there's that mix. Continues to blend out to to sort of closer to fifty fifty between international and The US. We do think with the actions that we're taking, as I mentioned, also earlier on the call around improving renewal rates, as an opportunity to, you know, to help, that that trend as well. And then, you know, we're we're committed to continuing to improve the value of the membership We've made obviously some major changes recently with the extended opening hours and the Instacart benefits and 5% gas on the credit card, but we'll we'll continue to look for ways to add greater membership value. So I think it's accurate to say that it's a little bit slower than it has been, but we feel good about the momentum and the opportunity to continue to grow. Edward Kelly: Thank you. Operator: And our next question comes from the line of Jiang Ma with Bernstein. Your line is open. Jiang Ma: Hi. Thank you for taking my question. So on the nonfood side of things, I think your comp is now in the mid single digit percentage range. Can you just update us on when you expect to unlet the tough comps from the gift card sales And does that timing coincide with the tax refunds or the incremental ones that consumers are gonna get, especially middle to higher income consumers early next year? Will you start to see some more outsized benefit in that category? Thank you. Gary Millerchip: Yeah. I think in overall, we generally don't provide sort of comments on on forward looking what we would expect. I think what we would say around nonfoods is that the team's done a great job of continuing deliver exciting items of great value and and quality. And we see while we have I think your comment is accurate that the the growth year over year has come down to to low double digits into that mid single digit range. And I think you've you've heard us mention before and you referenced it that some of that really is starting to cycle the impact of gold being sold in warehouse and online and also of the gift card programs that we had last year. But overall, we still see good market market share gains in in really pretty much all of the non food categories. And we saw may have heard us mention in the prepared comments that golden jewelry, special events, health and beauty were all double digits. We also saw high single digit growth in majors, in tires, and small appliances, and didn't mention apparel during the the call earlier, but that's also showing really strong improvement in in sales momentum and and comp growth as well. So I think our our perspective on nonfoods is that we think our teams are doing a really good job in delivering great value for the member, and we think we have a a clear path to continue to grow our market share in in nonfoods by continuing to deliver on that promise to our members, and that's really where our focus is. Jiang Ma: K. Thank you. Happy holidays. Gary Millerchip: Happy holidays. Thank you. Operator: And our next question comes from the line of Scott Ciccarelli with Truist Securities. Your line is open. Scott Ciccarelli: Good afternoon, guys. Thanks for the time. I guess another question on warehouse expansion. What are your latest thoughts around long term warehouse potential both in The US and in total? And then second, I think all of the lower price examples you gave were Kirkland products. So are most of your heaviest price investments on your private brand products? Thanks. Gary Millerchip: Yeah. On the first part of the question, Scott, I think Ron briefly alluded to it earlier as well. You know, we tend to look five to ten years out in terms of our real estate plans and we would still see a really good roadmap for 30 plus warehouses a year is the goal that we have at least achieving 30 new warehouses a year. The goal that we set for ourselves. And when we look at that five to ten year plan, we see opportunities for growth in all the markets and geographies that we're operating in today. So generally speaking, we're expecting around half, maybe slightly over half to be in The US And then just around half to slightly under a half to be in the rest of the markets that we operate in. So think of that being Canada, Mexico, Europe, Asia, Australia. Across those different markets. And and I wouldn't say it's you know, one specific geography. It's really fairly well spread across those markets continue to build our presence in each of those different geographies. The second part of your question around around Kirkland Signature, you know, I I think it's more a reflection of, you know, we tend to have a, obviously, a very strong understanding of the cost involved in in those items, and we we want to be always the first to lower prices for our members and the last to increase them. And so buyers in our in our category managers who look at those items whenever we see an opportunity either to work with our partners or to find ways to buy more effectively want to be looking for those opportunities. So in most of those cases, that's us really working very closely with our suppliers to look at what we're seeing in the cost base and working creatively to either increase buying globally so that we can improve our economies of scale or looking at ways to operate more efficiently without ever compromising on the quality of the and those would be all great examples of where our teams really looked and and found opportunities to to bring down the price and increase the value for our members. Scott Ciccarelli: Thank you, and happy holidays. Ron Vachris: Happy holidays. You too. Operator: And our next question comes from the line of David Bellinger with Mizuho. Your line is open. David Bellinger: Regarding the personalization efforts, those seem to be working pretty well early on. How much further does that have to roll out? Is it hitting every number at this point? And any specific examples you can share on the the conversion or the fills up with that some of these personalization changes are helping with today? Gary Millerchip: Yeah. We've been we have been pleased as you heard Ron mention in the comments around the progress that we made on personalization where we really are now starting to use our data to look for ways. How can we really make the experience better for the member? How do we improve the convenience for them? How do we help them see the most relevant messages that help them get to the best value from Costco. You know, I I still think there's plenty of road map and opportunity for us to continue to improve. First of all, you know, we're we're relatively early on the journey, so we're learning what do our members really like, where are the places we can fine tune and improve those those communications and the the places in which they show up. I still think there are there are a number of elements on our road map where we still see parts of the experience that our members have that we can make that personalization more relevant, whether that's the, you know, the the the items and the order in which they see among things like the MVM or whether it's way in which we deliver email communication to our members. So we still see a really strong runway to continue to improve. We don't really talk about metrics. I think our focus is much more on how we're driving overall member experience and top line sales. So some of these things are intended to improve the way the members are able to engage in our warehouses or the way they're able to buy online. So tend to look at it more of, is it is it driving an improvement in member engagement, and is that helping drive our digital sales, which we continue to expect to grow at a faster pace overall than our than our warehouse business, and is it driving more member engagement overall? And we've been really pleased with the results so far on that journey. David Bellinger: Great. Thank you. Operator: And our next question comes from the line of Kelly Bania with BMO. Your line is open. Kelly Bania: Hi. Thanks for taking our question. Hoping to go back to the topic of of renewal rates a little bit. I know you don't prefer to guide or or forecast, but I think you did say, Gary, we might see still a decline in the renewal rates the next few quarters. So I was just wondering if that's a little bit of conservatism because sounds like you are having some success on on mitigating that dynamic. Wondering if you could comment on that. But also, if you were to pull out that that cohort of of those younger consume members, would the membership rates be improving, excluding that, or can you share any, you know, of a deeper dive on on that renewal rate dynamic? Gary Millerchip: Sure. Yeah. It really the Kelly, the the impact that we've been talking about really is attributable to this phenomena that I've mentioned on the call earlier around as we add in and it sounds like you fully understand the sort of concept of of what's happening with the membership base overall. But as we've brought more of these digitally signed up members who are generally younger that just they they do renew a lower rate. So really, the the impact that we've talked about the last few quarters on renewal rate is is a function of of those members moving into the renewal rate overalls. That really is what's driving the or what has driven the the slight decline that we've seen over recent quarters. To your point, our goal obviously is to to arrest that decline as quickly as possible. And certainly, we're we're encouraged by what we saw last this last quarter with the improvements that we made through the more targeted and relevant communication to members who we we know have signed up through that channel. So we're very encouraged by what we've seen so far. Our goal is to you know, to to stop that decline and to to to reverse that decline as quickly as we possibly can. As we're only one quarter into the change that we made, we wanted to flag that, of course, you know, there's still work to be done there. And you know, we are still at a lower renewal rate on digital sign ups than we are on warehouse sign ups. And so our expectation of ourselves is to close that gap as quickly as but we wanna be transparent in all that we share that there's still work for us to do. And and and, you know, and and there is a possibility the next couple of quarters could still show a slight decline because of the factors that I've mentioned in prior calls. Kelly Bania: Super helpful. Thank you. Gary Millerchip: Thanks, Caddy. Operator: And our final question comes from the line of Spencer Hamas with Wolfe Research. Your line is open. Spencer Hamas: Good evening. Thanks for the question. Just curious if you could talk about the cadence of comps you saw through November and then into December. And how that's informing how the consumer is holding up heading into the holiday from your vantage point? And then you're any trade down or divergence in performance by customer cohort that is changing how you guys are buying? Gary Millerchip: Yeah. I think so. Thanks for the question. I think we don't obviously get into talking about specifically our current quarter because we report our sales on a monthly basis. But overall, I would say we're seeing relative consistency in how our members are shopping. I mentioned it earlier that we've you know, we have seen month to month some I call it bumpiness if you like in the in the sales, but most of that's been attributable to whether it's cycling port strikes or consumer uncertainty one month with tariffs and then the sales come back the next month. And if we look at the last six months or so outside of the you know, the two things that I I mentioned around you know, we've seen continued strong growth in nonfoods and market share gains, but we have seen a deceleration in nonfoods. And I think that that's really been offset when you look at the total comps by the benefit we've seen from extended operating hours. But net net, you know, really in that sort of six and a half percent range when you look at the last two quarters over the last seven months, really. Outside of a couple of months being one slightly above and one slightly below that six to 7% growth range, and and those months are right next to each other. So when you average out the two, they came in at six and a half as well. We've been really in that consistent range. So nothing that we'd call out that we're seeing as a change other than the two factors I just mentioned in terms of member behavior and the way in which we believe our value is resonating with them. Spencer Hamas: K. Got it. Operator: And ladies and gentlemen, that concludes our question and answer session and today's call. We thank you for your participation, and you may now disconnect.
Ji Yoo: Welcome to Broadcom Inc.'s Fourth Quarter and Fiscal Year 2025 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ji Yoo, Head of Investor Relations of Broadcom Inc. Thank you, Sherry, and good afternoon, everyone. Joining me on today's call are Hock Tan, President and CEO, Kirsten Spears, Chief Financial Officer, and Charlie Coaz, President, Semiconductor Solutions Group. Broadcom distributed a press release and financial tables after the market closed describing our financial performance for the fourth quarter and fiscal year 2025. If you did not receive a copy, you may obtain the information from the investor section of Broadcom's website at broadcom.com. This conference call is being webcast live, and an audio replay of the call can be accessed for one year through the Investors section of Broadcom's website. During the prepared remarks, Hock and Kirsten will be providing details of our fourth quarter and fiscal year 2025 results, guidance for 2026, as well as commentary regarding the business environment. We will take questions after the end of our prepared comments. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. In addition to U.S. GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today's press release. Comments made during today's call will primarily refer to our non-GAAP financial results. I'll now turn the call over to Hock. Hock Tan: And thank you everyone for joining us today. Well, we just ended our Q4 fiscal 2025. And before I get into details of that quarter, let me recap the year. In our fiscal 2025, consolidated revenue grew 24% year over year, to a record $64 billion, driven by AI semiconductors and VMware. AI revenue grew 65% year over year to $20 billion, driving the semiconductor revenue for this company to a record $37 billion for the year. In our infrastructure software business, strong adoption of VMware Cloud Foundation, or VCF as we call it, drove revenue growth of 26% year on year to $27 billion. In summary, 2025 was another strong year for Broadcom. And we see the spending momentum by our customers for AI continuing to accelerate in 2026. Now let's move on to the results of our fourth quarter 2025. Total revenue was a record $18 billion, up 28% year on year and above our guidance on better than expected growth in AI semiconductors as well as infrastructure software. Q4 consolidated adjusted EBITDA was a record $12.12 billion, up 34% year on year. So let me give you more color on our two segments. In semiconductors, revenue was $11.1 billion as year on year growth accelerated to 35%. This robust growth was driven by AI semiconductor revenue of $6.5 billion, which was up 74% year on year. This represents a growth trajectory exceeding 10 times over the eleven quarters we have reported this line of business. Our customer accelerated business more than doubled year over year as we see our customers increase adoption of XPUs, as we call those customer accelerators, in training their LLMs and monetizing their platforms through inferencing APIs and applications. These XPUs, I may add, are not only being used to train and inference internal workloads by our customers. The same experience in some situations has been extended externally to other LLM peers. Best exemplified at Google where the TPUs used in creating Gemini are also being used for AI cloud computing by Apple, Cohere, and SSI as a sample. The scale at which we see this happening could be significant. As you are aware, last quarter, Q3 2025, we received a $10 billion order to sell the latest TPU ironwood racks to Anthropic. This was our fourth custom. That we mentioned. In this quarter Q4, we received an additional $11 billion order from this same customer for delivery in late 2026. But that does not mean our other two customers are using TPUs. In fact, they prefer to control their own destiny by continuing to drive their multiyear journey to create their own custom AI accelerators or XPU RECs as we call them. I am pleased today to report that during this quarter, we acquired a fifth XPU customer through a $1 billion order placed for delivery in late 2026. Now moving on to AI networking. Demand here has even been stronger as we see customers build out their data center infrastructure ahead of deploying AI accelerators. Our current order backlog for AI switches exceeds $10 billion as our latest 102 terabyte terabit per second Tomahawk six switch, the first and only one of its capability out there, continues to book at record rates. This is just a subset of what we have. We have also secured record orders on DSPs, optical components like lasers, and PCI Express switches to be deployed in AI data centers. All these components combined with our XPUs bring our total order on hand in excess of $73 billion today, which is almost half Broadcom's consolidated backlog of $162 billion. We expect this $73 billion in AI backlog to be delivered over the next eighteen months. In Q1 fiscal 2026, we expect our AI revenue to double year on year to $8.2 billion. Turning to non-AI semiconductors, Q4 revenue of $4.6 billion was up 2% year on year and up 16% sequentially based on favorable wireless seasonality. Year on year, broadband showed solid recovery. Wireless was flat. All the other end markets were down as enterprise spending continued to show limited signs of recovery. Accordingly, in Q1, we forecast non-AI semiconductor revenue to be approximately $4.1 billion, flat from a year ago, down sequentially due to wireless seasonality. Let me now talk about our infrastructure software segment. Q4 Infrastructure Software revenue of $6.9 billion was up 19% year on year, both and above our outlook of 6.7. Bookings continued to be strong, as total contract value booked in Q4 exceeded $10.4 billion versus $8.2 billion a year ago. We ended the year with $73 billion of infrastructure software backlog, up from $49 billion a year ago. We expect renewals to be seasonal in Q1 and forecast infrastructure software revenue to be approximately $6.8 billion. We still expect, however, that for fiscal 2026, Infrastructure Software revenue to grow low double-digit percentage. So here's what we see in 2026. Directionally, we expect AI revenue to continue to accelerate and drive most of our growth. Non-AI semiconductor revenue to be stable. Infrastructure software revenue will continue to be driven by VMware growth at low double digits. For Q1 2026, we expect consolidated revenue of approximately $19.1 billion, up 28% year on year. We expect adjusted EBITDA to be approximately 67% of revenue. With that, let me turn the call over to Kirsten. Kirsten Spears: Thank you, Hock. Let me now provide additional detail on our Q4 financial performance. Consolidated revenue was a record $18 billion for the quarter, up 28% from a year ago. Gross margin was 77.9% of revenue in the quarter, better than we originally guided on higher software revenues and product mix within semiconductors. Consolidated operating expenses were $2.1 billion, of which $1.5 billion was research and development. Q4 operating income was a record $11.9 billion, up 35% from a year ago. Now on a sequential basis, even as gross margin was down 50 basis points on semiconductor product mix, operating margin increased 70 basis points sequentially to 66.2% on favorable operating leverage. Adjusted EBITDA of $12.12 billion or 68% of revenue was above our guidance of 67%. This figure excludes $148 million of depreciation. Now a review of the P&L for our two segments. Starting with semiconductors. Revenue for our Semiconductor Solutions segment was a record $11.1 billion with growth accelerating to 35% year on year driven by AI. Semiconductor revenue represented 61% of total revenue in the quarter. Gross margin for our Semiconductor Solutions segment was approximately 68%. Operating expenses increased 16% year on year, to $1.1 billion on increased investment in R&D for leading-edge AI semiconductors. Semiconductor operating margin of 59% was up 250 basis points year on year. Now moving to infrastructure software. Revenue for Infrastructure Software of $6.9 billion was up 19% year on year and represented 39% of total revenue. Gross margin for infrastructure software was 93% in the quarter compared to 91% a year ago. Operating expenses were $1.1 billion in the quarter, resulting in Infrastructure Software operating margin of 78%. This compares to operating margin of 72% a year ago reflecting the completion of the integration of VMware. Moving on to cash flow. Free cash flow in the quarter was $7.5 billion and represented 41% of revenue. We spent $237 million on capital expenditures. Day sales outstanding were thirty-six days in the fourth quarter, compared to twenty-nine days a year ago. We ended the fourth quarter with inventory of $2.3 billion, up 4% sequentially. Our days of inventory on hand were fifty-eight days in Q4, compared to sixty-six days in Q3 as we continue to remain disciplined on how we manage inventory across the ecosystem. We ended the fourth quarter with $16.2 billion of cash, up $5.5 billion sequentially on strong cash flow generation. The weighted average coupon rate in years to maturity of our gross principal fixed rate debt of $67.1 billion is 4% and 7.2 years, respectively. Turning to capital allocation. In Q4, we paid stockholders $2.8 billion of cash dividends based on a quarterly common stock cash dividend of $0.59 per share. In Q1, we expect the non-GAAP diluted share count to be 4.97 billion shares excluding the potential impact of any share repurchases. Now let me recap our financial performance for fiscal year 2025. Our revenue hit a record $63.9 billion with organic growth accelerating to 24% year on year. Semiconductor revenue was $36.9 billion, up 22% year over year. Infrastructure software revenue was $27 billion, up 26% year on year. Fiscal 2025 adjusted EBITDA was $43 billion and represented 67% of revenue. Free cash flow grew 39% year on year to $26.9 billion. For fiscal 2025, we returned $17.5 billion of cash to shareholders in the form of $11.1 billion of dividends and $6.4 billion in share repurchases and eliminations. Aligned with our ability to generate increased cash flows in the preceding year, we are announcing an increase in our quarterly common stock cash dividend in Q1 fiscal 2026 to 65¢ per share, an increase of 10% from the prior quarter. We intend to maintain this target quarterly dividend throughout fiscal 2026, subject to quarterly board approval. This implies our fiscal 2026 annual common stock dividend to be a record $2.60 per share, an increase of 10% year on year. I would like to highlight that this represents the fifteenth consecutive increase in annual dividends since we initiated dividends in fiscal 2011. The board also approved an extension of our share repurchase program of which $7.5 billion remains, through the end of calendar year 2026. Now moving to guidance. Our guidance for Q1 is for consolidated revenue of $19.1 billion, up 28% year on year. We forecast semiconductor revenue of approximately $12.3 billion, up 50% year on year. Within this, we expect Q1 AI semiconductor revenue of $8.2 billion, up approximately 100% year on year. We expect infrastructure software revenue of approximately $6.8 billion, up 2% year on year. For your modeling purposes, we expect Q1 consolidated gross margin to be down approximately 100 basis points sequentially, primarily reflecting a higher mix of AI revenue. As a reminder, consolidated gross margins through the year will be impacted by the revenue mix of infrastructure software and semiconductors and also product mix within semiconductor. Expect Q1 adjusted EBITDA to be approximately 67%. We expect the non-GAAP tax rate for Q1 and fiscal year 2026 to increase from 14% to approximately 6.5% due to the impact of the global minimum tax and shift in geographic mix of income compared to that of fiscal year 2025. That concludes my prepared remarks. Operator, please open up the call for questions. Operator: Thank you. Due to time restraints, we ask that you please limit yourself to one question. Please stand by while we come to our first question. Vivek Arya: Our first question will come from the line of Vivek Arya with Bank of America. Your line is open. Hock Tan: Thank you. Just wanted to clarify, Hock, you said $73 billion over eighteen months for AI. That's, you know, roughly $50 billion plus for fiscal 2026. For AI. I just wanted to make sure I got that right. And then the main question, Hock, is that there is sort of this emerging debate about customer-owned tooling. You know, your async customers potentially wanting to do more things on their own. How do you see your XPU content and share at your largest customer evolve over the next one or two years? Thank you. Hock Tan: Well, to answer your first question, what we said is correct that as of now, we have $73 billion of backlog in place, account of XPU switches, DSPs, lasers, for AI data centers that we anticipate shipping over the next eighteen months. And obviously, this is as of now. I mean, we fully expect more bookings to come in over that period of time. And so do not take that $73 billion as that's the revenue we ship over the next eighteen months. Just saying we have that now, and then the bookings have been accelerating. And frankly, we see that bookings not just in XPUs, but in switches, DSPs, all the other components that go into AI data centers. We have never seen bookings of the nature that what we have seen over the past three months. Particularly, with respect to Taiwan six switches. This is one of the fastest-growing products in terms of deployment that we have ever seen. Of any switch product that we put out there. It is pretty interesting. And partly because it's the only one of its kind out there at this point. At 102 terabit per second. And that's the exact product needed to expand the clusters of the latest GPU and XPUs out there. No. That's great. But as far as what is the future as XPU is your broader question. My answer to you is do not follow what you hear out there as gospel. It's a trajectory. It's a multiyear journey. And many of the players and not too many players doing LLMs want to do their own custom AI accelerator for very good reasons. You can put in hardware what if you use a general-purpose GPU you can only do in software and kernels in software. You can achieve performance-wise so much better in the custom-purpose design hardware-driven XPU. And we see that in the TPU and we see that in all the accelerators we are doing for other customers. Much much better in areas of sparse call, training, inference, reasoning, all that stuff. Now will that mean that over time, they all want to go do it themselves? Operator: Not necessarily. Hock Tan: And in fact, because the technology in silicon keeps updating, keeps evolving. And if you are an LLM player, where do you put your resources in order to compete in this space? Especially when you have to compete at the end of the day against merchant GPU. Who are not slowing down in their rate of evolution. So I see that as this concept of customer tooling is an overblown hypothesis which frankly I do not think will happen. Thank you. Operator: And that will come from the line of Ross Seymore with Deutsche Bank. Your line is open. Ross Seymore: Hi, thanks for letting me ask a question. Hock, I wanted to go to something you touched on earlier about the TPUs going a little bit more to like a merchant go-to-market to other customers. Do you believe that's the substitution effect for customers who otherwise would have done ASICs with you, or do you think it's actually broadening the market? And so what are kind of the financial implications of that from your perspective? Hock Tan: That's a very good question, Ross. And what we see right now is the most obvious move it does is it goes to the people who use TPUs. The alternative is GPUs, merchant basis. That's the most common thing that happens. Because to do that substitution for another custom, it's different. To make an investment in a custom accelerator is a multiyear journey. It's a strict directional thing. It's not necessarily a very transactional or short-term move. Moving from GPU to TPU is a transactional move. Going into an AI accelerator of your own is a long-term strategic move and nothing would deter you from there to continue to make that investment towards that end goal of successfully creating and deploying your own custom AI accelerator. So that's the motion we see. Ross Seymore: Thank you. Operator: And that will come from the line of Harlan Sur with JPMorgan. Harlan Sur: Yes, good afternoon. Thanks for taking my question and congratulations on the strong results, guidance, and execution. Hock, again, I just want to sort of verify this. Right? So you talked about total AI backlog of $73 billion over the next six quarters. Right? This is just a snap of your order book, like, right now. But given your lead times, I think customers can and still will place orders for AI in quarters four, five, and six. So as time moves forward, that backlog number for more shipments in '26 will probably still go up. Right? Is that the correct interpretation? And then given the strong and growing backlog, right, the question is does the team have three nanometer, two nanometer wafer supply, COA substrate, HBM supply commitments to