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DATE

• Thursday, June 12, 2025, at 12 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Gary Nugent
• Chief Financial Officer — Daniel Noreck

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TAKEAWAYS

• Reported Revenues: $285 million in revenue for 2024, driven by 12 months of Informa Tech digital businesses and one month of legacy TechTarget operations.
• GAAP Net Loss: GAAP net loss was $117 million for 2024, primarily due to acquisition and integration costs, noncash impairments, and limited contribution from legacy TechTarget.
• Adjusted EBITDA: $31 million in adjusted EBITDA, reflecting underlying earnings generated by the reported structure in 2024.
• Combined Company Revenues (Pro Forma): $490 million for the full year, assuming the combination was in effect from January 1, 2024, matching previous guidance and indicating flat underlying business performance.
• Combined Company Net Loss: $166 million net loss for the combined company in 2024, including nonrecurring combination-related operating costs.
• Combined Company Adjusted EBITDA: $82 million in adjusted EBITDA for 2024, including allocated Informa Group central costs and transitional service expenses.
• Cash, Cash Equivalents, and Short-Term Investments: $354 million at year-end, supporting ongoing operations.
• Convertible Senior Notes Outstanding: $416 million of outstanding convertible senior notes at year-end 2024.
• Year 1 Operating Cost Synergy Target: On track to surpass $5 million, and management maintains high confidence in achieving or exceeding the $45 million run-rate synergy target by year 3.
• Revenue Outlook: The company forecasts flat revenue for 2025 and an increase in adjusted EBITDA for the year, supported by cost synergies and the absence of one-off integration costs.
• Subscription Business Renewal Rates: Value-based renewal rates in intelligence and advisory remained flat year-on-year for the period referenced. Other Brand to Demand subscriptions were flat to slightly down in value year-on-year for the period referenced.
• Sales Organization: Restructuring accelerated, with a unified go-to-market strategy emphasizing largest customer accounts.
• Product Strategy: NetLine repositioned for higher-volume segment, and Intelligence & Advisory offerings consolidated into fewer, larger packages aligned by key industry segments.
• Cross-Sell Progress: Tactical success with cross-sell and initial execution of larger combined proposals, contributing to increased average deal size.
• AI Initiatives: Company applies AI to operational efficiency, product enhancements (such as integration into Priority Engine for sales use cases), and market education on AI technologies.
• Net Debt Position Update: CFO Daniel Noreck stated, "fundamentally, the net debt position is the same" after repayment of convertible notes and use of revolving credit.

SUMMARY

TechTarget (NASDAQ:TTGT) management confirmed the combination with Informa Tech produced a strong cash position and clear integration progress, supported by leadership appointments and restructured reporting lines. The subdued demand environment persists, but the company reiterated its target of broadly flat revenue and an improved adjusted EBITDA outlook for 2025, underpinned by synergy execution and cessation of one-time combination costs. Major integration milestones were completed during the quarter, and cost discipline was demonstrated.

• CEO Nugent said, We are tracking well ahead of our year 1 operating cost synergy target of $5 million and have a high degree of confidence in our ability to meet or exceed the $45 million overall run-rate synergies targeted by year 3 (non-GAAP).
• The integration produced successful tactical and strategic cross-selling, with several larger proposals accepted by key customers and an upsizing of average deal value.
• Subscription renewal rates in the intelligence and advisory segments remained stable year-on-year.
• AI's market impact spans three key areas: direct vertical opportunity, operational productivity, and product enhancement, but no material shift in serious buyer research behavior was reported.

INDUSTRY GLOSSARY

• Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted for nonrecurring and non-cash items, used for operating performance assessment.
• Run-rate synergies: Expected recurring annualized savings or incremental value created by the combination or integration of two companies, once integration is fully realized.
• NetLine: A demand generation product positioned for high-volume B2B lead delivery within the combined company's product suite.
• Priority Engine: A proprietary platform incorporating AI to improve sales targeting and customer engagement for enterprise technology decisions.

Full Conference Call Transcript

Gary Nugent, our Chief Executive Officer; and Dan Noreck, our Chief Financial Officer. Before turning the call over to Gary, we would like to remind everyone on the call of our earnings release process. As previously announced, in order to provide you with an update on our business in advance of the call, we have posted a press release to the Investor Relations section of our website and furnished it on an 8-K. You can also find these materials with the SEC free of charge at the SEC's website, www.sec.gov. The corresponding webcast as well as a replay of this conference call will be made available on the Investor Relations section of our website.

Following Gary's remarks, the management team will be available to answer questions. Any statements made today by Informa TechTarget that are not factual, including during the Q&A, may be considered forward-looking statements. These forward-looking statements, which are subject to risks and uncertainties, are based on assumptions and are not guarantees of our future performance. Actual results may differ materially from our forecast and from these forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our most recent periodic report filed on Form 10-K.

These statements speak only as of the date of this call, and Informa TechTarget undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. Finally, we may also refer to certain financial measures not prepared in accordance with GAAP. A reconciliation of certain of these non-GAAP financial measures to the most comparable GAAP measures, to the extent available without unreasonable effort, accompanies our press release. And with that, I'll turn the call over to Gary.

Gary Nugent: Thank you, Charlie. Good morning from Boston, Massachusetts, and thank you for investing the time to join us today and for your patience while we work through the Informa TechTarget 2024 audit and preparations for the 10-K filing. We filed our full set of 2024 financial statements and the annual report on Form 10-K last week on May 28, which is available at www.informatechtarget.com. Reported results for 2024 reflect the structure of the combination, comprising 12 months' contribution from the Informa Tech digital businesses and around 1-month contribution from the legacy TechTarget business, being the period from completion of the transaction on December 2, 2024, through to the year-end.

On this basis, reported revenues were $285 million with a GAAP net loss of $117 million, the latter reflecting the contribution period of TechTarget, acquisition and integration costs, and noncash impairments at the point of combination. Adjusted EBITDA was $31 million. On a combined company basis, assuming the combination was in effect from January 1, 2024, we delivered full-year revenues of $490 million, in line with the previous guidance. This equates to broadly flat underlying performance for the year, reflecting the subdued market backdrop, with activity levels impacted by geopolitical tensions and macroeconomic uncertainties. The combined company net loss was $166 million, and combined company adjusted EBITDA was $82 million.

The latter included certain nonrecurring operating costs relating to the combination, including an allocation of the Informa Group's central costs to the Informa Tech digital businesses in 2024, a portion of which are included in the transitional service agreements entered into on the closing date. Our financial position at the year-end was strong with cash, cash equivalents, and short-term investments of around $354 million and around $416 million of outstanding convertible senior notes. Given the subdued market backdrop, I would describe our performance in 2024 as robust, holding revenues while improving margins.

And if you let me turn to the future, our combined business sits at the intersection of 2 attractive and dynamic markets, technology and B2B marketing, representing a $20 billion addressable market. Through this combination, we are creating the scale, talent, and operating platform to nurture and build specialist audiences and deliver increasing value for clients. And I am excited and optimistic about the opportunity that we have ahead of us and how that can translate into value for our other stakeholders, too, including our shareholders and our 2,000-or-so colleagues at Informa TechTarget.

In 2025, the foundation year for Informa TechTarget, our focus is on combining our strengths across brands, product, go-to-market, and talent to position the business for long-term growth. The combination program to successfully integrate the legacy companies is well underway, with all executive and senior leadership appointments completed and reporting lines and responsibilities confirmed. The restructuring of our sales organization has been accelerated, including a unified go-to-market strategy that gives increased focus to our largest customer accounts through dedicated service teams. Product strategy work is advancing well, including a repositioning of the NetLine product to address the volume end of the demand market and reshaping the Intelligence & Advisory portfolio to better meet the needs of our evolving customer requirements.

We are tracking well ahead of year 1 operating cost synergy target of $5 million with a high degree of confidence in our ability to meet or beat the $45 million overall run rate synergies targeted by year 3. The business environment remains subdued, but our guidance remains in line with previous commentary with a target for broadly flat like-for-like revenues and an increase in adjusted EBITDA for the year, supported by the overdelivery of combination synergies and nonrecurrence of one-off combination costs that were included within the 2024 results.

Beyond the near-term market dynamics and the foundation year, we remain confident in the medium-term growth opportunities for Informa TechTarget, underpinned by innovation and growth in technology and the increasing demand for more efficient data-driven B2B digital services. A final note, we will update our investor presentation following today's call, which again, you will find on www.informatechtarget.com. Thank you. I will now pass the call back to our moderator, Sami, and open the call for any questions.

Operator: [Operator Instructions] Our first question comes from Joshua Reilly from Needham.

Joshua Reilly: All right. Maybe to start off with, we haven't had a call in a while, so I think it would be helpful to get an update on how AI is impacting your business, including the risks and opportunities. And maybe touch on the trends you're seeing with the average number of white papers and webinars that customers are reading and watching before making a B2B tech purchase today versus a year ago or more when there was less proliferation of gen AI tools.

Gary Nugent: Josh, thank you for the question. Let me maybe think about this or break this down into sort of 3 component parts. The first thing, of course, is that AI as a technology is a market, in and of itself, for our company, for our business. So in other words, we are in the position to inform and educate and connect the market, the buy side of the market, about AI technologies and how they can be applied to business. And of course, we're in the business then of also the AI companies, who are providing products and services and technologies, to then actually reach those audiences, reach those buyers and decision-makers.

So that is, in and of itself, a market for us and one that we're addressing with enthusiasm. You've then got the second thing, I think, which is how do we apply AI to our business, first and foremost, to improve upon our effectiveness and our efficiency. And again, we have a number of initiatives across the business to do so. We can see this in many areas of our business, in our research, in intelligence and advisory capabilities, in our editorial and audience development capabilities, and indeed, in our marketing and sales capabilities and our go-to-market. And we are applying that to our business to improve our efficiency and to improve our effectiveness and indeed, to improve quality.

We then have the matter of applying AI to actually improve the products and bring new products and services to market. And of course, in the latter half of last year, you will have heard TechTarget and Mike talk about the application of AI to the Priority Engine product to actually help the sales use cases, engage with their customers, as a good example of that. And then maybe finally, to your point about how AI is impacting the way in which the marketplace discovers content and consumes content and is informed and educated. I would say that obviously, there will be, I think -- I mean, the application of generative AI, in particular, is changing that landscape.

But certainly, what we are seeing is that when customers are -- or when buyers, to be precise, when buyers are in the market and are looking to make large capital decisions, significant investments in their business, they are needing deep research into the subject and are looking for content which comes from authoritative and unbiased and known sources. And so we're not really seeing any changes in the pattern of that, what I would call, serious buyer research.

Joshua Reilly: Got it. That's very helpful. Appreciate that. You mentioned in the release that the cost synergies are on plan or ahead of expectations in terms of timing. As you've now had some time to review the combined company, can you just comment on how you feel about the total $45 million in cost and revenue synergies, both in terms of timing? And then is that still a total number that you're comfortable with going forward?

Gary Nugent: I can confirm that I am comfortable with the total number, and it's certainly our intention to meet or exceed that over the period. And I think we will track certainly on the -- if you recall, the synergies of $45 million are broken down into both cost synergies and revenue synergies. In particular, we feel confident in our ability to accelerate the cost synergy side of that equation. On the revenue synergy side of that equation, we're confident that we will be on track.

Joshua Reilly: Got it. And then maybe I'll just throw one more out there. You talked about some short-term disruptions to the business in January and February. Maybe you can just discuss what happened there and how you remedied that pretty quickly within a quarter to be executing moving forward.

Gary Nugent: Largely, that's about us approaching -- implementing a combination plan, Josh. Obviously, when we bring 2 companies together, there's lots of work to be done on processes, on systems, on the operating model, and organization design. I talked earlier on about us accelerating our go-to-market strategy and the adjustments in the sales organization, et cetera, et cetera. There's obviously an element of disruption associated with that, but we felt that it was important that we get ahead of the curve and that we execute with peace and get ourselves into the position to anticipate the market opportunity.

Operator: Our next question comes from Jason Kreyer from Craig-Hallum.

Jason Kreyer: So, Gary, you talked about kind of a subdued market that you're seeing right now. So I'm wondering if you could just give more details on what that means, maybe more external. You talked about kind of the internal disruption, but more details on the macro would be great. And then just as a follow-up, your guidance kind of called for more of a decline in the near term with more momentum as we get into the back half of the year. Can you talk about what gives you the confidence in that and what you're hearing from customers that gets you to that conclusion?

Gary Nugent: Yes, of course, Jason, thank you for the question. I think I would use -- we use the term subdued market, and I think that is reflective of what we experienced in 2024 as well. So I suppose what we're really seeing is that we're seeing a continuation of the pattern in 2024, and that's why -- it's reflective of that. So neither I would say a significant improvement or, for that matter, a deterioration would be my description of that. In terms of what gives me confidence in improving in the back half of the year, it's largely around the investments that we're making.

So us pressing ahead with our combination, getting ourselves in a position to anticipate the market more effectively in the second half of the year through our new go-to-market model, through the product strategy and the product road map that we've created, and generally leveraging, if you like, the thesis that was the combination in the first place, which is that, in bringing these 2 companies together, we create a company that has breadth and scale. And in doing so, that breadth and scale will play out in the marketplace and win out in the marketplace, particularly with the larger customers in the market who have scale requirements, and then we have the ability to meet those scale requirements.

Jason Kreyer: Gary, can you call out any opportunities in the near term where you think, in the early stages of this integration, you can see more success with the cross-sell or areas where you're already seeing success of cross-sell?

Gary Nugent: I can tell say that at present, I would say I would describe that in 2 ways. We've certainly seen what I would describe as tactically success with the cross-sell as we've taken the customer relationships that we had from both sides of the combination and leveraging them to drive incremental revenues -- incremental sales and incremental revenues. And we've already seen some success of that throughout the first quarter. I think separate and distinct from that, though, is what I would describe as maybe more of the strategic cross-sell, which is actually our ability to put much larger proposals in front of our customers.

And therefore, we are seeing and we've had 1 or 2 really interesting examples of us putting larger-size proposals in front of our customers and our customers buying into that. And of course, our ability to increase our average deal size with our customer base over time is an important part of our strategy.

Operator: [Operator Instructions] Our next question comes from Eric Martinuzzi from Lake Street.

Eric Martinuzzi: About 1/3 of your business is subscription or at least that's the number I have from -- it might have been 2023. I'm not sure if that still applies for the 2024 numbers. But just wondering if you could comment on how renewals went over the past quarter or so in comparison to a year ago and whether kind of a net revenue retention or gross renewals. Just curious to know how the subscription business has gone.

Gary Nugent: Thank you. The largest element of our subscription business is in the intelligence and the advisory space. And I would say, if I sort of recall, really, year-on-year, the value-based renewal rates are holding flat, as I would say, year-on-year, was my observation. Similarly, then I think we have other subscriptions in the Brand to Demand portfolio. And I would say a little bit flat year-on-year to a little bit down from a value perspective in some areas. But generally speaking, I'm comfortable in the quality of the product and our ability to drive growth in those products over the long term of the year.

Eric Martinuzzi: Okay. And that also, I assume, is the better -- you're expecting better in the second half of '25 than in the first half?

Gary Nugent: I think I would expect so, yes. But I would say that in terms of growing the subscription businesses, holding the renewal rate is obviously a strong part of that strategy and improving them modestly. But really, I think the acquisition of new customers and growing the base within our existing customers, what I would describe as new upsell to the subscription or new subscription customers is a core part of the strategy.

Eric Martinuzzi: Okay. And then you talked about on the product side, repositioning NetLine to the volume end of the market. How has that process been going?

Gary Nugent: Certainly, we're very encouraged with the Q1 experience of taking that product to that end of the marketplace and the market acceptance.

Eric Martinuzzi: All right. And then what exactly do you mean by the reshaping of the Intelligence & Advisory portfolio to better meet evolving customer demand? Could you give an example?

Gary Nugent: This was largely about us taking the portfolio of services, in particular, the intelligence services within the Intelligence & Advisory portfolio, and maybe what you might describe as packaging them into a fewer number of larger packages and then also aligning those packages with the segments in the marketplace that we see, the segments being enterprise IT, consumer, industrial, and telecommunications and service providers. So it's really about product packaging and taking packages, which I think were more suited to the needs and the requirements of the marketplace.

In addition to that, then bringing the Enterprise Strategy Group business and joining that with the Omdia and the Wards and the Canalys business and Intelligence & Advisory, we've now created 2 consulting capabilities, one which is the strategy consulting capability and the other which is the go-to-market strategy consulting capability. And I think that creates a much cleaner offering in the marketplace to those corporate strategists, analyst relations, product business unit leaders, product managers, and product marketers.

Eric Martinuzzi: Got it. And then lastly, Dan, what can you tell us about the latest for the cash and debt balances, either a March 31 update of the -- or maybe even the end of May update on cash and debt?

Daniel Noreck: Sure, Eric. I mean, from a net debt position, we are fundamentally in the same place, right? Because we used the cash that was on hand, plus we drew down $135 million on the revolving line of credit to fund the repayment of the convertible notes. But fundamentally, the net debt position is the same.

Operator: We currently have no further questions. And with that, we would like to thank you all for joining us today. This concludes today's call. You may now disconnect your lines.

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DATE

Thursday, June 5, 2025 at 5 p.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Hock Tan

Chief Financial Officer — Kirsten Spears

Head of Investor Relations — Ji Yoo

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TAKEAWAYS

Total Revenue: $15 billion for Q2 FY2025, up 20% year over year, as the prior-year quarter was the first full period with VMware, making the 20% year-over-year growth organic relative to a VMware-included base.

Adjusted EBITDA: Adjusted EBITDA was $10 billion for Q2 FY2025, a 35% increase year over year, representing 67% of revenue and above the Q2 FY2025 guidance of 66%.

Semiconductor Revenue: $8.4 billion for Q2 FY2025, up 17% year over year, with growth accelerating from Q1 FY2025's 11% rate.

AI Semiconductor Revenue: Over $4.4 billion in AI semiconductor revenue for Q2 FY2025, up 46% year over year and marking nine consecutive quarters of growth; AI networking represented 40% of AI revenue in Q2 FY2025 and grew over 70% year over year.

Non-AI Semiconductor Revenue: $4 billion for non-AI semiconductor revenue in Q2 FY2025, down 5% year over year; broadband, enterprise networking, and service storage were sequentially higher, but industrial and wireless declined.

Infrastructure Software Revenue: $6.6 billion infrastructure software revenue for Q2 FY2025, up 25% year over year and above the $6.5 billion outlook for Q2 FY2025, reflecting successful enterprise conversion from perpetual vSphere to the VCF subscription model.

Gross Margin: 79.4% of revenue for Q2 FY2025, exceeding prior guidance, with Semiconductor Solutions gross margin was approximately 69% (up 140 basis points year over year), and Infrastructure Software gross margin was 93% (up from 88% year over year).

Operating Income: Q2 FY2025 operating income was $9.8 billion, up 37% year over year, with a 65% operating margin for Q2 FY2025.

Operating Expenses: $2.1 billion consolidated operating expenses for Q2 FY2025, including $1.5 billion for R&D in Q2 FY2025, and Semiconductor Solutions operating expenses increased 12% year over year to $971 million on AI investment.

Free Cash Flow: $6.4 billion free cash flow for Q2 FY2025, Free cash flow represented 43% of revenue, impacted by increased interest on VMware acquisition debt and higher cash taxes.

Capital Return: $2.8 billion paid as cash dividends ($0.59 per share) in Q2 FY2025, and $4.2 billion spent on share repurchases (approximately 25 million shares).

Balance Sheet: Ended Q2 FY2025 with $9.5 billion cash and $69.4 billion gross principal debt; repaid $1.6 billion after quarter end, reducing gross principal debt to $67.8 billion subsequently.

Q3 Guidance — Consolidated Revenue: Forecasting $15.8 billion consolidated revenue for Q3 FY2025, up 21% year over year.

Q3 Guidance — AI Semiconductor Revenue: $5.1 billion expected AI semiconductor revenue for Q3 FY2025, representing 60% year-over-year growth and tenth consecutive quarter of growth.

Q3 Guidance — Segment Revenue: Semiconductor revenue forecast at approximately $9.1 billion (up 25% year on year) for Q3 FY2025; Infrastructure Software revenue expected at approximately $6.7 billion (up 16% year over year).

Q3 Guidance — Margins: Consolidated gross margin expected to decline by 130 basis points sequentially in Q3 FY2025, primarily due to a higher mix of XPUs in AI revenue.

Customer Adoption Milestone: Over 87% of the 10,000 largest customers have adopted VCF as of Q2 FY2025, with software ARR growth reported as double digits in core infrastructure.

Inventory: Inventory of $2 billion for Q2 FY2025, up 6% sequentially, and 69 days of inventory on hand

Days Sales Outstanding: 34 days in the second quarter, improved from 40 days a year ago.

Product Innovation: Announced Tomahawk 6 switch, delivering 102.4 terabits per second capacity and enabling scale for clusters exceeding 100,000 AI accelerators in two switching tiers.

AI Revenue Growth Outlook: Management stated, "we do anticipate now our fiscal 2025 growth rate of AI semiconductor revenue to sustain into fiscal 2026."

Non-GAAP Tax Rate: Q3 and full-year 2025 expected at 14%.

SUMMARY

Management highlighted that executives provided multi-year roadmap clarity for AI revenue, signaling the current high growth rates could continue into FY2026, based on strong customer visibility and demand for both training and inference workloads. New product cycles, including Tomahawk 6, are supported by what management described as "tremendous demand." The company affirmed a stable capital allocation approach, prioritizing dividends, debt repayment, and opportunistic share repurchase, while maintaining significant free cash flow generation.

Despite a sequential uptick in AI networking content, management expects networking's share of AI revenue to decrease to below 30% in FY2026 as custom accelerators ramp up.

Management noted, "Networking is hard. That doesn't mean XPU is any soft. It's very much along the trajectory we expect it to be." addressing questions on product mix dynamics within AI semiconductors.

On customer conversion for VMware, Hock Tan said, "We probably have at least another year plus, maybe a year and a half to go" in transitioning major accounts to the VCF subscription model.

AI semiconductor demand is increasingly driven by customer efforts to monetize platform investments through inference workloads, with current visibility supporting sustained elevated demand levels.

Kirsten Spears clarified, "XPU margins are slightly lower than the rest of the business other than Wireless." which informs guidance for near-term gross margin shifts.

Management stated that near-term growth forecasts do not include potential future contributions from new "prospects" beyond active customers; updates will be provided only when revenue conversion is certain.

Hock Tan provided no update on the 2027 AI revenue opportunity, emphasizing that forecasts rest solely on factors and customer activity currently visible to Broadcom Inc.

On regulatory risk, Hock Tan said, "Nobody can give anybody comfort in this environment," in response to questions about prospective impacts of changing export controls on AI product shipments.

INDUSTRY GLOSSARY

XPU: A custom accelerator chip, including but not limited to CPUs, GPUs, and AI-focused architectures, purpose-built for a specific hyperscale customer or application.

VCF: VMware Cloud Foundation, a software stack enabling private cloud deployment, including virtualization, storage, and networking for enterprise workloads.

Tomahawk Switch: Broadcom Inc.'s high-performance Ethernet switching product, with Tomahawk 6 as the latest generation capable of 102.4 terabits per second throughput for AI data center clusters.

Co-packaged Optics: Integration of optical interconnect technology within switch silicon to lower power consumption and increase bandwidth for data center networks, especially as cluster sizes scale.

ARR (Annual Recurring Revenue): The value of subscription-based revenues regularized on an annual basis, indicating the stability and runway of software-related sales.

Full Conference Call Transcript

Hock Tan: Thank you, Ji. And thank you, everyone, for joining us today. In our fiscal Q2 2025, total revenue was a record $15 billion, up 20% year on year. This 20% year on year growth was all organic, as Q2 last year was the first full quarter with VMware. Now revenue was driven by continued strength in AI semiconductors and the momentum we have achieved in VMware. Now reflecting excellent operating leverage, Q2 consolidated adjusted EBITDA was $10 billion, up 35% year on year. Now let me provide more color. Q2 semiconductor revenue was $8.4 billion, with growth accelerating to 17% year on year, up from 11% in Q1.

And of course, driving this growth was AI semiconductor revenue of over $4.4 billion, which was up 46% year on year and continues the trajectory of nine consecutive quarters of strong growth. Within this, custom AI accelerators grew double digits year on year, while AI networking grew over 70% year on year. AI networking, which is based on Ethernet, was robust and represented 40% of our AI revenue. As a standards-based open protocol, Ethernet enables one single fabric for both scale-out and scale-up and remains the preferred choice by our hyperscale customers. Our networking portfolio of Tomahawk switches, Jericho routers, and NICs is what's driving our success within AI clusters in hyperscale.

And the momentum continues with our breakthrough Tomahawk 6 switch just announced this week. This represents the next generation 102.4 terabits per second switch capacity. Tomahawk 6 enables clusters of more than 100,000 AI accelerators to be deployed in just two tiers instead of three. This flattening of the AI cluster is huge because it enables much better performance in training next-generation frontier models through a lower latency, higher bandwidth, and lower power. Turning to XPUs or customer accelerators, we continue to make excellent progress on the multiyear journey of enabling our three customers and four prospects to deploy custom AI accelerators.

As we had articulated over six months ago, we eventually expect at least three customers to each deploy 1 million AI accelerated clusters in 2027, largely for training their frontier models. And we forecast and continue to do so a significant percentage of these deployments to be custom XPUs. These partners are still unwavering in their plan to invest despite the uncertain economic environment. In fact, what we've seen recently is that they are doubling down on inference in order to monetize their platforms. And reflecting this, we may actually see an acceleration of XPU demand into the back half of 2026 to meet urgent demand for inference on top of the demand we have indicated from training.

And accordingly, we do anticipate now our fiscal 2025 growth rate of AI semiconductor revenue to sustain into fiscal 2026. Turning to our Q3 outlook, as we continue our current trajectory of growth, we forecast AI semiconductor revenue to be $5.1 billion, up 60% year on year, which would be the tenth consecutive quarter of growth. Now turning to non-AI semiconductors in Q2, revenue of $4 billion was down 5% year on year. Non-AI semiconductor revenue is close to the bottom and has been relatively slow to recover. But there are bright spots. In Q2, broadband, enterprise networking, and service storage revenues were up sequentially. However, industrial was down, and as expected, wireless was also down due to seasonality.

We expect enterprise networking and broadband in Q3 to continue to grow sequentially, but server storage, wireless, and industrial are expected to be largely flat. And overall, we forecast non-AI semiconductor revenue to stay around $4 billion. Now let me talk about our infrastructure software segment. Q2 infrastructure software revenue of $6.6 billion was up 25% year on year, above our outlook of $6.5 billion. As we have said before, this growth reflects our success in converting our enterprise customers from perpetual vSphere to the full VCF software stack subscription.

Customers are increasingly turning to VCF to create a modernized private cloud on-prem, which will enable them to repatriate workloads from public clouds while being able to run modern container-based applications and AI applications. Of our 10,000 largest customers, over 87% have now adopted VCF. The momentum from strong VCF sales over the past eighteen months since the acquisition of VMware has created annual recurring revenue, or otherwise known as ARR, growth of double digits in core infrastructure software. In Q3, we expect infrastructure software revenue to be approximately $6.7 billion, up 16% year on year. So in total, we are guiding Q3 consolidated revenue to be approximately $15.8 billion, up 21% year on year.

We expect Q3 adjusted EBITDA to be at least 66%. With that, let me turn the call over to Kirsten.

Kirsten Spears: Thank you, Hock. Let me now provide additional detail on our Q2 financial performance. Consolidated revenue was a record $15 billion for the quarter, up 20% from a year ago. Gross margin was 79.4% of revenue in the quarter, better than we originally guided on product mix. Consolidated operating expenses were $2.1 billion, of which $1.5 billion was related to R&D. Q2 operating income of $9.8 billion was up 37% from a year ago, with operating margin at 65% of revenue. Adjusted EBITDA was $10 billion or 67% of revenue, above our guidance of 66%. This figure excludes $142 million of depreciation. Now a review of the P&L for our two segments.

Starting with semiconductors, revenue for our Semiconductor Solutions segment was $8.4 billion, with growth accelerating to 17% year on year, driven by AI. Semiconductor revenue represented 56% of total revenue in the quarter. Gross margin for our Semiconductor Solutions segment was approximately 69%, up 140 basis points year on year, driven by product mix. Operating expenses increased 12% year on year to $971 million on increased investment in R&D for leading-edge AI semiconductors. Semiconductor operating margin of 57% was up 200 basis points year on year. Now moving on to Infrastructure Software. Revenue for Infrastructure Software of $6.6 billion was up 25% year on year and represented 44% of total revenue.

Gross margin for infrastructure software was 93% in the quarter, compared to 88% a year ago. Operating expenses were $1.1 billion in the quarter, resulting in Infrastructure Software operating margin of approximately 76%. This compares to an operating margin of 60% a year ago. This year-on-year improvement reflects our disciplined integration of VMware. Moving on to cash flow, free cash flow in the quarter was $6.4 billion and represented 43% of revenue. Free cash flow as a percentage of revenue continues to be impacted by increased interest expense from debt related to the VMware acquisition and increased cash taxes. We spent $144 million on capital expenditures.

Day sales outstanding were 34 days in the second quarter, compared to 40 days a year ago. We ended the second quarter with inventory of $2 billion, up 6% sequentially in anticipation of revenue growth in future quarters. Our days of inventory on hand were 69 days in Q2, as we continue to remain disciplined on how we manage inventory across the ecosystem. We ended the second quarter with $9.5 billion of cash and $69.4 billion of gross principal debt. Subsequent to quarter end, we repaid $1.6 billion of debt, resulting in gross principal debt of $67.8 billion. The weighted average coupon rate and years to maturity of our $59.8 billion in fixed-rate debt is 3.8% and seven years, respectively.

The weighted average interest rate and years to maturity of our $8 billion in floating-rate debt is 5.3% and 2.6 years, respectively. Turning to capital allocation, in Q2, we paid stockholders $2.8 billion of cash dividends based on a quarterly common stock cash dividend of $0.59 per share. In Q2, we repurchased $4.2 billion or approximately 25 million shares of common stock. In Q3, we expect the non-GAAP diluted share count to be 4.97 billion shares, excluding the potential impact of any share repurchases. Now moving on to guidance, our guidance for Q3 is for consolidated revenue of $15.8 billion, up 21% year on year. We forecast semiconductor revenue of approximately $9.1 billion, up 25% year on year.

Within this, we expect Q3 AI Semiconductor revenue of $5.1 billion, up 60% year on year. We expect infrastructure software revenue of approximately $6.7 billion, up 16% year on year. For modeling purposes, we expect Q3 consolidated gross margin to be down 130 basis points sequentially, primarily reflecting a higher mix of XPUs within AI revenue. As a reminder, consolidated gross margins through the year will be impacted by the revenue mix of infrastructure software and semiconductors. We expect Q3 adjusted EBITDA to be at least 66%. We expect the non-GAAP tax rate for Q3 and fiscal year 2025 to remain at 14%. And with this, that concludes my prepared remarks. Operator, please open up the call for questions.

Operator: Withdraw your question, please press 11 again. Due to time restraints, we ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. And our first question will come from the line of Ross Seymore with Deutsche Bank. Your line is open.

Ross Seymore: Hi, guys. Thanks for letting me ask a question. Hock, I wanted to jump onto the AI side, specifically some of the commentary you had about next year. Can you just give a little bit more color on the inference commentary you gave? And is it more the XPU side, the connectivity side, or both that's giving you the confidence to talk about the growth rate that you have this year being matched next fiscal year?

Hock Tan: Thank you, Ross. Good question. I think we're indicating that what we are seeing and what we have quite a bit of visibility increasingly is increased deployment of XPUs next year and much more than we originally thought. And hand in hand, we did, of course, more and more networking. So it's a combination of both.

Ross Seymore: In the inference side of things?

Hock Tan: Yeah. We're seeing much more inference now. Thank you.

Operator: Thank you. One moment for our next question. And that will come from the line of Harlan Sur with JPMorgan. Your line is open.

Harlan Sur: Good afternoon. Thanks for taking my question and great job on the quarterly execution. Hock, you know, good to see the positive growth in inflection quarter over quarter. Year over year growth rates in your AI business. As a team, as mentioned, right, the quarters can be a bit lumpy. So if I smooth out kind of first 360% year over year. It's kind of right in line with your three-year kind of SAM growth CAGR. Right? Your prepared remarks and knowing that your lead times remain at thirty-five weeks or better, do you see the Broadcom Inc. team sustaining the 60% year over year growth rate exiting this year?

And I assume that potentially implies that you see your AI business sustaining the 60% year over year growth rate into fiscal 2026 again based on your prepared commentary? Which again is in line with your SAM growth taker. Is that kind of a fair way to think about the trajectory this year and next year?

Hock Tan: Yeah. Harlan, that's a very insightful set of analysis here, and that's exactly what we're trying to do here because six over six months ago, we gave you guys a point a year 2027. As we come into the second now into the second half, of 2025, and with improved visibility and updates we are seeing in the way our hyperscale partners are deploying data centers, AI clusters, we are providing you more some level of guidance, visibility, what we are seeing how the trajectory of '26 might look like. I'm not giving you any update on '27. We just still establishing the update we have in '27, months ago.

But what we're doing now is giving you more visibility into where we're seeing '26 head.

Harlan Sur: But is the framework that you laid out for us, like, second half of last year, which implies 60% kind of growth CAGR in your SAM opportunity. Is that kind of the right way to think about it as it relates to the profile of growth in your business this year and next year?

Hock Tan: Yes.

Harlan Sur: Okay. Thank you, Hock.

Operator: Thank you. One moment for our next question. And that will come from the line of Ben Reitzis with Melius Research. Your line is open.

Ben Reitzis: Hey. How are doing? Thanks, guys. Hey, Hock. Networking AI networking was really strong in the quarter. And it seemed like it must have beat expectations. I was wondering if you could just talk about the networking in particular, what caused that and how much is that is your acceleration into next year? And when do you think you see Tomahawk kicking in as part of that acceleration? Thanks.

Hock Tan: Well, I think the network AI networking, as you probably would know, goes pretty hand in hand with deployment of AI accelerated clusters. It isn't. It doesn't deploy on a timetable that's very different from the way the accelerators get deployed, whether they are XPUs or GPUs. It does happen. And they deploy a lot in scale-out where Ethernet, of course, is the choice of protocol, but it's also increasingly moving into the space of what we all call scale-up within those data centers. Where you have much higher, more than we originally thought consumption or density of switches than you have in the scale-out scenario.

It's in fact, the increased density in scale-up is five to 10 times more than in scale-out. That's the part that kind of pleasantly surprised us. And which is why this past quarter Q2, the AI networking portion continues at about 40% from when we reported a quarter ago for Q1. And, at that time, I said, I expect it to drop.

Ben Reitzis: And your thoughts on Tomahawk driving acceleration for next year and when it kicks in?

Hock Tan: Oh, six. Oh, yeah. That's extremely strong interest now. We're not shipping big orders or any orders other than basic proof of concepts out to customers. But there is tremendous demand for this new 102 terabit per second Tomahawk switches.

Ben Reitzis: Thanks, Hock.

Operator: Thank you. One moment for our next question. And that will come from the line of Blayne Curtis with Jefferies. Your line is open.

Blayne Curtis: Hey. Thanks, and results. I just wanted to ask maybe following up on the scale-out opportunity. So today, I guess, your main customer is not really using an NVLink switch style scale-up. I'm just kinda curious your visibility or the timing in terms of when you might be shipping, you know, a switched Ethernet scale-up network to your customers?

Hock Tan: The talking scale-up? Scale-up.

Blayne Curtis: Scale-up.

Hock Tan: Yeah. Well, scale-up is very rapidly converting to Ethernet now. Very much so. It's I for our fairly narrow band of hyperscale customers, scale-up is very much Ethernet.

Operator: Thank you. One moment for our next question. And that will come from the line of Stacy Rasgon with Bernstein. Your line is open.

Stacy Rasgon: Hi, guys. Thanks for taking my questions. Hock, I still wanted to follow-up on that AI 2026 question. I wanna just put some numbers on it. Just to make sure I've got it right. So if you did 60% in the 360% year over year in Q4, puts you at, like, I don't know, $5.8 billion, something like $19 or $20 billion for the year. And then are you saying you're gonna grow 60% in 2026, which would put you $30 billion in AI revenues for 2026. I just wanna make is that the math that you're trying to communicate to us directly?

Hock Tan: I think you're doing the math. I'm giving you the trend. But I did answer that question. I think Harlan may have asked earlier. The rate we are seeing and now so far in fiscal 2025 and will presumably continue. We don't see any reason why it doesn't give an time. Visibility in '25. What we're seeing today based on what we have visibility on '26 is to be able to ramp up this AI revenue in the same trajectory. Yes.

Stacy Rasgon: So is the SAM going up as well? Because now you have inference on top of training. So is the SAM still 60 to 90, or is the SAM higher now as you see it?

Hock Tan: I'm not playing the SAM game here. I'm just giving a trajectory towards where we drew the line on 2027 before. So I have no response to it's the SAM going up or not. Stop talking about SAM now. Thanks.

Stacy Rasgon: Oh, okay. Thank you.

Operator: One moment for our next question. And that will come from the line of Vivek Arya with Bank of America. Your line is open.

Vivek Arya: Thanks for taking my question. I had a near and then a longer term on the XPU business. So, Hock, for near term, if your networking upsided in Q2, and overall AI was in line, it means XPU was perhaps not as strong. So I realize it's lumpy, but anything more to read into that, any product transition or anything else? So just a clarification there. And then longer term, you know, you have outlined a number of additional customers that you're working with. What milestones should we look forward to, and what milestones are you watching to give you the confidence that you can now start adding that addressable opportunity into your 2027 or 2028 or other numbers?

Like, how do we get the confidence that these projects are going to turn into revenue in some, you know, reasonable time frame from now? Thank you.

Hock Tan: Okay. On the first part that you are asking, it's you know, it's like you're trying to be you're trying to count how many angels on a head of a pin. I mean, whether it's XPU or networking, Networking is hard. That doesn't mean XPU is any soft. It's very much along the trajectory we expect it to be. And there's no lumpiness. There's no softening. It's pretty much what we expect. The trajectory to go so far. And into next quarter as well, and probably beyond. So we have a fair it's a fairly I guess, in our view, fairly clear visibility on the short-term trajectory. In terms of going on to 2027, no.

We are not updating any numbers here. We six months ago, we drew a sense for the size of the SAM based on, you know, million XPU clusters for three customers. And that's still very valid at that point. That you'll be there. But and we have not provided any further updates here. Nor are we intending to at this point. When we get a better visibility clearer, sense of where we are, and that probably won't happen until 2026. We'll be happy to give an update to the audience.

But right now, though, to in today's prepared remarks and answering a couple of questions, we are as we are doing as we have done here, we are intending to give you guys more visibility what we've seen the growth trajectory in 2026.

Operator: Thank you. One moment for our next question. And that will come from the line of CJ Muse with Evercore ISI. Your line is open.

CJ Muse: Yes. Good afternoon. Thank you for taking the question. I was hoping to follow-up on Ross' question regarding inference opportunity. You discuss workloads that are optimal that you're seeing for custom silicon? And that over time, what percentage of your XPU business could be inference versus training? Thank you.

Hock Tan: I think there's no differentiation between training and inference in using merchant accelerators versus customer accelerators. I think that all under the whole premise behind going towards custom accelerators continues. Which is not a matter of cost alone. It is that as custom accelerators get used and get developed on a road map with any particular hyperscaler, that's a learning curve. A learning curve on how they could optimize the way they'll go as the algorithms on their large language models get written and tied to silicon. And that ability to do so is a huge value added in creating algorithms that can drive their LLMs to higher and higher performance.

Much more than basically a segregation approach between hardware and the software. It says you literally combine end-to-end hardware and software as they take that. As they take that journey. And it's a journey. They don't learn that in one year. Do it a few cycles, get better and better at it. And then lies the value, the fundamental value in creating your own hardware versus using silicon. A third-party merchant that you are able to optimize your software to the hardware and eventually achieve way higher performance than you otherwise could. And we see that happening.

Operator: Thank you. One moment for our next question. And that will come from the line of Karl Ackerman with BNP Paribas. Your line is open.

Karl Ackerman: Yes. Thank you. Hock, you spoke about the much higher content opportunity in scale-up networking. I was hoping you could discuss how important is demand adoption for co-package optics in achieving this five to 10x higher content for scale-up networks. Or should we anticipate much of the scale-up opportunity will be driven by Tomahawk and Thor and NICs? Thank you.

Hock Tan: I'm trying to decipher this question of yours, so let me try to answer it perhaps in a way I think you want me to clarify. First and foremost, I think most of what's scaling up there are a lot of the scaling up that's going in, as I call it, which means a lot of XPU or GPU to GPU interconnects. It's done on copper. Copper interconnects. And because, you know, there's the size of the size of this in of this scale-up cluster still not that huge yet, that you can get away with. Copper to using copper interconnects. And they're still doing it. Mostly, they're doing it today.

At some point soon, I believe, when you start trying to go beyond maybe 72, GPU to GPU, interconnects, you may have to push towards a different protocol by protocol mode at a different meeting. From copper to optical. And when we do that, yeah, perhaps then things like exotic stuff like co-packaging might be a fault of silicon with optical might become relevant. But truly, what we really are talking about is that at some stage, as the clusters get larger, which means scale-up becomes much bigger, you need to interconnect GPU or XPU to each other in scale-up many more.

Than just 72 or 100 maybe even 28, you start going more and more, you want to use optical interconnects simply because of distance. And that's when optical will start replacing copper. And when that happens, the question is what's the best way to deliver on optical. And one way is co-packaged optics. But it's not the only way. You can just simply use continue use, perhaps pluggable. At low-cost optics. In which case then you can interconnect the bandwidth, the radix of a switch and our switch is down 512 connections. You can now connect all these XPUs GPUs, 512 for scale-up phenomenon. And that was huge. But that's when you go to optical.

That's going to happen within my view a year or two. And we'll be right in the forefront of it. And it may be co-packaged optics, which we are very much in development, it's a lock-in. Co-package, or it could just be as a first step pluggable object. Whatever it is, I think the bigger question is, when does it go from optical and from copper connecting GPU to GPU to optical. Connecting it. And the stamp in that move will be huge. And it's not necessary for package updates, though that definitely one path we are pursuing.

Karl Ackerman: Very clear. Thank you.

Operator: And one moment for our next question. And that will come from the line of Joshua Buchalter with TD Cowen. Your line is open.

Joshua Buchalter: Hey, guys. Thank you for taking my question. Realized the nitpicky, but I wanted to ask about gross margins in the guide. So your revenue implies sort of $800 million and $100 million incremental increase with gross profit up, I think, $400 million to $450 million, which is kind of pretty well below corporate average fall through. Appreciate that semis are dilutive, and custom is probably dilutive within semis, but anything else going on with margins that we should be aware of? And how should we think about the margin profile of longer term as that business continues to scale and diversify? Thank you.

Kirsten Spears: Yes. We've historically said that the XPU margins are slightly lower than the rest of the business other than Wireless. So there's really nothing else going on other than that. It's just exactly what I said. That the majority of it quarter over quarter. Is the 30 basis point decline is being driven by more XPUs.

Hock Tan: You know, there are more moving parts here. Than your simple analysis pros here. And I think your simple analysis is totally wrong in that regard.

Joshua Buchalter: And thank you.

Operator: And one moment for our next question. And that will come from the line of Timothy Arcuri with UBS. Your line is open.

Timothy Arcuri: Thanks a lot. I also wanted to ask about Scale-Up, Hock. So there's a lot of competing ecosystems. There's UA Link, which, of course, you left. And now there's the big, you know, GPU company, you know, opening up NVLink. And they're both trying to build ecosystems. And there's an argument that you're an ecosystem of one. What would you say to that debate? Does opening up NVLink change the landscape? And sort of how do you view your AI networking growth next year? Do you think it's gonna be primarily driven by scale-up or would still be pretty scale-out heavy? Thanks.

Hock Tan: It's you know, people do like to create platforms. And new protocols and systems. The fact of the matter is scale-up. It can just be done easily, and it's currently available. It's open standards open source, Ethernet. Just as well just as well, don't need to create new systems for the sake of doing something that you could easily be doing in networking in Ethernet. And so, yeah, I hear a lot of this interesting new protocols standards that are trying to be created. And most of them, by the way, are proprietary. Much as they like to call it otherwise. One is really open source, and open standards is Ethernet.

And we believe Ethernet won't prevail as it does before for the last twenty years in traditional networking. There's no reason to create a new standard for something that could be easily done in transferring bits and bytes of data.

Timothy Arcuri: Got it, Alex. Thank you.

Operator: And one moment for our next question. And that will come from the line of Christopher Rolland with Susquehanna. Your line is open.

Christopher Rolland: Thanks for the question. Yeah. My question is for you, Hock. It's a kind of a bigger one here. And this kind of acceleration that we're seeing in AI demand, do you think that this acceleration is because of a marked improvement in ASICs or XPUs closing the gap on the software side at your customers? Do you think it's these require tokenomics around inference, test time compute driving that, for example? What do you think is actually driving the upside here? And do you think it leads to a market share shift faster than we were expecting towards XPU from GPU? Thanks.

Hock Tan: Yeah. Interesting question. But no. None of the foregoing that you outlined. So it's simple. The way inference has come out, very, very hot lately is remember, we're only selling to a few customers, hyperscalers with platforms and LLMs. That's it. They are not that many. And you we told you how many we have. And haven't increased any. But what is happening is this all on this hyperscalers and those with LLMs need to justify all the spending they're doing. Doing training makes your frontier model smarter. That's no question. Almost like science. Research and science. Make your frontier models by creating very clever algorithm that deep, consumes a lot of compute for training smarter. Training makes us smarter.

Want to monetize inference. And that's what's driving it. Monetize, I indicated in my prepared remarks. The drive to justify a return on investment and a lot of the investment is training. And then return on investment is by creating use cases a lot AI use cases AI consumption, out there, through availability of a lot of inference. And that's what we are now starting to see among a small group of customers.

Christopher Rolland: Excellent. Thank you.

Operator: And one moment for our next question. And that will come from the line of Vijay Rakesh with Mizuho. Your line is open.

Vijay Rakesh: Yeah. Thanks. Hey, Hock. Just going back on the AI server revenue side. I know you said fiscal 2025 kind of tracking to that up 60% ish growth. If you look at fiscal 2026, you have many new customers ramping a meta and probably, you know, you have the four of the six. Hyper skills that you're talking to past. Would you expect that growth to activate into fiscal 2026? If all that, you know, kind of the 60% you had talked about.

Hock Tan: You know, my prepared remarks, which I clarify, that the grade of growth we are seeing in 2025 will sustain into 2026. Based on improved visibility and the fact that we're seeing inference coming in on top of the demand for training as the clusters get built up again because it still stands. I don't think we are getting very far by trying to pass through my words or data here. It's just a and we see that going from 2025 into 2026 as the best forecast we have at this point.

Vijay Rakesh: Got it. And on the NVLink the NVLink fusion versus the scale-up, do you expect that market to go the route of top of the rack where you've seen some move to the Internet side in kind of scale-out? Do you expect scale-up to kind of go the same route? Thanks.

Hock Tan: Well, Broadcom Inc. does not participate in NVLink. So I'm really not qualified to answer that question, I think.

Vijay Rakesh: Got it. Thank you.

Operator: Thank you. One moment for our next question. And that will come from the line of Aaron Rakers with Wells Fargo. Your line is open.

Aaron Rakers: Yes. Thanks for taking the question. Think all my questions on scale-up have been asked. But I guess Hock, given the execution that you guys have been able to do with the VMware integration, looking at the balance sheet, looking at the debt structure. I'm curious if, you know, if you could give us your thoughts on how the company thinks about capital return versus the thoughts on M&A and the strategy going forward? Thank you.

Hock Tan: Okay. That's an interesting question. And I agree. Not too untimely, I would say. Because, yeah, we have done a lot of the integration of VMware now. And you can see that in the level of free cash flow we're generating from operations. And as we said, the use of capital has always been, we're very I guess, measured and upfront with a return through dividends which is half our free cash flow of the preceding year. And frankly, as Kirsten has mentioned, three months ago and six months ago too in the last two earnings call, the first choice typically of the other free a part of the free cash flow is to bring down our debt.

To a more to a level that we feel closer to no more than two. Ratio of debt to EBITDA. And that doesn't mean that opportunistically, we may go out there and buy back our shares. As we did last quarter. And indicated by Kirsten we did $4.2 billion of stock buyback. Now part of it is used to basically when RS employee, RSUs vest basically use we basically buy back part of the shares in used to be paying taxes on the invested RSU.

But the other part of it, I do a I do a main we use it opportunistically last quarter when we see an opportune situation when basically, we think that it's a good time to buy some shares back. We do. But having said all that, our use of cash outside the dividends would be, at this stage, used towards reducing our debt. And I know you're gonna ask, what about M&A? Well, kind of M&A we will do will, in our view, would be significant, would be substantial enough that we need debt. In any case.

And it's a good and it's a good use of our free cash flow to bring down debt to, in a way, expand, if not preserve our borrowing capacity if we have to do another M&A deal.

Operator: Thank you. One moment for our next question. And that will come from the line of Srini Pajjuri with Raymond James. Your line is open.

Srini Pajjuri: Thank you. Hock, couple of clarifications. First, on your 2026 expectation, are you assuming any meaningful contribution from the four prospects that you talked about?

Hock Tan: No comment. We don't talk on prospects. We only talk on customers.

Srini Pajjuri: Okay. Fair enough. And then my other clarification is that I think you talked about networking being about 40% of the mix within AI. Is it the right kind of mix that you expect going forward? Or is that going to materially change as we, I guess, see XPUs ramping, you know, going forward.

Hock Tan: No. I've always said, and I expect that to be the case in going forward in 2026 as we grow. That networking should be a ratio to XPU should be closer in the range of less than 30%. Not the 40%.

Operator: Thank you. One moment for our next question. And that will come from the line of Joseph Moore with Morgan Stanley. Your line is open.

Joseph Moore: Great. Thank you. You've said you're not gonna be impacted by export controls on AI. I know there's been a number of changes since in the industry since the last time you made the call. Is that still the case? And just know, can you give people comfort that you're there's no impact from that down the road?

Hock Tan: Nobody can give anybody comfort in this environment, Joe. You know that. Rules are changing quite dramatically as trade bilateral trade agreements continue to be negotiated in a very, very dynamic environment. So I'll be honest, I don't I don't know. I know as little as probably you probably know more than I do maybe. In which case then I know very little about this whole thing about whether there's any export control, how the export control will take place we're guessing. So I rather not answer that because no, I know. Whether it will be.

Operator: Thank you. And we do have time for one final question. And that will come from the line of William Stein with Truist Securities. Your line is open.

William Stein: Great. Thank you for squeezing me in. I wanted to ask about VMware. Can you comment as to how far along you are in the process of converting customers to the subscription model? Is that close to complete? Or is there still a number of quarters that we should expect that conversion continues?

Hock Tan: That's a good question. And so let me start off by saying, a good way to measure it is you know, most of our VMware contracts are about three on it. Typically, three years. And that was what VMware did before we acquired them. And that's pretty much what we continue to do. Three is very traditional. So based on that, the renewals, like, two-thirds of the way, almost to the halfway more than halfway through the renewals. We probably have at least another year plus, maybe a year and a half to go.

Ji Yoo: Thank you. And with that, I'd like to turn the call over to Ji Yoo for closing remarks. Thank you, operator. Broadcom Inc. currently plans to report earnings for the third quarter of fiscal year 2025 after the close of market on Thursday, September 4, 2025. A public webcast of Broadcom Inc.'s earnings conference call will follow at 2 PM Pacific. That will conclude our earnings call today. Thank you all for joining. Operator, you may end the call.

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DATE

Thursday, June 5, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Calvin McDonald

Chief Financial Officer — Meghan Frank

Need a quote from one of our analysts? Email [email protected]

RISKS

Chief Financial Officer Frank stated, "We did lower our op margin for the full year from 100 basis points decline year over year to 160. That's all driven by the net impact of tariffs."

Frank said, "We expect gross margin in Q2 to decline approximately 200 basis points compared to Q2 2024," citing increased occupancy, depreciation, tariffs, higher markdowns, and foreign exchange.

Frank said, "SG&A was above our guidance of 120 basis points of deleverage due predominantly to the negative impact from an FX revaluation loss."

Frank noted, "given consumer confidence and macroeconomic as we move into the second half of the year, we feel it's prudent to tick up our forecast slightly on the markdown line."

TAKEAWAYS

Revenue: lululemon athletica inc. (NASDAQ:LULU) reported $2.4 billion, up 7%, or 8% in constant currency.

Comparable Sales: Increased 1%; Americas comparable sales declined 1%, China Mainland increased 8%, Rest of World increased 7%.

Americas Revenue: Rose 3%, or 4% in constant currency; Canada up 4% (9% in constant currency), U.S. up 2%.

China Mainland Revenue: Grew 21%, or 22% in constant currency; management attributed a four-point impact to the Chinese New Year calendar shift.

Rest of World Revenue: Increased 16%, or 17% in constant currency.

Store Network: 770 global stores at quarter-end; three net new stores opened, square footage up 14% year over year.

Digital Revenue: $961 million, representing 41% of total revenue.

Category Growth: Men's revenue up 8%, women's up 7%, accessories and other up 8%.

Gross Margin: Increased 60 basis points to 58.3% (GAAP), driven by lower product cost, improved damages, improved markdowns, and leverage on fixed costs; 130 basis points improvement in product margin offset by 50 basis points deleverage on fixed costs and 20 basis points of FX pressure.

SG&A Expenses: $943 million, or 39.8% of revenue; deleveraged 120 basis points year over year (GAAP), above guidance due to FX revaluation loss.

Operating Income: $439 million, 18.5% of net revenue; operating margin declined from 19% in the prior year period.

Diluted EPS: $2.60 per diluted share, up from $2.54 in the prior year; full-year diluted EPS (GAAP) guidance is $14.58 to $14.78, compared to $14.64 in the prior year.

Inventory: Dollar value up 23%, units up 16%; increases attributed to higher average unit cost due to tariffs and FX.

Share Repurchases: 1,360,000 shares repurchased for $430 million at an average price of $316; $1.1 billion remaining in share repurchase authorization.

Balance Sheet: $1.3 billion in cash, no debt.

Full-Year Revenue Guidance: $11.15 billion to $11.3 billion, implying 5%-7% growth, or 7%-8% excluding the prior year’s fifty-third week.

Store Growth Guidance: 40-45 net new company-operated stores expected for the year; majority of new stores international, mainly China.

Gross Margin Guidance: Full-year gross margin (GAAP) expected to decrease 110 basis points due to tariffs and slightly higher markdowns; Q2 gross margin expected to decline 200 basis points from the prior year period.

SG&A Guidance: Full-year SG&A deleverage of 50 basis points expected; Q2 deleverage of 170-190 basis points from the prior year period.

Operating Margin Guidance: Operating margin (GAAP) expected to fall by 160 basis points year over year.

Capital Expenditures: $152 million in the quarter; full-year guidance of $740 million-$760 million, targeting growth, distribution centers, store expansion, and technology.

Tariff Mitigation: Management is planning "modest" price increases on select items, supply chain efficiency actions, and targeted sourcing shifts, with mitigation expected mainly in the second half of the year.

Brand Awareness: Unaided U.S. brand awareness rose from the mid-30% range in the prior quarter to 40% in the current quarter.

Product Innovation: New products such as Align No Line, Daydrift, Glow Up, and Be Calm received positive responses, with key launches selling out and full distribution planned for the back half.

SUMMARY

Management maintained full-year revenue guidance and highlighted international momentum, with China Mainland revenue up 22% in constant currency despite a calendar shift. Operating and gross margin guidance were revised downward, as management cited tariff impacts and plans for only modest, targeted price increases on a limited portion of the assortment. Digital revenue contributed 41% of the mix, and product innovation was a focus, with several new launches receiving rapid sell-through and positive guest feedback.

Chief Executive Officer McDonald said, "we gained market share across both men's and women's in the premium athletic wear market in the United States."

Management confirmed strategic investments remain on track across distribution, new markets, and technology, supported by $1.3 billion in cash and no debt.

Tariff mitigation actions—including pricing and sourcing—are expected to have greater impact in the second half of the year, with gross margin pressure front-loaded into Q2.

Inventory growth in dollars outpaced units, with management attributing the differential to tariffs and FX, but asserting inventory quality and composition remain healthy.

Brand activations and campaigns, such as Summer of Align, contributed to the sequential rise in unaided U.S. awareness, reflecting ongoing investment in grassroots and omni-channel engagement.

INDUSTRY GLOSSARY

Optimization: Reconfiguration or relocation of existing store sites to improve productivity, size, or guest experience.

Co-located Strategy: Approach of expanding or opening larger-format stores within high-traffic locations to offer a fuller assortment across categories.

Daydrift/Align No Line/Glow Up/Be Calm: Proprietary product franchises or new lines referenced by name, representing recent innovations in lululemon athletica inc.’s assortment.

Fifty-third Week: An additional fiscal week in the prior reporting year, impacting year-over-year comparisons.

Full Conference Call Transcript

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 which by 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-Ks 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. 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 first quarter as well as our quarterly infographic. Today's call is scheduled for one 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 you today to discuss our first quarter results. As you've seen from our press release, our revenue growth for the quarter came in at the high end of our guidance range. I'm pleased with this performance, which was relatively consistent with quarter four. I'd also note that our revenue in the United States grew 2%, which is an improvement in the trend we've seen over the last several quarters. Based on our quarter one revenue performance and what we're seeing thus far in quarter two, we are maintaining our revenue guidance for the full year.

As we look ahead, we will continue to leverage our financial strength and our position in the marketplace to play offense, remain agile, and successfully manage the environment around us. I'll begin by sharing the details of our quarter one performance, including high-level financial metrics and key highlights regarding our regional performance, product innovation, and our brand campaigns and activations. Next, I'll provide insights into the planning and strategies we're deploying related to the increase in tariffs. Meghan will speak to the specific financial implications, and I'll share some insights into the opportunities we have across the business. I'll then share my thoughts on quarter two and the remainder of the year.

Meghan will review our financials and our updated guidance, and we will conclude by taking your questions. Let's get started. In quarter one, total revenue increased 7% or 8% on a constant currency basis. Gross margin increased 60 basis points to 58.3%, and earnings per share were $2.60, ahead of our expectations. In addition, in quarter one, we continued repurchasing shares and bought back another $430 million of stock. Our ongoing repurchases demonstrate the strength of our balance sheet and our continued confidence in the long-term prospects for Lululemon.

Looking at our regional performance, we continue to see strength across markets driven by our high-performance, high-style merchandise and the compelling ways we engage with our guests through brand activations and community events. In North America, momentum continued in Canada, where sales grew 9% in constant currency, and in the United States, revenue growth improved to 2%. We're making progress on our assortment, and we've seen good response to many of our new innovations. But my sense is that in the U.S., consumers remain cautious right now, and they are being very intentional about their buying decisions. Even with this, we gained market share across both men's and women's in the premium athletic wear market in the United States.

In China Mainland, revenue increased 22% in constant currency. As you are aware, Chinese New Year shifted from quarter one of this year to Q4 of last year. While we estimate that this calendar shift had a negative impact of about four percentage points on Q1 revenue growth, we remain pleased with the underlying momentum in this very important growth market. And in the rest of the world, revenue increased 17% in constant currency as we continue to see a strong acceptance of our brand by guests across the APAC and EMEA regions. We are executing against our strategy to maximize our existing markets, expand in newer markets, while also seeding others for future growth.

I'm excited by the recent store openings in two of our franchise markets, Denmark and Turkey, which are off to a strong start, and we remain on track to enter Italy as a new company-operated market and Belgium and the Czech Republic under a franchise model later this year. When looking at the full year, our view on revenue is unchanged, and we continue to expect 7% to 8% growth. By region, we continue to anticipate revenue in North America to increase in the low to mid-single-digit range, China Mainland to grow in the 25% to 30% range, and revenue in the Rest of World segment to increase about 20%.

Key to our success within all our markets is our product, which offers unique and innovative solutions for guests across both athletic and lifestyle product categories. Throughout quarter one, guests responded well to the newness we introduced into our assortment. For women, our defined franchise continues to perform well across our markets globally, and we are pleased with the response to our recent launches, including Daydrift, Shake It Out, and Be Calm. For men, we're seeing strength in several of our key franchises, including Zeroed In, Smooth Spacer, and Show Zero.

In May, to celebrate the ten-year anniversary of our Align franchise, we launched Align No Line, which offers the same fit and feel as the iconic legging but without a front seam. We're pleased with the guest response both online and in the 80 doors where it was offered. We plan to build on this momentum for the fall when we roll it to all stores. I'm excited with the innovations we've rolled out this year and will continue to bring to market going forward. We have significant opportunity to expand all five of our key activities: yoga, run, train, golf, and tennis, and become the top-of-mind destination for guests who enjoy these activities.

Recent examples include our new Fast and Free running short for men, and for women, we launched additional styles which leveraged the research and development our teams conducted last year for our further ultra-marathon event. Switching now to our brand activations. Our teams continue to develop unique and compelling brand campaigns and community events that engage our guests, increase brand awareness, and support our product launches. Let me highlight a recent example. To support the launch and to celebrate Align's anniversary, we created our Summer of Align campaign. This fully integrated campaign included traditional and social media, exclusive experiences and events, and featured several influencers and ambassadors.

We hosted events around the world, including our Lululemon roller rink activation at the Bottle Rock Festival in Napa Valley and our largest-ever yoga experience in China, attended by 5,000 people in Beijing. This campaign and the other events we activated in quarter one is a great example of how we remain focused on our grassroots approach to guest engagement while at the same time leveraging traditional media assets and our roster of ambassadors to support product launches and build our brand. In fact, our unaided brand awareness in the United States grew from the mid-30s in quarter four to 40% in quarter one. I would now like to talk for a moment about the current environment related to tariffs.

Meghan will speak to our assumptions and the implications of potential higher rates during her guidance discussion. But I first want to spend a few minutes sharing our approach. The current tariff paradigm has brought uncertainty into the retail environment. As consumers try to assess the impact they will have on daily life, as businesses evaluate these impacts as well, I believe we are better positioned than most to navigate the near term while also maintaining our focus on investing in our growth potential over the long term. We are operating from a position of strength. Our brand remains strong, our guest engagement is high, we offer a compelling value proposition, and we are a highly profitable business.

Let me share a few details. We have an industry-leading operating margin. This allows us to continue investing across our strategic roadmap to enable long-term growth while managing any increased costs associated with tariffs. Our balance sheet is strong with $1.3 billion in cash and no debt, which provides us significant financial flexibility. We are making progress with our newness, have a robust pipeline of innovation, and our guests are responding well to many of the new solutions we are bringing into our assortment. And our premium positioning in the performance athletic apparel category yields different elasticity for our products relative to fashion-oriented brands.

We believe our guests will continue to live an active and healthy lifestyle and turn to us for the technical apparel we are known for. Shifting now to how we have been navigating this situation. Over the past few months, our teams have been looking across the enterprise for how we can offset increased tariff rates. Our work streams include prudently managing expenses, identifying efficiencies within our supply chain, and evaluating our position in the marketplace related to pricing. During COVID, we developed a strong muscle across our teams to be agile, pull levers across the business within a rapidly changing external environment, and simultaneously plan for multiple scenarios.

We are applying the same approach now as we maintain a disciplined focus on expenses, look across our supply chain, leverage our dual sourcing capabilities, engage in costing discussions with our vendors, and review pricing scenarios to ensure we sit where we want in the market, are pricing appropriately for the innovation in our assortment, and maximize any opportunity to gain market share. We have always been and will continue to be very intentional with our pricing decisions. These actions will be targeted and will reflect the work we've done on style elasticity. We remain nimble in our approach and feel we are well positioned during this period with many levers to pull.

Before handing it over to Meghan to discuss our financials, I wanted to share my perspective on quarter two and the remainder of the year. It's been approximately a year since we've made the changes in our product organization, and I'm pleased with our evolved structure, the way the teams are working together, and the efficiencies we're seeing across our processes. We still have work to do to create new products that have the potential to grow into core franchises and further optimize our merchandise mix. However, we are moving in the right direction.

And looking at the remainder of 2025, our teams are focused on strengthening our product pipeline and bringing more innovation into our core assortment while also introducing new styles with the potential to become key franchises and core items in the future, expanding deeper and bringing new technical solutions into our five key activities while further developing our lifestyle assortment, engaging more deeply with our guests through community activations, brand campaigns, and leveraging our membership program, and expanding our highly productive square footage profile through new store openings and optimizations.

As I hand it over to Meghan, I want to also say that while we recognize that quarter two has some pressures related to our planned business investments and additional expenses related to tariffs, we feel good about the full year and our ability to maintain our revenue guidance for 2025. There is considerable opportunity ahead for Lululemon, and we're intent on successfully navigating the near term while we plan for and invest in the long term. With that, I'll now hand it over to Meghan.

Meghan Frank: Thanks, Calvin. I'm happy we delivered Q1 results that exceeded our expectations. Guests are responding well to our product newness and innovations. As a result, we are maintaining our revenue guidance for the full year. Given the uncertainties in the macro environment, our approach to planning remains balanced on managing the dynamics of the current year while also maintaining our focus on the long term. We are managing expenses prudently while also continuing to invest to drive long-term growth and set ourselves up for future success. This includes new store openings and optimizations, new market entries, growing brand awareness, and ensuring we have adequate capacity across our supply chain. I'll share our detailed guidance with you in a moment.

But let's first take a look at our Q1 results in detail. For Q1, total net revenue rose 7% or 8% in constant currency to $2.4 billion. Comparable sales increased 1%. Within our regions, results were as follows: Americas revenue increased 3% or 4% in constant currency with comparable sales down 1%. By country, revenue increased 4% or 9% in constant currency in Canada and increased 2% in the U.S. China Mainland revenue increased 21% or 22% in constant currency with comparable sales increasing 8%, and in the rest of the world, revenue grew by 16% or 17% in constant currency with comparable sales increasing by 7%.

In our store channel, total sales increased 8%, and we ended the quarter with 770 stores globally. Square footage increased 14% versus last year, driven by the addition of 59 net new Lululemon stores since Q1 2024. During the quarter, we opened three net new stores and completed four optimizations. In our digital channel, revenue increased percent and contributed $961 million of top or 41% of total revenue. And by category, men's revenue increased 8% versus last year, while women's increased 7%, and accessories and other grew 8%. Gross profit for the first quarter was $1.4 billion or 58.3% of net revenue compared to a gross margin of 57.7% in Q1 2024.

The gross profit rate in Q1 was ahead of our guidance and increased 60 basis points driven primarily by the following: a 130 basis point increase in product margin driven predominantly by lower product cost, improved damages, and improved markdowns offset somewhat by higher airfreight. A 20 basis points negative impact from foreign exchange and 50 basis points of net deleverage on fixed costs. Relative to our guidance, which was for gross margin approximately flat with last year, the upside was driven predominantly by lower product costs, leverage on fixed costs, and slightly better markdowns. 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 $943 million or 39.8% of net revenue compared to 38.1% of net revenue for the same period last year. SG&A was above our guidance of 120 basis points of deleverage due predominantly to the negative impact from an FX revaluation loss. Operating income for the quarter was $439 million or 18.5% of net revenue compared to an operating margin of 19% in Q1 2024. Tax expense for the quarter was $136 million or 30.2% of pre-tax earnings, compared to an effective tax rate of 29.5% a year ago. Net income for the quarter was $315 million or $2.60 per diluted share compared to EPS of $2.54 for the first quarter of 2024.

Capital expenditures were $152 million for the quarter compared to $131 million for the first quarter last year. Q1 spend relates primarily to investments that support business growth, including our multi-year 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 approximately $1.3 billion in cash and cash equivalents. Dollar inventory, which was impacted by higher AUC related to tariffs and foreign exchange, increased 23%. When looking at units, increased 16%. We repurchased 1,360,000 shares in Q1 at an average price of $316.

Share repurchases remain our preferred method to return cash to shareholders, and we currently have approximately $1.1 billion remaining on a repurchase program. Let me now share our updated guidance outlook for the full year 2025. We continue to expect revenue in the range of $11.15 to $11.3 billion. This range represents growth of 5% to 7% relative to 2024. Excluding the fifty-third week that we had in the fourth quarter of last year, we expect revenue to grow 7% to 8%. We continue to expect 40 to 45 net new company-operated stores in 2025 and to complete approximately 40 optimizations. We expect overall square footage growth in the low double digits.

Our new store openings in 2025 will include approximately 10 to 15 stores in The Americas, with the rest of our openings planned in our international markets, the majority of which will be in China. For the full year, we now expect gross to decrease approximately 110 basis points versus 2024. Relative to our prior guidance for a 60 basis point decrease, we expect the additional 50 basis points of deleverage to be driven predominantly by increased tariffs offset somewhat by our enterprise-wide efforts to mitigate these costs and slightly higher markdowns. When looking specifically at tariffs, the assumptions we've made regarding rates include 30% incremental tariffs on China, and an incremental 10% on the remaining countries where we source.

From a mitigation standpoint, as Calvin said, we've looked across the enterprise and have identified several levers which will help offset much of the impact of these higher rates. Based on our implementation strategies, we expect our mitigation efforts to be most impactful in the second half of the year. Turning to SG&A for the full year. We expect deleverage of approximately 50 basis points versus 2024. Relatively in line with our prior guidance. Driven by FX headwinds and ongoing investments into our Power of Three times Two roadmap, including investments in marketing and brand building aimed at increasing our awareness and acquiring new guests, investments to support our international growth and market expansion, and continued investment in technology.

When looking at operating margin for the full year 2025, we now expect a decrease of approximately 160 basis points versus 2024. 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 $14.58 to $14.78 versus 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 approximately $740 million to $760 million in 2025.

The spend relates to investments to support business growth, including a continuation of our multi-year distribution center project, store capital for new locations, relocations and renovations, and technology investments. Shifting now to Q2. We expect revenue in the range of $2.535 billion to $2.56 billion, representing growth of 7% to 8%. We expect to open 14 net new company-operated stores in Q2 and complete nine optimizations. We expect gross margin in Q2 to decline approximately 200 basis points relative to Q2 2024. Driven predominantly by increased occupancy and depreciation, higher tariff rates, modestly higher markdowns, and foreign exchange. In Q2, we expect our SG&A rate to deleverage by 170 to 190 basis points relative to Q2 2024.

This will be driven predominantly by increased foundational investments and related depreciation, and strategic investments, including those to build brand awareness. In addition, as I mentioned last quarter, we were layering back on certain expenses, including store labor hours, which are having a more pronounced impact on Q2 relative to the remainder of the year. When looking at operating margin for Q2, we expect a year-over-year decrease of approximately 380 basis points. I wanted to add some additional context on our operating margin guidance. In Q2 last year, margin improved by 110 basis points, which was our strongest performance of the year.

This year, as I mentioned, we are also being impacted by external factors, namely tariffs, where our mitigation efforts are more pronounced in the back half, and foreign exchange. In addition, we are continuing to invest in our strategic roadmap to set ourselves up for ongoing success. While these items are having an outsized impact on Q2, when looking at the full year, the decrease in operating margin is significantly less. Turning to EPS, we expect earnings per share in the second quarter to be in the range of $2.85 to $2.90 versus EPS of $3.01 a year ago. We expect our effective tax rate in Q2 to be approximately 30%.

When looking at inventory, we expect units to increase in the low double digits in Q2, with dollar inventories up in the low 20s, due in large part to the impact of higher tariff rates and foreign exchange. We expect a similar dynamic in inventory growth for the remainder of the year. In Q2, the low double-digit unit growth reflects our investments in newness and innovation. In addition, we are comping a 6% decline in units in the prior year. We are pleased with both the level and composition of our inventory, which positions us well. And with that, I will turn it back over to Calvin.

Calvin McDonald: Thank you, Meghan. I feel we are well positioned to navigate the current period. We intend to leverage our strong financial position and competitive advantages to play offense while making deliberate decisions and continuing to invest in our growth opportunities. In closing, I want to thank our talented leaders and teams who make these results possible and demonstrate their agility and passion each day. We'll now take your questions. Operator?

Operator: Thank you. We'll now begin the question and answer session. Our first question is from Dana Telsey with Telsey Group. Please go ahead.

Dana Telsey: Hi, good afternoon everyone. As you think about the guidance for the balance of the year and the pressure on Q2, before you have some mitigation efforts in the back half of the year, can you expand on those mitigation efforts and what you're thinking about, whether it's price increases, diversifying sourcing, how should we think about it? And then when you think about just the U.S. business, any category strength that you saw with the newness that you offered and any early indications on the no-line Align, which frankly I've heard good sell-throughs? Thank you.

Meghan Frank: Thanks, Dana. I think given the dynamic of the year in terms of Q2 relative to the full year, it's important to anchor in the full year where we guided to a decline of 160 basis points versus our prior guide of 100, which is really related to the net impact of tariffs as well as the slight increase in markdowns. When we think about the tariff impact to mitigation actions, I'd highlight, one would be pricing. We are planning to take strategic price increases, looking item by item across our assortment as we typically do, and it will be price increases on a small portion of our assortment, and they will be modest in nature.

And then on the sourcing side, we are also pursuing some efficiency actions there, some of which will impact the second half of this year, and then we are also focused on that into 2026 as well. And I'll pass it over to Calvin on the product side.

Calvin McDonald: Yes. Thanks, Dana. In terms of category trends on newness, what's very encouraging is that it's balanced. It's balanced across our activity in lifestyle, new item introductions, as well as new and updates to our current. So just walk through a few of these. On the lifestyle side of our business, as you've seen and introduced at the beginning of Q1 and sold out pretty much in all doors, was our Daydrift trouser, which used performance fabrics with unique updated style, and she responded incredibly well to that. And we will be back in stock fully with some expanded silhouettes for September. So we're very encouraged and believe we have a future core success on our hands.

