HELE - NASDAQ

Greetings and welcome to the Helen of Troy Fourth Quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sabrina McKee, Senior Vice President, Investor Relations and Business Development. Thank you. You may begin.

Thank you, operator. Good morning, everyone. Welcome to Helen of Troy's fourth quarter fiscal 2025 earnings conference call. The agenda for the call this morning is as follows. I will begin with a brief discussion of forward-looking statements. Ms. Noel Geoffroy, the company's CEO, will provide comments on the current operating environment and the steps we have taken to navigate the volatile macro landscape. She will give an overview of our fourth quarter results and accomplishments in fiscal 2025, and highlight our areas of focus in fiscal 2026. Brian Grass, our CFO, will then detail the steps we've already taken to diversify our supply chain, give an overview of our financial performance in the fourth quarter and provide commentary on our expectations for fiscal 2026. Following this, we will open up the call for Q&A. This conference call may contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance. Generally, the words anticipates, believes, expects, and other similar words are words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Ms. Geoffroy, I would like to inform all interested parties that a copy of today's earnings release and related investment deck has been posted to the company's website at www.helenoftroy.com and can be found by navigating to the Investor Relations section of the site or by scrolling to the bottom of the homepage. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. I will now turn the conference call over to Ms. Geoffroy.

Thank you, Sabrina. Welcome, everyone, and thank you for joining us. Before discussing our business performance, I'd like to start by acknowledging the volatile environment we currently find ourselves in. The scope, severity, speed and daily changes to global trade policy are creating significant uncertainty and disruption to our business, and all indicators suggest we will see a meaningful impact to consumer behavior. As a result, until we have more clarity, we are not in a position to provide fiscal '26 guidance at this time and we are also stepping back from the long-term algorithm we laid out at our Investor Day in October 2023. We faced uncertainty at the onset of COVID, of course, for very different reasons. Our organization faced that crisis head-on with agility, taking steps to protect our people while meeting the increased COVID demand for some of our products, including kitchen and home, thermometry and air purification. As we did then, we will navigate this moment by continuing to stay true to our Purpose, Vision and Values by working collaboratively on our tariff mitigation plans and by staying centered on our consumers and our beloved brands. We are proud to have many brands that hold leadership positions across multiple categories and that continue to earn consumer and industry recognition for their outstanding quality and performance. As a result of our recent actions to reset and revitalize our business, we strengthened our brand fundamentals, increased our growth investment and expanded our brands distribution. Further, as we have seen in prior recessionary periods, many of our brands resonate well during economic downturns as they offer value to consumers who are looking to stretch their budgets. More on this in a moment. First, let me start with the actions we have already taken in response to the tariffs as they stand today. We are focusing on controlling our controllables while continuing to monitor the landscape closely. For the moment, we have paused certain purchases from China that were destined for the US market, and will rely on our current inventory to meet short-term demand. Recall, we purchased targeted additional inventory in late fiscal '25 and early fiscal '26, ahead of tariffs. That will help us now. We accelerated our multi-year risk mitigation plan to further diversify our supply chain outside of China and expect to make meaningful progress by the end of fiscal '26. We refreshed our SKU prioritization with the latest data so that we allocate our purchases and efforts towards the most promising and profitable opportunities. We are evaluating pricing and promotional plans across the portfolio in close partnership with our retailers. We are also evaluating our marketing spend and will leverage our marketing mix modeling capability to optimize investment in brands and programs with the highest ROI and the highest relevance in this environment. We made targeted organizational changes to both manage costs and improve focus in key areas, including strengthening our innovation capability in Beauty & Wellness, and aligning our supply chain and IT organizations to support our current priorities. We have increased our focus on controlling cost and capital expenditures across the organization. Importantly, as a result of Project Pegasus, we are now operating with a more efficient foundation, both through reduced cost of goods and a more centralized data-driven organizational structure. Finally, we are leaning into areas of opportunity, including international, which is not subject to tariffs, as well as value reframing across our portfolio. We believe that consumers will become even more cautious with their spending and many of our leading brands are well-positioned to offer consumers benefits they seek at a great value. For example, as consumers choose to eat out less, OXO is a go-to for at-home cooking and coffee. PUR can save consumers up to $75 every month when they switch from bottled water to a PUR system. And our Revlon hair tools deliver great salon styles compared to other brands that can cost up to 10 times more. As reported in the April 12 Wall Street Journal, young women are starting to recession-proof their lives. As just one example, the article quotes searches for press-on nails are up 10% since February. We see Olive & June, Drybar, Hot Tools, and Revlon as ideal's DIY alternatives to pricey salon services. Now turning to our business performance. Today, we reported fourth quarter net sales and adjusted EPS that were in-line with our expectations, with strength in Wellness, OXO, Osprey and International and better-than-expected contribution