support all of the demand in your order book and I know one of the areas where you are trying to mitigate this is in advanced packaging. Right? You're bringing up your Singapore facility. You guys just remind us what part of the advanced packaging process the team is focusing on with the Singapore facility? Thanks. Hock Tan: Thanks. Well, to answer your first simpler question, you're right. You can say that $73 billion is the backlog we have today. To ship over the next six quarters. You might also say that and given our lead time, we expect more orders to be able to be absorbed into our backlog for shipments over the next six quarters. So take it that we expect revenue a minimum revenue, one way to look at it, of $73 billion over the next six quarters. But we do expect much more as more orders come in. For shipments within the next six quarters. Yeah. Our lead time depending on the particular product it is, can be anywhere from six months to a year. On with respect to supply chain is what you're asking critical supply chain on silicon. Yeah. And packaging. Yeah. That's an interesting challenge that we have been addressing over for constantly and continue to. And with the strength of the demand and the need for more innovative packaging, advanced packaging, because you are talking about multi chips multi multi chips in creating every customer accelerator now. The packaging becomes a very interesting and technical challenge. And building our Singapore fab is to really talk about partially insourcing those advanced packaging. We believe that we have enough demand we can literally insource not from the viewpoint of not just cost, but in the viewpoint of supply chain security and delivery. And we're building up a fairly substantial facility for packaging advanced packaging, Singapore as indicated. Purely for that purpose to address the package advanced packaging site. Silicon wise, now we go back to the same pressure source in Taiwan, TSMC. And so we keep going for more and more capacity in two nanometers, three nanometers, and so far, we do not have that constraint. But again, time will tell as we progress and as our backlog builds up. Thank you. Operator: The next question will come from the line of Blayne Curtis with Jefferies. Your line is open. Blayne Curtis: Hey, good afternoon. Thanks for taking my question. I wanted to ask with the original $10 billion deal, you talked about a rack sale. I just wanted to with the follow-on order as well as the fifth customer, can you just maybe describe how you're gonna deliver those? Is it an XPU, or is it a rack? And then maybe you can kinda just walk us through the math and kinda what the deliverable is. Obviously, Google uses its own networking, so I'm kinda curious too. Would it be a copy exactly what Google does? That you could talk to it to name? Or would you have your own networking there as well? Hock Tan: Thanks. That's a very complicated question, Blayne. Let me tell you what it is. It's a system sale. How about that? It's a real system sale. We have so many components beyond XPUs, customer accelerators, in or any system, in AI system, any AI system, used by hyperscalers that, yeah, we believe it begins to make sense to do it as a system sales and be responsive but be fully responsible for the entire system or rack as you call it. I think people understand it as a system still better. And so on this customer number four, we are selling it as a system with our key components in it. And that's no different than selling a chip. We certify a final ability to run as part of the wholesale selling process. Operator: And that will come from the line of Stacy Rasgon with Bernstein. Your line is open. Stacy Rasgon: Wanted to touch on gross margins and maybe it feeds into a little bit of prior question. So I understand why the AI business is somewhat dilutive to gross margins. We have the HPM pass-through. And then presumably with the system sales, that will be more diluted. And you've hinted at this in the past, but I was wondering if you could be a little more explicit. As this AI revenue starts to ramp, as we start to get system sales, how should we be thinking about that gross margin number, say, if we're looking out, you know, four quarters or six quarters, is it low 70s? I mean, could it start with a six at the corporate level? And I guess I'm also wondering I understand how that comes down, but what about the operating margins? Do you think you get enough operating leverage on the OpEx side to keep operating margins flat, or do they need to come down as well? Hock Tan: I'll let Kirsten give you the details, enough for me to broadly high level explain to you stating good question. Phenomenal. You don't see that impacting us right now, and we have already started that process. Of some system sales. You don't see that in our numbers, but it worked. And we have said that openly. The AI revenue has a lower gross margin than our obviously, the rest of the business, including software, of course. But we expect the rate of growth to offer as we do more and more AI revenue to be so so much that we get the operating leverage on our operating spending that operating margin won't deliver dollars that are still a high level of growth from what it has been. So we expect operating leverage to benefit us at the operating margin level even as gross margin will start to deteriorate. High level. Kirsten Spears: No. I think Hock said that fairly. And the second half of the year when we do start shipping more systems, the situation is straightforward. We'll be passing through more components that are not ours. So think of it similar to the XPUs where we have memory on those XPUs, we're passing through those costs. We'll be passing through more costs within the rack. And so those gross margins will be lower. However, overall, the way Hock said it, gross margin dollars will go up. Margins will go down. Operating margins, because we have leverage, operating margin dollars will go up, but the margin itself, a percentage of revenues will come down a bit. But we're not I mean, we'll guide closer to you know, the end of the year for that. Stacy Rasgon: Got it. Thank you, guys. Operator: One moment for our next question. That will come from the line of Jim Schneider with Goldman Sachs. Your line is open. Jim Schneider: Good afternoon. Thanks for taking my question. Hock, I was wondering if you might care to calibrate your expectations for AI revenue in fiscal 2026 a little bit more closely. I believe you talked about acceleration in fiscal 2026 off of the 65% growth rate you did in fiscal 2025. And then you're guiding to 100% growth for Q1. So I'm just wondering if the Q1 is a good jumping-off point for the growth rate you expect for the full year something maybe a little bit less than that? And then maybe if you could separately clarify whether your $1 billion of orders for the fifth customer is indeed OpenAI, which you made a separate announcement about. Thank you. Hock Tan: Wow. There's a lot of question here. But let me start off with 2026. You know, our backlog is very dynamic these days. As I said. And it is continuing to ramp up. And you're right. We originally, six months ago said maybe year on year, AI revenues would grow in 2026 sixty, 70%. Q1, we doubled. And Q1 2026, today, we're saying it doubled. And when we're looking at it, because all the fresh orders keep coming in, and we give you a milestone of where we are today. Which is $73 billion of backlog to be shipped over the next eighteen months. And we do fully expect as I answered the earlier question, for that $73 billion over the eighteen months, to keep growing, Now it's a moving target. It's a moving number as we move in time. But it will grow. And it's hard for me to pinpoint what 2026 is going to look like precisely. I rather not give you guys any guidance, and that's why we don't give you guidance. But we do give it for Q1. Give it time or give it till Q2, and you're right. It's saying that to us, is it an accelerating trend? And my answer is it's likely to be an accelerating trend. As we progress through 2026. Hope that answers. Your question. Jim Schneider: Yes. Thank you. Operator: One moment for our next question. And that will come from the line of Ben Reitzes with Melius Research. Your line is open. Ben Reitzes: Yeah. Hey, guys. Thanks a lot. Hey, Hock. I wanted to ask I I'm not sure if the last caller said something on it, but I didn't hear it in the answer was wanted to ask about the OpenAI contract that it's supposed to start in the second half of the year and go through 2029 for 10 gigawatts. I'm gonna assume that that's the that's the fifth customer order there. And I was just wondering if you're still confident in that being a driver. Are there any obstacles to making that a major driver? And when you expect, you know, that to contribute? And your confidence in it. Thanks so much, Hock. Hock Tan: You didn't hear that answer from my last caller, Jim's question was because I did not answer it I'm not answering it either. The fifth customer. And he's a real customer and he will grow. They are on their multi-year journey to their own XPUs. And let's leave it at that. As far as the OpenAI view that you have, I we appreciate the fact that it is a multiyear journey. That will run through '29 as our press release with OpenAI showed. 10 gigawatts between '26 to more more like '27, 28. 29. Ben. Not 26. It's more like 27, 28, 29, 10 gigawatts. That was the OpenAI discussion. And that's I call it an agreement, an alignment where we're headed with respect to a various respected and valued customer OpenAI. Ben Reitzes: But that's real interesting. Hock Tan: We do not expect March in '26. Ah, okay. That's thanks for clarifying that. That's really interesting. Appreciate it. Operator: One moment for our next question. And that will come from the line of CJ Muse with Cantor Fitzgerald. Your line is open. CJ Muse: Yes. Good afternoon. Thank you for taking the question. I guess, Hock, I wanted to talk about custom silicon and maybe speak to how you expect content to grow for broad generation to generation. And as part of that, you know, your competitor announced CPX offering essentially accelerator for an accelerator for massive context windows. I'm curious if you see it a broadening opportunity you know, for your existing five customers to have multiple XPU offerings. Thanks so much. Hock Tan: Thank you. No. Yeah. It's you hit it right on. I mean, the nice thing about a custom accelerator is you try not to do one size fits all. And do and generationally. Each of these five customers now can create their version of chip of an XPU customer accelerator for training. And inference. And it basically is almost two parallel tracks going on almost simultaneously for each of them. So I would have plenty of versions to deal with. I do not need to create any more version. We got plenty of different content out there. Just on the basis of creating these customer accelerators. And by the way, when you do customer accelerators, you tend to put more hardware in that unique differentiated versus trying to make it work on software. And creating kernels into software. I know that's very tricky too. But think about the difference where you can create in hardware those sparse call data routers. Versus the dense matrix multipliers all in one same chip. And that's one of many one of just one example of what creating customer accelerators is letting us do. Over that matter, a variation in how much memory capacity or memory bandwidth from for the same customer from chip to chip just because even in inference, want to do more reasoning, first decoding, versus something else, like prefilled. So you literally start to create different hardware for different and run your workloads. aspect of how you want to train or inference It's a very fascinating area. And we are seeing a lot of variations and multiple chips. For each of our customers. Thank you. Operator: One moment for our next question. And that will come from the line of Harsh Kumar with Piper Sandler. Your line is open. Harsh Kumar: Yeah, Hock and team. First of all, congratulations on some pretty stunning numbers. I've got an easy one and a more strategic one. The easy one is, your guide in AI Hock and Kirsten is calling for almost $1.7 billion of sequential growth. I was curious, maybe you could talk about the diversity of the growth between the three existing customers. Is it pretty well spread out? All of them growing? Or is one sort of driving much of the growth? And then how strategically one of your competitors bought a photonic fabric company recently I was curious about your take on that technology and if you think it's disruptive or you think it's just gimmickry at this point in time. Hock Tan: I like the way you address this question because the way that you address the question to me is almost hesitant. Thank you. I appreciate that. But on your first part, yeah, we are driving growth and we it began to feel like this thing never ends. And it's a real mixed bag. Of existing customers and on existing XPUs And I'll be part of it as XPUs that we're seeing. And that's not to slow down the fact that as I indicated in my remarks and commented on the demand for switches. Not just among six, not among five. Switches. The demand for our latest 1.6 terabit per second DSPs. That enables optical interconnects for scale out. Particularly? It's just very, very strong. And by extension, demand for the optical components like lasers, pin diodes, just going nuts. All that come together. Now, all that is small dollar, relatively lesser dollars when it comes to XPUs, as you probably guessed. I mean, no. Of this to give you a sense, maybe let me look at it on a backlog side. Of the $73 billion or AI revenue backlog over the next eighteen months, I talked about maybe $20 billion of it is everything else. The rest, is XPUs. Hope that gives you a sense for what the mix is. That's not to say that the rest is still $20 billion. That's not small. By any means. So we value that. So when you talk about your next question of silicon photonics, and as a means to create basically much better, more efficient, lower power interconnects in not just scale out, but hopefully scale up Yeah. I could see a point in time in the future when silicon photonics methods as the only way to do it. We're not quite there yet. But we have the technology and we continue to develop the technology even as each time we develop it first for 400 gigabit then we going on to nine 800 gigabit bandwidth Not ready for it yet. So and even we have the product, and we're now doing it for 1.6 terabit bandwidth to create silicon photonics switches silicon photonics interconnects Not even sure it will get fully deployed because you know, engineers, our engineers, our peer, and the peers we have out there, was somehow trying to find a way to still do try to do scale up within a rack in copper as long as possible. And in scale up in no pluggable optics. The final final straw is when you can't do it well in pluggable optics. Of course, when you can't do it even in copper, then you're right. You go to silicon photonics. And it will happen. And we're ready for it. Just saying, not anytime soon. Harsh Kumar: Thank you, Hock. Operator: One moment for our next question. That will come from the line of Carl Ackerman with BNP Paribas. Your line is open. Carl Ackerman: Yes. Thank you. Could you speak to the supply chain resiliency and visibility you have with your key material suppliers, particularly co-ops as you not only support your existing customer programs, but the two new custom compute processors that you announced since your quarter. I guess what I can get at is you also happen to address the very large subset of networking and compute AI supply chains. You've talked about record backlog. If you were to pin some of the bottlenecks that you have, the areas that you're aiming to address and mitigate from supply chain bottlenecks, what would they be and how do you see that ameliorating into '26? Thank you. Hock Tan: It's across the board. Typically. I mean, it's we are very fortunate in some ways that we have the product technology and the operating business lines. To create multiple key leading-edge components that enable today's state-of-the-art AI data centers. I mean, our DSP as I said earlier, is now at 1.6 terabits per second. That's the leading edge. Connectivity for bandwidth for this for the top of the top of the heap, XPU, and even GPU. And we intend to be that way. And we have the lasers EMLs, VCSELs, CWL lasers that go with it. So it's fortunate that we have all this. And the key comp active components that go with it and we see it very quick early, and we expand the capacity as we do the design to match it. And along this is the long answer to what I'm trying to get at, which is I think we are of any of any of this data center suppliers of the system racks not counting the power the power shell and all that. Now that's hard to get beyond us. On the PowerShell and the transformers and the gas turbines. If you just look at the rack, the systems on AI, we probably have a good handle on where the bottlenecks are because sometimes we are part of the bottlenecks. Which we then want to get rid to resolve. So we feel pretty good about that. Through 2026. Carl Ackerman: Thank you. Hock Tan: One moment for our next question. Operator: That will come from the line of Christopher Rolland with Susquehanna. Your line is open. Christopher Rolland: Hi, thanks for the question. Just first a clarification and then my question. And sorry to come back to this issue, but if I understand you correctly, Hock, I think you were saying that OpenAI would be a general agreement so it's not binding maybe similar to the agreements with both NVIDIA and AMD. And then secondly, you talked about flat non-AI semiconductor revenue Maybe what's going on there? Is there still an inventory overhang in and what could what what do we need to get that going again? Do you see growth, eventually, eventually in that business? Thank you. Hock Tan: Well, on the non-AI semiconductor, we see broadband literally recovering very well. And we do not see the others No. We see stability. We do not see a sharp recovery that is sustainable yet. So I guess given a one a couple more quarters, but we do not see any further deterioration in demand. And it's more I think maybe the ops and AI is sucking the ops oxygen a lot out of enterprise spending elsewhere. And hyperscaler spending elsewhere. We do not see it getting any worse. We do not see it recovering very quickly. With the exception of broadband. That's a simple summary of non-AI. With respect to OpenAI now before diving into the I'm just telling you what that 10 gigawatt announcement is all about. Separately, the journey with them on the customer accelerated progresses at a very advanced stage and will happen very, very quickly. And it's and we will have a committed element to this whole thing. And I won't. But what we I was articulating earlier was the 10 gigawatt announcement. And that 10 gigawatt announcement is an agreement to be aligned on developing 10 gigawatts for OpenAI over 27 to 29 time frame. I said, that's different from the XPU program we're developing with them. Christopher Rolland: I see. Thank you very much. Operator: Thank you. And we do have time for one final question, and that will come from the line of Joe Moore with Morgan Stanley. Your line is open. Joe Moore: Great. Thank you very much. So if you have $21 billion of rack revenue in 2026, I guess, do we stay at that run rate beyond that? Are you gonna continue to sell racks, or does that sort of that type of business make shift over time? And I'm really just trying to figure out the percentage of your eighteen-month backlog that's actually full systems at this point. Hock Tan: Well, it's an interesting question. And while that question basically comes to how much compute capacity is needed by our customers over the next as I say, over the period beyond eighteen months. And your guess is probably as good as mine based on what we all know out there. Which is really what it relates to. But if they need more, then you see that continuing even larger. If they do not need it, then probably it won't. But so one is what we're trying to indicate is that the demand we are seeing over that period of time right now. Operator: Thank you. I would now like to turn the call back over to Ji Yoo for any closing remarks. Ji Yoo: Thank you, operator. This quarter, Broadcom will be presenting at the New Street Research Virtual AI Big Ideas Conference on Monday, 12/15/2025. Broadcom currently plans to report its earnings for the 2026 after close of market on Wednesday, 03/04/2026. A public webcast of Broadcom's earnings conference That will conclude our earnings call today. Thank you all for joining. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Allison Malkin: Good day, everyone, and welcome to the RH Third Quarter 2025 Earnings Call. As a reminder, this call is being recorded. I would now like to hand the call over to Ms. Allison Malkin. Please go ahead, ma'am. Thank you. Good afternoon, everyone. Thank you for joining us for our third quarter fiscal 2025 earnings call. Joining me today are Gary Friedman, Chairman and Chief Executive Officer, and Jack Preston, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer. We will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our press release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our press release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events. Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in today's financial results press release. A live broadcast of this call is also available on the Investor Relations section of our website at ir.rh.com. With that, I will now turn the call over to Gary. Gary Friedman: Great. Thank you, Allison. Good evening to those of you on the East Coast, and good afternoon on the West Coast. To our people, partners, and shareholders, we continue to generate industry-leading growth with revenue increasing 9% in the third quarter and up 18% on a two-year basis, demonstrating the disruptive nature of our brand, despite the worst housing market in almost fifty years and the polarizing impact of tariffs. Adjusted operating margin of 11.6% was below the 12.5% midpoint of our guidance due to higher than forecasted tariff expense on prior period special order and backorder sales delivered in the quarter and higher than expected tariffs opening expenses. Adjusted EBITDA was 17.6%, and we generated $83 million of free cash flow in Q3. Year-to-date free cash flow reached $198 million, and we are on track to achieve our outlook range of $250 to $300 million for the year. Net debt at the end of the quarter was $2.427 billion, down $85 million from Q2. We ended Q3 with real estate assets that we believe have an estimated equity value of approximately $500 million and that we plan to monetize opportunistically as market conditions warrant. Additionally, we are making progress on our goal of reducing the inventory estimated at $300 million, with inventory down 11% versus last year and down $82 million versus the second quarter. While a meaningful portion of our market share gains are coming from the fragmented to the trade design, showrooms, regional high-end furniture stores, and local independent boutiques, we are also gaining share from the better furniture base national brands, as you can see from the table below. I would point out that our share gains on a two-year basis range from a low of 12 points to a high of 28 points. We find it fascinating that the market chooses to reward companies that set remarkably low expectations and slightly beat them versus setting high expectations as we do and at times miss them while still meaningfully outperforming our industry. Let me turn to our outlook. We are providing the following updated financial outlook reflecting our year-to-date performance and our current trends. For the fourth quarter, revenue growth of 7% to 8%, adjusted operating margin of 12.5% to 13.5%, adjusted EBITDA margin of 18.7% to 19.6%. The above outlook includes an approximate negative 200 basis point operating margin impact from investments and startup costs to support our international expansion and a 170 basis point impact from tariffs net of mitigations. Fiscal year 2025. Our current outlook now is revenue growth of 9% to 9.2%, adjusted operating margin of 11.6% to 11.9%, adjusted EBITDA margin of 17.6% to 18%, and free cash flow of $250 million to $300 million. The above outlook includes an approximately negative 210 basis point operating margin impact from investments to startup costs to support our international expansion and a 90 basis point impact from tariffs net of mitigations. In the short run, the market is a voting machine, but in the long run, it is a weighing machine. Benjamin Graham. We are a company that is playing the long game, historically innovating and investing during uncertain times. We also believe post this high investment cycle in a historically low housing market, the weighing machine, as it has done over our twenty-five-year history, will accurately reward us with a truly unique high-performance brand we are building. On the other hand, there is no denying what an unusual time it is in our industry, and we also believe it's not a time to underestimate risk. We're in the third year of the worst housing market in almost fifty years. In 1978, there were 4.09 million existing homes sold in the US when the US had a population of 223 million people. We were on track to average 4.07 million existing homes sold over the three years from 2023 to 2025, with a population of 341 million, or 53% higher than 1978. This is a market we've never seen before. Not a time to underestimate risk. Tariffs are disrupting supply chains and driving higher prices. There have been 16 different tariff announcements over the past ten months that have resulted in significant resourcing product delays, out of stocks, and driven multiple rounds of price negotiations and increases. Despite the chaos, we continue to demonstrate our ability to gain meaningful market share while aggressively investing in strategies that we believe will create long-term strategic separation. While not a time to underestimate risk, it's also not a time to run from it. It's important to separate the signal from the noise. And remember, necessity is the mother of invention. Our most important innovations were birthed during the most challenging and uncertain times. Our strategic separation is a result of innovating and investing during those uncertain times, and this time is no different. Launching the most prolific product transformation in the history of our industry and believe the launch of our new concept in the spring of next year will reaccelerate our growth and create another step change in our business. We're building an iconic global selling platform that will likely never be duplicated in our lifetimes. Construction costs post-COVID had doubled across the industry, making it very difficult to emulate our immersive platform. At the same time, we have created new equally immersive physical experiences that are massively more capital efficient that we plan to unveil on our next call next quarter. We just opened what might be the most beautiful and talked about retail experience in the world, and arguably the most important city in the world, especially if your vision is to build a global luxury brand. You know which one I'm talking about. RH Paris, you have to see it to believe it. Developing a global hot business that generates significant brand awareness, traffic, and cash flow. We have built a powerful restaurant company that is seamlessly integrated into our core business that will generate operating income that represents, on average, 65% of the average aggregate galleries rent they reside in. The RH Ocean Grill at RH Newport Beach is our first $20 million plus restaurant that we believe will reach the mid-twenties in its second full year, and its cash flow next year might cover the rent for the entire 90,000 square foot gallery. We're establishing a global interior design that is moving the brand beyond presenting and selling products to conceptualizing and selling spaces. We opened our first freestanding interior design office in Palm Desert, California, with no product except for two small sitting areas in front of our designers' offices. There's four offices in the building and a workspace with clients. It's a real freestanding customer-facing design firm. Really don't exist in the world. You think about it. It's like finding a dentist. You know? You move to a new area. You buy a new home. You need a dentist. What do you do? You Google it. You ask a friend. Like, where do you find an interior designer? I mean, you can go online. You know? I don't know how that's gonna really help, Yeah. But if you think about it, the world of interior design is not a customer-facing business. And, you know, we opened our first freestanding interior design office in Palm Desert with no product. You know? It's a real freestanding customer-facing design firm. And it's generating a million dollars a month in design business. In 3,000 square feet. Rent of $200,000 a year. You can do the math. All of which is resulting in building a brand with no peer while generating industry-leading growth with high teens adjusted EBITDA margin. Imagine what our performance will look like in a robust housing market as we cycle and leverage these investments. Never underestimate the power of the few people who don't know what can't be done. Especially these people. Operator, we'll now open the call to questions. Thank you. Operator: And do ask that you limit yourself to one question and one follow-up. Our first question comes from Steven Forbes from Guggenheim Securities. Steven Forbes: Good afternoon, Gary, Jack. Gary, you obviously