Be Calm, another new core, future core, and she responded very well to both, had great rating reviews. On the activity side of our business, we balanced between new as well as updates. On the new side, Glow Up was well received, good reviews, continues to gain momentum. And again, introduced with a limited set of colors, and we continue to build and expand into that. And again, feel we have a very unique legging creating a unique sensation and unmet need for Train and seeing good success. And then on updates to our existing core, Align No Line is a great example of that. And early results but very encouraging as you alluded to.

And we only had it distributed to 80 doors. So again, we are chasing and we'll be in full store distribution by September. You'll see it get stronger and distributed more throughout the quarter. But this is one in which across all of these and when I referenced the response to newness is encouraging and these being some of the strong hits both from a newness and innovation standpoint, definitely we saw a sellout and are chasing excited about what that means for the back half. But balanced across activity lifestyle, new as well as updates. So we know the newness is resonating and working well.

And the team is busy chasing into these what appear to be future hits for us. Thank you.

Operator: The next question is from Janine Stichter with Jefferies. Please go ahead.

Janine Stichter: Hi, thanks for taking my question. I was hoping you could dig in a little bit more to the comp drivers, the top line drivers. Think last quarter you had talked about traffic falling off, but seeing some improvements in transaction size and solid performance in conversion. Wondering if still seeing the same thing then maybe any update on the progression of the quarter, what you saw in April into May? Thank you.

Meghan Frank: Hi, Janine. So in terms of comp drivers, as we talked about on the last call, we did see a decline in store traffic, particularly in the U.S. As we moved from Q4 into Q1. We did see that moderate somewhat, but we did still for the first quarter see a lower traffic trend in stores relative to Q4. Conversion trends remained relatively consistent, a little bit of a decline year over year. And then also we did see an uptick in terms of average dollars per transaction in the first quarter. And then in terms of how it's progressing April into May, we don't share specifics on Q2, but I would say nothing materially different.

Janine Stichter: Great. Thanks so much.

Operator: Thank you. The next question is from Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel: Hi, good afternoon. A couple of questions. I'm going to merge them together, both tied around kind of tariffs and your strategy for tariffs. I guess the first question, if I'm hearing you, I mean, as you're looking at these tariffs, it sounds like you're going to take the biggest hits on margin. So the question I have is, why not at least initially or do more with price? And then secondly, as we look at the guidance now, sort of say the bigger disconnect between top and bottom line, is that all, is that mostly tariffs or I think you did mention some other investment spending in there? Thanks.

Meghan Frank: Thanks, Brian. So in terms of top line versus bottom line, so for the full year, we maintained our revenue guide, so $11.15 billion to $11.3 billion. We did lower our op margin for the full year from 100 basis points decline year over year to 160. That's all driven by the net impact of tariffs. So the tariff impact then with some offsets, as I mentioned, in pricing and supply chain. And then a slight increase also in markdowns. They're not any meaningful changes in terms of our expense posture. We're maintaining our focus on the long term.

And as I mentioned, we do have some mitigation actions on tariffs that will also come into play as we get into 2026. In terms of price, as mentioned, we're really looking at this as operating from a position of strength, being strategic in our pricing, looking at our LS and where we have opportunity, and we'll continue to take a look at that as the year progresses. But feeling comfortable with our positioning at the state.

Brian Nagel: Okay. Thank you.

Operator: The next question is from Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss: Great. Thanks. So Calvin, maybe could you elaborate on the progression of comps that you saw over the course of the first quarter? And on the start to the second quarter that you cited, I guess if we think about it relative to first quarter performance in The Americas, and in China? Does the 7% to 8% revenue guidance for the quarter, does that embed a moderation in June and July trends relative to what you've seen in May, just given the uncertainty and the dynamic backdrop?

Meghan Frank: Hey, Matt. So in terms of how the quarter progressed, no material changes in terms of trend month to month in Q1. As we look to Q2, we don't guide to specifics in Q2, but what I can share is, I would say similar trends in the U.S. relative to Q1. As you know, China was impacted by the timing of Chinese New Year in Q1, which was about a four-point delta. So I would say our expectation and current trends would be in line with our annual color we offered on China performance, which should be in the 25% to 30% range.

Matthew Boss: Great. And then maybe Meghan just a follow-up as it relates to second quarter guidance and the full year. I guess could you elaborate on the slight increase in markdowns now contemplated in the full year outlook? And maybe just how you see the progression in the second quarter versus back half?

Meghan Frank: Yes. In terms of markdowns, so we did actually see a decline in markdowns in the first quarter. So we haven't seen an uptick in markdowns in our results to date. We were down 10 basis points in Q1. But given consumer confidence and macroeconomic as we move into the second half of the year, we feel it's prudent to tick up our forecast slightly on the markdown line. We would be in the range of 10 to 20 basis points above last year, so not meaningfully higher than our last year water line, which was relatively, I would say, in line with history.

Matthew Boss: But you're saying first quarter and so far into the second quarter? That you haven't seen the need to take the markdowns. It's just an assumption that you've baked in given the backdrop.

Meghan Frank: Yes. I would say on our actuals, in Q1, we saw a downward trend of 10 basis points, and our markdown positioning in Q2 would be embedded in our guidance.

Matthew Boss: Okay. That's great color. Thank you.

Operator: The next question is from Brooke Roach with Goldman Sachs. Please go ahead.

Brooke Roach: Good afternoon and thank you for taking our question. Calvin, given some of the success of some of the new launches that you've seen year to date, can you elaborate on your latest thoughts about returning the U.S. business to sustainable comp growth and whether or not that differs at all in your Canada versus U.S. as you contemplate North America reported comps?

Calvin McDonald: Thanks, Brooke. When I look at what we control, in terms of our mix of newness, and how that's performing, especially the new intended core and the way the guest is responding to that, definitely positive and feel good about those reactions to it. And the team knows and is working on what they can continue to add and innovate to that. When I look at our performance versus the market, our performance, we gained market share in the premium activewear. We had strong performance gains against our peers in this segment of the market where we compete. And the macro consumer is different. We continue to see a more cautious, discerning consumer.

We're definitely not happy where the growth is in the U.S., but relative to the market and our performance versus others, pleased that we're putting on share, pleased with the reaction to the newness and with the mix of newness that's coming. As we continue to get back into stock on the new core that she's reacting to and making those adjustments and the newness that we have planned. And I think a bit of the delta between the Canadian and the U.S. market consumer we see is we're not seeing the same discerning consumer in Canada as we are seeing in the U.S.

In terms of traffic as well as some other metrics that we monitor, we continue to monitor that, but the newness in both markets is responding very well. And the team is very focused on what the guest is reacting to. And bringing that to the consumer into the market in the back half.

Brooke Roach: Great. Thanks so much. I'll pass it on.

Operator: The next question is from Ike Boruchow with Wells Fargo. Please go ahead.

Ike Boruchow: Hey, thanks for taking my question. Two questions. I think first for Calvin. So appreciate on the product side, the commentary on what's working both in lifestyle and performance. But at the end of the day, the comps are up 1%. So clearly, there's got to be some things that are not working. Could you just maybe help us what exactly are the parts that are lagging that you're hoping to improve? And then Meghan, maybe just back to Matt's question, part of the guidance revision down is markdown, but it sounds like you're saying that you're not seeing any markdown yet, but you're planning it. So I guess maybe I'm just a little confused.

Is it because of the inventory build that you're expecting markdown to accelerate? I guess I'm just confused why you're taking a more cautious approach on that. Like what's the leading indicator that's making you think that if you're not seeing it yet?

Calvin McDonald: Thanks, Ike. In terms of the balance of the mix, I would say the overall traffic numbers are having an impact on the general mix of the assortment in the U.S. From a new guest perspective, we grew our new guests from, and I think, Meghan mentioned this from an AOV, UPT, both positive from a market share across all categories. We saw growth in our premium segment. I think where there continues to be opportunity is with our core and seasonal colors. We're seeing the guests shift to the truly new styles as I mentioned, the Glow Up, the Align No Line, the Daydrift, the Be Calm, and have opportunities.

But overall, it really is the macro discerning consumer that we're seeing through traffic in the store, the behavior, how they're shopping and reacting I think is definitely showing good indication. And as I alluded to the growth in market share is indicating we are gaining and winning to the marketplace and how the consumer is spending.

Meghan Frank: And I would add, Ike, similar on the markdown front. So the traffic trends, I would say, would be the leading indicator on why we've taken that positioning in terms of consumer confidence and macro uncertainty in the second half as well.

Ike Boruchow: Okay. Thank you.

Operator: The next question is from Paul Lejuez with Citi. Please go ahead.

Paul Lejuez: You maybe give a little bit more detail about inventory by geography? And if there are any specific regions that you're seeing potentially more margin pressure, markdown pressure, where is that coming from? Is that just the U.S. or is it more global? I mean is there anything in the competitive landscape front you see across your different global markets that make you think that things might heat up from a promotional perspective? Thanks.

Meghan Frank: Thanks, Paul. So in terms of inventory, I'd say again, we haven't seen markdown pressure to date, down 10 basis points year over year in Q1. But when we think about traffic trends and headwinds, they would be predominantly in the U.S. So I'd say that's where I'd probably place a little bit more of the as we move into the second half of the year in terms of what we've layered in terms of markdowns.

Calvin McDonald: And, from a competitive perspective, there's nothing we're seeing globally on a price promotional play other than in the U.S. Where I would say we continue to monitor that closely because we do see ongoing promotional activity across the market, across the competitors as we've seen certain consumer, the more cautious we know that to lever others pull and we continue to monitor it and quite frankly, anticipating a bit of a spike in the back half, if the macro headwinds continue. But we are a full-price business and we'll lead with innovation and our core assortment continue to play that. But we are seeing and do anticipate probably a dynamic competitive market in the U.S.

Paul Lejuez: Got it. Right. I just followed, have you adjusted purchases at all? You're just considering where your inventories are and the tariff situation maybe taking price up a little bit. Have you also taken your purchases and purchase assumptions down for the back half?

Meghan Frank: I would say we're always adjusting purchases and reflecting the current environment. We do benefit from about 40% of our purchases in core product. So that's an area we flex as we move forward. So I would say we always are doing that. We've done that to some degree. We'll continue to keep a close eye on inventory levels and sales trends.

Paul Lejuez: Thank you. Good luck.

Operator: The next question is from Alex Stratton with Morgan Stanley. Please go ahead.

Alex Stratton: Great. Thanks so much. Maybe for either of you, do newness levels stand in total? Like, are they back where you want them to be? And then if that's not inflecting Americas comp to positive, are you exploring maybe other potential drivers for what to do to get it there? And maybe related for Meghan on that one, is a positive comp for Americas possible this year? Or with your view on the macro, is that something that is more kicked out?

Calvin McDonald: Thanks, Alex. In terms of the composition of our merchandise mix, we are back at our newness percentages, historical newness percentages of the sum. I think the way the guest is reacting and responding within that newness, she is reacting very positively to the new core or intended core silhouette styles that she has not seen before, alluded to sort of Glow Up, the Align No Line, the Daydrift, Be Calm to name just a few, and there is a number of those. Those as a percentage of our newness mix, we are increasing in the back half so that we're reacting to what the guest is responding to.

And as a result, we are shifting some of the seasonal colors, patterns, and graphics in the remaining core to maintain that sort of ratio that we're seeing. But as I look to the back half, the percentage of newness remains strong above historical as we lean into a little bit of these areas where the guest has really responded well. And we weren't at full store distribution. We sold out of many of these styles and silhouettes and have very strong rating reviews on them. So I'm pleased with the newness mix and the work the team has done.

And what we have seen is the consumer respond very well to the completely new styles that she hasn't seen before, and that's sort of the mix that you will see us continue to do heading into the back half of this year.

Meghan Frank: And Alex, I'd add, we're not guiding specifically to comps for the year. But our view on the full year revenue for The Americas hasn't changed. So low single digit to mid-single digit and feel we're well positioned to capitalize if the consumer environment improves as well. That's what we're offering today.

Alex Stratton: Thanks a lot. Good luck.

Operator: The next question is from Jay Sole with UBS. Please go ahead.

Jay Sole: Great. Thank you so much. My question is about China. Given the comp in China, you've opened a lot of stores. How much more store growth opportunity do you see in China before you start worrying about cannibalizing your existing store base given the level of comp right here? Like can you tell us how many stores you have now, what you expect by the end of the year? And then maybe kind of what you're thinking about as a store growth rate going forward? Thank you.

Meghan Frank: Yes. So in terms of China, I would say still feel we're early in our journey there. So we've got 154 stores today. We had a goal of approximately 200 in our current Power of Three times Two plan and saw growth beyond that. I'm really pleased with the performance on new stores. And I'd also mention we are early in terms of our co-located strategy, so where we have stores with high traffic, high sales per square foot, and see an opportunity to expand the size of stores to have a more holistic assortment across men's, women's, accessories, capitalize on that traffic.

We're underway in that strategy in North America to a larger degree, and it's largely still in front of us in terms of China.

Jay Sole: Got it. And can you talk about what the traffic trends were in China? Maybe you talked about what the trends were in the U.S.?

Meghan Frank: We don't break out specifically on traffic trends, but I would say still seeing strong double-digit growth in terms of the China market and nothing notable there.

Jay Sole: Got it. Thank you so much.

Operator: The next question is from Adrian Yin with Barclays. Please go ahead.

Adrian Yin: Thank you very much. My question is on the inventory. The inventory does have some tariff impact and FX. Of the delta from units to dollars at about 7%, how much of that is tariff and how much of that would be the FX? And then secondarily, I guess it's a follow-on. You expecting that tariff inventory to sort of hit the P&L sort of late June and July? And is that when we should expect the commensurate price impact? Thank you.

Meghan Frank: Hey, Adrian. So in terms of the impact on dollar inventory, so it is predominantly driven by higher AUCs related to tariffs and then FX, I would say, we haven't broken out the details, but not too far off from each other in terms of relativity. And then in terms of the impact on tariffs, we do have, as I mentioned, a more pronounced impact in Q2 in terms of the P&L. So 60 basis points in Q2 because the mitigation actions come in the second half. The second half of the year or sorry, for the full year, the FX, sorry, the tariff headwind is 40 basis points.

With the mitigation actions coming into play towards the second half of the year. I would say in terms of pricing, those actions will start rolling out towards the second half of this quarter and into Q3.

Adrian Yin: Okay, great. And then my other question is on the lower product costs, what is driving that? Was it freight or cost engineering? And do you assume that will neutralize as we go into the back half of the year? Thanks.

Meghan Frank: Yes. So in terms of product cost, it would be predominantly driven by mix of business relative to expectations. So I would say right now what's reflected in our guide reflects our forecast in terms of mix of business in the second half of the year, and I wouldn't call out product costs as a variance driver for the full year at this point in time.

Adrian Yin: Okay, great. Thanks so much. Best of luck.

Operator: The next question is from Lorraine Hutchinson with Bank of America. Please go ahead.

Lorraine Hutchinson: Thank you. Good afternoon. I wanted to focus on SG&A for a minute. It looks quite high in the second quarter. Is there anything changing in your view of the investment needed to drive growth? Or is this just timing versus planned investments in the second half?

Meghan Frank: Thanks, Lorraine. Yeah. So in terms of Q2, so there are a few factors that are impacting Q2. So I think important to zoom out to the full year. So for the full year, we did guide revenue in line with last time, so $11.15 billion to $11.3 billion. And the operating margin relative to last time is about up 60 basis points driven by just tariffs and markdown changes. So when you look at Q2 specifically, first I'd note that we did expand our operating margin last year by 110 basis points. It was higher than our full year expansion, which was 50. So therefore, we had assumed some pressure in our operating margin as we planned the year.

Then if you look specifically at the year-over-year SG&A, that would be driven by increased foundational investments and depreciation, strategic investments. And then those add backs that we discussed last quarter in terms of expenses, for example, store labor. That we added back from a normalized perspective. Relative to the full year, 170 to 190 basis points deleverage in Q2. And 50 basis points for the full year.

Lorraine Hutchinson: Thank you.

Operator: The next question is from Aneesha Sherman with Bernstein. Please go ahead.

Aneesha Sherman: Thank you. I want to go back to China. Meghan, you talked about your store growth there, but wondering if you can share some color around the comp growth. There's been a pretty sizable deceleration year over year. Can you share some color around what's that's being driven by? Is it a macro slowdown or something else? And I know there were some tough compares last Q1 as those compares ease in China as well as in the rest of the world. Do you expect to see an acceleration in the comp in the next couple of quarters?

Meghan Frank: Yes. So in terms of China, we did see a slowdown both in trend and comp. We did have a four-point impact from the timing of Chinese New Year. We did also have an outsized performance, I would say, in terms of non-comp new store openings as well as the smaller portion that we do have co-located strategy there. We had an outperformance in terms of revenue growth last year. Even if looking at Q4 to Q1, we were at 39% growth in Q4, so well above expectations. So I would say still pleased with China trends, still strong double-digit growth, and do still have the same expectation for the full year of 25% to 30% growth rate for China.

Aneesha Sherman: And if I can just follow-up, is China still your best full-price market globally?

Meghan Frank: It's still our lowest markdown, yes, so highest full price.

Aneesha Sherman: Thank you.

Operator: The next question is from John Kernan. Oh, pardon me.

Howard Tubin: All right. We'll just take one more question. Thanks.

Operator: Thank you. The final question is from John Kernan with TD Cowen. Please go ahead.

John Kernan: All right. Thanks for squeezing me in, Howard. Just to stay on China and rest of world, obviously, you just talked about it in relation to Aneesha's question, but there was a sizable deceleration in the two-year stack if that's the best way to look at it. But do you think you're becoming more susceptible to a macro environment in China now that you're pushing the end of the year, be pushing $1.7 billion in revenue? And what are you seeing in Rest of World? There was a deceleration there as well. Thank you.

Calvin McDonald: Thanks, John. In terms of our view of our opportunities, nothing has changed. When I look at our performance in the quarter, and our guide for the year, across Mainland China, our Rest of World, and we look at our EMEA, and APAC markets, they continue to perform incredibly strong, double-digit momentum. We're early relative to market share, early relative to unaided brand awareness, continue to see very healthy new guest acquisition and matriculation with our existing guests. And the way the guest is responding to both our newness as well as our long lineup of core items. So nothing has changed from our vantage point.

I think as Meghan indicated, in some of the markets we had outsized growth last year, but very, very healthy strong numbers and relative to peer sets and with our market share gains, very excited and see a long runway of growth and opportunity. As I've alluded before, ended last year at 25% of our business being international and have opportunity we think for a fifty-fifty ratio into the future. So definitely Lululemon is a global brand underdeveloped in these markets and seeing great momentum, a very strong growth and anticipate that to continue.

John Kernan: Megan, did you give the markdown impact embedded in the gross margin guidance on a basis point level?

Meghan Frank: It did. For the full year, to 20 basis points up to last year.

John Kernan: Got it. Thank you.

Operator: That's all the time we have for questions today. Thank you for joining and have a nice day.

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DATE

Thursday, June 5, 2025 at 5 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Bruce Young

Chief Financial Officer — Iain Humphries

Managing Director, Gateway Group — Cody Slach

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RISKS

Management reported that "higher-for-longer interest rates and now with uncertainty around the tariffs" have weakened the near-term demand environment, particularly in U.S. commercial and residential end markets.

Net loss available to common shareholders was $400,000, or $0.01 per diluted share, compared to net income of $2.6 million, or $0.05 per diluted share, in the prior year quarter.

Adverse weather, including "higher than normal rainfall in our Central, Midwest, and Southern regions, as well as a severe storm system in April," negatively impacted revenue by an estimated $3 million to $4 million.

The company reduced its full-year guidance for FY2025, stating, "we do not expect there will be a meaningful market rebound in the current fiscal year."

TAKEAWAYS

Revenue— $94 million, down from $107.1 million, primarily due to volume-driven declines in the U.S. Concrete Pumping segment and adverse weather impacts.

U.S. Concrete Pumping Revenue— $62.1 million, compared to $74.6 million; management estimated weather-related impact at $3 million to $4 million.

UK Revenue— $13.8 million, down from $15.5 million, including a 180 basis point forex headwind.

U.S. Concrete Waste Management Services (Eco-Pan) Revenue— $18.1 million, up 7% from $16.9 million, driven by increased pan pickup volumes and sustained pricing improvement.

Gross Margin— 38.5%, down 50 basis points from 39%, due to revenue declines, partially offset by cost controls.

G&A Expenses— $27.9 million, down 6% from $29.7 million due to $1.3 million lower labor costs and $800,000 lower amortization; G&A as a percent of revenue increased to 29.7% from 27.7%.

Consolidated Adjusted EBITDA— $22.5 million, compared to $27.5 million, with an adjusted EBITDA margin of 23.9%, down from 25.7%.

Net Debt— $387.2 million as of April 30, 2025; net debt to EBITDA leverage ratio was approximately 3.7x.

Available Liquidity— Approximately $353 million, including cash and ABL facility availability, as of April 30, 2025.

Share Buyback— Repurchased approximately 1 million shares for $6 million at an average price of $5.90 per share.

2025 Guidance Update— Full-year FY2025 revenue guidance lowered to $380 million–$390 million; adjusted EBITDA (non-GAAP) guidance updated to $95 million–$100 million; free cash flow (non-GAAP) expected at approximately $45 million.

End Market Commentary— Management reported that infrastructure revenue grew both sequentially and year over year, with ongoing strength in UK infrastructure, particularly from HS2, and U.S. opportunities driven by Infrastructure Investment and Jobs Act allocations.

SUMMARY

Concrete Pumping Holdings, Inc. (NASDAQ:BBCP) management indicated that project delays in commercial construction continued and were exacerbated by ongoing tariff uncertainty, while customers are reporting strong backlogs for the next year but lack clear start dates. Residential market softness was described as minor and localized, with Mountain and Texas regions remaining resilient, but U.S. commercial activity experienced sustained weakness due to macroeconomic pressures. No significant delays are occurring in infrastructure projects, with infrastructure dollars "flowing more freely" and multiple U.S. and UK infrastructure sectors—such as bridges, wastewater, and airports—showing persistent momentum.

Management stated, "We are not expecting any meaningful recovery in construction markets until 2026 at the earliest," clarifying that commercial recovery is expected to lag residential, with improvement tied to tariff resolution and potential interest rate declines.

Tariff-related uncertainty, while not directly impacting operations, has led to further commercial construction delays according to customer feedback during the quarter.

The company attributed the resilience of gross margin and adjusted EBITDA margin (non-GAAP) to "disciplined fleet management and cost control strategies," which reduced margin contraction relative to revenue declines.

Visibility in infrastructure remains high, as management described broad-based growth across segments and said, "the infrastructure dollars are flowing more freely than what we've seen in the previous years."

INDUSTRY GLOSSARY

HS2: High Speed 2, a major UK rail infrastructure project referenced as a driver for UK infrastructure revenue.

Infrastructure Investment and Jobs Act: U.S. federal legislation offering significant funding for infrastructure projects, impacting construction company pipelines.

ABL Facility: Asset-based lending facility, a revolving line of credit secured by company assets, contributing to reported liquidity.

Full Conference Call Transcript

Cody Slach: we will be making certain forward-looking statements regarding our business and outlook. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Concrete Pumping Holdings annual report on Form 10-K, quarterly report on Form 10-Q, and other publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. On today's call, we will also reference certain non-GAAP financial measures, including adjusted EBITDA, net debt, and free cash flow, which we believe provide useful information for investors.

We provide further information about these non-GAAP financial measures and reconciliations to the comparable GAAP measures in our press release issued today or the investor presentation posted on the company's website. I'd like to remind everyone that this call will be available for replay later this evening. A webcast replay will also be available via the link provided in today's press release as well as on the company's website. Additionally, we have posted an updated investor presentation to the company's website. Now I'd like to turn the call over to the CEO of Concrete Pumping Holdings, Bruce Young. Bruce?

Bruce Young: Thank you, Cody, and good afternoon, everyone. In the second quarter, we continued to navigate a challenging construction environment marked by persistent macroeconomic headwinds and regional weather disruptions. Despite these market pressures and uncertainties, we remain focused on the elements we can control, including capital allocation, cost discipline, fleet optimization, and strategic pricing across our business. Our second quarter was again impacted by volume-driven declines in our U.S. Pumping segment, offsetting continued growth in our Concrete Waste Management business. Specifically, lingering higher interest rates and the broader macroeconomic uncertainty continue to delay the timing of commercial project starts, and more recently, we've experienced challenges in residential construction starts.

Additionally, higher than normal rainfall in our Central, Midwest, and Southern regions, as well as a severe storm system in April, which brought widespread flooding and tornadoes in our southern region, further impacted our revenue. In the UK, the impacts of the economic uncertainty on commercial project volume largely followed similar trends we experienced domestically, but our higher mix of work in infrastructure and improved pricing held up reasonably well considering the market backdrop. Despite the top-line decline, our disciplined fleet management and cost control strategies helped limit the impact on margins, leading to less pronounced declines in gross and adjusted EBITDA margins compared to the changes in revenue.

Turning to specific comments by end market, with our commercial end market, we continue to experience construction softness across a variety of commercial work, especially in more interest rate-sensitive areas like commercial and office building work. Larger commercial projects, including data centers and warehouses, remained mostly durable but continued to move at a slower pace given the economic uncertainty backdrop. The residential end markets in our Mountain and Texas regions remained largely resilient, but we have witnessed emerging signs of residential softness in our other U.S. regions due to the elevated interest rate environment. Despite this, our residential end market mix remained at 33% of total revenue on a trailing twelve-month basis.

We continue to see residential construction investments within our Mountain region and regions where single-family construction is prominent. We still expect the structural supply-demand imbalance in housing will continue to support medium to long-term homebuilding activity, especially as homebuilders entice customers with creative solutions that include rate buy-downs, and we believe the Federal Reserve's path to interest rate reductions should continue to support this end market's growth. Offsetting some of the commercial and residential market softness, revenue in our infrastructure end markets continue to grow sequentially and year over year. In the UK, infrastructure remains resilient, particularly with continued growth in HS2 construction, while in the U.S., our national footprint allows us to win more projects.

We expect our infrastructure business to remain robust in fiscal year 2025 due to the funding environment in the UK as well as opportunities domestically from the conversion of allocated budget funding into project starts within the Infrastructure Investment and Jobs Act. I will now let Iain address our financial results in more detail before I return to provide some concluding remarks. Iain?

Iain Humphries: Thanks, Bruce, and good afternoon, everyone. Moving right into our results for the second quarter. Revenue was $94 million compared to $107.1 million in the prior year quarter. As Bruce mentioned, the decreased revenue was attributable to a decline in our U.S. Concrete Pumping segment, due to the continued softness in U.S. commercial construction volume, recent regional residential headwinds, and adverse weather in several of our U.S. regional markets. Revenue in our U.S. Concrete Pumping segment, mostly operating under the Brundage-Bone brand, was $62.1 million compared to $74.6 million in the prior year quarter. We estimate that the adverse weather impact on our second quarter revenue was approximately $3 million to $4 million.

For our UK operations, operating largely under the Camfaud brand, revenue was $13.8 million compared to $15.5 million in the same year-ago quarter due to lower volumes caused by a general slowdown in commercial construction work, mostly due to the impact from higher interest rates. Foreign exchange translation was a 180 basis point headwind to revenue in the quarter. Revenue in our U.S. Concrete Waste Management Services segment, operating under the Eco-Pan brand, increased 7% to $18.1 million when compared to $16.9 million in the prior year quarter. This organic increase was driven by increased pan pickup volumes and sustained improvement in pricing.

Returning now to our consolidated results, gross margin in the second quarter declined by 50 basis points to 38.5%, compared to 39% in the same year-ago quarter. Continued improvement in our cost control initiatives, including improved fuel and repair and maintenance efficiencies, roughly offset lower revenue in the quarter. General and administrative expenses in the second quarter declined 6% to $27.9 million compared to $29.7 million in the prior year quarter, due to lower labor costs of approximately $1.3 million and non-cash decreases in amortization expense of $800,000. As a percentage of revenue, G&A costs were 29.7% in the second quarter, compared to 27.7% in the prior year quarter.

Net loss available to common shareholders in the second quarter was $400,000 or $0.01 per diluted share, compared to net income of $2.6 million or $0.05 per diluted share in the prior year quarter. Consolidated adjusted EBITDA in the second quarter was $22.5 million compared to $27.5 million in the same year-ago quarter, and adjusted EBITDA margin was 23.9% compared to 25.7% in the prior year quarter. In our U.S. Concrete Pumping business, adjusted EBITDA declined to $12.7 million compared to $17.5 million in the same year-ago quarter. In our UK business, adjusted EBITDA was $3.2 million compared to $4.1 million in the same year-ago quarter. For our U.S.

Concrete Waste Management Services business, adjusted EBITDA increased 12% to $6.7 million compared to $5.9 million in the same year-ago quarter. Turning now to liquidity. At April 30, 2025, we had total debt outstanding of $425 million and net debt of $387.2 million. This equates to a net debt to EBITDA leverage ratio of approximately 3.7 times. We had approximately $353 million of available liquidity at the end of April, which includes cash on the balance sheet and availability from our ABL facility. Now moving on to our share buyback plan. During the second quarter, we repurchased approximately 1 million shares for $6 million or an average price of $5.9 per share.

Since the buyback was initiated in 2022, we have repurchased approximately $26 million of our stock with $9 million remaining in the authorized plan through February. However, as announced today, our board has authorized an additional $15 million to be added to the existing share buyback plan. We believe our share buyback plan demonstrates both our commitment to delivering enhanced value to shareholders and our confidence in our long-term strategic growth plan. Moving now to our 2025 full-year guidance.

While we had expected some market recovery and project commencements in the first half of fiscal 2025, higher-for-longer interest rates and now with uncertainty around the tariffs, this has weakened the near-term demand environment, particularly in our U.S. commercial and residential end markets. As such, we do not expect there will be a meaningful market rebound in the current fiscal year, and thereby, we are adjusting our financial outlook for fiscal 2025. We now expect fiscal year revenue to range between $380 million and $390 million and adjusted EBITDA to range between $95 million and $100 million.

We expect free cash flow, which we define as adjusted EBITDA, less net replacement CapEx, and less cash paid for interest, to be approximately $45 million. Despite a challenging macro backdrop, we are committed to a prudent capital allocation and flexible investment strategy. Combined with our consistent track record of strong unit economics, healthy liquidity, and improving balance sheet strength, we believe we are well-positioned for continued investments in our fleet, strengthen our service offering in anticipation of a market recovery in fiscal 2026 and beyond. With that, I will now turn the call back to Bruce.

Bruce Young: Thanks, Iain. In conclusion, although the market has not recovered as we had expected, our business remains well-positioned for a future rebound. Over the past several quarters, we have strengthened our liquidity while consistently generating strong free cash flow. To address the anticipated discussion on tariffs, while there is no meaningful near-term direct impact on our business, the added uncertainty has caused some turbulence and further delays in commercial construction commitments. We remain focused on the long-term strategic aspects of our business that we can meaningfully influence, including the consistent and disciplined execution of our strategic growth plan, resolute adherence to our leading commercial strategy, and prudent cost control through ongoing operational excellence.

Our financial flexibility allows us to pursue disciplined strategic acquisitions when the timing is right, invest in organic growth opportunities, and return capital to shareholders, demonstrated by our recent special dividend and ongoing share buyback program. The fundamental strength and underlying drivers of our resilient business model, proven strategic plan, strong balance sheet with significant opportunities for growth, and long history of successfully managing and investing through economic cycles provide us with great confidence in our ability to continue delivering robust financial and operational performance. In closing, we believe these priorities lay a strong foundation for long-term value creation. With that, I would like to turn the call back over to the operator for Q&A. Joe?

Operator: Thank you, sir. 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. And our first question comes from the line of Tim Mulrooney with William Blair. Please proceed.

Luke McFadden: Hi. This is Luke McFadden on for Tim. Thanks for taking our questions here. Maybe one to start just on guidance. In your outlook commentary, you noted that you are not expecting any meaningful recovery in construction markets until 2026 at the earliest. I just wanted to confirm whether or not this comment pertains to expectations across both commercial and residential construction, or was it more end-market specific? And maybe as a follow-up to that, what are the factors that could cause your expectations around construction recovery to be pushed out even further?

Bruce Young: Yeah. So we'll take it one segment at a time. So in the residential, the softness is minor, and we do not expect anything too turbulent with the residential market going forward. The commercial market, there's continued softening there. We expect that once the tariff conversation settles, I think that market will start improving. As you know, there's been several delays, and so that's delayed a lot of those projects. But we are optimistic that we'll find a recovery there. The tax plan will eventually get approved, and with interest rates likely coming down at the end of the year, we expect the commercial market to come back after that.

Luke McFadden: Great. Thanks. Very helpful. And then maybe just one more from us. It sounds like the infrastructure market continues to be a bright spot for the business. Can you talk about what sort of visibility you have just into that end market going forward here? It sounds like you're continuing to expect strong results in 2025, but yeah, just any additional color there in terms of particular pockets of strength within infrastructure related to projects or otherwise would be helpful. Thanks much.

Bruce Young: Yeah. So we're seeing growth in nearly all segments of the infrastructure. Roads and bridges have been a big part of us. As you know, we do not do the paving, but we do the structures. And so, a lot of wastewater and water treatment plants going on. Airport construction has been really strong, but really, it's across the board with infrastructure. In the U.S., it's gaining some momentum, and the UK has been strong for quite some time, and we expect that to stay strong for the foreseeable future. Thank you very much.

Operator: Thank you. Ladies and gentlemen, again, if you would like to ask a question, please press 1 on your telephone keypad. And the next question comes from the line of Genevieve with D.A. Davidson. Please proceed.

Jean Ramirez: Hi, guys. Thank you for the time. Could you provide more color on the project delays? More specifically, have you guys seen more project delays since April? And as a follow-up, have customers given you a time horizon when those delayed projects may be reviewed again?

Bruce Young: Yeah. So a lot of the project delays have a lot to do with the tariffs and uncertainty there. Our customers are saying their backlogs are quite strong for next year. Still, there are some concerns when those projects might start. And so we're seeing that backlog is built by not only those jobs that delayed but new projects that would be coming on the books for them. So there is some optimism that once things settle out, the commercial market could come back very quickly.

Jean Ramirez: And on the commercial, sorry. On the infrastructure, are the delays also tied to these types of uncertainties or other factors that came into play this quarter?

Bruce Young: Yeah. So I do not think we're seeing delays in infrastructure programs. I think the challenge was meeting the requirements of the bill, and they seem to be doing a better job of getting that done. And so the infrastructure dollars are flowing more freely than what we've seen in the previous years.

Jean Ramirez: Alright. Appreciate the time. Thank you.

Bruce Young: Thank you.

Jean Ramirez: Thank you.

Operator: This concludes the question and answer session. And I'd like to hand the call back to Mr. Bruce Young for closing remarks.

Bruce Young: Thank you, Joe. We'd like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our third quarter fiscal 2025 results in September. Thank you.

Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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DATE

Thursday, June 5, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Lisa Harper

Chief Financial Officer — Paula Dempsey

Chief Strategy and Planning Officer — Ashlee Wheeler

Need a quote from one of our analysts? Email [email protected]

RISKS

The decision to pause the footwear business will result in a projected revenue loss of $40 million to $45 million this year, with management stating there will be a neutral EBITDA impact in 2025, as explicitly stated by management.

Gross margin (GAAP) declined by 320 basis points to 38.1% for Q1 FY2025 due to "planned promotional initiatives".

Comparable sales fell by 3.5% in Q1 FY2025, with management attributing the decline to ongoing pressure in physical retail and persistent promotional sensitivity among consumers.

TAKEAWAYS

Net Sales: Net sales were $266 million for the first quarter, compared to $279.8 million in the prior year.

EBITDA: Adjusted EBITDA was $27.1 million, representing a 10.2% margin for the first quarter compared to $38.2 million and 13.7% in the prior year.

Gross Profit: Gross profit was $101.4 million, down from $115.4 million in the prior year; gross margin declined to 38.1% for Q1 FY2025.

SG&A Expense: SG&A expense was $70 million, an improvement of $6.5 million year-over-year for the first quarter, with SG&A leveraging 100 basis points to 26.3% of sales for Q1 FY2025.

Marketing Investment: Marketing investment was $15.4 million, up from $12.8 million in the prior year, primarily supporting sub-brand launches and customer acquisition.

Digital Channel Penetration: Online demand is approaching 70% of total sales as of Q1 FY2025, with expectations for digital sales to reach the low to mid-70% range of total sales in 2026.

Store Closures: 35 stores were closed in FY2024 with a targeted 180 closures in FY2025 (60 by mid-year, 120 more in the back half), as part of accelerated fleet optimization.

Sales Transfer Rate: Post-closure customer and sales retention rate remains approximately 60% for closed stores, as stated by management.

Inventory: Inventory was $149.6 million, a 3.3% increase versus the prior year, driven by in-transit timing; year-end comparable store inventory is expected to decline by mid to high single-digit percentages in FY2025.

Liquidity: Cash and cash equivalents at quarter end totaled $23.7 million for Q1 FY2025, with total liquidity of $141 million, including the credit facility, for Q1 FY2025; total debt was $284.5 million after a $16.2 million reduction from the prior year.

Full-Year 2025 Guidance: Net sales are forecast in the range of $1.03 billion to $1.055 billion for FY2025, with adjusted EBITDA between $95 million and $105 million for FY2025 (non-GAAP), both reflecting the footwear business pause and tariff impacts.

EBITDA Margin Outlook: Fleet optimization and marketing investments are expected to yield 150 to 250 basis points of EBITDA margin expansion in FY2026.

Tariff Impact: Net exposure to tariffs is expected to be $20 million for the remainder of the year, with mitigation through expense reductions, store optimization, and vendor negotiations.

Sub-brand Penetration: Existing sub-brands are expected to increase their penetration from about 10% in FY2025 to up to 30% of the portfolio in FY2026, with increased delivery cadence and planned new launches throughout the year.

Q2 2025 Guidance: Net sales (GAAP) are expected to be between $250 million and $265 million for Q2 FY2025; adjusted EBITDA guidance is $18 million to $24 million for Q2 FY2025, incorporating a projected $5 million tariff impact for Q2 FY2025.

SUMMARY

Management confirmed first-quarter results met prior guidance. The company will accelerate its planned store closures in FY2025, targeting approximately 180 closures, with a retention strategy leveraging high loyalty program enrollment and digital migration. While gross margin contraction was driven by increased promotional activity to support customer conversion in Q1 FY2025. Management explicitly forecast a digital penetration rate in the low to mid-70% range by 2026, alongside a higher sub-brand mix and reiterated plans to use cost savings from closures to fund customer acquisition initiatives aligned with a digitally led omnichannel model.

Harper stated, "sub-brands are attracting new and younger customers, reactivating lapsed customers, while also creating a halo effect for our mainline Torrid offerings." indicating expanded reach and higher customer value.

Dempsey emphasized that "Stores identified for closure are underperforming relative to our fleet, with an average of approximately $350,000 in annual sales, as discussed in the context of FY2025." clarifying the rationale for footprint optimization.

Harper cited that "Our current exposure to China-sourced goods will be in the low single digits for the remainder of the year, down from the mid-teens." underscoring the company's tariff mitigation progress.

Management committed to "refreshing 135 stores in the third quarter" as low capital investments intended to align in-store experience with digital strengths while maintaining an omnichannel presence.

INDUSTRY GLOSSARY

Sub-brand: A distinct product line within Torrid, designed and marketed for specific customer segments and lifestyles, often carrying different price points and fashion sensibilities than the core brand.

Torrid Cash: A promotional event and rewards program specific to Torrid, offering customers incentives redeemable for future purchases to drive both sales and retention.

Full Conference Call Transcript

Lisa Harper, Chief Executive Officer of Torrid, Paula Dempsey, Chief Financial Officer, and Ashlee Wheeler, our Chief Strategy and Planning Officer, who is also present and will be participating in the Q&A session. Before we get started, I would like to remind you of the company's safe harbor language, which I am sure you are familiar with. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements may include, but are not limited to, statements containing the words expect, believe, plan, anticipate, will, may, should, estimate, and other words and terms of similar meaning. All forward-looking statements are based on current expectations and assumptions as of today, 06/05/2025.

These statements are subject to risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, see our filings with the SEC. This call will contain non-GAAP financial measures, such as adjusted EBITDA. Reconciliations to these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website. With that, I will turn the call over to Lisa.

Lisa Harper: Thank you, Chinwe. Hello, everyone, and thanks for joining us today. I am excited to update you on the progress we are making across our strategic business initiatives, namely enhancing our product assortment, driving customer growth, and executing our store optimization plan. I am also pleased to report that we delivered on our first quarter sales and EBITDA guidance. Now an update on our strategic business initiatives. Performance of our sub-brands continues to reinforce our belief that the strategy is working. Festi, Belle Isle, Nightfall, and Retro Chic have all had multiple deliveries at this point, and they are overachieving our expectations from two to six times what we had originally planned.

These sub-brands are designed and marketed for distinctive lifestyles, targeting a broader range of plus-size consumers. They are revolutionizing our collections to embrace diverse fashion sensibilities and deliver truly differentiated options. This calculated expansion has attracted new clientele and has deepened relationships with our current customers, driving increased spending across our portfolio. Importantly, our sub-brands are attracting new and younger customers, reactivating lapsed customers, while also creating a halo effect for our mainline Torrid offerings.

With the margin structure higher than our core Torrid product, we are doubling down on our efforts to further expand our strategy with planned launches of new sub-brands throughout the year, while also increasing the delivery frequency on existing sub-brands from the current six to eight times a year to 12 times annually. Growing their penetration from approximately 10% this year to up to 30% of our portfolio in 2026. We will continue to fund the growth of our sub-brands through reductions in less productive Torrid SKUs, enabling us to deliver compelling high-margin products. Now shifting to our channel optimization initiative.

Our customers continue to send a strong message that they prefer an online experience, which better supports our internal marketplace strategy that showcases the entire breadth of our assortment. Our website experience is powerful, and the perceived value to the customer is high across this channel. She loves that she can see and explore everything we offer, view outfitting options, and see herself. This is supported by our consistent sizing expertise and overall customer satisfaction, which continues to drive our industry-leading low return rate. Our online sales demand continues to grow and is approaching 70% of total sales. We expect web demand to reach a low to mid-70% penetration in 2026.

As part of our digital transformation long-term, we see the business model evolving to an approximate demand mix of 75% online and 25% in-store. This brings me to an update on the optimization of our retail footprint. As we mentioned on our Q4 call, we closed 35 stores in 2024, and we were targeting 40 to 50 closures in 2025, with the potential for additional closures as approximately 60% of our store fleet is up for lease renewals this year. With our customers increasingly preferring to shop our online experience, we are accelerating our fleet optimization efforts with a plan to now close approximately 60 stores in the first half of this year.

We believe we have an opportunity to close an additional 120 stores in the back half of this year, bringing the total number of targeted closures for the year to approximately 180. Paula will provide more detail on the net impact of these closures, but importantly, given many of these stores have lower productivity, and we continue to experience sales and customer retention rates from closed stores of approximately 60%, the projected impact on net sales is expected to be negligible. With the annualization of these closures, we would expect to see from 150 to 250 basis points of EBITDA margin net of increased marketing investment.

We are planning to allocate a portion of the cost savings from the store closures to customer acquisition marketing, as well as a more expansive effort to retain and transfer existing customers to the web or neighboring stores. As a reminder, 95% of our customers are in our loyalty program, so we have a large amount of data on their shopping patterns. Our physical stores will continue to represent an important touchpoint to complement our omnichannel go-to-market strategy. They serve as community hubs and immersive brand-building experiences, introducing customers to our brand and sub-brands, offering the dressing room experience, and acting as service centers for purchases made online or in stores.

Most importantly, our passionate sales associates bring the brand to life, delivering personalized service that deepens customer connection and drives long-term loyalty. As we mentioned on the Q4 call, we see opportunities to enhance the expression of our brand in stores to better align with the online experience. And we remain committed to refreshing 135 stores in the third quarter. These are low capital investments with an expected fast return. In summary, the optimization of our retail store fleet represents a strategic shift to better align our distribution with customer demand, which is expected to dramatically enhance our customer experience and deliver healthier sales growth while improving our overall profitability and cash flow. Now to tariffs.

Let me start with the punchline. Our current exposure to China-sourced goods will be in the low single digits for the balance of the year, down from the mid-teens. Improving our sourcing has been a key area of focus for several years, and I am proud of the robust sourcing infrastructure we have in place today. Our team has worked to reduce our exposure to China by diversifying into other countries and cultivating strong relationships with a broad range of vendor partners who, in many cases, have developed manufacturing capabilities in multiple countries.

In addition to shifting production out of China, our tariff mitigation playbook also includes sharing the increased cost with our vendor partners, exploring cost-saving fabric opportunities, such as using Egyptian denim instead of Turkish denim, and strategically and selectively making low single-digit price adjustments where we see a value proposition opportunity. As it stands today, after these actions, we expect the net impact of tariffs to be approximately $20 million for the remainder of the year, calculated based on current tariff rates. We will offset primarily through discretionary expense reductions, store optimization, and prioritization of projects across the business. We have also made the strategic decision to temporarily pause and reevaluate shoe offerings, which are 100% sourced out of China.

This strategy shift will result in a neutral EBITDA impact in 2025 and an expected revenue loss of approximately $40 to $45 million. On a go-forward basis, we are actively exploring opportunities to reenter the shoe category in a way that adds profitability and aligns with our broader sourcing strategy. Looking ahead, our goal is to keep any individual country, Vietnam included, to under 20% of apparel sourcing penetration. Turning to marketing, our strategy this quarter focused on creating momentum through bold storytelling, elevated community engagement, and agile execution. We leaned heavily into messaging around newness, supported by more frequent site refreshes.

This not only resonated with customers but helped set the stage for strong performance during our Torrid Cash and Afterparty events. While consumer sensitivity to promotions remains elevated in the current macro environment, our strategic messaging helped capture demand and drove conversion during key moments. One of the most exciting highlights of the quarter was our Coachella activation under the Festi by Torrid sub-brand. The campaign sparked remarkable engagement, generating millions of impressions and expanding our social following significantly in just one week. Beyond the numbers, it demonstrated the power of showing up in cultural moments where plus-size women are often underrepresented. The response from our community was overwhelmingly positive, reaffirming our strategy to lead with authenticity.

We saw meaningful success in evolving our approach across channels. In digital, we prioritized spending toward customer acquisition, contributing to solid performance in both new and reactivated customer segments. SMS and push campaigns benefited from thoughtful timing and dynamic content, leading to successful push revenue during the quarter. In email, we tested new creative formats and editorial storytelling, such as day-to-night looks and curated collections, which performed well and confirmed the value of continually refreshing our content pipeline. Across paid and owned channels, we continued balancing performance with brand building, testing new creative formats and placements to drive long-term value while maintaining short-term efficiency.

Our loyalty program played a critical role, with strategic bonus points events and targeted rewards helping drive frequency, retention, and cross-category migration. Torrid Cash, in particular, was a strong traffic and revenue driver during the quarter, and our Afterparty events sustained momentum with additional customer engagement. Lastly, our mobile app reached a new revenue high, supported by timely push notifications, exclusive offers, and seamless loyalty integration. The app continues to grow as a key touchpoint for high-value customers and plays an important role in omnichannel retention. Our marketing performance this quarter reflected a disciplined, creative, and community-first approach. We remain focused on amplifying what works while continuing to evolve with our customers, stay culturally relevant, and drive sustainable growth ahead.

Let me wrap up with a brief review of our first quarter results. As I mentioned, our performance for the quarter was in line with expectations for both net sales and EBITDA. We registered net sales of $266 million and EBITDA of $27.1 million at the high end of our guidance. Our comparable sales were down 3.5%. Although consumers remain price and value-conscious, our customers are responding well to newness highlighted by the sub-brand. As I noted earlier, our online demand once again outpaced stores, and we are encouraged to see a high percentage of customers who made a sub-brand product purchase are also picking up line items from our core line.

Overall apparel performance in Q1 showed encouraging signs of momentum as the quarter progressed. While February proved to be the most challenging month, we meaningfully improved in March with further stabilization in April. We saw strength in key categories, including dresses, denim, and non-denim bottoms, each of which delivered positive comps for the quarter, reflecting strong consumer response to refreshed assortments and trend-right products. We remain in a strong financial position, ending the quarter with $23.7 million in cash, and we have access to $117.3 million of additional liquidity from our revolving credit facility.

Our inventory position and composition are in excellent shape, and we are managing all aspects of the business with a prudent approach to the controllables while playing offense focused on profitable growth. In closing, I would like to thank our exceptional Torrid team. Their relentless commitment to elevating our merchandise, driving innovation, and streamlining operations has been transformative. We have made remarkable strides in our strategic initiatives, establishing the foundation for sustainable profitable growth with an eye towards creating value for all of our stakeholders. With that, I'll turn it over to Paula.

Paula Dempsey: Thank you, Lisa. Good afternoon, everyone, and thank you for joining us today. I will walk through our first quarter financial performance, discuss progress against our strategic priorities, and share our outlook and guidance for fiscal 2025, along with how we are positioning the business for long-term value creation. We delivered results in line with expectations for both net sales and EBITDA in Q1. After a slow start to the quarter in February, we saw improving sales momentum as the quarter progressed. Importantly, we began to realize tangible benefits from our store optimization initiative launched last year, which supported a reduction in SG&A and reinforced our focus on profitability and disciplined cost control.

Net sales for the first quarter were $266 million compared to $279.8 million in the prior year. Comparable store sales declined 3.5%, reflecting continued pressure in our physical retail location, partially offset by strength in our digital channel. Our performance reflects the continued evolution of our consumer shopping behavior, and we remain focused on adapting accordingly. Gross profit was $101.4 million, down from $115.4 million last year, with gross margin declining 320 basis points to 38.1%. The decline in margin rate was driven by planned promotional initiatives to improve conversion rates. We maintained an effective approach to expense management. SG&A was favorable by $6.5 million, resulting in $70 million in Q1 compared to $76.5 million in the prior year.

As a percentage of sales, SG&A leveraged 100 basis points to 26.3% versus last year. This expense discipline remains a critical lever as we navigate the current environment. The year-over-year favorability in SG&A was driven by our store optimization efforts, as well as prioritization of company-wide projects and contract renegotiations. We strategically increased marketing investments to $15.4 million from $12.8 million a year ago, deploying funds to support the launch and awareness of our new sub-brands. This reflects a strategic shift toward customer acquisition and brand building designed to drive long-term customer file growth.

In the first quarter, we saw steady customer acquisition and reactivation momentum on the web, achieving positive results, which we believe are due to our marketing strategy shift. We delivered net income of $5.9 million or $0.06 per share compared to a net income of $12.2 million or $0.12 per share in the prior year. Adjusted EBITDA was $27.1 million, representing a 10.2% margin versus $38.2 million and 13.7% last year. The year-over-year EBITDA cadence was anticipated, reflecting our decision to increase the allocation of marketing investments to earlier in the year to support our sub-brand momentum. We ended the quarter with a healthy liquidity position.

Cash and cash equivalents stood at $23.7 million, up from $20.5 million in the prior year, and we had no borrowings outstanding under our revolving credit facility. Total liquidity, including available borrowing capacity, remains strong at $141 million. Additionally, we continue to strengthen our balance sheet by reducing total debt from the prior year by $16.2 million to $284.5 million. Inventory totaled $149.6 million, a 3.3% increase versus last year, primarily due to in-transit timing. We are managing inventory with precision and expect to see temporary fluctuations throughout the year. However, we expect year-end comparable store inventory to be lower by mid to high single-digit percentages, and with store closures, expect our total inventory to be down meaningfully more.

As Lisa discussed earlier, as part of our continued strategy to align our demand channels, we are making decisive progress on our store fleet optimization. With over 60% of our store leases up for renewal in 2025, we are accelerating our store closure efforts and will have approximately 60 stores closed by the end of Q2 and as many as 180 stores over the full year. Most of these additional 120 closures are anticipated towards the end of the fiscal year, taking advantage of lease expiration dates, and therefore will require little, if any, incremental cost to exit. Stores we have identified for closure are underperforming relative to our fleet, with an average of approximately $350,000 in annual sales.

They are primarily situated in less attractive or lower-performing areas. We expect the net sales impact from these store closures to be minimal, and we plan to offset it through more targeted marketing investments and enhancements to our customer retention strategy. Historically, we have retained approximately 60% of our customers post-closure, a trend that has held true with our most recent closures. Going forward, our enhanced approach includes a multi-touch communication plan with both email and SMS outreach before and after closure, along with incentives to transition customers to a nearby store or to our digital platform.

Additionally, our store optimization strategy will significantly reduce our cost structure and improve working capital, allowing us to reinvest more aggressively in customer reactivation and acquisition initiatives to support long-term revenue growth. Turning to our updated guidance for fiscal 2025, we are revising our revenue outlook to reflect the strategic decision to pause our footwear business. This will result in a revenue impact of approximately $40 million to $45 million this year. We now expect full-year net sales in the range of $1.03 billion to $1.055 billion.

We remain committed to delivering healthy profitability and expect our adjusted EBITDA to range from $95 million to $105 million for the full year, which includes the net impact of tariff headwinds and our mitigation efforts. We expect to mitigate approximately $20 million of tariff impacts through $20 million in expense reductions for the year. Half of these reductions will come from our store optimization project, while the remainder will come from discretionary spending and reprioritization of internal projects. Our quarterly sequence will be slightly different from past years. Over the years, we realized 60% to 65% of our full-year adjusted EBITDA in the first half of the year.

In fiscal 2025, we expect our quarterly adjusted EBITDA to be more evenly spread due to a shift in marketing spend from the second half into the first half of the year to support the launch of the sub-brands, while cost reductions are expected to have a more significant impact in the second half of the year, leading to a more balanced strategy for profitability across the quarters. Capital expenditures are expected to be in the range of $10 million to $15 million, focused on technology, digital experience, store refreshes, and fulfillment capabilities to support our omnichannel growth strategy.

For the second quarter, we expect net sales of $250 million to $265 million and adjusted EBITDA between $18 million and $24 million. This includes a projected tariff impact of approximately $5 million. Looking ahead to fiscal 2026, while we are not issuing formal guidance at this time, we believe it is important to share early visibility into the expected benefits of our 2025 sales channel realignment actions. As I mentioned earlier, the stores identified for closure generate an average annual sales of approximately $350,000, significantly below the fleet average. As a result, we expect minimal impact on the top line both during the closure process and in future years.

Historically, we retained roughly 60% of sales and customers following a store closure, driven by the strength of our loyalty program, which includes 95% of our customer base. This high enrollment rate enables us to effectively redirect sales to nearby locations or our digital platform. Taking into account the net financial impact of these closures, together with incremental reinvestments into marketing and store experience, we expect a benefit of 150 to 250 basis points of EBITDA margin expansion in fiscal 2026 and beyond, supporting enhanced profitability and sustainable top-line growth. This initiative also advances our fleet rebalancing strategy, shifting the mix from 65% enclosed malls and 35% outdoor centers to approximately 55% and 45%, respectively.

As we have shared in previous calls, outdoor centers typically deliver stronger productivity for our brand. In closing, we are operating with discipline and a clear strategic framework, tightly controlling what we can while positioning the business to win in a fast-evolving retail environment. Our priorities remain optimizing our footprint, investing in high ROI growth levers, and strengthening our financial foundation. We are confident that our focused execution and strategic decisions today will support sustained profitable growth over the long term. With that, I'll turn the call back to the operator for Q&A.

Operator: Thank you. We will now be conducting a question and answer session. For participants using speaker equipment, one moment please while we poll for questions. Our first question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.

Mary: Hi. This is Mary on for Lorraine. Could you talk a little bit about how we should think about the cadence of newness for the second half? Hi. The cadence of newness per product. Yeah. Just in terms of, like, your sub-brand launches, just how we should think about that for the remainder of the year.

Lisa Harper: Right. We have another new sub-brand launching in August, which is Lovesick, which is geared toward a younger customer at a slightly lower price point. And then we have StudioLuxe that will launch in September, which is a higher-end kind of desk-to-drinks concept. We've been in the back half of the year accelerating the timing of our launches for the existing brands, Belle Isle, Festi, Nightfall, and Retro Chic. So by the end of the year, we'll be delivering, I would say, into the fourth quarter, we'll be delivering all of those brands on a monthly basis.

Mary: Thank you.

Operator: Thank you. Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Savannah Summer: Hi, this is Savannah Summer on for Brooke Roach. Thank you so much for taking our question. It's great to see the momentum with the sub-brands. You've discussed them as being an avenue for new customer acquisition, and I'm curious if you could discuss what trends you've been seeing with these new customers following their initial sub-brand purchase. Are you seeing them shop across the broader assortment and other sub-brands? And is there any unique differences in shopping behavior by channel or category to call out versus your legacy customer? Thank you.

Ashlee Wheeler: Hi. This is Ashlee. We are seeing really positive movement in the customer file related to these sub-brands, acquiring and reactivating new and younger customers than our average age in our existing file. Additionally, we're seeing really positive movement among existing customers with an increased lifetime value attached to them. So I'm really seeing incremental purchase behavior from that group as well as really high transaction size. We're seeing a very high attachment rate as well. So about 90% of the time, those that are participating in the sub-brands are adding other core Torrid products to their basket. And I would add that it is performing substantially higher online than in stores.

Although we've distributed Belle Isle particularly to 350 stores and Festi to an average of about 200 to 250 stores, we continue to see a predominance of the demand coming from the digital channel. So we think it's important to continue to bring newness to the store environment, but we're certainly, I think, by reaching a broader audience, reactivating a broader audience, and bringing younger customers into the brand, seeing a predominance even more than our average breakout towards the digital channel.

Savannah Summer: Great. Thanks so much for the color. I'll pass it on.

Operator: Our next question comes from the line of Alex Stratton with Morgan Stanley. Please proceed with your question.

Katie Delahunt: Hi. This is Katie on for Alex. Thank you for taking our question. I just wanted you to look at 2Q specifically. I think the midpoint of your guidance implies a sizable sales growth deceleration. Is there anything going on there? And does that reflect quarterly trends? Or what should we know there?

Paula Dempsey: Hi. This is Paula. How are you? Yeah. So as we had discussed earlier on our call, we are pausing right now our shoe business until further notice. So the majority of that business is currently sourced from China. And that business tends to be lower margin. So at this point, we're pausing it and just essentially reevaluating other partners to support the reentry into that business at higher, more profitable margins. So that impacts about $40 million to $45 million in sales for the year, kind of spread evenly through the balance of the year.

Katie Delahunt: Got it. Thank you. And I don't know if you're giving any color on quarter-to-date trends or if that's in line with your guidance there.

Lisa Harper: Just think through the guidance, we're continuing to see overall choppy customer behavior, but it's going in both directions. We have some softer times and some stronger times. So we feel and are observing that finds slightly closer to need. And so seasonal categories are coming, their demand is coming in a little bit later. We continue to see strength in our digital channel and look forward to really strong performance as we go through the back of the year where there's a semi-annual sale, our Torrid Cash event, as well as our Afterparty.

Katie Delahunt: Great. Thank you so much.

Operator: Thank you. Our next question comes from the line of Dylan Carden with William Blair. Please proceed with your question.

Dylan Carden: Appreciate it. I'm sure you covered this. Apologies. There's a lot going on tonight. But the planned promotional or the use of promotion strategically through the quarter kind of mixed in with this flow of newness that you're seeing. Can you just remind us sort of the promotional strategy from here? Should those things exist or coexist? And is that more a reflection of the current market? And then as far as the online versus retail channels, is online more promotional or more promotional channels? Thanks.

Ashlee Wheeler: Hi. This is Ashlee. So we are continuing to be, I would say, as promotional as we typically are. Our cadence of major events, like Torrid Cash, as you mentioned, will be four times a year as historically have been. And as planned. Two semi-annual sale events. And we're responding to general consumer, I would say, consciousness or value orientation with promotional events, which she's been very, very responsive to. So that will continue, and that's implied in our guidance.

Dylan Carden: Okay. Then I'm just kind of curious about the acceleration in closures. What's behind that? How you're arriving at kind of the 75%, 25% split is the right level? Yes, can we sort of start there?

Lisa Harper: Sure. I think that, Dylan, the customer continues to tell us that she prefers to shop online. We have talked previously. We're in the mid-sixties in terms of penetration. That penetration keeps growing. That business keeps comping online. We are now acquiring more customers online than we are in the store channel. So all of the trends, and I think we've supported this with marketing strategies, with investment in digital marketing, with the sub-brand strategy and the expansion of product categories, I think the web experience for us is a dramatically powerful channel of her storytelling for our customer. And as we do that, she continues to migrate online.

We still are seeing omni power, and we feel strongly that, you know, by closing these underperforming stores, we'll be able to move the fixed expenses associated with those stores. Some of that will go to a higher level of profitability for the company, and some of that will go toward the rightsizing of the digital investment that needs to happen to continue to drive this new customer to the brand.

As we see the younger customers coming in, as we see the reactivated customers coming in, the experience for the breadth of it for the product categories, being able to visualize them, outfit them, tell the stories about them has, I think, we've done a tremendous job in driving that visual representation of the brand. So it is the best expression of the brand. We're not giving up on stores at all. We are rightsizing the portfolio. So if you do the math, this ends up at about being 450 stores with this round of closures. And we think we're leaving very few markets. So it's really about the thinning out of existing markets.

The customers will still have a close-by store, and just to reinforce, we've seen with the closures, as most recently with the fourth-quarter closures, that we are still transferring slightly higher than 60% of those customers and sales to nearby stores or online. So as we're doing that, we're just rightsizing the business to the demands of the customer and being able to reallocate our resources to the right channel. I think sub-brands have illustrated to us and substantiated our theory that this customer wants more choices and is willing to pay for them, meaning she's willing to pay more for more fashion.

And our experience with their response to the sub-brands and the halo effect that it provides to the core business is best expressed online. So that became very, very clear to us that it was time to restructure our portfolio to a digitally led perspective. I hope that answered that.

Dylan Carden: Much so. Thank you. And last one, can you square the circle? You mentioned it there, the 60% retention but full-year negligible sales impact of closing the stores. Is that just some sort of function of when you're closing them, the fact that you retain maybe increased marketing in other online channels? Just how you get to that kind of neutral impact? Thanks.

Lisa Harper: Right. So most of those stores will close toward the end of the quarter, and at the same time, we will be ramping up our marketing spend in relation to that. So based on what we've learned from our digital marketing investments over the last eighteen months, we have a high confidence level in our ability to offset the small amount that doesn't naturally transfer with new customer acquisition through the digital channel.

Dylan Carden: Thank you. And those stores, by the way, are very, very low volume. So, it's less of a hill to climb in terms of replacing those revenue dollars.

Lisa Harper: Thanks.

Operator: And we have reached the end of the question and answer session. I would like to turn the floor back to CEO, Lisa Harper, for closing remarks.

Lisa Harper: Great. Thanks so much for joining us today. We look forward to sharing the progress in our next call as we reflect on Q2. Thanks so much.

Operator: Thank you. And this does conclude today's conference. You may disconnect your line at this time. Thank you for your participation. Have a great day.

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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DATE

Thursday, June 5, 2025 at 4:30 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Jennifer Hyman

Chief Financial Officer — Siddharth Thacker

Need a quote from one of our analysts? Email [email protected]

RISKS

CFO Siddharth Thacker stated that gross margins (GAAP) decreased to 31.5% in Q1 FY2025, down from 37.9% a year earlier and 37.7% in the previous quarter, due to higher revenue share costs and increased fulfillment costs.

Adjusted EBITDA was negative $1.3 million, down from $6.5 million a year ago, as a result of both declining revenue and higher revenue share expenses.

Free cash flow was negative $6.4 million, compared to negative $1.4 million a year ago, due to lower adjusted EBITDA and higher inventory investment.

Fulfillment costs rose to 29.3% of revenue in Q1 FY2025, up from 27.5% a year ago, driven by increased transportation costs and a shift to maintaining more inventory for subscribers.

TAKEAWAYS

Ending Active Subscribers: There were 147,157 ending active subscribers in Q1 FY2025, representing a 1% year-over-year increase and the highest quarter-end subscriber count in company history.

Average Active Subscribers: Average active subscribers totaled 133,468, down 1.8% from 135,896 a year ago.

Revenue: Total revenue was $69.6 million, a decrease of $5.4 million, or 7.2% year over year, and down $6.8 million, or 8.9%, quarter over quarter.

Gross Margin: Gross margin was 31.5%, down from 37.9% a year ago and 37.7% in the previous quarter, reflecting both higher revenue share and fulfillment costs.

Fulfillment Costs: Fulfillment costs were $20.4 million, nearly flat year over year, but rose to 29.3% of revenue from 27.5% a year ago due to higher transportation costs.

Adjusted EBITDA: Adjusted EBITDA was negative $1.3 million, or negative 1.9% of revenue, compared to $6.5 million and 8.7% of revenue a year earlier.

Free Cash Flow: Free cash flow was negative $6.4 million, compared to negative $1.4 million a year ago, primarily due to increased rental product purchases supporting the inventory strategy.

Inventory Investment: Inventory volume received in Q1 FY2025 rose 24% year over year, with 36 new brands and over 1,000 new styles launched during the quarter.

Inventory Engagement: Spring 2025 inventory recorded a 23% higher share of use, 46% more 'hearts,' and a 14% higher 'love rate' compared to the prior year. April add-on gross bookings increased 11% year over year (all metrics as reported for FY2025).

Revenue Mix Shift: Exclusive designs and revenue share are projected to account for 70% of acquired items in FY2025, up from 20% in FY2019.

Q2 and FY2025 Guidance: Q2 FY2025 revenue is projected between $76 million and $80 million, with adjusted EBITDA margin guidance at negative 22%. The company maintains a double-digit subscriber growth target for FY2025 and expects full-year cash consumption of negative $30 million to negative $40 million, but may invest beyond that range if prudent.

Product and Service Innovation: Introduced back-in-stock notifications with 25% subscriber adoption and a 48% completion rate since launch; stylist support reduced first-month churn by 27%; the 60-day customer promise dropped churn by 34%; and RTR Concierge lowered churn by up to 18% so far.

Customer Retention: Achieved the strongest quarterly retention in four years. Churn improvement in Q1 FY2025 was the best year over year and quarter over quarter since the pandemic recovery period.

Marketing and Engagement: Organic social engagement rate rose 163% since the April and May branding shift (compared to the two months prior). New member-driven events attracted over 350 attendees and expanded virtual community channels.

Upcoming Initiatives: The company plans to launch more than 40 new brands and add over 2,700 new styles in FY2025, expand into 19 new brands in Q2 FY2025, and continue scaling customer experience enhancements and a new rewards program.

SUMMARY

Rent the Runway delivered record quarter-end active subscribers and demonstrated sequential subscriber growth in Q1 FY2025, despite reporting a year-over-year decline in both average active subscribers and total revenue. The company faced compression in gross margin and negative free cash flow due to higher revenue share expenses, increased inventory investment, and rising fulfillment costs. Management reaffirmed double-digit subscriber growth guidance for FY2025 and outlined plans for rapid inventory expansion, differentiated merchandising, and further investment in customer innovations through the year.

CFO Siddharth Thacker said, "Our full-year guidance remains unchanged." indicating that major strategic and financial targets are intact despite short-term margin pressures.

The exclusive design and revenue share model is anticipated to account for 70% of inventory sourced in FY2025, a shift management identifies as central to brand partnerships and value creation.

Engagement with newly launched inventory in spring FY2025—measured by digital interaction 'hearts,' share-of-use, and add-on bookings—suggests an early positive response to increased assortment and category depth.

Operational discipline continues, with leadership stating willingness to "invest prudently when it makes sense for our customers, even if that results in free cash flow outside the provided ranges."

INDUSTRY GLOSSARY

Revenue Share Inventory: Merchandise supplied by brands or designers where Rent the Runway, Inc. pays a share of rental revenue rather than purchasing outright.

Share by RTR Inventory: Items procured through Rent the Runway, Inc.'s revenue share agreements rather than traditional wholesale purchase.

Hearts/Love Rate: User engagement metrics specific to Rent the Runway, Inc., tracking customer preference and interaction with inventory selections.

RTR Concierge: A program providing direct outreach and customer support to new and returning subscribers to boost retention and education.

Full Conference Call Transcript

Jennifer Hyman: Thank you, Cara, and thank you all for joining today. On our last earnings call, we walked you through our plan to transform Rent the Runway, Inc. as we increase the breadth and depth of our inventory, innovate on our product to give customers what they want, and get back to our customer-obsessed roots. In the past quarter, we've put this plan into action and we've seen very positive results.

We drastically increased the desirability and quantity of inventory on the platform, with much more to come, launched some of the most highly requested features from our members, including back-in-stock notifications, and a customer promise for new and rejoining subscribers, and restored our relationship with customers through a revitalized authentic approach to organic social and customer service. And as I speak with you today, I'm happy to report that our transformation strategy is working. We've seen a return to subscriber growth in Q1, ending the quarter with over 147,000 active subscribers, the most ending subscribers at the end of a quarter in company history.

We've also seen the strongest quarterly customer retention in four years, with improved churn rates for both early-term and long-term subscribers. Today, I'll walk through strategy and the results we're seeing in more detail as we show our community and the world that Rent the Runway, Inc. is back.

First and foremost, our bold inventory strategy. Rent the Runway, Inc. provides our customers with a valuable offering: a risk-free way to try new styles and brands that may have previously not been on their radar or in their closet. This ability to discover newness is a key reason why so many women love our service. And with the rejuvenated inventory this year, we're giving her an even greater opportunity to discover new brands and items that she loves. As we detailed on our last earnings call, we are planning our largest-ever investment in new inventory this year. Our new brands and styles have already started to roll out on our site and into the hands of our customers.

Throughout this transformation, we have been guided by our customer feedback and data, so that we can be more specific about the aesthetic of the styles we offer on Rent the Runway, Inc. with the ultimate goal of attracting new customers and retaining existing customers. We've been focused on building an assortment that resonates with our feminine, polished, and playful core customer. And we're building depth across categories that we know our customers desire, like denim, outerwear, day dresses, casual everyday clothing, handbags, and workwear. I truly believe that we've not only created visual differentiation between us and our competitors, but we're also well on our way to significantly improving customer loyalty.

Q1 inventory volume received was up 24% year over year. We launched 36 new brands and over 1,000 new styles that align with what we know our customer is looking for. And we've been right. Our customers are more engaged with our selection than ever before. Our spring 2025 inventory has a 23% higher share of use, 46% more hearts, and a 14% higher love rate than our spring buy last year. She's also adding more to her shipment, with April add-on gross bookings up 11% year over year.

We've identified several pillar brands like Veronica Beard, AL Ola Johnson, and Stodd, which drive a higher perception of the value of Rent the Runway, Inc. when a customer has one of them in her order. To double down on these pillar brands, we've considerably increased our buys from them. We've also released four new collaborations with Sea New York, Plan C, Ghani, and Simon Miller, and they are leading the way in customer engagement. The new Simon Miller collection alone drove almost 3 million views. And from a cost perspective, I want to remind you that these collections deliver comparable quality at approximately 40% lower cost on average.

We're excited and proud to be giving customers more styles from pillar brands they covet and introducing new brands that excite them. And we are just getting started. We expect that the remainder of the year will be significantly more impactful. In Q2 alone, new receipts are expected to be up over 420% year over year. And for the rest of the year, we expect new receipts to be up 134% year over year. We're also planning to launch over 40 new brands and post over 2,700 new styles. For the designers and brands themselves, we believe that Rent the Runway, Inc. is now well established as a core marketing channel.

We've delivered brands an opportunity to reach new customers outside of traditional paid marketing channels. We've done this by spending the last fifteen years building trust with brands and connecting them to our customers. The growth of our revenue share and exclusive design channels are unique to Rent the Runway, Inc. and a testament to the excitement that brands have to partner with us during a time in which they are losing confidence in other retail channels. About 20% of items acquired in fiscal year 2019 were exclusive designs and revenue share. This fiscal year, it's expected to be around 70%. And this momentum is expected to continue.

In Q2 alone, we're planning to expand into 19 new brands, launch three new exclusive collections, introduce fresh use cases like beach and tennis, and double down on the summer categories our customers crave most when temperatures rise. We expect that the new inventory will continue to have a dramatic effect as more of it hits the site over the course of the year.

Now let's walk through our recent product innovations, all of which are in response to direct customer feedback and are designed to make the experience with Rent the Runway, Inc. best in class for every customer. We know that inventory alone isn't everything. We want our customers to feel that they are getting the white glove experience they expect from a luxury brand, and we're investing in the product and customer service experiences designed to deliver on that vision. We've introduced enhancements to the product for both new members and for customers who've been with us for a while, including back-in-stock notifications, our number one most requested new feature.

Now a subscriber can set a notification if she has her eye on a style but it is not available at the time she is building her order. If it's back in stock, she gets notified and can add it to her next order. People are really excited about this feature. 25% of all subscribers have engaged with it since launch, and 48% of those who've engaged with it have successfully added a back-in-stock item to their bag after getting a notification. Secondly, we launched personalized styling support for our early-term customers, where stylists help build hearts lists, place orders, and provide personalized suggestions.

We believe that this is a very valuable service to our subscribers, many of whom are professional women that value the extra assistance with discovery and ordering. We provide a complimentary first thirty-minute session and have seen a 27% reduction in first-month churn when subscribers talk to stylists. We've also introduced a sixty-day customer promise for all new and rejoining customers. If a customer doesn't like any of the items in her order during the first sixty days, we'll send her new items at no cost. We've seen that this leads to a 34% reduction in churn.

RTR Concierge, where new and rejoining customers receive a call from us to explain the service and answer any questions, is another new initiative that members love. So far, we've seen an 18% reduction in churn for those who answered our call, and a 14% reduction in churn for those who didn't answer. This has been so successful that we're planning to scale it from 50% of new and rejoining subscribers to 100% by the end of Q2. And lastly, we've launched a more personalized homepage and browse experience, tailored to what she has happening that month. A key focus for the remainder of the year is to scale these improvements to as many of our subscribers as possible.