from Olive & June. As we have discussed, fiscal '25 continues to be a challenging year as consumers continue to be financially stretched and further prioritized essentials over discretionary items. The competitive environment intensified and retailers closely manage their inventory. During the fiscal year, we took necessary and focused actions to reset and revitalize our brands and business. We delivered the largest year of Project Pegasus savings and we acquired the innovative nail care company Olive & June. Following are the key actions we executed as part of our Reset and Revitalize plan. We implemented revitalized consumer and data-centric brand strategies, invested incremental fuel in full funnel experience plans and expanded our distribution footprint globally. We launched new brand content to enhance brand relevance and improve our innovation processes and pipeline. We continue to invest in infrastructure, core capabilities and talent, and we fully operationalized our Tennessee distribution facility. We elevated our operational rigor and accountability across the organization and we added significant new talent and capability to help take our performance to the next level. As a result of these actions, in fiscal '25 we saw encouraging improvement in the following key performance metrics. Continued execution against Project Pegasus that contributed to a 60 basis point increase in gross margin and helped generate fuel to increase our growth investments by approximately 160 basis points. Over the past three years, Pegasus has enabled us to increase our growth investments by over 40%, grew or maintained market share in five of our key categories in our US measured channels where seven of our brands hold number one or number two positions in their respective categories. Grew international net sales by 5.3%, reflecting expanded distribution, greater collaboration between brand and sales teams and incremental investments in our most promising opportunities. Increased our US weighted distribution by approximately 12% year-over-year, making our brands increasingly available where our shoppers shop. We are encouraged by the progress we've made and believe these steps have strengthened our position to navigate fiscal '26 and beyond. Now I will turn to a closer review of the key drivers and trends in the fourth quarter and the fiscal year. Our Wellness business performed better than we expected in the fourth quarter, driven by a late spike in flu that resulted in stronger POS for Braun and Vicks in North America. Sales for our Honeywell air purification products were also stronger-than-expected, driven by demand in the areas affected by the Los Angeles wildfires. In both cases, the primary impact was to drawdown existing retailer inventory. However, we did see some replenishment orders late in the quarter. On a full-year basis, we were pleased with meaningful stabilization in our Wellness business despite an overall softer cough, cold and flu season as well as the headwind from the expiration of the out license discussed previously. In thermometry, Braun and Vicks remain the number one and number two brands in the US respectively. Braun grew revenue and share of thermometry despite the overall category decline. Braun's growth was driven by commercial innovation that highlights Braun's point of difference, accuracy made easy, and US distribution gains. Vicks also gained share in US thermometry and remains the market leader in Rx humidifiers with particular strength in steam inhalers. PUR remained the number two water filtration brand in the US and is the only national brand that grew market share for the year in brick-and-mortar, gaining across all segments despite a decline in the water filtration category. As we've previously outlined, Beauty has had a very challenging year driven by soft POS and category declines for many of our key brands. There were some bright spots and learnings that informed our go-forward plans. Revlon is our largest beauty brand with our hair volumizer SKU that remains the number one hot air styling tool in units. Revlon showed sequential improvement driven by highly relevant value reframing content and strength in Walmart. We believe the brands value proposition will resonate well with consumers in the current economic environment. We are also encouraged by signs of strength in our international Revlon business. During fiscal '25, we were especially focused on refining Drybar's positioning and reinvigorating the brand's innovation pipeline. We are pleased to be launching the new Drybar, all-inclusive multi-styler tool along with the Blowout Defense system. The Blowout Defense system is available now and addresses a major consumer need, extending the life of a Blowout. This new regimen delivers salon quality style for up to 96 hours. The all-inclusive tool builds on that regimen and launched earlier this month with influencer seating and events. It will be available on our DTC site later this month and in retail stores in early May. The all-inclusive tool combines eight styling tools into one revolutionary product, giving the consumer unlimited ways to achieve her desired gorgeous hair. It combines both heated airflow and heated ceramic plates so consumers can take their hair from wet to dry to styled. It is unique in that all styling captures can be used without air for second day heated only styling. This new tool simplifies the Blowout routine with its innovative design and delivers on Drybar's promise of signature high quality salon worthy long lasting Blowout at home. Subsequent to the end of the quarter, Curlsmith launched three new liquid innovations, including a fragrance-free line, a detox shampoo, and a multi-benefit Curlshield heat protectant cream. Curlsmith also launched an innovative new tool, the Defrizzion Curl Reviving Wand designed for enhanced styling to refresh, enhance and define curls with less heat. It comes with interchangeable barrels to match the varying consumer curl patterns. Hot Tools performed below expectations, but we believe it has meaningful upside potential. Our focus going forward is to return to the brand's roots, styling tools that are inspired and developed by hair professionals. A key priority for the brand will be emphasizing its hallmark curling tools with the unique 24K gold styling surface, which