mentioned RH Paris, but curious if you can maybe give us some color on how the demand book is building. Noting it's early. And the reason I asked is just curious if you can maybe help inform us how RH Paris has influenced your pro forma expectations ahead of RH Milan and RH London? Gary Friedman: Sure. Well, you know, RH first is one, it's really quite different. What we did open our first gallery, with hospitality, it was really you know, we're two hours out of London at RH England. You know, there's not a lot of traffic out there. It's known how our business is developed. We kinda talked about it last quarter. But, you know, many of the other galleries, as I've spoken about, we didn't open in particularly the way we believe we should open. You know, to acquire the RH Paris and RH London, which we think are one-of-a-kind locations, you know, we had to take a kind of a portfolio of galleries and open some of those before we wanted to. That's why we opened London. I've already seen, like, excuse me, to, you know, to open something that kinda set a tone. You know, I think people know and in Europe, you know, Americans aren't really known for building luxury brands. We're not really looked upon by the Europeans that have a great taste or style. And, you know, all the really, all the luxury brands are you know, from Paris or Italy. The UK has a couple, you can argue that we have a couple, you know, argue that Ralph Lauren's a luxury brand that get very small part of Ralph Lauren's business. It's luxury. Yep. The biggest part of the business is you know, is it more of a department store based you know, higher-end business and not luxury and a giant outlet business? And that's not to say anything bad about Ralph Lauren. It's, like, the incredible company, incredible brand. It's just not a real you know, focused luxury brand. And you can argue that the only one we really had pure luxury brand in many ways was Tiffany, and now the French own it. Right? So again, the road we're on, the path we're on, it's a tricky one. Yeah. It's a tricky one to travel. Yeah. We the metaphor of climbing the luxury mountain and Eric coined the phrase, you know, if you get higher and higher in the mountain, it's where the air gets thin and the odds get slim. Know, no one's really made this climb. Know? And from especially from the level we started at twenty-five years ago. I and so, you know, we're again, the next few moves we're making are really important moves. You know, I'd I got heard several years ago that someone asked, yes, probably the most famous guy in the luxury world, and I I don't I didn't hear him say this, so I'm not gonna say who said it, but you can you can imagine, you know, only a couple people have built really the best luxury platforms in the world. But I I heard this someone asked the question, how do you build a luxury brand in China? And the response was, you build great stores. In Paris, London, and New York. And I heard that years ago, I've always thought about that as thought about our Asian and yes. How do we unveil this brand? And we yeah, we built RH New York, and and we opened it in 2018. And we said that was our bridge to Europe. So we we did it a little backwards, and and as we think about it for our business, it's it's really probably Paris, London, Milan, and New York. Because Milan is really the know, one of the design capitals of the world. Not only you know, for for design, but also also for fashion. Yeah. But it's where the biggest design show in the world is Saloni, where 500,000 people go once a year. Yeah. And, yeah. And, it's and it's also the time we're gonna open RH Milan. But but Paris, we pushed ourselves to another level. And it's not a particularly large gallery, but it's very unique, and I can describe it on the last call. And if you haven't seen it, we've, you know, we've had a video is the video is the video on the website or no? Like, yeah. You know, it's a video. We're also making a kind of a documentary video. Like, we have some of our other iconic buildings, and you'll see that come out probably the next couple of weeks. But you know, I kinda sad. Like, you know, you know, we're bragging about it, but it it might be one of the most beautiful and aspirational and inspiring retail stores that are was ever created. And and it gives a lot of natural things that were were we loved about it. One, it's the only building on the Champs Elysees, that doesn't have an an entrance. On the Champs Elysees. You can't enter the building. You enter through you know, 22 foot gold leaf gates and go down yeah, a 195 steps to the front door. And, you know, we built a freestanding interior design office. There. We're able to get a building approved, and there's, you know, so many elements of it. You know, it's where we built the first world of our age. Which is a you know, it's it's immersive experience, that brings to life all our all the places and spaces that we've built around the world. And and, you know, it's we think it's an important part of communicating who we are and connecting with consumers. We you know, while we only totally, I think, in hot coffee, have about a 150, a 155 seats, so it's really like a normal restaurant, but it's really two. Because it's in two smaller spaces. One's on a terrace. It's a slavery restaurant. You know, with and we invented some very new dishes there that we're gonna be rolling out in The US because they're so good. And and, and and also Lipozene, which is on the on the on the Top Floor on the rooftop. And the rooftop yeah. You get and then so so happy we figured out how to you know, work with faucets and partners, and they you know, we we we saw the building, we, know, went up this five stair ladder thing to get on the rooftop. We couldn't believe we could see the Eiffel Tower and the Grand Palais and the Louvre and, you know, and and everything. We've got, like, there anyone who uses rooftop, and there's no way to get to the rooftop? Like, yeah, you said you'd you'd have to build an elevator, but you'll never get an elevator approved because it could block people's views of the eye Tower. And Foster and Partners. This is why you know, wanna work with the best people. Is they said, well, maybe we can design a rooftop I I could design an elevator that that, you know, a hatch opens and the in the roof and the the glass elevator pops up and then it disappears. And I said, well, ever done that before? Said no. But like, we love to do things that haven't been done before. But, you know, like, once you see once you see the rooftop, you know, you couldn't unsee it. Once you're up there, you're saying we've gotta figure out how to activate this. And yeah, and what's interesting with about 40 seats, I think, on the rooftop, and unfortunately, right now, the rooftop's closed because weather in Paris gets you know, pretty grim in the in the winters, you know, we can't evacuate the roof if it's if it starts to rain and and The not not enough seats to relocate everybody to the level below. But the rooftop when it was open, you know, the first few months we were open, it is the highest grossing part of the, the restaurant operation in the in the two restaurants We're we're doing more there. For per seat than than anywhere else. So you know, just, again, learning about creating incredible spaces that is made us rethink some of the work in Milan and some of the work in London and and some find some some tweaks there. And then we found out that you know, we we're building this world of our age, and we had this you know, space for the building to our facts and and we thought, like, that will I don't know what if we put a bar in here. And, you know, it's like, try to make it a lounge, and so we put a we put a bar in there, then we feel like, well, we found out you couldn't you couldn't you couldn't have a bar in Paris unless you had food. And you couldn't just have nuts and snacks. So you had to have, like, a small menu. So we had a small menu The day we opened, we served our first meal. In a place that, in our mind, wasn't even a restaurant. And on opening night, you know, it's one of these places that has passed. And and now, you know, we we actually had a kinda retrofit it and put real tables in there that were big enough and now we're serve serving most of the menu. Are we tasty? Yeah. Yeah. And and and it's a it's a great offset as we've lost, you know, the the the seats on the roof. But, this has been so many lessons and, you know, so much we're learning about the customer and who knows us and who doesn't know us and how. How truly international the business in Paris is. I mean, I wish I had the list in front of me right now. Like, of all the design jobs we have and you know, Majorca and Morocco and, like, you you name it. Like, The Middle East and we're, like, the design jobs that the team worked It's, like, truly a a global store, and the the clientele is incredible. But so many people don't know us. And and, you know, team's walking people up to the world of RH, and walking people through and peep people I think, are kinda shocked by our body of work because they you know, many still don't know us, and and so just know, just the the thought of of you know, how important that world of our age is and what a tool that is for our teams to kind of not just try to explain who we are, try to pull it up on the website, but walk people into a really immersive experience that, you know, brings our spaces and places to life. And and know, speaks to our our authority and architecture interior design and landscape architecture because, you know, all of our know, buildings are representatives of those of those kind of core competencies. And yeah, we put at the last minute, we decided the entry with this small little entry, we we we'd stand to think it was communicating enough about our truth. And so we you know, we'll what? I don't know. We hit four weeks ago or six weeks ago. Decided to build a architecture and design library, like, in Orange England. And and now you can't unsee it. It's so incredible. You walk in. You you know, you look through the main doors, and if you've seen pictures of the gallery, you've seen the Vitruvian man under the artist's design ethos, you know, that you you have to interact with it. Yeah. You I think most people stop and read it and take pictures in front of it. And then left and right, we have these these fountains, beautiful fountains, and you know, above the fountain, we, you know, we came up with this line. Actually, my wife came up with the line. I I thought I wrote a really great letter to Paris and she read it, and she said, give me a day. And I said, what what do you mean? She's like, you don't like it? Said, yeah. Got him secure and and then she wrote that last night, level last line, a few you know, if any of you got the invite to our party, we, you know, use the letters you know, an invite with music and so on and so forth and use it for these opening of our video, and and it and it says in Paris, the measure is eternity. This we know. And have built accordingly. And you walk into that entry, and you can't help but read that. As as you go left and right around the design And then then you you then you're going to this you know, this immersive architecture and design library. Yet there's no product. You see a Steven Forbes: yet. Gary Friedman: Just, like, doesn't look like a furniture store at all to anybody. Right? You you actually, yeah, see yeah. We've now own two copies of the architectura. You know, they're the 10 books on architecture, where the, you know, first modern printing were in 1521, and we've got a one in in in French. And we have three iconic French architects, Delorem, Hausman, and Lucie the third. And and then we've got Vitruvius, da Vinci, and, Ladio. You know, displayed with bust and historic books and so on and so forth. And it's something you've never seen anywhere. Like, know, I've never even really seen one. But we built our first one in because there was a library there, and it came up with the idea, and and we created something, I think, really meaningful. And I remember telling the team, you know, the night before we opened, I yeah. We were in in the in the architecture design library. I said, this might be the most important work we did here. And, you know, because it really communicates our truth, and why we do this and what we believe in. And you know, so now that we've went back and we've we've now you're gonna walk into the entry of Milan, which kinda looks like a lobby of the building. Yeah. It look beautiful, but we didn't know what to do, like, a couple couches and a couple chandeliers. And I didn't really like, you you might have, like, interact with the first person and go, oh, excuse me, but I don't like, you know, is this a condominium building? Is this the the you know, because it it doesn't look like a store. If you walk in and you immediately look through it's kinda loggia into a backyard and yeah, and you have to kinda go up and left left and right. It doesn't have the branch staircase, except for that goes down underground. If we did our first underground restaurant. Like, everybody's gonna go, oh, we have a rooftop restaurant on this side. So that's not something we you know, Now we have a restaurant that's underground. It's got a, you know, skylight in the middle middle of the park, but we're putting you know, a architecture design library now in the entry, and all of a sudden, you you're gonna kinda go, like, who are these people? Like, look at this. Vitruvius and Da Vinci and, you know, Palladio and Scamozzi and Alberti and, you know, all the Italian iconic architects that, know, shaped the way that that the world was designed and built, you know, very early on. You know, that's gonna come to life there. We're gonna have a world of our age in Milan on the pop in a in a place in a space that we probably wouldn't have done anything with. It's kind of like a I don't know, an attic. You know? But the team reconcepted it as this incredible lounge, and and I think it's gonna be an iconic place that'll you know, help people understand who we are and what we believe in and and and also, these are great spaces that we can rent out and do events in that bring the right people into our galleries. And, you know, we're we're trying to test the event business because we've got these incredible spaces and you know, I've said no for I don't know how many years now. Fifteen, twenty I said my my line is always you know, our our galleries are our homes, and we don't rent our homes. You know? I I turned down Oscar parties and Grammy's parties, you know, like, top artists and and everything. And and I thought, we finally did an event. We did, you know, I go to a lot of Warriors games, and I'm friends with Joe Lakup and Nicole Lakup. You know, and Peter Goover, you know, the artist of the warriors. And you know, they they hosted the end NBA All Stars, and and they wanted to use our San Francisco. To do the owners, you know, the owners party, the opening party for the NBA star weekend, and we did it. And and we just got tremendous know, response and all the right people there. You know, it made us think like well, maybe we should, you know, for the right you know, to track the right clientele. Like, our know, we have such incredible spaces. So you know, so we we and and Tara so far, like, it's like, right away, Chanel wanted to take the world of our age, you know, to hold the dinner and we've been contacting out about, like, can so and so do their fashion show here? You know? And take over your gallery for the evening? And yeah. And so I think you know, we're learning about know, this idea of, like, we're these iconic spaces and ability to actually we have these unique you know, unique architectural masterpieces and the ability to bring the right people, you know, because we have the right place. You know, and I think it's even more important. And if everybody thinks, like, everything's moving online, like, I think people are dying for experiences. They're dying for authentic connections, not only with people, but with places, you know, and with history and with beauty and with food and you know, like, I mean, how many nights can you order DoorDash or Grubhub? I mean, I love I love the services when I have no time. I mean, and I, you know, he wanted to have some delivered. But don't know about anybody else on the phone, but I'd much rather go somewhere and you know, see people and feel like I'm somewhere and connected. You know? And and I think you know, that's why people still you know, aggregate and aggregate. And, you know, they may not go to movie theaters so much anymore because you know, that experience is you know, the not as unique and differentiated and, you know, you know, maybe we don't wanna be in a place where it's coughing behind you and so on and so forth. So that that one I I get. But I I just think the places that we're building people like to see, and they like to be there. You know? They they there's not a lot of places that are public like ours that you can get a meal in and experience. So you know, we're we're learning in Paris. You know, we're having all these people coming from off the board going, you know, seeing it and we're we're thinking about it like that. We're out there. We have have more people fluent in more languages. We need to ramp the design teams faster. Our design team in Paris kinda get overwhelmed. Like, we had no idea. That we'd have the traffic we got into Paris. Like, it was just so many people that came in, and we were just overwhelmed. I mean and and you know, even you know, finding out how early you have to hire people because people keep long you know, tenures. They can't just you know, give a two week notice and come to work for you. You know, we we kinda got behind in hiring for the restaurants and, like, we were behind. Had a fly people from America to kinda help you know, run the restaurant and cover the shifts and you know, they didn't speak French and know, that that was important. You know, that yeah. You know, there's just so so many things we're learning, you know, especially bringing hospitality into the high volume space. So but but there's just a little about the build you know, I I just did my own little math, and I was trying to understand, you know, got the try try to isolate the hospitality business because the hospitality business lost you know, 25% of its fees. After the first couple of months. And expect that to be a little off, and it's only a tiny bit off. You know, with all the seats we've launched. And the and the highest productive seats. So but we're thinking that, yes, we we might be able to tint that rooftop and actually do events there. Maybe make bring in, yeah, just as many people, if not more, because they only see 40 like, 44 people max there. But if the know, just about the staffing, design, like, we're we're we're we're learning learning learning a ton. And know, we're way ahead of we've done you know, team sent some incredible recaps and you know, learnings and We're gonna be so much more prepared and so much more efficient But the bills are are really interesting. So the, you know, the math I was looking at know, I kinda looked at the first eight weeks because, well, September was a five week month. We didn't we lost you know, it didn't open the first week, I think, on the fifth, which is you know, you you know, it's kind of a day, and then the next week started. But and I kinda try to isolate this our business. If you when you open cold in a market like this, right, you you're you're not shipping to anyone here. You've got no revenues happening, and yeah, and and it's it's interesting what we're learning all around, but but this one with you know, high volume, high traffic, you know, high traffic iconic location, international people coming from all over the place, And the first eight weeks well, I looked at the first eight weeks, yeah. So I kinda got the four weeks of September that weeks of we're open in the weeks of October. And then looked at it in the next really I've almost six weeks. I had to estimate the last three days. Just to kinda since we haven't had the business. But but when you look at the demand on the core business, and we haven't seen ramps like this. The the six weeks the average per week is 62% higher than the first eight weeks. And the first eight weeks actually had more traffic as we I think we're you know, it's still the you know, like, the fall, and there was a lot of people in Paris. And, yeah, a lot of people coming in. We still had very good traffic. But you know, you can tell the team's starting to kinda get feet underneath them. We you know, started people are starting to kind of figure out who we are and, you know, I trust them. I kinda buy furniture from them. And we, you know, we have some people that know us because we're you know, they either lived in America or they travel internationally and they know us from America. But I didn't expect, like, the ramp on the core goods that because we open with such such good traffic, I I wouldn't have thought, you know, it'd be a sixty fifty two, 63% ramp weeks. So the other week so when you start to think about that and and how that might build, you know, I think it's gonna take a while to kinda really understand it. And as we, you know, we we gotta get our arms around it. It's divine opportunity. There's I mean, when you look at all the places we're doing work, and you think, oh, man, our designers are gonna have to fly here and fly there, and, you know, and then and our customers pay for that. Like, we've been flying people from America to you know, all the major cities in the world, so many of the major cities. You know, we've had you know, customers flying our people to to Sydney, Australia, to Melbourne, to Shanghai, to, you know, all over Italy. I mean, I I can't say. It's almost every country. But you know Middle East. Yeah. Middle East. You know? Yeah. We did. You know, for the let's see. The prince of Qatar. Right? Four homes on its compound, you know, and like, a $3,000,000 job or something. Like but we're doing jobs, like, hundreds of thousands into the millions, Like, we just got a famous building in New York. I can't can't talk about it. You know, to disclose it, but we're just we're doing a $3,000,000 design project in one of the most most famous mansion. In New York City and done another $1,800,000 project for someone I can't talk about. You know? Very famous. And, you know, just we're and that's why I think I made the point about the know, design firm. And so know, this you know, so much so much that we're learning about Europe and so much we're learning about you know, just the potential of our of our brand if it's evolved. So, you know, long rambling answer that you started with that You know? With the quest I could talk about Paris for a long time. Thank you, Gary. I'll actually pass it on. Thanks so much. Operator: The next question comes from Max Rakhlenko from TD Cowen. Max Rakhlenko: Great. Hi, everyone. So, Gary, this is the first time that you guys have taken the pretty outsized price in a while. Can you just talk about how the customer responded in 3Q and the elasticity that you're seeing from the higher price points? What are the learnings, and how are you thinking about the right price points for the brand ahead? And depending on where tariffs go, could we actually see our continue to take prices further? Gary Friedman: Max, can I just ask clarifying this, Jack? Like, you're saying you you observed Q3 was the first time we raised prices for for a while. Is that what you're saying? Max Rakhlenko: Not necessarily the first quarter, but you have taken prices just given where tariffs have gone. So just curious what the elasticity looks like, how the customer is responding? Gary Friedman: Yeah. We're know, we're learning. We've taken a lot of price increases this year. We've got a lot of you know, movement in tariffs and tariffs are set at one level, and they went up. And they yeah. They they're they're moving around, and you know, it takes a while. I mean, everybody, you know, from manufacturers to you know, product designers and everybody who's involved in you know, the development process and you know, it's you know, it's the first time we're we're all to navigate this through the thing. So I don't know if, you know, if it maybe it's gonna stop moving for a while, but know, for a while that we Yeah. Man. We're kinda frozen. And, but but I think you know, so far, as long as it it's fair to everyone, know, I think that there I think that there's, you know, some businesses that that might be kind of violating the rules. I think that there is some yeah, high people that are coming in that that in other countries that are you know, opening up in The US, and they might be making the goods that they know know, they they might not be you know, bringing them in at the right price. You know, they're they're trying to yeah. There I mean, there's there's a lot of things going on. Like, it's set where there's marketplaces and again, you might have manufacturers bringing in goods, they're figuring out how to get around tariffs. You know? We hope that any of those kind of things, you know, get the the if we're gonna let tariffs, like, just make it fair. You know? Don't don't let some poor manufacturer come in here and you know, those are the people you're trying to stop, and there's actually loopholes You know, they're kinda getting product in here. And I think gonna in next to nothing. And those and that might be an advantage for certain people for a certain amount of time, but, you know, I think that stuff's getting to the administration and you know, hopefully, they it'll become a fair playing field for everybody. And then if it is, you know, it is. You know? And and, you know, the market you know, will kinda conform to the reality. Know? The I mean, the customer is gonna have to conform. Yeah. It's you know, things cost more. That's what happens. Know, we've had inflation forever, you know, in in this country. You know? Many times, much worse than this, So, you know, I think I think we just think about, hey. Just make it a fair game. You know, don't let don't let manufacturers come in and open a US entity and Max Rakhlenko: you know, Gary Friedman: their their price is really a thousand dollars for Don't let them bring it in for a $100 and and pay almost no tariff. Because you're, you know, shipping it to themselves. Max Rakhlenko: Yeah. So got it. Yeah. No. That's that's helpful. And then, Gary, just any more color on the new, collection that you're looking to roll out next year? Just how are you thinking about the timing And just what could it look like as we think about some of the building blocks for next year? Gary Friedman: Yeah. We we just got back from the trip that yeah. We worked exclusively on that thing. I I don't think we've ever been more excited about anything. That we we've worked on. I mean, it's and I think we worked any harder, not because we had to, just because we wanted to. Like, it's, like, it's I I think you know, Arie, Lisa, and, you know, anybody who's put us on the trip would you know, that has any perspective of the big moves that we've made over the years, I think this is gonna be the biggest incremental move we've ever made. And, and I think it's gonna be like a you know, a ten year thing. You know? Like, it's it's not only is is it a part of our assortment that we're way underpenetrated in. It's if you look at the architecture, that it's targeting and the the homes is targeting, it's targeting the the biggest architectural block, you know, an aesthetic block. Especially at the high end. Yep. I mean, some of our data says you know, 60% of homes 5,000,000 and above represent this kind of architecture. And it's where we used to be strong And, you know, when the launch of Modern and contemporary and really the you know, the the modern book. You know, it's the modern book and modern is modern. Interiors kinda became contemporary. That's why I consolidated it altogether. And then, you know, the kind of the Max Rakhlenko: you know, the Gary Friedman: the major look, you know, that that saying too much, you know, is the and where we kinda built, you know, built the company on, you know, more classic It's not only it's not only big, it's the next trend. So, and what we're doing is is our best work. And our partner's best work. And, I mean, everybody is excited about it, especially after this last trip. And so our our target is to Max Rakhlenko: launch it at Solone. Gary Friedman: In Milan. The biggest design show in the world. You know, when we have probably the biggest opening parties than anybody's had. In Celanese and you know, and have the world come see it and talk about it and and, yeah, try to get it into as many dollars we can as quickly as we can. It's it's what our interior designers and teams you know, are getting to ask ask the most about their what they're most excited about. Max Rakhlenko: Know, Gary Friedman: don't really represent it. Very well. So and the work we're doing is, I think, just incredible work. And I I think we can't wait to jump back on a plane and you know, gotta do some like, we just it can be so big. So I think it's I I kinda look at it, and I say, it's worth a few billion dollars over the next several years, you know, And it's five years or ten years, know, but it's it's gonna if it could be the biggest part of the brand. It should be. Especially with the trend that's gonna be powering it over the next and that and that trend should go fifteen to twenty years. You know, when you look at cycles. And this is the first time we're gonna actually kinda lead a cycle. Like, you know, we usually I used to say, you know, like, don't go too early on the way of being, a surfer. You get a false negative, the wave will go underneath you. Wait until the wave breaks. Let a few people ride that, you