And we have even more in store. In Q2, we're planning to launch a new rewards program that will give subscribers perks and rewards to celebrate break points. We're also planning to introduce Harding Progression and more personalized feeds to provide a more curated and personalized subscriber browsing and picking experience. All of this innovation is rooted in the pod structure we have developed for our teams at Rent the Runway, Inc. Our four pods—retention, revenue, customer growth, and inventory—map directly to our strategy and are designed to enable us to simplify and be more agile in the way we introduce new products and serve customers.

This has allowed us to shift new features rapidly, respond quickly to customer needs, and operate much more efficiently overall.

The third area we've been focused on has been restoring the relationship with our customers through authentic, transparent branding and communications, along with member experiences for our community. We know that Rent the Runway, Inc. is an emotional and aspirational product. It's not purely about renting and purchasing clothing items. In Q1, we significantly shifted the tone of our marketing towards transparency and community, showing customers we heard you and getting back to the basics of what this brand is all about. This wasn't about deploying more marketing dollars. Rather, we employed a customer-centric, radically authentic strategy ensuring customers felt valued, informed, and excited about the changes.

We also launched a brand new organic strategy that broke the fourth wall, meaning we acknowledged the presence of the audience and spoke directly to them through our channel. We engaged with our most opinionated community on Reddit, and through a very active Reddit AMA. Launched new social features like Instagram Q&A and Gen Reacts, and introduced a new face of Rent the Runway, Inc. social channels. And it's working. The engagement rate on social channels is up 163% since we launched our new strategy in April and May, as compared to the two months prior. I am also personally still responding to customer emails and feedback that comes my way and very actively engaging with our customers regularly.

Lastly, we reintroduced member-first experiences, engaging hundreds of members both online and in real life. We kicked off the We Heard You hybrid webinar, which allowed our community to hear directly from our leadership team on what's to come. We also hosted a Women at Work styling event, a Wixow exclusive design preview, a meet-the-drop event that drew over 350 attendees. All of these are examples of how we are bringing the power of our community back in person and virtually. In conclusion, we are confident that our new strategy is working. Thanks to the new inventory and product innovation, our quarterly customer retention is the strongest it's been in four years.

In Q1 2025, we experienced our greatest year-over-year and quarter-over-quarter Q1 churn improvement since the pandemic recovery period. We're incredibly excited about the early signals that this inventory strategy is driving results and believe the best is yet to come. I think this is only the beginning. We're optimistic and excited. We created this category and we know where it's going. With that, I'll hand it over to Siddharth Thacker.

Siddharth Thacker: Thanks, Jen, and thank you everyone for joining us. As Jen outlined in her remarks, the key message in this quarter's results is that we believe our inventory and product strategies are working. Our teams are energized and we are finding ways to improve our customers' experience every day. We believe our significant inventory investment this year will continue to drive retention as customers experience the full impact of the new arrivals in May and in the months to follow. Let me spend a few minutes discussing why it's taken until fiscal year 2025 to put these plans into action and how we expect fiscal 2025 to unfold.

Over the past two months, I've been asked by new and existing investors why it's taken us so long to implement the strategies we're executing on in fiscal 2025. Indeed, some investors have indicated that for the first time they feel like Rent the Runway, Inc. wants to grow. Let me begin in fiscal 2022. We had emerged from COVID with a similar-sized subscriber base as existed before COVID, but with a relatively small amount of inventory purchased in the intervening period. Over time, we focused on increasing depth and exiting older inventory within the context of managing our cash consumption and our balance sheet.

In order to continue funding improvements to our customer experience, we substantially reduced costs in fiscal 2022 and fiscal 2023 and made significant strides in moving to an asset-light inventory acquisition model. In fiscal 2024, we brought the business to almost free cash flow breakeven to demonstrate to stakeholders both the strength of our underlying revenue base as well as our sound unit economics. Finally, in fiscal 2025, armed with the right-sized cost structure, brands willing to provide more than double the amount of share by RTR inventory and having already demonstrated progress on cash flow, in fiscal 2024, we are ready to invest.

While it hasn't been easy, we're proud of the considerable progress made over the past three years. And yes, we are ready to grow.

Let me discuss fiscal 2025. Jen has already outlined how fiscal 2025 is off to a good start with the fastest sequential growth in ending active subscribers in Q1 versus Q4 over the last four years. An important driver of that growth is significantly improved retention on both a sequential and year-over-year basis. We believe we can improve retention further in fiscal 2025 given the planned buildup of inventory throughout the year as well as new product launches. We also expect subscriber acquisitions to benefit from our investments in fiscal 2025 albeit with a lag to retention improvements, as customers tell others about the positive changes they are seeing at Rent the Runway, Inc.

We expect acquisition improvements to also be driven by improved organic marketing as well as higher levels of promotional spending to expose more customers to our improved offering. Our results for Q1 demonstrated these trends. Improved subscriber growth, with revenue growth lagging subscriber growth due to higher promotional spending. The good news is that we've reactivated both paused and former customers' success in Q1. And so far, retention for those subscribers is better than we've seen historically. We expect continued improvement in ending active subscriber growth throughout the fiscal year. As I will also outline shortly, we will not hesitate to invest further in the customer proposition if we think it is prudent.

I will now review results for the first quarter before providing Q2 and full year 2025 guidance. We ended Q1 2025 with 147,157 ending active subscribers, up approximately 1% year over year. Average active subscribers during the quarter were 133,468 subscribers versus 135,896 subscribers in the prior year, a decrease of 1.8%. Ending active subscribers increased from 119,778 subscribers at the end of Q4 2024 due primarily to sequentially higher subscriber acquisitions, higher promotional spending, a decrease in paused subscribers, and improved retention. Total revenue for the quarter was $69.6 million, down $5.4 million or 7.2% year over year and down $6.8 million or 8.9% quarter over quarter.

Subscription and reserve rental revenue was down 6.2% year over year in Q1 2025 primarily due to lower average revenue per subscriber driven by increased promotional spend and lower average subscribers versus Q1 2024. Other revenue decreased 14.6% or $1.3 million year over year. Fulfillment costs were $20.4 million in Q1 2025 versus $20.6 million in Q1 2024 and $20.2 million in Q4 2024. Fulfillment costs as a percentage of revenue were 29.3% of revenue in Q1 2025 compared to 27.5% of revenue in Q1 2024. Fulfillment costs primarily reflect higher transportation costs as a result of carrier rate increases. Gross margins were 31.5% in Q1 2025 versus 37.9% in Q1 2024.

Q1 2025 gross margins reflect higher revenue share costs as a percentage of revenue due to greater share by RTR inventory in addition to higher fulfillment costs as a percentage of revenue. Q1 2025 gross margins decreased quarter over quarter to 31.5% from 37.7% in Q4 2024 due primarily to seasonally higher revenue share payments combined with higher fulfillment costs as a percentage of revenue. Sequentially higher fulfillment costs as a percentage of revenue reflect lower revenue per order as we chose to sell less inventory this quarter to increase inventory available for subscribers. Operating expenses were 6% lower year over year due primarily to lower stock-based compensation expenses.

Total operating expenses, which include technology, marketing, and G&A, were 55.9% of revenue in Q1 2025 versus 55.2% of revenue in Q1 2024 and 44% of revenue in Q4 2024. Adjusted EBITDA for Q1 2025 was negative $1.3 million or negative 1.9% of revenue versus $6.5 million or 8.7% of revenue in Q1 2024. The decrease in adjusted EBITDA versus the prior year is primarily a result of lower revenue and higher revenue share expenses. Free cash flow for Q1 2025 was negative $6.4 million versus negative $1.4 million in Q1 2024.

Free cash flow decreased versus the prior year primarily due to lower adjusted EBITDA and higher purchases of rental product on account of our inventory strategy for fiscal year 2025.

I will now discuss guidance for Q2 2025 and fiscal year 2025. Our full-year guidance remains unchanged. We continue to expect double-digit growth in ending active subscribers for fiscal year 2025. We also continue to expect full-year cash consumption to be between negative $30 million and negative $40 million. As I outlined last quarter, I want to emphasize that this free cash flow range is indicative with many factors that may influence the final result. The overarching message remains that Rent the Runway, Inc. is playing offense and that we intend to invest prudently when it makes sense for our customers, even if that results in free cash flow outside the provided ranges.

Let me now discuss Q2 guidance. For Q2 2025, we expect revenue to be between $76 million and $80 million. We expect adjusted EBITDA margins to be between negative 22% of revenue. Finally, let me reiterate my comments on tariffs from our April earnings call. Our guidance does not factor in any potential impact from tariffs given all the uncertainties. We believe we are fortunate that we directly import a relatively small portion of inventory and have placed orders for the majority of our inventory receipts for fiscal year 2025. However, there is no guarantee that this will mitigate any impact.

It's also difficult to predict customer behavior, but we believe renting does offer substantially greater value for consumers versus buying. We are mindful that the environment remains uncertain and plan to operate prudently in the months ahead.

In conclusion, we're pleased to see customers respond enthusiastically to our significant investment in inventory in fiscal 2025. The energy from both our customers and employees is palpable. Our brand messaging is authentic. We have more to do, but believe we are firmly on the right track.

Jennifer Hyman: Thanks for the call today, and we look forward to continuing to update you on Rent the Runway, Inc. Great. Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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DATE

Thursday, June 5, 2025 at 11 a.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Julie Masino

Senior Vice President and Chief Financial Officer — Craig Pommells

Director, Investor Relations — Adam Hanan

Need a quote from one of our analysts? Email [email protected]

RISKS

Craig Pommells stated, "We anticipate the net tariff impact on Q4 EBITDA will be approximately $5 million." explicitly identifying tariffs as a near-term earnings headwind.

Total cost of goods sold rose to 30.1% of revenue in Q3 FY2025, up from 30% in the prior year quarter, due to unfavorable menu mix and commodity inflation, partially offset by menu pricing.

Comparable store retail sales declined 3.8% in Q3 FY2025, indicating continued consumer softness in the retail segment.

TAKEAWAYS

Total Revenue: $821.1 million in total revenue for Q3 FY2025

Restaurant Revenue: $679.3 million in restaurant revenue for Q3 FY2025, a 1.2% increase in restaurant revenue, while Retail Revenue: $141.8 million in retail revenue for Q3 FY2025, a 2.7% decrease in retail revenue.

Comparable Store Restaurant Sales: 1% growth in comparable store restaurant sales, with Comparable Store Retail Sales: Comparable store retail sales decreased 3.8%.

Menu Pricing: 4.9% menu pricing in Q3 FY2025, comprised of 1.5% carryforward pricing from FY2024 and 3.4% new pricing actions.

Average Check Growth: 6.6%, attributed to 4.9% pricing and 1.7% mix.

Off-Premise Sales: 19.1% of restaurant sales versus 18.9% in the prior year.

Commodity Inflation: 2.9%, mainly higher beef, egg, and pork prices, partially offset by produce and poultry declines.

Restaurant Cost of Goods Sold: 26.2% of restaurant sales, a 30 basis point increase compared to the prior year quarter, with Retail Cost of Goods Sold: 48.9% of retail sales, a 10 basis point decline compared to the prior year quarter

Labor and Related Expenses: 37.1% of revenue, a 70 basis point improvement compared to the prior year quarter due to pricing and productivity, offset by 1.9% wage inflation.

Adjusted EBITDA: Adjusted EBITDA was $48.1 million, or 5.9% of revenue, nearly flat to the prior year (adjusted EBITDA $47.9 million, 5.9% for Q3 FY2024).

GAAP EPS: $0.56 (GAAP). Adjusted EPS: $0.58 adjusted earnings per diluted share.

Q3 Capital Expenditures: $36.6 million in capital expenditures; Quarter-End Inventories: $168.7 million, down from $175.3 million in the prior year.

Total Debt: $489.4 million at the end of Q3 FY2025, with debt capacity increasing to $800 million via new revolver and delayed draw term loan (DDTL).

Dividend Declaration: $0.25 per share quarterly dividend, payable August 13, 2025, to holders as of July 18, 2025.

Cracker Barrel Rewards Program: Surpassed 8 million members; Over one-third of tracked sales are now attributed to loyalty members.

AI Integration: Management cited mid-single-digit lift in average revenue per loyalty member from AI-driven personalization tests.

SUMMARY

Management reported that the Campfire menu promotion drove a strong start to Q4 FY2025 but did not disclose a specific figure for ongoing comparable sales trends. Restaurant operating margins benefited from earlier labor initiatives, including the rollout of phase one back-of-house optimization, with further savings anticipated in Q4 FY2025 and into 2026. Strategic pricing actions and a positive product mix, particularly for premium menu items, continued to support sales and profitability in Q3 FY2025 despite ongoing traffic challenges. Store remodels and refreshed retail strategies were highlighted as ongoing test-and-learn initiatives, with results and future plans to be detailed in September.

Pommells said, "our G&A level in Q4 will more closely resemble the G&A level that we had in Q1 and Q2." implying less discretionary expense tightening after short-term Q3 controls.

Masino explained that direct and indirect sourcing from China exposes approximately one-third of retail products to tariffs, and noted mitigation via vendor negotiations, SKU rationalization, and pricing adjustments to address tariff impacts.

Back-of-house cost savings are included in a broader $50 million–$60 million transformation target, with further benefits expected from future process and equipment phases.

Guidance for FY2025 was raised for adjusted EBITDA to $215 million–$225 million, incorporating the $5 million adjusted EBITDA impact from tariffs, while sales expectations remained at $3.45 billion–$3.5 billion.

Masino emphasized, "we've delivered four consecutive quarters of positive comparable store restaurant sales growth." indicating sustained momentum despite macroeconomic headwinds.

INDUSTRY GLOSSARY

Delayed Draw Term Loan (DDTL): A credit facility permitting the borrower to draw funds as needed, subject to specified conditions, providing flexibility for refinancing or capital needs.

Barbell Pricing Strategy: An approach mixing high-value premium offerings and accessible lower-priced items to appeal to a broad customer base and optimize margin mix.

Campfire Meals: Cracker Barrel’s proprietary foil-wrapped signature entrée line, cited as a significant promotional driver.

Full Conference Call Transcript

Adam Hanan: Thank you. Good morning, and welcome to Cracker Barrel's Third Quarter Fiscal 2025 Conference Call and Webcast. This morning, we issued a press release announcing our third quarter results. In this press release and on this call, we will refer to non-GAAP financial measures such as adjusted EBITDA for the third quarter ended May 2, 2025. Please refer to the footnotes in our press release for further details about these metrics. The company believes these measures provide investors with an enhanced understanding of the company's financial performance. This information is not intended to be considered in isolation or as a substitute for net income or earnings per share information prepared in accordance with GAAP.

Last pages of the press release include reconciliations from the non-GAAP information to the GAAP financial measures. On the call with me this morning are Cracker Barrel's President and CEO Julie Masino and Senior Vice President and CFO Craig Pommells. Julie and Craig will provide a review of the business, financials, and outlook. We will then open up the call for questions. On this call, statements may be made by management of their beliefs and expectations regarding the company's future operating results or expected future events. These are known as forward-looking statements which involve risks and uncertainties that in many cases are beyond management's control and may cause actual results to differ materially from expectations.

We caution our listeners and readers in considering forward-looking statements and information. Many of the factors that could affect results are summarized in the cautionary description of risks and uncertainties found at the end of the press release and are described in detail in our reports that we file with or furnish to the SEC. Finally, the information shared on this call is valid as of today's date. And the company undertakes no obligation to update it except as may be required under applicable law. I'll now turn the call over to Cracker Barrel's President and CEO, Julie Masino. Julie?

Julie Masino: Good morning, and thank you for joining us. We were pleased with our third quarter performance which included positive comparable store restaurant sales for the fourth consecutive quarter and adjusted EBITDA that exceeded our expectations. These results further underscore that our transformation plan is working. I'll do a quick recap of some Q3 highlights and then speak to the exciting ways our plan is coming together in Q4. As these initiatives exemplify how we're evolving the brand by leaning into what makes Cracker Barrel great and doing so in a refined way appeals to both existing and new guests alike. We're excited about our progress, and our teams are energized. Looking back at Q3, the quarter started soft.

So we took actions to support the top line and tightly manage our expenses without limiting our ability to deliver our important fourth quarter initiatives. I'm proud of how the team responded to these challenges. Their agility, discipline, and strong ability to manage the business helped deliver a solid quarter. From a culinary perspective, our spring promotion featured two shrimp dishes. A bold Louisiana-style shrimp skillet and a comforting shrimp and grits skillet. We also expanded our pancake platform by introducing innovative new flavors and options across various price points as part of our broader barbell strategy. From an operational perspective, we remain focused on strong execution and the metrics that matter.

For example, compared to the prior year quarter, hourly turnover improved by approximately 14 percentage points and our internal net sentiment scores increased 2.3%. During the quarter, we implemented phase one of our back house optimization initiative to the full system. As a reminder, this phase is focused on process simplification to improve quality and profitability while also making jobs easier and more enjoyable. We've been pleased with the results, and employee feedback has also been very positive as team members find the new processes easier to execute. There's a lot going on that we are excited about.

Let's talk about Q4. Our Q4 work demonstrates the complementary nature of our strategic pillars and provides compelling examples of how we're bringing our strategy to life. A big focus in recent months has been our brand refinement work, which will continue to gather steam in Q4 before officially launching in August. Brand refinement means evolving our brand across all touchpoints and creating deeper, more meaningful engagement with our guests. In addition to the updated look and feel that we've been incorporating into our advertising, we are showing up authentically in places where our existing and new guests are. An example of this is our partnership with Speedway Motorsports and the success of the Cracker Barrel 400.

The NASCAR race we sponsored this past Sunday just down the road from our home office. There's strong overlap with Cracker Barrel guests and NASCAR fans, and our brands have much in common. Both are highly experiential and put country hospitality in people at the heart of everything we do. The 400 is more than a race. It marks the launch of a key partnership and throughout the summer, NASCAR fans can expect activations at Speedway Motorsports destinations across the country. The Cracker Barrel 400 was a big moment in and of itself. But it is also a piece of our overall strategy and integrated marketing campaign to promote the much-anticipated return of Campfire Meals.

We heard loud and clear from both guests and employees that they deeply missed these unique and delicious foil-wrapped meals that are packed with hearty proteins, seasoned vegetables, and a rich broth. We brought them back for the first time since 2018 and made them even better. We've elevated the flavors, improved the quality, and made them easier for the kitchen to execute. In addition to the returning favorites of beef and chicken, we've added a new shrimp and andouille sausage offering starting at the great value price point of $10.99. To support Campfire, we've invested in advertising.

And our integrated marketing campaign also reflects our ongoing brand refinements including a refreshed look and feel that showcases the quality and appeal of our delicious food. We're also evolving how we show up in social media and are working with creators to tap into conversations as part of our efforts to connect authentically with our guests.

Cracker Barrel Rewards is another way we're deepening our engagement with guests and driving frequency. To jumpstart the Campfire menu promotion and reward our loyalty members, we gave them early access to our new decadent S'mores Brownie Skillet and will continue to give early access to provide value to our members. We recently achieved our fiscal 2025 year target of acquiring 8 million members. And over one-third of tracked sales are now associated with loyalty members. Cracker Barrel Rewards continues to deliver incremental sales and traffic. And looking ahead, we're focused on enhancing our personalization capabilities to further drive incrementality. As a part of this, we've been testing advanced personalization for Cracker Barrel Rewards using an AI-driven learning model.

We are encouraged by the results, as it's driven a mid-single-digit lift in average revenue per member compared to control. We're also using AI in other ways as part of our broader efforts to improve efficiency and effectiveness by leveraging technology. Our traffic forecasting utilizes machine learning, which has improved accuracy at the store level and enhanced our ability to manage labor. Our entry filter for guest relations, or kind of how we triage inbounds, is powered by AI, which speeds up time to resolution and more quickly puts guests in touch with a live representative. And finally, we're using machine learning to bolster our cybersecurity.

These are just a few examples, and we continue to evaluate opportunities to incorporate AI-based technology into our toolkit to positively impact the business.

Before turning it over to Craig, I'd like to comment on the tariff situation. For context, approximately one-third of our retail products are sourced directly from vendors in China. In addition to this direct exposure, we also have indirect exposure related to product that we purchased through domestic vendors that is also sourced from China. Our approach to mitigate the tariff impacts includes first, aggressively negotiating with vendors, second, alternate sourcing, and third, pricing.

As we have mentioned, we have been in the process of updating our retail strategy and we are also accelerating initiatives from this such as rationalizing SKUs, reducing the number of seasonal themes, adjusting our seasonal promotional strategy, All of these will also help mitigate the impact of tariffs. The situation remains dynamic, we intend to provide more specifics in September when we report Q4 earnings and share our fiscal year 2026 guidance, at which time we expect to have a higher degree of certainty on the net impacts related to tariffs and the timing of our mitigation efforts. I want to wrap up my prepared remarks with a few key points.

First, we acknowledge that there's a lot going on in the macroeconomic environment but our teams are keenly focused on executing the business today and transforming for the future. Second, we're leaning into what guests love about Cracker Barrel, and we're evolving to drive our business forward. Our Q4 initiatives are a great example of this. And there's much more to come. Third, guests are choosing us. And we've delivered four consecutive quarters of positive comparable store restaurant sales growth. Because of this momentum, we were able again to raise our guidance and Q4 is off to a strong start.

Finally, as a reminder, all of this work is anchored on our three business imperatives of driving relevancy, which is market share, delivering food and experiences guests love, and growing profitability. We remain confident in our plan and our ability to execute. And achieving these imperatives will drive significant long-term value creation. I'll now turn it over to Craig to review our financials and provide our outlook.

Craig Pommells: Thank you, Julie, and good morning, everyone. We're now three quarters into our fiscal year, and we continue to make progress against our transformation plan. Although traffic started soft in February, we saw improving trends in March and into April, which also benefited from a strong Easter. Overall, our third quarter performance exceeded our expectations and allowed us to raise our annual guidance. For Q3, we reported total revenue of $821.1 million, which was up 0.5% from the prior year quarter. Restaurant revenue increased 1.2% to $679.3 million and retail revenue decreased 2.7% to $141.8 million. Comparable store restaurant sales grew by 1%, while comparable store retail sales decreased by 3.8%. Pricing for the quarter was approximately 4.9%.

Our quarterly pricing consisted of 1.5% carry forward pricing from fiscal 2024 and 3.4% new pricing from fiscal 2025. Off-premise sales were 19.1% of restaurant sales, compared to 18.9% in the prior year.

Moving on to our third quarter expenses, total cost of goods sold in the quarter was 30.1% of total revenue versus 30% in the prior year. Restaurant cost of goods sold was 26.2% of restaurant sales versus 25.9% in the prior year. This 30 basis point increase was primarily driven by menu mix and commodity inflation partially offset by menu pricing. Commodity inflation was approximately 2.9%, driven principally by higher beef, egg, and pork prices partially offset by lower produce and poultry prices. As we discussed on the last earnings call, although we are fully contracted on egg prices, one of our vendors lost capacity due to an avian influenza outbreak.

And as a result, we had to purchase some eggs on the spot market during the quarter. However, egg prices moderated which reduced the overall cost impact. Retail cost of goods sold was 48.9% of retail sales versus 49% in the prior year. This 10 basis point decrease was primarily driven by higher vendor allowances, partially offset by higher markdowns. Our inventories at quarter-end were $168.7 million compared to $175.3 million in the prior year. Labor and related expenses were 37.1% of revenue compared to 37.8% in the prior year. This 70 basis point decrease was primarily driven by menu pricing and improved productivity, partially offset by wage inflation of approximately 1.9%.

One of the drivers of our improved productivity was our back of house optimization initiative. We rolled this out early in the quarter and we are pleased that we are achieving our savings targets. Other operating expenses were 25.3% of revenue compared to 24.5% in the prior year. This 80 basis point increase was primarily driven by higher advertising expense and higher depreciation. General and administrative expenses were 5.6% of revenue compared to adjusted general and administrative expenses of 5.4% in the prior year. This 20 basis point increase was primarily driven by investments to support our strategic transformation initiative. Net interest expense was $5 million compared to net interest expense of $5.2 million in the prior year.

This decrease was primarily the result of lower average interest rates, partially offset by higher debt levels. Our GAAP income taxes were a $2.7 million credit flowing from GAAP earnings before taxes. Adjusted income taxes were a $2.5 million credit. GAAP earnings per diluted share were $0.56, and adjusted earnings per diluted share were $0.58. Adjusted EBITDA was $48.1 million or 5.9% of total revenue compared to $47.9 million or 5.9% of total revenue in the prior year.

Now, turning to capital allocation and our balance sheet. In the third quarter, we invested $36.6 million in capital expenditures. We ended the quarter with $489.4 million in total debt. As we disclosed in May, we updated our revolver and added additional debt capacity through a delayed draw term loan or DDTL. The combination of the new revolver and the DDTL increases our debt capacity to $800 million compared to $700 million under the previous revolver, and provides flexibility to execute our plans, including the refinancing of our $300 million convertible loan that matures in June of 2026.

Lastly, as announced in today's press release, the Board declared a quarterly dividend of $0.25 per share payable on August 13, 2025, to shareholders of record on July 18, 2025.

Now moving to our outlook. As we move into the final quarter of the first year of our transformation plan, we are pleased with the progress that we're making, as evidenced by our results. And we're encouraged by the strong start to Q4 driven by our Campfire promotion. Additionally, our teams have done an excellent job working to mitigate the impact of tariffs. We anticipate the net tariff impact to Q4 EBITDA will be approximately $5 million. And as Julie stated, we will have more to share in September on the impact for fiscal 2026.

Turning to our guidance for fiscal 2025, we expect the following. Total revenue of $3.45 billion to $3.5 billion, pricing of approximately 5%. Commodity inflation in the mid-2% range and hourly wage inflation in the mid-2% range. We increased our EBITDA outlook and now anticipate full-year adjusted EBITDA of approximately $215 million to $225 million, which includes the previously mentioned $5 million tariff impact. We expect a full-year GAAP effective tax rate of negative 17% to negative 11%, and an adjusted effective tax rate of negative 6% to 0%. Lastly, we anticipate capital expenditures of approximately $160 million to $170 million. In closing, we continue to make great progress.

We remain confident in our plans and are focused on delivering a strong finish to fiscal 2025, to set us up for an important fiscal 2026. With that, I'll now turn the call over to the operator for questions.

Operator: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1 using a touch tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then 1. To join the question queue. Our first question today comes from Jeff Farmer from Gordon Haskett. Please go ahead with your question.

Jeff Farmer: Thanks, and good morning. You guys noted that Q4 is off to a strong start, but what does that mean in the context of the plus 1% restaurant same store sales number that you reported in Q3?

Craig Pommells: Hi, Jeff. I can start on that one. And yeah, we're definitely seeing improving trends as we have kind of gone through Q3 and into Q4. So our third quarter, as we noted on the last call, February started out a bit challenged as a result of both weather and some consumer uncertainty. Then we saw improvements into March and into April. And then we're particularly pleased that improvement continued further into Q4. So we're not giving an exact number other than to say that we're pleased with the Campfire promotion and it's resonating with guests.

Jeff Farmer: Okay. And then just a quick follow-up. Again, you mentioned tightly managing expenses in Q3. Can you just provide a little bit more detail on what you were doing there on the expense line?

Craig Pommells: Absolutely. I'll take that one as well. Yes. So given that Q3 started out challenged, in February in particular, we timed expenses in a number of areas, particularly around G&A. There were some discretionary items in terms of projects that we were able to adjust. And just generally, in discretionary areas, reduced our expense. So as we think about G&A, we would expect that our G&A level in Q4 will more closely resemble the G&A level that we had in Q1 and Q2. But that also includes the Q4 number will also include some of the shifts that we did with projects out of Q3.

So some G&A tightening in Q3 and Q4 inclusive of all of that will be more in line with Q1 and Q2.

Operator: Our next question comes from Todd Brooks from The Benchmark Company. Please go ahead with your question.

Todd Brooks: Hey, thanks for taking my questions. Following up on Jeff's last question, Craig, as you start to think about you gave us a framework for Q4 G&A, but there's also some catch-up in there. So how do we think about as we're looking to the out year? G&A as a percent of sales relative to the levels that you'll see in Q4 that you saw in the first half of this year?

Craig Pommells: Hi, Todd. I think we all need to—we'll give some more color on that into on the September call. I mean, keep in mind, we've shared before that fiscal '25 is an investment year. And our intention is as we work through the transformation plan, that G&A will return to a percent of sales will return to closer to its historical levels. And we'll give some more color on that in September.

Todd Brooks: Okay, great. And then two questions on pricing. Can you share—you gave us what the pricing was in fiscal Q3, but can you tell us what average check was or maybe size what mix benefit or drag may have been in the quarter? And then the second question on pricing. I think you talked about using 5% now in the fiscal fourth quarter. I think prior you were talking about 4%. Is that reflective of an element of pricing that needed to be taken to help offset the $5 million in tariff pressure?

Craig Pommells: Thanks. Todd, I'll start with the second part first. Really, our pricing guidance on is we're providing annual guidance in that regard, and it's essentially unchanged from what we said before, which is the approximately 5%. Then in terms of the overall check dynamic, the check was up 6.6% for the quarter. That includes 4.9% of pricing. 1.7% of mix. So a couple encouraging things there—you know, in on past calls, we've talked a lot about the barbell pricing strategy and just kind of the data-driven approach to pricing.

And so we're really pleased that we're able to continue to see our pricing flow through and also continue to deliver that positive mix, which really benefits from a lot of the items that were added to the top of the barbell. We have the steak and shrimp entrée and the pot roast and the hash brown casserole shepherd's pie. So those items have really worked hard for us and the flow through on the price also continues to demonstrate that the pricing strategy continues to work well for us.

Todd Brooks: And one follow-up, and then I'll jump back in queue. You talked about the success of Campfire across quarter to date. If we're thinking about the mix impact of Campfire, if it's performing very strongly, are you anticipating as strong of a mix result in the fourth quarter? Or how should we be thinking about mix?

Craig Pommells: I think as we move into Q4, we're going to start to comp on more favorable mix from the prior year. So we would expect that our mix contribution will moderate some as we move into Q4 in part as a function of what we're comping on.

Operator: Our next question comes from Jake Bartlett from Truist Securities. Please go ahead with your question.

Jake Bartlett: Great. Thanks for taking my questions. My first was on guidance. And Craig, I'm wondering, you raised your EBITDA guidance but kept your sales guidance. I think there's an—you mentioned an incremental $5 million headwind from tariffs. So what are the—what has changed or what are the drivers of improved outlook for margins versus the sustained outlook for sales?

Craig Pommells: Yes, we continue to be—we're pleased on a number of fronts. We talked a little bit about the menu mix and the benefits of that. We continue to be pleased with the gains that we're seeing on labor. As an example, we have the labor wage inflation is benefiting from some of the improvements that we've made across the business, things like turnover, the back of house initiative rolled out in the third quarter. But embedded in that were we had some training costs and so on, so as we move into Q4, we'll get more of a full benefit from that into Q4.

So a number of the initiatives that we've been working on over the year are kind of starting to come to life in Q4, and we're excited about the progress there. In spite of a bit of a challenging backdrop, we think we're making good progress.

Jake Bartlett: Okay. So it sounds like you're getting more labor leverage or some of those initiatives is offsetting the pressure you're expecting from the tariffs?

Craig Pommells: There are a lot of moving pieces there. The tariffs are a $5 million headwind for sure. But again, with the tariffs, we didn't plan for them at the beginning of the year; it's relatively new. We've been working on it here for quite a few months, and the team has done a great job with that. But we also have a little bit of favorability in Q4 versus our prior thinking related to eggs. So that's a little bit of a partial offset to some of the headwinds from tariffs.

But I think the underlying structural improvement kind of goes along with what Julie has been talking about here as a part of the transformation plan, which is year one is a test and learn investment year. And we are bringing out to life now a lot of the things that we've been testing and learning and investing in, and so you're starting to see the benefit of the broader strategic work come to life. In particular as it relates to labor in this case.

Jake Bartlett: Okay. And then, another question on the tariffs, the $5 million impact that you're seeing. Given your turnover of inventory, I would have expected the real impact to start a little bit later and so not actually to hit much of the fourth quarter. So how do we think of that $5 million impact? Is that directly, or are your costs fully impacted by tariffs at this point in the fourth quarter? What are the mitigating—efforts? What are they? Are there any in place in the fourth quarter? For instance, are you increasing retail prices to help offset the tariffs? Are you shifting away from the China supply? What are you doing in the fourth quarter?

And should we think of—is it fair to think of that $5 million as a good run rate as we think about 2026, so $20 million for the year? Or is it just way too early to tell at this point?

Julie Masino: Jake, I'll start and then I'll let Craig jump in, because I'm sure I won't get all of that. It's an excellent question. Right? So let me back up a little bit, right? The teams have been thinking about tariffs for months. This is a topic on the campaign trail. And frankly, we have been working on a similar transformation for the retail business that we've been doing on the restaurant side. So really relooking at the strategy there. What are the pieces of the business that require a little bit of reinvention and what will that look like?

And so thinking about that strategy and where we're going, there have been a couple of key things that the tariff situation have actually enabled us to accelerate. One of the key tenets of what we're looking at from a retail strategy is the number of SKUs that we have, the number of themes that we have, and the timing of when they hit the floor. We've been known to put Christmas and Halloween out quite early, and so we're readjusting some of that timing to really be more in time with where consumer needs state and demand is. And so we've got a lot of moving pieces while this tariff thing is coming in.

So the team has been really working for a while now on rationalizing SKUs, thinking about those themes, thinking about the timing, and moving all of those pieces. Now specifically against the way tariffs are at the moment, and remember, ninety days ago when we were sitting here, it looked really different than where we're sitting today. And time continues to be a very big factor in all of this. But we actually have to keep going because we have a business to run. So the teams are really working with vendors. Our vendor partners have been tremendous through this exercise. We've been able to negotiate with them. They're negotiating with their factories. We've been alternate sourcing for a while.

Are there different parts of the world where some of these goods can come from? And then as a last lever and look, pricing is an option. But we're being very thoughtful about pricing because this business is discretionary. And we know from work that we've done around the transformation that value is important in this business just like it is in our restaurant business. So we'll have more to share about how to think about 2026 in tariffs in September, because we'll present our annual guidance. And Jake will go like a couple clicks deeper on it at that point in time.

But know that the teams are really working as we push our strategy forward, absorb this tariff situation, and continue to just check and adjust against it. I'm actually very pleased about how we've been able to absorb the impact so far here in fiscal 2025 and what that looks like as we move forward. I don't know, Craig, if there's anything you would add.

Craig Pommells: No. I think that's right. The team's doing a really good job at it. It's dynamic, and they continue to adjust. Maybe one thing to just consider is there's an average inventory turn in there, some things that are turning faster, and some things are a little bit longer. And then there are decisions that we're making now that are kind of in anticipation of the tariff impact in the future. Yeah. So the big takeaway for us is while that's out there, the team has been working on this for months. They've made great progress, and we anticipate even more progress.

Operator: Our next question comes from Brian Mullan from Piper Sandler. Please go ahead with your question.

Brian Mullan: Thank you. Question back to phase one of the back of the house optimization initiative. You know, just understanding the benefits are probably only just starting now in fiscal Q4. Can you just talk about or help us understand, do you anticipate a permanent reduction in labor hours in the back of the house as a result of the fees? And do those fall to the bottom line, or do those get maybe reinvested into another area of the business? And then related to that, I think there's a phase two and then a phase three that we will see over the next couple of years.

Can you remind us what those phases are related to and when you transition into the second phase?

Julie Masino: Thank you. Sure. Brian, I'll start, and then I'll let Craig handle a couple of the specifics there on the movement of the savings. The goal, remember, of this entire work stream is to improve the quality of our food because we're mainly a restaurant business and make sure that we're always serving our delicious scratch-made food. But making it easier for the teams to do that consistently and making the jobs more enjoyable. We've got a lot of processes in the back of house that haven't changed a lot in a long time. And so that's really the genesis of this work.

As we got into it, as part of the transformation agenda, we've broken this work into three phases. So this first phase that we launched in Q3—you're right to think that not all of the benefit is there, I'll let Craig talk about that in a moment. The first phase is really focused on some of those processes and changing the way that we actually make the food to improve the quality and make the jobs easier. So that's kind of phase one.

Phase two is about how do we take that even further by bringing in some ingredients that are already like pre-chopped and pre-sliced and things like that, because today we do all of that by hand, or most of it by hand. And then phase three is, gosh, equipment has changed so much in the last few decades. Are there equipment solutions that would also make it easier for our cooks and our prep cooks to do their work easier. Those three phases will phase out over the remaining years of the transformation. This Phase one, I'll let Craig talk about how it's flowing through, but we're real pleased so far with the early days of this.

Craig Pommells: Yeah, I'll take the second part of that. We do expect the back of house initiative to flow through. Again, we didn't get the full benefit of that in Q3, because there were some learning curve training and so on. We do expect more of a benefit in Q4 and into 2026. We've talked a lot about 2025 being an investment year and a test and learn year. We do expect to get the benefit of this initiative on a more of a run-rate basis as we finish up Q4 and into fiscal 2026. It's really a part of that broader $50 million to $60 million cost save that we've talked about.

Now as we go into back of house phase two, we'll see—we expect to see some overall benefit to our total prime cost. But you might end up with a little bit of shift between buckets there. But a part of the plan here is to in a more permanent way, improve the ease of operating the back of house, and the consistency and the quality as well as the cost in a permanent structural way.

Brian Mullan: Thank you. That's great color. And then I just want to ask about the remodeling initiative. You've called fiscal 2025 a test and learn year. So can you just talk about what you've learned thus far this year in terms of the different approaches you've taken with some of the projects? And if you'd be willing to talk about your plans for fiscal 2026 or how you're thinking about any number of stores or maybe CapEx?

Julie Masino: It's never a call until somebody asks us about remodels. So thanks for the question, Brian. You know, as we've discussed, this has really been a year of testing and learning. We really are saving kind of this topic for September. So we will talk a lot about it in September, really what we've learned in this year and what we continue to learn because honestly, we're not done learning. We are really continuing to transform the organization to be one that's more agile and really to just continuously learn and improve as we go forward.

We launched a new version of a remodel Remember, we've got 20 remodels and 20 refreshes that, as of right now, are complete in the system. We continue to be really pleased with what we're learning there, the impact that it's having on the system, Employees have given us great feedback about working in those newly remodeled and refreshed stores and guests tell us they're lighter, brighter, more welcoming and they're enjoying them as well. But at April, we launched a new version of a remodel as well. It's early, early days of that. We're very pleased with the early results of that. We've taken retail into a different way in this remodel as well.

So there's just a lot to learn. As you can imagine, it's only been 30 days of that. That's why we want to wait and have the conversation in September. Talk about how it's informing our '26 and beyond plan and really what we've learned to date as we continue to learn on this topic.

Operator: And our next question comes from Sara Senatore from Bank of America. Please go ahead with your question.

Sara Senatore: Oh, thank you. I wanted to go back to the sort of traffic trends. I know that you said they started off soft in February and then improved. But I guess, as you think about all these initiatives, you said consumers or customers are choosing Cracker Barrel, but the traffic is still pretty negative. So I guess maybe you could help me understand, is this kind of a process where there are certain kinds of transactions that you're intentionally perhaps losing and then in lieu of that, you're getting perhaps some more profitable transactions at the higher end of the barbell. And then with respect to any kind of color on the trends across demographic groups?

I know last quarter you said you were seeing some better performance among 55 and up consumers. So does that continue? And does that say anything about the efficacy of some of the traffic-driving initiatives? Thanks.

Craig Pommells: Hi Sara, it's Craig. I'll start, and I think Julie and I will share this one. I think the thing I would keep in mind on the traffic for the quarter is there are pretty sizable differences in terms of, you know, let's say, February versus April. I would just keep that in mind. February was particularly challenged. The weather was tough. The macro uncertainty, there was a lot of news. It was elevated, but we've been pleased with the progress throughout the quarter. We've been pleased with the way that the fourth quarter has started.

So we—you know, what we're—the work that we're doing here is really about bringing Cracker Barrel back to, you know, to profitability growth, and that includes traffic. We think even though the overall quarter was challenged from a traffic perspective, we think the underlying trend is something that we're happy with.

In terms of the demographic trends, I would say it was pretty steady. There wasn't a big standout across the entire quarter. Our over-55 cohorts performed similarly to our under-55 cohorts. Our over $60k income cohort performed similarly to our under 60. I think the takeaway for us on the quarter is more about how the quarter developed and how fourth quarter has started. No, I think that's right.

Julie Masino: I think remember, we said this is an investment year and this is a three-year plan and it's not going to be a straight line. There's going to be some bumps along the way, some of which you can anticipate, some of which you can't. I don't think anybody thought macros would do what they did in February or that the weather would be as bad as it was on top of that. So I'm real pleased with how we have actually managed through this quarter given some of those real strong headwinds at the beginning of the quarter.

Then to Craig's point, I think, Sara, we continue to be very optimistic and confident in the long-term trends that we're seeing underneath the business. So I think Q3 is a little bit of a speed bump in kind of what's been a good year for us so far in terms of changing those trends and bending the curves that we need to bend. To keep this transformation on track and take the brand where it needs to go long term. Thank you.

Operator: And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Julie Masino for closing remarks.

Julie Masino: Thank you. I want to start with a huge thank you to the teams in our 658 stores who bring the Cracker Barrel country hospitality to life every day for our guests. The executive team, the board, and I really appreciate your smiles and hard work in what was, I know, a difficult quarter. And to everyone else on the call today, thank you for joining us. Our plan is working and we are excited about what's ahead. We appreciate your interest in the brand and we look forward to giving you our next update in September.

Operator: Ladies and gentlemen, that does conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

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DATE

Thursday, June 5, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Gary Smith

Chief Financial Officer — Jim Moylan

Executive Advisor — Scott McFeely

Vice President, Investor Relations — Gregg Lampf

Need a quote from one of our analysts? Email [email protected]

RISKS

Gross Margin Headwinds: Jim Moylan stated that "demand for two products, in particular, have greatly exceeded our expectations, the RLS systems and our plugs. As I discussed, both of those are currently below corporate average gross margins," resulting in annual gross margins are expected to be at the low end of the 42%-44% range for FY2025.

Tariff Costs: Jim Moylan noted, "as a result of the dynamic conditions, as well as the need to adjust our billing systems and our customers' systems, we absorbed a net impact to our bottom line in the mid-single-digit millions of dollars in the quarter."

TAKEAWAYS

Total Revenue: $1.13 billion, at the high end of guidance, with three out of the top five customers being cloud providers.

Cloud Provider Revenue: Direct cloud provider revenue set a record, reaching over $400 million—38% of total revenue—growing 85% year over year.

Order Momentum: Orders exceeded revenue again and cloud provider orders are on track to double in FY2025 compared to the prior year.

Adjusted Gross Margin: Adjusted gross margin was 41% in fiscal Q2 2025, in line with guidance, attributed to product mix and tariff costs.

Adjusted Operating Expense: Adjusted operating expense was $369 million, higher due to increased incentive compensation from strong order and financial performance.

Adjusted Operating Margin: Adjusted operating margin was 8.2% in fiscal Q2 2025.

Adjusted Net Income: Adjusted net income was $61 million; Adjusted EPS: Adjusted EPS was $0.42.

Cash From Operations: Generated $157 million in cash from operations.

Adjusted EBITDA: Adjusted EBITDA was $117 million.

Cash and Investments: Closed the quarter with about $1.35 billion.

Share Repurchase: Approximately 1.2 million shares were repurchased for $84 million.

WaveLogic 6 Extreme: 24 new customers added, totaling 49 since general availability in the first two quarters.

WaveLogic 5: 10 new WaveLogic 5 Extreme customers added for a cumulative 344; Nano pluggables now shipping to 178 customers.

Coherent Pluggable Optics: Revenue is projected to double year-over-year to at least $150 million.

Routing and Switching: Significant Tier 1 service provider win in India, displacing a major competitor; eight new broadband customers added.

800 Gig Router: Introduced first 800 gig router and expanded WAV router with WaveLogic 6 Extreme to make the industry's first generally available 1.6 terabit coherent router.

Blue Planet: Achieved a record quarter, with just under $30 million in revenue, the highest ever for the segment.

Navigator Orders: Navigator suite orders increased more than 30% year over year during the first half of FY2025, led by investment in its microservices-based platform.

Customer Concentration: Largest customer at 13.4% of revenue, second largest (AT&T) at 10.4%; Top five customers made up 45% of revenue.

Third Quarter Outlook: Revenue guidance of $1.13 billion to $1.21 billion; adjusted gross margin expected roughly in line with current quarter; Adjusted operating expense projected between $370 million and $375 million.

Annual Revenue Growth Guidance: Raised full-year guidance to approximately 14% revenue growth.

Annual Gross Margin Guidance: Now expected at the low end of the 42%-44% range due to sales mix of ramping products.

Annual Operating Expense Guidance: Anticipated to average $360 million to $370 million per quarter.

SUMMARY

Ciena Corporation (NYSE:CIEN) reported high-end revenue results of $1.13 billion, driven by record cloud provider demand and further customer diversification. Strong direct cloud revenue growth, along with sizable new awards from global cloud and service providers, highlight rapid infrastructure investment in AI and data center connectivity. Management reaffirmed confidence in long-term demand, with order momentum expected to drive an increased backlog heading into FY2026.

Jim Moylan stated, "We now expect to deliver revenue growth of approximately 14%."

Gary Smith indicated, "We have new awards with three additional major cloud providers this quarter alone."

Quarterly tariff costs are expected to remain around $10 million per quarter, with mitigation measures outlined by management for future quarters.

The company's new cohort of wins includes both a strategic deployment for regional GPU cluster connectivity and a solution for out-of-band network management inside data centers.

Product mix—particularly the early ramp of RLS and pluggables—will weigh on margins in the near term, but management projects margin improvement as these products mature and cost efficiencies are realized.

Backlog is expected to increase by year-end, with more orders converting to revenue over the next fiscal period.

INDUSTRY GLOSSARY

RLS (Reconfigurable Line System): An optical networking platform enabling dynamic configuration of optical channels for improved scalability and efficiency in high-capacity networks.

DCI (Data Center Interconnect): Technology enabling high-capacity connections between data centers, often used to support cloud and AI workloads.

MoFEN: Middle-of-Fiber Edge Networks; carrier partnerships and architectures that expand connectivity between core and edge or cloud infrastructure across geographies.

Pluggables (Coherent Pluggable Optics): Optical transceivers that can be modularly inserted into networking equipment to provide high-speed data transmission over varying distances.

WDM (Wavelength Division Multiplexing): A method of increasing the bandwidth of fiber-optic networks by combining multiple wavelengths onto a single fiber strand.

Navigator: Ciena's multilayer domain network control suite providing planning, provisioning, monitoring, and troubleshooting capabilities in complex networks.

Blue Planet: Ciena's software platform for service orchestration, inventory management, and automation—focused on enabling digital transformation and integration of AI-driven operations for network operators.

AGENTIC AI: Applied AI systems capable of autonomous decision-making and management actions within network operations.

Full Conference Call Transcript

Operator: Good day, and welcome to Ciena Corporation's Fiscal Second Quarter 2025 Financial Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Gregg Lampf: Thank you, Michael. Good morning, and welcome to Ciena Corporation's 2025 fiscal second quarter conference call. On the call today is Gary Smith, President and CEO, and Jim Moylan, CFO. Scott McFeely, Executive Advisor, is also with us for Q&A. In addition to this call and the press release, we have posted to the investors section of our website an accompanying investor presentation that reflects this discussion, as well as certain highlighted items from the quarter. Our comments today speak to our recent performance, our view on current market dynamics, and drivers of our business, as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena Corporation's results of operations.

A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I will remind you that during this call, we will be making certain forward-looking statements. Such statements, including our guidance, commentary on market dynamics, and discussion of our opportunities and strategy, are based on current expectations, forecasts, and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we will post shortly after, are an important part of such forward-looking statements, and we encourage you to consider them. Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K and 10-Q, which we expect to file with the SEC by June 12th. Ciena Corporation assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. As always, we will allow for as much Q&A as possible today, though we ask that you limit yourselves to one question and a follow-up.

With that, I will turn the call over to Gary.

Gary Smith: Thanks, Gregg. Today, we delivered strong fiscal second quarter results, including revenue of $1.13 billion, which is at the high end of our guidance and demonstrates the strength of both our strategy and our execution. This performance reflects continued strong demand across all customer segments, geographic regions, and our diversified portfolio. Notably, revenue from cloud providers stood out as a key driver in Q2. Specifically, we achieved record direct cloud provider revenue in Q2 that comprised 38% of total revenue, growing 85% year over year and reaching more than $400 million in a single quarter for the first time. This really highlights the accelerating investments in AI infrastructure and our leadership in addressing this demand.

Indeed, three of our top five customers this quarter were cloud providers, underscoring their sustained investments in AI expansion. Over the past quarter, market dynamics have not only validated our previous assumptions about customer network infrastructure spend but have also reflected an accelerating demand environment that continues to ramp and exceed our expectations. We believe this strength is differentiated for us as the market continues to evolve in our direction. Accordingly, orders in the quarter were, again, significantly greater than revenue. Notably, we are on track for cloud provider orders to double in fiscal 2025 over last year as we benefit from the breadth and depth of our customer base in this critical segment.

This outstanding performance showcases where we remain a very trusted partner for a wide range of network operators who are investing to scale their infrastructure for high-speed data center and cloud connectivity, including for emerging applications and use cases. To address this growing demand, we are deploying the entirety of our portfolio, including optical systems and interconnects, routing and switching solutions, software, and services. As the global leader in high-speed connectivity, our WaveLogic technology remains a cornerstone of our competitive advantage. Specifically, our WaveLogic Xstream 1.6T WAN technology maintains at least an 18 to 24-month competitive lead in the market, as our photonic line systems continue to be the de facto industry standard.

Demand for our reconfigurable line system (RLS) continues to increase, and our interconnects business is also ramping with tremendous activity and demand. We have new awards with three additional major cloud providers this quarter alone. This momentum reflects the growing adoption of and demand for 400ZR and 800ZR coherent pluggable solutions, as well as our 1.6T coherent light solution, which we will be sampling by the end of calendar 2025, with commercial availability in the first half of calendar 2026.

In As cloud providers expand their data center architectures with scale-up and scale-out AI-related deployments, we are broadening and deepening our relationships with them. In fact, we are addressing new data center-related applications, a strategy that we have spoken publicly about over the last few months, and where we recently secured two wins. The first is a very strategic win for an application involving the connection of regional GPU clusters, which is something the industry has been talking about for some time. For context, to support the massive scale and power requirements of AI training and inference traffic, data centers must become more distributed.

Historically, these traffic flows were primarily inside the data center, but they are now across multiple data centers over greater distances that require high capacity, low latency links. We are excited to report that our coherent 800 gig pluggables and RLS Photonics have been selected by a global cloud provider who is investing in geographically distributed regional GPU clusters. We will start to recognize revenue from this incremental opportunity later this fiscal year and ramping into 2026.

As one of the first vendors to address this application, and with our coherent optical technology ideally suited for this type of connectivity, we expect to see more of these types of opportunities emerge as cloud providers evolve their data center network architectures to support their AI strategies. The second win is for a focused application inside the data center for out-of-band network management. These networks operate separately from the main data traffic network and provide remote access to monitor and manage data center systems.

We recently worked with a global cloud provider to co-develop a solution based on our existing technologies, designed to significantly reduce the complexities of these networks and streamline the management of its large-scale data center operations. Now turning to service providers, it has now been several quarters of an improving trend line with service providers as their network investments in high-speed infrastructure become more durable and sustainable following a long period of underinvestment.

We are seeing growth and strength across the board with service providers in core optical transport, routing and switching, and software to address the connectivity needs of their own customer base and to support cloud providers' growing bandwidth demands. As a result, our business with Tier 1 North American service providers gained momentum in Q2. We also had several new customer wins in both the Americas and international regions, including Europe. This momentum is driven in part by new fiber builds as well as MoFEN.

In fact, alongside the record performance of DirectDCI in the quarter, we also achieved an all-time record for MoFEN activity in the first half of fiscal 2025, which further demonstrates how we are supporting the strong nexus between service providers and cloud providers. I also want to touch on the momentum of our software business. I will start with the Navigator network control suite, which is our multilayer domain controller. This provides a comprehensive set of capabilities to help network operators plan, provision, monitor, and troubleshoot their networks.

Orders for Navigator increased significantly in the first half of fiscal 2025 by more than 30% year over year, driven by increased investment in the unique capabilities of this microservices-based and differentiated platform. Similarly, Blue Planet had a record performance in Q2, achieving its highest ever quarterly revenue at just under $30 million. This milestone reflects the success of our deliberate transformation efforts over the past couple of years, positioning Blue Planet to better serve our customers' digital transformation needs and journey. Today, Blue Planet is at the leading edge of several large provider projects, particularly as the industry incorporates AGENTIC AI and data-driven intelligence to drive transformation.

Before I turn the call over to Jim, I would summarize by saying that we are very encouraged by the strong activity across all segments of our business. In the context of favorable market dynamics and an accelerating demand environment, we have strong momentum that we are confident will drive continued growth. In particular, we are very pleased with the validation from customers that we can strategically where high-speed connectivity is absolutely critical. In the short term, and as we have been talking about for some time, we are now seeing more AI traffic come out of the data center for training, as I mentioned earlier, and general monetization. That is driving cloud traffic.

An asset of technology is ideally positioned to address these connectivity needs at scale. With that, Jim, can you please provide us with updates on our financial performance in Q2 as well as our outlook?

Jim Moylan: Thank you, Gary. Good morning, everyone. As Gary noted, we delivered strong fiscal second quarter results. Total revenue in Q2 was $1.13 billion. This included two 10% plus customers, one cloud provider and one service provider. Adjusted gross margin was 41%, in line with our guidance, driven by product mix and, to a lesser extent, the cost of tariffs. During the quarter, we navigated a new and, in the early days, a rapidly changing US SAP tariff environment. We responded in real-time with mitigation strategies to minimize the impact both on our customers and our P&L.

However, as a result of the dynamic conditions, as well as the need to adjust our billing systems and our customers' systems, we absorbed a net impact to our bottom line in the mid-single-digit millions of dollars in the quarter. Adjusted operating expense in Q2 was $369 million. This was higher than expected, driven entirely by higher incentive compensation associated with very strong order performance in the quarter and our overall financial performance in the first half of the year. Both trends are expected to continue. Absent this higher incentive comp, OpEx is on our plan and our guide.

With regard to profitability measures in Q2, we delivered an adjusted operating margin of 8.2%, adjusted net income of $61 million, and adjusted EPS of $0.42. In addition, we generated $157 million in cash from operations. Adjusted EBITDA was $117 million. Finally, we ended the quarter with approximately $1.35 billion in cash and investments. During the quarter, we repurchased approximately 1.2 million shares for $84 million in this fiscal year. Some additional highlights from the quarter: We had an excellent quarter in optical. As Gary mentioned, our WaveLogic technology remains a strong competitive advantage. We added 24 new WaveLogic 6 Extreme customers in Q2, bringing the total to 49 within just two quarters of general availability.

WaveLogic 5 Extreme and Nano also performed well with continued adoption among cloud customers and service providers. We added 10 new WaveLogic 5 Extreme customers in Q2 for a total of 344 customers overall. WaveLogic 5 Nano pluggables continued ramping, now shipping to 178 customers, including both cloud providers and service providers. Overall, our momentum with coherent pluggable optics was strong in Q2, and we remain on target to double our year-over-year revenue to at least $150 million in fiscal 2025. Pluggables are proving to be a great complement to our optical systems business.

I also want to highlight the performance of our routing and switching business. This is being driven by AI momentum and an improving service provider environment. In Q2, we secured a significant win with a Tier 1 service provider in India, where we displaced a major competitor in the access domain. We also added eight new broadband customers in Q2. Additionally, we introduced the first 800 gig router to our coherent routing portfolio, and we expanded our flagship WAV router family with WaveLogic 6 Extreme capabilities, making it the industry's first generally available 1.6 terabit coherent router.

All of this performance confirms that we have the right portfolio with best-in-class technology for our customers who demand the highest performing connectivity for today's dynamic demand environment. With that, let's turn to guidance. Given recent developments, it appears that the tariff environment will remain uncertain. For purposes of our guidance, however, we are assuming that the current tariff structure does not change. Under this current tariff structure, we expect the total cost of tariffs to be approximately $10 million per quarter. We expect to mitigate most of the quarterly impact as compared to Q2. Therefore, we believe the net effect on our bottom line in future quarters will be immaterial.

So for the fiscal third quarter, we expect to deliver revenue in a range of $1.13 to $1.21 billion. We expect Q3 adjusted gross margin to be roughly in line with Q2. And we expect adjusted operating expense to be approximately $370 million to $375 million. Again, this includes higher incentive comp. Base OpEx is on our plan and on our guide. While the geopolitical environment has fluctuated quite a bit during the past few months, strong demand dynamics continue to drive momentum in our business.

As a result, we have increased visibility and are in a position to update all three elements of our annual guide. We now expect to deliver revenue growth of approximately 14% for fiscal 2025. At the same time, given the mix of products, including a higher proportion of newly introduced solutions and the RLS, all of which are still ramping, we expect annual gross margins at the lower end of our previously assumed range of 42% to 44% for fiscal 2025. With respect to OpEx, we expect to be on plan and guide for our base OpEx for the fiscal year.

However, given our strong financial performance, particularly on orders and revenue, we expect operating expense to average $360 million to $370 million per quarter for the year.

Michael, we will now take questions from the sell-side analysts.

Gary Smith: Michael, before we do that, I would just like to take a moment to acknowledge and recognize Jim's upcoming retirement. Given today will be his last earnings call with us all. As you know, for the past 18 years, an incredible 70 earnings calls, Jim has been an incredible partner and member of our executive team with a lengthy list of significant contributions to the growth and performance of our business. We will certainly miss Jim's leadership and his wealth of knowledge. Importantly as well, and I think I speak for all of you who know him on the call as well, we will miss his wit, his warmth, and his humor that makes working with him such a joy.

So while we will be sad to see him go later this summer, we all wish him the very best in his well-deserved retirement.

Jim Moylan: Thank you, Gary. With that, we really will open up for calls from the sell-side analysts, please. Thank you, Michael.

Operator: Certainly. We will now begin the question and answer session. To ask a question, you may press * then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Samik Chatterjee with JPMorgan. Hi. Thank you. Thanks for taking my question. I guess, Gary, if I go back and from the last earnings call, you already had indicated that you were seeing a strong start in terms of orders to this quarter.

But when I listened to the commentary this morning, it just sounds more like you have seen probably more acceleration through the quarter with the cloud customers. But just maybe if you can talk about the linearity of the orders with the cloud through the quarter because, overall, it sounded more sort of optimistic than what we heard from you 90 days ago. And in terms of visibility, how do you think about visibility beyond FY25? You are talking about doubling of orders, and how do you think about the sustainability of that sort of growth or investments from them into fiscal 26? And then I have a quick follow-up. Thank you.

Gary Smith: That was a pretty comprehensive question. Thank you, Samik. So I think in direct answer to the first part of that, I think we saw strong order flows in Q1. That continued in Q2, and probably accelerated in Q2 and the activity. I would say two things about it. One, service providers, nice steady increases underpinned all of that. I think that is very sustainable and durable. And then the cloud, I think we are seeing a step function here in demand. We are seeing cloud growth in terms of traffic flows, and then we are seeing these incremental opportunities as well that are emerging.

This regional GPU one that I talked about specifically today is really incremental to our thought process for the year. I would also say that momentum both on service providers and on the cloud players is continuing into Q3. This exceeds our expectations for the year. I think given this notion around traffic coming out of the data center, to both do training and for monetization, we are beginning to see that. For sure, in addition to these other applications. I think at this stage, obviously, it is early to predict next year and the three-year piece.

I think it is reasonable to assume that given the step function in demand, I think we will revise the three-year guidance when we get to the end of this year. Obviously, not appropriate to do that now. But I think what is behind your question there, Samik, is, you know, is this a long-term trend? And I think the answer to that is absolutely yes.

Samik Chatterjee: Got it. Got it. And for my follow-up, on the gross margin side, and I know mix is sort of impacting this year, but one of the concerns that we hear from investors is as you ramp on pluggables and this year, you also have the core and light products ramping next year. Is that a headwind in terms of mix to the overall margin and long-term margins for the company? Can you just address that concern if there is a change in terms of the longer-term thinking for gross margins for the company just given where the expansion opportunities that you are pursuing?

And before I pass it over to you, Jim, thank you for your help all of these days. Thank you.

Jim Moylan: Thanks for the question, Samik. We have always said that mix is the single most important element of our gross margin number in any given quarter. That certainly affected us in Q2 and likely will affect us in Q3. As we look out, though, we really are not backing off our view that mid-forties percentage is the right gross margin for us, at least as a target, and we think we can get there in a couple of years. What has happened in this quarter is that we have exceedingly high demand for pluggables and our new reconfigurable line system. Both of those are at lower than corporate average margins for slightly different reasons.

The RLS, the reconfigurable line system, has always been based on a razor-razor blade type pricing model. When we sell a lot of RLS without a lot of capacity adds, we are going to enjoy lower margins than our mid-forties. That is just a fact. It is becoming the industry standard. It is a good thing for future margins because we will sell the capacity, at least most of the capacity, to go into those line systems. So that by its very nature will improve over time. On the pluggable side, what I would say there is that we are in the very early stage of ramping our pluggables business.

It is going to be, you know, we said at least $150 million this year. It is with 20% of the market. It is going to grow. That share is going to grow. Our cost points are not as good as we would like them to be. Those cost points will decline over time, and our margins will improve. We are also going to introduce the next generation of plugs, the 800 gig plug, an 800ZR, ZR Plus, all of that generation will come out, and those should be higher performance and better gross margin. So there is a path to getting to gross margins.

It is not going to happen in Q3, and I think it will definitely start to happen next year. The other dimension on mix is WaveLogic 6 Extreme.

Scott McFeely: Part of our system business. Gary talked about the momentum that we had in that in his prepared remarks. That is in the early stages of ramp as well. So it has the same dynamic as the pluggables, lots of levers to pull on, you know, operational supply chain efficiencies and design cost reduction that you do over the life cycle of a product, and that will naturally lift the margins in those parts of the portfolio.

Gary Smith: The other thing I would just add to all of that is, Samik, we are, you know, given what we are seeing around the dynamics of demand and how sustainable that is, given what Jim and Scott have talked around the gross margin mix, you know, being a bit of a headwind in the short term for us, we are confident we will get through that. We have done that before. That makes us even more confident in our operating margin targets, you know, for getting into those mid-teens as we get to 2027. I think we will see continued improvement both in the second half of this year and also in 2026 on the journey.

Samik Chatterjee: Alright. Great. Thank you. Thanks for all the color.

Operator: And your next question comes from Simon Leopold with Raymond James. Please go ahead.

Simon Leopold: Thanks for taking the question. And Jim, thank you as well for all the service and certainly appreciate getting a full year's heads up on your retirement. So a nice glide path without a shock to the system. So grateful for that as well. So I wanted to see if maybe we could unpack the top customers a bit, and then you mentioned three out of the five were cloud. And the two 10% customers, one being a service provider, one cloud.

I guess what I am trying to get a better sense of is, you know, what were the more specific percentage contributions from the two over 10% and how much of overall revenue is coming from the top five customers in the quarter? Thank you.

Jim Moylan: Yeah. The largest customer was 13.4%, and the second one was our service provider, AT&T, at 10.4%. The top five, I would have to quickly calculate, but I will do that and get back to you, Simon.

Simon Leopold: Okay. And then just I will ask to follow-up while you are looking at those numbers. In terms of some of the trends from these cloud customers, so comfortable that visibility has improved. It sounds like a good trend. I know we are not ready to provide guidance for fiscal 2026. But I guess folks are trying to look for what sort of the sustainability of this due to this. Do you get a better sense that you will see a broadening base of contributions from cloud, both direct and indirect, that it should continue to grow next year? How should we think about the longer-term trend beyond the end of fiscal 2025?

Gary Smith: You know, as the as I am sharing appreciate, obviously, we do not want to get ahead of ourselves into giving sort of detailed guidance for 2026. But clearly, with the kind of dynamics that we are seeing, Simon, I think about it. You have got a broadening application base. You know, I talked about the GPU clusters earlier and the inside the data center focused application there. You have also got a broadening amount of, you know, cloud providers. You know, we have had significant new wins over the first half of the year, more and more of these cloud providers, not just the large four, are now really leaning into the network.

So I think you have got a broadening set of players and you have got a deepening set of applications, which obviously gives us confidence in the sustainability and durability of it.

Scott McFeely: The two big wins that Gary spoke about earlier, both of which have applicability outside of the original customers. The regional GPU clusters, in particular, are something that the industry has been talking about for, you know, years. Now the demands for data flows inside the data center have brought that phenomenon about. So this is a big trend for us. We think it will be at least considered if not adopted by other cloud providers. The inside the data center connectivity is being looked at by other cloud customers as well. So both of those have applicability outside of the original customers. The answer to your question, Simon, the top five customers were 45% of revenue.

Simon Leopold: Thank you.

Operator: And your next question comes from Amit Daryanani with Evercore. Please go ahead.

Amit Daryanani: Yep. Thanks a lot. I guess I have two as well. Maybe to start with, you know, when I think about the 14% growth outlook for the year, can you just talk about what are you sort of assuming from a growth basis in cloud versus telco for the year? And then really if I kind of look at what you implied for the October quarter specifically, I think you are implying some of the uploading and digit sequences around $1.2 billion. So would that imply that, you know, a lot of the order momentum you are seeing right now is more likely to convert to revenues in fiscal 2026 versus the back half of this year?

Gary Smith: Yes. Quick answer to that. I mean, this is yes. Given the scaling demand, we are not going to be able to, and a lot of it is scheduled for out further because of the size and scale of it. So we are certainly, I think, going to be going into 2026 with an increased backlog. I think that is where you are going with this, and that is absolutely a reasonable assumption. We are ramping our supply chain pretty strongly, and we started that last year, and we are continuing to increase that. So we can address that because we do think it is very sustainable, and we have got good visibility to it.

So we are going to go into 2026 even with, you know, the increase to sort of 14% growth in the year, we are still going to be leaving the year with a larger backlog than when we entered it. That is for sure.

Amit Daryanani: Super helpful. And then, you know, if you could spend a little bit of time on the pluggable opportunity, and you talked about deploying your pluggable optics with one of these distributed GPU clusters. Can you just talk about what distance are these pluggables being used for right now? And if I think longer term beyond the $150 million number you talked about, how big do you think this market can be, and where do you think your market share could eventually get in that space? Thank you.

Gary Smith: Okay. Let me take the second part of that, and then I will pass Scott to give you some more on the architectural side. I would say that, you know, we have been engaged with multiple players over this kind of architecture where because of power and space constraints, they cannot get all of the GPUs in a single data center. So this is the first one that we have seen, and we believe one of the first deployments like that. It is just a couple of the regions, and it is hundreds of millions of dollars of both 800 gig pluggables and line systems. So, you know, in terms of sizing, it is pretty material.

This is one player just beginning to roll this piece out. So this is a very sizable and substantial opportunity for us.

Scott McFeely: Yeah. In terms of the overall pluggable piece, you need to differentiate sort of our pluggable participation and sort of the class metro campus DCI, which is, you know, the 80 kilometers plus kind of domain with this regional GPU clustering application that we are talking about. In the latter case, what we are really talking about here is a simple way to think about it is an express overlay network between GPU clusters. That has massive capacity, reaches, you know, 100 to 150-kilometer type range, requires resilience, latency, requires WDM, and is right in the sweet spot of coherent technologies.

It is what we have been talking about for a long time, which is as power becomes a bigger constraint, they need to distribute these GPU clusters, capacity goes up. That is going to create more opportunities for coherent. This is an instantiation of that. It is coming across as pluggable opportunities at 800 gig. It is coming across as line systems. All incremental to the use cases that we have been pursuing in the past.

Amit Daryanani: Great. Thank you very much, and best of luck to you.

Operator: And your next question comes from Ruben Roy with Stifel. Please go ahead.

Ruben Roy: Thank you, Scott. You probably just answered this question, but just so I understand on the GPU cluster opportunity, it seems to me, you know, from the prepared remarks and what you just said, you know, that you are uniquely positioned given that you have both the line systems and the pluggables. That is, you know, part of this new architecture that, you know, some folks are thinking about. Is that the right way to think about it?

Scott McFeely: Yeah. I think, you know, over time, the opportunity we believe is big enough that there will be multiple vendors at play. But with our leadership in coherent and as we said, RLS being sort of the de facto standard for line systems, we are certainly going to get our unfair share or the bulk of the early move on this piece. So we are quite excited about it. We have been working on it with the lead customer for some time around looking at the feasibility. Super focused on delivering to it.

Ruben Roy: Great. Thank you. And as a quick follow-up for Gary, I wanted to talk about Blue Planet. It has shown quite a bit of momentum over the last several quarters, and you talked a little bit, Gary, about AGENTIC AI and some of the things that some of your customers are thinking about. I am wondering if you could just kind of delve into that a little bit, opportunities longer term, and, you know, any detail on use cases that you are talking to your customers about and, you know, how you are thinking about that in terms of growth going forward.

Gary Smith: Thank you. Yep. If you think about the sort of software assets that we have got that are strategically embedded on the service provider side, you have got Navigator around the sort of the main piece with a complete sort of services-based architecture. Then, as you know, we had a kind of a lot of learning around Blue Planet being a microservices software platform for OSS. I think we are seeing a lot of momentum now on the Blue Planet side. We are very focused on things like the inventory, confederation of inventory. You think about that strategically, you basically get to have the dataset within these service providers of what is out there.

Really without that, it is very difficult to have AGENTIC AI if you have not understood what the whole inventory of your network is. So we believe we are uniquely placed to be able to leverage that into the future, and that is what we are focused on developing and engaging with a number of very large service provider customers on. We have got a great position in a number of those large service providers. We have got the right architecture that will scale up for that. It is early days.

But, basically, we are in a tremendous position from a relationship and a trusted partner point of view and from an architecture point of view, Ruben, to really leverage that into something where we become management for allows and facilitates the AGENTIC AI.

Ruben Roy: Great. Thank you.

Operator: And your next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall: Great. Thanks. Maybe just a second. Kind of on the routing wins that you guys were talking about. Just wanted to get a sense, you know, you guys had invested a lot in that business over the past few years. You know, where was kind of one of the service provider wins kind of one of the, you know, finally kind of seeing some of the benefit of that investment. Then maybe just secondly, get the question in ahead of time, just on installation capacity, you know, are you guys seeing kind of more requests for installation capacity just as kind of your increased in revenue would point to kind of, you know, an increased need for capacity increases.

Scott McFeely: Yep. So I think on the routing and switching side, Meta, you know, I think it was completely aligned with the service provider journey. I think, you know, my own view of what has happened with service providers over the last few years, they have really underinvested COVID, then supply chain whiplash, and challenges around that, and then 5G. Where they have had to invest enormous amounts of money and capital and focus on 5G. That has largely not worked out from a, you know, profit-generating point of view. So I think we are at a point now where they are returning to, you know, I think, a very sustainable sort of scalable investment thesis. That includes routing and switching.

I think the two go hand in hand. I think, you know, with the service provider uptick that we are seeing, we are seeing now an investment in new routing and switching applications and a number of new wins. So that is encouraging for us. I think that will absolutely continue. To your point about EF and I, which I think is a very important point for a couple of reasons. One, the increased shipments, we have got really good visibility to what is happening with those shipments. We are the EFNI partner for a lot of our large customers, including the cloud customers. So we have good visibility to what is happening.

I will say to you that, you know, that is in balance, and the need for EF and I is going to go up exponentially similar to the ramping of our supply chain and demand. We are seeing a lot of activity across the board for EF and I both in service providers and in the cloud, obviously, to help install this massive amount of investment over the next few years.

Scott McFeely: I mean, just to continue on the routing and switching piece. I mean, we have been very encouraged by the number of logo wins that we have had over the last number of quarters. Logo wins, obviously, are a precursor to orders or a precursor to revenue. In line with the sort of service provider dynamics. The order book on routing and switching for the last number of quarters has been, you know, quite a bit in excess of the revenue piece. To put a dimension to that, orders in the first half of the year in routing and switching were greater than 75% of total orders last year for routing and switching.

So there is momentum there, and we would expect that to flow through to revenue with the strong second half.

Meta Marshall: Great. Thank you.

Operator: And your next question comes from Adrian Colby with Citi. Please go ahead.

Adrian Colby: Hi. It is Adrian Colby for Altice Malik. Thank you for the question. I was hoping we could go back to gross margin. I think last quarter you had been expecting gross margin to trend up from the Q2 levels into the second half and the back half of the year. So I just wanted to understand better what has changed, you know, perhaps the production scaling of the 400CRs is trending differently from expectations. We have talked about the product mix impacts, so I think that is well understood. But just trying to understand what shifted in that outlook.

Jim Moylan: Yes. You will recall that our original guide for the year on gross margin was 42% to 44%. We are now saying that it is going to be at the low end of that range. It is essentially that demand for two products, in particular, have greatly exceeded our expectations, the RLS systems and our plugs. As I discussed, both of those are currently below corporate average gross margins. We do have a path to improvement. You should see improvement in gross margins certainly next year. Q3 is probably going to look more like Q2 and probably a little improvement in Q4.

But again, as Gary said earlier, we are committed to improving those gross margins and to getting our operating margin back to the 15% to 16% level by the end of the three-year period.

Adrian Colby: Thank you for that clarification. Then I was just hoping we could talk about the MoFEN opportunities, maybe talk a little bit more about your pipeline. I know you have said that this is one of your strongest quarters in terms of orders there. Interested if you are seeing some expansion beyond India. I know that has been an area where you have had significant traction.