helps conduct heat evenly and lock-in style for up to 70% longer while minimizing damage. The newest addition to our beauty portfolio, Olive & June outperformed our expectations with growth driven by the strong gel system launch at Target and DTC and strong overall performance at Walmart. Subsequent to the end of the quarter, the brand expanded its retail footprint with an initial test launch into approximately 150 CVS stores in March and launched the gel system in Walmart in April. Olive & June continues to receive industry accolades and was included in the 2025 Bain Insurgent Brand list for the second year in a row as well as for vetted best products for Instant Mani Press-On and Allure's one-to-watch for the Gel Mani System. Through February, Olive & June is now the fastest-growing and number one nail brand at Target, driven by artificial. More broadly, Olive & June is growing well-above the nail care category and is number two in the US in the artificial nail category. These are impressive accomplishments for this young brand, which we believe has significant growth potential. Turning to our Home & Outdoor segment. OXO grew in the quarter, driven by continued strong performance at Walmart and on Amazon. OXO's product quality and functionality continue to attract new consumers to the brand with nearly 90% of Walmart OXO Kitchen utensil consumers being first-time buyers of the brand. Expanded distribution and continued strong velocity helped drive POS and market share, with OXO increasing its leading share of the kitchen utensils category for the full fiscal year. While the food storage category continues to normalize after strong growth during COVID, OXO continues to be the leading national brand in the category and is over two times the size of the next largest national brand. OXO continues to innovate in food stores with the new Twist & Stack containers, which launched in January. True to OXO's heritage, the Twist & Stack containers are long-lasting, leakproof, stain-resistant containers that can safely go from freezer to microwave to dishwasher. They come in a range of convenient sizes, are great for many occasions and offer uniquely stackable and storable components that easily match with interchangeable lids. Osprey also grew in the quarter with performance driven by strong growth in international and DTC. While the US tech pack category remains soft, Osprey continues to hold a strong number one position over two times the size of the next national brand. Osprey also continued to gain share in the adjacent everyday lifestyle pack and kid carrier pack categories. Turning to Hydro Flask, we continue to see the overall insulated beverage category slowing with some shift away from travelers and back into bottles. The brand continued to expand its presence in Target, into the sporting goods section with an assortment of drinkware, soft coolers and lunchboxes. The brand did an initial US DTC launch of a 7.6 ounce Micro Hydro that captured buzz subsequent to quarter end. That launch included three DTC-only drops that sold out within hours with eager consumers waiting for the next drop. The Micro Hydro was initially designed for the Japanese market primarily to carry hot water for tea or on-the-go soup, while also tapping into the fashion trend-setting consumer. We launched in Japan in February to strong reception, more than doubling our initial forecast. We are pleased that Micro Hydro Flask is now also successfully capture the interest of US consumers who love it for both its functionality and its irresistible aesthetic. It even showed up as an accessory in New York Fashion Week. Looking at the fiscal year for Home & Outdoor as a whole, we are pleased with the performance of OXO, particularly the distribution gains and strong performance at Walmart as well as growth online and in international. Hydro Flask continue to broaden its appeal and relevance with size and form innovation like travel bottle and now Micro Hydro to meet different usage occasions and delivered share growth in the Travel Tumbler segment. We continue to introduce on-trend seasonal colors and designs desired by consumers. The latest is our vibrant limited edition jelly collection launched in March. International was also a bright spot where the brand leveraged our home and outdoor channel distribution strength. International is also a bright spot for Osprey in fiscal '25, particularly in APAC and EMEA. Osprey continued to earn high praise for great quality and design, including Osprey Daylite being named one of Forbes 2025 Vetted Best Product Award and a Top 12 must-have for hiking by Travel and Leisure. Osprey's Daylite Sling was named as one of Glamour's 12 Best Bags for Men and the Osprey Aoede Briefpack was selected as the Best Work Backpack in the Reader's Choice Carryology's Carry Awards. As I touched on a bit earlier, International was again a standout in the quarter with sales outperforming our expectations. Growth was broad-based across all key geographic markets and segments with particular strength in Osprey and Hydro Flask. This caps off a strong year for our international business, which grew 5.3% in fiscal '25. As mentioned, we intend to lean into international opportunities even more in fiscal '26. Stepping back, fiscal '25 was a year of both internal and external challenges, but we feel good about the choices we've made and the actions we have taken to improve the strength of our brands and position them for improved performance. We remain committed to our strategic choices of growing our brands through consumer obsession, being and winning where our shoppers shop, fully leveraging our scale and assets, shaping our portfolio through opportunistic M&A and embracing next level data and analytics in everything we do. As we continue to navigate the dynamic macro landscape, we will remain agile and disciplined while building on the actions we took in fiscal '25. More than ever, we are focused on controlling our controllables as I outlined earlier, leveraging key initiatives to further improve the health, appeal and availability of our brands and executing as a collaborative team with excellence and agility. Before handing it over to Brian, I would like to acknowledge and thank our associates around the globe who remain dedicated and resilient during these challenging times.