know, wave. Learn from it. And then go own the wave. But this one, you know, it's it's actually the first cycle I I actually was a consumer. You know, I, like, bought my first house. You know, my my wife is a high end interior designer, and it which actually first we did another shoe, so interior designer It the first place I ever bought a a, you know, small condo in San Francisco. And know, I was the consumer for for that Max Rakhlenko: look and Gary Friedman: I have some Belvedere for for stuff I built, you know, and we did that house. And that was the look. So you know, so I kinda know this one. I actually was like, wow. I'm old enough. To live through the cycle here. That's that's good and a bad thing. Right? Max Rakhlenko: But Gary Friedman: you know, why we think we announced, like, we bought we don't even we didn't even announce that stuff yet. Max Rakhlenko: Yeah. Yeah. I can't yeah. I gotta I gotta get off stage. It came out of business. It came out. Yeah. This is a bomb. Gary Friedman: I think I'm in business. Oh, okay. Yeah. So if you guys know, we bought Michael Taylor, you know, Michael Taylor designs that was you know, Michael Taylor was the godfather of the California look in you know, one of the most famous interior designers at the time in the eighties and he did the Albert Just Soleil and his famous, diamond tables in the lobby of the Abbeir du Soleil. So we and I I have the dining table in my Belvedere house. You know, it's it's you know, I've had the Michael Taylor dining chairs and, you know, the snacks that really very cool iconic features. So we bought the Michael Taylor brand. We own all the IP, and, you know, you'll see a fresh only thing coming. So given given the competition a little little heads up. I I better shut up. Why didn't you anything in on the earnings calls? I'm just kinda do this thing, and I thought, like, no way. You know, in the world of AI, if it goes down, Max Rakhlenko: straight copy, but Gary Friedman: yeah, we bought another company, besides that, and and so we, you know, We're well on our way. It's gonna be a big deal. Max Rakhlenko: Awesome. Gary Friedman: Thanks a lot, guys. Best of luck. Operator: Up next, we'll take a question from Michael Lasser. UBS. Cleaning. Michael Lasser: You so much for taking my question. Gary, you you wrote in a letter that the way you offer your guidance is you have very high ambitions, and at times, Gary Friedman: you may fall short of that. Would it make sense to slow the pace of all the initiatives and aim for a little bit more predictability in light of this very dynamic environment And in that case, profitability might come a little higher as a result? Or is the is your theory Michael Lasser: at this point that we're gonna drive top line growth at all costs and the profitability will eventually come. Gary Friedman: I I guess if I Michael Lasser: if I thought that, I would've wrote that. Right? I mean, that's what I wrote. Gary Friedman: You know? I I just think that Michael Lasser: you know, Wall Street's a funny thing. A lot of people said to me throughout my career, hey. You know, I hate being a public company and you know, you gotta report quarterly earnings and it gets you to think small and Gary Friedman: I and I said I have a I, you know, I think that's a choice. Michael Lasser: I actually like the discipline Gary Friedman: of being a public company. I actually like Michael Lasser: that we have to you know, report earnings once a quarter. Right? You know, report numbers and, you know, it makes us stop and think, you know, assess and prioritize and, yeah, and so on and so forth. And and I I like that we have you know, quarterly board meetings, and I like that we, you know, have to you know, go through that process and distill things down and simplify and you know, assess everything Gary Friedman: So Michael Lasser: yes, I I don't mind it. I said the thing I I've learned, and I've observed, I think so many people you know, they get so focused you know, like, on quarterly result. Gary Friedman: That Michael Lasser: you know, that becomes their whole mission. As a CEO, you know, or a leadership team is, how do we make the quarter? And they do a lot of stupid things. To make a quarter that aren't brand building or Gary Friedman: you know, Michael Lasser: business model building or anything. You know? And and I I just yeah. Gary Friedman: I I Michael Lasser: think it's not a smart way to build something great, you know, and and you know, we one of our board members, you know, grew up in Silicon Valley, and she's, you know, Gary Friedman: you know, Michael Lasser: early Facebook, know, team member and everything. Yeah, she always says, like, we're we're like a Silicon Valley startup, you know, Yep. Like, we're you know, semi mature public company. And and I think that's a good thing to be. You know, it creates energy. It attracts great people. You know, great people wanna come in and just, oh, how are we gonna make the next quarter? Oh, let's lower our expectations. Let's make sure we make it. Know, that's like a downward spiral a lot of times. Yeah. I mean, Gary Friedman: we, you know, we Michael Lasser: we wanna do something great. We wanna do the best in the world at what we do. And you know, that's not for the faint of heart. It's not for everyone. You know? But we don't need everyone to buy the stock, and you know, we don't you know, our our our strategy is really simple here. Yeah. From a business point of view, I'd say it's it's we do what we love with people that we love For people that love what we do. We're doing focus groups. We don't do stuff like that. We, you know, we we it's just very personal business to us. And Gary Friedman: you know, probably you know, Michael Lasser: reflect the same way shareholders. You know, we have some people who've been with us forever, some people are out of stock and that's okay. They love us sometimes. Some of don't love us. You know, it's a free world. But I don't know. Like, I Gary Friedman: I I you know, it's like Michael Lasser: sometimes, you know, like, in good markets, you know, we're eating quarters and making quarters. In a market like this, This is the time to you know, make moves and take market share and you know, create real strategic separation on the other side of it. Ready for the Gary Friedman: for the turn Michael Lasser: And I don't think anybody's gonna be more ready than we are. I didn't like, look out when the housing market comes back. We're gonna see you think we're greatest? You you look at our two year numbers? Gary Friedman: You know, like, Michael Lasser: Just Gary Friedman: a handful. Like, you know, it's not that many publicly reported people, but, you know, if you look at furniture based retailers and, you know, a lot of those people, again, even on the list, they sell a lot of accessories and other things. You know, there's not too many just focused on furniture that are even that I every they've been in a store, so they said, like, they'll put this company there. We'll are they even in California? Like, why would we think about them, you know, competitor? Like, you know, they they don't sell anything like that. You know, not they're not at our price points or anything, but yeah, we you know, we took know, kind of national you know, public players and and, you know, have a, you know, at least like, 50% furniture or 80% furniture. Michael Lasser: And so we're gonna be Gary Friedman: more cyclical because of the furniture content, but furniture is the biggest part of the business. And Michael Lasser: Yeah. Gary Friedman: So you know, should we lower our ambition? Like, no. I don't think so. I mean, Michael Lasser: My question was not on be more Gary Friedman: stable? I don't know. Like, are are we not stable? Michael Lasser: I don't know. Like, I No. No. My my work Operator: we're gonna make IT teams EBITDA. Michael Lasser: Yeah. Gary Friedman: My my question wasn't on the the investment. It was more of the Michael Lasser: pay for that. Gary Friedman: It was more about the pace of initiatives than slowing down to eventually speed up. But and and you you're not gonna love my Michael Lasser: follow-up question in light of that, so I apologize in advance. But you Yeah. Gary Friedman: You know, like, I like you, Michael. You ask good questions. I it makes me think. Oh, thank you. Michael Lasser: Uh-huh. My my my second question is in light of the guidance Gary Friedman: that call for the fourth quarter that's called for a slowdown in the top line as well as some absorption Michael Lasser: of the tariffs. Is this a signal that you're running into Gary Friedman: limitations on being able to manage the tariffs with with price and and and we should consider that as we factor our models for next year. Not only is that put a little bit of a drag Michael Lasser: on the top line, Gary Friedman: but also we should consider that may have to absorb some more tariffs into next year. Thank you. Michael Lasser: You wanna take that, Jack? Yeah. Gary Friedman: I'm I'm thinking, Michael. You know, the tariff piece, I don't you know, we didn't materially change the impact from a basis point perspective. Obviously, that's just representative cost alone. You know, the other piece that's not calculated on that is is the price increase. You know, Gary called out in the letter one of the Q3 items was just the the the tariffs on the back order and special order goods. Well, some of that was timing. Right? Because we experienced an increase in expect you know, have expected increase in tariffs We do our mitigation efforts. We do our resourcing efforts, but we you know, concurrently also change prices but you're never perfect. You know, you have some delays in in the effectiveness of those But, you know, you're not gonna call your customers back and say, oh, by the way, the thing you just bought we're gonna be importing it at a 20% tariff. So can you give us more money? So you know, as as we read that needle and get all that, you know, dialed in, that was, some of the some of the things that Surprised us in Q3, and it'll flow a little bit in Q4. But you know, I I don't know that we're ready to to to to say that, you know, make make a statement like you're you're like you're describing. You know, it's it's dynamic situation. Not to mention looking at competitors. What do competitors do? You know, we don't lose sight of that. So Michael Lasser: you know, as far as what 2026 looks like, you know, Gary Friedman: we're a little early for that. I I understand the question and the desire to know. We'll we'll talk about that at the March. But I think, you know, I think we we're proud of how we've been navigating the tariff situation. You know, with with with price, you know, with with mitigation, with resource with with vendor partnerships, with with price increases, everything. Everything that you would expect us to do. So Yeah. I mean, I plus, we probably had the most you know, difficult situation from based on, you know, where we were where we were sourcing from and what we did and yeah, we we you know, read it wrong. We we thought, you know, the president was gonna like you know, moving goods to Vietnam, and Vietnam is you know, a smart place for us to, you know, move goods into and and I'll send Vietnam back here with a 47 per for 46¢ tariff. And we're like, uh-oh. Michael Lasser: That was Gary Friedman: possibly to move it to Vietnam, and it was, you know, a lot of work and a lot of yeah, effort and we were just getting ramped up, and then okay. Now where we're gonna put it? And then, you know, China's going from one tariff to another, and you know, Michael Lasser: and Gary Friedman: you know, there's other places we're moving goods to and moving it to The US and you know, like, it's it's a bit chaotic right now. Like, I don't know. I again, I I kinda look at it all in context, and I say, everything that we're investing in, you know, we're you know, we're building a restaurant company you know, Michael Lasser: I don't know. Name somebody who's Gary Friedman: ever done restaurants of our quality integrated into a retail experience especially a furniture store. Now you'll say, well, you know, I hear something, they sell meatballs or something. Right? And you know? But and actually, you know, we're, you know, we're generating cash. We're paying 65 It's an offset 55% of the rent for the buildings that on average, you know, some are higher, some are lower. And you know, we I think we're one of what is one of seven global luxury hospitality companies that own and operate their own. Michael Lasser: Business. A lot of people go, like, who's your chef? Gary Friedman: Know, what hospitality company runs your restaurants? We run them. Where are they? We're the chefs. And, you know, we have yeah. We've obviously have culinary leaders and chefs and all get together and collaborate. But they're, you know, they're a reflection of you know, what we love and what we do and we we're getting good at it. We're getting better and better. And like, I have an interesting point for a case when what was our our average ticket? $38. $38 and 19 In 2019? Yeah. So, I mean, here's the interesting in fact, we we we just had our ten year anniversary in October being in the restaurant business. We opened you know, in Chicago and that restaurant did get, like, you know, the partner we've you know, that we did it with is a great guy. He's still a good friend, and Michael Lasser: know, and Gary Friedman: super successful It's you know, a lot of times, like, if if you really wanna do something, you you know, someone's full time and doing this and, you know, we we just realized most Michael Lasser: of the chefs you know, driven businesses that are doing hospitality for other people, it's Gary Friedman: you know, kind of a license to name thing. They're not there. I mean, we had a a deal with Brendan, and he he was you know, we had half his time for a while, but then he you know, he had so many other opportunities. And, we realized you know, this is you know, turning into a real thing for us. We we need to make it a core for competency. So we we've invested now for many years, and, you know, it's like but that restaurant in Chicago that we opened at 5,000,000, it's first year. I mean, the the estimate was gonna do about a million bucks for here, and it did 5. It does. 9 or 10,000,000 now. Case. Yeah. And just just just shy of 10. Just shy of 10,000,000 and we opened a second restaurant, a second gallery, you know, in a suburb not too far from that. That's doing 11,000,000. You know? So you think it would've been cannibalized more. And, you know, and we're yeah. Our team is growing and maturing and, you know, collaborating, we're getting better and better. And you know, but if someone would have said, ten years ago that hey. How many people wanna wake up in the morning and go to a furniture store for dinner? You know, or for lunch? Like, I don't think anybody would've. You know? So think about that one. Like, I don't know. Should we not have done it? Because you could have said, like, Gary, that was, like, really hard. Why didn't you do that? Well, we do hard things. You know? And we do things that are unique and differentiated and you know, I think because we know, we're more ambitious than others, we think more deeply than others, and we're we're not just managers. Of something. You know? Managers arrange and organize the status quo. We're we're leaders. And, you know, leaders are leading people somewhere they've never been doing things they've never done. You know? And leaders have to be comfortable making others uncomfortable. You know, because that's what leaders do. Because you know? And and starting with the leader, the leaders may be somewhat uncomfortable. So, you know, I'm gonna I'm Sorry if I'm making you uncomfortable. Michael Lasser: Know, it's just what I do. Gary Friedman: And that's how I know I'm leading. That's how you know you're on the right path. But you know, if you if you can build things that other people haven't built and if you can lead you can create a lot of value. Michael Lasser: And Gary Friedman: we believe we're gonna create a lot of value. Like, maybe not at this moment. You know? Like, we look really risky, I guess, because we have debt, and You know, but we said, you know, we we're comfortable with paying down the debt. There's lots of lots of things we can do. You know? Heck, we've done more zero convertible notes than anybody in history, I think. And if we did four, Michael Lasser: I don't think anybody's done four. I mean, there were Gary Friedman: Yahoo had done two. Know, and at some point, you know, we might tap the convert market. Some point, we may refinance some of the debt with some point, you know, like, who knows? We got we you know, we've got a lot of real estate. When we think we can monetize that over time and and you know, our inventory has been high. We're you know, turning inventory into cash, you know, but we're I'm pretty comfortable. Like, hell, I lived down the edge of bankruptcy my first ten years. This is nothing. Yeah. Like Nope. Michael Lasser: Thank you for all the insight, and I wish you all a very Gary Friedman: holiday season. Thank you. Great. Happy holidays to you, Michael. Operator: The next question comes from Simeon Gutman from Morgan Stanley. Simeon Gutman: Hey, Gary. Hey, Jack. Maybe one question, maybe let's talk furniture. You talk about the backdrop? I know it's been a tough overall market. Can you just talk about how the quarter how the customer changed, the demand for furniture, how your current lines are resonating? And then barring anything in the backdrop getting worse, can we assume that free cash flow stays positive from here on out? Thank you. Bye. You know, I don't know if if this is the time to assume anything Gary Friedman: We'll Simeon Gutman: you know, be a certain way. Right? We just we just had China and Russia fly bombers over Japan. You know, flights hello. Was anybody expecting that? You know? And, you know, then we rallied bombers with Japan or fighter jets whatever. Like, who knows what's gonna happen in this world right now? I mean, there's a lot of discord, and there's a lot of noise. And you know, so I mean, we expect free cash flow to remain positive. Gary Friedman: But Simeon Gutman: you know, did did we expect at any time early in the year that we were gonna have all the tariff announcements, you know, Gary Friedman: such a Simeon Gutman: unpredictable, chaotic way and and have to delay our our interiors booked by eight weeks. Did we think we were gonna launch a stage this year? Yeah. We did. And, yeah, I said the name of that. Okay. This Sorry about that. But Gary Friedman: we, you know, we it's it's it's a really unusual time. And Simeon Gutman: you know, we're not trying to be flat or up three right now. Like, if we're trying to be flat or up three, would we be more predictable? We might. I know. Would that be really good? For the long term? I don't think so. I love what we're doing right now. I love that moves we're making right now. I think nobody's even gonna I think people are gonna be shocked I think competition gonna go, now what? I love, you know, our strategy in Europe. But is it more expensive than we thought? Yeah. It is. Like, know, we build these things during and post COVID, and they're way more expensive. And, you know, it's putting pressure on short term Yeah. You know, cash flow and things. Yeah. Sure. But wait till you see what we invented And, you know, again, necessity is the mother of invention. Put us into a corner, make things tough for us, we'll invent our way out of it. We've designed I think, some of the most exciting retail concepts coming, you know, like, versions of our age. That I think are mind blowing, and they cost half as much. And we have other ones that are equally creative that Gary Friedman: will take probably less than half the time Simeon Gutman: it costs less. You know? And, you know, we've got design ecosystems. We have design compounds. We have you know, at at you know, interior design office. Yeah. We we just got a lot a lot of things and and that's and they're all making a ton of sense. And yeah, so we're I think we're pretty responsive strategically We just don't like to get stuck in the weeds, and not see the bigger picture and you know, yeah, but but we're, yeah, we're really excited about where we are. We're super positive. But can you say things are gonna be super predictable in this what we've just seen in the last six to twelve months, I'd say it's gonna be predictably unpredictable. Like, just what we've all had to navigate and deal with, and, I mean, there's still changes. Like, you know, who knows? There could be a whole new round of tariffs. I mean, the the you know, Supreme Court could say, hey. This is illegal. And then all of a sudden, it's gonna be you if you read the news, gonna be these things happen. They should happen. Those things happen. This changes that. Like, Gary Friedman: well, you know, Simeon Gutman: we'll improvise, adapt, and overcome. That's what we do. Hey. Send me send me in on the free cash flow just so you know, like, talked about the 300,000,000 of of inventory coming down so that this year is a kind of a 200,000,000 figure we talked about. So there's still that element to come. There's we talked about reduction in cap cap capital spending, you know, last Gary Friedman: call. Simeon Gutman: A little bit here. So just there's building blocks to maintain positive cash flow going forward, but, obviously, know, there's a lot of unknowns and a lot of uncertainty. So we'll we'll be talking a lot about that and try try to drive that result as well. Gary Friedman: No exit over the Thank you. Operator: Lifeline? Up next, we'll take a question from Jonathan Matuszewski from Jefferies. Jonathan Matuszewski: Oh, great. Good evening, and and thanks for the time. Appreciate the, the color on market share, Gary. And it's easy for us to track the public players you outlined in the table, but less easy for us to assess, you know, the health of the the fragmented design showrooms. You know, those regional high end stores, some of the local independent boutiques. Gary Friedman: Curious if you could give us a sense of what you're seeing from a dislocation standpoint with majority of your share gains coming from, you know, those channels? Thanks so much. Yeah. I mean, you know, harder for any of us to measure, but, yes, I mean, the feedback we get Jonathan Matuszewski: from Gary Friedman: you know, some of the people that we've acquired and you know, that we know that know, believe we've been the biggest disruptive force the high end of the business over the last you know, ten years. Not more. And so, especially with what we've done, you know, with the new galleries and with the assortment and moving up market and taking the you know, the quality up and the level of design up and you know, so Jonathan Matuszewski: you know, Gary Friedman: I think you could I mean, we used to track how many independent high end boutique there were. Right? There used to be 32 between Yes. Sausalito and Santa Rosa, you know, county in Healdsburg and Sappa Napa and and we always said, you know, that that they all exist because you know, our age had a 6,000 square foot gallery, in Corda Madera, and you know, most of those boutiques were I don't know, 3,000 to 15,000 square feet. You know? All the majority of them kind of Jonathan Matuszewski: close to the size we are. Gary Friedman: And, yeah, it wasn't obvious the assortment. You know? If you didn't get our book, you know, you didn't know how big our assortment was. If you didn't go to our website, you know, you didn't know. And we all said, like, when we have the assortment, in physical marketplace, there will be a lot less than that. You know, you're making me wanna go do the latest math. I mean, we know you know, that it went from, like, 32 to about 18 or 20. You know, over x number of years, and she got do the math again. You know? But I mean, I think, you know, we went from 300,000,000 to three and a half billion, and yeah, some of it's hospitality and, you know, it's yeah. Contract business, and we own waterworks and but yeah, we we we believe most of the share came from the higher end and came from the like, it came from the showrooms, and they came from the independents, and they came from the regional furniture stores, and they came from you know, the Ethan Allens of the world or people like that. And I sticking Ethan Allen or anything, but Jonathan Matuszewski: I mean, Ethan Allen when I Gary Friedman: said our age earlier days, were, like, 1,200,000,000 or something. And, you know, they we we looked up to them and I think they I don't know if they do today five or 600,000,000 or 700,000,000. Jonathan Matuszewski: Yeah. So Gary Friedman: you know, there's always gonna be those shifting dynamics You know, they're sometimes hard to measure. But Jonathan Matuszewski: you know, we Gary Friedman: we like how our business has been performing from a market share point of view, and there's enough data to say you know, we're one of the leading share gainers right now at a know, at a certain size. You know, especially furniture based. Right? Again, know, there's other people that have a big tabletop business, so they have big accessories business. So they're in seasonal businesses like Halloween and Easter and this and Christmas, and we're not in any of those businesses anymore. You know? So yeah, you gotta compare us to the right kind of people. And you know, so we we don't have some of those other businesses that might make us a little less cyclical. You know, there's some of the businesses I think we exited too far. You know, we probably have some more home accessories or you know, some layer, you know, designers you know, that would like to have more things to complete a home. And so, you know, we're considering those things. We used to have a book called The Object of curiosity, and we may read relaunch that at some point. And you might see us I don't know. I wouldn't even rule out would we be in the tabletop business. But just in our own way. You know? And and, don't think I would be in the chase, the holiday businesses know, but it doesn't mean we can't have you know, beautiful candles that are you know, that are like, our branded stuff. You know? We and then we can't have, like, our our maids blanket or things like that. You know? And they're really high end and aspirational and you know, would be great gifts and know, things you'd really wanna in your home to identify, you know, that Jonathan Matuszewski: identify Gary Friedman: your status and where you are in life. So we think we built the brand correctly know, there's gonna be other opportunities like that. But Jonathan Matuszewski: you know, but I yeah. Gary Friedman: Yeah. Hard to it's it's that fragmented. Right? It's, like, not easy to exactly know. Jonathan Matuszewski: Helpful. Thank you, Gary. Operator: And that does conclude our question and answer session. I'll hand the conference back over to Mr. Gary Friedman for any additional or closing remarks. Gary Friedman: Great. Thank you, operator. Thank you, everyone, for your interest. Wanna thank our our teams, you know, that bring our brand to life. Each and every day, you know, throughout our galleries or hospitality or distribution centers or you know, every aspect of the company. You know, everybody in you know, every location around the world, and everybody who's all of our partners around the world that, you know, work so hard to you know, bring these beautiful products to life. You know, we we appreciate everyone and and your efforts and your collaboration. And we wish everyone a wonderful holiday. We look forward to talking to in the next year. Operator: Thank you. Operator: Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.