Gary Smith: Yeah. We are seeing a lot of MoFEN activity in India. It has not translated to a massive amount of revenues yet, but we have taken the orders, and it will. We are seeing MoFEN activity throughout the globe. I think it just really goes hand in hand with the whole cloud build-out. They cannot build everywhere with their own network, and so it is all augmented by these MoFEN opportunities. We are seeing that in North America as well. There have been some, as you know, large announcements around some of the larger carriers partnering there, you know, with Lumen and Zayo, etc.

We are seeing that reflected in pretty much all parts of the globe, you know, Asia outside of India, we are beginning to see that in Europe. You know, we have seen activity, you know, it is the largest amount of activity that we have seen, and it really just goes hand in hand with the overall strategic plans for these cloud providers.

Adrian Colby: Thank you.

Operator: And the next question comes from Tim Savageaux with Northland Capital Markets. Please go ahead.

Tim Savageaux: Hey. Good morning. And congrats on the results and increased outlook. Had a question on the cloud front. And, Gary, I think you mentioned a step function. I think you were referring to demand. It looks like we saw another major change in the quarter, and that is diversification of your cloud business among several providers. It seems like your top customers, the smallest percentage of that total bucket that it has been in a while or at least in recent history. I wonder if you could talk about that trend of customer diversification within cloud and whether you expect to see that continue?

I know it can be kind of lumpy, but I would be interested in your thoughts overall on that.

Gary Smith: Yeah. That is a good point, Tim. I mean, I would say overall, we are seeing, we start with the sort of four known, the hyperscalers as it were. We are seeing increases in all four, you know, step function increases in all four cloud players directly with us. Also through things, you know, as I was talking just with, you know, MoFEN as well. So it is all consistent with that. Then we are seeing them really, you know, and I think it is a sort of hierarchical flow is how I think about it. You know, they have been very focused obviously on power and GPUs and scaling all of that.

Now it is about scaling it out, and it is now about the network. They are very focused, all of them, on, you know, making sure that the network does justice to all this massive investment that has gone on in compute. So I think this is the phase that we are entering now. That is why we are seeing it across all of the hyperscalers. As you say, it is lumpy. You know, some are, you know, leaning in more than others, but they are all, I think, showing a step function increase in the importance of the network.

Then you have got a whole other set of players as well that is expanded out from a cloud point of view that are now leaning in on the network. So you have got a broadening out. It is not just the large four anymore. It is a much larger group of players that are now recognizing that if they are going to monetize and to optimize, it is all about the network. You know, that is why we think it is very, you know, diversified, durable, and sustainable. It is all about high-speed connectivity. That is really what it is about.

Tim Savageaux: Great. Thanks very much. And, Jim, congratulations. Been great working with you.

Operator: And your next question comes from Ryan Koontz with Needham and Company. Please go ahead.

Ryan Koontz: Great. Thanks. Wanted to follow-up on your comments around tariff mitigation and your different levers there around supply chain, customer surcharges. If you can kind of broadly characterize, you know, how negotiations are going with your customers there, in terms of, you know, passing some of those costs along, $10 million hit from tariff does not sound like that much relative to the big scheme. Thanks.

Jim Moylan: Yes. Any discussion of tariffs is going to have to be caveated by the fact that we only know what the regime in place is now. It could very well change soon. But under the regime in place now, and given all of the exemptions that are in the current regime, we are likely to experience a cost of about $10 million per quarter. Now, if other schemes come in place and the potential for tariffs go up, we do have a range of things that we could do. We could move manufacturing operations. We could change some flows in our supply chain. We can do a number of things like that, which would reduce it.

With respect to passing on to customers, it is going to be a, you know, a complicated situation because not in all cases are we going to actually pass a tariff along to them. Some cases, it might result in some price increases. General price increases, etc. So all of those things, that is about as far as we are willing to go today. But we think that the net cost to our bottom line is going to be immaterial going forward.

Ryan Koontz: Got it. Thanks, Jim. Congrats. And if I could follow-up on your momentum in pluggables or maybe for Scott on CR. Is this still dominantly driven by cloud operators or are you seeing much service provider traction? Where are we in the service provider adoption cycle for your pluggable CR products? Thanks.

Scott McFeely: Yeah. From a ZR perspective in terms of that application, Ryan, it is dominated by cloud in terms of the volume. Pluggables, you know, have existed forever in terms of service provider deployments for different reasons, for modularity, and we do ship our plugs into service providers. But the volume for ZR is dominated by the cloud.

Ryan Koontz: Got it. Thanks so much, Chris.

Operator: And your next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman: Yes. Good morning, gentlemen. I have two, and I will just ask them at the same time, if I may. You indicated that the mix of pluggables and line systems are the biggest driver of margins. First, does the increased backlog exiting 2026 assume a higher mix of transponder blades? Second, on pluggables, clearly volume plays a larger role here. But you did speak about a several hundred million dollar opportunity from your initial player. So could you discuss where you are on having a fully integrated coherent transceiver giving your IP across DSPs, CertiS, Electro Optics? Thank you.

Jim Moylan: The short answer to your first question is yes. We will be selling more capacity next year. That is one of the reasons why we can have the confidence that our margin will go up next year. Gross margin and operating margin for that matter.

Scott McFeely: Yeah. And on the second one, you know, from a capability perspective, all the major seminal ingredients, we own our own IPR on. As we ramp it over time, a greater proportion of the mix will be on our own components, and that is part of, you know, the cost improvement plan.

Karl Ackerman: Thank you.

Operator: Your next question comes from David Vogt with UBS. Please go ahead.

David Vogt: Great. Thanks, guys, for taking my question. And Jim, congratulations and good luck. Maybe one to start with you, Jim. So, obviously, you have spent some time talking about sort of the dynamic with RLS and pluggables. Can you kind of remind us again, should we expect something similar to what we saw maybe in fiscal 18, 19, and 20 from a systems and transponder capacity perspective? Recognizing that, obviously, COVID was a little bit different. But is that the kind of way we should think about the trajectory of capacity additions and the impact on gross margins going forward, and then I have a follow-up more specifically on margin.

Jim Moylan: So recall, we had an exceptionally high margin in 2020. That was because COVID did sort of reduce the level of activity with respect to new networks. So in order to get the capacity to adding capacity to existing line systems. So we generated, I think, a 48-point something percent gross margin in one or two quarters of 2020. I do not foresee that kind of move in the next three years. We do see, though, a move back to the mid-forties just based on the fact that all of the things we have talked about, WaveLogic 6, the fact that we are coming out with a new generation of pluggables, which will be higher performance and better gross margin.

Our cost position on the basic 400ZR will improve. So for all those reasons, we do have confidence that gross margins will improve as we move through the next year or two.

David Vogt: Got it. And that is helpful. As a follow-up, so if I just maybe take your commentary that the gross margin guide is going to be at the low end, but you are taking the revenue guide to the high end or above the high, excuse me, to 14%. That is largely sounds like driven by RLS systems and pluggables. You know, just quick math. It looks like sort of the incremental profitability, I know it is below corporate average, but it seems like it is pretty materially lower. You know, in the, you know, the low double-digit range. But, you know, can you kind of help us understand what is going on there?

Obviously, you are talking about and even that is adjusting for the mitigation strategies from tariffs and the impact of the quarter. Just trying to understand the magnitude of, you know, how the pluggables and the RLS revenue is impacting the gross margin for the balance of this year? Thanks.

Jim Moylan: Well, you have done some math. I am not going to confirm it. But what I will say is this, we think that given the mix of products in Q3, it is going to be, you know, maybe a little higher than gross margin in Q2, but probably in the same range. We do see improvement in Q4.

David Vogt: Great. Thanks a lot, guys.

Jim Moylan: Thank you, everyone, for listening. Okay. This is Jim. I will be retiring from Ciena Corporation at the end of August, and this is therefore my last call, as Gary said, as CFO. I have greatly enjoyed getting to know all of you. I wish you well in all of your future endeavors. I also look forward to seeing many of you at the end of this month in New York and Boston. That will be fun, and I am looking forward to it. For those of you who are in the enviable position of having recommended Ciena Corporation for purchase, I believe you have made a good call, a great call, actually.

For those of you who are not yet in that position, there is still time to get in on what I believe is a very bright future for this company. Good luck to all.

Gary Smith: Thank you, Jim. Thank you, everyone. We look forward to connecting with you over the next few weeks.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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DATE

• Thursday, May 29, 2025, at 7:30 a.m. EDT

CALL PARTICIPANTS

• Chief Executive Officer — Weidong Luo
• Chief Financial Officer — Shan-Nen Bong

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

• Total Revenue: 89 million RMB for Q1 2025, representing a 38% increase year over year compared to Q1 2024 and the highest Q1 revenue since the company's transition to a pure SaaS model.
• Gross Profit: Gross profit increased by 27% year over year in Q1 2025, achieving the highest gross profit level in nine quarters.
• Gross Margin: Gross margin improved by 520 basis points quarter over quarter in Q1 2025.
• EngageLab Contract Value: 63 million RMB newly signed in Q1 2025, bringing the total cumulative contract value to over 110 million RMB.
• EngageLab Recognized Revenue: Grew by 127% year over year for Q1 2025, with customer count up 25% to 848 and operations now spanning more than 40 countries and regions.
• Developer Services Revenue: Up 39% year over year, but down 12% quarter over quarter; includes Subscription Services and Value-Added Services.
• Subscription Services Revenue: 53.5 million RMB subscription services revenue, up 26% year over year compared to Q1 2024, down 2% quarter over quarter, with ARPU up 22% year-over-year and both domestic and overseas markets showing growth.
• Value-Added Services Revenue: 8.9 million RMB, up 269% year over year, but down 46% quarter over quarter; spike attributed to more than 200% increase in advertiser spending compared to Q1 2024 and sequential decline due to seasonality following Q4 online shopping festivals.
• Vertical Application Revenue: Increased 35% year over year and 20% quarter over quarter, driven primarily by Financial Risk Management.
• Financial Risk Management Revenue: 22.2 million RMB revenue for Financial Risk Management, up 64% year over year and 36% quarter over quarter, mainly due to 19% customer growth year over year and 38% ARPU growth year-over-year; represents the segment's highest quarterly revenue to date.
• Market Intelligence Revenue: Decreased by 26% year over year but grew 4% quarter over quarter due to continued weakness in market demand for Chinese app data.
• Operating Expenses (OpEx): 60.6 million RMB operating expenses, up 14% year over year compared to Q1 2024 and flat quarter over quarter; primary increase came from sales and marketing costs.
• R&D Expenses: 24.6 million RMB for R&D expenses, up 8% year over year compared to Q1 2024, attributed to staff costs and increased cloud fees.
• Selling and Marketing Expenses: 23.3 million RMB selling and marketing expenses, up 34% year over year, reflecting higher sales commissions and travel spending in line with revenue growth.
• General and Administrative (G&A) Expenses: 12.7 million RMB, down 2% year over year due to reduced professional fees.
• Net Dollar Retention Rate (NDR): 96% net dollar retention rate for the core Developer Subscription business for the trailing 12 months ended March 31, 2025.
• Deferred Revenue: Deferred revenue reached a record high of 156.9 million RMB as of March 31, 2025.
• Accounts Receivable Turnover Days: 53 days for accounts receivable turnover as of Q1 2025, marginally higher than Q4 2024 due to slower collections during the Chinese New Year period.
• Net Total Assets: Net total assets were 376 million RMB as of March 31, 2025, with cash and cash equivalents of 113.6 million RMB and total liabilities of 261.6 million RMB.
• Adjusted EBITDA: Positive adjusted EBITDA for the seventh consecutive quarter.
• Share Repurchase: 16,000 American depositary shares (ADS) repurchased in the quarter, bringing total repurchases to 295,000 ADS since program inception.
• Q2 2025 Revenue Guidance: Projected revenue for Q2 2025 is between 87.5 million RMB and 90.5 million RMB, representing a 10%-14% year-over-year increase compared to Q2 2024.

SUMMARY

Aurora Mobile (NASDAQ:JG) reported record first-quarter revenue at 89 million RMB, with strong, broad-based year-over-year growth across subscription, value-added, and financial risk management services. EngageLab drove multinational expansion, reaching 848 customers with over 63 million RMB in newly signed contracts, and management highlighted multi-year contracts with customers outside China as supporting future international growth. Despite market intelligence revenue declining 26% year over year amid weak domestic demand, 19% customer growth and 38% ARPU improvement propelled financial risk management revenue to historic highs. Cost discipline was maintained, with OpEx rising less than revenue, and the company delivered its seventh consecutive quarter of positive adjusted EBITDA while continuing share repurchases and projecting sustained double-digit revenue growth into the next quarter.

• Shan-Nen Bong said, "if you want net profit next quarter, I think we can do that. All we need to do is just to freeze our R&D and marketing expenses. However, this will come at the expense of product development and continuous market spend, and this will certainly hurt our ability to grow our revenue in the near future."
• Management attributed 269% year-over-year growth in value-added services revenue to a rebound in advertiser spending, specifically noted as "the recovery of the advertiser spending we have seen in Q1."
• EngageLab's geographic reach now includes over 40 countries and regions, underlining management's position that it is the intended "engine of growth for us in the next 24 months."
• Deferred revenue balance reached a historical record of 156.9 million RMB, indicating substantial prepaid future revenue commitments.

INDUSTRY GLOSSARY

• EngageLab: Aurora Mobile Limited's global SaaS communications and engagement platform, providing push notification and messaging services to app developers and enterprises.
• Net Dollar Retention Rate (NDR): A SaaS key performance indicator representing percentage of recurring revenue retained from existing customers over a period, including revenue expansion via up-sell and cross-sell, minus churn and contraction.
• Value-Added Services: Additional solutions offered beyond core subscriptions (such as marketing or monetization features) that generate incremental revenue streams.

Full Conference Call Transcript

Weidong Luo: Thanks, Rene. Greetings to all. Welcome to Aurora Mobile's 2025 First Quarter Earnings Call. Before I comment on our Q1 results, I would like to remind everyone that the quarterly earnings desk is available on our IR website. You may refer to the deck as we proceed with the call today. As we did in the past, based on the Q1 numbers, I have a suitable discussion for the first quarter results, which is a quarter of accelerated growth driven by globalization for the following reasons. Firstly, our EngageLab business had a monster quarter, where we closed out more than Chinese yuan renminbi (CNY) 63 million worth of contract value in just one quarter. This is unprecedented in our history.

This brings the total cumulative EngageLab contract value in excess of CNY 110 million by March 31, 2025. Secondly, the group's revenue this quarter of CNY 89 million, achieving a remarkable 38% growth year-over-year. This CNY 89 million was the highest Q1 quarterly revenue we had since transition to pure SaaS. EngageLab's recognized revenue also grew by 127% year-over-year. This Q1 revenue number exceeds what we have previously guided in Q4 of 2024. Thirdly, our Financial Risk Management business had its best quarter in its history, recording highest quarter revenue of CNY 22.2 million, revenue grew by 64% year-over-year. Fourthly, gross profit grew strongly by 27% year-over-year, while achieving the highest gross profit for the past 9 quarters.

Gross margin has also improved 520 basis points quarter-over-quarter. Fifth, we recorded another adjusted EBITDA profit in this quarter. This marks the seventh consecutive quarterly positive adjusted EBITDA we have had. Overall, it was a great quarter where all the business lines have outperformed the targets we have set for them. This is no doubt set a great momentum for the rest of 2025. Equally important, the progress in our performance and our solid financial position enable us to invest more resources into the development of our enterprise AI agent platform and its global expansion. Now let me share more on the individual business performance.

Our total Q1 group revenue has grown 38% year-over-year, driven by the great numbers from Developer Services. Within the group revenue, all business segments, mainly Developer Subscription services, Value-Added Services and Financial Risk Management, all outperformed and record significant year-over-year revenue growth. Developer Services revenues, which consists of Subscription Services and Value-Added Services, increased by a strong 39% year-over-year and decreased 12% quarter-over-quarter. Subscription revenue has been recording a great number, where it increased by 26% year-over-year and decreased 2% quarter over quarter. Value-Added Services revenue grew by an incredible 269% year-over-year and decreased 46% quarter over quarter. Our core business, subscription services revenue of CNY 53.5 million, record growth of 26% year over year and decreased 2% quarter over quarter.

The year-over-year revenue growth was mainly driven by a 22% increase in ARPU, carrying on the great momentum we had in Q4 of 2024. Our subscription revenue record third consecutive quarter of CNY 50 million plus revenue. For Subscription Services, we had recorded year-over-year revenue growth in both the domestic and overseas markets. In particular, our EngageLab revenue grew by 127% year-over-year. This remarkable number was a result of the hard work by team to convert many notable wins in the overseas markets. Both the customer numbers and ARPU have solid growth year-over-year.

With the great products and services we have, I believe we can scale this business globally to get more customers and new wins in many quarters to come. Next, I shall elaborate more on our EngageLab business this quarter. This business always gets me very pump up when sharing with you. Firstly, the total contract value we have signed has broken CNY 110 million milestone in Q1 of 2025. Just to recap, the total contract value was only CNY 10 million at Q3 of 2023. Six quarters later, this amount has grown 10x. This is a remarkable achievement by the team. Secondly, customer acquisition continue to be the driving force of the success of this business.

The customer number has increased by 25%, reaching 848. Thirdly, the revenue recognized for the EngageLab again record great growth of 127% year-over-year. Fourthly, our EngageLab products and services are now sold to customers in more than 40 different countries and regions globally. I'm truly pleased with the team's execution effort, results and the momentum of EngageLab. I believe that it's the engine of growth for us in the next 24 months. Within subscription revenue, some of the notable new and renewable customers in this quarter include, but not limited to, DeepSeek BYD, SF Express, Monsha AI and [ Hangzhou Ben ], just to name a few.

Value-Added Services revenue were CNY 8.9 million, increased by 269% year-over-year but decreased by 46% quarter-over-quarter. The huge revenue year-over-year growth we have seen was mainly due to the recovery of the advertiser spending we have seen in Q1. For the same period, the advertiser spending has increased more than 200%, which fueled the revenue spike year-over-year. The sequential revenue decline was mainly due to the Double 11, Double 12 online shopping festival in Q4 but was not existent in Q1. Let me pass the call over to Shan-Nen, who will share more about the Vertical Applications and other aspects of our financial performance of this quarter.

Shan-Nen Bong: Thanks, Chris. Next, I'll go over the revenue for Vertical Application that includes financial risk management and market intelligence. Overall, Vertical Application had a very strong quarter, where revenue increased by 35% year-over-year and 20% quarter-over-quarter. And within Vertical Application, financial risk management recorded a 64% growth in revenue year-over-year and 36% growth quarter-over-quarter. Financial risk management has its best and biggest quarter ever, recorded Q1 revenue in excess of CNY 22 million. This 64% year-over-year revenue growth was mainly due to the strong 19% customers number growth and 38% ARPU growth. As I mentioned in the prior quarter that our team has fine-tuned and upgraded the service and products. The result is simply stunning to say the least.

The upgraded product and services were in high demand amongst the financial industry vertical. The new and existing licensed financial institution for buying and consuming our product and services. Apart from Developer Subscription revenue that Chris mentioned earlier, financial risk management presented itself as the next growth engine in early 2025. We are certainly very pleased to see the resurgence of this business in this quarter and beyond. The customers that we have signed up or renewed in Q1 include but not limited to [indiscernible], Ningbo Ehang, [indiscernible] and many more license credit and financial institutions throughout China.

Market intelligence revenue, on the other hand, decreased by 26% year-over-year and managed to record a modest 4% growth quarter-over-quarter due to the continued weakness in the market demand for Chinese APP data, and this result is in line with our expectations. Next, I'll go through some of the key expenses and balance sheet items. On to operating expenses. The Q1 operating expenses was at CNY 60.6 million, representing a 14% increase year-over-year and remained flat quarter-over-quarter. The majority of the increase was attributable to our sales and marketing department. In a snapshot, our Q1 revenue grew by 38% year-over-year. Gross profit grew by 27%, while OpEx only grew by 14%.

Overall, we are very pleased to see how OpEx has been trending in view of the revenue and gross profit growth we have achieved. And this is a sustainable growth model for long-term basis. I'll now go over the individual OpEx category. For R&D, expenses increased 8% year-over-year to CNY 24.6 million, mainly due to the increase in staff costs and associated expenses. Cloud cost has also contributed to the year-over-year increase in R&D expenses. Selling and marketing essences increased by 34% year-over-year to CNY 23.3 million, mainly due to the increase in sales commission and traveling expenses in line with our revenue growth and cash collection recorded in this quarter.

G&A expenses decreased by 2% year-over-year to CNY 12.7 million, mainly due to the reduction in professional fees as a result of our continuous disciplined management of expenses. Next, I'll share 3 very important KPIs that we closely monitor. For net dollar retention rate, a commonly used KPI for SaaS company, it stood at 96% for our core Developer Subscription business for the trailing 12 months ended March 31, 2025. And this high NDR percentage, reflecting that we have high customer retention rate, coupled with the ability to increase revenue to upsells through upgrades and expansion. And this is another great quarter with such an impressive number.

Secondly, another financial KPI for tracking the performance of SaaS company is the total deferred revenue, which represents cash collected in advance from customers for future contract performance, which had a record high of CNY 156.9 million, and this is the historical record where our deferred revenue balance has exceeded CNY 150 million. Thirdly, we continue to maintain healthy AR turnover days level at 53 days. And these are slightly higher than what we had in Q4, simply due to the extended holiday during the Chinese New Year period, where collection is typically slower than other quarters.

We will continue to work hard to ensure we collect cash from customer activity and at the same time, mitigating the risk of bad and doubtful debts. On to balance sheet. Net total assets were CNY 376 million as of March 31, 2025. This includes cash and cash equivalents of CNY 113.6 million, accounts receivable of CNY 54.1 million, prepayments and other assets of CNY 17.4 million. Operating expenses -- operating lease right-of-use assets of CNY 15.9 million, fixed assets of CNY 4.3 million, long-term assets of CNY 113.5 million. Goodwill of CNY 37.8 million and intangible assets of CNY 12.8 million resulting from the Zanroo acquisition in March 2022.

And total liabilities were CNY 261.6 million as of March 31, this includes accounts payable of CNY 34.1 million. Current operating lease liability of CNY 4.2 million, deferred revenue of CNY 156.9 million and accrued liabilities of CNY 66.4 million. And now let me take a few minutes here to recap the description, a quarter of accelerated growth driven by globalization that Chris used at the beginning of this call. In this quarter, our revenue year-over-year grew strongly by 38%, reaching CNY 89 million. This was the highest Q1 revenue since the transition into a pure SaaS model. Our Developer Subscription service had another CNY 50 million revenue quarter with CNY 53.5 million.

Secondly, our EngageLab had a very strong quarter. Revenue grew by close to CNY 127 million on a year-over-year basis. And cumulative contract value increased by more than CNY 63 million in Q1 alone, bringing the total signed contract value to exceed CNY 110 million. Both the gross profit and gross margin has improved along with our global expansion efforts. We have a seventh consecutive quarter of positive adjusted EBITDA. And this is no doubt a very strong growth quarter for Aurora Mobile. We started the year with a great quarter 1, and we believe the momentum will carry on to the other quarters of 2025. Now let's turn to the business outlook.

And based on the current available information, the company sees Q2 2025 revenue guidance to be in the range of CNY 87.5 million to CNY 90.5 million, representing a solid 10% to 14% year-over-year compared to same quarter of 2024, and the above outlook is based on the current market conditions and reflects the company's current and preliminary estimate of the market and operating conditions and customer demands, which are all subject to change. Lastly, before I conclude, I'll give a quick update on the share repurchase plan. In the quarter ended March 31, 2025, we repurchased 16,000 ADS. Cumulatively, we have repurchased a total of 295,000 ADS since the start of our repurchase program.

And this concludes our prepared remarks. We're happy to take the questions now. Operator, please proceed.

Operator: [Operator Instructions] We will take our first question and the first question comes from the line of [ Calvin Wong from Spicer Capital ].

Unknown Analyst: I have one question related to the EngageLab. First of all, congrats on the EngageLab business has achieved breakthrough contract value of RMB 110 million in Q1. So if I work back the calculation correctly, so that's the total newly signed contract value was more than RMB 60 million in Q1. So I would be appreciate if management could provide some guidance outlook of the EngageLab business going forward?

Shan-Nen Bong: Okay. Thanks, Calvin. Let me take this call -- take this question. I guess your calculation is spot on. So at the back of achieving this CNY 60 million contract in single quarter, there are a few matters that I'll share with you and everyone on the call. One is the fact that we have proven to have the ability to win big contracts in global stage. Just to clarify, this newly signed CNY 60 million contract in Q1 2025 were from different customers outside of China. And second, our product and services are indeed meeting the needs of global customers.

Customers are willing to sign multi-year contract with us is another testament of the superior quality of our services and product. And this customer have shown great long-term commitment towards our product and services. And if you ask me whether we'll get another CNY 60 million new signed contract in Q2, I guess my frank and honest question (sic) [ answer ] is unlikely at this stage, which is a realistic expectation. But this CNY 60 million a quarter taught us a few very useful lessons to make significant wins going forward. It shows that we have the technical capability and the know-how to win big contracts. Our products are superior to competitors in the market.

So with our growing presence in the global stage, other overseas customers will start to look at EngageLab differently. And maybe this CNY 60 million new contracts a quarter is not too far away after all. I hope this answers your question, Calvin.

Operator: [Operator Instructions] We will take our next question. Your next question comes from the line of [ Marco Zhang from Gelonghui Research ].

Unknown Analyst: This is Marco from Gelonghui Research. Congrats to the company on another strong quarter. I have one question for the management. So this quarter, your revenue grew 38% year-over-year, gross profit grew 27% year-over-year and your adjusted EBITDA is on the seventh consecutive quarter of positive number. However, the company is still recording net loss. So my question is that when do you think we can expect your quarterly net profit?

Shan-Nen Bong: Marco, let me take your question. I think you are right to point out a few key numbers. Let me recap in this quarter, what we have is revenue grew by 38%, gross profit grew by 27% and our OpEx is only grew by 14%. And this business model has a perfect relationship to generate profitability. In short, you may conclude that we earn more than what we spend. But if I peel further deeper beyond the surface, one very important finding that I'll share with you and the others on the call is that there are certain expenses that we need to spend now in order to fill the continuous growth trajectory. Let me explain more.

For example, R&D, and it is vitally important that we continue to research and develop and continue to fine-tune our product. And one great example is the financial risk management, where the business grew by 64% year-over-year. And this is mainly due to product upgrades that we have made. And this upgrade resulted in more customers using and consuming our products. Therefore, we have the 65% revenue growth. On the flip side, if we stand still and with no intention to increase our R&D activities, our product will not have evolved, and we will not get a 65% revenue growth.

And secondly, marketing expenses is another crucial expense for any company needing to spend in order to broaden global reach and expansion. We need to have EngageLab brand name known globally. It was because of the marketing campaign that we had, we were able to grow the business with our borders into 40 countries and region by March 31, 2025. As a matter of fact, if you want net profit next quarter, I think we can do that. All we need to do is just to freeze our R&D and marketing expenses.

However, this will come at the expense of product development and continuous market spend, and this will certainly hurt our ability to grow our revenue in the near future. Therefore, we need to strike a balance between spending diligently enough so that we can have the firepower to fuel our continuous revenue growth in the next 12 or 24 months. And so long as we continue to scale our business, the results will come soon or later. And I hope this answers your question, Marco?

Operator: There are no further questions. I would like to hand back to Rene Vanguestaine for closing remarks. There are no further questions. I'll hand back to Rene Vanguestaine for closing remarks.

Rene Vanguestaine: Thank you, Heidi. Thank you, everyone, for joining our call tonight. If you have any further questions and comments, please don't hesitate to reach out to the IR team. This concludes the call. Have a good night. Thank you.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

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DATE

Thursday, June 5, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Andrew McLean

Chief Financial Officer — Bernie McCracken

Senior Director, Financial Planning and Analysis — Tom Altholz

Need a quote from one of our analysts? Email [email protected]

RISKS

Revenue Decline: Total revenue (GAAP) decreased by 9% to $261 million in Q1 FY2025

Net Loss: Reported net loss was $8.3 million, or $0.27 per share in Q1 FY2025, with adjusted net loss at $5.4 million, or $0.18 per share.

SG&A Deleverage: SG&A expenses (GAAP) were 47% of sales in Q1 FY2025, This represented an increase of approximately 270 basis points compared to 2024, primarily due to deleverage from lower revenues.

Third-Party Marketplace Headwinds: Gross profit dollars in the third-party marketplace business decreased by 11% as revenue fell by 9%, attributed to performance challenges in one marketplace.

TAKEAWAYS

Total Revenue: $261 million, a 9% decrease in Q1 FY2025; Adjusting for transitioned licensing, revenue fell by 4%.

GMV Trend: GMV decreased by low single digits, but excluding transitioned categories, grew by low single digits year over year, led by timing of orders.

Gross Margin Rate: 51%, up 210 basis points, setting a record for the quarter.

Adjusted EBITDA: Adjusted EBITDA was $10 million in the first quarter, within guidance parameters.

Inventory: $262 million at quarter-end, down 9% from prior year, reflecting supply chain changes and improved inventory turns.

U.S. eCommerce: Approximately flat sales and gross profit, despite strength in outerwear offset by slow swim sales early in the season.

European eCommerce: Sales increased 28% year over year, driven by rebranding, influencer-led marketing, and product assortment shifts.

Licensing Revenue: Licensing revenue increased by over 60% year over year in the first quarter, including incremental categories such as travel accessories, hosiery, and cold weather products.

Outfitters (B2B) Segment: Sales from Lands' End Outfitters increased 1%. Commitments in annualized new business for school uniforms totaled $13 million from new customer growth, benefiting from a competitor exit.

Third-Party Marketplaces: Combined gross profit in the third-party marketplace business fell 11% compared to the first quarter of 2024, due to one market’s underperformance, but April showed improvement in marketplace performance; Nordstrom's led all marketplaces with high average order value.

SG&A Expenses: SG&A expenses decreased by $4 million year over year in the first quarter; As a percentage of sales, SG&A was 47%, an increase due to deleverage from revenue decline.

Debt Level: Term loan balance was $244 million, ABL borrowing was $40 million at the end of the first quarter, both flat compared to the first quarter last year

Tariff Exposure: The company factored in 30% China and 10% rest-of-world tariffs for FY2025 annual guidance, maintaining an effective tariff rate near 12% for the second half of FY2025; mitigation actions implemented include Western Hemisphere sourcing shifts.

Share Repurchases: $3 million in shares were repurchased in Q1 FY2025; $11 million remains on the current authorization as of Q1 FY2025.

Guidance (Full-Year): Revenue is expected to be between $1.33 billion and $1.45 billion for FY2025; GMV is targeted at mid to high single-digit growth for FY2025; Adjusted net income is projected at $15 million-$27 million for FY2025; Adjusted diluted EPS is expected to be $0.48-$0.86 for FY2025; Adjusted EBITDA is forecast at $95 million-$107 million for FY2025; Capital expenditures are forecast at $25 million for FY2025.

Strategic Alternatives Review: Process exploring options including a sale or merger remains ongoing, with no further comment at this time.

SUMMARY

Lands' End, Inc. (NASDAQ:LE) delivered results marked by top-line contraction and bottom-line losses, with multiple initiatives underway to support stabilization and margin gains. Despite flat U.S. eCommerce performance in Q1 FY2025, European eCommerce delivered 28% year-over-year growth in Q1 FY2025, following localized rebranding and new market entries. Licensing expanded into new product segments, and B2B outfitters growth was supported by significant new commitments in school uniforms. The company rapidly diversified sourcing, reducing exposure to China to less than 8% of purchase order dollars in the last fiscal year and implementing tariff mitigation. Management continued the strategic alternatives process in pursuit of shareholder value.

CEO McLean highlighted the "record gross margin rate" of 51% in Q1 FY2025 as a key driver supporting future growth plans.

Gross margin gains in Q1 FY2025 were attributed to the prior year's transition of kids' and footwear inventory to licensees.

AI-driven personalization and expanded SMS marketing increased new customer acquisition and one-to-two-time customer repeat rates, signaling improvements in customer file quality.

Management stated it "continues as a significant vehicle for growth," emphasizing both channel and product white space expansion beyond replacement categories, specifically referencing the licensing business.

The new supply chain structure reduced reliance on China to less than 8% of purchase order dollars in the last fiscal year.

Outfitters' Delta Airlines partnership runs through 2027 with consistent run-rate volume expected, as no near-term new product launch is planned under this contract.

April’s recovery in marketplace performance was referenced as evidence that negative trends were moderating.

Management indicated, "our annual guidance remains unchanged." despite tariff risk and sourcing transitions.

INDUSTRY GLOSSARY

GMV (Gross Merchandise Value): The total dollar value of orders processed through the company’s selling channels before returns, discounts, or allowances.

Outfitters: The company's B2B segment, which provides uniforms and related apparel for corporate and educational clients.

Third-Party Marketplace: Sales channels operated by external online retailers (e.g., Amazon, Nordstrom, Macy's) where Lands' End, Inc. sells its products.

White space: Untapped market or product categories where the company did not previously have a presence.

Full Conference Call Transcript

Tom Altholz: Good morning, and thank you for joining the Lands' End, Inc. earnings call for a discussion of our first quarter 2025 results, which we released this morning and can be found on our website, landsend.com. I'm Tom Altholz, Lands' End, Inc.'s Senior Director, Financial Planning and Analysis. I'm pleased to join you today with Andrew McLean, our Chief Executive Officer, and Bernie McCracken, our Chief Financial Officer. After the prepared remarks, we will conduct a question and answer session. Please also note that the information we're about to discuss includes forward-looking statements. Such statements involve risks and uncertainties. The company's actual results could differ materially from those discussed on this call.

Factors that could contribute to such differences include, but are not limited to, those items noted and included in the company's SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking information that is provided by the company on this call represents the company's outlook as of today, and we do not undertake any obligation to update forward-looking statements made by us. Subsequent events and developments may cause the company's outlook to change. During this call, we will be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.

Reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release issued earlier today, a copy of which is posted in the Investor Relations section of our website at landsend.com. With that, I will turn the call over to Andrew.

Andrew McLean: Thank you, Tom. Good morning, and thank you for joining us today. We continue to execute our proven customer-centric strategy through creative engagement, viral moments centered around the reimagining of our iconic tote, expansion of our brand through licensing, and, of course, fresh solutions-based product. In addition, the period was characterized by improvement in the resiliency of our supply chain to maintain our momentum throughout fiscal 2025. Most pleasing was the continued performance at the top and bottom of our P&L with growth in GMV, which was low single digits positive when adjusted for prior year inventory sell-off, and a 12% improvement in our adjusted bottom line.

As we continue to flow through higher levels of incremental profitability, all accomplished on a faster inventory turn and with improved working capital. As always, our focus remains on building our brand, maintaining discipline around promotional activity, and staying the course to develop a healthier long-term brand. This resulted in a record gross margin rate for the quarter, with our margin rate just shy of 51% and 210 basis points greater than last year. These are strong foundations upon which to build. We intentionally drove significant change in our supply chain as we accelerated production in the Western Hemisphere, giving us both speed and additional avenues to mitigate tariffs and provide resiliency.

Less than 8% of our purchase order dollars last fiscal year were utilized on buys of China, while our supply of key franchises, including our sector-leading American-grown Supima, are now co-sourced across the globe. By intentionally creating a diverse sourcing network and strong relationships with excellent vendors, we are increasingly positioned to remain agile in our sourcing decisions, helping to address headwinds from the impact of tariffs. Innovation is the key to our successful brand building. As I touched on last quarter, we're leveraging digital and experiential marketing strategies that build our cultural relevancy and drive traffic to our owned channel.

We recently launched our Toad Girl Summer campaign, which features brand fans and influencers on social media and a series of pop-up shops across iconic summertime locations. The campaign introduces lovers of our iconic canvas pocket tote to a wider assortment of Lands' End, Inc. apparel and swim products that fit their lifestyle as perfectly as our pocket tote. We kicked off Memorial Day weekend with pop-up shops throughout the Hamptons, Jersey Shore, Charleston, and Nashville, and will host further coastal pop-ups, including the Nantucket Hotel, in June, July, and August. These viral moments covered extensively on TikTok and Instagram saw these one-of-a-kind totes changing hands after purchase.

As a reminder, our pocket tote remains our number one item in driving new customer acquisition and consistently attracts customers from all age ranges, notably driving brand awareness with a younger Gen Z and millennial cohort. We also improved our customer experience in the first quarter through our focus on offering greater personalization, including the launch of a new AI-driven recommendation and outfitting engine that makes it easier for customers to personalize products. In addition, we improved our SMS marketing program capabilities, generating nearly 400,000 new subscribers in Q1.

Picking up on our customer, our willingness to protect the brand continued to yield results, with growth in new customers supplemented by increases in one to two times buyers and our highest LTV five times buyers. Renewing our customer file, reaching a broader base of consumers, and leveraging our franchise products like Slim and Supima remain priorities as we build long-term shareholder value. Turning to product, with a late Easter and colder weather pushing swim selling back, our WonderWite and Squall outerwear franchises were key winners for us in the quarter, as were our wear-now items like our Anywear fleece and barn coats. Women's bottoms, knits, sweaters, and dresses also performed successfully.

Once the swim season kicked into gear, we saw good engagement with our core franchises. Tuggle, a 40-year-plus stalwart of the category, has expanded exponentially, building on the original one-piece silhouette to offer two-piece cross-body dresses, rompers, and backless in a range of colors and prints. This continued focus on winning with market-leading franchises is a core brand platform that we are extending across channels and licenses to broaden distribution and create long-term shareholder value. Turning to the performance of our various businesses, beginning with our asset-light B2C activities. Our asset-light licensing business had a strong first quarter and continues as a significant vehicle for growth of the Lands' End, Inc. brand, with revenues up over 60% year on year.

Within the channels, we saw success in both the clubs and traditional department stores, as the brand continues to reach new customers and offers incredible price and value. During the quarter, we completed the negotiation of additional licenses for travel accessories, men's underwear and base layer, and women's intimates. Our activity continues into the second quarter as we recently executed licenses for hosiery and cold weather accessories. The skill sets that the company is developing around the licensing of its IP and its integration of leading channel and category experts to augment its core competencies in e-commerce continue to set it apart from competitors and offer Lands' End, Inc. strategic options for significant future growth.

Turning to our B2B outfitters business, I am pleased to note that B2B delivered our revenue and profit objectives for the quarter. We saw strong performance across our enterprise business, as well as growth in our school uniform business. We were pleased to launch a partnership with Delta Airlines in the second quarter to service their uniform provider through the end of 2027. We're excited to be working with Delta again as we finalize the details of our collaboration together.

Our school uniform business saw strong new customer growth in the quarter with commitments in annualized new business of $13 million driven from a focus on leveraging our to drive outreach across the country, supplemented by a competitor exiting the segment. As previously noted, we have the most domestic embroidery capabilities of any retailer in the United States. We are continuing to win by leveraging the strength of our brand, our steadfast focus on quality, our market-leading embroidery and personalization capabilities, and our great customer service. Looking at our B2C business, domestically, we sharpened the customer proposition between landsend.com and our third-party marketplaces using a proprietary AI tool to maximize rankings through the application of product titles and descriptions.

This has created significant growth across our Amazon, Macy's, and Nordstrom's marketplaces. For example, on Amazon, we obsess on ranking by focusing our efforts on our top 25 items, product page optimization, Prime eligibility, and in-stock availability. By leading with these top performers, we can create algorithm-maximizing product titles and descriptions that drive search rankings complemented with solutions-driven imagery. We can achieve better margins, maintain efficient inventory levels, and turn faster. With new leadership, Europe began to show green shoots of progress to become the highly solutions-oriented, highly engaged, elevated brand that we know it is capable of being.

During the quarter, we relaunched both the German and UK websites, taking a different marketing and assortment approach to each, supported by specific and local influencer talent. That work continued into marketplaces where we launched on next.com, our first true marketplace experience in Europe. This work to develop nuanced customer-focused touch continues at pace. In May, we relaunched the French catalog as a prelude to a full relaunch of a French language website next month. In June, we will begin selling on debenhams.com, again creating a path to a specific customer with a specific experience. I'll now turn it over to Bernie to discuss our first quarter performance in more detail.

Bernie McCracken: Thank you, Andrew. For the first quarter, total revenue performance came in at $261 million, a decrease of 9% compared to last year. When excluding the impact of transitioning the kids and footwear inventory to licensed skis in the first quarter of 2024, total revenue decreased by 4% year over year. GMV decreased low single digits for the first quarter of 2025, primarily driven by timing of orders. When excluding the impact of transitioning the kids and footwear inventory to license the first quarter of 2024, GMV increased by low single digits year over year. We delivered adjusted EBITDA of $10 million in the first quarter, which came within our guidance. Gross profit decreased by 5% compared to last year.

Gross margin was 51%, an approximately 210 basis point increase from the first quarter of 2024. The margin increase was driven by the impact of transitioning kids and footwear inventory to licensees in the first quarter of fiscal 2024. Our U.S. e-commerce business saw approximately flat sales and gross profit compared to the first quarter of 2024 due to the continued strength in our outerwear product offset by a slow start to seasonal swim assortment. Sales from Lands' End Outfitters increased 1% from the first quarter of 2024. Sales from the business uniform channel were slightly up year over year, and sales from our school uniform channel were slightly down year over year, driven by timing of orders.

In our third-party marketplace business, gross profit dollars decreased by 11% compared to the first quarter of 2024, as revenue decreased by 9% year over year. While performance was consistently positive in most marketplaces, the combined third-party business was negatively impacted by challenges in one marketplace. Overall, marketplaces saw market improvement in April. Our European e-commerce business sales increased 28% year over year as new leadership used the quarter to relaunch as a more premium brand, eliminating lower value inventory and positioning for marketplace expansion. Revenues from our licensing business increased by over 60%. Licensing and our presence across our third-party marketplace partners continue to help the business diversify and reduce risk from any one individual partner.

SG&A expenses decreased by $4 million year over year, driven by strong cost controls across the entire business. As a percentage of sales, SG&A was 47%, an increase of approximately 270 basis points compared to 2024, primarily driven by deleverage from lower revenues. For the first quarter, we had a net loss of $8.3 million or $0.27 per share. We had an adjusted net loss of $5.4 million or $0.18 per share, which were both within our guidance range. Moving to our balance sheet, inventories at the end of the first quarter were $262 million compared to $289 million a year ago.

The 9% decrease in our inventory position resulted from our supply chain team's ongoing efforts to drive efficiencies and maintain resiliency and diversification with respect to our sourcing capabilities. In terms of our debt, at the end of the first quarter, our term loan balance was $244 million, and our ABL had $40 million of borrowings outstanding, which was flat to the first quarter last year. During the first quarter, we repurchased $3 million worth of shares under our $25 million share repurchase authorization announced in March of last year, bringing the balance of the remaining authorization to $11 million as of the end of the quarter. Now moving to guidance.

For the full year, our guidance includes the impact of tariffs at 30% for China, approximately 10% for the rest of the world. We are implementing mitigation measures to effectively manage the tariff headwinds at these levels, and accordingly, our annual guidance remains unchanged. As we continue to expect total revenue to be between $1.33 to $1.45 billion, while GMV is expected to be mid to high single-digit growth. Adjusted net income of $15 million to $27 million and adjusted diluted earnings per share of $0.48 to $0.86, and our adjusted EBITDA to be in the range of $95 million to $107 million. Our guidance for the full year incorporates approximately $25 million in capital expenditures.

With that, I will turn the call back over to Andrew.

Andrew McLean: Thank you, Bernie. As always, I want to thank all of the Lands' End, Inc. employees for their dedication to building the brand and upholding our customer-centric strategy. Our commitment to delivering exceptional quality, service, and care to our customers is what continues to set us apart and help sustain our momentum. Finally, the process our board of directors initiated last quarter to explore strategic alternatives, including a sale, merger, or similar transaction involving the company to maximize shareholder value, remains ongoing. We will not be commenting further on it at this time, and we will provide an update once appropriate. With that, we look forward to your questions.

Operator: We'll take our first question from Dana Telsey of Telsey Group. Your line is open.

Dana Telsey: Good morning. Good morning, everyone, and nice to see the progress. Couple questions. Typically, you provide second the upcoming quarter guidance. I didn't see anything, I think, in the release this time. Any color you can give us on the complexion of the year and the cadence of what you're looking for. And within that, tariff impacts. Holistically, how you're thinking about it, both in terms of pricing and on inventory? Then I have one follow-up. Thank you.

Bernie McCracken: Morning, Dana. As far as guidance goes, based on the near-term uncertainty with tariff rates, the company has provided annual guidance based on the current tariff rates, which, you know, we have talked about, which is the 10% baseline and the 30% for China. Which comes to about an effective 12% rate for us in the back half. And that we, you know, we put a lot of work into a transformation process to build mitigation efforts against that against those raised tariffs and feel strongly that we have the right mitigations to get to offset those for the year.

Andrew McLean: And then just a bit of color on the on your tariff impacts. Question. I mean, you know me. You know the company. It's like we're not gonna sit around and wait for a solve later in the year. We rolled up our sleeves actually towards the end of Q4 and started shifting heavily into Western Hemisphere. So we were taking big programs, not the small programs.

We took Supima is one of our biggest programs, in fact, it is our biggest program, and we moved that to Western Hemisphere actually in process of co-sourcing that in Eastern Hemisphere as well so that we've got a lot of pacing to go after it, to move with it, and to be able to react to it. And so we're taking we're taking the pain of all those shifts way up front.

Dana Telsey: Got it. And then congratulations on the new Delta agreement. That's very encouraging. How is it different than the last agreement that you have or had and or is it then on the marketplace's business, what are you seeing there? And it was encouraging to hear about Europe. What are your thoughts on the goals for Europe? Thank you.

Andrew McLean: Fair enough. Do you wanna take Delta? Sure. Definitely. Then Delta arrangement, is a two and a half year completion of a contract they signed with another vendor. That we will complete that, and we're in discussions on what the future of that will be beyond that. In terms of marketplaces, you know, we feel really good about marketplaces Nordstrom's continues to be the fastest growth marketplace for us. Actually, it's really driven off the back of a very high AOV. It's the highest AOVs we've ever recorded you know, as we as we just see a very premium customer come to the brand. So we're excited about that. Amazon's continued to grow for us along with along with Macy's.

And, you know, we saw progress on Target as well that we were happy with. I believe your question probably has some calls embedded in it, and I do want to address that. We did have a tough quarter with calls, but I actually feel very optimistic about it and the trends that we're seeing out of the business. We had a reset with calls and feel good about the direction we're seeing there and the selling getting, which is driven by actually also an increase in AOV. So in terms of marketplaces in general, we feel very positive. Europe, I couldn't be more excited about. I actually think the opportunity for Lands' End, Inc. internationally is amazing.

We just use the opportunity of the challenges we had late last year to really lean in and say, we want to create a halo for the US brand. It's like we should be continually evolving this brand upwards, and it's like Europe is a great place. To pick up on that cache. And we started to do a lot of work around segmentation as much as anything And we found that, you know, we can reach a customer from Debenhams to Next to the UK, to Germany. But, also, you know, we're looking at how we're really gonna lean in to France now. We see that as a very fashion-forward market. We've always had sales to France.

But we see that as a significant opportunity for us. And we see more market expansion coming off the back of that. So what actually way more bullish on it than we necessarily were even three months ago.

Dana Telsey: Thank you.

Andrew McLean: Thanks, David. Thanks, David.

Operator: We'll take our next question from Marni Shapiro of Retail Tracking. Your line is open.

Marni Shapiro: Hey, guys. Congratulations on the improvements. Could you talk a little bit about obviously swim was a highlight in the quarter. I'm curious about some of your other segments, you know, key segments like towels and things like that you guys have focused on. And could you also just talk a little bit about the changes happening here? The site has been outstanding. Really much more modern. You've storytelling. It feels more youthful. I guess, could you talk about what's happening behind the scenes? Even your fashion is really on trend, but not trendy. And could you kind of roll out what we could expect to see, especially with some big seasons coming up ahead?

With back to school and then winter with your outerwear business.

Andrew McLean: Right now, all that money. Marni, you can just keep asking questions forever. It's great. You know, I think that we wanted to be curious with us. When we're the number one online brand for women over forty. And, you know, we felt we had the right actually and the opportunity to move the market. And I think we built a team from design to merchandising to tech design to sourcing that could really start to react to that. We gave them the opportunity to be curious with the franchises. So you take Douglas, and, you know, Douglas Mhmm.

I think everybody who knows Douglas thinks about it as it's it does exactly what it says on the tin, but it always comes in black and it always comes in the same silo. And we just felt that there was such enough opportunity to reach a wider consumer. And, you know, in that, we just started to get curious about what we were seeing around the world. And you know, leveraging the comments that I was just making today about Europe, we see so much trend coming out of places like France. And it's like there's no reason that one, we shouldn't be servicing that.

But there's another there's another, which is that we should be starting to channel that And so as you know, we looked at turning tubeless into swim dresses. It was like taking the back out of tugless, take making it into a two piece, and actually hitting some of the real trends about having a romper tug list. Mhmm. It's been really it's been really powerful. And what we see is you know, you heard the numbers about how our customers responding. It's really our existing customer response to the existing product. But we have a whole new customer responding to the new product.

And we are really excited about the dynamics of the customer we're seeing coming into the brand. It's like they're they're less age oriented, and they're more oriented towards the fit and style and aesthetic of Lands' End, Inc., then that a handwriting that we're trying to develop across the business. And, you know, I've got Kim and Matt and team that's that's on the creative side of the business. Really leaning in and challenging us every day to think about you know, a different customer, a different consumer, and how we're going to consistently reach them. And so we're not gonna compromise on that. We see an opportunity to remake the brand.

Tells I'm gonna talk about towels and totes. If you put a towel in the you can put a towel in the tote, and I think that I think what we've done is we've taken the tote and we've opened it up to mean, we have we have gen we have gen a, let alone gen z coming in. And, you know, grabbing at the toads. It's our number one acquisition vehicle for new customers. You saw the work that we did with the collabs over Memorial Day in, you know, we're selling back to that because the tone opens you up to sell the swim. To sell the towel, to sell the swim dress.

I think that been incredibly powerful for us. The site you for the site. We've done a lot with the site. We think we can do more with the site, and what we're trying to do is open up the various channels to find different shoppers. So I talked about being on next.com or I talked about being on nordstroms.com. And I think that, you know, we find different customers there. I would point you to some of the work we're doing in Europe. You take a look at landsend.co.uk and the .de site as well.

Get some perspective of how we're not even so much regionalizing, but personalizing to those markets is becoming key to us because I've always believed that it's about the individual customer and the experience they're having. And the more we can personalize that, the better. Fashion and trends that's coming up, drop our June catalog next week. I'm really curious to see what you think about it, and I'd love to talk to you about I'm gonna leave it at that.

Marni Shapiro: By the way, I just popped on to the UK site, and it's so different. It feels like a European site, not an American site, which is a good thing. Can I just ask you one quick follow-up? You're getting a lot of new people in on totes. Are you able to transition them into other products? And I guess where do they move from totes? Like, where's the next place? Do they go to towels, or is it swim, or is it dresses? I'm curious, like, what the transition what the path looks like for that customer.

Andrew McLean: The big yeah. It's a great question. We talk about this a lot. So a big pivot point the it covers swim and dresses. So they go to swim dresses. So if you look at our swim dresses Mhmm. A lot of women pick up our swim dresses. And they were the most regular dresses. You know, that whole trend that's out there right now of you know, speech to bar, you know Mhmm. Pool to dinner is really calling for having the ability to not have to your room and change. And I you know, what we are seeing a real growth in that swim dress trend and actually swim dress is outperform regular dresses.

Now I don't wanna do regular dresses at the service. They continue to be strong, and we've seen some really strong trends in there. But where the customer goes where we're seeing a lot of action is on that is on that swim dress. And I it's it's so of a moment, and I think it's a franchise we can further build on going into the going into, you know, particularly next year.

Marni Shapiro: Fantastic. Thank you so much. Best of luck for summer.

Andrew McLean: Hey. Thank you.

Operator: We'll take our next question from Eric Beder of SCC Research. Your line is open.

Eric Beder: Good morning. I wanna talk a little bit about licensing here. You know, part of the kind of doing the apples to apples pieces that you licensing took this year are somewhat of a replacement for categories you already have. Are we now entering the part where licensing where we're seeing incremental categories that will start to add to the total revenue because they're not really replacing something that's already out there. And I guess I'd love to get an update on how you are happy on how you feel about the footwear and the kids' licenses in terms of helping drive business both online and with your partners. Hey, Eric. Good to good to have you on.

I'll start with just the strategy side of it, and I'll let Andrew move to the feelings about the current categories. You are correct in that, as you noticed, that we added a few new licenses in our announcement today, that were repeats from Q4 that we have signed. And those are white space, so those will be purely incremental. And start to build the brand and get us to additional channels. That we're very excited about. And as you'll realize that, you know, licensing just started in Q1 last year. So each quarter, we'll be building the historical license that we signed. They'll continue to grow Andrew, you wanna talk about footwear and Yeah. Shoot?

I mean, in I mean, the other the other color in there, Eric, is the is the reach that we get by being in other channels. You know, being in the clubs and being in wholesale is absolutely huge for us, and I don't wanna diminish the opportunity there of how far we can go. And I think, you know, the adjunct to that coming out of the conversation we just had about Europe is it's like this opens us up globally as well to significant opportunity to push the brand into new markets. So, you know, every on top of everything Bernie said, I just wanna make sure that's not getting lost in the midst of it.

Specific to specific to Kids In Shoes, Kids came out of the gate strong. We've been really happy with the transition we made, and you know, kids was an emotional one for Lands' End, Inc. because it's always been in the kids business and, you know, inside a vertical retailer, that's something that almost every one of my employees wanted to hang on to. And, you know, I've I've felt that we needed to concentrate on our best at because we're not a ten billion dollar company, not yet. Give us a couple of years. You know, so it was who do you lead in and work with?

And so we found that best what we believe for the best partner out there, and they've done a great job. We tremendous sales on our own website from kids, and it's not just discounted sales or it's not just add on sales. It's customers coming and buying at or near full price, and they're specifically buying for kids What a great adjunct that is for our School Uniform business. Which we're seeing a lot of growth from as well, where we, like, put the two side by side and like you've got, like, good symbiosis. I wanna put a plug in for. Backpack day, which is coming up. That's that's gonna be huge for us.

And, again, it's something we work with our partner on. Their ability to actually increase the penetration of Lands' End, Inc. KIDSO into the other channels into a wider population. Again, I just can't diminish that. That is extremely powerful for us. Choose is gonna be slower. You know, it's the newness works really well for us. I think we were slow because we tried to reinvent that. So we tried to go with what the original, shoes were. I was gonna say silhouettes, but that doesn't work for shoes. We really you know, took the original assortment and we kept that. We've turned that on its head now.

We've started to go to much more newness, and we've been more aggressive about that. And so we're seeing a lot we're seeing that work a lot, and it works back to swim. I'm sort of pick up on Marnie's question, which is, again, we'll we'll see her wearless slides. She's gonna wear the whole, you know, uniform from the beach, the whole uniform from the pool to go to dinner. And I think that gives us a lot of hope And we're seeing actually the clubs start to get interest and choose now as well. And I like that because that puts us in front of hundreds of millions of people.

Eric Beder: Yeah. We've been seeing that in the catalogs with the shoes we becoming much more wider in terms of styles and trends here going forward. In terms of in terms of B2B, two you have the Delta contract coming up. Could you remind us historically how these kind of contracts launch If I remember correctly, there's a there's a big bump initially and then they have a nice flow afterwards. And what's we be thinking about in terms of back to school? I know that the competitor just When did you think that's gonna be fully manifested and we're gonna see that in terms of the flow here this year also.

Bernie McCracken: Yeah, Eric. As far as Delta goes, it isn't necessarily the beginning or end of a contract that there's that there's large flows. It's when they decide to launch a new product line. Our current our current agreement with Delta you know, does not have a near-term new launch of product. They're they're working on that themselves. So this will be just the normal run rate that we experienced with them historically.

Eric Beder: Okay. In terms of back to school uniforms, you know, we're excited about the volume that we added in Andrew noted in his comments that there's $13 million of new customer schools that we have added over the last six months. As one of our competitors exited the industry. So we are you know, back to schools tends to start in June for us. And then play out through September. So we're excited for the effects on Q2 of that new added business.

One of the things that we like about this year just worth noting because I know there's a lot of implications for all back to schools, is we're seeing back to school line up very closely with 2024's back to school, so it should be relatively calm. It's the way we're viewing it.

Eric Beder: And last question. You mentioned in your release about SWIM. Do you and I agree that the product has materially improved. Do you believe that's just because of some ways and timing of the weather in some of the pieces? I know it's been cold to over year in certain areas. How should we think about that? Thank you.

Andrew McLean: No, Eric. We improved it ourselves. I keep telling you this. It's it's just like we make great product, and it's it's connecting with the customer. So that continues to be big for us. Now I'm being I'm being slightly facetious. It definitely was a it definitely was a chilled start. It was cold and wet, and it was interesting that for first month of the quarter, we were actually out, you know, we were actually outselling swim with outerwear. Which has never happened to us before. So we saw that business pick up and get on this trend. I think we'll continue to see it get on this trend.

And our view is that with the product that we've got and the reach that it's getting, that there is opportunity for us. But I do wanna put in a plug for you know, the Lands' End, Inc. teams who've really worked hard to put this collection together, and I think it's a splendid collection.

Eric Beder: Great. Good luck for the rest of

Andrew McLean: Thanks, Eric.

Operator: And we'll move next to Steve Silver of Argus Research. Your line is open.

Steve Silver: Thanks, operator, and thanks for taking my questions. My first question is really about the outfitters business in general. Particularly on the enterprise side. Just curious as to whether there's been any implied hesitancy across the pipeline for outfitters given all the macroeconomic noise that we're dealing with every day. Just curious as to whether it's really business as usual in terms of enterprise prospects moving forward with these kind of discussions or if any companies that you're talking to are getting a little bit more in, like, a wait and see mode given everything that's going out in the macro environment? The answer is a little surprisingly, no.

So we went through the cycles with everyone else yourself included, which was oh, there's gonna be a bump. Because everyone's gonna pull forward to get ahead of tariffs. And then there's gonna be a dip because everyone's got ahead of tariffs, and then there's gonna be a slowdown And we saw none of that. We saw very con we saw very consistent business. And I think that's I think that's a testament to how our teams engage with the market. And it's also a testament to, you know, strength in the enterprise businesses out there. But we're continuing to see that consistency from them. So right now today, I feel pretty good about that business.

And it's it's showing it's showing consistent strength that again, like you, I probably wasn't necessarily expecting was gonna come through.

Steve Silver: Great. And one more if I may. You mentioned in your prepared remarks about increasing the customer file through, like, SMS subscriptions and the like. I'm curious as to how that maybe compares just in context to previous campaigns where the customer file was, expanded and just in terms of maybe how many of those new subscribers showed stickiness and not unsubscribing once they've taken advantage of the of the product that brought them into the system in the first place. Just trying to get some context or in terms of the stickiness of some of these new customer ads. Yeah. The number we called out that's a great question, actually.

The number we called out that I think you would key on in the script is that one to two x customer. Because that's exactly, I think, where you're going, and that answers that question. You know? It's you can pay paid search, the very short traditional method, will get you that one time customer. But where you really get them in is making them a two times customer, and we saw significant growth in that. And I think that's a testament to how we've chosen to market and the brand that we're choosing to market which is we're not trying to sell so much on discounting.

We're trying to stand behind the quality of our product, the fashion of our product, the make experience that you have coming to Lands' End, Inc. And we were really excited to see the one times customer become a two times customer at the rate they did and help build our LTV relative to the cost of acquisition. I think there's a sort of sub part to this question, which is worth covering, which is we're doing less paid search than we were, and we're doing more in channels where I think we can have a fuller expression of the brand. So, for example, in social, we do a lot on Insta now.

It's not out of the question that we'll can we will ourselves be on TikTok. We are certainly on TikTok. Through our influencers. I think it's about reaching customers more individually or through cohorts that they follow. I mean, I think the whole Park collab that we do and we continue to collab with Park has been really powerful for us in reaching a whole new customer. So I hope that answers your question. I think the other thing I'd throw in there actually is we're starting to look more and more about using AI agents to market to customers. So we see a lot of search now whether you're on Safari or whether you're in Google.

You're getting an answer offered to you from an AI agent. So more of our marketing is starting to go against that. And while it's a very small base, it has tremendous growth associated with that, and we see that as the sky's the limit as we look like you use and deploy more AI based tools in the business.

Steve Silver: Great. I appreciate all the color.

Andrew McLean: Thanks, Steve. See you.

Operator: And this does conclude our question and answer session as well as the Lands' End, Inc. first quarter 2025 earnings call. You may now disconnect your lines. And everyone, have a great day.

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DATE

• Wednesday, May 28, 2025, at 8:15 a.m. EDT

CALL PARTICIPANTS

• Vice Chairman and Chief Executive Officer — Tao Zou
• Chief Financial Officer — Haijian He
• Investor Relations Director — Nicole Shan

Need a quote from one of our analysts? Email [email protected]

RISKS

• Chief Executive Officer Zou stated that non-GAAP gross margin declined by 2.6 percentage points quarter over quarter to 16.6%. He attributed the decline to "declined profit contribution from a lower proportion of enterprise cloud revenue as well as the impact of front-loaded investments of computing resources."
• Chief Financial Officer He noted a 25% sequential decrease in enterprise cloud revenues, mainly due to seasonality.
• Zou described the impact of supply chain issues, stating, "Therefore, the short-term impact is not that material. However, from a mid to long-term perspective, there will be a meaningful impact for both Kingsoft Cloud Holdings Limited as a company and for the industry as a whole as well."

TAKEAWAYS

• Total Revenue: Total revenue was RMB 1.97 billion, an increase of 11% year over year, supported by growth in both public and enterprise cloud segments.
• Public Cloud Revenue: Public cloud revenue was RMB 1.35 billion, up 14% year over year, with AI contributing significantly to this growth.
• AI Gross Billing: RMB 525 million, reflecting growth of over 200% year over year and 11% sequentially, and comprising 39% of public cloud revenue.
• Xiaomi and Kingsoft Ecosystem Revenue: RMB 500 million, a 50% increase year over year, contributing 25% of total revenue.
• Enterprise Cloud Revenue: RMB 616 million, a 5% year-over-year increase but a 25% sequential decline due to seasonality.
• Non-GAAP Gross Profit: Adjusted gross profit was RMB 327.7 million, up 9.6% year over year, but down 23.4% from the previous quarter.
• Non-GAAP Gross Margin: Adjusted gross margin was 16.6%, compared with 16.8% in the first quarter of 2024 and 19.2% in the fourth quarter of 2024, impacted by higher investment and business mix.
• Non-GAAP Operating Loss: Non-GAAP operating loss was RMB 55 million, with non-GAAP operating margin at negative 2.8%, an improvement from negative 7.2% in Q1 2024 but worse than last quarter.
• Non-GAAP EBITDA Margin: Non-GAAP EBITDA margin was 16.2%, up 14.3 percentage points year over year, primarily attributed to increased AI business penetration and cost management.
• Capital Expenditures: RMB 605 million, with diversified funding sources involving internal cash, leasing, and bank financing.
• IDCs Cost Trend: RMB 722.8 million, a reduction of 6% year over year, signaling improved resource utilization.
• Operating Expenses: Adjusted total operating expenses were RMB 427.3 million, down 9% year over year and 4.3% sequentially, reflecting cost control.
• Cash Position: Cash and cash equivalents totaled RMB 2.32 billion as of March 31, 2025, providing liquidity for operations and investments.

SUMMARY

Kingsoft Cloud (NASDAQ:KC) management highlighted continued acceleration of AI-related business, with deployments such as the Xiaomi (OTC:XIACY) large language model training on Kingsoft Cloud infrastructure. Strategic capital allocation to AI computing clusters is expected to further support revenue growth, with official service launch anticipated in Q2 2025. The company disclosed that, beginning in the second half of 2024, pricing dynamics and profit-sharing models have started to compress gross margins for newer artificial intelligence (AI) infrastructure projects with non-key customers.

Executives signaled no meaningful short-term impact from chip restrictions due to inventory, but flagged the potential for a more pronounced mid- to long-term industry effect. The firm refrained from providing formal top-line guidance but emphasized expectations for improved operating and EBITDA margins during the second half of 2025.

• Chief Executive Officer Zou explained that financial contributions from newly delivered AI clusters will be reflected in Q2 2025, highlighting a timing lag between deployment and revenue recognition.
• Zou observed that the integration of smaller and distilled models by Xiaomi and other ecosystem partners is driving incremental use of Kingsoft Cloud's infrastructure, potentially increasing future demand.
• The company reported no material negative impact on revenue or profitability from the shift toward smaller AI models or open-source competition, citing counterbalancing demand from new industry entrants.
• Chief Financial Officer He advised investors to monitor gross margin, EBITDA margin, and R&D trends as primary indicators of operating leverage and profitability in the coming quarters.
• The supply chain partnership approach adopted in the second half of 2024, which involves profit sharing with resource partners for non-top customers, will continue to influence future margin structure.

INDUSTRY GLOSSARY

• IDC Costs: Expenses related to Internet Data Center operations, including hosting, bandwidth, power, and maintenance of cloud infrastructure.
• AI Gross Billing: Aggregate billing amount generated from artificial intelligence-related cloud services within a reporting period.
• Public Cloud: Cloud services accessible to multiple customers over the internet, supporting multiple industry verticals as described by Kingsoft Cloud Holdings Limited.
• Enterprise Cloud: Dedicated cloud services tailored to large organizations and public sector clients, typically involving custom or private deployments.
• Resource Pool Supply Chain: Strategy of leveraging third-party partners to provide server and computing resources on a profit-sharing basis rather than capitalizing all infrastructure internally.
• Distilled Models: Smaller, more efficient versions of large artificial intelligence models designed to reduce computing requirements.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Kingsoft Cloud Holdings Limited First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nicole Shan, IR Director of Kingsoft Cloud Holdings Limited. Please go ahead.

Nicole Shan: Thank you, Operator. Hello, everyone, and thank you for joining us today. Kingsoft Cloud Holdings Limited's first quarter 2025 earnings release was distributed earlier today and is available on our IR website at ir.ksyun.com, as well as on the via newswire services. On the call today from Kingsoft Cloud Holdings Limited, we have our Vice Chairman and CEO, Tao Zou, and the CFO, Haijian He. Mr. Zou will review our business strategies, operations, and the company highlights, followed by Mr. He, who will discuss the financial performance. They will be available to answer your questions during the Q&A session that follows. There will be consecutive interpretation. Our interpretations are for your convenience and reference purposes only.

In case of any discrepancy, management statements in the original language will prevail. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties, or factors are included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. Finally, please note that unless otherwise stated, all financial figures mentioned during this conference call are denominated in RMB. It's now my pleasure to introduce our Vice Chairman and CEO, Tao Zou. Please go ahead.

Tao Zou: Thank you. Hello, everyone. Thank you, and welcome all for joining Kingsoft Cloud Holdings Limited's first quarter 2025 earnings call. This quarter, we continued to steadily advance our business to the target on high quality and sustainable development, centering on key areas of AI. First, we recorded year-over-year revenue growth of 11%, reaching RMB 1.97 billion. Both public cloud and enterprise cloud achieved year-over-year growth, among which public cloud increased by 14%, reaching RMB 1.35 billion. Second, we continued to drive progress with AI. This quarter, AI gross billing reached RMB 525 million, representing a year-over-year increase of over 200% and a quarter-over-quarter growth of 11%, further contributing 39% of public cloud revenue.

In addition, this quarter, we are accelerating the construction of our computing clusters with more flexible capital deployment, which is expected to launch service officially in the second quarter, further boosting our AI business revenue. Third, as the only strategic cloud platform of the Xiaomi and Kingsoft ecosystem, our business cooperation with the ecosystem progressed smoothly. This quarter, revenue from Xiaomi and Kingsoft ecosystem reached RMB 500 million, up 50% year over year, with its contribution to total revenue further increasing to 25%. By fully integrating the strength of both parties and jointly expanding cloud infrastructure for the AI era, our collaboration with Xiaomi and Kingsoft in the AI space continued to progress and deepen.

Finally, in terms of profitability, this quarter, our non-GAAP gross profit was RMB 327 million, representing a year-over-year increase of 9.6%. Non-GAAP EBITDA margin reached 16.2%, an increase of 14.3 percentage points year-over-year, mainly attributable to the continued increase in the proportion of AI business revenue. However, we also witnessed that our profits have experienced some fluctuation while non-GAAP gross margin declined by 2.6 percentage points quarter-over-quarter to 16.6%. The decline in gross margin was mainly due to declined profit contribution from a lower proportion of enterprise cloud revenue as well as the impact of front-loaded investments of computing resources.

The non-GAAP operating profit was impacted by the decline in gross profit, resulting in the loss of RMB 55 million this quarter. Non-GAAP operating margin was negative 2.8%, representing an improvement of 4.4 percentage points compared with a loss of 7.2 percentage points in the same period last year, and turned from a profit to a slight loss quarter-over-quarter. Despite quarter-over-quarter fluctuations in financial performance this quarter and the headwinds of both market pressure and supply chain uncertainties, we remain firmly on track with our long-term strategy and continued to move forward with confidence. We have strengthened our foundation in ecosystem cooperation, computing infrastructure deployment, and AI application, advancing the strategic layout of our company's overall AI cloud services.

Now, let me walk you through the key business highlights of the first quarter of 2025. In the public cloud space, revenue reached RMB 1.35 billion this quarter, representing a year-over-year increase of 14%. Our AI business, as a key growth driver, reported a significant increase in gross billings to RMB 525 million, up over 200% year-over-year and 11% quarter-over-quarter, accounting for 39% of public cloud revenue, continuing to lead the industry. Based on steady usage growth in ecosystem customers and foundation model customers, computing demands for AI applications in Internet customer business scenarios, such as online education and online travel, also made breakthroughs.

In the construction of clusters, we efficiently coordinated and responded quickly to the demand schedule of key customers, creating a benchmark case of delivering full-spectrum cloud services for large-scale clusters within the quarter. In addition, with flexible capital cooperation models, we ensured sufficient underlying computing power supply to support the rapid growth of our AI business. In the enterprise cloud space, revenue reached RMB 616 million this quarter, representing a year-over-year increase of 5%. Affected by seasonal slowdowns in project delivery and acceptance process, enterprise cloud revenue declined quarter-over-quarter. By industry, in the public service sector, we are advancing the application of AI in public service clouds and state-owned asset clouds.

Actively embracing the AI-driven trend, Kingsoft Cloud Holdings Limited has built a rich set of model resources through an open-source model marketplace while providing a one-stop model toolchain that covers key processes, including data processing, model fine-tuning, model evaluation, and model quantization. We remain committed to delivering full-process one-stop AI services to help customers deeply optimize model performance in their business scenarios. In the healthcare sector, we initiated the construction of a platform for mutual recognition and sharing of test and examination results in Wuhan. Kingsoft Cloud Holdings Limited's medical imaging cloud capabilities, which have been deployed in regions such as Jiangsu and Chongqing provinces, will once again validate our capabilities.

Our capabilities also expanded from imaging scenarios to test and examination scenarios and have been further replicated and extended to the entire Hubei province market. In terms of product and technology, we uphold the principle of building success based on technology and innovation, focusing on delivering best-in-class customer experiences across our core product offerings. This quarter, we continue to enhance the product capabilities of our intelligent cloud computing services. Our Xinyu training and inference platform, as a one-stop AI development and deployment platform, remains committed to providing enterprises with efficient, elastic, and cost-effective model training and inference services.

The integration of high-quality models, including the one from Xiaomi, will further expand the platform's ecosystem capabilities and help customers apply AI technologies in scenarios such as natural language processing, multimodal interaction, and intelligent decision-making. Overall, our AI business continued to grow rapidly, and our cloud services have entered a new development cycle. In the public cloud space, we strengthened our capabilities in infrastructure training, inference platforms, and AI tools to help customers reduce training costs and improve stability, convenience, and efficiency throughout model development, fine-tuning, and usage. In the enterprise cloud space, with a focus on AI, data, and office productivity, we provide one-stop model solutions and services under the trend of enterprise AI plus scenario development.

Looking ahead, we will maintain deep cooperation with the Xiaomi and Kingsoft ecosystem, fully understand and explore new AI opportunities, and continue to create value for our customers, shareholders, employees, and other stakeholders. I will now pass the call to our CFO, Haijian He, to go over our financials for the first quarter of 2025. Thank you.

Haijian He: Thank you, Mr. Zou, and thank you all for joining the call today. I will now walk you through the financial results for the first quarter of 2025. This quarter, our AI strategy continued to drive our growth and laid a foundation for future development. Total revenues for this quarter were RMB 1,970.0 million, reflecting an 11% year-over-year increase. Out of this, revenues from public cloud services were RMB 1,353.5 million, up 14% from RMB 1,187.4 million in the same quarter last year. This growth was mainly fueled by a surge in AI-related business, with the billing reaching RMB 525 million. This quarter, our capital expenditure reached RMB 605 million.

Revenues from enterprise cloud services reached RMB 616.5 million, up 5% from RMB 588.2 million in the same quarter last year, primarily driven by increased demand in industry solutions. However, we have witnessed a 25% sequential decrease in enterprise cloud revenues, which was mainly due to the seasonality impact. Total cost of revenue was RMB 1,651.7 million, up 11% year-over-year, which was in line with our revenue expansion. IDC costs dropped by 6% year-over-year from RMB 768.5 million to RMB 722.8 million this quarter, reflecting our execution on cost control and better resource utilization.