Thank you, Noel, good morning, everyone. Thank you for joining us. We are pleased to report fourth quarter net sales and adjusted EPS growth in-line with our expectations despite unfavorable foreign currency that was not included in our outlook. While fiscal '25 was not the year we'd hoped for, our results and business fundamentals steadily improved throughout the year and put us in a position to navigate an environment that has quickly become more challenging and uncertain as we enter fiscal '26. Given constantly evolving global trade policies and the related business and macroeconomic disruption, we are not providing an outlook for fiscal '26 this time. We are in the process of assessing the incremental tariff impact in light of continual changes in policy, the full extent of our mitigation plans as well as the associated timing and capacity to fully execute these plans in a rapidly changing environment. In addition to the uncertainty from evolving trade policies, we believe there is a high probability of unfavorable ripple effects on inflation, consumer confidence, employment and overall macroeconomic conditions that are impossible to predict and are outside of our control. That said, we've been here before. We faced a similar degree of uncertainty going into the pandemic, which gives me confidence that our organization can successfully adapt to the current environment. We learned then that success or failure is less about what happens to us and more about how we respond to it. Our leadership and associates are responding with the same level of commitment and find a way attitude as we face the current challenge ahead of us. Over the course of the past few years, we've made meaningful improvements in our supply chain to better prepare us for this moment. We took out significant sourcing costs through Project Pegasus, and we consolidated down to fewer, more strategic suppliers. We are now partnering with those strategic suppliers to diversify into new geographies that we believe will be less exposed to trade disruption with the goal of achieving a lower overall cost. We also began dual sourcing more of our production and are now intensifying those efforts even further. We purchased additional inventory several months ahead of tariff implementation and we are using this as an opportunity to move through existing lower velocity inventory not subject to tariff. These actions will allow us more time to complete supplier transitions before the tariff impacts are felt and will allow us to offer a more favorable value proposition to our retailers and consumers in a time of economic uncertainty. An expected slowdown in consumer demand while unfavorable, will further extend the time to complete diversification initiatives and mitigate as much of the tariff impact as possible. Finally, with our additional inventory buffer, we are pausing all China purchases in the short-term with a few exceptions. This will allow us to evaluate and adapt to further trade policy developments and minimize the overall tariff impact in the event there is a reversion back to a more normalized global trade posture in the near-future. In light of the size of current China tariffs, the estimated tariff impact that we will not be able to directly mitigate and the expectation of cascading impacts on the economy and consumer, we are taking additional actions to reduce other operating costs, optimize the balance sheet, maximize cash flow and accelerate debt paydown. With these actions and the tariff mitigation strategies referred to earlier, we believe we can offset 70% to 80% of the tariff impact in fiscal '26 based on tariffs currently in place. I'll outline the specific actions we are taking shortly. Turning now to our fourth quarter results. Consolidated net sales decreased 0.7%, which is at the higher end of the range implied in our full-year outlook provided in January despite an unfavorable foreign currency impact of 0.5% that was not included in our outlook. Total sales in our Beauty & Wellness segment increased 0.1%, driven by the contribution from Olive & June, and growth in Honeywell, Vicks, and Braun. Olive & June outperformed the expectations with sales of $23 million. Home & Outdoor saw an organic business decline of 1.2%, driven by Hydro Flask, partially offset by growth in both Osprey and OXO. Consolidated gross profit margin decreased 40 basis points to 48.6% primarily due to a less favorable product mix within the segments, a less favorable customer mix within Home & Outdoor and the unfavorable foreign currency impact on net sales. These factors were partially offset by favorable inventory obsolescence expense and lower commodity and product costs. SG&A ratio increased a 120 basis points to 35.9%, primarily due to acquisition-related expenses related to Olive & June and incremental growth investment of approximately 90 basis points. These factors were partially offset by lower overall personnel expense, driven by lower annual incentive and share-based compensation expense. GAAP operating margin for the quarter was 0.4% compared to 13.5% in the same period last year, primarily due to non-cash asset impairment charges of $51.5 million with respect to the Drybar business, higher restructuring charges and an increase in the SG&A ratio. As it relates to the Drybar impairment charges, during the fourth quarter we concluded a goodwill impairment triggering event had occurred primarily due to a continued sustained decline in our stock price. After performing quantitative impairment test work, we concluded that the impairment charges were necessary with respect to the Drybar business. Despite the impairment charges, we continue to believe in the longer-term prospects for the Drybar business and continue to make progress on improving its fundamentals. On an adjusted basis, operating margin decreased 160 basis points to 15.4%. The decrease was primarily driven by incremental growth investment of 90 basis points, less favorable product mix within the segments, a less favorable customer mix within Home & Outdoor and unfavorable foreign currency. These factors were partially offset by favorable inventory obsolescence expense, lower commodity and product costs, and lower annual incentive compensation expense. On a segment basis, Home & Outdoor adjusted operating margin decreased 80 basis points to 17.9%, driven by a less favorable product and customer mix. These factors were partially offset by lower commodity and product costs, favorable inventory obsolescence expense and lower annual incentive compensation expense. Adjusted operating margin for Beauty & Wellness declined 220 basis points to 13.4%, primarily due to incremental growth investments and a less favorable product mix. These factors were partially offset by favorable inventory obsolescence expense, lower annual incentive compensation expense and lower commodity and product costs. Income tax was a benefit of $62.5 million, primarily due to a favorable transitional tax impact of $64.6 million resulting from the intangible asset reorganization we completed during the fourth quarter as we adapt to global minimum tax rules and final phases of Pillar Two tax changes. Net income was $50.9 million or $2.22 per diluted share. Non-GAAP adjusted EPS was $2.33, which includes an unfavorable impact from foreign currency of approximately $0.11 not included in our outlook compared to $2.45 in the same period last year. The year-over-year decrease in adjusted diluted EPS was primarily due to lower adjusted operating income and higher interest expense, partially offset by a decrease in the adjusted effective tax rate and lower weighted-average diluted shares outstanding. We ended the fourth quarter with total debt of $917 million, a sequential increase of $183 million compared to the third quarter, which primarily reflects the acquisition of Olive & June in December 2024. Our