Operator: Good afternoon, and welcome to KESTRA MEDICAL TECHNOLOGIES, LTD. second quarter fiscal 2026 earnings call. This conference call is being recorded for replay purposes. We will be facilitating a question and answer session following prepared remarks from management. At this time, all participants are in a listen-only mode. I would now like to turn the call over to Neil Bhalodkar, Vice President of Investor Relations, for introductory comments. Neil Bhalodkar: Thank you, Operator. Thank you for joining KESTRA MEDICAL TECHNOLOGIES, LTD.'s second quarter fiscal 2026 earnings call. With me today are Brian Webster, President and Chief Executive Officer, and Vaseem Mahboob, Chief Financial Officer. This call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements. These statements are based on KESTRA MEDICAL TECHNOLOGIES, LTD.'s current expectations, forecasts, and assumptions and are subject to inherent uncertainties, risks, and assumptions that are difficult to predict. Actual outcomes and results could differ materially from any results, performance, or achievements expressed or implied by the forward-looking statements due to various factors. Please review KESTRA MEDICAL TECHNOLOGIES, LTD.'s most recent filings with the SEC, particularly the risk factors described in our Form 10-K, for additional information. Any forward-looking statements provided during this call, including projections of future performance, are based on management's expectations as of today. KESTRA MEDICAL TECHNOLOGIES, LTD. undertakes no obligation to update these statements except as required by applicable law. With that, I will now turn the call over to Brian. Brian Webster: Thanks, Neil. Good afternoon, everyone, and thank you for joining us on today's conference call. We are excited to discuss the strong financial performance we had in the second quarter and the continued progress we are making on our key operational objectives. Before we jump in, I want to begin by grounding us in the patient focus that makes KESTRA MEDICAL TECHNOLOGIES, LTD. a special company. At the center of everything we do are the lives we protect each day and the impact we have on patients, their families, and the providers who care for them. Recently, a patient in Florida collapsed from ventricular tachycardia and required urgent intervention. After stabilization, the patient was discharged with the competitive wearable defibrillator and referred to electrophysiology for follow-up. At his patient outpatient visit, the patient reported poor tolerance of that device. Due to discomfort and adherence risk, the physician transitioned the patient to the Assure system, citing improved comfort and care coordination for the switch. Once fitted with the Assure system, the patient expressed a clear improvement in wearability compared to the previous device. The patient and family also noted greater confidence due to the system's ability to connect them quickly to emergency care. Weeks later, the patient collapsed again at home. The Assure system detected the event and announced it was preparing to deliver therapy. Before therapy was delivered, the patient regained consciousness and successfully diverted the shock, reflecting the Assure system's ease of use and patient-first design. Following the cardiac event, the patient was transported safely to the emergency department, while our team delivered episode data directly to the emergency department. The following morning, care station reports guided discussion during cardiac ICU rounds. The care team described the data as detailed and clinically useful. Two days later, the patient received an ICD. This case reflects how the cardiac recovery system brings together protection, clinical insight, and care coordination to change outcomes when time matters most. While this is just one patient's experience, in 2026, our team and technology helped facilitate many similar life-saving events. We remain mindful of the trust placed in us by clinicians, patients, and their families every day. I would like now to turn over to our recent financial performance. In the second quarter, we continued to reach more patients who are at risk of cardiac arrest, accepting approximately 4,700 prescriptions written for the Assure system. Revenue was $22.6 million, with growth of 53% over the prior year period. Our gross margin climbed over the 50% line for the first time in the company's history, an important milestone for KESTRA MEDICAL TECHNOLOGIES, LTD. The actual gross margin of 50.6% was up 11 points year over year and reflects the attractive unit economics of our business model. This was the eighth quarter in a row of sequential gross margin expansion. We expect continued gross margin expansion in the back half of FY 2026 and remain confident that KESTRA MEDICAL TECHNOLOGIES, LTD. is on the path to 70% plus gross margins over the next few years. With the strong revenue growth that KESTRA MEDICAL TECHNOLOGIES, LTD. is generating, we are seeing nice operating leverage in our business. This leverage supports the investments we are making in the company's key growth drivers that we believe will yield significant long-term value for KESTRA MEDICAL TECHNOLOGIES, LTD. and its stakeholders. Turning to the overall WCD market, we have previously noted that despite the overwhelming evidence that an external defibrillation shock is highly effective in terminating dangerous cardiac rhythms, WCD therapy remains underutilized, reaching just 14% of the eligible US addressable market. That means six out of seven patients that are indicated for a WCD are not being protected by one. The best way for KESTRA MEDICAL TECHNOLOGIES, LTD. to positively influence clinical practice and have more patients protected by WCDs is by generating highly impactful clinical evidence. So one month ago, we did just that with the presentation of the primary results of ACE PAS, which is our FDA post-approval study, at the American Heart Association annual meeting in New Orleans. ACE PAS is the largest real-world prospective WCD study to date, with over 21,000 patients enrolled and protected. The study design includes pre-specified performance criteria with objective performance measurements. The key takeaways from the study results were as follows. First, the Assure system met both of its primary endpoints, demonstrating a safe and highly effective device. It's worth noting that not only was ACE PAS the largest WCD study ever, but it also enrolled the largest percentage of female patients at 34%. As a reminder, 40% of indicated patients are women, and the Assure system is the only WCD specifically designed for women. Next, sudden cardiac arrest doesn't wait. Patients were at high risk during the first 90 days of the study for all indicated populations. ACE PAS data showed patients at a 90-day incidence rate of 1.8% and an annualized incidence rate of 7.5%, which is actually slightly higher than landmark ICD trials. Guideline-directed medical treatment is effective in improving cardiac function, but it requires time, and patients need to be protected from significant SCA risk during their cardiac recovery. Third, at 23.1 hours, Assure had the highest wear time of any US WCD trial. In fact, 30% of our patients wore the device for more than 90 days, demonstrating effective protection for extended therapy optimization. And finally, ACE PAS reinforces that Assure has the lowest false alarm rate, with 94% of patients free from false alarms, dramatically lower than other commercially available WCDs. In our discussions with clinicians after the study results were presented, the most common theme is that the risk level of their patients is higher than they understood it to be, particularly early in the recovery and treatment journey. The existing WCD guidelines were published in 2017 and have not been updated since. We believe ACE PAS, in conjunction with other recent studies, such as SCD PROTECT, provide compelling data on over 40,000 patients that significantly strengthens the existing body of evidence and may help inform future updates to clinical guidelines. You've heard me say before there are three critical questions about the WCD category. The first one is, is there a patient population that has significant health risk? The second question, is there an effective therapy to treat those patients? And the third question is, will the patients wear the device? ACE PAS definitively answers all three of these questions in a very large real-world population. A strengthened recommendation to guidelines would have a positive impact on clinical decision-making and potentially accelerate TAM penetration. Based on our estimates and data from the incumbent, we believe the WCD market growth has already accelerated to the low double digits and will continue to expand into a multibillion-dollar market over the coming years. Moving on to other updates, we continue to expand our sales organization with the goal of further penetrating existing accounts, as well as calling on new potential WCD prescribers. As we have discussed previously, we are targeting geographies in which we have a high volume of WCD prescriptions and where we also have strong in-network payer coverage. We currently have approximately 100 active sales territories, up from about 80 sales territories at the end of 2025 in April. While this will not be a data point that we will be updating on a quarterly basis, our territory additions in the second quarter were in line with our hiring plan. We continue to aggressively expand our sales coverage. In recent months, we have seen the addition of clinical specialists in select markets, complementing our sales territory coverage and supporting further penetration of accounts. We also continue to make progress on improving our RCM capabilities, that's revenue cycle management, while also bringing more payers in-network. At the time of our IPO nine months ago, approximately 70% of our fittings were for patients with in-network benefits. This figure is now in the low eighties. The higher in-network mix meaningfully increases our team's efficiency and positively impacts all our RCM metrics. It's important to note there are over 3,000 payers in the United States, so there is still a long tail of regional and local payers we are working to bring under contract. You all know, we utilize a lease business model. Our substantial investment in our fleet of devices, each with the capacity to protect approximately three patients per year, enables the business to scale with our attractive unit economic profile. While our current business asset pool can support our near-term business objectives, we are continuing to add to our fleet as we grow our field team. Over the long term, we expect about 90% of our annual patient fittings to be accomplished with reuse of existing devices. So in conclusion, the fundamentals of the KESTRA MEDICAL TECHNOLOGIES, LTD. thesis remain intact and were in fact fortified in Q2. WCD market growth is accelerating, 50%. And gross margin has expanded beyond 50% for the first time. We have an underserved medical indication where we clearly have an effective and superior solution. We have rapidly closed the gap on payer endorsement of our product, and we are implementing a commercial expansion plan to significantly grow the business. Our commercial plan is now supported by a large body of clinical evidence that has the potential to influence the prescription guidelines. Our execution has been strong across all elements of the business, and the foundation we have built has positioned KESTRA MEDICAL TECHNOLOGIES, LTD. for strong growth this fiscal year and beyond. I'd like to thank our incredible team in the field and here at the home office in Kirkland for their passion and commitment to the KESTRA MEDICAL TECHNOLOGIES, LTD. mission. I'll now turn it over to Vaseem, who will discuss second quarter financial results in more detail and provide our updated fiscal year 2026 revenue guidance. Vaseem? Vaseem Mahboob: Thank you, Brian, and good afternoon, everyone. Total revenue for the quarter was $22.6 million, an increase of 53% compared to the prior year period. Revenue growth was driven by a 54% year-over-year increase in prescriptions, reflecting market share gains with existing customers and activation of new accounts. Excluding the impact of one-time revenue pickup in the prior year from a payer converting to accrual accounting, our revenue growth for this quarter was 16%. Gross margin was 50.6% in the second quarter compared to 39.6% in the prior year period. As Brian mentioned, we have now expanded our gross margin sequentially eight quarters in a row. The continued expansion in gross margin was driven by the attractive unit economics inherent in KESTRA MEDICAL TECHNOLOGIES, LTD.'s rental model, a higher revenue per fit from more in-network patients, and a 20% decline in cost per fit driven by volume leverage and cost improvement projects. In the quarters ahead, you should expect to see steady and consistent increases in our gross margins as our rental model benefits significantly from the volume and depreciation leverage. We remain confident in our ability to achieve 70% plus margins in the next few years. As we have discussed previously, a higher in-network mix unlocks the power of KESTRA MEDICAL TECHNOLOGIES, LTD.'s business model. We ended the quarter with our in-network mix percentage in the low eighties and are seeing improvements in all three key drivers of our conversion rate: our prescription fill rate, our bill rate, and our collections performance. Our conversion rate in the second quarter was 48.8%, up from an adjusted conversion rate of 48.2% in the prior year period. As we continue to bring more payers in-network and enhance our revenue cycle management capabilities, we will see benefits in our revenue growth, our gross margins, and our profitability profile. GAAP operating expenses were $43.2 million in the second quarter and included $1 million of non-recurring costs associated with professional fees and costs related to our recent equity offering. GAAP operating expenses were $25 million in the prior year period. Excluding non-recurring costs and stock-based compensation, operating expenses were $33.5 million in the second quarter of fiscal year 2026, compared to $23.8 million in the prior year period. The increase was primarily attributable to investments in commercial expansion and public company costs. GAAP net loss was $32.8 million in the second quarter compared to a GAAP net loss of $20.6 million in the prior year period. And adjusted EBITDA loss was $19.7 million in the second quarter compared to an adjusted EBITDA loss of $16.1 million in the prior year period. Cash and cash equivalents totaled $175.4 million as of 10/31/2025. This does not include the $148 million of net proceeds we received from our public equity offering last week. I will now provide our updated fiscal year 2026 guidance. We are increasing revenue guidance to $91 million, representing a growth of 52% compared to fiscal year 2025. This compares to prior guidance of $88 million and our initial fiscal year 2026 guidance of $85 million. Underpinning this guidance is our expectation that we will continue to see strong growth in prescriptions as the market share increases and the WCD market continues to expand. We expect revenue per fit to continue to benefit from a higher mix of in-network patients and improvements in our revenue cycle management capabilities. With that, Operator, we have concluded our prepared remarks and are ready to proceed to the Q&A portion of the call. Operator: Thank you. At this time, we'll conduct a question and answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 1 again. Please limit yourself to one question and one follow-up. In the interest of time, please stand by while we compile the Q&A roster. One moment for our first question. And our first question will come from the line of Matthew O'Brien from Piper Sandler. Your line is open. Matthew O'Brien: Good afternoon. Excuse me. Thanks for taking the questions. For starters, maybe Vaseem or Brian, just talk a little bit about the guide for the year. You know, it's nice to see it above what you know, how you'd be here in fiscal Q2. But maybe just talk a little bit about the cadence of the guidance, especially Q3, which I think has some seasonality to it. And just given that you're a newer public company, maybe just talk about that. And then and then just, you know, other factors you're considering as you think about the full year? And then again, I do have a follow-up. Vaseem Mahboob: Yes. Thanks for the question, Matt. You know, as we've said in the past, we are the run rate business and we track our performance on a daily, weekly, and a monthly basis. Our revenue growth has historically been driven by remaining focused on these drivers and tracking all of the KPIs in the right direction. Our strategy to expand our Salesforce responsibility so that we continue to deliver the service level to the patients, and we've talked about how critical and important that is. And we are still early in our public company journey, so our guidance will last is based on delivering consistent quarterly results that establish trust and confidence with investors. And, again, just a reminder, we have one of the fastest growth profiles in all of MedTech. And consensus has us growing at 45% to 50% through 2028. Matthew O'Brien: Thanks for that. And then as a follow-up in a million places I could go here, but, you know, maybe just Brian, use the proceeds now. And, again, I don't I don't want to skid over our skis too much as far as the impact of some of these investments, but just how do we think about, you know, this additional capital in terms of accelerating some of the growth initiatives that you have at KESTRA MEDICAL TECHNOLOGIES, LTD.? Thanks so much. Brian Webster: Yeah. Thanks for the question, Matt. You know, what we're trying to do is we're trying to build a durable, top-tier med tech growth profile for years to come. And, you know, as you know, we in the first half of the year, we've gone faster than our plan, and so we wanted to de-risk any future capital needs and really fortify our balance sheet. As we continue to invest in those key growth drivers, you know, we decided to take advantage of the timing of the strong ACE PAS clinical results and also our strong Q2 performance. And I think from our perspective, you know, we're going to now with that capital in hand, we're going to go through our planning process. On our fiscal calendar, we are just kicking into our annual planning process. We'll be doing that in conjunction with our board over the next few months, and we'll be outlining what the impact of that capital may be on our growth strategies for the next couple of years. So it's a strong move for us. We feel good about having the balance sheet in a good place. And it gives us optionality, frankly, especially with the potential of, you know, the clinical results impacting the guidelines in the future. So we're happy to get that done. Matthew O'Brien: Got it. So much. You bet. Thank you. One moment for our next question. Operator: Our next question will come from the line of Larry Biegelsen from Wells Fargo. Your line is open. Larry Biegelsen: Good afternoon. Thanks for taking the question. Congrats on a nice quarter here. Brian, I wanted to ask about the data. I heard your comment about the WCD market growing low single digits. Are you already seeing an impact from the data? Any color on this? Is this more share capture, you know, more market expansion, or both? And I had a follow-up. Brian Webster: Yeah. Hey, Larry. Thanks for the question. And just to clarify, the market growth is low double digit, is our calculation, which is up, you know, at least several points from at the time of the IPO. So we are seeing the market expansion absolutely accelerate. When it comes to the post-clinical results presentation, we are, you know, it's a little too early to see it in the numbers, but anecdotally, we're absolutely seeing some really exciting cases where our reps have been in front of clinicians, telling our story, telling the story of our clinical data, and clinicians making different decisions than they had before. I've heard directly from a handful of reps who said, when I presented the data to my physician, they said I didn't realize the risk level was this high, I'm going to start thinking about this device for a broader spectrum of my patients. So that's really good news for us. I think another really interesting data point, obviously, with that data in hand, we're hitting the street and really working on the clinical. And so our medical education team actually, in the month of December, this is sort of a fun fact, the month of December, we will be conducting more medical education events with providers than we have in Q1 and '26 combined. So we're getting after it, and so far, the feedback has been terrific. And the team is really excited to be out there talking about it. Larry Biegelsen: That's great to hear. And, Brian, did you talk a little bit about the rep productivity among the base reps and the new reps and your Salesforce hiring plans? I heard the 100 number, but, you know, the hiring plans following the recent secondary, are you planning to accelerate your commercial plans? And, you know, are you willing to kind of tell us where you expect to end the year? Thank you. Brian Webster: Yes. Thanks, Larry. If you recall, at the time of the IPO, we said we had about 70 reps at that time. We said over the next couple of years, we were going to double that. As I reported, we were up to about 100 reps now. I think we'll probably, in the next six to eight months, get close to having that doubling of that original number. So, you know, we definitely are right on plan with our hiring plan. As I mentioned to Matt's question, we are going to be going through a planning process here over the next few months to kind of figure out what we want that rate to look like as we move into our next fiscal year '27. We'll be taking that question up. And, you know, the nice thing is we have, as I mentioned, we have the optionality now to look and say, okay, where might we want to evaluate, you know, an even accelerated plan? Larry Biegelsen: Alright. Thanks so much. Operator: You bet. Thank you. One moment for our next question. Our next question will come from the line of Michael Polark from Wolfe Research. Your line is open. Michael Polark: Hey. Good afternoon. Maybe a question on the guidelines. You know, is there an event path to identify for us, Brian, timing, you know, a lot of these fields, guidelines can take a really long time. And it sounds like you're in front of doctors with the message from all this data anyways. But are the guidelines nice to have down the road, or do you view it as a needle mover? And if so, when might something like that be up for adjustment? Brian Webster: Yeah. Thanks, Mike, for the question. You know, first, let me just be extremely clear in saying that, you know, our exciting growth profile that we have planned for the next five years does not rely on the guidelines changing. There's no reliance on that in our business plans. So having said that, we do believe that the clinical evidence warrants a review of that. Now, the committee that is responsible for this is the arrhythmia committee that is part of and HRS. They will meet on an ad hoc basis when there's sufficient new evidence or a new product comes to market. So there's not a scheduled time for them to do that. We will obviously be seeking to get the newly established evidence by both KESTRA MEDICAL TECHNOLOGIES, LTD. and our competitor in front of them so they understand that maybe this is the time to start to reevaluate those guidelines. And we think there's a real reason, real strong clinical reason for them to do that. So I don't know a firm guideline meeting schedule. But I do think there's going to be some strong momentum for getting that ball rolling. Michael Polark: And for the follow-up, the comment on low double-digit WCD category growth, just doing some napkin math here, you're growing 50%. You're maybe 10 points of the market. You know, it kind of implies your competitor hasn't slowed down versus where they were. You know? So you're not purely taking from them. It is market expansive. And I'm curious just to confirm the math that the way you see your competitor, they're growing like they used to, and you're adding on top of that. Thank you. Brian Webster: Yeah. I think the math is roughly, first of all, it's all, you know, they released their earnings results a month ago or so now. And they did call out this part of their business. So they reported a little over 5% growth in that business. So if we have, we think we're probably at about 13% share now. So if we're growing at 53%, at 13% of the market, and they're growing at 5% at 87% of the market, you can do the math, and that's how we get there. And I think it's as good a data as we've ever had because in the past, they haven't really called out that specific part of their business separately. So we feel like that's a really supportable data point. We, of course, will buttress that data with our claims data that allows us to come at that from the other direction. But we feel pretty good about what that's telling us. And it definitely says that, you know, we're definitely taking share where we put reps, and we're also growing the market. Michael Polark: Thank you. Operator: Yep. Thank you. One moment for our next question. Our next question will come from the line of David Roman from Goldman Sachs. Your line is open. David Roman: Thank you. Good afternoon, everyone. I know there's been a lot of focus on the ACE PAS data here and what they might be able to do for guidelines. But if you kind of reflect on what you're seeing on a day-to-day real-world basis, what are some of the things that you view as contributing to acceleration in overall category growth? And as we think through things like the conversion rate and some of the other metrics that kind of inform the model on a go-forward basis, maybe just update us on where you think we are and some of the key drivers there, like the prescriptions, the fitting, and then the fitting to what's revenue and where you are on kind of average wear time. I know I threw a lot out there, but I'll leave it at that for my question and follow-up then. Brian Webster: Thanks, David. And by the way, your audio was a little garbled, so I think I got your questions. I'll let Vaseem talk to the conversion rate stuff. But when it comes to the clinical data and what we're seeing, you know, I think the biggest impact of it is it's, you know, everybody knows that an external defibrillator works. We've proven that patients will wear our device for extremely long periods of time if necessary. So the remaining question was around risk, and, you know, our competitor recently published a big German study, which was a national registry, and it was really a study that was trying to identify what the risk of cardiac arrest was in these patients, including the non-ischemic cardiomyopathy patients. So now on top of that 19,000 patient study, we come in with a 21,000 patient study that has, among other metrics, that data, and it confirms that risk level in an entirely different healthcare system, the United States system. So now we have two different countries, two different systems that are both saying the same thing about the risk of these patients, especially in the first 90 days. That's the eye-opener for these clinicians. They're saying, I didn't realize the risk was that great. And that's leading them, you know, to assess the decisions that they're making about WCDs. It is early. We're just getting started with the data, but the early returns are certainly positive. Vaseem, you want to talk a little bit about the impacts of insurance coverage and in-network and conversion rates, etcetera? Vaseem Mahboob: Sure. So, David, thanks for the question. I think, you know, I look at the conversion rate metric, I think we've made such tremendous progress over the last few years. Just to remind everybody, our conversion rate in fiscal year 2024 was 38%. Fiscal year 2025 was 44%. We just for this quarter, our conversion rate is going to be approximately 49%. So a huge, huge improvement. And I think that kind of goes to the point that you were making, David, which is all of those KPIs, whether it's the prescription fill rate, or the in-network mix rate, which really drives the conversion rate and or collections performance, they're all tracking in the right direction, and we continue to make good progress on that. And our strategy for that in-network mix remains unchanged, as we have said in the past. You know, we are deploying new reps into high prescription density areas, and also deploying them into high coverage areas. So that's really helping us, you know, move the rate along. Again, I want to remind everybody, the gap to close for us is not from 48% to 100%. It's just for those high sixties, which is where we think Zoll is at with 25 years. David Roman: Great. Thank you for all the detail. Operator: Thank you. One moment for our next question. Our next question will come from the line of Marie Thibault from BTIG. Your line is open. Marie Thibault: Good evening. Thanks for taking the questions. Wanted to ask here quickly about the prescription volume strength. A couple of quarters here, above 50%, do you expect that to be sustainable? Or did you see anything kind of out of the ordinary in the quarter? And as part of that, are you also sort of seeing prescribers, kind of alternate prescribers like physician assistants and nurse practitioners starting to join up as prescribers? Just would love to hear a little bit more of what you're seeing on the ground from the prescribers. Brian Webster: Yeah. Thanks for the question, Marie. I think when it comes to, you know, the north of 50% rate, we don't see anything that would reduce that. We're winning. Not only are we further penetrating existing accounts, but we're also continuing to add additional hospitals to our account list. So we expect to continue to see nice prescription acquisition rates. When it comes to the prescribers themselves, I think the typical prescribers for us, they're not all just the physicians. We get a lot of physician assistants. We get a lot of other people in the providers who are actually executing on those, obviously under the umbrella of the physician. So, you know, when we talk about medical education and some of our strategies around that, especially with the clinical results, you know, we're not just targeting physicians. We're also targeting APPs and other clinicians in the practice because we know that, you know, they're really central to the strategy there. So I think the good news about the high prescription rate in Q2 was that, you know, that didn't have the benefit of the new clinical results. So, you know, I think those stood on their own, and there was no sort of one-off events or anything else that you might point to and say, hey, that's kind of an unusual event. This is just, this is literally, as Vaseem said earlier, it's a day-by-day, week-by-week, month-by-month business, and we're just out there competing every single day in the territories that we're in. And the fact is that we're winning where we're competing. Marie Thibault: Yeah. Very helpful and good point on ACE PAS not being in the quarter. Wanted to follow-up here then with any detail on sort of OpEx spending plans. I noticed a little bit of a tick up this quarter, obviously, the new territory reps. That would make sense. Is this the new sustained level going forward? Anything you want to give us on the cadence of OpEx going forward this fiscal year? Thanks for taking the questions. Vaseem Mahboob: Marie, thanks for the question. And I think on the OpEx, we are winning, we are overachieving versus our guidance that we had put out initially. And we know that that comes with some, you know, level of