Depreciation and amortization costs increased from RMB 183.5 million in the same period of last year to RMB 378.5 million this quarter, mainly due to the depreciation of newly acquired high-performance servers to expand our AI business. Solution development and service costs rose by 13.3% year-over-year from RMB 446.0 million to RMB 505.2 million, driven by expansion in Camelot personnel to support revenue growth. Fulfillment costs and other costs were RMB 3.1 million and RMB 42.1 million this quarter, respectively. Our adjusted gross profit for the quarter was RMB 327.7 million, a 9.6% increase year-over-year, while a decrease of 23.4% quarter-over-quarter.

Adjusted gross margin was 16.6% in this quarter, compared with 16.8% in the first quarter of 2024 and 19.2% in the fourth quarter last year. Our adjusted gross margin has been negatively impacted by the seasonality of enterprise cloud services and higher upfront investments into servers and racks for AI business. On the expenses side, excluding share-based compensation, our total adjusted operating expenses were RMB 427.3 million, a decrease of 9% year-over-year and a 4.3% quarter-over-quarter. Of which, our adjusted R&D expenses were RMB 200.8 million, increased by 4% from the same quarter last year. Adjusted selling and marketing expenses were RMB 107.8 million, increased by 10.1% year-over-year.

Adjusted G&A expenses were RMB 118.7 million, decreased significantly by 13.6% year-over-year due to the decline of credit loss. Our adjusted operating loss was RMB 55.8 million, narrowed by 56% from RMB 127.0 million in the same period of last year. The improvement was mainly due to the increase of gross profit and a decrease of credit loss expenses. However, the adjusted operating profit turned to a loss from last quarter, which is mainly due to the decrease of gross profit in this quarter. Our non-GAAP EBITDA profit was RMB 318.5 million, increased by RMB 8.3 million from RMB 33.2 million in the same quarter of last year.

Our non-GAAP EBITDA margin achieved 16.2%, compared with 1.9% in the same quarter last year, mainly due to our strong commitment to AI cloud computing development, strategic adjustments, business structure, and our strict control over cost and expenses. As of March 31, 2025, our cash and cash equivalents totaled RMB 2,322.7 million, providing us a strong liquidity position to support operations and AI investments. Looking ahead, our cloud infrastructure is ready to serve in a short time. The demand from ecosystems and other AI application scenarios not only fuels our business growth but also reinforces our confidence in this trajectory. With demand for AI cloud service continuing to grow, we are well-positioned to capture and capitalize on AI capital opportunities.

Thank you. We are now happy to take your questions.

Operator: Please ask your question in both Mandarin Chinese and English because of consecutive interpretation. Operator, please go ahead.

Operator: Thank you. As a reminder, to ask a question, please press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one again. We will now take the first question from the line of Brian Gong from Citi. Please go ahead.

Brian Gong: I will translate myself. Thanks to management. So one is, you know, for both public cloud and the enterprise cloud, the growth seems a little bit weaker than our previous expectation. What are the reasons behind this? And how should we see the full-year growth right now? And secondly, recently, Xiaomi released its own large language model. How does management leverage this, and what's the latest demand from Xiaomi?

Tao Zou: Thank you very much for your question. So in relation to the first question about the growth speed, in terms of both public cloud and enterprise cloud, as we noted in the prepared remarks, especially for the enterprise cloud, the seasonality is quite evident. That includes impact for both our own enterprise cloud services as well as the business from Camelot. Because, obviously, Q1, there's the factor of the Chinese New Year. A lot of customers for enterprise cloud business are still doing their budgeting. Now in terms of the public cloud, as we mentioned before, the public cloud business of Kingsoft Cloud Holdings Limited focuses mainly on key customers, which typically are large customers.

And they have their own cycle of the construction of the clusters before they can actually get online and generate revenue. So in fact, in the first quarter, we have delivered a 512-node cluster to our key customers. However, that delivery time point was only at the end of March, and therefore, the revenue and profit reflection in the financial numbers will only be shown in the next quarter, which is the second quarter, Q2. Now in relation to your question about the model from Xiaomi, in fact, the Xiaomi's 7 billion parameter model was actually trained from our cluster.

And in fact, the tremendous growth of Kingsoft Cloud Holdings Limited's AI business has much to do with the demand coming from Xiaomi. In the long-term perspective, the tremendous demand for model inference coming from Xiaomi still has significant potential. However, since we are serving Xiaomi, the pace of Xiaomi's demand has a lot to do with when and the amount the revenue and profit will show on our financial statements on a quarterly basis.

Operator: Thank you. We will now take the next question from the line of Sheridan Suncroft from CICC. Please go ahead.

Sheridan Suncroft: Thanks, management, for taking my questions. First of all, I noticed that Kingsoft Cloud Holdings Limited and Kingsoft Office have recently jointly launched an AI all-in-one model machine for the government affairs sector. How do you view the business opportunities in the government affairs AI field? And also, could you introduce the pricing models of this all-in-one machine? Secondly, could you please update on the non-GAAP OP margin outlook for the subsequent quarters? Thank you.

Tao Zou: So let me quickly translate. As rightly pointed out, the market for AI in the office automation targeting the government space has been developing very fast, and therefore, that's the reason why Kingsoft Cloud Holdings Limited and Kingsoft Office have come together to jointly develop and offer a plan or a solution to such a market, which has been actually validated by the market. So that integrated solution is actually an integration of both software and hardware, and notably, in the software portion, there's the AI component that helps them become more efficient in office scenarios. And this is targeted for Chinese government agencies in various layers of various tiers.

Now in terms of the pricing question you asked, it actually varies based on the different configuration of hardware that we are providing to the customer. So the pricing can actually vary by quite a lot.

Haijian He: Thank you for the question on the margin side. I think probably a few things I want to point out. Given the seasonality in Q1, as probably many of you understand, our primary OPEX is the human capital expenses, so the salaries, compensation, bonuses, and so on. So in Q1, basically, not only do we need to incur the normal salary payment, but also there's a bonus and also certain kinds of employee benefits also incurred in Q1 during the holiday seasons, as you understand. Given the revenue side was affected by the delay of certain projects, and also the top-line growth has been affected by seasonality, the variation of the top-line growth largely affected the bottom line.

So the cost structure, especially on salary and compensation, is relatively fixed. That's why it's kind of affecting the OP margin in Q1. It's kind of very straight line given the better margin profile, for example, the AI projects and our relationship with our ecosystem partners, especially for Xiaomi, as our CEO, Mr. Zou, just mentioned, the big project we're likely to deploy on the way, and it will be largely booked starting from Q2 going forward. So, hopefully, our top-line growth will drive a better margin expansion in the following quarters. So we are in the view that our OP margin will be better in the following quarters.

It depends on the top-line growth, the pacing of that, and the scale of the revenue quality in the following quarters. But on the other hand, we also want to point out that the EBITDA margin will likely be better compared with the OP margin given the nature of the AI business. So as the AI business penetration becomes higher in the public cloud services, hopefully, the EBITDA margin can be recovered a little bit faster than the OP margin side.

So I think I will encourage the audience to probably closely track our gross margin profile and EBITDA margin profile as well as the R&D cost, which are primarily linked to the expenses and the compensation and salaries of employees. I think these are factors that are going to be the leading indicator for the OP margin going forward for the following quarters. So while we don't give a formal guidance, I understand Brian also mentioned this, for the full-year top-line revenue in the call today, by the way, in the view that the margin profile in the following quarters likely, especially in the second half of this year, will be better than the first half of this year.

And at this moment, we don't give a kind of formal management guidance for the top line, but the margin profile will continue to be better, especially in the second half of this year. Thank you.

Operator: Thank you. We will now take the next question from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong: Thanks, management, for taking my question. My first question is about the AI CapEx and the OpEx breakdown. Can we have an update, like, last quarter? And my second question is about our quarterly CapEx, like Q2. Is the chip ban issue affecting the sequential momentum in CapEx? And my first question is more about the industry landscape. Given that customers are now using more, like, distilled models, smaller models, rather than large models, would that affect the cloud revenue? Thank you.

Haijian He: Thank you, Thomas. I will take the first two questions, and I defer to CEO, Mr. Zou, for the second and third questions. The first question regarding the capital expenditures. So I have mentioned, in this quarter, our total CapEx was RMB 605 million for the first quarter of this year. So if the audience remembers, since last year, we actually diversified the way we're financing the investment into AI, especially infrastructure construction. So our own cash to be used for the CapEx is one part, but also we are going to, for example, doing the financial leasing, operation leasing with our partners, for example, Xiaomi as well.

But also, we are going to get financing, for example, the bank loans and certain leasing agreements with the state-owned banks in China locally, as well as some leasing companies in China as well to arrange certain off-the-balance-sheet financing arrangements. So I think these are the three ways that we're financing the total AI infrastructure demand. So out of that, I think the reason you probably point out that total CapEx for this quarter is kind of RMB 600 million for this quarter. But I think our total investment into AI because we also start to lease certain servers from third parties to reduce our burden to pay out of pocket from our own cash.

So there's a certain leasing and rental agreement we actually start to negotiate and set up with third parties starting from Q1. So, hopefully, for next quarter, we're going to give some updates regarding our total spending, including both our own cash out of pocket, but also the leasing agreement that we'll start to arrange with third parties. So this is going to be the total investment of the AI infrastructure from our definition. So I'm likely to have some updates for next quarter because we just start to arrange those agreements with third parties to ensure to reduce and save and to be more efficient in terms of our own cash management.

So I think right now, we give the number on total CapEx, but the leasing plus the CapEx and plus our own cash will be another update for next quarter. And also given the OpEx, you know, as I'm mentioning, our R&D expenses for this quarter are around RMB 200 million. And the sales expenses are around RMB 108 million, and the management SG&A is around RMB 119 million. So if you're putting the three numbers together, it's roughly about RMB 400 million on the OPEX side, including R&D, sales marketing, and SG&A. This probably can give you a kind of color regarding the total OpEx plus CapEx on a quarterly basis. Thank you.

Tao Zou: So, basically, to translate from Mr. Zou's response to the chip ban question. So honestly and very frankly, there surely will be an impact. Right? However, this is actually not the first time for similar kinds of restrictions being imposed on chips. So we have experienced similar things before. And so before this round of restrictions actually hit us, we have had some inventory and storage, so, therefore, the short-term impact is not that material. However, from a mid to long-term perspective, there will be a meaningful impact for both Kingsoft Cloud Holdings Limited as a company and for the industry as a whole as well.

We mentioned before since 2023, we have already strengthened our cooperation with Made in China computer resources. And that kind of cooperation we have managed to continue since then. And in light of similar restrictions, we have made and we have been well prepared for the gradual substitution of made in China computing resources should restrictions continue to be more restrictive. So the conclusion, the basic conclusion is that there's no negative impact on revenue and profitability for Kingsoft Cloud Holdings Limited. And the reason has been as follows. The first one is for the traditional HashiCorp model customers, their models have been a hundred billion parameter large language models.

And it has historically been using our computing power for training and inferences, and this part is actually not impacted. Secondly, for the more traditional Internet space customers, they have actually always been using relatively smaller models, including the 30B and 10B kind of parameter amounts for our business. So this for us is actually an incremental amount for our revenue development. And thirdly, in the future, for the Xiaomi and Kingsoft ecosystem, we also expect to have extra positive impact coming from the more prevailing usage of relatively small models because more of the model inference would originally come from outside of the Kingsoft Cloud Holdings Limited computing power infrastructure from other companies.

Actually, when Xiaomi and Kingsoft started to adopt more medium-sized or smaller-sized models, they're actually starting to use more of Kingsoft Cloud Holdings Limited computing resources. So that's actually another part of potential incremental revenue and profit for us.

Operator: Thank you. We will now take the next question from the line of Wenting Yu from CLSA. Please go ahead.

Wenting Yu: So the first question is, can management share the recent gross margin trends for AI cloud leasing services? Previously, we observed aggressive price competition in the industry mainly focused on model API pricing. Are we seeing the pricing pressure extend to the AI server leasing business as well? And the second question is, following the open sourcing of R1 by Deepstick, how do we see the latest dynamics of model training demand? While there is incremental demand for post-training models, the open-source release of R1 may also lead to some model vendors abandoning further iteration. So how should we evaluate these two factors and their overall impact on the industry?

Tao Zou: In relation to the AI cloud service margin or pricing pressure question, let me respond to you from two dimensions, which are internal and external. So externally, as you rightly pointed out, we're actually seeing sort of market concentration for AI players as our customers, and therefore, they do have some impact on our new projects, which we entered into more recently. And the impact would largely depend on the project size. However, for the old long-term contracts that we have signed in the past, those projects that we entered into in the past, there's no meaningful, no material impact.

Another point I want to point out is that starting from the second half of 2024, we're increasingly leveraging the so-called resource pool supply chain to expand our infrastructure. So the strategy basically is for top key customers, we use our own cash and dry powder and CapEx to build the infrastructure to provide cloud service to them. However, for non-top customers, we're increasingly using leveraging the partners who will supply us with the servers and computing resources. And we jointly together provide cloud service to these customers. And because these are partners that provide resources, we actually also have to share some of the profit with them. So this is like a partnership in a profit-sharing model.

And for that reason, that new or emerging supply chain model has also to some extent, negatively impacted the gross margin level of the company. In response to your question regarding the impact of open source of Deepstick R1 on the demand for model training, my answer to you is that this is coming from our SVP, Ms. Linlin Yang. So the old batch of large language model companies, it's open in ten and large language model companies, we do have seen their demand shrinking to some extent due to the success of Deepstick. However, the contracts that we entered with them are long-term contracts, which we have entered in the past.

So as we responded in the first question, the impact is very limited. However, there's also a group of other companies than those large language model companies. Some of them are coming from the Internet space, some from other emerging industries. They are inspired by the success of Deepstick. And also think that by using relatively manageable resources, they will also potentially be able to train and owe a state-of-the-art model. So therefore, we're seeing increasing demand coming from these customers as well. So all in all, we don't see a negative impact from the success of the Deepstick model.

Operator: Thank you. There are no further questions at this time. This concludes today's conference call. Thank you for participating.

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DATE

• Wednesday, May 28, 2025, at 8 a.m. EDT

CALL PARTICIPANTS

• Chairman and CEO — Tony Spring
• Chief Operating Officer and Chief Financial Officer — Adrian Mitchell

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TAKEAWAYS

• Net Sales: $4.6 billion in net sales, exceeding Q1 FY2025 analyst guidance, above earlier management guidance of $4.4 billion to $4.5 billion.
• Comparable Sales (O + L + M): Comparable owned, licensed, and marketplace sales down 1.2% in Q1 FY2025, which was better than guidance for a 2.5%-4.5% decline; go-forward business comps declined 0.9%.
• Adjusted Diluted EPS: Adjusted diluted EPS of $0.16 in Q1 FY2025, exceeding guidance range of $0.12 to $0.15, but below prior-year actual of $0.27.
• Gross Margin: $1.8 billion, or 39.2% of net sales in Q1 FY2025, flat compared to the prior year; merchandise margin improved by 40 basis points, offset by higher digital delivery expense.
• Luxury Segment Performance: Bloomingdale's posted net sales growth of 2.6% and comps up 3.8%; Blue Mercury net sales were up 0.8% and comps up 1.5%.
• Macy's Reimagined 125 Locations: Delivered a negative 0.8% comp versus a negative 2.1% for the total Macy's nameplate; Performance improved as the quarter progressed.
• Backstage and Marketplace: Backstage outperformed related full-line stores by several hundred basis points; Marketplace gross merchandise value grew by approximately 40%.
• Credit Card Revenues: Net credit card revenue was $154 million, $37 million higher year over year in the first quarter, driven by higher profit sharing and disciplined management.
• SG&A Expense: $1.9 billion, flat compared to the prior year; as a percent of revenue, SG&A increased by 170 basis points due to lower net sales.
• Inventory: Ended the quarter down 0.5% year over year, with management noting a healthy open-to-buy position.
• Adjusted EBITDA: $324 million, or 6.8% of total revenue in the first quarter; core adjusted EBITDA (excluding asset sale gains) was $308 million, or 6.4% of revenue.
• Operational Cash Flow: Outflow of $64 million in the first quarter; free cash flow outflow of $203 million with capital expenditures at $177 million.
• Shareholder Returns: Returned approximately $152 million to shareholders in the first quarter, including $101 million in share repurchases and $51 million in dividends.
• Tariff Exposure: 20% of overall products, 18% of national brands, and 27% of private brands sourced from China at the end of the last fiscal year; Sourcing from China in private brands was reduced from 32% in FY2024 and over 50% pre-pandemic.
• Tariff Impact on Gross Margin: The company estimates an annual gross margin hit of 20-40 basis points for FY2025 under current tariffs; The outlook for FY2025 does not factor in potential additional tariffs from the European Union or elsewhere.
• 2025 Full-Year Guidance: Net sales expected between $21 billion and $21.4 billion; comparable sales down 0.5%-2%; go-forward comps down roughly 2% to flat; adjusted EBITDA margin of 7.4%-7.9%; adjusted diluted EPS forecast of $1.60-$2.00 (excluding buybacks).
• Second-Quarter Guidance: Net sales of $4.65 billion-$4.75 billion; comps down 1.5% to up 0.5% in the second quarter; core adjusted EBITDA margin of 6%-6.2%; adjusted EPS of $0.15-$0.20.
• SG&A 2025 Outlook: Down low single digits in dollars for fiscal year 2025; as a percent of revenue, up 80-110 basis points, reflecting ongoing investment and a lower sales base.
• Management Transition: Adrian Mitchell confirmed his departure, with comments on strategy continuity during the change.

SUMMARY

Macy's (NYSE:M) management reported better-than-expected results on net sales, comps, and adjusted EPS in Q1 FY2025, primarily attributable to omnichannel execution, strategic discipline, and ongoing traction in the Bold New Chapter initiatives. Guidance for both the second quarter and full-year 2025 remains unchanged as the company balances recent momentum against persisting macroeconomic and tariff uncertainties. Management noted that key growth levers, such as new brand additions, store experience improvements, and targeted marketing, are delivering incremental gains in both reimagined and luxury format stores. Inventory remains tightly managed, positioning the company for ongoing flexibility in response to promotional and tariff dynamics as the year progresses.

• CEO Spring emphasized, "Results benefited from better than expected omnichannel performance at each of our nameplates and continued progress on our three pillars of the Bold New Chapter strategy."
• Management confirmed, "We are confident that we can continue to diversify countries of origin for both our private and national brands."
• Company actions to offset tariffs include "renegotiated orders with suppliers, and we've canceled or delayed orders where the value proposition is just not where it needs to be," according to Spring.
• The team highlighted a return to share repurchases as "really a signal of the confidence in the business" per Mitchell, with $1.3 billion in remaining authorization.
• No clear one-time items impacted SG&A expense, based on CFO Mitchell's commentary.

INDUSTRY GLOSSARY

O + L + M Sales: Comparable owned plus licensed plus marketplace sales, the company’s expanded comp metric blending store, licensed, and marketplace channels.

Go Forward Business: Locations and digital channels that remain core to Macy's future strategy post-recent closures and portfolio optimization.

Backstage: Macy's in-store off-price concept offering discounted merchandise within select full-line locations.

Full Conference Call Transcript

Tony Spring, our Chairman and CEO, and Adrian Mitchell, our COO and CFO. Along with our first quarter 2025 press release, a Form 8-K has been filed with the Securities and Exchange Commission, and a presentation has been posted on the Investors section of our website macysinc.com and is being displayed live during today's webcast. Unless otherwise noted, the comparisons we provide will be versus 2024. All references to our prior expectations, outlook, or guidance refer to information provided on our March 6th earnings call. On today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings presentation and SEC filings available at www.macysincinvestors.

All references to comp sales throughout today's prepared remarks represent comparable owned plus license plus marketplace sales and owned plus licensed sales for our store locations, unless otherwise noted. Go forward Macy's, Inc. comp sales include the approximately 350 Macy's go forward locations in digital, and Bloomingdale's and Blue Mercury nameplates inclusive of stores and digital. All forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in our filings with the SEC.

Today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call. With that, I'll turn it over to Tony.

Tony Spring: Thank you, Pam. Good morning, everyone. Today, we'll begin with a discussion of our first quarter results. We'll then share our thoughts on the current environment, and how it's informing our view for the second quarter and the remainder of the year. First quarter net sales, comparable O plus L plus M sales, and adjusted diluted EPS were all above our previously issued guidance. Results benefited from better than expected omnichannel performance at each of our nameplates and continued progress on our three pillars of the Bold New Chapter strategy. At Macy's, our reimagined 125 locations outperformed the remainder of the fleet. Our luxury businesses, Bloomingdale's and Blue Mercury, both delivered another quarter of positive comps.

And in end-to-end operations, we improved our in-store inventory allocation and leveraged generative AI to further modernize our supply chain. Macy's, Inc. achieved net sales of $4.6 billion compared to guidance of $4.4 billion to $4.5 billion. Comparable O plus L plus M sales declined 1.2% compared to the guidance for a decline of 4.5% to 2.5%. International tourism negatively impacted comps by about 30 basis points. Go forward business comps outperformed total, declining 0.9%. Momentum built in the March-April period, which we look at on a combined basis given the later Easter, and has improved quarter to date. I am proud of how our teams are navigating the current environment.

We are working closely together, maintaining a high level of flexibility. We are sharing ideas and leveraging relationships across departments, nameplates, vendors, and channels. As a result, adjusted diluted EPS of $0.16 was above our guidance range of $0.12 to $0.15. We entered the second quarter with inventories down 0.5%. We have ample open-to-buy for the remainder of the year and remain committed to providing a healthy flow of high-quality, relevant assortments at a compelling value proposition. Now let's discuss progress on each of the pillars of the Bold New Chapter strategy, starting with strengthening and reimagining Macy's. In the first quarter, Macy's NPS continued to improve year over year.

Customers appreciate our renewed emphasis on the shopping experience and a commitment to providing relevant fashion and newness at a compelling value across the good, better, and best price spectrum. Recently introduced contemporary apparel brands, Good American, Fiery, and Nick and Zoe have been well received, and Coach and Donna Karan continue to resonate. Our off-price concept, Backstage, and our Macy's marketplace remain strong. Backstage outperformed the full-line stores in which they operate by several hundred basis points, while marketplace achieved approximately 40% GMV growth. Backstage and marketplace fill white space in our assortments and help us retain customers seeking more price and brand variety while we maintain our commitment to limit redundancy.

During the quarter, the reimagined 125 posted a negative 0.8% comp versus a negative 2.1% comp for the total Macy's nameplate. These locations outperformed across all categories, and we expect momentum to build as the year progresses. The second pillar of our strategy is accelerating. In the first quarter, both Bloomingdale's and Blue Mercury continued their positive comp trend. Bloomingdale's posted a positive 3.8% comp, benefiting from brand launches such as Prada shoes and handbags online, Reformation Ready to Wear, and Burberry men's and ready to wear, as well as improvements in availability and pricing.

Bloomingdale's continues to emphasize special capsules and exclusive partnerships that align and reinforce its core identity, including the White Lotus and Aqua Collection, Coachtopia's Carousel, Alice and Olivia's Flagship Takeover, Mother's Boogie Woogie Boardwalk, and the Farm Rio wedding capsule. It's an exciting time at Bloomingdale's. As strategic initiatives bear fruit and the competitive landscape continues to shift in our favor, there's no question we are taking share. Our aspirational to luxury positioning, compelling on-trend assortments, and service orientation continue to attract new customers and new vendor partners. In addition, our Bloomys and Bloomingdale's outlet concepts are allowing us to enter new markets and expand our presence as well as share of wallet in existing markets.

Our other luxury concept, Blue Mercury, achieved a positive 1.5% comp, its seventeenth consecutive quarter of gains. Results were driven by the 24 new and remodeled locations opened last year, ongoing strength in dermatological skin care, recent brand launches, and a more targeted approach to loyalty and communications and offers. The third pillar of our Bold New Chapter strategy is simplifying and modernizing end-to-end operations. Our efforts to drive meaningful change for our customer and for our operational and financial performance remain on track.

We are challenging the complexity of our business model, containing the cost to serve the value chain, and streamlining our asset portfolio to deliver profitable sales growth, all while reinvesting the benefits captured to self-fund improvement in customer experience. I like where Macy's, Inc. is positioned today. The Bold New Chapter continues to gain traction, and our multi-category and multi-branded model provides a high level of flexibility to read and react. Our three nameplates span off-price to luxury and cater to roughly 40 million active consumers. When combined with our strong balance sheet and limited near-term debt maturities, these serve as positive differentiators in discussions with our vendors. Now let's turn to tariffs.

Our teams and partners are in active dialogue as we navigate this uncertain environment together. At the end of last fiscal year, roughly 20% of total Macy's, Inc. product originated in China. National brands, which represent the majority of our sales, sourced approximately 18% from China. Private brands, where we have more direct control of the supply chain, sourced roughly 27% from China. This is down from 32% last year and over 50% pre-pandemic. We are confident that we can continue to diversify countries of origin for both our private and national brands.

With the recent announcement of these tariffs, we've renegotiated orders with suppliers, and we've canceled or delayed orders where the value proposition is just not where it needs to be. Beyond China, we're closely monitoring Southeast Asia and Europe. We've had limited sourcing exposure to Canada and Mexico. In this evolving environment, we are controlling what we can control. Based on actions taken through today, and our assumption that current tariffs remain in place, we estimate a combined tariff impact to Macy's, Inc. annual gross margin of roughly 20 to 40 basis points. This incorporates those bought more recently, shared cost negotiations, vendor discounts, and selectively raising tickets.

It does not include a potential increase in tariffs from the EU or any other country. As of today, we have a good handle on the tariff-related costs. But we're cognizant that the environment is fluid. The impact on demand is less clear. Quarter to date, Macy's, Inc. comps are above the March-April period. We believe this reflects improvements in product and experience, more seasonable weather, and some pull forward of demand. We are encouraged by the first quarter and May results, which are another proof point that the Bold New Chapter initiatives are working, and that we remain on a path to achieving sustainable profitable growth.

Yet, the majority of the second quarter sales volume is still ahead of us. Given uncertainty regarding the tariff impact on consumer health and demand, we believe it's prudent to incorporate a more choiceful consumer into our outlook for the quarter and for the remainder of the year. Our second quarter and full-year guidance ranges, which Adrian will discuss in more detail, assume that the promotional landscape intensifies as the year progresses, international tourism does not rebound, and we continue to reinvest savings from closed stores and distribution centers in the initiatives that support our long-term growth. Reflecting these assumptions, we are being disciplined with our inventory commitments.

If trends remain at the May levels, inventory is available and we have the flexibility to chase. Looking specifically at the second quarter, there are two unique factors impacting gross margin. First, we're taking markdowns on early spring product that arrived late in the fourth quarter and in February. This will ensure we continue to provide newness throughout the summer and are well-positioned for the fall and holiday season. Second, a meaningful portion of the product bought under the 145% tariffs flows through the quarter. Regarding our full-year guidance, the low end assumes sales trends soften from first quarter levels, and we take additional actions to maintain a healthy inventory-sales ratio, including canceling receipts and taking deeper markdowns.

The high end assumes a continuation of the March-April sales trend, and only moderate gross margin pressure. In this environment of uncertainty, we remain focused on navigating the near term while executing to our long-term goals. We are in a unique moment, and we will not be complacent. This is our time to take advantage of the disruption in the market and capitalize on the opportunity to further build share of wallet across all of our nameplates. At Macy's, customers respond. The reimagined 125 locations are outperforming the rest of the Macy's fleet. Backstage provides an off-price offering, while marketplace and concession allow greater inventory flexibility. Finally, we closed 64 underperforming locations under the Bold New Chapter last year.

At our luxury nameplates, our customers are responding well to the accessible through premium product. And we have proven growth strategies firmly in place with small format Bloomys, Bloomingdale's outlet stores, and updated Blue Mercury store formats. And in our supply chain, we've become more nimble, leveraging knowledge and relationships across the business to increase our responsiveness while creating a more efficient, diverse, and productive operation. We are resilient. We have successfully navigated macro and geopolitical uncertainty in the past, and we will do so again. Aided by our guiding principles, we plan to one, be flexible so that we can react to the consumer demand and make purchasing decisions as late as possible.

Two, maximize gross margin dollars through strategic pricing decisions, being mindful of the price-value relationship between our market brands and private brands, and the broader marketplace. Three, partner with our suppliers on alternative sourcing and pricing options. And four, manage inventory to protect against markdown risk, set us up for success, and ultimately return to sustainable profitable growth. With that, I'll turn it over to Adrian.

Adrian Mitchell: Thank you, Tony, and good morning, everyone. Today, we will begin with a detailed discussion of our first quarter results, before turning to our assumptions for the second quarter and full-year guidance. First quarter Macy's, Inc. net sales were $4.6 billion, down 5.1% to last year. As a reminder, approximately $170 million of the year-over-year decline was due to last year's 64 non-go-forward store location closures. Total enterprise comps were down 1.2%, while Macy's, Inc. go-forward business comps declined 0.9%. By nameplate, Macy's net sales, which includes all Macy's locations in digital, were down 6.5% and comps were down 2.1%. Macy's go-forward business comps, which includes approximately 350 go-forward locations and digital, were down 1.9%.

At Macy's, reimagined 125 comps were down 0.8%. Backstage continued to outperform the total Macy's fleet and the full-line locations that they operate in. At our luxury nameplates, Bloomingdale's net sales were up 2.6% and comps rose 3.8%, while Blue Mercury net sales were up 0.8% and comps rose 1.5%. Net credit card revenues were $154 million, or $37 million higher year over year. The increase was driven primarily by higher profit share reflecting both our strong credit portfolio and continued active management of net credit card losses driven by strong underwriting. Macy's media network revenues were $40 million, or up 8% year over year due to growth in advertiser spend.

Gross margin was $1.8 billion, or 39.2% as a percent of net sales, flat to the prior year. On a rate basis, merchandise margin improved 40 basis points inclusive of favorable shortage and lower liquidations. This improvement was offset by higher delivery expense as a percent of net sales reflecting increased digital penetration. We continue to take a disciplined approach to receipts with end-of-quarter inventories down 0.5% year over year. SG&A expense dollars were relatively flat to last year at $1.9 billion. During the quarter, we continued to self-fund customer-facing initiatives through our end-to-end operations work and savings from closed locations that support our Bold New Chapter strategy.

As a percent of total revenue, SG&A was 39.9%, or 170 basis points higher than last year, reflecting lower net sales. During the quarter, we recognized $16 million of asset sale gains as we continue to monetize store locations and rightsize our supply chain network. First quarter adjusted EBITDA was $324 million, or 6.8% of total revenue. Core adjusted EBITDA, which is adjusted EBITDA excluding asset sale gains, was in line with our guidance at $308 million, or 6.4% of total revenue. First quarter EPS of $0.16 exceeded our guidance range of $0.12 to $0.15, and compared to $0.27 last year.

For the quarter, operating cash flow was an outflow of $64 million, and free cash flow was an outflow of $203 million, with capital expenditures of $177 million and monetization proceeds of $38 million. We returned approximately $152 million to shareholders consisting of $51 million in quarterly cash dividends, and $101 million of share repurchases. During times of uncertainty, the strength of our balance sheet and ample liquidity are critical to supporting our business and are a source of resiliency. We remain committed to exercising our prudent fiscal discipline, which is centered around free cash flow generation and a healthy balance sheet, as we continue to thoughtfully invest in our business for long-term growth and return capital to shareholders.

Now turning to guidance. We assume our customer will become more choiceful as the year progresses. Our full-year and second-quarter guidance provides flexibility to respond to an uncertain promotional environment and competitive landscape. Guidance also assumes that our current tariffs remain in place and that we're able to mitigate a meaningful portion, although not all, of the increased costs. It does not incorporate the potential for higher EU or other country tariffs. For the year, we expect Macy's, Inc. net sales of $21 to $21.4 billion. Please keep in mind that fiscal 2024 store closures contributed roughly $700 million to net sales.

Even with the first quarter beat, we believe it is prudent to maintain our prior net sales outlook given the uncertain environment. Macy's, Inc. comps to be down roughly 2% to down roughly 0.5%. Macy's, Inc. go-forward comps to be down roughly 2% to roughly flat. Other revenue of $815 to $825 million, with credit card revenues of $620 to $630 million. Gross margin as a percent of net sales to be roughly 30 to 70 basis points below the comparable period last year. Tariffs account for roughly 20 to 40 basis points of the difference to last year, or $0.10 to $0.25 of annual EPS.

The remainder reflects planned actions to strategically capture customer share of wallet while navigating a more competitive promotional landscape. SG&A to be down low single digits on a dollar basis. As a reminder, our SG&A growth investments are purposely planned to grow below the historic rate of inflation. As a percent of total revenue, we expect SG&A to be up 80 to 110 basis points. We are reinvesting savings from simplifying end-to-end operations and store closures into customer-facing growth initiatives that enhance omnichannel shopping experiences across our nameplates. We expect adjusted EBITDA as a percent of total revenue of 7.4% to 7.9%. Core adjusted EBITDA as a percent of total revenue of 7% to 7.5%.

Adjusted diluted EPS of $1.60 to $2, which does not contemplate potential share buybacks. We continue to anticipate capital expenditures of approximately $800 million as we are committed to investing in our business, supported by our healthy balance sheet to position Macy's, Inc. for long-term profitable growth. For the second quarter, we expect net sales of $4.65 to $4.75 billion. Last year's store closures contributed approximately $170 million to sales in the comparable period. Macy's, Inc. comps to be down 1.5% to up 0.5%. Core adjusted EBITDA as a percent of total revenue to be 6% to 6.2%, with SG&A dollars roughly flat to last year.

And adjusted EPS of $0.15 to $0.20, which does not consider potential share repurchases, and assumes $10 million of asset sale gains compared to $36 million in the same period last year. Before turning it back over to Tony, I want to take a moment to thank the Macy's, Inc. leadership team, the board, and all of the colleagues I've had the pleasure to work with over the past four and a half years. It has been an enriching and rewarding experience personally and professionally. Based on the talent in place across the organization and all of the work we have accomplished together, I am confident that Macy's, Inc. is well-positioned to return to sustainable profitable growth.

With that, I'll turn it back over to Tony.

Tony Spring: Thank you, Adrian. Before we begin Q&A, on behalf of the board and the entire Macy's leadership team, I want to thank Adrian for his leadership and contributions to Macy's, Inc. I appreciate his personal support over the last few years, and I wish him the best in his future endeavors. Operator, with that, we're now ready for questions.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Our first question today is coming from Blake Anderson of Jefferies. Please go ahead.

Blake Anderson: Hi, guys. Thanks for taking our questions. So I just wanted to start off on the sales guide. Sounds like you're holding that constant for the year. You talked about some consumer pressure and promotions. So just wanted to get your thoughts on maybe confidence in the sales guide for the rest of the year and how to think about the cadence of Q2 versus the back half compared to Q1, where it sounds like you outperformed.

Tony Spring: Thanks, Blake, for the question. We reaffirmed our annual guide for the year as you noted, with the first quarter beat. We did see a stronger performance in March, April versus February, which was more weather affected. And come into the second quarter with a stronger performance in the month of May. I think the guide appropriately reflects the level of uncertainty that we're navigating, controlling what we can control, making sure that we're well-positioned with the flow of inventory, with a thoughtful approach to our marketing calendar, investing in both top of funnel and bottom of funnel activities, and making sure that we're well-positioned across all three nameplates.

So, you know, I would look at it as being cautiously optimistic. We're taking the beats in the first quarter, and we're making sure that we are prudently planned for the rest of the year.

Blake Anderson: That makes sense. And then the follow-up was on the strategic pricing decisions. Any more commentary you can provide on what kind of categories or items or, you know, magnitude you'd be looking at for pricing to offset some of the tariffs?

Tony Spring: Blake, I would just say it's a work in progress that I feel really good about how the team has actioned, what we've had to act now based on the shipment and the current tariffs that are in place. But remember, as a multi-brand, multi-category retailer, we have a lot of optionality. If something isn't priced fairly, we're not gonna buy it. If a price point is important, we're gonna hold it. We're gonna negotiate fairly and aggressively with our partners as well as with our factories. And right now, I feel good about how we've positioned our pricing and our inventory for the remainder of the year.

But we got a lot in front of us, and we're gonna take it kind of day by day and month by month.

Blake Anderson: Sounds great. Thank you so much.

Tony Spring: Thank you.

Operator: Thank you. The next question is coming from Paul Kearney of Barclays. Please go ahead.

Paul Kearney: Hey, good morning. Thanks for taking my question. Two parts. To what degree has pricing already been impacted from the higher tariff goods that are flowing into Q2? And in your view, what is the consumer ability and willingness to accept those higher prices? And then two, under the current tariff outlook, can you talk about what exactly is your expectation for pricing for the fall season? And are the negotiations with vendors on sharing those costs largely completed? Thank you.

Tony Spring: Thanks, Paul. You know, first, I would say the price in little to no pricing in the first quarter. You're seeing some limited pricing in the second quarter. And so that's why we've taken a more cautious approach to our outlook for the remainder of the year. I feel good about the negotiations with the marketplace and, obviously, with our suppliers. It is a shared approach and mentality. It is not a one-size-fits-all across the board approach to anything. We're really trying to make sure that we are sharpening our value where necessary.

We are looking at the elasticity of pricing across the entire enterprise and leveraging marketplace, Backstage, Bloomingdale's, Macy's, Blue Mercury, to make sure that we're using the fulsomeness of our entire retail portfolio to capture share of market. We really believe in this disrupted time period, the health of our balance sheet, the quality of our team, the focus of our strategy is a competitive advantage.

Adrian Mitchell: Paul, if I could just add a little bit of commentary to the question that both you and Blake added. I think it's important to understand that we are not just broadly increasing price. We're being incredibly surgical about the situation with tariffs. Let me give you a little bit of color of the kinds of things that we're doing. Given the tariffs that we see today and that are currently in place, we've reduced our exposure to China as Tony referenced earlier in the call. We've renegotiated orders with vendors to make sure that we have the right brands and styles available for what customers are actually gonna buy.

We've even canceled certain orders and delayed other orders as we're just navigating all of the choppiness and uncertainty that we're dealing with. And we've been able to gain some vendor discounts, which has been helpful to us. But we're absorbing some of that price as well. So we're making selective price increases in selective brands, selective categories. Because we believe the value equation for the customer is still very relevant. So some of the impact on our gross margin this year is gonna be around the tariffs. But we're also investing in getting market share. Because we really do believe as we get into the back half of the year, that price-value dimension is gonna be very critical.

Paul Kearney: Excellent. Thank you.

Tony Spring: Thank you, Paul.

Operator: Thank you. The next question is coming from Brooke Roach of Goldman Sachs. Please go ahead.

Brooke Roach: Good morning, and thank you for taking my question. Tony, you've mentioned a couple of times about the opportunity to strategically capture market share while you navigate this uncertain environment. Beyond some of the pricing decisions that you've made to be more relevant to the consumer, what other actions are you taking to capture that market share throughout the rest of the year, whether that's promotional calendar, marketing calendar, etcetera? And then a follow-up for Adrian. Adrian, can you help us understand the magnitude of the gross margin pressure in Q2 from more transitory factors such as the spring product markdowns and the tariff on the 145% tariff rate versus what might be a little bit more sustainable in rate?

Thank you.

Tony Spring: Thanks, Brooke. Appreciate the question. It is a disrupted marketplace. You know, we all don't come into this environment in an equal position. Macy's, Inc. has done a lot of work over the last couple of years setting up the Bold New Chapter, doing a lot of research with 80,000 consumers, understanding the power of Bloomingdale's, Blue Mercury, and Macy's, closing underproductive stores. So I don't think that's comparable to what other department store retailers have experienced. We have a strategy that we are in the second year of. We're excited about the improvements that we've made in the reimagined 125. We're equally excited about the continued growth in Bloomingdale's and Blue Mercury.

But to answer your question specifically, number one is product. We are flowing newness into all three brands. We are seeing opportunities because of the competitive landscape to add brands to Macy's, add brands to Bloomingdale's, add brands to Blue Mercury. We have a healthy balance sheet, which means to the vendor community, we're gonna be around and we're gonna pay our bills. Secondly, we're improving the quality of our marketing. We have a better balance today than we had a year ago in top of funnel and bottom of funnel investments. That means we are equally committed to having a higher brand relevance as well as better conversion in our digital tactics.

Third, we are improving the experience inside our stores. We have added colleagues. We are getting a different net promoter score at Macy's and Bloomingdale's because the store experience, as measured by the customer feedback, is improving. And so the stores are well merchandised. There is better storytelling. There are colleagues available to assist the customer in the fitting room. Those are all reasons why I believe we can take share at this moment in time.

Adrian Mitchell: Brooke, good morning. Just to address your question around the gross margin, you know, what we're trying to accomplish is really managing the health and level of our inventory and being responsive in terms of the customer experience that Tony just described. We haven't shared the gross margin impact for Q2, but here's what we're doing in terms of our actions. As Tony mentioned a little bit earlier, we are gonna be taking markdowns based on some of the volume of inventory that we received at the end of the fourth quarter into the early part of the quarter. But also responding to the soft sales that we saw in February.

Because the health of the inventory is actually quite important. In addition, we do have some receipts that came through under the 145% China tariffs, and a meaningful portion of that will actually flow through the second quarter. So we're just being very judicious around that. If I take a step back and look at the year, there are really two factors that we're managing on the gross margin. The first is the 20 to 40 basis points of impact based on the current tariffs that we see that are in place. And how we believe that'll impact the second quarter and the fall season. But we're also investing in price and value.

Because we do believe that we have an opportunity to take share. We have an opportunity to be competitive. Especially in an environment that we anticipate will be more competitive and discretionary as we get into the back half of the year.

Brooke Roach: Great. Thanks so much. I'll pass it on.

Adrian Mitchell: Thank you. Thank you.

Operator: Thank you. The next question is coming from Alex Straton of Morgan Stanley. Please go ahead.

Alex Straton: Perfect. Thanks so much. Just on the reimagined 125 group, that comp still being negative. Can you just talk through the path to that turning positive? Is it possible this year? And then also, will more stores be added to that group this year? And then just the second question is on the widened SG&A guidance range. Can you just talk about the drivers of that for the year? What would put you on either end? Thanks so much.

Tony Spring: Thanks for the question, Alex. The reimagined 125, we still feel really good about. And the stores are not immune to the kind of macro pressures that we're seeing across the landscape. The good news is the March, April trend and the reimagined 125 was better than February as the weather improved. The May trend is better than the February, March, or the March, April performance.

So I can't comment on, you know, where we are going to see any individual segment of stores end the year, but I feel very good about the rollout of the initiatives into those stores, the additional staffing, the improvement in presentation, the additional brands, the better in-stock position, the localized marketing, all in flight. Like last year, as the year progresses, we'll talk about what are the opportunities to test additional ideas and additional stores. And what the expansion might be in 2026. But so far, I would say the improvement in the 125, we can and I'm cautiously optimistic that we have opportunity to improve that trend as the year progresses.

Adrian Mitchell: Alex, good morning to you. You know, as we look at the SG&A, the thing that I would highlight is that we do expect it to be down low single digits versus last year. So that's an important dimension. When we look at the breadth of the range, what we're really doing is giving ourselves the flexibility to be able to navigate a variety of scenarios as we think about the uncertainty over the course of the next several quarters. So as we really look at it from our perspective, we have a track record of achieving SG&A reductions.

We have a healthy pipeline of initiatives that's already in flight, and we're just giving ourselves some flexibility in terms of the range to be able to navigate multiple scenarios that could unfold in the upcoming quarters.

Alex Straton: Thanks so much. Good luck.

Tony Spring: Thanks, Alex.

Operator: Thank you. The next question is coming from Matthew Boss of JPMorgan. Please go ahead.

Matthew Boss: Great. Thanks. So, Tony, on the sequential improvement, have comps in May improved to positive territory across nameplates and maybe more specifically, could you walk through customer behavior that you're seeing in your reimagined doors that gives you confidence in Bold New Chapter, into year number two, and maybe just opportunities you see to accelerate initiatives in these doors.

Tony Spring: Sure, Matt. Thanks. I'm not gonna get into the specifics of the May performance, but I will tell you that the consumer is continuing to react differently than the sentiment. So while sentiment, I guess, yesterday improved a little bit, the demand is still better than the sentiment. So the consumer remains under pressure but is responding to newness, is responding to good value, is responding to improved presentation, is responding to inspiring marketing. You know, I think we can control some of these elements. You know, I can't control how much discretionary spend the consumer is willing to lay out, but I can control the quality of our execution.

I feel like in the reimagined 125 and in the digital experience at Macy's, we are better positioned today than we were three months ago and certainly better than we were a year ago. You feel the difference in our stores a year and a half into this strategy. You feel the colleague engagement. You feel the consumer sentiment as they shop for regular price merchandise. So where we have reduced the amount of clearance sales that we have as we improve the quality of our inventory, we're seeing better regular price performance in the reimagined 125. That, I think, is a good indicator along with customer sentiment about what the future potentials of these stores.

I think the store execution continues to get stronger. The density on the floor still looks impactful, but we're not over-inventorying the stores beyond what is necessary in any given quarter or season. And finally, I would say the turnover amongst colleagues in these stores is down. So we're getting the benefit of being able to provide the product knowledge and education, and the customer's getting the benefit of seeing those colleagues in those same stores.

Matthew Boss: Great color. Thanks a lot.

Tony Spring: Thank you, Matt.

Operator: Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.

Dana Telsey: Hi. Good morning, everyone. As you think about inventory, which I believe was down a half a percent, how are you planning inventory going forward in light of all the tariff planning or pull forward for holiday? And then the competitive landscape is definitely changing. Whether it's the turmoil at Saks, the privatization of Nordstrom, as you think about the landscape, Tony, both for Macy's and for Bloomingdale's, what are the opportunities that you see for each of the banners going forward? I just have a quick follow-up. Thank you.

Tony Spring: Thanks, Dana, for the question. You know, on inventory, we've got a good track record of really being disciplined about how we flow inventory. And we're gonna continue to be disciplined. And that means that if pricing is opportunistic and we're trying to mitigate or avoid the nature of tariffs in certain markets, we're gonna do that. We've got the liquidity. We've got the balance sheet to kind of move inventory. But I'm not gonna buy six months or a year worth of product just to avoid tariffs that may or may not materialize in different parts of the world. I do believe, you know, again, I'm not gonna speak to an individual competitor.

But I think you sized it up exactly right. That we're in a market environment where both Macy's and Bloomingdale's have opportunity to take share. We have vendors that are more committed to our brands and to our partnership than I've seen at my time with the company. We have new brands that we've added at both Macy's and Bloomingdale's that are resonating with the customer. We are seeing feedback from the customer that is acknowledging the different experience that they're seeing in a department store environment that they haven't seen in years. We have to remain committed to our investments.

We have to remain committed to this strategy, and we have to take advantage of this moment in time and this opportunity to get our fair share of the business.

Dana Telsey: Thank you.

Adrian Mitchell: Thanks, Dana.

Operator: Thank you. The next question is coming from Oliver Chen of TD Securities. Please go ahead.

Julie (for Oliver Chen): Hi, Tony and Adrian. This is Julie on for Oliver Chen. With the comp beat across all nameplates, how did your comps perform relative to your expectations? And what were the main catalysts relative to what you expected aside from the calendar shift? Which categories and levers were stronger, and then what is assumed in terms of category dynamics throughout the year? Thank you.

Tony Spring: Thanks, Julia. We again saw a better performance in March and April than in February. February was disrupted with a, you know, softer, I would say, weather environment. You know, we hate to use weather as an excuse, but it is helpful at defining, you know, why seasonal categories perform or don't perform. We certainly saw a better performance in the March, April time period, and now we see that continuing into May. I think we've talked about the fact that we're in an apparel cycle. So we're continuing to see categories like denim perform well. Denim dressing.

Whenever there's a change in silhouette or fabrication, we see a benefit to the business, and we're certainly seeing that at both Macy's and Bloomingdale's. We're seeing improved performance in categories like fine jewelry. Certainly, the fine watch and fashion watch business has been healthier. We're seeing better performance in parts of the home furnishings area, particularly in big ticket. We have a good mattress business at both of our brands, and we're seeing categories like textiles, sheets, and towels improve as the quarters progress. So I think what I'm underscoring is the fact we have a diversity. We have a variety of products.

And because we're not limited to any one category, any one segment, we can pivot and adjust our receipts and our marketing to where we see the business materializing.

Julie (for Oliver Chen): Great. Thank you.

Tony Spring: Thank you.

Operator: Thank you. The next question is coming from Michael Binetti of Evercore ISI. Please go ahead.

Michael Binetti: Hey, guys. Thanks for taking our question here. Is there was there anything one-time in the SG&A dollars in 1Q and try to go back in time here as you kinda guided us forward on what the SG&A per store was with some of the closures. I guess the dollars were up just a little bit in the quarter. I'm trying to think if there's anything we should adjust out as we think of the rest of the year with the stores closed and then maybe lapping it next year. And then also, I'm curious as you I know you guys focused on recapturing sales from store closures.

As you measure it, can you talk to any evidence that you've seen a transfer from some of the stores that have closed or anything we should try to keep an eye on there? Thank you.

Adrian Mitchell: I'll go ahead and get us started, Mike. I mean, the simple answer to your question when you think about a lot of the adjustments, we typically take those in the fourth quarter, but nothing unusual in the first quarter.

Tony Spring: Yeah. I would just say in terms of sales from store closures, you have the interesting impact, just to frame it for folks, that when the stores are closing, you have a slight depression of sales in the existing stores because of the going out of business communication in that environment. And then following, you start to see the recovery and opportunity to recapture. What I would say is we're slightly ahead of our expectation in terms of what we thought would happen with most stores recapture. And I think that remains an opportunity for us to lean in kind of by category and by geography to make sure that we're getting our fair share of that business.

Michael Binetti: That's great. If I could sneak one in on beauty. Good to see Blue Mercury positive. I'm curious maybe just a comment on the beauty business in total as you look across all your banners. Any comments on total category trends, you know, prestige versus mass or important shifts between the categories that we should think about as we model forward some of the center core and the Blue Mercury numbers for the rest of the year.

Tony Spring: Sure, Mike. I think the category has had a lot of distribution expansion. And we are certainly fighting for our fair share of the business. What I feel good about is that Macy's, Bloomingdale's, and Blue Mercury are great holiday destinations. So coming off of Mother's Day, heading into Father's Day, being a great destination for Christmas and Hanukkah. So, you know, we have more competition. I feel good about our reaction to the environment, making sure that we are doing everything in our control to show up well for the customers. That can include the value sets that we negotiate in the marketplace to make sure that we have value day in and day out.

In the fragrance and cosmetics area, to the quality of the staffing, you know, maintaining a full-service environment in beauty across all three of our brand or nameplates, we think it's very important to make sure that we offer both value and great service in that zone of business.

Michael Binetti: Thanks a lot, guys. Best of luck.

Tony Spring: Thank you.

Operator: Our next question is coming from Chuck Grom of Gordon Haskett. Please go ahead.

Chuck Grom: Hey, thanks. Good morning, and, you know, best of luck, Adrian. So been great working with you. Wanted to just focus on the first quarter a little bit and talk about the health of the consumer across income cohorts, also category performance during the first quarter, particularly in March and April and into May, if you could. And then, Tony, you talked about demand pull forward in the month of May. And I was curious if we could just dive into which categories you think you saw that pull forward. Thank you.

Tony Spring: Sure, Chuck. Thanks for the questions. You know, the consumer health, I would say, remains under pressure. You know, discretionary spending is something that I think we've seen from the middle of last year kind of forward that, you know, as inflation subsided a little bit, as gas prices became more affordable, the consumers still felt the pinch of other costs that were rising. And so we're maintaining our aggressive position in trying to make sure that we're capturing our fair share. I would say at the high end, the consumer is not obviously pressured, but they remain choiceful and they don't like uncertainty.

So there are fits and starts, I would say, at times to the way in which they respond. They love newness. They obviously love a good value. They like a compelling presentation and storytelling, so we're leaning into that. I think you heard, you know, at Bloomingdale's, all of these pop-ups and activations are really well received. The vendor community is very interested and best investing in Bloomingdale's to bring their brands to life, and I think that's just a winning strategy. In terms of categories, you know, it's hard to say what part is pulled forward. But I would just acknowledge that you can't say there isn't any pull forward.

So as we're all as consumers kind of watching what's happening, there is this mentality that I've got to buy something now. Maybe that's a part of some of the growth we've seen in fine jewelry, for instance. Maybe some of the big ticket areas where there's more uncertainty around the size of the impact of pricing changes that may come over the course of the year. But I continue to be very bullish on the fact that we have a better distributed model today than we even had a year ago. And what I mean by that is we have a better balance across categories of business. We have a better balance between marketplace and one P.

We have a better balance between off-price and full-price, and we have a better balance between Macy's, Bloomingdale's, and Blue Mercury. That just helps us with 40 million active customers to be in a position to, while others are disrupted, take share. And so it doesn't we don't have a right to it. We don't get it automatically. But I think if we remain surgical and aggressive on the things that we do well, we're gonna get our fair share of the business.

Chuck Grom: Okay. Great. Thank you. And then as you toggle between investing in value, to Adrian's point, and then raising prices, can we dive into, I guess, maybe which categories you would expect to see the largest price changes as you progress throughout the year?

Tony Spring: Again, I don't think, Chuck, it's about any one category. I think there are brands that have more elasticity, and there are items that have more elasticity, and others that don't. And the benefit that we have as a retailer is we don't have to buy those things where we think the pricing is too big a pinch on the consumer. And, conversely, in other items or within categories within brands, we will surgically take prices up because the customer votes and says the product is worth it.

And so, again, not pointing names, but between Coach and Ralph Lauren, and there are plenty of names out there that have talked about surgically adjusting price where they think the product commands and the value is apparent. Conversely, we're gonna be aggressive on pricing and make sure that those things where the customer is highly attuned to price, we're gonna be very competitive.

Chuck Grom: Great answer. Thank you. And then just one quick question for Adrian. Just on capital allocation, you bought back, it looks like about $100 million of stock first time in a couple of years. So I just wanted to understand that the guide does not assume any more additional share buybacks. It looks like your diluted share guide is about $7 million or $8 million lower than what it was back in March. Thanks.

Adrian Mitchell: Yep. Absolutely, Chuck. So, you know, really, the buyback of shares is really a signal of the confidence in the business. And, you know, as we reflect on the past year and the momentum, the momentum that we see coming into this year even with the uncertainty of tariffs, you know, we're pretty excited about the health of the business, and we're also excited about how we're managing our cash, managing our inventories, and managing multiple dimensions of the business. Now our practice is not to provide guidance on future buybacks. That's just not something that we typically would do. So as we think about the balance of the year, we're not assuming any further buybacks.

But that being said, you know, we have $1.3 billion of authorization still left on our approvals, and we're actually quite pleased that we resumed share buybacks in the first quarter. So again, it's really a reflection of the health of the business. And to help this company, and so we were pretty encouraged to be able to return $101 million back to shareholders in buybacks and an additional $51 million in terms of dividends.

Chuck Grom: Great. Thank you.

Operator: Thanks, Chuck. Thank you. This brings us to the end of the question and answer session. I would like to turn the floor back over to Mr. Tony Spring for closing comments.

Tony Spring: Thank you to everybody for your active participation on the call today. Thank you again to the Macy's, Inc. team for your leadership during these unusual and uncertain times. And I want to wish everybody a very happy summer holiday season. And please make sure you tune in and check out the Macy's Fourth of July fireworks. We have a great show planned for this year. Have a great day, everyone.

Operator: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time. Enjoy the rest of your day.

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DATE

• Wednesday, May 28, 2025, at 8:30 a.m. EDT

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — John Idol
• Chief Financial and Chief Operating Officer — Tom Edwards
• Vice President, Investor Relations — Jennifer Davis

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RISKS

• The company recorded a non-cash tax valuation allowance of $545 million for Q4 FY2025, which contributed to a net loss of $581 million and diluted loss per share of $4.90.
• Gross margin declined 170 basis points to 61%. Declines were driven by lower full-price sell-throughs on older styles and inventory actions.
• Michael Kors' Q4 FY2025 gross margin dropped to 58.6% from 60.8% in Q4 2024, and Jimmy Choo fell to 66.2% from 70.1%.

TAKEAWAYS

• Versace Divestiture: Management confirmed the pending sale of Versace to Prada Group, stating proceeds will be used to “substantially reduce our debt levels and reinstate a share repurchase program.”
• Revenue: Q4 FY2025 revenue decreased 15% year over year to $1 billion, while Michael Kors revenue declined 16% and Jimmy Choo 3%.
• Geographic Revenue Breakdown: Americas revenue in Q4 FY2025 fell 13%, EMEA revenue declined 14%, and Asia dropped 23%.
• Channel Performance: Total retail sales declined by a mid-teens percentage. E-commerce outperformed physical stores. Wholesale revenue dropped by double-digit percentages.
• Gross Margin: Gross margin fell 170 basis points to 61%, due to inventory actions taken to improve year-end position.
• Operating Margin: Company operating margin (non-GAAP) moved to negative 3.2% from positive 6.4%. Michael Kors' operating margin was 4.6% versus 14.1% in Q4 2024. Jimmy Choo was at negative 7.5% versus negative 5.8%.
• Net Loss: Net loss was $581 million, driven primarily by the non-cash tax valuation allowance.
• Inventory: Inventory ended at $869 million, up 1% year over year. $60 million was received earlier than planned for tariff mitigation in FY2026.
• Debt: Debt totaled $1.5 billion at the end of the quarter, and cash was $166 million. The leverage ratio was 3.2x net debt to adjusted EBITDAR at the end of FY2025.
• Stores: Store optimization included planned closure of 75 predominantly Michael Kors stores in the coming fiscal year, with wholesale closures expected to remove approximately $100 million revenue drag in following year comparisons.
• Michael Kors Brand Initiatives: A 10% increase in the global consumer database and positive traction from new JetSet and Hotel Stories marketing campaigns.
• Jimmy Choo Brand Initiatives: Jimmy Choo global consumer database increased 11% and saw a strong response to new accessories and sneakers.
• Q1 2026 Trend: Michael Kors retail comps improved from a 15% decline to nearly flat at the time of the call, led by full price business.
• Guidance: Fiscal 2026 revenue guidance is $3.3 billion to $3.4 billion, Michael Kors is $2.75 billion-$2.85 billion, and Jimmy Choo is $540 million-$550 million; Gross margin is expected at 61% to 61.5% for FY2026.
• Tariff Impact: Estimated unmitigated tariff cost of $60 million to cost of goods sold in FY2026, mainly on U.S. imports. China represents about 5% of U.S. production for Michael Kors and Jimmy Choo combined in FY2026.
• Capital Expenditure: Capital expenditures are projected at $110 million in FY2026, including approximately $350 million planned over three years for Michael Kors store renovations.
• Share Repurchase: Share repurchase program is planned to resume after Versace sale and debt reduction.
• EPS Guidance: Fiscal 2026 EPS is expected to be between $1.20 and $1.40 on approximately 119 million shares outstanding.
• First Quarter Guidance: Q1 FY2026 revenue is expected at $765 million to $780 million and EPS at $0.10-$0.15.

SUMMARY

Capri Holdings (NYSE:CPRI) outlined a major strategic shift through the sale of Versace to Prada Group, with proceeds targeted at substantial debt reduction and eventual reinstatement of share repurchases. The company also reported progress from new brand storytelling and product initiatives, and accelerating consumer database growth. Jimmy Choo experienced strong sell-through in new accessory collections and record-breaking sneaker launches (non-GAAP), contributing to higher consumer engagement.

Near-term guidance reflects tariff headwinds. Gross margin compression was largely tied to inventory actions, and continued disciplined capital allocation focused on store renovations and digital investment. The company expects to achieve revenue stabilization over FY2026 as turnaround initiatives gain traction, laying the foundation for growth and margin expansion in 2027 and beyond.

• John Idol said, “We are confident in our ability to grow Michael Kors to $4 billion in revenue and Jimmy Choo to $800 million in revenue while restoring operating margins to the double-digit range.”
• Versace will be treated as a discontinued operation from FY2026, and its removal from guidance results in future financials being driven exclusively by Michael Kors and Jimmy Choo.
• Tom Edwards noted, “Assuming a 10% baseline tariff and a 30% tariff on imports from China, we estimate the impact of tariffs on products shipped into the United States would increase our cost of goods sold by approximately $60 million in fiscal 2026 on an unmitigated basis.”
• Management intends to stabilize the wholesale business and achieve modest growth starting in FY2027.
• Store productivity initiatives, including a program to renovate approximately 50% of the Michael Kors fleet over three years, are positioned as key levers for sales recovery.
• The company’s cost-saving actions encompass store closures, global headcount reductions, office consolidation, and supply chain efficiencies.
• Foreign currency movements are expected to modestly increase revenue and operating expenses in FY2026, due to U.S. dollar weakness.

INDUSTRY GLOSSARY

• AUR: Average Unit Retail, the average selling price per item, used as an indicator of pricing power and premiumization in retail operations.
• Sell-through: The proportion of inventory sold within a period, reflecting product sellout velocity and demand.
• Store Optimization Program: Capri's initiative aimed at improving store productivity through closures, renovations, and selective wholesale reductions.
• Adjusted EBITDAR: Earnings before interest, taxes, depreciation, amortization, and restructuring, used for leverage ratio calculations.

Full Conference Call Transcript

Jennifer Davis: With me this morning are Chairman and Chief Executive Officer, John Idol, and Chief Financial and Chief Operating Officer, Tom Edwards. Before we begin, let me remind you that certain statements made on today's call may constitute forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that the statements made during this call will remain operative at a later time. The company undertakes no obligation to update any information discussed on today's call.

Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with impairment charges, restructuring and other charges, ERP implementation costs, Capri transformation costs, and transaction-related expenses. To view the corresponding GAAP measures and related reconciliation, please review our latest earnings release posted on our website earlier today at CapriHoldings.com. I would also like to note that given the pending sale of Versace, beginning in fiscal 2026, we will reclassify Versace as a discontinued operation, which means it will no longer be included in our non-GAAP results. Therefore, comments on today's call will focus only on Michael Kors and Jimmy Choo.

Now, I would like to turn the call over to Mr. John Idol, Chairman and Chief Executive Officer.

John Idol: Thank you, Jennifer. And good morning, everyone. I would like to begin today's call by discussing our recent announcement regarding the pending sale of Versace to Prada Group. After careful evaluation, we concluded that the most effective way to maximize value at Capri Holdings is to focus our resources on the compelling growth opportunities within our Michael Kors and Jimmy Choo brands. This transaction also positions us to substantially reduce our debt levels and reinstate a share repurchase program in the future. Both are important steps towards enhancing shareholder returns. Additionally, a strengthened financial foundation will enable us to more aggressively invest in reinvigorating the Michael Kors brand.

With our new strategic initiatives in place, our strong balance sheet, and focused senior leadership team, we are well-positioned to accelerate the growth trajectory of both Michael Kors and Jimmy Choo. Entering fiscal 2026, we are optimistic about our path forward. While the macro environment has become more challenging, with uncertainty around tariffs, we remain focused on executing against our strategic initiatives that are designed to improve current sales trends and position the company for future growth. Across our luxury houses, we are focused on building brand desirability through compelling storytelling, exciting fashion luxury product, and engaging omnichannel consumer experience. While our strategies are tailored uniquely for each brand, our overarching goals are similar.

First, in terms of building brand desire, our primary objective is to engage and inspire both new and existing consumers. Second, in terms of product, we are committed to creating exciting fashion designs and further enhancing our core styles, many of which feature our iconic brand codes. Third, our retail omnichannel strategy entails leveraging our enhanced data analytics and digital capabilities to grow e-commerce revenues as well as increase store sales densities. Fourth, we are focused on stabilizing and returning our wholesale business to growth. Now turning to our fourth quarter fiscal 2025 results. Overall, business remained challenged, and we were disappointed with our performance.

Revenue decreased 15% during the quarter as we were impacted by the continued softening demand for fashion luxury goods globally. Our performance was further affected by store closures, as well as ongoing reductions in the wholesale channel. At Michael Kors, fourth quarter revenue decreased 16% compared to the prior year. Despite these results, we began to see encouraging signs of progress stemming from our new brand storytelling and product initiatives during the fourth quarter. In our own retail channel, we saw a sequential improvement in March that accelerated into the first quarter. Michael Kors is a powerful fashion luxury brand that has a strong heritage, and we are eager to build on this solid foundation.

Guided by the insights gained from our data analytics and consumer feedback, we believe we have the right strategies underway to grow over time. First, we are focused on engaging new and existing consumers through a modern interpretation of our JetSet heritage based on our brand vision of traveling the world in style. Second, we are reinforcing our iconic brand codes and creating exciting product with compelling value to drive higher whole price sell-throughs. Third, we are focusing on improving store productivity through our optimization program, which includes store closures and renovations. And fourth, we plan to stabilize our wholesale business and return it to modest growth in the future.

In February, we launched our new JetSet storytelling, which reconnects with the heritage of the Michael Kors brand through our new brand vision of traveling the world in style. We are amplifying our storytelling strategies around a new franchise called Hotel Stories, a series that captures and conveys the very essence of our brand. The first chapter of Hotel Stories took place in Ibiza at the Montes Sol Hotel, featuring English actress and singer Suki Waterhouse. The story features exciting fashion moments captured in Ibiza and at the hotel while celebrating the joy of traveling the world in style. We are pleased with the and believe it is helping us reignite brand desirability.

According to our consumer insights, we have seen an inflection in brand affinity as well as a significant improvement in purchase intent. Additionally, our new storytelling is generating higher engagement across social media. We continue to believe that one of our most valuable assets and key differentiators is our founder and chief creative officer, Michael Kors. As a world-renowned fashion designer, his iconic runway shows cast a powerful halo over the brand. Michael's fall winter 2025 runway show channeled relaxed chic in a space inspired by a classic downtown New York loft. Attendees included Suki Waterhouse, Uma Thurman, Kerry Washington, Lea Michele, among others.

During New York Fashion Week, Michael Kors was the second most engaged fashion brand on social media. The show generated over 170 million impressions and 60 million video views. The combined power of our JetSet storytelling and data analytics capabilities helped contribute to a 10% year-over-year increase in Michael Kors' global consumer database.

Now turning to product. At its core, our strategy is centered around designing fashion products with standout style and compelling value. During the fourth quarter, we launched several new accessories groups that celebrate our iconic brand codes and are aligned with our new strategic pricing architecture. We are seeing an overwhelmingly positive response from consumers across these platforms.

Our new Leila, Dakota, and Bryant groups are experiencing extremely strong full-price sell-throughs and attracting new consumers to the brand. Additionally, we are seeing renewed momentum in our iconic core signature groups. We are pleased with the green shoots emerging within accessories and are working diligently to apply the same strategies to our footwear and apparel business. Next, I would like to discuss our store renovation plans. Retail stores are a critical pillar in driving our sales recovery, and we believe our global store renovation program will help change Michael Kors' sales trajectory. Over the next three years, we plan to renovate approximately 50% of the store fleet, as well as key department store locations.

Our new store design concept reflects a modern and warm residential aesthetic. With our store renovation process now underway, we look forward to sharing our progress and results with you in the future. Now, I would like to take a few moments to address current quarter-to-date trends. Overall, first quarter trends to We are also beginning to see improving trends in key indicators that we closely monitor, including our consumer database, door traffic, and AUR. The Michael Kors customer database continues to grow both month over month and year over year, underscoring the continued strength and desirability of the brand. Additionally, we have seen even more robust growth in our VIP loyalty consumer base.

In terms of store traffic trends, we have begun to see a moderation in the rate of decline. And lastly, in terms of AUR, in our full price retail stores, quarter-to-date trends turned positive. Overall, we have been moving very quickly to execute our exciting next chapter for Michael Kors. One that is built on the strength of our heritage and guided by our consumer insights. While still in the early stages of our turnaround initiatives, we are seeing positive indicators that our strategies are beginning to work. Now moving to Jimmy Choo. Fourth quarter revenue decreased 3% compared to the prior year. Jimmy Choo is an iconic brand with a sense of glamour and a playfully daring spirit.

Over its 29-year history, Jimmy Choo has built a reputation for its dedication to time-honored craftsmanship and innovative design. We have a renewed focus on Jimmy Choo and are developing strategies to realize the full potential of this highly recognized luxury brand. First, we are committed to engaging and energizing both new and loyal consumers through storytelling centered around an empowered sense of glamour. Second, we are focused on growing accessories and expanding our casual footwear offering. Third, we are taking actions to enhance store productivity and elevate our retail experience. And fourth, we intend to stabilize and return our wholesale businesses to growth.

During the fourth quarter, we saw strong performance in new accessory styles, including our diamond and cinch bags. The cinch group has been the fastest-selling Jimmy Choo day bag in the last five years. Looking ahead, we will build upon the momentum of these successful platforms by introducing new materials and animations each season. At the same time, we will continue to reinforce our leadership in evening bags through an ongoing commitment to innovation, craftsmanship, and glamorous design. Additionally, we have significant potential to broaden Jimmy Choo's reach by expanding our pricing architecture and attracting new audiences.

In the fall season, we will be introducing a wider offering of accessories, including three new collections priced between $500 and $1,000, to appeal to a broader base of luxury consumers. We believe this initiative will significantly increase sales in accessories, which in turn should strengthen the brand's positioning and increase store productivity. In footwear, we continued to see declines across the dress category, consistent with industry trends. We are focused on bringing newness to this category with innovation and animation. The recently launched Scarlet featuring our iconic drop heel is a good example of a new style that is generating excitement and strong sell-throughs. We continue to believe there is a meaningful opportunity to expand our casual offering.

Our sneaker business has grown to approximately 10% of our footwear sales, and we are introducing new styles to further expand this category. For example, during the fourth quarter, we launched the Diamond Flex, a new sneaker with an ultra-soft construction featuring a flexible, lightweight sole. Sales of the Diamond Flex far exceeded our expectations, and it has been the fastest-selling sneaker in Jimmy Choo's history. Turning to brand awareness and consumer engagement. Our storytelling continues to focus on glamour, igniting joy, and empowering achievement. For spring, our initiatives emphasized new seasonal styles featuring American actress and fashion icon Chloe Sevigny.

Additionally, to celebrate the opening of our new Madison Avenue flagship store as well as debut our spring collection, we hosted a series of high-impact events for influencers and clients during New York Fashion Week. These brand events generated strong engagement and broad social media amplification, driving 20 million impressions across key digital platforms. Complementing these efforts, Jimmy Choo debuted exclusive campaigns around the launch of our new Diamond Trainer styles featuring brand ambassador Wang Yibo. We also partnered with influencers to create social media posts. These activities generated strong engagement and resulted in nearly 50 million impressions across social media platforms.

Now, our engaging consumer communication, which combines storytelling with data analytics, helped contribute to an 11% year-over-year increase in Jimmy Choo's global consumer database. With our renewed focus on strategic initiatives, we are establishing the essential building blocks to fully harness Jimmy Choo's unique potential and expand its position within the world of fashion luxury. In conclusion, as we enter fiscal 2026, we are optimistic about our path forward. While still early, we are beginning to see positive indicators that give us confidence. Looking ahead, we continue to expect trends to improve throughout fiscal 2026, positioning us to return to growth in fiscal 2027 and beyond.

We are confident in our ability to grow Michael Kors to $4 billion in revenue and Jimmy Choo to $800 million in revenue while restoring operating margins to the double-digit range. Before I hand the call over to Tom, as many of you know, he will be leaving Capri Holdings on June 20th, and this marks his final earnings call with us. I would like to express my deep appreciation for Tom's exceptional leadership and his many contributions over the past eight years. His impact as both CFO and COO has been significant, and I am truly grateful for his partnership throughout his time at Capri Holdings. Thank you, Tom.

Now, Tom will review our fourth quarter results and guidance in more detail.

Tom Edwards: Thank you, John, and good morning, everyone. Starting with fourth quarter results, total company revenue of $1 billion decreased 15% versus prior year, slightly better than our expectations. We reported an operating loss of $33 million, slightly below our expectations. Our net loss was $581 million, resulting in diluted loss per share of $4.90, primarily due to a non-cash tax valuation allowance that I will discuss in more detail shortly. Now turning to fourth quarter results in more detail. Starting with revenue by channel, total company retail sales declined mid-teens, with e-commerce performing slightly better than stores. The impact of our store optimization program negatively impacted retail.

In the wholesale channel, revenue declined double digits due to overall softness in the channel as well as to our prior initiatives to reduce wholesale exposure. Turning to revenue performance by geography. In the Americas, revenue decreased 13%. Revenue in EMEA declined 14%, while revenue in Asia decreased 23%. Now looking at revenue performance by brand. Given the pending sale of Versace, beginning in fiscal 2026, we will reclassify Versace as a discontinued operation, which means it will no longer be included in our non-GAAP results. Therefore, my comments will focus only on the Michael Kors and Jimmy Choo brand. At Michael Kors, revenue decreased 16% compared to the prior year.

Global retail sales decreased mid-teens while wholesale declined double digits. Excluding the impact of foreign currency and store closures, retail sales declined at a similar rate in the fourth quarter versus the third quarter. By geography, sales in the Americas decreased 12%. Revenue in EMEA declined 15%, while revenue in Asia decreased 31%. At Jimmy Choo, revenue decreased 3% compared to the prior year. Global retail sales declined high single digits and wholesale increased high teens. By geography, total revenue in the Americas decreased 7%. Revenue in EMEA increased 9%, and revenue in Asia declined 16%. Now looking at total company margin performance. Gross margin of 61% declined 170 basis points.

This was below our expectations primarily due to actions taken during the quarter to ensure we enter the year in a more current inventory position. By brand, Michael Kors gross margin of 58.6% compared to 60.8% last year. The decline versus prior year was primarily driven by lower full price sell-throughs on older styles. Notably, AUR trends improved from high single-digit declines in the third quarter to mid-single-digit declines in the fourth quarter, driven by a sequential improvement in full price sell-through trends on new styles. Jimmy Choo gross margin of 66.2% compared to 70.1% last year.