net leverage ratio was just under three times at the end of fiscal '25, which reflects capital deployment of almost $330 million for the Olive & June acquisition and open market share repurchases during the year, compared to two times at the end of fiscal '24. Looking ahead to fiscal '26, while we are not providing a formal outlook, I do want to share with you how we are thinking about expected tariff impacts, further mitigation initiatives and expectations for ongoing China exposure past fiscal '26. I also want to share some early consumer and retailer trends we are seeing and additional actions we are taking in response to the challenges we see ahead of us. First, related to expected tariff impacts. There are direct impacts from the tariffs themselves and there is incremental costs associated with our ongoing efforts to diversify our exposure. Based on tariffs currently in place, current inventory levels and pre-tariff consumer demand trends, we expect the vast majority of direct tariff cost impact will fall in the second half of our fiscal year. If consumer demand begins to slow, the weighted impact will be pushed out even further. With respect to diversification, we intensified our efforts in fiscal '25 and early fiscal '26 to further diversify our tariff exposure. We began to build out our internal Southeast Asia sourcing capabilities to accelerate supplier transitions out of China and in many cases dual source our production. We also began making capital investments in equipment needed to replicate legacy China production. As the tariffs became more imminent, we doubled our investment in Southeast Asia sourcing capabilities, increased the number of projects and accelerated their timing where possible. Finally, as I referred to earlier, we pulled forward select inventory purchases in advance of tariff implementation. We continue to believe that diversification and dual sourcing are the best strategies to mitigate supply risks now and in the future, but they come at a cost of higher operating and interest expense in fiscal '26. In some cases, the diversification benefits won't be realized until the end of fiscal '26 or in early fiscal '27, while some of the direct tariff impacts will begin to be realized sooner. As a result of our extensive diversification efforts, we estimate that we will reduce our ongoing purchasing exposure to China to less than 20% of consolidated cost of goods sold by the end of fiscal '26. In the Investor Presentation posted to our website, we've included a slide that illustrates the estimated composition of our ongoing purchasing exposure by the end of fiscal '26 as compared to fiscal '25. We also expect that over 40% of our US bound purchases sourced from China will be available from other regions by the end of fiscal '26 and over 60% will be available from other regions by the end of fiscal '27. This gives us increased ability to adapt as the trade and cost environment continues to evolve. We continue to assess and implement other mitigation actions, including cost reductions from suppliers and the evaluation of pricing and promotional plans across the portfolio and close partnership with our retailers. While we have not yet made all of our pricing and promotional decisions, pricing actions will be considered with tariffs at current levels. We believe we can over index towards goods produced in the US or in lower tariff geographies and we believe we can further feed international sales for which product is not subject to US tariffs. Finally, we believe we can take advantage of higher inventory levels and existing lower velocity inventory to avoid tariff compression and create value propositions that resonate with our retailers and consumers in a difficult economic environment. With respect to early consumer and retailer trends, we are beginning to see softer demand given the deterioration in consumer confidence and uncertain macro environment and as retailers adjust to the expectation of higher prices and a consumer slowdown. Finally, out of an abundance of caution, and in the expectation of a difficult and uncertain environment, we are implementing a number of measures to reduce costs and preserve cash flow that will remain in place until there is greater certainty and less variability, which include the following. A suspension of projects and capital expenditures that are not critical or in support of supplier diversification or dual sourcing initiatives. A reduction in deferral of marketing, promotional and new product development expense, actions to reduce overall personnel costs and pause most project and travel expenses, a freeze on inventory purchases from China in the short-term with the exception of purchases supporting key launches already underway, an overall reduction in inventory purchases to optimize inventory and expectation of softer consumer demand in the short to intermediate term and actions to optimize accounts receivable and payable days outstanding. As mentioned, through the combination of tariff mitigation actions and cost reduction measures, we believe we can offset 70% to 80% of the currently expected tariff impact in fiscal '26. As of April 21st, the borrowing availability on our revolving credit facility is $423 million. The limitation on our ability to borrow based on leverage is $407 million and we have over $85 million in cash and investments. With the cash flow preservation measures I just mentioned, we expect to further improve our financial position and liquidity during the first half of fiscal '26. We believe this positions us well to navigate a downturn in the economy should it occur. We now expect to have an estimated average of 81% of our outstanding debt swapped at fixed SOFR of 3.7% for fiscal '26 and an estimated average of 56% swapped at fixed SOFR of 3.3% for fiscal '27. The fiscal '26 and '27 fixed rates are favorable to current floating rates by 60 basis points and 105 basis points respectively and give us certainty with respect to our interest costs going forward. Lastly, to help with modeling, I want to remind everyone that our first quarter is typically our lowest revenue quarter. The seasonality of our portfolio and retailer ordering patterns have evolved over the past few years, which has caused even more contraction in the first quarter. We expect this trend to further exacerbate in fiscal '26. We are also expecting an unfavorable impact from retailers who have paused our direct import shipments from China to avoid the current level of tariff, which we expect to have an impact on our first quarter revenue. Finally, we are expecting a decline in international revenue in the first quarter due to lower revenue from China, driven primarily by trade tensions. In closing, while trade tensions and pressure on the macro environment have led to considerable uncertainty, we believe we have a strong set of tariff mitigation actions and cost reduction measures that we expect to offset a high percentage of the estimated tariff impact and preserve cash for a further downturn in the economy. We see many opportunities to create value for our retailers and consumers, which we believe will be favored in the environment we are facing. Many of our products in our diversified portfolio have performed well in past economic downturns and we will look to leverage those strengths in fiscal '26. We are excited about the potential of the Olive & June acquisition, which we believe will perform even better in a cost conscious environment. With our resilient associates, efficient operating platform, solid financial position, ample liquidity and robust action plan to control the controllables, I believe we are well positioned to successfully navigate the current environment and a projected economic downturn if that should occur. And with that I'll turn it back to the operator.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.