investment and reinvestment. And we continue to make sure that we are deploying our investments into the two key areas, which is one, expansion of the team, and two, you know, on the revenue cycle management capability. And Brian has mentioned in the past, this is a service level business. We have to make sure that not only do we have the right level of coverage, we want to make sure that we have the right level of CapEx to support those teams. Then at the same time, to be able to convert those prescriptions into cash and revenue, we have to have the right revenue cycle management capability. So, you know, again, we feel that, you know, the run rate that we had on will help us get to, you know, not only the guidance, also continue to accelerate growth into 2027, and we'll continue to make those investments. Marie Thibault: Alright. Thanks so much. Operator: Thank you. One moment for our next question. Our next question will come from the line of Travis Steed from Bank of America Securities. Your line is open. Stephanie Pizzola: Hi. This is Stephanie Pizzola on for Travis. Thanks for taking the question. Congrats on a good quarter. Last quarter, you talked about the expanded clinical specialist role to support further penetration in existing accounts. So just wanted to follow-up on that and see if there's anything you can share on how that strategy is going and the impact on the business and penetration within existing accounts in making that change. Brian Webster: You bet. Thanks, Stephanie, for the question. Yeah. I think as we reported last quarter, we were starting to hire some clinical specialists to put those in some of our really high-producing accounts. And, you know, the basic strategy there is once you get a high-performance account up and running, you have a clinical specialist who can come in and really maintain that account and get that territory rep a little more bandwidth to go open up new accounts. And that's really the core of the strategy. We started to implement that program in the last quarter. And we hired our first kind of cohort of those clinical specialists. So far, the feedback on that has been really good. I don't see this as a case where we're going to, you know, add one to one for every rep, but I do think that we will selectively put more clinical specialists out there to help manage the just the day-to-day, you know, care and feeding of those significant accounts. So so far, so good on that. The early returns are positive, and we like the strategy. Stephanie Pizzola: Thank you. That's helpful. And then for my follow-up, just wanted to ask on gross margin. It was another great quarter of expansion there, you know, reached above 50%, and it talked about getting to 70% in the next few years. So, you know, just wanted to follow-up on the path to get there. And then any help in how we should think about the gross margin for this year? Thank you. Vaseem Mahboob: Yeah. No. Thanks, Stephanie, for the question. On gross margins, again, as Brian mentioned in his prepared remarks, eight quarters in a row, we have expanded our gross margins. And I think that goes back to the high thing that we have kind of constantly said we're going to do something and done it. And we feel really good about the work that's gone into getting us to the 50% plus range, and I think the unit economics that we have talked about plus the leverage that you get on the volume and the fact that the progress we are making with the in-network mix on rev cycle is really, really helping us, you know, expand our gross margins. And we feel at this point that, you know, we have good clear line of sight to the margins, you know, in the next couple of years, and we'll continue that journey. That as we run more volume through the P&L and as we continue to make progress on that in-network mix, we should see sustained margins expansion in the near term and the long-term line of sight to the 70% plus gross margins. Operator: Thank you. One moment for our next question. Our next question will come from the line of Rick Wise from Stifel. Your line is open. Annie: Hi. This is Annie on for Rick. Thanks for taking our question. So last quarter, you hinted at the potential for new products or technology launches at KESTRA MEDICAL TECHNOLOGIES, LTD. Could you give us a sense for what kind of innovation you might be working on? Are you focused on updating your existing systems or potentially developing completely new products? Thanks. Brian Webster: Yeah. Hey, thanks for the question. You know, we're not ready to disclose our full product pipeline for competitive reasons, of course, but we do have, you know, we very intentionally design the Assure system to be three distinct platforms: the WCD platform, the wearable platform, and the digital platform. And what we're doing is in our pipeline, we're innovating in each of those three platforms. Some of that innovation is extending our current capabilities to further differentiate our product. Some of that is bringing new capability, new therapeutic capability, and diagnostic capability to the product. I'll say this. We just published a 21,000 patient clinical study with an incredible amount of data, and we're going to follow that data to develop solutions for unmet needs and other patient conditions where our technologies can be useful. And really our focus. And I think if you look into the details of that data, it will give you some clues as to where we're going. And we're excited about using that data to help us to be an even better solution. So we've got a steady stream of innovation coming over the next two or three years, and we'll be excited to, you know, get that out into the market at the appropriate times. So thank you for the question. Annie: Thanks, Brian. Operator: Thank you. I'm not showing any further questions at this time. I will now turn the call back over to Brian Webster for closing remarks. Brian Webster: Okay. Well, thank you, everyone, for joining the call today. And as we mentioned earlier, we're pleased with the quarter that we have. We've got really exciting momentum going. And as I said, the core KESTRA MEDICAL TECHNOLOGIES, LTD. thesis is intact, and we're picking up steam on it. So we're excited about the back half of the year, and I'm very proud of the KESTRA MEDICAL TECHNOLOGIES, LTD. team for the way the team has executed our business plan every day, every week, and throughout the quarter. So thank you for joining us. We'll look forward to seeing you on the next call. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Greetings, and welcome to the Frequency Electronics, Inc. second quarter fiscal 2026 Earnings Release Conference Call. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Thomas McClelland, President and Chief Executive Officer. Sir, the floor is yours. Good afternoon. And thank you for joining Frequency Electronics, Inc. second quarter fiscal year 2026 earnings call. Thomas McClelland: With me today is our Chief Financial Officer, Steven Bernstein. On our first quarter fiscal 2026 earnings call in September, I discussed two near-term factors that produced a quarter with lower revenue than recent trend levels suggested. The first factor was that strong execution in fiscal 2025 allowed the company to produce revenue on certain programs in fiscal 2025 that we had originally expected to produce over a more extended period of time in fiscal 2026, essentially pulling forward some revenue. The second factor was customer-driven delays on a few key programs that pushed revenue recognition out of the fiscal first quarter. Despite those issues, I noted on that call that six weeks into the second quarter, we saw that those delays were behind us, making significant progress towards a bigger book of business. I'm pleased to report on today's call that our second quarter performance was very strong across a number of key metrics, as we resumed our revenue uptrend and have numerous proof points to support our belief that this will be a strong multiyear growth period for the company. Steven will provide more financial details later in the call, but I want to take a few moments to highlight several important data points and trends. For this quarter, we reported revenue of $17.1 million, up 24% sequentially. This was the third highest quarter of revenue in the past decade, with only two higher in that period having occurred in the third and fourth quarters of last fiscal year. In short, though our business does not proceed in a perfectly linear fashion, we have established a new higher baseline on which we expect to build in the years ahead. To illustrate that point, our quarter-end backlog was $82 million, the highest in company history and up 17% since our fiscal year-end in April. As we continue to book new business that is funded, many of the contracts we signed have initial funded portions, which are only a fraction of the full contract award with additional funding that comes later in the course of the contract. Meaning that the funded backlog we show is conservative relative to our bookings, and that existing contracts can continue to contribute to backlog in the years to come. While backlog in any given quarter can fluctuate based on newly funded awards and what is converted into revenue in a given quarter, based on what we are seeing coming down the road, we believe it's reasonable that we could see backlog north of $100 million in the not too distant future. Critically, this growth in backlog that we're describing is coming from our strong existing business. We know that many of you are excited for the growth prospects that we have coming in the future in large and growing end markets such as quantum sensing, proliferated satellites, and alternative station navigation and timing or alt PNT programs. We share that optimism and expect to participate meaningfully as these sectors expand. Critically, while these white space opportunities are much larger than our historical markets, we're not standing around waiting with nothing to show for it in the interim. These new markets will be additive to what is already a strong growing current business, as evidenced by our strong performance this quarter and the growth in funded backlog. We anticipate multiple awards in the coming months, some of which are as large or larger than the biggest ones we have historically announced. This is today's core business, which itself has years of profitable growth potential and upon which the future growth opportunities in quantum sensing, magnetometers, and other alt PNT and timing solutions as well as proliferated satellites will be additive. In other words, we can be a substantially larger company in the years to come as we layer new growth opportunities, which are built upon our industry-leading capabilities on top of a strong and growing core business. It's exciting to work with some of the next-generation defense companies, and they will be part of our growth story, especially in new technologies. At the same time, our long-standing strategic partnerships with the major prime contractors are also very important for our current and future business, and we have advantaged positions with them on many programs because of our technological capabilities. In multiple cases, we are sole source providers, and we're often the partner of multiple primes competing for the same government programs, meaning we can win regardless of whom the government selects as the prime on a given program. Turning to space, this means a significant and expanding market for us. We've been participating in space business for decades, and we see a long runway of growth ahead. For example, the US Space Force recently launched navigation technology satellite three, known as NTS-3, an experimental navigation satellite, a major milestone aimed at advancing more resilient next-generation PMT architecture. Our technology is onboard this satellite and underscores the strategic relevance of the solutions that Frequency Electronics, Inc. provides. We also have a strong and growing defense business that is booming and which we envision growing sharply for many years to come. On our last call, we highlighted the number of the critical multidomain defense systems we are involved with. We anticipate much continued growth from these programs as well as new ones. Just last week, the missile defense agency announced it has begun phase one of awarding contracts for the scalable homeland initiative innovative enterprise layered defense program, otherwise known as SHIELD, which is part of the Golden Dome initiative. We anticipate our technology being part of multiple bid winners' programs. Defense spending continues to increase, particularly in missiles, munitions, and other modernization initiatives. As an example of rapidly increasing scale, last week, the Pentagon announced plans to procure 200,000 drones by 2027. While not all of those require high-end precision timing, this illustrates the magnitude of modernization underway and the breadth of defense and space technology initiatives we will participate in. As we've shown over the past few quarters, the path there is not likely to be linear on a quarter-to-quarter basis, but the underlying strength in our core business and the growth prospects in our new areas support a consistent multiyear up into the right trajectory from a market share leader with growing strategic importance in its industry. Look forward to continuing to demonstrate this in the quarters and years to come. Two final notes on scheduling before I turn things over to Steve. Out of respect for our friends in the federal government, who could not attend our previously scheduled quantum sensing conference in October due to the government shutdown, we moved the conference to January in New York City. We have an excellent agenda that will cover quantum policy, multiple military missions that envision utilizing quantum technology, application research from leading national and academic labs, as well as updates on clock and oscillator applications. We look forward to hosting this event next month and gathering many of the leading players in the industry, many of whom we are already working with to build out our quantum future. Additional details related to this event are available on our website. In addition, we look forward to meeting with many of you at the Needham Growth Conference in New York City in January. And now I'll turn the call over to Steve to provide some more financial details. And I look forward to taking your questions during the Q&A session following Steve's remarks. Steven Bernstein: Thank you, Tom, and good afternoon. For the three months ended October 31, 2025, consolidated revenue was $17.1 million compared to $15.8 million for the same period of the prior fiscal year. The components of revenue are as follows. Revenue from commercial and US government satellite programs was approximately $4.6 million or 27% compared to $9.4 million or 59% in the same period of the prior fiscal year. Revenues on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the Frequency Electronics, Inc. New York segment. Revenue from non-space US government and Department of Defense customers, which are recorded in both the Frequency Electronics, Inc. New York and Frequency Electronics, Inc. ZIFER segments, were $11.9 million compared to $5.8 million in the same period of the prior fiscal year and accounted for approximately 69% of consolidated revenue compared to 37% for the prior fiscal year. Other commercial and industrial revenue were approximately $560,000 compared to approximately $591,000 in the prior fiscal year. Revenue for the three months ending October 31, 2025, was higher than revenue in the prior fiscal period due to an increase in non-space Department of Defense products in the Frequency Electronics, Inc. ZIPER segment. This increase was in both shipment-based products as well as products accounted for under the percentage of completion method. For the three months ending October 31, 2025, both gross margin and gross margin rate decreased compared to the same period of the prior fiscal year. The decrease in gross margin and gross margin rate were attributable to a change in the mix of high-margin production satellite programs in the prior year periods versus lower-margin programs with significant nonrecurring engineering efforts during the three and six months ending October 31, 2025. We demonstrated meaningful operating leverage in the business as compared to Q1. Our gross margins often have some variability depending on the shipment in a given quarter or the amount of new engineering development versus repeat business throughout a period. But we remain committed to ongoing improvements in profitability across our business. We have made excellent strides in this regard in the past few years, and it continues to be an area of emphasis. For the three months ended October 31, 2024, selling and general administrative expenses were approximately 21% of consolidated revenues. The increase in SG&A expense during the three months ending October 31, 2025, was due to the fluctuation in the various expense accounts that make up SG&A. R&D expense for the three months ending October 31, 2025, decreased to approximately $1.2 million from $1.6 million for the three months ended October 31, 2024, a decrease of approximately $400,000 and were approximately 7% and 10%, respectively, of consolidated revenue. Fluctuation in R&D expenditures will occur in some periods due to current operational needs supporting ongoing programs. The company plans to continue to invest in R&D in the future to keep its products at the state of the art. For the three months ending October 31, 2025, the company recorded operating income of approximately $1.7 million compared to operating income of approximately $2.6 million in the prior fiscal year. Operating income decreased due to lower gross margin and increased SG&A as described above. Other income expense net is derived from various sources. The majority of the approximately $200,000 of investing income for the three months ended October 31, 2025, was from interest income and unrealized gain on assets held in the Frequency Electronics, Inc. deferred comp trust. This yields a pretax income of approximately $1.8 million for the three months ending October 31, 2025, compared to approximately $2.7 million pretax income for the three months ending October 31, 2024. For the three months ended October 31, 2025, the company recorded a tax benefit of $31,000 compared to a tax provision of $139,000 for the same period of the prior fiscal year. Consolidated net income for the three months ending October 31, 2025, was approximately $1.8 million or 18¢ per share compared to approximately $2.7 million or 28¢ per share for the same period the previous fiscal year. Our fully funded backlog at the end of October 2025 was $82 million compared to approximately $70 million for the previous year ended April 30, 2025. The company's balance sheet continues to reflect a strong working capital position of approximately $31 million as of October 31, 2025, and a current ratio of approximately 2.6 to one. Additionally, the company is debt-free. The company believes that its liquidity is adequate to meet its operating and investing needs for the next twelve months and the foreseeable future. I will turn the call back to Tom, and we look forward to your questions later. Thomas McClelland: Thanks, Steve. We are now ready for any questions. Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Once again, please press 1 if you have a question or a comment. The first question comes from George Marema with Pareto Ventures. Please proceed. George Marema: Thank you. Good afternoon, Tom. I have a couple of questions. So I saw the other day, congratulations. You guys won on the first tranche of the Golden Dome Awards. I was wondering if you could provide any color on the frequency kind of component and system and quantities opportunity in that program. Thomas McClelland: Yeah. I don't think I can provide a whole lot of details. You know, Golden Dome is one of those things that is sort of in the process of being defined as we speak. And it's a little hard to precisely define exactly what is encompassed by that. I think, suffice it to say, we just in general terms, we anticipate participating in several different aspects of what will ultimately become Golden Dome. So in particular, you know, there are ground-based missiles. And as we've discussed previously, we're already very involved in both Patriot and THAAD programs. But, of course, one of the big things that is being pursued in Golden Dome is a space-based approach to missiles and defense. And there are various aspects of that. And we anticipate, although that's not something that we're under contract for at this point in time, we do believe that we will be involved in that in a very significant way in the near future. Yeah. I think that's about as much as I can say at this point. George Marema: Okay. And could you comment on your Colorado operations? Like, what kind of activities are going on there today? Thomas McClelland: Oh, sure. So we talked about that a little bit last quarter. I think the starting point for that is that we saw an opportunity to hire several senior scientists from NIST in Boulder, Colorado, as they were part of this federal effort to reduce the ranks there really pretty significantly. So we were successful in that. We've hired several people now. Of course, they weren't interested in moving to Long Island, but if we were willing to set up shop in Colorado, they were interested in joining us. So that's what we did. The focus primarily of the facility that we have started there in Boulder, Colorado, is technology. But we have some key efforts that are really going on there also in some very low phase noise oscillator technology that was actually started by work at NIST in Boulder. But the primary focus there is quantum technology. So we have magnetometer development that's going on there in Colorado. And we have established some cooperative research and development arrangements or CRADAs with several different research groups at NIST. And so some of that is in Rydberg sensors, which is a type of quantum sensor. And we also have some efforts in low phase noise oscillators, etcetera. So we're pretty excited about the Colorado setup. We have a really talented group of people working there. And, of course, we anticipate that, just in case you weren't aware, this is the Boulder, Colorado area. It is a focus of precision time and frequency technology with the NIST there, but also the University of Colorado. There's a tremendous amount of research there, and we hope to be able to attract talent from that area in the years to come. So yeah, that's pretty much the story at this point. Operator: Okay. Thank you, Tom. I'll get back in queue. The next question is from Chris Pokosky, a private investor. Chris, please proceed. Chris Pokosky: Hello. Good afternoon, and congratulations on resuming growth. Thomas McClelland: Thank you. Chris Pokosky: So you talked about how because this past quarter, you had more work in non-space related military applications where your work was apparently required more investigation and more R&D. The margins were lower. It seems logical that as you continue doing that work, less investigation will be required, then you kind of climb into higher margins. Am I thinking of that correctly? Thomas McClelland: Well, I would say things just a little bit differently. I think in the last quarter, the results were less than we might have expected otherwise, primarily because we had some significant delays in programs. I think that a lot of the things you're referring to, the non-space defense activity that we're involved in, is really pretty high-margin programs. And, you know, we expect those to be quite profitable. As always, we have a mix of things. When we do new development, and we are involved in some new development programs, in particular in some advanced missile technology, we do anticipate somewhat lower margins. But yeah, anyway, I think that is what I would say. Chris Pokosky: Alright. So some of the reason for the lower margins was because of interruptions of funding. You get to put work down and then start it over again. Is that what you're saying? Thomas McClelland: Well, that's correct. I think that it's not so much that that resulted in lower margins, but it resulted in delays in revenue. Revenue that we anticipated during that quarter, we weren't able to realize because we were put on hold on programs and weren't allowed to do any more work. Chris Pokosky: I see. Now that the shutdown is over, are those programs restarting? Have they restarted all? Thomas McClelland: Yeah. A lot of that, interestingly, wasn't really due to the shutdown. The programs were ongoing, but it was more about, we had actually brought up issues with some of the requirements that were levied on Frequency Electronics, Inc. It was really because of that that we were put on hold on several programs. And that was necessary for our customers to figure out what they really wanted in terms of performance requirements. What I will say about the government shutdown is that primarily that affected us because there are new programs that we anticipated getting started that would have started actually by now, which we're still waiting for. And so I think the primary thing was that some of the contracting activities that we thought would have taken place earlier haven't happened yet. Chris Pokosky: So if it wasn't for the shutdown, you would have even higher backlog. Thomas McClelland: That's correct. That's absolutely correct. Now, go ahead. You know, I should point out in that regard, and I tried to in the opening remarks, I tried to point this out. You know, when we get awarded a new contract, we'll announce, assuming it's a significant contract, we'll announce the full amount of the contract, but we won't add that full contract amount to our funded backlog. We only add the funded portion of the contract. So if we get a $10 million contract and we get funded for a million dollars initially, we would add a million dollars to backlog. Although, when we make a press release, we'll announce that we got a $10 million contract. Those numbers are all hypothetical. Let me just point out. Chris Pokosky: Okay. So this back and forth on requirements, is that progressing? Have you resolved most of that by now? Thomas McClelland: We have resolved most of that at this point in time. There is always a potential for more kind of issues in that regard in the future. But I think in the particular cases, referring to here, those issues have been resolved. Chris Pokosky: Alright. And have new contracts started, new funding started to appear after the shutdown? Or are they still trying to figure it out? Trying to catch up? Thomas McClelland: Well, we've had a few small things since the shutdown, but we are anticipating some much more significant stuff which hasn't arrived yet. Chris Pokosky: Alright. And I guess the major question I was trying to get to in a roundabout way is, you know, are we, as these requirements have been cleared up and as hopefully those new missile systems, you're kind of getting into stride after the new learnings, can we see normalization of margins near term? Thomas McClelland: Yes. I think so. Chris Pokosky: Okay. This is very good to hear. Alright. Congratulations again, and thanks for taking my call. Operator: The next question is from Jeff Van Rhee with Craig Hallum. Please proceed. Jeff Van Rhee: Great. Thanks for taking the questions. Several for me, guys. Congrats, first of all. But Tom, if you talk to this size or relative size of the initial awards versus the scope of the potential follow-on awards. You called it out in your opening transcript as abnormal. I know you won't give us an actual hard number, but can you at least give us a ratio? Does the initial order, the initial order is a dollar, and mean the subsequent order is usually $2? Are we talking now initial orders a dollar and follow-on orders are four? I mean, what's the scope of the increase that you're speaking to? Thomas McClelland: So, yeah. A little bit of clarification. So, typically, when we get a new contract, I think, typically, we are funded initially for 10% of the total contract. But another point of clarification. So we get a contract award for a certain amount of money. There are often additional options. So if it's a satellite program, we'll be funded for three satellites, with options for additional satellites, perhaps options to provide products for satellites four, five, and six. But the initial contract is just for the initial three satellites. And so that's a, you know, let's say, $10 million. We get initially funded for $1 million, 10% of that contract. There may be another $10 million later for options for the follow-on three satellites. So hopefully, that clarifies that to some extent. Jeff Van Rhee: Okay. I'll leave that there. And the incremental backlog, I mean, still all else the same, you know, very nice sequential bump. Is there anything to call out or commonality in terms of the contract types that drove the sequential increase in backlog, namely the use cases? Thomas McClelland: I think we can talk about that a little bit. I think we are seeing a big uptick in backlog for non-space defense products. I think that's a very significant portion of that. I think the other thing I would say is that we anticipate a very significant uptick in the very near future on the space end of things. So what I would say is over the last quarter, the big thing has been non-space defense. And over the next couple of quarters, I anticipate that it's likely to reverse, and we'll see that in space. Jeff Van Rhee: Got it. That's helpful. And then Steve, on the margin question, with respect to gross margins, if we think about it over the next couple of quarters, what do you fundamentally