The decline versus prior year was primarily driven by the impact of inventory taken to enter fiscal 2026 in a better position as well as the effect of the April 2024 acquisition of our second footwear factory. As a reminder, we acquired footwear factories to further align with the luxury industry's best practices and to strengthen our technical competencies while ensuring consistent future supply for Jimmy Choo. Today, approximately 50% of Jimmy Choo's footwear is vertically integrated. Operating expense decreased $25 million. The decline versus prior year was the result of our cost reduction program. These benefits were partially offset by higher variable costs and unfavorable foreign currency translation compared to our expectation.

As a percent of revenue, operating expense was 64.2% compared to 56.3% last year, primarily reflecting expense deleverage on lower revenue. Total company operating margin was negative 3.2%, compared to positive 6.4% last year. By brand, Michael Kors operating margin of 4.6% compared to 14.1%, and Jimmy Choo operating margin of negative 7.5% compared to negative 5.8% last year. Now I would like to discuss the tax valuation allowance. In light of our recent results, the future use of our deferred tax assets was reevaluated, and we recorded a non-cash valuation allowance of $545 million, $119 million of which was related to Versace.

Depending on our levels of profitability, we may be able to benefit from these deferred tax assets in the future. Taken together, our net loss was $581 million, resulting in diluted earnings per share of negative $4.90. Now turning to our balance sheet. Looking at inventory, we ended the quarter with $869 million, a 1% increase versus prior year. We received $60 million worth of inventory earlier than anticipated. The early receipt of inventory will provide the benefit of mitigating the tariff impact in fiscal 2026. By the end of the fiscal year, we anticipate inventory levels will be down in the mid-single-digit range.

We ended the quarter with cash of $166 million and debt of $1.5 billion, resulting in net debt of approximately $1.3 billion. This is higher than we originally anticipated due to the earlier timing of inventory receipts as well as the weaker US dollar, which increased the dollar value of our euro-denominated debt. Looking at our leverage ratio, net debt to adjusted EBITDAR was 3.2 times at the end of fiscal 2025. Now turning to guidance. Compared to prior expectations, there have been a number of changes, including first, the pending sale of Versace, second, the impact of tariffs, and third, foreign currency exchange rates.

I would like to take a few minutes to discuss how each is impacting our guidance. Starting with the pending sale of Versace. Since we will reclassify the business as discontinued operations, beginning in fiscal 2026, our guidance now excludes Versace from our results. Additionally, upon completion of the sale, which we expect will occur in the second half of calendar 2025, we plan to use the proceeds to reduce debt. After doing so, we anticipate we will have minimal net debt remaining on our balance sheet. As a result, we anticipate our interest expense will significantly decline. Turning to tariffs. The situation remains highly dynamic, but we are proactively managing the risk and remain positioned to respond.

Our sourcing is broadly diversified, with the majority of Michael Kors fiscal 2026 production volume originating from Vietnam, Cambodia, and Indonesia. Jimmy Choo sources the vast majority of its products from Italy. For Michael Kors and Jimmy Choo combined, China represents approximately 5% of US production volume. We anticipate we will begin to see the impact of current tariff rates in our fiscal first quarter when shipments of affected products commence. As the year progresses, the impacts will increase.

Assuming a 10% baseline tariff and a 30% tariff on imports from China, we estimate the impact of tariffs on products shipped into the United States would increase our cost of goods sold by approximately $60 million in fiscal 2026 on an unmitigated basis. Our global supply chain is highly agile, supported by longstanding relationships with our manufacturing partners. In fiscal 2026, we expect to begin to offset the impact of tariffs, with the goal of fully mitigating their effect over time. Some of the actions we are taking include sourcing optimization to minimize tariff exposure, working with our sourcing partners to create cost efficiencies, and strategically evaluating select price increases. And finally, looking at foreign currency.

Given the recent weakening of the US dollar, based on today's exchange rates, foreign currency is now expected to modestly increase both revenue and operating expense dollars in fiscal 2026 compared to fiscal 2025. Due to the uncertainty around tariffs, including the potential impact on consumer spending, as well as fluctuating foreign currency exchange rates, we are providing guidance assuming a range of outcomes. In fiscal 2026, we expect total company revenue to be between $3.3 and $3.4 billion. By brand, we expect Michael Kors revenue between $2.75 and $2.85 billion, and Jimmy Choo revenue between $540 million and $550 million. As we think about the cadence of the year, we anticipate gradual progression as our strategic initiatives gain traction.

For the year, we anticipate gross margin approximately 61% to 61.5% compared to a combined Michael Kors and Jimmy Choo gross margin of 62.2% last year. We expect operating expense of approximately $2 billion, reflecting the removal of Versace from our results as well as our cost reduction initiatives. As a reminder, our cost savings initiatives include store closures, global headcount reductions, office consolidation, and other efficiency measures across our supply chain and back office. Given the significant weakening of the US dollar, we now anticipate foreign currency will modestly increase operating expense dollars. We expect full-year operating income in a range around $100 million.

By brand, we anticipate Michael Kors operating margin in the and Jimmy Choo operating margin in the negative mid-single-digit range. Turning to our expectations around certain non-operating items. We expect net interest income between $85 million and $90 million, reflecting minimal debt levels and lower interest expense in the back half of the year after the as well as interest income from our net investment hedges. We anticipate an effective tax rate of approximately 15% and weighted average shares outstanding of approximately 119 million. As a result, we expect to generate diluted earnings per share between $1.20 and $1.40. Now turning to capital allocation.

As I mentioned, we plan to use the proceeds from the sale of Versace to reduce debt. Going forward, as we think about allocating our cash flow, our first priority is to invest in the business. This includes store renovations, as our retail locations are one of the cornerstones to rebuilding sales growth. As discussed during our Investor Day, we plan to renovate approximately 50% of the Michael Kors store fleet over the next three years. We anticipate these renovations will cost approximately $350 million over the three-year period and will be included in our store optimization program.

Our second priority is to maintain a strong balance sheet, and our third priority is to return cash to shareholders via share repurchases. Over time, we anticipate resuming share repurchases to create additional shareholder value. In terms of capital expenditures, we anticipate spending approximately $110 million in fiscal 2026, which includes Michael Kors and Jimmy Choo store renovations as well as IT expenditures, including investments in our digital and analytical capabilities. Now turning to first quarter guidance. We expect total company revenue to be between $765 million and $780 million. By brand, we anticipate Michael Kors' revenue between $615 million and $625 million, and Jimmy Choo revenue of approximately $150 million to $155 million.

Looking at operating margin, we expect first quarter operating margin will be. In terms of operating margin by brand, we anticipate Michael Kors operating margin in the mid-single-digit range and Jimmy Choo operating margin of approximately breakeven. Turning to our expectation, we expect first quarter net interest income of approximately $15 million, reflecting interest income from our net investment hedges. We anticipate an effective tax rate of approximately 15% and weighted average shares outstanding of approximately 119 million. As a result, we expect to generate diluted earnings per share of approximately $0.10 to $0.15.

In closing, as we enter fiscal 2026, we are encouraged by early signs that validate the effectiveness of our strategic initiatives and reinforce our confidence in our path forward. We expect underlying trends to continue improving through fiscal 2026. Looking to fiscal 2027 and beyond, with our strategic initiatives gaining traction, we expect to return to revenue growth and margin expansion. Now on a personal note, as this marks my final earnings call at Capri Holdings, I would like to take a moment to thank John for his support and partnership. It has been a privilege to work together.

And I would like to thank the board of directors, our leadership team, and all of our dedicated colleagues for your collaboration, support, and shared commitment over these past eight years. With the strength of Michael Kors and Jimmy Choo, I am confident that under your leadership, Capri Holdings is well-positioned to deliver sustained revenue and earnings growth as well as increased shareholder value in the future. Now we will open up the line for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. If participants are using speaker equipment, it may be necessary to pick up your We ask that you please limit yourself to one question. One moment please for your first question. Our first question comes from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Simeon Siegel: Thanks. Hey, guys. Good morning. Tom, it's been great working with you. Best of luck on your next chapter.

Tom Edwards: Thank you, Simeon.

Simeon Siegel: So great to see the slight revenue raised at Michael Kors and the discussion on returning to growth in 2027. I guess, on the other hand, the margins look lower. So can you guys speak to a little bit what gives you comfort in the troughing revenue expectations? And then maybe a little bit more color on the drivers you're baking into the margin degradation. I guess, just especially in light of what looks like healthier full price sell-through. Thanks.

John Idol: Good morning, Simeon. I'll take the revenue part. I'll pass the gross margin part out to Tom because I think there's a little more color to that in terms of its actual TY, LY, and how the tariffs are impacting that. Number one on the revenue side, we are optimistic given what we see happening right now for us in Q1. We are two months into the quarter, and the first number I will give you is we were down approximately 15% comp in Michael Kors retail last quarter. And we are almost flat at this point.

So there has been a significant step change in the performance of Michael Kors at retail, led by our full price business. Which is really nice to see because we have three groups that we talk about in our prepared remarks. That's Leila, Nolita, and Bryant, and then a further one called Dakota. All of which are having excellent full price sell-throughs. And they're all in the $200 to $400 range. So those are back to our historical kind of price ranges where we did where we were very successful in the past.

And between the great work that Michael and the design teams have done, as well as the great price value relationship that's been put into the product, we're seeing very, very strong green shoots. So I should also mention that our JetSet storytelling, which is around traveling the world in style, is really resonating with the consumers, and we're seeing that in some of the existing data analytics in terms of the sales and the consumers that are shopping with us, as well as some of the forward-looking analysis that we've done with consumers on intent to purchase, and that has gone up again sequentially very significantly.

So we believe, at least initially, that we're seeing results from the changes that we started to implement really in the beginning of the fourth quarter. It's nice to see that happening. We've got more work to do, particularly in excitement level onto that channel. And we're gonna be doing that starting in the back half of the year. So that's what gives us some good feeling about where the revenue projections are that we've just given you. As well as how we see a step change into next year. I would like to also add that we will be through most of the store closure program. We've got about 75 stores to close this year.

Predominantly, those will be Michael Kors. And that would have about a $50-plus million revenue impact that we will not have to anniversary next year. And, additionally, we'll have about another $50 million in wholesale door closures that were planned by us. Again, that program really ends at the end of this fall season. So we'll really be looking at comp doors. So that's almost a $100 million impact that we won't be anniversaring next year. So I think that's between our storytelling around our heritage jet set really the core of this company. Number one. Number two, the product, and our standout style with compelling value. Number three, the store closure program will be behind us.

And then on a very positive and exciting note as well, we're going to begin we've already started a store renovation program where we're gonna renovate about 50% of our fleet over the next three years. And we think that's also going to have a significant impact and inflection on our store productivity. So we're feeling very confident around what we see happening at Michael Kors. Regarding Jimmy Choo, I think we know we have some issues around the dress shoe category. We've seen ups and downs there. It came out of COVID. It was very strong. Things went back to casual again more from a fashion styling standpoint.

We are doing a better job with casual, but we think we can do even more in that category. Which obviously is our core category. But we're very excited about the announcement that we made about the three new groups coming for fall season in accessories. We think we've got a very big opportunity as we're in the luxury consumer's closet already. To be able to take our accessories and put them at more compelling price points in particular. For the aspirational luxury consumer. And we think that's a big opportunity for us. I think we've said that we are very engaged with Jimmy Choo. And we think that the brand has a great opportunity to grow and develop.

So that's what gives us a positive outlook on revenues, in particular for 2027 and 2028. Let me stop there, and I'll turn it over to Tom for the discussion around our gross margins.

Tom Edwards: Sure. And, Simeon, on gross margins, there are a couple of points here. The first is just to kind of remind back on our prior guidance. Where we are improving gross margin for the year based on the strategic initiatives for Jimmy Choo and Michael Kors, getting the right inventory into place and do everything that we are planning and are doing to drive the brand that we are seeing the first real results in green shoots here in the first quarter. With that, increase and those initiatives, that all still is in place and we still feel very good about that. What is happening now is there is an overlay for the tariff impact in fiscal 2026.

And that as I noted in the prepared remarks was about $60 million higher costs on an unmitigated basis. And if I just do the math between prior expectations of 50 bps, that tariff amount is about down 150 plus. So we get to at a midpoint down 100 bps basis points for gross margin for the year. And that is before we really get traction on the mitigation activities. Our goal is to fully mitigate over time the tariff impact. We're looking at sourcing optimization, we are looking and working with our sourcing partners to create cost efficiencies and we will be strategically evaluating select price increases. As we move through the year, we'll get more visibility on that.

But our first priority in all of that is to maintain the momentum of our brand recovery, and we'll be doing that as we strategically and very carefully assess our reactions particularly on the price front. Great.

Operator: Thank you. Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Brooke Roach: Good morning, and thank you for taking our question. It sounds like you have a lot of emerging momentum at Michael Kors retail. I was hoping you could discuss the wholesale outlook for the brand this year. How are your partner discussions going today versus your expectations at investor day a few months ago? Particularly in the North America business? Thank you.

John Idol: Thank you, and good morning, Brooke. I would say it's just about, you know, where we presented to you at our investor day. We've been around the world. We've met with all of our strategic wholesale partners. And I would say the response has been very consistent. In that number one, people are very much feeling positive about us returning to the focus around our JetSet heritage. They like the new storytelling, the way it's been developed, around hotel stories and traveling where we have a much associated with the Michael Kors brand.

I would say that's also caused a significant inflection in that I mentioned before, Leila, Nolita, Bryant, and Dakota, all seeing very strong sell-throughs on a global basis. So we're seeing positive response from those partners. In certain cases, they've actually gone back and relooked at their commitments to us and increased those commitments. I would also say that I think you're probably aware we launched on Amazon recently. And that has been very, very successful. It has exceeded our expectations. And it's also showing the ability to communicate with a broader customer group who has a high level of engagement with us. And our full price selling on that platform has been excellent.

So it's a little hard to see how that's gonna all come together when I talk about wholesale because we do, as I mentioned before, we still have some additional store closures that will happen throughout the fall season. Most of it will come to an end in September, October, November. So I think the kind of the true measurement, we will start to see fourth quarter calendar fourth quarter and then into spring of next year. So we do have a decline planned for wholesale.

But as I've said, again, in my prepared remarks, our goal and our belief is that we will stabilize that part of our business and actually see some modest growth especially in fiscal year 2027 and 2028.

Brooke Roach: Great. Thanks so much. I'll pass it on.

Operator: Thank you. Our next question comes from the line of Oliver Chen with TD Cowen. Please proceed with your question.

Katie: Hi there. This is Katie on for Oliver. One thing we wanted to talk about and ask is just on sort of what's within your to help drive traffic and conversion and those strong trends that you're currently seeing in your own retail channel, given just a more volatile consumer backdrop that we're seeing. Thank you.

John Idol: Yeah. Katie, so I first of all, good morning. I think we're very focused on traffic, you know, as we talked about before. We're seeing a lot of positive indicators. Our whole price AURs turn positive and see that happen really in a quarter is quite extraordinary, and we're very pleased with that. We have not seen traffic turn positive and I'll say that's more of a North America and China issue. We've got some very nice trends going in Europe for us. But the sequential declines have decelerated significantly. And, again, in full price, we're almost close to positive traffic there as well. What we're focused on is really our marketing initiatives and our storytelling.

Along with the you know, we spent a lot of time and money and have the resources around our data analytics to really give us the tools to be able to engage with new and existing consumers to excite them about the brand and to re-engage with them or to drive them in our stores. And we're seeing positive results around that initiative, and as I just mentioned, also around the significantly increased influencer program that we have going on, and you're gonna see a lot more of that particular around the hotel stories that are really just starting to launch around the globe.

So I think while we cannot a hundred percent control traffic, I think we can influence it. And we feel that we have the strategies and many tools within our control to be able to try to move that forward. And, of course, you know, having greater brand desirability also referred to as brand heat, will help to drive that as well. Through our stores. You know, conversion has always been something that even through all of our ups and downs, we've had very strong conversion rates at Michael Kors. So once they come in the door, converting with our customers has been less the issue for us.

It's been more footfall which obviously goes back to brand desirability, which goes back to brand heat, etcetera. And I don't wanna say that we've, you know, we've called the bottom, but we've definitely seen a change in Michael Kors. And it's nice to see that in such a short window of time. We've got a long way to go to rebuild this business to the $4 billion that we're aspiring to get to. But again, we are beginning to see the results of our initiatives. And we're quite hopeful given the results. Thank you.

Katie: Very helpful. Thank you very much.

Operator: Thank you. Our next question comes from the line of Jay Sole with UBS. Please proceed with your question.

Jay Sole: Great. Thank you so much. John, I'm just wondering if you can elaborate a little bit more on some of the strategies and things that you wanna do to improve the sales trajectory of the Michael Kors brand. I mean, you talked about initiatives when it comes to product and marketing and store experience. I think you mentioned the pricing that some of the newer bags are selling for is within that traditional area where you've had a lot of success. But if you look back over the history of the brand, you know, at some moments, you've had a lot of momentum, some probably less momentum than you've wanted.

What are some of the core things that, like, you know, work consistently to drive the brand for that maybe had fallen away a little bit in the last couple of years that, you know, you can get back to get to that positive sales growth rate on a sustainable basis that you know you can do. Thank you.

John Idol: Thank you, Jay, and good morning. Jay, I think we've talked about this in the past and know, we clearly have made missteps. Over the past few years and I won't go back into some of the causes of that. Some were self-inflicted, etcetera. But I think what happened is in November, December, we got clarity in this company what you know, this business was built by Michael. Originally, plus years ago. And he really had a vision for the way a consumer wanted to look and an exciting lifestyle that they wanted to live. And that's still a very relevant positioning.

And we I think lost our way and decided that various points in time that either wasn't the right thing for us or, you know, there were other trends happening that maybe were more exciting. And what again, our consumer research really told us was the customer likes our positioning, and they really yes. They wanted it maybe a little more modern and certain products need to be a bit more relevant. But you know, when you build a brand over that period of time, to try to either completely reset its or to run away from your history, those weren't the right things for us to do.

So I think that we look at that as a first starting point and the entire management team and all of our store managers are excited. Our retail partners are excited. So, think we're onto something when it comes to that. Secondly, you know, we had aspirations of, quote, elevating the brand. And while that worked at certain moments, certainly coming out of COVID, we raised prices considerably. It worked for a while. But then the customer came back and said, that's not exactly what we expect from Michael Kors. There is a window of pricing that we enjoy consuming your products in, and we'd really like you to stay there.

And so once we finally acknowledge that's what the consumer has voted and said, you can see the results are already starting. And, you know, even though, again, in my prepared remarks, I said we're working on our footwear and ready-to-wear businesses too. Get that same level of product reception. Actually, in ready-to-wear, we're starting to see it very, very quickly as well, where the customer has leaned into some of our very important key styles that we've been marketing, and the sell-throughs are very, very high. Sell-throughs, we haven't seen in three or four years. So, again, I think that you have to learn from your mistakes. You have to be honest with yourself about what those mistakes were.

I believe we are doing both of those things today. And then we're going to stay much more focused, much more committed to I think a brand positioning that is very important. And other brands who we compete with will have their positioning. And we should stay in our lane and try to be true to ourselves. I would also say similar in Jimmy Choo with the exception you know, Jimmy Choo is glamour. It's playful, it's really got an exciting DNA. And consumers love Jimmy Choo. You don't find consumers saying anything negative or, you know, you've gone off brand, etcetera.

But what we do have to do with Jimmy Choo is we have to expand the use for the consumer because she loves the brand. But she associates it very, very much with a more dressed up and a more formal and a more occasion vision of what the brand is. And we've gotta do a better job of bringing her the other parts of how Jimmy Choo can be a part of her lifestyle. And one of those areas is casual footwear, and the other area quite frankly, which, you know, we were off to a very good start. We got distracted. And we're reengaged and refocused is on accessories. Again, she comes into our store.

She's willing to spend very large amounts of money on footwear. And now to be able to say, yes, we'll still have our great cinch bag and our diamond bags, which will retail in the $1,400 to $2,500 range, or our bond bonds that will be $3,000 and higher. But to have this other range of product, which is still very expensive, and be able to have that not only in our own stores, but also on a wholesale distribution basis, in the best luxury stores in the world is gonna give Jimmy Choo, I think, another leg to be able to drive to.

And so, again, we just have laid out this additional strategy since we met with you at investor day. And so we're excited about where Jimmy Choo can go. We've got a store fleet located in the best locations in the world. Best streets, best cities, sitting next to the best retailers in the world, and we should be able to capitalize on the brand, and its recognition. As well as the fact that we've got customers who come in who are ready to shop, and we should be there with them for the right products. So thanks a lot, Jay.

Jay Sole: Great. Thank you.

Operator: Thank you. Our next question comes from the line of Anisha Sherman with Bernstein. Please proceed with your question.

Anisha Sherman: Thank you so much. My question is around your pricing strategy. So, you know, you've talked a few times now, including on this call, about the need to offer those better value price points to the consumer, and you're seeing some success there. When do you expect to be at steady state there on where you wanna be on pricing? And then you also made a comment, I think, Tom, earlier on strategically evaluating price increases to mitigate some of that tariff risk. Can you talk about how that fits into your broader pricing strategy? And could there be some risk around blurring the positioning of the brand there? Thank you.

John Idol: So first of all, good morning, Anisha. Number one, we should be where we need to be by the fall season with the Michael Kors brand. I'm guessing right now, but let's say we're 60 or 70% of the way now. You know, we made a lot of changes quickly. That also impacted some of our margin as well. We just lowered certain prices because we knew it was the right place to be. And by the way, those are historical prices, so I wanna be very clear that we're not going to levels that we're where we haven't been before.

So that put a little pressure on us on margin, and we'll see a bit of that in the first quarter as well as we slowly start to work with our supply base, etcetera, on some of those changes that we needed to make. But we should be in a very good place by the fall season. I might also say to you that conversely, also, one of the things that's gonna help impact AUR in our outlet channel, we've actually raised some prices. Where we found that some of our pricing was not commensurate with what we think the brand offered as value.

Nothing overly significant, but enough to that will hopefully help us impact our margins on a go-forward basis. But also that help us raise our AUR and selling. We're also, in particular, in our outlet channel, we are reducing a significant level of promotional activity, and that is actually that started already in the fourth quarter. That did impact some of our revenues in that channel, but that's what we wanted to do. We thought that was the right thing for us to do. So, again, there's a little bit of, you know, puts and takes here.

And I'll turn before I turn it over to Tom in a second, I think that the pricing increases as it relates to mitigating tariffs think we're gonna go slowly around that. I think we wanna first and foremost get the Michael Kors brand back on track moving forward reengaging with that consumer so that they're having a great experience with us, and how and where we need to tweak I will call it tweaking prices. There's not gonna be any significant price changes. That'll also depend on how much we're looking to do after we get done working with all of our suppliers on mitigating some of these tariffs.

And I think lastly, we need to also determine where the tariffs are because none of us actually sit here today and you know, we've given you a range in our guidance. You know, we're all sitting here as everyone is waiting to find out what is happening. And I think we'll know more of that towards the tail end of the summer. So we can have a better understanding of what, in fact, we are going to need to mitigate. And so that would also kind of get into where we would take price increases or not. But I wanna be clear.

The first thing that we want to do is to make sure that we have an exciting experience with the consumer. And again, if we can drive more revenues, that will increase our profitability. You can see that the leverage that just by having a small mid-single-digit increase in fiscal 2027 and fiscal 2028 will bring to us is quite significant. And will have a very, very big EPS impact as well as, you know, when you layer on top of that, if we do restart the share repurchase program, I think you're gonna see quite a significant lift in EPS for the company in a relatively short period of time.

Let me stop there and I'm gonna turn it over to Tom on the pricing piece.

Tom Edwards: Thank you, John. And, Anisha, I just wanna reiterate what John said. Our first priority is really brand momentum. Is the primary goal, and it's the primary really, basis for future success. So we will proceed extremely carefully on assessing any pricing actions. When ultimate tariff levels are better known, we'll certainly assess the market reaction. And look at this on a very granular basis. But our efforts now are really focused on the sourcing side working with our sourcing partners and sourcing optimization.

John Idol: Thank you. And, thank you, everyone, for joining us today. I'd like to remind everyone before we conclude the call that we are awaiting approval from various jurisdictions around the world on the Versace transaction. We are very optimistic that transaction will be completed sometime in the fall season. And as a result of that, the company will have very, very low net debt which puts us in a very strong position to be able to invest in the future of both Michael Kors and Jimmy Choo. It additionally has a very strong EPS impact for the company as our carry forward interest go down significantly.

So we're very pleased about the results of that transaction and hopeful that it will conclude in the fall season. Which will set us up for another very positive positioning for Capri Holdings. Thank you for joining us today, and look forward to updating you on our next call.

Operator: Thank you. This does conclude today's teleconference.

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DATE

• Wednesday, May 28, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Fran Horowitz
• Chief Operating Officer and Chief Financial Officer — Robert B. Ball
• Chief Administrative Officer — Scott Lipesky

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RISKS

• Tariff Cost Impact: Robert Ball stated, "Net of expected mitigation efforts, the assumed tariffs carry a cost impact of around $50 million for 2025, impacting our full-year operating margin outlook by 100 basis points."
• Abercrombie Brands Sales Decline: Abercrombie brands reported a 4% net sales drop and a 10% comparable sales decrease in Q1 FY2025, attributed to carryover inventory and lower AUR.

TAKEAWAYS

• Net Sales: Net sales reached a record $1.1 billion in Q1 2025, up 8% and above the initial guidance range of 4%-6%.
• Operating Margin: Operating margin was 9.3% of sales for Q1 FY2025, exceeding the March outlook, but down from 12.7% in Q1 FY2024 due to lower gross margin.
• Earnings Per Share: Earnings per share were $1.59 for Q1 2025, surpassing the range provided in March, but below last year’s $2.14.
• Regional Performance: Americas net sales rose 7% year over year in Q1 2025, EMEA net sales increased 12%, and APAC net sales grew 5%; EMEA comp sales increased 6%, and Americas comps rose 4%.
• Hollister Brand: Net sales rose 22%, with 23% comparable sales growth; eighth consecutive quarter of growth, supported by higher units and AUR.
• Abercrombie Brands: Net sales fell 4% with a 10% comparable sales decline, driven by lower AUR as the company cleared winter carryover inventory.
• Gross Margin: Gross margin declined 440 basis points, with over half the 440 basis point decline attributed to elevated freight costs and the balance to carryover inventory-related pressure; AUR was flat, with Hollister outperformance offsetting Abercrombie weakness.
• Operating Expense Leverage: Operating expense leverage was approximately 140 basis points, driven by lower payroll and incentive compensation.
• Inventory: Ended the first quarter with inventory at cost up 21% and inventory units up 6%, positioning the company for future growth; Four percentage points of the cost increase came from freight and tariff actions.
• Share Repurchases: $200 million repurchased during the first quarter; $1.1 billion remains authorized for repurchase as of the end of the first quarter.
• Liquidity: Cash and cash equivalents were $511 million as of the first quarter; total liquidity was approximately $940 million, bolstered by $97 million in marketable securities.
• 2025 Sales Guidance: Raised full-year net sales growth outlook to 3%-6% for FY2025, reflecting first quarter outperformance, from $4.95 billion in 2024.
• 2025 Operating Margin Guidance: Margin guidance was lowered to 12.5%-13.5% for FY2025, due primarily to $50 million in estimated tariff costs, offset partly by mitigation and Q2 operating margin flow-through.
• Capital Expenditure: Expecting approximately $200 million for 2025, with plans for 60 new stores and 40 remodels or right-sizings; net store count to increase by about 40.
• Q2 2025 Outlook: Net sales expected to rise 3%-5% from $1.13 billion in Q2 2024; Net income per diluted share anticipated at $2.10-$2.30; $50 million in share repurchases projected.

SUMMARY

Abercrombie & Fitch (NYSE:ANF) exceeded sales guidance with record first-quarter net sales, driven by double-digit growth in its Hollister stores, but operating margins narrowed due to higher freight costs and carryover inventory. Management explicitly reduced full-year operating margin expectations for FY2025 due to $50 million in projected net tariff impacts, with no broad-based price increases planned. It maintained flat AUR guidance for the second quarter and the remainder of FY2025 as promotional and inventory dynamics stabilize. The company executed $200 million in share repurchases in the first quarter, raised the top end of annual net sales guidance, and reaffirmed its commitment to capital investment and store expansion, while Abercrombie brand sales are expected to inflect positively in the back half of the year as current carryover inventory is cleared.

• Robert B. Ball said, "For the second quarter of 2025, we expect net sales to be up 3% to 5% to the Q2 2024 level of $1.13 billion." signaling management’s expectation for continued year-over-year growth momentum.
• Fran Horowitz stated, "We have 13 openings planned for the second quarter and some great locations, building on April's successful opening in Williamsburg, Brooklyn." highlighting the ongoing store expansion strategy.
• This guidance reflects real-time visibility into recent performance in the Q2 guidance.

INDUSTRY GLOSSARY

• AUR (Average Unit Retail): The average price at which each unit of merchandise is sold, a key measure of product mix and pricing power.
• EMEA: Company shorthand for the Europe, Middle East, and Africa region.
• APAC: Asia-Pacific operating region.
• Carryover Inventory: Seasonal products not fully sold in their intended period, carried into a subsequent quarter and typically sold at reduced margin.
• Store "Experiences": Term referencing company initiatives encompassing new stores, remodels, or space right-sizings intended to drive both physical and digital sales synergies.
• Grad Shop: A Hollister brand initiative focused on graduation-themed merchandise targeting culturally relevant teen moments.
• YPB: Sub-brand within Abercrombie focused on active lifestyle and performance product categories.

Full Conference Call Transcript

Fran Horowitz: Thanks, Mohit, and thanks, everyone, for joining. I'm pleased to report first quarter results came in ahead of the expectations. I am proud of how the team is applying our playbook to execute for our customer and our business. As we've mentioned before, our playbook and read and react model are an important part of the strong foundation we've built over years of transformation. This foundation allows us to manage and adapt to the environment while maintaining focus on strengthening our brands and company for the long term. We are one quarter into 2025, and our team is doing an excellent job balancing both of these priorities.

For the first quarter, we delivered record net sales of $1.1 billion on growth of 8% to last year, above our expected range of 4% to 6%. Operating expense leverage partially offset lower gross margin and marketing and earnings per share of $1.59 for the quarter, both above the ranges we provided in March. We also used our strong balance sheet to return $200 million to shareholders through share repurchases totaling 5% of shares outstanding as of the beginning of the year. We saw net sales growth across all regions in the first quarter. The Americas grew 7% on good traffic levels in both stores and digital, building on a terrific first quarter in 2024, where we grew 23%.

In EMEA, we grew 12% on top of 19% growth last year. We saw continued strength in the U.K. and Germany, with digital demand complementing the positive reception we've seen to the six stores we opened in the region last year. In APAC, we grew 5% on top of 10% growth last year, with nice comparable sales performance in China. From a brand perspective, Hollister led the way, delivering record first-quarter results with 22% net sales growth last year, on top of 12% growth in the first quarter of 2024. We had strong comparable sales as well, up 23%. I'm so proud of the Hollister team as they delivered the brand's eighth consecutive quarter of growth.

Both AUR and units were up in the quarter, and growth was balanced across genders and categories, with strength in fleece, jeans, and skirts. Cross-channel traffic was strong in the quarter, and we continue to ramp marketing investment year over year to support growth. We're excited about the balance we are seeing in the assortment, and we look forward to the summer season officially kicking off. At Abercrombie Brands, results fell short of expectations. We saw a 4% net sales decline against stellar 31% growth and record net sales achieved in Q1 2024. Comparable sales were down 10% versus 29% comp growth last year.

As we expected entering the quarter, sales performance was primarily driven by AUR decline as we move through winter carryover inventory. We also saw softer results in some of the spring categories that produced standout growth in Q1 last year. We built our business to rapidly respond to customer feedback, and the team acted quickly, leveraging our agile operating model to shift inventory receipts based on summer product test reads. The brand continues to see good traffic trends, and on the store side, we continue to see productivity and surrounding digital sales growth from new stores. We have 13 openings planned for the second quarter and some great locations, building on April's successful opening in Williamsburg, Brooklyn.

I have confidence in the team and the playbook, and our goal is to deliver sequential improvement on the top line in the second quarter, putting Abercrombie brands on a path to growth later this year. From a total company perspective, we expect to deliver year-over-year second quarter sales growth on top of a record 2024, with balanced growth across regions. As we navigate through the evolving trade environment, we remain open and agile with our inventory receipts and marketing spend to ensure we can best align our product investments with selling trends.

Our playbook was built to effectively respond to circumstances like these, just as our team successfully managed the freight and cotton spikes from a couple of years ago. Our global supply chain and sourcing teams are working hard to drive efficiency across the supply base through discussions with our sourcing partners and by making strategic geographic changes to our buys.

Robert Ball: Throughout our business, we are looking for expense efficiencies while remaining on offense in key investment areas. All of this work will have a clear impact, and based on our current assumptions on tariffs, we are not planning broad-based ticket increases. As we've done season after season, our goal is to deliver high-quality product and align inventory and promotions with our customers' value perception. This will give us the best opportunity to produce healthy sell-throughs, AURs, and gross margins that underpin our track record of net sales, earnings, and cash flow growth. Our playbook and model both work, and we will continue to leverage them moving forward.

Thinking further about what we've built over the years, we also have a history of capitalizing on moments like these to further strengthen the business, and we remain focused on the long-term opportunity ahead. We strongly believe in the global power of our brands, and we are continuing to further their reach by investing in marketing, technology, new channel partnerships, and company-owned stores. On the store side, we expect to add around 100 new physical experiences this year in total, with additional localized product and advertising to build lasting market presence and growth. The first quarter was another example of where we set a goal and delivered on that goal.

As we move through the second quarter, we expect to add to our track record of controlling what we can control and doing what we say we're going to do. Global growth remains our highest priority for 2025, and we look at our first quarter progress while investing for the long term. And with that, I'll hand it over to Robert to expand more on our results and key outlook drivers.

Robert Ball: Thanks, Fran, and good morning, everyone. Recapping the quarter, we delivered record Q1 net sales of $1.1 billion, up 8% to last year on a reported basis, above the range we provided in early March. Comparable sales for the quarter were up 4%, and we did not see meaningful impact from foreign currency. By region, net sales increased 7% in the Americas, 12% in EMEA, and 5% in APAC. On a comparable sales basis, the Americas was up 4%, EMEA was up 6%. For EMEA and APAC, the spread between reported and comp sales was due to net store openings, third-party channels, with EMEA also benefiting from foreign currency.

On the brands, Abercrombie brands net sales declined 4% with comparable sales down 10%. Consistent with our first quarter outlook, the sales decline was primarily due to lower AUR, as we worked to clear seasonal carryover inventory. Hollister Brands net sales grew 22% on comparable sales of 23% with both unit increases and AUR growth on lower promotions. Operating margin of 9.3% of sales was above the outlook range we provided in early March, delivering operating income of $102 million compared to $130 million or 12.7% of sales last year. Lower gross margin was partially offset by around 140 basis points of operating expense leverage, led by general and administrative expenses on lower payroll and incentive compensation.

Consistent with expectations, marketing, which as a reminder is fully included in selling expense, was 5.3% of sales for the quarter and was the primary driver of the 110 basis points of deleverage in selling expense. We ended the first quarter with inventory at cost up 21%. Within that, inventory units are up 6%, so we're positioned to support future growth, along with four percentage points from freight and inventory actions related to tariffs, with year-over-year changes in product category mix driving the remaining cost increase. The tax rate for the quarter was in line with our outlook at 25%, and net income per diluted share was above our outlook at $1.59 compared to $2.14 last year.

Moving to the balance sheet, we exited the quarter with cash and cash equivalents of $511 million and liquidity of approximately $940 million. We also ended the quarter with marketable securities of $97 million. For the quarter, we repurchased $200 million worth of shares consistent with our commentary from early March, ending the quarter with $1.1 billion remaining on our current share repurchase authorization. Shifting to the outlook, global growth remains our highest priority. On the cost side, our 2025 outlook assumes a 10% tariff on all global imports into the US as well as a 30% tariff on imports from China.

For China specifically, we worked for some time now to relocate resources of supply and this year's sourcing volume from China will be in the low single digits. Globally, we remain nicely diversified across 16 countries. We've been leveraging our agile playbook to build a list of mitigation strategies with our primary focus on the combination of supply chain footprint changes, vendor negotiations, and operating expense efficiencies. For AUR specifically, we are currently assuming no AUR mitigation in our outlook, as we do not anticipate broad-based ticket price increases. As always, we will pursue higher AURs through the combination of lean inventory and strong product acceptance.

Net of expected mitigation efforts, the assumed tariffs carry a cost impact of around $50 million for 2025, impacting our full-year operating margin outlook by 100 basis points. For the full year, we now expect net sales growth in the range of 3% to 6% from $4.95 billion in 2024, with full-year growth expected across regions. We increased the high end of our prior outlook by flowing through our first quarter outperformance, with the second half of the year largely unchanged on net sales. We now expect full-year operating margin in the range of 12.5% to 13.5%.

The reduction from our prior outlook range is primarily due to the estimated 100 basis point impact from tariffs net of mitigation efforts, with the remainder driven by a flow-through of the Q2 operating margin outlook. We are forecasting a tax rate around 27%. For earnings per share, we expect diluted weighted average shares of around 49 million, which incorporates the anticipated impact of 2025 share repurchases. Combined with the tax rate, we expect net income per diluted share in the range of $9.50 to $10.50. For capital allocation, we expect capital expenditures of approximately $200 million. On stores, expect to deliver around 100 new experiences, including 60 new stores and 40 right sizes or remodels.

We also expect to be net store openers with our 60 new stores outpacing around 20 anticipated closures. At the current sales and operating margin outlook, we continue to target around $400 million in share repurchases for the year, subject to business performance, share price, and market conditions. For the second quarter of 2025, we expect net sales to be up 3% to 5% to the Q2 2024 level of $1.13 billion. We expect operating margin to be in the range of 12% to 13%. We continue to expect slightly higher costs from freight as well as around $5 million of tariff impact, net of mitigation efforts.

We expect no leverage or deleverage on expense at the midpoint of our outlook. We expect the Q2 tax rate around 28%. We expect net income per diluted share in the range of $2.10 to $2.30, with diluted weighted average shares expected to be around 49 million, including the anticipated impact of around $50 million in share repurchases for the quarter. To close things out, our agile operating model has supported transformative growth and continues to be a catalyst for growth for driving consistent gains across sales, earnings, and cash flow. One quarter into 2025, we're executing with discipline to deliver against our near-term goals while keeping our sights firmly set on the significant long-term opportunities ahead.

And with that operator, we are ready for questions.

Operator: Thank you. One moment for questions. Our first question comes from Dana Telsey with Telsey Advisory Group. Your line is open. Dana, if your telephone's muted, please unmute.

Dana Telsey: Hi. Good morning, everyone. Sorry about that. Great to see the updated guidance. And would love to get some more color both on Hollister, Fran, and on Abercrombie. How do you see the outlook go forward on the different on men's and women's for Abercrombie? Cycling the compares and the newness that you're looking for. And, also, what other initiatives do you see at Hollister that continue to drive this growth? And then just on the real estate side, I noticed that the closures are being reduced this year in the guide to twenty from forty. What's changing? What's new there? And on the remodels, to forty from sixty. Any takeaways there? And gosh. Thank you.

Fran Horowitz: Thanks, Dana. Good morning. Yeah. So super excited about the record results that we just put up, Total Company. Let's break down your question. We'll start with Abercrombie. So Abercrombie, you know, we talked about this during the last call. We came into the quarter with a bit of carryover from last year up against obviously a spectacular Q1 of last year, where we were essentially clean of carryover. That put the pressure on the AUR as we had expected it to do so. But, you know, our model gives the team an opportunity to really stay flexible and chase goods. That's what our playbook is built on.

A great example of that was as we got into the first quarter, we had a terrific response to our swim. We had a vacation shot set for second quarter. We were able to get back into that swim, really ramp it up, ramp up our assets and our marketing even stronger than we're planning to. And we've been nice reaction to that. So exciting to see progress, and we do expect to see an inflection in Abercrombie in the back half. Hollister, again, what a quarter, up 22% in incredibly proud of that team. Lots of exciting things going on in that brand. Guess most recently to discuss would be The Grad Shop.

So, again, staying very culturally relevant to these teams, what's important to them, The Grad Shop just launched. We've seen nice success to that. The first quarter was driven by fleece, by jeans, by skirts, lots of exciting categories. So our expectation is obviously to continue to see that Hollister grow throughout the year. With that, I will turn it over to Robert on your real estate questions.

Robert Ball: Yeah. Hey, Dana. I'll hit this real estate one. So, again, you know, we're really thrilled here to be talking about being NetStar openers again here for another year. You know, adjustments here are pretty consistent. You know, excited to see 100 new store experiences, 60 new stores, 40 refreshes in model. We're always opportunistic here as we move throughout the year. From a store closure standpoint, we did close forty stores last year. Planning to close twenty stores this year. You know, teams have been working through landlord negotiations and packages, and we just see opportunities to keep these stores rolling.

So again, excited to be out there for the consumer and then build this fleet, which, you know, as we talked about last year is nicely contributory. So as long as we continue to see these productivities up on these stores, we're gonna keep these things rolling.

Dana Telsey: Thank you.

Operator: Thank you. Our next question comes from Corey Tarlowe with Jefferies. Your line is open.

Corey Tarlowe: Great. Thank you for taking my question. I guess, Robert and Scott, on the outlook for the full year, you obviously took down profit mainly as a result of tariffs. But on the sales outlook, the high end of the guide was actually revised up. So I'm just curious how you think about that and what's your confidence in sort of that the higher end of that range as we look to the remainder of the year, and what informs that?

Robert Ball: Yeah. So I'll take this one, Corey. So for the full year, you know, we are expecting growth across the regions in that 3% to 6% top-line guide. We're rolling through that Q1 beat on the top end of our guide, and we're holding the bottom, which again, you know, when we think about the environment that we're working in here, we feel is reasonable and appropriate with just one quarter in the books for the year. On the margin front, you're exactly right. We're rolling through that $50 million of tariff impact.

Net of the mitigation efforts to date, and that expect margin pressure from Q2 to walk us from that 14% to 15% from March to that 12.5% to 13.5% guide today.

Scott Lipesky: Yeah. Just to add on there at the end, Corey. I guess the confidence, you know, comes from being on offense. You know, we have a strong balance sheet. Robert just mentioned a hundred new experiences this year. Let's add in marketing, let's add in tech digital and technology investments. That's what gives us the comp. Fran mentions, you know, the brands are open. The brands are chasing. So we have the inventory. Have the investments and that's the confidence.

Corey Tarlowe: That's great. And then just on Abercrombie, is the expectation that we return to growth later in the year, that's presumably both sales and comp. Is there any expectation as to when or what the drivers might be for that as well? We think about the really strong compares that we're gonna be cycling.

Fran Horowitz: Yeah. I think, and I think Scott just said it. The team is hard at work, Corey. You know, that's what our model lets them do, which is really drive that open to buy and stay flexible and agile with their receipts going forward, reacting to the things that are happening in the business. You know, we do expect to see an inflection in the back half. We're not gonna give an exact date and time, but we do expect to see it in the back half. And the drivers are the categories that we're starting to see some nice reaction to that the team's getting back into.

Corey Tarlowe: Great. Thank you very much, and best of luck.

Robert Ball: Thanks.

Operator: Thank you. Our next question comes from Matthew Boss with JPMorgan. Your line is open.

Matthew Boss: Great. Thanks. So, Fran, could you speak to the progression of traffic during the first quarter and into May at Abercrombie relative to Hollister? Just where Abercrombie stands also with end of season carryover inventory today.

Fran Horowitz: Yeah. So we saw nice traffic actually throughout the quarter for Abercrombie. That's why I had discussed a little while ago, Matt, that, you know, the opportunity was really in this in the carryover and the compression of the AUR based on that product, which our expectation is that we are selling through that and seeing ourselves in a better position on all of that. And traffic was strong as well for Hollister on both digital as well as stores.

Robert Ball: Yeah, Matt, I'll just add one thing on the A and F inventory side of the house. So we did work through a ton of that carryover inventory in Q1. Still got some sitting on the books here, but, you know, we're not concerned with where those levels are. So if you remember last year, we had, you know, abnormally low levels of carryover inventory throughout the spring season, and we're just up against that year over year. Just for some perspective, we are below our carryover levels from this time in 2023. So it really is just a more of a normalized level of carryover, and we're up against the low levels from 2024.

Matthew Boss: And then maybe, Robert, just as a follow-up, is there a way to break apart second quarter gross margin for thinking about promotions relative to tariffs and freight? How best to think about gross margin progression in the back half of the year? And maybe just higher level, as we're thinking about operating margins, multi-year. Is there any give-back in the model, or how best to think about operating margins on a multi-year basis?

Robert Ball: Yeah. So on the gross margin guide in terms of what we're working through a lot of the freight and the carryover pressures. Again, that was what drove the gross margin declines in Q1. So we got through a ton of that. We'll still see some pressure here in Q2 as we work through the balance of that freight. We've got about $10 million of excess freight sitting on the balance sheet that we'll work through here in Q2 before that normalizes for the back half. And that's been consistent with what we expected coming into the year.

The carryover inventory, you know, we'll still see some AUR pressure here on the A and F side as we work through the balance of that carryover and right-size inventory, and that's a bit of a factor for Q2 as well. And AUR, you know, AUR was flat in Q1. Obviously, had some pressure on the ANF side that was offset by nice gains on the Hollister side. And so the way that we're thinking about this year is the balances of the year, Q2 and beyond. You know, we're gonna come in with flat AURs. And we're gonna work through, and expect sequential improvement here as we move through Q2 and moving forward.

On the operating margin side of the house, you know, no change here. You know, our focus is squarely on driving long-term sales, operating profit dollars, EPS growth go forward. You know, as Fran mentioned, we've got two incredible brands. We've got a proven operating model. We've got amazing teams. And we've got a pretty healthy financial framework. So, you know, cash productivity is strong. We'll continue to invest back into this business to strengthen for the long term.

We'll talk more long term here as we get deeper into the year, but, you know, we've guided to this 12.5% to 13.5% operating margin, which is a strong place to be and leaves us with potential to expand if we see that top line.

Matthew Boss: It's great color. Best of luck.

Robert Ball: Yep. Thanks, Matt.

Operator: Thank you. Our next question comes from Paul Lejuez with Citi. Your line is open.

Kelly Crago: Hi. This is Kelly on for Paul. Thanks for taking our question. I guess, Fran, if we could just, you know, circle back on the ANF brand in Q1, and you mentioned that it's disappointed versus your expectations. So could you just dig into where in the assortment from a category product perspective, where you saw disappointment in what you were doing to course correct that? And then just secondly, on the Q2 guide, 3% to 5%, is that sort of embedding in what you're seeing, Q2 quarter to date? Thanks.

Fran Horowitz: Sure. Hey, Kelly. So first, for Abercrombie, you know, as I mentioned earlier today, so we broke down you have to really break down Q1. As we set our expectation in the last call for Abercrombie Adult, we did have this carryover that we did not anniversary from 2024. And as Robert just said, from 2023, basically more normalized. That put the pressure on the AUR and drove a significant part of the decline. The other piece of it was up against, honestly, a spectacular launch of the wedding shop which we just did not comp as well.

So we had dresses that were strong that sold, but they did not sell to the level of actually the launch of the shop. So the team, as I've said, is busy, hard at work. They're very open to back half, chasing into product, that we are seeing selling. And we're excited about seeing an inflection in the back half of the year.

Robert Ball: Yeah. Kelly, I'll take the Q2 guide as we think about this. So, you know, we're excited to be in a position to grow top line in Q2 off of that plus 21 Q2 that we delivered last year. May month-to-date trends all incorporated into that outlook of 3% to 5% for the quarter. But as you know, you know, volume will build from here, particularly for Hollister as we move into the back-to-school season here. So, ultimately, you know, excited that we're targeting growth on growth here, and we feel good about the balance of the year from that perspective.

Fran Horowitz: Hey. Can I just wanna add one last thing on the first question? So just as far as Abercrombie goes, you know, again, the traffic was positive. Our customer file is growing. The brand is strong, and we're really excited about, you know, future growth. You know, one quarter, but we're excited about the inflection of that half and the opportunity globally for the brand.

Kelly Crago: Thank you.

Operator: Thank you. Our next question comes from Marni Shapiro with the Retail Tracker. Your line is open.

Marni Shapiro: Hey, guys. Congrats. Stores have looked absolutely fabulous. Could you just talk a little bit, just give us a quick update on a few things? What was the actual store count ending for the quarter? You know, what was the opening and closing for the first quarter? And then could you give us a little bit of an update just on YPB, where that stands, you know, how has it been doing, and also an update on your smaller footprint Abercrombie stores. I know you just opened the store in Williamsburg, but the smaller stores in cities and towns, if you could just talk a little bit about those.

Robert Ball: Yeah. So on the real estate side, just real quick, Marni. We opened seventeen new experiences, seven new stores in Q1, three closures, so net four. We'll see that accelerate here as we get into Q2. We're expecting about nineteen new stores and about five closures here for Q2 as then that's what's embedded in our guide.

Fran Horowitz: I'll take the YPB question. For YPB, active was actually a strong category for us for the first quarter. We're excited about what we continue to see with the opportunity of YPB, and there's some exciting things coming up for fall in that on that for that brand, that sub-brand.

Robert Ball: Thanks. Yeah. On the smaller footprint, so I'll grab this one at the end. You know, we're really happy with Williamsburg. We talked about that opening. That was an exciting opening for us when we've been waiting for a while. There's more coming here in Q2. Just running these smaller stores, you know, it's been a muscle that we've had to build over the last year and has been a focus for Abercrombie, the brand. And we've learned a lot. You know, we're tweaking these stores a little bit. You know, each neighborhood has its own vibe. Whether it's how we build or the product that's in there.

And so we're learning a lot and, you know, remains an amazing opportunity for Abercrombie to go forward.

Marni Shapiro: Awesome. Thank you, guys.

Operator: Thank you. Our next question comes from Alex Stratton with Morgan Stanley. Your line is open.

Alex Stratton: Perfect. Thanks so much. Maybe for Fran, just on A and F. You mentioned that the wedding shop was weaker. But were there any bright spots within A and F that are comping above the total banner level? And then for Robert, is the full-year EPS reduction I know it's mostly a function of tariffs on gross margin, but can you just walk us through the other dynamics in gross margin and SG&A that have perhaps changed since three months ago? Thanks a lot.

Fran Horowitz: Yeah. Just to reiterate, Alex. And if there are bright spots in ANF. That one particular category was not as strong, but we're excited about what we are seeing. We saw nice active. We saw strong bottoms. I've already mentioned swim. And, again, the flexibility of our models, letting the team read the business every single week, get back into what's working. They're very open for the back half, and there's some exciting things that they're reacting to.

Robert Ball: Yeah. Alex, on the EPS reduction, it's really two big pieces here. So as you think about where we were from March to where we are today, obviously, some color around the tariffs. You know, it's about a $70 million total impact on 2025. We're kind of early days with our mitigation playbooks and so we're working through some of those things. We think we can offset about $20 million of that, so that gets us to that $50 million that we've baked into our guide and that 100 basis points. The balance of it really just comes from, you know, Q2 where you know, again, we're working through some of the carryover.

We'll continue to see a little bit of gross margin pressure that brought down the Q2 operating margin a bit on a year-over-year basis. The tax rates also up a bit. But the primary drivers are really tariffs and that Q2 operating margin guide.

Alex Stratton: Thank you. Good luck.

Operator: Thank you. Our next question comes from Mauricio Serna with UBS. Your line is open.

Mauricio Serna: Great. Good morning and thanks for taking my questions. First, could you break down on the Q1 gross margin, the puts and takes you know, between a carryover and freight cost pressures. And then inventory, how are you thinking about inventory growth you know, as the year progresses? Thank you.

Robert Ball: Yeah, Mauricio. So no major surprises here on gross margin for Q1 based on what we shared in March. When you think about freight, it was more than half of that 440 basis point decline here in Q1 and then the balance of it was really the carryover pressure on the higher cost of the fall goods. AUR was roughly flat for the quarter. So, you know, A and F pressure with that sell through the carryover inventory offset by improving in Hollister. So, you know, as we think about where that goes for the balance of the year, we'll work through the balance of freights as we've been committing to all year.

That should kind of work us through Q2. Carryover will be some pressure here as we work through the inventory mix for the business and, you know, again, get through most of that during Q2. But again, just a reminder, that carryover it's not really an abnormal place to be. So it's not a major issue for us from a Q2 standpoint. We generally don't guide inventory on a cost basis, you know, as we've done historically. You know, we're looking to make sure that our units are aligned with our sales growth on a go-forward basis, so that's what we'll do here. You know, we ended the quarter with plus six units for the quarter.

Happy with where that sits, and we'll continue to tightly manage those units as we move through the balance of the year.

Mauricio Serna: Understood. And just a quick follow-up on inventory. Sorry. I based off for a second. I'm sorry. I'm on a holiday, sir. You talked about, you know, some success with the Grad Shop, like, good customer response. I guess, like, how are you thinking about the second half growth for this brand as, you know, you're gonna face a much tougher compare. So how are you thinking about, like, initiatives to sustain that growth? Thank you.

Fran Horowitz: Emeritus brand. So let's just back up. Record performance. We saw balanced growth across regions, across genders. We are gaining share, which is incredibly exciting in the teen space. I would say the team is doing a great job of really evolving from being a teen outfitter to being very culturally relevant. That was exhibited during all the work we did with collegiate, again with the grad shop, We are there meeting this customer at their most important life moments. And so there are some exciting things. I'm not gonna share the go forward, but they have got some more exciting stuff ready for summer to start and lots of exciting things happening for fall.

Robert Ball: Yeah. And I'd just say, Mauricio, you know, our job you know, is to grow the total. Right? We have two strong profitable brands. We've got a fleet of highly productive profitable stores. That complements a really profitable digital business. We've got three regions that are comping positive with line of sight to more growth ahead. So, you know, we love this diversified portfolio. We love this diversified channel and regions that helps us to deliver against that goal here in Q2. And know, we're excited about the balance of the year.

Mauricio Serna: Got it. And if I may just one quick follow-up. On gross margin, you know, was down 440 basis points in Q1. Is the expectation of Q2 just know, down but maybe, you know, not as much? Or how should we think about the Q2 gross margin evolution and particularly the drivers there? Thank you.

Robert Ball: Yeah. No specific guide for Q2, but you would expect sequential improvement from that down 440 in Q1 as we move into Q2. Again, freight won't be as big of a headwind for us. The carryover inventory is not that not gonna be as big of an impact for us in Q2. And again, we're assuming flat AUR. So sequential improvements the way that we're thinking about it. It's all baked into that operating margin guide.

Mauricio Serna: Thank you so much, and congratulations.

Robert Ball: Thanks, Mauricio.

Operator: Thank you. As a reminder, to ask a question, please press star one. Our next question comes from Rick Patel with Raymond James. Your line is open.

Rick Patel: Thanks. Good morning. I wanted to double-click on your expectations for promotions going forward. So it sounds like you have some work to do for carryover for the Abercrombie brand in the near term, but that the back half should be cleaner. Does that back half improvement reflect fewer units that you have planned, or does it reflect just more confidence in the assortment? And then as a follow-up, what are your assumptions for promotions for Hollister going forward? Given the strong momentum there, do you see opportunity to pull back?

Robert Ball: Yeah. So when you think about promotions on the A and F side of the house, yeah, you know, we'll see some AUR pressure here as we work through the carryover inventory. Again, not as big of an issue in Q2 as it was in Q1, so we should see sequential improvement there. You know, we're always gonna align our promotions with our inventory levels and customer demand. So you know, we'll see how that goes. We're gonna come in every day, and this goes for the whole your Hollister question as well. You know, we'll come in every day.

We'll work to make sure that we're pulling back on a day here or a promo or a discount depth there. You know, all of those things given this financial model are really beneficial for us, and that's our job. But you know, sitting here today, you know, we're gonna assume that we hold the gains. Again, multi-year double-digit positive AURs across the brands. We like where we are. We like the value proposition that we provide to that consumer. But, again, we're gonna come in every day and try to improve on that.

Rick Patel: Can you also double-click on your expectations for growth in Europe and Asia for the rest of the year? You know, some nice results in Q1 and you touched on positive global growth for the year. So just some additional color there would be great.

Robert Ball: Yeah. No change to our thinking here. You know, it was great to see all three regions post growth and positive comps in the first quarter. We're expecting this full year for these regions to all deliver growth, which is you know, something that we commit to every year, and we still see that growth opportunity across Americas, EMEA, and APAC. So you know, nice balance healthy growth here that we're seeing and a lot of opportunity ahead for us.

Scott Lipesky: Yeah. Rick, just to add on there for the international piece. You know, we've been very focused on the UK market and more recently moved into Germany, you know, with our team has gotten their feet under them there in Europe, our team in London. They've done an amazing job. So it was kind of the same story here in the quarter. Saw strong growth in U.K., see Germany growing, and those are our biggest two countries in EMEA. So great to see growth out of the two of them.

Rick Patel: Thanks very much.

Operator: Thank you. Our next question comes from Janet Kloppenburg with JJK Research Associates Inc. Your line is open.

Janet Kloppenburg: Hi, everybody. Great job on the quarter. I had a couple of questions. When you talk about the improvement for Abercrombie for the second half? Does that reflect some void that maybe you had in the spring or last year in the second half? And I just wondered about your confidence level there. And then I wondered about the carryover product. My thoughts are that well, it's really true. My question really is could this just be markdown levels normalizing after you guys, you know, had four years of double-digit growth there and sort of no markdowns that to really speak of. So just would love to hear more on that. Thank you.

Robert Ball: Yeah. Janet, let me jump in on that second one first. On the carryover product. You're absolutely right. I mean, you think about, you know, what we were up against from 2024's Q1. And we've delivered 66% gross margins, and we had basically zero carryover all the way through the spring season. So that's so we're just lapping that today. And, again, that's why we won't expect the carryover impact on margins on a go-forward basis to be as meaningful as we move into the back half.

Fran Horowitz: Sure. Hey, Janet. On the first question, I guess what I would say is that there were some products perhaps that we just didn't see the same rate of sale as we saw last year against what was an incredible launch right, of a shop. I would say that there weren't voids. I think that there's new trends that are emerging that the team is very excited about, and that's what our model allows us to do. I mean, a great example of that would be, you know, it's happening now in boho and western. I mean, those are things that the customer's starting to respond to. Our model allows us to get back into that pretty aggressively.

There's some leg shapes that are changing on the bottom that we're excited about for second quarter actually, for the second half. Excuse me. So there's things that the customer's starting to tell us that we're responding to.

Janet Kloppenburg: And you have time to get that done, Fran, with the lead times and everything?

Fran Horowitz: That was our model? I mean, that's that is what we do. The flexibility that we've built in, there's absolutely I mean, we're very open for the back half.

Janet Kloppenburg: And are you feeling any competitive heat from some of the other brands out there? You know, that often happens after a brand having this many years of outperformance. Is, you know, this pressure as people you know, sort of admire what you've done and trying to get a piece of it.

Fran Horowitz: Listen. It's certainly exciting that we have an incredibly successful playbook that we're gonna continue to stay focused on. Lining up that product voice experience is what, you know, what this team does best and staying close to that customer. It's a huge compliment, of course, that people are watching what we're doing. But it's our job you know, to stay ahead of them and to stay faster. And I believe it's the team has got some exciting things that they're working on. To do just that.

Janet Kloppenburg: Okay. Congratulations, and good luck.

Robert Ball: Thanks, Janet.

Fran Horowitz: Thanks, Janet.

Operator: Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to Fran for closing remarks.

Fran Horowitz: Thanks, everyone, and we just look forward to updating you after the second quarter.

Operator: Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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DATE

Wednesday, May 28, 2025 at 11 a.m. ET

CALL PARTICIPANTS

Executive Chairman — Stuart Rose

Chief Executive Officer — Zafar Rizvi

Chief Financial Officer — Doug Bruggeman

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Share Repurchase Activity: Repurchased approximately 822,000 shares for $32.7 million at an average price of $39.80 per share, reducing outstanding shares by about 6.8% since December 2024.

Remaining Buyback Authorization: Authority remains to repurchase approximately 1,182,000 additional shares, representing roughly 7% of current shares outstanding.

Ethanol Sales Volume: 70.9 million gallons sold, down from 74 million gallons in the prior-year period, primarily due to shipment timing.

Average Ethanol Selling Price: $1.76 per gallon.

Distillers Grain Sales: 153,000 tons of dried distillers grains at $145.65 per ton and 22,000 tons of modified distillers grains at $73.44 per ton.

Corn Oil Sales: 21.4 million pounds sold at $0.46 per pound.

Gross Profit: $14.3 million, compared to $14.5 million in the prior-year period, reflecting lower dried distillers grain prices offset by higher ethanol prices.

Selling, General, and Administrative Expenses: $5.9 million, down from $6.1 million in the prior-year period.

Interest and Other Income: $4.2 million, compared to $5.9 million in the prior-year period, reflecting lower cash balances and interest income.

Net Income Attributable to Shareholders: $8.7 million, or $0.51 per diluted share, compared to $10.2 million, or $0.58 per diluted share, in the prior-year period; reduction driven mainly by lower cash balances and interest income.

Cash, Cash Equivalents, and Short-Term Investments: $315.9 million at quarter-end, down from the previous quarter due to capital projects and share buybacks.

Capital Investment in Projects: Combined investment in carbon capture and ethanol expansion projects reached $122.7 million to date, within the revised $220 million–$230 million total budget range.

Regulatory Progress: EPA anticipates a final Class VI injection well permit decision by January 2026; proposed injection well sites are approximately six miles outside the Mahomet Sole Source Aquifer boundary defined by Illinois Senate Bill 1723.

Profitability Track Record: Nineteenth consecutive profitable quarter achieved.

Ethanol Export Growth: U.S. ethanol exports increased 23% in March 2025 and were nearly 19% higher cumulatively through March 2025.

Plant Expansion: Ongoing Gibson City plant expansion targets a roughly 33% increase in production capacity.

Balance Sheet: Company remains free of bank debt, supporting funded organic growth initiatives.

SUMMARY

REX American Resources Corporation (NYSE:REX) reported lower sales volume and net income, primarily due to shipment timing and reduced interest income from a lower cash balance. Management confirmed ongoing progress in the Gibson City plant expansion and carbon capture projects within budget, supported by a strong balance sheet with zero bank debt. Key project locations avoid new regulatory aquifer restrictions. The company repurchased approximately 822,000 shares for $32.7 million, reducing outstanding shares by about 6.8% since December 2024, while buyback authorization remains available for future deployment.

Chief Executive Officer Rizvi said, "Q1 FY2025 marked REX's nineteenth consecutive profitable quarter," highlighting consistent performance amidst volatility.

Management cited industry data showing a sustained increase in ethanol exports, with March 2025 volumes up 23% and year-to-date exports up 19% compared to the same periods in 2024.

Company leadership identified immediate market drivers as stable ethanol demand, progress on federally relevant tax credits (45Q and 45Z), and monitoring export tariff scenarios.

Management is "closely monitoring potential changes to the Inflation Reduction Act," specifically amendments to tax credit provisions that could affect project economics.

INDUSTRY GLOSSARY

Class VI injection well permit: EPA authorization required for underground carbon dioxide sequestration as part of carbon capture projects.

45Q / 45Z tax credits: U.S. federal tax incentives for carbon oxide sequestration (45Q) and for producing low-carbon transportation fuels (45Z).

Distillers grains: Byproduct of ethanol production used as animal feed, available in dried or modified forms.

Mahomet Sole Source Aquifer: Principal drinking water source in parts of Illinois, subject to special protection legislation affecting underground projects.

Full Conference Call Transcript

Stuart Rose: Good morning, and thank you to everyone for joining us today. The first quarter of 2025 demonstrated REX's continued operational excellence and strategic execution. We maintained our position as one of the industry's most resilient in the face of uncertain and evolving regulatory and market conditions. During the quarter, we saw stable ethanol demand and managed our production as we have in the past to capitalize on market conditions as we see them. The strength of our balance sheet continues to provide us with flexibility to pursue strategic opportunities while maintaining our disciplined approach to capital allocation. As always, we continue to evaluate potential acquisition opportunities that meet our strict operational and financial criteria.

Both of our organic growth initiatives, carbon capture, and expansion of ethanol production capacity at One Earth continued to progress. For the remainder of the year, we anticipate moving these projects forward, controlling what we can. Beyond operations, one of the duties we take very seriously at REX is delivering consistent value to our shareholders. To this end, we have continued the share buybacks that we've talked about on our last call. During the first quarter, we repurchased approximately 822,000 shares for total consideration of $32.7 million during a period when our share price, we believe, was undervalued. The average purchase price for the repurchased shares was $39.80.

This brings our buyback activity to approximately 6.8% of our shares since reinitiating purchases in December 2024. Currently, we have approximately 1,182,000 shares remaining on the buyback authorization, which represents an additional approximately 7% of our shares. We plan to continue executing on the remaining share purchase authorization when and where we see value. I'll now turn the call over to our CEO, Zafar Rizvi, to provide updates on our ongoing projects.

Zafar Rizvi: Thank you, Stuart. Regarding our ethanol facility expansion in Gibson City, we are continuing a technical review of several key project components. This ongoing evaluation has already yielded valuable insights that we believe will enhance the long-term operational efficiencies of the expanded facility when materialized. During the first quarter, we maintained close coordination with the EPA regarding our Class VI injection well permit. The EPA currently anticipates issuing a final permitting decision on our application by January 2026. In parallel, we are closely monitoring potential changes to the Inflation Reduction Act, particularly regarding tax credit provisions for carbon capture projects, specifically 45Q and 45Z, which is related to low carbon fuel.

The bill includes several proposed amendments that could impact our planning and future economic decisions. In the 2025 Illinois legislative session, Senate Bill 1723 was introduced with an amendment defining the term "sole source aquifer." Under this definition, the bill would prohibit carbon sequestration activities above, below, or through such aquifers. The legislation is now under consideration by the governor. But most importantly, our proposed injection well sites, including our initial well and two additional locations, are situated approximately six miles outside the mapped boundary of the Mahomet Sole Source Aquifer as defined in the bill. We view this as a positive development for our project.

From the beginning, we have supported measures to protect vital drinking water resources and are committed to ensuring safety for our operations and the broader community. As of the end of Q1, our total investment in the carbon capture and ethanol expansion projects stands at approximately $122.7 million. We remain within our revised combined budget range of $220 million to $230 million for both projects. I'll now hand the call over to Doug Bruggeman to discuss our financial results.

Doug Bruggeman: Thanks, Zafar. During the first quarter of fiscal 2025, our ethanol sales volumes reached 70.9 million gallons compared to 74 million gallons in the first quarter of 2024. The average selling price for ethanol was $1.76 per gallon during the quarter. Lower ethanol sales volumes in Q1 2025 were mostly attributable to the timing of shipments as our production was relatively stable between periods. Dry distillers grain sales volumes were approximately 153,000 tons for Q1 with an average selling price of $145.65 per ton. Modified distillers grain volumes totaled 22,000 tons, with an average selling price of $73.44 per ton.

Corn oil sales volumes were approximately 21.4 million pounds during the quarter, with an average selling price of $0.46 per pound. The gross profit for the first quarter was $14.3 million compared to $14.5 million in Q1 2024. This primarily reflects lower sales prices for dried distillers grains, somewhat offset by improved ethanol pricing. Selling, general, and administrative expenses were approximately $5.9 million for the quarter compared to $6.1 million in Q1 2024. Interest and other income totaled $4.2 million for the quarter, compared to $5.9 million in the first quarter of the prior year. Income before taxes and non-controlling interest was approximately $13.6 million compared to $16 million in Q1 2024.

Net income attributable to REX shareholders was $8.7 million or $0.51 per diluted share compared to $10.2 million or $0.58 per diluted share in Q1 2024. The reduction was primarily attributable to lower cash balances and interest income rather than operations. We ended the first quarter with cash, cash equivalents, and short-term investments of $315.9 million, a reduction from the previous quarter, primarily reflecting our ongoing capital investments in growth projects and share repurchases. As previously announced, we remained active in our share repurchase program during Q1, acquiring approximately 822,000 shares for total consideration of $32.7 million. This reflects our ongoing commitment to delivering shareholder value and our confidence in REX's future prospects.

REX continues to maintain a strong financial position with no bank debt. I'll now turn things back to Zafar.

Zafar Rizvi: Thank you, Doug. The REX team continues to execute on the three P's I discussed on our last call. First, profit. Our ongoing goal is to run a profitable business despite market ups and downs. Our team has consistently demonstrated their ability to overcome challenges and deliver strong financial results quarter after quarter for our shareholders. Notably, the first quarter marked REX's nineteenth consecutive profitable quarter. Second, position. We have strategically positioned ourselves for organic growth funded entirely by our own strong balance sheet, our ethanol expansion, and carbon capture and sequestration projects. We are focusing on what we can control and making investments to optimize our future operations. We are committed to building REX's long-term strength. Finally, policy.

On the policy front, we continue to monitor developments closely at both the federal and state levels. While many outcomes remain uncertain and outside our control, we believe we are well-informed and well-prepared to respond to any policy shifts that do arise. Our overall market conditions, particularly those that supported the ethanol sector in 2024, remain favorable. Ethanol exports in March 2025 were up 23% compared to March 2024. Cumulatively, US ethanol exports through March 2025 were nearly 19% higher than during the same period in 2024, according to the Renewable Fuel Association. Following a strong first quarter, we are seeing stable performance in the second quarter and expect another profitable result.

Now I would like to open things up for questions. Operator?

Operator: Thank you. It may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question comes from the line of Peter Dastreich with Water Tower Research. Please proceed.

Peter Dastreich: Good morning, gentlemen, and thanks for taking my questions. It's great to hear the progress on the share repurchase program. For starters, congratulations on your results and on your nineteenth consecutive quarter of profitability. That consistent profitability is something that has eluded some of your peers, and it's not just profit. You've been generating superior returns on capital as well. I'd just like to ask what drives REX's ability to consistently deliver this performance, and could you please discuss what it is about your strategy? Is it the cost control, logistics, or other factors at play? Thank you.

Stuart Rose: You want me to answer that? Our CEO has a lot to do with this. We have the top CEO, in my opinion—this is Stuart talking—in the industry who watches everything very, very closely. He watches the corn prices. He watches the ethanol. Very few CEOs, very few people at his level, get down to the details that he does. Then on top of that, we have good locations and very, very good people that we have set up in each of our plants that have, I think, separated us from the pack. Let Zafar expand on what I'm saying, but the big difference is our people.

Zafar Rizvi: Yes, I agree. I think the big difference is our people. We have a team that communicates well. We exactly know what's happening day to day. We have spreadsheets to monitor how the market is moving up and down, and we try to reach our targets. We try to lock in profit. That's basically it, but I think we cannot be successful without the great people and without the great team. And we are very fortunate that we have those people who support us, our ideology, and mission, and we continue to produce for our shareholders.

Peter Dastreich: Okay. Thank you. My second question is a regulatory question. Could you talk about what specific deregulation measures you'd like to see from the Trump administration that could help to smooth your runway, for example? Now, where are we on federal pipeline regulations or other relevant areas?

Zafar Rizvi: You want to answer that, or do you want me to? You know the answer? I don't know. I think we're—

Stuart Rose: I'll answer it, but everything's in limbo right now until this bill passes. We've worked with—we definitely have contacts in Washington that we're working with, and we have very, very good contacts in Illinois. But right now, we're trying to know exactly what the target is. It's a moving target every day with what's going on in Washington, so I can't—it's very hard right now to give anyone any indication of when a ref will ever—or when—and hopefully, it's not if, but it could be if we ever get our carbon cap project going. Things in Washington are in great limbo right now.

Zafar Rizvi: But I think I add to that is the big bill at this time stage still includes 45Q and 45Z. And actually, 45Z is extended to up to 2031. And I think that's very positive. And recently, Illinois passed this bill 1723, which we believe is also very positive for our ethanol location because we are six miles away from the aquifer. Compared to some other facilities, maybe very close to the aquifer, and they banned that. The over, under, and any pipeline or any carbon sequestration where the aquifer is close to that area. So we believe that's very positive. As Stuart mentioned, FISMA rules are still under review.

We had some contacts with them, and they are still saying they are trying to review. And that will build that rules make Trump administration may just leave it as it is as those were passed two days before the Biden administration left. And if that's the case, then I think we should get those rules very soon. As Stuart mentioned, some of these are beyond our control, as you can see, my prepared remarks, I mentioned that January 31st will be issuing the EPA permit. And today, this morning, they extended that date to April 31st. So some of these things are beyond our control, how the governments move forward. And when they finalize their reviews.

So those are just moving targets. So we are watching them very closely.

Peter Dastreich: Okay. Thank you. Yeah. That sounds generally like some good momentum on the regulatory side. Just a final—

Stuart Rose: The other thing that you should remember is no matter what, we are expanding our plant. And it's a great plant already. And we're adding roughly 33% once we finish greater capacity in that plant. So no matter what, we will be growing.

Peter Dastreich: Okay. That's great. Thank you very much. Just one final question, just a macro question. It'd be great to hear your thoughts on the industry fundamentals. Where are ethanol margins trending as we approach this summer, and what are the drivers and outlook there? Thank you.

Zafar Rizvi: I think we cautiously see that the ethanol margins are still very positive. And for the first second quarter, we see it still is positive, as I mentioned in our prepared remarks, and we expect the record corn is expected this year, thanks to strong planting in states like South Dakota and Illinois and good weather so far. If this continues, it could boost our profit for the rest of the year. We are also pleased with our export at this time, ethanol, as I mentioned previously, it's approximately 19% up compared to last year.