Good morning. Thanks for taking our questions.

Hey, Bob.

Hey. So you talked about diversifying your manufacturing base and kind of adding partners outside of China. Can you talk a little bit more about to what percent of the new manufacturing where you're moving is going to be with existing partners so that you've already worked with it. How much of that's going to be with finding a completely new partner and qualifying them and getting them up to speed?

Hey, Bob, thanks for the question. Yes, as you know, we've been working on supplier diversification over the past several years and I would say it is a blend of the two. We've got some of the opportunities where we're working with current suppliers in areas outside of China and then in a few cases there are some new suppliers. So it's a combination of the two as we look at our mitigation efforts. Brian, anything you want to build on it?

Yes, I'd say the larger percentage is with existing suppliers and a smaller percentage with new suppliers.

Okay, great. And then excluding tariffs for a moment, I know it's impossible, but what do you see as the potential cost increase of the new manufacturing locations versus if there weren't tariffs and you could have left them in China. I'm trying to think of like what level of tariffs, as you mentioned, changing daily is breakeven for you moving? What is it -- how do you think about it in that context? And so how much is the higher cost, no matter what, if you have to move everything to say Vietnam, it costs 10% more or what, excluding tariffs is kind of the thing I'm trying to think about.

I'd say largely we're seeing the ability to be cost-neutral irrespective of the tariffs as we move into these other geographies. Where we're going to incur additional costs in fiscal '26 is the cost of doing the moves themselves. We have to fund that with CapEx in some cases. We're kind of funding it with holding higher inventory as we, to have a buffer, as we kind of navigate the trade environment. We've had to build capability, Southeast Asia in particular, kind of the capability internally that then works with the manufacturers to make the moves and to, as you say, qualify the inventory and do all the things that are necessary when you're changing a sourcing partner. So that, I'd say the, there's less of a cost coming from the cost impact of the product itself and more of a cost impact coming from having to build the capability, fund the CapEx in some cases and fund holding more inventory right now than we probably normally would, but navigating such extensive changes in your supply chain, you need it as a buffer.

Got it. Okay. Thank you. That makes sense. And last one, I'll jump back in queue. But you said you're contemplating potential price increases. Can you talk about like I guess which areas and roughly how much is this like 5% to 10%, 10% to 15% more or less? And is it across the board or is it more specific in certain brands because others I think Osprey is like mostly made in Vietnam. So I guess we will wait to find out what those tariffs are, but not made in China.

Yes, Bob, I would say, we're still in the process of contemplating and evaluating the various different scenarios and doing that in conjunction with our retail partners. As we talked about in the past, this isn't an environment where we want to have to raise prices a significant amount based on where the consumer is and these are discretionary categories. As you said, we are evaluating it across the portfolio. So we've got some parts of the portfolio that are more exposed to China and more exposed to the tariffs than others as you mentioned. Osprey for right now, the reciprocal tariffs are on pause. So we're at the 10%. Now if the reciprocal tariffs come back into play at some point in the future, that changes the environment. So these are all the, as we mentioned and you reiterated, the daily changes that we're navigating, which is why we're not locking in at this point on pricing. We're partnering with our retailers, looking at the various options. As you do with pricing, we look at thresholds, we look at where the tariffs are, we look at all, take all of those things into account as we look at the scenarios that we think are going to make the most sense.

And just to your point, is it across the board or more targeted, I'd say it's very much more targeted. We're looking almost item by item price thresholds, being very choiceful and careful with the pricing decisions kind of almost on an item by item basis. This is not something that we're just doing across the board. And to Noel's point, you have to work with the retailers as well as to what makes sense given their assortment, the competitive set, that type of thing as well. And so taking all that into consideration and trying to be as thoughtful and targeted as possible.

Okay. Super. Thank you very much.

Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good morning, and thanks for taking my questions. So I guess just starting out with the tariff commentary. As we think about the 20% to 30% of tariffs that are not mitigated net of cost savings, is there a way to quantify a dollar amount in terms of what that could be for the year?