see as drivers that are going to push it up or push it down or likely kind of leave it where it is based on what you see in your backlog and likely to be able to take revenue on over the next few years, not by asking for a number, but really just asking directionally what you think the forces are that are at play. Steven Bernstein: I think, all in all, it'll stay flat to going up a drop. But I think, you know, it'll take time to go back to where you saw it, you know, in the prior year. Jeff Van Rhee: Okay. And then, Tom, on Turbo, I think, I don't know, last quarter probably wasn't the first time, but I know you've talked a few times about some initial expectation that in the fiscal year, Turbo could be a couple of million. And then in the out year, it had the potential for $20 million. Based on what you're seeing in the pipeline and discussions with customers, do you feel like those numbers are increasingly conservative? Comfortable, maybe a bit more of a stretch than you thought? How do you feel about those numbers? Thomas McClelland: I think those numbers are pretty much right on. You know, we are seeing a lot of enthusiasm and activity in our Turbo product. And I think, yes, we see the near term in a few million dollars, and I think that definitely the earlier estimate that we made, the $20 million kind of number, is very, very realistic. Jeff Van Rhee: Yep. Yep. And then maybe last for me, obviously, you're feeling very good. You gave some swags at what the pipeline looks like and where it could lead backlog. And if the backlog does surge and you've got to deliver on these contracts, what does that mean for your cost structure? How do you feel about the headcount? How do you feel about facilities available production capacity? You know, does it take meaningful hiring? Does it take meaningful CapEx? Just talk about the ability to address the growth without meaningful incremental spend. Thomas McClelland: Yeah. Good question. I think we certainly, that's something that we're actively looking at. It's very, very important. I think, on the one hand, we want to avoid getting out ahead of our skis and taking on too many people. On the other hand, I think at this point in time, we are in a cautious hiring mode in anticipation of the business that we think we're going to be getting in the near future. I think facility-wise, we are in good shape. I think we're capable of handling the business that we anticipate at this point and even a little bit more, given our current facilities. And, of course, we've added a little bit more capability in Colorado, although that isn't anticipated to be a primary manufacturing area. So I think we're in pretty good shape, but it's something that is always a bit of a challenge to try to be prepared but not too prepared. Jeff Van Rhee: Yeah. For sure. Yeah. I mean, given the backlog and the other commentary, I mean, just a lot of forward momentum here, so congratulations. Last time then just Tom, you talked on an answer to a prior question, I think, about the revenue that had pushed out whereby you'd done the right thing for the customer and they and it took a little delay and then you caught some revenue. Just to be clear, has all that revenue come back, or are we still going to pick some more of that delayed revenue up in the forward quarter? Just kind of curious where we are with that. Thomas McClelland: A significant portion has come back, and we're going to be picking up more in the next quarter. Jeff Van Rhee: Next quarter. Got it. Okay. I'll leave it there. Thanks. Next question is from Michael Eisner, a private investor. Michael, please proceed. Michael Eisner: Hey, great job on the backlog. Was any of that new contracts or was that just the release of funding? Thomas McClelland: It's a little bit of both, but I think more the release of funding than the new contracts. Michael Eisner: And, Colorado, do you think that's going to be profitable in the third quarter? Thomas McClelland: Yes, actually. I do. That's not going to be a huge contribution, but it's going to be a positive contribution as opposed to a negative one. Michael Eisner: Because the people you hired took away from rent earnings but now will come back in the third quarter. Thomas McClelland: Yeah. They are actively contributing to externally funded R&D programs at this point in time. And, so, you know, that is a positive contribution. Michael Eisner: Alright. And the backlog, most of that backlog all has legs on it to keep on going forward. Am I correct? Thomas McClelland: Yes. You are. Michael Eisner: Alright. Thank you very much. Great job. Thomas McClelland: Okay, Michael. Thanks. Operator: Next question is from Brett Rice with Janney Montgomery Scott. Please proceed. Brett Rice: Hi, Tom. Hi, Steve. Thomas McClelland: Hi. Steven Bernstein: Hi. Brett Rice: The growth opportunities, which you mentioned, do they continue unabated irrespective of which political party controls Congress and the presidency? Thomas McClelland: Well, that's actually a good question. I think that the way we look at it at this point, we think that to a large extent, they are independent of politics. You know, that's something that I think about a lot and worry about. We know that we see certain trends now, and the question always is, you know, if there's a change of command in the next election, does all of that disappear? I don't think so. So there are kind of two important things. I think if we look at the space business, there's just a strong growth in space that has nothing to do with politics. It's just a technology thing, I guess, is analogous to artificial intelligence. It's not primarily driven by government needs. Space is just growing in general. And I think that is good for our business. Then the other part of it is if we just look at defense in general, I think that, of course, is obviously dominated by the government. But if we look at the world situation at this point, and, you know, what is happening in China and other places in the world, it's hard to see the defense spending going down dramatically whether we're talking about a Republican administration or a Democratic administration. I think that's the fundamental reason for our optimism in that regard. So that's kind of how I look at these things. But, of course, you know, those are questions that we have to keep asking ourselves and pay attention to as we go forward. Brett Rice: Right. Your answer is music to thine ears. Have a good holiday. Okay? Thomas McClelland: Thank you. Operator: The next question comes from George Marema with Pareto Ventures. Please proceed. George Marema: Thanks for taking some more. I had a question, Tom, on Turbo. In terms of drones, with the anticipated upcoming changes in the FAA regulations to beyond visual line of sight, there seems to be a large commercial opportunity in autonomous drones. Do you see Turbo playing any part in commercial drones or just military applications? Thomas McClelland: Well, I think potentially in both commercial and military, but I think in the near term, we would anticipate more in military. I think that, you know, we have to keep in mind that, and I tried to say this in the initial remarks, you know, that there are huge numbers of drones that are going to be coming into play whether we're talking about commercial or military applications. And it's really a fraction of those which will employ Turbo or any of our other products. Our products are pretty specialized and relatively expensive. So when the military, for instance, is talking about this so-called kamikaze drone, drones that are going to fly once and be destroyed in the initial mission, it is unlikely that our products are going to be parts of those kinds of drones. I've seen recent things where the price tags for those drones are a few thousand dollars. And so it's hard to see our products participating in those cases. But, you know, in more sophisticated applications, we think that we will be very important. And as the commercial space gets more sophisticated and people are doing more elaborate things with drones, we do anticipate that our Turbo and some other potential products will be a very significant part of that. George Marema: Okay. And then in the recent weeks, there's been a lot of talk from folks like Elon Musk, and Google, and Amazon, etcetera, about putting data centers in space. There seems to be a big push coming up in that. And I was wondering if Frequency Electronics, Inc. if you would be playing in that arena at all, and if so, how? Thomas McClelland: Well, I think quite possibly. I think that synchronization in data centers is an important thing when those are ground-based data centers. That's relatively easy to accomplish because size is not much of a question. But once we get into space, of course, size, weight, and power become very, very important. And so our products, which are more compact, come into play. But also, they come into play because we have radiation-hardened synchronization time and frequency devices which are tailored for use in space. So I think, you know, we have to be a little bit careful because I don't think we're going to be seeing data centers in space in the next couple of years, except on people trying to demonstrate some capabilities. But I think to the extent that those data centers in space become a reality, I think we definitely anticipate being a participant in that. George Marema: Okay. Thank you, Tom. Operator: Up next is William Bremer with Vanquish Capital. Please proceed. William Bremer: Tom, good evening. Thomas McClelland: Hi, Bill. William Bremer: Sorry about that, gentlemen. Just curious on the international front. Whether or not we have any business with any of our allies or any international business going forward? Thomas McClelland: Good question. We actually do. Of course, most of our business is domestic defense and satellite business. But we do have some very significant business overseas with some of our allies. And we are actively pursuing additional things in this arena. There are some challenges in that. So just to highlight some of the things, most of our products there are export controls involved, so we have to get export licenses in order to be able to sell things overseas. So that's an additional challenge, and it takes typically more time to get those kinds of things started. But nonetheless, we do have some active programs as we speak. The other thing is that in particular with Europe, it's a challenge to do business there because there are several things that are going on at this point in time in the defense industry in the US. There's a strong emphasis on using only domestic sources. This helps us in obtaining business with the US Department of Defense. But at the same time, we see sort of a similar thing in Europe in particular where there's a strong emphasis on using European suppliers instead of US suppliers. So that's just a couple of thoughts on that topic. Hopefully, it sort of answers your question. William Bremer: No. I apologize about the doorbell on my dog. So but happy holidays, everyone, and keep up the good work, Tom. Thank you. Operator: Okay. Thanks. We have no further questions in queue. I'd like to turn the floor back to management for any closing remarks. Thomas McClelland: Okay. Thanks to everybody for taking the time to listen to and participate in today's earnings call. We look forward to providing further updates in the coming months. And we wish everyone happy and healthy holidays. Thank you. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by. This is the conference operator. Welcome to the lululemon Athletica Inc. Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon Athletica. Please go ahead. Howard Tubin: Thank you, and good afternoon. Welcome to lululemon's third quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of lululemon's future. These statements are based on current information, which we have assessed but by which its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the Investors Section of our website at www.lululemon.com. Before we begin the call, I'd like to remind our investors to visit our investor site where you'll find a summary of our key financial and operating statistics for the third quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I would like to turn the call over to Calvin. Calvin McDonald: Thank you, Howard. It's good to be here with all of you today. In just a few minutes, Meghan and I will provide an overview of our results for the third quarter, our performance over the Thanksgiving weekend as well as an updated guidance for the fourth quarter and full year. But let me begin with sharing more about the news that after more than 7 amazing years, I will step down from my role as CEO of lululemon on January 31. In my conversations with the Board, we carefully considered what's ahead for the company and for my own journey. Together, we agreed that the timing is right for a change as we near the end of our 5-year plan cycle. I'm incredibly proud of what we have accomplished together over the past 7 years. lululemon is a very different and much stronger company today than when I first joined the organization in August of 2018. I enjoy helping organizations set big, ambitious goals and growth targets and working towards achieving them. Since 2018, lululemon tripled its annual revenue, and we expect to generate $11 billion this fiscal year. We have broadened our global reach from 18 to over 30 geographies and grown the company's China Mainland business into our second largest market. We expanded the horizon for what's possible for lululemon, quadrupling our international business, growing our men's business as well as our online channel and extending into new categories and activities. And I am proud we are the #1 women's active apparel brand in the United States. We have done this while increasing our profitability. Based on our guidance for 2025, we will achieve a compound annual growth rate in EPS of approximately 20% from 2018 to 2025. And the company has strong cash flow and a balance sheet with $1 billion in cash and no debt. So lululemon is in a very good position going forward. But beyond the numbers, there is so much opportunity ahead for the company, which is poised to innovate new products and experiences and welcome more markets and guests. The teams have been addressing opportunities head on and making meaningful progress from product creation and activation to enterprise efficiency. And we've got a leadership team in place that is ready to author the next horizon of what's possible. Together, we built a foundation of innovation, creativity and connection at lululemon that has transformed the athletic apparel industry and will continue to drive it forward. As you've seen in our press release, Marti Morfitt will serve as Executive Chair, Meghan and Andre Maestrini will serve as co-CEOs, supporting all aspects of the business until the next CEO steps into their role. I will continue to serve as an adviser to the company through March of next year to support a smooth transition and assist the leadership team on executing against our business strategies, and I look forward to sharing more about my next chapter. I appreciate the support of our Board of Directors, our management team and everyone at lululemon for their support over the past 7 years. As we step into this transition period, I am confident in the company's senior leaders, and I know that Meghan and Andre will do an extraordinary job. This leadership team will play an important role in creating the future for lululemon. I believe the outstanding product pipeline we have built and the action plan now in place will yield positive results going forward. I cannot wait to see it come to fruition and deliver value to shareholders in the months and years ahead. I've described being CEO of lululemon as my dream job. It truly has lived up to every expectation and given me the opportunity of a lifetime. With that, Meghan and I will now share more about our business results. I'll speak to our Q3 results and then discuss our performance over the Thanksgiving weekend, which was encouraging. Next, I will turn it over to Meghan to build upon the foundation we laid out on our Q2 earnings call regarding the action plan to drive inflection in our U.S. business. And Meghan will then share our detailed Q3 financials and our Q4 outlook before we take your questions. So let's begin with quarter 3. When looking at our U.S. business, our guest metrics remain consistent. We continue to see growth in both total and retained guests, and we are acquiring new guests and retaining existing guests across all age demographics. Where we continue to have opportunity is increasing the frequency of visits and spend with our high-value guests. In the Americas, in Q3, we saw total revenue decline 2% with the U.S. down 3% and Canada negative 1%, in line with our expectations. From a product standpoint, we continue to lead with technical innovations and saw growth in our performance activities led by run and train. Guests also responded well to our outerwear assortment with performance up strong double digit. Shifting to international, where our momentum remains strong, revenue increased 33%, fueled by 46% growth in China Mainland and 47% on a constant currency basis. Our Rest of World segment also saw nice momentum with revenue growing 19% in constant currency. Looking forward, we now expect revenue in China Mainland to be at or better than the high end of our range of 20% to 25% revenue growth for the year, excluding the 53rd week. For Q4, we expect revenue growth to be below the Q3 trend due to calendar shifts, which benefited Q3 and will have a negative impact on Q4. In our Rest of World segment, I would highlight the recent Gangnam store opening in Seoul, South Korea and the strong guest response we've seen in the initial weeks. This store reflects our new design ethos that celebrates our Pacific Northwest heritage while modernizing the in-store experience. And in EMEA, our franchise partner recently opened the third lululemon store in Istanbul, and we have plans to enter several additional markets in 2026. Let me now share some highlights from Thanksgiving. We're pleased with our performance over the Thanksgiving shopping period. I traveled with Carla Anderson, our new GM of North America and other members of our leadership team to several stores over the weekend and saw our educators in action, bringing our brand to life and providing guests with a seamless shopping experience. Our final stop was our new SoHo location. This store offers improved visual merchandising and adjacencies and offers a truly elevated shopping experience. Given the competitive environment, we know guests are looking for value. With the increased traffic over the holiday period, we had the opportunity to clear through some seasonal and end-of-life product, which helps position us well from an inventory standpoint as we exit quarter 4 and enter spring. We also dropped new full-price product, including special edition training gear, which met with good guest response. And relative to last year, we offered our Black Friday product to our members a week earlier this year. Not only did this help drive traffic to our e-commerce sites, but also fueled a significant number of app downloads and new sign-ups for our membership program. Despite the earlier start, Black Friday was still our biggest volume day ever on our e-commerce sites. I also want to acknowledge we have seen trends slow a bit since Thanksgiving, which we've taken into account in our Q4 guidance. However, despite this, we expect revenue trends in the U.S. in Q4 to be modestly improved relative to Q3. Before I turn it over to Meghan, I want to take a moment to speak to the 3 pillars of the action plan underway to drive an inflection in the business. We are focused on product creation. I've been working with Jonathan Cheung, our Creative Director and our design and innovation teams on our product pipeline. As I've shared, we know that our current merchandising mix, particularly in North America, does not fully reflect the go-forward vision we have for our brand. The team has been in the work, and I believe that we have a strong pipeline of innovation and approach to new style creation. You'll see the impact of this work beginning in spring 2026 and continue to strengthen throughout the year. Product activation, where we are improving the in-store and online experience, engaging our high-value guests in new ways and better aligning our brand and marketing activities with product inflections and drops, and enterprise efficiency, ensuring we are operating as efficiently as possible as we work to inflect the U.S. business, particularly in light of the new tariff environment. We believe these priorities position us well for the near term and will continue to set lululemon up for long-term sustainable growth. Meghan, over to you. Meghan Frank: Thank you, Calvin. I'm grateful for your leadership over the last 7 years. It has been a privilege to be part of your team during your tenure to see how you immediately made an impact on this organization to go after and deliver against some incredible goals. I appreciate your support as we step into this transition. I'm excited to partner with Andre Maestrini as Interim Co-CEO and to work closely with Marti Morfitt in her expanded role as Executive Chair. In addition, I have full confidence in our entire leadership team as we guide lululemon through this important period. Let's now spend a few minutes on the details of our action plan we have in place to drive improvement in the U.S. As you know, our teams are focused on inflecting our business. On our Q2 earnings call, we laid out actions we have in place. And today, I'd like to share with you a more formal framework for the strategies underway and add some details to our prior discussion. At the highest level, the goals of our plan are simple. We are working to drive acceleration in our U.S. business, maintain momentum in our international regions and protect operating margin in the near term and drive improvement over the long term. We began this work last year as we saw the U.S. business slow, and we expect to see the most significant benefits of our work streams in 2026. As Calvin mentioned, we are executing against 3 pillars, which are product creation, product activation and enterprise efficiency. We believe this plan will enable us to deliver improved differentiated products to our guests, allow our teams to read and react more quickly based on style performance, elevate our in-store and online experience and refine our marketing approach to ensure new and existing guests are aware of the products and innovations coming in 2026. Let's now get into the details beginning with product creation. Our teams have been in the work to reenergize our product engine, bring a new energy into our assortment and increase our speed and agility. So let me give you a few examples. We are increasing the frequency and breadth of new styles and remain on track to bring new style penetration to 35% next spring. The teams have already begun this work with some recent examples being Milemaker, Shake It Out, Tumbled Fleece and Scuba Waffle. In addition, we recently debuted our Team Canada kit for the Milan 2026 Winter Olympic Games. Looking forward and under the direction of our design team, we will be updating several of our key franchises while also maintaining a strong pipeline of new innovations across our performance offering. We'll have a focus on train coming in early 2026, and we'll be bringing newness and novelty across some of our most important franchises, including Swiftly, Daydrift and Steady State. Next, we're increasing our speed to market. Our mainline product development process currently runs 18 to 24 months, and we are working to reduce it to 12 to 14 months. In addition, we've been enhancing our speed lanes. This includes our chase capabilities, which will allow us to get back into select strong performing styles within 6 to 8 weeks and also our fast-track design process. Finally, it's important to keep in mind that the assortments you currently see in stores and online include certain styles that are not representative of our go-forward vision for the brand. There are many elements that we like and our guests are responding well to. However, as we said on our last call, we've let product life cycles run too long within some of our key franchises. And we have not inspired our high-value guests to purchase as we had in the past. I'm looking forward to 2026 as we will begin to see the excitement our creative team is bringing into our assortments. In addition, given our improved agility, we'll be better able to read, react and adjust our assortments based on guest response to our offering. Shifting now to our second pillar, product activation, where we have several initiatives underway. First, we are elevating the store experience by improving our ability to curate our assortment by store and by market. In May of this year, we began testing an updated approach to the in-store experience and have seen good initial results. Our intention is to use these learnings to enhance our ability to have locally relevant assortments in all stores. The strategy goes beyond assorting stores based on climate differences alone, and we'll be better able to maximize the impact of our assortments through strategic curation, which takes into account local guest taste. We plan to reduce the density of our assortment on a local basis to better highlight styles that are most relevant. This will enable improved visual merchandising for the styles we know are most important to the guests in each local market. And we are working to improve our in-store storytelling by shifting product to adjacencies and category flow to ensure the guest is seeing the versatility and coordination across our assortment. Second, we're improving our digital experience. We recently rolled out a website redesign with enhanced visual merchandising and elevated storytelling, offering an overall more modern guest experience to inspire purchase and increase conversion. Next, we're rolling out new solves to engage our high-value guests. We have several initiatives underway to get at this objective, but there are 2 timely ones I'd highlight for you. These include the updates we've recently rolled out to our membership program and our new partnership with the Amex Platinum Card. Finally, under the product activation pillar, our brand building and marketing activities will continue as we invest in integrated marketing efforts around the world with a planned focus on driving awareness and excitement for both product newness and innovation across all athletic activities as well as lifestyle. We will leverage our ambassadors as well as brand right creators and talent with a sharp focus on engaging guests through social channels and community activations. The final pillar of our action plan is enterprise efficiency. This work stream is not new for us, however, in a world with higher tariffs and the removal of the de minimis provision. And while we work to inflect the U.S. business, we have a heightened focus on ensuring we're operating as efficiently as possible across the enterprise. As we've said, we're taking actions in both the near term and long term to mitigate the increased tariff costs. These include strategic pricing actions, supply chain initiatives, including vendor negotiations and DC network efficiency and enterprise-wide savings initiatives. I will also note that we benefit from strong cash flow generation and a balance sheet with $1 billion in cash and no debt. This enables us to keep our eye on the long term and prudently invest in our growth initiatives while navigating the near term. Let's now turn to our financials and guidance outlook. Starting with Q3. For Q3, total net revenue rose 7% to $2.6 billion on both a reported and constant currency basis. Comparable sales increased 2%. Within our regions, results were as follows: Americas revenue decreased 2% on both a reported and constant currency basis with comparable sales down 5%. By country, revenue decreased 3% in the U.S. and was up 1% on a reported basis and flat on a constant currency basis in Canada. China Mainland revenue increased 46% or 47% in constant currency, with comparable sales increasing 25%. Better-than-expected guest response to our merchandise assortment, particularly outerwear, coupled with an earlier start to 11/11 events on our third-party e-commerce platforms contributed to this above-plan performance. And in the Rest of World, revenue grew by 19% on a reported and constant currency basis with comparable sales increasing by 9%. In our store channel, total sales were flat, and we ended the quarter with 796 stores globally. Square footage increased 12% versus last year, driven by the addition of 47 net new lululemon stores since Q3 2024. During the quarter, we opened 12 net new stores and completed 16 optimizations. In our digital channel, revenues increased 13% and contributed $1.1 billion of top line or 42% of total revenue. By category, men's revenue increased 8% versus last year, women's increased 6% and accessories and other grew 12%. Gross profit for the third quarter was $1.43 billion or 55.6% of net revenue compared to 58.5% in Q3 2024. The gross profit rate in Q3 decreased 290 basis points and was driven primarily by the following: a 290 basis point decrease in overall product margin driven predominantly by the tariff impact and higher markdowns. Markdowns increased 90 basis points. In addition, foreign exchange had a 10 basis point unfavorable impact. There were several smaller items within gross margin, the net of which contributed 10 basis points of positive impact. Relative to our guidance for a decline of gross margin of approximately 410 basis points, the upside was driven predominantly by leverage on higher-than-expected top line, lower net tariff impact and prudent management of the fixed expenses within gross margin. Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were $988 million or 38.5% of net revenue compared to 38% of net revenue for the same period last year. This was favorable to our guidance for deleverage of approximately 150 basis points driven by top line leverage and prudent management of expenses. Operating income for the quarter was $436 million or 17% of net revenue compared to 20.5% of net revenue in Q3 2024. Tax expense for the quarter was $135 million or 30.5% of pretax earnings compared to an effective tax rate of 30.2% a year ago. Net income for the quarter was $307 million or $2.59 per diluted share compared to $2.87 for the third quarter of 2024. Capital expenditures were approximately $167 million for the quarter compared to approximately $178 million in the third quarter last year. Q3 spend relates primarily to investments to support business growth, including our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments. Turning to our balance sheet highlights. We ended the quarter with $1 billion in cash and cash equivalents. Inventory increased 11% and was $2 billion at the end of Q3. On a unit basis, inventory increased approximately 4%, below our estimate for an increase in the low double digits. Lower-than-expected inventory was driven predominantly by higher-than-planned sales and timing of receipts. The difference between dollar inventory growth and unit inventory growth relates predominantly to higher tariff rates relative to last year and foreign exchange. We repurchased approximately 1 million shares at an average price of $181 during the quarter. Including the recently approved $1 billion increase to our authorization, we now have approximately $1.6 billion in capacity to repurchase shares. Let me now share our updated guidance outlook for the full year 2025. We now expect revenue to be in the range of $10.96 billion to $11.05 billion. This range represents growth of 4% relative to 2024. Excluding the 53rd week that we had in the fourth quarter of 2024, we expect revenue to grow 5% to 6%. By region, excluding the 53rd week and on a constant currency basis, we continue to expect the U.S. to be within our guidance range of negative 1% to 2%. We continue to expect the Americas to be flat to down 1% and Canada to be flat. We now expect China Mainland to be at or above the high end of our guidance range of 20% to 25%, and we now expect Rest of World to be up in the high teens. When looking at China Mainland, Q3 results were strong and ahead of our expectations. However, let me remind you that there are 2 discrete calendar shifts, which will negatively impact Q4, namely the early start of 11/11 events, which benefited Q3 and a later Chinese New Year relative to last year. As a result, we expect revenue growth in the fourth quarter to be below the Q3 trend. We expect to open approximately 46 net new company-operated stores this year and complete approximately 36 optimizations. We expect overall square footage growth in the low double digits. Our new store openings in 2025 include approximately 15 stores in the Americas, with 9 of those openings planned in Mexico. The remainder of our new stores are planned for our international markets, the majority of which will be in China. While stores remain an important part of our omni ecosystem, we acknowledge that revenue trends in the U.S. are not where we'd like, and we are closely looking at all potential store openings as we plan for 2026. For the full year, we now expect gross margin to decrease approximately 270 basis points versus 2024. Relative to our prior guidance for a 300 basis point decrease, the improvement is being driven by lower estimated tariff impact. We now expect markdowns to be approximately 70 basis points higher than last year. Turning to SG&A for the full year. We expect deleverage of approximately 120 basis points versus 2024, above our prior guidance of 80 to 90 basis points. While we continue to manage expenses prudently, we're investing further in marketing in Q4 to help drive traffic and continue to build brand awareness. When looking at operating margin for the full year 2025, we now expect a decrease of approximately 390 basis points versus 2024, in line with our prior guidance. For the full year 2025, we continue to expect our effective tax rate to be approximately 30%. For the fiscal year 2025, we now expect diluted earnings per share in the range of $12.92 to $13.02 versus our prior guidance of $12.77 to $12.97 and EPS of $14.64 in 2024. Our EPS guidance excludes the impact of any future share repurchases, but does include the impact of our repurchases year-to-date. We expect capital expenditures to be near the low end of our $700 million to $720 million range in 2025. Shifting now to Q4. Looking at Q4, we expect revenue in the range of $3.5 billion to $3.59 billion. This represents a range of negative 3% to negative 1% relative to 2024. Including the 53rd week that we had in the fourth quarter of 2024, we expect revenue to grow 2% to 4%. We expect to open approximately 17 net new company-operated stores and complete 8 optimizations in Q4. We expect gross margin in Q4 to decrease approximately 580 basis points relative to Q4 2024. The decrease will be driven predominantly by the impact of increased tariffs and the removal of the de minimis exemption, deleverage on fixed costs and our ongoing investment in store growth and our multiyear distribution center project. The impact from tariffs and de minimis combined will be approximately 410 basis points. We expect markdowns to be 100 basis points higher than 2024. In Q4, we expect our SG&A rate to deleverage by approximately 100 basis points relative to Q4 2024. This will be driven predominantly by increased foundational investments and related depreciation and strategic investments, including those to build brand awareness. When looking at operating margin for Q4, we expect deleverage of approximately 680 basis points with 410 basis points related to tariffs and de minimis. Turning to EPS. We expect earnings per share in the fourth quarter to be in the range of $4.66 to $4.76 versus EPS of $6.14 a year ago. We expect our effective tax rate in Q4 to be approximately 30%. When looking at inventory, we expect units to increase in the high single digits in Q4, with dollar inventories up in the high teens due in large part to the impact of higher tariff rates and foreign exchange. As we look out to next year, we are planning inventory units below sales. Our aim is to increase full price penetration and utilize our chase capabilities to minimize markdown risk. And with that, I will turn it back over to Calvin. Calvin McDonald: Thank you, Meghan. I want to conclude my remarks for this earnings call by expressing my deep appreciation to the leaders and teams across lululemon. I have so much confidence in what you all will achieve going forward. This has been an extraordinary experience for me over the past 7 years, and I look forward to supporting our leadership team over the coming months as we work to deliver for our shareholders, our guests and for each other in both the near and long term. With that, we'll open it up for questions. Operator: [Operator Instructions] The first question comes from Matthew Boss with JPMorgan. Matthew Boss: So in the U.S., could you speak to the cadence of demand that you saw in the third quarter, elaborate on trends quarter-to-date, maybe notably the slowing trend that you cited post Black Friday. And just larger picture, the time line that you see is reasonable for the product assortment to be fully optimized as we look to next year? Meghan Frank: Thanks, Matt. I would say in terms of U.S. demand, the quarter progressed pretty much as we expected. We did come in line with our Q3 expectation. The best month was August, the softest month was October, but that was planned just based on some activities last year and did come in overall in line with expectation. In terms of quarter-to-date, we're really pleased and saw a strong Thanksgiving period result. We have seen some pullback in demand post Thanksgiving in terms of traffic. We've reflected that in our guidance. And then in terms of the longer picture, we are, as we mentioned, focused on activating the newness that we have in the assortment as we move into Q1. We'll start to see the benefits of that in Q1 in terms of getting our newness penetration up. And then we're also leaning into those activation pieces we mentioned in terms of ensuring we get eyeballs in terms of marketing on that newness in our assortment across all of our channels in terms of stores and e-com. Matthew Boss: Great. And then, Meghan, just taking all that into account on the product assortment changes, are there any puts and takes for us to consider as we model operating margins relative to this year? Any reinvestments for us to think about maybe as it relates to your comments on experience and activating newness as you outlined as we think about next year? Meghan Frank: Yes. There will be some puts and takes in terms of margin as we look into '26. And obviously, we'll offer more color as we get into March, see some initial results in response to our assortment. We will have a full year of increased tariffs and the removal of the de minimis provision, offset, obviously, by the actions the team is taking to mitigate those expenses, and we have been making some good progress there. We will need to layer in back some certain expenses we reduced in '25, including incentive comp. And we're going after, I would say, expense savings overall and looking for efficiencies across the business. Bottom line, I would say that the negative factors would outweigh the positives as we move into '26, but the team continues to work on the efficiency side, and we'll give an update in March there. Operator: The next question comes from Dana Telsey with Telsey Group. Dana Telsey: As you think about the segment, how did the segment perform this quarter versus how you performed? And then as you think about the newness that's flowing in, which segments should we be seeing first, what are you thinking about bottoms, about tops, about men's and women's? Any more clarification on that? And what are you looking for in the new CEO? What are you looking for in the new leader as you move forward? Calvin McDonald: Thanks, Dana. I'll take the first 2 parts of the question. In terms of the flow-through and what we've seen in the overall marketplace, we continue to see sort of pressure in the apparel space. We held share in premium athletic and lost some slight share in the performance apparel as we see guest behavior and trading down. From a newness perspective, I'm pleased with the innovation pipeline and what you've seen and we'll see this quarter in terms of some of the updates to franchises like Scuba, in lounge, BeCalm, Big Cosy, Loungeful are new introductions that are performing well and in performance, the Milemaker as well as Shake It Out. And as you know, as we head into spring, we're moving our new style penetration to 35%. That's going to be a balance of both innovation behind our performance active categories where we continue to see growth through Q3 as well as some other new items and new innovations across lifestyle. And we're going to be kicking off the year with the train campaign followed by some new introductions to some of our core franchises, including Scuba, Swiftly and ABC that the team is excited about. Meghan Frank: And in terms -- Dana, in terms of the CEO, the search has begun. The Board intends to do a thorough process and really focused on a leader with experience in growth and transformation. Operator: The next question comes from Adrienne Yih with Barclays. Adrienne Yih-Tennant: Yes. Calvin, thank you for all the hard work over the years and all the successful strategies in place going forward. I guess let me start with kind of the new product pipeline and the things that you'll be doing. How much of that new product has been sort of informed from primary research and from the customer directly? And then, Meghan, can you talk about kind of price increases, what you've done season to date and any additional price increases for spring? And you had mentioned kind of maintaining operating margins or supporting them at current levels for next year. Can you give us a little bit more color on what that entails? And best of luck, Calvin. Calvin McDonald: Thank you, and thank for the best wishes. From a product innovation perspective, our process always begins with research, really focusing on solving for the unmet needs. And I believe the pipeline has a lot of those solutions, both across our activity as we continue to put our performance activity categories initiatives first across run, train, yoga, golf and tennis. You'll see a lot of innovation across all 5 of those activities in the yoga category as well we're kicking off, as I mentioned, train. And we have a new performance fabric that's specifically designed for weight training that we're excited for. And then there's the ongoing updates to our core franchises as we've addressed and looked and using data to really look at our high-value guests into our core franchises and opportunities to bring newness and refresh those swiftly, some updates, our ABC pants for him as well as building on the success of Waffle Scuba seeing opportunities to innovate. So the team definitely focuses and targets using both our own data of our guest behavior as well as research with our ambassadors and collective community as to where the opportunities are. Meghan Frank: And in terms of pricing, we haven't taken any other further pricing actions relative to what we discussed last quarter. So we took a small amount of the assortment up modestly. We've been pleased with the price elasticity on those actions, I would say, in line with our expectations from a revenue and margin perspective. It's an area we continue to keep our eye on, closely monitoring where the competitive landscape goes, but no imminent plans to go further there. In terms of 2026 operating margin, it is fair to assume that the negatives will outweigh the positives. The margin push though will be a multiyear effort looking at efficiencies. It will be our first full year of tariffs, and we are looking for offsets. The team has been making some progress there. But I would assume we have some pressure next year, and we will be focused on it from a multiyear perspective. Operator: The next question comes from Brooke Roach with Goldman Sachs. Brooke Roach: Calvin, Meghan, I was hoping you could speak to the performance of your largest franchises, both in the performance category and in lounge and social. Are these businesses large enough that you think that they warrant a reset in order to let the new product innovation shine and the new design language pop out to the consumer in a bigger way in '26 and beyond? And what proof points in the new design language are you currently seeing that gives you confidence that the new styles launching in '26 will change the trend rate that you're seeing in the U.S. today? Calvin McDonald: Thanks, Brooke. In terms of the overall focus of the team, it's definitely balanced across our activity areas of run, train, yoga, golf and tennis, with some lifestyle. And when we look at the core franchises today, as I've shared, we continue to see growth across our performance activity categories. And we have innovation behind those categories as well as next year as that is definitely our leading strategy. So you'll see innovation in our bottom legging business. You'll see innovation across our top business, all geared towards these key activities and unmet needs of our athletes. And then on the lifestyle side, we continue to see growth in social, both on the back of the newness that we have brought in, Daydrift being a good example. And we have additional innovation next year in our men's bottom business, updating the ABC and bringing that silhouette as well for her that the team is excited about with some new fabric innovation. And then lounge, which has been our core franchises where we've seen the greatest headwind. We can see that updating Scuba with new materials and silhouette changes, we see great response. So the team is leaning and doing more of that as well in China, Mainland China, we activated it and saw great results. So we know even internationally, a lot of these core franchises, although in North America, they have more saturation internationally and globally, they don't yet. So it's a balance to make sure we continue to drive the growth there and then reinvent here in North America. And that really brings us to the overall balance and solution that the consumer is bringing. To your last point, Meghan mentioned, there's a lot of work going on in terms of in-store visual merchandising. We have some small tests going on in L.A., Miami, they are very much focused on exactly what you said, curating the stores, de-assorting, taking product out so that we could put focus on the newness and the guests can see that. And we're seeing very good results, and we're excited and plan to roll that out. That would be a key initiative so that our guests in the physical space can see the newness better than today. And online, with the launch of our new web design, the teams have a lot more levers than they've ever had before through guest navigation and storytelling to put the newness front and center in front of the guests. And there, we're already seeing good results as well in terms of the adoption and the visibility to the newness. We'll continue to play those levers into the next year as the new product comes. Operator: Our next question comes from Lorraine Hutchinson with Bank of America. Lorraine Maikis: I was hoping to hear more about the Amex partnership. Can you quantify the impact to sales and margins? And then talk about, if it attracted a new or reengaged guest in line with your expectations? Calvin McDonald: Great. Thanks, Lorraine. I'll take the first -- or the second part of your question and then hand it over to Meghan. But from an expectation point of view, we've been pleased with it. We went in similar to some of these partnerships and initiatives we do, very much focused on guest acquisition and being able to grow both our men's guests as well as our female guest. And I would say on this partnership, although it's early, we're pleased with the results in the number of new guests that we've seen come through this partnership. Meghan Frank: Yes. And I would say in terms of the numbers, it's a relatively small part -- exciting part, a small part of our business. We haven't broken out specifics. But I would say we're pleased overall with the profitability of the program. We do have a share in the credits, and that is a reduction to revenue. Operator: The next question comes from Michael Binetti with Evercore. Michael Binetti: Let me add my congrats, Calvin, to the next step. I think, Calvin, you did mention there are some signs of trade down in third quarter. I was just curious if you had any additional thoughts that you could share there and if that adds anything to your thoughts on using pricing as a lever for the mitigation efforts as we go forward. And then I guess as we look at the next year, I know you guys have been working on some of the multiyear DC projects for a while. I think there's a pretty big one in Canada that you've been working on for a long time that was scheduled to come online next year. There's been some questions about whether maybe that was originally intended to be used for some of the de minimis business. And I wonder if that's something you have to reposition on at this point or how you're thinking about that distribution center. Calvin McDonald: Thanks, Michael, and thanks for the best wishes. I'll take the first part. Meghan will take the DC network configuration. And in terms of the -- sorry -- yes, sorry, in terms of trading down, we've seen a bit of that behavior throughout the year. I've talked about the uncertain behavior of the consumer we're seeing. We're seeing a little bit in terms of how they're responding to the promotional activity in the marketplace today, and they're definitely looking for ways in which they can save in value. And it's behavior we've seen throughout the year and continued into Q3. Meghan Frank: And I would say in terms of pricing, we've been really strategic with the pricing moves we've made. As I mentioned, we're pleased with that -- with the elasticities we've seen and are in line with our expectations from a sales and margin perspective. So I don't see any concern there related to what Calvin just mentioned. And again, we'll take that same stance as we move forward on an item-by-item basis. In terms of the DCs, I would say, given the news on de minimis, the team is deep in the work on evaluating the network. I don't think it means we won't have a presence in Canada, but I do think it means some changes to our DC network, and we will make sure we're as most efficient as possible. I think we can share more as we move into '26 and the team is further along in that work stream. Operator: The next question comes from Paul Lejuez with Citi. Paul Lejuez: Curious if you could talk a little bit more about the China business, what you saw in e-comm performance versus stores. And also curious how you would characterize the athletic apparel market in China in general? And if there are any big differences by city tiers? Calvin McDonald: Thanks, Paul. In terms of the performance of our business in China, and obviously, as the results indicate, we continue to see very good momentum, very pleased with the overall results. There were a couple of timing opportunities and shifts to platform activations that helped us in the quarter. But on those, when we activate, we show up as a brand with the least amount of discounting. We actually have a large number of reg sales as a percentage of our business. We were able to use that event to activate Scuba. And as you know, we also have a lower outlet to store ratio, and we use these channels as a means to exit some of our markdown products. So those levers and that mix works well for that market. And obviously, we were really pleased with the overall results. We also saw very good success to our outerwear business, which is a very key important category within that market. And we continue to see guests respond very well to both existing Wunder Puff and styles as well as our new innovation, the Featherweight and other styles and silhouettes that we bring out. Overall, we're definitely gaining share, gaining momentum in that marketplace, and the team there is executing very well. And we're seeing success across all tier cities. And we definitely, as we enter into the Tier 2, Tier 3 deeper, see the business and the brand continue to resonate and perform well. Operator: The next question comes from Brian Nagel with Oppenheimer. Brian Nagel: First off, Calvin, best of luck. It's been a pleasure working with you. Calvin McDonald: Thanks, Brian. Brian Nagel: So with the leadership change, we've been talking for a while now about product refreshes and particularly a lot of new products set to hit in early '26. So I guess I want a 2-part question. I mean, does the leadership change, change the timing or any aspects of those product launches? And then I guess the follow-up, and I think this may be a bit of a follow-up, but I mean, what are you seeing now as far as consumer reception to the new products you have introduced? Are you -- is there a marked difference in how the consumer is reacting to those products versus some of your legacy items? Calvin McDonald: Great. Thanks, Brian. In terms of the team and confidence in the work that they've been working on for the past year, there's no change, and this shouldn't be perceived in terms of any lack of excitement and work that, that team has been creating. As I shared, I think, early on, the first season spring when I go back from -- to spring of this year, and we had all our regional teams in, the energy in the room was contagious and exciting. There is enthusiasm for the newness that's coming and shifting that mix to 35%. And there's work the team still has to do as we work and offset the life cycle of some of our core franchises. And that's the work they will continue to be in and have been in as the year progresses from season to season. And relative to the newness, no change. We continue to see newness, what we believe to be future core items drive outsized growth in the U.S. and we're seeing our high-value guests as well as all of our guests respond and react well to those. And we know as a mix that is increasing next year, and that's just not the existing styles, but it's more styles to come. So overall, the batting average on the newness is very good, and the guest response is very strong, encouraging, pleased with that and encouraged that we have more of that as a composition of our mix moving forward. And the teams are focused on the areas where they're going to continue to offset where we see some of the headwinds. Operator: The next question comes from Jay Sole with UBS. Jay Sole: My question is on the co-CEO structure that exists now. Calvin, given your transition and Celeste transition, who is design reporting to, who is merchandise reporting to, who's ultimately going to make the final decision on what happens in terms of product and what gets made and what goes into the stores? Calvin McDonald: Thanks, Jay. First of all, it's a very strong leadership team that I have huge confidence in. And in terms of the co-CEO structure, Andre taking on the Chief Commercial Officer role and being able to provide his leadership globally to our markets and to our GMs will really continue in that capacity and excited to have him work with Carla and the North American team and bring new perspective and new insights and sharing from some of the other global markets where we've seen momentum and success. And the other team members will report to Meghan through the search process. So product, both merchandising and design will report into Meghan as well as brand. And we've operated as a team of peers and challenging each other. And I expect and know that, that will continue to be the dynamics and look forward to how they continue to drive the business forward. What I would want to just remind you of is the dates. A lot of the decisions around design, product merchandising, the team has made, in particular, through the first half of next year. The teams are just completing the winter buy for '26. So the work has happened and a lot of that foundation is in place as the search occurs. So I think the team will work and execute the plans to the action plan that Meghan laid out, both on how to activate and leverage a lot of the test and learn initiatives that are underway. But a lot of the solid plans are in place to create the inflection that I know they've been working towards. Operator: The next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Good luck to you, Calvin. A question for Meghan, just on the puts and takes as we think about margins next year. Can you speak to how you're thinking about markdowns? They came in a little bit higher than expected in Q3. It looks like they step up a bit in Q4. Maybe talk about what you saw there. And then as you talk about aiming to increase full price penetration next year, just speak to your confidence in that? And is that more of something that we would see in the back half? Or could we see that as early as the first half? Meghan Frank: Thanks, Janine. So this year, as you know, sales haven't met our expectations, and therefore, we have more seasonal inventory that we're clearing through, and that's reflected in our markdown expectations. As we started planning next year, we are taking a more conservative posture on inventory. We will manage inventory units below our sales plans in an effort to mitigate markdown exposure and use those chase capabilities I described to chase the trend on the upside. I would expect and we're planning for that dynamic to start in Q1. That said, we have multiple scenarios if the trend ends up being different than we think. But we are definitely taking, I would say, a more conservative prudent posture in terms of inventory management. Operator: The next question comes from Mark Altschwager with Baird. Mark Altschwager: Calvin, best wishes for your next chapter. My question is for Meghan. I just was hoping we could zoom in specifically on the tariff de minimis piece. Last quarter, you gave us some dollar figures for gross and net this year and next year. It sounds like you're making some progress. I guess where are you seeing the progress? And would you be willing to share some updated figures on how you're thinking about the gross net impact both this year and next year? Meghan Frank: Yes. Thanks, Mark. So we -- our outlook has improved this year in terms of tariffs. So we had 220 basis points of pressure on an annual basis in our last guidance. We've updated that to $190 million. It's about $210 million net impact. When we think about next year, we offered a $320 million number. We're not giving a specific number update there. As I mentioned, we are making progress. I would say some of the areas we're working on still are in the vendor negotiation space as well as our DC network and inventory placement to offset some of those costs as well as just efficiencies across the business. There will be some puts and takes in terms of next year's operating margin that we went through, and we're really focused on inflecting the business. So we'll give you more of an update there in March in terms of our operating margin perspective for next year. Operator: That's all the time we have for questions today. Thank you for joining the call, and have a nice day.
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