And also, if the dust settles with Canada and Mexico, and there is no tariff, then we believe that the Trump administration's will may help us to eliminate those tariffs on the different countries, which they have on ethanol or DDGs. And if that market opens up, we believe that will be great for the ethanol industry. But at the same time, we're cautiously looking at natural gas. If natural gas is exported greater than we expect, then it can negatively affect our business.

But because natural gas and corn and those are the major expenses we have in our ethanol business, so we are monitoring very closely, but we believe at this time, there is a positive outlook for 2025.

Peter Dastreich: Okay. Thank you very much. Appreciate it. I'll get back in the queue.

Zafar Rizvi: Thank you.

Operator: Thank you. There are no further questions at this time. I'd like to turn the call back to Stuart Rose for closing remarks.

Stuart Rose: Okay. I'd like to thank everyone for listening. Again, we feel we have among the best plants in the industry. We have great locations in the Corn Belt. We have what we feel is the best technology. But most importantly, as I said during the call, we, in my opinion, have the best people in the industry, and that's what sets us apart. We have very, very high hopes that these same people and the other people that we've hired will do the exact same thing in carbon capture that we've done in ethanol. Very much look forward to the future.

Thank you very much for listening, and we'll talk to you at the end of next—or the conference call for next quarter. Thank you. Bye.

Operator: This concludes today's conference. You may disconnect your lines at this time. Enjoy the rest of your day.

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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DATE

Wednesday, May 28, 2025 at 8 a.m. ET

CALL PARTICIPANTS

Executive Chairman — Edward W. Stack

President and Chief Executive Officer — Lauren R. Hobart

Executive Vice President, Chief Financial Officer — Navdeep Gupta

Need a quote from one of our analysts? Email [email protected]

TAKEAWAYS

Comparable Sales Growth: Comp sales increased 4.5% in Q1 FY2025, marking the fifth consecutive quarter of over 4% comparable sales growth.

Consolidated Net Sales: Consolidated sales grew 5.2% to $3.17 billion in Q1 FY2025, with market share gains from online-only and omnichannel retailers.

Gross Margin: Gross margin expanded by 41 basis points to 36.7% of net sales in Q1 FY2025, driven primarily by higher merchandise margin.

SG&A Expense: Non-GAAP SG&A expenses rose 7% to $791.2 million in Q1 FY2025 and deleveraged by 42 basis points compared to the prior year's non-GAAP results, partly offset by lower incentive compensation.

Inventory: Inventory levels increased 12% year-over-year in Q1 FY2025, attributed to deliberate investments in key items and categories.

Non-GAAP Operating Income: Non-GAAP operating income reached $360.4 million, or 11.35% of net sales for Q1 FY2025, compared to $334.5 million, or 11.08% of net sales in Q1 FY2024 on a non-GAAP basis.

Non-GAAP EPS: Non-GAAP earnings per diluted share were $3.37, up 2.1% from $3.30 in the prior year.

GAAP EPS: GAAP earnings per diluted share stood at $3.24 for Q1 FY2025, including non-cash losses from non-operating investments in Foot Locker stock in GAAP results.

Cash Position: Ended Q1 FY2025 with approximately $1 billion in cash and cash equivalents, with no borrowing on the $1.6 billion unsecured credit facility.

Capital Allocation: Net capital expenditures totaled $242 million for Q1 FY2025, quarterly dividends paid were $100 million, and 1.4 million shares were repurchased for $298.7 million at an average price of $218.65 per share.

Guidance Reaffirmed: Full-year comp sales expected to be in the 1%-3% range for FY2025; EPS (non-GAAP) is guided at $13.80 to $14.40, including the impact of all current tariffs.

Gross Margin Outlook: Full-year gross margin for FY2025 expected to improve by approximately 75 basis points at the midpoint, offset by anticipated non-GAAP SG&A deleverage.

Preopening Expenses: Preopening expenses of $13.4 million in Q1 FY2025; full-year FY2025 guidance is $65 million to $75 million, with two-thirds to be incurred in the second half.

Store Portfolio Expansion: Opened two House of Sport locations and four Fieldhouse locations in Q1 FY2025, with targets to open approximately 16 House of Sport and 6 Fieldhouse locations in 2025.

Game Changer Metrics: Game Changer business recorded over 6.5 million unique active users in Q1 FY2025, averaging about 2.2 million daily active users.

Foot Locker Acquisition: Announced planned acquisition of Foot Locker, targeting $100 million to $125 million in cost synergies over the medium term and aiming for EPS accretion in the first full fiscal year post-close.

Market Reach Expansion: Combination with Foot Locker will expand access to over 3,200 stores worldwide and offer a pathway to participate in the $300 billion global sports retail market.

SUMMARY

The call detailed the newly announced plan to acquire Foot Locker, which management expects to transform DICK'S Sporting Goods, Inc. (NYSE:DKS) into a global leader and provide $100 million to $125 million in medium-term cost synergies. Management highlighted that the business has achieved comp sales gains over 4% for five consecutive quarters through Q1 FY2025, with gross and merchandise margins expanding even as SG&A deleveraged due to planned investments in digital, in-store, and marketing. Guidance for FY2025 remains unchanged, with all known tariffs factored in; the company projects improved gross margins but expects those gains to be offset by ongoing investment-driven SG&A deleverage.

Management stated that the Foot Locker transaction "be accretive to DICK'S EPS in the first full fiscal year post-close," and aims to strengthen global brand partnerships by serving new consumer segments.

The Game Changer business is scaling, showing a nearly 28% year-over-year increase in active users during the first quarter, and is viewed as a key strategic digital asset supporting both recurring revenue and media network monetization.

Quarter-end inventory, up 12% in Q1 FY2025, is positioned as a sales growth driver, with management expressing confidence in category diversification and real-time pricing capabilities amid volatile macroeconomic and tariff environments.

INDUSTRY GLOSSARY

House of Sport: DICK'S Sporting Goods' flagship large-format stores featuring experiential retail concepts such as batting cages, golf simulators, and fitness classes to elevate shopper engagement.

Fieldhouse: A smaller-format DICK'S store concept focused on serving communities with a curated sports assortment and localized athlete experiences.

Game Changer: A DICK'S-owned youth sports app providing video streaming, scorekeeping, scheduling, communications, and data analytics, now integrated with DICK'S Media Network.

DICK'S Media Network: An in-house digital and retail media platform enabling targeted advertising to DICK'S customers and Game Changer users.

Comp Sales (Comps): Comparable store sales growth, measuring revenue growth from stores open at least one year plus digital channels.

Gross Margin: Net sales minus cost of goods sold, expressed as a percentage of net sales, indicating merchandise and promotional profitability.

SG&A: Selling, general, and administrative expenses, representing overhead and operational costs not directly tied to production or sales of specific items.

Full Conference Call Transcript

Ed Stack, our Executive Chairman, Lauren Hobart, our President and Chief Executive Officer, and Navdeep Gupta, our Chief Financial Officer. A playback of today's call will be archived in our investor relations website located at investors.dicks.com for approximately twelve months. As a reminder, we will be making forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with cautionary statements in our earnings release and risk factor discussions in our filings with the SEC, including our last annual report on Form 10-K as well as cautionary statements made during this call.

We assume no obligation to update any of these forward-looking statements or information. Please refer to our investor relations website to find the reconciliation of our non-GAAP financial measures referenced in today's call. In addition, certain important information related to the transaction will be included in the registration statement on Form S-4 that will be filed by DICK'S Sporting Goods in connection with the transaction. Investors are encouraged to read the Form S-4 and other documents filed with the SEC in connection with the transaction. In addition, DICK'S and Foot Locker, and their directors and officers may be deemed to be participating in a solicitation of proxies in favor of the proposed transaction.

Please refer to the disclaimer information included in our earnings release. And finally, for future scheduling purposes, we are tentatively planning to publish our second quarter 2025 earnings results on September 3, 2025. With that, I'll now turn the call over to Ed.

Ed Stack: Thanks, Nate. Good morning, everyone. As announced earlier this morning, we had a very strong start to the year with another quarter over a four percent comp. Our momentum is significant and our long-term strategies are clearly working. On May 15th, we announced our plans to acquire Foot Locker, a move that represents a truly exciting and transformational moment for DICK'S. While we spoke about our strategic rationale and the significant breadth of this acquisition on our most recent investor call, I wanted to take a moment to reiterate why we're so excited about this combination and why it makes sense for DICK'S at this time.

The convergence of sport and culture has never been stronger, and we're seeing tremendous momentum and opportunity across our industry. For many years, we've admired Foot Locker's brand and the powerful community they built from sneaker culture. By bringing our two great brands together, we see the opportunity to create a global leader in the sports retail industry, one that serves more types of athletes, consumers, and communities than we do today. This combination positions us to participate in the $300 billion global sports retail market and expands our reach to over 3,200 stores worldwide. By applying the operational expertise we've built over the years, we will help unlock the next chapter of growth for Foot Locker.

We believe this makes us an even more important partner to the world's leading sports brands, giving them a larger, more connected platform to reach athletes across geographies, channels, and banners. As we said earlier, we expect the transaction to be accretive to DICK'S EPS in the first full fiscal year post-close, and we see a clear path to unlocking meaningful cost synergies over the medium term. We're proud of the strong position we're in today and incredibly excited about the future we believe is ahead in combination with Foot Locker. While this morning, we're focused on our strong Q1 results, we look forward to sharing updates as we move through this process.

I'll now turn the call over to Lauren.

Lauren Hobart: Thank you, Ed, and good morning, everyone. We are very pleased with our first quarter results, which we previewed for you almost two weeks ago. Our performance demonstrates the momentum and strength of our long-term strategies and the consistency of our execution. Our Q1 comps increased 4.5% driven by our four strategic pillars of omnichannel athlete experience, differentiated product assortment, deep engagement with the DICK'S brand, and our knowledgeable and passionate teammates who are integral to our success. This is the fifth straight quarter our team has delivered over 4% comp growth. In Q1, we saw growth in both average ticket and transaction.

In fact, compared to the same period last year, more athletes purchased from us, they purchased more frequently, and they spent more each trip. Our first quarter gross margin expanded over 40 basis points, driven by higher merchandise margin, and we delivered non-GAAP EPS of $3.37, ahead of last year. As we reflect on our strong results and look to the rest of the year, I want to acknowledge that we're operating in an increasingly complex macroeconomic environment, one shaped by shifting trade policies and a more cautious consumer mindset. However, despite this uncertainty, we continue to operate from a position of strength.

We hold a unique and compelling position in the industry, and we've seen that people continue to prioritize healthy lifestyles, sport, and fitness, and are increasingly looking to DICK'S Sporting Goods to meet these needs. It's worth highlighting that over the past three years, we've acquired over 20 million new athletes. With all of this in mind, we are reaffirming the guidance we provided for 2025, which includes the expected impact from all tariffs currently in effect. We continue to expect our comp sales to be in the range of 1% to 3%, which at the midpoint represents nearly a 10% three-year comp stack. We continue to expect our EPS to be in the range of $13.80 to $14.40.

As we outlined on last quarter's call, we are leaning into our strategic pillars while focusing on three exciting growth areas with significant potential: repositioning our real estate and store portfolio, driving continued strong growth in key categories, and accelerating our e-commerce business. First, we continue to make meaningful progress in repositioning our real estate and store portfolio. We opened two additional House of Sport locations in Q1, followed by another location earlier this month. I continue to expect to open approximately 16 total in 2025. We also added four new Fieldhouse locations in Q1, with two more opening a few weeks ago, and are on track to open approximately six in total this year.

The response to these openings has been incredibly positive and reinforces the strength of our approach to elevating the athlete experience and the importance of continuing to invest in the long-term growth opportunity ahead of us. The second of our three major growth areas is driving growth across key categories. Our strong access to top-tier products from national and emerging brands, combined with our premium in-store and digital experiences, are fueling robust demand, including strong sell-through on launches. Our third major growth area is accelerating our multibillion-dollar, highly profitable e-commerce business, where we see significant opportunity to grow our online presence and gain market share from online-only and omnichannel retailers alike.

To capture this opportunity, we're aggressively investing in technology and marketing to enhance the omnichannel athlete experience and drive greater consideration for dicks.com. We are seeing the impact of these investments. We delivered strong e-commerce growth in Q1, which again outpaced the total company growth. Our in-app capabilities have been instrumental in building excitement and driving the success of our launches across categories. In this past quarter, we delivered our biggest diamond sport launches ever, supported by our elevated and diverse assortment that positions us as the destination for new products.

Lastly, as part of our broader digital strategy, we remain very enthusiastic about two long-term growth opportunities: Game Changer and DICK'S Media Network, both of which are delivering strong, profitable growth as they scale. Looking more closely at the Game Changer business, we had over 6.5 million unique active users during the first quarter, with an average of approximately 2.2 million daily active users, a nearly 28% year-over-year increase. I'd like to thank all of our teammates for their hard work and commitment to DICK'S Sporting Goods and for their focus on delivering great experiences for our athletes this summer season. With that, I'll turn it over to Navdeep to share more detail on our financial results and 2025 outlook.

Navdeep, over to you.

Navdeep Gupta: Thank you, Lauren, and good morning, everyone. Let's begin with a brief review of our first quarter results. We are very pleased to report a consolidated sales increase of 5.2% to $3.17 billion. Our Q1 comps increased 4.5%, and we continue to gain market share from online-only and from omnichannel retailers. This represents a 9.8% two-year comp stack and a 13.4% three-year comp stack. These strong comps were driven by a 3.7% increase in average ticket and a 0.8% increase in transaction. We saw strength across key categories and our vertical brands, led by DSG, CALIA, and VRST, which all continue to resonate very well with our athletes.

Gross profit for the first quarter remains strong at $1.17 billion or 36.7% of net sales and increased 41 basis points from last year. This increase was driven by higher merchandise margin. On a non-GAAP basis, SG&A expenses increased 7% to $791.2 million and deleveraged 42 basis points compared to last year's non-GAAP results. As we previewed during last quarter's call, this year-over-year deleverage was expected and driven by strategic investments digitally, in-store, and in marketing to better position ourselves over the long term. This was partially offset by lower incentive compensation expense compared to the prior year. Preopening expenses were $13.4 million, a decrease of $7.7 million compared to the prior year and in line with our expectations.

Non-GAAP operating income was $360.4 million or 11.35% of net sales. This is up from non-GAAP operating income of $334.5 million or 11.08% of net sales in Q1 of 2024. On a non-GAAP basis, other income, primarily comprised of interest income, was $13.3 million, down $8.3 million from the prior year. This decline resulted from lower cash on hand and an expected lower interest rate environment. Non-GAAP EBT was $361.6 million or 11.39% of net sales. This is up from EBT of $342.4 million or 11.34% of net sales in Q1 of 2024. As expected, our Q1 tax rate grew from 19.6% last year to approximately 24% this year.

This approximate 440 basis points increase reflects the higher tax deduction from a greater number of employee equity awards being exercised in the prior year, which favorably impacted Q1 2024 earnings by approximately 19 cents compared to the current year quarter. In total, we delivered non-GAAP earnings per diluted share of $3.37, an increase of 2.1% compared to the earnings per diluted share of $3.30 last year. On a GAAP basis, our earnings per diluted share were $3.24. This includes non-cash losses from non-operating investments in Foot Locker stock. For additional details on this, you can refer to the non-GAAP reconciliation tables of our press release that we issued this morning.

Now looking to our balance sheet, we ended Q1 with approximately $1 billion of cash and cash equivalents and no borrowing on our $1.6 billion unsecured credit facility. Our quarter-end inventory levels increased 12% compared to Q1 of last year. We believe our inventory is well-positioned. As we have discussed, our deliberate investment in key items and categories continues to fuel our sales momentum. Turning to our first quarter capital allocation, net capital expenditures were $242 million, and we paid $100 million in quarterly dividends. We also repurchased 1.4 million shares of our stock for $298.7 million at an average price of $218.65.

Now moving to our outlook for 2025, which does not include acquisition-related costs, investment losses, or results from the recently announced Foot Locker acquisition. Assuming no material changes in consumer spending, we are reaffirming our expectations for comp sales and EPS. This balances a strong start to the year, our confidence in our strategic initiatives, and our operational strength against an increasingly complex macroeconomic environment. We continue to expect comp sales growth in the range of 1% to 3%, with comps closer to the high end of our guidance through the third quarter. Consolidated sales are expected to remain in the range of $13.6 billion to $13.9 billion.

Driven by the quality of our assortment, we also continue to expect gross margins to improve by approximately 75 basis points at the midpoint. As we have discussed, from this position of strength, we plan to make strategic investments digitally, in-store, and in marketing to better position ourselves over the long term. Thus, we anticipate our gross margin expansion to be offset by SG&A deleverage. From a pacing standpoint, we continue to expect greater SG&A expense deleverage in the first half, with moderation in the second half as we lap the higher investment levels from the second half of last year.

We continue to expect preopening expenses to be in the range of $65 to $75 million, with approximately one-third incurred in the first half of the year and the remaining two-thirds in the second half. We continue to expect operating margin to be approximately 11.1% at the midpoint, and at the high end of our expectations, we continue to expect to drive approximately 10 basis points of operating margin expansion. We continue to expect full-year earnings per diluted share to be in the range of $13.80 to $14.40. As a reminder, this does not include the acquisition-related costs, investment losses, or results from the recently announced Foot Locker acquisition.

From a pacing perspective, we continue to expect EPS to decline year-over-year in the first half and increase year-over-year in the second half. Our outlook guidance is based on approximately 81 million average diluted shares outstanding compared to the prior expectation of 82 million, and an effective tax rate of approximately 24%. We continue to expect net capital expenditures of approximately $1 billion for the year. As Lauren mentioned, our guidance includes the expected impact from all tariffs currently in effect. We are working closely with our manufacturing and brand partners to mitigate potential impact, and we are making continued progress in diversifying our direct sourcing footprint. As I mentioned, our inventory is well-positioned with healthy levels across key categories.

We have navigated similar environments before, and we are confident we have the team, tools, and relationships to manage through this. This concludes our prepared remarks. Thank you for your interest in DICK'S Sporting Goods. Operator, you may now open the line for questions.

Operator: Thank you. We will now begin the question and answer session. To raise your hand and join the queue, and if you'd like to withdraw that question, simply press star one again. We also ask that you limit yourself to one question and one follow-up. Your first question comes from Brian Nagel with Oppenheimer. Please go ahead.

Brian Nagel: Hey. Good morning. So my first question is for Ed. And with regard to the proposed transaction of Foot Locker. So, you know, I think a lot of us have said this very closely. I know you have been talking to a number of, you know, investors or potential investors out there. You know, you've touted the kind of merits of the transaction. The question I have is, as you're talking to investors, you know, with the DICK'S stock still being down from the time of announcement, what do you think there is anything clear that you think the market's really missing on the potential for this transaction both near and maybe longer term?

Ed Stack: Yeah. Brian, thanks for the question. You know, we understand that there's really a group of people out there, shareholders, that would really prefer we just continue to do what we're doing. And our business is very strong. We've got a lot of momentum around what's going on from a House of Sport standpoint, what's going on from a Fieldhouse, and we've got these projects firmly under control, and people would just be wishing we just continue to do what we're doing. We don't think that's right long term for the business. So with the Foot Locker transaction, we see several opportunities. It really gives us a unique opportunity to strengthen our brand relationships through a global presence.

It gives us the ability to service a portion of the market that we just can't service today with our DICK'S Sporting Goods stores. We believe we can bring greater operational efficiency to the Foot Locker business and increase its profitability. We've kind of talked to capturing $100 to $125 million of synergies through the medium term. And we've been very clear that we believe this will be accretive to our earnings in the first full fiscal year following the close. As we take a look at why we did this, we believe sport and culture have intersected around the globe, and it's only going to get stronger over time.

This gives us an opportunity to compete for that market share and not just abdicate it to other retailers around the globe. We just don't feel that we should do that. And what the street needs to understand is that like it or not, we don't make investments or decisions for a quarter or two. We make these decisions and investments for a lifetime. And we do know that it's up to us to prove to the street and to everybody that this was the right decision to make. We're confident that we'll be able to do that. So we're really excited about this acquisition. We think it's going to be very good for our shareholders.

It's very good for the Foot Locker shareholders. It'll be good for the consumer out there. And the momentum we have with our DICK'S business we do not expect to be interrupted. So we're pretty excited about this.

Brian Nagel: Thank you. Very helpful, and I appreciate it.

Lauren Hobart: Sure.

Brian Nagel: Thank you. The second question, for Lauren. Just, you know, on the business end, looking we're all still really focused here on tariffs and obviously it's a very fluid backdrop. So I guess the question I want to ask is, you know, as you're, you know, as you're talking to your brand partners out there, is there any update, you know, on how we should think about DICK'S plans with tariffs? We recognize that we really don't know what the tariffs are going to be yet.

Lauren Hobart: Thanks, Brian. Yes. I want to point to the fact that we are starting with, you know, this year started with such incredible momentum, and it's actually been a trend that's been going on now. Five consecutive quarters of over 4% comp growth. And we have tremendous momentum in many aspects of our business. So obviously, our long-term strategies are clearly working, and that's everything from our differentiated product assortment to how we are elevating our athlete experience. Our team is operating at an absolutely incredible level, and they are really to be given the credit for the incredible performance that we have.

And importantly, our consumer has held up very well, and this has been a trend for some time, and it continues to be a trend where people are prioritizing activities, healthy, active lifestyle, team sports, running, walking, being outside with their kids. And so this quarter, we actually saw no trade down from best to better to better to good. We saw growth across all income demographics. And we saw growth in ticket and transactions. So I say all that because as we look to tariffs, we have now factored in all of the known tariffs into our guidance.

We are able to affirm our guidance going forward, both top line and bottom line, and 75 basis points of gross margin improvement. And we will continue to work incredibly closely with our brand partners and our manufacturing partners to navigate. We are constantly making decisions on what the best thing is for athletes and what the best thing is for the business and the profitability. We'll continue to balance that. We have an incredibly dynamic pricing ability, but we're very pleased today to be able to confirm that we are holding to our guidance top line and bottom line.

Brian Nagel: Much appreciated. Thank you.

Lauren Hobart: Thank you.

Operator: Your next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman: Hey, good morning, everyone, and good quarter. I want to ask about the durability of the comp strength. So most discretionary business that we cover, they've comped negative for two to three years. You haven't had that. Now you've five in a row plus four. And you're guiding one to three for the full year. You mentioned dynamic backdrop, and it sounds like maybe some tough compares by the fourth quarter. Is that the rationale of keeping the one to three, or is there anything unique? Meaning, why can't it be eight quarters in a row of four given how the business keeps performing? Thanks.

Lauren Hobart: Yes. Thanks, Simeon. Our consumer, as I said, is incredibly strong. Our business has a tremendous amount of momentum. We do have higher comps that we're lapping in the back half of the year, and so that's a factor. But we feel incredibly strong about the factors that we can control in our business and incredibly confident as we go forward. I would point to the fact that the consumer has held up well does speak somewhat to the fact that our business is very resilient, and people are increasingly prioritizing these categories. We expect that with the available income that they have, and we continue to be the case throughout the year.

Simeon Gutman: Okay. My follow-up I want to ask about Nike. I realized there's maybe sensitivity to talk about one brand, but I think the importance of it goes higher now for DICK'S and then in the future with Foot Locker. So if you're willing, and I don't think there's a company or people better suited to give us an assessment where the brand is in terms of cleaning up inventories on the marketplace, do they have a defined distribution strategy? And then what your assessment or opinion on product innovation is. Just your thoughts. I realize you can't speak for them.

Lauren Hobart: Yes. Thanks, Simeon. So yeah, Nike is a very important strategic partner for us. And we continue to be really happy both with our partnership and the strategic nature of it, the fact that we're innovating and working on longer-term consumer trends and product pipelines. What we see coming down the pike, we're very excited about. And Nike continues to perform really, really well for us. So as we look to the future, we did, you know, we've heard about some distribution changes. We worked very closely with all of our brand partners.

And one thing that you can say about Nike time in and time out is that they are very good at segmenting their products, and we have no reason to expect that won't be the same. So we expect segmentation of the market. We expect minimal overlap with some of the new distribution. We're excited about a lot of product innovation coming down the pike. The running construct, some of the lifestyle apparel, women's basketball. There's a lot of great stuff going on. So we feel terrific about the Nike partnership.

Simeon Gutman: Okay. Thank you. Good luck.

Lauren Hobart: Thank you.

Operator: Next question comes from the line of Adrienne Yih with Barclays. Please go ahead.

Adrienne Yih: Great. Thank you very much, and congratulations on another, you know, very well-executed quarter.

Lauren Hobart: Thanks, Adrienne.

Adrienne Yih: You're welcome. For you, it's about, you know, the price increases or the, you know, inevitable price increases, I might say. It seems like at this level of the 30% China, 10% elsewhere, that the price increases needed are not terribly daunting, I would say. Maybe low to mid-single digit. How do you think about, you know, when you take prices in your own direct, you know, your direct segment versus when you're seeing the price increases after view from the brand? Thank you.

Lauren Hobart: Yeah. No. You're right. And that's why we were able to just confirm our guidance is that we believe with the tariffs that are known to date, we can manage, and we are continuing to do that. We are constantly assessing our pricing down to the item level, the SKU level, and we do that based on consumer demand and the profitability of the business. We have a very advanced pricing capability, much more advanced than we used to have and much more enabled to make real-time and quick decisions. And so this is just a core, this is something we do. This is a core strength of ours.

We will continue to navigate, and I would take comfort in the fact that our margin, we just guided at the midpoint up 75 basis points. We feel very confident.

Adrienne Yih: Right. And then Navdeep, my follow-up is on inventory for you. You pulled forward some, it seems. When would be tariffs and or, you know, the costs start to come through the P&L? And how are you thinking about units versus dollars as we end the quarter and start into the fall season? Thank you.

Navdeep Gupta: Yeah. Adrienne, let me start with where we finished with Q1. Our inventory growth was 12%, but one of the important things that we have said consistently is the fact that this is the differentiated inventory that is allowing us to drive this differentiated top-line results. As Lauren called out, this was the fifth straight quarter with over 4% of comp. That is driven as one of the core strategies that we have is the differentiated access to the product. The focused investments that we made at the end of Q4 are bringing the spring products earlier, actually worked really well. And that's what you saw was with the outsized contact we were able to deliver.

In terms of the inventory growth and that impact from tariff, you know, we expect that the inventory growth will moderate even with some of the tariff headwinds that we have anticipated in that, especially as we start to lap the investments that were made in the second half of 2024.

Operator: Your next question comes from the line of Robbie Ohmes with Bank of America. Please go ahead.

Robbie Ohmes: Oh, hey. Good morning. Thanks for taking my question. My really two follow-ups. One is just, you know, can you guys talk about, you know, the way how you took share from Foot Locker over the last few years and how much of that was a, you know, driver to growth? And then I think you guys called out you're gaining share from digital and omnichannel. You know, is there a shift in who you're taking share from and how are you thinking about taking that share as people like Amazon maybe be getting better allocations from people like Nike? And then my follow-up is just quickly on what just remind us what the...

Lauren Hobart: Thanks, Robbie. So we have been gaining share for some time now. We have been operating in a $140 billion TAM in the US. And we have been driving a point of growth in the last year, and it's continued. The great thing about our industry is we only have an 8% market share despite all of the growth that we've had and the fact that we are a dominant player and we, you know, we have incredible, we have such a strong business, and yet there is so much market share to be gained. And so we're gaining share from many places. We're gaining share from digital channels. We're gaining share from omnichannel.

And as I mentioned before, we continue to feel very confident that our brands appreciate that they can bring their whole brand to life in our store from head to toe, including gear and equipment. We can tell a whole brand story, and we are rooted in sport. And that gives us an advantage versus our competitors both online and omnichannel. I'll turn it to Navdeep to talk about the FTC.

Navdeep Gupta: Yeah. Robbie, let me just quickly build on what Lauren said. In terms of the share gain also, we have to keep in mind that the gains are coming from the core product focus category. So it's apparel. It's footwear. It's team sports. The work our merchant teams are doing even in some of the outdoor categories are the drivers of our differentiation. In terms of the FTC approval on the merger, we anticipate that'll be somewhere in the second half of this year.

Robbie Ohmes: And just in terms of Amazon, just do you expect segmentation to, you know, be favorable to DICK'S Sporting Goods still?

Lauren Hobart: Yes. Nike has a, Nike and all of our brands do a good job segmenting, and we are expecting this will be no different. We expect minimal overlap.

Robbie Ohmes: Terrific. Thank you. Thank you. Thanks, Robbie.

Operator: Your next question comes from the line of Michael Baker with DA Davidson. Please go ahead.

Michael Baker: Hey. I wanted to ask about a different acquisition. Can you talk a little bit about the investment you made in, or your affiliate made in Unrivaled Sports and how that impacts your Game Changer business, and was that contemplated in the guidance that you've given for the year for Game Changer? Just wanted to dig into that a little bit, if I could.

Lauren Hobart: Yeah. Michael, thank you so much for that question because we are very, very excited about the investment that we've made in Unrivaled and that we continue to make in Game Changer. So let me start quickly with Game Changer. That business over $100 million last year growing to a $150 million highly profitable software subscription business. But more importantly, it enables us as DICK'S to get involved in all aspects of the athlete's journey from the time they sign up for a team to when they're playing to a Game Changer's case when they are watching the game, fans, parents, watching scores, stats, an incredibly rich database.

And it also continues to fuel our DICK'S Media Network, which is, you know, Game Changer is a live sports platform media platform that we're very excited to be able to put into our DICK'S Media Network. Unrivaled, we're so excited because they are on the ground and they're providing youth sport experiences at places like Cooperstown, All Star Village, and they're hosting 600,000 youth athletes, 2 million families. In the course of the year, and we're so excited to be able to be at that point of sport when kids are competing and elevate the experience and share just best practices and a lot of business opportunities unlocked as well.

Navdeep Gupta: Let me quickly build on what Lauren said. If you think about the opportunity that we talk about in the youth sports infrastructure, that opportunity goes well beyond what happens during the physical game day where Game Changer is one of the most dominant and the most differentiated product platform that is out there. Now with the partnership and the equity investment that we have in Unrivaled, this gives us an opportunity to actually look at the ecosystem much more holistically and much more collectively between the Game Changer business and the Unrivaled opportunity that we have.

Couldn't be more excited about this overall $40 billion TAM which is growing really well and with the capability we have with Game Changer. And now the partnership that we have with Unrivaled, this will allow us to really differentiate in that space even further.

Michael Baker: Got it. Makes sense. If I could ask one more follow-up from a previous question asking you to comment on your on the competitive situation again. Nike tried to sell through Amazon in the past. It didn't work. They pulled back on it. Why would this be different? If you see, do you have any insight as to what your competitors are doing differently this time versus when they first tried that partnership?

Lauren Hobart: Yeah. Well, I don't, we don't speak on behalf of Nike. They are, I know, have an effort to clean up the marketplace. And that's a driver of what they're doing now. I'll let them speak to what their motives are.

Michael Baker: Okay. Fair enough. Thank you.

Operator: Your next question comes from the line of Kate McShane with Goldman Sachs. Please go ahead.

Kate McShane: Good morning. Thanks for taking our question. We just wanted to hear a little bit more about the category performance in the quarter, how footwear, apparel, and hard goods perform relative to each other, and the overall comp and if there was any cadence difference between the months.

Lauren Hobart: Thanks, Kate. We were the 4.5% comp, we saw growth across so many areas of our business. So we saw growth in footwear. We saw growth in apparel. We saw growth in team sports. And then from a cadence standpoint, you know, like the rest of the world, the beginning of the month was a little cold and wet. February was, but it continued to improve, and we had strength across the quarter in each month.

Kate McShane: Thank you.

Lauren Hobart: Yep.

Operator: Your next question comes from the line of Christopher Horvers with JPMorgan. Please go ahead.

Christopher Horvers: Thanks. Good morning, everybody. So I just want to follow up on the tariff question. Have you actually received any tariff items into inventory? Have you taken any prices yet on that product? And if not, when would you expect to start to turn that inventory of tariff items?

Navdeep Gupta: Chris, we have no impact from tariffs in Q1, and we are working very closely with each of the brand partners on the right cadence and how best do we flow it. So we'll share much more on these things start to actualize. As we called out in our guidance, we have contemplated some of the timings associated with it in our guidance, and we still feel great about the 75 basis points of the margin expansion that we guided for the full year.

Christopher Horvers: Understood. And I had a question on the Foot Locker deal as well. It looking at the documents, it seems like it's a pretty low divestiture threshold. I think it's $100 million in terms of, you know, if you were you're forced to divest more than that, that you could potentially walk away from the deal. Can you talk about why that level that doesn't seem like that's a whole lot of Foot Locker stores in terms of, you know, potential divestitures? So any comments on that would be helpful. Thank you.

Ed Stack: Sure. We think that as we talk about one of the main reasons for this is to serve a consumer that we're not able to serve today. And if we have to divest a lot, then it kind of makes it not consistent with what our strategy and the tactics are that we want to employ. So that's why we've got that $100 million number there. We really want to service a consumer we don't service today.

Christopher Horvers: Got it. Very helpful.

Operator: Your next question comes from the line of Joe Feldman with Kelsey Advisory Group. Please go ahead.

Joe Feldman: Thanks for taking the question, guys. I have two quick ones. On Golf Galaxy, can you maybe share some comp color on the business and how it trended through the quarter and maybe even more broadly to the DICK'S business, how golf is continuing to do?

Lauren Hobart: Sure, Joe. Yeah. Golf remains a very important category for us. We think there is a compelling long-term growth opportunity. And as you know, in 2024, rounds played were at an all-time high. I think for us, we're looking at reinventing the business with Golf Galaxy Performance Center, which is an immersive, experiential place for golfers to come and have lessons and fittings and really immerse themselves into the game of golf. We've got 27 GGPCs, Golf Galaxy Performance Centers, that are going to 35 this year. So we're really excited about it. One thing I'm also very excited about from a golf standpoint is how well our vertical brands do across our golf business.

And we are our own number one vendor partner in golf with vertical brands. And I just have to say, shout out to our team and to Ben Griffin who's been playing the Max Live ball and is so is just one PGA TOUR events and is doing so incredibly well. We have so much excitement around the golf business. And with Golf Galaxy and DICK'S Golf, we think that there's a tremendous potential here.

Joe Feldman: That's great. Thank you. And then just to I wanted to follow-up on Game Changer. Can you share a little more color on the crossover between the Game Changer users and DICK'S shoppers and how you drive that crossover to get them to sort of come to DICK'S and spend at the stores?

Lauren Hobart: Yeah. That's a great question. We do find that the people who do crossover, so our Game Changer users and our DICK'S shoppers are some of our absolute best shoppers. You know, they are highly engaged. They are gold members through and through. And we're doing increasingly every year, we're doing more to drive both sign up for Game Changer among DICK'S shoppers, so making Game Changer now known and available to DICK'S shoppers. And then similarly, presenting different options to Game Changer users to purchase at DICK'S. One of the big capabilities in the DICK'S Media Network is that there is an opportunity for in-game advertising. Again, it's a live sports platform that we're using.

And that's people focused watching, you know, at the point of sport, watching their kids, their grandkids, or their own stats and scoring history, and we are able to be highly targeted in terms of how we present products and items to them at DICK'S. So that's we are in early innings of that, but it's an incredibly important future growth area for both Game Changer and DICK'S.

Navdeep Gupta: Yeah. Sure. Let me build on what Lauren said. Another thing that we did here in Q1 was we introduced the Bat Lab initiative, which is basically bringing the content series to help parents and the youth athletes be able to find the right path for their game. Especially the baseball bat. So we invited twenty high school and collegiate players. They tested twelve different BB core bats using the Game Changer app and the platform. And the scoring was done both on a qualitative basis and a quantitative basis. And this data was all made available to the DICK'S Sporting Goods athlete on our website.

And this is the intersection opportunity that we see where we can leverage the core capabilities of the Game Changer platform and bring that as an opportunity to showcase differentiated opportunity to our athletes on the DICK'S platform.

Joe Feldman: That's great. Thanks, guys. Good luck with this quarter.

Navdeep Gupta: Thank you.

Operator: Your next question comes from the line of Michael Lasser with UBS. Please go ahead.

Michael Lasser: Good morning. Thank you so much for taking my question. There's still a perception by some that this comp over the last several quarters has been driven by unique and temporary factors, such as the contribution from the House of Sport or a unique allocation of footwear to the stores. Is there anything different from this quarter to suggest that these unique factors are really just not driving the business? It's more broad-based than that. And it's more sustainable such that you're still being quite conservative as you look out over the next couple of quarters. Thank you.

Lauren Hobart: Yes. Thanks, Michael, for the question. I can't emphasize enough that our growth has been ongoing for many, many quarters in a row, and it is due to the fact that our long-term strategies are working. And we have four core strategies. The first that we've leaned into across the board, not just temporary, in one category, but across the board is access to differentiated product. And we continue to build those relationships with brand partners, getting increasing access, and House of Sport and Fieldhouse enable us to bring in even newer product, more emerging brands, and also tell our partner brand story in delightful and powerful ways.

At the same time, elevating the athlete experience is a second core strategy of ours, and that is everything from our teammates working incredibly hard in the store to provide confidence to athletes that they are stepping into the right product for them. It's going to help them improve their game all the way to reinventing our entire concepts with House of Sport and Fieldhouse. The other thing I will say is one of our biggest assets is our team and the culture that we have at DICK'S. We have an incredible group of people. We say it's the best team in sports, and it is.

And I can't emphasize enough how powerful that team has been in terms of driving our growth. And the last thing, our fourth core strategy is just our investment in our brand and our Sports Matter program and the fact that our brand belief is really powerful. So I don't at all think that our growth has been driven by unique and temporary factors. I mean, it's this has been a core strategic plan that's been executed over the course of many, many years.

Michael Lasser: Okay. Thank you very much for that, Lauren. And my follow-up question is this is already getting pretty remarkable allocations from its key vendor partners, especially in the footwear categories. How much better can it get?

Lauren Hobart: Oh, Michael, it can always get better. We can always have more. We're putting more premium full-service footwear decks in. We're 90% now. We'll continue to go. And we know that's just a key part of our core strength is that we will continue to get fantastic allocation, but we're a very strong business.

Navdeep Gupta: Michael, just let me build because the opportunity is beyond your brand. We see the opportunity to be able to, you know, provide the head-to-toe look for the athlete, and be able to service their team sports needs and the accessory business. That's the differentiation that we bring not only to our athletes, but quite frankly, we bring that differentiation to our brand partners as well. That is what is driving this differentiated allocation. The work that we are doing in House of Sport, the work that our field team is doing in servicing those athletes and bringing that excitement to the store is the differentiating capability. That is allowing us to deliver these really strong results.

Lauren Hobart: Yeah. I'm sorry. I'm gonna build one more time. I just want to say that we mentioned it in our prepared remarks, but the fact that there is growth and excitement and newness and launches in all aspects of our business is an increasingly important phenomenon. So even in our diamond sport business, trading cards, I mean, we are having there's pockets of really incredible excitement across all aspects of our business.

Michael Lasser: I see it. Phrased my question better. Was more so in relation to the Foot Locker acquisition. That's all very helpful. Information. But, you know, like I said, DICK'S is already getting as good if not better than any other player allocations out there. So the contributions from Foot Locker can it get that much better?

Lauren Hobart: I think one of the important parts of the strategy in terms of us potential acquisition of Foot Locker is that we partner with our brands in an incredibly strong strategic way, and that's all of our partner brands. As we now would become a global business, we will now be partnering these are all global brands. We'll be partnering with them on even longer-term global product innovation. And so, yes, I do expect that this is a real win for our relationships with our brand partners. And we will continue to drive our product assortment.

Michael Lasser: Understood. Thank you so much and good luck.

Lauren Hobart: Thank you.

Operator: Your next question comes from the line of John Kernan with TD Cowen. Please go ahead.

John Kernan: Good morning. Thanks for taking my question. So, Lauren, maybe ask a different way. Operationally, what do you see as the biggest opportunity within the Foot Locker banner? And when you think about that, financially, what's the biggest opportunity? Their operating margin, obviously, depressed versus history. What do you see as the biggest line items for improvement in their operating margin and their financial returns?

Lauren Hobart: Yeah. John, we are obviously in the early stages of the acquisition, but we've done an extensive amount of due diligence. And we see a lot of opportunities. Their original strategies, the LASA plan has some very strong aspects to it that we believe we can continue to drive growth from, including reinventing their stores and leaning into the digital experience. And marketing and all of that. But I also want to say why I personally am so excited. I mean, we have the DICK'S business that has so much momentum. And we are going to keep our DICK'S team fully focused on the momentum that we have in the DICK'S business.

And at the same time, we are going to put a small group of people working for Ed to work with the Foot Locker team to really unlock all of that, the gross margin improvement that we know is available. And with Ed, obviously, he's an incredible retail expert. He's got operational excellence. Incredibly strong brand relationships. Real estate development relationships. I mean, it's such a wonderful thing that he's going to be able to bring all of that expertise and partner with the Foot Locker leadership team to drive both businesses. We are confident that we'll be able to execute the heck out of this and really drive that gross margin improvement that'll drive profitability.

John Kernan: Got it. And maybe just a quick follow-up on House of Sport and the Fieldhouse. I think you'll have roughly low forties number of Fieldhouse doors by the end of the year. Mid-thirties House of Sport. How should we think about the overall square footage growth of the total business this year? It looks like it was up about 5% year over year in Q1.

Navdeep Gupta: Yeah, John. Like, we continue to expect the House of Sport to be in the range of 75 to 100 as we look to the near future. And like you said, you know, we'll be about 35 House of Sport locations by the end of this year. Just over 40 Fieldhouse locations. The way I would characterize the square footage growth is would be in that same 2% or slightly north of that depending on the number of new store openings. As we have alluded to, we anticipate opening about 20 House of Sport locations in 2026. Which will be the continued driver of the business as we look to the future.

In terms of the Fieldhouse, this is our way of reimagining what a DICK'S 50k would look like. And so as we open new stores, as we relocate these locations in the future, those will all open as Fieldhouse locations.

John Kernan: Got it. So low single digits. Actual square footage growth. As we model that.

Navdeep Gupta: Yeah. That as you can imagine, that will vary depending on the number of new store openings, but generally in that range.

John Kernan: Okay. Thank you.

Operator: Your next question comes from the line of Paul Lejuez with Citigroup. Please go ahead.

Paul Lejuez: Hey. Thanks, guys. I just had a couple of questions related to the overlap with Foot Locker. Curious if you could talk about what percent of your stores overlap in the same centers. And if you can remind us what percent of your stores are more of us off. Second, just customer overlap, what you think it is? With Foot Locker. And then third, specifically on Nike, what percent of your Nike SKUs are also sold at Foot Locker as you might estimate it.

Lauren Hobart: Well, we are still very early in stages of the acquisition process. I'm not going to speak to most of those questions, but when we close the deal, we will come out and share all of this. Just to answer specific questions about DICK'S, about 30% of our stores are in malls, and we do believe one of the strong tenants of this acquisition is that we will be acquiring a different customer. We'll have access even within the US to urban locations that we don't have access to before with a large format. Stores, and we are hoping that this will be incremental to our customer base.

Paul Lejuez: So anything you could add maybe on potential revenue synergies? Between the two organizations?

Navdeep Gupta: We'll share much more detailed points when the transaction is closed.

Paul Lejuez: Thank you. Good luck.

Operator: Your next question comes from the line of Justin Kleber with Baird. Please go ahead.

Justin Kleber: Good morning, everyone. Thanks for taking the question. Just wanted to ask about gross margin and what drives the acceleration from the 40 basis points here in Q1 to 75 for the full year, particularly as I would think occupancy is going to delever across the balance of the year just based on the moderation in comps you're projecting.

Navdeep Gupta: Yeah. Justin, just so let's start with the Q1 performance. In Q1, we delivered a 41 basis points of gross margin expansion which was driven by the merch margin expansion. And as we have said, the gross margin and the merch margin expansion continues to come from the differentiated product, the work that our team has been doing on the pricing and promotion optimization, as well as the strong performance that we saw our vertical brands, which carry the 700 to 900 basis points of higher margin. And as we look to the future and the balance of this year, our expectation is these will be the same three drivers of the gross margin expansion.

In addition to the two new drivers, which we believe will continue to drive higher levels of margin improvement as we go into the balance of year between Game Changer as well as the DICK'S Media Network.

Justin Kleber: Okay. Thank you for that, Navdeep. Just one quick follow-up on buybacks. Nearly $300 million in the first quarter. Should we expect buybacks to be on hold as you work to close the acquisition?

Navdeep Gupta: Yeah. We'll continue to be, you know, nimble and flexible about it. As you can imagine, there are certain restrictions as we are in the phase of the S-4 filing. You know, so we'll evaluate that appropriately for the balance of the year.

Justin Kleber: Alright. Thank you so much. Best of luck.

Navdeep Gupta: Thank you.

Operator: We have time for one more question, and that question comes from the line of Jonathan Matuszewski with Jefferies. Please go ahead.

Jonathan Matuszewski: Great. Good morning, and thanks for taking my questions. First one was on the assortment. We're hearing of some retailers' plans to trim their product assortment as one method of neutralizing tariff cost headwinds. And just curious if that was part of your approach and if so, if you could elaborate.

Lauren Hobart: John, no. We are managing our business in terms of what's right for the consumer, making sure that we have the best product, everything from opening price point to the best performance gear and equipment. And so, no, that is not a stated strategy of ours. We are going to optimize our inventory for what the athlete needs.

Jonathan Matuszewski: Understood. And just a quick follow-up on Game Changer. If you could talk about just the mix of the active user base in terms of maybe what percentage of those Game Changer users are utilizing it from a free version versus, you know, a paid subscription and how you see that evolving? Thanks.

Navdeep Gupta: Yeah. John, in terms of what we are seeing is, one, we are seeing a strong level of engagement across both our free model that we have as well as the paid model that we have. Keep in mind the opportunity that Lauren talked about, the DICK'S Media Network, gives us an opportunity to engage even if somebody is using the app on a free basis. To be able to engage with those set of athletes in a differentiated way, and we definitely see an opportunity, and quite frankly, the team does a fantastic job of upselling and cross-selling the application across the active database.

So great opportunity, and that's the reason we feel confident in being able to drive a 40 to 50% growth that we have been driving on a top-line basis on the Game Changer platform.

Jonathan Matuszewski: Thank you.

Operator: And that concludes our question and answer session. I will now turn the conference back over to Lauren Hobart, President and CEO, for closing comments.

Lauren Hobart: Thank you all for your interest in DICK'S Sporting Goods, and we're excited to see you next quarter. Thank you.

Operator: This concludes today's conference call. Thank you for your participation and you may now disconnect.

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DATE

Wednesday, May 28, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Peter Fitzsimmons

Executive Vice President and Chief Financial Officer — Brian D'Ambrosia

Treasurer and Investor Relations Contact — Felix Veksler

Need a quote from one of our analysts? Email [email protected]

RISKS

Gross margin is expected to remain pressured throughout FY2026 due to material cost increases, customer trade-down to lower-margin tire offerings, increased self-funded promotions, and wage inflation, with further headwinds anticipated from potential tariff impacts.

Total operating expenses rose to $121.1 million, or 41.1% of sales, driven principally by $20.9 million in store impairment costs, resulting in an operating loss of $23.8 million, compared to operating income in Q4 FY2024.

The store optimization plan is projected to reduce total sales by approximately $45 million in FY2026 as 145 underperforming stores are closed, although some sales may be recaptured nearby.

Store closure costs of approximately $10 million to $15 million are expected, primarily during Q1 FY2026, predominantly impacting the first quarter of the next fiscal year.

TAKEAWAYS

Sales: $295 million, down 4.9%, primarily due to six fewer selling days, reducing sales by $18.9 million.

Comparable Store Sales: Increased 2.8% adjusted for days, but declined 3.6% unadjusted for days in the fourth quarter comps ranged from down 2% in January to up 8% in March.

Tire Units: Up mid-single digits, with unit growth exceeding 10% in March; share gains in higher-margin tire tiers were noted.

Gross Margin: Decreased by 250 basis points year-over-year, primarily due to value-oriented consumer trade-down in tires, increased self-funded promotions, and higher technician wage inflation.

Operating Loss: Reported operating loss was $23.8 million (negative 8.1% of sales). influenced by $20.9 million in store impairment costs; Last year showed an operating income of $10.3 million for Q4 FY2024.

Net Loss: $21.3 million net loss (GAAP), versus net income of $3.7 million in the same period last year.

Diluted Loss Per Share: $0.72 GAAP; adjusted diluted loss per share (non-GAAP) of $0.09, compared with prior-year adjusted diluted earnings per share (non-GAAP) of $0.21.

Cash From Operations: $132 million generated during FY2025, aided by $43 million in working capital reductions.

AP to Inventory Ratio: Ended the period at 177%, up from 164% at the end of FY2024.

Divestitures and Capital Use: $12 million received from divestitures and $9 million from headquarters sale; capital expenditures were $26 million, and dividends distributed totaled $35 million.

Net Bank Debt and Liquidity: Net bank debt stood at $40 million, with available credit facility of ~$509 million and cash/equivalents of $21 million at quarter-end.

Store Closures: Plan to close 145 underperforming stores, representing approximately 5% of total sales, with targeted completion in Q1 of the next fiscal year.

Full-Year Outlook: Management expects improvement in adjusted diluted earnings per share in FY2026, driven by the performance plan and operational efficiencies, though no formal guidance was issued due to tariff uncertainty.

Preliminary Q1 Sales Trend: Quarter-to-date comparable store sales are up approximately 7% in the first eight weeks of Q1 FY2026.

Capex Guidance: Capital expenditures for FY2026 are expected to be between $25 million and $35 million.

Tariff Impact: Tariffs are anticipated to increase costs across major product categories, and pricing actions for customers are under consideration to offset this effect.

Customer Insights: Management’s analysis highlights that Monro’s highest-value customers deliver 25 times more profit than its lowest-value tier, leading to reallocation of marketing spending toward more profitable segments.

SUMMARY

Monro, Inc. (MNRO) is closing 145 underperforming stores in the first quarter of the upcoming fiscal year, which is expected to meaningfully improve profitability but is expected to reduce annual sales by about $45 million in FY2026. Management did not provide formal earnings guidance due to uncertainty around tariffs but expressed confidence in achieving year-over-year improvement in adjusted diluted earnings per share (non-GAAP) in FY2026 through operational efficiencies and a targeted performance improvement plan. Tariff-related cost inflation was explicitly cited as a risk to gross margin in FY2026, with the company mobilizing to negotiate with suppliers and potentially adjust prices for customers. Early results from focused marketing tests indicate encouraging progress in attracting higher-value, more profitable customers, with quarter-to-date same-store sales up approximately 7% in Q1 FY2026 as the new fiscal year begins. The company maintains significant liquidity, with net bank debt at $40 million and $509 million available under its credit facility at the end of Q4 FY2025, supporting continued investment and dividend priorities.

President Fitzsimmons said, "We are positioned as one of the leading players in a highly fragmented industry" and outlined four improvement focus areas: store closures, customer experience, acquisition and activation, and merchandising productivity.

Gross margin pressure was specifically attributed by D'Ambrosia to "higher material costs due to mix within tires from a value-oriented consumer that traded down more of their tire purchases to our tier three offerings, and an increased level of self-funded promotions."

An internal team is actively working on "fact-based negotiations with top suppliers to mitigate as much of that anticipated tariff as possible." management stated, while warning that price adjustments for consumers may be necessary if tariff increases persist.

The company expects to incur store closure costs in the range of $10 million to $15 million, primarily during Q1 FY2026, but confirmed that further large-scale closures beyond this phase are not currently anticipated.

INDUSTRY GLOSSARY

AP to Inventory Ratio: Accounts payable as a percentage of inventory; a liquidity measure indicating how much of inventory is financed through payables rather than cash or short-term debt.

Self-funded Promotions: Discounts or deals offered to customers that are subsidized directly by the company, impacting gross margin but not requiring vendor support.

Tire Tier: Classification of tire product lines by value or segment; Monro references tiers with "tier three" representing lower-margin, value-focused offerings.

Full Conference Call Transcript

Felix Veksler: Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the investor section of our website at corporate.monro.com/investors. If I could draw your attention to the Safe Harbor statement on slide two, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release.

The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise except as required by law. Additionally, on today's call, management's statements included the discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures will be included as part of today's presentation and in our earnings release.

Lastly, unless otherwise noted, all references to comparable store sales, category sales, and units on today's call will be made on an adjusted for days basis, which adjusts for six fewer selling days in the current year quarter due to an extra week of sales in fiscal 2024 and a shift in the timing of Christmas holiday from the fourth quarter in fiscal 2024 to the third quarter in fiscal 2025. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Peter Fitzsimmons.

Peter Fitzsimmons: Thank you, Felix. And thanks to everyone for joining us this morning. It's terrific to be part of the Monro team. As many of you already know, my primary objective is to work with the company's management team and board to develop and execute a performance improvement plan that will enhance Monro's operations, drive profitability, and increase operating income and total shareholder returns. I successfully led similar improvement plans at other companies, and I intend to leverage my extensive background and experience to do the same at Monro. I've now spent about eight weeks in Rochester at the company and have been fully immersed in our business.

I've spent a lot of time with the senior leadership and also engaging with our talented teammates in the field, as well as visiting many stores, both Monro stores and our competitors. This has only confirmed the positive view I had about Monro before I decided to join the company. Let's start with Monro's strengths. First, this business has shown impressive durability through business cycles. We are positioned as one of the leading players in a highly fragmented industry. Monro has significant scale that gives us important competitive advantages over smaller players in our industry.

We can leverage this scale in our financial position to make critical investments in our business, our people, and our technology to deliver an outstanding guest experience. Second, certain fundamentals in our industry remain strong. These fundamentals include continued growth of vehicles on the road, which now exceeds 280 million in the United States. Vehicle miles traveled have returned to pre-COVID levels. Importantly, the average vehicle life of cars on the road today is more than twelve and a half years. Further, an increase in the complexity of vehicles continues to drive a shift from do-it-yourself to do-it-for-me, with future technology advances expected to accelerate this shift.

Third, and finally, our business is a consistent cash generator with ample liquidity, a solid balance sheet, and low leverage. All of this, coupled with our compelling consumer offerings, gives us confidence that we can successfully execute on and accelerate the pace of the company's improvement plan as well as better capitalize on positive industry trends to unlock Monro's full potential. Now I'd like to share my initial assessment of the business, which highlights four key areas of focus that we've identified as opportunities for improvement and is shown on slide three of our presentation materials.

These include closing unprofitable stores, improving our customer experience and selling effectiveness, driving profitable customer acquisition and activation, and increasing merchandising productivity, which includes mitigating tariff risk. Let's start with closing unprofitable stores. In the past few weeks, we conducted a comprehensive store portfolio review that identified 145 underperforming stores to prioritize for closure.

Felix Veksler: Our review included an evaluation of store performance,

Peter Fitzsimmons: as well as market segmentation and demographic data specific to the geographic areas of each location. We are now setting into motion a process to close these locations during the first quarter of fiscal 2026. The closure of these stores will have a limited impact on our total sales but is expected to deliver meaningful improvement in profitability. The 145 stores generated approximately 5% of our total sales in fiscal 2025, and we're likely to recapture some of those sales in locations near the closing stores. Second, improving our customer experience and selling effectiveness.

Felix Veksler: We

Peter Fitzsimmons: reviewed stores across our portfolio, from low to high performers, to understand the store experience from both the customer and teammate perspective. Our analysis indicates that customers have had an uneven experience in our stores largely due to inconsistent teammate execution of core processes, including scheduling and appointments, communication, and quality of service. By breaking down the customer journey, we are developing an approach to address customer pain points that we believe will improve the customer experience and unlock value in our selling effectiveness. The company's Confy Drive digital courtesy and inspection, which you're all familiar with, will continue to be a key component of our in-store experience. We have many stores that serve our customers very well.

Unfortunately, we have others that don't always live up to customer expectations. Addressing this is a high priority item that we will be working hard to improve and with a high sense of urgency. Third,

Felix Veksler: we

Peter Fitzsimmons: are driving profitable customer acquisition and activation. As all of you are aware, Monro sales have declined sequentially for the past three fiscal years, driven largely by declines in store traffic. Our work indicates that recently there's also been a decline in the quality and retention of new customers. We believe this has been driven by suboptimal marketing, insufficient clarity on who Monro's target customers are, what these customers value, and how we fulfill their needs. Our analysis also uncovered that Monro's highest value customers deliver 25 times more profit than our lowest tier of customers.

As a result, we are in the process of converting our market testing into a reallocation of marketing dollars aimed at higher value and more profitable customers. The early results from our tests are encouraging. We expect that our approach to improvement in this area will include additional tests which will touch such things as messaging, type of media, and promotional offers. We will then scale the tests that deliver the most value across all of our stores.

Felix Veksler: We

Peter Fitzsimmons: Fourth and finally, increasing merchandising productivity as well as mitigating tariff risk. The company has a broad tire assortment. Our work on the company's current merchandising shows that this broad assortment may not be aligned with what our customer really wants. We expect to narrow the breadth of our core tire assortment, which will simplify the in-store selling process for both our customers and our Monro teammates. Of course, we will continue to get any tire that a customer wants through our many distribution channels, but our core in-store offering will likely be simplified. This will allow us to lean into stronger strategic partnerships with important tire manufacturers.

In addition, we are reviewing our pricing and promotions across tires and services to ensure we deliver value to our customers while also achieving appropriate levels of profitability. A word about tariffs. No company today, especially in the automotive sector, can look at the current landscape without considering tariffs. While it is still an obviously uncertain environment, tariffs are expected to drive cost increases across almost all of our major product categories. We have mobilized an internal team for fact-based negotiations with top suppliers to mitigate as much of that anticipated tariff as possible. We expect that we may need to adjust prices to our consumers to counter the impact of tariff-related cost increases.

We are currently evaluating the full impact.

Felix Veksler: Now

Peter Fitzsimmons: To conclude, as I reflect on my first eight weeks at Monro, I think we've conducted a very detailed preliminary assessment of the business, and I believe the opportunities that we've uncovered and plans that we're putting into place will accelerate the pace of the company's performance improvement and unlock Monro's full potential. We don't expect to see improvement overnight, but I feel pretty confident that we will drive enhanced profitability and increase operating income along with total shareholder returns during fiscal 2026. Before I hand the call over to Brian, I'd like to thank our dedicated teammates for their commitment to our customers. Thanks also to our shareholders and our suppliers for their continued support.

And with that, I'll turn the call over to Brian.

Brian D'Ambrosia: Thank you, Peter, and good morning, everyone. Before I get into more specific details, I'd like to briefly touch upon just a few highlights from our fourth quarter performance. While our results are far from where we want them to be, we drove positive comparable store sales growth for the full quarter, sequential improvement in comp sales and gross margin as the months of the quarter progressed, comp sales and unit growth in our tire category and our high-margin service categories including front-end shocks, batteries, brakes, and maintenance service, and a year-over-year store traffic increase in March.

Our overall gross margin and profitability in the quarter was negatively impacted by extreme weather in the first half of the quarter, which resulted in temporary store closures and lower store traffic primarily in January. The second half of the quarter saw better operating profitability. Now turning to slide four for more specific details. Sales decreased 4.9% to $295 million in the fourth quarter, primarily driven by six fewer selling days compared to the fourth quarter of fiscal 2024, resulting in a sales decrease of $18.9 million. Comp store sales increased 2.8% and decreased 3.6% unadjusted for days.

For reference, comps were down 2% in January and rebounded to up 2% in February, and we exited the quarter up 8% in March. Tire units were up mid-single digits in the fourth quarter, driven by growth in units above 10% during the month of March. We also gained tire market share in our higher margin tiers in the quarter. Turning to slide five, gross margin decreased 250 basis points compared to the prior year, primarily resulting from higher material costs due to mix within tires from a value-oriented consumer that traded down more of their tire purchases to our tier three offerings, and an increased level of self-funded promotions.

Technician labor costs also increased as a percentage of sales, primarily due to wage inflation. Total operating expenses were $121.1 million or 41.1% of sales as compared to $99.7 million or 32.2% of sales in the prior year period. Importantly, the increase was principally due to an increase of $20.9 million in store impairment costs related to certain owned and leased assets. Operating loss for the fourth quarter was $23.8 million or negative 8.1% of sales and was negatively impacted by the store impairment costs just discussed. This is compared to operating income of $10.3 million or 3.3% of sales in the prior year period.

Net interest expense decreased to $4.4 million as compared to $5 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax benefit was $6.8 million or an effective tax rate of 24.3%, which is compared to income tax expense of $2 million or an effective tax rate of 35% in the prior year period. The year-over-year difference in effective tax rate is primarily related to an increase in valuation allowances as well as the impact from other adjustments, none of which are significant, on the change in pretax loss or income. Net loss was $21.3 million as compared to net income of $3.7 million in the same period last year.

Diluted loss per share was $0.72. This is compared to diluted earnings per share of $0.12 for the same period last year. Adjusted diluted loss per share, a non-GAAP measure, was $0.09. This is compared to adjusted diluted earnings per share of $0.21 in the fourth quarter of fiscal 2024. Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release and on slide nine in the appendix to our earnings presentation for further details regarding excluded items in the fourth quarter of both fiscal years. As highlighted on slide six, we continue to maintain a strong financial position.

We generated $132 million of cash from operations, including $43 million of working capital reductions, during fiscal 2025. Our AP to inventory ratio improved to 177% at the end of fiscal 2025, versus 164% at the end of fiscal 2024. We received $12 million in divestiture proceeds as well as $9 million from the sale of our corporate headquarters. We invested $26 million in capital expenditures, spent $40 million in principal payments for financing leases, and distributed $35 million in dividends. At the end of the fourth quarter, we had net bank debt of $40 million, availability under our credit facility of approximately $509 million, and cash and cash equivalents of approximately $21 million.

Felix Veksler: Now

Brian D'Ambrosia: turning to our expectations for the full year of fiscal 2026 on slide seven. Given the uncertainties surrounding a fluid tariff situation, we are not providing guidance for fiscal 2026 at this time. However, we are providing the following assumptions to assist in your modeling. We expect to deliver year-over-year comparable store sales growth in fiscal 2026, primarily driven by the improvement plan that Peter discussed earlier, as well as any tariff-related price increases to our customers. Encouragingly, our sales momentum has continued into the first eight weeks of our fiscal first quarter with preliminary quarter-to-date comps up approximately 7%. We expect the results of our store optimization plan to reduce total sales by approximately $45 million in fiscal 2026.

Felix Veksler: We

Brian D'Ambrosia: Given expected baseline cost inflation, as well as our exposure to tariff-related cost increases, we expect that our gross margin for the full year of fiscal 2026 will continue to remain pressured, particularly as it relates to a tough gross margin comparison in the first quarter of the prior year period. We expect to partially offset some of this baseline cost inflation as well as some of the tariff-related cost increases with benefits from closing stores and operational improvements from our improvement plan. We believe this will allow us to deliver a year-over-year improvement in our adjusted diluted earnings per share in fiscal 2026.

As a result of our store portfolio optimization plan, we expect to incur store closure costs of approximately $10 million to $15 million, primarily during the first quarter of fiscal 2026.

Felix Veksler: We

Brian D'Ambrosia: We expect to generate sufficient operating cash flow that will allow us to maintain a strong financial position and to fund all of our capital allocation priorities, including our dividend during fiscal 2026. Regarding our capital expenditures, we expect to spend $25 million to $35 million. And with that, I will now turn the call back over to Peter for some closing remarks.

Peter Fitzsimmons: Thanks, Brian. We believe our business is durable, Monro has a solid balance sheet and cash flow profile, and the fundamentals of our industry are strong. We believe that we can capitalize on positive industry trends through the four key areas of our improvement plan to unlock Monro's full potential as we enhance operations, drive profitability, and increase operating income and total shareholder returns. With that, I will now turn it over to the operator for questions.

Operator: Thank you. We will now begin the question and answer session. And we do ask that you please limit yourself to one question and one or two follow-up questions. And if you did have any more, you will need to rejoin the queue.

Felix Veksler: And as a final reminder, that is star one to register for a question.

Operator: We have a question from Thomas Wendler with Stephens. Please go ahead.

Thomas Wendler: Hey. Good morning, everyone.

Brian D'Ambrosia: Good morning, Thomas. Hi, Tom. Nice

Peter Fitzsimmons: nice

Felix Veksler: nice comps this quarter. Lots of moving pieces here. I'm gonna

Thomas Wendler: kick things off, mate, with the gross margins. You're running some self-funded promotions. Are these the additional savings I see as an offering from the usage of the drive card? And then with these promotions and the wage inflation, is there any additional color you can provide as we're thinking about gross margins moving forward?

Brian D'Ambrosia: Thanks for the question, Tom. This is Brian. I'll take that. So the gross margin impact related to the self-funded promotions is really our tire promotions, and it includes some of the drive card promotions that you're seeing, but it also includes everyday offers on buy three get one brands, buy one, get one of other brands. These have been in place for a good portion of our FY25 and have been a consistent impact on year-over-year gross margins during the fiscal year. There's been no real change in the use of those self-funded promotions sequentially. But year-over-year, we do have more self-funded promotions running than we had in the prior year.

Related to gross margins going forward, as we said, we expect them to remain pressured primarily due to the baseline cost increases and potential tariff impacts. Those are gonna be, you know, offset somewhat by the impact of closing the 145 underperforming stores as well as some of the benefits of our improvement plan. But as a reminder, Q1 is a particularly tough gross margin comp, but we expect that the comp related to gross margin year-over-year will continue to be pressured.

Thomas Wendler: Perfect. I appreciate that. And then maybe shifting gears a bit to customer acquisition and the Monro experience. Can you provide any color on, like, who these higher value targets are and kinda what you're doing on the marketing front to convert them to customers? And then maybe some color on your approach towards the customer experience changes moving forward.

Felix Veksler: Sure. Thanks for that question. This is Peter.

Peter Fitzsimmons: One thing we've done in the last couple of months is look very closely at where we generate the most revenue and profit by customer. And it's very clear that what we're looking for are repeat customers who appreciate that we provide a range of services. When you look at a three-year period, you see, as we've suggested on this call, that there's dramatically higher sales and profitability for those customers.

Now I think one of the things that the Alex Partners team can bring to the table is a full understanding of the range of marketing and advertising that can undertake in order to meet the needs of those customers that have proven to be the best customers for us. And so what you're gonna see over the next couple of quarters is a reallocation of our marketing investment towards targeting new customers that fit the profile that we're really looking for. I'm pretty confident we're gonna be able to find a much better-targeted way of attracting incremental customer traffic. So we haven't completed all of the analysis.

This is something that takes a couple of months to fully understand, but it's very clear that there are customers in all of our markets that are preferred, and we're gonna chase them.

Thomas Wendler: Perfect. I appreciate you answering my questions.

Peter Fitzsimmons: Sure. Thank you for the questions.

Operator: Thank you. We now have David Lantz with Wells Fargo on the line. Please go ahead.

David Lantz: Hey, good morning, guys, and thanks for taking my questions.

Brian D'Ambrosia: Morning, David. Absolutely. Related to the gross margin 250 basis points

David Lantz: quarter over quarter from the prior year.

Brian D'Ambrosia: Hundred and sixty there was a hundred and sixty basis points of the 250 related to material costs. And that due to trade down within the tire category as well as the self-funded tire promotions we discussed earlier. About eighty basis points of technician labor costs primarily driven by year-over-year wage inflation. And then the balance is just a little bit of deleverage on the fixed occupancy cost given the loss of the extra week in the prior year.

David Lantz: Got it. That's helpful. And then you know, I understand that gross margins will be down or pressured for 2026. We're curious if you can help think through kind of the trajectory in a bit more detail. I recognize, you know, compares get a lot easier when you go through the year. So, you know, is it fair to assume that there could be some expansion later in the year, but still for the full year, there's pressure?

Felix Veksler: Yeah. I think that's right. I think as you think about gross margins,

Brian D'Ambrosia: this past year, it's been kind of a quarter over quarter to kind sequential decline, and I think next year, the gross margins, while still you know, a little bit pressured versus the overall gross margin percent for FY25, that the cadence of that gross margin will be much more even throughout the year where we'll likely underperform in Q1 because of the tough compare, but make up for that in the back half of the year.

David Lantz: Got it. That's helpful. And then with respect to comps in the quarter, can you talk about, you know, the dynamics between traffic and ticket as well and what you're kind of embedding for you know, the improvements in 2026?

Brian D'Ambrosia: Yes. For the quarter, traffic was down low single digits. Ticket was up mid-single digits to blend out to the adjusted comp of up about three, 2.8%. Encouragingly, we saw positive store traffic in March, and our comps in April and May are supported by better traffic trends as well. So I think we feel, you know, a little bit encouraged there in terms of the bending of the traffic trends in the recent months. Thank you.

David Lantz: You're welcome.

Operator: Thank you. Just as a reminder, if you would like to ask any further questions, you can press star one on your telephone keypad. We now have a question from Bret Jordan with Jefferies.

Bret Jordan: Hey. Good morning, guys.

Brian D'Ambrosia: Good morning.

Bret Jordan: On the ATD relationship, did the economics of that change with their final payment of the earn-out? Seemed in that press release. They talked about, like, commercially reasonable support efforts. Is there anything that either promotions or supply fill that has changed with them or pricing?

Brian D'Ambrosia: Yep. Bret, this is Brian. There's nothing material that's changed in our relationship with them.

Felix Veksler: There was a couple things that we just clarified from the original agreement.

Brian D'Ambrosia: Related to service levels. Just given current operating environments, but nothing that materially impacts our business. Or our relationship with ATD going forward.

Bret Jordan: Okay. Great. And then when you think about the store closures, I mean, what's the common denominator? Is there a specific region or a class of stores that are underperforming cleanup or is it sort of spaced throughout the network?

Peter Fitzsimmons: So, Bret, it's Peter. It's spaced throughout the network. We haven't produced a list of those stores and, obviously, we need to communicate with our teammates before we do that. I would say that when you build a brand over decades, in the retail and auto aftermarket industry, you always have places that are gaining in momentum and other locations that probably aren't as strong. And so what we've chosen to do in the last two months is look very closely at those stores that we don't think can ever really produce the earnings profile that we're looking for. And those are the ones we addressed in the 145 store closings.

I think that there will continue to be evaluation of stores over every year, but I don't anticipate any other store closings this year. And I'm very confident that the remaining stores are well-positioned to improve their performance as time passes.

Bret Jordan: Okay. And then a quick final question. I guess, significant improvement in performance recently, and I guess what do you attribute that to? Have you been more promotional? Is the broader market getting a lift? I mean, obviously, not having been there a long time to make big operational changes, but how do you see the backdrop on the industry relative to the comp lift you've seen recently?

Peter Fitzsimmons: Well, I think that the economic environment favors our type of service. For example, I would be surprised if there isn't downward pressure on people buying new and used cars. And for automotive aftermarket service companies like ourselves, there's gonna continue to be a need to replace tires and provide other services. So I think the industry dynamics are quite positive for what we do even if we have some slowdown in the economy, which I think we saw in the first quarter. I think that over a longer period of time, the things that we're putting into place that will improve our performance means that we can increase our operating income this year without significant improvement in the economy.

And I think that the need for the company right now is to focus on the continuing stores and produce the sort of results that we can I think, ultimately, appreciate with time during this year by quarter to see the improvement actions that we're putting into place now take effect.

Bret Jordan: Great. Thank you.

Brian D'Ambrosia: Thanks, Bret.

Operator: Thank you. Just another reminder, if you would like to ask any further questions, you can do so by pressing star one. I can confirm that does conclude the Q&A session today. And I would now like to hand it back to our CEO, Peter Fitzsimmons, for some final closing comments.

Peter Fitzsimmons: So thanks again for joining us today. I think we're all very optimistic about the opportunities in front of us. And I'm confident that Monro is well-positioned to capitalize on some of the strong industry trends for a company like ours as we go forward. I know we have significant room for improvement, as we implement our performance improvement plan. I know we have a lot of work to do, but I really do think that there's a solid foundation for us to create long-term value for all of our shareholders. We look forward to keeping you updated on our progress in the quarters to come. And thanks again for joining today.

Operator: Thank you all for joining today's conference call with Monro. I can confirm today's call has now concluded. Thank you for your participation, and you may now disconnect.

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DATE

• Wednesday, May 28, 2025 at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Eyal Shamir
• Chief Financial Officer and Chief Operating Officer — Ronen Tsimerman

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TAKEAWAYS

• Revenue: $725,000 in revenue for the three months ended March 31, 2025, primarily from a rise in North America and Europe, offset by lower sales in Asia.
• Gross Profit: $218,000 in gross profit for Q1 2025, resulting in a gross margin of 30%, down from 36% a year earlier.
• Operating Expenses: $3.88 million compared to $3.92 million in the prior-year period.
• Net Loss: $3.59 million, or $0.06 per share, for the three months ended March 31, 2025, versus a net loss of $3.61 million, or $0.08 per share, in Q1 2024.
• Cash Position: $4.0 million as of March 31 and $6.2 million as of May 27, which includes a $2 million unsecured bridge loan from Epoch Partner Investments.
• North America YOY Revenue Growth: 11%.
• Europe YOY Revenue Growth: 60%.
• Asia Revenue Decline: Japan revenue fell about 60% year over year; other Asia geographies down about 40% year over year, with overall low figures in both regions.
• At-the-Market Offering Proceeds: $2.65 million in net proceeds raised from Jan. 13 through May 27, 2025, via sales of 2,124,429 ordinary shares.
• FDA Interaction: The company met with the FDA in April, submitting a required post-market study plan as the final prerequisite for a marketing authorization decision on ProSense for early-stage, low-risk breast cancer in women aged 70 and older.
• Post-Market Study Scope: The post-market study will require 400 patients at a minimum of 25 sites, according to CEO Shamir.
• Expected Patient Recruitment Timeline: Recruitment targeted for completion within three years, pending FDA discussion.
• Commercial Readiness: IceCure plans for immediate U.S. commercial launch of ProSense for the new indication, with sales and study run in parallel upon FDA approval.
• Base Reimbursement: U.S. treatment facility reimbursement for the CPT code stands at $3,800; expanded reimbursement may follow regulatory milestones.
• Reimbursement Strategy: Management stated they intend to pursue a CPT1 code post-authorization to include physician fees in reimbursements.
• Geographic Expansion: Partner Terumo aims to file for regulatory approval in Japan in 2H 2025, targeting over 100,000 new breast cancer cases annually in Japan, most of which are early stage.
• Commercial Model: Shamir indicated a mix of "60/40 between placement and selling the consoles" is expected, with probe purchase commitments on placements.
• Sales Team Expansion: IceCure will scale its U.S. salesforce after FDA authorization, with experienced management already in place.
• Shareholder Support: A $2 million unsecured loan from Epoch demonstrates continued major shareholder backing, according to management statements.
• Tariffs: CFO Tsimerman confirmed the company has been affected by U.S. tariffs, but future presidential decisions may alter that impact.