Yes. I'll give you some directional numbers. I think the -- we don't want to get too specific with the assessed impact of the tariff because timing plays big factor into that, changes in tariffs plays big factor into that and what's demand going to do because demand dictates how much inventory that we currently have or work through and when tariffs could potentially impact us. Currently, we're pausing all our China purchases so we don't even have that coming into our inventory. When we toggle that off is something that we still have to work through. So there's a lot of variables in terms of when the tariff impact will be felt. So what I would say is it's at current rates, including China at 145% and the step up in reciprocal, tariffs after the 90 day pause, it's over $200 million of impact to fiscal year '26.

Okay. That's helpful. And then 20% to 30% is that's what's not mitigate at this point, net of cost savings. That's helpful. Okay. And then just on I guess clearly your team is going more defensive in the near-term. Do you expect positive free cash flow for the full year?

Absolutely.

Okay, great. And then maybe my last question. So I appreciate some of the commentary in terms of what you guys are seeing near-term from a retail or consumer perspective. Is there any directional commentary versus that the organic sales growth decline in Q4, whether you expect Q1 to be worse or I don't know if there's anything you can just share in terms of it sounds like it will be worse than Q4, but I don't know if there's any additional color you can provide in terms of Q1 top line dynamics.

Well, in my remarks, I talked about pressure on Q1. We did make it a point to call out pressure that we see and some of it is tariff related. We have a retailer, we have a pretty sizable direct import business. So those are shipments where the retailers pick up our product from where it's sourced. And basically they turn that off at this point. And so we expect that to have an unfavorable impact on Q1 and the year and we'll see how that evolves. But, yes, we're expecting softness in Q1 and as you know it's the lowest kind of quarter in our seasonal cycle and we kind of see just the confluence of things with retail ordering patterns and that kind of exacerbating this year and actually being even weaker for all those reasons and then layer on the direct import impact. And then also in our international business, we're seeing, headwinds due to the kind of nationalism in China related to how they view their brands and US brands and that's -- we expect that to have an impact on our international revenue, which is growing, but we do not expect it to grow in Q1.

Okay, great. Thank you. I'll pass it along. Appreciate all the color.

Our next question comes from the line of Susan Anderson with Canaccord Genuity. Please proceed with your question.

Hi. Good morning. Thanks for taking my questions. I guess maybe just a follow-up, one more question on the tariff front. The 70% to 80% mitigation, did you -- could you maybe give some color on what percent of that is coming from price increases versus pushing back on the suppliers for additional cost savings? And then also do you have an exposure number once you include Olive & June?

Well, just to answer the Olive & June question, they have a plan where we think we can mitigate their costs. So they've got a plan where they would be neutral and maybe even slightly ahead. So not a concern with respect to Olive & June. As we're -- we were trying to convey, there's a lot of variables here and we've got a range of outcomes on multiple variables. So don't want to lock into what a pricing scenario would look like because there's a range of outcomes just for a pricing scenario. Then there's a range of outcomes for cost reductions from suppliers. There's range of outcomes and the choices that we make in terms of spending adjustments and things of that nature. There we're making tough choices currently with the tariffs that are in place now that we would adjust most likely if there's a change in the tariff posture or a reduction in the amount of tariffs. So I would hesitate to give you. I would say we are pulling all the levers and there's a meaningful amount of cost mitigation with respect to all the levers that we're pulling. So hopefully that gives you some dimensionality. I mean there's five or six levers that we're doing and they're -- the size of them is not --

The only other build I would have is, there's also variability on the supplier diversification moves. We are -- we had a lot of these in place. We're working to accelerate as many of them as we can. So to the extent we can move more, more quickly and mitigate some of the tariffs by accelerating the moves that will also put us in a better position. So we are really working to pull all the levers across the organization multifunctionally. And I would just add all of you have heard me talk about the importance of investing in our brands and we've increased that investment by 40% over the last three years from a growth investment standpoint. It continues to be a critical part of how we'll go forward in our long-term health. And so reducing any marketing or innovation expense will be one of the last levers that I want to pull. And as we do that, if we get to a point that we need to do that, we will leverage all of the new marketing mix capability that we've built to optimize that investment in areas where we've got the highest ROI, the highest relevant in this environment, some of the value reframing work that we think will really resonate and we'll maintain the key innovation that we think is critical for the future health of the brand. So I just want to emphasize that point.

Okay, great. Thanks. That was really helpful. And then I guess maybe if you could just give some color on, I mean, it sounds like maybe you're expecting consumer weakness and maybe there's been a little bit so far, but not to the extent that we're in a recessionary environment. I guess if you can maybe just elaborate a little bit on what you're seeing so far in this quarter? And then from the consumers' perspective, both in the US and then I guess international ex-China? And then what you're also seeing from retailer orders if you're already seeing them pull back on those? Thanks.

Yes, sure, Susan. Here's what I would say. I mean, as we've talked even in fiscal '25, we saw some consumer softness especially as they were prioritizing kind of the necessities over discretionary. I would say right now with all of the potential tariffs that are out there, all indicators would say that, that will get softer yet. Now if there is a change in that posture that will likely change where the consumer's head is. But I think all of the different indicators, surveys, et cetera that we see on consumers indicate that they're looking to make choices, pull back, eat out less, travel less, pull back on their discretionary spend, et cetera. And so we're anticipating that sort of environment as we look forward. Again, as the tariff posture changes, that could change the consumer sentiment and where the consumers are. In terms of so far in quarter one, I would say, it's fairly early. The retailer patterns that we see, Brian touched on a bit earlier like we are pausing our current purchases from China, we're seeing the retailers pause the direct import orders from China. So that has a meaningful impact on us in the first quarter. I would say we probably don't have enough data yet to see a lot of consumer impact in quarter one quite yet.

I'd just add that demand changes and potentially demand softness, actually helps the tariff impact algorithm because if demand softens, it buys us more time to work through existing inventory and complete diversification moves that we expect to occur towards the end of this year and early fiscal '27. And so it would reduce the tariff impact that we actually see in fiscal '26 if demand softens. So I'm not calling that a positive, obviously, but it does help the tariff algorithm. And as Noel said, we're trying to accelerate things and do them as quickly as possible so we have those moves in place while we work through our inventory buffer.

Okay. Great. Thanks so much for all the details.

Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Thanks, operator. Good morning, everyone. So I guess I wanted to ask a few just building block question for fiscal '26. I know there are a lot of variables, a huge range of outcomes here, but maybe just a few follow-ups to some of the prior lines of questions. Like first just the Pegasus or the cost savings, I mean, I guess, are those -- are you including those as mitigation efforts or is that kind of incremental to other efforts? That's first. And then I guess the 70% to 80% that you would expect to mitigate, is that a fiscal '26 number or is that something you would expect to kind of mitigate over time? And I guess what I'm just trying to get at here is if we were to take, Brian, your response to Rupesh's question of $200 million and then you say you mitigate 75%, that would, is that $50 million number like that, is that the direct impact to the bottom line we should be expecting as things stand today? So I know you're not giving guidance, but I do think it would be helpful to kind of just give some guardrails in terms of maybe where we should be kind of the puts and takes for fiscal '26?

Yes. What I would say about cost savings is the intention of the cost savings that we already knew that we had was to fund our growth investment. And so that was the benefit that we get to the P&L, but we're going to put it back into investment. So I would not count that, that savings as incremental to what we're framing up for you today. And that was kind of already embedded in our plans. Now what we are having to adjust is some level of marketing expense and with the focus on non-working marketing to achieve the 70% to 80% cost mitigation that we have along with all the other levers that we talked about. So and I just want to be clear too that we said it's over $200 million. You can use $200 million if you want, but the amount is over $200 million. And then I forgot the second part of your question.

No, just like, is that mitigation that you mentioned 70%, 80% like as we do the math on fiscal '26, is that what you would expect to mitigate this year alone or is that saying over time we would expect to mitigate 70% to 80%?

That is specific to fiscal '26. I would envision so and tariffs are kind of rolling in on a half year basis, both -- there's another half that has a full-year impact that has to be realized. Now the benefit that we get in fiscal '27 is we will have all our supplier diversification in place by very early in fiscal '27. So we get those diversification benefits in '27 to offset more of the tariff impact. We also have to incur less cost to do this diversification work that I mentioned on one of the previous questions. There's a cost -- the diversification comes at a cost in fiscal '26 that will largely be out of the system in '27. So there's two benefits in '27. We have the diversification in place and we're exposed to less tariffs and we don't have to incur the cost to continue to do the extent of diversification that we're doing currently. Now we could choose to do more diversification later. We'll have to see how that goes and there could be some costs associated with that, but much smaller in scale I would imagine.

Okay. That's super helpful. And then I guess just following up on the 1Q commentary. I mean we're kind of -- I know it's still a little early to have visibility on consumer demand and the retail commentary was super helpful. But Brian anything that you would say just as we think about earnings at this point in time, margins, I'm just trying to think through the parameters at this point in time, totally get that for the year, it's very hard to have visibility, but I would imagine you have some line of sight in terms of how things are trending from a cost perspective or margin perspective at this point for the first quarter?

Yes, I would say, we called out the softness that we see potentially in Q1 revenue. I would say we're being very cautious with spending in this environment, both based on the revenue trends that we're seeing for Q1 and the potentially broader impact that could result from all of this. And so I would say we're being very cautious with respect to spending. If that helps.

Yes, many of the measures we talked about, we're implementing now in terms of T&E and being very cautious with our marketing spend, really making sure we're spending on things that we feel have a great return and are really relevant right now. So being very choiceful on those things. And if the environment changes and we're able to turn some of those things back on we will.

And that's a good point. A lot of the choices that we're making, we're doing it in a way that allows us to very easily and quickly turn them off and turn them back on again. So they're as least disruptive to the business as possible. It's almost across the board with every lever that we have. We have -- it's not a choice that locks us into anything. It's choices where we can pause, evaluate and then turn things back on.

Got it. Thank you so much. I'll pass it on.

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Thank you, everyone, for joining us. We appreciate it and we look forward to speaking with many of you in the next coming couple of days.