SUMMARY

IceCure Medical's (NASDAQ:ICCM) quarterly call reflected stable operating expenses and a nearly unchanged net loss compared to the same period in 2024, despite a slight decrease in revenue and gross margin compared to the same period in 2024. Ongoing FDA engagement was highlighted by the submission of a sizeable post-market study plan, with leadership involvement from the FDA's Center for Devices and Radiological Health, but no set decision timeline. Cash reserves increased after both a bridge loan from its largest shareholder and new share offerings, enhancing the company's liquidity.

• Management emphasized that commercial acceleration and material revenue growth are contingent on favorable FDA marketing authorization for ProSense.
• Shamir said, "FDA granting ProSense cryoablation marketing authorization in early-stage breast cancer for women aged seventy and older, we will commence commercial sales for this indication while simultaneously running the post-market study."
• The company is positioning for broader reimbursement by targeting a transition from CPT3 to CPT1 code status after regulatory milestones are achieved.
• IceCure reported "high level of interest in ProSense" from surgeons and clinicians at the major American Society of Breast Surgeons 2025 meeting, anticipating future adoption following approval.
• Geographical diversification remains a focus, with a near-term goal of regulatory filings in Japan and Israel in addition to the U.S. market.

INDUSTRY GLOSSARY

• CPT Code: Current Procedural Terminology code, a billing code for U.S. medical procedures and reimbursement.
• CPT3 vs. CPT1: CPT3 codes are temporary tracking codes; CPT1 codes are permanent, established reimbursement codes that include physician payment.
• Cryoablation: A minimally invasive technique that destroys tissue, including tumors, by freezing.
• Post-Market Study (PMS): A clinical study conducted after a product's regulatory approval to monitor real-world safety and effectiveness.

Full Conference Call Transcript

Michael Polyviou: Thank you, and welcome to IceCure Medical Ltd's conference call to review the financial results as of and for the three months ended March 31, 2025, and provide an update on recent operational highlights. You may refer to the earnings press release that we issued earlier this morning. Participating on today's call are IceCure Medical Ltd CEO, Eyal Shamir, and company CFO and COO, Ronen Tsimerman. Before we begin, I will now take a moment to read a statement about our forward-looking statements. This call and the question and answer session that follows it contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws.

Words such as expects, anticipates, intends, plans, believes, seeks, estimates, and similar expressions or variations of such words are intended to identify forward-looking statements. For example, we are using forward-looking statements in this presentation when we discuss a prospective post-market study plan and our beliefs and expectations following our meeting with the FDA at the end of April. The expectation of the FDA's final marketing authorization decision will depend upon approval of the post-market study plan or plan to commence commercial sales in parallel with running our post-market study. Our belief that additional reimbursements may become available based on regulatory approval and our potential catalysts for the rest of 2025.

Because such statements deal with future events and are based on our current expectations, they are subject to various risks and uncertainties, and actual results, performance, or achievements of IceCure Medical Ltd could differ materially from those described in or implied by these statements during this call. The forward-looking statements contained or implied during this call are subject to such other risks and uncertainties, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the company's annual report on Form 20-F for the year ended December 31, 2024, filed with the SEC on March 27, 2025. It is available on the SEC's website at www.sec.gov.

The company disclaims any intention or obligation, except as required by law, to update or revise any forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and speaks only as of the live broadcast today, May 28, 2025. I will now turn the call over to IceCure Medical Ltd CEO, Eyal Shamir. Eyal, please go ahead.

Eyal Shamir: Thanks, Michael, and hello, everyone, and thank you for joining us today to review our first quarter 2025 results as we continue to experience momentum and continuous growth in ProSense system and disposable probe sales in North America. Ronen will provide further detail on the company's financial performance in the first quarter, and I will focus my comments on more recent developments, namely the positive high-level meeting we had with the FDA at the end of April.

We met with the leadership of the FDA and its Center for Devices and Radiological Health (CDRH) to discuss our marketing authorization request for ProSense in the treatment of early-stage low-risk breast cancer when combined with adjuvant endocrine therapy for women aged seventy and over, a demographic comprising approximately 46,000 patients annually in the US. During the meeting, the FDA requested that we conduct a post-market study after marketing authorization has been granted, which we believe represents a positive signal. The FDA requested that we prepare this post-market study plan and deliver it to the Center for Devices and Radiological Health (CDRH) for review and comments. The FDA's decision on marketing authorization is expected upon the post-market study plan's approval.

I am pleased to report that after the team's diligent work to prepare the plan, we recently submitted it to the Center for Devices and Radiological Health office for review. As you all well know, we have been anticipating the FDA decision on cryoablation for early-stage breast cancer since the beginning of the year. It is our hope that the review of our post-market study plan will be the final step leading up to an FDA decision about which we are optimistic. Upon the FDA granting ProSense cryoablation marketing authorization in early-stage breast cancer for women aged seventy and older, we will commence commercial sales for this indication while simultaneously running the post-market study.

This would afford the company access to reimbursement under the CPT code, which covers $3,800 for the treatment facility cost. We believe that additional reimbursement may become available based on regulatory approval and any recommendations from professional medical associations. Our US commercial team is ready and eager to serve doctors and patients to deliver ProSense, which would become the first-in-class minimally invasive option for women. We see this as a major advancement in women's health and a new paradigm in breast cancer care. The news of the FDA request for our post-market plan was well-timed and very well received at the American Society of Breast Surgeons 2025 annual meeting, which took place in early May.

We were encouraged by the high level of interest in ProSense as a large number of breast surgeons approached our booth asking how they could participate in our planned post-market study and how they could offer ProSense to their patients following marketing authorization. Moreover, ASBRS leadership is giving breast cryoablation a good deal of attention over the past years, including this year. So we believe that this and the positive recommendation of the FDA advisory committee meeting in November 2024 give us an awareness advantage through the FDA marketing authorization agreement. Cryoablation for breast cancer was included in a prominent presentation, including the American Society of Breast Surgeons' presidential address and its best paper tool for 2024 review.

As our ICE3 study was named one of the best papers of the year. In addition to the ASBRS, we are receiving new interest in ProSense from interventional radiologists and other doctors following the FDA request for a post-market plan. As we await the FDA decision, we also look ahead to other potential catalysts for the rest of 2025, including regulatory filings and potential approvals in Japan and in Israel. Meanwhile, the number of published independent studies of ProSense continues to increase globally. Before I turn the call over to Ronen to review our Q1 results, I want to comment on the continued support and friendly relationship we enjoy with our largest shareholder, Mr.

Li Lei Shen, of Epoch Partner Investments Limited. Epoch and Mr. Li, also a board member of the company, once again demonstrated confidence in our company, our technology, and our ability to execute our business plan by providing a $2 million unsecured loan through Epoch at an interest rate that matches the US federal bills. This bridge loan will be prepaid prior to its one-year term or upon Epoch's participation in an equity transaction. This loan affords us additional flexibility as we await the FDA decision. I will now turn the call over to Ronen.

Ronen Tsimerman: Thank you, Eyal. For the three months ended March 31, 2025, revenue representing ProSense system and disposable probe sales was $725,000 compared to $743,000 for the three months ended March 31, 2024. Revenue was driven primarily by the increase in sales in North America and Europe, offset by a decline in sales in Asia. Gross profit for the three months ended March 31, 2025, was $218,000 compared to $269,000 for the three months ended March 31, 2024. Gross margin was 30% for the three months ended March 31, 2025, compared to 36% in the three months ended March 31, 2024.

Due to the low revenue base, we continue to expect revenue and gross profit to fluctuate quarter to quarter as we focus on building out our commercial infrastructures and scale sales. We do not expect a material change in revenues before receiving the FDA marketing authorization decision. Total operating expenses for the three months ended March 31, 2025, were $3.88 million compared to $3.92 million for the three months ended March 31, 2024. Net loss was $3.59 million or $0.06 per share for the three months ended March 31, 2025, compared to a net loss of $3.61 million or $0.08 per share for the same period last year.

As of March 31, 2025, the company had cash and cash equivalents, including short-term deposits, of approximately $4.0 million. As of May 27, 2025, we had cash and cash equivalents of approximately $6.2 million, which includes the $2 million unsecured bridge loan from Epoch. Between January 13, 2025, and May 27, 2025, the company raised $2.65 million in net proceeds from the sales of 2,124,429 ordinary shares under its at-the-market offering facility.

Operator: We will now open the call for Q&A.

Operator: Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. The numbers will be taken in the order they are received. Please stand by while we poll for your questions. The first question is from Anthony Vendetti of Maxim Group. Please go ahead.

Anthony Vendetti: Yes. Hi. Good morning, Eyal, Ronen. I am glad to hear that you have submitted the proposed post-market study to the FDA. I think that's a significant milestone. Just as you mentioned, the CDRH, the Center for Devices and Radiological Health at the FDA, is the division within the FDA that is going to review and ultimately decide on the approval of the post-market study. First, is it still expected to be a minimum of 400 patients over 25 sites? And is there any indication from the FDA when they would potentially respond to the submission of your post-market study? Thanks.

Eyal Shamir: Hi, Anthony. This is Eyal. Yes, the post-market study, which is in the last few years, is pretty common for de novo approvals, will require 400 patients in at least 25 sites. The top management of CDRH, including the director's office, promised us that top management will continue to review it, and they will be part of the process on top of the review team, but they cannot guarantee us a specific time. We submitted quite a big package, and I am sure that they will review it, and we will have a continuous discussion like we did until now.

Anthony Vendetti: Okay. I am just curious about how I know these packages are fairly large and voluminous in terms of length. Approximately how many pages was the package that you submitted?

Eyal Shamir: Quite a lot. You know, it's a lot of information.

Anthony Vendetti: Okay. And then assuming that the study is reviewed and approved, how long is that post-market study expected to take?

Eyal Shamir: This is not yet finalized with the FDA, but I believe, from what we saw in other PMS, that the FDA would like to see that the recruitment time will be within three years.

Anthony Vendetti: Recruitment within three years. Okay. Thanks. So the 400 patients should be recruited during three years.

Eyal Shamir: Yes.

Anthony Vendetti: Okay. And you did mention in your prepared remarks that there's an opportunity potentially for expanded reimbursement. Can you get any more specific on what that potential is?

Eyal Shamir: As soon as we have more records, more claims on our specific code CPT3 code for breast cancer, and additional information on the actual cost that the site will put as part of the claims, we will be able to increase, we believe, and according to what we heard from our reimbursement consultant, that we will be able to increase the CPT in its record. This is number one. Number two, after the FDA grants us the marketing authorization, we will be able to apply to AMA to move from CPT3 to CPT1, which includes also the physician fee.

In parallel, we are doing all the preparation for that meta-analysis and some other requirements that need to be part of the AMA. We will apply to the AMA. It will be a process, but we will seek a CPT1 code.

Anthony Vendetti: Okay. Great. And then just lastly, before I jump back in the queue, Terumo, your partner in Japan, is still on schedule to file for approval in the second half of 2025. What is the size of the population there? I know in the press release, 46,000 women are potential candidates for the ProSense system. What about Japan? What's the size of the market or the opportunity there?

Eyal Shamir: The total number of patients that have breast cancer is a bit more than 100,000, between 100,000 and 105,000 new cases every year. Very similar to the US, almost two-thirds of them are low-risk early-stage breast cancer.

The assumption that Terumo presents at the moment is that it will not be with the limitation of age and even tumor size, or maybe very similar to what we have in the CE and many other regulatory approvals listed just as breast cancer, which does not include any limitation or even like an independent study that runs now in Europe by one of the top three centers in Europe for oncology that they are doing patients who are fifty and up in both luminal A and luminal B. So it cannot be that limited like we are going to have in the US at the beginning.

Anthony Vendetti: Okay. That's great to hear. Okay. Thanks so much. I'll hop back in the queue. Appreciate it.

Operator: The next question is from Kemp Dolliver of Berkline Capital Markets. Please go ahead.

Kemp Dolliver: Great. Thank you. Can you give any more details on the geographic breakdown of revenue this quarter? You know, how much growth you saw in the U.S. and North America, and the size of the decline in Asia?

Ronen Tsimerman: Hi, and thank you for the question, Kemp. So in North America, we've seen an increase of about 11% year over year. And in Europe, we've seen an increase of about 60% from, again, year over year. So we're very happy about it. In Japan, the numbers were not very big, so the decrease was about 60%. And again, the numbers fluctuate between quarters and also in other parts of Asia, about 40%. But again, the numbers are fluctuating, and they weren't very big anyway.

Kemp Dolliver: Great. And these were entirely probe and system sales this quarter?

Ronen Tsimerman: Yes. Probes and system sales, there was no revenue.

Kemp Dolliver: Great. Thank you.

Operator: The next question is from Yi Chen of H.C. Wainwright. Please go ahead.

Eduardo: Hi there. This is Eduardo on for Yi. Curious if there's the ProSense subject to any of the new tariffs for US markets, kind of get some clarity on that.

Ronen Tsimerman: So, yes, I will take the question. Thank you for the question. Yes, currently, we know that there is some kind of freeze of the taxes, but again, we will need to see it when President Trump decides exactly what to do. But initially, yes, we were affected or influenced by the tariffs that were stated by the US Administration.

Eduardo: Understood. And I'm kind of curious if for the post-market approval, once the study assuming the study goes through, do you guys plan to expand your sales team in addition to the ones you currently have?

Eyal Shamir: Yes. Hi. This is Eyal. Yes, of course, after we have the marketing authorization grant, we plan to increase the sales team. We have a very professional team starting from North America, led by Mr. Shad Good, who is bringing over twenty years of experience in the breast field from J&J and Mammotome, and others. So we will build the teams with sales reps, regional sales managers, technical applications, and we plan that quite an important part of our future growth will come from the US market.

Eduardo: Understood. And kind of also curious what strategies you guys have for pricing and sales. Specifically, do you guys primarily focus on purchasing outright? Do you guys have leases or pay-per-use agreements in place? Kind of getting more clarity on your commercial strategies in that regard.

Eyal Shamir: I believe that it will be, you know, kind of a 60/40 between placement and selling the consoles. Like, you know, it's pretty common in this type of capital equipment or maybe half and half. But for placement, we will require a very important commitment of a monthly number of probes over two to three years for a higher price. And we will have also a separate business model where we will sell the console and, of course, the single-use probe.

Eduardo: Got it. That's helpful. Those are all my questions. Thank you.

Operator: Thank you. This concludes the question and answer session. I will turn the call over to Eyal Shamir for his concluding statements. Please go ahead.

Eyal Shamir: Thanks for participating in today's call. We look forward to the FDA decision on marketing authorization of ProSense in early-stage breast cancer. We also believe that the post-market study, should we receive the FDA marketing authorization, will drive further interest in ProSense and has the potential to accelerate adoptions. Our U.S. sales team is ready, and they are fielding questions from prospective standard sites at this time. We hope to report back to our shareholders soon with further news. Have a great day, everyone.

Operator: Thank you. This concludes the IceCure Medical Ltd First Quarter 2025 Results Conference Call.

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DATE

Wednesday, May 28, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chairman and Chief Executive Officer — Thomas Majewski

Chief Financial Officer — Ken Onorio

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RISKS

Net Asset Value Decline: Ken Onorio stated, Our NAV as of March 31st was $7.23 per share. This is a 13.7% decrease from $8.38 per share at year-end.

Leverage Above Target: Ken Onorio confirmed, Our debt and preferred securities outstanding as of March 31st totaled approximately 41% of the company's total assets. This is above our target leverage range of 27.5% to 37.5% at which we expect to operate the company under normal market conditions, largely due to the recent drop in the value of our portfolio.

Spread Compression Impact: Thomas Majewski explained, Spread compression has been a meaningful headwind to the CLO equity market over the past year.

TAKEAWAYS

Net Investment Income and Realized Gains: Earnings totaled $0.33 per share, consisting of $0.28 in net investment income and $0.05 in realized capital gains for Q1 2025.

Portfolio Cash Flow: Recurring cash flows collected totaled $79.9 million, or $0.69 per share, exceeding total distributions paid to common stockholders for Q1 2025.

Net Asset Value: Net asset value ended at $7.23 per share for Q1 2025, reflecting a 13.7% sequential decline primarily driven by broad market price drops in CLO securities.

New Investment Activity: Over $190 million was deployed into new investments, including CLO equity positions with a weighted average effective yield of 18.9% during Q1 2025.

Portfolio Rotation Execution: $48.5 million of CLO debt was sold and largely reinvested in CLO equity during Q1 2025, with the portfolio rotation substantially completed prior to the recent market volatility.

Common Stock Issuance: $66 million of new common shares were issued through the at-the-market program at a premium to NAV, resulting in NAV accretion of $0.02 per share in Q1 2025.

Distributions: $0.42 per share was distributed in cash over three monthly payments for Q1 2025, while Q3 2025 distributions were declared at $0.14 per share monthly.

Leverage and Capital Structure: Asset coverage ratios were 244% for preferred stock and 492% for debt as of March 31, 2025, with all financing at fixed rates and no maturities until at least April 2028.

Portfolio Quality Metrics: CLO equity holdings had a 4.9% CCC concentration, 2.9% of loans below 80, and a 4.6% weighted average junior OC cushion as of Q1 2025, each stronger than market averages.

Reinvestment Period Advantage: The weighted average remaining reinvestment period (WARP) for the CLO equity portfolio was 3.5 years, more than 1.1 years higher than the market, as of Q1 2025.

Reset and Refinancing Activity: Nine positions were reset, seven refinanced, and 45 CLOs have been reset during 2024 and Q1 2025, with ongoing plans for further activity.

Market Pricing Trends: Less than 20% of the loan market was trading above par as of May 23, 2025, following a significant drop in March.

SUMMARY

CLO equity investments generated recurring portfolio cash flow exceeding distributions paid for Q1 2025, reflecting strong underlying asset performance despite market turbulence. The majority of capital allocated to new investments shifted heavily to CLO equity, as the company largely completed a significant repositioning before the most recent volatility in Q1 2025. While market-wide spread compression persisted as a headwind over the past year, leadership signaled that this pressure had moderated as of May 2025 and that refinancing and reset pipelines remain active to capture future value. The company executed new equity and preferred share issuances above NAV, supporting capital structure flexibility. Portfolio metrics, including below-market CCC exposure, below-80 loan percentages, and above-market OC cushions, reinforce management's claims of higher credit quality relative to the broader CLO space.

Management emphasized the cyclical resilience of CLO cash flows, stating, "the cash just keeps coming," and positioned current discounted market prices as a reinvestment opportunity.

April 2025 saw a further decline in CLO prices, temporarily reducing deployment pace as bid/ask spreads widened; activity began to recover in late May 2025.

Ken Onorio clarified that net capital deployment figures are adjusted for gross sales proceeds from the ongoing rotation out of CLO debt and other assets, as discussed in relation to Q1 2025.

Chairman Majewski highlighted a ten-year weighted average loan spread of 370 bps and the persistence of long-term structural changes in CLO funding costs post-2008.

Asset coverage ratios for both preferred stock and debt as of March 31 were well above regulatory thresholds, providing support against additional downside volatility.

INDUSTRY GLOSSARY

CLO (Collateralized Loan Obligation): A securitization backed predominantly by pools of below-investment-grade corporate loans, often managed in equity and junior debt tranches.

WARP (Weighted Average Remaining Reinvestment Period): An indicator of the average remaining period in which the CLO manager can actively reinvest principal proceeds.

OC Cushion (Overcollateralization Cushion): The difference between the par value of a CLO’s underlying assets and its liabilities, expressed as a percentage and serving as a measure of portfolio protection against losses.

Full Conference Call Transcript

Thomas Majewski: Thank you, Darren. Good morning, everyone, and thank you for joining us on the call today. The company started off 2025 with a strong part of the first quarter. We priced three new issue majority CLO equity investments. We reset nine positions in our portfolio, lengthening the reinvestment periods to five years. And we refinanced seven CLOs. The second part of the quarter saw a downturn in markets globally driven in large part from the uncertainty caused by the anticipation of tariff announcements. The prices of nearly all broadly syndicated loans and CLO securities fell in March. The company's portfolio is in an advantageous position and is designed to thrive in periods of volatility.

Indeed, with a weighted average remaining reinvestment period, or WARP, of 3.5 years, our CLOs are well positioned to capitalize on this volatility. Our CLO equity portfolio's WARP is more than 1.1 years above the market average, and as a result of our team's efforts to reset many of our CLOs in our portfolio over the last year plus. Indeed, during 2024 and the first quarter of 2025, 45 CLOs in our portfolio were reset. The company generated net investment income and realized capital gains of $0.33 per share for the first quarter of 2025, consisting of $0.28 of net investment income and $0.05 of realized capital gains.

The realized gains were principally driven by trading activity selling appreciated securities as part of a strategy to rotate from CLO debt into CLO equity.

Ken Onorio: Our NAV as of March 31st was $7.23 per share. This is a 13.7% decrease from $8.38 per share at year-end. The decline was driven predominantly by the drop in prices of nearly all CLO securities in the market, including those in our portfolio. That drawdown did continue into April as well. While our NAV may decline in environments like these, it is important to remember that the prices of CLO equity securities will generally move more than middle market loans held by many BDCs. We view the drawdown in our portfolio as a short-term market price fluctuation and not indicative of concerns specific to our portfolio.

In fact, in our view, the market price of CLO equity significantly undervalues the reinvestment optionality within CLOs during periods like these. We believe the opportunities to purchase discounted loans today within our CLOs will benefit the company in the medium term just as it did in 2020 and in other periods of volatility. We substantially completed our planned portfolio rotation from CLO debt into CLO equity and other investments prior to the start of this most recent bout of volatility. During the first quarter, sales and paydowns of CLO debt in our portfolio totaled $48.5 million, and the company generated $0.05 per share of realized gains.

The new investments we've deployed these proceeds into are expected to generate more net investment income for the company in the coming quarters. Recurring cash flow from our portfolio remains strong in the first quarter. We collected $79.9 million of recurring cash flows or $0.69 per share. This exceeded our quarterly aggregate common distributions and total. This compares to $82 million or $0.74 per share for the fourth quarter of 2024. The slightly lower recurring cash flows were principally driven by loan spread compression. Some fluctuations in cash flow are expected from quarter to quarter, due to new investments, in addition to semiannual paying bond positions in some of our CLO portfolios.

Approximately 18% of our CLO equity portfolio based on fair value are new investments or recently reset CLOs and are scheduled to make their initial payments in subsequent quarters. During the first quarter, we deployed over $190 million into new investments. New CLO equity purchases during the first quarter had a weighted average effective yield of 18.9%. During April, we received recurring cash flows from our portfolio totaling approximately $75.5 million. We expect additional collections in May and June. A number of the CLOs in our portfolio are scheduled to make their first payments until the third quarter, which should bolster cash flows in future periods.

For the first quarter, we utilized our at-the-market program to issue $66 million of common stock at a premium to NAV. This resulted in NAV accretion for shareholders of $0.02 per share. We also issued approximately $22 million of our 7% Series A and B convertible perpetual preferred stock as part of our continuous public offering. We believe the 7% distribution rate on this perpetual preferred stock represents a very attractive cost of capital for the company.

Thomas Majewski: This continuous offering provides the company with a material advantage over our competitors, and we are unaware of any other publicly traded entity focused principally on investing in CLO equity. Having such a program. During the first quarter, we paid $0.42 per share of cash distributions to our common shareholders across three monthly distributions of $0.14 per share. Earlier today, we declared common regular monthly distributions for the third quarter of 2025 also of $0.14 per share. I'd also like to take a moment to highlight Eagle Point Income Company, which also trades under the New York Stock Exchange. It trades under symbol EIC. EIC primarily invests in junior CLO debt securities.

We'll be hosting an investor call for EIC today at 11:30 AM. And we invite you to join us and visit eaglepointincome.com to learn more. After Ken's remarks, I'll take you through the current state of the loan and CLO market. I'll now turn the call over to Ken.

Ken Onorio: Thank you, Tom. Thanks, everyone, for joining our call today. For the first quarter of 2025, the company recorded NII and realized gains of $38 million or $0.33 per share. This compares to NII less net realized losses of $0.12 per share in the fourth quarter of 2024 and NII and net realized gains of $0.29 per share in the first quarter of 2024. The company's first quarter GAAP net loss was $97.5 million.

This was comprised of total investment income of $52.3 million and realized capital gains of $5.3 million offset by total net unrealized depreciation on investments of $122.3 million and net unrealized appreciation on certain liabilities held at fair value of $9.6 million, financing costs and operating expenses of $20 million, and distributions and amortization of offering cost on temporary equity of $3.2 million. As a reminder, temporary equity refers to our multiple series of perpetual preferred stock. Additionally, the company recorded other comprehensive income of $7.1 million for the first quarter. The company's asset coverage ratios on March 31st for preferred stock and debt calculated pursuant to investment company act requirements were 244% and 492% respectively.

Our debt and preferred securities outstanding as of March 31st totaled approximately 41% of the company's total assets. This is above our target leverage range of 27.5% to 37.5% at which we expect to operate the company under normal market conditions. Largely due to the recent drop in the value of our portfolio. Consistent with our long-range financing strategy, all of our financing remains fixed rate, and we have no maturities prior to April 2028. In addition, a significant proportion of our preferred stock financing is perpetual with no set maturity date. I will now hand the call back over to Tom for his market insights and updates.

Thomas Majewski: Let me share some updates on what we see in the loan and CLO markets, and I'll share a bit more about our portfolio. Starting off with loan performance, the S&P/LSTA Leveraged Loan Index generated a total return of 0.6% during the first quarter. After two positive months, during March, the index experienced its first negative monthly return since 2023. The decline in the loan index reversed, and as of May 23rd, the index is now up 1.8% for the year. During the first quarter, there were only three leveraged loans that defaulted.

And as of March 31st, the trailing twelve-month default rate stood at 82 basis points, which is well below the long-term average of 2.6% and certainly below most dealer forecasts. Our portfolio's look-through default exposure as of March 31st stood at 40 basis points. Bank research desks have revised their 2025 forecast for default rates upward, with many estimates now between 3% and 5% for the year. We continue to believe this represents an overly pessimistic outlook, especially in light of how many bank estimates significantly overstated corporate default risk in both 2023 and 2024. During the first quarter, approximately 5% of leveraged loans or roughly 20% annualized prepaid at par.

Many loan issuers have been proactively tackling their near-term maturities, and the maturity wall of the market continues to get pushed out further and further. As part of many of these repayments, however, borrowers issue new loans at tighter spreads. This has been driving the spread compression that we've talked about for the past few quarters. Looking to our portfolio, the weighted average spread of our CLO's underlying loan portfolios stood at 3.36% as of March 31st. This compares unfavorably to 3.49% as of year-end and 3.74% as of March 31st, 2024. Spread compression has been a meaningful headwind to the CLO equity market over the past year.

While a significant majority of the loan market was trading at a premium to par on January 31st, 2025, thankfully, as of May 23rd, less than 20% of the loan market is now trading at a premium. While it will likely reappear at some point in the future, for now, spread compression is largely behind us. Indeed, we are starting to see increases in some of the spreads of our CLO's loan portfolios. The weighted average AAA spread within our CLO equity portfolio tightened by about three basis points during the quarter to 137 basis points. This was primarily driven by our reset and refinancing activity.

While CLO debt spreads in the market have widened over the past sixty days, still over 36% of the CLOs in our equity portfolio have AAA spreads wider than 140 over, with some as wide as 200 basis points over so far. This means that even in the current market, some of our portfolio still has the potential for reset and refinancing upside. We are focusing on these CLOs and expect to complete multiple resets and refinancings in the coming weeks and months. In terms of new CLO issuance, we saw $49 billion issued during the first quarter of 2025.

Combined with the $64 billion of reset activity and $41 billion of refinancing activity, the total issuance volume reached $153 billion during the quarter. Significantly above the $88 billion from the first quarter of 2024. This activity was concentrated at the beginning of the quarter as market volatility led to wider CLO AAA spreads and a subsequent slowdown in the latter part of the quarter. We continue to deploy significant amounts of capital throughout the quarter, placing a greater emphasis on secondary market opportunities given the dislocation during the latter part of the quarter. CCC concentrations within our CLO equity portfolio stood at 4.9% as of quarter-end. This compares favorably to the broader market average of 6.2%.

Similarly, the percentage of loans trading below 80 within our CLOs stood at 2.9%. This is also more favorable than the market average of 4.6%. Further, our CLO equity's weighted average junior OC cushion stood at 4.6% at quarter-end. This is also significantly better than the market average of 3.7%. By all three of these measures, it's very clear that our portfolio is a much higher quality portfolio than the broader market. This doesn't happen by accident. It's a direct result of our advisor's time-tested proactive investment process. Looking at the company's capital structure, we continue to maintain 100% fixed rate financing, with no maturities prior to 2028.

This provides us protection from any future rise in interest rates and locks us into an attractive cost of capital for years to come. Before wrapping up, I'd also like to touch on our current market outlook. Defaults remain low, and we're not seeing signs of fundamental weaknesses in many companies. Indeed, revenue and EBITDA of many borrowers continues to grow. The spread compression that we observed this past year plus has largely abated, and we're seeing CLO refinancing and reset activity pick up again in May as markets stabilized. We've continued selectively with resets, and this should lead to lower CLO financing costs within our portfolio of CLO equity.

Macro factors, particularly global tariff policy, will remain in focus for some time. While macro uncertainty nearly always brings price volatility to the CLO market, our view is that in credit, the rumor is worse than the news. And that loan prices will move more than the actual default rates in the market. Every loan that doesn't default pays off at par. And that's how today's discounted reinvestment opportunities ultimately translate into good returns for ECC in the medium term. In closing, we continue to focus on enhancing our net investment income and cash flow.

Our proactive investment approach, particularly our focus over the past year on resetting and refinancing CLOs, as well as rotating from CLO debt to CLO equity, has been effective. Indeed, our resulting CLO equity portfolio has a significantly better WARP and weighted average OC cushion than the broader market. We believe the company is well positioned for continued strong performance going forward. We thank you for your time and interest in Eagle Point Credit Company. Ken and I will now open the call to your questions. Operator?

Operator: Thank you. At this time, we'll be conducting a question and answer session. You may press star two if you'd like to remove your question from the queue. Before pressing the star keys. One moment please while we poll for questions. Our first question comes from Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.

Mickey Schleien: Hey, good morning, everyone. Tom, you mentioned that the dislocation in the markets feels temporary. But CLO NAVs have been weak now for several quarters, which is obviously disheartening. Meanwhile, I see that your estimated yields at fair value are almost 20% and they're even higher in terms of cash yields. So other than some clarity on the administration's tariff policy, what do you think it's gonna take for the market to recognize what's seems to be relatively stable background for CLO cash flows.

Thomas Majewski: I don't know. Here's the short answer on that. The cash flows have been stable for CLO equity since I've been doing this for twenty-five years, give or take, thirty, you know, thirty in total in the markets, twenty-five in CLOs largely. The cash just keeps coming. I mean, we saw this in COVID. You know, in the financial crisis, you know, half of CLOs missed a payment. Some missed two. Many did worse than that. The cash just keeps coming. I've looked over our track record. I think going back to 2015, and the average cash, you know, versus the value of the portfolios on an annualized basis, this is I think, firm-wide, not just ECC.

Between 25% and 30%. The cash just keeps coming. So that's the first thing. So at least historically, the money keeps coming at the end of the day. That's what we're here to because we're here to generate. Now the prices of CLO securities move around more than I in my opinion, the real fair value suggests, but marks are the marks, and this is the price of securities. You've seen other public CLO funds have similar mark to market trends and the first quarter. In April as well, which was another down month. Without opining on our specific portfolio, you know, feel credit markets are generally stronger in May and, you know, trending in the right direction.

Obviously, the month's not over yet, so it's too soon to call what's gonna happen. In our portfolio. But I'll say, in general, the tide has turned. And if you look at, like, the JPMorgan double B index, the Chloe index just as a market indicator, you can see that's up a bunch from the lows in May. So we view situations like this as an opportunity on a two-pronged basis. First is we can buy stuff cheaper. To be candid, we can't buy enough. Volumes lighten in situations like this, but we have been able to buy some things. At cheaper prices. So we like that.

And then within our CLOs, this is the time when they really can shine. And, like, if you will get the total return on our NAV from January 1, 2020, to January or December 31, 2021, so I get the change in NAV. The, you know, proverbially investing the day before COVID, you could see just how well it did. And that's a function of what I think the market underappreciates is the reinvestment optionality. Okay. Spread let's, you know and if we were to having this call on April 15th, and I'm kinda glad we weren't, you know, spread the gapped out a bunch. But loans were down. CLO equity was down. CLO debt was wider.

Our CLOs have locked in financing for the next up to twelve years. At yesterday's spreads. I mean, we've got CLO, triple A spreads, as low as 115, maybe even lower in the book. And we can keep reinvesting. Within each CLO and making relative value trades. It's hard to do that in strong markets. The biggest thing that was a drawback, you know, with the benefit of hindsight over the last fifteen plus months, frankly, has been spread compression. Not defaults and things like that. People always ask about defaults. The challenge over the last fifteen months really ending, you know, proverbially April or March 1 was loan spreads tightening.

And you can see a weighted average spread in our loan portfolio is down with thirty-five, forty bps can, something in that context. And we've done our part to lower the right side of our balance sheet, but we haven't done it as we've done more actions than probably anyone in terms of resets and refinancing. That said, we still gotta keep doing more. And the good news is we have an active pipeline of it because we still got a lot of stuff above triple A is wider than the market, including as wide as two hundred over. We're still gonna be keeping resetting, lowering the right side of our balance sheet.

Right now, essentially, no loan borrowers resetting or repricing their financing of anything. We're seeing collateral managers start to get spreads up in portfolios, which is good. Against that, while dealers talk about, you know, three, four, five percent default rates, you know, the show me the data. I mean, it's just not there. There are some loan modification exercises going on LMEs, sometimes that creates winners and losers in a loan. And then, you know, in many cases, many of our CLOs have actually built par over the last year. Which is great, suggesting their net winners in LMEs. Not everyone, of course, but some and I think many are. But this is the vagary of the market.

And I appreciate I made the direct comparison to BDC middle market loans, loans were down a bunch. Middle market loans probably didn't move as much as the broader syndicated market. I'll leave it to others to decide what's right and wrong there, I appreciate that our NAV moves differently than others, you know, more than others, I guess, would be the way to put it. But what I hope you see and you can look back over years and years of our public data up markets, down markets, sky is sunny, sky is raining, the cash just keeps coming. And that's at the end of the day. What we're here to create. And keep doing.

Mickey Schleien: Yeah. I agree, Tom. And, you know, thanks for your insight. It's always helpful. And, appreciate your time this morning.

Thomas Majewski: Very good. Thanks so much. And if you have any follow-up questions on the numbers, feel free to give us a call later. Thank you, Mickey.

Operator: Our next question is from Randy Binner with B. Riley Securities. Please proceed with your question.

Randy Binner: Oh, okay. Good morning. Thank you. I had a couple. Yeah. Good morning, Tom. I had a couple, but, yeah, I obviously appreciate the commentary and the solid result. The first is on the resets and refis, I initially, I thought that was, you know, like, nine resets and seven refis was a lot. But I think I heard in your commentary that it could kinda keep that pace for the next couple of quarters. So just wondering if we get a little more color there on if that level of activity is something we should kinda plan on in this, you know, given moving in the market and interest rates are what's driving that?

And is it did I hear it right that it would stay at this level?

Thomas Majewski: So I think we said nine resets that we focused principally. That was actually, I think, a late quarter for us. You know, kind of in, you know, latter part. You know, certainly March we were not particularly active. Yeah. Everyone's just kinda seeing what's going on in the world. So if I, you know, if I make a generic statement, you know, that nine feels like a two-month number, not a full quarter number. Okay. Got it. That said, you know, but and if you look back to our, you know, Q4 and Q3, you'd see much higher numbers frankly.

That said, looking forward, we shared a number, what was it, in the thirties percent of our CLOs that have over 140. Yep. You know, we have it in the prepared remarks. It was thirty-something percent of our CLOs have triple A's over 140. You can see in our on our web on our presentation, you know, line by line, I'm on our website. The triple A spread on every single CLO where the equity ends, so you know exactly what we're talking about. We've got triple A spreads from 141 to 200. So we're gonna keep working on ripping those costs out as best we can.

The market's a little slower now compared to the first quarter while it's back open. Yeah. Everyone, you know, it was a big bang. Everyone's still kinda behaving a little cautiously. But, yeah, I would certainly expect single-digit, maybe double-digit resets a quarter in current market conditions. Obviously, that can change very quickly. For the portfolio. One of the analogies I like to make when you look at the what's happened to us on the loan spread side, which has come down a ton, as I mentioned, we've got somewhere between fifteen hundred and two thousand obligors underlying all our CLOs. Picture like a wall of sand, these little grains coming at you. There's so many so many so many.

And we've got, you know, a hundred and fifty, give or take, CLOs we're kinda pushing boulders the other way. Ten times bigger than the sand coming out of. And it just takes unfortunately, long you know, we could get forty percent of our loans, sixty percent of our loans to reprice in face very quickly. We can't reset all of our CLOs that quickly. What that does get us is kinda forced vintage diversification. And on February 15th, I didn't know if spreads would be wider or tighter on May 28th. I couldn't reset everything I wanted to on February 28th just because the market's not big enough. Now if spreads kept tightening, great, I would've said, oh, great.

We'll refinance tighter today. It turns out they widened. But by virtue of the diversity of our portfolio, we still have things that we can do to keep creating value on the right side of our balance sheet. Going back to the earlier questioner's question, the biggest thing though is you just look at the trends and cash flows on the portfolio. These things just keep generating gobs and gobs of cash. These changes in prices are frustrating. My skin is perhaps a little thicker to it having done it for so long. But it's as we said very clearly, it's with we believe this is a short-term mark to market swing.

Not a not any sort of fundamental issue with our portfolio, and the proof is in the pudding. With the cash that keeps coming off of it.

Randy Binner: Alright. That's helpful. And then the other one I had was just kind of higher level, and it goes to the I think it was covered in your prepared remarks and the press release, but the you said you deployed nearly $200 million of new investments, but then the specific number of net capital into the CLO structures was $95 million. And I just not I'm not reconciling that number based on what we put into our model. Can you just clarify that? Like, what's the difference between the ninety-five and the two hundred?

Ken Onorio: Sure. So the difference between the two hundred and the ninety-five, it's gross versus net. As you recall, we have done a significant rotation program of CLO debt into CLO equity. So those sales would bring down the overall number to a net basis. As well as any other conversions of loan accumulation facilities or other assets that were sold off the balance sheet and redeployed into new investments.

Randy Binner: Okay. Got it. Thank you. Appreciate it.

Operator: No problem. Our next question comes from Erik Zwick with Lucid Capital Markets. Please proceed with your question.

Erik Zwick: Thanks. Good morning, Tom and Ken. Maybe I'll start just with a follow-up to that last question. On deployments. In the press release, you indicate since April 30th, deployed $4.2 million of net capital. Which seems like a relatively slower pace compared to the ninety-five that was just referenced in the first quarter, and I realized April was a fairly volatile month in the market. So curious if that slower pace of deployment grows into the net numbers, so maybe the gross number was larger.

But just curious kind of what you saw in April that resulted in the slower net deployment and if it was market related, has that maybe not resolved yet, but lessened so that deployment in May and June will potentially be at a higher level.

Thomas Majewski: Yeah. So it's frustrating. So the marks are down. We've got cash. Show me the trades, unfortunately. What happens in the CLO market and this happened during COVID, this happened during the regional bank crisis. This happened or turmoil, pardon me, this happened during the energy, you know, blip in 2015. Prices drop and volume grinds to a halt in the CLO equity market. Where it grinds comes very you know, slows significantly, let me say. Let me correct my statement. That kinda stinks.

So while we have ample cash and can be on the offense, we were you know, working in a market where sellers hadn't everyone agrees what the where they buy something, sellers hadn't agreed to sell there yet. So we got a little bit in the ground, kind of four to six weeks after a big bang event. That big bang event measured on April 2nd, 2025, this year for us. Start to see things open up again. And literally today, I'm watching the Bloomberg. So, you know, lots of CLO equity actually trading today. I think we'll be bidding on a bunch of stuff that's up for auction today.

While the prices in general are up from the April lows, there's still I'd call them pretty attractive levels. Unfortunately, there's a lag. Whenever there's a disruption in CLO equity, we do the best we can. We don't overpay just to act, but the market sellers kind of acquiesce and the market kinda comes to them a little bit. So and that's a tried and true thing in the CLO market. So four to six weeks, typically what happens. Now that said, CLO double B's have a little more they come back to life a little quicker. In terms of activity. And they move around faster. There's shorter, weaker hands in there.

You know, the good and the bad news while lots of like us and some of our public competitors, you know, the good news is we're stable hands. The bad news for us is the other guys stable hands and, you know, not a lot of forced sellers. There were a couple in COVID who had ACR-ish issues or repo stuff, but by and large, equities and pretty sticky hands. CLO debt moves around a little more. So the other spot, we did put some money into the ground, you know, this quarter. Has been in CLO double B. As I mentioned, we largely completed our rotation. Back in kinda February. Which was great.

You know, we bought a bunch of stuff in the eighties and nineties. And sold it in the high nineties to even, you know, par area, sometimes maybe even above. But we got back in a little bit in CLO double B's. And certainly any we purchased in April would nearly certainly be up today. So we'll continue to deploy. We've got a stable hand. We've got the right balance sheet to be in this market. And we're, you know, we're I don't wanna say aggressively, but we're keenly looking to keep expanding the portfolio in discounted areas. You will see a little pickup in double B's.

We might actually sell them before the end of the quarter, but on an interim basis, where when equity was still quiet, we did pick up some double B's.

Erik Zwick: I appreciate the color. That's great. And then next one, another one, just looking at the seventy-five and a half million of recurring cash distributions that you received since April 30th. And I think you mentioned in your prepared comments here that additional cash flow is expected in May and June. Curious if you could just quantify that to any degree because I guess as I understand it, you know, the majority of the cash flow you're seeing is usually front-end weighted in the quarter.

Thomas Majewski: Yeah. It's the vast majority even. So, you know, it's a few million bucks more. Like, if you look back to the earnings script or even probably the press release from Q1, you know, we would have told you how much we received by January 31st or something like that and then look at the total quarter. It's a little you know, it's five percent more in that kind of context. I've checked the numbers to be sure, but that similar pattern you'd expect to see. The good thing we've got is we do have some resets and some other new investments that we did in Q1. That won't make first payments until July.

So those payments tend to be oversized, which is good. And they're not you know, they're a zero this quarter. They weren't scheduled to pay this quarter, but kinda the first payment date, proverbially, July 15th. So we'll continue to have more stuff coming our way. But if you look back to Q1 or Q4, and kind of piece together the scripts, you can see it's, you know, in a couple percent more cash.

Erik Zwick: Yep. Makes sense. And then last one, you talked about the spread compression that you're battling over the past fifteen months or so. And if I look at slide nineteen, your deck that's certainly apparent. However, when I look like, the longer-term trend, you know, your slide points out that over the past ten years and maybe a little bit more, the average spread has been higher about fifty-five basis points over that longer-term average. So wondering if you could just, from a bigger picture perspective, talk about you know, what's happened, I guess, really kinda looking at that chart from kind of you know, post-GFC to today that has resulted in the higher spreads relative to that pre-GFC period.

Thomas Majewski: Yeah. No. That's a really good question, GFC. The long-term average there is 315 bps. The ten-year average is 370 bps. And you can see the viciously painful spread compression from the last three years. I have a version of the chart the team gave me. It has a red arrow there. We didn't publish that one, but, ugh, I don't like it. So broadly, you know, what gave rise to the what I think your question is something I understand the 315 versus 370. Exactly. Yep. Yeah. Not just mathematical. You obviously get the math as why.

So if you look at the drivers into that 315, if you ran an average ending 2007, I'm gonna that's gonna be a two-handle average even. So things got going on then. You had bank So in the olden days, pre-financial crisis, we'd sell triple A's at LIBOR plus twenty-five. And we'd get excited if we get a LIBOR plus twenty-four print. You know, that was like a high five. And banks would buy that kind of stuff, insurance companies would buy and banks were funding at LIBOR minus back then. So they would say, well, this is great. They'd even go and buy a credit default swap from a monoline insurer. Pay that guy five basis points.

So take his L plus twenty bond, edge it to a guy for, let's say, five bips. So he's getting now L plus twenty. But if you're funding at L minus twenty, which is where a lot of major banks funded that time, he did great. You know, you're locking in that forty basis point spread. Until, kaboom, 2008, you don't fund that LIBOR minus twenty anymore. Now you're funding a LIBOR plus two hundred. And you're losing. So we had some in the, like, 05, 06, 07. We had a period of time of unusually cheap funding for CLO, triple A's. Which then brought loan spreads way in. Versus look where it got to in 02, 03.

And then roll the clock back to the pre into the 1990s, you know, ancient history, Other than the next call or next question person in the queue, probably not a lot of people even remember those days. The you know, that was just when banks bought loans. I mean, the syndicated loans used to be called bank loans or par loans. They were just held to banks. So the banks, there was kinda two prices, you know, L plus 225 and L plus 275. And those were the two prices of loans, but it all just went to banks directly without the structured market. So we've had a fundamental a really long answer here. Sorry.

But a fundamental reracking of the funding cost of loans. It used to be you could get the triple A's where eighty percent of your capital structure. Now you're getting sixty-five percent of your capital structure done at SOFR plus 140. So I think that's more here to stay because the yield on whether spread on loans is driven by where buyers can buy loans, and the number one buyer of loans is the CLO market. And as long as our triple A guys charge us what I think is a usurious 140 over, the price that yield on loans is gonna stay or spread is gonna stay in the context where it is right now would be my expectation.

So we provide this data just we're, you know, data-rich firm, and we'd like to share this data. I think the relevant measure to look at is really the last ten years. Please don't extrapolate or I'm afraid we don't have to extrapolate the 23 onward trend. You know, it feels like loan spread compression is largely paused right now. It will resurface at some point, and you can see it did, like, between twenty look between twenty what is that? Fifteen, sixteen, seventeen. It went from 391 to 348. You listen to some of these calls, we would have lamented the same thing. Back then. That's what we've been facing right now.

The good news is there's not a lot of defaults. Many of our CLOs have net built par even through this stuff. But the markets move around. And I think I feel comfortable that the ten-year average doesn't really move that much here heretofore. Unless we see a significant change in CLO debt cost, in which case this could come down.

Erik Zwick: Yeah. No. That's very helpful, and I appreciate the commentary and historical perspective because you're right. It does seem and that was kinda the Ancient history even. Yeah. Post-GFC there. Some something had changed, and it seems like lenders are, you know, requiring more and the borrowers are paying more. But you're right. The kind of ten-year it seems like we've kind of entered a new period and it'll revolve around that ten-year average of 370 ish or so.

Thomas Majewski: That's my expectation. I mean, I'd love to see triple A's come in. It's on I mean, in my opinion, those guys know, they get I mean, they get pretty darn rich on buying this stuff. I'm wondering if you guys could go ahead and help the rebate P and I. But in any event, I digress.

Erik Zwick: No. That's great. I appreciate it. Thank you so much. That's all I have today.

Thomas Majewski: Okay. Very good. If you have any other questions on the numbers, feel free to follow-up later today, Erik. Thank you.

Operator: Our next question is from Steven Bavaria with Inside the Income Factory. Please proceed with your question.

Steven Bavaria: So, Steve, you're the caller who remembers loans in the 1990s. Hey. Listen. I introduced loan ratings at Standard and Poor's back then. They thought I was nuts, like, we don't do that, and it's good thing they listened to me finally. Took a couple years. It all works out. I think I think they make a few bucks doing that these days.

Thomas Majewski: They do. I wish they'd paid me more of it, but that's okay. I'm doing fine.

Steven Bavaria: Here. Hey. You know, all of us who are income investors love your dividend, your distribution at twenty plus percent. And, you know, in our wildest dreams, we'd love to think that your total returns are gonna be that much over time as well. But what I'm curious about is you know, in a real bank I mean, you know, I could say CLOs are virtual banks, but in at JPMorgan and other places, they can reserve in advance. You know, for projected loan losses I don't think CLOs can do that, and I don't think you can do that as a closed-end fund.

So you're if I'm right, you're required to pay ninety percent or so of your taxable income as you move along. But I assume since you can't create a reserve for loan loss in that, like a like banks can, And a lot of the losses creep up probably when individual CLOs are actually you know, when they wind down. Is there a permanent sort of back ending of loan loss that you can't pay you know, you can't consider in calculating your required distributions that's gonna sort of continually make it almost seem like a bit of an annuity as opposed you know what I'm asking? Is that I know exactly where we're going.

Thomas Majewski: Yeah. No. I understand the question. Yep. But and see, yeah. The thoughts were masters to three things. Gap, Everyone loves gap income. No one, you know, no one gets fired for having too much gap income. Acts, as you point out, we've gotta pay out I think it's actually ninety-eight percent of our taxable income. Within a year. So we have, you know, I think of it as essentially all of our taxable income has to be paid out. And cash, And you can't pay any of that stuff without cash. So when we think, you know, if I could have only one master, it'd be cash. As long as we keep generating cash, the whole model works.

And indeed, we continue to generate, you know, tons and tons of cash. So we, you know, our again, our portfolio generates in the high twenties cash on cash. So that's good. And to the point of you know, loan loss reserve, so a bank you know, I mean, JPMorgan, you know, published you know, nine hundred million dollars of loan loss reserve or some number like that recently I saw. Some, you know, hundreds of millions of dollars. While we don't have a specific route so let me this I'm gonna talk about gap for a minute, and then I'm gonna come to tax. So for GAAP Yeah.

We kinda do have a loan loss reserve and that our effective yields have a provision for future losses. So if we ran our yields assuming no loans ever defaulted, our effective yields would be much higher. I don't know how much higher, but a bunch higher. So that assumes that the portfolios start to fall, you know, they rent with it seems like very low defaults at the beginning, but they ramp up you know, reasonably quickly. A lot of these loans are first period defaults in the large corporate loan market. But there is a default assumption in our yields. So that's very important.

That's unlike a BDC, who can't use an effective doesn't use effective yield for their loans. We actually do. So from a GAAP basis and that's why GAAP income is less than cash income. Even though this is recurring cash flows from the interest column of the CLO, it we GAAP requires us to take a reserve. So there is a reserve there. Now sometimes we get it wrong, and we have had some write downs once in a while on end of life CLOs, generally relatively minor. They're already caught in the NAV. It's not like something's marked from forty to zero.

It's probably marked at one and then, you know, written from one to zero in the extreme case. If our projections were off by a nontrivial amount, but that's relatively infrequent. But so for Gap, the easiest way to think of it is the difference between cash income there are, you know, recurring cash flows, and GAAP income, is kind of a or investment income, gross investment income is the difference between recurring cash flows and gross investment income is our reserve for loan losses. So we do take that for GAAP. Now for tax, they don't care about any of that. Taxes, basically, on a cash basis. Or losses.

So there have been years where the majority of our distributions have been treated as a return of capital. And that's because there were a lot of realized losses in CLOs. Now it doesn't mean the CLOs took net losses per se, A collateral manager could have bought a loan at a par and traded down to ninety. He or she sold it for ninety and bought another loan at eighty-nine. On the same day. And if he or she was correct, that's that works out to be a one-point gain when all when that eighty-nine loan pays off at par. The nice thing is it actually helps shelter your taxable income.

Now next year, you gotta pay the piper when let's say that loan pays off at par next year, and now you got an eleven-point gain, which you pick up as taxable income. But there is tax losses. There's no reserve for taxes. No reserve for losses in tax. So we have all these different things, and it's that we do a lot of things here pretty good. Ken and I look at each other every time someone asks us about projecting taxable income, because close to impossible, I think. In that let's say we have perfect information. Our tax year ends November 30th. Let's say we have perfect information of where we are on November 15th.

Which we would never actually have. If collateral manager sold a bunch of loans down to rotate into other loans, that could change our taxable income profile materially. In right at the end of the tax year. So it's hard. We make our best estimates. We have the outside tax preparers give some midyear estimate to kinda give us a flavor of where things are going. But yeah, we could have big portfolio rotation in November, which takes away a lot of taxable income at the same time, a lot of stuff bought at discounts right now, could all pay off and spike our taxable income. So it's frustrating. It's the law. So, obviously, we have to work within that.

But GAAP, cash, and tax are three different masters. GAAP does allow a loan loss reserve. Tax doesn't. Cash is what pays the distributions, and you know, at the end of the day, while we love all numbers to be high except for taxable income, we you know, cash is the number one thing I like to make high.

Steven Bavaria: Thanks.

Operator: Due to time constraints, we do not have time for additional questions. At this point, I'd like to turn the call back over to Thomas Majewski for closing comments.

Thomas Majewski: Great. Thank you very much, everyone. We appreciate your time and interest in Eagle Point Credit Company. We do invite you to join Eagle Point Income Company's call later today at 11:30 if you are available. Thank you very much.

Operator: This concludes today's conference call. You may disconnect your lines at this time. And we thank you for your participation.

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DATE

Wednesday, May 28, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

President & Chief Executive Officer — Frank Lee

Chairman & Chief Executive Officer — George Makrokostas

Chief Financial Officer — Eric Rivera

Chief Technology Officer — Chris Progler

Vice President, Investor Relations — Ted Moreau

Need a quote from one of our analysts? Email [email protected]

RISKS

Management stated that mainstream IC demand remains weak due to low wafer fab utilization, with recovery not expected until "even later in 2026."

Eric Rivera noted ongoing macroeconomic uncertainty related to US tariffs is contributing to a "cautious outlook for the rest of the year."

US revenue declined sequentially, attributed to weakness in lower-end design nodes and timing of advanced node projects.

TAKEAWAYS

Total Revenue: $211 million, flat sequentially and down 3% year over year compared to Q2 FY2024, landing within guidance.

IC Segment Revenue: $156 million in IC revenue, down 3% year over year compared to Q2 FY2024, reflecting ongoing design node migration.

High-End Revenue: Rose 2% year over year and constituted 38% of IC revenue, with healthy foundry demand in Asia for 22- and 28-nanometer products.

Mainstream IC Revenue: Declined 6% year over year, with the steepest fall in photomasks for the oldest generation nodes; partially offset by migration to smaller geometries requiring higher value photomasks.

FPD Revenue: $55 million in FPD revenue, down 2% year over year compared to Q2 FY2024, experiencing a low early in the quarter before demand picked up seasonally.

Gross Margin: 37%, matching the quarterly average for the last three years, with leverage improvement driven by operational controls.

Operating Margin: 26%, up 180 basis points sequentially in GAAP operating margin.

Diluted GAAP EPS: $0.15 per share (GAAP); Diluted Non-GAAP EPS: $0.40 non-GAAP diluted EPS per share, after adjusting for foreign exchange.

Operating Cash Flow: $31 million in operating cash flow, equal to 15% of total revenue.

Capital Expenditures: $61 million in capital expenditures, supporting US capacity expansion; CapEx is on track to reach $200 million for FY2025.

Total Cash & Short-Term Investments: $558 million at quarter end.

Share Repurchases: $72 million spent to buy back 3.6 million shares, with $23 million remaining under the repurchase authorization.

Guidance: Q3 FY2025 expected revenue of $200–$208 million; non-GAAP EPS of $0.35–$0.41 for Q3 FY2025; non-GAAP operating margin forecast of 20%–22% for Q3 FY2025.

CEO Transition: Frank Lee announced retirement from the CEO role, with George Makrokostas appointed as the new CEO effective immediately.

Tariff Impact: Rivera stated, "we have determined that these costs will have a negligible impact on our financial results."

Manufacturing Footprint: Photronics operates eleven cleanroom facilities globally, with six in Asia, supporting both capacity expansion and rapid customer response.

SUMMARY

Photronics, Inc. (PLAB) delivered revenue at the midpoint of guidance but cited macroeconomic and tariff-related headwinds that led to cautious forward expectations. Leadership transition was announced, with George Makrokostas elevated to CEO as succession planning continues. Management reiterated that recent share repurchase actions reflect long-term confidence, though visibility for near-term demand remains limited. Geographic and segmental details showed relative resilience in Asia’s high-end foundry demand and in China and Taiwan joint ventures. Customer demand in lower-end nodes and mainstream segments across major geographies was described as muted, with pronounced weakness in automotive and industrial applications.

Eric Rivera said, "ASPs for high-end assets are high, meaning a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings."

Makrokostas clarified that future capital deployment will be balanced between US capacity expansion and responding to ongoing growth in Asia, emphasizing a flexible investment approach amid global industry shifts.

Photronics’ capital allocation strategy aims to balance organic growth, strategic investments, and returning cash to shareholders, with an opportunistic stance on future share buybacks.

Based on the transcript, company leadership views its geographic footprint as a key differentiator to address customer needs and mitigate regional tariff risks.

INDUSTRY GLOSSARY

FPD: Flat Panel Display; used for screens in consumer electronics, such as smartphones and laptops.

IC: Integrated Circuit; semiconductor device that integrates numerous tiny transistors.

Node Migration: Transition by customers to semiconductor manufacturing processes employing smaller feature sizes, impacting mask demand and pricing.

AMOLED: Active-Matrix Organic Light-Emitting Diode; a display technology prevalent in high-end devices and adopted in new panel sizes referenced in the call.

G8.6: Refers to the 8.6-generation size standard for large display manufacturing panels.

Full Conference Call Transcript

Ted Moreau: Thank you, operator. Good morning, everyone. Welcome to our review of Photronics' fiscal second quarter 2025 financial results. Joining me this morning are Frank Lee, CEO, George Makrokostas, Chairman, Eric Rivera, CFO, and Chris Progler, CTO. The press release we issued earlier this morning, together with the presentation material that accompanies our remarks, are available on the Investor Relations section of our website. Comments made by any participants on today's call may include forward-looking statements that include such words as anticipate, believe, estimate, expect, forecast, and in our view. These forward-looking statements are subject to various risks and uncertainties, and other factors that are difficult to predict.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after the date of the presentation to conform these statements to actual results. Photronics has provided additional information in its most recent Form 10-K and other subsequent reports filed with the SEC concerning factors that could cause actual results to differ materially. During the course of our discussion, we will refer to certain non-GAAP financial measures. These numbers may be useful for analysts, investors, and management to evaluate ongoing performance.

A reconciliation of these metrics to GAAP financial results is provided in our presentation materials. During the third quarter, we will be participating in the TD Cowen TMT Conference, the DA Davidson Consumer and Technology Conference, the Three Part Advisors East Coast Conference, and the Singular Research Investor Conference. I will now turn the call over to Frank.

Frank Lee: Thank you, Ted, and good morning, everyone. We achieved second quarter sales of $211 million, which was in the middle of our guidance range. Non-GAAP diluted EPS was $0.40. We took advantage of financial market opportunity during the quarter by spending $72 million to repurchase 3.6 million shares, which should drive greater earnings leverage in the future. In our ICM market, chip designs are migrating to higher-end nodes. These nodes require more photomasks per design, which generate higher ASPs per mask set. In the United States, our 2025 capacity expansion plan targets this node migration opportunity. In Asia, we are also in a strong position to benefit from a market transition towards higher-end nodes, as reflected in our Q2 results.

We believe some of the positive node transition trends come from ICs serving a growing AI ecosystem. In the equity market, we are the technology-leading mask suppliers to the industry, including to companies that have their own captive mask operations. Conditions improved during the quarter due to the seasonal timing of major smartphone and laptop design releases. For the first time, these consumer products were produced in larger G8.6 panel sizes using AMOLED display technology. We are optimistic that with more emerging G8.6 related products and R&D activities, our advanced photomask technology will help us gain market share in the coming G8.6 AMOLED era. With the current market dynamics, our geographic footprint is a strategic asset that differentiates Photronics' position.

To support our global customers, we operate eleven cleanroom production facilities, including six in Asia, three in the US, and two in Europe. Our manufacturing facilities located close to our customers enable our rapid response advantage and facilitate collaboration with customers. Our global footprint allows Photronics to capitalize on new business opportunities as the semiconductor industry diversifies its manufacturing footprint. For example, our strategic capacity and capability expansion in the US coincides with the reshoring of semiconductor production to the US. Our program is progressing as planned to support this US customer fab and design roadmaps and expansions. US tariff dynamics during the quarter increased global macroeconomic uncertainty.

While tariff negotiations remain ongoing, we can leverage our diverse geographic footprint as a strategic asset and a competitive advantage. Our ability to allocate production across our geographic locations allows us to ship the majority of masks within regions or countries, mitigating potential tariff costs for our customers. This morning, as part of our carefully considered succession plan, I have decided to retire from the CEO position after three years. I have truly enjoyed my time and am proud of the work we have done to move us forward. I will continue to manage the Photronics' Asia operations until my retirement. I will now introduce you to George Makrokostas, our Chairman, and newly appointed CEO.

George Makrokostas: Thank you, Frank. On behalf of the board and the entire company, I wish to thank you for your twenty years of dedication to Photronics, including the last three years as CEO. You have played a significant role in our success, particularly in our Asia expansion. I look forward to continuing to work with you at Photronics and on the board. By way of introduction, I started my career at Photronics at an entry-level role and worked my way up to a senior leadership position, giving me a thorough understanding of the business and underlying technology. In 2000, I founded RagingWire Data Centers, which became a highly respected data center provider leading to its ultimate sale to NTT in 2018.

I've been a member of Photronics Board of Directors for approximately twenty years, and earlier this year, I was named executive chairman. I look forward to driving Photronics towards the next leg of profitable growth as I focus intensely on operational execution. I will now turn the call over to Eric to review our second quarter results and provide third quarter guidance.

Eric Rivera: Quarter revenue was in line with expectations at $211 million, which was essentially flat sequentially and down 3% year over year. IC revenue of $156 million declined 3% year over year. We noted a continuation of favorable design node migration trends in the quarter, which should continue in the future. High-end revenue increased 2% year over year, representing 38% of our IC revenue. We saw healthy foundry demand for both 22 and 28 nanometer automax products in Asia. Mainstream IC revenue declined 6% year over year, with the largest decline in photomasks serving the oldest generation design nodes, indicating continued weakness in the segment.

This reduction was partially offset by design node migration to smaller IC geometries within mainstream, which require higher value photomasks. By application, revenue from memory applications declined sequentially due to the timing of projects. On the logic side, photomask sets serving mobile communications such as Wi-Fi, Bluetooth, and baseband ICs were strong, along with OLED driver ICs. Lower-end design nodes serving power electronics, automotive, and industrial applications remain in a weaker recovery state. Turning to FPD, revenue of $55 million declined 2% year over year. FPD revenue experienced a low early in the quarter before the anticipated seasonal demand uplift. Higher mobile applications and adoption of advanced mask technologies supporting innovative new designs were areas of strength.

Geographically, revenue was led by our IC joint ventures in China and Taiwan. Business remained healthy as customers rely on Photronics' scale and product mix to support expansion of their product offerings. Revenue from the US declined sequentially due to lower-end design node weakness and the timing of customer advanced node projects. We reported a gross margin of 37%, in line with our quarterly average over the past three years and well above historical levels, as elevated operational controls drove greater than expected leverage across our infrastructure. We recently performed an analysis of the impact of tariffs on our supply chain. Based on current expectations, we have determined that these costs will have a negligible impact on our financial results.

Operating margin of 26% in Q2 was above our guidance range, improved 180 basis points sequentially. Diluted GAAP EPS attributable to Photronics shareholders was $0.15 per share. After removing the impact of foreign exchange, fully diluted non-GAAP EPS attributable to Photronics shareholders was $0.40 per share. Our overall profitability reflects a greater contribution from our joint ventures in China and Taiwan. During the second quarter, we generated $31 million in operating cash flow, which represented 15% of total revenue. CapEx was $61 million in the quarter, which included our planned expansion in the US. We remain on track to spend $200 million in CapEx fiscal 2025 on a combination of capacity, capability, and end-of-life tool initiatives.

Based on current investment plans, we estimate that our CapEx in fiscal 2026 will normalize from elevated fiscal 2025 levels. Total cash and short-term investments at the end of the quarter was $558 million. We have three elements to our capital allocation strategy, including organic growth, strategic investments, and returning cash to shareholders. During the quarter, we spent $72 million to opportunistically repurchase 3.6 million shares and now have $23 million remaining under our existing repurchase authorization. This is a significant endorsement of our confidence in the long-term health of Photronics, and we will remain strategic with respect to future share repurchases. Before providing guidance, I'll remind you that demand for products is inherently uneven and difficult to predict.

We have limited visibility and a typical backlog of one to three weeks. In addition, ASPs for high-end assets are high, meaning a relatively low number of high-end orders can have a significant impact on our quarterly revenue and earnings. Additionally, and as we have highlighted previously, our business is influenced by IC and display design activity and, to a lesser degree, by wafer and panel capacity dynamics. Given market conditions and tariff uncertainty, we remain cautious about the near-term demand environment. We expect third-quarter revenue to be in the range of $200 to $208 million.

Based on those revenue expectations and our current operating model, we estimate non-GAAP earnings per share for the third quarter to be in the range of $0.35 to $0.41 per diluted share, equating to an operating margin between 20% and 22%. I'll now turn the call over to the operator for your questions.

Operator: Our first question comes from the line of Tom Diffely with D.A. Davidson and Company. Your line is now open.

Tom Diffely: Yes. Good morning. Thank you for taking my questions. So first, maybe a little more color on the mainstream business. You said there's continued softness there. I'm curious what you're seeing in kind of the overall supply demand of mainstream mask-making capacity today and how that has impacted the margins, and maybe perhaps how that influenced your capital spending plan this year.

Frank Lee: Thank you, Tom. The mainstream market, as we highlighted in previous calls, still remains weak, mainly because a lot of our age fab customers still have very low wafer fab utilization. I think this trend is something related to the industry, especially in power, industrial, and consumer parts of the business. So I think in the long run, we will still put more focus on building our capacity and capability in high-end and also in the high end of the mainstream. Chris, you want to add some comments?

Chris Progler: Yeah. Thanks, Frank. I can say, you know, Tom, we talked quite a bit about end-of-life tools impacting kind of organic supply of masks in the mainstream. We definitely saw that, but that cycle is starting to move forward. Many companies are replacing those end-of-life tools with new equipment. There has been, because of that, a fair amount of capacity also added to the network globally for mainstream masks. I don't think it's an oversupply situation, but the muted demand Frank talked about and lower utilizations in wafer fabs combined with some capacity increases that were driven by end-of-life tool turnovers has made us somewhat a little bit unfavorable supply-demand balance. But it's not a long-term issue.

It's just a point in the evolution of the mainstream mask supply.

Tom Diffely: So, Chris, are you seeing more of the weakness in Asia right now? And does that have anything to do with some of these kind of startup photomask companies there? And then maybe to follow-up on that, in the US, you're still seeing a migration, it sounds like, of the mainstream to higher-end mainstream. And I guess that is the driver of your increased capital spending this year?

Chris Progler: Yes. So on the first question, not necessarily confined to Asia. The weakness in mainstream on the wafer side is pretty broad-based. Europe may be the strongest example of it because their wafer supply is very much hinged to automotive and industrial microcontrollers and things like that. So it's pretty weak for mainstream in general. So it's not necessarily confined to Asia or new upstarts in China. It's pretty broad-based. Still, the weakness in mainstream. And if you look at the projections for fab utilization and supply for the customers, strong recoveries are not really projected till even later in 2026. So there's a fair amount of supply sloshing around still for mainstream applications in the industry.

As far as our projects in the US, so that's correct. We had a marginal amount of capacity, but also node migration to, let's say, the higher end of the mainstream applications was one of our strategic goals for those investments. And we do think that's a growing part of the market in the US. So that's what we were targeting here.

Tom Diffely: Great. Thanks. And then just looking at the earnings on a year-over-year basis, is the largest impact year-over-year on roughly the same amount of revenue just the margins or pricing in the mainstream world, or would you say there's other factors in there as well?

Frank Lee: Correct. You want to add in pricing? You want the market?

Eric Rivera: Oh, hi, Tom. This is Eric here. So with respect to pricing, I mean, we're trying to, as we discussed previously, we are focusing on product mix. There is a bit of pressure on pricing overall, but we are muting that with product mix. So we're trying to focus on the higher end of mainstream and node migration as Chris just mentioned a few seconds ago.

Tom Diffely: Okay.

Frank Lee: In addition to what Eric just commented, for Photronics, we do have several long-term agreements with many of our main customers. So this long-term agreement not only guarantees the order from the customer but also provides us stable pricing.

Chris Progler: Yeah. And Tom, maybe I can make one more comment on the mainstream because we don't want it to sound like it's all gloom. There's another positive trend we're seeing also with some of the regionalization of the high-end chip makers, foundries, and things like that where starting to look a little more seriously at outsourcing of the lower-end layers of the advanced mask sets. So for example, this might be a five-nanometer node and there's lots of mainstream mask layers in that. Regionalization of fabs is starting to open up some opportunities in mainstream demand for those applications as well. So that's kind of a positive side for the demand.

Tom Diffely: Okay. Great. And I appreciate all the extra color there. And, George, look forward to working with you. I worked with your dad for many, many years, and always a good experience. Could you give us a hint as to what your first focus will be on? Is it, you know, cost structure? Is it driving revenue? Is it saving cost? What in particular do you think you'll be focused on first?

George Makrokostas: Probably all of the above with Frank. You know, Frank has been leading the organization for the last three years and obviously has, you know, more than twenty years with the company. So I'm, you know, looking forward to working with Frank to learn more about Asia. That's not an area that I, you know, have a tremendous experience, and I know more about the US and Europe and the business overall. I'm gonna be working with Frank going forward, you know, to do more of an orderly type of a transition, you know, discipline by discipline. So this is not a wholesale change. It's more of an evolution.

So I would say right now, my focus has been more on the back of house administrative type matters and governance, etcetera. HR, legal, finance, and, you know, now I'm segueing into, you know, more of Frank's responsibilities. But, you know, definitely, we are cost-conscious and want to drive market share. So I think it's both levers. It's, you know, cost reduction containment slash, you know, growing revenue by growing market share. Because as we know, the market is, you know, finite. So we can't necessarily create demand, so we're gonna have to go and, you know, gain market share.

Tom Diffely: I appreciate that. And, Frank, it's been a pleasure working with you the last three years as CEO and, you know, decade plus as the head of Asia before that. Well, thank you, everybody. I appreciate your ability to answer my questions today, and talk to you soon.

Frank Lee: That's excellent. Thank you. Thank you. Thank you.

Operator: Thank you. Our next question comes from the line of Ghoshi Shree with Singular Research. Your line is now open.

Ghoshi Shree: Good morning, guys. Can you hear me?

Chris Progler: Yes. We can.

Frank Lee: Okay. George, congratulations on your new role. Could you share your, kind of, your priorities, like, with regards to US capacity expansion versus balancing your regional utilization efforts due to ongoing growth in Asia?

George Makrokostas: Well, there's definitely gonna be, it appears anyway, there'll be some opportunities here in the US, you know, with TSMC and others and, you know, reshoring and obviously, the geopolitical issues are driving that thought process. And, you know, the creating action by our customer base that we're gonna have to react to. So I would say we're gonna, you know, evaluate the opportunities and deploy capital as we see fit. I think we may have mentioned that we're, you know, expanding our US capacity as it is. We're gonna continue to monitor that and invest, you know, appropriately to, you know, spend CapEx on, but also on, you know, pure capability on the high end as well.

Ghoshi Shree: Okay. Awesome. Given that your top line was just around the midpoint guidance and then you're forecasting a sequential decline, you talked a little bit about the efforts that you would need to take to maybe address the weaker demand. Are these just customers delaying orders due to macroeconomic concerns? And what would it take to kind of lift it in H2?

Eric Rivera: Hello, Ghoshi. This is Eric here. So I think you hit the nail on the head. So we are seeing customers feeling the uncertainty that's reflected in the market. Right? So, you know, the current tariff environment is creating that uncertainty. So that is the reason for our cautious outlook for the rest of the year.

Ghoshi Shree: Okay. And just my last question before. Given that you guys repurchased $72 million even during kind of weaker earnings, how do you prioritize? Are you looking to authorize any expansion of the buyback program if conditions remain challenging?

Chris Progler: Well, we have $23 million remaining under our existing authorization, and we'll continue to be opportunistic with that remaining authorization that we have. And, you know, in terms of looking forward to, you know, increasing that authorization, share repurchases are part of our capital allocation strategy and in doing so, we need to, you know, compare against other investment opportunities that could yield a favorable, you know, return to Photronics to ensure long-term continued growth. So with all those considered, we keep our eyes open and will act appropriately at the appropriate time.

Ghoshi Shree: That's all I had. Thank you guys for taking my questions.

Operator: Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Ted Moreau for closing remarks.

Ted Moreau: Thank you, Shannon, and thank you everybody for joining us today. We really appreciate your interest in Photronics. And we will be available throughout the quarter to speak with all, you know, investors. Have a great day.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.

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